Weis Markets, Inc. — Q1 2013 Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operated 165 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia as of March 30, 2013. The company reports one operating segment and generates revenue primarily from grocery, pharmacy, fuel, fresh food and general merchandise sales. This filing covers the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. The financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $682.7 million | $661.6 million | 3.2% |
| Gross profit | $191.1 million | $183.1 million | 4.4% |
| Gross margin | 28.0% | 27.7% | 30 basis points higher |
| Operating income | $30.9 million | $30.4 million | 1.6% |
| Operating margin | 4.5% | 4.6% | 10 basis points lower |
| Net income | $20.1 million | $20.0 million | 0.5% |
| Net margin | 2.9% | 3.0% | 10 basis points lower |
| Diluted EPS | $0.75 | $0.74 | 1.4% |
| Operating cash flow | $36.2 million | $23.0 million | Increase of $13.2 million |
| Capital expenditures | $30.0 million | $13.0 million | Increase of $17.0 million |
Cash and cash equivalents were $24.4 million at March 30, 2013, compared with $21.4 million at December 29, 2012. Marketable securities totaled $78.7 million. Total assets were $1.119 billion and shareholders’ equity was $808.3 million. The filing does not report outstanding borrowings; the company had no liability under its $50 million short-term credit facility. Outstanding letters of credit totaled $15.6 million.
Cash dividends were $0.30 per share for the quarter, with $8.1 million paid in total. The Board subsequently approved another $0.30 quarterly dividend payable May 20, 2013.
Material Changes Versus the Prior Comparable Period
- Comparable-store sales increased 0.8%, while total store sales increased 3.2%. Excluding fuel, comparable-store sales increased 0.4%.
- Sales benefited by approximately $8.6 million from Easter occurring in the first quarter of 2013 rather than the second quarter in 2012. Management expects a related post-holiday sales slump in the second quarter.
- Pharmacy sales declined 6.5% on a comparable basis, including an estimated $6.5 million impact from conversions of branded drugs to lower-priced generics. Management expected this conversion cycle to be completed by July 1, 2013.
- Comparable petroleum sales decreased 6.7%, partly because average Weis Gas-n-Go prices were $0.24 per gallon lower year over year.
- Operating, general and administrative expenses increased 4.9%, faster than sales. Employee-related costs increased 6.7%, self-insured health care costs increased 12.3%, and depreciation and amortization rose to $13.8 million from $12.3 million.
- Operating cash flow improved substantially, partly because of working-capital timing associated with Easter. Capital expenditures more than doubled year over year.
- Investment income declined 7.6%, primarily because the company held $12.6 million less in municipal bonds than in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- Management estimated that its 2013 development plans, including new stores, remodels, site acquisitions, technology and distribution-facility upgrades, require approximately $135.0 million of investment.
- The company expects to fund working capital and capital expansion through cash and investment reserves and internally generated operating cash flow.
- Management expected diesel fuel prices to decline slightly and then remain fairly steady during 2013, but fuel, utility, product-cost and other inflationary pressures could affect margins.
- Health care costs were expected to increase approximately 6% in fiscal 2013. Management identified potential effects of the Patient Protection and Affordable Care Act as a concern.
- Demand remained affected by slow economic growth, high unemployment and declining household income in certain operating markets. Customers continued to emphasize value and savings.
- Promotional programs included a 90-day price freeze on more than 2,000 products, a seasonal “Get Grillin’” program covering approximately 1,200 items, and gas-rewards programs.
- The company maintained operating leases for stores expiring at various dates through 2028 and did not expect to draw on its letters of credit.
- Management identified competition, price pressures, economic conditions, regulation, technology changes, capital-expenditure requirements, operating-cost increases and fuel prices as material risks. No material changes in market risk were reported.
- The company adopted updated comprehensive-income disclosure guidance; adoption affected presentation and disclosures but had no impact on the consolidated financial statements.
Investor Verification Checklist
- Verify the sustainability of sales growth after normalizing for the approximately $8.6 million Easter timing benefit.
- Monitor the expected second-quarter post-Easter sales effect and the completion of branded-to-generic pharmacy conversions.
- Assess whether operating expenses, especially labor, health care, utilities and depreciation, continue to grow faster than sales.
- Reconcile the planned $135.0 million capital program with operating cash flow, available cash and marketable securities.
- Review the liquidity implications of $15.6 million in letters of credit, operating leases and the unused $50 million credit facility.
- Evaluate exposure to competitive pricing, fuel and commodity costs, economic weakness and regulatory changes.
- Confirm the recurring nature of the $0.30 quarterly dividend and the remaining authorization to repurchase 752,468 shares.