Ingles Markets, Inc. — Q2 FY2024 Form 10-Q
Business and period: Regional supermarket operator with 198 stores across six Southeastern states. The unaudited quarter ended March 30, 2024 (13 weeks); the six-month period ended the same date (26 weeks). Comparatives are the quarter and six months ended March 25, 2023.
Financial performance
| Metric | Q2 FY2024 | Q2 FY2023 | Six months FY2024 | Six months FY2023 |
|---|---|---|---|---|
| Net sales | $1.367B | $1.381B | $2.849B | $2.874B |
| Gross profit / margin | $321.9M / 23.5% | $325.9M / 23.6% | $670.7M / 23.5% | $697.1M / 24.3% |
| Operating income / margin | $44.8M / 3.3% | $57.6M / 4.2% | $104.4M / 3.7% | $153.4M / 5.3% |
| Net income | $31.9M | $40.5M | $75.3M | $109.9M |
| Class A diluted EPS | $1.68 | $2.13 | $3.96 | $5.79 |
Quarterly sales declined 1.0% and net income declined 21.3% year over year; six-month sales declined 0.9% and net income declined 31.5%. Excluding fuel, comparable store sales decreased 0.2% in the quarter and increased 0.43% for the six months. Quarter sales were affected by a $9.7M favorable Easter timing impact, partly offset by lower comparable sales and other factors.
Operating and administrative expenses rose 5.9% in the quarter and 5.4% for the six months, to $284.8M and $574.6M, respectively. Management cited higher labor costs, self-insurance claims and costs, and repairs and maintenance. Gross margin pressure was attributed primarily to inflation and raw-material shortages. Interest expense rose to $5.6M for the quarter and $11.3M for the six months, primarily reflecting higher rates on variable-rate debt.
Cash, debt and liquidity
- Six-month operating cash flow was $86.0M, versus $94.4M a year earlier. Capital expenditures were $98.4M; investing cash outflow was $94.6M. Financing cash outflow was $17.9M, including debt principal payments and dividends. Cash declined $26.5M to $302.0M.
- At March 30, 2024, total assets were $2.486B, current assets $917.1M, and current liabilities $287.0M. Stockholders’ equity was $1.525B.
- Reported balance-sheet debt was approximately $539.1M, including $17.5M current and $521.6M long-term. The $150M revolving credit line, maturing June 2026, had no borrowings outstanding. The company reported covenant compliance and stated it had sufficient resources for foreseeable needs.
- Debt agreements include financial covenants and cross-default provisions; some restrict additional dividends. The company had $498.5M of excess net worth under specified covenants, but this does not remove all dividend restrictions.
Outlook, risks and unusual items
- FY2024 capital spending is expected to be approximately $160M–$200M, mainly for store improvements and remodeling, one planned store opening, technology, equipment, and the milk-processing plant. Ongoing annual capital spending is expected to be approximately $120M–$160M. No earnings or sales guidance is provided.
- Management expects to continue quarterly dividends at current rates—$0.165 per Class A share and $0.15 per Class B share—but declarations remain at the board’s discretion and subject to debt restrictions.
- A $7.7M quarterly gain on asset sales/disposals, primarily related to an exchange of adjoining property, benefited operating income; the six-month gain was $8.3M. In January 2024, the company exchanged adjoining properties with an LLC in which its chairman was a principal, received $2.3M in addition to the property exchanged, and reported independent appraisals and Audit Committee approval.
- Risks cited include competition and pricing pressure, lower fuel prices, labor and utility cost increases, food supply or distribution disruption, economic and weather conditions, financing availability, and real-estate development and store-performance uncertainty. Ordinary-course legal claims are pending; management does not expect them to materially affect financial position, results, or cash flows. Self-insurance reserves totaled $34.6M.
- Interest-rate exposure is partly hedged by swaps with $142.3M aggregate notional value. Management reported no material impact from the transition from LIBOR to SOFR. No asset impairments were recorded in the six months.
Investor facts to verify
- Reconcile the debt disclosures: the balance sheet and debt note indicate approximately $539.1M of total debt and a $49.9M bond balance, while the MD&A states a $44.9M bond balance and cites $556.7M of debt at March 2023.
- Assess whether margin pressure and higher operating costs persist, particularly labor, insurance, repairs, inflation, and product costs.
- Monitor execution and returns on the $160M–$200M FY2024 capital-spending plan and the planned store opening.
- Review debt covenant, interest-rate, dividend-restriction, and self-insurance exposures alongside cash generation and capital requirements.
- Consider the effect of the property-exchange gain and Easter timing when evaluating underlying operating trends.