Ingles Markets, Inc. — FY2012 Form 10-K
Business context and reporting period. Ingles operates supermarkets, shopping-center rentals and a fluid dairy business in the Southeastern United States. This annual report covers the fiscal year ended September 29, 2012, a 53-week year; FY2011 and FY2010 each had 52 weeks. At year-end, the company operated 203 supermarkets across six states.
Financial performance and position
- Revenue: Net sales were $3.709 billion, up 4.2% from $3.560 billion. Total revenue from unaffiliated customers, including rental and dairy revenue, was $3.718 billion. Excluding gasoline and the extra week, net sales increased 1.7%; comparable grocery sales rose 1.9% excluding gasoline.
- Profit and margins: Gross profit increased 3.5% to $819.3 million, while gross margin edged down to 22.1% from 22.2%. Operating income was $123.8 million (3.3% of net sales). Net income rose 11.1% to $43.4 million; diluted EPS was $1.79 for Class A and $1.70 for Class B. Interest expense was $60.0 million.
- Cash flow and investment: Cash from operations was $133.8 million, versus $97.2 million. Capital expenditures were $180.6 million, compared with $97.5 million; operating cash flow less capital expenditures was negative $46.9 million. Investing activities used $103.6 million, and financing activities used $37.9 million. Year-end cash was $4.7 million.
- Liquidity and debt: Current assets were $426.2 million and current liabilities $306.2 million. Total borrowed debt was $835.2 million, down from $855.1 million; this included $40.1 million drawn on a $175 million credit line, leaving $126.7 million available. The $575 million senior notes carry an 8.875% coupon, mature in 2017 and become callable in May 2013. Total liabilities were $1.185 billion and stockholders’ equity $457.4 million.
- Shareholder returns: Regular annual dividends remained $0.66 per Class A share and $0.60 per Class B share. After year-end, the company declared a special dividend of the same amounts per share.
Material changes versus FY2011
- Net sales increased $149.5 million and net income rose $4.3 million. The extra fiscal week contributed approximately $67.5 million of grocery sales; comparable grocery sales increased 2.4% on the company’s 53-week comparison basis, including gasoline.
- Gross profit dollars grew, but the consolidated gross margin declined 0.1 percentage point. Operating and administrative expenses increased $19.7 million, while their ratio to sales improved to 18.8% from 19.0%.
- Operating cash flow improved by $36.5 million. Capital spending rose sharply, principally due to completion of the new distribution facility.
- Debt declined by $19.9 million and interest expense fell by $1.9 million, reflecting debt reduction and refinancing at lower rates.
Outlook, risks and unusual items
- Management expected FY2013 sales growth to exceed FY2012 growth, with additional retail square footage and continued store improvements. Planned FY2013 capital expenditures were approximately $100–$130 million; longer-run annual net capital expenditures were estimated at $110–$180 million.
- Management expected the distribution facility completed during FY2012 to produce savings and operating efficiencies. The filing identifies execution risk: expected facility benefits and returns from new, remodeled or expanded stores may not be realized.
- Key exposures include intense grocery price competition and narrow margins; regional economic and weather events; food safety and supply disruptions; volatile gasoline, food, labor, utility and insurance costs; environmental liabilities; and substantial debt and financing availability. The company was in compliance with its debt covenants at year-end.
- Debt service and covenant restrictions may limit dividends. Robert P. Ingle II held approximately 87% of combined voting power, giving him control over director elections and many shareholder matters.
- Fiscal 2011 included an approximately $2.8 million gain related to an eminent-domain award; the corresponding asset-sale gain was $0.7 million in FY2012. The company changed its independent auditor from Ernst & Young to Deloitte in February 2012; the filing reports no disagreements or reportable events related to the change.
- Management and Deloitte reported effective disclosure controls and internal control over financial reporting as of September 29, 2012. Management said ordinary-course legal proceedings were not expected to have a material effect.
Important facts for investors to verify
- How much of reported sales growth and EPS improvement persists after accounting for the extra fiscal week, gasoline prices and fuel margins?
- Whether the new distribution facility delivers the anticipated cost savings, and how those savings compare with its capital and operating costs.
- The company’s refinancing plans for the 8.875% senior notes as the May 2013 call date approaches, including resulting interest costs and liquidity needs.
- Whether operating cash generation can support the planned capital program, debt service and dividends, particularly given low year-end cash and substantial leverage.
- The assumptions and potential variability in self-insurance reserves, environmental exposures and state tax examinations.
- The terms and payment of the special dividend declared after year-end, and the effect of debt covenants on future distributions.