Village Super Market, Inc. — Form 10-Q Summary
Reporting period: The 13 weeks ended October 27, 2018, the first quarter of fiscal 2019. Comparisons are with the 13 weeks ended October 28, 2017, unless otherwise noted. The company operates 30 ShopRite supermarkets and is a major member of Wakefern, its principal supplier and cooperative.
Financial performance and position
| Metric | Q1 FY2019 | Prior-year quarter | Change |
|---|---|---|---|
| Sales | $401.550 million | $387.340 million | +3.7% |
| Gross profit | $112.113 million | $104.792 million | +7.0% |
| Operating income | $8.922 million | $5.352 million | +66.7% |
| Net income | $6.269 million | $3.016 million | +107.9% |
| Operating cash flow | $6.125 million | $(2.229) million | Improved |
| Capital expenditures | $8.571 million | $6.629 million | +29.3% |
Margins: Gross margin was 27.92%, versus 27.05%; operating margin was 2.23%, versus 1.39%; and net margin was 1.56%, versus 0.78%. Basic/diluted earnings per share were $0.49/$0.43 for Class A and $0.32/$0.32 for Class B, compared with $0.23/$0.21 and $0.15/$0.15, respectively.
Liquidity and debt: Cash and cash equivalents were $88.834 million at October 27, 2018, down from $96.108 million at fiscal year-end. Working capital was $89.186 million and the current ratio was 1.89. Long-term debt was $48.690 million, including $41.547 million of long-term capital and financing lease obligations and $6.356 million related to New Markets Tax Credits. The company had no borrowings under its $25 million revolving credit facility. Cash includes $65.145 million of demand deposits held at Wakefern; the company also had $47.824 million of variable-rate notes receivable from Wakefern.
Cash flows: Cash decreased by $7.274 million during the quarter. Operating cash flow was positive, while investing activities used $9.314 million and financing activities used $4.085 million. Financing outflows included $3.222 million of dividends.
Changes and management commentary
- Sales growth reflected the Bronx store, opened June 28, 2018, and a 1.3% same-store sales increase. Management attributed same-store growth mainly to recently remodeled and expanded stores, partly offset by a competitor opening.
- Gross margin improved 0.87 percentage points, primarily from lower promotional spending, higher departmental margins, favorable product mix, and increased Wakefern patronage dividends and rebates.
- Net income included a $290,000 after-tax gain from Superstorm Sandy insurance recoveries. The company reported receiving another $415,000 in November 2018, recognized as a reduction of operating and administrative expense in the first quarter. Excluding the Sandy gain, management said net income increased 98% year over year.
- The effective tax rate fell to 30.2% from 41.4%, primarily reflecting the federal tax-rate reduction under the Tax Cuts and Jobs Act, partly offset by a temporary increase in New Jersey’s corporate tax rate.
- Operating cash flow improved from the prior-year use of cash, which management attributed to working-capital timing and increased earnings adjusted for noncash expenses.
- Revenue recognition standard ASC 606 was adopted retrospectively. Certain prior-period income streams and pharmacy fees were reclassified between sales, cost of sales, and operating expenses.
Outlook, risks, and contingencies
- Fiscal 2019 same-store sales guidance: increase of 0.5% to 2.5%. Product prices experienced moderate inflation in most departments; pharmacy continued to experience deflation.
- Fiscal 2019 capital expenditure budget: $40 million, including a replacement store in Stroudsburg, Pennsylvania, remodels, self-checkout expansion, and technology and facility upgrades.
- The board’s current intention is to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share. Management expects cash, operating cash flow, and other liquidity sources to cover foreseeable needs.
- Management expects a 30%–31% effective tax rate, approximately $1.3 million in fiscal 2019 periodic pension costs, and $3 million of pension contributions. Operating expenses may face pressure from operational initiatives and medical and other benefit costs.
- Key risks include intense competition and narrow supermarket margins; geographic concentration in New Jersey; dependence on Wakefern for merchandise, services, deposits, and receivables; labor and pension costs (about 89% of employees are covered by collective bargaining agreements); food safety, self-insurance, asset impairment, cybersecurity, and changes in tax law.
- The New Markets Tax Credit financing is subject to a seven-year recapture period; noncompliance could require indemnification of Wells Fargo. Management does not anticipate recapture. The company expects adoption of the new lease standard in fiscal 2020 to materially increase reported lease liabilities and right-of-use assets.
- Wakefern’s litigation to recover Superstorm Sandy insurance claims remains ongoing. Management believes other ordinary-course litigation should not materially adversely affect financial position, results, or liquidity.
Investor verification priorities
- Confirm the durability of same-store sales growth and the 0.5%–2.5% fiscal 2019 outlook, especially given competitor openings and pharmacy deflation.
- Assess earnings quality by separating the Sandy insurance recovery from recurring operating performance and reviewing the drivers of margin improvement.
- Monitor cash use against the $40 million capital budget, dividends, pension contributions, and planned Stroudsburg replacement store.
- Evaluate Wakefern concentration and exposure, including deposits, notes receivable, supplier payables, and the cooperative’s financial condition.
- Review lease-standard adoption effects, pension and labor obligations, and compliance with New Markets Tax Credit requirements.