Village Super Market, Inc. — Q2 FY2017 Form 10-Q
Reporting period: 13 and 26 weeks ended January 28, 2017; comparisons are to the corresponding periods ended January 23, 2016. Amounts below are in millions unless stated otherwise.
Business context and results
Village operated 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. It is a major member of Wakefern, its principal supplier and a source of patronage dividends and other support. The company describes the supermarket business as highly competitive and low-margin.
| Metric | 13 weeks ended Jan. 28, 2017 | Prior-year quarter | 26 weeks ended Jan. 28, 2017 | Prior-year period |
|---|---|---|---|---|
| Sales | $412.2 | $420.2 | $801.9 | $809.7 |
| Gross profit | $111.2 | $112.7 | $215.9 | $218.2 |
| Operating income | $10.6 | $11.4 | $18.1 | $19.6 |
| Net income | $6.0 | $6.3 | $10.1 | $10.7 |
| Class A diluted EPS | $0.42 | $0.44 | $0.71 | $0.76 |
In the quarter, same-store sales fell 1.9%; excluding the prior-year benefit from customers preparing for Winter Storm Jonas, the decline was 0.5%. For the six-month period, same-store sales fell 1.0%, or 0.3% excluding that storm-related comparison. The gross margin was 26.99% in the quarter and 26.92% year to date; operating margin was 2.57% and 2.25%, respectively.
Liquidity, cash flow and debt
- At January 28, cash and cash equivalents were $83.1 million, working capital was $85.7 million, and the current ratio was 1.92:1. Working capital increased from $60.5 million at July 30, 2016, largely because $21.7 million due from Wakefern was classified as current.
- Operating cash flow was $15.1 million for the first half, versus $38.7 million a year earlier. The filing attributes the decrease primarily to working-capital timing, notably income-tax payments and receivables/payables.
- Capital expenditures were $13.0 million; dividends paid were $6.3 million. Cash declined $5.3 million to $83.1 million during the period.
- Debt and capital/financing lease obligations totaled approximately $44.0 million, including $42.9 million of long-term lease obligations. No amounts were drawn on the $25 million revolving credit facility.
- The company also held $43.7 million in notes receivable from Wakefern and had $58.6 million of demand deposits invested there, creating material exposure to its principal cooperative counterparty.
Changes, outlook and risks
- Quarterly sales declined 1.9% and net income declined 5%; six-month sales declined 1.0% and net income declined 6%. Management cited lower same-store sales and higher operating and administrative expenses as the principal reasons for lower earnings.
- Quarterly gross margin improved 0.16 percentage points, mainly from higher departmental margins, partly offset by lower patronage dividends and increased promotional spending. Year-to-date gross margin decreased 0.03 percentage points. Operating and administrative expense as a percentage of sales rose 0.23 points for the quarter and 0.10 points year to date.
- Management expects FY2017 same-store sales to range from a 1.0% decrease to flat; capital expenditures are budgeted at approximately $25 million, including initial construction of a Bronx store and remodels. The Board’s stated intention was to maintain quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share.
- Management expects a 40.5%–41.5% effective tax rate, approximately $435,000 of net periodic pension cost, and $3 million of pension contributions in FY2017. It believes cash flow and other liquidity sources will meet foreseeable needs. These are forward-looking estimates, not guarantees.
- A union pension plan was amended to freeze benefits effective January 31, 2017. This produced a $629,000 pretax remeasurement gain recorded in other comprehensive income, not earnings. No pension contributions had been made in FY2017 as of the quarter-end.
- Risks highlighted include competitor openings and pricing, deflation and economic conditions, reliance on Wakefern, collective bargaining and benefit costs, food safety, underfunded multi-employer pension plans, asset impairment, tax matters, and information-system or cybersecurity disruptions. Routine litigation is not expected by management to materially affect financial position, results or liquidity.
Important facts for investors to verify
- Whether same-store sales stabilize within management’s FY2017 range, and how competitor activity, deflation and promotional spending affect margins.
- Whether operating cash flow recovers from the first-half working-capital-related decline while supporting the $25 million capital budget, dividends and pension contributions.
- Wakefern’s financial condition and the collectability, timing and interest terms of the company’s deposits and notes receivable from Wakefern.
- The effect of labor negotiations and pension obligations, including multi-employer plan exposure, and the eventual balance-sheet impact of the pending lease-accounting standard.