Village Super Market, Inc. — Q1 FY2013 Form 10-Q
Business and period: The company operates 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania and is a member of Wakefern Food Corporation. This unaudited report covers the 13 weeks ended October 27, 2012; comparisons are with the 13 weeks ended October 29, 2011. Dollar amounts below are in thousands unless stated otherwise.
Financial results and position
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Sales | $358,151 | $342,737 | +4.5% |
| Gross profit / margin | $95,637 / 26.70% | $92,876 / 27.10% | Margin down 0.40 percentage points |
| Operating income / margin | $10,472 / 2.92% | $12,202 / 3.56% | Income down 14.2% |
| Net income / margin | $5,855 / 1.63% | $6,736 / 1.97% | Down 13.1% |
| Operating cash flow | $8,023 | $5,789 | +$2,234 |
| Capital expenditures | $5,792 | $6,257 | Down $465 |
- Same-store sales increased 2.6%; total sales growth also reflected the January 2012 Old Bridge store acquisition. Management said unusually strong sales in the quarter’s final week reflected customer preparation for Hurricane Sandy.
- Gross margin pressure reflected lower departmental margins and higher Wakefern warehouse assessment charges, partly offset by higher patronage dividends and lower LIFO charges. Operating and administrative expense rose as a share of sales, including higher payroll and benefit costs. The quarter included a landlord dispute settlement charge and income from the national credit card lawsuit settlement.
- Cash and cash equivalents were $101,999 at October 27, 2012, versus $103,103 at July 28, 2012. Working capital was $72,899 and the current ratio was 1.7:1. Cash from operations exceeded capital expenditures by $2,231 before financing and other investing flows.
- Debt and lease obligations included $40,849 of capital and financing lease obligations and $3,660 of notes payable to Wakefern, including $1,439 current. The filing reports no current portion of lease obligations. Cash exceeded these stated obligations, but the filing does not present a net-debt measure.
- Cash declined by $1,104 during the quarter. Financing cash use included $2,990 of dividends; investing cash use included $5,792 of capital expenditures and $369 invested in Wakefern notes receivable. The company also held a $21,287 Wakefern note receivable bearing fixed interest at 7%.
Outlook, risks and notable items
- Management expected FY2013 same-store sales growth of 1.5%–3.5%, modest retail price inflation, and an effective tax rate of 41.5%–42.5%. It budgeted approximately $20,000 for capital expenditures, including work on two replacement stores and three major remodels, and expected cash and operating cash flow to meet foreseeable requirements.
- Management expected higher medical and pension costs. It expected to contribute a further $2,929 to its pension plans during the remainder of FY2013. The first-quarter results are not necessarily indicative of full-year results.
- Hurricane Sandy struck on October 29, two days after quarter-end. Almost all stores closed for periods ranging from hours to eight days in Q2; the company reported spoiled perishable goods and repair, labor and other costs. Insurance coverage is subject to deductibles, and claims were still being assessed. Management expected the storm’s overall FY2013 impact, including uninsured losses, not to be material, while anticipating a negative Q2 sales effect partly offset by subsequent restocking sales.
- On November 29, the board declared approximately $15 million in dividends: a special $1.00 per Class A share and $0.65 per Class B share, plus regular quarterly dividends of $0.25 and $0.1625, respectively. Management stated its intention to maintain the regular quarterly rates in 2013.
- Key risks include intense competition in a low-margin industry; economic and consumer-spending conditions; the Maryland stores’ still-below-expectation sales and brand awareness; dependence on Wakefern; collective bargaining and employee benefit costs; food safety; and potential multi-employer pension plan contributions or withdrawal liabilities. A potential mass-withdrawal liability related to a previously exited pension fund could be material.
Important facts for investors to verify
- Whether same-store sales can meet management’s 1.5%–3.5% FY2013 outlook, particularly given Sandy-related closures and the Maryland stores’ performance.
- The realized costs of Sandy, insurance recoveries and timing, and whether the company’s immateriality expectation remains appropriate.
- Whether margin and earnings pressure persists as labor, medical, pension and competitive costs evolve.
- Funding of planned capital expenditures, the announced special dividend, and expected pension contributions; the board’s stated regular-dividend intention is not a guarantee.
- Potential exposure to multi-employer pension liabilities and changes in the company’s relationship with or financial exposure to Wakefern.