Village Super Market, Inc. — FY2013 Form 10-K
Business and period. Village operated 29 ShopRite supermarkets, primarily in New Jersey, with two in Maryland and one in northeastern Pennsylvania. The fiscal year ended July 27, 2013 and comprised 52 weeks. The company is a major Wakefern cooperative member and purchases substantially all merchandise through Wakefern. Unless stated otherwise, dollar amounts are in thousands.
Financial performance and condition
| Metric | FY2013 | FY2012 |
|---|---|---|
| Sales | $1,476,457 | $1,422,243 |
| Same-store sales growth | 2.9% | 4.9% |
| Gross profit / margin | $397,761 / 26.94% | $388,827 / 27.34% |
| Operating income / margin | $44,177 / 2.99% | $55,552 / 3.91% |
| Net income / net margin | $25,784 / 1.75% | $31,445 / 2.21% |
| Class A diluted EPS | $1.85 | $2.28 |
| Operating cash flow | $51,273 | $43,432 |
| Capital expenditures | $21,888 | $16,729 |
| Dividends paid | $24,048 | $9,758 |
Sales increased 3.8%, reflecting the Old Bridge acquisition and same-store growth. Net income fell 18.0%; management said net income excluding specified unusual items declined 21%, primarily due to lower gross margins and higher operating expenses. Gross margin contracted 0.40 percentage points, chiefly from price investments to compete with nontraditional retailers. Operating expenses rose as a share of sales by 0.53 points, reflecting payroll and benefit costs, among other items.
Fourth-quarter sales were $376,323, gross profit was $101,890, and net income was $6,203, compared with $369,859, $101,199, and $9,019, respectively, in FY2012’s fourth quarter.
At year-end, cash and cash equivalents were $109,571; working capital was $94,299 and the current ratio was 1.85. Total long-term debt was $42,738, principally capital and financing lease obligations; there were no borrowings on the $25,000 revolving credit facility. The company reported compliance with its credit covenants. Cash flow from operations increased year over year; the filing attributes much of the increase to the prior year’s pension-liability payment and timing of payables. FY2013 dividends included $12,009 of special dividends.
Material changes, outlook, and risks
- Hurricane Sandy: Closures, lost perishables, repairs, labor and other costs affected operations. Village recorded estimated insurance recoveries; final claim resolution was expected in FY2014 and could materially affect results.
- Outlook: Management expected FY2014 same-store sales growth of 1.5%–3.5%, modest retail price inflation, and an effective tax rate of 41.5%–42.5%. The company budgeted $35,000 of capital expenditures, including two replacement stores, and expected quarterly dividends to continue at $0.25 per Class A and $0.1625 per Class B share. Management believed available liquidity and operating cash flow would meet foreseeable needs.
- Wakefern concentration: Village held 13.7% of Wakefern and was required to source at least 85% of primary merchandise requirements from it. The company had $85,222 in Wakefern demand deposits and a $22,421 fixed-rate, 7% note receivable; Wakefern intended to prepay the note on February 15, 2014.
- Labor and pensions: Approximately 91% of employees were union-represented; contracts for about 49% of associates had expired or expired within one year. Certain multi-employer pension plans were underfunded, creating potential for increased contributions or withdrawal liability. FY2013 multi-employer pension contributions were $5,046.
- Legal and tax contingencies: New Jersey tax disputes involving fiscal 2002–2009 assessments remained unresolved; a trial on the nexus issue had occurred in June 2013 without a decision. The company disclosed $11,466 of unrecognized tax benefits, net of federal benefit; ultimate resolution could materially affect results and cash flows.
- Other risks: Intense price competition and narrow margins; weaker-than-expected Maryland store performance; rising healthcare and pension costs; food-safety and IT risks; and potential residual rent costs when replacement stores open. Future lease payments totaled $189,941 before associated charges and other exclusions.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Investor verification priorities
- Track whether FY2014 same-store sales meet the 1.5%–3.5% outlook while margins recover from FY2013’s decline.
- Verify the timing and amount of Sandy insurance proceeds and any related adjustments to earnings.
- Review outcomes and potential cash exposure from New Jersey tax litigation and unrecognized tax benefits.
- Monitor Wakefern’s prepayment of the $22,421 note, concentration of cash deposits there, and cooperative patronage-dividend trends.
- Assess union contract negotiations, pension-plan funding and replacement-store lease exposure alongside the $35,000 capital plan and dividend commitment.