VLGEA

Business Context and Reporting Period

Company: Village Super Market, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 24, 2004 (Second Quarter of Fiscal 2004)
Business Overview: Operates 23 ShopRite supermarkets in New Jersey and eastern Pennsylvania. The Company is a member of Wakefern Food Corp., the nation's largest retailer-owned food cooperative.

Key Financial Metrics

Material Changes vs. Prior Period

• Sales Growth: Sales increased 3.5% in the quarter and 4.1% for the six-month period compared to the prior year. Growth was driven by improved performance in stores opened in fiscal 2002 and remodeled in fiscal 2003, as well as a favorable comparison to a prior year period impacted by competitor openings and a softer economy.
• Profitability: Gross profit margins improved to 25.6% (quarter) and 25.4% (six-months) due to lower promotional spending, higher patronage dividends, and reduced assessment charges from Wakefern. These gains were partially offset by increased LIFO charges.
• Expenses: Operating and administrative expenses as a percentage of sales increased to 21.8% (quarter) and 21.9% (six-months), primarily due to higher fringe benefit costs (health and pension), utility costs, and occupancy costs. Payroll costs as a percentage of sales declined.
• Net Income: Reported net income decreased 10% in the quarter to $3.651 million. However, excluding a one-time $967,000 after-tax partnership distribution received in the prior year, net income would have increased 19%.
• Interest Expense: Net interest expense decreased due to reduced borrowing levels and the disposal of a capital lease in the prior year.
• Tax Rate: The effective income tax rate increased to 42.8% (quarter) and 42.1% (six-months) due to recent tax audits of previous fiscal years.

Guidance, Outlook, and Risks

• Capital Expenditures: The Company has budgeted approximately $12 million for capital expenditures in fiscal 2004, including the expansion of the Bernardsville store and equipment for the Somers Point replacement store.
• Liquidity: Primary sources of liquidity are cash on hand ($40.6 million) and operating cash flow. The Company has a $15 million unsecured revolving credit line expiring September 16, 2004, which is expected to be replaced during fiscal 2004.
• Related Party Investment: The Company invested $20.042 million in a one-year unsecured note receivable from Wakefern (principal supplier) dated January 15, 2004, earning interest at prime minus 1.5%.
• Risks: Key risks include local economic conditions, competitive pressures, ability to maintain sales and margins, union contract negotiations, increased cost of goods sold from Wakefern, and the rate of return on pension assets.
• Market Risk: The Company is exposed to interest rate risk via an interest rate swap agreement (notional amount $8.57 million) and variable rate deposits/notes with Wakefern. A 100 basis point increase in rates would increase annual interest expense by approximately $85,714.

Investor Verification Checklist

• Recurring Income: Verify the sustainability of net income growth by excluding the non-recurring partnership distribution of $967,000 (after-tax) from the prior year.
• Related Party Concentration: Confirm the terms and security of the $20.042 million note receivable from Wakefern, which represents a significant portion of current assets.
• Expense Trends: Monitor the trajectory of fringe benefit and utility costs, which drove the increase in operating expense percentages.
• Debt Maturity: Review the plan to replace the $15 million revolving credit line expiring in September 2004.
• Tax Liabilities: Assess the impact of recent tax audits on future effective tax rates and cash flows.