Weis Markets, Inc. — 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 204 supermarkets with approximately 23,000 associates across Pennsylvania and six surrounding states. The company reports one operating segment. This unaudited Form 10-Q covers the 13 and 26 weeks ended July 1, 2017, compared with the periods ended June 25, 2016.
Results include the 2016 acquisitions of five Mars Super Market stores, 38 former Food Lion stores and one Nell’s Family Market store. The acquired stores increased the company’s store count by approximately 25% and contributed $122.5 million of second-quarter sales and $243.5 million of first-half sales.
Financial Performance and Key Metrics
| Metric | 13 Weeks Ended July 1, 2017 | 13 Weeks Ended June 25, 2016 | 26 Weeks Ended July 1, 2017 | 26 Weeks Ended June 25, 2016 |
|---|---|---|---|---|
| Net sales | $876.6 million | $730.4 million | $1,728.8 million | $1,468.6 million |
| Gross profit | $239.9 million | $201.9 million | $469.7 million | $409.0 million |
| Gross margin | 27.4% | 27.6% | 27.2% | 27.9% |
| Operating income | $27.7 million | $24.1 million | $48.0 million | $55.3 million |
| Operating margin | 3.2% | 3.3% | 2.8% | 3.8% |
| Net income | $18.5 million | $15.3 million | $30.3 million | $35.4 million |
| Net margin | 2.1% | 2.1% | 1.8% | 2.4% |
| Diluted EPS | $0.69 | $0.57 | $1.13 | $1.32 |
Second-quarter net sales increased 20.0%, operating income increased 15.2%, net income increased 21.0% and diluted EPS increased 21.0%. First-half sales increased 17.7%, while operating income declined 13.3%, net income declined 14.4% and diluted EPS declined 14.4%.
Comparable-store sales increased 3.7% in the quarter and 1.7% year to date; excluding fuel, comparable sales increased 3.4% and 1.2%, respectively. Comparable sales adjusted for holiday timing increased 2.7% in the quarter and 1.9% year to date.
Cash Flow, Liquidity, Debt and Capital Resources
- Cash provided by operating activities was $69.3 million in the first half of 2017, compared with $74.4 million in the prior-year period. The decrease primarily reflected $11.8 million of long-term incentive payments to associates.
- Capital expenditures were $40.3 million, compared with $54.5 million in the prior-year period. Management planned approximately $90.0 million of 2017 capital investment.
- Cash used in financing activities was $28.7 million, including $12.5 million of debt repayment and $16.1 million of dividends.
- Cash and cash equivalents were $17.6 million at July 1, 2017, compared with $14.7 million at December 31, 2016. Marketable securities totaled $63.1 million and were available for potential liquidity needs.
- Long-term debt was $52.0 million, down from $64.5 million at December 31, 2016. The company had $52.0 million borrowed under a $120.0 million revolving facility, plus $15.2 million of outstanding letters of credit.
- Unused borrowing availability was reported at $52.8 million. On July 17, 2017, the company decided to reduce the revolving facility to $100.0 million.
- The credit facility matures September 1, 2019, bears interest at one-month LIBOR plus a 0.65% margin, and requires trailing twelve-month EBITDA of at least $75.0 million.
- The quarterly dividend remained $0.30 per share. The board approved a $0.30 dividend payable August 14, 2017, while noting that future dividends remain subject to quarterly board approval.
Material Changes, Outlook and Risks
- Sales benefited from the Easter holiday shift, contributing approximately $7.1 million of second-quarter sales and approximately $3.0 million of first-half sales. Winter weather differences adversely affected comparable sales by an estimated $7 million.
- Food-price deflation was significant in meat, produce and bakery items. Fuel inflation supported comparable fuel sales growth of 11.9% in the quarter and 15.0% year to date.
- Gross margin declined because of higher transportation costs for acquired stores located farther from the distribution center and, in the first half, weaker winter-related sales volume and deflationary pressure.
- Operating expenses increased primarily because of the acquired stores, higher sales volume, advertising, rent, utilities, repairs and depreciation. Management expects expense ratios to improve over time as acquired-store sales develop and cost-saving initiatives are implemented.
- The company opened a 65,000-square-foot “Community Market” prototype in Enola, Pennsylvania, and plans to evaluate its features for potential use in other stores.
- Management stated that the acquired store group was generating positive cash flow and that it continued to evaluate acquisition opportunities, although no acquisitions were pending at the filing date.
- Key risks include intense competition, price pressure, food-price volatility, economic conditions, regulatory changes, technology changes, capital spending requirements and potential increases in health-care costs under the Affordable Care Act.
- The company is evaluating several new accounting standards. Revenue recognition adoption is expected to have no significant impact on point-of-sale product sales; the financial instruments standard may affect reported net income; and the leases standard is expected to have a significant impact on the balance sheet.
- Management reported no material change in market risk, no material subsequent events requiring disclosure and effective disclosure controls and procedures.
Important Facts for Investors to Verify
- Assess whether sales growth from the 2016 acquisitions is translating into sustainable comparable-store and margin improvement after holiday and fuel effects.
- Monitor gross-margin pressure from transportation costs, food deflation, inventory shrinkage and slower inventory turns.
- Verify compliance with the $75.0 million EBITDA covenant and the effect of the July 2017 reduction in revolving-credit capacity.
- Evaluate the funding balance among operating cash flow, capital expenditures, debt repayment, acquisitions and the $0.30 quarterly dividend.
- Track performance of the acquired stores and the new Community Market format, including required investments and operating efficiencies.
- Review the potential earnings volatility from marketable-securities investments and the future adoption of accounting standards, particularly financial instruments and leases.