Weis Markets, Inc. — First-Quarter 2016 Form 10-Q
Reporting period: Thirteen weeks ended March 26, 2016, compared with March 28, 2015. Weis Markets operated 162 retail food stores in Pennsylvania and four surrounding states and reported one operating segment.
Financial Highlights
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $738.2 million | $712.4 million | 3.6% |
| Gross profit | $207.1 million | $195.1 million | 6.1% |
| Gross margin | 28.1% | 27.4% | +0.7 percentage points |
| Operating income | $31.3 million | $19.9 million | 57.4% |
| Operating margin | 4.2% | 2.8% | +1.4 percentage points |
| Net income | $20.1 million | $13.3 million | 51.1% |
| Net margin | 2.7% | 1.9% | +0.8 percentage points |
| Diluted EPS | $0.75 | $0.50 | 50.0% |
| Cash dividends per share | $0.30 | $0.30 | No change |
Operating, general and administrative expenses increased only 0.3% to $175.8 million, while expense as a percentage of sales declined to 23.8% from 24.6%. The effective income tax rate increased to 36.9% from 34.7%, primarily because of higher state tax expense.
Cash Flow, Balance Sheet and Liquidity
- Operating cash flow was $38.1 million, up from $31.0 million.
- Capital expenditures were $29.9 million, compared with $20.6 million, including the purchase of four properties.
- Net cash used in investing activities was $17.2 million versus $28.8 million, aided by $15.2 million of marketable-security proceeds.
- Dividends paid were $8.1 million in both periods. Cash increased to $30.4 million from $17.6 million at December 26, 2015.
- Marketable securities totaled $78.6 million, and the SERP investment totaled $9.8 million.
- Total liabilities were $348.5 million and shareholders’ equity was $884.5 million at March 26, 2016. The filing does not identify outstanding long-term debt; liquidity was supported by cash, investments and operating cash flow.
- The Company had a $30 million line of credit, with $13.3 million committed to letters of credit, and a $50 million short-term facility agreement. Management did not anticipate drawing on the letters of credit.
- Management planned approximately $140 million of capital spending for 2016, funded through cash and investment reserves and internally generated operating cash flow.
Material Changes and Operating Drivers
- Total and comparable-store sales increased 3.6%; comparable sales excluding fuel increased 3.7%. Management estimated that the Easter holiday shift into the first quarter contributed approximately $7.1 million, or 1.0% of comparable-store sales.
- Customer visits increased 4.7%, while average sales per transaction declined 1.1%.
- Comparable fresh sales increased 5.2%, pharmacy sales increased 10.0%, and center-store sales increased 1.2%. Fuel sales declined 9.1%, primarily because of lower retail fuel prices.
- Gross margin benefited from a shift in sales mix from lower-margin fuel to grocery sales.
- Employee-related expenses increased $2.2 million. The $9 hourly base wage implemented in August 2015, including wage compression, had an estimated $2.7 million first-quarter cost.
- Self-insured health-care expense decreased $0.8 million, or 12.5%, due primarily to lower claims costs. Management estimated that increased full-time employment under the Affordable Care Act could cost approximately $1.0 million annually.
- Depreciation and amortization increased to $18.4 million from $17.3 million because of capital expansion and technology investments.
Outlook, Risks and Unusual Items
- Management expected the Easter timing benefit in the first quarter to adversely affect second-quarter sales because of the typical post-holiday sales slump.
- Management remained confident in sales growth but cited intense competition, competitors with greater financial resources, pricing pressure, economic conditions, regulatory changes, technology changes and retail-industry conditions as risks.
- Fuel and diesel-price volatility may affect merchandise delivery costs, petroleum-based supplies and fuel sales. Management expected diesel prices to remain relatively steady through the remainder of 2016.
- Prior-period self-insurance actuarial errors were corrected in the historical financial statements. The errors increased reported first-quarter 2015 net income by $214,000, or $0.01 per share; the Company concluded the errors were not material to previously filed financial statements.
- The Company was evaluating the future impact of revenue-recognition, lease, stored-value breakage and other recently issued accounting standards. Adoption of the business-combination measurement-period amendment had no impact, and the going-concern and inventory standards were not expected to have a material impact.
- There were no material changes in market risk, no material subsequent events requiring disclosure, and management concluded disclosure controls were effective.
Investor Verification Items
- Verify the sustainability of margin expansion after the temporary Easter sales benefit and the favorable fuel-to-grocery mix shift.
- Monitor the planned $140 million capital program, property acquisitions and resulting cash requirements.
- Assess the impact of wage increases, wage compression, health-care costs and Affordable Care Act requirements on future operating expenses.
- Review the self-insurance reserve methodology and the effect of the prior-period actuarial-error correction.
- Confirm available borrowing capacity, letters-of-credit commitments, lease obligations and the absence or presence of future debt financing.
- Evaluate the effects of fuel-price movements, competitive pricing and the expected second-quarter post-Easter sales comparison.