Weis Markets, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates 169 retail food stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia, supported by a distribution facility, transportation fleet and manufacturing facilities. The company reports one operating segment. This report covers the 13 and 26 weeks ended June 28, 2014, compared with the periods ended June 29, 2013.
Financial Performance and Position
| Metric | 13 Weeks Ended June 28, 2014 | 13 Weeks Ended June 29, 2013 | 26 Weeks Ended June 28, 2014 | 26 Weeks Ended June 29, 2013 |
|---|---|---|---|---|
| Net sales | $691.9 million | $662.1 million | $1,379.0 million | $1,344.8 million |
| Gross profit | $187.7 million | $190.3 million | $374.4 million | $381.4 million |
| Gross margin | 27.1% | 28.7% | 27.2% | 28.4% |
| Operating income | $19.4 million | $37.6 million | $41.7 million | $68.5 million |
| Operating margin | 2.8% | 5.7% | 3.0% | 5.1% |
| Net income | $12.8 million | $24.2 million | $27.6 million | $44.3 million |
| Net margin | 1.8% | 3.7% | 2.0% | 3.3% |
| Diluted EPS | $0.48 | $0.90 | $1.02 | $1.65 |
Second-quarter sales increased 4.5%, while first-half sales increased 2.5%. Excluding fuel, sales increased 3.9% for the quarter and 2.1% year to date. Comparable-store sales increased 2.9% in the quarter and 0.8% for the first half; excluding fuel, the increases were 2.2% and 0.5%, respectively.
Cash flow from operations was $55.7 million for the first half of 2014, compared with $78.4 million in the prior-year period. Capital expenditures were $35.8 million versus $57.3 million. Dividends paid were $16.1 million in both periods, or $0.60 per share year to date. Cash and cash equivalents were $21.7 million at June 28, 2014, compared with $18.0 million at December 28, 2013. Marketable securities totaled $65.1 million, and the SERP investment totaled $10.3 million.
The balance sheet reports no long-term debt. The company had a $30 million line of credit, with $18.0 million committed to outstanding letters of credit; management did not expect to draw on the facility. Total liabilities were $299.8 million and shareholders’ equity was $846.6 million at June 28, 2014.
Material Changes Versus the Prior Comparable Period
- Operating income declined 48.3% in the quarter and 39.1% year to date; net income declined 47.1% and 37.8%, respectively.
- Gross margin contracted 160 basis points in the quarter and 120 basis points year to date, primarily because of the company’s Three Ways to Save pricing initiatives.
- Operating, general and administrative expenses increased 10.2% in the quarter and 6.3% year to date, reaching 24.3% and 24.1% of sales, respectively, versus 23.1% and 23.3%.
- Depreciation and amortization increased to $16.2 million in the quarter and $32.3 million year to date, reflecting capital expansion investments.
- Investment income decreased 64.0% in the quarter and 49.7% year to date, partly because the prior-year period included gains from equity-security sales.
- First-half operating cash flow decreased primarily because of differences in inventory and working-capital activity; inventories declined $21.5 million during the period.
- Sales benefited from the Easter holiday’s shift into the second quarter. Management estimated the benefit at approximately $8.6 million in total-store sales; adjusted for this shift, second-quarter total-store sales increased 3.2% and comparable-store sales increased 1.5%.
Guidance, Outlook, Risks and Unusual Items
Management estimated that current 2014 development plans require approximately $101.0 million of investment, to be funded through cash and investment reserves and internally generated operating cash flow. The company expects diesel fuel prices to remain fairly steady through year end, based on cited government projections.
Management cited weak economic growth in parts of Northeastern Pennsylvania and New York’s Southern Tier, reduced SNAP benefits, cautious consumer spending, price competition and the risk that higher labor, healthcare, utility and other operating costs may not be fully recovered through pricing. Competition from regional and national retailers with greater financial resources is also identified as a risk.
Utility expense increased 6.2% in the quarter and 7.8% year to date, partly because of unusually cold first-quarter temperatures. The company recognized a $1.7 million pretax gain from a property sale in the first half of 2014, compared with $2.9 million from two property sales in the prior-year period.
The company adopted no material new accounting impact during the period. It was evaluating the future revenue-recognition and discontinued-operations standards and did not expect either adoption to have a material effect. Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Investor Verification Checklist
- Verify whether sales growth can continue after adjusting for the Easter holiday benefit and fuel-price effects.
- Monitor recovery or further deterioration in gross margin following promotional pricing investments.
- Assess whether SG&A growth, utilities, labor, healthcare and depreciation costs remain elevated.
- Evaluate funding capacity for the approximately $101.0 million 2014 capital expansion program.
- Confirm liquidity and contingent obligations associated with the $18.0 million of outstanding letters of credit.
- Track comparable-store traffic, transaction size, SNAP-related demand and competitive pricing conditions.
- Review the effect of marketable-security valuations and investment income on earnings and accumulated other comprehensive income.