Weis Markets, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operated 162 retail food stores in Pennsylvania and four surrounding states as of June 30, 2012. The company reports one operating segment and generates revenue primarily from retail sales of food, pharmacy, fuel, and general merchandise. This filing covers the 13 and 26 weeks ended June 30, 2012, compared with the periods ended June 25, 2011.
Key Financial Metrics
| Metric | 13 Weeks Ended June 30, 2012 | 26 Weeks Ended June 30, 2012 |
|---|---|---|
| Net sales | $677.1 million | $1.339 billion |
| Gross profit | $187.6 million | $370.7 million |
| Gross margin | 27.7% | 27.7% |
| Income from operations | $35.3 million | $65.7 million |
| Operating margin | 5.2% | 4.9% |
| Net income | $23.2 million | $43.2 million |
| Net margin | 3.4% | 3.2% |
| Diluted earnings per share | $0.86 | $1.61 |
| Operating cash flow | Not separately provided | $64.1 million |
At June 30, 2012, cash and cash equivalents were $46.7 million and marketable securities were $82.6 million. Total assets were $1.068 billion, total liabilities were $295.0 million, and shareholders’ equity was $773.3 million. The filing does not report outstanding debt. Weis had a $50 million short-term credit facility available for working capital and potential acquisitions, with no outstanding liability under the facility at quarter-end.
Capital expenditures were $40.4 million during the first half, and the company spent $6.1 million acquiring three former Genuardi’s stores. Dividends paid were $16.1 million, or $0.60 per share. Letters of credit outstanding totaled $11.8 million.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales increased 0.1% and first-half sales increased 0.2% year over year.
- Comparable-store sales increased 0.4% in the second quarter and 0.7% year to date; excluding fuel, comparable-store sales increased 0.5% and 0.4%, respectively.
- Gross profit increased 2.7% in the quarter and 2.6% year to date, with gross margin improving from 27.0% to 27.7%.
- Operating income increased 11.4% in the quarter and 9.7% year to date. Net income increased 12.1% and 10.0%, respectively.
- Operating cash flow increased from $62.8 million to $64.1 million year to date, while net investing cash outflows declined from $85.5 million to $38.7 million.
- Property and equipment purchases declined from $47.4 million to $40.4 million, while marketable securities purchases declined from $50.0 million to $9.8 million.
- Average sales per customer transaction increased 1.9% in the quarter and 2.0% year to date, while identical customer visits declined 1.2% and 1.1%, respectively.
Guidance, Outlook, Risks, and Unusual Items
- Management estimated approximately $110 million of 2012 development investment after previously reporting $125 million; the reduction reflected projects shifting from 2012 to 2013. Management continued to describe the capital expansion program as a priority and stated it expected to invest the previously reported $125 million.
- The company expected diesel fuel prices to stabilize for the remainder of 2012, with modest increases, if any.
- Management expected healthcare benefit costs to increase approximately 5% in fiscal 2012 and cited potential future cost impacts from the Patient Protection and Affordable Care Act.
- Food-at-home and finished-food price indexes were elevated, and management cautioned that inflation, fuel costs, utilities, labor, healthcare, competition, and price pressures could reduce earnings or limit the ability to pass through higher costs.
- On June 11, 2012, Weis acquired three former Genuardi’s stores in Pennsylvania. The stores contributed $2.0 million of second-quarter sales, and the company recognized a $414,000 bargain-purchase gain.
- Effective January 1, 2012, the company changed depreciation for buildings, improvements, and equipment from accelerated methods to straight-line, accounted for prospectively as a change in estimate. The change reduced depreciation expense by $2.9 million in the quarter and $5.8 million year to date versus the former method. Management stated that continued use of accelerated depreciation would have reduced net income by $1.6 million, or $0.06 per share, in the quarter and $3.2 million, or $0.12 per share, year to date, after tax.
- Internal controls and disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Investor Verification Checklist
- Verify the effect of the depreciation-method change on reported earnings, margins, asset values, and comparability with prior periods.
- Assess whether modest sales growth and declining store visits can be sustained amid promotional pricing and competitive pressure.
- Review the economics, lease obligations, integration costs, and future capital needs associated with the three acquired Genuardi’s stores.
- Confirm the timing and total amount of the 2012 capital expansion program, including projects deferred to 2013.
- Monitor food, fuel, labor, healthcare, utility, and regulatory costs and the company’s ability to recover them through pricing.
- Review liquidity after planned capital spending, dividends, potential acquisitions, letters of credit, and operating lease commitments through 2028.