VILLAGE SUPER MARKET INC annual report, FY2021

Village Super Market, Inc. — FY2021 Form 10-K

Business context and reporting period. Village operates 37 supermarkets: 29 ShopRite, five Fairway and three Gourmet Garage stores across New Jersey, New York, Pennsylvania and Maryland. It is a 12.2% owner of Wakefern, its principal supplier and cooperative. Fiscal 2021 ended July 31, 2021 and included 53 weeks, versus 52 weeks in fiscal 2020; amounts below are in thousands unless stated otherwise.

Key financial results

MetricFY2021FY2020Change / context
Sales$2,030,330$1,804,594Up 12.5%; $35,433 of the increase was attributed to the extra week. Excluding it, sales growth reflected Fairway, the Stroudsburg replacement store and 1.8% same-store growth.
Gross profit$565,044$506,475Gross margin 27.83%, down from 28.07%.
Operating income$29,163$30,284Operating margin 1.43%, down from 1.68%.
Net income$19,994$24,939Net margin 0.98%, down from 1.38%. Class A diluted EPS was $1.37, versus $1.72.
Adjusted net income (non-GAAP)$18,914$23,087Down 18%; management cites weaker Manhattan sales and costs integrating Fairway commissary operations.
Operating cash flow$52,692$83,948Decrease primarily reflected working-capital changes and lower net income adjusted for non-cash items.
Cash and cash equivalents$116,314$111,681FY2021 cash included $86,670 in demand deposits at Wakefern.
Working capital$44,023$34,522Current ratio was 1.29, versus 1.21.
Debt, excluding leases$73,803$80,615Includes current debt; FY2021 long-term portion was $66,827.
Lease obligations$322,618Not directly comparablePresent value of operating and finance lease liabilities at FY2021 year-end.
Capital expenditures$25,233$54,495FY2021 operating cash flow also funded $13,050 of dividends and $8,414 of debt principal payments.

Material changes and operating performance

  • Same-store sales rose 1.8% excluding the 53rd week; two-year stacked same-store growth was 7.5%. Digital same-store sales grew 68% year over year and 219% on a two-year stacked basis.
  • COVID-19 drove changes in shopping patterns, including larger baskets and fewer transactions. Manhattan Fairway and Gourmet Garage locations faced weaker sales amid population migration and reduced commuter and tourist traffic.
  • Gross margin fell 24 basis points. Management cited weaker departmental margins and higher Wakefern warehouse assessments, partly offset by product mix, lower promotional spending and greater patronage dividends and rebates.
  • Adjusted operating and administrative expense was 24.76% of sales, up from 24.63%. Higher Fairway occupancy and digital fulfillment costs were partly offset by lower COVID-related costs and payroll leverage.
  • FY2021 included $2,900 of non-cash impairment charges: $2,386 for the Fairway trade name and $514 for one Gourmet Garage store’s long-lived assets. The company also recorded $4,768 of gains on asset sales, including the Fairway-related parking lot leasehold and Silver Spring pharmacy prescription list.
  • Village closed its Silver Spring ShopRite in February 2021; the company said the financial-statement impact was not material. The Fairway acquisition was completed in May 2020 for $73,622 net of cash acquired.

Liquidity, debt and capital plans

  • The Wells Fargo facility had $67,664 available on the $75,000 revolving line at July 31, 2021. The company reported compliance with its debt covenants; $7,336 of letters of credit were outstanding.
  • The company had $55,295 of notes receivable from Wakefern and $86,670 of Wakefern demand deposits. This concentration creates exposure to its principal supplier and related party.
  • Management budgeted $40,000 of FY2022 capital expenditures, including three major remodels, smaller remodels, the Galloway shopping-center purchase, a new Gourmet Garage store, and digital and self-checkout investment. The Galloway shopping center was acquired October 13, 2021 for $9,800.
  • Management expects cash on hand, operating cash flow and the credit facility to meet foreseeable requirements. The Board’s stated intention was to continue quarterly dividends at $0.25 per Class A share and $0.1625 per Class B share; FY2021 dividends totaled $13,050.

Outlook, risks and contingencies

  • Village did not provide FY2022 same-store sales guidance because of uncertainty around COVID-19. It expected an effective tax rate of 30.5%–31.5%.
  • Management expected approximately $15,891 of FY2022 net periodic pension costs, including a $15,155 non-cash, pre-tax settlement charge associated with a plan termination expected in FY2022. The plan had a $3,844 net liability at year-end; contributions to remaining company-sponsored plans were expected to be immaterial.
  • Key risks include persistent pandemic effects, labor shortages and supply disruptions; Fairway integration and performance; intense competition in a low-margin industry; dependence on Wakefern for merchandise, services and patronage dividends; and union negotiations. Approximately 89% of employees were covered by collective bargaining agreements, and some contracts had expired or were due to expire within a year.
  • Other disclosed exposures include underfunded multi-employer pension plans and potential withdrawal liabilities, store and brand impairment, food-safety claims, cybersecurity and information-system interruptions, and insurance/self-insurance claim variability. Management did not expect ordinary-course litigation to have a material adverse effect.
  • The FY2020 comparison included unusual items, including a $2,733 Superstorm Sandy insurance recovery and a $2,512 tax benefit from a federal net operating loss carryback; adjusted figures exclude specified unusual items and are non-GAAP.

Important facts for investors to verify

  • Whether Manhattan Fairway and Gourmet Garage sales recover, and whether the Fairway integration and commissary investments improve profitability without further impairment.
  • How much reported sales growth is attributable to the extra fiscal week, acquisitions and replacement-store effects, versus ongoing comparable-store performance.
  • Cash-flow durability and the availability of liquidity, considering Wakefern deposits and receivables, lease commitments, planned capital spending and dividends.
  • The timing and cash consequences of the pension-plan termination, including the distinction between its projected non-cash settlement charge and required funding.
  • Wakefern-related dependence and exposure, including patronage-dividend estimates, supplier obligations, notes receivable and demand deposits.
  • The filing reports an unqualified audit opinion and effective internal control over financial reporting; review the auditor’s critical audit matter on Fairway trade-name valuation and its sensitivity to forecast revenue and discount-rate assumptions.