Weis Markets, Inc. 2016 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Weis Markets operates retail food stores, pharmacies, fuel locations, manufacturing facilities, a distribution center and transportation operations. As of June 25, 2016, the company operated 162 stores in Pennsylvania, Maryland, New Jersey, New York and West Virginia and reported one operating segment. The filing covers the 13 and 26 weeks ended June 25, 2016, compared with June 27, 2015.
Financial Performance and Position
| Metric | 13 Weeks Ended June 25, 2016 | 13 Weeks Ended June 27, 2015 | 26 Weeks Ended June 25, 2016 | 26 Weeks Ended June 27, 2015 |
|---|---|---|---|---|
| Net sales | $730.4 million | $718.4 million | $1,468.6 million | $1,430.8 million |
| Gross profit | $201.9 million | $198.9 million | $409.0 million | $394.0 million |
| Gross margin | 27.6% | 27.7% | 27.9% | 27.5% |
| Income from operations | $24.1 million | $25.6 million | $55.3 million | $45.4 million |
| Operating margin | 3.3% | 3.6% | 3.8% | 3.2% |
| Net income | $15.3 million | $16.6 million | $35.4 million | $30.0 million |
| Diluted EPS | $0.57 | $0.62 | $1.32 | $1.12 |
- Second-quarter sales increased 1.7%; first-half sales increased 2.6%.
- Second-quarter net income declined 8.3% and EPS declined 8.1%, while first-half net income increased 18.1% and EPS increased 17.9%.
- Second-quarter operating income declined 5.9%, primarily reflecting higher operating expenses; first-half operating income increased 21.8%.
- Operating, general and administrative expense increased 2.6% in the quarter and 1.5% year to date. The second-quarter expense ratio increased to 24.4% from 24.1%.
- The effective tax rate increased to 38.3% in the quarter and 37.5% year to date, compared with 36.4% and 35.6%, respectively, due primarily to higher state tax expense.
- Operating cash flow increased to $74.4 million from $63.9 million in the first half of 2015.
- Capital expenditures were $54.5 million, compared with $39.0 million, and represented 3.7% of sales versus 2.7% previously.
- Cash and cash equivalents were $34.3 million at June 25, 2016, compared with $17.6 million at December 26, 2015. Marketable securities totaled $78.4 million.
- Total liabilities were $336.6 million and shareholders’ equity was $892.2 million at June 25, 2016. The filing does not report outstanding long-term debt.
- The company paid $16.1 million in dividends during the first half, or $0.60 per share, and approved another $0.30 quarterly dividend payable August 1, 2016.
Material Changes Versus the Prior Comparable Period
- Comparable store sales increased 1.8% in the quarter and 2.7% year to date; excluding fuel, increases were 2.0% and 2.8%.
- Customer visits increased 4.3% in the quarter and 4.5% year to date, while average sales per transaction declined 2.3% and 1.7%, respectively.
- Fuel comparable sales declined 13.4% in the quarter and 11.5% year to date because of lower retail fuel prices, despite a 3.5% year-to-date increase in gallons sold.
- Comparable pharmacy sales increased 9.2% in the quarter and 9.6% year to date. Bakery, deli and food service also posted strong comparable growth.
- The company incurred an estimated $2.8 million of second-quarter and $5.5 million of first-half costs from raising the base hourly wage to $9 and related wage compression. Labor-efficiency savings partially offset these costs.
- Depreciation and amortization increased to $37.0 million from $34.8 million year to date because of store, technology and other capital investments.
- The first-half gross margin improved because of a shift from lower-margin fuel sales toward grocery sales.
Guidance, Outlook, Risks and Unusual Items
- Management planned approximately $140.0 million of capital investment during 2016, funded through cash, internally generated operating cash flow and a credit facility being finalized.
- The company planned to acquire five Mars Super Market locations in the third quarter of 2016 and announced a definitive agreement to acquire 38 Food Lion locations in Maryland, Virginia and Delaware, subject to regulatory approval and expected completion in the fourth quarter.
- As of June 25, 2016, the company had a $30 million line of credit, with $12.8 million committed to letters of credit. Management did not expect to draw on the facility.
- Key risks include intense retail competition, price pressure, wage and health-care cost inflation, Affordable Care Act costs, fuel and commodity-price volatility, regulatory changes, technology requirements and execution of planned acquisitions and capital expansion.
- The company disclosed prior-period corrections related to workers’ compensation and general-liability self-insurance estimates. The corrections increased reported 2015 net income by $214,000 for the quarter and $428,000 for the first half, or $0.01 and $0.02 per share, respectively.
- The company expects the new revenue-recognition standard to have no significant financial-statement impact and expects the inventory and stored-value standards to have no significant impact. It expects the new lease standard to have a significant balance-sheet impact.
- Management stated that disclosure controls were effective and that no material change occurred in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Completion timing, purchase price, financing and regulatory approval for the Mars and Food Lion acquisitions.
- Whether the planned $140 million capital program and acquisitions can be funded without drawing on credit facilities or materially reducing liquidity.
- Trends in labor, health-care, insurance and other operating expenses, including the impact of the $9 hourly wage rate.
- Comparable-store sales excluding fuel, customer traffic and transaction size, given the divergence between higher visits and lower average transaction values.
- Exposure to fuel, commodity, interest-rate and marketable-securities volatility.
- Self-insurance reserve estimates and the potential for additional revisions following the disclosed prior-period correction.