Ingles Markets, Incorporated
Q1 2010 Earnings Call Transcript

Published: 29 Jan 2010

[Operator:]

Good day and welcome to the Ingles Markets Incorporated first quarter conference call. Today's conference is being recorded. For opening remarks and introductions I would now like to turn the conference over to Chief Financial Officer, Mr. Ron Freeman. Please go ahead sir.

[Ron Freeman:]

Thank you and good morning. Welcome to Ingles Markets fiscal 2010 first quarter conference call. With me today are Robert Ingle, Founder of the company and Chief Executive Officer, Robert Ingle II, Chairman of the Board, Jim Lanning, President and Tom Outlaw, Vice President of Sales and Marketing. Statements made on this call include forward-looking statements as defined by and subject to the Safe Harbors created by Federal Securities laws. Words such as expect, anticipate, intend, plan, likely, goal, seek, believe and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed on this call. Ingles Markets does not undertake and declines any obligations and update publicly any forward-looking statements whether as a result of new information future events or otherwise. For a description of factors that could cause actual results to differ materially from that anticipated by forward-looking statements, you are referred to the company’s public filings including the Form 10-K for the fiscal year ended September 26, 2009. In accordance with the long standing company policy and in recognition of the extremely competitive nature of our industry this call will not address individual competitors or Ingles Marketing strategies other than what is included in the company’s public filings. This morning I will provide you with a summary of our first quarter results followed by additional comments. After that we will be pleased to take your questions. Our press release issued this morning is available on our website at www.ingles-markets.com. We plan to file our 10-Q for the quarter this afternoon. It will be available on our website as well. Net sales totaled $841 million for the quarter ended December 26, 2009 compared with $804.9 million for the comparable quarter ended December 2008. That represents a 4.5% increase in total consolidated sales. Grocery segment comparable store sales increased $26.5 million or 3.4%. Excluding gasoline sales, comparable store sales increased $5.6 million or 0.8%. The difference in comparable store sales growth with and without gasoline is attributable to gasoline prices that were approximately 14% higher this quarter versus the same quarter last year. Outside of gasoline, price deflation in many staple items and the continued recession has affected our sales growth. Our fluid dairy segment also experienced volume growth but lower sales dollars due to lower raw milk cost. Given the extended recession and intensified competition for a smaller amount of consumer dollars, we are pleased with our sales growth and the increase in our average customer visits. Our long-term objectives remain focused on driving top line sales to product offerings, customer satisfaction and expanded store offerings. Although, this focus contemporarily depress operating profits, we believe that it's important to maintain customer royalty during these difficult economic times. We believe we have been successful on this regard as evidenced by this quarters 11.6% increase in average weekly customer visits compared with the first quarter of last year. That’s the best indicator that Ingles is delivering value to our customers. Our sales and customer visits increased even though the average purchased amount decreased 9.8% when comparing the December 2009 and December 2008 quarters. Gross profit for the three-month period ended December 26, 2009 decreased $0.3 million to $185.3 million or 22% of sales compared to $185.6 million or 23.1% of sales for the three-month period ended December 27, 2008. The primary reason for the decline in gross margin and gross profit since last year was lower gasoline margins. Excluding gasoline sales, grocery segment gross profit as a percentage of sales was relatively constant at 25% for the three months ended December 26, 2009 compared with 24.9% for the three months ended December 27, 2008. We are pleased that we are able to report relatively stable grocery segment gross margins in light of competitive factors and price deflation on a number of key items. Total operating expenses were $160.6 million for the first quarter of fiscal 2010, compared with $156.3 million for the comparable fiscal 2009 quarter. The dollar growth in operating expenses was comprised primarily of increases in depreciation, insurance and payroll arising from stores opened or remodeled since the first quarter of last year. As these stores mature, we expect additional improvement in our ratio of operating expenses to sales. Excluding gasoline sales on associated operating expenses, operating and administrative expenses as a percentage of sales were 21.7% and 21.5% for the three months ended December 26, 2009 and December 27, 2008 respectively. Net rental income, losses on asset disposals and other income totaled $900,000 for the first quarter of fiscal 2010, compared with $1.9 million for the 2009 first fiscal quarter, primarily due to the lower rental income and lower income from sales of scrap part cardboard and packaging materials. Asset disposal transactions were insignificant for the comparable fiscal quarters. Interest expense increased $3.2 million for the three months period ended December 26, 2009 to $16.2 million from the $13 million for the three months period ended December 27, 2008. Total debt at December 26, 2009 was $841.7 million compared to $753.4 million at December 27, 2008. The increases in interest expense and total debt were due to the company’s comprehensive refinancing that took place in May 2009. This refinancing included the issuance of $575 million, the principal amount of senior notes due in 2017, the repayment of certain other debt outstanding at the time of the issuance and an increase in our cash reserves. The company currently has lines of credit totaling $185 million with no amounts borrowed at December 26, 2009. We believe the comprehensive refinancing was an important part of our strategy to ensure that Ingles had the funding in place to execute our growth plans. With the solid cash position on our balance sheet, and abundant sources of additional credit, we are in an excellent position at this time to fund our operations. Net income for the December 2009 quarter totaled $6.0 million compared with net income of $11.1 million for the December 2008 quarter. Basic and diluted earnings per share for the company’s publicly traded class A common stock were $0.26 and $0.25 per share respectively for the December 2009 quarter compared with $0.47 and $0.45 per share respectively for the December 2008 quarter. Capital expenditures totaled $17.7 million for the first quarter of fiscal year 2010. This is a significantly lower run rate compared with total CapEx of approximately $390 million invested during fiscal years 2008 and 2009. Economic conditions have resulted in a longer ramp-up time for those 2008 through 2009 store development projects and has made us more deliberate in our 2010 development plans until the economic conditions improve. The company's capital expenditure plans for fiscal year 2010 include investments of approximately $120 million to $150 million. At the present time, the company intends to open seven new replacement or remodel stores and add approximately four new fuel stations at either new or existing stores during the remainder of fiscal 2010. During the first quarter, Ingles opened one new and one remodeled store. Our liquidity position is strong with cash-on-hand totaling $50.2 million at December 26, 2009; no outstanding on our lines of credit and significant unencumbered assets. We believe our financial resources will be sufficient to meet planned capital expenditures, schedule debt repayment and working capital requirements for the foreseeable future. We will now take your questions.

[Operator:]

Today's question-and-answer session will be conducted electronically. (Operator Instructions). And we'll pause for just a moment to give everyone a chance to signal. (Operator Instructions).

[Ron Freeman:]

Well it appears we don’t have any questions today, so we'll go ahead and wrap things up. Thank you for listening in today. We appreciate your time and your interest and we look forward to speaking with you again soon. Thank you and have a good day.

[Operator:]

That does conclude today's conference. Thank you for your participation.