Ingles Markets, Incorporated
Q2 2013 Earnings Call Transcript

Published: 6 May 2013

[Operator:]

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

[Ron Freeman:]

Thank you. Good morning and welcome Ingles Markets fiscal 2013 second quarter conference call. With me today are Robert Ingle II, CEO and Chairman, Jim Lanning, President and Tom Outlaw, Vice President of Sales. 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 Incorporated does not undertake and decline 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 29, 2012. 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 second quarter and six month results followed by additional comments. After that we will be pleased to take your questions. Our press release was issued this morning and is available on our website at www.ingles-markets.com. We expect to plan to file our 10-Q for the quarter later this week. It will be available via our website as well. We will begin with our second-quarter results. Net income for the second quarter of fiscal 2013 totaled $8.1 million compared with net income of $6.5 million earned for the second quarter of fiscal 2012. We experienced good sales growth along with stable margins and operating expenses. This quarter’s results were also helped by extra Easter sales and by the sale of a former store property. Net sales increased $36.9 million or 4.2% to $918.6 million for the three months ended March 30, 2013 from $881.7 million for the three months ended March 24, 2012. Ingles operated 203 stores out of 11 million square feet of retail space at the end of both March 2013 and 2012. Excluding gasoline, grocery segment comparable store sales grew 3.8%. Excluding gasoline and the effect of Easter, comparable store sales grew 2.7%. The number of customer transactions, excluding gasoline, increased 3.3% while the comparable average transaction size, excluding gasoline, increased 1.9% compared with the same quarter last year. Gross profit for the March 2013 quarter increased 3.1% to $198.3 million compared with $192.4 million for the second quarter of last fiscal year. Gross profit as a percentage of sales was 21.6% for the March 2013 quarter compared with 21.8% for the March 2012 quarter. Gasoline margins were lower. Excluding gasoline sales, grocery segment gross profit as a percentage of sales decreased 32 basis points for the three months ended March 30, 2013 compared with the same quarter of last fiscal year. Operating and administrative expenses for the March 2013 quarter totaled $175 million, an increase of $5.9 million, or 3.5% over the March 2012 quarter. Excluding gasoline sales and associated operating expenses which are primarily payroll, operating and administrative expenses as a percentage of sales were 22.1% for the three months ended March 30, 2013 and 22.4% for the three months ended March 24, 2012. We are pleased with our expense control measures. During the quarter, we sold a former store property for $7.5 million and recognized a pre-tax gain of $3.9 million on the sale. Interest expense increased $0.8 million for the three-month period ended March 30, 2013 to $15.7 million from $14.9 million for the three-month period ended March 24, 2012. Total debt at March 30, 2013 was $860 million compared with $833.5 million at March 24, 2012. Interest expense increased due to a higher total debt and last year’s capitalization of interest on the construction of our distribution center that opened last summer. Income tax expense totaled 36.5% of pre-tax income for the March 2013 quarter compared with 32.9% in the March 2012 quarter. Net income of $8.1 million for the March 2013 quarter represents 0.9% of sales. Net income of $6.5 million for the March 2012 quarter represented 0.7% of that quarter sales. Basic and diluted earnings per share for the company's publicly traded class A common stock were $0.35 and $0.33 per share respectively for the March 2013 quarter compared to $0.28 and $0.27 per share, respectively for the March 2012 quarter. Next, I will discuss our six months results. Net sales increased $51.5 million or 2.9% to $1.85 billion for the six months ended March 30, 2013 from $1.8 billion for the six months ended March 24, 2012. Excluding gasoline and extra Easter 2013 sales, grocery segment comparable store sales increased 2.4%. The number of customer transactions, excluding gasoline, increased 2.3% while the comparable average transaction size, excluding gasoline, increased 0.6% compared with the March 2012 six-month period. Gross profit for the six months ended March 30, 2013 increased 3.1% to $406.2 million, an increase of $12 million compared with the first six months of last year. Gross profit as a percentage of sales was 21.9% for both the March 2013 and 2012 six-month period. Excluding gasoline sales, grocery segment gross profit as a percentage of sales increased eight basis points for the six months ended March 30, 2013 compared with the same period of last year. Operating and administrative expenses increased $8.9 million or 2.6% to $349.8 million for the six months ended March 30, 2013 from $340.9 million for the six months ended March 24, 2012. As a percentage of sales and excluding gasoline, operating and administrative expenses were leveled at 22% for the six months period end March 2013 compared with 21.9% for the six-month period ended March 2012. Operating expense dollar increases were driven by store development activities and higher insurance expense. Interest expense totaled $31.3 million for the six month period ended March 30, 2013 compared with $30 million for the six-month period ended March 24, 2012. As noted in the three-month discussion, interest expense increased due to higher total debt and last year’s capitalization of interest on the construction of our distribution center that opened last summer. Income tax as a percentage of pre-tax income increased to 37% for the March 2013 six-month period compared with 34.3% for the comparable March 2012 primarily due to decreased tax credits in the current year. Summarizing our six-month results, net income totaled $19.7 million for the six-month period ended March 30, 2013 compared with $17.1 million for the six-month period ended March 24, 2012. Net income as a percentage of sales was 1.1% for the six months ended March 30, 2013 and 1.0% for the six months ended March 24, 2012. Basic and diluted earnings per share for publicly traded Class A common stock were $0.85 and $0.81 for the six months ended March 30, 2013 compared to $0.73 and $0.70 respectively for the six months ended March 24, 2012. Next, I'll update our investing and financing activities and after that I will take your questions. Capital expenditures for the March 2013 six-month period totaled $47 million compared with $103.5 million for the March 2012 six-month period. The decrease is attributable to the construction of the new distribution center that opened in mid-2012. Capital expenditures for the entire fiscal year are expected to be approximately $100 million to $130 million, including expenditures for stores that open in fiscal 2013 and 2014, as well as for the company’s ongoing remodeling program at multiple stores. Just after quarter end, we opened new Ingles store in Mills River, North Carolina bringing our store total to 204. At March 30, 2013 the company currently has lines of credit totaling $175 million with $62 million borrowed and $8.2 million of issued but unused letters of credit at March 30, 2013. The company’s $575 million of senior notes with a yield of 9.5% become callable at a price of 104.438% of par on May 15, 2013. We are monitoring market conditions to determine the best mix of debt arrangements to fund our current operations and future growth. The company believes based on its current results of operations and financial condition that its financial resources, including existing bank lines of credit, short and long-term financing expected to be available to it and internally generated funds will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. We recently celebrated the 50th anniversary of the first Ingles store. The focus of that celebration has been for our customers and for our more than 20,000 associates. The owners and managers of Ingles deeply appreciate both relationships and look forward to many more decades together. And we will now take your questions.

[Operator:]

(Operator Instructions) We’ll go first to Damian Witkowski with Gabelli & Co.

[Damian Witkowski:]

Let me just start off with the thing you mentioned last which is the debt – it’s becoming callable about a week from today. Just remind me, is it the entire $575 million face value of the debt that’s callable 104.4 or so?

[Ron Freeman:]

Yes, it is.

[Damian Witkowski:]

And have you done any – do you have a sense of what rate you could refine so that in today’s market versus the almost 9% that you are currently paying?

[Ron Freeman:]

Yes, we do have a good sense of what we can pay in the market right now.

[Damian Witkowski:]

Could you share that or not yet?

[Ron Freeman:]

I can’t share it yet but suffice it to say it’s a good dip below the 9.5% we are currently paying.

[Damian Witkowski:]

And then in terms of the property gain, what’s the tax rate on a gain real estate sales gain, like this one which I assume is obviously long term?

[Ron Freeman:]

Yes, it is a long term and we will have to check with our tax accountants on that when we do the next year’s tax return. But it was a property that we owned, to where we had not operated the store in a number of years, had a very interested buyer, and it was a really good transaction for the company.

[Damian Witkowski:]

And if you look at that property, I mean is it – I know it’s hard to generalize but is it different than your – the other average store that you own currently, is it better or worse?

[Ron Freeman:]

Well, again it’s not – it hasn’t had an open store in it for a while. So it’s different from a lot of the properties where we currently operate. So when you have many properties as we do it’s hard to make one general case for every property.

[Damian Witkowski:]

But essentially I wasn’t hoping you could sort of think about it from your perspective, I believe that the location itself wasn’t as good as your other stores, which are obviously open and operating. And then just lastly on the distribution center, where – what kind of savings did you get during the second quarter?

[Ron Freeman:]

Well, we don't quantify the savings but strategically it’s cut down on our distribution expenses because this center is right here where the rest of our distribution capabilities are. We already have our own trucks. We are doing more of our negotiations with our vendors. So both strategically and in the short term it has been a very, very good investment for the company.

[Damian Witkowski:]

And in terms of – if you look at it where it is today, where it has been running in terms of ramp up, I mean in terms of what you have, what you got plan for it ultimately, I mean where are we – we’re not a 100% utilization yet, but is it 50, 60% at this point?

[Ron Freeman:]

We built it with room to grow. And we made it through our busiest holiday season quite well. So we think we’re really well-positioned to handle what we're doing now as well as have a lot of capacity for future growth.

[Operator:]

We’ll go next to Bryan Hunt with Wells Fargo Securities.

[Bryan Hunt:]

So my questions actually got to the same topics the previous questioner had. But first of all, if you look at the property that was sold, one, can you tell us where it was located, and two, what did it consist of in terms of buildings, square footage et cetera?

[Ron Freeman:]

Well, it was in Georgia and I can’t even remember the size of the building that was on it. It’s gone now. So somebody wanted the property, not the building.

[Bryan Hunt:]

Can you tell us a bit around the line of market or was it north of the state, northern of the state?

[Ron Freeman:]

Well it was outside of Atlanta.

[Bryan Hunt:]

All right. Second, when you look at the distribution center, I mean you talked about distribution savings and capacity utilization, but in general would you say that the savings that you’re realizing so far meeting your expectations or are they exceeding your expectations?

[Ron Freeman:]

Exceeding our expectations.

[Bryan Hunt:]

And then just to give us an idea how many properties do you have there that are either greenfield or dormant at this time, or even can you talk about how many you’re actively having for sale?

[Ron Freeman:]

Yeah, that’s not in any of our public filings. So I can’t talk about that here.

[Bryan Hunt:]

And then lastly, if you look at the Mills River store you opened, can you give us an idea of the size of that, location as well as maybe the total CapEx associated with it?

[Ron Freeman:]

But we never talk about total CapEx with individual projects just because it can vary so much for you to land cost and everything else. The size is between 70,000 and 80,000 square feet, it does have a new look and some features to what we have done in other stores. So you should try to get by there as soon as you can, Bryan.

[Bryan Hunt:]

Well, it’s not too away. I appreciate it. Appreciate your time.

[Operator:]

We’ll go back to Damian Witkowski with Gabelli & Co.

[Damian Witkowski:]

A couple more quick questions. On gasoline, you said your margins were lower but if you look at how you make money on gasoline on a penny per gallon profits, where did those come in year over year?

[Ron Freeman:]

I do not have that information in front of me. So I can’t answer that question. So really (inaudible) about what I said in the comments.

[Damian Witkowski:]

And then from a – on the milk side in your milk processing business, where are the margins there? I think there still continues to be a good amount of pressure on the retail side in terms of keeping milk prices low. But are you able to pass along or recover some of that costs?

[Ron Freeman:]

Well, and you’ve also got to take into account that overall milk consumption is down nationwide. So there is a lot of pressure on that business and which creates pressure to pass along any price increases as well.

[Damian Witkowski:]

And then just lastly on development property, how should they think of it in this quarter in terms of what part of the 4.6 million in income taxes that you paid in the quarter, how much of that is attributable to the 3.9 million gain on the property sales?

[Ron Freeman:]

Well, right now we didn’t make any difference in our provision for possible rates on the gain of that, our tax guys have to figure that out.

[Operator:]

And we’ll go back to Bryan Hunt with Wells Fargo Securities.

[Bryan Hunt:]

When you look at your sales throughout the departments, can you talk about – was there any individual department that had a greater list in the period on a relative basis?

[Ron Freeman:]

Three or six months?

[Bryan Hunt:]

For the three months period.

[Ron Freeman:]

Yeah, they all did very well. Everyone was up and we will have a table in the 10-Q when that’s released. That will kind of give you a little bit breakdown of the sales increases overall. Our perishables did well. Gasoline hung in there. So again they’re all up but we were particularly with our perishable performance.

[Bryan Hunt:]

And when you look at overall traffic, is there – I know you got stores in Georgia and North Carolina, but is there any difference in the performance regionally when you look at your store footprint in terms of traffic?

[Ron Freeman:]

No, not really.

[Bryan Hunt:]

How about store size? If you were to segment your store size, are the bigger stores outperforming smaller stores in terms of comp performance?

[Ron Freeman:]

They’ve all done well. Again you can go back to the K and see how they are spread of our store sizes that’s out there. Certainly anything that we are building or remodeling these days has a little bit larger square footage in them but we’re pleased – we don’t think there is an appreciable difference in the square foot size. I think they are all doing fine.

[Bryan Hunt:]

And then lastly, if you look at the improvement in basket and comps on a sequential basis, do you believe you are doing anything different in terms of circulars, promotions or using your card data to drive sales or do you think it’s just an overall lift in the consumer performance that had suited home consumption?

[Ron Freeman:]

Well, we are always looking at all of those ways to drive sales. So to your point, one particular piece of that, I don’t think you can necessarily do that. We care about that top line growth and whether it comes from better promotions, better circulars and what not, we are somewhat indifferent to that.

[Operator:]

And there are no further questions at this time.

[Ron Freeman:]

Okay. Thanks everyone for joining us today. We look forward to being back with you quite soon. Have a great day.

[Operator:]

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