Ingles Markets, Incorporated
Q4 2013 Earnings Call Transcript

Published: 9 Dec 2013

[Operator:]

Good day and welcome to the Ingles Markets Incorporated Fourth Quarter conference call. Today’s call 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. Ronald Freeman. Please go ahead, sir.

[Ronald Freeman:]

Thank you. Good morning and welcome to the Ingles Markets 2013 Fourth Quarter and Year-End Earnings Announcement and Conference Call. With me today are Robert Ingle II, Chairman and Chief Executive Officer; Tom Outlaw, Vice President of Sales; and Jim Lanning, President. 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 declines any obligation to 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 will refer to the company’s public filings, including the Form 10-K for the fiscal year ended September 28, 2013 that will be filed later this week. In accordance with the longstanding 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’ll provide you with a summary of our fourth quarter and annual results followed by additional comments on each period. 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. Our 10-K will be filed later. Upon filing, it will be available via the website as well. We are very pleased to report that this was our 49th consecutive year of record sales totaling $3.74 billion. Fourth quarter sales totaled $994 million. Fiscal 2013 compared 52 weeks with a 53-week fourth quarter. Fiscal year 2012 had an extra week with 53 weeks in the year and 14 weeks in the fourth quarter. The shorter year this year had an effect on our sales and net income comparisons for both the fourth quarter and the full year. Net income for the fourth quarter totaled $15.6 million, 17.2% higher than net income of $13.3 million for the fourth quarter of fiscal 2012. For the full fiscal year, net income was $20.8 million in 2013 compared with $43.4 million in 2012. Fiscal 2013 included a $43.1 million pre-tax charge for $26.2 million net of tax for debt extinguishment cost that occurred during the third quarter of fiscal 2013. These costs were incurred as part of a refinancing of the company’s major credit arrangements on more favorable terms. Without this year’s debt extinguishment cost, net income would have been higher than last year. First, our fourth quarter results. Net sales totaled $948.9 million for the quarter ended September 28, 2013 compared with $993 million for the comparable quarter in fiscal year 2012. Total sales comparisons are affected by the difference in the number of weeks in the comparative quarters. Comparing the 13 weeks of the fourth fiscal quarter of 2013 with the corresponding 13 calendar weeks of the previous quarter, grocery segment comparable store sales, excluding gasoline, increased 1.3%. The growth in grocery segment sales benefited from increases in average weekly customer visits and in the average purchase amount compared with the fourth quarter of fiscal 2012. Adjusting for the difference in weeks, gallons of gasoline sold increased while the average price per gallon dropped slightly. Gross profit for the fourth quarter of fiscal 2013 totaled $210.3 million compared with $219.4 million for the fourth quarter of fiscal 2012. Gross profit as a percentage of sales was 22.2% for the fourth quarter of fiscal 2013 compared with 22.1% for the fourth quarter of fiscal 2012. Grocery segment gross margin, excluding gasoline, was 30 basis points higher this quarter compared with last year’s fourth quarter. Total operating expenses were $178.9 million for the fourth quarter of fiscal 2013 compared with $184.4 million for the 2012 quarter. Operating expenses as a percentage of sales were 18.9% and 18.6% for the fourth quarters of fiscal 2013 and 2012 respectively. Ingles operated 203 stores and approximately 11 million square feet of store space at the end of both fiscal 2013 and 2012. During 2013, the company opened one store and closed one store. The company’s store improvement capital projects this year improved merchandising, convenience, and the range of products offered to our customers without substantially increasing square footage. Personnel and depreciation expenses represented the largest line item increases. Interest expense totaled $11.9 million for the fourth fiscal quarter of 2013 compared with $15.2 million for the fourth fiscal quarter of 2012. Total debt was $912.5 million at the end of fiscal 2013 compared with $835.2 million at the end of fiscal 2012. Interest expense decreased as a result of a significantly lower interest rate on new senior notes that were issued in June of 2013. The company’s effective tax rate was 23.8% for the fourth quarter of fiscal 2013 compared with 35.5% for the fourth quarter of fiscal 2012. The fourth quarter 2013 rate decrease is primarily due to a decrease in certain state tax rates and to the greater influence on tax credits on pre-tax income compared with the prior fiscal year. Net income for the September 2013 quarter rose to $15.6 million compared with net income of $13.3 million for the September 2012 quarter. Basic and diluted earnings per share for the company’s publicly traded Class A common stock increased to $0.71 and $0.68 per share respectively for the September 2013 quarter compared with $0.58 and $0.55 per share respectively for the September 2012 quarter. Now I’ll go over our annual results. Net sales totaled a record $3.74 billion for the 52-week fiscal year ended September 2012 compared with $3.72 billion for the 53-week fiscal year ended September 2013—I got that backwards folks, I’m sorry. Net sales totaled a record $3.74 billion for the 52-week fiscal year ended September 2013 compared with $3.72 billion for the 53-week fiscal year ended September 2012. Fiscal year 2013 was Ingles’ 49th consecutive year of record sales. Comparing the 52 calendar weeks of fiscal 2013 with the corresponding 52 calendar weeks of the previous year, grocery segment comparable store sales increased 1.8% excluding gasoline sales. The number of customer transactions increased 1.7% and the average transaction size was essentially level if you exclude gasoline sales. Gross profit for the fiscal year ended September 28, 2013 increased $7 million or 0.9% to $827.8 million compared with $820.8 million for the fiscal year ended September 29, 2012. As a percentage of sales, gross profit totaled 22.2% for both fiscal years. Grocery segment gross profit as a percentage of total sales, excluding gasoline, increased 20 basis points in fiscal 2013 compared with fiscal 2012. Changes in the company’s sales mix and efficiencies gained from our new distribution center opened in June 2012 helped this year’s margin. Operating expenses increased $8.9 million in fiscal ’13 compared with fiscal 2012 and were 18.9% of sales for fiscal 2013 compared with 18.8% of sales for fiscal 2012. Excluding gasoline sales and associated gasoline operating expenses, primarily payroll, operating expenses were 22.1% of sales for fiscal 2013 compared with 21.9% for fiscal 2012. As noted in the fourth quarter comments, payroll and deprecation tied to store remodeling activities represented most of the cost increase. Gains and losses on asset disposals and other income totaled $7.2 million for fiscal 2013 compared with $4.2 million for fiscal 2012. The increase is attributable to a $3.9 million gain on the sale of a former store property in the current fiscal year. Interest expense totaled $59.1 million for the year ended September 28, 2013 compared with $60 million for the year ended September 29, 2012. Interest expense decreased due to the refinancing of existing debt at lower rates. Interest on the $99.7 million of bonds issued in December of 2010 was capitalized as part of the construction cost of the company’s new distribution and warehouse facility until the time that facility opened during the third quarter of fiscal 2012. In June of 2013, the company repaid $575 million of 9.5% effective rate debt and other borrowings with proceeds of a $700 million senior note offering due in 2023 that was priced at 5.75%. The extra proceeds from the new offering we used to pay off the outstanding balance under its line of credit, pay the cost of the offering, and for general corporate purposes. Because of prepayment penalties and other costs associated with the prepaid debt, the company incurred a $43.1 million charge to pre-tax earnings during the third quarter of fiscal 2013. Income tax expense as a percentage of pre-tax income was 20.8% for fiscal 2013 compared with 35.5% for fiscal 2012. The previously mentioned debt extinguishment cost resulted in 2013 tax credits offsetting a greater portion of fiscal 2013 income, resulting in a lower fiscal 2013 effective tax rate. Net income for fiscal 2013 totaled $20.8 million compared with net income of $43.4 million for fiscal 2012. Basic and diluted earnings per share for the company’s publicly traded Class A common stock were $0.89 and $0.87 per share respectively for the year ended September 2013 compared with $1.87 and $1.79 per share respectively for the year ended September 29, 2012. Now to update our investing and financing activities. Capital expenditures totaled $101.5 million and $180.6 million for fiscal years 2013 and 2012 respectively. The higher CAPEX in fiscal 2012 is attributable to the new distribution center, including related vehicles and equipment, that opened in 2012. Ingles’ capital expenditure plans for fiscal 2014 include investments somewhere in the range of between $100 million and $140 million. We have a $175 million line of credit facility that is in place through mid-2018. There were no outstandings on this line at September 28, 2013. The company is in compliance with all its debt agreements and has significant unencumbered real property and equipment as a secondary source of liquidity. At the close of another record year, we look forward to serving our customers with more stores and more products delivered with value and exceptional service. We will now take your questions.

[Operator:]

Thank you. The question and answer session will be conducted electronically. [Operator instructions] Our first question, we’ll hear from Damian Witkowski with Gabelli & Company.

[Damian Witkowski:]

Good morning, Ron. It’s Damian Witkowski with Gabelli & Company. Congrats on another strong year.

[Ronald Freeman:]

Thank you.

[Damian Witkowski:]

Just a couple of housekeeping items. The interest expense, the $12 million or so for the fourth quarter, is that a good run rate to think about going forward in terms of all inclusive?

[Ronald Freeman:]

Yes, it is. We have some of the debt out there that’s at floating rates that could affect some, depending on how rates go up and down; but by and large, that’s a good run rate to use.

[Damian Witkowski:]

Okay, and then same store sales in the fourth quarter up 1.3%, you said traffic was positive what for the fourth quarter? I know you said it for the full year. I didn’t catch it for the fourth quarter.

[Ronald Freeman:]

Let me go back and look.

[Damian Witkowski:]

Well I guess I can get that again, but I’m more curious if you look at it, traffic obviously is positive and so is the basket every time the customer comes in. I’m wondering if the basket is—are they putting extra units in there, or is it mostly just inflation?

[Ronald Freeman:]

Well it’s hard to tell because inflation has really affected some products and it’s had a detrimental effect on other products, so I really couldn’t—I would be very hesitant to put an inflation number on the basket increase. So again, I think the best way to look at it is we’ve had a traffic increase but pretty flat basket overall.

[Damian Witkowski:]

Okay. And overall the consumer, how you would you describe him or her? You have obviously gasoline prices that have been decreasing, now sort of stabilized or climbing back up. Are you still seeing a lot of volatility week-to-week, month-to-month, based on where the fuel is?

[Ronald Freeman:]

That’s sort of difficult to tell as well. We began an expanded fuel program during the fourth quarter that’s been very successful, so it’s kind of changing that typical relationship between gasoline and inside the store.

[Damian Witkowski:]

Okay. And can you talk about how big in dollar terms or percentages food stamps are for your business?

[Ronald Freeman:]

No, we don’t talk about that.

[Damian Witkowski:]

Should I think of it as sort of average, or do you think you skew higher or lower to food stamps versus the national average?

[Ronald Freeman:]

I have no idea.

[Damian Witkowski:]

Okay.

[Ronald Freeman:]

I mean, we accept them when they are offered, just like any other valid form of payment.

[Damian Witkowski:]

Sure. And you haven’t seen any difference in terms of customer behavior as some of the food stamp funding got cut earlier in November?

[Ronald Freeman:]

Well, I think there was some concern before some of the states in our market area really determined what they were going to do, but I think that resolved itself in our area pretty satisfactorily, and we did not see a change on any appreciable basis.

[Damian Witkowski:]

Okay, yes. And then you said CAPEX for next year should be 100 to 140?

[Ronald Freeman:]

Yes.

[Damian Witkowski:]

Should we—I mean, would that include any new stores or is that just remodels and such?

[Ronald Freeman:]

No, no – it includes some new store projects. The timing of whether they will be finished and opened in ’14 or wait a little bit until early ’15 is still up in the air, but we’re picking up the pace of new stores a little.

[Damian Witkowski:]

Okay, so should we think about two to three stores, or--?

[Ronald Freeman:]

Perhaps three to five over the next two years.

[Damian Witkowski:]

Okay, okay. All right. Thanks so much.

[Ronald Freeman:]

Sure thing, Damian.

[Operator:]

Once again, if you would like to ask a question, please press star followed by the digit one. Next we’ll hear from Bryan Hunt with Wells Fargo Securities.

[Bryan Hunt:]

Good morning Ron.

[Ronald Freeman:]

Hello, Bryan. How are you?

[Bryan Hunt:]

Good. First on sales, I was wondering if you could talk about to any degree whether there was any geographical differences in the sales performance.

[Ronald Freeman:]

Not appreciable, no.

[Bryan Hunt:]

That’s good to hear. Next, when you look at your gross margin improvement, you said some of it was from DC savings, some of it was from mix. First on the DC savings, do you believe you are at a full run rate now on distribution center savings?

[Ronald Freeman:]

I think we’re pretty close to it. There is always some room for improvement, but we’ve been operating that facility for a year so I think we’re pretty close to what we’re going to do, day-in and day-out.

[Bryan Hunt:]

Is there any way you could parse out for us kind of the difference between the DC savings and the mix improvement?

[Ronald Freeman:]

It’s really difficult to do that because those DC improvements have come in so many places, everything from more direct negotiations with our vendors to the direct cost of our employees and our trucks hauling more product, so hard to put all that together and give one number on it.

[Bryan Hunt:]

Okay. Then on the mix side, is it kind of an ongoing sales momentum on prepared foods and fresh? Is that the driver on the gross margin side on the mix?

[Ronald Freeman:]

Yes, that’s a lot of it. Our perishable department is doing very well.

[Bryan Hunt:]

Okay, and then a little bit on fuel. You talked about you all ran a successful marketing program in Q4 which drove fuel. Is there any way you can describe that a little bit more for us?

[Ronald Freeman:]

It’s pretty public out there, on our billboards and in our stores; so again, needless to say it’s been a successful program for us and we’re happy with the results.

[Bryan Hunt:]

And when you said gallons are up, was that same store gallons or do you all have more fuel centers this year than a year ago?

[Ronald Freeman:]

We’ve got a couple more fuel centers, but again I think the program success has driven some growth everywhere.

[Bryan Hunt:]

And I heard you say three to five new stores. Is that next year or is that over the next couple years? I’m sorry – I just missed that last statement.

[Ronald Freeman:]

Next couple of years.

[Bryan Hunt:]

So when I look at the $100 million to $140 million of CAPEX, is that ongoing store improvement programs, additional fuel centers, maybe a replacement store?

[Ronald Freeman:]

Yes, yes, and yes.

[Bryan Hunt:]

Okay. Is there any way you can quantify any of that for us?

[Ronald Freeman:]

We’re still working through the details of some of that; and Bryan, there is so much variability in the timing of things, whether it’s weather, whether it’s the municipalities you’re dealing with on permitting issues, that we always have to be very flexible in the priority that we place on things, so it’s difficult to be more precise than the numbers that we’ve given you there.

[Bryan Hunt:]

Okay, thanks for your time.

[Ronald Freeman:]

Sure, Bryan.

[Operator:]

And there are no further questions at this time.

[Ronald Freeman:]

Okay, well we appreciate everyone joining us today for the call. We wish all of our customers and our employees and our shareholders, and anyone else who happened to be with us this morning a very safe holiday season. Thank you very much.

[Operator:]

That will conclude today’s call. We thank you for your participation.

[Ronald Freeman:]

Thanks.