Ingles Markets, Incorporated
Q1 2009 Earnings Call Transcript

Published: 17 Feb 2009

[Operator:]

Good day everyone. Welcome to the Ingles Markets Incorporated First 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. Ron Freeman. Please go ahead.

[Ron Freeman:]

Thank you. Good morning. Welcome to Ingles Markets Fiscal 2009 First Quarter Conference Call. With me today are Robert Ingle, Founder of our 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 Harbor as created by Federal Securities laws. Words such as expect, anticipate, intend, plan, 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 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 are referred to the Company's public filings, including the Form 10-K for the fiscal year ended September 27, 2008. In accordance with the long standing Company policy and in recognition of the extremely competitive nature of our industry this call will not address competitive issues or Ingles Marketing strategies other than what is included in the Company’s public filing. 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 filed our Form 10-K for the quarter yesterday afternoon. It is available via our website as well. Net income for the December 2008 quarter totaled $11.1 million compared with net income of $12.7 million for the December 2007 quarter. Predominant factors affecting comparative net income include higher costs related to the Company’s accelerated pace of store expansions in fiscal year 2008 and the first quarter of Fiscal year 2009. Our long term focus has been and will continue to be driving top line sales through product offerings, customer satisfaction and expanded store offerings. This long time sales and customer focus as well as the recessionary economy contemporarily depressed operating results but we believe that it is important to maintain customer loyalty. Net sales increased 3.6% to $804.9 million for the quarter ended December 27, 2008 from $777.1 million for the December 2007 quarter. The retail price of gasoline declined substantially during the current quarter resulting in the lower total gasoline sales dollars over the comparative quarters even though total gallons sold increased. Excluding gasoline sales, grocery segment comparable store sales growth rose 5.4%. We are pleased with our sales growth during a recessionary time when consumer spending has declined. Both average weekly customer visits and the average purchase amount excluding gasoline increased over the comparative first quarters. We operated 199 stores and approximately 10.4 million square feet of retail space at the end of December 2008 compared with 197 stores and 9.9 million square feet at the end of December 2007. Gross profit for the first quarter of fiscal 2009 totaled $197.1 million, an increase of $16.4 million or 9.1% compared with the first quarter of fiscal 2008. Gross profit as a percentage of sales was 24.5% for the first quarter of fiscal 2009 compared with 23.3% for the first quarter of fiscal 2008. Excluding lower margin gasoline sales, grocery segment gross profit as a percentage of sales was relatively constant at 26.5% for the first fiscal quarter of 2009 compared with 26.4% for the comparable fiscal 2008 quarter. The consumer price index for food and beverages increased 6% for the 12 months ended September 2008 but increased only 1.7% for the 3 months ended December 2008. As noted earlier retail gasoline prices declined during the quarter as did milk prices. We were pleased to pass these price decreases to our customers and still achieved sales growth and level gross margins. Total operating expenses were $167.9 million for the first quarter fiscal year 2009 compared with $150.3 million for the comparable fiscal year 2008 quarter. The growth in operating expenses was due in part to 11 stores that were opened or remodeled during the past 9 months. Bringing a larger number of stores online in a short period often results in higher personnel costs and promotional expenses to ensure a successful start for new and remodeled stores. Additions to and remodeling of retail square footage also resulted in higher depreciation, distribution, utility and supply expenses. Increases in these line items accounted for approximately 85% of the dollar increase for the comparative fiscal 2009 and fiscal 2008 first quarters. Operating expenses as a percentage of sales were 20.9% for the three months ended December 2008 compared with 19.4% for the three months ended December 2007. Net rental and other income totaled $2 million for the first quarter of fiscal 2009 compared with $1.9 million for the 2008 first fiscal quarter primarily due to the lower rental income partially offset by higher sales of scrap cardboard and packaging materials. Asset disposals transactions were insignificant for the comparative quarters. Interest expense increased $1.5 million for the three month period ended December 27, 2008 to $13 million. Total debt at December 27, 2008 was $753.4 million compared with $605.1 million at December 29, 2007. In general new debt added over the past 15 months has been with interest rates lower than existing or re-paid debts. This additional debt was incurred primarily to fund capital expenditures. Over the past 15 months, capital expenditures totaled $309 million including $60.2 million for the 3 months ended December 27, 2008. Given the current state of various debt markets, the Company is pleased to have been able to complete and finance this increased level of capital expenditures before the recent economic restrictions on credit availability. Ingles currently has lines of credit totaling $185 million. At December 27, 2008 a total of $24.2 million was outstanding with $160.8 million available for future borrowings. The Company believes its financial resources including these lines of credit and other internal and anticipated external sources of funds will be sufficient to meet plans, capital expenditures and working capital requirement for the foreseeable future. Recent volatility in the credit and equity markets could affect the timing and type of financing the Company seeks. The Company’s effective tax rate was 38.8% for the December 2008 quarter compared with 38.7% for the December 2007 quarter. Net income for the December 2008 quarter totaled $11.1 million compared with net income of $12.7 million for the December 2007 quarter. Basic and diluted earnings per share for the Company’s publicly traded Class A common stock were $0.47 and $0.45 per share respectively for the December 2008 quarter compared with $0.54 and $0.52 per share respectively for the December 2007 quarter. Now, to update on our investing and financing activities. As noted above, capital expenditures totaled $60.2 million for the 3 months ended December 2008. The majority of these capital expenditures were for projects begun in the previous fiscal year. During the quarter, Ingles opened 2 new stores, 1 replacement store, and added 5 fuel centers. Ingles capital expenditure plans for the remainder of fiscal 2009 include 9 new replacement or remodeled stores and to add 4 fuel stations at either new or existing stores. Most of these projects are already underway with the portion of the expenditures included in last year’s CapEx. Future CapEx will largely depend upon overall economic conditions and credit availability. Total fiscal 2009 CapEx is projected to be between $140 and $160 million. We are in difficult and uncertain economic times and as we have done throughout our history, we are focused on delivering value and service to increase sales and financial performance. We will now take your questions.

[Operator:]

(Operator Instructions) Your first question comes from Bryan Hunt from Wachovia.

[Analyst for Bryan Hunt:]

Hi this is actually Meredith filling in for Bryan. Can you quantify the gallon increases during the quarters?

[Ron Freeman:]

No we do not quantify gallon increases on any quarter or annual basis.

[Analyst for Bryan Hunt:]

Can you discuss your competitive environment? Have you seen any increase competitive openings or closings or based on any pricing pressures that could impact you going forward?

[Ron Freeman:]

We compete on a lot of different fronts with a lot of different types of stores so it is difficult to quantify and as we mentioned at the start of the call, for competitive reasons, we prefer not to discuss our competition.

[Analyst for Bryan Hunt:]

Could you just give us a direction, higher or lower from what you have seen in the past?

[Ron Freeman:]

I am really not able to do that.

[Operator:]

Your next question comes from Emily Shanks from Barclays Capital.

[Emily Shanks:]

Good morning. I have a question around the current lines of credit outstanding of $24.2 million. I know this is one of the first maturities on those lines of credit that will begin on October 2009. Is any of the amounts drawn or a portion of what is coming due in October?

[Ron Freeman:]

Well, again we have got these lines with different banks and we really do not get in to where the individual draws are from, but our lines are secure; we are fine.

[Emily Shanks:]

Okay. So should that balance be coming due in October 09, do you think that you will have the ability to simply just draw on one of the other lines to fund it?

[Ron Freeman:]

When we need the line; yes, that is our intent.

[Emily Shanks:]

And then around the Letters of Credit facility that is maturing in April of 2009. What are your plans on that?

[Ron Freeman:]

We intend to renew that as well.

[Emily Shanks:]

Are you currently in discussion with your banks on that?

[Ron Freeman:]

Yes

[Emily Shanks:]

Are you getting positive indications from them? That they will be doing that?

[Ron Freeman:]

They are just normal discussions that we have with our banks on an ongoing basis. We stay in very close touch with them on how we are doing and they keep in very close touch with us on how they are doing. So it is nothing out of the ordinary.

[Operator:]

(Operator’s instruction) Your next question comes from Wayne Harris from Semaphore Management

[Analyst for Wayne Harris:]

Actually Paul Carpenter asking the question. Our firm has been a shareholder on and off for about 5 years and right now we have about 1% of the A shares and I have a broad question about strategy. From my point of view, looking at the increased capital spending in the last couple of years 2007 and 2008, you spent about $375 million or so which is up from the previous capital spending rate of maybe about $60, $70, $80 million a year. Looking at how your cash flows have changed since you embarked on that increased level of spending, it had not really gone up very much, so you have EBITDA of about $180 million or so and now it is about $190 million. So my question to you from a strategic standpoint is - how do you review those expenditure decisions? It is not a great return on investment. It would have been better maybe to buy back those tier bonds; you would still get a 9% return rate, 10% or 11% if you bought them back during the last few months when the market was down instead of spending all this capital and we do not have very much to show for it.

[Ron Freeman:]

We believe that it is important to keep our store base modern. It is something that you have to do if you want to remain successful in this business and we had some great opportunities to develop some new stores in the past couple of years and it was very important for us to do that. Certainly the environment has changed now from a credit availability standpoint and also from a consumer spending standpoint and we are reacting to those changes. In addition the bonds are not due yet. They do not mature until December 2009.

[Analyst for Wayne Harris:]

I understand that. I think they are callable. I think they mature later than that if I am not mistaken.

[Ron Freeman:]

You are correct. I think they mature December of 2011. I am sorry. [Cross Talking] away in December 2009.

[Analyst for Wayne Harris:]

But at the same time I am not as interested in the month to month competitive openings against your broad corporate strategy. The hidden gem of the Company has always been these real estate assets and hidden value, you never really gotten credit for it, maybe you could have realized some value when times were good but they are not good anymore but the CapEx of the Company really went up in the past 24 months. Maybe that was because the credit was available and cheap or maybe not but at least in the short term the report card is that there was not a great return of investment and having CMAP now, is that going to substantially change your strategy going forward? You have a lot of land parcels available for future development, in my mind; you probably do not have to spend that much now to still have that good pipeline for new sites. You could do some replacements. You could do some remodels but it would seem to me that you have the option to dramatically lower the capital spending without disadvantaging the competitive position of the stores because of all these expenditures in the last couple of years. I just want to know if that is something that is being considered. Do you evaluate these expenditures? Do you evaluate these expenditures on 1 or 2 year basis? Are you just going to keep spending like that as you see the sites come up without regard for the foreseeable near term return on investment?

[Ron Freeman:]

I believe we have addressed that during the call. We believe in driving top line sales and we have reduced our CapEx guidance for this year, partially in reaction to general economic conditions. I believe I have answered your question.

[Operator:]

Anything further Mr. Harris?

[Analyst for Wayne Harris:]

No, it is fine thank you.

[Operator:]

I have no further questions at this time but I would like to give everyone another opportunity. (Operator instruction) It appears that there are no more questions today, Mr. Freeman I will turn the conference back to you for additional or closing remarks.

[Ron Freeman:]

Thank you very much for joining us today. We appreciate your answers and we will speak to you after next quarter. Thank you very much.

[Operator:]

That does conclude our conference call today. Thank you all for your participation.