10-K 1 village.htm VILLAGE SUPER MARKET, INC. 10K 2014-07-26 village.htm


UNITED STATES
SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.
 
For the fiscal year ended:  July 26, 2014
 
COMMISSION FILE NUMBER:   0-33360

VILLAGE SUPER MARKET, INC.
(Exact name of registrant as specified in its charter)
 
NEW JERSEY
22-1576170
(State or other jurisdiction of incorporation or organization)
(I. R. S. Employer Identification No.)
   
733 MOUNTAIN AVENUE, SPRINGFIELD, NEW JERSEY
07081
(Address of principal executive offices)
(Zip Code)
   
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 467-2200
   
Securities registered pursuant to Section 12(b) of the Act:
 
Class A common stock, no par value
The NASDAQ Stock Market
(Title of Class)
(Name of exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act:  NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o   No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
 
Accelerated filer x
     
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o   No  x

 
 

 

The aggregate market value of the Class A common stock of Village Super Market, Inc. held by non-affiliates was approximately $172.8 million and the aggregate market value of the Class B common stock held by non-affiliates was approximately $0.5 million based upon the closing price of the Class A shares on the NASDAQ on January 25, 2014, the last business day of the second fiscal quarter.  There are no other classes of voting stock outstanding.
 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of latest practicable date.
 
Class
 Outstanding at
October 3, 2014
   
Class A common stock, no par value
9,692,698 Shares
Class B common stock, no par value
4,360,998 Shares
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Information contained in the 2014 definitive Proxy Statement to be filed with the Commission and delivered to security holders in connection with the Annual Meeting scheduled to be held on December 12, 2014 are incorporated by reference into this Form 10-K at Part II, Item 5 and Part III.

 
 

 

PART I
 
 
ITEM I.   BUSINESS
 
 (All dollar amounts in this report are in thousands, except per square foot data).
 
GENERAL
 
Village Super Market, Inc. (the “Company” or “Village”) was founded in 1937.   Village operates a chain of 29 ShopRite supermarkets, eighteen of which are located in northern New Jersey, eight in southern New Jersey, two in Maryland and one in northeastern Pennsylvania.   The Company is a member of Wakefern Food Corporation ("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite name.  This relationship provides Village many of the economies of scale in purchasing, distribution, private label products, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage.
 
Village seeks to generate high sales volume by offering a wide variety of high quality products at consistently low prices with superior customer service.  During fiscal 2014, sales per store were $52,367 and sales per average square foot of selling space were $1,153.  The Company gives ongoing attention to the décor and format of its stores and tailors each store's product mix to the preferences of the local community.  Village competes by using low pricing, superior customer service, and a broad range of consistently available quality products, including ShopRite private labeled products.  The ShopRite Price Plus card also strengthens customer loyalty.
 
On April 30, 2014, Village opened a 59,000 sq. ft. store in Union, New Jersey that replaced our existing 40,000 sq. ft. store in Union.  On November 6, 2013, Village opened a 77,000 sq. ft. store in Hanover Township, New Jersey that serves the greater Morristown area and replaced the 40,000 sq. ft. Morris Plains store.  
 
On January 29, 2012, Village acquired the store fixtures, lease and other assets of the ShopRite in Old Bridge, New Jersey (40,000 sq. ft.) for $3,250 plus inventory and other working capital for $1,116.  On July 7, 2011, Village acquired the store fixtures, leases and pharmacy lists of locations in Silver Spring (64,000 sq.ft.) and Timonium, Maryland (57,000 sq.ft.) for $6,595 from SuperFresh.  Village opened the Maryland stores as ShopRites on July 28, 2011 after remodeling.  
 
Below is a summary of the range of store sizes at July 26, 2014:
 
Total Square Feet
 
Number of Stores
 
       
Greater than 60,000
    14  
50,001 to 60,000
    8  
40,000 to 50,000
    5  
Less than 40,000
    2  
         
Total
    29  
 
These larger store sizes enable the Company’s stores to provide a “one-stop” shopping experience and to feature expanded higher margin specialty departments such as an on-site bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies.  Many of our stores emphasize a Power Alley, which features high margin, fresh, convenience offerings in an area within the store that provides quick customer entry and exit for those customers shopping for today's lunch or dinner. The greater Morristown and Union stores include the Village Food Garden concept previously introduced in our remodeled Livingston store. Village Food Garden features a restaurant style kitchen, and several kiosks offering a wide variety of store prepared specialty foods for both take-home and in-store dining.
 
Village also has on-site registered dieticians in thirteen stores that provide customers with free, private consultations on healthy meals and proper nutrition, as well as leading health related events both in store and in the community as part of the Live Right with ShopRite program.  Our greater Morristown store offers customers expanded services including a culinary classroom, fitness studio and a learning and childcare center.
 
We have twelve stores that offer ShopRite from Home covering most of the communities served by our stores.  ShopRite from Home is an online ordering system that provides for in-store pickup or home delivery.  Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or on their smart phones or tablets through the ShopRite app.  Additionally, we have commenced a mobile shopping pilot program at one store that allows in-store shoppers to scan and express pay for their purchases via our smart phone app.
 
 
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The following table shows the percentage of the Company's sales allocable to various product categories during each of the periods indicated:
 
Product Categories
     
   
2014
   
2013
   
2012
 
                   
Groceries
    37.2 %     37.9 %     38.3 %
Dairy and Frozen
    17.5       17.8       17.8  
Produce
    11.8       11.5       11.3  
Meats
    10.5       10.5       10.5  
Non-Foods
    8.1       8.0       7.9  
Deli and prepared food
    6.3       5.6       5.4  
Pharmacy
    4.1       4.1       4.3  
Seafood
    2.4       2.5       2.5  
Bakery
    2.1       2.1       2.0  
      100 %     100 %     100 %
 
A variety of factors affect the profitability of each of the Company's stores, including local competitors, size, access and parking, lease terms, management supervision, and the strength of the ShopRite trademark in the local community.  Village continually evaluates individual stores to determine if they should be closed, remodeled or replaced.
 
DEVELOPMENT AND EXPANSION
 
The Company has an ongoing program to upgrade and expand its supermarket chain.  This program has included store remodels as well as the opening or acquisition of additional stores.  When remodeling, Village has sought, whenever possible, to increase the amount of selling space in its stores.
 
Village has budgeted $25 million for capital expenditures for fiscal 2015.  Planned expenditures include three major remodels and several smaller remodels.
 
In fiscal 2014, Village completed the construction of a replacement store in Union, New Jersey, and a replacement store in Hanover Township, New Jersey that serves the greater Morristown area and replaced the Morris Plains, New Jersey store.  
 
In fiscal 2013, Village began construction of a replacement store in Hanover Township, New Jersey and completed three major remodels.
 
In fiscal 2012, Village completed several smaller remodels and the installation of solar panels on one store.  In addition, on January 29, 2012, Village acquired the store fixtures, lease and other assets of the ShopRite in Old Bridge, New Jersey.
 
In fiscal 2011, Village purchased the land for a replacement store and completed several small remodels.  In addition, on July 7, 2011, Village acquired the store fixtures, leases and pharmacy lists of locations in Silver Spring and Timonium, Maryland.
 
Additional store remodels and sites for new stores are in various stages of development.  Village will also consider additional acquisitions should appropriate opportunities arise.
 
WAKEFERN FOOD CORPORATION
 
The Company is the second largest member of Wakefern and owns 13.7% of Wakefern’s outstanding stock as of July 26, 2014.  Wakefern, which was organized in 1946, is the nation’s largest retailer-owned food cooperative.  Wakefern and its 49 shareholder members operate 321 supermarkets and other retail formats, including 89 stores operated by Wakefern.  Only Wakefern and its members are entitled to use the ShopRite name and trademark, and to participate in ShopRite advertising and promotional programs.
 
 
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The principal benefits to the Company from its relationship with Wakefern are the use of the ShopRite name and trademark, volume purchasing, ShopRite private label products, distribution and warehousing economies of scale, ShopRite advertising and promotional programs, including the ShopRite Price Plus card, and the development of advanced retail technology.  The Company believes that the ShopRite name is widely recognized by its customers and is a factor in their decisions about where to shop. ShopRite private label products accounted for approximately 10.8% of sales in fiscal 2014.
 
Wakefern distributes as a "patronage dividend" to each of its stockholders, a share of substantially all of its earnings in proportion to the dollar volume of purchases by the stockholder from Wakefern during each fiscal year.
 
While Wakefern has a substantial professional staff, it operates as a member owned cooperative.  Executives of most members make contributions of time to the business of Wakefern.  Executives of the Company spend a significant amount of their time working on various Wakefern committees, which oversee and direct Wakefern purchasing, merchandising and other programs.  James Sumas, the Company’s Chief Executive Officer, is Vice Chairman of Wakefern, and a member of the Wakefern Board of Directors.
 
Most of the Company's advertising is developed and placed by Wakefern's professional advertising staff.  Wakefern is responsible for all television, radio and major newspaper advertisements. Wakefern bills its members using various formulas which allocate advertising costs in accordance with the estimated proportional benefits to each member from such advertising.  The Company also places Wakefern developed materials with local newspapers.  In addition, Wakefern and its affiliates provide the Company with other services including liability and property insurance, supplies, certain equipment purchasing, coupon processing, certain financial accounting applications, and retail technology support, including shoprite.com and the ShopRite smart phone app.
 
Wakefern operates warehouses and distribution facilities in Elizabeth, Keasbey, Whitehouse, Dayton, Newark and Jamesburg, New Jersey and Gouldsboro and Breinigsville, Pennsylvania.  The Company and all other members of Wakefern are parties to the Wakefern Stockholder’s Agreement which provides for certain commitments by, and restrictions on, all shareholders of Wakefern.  This agreement extends until ten years from the date that stockholders representing 75% of Wakefern sales notify Wakefern that those stockholders request the Wakefern Stockholder Agreement be terminated.  Each member is obligated to purchase from Wakefern a minimum of 85% of its requirements for products offered by Wakefern.  If this purchase obligation is not met, the member is required to pay Wakefern's profit contribution shortfall attributable to this failure.  The Company fulfilled this obligation in fiscal 2014, 2013 and 2012.  This agreement also requires that in the event of unapproved changes in control of the Company or a sale of the Company or of individual Company stores, except to a qualified successor, the Company in such cases must pay Wakefern an amount equal to the annual profit contribution shortfall attributable to the sale of a store or change in control.  No payments are required if the volume lost by a shareholder as a result of the sale of a store is replaced by such shareholder by increased volume in existing or new stores.  A "qualified successor" must be, or agree to become, a member of Wakefern, and may not own or operate any supermarkets, other than ShopRite supermarkets, in the states of New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, Connecticut, Massachusetts, Rhode Island, Vermont, New Hampshire, Maine or the District of Columbia, or own or operate more than 25 non-ShopRite supermarkets in any other locations in the United States.
 
Wakefern, under circumstances specified in its bylaws, may refuse to sell merchandise to, and may repurchase the Wakefern stock of, any member.  Such circumstances include a members bankruptcy filing, certain unapproved transfers by a member of its supermarket business or its capital stock in Wakefern, unapproved acquisition by a member of certain supermarket or grocery wholesale supply businesses, the material breach by a member of any provision of the bylaws of Wakefern or any agreement with Wakefern, or a failure to fulfill financial obligations to Wakefern.
 
Any material change in Wakefern's method of operation or a termination or material modification of the Company's relationship with Wakefern following termination of the above agreements, or otherwise, might have an adverse impact on the conduct of the Company's business and could involve additional expense for the Company.  The failure of any Wakefern member to fulfill its obligations under these agreements or a member's insolvency or withdrawal from Wakefern could result in increased costs to remaining members.
 
Wakefern does not prescribe geographical franchise areas to its members.  The specific locations at which the Company, other members of Wakefern, or Wakefern itself, may open new units under the ShopRite name are, however, subject to the approval of Wakefern's Site Development Committee.  This committee is composed of persons who are not employees or members of Wakefern.  Committee decisions to deny a site application may be appealed to the Wakefern Board of Directors.  Wakefern assists its members in their site selection by providing appropriate demographic data, volume projections and estimates of the impact of the proposed store on existing member supermarkets in the area.
 
Each of Wakefern's members is required to make capital contributions to Wakefern based on the number of stores operated by that member and the purchases generated by those stores.  As additional stores are opened or acquired by a member, additional capital must be contributed by it to Wakefern.  The Company’s investment in Wakefern and affiliates was $25,012 at July 26, 2014.  The total amount of debt outstanding from all capital pledges to Wakefern is $1,741 at July 26, 2014.  The maximum per store capital contribution increased from $825 to $850 in fiscal 2014, resulting in an additional $657 capital pledge, which was paid in fiscal 2014.
 
 
3

 
 
As required by the Wakefern bylaws, the Company’s investment in Wakefern is pledged to Wakefern to secure the Company’s obligation to Wakefern.  In addition, four members of the Sumas family have guaranteed the Company’s obligations to Wakefern.  These personal guarantees are required of any 5% shareholder of the Company who is active in the operation of the Company.  Wakefern does not own any securities of the Company or its subsidiaries.  The Company’s investment in Wakefern entitles the Company to enough votes to elect one member to the Wakefern Board of Directors due to cumulative voting rights.
 
TECHNOLOGY
 
The Company considers automation and information technology important to its operations and competitive position.    Village completed the replacement of its point of sale systems in fiscal 2010 to improve the checkout experience and reduce training costs.  Electronic payment options are offered at all checkout locations.  In recent years, we have upgraded our communication network, which is used for secure, reliable, high speed processing of electronic payments and transmission of data.
 
The Company’s commitment to advanced point of sale and communication systems enables it to participate in Price Plus, ShopRite’s preferred customer program.  Customers receive electronic discounts by presenting a scannable Price Plus card.  This technology also enables Village to offer continuity programs and focus on target marketing initiatives. 
 
Wakefern and Village have responded to customers increased use of the internet by creating a smart phone app and shoprite.com to provide weekly advertising and other shopping information.  On-line shopping is available in twelve store locations with store pick-up and delivery options servicing our current market.  Additionally, we have commenced a mobile shopping pilot program at one store that allows in-store shoppers to scan and express pay for their purchases via our smart phone app.
 
Eighteen stores use self-checkout systems to provide improved customer service, especially during peak periods, and reduce operating costs.   RFID readers are installed in all checkout lanes to enable contactless payment options for customers to quicken checkout times. Certain in-store department records are computerized, including the records of all pharmacy departments.  In all stores, meat, seafood, delicatessen, and bakery prices are maintained on computer for automatic weighing and pricing. 
 
Village utilizes a computer generated ordering system, which is designed to reduce inventory levels and out of stock conditions, enhance shelf space utilization, and reduce labor costs. This system is also utilized to reduce the cost of taking periodic inventories. The Company utilizes a direct store delivery system, consisting of personal computers and advanced hand held scanners, for product not purchased through Wakefern to provide equivalent cost and retail price control over these products.
 
Village seeks to design its stores to use energy efficiently, including recycling waste heat generated by refrigeration equipment for heating and other purposes.  Most stores utilize computerized energy management systems.  The Company installed solar panels on the roof of one store in 2010 and a second store in 2012, reducing both carbon emissions and energy costs.  
 
The Company has installed computer based training systems in all stores to assist in the training of associates.  Village utilizes a time and attendance system and labor scheduling system to improve scheduling and reduce labor. Automated cash handling systems are utilized in the store back office to improve accuracy and reduce costs.
 
Village uses digital surveillance systems that are integrated with the cashier monitoring systems in all stores to aid shrink reduction, increase productivity and assist in accident investigations.  These systems include electronic monitoring of the bottom of carts to reduce shrink.
 
The Company utilizes a division of Wakefern for data processing services, including financial accounting support.
 
COMPETITION
 
The supermarket industry is highly competitive and characterized by narrow profit margins.  The Company competes directly with multiple retail formats, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores.  
 
Some of the Company's principal competitors include Pathmark, A&P, Stop & Shop, Acme, Kings, Wal-Mart, Target, Wegmans, Whole Foods, Costco, BJ’s, Giant, Safeway and Foodtown.  Some of these competitors have financial resources substantially greater than those of the Company, and some are non-union.
 
 
4

 
 
LABOR
 
As of October 1, 2014, the Company employed approximately 7,050 persons with approximately 75% working part-time.  Approximately 91% of the Company’s employees are covered by collective bargaining agreements. Contracts with the Company’s seven unions expire between December 2014 and October 2018.  Approximately 29% of our associates are represented by unions whose contracts expire within one year.  Most of the Company’s competitors are similarly unionized.
 
AVAILABLE INFORMATION
 
As a member of the Wakefern cooperative, Village relies upon our customer focused website, shoprite.com, for interaction with customers and prospective employees.  This website is maintained by Wakefern for the benefit of all ShopRite supermarkets, and therefore, does not contain any financial information related to the Company.
 
The Company will provide paper copies of the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases free of charge upon request to any shareholder.  In addition, electronic copies of these filings can be obtained at sec.gov.
 
REGULATORY ENVIRONMENT
 
The Company’s business requires various licenses and the registration of facilities with state and federal health and drug regulatory agencies.  These licenses and registration requirements obligate the Company to observe certain rules and regulations, and a violation of these rules and regulations could result in a suspension or revocation of licenses or registrations.  In addition, most licenses require periodic renewals.  The Company has not experienced material difficulties with respect to obtaining or retaining licenses and registrations. 
 
ITEM 1A.   RISK FACTORS
 
COMPETITIVE ENVIRONMENT
 
The supermarket business is highly competitive and characterized by narrow profit margins.  Results of operations may be materially adversely impacted by competitive pricing and promotional programs, industry consolidation and competitor store openings.  Village competes directly with multiple retail formats, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Competition with these outlets is based on price, store location, promotion, product assortment, quality and service.  Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do.  In addition, Village made investments in lower prices to combat nontraditional competitors beginning in the second half of fiscal 2013.
 
GEOGRAPHIC CONCENTRATION AND NEW TRADE AREA
 
The Company’s stores are concentrated in New Jersey, with one store in northeastern Pennsylvania and two in Maryland. We are vulnerable to economic downturns in New Jersey in addition to those that may affect the country as a whole.  Economic conditions such as inflation, deflation, interest rates, energy costs and unemployment rates may adversely affect our sales and profits.  Further, since our store base is concentrated in densely populated metropolitan areas, opportunities for future store expansion may be limited, which may adversely affect our business and results of operations.
 
Village acquired two stores in July 2011 in Maryland, a new market for Village where the ShopRite name is less known than in New Jersey. Maryland stores sales, marketing costs and operating performance remain worse than initially projected as we continue to build market share and brand awareness.  If these trends continue, the performance of our Maryland stores may negatively impact the Company’s results of operations.
 
WAKEFERN RELATIONSHIP
 
Village purchases substantially all of its merchandise from Wakefern.  In addition, Wakefern provides the Company with support services in numerous areas including supplies, advertising, liability and property insurance, technology support and other store services.  Further, Village receives patronage dividends and other product incentives from Wakefern.
 
Any material change in Wakefern’s method of operation or a termination or material modification of Village’s relationship with Wakefern could have an adverse impact on the conduct of the Company’s business and could involve additional expense for Village.  The failure of any Wakefern member to fulfill its obligations to Wakefern or a member’s insolvency or withdrawal from Wakefern could result in increased costs to the Company.  Additionally, an adverse change in Wakefern’s results of operations could have an adverse effect on Village’s results of operations.
 
 
5

 
 
LABOR RELATIONS
 
Approximately 91% of the Company’s employees are covered by collective bargaining agreements with unions. Contracts with the Company’s seven unions expire between December 2014 and October 2018.  Approximately 29% of our associates are represented by unions whose contracts expire within one year.  In future negotiations with labor unions, we expect that rising health care and pension costs, among other issues, will continue to be important topics for negotiation.  Upon the expiration of our collective bargaining agreements, work stoppages by the affected workers could occur if we are unable to negotiate acceptable contracts with labor unions.  This could significantly disrupt our operations or have an adverse impact on our financial results.  Further, if we are unable to control health care and pension costs provided for in the collective bargaining agreement, we may experience increased operating costs and an adverse impact on our results of operations.
 
HEALTHCARE LEGISLATION
 
We provide health benefits to a large number of our employees, primarily through multi-employer health plans.  Effective January 1, 2015, the Patient Protection and Affordable Care Act will impose new mandates on employers that could significantly increase the number of employees receiving benefits and our required contributions to these multi-employer health plans.  The impact of the law will depend on many factors, including finalization of rules implementing the law, the number of additional employees that we will be required to provide health benefits and the number of eligible employees that enroll for medical benefits, which could be material to our results of operations.
 
FOOD SAFETY
 
The Company could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain.  Adverse publicity about these types of concerns, whether or not valid, could discourage consumers from buying our products.  The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations.
 
MULTI-EMPLOYER PENSION PLANS
 
The Company is required to make contributions to multi-employer pension plans in amounts established under collective bargaining agreements.  Pension expense for these plans is recognized as contributions are funded.  Benefits generally are based on a fixed amount for each year of service.   Based on the most recent information available to us, certain of these multi-employer plans are underfunded.  As a result, we expect that contributions to these plans may increase.  Additionally, the benefit levels and related items will be issues in the negotiation of our collective bargaining agreements.  Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under complex actuarial and allocation rules.  The failure of a withdrawing employer to fund these obligations can impact remaining employers.   The amount of any increase or decrease in our required contributions to these multi-employer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations and the actual return on assets held in the plans, among other factors. See Note 8 to the Consolidated Financial Statements for more information relating to our participation in multi-employer pension plans.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
Our long-lived assets, primarily stores, are subject to periodic testing for impairment. Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.
 
TAXES
 
The Company’s effective tax rate may be impacted by the results of tax examinations and changes in tax laws, including the disputes with the state of New Jersey described in Note 5 to the Consolidated Financial Statements.
 
INFORMATION TECHNOLOGY
 
Wakefern provides all members of the cooperative with information system support that enables us to effectively manage our business data, customer transactions, ordering, communications and other business processes.  These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human error.  Any material interruption of our or Wakefern’s information systems could have a material adverse impact on our results of operations.
 
 
6

 
 
Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems.  In addition, confidential information is transmitted through our ShopRite from Home online business at shoprite.com and through the ShopRite app.  Unauthorized parties may attempt to access information stored in or to sabotage or disrupt these systems.  Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions.  It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at Wakefern or those of third-party service providers.
 
Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties.  Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered or are in excess of carried insurance policies.  In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 2.   PROPERTIES
 
As of July 26, 2014, Village owns the sites of six of its supermarkets (containing 412,000 square feet of total space), all of which are freestanding stores, except the Egg Harbor store, which is part of a shopping center.  The remaining 23 supermarkets (containing 1,288,000 square feet of total space) and the corporate headquarters are leased, with initial lease terms generally ranging from 20 to 30 years, usually with renewal options.  Sixteen of these leased stores are located in shopping centers and the remaining seven are freestanding stores.  In addition to the above, the Company owns the land and building of the old Washington store, which is currently available for sale.
 
The annual rent, including capitalized leases, for all of the Company's leased facilities for the year ended July 26, 2014 was approximately $15,586.
 
Village is a limited partner in two partnerships, one of which owns a shopping center in which one of our leased stores is located.  The Company is also a general partner in a partnership that is a lessor of one of the Company's freestanding stores.
 
ITEM 3.   LEGAL PROCEEDINGS
 
In prior years, the state of New Jersey issued two separate tax assessments related to nexus beginning in fiscal 2000 and the deductibility of certain payments between subsidiaries beginning in fiscal 2002.  Village contested both of these assessments through the state’s conference and appeals process and was subsequently denied. The Company then filed two complaints in Tax Court against the New Jersey Division of Taxation contesting these assessments and a trial limited to the nexus dispute was conducted in June 2013. On October 23, 2013, the Tax Court issued their opinion on the matter in favor of the New Jersey Division of Taxation.  The Company is currently in the process of appealing the court’s decision.  No payments with respect to these matters are required until the dispute is definitively resolved.
 
The Company recorded a $10,052 charge to income tax expense in the fiscal quarter ended October 26, 2013, which includes a $4,933 (net of federal benefit of $2,656) increase in  unrecognized tax benefits and $5,119 (net of federal benefit of $2,078) of related interest and penalties for tax positions taken in prior years.  This charge increased our beginning of year accrued tax liability to reflect the estimated total tax, interest and penalties due if the Company is unable to overturn the Court’s decision upon appeal.  It is reasonably possible that this matter will be resolved within the next twelve months.  A favorable resolution could result in a reduction in gross unrecognized tax benefits of up to $28,993. The ultimate resolution of these matters could materially impact our results of operations and cash flows.
 
Superstorm Sandy devastated our area on October 29, 2012 and resulted in the closure of almost all of our stores for periods of time ranging from a few hours to eight days. Village disposed of substantial amounts of perishable product and also incurred repair, labor and other costs as a result of the storm. The Company has property, casualty and business interruption insurance, subject to deductibles and coverage limits. During fiscal 2013, Wakefern began the process of working with our insurers to recover the damages and Village has recorded estimated insurance recoveries. Net of payments received, the related insurance receivable was $2,290 at July 26, 2014. In October 2013, Wakefern, as the policy holder, filed suit against the primary carrier seeking payment of remaining claims due for all Wakefern members. The suit is the result of different interpretations of policy terms. Final resolution of our insurance claim related to the storm could have a material impact on our results of operations.
 
In addition, the Company, in the ordinary course of business, is involved in various legal proceedings.  Village does not believe the outcome of these proceedings will have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity.

 
7

 

PART II
 
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES  OF EQUITY SECURITIES
 
(All dollar amounts are in thousands, except per share data).
 
Stock Price and Dividend Information
 
The Class A common stock of Village Super Market, Inc. is traded on the NASDAQ Global Select Market under the symbol “VLGEA.” The table below sets forth the high and low last reported sales price for the fiscal quarter indicated.
 
2014
 
High
   
Low
 
4th Quarter
  $ 25.69     $ 22.62  
3rd Quarter
    29.41       24.69  
2nd Quarter
    38.73       28.45  
1st Quarter
    39.23       34.40  
                 
                 
2013
 
High
   
Low
 
4th Quarter
  $ 38.47     $ 32.88  
3rd Quarter
    35.11       31.79  
2nd Quarter
    37.66       30.09  
1st Quarter
    37.95       32.87  
 
As of October 1, 2014, there were approximately 775 holders of Class A common stock.
 
During fiscal 2014, Village paid cash dividends of $12,432.  Dividends in fiscal 2014 consist of $1.00 per Class A common share and $0.65 per Class B common share.
 
During fiscal 2013, Village paid cash dividends of $24,048. Dividends in fiscal 2013 consist of $2.00 per Class A common share and $1.30 per Class B common share. These amounts include $12,009 of special dividends paid in December 2012, comprised of $1.00 per Class A common share and $0.65 per Class B common share.

 
8

 


Performance Graph
 
Set forth below is a graph comparing the cumulative total return on the Company’s Class A stock against the cumulative total return of the S&P 500 Composite Stock Index and the NASDAQ Retail Trade index for the Company’s last five fiscal years.
 
 
   
Jul-09
   
Jul-10
   
Jul-11
   
Jul-12
   
Jul-13
   
Jul-14
 
                                     
Village Super Market Inc.
  $ 100     $ 97     $ 101     $ 137     $ 151     $ 99  
S&P 500
  $ 100     $ 114     $ 136     $ 149     $ 186     $ 217  
NASDAQ Retail Trade
  $ 100     $ 124     $ 181     $ 204     $ 257     $ 256  
 
 
9

 
 
ITEM 6.   SELECTED FINANCIAL DATA
 
Selected Financial Data
(Dollars in thousands except per share and square feet data)
 
Fiscal 2010 contains 53 weeks. All other fiscal years contain 52 weeks.
 
For year
 
July 26,
2014
   
July 27,
2013
   
July 28,
2012
   
July 30,
2011
   
July 31,
2010
 
Sales
  $ 1,518,636     $ 1,476,457     $ 1,422,243     $ 1,298,928     $ 1,261,825  
Net income
    5,045       25,784       31,445       20,982       25,381  
Net income as a % of sales
    0.33 %     1.75 %     2.21 %     1.62 %     2.01 %
Net income per share:
                                       
Class A common stock:
                                       
Basic
  $ 0.41     $ 2.18     $ 2.74     $ 1.86     $ 2.28  
Diluted
    0.36       1.85       2.28       1.54       1.88  
Class B common stock:
                                       
Basic
    0.26       1.36       1.78       1.21       1.48  
Diluted
    0.26       1.36       1.77       1.21       1.47  
Cash dividends per share:
                                       
Class A
    1.000       2.000       0.850       1.700       0.970  
Class B
    0.650       1.300       0.553       1.105       0.631  
                                         
At year-end
                                       
Total assets
  $ 457,412     $ 427,412     $ 409,538     $ 386,190     $ 357,129  
Long-term debt
    45,242       42,738       43,149       43,147       41,831  
Working capital
    16,782       94,299       71,672       44,448       41,201  
Shareholders’ equity
    233,136       244,560       230,311       208,157       205,775  
Book value per share
    16.59       17.66       16.74       15.22       15.35  
                                         
Other data
                                       
Same store sales increase (decrease)
    0.2 %     2.9 %     4.9 %     4.0 %     (0.7 )%
Total square feet
    1,700,000       1,644,000       1,644,000       1,604,000       1,483,000  
Average total sq. ft. per store
    59,000       57,000       57,000       57,000       57,000  
Selling square feet
    1,339,000       1,295,000       1,295,000       1,264,000       1,171,000  
Sales per average square foot of selling space (1)
  $ 1,153     $ 1,140     $ 1,112     $ 1,109     $ 1,085  
Number of stores
    29       29       29       28       26  
Sales per average number of stores (1)
  $ 52,367     $ 50,912     $ 49,903     $ 49,959     $ 48,532  
Capital expenditures and acquisitions
    50,322       21,888       20,852       19,941       20,204  
 
(1) Amounts for the year ended July 30, 2011 exclude results of the two stores acquired in Maryland in July 2011.

 
10

 

Unaudited Quarterly Financial Data
(Dollars in thousands except per share amounts)
 
   
First
   
Second
   
Third
   
Fourth
   
Fiscal
 
   
Quarter
   
Quarter
   
Quarter
   
Quarter
   
Year
 
2014
                             
Sales
  $ 357,046     $ 392,241     $ 372,511     $ 396,838     $ 1,518,636  
Gross profit
    93,706       105,358       100,437       108,997       408,498  
Net (loss) income
    (6,831 )     2,818       3,188       5,870       5,045  
Net (loss) income per share:
                                       
Class A common stock:
                                       
Basic
    (0.55 )     0.23       0.26       0.47       0.41  
Diluted
    (0.55 )     0.20       0.23       0.42       0.36  
Class B common stock:
                                       
Basic
    (0.36 )     0.15       0.17       0.30       0.26  
Diluted
    (0.36 )     0.15       0.17       0.30       0.26  
                                         
2013
                                       
Sales
  $ 358,151     $ 382,175     $ 359,808     $ 376,323     $ 1,476,457  
Gross profit
    95,637       102,920       97,314       101,890       397,761  
Net income
    5,855       9,104       4,622       6,203       25,784  
Net income per share:
                                       
Class A common stock:
                                       
Basic
    0.52       0.76       0.38       0.51       2.18  
Diluted
    0.42       0.65       0.33       0.44       1.85  
Class B common stock:
                                       
Basic
    0.30       0.49       0.25       0.33       1.36  
Diluted
    0.30       0.49       0.25       0.33       1.36  
 
ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 (Dollars in thousands except per share and per square foot data)
 
OVERVIEW
 
Village Super Market, Inc. (the “Company” or “Village”) operates a chain of 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. On November 6, 2013, Village opened a 77,000 sq. ft. store in Hanover Township, New Jersey that serves the greater Morristown area and replaced the 40,000 sq. ft. Morris Plains store.  On April 30, 2014, Village opened a 59,000 sq. ft. store in Union, New Jersey and closed our existing 40,000 sq. ft. store.
 
Village is the second largest member of Wakefern Food Corporation (“Wakefern”), the nation’s largest retailer-owned food cooperative and owner of the ShopRite name. This ownership interest in Wakefern provides Village many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with larger chains.
 
The Company’s stores, six of which are owned, average 59,000 total square feet. These larger store sizes enable the Company’s stores to provide a “one-stop” shopping experience and to feature expanded higher margin specialty departments such as an on-site bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies.  During fiscal 2014, sales per store were $52,367 and sales per average square foot of selling space were $1,153. Management believes these figures are among the highest in the supermarket industry. 
 
The supermarket industry is highly competitive and characterized by narrow profit margins.  The Company competes directly with multiple retail formats, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Village competes by using low pricing, superior customer service, and a broad range of consistently available quality products, including ShopRite private labeled products. The ShopRite Price Plus card also strengthens customer loyalty.
 
 
11

 
 
Many of our stores emphasize a Power Alley, which features high margin, fresh, convenience offerings in an area within the store that provides quick customer entry and exit for those customers shopping for today's lunch or dinner. The greater Morristown and Union stores include the Village Food Garden concept previously introduced in our remodeled Livingston store. Village Food Garden features a restaurant style kitchen, and several kiosks offering a wide variety of store prepared specialty foods for both take-home and in-store dining.  Village also has on-site registered dieticians in thirteen stores that provide customers with free, private consultations on healthy meals and proper nutrition, as well as leading health related events both in store and in the community as part of the Live Right with ShopRite program.  Wakefern and Village have responded to customers increased use of the internet by creating a smart phone app and shoprite.com to provide weekly advertising and other shopping information.  In addition, on-line shopping is available in twelve store locations with store pick-up and delivery options servicing our current market.
 
We consider a variety of indicators to evaluate our performance, such as same store sales; percentage of total sales by department (mix); shrink; departmental gross profit percentage; sales per labor hour; and hourly labor rates.
 
The Company utilizes a 52 - 53 week fiscal year, ending on the last Saturday in the month of July. Fiscal 2014, 2013 and 2012 contain 52 weeks.
 
RESULTS OF OPERATIONS
 
The following table sets forth the components of the Consolidated Statements of Operations of the Company as a percentage of sales:
 
   
July 26,
2014
   
July 27,
2013
   
July 28,
2012
 
Sales
    100.00 %     100.00 %     100.00 %
Cost of sales
    73.10       73.06       72.66  
Gross profit
    26.90       26.94       27.34  
Operating and administrative expense
    23.47       22.57       22.04  
Depreciation and amortization
    1.47       1.38       1.39  
Operating income
    1.96       2.99       3.91  
Income from partnerships
    -       0.10       -  
Interest expense
    (0.24 )     (0.26 )     (0.31 )
Interest income
    0.17       0.19       0.18  
Income before income taxes
    1.89       3.02       3.78  
Income taxes
    1.56       1.27       1.57  
Net income
    0.33 %     1.75 %     2.21 %
 
SALES
 
Sales were $1,518,636 in fiscal 2014, an increase of $42,179, or 2.9% from the prior year. Sales increased due to the opening of the greater Morristown replacement store on November 6, 2013 and Union replacement store on April 30, 2014.  Same store sales increased .2% due to increased sales in both Maryland stores and in stores that were closed for periods of up to eight days in the prior year due to superstorm Sandy, partially offset by lower sales due to three store openings by competitors, very high sales in the prior year as customers prepared for superstorm Sandy, and reduced sales in stores that reopened quickly after the storm. New stores and replacement stores are included in same store sales in the quarter after the store has been in operation for four full quarters.  Store renovations are included in same store sales immediately.
 
Sales were $1,476,457 in fiscal 2013, an increase of $54,214, or 3.8% from the prior year.  Sales increased due to the acquisition of a store in Old Bridge, NJ on January 29, 2012 and a same store sales increase of 2.9%.  Same store sales increased due to higher sales as customers prepared for superstorm Sandy, improved sales at the stores that reopened quickly after that storm and higher sales in the two stores in Maryland.  Sales continued to be impacted by economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down.
 
 
12

 
 
GROSS PROFIT
 
Gross profit as a percentage of sales decreased .04% in fiscal 2014 compared to the prior year primarily due to decreased departmental gross margin percentages (.33%). Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors. This decrease was partially offset by improved product mix (.10%), lower promotional spending (.09%), and higher patronage dividends (.08%).
 
Gross profit as a percentage of sales decreased .40% in fiscal 2013 compared to the prior year primarily due to decreased departmental gross margin percentages (.47%), partially offset by improved product mix (.06%).  Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors.
 
OPERATING AND ADMINISTRATIVE EXPENSE
 
Operating and administrative expense as a percentage of sales increased .90% in fiscal 2014 compared to the prior year primarily due to a charge for future lease obligations resulting from the closures of the Morris Plains and Union stores (.29%), higher payroll (.19%), healthcare (.14%) and repair and snow removal costs (.07%), increased legal and consulting fees (.09%) and pre-opening costs for the greater Morristown and Union replacement stores (.13%).  These increases were partially offset by a reduction in non-union pension expense (.14%).  Payroll costs increased due to efforts to enhance the customer experience and provide additional services, including the addition and expansion of ShopRite from Home in several stores and our Village Food Garden at the greater Morristown and Union replacement stores and the remodeled Livingston store.  In addition, the prior fiscal year included a charge from the settlement of a dispute with a landlord (.04%) and income from settlement of the national credit card lawsuit (.08%).
 
Operating and administrative expense as a percentage of sales increased .53% in fiscal 2013 compared to the prior year primarily due to higher payroll (.15%) and fringe benefit (.27%) costs, a charge from settlement of a dispute with a landlord (.04%), and the prior fiscal year included a favorable settlement of a pension withdrawal liability (.04%).  These increases were partially offset by income from settlement of the national credit card lawsuit (.08%) in the current fiscal year.  Payroll costs increased due to efforts to enhance the customer experience and provide additional services, including our first Village Food Garden at the remodeled Livingston store and the addition of ShopRite from Home in several stores.  Fringe benefit costs increased due to higher costs for health, pension and workers compensation.
 
DEPRECIATION AND AMORTIZATION
 
Depreciation and amortization expense was $22,274, $20,354 and $19,759 in fiscal 2014, 2013 and 2012, respectively. Depreciation and amortization expense increased in fiscal 2014 and 2013 compared to the prior years due to depreciation related to fixed asset additions.
 
INCOME FROM PARTNERSHIPS
 
Income from partnerships of $1,450 in fiscal 2013 are distributions received from two partnerships that exceeded the invested amounts.  The Company’s partnership interests resulted from its leasing of supermarkets in two shopping centers.  The Company remains a tenant in one of these shopping centers.
 
INTEREST EXPENSE
 
Interest expense was $3,602, $3,771 and $4,415, in fiscal 2014, 2013 and 2012, respectively. Interest expense decreased in fiscal 2014 and 2013 compared to fiscal 2012 due to interest costs capitalized in fiscal 2014 and 2013, and interest incurred on a pension withdrawal liability included in fiscal 2012.
 
INTEREST INCOME
 
Interest income was $2,622, $2,783 and $2,571 in fiscal 2014, 2013 and 2012, respectively.
 
INCOME TAXES
 
The Company’s effective income tax rate was 82.5%, 42.2% and 41.5% in fiscal 2014, 2013 and 2012, respectively.
 
As described in Note 5 to the Consolidated Financial Statements, income taxes in fiscal 2014 includes a $10,052 charge related to tax positions taken in prior years as a result of the unfavorable ruling by the New Jersey Tax Court.   Excluding this charge, the effective tax rate was 47.6% in fiscal 2014 compared to 42.2% in the prior year.  The increase in the effective tax rate is due to the impact of New Jersey Tax Court decision including increased accrued interest and penalties in the current year.
 
 
13

 
 
NET INCOME
 
Net income was $5,045 in fiscal 2014 compared to $25,784 in fiscal 2013.  Fiscal 2014 includes a $11,608 increase to income tax expense as a result of the unfavorable ruling by the New Jersey Tax Court, a charge for future lease obligations due to the closure of the Morris Plains and Union stores of $2,551 (net of tax) and pre-opening costs for the replacement stores in greater Morristown and Union of $1,141 (net of tax), while fiscal 2013 includes income from the national credit card lawsuit of $693 (net of tax), income from a partnership distribution of $840 (net of tax) and a charge for the settlement of a landlord dispute of $376 (net of tax).  Excluding these items from both fiscal years, net income in fiscal 2014 declined 17% compared to the prior year primarily due to flat same store sales, higher operating expenses as a percentage of sales, and higher depreciation expense.
 
Net income was $25,784 in fiscal 2013 compared to $31,445 in fiscal 2012.  Fiscal 2013 includes income from partnership distributions of $840 (net of tax), income from the national credit card lawsuit of $693 (net of tax) and a charge for the settlement of a landlord dispute of $376 (net of tax), while fiscal 2012 includes a favorable settlement of a pension withdrawal liability of $374 (net of tax).   Excluding these items from both fiscal years, net income in fiscal 2013 declined 21% compared to the prior year primarily due to lower gross profit percentages and higher operating expenses as a percentage of sales, partially offset by reduced losses in the two Maryland stores compared to the prior year, which was their initial year of operations.  
 
CRITICAL ACCOUNTING POLICIES
 
Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
IMPAIRMENT
 
The Company reviews the carrying values of its long-lived assets, such as property, equipment and fixtures for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review analyzes the undiscounted estimated future cash flows from asset groups at the store level to determine if the carrying value of such assets are recoverable from their respective cash flows. If impairment is indicated, it is measured by comparing the fair value of the long-lived asset groups held for use to their carrying value.
 
Goodwill is tested for impairment at the end of each fiscal year, or more frequently if circumstances dictate. The Company utilizes valuation techniques, such as earnings multiples, in addition to the Company’s market capitalization to assess goodwill for impairment. Calculating the fair value of a reporting unit requires the use of estimates. Management believes the fair value of Village’s one reporting unit exceeds its carrying value at July 26, 2014. Should the Company’s carrying value of its one reporting unit exceed its fair value, the amount of any resulting goodwill impairment may be material to the Company’s financial position and results of operations.
 
PATRONAGE DIVIDENDS
 
As a stockholder of Wakefern, Village earns a share of Wakefern’s earnings, which are distributed as a “patronage dividend” (see Note 3). This dividend is based on a distribution of substantially all of Wakefern’s operating profits for its fiscal year (which ends September 30) in proportion to the dollar volume of purchases by each member from Wakefern during that fiscal year. Patronage dividends are recorded as a reduction of cost of sales as merchandise is sold. Village accrues estimated patronage dividends due from Wakefern quarterly based on an estimate of the annual Wakefern patronage dividend and an estimate of Village’s share of this annual dividend based on Village’s estimated proportional share of the dollar volume of business transacted with Wakefern that year. The amount of patronage dividends receivable based on these estimates were $12,923 and $11,810 at July 26, 2014 and July 27, 2013, respectively.
 
 
14

 
 
PENSION PLANS
 
The determination of the Company’s obligation and expense for Company-sponsored pension plans is dependent, in part, on Village’s selection of assumptions used by actuaries in calculating those amounts. These assumptions are described in Note 8 and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rate of increase in compensation costs. Actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. While management believes that its assumptions are appropriate, significant differences in actual experience or significant changes in the Company’s assumptions may materially affect cash flows, pension obligations and future expense.
 
The objective of the discount rate assumption is to reflect the rate at which the Company’s pension obligations could be effectively settled based on the expected timing and amounts of benefits payable to participants under the plans. Our methodology for selecting the discount rate as of July 26, 2014 was to match the plans cash flows to that of a yield curve on high-quality fixed-income investments. Based on this method, we utilized a weighted-average discount rate of 3.95% at July 26, 2014 compared to 4.43% at July 27, 2013. The .48% decrease in the discount rate, and a change in the mortality table utilized, increased the projected benefit obligation at July 26, 2014 by approximately $6,337. Village evaluated the expected long-term rate of return on plan assets of 7.5% and the expected increase in compensation costs of 4 to 4.5% and concluded no changes in these assumptions were necessary in estimating pension plan obligations and expense.
 
Sensitivity to changes in the major assumptions used in the calculation of the Company’s pension plans is as follows:
 
   
Percentage
 point change
   
Projected benfit
 obligation
decrease
 (increase)
   
Expense
decrease
 (increase)
 
Discount rate
    + / - 1.0 %   $
10,214  ($12,844)
    $ 403   ($482)  
Expected return on assets
    + / - 1.0 %     -     $ 425   ($425)  
 
Village contributed $3,320 and $3,254 in fiscal 2014 and 2013, respectively, to these Company-sponsored pension plans. Village expects to contribute $6,000 in fiscal 2015 to these plans. The 2014 and 2013 contributions are substantially all voluntary contributions.
 
The Company also contributes to several multi-employer pension plans based on obligations arising from collective bargaining agreements.  These plans provide retirement benefits to participants based on their service to contributing employers.  We recognize expense in connection with these plans as contributions are funded.  
 
UNCERTAIN TAX POSITIONS
 
The Company is subject to periodic audits by various taxing authorities. These audits may challenge certain of the Company’s tax positions such as the timing and amount of deductions and the allocation of income to various tax jurisdictions. Accounting for these uncertain tax positions requires significant management judgment.  Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future years.
 
As discussed in note 5 of the accompanying notes to the consolidated financial statements, the Company is currently in the process of appealing an unfavorable decision by the New Jersey Tax Court regarding tax assessments received from the state of New Jersey.  As a result of the decision, we have increased our accrued tax liability to reflect the estimated total tax, interest and penalties due if the Company is unable to overturn the Court’s decision upon appeal.  A favorable resolution would result in a material reduction in gross unrecognized tax benefits and related accrued interest and penalties.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently assessing the potential impact of ASU No. 2014-09 on its financial statements.
 
 
15

 
 
LIQUIDITY and CAPITAL RESOURCES
 
CASH FLOWS
 
Net cash provided by operating activities was $52,447 in fiscal 2014 compared to $51,273 in the corresponding period of the prior year.
 
During fiscal 2014, Village used cash to fund capital expenditures of $50,322, dividends of $12,432 and invested an additional $18,177 in notes receivable from Wakefern. Capital expenditures include the construction of two replacement stores.
 
Net cash provided by operating activities was $51,273 in fiscal 2013 compared to $43,432 in the corresponding period of the prior year.  This increase is primarily attributable to the prior year including a settlement of a $7,028 pension liability and changes in the timing of payables.
 
During fiscal 2013 Village used cash to fund capital expenditures of $21,888 and dividends of $24,048.  Capital expenditures include substantial remodels of three stores and the site work and beginning of construction of a replacement store.  Dividends paid include $12,009 of special dividends.
 
LIQUIDITY and DEBT
 
Working capital was $16,782, $94,299, and $71,672 at July 26, 2014, July 27, 2013 and July 28, 2012, respectively.  The decrease in working capital in fiscal 2014 compared to prior year is due primarily to the $40,598 investment in long-term notes receivable, increased income tax liabilities as result of the New Jersey Tax Court decision and capital expenditures.  Working capital ratios at the same dates were 1.11, 1.85, and 1.72 to one, respectively.  The Company’s working capital needs are reduced, since inventories are generally sold by the time payments to Wakefern and other suppliers are due.
 
Village has budgeted approximately $25,000 for capital expenditures in fiscal 2015. Planned expenditures include three major remodels and several smaller remodels. The Company’s primary sources of liquidity in fiscal 2015 are expected to be cash and cash equivalents on hand at July 26, 2014 and operating cash flow generated in fiscal 2015.
 
On February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern.  These notes earned interest at a fixed rate of 7%.  The Company invested the proceeds received and additional funds previously invested in demand deposits at Wakefern in variable rate notes receivable from Wakefern of $40,000 on February 15, 2014.  Half of these notes earn interest at the prime rate plus .25% and mature in 3.5 years and half earn interest at the prime rate plus 1.25% and mature in 5 years.  Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.
 
Village has an unsecured revolving credit agreement providing a maximum amount available for borrowing of $25,000.  This loan agreement expires on December 31, 2015. The revolving credit line can be used for general corporate purposes. Indebtedness under this agreement bears interest at the prime rate, or at the Eurodollar rate, at the Company’s option, plus applicable margins based on the Company’s fixed charge coverage ratio. There were no amounts outstanding at July 26, 2014 or July 27, 2013 under this facility.
 
The revolving loan agreement contains covenants that, among other conditions, require a maximum liabilities to tangible net worth ratio, a minimum fixed charge coverage ratio and a positive net income. At July 26, 2014, the Company was in compliance with all terms and covenants of the revolving loan agreement. Under the above covenants, Village had approximately $106,152 of net worth available at July 26, 2014 for the payment of dividends.
 
During fiscal 2014, Village paid cash dividends of $12,432.  Dividends in fiscal 2014 consist of $1.00 per Class A common share and $.65 per Class B common share.
 
During fiscal 2013, Village paid cash dividends of $24,048. Dividends in fiscal 2013 consist of $2.00 per Class A common share and $1.30 per Class B common share. These amounts include $12,009 of special dividends paid in December 2012, comprised of $1.00 per Class A common share and $0.65 per Class B common share.

 
16

 

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
 
The table below presents significant contractual obligations of the Company at July 26, 2014:
 
   
Payments due by fiscal period
 
   
2015
   
2016
   
2017
   
2018
   
2019
   
Thereafter
   
Total
 
                                           
Capital and financing leases (2)
  $ 4,674     $ 4,875     $ 4,875     $ 4,959     $ 5,001     $ 69,964     $ 94,348  
Operating leases (2)
    10,411       9,265       6,845       6,282       5,076       47,740       85,619  
Notes payable to Related Party
    667       518       446       110       -       -       1,741  
    $ 15,752     $ 14,658     $ 12,166     $ 11,351     $ 10,077     $ 117,704     $ 181,708  
 
(1)
In addition, the Company is obligated to purchase 85% of its primary merchandise requirements from Wakefern (see Note 3).
(2)
The above amounts for capital, financing and operating leases include interest, but do not include certain obligations under these leases for other charges. These charges consisted of the following in fiscal 2014: Real estate taxes - $4,380; common area maintenance - $2,334; insurance - $107; and contingent rentals - $872.
(3)
Pension plan funding requirements are excluded from the above table as estimated contribution amounts for future years are uncertain. Required future contributions will be determined by, among other factors, actual investment performance of plan assets, interest rates required to be used to calculate pension obligations, and changes in legislation. The Company expects to contribute $6,000 in fiscal 2015 to fund Company-sponsored defined benefit pension plans compared to actual contributions of $3,320 in fiscal 2014. The table also excludes contributions under various multi-employer pension plans, which totaled $5,113 in fiscal 2014.
(4)
The amount of unrecognized tax benefits of $18,845 at July 26, 2014 has been excluded from this table because a reasonable estimate of the timing of future tax settlements cannot be determined.
 
OUTLOOK
 
This annual report contains certain forward-looking statements about Village’s future performance. These statements are based on management’s assumptions and beliefs in light of information currently available. Such statements relate to, for example: economic conditions; uninsured losses; expected pension plan contributions; projected capital expenditures; expected dividend payments; cash flow requirements; inflation expectations; and legal matters; and are indicated by words such as “will,” “expect,” “should,” “intend,” “anticipates,” “believes” and similar words or phrases. The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-looking statements. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof.
 
·
We expect same store sales to range from flat to an increase of 2% in fiscal 2015.
   
·
We expect modest retail price inflation in fiscal 2015.
   
·
We have budgeted $25,000 for capital expenditures in fiscal 2015. Planned expenditures include three major remodels and several smaller remodels.
   
·
The Board’s current intention is to continue to pay quarterly dividends in 2015 at the most recent rate of $.25 per Class A and $.1625 per Class B share.
   
·
We believe cash flow from operations and other sources of liquidity will be adequate to meet anticipated requirements for working capital, capital expenditures and debt payments for the foreseeable future.
   
· We expect our effective income tax rate in fiscal 2015 to be 46.0% - 47.0%. Excluding interest and penalties related to unrecognized tax benefits, we expect our effective income tax rate in fiscal 2015 to be 41.5% - 42.5%.
   
·
We expect operating expenses will be affected by increased costs in certain areas, such as medical and pension costs.
 
 
17

 
 
Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include:
 
·
The supermarket business is highly competitive and characterized by narrow profit margins. Results of operations may be materially adversely impacted by competitive pricing and promotional programs, industry consolidation and competitor store openings. Village competes with national and regional supermarkets, local supermarkets, warehouse club stores, supercenters, drug stores, convenience stores, dollar stores, discount merchandisers, restaurants and other local retailers. Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do.
   
·
The Company’s stores are concentrated in New Jersey, with one store in northeastern Pennsylvania and two in Maryland. We are vulnerable to economic downturns in New Jersey in addition to those that may affect the country as a whole. Economic conditions such as inflation, deflation, interest rates, energy costs and unemployment rates may adversely affect our sales and profits.
   
·
Village acquired two stores in July 2011 in Maryland, a new market for Village where the ShopRite name is less known than in New Jersey. Maryland stores sales, marketing costs and operating performance remain worse than initially projected as we continue to build market share and brand awareness.  If these trends continue, the performance of our Maryland stores may negatively impact the Company’s results of operations.
   
·
Village purchases substantially all of its merchandise from Wakefern. In addition, Wakefern provides the Company with support services in numerous areas including supplies, advertising, liability and property insurance, technology support and other store services. Further, Village receives patronage dividends and other product incentives from Wakefern. Any material change in Wakefern’s method of operation or a termination or material modification of Village’s relationship with Wakefern could have an adverse impact on the conduct of the Company’s business and could involve additional expense for Village. The failure of any Wakefern member to fulfill its obligations to Wakefern or a member’s insolvency or withdrawal from Wakefern could result in increased costs to the Company. Additionally, an adverse change in Wakefern’s results of operations could have an adverse effect on Village’s results of operations.
   
·
Approximately 91% of our employees are covered by collective bargaining agreements. Any work stoppages could have an adverse impact on our financial results. If we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs.
   
·
Village could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations.
   
·
Certain of the multi-employer plans to which we contribute are underfunded. As a result, we expect that contributions to these plans may increase. Additionally, the benefit levels and related items will be issues in the negotiation of our collective bargaining agreements. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. The failure of a withdrawing employer to fund these obligations can impact remaining employers. The amount of any increase or decrease in our required contributions to these multi-employer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations and the actual return on assets held in the plans, among other factors.
   
·
We provide health benefits to a large number of our employees, primarily through multi-employer health plans.  Effective January 1, 2015, the Patient Protection and Affordable Care Act will impose new mandates on employers that could significantly increase the number of employees receiving benefits and our required contributions to these multi-employer health plans.  We are not able at this time to determine the impact of the law, as it will depend on many factors, including finalization of rules implementing the law, the number of additional employees that we will be required to provide health benefits and the number of eligible employees that enroll for medical benefits, which could be material to our results of operations
   
·
Our long-lived assets, primarily stores, are subject to periodic testing for impairment. Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.
   
·
Our effective tax rate may be impacted by the results of tax examinations and changes in tax laws, including the disputes with the state of New Jersey described in note 5 of the accompanying notes to the consolidated financial statements.
   
·
Wakefern provides all members of the cooperative with information system support that enables us to effectively manage our business data, customer transactions, ordering, communications and other business processes.  These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human error.  Any material interruption of our or Wakefern’s information systems could have a material adverse impact on our results of operations.
   
  Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems. In addition, confidential information is transmitted through our ShopRite from Home online business at shoprite.com and through the ShopRite app. Unauthorized parties may attempt to access information stored in or to sabotage or disrupt these systems. Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions. It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at Wakefern or those of third-party service providers.
   
  Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties. Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered or are in excess of carried insurance policies. In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation.
 
 
18

 
 
RELATED PARTY TRANSACTIONS
 
The Company holds an investment in Wakefern, its principal supplier. Village purchases substantially all of its merchandise from Wakefern in accordance with the Wakefern Stockholder Agreement. As part of this agreement, Village is required to purchase certain amounts of Wakefern common stock. At July 26, 2014, the Company’s indebtedness to Wakefern for the outstanding amount of this stock subscription was $1,741. The maximum per store investment, which is currently $850, increased by $25 in both fiscal 2014 and 2013, resulting in additional investments of $657 and $949, respectively. Wakefern distributes as a “patronage dividend” to each member a share of its earnings in proportion to the dollar volume of purchases by the member from Wakefern during the year. Wakefern provides the Company with support services in numerous areas including advertising, supplies, liability and property insurance, technology support and other store services. Additional information is provided in Note 3 to the consolidated financial statements.
 
On February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern.  These notes earned interest at a fixed rate of 7%.  The Company invested the proceeds received and additional funds previously invested in demand deposits at Wakefern in variable rate notes receivable from Wakefern of $40,000 on February 15, 2014.  Half of these notes earn interest at the prime rate plus .25% and mature in 3.5 years and half earn interest at the prime rate plus 1.25% and mature in 5 years.  Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.
 
At July 26, 2014, Village had demand deposits invested at Wakefern in the amount of $52,891. These deposits earn overnight money market rates.
 
The Company subleases the Galloway and Vineland stores from Wakefern at combined current annual rents of $1,296. Both leases contain normal periodic rent increases and options to extend the lease.
 
The Company leases a supermarket from a realty firm 30% owned by certain officers of Village. The Company paid rent to related parties under this lease of $640, $640 and $640 in fiscal 2014, 2013 and 2012, respectively. This lease expires in fiscal 2016 with options to extend at increasing annual rents.
 
The Company has ownership interests in three real estate partnerships. Village paid aggregate rents to two of these partnerships for leased stores of approximately $1,008, $834 and $801 in fiscal years 2014, 2013 and 2012, respectively. In fiscal 2013, the Company recognized income from partnerships of $1,450 resulting from distributions received from two of these partnerships that exceeded the invested amounts.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
IMPACT OF INFLATION AND CHANGING PRICES
 
Although the Company cannot accurately determine the precise effect of inflation or deflation on its operations, it estimates that product prices overall experienced slight inflation in fiscal 2014 and 2013. The Company recorded a pre-tax LIFO benefits of $216 and $56 in fiscal 2014 and 2013, respectively, compared to a pre-tax LIFO charge of $601 in fiscal 2012. The Company calculates LIFO based on CPI indices published by the Department of Labor, which indicated weighted-average CPI changes of (0.6%), (0.1%) and 2.1%, in fiscal 2014, 2013 and 2012, respectively.
 
MARKET RISK
 
At July 26, 2014, the Company had demand deposits of $52,891 at Wakefern earning interest at overnight money market rates, which are exposed to the impact of interest rate changes.
 
On February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern.  These notes earned interest at a fixed rate of 7%.  The Company invested the proceeds received and additional funds previously invested in demand deposits at Wakefern in variable rate notes receivable from Wakefern of $40,000 on February 15, 2014.  Half of these notes earn interest at the prime rate plus .25% and mature in 3.5 years and half earn interest at the prime rate plus 1.25% and mature in 5 years.  Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.

 
19

 
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (In thousands)

   
July 26,
2014
   
July 27,
2013
 
ASSETS
           
Current Assets
           
Cash and cash equivalents
  $ 77,352     $ 109,571  
Merchandise inventories
    44,694       41,515  
Patronage dividend receivable
    12,923       11,810  
Notes receivable from Wakefern
    -       22,421  
Other current assets
    27,817       20,047  
                 
Total current assets
    162,786       205,364  
                 
Notes receivable from Wakefern
    40,598       -  
Property, equipment and fixtures, net
    206,720       176,981  
Investment in Wakefern
    25,012       24,355  
Goodwill
    12,057       12,057  
Other assets
    10,239       8,655  
                 
Total assets
  $ 457,412     $ 427,412  
                 
LIABILITIES and SHAREHOLDERS’ EQUITY
               
Current Liabilities
               
Capital and financing lease obligations
  $ 231     $ 10  
Notes payable to Wakefern
    667       600  
Accounts payable to Wakefern
    66,004       59,465  
Accounts payable and accrued expenses
    15,859       16,999  
Accrued wages and benefits
    18,856       14,710  
Income taxes payable
    44,387       19,281  
                 
Total current liabilities
    146,004       111,065  
                 
Long-term Debt
               
Capital and financing lease obligations
    44,168       41,019  
Notes payable to Wakefern
    1,074       1,719  
                 
Total long-term debt
    45,242       42,738  
                 
Pension liabilities
    23,876       20,062  
Other liabilities
    9,154       8,987  
                 
Commitments and Contingencies (Notes 3, 4, 5, 6, 8 and 9) 
               
                 
Shareholders' Equity
               
Preferred stock, no par value: Authorized 10,000 shares, none issued
           
Class A common stock, no par value: Authorized 20,000 shares; issued 10,147 shares at July 26, 2014 and  9,440 shares at July 27, 2013
    47,056       44,543  
Class B common stock, no par value: Authorized 20,000 shares; issued and outstanding 4,361 shares at July 26, 2014 and 4,780 shares at July 27, 2013
    708       776  
Retained earnings
    203,722       211,109  
Accumulated other comprehensive loss
    (12,465 )     (8,467 )
Less treasury stock, Class A, at cost (454 shares at July 26, 2014 and 375 shares at July 27, 2013)
    (5,885 )     (3,401 )
                 
Total shareholders’ equity
    233,136       244,560  
                 
Total liabilities and shareholders' equity
  $ 457,412     $ 427,412  
 
          See notes to consolidated financial statements.

 
20

 

VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share amounts)

   
Years ended
 
 
July 26,
2014
   
July 27,
2013
   
July 28,
2012
 
                   
Sales
  $ 1,518,636     $ 1,476,457     $ 1,422,243  
Cost of sales
    1,110,138       1,078,696       1,033,416  
                         
Gross profit
    408,498       397,761       388,827  
                         
Operating and administrative expense
    356,396       333,230       313,516  
Depreciation and amortization
    22,274       20,354       19,759  
                         
Operating income
    29,828       44,177       55,552  
                         
Income from partnerships
    -       1,450       -  
Interest expense
    (3,602 )     (3,771 )     (4,415 )
Interest income
    2,622       2,783       2,571  
                         
Income before income taxes
    28,848       44,639       53,708  
Income taxes
    23,803       18,855       22,263  
                         
Net income
  $ 5,045     $ 25,784     $ 31,445  
                         
Net income per share:
                       
Class A common stock:
                       
Basic
  $ 0.41     $ 2.18     $ 2.74  
Diluted
  $ 0.36     $ 1.85     $ 2.28  
                         
Class B common stock:
                       
Basic
  $ 0.26     $ 1.36     $ 1.78  
Diluted
  $ 0.26     $ 1.36     $ 1.77  
 
See notes to consolidated financial statements.

 
21

 

VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (in thousands)
 
   
Years ended
 
   
July 26,
2014
   
July 27,
2013
   
July 28,
2012
 
                   
Net income
  $ 5,045     $ 25,784     $ 31,445  
                         
Other comprehensive income (loss):
                       
Amortization of pension actuarial loss, net of tax (1)
    475       1,309       780  
Pension adjustment to funded status, net of tax (2)
    (4,473 )     5,698       (5,112 )
Total other comprehensive income (loss)
    (3,998 )     7,007       (4,332 )
                         
Comprehensive income
  $ 1,047     $ 32,791     $ 27,113  
                         
(1) Amounts are net of tax of $329, $872 and $519 for 2014, 2013 and 2012, respectively.
                       
(2) Amounts are net of tax of $3,238, $3,800 and $3,429 for 2014, 2013 and 2012, respectively.
                       
 
See notes to consolidated financial statements.

 
22

 

VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)

Years ended July 26, 2014, July 27, 2013 and July 28, 2012
 
                                 
Accumulated
 other
comprehensive
 income (loss)
                   
                           
Total
 shareholders'
equity
 
   
Class A Common Stock
   
Class B Common Stock
   
Retained Earnings
   
Treasury Stock Class A
 
   
Shares Issued
   
Amount
   
Shares Issued
   
Amount
   
Shares
   
Amount
 
Balance, July 30, 2011
    7,833     $ 35,385       6,376     $ 1,035     $ 187,686     $ (11,142 )     530     $ (4,807 )   $ 208,157  
Net income
    -       -       -       -       31,445       -       -       -       31,445  
Other comprehensive loss, net of tax of $2,910
    -       -       -       -       -       (4,332 )     -       -       (4,332 )
Dividends
    -       -       -       -       (9,758 )     -       -       -       (9,758 )
Exercise of stock options
    -       723       -       -       -       -       (69 )     630       1,353  
Treasury stock purchases
    -       -       -       -       -       -       -       (9 )     (9 )
Share-based compensation expense
    9       3,180       -       -       -       -       -       -       3,180  
Excess tax benefits from exercise of stock options and restricted share vesting
    -       275       -       -       -       -       -       -       275  
Conversion of Class B shares to Class A shares
    41       7       (41 )     (7 )     -       -       -       -       -  
Balance, July 28, 2012
    7,883       39,570       6,335       1,028       209,373       (15,474 )     461       (4,186 )     230,311  
Net income
    -       -       -       -       25,784       -       -       -       25,784  
Other comprehensive income, net of tax of $4,672
    -       -       -       -       -       7,007       -       -       7,007  
Dividends
    -       -       -       -       (24,048 )     -       -       -       (24,048 )
Exercise of stock options
    -       957       -       -       -       -       (86 )     785       1,742  
Share-based compensation expense
    2       3,222       -       -       -       -       -       -       3,222  
Excess tax benefits from exercise of stock options and restricted share vesting
    -       542       -       -       -       -       -       -       542  
Conversion of Class B shares to Class A shares
    1,555       252       (1,555 )     (252 )     -       -       -       -       -  
Balance, July 27, 2013
    9,440       44,543       4,780       776       211,109       (8,467 )     375       (3,401 )     244,560  
Net income
    -       -       -       -       5,045       -       -       -       5,045  
Other comprehensive loss, net of tax of $2,909
    -       -       -       -       -       (3,998 )     -       -       (3,998 )
Dividends
    -       -       -       -       (12,432 )     -       -       -       (12,432 )
Exercise of stock options
    -       132       -       -       -       -       (9 )     85       217  
Treasury stock purchases
    -       -       -       -       -       -       88       (2,569 )     (2,569 )
Share-based compensation expense
    288       3,229       -       -       -       -       -       -       3,229  
Net tax deficit from exercise of stock options and restricted share vesting
    -       (916 )     -       -       -       -       -       -       (916 )
Conversion of Class B shares to Class A shares
    419       68       (419 )     (68 )     -       -       -       -       -  
Balance, July 26, 2014
    10,147     $ 47,056       4,361     $ 708     $ 203,722     $ (12,465 )     454     $ (5,885 )   $ 233,136  
 
See notes to consolidated financial statements.

 
23

 

VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
   
Years ended
 
   
July 26,
2014
   
July 27,
2013
   
July 28,
2012
 
                   
CASH FLOWS FROM OPERATING ACTIVITIES
                 
Net income
  $ 5,045     $ 25,784     $ 31,445  
Adjustments to reconcile net income to net cash provided by operating activities:
                       
Depreciation and amortization
    22,274       20,354       19,759  
Non-cash share-based compensation
    3,229       3,222       3,180  
Deferred taxes
    (8,048 )     (3,499 )     1,089  
Provision to value inventories at LIFO
    (216 )     (56 )     601  
Income from partnerships
    -       (1,450 )     -  
                         
Changes in assets and liabilities, net of effects of stores acquired:
                       
Merchandise inventories
    (2,963 )     (860 )     (1,423 )
Patronage dividend receivable
    (1,113 )     (1,036 )     (1,756 )
Accounts payable to Wakefern
    6,539       4,024       32  
Accounts payable and accrued expenses
    933       (1,778 )     643  
Accrued wages and benefits
    4,146       1,908       (6,415 )
Income taxes payable
    24,144       4,147       (2,745 )
Other assets and liabilities
    (1,523 )     513       (978 )
                         
Net cash provided by operating activities
    52,447       51,273       43,432  
                         
CASH FLOWS FROM INVESTING ACTIVITIES
                       
Capital expenditures
    (50,322 )     (21,888 )     (16,729 )
Investment in notes receivable from Wakefern
    (41,597 )     (1,503 )     (1,406 )
Maturity of notes receivable from Wakefern
    23,420       -       -  
Store acquisitions
    -       -       (4,123 )
Proceeds from partnerships
    -       1,980       -  
                         
Net cash used in investing activities
    (68,499 )     (21,411 )     (22,258 )
                         
CASH FLOWS FROM FINANCING ACTIVITIES
                       
Proceeds from exercise of stock options
    217       1,742       1,353  
Excess tax benefit related to share-based compensation
    46       542       275  
Principal payments of long-term debt
    (1,429 )     (1,630 )     (1,294 )
Dividends
    (12,432 )     (24,048 )     (9,758 )
Treasury stock purchases
    (2,569 )     -       (9 )
                         
Net cash used in financing activities
    (16,167 )     (23,394 )     (9,433 )
                         
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (32,219 )     6,468       11,741  
                         
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    109,571       103,103       91,362  
                         
CASH AND CASH EQUIVALENTS, END OF YEAR
  $ 77,352     $ 109,571     $ 103,103  
                         
SUPPLEMENTAL DISCLOSURES OF CASH PAYMENTS MADE FOR:
                       
Interest
  $ 4,240     $ 4,012     $ 4,116  
Income taxes
    7,661       17,665       23,076  
                         
NONCASH SUPPLEMENTAL DISCLOSURES:
                       
Investment in Wakefern
  $ -     $ -     $ 323  
Capital lease obligations
    3,525       -       -  
 
See notes to consolidated financial statements.
 
 
24

 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All amounts are in thousands, except per share data)
 
 
NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Nature of operations

Village Super Market, Inc. (the “Company” or “Village”) operates a chain of 29 ShopRite supermarkets in New Jersey, eastern Pennsylvania and Maryland. The Company is a member of Wakefern Food Corporation ("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite name.  This relationship provides Village many of the economies of scale in purchasing, distribution, private label products, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage.

Principles of consolidation

The consolidated financial statements include the accounts of Village Super Market, Inc. and its subsidiaries, which are wholly owned. Intercompany balances and transactions have been eliminated.

Fiscal year

The Company and its subsidiaries utilize a 52-53 week fiscal year ending on the last Saturday in the month of July. Fiscal 2014, 2013 and 2012 contain 52 weeks.

Industry segment 

The Company consists of one operating segment, the retail sale of food and nonfood products.

Revenue recognition

Merchandise sales are recognized at the point of sale to the customer. Sales tax is excluded from revenue. Discounts provided to customers through ShopRite coupons and loyalty programs are recognized as a reduction of sales as the products are sold.

Cash and cash equivalents

The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Included in cash and cash equivalents are proceeds due from credit and debit card transactions, which typically settle within five business days, of $9,864 and $8,922 at July 26, 2014 and July 27, 2013, respectively. Included in cash and cash equivalents at July 26, 2014 and July 27, 2013 are $52,891 and $85,222, respectively, of demand deposits invested at Wakefern at overnight money market rates.

Merchandise inventories

Approximately 65% of merchandise inventories are stated at the lower of LIFO (last-in, first-out) cost or market. If the FIFO (first-in, first-out) method had been used, inventories would have been $14,570 and $14,786 higher than reported in fiscal 2014 and 2013, respectively. All other inventories are stated at the lower of FIFO cost or market.

Vendor allowances and rebates

The Company receives vendor allowances and rebates, including the patronage dividend and amounts received as a pass through from Wakefern, related to the Company’s buying and merchandising activities. Vendor allowances and rebates are recognized as a reduction in cost of sales when the related merchandise is sold or when the required contractual terms are completed.

Property, equipment and fixtures

Property, equipment and fixtures are recorded at cost. Interest cost incurred to finance construction is capitalized as part of the cost of the asset. Maintenance and repairs are expensed as incurred.

Depreciation is provided on a straight-line basis over estimated useful lives of thirty years for buildings, ten years for store fixtures and equipment, and three years for vehicles. Leasehold improvements are amortized over the shorter of the related lease terms or the estimated useful lives of the related assets.

When assets are sold or retired, their cost and accumulated depreciation are removed from the accounts, and any gain or loss is reflected in the consolidated financial statements.

 
25

 
 
Investments

The Company’s investments in its principal supplier, Wakefern, and a Wakefern affiliate, Insure-Rite, Ltd., are stated at cost (see Note 3). Village evaluates its investments in Wakefern and Insure-Rite, Ltd. for impairment through consideration of previous, current and projected levels of profit of those entities.

The Company’s 20%-50% investments in certain real estate partnerships are accounted for under the equity method. One of these partnerships is a variable interest entity which does not require consolidation as Village is not the primary beneficiary (see Note 6).

Store opening and closing costs

All store opening costs are expensed as incurred. The Company records a liability for the future minimum lease payments and related costs for closed stores from the date of closure to the end of the remaining lease term, net of estimated cost recoveries that may be achieved through subletting, discounted using a risk-adjusted interest rate.

Leases

Leases that meet certain criteria are classified as capital leases, and assets and liabilities are recorded at amounts equal to the lesser of the present value of the minimum lease payments or the fair value of the leased properties at the inception of the respective leases. Such assets are amortized on a straight- line basis over the shorter of the related lease terms or the estimated useful lives of the related assets. Amounts representing interest expense relating to the lease obligations are recorded to effect constant rates of interest over the terms of the leases. Leases that do not qualify as capital leases are classified as operating leases. The Company accounts for rent holidays, escalating rent provisions, and construction allowances on a straight-line basis over the term of the lease.

For leases in which the Company is involved with the construction of the store, if Village concludes that it has substantially all of the risks of ownership during construction of the leased property and therefore is deemed the owner of the project for accounting purposes, an asset and related financing obligation are recorded for the costs paid by the landlord. Once construction is complete, the Company considers the requirements for sale-leaseback treatment. If the arrangement does not qualify for sale-leaseback treatment, the Company amortizes the financing obligation and depreciates the building over the lease term.

Advertising

Advertising costs are expensed as incurred. Advertising expense was $11,474, $11,018 and $10,952 in fiscal 2014, 2013 and 2012, respectively.

Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

The Company recognizes a tax benefit for uncertain tax positions if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50% likely of being realized upon effective settlement with a taxing authority having full knowledge of all relevant information.

Use of estimates

In conformity with U.S. generally accepted accounting principles, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the more significant estimates are patronage dividends, pension accounting assumptions, share-based compensation assumptions, accounting for uncertain tax positions, accounting for contingencies and the impairment of long-lived assets and goodwill. Actual results could differ from those estimates.

Fair value

Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that should be determined using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level hierarchy to prioritize the inputs used in measuring fair value.  Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.  Level 2 inputs are inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs for the asset or liability
 
Cash and cash equivalents, patronage dividends receivable, accounts payable and accrued expenses are reflected in the consolidated financial statements at carrying value, which approximates fair value because of the short-term maturity of these instruments. The carrying values of the Company’s notes receivable from Wakefern approximate their fair value as interest is earned at variable market rates. As the Company’s investments in Wakefern can only be sold to Wakefern at amounts that approximate the Company’s cost, it is not practicable to estimate the fair value of such investments.

 
26

 
 
Long-lived assets

The Company reviews long-lived assets, such as property, equipment and fixtures on an individual store basis for impairment when circumstances indicate the carrying amount of an asset group may not be recoverable. Such review analyzes the undiscounted estimated future cash flows from such assets to determine if the carrying value of such assets are recoverable from their respective cash flows. If impairment is indicated, it is measured by comparing the fair value of the long-lived assets to their carrying value.

Goodwill

Goodwill is tested at the end of each fiscal year, or more frequently if circumstances dictate, for impairment. An impairment loss is recognized to the extent that the carrying amount of goodwill exceeds its implied fair value. Village operates as a single reporting unit for purposes of evaluating goodwill for impairment and primarily considers earnings multiples and other valuation techniques to measure fair value, in addition to the value of the Company’s stock.

Net income per share

The Company has two classes of common stock. Class A common stock is entitled to cash dividends as declared 54% greater than those paid on Class B common stock. Shares of Class B common stock are convertible on a share-for-share basis for Class A common stock at any time.

The Company utilizes the two-class method of computing and presenting net income per share. The two-class method is an earnings allocation formula that calculates basic and diluted net income per share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings. Under the two-class method, Class A common stock is assumed to receive a 54% greater participation in undistributed earnings than Class B common stock, in accordance with the classes respective dividend rights. Unvested share-based payment awards that contain nonforfeitable rights to dividends are treated as participating securities and therefore included in computing net income per share using the two-class method.

Diluted net income per share for Class A common stock is calculated utilizing the if-converted method, which assumes the conversion of all shares of Class B common stock to Class A common stock on a share-for- share basis, as this method is more dilutive than the two-class method. Diluted net income per share for Class B common stock does not assume conversion of Class B common stock to shares of Class A common stock.

 
27

 

The tables below reconcile the numerators and denominators of basic and diluted net income per share for all periods presented.

   
2014
   
2013
   
2012
 
   
Class A
   
Class B
   
Class A
   
Class B
   
Class A
   
Class B
 
Numerator:
                                   
Net income allocated, basic
  $ 3,788     $ 1,141     $ 18,089     $ 7,053     $ 19,314     $ 11,317  
Conversion of Class B to Class A shares
    1,141       -       7,053       -       11,317       -  
Effect of share-based compensation on allocated net income
    (20 )     (11 )     6       (5 )     94       (54 )
Net income allocated, diluted
  $ 4,909     $ 1,130     $ 25,148     $ 7,048     $ 30,725     $ 11,263  
                                                 
Denominator: