10-Q 1 imkt-20170624x10q.htm 10-Q 20170624 Q3 10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,  D.C. 20549 

 

 

 

FORM 10-Q



 

 

        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 24, 2017

 

         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 

 

Commission file number 0-14706.

 

 

 

INGLES MARKETS, INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

North Carolina

 

56-0846267

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

P.O. Box 6676,  Asheville NC

 

28816

(Address of principal executive offices)

 

(Zip Code)



 

(828) 669-2941

Registrant’s telephone number, including area code

 

 

 

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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No .



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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     No .  

 

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



Large accelerated filer

Accelerated filer

Non-accelerated filer (Do not check if a smaller reporting company.)

Smaller reporting company



Emerging growth company



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

  

As of July 31, 2017, the Registrant had 14,073,594 shares of Class A Common Stock, $0.05 par value per share, outstanding and 6,186,182 shares of Class B Common Stock, $0.05 par value per share, outstanding.



 

1

 


 

 

INGLES MARKETS, INCORPORATED

 

INDEX

 



 

 



 

 

 

  

Page

No.

 

Part I — Financial Information

  

 



 

    Item 1. Financial Statements (Unaudited)

  

 



 

Condensed Consolidated Balance Sheets as of June 24,  2017 and September 24,  2016 

  



 

Condensed Consolidated Statements of Income for the

  

 

Three Months Ended June 24,  2017 and June 25,  2016

  

Nine Months Ended June 24,  2017 and June 25,  2016

  



 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended June 24,  2017 and June 25,  2016

  



 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended June 24,  2017 and June 25,  2016

  



 

Notes to Unaudited Interim Financial Statements

  



 

    Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

12 



 

    Item 3. Quantitative and Qualitative Disclosures About Market Risk

  

20 



 

   Item 4. Controls and Procedures

 

21 



 

Part IIOther Information

  

 



 

 

    Item 6. Exhibits

  

21 



 

Signatures

  

24 



2

 


 

Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS 

 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)









 

 

 

 

 



 

 

 

 

 



June 24,

 

September 24,



2017

 

2016

ASSETS

  

 

  

 

 

Current Assets:

  

 

  

 

 

Cash and cash equivalents

$

8,019,291 

 

$

5,679,509 

Receivables - net

  

63,506,903 

  

 

61,735,387 

Inventories

  

348,284,592 

  

 

343,881,078 

Other current assets

  

11,619,689 

  

 

7,191,465 

Total Current Assets

  

431,430,475 

  

 

418,487,439 

Property and Equipment – Net

  

1,252,736,772 

  

 

1,247,881,773 

Other Assets

  

21,895,019 

  

 

20,109,087 

Total Assets

$

1,706,062,266 

  

$

1,686,478,299 



  

 

  

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

 

  

 

 

Current Liabilities:

  

 

  

 

 

Current portion of long-term debt

$

37,113,397 

  

$

10,000,629 

Accounts payable - trade

 

167,090,891 

 

 

155,288,402 

Accrued expenses and current portion of other long-term liabilities

  

61,069,611 

  

 

76,315,606 

Total Current Liabilities

  

265,273,899 

  

 

241,604,637 

Deferred Income Taxes

  

71,537,000 

  

 

71,449,000 

Long-Term Debt

  

833,625,300 

  

 

866,473,465 

Other Long-Term Liabilities

  

40,695,534 

  

 

36,775,587 

Total Liabilities

  

1,211,131,733 

  

 

1,216,302,689 

Stockholders’ Equity

  

 

  

 

 

Preferred stock, $0.05 par value; 10,000,000 shares authorized; no shares issued

  

 —

  

 

 —

Common stocks:

  

 

  

 

 

Class A, $0.05 par value; 150,000,000 shares authorized; 14,073,594 shares issued and outstanding June 24, 2017; 13,966,476 shares issued and outstanding at September 24, 2016

  

703,680 

 

 

698,324 

Class B, convertible to Class A, $0.05 par value; 100,000,000 shares authorized; 6,186,182 shares issued and outstanding June 24, 2017; 6,293,300 shares issued and outstanding at September 24, 2016

  

309,309 

 

 

314,665 

Paid-in capital in excess of par value

  

12,311,249 

 

 

12,311,249 

Retained earnings

  

481,606,295 

 

 

456,851,372 

Total Stockholders’ Equity

  

494,930,533 

 

 

470,175,610 

Total Liabilities and Stockholders’ Equity

$

1,706,062,266 

 

$

1,686,478,299 



See notes to unaudited condensed consolidated financial statements.

3

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)









 

 

 

 

 

 



 

 

 

 

 

 



 

Three Months Ended



 

June 24,

 

June 25,



 

2017

 

2016



 

 

 

 

 

 

Net sales

 

$

984,397,728 

 

$

957,177,645 

Cost of goods sold

 

  

747,263,567 

 

  

724,323,504 

Gross profit

 

  

237,134,161 

 

  

232,854,141 

Operating and administrative expenses

 

  

207,595,217 

 

  

199,433,998 

Gain (loss) from sale or disposal of assets

 

  

125,031 

 

  

(1,555,179)

Income from operations

 

  

29,663,975 

 

  

31,864,964 

Other income, net

 

  

1,030,236 

 

  

512,356 

Interest expense

 

  

11,729,505 

 

  

11,190,865 

Income before income taxes

 

  

18,964,706 

 

  

21,186,455 

Income tax expense

 

  

7,438,000 

 

 

8,518,000 

Net income

 

$

11,526,706 

 

$

12,668,455 



 

  

 

 

  

 

Per share amounts:

 

  

 

 

  

 

Class A Common Stock

 

 

 

 

 

 

Basic earnings  per common share

 

$

0.58 

 

$

0.64 

Diluted earnings  per common share

 

$

0.57 

 

$

0.63 

Class B Common Stock

 

 

 

 

 

 

Basic earnings  per common share

 

$

0.53 

 

$

0.59 

Diluted earnings  per common share

 

$

0.53 

 

$

0.59 

Cash dividends per common share

 

 

 

 

 

 

Class A Common Stock

 

$

0.165 

 

$

0.165 

Class B Common Stock

 

$

0.150 

 

$

0.150 





See notes to unaudited condensed consolidated financial statements.

4

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 





 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

June 24,

 

June 25,



 

2017

 

2016



 

 

 

 

 

 

Net sales

 

$

2,913,308,035 

 

$

2,832,603,557 

Cost of goods sold

 

  

2,211,004,100 

 

  

2,145,391,994 

Gross profit

 

  

702,303,935 

 

  

687,211,563 

Operating and administrative expenses

 

  

616,914,673 

 

  

589,654,137 

Gain (loss) from sale or disposal of assets

 

  

1,493,009 

 

  

(934,039)

Income from operations

 

  

86,882,271 

 

  

96,623,387 

Other income, net

 

  

2,469,684 

 

  

1,652,297 

Interest expense

 

  

34,761,917 

 

  

34,393,394 

Income before income taxes

 

  

54,590,038 

 

  

63,882,290 

Income tax expense

 

  

20,088,000 

 

 

23,876,000 

Net income

 

$

34,502,038 

 

$

40,006,290 



 

  

 

 

  

 

Per share amounts:

 

  

 

 

  

 

Class A Common Stock

 

 

 

 

 

 

Basic earnings per common share

 

$

1.75 

 

$

2.03 

Diluted earnings per common share

 

$

1.70 

 

$

1.98 

Class B Common Stock

 

 

 

 

 

 

Basic earnings per common share

 

$

1.59 

 

$

1.85 

Diluted earnings per common share

 

$

1.59 

 

$

1.85 

Cash dividends per common share

 

 

 

 

 

 

Class A Common Stock

 

$

0.495 

 

$

0.495 

Class B Common Stock

 

$

0.450 

 

$

0.450 





See notes to unaudited condensed consolidated financial statements.



5

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

NINE MONTHS ENDED JUNE 24,  2017 AND JUNE 25,  2016 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

Paid-in

  

 

 

 

 

 



 

Class A

 

Class B

 

Capital in

 

 

 

 

 

 



 

Common Stock

 

Common Stock

 

Excess of

 

Retained

 

 

 



  

Shares

  

Amount

 

Shares

 

Amount

 

Par Value

  

Earnings

 

Total



  

 

  

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

Balance, September 26, 2015

 

13,924,651 

  

$

696,233 

 

6,335,125 

 

$

316,756 

 

$

12,311,249 

 

$

415,654,162 

 

$

428,978,400 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

40,006,290 

 

 

40,006,290 

Cash dividends

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(9,744,056)

 

 

(9,744,056)

Common stock conversions

 

24,250 

 

 

1,212 

 

(24,250)

 

 

(1,212)

 

 

 —

 

 

 —

 

 

 —

Balance, June 25, 2016

 

13,948,901 

 

$

697,445 

 

6,310,875 

 

$

315,544 

 

$

12,311,249 

 

$

445,916,396 

 

$

459,240,634 

Balance, September 24, 2016

 

13,966,476 

  

$

698,324 

 

6,293,300 

 

$

314,665 

 

$

12,311,249 

 

$

456,851,372 

 

$

470,175,610 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

34,502,038 

 

 

34,502,038 

Cash dividends

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(9,747,115)

 

 

(9,747,115)

Common stock conversions

 

107,118 

 

 

5,356 

 

(107,118)

 

 

(5,356)

 

 

 —

 

 

 —

 

 

 —

Balance, June 24, 2017

 

14,073,594 

 

$

703,680 

 

6,186,182 

 

$

309,309 

 

$

12,311,249 

 

$

481,606,295 

 

$

494,930,533 





See notes to unaudited condensed consolidated financial statements.

6

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  





 

 

 

 

 

 



  

 

 

 

 

 



 

Nine Months Ended



  

June 24,

 

June 25,



 

2017

 

2016

Cash Flows from Operating Activities:

  

 

 

 

 

 

Net income

  

$

34,502,038 

 

$

40,006,290 

Adjustments to reconcile net income to net cash provided by operating activities:

  

 

 

 

 

 

Depreciation and amortization expense

 

 

82,748,225 

 

 

79,343,688 

(Gain) loss from sale or disposal of assets

 

 

(1,493,009)

 

 

934,039 

Receipt of advance payments on purchases contracts

  

 

3,736,862 

 

 

3,195,887 

Recognition of advance payments on purchases contracts

  

 

(1,719,541)

 

 

(2,454,998)

Deferred income taxes

  

 

88,000 

 

 

7,322,000 

Changes in operating assets and liabilities:

 

 

 

 

 

 

Receivables

  

 

(1,771,516)

 

 

(6,224,510)

Inventory

  

 

(4,403,514)

 

 

(3,201,948)

Other assets

 

 

(6,214,157)

 

 

1,988,751 

Accounts payable and accrued expenses

 

 

1,174,389 

 

 

(17,322,748)

Net Cash Provided by Operating Activities

  

 

106,647,777 

 

 

103,586,451 

Cash Flows from Investing Activities:

  

 

 

 

 

 

Proceeds from sales of property and equipment

  

 

2,150,638 

 

 

686,480 

Capital expenditures

  

 

(90,010,736)

 

 

(107,823,914)

Net Cash Used by Investing Activities

  

 

(87,860,098)

 

 

(107,137,434)

Cash Flows from Financing Activities:

  

 

 

 

 

 

Proceeds from short-term borrowings

 

 

354,457,462 

 

 

577,982,521 

Payments on short-term borrowings

 

 

(351,649,625)

 

 

(556,186,709)

Principal payments on long-term borrowings

  

 

(9,508,619)

 

 

(10,570,808)

Dividends paid

  

 

(9,747,115)

 

 

(9,744,056)

Net Cash (Used) Provided by Financing Activities

  

 

(16,447,897)

 

 

1,480,948 

Net Increase (Decrease)  in Cash and Cash Equivalents

  

 

2,339,782 

 

 

(2,070,035)

Cash and cash equivalents at beginning of period

  

 

5,679,509 

 

 

7,505,040 

Cash and Cash Equivalents at End of Period

  

$

8,019,291 

 

$

5,435,005 





See notes to unaudited condensed consolidated financial statements.

7

 


 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS 

Nine Months Ended June 24,  2017 and June 25,  2016 

 

A. BASIS OF PREPARATION

 

In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the financial position of Ingles Markets, Incorporated and Subsidiaries (the Company)  as of June 24,  2017, the results of operations for the three-month and nine-month periods ended June 24,  2017 and June 25,  2016, and the changes in stockholders’ equity and cash flows for the nine-month periods ended June 24,  2017 and June 25,  2016. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. It is suggested that these unaudited interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 24,  2016 filed by the Company under the Securities Exchange Act of 1934 on December 16, 2016.  

 

The results of operations for the three-month and nine-month periods ended June 24,  2017 are not necessarily indicative of the results to be expected for the full fiscal year.



B. NEW ACCOUNTING PRONOUNCEMENTS

 

In February 2016, the FASB issued Accounting Standards Update ASU 2016-02 “Leases” (ASU 2016-02).  ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases.  This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.



In May 2014, the FASB issued Accounting Standards Update ASU 2014-09 “Revenue from Contracts with Customers” (ASU 2014-09).  ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services.  In August 2015, the FASB issued ASU 2015-14 which deferred the effective date of the ASU to fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, with early adoption permitted.  The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.



C. ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Receivables are presented net of an allowance for doubtful accounts of $508,000 at June 24, 2017 and $358,000 at September 24, 2016.  



D. INCOME TAXES



The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits.



The Company has unrecognized tax benefits and could incur interest and penalties related to uncertain tax positions. These amounts are insignificant and are not expected to significantly increase or decrease within the next twelve months.



E. ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES

 

Accrued expenses and current portion of other long-term liabilities consist of the following:

 





 

 

 

 

 

 



 

 

 

 

 

 



  

June 24,

 

September 24,



 

2017

 

2016

Property, payroll and other taxes payable

  

$

15,696,394 

 

$

18,883,819 

Salaries, wages and bonuses payable

  

 

26,257,817 

 

  

28,159,164 

Self-insurance liabilities

  

 

13,319,201 

 

  

14,083,047 

Interest payable

 

 

2,380,892 

 

 

12,406,614 

Other

  

 

3,415,307 

 

  

2,782,962 



 

$

61,069,611 

 

$

76,315,606 



8

 


 

Self-insurance liabilities are established for general liability claims, workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. The Company is insured for covered costs in excess of $750,000 per occurrence for workers’ compensation, $500,000 for general liability and $450,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance liabilities totaled $35.3 million and $35.9 million at June 24, 2017 and September 24, 2016, respectively.  Of this amount, $13.3 million is accounted for as a current liability and $22.0 million as a long-term liability, which is inclusive of $5.1 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at June 24, 2017.   At September 24, 2016, $14.1 million is accounted for as a current liability and $21.8 million as a long-term liability, which is inclusive of $4.8 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.



Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $8.0 million and $7.7 million for the three-month periods ended June 24, 2017 and June 25, 2016, respectively. For the nine-month periods ended June 24, 2017 and June 25, 2016, employee insurance expense, net of employee contributions, totaled $24.4 million and $26.8 million, respectively.



F. LONG-TERM DEBT

 

In June 2013, the Company issued $700.0 million aggregate principal amount of senior notes due in 2023 (the “Notes”) in a private placement.  The Notes bear an interest rate of 5.75% per annum and were issued at par.



The Company filed a registration statement with the Securities and Exchange Commission to exchange the private placement notes with registered notes. The exchange has been completed.



The Company may redeem all or a portion of the Notes at any time on or after June 15, 2018 at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning June 15 of the years indicated below:







 



 

Year

 

2018

102.875%

2019

101.917%

2020

100.958%

2021 and thereafter

100.000%



The Company has $175.0 million line of credit (the “Line”) that matures June 2018The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate (“LIBOR”). The Line allows the Company to issue up to $30.0 million in unused letters of credit, of which $9.6 million of unused letters of credit were issued at June 24, 2017.  The Company is not required to maintain compensating balances in connection with the Line. At June 24, 2017, the Company had $2.8 million of borrowings outstanding under the line.    



In December 2010, the Company completed the funding of $99.7 million of Recovery Zone Facility Bonds (the “Bonds”) for construction of new warehouse and distribution space in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.



The Bonds were issued by the Buncombe County Industrial Facilities and Pollution Control Financing Authority and were purchased by certain financial institutions.  Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between the financial institutions and the Company, the financial institutions would hold the Bonds until June 30, 2021, subject to certain events.   Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014.  The Company may redeem the Bonds without penalty or premium at any time prior to June 2021.

 

Interest earned by bondholders on the Bonds is exempt from Federal and North Carolina income taxation.  The interest rate on the Bonds is equal to one month LIBOR (adjusted monthly) plus a credit spread, adjusted to reflect the income tax exemption. 



The Company’s obligation to repay the Bonds is collateralized by the Project.  Additional collateral was required in order to meet certain loan to value criteria in the Covenant Agreement.  The Covenant Agreement incorporates substantially all financial covenants included in the Line.  



The Line and approximately $25.1 million of secured borrowing mature in June 2018.  The Company is in the process of renewing or refinancing these obligations and expects to complete the process well before the contractual maturity dates.



The Notes, the Bonds and the Line contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the

9

 


 

initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. The Company was in compliance with all financial covenants related to its borrowings at June 24, 2017.  



The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bond and Notes indenture in the event of default under any one instrument.



G. DIVIDENDS



The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on October 14, 2016 to stockholders of record on October 6, 2016.



The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on January 12, 2017 to stockholders of record on January 6, 2017.



The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on April 13, 2017 to stockholders of record on April 6, 2017.  

 

For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements of the Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934 on December 16, 2016.



H. EARNINGS PER COMMON SHARE



The Company has two classes of common stock:  Class A which is publicly traded, and Class B, which has no public market.  The Class B Common Stock has restrictions on transfer; however, each share is convertible into one share of Class A Common Stock at any time.  Each share of Class A Common Stock has one vote per share and each share of Class B Common Stock has ten votes per share.  Each share of Class A Common Stock is entitled to receive cash dividends equal to 110% of any cash dividend paid on Class B Common Stock. 



The Company calculates earnings per share using the two-class method in accordance with FASB Accounting Standards Codification ("FASB ASC”) Topic 260. 



The two-class method of computing basic earnings per share for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock.  Diluted earnings per share is calculated assuming conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis.  The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods.







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

June 24, 2017

 

June 24, 2017



 

Class A

 

Class B

 

Class A

 

Class B

Numerator: Allocated net income

 

 

               

 

 

 

 

 

 

 

 

 

Net income allocated, basic

 

$

8,234,965 

 

$

3,291,741 

 

$

24,563,248 

 

$

9,938,790 

Conversion of Class B to Class A shares

 

  

3,291,741 

 

 

 —

 

 

9,938,790 

 

 

 —

Net income allocated, diluted

 

$

11,526,706 

 

$

3,291,741 

 

$

34,502,038 

 

$

9,938,790 



 

  

 

 

 

 

 

 

 

 

 

 

Denominator: Weighted average shares outstanding

 

  

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

  

14,072,598 

 

 

6,187,178 

 

 

14,025,733 

 

 

6,234,043 

Conversion of Class B to Class A shares

 

  

6,187,178 

 

 

 —

 

 

6,234,043 

 

 

 —

Weighted average shares outstanding, diluted

 

  

20,259,776 

 

 

6,187,178 

 

 

20,259,776 

 

 

6,234,043 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.58 

 

$

0.53 

 

$

1.75 

 

$

1.59 

Diluted

 

$

0.57 

 

$

0.53 

 

$

1.70 

 

$

1.59 



10

 


 

The per share amounts for the third quarter of fiscal 2016 and the nine months ended June 25, 2016 are based on the following amounts:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

  Three Months Ended

 

Nine Months Ended



 

June 25, 2016

 

June 25, 2016



 

Class A

 

Class B

 

Class A

 

Class B

Numerator: Allocated net income

 

 

 

 

 

 

 

 

 

 

 

 

Net income allocated, basic

 

$

8,973,689 

 

$

3,694,766 

 

$

28,317,738 

 

$

11,688,552 

Conversion of Class B to Class A shares

 

  

3,694,766 

 

 

 

 

11,688,552 

 

 

Net income allocated, diluted

 

$

12,668,455 

 

$

3,694,766 

 

$

40,006,290 

 

$

11,688,552 



 

  

 

 

 

 

 

 

 

 

 

 

Denominator: Weighted average shares outstanding

 

  

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding, basic

 

  

13,944,818 

 

 

6,314,958 

 

 

13,932,356 

 

 

6,327,420 

Conversion of Class B to Class A shares

 

  

6,314,958 

 

 

 

 

6,327,420 

 

 

Weighted average shares outstanding, diluted

 

  

20,259,776 

 

 

6,314,958 

 

 

20,259,776 

 

 

6,327,420 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.64 

 

$

0.59 

 

$

2.03 

 

$

1.85 

Diluted

 

$

0.63 

 

$

0.59 

 

$

1.98 

 

$

1.85 







I. SEGMENT INFORMATION

 

The Company operates one primary business segment, retail grocery sales.  The “Other” activities include fluid dairy and shopping center rentals.  Information about the Company’s operations by lines of business (amounts in thousands) is as follows:   





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



  

Three Months Ended

 

Nine Months Ended



  

June 24,

  

June 25,

 

June 24,

  

June 25,



 

2017

 

2016

 

2017

 

2016

Revenues from unaffiliated customers:

  

 

 

  

 

 

 

 

 

  

 

 

Grocery

  

$

341,442 

  

$

337,030 

 

$

1,044,531 

  

$

1,046,616 

Non-foods

 

 

212,322 

 

 

207,575 

 

 

625,890 

 

 

608,601 

Perishables

 

 

265,828 

 

 

257,799 

 

 

770,350 

 

 

753,027 

Gasoline

 

 

129,569 

 

 

120,347 

 

 

366,175 

 

 

321,049 

Total Retail

 

 

949,161 

 

 

922,751 

 

 

2,806,946 

 

 

2,729,293 

Other

  

 

35,237 

  

 

34,427 

 

 

106,362 

  

 

103,311 

Total revenues from unaffiliated customers

  

$

984,398 

  

$

957,178 

 

$

2,913,308 

  

$

2,832,604 



  

 

 

  

 

 

 

 

 

  

 

 

Income from operations:

  

 

 

  

 

 

 

 

 

  

 

 

Retail

  

$

25,350 

  

$

28,031 

 

$

74,947 

  

$

84,669 

Other

  

 

4,314 

  

 

3,834 

 

 

11,935 

  

 

11,954 

Total income from operations

  

$

29,664 

  

$

31,865 

 

$

86,882 

  

$

96,623 

 





 

 

 

 

 

 



 

 

 

 

 

 



  

June 24,

 

September 24,



 

2017

 

2016

Assets:

  

 

 

 

 

 

Retail

  

$

1,574,392 

 

$

1,555,319 

Other

  

 

133,293 

 

 

133,574 

Elimination of intercompany receivable

  

 

(1,623)

 

 

(2,415)

Total assets

  

$

1,706,062 

 

$

1,686,478 

11

 


 

 

The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

The perishables category includes meat, produce, deli and bakery.



For the three-month periods ended June 24, 2017 and June 25, 2016, respectively, the fluid dairy operation had $10.6 million and $10.1 million in sales to the grocery sales operation. The fluid dairy operation had $33.9 million and $32.4 million in sales to the grocery sales operation for the nine-month periods ended June 24, 2017 and June 25, 2016, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.



J. FAIR VALUES OF FINANCIAL INSTRUMENTS



The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.



The fair value of the Company’s debt is estimated using valuation techniques under the accounting guidance related to fair value measurements based on observable and unobservable inputs.  Observable inputs reflect readily available data from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These inputs are classified into the following hierarchy:



Level 1 Inputs  –

Quoted prices for identical assets or liabilities in active markets.



 

Level 2 Inputs  –

Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.



 

Level 3 Inputs  –

Pricing inputs are unobservable for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities.  The inputs into the determination of fair value require significant management judgment or estimation.



The carrying amount and fair value of the Company’s debt at June 24, 2017 is as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



  

Carrying

  

 

 

  

Fair Value



 

Amount

 

Fair Value

 

Measurements

Senior Notes

  

$

700,000 

  

$

686,000 

 

Level 2

Facility Bonds

  

 

81,620 

  

  

81,620 

 

Level 2

Secured notes payable and other

  

 

86,311 

  

  

86,311 

 

Level 2

Line of credit payable

 

 

2,808 

 

 

2,808 

 

Level 2

Total debt

  

$

870,739 

  

$

856,739 

 

 



The fair values for Level 2 measurements were determined primarily using market yields and taking into consideration the underlying terms of the debt.



K. SUBSEQUENT EVENTS



We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements were issued.





Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     



Overview

 

Ingles, a leading supermarket chain in the Southeast, operates 199 supermarkets in Georgia (70), North Carolina (70), South Carolina (36), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health and beauty care products and general merchandise. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections.  As of June 24,  2017, the Company operated 103 in-store pharmacies and 97 fuel centers. 



12

 


 

Ingles also operates a fluid dairy and earns shopping center rentals. The fluid dairy processing operation sells approximately  25% of its products to the retail grocery operation and approximately 75% of its products to third parties. Real estate ownership is an important component of the Company’s operations, providing both operational and economic benefits. 

 

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, and 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. Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates.

 

Self-Insurance

 

The Company is self-insured for workers’ compensation and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverage of $750,000 per occurrence for workers’ compensation, $500,000 for general liability, and $450,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators. These estimates can fluctuate if historical trends are not predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained.  At June 24, 2017 the Company’s self-insurance liabilities totaled $35.3 million.  Of this amount, $13.3 million is accounted for as a current liability and $22.0 million as a long-term liability, which is inclusive of $5.1 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at June 24, 2017.

 

Asset Impairments 

 

The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred.  There were no asset impairments during the nine-month period ended June 24, 2017.

 

Vendor Allowances

 

The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily comprised of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of a month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis.  Whenever possible, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to system constraints and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold.  Vendor allowances applied as a reduction of merchandise costs totaled $27.4 million and $29.5 million for the fiscal quarters ended June 24, 2017 and June 25, 2016, respectively.  For the nine-month periods ended June 24, 2017 and June 25, 2016, vendor allowances applied as a reduction of merchandise costs totaled $87.1 million and $88.0 million, respectively.  Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred.  Vendor advertising allowances recorded as a reduction of advertising expense totaled $3.2 million and $3.4 million for the fiscal quarters ended June 24, 2017 and June 25, 2016, respectively.  For the nine-month periods ended June 24, 2017 and June 25, 2016, vendor advertising allowances recorded as a reduction of advertising expense totaled $10.3 million and $10.2 million, respectively.



13

 


 

If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures.



Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue for the Company’s stores.



Results of Operations

 

Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. There are 13 and 39 weeks of operations included in the unaudited Condensed Consolidated Statements of Income for the three and nine-month periods ended June 24, 2017 and June 25, 2016.  Comparable store sales are defined as sales by grocery stores in operation for five full fiscal quarters.    Sales from replacement stores, major remodels, minor remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a new store that is opened to replace an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and may include additional retail square footage. For the three and nine-month periods ended June 24, 2017 and June 25, 2016, comparable store sales include 196 and 199 stores, respectively.  



The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note I “Segment Information” to the Condensed Consolidated Financial Statements.

 





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



  

Three Months Ended

  

Nine Months Ended



  

June 24,

 

June 25,

  

June 24,

 

June 25,



 

2017

 

2016

 

2017

 

2016

Net sales

  

100.0 

%

 

100.0 

%

  

100.0 

%

 

100.0 

%

Gross profit

  

24.1 

%

 

24.3 

%

  

24.1 

%

 

24.3 

%

Operating and administrative expenses

  

21.1 

%

 

20.8 

%

  

21.2 

%

 

20.8 

%

Gain (loss) from sale or disposal of assets

 

 —

%

 

(0.2)

%

  

0.1 

%

 

(0.1)

%

Income from operations

  

3.0 

%

 

3.3 

%

  

3.0 

%

 

3.4 

%

Other income, net

  

0.1 

%

 

0.1 

%

  

0.1 

%

 

 —

%

Interest expense

  

1.2 

%

 

1.2 

%

  

1.2 

%

 

1.2 

%

Income tax expense

  

0.7 

%

 

0.9 

%

  

0.7 

%

 

0.8 

%

Net income

  

1.2 

%

 

1.3 

%

  

1.2 

%

 

1.4 

%



Three Months Ended June 24,  2017 Compared to the Three Months Ended June 25,  2016 

 

Net income for the third quarter of fiscal 2017 totaled $11.5 million compared with $12.7 million for the third quarter of fiscal 2016Comparing the quarters, fiscal 2017 had higher sales and gross profit that were offset by higher expenses.



Net Sales. Net sales increased by $27.2 million, or 2.8% to $984.4 million for the three months ended June 24, 2017 from $957.2 million for the three months ended June 25, 2016Sales increased in each retail product category and in non-retail operations.  Comparing the third quarter of fiscal 2017 with the third quarter of fiscal 2016, gasoline sales dollars and gallons sold both increased approximately 3.8%.    Easter occurred in the third quarter of the current fiscal year, but occurred in the second quarter of fiscal 2016.  Excluding gasoline sales and the effect of extra Easter sales in this year’s third quarter, grocery comparable store sales increased 0.8%  over the comparative fiscal quarters.  Comparing the third quarters of fiscal year 2017 and 2016 (and excluding gasoline), the number of customer transactions was level and the average transaction size increased 2.0%.  



Ingles operated 199 stores at June 24, 2017 and 201 stores at June 25, 2016. Retail square footage was approximately 11.2 million at June 24, 2017 and 11.1 million at June 25, 2016. 



14

 


 

Sales by product category (amounts in thousands) are as follows:









 

 

 

 

 

 



 

 

 

 

 

 



  

Three Months Ended



  

June 24,

  

June 25,



 

2017

 

2016

Grocery

  

$

341,442 

  

$

337,030 

Non-foods

  

 

212,322 

  

 

207,575 

Perishables

 

 

265,828 

 

 

257,799 

Gasoline

  

 

129,569 

  

 

120,347 

Total retail

  

$

949,161 

  

$

922,751 



The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

The perishables category includes meat, produce, deli and bakery.



Changes in grocery segment sales for the quarter ended June 24, 2017 are summarized as follows (dollars in thousands):









 

 

 



  

 

 

Total retail sales for the three months ended June 25, 2016

  

$

922,751 

Comparable store sales increase (including gasoline)

  

 

13,030 

Effect of Easter in second quarter of fiscal 2016

 

 

7,084 

Impact of stores opened in fiscal 2016 and 2017

  

 

11,473 

Impact of stores closed in fiscal 2016 and 2017

  

 

(4,505)

Other

 

 

(672)

Total retail sales for the three months ended June 24, 2017

  

$

949,161 



Gross Profit. Gross profit for the three-month period ended June 24, 2017 increased $4.2  million, or 1.8%, to $237.1 million, or 24.1%  of sales, compared with  $232.9 million, or 24.3% of sales, for the three-month period ended June 25,  2016.  



Excluding gasoline sales, grocery segment gross profit as a percentage of sales decreased 64 basis points in the third quarter of fiscal 2017 compared with the same fiscal 2016 period.  Gasoline gross profit dollars were higher for the quarter ended June 24, 2017 compared with the quarter ended June 25, 2016.



In addition to the direct product cost, the cost of goods sold line item for the grocery segment includes inbound freight charges and the costs related to the Company’s distribution network.  The milk processing operation is a manufacturing process; therefore, the costs mentioned above as well as purchasing, production costs, and internal transfer costs incurred by the milk processing operation are included in the cost of goods sold line item, while these items are included in operating and administrative expenses in the grocery segment.



Operating and Administrative Expenses. Operating and administrative expenses increased $8.2 million, or 4.1%, to $207.6 million for the three months ended June 24, 2017, from $199.4 million for the three months ended June 25,  2016.   As a percentage of sales, operating and administrative expenses were 21.1%  for the three months ended June 24,  2017 compared with 20.8% for the three months ended June 25,  2016.  Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 24.1% and 23.6% of sales for the third fiscal quarter of 2017 and 2016, respectively.

 

A breakdown of the major increases in operating and administrative expenses is as follows:

 



 

 

 

 

 

 



 

 

 

 

 

 



 

 

 

Increase



 

Increase

 

as a % of



 

in millions

 

sales

Salaries and wages

  

$

3.6

 

0.37 

%

Repairs and maintenance

  

$

1.3

 

0.14 

%

Depreciation and amortization

  

$

1.0

 

0.10 

%

Store supplies

 

$

0.9

 

0.09 

%

15

 


 

 

Salaries and wages increased due to the additional labor hours required in part to accommodate in-store merchandising changes.  Competition for labor has also increased in the Company’s market area.



Repairs and maintenance increased due to more sophisticated equipment and updated lighting in our stores, and due also to a higher level of building maintenance.



Depreciation and amortization increased as a result of the Company’s capital expenditure programs, including new stores and remodeling projects.



Store supplies increased due to stocking of new stores and changes in the mix of products sold.



Gain or Loss from Sale or Disposal of Assets. Gain from Sale or Disposal of Assets was $0.1 million for the June 2017 quarter compared with a loss of $1.6 million for the June 2016 quarter. During the June 2016 quarter, the Company demolished certain buildings for redevelopment into larger and improved store or tenant space.    



Interest Expense. Interest expense increased $0.5 million for the three-month period ended June 24, 2017 to $11.7 million from $11.2 million for the three-month period ended June 25, 2016.  Total debt at June 2017 was $870.7 million compared to $898.2 million at June 2016The London Interbank Offering Rate (“LIBOR”) has increased over the past twelve months, resulting in higher interest expense on the Company’s floating rate debt.



Income Taxes. Income tax expense as a percentage of pre-tax income was 39.2% for the June 2017 quarter, compared with 40.2% for the June 2016 quarter.  During the third quarter of each fiscal year, the Company reconciles estimated prior year tax expense to actual tax returns filed during the quarter.  This process increased tax expense during both the current fiscal quarter and last year’s third fiscal quarter.

 

Net Income. Net income totaled $11.5 million and $12.7 million for the three-month periods ended June 24, 2017 and June 25, 2016, respectively.  Basic and diluted earnings per share for Class A Common Stock were $0.58 and $0.57, respectively for the June 2017 quarter.  Basic and diluted earnings per share for Class B Common Stock were each $0.53 for the June 2017 quarterBasic and diluted earnings per share for Class A Common Stock were $0.64 and $0.63, respectively for the June 2016 quarterBasic and diluted earnings per share for Class B Common Stock were each $0.59 for the June 2016 quarter



Nine Months Ended June 24,  2017 Compared to the Nine Months Ended June 25,  2016 

 

Net income for the first nine months of fiscal 2017 totaled $34.5 million compared with net income of $40.0 million for the nine-month fiscal 2016 period.  Total sales and gross profit increased, but expenses increased to a higher degree.



Net Sales.  Net sales totaled $2.91 billion and $2.83 billion for the nine month periods ended June 24, 2017 and June 25, 2016, respectivelyThe sales increase was broad-based across the Company’s retail product categories and non-retail operations.  Retail gasoline prices, gallons sold, and sales dollars were higher in the June 2017 nine-month period compared with the same period last year   

 

Grocery segment comparable store sales, excluding the effect of gasoline increased 0.8%.  The number of customer transactions (excluding gasoline) increased 0.8%, while the average transaction size (excluding gasoline) increased by 0.5%.



Sales by product category (amounts in thousands) are as follows:





 

 

 

 

 

 



 

 

 

 

 

 



  

Nine Months Ended



  

June 24,

  

June 25,



 

2017

 

2016

Grocery

  

$

1,044,531 

  

$

1,046,616 

Non-foods

  

 

625,890 

  

 

608,601 

Perishables

 

 

770,350 

 

 

753,027 

Gasoline

  

 

366,175 

  

 

321,049 

Total retail

  

$

2,806,946 

  

$

2,729,293 



The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

The perishables category includes meat, produce, deli and bakery.



16

 


 

Changes in grocery segment sales for the nine months ended June 24, 2017 can be summarized as follows (dollars in thousands):







 

 

 



  

 

 

Total retail sales for the nine months ended June 25, 2016

  

$

2,729,293 

Comparable store sales increase (including gasoline)

  

 

57,397 

Impact of stores opened in fiscal 2016 and 2017

  

 

28,517 

Impact of stores closed in fiscal 2016 and 2017

  

 

(7,534)

Other

 

 

(727)

Total retail sales for the nine months ended June 24, 2017

  

$

2,806,946 



Sales growth for the remainder of fiscal 2017 will depend upon the pace of economic improvement, inflation and market prices for gasoline and raw milk.  In addition to recently opened new and remodeled stores, the Company expects that the maturation of previous new and expanded stores will contribute to sales growth.  The Company continues to remodel existing stores in order to increase sales at a lower cost compared with construction cost of adding additional square footage.



Gross Profit. Gross profit for the nine months ended June 24, 2017 increased $15.1 million, or 2.2%, to $702.3 million compared with $687.2 million, for the nine months ended June 25, 2016.  As a percentage of sales, gross profit totaled 24.1% for the nine months ended June 24, 2017 and 24.3% for the nine months ended June 25, 2016.



Excluding gasoline sales, retail grocery segment gross profit as a percentage of sales decreased five basis points in the first three quarters of fiscal 2017 compared with the same fiscal 2016 period.  Gasoline gross profit dollars were higher for the nine months ended June 24, 2017 compared with the nine months ended June 25, 2016.



Operating and Administrative Expenses. Operating and administrative expenses increased $27.2 million, or 4.6%, to $616.9 million for the nine months ended June 24, 2017, from $589.7 million for the nine months ended June 25, 2016.  As a percentage of sales, operating and administrative expenses were 21.2% for the June 2017 nine-month period compared with 20.8% for the same period last year.  Excluding gasoline sales and associated gasoline operating expenses (primarily payroll), operating expenses were 24.0%  and 23.3% of sales for the nine-month fiscal 2017 and 2016 periods, respectively.



A breakdown of the major increases in operating and administrative expenses is as follows:

 





 

 

 

 

 

 



 

 

 

Increase



 

Increase

 

as a % of



 

in millions

 

sales

Salaries and wages

  

$

17.1

 

0.59 

%

Repairs and maintenance

 

$

3.7

 

0.13 

%

Depreciation and amortization

 

$

3.3

 

0.11 

%

Bank charges

 

$

1.8

 

0.06 

%

 

Salaries and wages increased due to the additional labor hours required in part to accommodate in-store merchandising changes.  Competition for labor has also increased in the Company’s market area.



Repairs and maintenance increased due to more sophisticated equipment and updated lighting in our stores, and due also to a higher level of building maintenance.



Depreciation and amortization increased as a result of the Company’s capital expenditure programs, including new stores and remodeling projects.



Bank charges increased due to higher volume and per transaction costs of credit and debit card transactions.



Gain or loss from sale or disposal of assets.  Gain from Sale or Disposal of Assets was $1.5 million for the June 2017 nine month period compared with a loss of $0.9 million for the June 2016 nine month period. During the June 2017 nine month period the Company realized gains on disposal of various real and personal property.  During the June 2016 nine month period, the Company demolished certain buildings for redevelopment into larger and improved store or tenant space.    



17

 


 

Interest Expense. Interest expense increased $0.4 million to $34.8 million for the nine months ended June 24, 2017 from $34.4 million for the nine months ended June 25, 2016



Income Taxes. Income tax expense as a percentage of pre-tax income was 36.8% in the June 2017 nine-month period compared to 37.4% in the June 2016 nine-month period. 



Net Income. Net income totaled $34.5 million for the nine-month period ended June 24, 2017.  Basic and diluted earnings per share for Class A Common Stock were $1.75 and $1.70, respectively, for the June 2017 nine-month period.  Basic and diluted earnings per share for Class B Common Stock were each $1.59 for the June 2017 nine-month period.  Net income totaled $40.0 million for the nine-month period ended June 25, 2016.  Basic and diluted earnings per share for Class A Common Stock were $2.03 and $1.98, respectively, for the June 2016 nine-month period.  Basic and diluted earnings per share for Class B Common Stock were each $1.85 for the June 2016 nine-month period.