0000050493-21-000017.txt : 20211124 0000050493-21-000017.hdr.sgml : 20211124 20211124161647 ACCESSION NUMBER: 0000050493-21-000017 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 79 CONFORMED PERIOD OF REPORT: 20210925 FILED AS OF DATE: 20211124 DATE AS OF CHANGE: 20211124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INGLES MARKETS INC CENTRAL INDEX KEY: 0000050493 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-GROCERY STORES [5411] IRS NUMBER: 560846267 STATE OF INCORPORATION: NC FISCAL YEAR END: 0925 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-14706 FILM NUMBER: 211446923 BUSINESS ADDRESS: STREET 1: PO BOX 6676 CITY: ASHEVILLE STATE: NC ZIP: 28816 BUSINESS PHONE: 828-669-2941 MAIL ADDRESS: STREET 1: P O BOX 6676 CITY: ASHEVILLE STATE: NC ZIP: 28816 10-K 1 imkt-20210925x10k.htm 10-K imkt-20210925x10k
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

FORM 10-K

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

For the fiscal year ended September 25, 2021

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.)

2913 U.S. Hwy. 70 West, Black Mountain, NC

28711

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number including area code: (828) 669-2941

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

 

Class A Common Stock, $0.05 par value

The NASDAQ Global Market LLC

 Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES 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 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 the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO .

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES x NO NOT APPLICABLE .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an 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 o

Non-accelerated filer o

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. YES x NO

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 Trading Symbol

Name of each exchange on which registered

Class A Common Stock, $0.05 par value per share

IMKTA

The NASDAQ Global Select Market

As of March 27, 2021, the aggregate market value of voting stock held by non-affiliates of the registrant, based on the closing sales price of the Class A Common Stock on The NASDAQ Global Select Market on March 27, 2021, was approximately $935 million. As of November 22, 2021, the registrant had 14,272,835 shares of Class A Common Stock outstanding and 4,721,541 shares of Class B Common Stock outstanding.

Certain information required in Part III hereof is incorporated by reference to the Proxy Statement for the registrant’s 2022 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A no later than 120 days after the end of the fiscal year covered by this report.

1


Ingles Markets, Incorporated

Annual Report on Form 10-K

September 25, 2021

Page 

PART I

Item 1.

Business

4

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

12

Item 2.

Properties

12

Item 3.

Legal Proceedings

13

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

13

Item 6.

[Reserved]

15

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 7A.

Quantitative and Qualitative Disclosures About Market Risks

21

Item 8.

Financial Statements and Supplementary Data

22

Item 9A.

Controls and Procedures

22

Item 9B.

Other Information

23

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

23

Item 11.

Executive Compensation

24

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

24

Item 13.

Certain Relationships and Related Transactions, and Director Independence

24

Item 14.

Principal Accountant Fees and Services

24

PART IV

Item 15.

Exhibits and Financial Statement Schedules

24

Item 16.

Form 10-K Summary

26

 

2


This Annual Report of Ingles Markets, Incorporated (“Ingles” or the “Company”) contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this Annual Report, including the statements under “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere regarding the Company’s strategy, future operations, financial position, estimated revenues, projected costs, projections, prospects, plans and objectives of management, are forward-looking statements. The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”, “believe”, “seek”, “will”, “may”, “would”, “should” and similar expressions are intended to identify forward-looking statements. While these forward-looking statements and the related assumptions are made in good faith and reflect the Company’s current judgment regarding the direction of the Company’s business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested or described by such forward-looking statements. Such statements are based upon a number of assumptions and estimates that are inherently subject to significant risks and uncertainties, many of which are beyond the Company’s control. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company’s results. Some important factors (but not necessarily all factors) that affect the Company’s revenues, financial position, growth strategies, profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, include:

business and economic conditions generally in the Company’s operating area, including inflation or deflation;

the ongoing impact of the COVID-19 pandemic on Company traffic, sales and profitability as many schools, restaurants and other business have operated and continue to operate differently since March 2020;

the additional costs incurred by the Company due to the COVID-19 pandemic for additional staff, cleaning and compliance with social distancing guidelines;

the level of COVID-19 assistance provided to customers in the Company’s market area and its impact on Company sales;

Shortages of labor, distribution capacity, and some product outages as the economy recovers from the COVID-19 pandemic;

Inflation in food, labor and gasoline caused by pressures of the COVID-19 pandemic recovery;

the Company’s ability to successfully implement our expansion and operating strategies;

pricing pressures and other competitive factors, including online-based procurement of products the Company sells;

sudden or significant changes in the availability of gasoline and retail gasoline prices;

the maturation of new and expanded stores;

general concerns about food safety;

the Company’s ability to manage technology and data security;

the availability and terms of financing;

increases in costs, including food, utilities, labor and other goods and services significant to the Company’s operations;

success or failure in the ownership and development of real estate;

changes in the laws and government regulations applicable to the Company;

disruptions in the efficient distribution of food products;

changes in accounting pronouncements that could impact the Company’s reported financial results and compliance with various debt agreements; and

other risks and uncertainties, including those described under the caption “Risk Factors” in Item 1A of this Annual Report.

Consequently, actual events affecting the Company and the impact of such events on the Company’s operations may vary significantly from those described in this Annual Report. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this Annual Report are made only as of the date hereof. The Company does not undertake and specifically declines any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments, except to the extent required by applicable law.


3


PART I

Item 1. BUSINESS

General

Ingles Markets, Incorporated, a North Carolina corporation (collectively with its subsidiaries, (“Ingles,” or the “Company,” “we,” “us” or “our’), a leading supermarket chain in the southeast United States, operates 198 supermarkets in North Carolina (75), Georgia (65), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1).

The Company remodels, expands and relocates stores in these communities and builds stores in new locations to retain and grow its customer base while retaining a high level of customer service and convenience. 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. The Company also offers quality private label items and locally-sourced items throughout its market areas.

The Company believes that customer service and convenience, modern stores and competitive prices on a broad selection of quality merchandise are essential to developing and retaining a loyal customer base. The Company has an ongoing renovation and expansion plan to add stores in its target markets and modernize the appearance and layout of its existing stores. The Company’s new and remodeled supermarkets provide an enhanced level of customer convenience in order to accommodate the lifestyle of today’s shoppers. Design features of the Company’s modern stores focus on selling high-growth, high-margin products including perishable departments featuring local organic and home meal replacement items, in-store pharmacies, on-premises fuel centers, and an expanded selection of food and non-food items. The Company offers on-line ordering of its products for pickup at its stores.

Substantially all of the Company’s stores are located within 280 miles of its warehouse and distribution facilities, near Asheville, North Carolina. The Company operates 1.65 million square feet of warehouse and distribution facilities. These facilities supply the Company’s supermarkets with approximately 60% of the goods the Company sells. The remaining 40% is purchased from third parties and is generally delivered directly to the stores. The close proximity of the Company’s purchasing and distribution operations to its stores facilitates the timely distribution of consistently high quality perishable and non-perishable items.

To further ensure product quality, the Company also owns and operates a milk processing and packaging plant that supplies approximately 73% of the milk products sold by the Company’s supermarkets as well as a variety of organic milk, fruit juices and bottled water products. In addition, the milk processing and packaging plant sells approximately 75% of its products to other retailers, food service distributors and grocery warehouses in 16 states, which provides the Company with an additional source of revenue.

The Company owns 163 of its supermarkets, either in free-standing stores or as the anchor tenant in an owned shopping center. The Company also owns 23 undeveloped sites suitable for a free-standing store or development by the Company or a third party. The Company’s owned real estate is generally located in the same geographic region as its supermarkets.

As of September 25, 2021, Mr. Robert P. Ingle II, our Chairman, owned beneficially (as defined by the Exchange Act) approximately 71% of the combined voting power and 23% of the total number of shares of the Company’s outstanding Class A and Class B Common Stock (in each case including stock held by the Company’s Investment/Profit Sharing Plan and Trust of which Mr. Ingle II serves as one of the trustees). The Company became publicly traded in September 1987. The Company’s Class A Common Stock is listed on The NASDAQ Global Select Market under the symbol “IMKTA.” The Company’s Class B Common Stock is not publicly listed or traded.

The Company was incorporated in 1965 under the laws of the State of North Carolina. Its principal mailing address is P.O. Box 6676, Asheville, North Carolina 28816, and its telephone number is 828-669-2941. The Company’s website is www.ingles-markets.com. Information on, or accessible through, the Company’s website is not a part of and is not incorporated by reference into this Annual Report on Form 10-K. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments and supplements to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available on the Company’s website as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission.

Use of our Website and Social Media to Distribute Material Company Information

We use our website as a channel of distribution for important Company information. We routinely post on our website important information, including press releases and financial information, which may be accessed by selecting the “Corporate” sections of www.ingles-markets.com. We also use our website to expedite public access to time-critical information regarding our Company in advance of or in lieu of distributing a press release or a filing with the SEC disclosing the same information. Therefore, investors should look to the Corporate sections of our website for important and time-critical information. Visitors to our website can also register to receive financial information press releases. Information contained on, or accessible through, our website is not a part of and is not incorporated by reference into this Annual Report on Form 10-K.

4


Business

The Company operates one primary business segment, retail grocery. Information about the Company’s operations is as follows (for information regarding the Company’s industry segments, see Note 11, “Segment Information” to the Consolidated Financial Statements of this Annual Report on Form 10-K):

Fiscal Year Ended September

(dollars in millions)

2021

2020

2019

Revenues from unaffiliated customers:

Grocery

$

1,762.9

$

1,694.0

$

1,443.4

Non-foods

1,136.3

1,067.0

936.2

Perishables

1,349.1

1,261.5

1,110.7

Gasoline

583.7

459.6

581.1

Total retail

4,832.0

96.9%

4,482.1

97.2%

4,071.4

96.9%

Other

156.0

3.1%

128.5

2.8%

130.6

3.1%

$

4,988.0

100.0%

$

4,610.6

100.0%

$

4,202.0

100.0%

Income from operations:

Retail

$

327.6

93.6%

$

264.4

94.1%

$

135.4

89.0%

Other

22.5

6.4%

16.5

5.9%

16.8

11.0%

350.1

100.0%

280.9

100.0%

152.2

100.0%

Other income, net

2.9

1.7

1.8

Interest expense

24.3

40.5

47.4

Loss on early extinguishment of debt

1.1

7.1

Income before income taxes

$

327.6

$

235.0

$

106.6

“Other” consists of fluid dairy operations and shopping center rentals.

The grocery category includes grocery, dairy and frozen foods.

The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

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

Supermarket Operations

At September 25, 2021, the Company operated 189 supermarkets under the name “Ingles,” and nine supermarkets under the name “Sav-Mor” with locations in western North Carolina, western South Carolina, northern Georgia, eastern Tennessee, southwestern Virginia and northeastern Alabama. The “Sav-Mor” store concept accommodates smaller shopping areas and carries dry groceries, dairy, fresh meat and produce, all of which are displayed in a modern, readily accessible environment.

The COVID-19 pandemic which began in March 2020 and has continued throughout fiscal year 2021, impacted supermarket operations, as the Company implemented several enhanced cleaning and social distancing protocols designed to keep our customers and our associates safe. Since March 2020, the Company’s stores have operated at an increased level and have experienced occasional product shortages. Recently, an extremely tight labor market has impacted the Company’s ability to attract and retain qualified store personnel, but these impacts have not materially affected our operations.

The following table sets forth certain information with respect to the Company’s supermarket operations.

Number of Supermarkets

Percentage of Total

at Fiscal

Net Sales for Fiscal

Year Ended September

Year Ended September

2021

2020

2019

2021

2020

2019

North Carolina

75

73

73

41%

41%

41%

South Carolina

35

35

36

19%

19%

19%

Georgia

65

66

66

32%

32%

32%

Tennessee

21

21

21

8%

8%

8%

Virginia

1

1

1

Alabama

1

1

1

198

197

198

100%

100%

100%

The Company believes that today’s supermarket customers are focused on convenience, quality and value in an attractive store environment. As a result, the Company’s shopping experience combines a high level of customer service, convenience-oriented quality product offerings and low overall pricing. The Company’s modern stores provide products and services such as home meal replacement items, delicatessens, bakeries, floral departments, greeting cards and broad selections of local organic, beverage and health-related items. At September 25, 2021, the Company operated 111 pharmacies and 107 fuel stations. The Company plans to

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continue to incorporate these departments in substantially all future new and remodeled stores. The Company trains its associates to provide friendly service and to actively address the needs of customers. These associates reinforce the Company’s distinctive service-oriented image.

Selected statistics on the Company’s supermarket operations are presented below:

Fiscal Year Ended September

2021

2020

2019

2018

2017

Weighted Average Sales Per Store (000’s) (1)

$

23,926

$

22,215

$

20,189

$

19,674

$

19,133

Total Square Feet at End of Year (000’s)

11,342

11,256

11,247

11,329

11,173

Average Total Square Feet per Store

57,281

57,138

56,806

56,643

56,146

Average Square Feet of Selling Space per Store (2)

40,097

39,997

39,765

39,650

39,302

Weighted Average Sales per Square Foot of
  Selling Space (1) (2)

609

568

516

502

494

(1)Weighted average sales per store include the effects of increases in square footage due to the opening of replacement stores and the expansion of stores through remodeling during the periods indicated, and gasoline sales.

(2)Selling space is estimated to be 70% of total interior store square footage.

Merchandising

The Company’s merchandising strategy is designed to create a comprehensive and satisfying shopping experience that blends value and customer service with variety, quality and convenience. Management believes that this strategy fosters a loyal customer base by establishing a reputation for providing high quality products and a variety of specialty departments.

The Company’s stores carry broad selections of quality meats, produce and other perishables. The Company offers a wide variety of fresh and non-perishable organic products, including organic milk produced by the Company’s fluid dairy plant. The Company’s market areas contain numerous providers of quality local products, which is in line with current customer preferences for goods produced where they live. Management believes that customers perceive supermarkets offering a broad array of products and time-saving services as part of a solution to today’s lifestyle demands. Accordingly, a principal component of the Company’s merchandising strategy is to design stores that enhance the shopping experience. The Company operates fuel stations at 107 of its store locations.

A selection of prepared foods and home meal replacements are featured throughout Ingles’ deli, bakery, produce and meat departments to provide customers with easy meal alternatives that they can eat at home or in the store. Many stores offer daily selections of home meal replacement items, such as rotisserie chicken and pork, international foods, fried chicken and other entrees, sandwiches, pre-packaged salads, sushi, cut fruit and prepared fresh vegetables. The bakery offers an expanded selection of baked goods and self-service selections. Ingles bakes most of its items on site, including bread baked daily, cakes made to order in various sizes, donuts and other pastries. The deli offers salad, chicken wing and olive bars, an expanded offering of cheeses, gourmet items and home meal replacement items. The Company also provides its customers with an expanded selection of frozen food items (including organics) to meet the increasing demands of its customers.

The Ingles Curbside offering allows customers to order online any product in the Company’s stores. The order is picked by store associates and loaded into the customer’s vehicle. This service is currently offered at 46 of the Company’s stores, with additional stores expected to be added each month.

Ingles intends to continue to increase sales of its private label brands, which typically carry higher margins than comparable branded products. Ingles’ private labels cover a broad range of products throughout the store, such as milk, bread, organic products, soft drinks and canned goods. In addition to increasing margins, Ingles believes that private label sales help promote customer loyalty and provide a value-priced alternative to national brands.

The Company seeks to maintain a reputation for providing friendly service, quality merchandise and customer value and for its commitment to locally-sourced product and community involvement. The Company employs various advertising and promotional strategies to reinforce the quality and value of its products. The Company promotes these attributes using traditional advertising vehicles including radio, television, direct mail and newspapers, as well as electronic and social media. The Ingles Advantage Card is designed to foster customer loyalty by providing information to better understand the Company’s customers’ shopping patterns. The Ingles Advantage Card provides customers with special discounts throughout the Company’s stores and fuel stations.

Purchasing and Distribution

The Company currently supplies approximately 60% of its supermarkets’ inventory requirements from its modern warehouse and distribution facilities. The Company has 1.65 million square feet of office, warehouse and distribution facilities at its headquarters near Asheville, North Carolina. The Company believes that its warehouse and distribution facilities contain sufficient capacity for the continued expansion of its store base for the foreseeable future.

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The Company’s centrally managed purchasing and distribution operations provide several advantages, including the ability to negotiate and reduce the cost of merchandise, decrease overhead costs and better manage its inventory at both the warehouse and store level. From time to time, the Company engages in advance purchasing on high-turnover inventory items to take advantage of special prices offered by manufacturers for limited periods, or to ensure adequate product supply during tight distribution market conditions.

The remaining 40% of the Company’s inventory requirements, primarily beverages, gasoline, bread and snack foods, are supplied directly to the Company’s supermarkets by local distributors and manufacturers.

Goods from the warehouse and distribution facilities and the milk processing and packaging plant are distributed to the Company’s stores by a fleet of 179 tractors and 777 trailers that the Company owns, operates and maintains. The Company invests on an ongoing basis in the maintenance, upgrade and replacement of its tractor and trailer fleet. The Company also operates truck servicing and fuel storage facilities at its warehouse and distribution facilities. The Company reduces its overall distribution costs by capitalizing on back-haul opportunities (contracting to transport merchandise on trucks that would otherwise be empty).

During fiscal year 2021, the pandemic has caused disruption in the receipt of some products and our distribution system encountered difficulty in getting product to our stores to meet spikes in customer demand. There is currently a nationwide shortage of truck drivers and warehouse workers, which has negatively impacted the Company’s distribution operations. We do not know how long these current conditions will persist.

The Company receives product recall information from various subscription, government and vendor sources. Upon receipt of recall information, the Company immediately contacts each of its stores to have the recalled product removed from the shelves and disposes of the product as instructed. The Company may also use social media to communicate product recall information to the public. The Company has a policy of refunding and/or replacing any goods returned by customers. The details of this policy are posted inside each of the Company’s stores.

Store Development, Expansion and Remodeling

The Company believes that the appearance and design of its stores are integral components of its customers’ shopping experience and aims to develop one of the most modern supermarket chains in the industry. The ongoing modernization of the Company’s store base involves (i) the construction of new stores with continuously updated designs, and (ii) the replacement, remodeling or expansion of existing stores. The Company’s goal is to maintain clean, well-lit stores with attractive architectural and display features that enhance the image of its stores as catering to the changing lifestyle needs of quality-conscious consumers who demand increasingly diverse product offerings. The construction of new stores by independent contractors is closely monitored and controlled by the Company. Recently, the Company has had a greater number of circumstances where an existing store was closed in order to build a new store building on the same site that reflects the Company’s current marketing strategies. During fiscal year 2021, the COVID-19 pandemic resulted in shortages of some building materials, equipment, and construction labor. As a result, the Company has slowed some of its new store and remodeling plans. We do not know how long these current conditions will persist, but the Company has continued to build/remodel stores albeit at what management believes will be a temporarily slower pace.

The Company renovates and remodels stores in order to increase customer traffic and sales, respond to existing customer demand, compete effectively against new stores opened by competitors and support its quality image merchandising strategy. The Company decides to complete a remodel of an existing store based on its evaluation of the competitive landscape of the local marketplace. A remodel or expansion provides the quality of facilities and product offerings identical to that of a new store, capitalizing upon the existing customer base. The Company retains the existing customer base by keeping the store in operation during the entire remodeling process. The Company may elect to relocate, rather than remodel, certain stores where relocation provides a more convenient location for its customers.

The following table sets forth, for the fiscal years indicated, the Company’s new store development and store remodeling activities and the effect this program has had on the average size of its stores:

2021

2020

2019

2018

2017

Number of Stores:

Opened

2

1

5

2

Closed

1

1

3

4

4

Stores open at end of period

198

197

198

200

199

Size of Stores:

Less than 42,000 sq. ft.

46

46

48

49

50

42,000 up to 51,999 sq. ft.

22

22

22

22

22

52,000 up to 61,999 sq. ft.

47

47

47

48

50

At least 62,000 sq. ft.

83

82

81

81

77

Average store size (sq. ft.)

57,281

57,138

56,806

56,643

56,146

The Company’s ability to open new stores is subject to many factors, including the acquisition of satisfactory sites, as well as zoning limitations and other governmental regulation. In addition, the Company’s expansion, remodeling and replacement plans are

7


continually reviewed and are subject to change. See the “Liquidity and Capital Resources” section included in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s capital expenditures.

Competition

The supermarket industry is highly competitive and characterized by narrow profit margins. The degree of competition the Company’s stores encounter varies by location, primarily based on the size of the community in which the store is located and its proximity to other communities. The Company’s principal competitors are, in alphabetical order, Aldi, Inc., Bi-Lo, LLC., Earth Fare, Inc, Food City (K-VA-T Food Stores, Inc.), Food Lion (Koninlijke Ahold Delhaize America N.V..), The Fresh Market, Inc., Harris Teeter (owned by The Kroger Co.), The Kroger Co., Lidl (Lidl Stiftung & Co. KG), Publix Super Markets, Inc., Sprouts Farmers Market, Inc., Target Corporation, Whole Foods Market, and Wal-Mart Stores, Inc. Increasingly over the last few years, competition for consumers’ food dollars has intensified due to the addition of, or increase in, food sections by many types of retailers (physical and online) and by restaurants.

Supermarket chains generally compete on the basis of location, quality of products, service, price, convenience, product variety, online ordering/delivery capabilities, and store condition.

The Company believes its competitive advantages include convenient locations, the quality of service it provides its customers, competitive pricing, product variety, quality and a pleasant shopping environment, which is enhanced by its ongoing modernization program.

By concentrating its operations within a relatively small geographic region, the Company is also positioned to more carefully monitor its markets and the needs of its customers within those markets. The Company’s senior executives live and work in the Company’s operating region, thereby allowing management to quickly identify changes in needs and customer preference. Because of the Company’s size, store managers have direct access to senior corporate management and are able to receive quick decisions regarding requested changes in operations. The Company can then move quickly to make adjustments in its business in response to changes in the market and customer needs.

The Company’s management monitors competitive activity and regularly reviews and periodically adjusts the Company’s marketing and business strategies as management deems appropriate in light of existing conditions in the Company’s region. The Company’s ability to remain competitive in its changing markets will depend in part on its ability to pursue its expansion and renovation programs and its response to remodeling and new store openings by its competitors.

Seasonality

Sales in the grocery segment of the Company’s business are subject to a slight seasonal variance due to holiday related sales and due to sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. The Company’s second fiscal quarter traditionally has the lowest sales of the year, unless Easter falls in that quarter. In the third and fourth quarters, sales are affected by the return of customers to seasonal homes in the Company’s market area. During fiscal years 2020 and 2021, typical seasonality was disrupted by the COVID-19 pandemic. Beginning in March 2020, the general population began to spend more time at home working remotely and, in some cases, providing more child care and education support from home. Restaurant traffic and non-essential travel have not yet returned to pre-pandemic levels. These factors contributed to increased sales in the Company’s supermarkets in excess of typical seasonal factors. We currently expect that, as the pandemic eases over time, traditional seasonal patterns will resume.

The Company’s fluid dairy operations have a slight seasonal variation to the extent of its sales into the grocery industry. The Company’s real estate operations are not subject to seasonal variations.

Human Capital

At September 25, 2021, the Company had approximately 26,000 associates, of which 93% were supermarket personnel. Approximately 58% of these associates work on a part-time basis. Management considers labor relations to be good. The Company values its associates and believes that associate loyalty and enthusiasm are key elements of its operating performance. The COVID-19 pandemic increased our need for associates to accommodate a higher level of sales, as well as to comply with more rigorous cleaning and social distancing recommendations. The Company has responded by increasing resources devoted to associate recruitment and retention, and by expanding the ways in which it markets itself to prospective associates; however, competition for labor has become more intense, resulting in higher costs to attract and retain associates. Additionally, there is currently a nationwide shortage of truck drivers, warehouse workers and labor in general. The foregoing factors have resulted in a reduction in the number of our associates since the beginning of fiscal 2021, but we have been able to continue operations without material disruption.

Recent Occupational Health and Safety Administration (“OSHA”) guidelines require that employers with over 100 employees either, by January 2022, have all employees vaccinated or test employees weekly for COVID-19. These guidelines are currently being

8


challenged in the courts. At this time we do not know how or when this dispute will be resolved and what the impact will be on the Company’s operations.

The Company has various programs to ensure adequate store staffing levels at any given time during the week. Store managers are given tools to assist in scheduling and levels of staffing. We provide flexible scheduling to accommodate the needs of our full and part-time associates, and we also provide incentives for associates based on the achievement of operating and safety goals. The Company has made technology investments to allow efficient remote work environments for associates that do not work in our stores or distribution center.

Trademarks and Licenses

The Company employs various trademarks and service marks in its business, the most important of which are its own “Laura Lynn” and “Harvest Farms” private label trademarks, “The Ingles Advantage” service mark, and the “Ingles” service mark. These service marks and the trademarks are federally registered in the United States pursuant to applicable intellectual property laws and are the property of Ingles. The Company believes it has all material licenses and permits necessary to conduct its business.

The current expiration dates for significant trade and service marks are as follows: “Ingles” – December 9, 2025; “Laura Lynn” – March 13, 2024; “Harvest Farms” – August 5, 2024; and “The Ingles Advantage” – August 30, 2025. Each registration may be renewed for an additional ten-year term prior to its expiration. The Company intends to file all renewals timely. Each of the Company’s trademark license agreements has a one year term which, with respect to one license, is automatically renewed annually, unless the owner of the trademark provides notice of termination prior to the expiration date and, with respect to the other licenses, are renewed periodically by letter from the licensor.

Environmental Matters

Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions and may be subject to associated liabilities relating to its stores and other buildings and the land on which such stores and other buildings are situated (including responsibility and liability related to its operation of its gas stations and the storage of gasoline in underground storage tanks), regardless of whether the Company leases or owns the stores, other buildings or land in question and regardless of whether such environmental conditions were created by the Company or by a prior owner or tenant. The presence of contamination from hazardous or toxic substances, or the failure to properly remediate such contaminated property, may adversely affect the Company’s ability to sell or rent such real property or to borrow using such real property as collateral. The Company typically conducts an environmental review prior to acquiring or leasing new stores, other buildings or raw land.

Federal, state and local governments could enact laws or regulations concerning environmental matters that affect the Company’s operations or facilities or increase the cost of producing or distributing the Company’s products. The Company believes that it currently conducts its operations, and in the past has conducted its operations, in substantial compliance with applicable environmental laws. The Company, however, cannot predict the environmental liabilities that may result from legislation or regulations adopted in the future, the effect of which could be retroactive. Nor can the Company predict how existing or future laws and regulations will be administered or interpreted or what environmental conditions may be found to exist at its facilities or at other properties where the Company or its predecessors have arranged for the disposal of hazardous substances.

The Company strives to employ sound environmental operating policies, including recycling packaging, recycling wooden pallets, and re-circulating some water used in its car washes. The Company offers reusable shopping bags to its customers and will pack groceries in bags brought in by its customers. The Company’s store modernization plans include energy efficient lighting and refrigeration equipment.

Government Regulation

The Company is subject to regulation by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture, OSHA, and other federal, state and local agencies. The Company’s stores are also subject to local laws regarding zoning, land use and the sale of alcoholic beverages. The Company believes that its locations are in material compliance with such laws and regulations. The Company is not aware of any proposed regulations that would materially affect the Company’s business, financial condition, or results of operations.

The COVID-19 pandemic resulted in a number of public safety requirements enacted at the federal, state and local levels. These requirements included social distancing, masking, hours of operation, and vaccination recommendations. These requirements changed as the impact of COVID-19 changed and vaccines became widely available. The Company believes requirements will continue to change, but cannot predict the nature and timing of any changes. The Company has complied and will continue to comply with current requirements at each of its locations.

Recent OSHA guidelines require that employers with over 100 employees either, by January 2022, have all employees vaccinated or test employees weekly for COVID-19. These guidelines are currently being challenged in the courts. At this time we do not know how or when this dispute will be resolved and what the impact will be on the Company’s operations.

9


Item 1A. RISK FACTORS

Below is a series of risk factors that may affect the Company's business, financial condition and/or results of operations. Other risk factors are contained in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K. The Company operates in a continually changing business environment, and new risk factors emerge from time to time. Management cannot predict such new risk factors, nor can it assess the impact, if any, of these risk factors on the Company's business, financial condition and/or results of operations or the extent to which any factor or combination of factors may impact any of these areas.

Coronavirus (COVID-19) Pandemic Impact

We are unable to predict the ongoing impact of the coronavirus (COVID-19) pandemic on Company traffic, sales and profitability.

The coronavirus (COVID-19) pandemic was declared a national emergency on March 13, 2020 and the Company was classified as an essential business. Since that time the Company has had to continuously alter certain operating procedures to accommodate isolation/social distancing, school and restaurant closures, reduced leisure travel, and increased remote work. At times, some of the Company’s stores were subject to capacity limits, masking requirements, and social distancing measures that incorporated enhanced cleaning, additional protective equipment and the closure of self-service food bars plus in-house dining.

During fiscal year 2021, vaccines became widely available and are administered in all our pharmacies. As the economy began to recover, we have experienced labor shortages in our stores and distribution center. Truck driver shortages and supply chain disruptions have resulted in occasional product shortages in our stores. Inflation in food and fuel costs have reached levels not experienced in many years.

Our sales continue to be above pre-pandemic levels. At the present time, we do not know how long the pandemic will influence our daily operations. National, state and local mandates related to the pandemic continue to evolve and may result in vaccination requirements that could impact our ability to retain associates.

Recent OSHA guidelines require that employers with over 100 employees either, by January 2022, have all employees vaccinated or test employees weekly for COVID-19. These guidelines are currently being challenged in the courts. At this time we do not know how or when this dispute will be resolved and what the impact will be on the Company’s operations.

Any of the foregoing factors, or other effects of the pandemic that are not currently foreseeable, may materially increase costs, negatively impact sales and adversely affect the Company’s financial condition, results of operations, cash flows and its liquidity position

Risks Related to Our Business and Industry

The Company’s warehouse and distribution center and milk processing and packaging plant, as well as all of the Company’s stores, are concentrated in the Southeastern United States, which makes it vulnerable to economic downturns, natural disasters and other adverse conditions or other catastrophic events in this region.

The Company operates in the Southeastern United States, and its performance is therefore heavily influenced by economic developments in the Southeast region. The Company’s headquarters, warehouse and distribution center and milk processing and packaging plant are located in North Carolina and all of the Company’s stores are located in the Southeast region. As a result, the Company’s business may be more susceptible to regional factors than the operations of more geographically diversified competitors. These factors include, among others, changes in the economy, weather conditions, demographics and population.

Various aspects of the Company’s business are subject to federal, state and local laws and various operating regulations. The Company’s compliance with these regulations may require additional capital expenditures and could adversely affect the Company’s ability to conduct the Company’s business as planned.

The Company is subject to federal, state and local laws and regulations relating to zoning, land use, work place safety, public health, community right-to-know, beer and wine sales, country of origin labeling of food products, pharmaceutical sales and gasoline station operations. Furthermore, the Company’s business is regulated by a variety of governmental agencies, including, but not limited to, the U.S. Food and Drug Administration, the U.S. Department of Agriculture, and OSHA. Employers are also subject to laws governing their relationship with employees, including minimum wage requirements, overtime, working conditions, insurance coverage, disabled access and work permit requirements. Recent and proposed regulation has had or may have a future impact on the cost of insurance benefits for associates and on the cost of processing debit and credit card transactions. Compliance with, or changes in, these laws could reduce the revenue and profitability of the Company’s supermarkets and could otherwise adversely affect the Company’s business, financial condition or results of operations.

10


The Company is affected by certain operating costs which could increase or fluctuate considerably.

The Company depends on qualified associates to operate the Company’s stores. A shortage of qualified associates could require the Company to enhance the Company’s wage and benefit package in order to better compete for and retain qualified associates, and the Company may not be able to recover these increased labor costs through price increases charged to customers, which could significantly increase the Company’s operating costs.

The Company is self-insured for workers’ compensation, general liability 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. 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 and analyses performed by actuaries engaged by the Company. 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.

Energy and utility costs have been volatile in recent years, during which time the Company has expanded its store square footage. The Company attempts to increase its energy efficiency during store construction and remodeling through the use of energy-saving equipment and construction.

The Company is subject to risks related to information systems and data security.

The Company’s business is dependent on information technology systems. These complex systems are an important part of ongoing operations. If the Company were to experience disruption in these systems, did not maintain existing systems properly, or did not implement new systems appropriately, operations could suffer. The Company is currently undergoing a systematic program to enhance its information technology abilities.

The Company has implemented procedures to protect its information technology systems and data necessary to conduct ongoing operations. The Company cannot however, be certain that all of these systems and data are entirely free from vulnerability to attack.

Compliance with tougher privacy and information security laws and standards, including protection of customer debit and credit card information, may result in higher investments in technology and changes to operational processes.

In recent years, more industry transactions have been online for ordering and fulfillment. This trend places a higher reliance on effective and efficient information systems.

The Company is affected by the availability and wholesale price of gasoline and retail gasoline prices, all of which can fluctuate quickly and considerably.

The Company operates fuel stations at 107 of its store locations. While the Company obtains gasoline and diesel fuel from a number of different suppliers, long-term disruption in the availability and wholesale price of gasoline for resale could have a material adverse effect on the Company’s business, financial condition and/or results of operations.

Fluctuating fuel costs could adversely affect the Company’s operating costs which depend on fuel for the Company’s fleet of tractors and trailers which distribute goods from the Company’s distribution facility and for the Company’s fluid dairy operations.

Furthermore, fluctuating fuel costs could have an adverse effect on the Company’s total gasoline sales (both in terms of dollars and gallons sold), the profitability of gasoline sales, and the Company’s plans to develop additional fuel centers. Also, retail gas price volatility could diminish customer usage of fueling centers and, thus, adversely affect customer traffic at the Company’s stores.

The Company’s industry is highly competitive. If the Company is unable to compete effectively, the Company’s financial condition and results of operations could be materially affected.

The supermarket industry is highly competitive and continues to be characterized by intense price competition, increasing fragmentation of retail formats, entry of non-traditional competitors (both physical and online) and market consolidation. Furthermore, some of the Company’s competitors have greater financial resources and could use these financial resources to take measures, such as altering product mix, reducing prices, home/in-store fulfillment, or online ordering which could adversely affect the Company’s competitive position.

Disruptions in the efficient distribution of food products to the Company’s warehouse and stores may adversely affect the Company’s business.

The Company’s business could be adversely affected by disruptions in the efficient distribution of food products to the Company’s warehouse and stores. Such disruptions could be caused by, among other things, adverse weather conditions, fuel availability, shortage of truck drivers, food contamination recalls and civil unrest in foreign countries in which the Company’s suppliers do business.

11


The Company’s operations are subject to economic conditions that impact consumer spending.

The Company’s results of operations are sensitive to changes in overall economic conditions that impact consumer spending, including discretionary spending. Future economic conditions such as employment levels, business conditions, interest rates, energy and fuel costs and tax rates could reduce consumer spending or change consumer purchasing habits. A general reduction in the level of consumer spending or the Company’s inability to respond to shifting consumer attitudes regarding products, store location and other factors could adversely affect the Company’s business, financial condition and/or results of operations.

Inflation could impact the Company’s operations

As the economy recovers from the initial impact of the COVID-19 pandemic, inflation has recently reached levels not experienced in decades. Food and energy costs have increased, reflecting a tight labor market and supply chain/transportation issues.

The following table from the United States Bureau of Labor Statistics lists annualized changes in the Consumer Price Index that could have an effect on the Company’s operations. One of the Company’s significant costs is labor, which increases with general inflation. Inflation or deflation in energy costs affects the Company’s gasoline sales, distribution expenses and plastic supply costs. During fiscal year 2021, inflation has reached its highest level in a number of years, impacting food costs, transportation costs, and labor costs.

Twelve Months Ended

September 25,

September 26,

2021

2020

All items

5.4

%

1.4

%

Food and beverages

4.6

%

3.9

%

Energy

24.8

%

(7.7)

%

Risk Related to Ownership of Our Common Stock

The Company’s principal stockholder, Robert P. Ingle II, has the ability to elect a majority of the Company’s directors, appoint new members of management and approve many actions requiring stockholder approval.

Mr. Ingle II’s beneficial ownership (as defined by the applicable rules under the Exchange Act) represents approximately 71% of the combined voting power of all classes of the Company’s capital stock as of September 25, 2021. As a result, Mr. Ingle II has the power to elect a majority of the Company’s directors and approve any action requiring the approval of the holders of the Company’s Class A Common Stock and Class B Common Stock, including adopting certain amendments to the Company’s charter and approving mergers or sales of substantially all of the Company’s assets.

The Company is a Controlled Company under the NASDAQ Marketplace Rules. As a result, the Company is exempt from certain of NASDAQ’s corporate governance policies, including the requirements that the majority of Directors be independent (as defined in NASDAQ rules), and that the Company have a nominating committee for Director candidates.

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

Owned Properties

The Company owns 163 of its supermarkets either as free-standing locations or in shopping centers where it is the anchor tenant. The Company also owns 23 undeveloped sites which are suitable for a free-standing store or shopping center development. The Company owns numerous outparcels and other acreage located adjacent to the shopping centers and supermarkets it owns. Real estate owned by the Company is generally located in the same geographic regions as its supermarkets.

The shopping centers owned by the Company contain an aggregate of 8.1 million square feet of leasable space, of which 3.9 million square feet is used by the Company’s supermarkets. The remainder of the leasable space in these shopping centers is leased or held for lease by the Company to third-party tenants. A breakdown by size of the shopping centers owned and operated by the Company is as follows:

Size

Number

Less than 50,000 square feet

14

50,000 – 100,000 square feet

33

More than 100,000 square feet

36

Total

83

12


The Company owns a 1,649,000 square foot facility, which is strategically located between Interstate 40 and Highway 70 near Asheville, North Carolina, as well as the 119 acres of land on which it is situated. The facility includes the Company’s headquarters and its warehouse and distribution facility. The property also includes truck servicing and fuel storage facilities. The Company also owns a 139,000 square foot warehouse on 21 acres of land approximately one mile from its main warehouse and distribution facility.

The Company’s milk processing and packaging subsidiary, Milkco, Inc., owns a 140,000 square foot manufacturing and storage facility in Asheville, North Carolina. In addition to the plant, the 20-acre property includes truck cleaning and fuel storage facilities.

Certain long-term debt of the Company is secured by the owned properties. See Note 7, “Long-Term Debt” to the Consolidated Financial Statements of this Annual Report on Form 10-K for further details.

Leased Properties

The Company operates supermarkets at 35 locations leased from various unaffiliated third parties. The Company has seven owned store buildings that are on ground leases. The Company leases two other former supermarket locations, one of which is subleased to a third party. The majority of these leases require the Company to pay property taxes, utilities, insurance, repairs and certain other expenses incidental to occupation of the premises. In addition to base rent, most leases contain provisions that require the Company to pay additional percentage rent (ranging from 0.75% to 1.50%) if sales exceed a specified amount.

Rental rates generally range from $3.09 to $7.68 per square foot. During fiscal 2021, 2020 and 2019, the Company paid cash supermarket rent of $10.3 million, $10.2 million and $10.3 million, respectively. These amounts exclude property taxes, utilities, insurance, repairs, other expenses, and non-cash rent adjustments. The following table summarizes lease expiration dates as of September 25, 2021, with respect to the initial and any renewal option terms of leased supermarkets properties:

Year of Expiration

Number of

(Including Renewal Terms)

Leases Expiring

2021-2032

5

2033-2047

1

2048 or after

31

Management believes that the long-term rent stability provided by these leases is a valuable asset of the Company.

Item 3. LEGAL PROCEEDINGS

Various legal proceedings and claims arising in the ordinary course of business are pending against the Company. In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims would not materially affect the Company’s business, financial condition, results of operations or cash flows.

PART II

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is listed on The NASDAQ Global Select Market under the symbol “IMKTA”. There is no public market for the Company’s Class B Common Stock. Under the terms of the Company’s Articles of Incorporation, a holder of Class B Common Stock may convert any or all of the holder’s shares of Class B Common Stock into an equal number of shares of Class A Common Stock at any time.  For additional information regarding the voting powers, preferences and relative rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements contained in this Annual Report on Form 10-K.

As of November 22, 2021, there were approximately 356 holders of record of the Company’s Class A Common Stock and 106 holders of record of the Company’s Class B Common Stock.

 

Dividends

The Company has paid cash dividends on its Common Stock in each of the past 37 fiscal years, except for the 1984 fiscal year when the Company paid a 3% stock dividend. During both fiscal 2021 and fiscal 2020, the Company paid annual dividends totaling $0.66 per share of Class A Common Stock and $0.60 per share of Class B Common Stock, paid in quarterly installments of $0.165 and $0.15 per share, respectively. The Company’s last dividend payment was made on October 14, 2021 to common stockholders of record on October 7, 2021. 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 this Annual Report on Form 10-K.

13


The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors. The continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. The payment of cash dividends is also subject to restrictions contained in certain financing arrangements. Such restrictions are summarized in Note 7, “Long-Term Debt” to the Consolidated Financial Statements of this Annual Report on Form 10-K.

Stock Performance Graph

Set forth below are a graph and accompanying table comparing the five-year cumulative total stockholder return on the Class A Common Stock with the five-year cumulative total return of (i) the S&P 500 Comprehensive-Last Trading Day Index and (ii) a peer group of companies in the Company's line of business. The 2021 peer group consists of the following companies: Koninklijke Ahold Delhaize N.V., Weis Markets, Inc., The Kroger Co., Supervalu Inc., SpartanNash Co., Sprouts Farmers Markets, Inc., and Village Super Market, Inc.

The comparisons cover the five-years ended September 25, 2021 and assume that $100 was invested after the close of the market on September 24, 2016, and that dividends were reinvested quarterly. Returns of the companies included in the peer group reflected below have been weighted according to each company’s stock market capitalization at the beginning of each section for which a return is presented.

INGLES MARKETS, INCORPORATED
COMPARATIVE RETURN TO STOCKHOLDERS

H:\usr\Accounting Dept\Acct Mngmt\Audit 21 Miscellaneous\Stock Performance Graph\IMKTA2021 vReplacement.jpg


14


INDEXED RETURNS OF INITIAL $100 INVESTMENT*

Company/Index

2017

2018

2019

2020

2021

Ingles Markets, Incorporated Class A Common Stock

$

67.70

$

92.21

$

106.86

$

102.04

$

185.66

S&P 500 Comprehensive – Last Trading Day Index

$

118.61

$

139.85

$

145.80

$

167.89

$

218.27

2021 Peer Group

$

75.36

$

101.25

$

101.83

$

130.68

$

154.60

*Assumes $100 invested in the Class A Common Stock of Ingles Markets, Incorporated after the close of the market on September 24, 2016.

The foregoing stock performance information, including the graph, shall not be deemed to be “soliciting material” or to be filed with the Securities and Exchange Commission.

Item 6. [Reserved]

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Ingles, a leading supermarket chain in the Southeast United States, operates 198 supermarkets in North Carolina (75), Georgia (65), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and neighborhood shopping centers. 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. The Company offers quality private label items in most of its departments. 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 September 25, 2021, the Company operated 111 in-store pharmacies and 107 fuel centers. Ingles also operates a fluid dairy and earns shopping center rentals.

Critical Accounting Policies and Estimates

Critical accounting policies are those accounting policies that management believes are important to the presentation of Ingles’ financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate 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, general liability, 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 $1,000,000 per occurrence for workers’ compensation and 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 which is then applied to appropriate actuarial methods. 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. The Company’s self-insurance reserves totaled $32.1 million and $34.1 million for employee group insurance, workers’ compensation insurance and general liability insurance at September 25, 2021 and September 26, 2020, respectively. These amounts are inclusive of expected recoveries from excess cost insurance or other sources that are recorded as receivables of $4.2 million at September 25, 2021 and $4.7 million at September 26, 2020.

Asset Impairments

The Company accounts for the impairment of long-lived assets in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 360. Asset groups are primarily comprised of our individual store and shopping center properties. 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, net of costs to sell. 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

15


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.

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 composed 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 applicable vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of one month or less and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever practical, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a reduction of item cost in inventory and recognized in merchandise costs when the item is sold. Due to the use of the retail method for store inventory 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 $116.3 million, $107.5 million and $111.7 million for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, 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 that the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $8.1 million, $8.0 million, and $13.8 million for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, respectively. During fiscal years 2021 and 2020, the COVID-19 pandemic increased the Company’s sales. As a result, vendors offered the Company a lower level of incentives to sell their products.

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

Fiscal Year

Ingles operates on a 52- or 53-week fiscal year ending on the last Saturday in September. The consolidated statements of income for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, each consisted of 52 weeks of operations.

Comparable Store Sales

Comparable store sales are defined as sales by grocery stores in operation for five full fiscal quarters. The Company has an ongoing renovation and expansion plan to modernize the appearance and layout of its existing stores. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date of completion of the replacement, remodel or addition. A replacement store is a newly opened store that replaces 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 both the fiscal years ended September 25, 2021 and September 26, 2020 comparable store sales included 196 stores.

The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales.

Fiscal Year Ended September

2021

2020

2019

Net sales

100.0%

100.0%

100.0%

Gross profit

26.1

26.0

24.3

Operating and administrative expenses

19.3

20.0

20.8

Gain from sale or disposal of assets

0.2

0.1

0.1

Income from operations

7.0

6.1

3.6

Other income, net

0.1

0.1

Interest expense

0.5

0.9

1.1

Loss on early extinguishment of debt

0.2

Income before income taxes

6.6

5.1

2.5

Income tax expense

1.6

1.2

0.6

Net income

5.0

3.9

1.9

16


Fiscal Year Ended September 25, 2021 Compared to the Fiscal Year Ended September 26, 2020

The Company’s fiscal year 2021 performance was heavily influenced by the COVID-19 pandemic, which was declared a national emergency on March 13, 2020. Various stay-at-home measures were enacted, most schools closed to in-person learning, and restaurant dining was severely restricted. Many of these measures, though relaxed, have remained in place during the fall of 2021 and resulted in higher retail grocery sales throughout the United States.

Net income for the fiscal year ended September 25, 2021 was $249.7 million, compared with net income of $178.6 million for the fiscal year ended September 26, 2020, primarily due to the impact of the COVID-19 pandemic, as more persons relied upon their local grocery stores for food and non-food products given travel restrictions and limited options for dining out. Net income as a percentage of sales was 5.0% for fiscal year 2021 compared with 3.9% for fiscal year 2020.

Sales and gross margin increased in the retail segment, including increases in gasoline gross profit. Expenses increased primarily as a result of pandemic-related increases in staffing levels, sanitation expenses and social distancing measures. Fluid dairy income increased over the comparable fiscal year, and real estate income increased as tenants reopened their business after the early part of the pandemic.

Net Sales. Net sales for the fiscal year ended September 25, 2021 totaled $4.99 billion, compared with $4.61 billion for the fiscal year ended September 26, 2020.

Retail comparable sales excluding gasoline increased 5.4% during fiscal 2021 compared with 2020. The number of transactions (excluding gasoline) increased 0.7% while the average transaction size (excluding gasoline) increased by 4.8%. Comparing fiscal 2021 with 2020, gasoline gallons sold increased 5.7% and per gallon gasoline prices increased 20.3%.

Sales by product category for the fiscal years ended September 25, 2021 and September 26, 2020 were as follows:

Fiscal Year Ended September

(dollars in thousands)

2021

2020

Grocery

$

1,762,872

$

1,693,961

Non-foods

1,136,250

1,066,939

Perishables

1,349,081

1,261,537

Gasoline

583,749

459,639

Total retail grocery

$

4,831,952

$

4,482,076

The grocery category includes grocery, dairy and frozen foods.

The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

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

Changes in retail grocery sales for the fiscal year ended September 25, 2021 are summarized as follows (in thousands):

Total grocery sales for the fiscal year ended September 26, 2020

$

4,482,076

Comparable store sales increase

334,236

Impact of stores closed in fiscal years 2021 and 2020

(1,398)

Sales growth stores opened fiscal years 2021 and 2020