OVERVIEW
Village Super Market, Inc. (the "Company" or "Village") operates a chain of 30 ShopRite supermarkets inNew Jersey , easternPennsylvania ,Maryland andNew York City and threeGourmet Garage specialty markets inManhattan, New York City. OnNovember 1, 2019 , Village opened a 82,000 sq. ft. (52,000 selling sq. ft.) store inStroudsburg, Pennsylvania and replaced our existing 53,000 sq. ft. store. OnJune 24, 2019 , Village acquired the assets and certain liabilities ofGourmet Garage for$5,203 .Gourmet Garage operates three specialty markets averaging 11,000 sq. ft. (5,800 selling sq. ft.) inManhattan, New York City. OnJune 28, 2018 , Village opened a 53,000 sq. ft. (31,000 selling sq. ft.) ShopRite in theBronx, New York City. OnMay 14, 2020 , Village completed its acquisition of certain assets, including five supermarkets, a production distribution center (the "PDC") and the intellectual property ofFairway Group Holdings Corp. and certain of its subsidiaries ("Fairway"), including the names "Fairway" and "Fairway Markets." Four of the supermarkets are inManhattan , specifically the UpperWest Side , UpperEast Side ,Kips Bay and Chelsea locations, and a fifth store is located inPelham, NY . The acquisition was effectuated pursuant to the Asset Purchase Agreement (the "APA"), entered into onJanuary 20, 2020 , revised onMarch 25, 2020 and approved by theUnited States Bankruptcy Court for the Southern District of New York through a Sale Order entered onApril 20, 2020 . Village paid$73,200 for the Fairway assets, net of adjustments set forth in the APA, and assumed certain liabilities, consisting primarily of those arising from acquired leases. Additionally, Village's cash purchase price was reduced by a$2,000 credit arising from the breakup of Village's initial "stalking horse" bid under theJanuary 20, 2020 Asset Purchase Agreement. Village is the second largest member ofWakefern Food Corporation ("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite andGourmet Garage names. As further described in the Company's Form 10-K, this ownership interest in Wakefern provides Village many of the economies of scale in purchasing, distribution, store brands, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage. The supermarket industry is highly competitive and characterized by narrow profit margins. The Company competes directly with multiple retail formats, both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Village competes by using low pricing, providing a superior customer service experience and a broad range of consistently available quality products, including our own brands portfolio. InOctober 2019 , ShopRite introduced the Right Price Promise pricing strategy, a commitment to everyday low prices on the items customers purchase most frequently. The ShopRite Price Plus preferred customer program enables Village to offer continuity programs, focus on target marketing initiatives and to offer discounts and attach digital coupons directly to a customer's Price Plus card.
In
More than 100 newly branded items, including packaged salads, salty snacks, cooking oils, bottled water and paper goods, were introduced in early November. ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products through fiscal 2021. The introduction of Bowl & Basket and Paperbird follows the 2016 launch of ShopRite's Wholesome Pantry brands, which include the Wholesome Pantry Organic line as well as a range of products free from 110 ingredients and artificial additives and preservatives. The Company's stores, six of which are owned, average 56,000 total square feet. These larger store sizes enable the Company's stores to provide a "one-stop" shopping experience and to feature expanded higher margin specialty departments such as an on-site bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies. Many of our stores emphasize aPower Alley , which features high margin, fresh, convenience offerings in an area within the store that provides quick customer entry and exit for those customers shopping for today's lunch or dinner. Certain of our stores include the Village Food Garden concept featuring a restaurant style kitchen, and several kiosks offering a wide variety of store prepared specialty foods for both take-home and in-store dining. We offer ShopRite from Home covering most of the communities served by our stores. ShopRite from Home is an online ordering system that provides for in-store pickup or home delivery. Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or on their smart phones or tablets through the ShopRite app. We also offer online purchasing through various third party digital platforms. 15 -------------------------------------------------------------------------------- We consider a variety of indicators to evaluate our performance, such as same store sales; percentage of total sales by department (mix); shrink; departmental gross profit percentage; sales per labor hour; units per labor hour; and hourly labor rates. COVID-19 The Company was significantly impacted by the COVID-19 outbreak as it operates in and around one of the epicenters of the health crisis with much of our trade area under stay-at-home orders sincemid-March 2020 . The Company is classified as an essential business and has remained open to serve our customers and the communities in which we operate. Our first priority throughout this unprecedented time has and will continue to be the safety of our associates and our customers. In response to COVID-19, Village incurred incremental operating expenses of over$5,500 in the 13 weeks endedApril 25, 2020 for programs and new initiatives implemented to support and protect our associates, customers and the communities we are a part of including:
• Enhanced and more frequent sanitation practices, including hourly cleaning
of high touch point areas throughout our stores, nightly deep cleaning and
bi-weekly disinfectant fogging in every store • Reduced store operating hours, including the closure of all stores on
Easter Sunday, to provide time for our associates to rest and complete the
enhanced cleaning practices • Created a centralized call center to provide our associates with
consistent, accurate, reliable guidance regarding Company policies and CDC
recommended protocols
• Created a text communication platform to provide enrolled associates with
real-time alerts and updates
• Expanded remote work capabilities for office associates and limited travel
of regional supervision teams
• Provided over 150,000 meals, including two hot meals during the day to all
associates on duty and a boxed lunch to all night crew associates, through
the Feeding Our Village Heroes Program
• Provided over 15,000 meals sourced from local restaurants to healthcare
professionals through our Heroes Feeding Heroes program
• Reserved the first hour of business each day for elderly and at-risk customers
• Implemented a temporary wage premium of
base rate of pay for all hourly front-line associates and weekly premiums
for salaried front-line associates, applied to hours worked fromMarch 22nd through June 13th
• Accelerated payment of quarterly bonuses for the 13 weeks ended
• Provided Emergency Paid Leave to associates affected by COVID-19
• Maintained health care coverage for all associates unable to work due to
COVID-19
• Blue Squares for Social Distancing program - installed floor markers and
additional signage in high traffic areas to signify six-foot distances to
encourage proper social distancing
• Installed plexiglass shields at all registers, guest services and pharmacy
counters • Reduced offerings at service departments, eliminated the sale of bulk self-service merchandise and closed in-store restaurants and dining areas to assist and encourage social distancing
• Limited the number of customers to approximately 30% of each store's
maximum occupancy • Implemented a Personal Protective Equipment program and provided associates with masks and gloves
• Donated and supplied masks to local hospitals
• Implemented temperature checks for all associates
• Expanded digital capabilities, including four rapidly deployed "pop-up"
ShopRite from Home stores, contactless pickup and prescription drug pickup
and delivery
• Expanded partnerships with online grocery picking and delivery services to
better support our customers increased demand for these services
• Introduced the Essentials Box Program - providing a safe and convenient
way to stock up on in-demand produce or cleaning products, pre-packaged
and available for delivery
• Expanded mobile scan to an additional 10 stores
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RESULTS OF OPERATIONS
The following table sets forth the major components of the Consolidated Statements of Operations as a percentage of sales:
13 Weeks Ended
39 Weeks Ended
April 25, 2020 April 27, 2019 April 25, 2020 April 27, 2019 Sales 100.00 % 100.00 % 100.00 % 100.00 % Cost of sales 71.66 72.03 72.27 72.21 Gross profit 28.34 27.97 27.73 27.79 Operating and administrative expense 23.34 24.62 24.39 23.97 Depreciation and amortization 1.68 1.65 1.76 1.66 Operating income 3.32 1.70 1.58 2.16 Interest expense (0.12 ) (0.28 ) (0.13 ) (0.27 ) Interest income 0.20 0.35 0.25 0.32 Income before taxes 3.40 1.77 1.70 2.21 Income taxes 0.97 0.51 0.49 0.66 Net income 2.43 % 1.26 % 1.21 % 1.55 % Sales. Sales were$458,292 in the 13 weeks endedApril 25, 2020 , an increase of 15.9% compared to the 13 weeks endedApril 27, 2019 . Sales increased due to the opening of theStroudsburg replacement store onNovember 1, 2019 , the acquisition ofGourmet Garage onJune 24, 2019 and a same store sales increase of 13.6%. Same store sales increased due primarily to the impact of the COVID-19 outbreak and related stay-at-home measures, most significantly in March where sales reached unprecedented levels. Same store sales also increased due to continued sales growth in theBronx, New York City store opened onJune 28, 2018 and digital sales growth of 41.8%. Sales were$1,303,116 in the 39 weeks endedApril 25, 2020 , an increase of 6.4% from the 39 weeks endedApril 27, 2019 . Sales increased due to the opening of theStroudsburg replacement store onNovember 1, 2019 , the acquisition ofGourmet Garage onJune 24, 2019 and a same store sales increase of 4.5%. Same store sales increased due primarily to the impact of the COVID-19 outbreak and related stay-at-home measures. Same store sales also increased due to continued sales growth in theBronx, New York City store opened onJune 28, 2018 and digital sales growth of 28.1%. These increases were partially offset by the impact of two competitor store openings and decreased promotional spending inMaryland .
New stores and replacement stores are included in same store sales in the quarter after the store has been in operation for four full quarters. Store renovations and expansions are included in same store sales immediately.
Gross Profit. Gross profit as a percentage of sales increased .37% in the 13 weeks endedApril 25, 2020 compared to the 13 weeks endedApril 27, 2019 . Excluding the impact of the addition ofGourmet Garage , gross profit as a percentage of sales increased .16% in the 13 weeks endedApril 25, 2020 compared to the 13 weeks endedApril 27, 2019 due primarily to lower promotional spending due to uncertainty of product availability during the COVID-19 outbreak (.49%) and increased leverage on fixed warehouse assessment charges from Wakefern (.26%). These increases were partially offset by an unfavorable change in product mix (.37%), decreased departmental gross margin percentages (.18%) and decreased patronage dividends and rebates received from Wakefern (.05%). Both product mix and departmental gross margin percentages were impacted by limitations in service departments and product availability as a result of the COVID-19 outbreak. Gross profit as a percentage of sales decreased .06% in the 39 weeks endedApril 25, 2020 compared to the 39 weeks endedApril 27, 2019 . Excluding the impact of the addition ofGourmet Garage , gross profit as a percentage of sales decreased .28% due primarily to decreased departmental gross margin percentages (.31%), decreased patronage dividends and rebates received from Wakefern (.07%) and an unfavorable change in product mix (.10%) partially offset by lower promotional spending (.11%) and increased leverage on warehouse assessment charges from Wakefern (.09%). Departmental gross profits decreased in both the 13 and 39 week periods endedApril 25, 2020 compared to the 13 and 39 weeks endedApril 27, 2019 due primarily to limitations in service departments and product availability as a result of the COVID-19 outbreak, price investments, including the ShopRite's Right Price Promise pricing strategy, a commitment to everyday 17 --------------------------------------------------------------------------------
low prices on the items customers purchase most frequently, introduced in
Operating and Administrative Expense. Operating and administrative expense as a percentage of sales decreased 1.28% in the 13 weeks endedApril 25, 2020 compared to the 13 weeks endedApril 27, 2019 . The 13 weeks endedApril 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed inMarch 2020 (.26%) and lease costs reclassified from Depreciation and Amortization and Interest Expense to Operating and Administrative Expense (.14%) as a result of the adoption of ASU 2016-02, "Leases" (see note 1 to the consolidated financial statements), and a reduction in pension settlement charges of (.08%) compared to the 13 weeks endedApril 27, 2019 . Excluding these items, operating and administrative expense as a percentage of sales decreased 1.08% in the 13 weeks endedApril 25, 2020 compared to the 13 weeks endedApril 27, 2019 due primarily to leverage from higher sales despite incremental costs related to COVID-19, including enhanced wages and benefits and expanded safety and sanitation protocols (1.21%). Operating and administrative expense as a percentage of sales increased .42% in the 39 weeks endedApril 25, 2020 compared to the 39 weeks endedApril 27, 2019 . The 39 weeks endedApril 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed inMarch 2020 (.09%), a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges (.10%) (see note 4 to the consolidated financial statements), pre-opening costs of theStroudsburg, Pennsylvania replacement store (.10%), store closure costs and charges to write off the lease asset and related obligations for the oldStroudsburg store (.06%) and lease costs reclassified from Depreciation and Amortization and Interest Expense to Operating and Administrative Expense (.14%) as a result of the adoption of ASU 2016-02, "Leases" (see note 1 to the consolidated financial statements). The 39 weeks endedApril 27, 2019 includes a gain for Superstorm Sandy insurance proceeds received (.03%) and pension settlement charges (.04%). Excluding these items from both periods, operating and administrative expense as a percentage of sales increased .10% in the 39 weeks endedApril 25, 2020 compared to the 39 weeks endedApril 27, 2019 due primarily to incremental costs related to COVID-19, including enhanced wages and benefits and expanded safety and sanitation protocols (.42%) partially offset by increased leverage from higher sales. Depreciation and Amortization. Depreciation and amortization expense increased in the 13 weeks endedApril 25, 2020 compared to the 13 weeks endedApril 27, 2019 due to depreciation related to acquisition ofGourmet Garage and capital expenditures. Depreciation and amortization expense increased in the 39 weeks endedApril 25, 2020 compared to the 39 weeks endedApril 27, 2019 due to depreciation related to acquisition ofGourmet Garage , capital expenditures and accelerated depreciation related to assets at the existingStroudsburg store that was replaced onNovember 1, 2019 . Interest Expense. Interest expense in the 13 and 39 weeks endedApril 25, 2020 decreased compared to the 13 and 39 weeks endedApril 27, 2019 due to lease costs reclassified to Operating and Administrative Expenses as a result of the adoption of ASU 2016-02, "Leases" (see note 1 to the consolidated financial statements).
Interest Income. Interest income decreased in the 13 and 39 weeks ended
Income Taxes. The effective income tax rate was 28.4% and 28.9% in the 13 and 39 weeks endedApril 25, 2020 , respectively, compared to 28.9% and 29.9% in the 13 and 39 weeks endedApril 27, 2019 , respectively. Net Income. Net income was$11,152 in the 13 weeks endedApril 25, 2020 compared to$4,970 in the 13 weeks endedApril 27, 2019 . The 13 weeks endedApril 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed inMarch 2020 of$854 (net of tax). The 13 weeks endedApril 25, 2020 includes pension settlement charges of$83 (net of tax) compared to$302 (net of tax) in the 13 weeks endedApril 27, 2019 . Excluding these items from both periods, net income increased 97% in the 13 weeks endedApril 25, 2020 compared to the prior year. Net income was$15,724 in the 39 weeks endedApril 25, 2020 compared to$18,810 in the 39 weeks endedApril 27, 2019 . The 39 weeks endedApril 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed inMarch 2020 of$854 (net of tax), a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges of$954 (net of tax), pre-opening costs related to theStroudsburg, Pennsylvania replacement store of$891 (net of tax) and store closure costs and charges to write off the lease asset and related obligations for the oldStroudsburg store of$557 (net of tax). The 39 weeks endedApril 27, 2019 includes a$290 (net of tax) gain for Superstorm Sandy insurance proceeds received and pension settlement charges of$302 (net of tax). Excluding these items from both periods, net income decreased 8% in the 39 weeks endedApril 25, 2020 compared to the prior year. 18 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company's financial condition and results of operations. These policies require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company's critical accounting policies relating to the impairment of long-lived assets and goodwill, accounting for patronage dividends earned as a stockholder of Wakefern and accounting for pension plans, are described in the Company's Annual Report on Form 10-K for the year endedJuly 27, 2019 . Except for the changes due to the adoption of ASU 2016-02 related to leases discussed in "Recently adopted accounting standards," Note 1, and Note 7 as ofApril 25, 2020 , there have been no changes to the critical accounting policies contained therein.
The preparation of financial statements in conformity with
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was$59,404 in the 39 weeks endedApril 25, 2020 compared to$39,769 in the corresponding period of the prior year. The increase in net cash provided by operating activities in fiscal 2020 was primarily due to changes in working capital. Working capital changes, including Other assets and liabilities, increased net cash provided by operating activities by$16,965 in fiscal 2020 compared to a decrease of$1,718 in fiscal 2019. The change in impact of working capital is due primarily to lower merchandise inventories caused by higher sales due to COVID-19 and higher accounts payable to Wakefern due to higher purchase fulfillment at the end of April. During the 39 weeks endedApril 25, 2020 , Village used cash to fund capital expenditures of$47,812 , dividends of$9,697 , a$7,600 deposit into escrow related to the Fairway acquisition and additional investments of$2,243 in notes receivable from Wakefern. Capital expenditures primarily include costs associated with theStroudsburg replacement store, expansion of ShopRite from Home and equipment purchases. Village has budgeted$55,000 for capital expenditures for fiscal 2020. Planned expenditures include the construction of a replacement store inStroudsburg, Pennsylvania , one major remodel, expansion of ShopRite from Home, and various merchandising, technology, equipment and facility upgrades. The Company's primary sources of liquidity in fiscal 2020 are expected to be cash and cash equivalents on hand atApril 25, 2020 , operating cash flow generated in fiscal 2020 and the Company's Credit Facility. AtApril 25, 2020 , the Company held variable rate notes receivable due from Wakefern of$25,839 that earn interest at the prime rate plus 1.25% and mature onAugust 15, 2022 and$26,612 that earn interest at the prime rate plus .75% and mature onFebruary 15, 2024 . Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits. Working capital was$21,067 atApril 25, 2020 compared to$56,307 atJuly 27, 2019 . Working capital ratios at the same dates were 1.17 and 1.50 to 1, respectively. The decrease in working capital in fiscal 2020 compared to fiscal 2019 is due primarily to a decrease in merchandise inventories caused by higher sales and intermittent supply chain disruptions due to COVID-19 and recognition of current operating lease obligations as a result of the adoption of ASU 2016-02, "Leases". The Company's working capital needs are reduced, since inventories are generally sold by the time payments to Wakefern and other suppliers are due. Village had an unsecured revolving credit agreement providing a maximum amount available for borrowing of$25,000 . The credit agreement provided for up to$3,000 of letters of credit, which secured obligations for construction performance guarantees to municipalities. There were no amounts outstanding atApril 25, 2020 orJuly 27, 2019 under the facility. OnMay 6, 2020 , Village entered into a credit agreement (the "Credit Facility") withWells Fargo Bank, National Association ("Wells Fargo") that supersedes in its entirety the prior$25,000 credit agreement with Wells Fargo datedNovember 9, 2017 . The principal purpose of the Credit Facility is to finance general corporate and working capital requirements and Village's acquisition of certain Fairway assets which closed onMay 14, 2020 . Among other things, the Credit Facility provides for a maximum loan amount of$150,500 , as further set forth below: 19 --------------------------------------------------------------------------------
• An unsecured revolving line of credit providing a maximum amount available
for borrowing of$125,000 . Indebtedness under this agreement bears interest at the applicable LIBOR rate plus 1.10% and expires onMay 6, 2025 .
• An unsecured term loan with a maximum loan amount of
2020, Village executed a
installments based on a seven-year amortization schedule through
2027 and bearing interest at the applicable LIBOR rate plus 1.35%.
Additionally, Village executed an interest rate swap for a notional amount
equal to the term loan amount that fixes the base LIBOR rate at .41% per
annum through
1.76% on the term note.
• The ability to convert up to
secured converted term loan, which shall reduce the maximum amount available for borrowing under the revolving line of credit. Village expects to reduce the capacity of the revolving line of credit by converting approximately$50,000 to a converted term loan that will bear
interest at the applicable LIBOR rate plus 1.50% and will be repayable in
equal monthly installments based on a fifteen-year amortization schedule
beginning on the conversion date. The converted term loan is subject to completion of customary closing conditions, including title searches and environmental studies for properties to be mortgaged. Additionally, Village executed a forward interest rate swap, effectiveAugust 3, 2020 , for a notional amount of$50,000 that fixes the base LIBOR rate at .69% per annum for fifteen years, resulting in a fixed effective interest rate of 2.19% on the converted term loan. The Credit Facility also provides for up to$25,000 of letters of credit, and contains covenants that, among other conditions, require a minimum tangible net worth, a minimum fixed charge coverage ratio and a maximum adjusted debt to EBITDAR ratio.
Fairway Markets
The$73,200 purchase price for the Fairway acquisition was funded by borrowing against the Company's unsecured revolving line of credit and an unsecured term loan pursuant to the Company's Credit Facility. Additionally, as required by the APA, Village had made a$7,600 deposit into escrow which is included in Other assets in the Company's Consolidated Balance Sheet as ofApril 25, 2020 .
There have been no other substantial changes as of
OUTLOOK
This Form 10-Q contains certain forward-looking statements about Village's future performance. These statements are based on management's assumptions and beliefs in light of information currently available. Such statements relate to, for example: same store sales; economic conditions; expected pension plan contributions; projected capital expenditures; cash flow requirements; inflation expectations; and legal matters; and are indicated by words such as "will," "expect," "should," "intend," "anticipates," "believes" and similar words or phrases. The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-looking statements. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof.
• Due to the uncertainty arising from the COVID-19 global health crisis and
its significant impact on our business, the Company will not provide same store sales guidance for fiscal 2020.
• We have budgeted
expenditures include the construction of a replacement store inStroudsburg, Pennsylvania , one major remodel, expansion of ShopRite from Home, and various merchandising, technology, equipment and facility upgrades.
• The Board's current intention is to continue to pay quarterly dividends in
2020 at the most recent rate of
share.
• We believe cash and cash equivalents on hand, operating cash flow and the
Company's Credit Facility will be adequate to meet anticipated requirements for working capital, capital expenditures, acquisition of Fairway and debt payments for the foreseeable future. 20
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• We expect our effective income tax rate in fiscal 2020 to be in the range
of 29.5% - 30.5%.
• We expect approximately
2020 related to the four Company sponsored defined benefit pension plans.
The Company expects contributions to its defined benefit pension plans to
be immaterial in fiscal 2020.
Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include:
• The Company operates in and around one of the epicenters of the COVID-19
health crisis with much of our trade area under stay-at-home orders since
remained open to serve our customers and the communities in which we
operate. The continuing impact on our business, including the length and
impact of stay-at-home orders and/or regional quarantines, labor shortages
and employment trends, disruptions to supply chains, including our ability
to obtain products from our suppliers, higher operating costs, the form
and impact of economic stimulus and general overall economic instability,
is uncertain at this time and could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
Furthermore, the impact of the COVID-19 health crisis may exacerbate other
risks and uncertainties included herein and in the Company's Annual Report
on Form 10-K for the year ended
effect on the Company. • The Fairway acquisition involves a number of risks, uncertainties and
challenges, including under-performance relative to our expectations,
additional capital requirements, unforeseen expenses or delays, imprecise
assumptions or our inability to achieve projected cost savings or other
synergies, competitive factors in the marketplace and difficulties
integrating the business, including merging company cultures, cultivating
brand strategy, expansion of food production and conforming the acquired
company's standards, processes, procedures and controls. Many of these potential circumstances are outside of our control and any of them could result in an adverse impact on our results of operations, financial condition and cash flows and the diversion of management time and resources.
• The supermarket business is highly competitive and characterized by narrow
profit margins. Results of operations may be materially adversely impacted
by competitive pricing and promotional programs, industry consolidation
and competitor store openings. Village competes directly with multiple
retail formats both in-store and online, including national, regional and
local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do. • The Company's stores are concentrated inNew Jersey ,New York ,Pennsylvania andMaryland . We are vulnerable to economic downturns in
these states in addition to those that may affect the country as a whole.
Economic conditions such as inflation, deflation, interest rate
fluctuations, movements in energy costs, social programs, minimum wage
legislation, unemployment rates and changing demographics may adversely
affect our sales and profits.
• Village purchases substantially all of its merchandise from Wakefern. In
addition, Wakefern provides the Company with support services in numerous
areas including advertising, liability and property insurance, supplies,
certain equipment purchasing, coupon processing, certain financial
accounting applications, retail technology support, and other store
services. Further, Village receives patronage dividends and other product
incentives from Wakefern and also has demand deposits and notes receivable
due from Wakefern.
Any material change in Wakefern's method of operation or a termination or material modification of Village's relationship with Wakefern could have an adverse impact on the conduct of the Company's business and could involve additional expense for Village. The failure of any Wakefern member to fulfill its obligations to Wakefern or a member's insolvency or withdrawal from Wakefern could result in increased costs to the Company. Additionally, an adverse change in Wakefern's results of operations or solvency could have an adverse effect on Village's results of operations. • Approximately 88% of our employees are covered by collective bargaining
agreements. Any work stoppages could have an adverse impact on our
financial results. If we are unable to control health care and pension
costs provided for in the collective bargaining agreements, we may experience increased operating costs.
• The Company could be adversely affected if consumers lose confidence in
the safety and quality of the food supply chain. The real or perceived
sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations. 21
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• Certain of the multi-employer plans to which we contribute are
underfunded. As a result, we expect that contributions to these plans may
increase. Additionally, the benefit levels and related items will be
issues in the negotiation of our collective bargaining agreements. Under
current law, an employer that withdraws or partially withdraws from a
multi-employer pension plan may incur a withdrawal liability to the plan,
which represents the portion of the plan's underfunding that is allocable
to the withdrawing employer under very complex actuarial and allocation
rules. The failure of a withdrawing employer to fund these obligations can
impact remaining employers. The amount of any increase or decrease in our
required contributions to these multi-employer pension plans will depend
upon the outcome of collective bargaining, actions taken by trustees who
manage the plans, government regulations, withdrawals by other
participating employers and the actual return on assets held in the plans,
among other factors.
• The Company uses a combination of insurance and self-insurance to provide
for potential liability for workers' compensation, automobile and general
liability, property, director and officers' liability, and certain employee health care benefits. Any projection of losses is subject to a high degree of variability. Changes in legal claims, trends and
interpretations, variability in inflation rates, changes in the nature and
method of claims settlement, benefit level changes due to changes in
applicable laws, and insolvency of insurance carriers could all affect our
financial condition, results of operations, or cash flows.
• Our long-lived assets, primarily store property, equipment and fixtures,
are subject to periodic testing for impairment. Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.
• Our effective tax rate may be impacted by the results of tax examinations
and changes in tax laws.
• Wakefern provides all members of the cooperative with information system
support that enables us to effectively manage our business data, customer
transactions, ordering, communications and other business processes. These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human
error. Any material interruption of our or Wakefern's information systems
could have a material adverse impact on our results of operations. Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems. In addition, confidential information is transmitted through our ShopRite from Home online business at shoprite.com and through the ShopRite app. Unauthorized parties may attempt to access information stored in or to sabotage or disrupt these systems. Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions. It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at the Company, Wakefern or those of third-party service providers. Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, cause us to make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties. Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered or are in excess of carried insurance policies. In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation.
RELATED PARTY TRANSACTIONS
See note 5 to the unaudited consolidated financial statements for information on related party transactions.
RECENTLY ISSUED ACCOUNTING STANDARDS
InAugust 2018 , the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The guidance modifies disclosure requirements for defined benefit plans. This guidance is effective for fiscal years ending afterDecember 15, 2020 , and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2018-14 on its consolidated financial statement disclosures. 22
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