Overview
Ingles, a leading supermarket chain in the Southeast, operates 197 supermarkets
in
Critical Accounting Policies
Critical accounting policies are those accounting policies that management believes are important to the presentation of the Company's financial condition and results of operations, and require management's most difficult, subjective or complex judgments, often as a result of the need to 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.
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Self-Insurance
The Company is self-insured for workers' compensation and group medical and
dental benefits. Risks and uncertainties are associated with self-insurance;
however, the Company has limited its exposure by maintaining excess liability
coverage of
Asset Impairments
The Company accounts for the impairment of long-lived assets in accordance with
FASB ASC Topic 360. For assets to be held and used, the Company tests for
impairment using undiscounted cash flows and calculates the amount of impairment
using discounted cash flows. For assets held for sale, impairment is recognized
based on the excess of remaining book value over expected recovery value. The
recovery value is the fair value as determined by independent quotes or expected
sales prices developed by internal associates. Estimates of future cash flows
and expected sales prices are judgments based upon the Company's experience and
knowledge of local operations and cash flows that are projected for several
years into the future. These estimates can fluctuate significantly due to
changes in real estate market conditions, the economic environment, capital
spending decisions and inflation. The Company monitors the carrying value of
long-lived assets for potential impairment each quarter based on whether any
indicators of impairment have occurred. There were no asset impairments during
the three-month period ended
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 a 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 component of item cost in
inventory and recognized in merchandise costs when the item is sold. Due to the
use of the retail method of 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
If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company's product advertising, which could increase or decrease the Company's expenditures.
Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue for the Company's stores.
Results of Operations
Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in
September. The Condensed Consolidated Statements of Income for the three-month
periods ended
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The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note I "Segment Information" to the Condensed Consolidated Financial Statements.
Three Months Ended December 26, December 28, 2020 2019 Net sales 100.0 % 100.0 % Gross profit 26.4 % 23.9 % Operating and administrative expenses 20.0 % 20.6 % Gain from sale or disposal of assets - % 0.2 % Income from operations 6.4 % 3.5 % Other income, net - % - % Interest expense 0.5 % 1.1 % Loss on early extinguishment of debt - % 0.3 % Income tax expense 1.4 % 0.5 % Net income 4.5 % 1.6 %
Three Months Ended
Net income for the first quarter of fiscal 2021 totaled
Ingles operated 197 stores at
Sales by product category (in thousands) are as follows:
Three Months Ended December 26, December 28, 2020 2019 Grocery$ 442,121 $ 378,329 Non-foods 279,688 246,030 Perishables 321,263 280,805 Gasoline 110,469 139,112 Total retail grocery$ 1,153,541 $ 1,044,276
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 quarter ended
Total retail sales for the three months ended
109,629 Impact of stores closed in fiscal 2020 (494) Other 130
Total retail sales for the three months ended
Gross Profit. Gross profit for the three-month period ended
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There was less discounting and shrink during the current year quarter, and the
gasoline gross margin was higher, as compared with the quarter ended
Operating and Administrative Expenses. Operating and administrative expenses
increased
A breakdown of the major changes in operating and administrative expenses is as follows: Increase Increase as a % of in millions sales Salaries and wages $ 9.7 0.82 % Depreciation and amortization $ 2.0 0.17 % Repairs and maintenance $ 1.0 0.08 % Insurance $ 0.9 0.07 %
Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume, including extra labor needed in response to the COVID-19 pandemic.
Depreciation expense increased due to equipment purchased for store improvements and the distribution network.
Repairs and maintenance expense increased due to extra sales and enhanced cleaning protocols as a result of the COVID-19 pandemic.
Insurance expense increased due to increased claims under the Company's self-insurance programs.
Gain (loss) from Sale or Disposal of Assets. Gain from the sale or disposal of
assets totaled
Interest Expense. Interest expense totaled
Income Taxes. Income tax expense totaled
Net Income. Net income totaled
Liquidity and Capital Resources
Capital Expenditures
The Company believes that a key to its ability to continue to develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and an increasingly diverse selection of competitively priced products. Therefore, the Company has invested and plans to continue to invest significant amounts of capital toward the modernization of its store base. The Company's modernization program includes the opening of new stores, the completion of major remodels and expansion of selected existing stores, the relocation of selected existing stores to larger, more convenient locations and the completion of minor remodeling of its remaining existing stores.
Capital expenditures totaled
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Ingles' capital expenditure plans for fiscal 2021 currently include investments
of approximately
The Company currently expects that its annual capital expenditures will be in
the range of approximately
The Company does not generally enter into commitments for capital expenditures
other than on a store-by-store basis at the time it begins construction on a new
store or begins a major or minor remodeling project. Outstanding construction
commitments totaled
Liquidity
The Company generated
Cash used by investing activities for the three-month periods ended
Cash used by financing activities totaled
In
In
In
The Company has a
In
Under a Continuing Covenant and Collateral Agency Agreement (the "Covenant
Agreement") between certain financial institutions and the Company, the
financial institutions would hold the Bonds until
The Company has an interest rate swap agreement for a current notional amount of
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effectively hedges floating rate debt in the same amount as the current notional
amount of the interest rate swap. Both the floating rate debt and the interest
rate swap have monthly principal amortization of
The Company has an interest rate swap agreement for a current notional amount of
The fair market value of the interest rate swaps are measured quarterly with adjustments recorded in other comprehensive income.
The Company's long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company's Line, Bonds and Notes indenture in the event of default under any one instrument.
The Company's long-term debt agreements generally contain provisions that under
certain circumstances would permit lending institutions to terminate or withdraw
their respective extensions of credit to the Company. Included among the
triggering factors permitting the termination or withdrawal of the Line to the
Company are certain events of default, including both monetary and non-monetary
defaults, the initiation of bankruptcy or insolvency proceedings, and the
failure of the Company to meet certain financial covenants designated in its
respective loan documents. As of
The Company's principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing. The Company believes, based on its current results of operations and financial condition, that its financial resources, including the Line, short- and long-term financing expected to be available to it and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there is no assurance that any such sources of financing will be available to the Company when needed on acceptable terms, or at all.
It is possible that, in the future, the Company's results of operations and financial condition will be different from that described in this report based on a number of factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, changing demographics, and the impact of the COVID-19 pandemic, as well as the additional factors discussed below under "Forward Looking Statements." It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this report.
Contractual Obligations and Commercial Commitments
There have been no other material changes in contractual obligations and
commercial commitments subsequent to
Off Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company's financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources.
Quarterly Cash Dividends
Since
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 and 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. In addition, the Notes, the Bonds, the Line, and other debt agreements contain provisions that, based on certain financial parameters, restrict the ability of the Company to pay additional cash dividends in excess of current quarterly per share amounts. Further, the Company is prevented from declaring dividends at any time that it is in default under the indenture governing the Notes.
Seasonality
Grocery sales 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
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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 quarter, sales are affected by the return of customers to seasonal homes in our market area. The Company's fluid dairy operations have slight seasonal variation to the extent of its sales into the grocery industry. The Company's real estate activities are not subject to seasonal variations.
Impact of Inflation
There have been no other material changes in the impact of inflation subsequent
to
Forward Looking Statements
This Quarterly Report contains certain forward-looking statements within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. 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 which 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 the potential continued impact of the
COVID-19 pandemic on our business and economic conditions generally in the
Company's operating area; the Company's ability to successfully implement its
expansion and operating strategies and to manage rapid expansion; pricing
pressures and other competitive factors; reduction in per gallon retail gasoline
prices; the maturation of new and expanded stores; the Company's ability to
reduce costs and achieve improvements in operating results; the availability and
terms of financing; increases in labor and utility costs; 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 policies, standards, guidelines or
principles as may be adopted by regulatory agencies as well as the
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 report or contemplated or implied by statements in this report. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except to the extent required by applicable law.
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