INGLES MARKETS, INCORPORATED Overview
Ingles, a leading supermarket chain in the Southeast, operates 198 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.
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
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year. Self-insurance liabilities are established based on claims filed and
estimates of claims incurred but not reported. The estimates are based on data
provided by the respective claims administrators. These estimates can fluctuate
if historical trends are not predictive of the future. The majority of the
Company's properties are self-insured for casualty losses and business
interruption; however, liability coverage is maintained. At
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 six-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 practicable, 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. There are 13 and 26 weeks of operations included in the Unaudited
Condensed Consolidated Statements of Income for the three- and six-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 Six Months Ended
March 27, March 28, March 27, March 28,
2021 2020 2021 2020
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross profit 26.2 % 25.4 % 26.3 % 24.7 %
Operating and administrative expenses 20.0 % 19.9 % 20.0 % 20.3 %
Gain from sale or disposal of assets 0.1 % - % - % 0.1 %
Income from operations 6.3 % 5.5 % 6.3 % 4.6 %
Other income, net 0.1 % - % 0.1 % - %
Interest expense 0.5 % 0.9 % 0.5 % 1.0 %
Loss on early extinguishment of debt - % - % - % 0.2 %
Income tax expense 1.4 % 1.1 % 1.4 % 0.8 %
Net income 4.5 % 3.5 % 4.5 % 2.6 %
Three Months Ended
Net income for the second quarter of fiscal 2021 totaled
Ingles operated 198 stores at
Sales by product category (in thousands) are as follows:
Three Months Ended
March 27, March 28,
2021 2020
Grocery $ 427,219 $ 424,664
Non-foods 268,799 260,914
Perishables 320,493 304,105
Gasoline 130,679 121,932
Total retail grocery
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.
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Changes in retail grocery sales for the quarter ended
Total retail sales for the three months ended
33,299
Impact of stores opened in fiscal 2021 2,687
Impact of stores closed in fiscal 2020 (668)
Other 257
Total retail sales for the three months ended
Gross Profit. Gross profit for the three-month period 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
Repairs and maintenance $ 2.1 0.18 %
Bank charges $ 1.9 0.16 %
Depreciation and amortization $ 1.3 0.11 %
Salaries and wages $ 1.3 0.11 %
Repairs and maintenance expense increased due to higher sales and enhanced cleaning protocols as a result of the COVID-19 pandemic.
Bank charges increased as a result of increased sales and higher card usage compared with cash or checks.
Depreciation expense increased due to equipment purchased for store improvements and the distribution network.
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.
Gain 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
Six Months Ended
Net income for the first half of fiscal 2021 totaled
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restaurants beginning in
Sales by product category (in thousands) are as follows:
Six Months Ended
March 27, March 28,
2021 2020
Grocery $ 869,339 $ 802,993
Non-foods 548,487 506,945
Perishables 641,756 584,910
Gasoline 241,148 261,044
Total retail grocery $ 2,300,730 $ 2,155,892 Changes in retail grocery sales for the quarter ended
Total retail sales for the six months ended
142,928
Impact of stores opened in fiscal 2021 2,687
Impact of stores closed in fiscal 2020 (1,162)
Other 385
Total retail sales for the six months ended
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.
Gross Profit. Gross profit for the six-month period 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 $ 11.0 0.46 %
Depreciation and amortization $ 3.4 0.14 %
Repairs and maintenance $ 3.1 0.13 %
Bank charges $ 2.7 0.11 %
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.
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Bank charges increased as a result of increased sales and higher card usage compared with cash or checks.
Gain from Sale or Disposal of Assets. Gain from the sale or disposal of assets
totaled
Interest Expense. Interest expense totaled
Loss on Early Extinguishment of Debt. In
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
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
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Cash used by investing activities for the six-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
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,
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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.
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
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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