INGLES MARKETS, INCORPORATED Overview
Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets
in
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Coronavirus (COVID-19) Pandemic Impact
The COVID-19 pandemic which began in March 2020 and has continued through the
three months ended December 24, 2022 , has impacted supermarket operations. At
the onset of the COVID-19 pandemic, the Company implemented several enhanced
cleaning and social distancing protocols designed to keep our customers and our
associates safe and has continued to monitor and update its protocols as the
pandemic has evolved. Since March 2020 , the Company's stores have experienced
increased customer traffic and occasional product shortages due to supply chain
issues. 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. Finally, as the economy recovers,
inflation has reached levels not seen in decades. Inflation impacts product
costs, labor costs and other goods used by the Company.
At the present time, we do not know how long and to what extent the ongoing
effects of the pandemic and inflation could impact our sales and financial
performance.
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.
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
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
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reduction of advertising expense totaled $2.0 million and $2.1 million for the
fiscal quarters ended December 24, 2022 and December 25, 2021 , respectively.
Overall, vendor allowances decreased significantly at the onset of the COVID-19
pandemic as vendors reduced support for promotional activities. Vendor
promotional support subsequently increased, but has not reached pre-pandemic
levels.
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
Three Months Ended
December 24, December 25,
2022 2021
Net sales 100.0 % 100.0 %
Gross profit 24.9 % 25.2 %
Operating and administrative expenses 18.5 % 18.7 %
Income from operations 6.4 % 6.5 %
Other income, net 0.1 % 0.1 %
Interest expense 0.4 % 0.4 %
Income tax expense 1.5 % 1.4 %
Net income 4.6 % 4.8 %
Three Months Ended
Net income for the first quarter of fiscal 2023 totaled$69.4 million , compared with net income of$66.2 million for the first quarter of fiscal 2022. Retail grocery sales increased due to continued consumer trends seen since the beginning of the COVID-19 pandemic, as well as the effects of inflation. Corresponding operating expenses did not increase as much as sales, resulting in higher pre-tax income.Net Sales . Net sales increased by$101.8 million , or 7.3%, to$1.5 billion for the three months endedDecember 24, 2022 compared with$1.4 billion for the three months endedDecember 25, 2021 . Excluding fuel sales, total grocery comparable store sales increased 7.3% over the comparative fiscal quarter. Ingles operated 198 stores at bothDecember 24, 2022 andDecember 25, 2021 . Inflation in the prices of food and fuel has also positively impacted the dollar amount of sales. Changes in retail grocery sales for the quarter endedDecember 24, 2022 are summarized as follows (in thousands):
Total retail sales for the three months ended
86,427
Impact of stores opened in fiscal 2021 354
Impact of stores closed in fiscal 2021 (330)
Other 162
Total retail sales for the three months ended
Gross Profit. Gross profit for the three-month period ended
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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 (decrease)
(decrease) as a % of
in millions sales
Salaries and wages $ 13.0 0.87 %
Insurance $ (2.9) (0.19) %
Repairs and maintenance $ 2.7 0.18 %
Store supplies $ 1.8 0.12 %
Bank charges $ 1.3 0.09 %
Salaries and wages increased in dollars due to increased competition in the
labor market in the Company's market area.
Insurance expense decreased due to lower claims under the Company's
self-insurance programs.
Repairs and maintenance increased due to wear and tear of equipment due to
increased sales volume, increased costs of parts and refrigeration.
Store supplies, which include customer packaging containers, increased as a
result of increased sales and market costs of certain supplies and supply chain
issues for certain raw materials.
Bank charges increased due to increased sales and a greater portion of sales
settled with credit/debit cards instead of cash or check.
Other Income. Other income totaled $1.4 million for the three months ended
December 24, 2022 compared with $1.6 million for the three months ended December
25, 2021 .
Interest Expense. Interest expense totaled $5.3 million for the three-month
period ended December 24, 2022 compared with $5.4 million for the three-month
period ended December 25, 2021 . Total debt at December 24, 2022 was $564.5
million compared with $586.1 million at December 25, 2021 .
Income Taxes. Income tax expense totaled $22.5 million for the three months
ended December 24, 2022 , reflecting an effective tax rate of 24.5% of pretax
income. Income tax expense totaled $20.4 million for the three months ended
December 25, 2021 , reflecting an effective tax rate of 23.6% of pretax income.
Net Income. Net income totaled $69.4 million for the three-month period ended
December 24, 2022 compared with $66.2 million for the three-month period ended
December 25, 2021 . Basic and diluted earnings per share for Class A Common Stock
were $3.73 and $3.65 , respectively, for the December 2022 quarter, compared to
$3.57 and $3.48 , respectively, for the December 2021 quarter. Basic and diluted
earnings per share for Class B Common Stock were each $3.40 for the December
2022 quarter compared with $3.24 for the December 2021 quarter.
Liquidity and Capital Resources
Capital Expenditures
Capital expenditures totaled
The Company's capital expenditure plans for fiscal 2023 currently include
investments of approximately
The Company currently expects that its annual capital expenditures will be in
the range of approximately
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affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and major remodel/expansions. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.
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.
Liquidity
The Company generated
Cash used by financing activities totaled$10.7 million for the three-month period endedDecember 24, 2022 , compared with$6.5 million for the three-month period endedDecember 25, 2021 . During the quarter endedDecember 24, 2022 , the Company repaid$4.2 million of mortgage debt. InJune 2021 , the Company issued$350.0 million aggregate principal amount of senior notes due 2031 (the "Notes"). The Notes bear an interest rate of 4.00% per annum and were issued at par. The Company has a$150.0 million line of credit (the "Line") that matures inJune 2026 . The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to$10.0 million in letters of credit, of which none were issued atDecember 24, 2022 . The Company is not required to maintain compensating balances in connection with the Line. AtDecember 24, 2022 , the Company had no borrowings outstanding under the Line. InDecember 2010 , the Company completed the funding of$99.7 million of Bonds (the "Bonds") for the construction of new warehouse and distribution space adjacent to its existing space inBuncombe County, North Carolina (the "Project"). The final maturity date of the Bonds isJanuary 1, 2036 . 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 untilDecember 17, 2029 , subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of$4.5 million began onJanuary 1, 2014 . The outstanding balance of the Bonds is$59.0 million as ofDecember 24, 2022 . The Company may redeem the Bonds without penalty or premium at any time prior toDecember 17, 2029 . The Covenant Agreement was amended during the three months endedDecember 25, 2021 to extend the holding period fromSeptember 2026 toDecember 2029 and reduce the interest rate on the Bonds. InSeptember 2017 , the Company refinanced approximately$60 million secured borrowing obligations with a LIBOR-based amortizing floating rate loan secured by real estate maturing inOctober 2027 . The Company has an interest rate swap agreement for a current notional amount of$29.0 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap 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$0.5 million and matureOctober 1, 2027 . InDecember 2019 , the Company closed a$155 million LIBOR-based amortizing floating rate loan secured by real estate maturing inJanuary 2030 . The Company has an interest rate swap agreement for a current notional amount of$130.5 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of$0.65 million and mature in fiscal year 2030. 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 ofDecember 24, 2022 , the Company was in compliance with these 16
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covenants. Under the most restrictive of these covenants, the Company would have
been permitted to incur approximately
It is possible that, in the future, the Company's results of operations and financial condition will be different from that described in this Quarterly Report on Form 10-Q 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 ongoing 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 Quarterly Report on Form 10-Q. 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 both holiday
related sales and 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
Impact of Inflation As the economy continues to recover 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 disruptions.
The following table from the
Twelve Months Ended
December 2022
All items 6.5 %
Food at home 11.8 %
Energy 8.3 %
Forward Looking Statements
This Quarterly Report on Form 10-Q 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
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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 fuel 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 Quarterly Report on Form 10-Q or contemplated or implied by statements in this Quarterly Report on Form 10-Q. 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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