VILLAGE SUPER MARKET, INC. OVERVIEW
Village Super Market, Inc. (the "Company" or "Village") operates a chain of twenty-nine ShopRite supermarkets, five Fairway Markets and threeGourmet Garage specialty markets located inNew Jersey ,New York ,Pennsylvania andMaryland . Village is the second largest member ofWakefern Food Corporation ("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite, Fairway andGourmet Garage names. As further described in the Company's Form 10-K, this ownership interest in Wakefern provides Village with many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage. OnMay 14, 2020 , Village completed its acquisition of certain assets, including five supermarkets averaging 52,000 sq. ft. (30,000 selling sq. ft.), 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" for$73,622 , net of cash acquired. 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 .Like Village , Fairway traces its roots back to a neighborhood market over 80 years ago. Fairway Markets offer a one-stop destination shopping experience with an emphasis on fresh, unique, and high quality offerings paired with an expansive variety of natural, organic, specialty and gourmet products. The PDC is a centralized commissary that promotes production efficiency, product quality and consistency in the bakery, prepared foods, meals to go and other perishable product categories. Production costs at the PDC, including materials, labor and overhead, are included in Cost of sales. The Fairway acquisition expands our presence inNew York City under an iconic city brand and provides Village the ability to expand centralized food production to support stores under all of our banners.
On
OnNovember 1, 2019 , Village opened an 82,000 sq. ft. (52,000 selling sq. ft.) ShopRite inStroudsburg, Pennsylvania and replaced our existing 53,000 sq. ft. store. 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. InNovember 2019 , ShopRite launched the Bowl & Basket and Paperbird own brands. Bowl & Basket foods pair thoughtfully selected ingredients at a budget friendly price and Paperbird offers a line of newly designed household products. ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products from their launch inNovember 2019 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 55,000 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 onsite 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.
Online grocery ordering for in-store pick up or home delivery through ShopRite from Home is available in twenty-seven stores. Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through
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shoprite.com or the ShopRite app. Additionally, the ShopRite Order Express app
enables customers to pre-order deli, catering, specialty occasion cakes and
other items. Online ordering for home delivery through third party services is
available in all Fairway and Gourmet Garage stores. In April 2020 we also added
online ordering for home delivery through third party services in all ShopRite
stores.
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 early U.S. epicenters of the health crisis with much of
our trade area under stay-at-home orders from mid-March 2020 through June 2020 .
The Company is classified as an essential business and has remained open to
serve our customers and the communities in which we operate. We continue to
experience significant sales volatility, changes in customer shopping habits,
shifts in product mix and increased demand through digital channels as a result
of the COVID-19 pandemic. Demand remains high in most stores, however sales at
Fairway and Gourmet Garage locations in Manhattan have been negatively impacted
by localized residential population migration out of the city and less commuter
and tourist traffic. We expect continued uncertainty in our business as well as
the local and regional economies in which we operate depending on the duration
and intensity of the COVID-19 pandemic (see the "Outlook" section below for
further discussion of risks and uncertainties).
Safety. Our first priority has and will continue to be the safety of our
associates and our customers. We implemented enhanced sanitation programs,
including hourly cleaning of high touch point areas throughout our stores,
nightly deep cleaning and biweekly disinfectant fogging in every store, reduced
store hours to allow appropriate time for cleaning, limited the number of
customers allowed in each store at a time, reduced service department offerings
including the sale of bulk self-service merchandise and closure of in-store
restaurants and dining areas, instituted a personal protective equipment
program, required temperature checks for associates and installed Plexiglas
shields, floor markers and additional signage in high traffic areas to signify
six-foot distances to encourage proper social distancing.
Associate Support. We paid temporary wage premiums up to $2 per hour above the
standard wage rate for hourly front-line associates and weekly premiums for
salaried front-line associates from late March through mid-August, provided
Emergency Paid Leave to associates affected by COVID-19, supplied meals or meal
coupons to our associates on duty through our Feeding Our Village Heroes
Program, expanded remote work capabilities, limited travel of regional
supervision teams, created a centralized call center and real-time alert text
communication platform.
Responding to the needs of our Customers and Communities. Expanded digital
capabilities, including expansion of stores offering ShopRite from Home,
expanded the ShopRite Order Express app to provide pre-ordering capabilities in
the deli and other areas, contactless pickup, prescription drug pickup and
delivery, launched partnerships with online grocery picking and delivery
services to better support our customers increased demand for these services and
expanded mobile scan to an additional 10 stores. In December 2020 , we began
administering COVID-19 vaccinations at certain of our retail pharmacies in New
Jersey .
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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 26 Weeks Ended
January 23, 2021 January 25, 2020 January 23, 2021 January 25, 2020
Sales 100.00 % 100.00 % 100.00 % 100.00 %
Cost of sales 72.87 73.04 72.38 72.60
Gross profit 27.13 26.96 27.62 27.40
Operating and administrative expense 24.19 24.63 24.76 24.96
Depreciation and amortization 1.68 1.78 1.73 1.80
Operating income 1.26 0.55 1.13 0.64
Interest expense (0.19) (0.13) (0.19) (0.13)
Interest income 0.17 0.24 0.17 0.27
Income before taxes 1.24 0.66 1.11 0.78
Income taxes 0.37 0.20 0.33 0.23
Net income 0.87 % 0.46 % 0.78 % 0.55 %
Sales. Sales were
Sales were
Sales increased in both the 13 and 26 weeks endedJanuary 23, 2021 due to the Fairway acquisition onMay 14, 2020 , the opening of theStroudsburg replacement store onNovember 1, 2019 and a same store sales increase of 6.5%. Same store sales increased due primarily to increased customer demand across most stores due to the impact of the COVID-19 pandemic. We continue to experience higher average basket sizes and decreased transaction counts as customers consolidate shopping trips. Digital sales growth accelerated through both ShopRite from Home and partnerships with online grocery picking and delivery services, increasing 176% and 174% in the 13 and 26 weeks endedJanuary 23, 2021 , respectively, compared to the 13 and 26 weeks endedJanuary 25, 2020 . Demand remains high in most stores, however sales at Fairway andGourmet Garage locations inManhattan during the 13 and 26 weeks endedJanuary 23, 2021 have been significantly negatively impacted due primarily to residential population migration out of the city and less commuter and tourist traffic during the COVID-19 pandemic.
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 .17% in the 13 weeks endedJanuary 23, 2021 compared to the 13 weeks endedJanuary 25, 2020 due primarily to higher margins associated with Fairway despite higher costs as we transition and integrate commissary operations into our business. Excluding the impact of Fairway, gross profit as a percentage of sales decreased .15% due primarily to decreased departmental gross margin percentages (.15%), an unfavorable change in product mix (.05%) and increased warehouse assessment charges from Wakefern (.36%) partially offset by increased patronage dividends and rebates received from Wakefern (.15%) and lower promotional spending (.26%). Gross profit as a percentage of sales increased .22% in the 26 weeks endedJanuary 23, 2021 compared to the 26 weeks endedJanuary 25, 2020 due primarily to higher margins associated with Fairway despite higher costs as we transition and integrate commissary operations into our business. Excluding the impact of Fairway, gross profit as a percentage of sales decreased .30% due primarily to decreased departmental gross margin percentages (.50%), increased warehouse assessment charges from Wakefern (.10%) and an unfavorable change in product mix (.04%) partially offset by lower promotional spending (.31%) and increased patronage dividends and rebates received from Wakefern (.03%).
Departmental gross profits, excluding the impact of Fairway, decreased in the 13
and 26 weeks ended
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ShopRite's Right Price Promise pricing strategy introduced in October 2019 . Both
product mix and departmental gross margin percentages were also impacted by
limitations in service departments and product availability as a result of the
COVID-19 pandemic.
Operating and Administrative Expense. Operating and administrative expense as
a percentage of sales decreased .44% in the 13 weeks ended January 23, 2021
compared to the 13 weeks ended January 25, 2020 . The 13 weeks ended January 25,
2020 includes a non-cash pension charge related to the termination of a
company-sponsored pension plan and other pension settlement charges (.28%) (see
note 4 to the consolidated financial statements), pre-opening costs of the
Stroudsburg, Pennsylvania replacement store (.10%), store closure costs and
charges to write off the variable lease obligations of the old Stroudsburg store
(.12%). Excluding these items, operating and administrative expense as a
percentage of sales increased .06% in the 13 weeks ended January 23, 2021
compared to the 13 weeks ended January 25, 2020 due primarily to increased
occupancy costs as a result of the Fairway acquisition (.63%), increased
external costs associated with digital sales (.45%) and incremental costs
related to COVID-19, including enhanced wages and benefits and expanded safety
and sanitation protocols, (.07%) partially offset by decreased payroll (.61%),
other fringe benefits (.25%), maintenance costs (.12%) and legal and consulting
fees (.07%). Payroll, other fringe benefits and maintenance costs decreased
primarily due to leverage from higher sales and reductions in service department
offerings partially offset by the addition of Fairway and growth of ShopRite
from Home.
Operating and administrative expense as a percentage of sales decreased .20% in
the 26 weeks ended January 23, 2021 compared to the 26 weeks ended January 25,
2020 . The 26 weeks ended January 25, 2020 includes a non-cash pension charge
related to the termination of a company-sponsored pension plan and other pension
settlement charges (.15%) (see note 4 to the consolidated financial statements),
pre-opening costs of the Stroudsburg, Pennsylvania replacement store (.15%),
store closure costs and charges to write off the variable lease obligations of
the old Stroudsburg store (.09%). Excluding these items, operating and
administrative expense as a percentage of sales increased .19% in the 26 weeks
ended January 23, 2021 compared to the 26 weeks ended January 25, 2020 due
primarily to increased occupancy costs due primarily to the Fairway acquisition
(.70%), increased external costs associated with digital sales (.42%) and
incremental costs related to COVID-19, including enhanced wages and benefits and
expanded safety and sanitation protocols, (.15%) partially offset by decreased
payroll (.59%), other fringe benefits (.30%) and maintenance costs (.09%).
Payroll, other fringe benefits and maintenance costs decreased primarily due to
leverage from higher sales and reductions in service department offerings
partially offset by the addition of Fairway and growth of ShopRite from Home.
Depreciation and Amortization. Depreciation and amortization expense increased
in the 13 and 26 weeks ended January 23, 2021 compared to the 13 and 26 weeks
ended January 25, 2020 due primarily to depreciation related to the Fairway
acquisition.
Interest Expense. Interest expense increased in the 13 and 26 weeks ended
Interest Income. Interest income decreased in the 13 and 26 weeks ended
Income Taxes. The effective income tax rate was 29.9% in both the 13 and 26 weeks endedJanuary 23, 2021 , compared to 30.3% and 30.0% in the 13 and 26 weeks endedJanuary 25, 2020 , respectively. Net Income. Net income was$4,555 in the 13 weeks endedJanuary 23, 2021 compared to$2,005 in the 13 weeks endedJanuary 25, 2020 . The 13 weeks endedJanuary 25, 2020 includes a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges of$871 (net of tax), pre-opening costs related to theStroudsburg, Pennsylvania replacement store of$304 (net of tax) and store closure costs and charges to write off the variable lease obligations related to the oldStroudsburg store of$365 (net of tax). Excluding these items, net income increased 28% in the 13 weeks endedJanuary 23, 2021 compared to the prior year. Net income increased due to increased same store sales partially offset by lower sales volumes inManhattan and higher costs as we transition and integrate commissary operations into our business. Net income was$7,916 in the 26 weeks endedJanuary 23, 2021 compared to$4,572 in the 26 weeks endedJanuary 25, 2020 . The 26 weeks endedJanuary 25, 2020 includes a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges of$871 (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 17 -------------------------------------------------------------------------------- and related obligations for the oldStroudsburg store of$557 (net of tax). Excluding these items, net income increased 15% in the 26 weeks endedJanuary 23, 2021 compared to the prior year. Net income increased due to increased same store sales partially offset by lower sales volumes inManhattan and higher costs as we transition and integrate commissary operations into our business. 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 25, 2020 . As ofJanuary 23, 2021 , 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$24,911 in the 26 weeks endedJanuary 23, 2021 compared to$27,761 in the corresponding period of the prior year. The change in cash flows from operating activities in fiscal 2021 was primarily due to changes in working capital partially offset by increased net income. Working capital changes, including Other assets and liabilities, decreased cash flows from operating activities by$939 in fiscal 2021 compared to an increase of$5,456 in fiscal 2020. The change in impact of working capital is due primarily to higher merchandise inventories and a decrease in accounts payable to Wakefern as stock levels and inventory turnover normalized in the first half of fiscal 2021 following the COVID outbreak. During the 26 weeks endedJanuary 23, 2021 , Village used cash to fund capital expenditures of$9,958 , dividends of$6,523 , principal payment of long-term debt of$4,091 and additional investments of$1,141 in notes receivable from Wakefern. Capital expenditures primarily include costs associated with the integration of Fairway stores, completion of one major remodel, continued expansion of self checkout and equipment purchases. Village has revised its budgeted capital expenditures lower than previously estimated to$25,000 in fiscal 2021 due primarily to shifts in timing of planned store remodels. Planned expenditures include several smaller store remodels, continued expansion of ShopRite from Home and self-checkout, and various merchandising, technology, equipment and facility upgrades. The Company's primary sources of liquidity in fiscal 2021 are expected to be cash and cash equivalents on hand atJanuary 23, 2021 and operating cash flow generated in fiscal 2021. AtJanuary 23, 2021 , the Company held variable rate notes receivable due from Wakefern of$26,726 that earn interest at the prime rate plus 1.25% and mature onAugust 15, 2022 and$27,423 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
Credit Facility
OnMay 6, 2020 , Village entered into a credit agreement (the "Credit Facility") withWells Fargo National Bank , National Association ("Wells Fargo") that supersedes in its entirety the prior credit agreement with Wells Fargo datedNovember 9, 2017 . The principal purpose of the Credit Facility is to finance general corporate and working capital 18 -------------------------------------------------------------------------------- requirements and Village's acquisition of certain Fairway assets. Among other things, the Credit Facility provides for a maximum loan amount of$150,500 as further set forth below: •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$25,500 . OnMay 12, 2020 , Village executed a$25,500 term note, repayable in equal monthly installments based on a seven-year amortization schedule throughMay 4, 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 throughMay 4, 2027 , resulting in a fixed effective interest rate of 1.76% on the term note. •OnSeptember 1, 2020 , Village converted$50,000 of its revolving line of credit to a secured converted term loan. The conversion reduced the maximum amount available for borrowing under the revolving line of credit from$125,000 to$75,000 . The term loan bears interest at the applicable LIBOR rate plus 1.50% and is repayable in equal monthly installments based on a fifteen-year amortization schedule beginning on the conversion date. Additionally, Village previously executed a forward interest rate swap, effective on the conversion date, for a notional amount equal to the term loan amount that fixes the base LIBOR rate at .69% per annum for 15 years, resulting in a fixed effective interest rate of 2.19% on the converted term loan. The term loan is secured by real properties ofVillage Super Market, Inc. and its subsidiaries, including the sites of three Village stores. The Credit Facility also provides for up to$25,000 of letters of credit ($7,336 outstanding atJanuary 23, 2021 ), which secure obligations for store leases and construction performance guarantees to municipalities. The Credit Facility 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. The Company was in compliance with all covenants of the credit agreement atJanuary 23, 2021 . There have been no other substantial changes as ofJanuary 23, 2021 to the contractual obligations and commitments discussed in the Company's Annual Report on Form 10-K for the year endedJuly 25, 2020 .
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. •We estimate that same store sales trends will be flat to slightly down in fiscal 2021 with positive trends in the first half of the year being offset by negative trends in the second half of the year as we recycle the impact of the COVID-19 health crisis. •Excluding the impact of acquired stores, we expect decreased gross profit margins due to continued investments in retail pricing through the Right Price Promise commitment to everyday low pricing on the items customers purchase most frequently that was introduced inOctober 2019 . •We revised our budgeted capital expenditures lower than previously estimated to$25,000 in fiscal 2021 due primarily to shifts in timing of planned store remodels. Planned expenditures include several smaller store remodels, continued expansion of ShopRite from Home and self-checkout, and various merchandising, technology, equipment and facility upgrades. •The Board's current intention is to continue to pay quarterly dividends in 2021 at the most recent rate of$.25 per Class A and$.1625 per Class B share. 19 -------------------------------------------------------------------------------- •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 and debt payments for the foreseeable future. •We expect our effective income tax rate in fiscal 2021 to be in the range of 30.0% - 31.0%. •We expect approximately$1,400 of net periodic pension costs in fiscal 2021 related to the three Company sponsored defined benefit pension plans. The Company expects contributions to its defined benefit pension plans to be immaterial in fiscal 2021.
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 frommid-March 2020 throughJune 2020 . The Company is classified as an essential business and has 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, 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, which could have a material 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 technology, standards, processes, procedures and controls. Sales and operating profits have underperformed compared to initial expectations due primarily to residential population migration out ofManhattan and less commuter and tourist traffic during the COVID-19 pandemic. 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, disturbances due to social unrest 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. 20 -------------------------------------------------------------------------------- •Approximately 90% 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. •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 goodwill and indefinite-lived intangible assets are tested at the end of each fiscal year, or more frequently if circumstances dictate, for impairment. Failure of acquired businesses to achieve their forecasted expectations could result in impairment charges to goodwill and indefinite-lived intangible 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. 21 -------------------------------------------------------------------------------- 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. 22 --------------------------------------------------------------------------------
RELATED PARTY TRANSACTIONS
See note 5 to the unaudited consolidated financial statements for information on related party transactions.
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