Earnings Transcript for IMKTA - Q1 Fiscal Year 2015

Executives: Ron Freeman - CFO Robert Ingle II - CEO Jim Lanning - President Tom Outlaw - VP, Sales & Marketing

Analysts: Damian Witkowski - Gabelli & Company Keith Cooke - Wells Fargo Ken Goldman - JPMorgan

Operator: Good day, everyone, and welcome to the Ingles Markets First Quarter 2015 Earnings Release Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to the Chief Financial Officer, Ron Freeman. Please go ahead, sir.

Ron Freeman: Thank you. Good morning, everyone, and welcome to the Ingles Markets fiscal 2015 first quarter conference call. With me today are Robert Ingle II, Chief Executive Officer; Jim Lanning, President; and Tom Outlaw, Vice President of Sales and Marketing. Statements made on this call include forward-looking statements as defined by and subject to the Safe Harbors created by federal securities laws. Words such as expect, anticipate, intend, plan, believe and similar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed on this call. Ingles Markets Incorporated does not undertake to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. For a description of factors that could cause actual results to differ materially from that anticipated by forward-looking statements, you are referred to the company's public filings, including the Form 10-K for the fiscal year ended September 27, 2014. In accordance with a longstanding company policy, and in recognition of the extremely competitive nature of our industry, this call will not address individual competitors or Ingles' marketing strategies other than what is included in the company's public filings. This morning, I'll provide you with a summary of our first quarter results followed by additional comments. After that, we will be pleased to take your questions. Our press release issued this morning is available on our website at www.ingles-markets.com. We filed our 10-Q for the quarter yesterday after the market closed and it is available via our website as well. Net income totaled $15.0 million for the December 2014 quarter compared with net income of $9.5 million for the quarter ended in December 2013. Non-gasoline grocery sales increased and gross margin improved. We believe Ingles also benefited from a boost to customer spending driven by lower gasoline prices. Net sales totaled $964.5 million for the quarter ended December 27, 2014, compared with $945.1 million for the quarter ended December 28, 2013. That represents a 2.1% increase in total consolidated sales. For the comparable December 2014 and 2013 quarters, and excluding gasoline sales, grocery segment comparable store sales increased 2.3%. Excluding gasoline, the average transaction amount increased 3.1%, and the number of customer transactions decreased slightly. Retail gasoline gallons sold increased but dollar sales decreased due to significantly lower per gallon gas prices. Gross profit for the December 2014 quarter totaled $224.4 million, an increase of $20.9 million or 10.3% compared with the December 2013 quarter. Gross profit as a percentage of sales was 23.3% for the current quarter compared with 21.5% for the same quarter of last fiscal year. The gross profit increase is attributable to higher gasoline gross profits and other grocery segment margin improvements during the current fiscal quarter. Excluding gasoline sales, grocery segment gross profit as a percentage of sales increased 58 basis points in the December 2014 quarter compared with the same December 2013 quarter. Total operating expenses were $187.0 million for the current quarter compared with $177.4 million for the comparable quarter last year. The dollar growth in operating expenses was comprised primarily of increased in pay-roll, insurance, and deprecation. Excluding gasoline sales, and associated operating expenses, our operating and administrative expenses as a percentage of sales were 22.8% and 21.9% for the three-months ended December 27, 2014, and December 28, 2013, respectively. Interest expense increased only $0.2 million for the three-months period ended December 27, 2014, to $11.8 million. The increase is attributable to higher debt levels which totaled $970.4 million at the end of December 2014, and $925.1 million at the end of December 2013. The company currently has lines of credit totaling $175 million, with $65 million borrowed, and $11.5 million of unused letters of credit issued at December 27, 2014. Income tax expense as a percentage of pre-tax income was 42.3% and 37.5% for the December 2014 and 2013 quarters respectively. The higher effective tax rate for the December 2014 quarter is attributable to certain discrete items which are not expected to recur in future periods. Net income for the December 2014 quarter, totaled $15.0 million compared with net income of $9.5 million for the December 2013 quarter. Basic and diluted earnings per share for the company's publically traded Class A common stock were $0.77 and $0.74 per share respectively for the December 2014 quarter compared with $0.44 and $0.42 per share respectively for the December 2013 quarter. Capital expenditures totaled $27.6 million for the first quarter of fiscal year 2015. Most of these capital expenditures were related to remodeling projects in a number of the company stores and new store construction. The company's capital expenditure plans for fiscal 2015 include investments of approximately $100 million to $140 million. To summarize, we're off to a great start in the current fiscal year by putting the customer first and keeping them in front of mind over the long-term. We will now take your question.

Operator: Thank you. [Operator Instructions]. And we'll go first to Damian Witkowski with Gabelli & Company.

Damian Witkowski: Just looking at the same store sales which were strong up 2.3%, but driven by transaction by the basket size not transactions is there anything which you read into it, why would traffic go down? Do you think is it people just coming in less often and buying more?

Ron Freeman: It wasn't much of a change in the transaction count at all. I think the biggest impact is again with lower gas prices the consumer just had a lot more money in his pocket, he is coming in, he is buying more, and he is buying better.

Damian Witkowski: Okay. Do you think, I mean which categories inside the store actually benefit with the lower gas prices do you think, I mean are people spending more on certain items?

Ron Freeman: It's across our product line. We're very happy with that.

Damian Witkowski: Okay. And there was no weather compares, I mean last year just the first quarter about the same weather as this year in your area? The weather impact, like you know --

Ron Freeman: Yes, I'm sorry. A little less weather for the December quarter this year and unlike the Northeast we wouldn't mind a little bit of weather right now for the current quarter.

Damian Witkowski: Okay. And then gross margins which were very strong and -- its good to hear that you're actually earning a lot more on the gallons you sell, and I guess the industry is having a record quarter on that as well. But if I look at just groceries, the 58 basis point improvement, what's driving them mostly, is it that just people are buying more perishable items which have a higher gross margin or is it something else?

Ron Freeman: There is a lot of nice change in product mix going on for some of those higher margin products and that certainly add a benefit.

Damian Witkowski: Okay.

Ron Freeman: Private label helped out as well.

Damian Witkowski: Okay. And then I know I've asked this before but I forget the answer, you do reuse some of your real estate to -- for some of the debt shares outstanding is it collateral, but I forget if you need to a) can you remind me how that really works and b) do you need to have your real estate appraised for the banks that lend you money?

Ron Freeman: We still do have a couple of pieces of debt out there that are secured by real estate by specific properties and appraisals of both properties would have been done when those loans were originated, but we haven't had any real estate originations in probably two or three years now. Outside of that there is no need for us to have all of our other real estate appraised on a current basis so we don't have it.

Damian Witkowski: All right. Thanks Ron.

Operator: And we'll take our next question from Bryan Hunt with Wells Fargo.

Keith Cooke: Hi, it's actually Keith Cooke on for Bryan. Couple of quick questions. Do you have your same side gallons performance for the quarter?

Ron Freeman: We typically don't talk about that for same sides. But needless to say, our gallons were up. We did have a couple of more stations this quarter than we had at the same quarter last year.

Keith Cooke: Okay. And on the grocery side of things, do you think you saw any sort of benefit from the lapping of the reduction in SNAP benefits from late 2013 in this quarter?

Ron Freeman: That didn't have very much effect on us last year or this year.

Keith Cooke: Okay. Thanks, that's all I had.

Operator: [Operator Instructions]. We'll go next to Ken Goldman with JPMorgan.

Ken Goldman: Hi, thank you. I'm just curious any color you can give qualitatively or quantitatively on the impact of cheaper crude on your margins right, and obviously retail prices are sticky than wholesale. Can you just give us a sense of how much that benefited you in the quarter it would be helpful?

Ron Freeman: Well, we can't precisely quantify but as we've said before lower gas prices had just put a lot more money in the consumer's pocket for spending on whatever they want to spend on and unfortunately some of that's come our way. Decreasing gas prices, I think as Damian noted earlier, has benefited anyone who sells gasoline and we're not unique in that regard.

Ken Goldman: And is it something you'd expect to continue into next quarter as well?

Ron Freeman: Who knows?

Ken Goldman: All right. Thank you.

Operator: [Operator Instructions]. And gentlemen it appears we have no further questions at this time. I'll turn the call back over to you.

Ron Freeman: Great, well thank you, Diana. Thank you everyone who has called in today and has listened to this call. And we look forward to speaking with you again in the near future. Have a great day.

Operator: Thank you. And that does conclude today's conference. Thank you for your participation.