Earnings Transcript for IMKTA - Q1 Fiscal Year 2016

Executives: Ron Freeman - Chief Financial Officer

Analysts: Damian Witkowski - Gabelli & Company Bryan Hunt - Wells Fargo Securities, LLC

Operator: Good day, and welcome to this Ingles Markets First Quarter 2016 Earnings Release Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to the Chief Financial Officer, Mr. Ronald Freeman. Please go ahead, sir.

Ron Freeman: Good morning. Welcome to the Ingles Markets fiscal 2016 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 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 26, 2015. In accordance with a long-standing 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 late last week and it is available on our website as well. Total sales were $951.1 million for the quarter ended December 26, 2015, compared with $964.5 million for the quarter ended December 27, 2014, a decrease of $13.4 million. Gasoline gallons sold increased, but gasoline dollar sales were $29.4 million lower comparing the December 2015 quarter with the December 2014 quarter. Net income totaled $13 million for the December 2015 quarter, compared with net income of $15 million for the quarter ended December 2014. Lower gasoline gross profit and higher personnel-related costs were the predominant reasons for the lower net income in the current quarter. For the comparable December 2015 and 2014 quarters, and excluding gasoline sales, comparable store sales increased 2.3% and the number of transactions increased and the average transaction size increased by 1.7%. These were all positive measures for growth in our grocery business. Gross profit for the December 2015 quarter rose to $225.6 million, or 23.7% of sales, compared with December 2014 quarterly gross profit of $224.4 million, which was 23.3% of sales. Grocery gross margins, excluding gasoline, were substantially the same for both the December 2015 and 2014 quarters. Our total operating expenses were $194.1 million for the current quarter, compared with $187.0 million for the comparable quarter last year. The dollar growth in operating expenses was comprised primarily of increases in personnel and insurance. We also experienced higher maintenance and promotional costs. Interest expense totaled $12 million for both the December 2015 and 2014 quarters. Total debt decreased $35.5 million over the 12 months ended December 2015 and totaled $924.8 million at period end. The company currently has lines of credit totaling $175 million, with $124 million available after accounting for outstanding borrowings and letter of credit commitments. Basic and diluted earnings per share for the company’s publicly traded Class A Common Stock were $0.66 and $0.64 per share, respectively, for the December 2015 quarter, compared with $0.77 and $0.74 per share, respectively, for the December 2014 quarter. Capital expenditures totaled $40.6 million for the first quarter of fiscal year 2016, compared with $27.6 million for the first quarter of the prior fiscal year. The increase is primarily attributable to sites purchased for future store development. The company’s capital expenditure plans for fiscal 2016 include investments of approximately $100 million and $140 million. To summarize, we’re pleased with the continued growth in our grocery sales and will continue to provide value to our customers both inside the store and at our fuel locations. We will now take your questions.

Operator: [Operator Instructions] Our first question comes from Damian Witkowski with Gabelli & Company.

Damian Witkowski: Your last comment on capital expenditures and the increase being primarily new sites purchased for future development, just out of curiosity, how many sites and how long before they are developed?

Ron Freeman: It was two sites and we’re still working on the timeframe on how they fit in with our other projects that we’ve got going on. But they are going to be really good sites for us.

Damian Witkowski: I mean, it’s reasonable to think they will be done within the next two fiscal years or...?

Ron Freeman: That’s a good medium guess, yes.

Damian Witkowski: And then what was your grocery gross margin? I know you said it was flat year-over-year, but what was the actual gross margin?

Ron Freeman: Damian, give me just a moment, let me see if I can dig that out of the Q. I’m not sure we gave the actual number.

Damian Witkowski: Yes, you did in your Q. So do you have it?

Ron Freeman: I’m sorry.

Damian Witkowski: We can do that offline. And then on gasoline, I know that gross margin was lower year-over-year and we would have expected that considering what crude was doing last year versus this year, but was there anything unusual in that number in terms of was it lower, the actual gross margin per gallon, was it lower than you would have expected because of competition?

Ron Freeman: I think it was more, last year’s first quarter was unusually high. I mean, our gallons grew, that’s an important thing for us and we’re happy with the margins we got, it was just the first quarter of last year was exceptionally high.

Damian Witkowski: And then lastly on expenses, and again I know a lot of it is just you’re doing more work, more labor hours because of additional work you’re doing with prepared foods and such and it seems to be paying off because those sales are rising. But we had that increase every quarter of last year and so I’m just trying to think about does that continue the trend, for example, in the first quarter of – two years ago, the operating expenses, excluding D&A were $153 million. They went up to $161 million last year and now to $168 million. And I’m just trying to extrapolate what that might be going forward? I mean, is it going to continue rising at the same rate?

Ron Freeman: I wouldn’t necessarily say that. It’s a function of two or three things. One, we’re experiencing tight labor markets here right now, so there is a little upward pressure on wages and a lot of it depends upon the remodel and new store activity. You always have a little bit higher personnel and promotional cost based on the level of those things that are going on and the labor shift does take place a little bit more in the prepared foods categories which we are emphasizing. So you got to take all of that into account. But I would not say that it’s a linear progression from what you’ve been seeing.

Operator: [Operator Instructions] Our next question comes from Bryan Hunt with Wells Fargo.

Bryan Hunt: Ron, I was wondering if you could talk about non-food sales, I mean, if I look at your same-store sales, non-foods really had the strongest growth [indiscernible] 7%. Could you just dive in a little bit more, was there something unique that was going on that’s driving this increase?

Ron Freeman: There was nothing unique in the non-foods categories that would drive that. I don’t recall any specific cost or price changes in those categories, think of just one of those quarters that ended up that way.

Bryan Hunt: And on your perishable growth, it’s [running at 3%], is that more of just the consumer trend, consumer buying more prepared foods, more fresh goods or again, you all dedicated more square footage to that category as well. What’s behind that increase?

Ron Freeman: To your two questions, yes and yes. We are devoting more resources to it and we are seeing really good growth to it.

Bryan Hunt: And continuing on your comment on gallons, gallons were up almost 11%. If I look at the number of fuel centers, year-over-year, they’re up less than 4%, so it appears you had a pretty strong same-store gallon growth. Were you running any promotions to drive that? What do you put behind that market share growth that you had during the period on gallons?

Ron Freeman: We have our fuel rewards program that ties sales in the store [indiscernible], so if you’re getting increased sales inside the store, then that’s going to drive at least a certain amount of similar sales at the pump. And again, I think that program has been successful and perhaps driving the gallon growth even larger than you might otherwise see.

Bryan Hunt: And then on Damian’s question on the labor increases, if we were to look at your store base and analyze the upgrades to prepared foods and also to your perishable categories overall, where do you stand in the store evolution in making those investments? Are you halfway down, three quarters of the way down, just trying to get an idea of how much more labor there is to invest in those categories going forward?

Ron Freeman: We’re always going to have a certain number of stores that we’re going to remodel and upgrade just because that’s the natural lifecycle. So again, kind of in the same answer to Damian’s question, you can’t just assume a linear growth in that because we’re always going back and looking at the base on a pretty regular basis.

Bryan Hunt: And then lastly, you talked about you bought a couple of locations, greenfields for future expansion. If we look at your total land bank, how many sites do you have in your land bank today?

Ron Freeman: Bryan, I should know this, but back in the 10-Q we gave the number of undeveloped sites, so whatever that number was in December add two to it.

Operator: [Operator Instructions] It appears there are no further questions at this time. Mr. Freeman, I’d like to turn the conference back to you for any additional or closing remarks.

Ron Freeman: Thank you. We appreciate everyone joining the call today. Thank you for your time and your interest, and we look forward to speaking with you in about three months. Have a great day.

Operator: This concludes today’s conference. You may now disconnect.