Earnings Transcript for IMKTA - Q2 Fiscal Year 2014

Executives: Ron Freeman - CFO Robert Ingle, II - CEO Jim Lanning - President

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Analysts: Bryan Hunt - Wells Fargo Securities Damian Witkowski - Gabelli & Company Hale Holden - Barclays

Operator: Good day, and welcome to the Ingles Markets Incorporated second quarter 2014 earnings release conference call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the chief financial officer, Mr. Ron Freeman. Please go ahead, sir.

Ron Freeman: Thank you. Good morning. Welcome to the Ingles Markets fiscal 2014 second 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 will refer to the company’s public filings, including the Form 10-K for the fiscal year ended September 28, 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 public filings. This morning, I’ll provide you with a summary of our second 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 plan to file the 10-Q for the quarter later this week. It will be available on our website as well. Net income totaled $10.5 million for the March 2014 quarter, compared with net income of $8.1 million for the quarter ended March 2013. Net sales increased 2.9% to $947.8 million for the three months ended March 29, 2014 from $920.7 million for the three months ended March 30, 2013. The growth in sales was affected by the Easter holiday, which benefited sales in the second quarter of last fiscal year, but which will not occur until the third quarter of this fiscal year. Comparable store sales, excluding gasoline and extra Easter 2013 sales, increased 2.5% over the comparable quarters. Weekly customer visits increased 0.5% and the average transaction amount increased 1.5%. Retail gasoline sales dollars in gallons both increased comparing to March 2014 and 2013 quarters. Gross profit for the second quarter of fiscal 2014 totaled $206.1 million, an increase of $7.5 million or 3.8% compared with the second quarter of fiscal 2013. Gross profit as a percentage of sales was 21.7% for the second quarter of fiscal 2014, compared with 21.6% for the second quarter of fiscal 2013. Gross profit contributed by gasoline sales was lower this quarter, partially attributable to promotional activities involving gasoline sales. Total operating expenses were $178.4 million for the second quarter of fiscal 2014 compared with $175 million for the comparable fiscal 2013 quarter. The dollar growth in operating expenses was comprised primarily of increases in payroll, partially offset by savings in our self-insurance program. Excluding gasoline sales and associated operating expenses, operating and administrative expenses as a percentage of sales was 22.1% and 22.2% for the three months ended March 28, 2014 and March 29, 2013 respectively. Interest expense totaled $11.7 million for the three month period ended March 29, 2014, compared with $15.7 million for the three month period ended March 30, 2013. The company currently has lines of credit totaling $175 million, with no amounts borrowed and $9.7 million of unused letters of credit issued at March 29, 2014. Income tax expense as a percentage of pretax income was 37.9% and 36.5% for the March 2014 and 2013 quarters respectively. As mentioned earlier, net income for the March 2014 quarter totaled $10.5 million compared with net income of $8.1 million for the March 2013 quarter. Basic and diluted earnings per share for the company’s publicly traded class A common stock were $0.47 and $0.46 per share respectively for the March 2014 quarter, compared with $0.35 and $0.33 per share respectively for the March 2013 quarter. For the six-month period, net income totaled $20 million for the March 2014 six-month period compared with net income of $19.7 million for the six-month period ended March 2013. Net sales increased by 2.1% to $1.89 billion for the six months ended March 29, 2014, from $1.86 billion for the first six months ended March 30, 2013. Comparable store sales, excluding gasoline and extra Easter 2013 sales, increased to 0.8% over the comparable six-month period. Weekly customer visits increased 0.3% and the average transaction amount increased to 0.6%. Retail gasoline sales dollars and gallons sold both increased comparing to March 2014 and 2013 six-month periods. Gross profit for the first half of fiscal 2014 totaled $409.6 million, an increase of $2.8 million or 0.7%, compared with the first half of fiscal 2013. Gross profit as a percentage of sales was 21.6% for the first half of fiscal 2014, compared with 21.9% for the first half of fiscal 2013. Gross profit contributed by gasoline sales was lower this six-month period, primarily attributable to the promotional activities involving gasoline sales. Total operating expenses were $355.8 million for the six-month period of fiscal 2014 compared with $349.8 million for the comparable fiscal 2013 period. The dollar growth in operating expenses was comprised primarily of increases in payroll, partially offset by savings in our self-insurance program. Interest expense totaled $23.5 million for the six-month period ended March 29, 2014, compared with $31.3 million for the six-month period ended March 30, 2013. Income tax expense as a percentage of pre-tax income was 37.7% and 37% for the March 2014 and 2013 six-month periods respectively. Basic and diluted earnings per share for the company’s publicly traded class A common stock were $0.91 and $0.81 per share respectively, for the March 2014 six-month period, compared with $0.85 and $0.81 per share respectively, for the March 2013 six-month period. Capital expenditures totaled $51.8 million for the first six month period of fiscal year 2014. The company’s capital expenditure plans for fiscal 2014 include investments of approximately $100 million to $140 million. To summarize, second quarter sales growth and net income rebounded nicely from our first quarter that ended in December. We are on track for another successful year. And we will now take your questions.

Operator: [Operator instructions.] And we’ll go first to Bryan Hunt of Wells Fargo.

Bryan Hunt - Wells Fargo Securities : This was a pretty strong quarter from a sales perspective, and I’m wondering if you could maybe quantify for us the weather benefit. I know that there were a number of school cancellations and disruptions in the mountains, for instance, during the quarter, and I’m hoping you could parse out the weather impact for us.

Ron Freeman : It’s difficult to parse out the weather impact, given that we cover six states, but there’s no question that we got a benefit from that. The winter was a little harsher this year compared to the previous two winters, and there was definitely some benefit there.

Bryan Hunt - Wells Fargo Securities : And with the Easter impact, how much sales would you estimate shifted into fiscal Q3? Or how much of a boost should we get from a comparison standpoint?

Ron Freeman : There will be a table in the 10-Q when it’s filed next week, and I think it’s just a little bit north of about $8 million in sales.

Bryan Hunt - Wells Fargo Securities : And could you provide an update on the Mills River store and how that’s performing relative to your expectations? Are the sales above the legacy base? Can you maybe quantify for us how many stores are currently under development? You have a fairly wide range on the capex outlook for the year, and I’m hoping to just get a sense for your development activities.

Ron Freeman : As you know, we don’t quantify any individual store results, but Mills River has been open right at a year now, and we’ve been very, very pleased with the results, and we’ve gotten great customer response from it. For this year, we have one store that is scheduled to open near the end of the fiscal year, but with weather and permitting and everything else, it could fall over into early 2015, but it will be right towards the end of the year. And we have a few other projects that are early enough in the process where I’m not comfortable giving a timeframe on them.

Bryan Hunt - Wells Fargo Securities : Did you buy back any stock during the quarter?

Ron Freeman : We did not.

Operator: We’ll go next to Damian Witkowski with Gabelli & Company.

Damian Witkowski - Gabelli & Company: What were the same-store sales if you exclude the Easter impact?

Ron Freeman : The comparable store sales for the quarter, excluding gasoline and excluding Easter, were up 2.5% quarter over quarter.

Damian Witkowski - Gabelli & Company : But you’re taking the positive Easter impact from last year and putting it back, excluding it from last year’s number, right? Do you have a real comparable number?

Ron Freeman : I’m not sure I understand.

Damian Witkowski - Gabelli & Company : No, that’s fine. And then on the gross profit line, fuel sales, gallons were obviously up, and sales were up as well, but the actual fuel gross margin benefit was lower year over year. Gross margin was still up. Is there a particular category that drove the improvements?

Ron Freeman : Again, I think coming off the holidays, we typically see a margin lift as some of the holiday promotions burn off. We’ve definitely seen some beneficial impact from inflation in some categories, but in well-publicized cost increases in the meat category in particular that are very, very tough to deal with the cost there and how you can or cannot pass those along.

Damian Witkowski - Gabelli & Company : Overall, you’re feeling on the consumer, in your areas, in your states, everyone sort of has a view that the consumer is still fairly weak, but it sounds to me like you’re able to pass along the majority at least of the inflation.

Ron Freeman : I’m not sure I would say majority. Again, in some cases you can, in other cases, meat in particular, you can’t right now. We’ll just have to see how that changes, if these cost increases continue to stay out there.

Damian Witkowski - Gabelli & Company : And how is the milk processing doing with raw materials going up? You’re no longer breaking that out anymore?

Ron Freeman : It doesn’t meet the criteria for separate segment disclosure, but the milk business is doing fine. Overall milk pricing for everyone tends to be very commodity based, based on indexes that everyone sees. It’s a little bit of a different way of passing inflation along there. So it’s doing fine.

Damian Witkowski - Gabelli & Company : And the $4 million gain last year, from a sale of a store, was that a single store?

Ron Freeman : That was a single store.

Damian Witkowski - Gabelli & Company : And did you actually disclose the sale price of that particular store? Because $4 million was just the gain.

Ron Freeman : Yeah, I think the sale price was around $7.5 million, somewhere around there. That will be in the Q. It wasn’t in last year’s Q.

Damian Witkowski - Gabelli & Company : And just out of curiosity, the property itself, why did you decide to sell it?

Ron Freeman : Well, it was a closed store property, and the owners of the adjacent property were very interested in it, so we were able to reach an agreement.

Damian Witkowski - Gabelli & Company : Is this a typical property? Is it comparable to all the other ones that you own?

Ron Freeman : No, certainly not, because there’s not an average Winn. We own the majority of our 203 stores, and we’ve only had a couple of true store property sales transactions in the last five or six years, so it’s hard to call anything typical with that level of infrequency.

Damian Witkowski - Gabelli & Company : And then lastly, just a bigger question, stepping back. It’s been three years now since Mr. Ingle Sr. passed away. Any changes in strategy that we should be aware about?

Ron Freeman : Other than what you see in our stores every day when you visit them? No changes. But we’re continuing to come up with new ideas and new designs and new things all the time, and that’s what you have to do in this business. That’s the way it’s been throughout the company’s 51-year history.

Operator: [Operator instructions.] And we’ll go now to Hale Holden with Barclays.

Hale Holden - Barclays: If you could maybe further flesh out the meat price inflation comments you made? How do you see this playing forward over the next couple of quarters? How long do you think you can kind of try to offset the inflation there, or at what point do you think we’ll have to see prices on the shelf go up a lot?

Ron Freeman : I cannot predict. I mean, a lot of it depends upon what our competitors do. A lot of it depends on what our customers do. You know, we are absolutely committed to passing along the best prices that we possibly can to our customers, and we’ve certainly demonstrated that by us taking a little bit reduced margin in those price increases so far. But it would be reckless of me to predict how we’ll behave with that if this continues for another 6, 9, 12 months.

Hale Holden - Barclays : And then the second question, just wanted to touch base with potentially a couple of assets on the market, if there’s been any change in your thoughts out and around organic versus inorganic expansion?

Ron Freeman : Well, our history has been based on organic expansion. You know, we’re a little bit unique in our store sizes and the way we operate things, so we’ve tended not to see a whole lot of matching other assets that have come on the market.

Operator: And it appears there are no further questions at this time. I’d like to turn the call back to Mr. Freeman for any closing remarks.

Ron Freeman : Thank you very much. We appreciate everyone joining the call today. It’s always nice to report good numbers like this, and we look forward to speaking with in another three months. Have a great day and great weekend.