Earnings Transcript for IMKTA - Q3 Fiscal Year 2015

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

Analysts: Damian Witkowski - Gabelli Dave Cooke - Wells Fargo Hale Holden - Barclays

Operator: Good day, and welcome to the Ingles Markets Third Quarter 2015 Earnings Release Conference Call. Today's conference 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. Ronald Freeman. Please go ahead, sir.

Ronald Freeman: Thank you. Good morning, everyone. And welcome to the Ingles Markets fiscal 2015 third 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 involves 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 third quarter and nine month 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. Our 10-Q for the quarter will be filed later this week and will be available on our website at that time. Net income totaled $13.8 million for the quarter ended June 27, 2015 and for the same quarter of last year. For the nine months ended June 27, 2015 net income rose 27.5% and totaled $43.1 million. Third quarter fiscal 2015 sales, excluding gasoline sales increased 1.0% and comparable store sales, excluding gasoline increased 1.6%. Per gallon gasoline prices were significantly lower in fiscal 2015 compared with the same periods of last year, resulting in lower total sales. First, a description of our third quarter results. Third quarter fiscal 2015 sales [excluding gasoline sales] increased 1.0% to $817.4 million, an increase of $8.0 million from last year's non-gas third quarter sales. Comparable store sales, excluding gasoline increased 1.6%. Gasoline gallons sold increased, while the average price per gallon was 31% lower comparing to June, 2015 quarter with the same quarter of last year. Customer transactions and average transaction size, excluding gasoline also increased. Ingles' operated 201 stores, encompassing 11 million retail square feet at June 27, 2015. Gross profit for the June 2015 quarter increased 3.3% to $222.2 million compared with $215.2 million for the third quarter of last fiscal year. Gross profit as a percentage of sales rose to 23.5% for the June 2015 quarter compared with 22% for the June 2014 quarter. Gasoline gross profit dollars were lower for the current fiscal quarter compared with the same quarter of last year, but the margin on other grocery segment products increased from favorable changes in sales mix among other factors. Operating and administrative expenses for the June 2015 quarter totaled $109.7 million, an increase of $8 million, or 4.4%, over the June 2014 quarter. The dollar growth in operating expenses was primarily in payroll and self-insurance claims. Interest expense decreased $1.0 million to $10.6 million for the three-month period ended June 27, 2015. Total debt at the end of June 2015 was $918.2 million compared with $909.3 million at the end of June 2014. Our effective income tax rate was 34.6% for the current quarter. Net income totaled $13.8 million for each of the three month periods ended June 27, 2015 and June 28, 2014. Net income, as a percentage of sales increased to 1.5% for the quarter ended June 27, 2015, compared with 1.4% for the quarter ended June 28, 2014. Basic and diluted earnings per share for publicly traded Class A Common Stock were $0.70 and $0.68, respectively, for the quarter ended June 27, 2015, compared with $0.63 and $0.61, respectively, for the quarter ended June 28, 2014. The growth in earnings per share benefited from a decrease in the average shares outstanding due to shares repurchased over the past year as part of the company's now-concluded stock repurchase program. Now I'll talk about our nine month results. Nine month fiscal 2015 sales, excluding gas increased 1.7% to $2.46 billion, an increase of $40.3 million over last year's nine month non-gas sales. Comparable store sales, excluding gasoline increased 1.7%. Gasoline gallons sold increased, while the average price per gallon was 27% lower comparing to nine months ended June, 2015 with the same period of last year. The average non-gallon transaction size increased and the number of customer visits decreased slightly. Gross profit for the nine months ended June 27, 2015, totaled $665.2 million, compared with $624.8 million for the first nine months of last fiscal year. Gross profit, as a percentage of sales rose to 23.5% for the June 2015 nine-month period, compared with 21.8% for the June 2014 nine-month period. Gross profit dollars and gross profit margin were higher across most product categories, including gasoline for the comparative nine month periods. Operating and administrative expenses increased $24.7 million, or 4.6% to $563.3 million for the nine months ended June 27, 2015, from $538.6 million for the nine months ended June 28, 2014. As with the third quarter's results, expense increases occurred in payroll, higher insurance costs, and other store base expenses. Interest expense totaled $34.2 million for the nine-month period ended June 27, 2015, compared with $35.0 million for the nine-month period ended June 28, 2014. Total debt is been reduced by $19.1 million during the first nine months of fiscal year 2015. The company has a line of credit totaling $175 million, of which $142.7 million is currently available. The company has not entered into any new debt agreements during fiscal 2015 and it’s used the line of credit to handle seasonal working capital and capital expenditures not funded by current operations. Net income totaled $43.1 million for the nine-month period ended June 27, 2015, compared with $33.8 million for the nine-month period ended June 28, 2014. Net income, as a percentage of sales was 1.5% for the nine months ended June 27, 2015, compared with 1.2% for the nine months ended June 28, 2014. Basic and diluted earnings per share for publicly traded Class A Common Stock were $2.19 and $2.13, respectively for the nine months ended June 27, 2015, compared with $1.54 and $1.49, respectively, for the nine months ended June 28, 2014. Capital expenditures for the June 2015 nine-month period totaled $73.5 million, compared with $73.1 million for the June 2014 nine-month period. Capital expenditures for the entire year are expected to be approximately $100 million to $120 million. The company believes its financial resources, including the lines of credit and other internal and anticipated external sources of funds will be sufficient to meet planned capital expenditures, debt service and working capital requirements for the foreseeable future. We'll now take your questions.

Operator: Thank you. [Operator Instructions] We'll go first to Damian Witkowski at Gabelli.

Damian Witkowski: Hi, Good morning, Ron.

Ronald Freeman: Damian, how are you?

Damian Witkowski: Good. The 1.6 same store sales increase in the quarter, how does that break down between number of transactions and the basket size?

Ronald Freeman: Both the number of transactions and the basket size were up for the quarter. I have not split that out into the dollar comp sales increase. But again, they were certainly contributors to that.

Damian Witkowski: Sure. But I mean, those - I am assuming you are seeing the same thing in those deflation in produce and things like that. So I would imagine the basket might actually be a smaller contributor than the actual number of transactions?

Ronald Freeman: That’s possible, but we are seeing some cost increases in some other areas. So I don’t think it’s a big factor on it.

Damian Witkowski: Okay. And then can I just – the last comment on the CapEx for the full year, I am sorry, whether you said 115 to 120?

Ronald Freeman: I said 100 to 120.

Damian Witkowski: Okay. But I mean, we're at 73 and we're two months from the year being done. So I mean, is it – I mean, what would make it a – I am just trying to, I mean, it’s pretty wide gap so for remaining two months?

Ronald Freeman: We've got a new store that we anticipate opening before the end of the year. We're about to crank up a couple more. So the timing of when those targets get – or it could accelerate it little bit.

Damian Witkowski: Okay. And then do you have the grocery gross margins, excluding fuel?

Ronald Freeman: That will be in the Q later on this week. But again, we've been pleased the performance in those non-gas gross margins there, so they're pretty much across the board.

Damian Witkowski: Okay. And then it sounds like you actually sold more fuel, but it sounds like cents per gallon that you earned were probably lower year-over-year?

Ronald Freeman: That’s correct.

Damian Witkowski: Okay. And again but that won't be in the Q, right, you don’t disclose the actual cents per gallon that you earn?

Ronald Freeman: No, we do not.

Damian Witkowski: Okay. And then the loss versus gain, this year versus last, I know these are not big numbers. But I am just curious I mean, is it a single asset or is it a multiple number of assets that were sold and then why would you take a – what drove the loss?

Ronald Freeman: They are really two transactions that happened. In the third quarter this year we closed a store, demolished the existing building and we'll be rebuilding from the ground up there. So we wrote off the existing building. Last year we had an outparcel sale that resulted in a profit. So just a delta between those two transactions…

Damian Witkowski: Okay. And then lastly, I know you don’t want to comment on specific competitors. But just overall I mean, I think the competitive environment is always difficult. But is it – is there anything that’s changing, that you are seeing in the market place in terms of either your visiting competitors acting differently or anything like that?

Ronald Freeman: Well, you are right to say that we generally don’t talk about that a whole lot. But we've got a lot of things that we're focusing on that we are doing, that we are very pleased with and very positive about.

Damian Witkowski: Okay. Thanks, Ron.

Ronald Freeman: You're welcome, Damian.

Operator: And we'll move next to Bryan Hunt with Wells Fargo.

Dave Cooke: Good morning. It’s actually Dave Cooke on for Bryan. Thanks for taking my questions. First of all any discernible difference in the cadence of same store sales throughout the quarter?

Ronald Freeman: I am sorry, in the what?

Dave Cooke: In the pace of same store sales in the quarter, one month versus the next, any real difference?

Ronald Freeman: Nothing tremendously different. It’s been pretty consistent across the quarter.

Dave Cooke: Okay. And then on the increase in gasoline gallons sold. We read a lot about people traveling more this year, is that kind of what you are seeing or is it - I don’t know certain promotions you are running or could you expand on that a little bit?

Ronald Freeman: We haven’t introduced new promotions. We are seeing some additional travel and I think both of those things are helping.

Dave Cooke: Okay. And then the increase in OG&A, you mentioned payroll and self insurance claims, with regard to payroll, are those more minimum wage increases or higher incentive comp?

Ronald Freeman: Really, we're just seeing tighter labor for the first time in a while. It’s becoming more difficult to hire the associates we need and I think that’s providing a little bit of wage pressure.

Dave Cooke: Okay. I appreciate it. Thanks.

Ronald Freeman: You're welcome.

Operator: [Operator Instructions] We'll go next to Hale Holden at Barclays.

Hale Holden: Thanks for taking the call. Couple of quick ones. Any commentary you can give us on what you are seeing or outlook for inflation, deflation is?

Ronald Freeman: Well, certainly there has been a lot of talk in the news about what's been going out with egg prices. We've certainly been affected like that and that can affect a lot of our products in bakery and anywhere else where eggs would be used, that’s certainly the most pronounced thing that we're seeing right now. Other than that, I wouldn’t say there is anything up or down that’s really pushing the needle. We'll see what happens if gas prices decreases in the way that a lot of people are expecting that they will.

Hale Holden: Any thoughts on [indiscernible] consumer in your markets, consumer health spending and how they're feeling?

Ronald Freeman: Yes. Again, we talked about a little bit with labor. I think people are feeling better. They are seeing some wage increases. There has been more than they've been able to see in the last few years. So we think consumer sentiment is pretty good in our area.

Hale Holden: And then on the labor comment, is it across stores that you're having trouble filling seats you’ve or you having – I mean, do have empty positions you're looking to fill?

Ronald Freeman: We always have empty positions we're looking fill. It’s pretty wide spread. Again I think that there has been evidence nationwide of wage growth and employment numbers generally ticking down a little bit and we're certainly seeing that in our markets.

Hale Holden: Great. I appreciate the comments. Thank you.

Ronald Freeman: Hale, you're welcome.

Operator: [Operator Instructions] And at this time we have no further questions. I'll turn the conference back over management for any closing or additional remarks.

Ronald Freeman: Okay, well thank you. We appreciate everyone joining us for the call this morning. Again be on to lookout 10-Q later on this week and we will be back with you in early December with our annual results. Everyone have a good day.

Operator: And that does conclude today's conference. Again, thank you for your participation.