Ingles Markets, Incorporated (IMKTA) 2003 Q2 法說會逐字稿

Good day, and welcome to the Ingles Markets, Incorporated 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 Vice President-Finance, Chief Financial Officer, Ms. Brenda Tudor. Please go ahead, ma’am.

Good morning. Welcome to Ingles Markets’ 2003 Second Quarter Conference Call. With me today are Robert Ingle, Founder of our Company, Chairman of the Board and Chief Executive Officer, and Tom [Atwall][ph], Vice President of Sales and Marketing.

Statements made on this call include forward-looking statements, which are based on current expectations, estimates, forecasts and projections about the Company’s business, based on management’s beliefs and assumptions. These statements are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995 and are subject to the safe harbors created by such laws. Words such as expects, anticipates, intends, plans and believes and variations of such words 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.

We do 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 10K for the fiscal year ended September 28, 2002 and the Form 10Q for the quarter ended December 28, 2002.

Now, I will give you a brief overview of our second quarter ended March 29, 2003. Then we will be happy to take your questions.

Hopefully, you’ve all seen our press release. If not, it is available on our website at www.ingles-markets.com.

We are happy to report an increase in net income for the March 2003 quarter of 4.9 percent to $3.5m, or 15 cents per diluted share, in spite of a sluggish economy and the strong competitive environment in our industry.

Net sales for the March 2003 quarter decreased .8 percent over the same quarter last year, while comparable store sales decreased 1.3 percent. Excluding the effect of the timing of the Easter holiday, comparable store sales only decreased .4 percent. At March 2003, we operated 200 stores, compared to 201 stores at March 2002.

Gross margins declined 34 basis points to 26.5 percent of sales in the March 2003 quarter, compared to 26.9 percent in the March 2002 quarter. Sales distributions in the higher-margin deli, bakery and meat departments were affected by weak economic conditions resulting in consumers’ buying down. In addition, consumers are more price-sensitive during periods of apprehension about the economy and drive retailers to price more aggressively.

Operating expenses decreased $0.5 million for the quarter. As a percentage of sales, they increased nine basis points. The soft sales had an effect, particularly in fixed [occupancy][ph] [indiscernible] such as depreciation expense, rent expense and property taxes. We once again demonstrated the value of owning a majority of our operating real estate during the quarter. We sold a shopping center at a $1.1m gain. This was a shopping center in which we no longer operated a store. We’ve replaced that store and moved to a different location.

Our interest expense decreased $1.2m for the quarter due primarily to a decrease in aggregate debt of $33.4m from March 2002 to March 2003. During the first quarter of 2003, we used the balance of the proceeds from the December 2001 bond issuance to fund current maturities and capital expenditures. Now, as higher interest rate debt is amortizing and maturing, we are using lower interest rate lines of credit to fund our capital needs.

At March 2003, we had committed lines of credit totaling $145m, of which $124m was unused. In addition, we had unencumbered property with a book value of $312m, of which $256m book value is real estate.

Capital expenditures totaled $37m for the first six months of fiscal 2003. During the first six months, we opened three new stores, one that we own and two that are leased. We completed one major remodel expansion and three minor remodels. In addition, we purchased one shopping center, where we are a tenant.

Co-capital expenditure plans for fiscal 2003 are projected to be $70m. We plan to open one additional new store and one replacement store and complete one major remodel expansion during the balance of fiscal 2003.

Several factors make us very optimistic about the future. Our new president is charging forward with a focus on improving sales and customer service. We believe that with the war behind us, the economy will begin to improve. We continue to upgrade, improve our store base and our technology, and we are vigilant about ways to streamline our operations and cut costs where possible.

We will now take your questions.

Thank you, ma’am. [Caller instructions.]

We’ll go first to [Brian Hunt][ph] with Wachovia Securities.

Thank you. Brenda, I believe in the past you’ve given us EBITDA and EBITDAR, and I was wondering if you could give us those numbers?

Well, you know, there’s these new rules out now that when you give EBITDA or EBITDAR, any non-GAAP measures, you have to do all these disclosures, and so that’s why I took it out of the press release because it became too cumbersome, and I think you probably will see other people doing the same. But I’ll be glad to give you depreciation expense and rent expense.

All right. That’d be fine.

Okay. Do you want six months or three months?

Three months.

A three months’ depreciation is $25.1m and rent is $41.7m.

Okay. And then with regards to your comps, [I think][ph] down and even if you want to adjust it, which is fine, could you talk about the relative factors? Is it a traffic issue which is impacting comps, or is it a ticket issue? It sounds more like a ticket issue.

No, actually, if you look compared to last year, there is a traffic issue. Our customer count is down, where our total ticket price is up. And we believe that, you know, one of the things that’s impacting us is so many different people are selling groceries now, and so maybe people are not stopping by as often. Like if you wanted to pick up paper towels or something like that, you might stop off at one of the drugstores or the dollar stores, something like that. And so I think we’re seeing less visits per customer but a larger ticket when they do come in the store.

Interesting. Could you talk, also, about competitive openings and competitive closures? What do the competitive openings have – accelerated, decelerated – you know, compared to last quarter, as well as you had some significant stores close in your market from Food Lion, and could you talk about whether you picked up any market share from that?

Yes, Mr. Atwall will answer that question.

Okay, Brian, in regards to what we have coming up in this next quarter, it looks like there are going to be two new public stores affecting three of our stores. This is a fairly quiet quarter. July through September 2003, there are four anticipated Wal-Mart Supercenters that will affect at least five of our stores and one more Publix that will affect another store.

In regards to the Food Lion closings, it did have a very positive effect on the stores. The Lion’s increase was from 5 to 25 percent increase in sales depending on the proximity of a Food Lion’s store to our store.

That sounds promising. Well, that’s it. Thank you very much.

Thank you, Brian.

We’ll take our next question from [Greg Gore][ph] with [Pimko][ph].

Good morning. Could you just share the dollar amount of cash and equivalents, please?

Fifteen point one million ($15.1m).

Thank you very much.

You’re welcome.

[Caller instructions.]

We’ll go next to [Paul Ross][ph] with ING.

Brenda, can you hear me?

Yes, Paul.

Could you tell us about the – you talked about the comp numbers, minus 1.3 and then a minus .4 base with the Easter adjustment. Could you talk on a state basis starting with the states where you have the largest concentration of stores – whether the problem was throughout your entire marketing territory or was it in a particular state because of that state’s economics or the competition in that state?

Yes, I don’t have numbers to give you by state, but I can tell you, in general, the largest impact is in the Georgia market, where there is the most competition. That’s the most competitive area of our business.

So that would be consistent with where Food Lion was closing? Weren’t they closing in North and South Carolina?

Well, their closing was primarily in Tennessee?

It was?

The ones that competed with us were primarily in Tennessee. And, you know, we’re doing well in the Tennessee market. Our Western North Carolina market, I think, continues to do well, as well as our South Carolina market. I think the hardest impact is certainly in the Georgia market.

And what percent of your total volume or what percent of your stores are in Georgia?

Well, I think the total is –

That would be 201?

I believe it’s about

Forty-one percent of the stores –

Forty-one percent of our stores are in the Georgia market.

Great. Brenda, thank you very much.

You’re welcome.

Next, we’ll take a follow-up question from Brian Hunt with Wachovia Securities.

Brenda, I was wondering if you could talk to the two issues. You said you were optimistic or management is optimistic about the future because of, one, of the new president’s initiatives on customer service. Could you talk about what the plans are with regard to sales and customer service? And then, second, give us a technology update, what you’re spending capital on and what percent of the stores have been rolled out or where we are in a rollout stage?

Okay. On the first question, the customer service, I don’t want to get into too many details on that. As you know, our president has just come on board, and I know his focus in the things that he is looking at are on sales and customer service. Again, we’ve got a focus group of customer service consisting of employees throughout the operating areas of the business and trying to come up with some training programs on customer service and just an overall emphasis on that from the top down.

On the technology aspects, we are in the midst of doing some point-of-sale conversions. We’re about 63 percent converted to an IBM point-of-sales platform, and the other is an older NCR platform. So by the first of calendar year 2004, we hope to be completed with that and have all of our point-of-sale systems on one platform as well as one of the other things we’re doing in the operations area on technology is we’re rolling out a frame relay system of transferring data between our stores and our credit card processor and, you know, the way you retrieve data going from a satellite system to a frame relay system. So we’re in the midst of doing all of that.

Could you talk about the cost associated with the POS conversion?

Well, our total technology budget for the year is about $15m. The actual point-of-sale conversion, which also includes self-checkout, we are – while we’re doing the conversions, we’re adding self-checkout systems. You know, our goal is to have about 120 of our stores having self-checkout. Right now, about 73 stores have self-checkout. So we’re about 60 percent complete on that. So that piece of the budget between the self-checkouts and the IBM conversions is about $10m.

Okay. And is any of that being expensed? Or is that all capex on the [inaudible]?

It’s capex.

And will that drop basically to, I mean, to zero next year?

It won’t drop to zero because we will be doing this up until January of 2004. Since our fiscal year ends in September, we will have some in the first quarter of next year as well.

So I can imagine your capex budget dropping pretty substantial – I mean –

For the technology piece. Yes, we’ve spent more money on technology than normal this year.

Okay. Thank you.

Next, we’ll take a follow-up from Greg Gore with Pimco.

Yes, good morning again. I just want to make sure I heard you correctly. When you gave depreciation figures of $25m and rent approaching $42m, was that for the quarter or for the first six –

That was for the quarter. That was quarter. Do you need six months?

Well, the reason I asked is because –

No, I’m sorry. You’re right. I have it backwards. You’re right. It’s $12.7m –

For depreciation?

For depreciation and 41.7 for rent.

Okay. So rent was $41.7m for the quarter?

Yes.

The only reason that I asked is it was $42m for fiscal 2002.

Right. I’m glad you caught me on that.

Okay. And then, also, what was amortization in the quarter, please?

The amortization’s included in that depreciation number.

I see. Okay, thanks a lot.

And, Ms. Tudor, it appears we have no further questions at this time. I’d like to turn the conference back over to you for any additional or closing comments.

Okay. Well, we thank you for your time and interest, and we will look forward to keeping you updated in the future. Have a good day.

This concludes today’s conference call. We thank you for your participation. You may disconnect at this time.