Ingles Markets, Incorporated (IMKTA) 2004 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 of Finance, Chief Financial Officer, Ms. Brenda Tudor. Please go ahead ma'am.

Good morning, welcome to Ingles Markets 2004 2nd quarter conference call. With me today are Robert Ingle, Founder of our Company, Chairman of the Board, and Chief Executive Officer, Jim Lanning, President and Tom Outlaw, 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 are statements forward-looking statements within the meaning of Section 27-A, of Securities Act of 1933 Section 21-E 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 different differ materiallt from what is expressed on this call. We do not undertake to update any publically any forward-looking statements, whether as a result of new information, future events or otherwise.

For a description of factors that could cause that could cause actual restults to differ materially from that anticipated by forward looking statements, you are referred to the company's public filings, including the Form 10K for the fiscal year ended September 27th, 2003 and the Form 10Q for the quarter ended December 27, 2003. Now I will give you a brief overview of our 2nd quarter, and six months, ended March 27, then we'll 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 very happy to report both significant sales and earnings increases today. Total sales growth was 6.5%. And comparable store sales growth was 5.6% for the March 2004 quarter.

For the March 6-month period, total sales growth was 7.2% with comparable store sales growth of 6%. As you recall, we introduced the Ingles Advantage Savings and Rewards Card at the beginning of the fiscal 2004 year. We are pleased that the sales increases we experienced in the 1st quarter continued into the 2nd quarter. Both customer traffic and average ticket price increased during the quarter.

Gross profit dollars increased due primarily to the increase on sales while gross margin declined year-over-year due to aggressive promotion activity. We did see our gross margins improve from the 1st quarter of fiscal 2004. The March 2003 quarter and 6 month period, included a pretax charge to cost of sales of $2.6 million for the adoption of the new accounting pronouncement, EITF 02-16. Which changed the accounting treatment treatment of certain considerations received from vendors, the effect of the charge as a percentage of sales was 0.5% in the March 2003 quarter and 0.3% in the March 2003 6-month period.

Operating expenses also increased in dollars due to the sales growth. But decreased 94 basis points for the March 2004 quarter and 107 basis points for the March 2004 six-month period. Operating expenses for the March 2004 six-month period included 1.4 million in an introductory cost for the card, which is approximately 13 basis points. Rental income for the March 2004 quarter declined .6 million over the prior year quarter and 1.2 million for the six-month period.

The decrease is due primarily to the loss of rental income, from the sell of shopping centers in September 2003. And at the beginning of the March 2004 quarter. The shopping centers were both sold at significant gains. Income from operations increased $6.7 million or 48% for the March 2004 quarter and 4.9 million or 16% for the March 2004 six-month period.

The 2003 fiscal periods included the $2.6 million charge for the adoption of the new accounting pronouncement. The March 2004 six-month period, included the $1.4 million in introductory card costs. During the March 2004 quarter, we sold a shopping center in which we no longer operated a store, for a gain of $3.8 million.

We also sold a shopping center in the March 2003 comparable quarter for a gain of 1.1 million. Interest expense increased for the March 2004 quarter and 6-month period due primarily to the issuance on May 29th, 2003 of a $100 million add-on to the existing 8-7/8% Senior Unsecured Subordinated Notes due December 2011.

A portion of the proceeds from the additional notes was used to reduce 30.5 million in debt and to fund capital expenditures in fiscal years 2003 and 2004. We would have liked to pay down more debt. But the prepayment penalties were prohibitive.

Our cash balance at March 2004 is approximately 30 million more than our normal cash balance and will be used to fund current maturities of exisiting and capital expenditures for the balance of 2004. Net income increased 5.4 million for the March 2004 quarter and 4 million for the March 2004 6-month period. The strong sales growth, effective cost controls and the sale of the shopping center all contributed to the increase.

Factors affecting the comparability of net income include the after-tax effect of the adoption of EITF 02-16 in the March 2003 quarter and the after tax effects of the introductory card cost in the March 2004 6-month period. We currently have committed lines of credit totalling 135 million all of which is unused. 120 million of the lines mature in October 2006 while the other 15 million matures in October and November 2004.

We had unincumbered property with a book value of $355 million of which 280 million is real estate at March 27th, 2004. Our capital expenditures for the March 2004 6-month period totalled 49.5 million. During the period, Ingles completed two major remodel expansions and two minor remodels. And closed one older store.

In addition, we purchased four store sites, two shopping centers in which Ingles is a tenant and one free-standing retail store leased to another retailer. We also completed our point of sale conversion and self-checkout rollout. And purchased 7.6 million in existing store equipment that was on an operating lease.

For the balance of the fiscal year, Ingles expects to open one-new store, complete one major remodel expansion, and open one replacement store. Capital expenditures for the entire fiscal year, expect to believe approximately 70 million. Including expenditures for stores to open in fiscal 2005.

Capital expenditures were more heavily weighted in the first 6-months of the year as we had 180 days from the sale of the shopping center, in September 2003, to reinvest the proceeds in a like kind exchange in order to defer the tax impact of the sale. We are very proud of our performance in this first half of of our year. We have an energetic team working diligently to grow and improve our business by both driving sales and managing expenses.

Performance in our grocery operations was outstanding and once again, we demonstrated the underlying value of our real estate. We hope to continue to build on the sales momentum we have established and bring increased profitability to the bottom line. We anticipate filing our 10-Q on May 10th and we'll now take your questions.

Thank you. The question and anwer session will be conducted electronically. If you would like to ask a question, please do so by pressing star 1 at this time. Also, you are using a speaker phone, please unmute so that your signal will reach our equipment. And we'll take our first question from Andrew [Berg] of Financial Management Advisors.

Robert, great quarter. A couple quick questions, can you break out sales between grocery and fluid dairy? And then second Brenda, I think you said you had nothing drawn on the revolver. But do you have LCs that are offsetting your availability?

I will break out the sales in the 10Q and it will be filed on May 10th. We do have some LC's, I believe it's a total of about $7 million.

Okay. And one last question. Your rent expense for the quarter was well below when I where I thought it was going to be. Should we look for that sort of same type of level that you're running in this quarter for the subsequent quarters going-forward, around 7.5 million?

Yes, I mentioned that we had purchased 7.6 million of store equipment that was on an operating lease. And so that -- the rent expense that you're seeing the decrease on is because of that.

Okay. Great. Thank you.

Next we'll go to [Sue Goodman] with ATD Investments.

Hi Breda, thank you. I was wondering if you could us some more color on the comp increases with regard to number of transactions, basket size? If you all have been able to see who the customer is causing this. If it's new or existing customers or are you getting cherry picked on certain items, or just what's going on here?

Well, we have seen increases in customer counts and basket size. I would say that probably on a percentage basis, the basket size is probably a larger increase than on the customer count. Of course, we went into the loyalty card at the beginning of October so we're just now really being able to get enough data to be able to look at customers and tell a little bit more and try to figure out what drives our customers with this specific data. But we're not very far into that at this point.

Can you tell if you're getting cherry picked on sale items or is it pretty much across the board that you're seeing a lift.

I would say it's both. Certainly, you always get cherry picked I guess everybody does. But we are seeing a lift overall.

What about geography, is this broad based comp increase across all your geographies? Or just a few? I know you won't tell us which ones, but --

we are seeing it pretty much all over our store base.

Great. Thank you.

Once again, it is star one if you have a question. And next we'll go to [Barrett Iniyion] with Bank of America.

Hi, Brenda. Couple of question. Just in terms of the margin improvement, can you talk a little more about -- is it - you cited obviously improved sales volume. As well the fact that you didn't have the 1.4 million introductory cost this quarter. Is there anything else that's driving that improvement?

Tom, you want to address that?

Sure. One thing that's really contributed for meat sales was the [honSlav] or the low carb diets and Atkins diets. There's been a very large increase in meat sales and gross profits. So that's one factor that's really contributing.

Okay. And then do you think these margin improvements are sustainable throughout the second half of the year?

We think so.

Okay. And then how much did higher gas prices benefit same store sales and operating income.

it's really pretty negligible at this point. Casue we only have 19 gas stations, so it's not a major impact.

Okay then, last question, how much did you get in proceeds from the sale of the shopping center during the quarter?

About 8 million.

8 million. Okay, thanks.

And Mark Cooper with Wells Capital has the next question.

Actually, my question's been answered. Thank you.

Thank you, sir. Moving on, we'll go to Paul Carpenter, with Semifor Management.

Good morning. I was impressed with the results on the quarter. However, I'm distressed to see Ingles coming up on a lot of insider selling screens for just the pace and frequency of the insider sales. And was wondering if you could provide some detail on that. Why the sales keep coming and they're coming in such large numbers? Do you have particular windows that restrict your selling or? We're just a bit concerned about the volume and the fact that it seems to be coming very often.

Yeah, I'll be glad to address that. What we had is we had a lot of the stock options that were exercisable between May of last queer and May of this year. And they really only became in the money later on in that period. So I think you've seen a lot of trading there. And one thing that I guess I'd like people to recognize that people don't typically see, is a lot of the long term employees, people who have been here a long time.

We used to only have a profit sharing plan that was invested primarily in Ingles stock. And now we also have a 401K. But the people that have been here a long time, are already very heavily invested in Ingles stock, in their retirement plan. The retirement plan owns about 1.7 million shares. And so I think you're seeing a factor of people trading their options- trading the shares that they've got under option one to keep their portfolios diversified. And number two, is I guess, if you've seen our proxy. We're not a lot of real high-paid executives that can afford to buy the stock under their options. So they have to sell a portion of them.

Well, that's helpful, but it sounds like things are going -- have been going pretty well. I mean, these options that are expiring, or why not just hold on to them if -- the year looks very promising.

The options are expiring.

And is that going to end any time soon? When can we expect to stop seeing those transactions.

The bulk of the options are expiring May 19th. So very soon. There's a few more out there that don't expire until October but the bulk of them are expiring in May.

Okay. And after that we should expect to see a real drop off?

Yes.

Thank you.

Karen Miller, with Bear Stearns has our next question.

Yes. Good morning. I'm wondering if you could also -- getting back to the increase in costs of the 500%. Do you get the sense you're taking some market share from your competition and could you express that a little bit?

Well, I think we probably are -- it's very hard for us in the market that we're in to get credible market share data. I would imagine in the type of growth, that we're seeing in our comparable store sales, it's got to be coming from somewhere. Tom?

One thing we could add to that, AC Nielsen measures all the categories across the board. And we look at all the categories we're talking about, say water, canned vegetables, whatever the category may be. Ingles in the last six months has had significant increases. And then we're also able to look at our comp markets and our increases in all the -- nearly all the categories are significantly better than our competition.

What would you attribute that too?

The marketing of the loyalty card.

Okay. Great, thanks a lot. That's helpful.

As a final reminder, it is star one at this time if you have a question or a comment. Next we'll go to Michael Rosenthal with Shankman Capital.

Thanks. Very good results.

Thank you.

Could you talk a little bit about how the sale of BiLo Bruno's is going to be affecting results now and what you think that might do? Jim?

The turmoil which employees are having due to uncertainty, can't help but reflect on their work. Which gives us an opportunity to gain new customers through the BiLo and Winn-Dixie.

The Winn-Dixie, overlaps do you think that has an effect as well?

Yes sir.

I see. Would you have any interest in any of those stores? [ Laughter ]

Maybe not the Winn-Dixie.

None that we want to talk about.

I see. Okay. Thank you.

Thank you.

Our final question comes from Lee [Shanes] from Fritana capital.

Good morning, going back to the same store sales discussion. You discussed increasing customers and increasing basket. I wondered if you could comment on food inflation? And has it affected your grocery revenues and your dairy business revenues?

Yeah, I think the food inflation, particularly in the meat department has helped us, because meat has been the fastest growing department in this year. You know, a combination of what Tom talked with the low carb diet plus inflation. The dairy I don't think has hit us as much so far as it will coming up in the next quarter. What we have seen basically in dairy is whatever we've gained in sales we've lost in margins, so we're pretty much staying flat when you come to gross profit.

Okay. In your comp, is it -- are you able to tell us what portion of your comp increase might have come from the meat sales or the meat inflation?

No, I really don't have that. But I mean --

It is better than labor also.

I mean, the meat department is better than the overall -- the other departments, but all the departments are up.

In volume?

Yes.

Okay. Thank you very much.

Thank you.

There are no further questions in the queu at this time. Ms. Tudor I'd like to turn the conference back over to you for any closing or additional remarks.

Thank you for your time and interest and we will look forward to updating you in the future. Have a great day.

That concludes today's teleconference, we do thank you for your participation at this time. You may now disconnect.