Ingles Markets, Incorporated (IMKTA) 2004 Q4 法說會逐字稿

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

Thank you. Good morning. Welcome to Ingles Markets’ 2004 Fourth Quarter Conference Call. We are glad to finally be able to discuss our fiscal 2004 earnings with you.

With me today are Robert Ingle, Founder of our Company and Chief Executive Officer, Robert Ingle II, Chairman of the Board, 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 ‘expects, anticipates, intends, plans, and believes’ 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, if you will refer to the Company’s public filings, including the Form 10-K for the fiscal year ended September 25th, 2004.

Now, I’ll give you a brief overview of our fiscal 2004 fourth quarter and yearend results, as well as discuss the restatements of prior periods. Then, we will be happy to take your questions. Hopefully, you have had a chance to review our Form 10-K that was filed last week. Our press release issued this morning is available on our web site at www.ingles-markets.com.

We’re very pleased to report to you today the highest net income in the 41-year history of our Company, a 69 percent increase over fiscal year 2003. We attribute the record year primarily to outstanding comparable store sales growth of 6.7 percent for the year and 8.2 percent for the fourth quarter.

We believe the sales growth was a result of many factors, the most important of which is our team’s focus on providing quality value and service to our valued customers. We’ve experienced strong sales growth in each quarter of fiscal year 2004, and the fourth quarter provided our strongest sales growth of the year. Net sales growth was 8.3 percent in the fourth quarter, and 7.3 percent for the fiscal year.

Gross profit dollars increased 6.8 percent for the quarter, and 6 percent for the year, primarily as a result of the increase of sales, while gross profit margin declined 36 basis points in the fourth quarter, and 34 basis points for the year. Increased promotional activity designed to drive sales resulted in the lower gross profit margin percent.

Operating expenses increased 1.3 percent for the quarter, and 1.7 percent for the year, but decreased as a percentage of sales by 156 basis points for the fourth quarter, and 124 basis points for the year. The increased sales volume resulted in lower operating expenses as a percentage of sales as certain fixed costs were spread over higher volume. In addition, the purchase of store equipment previously under operating leases resulted in lower rent expense of approximately 3.4m for the fourth quarter and 13.3m for the year. Depreciation expense increased approximately $500,000 for the fourth quarter and 1.7m for a the year as a result of the purchase.

Our net rental income decreased 1.2m for the year but only decreased 53,000 in the fourth quarter. The sale of shopping centers in September 2003, and then again in January 2004 in which Ingles was not a tenant, the rejection of certain leases by tenants in their bankruptcy proceedings, and the relocation of several drugstores from shopping centers to standalone sites all decreased gross rental income in the 2004 period. The rental of previously vacant space during the June 2004 and September 2004 quarters partially offset the decreases. Another shopping center in which Ingles was not a tenant was sold in September 2004. Net annual rental income from that shopping center was approximately 350,000 in fiscal 2004.

Our income from operations increased 48 percent in the fourth quarter and 35 percent for the year over the prior year comparable period. Our other income for the fourth quarter of $6.7m includes net gains on the disposal of assets, including gains from the sale of the shopping center in which Ingles was not a tenant, the sale of one out parcel and the sale of undeveloped tract of land, and a loss of approximately $442,000 resulting from a fire in a portion of one shopping center.

Other income from fiscal 2004 includes net gains on the disposals of property and equipment, totaling 11.8m, including the disposals in the fourth quarter just described, plus the sale of another shopping center that did not contain an Ingles store earlier in the year, and four out parcels adjacent to Ingles properties earlier in the year.

For the fourth quarter, interest expense decreased 730,000 over the same quarter last year. For the year interest expense increased 1.8m. No new debt was incurred during fiscal 2004. The increase in interest expense for the year is due primarily to the issuance in May 2003 of an additional 100m of Ingles’ existing senior unsecured subordinated notes.

Total short and long-term debt decreased 38.6m during fiscal 2004. Ingles’ cash balance remained approximately 65m higher than the operating cash balance needed at both 2004 and 2003 fiscal year ends. However, prepayment of existing debt is not feasible due to large prepayment penalties.

We currently have committed lines of credit totaling $135m. No amounts are borrowed on these lines, however, letters of credit totaling 18.6m reduced the amount available to be drawn under the line to $116.4m at September 25th 2004. $120m of the lines mature in October 2006, and $15m matures in October and November of 2005. We had unencumbered property with a book value of $365m, of which 258m is real estate at September 25th, 2004.

Capital expenditures for the year totaled $71m. During the year we opened two new stores and one replacement store, completed two major remodel expansions, and two minor remodels, and closed four older stores. In addition, we purchased five store sites, two shopping centers in which Ingles is a tenant, and one freestanding retail store leased to another retailer.

We also completed our point of sale conversion and self-checkout rollout, and purchased $9.6m in existing store equipment that was previously on an operating lease, as mentioned earlier.

Capital expenditure plans for fiscal year 2005 are expected to be approximately 70m, including three new stores, and two major remodels expected to be completed in fiscal 2005, as well as expenditures for the stores to open in fiscal 2006.

As previously discussed, during preparation for our annual audit and annual report for fiscal 2004, and as a result of a recently completed internal investigation initiated after informal SEC inquiry, the Company determined that certain vendor allowances during prior years and certain other revenue and expense items were recognized in the incorrect accounting periods, resulting in a delay of the Company’s ability to timely file its Form 10-K and release earnings.

In addition, during the delay the SEC issued a letter clarifying the application of guidance related to accounting for operating leases. Therefore, we felt it important to fully review our lease transactions and include the required changes in the restatements, even though it meant further delay.

The majority of the restatements resulted from the accounting for vendor allowances. During 2003 and at the beginning of fiscal 2004, we implemented additional controls and procedures designed to ensure more accurate accounting for vendor allowances. However, these controls and procedures did not address previously recorded transactions.

Vendor allowance recognition has been an involving, complex issue over the last few years, and we believe now we have systems and controls in place that will prevent recognition issues going forward.

In addition, we are reviewing our staffing levels and other controls and procedures in light of the results of the internal investigation and the increasing regulatory requirements of public companies, including the requirements of Section 404 under the Sarbanes-Oxley Act of 2002, which becomes effective for us at the end of fiscal 2005.

While the SEC inquiry has not been closed it remains an informal inquiry, and the Company has fully cooperated with the SEC’s request. We regret the delay in announcing our fourth quarter and fiscal year 2004 results, especially since we’re so proud of them, but it was important that we fully address all issues arising from the inquiry and the internal investigation.

First quarter 2005 will be affected by the cost of the internal investigation, and increased audit fees related to the investigation, and the restatement, although we do not have a solid estimate of these costs at this time.

The restatements resulted in an increase in earnings of approximately $726,000 for the fiscal year 2004 through the third quarter, a slight increase in earnings of 24,000 in fiscal 2003, and a reduction in earnings of 2.2m in 2002. Cumulatively through the beginning of fiscal 2003 the decrease in retained earnings of the Company resulting from the restatements totaled approximately $7m. There was no cash flow impact from the restatements. The restatements should have a positive impact on earnings going forward, although we do not anticipate that the impact will be material in any given year to total earnings.

As previously announced, the Company received a notice from the staff of the NASDAQ Stock Market indicating that the Company was subject to potential de-listing proceedings due to the failure to timely file its Form 10-K for the year ended December 25th, 2004. The Company attended a hearing with the NASDAQ’s Listing Qualifications Panel on January 27th, 2005. At the hearing, in addition to an extension of time for filing the Annual Report on Form 10-K, we requested an extension of time to file the Form 10-Q for the first quarter of fiscal 2005 ended December 25th. The Panel has not yet ruled, and the Company’s stock continues to trade on NASDAQ under the symbol IMKTE. We continue to work diligently to get the first quarter closed and the 10-Q filed as soon as possible.

We’re very proud of our sales and earnings increase for fiscal 2004, particularly in a time when many food retailers are struggling for sales dollars. In the first quarter of 2005 our strong sales growth continued with comparable store sales growth of 4.7 percent. We are particularly pleased as we were going up against very strong sales in the prior year.

We attribute our sales and earning growth to the efforts of our team to better know our customers and provide them with a quality service and value they expect. This has been the best financial year in the history of our Company, and the credit goes to all of our dedicated associates.

We will now take your questions.

[Caller instructions.]

And we will take our first question from Jonathan Feldman with SBC Select Investments.

Good morning, Brenda. Just had a question on your CapEx budget for ’05. How would you allocate that between what you would consider maintenance CapEx versus new store CapEx?

Maintenance CapEx is typically about a half a percent of sales, so it’s probably about $10m.

And the remaining 60 would be?

Between new stores, major remodels, and expansions, and there are some capital expenditures for the milk processing subsidiary and some technology upgrades.

Okay. Just two other quick questions. The second question was about how many of your stores would you estimate as being directly competitive with Winn Dixie, and to what extent do you think they’re difficulties are helping you guys?

I’m going to let Mr. Outlaw answer that question.

It’s probably less than 25 now, and there has been some impact from their closings.

Any way that you can quantify that, or is that tough to do?

That’s pretty hard to do, to quantify it.

I think most of the closings that we had against Winn Dixie were actually a couple of years ago when they closed about 12 stores in Tennessee. I don’t think we’ve had a lot of Winn Dixie’s.

There have been some in Georgia.

Close against…

Out here in Canton, North Carolina.

Yes. We haven’t had a great deal over the last year.

So, would you think five or 10? Or just in terms of rough estimate?

Probably more like five.

Okay. And then, the third question was I understand that there’s a Wal-Mart Super Center opening in Asheville, and I just wondered if you had seen any impact from that competitive opening?

We did have one open on the 26th of January, and you know, we continued to offer our customers value and good service, along with an expanded variety. And we really haven’t seen any kind of significant sales change.

Great. Okay, that’s it. Thanks, again, for your time and great results, buys.

Thank you.

[Caller instructions.]

We’ll hear now from [Andrew Berg] [ph] with Financial Management.

Thanks. A couple of questions. Brenda, going back to the three new stores, can you give me a sense of timing on when you expect those stores to open? And then, I’ve got a follow-up question.

One of the stores already opened in the first quarter. I believe it opened in December, and the other two, I think one of them is probably within the next maybe three months, and then the other one I don’t have a firm date on at this time. Probably later in the fiscal year, and probably in the fourth quarter.

Okay. And can you talk about competitive openings that you expect to see this year? How many do you guys see coming up?

I’ll have Mr. Outlaw answer that question.

It looks like it’s going to be a fairly normal year as far as new competitors. Last year we had approximately 25 competitors open up against us. This year it looks like about 23. So, it’s fairly – no big change as far as new competitors.

Okay. And with respect to the Wal-Mart Store that opened up against you, and I recognize there’s only one store against the big chain. You said you’d not seen any change in sales? Have you had to change your pricing so that you could hold your sales up, and have you done it at the expense of margin to compete with them?

We compete with Super Wal-Mart in many of our locations currently. And we have not changed our marketing as far as our values to our customers, just because of this Wal-Mart in Asheville.

Okay. Great. Thank you very much.

Thank you.

[Caller instructions.]

And it appears there are no further questions. Ms. Tudor, I’ll turn things back to you for any additional or closing remarks.

We thank you for your time and interest, and we’ll look forward to updating you in the future. Hopefully, we will have the first quarter ’05 results just as quickly as we possibly can to keep you updated. Thank you.

That does conclude today’s conference. Have a great day. You may now disconnect.