Ingles Markets, Incorporated (IMKTA) 2005 Q2 法說會逐字稿

Good day and welcome to the Ingles Markets Incorporate conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the conference over to Chief Financial Officer, Mr. Ronald Freeman. Please go ahead, sir.

Good morning. Welcome to Ingles Markets 2005 second quarter conference call. 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 Harbor's 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 future events or otherwise. For a description of factors that could cause 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 25, 2004, and of Form 10-Qs for the quarters ended December 25, 2004, and March 26, 2005.

Now I will give you a brief overview of our second quarter and six months ended March 26, 2005. Then we will be happy to take your questions. Our 10-Q was filed yesterday, and our press release issued this morning is available on our website at www.ingles--markets.com.

We are very happy to report significant sales increases. Total sales growth was 7%, and comparable store sales growth was 6.3% for the March 2005 quarter. For the March six-month period, total sales growth was 5.8%, with comparable store sales growth of 5.6%. Sales comparisons for the three- and six-month periods were affected by the timing of the Easter holiday. Easter sales occurred in the March quarter of fiscal 2005, but in the June quarter of fiscal 2004. We estimate that comparable store sales increases are slightly lower at 5.7% and 5.2% for the March three- and six-month periods respectively adjusted for the effect of Easter sales.

We are pleased with comparable store sales growth since we were up against strong fiscal 2004 sales. Sales grew in all major departments over both the second quarter and six-month periods including above average growth in are higher margin perishable departments and in pharmacy and gasoline. Ingles operated two fewer stores at the end of the March 2005 quarter then at the end of the March 2004 quarter, and total retail square footage remained about the same at 9.3 million square feet.

Gross profit dollars increased due to the increase in sales while gross margin declined quarter-over-quarter and the year-over-year. Pharmacy gross margin decreased due to tightening on negotiated rates with third-party insurers while gasoline gross margin decreased due to rising fuel costs and competitive pressures.

Operating expenses increased in dollars due to the sales growth but decreased as a percentage of sales by 85 basis points for the March 2005 quarter and 54 basis points for the March 2005 six-month period.

Rental income for the March 2005 quarter declined 0.7 million over the prior year quarter and the six-month period. The decrease is due primarily to the loss of rental income from the sale of a shopping center in September 2004 and the relocation of other tenants from shopping centers to stand-alone sites.

Income from operations totaled 21.5 million for the March 2005 quarter, a 3% increase over the same 2004 quarter. Income from operations totaled 42.2 million for the six months ended March 2005, an increase of 5.1 million or 13.6% over the same fiscal 2004 six-month period. There were no significant property sales in the three and six months ended March 2005. In the second 2004 quarter, we sold a shopping center in which we no longer operated a store for a gain of 3.8 million which was included in other income. In the first 2004 quarter, we sold an outparcel adjacent to an existing shopping center for a gain of 1 million which was also included in other income.

(technical difficulty) expense decreased to 0.8 million and 1.6 million for the three- and six-month period ended March 2005, respectively compared to the same periods ended March 2004 due to a reduction in total debt from 620 million at March 27, 2004, to 586.5 million at March 26, 2005.

Net income totaled 5.5 million for the March 2005 quarter, compared to 7.2 million for the second fiscal 2004 quarter. Net income for the first six months of fiscal 2005 totaled 10.5 million, 9.2% higher than the comparable 2004 six-month period. As noted earlier, property sales contributed 2.5 million and 3.1 million to after-tax net income for the three and six months ended March 2004.

We currently have committed lines of credit totaling 135 million all of which are unused. However, letters of credit totaling 14.7 million reduced the amount available to be drawn lawn under the lines. 120 million of the lines mature in October 2006, while the other 15 million matures in October and November 2005. We had unencumbered property with a book value of 379 million of which 272 million is real estate at March 26, 2005.

During the March 2005 six-month period, Ingles completed one new store, completed one major remodel expansion, purchased three future store sites and closed to stores. Capital expenditures for the March 2005 six-month period totaled 26.8 million. For the balance of the fiscal year, Ingles expects to open three new stores, complete one major remodel expansion, have seven new fuel stations and purchase one store site. Capital expenditures for the entire fiscal year are expected to be approximately 70 million including expenditures for stores scheduled to open in 2006.

We are very proud of our performance in this first half of our fiscal year. We have an energetic team working diligently to grow and improve our business by both driving sales and managing expenses. We hope to continue to build on the sales momentum we have established and bring increased profitability to the bottom line.

We will now take your questions.

Thank you. The question-and-answer session will be conducted electronically today. (OPERATOR INSTRUCTIONS) Bryan Hunt with Wachovia Securities.

Good morning. This is Robert Crawford (ph) filling in for Bryan Hunt. A question about your same store sales in this current quarter, how do you see that trending? Is that trending up as well?

Yes. Very much so.

Okay and how is your mix in this quarter? Sales mix?

As far as our mix of --?

Has your mix been desirable or is it an undesirable sales mix or is it pretty much in line with your first couple of quarters?

Were you referring to the quarter that just ended?

The current quarter, your third quarter.

I thought you were referring to the quarter that just ended. (multiple speakers)

Excuse me.

We can't comment on the quarter that we are currently in.

Okay. That's fine.

Result was on a last quarter, the quarter we reported.

Got you. My next question -- can you talk a little bit about the promotional environment as well as the competitive environment in terms of store -- competitive store closures and openings that you have seen and that you expect?

It looks like we are running about the same store openings against this is a pretty much a normal year. As you know, we compete with over 100 Wal-Marts currently. There is some being opened, but it looks like it is about the normal trend. As far as promotion activity, we haven't seen anything particularly unusual from our competition.

Okay, thank you.

James Kaelin (ph) with Banc of America Securities.

Just on the gross margin, year-over-year gross margin was down about 85 basis points and it was up about 10 sequentially. Can you talk about what some of the changes were that led to that? And then sort of directionally where you think that is going to head the rest of the year?

We continue to focus on pushing our sales with our concentration of course being on value, service, variety in our quality. Our increased promotional activity has affected our gross a little bit, and we see our gross as leveling out, but we do see us to continue to focus on pushing our sales.

Okay, so this is probably a pretty decent run rate and it's really -- you have really focused on driving traffic?

Yes sir.

And then the next two quarters you have a pretty tough comp against last year. Would you expect to be sort of about even with those?

We can't comment on what is coming forward. We of course will continue, like I said to focus on pushing our sales, and that is what our whole team's objectives are.

On the last conference call, you mentioned that there were a few stores and/or shopping centers that you were looking at potentially monetizing given how strong the real estate market is down there. Can you give us any update on those plans?

Other than what we said in the comments?

Can you repeat that question? I'm sorry.

On the last conference call, I think you talked about the fact that given how strong the real estate market is down there, there were a number of stores and/or shopping centers that you were looking at potentially selling. I was wondering if you could give any sort of update on -- if the market is still strong; if that is something you guys are still looking at?

The market is still very strong on the real estate and especially those stores in those particular areas. As of this point, we haven't decided to turn the stores loose.

All right. Thanks very much.

Ken Bann with Jefferies & Co.

Just one question. The stores that you are opening this year, will they be on real estate that you own and will you own those shopping centers?

Two of the stores will be on areas that we will own and one of them will be a leased property.

How about the one that you opened earlier this year, is that on owned property?

Yes sir.

Okay. All right, thank you,

(OPERATOR INSTRUCTIONS) Todd Shirak with Shankman Capital.

Good morning fellows. I have just one quick question. Have you had any recent conversations with Moody's regarding the three-notch downgrade?

No, other than to have a final discussion with them before they announced their decision. Again as we have said before, we believe that that is their view of the entire industry and not particularly of us.

Do you recall what particularly stood out for them in terms of what preempted them to downgrade it by three notches? Was it debt reduction, free cash flow, or leverage?

Nothing stands out.

Anything further sir?

No thanks.

Jim Kohl (ph) of Lombard Securities (ph).

Good morning. I was wondering if you could tell me on average how far Wal-Mart stores are from your locations?

About three miles.

About three miles?

We compete with them in about 109 locations, and I would say a good estimation will be somewhere between three and five miles.

Okay. Have they ever brought any real estate from you all?

Yes they have.

All right, thank you. Appreciate it.

Andrew Berg of Financial Management Advisors.

Just going back to the ratings questions, for a moment. I was kind of surprised by the move and how aggressive Moody's was when they did it. Had they had a conversation with you guys in meetings? Had you met with them recently prior to the downgrade, or was it one where they just called to inform you that guys were going to move you down? Because it seemed to be a bit aggressive given the improvement in the business. (technical difficulty) in the rearview mayor.

I believe all of the conversations (inaudible).

I'm sorry can you said again. It was tough to hear you.

I believe all the conversations that they had were with Brenda (inaudible) --.

Our previous CFO.

Understood, but do you know if Brenda had had meetings with them recently or whether they were still working on their outlook from before and they just called to inform you that at this point they were changing the ratings?

They did come down and spend a day with Brenda. But -- they toured some of our stores, and spend a little bit of time with her. But that's all I know.

Okay, thank you.

There are no further questions. Mr. Freeman, I'll turn the conference -- there has just been a question that has queued up. Paul (indiscernible) with SBZ Select Investments.

I noticed that you guys have gas and the pharmacy locations at stores that are in your comp store sales data. I was wondering how much did this contribute to your same store sales?

Right now, our same store sales would continue to be up even without the gas and the pharmacy. Our gas distribution has increased, but so have some of our other perishable departments. But we see total comp sales up even without figuring in the gas and the pharmacy.

Okay. Actually, can you comment on how gas price increases impact your current business?

As far is a sales part or as far as gross part?

Both.

From a sales standpoint, like I said, our gas distribution has picked up, but a lot of that has to do with of course the new locations and with the escalating cost of gasoline. And from a gross standpoint, as gasoline increases, of course that is an area that we follow the competition with, and as gas increases, actually your margin decreases. It is a very competitive part of the industry. And we -- in order to be aggressive with our sales just follow the market.

Very good, thank you very much.

Gentlemen, there are no further questions. Mr. Freeman -- we have a question from Andrew Berg from Financial Management Advisors.

Just a follow-up on the gas question. Can you comment on what your profitability is on gas in terms of cents per gallon? Your gross?

It fluctuates so much. The gas price is something that is -- it changes daily. When we buy a load, it is just like any other commodity, it changes by the hour. So consequently something that you buy, margin might be one thing this morning and another thing tomorrow morning.

On average though. Can you comment on that?

No, sir, I don't think I can give you a real (inaudible).

Reason why I ask, I know that if you look at some of the convenient store chains that they will run a gross of $0.10 to $0.12 per gallon. Are you guys within sort of that ballpark?

No, sir.

Higher or lower?

Considerably lower.

Thank you very much.

Gentlemen, there are no further questions.

Okay. Thank you for your time and interest, and we look forward to keeping you updated in the future. Thank you very much.

That concludes today's conference. We appreciate your participation. Have a great day.