Ingles Markets, Incorporated (IMKTA) 2005 Q3 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 Chief Financial Officer, Mr. Ron Freeman. Please go ahead.

Good morning. Welcome to the Ingles Markets' 2005 third-quarter conference call. With me today are Robert Ingle, Founder of our Company and Chief Executive Officer, Robert Ingle II, Chairman of the Board, and Jim Lanning, President.

Statements made on this call include forward-looking statements as defined by and subject to the Safe Harbors created by federal Securities laws. The words expect, anticipate, intend, plan, believe, 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 publicly update any forward-looking statements whether as a result of new information, future events or otherwise. For a description of factors that could cost 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 25, 2004 and Form 10-Qs for the quarters ended December 25, 2004, March 26, 2005 and June 25, 2005.

Now, I will give you a brief overview of our third quarter and nine months ended June 25, 2005. Then we will be happy to take your questions. Our 10-Q filed on August 4 and our press release issued this morning are available on our Web site at www.Ingles-markets.com.

For the third consecutive quarter of 2005, we are pleased to report growth in both total and comparable store sales over the corresponding 2004 quarter. Total sales growth was 5.4% and comparable store sales growth was 5.5% for the June 2005 quarter. For the June nine-month period, total sales growth was 5.7% with comparable store sales growth of 5.6%.

Sales comparisons for the three-month periods are 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, excluding the effect of the Easter holiday, comparable store sales increased 6.2% for the June 2005 quarter.

Sales grew in all major departments over both the third quarter and nine-month periods with the largest percentage increases in perishables, pharmacy and gasoline. Total retail square footage remained about the same at 9.3 million square feet between June 2004 and 2005. We operated 195 stores at the end of June 2005, 1 fewer than last year. Gross profit dollars increased primarily due to the increase in sales while gross margin declined quarter-over-quarter and year-over-year. Pharmacy growth margin decreased due to tightening of negotiated rates with third-party insurers while gasoline gross margin decreased due to rising fuel costs and competitive pressures. Excluding the effect of gasoline and pharmacy sales, the retail grocery segment gross margin was higher for the nine-month 2005 period compared to the same period of 2004.

Operating expenses increased in dollars due to sales growth but decreased as a percentage of sales by 30 basis points for the June 2005 quarter and 46 basis points for the June 2005 nine-month period.

Rental income declined for both the June 2005 quarter and the nine-month period. This 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.

Interest expense decreased 0.4 million and 2.1 million for the three and nine-month periods ended June 2005 respectively compared to the same periods ended June 2004 due to a reduction in total debt from 610.7 million at June 26, 2004 to 579.7 million at June 25, 2005.

Net income totaled 6.6 million for the June 2005 quarter compared to 8.3 million for the third fiscal 2004 quarter. Net income for the first nine months of fiscal 2005 totaled 17.2 million compared to 17.9 million for the comparable 2004 nine-month period.

During the June 2004 nine-month period, the Company sold a shopping center in which it no longer operated a store and three out-parcels adjacent to existing store locations. These sales contributed 3.5 million to after-tax net income for the nine months ended June 2004.

Operating income from our retail grocery and fluid dairy segments is higher for the nine months ended June 2005 compared to last year. We currently have committed lines of credit totaling 135 million, all of which are unused. However, letters of credit totaling 13.7 million reduced the amount available to be drawn 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 (ph) property with a book value of 388 million of which 279 million is real estate at June 25, 2005.

During the June 2005 nine-month period, Ingles completed one new store, completed two major remodels or expansions, purchased three future store sites and closed two stores.

Capital expenditures for the June 2005 nine-month period totaled 43.8 million. For the balance of the fiscal year, Ingles expects –to open 3 new stores, including the opening of a former store operated by a competitor currently in bankruptcy. Capital expenditures for the entire fiscal year are expected to be approximately 70 million, including expenditures for stores scheduled to open in fiscal 2006.

We are pleased with our sales growth compared to strong fiscal 2004 sales and are enthusiastic about the direction of our company. Our focus remains to drive sales, manage expenses and provide a quality shopping environment for our customers.

We will now take your questions.

(Operator Instructions). Bryan Hunt with Wachovia Securities.

Thank you. I was wondering if you could talk about the SEC formal investigation. Does this investigation cover a particular vendor contract, a series of contracts or is it basically covering an accounting policy executed by the Company for vendor payments?

The issues are the same that they have been since the informal investigation.

Could you go back over those for potential investors and folks that may have a short-term memory problem?

They are disclosed in the 10-K and the 10-Q very extensively.

Next, looking at your AP, it is up about $22 million from a year ago. I was wondering, one, are you getting better trade terms from your vendors or, two, is it a timing issue?

It's more of a timing issue than anything else. Since that is a point in time end of the quarter number, our terms are approximately the same with our vendors.

On the three new stores, could you give us the locations of the three new stores?

The new one that we opened was our Long Shoals Road and the remodels that we have done were Brevard and Cleveland. The new stores to come are Boling Springs, South Carolina, Lake Lure, North Carolina and then the Winn-Dixie we took over in Boone, North Carolina.

Could you talk about the competitive environment, how many competitive openings you have seen in the maybe most recent quarter or twelve months and what the outlook is?

We have not seen anything much different than what our normal is. We generally have probably three to five competitors in a quarter. We see several locations with Winn-Dixie going away and we feel very good about the fact that we feel like we can pick up some of that business.

I mapped it out and there appeared to be roughly 40 locations where you overlap with Winn-Dixie, give or take a few. Of those 40 locations, how many of those do you believe, besides the one you are taking, will remain open?

We really don't know.

You don't know at this point in time?

No sir.

Maybe lastly, could you talk about the promotional environment? You talked about fuel and how it had become a little bit more competitive. What about for groceries? Even though your gross margin is up, how would you quantify or qualify the competitive our promotional environment? Has it become more promotional sequentially or has it become less and in what context?

It's pretty stable. We see about the same competitive environment that we have had. We are continuing to push for sales. We've always been very sales oriented and from our standpoint, we focus in on the value to the customer, the variety and of course our service to the customers.

Okay, I will get back in the queue. Thank you.

(Operator Instructions). Kent Shaw (ph) with Buckhead Capital.

Good morning, gentlemen. I just wanted to ask you a quick -- if you could give us an update on the rental properties, what do you have vacant right now and what it looks like for the future with those properties?

As far as there has not been as much change in the properties available for rent in 2005 as there were in 2004, like we mentioned in the press release and the script.

I guess I was referring to I suppose it was maybe two or three quarters ago, there has been a statement made that there was quite a lot of interest in some of the rental properties that had come available. I think maybe CVS had stepped out of some of the properties so they could have freestanding buildings. I had never heard any update as to whether those properties that came available have been leased since then?

We have had quite a lot of interest in our properties but right now ,we are just holding that status quo on our properties.

Typically what type of timeframe does it take once a discussion begins before a lease might actually be signed on something like that?

Are you speaking of existing still buildings or --?

Yes, existing buildings. If somebody called and just expressed an interest and that discussion process started, how long would it be from that time before a lease would be signed, just hypothetically speaking?

30 days.

The purchase of the Winn-Dixie store, can you give us any insight or any -- is there any discussion you can offer about any information you might have gained from that bidding process? Were there other stores that you bid for that you did not win or were you surprised to see maybe what others were paying for those stores?

We really can't comment on that other than just the fact that we are pleased to get the one in Boone.

Okay, all right, thank you.

Bryan Hunt, Wachovia Securities.

Thank you. I was wondering if you could talk about the same-store sales in a little bit more detail? Are you seeing basket size go up or customer count go up as well as what is the impact of inflation on the same-store sales number?

I think inflation is pretty flat other than the gasoline. We've seen basket size increase about $1 roughly. If you exclude the gas and the pharmacy, we are still comfortable sales are up over previous year. Does that answer what --?

Yes. Also getting back to the property question the last caller had, there had been conversations I guess in the last three quarters that the Company had call it nine or ten properties in the Atlanta area that you all were examining and potentially selling because they were non-strategic; you all did not have a store in those properties. Is that conversation progressing or is the Company sitting on its hands right now? What is the I guess the situation with those properties today?

We are still in negotiations on some of the properties but so far, we have not made a decision to sell.

Okay. Then Lastly, you all did buy three partials of land this year. Could you talk about the openings for next year as well as maybe giving us an idea of what CapEx may be for 2006?

For total CapEx for 2006 will continue to be around 60 to 70 million.

How many locations do you plan on opening next year?

Probably five.

Is that net or will there be some closures as well?

We have not made any decision to close any stores at this point.

Thank you very much.

Ross Maris (ph) with First Manhattan.

Good morning. In your 10-Q, you have a statement about internal controls and saying that essentially they have not been fixed yet so that as of September of this year, you expect to report a material weakness. Could you just comment on why that is continuing?

Sarbanes-Oxley Section 404 is a very extensive regulation and we are certainly not alone among public companies or in our industry in having a lot of work to do to comply with 404 and get a clean opinion on our internal controls.

Would you have an estimate of when you think you would get the clean opinion?

I can't at this point.

Okay, but needless to say, we can assume you are working pretty hard on cleaning up?

We are working very hard.

Okay, thank you.

(Operator Instructions). Glenn Cutler (ph) with ING Clarion.

Good morning. You guys have a lot of real estate on your books and are trading at a pretty attractive enterprise value to EBITDA multiple. With all of these buyout shop looking for retailers with a lot of real estate assets, I'm wondering if anyone's approached you or if you would perhaps consider being bought out if an attractive offer was made? Thank you.

I don't think we've ever been approved for a buyout in 43 years.

Gentlemen, with no further questions, I'd like to turn the call back to you for any additional remarks or closing comments.

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

Ladies and gentlemen, this does conclude today's teleconference. You may now disconnect and have a great day.