Ingles Markets, Incorporated (IMKTA) 2007 Q4 法說會逐字稿

Good day, and welcome to the Ingles Markets Incorporated fourth quarter 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.

Thank you. Good morning. Welcome to the Ingles Markets 2007 fourth quarter and year end conference call. With me today are Robert Ingle, Founder of our company and Chief Executive Officer, Robert Ingle the Second, 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 security cities laws. Words such as expect, anticipate, intend, plan and 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. Ingles Markets, Inc. does 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 are referred to the company's public filings, including the Form 10-K for the fiscal year ended September 29th, 2007.

This morning, I'll provide you with a summary of our annual and fourth quarter results, followed by additional comments on each period. After that, we will be pleased to take your questions. Our Form 10-K filed on Wednesday, November 28th, and our press release, issued this morning are available on our website at www.ingles-markets.com.

For the 43rd consecutive year, our sales grew, totaling a record $2.85 billion. Net income for fiscal 2007 was a record as well, at $58.6 million. This net income figure is 37.7% better than last year's record total of $42.6 million. Net income for the fourth quarter of fiscal 2007 totaled $14.2 million, 23.3% higher than net income of $11.5 million for the same quarter of last year. Fourth quarter 2007 sales were $746 million, an increase of 3.2% over fourth quarter fiscal 2006 sales of $723 million. Our focus has been and will continue to be driving top line sales, the main factor behind these excellent net income numbers.

It is important to note that the fourth quarter and fiscal year 2007 contain one less week than the comparable 2006 periods. Ingles operates on a 52 or 53 week fiscal year, ending on the last Saturday in September. Fiscal 2006 contained 53 weeks, versus 52 weeks this fiscal year. Similarly, the fourth quarter of fiscal 2006 contained 14 weeks, compared to 13 weeks in the fourth quarter of this fiscal year.

First, our fourth quarter results. Net sales increased 3.2%, to $746 million for the quarter ended September 29, 2007, from $723 million for the comparable fiscal 2006 quarter. Adjusted for the additional week in the fiscal 2006 quarter, net sales increased 9.6%, and grocery segment comparable store sales growth was 9.3%. Both average weekly customer visits and the average purchase amount increased over the comparative fourth quarters. Excluding gasoline sales, and adjusting for the additional week in the fiscal 2006 quarter, sales increased $53.6 million, or 8.8%. Compared to the fourth quarter of fiscal 2006, gasoline gallons sold increased by 16% and the average price per gallon increased approximately $0.02.

Gross profit for the current quarter totaled $179.6 million, an increase of $1.6 million over the fourth quarter of fiscal 2006. Excluding lower margin gasoline sales, gross profit as a percentage of sales was 26.9% for both the fourth quarters of fiscal 2007 and fiscal 2006. For the first three quarters of fiscal 2007, gross margins were lower than the comparable 2006 quarters. Without these adjustments, gross profit as a percentage of sales was 24.1% for the fourth quarter of fiscal 2007, compared to 24.6% for the fourth quarter of fiscal 2006. Operating expenses decreased as a percentage of sales to 19.6% for the fiscal 2007 quarter, compared to 19.9% for the fiscal 2006 quarter.

We successfully leveraged our cost structure, including our labor costs. Labor costs are our largest component of operating expenses, so increasing sales without a similar increase in operating hours or overtime has a positive effect on the bottom line. Total operating expenses were $146.3 million for the fourth quarter of fiscal 2007, compared to $144 million for the comparable 2006 period. Net rental income and other income for the fourth quarter of fiscal 2007 were somewhat comparable with the fiscal 2006 amounts, as lower rental income was offset by increased sales of scrap cardboard and packaging materials.

Losses from asset disposals were $300,000 for the current year fourth quarter, compared with losses of $4.6 million for the fourth quarter of fiscal 2006. During the fourth quarter of fiscal 2006, Ingles recognized approximately $4.5 million of expense related to shopping center and store assets, demolished or otherwise taken out of service in conjunction with the company's store relocation, closing and remodeling activities. To recap the quarter, net income for the September 2007 quarter totaled $14.2 million, 23.3% higher than net income of $11.5 million for the September 2006 quarter. Basic and diluted earnings per share for the company's publicly traded Class-A common stock were $0.61 and $0.57 per share respectively for the September 2007 quarter, compared to $0.49 and $0.47 per share respectively for the September 2006 quarter.

Now, I'll go over our record annual results. Net sales increased 9.2% to $2.85 billion for the fiscal year ended September 29, 2007, from $2.61 billion for the fiscal year ended September 30, 2006. Adjusted for the 53rd week in fiscal 2006, net sales increased $281.9 million or 11%. Sales increased in every department except one in fiscal 2007. In general, net sales increases were driven by effective promotions, service execution and expanded product selections. Fuel stations, pharmacies, meal replacement items, organics and expanded perishable offerings have offered customers competitive choices and allowed them to combine shopping trips during a period of high fuel costs.

Customer visits to our 197 stores topped 100 million during fiscal 2007. Grocery segment comparable store sales, excluding gasoline and adjusted for the additional week in fiscal 2006, increased $187.8 million or 8.4% for the same period. Gasoline gallons sold increased 39% year-over-year, while the average price per gallon was slightly lower in fiscal 2007. Retail square footage increased to 9.7 million square feet at September 29, 2007, compared to 9.6 million square feet at September 30, 2006. We operated 197 stores at the end of both 2007 and 2006, so our average store size is increasing. Gross profit for the 52-week fiscal year ended September 29, 2007 increased $34 million or 5.2%, to $686.2 million, or 24.1% of sales, compared with $652.2 million, or 25% of sales for the 53-week fiscal year ended September 30th, 2006.

The increase in grocery segment gross profit dollars was primarily due to the higher sales volume. Grocery segment gross profit as a percentage of total sales was lower for fiscal 2007, primarily due to higher sales growth in the lower margin gasoline department, and overall food and distribution cost increases, which were not entirely passed through to our customers. According to the Bureau of Labor Statistics, food, beverage and energy inflation for fiscal 2007 was higher than general inflation and higher than food, beverage and energy inflation experienced in fiscal 2006. Excluding gasoline sales, grocery segment gross profit as a percentage of sales was 26.7% for fiscal year 2007, and 27% for fiscal year 2006. Operating and administrative expenses decreased as a percentage of sales to 19.6% for the fiscal year ended September 29, 2007, compared with 20.6% for the fiscal year ended September 30, 2006. In dollars, operating and administrative expenses increased $27.4 million, or 5.1% to $564 million for the year ended September 29, 2007, from $536.6 million for the year ended September 30, 2006.

As discussed in the quarterly results, higher sales resulted in improved cost leverage. With the exception of bank charges for processing debit and credit card transactions, all major expense categories decreased as a percentage of sales. Net rental income decreased $0.6 million, to $4.4 million for the fiscal -- for the 2007 fiscal year, from $5 million for the fiscal -- for the 2006 fiscal year, due to higher vacancy rates and a more selective process regarding complementary tenants. Gains on asset disposals totaled $6.9 million for fiscal 2007 compared with losses of $4.4 million for fiscal 2006. During fiscal 2007, the company sold a shopping center in which it no longer operated a store at a pretax gain of approximately $7.9 million. During fiscal 2006, Ingles recognized approximately $4.5 million of expense related to shopping center and store assets taken out of service in conjunction with the company's store relocation, closing and remodeling activities.

Other income totaled $3 million for fiscal 2007, compared to other income of $1.7 million for fiscal 2006. Increased waste paper and packaging sales accounted for most of the increase. Interest expense decreased $3.1 million for the year ended September 29, 2007 to $46.7 million from $49.8 million for the year ended September 30, 2006, due primarily to the repayment of $29.7 million of principal debt during fiscal 2007, partially offset by $16.6 million of additional line of credit borrowings that were generally at lower rates than the mortgage debt that was paid off.

Total debt at September 29, 2007 was $543.3 million, compared to $556.3 million at September 30, 2006. The company's effective tax rate was 34.7% for fiscal 2007, compared with 37.5% for fiscal 2006. During fiscal 2007, the company settled a tax position under an initiative offered by one of the states in which it does business. As a result of this settlement, income tax expense was reduced in fiscal 2007 by $3.2 million. Net income increased $16.0 million, or 37.3% for the fiscal year ended September 29, 2007, to $58.6 million from $42.6 million for the fiscal year ended September 30, 2006. Basic and diluted earnings per share for Class A common stock were $2.51 and $2.39 for the fiscal year ended September 29, 2007, compared with $1.82 and $1.74 respectively for the fiscal year ended September 30th, 2006.

Updating our investing and financing activities, capital expenditures totaled $127.8 million and $94.3 million for fiscal years 2007 and 2006 respectively. During fiscal 2007, Ingles opened two new stores, closed two older stores, completed five replacement or remodeled stores and purchased 12 land parcels for future development. Ingles' capital expenditure plans for fiscal 2008 include investments of approximately $105 million. The company plans to open 10 new replacement or remodeled stores and add 10 fuel stations at either new or existing stores. The company expects annual capital expenditures of between $90 million and $110 million for the foreseeable future.

At September 29, 2007, the company had $150 million of committed lines of credit, of which $20.6 million was outstanding. Total borrowing availability under these lines, after deducting amounts outstanding and letters of credit, totaled $109.3 million at September 29, 2007. The company is currently in the process of securing an add additional $35 million in credit line facilities at terms similar to existing facilities. At fiscal year end 2007, the company had unencumbered property with a book value of $572 million, of which $409 million is real estate. A $349.8 million of 8.875% senior subordinated notes are now callable of at a call price of 102.903%. We are currently evaluating financing options for the subordinated notes and for our future capital needs.

At the close of another successful year, we look forward to serving our customers with more stores, more products delivered with value and exceptional service. We will now take your questions.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Our first question will come from Bryan Hunt with Wachovia. Please go ahead.

This is actually Meredith Fowler speaking for Bryant. Can you please speak to competitive pressures and competitive openings during the quarter?

We compete against a number of different national grocery chains and a host of regional grocers and specialty stores and we also compete with restaurants. So it's very difficult to talk about the competitive environment with such a diverse base of competitors. And as a policy, we really don't care to talk about our competitors very much.

Can you at least say if it was -- if it increased or decreased relative to last quarter?

We really can't say. Thank you.

And then with regards to your new store openings expected for 2008, are any in new geographies or are they all in your current geography?

They're all in our current geography, but some of them are new stores and some of them are replacement or remodeled stores.

Lastly, can you talk about your dairy profitability and are you passing along any prices to any of your third parties?

We're hesitant to discuss pricing. We're under the same cost pressures as everyone else for dairy products, given drought and feed cost conditions. Other than that, we really don't discuss our pricing policies publicly.

Thank you.

Our next question comes from Emily Shanks with Lehman Brothers.

Good morning. Very nice quarter. Just a couple of follow-up questions. We were wondering, in the fourth quarter, did you see the similar environment that you saw in the prior quarters where you were giving up a bit on price to maintain or grow the market share?

It's hard to read a whole lot into one quarter. The fourth quarter was a little bit better from a margin standpoint. But there's so many volatile issues out there right now from a cost standpoint that I don't think you can say that it's necessarily a trend one way or the other.

Okay. And then around -- you all had referenced that there was a favorable product mix shift in the fourth quarter to offset some of those product cost increases. Can you speak specifically about what that product mix shift was?

Well, we're doing pretty well in our perishable departments and we're doing really well in a lot of prepared foods and meal replacement items, and those things tend to carry a little bit higher profit margin.

That's very helpful. My last question, in terms of the fact that you're seeking to upsize the revolver, can you speak a little bit about what went into that decision to do so?

Well, we've increased our CapEx plans for the next few years and given the volatility in the bond and financing markets over the last six months or so, we want to make sure that we've got adequate sources of capital to build and remodel the stores the way we want to do them.

Great. Thank you.

You're welcome.

Next we'll go to Andrew Berg with Post Advisory Group.

With respect to the store openings, I think you said there were going to be 10 openings or remodelings. How many are actually going to be net new stores in terms of openings?

I don't have that information in front of me. I'm aware of at least a couple. But beyond that, I don't have that with me right now.

Okay. And in terms of the timing for those to open, are those -- should we think about those coming on in the my middle of the year? The end of next year? Do you have those set to open in the December quarter?

It's hard to be precise, given weather and permitting and all the other things that can go into a construction schedule. I guess the best thing to say would be somewhat ratable over the year.

And just to refresh my memory, what's the cost to open a new store?

Well, there's nothing really to refresh your memory there. That's not something we talk about because land prices can vary so much and the construction cost for the store can vary based on the size.

Okay. And then lastly, you said you are evaluating options for your notes. Who have you retained to assist you in that? Who is your financial advisor?

We have not retained anyone.

Thank you.

Thank you.

We have a question from Paul Carpenter with Semaphore Management.

Good morning. Thank you for taking the question. I've been following the company since you did the high yield bond deal which if my memory serves me correctly I think was 2001 or so.

That's correct.

And every couple of conference calls someone gets on and asks whether or not you're going to break up the company to unlock the real estate value, which has become amusing to me. I'm sure it's always amusing to you. But in having followed the company over the years, I've noticed that the number of undeveloped sites you keep for development has really increased substantially from I think about four or five a few years ago to now 14, and if you're going to open 10 new and replacement stores this year and assuming that I don't know, half of those or so are replacement stores, the number of parcels which you're not going to use for a while that you're keeping in inventory so-to-speak for new store development has been going up on an up basis and maybe the equity investors got too excited about your underlying real estate value on the way up and now they've become too uncaring about it on the way down. As a long-term manager of a business, where you have obviously created a lot of value, what do you do in the face of this kind of movement in your stock price when it's down 50% and be curious to see what have you to say about that and then I have a couple of follow-up questions as well.

Yes, we focus on running our business for the long-term. And that means that we always want to have a number of projects in the pipeline covering multiple years for new store development. So you're going to have some pieces of property that you'll own for a while before you actually put a store on them. As far as the stock market, again, the best we can do is manage our business the best we can for our customers and shareholders day in and day out over the long-term. We can't focus on the stock market.

No, I guess I understand that. My comment is sometimes the stock market presents opportunities. Sometimes it overshoots too far on the upside, sometimes it overshoots too far on the down side. The amount of capital you're putting into real estate, it may be that a number of parcels have come up right now that you wanted to jump on that are going to be good opportunities for the next three to four years, but the amount of -- the additional amount of capital you're putting into that phase of your business, your decision to do that now, I would hope it would be different from where it was in February or March when the stock was at a different valuation and maybe it was driven up by quantitative or technical investors who didn't really care about the business. Is that even something that creeps into the capital allocation decision when you're thinking about whether to refinance the notes or add new undeveloped store sites or sell shopping centers? That's really the thrust of my question. Or is it just not in the cards at all?

I guess to go back to what we said earlier on the call, we focus on growing top line sales and developing good stores. That's first and foremost in the decision and then we want to make sure that we've got ways to finance that. And it's a long-term process but again, the emphasis is on the sales and on the stores.

Okay. I just have a few additional questions. Your note about inflation in the financial statements I believe is lifted from what the government claims inflation is. I'd be curious to know what you're seeing in terms of food price inflation. And then the final two questions are could you talk a bit about the drought in your area, what you think that might mean in tension of operational challenges in the last few months. And then lastly, I think there was a recent sale of a shopping center for about twice the book value and would be curious to know how aged that shopping center was. Was that something that had been on the books for five years or 10 years or 15 years, if you could just take those three questions, I would appreciate it.

I'll try to remember all three of them. You may have to prompt me again.

Sure.

First of all, inflation, I don't think what we've seen is markedly different from the nationwide statistics. It is an impact on our business and everyone else's in the food industry, and I'm sure part of that inflation number, not just in the Southeast, but nationwide, is drought driven, because it hasn't been just strictly in this one area where we operate. That said, there is no question that it's reduced yields for a lot of things that grow, feed costs have accordingly gone up, which feeds into dairy costs, which feeds into meat costs. It's been tough. There's no question about it.

But I don't think we're seeing anything down here that is markedly different from probably what you're seeing nationwide. Then the last question on the shopping center that was sold, we had had that store open for a number of years. 27 years. So it had been there for a while. It was a smaller store and we got a great offer and it was going to be difficult to bring the store up to our current standards so it was a good opportunity for us.

Okay. Thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). Our next question comes from Bryan Hunt with Wachovia.

Thank you. Ron, I was wondering if you could talk about the number of parcels you have for sale at this time and given the number of replacement stores you're going to open during the year, how might that number grow throughout fiscal 2008?

Well, we don't have any parcels up for sale right now. I think as we have said on past calls, we receive inquiries very regularly, but there's nothing out there that's explicitly for sale. I'm sorry, what was the second question?

How many replacement stores you were going to open that might drive that number for fiscal 2008?

I don't think there's a correlation.

Okay. And then my next question is in past calls, there's been some discussion about your warehouse capacity, the business continues to grow at very high rates relative to the industry and you're going to be adding a lot of stores it sounds like in the next two years. How are you guys set up to grow the business given the potential restrictions on your warehouse capacity?

Warehouse capacity and restrictions will not hold us from growing the business.

And are you guys setting aside capital to grow the warehouse after you bought a new plot of land to construct a new warehouse?

As we mentioned in the 10-K, we did buy some land adjacent to our existing facility.

And is that CapEx to expand the warehouse going into fiscal 2008 or is that a 2009 project?

The CapEx number that we put out is primarily for stores.

All right. So is it -- I guess that makes it sound like it's a 2009 project?

I can't comment on the timing of that at all.

All right. Could you tell us how much that property cost and how big it was?

That's going to vary too much. No, I really can't.

Thank you very much.

Sure, Bryan, thanks.

(OPERATOR INSTRUCTIONS). Mr. Freeman, it appears there are no questions at this time.

Okay. Thank you very much. I appreciate everyone listening in today and thank you for your time and interest. We wish all of our customers, employees and shareholders a happy and safe holiday season. Thank you very much.

Ladies and gentlemen, this does conclude today's conference call. We appreciate your participation. You may now disconnect.