Ingles Markets, Incorporated (IMKTA) 2008 Q1 法說會逐字稿

Good day and welcome to the Ingles Markets, Incorporated first 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 Chief Financial Officer, Mr. Ron Freeman. Please go ahead, sir.

Thank you. Good morning. Welcome to the Ingles Markets fiscal 2008 first 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 Harbors created by federal securities laws. Words such as 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 the call.

Ingles Markets, Incorporated 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 will refer to the Company's public filings, including the form 10K for the fiscal year ended September 29, 2007. This morning I'll provide you a summary of our first quarter results followed by additional comments. After that, we will be pleased to take your questions. Our press release issued this morning is available on our website at www.ingles-markets.com. We expect to file our 10Q for the quarter in a few days. It will be available via our website as well.

Sales growth led to a strong start for fiscal 2008. Net income for our first fiscal quarter ended December 29, 2007, totaled $12.7 million, an increase of $1.5 million or 13.3% (sic -- see Press Release) over net income of $11.2 million for the first fiscal quarter of last year. First quarter sales also increased 13.3%, to $777.1 million, compared to $685.7 million for the quarter that ended in December 2006. During this quarter, which included Thanksgiving and Christmas, we were pleased with customer response to our promotions and our offer of being able to fulfill a number of shopping needs into a single trip at Ingles. Included in the overall sales increase were increases in grocery segment comparable store sales and in sales from our fluid dairy operations.

Grocery segment comparable store sales increased 12.8%, including gasoline sales, and by 8.4% if gasoline sales are excluded. Sales increased in every major grocery segment department, led by increases in the gasoline, deli, bakery, and produce departments. Fuel revenues increased both in gallon volume and from a 34% increase in the average sales price per gallon. Excluding fuel operations, total customer visits were up approximately 9.5%, with the average purchase somewhat level with last year. Fluid dairy sales increased 19.7% during the first quarter of fiscal 2008, compared to the same quarter of last year. Most of this increase reflects increased raw milk costs as case volume decreased slightly.

As we reported last quarter, Ingles reported its 43rd consecutive yearly increase in sales. With our results for the first quarter, we believe we are on track for another good year for Ingles.

Gross profit increased $15.8 million or 9.6% to $180.7 million for the first quarter of fiscal 2008. Gross profit, as a percentage of sales, including lower margin gasoline sales, decreased to 23.3% for the December 2007 quarter, compared to 24.0% for the December 2006 quarter. Excluding lower margin gasoline sales, gross profit as a percentage of sales was level at 26.2% and 26.3% for the December 2007 and 2006 quarters, respectively. The grocery industry is facing broad-based cost increases. For example, higher grain prices from drought or diversion to fuel production affect, among other things, dairy and meat prices. Higher energy costs affect our inbound product costs. We are pleased with our gross margin stability in the face of these cost increases and during holiday seasons that are increasingly competitive. We believe in keeping prices as low as possible for our customers, and favorable sales mix changes in non-fuel product categories helped maintain margin stability.

Operating expenses decreased as a percentage of sales to 19.4% for the December 2007 quarter, compared to 19.9% for the December 2006 quarter, but increased in total dollars. Much of the operating expense increase supports sales increases, but we are being affected by higher energy costs which affect, among other things, our distribution cost and the cost of plastic supplies and packaging. Other cost increases include depreciation attributable to higher recent capital expenditures and increased cost of debit and credit card transactions. In total, our operating expenses were $150.3 million for the current quarter, an increase of $13.8 million or 10.1%, over operating expenses of $136.5 million for the first quarter of last year.

Total net rental income, asset disposal losses, and other income was a combined $1.8 million during the December 2007 quarter, compared to a combined $1.6 million for the December 2006 quarter. There were no significant real estate transactions in either quarter. Interest expense totaled $11.5 million during the current quarter, lower than the $12.0 million for the first fiscal quarter of last year. Total debt was $605.1 million at December 29, 2007, compared to $556.1 million at the end of December 2006. Increased total borrowings under the Company's line of credit facilities accounted for most of the increase. Floating rate line of credit borrowings were generally at lower interest rates than the fixed-rate mortgages that were paid down during the preceding 12 months, resulting in lower total interest expense.

During the just-concluded quarter, the Company increased its line of credit facilities to a total of $185 million. At quarter-end, $81.8 million was outstanding, leaving $103.9 million (sic -- see Press Release) available for future borrowing. The Company also established a separate $30-million facility for unused letters of credit, of which $22.2 million were issued at December 29, 2007. Capital expenditures totaled $60.5 million for the first quarter of fiscal year 2008. During the first quarter, Ingles opened three replacement stores, constructed four fuel centers, acquired four sites for future development, and purchased two shopping centers where the Company operated leased stores.

Ingles' capital expenditure plans for fiscal 2008 include investments of approximately $175 million. For the balance of this fiscal year, the Company plans to open three new stores, remodel or replace seven stores, and add eight fuel stations at either new or existing stores. We have increased our planned level of capital expenditures based on our assessment of opportunities available to us in our existing market territory. Our $349.8 million of 8 7/8% senior subordinated notes are now callable at a call price of 102.903%. Because of recent volatility in the financial markets, we are evaluating various financing options for our future investing and financing activities.

To recap the quarter, net income for the December 2007 quarter totaled $12.7 million, 13.3% higher than net income of $11.2 million for the December 2006 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A Common Stock were $0.54 and $0.52 per share, respectively, for the December 2007 quarter, compared to $0.48 and $0.46 per share, respectively, for the December 2006 quarter.

We will now take your questions.

(OPERATOR INSTRUCTIONS) We'll go first to Emily Shanks with Lehman Brothers.

Good morning, is this actually Jason Trujillo, calling for Emily. My first question relates to your organic offering and perishables. Specifically, how's it been performing as of late, and is it a significant part of the business so far?

It's been performing well, and it's certainly something that a lot of our customers are interested in. You know, other than that, we try to expand our organic offerings through perishables, meat, frozen, and a number of other items. But it's still not a terribly large percentage of our overall grocery business.

Okay, great, thank you. And my next question relates to something you alluded to earlier, around cost increases. Specifically, I was wondering, have you have been able to take in some of the cost increases to maintain market share or pass those through to customers?

We're most concerned about sales. So we're trying to absorb as much as we can to keep our sales up and to keep costs low for our customers. In some cases, there have been cost increases. It's been unavoidable.

Great, that's very helpful. And then just one housekeeping item, what was the cash balance at the quarter-end?

I don't have that in front of me. That will be in the 10Q when we file it later this week.

All right, great, thank you very much.

And our next question comes from Brian Hunt with Wachovia.

Thank you. I was wondering if you could tell us what your weakest department or category was?

Bryan, we don't talk about our individual department performance, except broad comments about gasoline because of their affect on the overall business.

Okay, that leads to my next question. Looking at gasoline, you're comparable gallons sold, is there, do you have that measure in front of you or could you provide that to us?

I don't have that in front of me right now. Again, one of the biggest things that happened in gas, if you look at the December quarter of this year versus the December quarter of last year, the price at the pump nationwide, including us, is up over about $0.70 where it was last year. Our gallons are up as well, but just the cost increase has been very difficult for a lot of people.

Could you tell us whether your, because last year most convenience store operators saw a compression in there, or a reduction in there fuel margin pretty significantly in Q4, or in the December quarter of 2006. Could you tell us whether or not you're cents per gallon margin increased in the December quarter relative to a year ago?

We really don't discuss that for competitive reasons.

Okay. With continuing same-store sales growth and opening new and bigger stores, when does the Company needs to expand its distribution center? Is that included in your 175 of CapEx this year?

Well, you know, right now we're okay. And you know, we're doing what we can to make sure that our stores stay stocked. It's something that we'll certainly have to address in the future at some point, but right now we're okay.

Okay. And looking at the two shopping centers you purchased, could you tell us what you paid on a price per square foot level or a cap rate level?

Yes, and it's not really applicable. Because those are shopping centers where we had operated lease stores for a number of years, and the entire center became available to us for purchase and we took advantage of that.

Are they fully occupied or could you tell us where they're located?

One's in Tennessee and one's in North Carolina, and again, they're good locations for us.

All right. If you look at the Company valuation and the stock valuation, I mean, your Company's trading at less --- stocks trading at less than a 10 PE and Company's trading at a 5.8 times, or less enterprise --- LTM EBITDA, which are substantial discounts to your peers. Have you all thought about buying back stock, given the current levels?

You know, we can't,, we can't influence what the stock market does. The retail sector's having some trouble overall. From our standpoint, we've had four of the best years in the Company's history and a great first quarter of this year. We focus on that.

Okay, and then lastly, I was wondering if you could carve up in the [basket] your $175 million of CapEx for us so we could understand where the dollars are going?

As has typically been the case for us, the large majority of it is going to store development. If you look at the number of projects that we've laid out for the remainder of this year, it's pretty easy to get to that number.

Okay, thank you.

You're welcome

We'll take our next question come from Todd [Duvick] with Bank of America.

Yes, good morning.

Good morning.

I had a quick question for you, as you talk about the call price for the note that you have outstanding in evaluating your capital structure. Can you give us kind of a timeline for what you're looking at there?

No, again, we've expanded our lines of credit. We're fine from a financing standpoint now to do what we'd like to do to maintain the business and grow it the way we want to. But again, it's no secret that since last summer, the fixed-income markets have been very difficult and volatile, so it's made us sort of expand the scope of what we're looking at as far as instruments for future growth and financing.

Okay, I'm not trying to put words in your mouth, but it almost sounds like you're wanting to call the existing notes. Is that something that you're considering?

I think you're just trying to put words in my mouth.

Okay. I'm really not trying to. All right. Very good. And it sounds like, in terms of the capital spending plans, it sounds like you're trying to accelerate growth going forward and your growth is already very strong. Can you talk about what your plans might be for free cash flow going forward?

Well it's really difficult to pin down. Again, we've gone through a process of looking at our store base and have found some great opportunities out there for the next four or five years. So as you'll see when the 10Q comes out, the $175 million-a-year level that we project this year, is a level we intend to maintain over the next few years, primarily for store development and store expansion.

Okay, and just one final question. Wal-Mart was making some noise yesterday, coming out saying they're taking pricing down on 10 to 30%, or taking prices down 10 to 30% on some items. I think it was really focused on Super Bowl party-type items, but that just kind of leads me to the question about what you're seeing in the competitive landscape. Are you seeing someone like a Wal-Mart really being a little more competitive on price, or are you seeing that from maybe some of the other competitors in your footprint?

Well, we compete against a number of national grocery chains and regional grocers, specialty grocers, drug stores, convenience stores, and restaurants. So, it's very difficult to gage the competitive environment when you've got such diverse group of competitors. We're pleased with what we're doing, we're going to continue to do it, and then finally, just as a policy, we don't comment on the activities of our competitors.

Okay, thank you very much.

You're welcome.

We'll take our next question from Andrew Wolf with BB & T.

Thanks. Good morning, Ron. Congratulations to you all on the very strong numbers. I wanted to ask about the competitive environment as well. So, I won't ask you to comment on your competitors if you don't want to. But taking from your press release, your words essentially that you had good promotions in the holidays. Could you just characterize, maybe it's a little more about the consumer, just how you felt, the consumer, you know, good response to your promotions. On the consumer, what's your sense of how the consumer is in your market? They are obviously healthy enough, there is sales to be had with good promotions. So, that's a good sign. And secondly, I guess maybe on the competitive side, you know, did you need to be a little more aggressive or less aggressive, or about the same, in order to have the good response for the holiday promotions? Thanks.

We think consumers, in general, are becoming more cost conscience, from what's happening to them from a fuel cost increase, food cost increases. They are getting hit from a number of directions. We think our one-stop shopping offering, including our fuel centers, bigger stores with a wide variety of products, is helping us out. The consumer really can combine trips and come to Ingles. So, you know, we plan to continue that.

Okay, any comment on the promotionality, if it was, you know, if it --- was it more effective than last year? Why it was effective, let's put it that way?

Well, we had a good first quarter last year too, and we just built on it. We had a free turkey program, as we have had a couple of years. We changed it a little bit, had some good response to it, and it has just been, it was a good strong holiday season for us.

Okay, and second question I'd like to ask is, just on inflation. Maybe you called this out, sorry if you did. But if you didn't, would you comment on what your product cost inflation is, in gross, excluding gas, which obviously is going to fluctuate a lot? And the ability that you have, your gross margins seem fairly stable, which would suggest you're essentially, in total passing it through, but any commentary there on the ability to pass it through?

With all the different products we have, I really couldn't give you a number for cost inflation. The best we can all do is I think acknowledge that it's there. And again, we've had some good mix changes that have kind of helped us overcome the product cost changes, but it's really difficult to pin down in much more detail than that.

Okay and what about the sense , you know the gross margin, the X gas gross margin, being almost stable reflect the ability --- you know, more or less pass most of it through?

I don't think you can say that. I mean, you know, we have had higher sales as we said, in our deli and produce departments that tend to carry a little but higher margin. So that, in some cases, can compensate for some of the other areas where you don't pass costs all the way through.

Okay, thanks, I appreciate that. Congratulations again.

Thank you.

(OPERATOR INSTRUCTIONS) We'll go next to Karen Short with Friedman, Billings, Ramsey.

Hi. Thanks for taking my call. I just had a couple questions. I think you said that average ticket was flat, but traffic was up. Was I right in hearing that?

Yes, that's correct.

So just out of curiosity, would you have seen trading down within the store, among the different categories?

I don't think we can say.

Meaning, it's hard to tell, now?

Yes.

Okay. And then I guess you also commented that the holiday seasons are increasingly competitive, I'm not sure if that's standard language for you or if you specifically noticed a change in the competitive landscape this particular holiday season? Want to see if you could elaborate.

The holidays are always competitive and this year really was no different from other holiday seasons.

Okay. And then I guess, the last question I just want to ask, when you do promotions on your gas side of it, I'm just curious, where do you book that promotion? Do you book it out of the gas margin or does it come out of the same store sales? Or does it get booked to same store sales?

We include all our gas sales in the same store sales calculation and we include all our gas costs in the gas profit calculation.

Okay. And do you guys have a gift card promotion?

We do sell gift cards, and it's been a pretty successful program for us.

Okay. Would you say, was it more successful this year than it was last year? Or do you have comments on the consumer behavior as it relates to gift cards?

No discernible comments.

Okay. Alright, thanks very much.

You're welcome.

We'll take our next question from James Fort with Spartan Capital.

Hi. I just had a quick question regarding how many Ingles stores have gas stations attached to them now? And where do you see that number being approximately three to five years out? Thank you.

You know, I'm a little embarrassed. I don't have that number in, wait a minute. I do have that number in front of me. I've got to flip to my 10Q draft right quick. Bear with me. 48 fuel stations as of the end of December. And in our guidance for the rest of the year, right now, we're planning to add eight more for the rest of this year.

Okay, and what about your long-term plans?

Gas is an important part of our overall store development program. When we're doing new stores, we've got the opportunity to add gas, we try to idea that.

Okay. And do you have to own the land in order to add a gas station?

It's not necessary, it helps.

Okay. And what percentage of the stores do you own land in?

I do not have that number right in front of me. But, I think if you refer back to last year's 10K, there's some summary information on the number of owned versus leased stores.

Okay, thank you.

You're welcome

We have a follow-up question from Jason Trujillo with Lehman Brothers.

I have just one follow-up. I'm hoping you would comment on any trends you're seeing with regard to sales of prepared foods? Particularly, if you're seeing increasing demand in that category?

Well, we did mention that our deli and bakery departments were a couple of our higher sales-increased departments this past quarter. I think that reflects that trend, and I think it fits into our one-stop shopping strategy.

Okay, great, thank you. That's very helpful.

You'r welcome.

We have a follow-up question from Bryan Hunt with Wachovia.

Yes. I was wondering, Ron, on your CapEx initiatives going forward, you said the Company plans on maintaining a roughly $175 million CapEx level going forward. This year, at least in the first quarter, you borrowed roughly $62 million additional on, on your revolving lines of credit. Granted, you have seen a small bump up in cash flow. But I'm modelling out that you're going to borrow roughly $60 million this year, potentially a similar amount next year. By the time you get to early 2010, it looks like you could be out of liquidity, without a fairly significant bump up in EBITDA. You know, is there flexibility in that CapEx plan or are you all pretty dead set on spending $175 million a year?

It's our best estimate right now. Again, we've got some great opportunities out there, and we want to take advantage of them.

Okay, thank you.

You're welcome.

Mr. Freeman, we have no further questions at this time. We'll turn the call back to you for any closing comments.

Okay, thank you very much for all joining us this morning. And we're moving on to the second quarter. We'll speak to you again in about three months. Have a good day, everyone.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.