Ingles Markets, Incorporated (IMKTA) 2008 Q4 法說會逐字稿

Good day and welcome to the Ingles Markets Incorporated fourth quarter conference call. This 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, sir.

Thank you. Good morning. Welcome to Ingles Markets 2008 fourth quarter and year-end 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 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 this 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 10-K for the fiscal year ended September 27, 2008.

In accordance with the longstanding Company policy, and in recognition of the extremely competitive nature of our industry, this call will not address competitive issues or Ingles Marketing strategies, other than what is included in Form 10-K. This morning, I will 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 press release issued this morning is available on our website at www.Ingles-Markets.com. Our Form 10-K will be filed later today, and will be available on the website as well. For the 44th consecutive year we had record sales, with this year's increase of 13.6% resulting in sales totaling $3.24 billion. This was the first time in the Company's history sales exceeded $3 billion. Fourth quarter sales totaled $842.8 million, a 13% increase compared with the fourth quarter of the prior fiscal year.

For the 2008 fiscal year, net income totaled $52.1 million, compared with $58.6 million for fiscal year 2007. Fourth quarter fiscal year 2008 net income totaled $10.5 million, compared with $14.2 million for the fourth quarter of fiscal year 2007. Predominant factors affecting comparative net income include energy costs, weather related disruptions in retail gasoline operations, and higher costs related to the Company's accelerated store expansions in fiscal year 2008.

Capital expenditures almost doubled to $248.8 million in fiscal 2008 compared with fiscal 2007. Our long term focus has been and will continue to be driving top line sales through product offerings, customer satisfaction, and expanded store offerings, this long term sales and customer focus can temporarily depress operating results, but we believe it is important to maintain customer loyalty during these uncertain economic times.

First, our fourth quarter results. Net sales increased 13.0% to $842.8 million for the quarter ended September 27, 2008, from $746.0 million for the comparable fiscal 2007 quarter. Grocery segment comparable store sales growth rose 13%, and were up 7.8% excluding gasoline sales, when compared with the fourth quarter of fiscal 2007.

Both average weekly customer visits and the average purchase amount increased over the comparative fourth quarters. Fourth quarter sales were substantially impacted by hurricane related gasoline shortages for most of the month of September 2008. There were a few days during that month where all of our 55 fuel stations were able to sell all grades of fuel without shortage.

Gross profit for the fourth quarter of fiscal 2008 totaled $191.6 million, an increase of $12.1 million compared with the fourth quarter of fiscal 2007. Gross profit as a percentage of sales was 22.8% for the fourth quarter of fiscal 2008, compared with 24.1% for the fourth quarter of fiscal 2007. Excluding lower margin gasoline sales, grocery segment gross profit as a percentage of sales was 26.6% for the fourth fiscal quarter of 2008, compared with 26.9% for the comparable 2007 quarter.

As noted earlier, hurricane influenced disruptions in retail gasoline supplies in September 2008 and the resultant price volatility, hurt fourth quarter 2008 gross profits. The Company sold much of it's gasoline at cost during the worst of the crisis, and suffered reduced supply at many of it's fuel stations. The Company estimates fuel gross profit losses of approximately $1.5 million during that time period. Fluid dairy gross profits were lower as well, reflecting a year long environment of cost pressures and increased competition.

Total operating expenses were up $165.0 million for the fourth quarter of fiscal 2008, compared with $146.3 million for the comparable 2007 quarter. The growth in operating expenses was due in part to eight stores that were open or remodeled during the third and fourth quarters of fiscal year 2008. Bringing a large number of stores online in a short period often results in higher personnel costs and promotional expenses, to insure a successful start for new and remodeled stores. Additions of capitalized store assets also result in higher depreciation expense.

Increases in these line items accounted for more than half of the dollar increase for the comparative fourth quarters. Operating expenses as a percentage of sales were 19.6% for each fourth quarter period. Net rental and other income decreased $0.4 million in the fourth quarter of fiscal 2008, compared with the 2007 fourth fiscal quarter, primarily due to lower rental income, partially offset by higher sales of scrap cardboard and packaging materials. Losses from asset disposals totaled $700,000 for the fourth quarter of fiscal 2008, compared with losses of $300,000 for the fourth quarter of fiscal 2007.

Interest expense totaled $12.1 million for the fourth fiscal 2008 quarter, compared with $10.8 million for the same quarter last year. The Company has increased it debt during fiscal year 2008 to fund capital expenditures, although the new debt has generally been at lower rates than previously existing debt. Net income for the September 2008 quarter totaled $10.5 million, compared with net income of $14.2 million for the September 2007 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A Common Stock were $0.44 and $0.43 per share respectively for the September 2008 quarter, compared with $0.61 and $0.57 per share respectively for the September 2007 quarter.

Now I will go over our annual results. Net sales increased 13.6% to $3.24 billion for the fiscal year Ended September 27, 2008, from $2.85 billion for the fiscal year ended September 29, 2007. Sales increased in every major grocery segment product category, and in our fluid dairy operations. Both the average purchase amount and average weekly customer visits increased during fiscal year 2008, with customer visits to our 197 stores exceeding 113 million shopping trips.

Grocery segment comparable store sales excluding gasoline increased $194.3 million, or 8%. A number of factors influenced sales growth, many of which reflect an increasingly unstable economic environment. Trends include more at home consumption of prepared meals, increased sales of private label items and combined shopping trips. We believe we are well-positioned to respond to these trends.

Retail square footage increased to 10.2 million square feet at September 27, 2008, compared to 9.7 million square feet at September 29, 2007. We operated 197 stores at the end of both 2008 and 2007, so our average store size is increasing. Gross profit for the fiscal year ended September 27, 2008, increased $61.6 million, or 9.0% to $747.9 million, or 23.1% of sales, compared with $686.2 million, or 24.1% of sales for the fiscal year ended September 29, 2007.

The increase in grocery segment gross profit dollars was primarily due to higher sales volume. Grocery segment gross profit margin was lower for fiscal 2008, primarily due to higher sales growth in the gasoline department, which has the lowest gross margin. Excluding gasoline sales, grocery segment gross profit margin increased to 26.9% for fiscal year 2008, compared to 26.7% for fiscal year 2007. Fluid dairy gross profits decreased $2.9 million in response to cost and competitive factors.

Operating and administrative expenses decreased as a percentage of sales to 19.4% for the fiscal year ended September 27, 2008, compared with 19.8% for the fiscal year ended September 29, 2007. In dollars, operating and administrative expenses increased $62.4 million, or 11.1%, to $626.4 million for the year-ended September 27, 2008, from $564.0 million for the year ended September 29, 2007. Excluding gasoline, which does not have significant direct operating expenses, the ratio of operating expenses to sales was 22.4% for fiscal year 2008, compared with 21.9% for fiscal year 2007.

In addition to the factors noted above in the fourth quarter discussion, the Company experienced higher distribution, energy, and insurance expenses, as well as increased credit and debit card processing and supply costs. Many of these cost increases were not passed through to customers in the form of higher sales prices. The Company believes it is important to maintain customer loyalty and overall sales growth during the current economic conditions.

Net rental and other income totaled $6.4 million for fiscal year 2008, compared with $7.4 million for fiscal year 2007, due to less available tenant space as we expand certain stores, and due to a more selective process regarding complimentary tenants. Offsetting some of this decline are higher income from scrap cardboard and plastic sales. Losses on asset disposals totaled $1.3 million in fiscal year 2008, primarily as a result of replacing equipment in relocated and remodeled stores. Gains on asset disposals totaled $6.9 million for fiscal year 2007, as the Company sold a shopping center in which it no longer operated a store, at a pre-tax gain of approximately $7.9 million.

Interest expense totaled $46.9 million for the year ended September 27, 2008, compared with $46.7 million for the year ended September 29, 2007. During fiscal year 2008, the Company's financing activities provided $158.4 million in cash, comprised of new borrowings totaling $189.4 million, reduced by principal payments on long term debt and dividend payments totaling $30.9 million. The additional borrowings were used primarily to finance the increased level of capital expenditures during fiscal year 2008. At September 27, 2008, the weighted average interest rate on new and refinanced borrowings was 5.4%.

The Company's effective tax rate was 34.6% for fiscal year 2008, and 34.7% for fiscal year 2007. 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 for fiscal year 2008 totaled $52.1 million, compared with net income of $58.6 million for fiscal year 2007. Despite the year-over-year decrease, fiscal year 2008 net income was the second highest in the Company's history. Basic and diluted earnings per share for the Company's publicly traded Class A Common Stock were $2.22 and $2.13 per share respectively for the year ended September 27, 2008, compared with $2.51 and $2.39 per share respectively for the year ended September 29, 2007.

Now an update on our investing and financing activities. Capital expenditures totaled $248.8 million and $127.8 million for fiscal years 2008 and 2007 respectively. During fiscal 2008, Ingles opened two new stores, closed two older stores, completed 10 replacement or remodel stores, and purchased land parcels for future development. 2008 CapEx and store development activities were the Company's highest in a number of years.

Ingles capital expenditure plans for fiscal 2009 include 12 new replacement or remodeled stores, and to add 10 fuel stations at either new or existing stores. Most of these projects are already under way, with some of the expenditures included in fiscal 2008 CapEx. Given the recent pull back in credit availability, we are pleased to have been able to economically fund 2008's higher level of CapEx.

Future CapEx will largely depend upon overall economic conditions and credit availability. At September 27, 2008, the Company had $185 million of committed lines of credit, of which $27.8 million was outstanding. We believe that these committed lines and other sources of financing are sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future. At the close of another successful year, we look forward to serving our customers with more stores and more products, delivered with value and exceptional service.

And we will now take your questions.

(OPERATOR INSTRUCTIONS). We will go to Ellen Itskovitz with Lord Abbett.

Hi, just a real quick question. When you are doing a lot of your renovations, et cetera, you said that a lot of that went into your SG&A. Did some of that also go into, did you also put some of it in PP&E, and I guess I am just curious how much of it is expensed versus capitalized?

Well typically the personnel costs that you incur for additional training and for having additional staff on hand during a store opening will go to SG&A expense. What is capitalized typically is going to be construction costs and the equipment that goes in there, but personnel and promotional costs go directly to SG&A.

So the SG&A was really just the personnel costs associated with it?

And the additional promotional expenses. Everything that it takes to get a successful store opening.

Okay, great. Thank you very much.

You are welcome, Ellen.

We go next to Bryan Hunt with Wachovia.

Thank you. I was wondering if you could discuss your revolver maturities, and your LC facility that I believe matures at the end of this calendar, and your revolvers mature in 2010. Is that correct?

Bryan, that is a little bit off. The details on that are going to be in the 10-K that we file later today. Right now, everything we have is committed through this time next year, through the end of 2009, and we have maturities coming up in late 2009 and 2010.

Okay. All right, that is great. Could you give us an idea of what your CapEx plan is for next year? I mean you have given us an idea of what you're going to spend on, and a chunk of that fell in 2008, but could you frame the dollars for us?

Fiscal 2009 we expect to be somewhere between 140 and $160 million.

And with that level of CapEx, do you feel like you will be able to pay down your revolvers balances by the end of next year?

Yes.

All right. Next, when I look at your CapEx numbers, that 140 to 160, is there anything in there for distribution center expansion, I know you guys bought some land for that. Is there any planned CapEx on expanding the DC next year?

We don't go into the details of our CapEx plans, other than to talk about the number of store openings we anticipate having in the coming year.

Okay. If I look at your same-store sales growth in Q4, could you talk about pharmacy. Did you experience growth in that department as well?

We don't provide in the K the detail on pharmacy. That is included in the category with non-perishables, so if it is not in the 10-K, we really can't discuss it on the call.

And could you talk about general department, were sales up across all departments in Q4?

Yes.

Okay. As well as on your new stores and your remodels, are those hitting your sales targets? Do you feel like it hit your ROI hurdles?

Bryan, we don't go into individual store performance. We are pleased with the store openings we had in 2008. We are excited with the ones we had in progress for 2009, but we are not able to go into individual store performance.

And of the 12 new openings and replacements, are there any geographic concentration on those stores, or are they mostly North/South Carolina, or are you doing some openings in Georgia?

Well that 12 fell six in Georgia, Four in North Carolina, and two in South Carolina, so spread out pretty well.

Okay. And with regards to sales performance, are there any differentials between those particular states, or are you seeing pretty much general lifts across the all geographies?

We look at it across all geographic lines. We really don't distinguish one market from the next in that way.

Okay. If I look at your sales gains, what percent of your sales are to customers with an Advantage Card versus customers without a card?

I am not sure we have that detailed number in the K. The percentage is a little bigger this year than it was last, so we continue to be very pleased with the Advantage Card program.

All right, and with regards to private label and you mentioned it in your comments that you had gained sales year-over-year in private label. Could you talk about what your mix is and maybe what your goal is, and whether you are introducing any new private label products this year?

We have new product, private label products coming on all the time, and they are literally in every department in the store now, and I think that it has been an industry wide trend this year, given the economy that a lot of people have been purchasing more private label items, and we are no exception to that.

All right, and then lastly and I will get back in the Q. If you look at those 16 shopping centers the Company does not occupy, are you actively selling any of those locations?

Well we hear things all the time, and if the right offer comes around, then we may do something.

Are any of those locations in the Georgia market, or are they in the North Carolina/South Carolina areas?

I don't have the detail in front of me. I can only assume that they pretty much mirror the Company's geographic presence.

All right, thank you for your time.

Sure, Bryan.

(OPERATOR INSTRUCTIONS). We go next to Todd Duvick with Banc of America.

Yes, good morning. I had a couple of questions following up on Bryan's questions. First off with respect to Capital Expenditures I appreciate the guidance, and I wanted to know if you can tell us if you expect Capital Expenditures to be paid out of the cash flow this year, to be free cash flow positive or breakeven?

Good morning. I hesitate to go into much detail on the breakdown between internally provided and externally provided. I think the important take away here is we have a lot of revolver availability, and we have a lot of unencumbered properties. We have had even in the tight credit environment, relative ease in financing what we needed to this year, and we don't really see that changing for us in 09.

Okay. Shifting to the Income Statement, it seems if you take a look at your comparable store sales growth over the last three years excluding gasoline, it seems like you are defying gravity as compared to your competition. Do you expect comparable store sales to continue at the pace you have set over the last few years, or can you provide us any color on what you're looking for going forward?

We don't provide guidance on future sales. The CapEx level is about the only thing we provide future guidance on, but we are top line oriented. That is where it all starts with us, and that is what we are going to continue to focus on. A lot can depend upon what happens in the general economy over the next 12 months, so I would hate to put a number out there.

Okay, and can you comment, I guess generally, if you take a look at the underlying agricultural commodities, obviously we are seeing a lot of prices come down there, and there is speculation out there that that may ultimately impact the prices that packaged food companies are going to be able to charge going forward. How do you think that this environment is going to affect your ability to grow sales comparable store sales going forward? Have you seen any impact on same-store sales so far in the first quarter?

Well, we really can't talk about the first quarter since we are not there yet, but even though we have had some costs coming down, it takes a while for the effect of that to flow all the way through purchasing and distribution and retail sales channels, and even though commodity prices come down, there is an awful lot of other factors that go into that. Distribution costs have been very difficult this year for everyone given the volatile gas prices, so I don't think you can just point to commodity cost activities, and say this is the direction that retail grocery sales are going to go.

Okay. No, that is fair enough, and so I guess with respect to that, going into next year, obviously distribution, the headwinds in terms of the fuel costs for distributing your own products are going to be I guess more favorable.

What would you expect for margins going forward? I mean it looks like in the current quarter, the sales of gasoline really impacted your margins, so can you talk about how gasoline you would expect it to affect the margins of the products you sell, in addition to the margins because of lower delivery costs?

That is too many factors I think to balance and try to speculate on, to say that this is where your margin number is going to come out. Again, our focus, while we certainly care about margin, our focus is on top line sales, and being competitive. So beyond that, I don't know. What do you think?

Yes, there are definitely puts and takes in there, aren't there?

Yes, there are.

Okay, well thank you for your answers.

You are welcome.

We go next to Emily Shanks with Barclays Capital.

Good morning. Could you let us know what the amount of outstanding letters of credit were at year-end?

Yes. Give me just a moment, and I will find that for you.

Great.

23.9 million.

Terrific, thank you. And then I have just got a quick balance sheet question. It looks like Fiscal Year '07 in the press release was restated on the cash and cash equivalent line to a lower number, and then there was an equal offset in the Other current liabilities line item versus what was in the 10-K. To what is this difference attributable?

That is a reclassification of outstanding checks.

What type of outstanding checks?

Well, checks that we have written that haven't cleared the bank yet. Okay, so checks that you are paying what your vendors? Yes. The vendors, anyone that we would pay, so you are right. It is strictly a reclass between cash and Accounts Payable, and we have made it comparable for all years presented.

Okay. Thanks.

You are welcome.

(OPERATOR INSTRUCTIONS). We go to a follow-up from Bryan Hunt with Wachovia.

Great. Thank you. I was wondering if you could talk about your store expansion. Are all the planned store openings and current geographies for 2009, or are you moving into any new markets?

They are in current geographies.

Okay, and then second you opened a few convenience stores over the last couple years. How did those perform relative to expectations, and are there any plans for 2009 to open any additional?

Again, the C-stores are a small part of our operation, and we don't discuss them individually.

Alright. And then lastly, could you talk about where your RP basket is and then relative to cash, I mean, with the stock down here, there are definitely opportunities to buy the stock back or potentially raise the dividend considering the size of where I think your RP basket is. Could you talk about what your priorities are for cash, whether it is buyback stock, raise the dividend or pay down debt for 2009?

Well our first priority is to continue to take care of our stores. We will do that. Beyond that, we will see how the economy turns out, and what happens with interest rates and credit availability, and all of the other factors that can affect our cash.

Could you give us an idea where the RP basket is underneath the notes currently?

I think it is somewhere in the $30 million range. That's not a number we calculate every day, because it doesn't affect our day-to-day operations.

All right, thank you, Ron.

You are welcome.

(OPERATOR INSTRUCTIONS). We will go to Rob Magnuson with Goldman Sachs.

Hi, just a couple of housekeeping. Can you give me D&A for the year or in the quarter?

I am sorry say that again please?

Depreciation and amortization for the fiscal year.

Yes. That's in the press release and that is already out there on the web. Depreciation and amortization expense was $69.1 million for fiscal 2008, and 60.9 million for fiscal 2007.

Great. And just maybe in terms of the tenants in some of your shopping mall locations, have you noticed any increase in delinquencies, or maybe increased pushback in terms of renegotiations with any of the tenants?

No, we haven't.

Great. Thank you.

Thank you.

With no other questions in the queue, I would like to turn the call back to Mr. Freeman for any additional or closing comments.

Well thank you for all joining us today. We wish all of our customers, employees, and shareholders a happy and safe holiday season. Thank you very much.

That does conclude today's call. Again thank you for your participation. Have a good day.