Ingles Markets, Incorporated (IMKTA) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Ingles Markets, Inc. second-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, Ron Freeman.

Good morning. Welcome to the Ingles Markets fiscal 2009 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; 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. 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 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 Form 10-K for the fiscal year ended September 27, 2008.

This morning I will provide you with a summary of our second-quarter and six-month results followed by additional comments. After that, we will be pleased to take your questions. Our press release was issued yesterday evening and is available on our website at www.ingles-markets.com. We expect to file our 10-Q for the quarter later this week. It will be available on our website as well.

First, our second best results. Net sales totaled $789.2 million for the March 2009 quarter, an increase over sales of $782.8 million for the quarter that ended in March 2008. Grocery segment comparable store sales increased 4.9% excluding gasoline sales and the effect of the Easter holiday. Easter occurred during the Company's second fiscal quarter of 2008 but will occur in the third fiscal quarter of 2009.

Sales increased in every major product category except gasoline and fluid dairy, where gallons sold increased but retail prices were substantially lower during the March 2009 quarter compared with the same quarter of last fiscal year. The number of customer transactions excluding gasoline increased 7.9% while the average transaction amount decreased slightly.

We operated 200 stores with 10.6 million total square feet at the end of 2009 compared with 197 stores totaling 9.8 million square feet at the end of March 2008. Gross profit for the March 2009 quarter increased 4.5% to $192.8 million, an increase of $8.3 million compared with the second quarter of last fiscal year.

Gross margin as a percentage of sales was 24.4% for the March 2009 quarter versus 23.6% for the same quarter last year. Gross profit as a percentage of sales increased primarily due to lower per gallon prices for gasoline and milk. Excluding gasoline sales, grocery segment gross profit as a percentage of sales was 26.9% and 27.4% for the March 2009 and 2008 quarters respectively.

Operating expenses increased $15.6 million for the second quarter of 2009 over 2008, primarily due to additional interest, depreciation, and other expenses related to our increased number of store openings over the past year or so. As a percentage of sales, operating expenses were 21.4% for the March 2009 quarter, compared with 19.6% for the March 2008 quarter.

Net rental income, gains or losses on asset disposals, and other income totaled $1.2 million for both the March 2009 and 2008 quarters. The sale of an out parcel in the 2009 period was offset by lower income from the sale of scrap cardboard and plastic.

Interest expense increased $1.5 million for the three-month period ended March 29, 2008 -- excuse me, March 28, 2009 -- to $13.1 million from $11.6 million for the March quarter of last year. Total debt at March 28, 2009 was $778.3 million compared with $626.1 million at the end of March 2008. The increased debt was used to fund new and redeveloped stores.

Income tax expense totaled 36.2% of pretax income for the March 2009 quarter compared with 38.1% in the March 2008 quarter due to lower state income taxes and increased tax credits. Primarily because of higher expenses related to increased store development activity, net income decreased to $7.8 million for the three-month period ended March 28, 2009 compared with $13.0 million for the three-month period ended March 29, 2008.

Net income as a percentage of sales was 1% for the March 2009 quarter compared with 1.7% for the March 2008 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A common stock were $0.56 and $0.53 per share respectively for the March 2008 quarter compared with $0.58 and $0.55 per share respectively for the March 2008 quarter. I'm sorry; those first numbers were the March 2009 quarter.

Now I will discuss our six-month results. Consistent with our quarterly results, six-month performance began with increased sales. Net sales for the six months ended March 29, 2008 totaled $1.59 billion compared with $1.56 billion for the first six months of fiscal year 2008. Grocery segment comparable store sales increased 5% excluding gasoline sales and the effect of the Easter holiday.

Gross profit for the six-month fiscal 2009 period totaled $389.9 million, an increase of $24.7 million over the comparable fiscal 2008 period. Gross profit as a percent of sales was 24.5% and 23.4% for the six months ended March 2009 and 2008 respectively. Excluding gasoline sales, the gross margin comparison was 26.7% year-to-date fiscal 2009 versus 27% year-to-date fiscal 2008.

Operating expenses totaled $336.5 million for the first half of fiscal 2009, $33.2 million higher than the first half of fiscal 2008. The cost increase factors discussed earlier for the quarter also contributed to the first-half increase. Operating expenses as a percentage of sales were 21.1% for the March 2009 six-month period compared to 19.5% for the March 2008 six-month period. Net rental income gains or losses on asset disposals and other income totaled $3.1 million for both the March 2009 and 2008 six-month periods.

Interest expense increased $3.0 million for the six-month period ended March 28, 2009 to $26.1 million from $23.1 million for the six-month period ended March 29, 2008. Total debt increased by $152.2 million between the end of March 2008 and the end of March 2009. Much of this increased debt was funded with borrowings secured by equipment and real estate.

Income tax expense as a percentage of pretax income decreased to 37.7% for the March 2009 six-month period compared with 38.4% for the comparable March 2008 period due to lower state taxes and increased income tax credits.

Summarizing our six-month results, net income totaled $18.9 million for the six-month period ended March 28, 2009 compared with $25.6 million for the six-month period ended March 29, 2008. Net income as a percentage of sales was 1.2% for the first half of fiscal year 2009, compared with 1.7% for the first half of fiscal year 2008.

Basic and diluted earnings per share for publicly traded Class A common stock were $0.80 and $0.77 for the March 2009 six-month period compared with $1.10 and $1.05 respectively for the March 2008 six-month period.

Next, I will update our investing and financing activities. During the March 2009 six-month period, Ingles completed three new, two replacement, and one remodeled store development project and added five fuel centers. Capital expenditures for the March 2009 six-month period totaled $103.7 million. For the balance of the fiscal year, Ingles expects to open four new replacement or remodeled stores and add a total of four fuel stations.

Substantially all projects completed or expected to be completed in fiscal year 2009 were begun in fiscal year 2008. Capital expenditures for the entire fiscal year are expected to be approximately $150 million. Total borrowing availability under the Company's $185 million line of credit facility at the end of March 2009 was $144.4 million after deducting the $40.6 million currently outstanding.

I will now take your questions.

(Operator Instructions) Bryan Hunt, Wachovia.

Thanks for taking my questions. Ron, I was wondering if you can address the gross profit margin decline on your grocery segment? During the quarter, it was down about 50 bps. Could you tell us what that stems from?

Well, there is a lot of price competition going on right now. We are going to be very competitive during the tough economic times that we are experiencing right now and in some cases that means you price pretty aggressively.

Okay, and along those lines, could you talk about your sales mix, whether you are seeing any major changes and whether it's private label, organics in the deli, bakery, or meat category? Where are you seeing one the most growth and maybe one the greatest weakness?

Well, we are not seeing any significant divisions or significant differences from what we've seen over the past six or nine months since the economy went into recession. And we have talked before about the shift from dining out to purchase of ready-prepared meals and overall increase in the industry of private label purchases. And that is still out there.

Okay, then looking at operating expenses, I would've expected a pretty material decline in your distribution costs just because the decrease in diesel fuel in the second quarter as well as the decline in plastics costs, which I think you all alluded to in the past. Could you talk about maybe the major -- since we don't have your 10-Q yet, some of the major changes that are taking place in your operating cost line?

Well, the biggest changes in operating costs are the interest in depreciation from the greater level of store development that we've had over the next last 18 months or so and associated with that when you open a larger number of new stores, you've got a certain amount of front-end loaded expenses with that. You staff up to make sure service levels are excellent and off to a good start and it just takes a while and in this economy, it takes a little while longer for the sales to ramp up to provide that operating leverage.

Okay. And just along that line of questioning, the new stores have been a drag on earnings, especially this quarter. Given the current environment, when do you expect those stores to mature and hit your hurdle rates on cost of capital?

You know, given that we are in an economy that we haven't been in for a long time now, I would not want to put a line in the sand out there as to when that would happen.

Okay and the last two questions. One, if you look at your inventories, they are up $27 million year-over-year and yet there's been some deflation in items such as dairy, the dairy category is a good example. Could you talk about maybe what's going on in inventories? Do you expect some of this is seasonal and it's going to cycle out just due to the timing of Easter?

Yes, there is a little bit of an Easter effect since that happened in the first week of April. With all the new stores and with those new stores being larger, you need more inventory to support that.

Okay. So if I were to look at it on an inventory per square foot basis, I would imagine the numbers would be a little less than 9.3% growth on an inventory per store basis.

I haven't run those numbers.

Okay. And the last question, it appears your second largest competitor, BI-LO, they filed Chapter 11 during the quarter. It looks like they are closing 17 stores according to their bankruptcy filings. Could you tell us how many of those stores are -- you directly compete with?

We don't talk about our competitors.

Okay, thank you.

(Operator Instructions) Currently we have no questions in the queue, but I would like to take this opportunity to remind our audience (Operator Instructions) A follow-up question from Bryan Hunt, Wachovia.

Well, since it is just the Bryan Hunt show, I will stick with one more question. If you look at one, the returns you are generating on new stores and given the economic environment, does this cause you all to maybe to change the tempo of CapEx? Since you are not getting the returns on the new store builds that you like and it's causing leverage to creep higher, do you think you may dial back CapEx going into next year?

Well, if you've looked at past reports, we have dialed back the forward guidance on CapEx to where it's now below $200 million, which we had been saying the past few quarters. I think one thing that's very important to keep in mind here is new stores are a long-term process. Yes, we wish we were in a better economy and we were seeing those things pick up a little bit better, but we are very pleased with those new stores in the locations they are in and they are going to be good performers over the long term.

So what -- there is not a one-to-one effect on what we've done recently with what we want to be able to do going forward. But we do acknowledge that we lowered the CapEx guidance for a number of factors, not just what's happened with the last few stores we've built.

Could you tell us where the three new stores were located, as well as the two replacement stores?

Bryan, I don't have that list in front of me this morning.

Okay and I had the luxury of driving by your headquarters not long ago and noticed you all have begun clearing the site next to your current distribution center for expansion. Could you give us a timeline and maybe the cost of one, expanding your distribution center and how many stores you will be able to service once it is completed?

Well, we needed to do the site work on that [sand lot] site for a number of different reasons, but we have no set time frame for any building on that and no cost estimates that we are able to share with you.

Okay, thank you.

We currently have no questions in the queue. I will turn the conference back over to our host for any closing or additional remarks.

Thank you very much. We appreciate everyone joining us today and we look forward to speaking with you again soon. Have a good day.

That does conclude our conference call. Thank you for your participation.