Ingles Markets, Incorporated (IMKTA) 2009 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 Chief Financial Officer, Mr. Ron Freeman. Please go ahead.

Thank you. Good morning. Welcome to the Ingles Markets 2009 fourth quarter and year-end conference call. With me today are Robert Ingle, Founder of the 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 Harbor 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 are referred to the Company's public filings including the Form 10-K for the fiscal year ended September 26, 2009, that will be filed later today.

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 press release issued this morning is available on our website at www.Ingles-markets.com. Our Form 10-K will be available on the website as well after it's filed.

We are very pleased to report that this was our 45th consecutive year of record sales totaling $3.25 billion. Fourth quarter sales totaled $830.1 million. Excluding gasoline, sales grew 4.3% for the year and 1.5% for the fourth quarter. Net income totaled $5.2 million for the three months ended and $28.8 million for the fiscal year ended September 26, 2009, compared with $10.5 million and $52.1 million for the comparable three-month and fiscal year periods of 2008. Net income for the fiscal 2009 fourth quarter and full fiscal year were adversely affected by higher interest expense following the Company's issuance of $575 million face value senior notes in May 2009, higher depreciation and higher operating expenses resulting from our increased level of store development activities, and also by higher income tax expense. The full fiscal year 2009 results also include income reductions of $10.2 million in pre-payment penalty and loan cost write-offs related to the $575 million bond issuance.

Given the extended recession and intensified competition for a smaller amount of consumer dollars, we're pleased with our sales growth. Our long term objective remains focused on driving top line sales through product offerings, customer satisfaction, and expanded store offerings. Although this focus can temporarily depress operating results, we believe it is important to maintain customer loyalty during these difficult economic times. We believe we have been successful in this regard as evidenced by this quarter's 9.9% increase in average weekly customer visits compared with the fourth quarter of last year. In addition, we've experienced a higher percentage of private label sales. Our private label products are very good quality and represent excellent value. We are continuing to add more private label products throughout our store as part of this program.

First, our fourth quarter results. Net sales totaled $830.1 million for the quarter ended September 26, 2009 compared with $842.8 million for the comparable quarter in fiscal 2008. Total and comparable store sales comparison were affected by retail gasoline prices which were approximately 37% lower during the fourth fiscal quarter of 2009 compared with the prior year. Gross resegment comparable store sales excluding gasoline sales rose 2.4% compared with the fourth quarter of fiscal 2008. The growth in comparable store sales benefited from the 9.9% increase in average weekly customer visits that more than offset a $1.51 decrease in the average purchase amount compared with the fourth quarter of fiscal 2008. In effect, we are seeing our customers on a more frequent basis in our stores and we are optimistic about this trend for future sales as the economy improves.

Gross profit for the fourth quarter of fiscal 2009 totaled $184.8 million, an increase of $4.4 million compared with the fourth quarter of fiscal 2008. Gross profit as a percentage of sales increased to 22.3% for the fourth quarter of fiscal 2009 compared with 21.4% for the fourth quarter of fiscal 2008. Gross resegment gross margins, excluding gasoline, were stable while gross profit in the Company's fluid dairy operations increased due to substantially lower milk commodity prices for the fourth fiscal quarter of 2009 compared with 2008. Gasoline margins were higher, as well, compared with the fourth quarter of fiscal year 2008 when we experienced higher costs due to the hurricane effect on supplies.

Beginning with the fourth quarter of 2009, we have included distribution costs as a component of costs of goods sold so that our results are more comparable with other publicly traded grocers. All prior periods in our press release and 10-K have been restated to maintain comparability across time periods. Distribution costs had formerly been included with operating and administrative expenses.

Total operating expenses were $161.1 million for the fourth quarter of fiscal 2009 compared with $153.8 million for the comparable 2008 quarter. The growth in operating expenses was due in part to the 10 stores that were opened or remodeled during fiscal year 2009. Operating expenses as a percentage of sales were 19.4% and 18.3% for the fourth quarters of fiscal 2009 and 2008, respectively. Bringing our larger 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. Ingles operated 200 stores at the end of fiscal year 2009 compared with 197 stores at the end of fiscal 2008. Retail square footage increased to 10.7 million square feet at September 26, 2009, compared with 10.2 million square feet at September 27, 2008.

Net rental income, other income, and losses on asset disposals totaled $1.1 million and $700,000 for the fourth quarters of fiscal 2009 and 2008, respectively. This increase was primarily due to the lower rental income in 2009 partially offset by lower fiscal 2009 losses related to shopping center and store assets taken out of service in conjunction with the Company's store relocation, closing, and remodeling activities. Interest expense totaled $16.5 million for the fourth quarter of fiscal 2009 compared with $12.1 million for the fourth fiscal quarter of 2008. Total debt at September 26, 2009, was $849.3 million compared with $717.2 million at September 27, 2008. The Company's effective tax rate was 37.5% for the fourth quarter of fiscal 2009 compared with 31.1% for the fourth fiscal quarter of 2008.

Net income for the September 2009 quarter totaled $5.2 million compared with net income of $10.5 million for the September 2008 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A Common Stock were $0.23 and $0.22, per share respectively for the September 2008 quarter compared with $0.44 and $0.43 per share, respectively, for the September 2007 quarter.

Now, I'll go over our annual results. Net sales totaled a record $3.25 billion for the fiscal year ended September 2009, an increase of $12.9 million or 0.4% from the $3.24 billion for the fiscal year ended September 2008. Fiscal year 2009 was Ingles' 45th consecutive year of record sales. Excluding gasoline sales where the retail per gallon price was approximately 37% lower, grocery segment comparable store sales increased 5.4%. Excluding gasoline, the number of customer transactions increased to 7.9% and the average transaction size decreased by $0.53. The Company believes customers are eating at home more often and changing purchasing habits towards private label and lower priced products. Our customers are buying a higher percentage of private label products due to the higher quality and excellent value they represent. Customers made over 122 million shopping trips to Ingles during fiscal year 2009.

Gross profit for the fiscal year ended September 26, 2009, increased $36.8 million or 5.2% to $743.1 million compared with $706.3 million for the fiscal year ended September 27, 2008. The increase in gross profit dollars was primarily due to the higher sales volume, despite lower sales prices for high volume, gasoline and dairy items. Gross profit as a percentage of sales including these items increased to 22.9% for fiscal year 2009 compared with 21.8% for fiscal year 2008.

Excluding gasoline, grocery segment gross profit as a percentage of total sales was 25.3% for fiscal year 2009 compared with 25.5% for the comparable fiscal 2008 period. As I noted earlier, the Company has responded to the current competitive environment by keeping prices as low as possible in order to grow sales and market share. Operating and administrative expenses increased as a percentage of sales to 19.5% for the fiscal year ended September 26, 2009 compared to 18.1% for the fiscal year ended September 27, 2008. In dollars, operating and administrative expenses increased $47.5 million to $632.4 million for the year ended September 26, 2009 from $584.9 million for the year ended September 27, 2008. Excluding gasoline, which does not have significant direct operating expenses, the ratio of operating expenses to sales was 21.7% for fiscal year 2009 compared with 20.9% for fiscal year 2008.

Since the beginning of fiscal year 2008, the Company has completed 22 new remodeled or relocated stores. The increase in operating expenses is due in part to current unfavorable economic conditions that have extended the time needed for new and redeveloped stores to reach targeted levels of sales and profitability to cover additional personnel, utility, and depreciation costs. These costs were incurred in full from the opening of a new or redeveloped store.

Net rental income, other income and losses on asset disposals totaled $4.9 million and $5.1 million for the fourth quarters of fiscal 2009 and 2008, respectively. Lower rental income in fiscal 2009 was partially offset by fiscal 2008 losses related to shopping center and store assets taken out of service in conjunction with the Company's store relocation, closing, and remodeling activities.

Interest expense totaled $59.1 million for the year ended September 26, 2009, compared with $46.9 million for the year ended September 27, 2008. The increased interest expense for fiscal year 2009 is primarily attributable to increased total debt with a higher average interest rate and less interest capitalized as a component of store construction costs. During fiscal year 2009, the Company incurred $10.2 million of debt extinguishment costs. In May 2009, the Company issued $575 million aggregate principal amount of senior notes due in 2017. Note proceeds were used to pay off $350 million aggregate principal amount of senior subordinated debt maturing in 2011, to pay off $45.3 million of indebtedness outstanding under the Company's committed lines of credit and pay off $77.7 million of secured indebtedness. In conjunction with these pay-offs, the Company incurred call premiums and prepayment penalties totaling $6.8 million and wrote off $3.4 million of unamortized capitalized loan issuance costs related with the paid off debt.

The Company's effective tax rate was 37.6% for fiscal year 2009 compared with 34.6% for fiscal year 2008 due to a higher provision for deferred taxes. Net income for fiscal year 2009 totaled $28.8 million compared with net income of $52.1 million for fiscal year 2008. Basic and diluted earnings per share for the Company'spublicly traded Class A Common Stock were $1.23 and $1.18 per share, respectively, for the year ended September 26, 2009, compared with $2.22 and $2.13 per share, respectively, for the year ended September 27, 2008.

And now to update our investing and financing activities. Capital expenditures totaled $141.8 million and $248.8 million for fiscal years 2009 and 2008, respectively. During fiscal 2009, Ingles opened four new stores, closed one older store, and completed six replacement or remodeled stores. Ingles capital expenditure plans for fiscal 2010 include 10 new replacement or remodeled stores and to add three fuel stations at either new or existing stores. Current economic conditions have resulted in us reducing the scope of our 2010 projects which are expected to result in total Capital expenditures of between $120 million and $150 million.

In conjunction with the new senior note issuance in May 2009, the Company entered a new three year $175 million syndicated line of credit facility to replace certain existing facilities. Line of credit facilities totaled $190 million of which there are no amounts outstanding at September 26, 2009. As a result of the new senior note issuance and repayment of other debt, the Company extended the average maturity of its debt, decreased its letters of credit outstanding to $8.2 million and increased the amount of unencumbered real property and equipment. The net result of the new financings put the Company in a better position to take care of our financing needs in the future. At the end of September 2009, we have $77 million of cash on hand.

At the close of another year, we look forward to serving our customers with more stores and more products delivered with value and exceptional service.

We will now take your questions.

Thank you. (Operator Instructions) We'll go first to Emily Shanks with Barclays Capital.

Hi, good morning. Apologies if I missed this but what was the actual reason for reallocating distribution costs? What was the trigger event?

We did research of most of the other publicly filing grocery companies and we were one of the few companies left that still included distribution costs and operating in administrative expenses, so we just made the mere reclassification in order to allow us and to allow folks like you to better compare our margins to our peers.

Great. Sounds terrific. Thanks for making the change. And then specific to trends during the quarter, can you comment on how prepared foods did specifically on a year-over-year and maybe even a quarter-over-quarter basis?

In the 10-K, we've got a table that breaks out the perishables versus the non-perishables. They did a little bit better. Again, I think that's a continuation of the trend of people not dining out as much but yet still not having a lot of time or inclination to cook at home.

Okay, and then just my final question is, can you comment at all about how comps have trended in the months of October and November?

I'm sorry, how what trended?

Comparable store sales.

No, we don't talk about individual months within a quarter.

Okay, can you just comment quarter to date how things are looking?

No, we can't.

Okay, thank you.

Thank you.

We'll take our next question from Bryan Hunt with Wells Fargo Securities.

Thank you and good morning. I was wondering if you could talk about some of your competitors' actions. Food Lion's cut prices, just had a big announcement, other companies as well, some of your competitors are triple couponing. Could you just talk about what actions you're taking to maintain your customer counts at such high levels?

We aren't going to talk about any of our individual competitors, you know we don't do that, but suffice it to say, everyone is trying to keep market share and it's an intensely competitive environment out there right now.

Could you just maybe and that's the first time you've used the word "intensely" in a while, could you maybe talk about when you saw the competitive intensity escalate to help us gauge?

Six months ago.

Okay, six months ago from the day or the end of the quarter?

Maybe we should just say back in the spring, once everybody got through the holidays last year.

Okay, that's fair. I was just trying to gauge it. And maybe more specifically given your customer counts are growing at such a strong rate, could you maybe give us some insight into some strategy? Do you feel like it's tied to your ability to mine your data from your customer cart information or what do you attribute it to?

We attribute it to having a great product selection including gasoline that makes people want to come visit us even if they can't spend quite as much as they used to.

All right. And then with regards to product selection when you talked about private label earlier, could you tell us what your private label is as a percent of mix and do you all have a strategy to hit a specific percentage mix behind private label?

I don't have the percentage numbers but again, our strategy is to make sure that we give the customer a choice, and with our stores being a little larger than some of our competitors it gives us some leeway to do that.

Okay. And looking at the balance sheet, your account payable days, the way we calculate it is roughly 18 days and it's the lowest it's been in several years. Could you give us any reasoning behind why it's at a low point over the last three to four years?

It's a difficult number to look at because you're looking at one point in time day. Our overall vendor management strategy is that we're going to take payment discounts wherever we can get them, we're going to pay electronically wherever we can because it's the cheapest form of payment for both the vendors and for us. And both of those things can tend to drive that number down, but again, since you're looking at one day at a point in time at the end of that day, it's hard to draw a lot of hard conclusions beyond that.

Given your customer count data and your continuing growing same-store sales which are I would say strong relative to your peer group, are you getting more opportunities to get promotional dollars from your vendors? Are you seeing an increase in promo dollars and marketing dollars?

Any time you have higher volumes that gives you a little bit better leverage.

Okay, and could you talk to us about how many stores you closed in fiscal 2009 and what's the plan for that real estate if any of that is owned?

That was one store that we closed and I believe it was a leased store. We just didn't renew the lease.

And is that Q4 or for the whole year?

That's for the whole year.

And then lastly, looking at your CapEx spend, $120 million to $150 million, I was wondering if you could tell us what the maintenance number is within that $120 million to $150 million as well as how many are actual new stores versus replacements or remodels within that mix?

Sure. And as we've consistently said for a long time, maintenance CapEx number is a concept that we just don't subscribe to because you have to improve your store base, so a maintenance CapEx number where you don't improve your stores is just not a number where we're going to bother to calculate or pay attention to. For 2010, we'll still have a number of projects but it will be a little bit more weighted towards remodels as opposed to completely new buildings.

Okay, I appreciate your time this morning, thank you.

Sure, thanks.

We'll take our next question from Karen Short with BMO Capital Markets.

Hi, thanks for taking my question. I had a couple questions just on inflation or deflation, I didn't catch it if you said it, but do you have a sense of what the food deflation would have been in the quarter or if there was any?

Once you get past milk and gasoline which are two huge volume items that have had substantial cost decreases over the last year, the effect of most everything else on top of that tends to be muted. But we have had some cost deflation in most of our produce and meat items, as well.

Okay, do you have a percent off the top of your head excluding gas obviously?

No, I do not, sorry.

Okay. And then just talking a little bit about private label penetration, where is it at in terms of percent of food sales and what do you think the opportunity is?

We didn't have a percent available as a percent of total food sales but you have more options in most every area of the store now than you had a few years ago. And again, we want to make sure that the customers have a choice, that if they want the national brand it's going to be just as easy for them to buy that as it is to be able to buy and expand private label product.

Okay. And then just to clarify in the environment, the competitive environment, has it gotten more competitive into your first quarter from your fourth?

We can't talk about the first quarter at all. Sorry.

Okay, and then on your gross margin, other than private label, what else would have been the driver of the improvements in gross margin in the fourth quarter?

Again, gasoline, we had some difficult gross margins last year fourth quarter due to the hurricane disruptions, with milk prices being down and with your volume being up, your margin's going to improve there some. And in most other cases it hasn't been that appreciably different one way or the other because at the end of the day, the overall margins have been pretty stable.

Okay, got it. Thanks very much.

(Operator Instructions) We'll go next to Damon Witkowski with Gabelli & Company.

Hi, good morning. Just wanted to dig in a little bit more on the operating expense side. For the fourth quarter, the $161 million versus $154 million last year, and I know you said that a lot of it was due to the fact that you've opened a lot of stores and it required a lot of help, but is any of it temporary or is it all just that the sales haven't caught up to the expense number yet?

I think it's more the sales haven't caught up to the expense number yet. Like I said earlier in the call, you incur those costs from day one and in a recession it's just taking a little bit longer for the sales volume to catch up to the level we want it to to bring that operating expense leverage number down a little bit.

And Ron, you don't actually disclose the number of new stores you plan on opening in the next fiscal year? Because in the press release it says 10 but it doesn't break down the remodels versus new stores.

Yes, and you'll see that in the K later on. We have 10 projects but with a little bit lower overall number, maybe a little bit more towards the remodel side than the new.

And just to clarify, you spelled it out in your press release for the full year but not for the quarter, when you talk about traffic being up 9.9% in the fourth quarter, I assume that excludes traffic to your gas pumps?

That's correct.

And do you talk about that number at all just out of curiosity in terms of what's happening there as prices have come down 37%? Are people actually buying more gallons of gas?

Yes, our gallon sales are up, yes.

Okay. You don't disclose by how much though?

No, we do not. Sorry.

That's okay. And milk obviously helped your gross margins because the actual raw material, the actual milk itself is, was cheaper on a year-over-year basis. I assume that's reversing here in the first quarter.

Again, I'm sorry, I can't address anything in the first quarter.

Okay, and just going back to gasoline one more time, do you care whether, I think you manage the business to profit per gallon, is that right? So ideally you'd have it lower but it doesn't, because in theory people would buy more gallons but do you really care either way whether gas is higher or lower?

It's certainly better for our customers when gasoline is lower because that means they have more money to come inside the store then.

But again, from your profitability, you manage it more to a profit per gallon.

Correct.

Okay. Thanks, Ron.

Sure. You're welcome.

We'll take our next question from Andrew Bark with Post Advisory Group.

Yes, a couple questions. With respect to the change in accounting where can we find the quarterly historical restatements? Will those be in the 10-K?

You'll certainly see '09, '08 and '07 fiscal years in the K. We don't have a separate gross profit number in the quarterly results of operations footnote. No, I take that back. Yes we do, so you'll see the quarters for '09 and '08 in the 10-K, as well.

Okay, and roughly what's the shift in dollars in the fourth quarter that went from O&A to cost of goods sold?

$30 something million, roughly.

Okay. Revolver availability at the end of the quarter?

I'm sorry, say that again, please?

What was available in the revolver at the end of the quarter?

All of it, the $190 million.

Okay, and can you tell me what the break out is on your sales between grocery and dairy? I missed that.

We include dairy as part of grocery and again, we've got tables in the 10-K that break out three or four categories but that's as deep as we go.

Okay. And when you talk about average transaction size being down, I think it was $1.51, what's that on a percentage basis?

I do not have that number with me. The average number is somewhere in the 20s but I don't know the exact percentage of that decrease.

And then when are you guys going to actually file the K?

It will be after the market closes this afternoon.

Okay, thank you.

You're welcome.

(Operator Instructions) We'll take our next question from Ken Ban with Jefferies & Company.

Good morning. I was wondering, on the new stores that you opened last year, you said that the results were a little bit behind schedule. Is there anything other than the economy that you can attribute that to? Did you market them any less than you normally do on new stores or anything like that? And has that changed your outlook for new stores this next year or going forward?

Three things to address there. We didn't market them any differently. It's overwhelmingly due to the economy. And it's also important to keep in mind that most of these '08 and '09 store openings were in process when the economy turned bad, so it certainly would have been cost efficient to just pull the plug and stop. And the good news is that when the economy turns around and perhaps some other folks saying, "Great, I can start building stores again," we've already got them there. We suffered through a couple of years while we wait for them to catch up but I think that will put us ahead of things coming out of this.

Okay, and could you tell us how many of those new stores were on properties that you own and going into 2010 how many of the new stores will be also on properties that you own versus lease?

Substantially all of them were on owned properties. That's far and away our preference.

Okay, and then going into 2010 will that be the same?

I don't have the exact numbers but it should be the same.

Okay, thank you.

This will conclude today's question and answer session. At this time I'd like to turn the conference back to Mr. Freeman for any additional or closing remarks.

Thank you for your time and interest in joining us today and we wish all of our customers, employees and shareholders a happy and safe holiday season. Thank you very much.

This will conclude today's conference. Thank you for your participation.