Ingles Markets, Incorporated (IMKTA) 2010 Q2 法說會逐字稿

Good day, and welcome to the Ingles Markets, Incorporated second-quarter conference call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would now like to turn the conference over to the Chief Financial Officer, Mr. Ron Freeman. Please go ahead, sir.

Thank you. Good morning. Welcome to Ingles Markets' fiscal 2010 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; Jim Lanning, President; and Tom Outlaw, Vice President of Sales.

Statements made on this call include forward-looking statements such as defined by and subject to the Safe Harbors created by federal securities laws. Words such as expect, anticipate, intend, plan, likely, goal, seek, 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 and declines any obligation 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.

In accordance with a long-standing Company policy, and in recognition of the extremely competitive nature of our industry, this call will not address individual competitors or Ingles' market strategies other than what is included in the Company's public filings.

This morning I'll 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 this morning and is available on our website at www.ingles-markets.com. We expect to file our 10-Q for the quarter after the markets close this afternoon. It will be available via our website as well.

We'll begin with our second quarter results. Net income for the second quarter of fiscal 2010 totaled $5.6 million, compared with net income of $7.8 million earned for the second quarter of fiscal 2009. Total and comparable store sales increases were offset by higher interest and other expenses, influenced by the Company's accelerated store development strategy during fiscal year 2008 and 2009.

Net sales increased by $47.8 million to $837.0 million for the three months ended March 27, 2010, from $789.2 million for the three months ended March 28, 2009. Ingles operated 202 stores and 10.8 million square feet of retail space at March 27, 2010, compared to 200 stores and 10.6 million square feet at March 28, 2009. Excluding gasoline, where retail prices were approximately 49% higher than in the March 2009 quarter, grocery segment total sales increased 1.7% [sic] and comparable store sales increased 1.1%. The total number of customer transactions, excluding gasoline, increased 7.8%, while the comparable average transaction size decreased by 6.3% compared with the same quarter last year. The trend in total and average transactions has followed this pattern for several recent quarters, and is indicative of the effect of economic recession on consumer spending. More trips to the store but spending less on each trip.

Our sales increases are broad based across all product lines, with sales of private-label items and prepared foods growing at a faster rate, consistent with industry-wide trends.

Gross profit for the March 2010 quarter increased 2.6% to $185.9 million, an increase of $4.8 million compared with the second quarter of last fiscal year. Gross margin, as a percentage of sales, was 22.2% for the March 2010 quarter versus 23.0% for the same quarter last year. Excluding gasoline sales, grocery segment gross profit as a percentage of sales was relatively constant at 25.4% and 25.2% for the March 2010 and 2009 quarters, respectively.

The effect of recent food cost deflation seems to have decreased. Price competition, however, continues to influence our margins.

Operating and administrative expenses for the March 2010 quarter totaled $161.8 million, an increase of $4.8 million, or 3.1% over the March 2009 quarter. Excluding gasoline sales and its relatively low associated operating expenses, which are primarily payroll, operating and administrative expenses as a percentage of sales were 22.0% for the three months ended March 27, 2010, compared with 21.8% for the three months ended March 28, 2009. In general, the Company's increased store development activities in fiscal years 2008 and 2009 have resulted in higher personnel, depreciation and occupancy costs. The Company opened or redeveloped 22 stores in fiscal 2008 and 2009. Current economic conditions have extended the time needed for new and redeveloped stores to reach targeted levels of sales and operating expense leverage. The operating expense leverage gap between the current-year quarter and the prior-year quarter has narrowed as compared to the past few quarters.

Net rental income, gains or losses on asset disposals and other income totaled $1.2 million for both the March 2010 and 2009 quarters. The sale of an outparcel in the 2009 period was offset by higher 2010 income from the sale of scrap cardboard and plastics, and vendor recoveries.

Interest expense increased $3.5 million for the three-month period ended March 27, 2010, to $16.6 million from $13.1 million for the three-month period ended March 28, 2009. Total debt at March 27, 2010, was $833.5 million compared with $778.3 million at March 28, 2009. The increased debt was used to fund new and redeveloped stores and to provide the Company with additional operating cash.

Income tax expense totaled 35.5% of pre-tax income for the March 2010 quarter, compared with 36.2% in the March 2009 quarter due to lower state income taxes and increased tax credits.

Net income of $5.6 million for the March 2010 quarter represents 0.7% of sales. Net income of $7.8 million for the March 2009 quarter represents 1.0% of that quarter's sales. Basic and diluted earnings per share for the Company's publicly traded Class A Common Stock were $0.24 and $0.23 per share respectively for the March 2010 quarter, compared to $0.33 and $0.32 per share, respectively, for the March 2009 quarter.

Now, I'll 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 27, 2010 totaled $1.68 billion, compared with $1.59 billion for the first six months of fiscal year 2009. Grocery segment comparable store sales increased 1.0%, excluding gasoline sales, where retail prices were approximately 29% higher than the first half of 2010. The number of customer transactions, excluding gasoline, increased 10.8%, while the comparable average transaction size decreased 8.1% compared with the March 2009 six-month period.

Given the extended recession and intensified competition for a smaller amount of consumer dollars, we're pleased with our sales growth and the increase in our average customer visits. 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 profits, we believe it is important to maintain customer loyalty during difficult economic times.

Gross profit for the six months ended March 27, 2010, increased 1.2%, to $371.1 million, an increase of $4.4 million compared with the first six months of last fiscal year. Gross profit, as a percentage of sales, was 22.1% for the March 2010 six-month period compared with 23.0% for the March 2009 six-month period. Gross profit dollars increased due to the higher sales volume and a change in the mix of products sold in the grocery segment. Excluding gasoline sales, grocery segment gross profit as a percentage of sales was 25.2% for the six months ended March 27, 2010, compared with 25.1% for the same period of last fiscal year.

Raw milk prices, after decreasing during the December 2009 quarter, increased during the March 2010 quarter. Overall, fluid dairy dollar sales were relatively flat over the compared six-month fiscal 2010 and fiscal 2009 periods. Gross profit as a percent of fluid dairy sales was 12.4% and 13.1% for the six months ended March 2010 and 2009, respectively.

Operating and administrative expenses increased $9.1 million, or 2.9%, to $322.4 million for the six months ended March 27, 2010, from $313.3 million for the six months ended March 28, 2009. As a percentage of sales, and excluding gasoline, operating and administrative expenses were 21.8% for the six-month period ended March 27, 2010, compared with 21.6% for the six-month period ended March 28, 2009. As previously noted, increased expense related to accelerated store development activity in fiscal years 2008 and 2009, and unfavorable economic conditions have resulted in increased expenses as a percentage of sales. Our 10-Q has additional detail on changes in operating expenses.

Net rental income, losses on asset disposals and other income totaled $2.2 million and $3.1 million for the March 2010 and 2009 six-month periods, respectively. In addition to the factors mentioned above, net rental income has decreased due to less tenant space available for rent and increased tenant vacancies.

Interest expense increased $6.7 million for the six-month period ended March 27, 2010, to $32.8 million from $26.1 million for the six-month period ended March 28, 2009. Interest expense is higher due to higher total debt, including the issuance in May 2009 of $575.0 million aggregate principal amount of senior notes due in 2017, and related transactions.

Income tax expense as a percentage of pre-tax income decreased to 35.9% for the March 2010 six-month period compared with 37.7% for the comparable March 2009 period due to lower state taxes and increased tax credits.

Summarizing our six-month results, net income totaled $11.6 million for the six-month period ended March 27, 2010, compared with $18.9 million for the six-month period ended March 28, 2009. Net income, as a percentage of sales, was 0.7% for the first half of fiscal year 2010, compared with 1.2% for the first half of fiscal year 2009. Basic and diluted earnings per share for publicly traded Class A Common Stock were $0.50 and $0.48 for the March 2010 six-month period, compared with $0.80 and $0.77 for the March 2009 six-month period.

Next, I'll update our investing and financing activities, and then take your questions.

Capital expenditures totaled $34.2 million for the first half of fiscal year 2010. This is a significantly lower run rate, compared with total CapEx of $390 million invested during fiscal years 2008 and 2009, which included the opening or redevelopment of 22 stores. Economic conditions have resulted in a longer ramp-up time for these 2008 and 2009 store development projects, and has made us more deliberate in our 2010 development plans until economic conditions improve.

The Company's capital expenditure plans for fiscal year 2010 include investments of approximately $120 million. During the first half of fiscal 2010, Ingles opened two new and one remodeled store. At the present time, the Company intends to open five new replacement or remodeled stores, and add approximately four new fuel stations at either new or existing stores during the remainder of fiscal 2010.

Our liquidity position is strong, with cash on hand totaling $76.4 million at March 27, 2010, no outstandings on our lines of credit and significant unencumbered assets. We believe our financial resources will be sufficient to meet planned capital expenditures, scheduled debt repayment and working capital requirements for the foreseeable future. We are comfortably in compliance with all of our debt covenants.

We will now take your questions.

(Operator instructions.) It appears our first question comes from Emily Shanks with Barclays Capital.

Good morning.

Good morning, Emily. How are you?

Good. How are you?

I'm fine, thank you.

I had a couple of questions. My first one is around the working capital. It looks like it was a meaningful source of cash during the quarter, particularly when you juxtapose that to historical second quarters. Can you just help us understand what's driving that, and specifically if there were any different trends that you're seeing around your payables at all?

There aren't specific trends that we're seeing around our payables. One of the--especially with payables, when you take a point-in-time snapshot at the end of the quarter, a lot of it depends on when we cut the check. But given that the store development has slowed down, we don't have a whole lot of inventory growth that's using up working capital, and we continue to take vendor discounts for early payment whenever possible. But there's no big change one way or the other.

Okay, great. Thank you. And then around the CapEx guidance, stepping down from the $120 million to $150 million range just to the $120 million, of that amount specific to the growth portion that's baked into that guidance, do you have the flexibility to decrease that even further as you look out over the next couple of quarters? Or are you locked into all of those projects at this point?

No, we're not locked in, and we do have some flexibility.

Okay, great. Thank you.

You're welcome.

And our next question comes from Alex Bisson with Northcoast Research.

Good morning, and thank you for taking my questions. I guess first, just on the consumer mindset, are you seeing signs that consumers are starting to get a little bit more confident and perhaps trading up within your stores? Perhaps another way to ask that is is the onslaught of trading down and consumer concern over?

We have not seen any large shifts in behavior at this point.

Okay. My second question is actually on the dairy. You guys provided a little bit of new detail around the dairy in today's press release. As you look at the decline in gross profit at the dairy, for just this quarter, how much of that is related to the large increase in the price of raw milk versus an actual decline in gross profitability in terms of dollars?

Well, you tend to make your gross profit in dairy on a cents-per-gallon basis, really regardless of what the raw milk price is. So in times of high milk prices, that dollar percentage gross profit's going to be a little lower. The cents-per-gallon margin is pretty stable. There are some competitive factors out there. There's been a lot of fluctuation in milk prices over the first two quarters.

Okay. You said that cents-per-margin is under a little pressure. Is it under more pressure for the milk you sell through your stores, or the milk you sell to other retailers?

It's consistent pressure.

Okay. Thank you very much.

(Operator instructions.) Our next question comes from Damian Witkowski with Gabelli & Co.

Hi. Good morning, Ron.

Hey, Damian.

A question for you on just I think the last caller touched on this, but just the environment that you're seeing. I know you don't talk about specific competitors, but in general, in the markets where you serve, is the competition getting less or more rational in terms of pricing? And then you said there's no change in the consumer mood, but does that mean that it's stabilized, or is it getting worse, or how would you define that?

On the consumer mood, I would say it's stabilized. But as far as the competition's concerned, again, we're not going to address that. I know you have access to what some of our competitors have been saying about pricing and all, and we'll just leave it at that.

Okay. And then are you--a company that reported yesterday talked about seeing competitive pressure on pricing in things like milk, dairy--dairy in general, I guess--meat and produce, and supermarkets using that as a traffic driver. I'm just wondering if you're seeing the same thing in your markets?

Yes.

Okay. And that's a change from a historical perspective? I mean, typically these things were not used as a traffic driver.

Yes.

Okay. And just on the capital expenditures, so you've gone from $120 million to $150 million range to now $120 million. And is that how we should think about that going forward, even into next year? Or would you expect--what kind of makes you change your mind and re-evaluate the number of new and remodeled stores you're going to do, going forward?

Well, we're still comfortable with the annual guidance that we provided in the 10-K in that mid point $150 million, but in this environment, we're looking at one project at a time. And timing can have a lot to do with it as well, just because a new store or a redeveloped store takes such a long time from start to finish.

Okay. And just one last thing on share repurchases, I know you've bought back 40,000 of Bs during the quarter, but any update there in terms of what you're thinking on perhaps timing and--? There is no--it's an open-ended kind of a mandate, right? So there is no--you don't have to do it in the next three quarters.

Right. It is an open-ended plan for the repurchase of up to 1 million Class A or Class B shares, and in this particular place or this particular transaction that we had, our profit-sharing plan, which owns B shares, needed some liquidity to meet some retirement obligations, so the Company repurchased the shares. That's a very efficient way to handle both issues, and we'll continue to do that as those distribution needs arise.

Okay. All right. Thanks, Ron.

You're welcome, Damian.

And our next question comes from [Reid Kim] with Bank of America Merrill Lynch.

Hi, guys. This is [Mike Caplan] for Reid. I know you guys talked about the inflationary environment wasn't as deflationary as much. I just didn't know if you could give some more color there in terms of within specific areas. And then just kind of what your outlook is on that front for the balance of the year. Thanks.

Could you say that last part again? I'm sorry.

Just kind of the inflation outlook. I know you said that it's less deflationary than it's been and kind of within specific areas, and kind of what your thoughts are for the rest of the year on food inflation.

I certainly don't have the crystal ball on food deflation, and certainly with gasoline and milk, that's just going to fluctuate a lot. I guess the point that we're trying to make is that after some pronounced deflation previously, it seems to have settled a little bit. And that's pretty much broad-based outside of gas and milk, and I'm really not comfortable going in any more detail than that.

All right. Thanks.

And it appears we have no further questions in the queue at this time.

Okay, great. Well, we appreciate everyone joining us today, and we look forward to speaking with you at the end of next quarter. Have a good day.