Ingles Markets, Incorporated (IMKTA) 2010 Q3 法說會逐字稿

Please stand by. Good day and welcome to the Ingles Markets, Incorporated third quarter conference call. Today's call is being recorded. At this time 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 fiscal 2010 third quarter conference call. With me today are Robert Ingle, founder of our Company and Chief Executive Officer, Robert Ingle II, Chairman of the Board, Tom Outlaw, Vice President of Sales, 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, 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 publically 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 the longstanding Company policy and in recognition of the extremely competitive nature of our industry, this call will not address individual competitors or Ingles Marketing Strategies other than what is included in the Company's public filings.

This morning I'll provide you with a summary of our third quarter and nine-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 third quarter results. Net income for the third quarter of fiscal 2010 totaled $11.7 million compared with net income of $4.7 million earned for the third quarter of fiscal 2009. Last year's third quarter included $10.2 million of pre-tax expenses related to our May 2009 issuance of $575 million of senior notes and the related pre-payment of other debt. Our pre-tax income for the third quarter of 2010 was $18.3 million compared to $17.8 million for the third quarter of last year after adding back last year's debt-related expenses. We're pleased with this quarter-over-quarter increase in an operating and economic environment that still has significant challenges.

Net sales increased 3.6% to $856.1 million for the three months ended June 26, 2010 from $826.8 million for the three months ended June 27, 2009. Ingles operated 202 stores and 10.8 million square feet of retail space at June 26, 2010 compared to 201 stores and 10.7 million square feet at June 27, 2009.

Excluding gasoline where retail prices were significantly higher this year, grocery segment comparable store sales increased 0.8%. The number of customer transactions excluding gasoline increased 7.9% while the comparable average transaction size decreased 7.0% 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. That is 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 June 2010 quarter increased $5.3 million or 2.8% to $196.9 million. Gross margin as a percentage of sales was 23.0% for the June 2010 quarter versus 23.2% for the same quarter last year. Excluding gasoline sales, grocery segment gross profit as a percentage of sales was relatively constant at 26.0% and 25.9% for the June 2010 and 2009 quarters, respectively.

The 2010 third-quarter margins improved from margins earned in this year's second quarter. The effect of recent food cost deflation seems to have decreased. Price competition and customer purchasing habits, however, continue to influence margins.

Operating and administrative expenses for the June 2010 quarter totaled $164.5 million, an increase of $6.5 million or 4.1% over the June 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 19.2% for the first three -- for the three months ended June 26, 2010 compared with 19.1% for the three months ended June 27, 2009.

In general, the Company's increased store development activities in fiscal years 2008 and 2009 have resulted in higher personnel, depreciation, and occupancy cost. 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 when compared with the past few quarters.

Net rental income, gains or losses on asset disposals, and other income total $2.1 million for the June 2010 quarter and $0.6 million for the June 2009 quarter. The increase consists primarily of higher unit sales prices for waste paper and packaging, and an increase in the volume sold of these items.

Interest expense decreased $0.2 million for the three-month period ended June 26, 2010 to $16.2 million from $16.4 million for the three-month period ended June 27, 2009. Total debt at June 26, 2010 was $825.6 million compared to $855.7 million at June 27, 2009. Over the next 12 months, scheduled principal debt reductions total $91.4 million.

Income tax expense totaled 36.4% of pre-tax income for the June 2010 quarter compared with 37.5% in the June 2009 quarter due to lower state income taxes and deferred taxes. Net income of $11.7 million for the June 2010 quarter represents 1.4% of sales. Net income of $4.7 million for the June 2009 quarter represents 0.9% (Sic - see press release) of that quarter's sales. Basic and diluted earnings per share for the Company's publically traded Class A common stock were $0.50 and $0.48 per share, respectively, for the June 2010 quarter compared to $0.20 and $0.19 per share, respectively, for the June 2009 quarter.

Now, I'll discuss our nine-month results. Consistent with our quarterly results, nine-month performance began with increased sales. Net sales for the nine months ended June 26, 2010 totaled $2.53 billion compared with $2.42 billion for the first nine months of fiscal year 2009.

Grocery segment comparable store sales increased 0.9% excluding gasoline sales where retail prices have been significantly higher during fiscal 2010. The number of customer transactions excluding gasoline increased 10% while the comparable average transaction size decreased 7.7% compared with the June 2009 nine-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 these difficult economic times.

Gross profit for the nine-months ended June 26, 2010 increased 1.8% to $568.0 million, an increase of $9.8 million compared with the first nine months of last fiscal year. Gross profit as a percentage of sales was 22.4% for the June 2010 nine-month period compared with 23.1% for the June 2009 nine-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 25.5% for the nine months ended June 26, 2010 compared with 25.4% for the same period of last fiscal year.

Raw milk prices after decreasing during the December 2009 quarter increased during the March and June 2010 quarters. Overall fluid dairy case sales were relatively flat over the comparative nine-month fiscal 2010 and 2009 periods.

Gross profit as a percentage of fluid dairy sales was 12.2% and 13.6% for the nine months ended June 2010 and 2009, respectively.

Operating and administrative expenses increased $15.6 million or 3.3% to $486.9 million for the nine months ended June 26, 2010 from $471.3 million for the nine months ended June 27, 2009. As a percentage of sales and excluding gasoline, operating and administrative expenses were 21.9% for the nine-month period ended June 26, 2010 compared with 21.6% for the nine-month period ended June 27, 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 the slight increase in 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 $4.3 million and $3.7 million for the June 2010 and 2009 nine-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 $6.4 million for the nine-month period ended June 26, 2010 to $48.9 million from $42.5 million for the nine-month period ended June 27, 2009. Interest expense is higher due primarily to the issuance in May 2009 of $575 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 36.1% for the June 2010 nine-month period compared with 37.7% for the comparable June 2009 period due to lower state taxes and deferred taxes.

Net income totaled $23.3 million for the nine-month period ended June 26, 2010 compared with $23.6 million for the nine-month period ended June 27, 2009. Net income as a percentage of sales was 0.9% for the first three quarters of fiscal year 2010 compared with 1.0% for the first three quarters of fiscal year 2009.

Basic and diluted earnings per share for publically traded Class A common stock were $0.99 and $0.96 for the June 2010 nine-month period compared with $1.01 and $0.95 for the June 2009 nine-month period.

Next I'll update our investing and financing activities. Capital expenditures totaled $65.3 million for the first nine-months of fiscal year 2010. This is a significantly lower run rate compared with total CapEx of $390 million, which was 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 development plans until economic conditions improve. The Company's capital expenditure plans for fiscal year 2010 include investments of approximately $90 million.

During the first nine months of fiscal 2010, Ingles opened two new and one remodeled store. Our liquidity position is strong with cash on hand totaling $53.1 million at June 26, 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). We'll here first from Emily Shanks with Barclays Capital. Please go ahead.

Good morning. Very nice quarter. I had a couple of follow-up questions. On the last statement that you just made, that guidance for 2010 if I caught this correctly for CapEx is now $90 million. That's down significantly from the last time we got guidance of $120 million for this year. Does that just mean that we should assume next year, fiscal year 2011's CapEx spend is going to be closer to that $120 million number, or have you permanently cancelled some plans for CapEx?

We haven't permanently cancelled any plans. It's really more of a timing issue than anything else and monitoring overall economic conditions. We've got the future year guidance in the 10-Q that will go beyond this year's $90 million, but we're still looking somewhere in that $120 million to $150 million range. But again, a lot depends upon what economic conditions look like as far as the amount and timing in any given quarter.

Okay. That's helpful. And then in terms of the raw land buying opportunities, are there? And how are you guys approaching those?

Well, we've got a few pieces of -- a few parcels of land now that we have available for future development. Land prices have certainly decreased given economic conditions, and we're always on the lookout for good future store sites.

Okay. And then my last question is just that traffic that you are guys are posting, and thank you for including it in the press release, is up fairly impressively versus some of your competitors. And I was just curious, do you think that that's more attributable to actually taking market share and acquiring customers or is it simply what you noted in terms of customers are just making more trips to the store generally?

Well we hope it's coming from all three areas, customers making more trips to the stores, purchasing more prepared foods, and taking market share. We like the traffic increases from all three areas.

Okay. Great. Best of luck.

Thank you.

(Operator Instructions). We'll hear next from Bryan Hunt with Wells Fargo Securities. Please go ahead.

Thank you. Ron, I was wondering if you could just give us an idea of what the outlook for openings and remodels may be for the Q4 period given the reduced CapEx outlook?

Well, again, we expect the total CapEx to be $90 million. We do have some projects in progress right now that may open before the end of this fiscal year, may open the first quarter of next fiscal year. So given that we're already two months into the last quarter, we were hesitant to specifically mention the fourth quarter in the 10-Q, but we do have some projects going right now.

Could you give us an idea of what you have underway, whether -- how many remodels or new store openings are under construction at this time?

Well at this time, again, given where we are with those projects I think we're going to -- we'd be much better off and would give you better information if we wait until we get to the yearend and then have a better idea of where we're going to be for all of fiscal 2011.

Okay. And then when you look at -- kind of switching gears and looking at historical openings and remodels and what it's done to your operating cost line, when do you feel like you're going to anniversary the personnel expense delevering that you've seen?

Well on some of it we're there already. And I think that's one of the reasons why we're seeing the operating expense as a percent of sales numbers now tracking pretty close with where they were last year.

Okay. And looking at your $91 million of debt maturities that must be paid off in the upcoming fiscal year and perhaps your CapEx guidance broadly in the $120 million to $150 million range, if your numbers don't remain consistent like you've seen this year in terms of earnings, is there an opportunity to defer some of that $120 million to $150 million range back to what we're seeing this year to help generate free cash and meet that debt maturity?

Well there's always that opportunity to do that. I think the better way to look at it is the $56 million cash number at the end of the quarter was at a little bit of a low point just due to the timing of some items. It was I think in the $70 million, $80 million range last quarter.

So I think the best way to look at it is we've got numerous sources to take care of that $91 million worth of maturities that's coming up. We've got a lot of cash on hand at the balance sheet -- cash on the balance sheet at today's date. We have nothing outstanding on our $185 million worth of lines of credit. And we still have significant unencumbered assets.

So I think that's the important take away right now. And then all that flexibility allows us to approach our CapEx plans as we've tried to do in the past, even before tough economic conditions, where if it's a good project that's going to perform well for the Company in the future, we'll do it.

Okay. Could you talk about -- you mentioned competition in your comments. Could you just talk about maybe sequentially did the competitive environment increase from Q2 to Q3, or did you see it remain relatively stable?

Bryan, we're not going to address that.

Okay. And then looking at the milk market and your gross profit there. You mentioned higher raw materials as well as increased competition, do you believe that there's been a permanent change in the margin for that business, or do you feel like this is just a temporary change in the market?

That's hard to say. I think everyone in the industry will acknowledge that milk is one of those battleground products and it's certainly on the battleground right now.

Okay. I'll get back in the queue. Thank you for your time, Ron.

Sure thing.

(Operator Instructions). We'll move next to Damian Witkowski with Gabelli and Company. Please go ahead.

Hi. Good morning, Ron. Question -- I missed the comment you made on deflation in your prepared remarks. I think you said that cost deflation is now abating, and just let me know if that's true. And then if so, what categories in particular and what does that really mean for -- that's on the cost side, so what does that mean on the retail side?

Yes. Just generally broad-based we're not seeing the deflation that we saw a few quarters ago. There's still some pockets of it out there among individual products. We've got other products where we're starting to see some price increases again.

But I guess the point that we're trying to make is that it is -- deflation does not have the impact now that it had in past quarters. And we hope it stays that way.

Yes. That's a positive. But now are you able to -- in those areas where there are increases, are you able to pass those on on retail?

Well, our margins are pretty stable, so I think overall we're managing it pretty well.

Okay. And then on the milk, just to go back to that for a second. It actually sounds like, again, gross margins might be declined just because the prices have gone up, but you sort of manage that business to profit -- penny profit per gallon. And so are those penny profits kind of stabilizing at this point, both in your fluid dairy business as well as the retail?

Yes.

So that's an improvement from the last quarter?

Yes.

Okay. And then just lastly, if you -- looking at the consumer, and I know it sounds like the traffic, they are coming in more often and buying less each time, the good news is they continue to shop with you and they like what you have, and so they keep coming back.

But it sounds like they are still fairly stressed. That's not a huge surprise, but is it at least improving or just stabilizing? And what really should we be -- what do you look at, sort of in the more macrolevel in your regions to sort of get comfortable that the consumer may be stabilizing again?

We're still getting mixed signals. I think it's too early to say that we're seeing any sort of permanent improvement. But again, we're just happy they're still shopping with us, and more often.

Thanks, Ron.

You're welcome, Damian.

(Operator Instructions). We'll hear next from Alex Bisson with Northcoast Research. Please go ahead.

Good morning and congratulations on a great quarter.

Thank you.

I guess one question on the traffic, obviously over the last couple of years you've made some great gains in traffic. Could you give us a sense of how much of the gain is a new unique customer as opposed to an existing customer coming more frequently?

You know we really, in our internal look at the numbers, we really try not to distinguish that much between the two. We just like getting the traffic.

Okay. Could you just touch on gas profitability and how that trended in the quarter or maybe how it's trending year-to-date? Is that a more profitable piece of the business?

We don't go down to specific product lines in our gross profit analysis. To suffice it to say gas prices have been a lot higher this year and similar to milk, you measure your gas profits in cents per gallon as opposed to a percentage of the sales price. But other than that --

How is that cents per gallon trended maybe then?

Yes. I'm sorry, we don't discuss that level of detail.

Okay. In the press release you said that the per-gallon profitability of milk is stable? I assume that means on a sequential basis not year-over-year?

Yes.

Okay. How does that -- so if I look at the gross profits in the second quarter it was 11.3 but this quarter it's 11.9. Why doesn't the increase in gross profit of that subsidiary suggest an increase in per-gallon milk profit?

Again, we don't go into that level of detail in discussing some of our individual product lines.

All right. Well maybe just one final one for you. As you think about your competitive set, would you rather compete against a high-low player or an everyday low price player, and if a shift from everyday low price to high-low -- or is a shift from everyday low price to high-low a good think for you in your strategy?

Alex, I'm sorry, but like we said at the first of the call, we're not going to discuss individual competitors and that includes their ways of going to market any more than ours. Sorry about that.

No, that's all right. Thank you very much.

You're welcome.

And Mr. Freeman, seeing no further questions in our queue, I'll turn the conference back over to you for any additional or closing comments.

Okay. Well thank you all for joining us today. We'll be back with you probably in late November/early December after the close of our fiscal year in September. Thank you very much.

That does conclude today's conference. Thank you all once again for your participation and have a wonderful day.