Ingles Markets, Incorporated (IMKTA) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Ingles Markets, Inc. first 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, Mr. Ronald Freeman. Please go ahead, sir.

Thank you. Good morning. Welcome to the Ingles Markets fiscal 2011 first-quarter conference call. With me today are Robert Ingle, Founder of our Company and Chief Executive Officer; Robert Ingle Ingles, 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 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 the Form 10-K for the fiscal year ended September 25, 2010.

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' marketing strategies other than what is included in the Company's public filings.

This morning, I will provide you with the summary of our first-quarter results, followed by additional comments. After that, we will be pleased to take your questions. Our press release issued this morning is available on our website, www.ingles-markets.com. We plan to file our 10-Q for the quarter this afternoon. It will be available on our website as well.

Net income totaled $7.7 million for the quarter ended December 25, 2010, compared with $6.0 million for the comparable quarter ended December 26, 2009. The net income increase was driven primarily by increased sales. Net sales totaled $872.8 million for the quarter ended December 25, 2010, compared with $841 million for the comparable quarter ended December 26, 2009. This represents a 3.8% increase in total consolidated sales.

Grocery segment comparable store sales increased $23.5 million or 2.9%. Excluding gasoline sales, the quarter-over-quarter comparable store sales increase was still 2.9% as retail gas prices increased and gallon volume decreased. Our fluid dairy segment experienced sales dollar growth from increased raw milk prices and from increased case volume sales.

We are pleased with our sales growth during the first quarter, which included the Thanksgiving and Christmas holidays. Customer spending was up but we believe future periods will still be affected by unsettled consumer sentiment and job growth. Our long-term objective remains focused on driving topline sales and maintaining customer loyalty through product offerings, customer satisfaction, and expanded store offerings.

Gross profit for the three-month period ended December 25, 2010 increased $8.2 million to $193.5 million or 22.2% of sales compared with the $185.3 million or 22% of sales for the three-month period ended December 26, 2009. Excluding gasoline sales, gross profit totaled 25.2% of sales for the December 2010 quarter compared with 25% for the December 2009 quarter.

It was a very competitive holiday quarter and we were pleased with the success of some of our promotions and favorable changes in the mix of products our customers purchased. Gross profit dollars in the fluid dairy segment increased slightly but the gross profit as a percentage of sales decreased due to higher raw milk costs.

Total operating expenses were $167.3 million for the first quarter of fiscal 2011 compared with $160.6 million for the comparable fiscal 2010 quarter. Total growth in operating expenses was comprised primarily of increases in depreciation, insurance, utilities, and payroll arising from square footage and sales growth since the first quarter of last year.

Bank charges also increased due to increased debit card interchange costs and a greater percentage of transactions settled with debit and credit cards. Excluding gasoline sales and associated operating expenses, operating and administrative expenses as a percentage of sales were 21.8% and 21.7% for the three-months ended December 25, 2010 and December 26, 2009 respectively.

Net rental income, other income, and gains or losses on asset disposals totaled $1.5 million for the first quarter of fiscal 2011 compared with $0.9 million for the 2010 first fiscal quarter primarily due to higher income from sales of scrap cardboard and packaging materials. Asset disposal transactions were insignificant for the comparative fiscal quarters.

Interest expense increased $300,000 for the three-month period ended December 25, 2010 to $15.9 million from $16.2 million for the three-month period ended December 26 2009. Total debt at December 25, 2010 was $784.5 million compared to $841.7 million at December 26, 2009. We have steadily decreased our debt and interest expense following the Company's comprehensive $575 million refinancing that took place in May 2009.

The Company currently has lines of credit totaling $185 million with no amounts borrowed at December 25, 2010. On December 29, 2010 just after the end of the quarter, the maturity date of the $175 million line of credit facility was extended from May 2012 to December 2015. The Company believes its financial resources including these lines of credit and other internal and anticipated external sources of funds will be sufficient to meet planned capital expenditures, debt service, and working capital requirements for the foreseeable future.

Net income for the December 2010 quarter totaled $7.7 million compared with net income of $6 million for the December 2009 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A common stock were $0.33 and $0.31 per share respectively for the December 2009 quarter compared with $0.26 and $0.25 per share respectively for the December 2009 quarter.

Capital expenditures totaled $25.7 million for the first quarter of fiscal year 2011. During the first quarter, Ingles opened one new and two remodeled stores. Following a period of increased store development in fiscal 2008 and 2009, the Company is being more cautious in its development plans until economic conditions improve.

The Company's capital expenditure plans for fiscal 2011 include investments of approximately $100 million to $140 million. During fiscal 2011, the Company expects to begin construction of an adjacent addition to its current distribution center. The project will be funded with tax-exempt Recovery Zone Facility Bonds that were issued on December 29, 2010 in the amount of $99.7 million.

In addition to the distribution center, proceeds will be used to construct a new store in Buncombe County, North Carolina. Both of these projects are expected to be completed in fiscal 2012.

Depending upon the timing of fiscal 2011 expenditures for the distribution center expansion, the Company intends to open two new replacement or remodeled stores and add approximately four new fuel stations at either new or existing stores during the remainder of fiscal 2011.

As mentioned earlier, just after the end of the quarter, $99.7 million of Recovery Zone Facility Bonds were funded to the Company by a group of financial institutions for a seven-year period that ends January 1, 2017 subject to certain events. The bonds are prepayable without penalty during this initial seven-year period. The interest rate on the bonds is equal to one month LIBOR adjusted monthly plus a credit spread adjusted to reflect interest that is exempt from Federal and North Carolina taxation. The final maturity date of the bonds is January 1, 2036.

The Company's obligation to repay the bonds is collateralized by the project. Additional collateral may be required in order to meet certain loan-to-value criteria in the agreement with the financial institutions. The agreement incorporates substantially all financial covenants included in the line agreement.

We will now take your questions.

(Operator Instructions) William Reuter, Bank of America Merrill Lynch.

Good morning, guys. In terms of the activity of your customer, did you see much of a change in their behavior as we trended throughout the quarter?

Well, it was a holiday quarter so you get a little bit different behavior then than you do in the other three quarters. But outside of that, there were no discernible changes.

Okay, then in terms of the addition to the distribution center, I was wondering if this was just a capacity issue or if this is going to have some additional benefits that you could kind of give us a little bit more color on?

Well, we'll begin to self-distribute a number of products and product lines that we previously used third-party distributors for. So that will be beneficial to the Company from the day we open the facility. It does also allow some growth space for what we currently self distribute.

Okay, then I guess just one last one. I was wondering -- I was going back to my notes and I don't know whether you guys have historically commented on this, but your market share in some of your key areas, whether you guys have ever disclosed this? And if you don't give the numbers, if you could comment at all on if there's been a trend there?

Well, we don't disclose market share information in our filings and there are various publicly available data on that but we really don't have a comment on it.

Okay, that's it for me. Thank you.

Bryan Hunt, Wells Fargo Securities.

Thank you. Ron, I was wondering if you could just talk about the timing on the spend of the proceeds received from the bond offering and when do you expect to complete the distribution center expansion?

Well, we expect to complete both projects by the end of fiscal year 2012. It's hard to do a lot of work right now in the middle of the winter in the mountains. So most of the spend will take place in fiscal 2012.

Okay, next, could you give us an idea of what percent of your total sales are in credit and debit card transactions versus cash?

We've got that data. I don't have it handy, but it's not something that we typically disclose. But I think it's -- our experience is very similar to what all retailers are seeing that more and more transactions are settled through some sort of electronic means as opposed to cash or check. And the increase in the debit card interchange rates last year in advance of some legislative changes did have an impact.

Okay, is there any way you can give us idea of what percent of your expenses are interchange fees?

We have a table that's in the 10-Q that talks about increases in those charges along with some of our other significant operating expense increases. So you can refer to that, but I will say that bank charges and interchange fees has been a pretty consistent line item that's in those major increases for a number of quarters.

All right, thank you. Looking at the industry overall, there's been for a couple quarters now a significant amount of conversation around center of the store inflation and costs going up. How does the Company plan on handling that? Do you plan on passing all of that along to your consumers? Do you plan on absorbing part of that? Could you just talk about the strategy around consumer product cost increases?

Well, we are seeing cost increases and we will address them the way we have always wanted to address them, to keep our customer in the forefront of any of our actions, negotiate the best we can with the vendors, watch our competitors, and provide good value.

Okay, and then my last question, in the press release -- I'm quoting here -- overall conditions are improving somewhat. That's straight out of the press release. Could you just give us a little bit more color around how conditions are improving in your mind and what the Company is seeing?

Well, we had a very good increase in sales for the quarter. You know, people changed a little bit to buy some higher priced products. That hasn't always been the case over the last couple of years. And again, I think it's consistent with what you are seeing in the press about just overall economic conditions. People's confidence is picking up a little bit, but it's very small steps.

Would you say in terms of general merchandise, are you seeing an increased acceleration in the sales of GM as well as high-priced merchandise items?

Nothing out of the ordinary there, no.

Okay, I appreciate your time. I will get back in the queue.

(Operator Instructions) Damian Witkowski, Gabelli & Co.

Good morning, Ron. A question just to follow up on inflation. The 2.9% increase in your basket that you saw in the first quarter, can you break it down a little further in terms of how much of that is inflation or how much is people keep putting more items or more expensive items in the basket?

I don't have a precise breakdown. Again in the 10-Q and that is out today, there's some information about overall inflation that I am sure you already have access to. Again, it's hard to judge during a holiday quarter because people buy differently than they do the rest of the year. Again, we were pleased with the sales growth and we were pleased with the mix change that went towards some more expensive products.

Okay, and on gasoline, you said in your prepared remarks that gasoline is obviously up year-over-year on a gallon basis but number of gallons actually decreased. And I know you don't comment on your market share, but any -- qualitatively any idea if you are losing share to someone who is just charging less for gas, undercutting you? Or are people simply driving less and therefore buying less gasoline as it goes up?

Well, keep in mind that it's sort of unusual for this region. We had two significant snowstorms that hit in the month of December. And that kept people home a lot. Last year, the snow tended to come a little bit later in the year, so I don't think we are losing any market share. I think we're just as competitive as we have always been and it wasn't a huge volume decrease. So you've got to take into account those storms.

Okay, but is it getting more competitive overall on the gallon price front?

It's always going to be competitive.

Okay, then your new distribution center that you're building, it sounds that you're going to start building probably in the spring and that will last for about 12 months, the big 830,000 square-foot facility. Is -- how much of the $100 million to $140 million in CapEx guidance for this fiscal year, how much of that is this DC?

Not a tremendous amount. Again, a lot of that is going to depend so much on the weather and when you can get started and what kind of progress you can make during the first year.

So talking about $20 million or $40 million?

I'm not going to give an exact number.

In terms of just thinking about what the benefit of this is, obviously if you look at your DC now, you're distributing about 47% -- almost half of your items that you sell you self distribute. Then you have another 40% that is third-party distribution, and then -- I'm sorry, Direct Store Delivery, and then the remaining 10% is third-party distribution.

Once this new DC is up and fully running, what do you think that split will be? Will it be 60/40 or what's your anticipation?

I think 60/40 is a good indication because there will be very little that we will have from third parties coming to the warehouse.

Okay. And in terms of thinking about the incremental benefit of self-distributing, if I look at other self-distributing players, their EBIT margins are anywhere from 3% to 4%, depending on how they are run. I mean, is that a good gauge in terms of how we should think about that business?

Well, we can't comment on what someone else does. There's a lot of other things that go into EBITDA in addition to distribution costs. Suffice it to say this is going to be a very good transaction and project for the Company. We've already got trucks going on all the routes. It will be very easy to distribute additional products there and this is going to be a good long-term project for the Company.

Okay. And, Ron, just lastly just going back to inflation, deflation, I think the majority of the comments now coming from other players in the industry are that they are seeing certainly inflation in the perishable items that some are having a harder time to pass along and some have begun to see now inflation in the center of the store as well that they are all planning on passing along to the consumer. Is it fair to say that you are seeing sort of same trends?

Well, we're certainly seeing the same trends as far as center store cost increases. How we react to it, as I mentioned earlier, we will deal with it when it happens.

Okay. Thanks, Ron.

(Operator Instructions) Emily Shanks, Barclays Capital.

Good morning, thank you for all the detail. Most of my questions have been answered. I did have one follow-up around the increase in ticket. I was hoping we could get a little bit more color around what was driving that. If I heard you correctly, it sounded like you did see people buying higher priced products. I wanted to see if there was any significant shift between private to branded products or if it was a category mix that drove that? How should we think about that?

Well, again, with a holidays, you had people cooking at home more. This afternoon when you look at the Q, you will get the breakdown between perishables and nonperishable items. We had a little bit higher percentage growth in the perishable items that tend to be a little bit higher priced and higher margin, so those are the main drivers.

Have you seen that trend continue post quarter end?

We really can't talk about post quarter end until we get to the end of this quarter.

All right, thought I'd try. And then my last question is just around shrink that you are seeing in the system. Have you seen any uptick as you look over the past six-ish months or so? Or has it held steady?

We really don't talk about shrink in any of our publications, so we're going to leave that one open.

Okay, thank you. Good luck.

At this time, there are no further questions in the queue.

Great. Well, we appreciate everyone's time today and thank you for dialing in. We will talk to you in approximately three months. Have a good day.

That does conclude today's conference. Thank you for your participation.