Ingles Markets, Incorporated (IMKTA) 2011 Q3 法說會逐字稿

Good day and welcome to the Ingles Markets Inc. Third-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. Ron Freeman.

Thank you. Good morning. Welcome to the Ingles Markets Fiscal 2011 Third-quarter Conference Call. With me today are Robert Ingle II, Chairman and Chief Executive Officer; 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 Inc. 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 will refer to the Company's public filings including the Form 10-K for the fiscal year ended September 25, 2010.

In accordance with the long-standing Company policy and in recognition that the comps 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 filed our 10-Q for the quarter earlier this week and it is available via our website as well.

We will begin with our third-quarter results. Net income for the third quarter of fiscal 2011 totaled $12.7 million compared with net income of $11.4 million earned for the third quarter of fiscal 2010.

Increases in total sales, comparable store sales and gross profit and decreases in interest expense more than offset increases in operating expenses. A $2.8 million pretax gain on the disposal of a land parcel also contributed to the net income increase. We're pleased with this quarter over quarter increase in an economic and competitive environment that has significant challenges.

Net sales rose 6.4% to $911 million for the three months ended June 25, 2011 compared with $856.1 million for the three months ended June 26, 2010. The growth in sales benefited from higher same-store sales, an increase in stores in operation and growth in customer transactions and transaction amounts.

Ingles operated 203 stores and 11.0 million retail square feet at the end of the June 2011 quarter, compared with 202 stores and 10.8 million retail square feet the end of June 2010. Excluding gasoline, where retail prices were significantly higher in the June 2011 quarter compared with the June 2010 quarter, Groceries segment comparable store sales increased 2.0%. The number of customer transactions include excluding gasoline increased 0.2%, while the comparable average transaction size increased 2.1% compared with the same quarter last year. In addition to higher gasoline prices, our sales increases were influenced by inflation in a number of areas.

Gross profit for June 2011 quarter increased 2.3% to $201.3 million, an increase of $4.5 million compared with the third quarter last year. The increase in gross profit dollars is attributable to increased sales. Gross profit as a percentage of sales was 22.1% for the June 2011 quarter compared with 23% for the June 2010 quarter. Excluding gasoline sales, Groceries segment gross profit as a percentage of sales was 25.9% for the three months ended June 25, 2011 compared with 26% for the same quarter of last fiscal year.

In broad terms, the beneficial margin impact of moderate inflation was offset by competitive factors and Grocery segment margins were substantially level [though with the] comparative 2011 and 2010 third quarters.

Gross profit for the Company's milk processing subsidiary increased $400,000 over the comparable three-month periods in fiscal 2010, and was 11.1% of sales for the June 2011 quarter compared to 11.9% of sales for the June 2010 quarter. Raw milk prices were higher during the June 2011 quarter which decreased gross profit as a percentage of sales, as relatively stable per-gallon milk profit margins were applied to the higher sales price.

Operating and administrative expenses for the June 2011 quarter totaled $169.8 million, an increase of $4.9 million or 3.0% over the June 2010 quarter. Excluding gasoline sales and associated operating expenses which are primarily payroll, operating and administrative expenses as a percentage of sales remained level at approximately 22.1% for both the three fiscal months ended June 2011 and June 2010. The largest expense increases occurred in personnel-related costs, depreciation and bank charges related to debit and credit card transactions.

During the third quarter of fiscal 2011, the Company was granted $3.1 million in an eminent domain proceeding relating to a land parcel that had been owned by Ingles for many years. We recognized a gain on this transaction of approximately $2.8 million. There were no other significant sale or disposal transactions in the third quarter of either fiscal 2011 or 2010.

Net rental and other income totaled $1.5 million for the June 2011 quarter and $2.0 million for the June 2010 quarter. The change is primarily attributable to the timing of waste, paper and packaging sales.

Interest expense decreased $0.9 million for the three month period ended June 25, 2011 to $15.3 million, from $16.2 million for the three months ended June 26, 2010.

Total debt at June 25, 2011 was $857.1 million compared with $825.6 million at June 26, 2010. The debt increase is attributable to the issuance in December 2010 of $99.7 million in bonds for the construction of an additional distribution facility located adjacent to the current facility. Construction has begun on this new facility which is expected to open near the end of fiscal 2012.

Income tax expense totaled 37.7% of pretax income for the June 2011 quarter compared with 36.4% in the June 2010 quarter due to higher state income taxes and lower tax credits. Net income of $12.7 million for the June 2011 quarter represents 1.4% of sales. Net income of $11.4 million for the June 2010 quarter represents 1.3% of that quarter's sales. Basic and diluted earnings per share for the Company's publicly traded Class A common stock were $0.54 and $0.52 per share respectively for the June 2011 quarter compared to $0.49 and $0.46 per share respectively for the June 2010 quarter.

Net income for the third quarter of fiscal 2010 has been reduced by approximately $200,000 from the previously reported amount to account for the way in which the Company calculates the retained claim liability for its self-insured workers' compensation insurance program. The adjustment to the 2010 balance sheet reflects the cumulative change in workers' compensation expense and workers' compensation self-insurance liabilities over multiple fiscal years through September 25, 2010. The changes were not material to individual years through fiscal 2011.

Please refer to Note B in the Company's Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended June 25, 2011.

Now, I will 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 25, 2011 totaled $2.65 billion compared with $2.53 billion for the first nine months of fiscal year 2010.

Grocery segment comparable store sales excluding gasoline sales increased 2.3%. The number of customer transactions excluding gasoline increased 0.5%, while the comparable average transaction size increased 2.1% compared with the June 2010 nine-month period.

Gross profit dollars for the June 2011 nine-month period increased $21.4 million or 3.8% to $589.5 million, compared with $568 million for the same period of fiscal 2010. Gross profit as a percentage of sales was 22.2% and 22.4% for the nine months ended June 25, 2011 and June 26, 2010 respectively.

The decline in gross profit margin was due primarily to gasoline sales. Excluding gasoline sales, Grocery segment gross profit as a percentage of sales rose to 25.7% for the nine months ended June 25, 2011 compared with 25.5% for the same period of last fiscal year.

Gross profit for the Company's milk processing subsidiary, increased $1 million over the comparable nine-month periods and was 11.9% of sales for the June 2011 nine-month period, compared to 12.2% of sales for the June 2010 nine-month period. As noted in the three-months' discussion, raw milk prices were higher during the June 2011 nine-month period, which decreased gross profit as a percentage of sales as relatively stable per gallon milk profit margins were applied to the higher [sales price].

Operating expenses increased $17.5 million comparing to first nine months of fiscal 2011 to the same period of last fiscal year, and were 19.1% of sales for the nine months ended June 25, 2011 compared with 19.3% of sales for the nine months of fiscal 2010.

Excluding gasoline sales and associated gasoline operating expenses, primarily payroll, operating expenses were 22.1% of sales for the nine-month fiscal 2011 operating period compared with 22.0% for the same period of fiscal 2010. Operating expense increases were driven by sales growth and store development activities including higher personnel, insurance, bank fees, depreciation and utility costs. Net rental and other income totaled $4.5 million and $4.3 million for the June 2011 and 2010 nine-month periods respectively.

As noted earlier, nine-month fiscal 2011 results include a gain of approximately $2.8 million from an eminent domain proceeding related to an owned land parcel. There were no other significant sale or disposal transactions and either fiscal 2011 or 2010.

Interest expense totaled $46.9 million for the nine-month period ended June 25, 2011, a decrease of $2 million from the $48.9 million for the nine-month period ended June 26, 2010. During the nine months ended June 25, 2011, principal debt reductions totaled $60.1 million. Income tax expense as a percentage of pretax income was 36.2% for the June 2011 nine-month period, compared with 36% for the comparable June 2010 period.

Net income totaled $28.1 million or 1.1% of sales for the nine-month period ended June 25, 2011 compared with $22.6 million or 0.9% of sales for the nine-month period ended June 26, 2010. Basic and diluted earnings per share for publicly traded Class A common stock were $1.20 and $1.15 for the June 2011 nine-month period compared with $0.97 and $0.92 respectively for the June 2010 nine-month period.

Net income for the first nine months of fiscal 2010 has been reduced by approximately $0.7 million from the previously reported amount, to account for the way in which the company calculates the retained claim liability for its self-insured workers' compensation insurance program. The change had no material effect on the 2011 condensed consolidated financial statements. Please see Note B in the Company's Form 10-Q filed with the Securities and Exchange Commission for the quarterly period ended June 25, 2011.

Next I will update our investing and financing activities. Capital expenditures totaled $63 million for the first nine months of fiscal year 2011, including the opening of one new and five remodeled stores. The Company's capital expenditure plans for fiscal 2011 include investments of approximately $100 million to $120 million. This range includes work on the new distribution facility and store projects that are scheduled for fiscal 2012 completion.

At June 25, 2011 the Company had $175 million of undrawn committed credit facilities. The Company believes based on its current results of operations and financial condition that its financial resources including existing bank lines of credit, short and long-term financing expecting to be available to it, and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings.

Over the next 12 months scheduled principal debt payments total $74.3 million.

Okay, we will now take your questions.

(Operator Instructions) Damian Witkowski, Gabelli & Co.

Good morning. Just a quick question on the $2.8 million gain that you had in the quarter. Is there -- what is the tax treatment on those gains?

It will be capital gains.

Okay, so it will be a long-term capital gain?

Yes.

Okay. So 20%?

Yes.

Okay, just wanted to make sure I understood that. And the new DC, do you know how much you are going to spend in this fiscal year? You've begun to work on it, I believe, already. Do you know how much is going to be spent by the end of this quarter?

Nothing precise. A lot of it is going to depend upon how much of the materials get ordered, when they get ordered and what the weather is going to be like. But we're running full steam on getting it built.

Okay, so you have broken ground, so there is -- it has already begun?

Yes.

And you say you're going to finish it in fiscal 2012. Should I assume it is towards the end of the fiscal year?

Yes. And again, we are still so far out from that right now there is potential for change in that either way. So we just have to, again, just see how we are progressing.

Okay. And then just want to circle back on the consumer, gas prices are -- during your third quarter are probably almost $1.00 higher than a year ago. And I'm just curious; from your perspective, what are you seeing from your consumer? How are they behaving differently, if at all?

There is not a huge difference in behavior. But certainly based on what has been happening over the last few weeks, I think there is some concern out there.

And then you say that it just -- you obviously have seen that in how your consumer buys at the pump, or is it also within the store?

Again, no measurable differences right now.

Okay. Just an overall concern I guess, like everyone else.

Right.

And then if you look at your -- I mean the gallons that you've sold were down slightly, but I don't think it was a lot.

That's correct.

You don't quantify that though?

No, we don't.

Okay, all right. Thanks Ron.

Thank you, Damien.

(Operator Instructions) Brian Hunt, Wells Fargo Securities.

I was wondering if you could talk about the amount of inflation that was in your comp number.

Well, I think we've got in the 10-Q what overall inflation has been, and that's straight from the Department of Labor. And that is showing food and beverage inflation of about 3.7% for the 12 months ended June and 3.3% for the three months ended June. Now again, that is a nationwide figure and it would include a lot of things that you wouldn't necessarily get in a retail grocery store. And we don't quantify our own particular inflation.

Okay. When you look at your inventory, it is up about $22 million year over year. Could you parse that out in between what is in store versus in the warehouse?

A good bit of it is in the warehouse, but it is also spread out over the stores. You know, in addition to inflation we've done a really good job, we think, of buying in advance of some price increases, so that is good investment of inventory for us.

Do you think you will burn through that inventory build at some point next year as prices stabilize?

Well, who knows? Again, it is part of our overall buying and inventory management program. And we've been doing it for a long time. And as conditions dictate we'll make smart inventory buys. And if conditions dictate we run a little lean, we'll do that. But we won't be short in the stores. We can promise you that.

Okay. And looking at the new DC or the addition to the distribution center, what is the square footage addition to that facility? And can you give us what the percentage increase is on a square foot basis as well?

It is approximately 800,000 square feet and it will double the size of what we have now.

You are adding, or that is what the total will be after the fact?

No, that is adding 800,000 to the 800,000 we already have.

Very good. And how many stores will that give you an opportunity to service? I know you're getting a significant portion of your product today from another distributor. But is the goal to be able to service all of your stores with your own distribution center? Or is the goal to really build [our] capacity for growth?

Yes, both actually. Again, we'll be self-distributing some things we haven't done in the past. We've been pretty tight here in the current facility. And this will give us the additional space to accommodate all of that for a number of years.

Okay. And do you have a total amount of the cost of the expansion?

Well, the only thing we can really say right now is we did the bonds last year for $99.7 million, and that was to cover the DC plus the store here in Buncombe County.

Okay. And when you look at competitive activity right now, would you say the overall the market is more promotional or less promotional? Can you just give us an idea of what the tone is?

It's more promotional.

Okay. That is it for me. I appreciate your time.

Sure thing, Brian. Have a good day.

(Operator Instructions) Daniel Witkowski, Gabelli & Co.

Hi Ron. Just going back to -- on competition, I think a lot of your competitors that don't necessarily compete in your area, but overall, have said the competitive environment on price is pretty rational. So is the -- have you seen the competitive environment get more promotional recently? Or has it been that way for the entire quarter?

I think it is pretty safe to say it has been for the entire quarter, yes.

And is it worse than the first, the second quarter and the first quarter, so sequentially is it getting worse?

Yes, I think so.

And I know you don't comment on individual competitors, but is it one competitor or is it sort of the case across the board?

I'm not going to touch that one, Damien.

Okay. And then just going back to the basket which increased 2.1%. I know you don't break out inflation, but it sounds like that is a majority of it. On average, are people putting more -- is the volume up? Are people putting more items in the basket?

I don't have the data on the number of items in the basket. And again, I think it's difficult to say overall inflation is X, so your average transaction account -- amount is also going to go up by X. I think that is too simplistic a way to look at it.

All right, thanks, Ron.

Sure thing.

(Operator Instructions) There are no further questions in queue. Mr. Freeman, I will go ahead and turn it back over to you for any additional or closing remarks.

Great, okay. Thank you very much. We appreciate everyone joining us today and I guess we'll be speaking to you again in late November or early December with our annual results. Thank you very much.

And that does conclude today's conference. We thank you for your participation.

Thanks everyone.