Ingles Markets, Incorporated (IMKTA) 2011 Q4 法說會逐字稿

Good day and welcome to this Ingles Markets Incorporated fourth quarter and fiscal year 2011 conference call. Today's call is being recorded. Now at this time, for opening remarks and introductions I would like to turn the call over to Chief Financial Officer, Mr. Ronald Freeman. Please go ahead.

Great. Good morning. Welcome to the Ingles Markets 2011 fourth quarter and year-end earnings announcement and conference call. With me today are Robert Ingles the second, 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 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 24, 2011. In accordance with a 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 fourth quarter and annual 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 10K was filed after the market closed on Friday, December 2nd. It is available on the website as well.

We are very pleased to report, this was our 47th consecutive year of record sales, totaling $3.56 billion. Fourth-quarter sales totaled $906 million. Net income totaled $11.0 million for the three months ended and $39.1 million for the fiscal year ended september 24, 2011, compared with $8.2 million and $30.8 million for the comparable three-month and fiscal year periods of 2010. On a percentage basis, fourth-quarter income increased 33.1% and annual net income increased 26.6%.

As we'll discuss in more detail later, the most important positive factors contributing to these increases were sales growth and gross margin increases in the grocery segment. These positive factors were partially offset by increases in operating expenses. The Company's CapEx and financing activities in fiscal 2010 and 2011 also affected the comparable quarterly and annual results. We are proud of both increased sales and profits in tough economic conditions, that include inflation and intense competition. These results are a fitting tribute to the way Robert P. Ingle built and ran this Company. Our Management team and associates are more focused than ever on driving excellent results for our customers and stakeholders.

First, our fourth-quarter results. Net sales totaled $905.8 million for the quarter ended September 24, 2011, 5.8% higher than $856 million of sales for the comparable quarter in fiscal 2010. Grocery segment comparable store sales, excluding gasoline sales, rose 2.3%,(Sic-see press release) compared with the fourth quarter of fiscal 2010. The growth in ex-gas comparable store sales benefited from increases in average weekly customer visits, and in the average purchase amount, compared with the fourth quarter of fiscal 2010. Total and comparable store sales comparisons are affected by retail gasoline prices, which were approximately 37% higher than in the fourth fiscal quarter of 2011, compared with the prior year.

Gross profit for the fourth quarter of fiscal 2011 totaled $202.4 million, an increase of $7.5 million compared with the fourth quarter of fiscal 2010. Gross profit as a percentage of sales was 22.4% for the fourth quarter of fiscal 2011, compared with 22.8% for the fourth quarter of fiscal 2010. Grocery segment gross margins, excluding gasoline, increased to 26.0% for the current year quarter, from 25.7% for the fourth quarter of fiscal 2010. Total operating expenses were $172.3 million for the fourth quarter of fiscal 2011, compared with $167.1 million for the comparable 2010 quarter, a 3.1% increase. The largest line item increases were personnel costs, repairs and maintenance, and insurance. These cost increases are generally related to an increase in the number of stores and retail square footage. Ingles operated 203 stores and 11 million square feet of store space at the end of fiscal 2011, compared with 202 stores and 10.8 million square feet at the end of fiscal 2010. Operating expenses as a percentage of sales were 19.0% and 19.5% for the fourth quarters of fiscal 2011 and 2010, respectively.

Net rental income, other income, and losses on asset disposals totaled $1.4 million and $1.6 million for the fourth quarters of fiscal 2011 and 2010 respectively. The decrease was primarily due to lower rental income, offset by higher sales of waste paper and packaging. Interest expense totaled $15.1 million for the fourth fiscal quarter of 2011, compared with $15.9 million for the fourth fiscal quarter of 2010. Over the year, the Company has either paid down or refinanced maturing debt at lower interest rates.

The Company's effective tax rate was 33.5% for the fourth quarter of fiscal 2011, compared with 39.1% for the fourth quarter of fiscal 2010, due to increased employment-related tax credits recognized in the current fiscal quarter. Net income for the September 2011 quarter totaled $11.0 million, compared with net income of $8.2 million for the September 2010 quarter. Basic and diluted earnings per share for the Company's publicly-traded Class A Common Stock were $0.47 and $0.45 per share respectively for the September 2011 quarter compared with $0.35 and $0.34 per share respectively for the September 2010 quarter.

Now, I'll go over our annual results. Net sales totaled a record $3.56 billion for the fiscal year ended September 2011, an increase of $169.9 million or 5.0%, from $3.39 billion for the fiscal year ended September 2010. Fiscal year 2011 was Ingles' 47th consecutive year of record sales. Excluding gasoline sales, where the retail per gallon price was approximately 27% higher, grocery segment comparable store sales increased 2.3%. As with our quarterly results, both the number of customer transactions, and the average transaction size increased. We believe our 2011 efforts to undertake smaller-scale capital improvements to a larger number of stores helped increase both sales and traffic.

Gross profit for the fiscal year ended September 24, 2011 increased to $29.0 million or 3.8% to $791.9 million, compared with $762.9 million for the fiscal year ended September 25, 2010. The increase in gross profit dollars was primarily due to higher sales volume. Grocery segment gross profit as a percentage of sales and excluding gasoline increased to 25.8% for fiscal year 2011 compared with 25.5% for fiscal year 2010. The Company has responded to the current competitive environment by keeping prices as low as possible, in order to grow sales and market share. Comparative replacement or model stores, excuse me, comparative grocery gross margins were also affected by inflationary pressure on certain items, and changes in sales mix amongst product categories. None of these factors were predominant, resulting in modest gross margin growth.

Operating expenses increased to $22.7 million in fiscal 2011, compared with fiscal 2010, and were 19.0% of sales for fiscal 2011, compared with 19.3% of sales for fiscal 2010. Excluding gasoline sales and associated gasoline operating expenses, primarily payroll, operating expenses were 22.1% of sales for fiscal 2011, compared with 22.0% for fiscal 2010. As noted in the fourth-quarter comments, cost increases were associated with an increase in the number of stores and retail square footage. The most significant cost increases were personnel, insurance, and bank charges. At this point, it is not clear if recent debit card swipe fee legislation will result in an increase in the Company's overall bank charges. However, overall, we're pleased with our efforts to hold the line on operating expenses as a percentage of sales and look forward to continued improvement.

Net rental income, gains and losses on asset disposals, and other income totaled $8.7 million for fiscal 2011, compared with $5.9 million for the year-ended in fiscal 2010. The increase is attributable to a $2.8 million gain on property sold in an eminent domain proceeding during the third quarter of fiscal 2011. Interest expense totaled $62 million for the year-ended September 24, 2011, compared with $64.9 million for the year-ended September 25, 2010. Total debt at September 24, 2011 was $855.1 million, compared with $817.5 million at September 25, 2010. During fiscal 2011, the Company secured financing for construction of the new distribution facility, and reduced interest expense through pay down or refinancing of debt with higher interest rates.

The Company's effective tax rate was 35.7% for fiscal 2011, compared with 36.8% for fiscal 2010, due to additional federal tax credits available in fiscal 2011. Net income for fiscal 2011 totaled $39.1 million compared with net income of $30.8 million for fiscal 2010. Basic and diluted earnings per share for the Company's publicly-traded Class A Common Stock were $1.67 and $1.60 per share respectively, for the year-ended September 24, 2011, compared with $1.32 and $1.26 per share respectively for the year-ended September 25, 2010.

Now, I'll update our investing and financing activities. Capital expenditures totaled $97.5 million and $92 million for fiscal years 2011 and 2010 respectively. During fiscal 2011, Ingles opened four new replacement or remodeled stores, and began construction on a new distribution facility expected to open some time in calendar 2012. Ingles' capital expenditure plans for fiscal 2012 include investments of approximately $120 million to $160 million, including completion of the distribution facility. The number of store projects will depend somewhat on the timing of distribution facility expenditures. We have a $175 million line of credit facility that is in place through the end of 2015. There are no amounts outstanding at September 24, 2011. At the end of fiscal 2011, the Company has letters of credit outstanding of $8.8 million, is in compliance with all its debt agreements, and has significant unencumbered real property and equipment.

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, regardless of overall economic conditions. We will now take your questions.

(Operator Instructions). We will take the first question from Bryan Hunt, Wells Fargo Securities.

I was wondering if you can break down the components for the same-store sales increase between basket and traffic in Q4?

I've got a little bit more detailed information on that in the K, which I did not bring down here with me. The traffic increase was relatively modest, and the basket increase was pretty good.

Okay, and the basket, was it a unit driver, or was it price?

Probably both. There's no question there's been some inflationary effect on certain products this year, but it's certainly not all attributable to that. We had growth on every aspect of it.

Okay, and within your average basket, are you seeing any growth in more discretionary items or is the consumer still focused on value and core shopping in your opinion?

It's really both. We are seeing some discretionary item pick up, but we're also seeing your core basket increasing as well.

And would you say that discretionary item was one of your contributors to gross margin expansion in Q4?

Yes, gross margin was so all over the place between inflation on certain items and all like that, it's really difficult to attribute it to one predominant factor.

Okay, and do you think, I guess given the volatility in gross margin throughout the year, it's hard to say whether or not that's sustainable on a go-forward basis?

That is correct.

Okay. Gasoline has historically been a great marketing tool for you all. You were one of the first movers in your markets, but other competitors have added things like fuel perks, etc. Do you believe the effectiveness of your promotions have changed when it comes to fuel?

No, we don't. We think that by being in that business early on, we've built up a lot of loyalty, and we've built up a lot of customer habit to where they're going to come to our stores with one stop, and buy both gasoline and groceries.

Okay, and then next on CapEx, $120 million to $160 million in 2012. Could you give us a break down between the distribution center and what the maintenance CapEx might be?

Well as we've talked numerous times before, maintenance CapEx is a concept that we don't subscribe to, because improving our store base is vitally important to this Company, but the expected 2012 range is higher overall, because we're coming along really well with the distribution center, the costs are coming in about like we expected they would be, but that is an add-on to what we normally like to do in our stores as well.

And then with regards to the distribution center, what type of ROI are you expecting out of that project, and when do you expect to see meaningful changes in your cost within the P&L?

Well, some of it we'll see pretty immediately but this is a long term project. This is not something where you can calculate the payback with the fingers on one hand, but it's very important strategically to this Company and we're excited about it, and it's going to be a long-term improvement for us.

And then finally with regards to the distribution center, what percent of your product will be self-distributed after you finish the expansion?

Probably it will add another 10 to 15 points of what we distribute now, which will probably take us somewhere into the 60% range, with pretty much the rest of it all being in DSD.

All right, I appreciate your time. I'll get back in the queue.

We're now moving to Damian Witkowski with Gabelli & Company.

What are you seeing, you talk about the basket. Are you seeing private label store growth faster than branded?

Yes.

And is it a big factor, and is it changing sequentially, sort of changing from last quarter more private label growth?

I don't know about a quarter, but if you look over the past year, we continue to add more and more private label products in every department in the store, and we have been very, very pleased with the success of those additional products, plus the private label business we've built up over the years. So we're going to keep that moving.

And again, on the private label, your gross margin rate is probably, is it lower than branded?

No, we make a higher margin on it.

Margin rate and I'm sorry, are your absolute dollars that you make, even if the rate is higher, the gross margin dollars you make on average on a private label product, is it higher than a comparable branded product?

I'm sorry, I didn't get that.

Just curious if you actually, I know the gross margin rate is higher on private label products, but I'm just wondering, if the actual gross margin dollars that you earn on private label, even with the higher gross margin rate, are those typically higher still?

Yes.

And then Ron, you talked about debit card fees. That should be a benefit, right?

It should be a benefit.

And any way to quantify it, if you look at how much you sell on debit cards and such?

Well, we've made some estimates, but we've had all of one month's experience with the new swipe fee regulation, and there's certain aspects of it that again, we don't know at this point exactly what it's going to mean for us. There's so many components, cost components to a card transaction that with one month into it, it's kind of hard to cut the pieces off.

Are you seeing a higher usage of just regular credit cards versus debit cards in the last year?

No, we really haven't. I think since the banks were generally not successful in implementing debit card fees, the payment mechanisms between our customers haven't changed very much.

Okay. And I know you all talk about competition specifically but just in general, its always been a very competitive marketplace, but is it getting worse or is it sort of status quo?

It's always bad.

Okay, and tax rate for next year, you don't guide to that, but it sounds like it probably will be higher than this year?

Well, I guess that depends upon what legislation may take place, and a lot of times, they will have tax legislation that's retroactive, no question, that we benefited this year from some HIRE act credits and things like that, but I'm certainly not about to try to predict tax policy for the next year.

And then if you look at the distribution center, it's going to, I know you said it's going to open in fiscal 2012 but is it sort of where are we? Are we 80% done, or do we expect it to be sort of opened in the first half or second half of the year, fiscal year?

We're on schedule, but we're also going into the winter, so let's just leave it, we're on schedule right now.

Okay, and even once it opens, is there a period of time where you have sort of unusually-high expenses associated with the new DC, that it will be a drag before it becomes a positive?

I don't know that you can necessarily say that. We're doing a lot of work on that right now to minimize any detrimental opening effects.

Okay, thanks, Ron.

Now we'll hear from Emily Shanks with Barclays.

I was just hoping, we've touched upon it slightly, just around CapEx spend, but I was hoping you could give us a little color around the cadence we should expect intra-year or by quarter. For instance is it fair to assume that 50% of it, or over 50% of your $120 million to $160 million will be spent in the first half?

It's going to be fairly even. Again, the big unknown there will be the distribution center, and that at this point of the year, will depend a lot on weather. Our store projects are pretty much ratably across the year.

Okay, great and then in terms of the recovery zone bonds that you issued this year, are you done with that, or should we expect further issuance this coming fiscal year?

No, we're done with the recovery zone bonds.

Okay, great. And then, my third question is just around inflation. Can you give us a sense of generically what you have seen during your fourth quarter and what your outlook is?

Just as we've talked about for what's happened throughout the year, it seems to hit certain product classes at certain times, and depending upon what the competitive environment is, we've either been successful or not as successful as we would like to be in passing through those cost increases, so really the best thing I can say about it is, it was volatile in 2011, and we think it will be continued volatility on that in 2012.

Great. That's helpful, and then my final question is just, can you give us any color around how competitive you found Thanksgiving? There were a number of articles, including one entitled "Turkey Wars" in the Wall Street Journal. Just curious what you saw on your side of things?

We were very happy with Thanksgiving.

Fair enough. Thanks, have a nice holiday.

Mr. Freeman, with no additional questions in the queue, I'll turn the call back over to you for closing remarks.

Great. Well, thanks, everyone, for joining the call today, and we appreciate your time and your interest, and we wish all of you, our customers, employees and shareholders, a happy and safe holiday season. Talk to you soon.

Ladies and gentlemen, that will conclude your conference for today. We do thank you for your participation. You may now disconnect.