Ingles Markets, Incorporated (IMKTA) 2013 Q1 法說會逐字稿

Good day 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. Ron Freeman. Please go ahead.

Thank you. Good morning, everyone, and welcome to the Ingles Markets fiscal 2013 first-quarter conference call. With me today are Robert Ingle II, Chief Executive Officer; 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 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 will refer to the Company's public filings including the Form 10-K for the fiscal year ended September 29, 2012.

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 a 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 at www.ingles-markets.com. We plan to file our 10-Q for the quarter later this week. It will be available on our website as well.

Net income totaled $11.6 million for the quarter ended December 29, 2012, compared with $10.6 million for the comparable quarter ended December 24, 2011. The net income increase was driven by increased sales, increased gross profit, and expense management partially offsetting these positive factors with a higher effective tax rate.

Net sales totaled $932.8 million for the quarter ended December 29, 2012, compared with $918.2 million for the comparable quarter ended December 24, 2011. That represents a 1.6% increase in total consolidated sales. For the comparable December 2012 and 2011 quarters, and excluding gasoline sales, grocery segment comparable store sales increased 1.5%, weekly customer visits increased 1.4%, and the average transaction amount was essentially unchanged.

Retail gasoline prices increased and the number of gallons sold decreased slightly. Our fluid dairy segment continues to be affected by higher milk prices and lower milk consumption nationwide.

We are pleased with our sales growth during the first quarter which included the Thanksgiving and Christmas holidays. Our long-term objective remains focused on driving top-line sales and maintaining customer loyalty through product offerings, customer satisfaction, and expanded store offerings.

Gross profit for the three-month period ended December 29, 2012, increased $6.2 million to $207.9 million, or 22.3% of sales, compared with $201.7 million, or 22% of sales, for the three-month period ended December 24, 2011. It was a very competitive holiday quarter with higher promotions and tighter margins in our market area.

Total operating expenses were $174.8 million for the first quarter of fiscal 2013 compared with $171.8 million for the comparable fiscal 2012 quarter. The total dollar growth in operating expenses was comprised primarily of increased payroll and insurance, partially offset by savings and store depreciation and maintenance expenses. Excluding gasoline sales and associated operating expenses, operating and administrative expenses as a percentage of sales were 21.7% and 21.6% for the three months ended December 29, 2012, and December 24, 2011, respectively.

Net rental income, gains and losses on asset disposals, and other income totaled approximately $1.0 million and $1.4 million for the December 2012 and 2011 quarters, respectively. There were no individually significant trends or transactions for either first fiscal quarter. Interest expense increased $0.6 million for the three-month period ended December 29, 2012, to $15.6 million from $15 million for the three-month period ended December 24, 2011.

Total debt at December 29, 2012, was $877 million compared with $882.5 million at December 24, 2011. Interest on the bonds that funded construction of our new distribution facility that opened in mid-2012 was capitalized during the December 2011 quarter but expensed during the 2012 quarter.

The Company currently has lines of credit totaling $175 million with $84.8 million borrowed and $9.5 million of unused letters of credit issued at December 29, 2012. The Company's $575 million of senior notes with a yield of 9.5% become callable at a price of 104.438% of par on May 15, 2013. We are monitoring market conditions to determine the best mix of debt arrangements to fund our current operations and future growth.

Income tax expense as a percentage of pretax income was 37.4% in the December 2012 quarter compared to 35.2% in the December 2011 quarter. The lower tax rate for the December 2011 quarter benefited from certain tax incentives related to hiring and investing during the recent economic downturn, but it expired for this year's first fiscal quarter.

Net income for the December 2012 quarter increased 9.2% to $11.6 million compared with net income of $10.6 million for the December 2011 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A common stock were $0.50 and $0.48 per share, respectively, for the December 2012 quarter compared with $0.45 and $0.43 per share, respectively, for the December 2011 quarter.

Capital expenditures totaled $28.1 million for the first quarter of fiscal year 2013. Most of these capital expenditures were related to remodeling projects in a number of the Company's stores and new store construction. Capital expenditures last year totaled $63.7 million for the three-month period ended December 24, 2011, much of which was dedicated to the construction of the new distribution facility which opened in mid-2012.

The Company's capital expenditure plans for fiscal 2013 include investments of approximately $100 million to $130 million. We currently plan to complete two or more new stores or major remodeling projects, as well as continue our program to remodel multiple stores.

To summarize, we are off to a good start for fiscal 2013 and look forward to the 50th anniversary of the first Ingles store in March of 2013. We will now take your questions.

(Operator Instructions) Bryan Hunt, Wells Fargo Securities.

Good morning, Ron. I was wondering -- in the press release and also in your comments you all talked about how competition intensified in the calendar fourth quarter. I was wondering how was it different from the previous quarter. Is there any way you can give us some descriptors?

Well, the stakes are higher when you have a quarter that includes Thanksgiving and Christmas, because those are big quarters for our industry. And so because of that the competition heated up on a lot more fronts.

Were there more pages in circulars or was there greater television advertising? Is there any way to give us a little bit more details on about it?

It was mostly in pricing.

Okay. Next, if I were to look at gross profit, gross profit dollars were up in round figures $6 million, or excuse me, $7 million year over year. Is there any way for you to give us an idea how much of that expansion came from benefits on the distribution center expansion?

We did get a pump from having the new distribution center and self-disturbing those products, but depending upon how you want to do the comparison, it is really difficult to put a precise number on it. Again, the new distribution center is a long-term investment and this was really the first holiday season we have been through with it and really the first full quarter we had been through some parts of the new distribution center, such as health, beauty, and cosmetics.

So, yes, it was accretive to our margin. We don't think we have realized all the benefits we are going to get from the distribution center and it is going to be a great long-term investment for us.

Are you all using MDI for any distribution at all at this point?

Basically none. We have a few things that we are still wrapping up with them but we have pretty much brought it all in house now.

Okay, just a few more questions. I mean pharmacy; you all have a significant number of pharmacies in your stores and there has been a big generics wave. Is part of the gross profit dollar improvement related to generics on the pharmacy front, or is there any way you could segment that out for us as well?

I do not have that information in front of me. Again, we are very pleased with the progress in our pharmacies. We have devoted some remodel dollars to making those pharmacies more efficient and look a lot better for the customers, and we think that is paying off for us.

All right. Then if I were to look at your states -- North Carolina, South Carolina, and then Georgia -- is there any region for you all that is seeing greater competitive pressures overall?

Again, we don't talk about what is going on with specific competitors. I mean obviously we have different competitors in different parts of our market area, and you are well aware of who those are, so there is nothing really specific to add there.

Okay. Then lastly on CapEx. When you look at your CapEx, $100 million to $130 million and you say you are going to -- two new stores or two major remodels, is there any way you can give us an idea of how much we spend on those two projects?

We don't really break down the components of our capital expenditures. We didn't really do it last year when the distribution center took up a large portion of our CapEx, but certainly with that facility being done what you will see for 2013 CapEx is going to be much more typical of what we have done in past years.

You are going to have some new store construction. You are going to continue to have a number of interior remodels at a lot of stores. Do have a couple of new stores that are in the process and we have got gas station adds as well.

Okay. Thank you for your time. I will get back in the queue.

Damian Witkowski, Gabelli & Co.

Good morning, Ron. Just on rental income, the number coming down, $1.4 million coming down to $1 million, and then I think there is a higher one-time gain in that number as well; what it is happening to your vacancy rates? I am assuming they are going up.

Is that sort of the market, or is it done on purpose because you just don't want to resign certain places because you are going to build there in the near future?

Well, some of that is a little bit due to the timing of when things like annual CAM bills and things like that go out, so you have got some of that. The vacancy rate has been pretty stable once we took a drop when the recession hit. The vacancy rate has been pretty stable since then, because we are not taking as much tenant space to expand stores as we used to.

Again, we have just sort of hit that bottom when we had some tenants that couldn't stand the economic downturn. So it is not a huge, discernible trend right now either positive or negative.

Then just going back to CapEx, I think you said you gave a range $100 million to $130 million for the full year. Two new stores or two remodels, is that how you said it?

Well, we have got a couple of things in process right now. Certainly one new store is going to open this year. The timing on a couple of the other major projects we have got going on right now could wiggle a little bit as we get a little further throughout the year and get out of the bad weather.

Okay. And when do you expect to open the one new store?

April, March/April, somewhere around that time frame.

Okay. And then your senior notes; should we expect anything as they come callable in March of this year? Obviously a higher par number, but should we expect to hear something in next couple of months from you guys in terms of what are you going to do with that debt?

Well, again, the first call date is May 15 and it is something that we have been watching for a few months now and are continuing to get very regular updates on the high-yield market, the various other credit markets. So we will make that call, so to speak, if that is what it ends up being sometime in May.

Lastly, just on Milkco, I don't see the numbers but you said obviously milk prices continue to be high and I guess there is a general decrease in demand as a result. Is that just -- so I guess the profitability of that division has gone down in the quarter.

It is down a little bit, yes, and you will see that when the Q is filed later on this week. We have been through cycles like this before. I guess it was maybe three or four years ago; we had had a drought, difficult to get feed, prices went up, supply went down. It was a little tough for a while.

Yes. And your stores at retail, do you actually -- are you still earning the same pennies per gallon of milk that you typically do or have you had to cut prices?

It really varies on a type of product and the location. The competitors have a lot to do with that.

Okay. Thanks, Ron.

Sure thing, Damian.

(Operator Instructions) It appears there are no further questions at this time. Mr. Freeman, I would like to turn the conference back to you for any additional or closing remarks.

Great, thank you for doing that. We appreciate everyone calling in today and thank you for your time and interest. We look forward to speaking with you again, probably in latter part of April after our next quarter. Have a great day.

This concludes today's conference call. We thank you for your participation.