Ingles Markets, Incorporated (IMKTA) Q3 2012 Earnings Report, Transcript and Summary

Good day, and welcome to the Ingles Markets, Incorporated Third Quarter Fiscal 2012 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. Richard Freeman. Please go ahead, sir.

Actually, that's Ron Freeman. But good morning, everyone. Welcome to Ingles Markets Fiscal 2012 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, 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 the actual results to differ materially from that anticipated by forward-looking statements, you are referred to the company's public filings, including Form 10-K for the fiscal year ended September 24, 2011. In accordance with the 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'll provide you with a summary of our third quarter and 9-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 will file our 10-Q for the quarter later this week, at which time it will be available on our website as well. We'll begin with our third quarter results. Net income for the third quarter of fiscal 2012 totaled $13.1 million compared with net income of $12.7 million earned for the third quarter of fiscal 2011. Increases in total sales, comparable store sales and gross profits plus decreases in interest expense more than offset increases in operating expenses. Excluding a $2.8 million pretax gain on a property disposal during last year's third quarter, our pretax income increased 18.2% for the current fiscal quarter. We opened our new distribution center in June and are pleased with the initial results. Net sales rose to $917.8 million for the 3 months ended June 23, 2012, compared with $911 million for the 3 months ended June 25, 2011. Ingles operated 203 stores and $11 million retail square feet at the end of both June 2012 and June 2011. Excluding gasoline, where retail prices were approximately $0.10 per gallon lower in the June 2012 quarter compared with the June 2011 quarter, Grocery segment comparable store sales increased 2.1%. The number of customer transactions, excluding gasoline, increased 1.4%, while the comparable average transaction size increased 0.7% compared with the same quarter last year. Gross profit for the June 2012 quarter increased 2.3% to $205.9 million, an increase of $4.6 million compared with the third quarter of last fiscal year. The increase in gross profit dollars is attributable to increased sales and an increase in gross profit margin. Gross profit as a percentage of sales rose to 22.4% for the June 2012 quarter compared to 22.1% for the June 2011 quarter. Excluding gasoline sales, Grocery segment gross profit as a percentage of sales was 26.1% for the 3 months ended June 23, 2012, compared with 26.0% for the same quarter of last fiscal year. Gasoline gross profits were lower, comparing the June 2012 quarter with the June 2011 quarter. Operating and administrative expenses for the June 2012 quarter totaled $172.3 million, an increase of $2.5 million or 1.5% over the June 2011 quarter. Excluding gasoline sales and associated operating expenses, which are primarily payroll, operating and administrative expenses as a percentage of sales remained level at 22.0% for the 3 months ended June 2012 compared with 22.1% for the 3 fiscal months ended June 2011. The largest expense increase incurred in personnel-related costs. Personnel cost increases were used to drive additional sales and to maintain excellent customer service, especially in more labor-intensive area of our stores. During last year's third fiscal quarter, the company was granted $3.1 million in an eminent domain proceeding related 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 2012 or 2011. As previously mentioned, third quarter 2012 pretax income increased 18.2%, if this gain is backed out of last year's comparable results. Net rental and other income totaled $1.4 million for the June 2012 quarter and $1.5 million for the June 2011 quarter. This change is primarily attributable to the timing of waste paper and packaging sales. Interest expense decreased $0.4 million for the 3-month period ended June 23, 2012, to $14.9 million compared with $15.3 million for the 3-month period ended June 25, 2011. Total debt at June 23, 2012, was $846.1 million compared with $857.1 million at June 25, 2011. Interest on the $99.7 million of bonds issued in December 2010 to fund the new distribution center was capitalized as part of the project cost up until June 2012, when the facility began operation. Income tax expense as a percentage of pretax income decreased to 37% in the June 2012 quarter compared with 37.7% in the June 2011 quarter due to higher tax credits, partially offset by higher state income taxes. Net income of $13.1 million for the June 2012 quarter represents 1.4% of sales. Net income of $12.7 million for the June 2011 quarter also represents 1.4% of that quarter's sales. Basic and diluted earnings per share for the company's publicly traded Class A Common Stock were $0.56 and $0.54 per share, respectively, for the June 2012 quarter compared with $0.54 and $0.52 per share, respectively, for the June 2011 quarter. Next, I'll discuss our 9-month results. Our 9-month performance began with increased sales. Net sales for the 9 months ended June 23, 2012, totaled $2.72 billion compared with $2.65 billion for the first 9 months of fiscal year 2011. That's a 2.4% increase in total sales. Grocery segment comparable store sales, excluding gasoline, increased 2.3%. The number of customer transactions, excluding gasoline, increased 1.4%, while the comparable average transaction size increased 0.4% compared with the June 2011 9-month period. Comparing the sequential quarters of fiscal 2012 and 2011, gas prices were higher the first 2 quarters of 2012 but lower in the third quarter of 2012 when compared to fiscal 2011. Gross profit for the 9 months ended June 23, 2012, increased $10.7 million or 1.8% to $600.1 million compared with $589.5 million for the 9 months ended June 25, 2011. As a percentage of sales, gross profit totaled 22.1% for the 9 months ended June 23, 2012, and 22.2% for the 9 months ended June 25, 2011. Gasoline demand and gross profit has been lower throughout fiscal year 2012 compared with fiscal year 2011. Grocery segment gross profit as a percentage of total sales, excluding gasoline, was 25.8% for the June 2012 9-month period compared with 25.7% for the comparable fiscal 2011 period. Operating expenses increased $7.6 million, comparing the first 9 months of fiscal 2012 to the same period of last fiscal year, and were 18.9% of sales for the 9-month 2012 period compared with 19.1% of sales for the 9-month 2011 period. Excluding gasoline sales and associated gasoline operating expenses, which again were primarily payroll, operating expenses were 22.0% of sales for the 9-month fiscal 2012 period compared with 22.1% for the same period of fiscal 2011. Operating expense increases were driven by sales growth and store development activities, including higher personnel, insurance, depreciation and supply costs. We have seen a positive impact from regulatory changes in debit and credit card fees. Net rental and other income totaled $4 million and $4.6 million for the June 2012 and 2011 9-month periods, respectively. As noted earlier, the 9-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 in either fiscal 2012 or 2011. Interest expense totaled $44.8 million for the 9-month period ended June 23, 2012, a decrease of $2.1 million from the $46.9 million for the 9-month period ended June 25, 2011. During the 9 months ended June 2012, net principal debt reductions totaled $9 million. The company's average interest rate on all debt decreased over the comparable 9-month periods. Income tax expense as a percentage of pretax income was 35.5% for the June 2012 9-month period compared with 36.5% for the comparable June 2011 period. Net income totaled $30.2 million or 1.1% of sales for the 9-month period ended June 23, 2012, compared with $28.1 million, also 1.1% of sales, for the 9-month period ended June 25, 2011. Basic and diluted earnings per share for publicly traded Class A Common Stock were $1.30 and $1.24 for the June 2012 9-month period compared with $1.20 and $1.15, respectively, for the June 2011 9-month period. Next, I'll update our investing and financing activities. Capital expenditures totaled $144.9 million for the first 9 months of fiscal year 2012. Approximately half this amount was devoted to the construction and equipping for the new distribution center. Another significant of the company's capital expenditures has been its ongoing program of remodels to a larger number of stores, which do not, however, result in increased square footage or new buildings. Capital expenditures are expected to be approximately $170 million for the full fiscal year. At June 23, 2012, the company had $175 million of committed credit facilities, of which $20 million was outstanding. The company believes, based on its current results of operations and financial conditions, that its financial resources, including existing bank lines of credit, short and long-term financing expected 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 for additional borrowings. Over the next 12 months, scheduled principal debt payments total $33.5 million. We may repay some of this debt early to take advantage of the current rate environment. We will now take your questions.

[Operator Instructions] And we'll take our first question from Damian Witkowski with Gabelli & Company.

Ron, the debit and credit benefit that you noted, you didn't quantify, but I'm also wondering, I assume that's just a Durbin Amendment. What about the most recent settlement with Visa and MasterCard? A, are you -- what do you think -- any financial benefit you might have from that, as well as from the $7 billion that they're going to pay out to retailers, as well as just the fees going forward?

Well, the proposed settlement certainly hasn't had an effect on our operations yet, and we're evaluating that right now to determine whether we'll sign off or not. I think there seems to be a lot of industry sentiment going both ways at this point. The debit card savings did come from the Durbin Amendment. We also entered into new agreements with some of our debit card providers and services there that also yielded some benefits to us.

And these -- I mean, have you -- the magnitude of these savings just from the interchange fees and such, how meaningful is it?

Well, as you'll see, when we file the Q next week, it wasn't meaningful enough to merit individual mention in the 10-Q. But after so many years of cost increases, we're just glad to have some savings.

Sure. And -- okay. And you also said gasoline gross profit was actually down in the quarter. And just a little bit more clarity on that. Is it just the gallons that are down? Is it the profit per gallon is down as well?

Well, gallons are down nationwide, so I don't think it's anything unique to us. And of course, when gas prices are high, I think things tend to be a lot more competitive. And we want to keep our prices as low as possible for our customers. Say you put all 3 of those things together, and you end up where you are.

All right. And then just looking at the -- have you -- can you remind me around how much of your real estate holdings have remained unencumbered by...

That number will, again, be in the Q as well when we file that later this week. But it's north of $800 million.

Okay. And as we sort of get closer to date you can actually call the $575 million and the 8 7/8 debt that you have outstanding out there. I mean, have you actually looked at using your vast real estate to sort of get -- lower your borrowing expenses, lowering your overall debt cost?

Well, we'll start taking a look at that in more detail after we pass that first call date next May. And we're fortunate enough to have a lot of options, including the available real estate.

Okay. Have you looked at using real estate in the past?

Yes. And there's been instances where we've actually done that.

[Operator Instructions] Next, we'll move to Bryan Hunt with Wells Fargo Securities.

This is Kevin McClure standing in for Bryan. Forgive me if you mentioned this, but now that the D.C. is open, can you maybe give us an estimate as to the run rate savings you expect? You said that it's performing well. I don't know if you could quantify that for us.

Yes, and we have never quantified our internal expectations on the savings ever since we announced the project. So I don't think we can do that now. But needless to say, it's a great project for us with long-term financial and operational benefits. And if anything, after a month or so of operation of that now, we've been very presently surprised with how that has all gone.

Got you. Okay. And then just moving on to just general commentary on the consumer. Have you noticed any particular areas where the pullback in consumer spending has been more pronounced? And what are you guys doing to maybe get in front of this expected wave of inflation in this department later in the year?

Well, I think you guys in the press are doing the best thing to get in front of the increases, with as much as you talk about the effects of the drought and what it might have. We're continuing with the programs that have been successful for us in the past. And please keep in mind, we're coming off a winter quarter that was down a little bit because it tended to be so mild, and that sort of affected our year-to-date sales increases. So we're pretty happy with what we've been going so far. We just want to do more of it.

Great. Okay. And then lastly for us. I know you probably haven't released any expectation for CapEx spend in the upcoming year. When -- do you expect to continue with the pace of your remodels out into the future? And are there a set number of stores that you hope to remodel in the upcoming fiscal year?

We're working on our 2013 project priorities right now, so it's really too early to discuss that.

And we'll take a follow-up question from Damian Witkowski with Gabelli & Company.

Ron, it's me again. I just want to go back on milk -- we didn't discuss it. Just want to know what's going on there in terms of both volume demand, as well as how are you able to pass along any costs? What's happening with the margins?

Well, overall, milk has had a fair amount of price volatility this year. And so it's affected both our sales and profits some. Also, it's been an unusually heavy year for a lot of contract renewals, so quite a bit going on in the milk space. Can you tell me again what your last question was?

No, I'm just wondering, I mean, from a profitability perspective, I mean, so as you renegotiate these contracts, are you actually maybe getting rid of some that are -- that have been unprofitable in the past?

Well, we have tried to avoid signing unprofitable contacts.

Well, less profitable, maybe.

No, it's a challenging time for the milk business. A little moreso than normal, but they're doing quite well.

Okay. All right. And then just lastly on the rent expense being down both in the quarter and year to date, is that just simply you moving more of your -- square footage has stayed the same year-over-year at 11 million square feet. Are you simply just using more of your own real estate?

Yes, to some extent. It's been pretty stable for over the last year or so.

Or is it -- I mean, are you renegotiating contracts at lower rate these days? Is that part of it?

No.

[Operator Instructions] And next, we'll take Roy White with PLMA.

I'm just kind of curious. I'm with PLMALive!. And what kind of role has your private label program done with the sales increases, particularly those for comp stores?

Sure. We've been very active in the private label area. We have more private label products in more areas of the stores, and it's been a positive contributor.

Okay. About what percentage would your private label be of total Grocery sales?

Yes, we typically do not disclose that number.

And at this time, there are no further questions. [Operator Instructions] Mr. Freeman, there are no further questions. I will turn it back to you for any additional or closing remarks.

Okay. Thank you very much. We appreciate everyone joining us on the call today. And we plan on speaking with you again in early December when we'll have our annual results. Have a good day.

And that will conclude today's call. We thank you for your participation.