Overview
Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets inNorth Carolina (75),Georgia (65),South Carolina (35),Tennessee (21),Virginia (1) andAlabama (1). Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health/beauty/cosmetic products and general merchandise, as well as quality private label items. In addition, the Company focuses on selling products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections. Coronavirus (COVID-19) Pandemic Impact The effects of the COVID-19 pandemic, which began inMarch 2020 , have eased considerably over the six months endedMarch 25, 2023 , but the earlier portion of the pandemic substantially impacted supermarket operations, and some effects have continued through the six months endedMarch 25, 2023 . At the onset of the COVID-19 pandemic, the Company implemented several enhanced cleaning and social distancing protocols designed to keep our customers and our associates safe and has continued to monitor and update its protocols as the pandemic has evolved. SinceMarch 2020 , the Company's stores have experienced increased customer traffic and occasional product shortages due to supply chain issues. The currently tight labor market has impacted the Company's ability to attract and retain qualified store personnel, but these impacts have not materially affected our operations. Finally, as the economy continues to recover from the effects of the pandemic, inflation has recently reached levels not seen in decades. Inflation impacts product costs, labor costs and the cost of other goods used by the Company, which could negatively impact our results of operation. At the present time, we do not know how long and to what extent the ongoing effects of the pandemic and inflation could impact our sales and financial performance. Critical Accounting Policies and Estimates
Critical accounting policies are those accounting policies that management believes are important to the presentation of the Company's financial condition and results of operations, and require management's most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about
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the carrying values of assets and liabilities that are not readily apparent from other sources. Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates.
The Company is self-insured for workers' compensation and group medical and
dental benefits. Risks and uncertainties are associated with self-insurance;
however, the Company has limited its exposure by maintaining excess liability
coverage of
Asset Impairments
The Company accounts for the impairment of long-lived assets in accordance with
FASB ASC Topic 360. For assets to be held and used, the Company tests for
impairment using undiscounted cash flows and calculates the amount of impairment
using discounted cash flows. For assets held for sale, impairment is recognized
based on the excess of remaining book value over expected recovery value. The
recovery value is the fair value as determined by independent quotes or expected
sales prices developed by internal associates. Estimates of future cash flows
and expected sales prices are judgments based upon the Company's experience and
knowledge of local operations and cash flows that are projected for several
years into the future. These estimates can fluctuate significantly due to
changes in real estate market conditions, the economic environment, capital
spending decisions and inflation. The Company monitors the carrying value of
long-lived assets for potential impairment each quarter based on whether any
indicators of impairment have occurred. There were no asset impairments during
the six-month period ended
The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily composed of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the applicable vendor's products. These allowances generally relate to short term arrangements with vendors, often relating to a period of one month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever practical, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to the use of the retail method of store inventory and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold. Vendor allowances applied as a reduction of merchandise costs totaled$29.8 million and$26.2 million for the fiscal quarters endedMarch 25, 2023 andMarch 26, 2022 , respectively. For the six-month periods endedMarch 25, 2023 andMarch 26, 2022 , vendor allowances applied as a reduction of merchandise costs totaled$64.6 million and$58.0 million , respectively. Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor's specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled$1.9 million and$1.7 million for the fiscal quarters endedMarch 25, 2023 andMarch 26, 2022 , respectively. For the six-month periods endedMarch 25, 2023 andMarch 26, 2022 , vendor advertising allowances recorded as a reduction of advertising expense totaled$3.9 million and$3.7 million , respectively. Overall, vendor allowances decreased significantly at the onset of the COVID-19 pandemic as vendors reduced support for promotional activities. Vendor promotional support subsequently increased, but has not returned to pre-pandemic levels. If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company's product advertising, which could increase or decrease the Company's expenditures. Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue for the Company's stores. Results of Operations
Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in
September. The Condensed Consolidated Statements of Income for the three and six
month periods ended
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calculation from the date thereof. A replacement store is a newly-opened store
that replaces an existing nearby store that has closed. A major remodel entails
substantial remodeling of an existing store and includes additional retail
square footage. For the three- and six-month periods ended
Three Months Ended Six Months Ended March 25, March 26, March 25, March 26, 2023 2022 2023 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 23.6 % 25.3 % 24.3 % 25.3 % Operating and administrative expenses 19.4 % 18.5 % 19.0 % 18.6 % Gain from sale or disposal of assets - % 0.1 % - % - % Income from operations 4.2 % 6.9 % 5.3 % 6.7 % Other income, net 0.1 % 0.1 % 0.1 % 0.1 % Interest expense 0.4 % 0.4 % 0.4 % 0.4 % Income tax expense 1.0 % 1.6 % 1.2 % 1.5 % Net income 2.9 % 5.0 % 3.8 % 4.9 %
Three Months Ended
Net income for the second quarter of fiscal 2023 totaled
Three Months Ended March 25, March 26, 2023 2022 Grocery$ 492,553 $ 482,179 Non-foods 308,684 289,419 Perishables 348,204 355,651 Fuel 175,551 200,192 Total retail grocery$ 1,324,992 $ 1,327,441
The "Grocery" category includes grocery, dairy, and frozen foods.
The "Non-foods" category includes alcoholic beverages, tobacco, pharmacy, and
health/beauty/cosmetic products.
The "Perishables" category includes meat, produce, deli and bakery.
Changes in retail grocery sales for the quarter ended
Total retail sales for the three months ended
(2,635) Other 186
Total retail sales for the three months ended
Gross Profit. Gross profit for the three-month period ended
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A breakdown of the major changes in operating and administrative expenses is as follows: Increase Increase (Decrease) (Decrease) as a in millions % of sales Salaries and wages$ 8.8 0.64 % Taxes and licenses$ 2.4 0.18 % Repairs and maintenance$ 2.1 0.15 % Advertising and promotion$ (1.8) (0.13) % Salaries and wages increased in dollars due to increased labor market competition, which has increased the Company's cost to attract and retain associates in the Company's market area. Taxes and licenses expense increased due to system improvements that provided us the ability to separately account for use tax during invoice processing. Repairs and maintenance increased due to higher refrigerant costs and the cost of other supply items, as well as increased wear and tear on equipment to accommodate sales volume. Advertising and promotion costs decreased due to absorbing some of the activity in-house and movement towards lower-cost types of advertising. Gain from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled$0.6 million for the three months endedMarch 25, 2023 . Gain from the sale or disposal of assets totaled$1.3 million for the three months endedMarch 26, 2022 , primarily from the sale of rolling stock. Interest Expense. Interest expense totaled$5.3 million for the three-month period endedMarch 25, 2023 compared with$5.4 million for the three-month period endedMarch 26, 2022 . Total debt atMarch 2023 was$556.7 million compared with$578.5 million atMarch 2022 . Income Taxes. Income tax expense totaled$13.5 million for the three months endedMarch 25, 2023 , reflecting an effective tax rate of 25.0% of pretax income. Income tax expense totaled$22.4 million for the three months endedMarch 26, 2022 , reflecting an effective tax rate of 24.6% of pretax income. Net Income. Net income totaled$40.5 million for the three-month period endedMarch 25, 2023 compared with$68.6 million for the three-month period endedMarch 26, 2022 . Basic and diluted earnings per share for Class A Common Stock were$2.18 and$2.13 , respectively, for theMarch 2023 quarter, compared to$3.70 and$3.61 , respectively, for theMarch 2022 quarter. Basic and diluted earnings per share for Class B Common Stock were each$1.98 for theMarch 2023 quarter compared with$3.36 for theMarch 2022 quarter. Six Months EndedMarch 25, 2023 Compared to the Six Months EndedMarch 26, 2022
Net income for the first half of fiscal 2023 totaled
Six Months Ended March 25, March 26, 2023 2022 Grocery$ 1,033,411 $ 970,585 Non-foods 636,040 594,091 Perishables 722,392 720,001 Fuel 368,023 391,025 Total retail grocery$ 2,759,866 $ 2,675,702 17
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Changes in retail grocery sales for the quarter ended
Total retail sales for the six months ended
83,792 Other 372
Total retail sales for the six months ended
The "Grocery" category includes grocery, dairy, and frozen foods. The "Non-foods" category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products. The "Perishables" category includes meat, produce, deli and bakery. Gross Profit. Gross profit for the six-month period endedMarch 25, 2023 totaled$697.1 million , a decrease of$2.0 million , or 0.3%, compared with gross profit of$699.1 million for the six-month period endedMarch 26, 2022 . Gross profit as a percentage of sales was 24.3% and 25.3% for the six months endedMarch 25, 2023 andMarch 26, 2022 , respectively. Inflation and supply chain pressures have increased the cost of goods sold. Operating and Administrative Expenses. Operating and administrative expenses increased$30.3 million , or 5.9%, to$545.1 million for the six months endedMarch 25, 2023 , from$514.8 million for the six months endedMarch 26, 2022 . As a percentage of sales, operating and administrative expenses were 19.0% and 18.6% for theMarch 2023 andMarch 2022 six-month periods, respectively. Excluding fuel sales and associated fuel operating expenses (primarily payroll), operating expenses were 21.6% of sales for the first six months of 2023 compared with 21.5% for the first six months of 2022. A breakdown of the major changes in operating and administrative expenses is as follows: Increase Increase as a % of in millions sales
Salaries and wages$ 21.8 0.76 % Repairs and maintenance $ 4.9 0.17 % Utilities and fuel $ 2.8 0.10 % Store supplies $ 2.8 0.10 % Salaries and wages increased in dollars due to additional labor hours required for the increased sales volume and continued labor market pressures. Repairs and maintenance expense increased due to higher refrigerant costs and the cost of other supply items, as well as increased wear and tear on equipment to accommodate sales volume. Utilities and fuel expense increased due to higher costs of energy. Store supplies are up for the year due to raw material shortages and inflation, especially in packaging materials. Gain from Sale or Disposal of Assets. Gain from the sale or disposal of assets totaled$1.4 million for the six months endedMarch 25, 2023 . For the six months endedMarch 26, 2022 , the gain from the sale or disposal of assets totaled$1.2 million . Interest Expense. Interest expense totaled$10.7 million for the six-month period endedMarch 25, 2023 compared with$10.8 million for the six-month period endedMarch 26, 2022 . Total debt atMarch 2023 was$556.7 million compared with$578.5 million atMarch 2022 . Income Taxes. Income tax expense totaled$36.0 million for the six months endedMarch 25, 2023 , reflecting an effective tax rate of 24.7% of pretax income. Income tax expense totaled$42.8 million for the six months endedMarch 26, 2022 , reflecting an effective tax rate of 24.1% of pretax income. Net Income. Net income totaled$109.9 million for the six-month period endedMarch 25, 2023 compared with$134.8 million for the six-month period endedMarch 26, 2022 . Basic and diluted earnings per share for Class A Common Stock were$5.92 and$5.79 , respectively, for the six months endedMarch 25, 2023 , compared to$7.26 and$7.10 , respectively, for the six months endedMarch 26, 2022 . Basic and diluted earnings per share for Class B Common Stock were each$5.38 for the six months endedMarch 25, 2023 compared with$6.60 for the six months endedMarch 26, 2022 . 18
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Liquidity and Capital Resources
Capital Expenditures
Capital expenditures totaled
The Company's capital expenditure plans for fiscal 2023 currently include
investments of approximately
The Company currently expects that its annual capital expenditures will be in
the range of approximately
The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project.
Liquidity
The Company generated
Cash used by financing activities totaled$21.7 million for the six-month period endedMarch 25, 2023 , compared with$17.6 million for the six-month period endedMarch 26, 2022 . The increase was primarily related to principal payments on long-term debt. InJune 2021 , the Company issued$350.0 million aggregate principal amount of senior notes due 2031 (the "Notes"). The Notes bear an interest rate of 4.00% per annum and were issued at par. The Company has a$150.0 million line of credit (the "Line") that matures inJune 2026 . The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or LIBOR. The Line allows the Company to issue up to$10.0 million in letters of credit, of which none were issued atMarch 25, 2023 . The Company is not required to maintain compensating balances in connection with the Line. AtMarch 25, 2023 , the Company had no borrowings outstanding under the Line. InDecember 2010 , the Company completed the funding of$99.7 million of Bonds (the "Bonds") for the construction of new warehouse and distribution space adjacent to its existing space inBuncombe County, North Carolina (the "Project"). The final maturity date of the Bonds isJanuary 1, 2036 . Under a Continuing Covenant and Collateral Agency Agreement (the "Covenant Agreement") between certain financial institutions and the Company, the financial institutions would hold the Bonds untilDecember 17, 2029 , subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of$4.5 million began onJanuary 1, 2014 . The outstanding balance of the Bonds was$54.4 million as ofMarch 25, 2023 . The Company may redeem the Bonds without penalty or premium at any time prior toDecember 17, 2029 . InSeptember 2017 , the Company refinanced approximately$60 million secured borrowing obligations with a LIBOR-based amortizing floating rate loan secured by real estate maturing inOctober 2027 . The Company has an interest rate swap agreement for a current notional amount of$27.5 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest rate swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of$0.5 million and matureOctober 1, 2027 . InDecember 2019 , the Company closed a$155 million LIBOR-based amortizing floating rate loan secured by real estate maturing inJanuary 2030 . The Company has an interest rate swap agreement for a current notional amount of$128.5 million at a fixed rate of 19
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2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95%
and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively
hedges floating rate debt in the same amount as the current notional amount of
the interest swap. Both the floating rate debt and the interest rate swap have
monthly principal amortization of
It is possible that, in the future, the Company's results of operations and financial condition will be different from that described in this Quarterly Report on Form 10-Q based on a number of factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, changing demographics, as well as the additional factors discussed below under "Forward- Looking Statements." It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this Quarterly Report on Form 10-Q. Quarterly Cash Dividends
Since
The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant. In addition, the Notes, the Bonds, the Line, and other debt agreements contain provisions that, based on certain financial parameters, restrict the ability of the Company to pay additional cash dividends in excess of current quarterly per share amounts. Further, the Company is prevented from declaring dividends at any time that it is in default under the indenture governing the Notes.
Seasonality
Grocery sales are subject to a slight seasonal variance due to both holiday related sales and sales in areas where seasonal homes are located. Sales are traditionally higher in the Company's first fiscal quarter due to the inclusion of sales related toThanksgiving and Christmas. Unless Easter falls within the quarter, the Company's second fiscal quarter traditionally has the lowest sales of the year predominantly due to lower occupancy of seasonal homes. In the third and fourth quarters, sales are usually positively affected by the return of customers to seasonal homes in our market area. Impact of Inflation As the economy continues to recover from the impact of the COVID-19 pandemic, inflation has reached levels not experienced in decades. Food costs remain high, reflecting a tight labor market and supply chain transportation disruptions, while energy costs have decreased.
The following table from the
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Twelve Months EndedMarch 2023 All items 5.0 % Food at home 8.4 % Energy (6.4) %
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). The words "expect", "anticipate", "intend",
"plan", "likely", "goal", "believe", "seek", "will", "may", "would", "should"
and similar expressions are intended to identify forward-looking statements.
While these forward-looking statements and the related assumptions are made in
good faith and reflect the Company's current judgment regarding the direction of
the Company's business, actual results will almost always vary, sometimes
materially, from any estimates, predictions, projections, assumptions or other
future performance suggested or described by such forward-looking statements.
Such statements are based upon a number of assumptions and estimates which are
inherently subject to significant risks and uncertainties many of which are
beyond the Company's control. Some of these assumptions inevitably will not
materialize, and unanticipated events will occur which will affect the Company's
results. Some important factors (but not necessarily all factors) that affect
the Company's revenues, financial position, growth strategies, profitability and
operating results, or that otherwise could cause actual results to differ
materially from those expressed in or implied by any forward-looking statement,
include the potential continued impact of the COVID-19 pandemic on our business
and economic conditions generally in the Company's operating area; the Company's
ability to successfully implement its expansion and operating strategies and to
manage rapid expansion; pricing pressures and other competitive factors;
reduction in per gallon retail fuel prices; the maturation of new and expanded
stores; the Company's ability to reduce costs and achieve improvements in
operating results; the availability and terms of financing; increases in labor
and utility costs; success or failure in the ownership and development of real
estate; changes in the laws and government regulations applicable to the
Company; disruptions in the efficient distribution of food products; changes in
accounting policies, standards, guidelines or principles as may be adopted by
regulatory agencies as well as the
Consequently, actual events affecting the Company and the impact of such events on the Company's operations may vary significantly from those described in this Quarterly Report on Form 10-Q or contemplated or implied by statements in this Quarterly Report on Form 10-Q. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except to the extent required by applicable law.
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