Ingles Markets, Incorporated F3Q09 (Qtr End 06/27/09) Earnings Call Transcript

Aug. 3.09 | About: Ingles Markets, (IMKTA)

Ingles Markets, Incorporated (NASDAQ:IMKTA)

F3Q09 Earnings Call

August 3, 2009 9:00 am ET

Executives

Ron Freeman – Chief Financial Officer

Robert Ingle - Founder Chief Executive Officer

Robert Ingle II - Chairman of the Board

Jim Lanning – President

Tom Outlaw - Vice President of Sales and Marketing

Analysts

Emily Shanks – Barclays Capital

Robert Beal – Bank of America Securities

Meredith Fowler – Wells Fargo Securities

Operator

(Operator Instructions) Welcome to the Ingles Markets Incorporated Third Quarter Conference Call. At this time for opening remarks and introductions I would like to turn the call over to the Chief Financial Officer, Mr. Ronald Freeman.

Ron Freeman

Welcome to Ingles Markets Fiscal 2009 Third Quarter Conference Call. With me today are Robert Ingle, Founder of our Company and Chief Executive Officer, Robert Ingle II, Chairman of the Board, 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 the call.

Ingles Markets, Incorporated 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 are referred to the company's public filings, including the Form 10-K for the fiscal year ended September 28, 2008.

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 issued this morning is available on our website, www.Ingles-Markets.com. We filed our 10-Q for the quarter on Friday afternoon and it is available via our website as well.

The most significant event of the third fiscal quarter of this year was the issuance in May of $575 million of face value senior notes due 2017. The notes were issued at a discount to yield 9.5%. Using the net proceeds we repaid a $349.5 million of subordinated notes due 2011; repaid $45.3 million outstanding on our lines of credit, repaid approximately $77.7 million of secured debt, and paid transaction costs. Now we have sufficient funding to execute our store redevelopment strategy when conditions warrant and have extended the average maturity of our various pieces of debt.

In conjunction with this transaction we incurred $10.2 million of debt extinguishment costs that flow through the third quarter and nine month P&L. Given that the debt markets have been essentially closed for the past year or so with no guarantee of improvement over the next couple of years, we were pleased to take advantage of a window of opportunity to access the high yield debt market. Additional information on this transaction in the Form 10-4 filed with the SEC can be accessed via our website as well.

Net income for the fiscal 2009 three and nine month periods was adversely affected by these debt extinguishment costs, higher operating expenses resulted from our increased level of store development activities and by higher income tax expense. Net income totaled $4.7 million for the three months ended and $23.6 million for the nine months ended June 27, 2009, compared with $16.0 million and $41.6 million for the comparable three and nine month periods of fiscal 2008.

At the top line, sales comparisons between the three and nine month periods of 2009 versus 2008 are affected by significantly lower prices for gasoline and milk. First, our third quarter results. Net sales totaled $826.8 million for the three months ended June 27, 2009, compared with $835.3 million for the three months ended June 28, 2008. Excluding gasoline, net sales increased 5.1%. The average retail price of gasoline was approximately $1.50 per gallon lower comparing the third quarter of fiscal 2009 with the previous year.

Third quarter sales comparisons are also affected by the timing of the Easter holiday. In fiscal 2008 Easter fell in the company’s second fiscal quarter but occurred in the company’s third quarter of fiscal year 2009. Excluding gasoline sales and the effect of Easter sales, grocery segment comparable store sales increased 1.9% for the three months ended June 27, 2009, compared with the three months ended June 28, 2008.

Top sales have not increased as much as previous quarters, reflecting general economic conditions, customers trading down, and the substantial elimination of food inflation. Given those circumstances we’re pleased the number of customer transactions, excluding gasoline, increased 7.8%. We believe we are competing well in a difficult environment. The average transaction size, excluding gasoline, decreased by approximately 1.3%.

Ingles operated 201 stores at June 27, 2009, compared to 197 stores at June 28, 2008. Gross profit for the June 2009 quarter increased 6.4% to $203.4 million an increase of $12.3 million compared with the third quarter of last fiscal year.

Gross margin as a percentage of sales was 24.6% for the June 2009 quarter versus 22.9% for the same quarter last year. Excluding the effect of gross profit on lower priced gasoline, grocery segment gross profit as a percentage of sales was 27.6% and 27.7% for the June 2009 and 2008 quarters respectively. We are pleased with this margin stability during a time when competition and purchasing behaviors can change quickly.

Operating expenses as a percentage of sales were 20.5% for the June 2009 quarter compared with 18.9% for the June 2008 quarter. Excluding gasoline sales and associated gasoline operating expenses which are primarily payroll, operating expenses were 23.1% of sales for the third quarter of fiscal 2009 compared to 22.6% for the third fiscal quarter of 2008.

Current unfavorable economic conditions have extended the time needed for new and redeveloped stores to reach targeted levels of sales and profitability to cover additional personnel, utility and deprecation costs that are incurred in full from the opening of a new or redeveloped store. Net rental income, gains and losses on asset disposals and other income totaled $600,000 for the June 2009 quarter compared with $1.4 million for the June 2008 quarter. Lower occupancy rates and rent collections plus lower prices received for sales of scrap cardboard and plastic account for the decrease.

Interest expense increased $4.8 million for the three month period ended June 27, 2009, to $16.4 million from $11.6 million for the three month period ended June 28, 2008. Total debt at June 2009 was $855.7 million compared with $666.6 million at June 2008. Our effective tax rate was 37.5% for the June 2009 quarter compared with 29.9% for the same quarter of last year due to higher state income taxes and a higher provision for deferred income taxes.

Net income for the June 2009 quarter totaled $4.7 million compared with net income of $16.0 million for the June 2008 quarter and the 2009 number includes $10.2 million of debt extinguishment costs incurred during the current quarter as we discussed earlier. Basic and diluted earnings per share for the company’s publicly traded Class A common stock were $0.20 and $0.19 per share respectively for the June 2009 quarter compared with $0.68 and $0.65 per share respectively for the June 2008 quarter.

Next, our nine month results. Net sales for the nine months ended June 27, 2009, totaled $2.42 billion which was $25.5 million or 1.1% higher then the first nine months of fiscal year 2008. Excluding the 36% drop in per gallon gas prices, sales grew 5.3%. Grocery segment comparable store sales excluding gasoline grew 3.9% over the same nine month period. The number of customer transactions excluding gasoline, increased 7.2% while the average transaction amount decreased by approximately $0.18. Our nine month sales results were driven by the same factors mentioned earlier in the three month comments.

Gross profit for the nine month fiscal 2009 period totaled $593.2 million, that’s an increase of $37.0 million or 6.7% over the comparable fiscal 2008 period. Gross profit as a percent of sales was 24.5% and 23.2% for the nine months ended June 2009 and 2008 respectively. Excluding gasoline sales, the grocery segment gross margin comparison is 27.0% year to date fiscal 2009 versus 27.2% year to date fiscal 2008.

Operating expenses increased by $44.8 million comparing the first nine months of fiscal 2009 to the same period of last fiscal year and were 20.9% of sales for the nine months ended June 27, 2009, compared with 19.3% of sales for the nine months of fiscal year 2008. Excluding gasoline sales and associated gasoline operating expenses, operating expenses were 23.2% of sales for the nine month fiscal 2009 period compared with 22.3% for the same period of fiscal 2008.

Since the beginning of fiscal year 2008 the company has completed 22 new, remodeled, or relocated stores. As noted earlier, additional personnel, utility and depreciation costs that are incurred in full from the opening of new or redevelopment store, while it takes a longer period of time in this economic environment to reach targeted levels of sales and profitability.

Net rental income gains and losses on asset disposals and other income totaled $3.7 million for the June 2009 nine month period compared with $4.5 million for the June 2008 nine month period. In addition to the factors mentioned earlier in the three month discussion, the company sold an out-parcel at a $1.0 million gain in March 2009.

Interest expense totaled $42.5 million for the nine month period ended June 27, 2009, an increase of $7.7 million from the $34.8 million for the nine month period ended June 28, 2008. As noted earlier, extra debt extinguishment expenses related to the company’s 2009 financing activities totaled $10.2 million that flowed through the P&L.

Income tax expense as a percentage of pre-tax income increased to 37.7% for the June 2009 nine month period compared with 35.4% for the comparable June 2008 period, attributable to higher deferred taxes.

Summarizing our nine month results, fiscal 2009 net income totaled $23.6 million compared with net income of $41.7 million for the nine months of fiscal 2008. Net income as a percentage of sales was 1.0% for the June 2009 and 1.7% for the June 2008 nine month periods respectively. Basic and diluted earnings per share for publicly traded Class A common stock were $1.01 and $0.95 for the June 2009 nine month period compared with $1.78 and $1.70 respectively for the June 2008 nine month period.

Next, I’ll update our investing and financing activities. Capital expenditures for the June 2009 nine month period totaled $127.4 million. During the June 2009 nine month period Ingles opened four new stores, four replacement stores, two remodeled stores and added nine fuel centers. Retail square footage was approximately 10.7 million at June 27, 2009, and approximately 10.1 million at June 28, 2008.

We do not expect to complete any additional store projects over the balance of this fiscal year. Capital expenditures for the entire fiscal year are expected to be approximately $150 million including expenditures for stores to open in fiscal 2010. We are carefully evaluating future store projects in recognition of recent conditions and future uncertainty. Our base line annual CapEx range is between $125 and $175 million.

In conjunction with the new senior note issuance in May 2009 the company entered into a new three year $175 million syndicated line of credit facility to replace certain existing facilities. Line of credit facilities totaled $190 million of which there are no amounts outstanding at June 27, 2009. As a result of the new senior note issuance and repayment of other debt, the company has extended the average maturity of its debt, decreased its letter of credit outstandings to $9.2 million and increased the amount of unencumbered real property and equipment.

We will now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Emily Shanks – Barclays Capital

Emily Shanks – Barclays Capital

Thank you for the break out of traffic versus ticket as it pertains to the comparable store sales. Just to be clear, those figures of plus 7.8% for traffic and the negative 1.3% for ticket, that excludes fuel but does that exclude Easter?

Ron Freeman

No they do not; they’re not adjusted for Easter.

Emily Shanks – Barclays Capital

Can you give us a sense of what traffic would have been if you had accounted for Easter?

Ron Freeman

I haven’t calculated that number. I think it’d be pretty safe to say that since the quarter and the year to date traffic numbers are both up by similar amounts that there wouldn’t have been an appreciable difference.

Emily Shanks – Barclays Capital

In terms of your CapEx indications, this baseline CapEx of $125 to $175 million which I know the Q notes that’s what’s required to maintain a modern store base. Does that include any new stores?

Ron Freeman

We have a number of new, redeveloped, and remodeled store projects in the queue, it’s really just a question of how many and in what order we execute them. I don’t think you’ll see the overall store count change by a whole lot.

Emily Shanks – Barclays Capital

The baseline CapEx of $125 to $175 million does incorporate some new store growth plans?

Ron Freeman

Yes.

Emily Shanks – Barclays Capital

What number is that?

Ron Freeman

We don’t break that out into individual numbers until the projects are completed.

Emily Shanks – Barclays Capital

Can you give me a sense of how you would evaluate what maintenance CapEx is as a component of that, is that possible?

Ron Freeman

Maintenance CapEx I think we’ve addressed this on previous calls, is a concept that we really subscribe to around here because we believe so strongly that you have got to improve your store base to stay competitive in this business. There’s not really a level that would say we’re not going to do anything to our stores and this would be what we would have to spend. It’s just not a concept we subscribe to.

Emily Shanks – Barclays Capital

In terms of a new store versus a major remodel, can you give us a sense of what the average cost of each of those are?

Ron Freeman

It’s going to vary a good bit primarily because of land costs, especially given the terrain that we operate in up here. Beyond that, we really don’t provide details on our individual CapEx type breakdowns.

Emily Shanks – Barclays Capital

As you look at your interaction with the vendors, are you seeing any trends that are noteworthy, specifically are you seeing that vendors are looking to increase their allowances or are they targeting being more specific with their vendor dollars, what are you seeing as it relates to supporting promotions?

Ron Freeman

In general, the vendors are being more aggressive which we find very helpful and we think is necessary in today’s environment. They are trying to be more pointed in their promotions.

Emily Shanks – Barclays Capital

When you say more aggressive, are you seeing an actual increase in targeted dollars or is it just simply that they’re being deeper in some categories?

Ron Freeman

There is an increase in dollars and in times of promotion.

Operator

Your next question comes from Robert Beal – Bank of America Securities

Robert Beal – Bank of America Securities

Could you provide us what same store sales were without the adjustment for Easter and excluding gasoline sales?

Ron Freeman

Without the adjustment for Easter and excluding gasoline sales, 5.1% for the quarter and 5.3% for the nine months.

Robert Beal – Bank of America Securities

In terms of your market share in the quarter do you think that changed at all?

Ron Freeman

It’s up some. We’re really pleased with that.

Robert Beal – Bank of America Securities

Could you tell us what percent of your grocery sales were promotion our coupon based and how that compared to last year?

Ron Freeman

I do not have that information available to me right here. Typically that’s not a hard number that we disclose but it’s pretty safe to say that our customers are very aware of promotions that are going on and ad prices, no question.

Robert Beal – Bank of America Securities

What about the percentage of private label sales in the quarter and how important that is to keeping your gross margins where they are?

Ron Freeman

The percentage of private label sales is up and that is important to help us maintaining our margins. What we want to make sure is with our generally larger stores that we give the customer a choice. We’re not going to try to push them one way or the other; we want to make sure that there is a large selection of both national and private label brands.

Robert Beal – Bank of America Securities

Have you ever disclosed what the percentage of private label penetration is in your stores?

Ron Freeman

I believe we disclose that annually in the 10-Q but not in the quarters. It is up this year over last year.

Robert Beal – Bank of America Securities

Do you think the same store sales and gross margins seen in third quarter are sustainable or do you expect them to change going into the fourth quarter?

Ron Freeman

It’s hard to say, things are changing so rapidly right now that again the quarterly numbers somewhat track the nine month numbers. Third quarter was off just a little bit in the column. The main thing for us is that we want to make sure that we continue to grow those top line sales regardless of what the price of gasoline is and that we keep that transaction count up. Both of those were late in the market share gains or market share maintenance and that’s really important to us given the climate right now.

Operator

Your next question comes from Meredith Fowler – Wells Fargo Securities

Meredith Fowler – Wells Fargo Securities

To build on the previous market share question, can you disclose what markets you’ve seen the greatest gain in market share?

Ron Freeman

I’m sorry we don’t break our markets down into segments that way for public disclosure.

Meredith Fowler – Wells Fargo Securities

Can you discuss how you track your market share gains given your strategy?

Ron Freeman

We subscribe to the same standard data that most everyone else in the industry gets. Again, we also track our transaction counts.

Meredith Fowler – Wells Fargo Securities

Can you discuss the drivers behind your non-food sales growth during the quarter?

Ron Freeman

I’m not sure because gasoline prices were down a good bit so in total dollars the gasoline sales were down but we did experience gallon growth. That’s the biggest portion of our non-food items.

Meredith Fowler – Wells Fargo Securities

Inventory growth has outpaced your sales growth for the last three consecutive quarters. Can you talk about what you’re doing to manage your inventories?

Ron Freeman

We’ve also had a pretty decent square footage growth and a lot of new store projects. It’s pretty important to make sure that those stores are adequately stocked especially with so many fairly new stores. You don’t want to open a new store, a remodel and have holes on your shelves. We are managing our inventory growth, we implemented a new software system this past year that is still in the learning curve phase, which helps us manage that inventory down as closely as we can. Fortunately incremental financing costs are pretty low these days so that helps soften the flow of the inventory growth.

Operator

There are no further questions at this time. I’ll turn it back to our speakers for any additional or closing comments.

Ron Freeman

Thank you everyone for joining us today. We’re in our fourth quarter and we look forward to speaking with you again in late November, early December with our annual results. Everyone have a good day.

Operator

That does conclude today’s conference call. Thank you for your participation.

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