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Ingles Markets – a special grocery brand

"Your premium brand had better be delivering something special, or it's not going to get the business." -Warren Buffett

Founded in 1963 by Robert P. Ingle (CEO), this southeastern grocery retailer has grown into a premium grocery chain brand with approximately 200 stores all located within a 280 mile radius of the company’s Black Mountain (Asheville), North Carolina headquarters. Strategically anchored in the mountainous western North Carolina area, Ingles operates its fleet of stores in the following six states.

Ingles Grocery Stores

Stores

%

Georgia

73

36%

North Carolina

69

34%

South Carolina

36

18%

Tennessee

21

10%

Virginia

2

1%

Alabama

1

0%

Total

202

100%

This “best in class” brand became public in 1987 and the company’s Class A stock is traded on the NASDAQ Global Select Market under the symbol IMKTA. The Ingles family name has grown into a well-known regional brand and I decided to check inside the cart to determine what ingredients make this southeastern recipe for success so special.

SALES GROWTH

Ingles Markets has delivered 46 consecutive years of sales growth with record sales in 2010 of $ 3.39 billion. In addition, Q4 2010 profits rose 63% while annual net income grew from $ 28.8 million in 2009 to $ 31.7 million in 2010.

Ingles Markets Operating Results

2010

2009

%

Revenue

3,390,052

2,250,933

34%

Net Income

31,739

28,828

9%

Long Term Debt

725,314

818,000

-13%

Shareholder Equity

413,840

398,164

4%

The 2010 grocery sales have increased 34% over 2009 sales as the company has effectively grown its core customer base. The company has three business (revenue) lines: grocery sales, shopping center rentals, and dairy processing.

Ingles Markets Sales Categories

2010

2009

2008

Grocery Sales

3,274

3,143

3,107

Fluid Dairy Sales

116

107

131

Shopping Center Rentals

9

11

11

Total

3,399

3,261

3,249

The combined grocery sales platform consists of 193 Ingles’ branded stores, 9 Sav-Mor stores, 70 in-line pharmacies, and 67 fuel centers. The $116 million (2010) fluid dairy sales increased by 7.5 % over $107.3 million (2009) sales. The company operates a milk processing and packaging plant that supplies milk, juice, and water products to all Ingles stores and other retailers in 17 states.

REAL ESTATE

Mr. Ingles, Founder and CEO, has always had a passion for real estate ownership, and specifically, the strategy of controlling the tenant mix, access (ingress and egress), signage, and other elements related to shopping center operations. As noted in Ingles’ 2010 10-K, real estate ownership is an important component as Ingles owns and operates 70 shopping centers, of which 58 contain Ingles stores and 93 stores are free-standing (company owned). The company also owns 14 undeveloped sites suitable for future free-standing stores. Just 53 stores out of 202 stores (26%) are leased to third party owners. In addition, many of the 53 leased sites enjoy long term, below market rent terms making these leases an attractive intangible asset for the company.

According the 2010 10-K, the average Ingles store is 53,524 square feet with over 120 stores over 52,000 square feet in size. Currently, the company develops its newest prototype store of 65,000 sf or 80,000 sf. In 2010, the company reported modest expansion with only two (2) new stores (4 in 2009). In 2011, the company plans to open up to 5 new, replacement, or remodel stores and also add 6 fuel stations. Budgeted capital expenditures (for 2011) are between $100 million to $ 140 million. In addition, and evidence of future growth, the company is expanding its North Carolina distribution facility funded with a $99.7 million bond issue.

The 2010 Annual Report cites several national and regional competitors including Aldi, Bi-Lo, Food City, Food Lion (DEG), Kroger (KR), Publix, Target (TGT) and Wal-Mart (WMT). Having control of its own real estate development and acquisition program, Ingles has been able to provide a strategic competitive advantage over the competition. Ingles typically purchases a minimum 20+ acre site and constructs a 65,000 to 80,000 sf facility. This larger than average box (Bi-Lo and Publix occupy around 45,000 sf) includes typical grocery products in addition to an upscale book and magazine department, a video and game rental department, a pharmacy (many with drive-thru capability), a broad range of necessity items that can be found in a dollar store or drug store, and several stores provide ready-made Starbucks (SBUX) coffee.

As evidenced by the number of Ingles free-standing store sites; the grocery, drug store, and dollar store categories have evolved into a similar free-standing box strategy and Ingles pioneered this innovative concept many years ago. In many of its company owned stores it is unlikely to see a competing dollar store or drug store within the boundaries of an Ingles’ owned property.

Finally, Ingles has a BB- S&P credit rating and the company has approximately $ 725 million in long term debt. The company’s corporately owned real estate is secured with senior secured debt (included in the balance sheet). Also, Ingles has a significant amount of excess land associated with its corporately owned real estate and this land value is reflected as a conservative asset within the company’s most recent 10-K where the current shareholders equity is $ 413,840 million.

DIVIDENDS

The final ingredient for the special brand is its dividend. As mentioned above, Ingles owns a large portion (74%) of its brick & mortar, excess land (14 sites), a milk production plant, and a distribution center. Appropriately, Ingles looks like a REIT in a grocery store wrapper. Much like a REIT, Ingles is currently paying investors a meaty 4.2 % dividend. Here is a comparison of the other current dividends paid by peer grocery/drug operators:

Grocery Dividends

Symbol

Yield

Kroger

KR

1.90%

Ingles Markets

IMKTA

4.20%

Walgreens

WAG

1.80%

Food Lion

DEG

2.10%

SuperValue

SVU

3.50%

In conclusion, Ingles Markets is a premium regional grocery brand with distinctive advantages. The senior management (Robert Ingle II, Chairman; James Lanning, President, COO; and Ron Freeman, CFO) have done an excellent job building the brand and identifying some evolutionary strategies that have allowed the company to maintain and build its competitive footprint. The sales history (46 years of consecutive growth), real estate strategy (202 stores), and dividend yield (4.2%) are the exceptional ingredients for Ingles Markets, Inc. to deliver “something special”.

Source: Ingles Markets: What Makes It Something Special?