10-Q: Village Super Market Reports Mixed Results in Third Quarter Amidst Expansion

Village Super Market saw a sales increase of 3.2% but a decrease in adjusted net income of 6% in the third quarter of fiscal year 2024, while opening a new ShopRite store.

Summary

• Village Super Market's sales increased by 3.2% to $546.4 million for the 13 weeks ended April 27, 2024, compared to $529.3 million for the same period last year.
• Same store sales grew by 2.3% during the quarter, driven by retail price inflation, digital sales growth, and higher pharmacy sales.
• The company opened a new 83,000 sq. ft. ShopRite replacement store in Old Bridge, NJ on March 17, 2024, which contributed to the sales increase.
• However, the closure of a Gourmet Garage location on November 1, 2023, partially offset the sales growth.
• Gross profit margin decreased slightly to 28.54% due to higher promotional spending and an unfavorable product mix, partially offset by increased patronage dividends and rebates from Wakefern.
• Operating and administrative expenses increased to 25.19% of sales, with adjusted expenses at 25.03%, primarily due to higher labor costs, digital sales fees, and store security expenses.
• Net income for the quarter was $9.0 million, while adjusted net income was $9.6 million, a 6% decrease compared to the prior year's adjusted net income of $10.2 million.
• For the 39 weeks ended April 27, 2024, sales increased by 2.8% to $1,658.3 million, with same store sales up by 2.2%.
• Year-to-date net income was $35.0 million, and adjusted net income was $35.7 million, a 6% increase compared to the prior year-to-date period.
• The company has budgeted $70 million for capital expenditures in fiscal 2024, including costs for new store construction and technology upgrades.

Sentiment

Score: 5

Explanation: The sentiment is neutral to slightly negative. While sales increased, the decrease in adjusted net income and rising operating expenses raise concerns. The company is making investments in new stores and technology, but faces competitive pressures and risks.

Positives

• Sales increased by 3.2% in the third quarter and 2.8% year-to-date.
• Same store sales showed growth of 2.3% in the third quarter and 2.2% year-to-date.
• Digital sales continue to grow, with a 9% increase in the third quarter and 12% year-to-date.
• The company successfully opened a new, larger ShopRite replacement store in Old Bridge, NJ.
• Year-to-date adjusted net income increased by 6% compared to the prior year-to-date period.
• Interest income increased due to higher interest rates and larger investments in Wakefern notes and deposits.
• The effective income tax rate decreased in the third quarter due to work opportunity tax credits.

Negatives

• Adjusted net income decreased by 6% in the third quarter compared to the prior year.
• Gross profit margin decreased slightly in the third quarter due to higher promotional spending and an unfavorable product mix.
• Operating and administrative expenses increased as a percentage of sales, driven by higher labor costs, digital sales fees, and store security expenses.
• The closure of a Gourmet Garage location partially offset sales growth.
• Working capital decreased due to the reinvestment of maturing notes receivable from Wakefern into longer-term notes.

Risks

• The supermarket industry is highly competitive with narrow profit margins.
• The company is vulnerable to economic downturns in the states where its stores are located.
• Any material change in the relationship with Wakefern could adversely impact the business.
• Work stoppages due to collective bargaining agreements could negatively affect financial results.
• The company could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain.
• Certain multi-employer pension plans to which the company contributes are underfunded, potentially increasing future contributions.
• The company's long-lived assets are subject to periodic testing for impairment.
• The company's goodwill and indefinite-lived intangible assets are tested for impairment annually.
• The company's effective tax rate may be impacted by tax examinations and changes in tax laws.
• Any material interruption of the company's or Wakefern's information systems could have a material adverse impact on results of operations.
• A security breach could damage the company's reputation and result in significant costs.

Future Outlook

The company expects same store sales to increase by 2.0% to 2.5% in fiscal 2024 and plans to continue paying quarterly dividends. They believe cash on hand, operating cash flow, and the credit facility will be adequate to meet future needs. The company anticipates an effective income tax rate between 31.0% and 32.0% for fiscal 2024.

Management Comments

• Management believes that the company's disclosure controls and procedures are effective.
• Management is of the opinion that the ultimate resolution of legal proceedings should not have a material adverse effect on the company's financial position.
• Management uses non-GAAP measures, including Adjusted net income and Adjusted operating and administrative expenses, as they provide greater transparency in assessing ongoing operating performance.

Industry Context

The supermarket industry is highly competitive with narrow profit margins, requiring companies to focus on customer service, competitive pricing, and product quality. Village Super Market competes with various retail formats, including national and regional chains, warehouse clubs, and online retailers. The company's relationship with Wakefern provides economies of scale, but also presents risks if that relationship changes.

Comparison to Industry Standards

• Village Super Market's same-store sales growth of 2.3% in the third quarter is within the range of other established grocery chains, but slightly below some of the higher performing retailers.
• The company's gross profit margin of 28.54% is typical for the supermarket industry, which operates on relatively thin margins.
• Operating expenses as a percentage of sales are higher than some of the more efficient operators, indicating potential areas for improvement.
• The company's digital sales growth of 9% in the third quarter is a positive sign, as online grocery sales continue to be a key growth area for the industry.
• Compared to companies like Kroger and Albertsons, Village Super Market is smaller and more regionally focused, which can impact its ability to achieve the same level of scale and efficiency.
• The company's reliance on Wakefern for purchasing and distribution is similar to other cooperative members, but also presents a unique set of risks and opportunities.
• The capital expenditure budget of $70 million for fiscal 2024 is a significant investment, reflecting the company's commitment to store upgrades and technology improvements, which is in line with industry trends.

Legal Proceedings

• The company is involved in litigation incidental to the normal course of business, but management believes the ultimate resolution should not have a material adverse effect.

Related Party Transactions

• The company has significant transactions with Wakefern, including purchases, notes receivable, and demand deposits.
• The company invested in variable rate notes receivable from Wakefern that earn interest at the prime rate plus .50% and mature on August 15, 2027 and September 28, 2027.
• The company invested in variable rate notes receivable from Wakefern that earn interest at the SOFR plus 2.25% and mature on February 15, 2029.
• The company has demand deposits invested at Wakefern at overnight money market rates.
• The company has a 30% interest in a real estate partnership for the development of a retail center in Old Bridge, New Jersey.

Stakeholder Impact

• Shareholders may be concerned about the decrease in adjusted net income in the third quarter.
• Employees may be affected by changes in labor costs and benefits.
• Customers may benefit from new store openings and technology upgrades.
• Suppliers may be affected by changes in the company's relationship with Wakefern.
• Creditors may be affected by changes in the company's debt levels and credit facility.

Next Steps

• The company plans to continue evaluating, upgrading, and expanding its supermarket chain.
• The company will continue to invest in technology and facility upgrades.
• The company will continue to monitor and manage its relationship with Wakefern.
• The company will continue to monitor and manage its multi-employer pension plan obligations.
• The company will continue to monitor and manage its exposure to interest rate risk.

Key Dates

Keywords

supermarket, retail, grocery, ShopRite, Fairway, Gourmet Garage, sales, net income, digital sales, Wakefern, operating expenses, same store sales