ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
OVERVIEW
Village Super Market, Inc. (the “Company” or “Village”) was founded in 1937. Village operates a chain of 34 supermarkets in New Jersey (26), New York (6), Maryland (1) and Pennsylvania (1) under the ShopRite and Fairway banners and four Gourmet Garage specialty markets in New York City. Village is the second largest member of Wakefern Food Corporation (“Wakefern”), the nation’s largest retailer-owned food cooperative and owner of the ShopRite, Fairway and Gourmet Garage names. As further described in the Company’s Form 10-K, this ownership interest in Wakefern provides Village with many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage.
The supermarket industry is highly competitive and characterized by narrow profit margins. The Company competes directly with multiple retail formats, both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. The Company competes by providing a superior customer service experience, competitive pricing and a broad range of consistently available quality products. The ShopRite Price Plus customer loyalty program enables Village to offer continuity programs, focus on target marketing initiatives and to offer discounts and attach digital coupons directly to a customer's Price Plus card.
Online grocery ordering for in-store pick up or home delivery is available in all of our ShopRite stores through shoprite.com, the ShopRite app or through third party service providers. Additionally, the ShopRite Order Express app enables customers to pre-order deli, catering, specialty occasion cakes and other items. Online ordering for home delivery is available in all Fairway and Gourmet Garage stores through third party service providers.
To promote production efficiency, product quality and consistency, the Company operates a centralized commissary supplying certain products in deli, bakery, prepared foods and other perishable product categories to all stores. The Company also owns and operates an automated micro-fulfillment center to facilitate online order fulfillment for the south New Jersey stores.
The Company’s stores, seven of which are owned, average 54,000 total square feet. These larger store sizes enable the Company to offer a wide variety of national branded and locally sourced food products, including grocery, meat, produce, dairy, deli, seafood, prepared foods, bakery and frozen foods as well as non-food product offerings, including health and beauty care, general merchandise, liquor and 21 in-store pharmacies. Most product departments include high-quality, competitively priced own-brand offerings under the Wholesome Pantry, Bowl & Basket, Paperbird and Fairway brands. Our Fairway Markets offer a one-stop destination shopping experience with an emphasis on fresh, unique, and high quality offerings paired with an expansive variety of natural, organic, specialty and gourmet products. Our Gourmet Garage specialty markets offer organic produce, signature soups and prepared foods, high-quality meat and seafood, charcuterie and gourmet cheeses, artisan baked bread and pastries, chef-prepared meals to go and pantry staples.
The Company has an ongoing program to upgrade and expand its supermarket chain. This program has included store remodels as well as the opening or acquisition of additional stores. When remodeling, Village has sought, whenever possible, to increase the amount of selling space in its stores. On August 14, 2022, we converted the Pelham, NY store from the Fairway banner to the ShopRite banner and a major remodel of the store was completed in late October 2022. On April 29, 2022, Village opened a 14,600 sq. ft. Gourmet Garage in the West Village in Manhattan, NYC.
We consider a variety of indicators to evaluate our performance, such as same store sales; percentage of total sales by department (mix); shrink; departmental gross profit percentage; sales per labor hour; units per labor hour; and hourly labor rates.
RESULTS OF OPERATIONS
The following table sets forth the major components of the Consolidated Statements of Operations as a percentage of sales:
| | | | | | | | | | | | | | | |
| 13 Weeks Ended | | |
| October 29, 2022 | | October 30, 2021 | | | | |
Sales | 100.00 | % | | 100.00 | % | | | | |
Cost of sales | 71.27 | | | 71.64 | | | | | |
Gross profit | 28.73 | | | 28.36 | | | | | |
Operating and administrative expense | 24.16 | | | 24.54 | | | | | |
Depreciation and amortization | 1.65 | | | 1.68 | | | | | |
Operating income | 2.92 | | | 2.14 | | | | | |
| | | | | | | |
Interest expense | (0.21) | | | (0.20) | | | | | |
Interest income | 0.38 | | | 0.20 | | | | | |
Income before income taxes | 3.09 | | | 2.14 | | | | | |
Income taxes | 0.96 | | | 0.66 | | | | | |
Net income | 2.13 | % | | 1.48 | % | | | | |
Sales. Sales were $519,689 in the 13 weeks ended October 29, 2022, an increase of 5.2% compared to the 13 weeks ended October 30, 2021. Sales increased due to an increase in same store sales of 4.3%, the opening of a Gourmet Garage in the West Village in Manhattan, NY on April 29, 2022 and increased sales due to the remodel and conversion of the Pelham, NY Fairway to the ShopRite banner on August 15, 2022. Same store sales increased due primarily to retail price inflation. New stores, replacement stores and stores with banner changes are included in same store sales in the quarter after the store has been in operation for four full quarters. Store renovations and expansions are included in same store sales immediately.
Gross Profit. Gross profit as a percentage of sales increased .37% in the 13 weeks ended October 29, 2022 compared to the 13 weeks ended October 30, 2021 due primarily to increased departmental gross margin percentages (.17%), decreased warehouse assessment charges from Wakefern (.21%) due primarily to sales leverage, a favorable change in product mix (.07%) and lower promotional spending (.06%), partially offset by higher LIFO charges (.05%) and decreased patronage dividends and rebates received from Wakefern (.10%).
Operating and Administrative Expense. Operating and administrative expense as a percentage of sales decreased .38% in the 13 weeks ended October 29, 2022 compared to the 13 weeks ended October 30, 2021 due primarily to lower labor costs and fringe benefits (.21%) and decreased supply spending (.15%). Labor costs and fringe benefits decreased due primarily to ongoing productivity initiatives and sales leverage partially offset by minimum wage and market-driven pay rate increases.
Depreciation and Amortization. Depreciation and amortization expense increased in the 13 weeks ended October 29, 2022 compared to the 13 weeks ended October 30, 2021 due primarily to capital expenditures.
Interest Expense. Interest expense increased in the 13 weeks ended October 29, 2022 compared to the 13 weeks ended October 30, 2021 due primarily to interest related to the $10,000 unsecured term loan executed on September 1, 2022.
Interest Income. Interest income increased in the 13 weeks ended October 29, 2022 compared to the 13 weeks ended October 30, 2021 due primarily to higher interest rates and larger amounts invested in variable rate notes receivable from Wakefern and demand deposits at Wakefern.
Income Taxes. The effective income tax rate was 31.0% in the 13 weeks ended October 29, 2022 compared to 30.7% in the 13 weeks ended October 30, 2021. The increase in the effective income tax rate is due primarily to greater apportionment in higher state tax rate jurisdictions.
Net Income. Net Income was $11,081 in the 13 weeks ended October 29, 2022 compared to net income of $7,328 in the 13 weeks ended October 30, 2021. Net income increased 51% due primarily to the 4.3% increase in same store sales, higher gross profit margins and lower operating and administrative expenses.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The Company’s critical accounting policies relating to the impairment of long-lived assets, goodwill and indefinite-lived intangible assets, accounting for patronage dividends earned as a stockholder of Wakefern and accounting for pension plans, are described in the Company’s Annual Report on Form 10-K for the year ended July 30, 2022. As of October 29, 2022, there have been no changes to the critical accounting policies contained therein.
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $22,019 in the 13 weeks ended October 29, 2022 compared to $7,887 in the corresponding period of the prior year. The change in cash flows from operating activities in fiscal 2023 was primarily due to changes in working capital and higher net income adjusted for non-cash items. Working capital changes, including Other assets and liabilities, increased cash flows from operating activities by $756 in fiscal 2023 compared to a decrease of $8,281 in fiscal 2022. The change in impact of working capital is due primarily to the timing of tax payments, accounts payable and accrued expenses.
During the 13 weeks ended October 29, 2022, Village used cash to fund capital expenditures of $9,813, dividends of $3,252, principal payments of long-term debt of $2,352, an investment in a real estate partnership for the development of a retail center in Old Bridge, New Jersey of $1,276 and additional net investments of $30,917 in notes receivable from Wakefern. Capital expenditures primarily include costs associated with the remodel and conversion of the Pelham, NY Fairway to the ShopRite banner, the new Gourmet Garage store in the West Village of New York City, continued expansion of self-checkout, and various merchandising, technology, equipment and facility upgrades.
We expect capital expenditures to approximate $70,000 in fiscal 2023. Planned expenditures include costs for construction of three replacement stores scheduled to open in fiscal 2024, two major remodels, including the conversion of the Pelham, NY store from the Fairway to the ShopRite banner, the purchase of the Vineland store shopping center, several smaller store remodels and merchandising initiatives, installation of electronic shelf labels in six stores, continued expansion of self-checkout, and various technology, equipment and facility upgrades. The Company’s primary sources of liquidity in fiscal 2023 are expected to be cash and cash equivalents on hand at October 29, 2022 and operating cash flow generated in fiscal 2023.
On April 28, 2022 the Company entered into a partnership agreement for 30% interest in the development of a retail center in Old Bridge, New Jersey, which includes a Village replacement store with future lease obligations of $18,948. Village will fund its share of project costs estimated to be $15,000 to $20,000 over the two to three year life of the project. As of October 29, 2022, Village has invested $6,286 into the real estate partnership, which is accounted for as an equity method investment included in Investments in Real Estate Partnerships on the Consolidated Balance Sheet.
On August 15, 2022, notes receivable due from Wakefern of $28,850 that earned interest at the prime rate plus 1.25% matured. The Company invested all of the proceeds received in variable rate notes receivable from Wakefern that earn interest at the prime rate plus .50% and mature on August 15, 2027. On September 28, 2022, the Company invested an additional $30,000 in variable rate notes receivable from Wakefern that earn interest at the prime rate plus .50% and mature on September 28, 2027. At October 29, 2022, the Company held variable rate notes receivable due from Wakefern of $29,606 that earn interest at the prime rate plus .75% and mature on February 15, 2024, $29,078 that earn interest at the prime rate plus .50% and mature on August 15, 2027 and $30,017 that earn interest at the prime rate plus .50% and mature on September 28, 2027. Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.
Working capital was $31,059 at October 29, 2022 compared to $79,796 at July 30, 2022. Working capital ratios at the same dates were 1.18 and 1.50 to one, respectively. The decrease in working capital in fiscal 2023 compared to fiscal 2022 is due primarily to $28,850 in notes receivable from Wakefern that matured on August 15, 2022 and were reinvested in long-term
notes receivable from Wakefern and an additional $30,017 investment in long-term notes receivable from Wakefern. The Company’s working capital needs are reduced, since inventories are generally sold by the time payments to Wakefern and other suppliers are due.
Credit Facility
The Company has a $150,500 credit facility (the “Credit Facility”) with Wells Fargo National Bank, National Association (“Wells Fargo”). The principal purpose of the Credit Facility is to finance general corporate and working capital requirements, Village’s acquisition of certain Fairway assets, the purchase of the Galloway store shopping center and certain capital expenditure projects. Among other things, the Credit Facility provides for:
•An unsecured revolving line of credit providing a maximum amount available for borrowing of $75,000. Indebtedness under this agreement bears interest at the applicable Secured Overnight Financing Rate ("SOFR") plus 1.10% and expires on May 6, 2025.
•An unsecured $25,500 term loan issued on May 12, 2020, repayable in equal monthly installments based on a seven-year amortization schedule through May 4, 2027 and bearing interest at the applicable SOFR plus 1.46%. An interest rate swap with notional amounts equal to the term loan fixes the base SOFR at .26% per annum through May 4, 2027, resulting in a fixed effective interest rate of 1.72% on the term loan.
•A secured $50,000 term loan issued on September 1, 2020 repayable in equal monthly installments based on a fifteen-year amortization schedule through September 1, 2035 and bearing interest at the applicable SOFR plus 1.61%. An interest rate swap with notional amounts equal to the term loan fixes the base SOFR at .57% per annum through September 1, 2035, resulting in a fixed effective interest rate of 2.18% on the term loan. The term loan is secured by real properties of Village Super Market, Inc. and its subsidiaries, including the sites of three Village stores.
•A secured $7,350 term loan issued on January 28, 2022 repayable in equal monthly installments based on a fifteen-year amortization schedule through January 28, 2037 and bearing interest at the applicable SOFR plus 1.50%. An interest rate swap with notional amounts equal to the term loan fixes the base SOFR at 1.41% per annum through January 28, 2037, resulting in a fixed effective interest rate of 2.91% on the term loan. The term loan is secured by the Galloway store shopping center acquired in the first quarter of fiscal 2022.
On September 1, 2022, the Company amended the Credit Facility due to the execution of a seven year $10,000 unsecured term loan. The unsecured term loan is repayable in equal monthly installments based on a seven year amortization schedule through September 4, 2029 and bears interest at the applicable SOFR plus 1.35%. Village also executed an interest rate swap for a notional amount equal to the term loan amount that fixes the base SOFR at 2.95%, resulting in a fixed effective rate of 4.30%. This loan qualified for an interest rate subsidy program with Wakefern on financing related to certain capital expenditure projects. Net of the subsidy, the Company will pay interest at a fixed effective rate of 2.30%.
Based on current trends, the Company believes cash and cash equivalents on hand at October 29, 2022, operating cash flow and availability under our Credit Facility are sufficient to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months.
There have been no other substantial changes as of October 29, 2022 to the contractual obligations and commitments discussed in the Company’s Annual Report on Form 10-K for the year ended July 30, 2022.
OUTLOOK
This Form 10-Q contains certain forward-looking statements about Village’s future performance. These statements are based on management’s assumptions and beliefs in light of information currently available. Such statements relate to, for example: same store sales; economic conditions; expected pension plan contributions; projected capital expenditures; cash flow requirements; inflation expectations; and legal matters; and are indicated by words such as “will,” “expect,” “should,” “intend,” “anticipates,” “believes” and similar words or phrases. The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-looking statements. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof.
•We expect the increase in same store sales to range from 1.0% to 3.0% in fiscal 2023.
•We have budgeted $70,000 for capital expenditures in fiscal 2023. Planned expenditures include costs for construction of three replacement stores scheduled to open in fiscal 2024, two major remodels, including the conversion of the Pelham, NY store from the Fairway to the ShopRite banner, the purchase of the Vineland store shopping center, several smaller store remodels and merchandising initiatives, installation of electronic shelf labels in six stores, continued expansion of self-checkout, and various technology, equipment and facility upgrades.
•The Board’s current intention is to continue to pay quarterly dividends in 2023 at the most recent rate of $.25 per Class A and $.1625 per Class B share.
•We believe cash and cash equivalents on hand, operating cash flow and the Company's Credit Facility will be adequate to meet anticipated requirements for working capital, capital expenditures and debt payments for the foreseeable future.
•We expect our effective income tax rate in fiscal 2023 to be in the range of 31.0% - 32.0%.
Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include:
•The COVID-19 pandemic created significant volatility and uncertainty in our business since the first outbreak in our trade area in March 2020. Its continuing impact and the impact of new virus variants and the measures taken in response could adversely impact our business, financial condition and results of operations. We continue to monitor and adjust the safety measures we have implemented since the beginning of the pandemic. Our business may be affected by uncertain or changing economic and market conditions arising in connection with and in response to the COVID-19 pandemic, including labor shortages, inflation, disruptions to supply chains, higher operating and/or compliance costs, changes in customer trends and consumer demand, changes in federal, state and local laws, regulations and community response measures, the form and impact of economic stimulus, our customers access to and the continued availability of government benefit programs through the Supplemental Nutrition Assistance Program ("SNAP") and general overall economic instability. It is unclear whether and to what extent sales, consumer behavior, general economic and business activity will return to pre-pandemic levels and its impact on our business. Furthermore, the impact of the COVID-19 health crisis may exacerbate other risks and uncertainties included herein, which could have a material effect on the Company.
•The Fairway acquisition involves a number of risks, uncertainties and challenges, including under-performance relative to our expectations, additional capital requirements, unforeseen expenses or delays, imprecise assumptions or our inability to achieve projected cost savings or other synergies, competitive factors in the marketplace and difficulties integrating the business, including merging company cultures, cultivating brand strategy, expansion of food production and conforming the acquired company's technology, standards, processes, procedures and controls. Sales and operating profits have underperformed in Manhattan due primarily to less residential, commuter and tourist traffic during the COVID-19 pandemic. Many of these potential circumstances are outside of our control and any of them could result in an adverse impact on our results of operations, financial condition and cash flows and the diversion of management time and resources.
•The supermarket business is highly competitive and characterized by narrow profit margins. Results of operations may be materially adversely impacted by competitive pricing and promotional programs, industry consolidation and competitor store openings. Village competes directly with multiple retail formats both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do.
•The Company’s stores are concentrated in New Jersey, New York, Pennsylvania and Maryland. We are vulnerable to economic downturns in these states in addition to those that may affect the country as a whole. Economic conditions such as inflation, deflation, interest rate fluctuations, movements in energy costs, social programs, minimum wage legislation, unemployment rates, disturbances due to social unrest and changing demographics may adversely affect our sales and profits.
•Village purchases substantially all of its merchandise from Wakefern. In addition, Wakefern provides the Company with support services in numerous areas including advertising, workers' compensation, liability and property insurance, supplies, certain equipment purchasing, coupon processing, certain financial accounting applications, retail technology
support, and other store services. Further, Village receives patronage dividends and other product incentives from Wakefern and also has demand deposits and notes receivable due from Wakefern.
Any material change in Wakefern’s method of operation or a termination or material modification of Village’s relationship with Wakefern could have an adverse impact on the conduct of the Company’s business and could involve additional expense for Village. The failure of any Wakefern member to fulfill its obligations to Wakefern or a member’s insolvency or withdrawal from Wakefern could result in increased costs to the Company. Additionally, an adverse change in Wakefern’s results of operations could have an adverse effect on Village’s results of operations.
•Approximately 88% of our employees are covered by collective bargaining agreements. Any work stoppages could have an adverse impact on our financial results. If we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs.
•The Company could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations.
•Certain of the multi-employer plans to which we contribute are underfunded. As a result, we expect that contributions to these plans may increase. Additionally, the benefit levels and related items will be issues in the negotiation of our collective bargaining agreements. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. The failure of a withdrawing employer to fund these obligations can impact remaining employers. The amount of any increase or decrease in our required contributions to these multi-employer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, withdrawals by other participating employers and the actual return on assets held in the plans, among other factors.
•The Company uses a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile, general liability, property, director and officers’ liability, and certain employee health care benefits. Any projection of losses is subject to a high degree of variability. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, and insolvency of insurance carriers could all affect our financial condition, results of operations, or cash flows.
•Our long-lived assets, primarily store property, equipment and fixtures, are subject to periodic testing for impairment. Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.
•Our goodwill and indefinite-lived intangible assets are tested at the end of each fiscal year, or more frequently if circumstances dictate, for impairment. Failure of acquired businesses to achieve their forecasted expectations could result in impairment charges to goodwill and indefinite-lived intangible assets.
•Our effective tax rate may be impacted by the results of tax examinations and changes in tax laws.
•Wakefern provides all members of the cooperative with information system support that enables us to effectively manage our business data, customer transactions, ordering, communications and other business processes. These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human error. Any material interruption of our or Wakefern’s information systems could have a material adverse impact on our results of operations.
Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems. In addition, confidential information is transmitted through our online business at shoprite.com and through the ShopRite app. Unauthorized parties may attempt to access information stored in or to sabotage or disrupt these systems. Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions. It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at the Company, Wakefern or those of third-party service providers.
Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, cause us to make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties. Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered or are in excess of carried insurance policies. In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation.
RELATED PARTY TRANSACTIONS
See note 5 to the unaudited consolidated financial statements for information on related party transactions.