IMKTA - NASDAQ

Ronald Freeman - CFO Robert Ingle II - CEO Jim Lanning - President Tom Outlaw - VP, Sales & Marketing

Bryan Hunt - Wells Fargo Securities Damian Witkowski - Gabelli & Co.

Good day, and welcome to the Ingles Markets Fourth Quarter 2015 Earnings Release Conference Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Chief Financial Officer, Mr. Ron Freeman. Please go ahead, sir.

Thank you very much. Good morning, everyone. And welcome to the Ingles Markets 2015 fourth quarter yearend earnings conference announcement and call. With me today are Robert Ingle II, Chairman and Chief Executive Officer; Tom Outlaw, Vice President of Sales; and Jim Lanning, President. 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, likely, goal, seek, 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 this call. Ingles Markets does not undertake and declines any obligation 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 26, 2015, that will be filed after market close this afternoon. In accordance with a longstanding company policy and in recognition of the extremely competitive nature of our industry, this call will not address individual competitors or Ingles' marketing strategies other than what's included in the company's public filings. This morning, I'll provide you with a summary of our fourth quarter and annual results followed by additional comments on each period. After that, we will be pleased to take your questions. Our press release issued this morning is available on our website at www.ingles-markets.com. Our Form 10-K will be on the website as well after it's filed this afternoon. We're very pleased to report that annual and fourth quarter fiscal 2015 sales of $3.78 billion and $952.8 million respectively. Core grocery sales, which we define as grocery segment sales without gasoline were a record $3.14 billion for fiscal 2015. Fiscal 2015 net income of $59.4 million was the highest in the company's 51-year history. This amount was 15.4% higher than fiscal 2014 net income of $51.4 million. Net income for the fourth quarter of fiscal 2015 totaled $16.2 million, compared with net income of $17.6 million for the fourth quarter of fiscal 2014. The growth in core grocery sales for the fourth quarter and fiscal 2015 were offset by lower gasoline prices compared with the prior year. Ingles sold a record number of gallons of gasoline in fiscal 2015, but the average sales price per gallon was $0.94 lower in fiscal 2015 compared with fiscal 2014. As a result, total sales were lower in the comparable 2015 periods compared with 2014. As we'll discuss in more detail, core grocery sales increased for the quarter and annual periods of 2015 compared with those of 2014. First I'll discuss our fourth quarter results. Net sales totaled $952.8 million for the quarter ended September 26, 2015, compared with $964.8 million of sales for the comparable quarter in fiscal 2014. Comparable store sales, excluding gasoline, increased 3.1%. Gross profit for the fourth quarter of fiscal 2015 increased to $228.1 million, compared with $220.4 million for the fourth quarter of fiscal 2014. Gross profit as a percentage of sales was 23.9% for the fourth quarter of fiscal 2015 compared with 22.8% for the fourth quarter of fiscal 2014. Core grocery gross margin was essentially level over the comparative fourth quarters. Total operating expenses were $193.1 million for the fourth quarter of fiscal 2015, compared with $184.1 million for the 2014 quarter. Operating expenses as a percentage of sales were 20.3% and 19.1% for the fourth quarters of fiscal 2015 and 2014 respectively. Ingles operated 201 stores and approximately 11.1 million square feet of store space at the end of fiscal 2015, and 202 stores and approximately 11.1 million square feet of store space at the end of fiscal 2014. During fiscal 2015, the Company opened one new store and closed two stores that are being rebuilt and will reopen in the future. The Company's other store improvement capital projects this year focused on improved merchandising, convenience, and the range of products offered to our customers. Interest expense totaled $12.8 million for the fourth quarter of fiscal 2015, compared with $11.5 million for the fourth fiscal quarter of 2014. Total debt was $895.3 million at the end of fiscal 2015 compared with $937.3 million at the end of fiscal 2014. The Company's effective tax rate was 34.3% for the fourth quarter of fiscal 2015, compared with 30.2% for the fourth quarter of fiscal 2014. The unusually low effective tax rate for the fourth quarter of 2014 reflects certain discrete items in that year, which are not expected to recur in the future. Net income for the September 2015 quarter was $16.2 million, compared with net income of $17.6 million for the September 2014 quarter. Basic and diluted earnings per share for the Company's publicly traded Class A common stock increased to $0.83 and $0.80 per share, respectively, for the September 2015 quarter compared with $0.82 and $0.79 per share respectively for the September 2014 quarter. The increase in earnings per share benefited from a decrease in average shares outstanding due to the Company's now-concluded stock repurchase program. Now I'll go over our annual results. Net sales totaled $3.78 billion for the fiscal year ended September 2015 compared with $3.84 billion for the fiscal year ended September 2014. As mentioned at the beginning of the call, significantly lower gasoline prices accounted for the total sales dollar decrease. Core grocery sales, however, were the highest in the company's 51-year history. Comparing fiscal 2015 with the previous year, grocery segment comparable store sales excluding gasoline increased by 2.1%. Gross profit for the fiscal year ended September 26, 2015, increased $48.1 million, or 5.7%, to $893.3 million, compared with $845.2 million for the fiscal year ended September 27, 2014. As a percentage of sales, gross profit totaled 23.6% for fiscal 2015 and 22% for fiscal 2014. Core grocery gross profit as a percentage of total sales increased 64 basis points in fiscal 2015 compared with fiscal 2014. Operating expenses increased by $33.7 million in fiscal 2015, compared with fiscal 2014. Operating expenses as a percent of total sales were 20% for fiscal 2015 and 18.8% for 2014. Excluding gasoline sales and associated gasoline operating expenses, which are primarily payroll, operating expenses were 22.9% of sales for fiscal 2015, compared with 22.3% for fiscal 2014. Personnel and insurance costs were the largest line item increases. Gains on asset disposals totaled $2.2 million for fiscal 2015, compared with $0.8 million for fiscal 2014. During fiscal 2015, the Company sold outparcels and wrote off buildings demolished in advance of rebuilding new stores in future periods. Interest expense increased $0.4 million for the year ended September 26, 2015, to $47.0 million, compared with $46.6 million for the year ended September 27, 2014. Interest rates were stable across both fiscal periods. Over the course of fiscal 2015, net debt repayments totaled $41.9 million. Income tax expense as a percentage of pre-tax income was 37.2% for fiscal 2015 compared with 35.5% for fiscal 2014. The increase in the effective tax rate is primarily attributable to certain discrete items in fiscal 2014, which are not expected to recur in future periods. Net income for fiscal 2015 totaled a record $59.4 million, 15.4% higher than net income of $51.4 million for fiscal 2014. Basic and diluted earnings per share for the Company's publicly traded Class A common stock were $3.02 and $2.93 per share, respectively, for the year ended September 26, 2015, compared with $2.36 and $2.28 per share, respectively, for the year ended September 27, 2014. Next, updating our investing and financing activities, capital expenditures totaled $104.1 million and $108.3 million for fiscal years 2015 and '14, respectively. Major capital expenditures for 2015 included a new store, store remodels and the opening of five fuel stations. Our capital expenditure plans for fiscal 2016 included investments of approximately $100 million to $140 million. We have a $175 million line of credit facility that is in place through mid 2018. After deducting outstanding borrowings and unfunded letters of credit, $164.1 million of that line is available at September 26, 2015. The Company is in compliance with all of its debt agreements and has significant unencumbered real property and equipment as a secondary source of liquidity. At the close of another record year, we look forward to serving our customers with more stores and more products delivered with value and exceptional service. We'll now take your questions.

[Operator Instructions] And first question comes from Bryan Hunt with Wells Fargo.

Thank you. And good morning, Ron.

Good morning, Bryan. How are you?

I am doing well. My first question is if you look at same-store sales, could you divide that up between customer count and basket for us?

We've got that information in the 10-K. I don't have it in front of me right now, but you'll be able to get that later on this afternoon.

Okay. And next, if I were to look at same-store sales across categories, did you see any major differences across categories?

There was a little bit of a mix change this year. We continue to have a little bit higher growth in our perishable categories compared to non-perishable, but that was the most significant change.

Great. Also, could you give us an idea what your private label penetration is at this point and maybe how many product introductions you had for the year?

We typically do not disclose that information. So I won't be able to answer that for you I’m sorry.

No problem. And then couple other questions. You are I know, I’ve asked this question over the years, but about the DC expansion and how it’s performing and the savings associated with it, but can you talk to us about maybe where capacity utilization is in the DC and how many stores do you think the current assets can handle?

Well, capacity is going to vary over the time of the year, but in course this being our busiest time, we’ve got plenty of capacity, we’re fine. We’ve got enough capacity in the DC to do whatever we anticipate as far as store and square footage growth for quite some time.

Okay. Next when I look at the two stores that are under construction that were destroyed, can you talk about maybe what the square footage was in the stores that were raised and then what the new square footage is going to be at these stores when they open up?

I do not have the exact square footage of the two stores that were taking down, but the one that we’ll replace will be our typical size that we’re building these days around 70,000 square feet. So there will be a little bit of square footage pick up once we finish those projects.

Very good and then lastly, has there been any unusual change in promotional activity from any of your competitors or how would you gauge it or define it at this moment?

I would define it as it’s intensive as it always is. I've no let up in that whatsoever.

Okay. Very good. I appreciate your time and best of luck next quarter.

Thanks Brian.

[Operator Instructions] And we move next to Damian Witkowski with Gabelli & Company.

Hi Ron.

Good morning, Damian.

Congratulations on another record year.

Thank you.

I want to start off with operating and administrative expenses. They were up $9 million in the quarter, up $30 million for the full year, which is -- this is excluding D&A, which is kind of the biggest ramp I’ve seen for I think actually ever in my model. And so I know that you said that personnel costs and insurance costs were the biggest reasons why it went up, but can you just -- you have about the same number of stores. So should we except that kind of an increase going forward or what is the -- what is really driving those and what should we expect going forward?

The two main things that are driving it is we continue to develop more resources at some of our perishable areas and prepared foods. Those have a higher labor component to them, but they also have a higher gross profit. So I think you need to look at those two things together and also with some of the provisions under the Affordable Care Act, we had a lot of people join our insurance plan this year and used those plans a bit more than we may have anticipated. So we hope that, that will level itself out, but you tell me.

And then on the gain, on the sale of assets, the $1.9 million and $2.2 million for the full year, how much of that actually falls to the net income line? How was the tax rate on those gains?

There is no different tax rate on those really than anything else. It's so small couple of million dollars out of $90 million pretax income that it didn't really move the needle.

Okay. And when you talk about selling out parcels and demolishing buildings, is that just your normal course of business?

Well, pretty much. We've always had, not always, but in a lot of cases we do have a little bit of extra land, and if there is a good price and it’s a business that is complementary to our stores, then we’re going to look pretty strongly at it. The demolition of existing buildings to rebuild, that’s a little bit of a new thing for us but again it's our plan.

Okay. Can you just -- it sounds like there are two buildings that were destroyed. So how many -- you still have 202 stores operating currently right.

201.

201 okay, so there is a one okay. And that’s probably going to be the number for the entire fiscal year.

I don’t know. Again we expect to get both of the two rebuilt and open this year, and we’re still -- we're always looking at the order of some of the other things that we’re looking at. So I really would hesitate to give you a number where we think we'll be in store count at the end of 2016.

Okay. Have you thought about just stepping back and giving more guidance on certain five-year plans? It's hard to figure, you're at 201 currently. You're at 202 last year. How do we think about where you're going to be in the five years?

Well, we've never provided that type of guidance. So, really I think it would be instructed to you to kind of look back and look at what our store count has been over the last five-ten years.

Okay.

It's been pretty stable.

Yes, the other thing is if you look at, I know you don't like talking about competition by name, but so let's not do that, but if I look at what's going on your near area you had Harris Teeter being purchased by Kroger. I would have assumed that changes the dynamics there a bit. There isn’t that much overlap, but there is certainly some. You have Publix coming up north pushing into your territories. I don't know how much of a headwind that has been thus far. And then you have even Wall Mart with the smaller neighborhood store markets kind of I think building those out as well and obviously your same-store sales in the fourth quarter were the highest they were for the full -- for the full year. So it doesn’t seem like it's really affecting you that much, but without maybe naming names, I know you said that competition is as severe as it's always been, but how do you think about next two-three years in terms of new competition coming into your markets?

Yeah well, as you mentioned when you first started saying that we're not going to discuss what individual competitors are doing. We focus on what we do and focus on what we have done in the past. We think we’ve been pretty successful with it and that’s going to be continue to be our focus.

Okay. And then just on fuel, obviously it continues to decline I don't know year-over-year in terms of consumers having more money in their pockets. Are you seeing pick up in your store in any particular items that are categories that may be driven by the fact that people do have more money in their pocket?

Well, that's been going on for about a year now. We've really just about lapped the first time that fuel prices dropped. So our fourth quarter comp sales growth was a little bit higher than it was for the full year. So that's perhaps one indication that as prices have started to drift down again a little bit that we're seeing some more of that money inside the store. It's a good thing for us.

Good. Thanks Ron.

Sure, you're welcome.

[Operator Instructions] And there are no further questions in queue. I would like to turn the conference back over to management for closing remarks.

Great. Well thank you very much and we appreciate everyone who has joined us on the call today. We do appreciate your time and your interest in our company. And we want to wish all of you and our customers and our associates a very happy and safe holiday season. Thank you very much.