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VLGEA > SEC Filings for VLGEA > Form 10-Q on 5-Jun-2013All Recent SEC Filings

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Form 10-Q for VILLAGE SUPER MARKET INC


5-Jun-2013

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)

OVERVIEW

The Company operates a chain of 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. Village is the second largest member of Wakefern Food Corporation ("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite name. As further described in the Company's Form 10-K, this ownership interest in Wakefern provides the Company many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with larger chains. On January 29, 2012, Village acquired the store fixtures, lease and other assets of the ShopRite in Old Bridge, New Jersey (40,000 sq. ft) for $3,250 plus inventory and other working capital for $1,116. On July 7, 2011, Village acquired the store fixtures, leases and pharmacy lists of locations in Silver Spring, Maryland (64,000 sq.ft.) and Timonium, Maryland (57,000 sq.ft.) for $6,595 from Super Fresh.

The Company's stores, five of which are owned, average 57,000 total square feet. Larger store sizes enable the Company to offer the specialty departments that customers desire for one-stop shopping, including pharmacies, natural and organic departments, ethnic and international foods, and home meal replacement.

Hurricane Sandy devastated our area on October 29, 2012, two days after the end of our first fiscal quarter. The storm increased sales in the last week of our first quarter of fiscal 2013 as customers prepared for the storm. Sales in the first week of the second quarter of fiscal 2013 were negatively impacted by the closure of almost all of our stores for periods of time ranging from a few hours to eight days. However, this impact was partially offset by improved sales in stores that reopened quickly and by higher sales in most stores in subsequent weeks as customers restocked after their power was restored. In addition, Village disposed of substantial amounts of perishable product due to the loss of power, and also incurred repair, labor and other costs in connection with the storm. The Company has property, casualty and business interruption insurance, subject to deductibles and coverage limits. During the second quarter of fiscal 2013, Village began the process of working with our insurers to recover the damages, a process that will likely take several months. The Company does not expect the overall impact of the storm, including uninsured losses, to be material to fiscal 2013 results of operations.


The supermarket industry is highly competitive. The Company competes directly with multiple retail formats, 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. Village competes by using low pricing, superior customer service, and a broad range of consistently available quality products, including ShopRite private labeled products. In recent years, Village has enhanced customer service by adding ShopRite from Home, dieticians and customer service advocates to our stores. The ShopRite Price Plus card also strengthens customer loyalty.

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; and hourly labor rates.

During the last few years, the supermarket industry has been impacted by changing consumer behavior due to the weak economy and high unemployment. Consumers continue to spend cautiously by trading down to lower priced items, including private label, and concentrating their buying on sale items. Also, the Company estimates that product prices overall experienced substantial inflation in the first half of fiscal 2012, with only modest inflation in the second half of fiscal 2012 and the first nine months of fiscal 2013.

RESULTS OF OPERATIONS

The following table sets forth the major components of the Consolidated
Condensed Statements of Operations as a percentage of sales:

                                      13 Weeks Ended                          39 Weeks Ended
                            April 27, 2013      April 28, 2012      April 27, 2013      April 28, 2012
Sales                                100.00 %            100.00 %            100.00 %            100.00 %
Cost of sales                         72.95               72.55               73.11               72.67
Gross profit                          27.05               27.45               26.89               27.33
Operating and
administrative expense                23.37               22.67               22.52               22.13
Depreciation and
amortization                           1.41                1.44                1.36                1.39
Operating income                       2.27                3.34                3.01                3.81
Income from partnerships                  -                   -                0.13                   -
Interest expense                      (0.27 )             (0.31 )             (0.27 )             (0.32 )
Interest income                        0.20                0.19                0.19                0.18
Income before taxes                    2.20                3.22                3.06                3.67
Income taxes                           0.92                1.34                1.28                1.54
Net income                             1.28 %              1.88 %              1.78 %              2.13 %

Sales. Sales were $359,808 in the third quarter of fiscal 2013, an increase of 3.7% compared to the third quarter of the prior year. The sales increase is attributable to same store sales, as the Old Bridge, NJ store, acquired on January 29, 2012, is now included in same store sales. Same store sales increased due to higher sales in the two stores in Maryland, higher sales in one remodeled store and modest inflation. Sales continue to be impacted by economic weakness, high gas prices and high unemployment, which have resulted in increased sale item penetration and trading down. The Company expects same store sales in fiscal 2013 to increase from 2.75% to 3.50%. New stores and replacement stores are included in same store sales in the quarter after the stores have been operating for four full quarters. Store renovations are included in same store sales immediately.


Sales were $1,100,134 in the nine-month period of fiscal 2013, an increase of 4.5% from the prior year. Sales increased due to the acquisition of the Old Bridge store and a same store sales increase of 3.2%. Same store sales increased due to higher sales as customers prepared for hurricane Sandy, improved sales at the stores that reopened quickly after the storm, higher sales in the two stores in Maryland and modest inflation.

Gross Profit. Gross profit as a percentage of sales decreased 0.40% in the third quarter of fiscal 2013 compared to the third quarter of the prior year primarily due to decreased departmental gross margin percentages (.62%). Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors. These declines were partially offset by improved product mix (.11%), lower promotional spending (.07%) and lower LIFO charges (.06%).

Gross profit as a percentage of sales decreased .44% in the nine-month period of fiscal 2013 compared to the corresponding period of the prior year primarily due to decreased departmental gross margin percentages. Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors.

Operating and Administrative Expense. Operating and administrative expense as a percentage of sales increased .70% in the third quarter of fiscal 2013 compared to the third quarter of the prior year primarily due to higher payroll (.16%) and fringe benefit (.19%) costs. Payroll costs increased due to efforts to enhance the customer experience and provide additional services including our first Village Food Garden at the remodeled Livingston store and the addition of ShopRite from Home in several stores. Fringe benefits increased due to higher costs for health, pension and worker's compensation.

Operating and administrative expense as a percentage of sales increased .39% in the nine-month period of fiscal 2013 compared to the nine-month period of the prior year primarily due to higher payroll (.13%) and fringe benefit (.27%) costs, a charge from settlement of a dispute with a landlord (.06%), and the prior fiscal year including a favorable settlement of a pension withdrawal liability (.06%). These increases were partially offset by income from settlement of the national credit card lawsuit (.11%) in the current fiscal year.


Depreciation and Amortization. Depreciation and amortization expense increased in the third quarter and nine-month period of fiscal 2013 compared to the corresponding periods of the prior year due to depreciation related to fixed asset additions.

Income from Partnerships. Income from partnerships in the nine-month period of fiscal 2013 of $1,450 are distributions received from two partnerships that exceeded the invested amounts. The Company's partnership interests resulted from its leasing of supermarkets in two shopping centers. The Company remains a tenant in one of these shopping centers.

Interest Expense. Interest expense decreased in the third quarter and nine-month period of fiscal 2013 compared to the corresponding periods of the prior year due to interest costs capitalized in the current fiscal year, and the prior fiscal year including interest incurred on a pension withdrawal liability that was paid in fiscal 2012.

Interest Income. Interest income increased slightly in the third quarter and nine-month period of fiscal 2013 compared to the corresponding periods of the prior year due to higher amounts invested.

Income Taxes. The effective income tax rate was 41.6% and 41.9%, in the third quarter and nine-month period of fiscal 2013, respectively, compared to 41.5% and 42.0% in the third quarter and nine-month period of the prior year, respectively.

Net Income. Net income was $4,622 in the third quarter of fiscal 2013, a decrease of 29% from the third quarter of the prior year. Net income declined primarily due to lower gross profit percentages and higher operating costs as a percentage of sales, partially due to investments in lower prices and enhanced customer service.

Net income was $19,581 in the nine-month period of fiscal 2013. Fiscal 2013 includes income from partnership distributions of $840 (net of tax), income from the national credit card lawsuit of $693 (net of tax) and a charge for the settlement of a landlord dispute of $376 (net of tax), while fiscal 2012 includes a favorable settlement of a pension withdrawal liability of $374 (net of tax). Excluding these items from both fiscal years, net income in the nine-month period of fiscal 2013 declined 16% compared to the prior year primarily due to lower gross profit percentages and higher operating expenses as a percentage of sales, partially offset by reduced losses in the two Maryland stores compared to the nine-month period of the prior year, which was their initial nine months of operations. Maryland stores sales and operating performance remain lower than expected as we continue to build market share and brand awareness.


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 and goodwill, accounting for patronage dividends earned as a stockholder of Wakefern, accounting for pension plans, accounting for share-based compensation, and accounting for uncertain tax positions are described in the Company's Annual Report on Form 10-K for the year ended July 28, 2012. As of April 27, 2013, there have been no changes to any of 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 $35,031 in the nine-month period of fiscal 2013 compared to $25,277 in the corresponding period of the prior year. This increase is primarily attributable to the prior year including a settlement of a $7,028 pension liability and changes in the timing of payables. During the first nine-months of fiscal 2013, Village used cash to fund capital expenditures of $14,533 and dividends of $21,006. Capital expenditures include substantial remodels of three stores and site work for a replacement store. Dividends paid include $12,000 of special dividends.

Village has budgeted approximately $20 million for capital expenditures in fiscal 2013. Planned expenditures included the beginning of construction of a replacement store and three major remodels. The Company's primarily sources of liquidity in fiscal 2013 are expected to be cash and cash equivalents on hand at April 27, 2013 and operating cash flow generated in fiscal 2013.

Working capital was $72,284 at April 27, 2013 compared to $71,672 at July 28, 2012. The working capital ratio was 1.7 to 1 at both April 27, 2013 and July 28, 2012. The Company's working capital needs are reduced since inventories are generally sold by the time payments to Wakefern and other suppliers are due.

On November 29, 2012 the Board of Directors declared a special dividend of $1.00 per Class A common Share and $.65 per Class B common share. In addition, the Board declared regular quarterly dividends of $.25 per Class A common share and $.1625 per Class B common share. These dividends were paid on December 27, 2012 to shareholders of record at the close of business on December 12, 2012. The Board declared these $15 million of dividends in order to provide a return to our shareholders in 2012 while tax rates on dividends remained low. The Board declared and paid regular quarterly dividends of $.25 per Class A and $.1625 per Class B share during the third fiscal quarter.

There have been no substantial changes as of April 27, 2013 to the contractual obligations and commitments discussed in Company's Annual Report on Form 10-K for the year ended July 28, 2012, except for an additional $949 required investment in Wakefern common stock.


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: economic conditions; uninsured losses; 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 same store sales to increase from 2.75% to 3.50% in fiscal 2013, including the positive impact from the inclusion of the Maryland stores in same stores sales.

During the last few years, the supermarket industry has been impacted by changing consumer behavior due to the weak economy and high unemployment. Consumers continue to spend cautiously by trading down to lower priced items, including private label, and concentrating their buying on sale items. Management expects these trends to continue into fiscal 2014.

We expect modest retail price inflation in fiscal 2013 and 2014.

We have budgeted $20,000 for capital expenditures in fiscal 2013. This amount includes the beginning of construction of a replacement store and three major remodels.

The Board's current intention is to continue to pay quarterly dividends in 2013 at the most recent rate of $.25 per Class A and $.1625 per Class B share.

We believe cash flow from operations and other sources of liquidity 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 2013 to be 41.5% - 42.5%.

We expect operating expenses will be affected by increased costs in certain areas, such as medical and pension costs.


Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include:

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 with national and regional supermarkets, local supermarkets, warehouse club stores, supercenters, drug stores, convenience stores, dollar stores, discount merchandisers, restaurants and other local retailers. 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, with one store in northeastern Pennsylvania and two in Maryland. We are vulnerable to economic downturns in New Jersey in addition to those that may affect the country as a whole. Economic conditions such as inflation, deflation, interest rates, energy costs and unemployment rates may adversely affect our sales and profits.

Village acquired two stores in July 2011 in Maryland, a new market for Village where the ShopRite name is less known than in New Jersey. As the Company begins operating in this new market, marketing and other costs are higher than in established markets as Village attempts to build market share and brand awareness. In addition, sales for these two stores are initially expected to be lower than the typical Company store. Potentially higher costs and sales results lower than the Company's expectations could have a material adverse effect on Village's results of operations.


Village purchases substantially all of its merchandise from Wakefern. In addition, Wakefern provides the Company with support services in numerous areas including supplies, advertising, liability and property insurance, technology support and other store services. Further, Village receives patronage dividends and other product incentives 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 93% 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.

We provide health benefits to a large number of our employees, primarily through multi-employer health plans. Effective January 1, 2014, the Patient Protection and Affordable Care Act will impose new mandates on employers that could significantly increase the number of employees receiving benefits and our required contributions to these multi-employer health plans. We are not able at this time to determine the impact of the law, as it will depend on many factors, including finalization of rules implementing the law, the number of additional employees that we will be required to provide health benefits, and negotiation of collective bargaining agreements, which could be material to our results of operations.

Village 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.


On April 15, 2011, Village, along with all of the other individual employers trading as ShopRite, permanently withdrew from participating in the United Food and Commercial Workers Local 152 Retail Meat Pension Fund ("the Fund"), effective the end of April 2011. The Fund is a multi-employer defined benefit plan that includes other supermarket operators. Village, along with the other affiliated ShopRite operators, determined to withdraw from the Fund due to exposures to market risks associated with all defined benefit plans and the inability to partition ShopRite's liabilities from those of the other participating supermarket operators. Village now provides affected associates with a defined contribution plan for future service, which eliminates market risks and the exposure to shared liabilities of other operators, and is estimated to be less costly than the defined benefit plan in the future, while ensuring that our associates are provided a secure benefit. The Company recorded a pre-tax charge of $7,028 in fiscal 2011 for this withdrawal liability, which represented our estimate of the liability based on calculations provided by the Fund actuary. The Company settled this obligation in January 2012, resulting in a pre-tax benefit of $646 in fiscal 2012. Village remains liable for potential additional withdrawal liabilities to the Fund in the event a mass withdrawal, as defined by statute, occurs within two plan years after the plan year of Village's withdrawal. Such liabilities could be material to the Company's consolidated financial statements.

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 and the actual return on assets held in the plans, among other factors.

Our effective tax rate may be impacted by the results of tax examinations and changes in tax laws, including the disputes with the state of New Jersey described in note 5 of the Company's Annual Report on Form 10-K for the year ended July 28, 2012.

RELATED PARTY TRANSACTIONS

A description of the Company's transactions with Wakefern, its principal supplier, and with other related parties is included in the Company's Annual Report on Form 10-K for the year ended July 28, 2012. There have been no significant changes in the Company's relationship or nature of the transactions with related parties during the nine months of fiscal 2013, except for additional required investments in Wakefern stock of $949.

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