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VLGEA > SEC Filings for VLGEA > Form 10-K on 8-Oct-2013All Recent SEC Filings

Show all filings for VILLAGE SUPER MARKET INC | Request a Trial to NEW EDGAR Online Pro

Form 10-K for VILLAGE SUPER MARKET INC


8-Oct-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands except per share and per square foot data)

OVERVIEW

Village Super Market, Inc. (the "Company" or "Village") operates a chain of 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. 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. These stores opened as ShopRites on July 28, 2011 after remodeling.

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. This ownership interest in Wakefern provides Village many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with larger chains.

The Company's stores, five of which are owned, average 57,000 total square feet. Larger store sizes enable Village 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. During fiscal 2013, sales per store were $50,912 and sales per square foot of selling space were $1,140. Management believes these figures are among the highest in the supermarket industry.

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. 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 was 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 during fiscal 2013.

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 and has recorded estimated insurance recoveries. Final resolution of our insurance claim related to the storm is expected in fiscal 2014, which could have a material impact on our results of operations.

The Company utilizes a 52 - 53 week fiscal year, ending on the last Saturday in the month of July. Fiscal 2013, 2012 and 2011 contain 52 weeks.

RESULTS OF OPERATIONS

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

                                              July 27,      July 28,      July 30,
                                                2013          2012          2011
       Sales                                     100.00 %      100.00 %      100.00 %
       Cost of sales                              73.06         72.66         73.04
       Gross profit                               26.94         27.34         26.96
       Operating and administrative expense       22.57         22.04         22.57
       Depreciation and amortization               1.38          1.39          1.43
       Operating income                            2.99          3.91          2.96
       Income from partnerships                    0.10             -             -
       Interest expense                           (0.26 )       (0.31 )       (0.33 )
       Interest income                             0.19          0.18          0.17
       Income before income taxes                  3.02          3.78          2.80
       Income taxes                                1.27          1.57          1.18
       Net income                                  1.75 %        2.21 %        1.62 %

SALES

Sales were $1,476,457 in fiscal 2013, an increase of $54,214, or 3.8% from the prior year. Sales increased due to the acquisition of a store in Old Bridge, NJ on January 29, 2012 and a same store sales increase of 2.9%. Same store sales increased due to higher sales as customers prepared for hurricane Sandy, improved sales at the stores that reopened quickly after that storm and higher sales in the two stores in Maryland. Sales continued to be impacted by economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down. New stores and replacement stores are included in same store sales in the quarter after the store has been in operation for four full quarters. Store renovations are included in same store sales immediately.

Sales were $1,422,243 in fiscal 2012, an increase of $123,315, or 9.5% from the prior year. Sales increased due to the opening of two new stores in Maryland on July 28, 2011, the acquisition of a store in Old Bridge, NJ on January 29, 2012 and a same store sales increase of 4.9%. Same stores sales increased due to higher sales in seven stores due to store closings by competitors, inflation, increased customer counts, and improved sales in the Washington and Marmora stores, which opened in recent fiscal years. Although Village experienced inflation in fiscal 2012, there was minimal change in the average transaction size during the year. As expected, the impact of the competitive store closures that began in the second half of fiscal 2011 and inflation both moderated beginning in the third quarter of fiscal 2012, resulting in a fourth quarter same store sales increase of 1.8%. Sales continue to be impacted by economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down.


GROSS PROFIT

Gross profit as a percentage of sales decreased .40% in fiscal 2013 compared to the prior year primarily due to decreased departmental gross margin percentages (.47%), partially offset by improved product mix (.06%). Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors.

Gross profit as a percentage of sales increased .38% in fiscal 2012 compared to the prior year primarily due to increased departmental gross margin percentages (.15%), decreased warehouse assessment charges from Wakefern (.16%) and higher patronage dividends (.11%). These improvements were partially offset by higher promotional spending (.06%).

OPERATING AND ADMINISTRATIVE EXPENSE

Operating and administrative expense as a percentage of sales increased .53% in fiscal 2013 compared to the prior year primarily due to higher payroll (.15%) and fringe benefit (.27%) costs, a charge from settlement of a dispute with a landlord (.04%), and the prior fiscal year included a favorable settlement of a pension withdrawal liability (.04%). These increases were partially offset by income from settlement of the national credit card lawsuit (.08%) in the current fiscal year. 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 benefit costs increased due to higher costs for health, pension and workers compensation.

Operating and administrative expense as percentage of sales decreased .53% in fiscal 2012 compared to the prior year due to the prior year including a $7,028 charge for the withdrawal liability from a multi-employer defined benefit plan (.54%). In addition, fiscal 2012 benefitted from operating leverage from the 4.9% same store sales increase, partially offset by higher operating costs as a percentage of sales for the two new Maryland stores, including store opening costs.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $20,354, $19,759 and $18,621 in fiscal 2013, 2012 and 2011, respectively. Depreciation and amortization expense increased in fiscal 2013 and 2012 compared to the prior years due to depreciation related to fixed asset additions.

INCOME FROM PARTNERSHIPS

Income from partnerships in 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 was $3,771, $4,415 and $4,280, in fiscal 2013, 2012 and 2011, respectively. Interest expense decreased in fiscal 2013 compared to 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 was $2,783, $2,571 and $2,207 in fiscal 2013, 2012 and 2011, respectively. Interest income increased in fiscal 2013 and 2012 compared to the prior years due to higher amounts invested.

INCOME TAXES

The Company's effective income tax rate was 42.2%, 41.5% and 42.1% in fiscal 2013, 2012 and 2011, respectively.


NET INCOME

Net income was $25,784 in fiscal 2013 compared to $31,445 in fiscal 2012. 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 fiscal 2013 declined 21% 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 prior year, which was their initial year of operations. Maryland stores sales and operating performance remain lower than expected as we continue to build market share and brand awareness.

Net income was $31,445 in fiscal 2012 compared to $20,982 in the prior year. Excluding a $4,241 (net of tax) charge for the withdrawal liability from a multi-employer pension plan in the prior year, net income increased 25%. Net income increased primarily due to improved same store sales and increased gross profit percentages. Net income increased despite losses in the two new Maryland stores as sales in Maryland are lower than expected and 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 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.

IMPAIRMENT

The Company reviews the carrying values of its long-lived assets, such as property, equipment and fixtures for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review analyzes the undiscounted estimated future cash flows from asset groups at the store level to determine if the carrying value of such assets are recoverable from their respective cash flows. If impairment is indicated, it is measured by comparing the fair value of the long-lived asset groups held for use to their carrying value.

Goodwill is tested for impairment at the end of each fiscal year, or more frequently if circumstances dictate. The Company utilizes valuation techniques, such as earnings multiples, in addition to the Company's market capitalization to assess goodwill for impairment. Calculating the fair value of a reporting unit requires the use of estimates. Management believes the fair value of Village's one reporting unit exceeds its carrying value at July 27, 2013. Should the Company's carrying value of its one reporting unit exceed its fair value, the amount of any resulting goodwill impairment may be material to the Company's financial position and results of operations.

PATRONAGE DIVIDENDS

As a stockholder of Wakefern, Village earns a share of Wakefern's earnings, which are distributed as a "patronage dividend" (see Note 3). This dividend is based on a distribution of substantially all of Wakefern's operating profits for its fiscal year (which ends September 30) in proportion to the dollar volume of purchases by each member from Wakefern during that fiscal year. Patronage dividends are recorded as a reduction of cost of sales as merchandise is sold. Village accrues estimated patronage dividends due from Wakefern quarterly based on an estimate of the annual Wakefern patronage dividend and an estimate of Village's share of this annual dividend based on Village's estimated proportional share of the dollar volume of business transacted with Wakefern that year. The amount of patronage dividends receivable based on these estimates were $11,810 and $10,774 at July 27, 2013 and July 28, 2012, respectively.

PENSION PLANS

The determination of the Company's obligation and expense for Company-sponsored pension plans is dependent, in part, on Village's selection of assumptions used by actuaries in calculating those amounts. These assumptions are described in Note 8 and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rate of increase in compensation costs. Actual results that differ from the Company's assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. While management believes that its assumptions are appropriate, significant differences in actual experience or significant changes in the Company's assumptions may materially affect cash flows, pension obligations and future expense.


The objective of the discount rate assumption is to reflect the rate at which the Company's pension obligations could be effectively settled based on the expected timing and amounts of benefits payable to participants under the plans. Our methodology for selecting the discount rate as of July 27, 2013 was to match the plans cash flows to that of a yield curve on high-quality fixed-income investments. Based on this method, we utilized a weighted-average discount rate of 4.43% at July 27, 2013 compared to 3.59% at July 28, 2012. The .84% increase in the discount rate, and a change in the mortality table utilized, decreased the projected benefit obligation at July 27, 2013 by approximately $10,077. Village evaluated the expected long-term rate of return on plan assets of 7.5% and the expected increase in compensation costs of 4 to 4.5% and concluded no changes in these assumptions were necessary in estimating pension plan obligations and expense.

Sensitivity to changes in the major assumptions used in the calculation of the Company's pension plans is as follows:

                                                             Projected benfit
                                                                obligation               Expense
                                        Percentage               decrease                decrease
                                        point change            (increase)              (increase)

Discount rate + / - 1.0% $ 5,379 $ (6,481) $ 34 $ (36) Expected return on assets + / - 1.0% --- $ 365 $ (365)

Village contributed $3,254 and $3,227 in fiscal 2013 and 2012, respectively, to these Company-sponsored pension plans. Village expects to contribute $3,000 in fiscal 2014 to these plans. The 2013, 2012 and expected 2014 contributions are substantially all voluntary contributions.

The Company also contributes to several multi-employer pension plans based on obligations arising from collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. We recognize expense in connection with these plans as contributions are funded.

SHARE-BASED EMPLOYEE COMPENSATION

All share-based payments to employees are recognized in the financial statements as compensation expense based on the fair market value on the date of grant. Village determines the fair market value of stock option awards using the Black-Scholes option pricing model. This option pricing model incorporates certain assumptions, such as a risk-free interest rate, expected volatility, expected dividend yield and expected life of options, in order to arrive at a fair value estimate.

UNCERTAIN TAX POSITIONS

The Company is subject to periodic audits by various taxing authorities. These audits may challenge certain of the Company's tax positions such as the timing and amount of deductions and the allocation of income to various tax jurisdictions. Accounting for these uncertain tax positions requires significant management judgment. Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future years.

LIQUIDITY and CAPITAL RESOURCES

CASH FLOWS

Net cash provided by operating activities was $51,273 in fiscal 2013 compared to $43,432 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 fiscal 2013 Village used cash to fund capital expenditures of $21,888 and dividends of $24,048. Capital expenditures include substantial remodels of three stores and the site work and beginning of construction of a replacement store. Dividends paid include $12,009 of special dividends.

Net cash provided by operating activities was $43,432 in fiscal 2012 compared to $64,144 in the corresponding period of the prior year. This decrease is primarily attributable to settlement of a $7,028 pension withdrawal liability in fiscal 2012, a decrease in payables in the current fiscal year as compared to an increase in the prior fiscal year, and the prior year including a refund of cash the Company had placed in escrow to fund a property acquisition. These decreases were partially offset by higher net income in the current fiscal year.


During fiscal 2012, Village used cash to fund capital expenditures of $16,729, the acquisition of the Old Bridge ShopRite of $4,123 and dividends of $9,758. Capital expenditures include remodeling and equipment for the acquired Maryland stores, the installation of solar panels in one store and several small remodels.

LIQUIDITY and DEBT

Working capital was $94,299, $71,672, and $44,448 at July 27, 2013, July 28, 2012 and July 30, 2011, respectively. Working capital ratios at the same dates were 1.85, 1.72, and 1.41 to one, respectively. The Company's working capital needs are reduced since inventory is generally sold before payments to Wakefern and other suppliers are due.

Village has budgeted approximately $35,000 for capital expenditures in fiscal 2014. Planned expenditures include the construction of two replacement stores, one of which began in fiscal 2013. The Company's primary sources of liquidity in fiscal 2014 are expected to be cash and cash equivalents on hand at July 27, 2013 and operating cash flow generated in fiscal 2014.

At July 27, 2013, the Company had a $22,421 note receivable due from Wakefern earning a fixed rate of 7%. Previously, this 15-month note was automatically extended for additional, recurring 90-day periods, unless, not later than one year prior to the due date, the Company notified Wakefern requesting payment on the due date. Wakefern has the right to prepay this note at any time and notified the Company that they intend to prepay the note on February 15, 2014.

Village has an unsecured revolving credit agreement providing a maximum amount available for borrowing of $25,000. This loan agreement expires on December 31, 2014. The revolving credit line can be used for general corporate purposes. Indebtedness under this agreement bears interest at the prime rate, or at the Eurodollar rate, at the Company's option, plus applicable margins based on the Company's fixed charge coverage ratio. There were no amounts outstanding at July 27, 2013 or July 28, 2012 under this facility.

The revolving loan agreement contains covenants that, among other conditions, require a maximum liabilities to tangible net worth ratio, a minimum fixed charge coverage ratio and a positive net income. At July 27, 2013, the Company was in compliance with all terms and covenants of the revolving loan agreement. Under the above covenants, Village had approximately $138,104 of net worth available at July 27, 2013 for the payment of dividends.

During fiscal 2013, Village paid cash dividends of $24,048. Dividends in fiscal 2013 consist of $2.00 per Class A common share and $1.30 per Class B common share. These amounts include $12,009 of special dividends paid in December 2012, comprised of $1.00 per Class A common share and $0.65 per Class B common share.

During fiscal 2012, Village paid cash dividends of $9,758. Dividends in fiscal 2012 consist of $.85 per Class A common share and $.5525 per Class B common share.


CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The table below presents significant contractual obligations of the Company at
July 27, 2013:

                  Payments due by fiscal period
                    2014                 2015            2016          2017          2018         Thereafter        Total

Capital and
financing
leases (2)     $        4,285       $        4,476     $   4,491     $   4,491     $   4,576     $     79,631     $ 101,950
Operating
leases (2)             11,204               10,904         9,610         6,928         5,793           43,552        87,991
Notes
payable to
Related
Party                     600                  667           518           446            88                -         2,319
               $       16,089       $       16,047     $  14,619     $  11,865     $  10,457     $    123,183     $ 192,260

(1) In addition, the Company is obligated to purchase 85% of its primary merchandise requirements from Wakefern (see Note 3).
(2) The above amounts for capital, financing and operating leases include interest, but do not include certain obligations under these leases for other charges. These charges consisted of the following in fiscal 2013: Real estate taxes - $4,504; common area maintenance - $1,973; insurance - $270; and contingent rentals - $960.
(3) Pension plan funding requirements are excluded from the above table as estimated contribution amounts for future years are uncertain. Required future contributions will be determined by, among other factors, actual investment performance of plan assets, interest rates required to be used to calculate pension obligations, and changes in legislation. The Company expects to contribute $3,000 in fiscal 2014 to fund Company-sponsored defined benefit pension plans compared to actual contributions of $3,254 in fiscal 2013. The table also excludes contributions under various multi-employer pension plans, which totaled $5,046 in fiscal 2013.
(4) The amount of unrecognized tax benefits of $11,466 at July 27, 2013 has been excluded from this table because a reasonable estimate of the timing of future tax settlements cannot be determined.

OUTLOOK

This annual report 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; expected dividend payments; 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 1.5% to 3.5% in fiscal 2014.

During the last few years, the supermarket industry was 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 in fiscal 2014.

We expect modest retail price inflation in fiscal 2014.

We have budgeted $35,000 for capital expenditures in fiscal 2014. This amount includes the construction of two replacement stores, one of which began in fiscal 2013.

The Board's current intention is to continue to pay quarterly dividends in 2014 at the most recent rate of $.25 per Class A . . .

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