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WMK > SEC Filings for WMK > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for WEIS MARKETS INC

Form 10-K for WEIS MARKETS INC


14-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations:

Overview

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Weis Markets, Inc., its operations and its present business environment. The MD&A is provided as a supplement to and should be read in conjunction with the consolidated financial statements and the accompanying notes thereto contained in "Item 8. Financial Statements and Supplementary Data" of this report. The following analysis should also be read in conjunction with the Financial Statements included in the Quarterly Reports on Form 10-Q and the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, as well as the cautionary statement captioned "Forward-Looking Statements" immediately following this analysis. This overview summarizes the MD&A, which includes the following sections:

Company Overview - a general description of the Company's business and strategic imperatives.

Results of Operations - an analysis of the Company's consolidated results of operations for the three years presented in the Company's consolidated financial statements.

Liquidity and Capital Resources - an analysis of cash flows, aggregate contractual obligations, and off-balance sheet

arrangements.

Critical Accounting Policies and Estimates - a discussion of accounting policies that require critical judgments and estimates.

Company Overview

General

Weis Markets, Inc. was founded in 1912 by Harry and Sigmund Weis in Sunbury, Pennsylvania. Today, the Company ranks among the top 50 food and drug retailers in the United States in revenues generated. As of December 28, 2013, the Company operated 165 retail food stores in Pennsylvania and four surrounding states:
Maryland, New Jersey, New York and West Virginia.

Company revenues are generated in its retail food stores from the sale of a wide variety of consumer products including groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, deli products, prepared foods, bakery products, beer and wine, fuel, and general merchandise items, such as health and beauty care and household products. The Company supports its retail operations through a centrally located distribution facility, its own transportation fleet, three manufacturing facilities and its administrative offices. The Company's operations are reported as a single reportable segment.


WEIS MARKETS, INC.

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Company Overview, (continued)

Strategic Imperatives

The following strategic imperatives will be focused upon by the Company to attempt to ensure the success of the Company in the coming years:

Establish a Sales Driven Culture - The Company continues to focus on sales and profits growth, improved operating discipline, increased productivity and positive cash flow. The Company believes disciplined growth will increase its market share and operating profits, resulting in enhanced shareholder value. The Company's method of driving sales includes focused preparation and execution of sales programs, investing in new stores and remodels, and strategic acquisitions. Communicating clear executable standards and aligning performance measures across the organization will help to instill a sales-driven operating environment.

Continuously Upgrade Organizational Talent Pool - In support of the Company's growth and sales building strategies, the Company is committed to growing leaders at every level throughout the organization through enhanced leadership development programs, succession planning, and establishing rewarding career paths. The Company believes that improved associate talent directly impacts the ability to execute strategic plans and views this as a strategic imperative for future growth.

Become More Relevant to Consumers - Understanding the consumer is crucial to the Company's strategic plan. Research can be done by studying the wants and needs of core consumers and casual consumers. Measuring customer satisfaction and sharing insights across the organization will help communication between management and its consumers. The Company strives to build customer loyalty by purchasing produce from local growers and supporting organizations within the communities it serves. It will continue to invest in new stores, remodels and additions and strategic acquisitions, to help retain and attract new consumers.

Create Meaningful Differentiation - The Company has identified product pricing, locally focused store assortments, shopping experience, overall convenience and customer service as critical components of future success. The strategy includes developing improved customer service training and setting customer service measurements and goals. As part of this strategy, management is committed to offering its customers a strong combination of quality, service and value. It will continue to offer competitive prices on name brand and private brand products to exceed customers' expectations.

Significantly Improve Decision Support and Measurement - The Company will continue to make investments in its information technology systems and distribution network. This will help improve associate productivity, store conditions and the overall customer experience with user-friendly, support driven systems. These systems will also continue to play a key role in the measurement of the Company's strategic decisions and provide valuable insight into customer behavior, shopping trends, and financial returns. Management will continue to streamline its supply chain by focusing on improving inventory turns, cost per case, in-stock position and overall service levels, which will help to improve in-store conditions and result in increased sales and profits.

Focus on Sustainability Strategies - The Company continues to focus on green best-practices, conservation, food and agricultural impact and social responsibility. The Company views being good stewards in the communities where we operate as an important component of overall success. In 2013, strategies were implemented to reduce the Company's carbon footprint. One of these strategies included reducing the number of miles the Company's transportation fleet travels by mapping more efficient travel routes. During 2012, the fleet traveled 10,483,000 miles, compared to 10,108,000 miles in 2013, a reduction of 375,000 miles or 3.6%. Food sustainability and the impact on the environment will continue to influence the Company's strategic plans.


WEIS MARKETS, INC.

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations

Analysis of Consolidated Statements of Income




(dollars in thousands                                                              Percent Changes
except per share amounts)
For the Fiscal Years Ended       2013             2012              2011        2013 vs.      2012 vs.
December 28, 2013,
December 29, 2012 and         (52 weeks)       (52 weeks)        (53 weeks)       2012          2011
December 31, 2011
Net sales                   $ 2,692,588      $ 2,701,405       $ 2,752,504         (0.3) %      1.9  %
Cost of sales, including
warehousing and
distribution expenses         1,947,120        1,958,852         2,016,649         (0.6)       (2.9)
Gross profit on sales           745,468          742,553           735,855          0.4         0.9
Gross profit margin                27.7  %          27.5  %           26.7  %
Operating, general and          634,286          615,521           621,575          3.0        (1.0)
administratives expenses
O, G & A, percent of net           23.6  %          22.8  %           22.6  %
sales
Income from operations          111,182          127,032           114,280        (12.5)       11.2
Operating margin                    4.1  %           4.7  %            4.2  %
Investment income                 4,684            3,468             3,326         35.1         4.3
Investment income, percent          0.2  %           0.1  %            0.1  %
of net sales
Other income                           -             414                  -      (100.0)      100.0
Other income, percent of               - %           0.0  %               - %
net sales
Income before provision         115,866          130,914           117,606        (11.5)       11.3
for income taxes
Provision for income taxes       44,145           48,403            42,022         (8.8)       15.2
Effective tax rate                 38.1  %          37.0  %           35.7  %
Net income                  $    71,721      $    82,511       $    75,584        (13.1) %      9.2  %
Net income, percent of net          2.7  %           3.1  %            2.7  %
sales
Basic and diluted earnings  $      2.67      $      3.07       $      2.81        (13.0) %      9.3  %
per share

Income is earned by selling merchandise at price levels that produce revenues in excess of cost of merchandise sold and operating and administrative expenses. Although the Company may experience short term fluctuations in its earnings due to unforeseen short-term operating cost increases, it historically has been able to increase revenues and maintain stable earnings from year to year.

Net Sales

The Company's revenues are earned and cash is generated as merchandise is sold to customers at the point of sale. Discounts provided to customers by the Company at the point of sale are recognized as a reduction in sales as products are sold or over the life of a promotional program if redeemable in the future. Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons.

Total store sales decreased 0.3% in 2013, a 52-week period, compared to 2012, a 52-week period. Excluding fuel sales, total sales decreased 0.4%. Total store sales decreased 1.9% from 2012, compared to 2011, a 53-week period. Excluding fuel sales, total sales decreased 2.3%. Adjusting for the extra week in 2011, there was no change in total sales from 2012 to 2011. Excluding fuel sales and adjusting for the extra week in 2011, total sales decreased 0.4% in 2012 compared to 2011.

When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation for five full quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.


WEIS MARKETS, INC.

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations (continued)

Comparable store sales decreased 2.6% in 2013, a 52-week period, compared to 2012, a 52-week period. Excluding fuel sales, comparable store sales decreased 2.7%. The 2013 sales decline is attributed to increased competition, cycling the 2012 sales impact of Hurricane Sandy and a decline in food stamp/SNAP (the United States Department of Agriculture's Supplemental Nutrition Assistance Program) spending in its stores, which accelerated in the fourth quarter with the reduction in SNAP benefits that went into effect November 1, 2013. Comparable store sales decreased 2.0% in 2012, compared to 2011, a 53-week period. Excluding fuel sales, comparable store sales decreased 2.4% in 2012 compared to 2011. Adjusting for the extra week in 2011, comparable store sales decreased 0.1% in 2012 compared to 2011. Excluding fuel sales and adjusting for the extra week in 2011, comparable store sales decreased 0.5% in 2012 compared to 2011.

The Company's operating regions continue to be hindered by slow economic growth, high unemployment and declining household income, particularly in Northeastern Pennsylvania, New York's Southern Tier and the Lehigh Valley and Pocono areas of Central Pennsylvania. In addition, the Company's customers were impacted by the reduction in SNAP benefits. Many customers remain cautious in their spending and continue to focus on value and long term savings.

To meet these needs, the Company continued to make significant investments in its "Price Freeze" and "Get Grillin'" promotional programs. The Company ran two "Price Freeze" programs in 2013. The first program froze prices on more than 2,000 products for a thirteen-week period. The second "Price Freeze" program froze prices on over 1,500 items for a thirteen-week period. The Company launched a twelfth round of its "Price Freeze" program on December 29, 2013, which has proven to be an enduring and relevant promotion for our customers during challenging economic times. This program froze prices on more than 2,000 products for a thirteen-week period. The "Get Grillin'" promotional program was a reduced pricing program on top items throughout the store that our customers found to be the most seasonally relevant. This program lowered prices of approximately 1,200 items for a fifteen-week period. In addition, the Company introduced a promotional program in October 2013 which reduced the price of over 300 Weis Quality products by 10% through the end of the year.

In addition to the "Price Freeze" and "Get Grillin'" promotional programs, the Company also offered its "Gas Rewards" program in most markets. The "Gas Rewards" program allows Weis Preferred Shoppers club card members to earn gas discounts resulting from their in-store purchases. Customers can redeem these gas discounts at Sheetz convenience stores, located in most of the Company's markets, at Manley's Mighty Mart Valero locations, in the Binghamton, NY market or at any of the twenty-three Weis Gas-n-Go locations.

The Company continued to employ a disciplined marketing and advertising strategy, along with targeted promotional activity in key markets, to help maintain its market share and increase its profits. During 2013, the Company generated a 0.7% increase in average sales per customer transaction, while the number of identical customer store visits declined by 3.3%. In the fourth quarter of 2011, in preparation for the Company's 100th anniversary celebration in 2012, the Company launched its Gold Card program, an extension of its existing Preferred Club Shopper program. The Gold Card program targets the Company's best shoppers with personalized offers and strong values to help them save money. In 2014, the Company started an aggressive sales building program, notably its Three Ways to Save sales initiative, which offers discounts on more than 2,000 products and includes its Prize Freeze, Lowest Price Guarantee and Everyday Lower Price programs.

Comparable center store sales decreased 3.4% in 2013, compared to 2012. Center store was impacted by stagnant sales performance in key center store categories, increased competition and a decline in food stamp/SNAP spending in its stores, which accelerated in the fourth quarter with the reduction in SNAP benefits that went into effect November 1, 2013. Comparable fuel sales declined 8.3% in 2013, compared to 2012. Sales were affected by fuel price deflation in 2013, which resulted in lower retail gas sales.


WEIS MARKETS, INC.

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations (continued)

Comparable deli sales decreased 4.6% in 2013, compared to 2012, and 2.8% in 2012 compared to 2011, adjusting for the extra week in 2011. Sales declined in 2013 and 2012 as a result of emergency sales surges in October 2012 and September 2011, respectively, caused by flooding due to Hurricane Sandy in 2012 and Hurricanes Irene and Lee in 2011, which impacted regions of Pennsylvania and southern New York, where the majority of the Company's stores are located. Customers were unable to prepare meals at home for extended periods of time in 2012 and 2011, resulting in increased deli sales. Additionally, 2013 sales were negatively affected by deli salad recalls occurring in September and which continued to impact the fourth quarter, due to a disruption in supply.

Comparable meat sales decreased 2.5% in 2013, compared to 2012. With the cost of meat rising, the Company made the strategic decision to reduce retail prices in order to encourage meat sales. The Company sold 256,084 more pounds of meat in 2013, compared to 2012. Although total tonnage of meat sold increased, comparable meat sales decreased over the previous fiscal year due to the retail price reduction strategy.

Comparable pharmacy sales decreased 2.2% in 2013, compared to 2012. Adjusting for the extra week in 2011, pharmacy sales decreased 3.1% in 2012 compared to 2011. Pharmacy sales were impacted by a $15.3 million and $10.4 million decline in 2013 and 2012, respectively, due to the conversion of brand drugs to generic. Generics are sold at lower retail prices, decreasing total pharmacy sales. While sales dropped significantly in dollars because of the increased utilization of generic pharmaceuticals, the number of units sold in comparable stores decreased 0.4% in 2013 compared to 2012 but increased 0.4% in 2012 compared to 2011. As part of management's strategy to offset this decline, the Company emphasized a continued focus on immunization while implementing in-store pet medications and a medication synchronization program.

Management remains confident in its ability to generate sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company's competitive position.

Cost of Sales and Gross Profit

Cost of sales consists of direct product costs (net of discounts and allowances), distribution center and transportation costs, as well as manufacturing facility operations.

According to the latest U.S. Bureau of Labor Statistics' report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 0.9% in 2013, 2.4% in 2012 and 4.8% in 2011. The annual Seasonally Adjusted Producer Price Index for Finished Consumer Foods increased 2.3% in 2013, 2.5% in 2012 and 6.3% in 2011. Despite the fluctuation of retail and wholesale prices, the Company maintained a gross profit rate of 27.7% in 2013, 27.5% in 2012 and 26.7% in 2011. Even though the U.S. Bureau of Labor Statistics' index rates may be reflective of a trend, it will not necessarily be indicative of the Company's actual results.

The Company experienced a LIFO charge of $692,000 for 2013, compared to a charge of $1.2 million for 2012 and a charge of $8.7 million in 2011. Significant wholesale price inflation occurred during 2011. With the exception of pharmacy, the Company expects wholesale price inflation to increase slightly in 2014.

The Company's profitability is impacted by the cost of oil. Fluctuating fuel prices affect the delivered cost of product and the cost of other petroleum-based supplies such as plastic bags. As a percentage of sales, the cost of diesel fuel used by the Company to deliver goods from its distribution center to its stores remained unchanged in 2013 compared to 2012 and in 2012 compared to 2011. According to the U.S. Department of Energy, the 52-week average diesel fuel price for the Central Atlantic States decreased $0.09 per gallon to $4.01 per gallon as of December 23, 2013, compared to $4.10 per gallon as of December 24, 2012. Based upon the U.S. Energy Information Administration's current projections, the Company is expecting diesel fuel prices to slightly decrease during 2014.


WEIS MARKETS, INC.

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations (continued)

Although the Company experienced product cost inflation and deflation in various commodities in 2013, 2012 and 2011, management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.

Operating, General and Administrative Expenses

Business operating costs including expenses generated from administration and purchasing functions, are recorded in "Operating, general and administrative expenses." Business operating costs include items such as wages, benefits, utilities, repairs and maintenance, advertising costs and credits, rent, insurance, equipment depreciation, leasehold amortization and costs for outside provided services.

The Company may not be able to recover rising expenses through increased prices charged to its customers. Any delay in the Company's response to unforeseen cost increases or competitive pressures that prevent its ability to raise prices may cause earnings to suffer. A majority of our associates are paid hourly rates related to federal and state minimum wage laws. Although we have and will continue to attempt to pass along any increased labor costs through food price increases, there can be no assurance that all such increased labor costs can be reflected in our prices or that increased prices will be absorbed by consumers without diminishing consumer spending to some degree. However, to date, we have not experienced a significant reduction in profit margins as a result of changes in such laws, and management does not anticipate any significant related future reductions in gross profit margins.

Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise over 60% of the total "Operating, general and administrative expenses." Employee-related costs increased 1.2% in 2013 compared to 2012 and increased 1.0% in 2012 compared to 2011, inclusive of the extra week in 2011. As a percent of sales, employee-related costs increased 0.2% in 2013 compared to 2012 and increased 0.4% in 2012 compared to 2011. As a percent of sales, direct store labor increased 0.3% in 2013 compared to 2012 and 0.2% in 2012 compared to 2011.

The Company expensed $2.0 million, $1.1 million and $111,000 in 2013, 2012 and 2011, respectively, due to adjustments made to the non-qualified supplemental executive retirement plan resulting from a rise in the equity market. See Note 6 Retirement Plans, of Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the Company's retirement plans.

The Company's self-insured health care benefit expenses decreased 14.9% in 2013 compared to 2012 and increased 5.4% in 2012 compared to 2011. During 2013, the Company incurred less expensive health care claims, compared to 2012. The Company remains concerned about the potential impact that The Patient Protection and Affordable Care Act will have on its future operating expenses.

On September 21, 2013, the Company entered into a separation agreement with the former President and Chief Executive Officer. The Company's "Operating, general and administrative expenses" were negatively impacted by the charge of $6.1 million worth of estimated expenses related to the separation agreement. See Exhibit 10, filed with the quarterly report on Form 10-Q filed on November 7, 2013, for more information pertaining to the separation agreement.

Depreciation and amortization expense was $58.3 million, or 2.2% of net sales, for 2013 compared to $50.7 million, or 1.9% of net sales, for 2012 and $59.4 million, or 2.2% of net sales, for 2011. The increase in depreciation and amortization expense in 2013 compared to 2012 was the result of additional capital expenditures as the Company implements its capital expansion program. In the first quarter of 2012, the Company changed its accounting policy for property and equipment. The decrease in depreciation and amortization expense in 2012 compared to 2011 resulted from the Company's change in depreciation method for this group of assets from accelerated methods to straight-line, despite additional capital expenditures as the Company implements its capital expansion program. See Note 1 (j) to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the Company's change in accounting estimate related to depreciation expense. See the Liquidity and Capital Resources section for further information regarding the Company's capital expansion program.


WEIS MARKETS, INC.

Table of Contents

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations: (continued)

Results of Operations (continued)

The Company recognized pre-tax gains of $2.9 million and $1.7 million in 2013 and 2012, respectively, from the sale of two properties in 2013 and one property in 2012. In 2013, the Company determined that the asset value of four properties was impaired. As a result, the Company recognized a pre-tax impairment loss of $2.1 million. See Note 1(l) to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the Company's impairment charges. Earnings were further impacted in 2013 by a $680,000 adjustment to liabilities for future expenses on closed stores.

Retail store profitability is sensitive to volatility in utility costs due to the amount of electricity and gas required to operate the Company's stores and facilities. The Company is responding to this volatility in operating costs by employing conservation technologies, procurement strategies and associate energy awareness programs to manage and reduce consumption. The Company is a member of the EPA GreenChill program for advancing environmentally beneficial refrigerant management systems. The Company was awarded the GreenChill Distinguished Partner Award for leadership in refrigerant management due to the demonstrated extraordinary leadership and initiative in achieving GreenChill's mission in 2013. This past year, the Company received 3 Gold Level Certified Stores. In total, the Company has nine stores registered under the EPA GreenChill program. In 2012, the Company replaced its existing lighting system at its 1.1 million square-foot distribution center with low watt fluorescent and LED lighting, reducing energy consumption by 80% and operating costs by 30%. Its new store prototypes contain skylights that harvest natural daylight to reduce lighting costs, LED lighting and motion sensors in its frozen departments and energy management systems. All Company stores have an assigned Energy Captain to promote in-store energy conservation. Through these initiatives, with the added benefit of clement weather and a declining market in electricity costs, the Company's utility expense decreased by 2.6% in 2013 compared to 2012 and decreased 8.6% in 2012 compared to 2011. . . .

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