What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2024-02-08 · 118 added, 71 removed, 123 unchanged (61% of the section changed)

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In addition, the Company focuses on selling products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections.

Critical Accounting Policies and Estimates

Critical accounting policies are those accounting policies that management believes are important to the presentation of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain.

Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Critical Accounting Estimates

Critical accounting estimates are those estimates that management believes are important to the presentation of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain.

Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying

values of assets and liabilities that are not readily apparent from other sources.

Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates.

For the six months ended March 30, 2024, there were no material changes to our critical accounting policies and estimates described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 that have had a material impact on our condensed consolidated financial statements and related notes.

Self-Insurance

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Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported.

The estimates are based on data provided by the respective claims administrators.

The estimates are based on data provided by the respective claims administrators which is then applied to appropriate actuarial methods.

These estimates can fluctuate if historical trends are not accurately predictive of the future.

These estimates can fluctuate if historical trends are not predictive of the future.

The majority of the Company’s properties are self-insured for casualty losses and business interruption;

however, liability coverage is maintained.

At December 30, 2023, the Company’s self-insurance reserves totaled $34.2 million.

This amount was inclusive of $4.3 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.

however, the Company maintains liability coverage.

At March 30, 2024 the Company’s self-insurance reserves totaled $34.6 million.

This amount included $4.6 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.

Asset Impairments

The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360.

Asset groups are primarily composed of our individual store and shopping center properties.

Asset groups are primarily composed of our individual stores and shopping center properties.

For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows.

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The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred.

There were no asset impairments during the three-month period ended December 30, 2023.

There were no asset impairments during the six-month period ended March 30, 2024.

Vendor Allowances

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These allowances generally relate to short term arrangements with vendors, often relating to a period of one month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis.

Whenever practical, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the

item is sold.

Due to the use of the retail method of store inventory and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory.

In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold.

Vendor allowances applied as a reduction of merchandise costs totaled $36.8 million and $34.4 million for the fiscal quarters ended December 30, 2023 and December 24, 2022, respectively.

Vendor allowances applied as a reduction of merchandise costs totaled $35.8 million and $29.8 million for the fiscal quarters ended March 30, 2024 and March 25, 2023, respectively.

For the six-month periods ended March 30, 2024 and March 25, 2023, vendor allowances applied as a reduction of merchandise costs totaled $72.6 million and $64.6 million, respectively.

Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period in which the related expense is incurred.

Vendor advertising allowances recorded as a reduction of advertising expense totaled $1.9 million and $2.0 million for the fiscal quarters ended December 30, 2023 and December 24, 2022, respectively.

Vendor advertising allowances recorded as a reduction of advertising expense totaled $2.3 million and $1.9 million for the fiscal quarters ended March 30, 2024 and March 25, 2023, respectively.

For the six-month periods ended March 30, 2024 and March 25, 2023, vendor advertising allowances recorded as a reduction of advertising expense totaled $4.2 million and $3.9 million, respectively.

If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising, as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures.

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Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September.

The Condensed Consolidated Statements of Income for the three-month periods ended December 30, 2023 and December 24, 2022 both include 13 weeks of operations.

The Condensed Consolidated Statements of Income for the three and six-month periods ended March 30, 2024 and March 25, 2023 both include 13 and 26 weeks of operations, respectively.

Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters.

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A major remodel entails substantial remodeling of an existing store and includes additional retail square footage.

For the three-month period ended December 30, 2023, comparable store sales included 198 stores.

For the three-month period ended December 24, 2022, comparable store sales included 197 stores.

For both the three- and six-month periods ended March 30, 2024 and March 25, 2023, comparable store sales included 198 stores.

The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales.

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Three Months Ended

Six Months Ended

Operating and administrative expenses

Gain from sale or disposal of assets

Income from operations

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Income tax expense

Three Months Ended December 30, 2023 Compared to the Three Months Ended December 24, 2022

Net income for the first quarter of fiscal 2024 totaled $43.4 million, compared with net income of $69.4 million for the first quarter of fiscal 2023.

Total sales, less fuel, increased by 0.2%.

As described below, corresponding increases, as a percentage of sales, in costs of goods sold and operating expenses resulted in lower pre-tax income.

Net sales decreased by $12.3 million, or 0.82%, to $1.48 billion for the three months ended December 30, 2023 compared with $1.49 billion for the three months ended December 24, 2022.

The three months ended December 24, 2022 included a record week of sales due to weather related events.

Excluding fuel sales, total grocery comparable store sales increased 1.0% over the comparative fiscal quarter.

Ingles operated 198 stores at both December 30, 2023 and December 24, 2022.

Changes in retail grocery sales for the quarter ended December 30, 2023 are summarized as follows (in thousands):

Total retail sales for the three months ended December 24, 2022

Comparable store sales increase (including fuel)

Total retail sales for the three months ended December 30, 2023

Three Months Ended March 30, 2024 Compared to the Three Months Ended March 25, 2023

Net income for the second quarter of fiscal 2024 totaled $31.9 million, compared with net income of $40.5 million for the second quarter of fiscal 2023.

The decrease related primarily to increased expenses, as described below.

Net sales decreased by $13.1 million, or 0.95%, to $1.37 billion for the three months ended March 30, 2024 compared with $1.38 billion for the three months ended March 25, 2023.

Excluding fuel sales, total grocery comparable store sales decreased 0.2% over the comparative fiscal quarter.

Ingles operated 198 stores at both March 30, 2024 and March 25, 2023.

Sales by product category (in thousands) were as follows:

Three Months Ended

Total retail grocery

The “Grocery” category includes grocery, dairy, and frozen foods.

The “Non-foods” category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

The “Perishables” category includes meat, produce, deli and bakery.

Changes in retail grocery sales for the quarter ended March 30, 2024 are summarized as follows (in thousands):

Total retail sales for the three months ended March 25, 2023

Comparable store sales decrease (including fuel)

Effect of Easter in second quarter of fiscal 2024

Total retail sales for the three months ended March 30, 2024

Gross Profit.

Gross profit for the three-month period ended December 30, 2023 totaled $348.8 million, a decrease of $22.4 million, or 6.0%, compared with gross profit of $371.2 million for the three-month period ended December 24, 2022.

Gross profit as a percentage of sales was 23.6% for the three months ended December 30, 2023 as compared to 24.9% for the three months ended December 24,

Gross profit for the three-month period ended March 30, 2024 totaled $321.9 million, a decrease of $4.1 million, or 1.2%, compared with gross profit of $325.9 million for the three-month period ended March 25, 2023.

Gross profit as a percentage of sales was 23.5% and 23.6% for the three months ended March 30, 2024 and March 25, 2023, respectively.

The decrease in gross profit as a percentage of sales resulted primarily from inflation and raw material shortages, which have increased the cost of products.

Retail segment gross profit, excluding fuel decreased 182 basis points for the quarter ended December 30, 2023, as compared with the quarter ended December 24, 2022.

Operating and Administrative Expenses.

Operating and administrative expenses increased $13.6 million, or 4.9%, to $289.8 million for the three months ended December 30, 2023, as compared to $276.2 million for the three months ended December 24, 2022.

As a percentage of sales, operating and administrative expenses were 19.6% and 18.5% for the December 2023 and December 2022 quarters, respectively.

Excluding fuel sales and associated fuel operating expenses (primarily payroll), operating expenses were 22.0% of sales for the first fiscal quarter of 2024 compared with 21.0% for the first fiscal quarter of 2023.

Operating and administrative expenses increased $15.9 million, or 5.9%, to $284.8 million for the three months ended March 30, 2024, from $268.9 million for the three months ended March 25, 2023.

As a percentage of sales, operating and administrative expenses were 20.8% and 19.5% for the March 2024 and March 2023 quarters, respectively.

A breakdown of the major changes in operating and administrative expenses is as follows:

Increase as a

Salaries and wages

Taxes and licenses

Professional fees

Salaries and wages increased in dollars due to increased labor market competition, which has increased the Company’s cost to attract and retain associates in the Company’s market area.

Insurance expense increased due to higher claims under the Company’s self-insurance medical programs.

Taxes and license expense increased in dollars due to higher taxable expenses and timing of payment.

Professional fees increased in dollars due to investments the Company has made in its information technology services and in technology transformation projects.

Other Income.

Other income totaled $3.6 million for the three months ended December 30, 2023 compared with $1.4 million for the three months ended December 24, 2022.

The increase was primarily due to increased interest income on cash balance.

Repairs and maintenance

Salaries and wages increased due to increased labor market competition, which has increased the Company’s cost to attract and retain associates in the Company’s market area.

Insurance expense increased due to higher claim volume for our self-insured employee benefit plans.

Repairs and maintenance increased due to higher refrigerant costs and the cost of other supply items, as well as increased wear and tear on equipment to accommodate sales volume.

Gain from Sale or Disposal of Assets.

Gain from the sale or disposal of assets totaled $7.7 million for the three months ended March 30, 2024, primarily from the exchange of adjacent property.

Gain from the sale or disposal of assets totaled $0.6 million for the three months ended March 25, 2023.

Interest Expense.

Interest expense totaled $5.7 million for the three-month period ended December 30, 2023 compared with $5.3 million for the three-month period ended December 24, 2022.

Total debt at December 30, 2023 was $546.9 million compared with $564.5 million at December 24, 2022.

Interest expense totaled $5.6 million for the three-month period ended March 30, 2024 compared with $5.3 million for the three-month period ended March 25, 2023.

The increase related primarily to higher interest rates applicable to our variable rate indebtedness.

Total debt at March 2024 was $539.1 million compared with $556.7 million at March 2023.

Income Taxes.

Income tax expense totaled $14.1 million for the three months ended December 30, 2023, reflecting an effective tax rate of 24.6% of pretax income.

Income tax expense totaled $22.5 million for the three months ended December 24, 2022, reflecting an effective tax rate of 24.5% of pretax income.

Net income totaled $43.4 million for the three-month period ended December 30, 2023 compared with $69.4 million for the three-month period ended December 24, 2022.

Basic and diluted earnings per share for Class A Common Stock were $2.33 and $2.28, respectively, for the December 2023 quarter, compared to $3.73 and $3.65, respectively, for the December 2022 quarter.

Basic and diluted earnings per share for Class B Common Stock were each $2.12 for the December 2023 quarter compared with $3.40 for the December 2022 quarter.

Income tax expense totaled $10.7 million for the three months ended March 30, 2024, reflecting an effective tax rate of 25.1% of pretax income.

Income tax expense totaled $13.5 million for the three months ended March 25, 2023, reflecting an effective tax rate of 25.0% of pretax income.

Net income totaled $31.9 million for the three-month period ended March 30, 2024 compared with $40.5 million for the three-month period ended March 25, 2023.

Basic and diluted earnings per share for Class A Common Stock were $1.72 and $1.68, respectively, for the March 2024 quarter, compared to $2.18 and $2.13, respectively, for the March 2023 quarter.

Basic and diluted earnings per share for Class B Common Stock were each $1.56 for the March 2024 quarter compared with $1.98 for the March 2023 quarter.

Six Months Ended March 30, 2024 Compared to the Six Months Ended March 25, 2023

Net income for the first half of fiscal 2024 totaled $75.3 million, compared with net income of $109.9 million for the first half of fiscal 2023.

The decrease related primarily to increased expenses, as described below.

Net sales decreased by $25.4 million, or 0.88%, to $2.85 billion for the six months ended March 30, 2024 compared with $2.87 billion for the six months ended March 25, 2023.

Excluding fuel sales, total grocery comparable store sales increased 0.43% over the comparative six-month period.

Sales by product category (in thousands) were as follows:

Six Months Ended

Total retail grocery

Changes in retail grocery sales for the quarter ended March 30, 2024 are summarized as follows (in thousands):

Total retail sales for the six months ended March 25, 2023

Comparable store sales increase (including fuel)

Effect of Easter in second quarter of fiscal 2024

Total retail sales for the six months ended March 30, 2024

The “Grocery” category includes grocery, dairy, and frozen foods.

The “Non-foods” category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

The “Perishables” category includes meat, produce, deli and bakery.

Gross Profit.

Gross profit for the six-month period ended March 30, 2024 totaled $670.7 million, a decrease of $26.4 million, or 3.79%, compared with gross profit of $697.1 million for the six-month period ended March 25, 2023.

Gross profit as a percentage of sales was 23.5% and 24.3% for the six months ended March 30, 2024 and March 25, 2023, respectively.

Operating and Administrative Expenses.

Operating and administrative expenses increased $29.5 million, or 5.4%, to $574.6 million for the six months ended March 30, 2024, from $545.1 million for the six months ended March 25, 2023.

As a percentage of sales, operating and administrative expenses were 20.2% and 19.0% for the March 2024 and March 2023 six-month periods, respectively.

A breakdown of the major changes in operating and administrative expenses is as follows:

Salaries and wages

Repairs and maintenance

Salaries and wages increased due to increased labor market competition, which has increased the Company’s cost to attract and retain associates in the Company’s market area .

Insurance expense increased due to higher claim volume and costs related to the self-insured employee benefits.

Repairs and maintenance expense increased due to higher refrigerant costs and the cost of other supply items, as well as increased wear and tear on equipment to accommodate sales volume.

Gain from Sale or Disposal of Assets.

Gain from the sale or disposal of assets totaled $8.3 million for the six months ended March 30, 2024, as compared to $1.4 million for the six months ended March 25, 2023.

Interest Expense.

Interest expense totaled $11.3 million for the six-month period ended March 30, 2024 compared with $10.7 million for the six -month period ended March 25, 2023.

The increase related primarily to higher interest rates applicable to our variable rate indebtedness.

Total debt at March 2024 was $539.1 million compared with $556.7 million at March 2023.

Income Taxes.

Income tax expense totaled $24.8 million for the six months ended March 30, 2024, reflecting an effective tax rate of 24.8% of pretax income.

Income tax expense totaled $36.0 million for the six months ended March 25, 2023, reflecting an effective tax rate of 24.7% of pretax income.

Net income totaled $75.3 million for the six-month period ended March 30, 2024 compared with $109.9 million for the six-month period ended March 25, 2023.

Basic and diluted earnings per share for Class A Common Stock were $4.05 and $3.96, respectively, for the six months ended March 30, 2024, compared to $5.92 and $5.79, respectively, for the six months ended March 25, 2023.

Basic and diluted earnings per share for Class B Common Stock were each $3.68 for the six months ended March 30, 2024 compared with $5.38 for the six months ended March 25, 2023.

Liquidity and Capital Resources

Capital Expenditures

Capital expenditures totaled $63.2 million for the three-month period ended December 30, 2023.

The Company’s capital expenditures included the construction of new stores, the expansion and remodeling of existing stores, the acquisition of sites, new technology, and upgrades of the Company’s transportation fleet and facilities.

Capital expenditures totaled $98.4 million for the six-month period ended March 30, 2024.

The Company’s capital expenditures include the construction of new stores, the expansion and remodeling of existing stores, the acquisition of sites, new technology, and upgrades of the Company’s transportation fleet and facilities .

The Company’s capital expenditure plans for fiscal 2024 currently include investments of approximately $160 to $200 million.

The Company currently plans to dedicate the majority of its fiscal 2024 capital expenditures to continued improvement of its store base, including remodeling, and continued investment in one store expected to open in fiscal 2024, as well as technology improvements, upgrading and replacing existing store, warehouse and transportation equipment and improvements to the Company’s milk processing plant.

Notwithstanding higher anticipated capital expenditures for fiscal 2024, the Company currently expects that its annual capital expenditures will be in the range of approximately $120 to $160 million going forward in order to maintain a modern store base.

The Company currently plans to dedicate the majority of its fiscal 2024 capital expenditures to continued improvement of its store base,

including remodeling and continued investment in one store expected to open in fiscal 2024, as well as technology improvements, upgrading and replacing existing store, warehouse and transportation equipment and improvements to the Company’s milk processing plant.

The Company currently expects that its annual capital expenditures will be in the range of approximately $120 to $160 million going forward in order to maintain a modern store base.

Among other things, planned expenditures for any given future fiscal year will be affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects.

The number of projects may also fluctuate

due to the varying costs of the types of projects pursued including new stores and major remodel/expansions.

The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores and major remodel/expansions.

The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.

The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project.

The Company generated $15.5 million net cash from operations for the December 2023 three-month period compared with $57.3 million for the December 2022 three-month period.

The decrease was primarily attributable to higher working capital needs and lower net income .

Cash used by investing activities for the three-month periods ended December 30, 2023 and December 24, 2022 totaled $62.4 million and $58.2 million, respectively.

Cash used by financing activities totaled $6.7 million for the three-month period ended December 30, 2023, compared with $10.7 million of cash used by financing activities for the three-month period ended December 24, 2022.

During the quarter ended December 24, 2022, the Company repaid $4.2 million of mortgage debt whereas the Company made no comparable payment in the December 30, 2023 quarter.

The Company generated $85.9 million net cash from operations for the March 2024 six-month period compared with $94.4 million for the March 2023 six-month period.

Cash from operations decreased by $8.5 million due to lower net income for the March 2024 six-month period compared with the March 2023 six-month period.

Cash used by investing activities for the six-month periods ended March 30, 2024 and March 25, 2023 totaled $94.6 million and $89.6 million, respectively, consisting primarily of capital expenditures and purchases of short term investments.

Cash used by financing activities totaled $17.9 million for the six-month period ended March 30, 2024, compared with $21.7 million for the six-month period ended March 25, 2023.

The increase was primarily related to principal payments on long-term debt.

Dollar LIBOR panel ceased following June 30, 2023, and the Company’s debt agreements and interest rate swaps that utilized LIBOR discontinued the use of LIBOR and adopted SOFR, which did not materially impact our condensed consolidated unaudited interim financial statements.

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The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or SOFR.

The Line allows the Company to issue up to $10.0 million in letters of credit, of which none were issued at December 30, 2023.

The Line allows the Company to issue up to $10.0 million in letters of credit, of which none were issued at March 30, 2024.

The Company is not required to maintain compensating balances in connection with the Line.

At December 30, 2023, the Company had no borrowings outstanding under the Line.

At March 30, 2024, the Company had no borrowings outstanding under the Line.

In December 2010, the Company completed the funding of $99.7 million of Bonds (the “Bonds”) for the construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”).

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Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014.

The outstanding balance of the Bonds is $54.4 million as of December 30, 2023.

The outstanding balance of the Bonds was $44.9 million as of March 30, 2024.

The Company may redeem the Bonds without penalty or premium at any time prior to December 17, 2029.

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The Company’s long-term debt agreements generally contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company.

Included among the triggering factors

permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents.

As of December 30, 2023, the Company was in compliance with these covenants.

Under the most restrictive of these covenants, the Company would have been permitted to incur approximately $1.7 billion of additional borrowings (including borrowings under the Line) as of December 30, 2023.

Included among the triggering factors permitting the termination or withdrawal of the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents.

As of March 30, 2024, the Company was in compliance with these covenants.

The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing.

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Twelve Months Ended

December 2023

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”, “believe”, “seek”, “will”, “may”, “would”, “should” and similar expressions are intended to identify forward-looking statements.

While these forward-looking statements and the related assumptions are made in good faith and reflect the Company’s current judgment regarding the direction of the Company’s business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested or described by such forward-looking

The words “expect”, “anticipate”, “intend”, “plan”, “likely”, “goal”,

“believe”, “seek”, “will”, “may”, “would”, “should” and similar expressions are intended to identify forward-looking statements.

Such statements are based upon a number of assumptions and estimates which are inherently subject to significant risks and uncertainties many of which are beyond the Company’s control.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis