What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-12-27 compared with 2023-11-29 · 69 added, 46 removed, 167 unchanged (41% of the section changed)

7 unchanged sentences

Ingles also operates a fluid dairy and earns shopping center rentals.

Recent Developments

On September 27, 2024, Hurricane Helene severely impacted western North Carolina, including where the Company’s headquarters are located, resulting in catastrophic flooding and destruction, power and communication outages, water outages and ban on usage, major road closures and loss of life.

The storm caused damage to certain of the Company’s properties and temporarily impacted the ability of the Company’s stores to report information to the Company’s headquarters.

The distribution center sustained damage but returned to full operation within two weeks following the storm.

During the first two weeks immediately following the storm, the Company’s headquarters experienced communication loss and some stores remained without power and communication.

Four stores sustained damage that required that they be temporarily closed.

One store has now reopened and the Company expects the remaining three stores will reopen in 2025.

Among other impacts from the storm, the Company sustained approximately $30.4 million in lost inventory, of which approximately $10 million is expected to be covered by insurance.

Real property and equipment damage was approximately $4.5 million.

Real property and equipment repair expenses at the distribution center, including anticipated future expenses, of approximately $1.5 million were insured.

Critical Accounting Policies and Estimates

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The Company’s self-insurance reserves totaled $35.9 million and $32.9 million for employee group insurance, workers’ compensation insurance and general liability insurance at September 28, 2024 and September 30, 2023, respectively.

These amounts were inclusive of expected recoveries from excess cost insurance or other sources that are recorded as receivables of $4.3 million at September 30, 2023 and $4.0 million at September 24, 2022.

These amounts were inclusive of expected

recoveries from excess cost insurance or other sources that are recorded as receivables of $4.1 million at September 28, 2024 and $4.3 million at September 30, 2023.

Asset Impairments

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Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future.

These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital

spending decisions and inflation.

These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital spending decisions and inflation.

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

For the year ended September 28, 2024, the Company recognized a property and equipment impairment loss of $4.5 million pertaining to Hurricane Helene.

Vendor Allowances

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

The consolidated statements of income for the fiscal year ended September 30, 2023 had 53 weeks.

The consolidated statements of income for fiscal years September 24, 2022, and September 25, 2021 each consisted of 52 weeks of operations.

The consolidated statements of income for the fiscal years ended September 28, 2024 and September 24, 2022 each consisted of 52 weeks of operations.

The consolidated statements of income for the fiscal year ended September 30, 2023 consisted of 53 weeks.

The period-to-period comparisons of our results of operations contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operation have been prepared using the Company’s audited consolidated financial statements and the notes thereto, and the following discussion should be read in conjunction with such audited annual consolidated financial statements and related notes contained elsewhere in this Annual Report on Form 10-K.

Comparable Store Sales

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

Comparable store sales for the fiscal year ended September 30, 2023, included 198 stores and, for the fiscal year ended September 24, 2022, comparable store sales included 197 stores.

Comparable store sales for the fiscal years ended September 28, 2024 and September 30, 2023 included 198 stores.

Since the impacts

of Hurricane Helene occurred during the last two days of the fiscal year ended September 28, 2024, comparable store sales included all 198 stores.

During the last two days of the fiscal year ended September 28, 2024, Hurricane Helene caused power outages at approximately 80 stores, some of which were without power for only several hours, and others were without power for up to 13 days.

Due to the disruption of internet connectivity at the headquarters and the Western North Carolina area, all of the Company’s stores were unable to process credit or debit cards and could only accept cash for various periods of time.

The internet connection outage was restored at the headquarters several days after the storm but remained inconsistent for our stores for approximately two weeks.

Due to the foregoing disruptions, the Company estimates that it lost approximately $14.0 million in sales for the last two days of the fiscal year ended September 28, 2024.

The disruptions to internet connectivity and water continued into quarter one of fiscal year 2025.

Stores that were closed during the last two days of the fiscal year ended September 28, 2024 as a result of Hurricane Helene were included in comparable store sales.

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

Fiscal Year Ended September

September 28,

September 30,

September 24,

Operating and administrative expenses

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Net income as a percentage of sales was 1.9% for fiscal year 2024 compared with 3.6% for fiscal year 2023.

Inflation in the cost of goods and increases in operating expenses due to the competition in the labor market contributed to this decrease.

Inflation in the cost of goods and increases in operating expenses due to increased labor market competition contributed to this decrease.

Net sales for the fiscal year ended September 28, 2024 totaled $5.64 billion, compared with $5.89 billion for the fiscal year ended September 30, 2023.

In fiscal years with 53 weeks, such as 2023, management analyzes comparable stores sales for the 53 weeks of the year with the corresponding 52 calendar weeks of the previous year plus one additional week.

On this basis, retail grocery comparable store sales excluding fuel increased 4.0% for fiscal 2023 compared with 2022.

The number of transactions (excluding fuel) increased 2.9% while the average transaction size (excluding fuel) increased by 0.9%.

Comparing fiscal 2023 with 2022, fuel gallons sold decreased 0.4% and per gallon fuel prices decreased 10.2%.

In addition to the stores closed due to damage and power outages caused by Hurricane Helene, the Company’s headquarters lost connectivity to the internet which disrupted the Company’s ability to accept credit and debit cards.

As described above under “Comparable Store Sales”, the Company estimates that it lost approximately $14.0 million in sales for the last two days of the fiscal year ended September 28, 2024 due to the disruptions caused by Hurricane Helene.

Store closures and power outages as a result of Hurricane Helene will have an impact on net sales for the first quarter and full fiscal year of 2025.

In addition, the lack of water and subsequent ban on water usage, will have an impact on the fluid dairy operations for the first quarter of fiscal year 2025.

Management analyzes comparable stores sales for the 52 weeks of fiscal year 2024 with the corresponding 52 calendar weeks of the 53 week fiscal year 2023.

On this basis, retail grocery comparable store sales excluding fuel decreased 1.7% for fiscal year 2024 compared to fiscal year 2023.

The number of transactions (excluding fuel) decreased 0.3% while the average transaction size (excluding fuel) decreased by 1.4%.

Comparing fiscal year 2024 with 2023, fuel gallons sold decreased 5.5% and per gallon fuel prices decreased 3.3%.

Sales by product category for the fiscal years ended September 28, 2024 and September 30, 2023 were as follows:

Fiscal Year Ended September

(dollars in thousands)

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Total retail grocery sales for the fiscal year ended September 30, 2023

Comparable store sales increase

Effect of 53rd week

Sales growth from stores opened fiscal 2023

Comparable store sales decrease

Effect of 53rd week in fiscal year 2023

Total retail grocery sales for the fiscal year ended September 28, 2024

Increased sales for fiscal year 2023 were due to comparable store sales through enhanced loyalty programs and special offers, as well as the additional 53 rd week in fiscal year 2023.

Gross Profit.

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As a percentage of sales, gross profit totaled 23.0% for the fiscal year ended September 28, 2024 as compared to 23.8% for the fiscal year ended September 30, 2023.

The decrease in gross profit resulted primarily from the $30.4 million in inventory loss due to Hurricane Helene.

Retail grocery gross profit as a percentage of total sales (excluding fuel) decreased 0.9 basis points in fiscal year 2024, compared with fiscal year 2023.

The gross margin decrease was primarily due to inflation and supply chain factors that impacted prices and mix of products sold.

In addition to the direct product cost, the cost of goods sold line item for the grocery segment includes inbound freight charges, which generally increased in fiscal year 2023 as compared to fiscal year 2022, and increased costs related to the Company’s distribution network, including the impact of higher diesel prices.

The gross margin decrease was primarily due to the inventory impairment loss of $30.4 million as a result of Hurricane Helene.

Operating and Administrative Expenses.

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Excluding fuel, which does not have significant direct operating expenses, the ratio of operating expenses to sales was 23.4% for fiscal year 2024 compared with 21.7% for fiscal year 2023.

A breakdown of the major increases and (decreases) in operating and administrative expenses is as follows.

Included in the operating expenses is the asset impairment write off of $4.5 million, due to Hurricane Helene.

The costs of clean up and repairs will impact operating and administrative expenses for the first quarter and full fiscal year of 2025.

A breakdown of the primary increases in operating and administrative expenses is as follows.

(in millions)

Salaries and wages

Repairs and maintenance

Advertising and promotion

Store supplies

Salaries and wages increased due to increased competition in the labor market in the Company’s market area, in addition to the extra week of expense for the 53 rd week.

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, in addition to the extra week of expense for the 53 rd week.

Advertising and promotion costs decreased due to absorbing some of the activity in-house and moving towards lower-cost types of advertising.

Store supplies, which include customer packaging containers, increased as a result of increased sales, market costs of certain supplies, and supply chain issues for certain raw materials, in addition to the extra week of expense for the 53 rd week.

Taxes and licenses

Miscellaneous

Insurance expense increased primarily due to higher claim volume for the Company’s self-insured employee benefit plans.

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.

Taxes and licenses expenses increases were noted in both payroll taxes and in property taxes.

Miscellaneous expense increased due to the asset impairment loss of $4.5 million as a result of Hurricane Helene.

Gain from Sale or Disposal of Assets.

Gains on sale or disposal of assets totaled $9.1 million for fiscal year 2024 and $2.8 million for fiscal year 2023.

The increase was primarily related to the swap of shopping center properties that occurred in January 2024.

Other Income, Net.

Other income, net totaled $14.2 million and $8.3 million for the fiscal years ended September 28, 2024 and September 30, 2023, respectively.

Other income consists primarily of interest earned and sales of waste paper and packaging.

Other income consists primarily of interest earned, which increased for the 2024 fiscal year due to a combination of higher deposits in interest bearing accounts and higher rates of interest earned on the Company’s cash balances.

Interest Expense.

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Capital Expenditures

The Company believes that a key to its ability to continue to increase sales and develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and an increasingly diverse selection of competitively priced products.

The Company believes that a key to its ability to continue to increase sales and develop a loyal customer base is providing conveniently located, clean and modern stores that provide customers with good service and an increasingly diverse selection of competitively priced products.

As such, the Company has invested and plans to continue to invest significant amounts of capital toward the modernization of its store base.

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The Company currently expects that its net annual capital expenditures will be in the range of approximately $100 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, major store remodels/expansions, and build-out of tenant space under the long-term leases.

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 number of projects may also fluctuate due to the types of projects pursued including new stores, major store remodels/expansions, and build-out of tenant space under the long-term leases.

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

In general, the Company finances its capital expenditures to the extent possible from cash on hand and cash flow from operations.

Additional financing sources for capital expenditures could include borrowings under the Company’s $150 million of committed line of credit (described below), other borrowings that could be collateralized by unencumbered real property and equipment with a net book value of approximately $1.2 billion, and the public debt or equity markets.

Additional financing sources for capital expenditures could include borrowings under the Company’s $150 million committed line of credit (described below), other borrowings that could be collateralized by unencumbered real property and equipment with a net book value of approximately $1.5 billion, and the public debt or equity markets.

The Company has used each of these to finance past capital expenditures and expects to have them available in the future.

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The Company generated $262.5 million of cash from operations in fiscal 2024 compared with $266.4 million for fiscal year 2023.

The decrease resulted primarily from a $61.9 million decrease in net income for fiscal year 2023 compared with fiscal 2022.

Cash used by investing activities for fiscal year 2024 totaled $206.2 million compared with $170.1 million for fiscal year 2023.

The Company’s most significant investing activity is capital expenditures, which increased in fiscal year 2023 as compared to fiscal year 2022.

The increase in cash used in investing activities was primarily due to capital expenditures, which increased by $37.3 in fiscal year 2024 as compared to fiscal year 2023.

The Company’s cash used by net financing activities totaled $31.2 million and $35.0 million for fiscal years 2024 and 2023, respectively.

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 the Secured Overnight Financing Rate (“SOFR”).

In June 2021, the Company issued at par $350.0 million aggregate principal amount of 4.00% senior notes due 2031 (the “2031 Notes”) and used a portion of the proceeds to redeem the remaining outstanding $295.0 million principal amount of the Company’s 5.75% senior notes due.

In June 2021, the Company issued at par $350.0 million aggregate principal amount of 4.00% senior notes due 2031 (the “Notes”).

The Company has a $150.0 million unsecured senior line of credit (the “Line”) that matures in June 2026.

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

The final maturity date of the Bonds is January 1, 2036.

The Project was completed in 2012, and the final maturity date of the Bonds is January 1, 2036.

Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, such financial institutions hold the Bonds until December 2029, subject to certain events.

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Under this agreement, the Company pays monthly the fixed rate of 3.962% and receives the one-month SOFR plus 1.75%.

The interest rate swap effectively hedges floating rate debt in the same

amount as the current notional amount of the interest swap.

The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap.

Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.

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The fair market value of the interest rate swaps is measured quarterly with adjustments recorded in other comprehensive income.

The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and 2031 Notes indenture in the event of default under any one instrument.

The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and the Notes indenture in the event of default under any one instrument.

The Bonds and the Line contain provisions that under certain circumstances would permit the acceleration of the indebtedness under such instruments or would otherwise permit lending institutions to terminate or withdraw their respective extensions of credit to the Company.

1 unchanged sentence

As of September 28, 2024, the Company was in compliance with these covenants.

Under the most restrictive of these covenants, the Company would have been permitted to incur approximately $1.8 billion of additional borrowings (including borrowings under the Line) as of September 30, 2023.

Under the most restrictive of these covenants, the Company would have been permitted to incur approximately $945.5 million of additional borrowings (including borrowings under the Line) as of September 28, 2024.

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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It is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this Annual Report on Form 10-K based on a number of intangible factors.

These factors may include, among others, resurgence of the COVID-19 pandemic virus, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery and changing demographics as well as the additional factors discussed above and elsewhere under “Item 1A.

These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery and changing demographics as well as the additional factors discussed above and elsewhere under “Item 1A.

Risk Factors.” It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this Annual Report on Form 10-K.

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However, the Board of Directors periodically reconsiders the declaration of dividends.

The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant.

The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the Company’s results of operations, and financial condition, as well as other factors that the Board of Directors deems relevant.

Certain of the Company’s long-term debt agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios.

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Outlook and Trends in the Company’s Markets

The COVID-19 pandemic that began in March 2020 substantially impacted supermarket operations during fiscal years 2020, 2021 and 2022.

While the effects of the pandemic on the Company have eased considerably over the fiscal year ended September 30, 2023, some effects have continued through the year ended September 30, 2023, and we do not know how long and to what extent COVID-19 will impact our markets in fiscal year 2024.

The Company continually assesses and modifies its business model to meet the changing needs and expectations of its customers.

In connection with this review, the Company assesses the trends present in the markets in which it competes.

Generally, it is difficult to predict whether a trend will continue for a period of time and it is possible that new trends will develop which will affect an existing trend.

Generally, it is difficult to predict whether a trend will continue for a sustained period of time and it is possible that new trends will develop that will affect an existing trend.

The Company believes that the following trends are likely to continue for at least the next fiscal year:

 The impact of Hurricane Helene due to physical damage to stores, water outage and ban and connectivity issues, will impact the 2025 first quarter and fiscal year 2025 results.

 The supermarket industry will remain highly competitive and will be characterized by industry consolidation, fragmented food retail platforms, and continued competition from super centers and other non-supermarket operators.

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Economic conditions may affect purchasing patterns with regard to meal replacement items, private label purchases, promotions and product variety.

 The Company and its customers will continue to become more environmentally aware, evidenced by the Company’s increased recycled waste paper and pallets and customers’ increased usage of reusable shopping bags.

 The Company and its customers will continue to become more environmentally aware, evidenced by the Company’s transition to more energy efficient lighting and refrigerants, increased recycled waste paper and pallets, and customers’ increased usage of reusable shopping bags.

 Volatile petroleum costs will impact utility and distribution costs, plastic supplies cost and may change customer shopping and dining behavior.

2 unchanged sentences

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-K

Item 7. Management’s Discussion and Analysis