INGLES MARKETS INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Ingles, a leading supermarket chain in the Southeast, currently operates 194 supermarkets in North Carolina (72), Georgia (64), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1), excluding three stores that remain temporarily closed due to damage sustained during Hurricane Helene. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health/beauty/cosmetic products and general merchandise, as well as quality private label items. 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. Impact of Hurricane Helene On September 27, 2024, Hurricane Helene severely impacted western North Carolina, including the area where the Company’s headquarters are located, resulting in catastrophic flooding and destruction, power and communication outages, water outages, major road closures, and loss of life. For the year ended September 28, 2024, the Company recognized an impairment loss of $30.4 million 13 related to inventory damaged or destroyed by Hurricane Helene. Additionally, the Company recognized a property and equipment impairment loss of $4.5 million for the year ended September 28, 2024 pertaining to the same storm, for which insurance proceeds of $1.0 million were received during October 2024. These recorded losses did not include future repairs and rebuilds, nor did they account for revenue lost due to store closures or electronic payment disruptions. The Company’s properties, including its distribution center, were impacted; however, the distribution center returned to full operation within two weeks following the storm. Four stores sustained damage that required that they be temporarily closed. As of the date of this Quarterly Report on Form 10-Q, three stores remain closed and are expected to reopen at various times during 2026 and 2027. In addition, during the quarter ended December 27, 2025, the Company incurred approximately $5.4 million in cleanup and repair costs as a result of Hurricane Helene. Legislative Update On July 4, 2025, the One Big Beautiful Bill Act (“OBBBA”) was enacted into law. The OBBBA includes a broad range of tax reform provisions with multiple effective dates. The Company has determined that the impact of the OBBBA is not material to the Company’s consolidated financial statements. 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. Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates. Self-Insurance The Company is self-insured for workers’ compensation, general liability and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverage of $1.0 million per occurrence for workers’ compensation and for general liability, and $500,000 per covered person for medical care benefits for a policy year. 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 which is then applied to appropriate actuarial methods. These estimates can fluctuate if historical trends are not accurately predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, the Company maintains liability coverage. At December 27, 2025, the Company’s self-insurance reserves totaled $36.8 million. This amount included $3.1 million of expected self-insurance recoveries from excess cost insurance or other sources that were 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 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. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates, net of costs to sell. 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. 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 27, 2025. Vendor Allowances The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily composed of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the applicable vendor’s products. 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 $38.4 million and $35.1 million for the fiscal quarters ended December 27, 2025 and December 28, 2024, respectively. Vendor advertising allowances that 14 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 $2.4 million and $1.3 million for the fiscal quarters ended December 27, 2025 and December 28, 2024, 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. Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue for the Company’s stores. Results of Operations 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 27, 2025 and December 28, 2024 both include 13 weeks of operations. Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a newly opened store that replaces an existing nearby store that has closed. A major remodel entails substantial remodeling of an existing store and includes additional retail square footage. For the three-month period ended December 27, 2025, comparable store sales included 194 stores, which excludes the three stores that remained closed due to the impact of Hurricane Helene. For the three-month period ended December 28, 2024, comparable store sales included 195 stores, which excluded the three stores that remained closed due to the impact of Hurricane Helene. The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the business’ segments, see Note K “Segment Information” to the Condensed Consolidated Financial Statements. Three Months Ended December 27, December 28, 2025 2024 Net sales 100.0 % 100.0 % Gross profit 24.4 % 23.4 % Operating and administrative expenses 21.5 % 21.8 % (Loss) gain from asset disposals ( —) % 0.2 % Income from operations 2.9 % 1.8 % Other income, net 0.2 % 0.3 % Interest expense 0.3 % 0.4 % Income tax expense 0.7 % 0.4 % Net income 2.1 % 1.3 % Three Months Ended December 27, 2025 Compared to the Three Months Ended December 28, 2024 Net income for the first quarter of fiscal 2026 totaled $28.1 million, compared with net income of $16.6 million for the first quarter of fiscal 2025. The increase related primarily to an increase in net sales and an increase in gross profit as a percentage of net sales. Net Sales. Net sales increased by $84.9 million, or 6.6%, to $1.37 billion for the three months ended December 27, 2025 compared with $1.29 billion for the three months ended December 28, 2024. The Company estimated that approximately $55 to $65 million of revenue was lost during the first three-week period of fiscal year 2025 due to road and power outages that prevented some stores from opening or maintaining normal store hours, as well as due to electronic payment disruptions as a result of Hurricane Helene. Excluding fuel sales, total grocery comparable store sales increased 6.2% over the comparative fiscal quarter. Ingles operated 194 stores at December 27, 2025, excluding three stores that remained closed after Hurricane Helene and 195 stores at December 28, 2024, excluding three stores damaged by Hurricane Helene. Changes in retail grocery sales for the quarter ended December 27, 2025 as compared to the quarter ended December 28, 2024 are summarized as follows (in thousands): Total retail sales for the three months ended December 28, 2024 $ 1,245,065 Comparable store sales increase (including fuel) 75,899 Impact of stores closed in fiscal 2025 (2,098) Other 524 Total retail sales for the three months ended December 27, 2025 $ 1,319,390 Gross Profit. Gross profit for the three-month period ended December 27, 2025 totaled $334.6 million, an increase of $33.4 million, or 11.1%, compared with gross profit of $301.1 million for the three-month period ended December 28, 2024. Gross profit as a 15 percentage of sales was 24.4% for the three months ended December 27, 2025 as compared to 23.4% for the three months ended December 28, 2024. Retail segment gross profit, excluding fuel increased 76 basis points for the quarter ended December 27, 2025 as compared with the quarter ended December 28, 2024. Operating and Administrative Expenses. Operating and administrative expenses increased by $14.7 million, or 5.2%, to $295.4 million for the three months ended December 27, 2025, as compared to $280.7 million for the three months ended December 28, 2024. Operating expenses were lower than normal for the three months ended December 28, 2024 as a result of Hurricane Helene. As a percentage of sales, operating and administrative expenses were 21.5% and 21.8% for the December 2025 and December 2024 quarters, respectively. Excluding fuel sales and associated fuel operating expenses (primarily payroll), operating expenses were 24.0% of sales for the first fiscal quarter of 2026 compared with 24.3% for the first fiscal quarter of 2025. A breakdown of the major changes in operating and administrative expenses is as follows: Increase Increase as a % of in millions sales Salaries and wages $ 8.7 0.63 % Insurance $ 2.4 0.18 % Bank charges $ 2.1 0.15 % Miscellaneous $ 2.1 0.15 % Salaries and wages increased in dollars for the three months ended December 27, 2025 compared to the three months ended December 28, 2024 due to the impact of Hurricane Helene in the prior year which included disruption at stores due to storm-related power losses and difficulties for associates to get to work due to the damage caused by Hurricane Helene. Insurance expense increased due to the increased claim volume and higher number of covered members reaching stop loss limits. Bank charges increased due to decreased activity in the prior year related to loss of internet connectivity after the storm, which temporarily disrupted the ability to accept credit and debit cards. Miscellaneous expense increased due to straight line rent credits from the purchase of a ground lease and insurance proceeds of $1.0 million received in the prior year. Other Income. Other income totaled $2.9 million for the three months ended December 27, 2025 compared with $3.3 million for the three months ended December 28, 2024. Interest Expense. Interest expense totaled $4.6 million for the three months ended December 27, 2025 compared with $5.0 million for the three months ended December 28, 2024. Total debt at December 27, 2025 was $511.5 million compared with $529.4 million at December 28, 2024. Income Taxes. Income tax expense totaled $9.3 million for the three months ended December 27, 2025, reflecting an effective tax rate of 24.9% of pretax income. Income tax expense totaled $5.3 million for the three months ended December 28, 2024, reflecting an effective tax rate of 24.1% of pretax income. Net Income. Net income totaled $28.1 million for the three months ended December 27, 2025 compared with $16.6 million for the three months ended December 28, 2024. Basic and diluted earnings per share for Class A Common Stock were $1.51 and $1.48, respectively, for the December 2025 quarter, compared to $0.89 and $0.87, respectively, for the December 2024 quarter. Basic and diluted earnings per share for Class B Common Stock were each $1.38 for the December 2025 quarter compared with $0.81 for the December 2024 quarter. Liquidity and Capital Resources Capital Expenditures Capital expenditures totaled $36.4 million for the three months ended December 27, 2025. The Company’s capital expenditures included the continued construction of a new store expected to open in fiscal 2026, 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 2026 currently include investments of approximately $120 to $160 million. The Company currently plans to dedicate the majority of its fiscal 2026 capital expenditures to continued improvement of its store base, including the re-opening of the three stores temporarily closed due to the impact of Hurricane Helene, remodeling, and continued investment in one new store expected to open in fiscal 2026, as well as technology improvements, upgrading and replacing existing store, warehouse and transportation equipment and improvements to the Company’s milk processing plant. 16 The Company currently expects that its annual capital expenditures will be in the range of approximately $120 to $160 million going forward 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 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. Liquidity The Company provided $38.4 million net cash for operations for the three months ended December 27, 2025 compared with $43.6 million used for the three months ended December 28, 2024. The increase was primarily attributable to higher net income and lower working capital needs . Cash used by investing activities for the three-month periods ended December 27, 2025 and December 28, 2024 totaled $36.3 million and $33.9 million, respectively. Cash used by financing activities totaled $6.7 million for both the three-month periods ended December 27, 2025 and December 28, 2024. In June 2021, the Company issued $350.0 million aggregate principal amount of senior notes due 2031 (the “Notes”). The Notes bear an interest rate of 4.00% per annum and were issued at par. The Company has a $150.0 million line of credit (the “Line”) that, as amended in June 2025, matures in June 2030. 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 a single letter of credit in the amount of $500,000 was issued at December 27, 2025. The Company is not required to maintain compensating balances in connection with the Line. At December 27, 2025, the Company had no other 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 in Buncombe County, North Carolina (the “Project”). 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, the financial institutions have agreed to hold the Bonds until December 17, 2029, subject to certain events. 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 was $45.4 million as of December 27, 2025. The Company may redeem the Bonds without penalty or premium at any time prior to December 17, 2029. In September 2017, the Company refinanced approximately $60 million secured borrowing obligations with a SOFR-based amortizing floating rate loan secured by real estate maturing in October 2027. As of December 27, 2025, the Company had an interest rate swap agreement for a current notional amount of $11.0 million at a fixed rate of 3.962%. 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 rate swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027. In December 2019, the Company entered into a $155 million SOFR-based amortizing floating rate loan secured by real estate maturing in January 2030. As of December 27, 2025, the Company had an interest rate swap agreement for a current notional amount of $107.2 million at a fixed rate of 2.998%. Under this agreement, the Company pays monthly the fixed rate of 2.998% and receives the one-month SOFR plus 1.60%. 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 $0.65 million and mature in fiscal year 2030. 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 Line, Bonds and Notes indenture in the event of default under any one instrument. 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 are certain events of default, including both monetary and non-monetary defaults, 17 the initiation of bankruptcy or insolvency proceedings, or the failure of the Company to meet certain financial covenants designated in its loan documents. As of December 27, 2025, 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. The Company believes, based on its current results of operations and financial condition, that its financial resources, including the Line, short- and long-term financing expected to be available to it and operating cash flow, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there is no assurance that any such sources of financing will be available to the Company when needed on acceptable terms, or at all. It is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this Quarterly Report on Form 10-Q based on a number of factors. These factors may include, among others, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery, natural disasters, changing demographics, and pandemics or other health emergencies, as well as the additional factors discussed below under “Forward-Looking Statements” and under the heading “Risk Factors” contained in our most recently filed Annual Report on Form 10-K, as well as under similar headings in our Quarterly Reports on Form 10-Q and our other filings with the Securities and Exchange Commission. Quarterly Cash Dividends Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 per share on its Class A Common Stock and $0.15 per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 per share, respectively. The Company expects to continue paying regular cash dividends on a quarterly basis. 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. In addition, the Bonds and the Line contain provisions that restrict the ability of the Company to pay cash dividends in excess of two times the current quarterly per share amounts. Seasonality Grocery sales are subject to a slight seasonal variance due to both holiday related sales and sales in areas where seasonal homes are located. Sales are traditionally higher in the Company’s first fiscal quarter due to the inclusion of sales related to Thanksgiving and Christmas. Unless Easter falls within the quarter, the Company’s second fiscal quarter traditionally has the lowest sales of the year predominantly due to lower occupancy of seasonal homes. In the third and fourth quarters, sales are usually positively affected by the return of customers to seasonal homes in our market area. Impact of Inflation The following table from the United States Bureau of Labor Statistics lists annualized changes in the Consumer Price Index that could have an effect on the Company’s operations. One of the Company’s significant costs is labor, which increases with general inflation. Inflation or deflation in energy costs affects the Company’s fuel sales, distribution expenses and plastic supply costs. Twelve Months Ended December 2025 All items 2.7 % Food at home 2.4 % Energy 2.3 % 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 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. Some of these assumptions inevitably will not materialize, and unanticipated events will occur which will affect the Company’s results. Some important factors (but not necessarily all factors) that affect the Company’s revenues, financial position, growth strategies, profitability and operating results, or that otherwise could cause actual results to differ materially from those expressed in or implied by any forward-looking statement, include public health 18 emergencies and pandemics; economic conditions generally in the Company’s operating area; the Company’s ability to successfully implement its expansion and operating strategies and to manage rapid expansion; pricing pressures and other competitive factors; reduction in per gallon retail fuel prices; the maturation of new and expanded stores; the Company’s ability to reduce costs and achieve improvements in operating results; the availability and terms of financing; increases in labor and utility costs; success or failure in the ownership and development of real estate; changes in the laws and government regulations applicable to the Company; disruptions in the efficient distribution of food products; changes in accounting policies, standards, guidelines or principles as may be adopted by regulatory agencies as well as the Financial Accounting Standards Board; and those factors contained under the heading “Risk Factors” in Item 1A of Part I of our most recent Annual Report on Form 10-K for the year ended September 27, 2025, filed by the Company under the Exchange Act, on November 26, 2025, as amended on January 22, 2026 . Consequently, actual events affecting the Company and the impact of such events on the Company’s operations may vary significantly from those described in this Quarterly Report on Form 10-Q or contemplated or implied by statements in this Quarterly Report on Form 10-Q. The Company does not undertake and specifically denies any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments, except to the extent required by applicable law.