What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-12-03 compared with 2020-06-04 · 102 added, 135 removed, 122 unchanged (66% of the section changed)

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Village Super Market, Inc.

(the “Company” or “Village”) operates a chain of 30 ShopRite supermarkets in New Jersey, eastern Pennsylvania, Maryland and New York City and three Gourmet Garage specialty markets in Manhattan, New York City.

On November 1, 2019, Village opened a 82,000 sq.

(52,000 selling sq.

ft.) store in Stroudsburg, Pennsylvania and replaced our existing 53,000 sq.

On June 24, 2019, Village acquired the assets and certain liabilities of Gourmet Garage for $5,203.

Gourmet Garage operates three specialty markets averaging 11,000 sq.

(the “Company” or “Village”) operates a chain of thirty ShopRite supermarkets, five Fairway Markets and three Gourmet Garage specialty markets located in New Jersey, New York, Pennsylvania and Maryland.

Village is the second largest member of Wakefern Food Corporation (“Wakefern”), the nation’s largest retailer-owned food cooperative and owner of the ShopRite, Fairway and Gourmet Garage names.

As further described in the Company’s Form 10-K, this ownership interest in Wakefern provides Village with many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage.

On May 14, 2020, Village completed its acquisition of certain assets, including five supermarkets averaging 52,000 sq.

(30,000 selling sq.

ft.) in Manhattan, New York City.

On June 28, 2018, Village opened a 53,000 sq.

ft.), a production distribution center (the “PDC”) and the intellectual property of Fairway Group Holdings Corp.

and certain of its subsidiaries (“Fairway”), including the names “Fairway” and “Fairway Markets” for $73,622, net of cash acquired.

Four of the supermarkets are in Manhattan, specifically the Upper West Side, Upper East Side, Kips Bay and Chelsea locations, and a fifth store is located in Pelham, NY.

Like Village, Fairway traces its roots back to a neighborhood market over 80 years ago.

Fairway Markets offer a one-stop destination shopping experience with an emphasis on fresh, unique, and high quality offerings paired with an expansive variety of natural, organic, specialty and gourmet products.

The PDC is a centralized commissary that promotes production efficiency, product quality and consistency in the bakery, prepared foods, meals to go and other perishable product categories.

Production costs at the PDC, including materials, labor and overhead, are included in Cost of sales.

The Fairway acquisition expands our presence in New York City under an iconic city brand and provides Village the ability to expand centralized food production to support stores under all of our banners.

On November 1, 2019, Village opened an 82,000 sq.

(52,000 selling sq.

ft.) ShopRite in the Bronx, New York City.

On May 14, 2020, Village completed its acquisition of certain assets, including five supermarkets, a production distribution center (the “PDC”) and the intellectual property of Fairway Group Holdings Corp.

and certain of its subsidiaries (“Fairway”), including the names “Fairway” and “Fairway Markets.” Four of the supermarkets are in Manhattan, specifically the Upper West Side, Upper East Side, Kips Bay and Chelsea locations, and a fifth store is located in Pelham, NY.

The acquisition was effectuated pursuant to the Asset Purchase Agreement (the "APA"), entered into on January 20, 2020, revised on March 25, 2020 and approved by the United States Bankruptcy Court for the Southern District of New York through a Sale Order entered on April 20, 2020.

Village paid $73,200 for the Fairway assets, net of adjustments set forth in the APA, and assumed certain liabilities, consisting primarily of those arising from acquired leases.

Additionally, Village’s cash purchase price was reduced by a $2,000 credit arising from the breakup of Village’s initial “stalking horse” bid under the January 20, 2020 Asset Purchase Agreement.

Village is the second largest member of Wakefern Food Corporation (“Wakefern”), the nation’s largest retailer-owned food cooperative and owner of the ShopRite and Gourmet Garage names.

As further described in the Company’s Form 10-K, this ownership interest in Wakefern provides Village many of the economies of scale in purchasing, distribution, store brands, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage.

ft.) ShopRite in Stroudsburg, Pennsylvania and replaced our existing 53,000 sq.

The supermarket industry is highly competitive and characterized by narrow profit margins.

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The ShopRite Price Plus preferred customer program enables Village to offer continuity programs, focus on target marketing initiatives and to offer discounts and attach digital coupons directly to a customer's Price Plus card.

In November 2019, ShopRite launched the Bowl & Basket and Paperbird store brands.

In November 2019, ShopRite launched the Bowl & Basket and Paperbird own brands.

Bowl & Basket foods pair thoughtfully selected ingredients at a budget friendly price and Paperbird offers a line of newly designed household products.

More than 100 newly branded items, including packaged salads, salty snacks, cooking oils, bottled water and paper goods, were introduced in early November.

ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products through fiscal 2021.

ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products from their launch in November 2019 through fiscal 2021.

The introduction of Bowl & Basket and Paperbird follows the 2016 launch of ShopRite’s Wholesome Pantry brands, which include the Wholesome Pantry Organic line as well as a range of products free from 110 ingredients and artificial additives and preservatives.

The Company’s stores, six of which are owned, average 55,000 total square feet.

These larger store sizes enable the Company’s stores to provide a “one-stop” shopping experience and to feature expanded higher margin specialty departments such as an on-site bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies.

These larger store sizes enable the Company’s stores to provide a “one-stop” shopping experience and to feature expanded higher margin specialty departments such as an onsite bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies.

Many of our stores emphasize a Power Alley, which features high margin, fresh, convenience offerings in an area within the store that provides quick customer entry and exit for those customers shopping for today's lunch or dinner.

Certain of our stores include the Village Food Garden concept featuring a restaurant style kitchen, and several kiosks offering a wide variety of store prepared specialty foods for both take-home and in-store dining.

We offer ShopRite from Home covering most of the communities served by our stores.

ShopRite from Home is an online ordering system that provides for in-store pickup or home delivery.

Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or on their smart phones or tablets through the ShopRite app.

We also offer online purchasing through various third party digital platforms.

Online grocery ordering for in-store pick up or home delivery through ShopRite from Home is available in twenty-six stores.

Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or the ShopRite app.

Additionally, the ShopRite Order Express app enables customers to pre-order deli, catering, specialty

occasion cakes and other items.

Online ordering for home delivery through third party services is available in all Fairway and Gourmet Garage stores.

In April 2020 we also added online ordering for home delivery through third party services in all ShopRite stores.

We consider a variety of indicators to evaluate our performance, such as same store sales;

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and hourly labor rates.

The Company was significantly impacted by the COVID-19 outbreak as it operates in and around one of the epicenters of the health crisis with much of our trade area under stay-at-home orders since mid-March 2020.

The Company was significantly impacted by the COVID-19 outbreak as it operates in and around one of the early U.S.

epicenters of the health crisis with much of our trade area under stay-at-home orders from mid-March 2020 through June 2020.

The Company is classified as an essential business and has remained open to serve our customers and the communities in which we operate.

Our first priority throughout this unprecedented time has and will continue to be the safety of our associates and our customers.

In response to COVID-19, Village incurred incremental operating expenses of over $5,500 in the 13 weeks ended April 25, 2020 for programs and new initiatives implemented to support and protect our associates, customers and the communities we are a part of including:

Enhanced and more frequent sanitation practices, including hourly cleaning of high touch point areas throughout our stores, nightly deep cleaning and bi-weekly disinfectant fogging in every store

Reduced store operating hours, including the closure of all stores on Easter Sunday, to provide time for our associates to rest and complete the enhanced cleaning practices

Created a centralized call center to provide our associates with consistent, accurate, reliable guidance regarding Company policies and CDC recommended protocols

Created a text communication platform to provide enrolled associates with real-time alerts and updates

Expanded remote work capabilities for office associates and limited travel of regional supervision teams

Provided over 150,000 meals, including two hot meals during the day to all associates on duty and a boxed lunch to all night crew associates, through the Feeding Our Village Heroes Program

Provided over 15,000 meals sourced from local restaurants to healthcare professionals through our Heroes Feeding Heroes program

Reserved the first hour of business each day for elderly and at-risk customers

Implemented a temporary wage premium of $2 per hour above the standard base rate of pay for all hourly front-line associates and weekly premiums for salaried front-line associates, applied to hours worked from March 22nd through June 13th

Accelerated payment of quarterly bonuses for the 13 weeks ended April 25, 2020

Provided Emergency Paid Leave to associates affected by COVID-19

Maintained health care coverage for all associates unable to work due to COVID-19

Blue Squares for Social Distancing program - installed floor markers and additional signage in high traffic areas to signify six-foot distances to encourage proper social distancing

Installed plexiglass shields at all registers, guest services and pharmacy counters

Reduced offerings at service departments, eliminated the sale of bulk self-service merchandise and closed in-store restaurants and dining areas to assist and encourage social distancing

Limited the number of customers to approximately 30% of each store's maximum occupancy

Implemented a Personal Protective Equipment program and provided associates with masks and gloves

Donated and supplied masks to local hospitals

Implemented temperature checks for all associates

Expanded digital capabilities, including four rapidly deployed "pop-up" ShopRite from Home stores, contactless pickup and prescription drug pickup and delivery

Expanded partnerships with online grocery picking and delivery services to better support our customers increased demand for these services

Introduced the Essentials Box Program - providing a safe and convenient way to stock up on in-demand produce or cleaning products, pre-packaged and available for delivery

Expanded mobile scan to an additional 10 stores

We continue to experience significant sales volatility, changes in customer shopping habits, shifts in product mix and increased demand through digital channels as a result of the COVID-19 pandemic.

Demand remains high in most stores, however sales at Fairway and Gourmet Garage locations in Manhattan have been negatively impacted by localized residential population migration out of the city and less commuter and tourist traffic.

Although the Company estimates that the current trends in sales and profits will continue for the second quarter of fiscal 2021, we expect continued uncertainty in our business as well as the local and regional economies in which we operate depending on the duration and intensity of the COVID-19 pandemic (see the "Outlook" section below for further discussion of risks and uncertainties).

Our first priority has and will continue to be the safety of our associates and our customers.

We implemented enhanced sanitation programs, including hourly cleaning of high touch point areas throughout our stores, nightly deep cleaning and biweekly disinfectant fogging in every store, reduced store hours to allow appropriate time for cleaning, limited the number of customers allowed in each store at a time, reduced service department offerings including the sale of bulk self-service merchandise and closure of in-store restaurants and dining areas, a personal protective equipment program, required temperature checks for associates and installation of Plexiglas shields, floor markers and additional signage in high traffic areas to signify six-foot distances to encourage proper social distancing.

Associate Support .

We paid temporary wage premiums up to $2 per hour above the standard wage rate for hourly front-line associates and weekly premiums for salaried front-line associates from late March through mid-August, provided Emergency Paid Leave to associates affected by COVID-19, supplied meals or meal coupons to our associates on duty through our Feeding Our Village Heroes Program, expanded remote work capabilities, limited travel of regional supervision teams, created a centralized call center and real-time alert text communication platform.

Responding to the needs of our Customers and Communities .

Expanded digital capabilities, including expansion of stores offering ShopRite from Home, expanded the ShopRite Order Express app to provide pre-ordering capabilities in the deli and other areas, contactless pickup, prescription drug pickup and delivery, launched partnerships with online grocery picking and delivery services to better support our customers increased demand for these services and expanded mobile scan to an additional 10 stores.

RESULTS OF OPERATIONS

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13 Weeks Ended

39 Weeks Ended

April 25, 2020

April 27, 2019

April 25, 2020

April 27, 2019

October 24, 2020 October 26, 2019

Sales 100.00 % 100.00 %

Cost of sales 71.85 72.13

Gross profit 28.15 27.87

Operating and administrative expense 25.37 25.32

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Income before taxes 0.98 0.90

Sales were $458,292 in the 13 weeks ended April 25, 2020 , an increase of 15.9% compared to the 13 weeks ended April 27, 2019 .

Sales increased due to the opening of the Stroudsburg replacement store on November 1, 2019, the acquisition of Gourmet Garage on June 24, 2019 and a same store sales increase of 13.6% .

Same store sales increased due primarily to the impact of the COVID-19 outbreak and related stay-at-home measures, most significantly in March where sales reached unprecedented levels.

Same store sales also increased due to continued sales growth in the Bronx, New York City store opened on June 28, 2018 and digital sales growth of 41.8%.

Sales were $1,303,116 in the 39 weeks ended April 25, 2020 , an increase of 6.4% from the 39 weeks ended April 27, 2019 .

Sales increased due to the opening of the Stroudsburg replacement store on November 1, 2019, the acquisition of Gourmet Garage on June 24, 2019 and a same store sales increase of 4.5% .

Same store sales increased due primarily to the impact of the COVID-19 outbreak and related stay-at-home measures.

Same store sales also increased due to continued sales growth in the Bronx, New York City store opened on June 28, 2018 and digital sales growth of 28.1%.

These increases were partially offset by the impact of two competitor store openings and decreased promotional spending in Maryland.

Income taxes 0.29 0.27

Net income 0.69 % 0.63 %

Sales were $490,136 in the 13 weeks ended October 24, 2020, an increase of 20.3% compared to the 13 weeks ended October 26, 2019.

Sales increased due to the Fairway acquisition on May 14, 2020, the opening of the Stroudsburg replacement store on November 1, 2019 and a same store sales increase of 6.6%.

Same store sales increased due primarily to increased customer demand across most stores due to the impact of the COVID-19 pandemic.

We continue to experience higher average basket sizes and decreased transaction counts as customers consolidate shopping trips.

Digital sales growth accelerated through both ShopRite from Home and partnerships with online grocery picking and delivery services, increasing 172% in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019.

Demand remains high in most stores, however sales at Fairway and Gourmet Garage locations in Manhattan have been significantly negatively impacted due primarily to residential population migration out of the city and less commuter and tourist traffic during the COVID-19 pandemic.

New stores and replacement stores are included in same store sales in the quarter after the store has been in operation for four full quarters.

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Gross Profit .

Gross profit as a percentage of sales increased .37% in the 13 weeks ended April 25, 2020 compared to the 13 weeks ended April 27, 2019 .

Excluding the impact of the addition of Gourmet Garage, gross profit as a percentage of sales increased .16% in the 13 weeks ended April 25, 2020 compared to the 13 weeks ended April 27, 2019 due primarily to lower promotional spending due to uncertainty of product availability during the COVID-19 outbreak ( .49% ) and increased leverage on fixed warehouse assessment charges from Wakefern ( .26% ).

These increases were partially offset by an unfavorable change in product mix ( .37% ), decreased departmental gross margin percentages ( .18% ) and decreased patronage dividends and rebates received from Wakefern ( .05% ).

Both product mix and departmental gross margin percentages were impacted by limitations in service departments and product availability as a result of the COVID-19 outbreak.

Gross profit as a percentage of sales decreased .06% in the 39 weeks ended April 25, 2020 compared to the 39 weeks ended April 27, 2019 .

Excluding the impact of the addition of Gourmet Garage, gross profit as a percentage of sales decreased

.28% due primarily to decreased departmental gross margin percentages ( .31% ), decreased patronage dividends and rebates received from Wakefern ( .07% ) and an unfavorable change in product mix ( .10% ) partially offset by lower promotional spending ( .11% ) and increased leverage on warehouse assessment charges from Wakefern ( .09% ).

Departmental gross profits decreased in both the 13 and 39 week periods ended April 25, 2020 compared to the 13 and 39 weeks ended April 27, 2019 due primarily to limitations in service departments and product availability as a result of the COVID-19 outbreak, price investments, including the ShopRite's Right Price Promise pricing strategy, a commitment to everyday

low prices on the items customers purchase most frequently, introduced in October 2019, and decreased pharmacy margins as a result of continued downward pressure on prescription reimbursement rates from third party providers.

Gross profit as a percentage of sales increased .28% in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019 due primarily to higher margins associated with Fairway despite higher costs as we transition and integrate the commissary operations into our business.

Excluding the impact of Fairway, gross profit as a percentage of sales decreased .39% due primarily to decreased departmental gross margin percentages (.70%), decreased patronage dividends and rebates received from Wakefern (.10%) and an unfavorable change in product mix (.10%) partially offset by lower promotional spending (.35%) and increased leverage on warehouse assessment charges from Wakefern (.16%).

Departmental gross profits, excluding the impact of Fairway, decreased in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019 due primarily to price investments resulting from ShopRite's Right Price Promise pricing strategy introduced in October 2019.

Both product mix and departmental gross margin percentages were also impacted by limitations in service departments and product availability as a result of the COVID-19 pandemic.

Operating and Administrative Expense.

Operating and administrative expense as a percentage of sales decreased 1.28% in the 13 weeks ended April 25, 2020 compared to the 13 weeks ended April 27, 2019 .

The 13 weeks ended April 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed in March 2020 ( .26% ) and lease costs reclassified from Depreciation and Amortization and Interest Expense to Operating and Administrative Expense ( .14% ) as a result of the adoption of ASU 2016-02, “Leases” (see note 1 to the consolidated financial statements), and a reduction in pension settlement charges of ( .08% ) compared to the 13 weeks ended April 27, 2019 .

Excluding these items, operating and administrative expense as a percentage of sales decreased 1.08% in the 13 weeks ended April 25, 2020 compared to the 13 weeks ended April 27, 2019 due primarily to leverage from higher sales despite incremental costs related to COVID-19, including enhanced wages and benefits and expanded safety and sanitation protocols ( 1.21% ).

Operating and administrative expense as a percentage of sales increased .42% in the 39 weeks ended April 25, 2020 compared to the 39 weeks ended April 27, 2019 .

The 39 weeks ended April 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed in March 2020 ( .09% ), a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges ( .10% ) (see note 4 to the consolidated financial statements), pre-opening costs of the Stroudsburg, Pennsylvania replacement store ( .10% ), store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store ( .06% ) and lease costs reclassified from Depreciation and Amortization and Interest Expense to Operating and Administrative Expense ( .14% ) as a result of the adoption of ASU 2016-02, “Leases” (see note 1 to the consolidated financial statements).

The 39 weeks ended April 27, 2019 includes a gain for Superstorm Sandy insurance proceeds received ( .03% ) and pension settlement charges ( .04% ).

Excluding these items from both periods, operating and administrative expense as a percentage of sales increased .10% in the 39 weeks ended April 25, 2020 compared to the 39 weeks ended April 27, 2019 due primarily to incremental costs related to COVID-19, including enhanced wages and benefits and expanded safety and sanitation protocols ( .42% ) partially offset by increased leverage from higher sales.

Operating and administrative expense as a percentage of sales increased .05% in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019.

The 13 weeks ended October 26, 2019 included pre-opening costs of the Stroudsburg, Pennsylvania replacement store (.21%) and store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store (.07%).

Excluding these items, operating and administrative expense as a percentage of sales increased .33% in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019 due primarily to incremental costs related to COVID-19, including enhanced wages and benefits and expanded safety and sanitation protocols (.24%), increased occupancy costs due primarily to the acquisitions of Fairway (.79%), increased costs associated with digital sales (.40%) partially offset by decreased payroll (.75%) and workers' compensation and other fringe benefits (.25%).

Payroll decreased primarily due to leverage from higher sales and reductions in service department offerings partially offset by the addition of Fairway and growth of ShopRite from Home.

Depreciation and Amortization .

Depreciation and amortization expense increased in the 13 weeks ended April 25, 2020 compared to the 13 weeks ended April 27, 2019 due to depreciation related to acquisition of Gourmet Garage and capital expenditures.

Depreciation and amortization expense increased in the 39 weeks ended April 25, 2020 compared to the 39 weeks ended April 27, 2019 due to depreciation related to acquisition of Gourmet Garage, capital expenditures and accelerated depreciation related to assets at the existing Stroudsburg store that was replaced on November 1, 2019.

Depreciation and amortization expense increased in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019 due to depreciation related to the Fairway acquisition and the Stroudsburg replacement store.

Interest Expense .

Interest expense in the 13 and 39 weeks ended April 25, 2020 decreased compared to the 13 and 39 weeks ended April 27, 2019 due to lease costs reclassified to Operating and Administrative Expenses as a result of the adoption of ASU 2016-02, “Leases” (see note 1 to the consolidated financial statements).

Interest expense increased in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019 due primarily to interest expense related to the credit agreement entered into on May 6, 2020 (see note 7 to the consolidated financial statements).

Interest Income .

Interest income decreased in the 13 and 39 weeks ended April 25, 2020 compared to the 13 and 39 weeks ended April 27, 2019 due primarily to lower amounts invested in variable rate notes receivable from Wakefern and demand deposits invested at Wakefern and lower interest rates.

Interest income decreased in the 13 weeks ended October 24, 2020 compared to the 13 weeks ended October 26, 2019 due primarily to lower interest rates for amounts invested in variable rate notes receivable from Wakefern and demand deposits invested at Wakefern.

Income Taxes.

The effective income tax rate was 28.4% and 28.9% in the 13 and 39 weeks ended April 25, 2020 , respectively, compared to 28.9% and 29.9% in the 13 and 39 weeks ended April 27, 2019 , respectively.

Net income was $11,152 in the 13 weeks ended April 25, 2020 compared to $4,970 in the 13 weeks ended April 27, 2019 .

The 13 weeks ended April 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed in March 2020 of $854 (net of tax).

The 13 weeks ended April 25, 2020 includes pension settlement charges of $83 (net of tax) compared to $302 (net of tax) in the 13 weeks ended April 27, 2019 .

Excluding these items from both periods, net income increased 97% in the 13 weeks ended April 25, 2020 compared to the prior year.

Net income was $15,724 in the 39 weeks ended April 25, 2020 compared to $18,810 in the 39 weeks ended April 27, 2019 .

The 39 weeks ended April 25, 2020 includes a gain on the sale of pharmacy prescription lists related to three store pharmacies closed in March 2020 of $854 (net of tax), a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges of $954 (net of tax), pre-opening costs related to the Stroudsburg, Pennsylvania replacement store of $891 (net of tax) and store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store of $557 (net of tax).

The 39 weeks ended April 27, 2019 includes a $290 (net of tax) gain for Superstorm Sandy insurance proceeds received and pension settlement charges of $302 (net of tax).

Excluding these items from both periods, net income decreased 8% in the 39 weeks ended April 25, 2020 compared to the prior year.

The effective income tax rate was 29.9% in the 13 weeks ended October 24, 2020 compared to 29.9% in the 13 weeks ended October 26, 2019.

Net income was $3,360 in the 13 weeks ended October 24, 2020 compared to $2,567 in the 13 weeks ended October 26, 2019.

The 13 weeks ended October 26, 2019 included pre-opening costs of the Stroudsburg, Pennsylvania replacement store of $594 (net of tax) and store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store of $191 (net of tax).

Excluding these items, net income was flat in the 13 weeks ended October 24, 2020 compared to the prior year.

Net income was flat despite the increase in same store sales due to the impact of lower sales volumes in Manhattan, higher costs as we transition and integrate commissary operations into our business and increased operating and administrative expenses.

CRITICAL ACCOUNTING POLICIES

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The Company’s critical accounting policies relating to the impairment of long-lived assets and goodwill, accounting for patronage dividends earned as a stockholder of Wakefern and accounting for pension plans, are described in the Company’s Annual Report on Form 10-K for the year ended July 25, 2020.

Except for the changes due to the adoption of ASU 2016-02 related to leases discussed in "Recently adopted accounting standards," Note 1, and Note 7 a s of April 25, 2020 , there have been no changes to the critical accounting policies contained therein.

A s of October 24, 2020, there have been no changes to the critical accounting policies contained therein.

The preparation of financial statements in conformity with U.S.

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LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $59,404 in the 39 weeks ended April 25, 2020 compared to $39,769 in the corresponding period of the prior year.

The increase in net cash provided by operating activities in fiscal 2020 was primarily due to changes in working capital.

Working capital changes, including Other assets and liabilities, increased net cash provided by operating activities by $16,965 in fiscal 2020 compared to a decrease of $1,718 in fiscal 2019 .

The change in impact of working capital is due primarily to lower merchandise inventories caused by higher sales due to COVID-19 and higher accounts payable to Wakefern due to higher purchase fulfillment at the end of April.

During the 39 weeks ended April 25, 2020 , Village used cash to fund capital expenditures of $47,812 , dividends of $9,697 , a $ 7,600 deposit into escrow related to the Fairway acquisition and additional investments of $ 2,243 in notes receivable from Wakefern.

Capital expenditures primarily include costs associated with the Stroudsburg replacement store, expansion of ShopRite from Home and equipment purchases.

Village has budgeted $55,000 for capital expenditures for fiscal 2020 .

Planned expenditures include the construction of a replacement store in Stroudsburg, Pennsylvania, one major remodel, expansion of ShopRite from Home, and various merchandising, technology, equipment and facility upgrades.

The Company’s primary sources of liquidity in fiscal 2020 are expected to be cash and cash equivalents on hand at April 25, 2020 , operating cash flow generated in fiscal 2020 and the Company's Credit Facility.

At April 25, 2020 , the Company held variable rate notes receivable due from Wakefern of $ 25,839 that earn interest at the prime rate plus 1.25% and mature on August 15, 2022 and $ 26,612 that earn interest at the prime rate plus .75% and mature on February 15, 2024.

Net cash used in operating activities was $3,353 in the 13 weeks ended October 24, 2020 compared to net cash provided by operating activities of $3,375 in the corresponding period of the prior year.

The change in cash flows from operating activities in fiscal 2021 was primarily due to changes in working capital.

Working capital changes, including Other assets and liabilities, decreased cash flows from operating activities by $15,530 in fiscal 2021 compared to a decrease of $8,733 in fiscal 2020.

The change in impact of working capital is due primarily to higher merchandise inventories and a larger decrease in accounts payable to Wakefern as stock levels and inventory turnover normalized through the pandemic.

During the 13 weeks ended October 24, 2020, Village used cash to fund capital expenditures of $3,301, dividends of $3,257 and additional investments of $567 in notes receivable from Wakefern.

Capital expenditures primarily include costs associated with the integration of Fairway stores, continued expansion of self checkout and equipment purchases.

Village has budgeted $35,000 for capital expenditures in fiscal 2021.

Planned expenditures include two major remodels, several smaller store remodels, continued expansion of ShopRite from Home and self-checkout, and various merchandising, technology, equipment and facility upgrades.

The Company’s primary sources of liquidity in fiscal 2021 are expected to be cash and cash equivalents on hand at October 24, 2020 and operating cash flow generated in fiscal 2021.

At October 24, 2020, the Company held variable rate notes receivable due from Wakefern of $26,426 that earn interest at the prime rate plus 1.25% and mature on August 15, 2022 and $27,149 that earn interest at the prime rate plus .75% and mature on February 15, 2024.

Wakefern has the right to prepay these notes at any time.

Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.

Working capital was $21,067 at April 25, 2020 compared to $56,307 at July 27, 2019 .

Working capital ratios at the same dates were 1.17 and 1.50 to 1, respectively.

The decrease in working capital in fiscal 2020 compared to fiscal 2019 is due primarily to a decrease in merchandise inventories caused by higher sales and intermittent supply chain disruptions due to COVID-19 and recognition of current operating lease obligations as a result of the adoption of ASU 2016-02, “Leases”.

Working capital was $38,583 at October 24, 2020 compared to $34,522 at July 25, 2020.

Working capital ratios at the same dates were 1.25 and 1.21 to one, respectively.

The Company’s working capital needs are reduced, since inventories are generally sold by the time payments to Wakefern and other suppliers are due.

Village had an unsecured revolving credit agreement providing a maximum amount available for borrowing of $25,000.

The credit agreement provided for up to $3,000 of letters of credit, which secured obligations for construction performance guarantees to municipalities.

There were no amounts outstanding at April 25, 2020 or July 27, 2019 under the facility.

On May 6, 2020, Village entered into a credit agreement (the “Credit Facility”) with Wells Fargo Bank, National Association (“Wells Fargo”) that supersedes in its entirety the prior $25,000 credit agreement with Wells Fargo dated November 9, 2017.

The principal purpose of the Credit Facility is to finance general corporate and working capital requirements and Village’s acquisition of certain Fairway assets which closed on May 14, 2020.

Credit Facility

On May 6, 2020, Village entered into a credit agreement (the “Credit Facility”) with Wells Fargo National Bank, National Association (“Wells Fargo”) that supersedes in its entirety the prior credit agreement with Wells Fargo dated November 9, 2017.

The principal purpose of the Credit Facility is to finance general corporate and working capital requirements and Village’s acquisition of certain Fairway assets.

Among other things, the Credit Facility provides for a maximum loan amount of $150,500 as further set forth below:

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• The ability to convert up to $50,000 of the revolving line of credit to a secured converted term loan, which shall reduce the maximum amount available for borrowing under the revolving line of credit.

Village expects to reduce the capacity of the revolving line of credit by converting approximately $50,000 to a converted term loan that will bear interest at the applicable LIBOR rate plus 1.50% and will be repayable in equal monthly installments based on a fifteen-year amortization schedule beginning on the conversion date.

The converted term loan is subject to completion of customary closing conditions, including title searches and environmental studies for properties to be mortgaged.

Additionally, Village executed a forward interest rate swap, effective August 3, 2020, for a notional amount of $50,000 that fixes the base LIBOR rate at .69% per annum for fifteen years, resulting in a fixed effective interest rate of 2.19% on the converted term loan.

The Credit Facility also provides for up to $25,000 of letters of credit, and contains covenants that, among other conditions, require a minimum tangible net worth, a minimum fixed charge coverage ratio and a maximum adjusted debt to EBITDAR ratio.

Fairway Markets

The $73,200 purchase price for the Fairway acquisition was funded by borrowing against the Company’s unsecured revolving line of credit and an unsecured term loan pursuant to the Company's Credit Facility.

Additionally, as required by the APA, Village had made a $ 7,600 deposit into escrow which is included in Other assets in the Company's Consolidated Balance Sheet as of April 25, 2020 .

There have been no other substantial changes as of April 25, 2020 to the contractual obligations and commitments discussed in the Company’s Annual Report on Form 10-K for the year ended July 27, 2019 .

On September 1, 2020, Village converted $50,000 of its revolving line of credit to a secured converted term loan.

The conversion reduced the maximum amount available for borrowing under the revolving line of credit from $125,000 to $75,000.

The term loan bears interest at the applicable LIBOR rate plus 1.50% and is repayable in equal monthly installments based on a fifteen-year amortization schedule beginning on the conversion date.

Additionally, Village previously executed a forward interest rate swap, effective on the conversion date, for a notional amount equal to the term loan amount that fixes the base LIBOR rate at .69% per annum for 15 years, resulting in a fixed effective interest rate of 2.19% on the converted term loan.

The term loan is secured by real properties of Village Super Market, Inc.

and its subsidiaries, including the sites of three Village stores.

The Credit Facility also provides for up to $25,000 of letters of credit ($7,336 outstanding at October 24, 2020), which secure obligations for store leases and construction performance guarantees to municipalities.

The Credit Facility contains covenants that, among other conditions, require a minimum tangible net worth, a minimum fixed charge coverage ratio and a maximum adjusted debt to EBITDAR ratio.

The Company was in compliance with all covenants of the credit agreement at October 24, 2020.

There have been no other substantial changes as of October 24, 2020 to the contractual obligations and commitments discussed in the Company’s Annual Report on Form 10-K for the year ended July 25, 2020.

This Form 10-Q contains certain forward-looking statements about Village’s future performance.

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and are indicated by words such as “will,” “expect,” “should,” “intend,” “anticipates,” “believes” and similar words or phrases.

The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-looking statements.

The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-

looking statements.

The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof.

Due to the uncertainty arising from the COVID-19 global health crisis and its significant impact on our business, the Company will not provide same store sales guidance for fiscal 2020.

• We estimate that same store sales trends will be flat to slightly down in fiscal 2021 with positive trends in the first half of the year being offset by negative trends in the second half of the year as we recycle the impact of the COVID-19 health crisis.

• Excluding the impact of acquired stores, we expect decreased gross profit margins due to continued investments in retail pricing through the Right Price Promise commitment to everyday low pricing on the items customers purchase most frequently that was introduced in October 2019.

• We have budgeted $35,000 for capital expenditures in fiscal 2021.

• The Board’s current intention is to continue to pay quarterly dividends in 2021 at the most recent rate of $.25 per Class A and $.1625 per Class B share.

We believe cash and cash equivalents on hand, operating cash flow and the Company's Credit Facility will be adequate to meet anticipated requirements for working capital, capital expenditures, acquisition of Fairway and debt payments for the foreseeable future.

• We believe cash and cash equivalents on hand, operating cash flow and the Company's Credit Facility will be adequate to meet anticipated requirements for working capital, capital expenditures and debt payments for the foreseeable future.

• We expect our effective income tax rate in fiscal 2021 to be in the range of 30.0% - 31.0%.

We expect approximately $1,800 of net periodic pension costs in fiscal 2020 related to the four Company sponsored defined benefit pension plans.

• We expect approximately $1,400 of net periodic pension costs in fiscal 2021 related to the three Company sponsored defined benefit pension plans.

The Company expects contributions to its defined benefit pension plans to be immaterial in fiscal 2021.

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These include:

The Company operates in and around one of the epicenters of the COVID-19 health crisis with much of our trade area under stay-at-home orders since mid-March 2020.

• The Company operates in and around one of the epicenters of the COVID-19 health crisis with much of our trade area under stay-at-home orders from mid-March 2020 through June 2020.

The Company is classified as an essential business and has remained open to serve our customers and the communities in which we operate.

The continuing impact on our business, including the length and impact of stay-at-home orders and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, including our ability to obtain products from our suppliers, higher operating costs, the form and impact of economic stimulus and general overall economic instability, is uncertain at this time and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Furthermore, the impact of the COVID-19 health crisis may exacerbate other risks and uncertainties included herein and in the Company’s Annual Report on Form 10-K for the year ended July 27, 2019 , which could have a material effect on the Company.

The Fairway acquisition involves a number of risks, uncertainties and challenges, including under-performance relative to our expectations, additional capital requirements, unforeseen expenses or delays, imprecise assumptions or our inability to achieve projected cost savings or other synergies, competitive factors in the marketplace and difficulties integrating the business, including merging company cultures, cultivating brand strategy, expansion of food production and conforming the acquired company's standards, processes, procedures and controls.

The continuing impact on our business, including the length and impact of stay-at-home orders and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, higher operating costs, the form and impact of economic stimulus and general overall economic instability, is uncertain at this time and could have a material adverse effect on our business, results of operations, financial condition and cash flows.

Furthermore, the impact of the COVID-19 health crisis may exacerbate other risks and uncertainties included herein, which could have a material effect on the Company.

• The Fairway acquisition involves a number of risks, uncertainties and challenges, including under-performance relative to our expectations, additional capital requirements, unforeseen expenses or delays, imprecise assumptions or our inability to achieve projected cost savings or other synergies, competitive factors in the marketplace and difficulties integrating the business, including merging company cultures, cultivating brand strategy, expansion of food production and conforming the acquired company's technology, standards, processes, procedures and controls.

Sales and operating profits have underperformed compared to initial expectations due primarily to residential population migration out of Manhattan and less commuter and tourist traffic during the COVID-19 pandemic.

Many of these potential circumstances are outside of our control and any of them could result in an adverse impact on our results of operations, financial condition and cash flows and the diversion of management time and resources.

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We are vulnerable to economic downturns in these states in addition to those that may affect the country as a whole.

Economic conditions such as inflation, deflation, interest rate fluctuations, movements in energy costs, social programs, minimum wage legislation, unemployment rates and changing demographics may adversely affect our sales and profits.

Economic conditions such as inflation, deflation, interest rate fluctuations, movements in energy costs, social programs, minimum wage legislation, unemployment rates, disturbances due to social unrest and changing demographics may adversely affect our sales and profits.

• Village purchases substantially all of its merchandise from Wakefern.

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Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.

• Our goodwill and indefinite-lived intangible assets are tested at the end of each fiscal year, or more frequently if circumstances dictate, for impairment.

Failure of acquired businesses to achieve their forecasted expectations could result in impairment charges to goodwill and indefinite-lived intangible assets.

• Our effective tax rate may be impacted by the results of tax examinations and changes in tax laws.

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See note 5 to the unaudited consolidated financial statements for information on related party transactions.

RECENTLY ISSUED ACCOUNTING STANDARDS

In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20):

Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The guidance modifies disclosure requirements for defined benefit plans.

This guidance is effective for fiscal years ending after December 15, 2020, and early adoption is permitted.

The Company is currently assessing the potential impact of ASU 2018-14 on its consolidated financial statement disclosures.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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