VILLAGE SUPER MARKET INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in Thousands) OVERVIEW Village Super Market, Inc. (the “Company” or “Village”) operates a chain of twenty-nine 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. ft. (30,000 selling 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 February 22, 2021, Village closed the ShopRite store located in Silver Spring, Maryland. Despite continued investment in marketing and promotional programs, the store was unable to generate sales at a level sufficient to maintain profitability, resulting in its closure. The impacts associated with this closure were not material to the consolidated financial statements. On November 1, 2019, Village opened an 82,000 sq. ft. (52,000 selling sq. ft.) ShopRite in Stroudsburg, Pennsylvania and replaced our existing 53,000 sq. ft. store. The supermarket industry is highly competitive and characterized by narrow profit margins. The Company competes directly with multiple retail formats, both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Village competes by using low pricing, providing a superior customer service experience and a broad range of consistently available quality products, including our own brands portfolio. In October 2019, ShopRite introduced the Right Price Promise pricing strategy, a commitment to everyday low prices on the items customers purchase most frequently. 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 own brands. Bowl & Basket foods pair thoughtfully selected ingredients at a budget friendly price and Paperbird offers a line of newly designed household products. 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 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. Online grocery ordering for in-store pick up or home delivery through ShopRite from Home is available in all of our ShopRite stores. Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through 14 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; percentage of total sales by department (mix); shrink; departmental gross profit percentage; sales per labor hour; units per labor hour; and hourly labor rates. COVID-19 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. The Company is classified as an essential business and has remained open to serve our customers and the communities in which we operate. We continue to experience 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. 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). 15 RESULTS OF OPERATIONS The following table sets forth the major components of the Consolidated Statements of Operations as a percentage of sales: 13 Weeks Ended 39 Weeks Ended April 24, 2021 April 25, 2020 April 24, 2021 April 25, 2020 Sales 100.00 % 100.00 % 100.00 % 100.00 % Cost of sales 72.27 71.66 72.34 72.27 Gross profit 27.73 28.34 27.66 27.73 Operating and administrative expense 25.18 23.34 24.90 24.39 Depreciation and amortization 1.74 1.68 1.74 1.76 Operating income 0.81 3.32 1.02 1.58 Interest expense (0.21) (0.12) (0.20) (0.13) Interest income 0.19 0.20 0.18 0.25 Income before taxes 0.79 3.40 1.00 1.70 Income taxes 0.25 0.97 0.30 0.49 Net income 0.54 % 2.43 % 0.70 % 1.21 % Sales . Sales were $481,093 in the 13 weeks ended April 24, 2021, an increase of 5.0% compared to the 13 weeks ended April 25, 2020. Sales increased in the 13 weeks ended April 24, 2021 due to the Fairway acquisition on May 14, 2020 partially offset by a same store sales decrease of 5.5%. Sales were $1,494,047 in the 39 weeks ended April 24, 2021, an increase of 14.7% compared to the 39 weeks ended April 25, 2020. Sales increased in the 39 weeks ended April 24, 2021 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 2.3%. Same store sales decreased in the 13 weeks ended April 24, 2021 due primarily to the unprecedented sales levels at the beginning of the COVID-19 outbreak in our trade area in March 2020. Since the beginning of the COVID-19 pandemic, we have experienced higher average basket sizes and decreased transaction counts as customers have consolidated shopping trips. Additionally, digital sales growth accelerated through both ShopRite from Home and partnerships with online grocery picking and delivery services, increasing 127% and 155% in the 13 and 39 weeks ended April 24, 2021, respectively, compared to the 13 and 39 weeks ended April 25, 2020. During the COVID-19 pandemic, sales at Fairway and Gourmet Garage locations in Manhattan during the 13 and 39 weeks ended April 24, 2021 have been significantly negatively impacted due primarily to residential population migration out of the city and less commuter and tourist traffic. On a two-year stacked basis, same store sales increased 7.7% and 7.4% in the 13 and 39 weeks ended April 24, 2021, respectively, compared to the 13 and 39 weeks ended April 27, 2019. The Company expects same store sales in fiscal 2021 to range from an increase of 1.0% to 2.0% compared to fiscal 2020. 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. Store renovations and expansions are included in same store sales immediately. Gross Profit . Gross profit as a percentage of sales decreased .61% in the 13 weeks ended April 24, 2021 compared to the 13 weeks ended April 25, 2020. Higher margins associated with Fairway increased gross profit (.70%) despite higher costs as we transition and integrate commissary operations into our business. Excluding the impact of Fairway, gross profit as a percentage of sales decreased 1.31% due primarily to decreased departmental gross margin percentages (1.00%), increased warehouse assessment charges from Wakefern (.59%) and higher promotional spending (.21%) partially offset by favorable change in product mix (.46%), and increased patronage dividends and rebates received from Wakefern (.03%). These trends are due primarily to the disproportionately high sales levels at the beginning of the pandemic during the 13 weeks ended April 25, 2020 which favorably impacted departmental gross profit margins through reduced shrink costs, reduced promotional spending due to decreased sale item penetration, increased sales leverage on fixed warehouse assessment charges from Wakefern and resulted in a lesser mix of higher margin perishable items. Additionally, departmental gross profits decreased due partly to continued price investments as part of ShopRite's Right Price Promise pricing strategy. 16 Gross profit as a percentage of sales decreased .07% in the 39 weeks ended April 24, 2021 compared to the 39 weeks ended April 25, 2020. Higher margins associated with Fairway increased gross profit (.62%) despite higher costs as we transition and integrate commissary operations into our business. Excluding the impact of Fairway, gross profit as a percentage of sales decreased .70% due primarily to decreased departmental gross margin percentages (.73%), increased warehouse assessment charges from Wakefern (.26%) partially offset by a favorable change in product mix (.14%), lower promotional spending (.12%) and increased patronage dividends and rebates received from Wakefern (.03%). Departmental gross profits decreased due partly to continued price investments as part of from ShopRite's Right Price Promise pricing strategy. Operating and Administrative Expense. Operating and administrative expense as a percentage of sales increased 1.84% in the 13 weeks ended April 24, 2021 compared to the 13 weeks ended April 25, 2020. The 13 weeks ended April 24, 2021 includes a gain on the sale of a pharmacy prescription list related to the Silver Spring store, net of store closing costs, (.08%) and 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 (.27%) and a pension settlement charge of (.03%). Excluding these items, operating and administrative expense as a percentage of sales increased 1.68% in the 13 weeks ended April 24, 2021 compared to the 13 weeks ended April 25, 2020 due primarily to increased occupancy costs as a result of the Fairway acquisition (0.99%), increased external fees and transportation costs associated with digital sales (.54%), increased payroll (.83%) and increased facility costs, including utilities, repairs and maintenance (.36%), partially offset by decreased costs related to COVID-19, including enhanced wages and benefits, security and outside sanitation services (1.13%). Payroll and facilities costs increased primarily due to reduced sales leverage, increasing wage rates and the addition of Fairway. Operating and administrative expense as a percentage of sales increased .51% in the 39 weeks ended April 24, 2021 compared to the 39 weeks ended April 25, 2020. The 39 weeks ended April 24, 2021 includes a gain on the sale of a pharmacy prescription list related to the Silver Spring store, net of store closing costs, (.03%) and 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%) and store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store (.06%). Excluding these items, operating and administrative expense as a percentage of sales increased .71% in the 39 weeks ended April 24, 2021 compared to the 39 weeks ended April 25, 2020 due primarily to increased occupancy costs due primarily to the Fairway acquisition (.85%) and increased external fees and transportation costs associated with digital sales (.49%), partially offset by decreased costs related to COVID-19, including enhanced wages and benefits, security and outside sanitation services (.30%) and lower payroll and fringe benefit costs (.30%). Payroll and fringe benefits 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 and 39 weeks ended April 24, 2021 compared to the 13 and 39 weeks ended April 25, 2020 due primarily to depreciation related to the Fairway acquisition. Interest Expense . Interest expense increased in the 13 and 39 weeks ended April 24, 2021 compared to the 13 and 39 weeks ended April 25, 2020 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 24, 2021 compared to the 13 and 39 weeks ended April 25, 2020 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 31.5% and 30.3% in the 13 and 39 weeks ended April 24, 2021, compared to 28.4% and 28.9% in the 13 and 39 weeks ended April 25, 2020, respectively. The increase in the effective income tax rate is due primarily to favorable return to provision adjustments in the 13 and 39 weeks ended April 25, 2020. Net Income . Net income was $2,574 in the 13 weeks ended April 24, 2021 compared to $11,152 in the 13 weeks ended April 25, 2020. The 13 weeks ended April 24, 2021 includes a gain on the sale of a pharmacy prescription list related to the Silver Spring store, net of store closing costs, of $278 (net of tax) and 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) and pension settlement charges of $83 (net of tax). Excluding these items, net income decreased 78% in the 13 weeks ended April 24, 2021 compared to the prior year. Net income decreased compared to the prior year period due primarily to the sharp rise in sales volumes at the beginning of the COVID-19 pandemic in March 2020 that resulted in higher gross profit margins and sales leverage on operating expenses during the 13 weeks ended April 25, 2020. Additionally, the 13 weeks ended April 24, 2021 17 were negatively impacted by lower sales volumes in Manhattan and higher costs as we transition and integrate commissary operations into our business. Net income was $10,490 in the 39 weeks ended April 24, 2021 compared to $15,724 in the 39 weeks ended April 25, 2020. The 39 weeks ended April 24, 2021 includes a gain on the sale of a pharmacy prescription list related to the Silver Spring store, net of store closing costs, of $278 (net of tax). 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). Excluding these items, net income decreased 40% in the 39 weeks ended April 24, 2021 compared to the prior year. Net income decreased due primarily to lower sales volumes in Manhattan and higher costs as we transition and integrate commissary operations into our business. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. 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. A s of April 24, 2021, there have been no changes to the critical accounting policies contained therein. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $32,995 in the 39 weeks ended April 24, 2021 compared to $59,404 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 and lower net income. Working capital changes, including Other assets and liabilities, decreased cash flows from operating activities by $3,820 in fiscal 2021 compared to an increase of $16,965 in fiscal 2020. The change in impact of working capital is due primarily to the significant increase in inventory turnover in March and April 2020 at the beginning of the COVID-19 outbreak that lowered stock levels and increased accounts payable to Wakefern. During the 39 weeks ended April 24, 2021, Village used cash to fund capital expenditures of $14,901, dividends of $9,785, principal payment of long-term debt of $6,459 and additional investments of $1,708 in notes receivable from Wakefern. Capital expenditures primarily include costs associated with the integration of Fairway stores, completion of one major remodel, continued expansion of ShopRite from Home and self-checkout. Village has budgeted capital expenditures of $25,000 in fiscal 2021. Planned expenditures include several smaller 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 April 24, 2021 and operating cash flow generated in fiscal 2021. At April 24, 2021, the Company held variable rate notes receivable due from Wakefern of $27,022 that earn interest at the prime rate plus 1.25% and mature on August 15, 2022 and $27,694 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. 18 Working capital was $40,693 at April 24, 2021 compared to $34,522 at July 25, 2020. Working capital ratios at the same dates were 1.27 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. 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: • An unsecured revolving line of credit providing a maximum amount available for borrowing of $125,000. Indebtedness under this agreement bears interest at the applicable LIBOR rate plus 1.10% and expires on May 6, 2025. • An unsecured term loan with a maximum loan amount of $25,500. On May 12, 2020, Village executed a $25,500 term note, repayable in equal monthly installments based on a seven-year amortization schedule through May 4, 2027 and bearing interest at the applicable LIBOR rate plus 1.35%. Additionally, Village executed an interest rate swap for a notional amount equal to the term loan amount that fixes the base LIBOR rate at .41% per annum through May 4, 2027, resulting in a fixed effective interest rate of 1.76% on the term note. • 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 April 24, 2021), 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 April 24, 2021. There have been no other substantial changes as of April 24, 2021 to the contractual obligations and commitments discussed in the Company’s Annual Report on Form 10-K for the year ended July 25, 2020. OUTLOOK This Form 10-Q contains certain forward-looking statements about Village’s future performance. These statements are based on management’s assumptions and beliefs in light of information currently available. Such statements relate to, for example: same store sales; economic conditions; expected pension plan contributions; projected capital expenditures; cash flow requirements; inflation expectations; and legal matters; 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 undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof. • The Company expects same store sales in fiscal 2021 to range from an increase of 1.0% to 2.0%. • 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. 19 • We have budgeted capital expenditures of $25,000 in fiscal 2021. Planned expenditures include several smaller remodels, continued expansion of ShopRite from Home and self-checkout, and various merchandising, technology, equipment and facility upgrades. • 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 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 $1,400 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. Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include: • The Company operates in and around one of the epicenters of the COVID-19 health crisis. 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, 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. • The supermarket business is highly competitive and characterized by narrow profit margins. Results of operations may be materially adversely impacted by competitive pricing and promotional programs, industry consolidation and competitor store openings. Village competes directly with multiple retail formats both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do. • The Company’s stores are concentrated in New Jersey, New York, Pennsylvania and Maryland. 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, disturbances due to social unrest and changing demographics may adversely affect our sales and profits. • Village purchases substantially all of its merchandise from Wakefern. In addition, Wakefern provides the Company with support services in numerous areas including advertising, liability and property insurance, supplies, certain equipment purchasing, coupon processing, certain financial accounting applications, retail technology support, and other store services. Further, Village receives patronage dividends and other product incentives from Wakefern and also has demand deposits and notes receivable due from Wakefern. 20 Any material change in Wakefern’s method of operation or a termination or material modification of Village’s relationship with Wakefern could have an adverse impact on the conduct of the Company’s business and could involve additional expense for Village. The failure of any Wakefern member to fulfill its obligations to Wakefern or a member’s insolvency or withdrawal from Wakefern could result in increased costs to the Company. Additionally, an adverse change in Wakefern’s results of operations or solvency could have an adverse effect on Village’s results of operations. • Approximately 90% of our employees are covered by collective bargaining agreements. Any work stoppages could have an adverse impact on our financial results. If we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs. • The Company could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain. The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations. • Certain of the multi-employer plans to which we contribute are underfunded. As a result, we expect that contributions to these plans may increase. Additionally, the benefit levels and related items will be issues in the negotiation of our collective bargaining agreements. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. The failure of a withdrawing employer to fund these obligations can impact remaining employers. The amount of any increase or decrease in our required contributions to these multi-employer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, withdrawals by other participating employers and the actual return on assets held in the plans, among other factors. • The Company uses a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, property, director and officers’ liability, and certain employee health care benefits. Any projection of losses is subject to a high degree of variability. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, and insolvency of insurance carriers could all affect our financial condition, results of operations, or cash flows. • Our long-lived assets, primarily store property, equipment and fixtures, are subject to periodic testing for impairment. 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. • Wakefern provides all members of the cooperative with information system support that enables us to effectively manage our business data, customer transactions, ordering, communications and other business processes. These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human error. Any material interruption of our or Wakefern’s information systems could have a material adverse impact on our results of operations. Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems. In addition, confidential information is transmitted through our ShopRite from Home online business at shoprite.com and through the ShopRite app. Unauthorized parties may attempt to access information stored in or to sabotage or disrupt these systems. Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions. It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at the Company, Wakefern or those of third-party service providers. 21 Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, cause us to make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties. Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered or are in excess of carried insurance policies. In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation. 22 RELATED PARTY TRANSACTIONS See note 5 to the unaudited consolidated financial statements for information on related party transactions. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable.