VILLAGE SUPER MARKET INC 10-Q

ITEM 1. FINANCIAL STATEMENTS VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands) (Unaudited) October 28, 2023 July 29, 2023 ASSETS Current assets Cash and cash equivalents $ 134,773 $ 140,910 Merchandise inventories 47,492 44,515 Patronage dividend receivable 17,315 12,466 Notes receivable from Wakefern 32,211 31,483 Other current assets 17,683 17,313 Total current assets 249,474 246,687 Property, equipment and fixtures, net 281,611 277,310 Operating lease assets 268,790 274,100 Notes receivable from Wakefern 64,137 62,726 Investment in Wakefern 33,145 33,107 Investments in Real Estate Partnerships 14,968 13,155 Goodwill 24,190 24,190 Other assets 40,408 36,431 Total assets $ 976,723 $ 967,706 LIABILITIES and SHAREHOLDERS' EQUITY Current liabilities Operating lease obligations $ 20,937 $ 20,389 Finance lease obligations 686 667 Notes payable to Wakefern 754 737 Current portion of debt 9,370 9,370 Accounts payable to Wakefern 81,178 77,033 Accounts payable and accrued expenses 34,960 31,441 Accrued wages and benefits 28,433 29,853 Income taxes payable 6,881 9,483 Total current liabilities 183,199 178,973 Long-term debt Operating lease obligations 262,220 266,683 Finance lease obligations 20,390 20,623 Notes payable to Wakefern 1,566 1,686 Long-term debt 70,039 72,426 Total long-term debt 354,215 361,418 Pension liabilities 5,005 4,893 Other liabilities 15,059 12,256 Commitments and contingencies (Note 5) Shareholders' equity Preferred stock, no par value: Authorized 10,000 shares, none issued — — Class A common stock, no par value: Authorized 20,000 shares; issued 11,568 shares at October 28, 2023 and 11,563 shares at July 29, 2023 77,103 76,179 Class B common stock, no par value: Authorized 20,000 shares; issued and outstanding 4,204 shares at October 28, 2023 and July 29, 2023 683 683 Retained earnings 351,732 343,497 Accumulated other comprehensive income 8,836 8,134 Less treasury stock, Class A, at cost: 944 shares at October 28, 2023 and 912 shares at July 29, 2023 ( 19,109 ) ( 18,327 ) Total shareholders’ equity 419,245 410,166 Total liabilities and shareholders’ equity $ 976,723 $ 967,706 See notes to consolidated financial statements. 3 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) 13 Weeks Ended October 28, 2023 October 29, 2022 Sales $ 536,354 $ 519,689 Cost of sales 383,406 370,404 Gross profit 152,948 149,285 Operating and administrative expense 130,292 125,562 Depreciation and amortization 8,506 8,547 Operating income 14,150 15,176 Interest expense ( 1,064 ) ( 1,087 ) Interest income 3,825 1,968 Income before income taxes 16,911 16,057 Income taxes 5,326 4,976 Net income $ 11,585 $ 11,081 Net income per share: Class A common stock: Basic $ 0.87 $ 0.85 Diluted $ 0.78 $ 0.76 Class B common stock: Basic $ 0.56 $ 0.55 Diluted $ 0.56 $ 0.55 See notes to consolidated financial statements. 4 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited) 13 Weeks Ended October 28, 2023 October 29, 2022 Net income $ 11,585 $ 11,081 Other comprehensive income: Unrealized gains on interest rate swaps, net of tax (1) 777 2,765 Amortization of pension actuarial gain, net of tax (2) ( 75 ) ( 96 ) Comprehensive income $ 12,287 $ 13,750 (1) Amount is net of tax of $ 357 and $ 1,242 for the 13 weeks ended October 28, 2023 and October 29, 2022, respectively. (2) Amounts are net of tax of $ 34 and $ 43 for the 13 weeks ended October 28, 2023 and October 29, 2022, respectively. All amounts are reclassified from accumulated other comprehensive income to operating and administrative expense. See notes to consolidated financial statements. 5 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In thousands) (Unaudited) 13 Weeks Ended October 28, 2023 and October 29, 2022 Class A Common Stock Class B Common Stock Accumulated Other Comprehensive Income (Loss) Treasury Stock Class A Total Shareholders' Equity Shares Issued Amount Shares Issued Amount Retained Earnings Shares Amount Balance, July 29, 2023 11,563 $ 76,179 4,204 $ 683 $ 343,497 $ 8,134 912 $ ( 18,327 ) $ 410,166 Net income — — — — 11,585 — — — 11,585 Other comprehensive loss, net of tax of $ 323 — — — — — 702 — — 702 Dividends — — — — ( 3,350 ) — — — ( 3,350 ) Treasury stock purchases — — — — — — 32 ( 782 ) ( 782 ) Restricted shares forfeited ( 9 ) ( 28 ) — — — — — — ( 28 ) Share-based compensation expense 14 952 — — — — — — 952 Balance, October 28, 2023 11,568 $ 77,103 4,204 $ 683 $ 351,732 $ 8,836 944 $ ( 19,109 ) $ 419,245 Balance, July 30, 2022 10,971 $ 72,891 4,294 $ 697 $ 306,974 $ 6,135 752 $ ( 14,588 ) $ 372,109 Net income — — — — 11,081 — — — 11,081 Other comprehensive income, net of tax of $ 1,199 — — — — — 2,669 — — 2,669 Dividends — — — — ( 3,252 ) — — — ( 3,252 ) Share-based compensation expense — 608 — — — — — — 608 Balance, October 29, 2022 10,971 $ 73,499 4,294 $ 697 $ 314,803 $ 8,804 752 $ ( 14,588 ) $ 383,215 See notes to consolidated financial statements. 6 VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) 13 Weeks Ended October 28, 2023 October 29, 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 11,585 $ 11,081 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 8,967 8,950 Non-cash share-based compensation 924 608 Deferred taxes ( 207 ) 103 Provision to value inventories at LIFO 466 538 Gain on sale of property, equipment and fixtures ( 39 ) ( 17 ) Changes in assets and liabilities: Merchandise inventories ( 3,443 ) ( 4,893 ) Patronage dividend receivable ( 4,849 ) ( 4,745 ) Accounts payable to Wakefern 4,216 3,760 Accounts payable and accrued expenses 3,954 3,389 Accrued wages and benefits ( 1,420 ) ( 697 ) Income taxes receivable / payable ( 2,602 ) 4,492 Other assets and liabilities 827 ( 550 ) Net cash provided by operating activities 18,379 22,019 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures ( 13,773 ) ( 9,813 ) Proceeds from the sale of assets 39 17 Investment in notes receivable from Wakefern ( 2,139 ) ( 59,767 ) Maturity of notes receivable from Wakefern — 28,850 Investment in real estate partnership ( 1,813 ) ( 1,276 ) Net cash used in investing activities ( 17,686 ) ( 41,989 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of long-term debt — 10,000 Principal payments of long-term debt ( 2,698 ) ( 2,352 ) Debt issuance costs — ( 11 ) Dividends ( 3,350 ) ( 3,252 ) Treasury stock purchases ( 782 ) — Net cash (used in) provided by financing activities ( 6,830 ) 4,385 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 6,137 ) ( 15,585 ) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 140,910 134,832 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 134,773 $ 119,247 SUPPLEMENTAL DISCLOSURES OF CASH PAYMENTS MADE FOR: Interest $ 1,064 $ 1,087 Income taxes $ 8,135 $ 380 NONCASH SUPPLEMENTAL DISCLOSURES: Investment in Wakefern and increase in notes payable to Wakefern $ 38 $ — Capital expenditures included in accounts payable and accrued expenses $ 5,086 $ 5,427 Lease obligations obtained in exchange for right-of-use assets $ 908 $ — See notes to consolidated financial statements. 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands) (Unaudited) 1. BASIS OF PRESENTATION and ACCOUNTING POLICIES In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly the consolidated financial position as of October 28, 2023 and the consolidated statements of operations, comprehensive income and cash flows for the 13 weeks ended October 28, 2023 and October 29, 2022 of Village Super Market, Inc. (“Village” or the “Company”). The significant accounting policies followed by the Company are set forth in Note 1 to the Company's consolidated financial statements in the July 29, 2023 Village Super Market, Inc. Annual Report on Form 10-K, which should be read in conjunction with these financial statements. The results of operations for the period ended October 28, 2023 are not necessarily indicative of the results to be expected for the full year. Disaggregated Revenues The following table presents the Company's sales by product categories during each of the periods indicated: 13 Weeks Ended October 28, 2023 October 29, 2022 Amount % Amount % Center Store (1) $ 320,924 59.8 % $ 311,824 60.0 % Fresh (2) 193,520 36.1 189,008 36.4 Pharmacy 20,211 3.8 17,169 3.3 Other (3) 1,699 0.3 1,688 0.3 Total Sales $ 536,354 100.0 % $ 519,689 100.0 % (1) Consists primarily of grocery, dairy, frozen, health and beauty care, general merchandise and liquor. (2) Consists primarily of produce, meat, deli, seafood, bakery, prepared foods and floral. (3) Consists primarily of sales related to other income streams, including service fees related to digital sales, gift card and lottery commissions and wholesale sales. 2. MERCHANDISE INVENTORIES At October 28, 2023 and July 29, 2023, approximately 63 % and 64 %, respectively, of merchandise inventories are valued by the LIFO method while the balance is valued by FIFO. If the FIFO method had been used for the entire inventory, inventories would have been $ 21,704 and $ 21,238 higher than reported at October 28, 2023 and July 29, 2023, respectively. 3. NET INCOME PER SHARE The Company has two classes of common stock. Class A common stock is entitled to cash dividends as declared 54 % greater than those paid on Class B common stock. Shares of Class B common stock are convertible on a share-for-share basis for Class A common stock at any time. The Company utilizes the two-class method of computing and presenting net income per share. The two-class method is an earnings allocation formula that calculates basic and diluted net income per share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings. Under the two-class method, Class A common stock is assumed to receive a 54 % greater participation in undistributed earnings than Class B common stock, in accordance with the classes' respective dividend rights. Unvested share-based payment awards that contain nonforfeitable rights to dividends are treated as participating securities and therefore included in computing net income per share using the two-class method. 8 Diluted net income per share for Class A common stock is calculated utilizing the if-converted method, which assumes the conversion of all shares of Class B common stock to Class A common stock on a share-for-share basis, as this method is more dilutive than the two-class method. Diluted net income per share for Class B common stock does not assume conversion of Class B common stock to shares of Class A common stock. The table below reconciles Net income to Net income available to Class A and Class B shareholders: 13 Weeks Ended October 28, 2023 October 29, 2022 Net income $ 11,585 $ 11,081 Distributed and allocated undistributed Net income to unvested restricted shareholders 440 304 Net income available to Class A and Class B shareholders $ 11,145 $ 10,777 The tables below reconcile the numerators and denominators of basic and diluted Net income per share for all periods presented. 13 Weeks Ended October 28, 2023 Class A Class B Numerator: Net income allocated, basic $ 8,782 $ 2,363 Conversion of Class B to Class A shares 2,363 — Net income allocated, diluted $ 11,145 $ 2,363 Denominator: Weighted average shares outstanding, basic 10,146 4,204 Conversion of Class B to Class A shares 4,204 — Weighted average shares outstanding, diluted 14,350 4,204 13 Weeks Ended October 29, 2022 Class A Class B Numerator: Net income allocated, basic $ 8,402 $ 2,376 Conversion of Class B to Class A shares 2,376 — Net income allocated, diluted $ 10,778 $ 2,376 Denominator: Weighted average shares outstanding, basic 9,863 4,294 Conversion of Class B to Class A shares 4,294 — Weighted average shares outstanding, diluted 14,157 4,294 Outstanding stock options to purchase Class A shares of 86 and 93 were excluded from the calculation of diluted net income per share at October 28, 2023 and October 29, 2022, respectively, as a result of their anti-dilutive effect. In addition, 507 and 363 non-vested restricted Class A shares, which are considered participating securities, and their allocated net income were excluded from the diluted net income per share calculation at October 28, 2023 and October 29, 2022, respectively, due to their anti-dilutive effect. 9 4. RELATED PARTY INFORMATION A description of the Company’s transactions with Wakefern, its principal supplier, and with other related parties is included in the Company’s Annual Report on Form 10-K for the year ended July 29, 2023. On August 15, 2022, notes receivable due from Wakefern of $ 28,850 that earned interest at the prime rate plus 1.25 % matured. The Company invested all of the proceeds received in variable rate notes receivable from Wakefern that earn interest at the prime rate plus .50 % and mature on August 15, 2027. On September 28, 2022, the Company invested an additional $ 30,000 in variable rate notes receivable from Wakefern that earn interest at the prime rate plus .50 % and mature on September 28, 2027. At October 28, 2023, the Company held variable rate notes receivable due from Wakefern of $ 32,211 that earn interest at the prime rate plus .75 % and mature on February 15, 2024, $ 31,559 that earn interest at the prime rate plus .50 % and mature on August 15, 2027 and $ 32,578 that earn interest at the prime rate plus .50 % and mature on September 28, 2027. 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. Included in cash and cash equivalents at October 28, 2023 and July 29, 2023 are $ 116,520 and $ 122,028 , respectively, of demand deposits invested at Wakefern at overnight money market rates. On April 28, 2022, the Company entered into a partnership agreement for 30 % interest in the development of a retail center in Old Bridge, New Jersey, which includes a Village replacement store with an operating lease obligation of $ 4,304 as of October 28, 2023.Village will fund its share of project costs estimated to be $ 15,000 to $ 20,000 over the two to three year life of the project. As of October 28, 2023, Village has invested $ 12,688 into the real estate partnership, which is accounted for as an equity method investment included in Investments in Real Estate Partnerships on the Consolidated Balance Sheet. There have been no other significant changes in the Company’s relationships or nature of transactions with related parties during the 13 weeks ended October 28, 2023. 5. COMMITMENTS and CONTINGENCIES The Company is involved in litigation incidental to the normal course of business. Company management is of the opinion that the ultimate resolution of these legal proceedings should not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company. 6. DEBT Long-term debt consists of: October 28, 2023 July 29, 2023 Secured term loans $ 52,846 $ 53,912 Unsecured term loan 21,443 22,702 New Market Tax Credit Financing 5,120 5,182 Total debt, excluding obligations under leases 79,409 81,796 Less current portion 9,370 9,370 Total long-term debt, excluding obligations under leases $ 70,039 $ 72,426 Credit Facility The Company has a credit facility (the “Credit Facility”) with Wells Fargo National Bank, National Association (“Wells Fargo”). The principal purpose of the Credit Facility is to finance general corporate and working capital requirements, Village’s fiscal 2020 acquisition of certain Fairway assets and certain capital expenditures. Among other things, the Credit Facility provides for: 10 • An unsecured revolving line of credit providing a maximum amount available for borrowing of $ 75,000 . Indebtedness under this agreement bears interest at the applicable Secured Overnight Financing Rate ("SOFR") plus 1.10 % and expires on May 6, 2025. • An unsecured $ 25,500 term loan issued on May 12, 2020, repayable in equal monthly installments based on a seven-year amortization schedule through May 4, 2027 and bearing interest at the applicable SOFR plus 1.46 %. An interest rate swap with notional amounts equal to the term loan fixes the base SOFR at .26 % per annum through May 4, 2027, resulting in a fixed effective interest rate of 1.72 % on the term loan. • A secured $ 50,000 term loan issued on September 1, 2020 repayable in equal monthly installments based on a fifteen-year amortization schedule through September 1, 2035 and bearing interest at the applicable SOFR plus 1.61 %. An interest rate swap with notional amounts equal to the term loan fixes the base SOFR at .57 % per annum through September 1, 2035, resulting in a fixed effective interest rate of 2.18 % on the 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. • A secured $ 7,350 term loan issued on January 28, 2022 repayable in equal monthly installments based on a fifteen-year amortization schedule through January 28, 2037 and bearing interest at the applicable SOFR plus 1.50 %. An interest rate swap with notional amounts equal to the term loan fixes the base SOFR at 1.41 % per annum through January 28, 2037, resulting in a fixed effective interest rate of 2.91 % on the term loan. The term loan is secured by the Galloway store shopping center acquired in the first quarter of fiscal 2022. On September 1, 2022, the Company amended the Credit Facility due to the execution of a seven year $ 10,000 unsecured term loan. The unsecured term loan is repayable in equal monthly installments based on a seven year amortization schedule through September 4, 2029 and bears interest at the applicable SOFR plus 1.35 %. Village also executed an interest rate swap for a notional amount equal to the term loan amount that fixes the base SOFR at 2.95 %, resulting in a fixed effective rate of 4.30 %. This loan qualified for an interest rate subsidy program with Wakefern on financing related to certain capital expenditure projects. Net of the subsidy, the Company will pay interest at a fixed effective rate of 2.30 %. On January 27, 2023, the Company purchased the Vineland store shopping center for $ 9,500 . As part of the purchase, the Company amended the Credit Facility due to the execution of a fifteen year $ 7,125 term loan secured by the Vineland store shopping center. The secured term loan is repayable in equal monthly installments based on a fifteen year amortization schedule through January 27, 2038 and bears interest at the applicable SOFR plus 1.75 %. Village also executed an interest rate swap for a notional amount equal to the term loan amount that fixes the base SOFR at 3.59 %, resulting in a fixed effective rate of 5.34 %. The Credit Facility also provides for up to $ 25,000 of letters of credit ($ 7,336 outstanding at October 28, 2023), 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 28, 2023. As of October 28, 2023, $ 67,664 remained available under the unsecured revolving line of credit. New Markets Tax Credit Financing On December 29, 2017, the Company entered into a financing transaction with Wells Fargo Community Investment Holdings, LLC (“Wells Fargo”) under a qualified New Markets Tax Credit (“NMTC”) program related to the construction of a new store in the Bronx, New York. The NMTC program was provided for in the Community Renewal Tax Relief Act of 2000 (the “Act”) and is intended to induce capital investment in qualified lower income communities. The Act permits taxpayers to claim credits against their Federal income taxes for up to 39% of qualified investments in the equity of community development entities (“CDEs”). CDEs are privately managed investment institutions that are certified to make qualified low-income community investments. In connection with the financing, the Company loaned $ 4,835 to VSM Investment Fund, LLC (the "Investment Fund") at an interest rate of 1.403 % per year and with a maturity date of December 31, 2044. Repayments on the loan commence in March 2025. Wells Fargo contributed $ 2,375 to the Investment Fund and, by virtue of such contribution, is entitled to substantially all of the tax benefits derived from the NMTC. The Investment Fund is a wholly owned subsidiary of Wells Fargo. The loan to the Investment Fund is recorded in Other assets in the consolidated balance sheets. The Investment Fund then contributed the proceeds to a CDE, which, in turn, loaned combined funds of $ 6,563 , net of debt issuance costs, to Village Super Market of NY, LLC, a wholly-owned subsidiary of the Company, at an interest rate 11 of 1.000 % per year with a maturity date of December 31, 2051. These loans are secured by the leasehold improvements and equipment related to the construction of the Bronx store. Repayment of the loans commences in March 2025. The proceeds of the loans from the CDE were used to partially fund the construction of the Bronx store. The Notes payable related to New Markets Tax Credit, net of debt issuance costs, are recorded in long-term debt in the consolidated balance sheets. The NMTC is subject to 100% recapture for a period of seven years. The Company is required to be in compliance with various regulations and contractual provisions that apply to the New Markets Tax Credit arrangement. Noncompliance could result in Wells Fargo's projected tax benefits not being realized and, therefore, require the Company to indemnify Wells Fargo for any loss or recapture of NMTCs. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement. The transaction includes a put/call provision whereby the Company may be obligated or entitled to repurchase Wells Fargo's interest in the Investment Fund. The value attributed to the put/call is de minimis. We believe that Wells Fargo will exercise the put option in December 2024, at the end of the recapture period, that will result in a net benefit to the Company of $ 1,728 . The Company is recognizing the net benefit over the seven-year compliance period in operating and administrative expense. 7. DERIVATIVES AND HEDGING ACTIVITIES The Company is exposed to interest rate risk arising from fluctuations in SOFR related to the Company’s Credit Facility. The Company manages exposure to this risk and the variability of related cash flows primarily by the use of derivative financial instruments, specifically, interest rate swaps. The Company’s objectives in using interest rate swaps are to add stability to interest expense and to manage its exposure to interest rate movements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. As of October 28, 2023, the Company had five interest rate swaps with an aggregate initial notional value of $ 99,975 to hedge the variable cash flows associated with variable-rate loans under the Company's Credit Facility. The interest rate swaps were executed for risk management and are not held for trading purposes. The objective of the interest rate swaps is to hedge the variability of cash flows resulting from fluctuations in the reference rate. The swaps replaced the applicable reference rate with fixed interest rates and payments are settled monthly when payments are made on the variable-rate loans. The Company's derivatives qualify and have been designated as cash flow hedges of interest rate risk. The gain or loss on the derivative is recorded in Accumulated other comprehensive income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in Accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the variable-rate loans. The Company reclassified $ 781 and $ 243 during the 13 weeks ended October 28, 2023 and October 29, 2022, respectively, from Accumulated other comprehensive income to Interest expense. The notional value of the interest rate swaps were $ 74,570 as of October 28, 2023. The fair value of interest rate swaps recorded in Other assets in the consolidated balance sheets is $ 10,269 as of October 28, 2023. 12