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Item 7. Management’s Discussion and Analysis

2024-10-10 compared with 2023-10-11 · 56 added, 82 removed, 224 unchanged (38% of the section changed)

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Village Super Market, Inc.

(the “Company” or “Village”) operates a chain of 34 supermarkets in New Jersey (26), New York (6), Maryland (1) and Pennsylvania (1) under the ShopRite and Fairway banners and four Gourmet Garage specialty markets in New York City.

(the “Company” or “Village”) operates a chain of 34 supermarkets in New Jersey (26), New York (6), Maryland (1) and Pennsylvania (1) under the ShopRite and Fairway banners and three Gourmet Garage specialty markets in New York City.

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.

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Online ordering for home delivery is available in all Fairway stores through fairwaymarket.com, the Fairway app or through third party service providers.

Online ordering for home delivery

is available in all Gourmet Garage stores through gourmetgarage.com, the Gourmet Garage app or through third party service providers.

Online ordering for home delivery is available in all Gourmet Garage stores through gourmetgarage.com, the Gourmet Garage app or through third party service providers.

To promote production efficiency, product quality and consistency, the Company operates a centralized commissary supplying certain products in deli, bakery, prepared foods and other perishable product categories to all stores.

The Company also owns and operates an automated micro-fulfillment center to facilitate online order fulfillment for the south New Jersey stores.

The Company’s stores, eight of which are owned, average 56,000 total square feet.

These larger store sizes enable the Company to offer a wide variety of national branded and locally sourced food products, including grocery, meat, produce, dairy, deli, seafood, prepared foods, bakery and frozen foods as well as non-food product offerings, including health and beauty care, general merchandise, liquor and 21 in-store pharmacies.

Most product departments include high-quality, competitively priced own-brand offerings under the Wholesome Pantry, Bowl & Basket, Paperbird and Fairway brands.

Most product departments include high-quality, competitively priced own-brand offerings under the Wholesome Pantry, Bowl & Basket, Paperbird, Fairway and Gourmet Garage brands.

Our 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.

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When remodeling, Village has sought, whenever possible, to increase the amount of selling space in its stores.

On March 17, 2024, we opened an 83,000 sq.

replacement ShopRite store in Old Bridge, NJ, that replaced our existing 32,000 sq.

On August 14, 2022, we converted the Pelham, NY store from the Fairway banner to the ShopRite banner and a major remodel of the store was completed in late October 2022.

On April 29, 2022, Village opened a 14,600 sq.

Gourmet Garage in the West Village in Manhattan, NYC.

The Company operated an automated micro-fulfillment center to facilitate online order fulfillment for the south New Jersey stores that was closed on September 1, 2024.

On November 1, 2023, Village closed an 8,400 sq.

Gourmet Garage store located in New York City.

The impact associated with the closure and ongoing results of operating were not material to Village’s consolidated financial statements.

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

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Adjustments to Operating Expenses:

Store pre-opening costs (1) $ 907 $ —

Impairment of assets (2) 2,125 —

Litigation settlement gain (3) — (1,200)

Loss (gain) on non-operating investments (2) 400 (494)

Pension termination and settlement charges (3) — 12,341

Adjustments to Income Taxes:

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Adjusted operating and administrative expenses as a % of sales 24.30 % 23.91 %

(1) Fiscal 2024 pre-opening costs are associated with opening of the Old Bridge, NJ ShopRite replacement store opened on March 17, 2024.

(2) Fiscal 2024 includes non-cash impairment charges for long-lived assets due to the closure of the automated micro-fulfillment center in south NJ.

(3) Fiscal 2023 litigation settlement gains are related to claims associated with the Fairway acquisition and liabilities associated thereto.

(2) Fiscal 2023 and 2022 include a $400 loss and a $494 gain, respectively, related to non-operating equity investments.

(3) Fiscal 2022 pension settlement charges related primarily to the termination of the Village Super Market, Inc.

Employees’ Retirement Plan.

The Company contributed cash of $1,440 to fully fund the plan and the remaining $10,901 represents non-cash charges for unrecognized losses within accumulated other comprehensive loss as of the termination date.

RESULTS OF OPERATIONS

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Depreciation and amortization 1.48 % 1.58 %

Impairment of assets 0.10 % — %

Operating income 2.78 % 3.01 %

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Net income 2.26 % 2.29 %

Sales were $2,166,654 in fiscal 2023, an increase of $105,570, or 5.1% from fiscal 2022.

Sales increased due primarily to an increase in same store sales of 3.5%, the opening of a Gourmet Garage in the West Village in Manhattan, NY on April 29, 2022 and increased sales due to the remodel and conversion of the Pelham, NY Fairway to the ShopRite banner on August 15, 2022.

Same store sales increased due primarily to retail price inflation.

Sales were $2,236,566 in fiscal 2024 compared to $2,166,654 in fiscal 2023.

Sales increased due primarily to an increase in same store sales of 2.3% and the opening of the Old Bridge, NJ replacement store on March 17, 2024 partially offset by the impact of the closure of a Gourmet Garage location on November 1, 2023.

Same store sales increased due primarily to retail price inflation, digital sales growth, higher pharmacy sales and continued growth in recently remodeled stores.

New stores, replacement stores and stores with banner changes 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 as a percentage of sales increased to 28.45% in fiscal 2023 compared to 28.12% in fiscal 2022 due primarily to increased departmental gross margin percentages (.23%), increased patronage dividends and rebates received from Wakefern (.08%), lower LIFO charges (.04%), a favorable change in product mix (.02%) and lower promotional spending (.03%) partially offset by increased warehouse assessment charges from Wakefern (.07%).

Gross profit as a percentage of sales increased to 28.70% in fiscal 2024 compared to 28.45% in fiscal 2023 due primarily to increased departmental gross margin percentages (.21%), increased patronage dividends and rebates received from Wakefern (.13%), decreased warehouse assessment charges from Wakefern (.10%) and lower LIFO charges (.09%) partially offset by higher promotional spending (.18%) and an unfavorable change in product mix (.11%).

Department gross margins increased due primarily to pricing initiatives and improvements in commissary operations partially offset by higher inventory shrink.

OPERATING AND ADMINISTRATIVE EXPENSE

Operating and administrative expense as a percentage of sales decreased to 23.86% in fiscal 2023 compared to 24.63% in fiscal 2022.

Adjusted operating and administrative expense as a percentage of sales decreased to 23.89% in fiscal 2023 compared to 24.05% in fiscal 2022 due primarily to lower labor costs (.19%) and decreased supply spending (.12%) partially offset by increased self-insured claim costs (.09%) and higher facility repair and maintenance costs (.05%).

Labor costs and fringe benefits decreased due primarily to sales leverage and ongoing productivity initiatives partially offset by minimum wage and market-driven pay rate increases.

Operating and administrative expense as a percentage of sales increased to 24.34% in fiscal 2024 compared to 23.86% in fiscal 2023.

Adjusted operating and administrative expense as a percentage of sales increased to 24.30% in fiscal 2024 compared to 23.91% in fiscal 2023 due primarily to increased labor costs and fringe benefits (.21%), increased external fees associated with digital sales growth (.08%), expanded store security (.06%) and software licensing associated with retail and commissary technology investments (.05%).

Higher labor and fringe benefit costs are due primarily to minimum wage and demand driven pay rate increases and higher union health and welfare plan costs.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense was $34,002 and $33,122 in fiscal 2023 and 2022, respectively.

Depreciation and amortization expense increased due primarily to capital expenditures.

Depreciation and amortization expense decreased in fiscal 2024 compared to fiscal 2023 due primarily to the timing of capital expenditures.

IMPAIRMENT OF ASSETS

Impairment of assets in fiscal 2024 includes non-cash charges for long-lived assets at the automated micro-fulfillment center which was closed in September 2024.

INTEREST EXPENSE

Interest expense was $4,220 and $3,907 in fiscal 2023 and 2022, respectively.

Interest expense increased due primarily to higher average outstanding debt balances.

Interest expense decreased in fiscal 2024 compared to fiscal 2023 due primarily to lower average outstanding debt balances.

INTEREST INCOME

Interest income was $11,399 and $4,023 in fiscal 2023 and 2022, respectively.

Interest income increased in fiscal 2024 compared to fiscal 2023 due primarily to higher interest rates and larger amounts invested in variable rate notes receivable from Wakefern and demand deposits invested at Wakefern.

The Company’s effective income tax rate was 31.6% and 31.3% in fiscal 2023 and 2022, respectively.

The Company’s effective income tax rate was 30.6% in fiscal 2024 compared to 31.6% in fiscal 2023.

The effective tax rate decreased in fiscal 2024 compared to fiscal 2023 due primarily to increased estimated work opportunity tax credits and a favorable deferred tax asset revaluation to reflect changes in state tax rates.

Net income was $50,462 in fiscal 2024 compared to $49,716 in fiscal 2023.

Adjusted net income was $52,554 in fiscal 2024 compared to $48,888 in fiscal 2023.

Adjusted net income increased 40% compared to the prior year due primarily to the 3.5% increase in same store sales, improvements in gross profit and operating and administrative expense margins and increased interest income.

Adjusted net income increased 7% compared to the prior year due primarily to the 2.3% increase in same store sales, improvements in gross profit and increased interest income.

CRITICAL ACCOUNTING POLICIES

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The patronage dividend receivable based on these estimates was $16,068 and $12,466 at July 27, 2024 and July 29, 2023, respectively.

PENSION PLANS

The determination of the Company’s obligation and expense for Company-sponsored pension plans is dependent, in part, on Village’s selection of assumptions used by actuaries in calculating those amounts.

These assumptions are described in Note 9 to the consolidated financial statements and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rate of increase in compensation costs.

Actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods.

While management believes that its assumptions are appropriate, significant differences in actual experience or significant changes in the Company’s assumptions may materially affect cash flows, pension obligations and future expense.

The objective of the discount rate assumption is to reflect the rate at which the Company’s pension obligations could be effectively settled based on the expected timing and amounts of benefits payable to participants under the plans.

Our methodology for selecting the discount rate as of July 29, 2023 was to match the plans' cash flows to that of a yield curve on high-quality fixed-income investments.

Based on this method, we utilized a weighted-average discount rate of 4.85% at July 29, 2023 compared to 3.77% at July 30, 2022.

Changes in the discount rate and updated assumptions on mortality tables and improvement scales resulted in a net decrease in the projected benefit obligation by approximately $771 at July 29, 2023.

Village evaluated the expected increase in compensation costs of 4.50% and concluded no changes in this assumption was necessary in estimating pension plan obligations and expense.

The Company utilizes a liability-driven investment ("LDI")

A LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk.

This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability.

The investment allocation to fixed income instruments will increase as each plans' funded status increases.

Based on the Company’s LDI strategy, the Company assumed a weighted-average assumed long-term rate of return on plan assets of 5.75% in fiscal 2023.

Sensitivity to changes in the major assumptions used in the calculation of the Company’s pension plans is as follows:

point change Projected benefit

(increase) Expense

Discount rate + / - 1.0 % $ 638 $ (684) $ 34 $ (72)

Expected return on assets + / - 1.0 % $ — — $ 21 $ (21)

In April 2022, the Company terminated the Village Super Market, Inc.

Employees’ Retirement Plan.

Prior to termination, the Company made a $1,485 contribution to fully fund the plan.

Plan assets were liquidated to fund lump sum distributions to participants of $37,289 and purchase annuity contracts totaling $14,930 with an insurance company for all participants who did not elect a lump sum distribution.

No benefit obligation or plan assets related to the Village Super Market, Inc.

Employees’ Retirement Plan remain as of July 29, 2023.

In fiscal 2022, the Company recognized a $12,296 pre-tax settlement charge as a result of the termination, including a 10,856 non-cash charge for unrecognized losses within accumulated other comprehensive loss as of the termination date.

Village made no contributions to the remaining plans in fiscal 2023 or fiscal 2022.

Contributions to the remaining plans are expected to be immaterial in fiscal 2024.

RECENTLY ISSUED ACCOUNTING STANDARDS

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Net cash provided by operating activities was $80,849 in fiscal 2024 compared to $104,513 in fiscal 2023.

The change in cash flows from operating activities in fiscal 2023 was primarily due to changes in working capital and higher net income adjusted for non-cash items including depreciation and amortization, share-based compensation, deferred taxes, pension settlement charges, the provision to value inventories at LIFO, impairment charges and the gain on sale of property, equipment and fixtures.

Working capital changes, including other assets and other liabilities, increased net cash provided by operating activities by $15,021 in fiscal 2023 compared to $7,081 in fiscal 2022.

The change in cash flows from operating activities in fiscal 2024 was primarily due to changes in working capital partially offset by an increase in net income.

Working capital changes, including Other assets and liabilities, decreased cash flows from operating activities by $11,340 in fiscal 2024 compared to an increase of $15,021 in fiscal 2023.

The change in impact of working capital is due primarily to the timing of tax payments.

During fiscal 2024, Village used cash to fund capital expenditures of $63,113, dividends of $13,341, principal payments of long-term debt of $11,003, share repurchases of $2,211, an investment in a real estate partnership for the development of a retail center in Old Bridge, New Jersey of $6,480 and additional net investments of $8,653 in notes receivable from Wakefern.

Capital expenditures primarily include costs associated with the construction of the Old Bridge replacement store

that opened on March 17, 2024, the minor remodel of the Millburn, NJ ShopRite, two other replacement stores scheduled to open in fiscal 2025, the purchase of real estate and various technology, equipment and facility upgrades.

During fiscal 2023, Village used cash to fund capital expenditures of $46,400, dividends of $13,193, principal payments of long-term debt of $10,446, treasury stock purchases of $3,739, an investment in a real estate partnership for the development of a retail center in Old Bridge, New Jersey of $5,865 and additional net investments of $36,425 in notes receivable from Wakefern.

Capital expenditures primarily include costs associated with the remodel and conversion of the Pelham, NY Fairway to the ShopRite banner, the new Gourmet Garage store in the West Village of New York City, the purchase of the Vineland store shopping center, costs for construction of the Old Bridge replacement store, installation of electronic shelf labels, continued expansion of self-checkout, and various technology, equipment and facility upgrades.

During fiscal 2022, Village used cash to fund capital expenditures of $43,270, dividends of $13,041, principal payments of long-term debt of $8,299 and additional investments of $2,489 in notes receivable from Wakefern.

Capital expenditures primarily include costs associated with the purchase of the Galloway store shopping center, the purchase of land in central New Jersey for a potential replacement store and other development, the new Gourmet Garage store in the West Village of New York City, continued expansion of self-checkout, and various merchandising, technology, equipment and facility upgrades.

LIQUIDITY and DEBT

Working capital was $67,714 and $79,796 at July 29, 2023 and July 30, 2022, respectively.

Working capital was $25,485 at July 27, 2024 compared to $67,714 at July 29, 2023.

Working capital ratios at the same dates were 1.15 and 1.38 to one, respectively.

The decrease in working capital in fiscal 2023 compared to fiscal 2022 is due

primarily to an additional $36,425 investment in long-term notes receivable from Wakefern.

The decrease in working capital in fiscal 2024 compared to fiscal 2023 is due primarily to $33,338 in notes receivable from Wakefern that matured on February 15, 2024 and were reinvested in long-term notes receivable from Wakefern.

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

We have budgeted $75,000 for capital expenditures in fiscal 2025.

Planned expenditures include costs for construction of the Old Bridge replacement store scheduled to open in fiscal 2024 and two other replacement stores scheduled to open in fiscal 2025, potential real estate purchases, several smaller store remodels and merchandising initiatives and various technology, equipment and facility upgrades.

Planned expenditures include costs for construction of replacement stores in both East Orange, NJ and Watchung, NJ, real estate purchases, several smaller store remodels and merchandising initiatives and various technology, equipment and facility upgrades.

The Company’s primary sources of liquidity in fiscal 2025 are expected to be cash and cash equivalents on hand at July 27, 2024 and operating cash flow generated in fiscal 2025.

On April 28, 2022 the Company entered into a partnership agreement for a 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 $4,127 as of July 29, 2023.

During fiscal 2022 the Company entered into a partnership agreement for a 30% interest in the development of a retail center in Old Bridge, New Jersey, which includes the Village Old Bridge replacement store with an operating lease obligation of $4,374 as of July 27, 2024.

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.

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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 July 29, 2023, the Company held variable rate notes receivable due from Wakefern of $31,483 that earn interest at the prime rate plus .75% and mature on February 15, 2024, $30,865 that earn interest at the prime rate plus .50% and mature on August 15, 2027 and $31,861 that earn interest at the prime rate plus .50% and mature on September 28, 2027.

On February 15, 2024, notes receivable due from Wakefern of $33,338 that earned interest at the prime rate plus .75% matured.

The Company invested all of the proceeds received in variable rate notes receivable from Wakefern that earn interest at the SOFR plus 2.25% and mature on February 15, 2029.

At July 27, 2024, the Company held variable rate notes receivable due from Wakefern of $33,740 that earn interest at the prime rate plus .50% and mature on August 15, 2027, $34,829 that earn interest at the prime rate plus .50% and mature on September 28, 2027, and $34,293 that earn interest at the SOFR plus 2.25% and mature on February 15, 2029.

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

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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 for $9,800 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%.

The term loan is secured by the Galloway store shopping center.

• An unsecured $10,000 term loan issued on September 1, 2022 repayable in equal monthly installments based on a seven-year amortization schedule through September 4, 2029 and bearing interest at the applicable SOFR plus 1.35%.

An interest rate swap for a notional amount equal to the term loan fixes the base SOFR at 2.95% per annum through September 4, 2029, resulting in a fixed effective interest rate of 4.30% on the term loan.

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%.

• A secured $7,125 term loan issued on January 27, 2023 repayable in equal monthly installments based on a fifteen-year amortization schedule through January 27, 2038 and bearing interest at the applicable SOFR plus 1.75%.

An interest rate swap for a notional amount equal to the term loan fixes the base SOFR at 3.59% per annum through January 27, 2038, resulting in a fixed effective interest rate of 5.34% on the term loan.

The term loan is secured by the Vineland store shopping center.

The Credit Facility also provides for up to $25,000 of letters of credit ($7,336 outstanding at July 27, 2024), which secure obligations for store leases and construction performance guarantees to municipalities.

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• We have budgeted $75,000 for capital expenditures in fiscal 2025.

• The Board’s current intention is to continue to pay quarterly dividends in 2025 at the most recent rate of $.25 per Class A and $.1625 per Class B share.

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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, disturbances due to social unrest and changing demographics may adversely affect our sales and profits.

Results of operations may be materially adversely impacted by inflation, deflation, interest rate fluctuations, movements in energy costs, social programs, minimum wage legislation, labor shortages, changing demographics, natural disasters, terrorist attacks, the outbreak of pandemics or other illnesses, disruptions to supply chains and disturbances due to social unrest, geopolitical conflict and political instability.

• Village purchases substantially all of its merchandise from Wakefern.

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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.

On February 15, 2024, notes receivable due from Wakefern of $33,338 that earned interest at the prime rate plus .75% matured.

The Company invested all of the proceeds received in variable rate notes receivable from Wakefern that earn interest at the SOFR plus 2.25% and mature on February 15, 2029.

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

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These deposits earn overnight money market rates.

The Company subleased the Galloway and Vineland stores from Wakefern under sublease agreements which provided for combined annual rents of $413 and $959 in fiscal 2023 and 2022.

Both leases contained normal periodic rent increases and

options to extend the lease.

The sublease agreements were terminated upon the acquisition of the Galloway store shopping center in fiscal 2022 and Vineland store shopping center in fiscal 2023 for $9,800 and $9,500, respectively.

The Company subleased the Vineland store from Wakefern under a sublease agreement which provided for annual rent of $413 in fiscal 2023.

The sublease contained normal periodic rent increases and options to extend the lease.

The sublease agreement was terminated upon the acquisition of the Vineland store shopping center in fiscal 2023.

The Company leases a supermarket from a realty firm 30% owned by certain officers of Village.

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The Company has ownership interests in four real estate partnerships.

Village paid aggregate rents to two of these partnerships for leased stores of $1,568 and $1,556 in fiscal 2023 and 2022, respectively, and has aggregate lease obligations of $15,996 at July 29, 2023 related to these leases.

Village paid aggregate rents to three of these partnerships for leased stores of $1,827 and $1,568 in fiscal 2024 and 2023, respectively, and has aggregate lease obligations of $15,733 at July 27, 2024 related to these leases.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis