Weis Markets (WMK) is a retail food store which as of the most recent quarter owned and operated 165 stores in Pennsylvania, New York, Maryland, New Jersey and West Virginia.
For its latest quarter ending March 30, 2013, the company showed incremental growth, with CEO David Hepfinger calling the slight 0.8 percent growth in underlying sales (same-store) attributable to a “soft sales environment.”
“Our customers were also impacted in the first quarter by a tax increase and post-holiday debt. This soft sales environment spurred increased competitive activity in most of our key markets. We were able to offset these trends through disciplined marketing and promotional programs and improved productivity and operational efficiencies at store and distributional levels,” Hepfinger added.
Same-store sales continue to be flat.
Latest Earnings
Revenue for Weis Markets in the 1st quarter 2013 came in at $682.7 million, beating the $667.6 million estimate of the only analyst that covers the company. It was 3.2 percent above the revenue generated in the 1st quarter 2012.
Net income in the period ended March 30, 2013, was $20.1 million, a gain of 0.5 percent year-over-year. Diluted earnings per share rose to $.75 a share, slightly up from the $.74 per share in the same quarter last year.
Gross margins in the quarter were 28 percent and ROE stood at 10.5 percent. Over the trailing twelve months (TTM) gross margin is 27.6 percent, operating margin 4.7 percent and net margin 3.0 percent.
When measured against the last five years, it isn’t too bad, as gross margins over that time averaged 26.9 percent, operating margin 3.9 percent, and net margin 2.6 percent. This suggests the company is doing OK with margins over the last year in contrast to its recent historical averages, although sales remain flat.
Cash Flow Statement
Income Statement
Capex
The grocer has committed $135 million in 2013 for its capital expenditure program, about 8 percent over the amount it spent in 2012.
“To position our company for continued growth, we have made record investments in our store base,” said Vice Chairman Jonathan H. Weis. “Look for more of the same in 2013 when we increase our Cap Ex investment to $135 million – an 8 percent increase compared to 2012 – and a 33 percent increase compared to 2011.”
“By the end of 2013, we will have invested nearly half a billion dollars in our growth and will have completed more than 100 projects, added President and CEO David J. Hepfinger.
Among the 37 planned projects for 2013, Weis Markets will open another four stores, perform 17 remodels and 15 major remodels.
With little sign of an economic turnaround in the region it serves, the company has also focused on shoring up its information technology infrastructure in order to improve the decision-making process by using as accurate data as it can. Hepfinger sees this as “essential” to the “growth and future profitability” of the company, pointing to improving margins in a non-growth environment.
Weis is also targeting supply chain and customer service as ways to improve sales.
The large amount of capital expenditures has weighed on the company, as it consumes over 92 percent of cash from operations. Shareholders are going to want to see some significant results after this type of capex. I think the latter part of 2013 or the first quarter of 2014 there will be a need for some better numbers from the company or there will be some pressure put upon it.
Balance Sheet
Store Upgrades
It’s difficult to assess the impact renovations and upgrades have had on the stores, because of the regional differences and focuses, as far as what may be added and taken away from each on in direct relationship to products offered.
The renovations themselves are easy to understand, as the stores being made to look like the new stores Weis is opening, providing a more fresh and clean look. While that is all fine, I think the benefit will primarily be in how the interior of the store is changed to accommodate adjustments in product mix.
For example, some stores are having a beer cafe added, something fairly popular in Pennsylvania particularly. While interesting, I don’t see this as much of a positive, as people are concerned about drinking and being stopped over suspicions of DUI. Some restaurants have also added a seated bar sections, and those usually attract a few locals that sit around sipping on their drinks while buying little else. This is mostly a response to competitors adding beer cafes to their stores. It may boost margin in that product line, but it won’t do much for ancillary sales unless people add some deli food to their drinking.
Other additions include a wider selection of meals to go – customers can eat at the cafe or take the meal out. Self-checkout kiosks are also being added. There will also be an increase in refrigerated produce cases and a larger floral section in some stores. Again, some of this will be included in the remodels and new stores.
The purpose is to retain existing customers while attracting new. Since the company is primarily focusing on renovation, the implication is it is trying to boost same-store traffic to increase its growth, which has been anemic in that metric in recent years.
Foodservice Program
One area of Weis that has been vastly improved is its foodservice program. Having the most impact is its leafy green salads and rotisserie chicken program. Other offerings such as house-made pizza and plated meals are harder to evaluate because they change from location to location based on local tastes and preferences.
By far the fastest growing offering is leafy green salads with a protein. This assuredly has to be from people wanting healthier and tasty food. The addition of a protein is probably what makes it stand out, as it would expand the number of customers desiring that as an option.
“That category has really blown up. We’ve had overwhelming customer response,” said Geoffrey Wexler, the chain’s director of deli and prepared foods.
“Whenever we’ve built new stores or remodeled existing units over the past two decades, we’ve devoted more space to foodservice or improved our ability to offer it,” added Wexler.
The rotisserie chicken revamp has also been highly successful, offering flavors unique – and in some cases – exclusive to the store, which helps to differentiate the company from its competitors.
The point in the foodservice program is people have increasingly considered food stores as a quick and legitimate alternative to going out to a restaurant. In 2008 that exploded when people looked for alternatives to pricey restaurants, and grocers offering quality and a variety of meals generated growth. Since the region Weis serves continues to be weak economically, that will be a growth sector for some time.
Add to that the continual work on improving what it offers, if the economy eventually turns around, it has unique and exclusive meal offerings. It will be a place customers who like the food will continue to go to eat.
Wexler said of the strategy, “… we’ve concentrated on freshness and variety and quality to make us as attractive as a restaurant.”
Each new store opened by Weis includes more space dedicated to prepared foods, and in remodels the traditional deli has been consolidated, making room for about 15 percent to 20 percent more space for foodservice offerings.
Adding Profitect’s Profit Amplication Tool
On the IT side, in January 2013 Profitect announced it has been chosen by Weis Markets to help it transform its store processes.
The stated purpose is “to provide a single, integrated solution, which could transform our teams and stores processes,” said Scott Frost, CFO, Weis Markets. “The ability to quickly impact the top and bottom line and make more informed decisions is a critical component of our strategy to exceed the expectations of our customers.”
“We needed a predictive analytics solution that could identify traditional asset protection challenges, but more importantly, improve the customer experience by reducing out-of-stocks and improving efficiencies in a proactive manner. Thus, reducing the overall cost to our business while increasing profits across the entire enterprise,” added Mike Limauro, VP asset protection, Weis Markets.
Profit Amplication is a cloud-based tool with pattern-seeking predictive analytics included with it. Weis Markets started off using the Point of Sale and Inventory modules of the Profitect suite, showing where the priorities of the company lie in deploying it.
Conclusion
Weis Markets has had an image problem with its stores, apparently from lack of uniform quality across its various outlets. The steps it’s taking to address those issues are the right ones, and hopefully the company will not only implement the new policies, but maintain them as well.
The Board apparently likes where CEO David Hepfinger is taking the company, as it offered him a new five-year deal in March 2013.
So with some continuity in place concerning leadership and a commitment to improving the physical stores and product mix offered, the question is how will all of that impact Weis Markets.
The answer appears to be it’ll be on an incremental basis. Weis is fighting hard to maintain its same-store revenue growth, and the improvements mentioned above seem to provide a decent chance for that to grow. As for new stores, the company is also going forward tentatively, adding four more in 2013. That implies caution and a lack of confidence in the economy in the region it serves. It also suggests Weis isn’t ready to expand much beyond its geographic base. I think it’s the need to iron out its weaknesses that is being focused on now, and until the company has that in order, it makes little sense to roll out a big new-store expansion program if all it’s doing is multiplying the existing problems.
In line with its growth model, over the last five years Weis has been slowly moving up in share price. Add to that its $1.20 dividend, which as of this writing provides a 2.80 percent yield, this is a company someone looking out over the long term may want to include in their portfolio, especially those with more of a conservative bent.
Once the potential benefits of the many improvements kick in at Weis, it could pleasantly surprise investors, as it could jump higher and quicker than its historical norm. On the other hand, if after spending almost $500 million the results of the company don’t improve, the opposite could happen. It will probably take three quarters to a year before the jury is out on that, although some of the early renovations and improvements could be reflected in the numbers before that.
Taken in aggregate though, the full impact won’t be felt until the end of 2013 and early 2014. Once Weis gets its act together, at that time it’ll be very interesting to see if they decide to get aggressive with new stores. If so, that would really add shareholder value. That probably wouldn’t happen for at least a couple of years. The economic climate is also a factor in new expansion.
As it is now, it looks like Weis will continue to plod along and offer some fairly predictable and safe returns for shareholders.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Source Article from http://seekingalpha.com/article/1495432-weis-markets-remains-steady-under-weak-economic-conditions?source=google_news
