Ingles Markets, Incorporated

Second-quarter fiscal 2016 net sales increased 1% to $924.3 million, and comparable store sales excluding gasoline increased 1.2%. Net income was $14.4 million versus $14.3 million in the prior-year quarter, with basic EPS of $0.73 and diluted EPS of $0.71, both essentially unchanged year over year. Gross profit rose 4.6% to $228.7 million, and gross margin improved to 24.7% from 23.9%; excluding gasoline, grocery gross profit margin increased 23 basis points. For the first half, sales were $1.88 billion, gross profit was $454.4 million, net income was $27.3 million versus $29.3 million, and EPS was $1.39 basic and $1.35 diluted versus $1.49 and $1.45. Management did not provide next-quarter sales or EPS guidance, but said full-year capital expenditures should be approximately $125 million to $145 million and that two or three replacement stores are expected to open later this fiscal year.

Jim Lanning’s strategic message centered on continuing to improve the store base and customer satisfaction while maintaining momentum through the rest of the year. The tone was constructive, with management pointing to higher sales, improved gross profit, and an accelerated pace of new building compared with the last couple of years. He also highlighted interest in exploring new customer payment/access options, including click-and-collect-type solutions, though no announcement was ready.

Ron Freeman emphasized that the quarter benefited from better sales mix and Easter timing, while gasoline remained a mixed factor because lower retail fuel prices reduced reported sales. He cited Q2 gross profit of $228.7 million, operating and administrative expenses of $196.2 million, interest expense of $11.2 million, and total debt of $907.7 million; for the first half, operating and administrative expenses were $390.2 million and interest expense was $23.2 million. He also noted capital expenditures of $71.2 million in the first half, planned full-year capex of $125 million to $145 million, and $175 million in credit lines with $135.9 million available, saying resources should cover planned capex, debt service, and working capital needs.

Analysts pressed management on inflation/deflation, promotional intensity, click-and-collect, fuel margins, labor costs, and the chip-card/EMV liability shift. Freeman said inflation was modest and uneven by department, declined to discuss competitors’ promotions, and said Ingles is exploring multiple ways for customers to pay and access products but has no announcement yet. He also said the fluid dairy business remains a strategic asset, explained that fuel-margin comparisons were mainly affected by the December quarter, and said EMV compliance is in place with no detectable impact on gross margin.