Ingles Markets (IMKTA, Financial) is a supermarkets chain operator in the southeast region of the country, dealing in various food products, including grocery, meat and dairy products, produce, frozen foods, and other perishables; and non-food products comprising fuel, pharmacy products, health and beauty care products, and general merchandise, as well as private label items. Its stores also offer home meal replacement items, delicatessens, bakery and floral products, and greeting cards, as well as various selections of organic, beverage, and health-related items.
Shareholders of Ingles are sitting on a year-to-date gains of around 35% and the company posted its second-quarter fiscal 2015 results earlier this month. Let’s recap the numbers and see whether it can sustain the momentum, especially in the face of stiff competition from big-box retailers like Wal-Mart (WMT, Financial) and Target (TGT, Financial)
Second-quarter numbers
- Comparable-store sales, or comps, grew 1.2% year-over-year (excluding gasoline) during the quarter, backed by 3.2% year-over-year increase in average transaction size which was partly offset by 0.7% year-over-year decline in number of transactions.
- On the back of comps growth, net sales (excluding gasoline) witnessed 1% year-over-year growth to clock $810.9 million.
- Gross profit increased 6.1% year-over-year to $218.7 million. Gross profit as a percentage of sales was 23.9% versus 21.7% in the year-ago quarter.
- Net income increased $14.3 million versus $10.5 million in the year-ago quarter. This is significantly higher than the growth of S&P 500 and the Food & Staples Retailing industry.
- Basic and diluted earnings per share came in at $0.71 and $0.71 versus $0.47 and $0.46, respectively, in the year-ago-quarter.
- Net operating cash flow increased by a whopping 54.59% to $63.73 million versus industry average cash flow growth rate of 20.45%.
Looking forward
Two contributing factors driving the growth are comps and margins. Ingles has been reporting comps and margins growth for several quarters now. However, one negative factor is the growth in inventory by 1.09% year over year.
During the recently reported quarter the company closed one store bringing the count to 202. It has plans to add one store, update old stores, and add gas station and pharmacy outlets to stores wherever possible in order to drive long-term growth. The grocer currently has 85 gas stations as at the end of second quarter.
On adding gas station and pharmacy to each store, during the earnings call Ron Freeman, CFO, said:
We look at locations individually and market conditions individually. So there's not a real target number in mind and as conditions change, we may look at some sites that we had passed on before.
The company’s customer-centric focus is the key growth driver and during the recent earnings report, CEO Robert Ingle said:
We will continue to add products and amenities that appeal to our customers. Our first half results reflect that, as well as the hard work of our associates.
Ingles operates it stores through one central warehouse located in Black Mountain, NC. This makes it nimble footed with respect to changing consumer market demands and also helps the grocer to control costs.
The company is confident of earnings growth in the current as well as next fiscal year. Fiscal 2015 earnings are expected to be around $2.60 per share, whereas for fiscal 2016 the same is expected to surge to $3.30 per share.
Wrapping up
With a forward P/E of around 15.25, the valuation is enticing compared to peers like Kroger (KR, Financial) and Whole Foods (WFM, Financial). I had covered Kroger earlier this month, here. Also, it is currently trading above the 20 SMA so investors are bullish on the stock. The company has outperformed S&P 500 and the Food & Staples Retailing industry on many growth metrics. For the next five years, analysts expect the growth to be at a CAGR of 17.20%.
So, Ingles is a good stock to own for long-term.
