WEIS MARKETS INC - Quarter Report: 2021 March (Form 10-Q)

UNITED STATES
‎SECURITIES AND EXCHANGE COMMISSION
‎WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

WEIS MARKETS, INC.
‎(Exact name of registrant as specified in its charter)

Not Applicable
‎(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Securities registered pursuant to section 12(b) of the act:

As of May 6, 2021, there were issued and outstanding 26,898,443 shares of the registrant’s common stock.

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TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM I – FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(unaudited)

See accompanying notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

See accompanying notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited)

See accompanying notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

See accompanying notes to Consolidated Financial Statements. In the first thirteen weeks of 2021, there was $1.1 million cash paid for income taxes compared to $89 thousand in 2020 for the same period. Cash paid for interest related to long-term debt was $9 thousand and $10 thousand in the first thirteen weeks of 2021 and 2020, respectively.

(1) Significant Accounting Policies
‎Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring deferrals and accruals) considered necessary for a fair presentation have been included. The operating results for the periods presented are not necessarily indicative of the results to be expected for the full year. The Company has evaluated subsequent events for disclosure through the date of issuance of the accompanying unaudited consolidated interim financial statements and there were no material subsequent events which require additional disclosure. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company's latest Annual Report on Form 10-K.

(2) Current Relevant Accounting Standards

The Company regularly monitors recently issued accounting standards and assesses their applicability and impact. The Company believes that there are no accounting standard updates that have or will have a material or significant impact on the Company's accounting policies.

(3) Marketable Securities

The Company’s marketable securities are all classified as available-for-sale within “Current Assets” in the Company’s Consolidated Balance Sheets. FASB has established three levels of inputs that may be used to measure fair value:

Level 1 Observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2 Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and

Level 3 Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.

The Company’s marketable securities valued using Level 1 inputs include highly liquid equity securities, for which quoted market prices are available. The Company’s municipal bond portfolio is valued using Level 2 inputs. The Company’s municipal bonds are valued using a combination of pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs, which are considered Level 2 inputs.

For Level 2 investment valuation, the Company utilizes standard pricing procedures of its investment advisory firm which includes various third party pricing services. These procedures also require specific price monitoring practices as well as pricing review reports, valuation oversight and pricing challenge procedures to maintain the most accurate representation of investment fair market value.

The Company accrues interest on its bond portfolio throughout the life of each bond held. Dividends from the equity securities are recognized as received. Interest, dividends and unrealized gains and losses on equity securities are recognized in “Investment income (loss) and interest expense” on the Company’s Consolidated Statements of Income. The Company recognized investment income of $844 thousand in the first quarter of 2021, which included an unrealized gain in equity securities of $237 thousand. In the thirteen weeks ending March 28, 2020, the Company recognized investment loss of $1.3 million, which included unrealized loss in equity securities of $1.9 million.

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(3) Marketable Securities (continued)

Marketable securities, as of March 27, 2021 and December 26, 2020, consisted of:

Maturities of marketable securities classified as available-for-sale at March 27, 2021, were as follows:
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SERP Investments

The Company also maintains a non-qualified supplemental executive retirement plan for certain of its associates which allows them to defer income to future periods. Participants in the plans earn a return on their deferrals based on mutual fund investments. The Company chooses to invest in the underlying mutual fund investments to offset the liability associated with the non-qualified deferred compensation plans. Such investments are reported on the Company’s Consolidated Balance Sheets as “SERP investment,” are classified as trading securities and are measured at fair value using Level 1 inputs with gains and losses included in “Investment income (loss) and interest expense” on the Company’s Consolidated Statements of Income. The Company recognized investment income of $775 thousand in the first quarter of 2021, and investment loss of $2.7 million in the same period in 2020. The changes in the underlying liability to the associates are recorded in “Other income (expense).”

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(4) Accumulated Other Comprehensive Income

All balances in accumulated other comprehensive income are related to available-for-sale marketable securities. The following table sets forth the balance of the Company’s accumulated other comprehensive income, net of tax.

The following table sets forth the effects on net income of the amounts reclassified out of accumulated other comprehensive income for the periods ended March 27, 2021 and March 28, 2020.

(5) Long-Term Debt

On September 1, 2016 Weis Markets entered into a revolving credit agreement with Wells Fargo Bank, National Association (the “Credit Agreement”), which was amended on August 21, 2019 and matures on September 1, 2022. The Credit Agreement provides for an unsecured revolving credit facility with an aggregate principal amount not to exceed $30.0 million with an additional discretionary amount available of $70.0 million. As of March 27, 2021, the availability under the revolving credit agreement was $25.1 million, net of $4.9 million letters of credit. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.

Interest expense related to long-term debt was $8 thousand and $9 thousand in the thirteen weeks ended March 27, 2021 and March 28, 2020, respectively.

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(6) Revenue Recognition

The Chief Operating Officer, the Company’s chief operating decision maker, analyzes store operational revenues by geographical area but each area offers customers similar products, has similar distribution methods, and is supported by centralized management processes. The Company’s operations are reported as a single reportable segment.

The following table represents net sales by type of product for the thirteen-week periods ending March 27, 2021 and March 28, 2020:

(7) Leases

As of March 27, 2021, the Company leased approximately 50% of its open store facilities under operating leases that expire at various dates through 2036, with the remaining store facilities being owned. These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus variable lease costs related to real estate taxes and insurance as well as contingent rentals based on a percentage of annual sales or increases periodically based on inflation. These variable lease costs are not included in the measurement of the operating lease right-to-use assets or lease liabilities and are charged to the related expense category included in “Operating, general and administrative expenses.” Most of the leases contain multiple renewal options, under which the Company may extend the lease terms from 5 to 20 years. Additionally, the Company has operating leases for certain transportation and other equipment.

The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.”

The following is a schedule of the lease costs included in “Operating, general and administrative expenses” for the thirteen weeks ended March 27, 2021 and March 28, 2020.

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(8) COVID-19

On March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus pandemic. The coronavirus and actions taken to mitigate the spread of it have had and are expected to continue to have an adverse impact on the economies and financial markets of the geographical area in which the Company operates. Since the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted March 27, 2020 to, amongst other provisions, provide emergency assistance for individuals, families and businesses affected by the novel coronavirus pandemic, there have been two subsequent acts adopted to provide aditional emergency assistance, the most recent of which being the American Rescue Plan Act of 2021 enacted on March 11, 2021.

The Company’s business being deemed essential resulted in incremental financial performance that may not be indicative of future financial results and there remains uncertainty and increased risks concerning its employees, customers, supply chain and government regulation (see Forward-Looking Statements).

The following discussion and analysis of Weis Markets, Inc.’s (the “Company”) financial condition and results of operations should be read in conjunction with the unaudited Consolidated Financial Statements and related notes included in Item 1 of this Quarterly Report on Form 10-Q, the Company’s audited Consolidated Financial Statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 26, 2020, filed with the U.S. Securities and Exchange Commission, as well as the cautionary statement captioned "Forward-Looking Statements" immediately following this analysis.

Company Summary

Weis Markets is a conventional supermarket chain that operates 198 retail stores with approximately 24 thousand associates located in Pennsylvania and six surrounding states: Delaware, Maryland, New Jersey, New York, Virginia and West Virginia. Its products include groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, deli products, prepared foods, bakery products, beer and wine, fuel and general merchandise items, such as health and beauty care and household products. The store product selection includes national, local and private brands and the Company promotes by using Everyday Lower Price; Low Price Guarantee; Low, Low Price; and Loyalty programs. The Loyalty program includes fuel rewards that may be redeemed at the Company’s fuel stations or one of its third-party fuel station partners.

On March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus pandemic. The Company’s business was deemed essential and thus its stores have remained open during this time period. The closure of other food sources and government stimulus payments to affected individuals have been accretive to our sales and gross profits compared to the time periods preceding the impact of the novel coronavirus pandemic; however, the Company also faces new and increased risks concerning its associates, government regulation, and supply chain. The Company is not able to speculate how the ensuing economy or unknown future related expenses will affect it after the governmental novel coronavirus pandemic measures have ended (see Forward-Looking Statements).

The Company advertises its products and promotes its brand through weekly and monthly printed circulars; radio ads; e-mail blasts; and on-line via its web site, social media and mobile applications.  The Company promotes by using Everyday Lower Price, Low Price Guarantee, Low, Low Price and utilizes a loyalty marketing program, “Weis Club Preferred Shopper,” which enables customers to receive discounts, promotions and in-store and fuel rewards.

Utilizing its own centrally located distribution center and transportation fleet, Weis Markets self distributes approximately 68% of product with the remaining being supplied by direct store vendors. In addition, the Company has three manufacturing facilities which process milk, ice cream and fresh meat products primarily for the Company’s stores but serve other companies as well. The corporate offices are located in Sunbury, PA where the Company was founded in 1912. The Company has implemented current CDC guidelines to attempt to ensure the continuity of its distribution center and fleet.

The Company continues to innovate and remain relevant to industry trends and offering customer convenience by presenting

programs like “Weis 2 Go Online” ordering with curbside pickup and home delivery. In the first quarter of 2021, the Company offered Weis 2 Go Online curbside pickup in 184 of its locations. During the third quarter of 2018 the Company began offering home delivery with Shipt, and currently offers this convenience to customers in 175 different locations. Due to the surge in volume created by the novel coronavirus pandemic, sales in the first quarter of 2021 through Weis 2 Go Online have increased over 170% percent when compared to the same period last year.

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(continued)

Results of Operations

Net Sales

Analysis of Sales

When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable after it has been in operation for five full quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.

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(continued)

Results of Operations (continued)

Net Sales (continued)

Analysis of Sales (continued)

According to the latest U.S. Bureau of Labor Statistics’ report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 0.2% compared to an increase of 1.1% for the same period last year. Even though the U.S. Bureau of Labor Statistics’ index rates may be reflective of a trend, it will not necessarily be indicative of the Company’s actual results. According to the U.S. Department of Energy, the thirteen-week average price of gasoline in the Central Atlantic States increased 5.2% or $0.14 per gallon in the first quarter of 2021 compared to the same quarter in 2020.

Comparable store sales for the first quarter of 2021 compared to the same period in 2020 increased 1.4% with fuel and 1.1% without fuel. The Company’s first quarter sales were favorably impacted as a result of increased sales demand related to the novel coronavirus pandemic. The pandemic affected the latter half of the first quarter in 2020, whereas in 2021 the Company has recognized impacts of the pandemic through the whole period.

Although the Company experienced retail inflation and deflation in various commodities for the periods presented, the novel coronavirus pandemic has caused uncertainty about future economic conditions and may change future product mix. Management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors. Management remains confident in its ability to generate long-term sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company's competitive position.

Cost of Sales and Gross Profit

Cost of sales consists of direct product costs (net of discounts and allowances), net advertising costs, distribution center and transportation costs, as well as manufacturing facility operations. Increased sales volume resulted in an increase in cost of sales. Both direct product costs and distribution costs increase when sales volume increases.

Gross profit on sales increased 1.2% for the first quarter of 2021 compared to the same period in 2020. The increase is attributable to a change in sales mix along with increased fresh department sell-through, which reduced the amount of product loss.

Non-cash LIFO inventory valuation adjustments represent expense of $329 thousand in the first quarter of 2021 compared to expense of $1.5 million in the same period in 2020. Although the Company experienced cost inflation and deflation in various commodities for the periods presented, the novel coronavirus pandemic has caused uncertainty about future economic conditions.

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(continued)

Results of Operations (continued)

Operating, General and Administrative Expenses
‎The majority of the operating, general and administrative expenses are driven by sales volume.

Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise approximately 61% of the total “Operating, general and administrative expenses.” As a percent of sales, direct store labor increased 0.3% in the first quarter of 2021 when compared to the same period in 2020.

Depreciation and amortization expense charged to “Operating, general and administrative expenses” was $23.4 million, or 2.3% of net sales during the first quarter of 2021 compared to $21.7 million, or 2.2% of net sales during the first quarter of 2020. See the Liquidity and Capital Resources section for further information regarding the Company’s capital expansion program.

Wages expense increased in the first quarter of 2021 as a percent of sales when compared to the same period in 2020 as a result of the ongoing novel coronavirus pandemic. Fixed expenses include occupancy costs, depreciation and amortization and insurance expenses.

Provision for Income Taxes

The effective income tax rate was 25.8% and 26.0% for the first quarter of 2021 and 2020, respectively. Historically, the effective income tax rate differed from the federal statutory rate, primarily due to the effect of state taxes, net of permanent differences.

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Liquidity and Capital Resources

The primary source of cash is cash flows generated from operations. In addition, the Company has access to a revolving credit agreement entered into on September 1, 2016, and amended on August 21, 2019, with Wells Fargo Bank, NA (the “Credit Agreement”). The Credit Agreement matures on September 1, 2022 and provides for an unsecured revolving credit facility with an aggregate principal amount not to exceed $30.0 million with an additional discretionary amount available of $70.0 million. As of March 27, 2021, the availability under the revolving credit agreement was $25.1 million with $4.9 million of letters of credit outstanding. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.

The Company’s investment portfolio consists of high-grade bonds with maturity dates between one and 10 years and three long-held high yield, large capitalized public company equity securities. The portfolio totaled $114.7 million as of March 27, 2021. Management anticipates maintaining the investment portfolio but has the ability to liquidate if needed.

The Company’s capital expansion program includes the construction of new superstores, the expansion and remodeling of existing units, the acquisition of sites for future expansion, new technology purchases and the continued upgrade of the Company’s distribution facilities and transportation fleet. Management currently plans to invest approximately $135 million in its capital expansion program in 2021.

The Company expects that cash generated from operations and cash available under the Credit Agreement will fund its working capital requirements, debt requirements, capital expansion program, acquisitions and dividends. The Company has no other commitment of capital resources as of March 27, 2021, other than the lease commitments on its store facilities and transportation equipment under operating leases that expire at various dates through 2036.

The Board of Directors’ 2004 resolution authorizing the repurchase of up to one million shares of the Company’s common stock has a remaining balance of 752,468 shares. In the second quarter of 2019, the Company entered into a brokerage agreement with Wells Fargo Securities, LLC to facilitate possible share repurchases.

Quarterly Cash Dividends

At its regular meeting held in April, the Board of Directors unanimously approved a quarterly dividend of $0.31 per share, payable on May 24, 2021 to shareholders of record on May 10, 2021. The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors reconsiders the declaration of dividends quarterly. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments and the amount of the dividends depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant.

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(continued)

Liquidity and Capital Resources (continued)

Cash Flow Information

Operating

Cash flows from operating activities decreased $109.8 million in the first thirteen weeks of 2021 compared to the first thirteen weeks of 2020. Management attributes this decrease to cycling the immediate impact of the novel coronavirus pandemic experienced by the Company during the first quarter of 2020 which, comparably in 2021, produced decreases in accounts payables and increases in inventories.

Investing

Property and equipment purchases during the first thirteen weeks of 2021 totaled $37.0 million compared to $24.8 million in the first thirteen weeks of 2020. As a percentage of sales, capital expenditures were 3.7% in the first thirteen weeks of 2021 and 2.5% in the first thirteen weeks of 2020. In 2021, the Company plans to maintain or increase its marketable securities portfolio.

Financing

The Company paid dividends of $8.3 million in the first thirteen weeks of 2021 and 2020, respectively. The Company has not had an obligation on the Credit Agreement since the second quarter of 2018.

Accounting Policies and Estimates

The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the Consolidated Financial Statements included in the 2020 Annual Report on Form 10-K. There have been no changes to the Significant Accounting Policies since the Company filed its Annual Report on Form 10-K for the fiscal year ended December 26, 2020.

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Forward-Looking Statements

In addition to historical information, this Form 10-Q Report may contain forward-looking statements, which are included pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the retail industry; the regulatory environment; rapidly changing technology and competitive factors, including increased competition with regional and national retailers; and price pressures. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files periodically with the Securities and Exchange Commission.

On March 11, 2020, the World Health Organization declared that the novel coronavirus (COVID-19) had become a pandemic, and on March 13, the U.S. President declared a National Emergency concerning the disease. Additionally, in March 2020, state governments in the Company’s geographic operating area began instituting preventative shut down measures in order to combat the novel coronavirus pandemic. Management, at this time, cannot assess the ultimate economic impact to the Company, which will be determined by, among other things, the length of time that such circumstances continue, nor can the Company predict the effects of governmental and public responses to changing conditions. Below is a list of risks that management is monitoring:

Employees - Reduced workforces due to the temporary inability to work caused by illness, quarantine, or government mandates.

Supply Chain – Interruption in the Company’s supply chain due to having to suspend operations at its centrally located distribution center or vendors not being able to supply the Company because of their own suspended operations.

Lawsuits – Future litigation arising from issues concerning the novel coronavirus.

Future government regulation - Future laws, regulations, interpretations, administrative orders, or applications that may have an adverse impact on the Company’s operations and costs.

Customer trends – Changes in the methods in which customers procure the Company’s products.

Cyber security – Increased Cyber-attacks due to “work at home” requirements.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative Disclosure - There have been no material changes in the Company's market risk during the fiscal quarter ended March 27, 2021. Quantitative information is set forth in Item 7a on the Company’s Annual Report on Form 10-K under the caption “Quantitative and Qualitative Disclosures About Market Risk,” which was filed for the fiscal year ended December 26, 2020 and is incorporated herein by reference.

Qualitative Disclosure - This information is set forth in the Company's Annual Report on Form 10-K under the caption “Liquidity and Capital Resources,” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which was filed for the fiscal year ended December 26, 2020 and is incorporated herein by reference.

ITEM 4. CONTROLS AND PROCEDURES

The Chief Executive Officer and the Chief Financial Officer, together with the Company’s Disclosure Committee, evaluated the Company’s disclosure controls and procedures as of the fiscal quarter ended March 27, 2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports was accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

In connection with the evaluation described above, there was no change in the Company’s internal control over financial reporting during the fiscal quarter ended March 27, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II – OTHER INFORMATION

ITEM 6. EXHIBITS

Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.