Ingles' Sales Soar, but Expansion Costs Hit Profits

ASHEVILLE, N.C. — Ingles Markets here said last week that fourth-quarter same-store sales rose 7.8%, excluding gas, but an aggressive development schedule and an effort to keep retail prices low put pressure on profit margins.

For the period, which ended Sept. 27, net income fell about 26%, to $10.5 million.

Operating expenses totaled $165 million in the most recent quarter, compared with $146.3 million for the year-ago period. Increases in personnel costs, depreciation and promotional expenses related to the higher pace of development accounted for more than half of the increase, the company said. Operating expenses as a percentage of sales remained steady at 19.6% in both the fiscal 2008 fourth quarter and the year-ago period.

Ingles said its capital expenditures “nearly doubled” in fiscal 2008, to $248.8 million, as the company opened or remodeled eight stores in the second half of the year. It finished the year with 197 stores — the same number as the preceding year.

Cap-ex for the current year is projected to be between $140 million and $160 million, the company said in a conference call last week discussing the earnings results.

Ingles said energy costs and disruptions to its gasoline supplies due to hurricanes also hurt profitability in the quarter.

Sales for the period rose 13%, to $842.8 million, and comparable-store sales, including gasoline, also rose 13%. Both basket size and trip frequency increased in the quarter, compared with the year-ago period, Ingles said.

“What continues to be really phenomenal about what this company has accomplished is their same-store sales growth,” said Bryan Hunt, managing director of high-yield research for Wachovia Securities, Charlotte, N.C. “They have had five years of better than 6% same-store sales growth, and nobody's done that, except Whole Foods in their heyday.”

Hunt said Ingles has been successful in “layering in” additional products and services for customers, such as pharmacy, fuel, prepared foods and delis, that have built both sales and profitability. In addition, Ingles has done a good job of improving its marketing using data from its Ingles Advantage loyalty-card program.

“They are tailoring promotions to the individual instead of the masses,” Hunt said.

In an effort to keep sales volume high, the company has been reluctant to pass along price increases, however, which hurt its profit margins in the most recent quarter.

“We believe this strategy is important to maintain customer loyalty and to help our customers during these uncertain economic times,” said Robert P. Ingle, chief executive officer.

For the year, net income fell about 11.1%, to $52.1 million, on a sales increase of 13.6%, to $3.24 billion — the first time Ingles' annual sales crested the $3 billion threshold. Comparable-store sales were up 8% for the year excluding gasoline, and 13.5% including gas.

Gross profit for the fiscal year was up 9%, to $747.9 million, or 23.1% of sales, compared with 24.1% of sales a year ago. The ratio decline was primarily due to higher sales of gasoline, which carries a lower margin, Ingles said. The company, which supplies most of its own fluid dairy products, said gross profits in that category fell $2.9 million in the most recent year amid competitive pressures.