IMKTA

Ingles Markets, Incorporated (IMKTA)

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Exchange: NASDAQ
Industry: Consumer Services
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Ingles Markets, Incorporated (IMKTA)

F3Q09 Earnings Call

August 3, 2009 9:00 am ET

Executives

Ron Freeman – Chief Financial Officer

Robert Ingle - Founder Chief Executive Officer

Robert Ingle II - Chairman of the Board

Jim Lanning – President

Tom Outlaw - Vice President of Sales and Marketing

Analysts

Emily Shanks – Barclays Capital

Robert Beal – Bank of America Securities

Meredith Fowler – Wells Fargo Securities

Presentation

Operator

(Operator Instructions) Welcome to the Ingles Markets Incorporated Third Quarter Conference Call. At this time for opening remarks and introductions I would like to turn the call over to the Chief Financial Officer, Mr. Ronald Freeman.

Ron Freeman

Welcome to Ingles Markets Fiscal 2009 Third Quarter Conference Call. With me today are Robert Ingle, Founder of our Company and Chief Executive Officer, Robert Ingle II, Chairman of the Board, Jim Lanning, President, and Tom Outlaw, Vice President of Sales and Marketing.

Statements made on this call include forward looking statements as defined by and subject to the Safe Harbors created by Federal Securities laws. Words such as expect, anticipate, intend, plan, believe, and similar expressions are intended to identify forward looking statements. These statements are not guarantees of future performance and involve risks, uncertainties, and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed on the call.

Ingles Markets, Incorporated does not undertake to update publicly any forward looking statements, whether as a result of new information, future events or otherwise. For a description of factors that could cause actual results to differ materially from that anticipated by forward looking statements, you are referred to the company's public filings, including the Form 10-K for the fiscal year ended September 28, 2008.

This morning, I’ll provide you with a summary of our third quarter and nine month results followed by additional comments. After that, we will be pleased to take your questions. Our press release issued this morning is available on our website, www.Ingles-Markets.com. We filed our 10-Q for the quarter on Friday afternoon and it is available via our website as well.

The most significant event of the third fiscal quarter of this year was the issuance in May of $575 million of face value senior notes due 2017. The notes were issued at a discount to yield 9.5%. Using the net proceeds we repaid a $349.5 million of subordinated notes due 2011; repaid $45.3 million outstanding on our lines of credit, repaid approximately $77.7 million of secured debt, and paid transaction costs. Now we have sufficient funding to execute our store redevelopment strategy when conditions warrant and have extended the average maturity of our various pieces of debt.

In conjunction with this transaction we incurred $10.2 million of debt extinguishment costs that flow through the third quarter and nine month P&L. Given that the debt markets have been essentially closed for the past year or so with no guarantee of improvement over the next couple of years, we were pleased to take advantage of a window of opportunity to access the high yield debt market. Additional information on this transaction in the Form 10-4 filed with the SEC can be accessed via our website as well.

Net income for the fiscal 2009 three and nine month periods was adversely affected by these debt extinguishment costs, higher operating expenses resulted from our increased level of store development activities and by higher income tax expense. Net income totaled $4.7 million for the three months ended and $23.6 million for the nine months ended June 27, 2009, compared with $16.0 million and $41.6 million for the comparable three and nine month periods of fiscal 2008.

At the top line, sales comparisons between the three and nine month periods of 2009 versus 2008 are affected by significantly lower prices for gasoline and milk. First, our third quarter results. Net sales totaled $826.8 million for the three months ended June 27, 2009, compared with $835.3 million for the three months ended June 28, 2008. Excluding gasoline, net sales increased 5.1%. The average retail price of gasoline was approximately $1.50 per gallon lower comparing the third quarter of fiscal 2009 with the previous year.

Third quarter sales comparisons are also affected by the timing of the Easter holiday. In fiscal 2008 Easter fell in the company’s second fiscal quarter but occurred in the company’s third quarter of fiscal year 2009. Excluding gasoline sales and the effect of Easter sales, grocery segment comparable store sales increased 1.9% for the three months ended June 27, 2009, compared with the three months ended June 28, 2008.

Top sales have not increased as much as previous quarters, reflecting general economic conditions, customers trading down, and the substantial elimination of food inflation. Given those circumstances we’re pleased the number of customer transactions, excluding gasoline, increased 7.8%. We believe we are competing well in a difficult environment. The average transaction size, excluding gasoline, decreased by approximately 1.3%.

Ingles operated 201 stores at June 27, 2009, compared to 197 stores at June 28, 2008. Gross profit for the June 2009 quarter increased 6.4% to $203.4 million an increase of $12.3 million compared with the third quarter of last fiscal year.

Gross margin as a percentage of sales was 24.6% for the June 2009 quarter versus 22.9% for the same quarter last year. Excluding the effect of gross profit on lower priced gasoline, grocery segment gross profit as a percentage of sales was 27.6% and 27.7% for the June 2009 and 2008 quarters respectively. We are pleased with this margin stability during a time when competition and purchasing behaviors can change quickly.

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