UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
(Mark One)
[x] 
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
 
For the quarterly period ended: January 25, 2020
 
 
OR
 
 
[ ]   
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
Commission File No. 0-2633

VILLAGE SUPER MARKET, INC.
(Exact name of registrant as specified in its charter)

NEW JERSEY
22-1576170
(State or other jurisdiction of incorporation or organization)
(I. R. S. Employer Identification No.)
 
 
733 MOUNTAIN AVENUE, SPRINGFIELD, NEW JERSEY
07081
(Address of principal executive offices)
(Zip Code)
 
 
(973) 467-2200
      
(Registrant's telephone number, including area code)
 
 
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes X   No __

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12-b2 of the Exchange Act.

Large accelerated filer  q
Accelerated filer   x
Non-accelerated filer    q
 (Do not check if a smaller reporting company)
Smaller reporting company  x
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes _____    No __X__
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
 
 
 
 
March 5, 2020
 
 
 
 
Class A Common Stock, No Par Value
10,042,598 Shares
 
Class B Common Stock, No Par Value
  4,293,748 Shares





VILLAGE SUPER MARKET, INC.

INDEX



PART I
  PAGE NO.
 
 
FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (Unaudited)
 
 
 
Consolidated Balance Sheets
3
 
 
Consolidated Statements of Operations
4
 
 
Consolidated Statements of Comprehensive Income
5
 
 
Consolidated Statements of Shareholders' Equity
6
 
 
Consolidated Statements of Cash Flows
7
 
 
Notes to Consolidated Financial Statements
8
 
 
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
15
 
 
Item 3.  Quantitative & Qualitative Disclosures about Market Risk
21
 
 
Item 4.  Controls and Procedures
22
 
 
PART II
 
 
 
OTHER INFORMATION
 
 
 
Item 6.  Exhibits
24
 
 
Signatures
25


2


PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements
VILLAGE SUPER MARKET, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)
 
January 25,
2020
 
July 27,
2019
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
75,396

 
$
101,121

Merchandise inventories
41,313

 
38,503

Patronage dividend receivable
4,441

 
11,908

Income taxes receivable
853

 
43

Other current assets
25,461

 
17,206

Total current assets
147,464

 
168,781

 
 
 
 
Property, equipment and fixtures, net
231,322

 
224,890

Operating lease assets
97,795

 
—

Notes receivable from Wakefern
51,754

 
50,208

Investment in Wakefern
28,783

 
28,644

Goodwill
12,586

 
12,650

Other assets
17,068

 
17,116

 
 
 
 
Total assets
$
586,772

 
$
502,289

 
 

 
 

LIABILITIES AND SHAREHOLDERS' EQUITY
 

 
 

Current liabilities
 
 
 
Operating lease obligations
$
12,105

 
$
—

Finance lease obligations
425

 
1,022

Notes payable to Wakefern
109

 
43

Accounts payable to Wakefern
72,544

 
66,130

Accounts payable and accrued expenses
19,800

 
23,950

Accrued wages and benefits
19,216

 
20,259

Income taxes payable
—

 
1,070

Total current liabilities
124,199

 
112,474

 
 
 
 
Long-term debt
 
 
 
Operating lease obligations
98,059

 
—

Finance lease obligations
23,431

 
40,753

Notes payable to Wakefern
808

 
803

Notes payable related to New Markets Tax Credit
6,035

 
6,169

Total long-term debt
128,333

 
47,725

 
 
 
 
Pension liabilities
5,682

 
4,759

Other liabilities
6,576

 
18,659

 
 
 
 
Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 

 
 

Preferred stock, no par value: Authorized 10,000 shares, none issued
—

 
—

Class A common stock, no par value: Authorized 20,000 shares; issued 10,586 shares at January 25, 2020 and 10,593 shares at July 27, 2019
66,655

 
65,114

Class B common stock, no par value: Authorized 20,000 shares; issued and outstanding 4,294 shares at January 25, 2020 and July 27, 2019
697

 
697

Retained earnings
272,401

 
270,753

Accumulated other comprehensive loss
(7,972
)
 
(8,342
)
Less treasury stock, Class A, at cost: 513 shares at January 25, 2020 and 502 shares at July 27, 2019
(9,799
)
 
(9,550
)
Total shareholders’ equity
321,982

 
318,672

 
 
 
 
Total liabilities and shareholders’ equity
$
586,772

 
$
502,289

 

See accompanying Notes to Consolidated Financial Statements.

3


VILLAGE SUPER MARKET, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) (Unaudited)
 
13 Weeks Ended
 
26 Weeks Ended
 
January 25,
2020
 
January 26,
2019
 
January 25,
2020
 
January 26,
2019
Sales
$
437,422

 
$
428,128

 
$
844,824

 
$
829,678

 
 
 
 
 
 
 
 
Cost of sales
319,475

 
310,392

 
613,331

 
599,830

 
 
 
 
 
 
 
 
Gross profit
117,947

 
117,736

 
231,493

 
229,848

 
 
 
 
 
 
 
 
Operating and administrative expense
107,734

 
100,036

 
210,874

 
196,330

 
 
 
 
 
 
 
 
Depreciation and amortization
7,798

 
7,017

 
15,237

 
13,915

 
 
 
 
 
 
 
 
Operating income
2,415

 
10,683

 
5,382

 
19,603

 
 
 
 
 
 
 
 
Interest expense
(568
)
 
(1,112
)
 
(1,135
)
 
(2,227
)
 
 
 
 
 
 
 
 
Interest income
1,030

 
1,305

 
2,289

 
2,483

 
 
 
 
 
 
 
 
Income before income taxes
2,877

 
10,876

 
6,536

 
19,859

 
 
 
 
 
 
 
 
Income taxes
872

 
3,305

 
1,964

 
6,020

 
 
 
 
 
 
 
 
Net income
$
2,005

 
$
7,571

 
$
4,572

 
$
13,839

 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 
 
 

Class A common stock:
 
 

 
 

 
 

Basic
$
0.16

 
$
0.59

 
$
0.35

 
$
1.08

Diluted
$
0.14

 
$
0.53

 
$
0.32

 
$
0.96

 
 
 
 
 
 
 
 
Class B common stock:
 
 
 

 
 

 
 

Basic
$
0.10

 
$
0.38

 
$
0.23

 
$
0.70

Diluted
$
0.10

 
$
0.38

 
$
0.23

 
$
0.70

 
See accompanying Notes to Consolidated Financial Statements.

4


VILLAGE SUPER MARKET, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands) (Unaudited)
 
13 Weeks Ended
 
26 Weeks Ended
 
January 25,
2020
 
January 26,
2019
 
January 25,
2020
 
January 26,
2019
Net income
$
2,005

 
$
7,571

 
$
4,572

 
$
13,839

 
 
 
 
 
 
 
 
Other comprehensive income:
 

 
 

 
 

 
 

Amortization of pension actuarial loss, net of tax (1)
102

 
102

 
203

 
204

Pension settlement loss, net of tax (2)
871

 
—

 
871

 
—

Pension remeasurement, net of tax (3)
(704
)
 
—

 
(704
)
 
—

 
 
 
 
 
 
 
 
Comprehensive income
$
2,274

 
$
7,673

 
$
4,942

 
$
14,043


(1)
Amounts are net of tax of $44 and $43 for the 13 weeks ended January 25, 2020 and January 26, 2019, respectively, and $88 and $86 for the 26 weeks ended January 25, 2020 and January 26, 2019, respectively. All amounts are reclassified from Accumulated other comprehensive loss to Operating and administrative expense.
(2)
Amounts are net of tax of $375 for the 13 and 26 weeks ended January 25, 2020. All amounts are reclassified from accumulated other comprehensive loss to operating and administrative expense.
(3)
Amounts are net of tax of $303 for the 13 and 26 weeks ended January 25, 2020.



See accompanying Notes to Consolidated Financial Statements.

5


VILLAGE SUPER MARKET, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands) (Unaudited)
 
13 Weeks Ended January 25, 2020 and January 26, 2019
 
Class A
Common Stock
 
Class B
Common Stock
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)

 
Treasury Stock
Class A
 
Total
Shareholders'
Equity

 
Shares Issued
 
Amount
 
Shares Issued
 
Amount
 
Retained Earnings
 
Shares
 
Amount
Balance, October 26, 2019
10,593

 
$
65,947

 
4,294

 
$
697

 
$
273,614

 
$
(8,241
)
 
503

 
$
(9,570
)
 
$
322,447

Net income
—

 
—

 
—

 
—

 
2,005

 
—

 
—

 
—

 
2,005

Other comprehensive income, net of tax of $116
—

 
—

 
—

 
—

 
—

 
269

 
—

 
—

 
269

Dividends
—

 
—

 
—

 
—

 
(3,218
)
 
—

 
—

 
—

 
(3,218
)
Treasury stock purchases
—

 
—

 
—

 
—

 
—

 
—

 
10

 
(229
)
 
(229
)
Restricted shares forfeited
(7
)
 
(150
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(150
)
Share-based compensation expense
—

 
858

 
—

 
—

 
—

 
—

 
—

 
—

 
858

Balance, January 25, 2020
10,586

 
$
66,655

 
4,294

 
$
697

 
$
272,401

 
$
(7,972
)
 
513

 
$
(9,799
)
 
$
321,982

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, October 27, 2018
10,583

 
$
62,499

 
4,304

 
$
699

 
$
261,151

 
$
(8,083
)
 
518

 
$
(9,716
)
 
$
306,550

Net income
—

 
—

 
—

 
—

 
7,571

 
—

 
—

 
—

 
7,571

Other comprehensive income, net of tax of $43
—

 
—

 
—

 
—

 
—

 
102

 
—

 
—

 
102

Dividends
—

 
—

 
—

 
—

 
(3,214
)
 
—

 
—

 
—

 
(3,214
)
Treasury stock purchases
—

 
—

 
—

 
—

 
—

 
—

 
6

 
(164
)
 
(164
)
Restricted shares forfeited
(9
)
 
(127
)
 
—

 
—

 
—

 
—

 
—

 
—

 
(127
)
Share-based compensation expense
—

 
822

 
—

 
—

 
—

 
—

 
—

 
—

 
822

Balance, January 26, 2019
10,574

 
$
63,194

 
4,304

 
$
699

 
$
265,508

 
$
(7,981
)
 
524

 
$
(9,880
)
 
$
311,540

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
26 Weeks Ended January 25, 2020 and January 26, 2019
 
Class A
Common Stock
 
Class B
Common Stock
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)

 
Treasury Stock
Class A
 
Total
Shareholders'
Equity

 
Shares Issued
 
Amount
 
Shares Issued
 
Amount
 
Retained Earnings
 
Shares
 
Amount
Balance, July 27, 2019
10,593

 
$
65,114

 
4,294

 
$
697

 
$
270,753

 
$
(8,342
)
 
502

 
$
(9,550
)
 
$
318,672

Net income
—

—

—

—

—

—

—

—

4,572

—

—

—

—

—

—

 
4,572

Other comprehensive income, net of tax of $160
—

—

—

—

—

—

—

—

—

—

370

—

—

—

—

 
370

Dividends
—

—

—

—

—

—

—

—

(6,438
)
—

—

—

—

—

—

 
(6,438
)
Treasury stock purchases
—

—

—

—

—

—

—

—

—

—

—

—

11

—

(249
)
 
(249
)
Restricted shares forfeited
(9
)
—

(180
)
—

—

—

—

—

—

—

—

—

—

—

—

 
(180
)
Share-based compensation expense
2

—

1,721

—

—

—

—

—

—

—

—

—

—

—

—

 
1,721

Adjustment due to the adoption of ASU 2016-02, net of tax of $1,385
—

 
—

 
—

 
—

 
3,514

 
—

 
—

 
—

 
3,514

Balance, January 25, 2020
10,586

 
$
66,655

 
4,294

 
$
697

 
$
272,401

 
$
(7,972
)
 
513

 
$
(9,799
)
 
$
321,982

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, July 28, 2018
10,575

 
$
61,678

 
4,304

 
$
699

 
$
258,104

 
$
(8,185
)
 
496

 
$
(9,151
)
 
$
303,145

Net income
—

—

—

—

—

—

—

—

13,839

—

—

—

—

—

—

 
13,839

Other comprehensive income, net of tax of $86
—

—

—

—

—

—

—

—

—

—

204

—

—

—

—

 
204

Dividends
—

—

—

—

—

—

—

—

(6,435
)
—

—

—

—

—

—

 
(6,435
)
Treasury stock purchases
—

—

—

—

—

—

—

—

—

—

—

—

28

—

(729
)
 
(729
)
Restricted shares forfeited
(9
)
—

(127
)
—

—

—

—

—

—

—

—

—

—

—

—

 
(127
)
Share-based compensation expense
8

—

1,643

—

—

—

—

—

—

—

—

—

—

—

—

 
1,643

Balance, January 26, 2019
10,574

 
$
63,194

 
4,304

 
$
699

 
$
265,508

 
$
(7,981
)
 
524

 
$
(9,880
)
 
$
311,540

 
See accompanying Notes to Consolidated Financial Statements.




6


VILLAGE SUPER MARKET, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
 
26 Weeks Ended
 
January 25,
2020
 
January 26,
2019
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
4,572

 
$
13,839

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 

Depreciation and amortization
15,237

 
13,915

Non-cash share-based compensation
1,541

 
1,516

Loss on pension settlements
(1,246
)
 
—

Deferred taxes
(291
)
 
(573
)
Provision to value inventories at LIFO
—

 
103

 
 
 
 
Changes in assets and liabilities:
 
 
 

Merchandise inventories
(2,810
)
 
(331
)
Patronage dividend receivable
7,467

 
7,036

Accounts payable to Wakefern
10,109

 
665

Accounts payable and accrued expenses
(3,957
)
 
376

Accrued wages and benefits
(1,043
)
 
(279
)
Income taxes receivable / payable
(1,880
)
 
(1,066
)
Other assets and liabilities
62

 
677

Net cash provided by operating activities
27,761

 
35,878

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Capital expenditures
(38,121
)
 
(13,631
)
Investment in notes receivable from Wakefern
(1,546
)
 
(1,531
)
Acquisition deposit in escrow
(6,860
)
 
—

Acquisition of Gourmet Garage, net of cash acquired
64

 
—

Net cash used in investing activities
(46,463
)
 
(15,162
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Principal payments of long-term debt
(336
)
 
(1,126
)
Dividends
(6,438
)
 
(6,435
)
Treasury stock purchases, including shares surrendered for withholding taxes
(249
)
 
(729
)
Net cash used in financing activities
(7,023
)
 
(8,290
)
 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
(25,725
)
 
12,426

 
 
 
 
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
101,121

 
96,108

 
 
 
 
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
75,396

 
$
108,534

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF CASH  PAYMENTS MADE FOR:
 

 
 

Interest
$
1,135

 
$
2,227

Income taxes
$
4,132

 
$
7,659

 
 
 
 
NONCASH SUPPLEMENTAL DISCLOSURES:
 

 
 

Investment in Wakefern and increase in notes payable to Wakefern
$
93

 
$
845

 
See accompanying Notes to Consolidated Financial Statements.

7


VILLAGE SUPER MARKET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands) (Unaudited)


1. BASIS OF PRESENTATION and ACCOUNTING POLICIES

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal and recurring accruals) necessary to present fairly the consolidated financial position as of January 25, 2020 and the consolidated statements of operations, comprehensive income and cash flows for the 13 and 26 weeks ended January 25, 2020 and January 26, 2019 of Village Super Market, Inc. (“Village” or the “Company”).

The significant accounting policies followed by the Company, except as updated for the adoption of new lease guidance, are set forth in Note 1 to the Company's consolidated financial statements in the July 27, 2019 Village Super Market, Inc. Annual Report on Form 10-K, which should be read in conjunction with these financial statements.  The results of operations for the periods ended January 25, 2020 are not necessarily indicative of the results to be expected for the full year.

Recently adopted accounting standards

On July 28, 2019, the Company adopted ASU 2016-02, “Leases.” This guidance requires lessees to recognize lease liabilities and a right-of-use asset for all leases with terms of more than 12 months on the balance sheet.  The Company adopted the standard using the modified retrospective approach under which the cumulative effect of initially applying the standard was recognized as an adjustment to opening fiscal 2020 retained earnings, with no restatement of prior year amounts.  In addition, the Company applied the transition package of practical expedients permitted within the standard, which allowed the carryforward of historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption. 

The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of $99,415 and $111,139, respectively, as of the date of adoption. Included in the initial measurement of the new lease assets is the reclassification of certain prepaid and deferred rent balances. Additionally, the Company recorded an adjustment to reduce its opening retained earnings balance by $3,514, net of income taxes, as the Company derecognized the remaining financing obligations of $17,442 and related net assets of $12,543 for leases in which the Company was previously deemed to be the owner of the project for accounting purposes but did not qualify for sale-leaseback treatment. As such designation ended for these leases with adoption of the ASU, operating lease right-of-use asset and liability balances were established for these leases based on the Company's remaining fixed payment obligations under the leases and are included in the amounts described above. Accordingly, the fixed lease payments related to these leases will be recognized as an operating lease cost on a straight-line basis over the lease term, and eliminated depreciation and interest expense in the fiscal 2020 consolidated statement of operations. The Company recognized expense related to these leases in fiscal 2020 and 2019 as follows:
 
 
13 Weeks Ended
 
26 Weeks Ended
Consolidated Statement of Operations Classification
 
January 25,
2020
 
January 26,
2019
 
January 25,
2020
 
January 26,
2019
Operating and administrative expense
 
$
677

 
$
—

 
$
1,354

 
$
—

 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
—

 
107

 
—

 
215

Interest expense
 
—

 
537

 
—

 
1,077

 
 
 
 
 
 
 
 
 
 
 
$
677

 
$
644

 
$
1,354

 
$
1,292

 
 
 
 
 
 
 
 
 
The adoption of this standard also resulted in a change in naming convention for leases classified historically as capital leases to finance leases. The adoption of the new standard did not have a material impact on the consolidated statement of cash flows. Additional information on leases is provided in Note 7.




8


2. MERCHANDISE INVENTORIES
    
At both January 25, 2020 and July 27, 2019, approximately 64% of merchandise inventories are valued by the LIFO method while the balance is valued by FIFO.  If the FIFO method had been used for the entire inventory, inventories would have been $14,512 higher than reported at both January 25, 2020 and July 27, 2019.

3. NET INCOME PER SHARE

The Company has two classes of common stock. Class A common stock is entitled to cash dividends as declared 54% greater than those paid on Class B common stock. Shares of Class B common stock are convertible on a share-for-share basis for Class A common stock at any time.

The Company utilizes the two-class method of computing and presenting net income per share. The two-class method is an earnings allocation formula that calculates basic and diluted net income per share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings. Under the two-class method, Class A common stock is assumed to receive a 54% greater participation in undistributed earnings than Class B common stock, in accordance with the classes' respective dividend rights. Unvested share-based payment awards that contain nonforfeitable rights to dividends are treated as participating securities and therefore included in computing net income per share using the two-class method.

Diluted net income per share for Class A common stock is calculated utilizing the if-converted method, which assumes the conversion of all shares of Class B common stock to Class A common stock on a share-for-share basis, as this method is more dilutive than the two-class method. Diluted net income per share for Class B common stock does not assume conversion of Class B common stock to shares of Class A common stock.


9


The tables below reconcile the numerators and denominators of basic and diluted net income per share for all periods presented.
 
 
13 Weeks Ended
 
26 Weeks Ended
 
January 25, 2020
 
January 25, 2020
 
Class A
 
Class B
 
Class A
 
Class B
Numerator:
 
 
 
 
 
 
 
Net income allocated, basic
$
1,521

 
$
435

 
$
3,461

 
$
993

Conversion of Class B to Class A shares
435

 
—

 
993

 
—

Effect of share-based compensation on allocated net income
(3
)
 
(1
)
 
(5
)
 
(2
)
Net income allocated, diluted
$
1,953

 
$
434

 
$
4,449

 
$
991

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average shares outstanding, basic
9,768

 
4,294

 
9,769

 
4,294

Conversion of Class B to Class A shares
4,294

 
—

 
4,294

 
—

Weighted average shares outstanding, diluted
14,062

 
4,294

 
14,063

 
4,294

 
 
 
 
 
 
 
 
 
13 Weeks Ended
 
26 Weeks Ended
 
January 26, 2019
 
January 26, 2019
 
Class A
 
Class B
 
Class A
 
Class B
Numerator:
 

 
 

 
 

 
 

Net income allocated, basic
$
5,727

 
$
1,646

 
$
10,466

 
$
3,007

Conversion of Class B to Class A shares
1,646

 
—

 
3,007

 
—

Net income allocated, diluted
$
7,373

 
$
1,646

 
$
13,473

 
$
3,007

 
 
 
 
 
 
 
 
Denominator:
 

 
 

 
 

 
 

Weighted average shares outstanding, basic
9,723

 
4,304

 
9,727

 
4,304

Conversion of Class B to Class A shares
4,304

 
—

 
4,304

 
—

Weighted average shares outstanding, diluted
14,027

 
4,304

 
14,031

 
4,304


Outstanding stock options to purchase Class A shares of 157 and 278 were excluded from the calculation of diluted net income per share at January 25, 2020 and January 26, 2019, respectively, as a result of their anti-dilutive effect. In addition, 316 and 329 non-vested restricted Class A shares, which are considered participating securities, and their allocated net income were excluded from the diluted net income per share calculation at January 25, 2020 and January 26, 2019, respectively, due to their anti-dilutive effect.

4. PENSION PLANS

The Company sponsored four defined benefit pension plans in fiscal 2020 and 2019.  Net periodic pension cost for the four plans includes the following components:

 
13 Weeks Ended
 
26 Weeks Ended
 
January 25,
2020
 
January 26,
2019
 
January 25,
2020
 
January 26,
2019
Service cost
$
50

 
$
53

 
$
101

 
$
106

Interest cost on projected benefit obligations
566

 
655

 
1,131

 
1,310

Expected return on plan assets
(625
)
 
(721
)
 
(1,328
)
 
(1,442
)
Loss on settlement
1,246

 
—

 
1,246

 
—

Amortization of net losses
146

 
145

 
291

 
290

Net periodic pension cost
$
1,383

 
$
132

 
$
1,441

 
$
264


10


    
As of January 25, 2020, the Company has not made any contributions to its pension plans in fiscal 2020.  The Company expects contributions to its defined benefit pension plans to be immaterial in fiscal 2020.
On December 23, 2019, the Company terminated the Village Super Market, Inc. Retail Clerks Employees’ Retirement Plan. All participants of the plan were former employees of a store previously closed in 1994. A annuity contract totaling $1,302 was purchased with an insurance company for all participants who did not elect a lump sum distribution. Additionally, lump sum distributions related to the termination totaled $451. The plan had sufficient assets to satisfy all termination transaction obligations, and no benefit obligation or plan assets related to the Village Super Market, Inc. Retail Clerks Employees’ Retirement Plan remain as of January 25, 2020. As a result of this termination, the Company recognized a non-cash pre-tax settlement charge totaling $669 during the 13 weeks ended January 25, 2020. This settlement charge represents the plan’s remaining unrecognized losses within accumulated other comprehensive loss as of the termination date.
    
Additionally, the Company recognized a settlement loss of $577 in the 13 weeks ended January 25, 2020 for a plan where benefits paid exceeded the sum of the service cost and interest cost components of net periodic pension cost. Assumptions used in the related remeasurement include a discount rate of 3.00% and long term expected rate of return on plan assets of 5.00%.


5. RELATED PARTY INFORMATION
 
A description of the Company’s transactions with Wakefern, its principal supplier, and with other related parties is included in the Company’s Annual Report on Form 10-K for the year ended July 27, 2019.  
        
Included in cash and cash equivalents at January 25, 2020 and July 27, 2019 are $51,141 and $73,879, respectively, of demand deposits invested at Wakefern at overnight money market rates.

There have been no other significant changes in the Company’s relationships or nature of transactions with related parties during the 26 weeks ended January 25, 2020.


6. COMMITMENTS and CONTINGENCIES

Superstorm Sandy devastated Village's trade area on October 29, 2012 and resulted in the closure of almost all of our stores for periods of time ranging from a few hours to eight days. Village disposed of substantial amounts of perishable product and also incurred repair, labor and other costs as a result of the storm. Wakefern, as the policy holder, has pursued recovery of uncollected insurance claims on behalf of all Wakefern members through litigation against the insurance carrier and others since October 2013. This litigation is ongoing and the Company received an additional $415 in November 2018 which was recognized as a reduction in Operating and administrative expense in the first quarter of fiscal 2019. Including the November 2018 recoveries, Village has received $3,998 related to losses incurred as a result of Superstorm Sandy. Any further proceeds recovered will be recognized as they are received.
    
The Company is involved in other litigation incidental to the normal course of business. Company management is of the opinion that the ultimate resolution of these legal proceedings should not have a material adverse effect on the consolidated financial position, results of operations or liquidity of the Company.


7. LEASES

The Company leases 27 retail stores, as well as the corporate headquarters and equipment at January 25, 2020. The majority of initial lease terms range from 20 to 30 years. Most of the Company’s leases contain renewal options at increased rents of five to ten years each at the Company’s sole discretion. These options enable Village to retain the use of facilities in desirable operating areas. Each renewal option is evaluated when recognizing the lease right-of-use assets and liabilities, and the Company utilizes the lease term for which it is reasonably certain to use the underlying asset. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company is obligated under all leases to pay for real estate taxes, utilities and liability insurance, and under certain leases to pay additional amounts based on maintenance and a percentage of sales in excess of stipulated amounts. The Company accounts for rent holidays, escalating rent provisions, and construction allowances on a straight-line basis over the term of the lease.


11


The composition of total lease cost is as follows:
 

 
13 Weeks Ended
 
26 Weeks Ended
 
Consolidated Statement of Operations Classification
 
January 25,
2020
 
January 25,
2020
Operating lease cost
Operating and administrative expense
 
$
4,425

 
$
9,204

Finance lease cost
 
 
 
 
 
Amortization of leased assets
Depreciation and amortization
 
237

 
474

Interest on lease liabilities
Interest expense
 
515

 
1,032

Variable lease cost
Operating and administrative expense
 
3,968

 
7,662

 
 
 
 
 
 
Total lease cost
 
 
$
9,145

 
$
18,372


As of January 25, 2020, finance lease right-of-use assets of $14,227 are included in Property, equipment and fixtures, net in the Company's Consolidated Balance Sheet. Maturities of operating and finance lease liabilities, including options to extend lease terms that are reasonably certain of being exercised, are as follows as of January 25, 2020:
 
 
Operating leases
 
Finance leases
 
Total
Remainder of 2020
 
$
9,352

 
$
1,345

 
$
10,697

2021
 
16,621

 
2,689

 
19,310

2022
 
15,739

 
2,689

 
18,428

2023
 
15,412

 
2,689

 
18,101

2024
 
13,276

 
2,689

 
15,965

Thereafter
 
79,385

 
24,428

 
103,813

Total lease payments
 
149,785

 
36,529

 
186,314

Less amount representing interest

 
39,621

 
12,673

 
52,294

 
 
 
 
 
 


Present value of lease liabilities
 
$
110,164

 
$
23,856

 
$
134,020


The Company has approximately $16,671 of future payment obligations related to lease agreements that have not yet commenced but have been executed as of January 25, 2020.
    
For purposes of measuring the present value of its fixed payment obligations for a given lease, the Company uses its incremental borrowing rate as the discount rate implicit within its leases is generally not determinable. The Company's incremental borrowing rate reflects the rate it would pay to borrow on a secured basis, and incorporates the term and economic environment of the lease. As of January 25, 2020, the Company's lease terms and discount rates are as follows:
 
January 25,
2020
Weighted-average remaining lease term (years)

Operating leases
11.8

Finance leases
16.1

Weighted-average discount rate
 
Operating leases
5.3
%
Finance leases
8.5
%
Supplemental cash flow information related to leases is as follows:
 
 
26 Weeks Ended
 
 
January 25,
2020
Cash paid for amounts in the measurement of lease liabilities
 
 
Operating cash flows from operating leases
 
$
8,695

Operating cash flows from finance leases
 
1,032

Financing cash flows from finance leases
 
268



12


In the first quarter of fiscal 2020, the Company adopted ASU 2016-02, and as required, the following disclosure is provided for periods prior to adoption. Future minimum lease payments by year and in the aggregate for all non-cancelable leases with initial terms of one year or more consisted of the following at July 27, 2019:

 
Capital and
 financing leases
 
Operating
leases
2020
$
5,173

 
$
13,573

2021
5,240

 
12,972

2022
5,240

 
10,348

2023
5,305

 
9,747

2024
5,342

 
7,457

Thereafter
43,708

 
61,043

Minimum lease payments
70,008

 
$
115,140

Less amount representing interest
28,233

 
 

 
 
 
 
Present value of minimum lease payments
41,775

 
 

 
 
 
 
Less current portion
1,022

 
 

 
$
40,753

 
 



8. BUSINESS ACQUISITIONS

Fairway Markets
On January 22, 2020, Village Super Market, Inc. (“Village”) entered into an asset purchase agreement (the “APA”) with Fairway Group Holdings Corp. (“Fairway”) in conjunction with Fairway filing voluntary petitions for relief under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Under the APA, Village agreed to acquire up to five supermarkets in New York, NY, a production distribution center (the “PDC”), and the intellectual property used by Fairway, including the names “Fairway” and “Fairway Markets,” for a cash purchase price of $68,600, subject to closing adjustments and assumed liabilities (as defined in the APA). The assumed liabilities consist primarily of lease liabilities.
On February 20, 2020, the Bankruptcy Court entered an order that established the bidding procedures for the assets of Fairway, including those subject to the APA.  The APA represents an offer under Section 363 of the U.S. Bankruptcy Code. Such offers are commonly referred to as “stalking horse” bids and are subject to higher bids, in accordance with the bidding procedures established by the Bankruptcy Court. Accordingly, Village cannot be certain that it will complete the transaction. The Section 363 sale process is expected to be concluded in March 2020.  In the event that Village is not the winning bidder, it will be entitled to a break-up fee equal to 3% of the cash purchase price.
The APA allows Village to remove two of the supermarkets and the PDC (each, a “Non-Core Asset”) from the list of assets acquired within the later of 45 days from the execution of the APA and two days prior to the auction or the sale hearing if no auction is held under the Section 363 sale process. Should Village elect to remove Non-Core Assets from the list of assets acquired, the cash purchase price will be reduced by up to $5,500.
As required by the APA, Village made a $6,860 deposit into escrow on January 23, 2020 included in Other current assets in the Company's Consolidated Balance Sheet as of January 25, 2020. Village intends to fund the balance of the purchase price, if the transaction is consummated, with cash on hand, its revolving credit agreement and other debt.
The parties have made representations, warranties and covenants in the APA, and the completion of the acquisition is subject to regulatory approvals, including, without limitation, regulatory clearance, and closing conditions.





13


Gourmet Garage

On June 24, 2019, the Company purchased three Gourmet Garage specialty markets in Manhattan, New York City. Village acquired the store fixtures, leases, inventory, other working capital and other assets for $5,203, net of cash and cash equivalents. Village has accounted for this transaction as a business combination in accordance with the acquisition method of accounting, which requires, among other things, that assets acquired and liabilities assumed be recognized at their estimated fair values as of the acquisition date. In connection with this acquisition, the Company recorded $529 of goodwill attributable to the assembled workforce of Gourmet Garage and cost synergies and a $1,485 indefinite-lived intangible asset related to the trade name. Transaction costs were expensed as incurred. The final allocation of the purchase price consideration to the assets acquired and the liabilities assumed has been completed.



14


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)

OVERVIEW

Village Super Market, Inc. (the “Company” or “Village”) operates a chain of 30 ShopRite supermarkets in New Jersey, eastern Pennsylvania, Maryland and New York City and three Gourmet Garage specialty markets in Manhattan, New York City. On November 1, 2019, Village opened a 82,000 sq. ft. (52,000 selling sq. ft.) store in Stroudsburg, Pennsylvania and replaced our existing 53,000 sq. ft. store. On June 24, 2019, Village acquired the assets and certain liabilities of Gourmet Garage for $5,203. Gourmet Garage operates three specialty markets averaging 11,000 sq. ft. (5,800 selling sq. ft.) in Manhattan, New York City. On June 28, 2018, Village opened a 53,000 sq. ft. (31,000 selling sq. ft.) ShopRite in the Bronx, New York City. Village is the second largest member of Wakefern Food Corporation (“Wakefern”), the nation’s largest retailer-owned food cooperative and owner of the ShopRite and Gourmet Garage names.  As further described in the Company’s Form 10-K, this ownership interest in Wakefern provides Village many of the economies of scale in purchasing, distribution, store brands, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage. 

The supermarket industry is highly competitive and characterized by narrow profit margins.  The Company competes directly with multiple retail formats, both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Village competes by using low pricing, providing a superior customer service experience and a broad range of consistently available quality products, including our own brands portfolio. In October 2019, ShopRite introduced the Right Price Promise pricing strategy, a commitment to everyday low prices on the items customers purchase most frequently. The ShopRite Price Plus preferred customer program enables Village to offer continuity programs, focus on target marketing initiatives and to offer discounts and attach digital coupons directly to a customer's Price Plus card. 

In November 2019, ShopRite launched the Bowl & Basket and Paperbird store brands. Bowl & Basket foods pair thoughtfully selected ingredients at a budget friendly price and Paperbird offers a line of newly designed household products.  More than 100 newly branded items, including packaged salads, salty snacks, cooking oils, bottled water and paper goods, were introduced in early November. ShopRite expects to add nearly 3,500 Bowl & Basket foods and Paperbird household products through fiscal 2021. The introduction of Bowl & Basket and Paperbird follows the 2016 launch of ShopRite’s Wholesome Pantry brands, which include the Wholesome Pantry Organic line as well as a range of products free from 110 ingredients and artificial additives and preservatives.

The Company’s stores, six of which are owned, average 56,000 total square feet. These larger store sizes enable the Company’s stores to provide a “one-stop” shopping experience and to feature expanded higher margin specialty departments such as an on-site bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies. Many of our stores emphasize a Power Alley, which features high margin, fresh, convenience offerings in an area within the store that provides quick customer entry and exit for those customers shopping for today's lunch or dinner. Certain of our stores include the Village Food Garden concept featuring a restaurant style kitchen, and several kiosks offering a wide variety of store prepared specialty foods for both take-home and in-store dining.

Village also has on-site registered dieticians in 19 ShopRite stores that provide customers with free, private consultations on healthy meals and proper nutrition, as well as leading health related events both in store and in the community as part of the Well Everyday program. We have 19 stores that offer ShopRite from Home covering most of the communities served by our stores. ShopRite from Home is an online ordering system that provides for in-store pickup or home delivery. Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or on their smart phones or tablets through the ShopRite app.

We consider a variety of indicators to evaluate our performance, such as same store sales; percentage of total sales by department (mix); shrink; departmental gross profit percentage; sales per labor hour; units per labor hour; and hourly labor rates.
 


15


RESULTS OF OPERATIONS

The following table sets forth the major components of the Consolidated Statements of Operations as a percentage of sales:

 
13 Weeks Ended
 
26 Weeks Ended
 
January 25, 2020
 
January 26, 2019
 
January 25, 2020
 
January 26, 2019
Sales
100.00
 %
 
100.00
 %
 
100.00
 %
 
100.00
 %
Cost of sales
73.04

 
72.50

 
72.60

 
72.30

Gross profit
26.96

 
27.50

 
27.40

 
27.70

Operating and administrative expense
24.63

 
23.37

 
24.96

 
23.66

Depreciation and amortization
1.78

 
1.63

 
1.80

 
1.68

Operating income
0.55

 
2.50

 
0.64

 
2.36

Interest expense
(0.13
)
 
(0.26
)
 
(0.13
)
 
(0.27
)
Interest income
0.24

 
0.30

 
0.27

 
0.30

Income before taxes
0.66

 
2.54

 
0.78

 
2.39

Income taxes
0.20

 
0.77

 
0.23

 
0.73

Net income
0.46
 %
 
1.77
 %
 
0.55
 %
 
1.66
 %

Sales.  Sales were $437,422 in the 13 weeks ended January 25, 2020, an increase of 2.2% compared to the 13 weeks ended January 26, 2019.  Sales increased due to the opening of the Stroudsburg replacement store on November 1, 2019, the acquisition of Gourmet Garage on June 24, 2019 and a same store sales increase of 0.1%. Same store sales increased due to continued sales growth in the Bronx, New York City store opened on June 28, 2018, recently remodeled or replaced stores and continued growth of ShopRite from Home including expansion to five additional stores. These increases were partially offset by the impact of one competitor store opening, decreased promotional spending in Maryland and the early release of Supplemental Nutrition Assistance Program ("SNAP") benefits in January 2019. The Company expects same store sales in fiscal 2020 to range from a .5% decrease to an increase of 1.0%. 

Sales were $844,824 in the 26 weeks ended January 25, 2020, an increase of 1.8% from the 26 weeks ended January 26, 2019. Sales increased due to the opening of the Stroudsburg replacement store on November 1, 2019, the acquisition of Gourmet Garage on June 24, 2019 and a same store sales increase of 0.1%. Same store sales increased due to continued sales growth in the Bronx, New York City store opened on June 28, 2018, recently remodeled or replaced stores and continued growth of ShopRite from Home including expansion to five additional stores. These increases were partially offset by the impact of two competitor store openings, decreased promotional spending in Maryland and the early release of Supplemental Nutrition Assistance Program ("SNAP") benefits in January 2019.

Although the Company cannot accurately determine the precise impact of inflation or deflation on operations due to changes in product mix, customer buying patterns and competitive factors, we estimate that product prices experienced modest inflation during the 26 weeks ended January 25, 2020. New stores and replacement stores are included in same store sales in the quarter after the store has been in operation for four full quarters.  Store renovations and expansions are included in same store sales immediately.

Gross Profit.  Gross profit as a percentage of sales decreased .54% in the 13 weeks ended January 25, 2020 compared to the 13 weeks ended January 26, 2019. Excluding the impact of the addition of Gourmet Garage, gross profit as a percentage of sales decreased .83% in the 13 weeks ended January 25, 2020 compared to the 13 weeks ended January 26, 2019 due primarily to decreased departmental gross margin percentages (.67%), decreased patronage dividends and rebates received from Wakefern (.12%) and higher promotional spending (.13%), partially offset by decreased warehouse assessment charges from Wakefern (.05%) and a favorable change in product mix (.04%).

Gross profit as a percentage of sales decreased .30% in the 26 weeks ended January 25, 2020 compared to the 26 weeks ended January 26, 2019. Excluding the impact of the addition of Gourmet Garage, gross profit as a percentage of sales decreased
.55% due primarily to decreased departmental gross margin percentages (.44%), decreased patronage dividends and rebates received from Wakefern (.07%) and higher promotional spending (.07%) partially offset by a favorable change in product mix (.04%).


16


Departmental gross profits decreased in both the 13 and 26 week periods ended January 25, 2020 compared to the 13 and 26 weeks ended January 26, 2019 due primarily to price investments, including the ShopRite's Right Price Promise pricing strategy, a commitment to everyday low prices on the items customers purchase most frequently, introduced in October 2019, and decreased pharmacy margins as a result of continued downward pressure on prescription reimbursement rates from third party providers.

Operating and Administrative Expense.  Operating and administrative expense as a percentage of sales increased 1.26% in the 13 weeks ended January 25, 2020 compared to the 13 weeks ended January 26, 2019. The 13 weeks ended January 25, 2020 includes a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges (.28%) (see note 4 to the consolidated financial statements), pre-opening costs of the Stroudsburg, Pennsylvania replacement store (.10%), store closure costs and charges to write off the variable lease obligations of the old Stroudsburg store (.12%) and lease costs reclassified from Depreciation and Amortization and Interest Expense to Operating and Administrative Expense (.15%) as a result of the adoption of ASU 2016-02, “Leases” (see note 1 to the consolidated financial statements).

Excluding these items, operating and administrative expense as a percentage of sales increased .61% in the 13 weeks ended January 25, 2020 compared to the 13 weeks ended January 26, 2019 due primarily to increased payroll (.49%), increased occupancy costs (.07%) and higher fringe benefit costs (.11%). These increases were partially offset by decreased legal and consulting fees (.16%). Payroll increased due primarily to the addition of Gourmet Garage, higher payroll in the first full quarter of operations in the Stroudsburg replacement store, minimum wage increases in New Jersey and continued growth of ShopRite from Home and expansion to five additional stores. Fringe benefit costs increased primarily due to increased claim costs on self-insured medical plans. Occupancy costs increased due primarily to the addition of Gourmet Garage.

Operating and administrative expense as a percentage of sales increased 1.30% in the 26 weeks ended January 25, 2020 compared to the 26 weeks ended January 26, 2019. The 26 weeks ended January 25, 2020 includes a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges (.15%) (see note 4 to the consolidated financial statements), pre-opening costs of the Stroudsburg, Pennsylvania replacement store (.15%), store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store (.09%) and lease costs reclassified from Depreciation and Amortization and Interest Expense to Operating and Administrative Expense (.15%) as a result of the adoption of ASU 2016-02, “Leases” (see note 1 to the consolidated financial statements). The 26 weeks ended January 26, 2019 includes a gain for Superstorm Sandy insurance proceeds received (.05%).

Excluding these items from both periods, operating and administrative expense as a percentage of sales increased .71% in the 26 weeks ended January 25, 2020 compared to the 26 weeks ended January 26, 2019 due primarily to increased payroll (.47%) and increased occupancy costs (.16%). These increases were partially offset by decreased legal and consulting fees (.10%). Payroll increased due primarily to the addition of Gourmet Garage, higher payroll in the first full quarter of operations in the Stroudsburg replacement store, minimum wage increases in New Jersey and continued growth of ShopRite from Home and expansion to five additional stores. Occupancy costs increased due primarily to the addition of Gourmet Garage and increased common area maintenance charges.

Depreciation and Amortization.  Depreciation and amortization expense increased in the 13 and 26 weeks ended January 25, 2020 compared to the 13 and 26 weeks ended January 26, 2019 due to depreciation related to acquisition of Gourmet Garage, capital expenditures and accelerated depreciation related to assets at the existing Stroudsburg store that was replaced on November 1, 2019.
 
Interest Expense.  Interest expense in the 13 and 26 weeks ended January 25, 2020 decreased compared to the 13 and 26 weeks ended January 26, 2019 due to lease costs reclassified to Operating and Administrative Expenses (.13%) as a result of the adoption of ASU 2016-02, “Leases” (see note 1 to the consolidated financial statements).
 
Interest Income.  Interest income decreased in the 13 and 26 weeks ended January 25, 2020 compared to the 13 and 26 weeks ended January 26, 2019 due primarily to lower amounts invested in variable rate notes receivable from Wakefern and demand deposits invested at Wakefern and lower interest rates.

Income Taxes.  The effective income tax rate was 30.3% and 30.0% in the 13 and 26 weeks ended January 25, 2020, respectively, compared to 30.4% and 30.3% in the 13 and 26 weeks ended January 26, 2019, respectively.
 
Net Income.  Net income was $2,005 in the 13 weeks ended January 25, 2020 compared to $7,571 in the 13 weeks ended January 26, 2019. The 13 weeks ended January 25, 2020 includes a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges of $871 (net of tax), pre-opening costs related to the Stroudsburg, Pennsylvania replacement store of $304 (net of tax) and store closure costs and charges to write off the variable lease

17


obligations related to the old Stroudsburg store of $365 (net of tax). Excluding these items, net income decreased 53% in the 13 weeks ended January 25, 2020 compared to the prior year due primarily to decreased gross profit margins and increased operating and administrative expenses.

Net income was $4,572 in the 26 weeks ended January 25, 2020 compared to $13,839 in the 26 weeks ended January 26, 2019. The 26 weeks ended January 25, 2020 includes a non-cash pension charge related to the termination of a company-sponsored pension plan and other pension settlement charges of $871 (net of tax), pre-opening costs related to the Stroudsburg, Pennsylvania replacement store of $891 (net of tax) and store closure costs and charges to write off the lease asset and related obligations for the old Stroudsburg store of $557 (net of tax). The 26 weeks ended January 26, 2019 includes a $290 (net of tax) gain for Superstorm Sandy insurance proceeds received. Excluding these items from both periods, net income decreased 49% in the 26 weeks ended January 25, 2020 compared to the prior year due primarily to decreased gross profit margins and increased operating and administrative expenses.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations.  These policies require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  The Company’s critical accounting policies relating to the impairment of long-lived assets and goodwill, accounting for patronage dividends earned as a stockholder of Wakefern and accounting for pension plans, are described in the Company’s Annual Report on Form 10-K for the year ended July 27, 2019. Except for the changes due to the adoption of ASU 2016-02 related to leases discussed in "Recently adopted accounting standards," Note 1, and Note 7 as of January 25, 2020, there have been no changes to the critical accounting policies contained therein.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.
 

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $27,761 in the 26 weeks ended January 25, 2020 compared to $35,878 in the corresponding period of the prior year.  The decrease in net cash provided by operating activities in fiscal 2020 was primarily due to decreased net income adjusted for non-cash expense and changes in working capital. Working capital changes, including Other assets and liabilities, increased net cash provided by operating activities by $7,948 in fiscal 2020 compared to an increase of $7,078 in fiscal 2019. The change in impact of working capital is due primarily to changes in timing of payments for payables partially offset by an increase in merchandise inventories.
 
During the 26 weeks ended January 25, 2020, Village used cash to fund capital expenditures of $38,121, dividends of $6,438 and additional investments of $1,546 in notes receivable from Wakefern.  Capital expenditures primarily include costs associated with the Stroudsburg replacement store, expansion of ShopRite from Home and equipment purchases.

At January 25, 2020, the Company held variable rate notes receivable due from Wakefern of $25,480 that earn interest at the prime rate plus 1.25% and mature on August 15, 2022 and $26,274 that earn interest at the prime rate plus .75% and mature on February 15, 2024. Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.

Village has budgeted $55,000 for capital expenditures for fiscal 2020. Planned expenditures include the construction of a replacement store in Stroudsburg, Pennsylvania, three major remodels, expansion of ShopRite from Home, and various merchandising, technology, equipment and facility upgrades. The Company’s primary sources of liquidity in fiscal 2020 are expected to be cash and cash equivalents on hand at January 25, 2020 and operating cash flow generated in fiscal 2020.

Working capital was $23,265 at January 25, 2020 compared to $56,307 at July 27, 2019. Working capital ratios at the same dates were 1.19 and 1.50 to 1, respectively.  The decrease in working capital in fiscal 2020 compared to fiscal 2019 is due primarily to a decrease in cash and cash equivalents as a result of capital expenditures related to the Stroudsburg replacement store and recognition of current operating lease obligations as a result of the adoption of ASU 2016-02, “Leases”. The Company’s

18


working capital needs are reduced, since inventories are generally sold by the time payments to Wakefern and other suppliers are due.

Village has an unsecured revolving credit agreement providing a maximum amount available for borrowing of $25,000.
The revolving credit line can be used for general corporate purposes and expires on December 31, 2020. Indebtedness under this agreement bears interest at the applicable LIBOR rate plus 1.25%. The credit agreement provides for up to $3,000 of letters of credit, which secure obligations for construction performance guarantees to municipalities. The credit agreement contains covenants that, among other conditions, require a maximum liabilities to tangible net worth ratio, a minimum fixed charge coverage ratio and a positive net income. There were no amounts outstanding at January 25, 2020 or July 27, 2019 under the facility.

On January 22, 2020, Village Super Market, Inc. (“Village”) entered into an asset purchase agreement (the “APA”) with Fairway Group Holdings Corp. (“Fairway”) in conjunction with Fairway filing voluntary petitions for relief under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Under the APA, Village agreed to acquire up to five supermarkets in New York, NY, a production distribution center (the “PDC”), and the intellectual property used by Fairway, including the names “Fairway” and “Fairway Markets,” for a cash purchase price of $68,600, subject to customary closing adjustments and assumed liabilities (as defined in the APA). The assumed liabilities consist primarily of lease liabilities.
On February 20, 2020, the Bankruptcy Court entered an order that established the bidding procedures for the assets of Fairway, including those subject to the APA.  The APA represents an offer under Section 363 of the U.S. Bankruptcy Code. Such offers are commonly referred to as “stalking horse” bids and are subject to higher bids, in accordance with the bidding procedures established by the Bankruptcy Court. Accordingly, Village cannot be certain that it will complete the transaction. The Section 363 sale process is expected to be concluded in March 2020.  In the event that Village is not the winning bidder, it will be entitled to a break-up fee equal to 3% of the cash purchase price.
The APA allows Village to remove two of the supermarkets and the PDC (each, a “Non-Core Asset”) from the list of assets acquired within the later of 45 days from the execution of the APA and two days prior to the auction or the sale hearing if no auction is held under the Section 363 sale process. Should Village elect to remove Non-Core Assets from the list of assets acquired, the cash purchase price will be reduced by up to $5,500.
As required by the APA, Village made a $6,860 deposit into escrow on January 23, 2020 included in Other current assets in the Company's Consolidated Balance Sheet as of January 25, 2020. Village intends to fund the balance of the purchase price, if the transaction is consummated, with cash on hand, its revolving credit agreement and other debt.

There have been no other substantial changes as of January 25, 2020 to the contractual obligations and commitments discussed in the Company’s Annual Report on Form 10-K for the year ended July 27, 2019.


OUTLOOK

This Form 10-Q contains certain forward-looking statements about Village’s future performance. These statements are based on management’s assumptions and beliefs in light of information currently available.  Such statements relate to, for example:  same store sales; economic conditions; expected pension plan contributions; projected capital expenditures; cash flow requirements; inflation expectations; and legal matters; and are indicated by words such as “will,” “expect,”  “should,” “intend,” “anticipates,” “believes” and similar words or phrases.  The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-looking statements.  The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof.

•
We expect same store sales to range from a .5% decrease to an increase of 1.0% in fiscal 2020, including the impact of price investments and expansion of our own brand product portfolio.
•
We expect continued reductions in gross margin due to price investments, including the ShopRite's Right Price Promise pricing strategy, a commitment to everyday low prices on the items customers purchase most frequently, introduced in October 2019.
•
We have budgeted $55,000 for capital expenditures in fiscal 2020. Planned expenditures include the construction of a replacement store in Stroudsburg, Pennsylvania, three major remodels, expansion of ShopRite from Home, and various merchandising, technology, equipment and facility upgrades.

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•
The Board’s current intention is to continue to pay quarterly dividends in 2020 at the most recent rate of $.25 per Class A and $.1625 per Class B share.
•
We believe cash and cash equivalents on hand, operating cash flow and other sources of liquidity will be adequate to meet anticipated requirements for working capital, capital expenditures and debt payments for the foreseeable future.
•
We expect our effective income tax rate in fiscal 2020 to be in the range of 29.5% - 30.5%.
•
We expect approximately $1,800 of net periodic pension costs in fiscal 2020 related to the four Company sponsored defined benefit pension plans. The Company expects contributions to its defined benefit pension plans to be immaterial in fiscal 2020.
Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include:

•
The supermarket business is highly competitive and characterized by narrow profit margins. Results of operations may be materially adversely impacted by competitive pricing and promotional programs, industry consolidation and competitor store openings. Village competes directly with multiple retail formats both in-store and online, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do.
•
The Company’s stores are concentrated in New Jersey, with two stores in Maryland, one in northeastern Pennsylvania and four in New York City. We are vulnerable to economic downturns in New Jersey in addition to those that may affect the country as a whole. Economic conditions such as inflation, deflation, interest rate fluctuations, movements in energy costs, social programs, minimum wage legislation, unemployment rates and changing demographics may adversely affect our sales and profits.
•
Village purchases substantially all of its merchandise from Wakefern.  In addition, Wakefern provides the Company with support services in numerous areas including advertising, liability and property insurance, supplies, certain equipment purchasing, coupon processing, certain financial accounting applications, retail technology support, and other store services.  Further, Village receives patronage dividends and other product incentives from Wakefern and also has demand deposits and notes receivable due from Wakefern.
Any material change in Wakefern’s method of operation or a termination or material modification of Village’s relationship with Wakefern could have an adverse impact on the conduct of the Company’s business and could involve additional expense for Village.  The failure of any Wakefern member to fulfill its obligations to Wakefern or a member’s insolvency or withdrawal from Wakefern could result in increased costs to the Company.  Additionally, an adverse change in Wakefern’s results of operations or solvency could have an adverse effect on Village’s results of operations.
•
Approximately 88% of our employees are covered by collective bargaining agreements. Any work stoppages could have an adverse impact on our financial results. If we are unable to control health care and pension costs provided for in the collective bargaining agreements, we may experience increased operating costs.
•
The Company could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain.  The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations.
•
Certain of the multi-employer plans to which we contribute are underfunded. As a result, we expect that contributions to these plans may increase. Additionally, the benefit levels and related items will be issues in the negotiation of our collective bargaining agreements. Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under very complex actuarial and allocation rules. The failure of a withdrawing employer to fund these obligations can impact remaining employers. The amount of any increase or decrease in our required contributions to these multi-employer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations, withdrawals by other participating employers and the actual return on assets held in the plans, among other factors.

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•
The Company uses a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, property, director and officers’ liability, and certain employee health care benefits. Any projection of losses is subject to a high degree of variability. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, and insolvency of insurance carriers could all affect our financial condition, results of operations, or cash flows.
•
Our long-lived assets, primarily store property, equipment and fixtures, are subject to periodic testing for impairment. Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.
•
Our effective tax rate may be impacted by the results of tax examinations and changes in tax laws.
•
Wakefern provides all members of the cooperative with information system support that enables us to effectively manage our business data, customer transactions, ordering, communications and other business processes.  These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human error.  Any material interruption of our or Wakefern’s information systems could have a material adverse impact on our results of operations.
Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems. In addition, confidential information is transmitted through our ShopRite from Home online business at shoprite.com and through the ShopRite app. Unauthorized parties may attempt to access information stored in or to sabotage or disrupt these systems. Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions. It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at the Company, Wakefern or those of third-party service providers.
Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, cause us to make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties. Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered or are in excess of carried insurance policies. In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation.
•
Our business could be adversely affected by an outbreak of disease, epidemic or pandemic, or similar public threat, or fear of such an event. The spreading of a novel strain of coronavirus (“COVID-19”), that is impacting global economic activity, could lead to regional quarantines, labor shortages, disruptions to supply chains, including our ability to obtain products from our suppliers, and overall economic instability. The impact of the virus in our region is uncertain at this time and could have a material adverse effect on our business and results of operations.

RELATED PARTY TRANSACTIONS
 
See note 5 to the unaudited consolidated financial statements for information on related party transactions.


RECENTLY ISSUED ACCOUNTING STANDARDS
 
In August 2018, the FASB issued ASU 2018-14, "Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20): Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans." The guidance modifies disclosure requirements for defined benefit plans. This guidance is effective for fiscal years ending after December 15, 2020, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2018-14 on its consolidated financial statement disclosures.





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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
At January 25, 2020, the Company had demand deposits of $51,141 at Wakefern earning interest at overnight money market rates, which are exposed to the impact of interest rate changes.

At January 25, 2020, the Company held variable rate notes receivable due from Wakefern of $25,480 that earn interest at the prime rate plus 1.25% and mature on August 15, 2022 and $26,274 that earn interest at the prime rate plus .75% and mature on February 15, 2024. Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.


ITEM 4.  CONTROLS AND PROCEDURES
 
As required by Rule 13a-15 under the Exchange Act, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures at the end of the period.  This evaluation was carried out under the supervision, and with the participation, of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer.  Based upon that evaluation, the Company’s Chief Executive Officer, along with the Company’s Chief Financial Officer, concluded that the Company’s disclosure controls and procedures are effective.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in the Company’s internal control over financial reporting during the quarter ended January 25, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
 

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PART II - OTHER INFORMATION


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ITEM 2C.   ISSUER PURCHASES OF EQUITY SECURITIES

The number and average price of shares purchased in each fiscal month of the second quarter of fiscal 2020 are set forth in the table below:
Period(1)
 
Total Number of Shares Purchased(2)
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (3)
October 27, 2019 to November 23, 2019
 
—
 
$—
 
—
 
$5,665,465
November 24, 2019 to December 21, 2019
 
—
 
$—
 
—
 
$5,665,465
December 22, 2019 to January 25, 2020
 
10,000
 
$22.98
 
10,000
 
$5,435,665
Total 
 
10,000
 
$22.98
 
10,000
 
$5,435,665
 
(1)  
The reported periods conform to our fiscal calendar.
(2)     Includes shares repurchased under a $5.0 million repurchase program of the Company's Class A Common Stock authorized by the Board of Directors and announced on June 12, 2015. Repurchases may be made from time-to-time through a variety of methods, including open market purchases and other negotiated transactions, including through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934.
(3)     Includes amount remaining under the program described in (2) and an additional $5.0 million repurchase program of the Company's Class A Common Stock authorized by the Board of Directors and announced on September 13, 2019. Repurchases may be made from time-to-time through a variety of methods, including open market purchases and other negotiated transactions, including through plans designed to comply with Rule 10b5-1 under the Securities Exchange Act of 1934.



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Item 6.    
Exhibits
 
 
Exhibit 31.1
 
 
Exhibit 31.2
 
 
Exhibit 32.1
Certification (furnished, not filed)
 
 
Exhibit 32.2
Certification (furnished, not filed)
 
 
Exhibit 99.1
 
 
101 INS
XBRL Instance
 
 
101 SCH
XBRL Schema
 
 
101 CAL
XBRL Calculation
 
 
101 DEF
XBRL Definition
 
 
101 LAB
XBRL Label
 
 
101 PRE
XBRL Presentation

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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.
 
 
Village Super Market, Inc.
 
Registrant
 
 
Dated: March 5, 2020
/s/ Robert P. Sumas
 
Robert P. Sumas
 
(Chief Executive Officer)
 
 
Dated: March 5, 2020
/s/ John Van Orden
 
John Van Orden
 
(Chief Financial Officer)



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