SUPERMARKET OF THE VILLAGE: ANALYSIS BY THE DEPARTMENT OF FINANCIAL SITUATION AND RESULTS OF OPERATIONS (form 10-K)
(Dollars in thousands, except data per share and per square foot).
Village operates a chain of twenty-nine ShopRite supermarkets, five Fairway Markets and three
Gourmet Garagespecialty markets located in New Jersey, New York, Pennsylvaniaand Maryland. Village is the second largest member of Wakefern Food Corporation("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite, Fairway and Gourmet Garagenames. This ownership interest in Wakefern provides Village with many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with larger chains.
May 14, 2020, Village completed its acquisition of certain assets, including five supermarkets averaging 52,000 sq. ft. (30,000 selling sq. ft.), a production distribution center (the "PDC") and the intellectual property of Fairway Group Holdings Corp.and certain of its subsidiaries ("Fairway"), including the names "Fairway" and "Fairway Markets" for $73,622, net of cash acquired. Four of the supermarkets are in Manhattan, specifically the Upper West Side, Upper East Side, Kips Bayand Chelsea locations, and a fifth store is located in Pelham, NY. Like Village, Fairway traces its roots back to a neighborhood market over 80 years ago. Fairway Markets offer a one-stop destination shopping experience with an emphasis on fresh, unique, and high quality offerings paired with an expansive variety of natural, organic, specialty and gourmet products. The PDC is a centralized commissary that promotes production efficiency, product quality and consistency in the bakery, prepared foods, meals to go and other perishable product categories. Production costs at the PDC, including materials, labor and overhead, are included in Cost of sales. The Fairway acquisition expands our presence in New York Cityunder an iconic city brand and provides Village the ability to expand centralized food production to support stores under all of our banners. On November 1, 2019, Village opened an 82,000 sq. ft. (52,000 selling sq. ft.) ShopRite in Stroudsburg, Pennsylvaniaand replaced our existing 53,000 sq. ft. store. 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. 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. The Company's stores, six of which are owned, average 55,000 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. Online grocery ordering for in-store pick up or home delivery through ShopRite from Home is available in all of our ShopRite stores. Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or the ShopRite app. Additionally, the ShopRite Order Express app enables customers to pre-order deli, catering, specialty occasion cakes and other items. Online ordering for home delivery through third party services is available in all Fairway and Gourmet Garagestores. In April 2020we also added online ordering for home delivery through third party services in all ShopRite stores. 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. 10 -------------------------------------------------------------------------------- The Company utilizes a 52 - 53 week fiscal year, ending on the last Saturday in the month of July. Fiscal 2021 contains 53 weeks and fiscal 2020 contains 52 weeks. COVID-19 The Company was significantly impacted by the COVID-19 outbreak as it operates in and around one of the early U.S.epicenters of the health crisis. The Company is classified as an essential business and has remained open to serve our customers and the communities in which we operate. We continue to experience changes in customer shopping habits, shifts in product mix and increased demand through digital channels as a result of the COVID-19 pandemic. Demand remains high in most stores, however sales at Fairway and Gourmet Garagelocations in Manhattanhave been negatively impacted by localized residential population migration out of the city and less commuter and tourist traffic. We expect continued uncertainty in our business as well as the local and regional economies in which we operate depending on the duration and intensity of the COVID-19 pandemic (see the "Outlook" section below for further discussion of risks and uncertainties). NON-GAAP MEASURES The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles ("GAAP"). We provide non-GAAP measures, including Adjusted net income and Adjusted operating and administrative expenses management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to GAAP measures such as net income, operating income, operating and administrative expense or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. We believe Adjusted net income and Adjusted operating and administrative expense are useful metrics to investors and analysts because they present more accurate year-over-year comparisons of our net income and operating and administrative expense. Other companies may have different definitions of Non-GAAP Measures and provide for different adjustments, and comparability to the Company's results of operations may be impacted by such differences. The Company's presentation of Non-GAAP Measures should not be construed as an implication that its future results will be unaffected by unusual or non-recurring items. 11
-------------------------------------------------------------------------------- The following tables reconciles Net income to Adjusted net income and Operating and administrative expenses to Adjusted operating and administrative expenses: 53 Weeks Ended 52 Weeks Ended July 31, July 25, 2021 2020 Net Income
$ 19,994 $ 24,938Adjustments to Gross Profit: Amortization of acquisition related inventory step up - 507
Adjustments to operating and administrative expenses: Gain on disposal of assets (1)
(4,768) (1,220) Non-cash pension termination and settlement charges 587 1,604 Store closure costs (2) 325 799 New store pre-opening costs (3) - 1,274 Gain on Superstorm Sandy insurance proceeds - (2,733) Fairway acquisition transaction costs - 2,701 Break-up fee income (4) - (2,035) Other adjustments: Impairment of assets (5) 2,900 - Estimated income from 53rd week (6) (602) - Adjustments to Income taxes: Tax impact of adjustments to gross profit and operating expenses 478 (236) Tax gain on federal net operating loss carryback - (2,512) Adjusted net income
$ 18,914 $ 23,087Operating and administrative expense 498,786 444,833 Total adjustments to operating administrative expense 3,856 (390) Adjusted operating and administrative expense 502,642 444,443 Adjusted operating and administrative expense as a % of sales 24.76 % 24.63 % (1) Fiscal 2021 includes a $4,044gain on the sale of the leasehold interest in a non-supermarket related parking lot obtained as part of the Fairway acquisition and a $724gain on the sale of the pharmacy prescription list related to the Silver Springstore. Fiscal 2020 includes a gain on the sale of the pharmacy prescription lists related to three store pharmacies closed in March 2020. (2) Fiscal 2021 includes costs associated with the closure of the Silver Spring, Marylandstore on February 22, 2021and Fiscal 2020 includes charges to write off the lease asset and related obligations for the old Stroudsburgstore. (3) Fiscal 2020 pre-opening costs relate to the Stroudsburgreplacement store opened on November 1, 2019. (4) Fiscal 2020 gain due to the breakup of Village's initial "stalking horse" bid under the January 20, 2020Fairway Asset Purchase Agreement. (5) Fiscal 2021 non-cash impairment charges for the Fairway trade name of $2,386and the long-lived assets for one Gourmet Garagestore of $514. (6) Fiscal 2021 is a 53-week fiscal year, with the additional week included in the fourth quarter. 12 --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table presents the components of the Company’s consolidated statements of earnings as a percentage of sales:
July 31, 2021 July 25, 2020 Sales 100.00 % 100.00 % Cost of sales 72.17 % 71.93 % Gross profit 27.83 % 28.07 % Operating and administrative expense 24.57 % 24.65 % Depreciation and amortization 1.69 % 1.74 % Impairment of assets 0.14 % - % Operating income 1.43 % 1.68 % Interest expense (0.19) % (0.14) % Interest income 0.18 % 0.22 % Income before income taxes 1.42 % 1.76 % Income taxes 0.44 % 0.38 % Net income 0.98 % 1.38 % SALES Sales were
$2,030,330in fiscal 2021, an increase of $225,736, or 12.5% from fiscal 2020. Sales increased $35,433, or 2.0%, due to fiscal 2021 containing 53 weeks. Excluding the impact of the 53rd week, sales increased due to the Fairway acquisition completed on May 14, 2020, the opening of the Stroudsburgreplacement store on November 1, 2019and a same store sales increase of 1.8%. Excluding the impact of the 53rd week, same store sales increased 7.5% in fiscal 2021 on a two-year stacked basis compared to fiscal 2019. Since the beginning of the COVID-19 pandemic, we have experienced higher average basket sizes and decreased transaction counts as customers have consolidated shopping trips. Additionally, both food inflation and increased Supplemental Nutrition Assistance Program("SNAP") benefits positively impacted sales. Same store digital sales growth accelerated through both ShopRite from Home and partnerships with online grocery picking and delivery services, increasing 68% in fiscal 2021 compared to fiscal 2020 and 219% on a two-year stacked basis. During the COVID-19 pandemic, fiscal 2021 sales at Fairway and Gourmet Garagelocations in Manhattanhave been significantly negatively impacted due primarily to residential population migration out of the city and less commuter and tourist traffic.
New stores and replacement stores are included in comparable store sales in the quarter following store operations for four full quarters. Store renovations and expansions are immediately included in comparable store sales.
Gross profit as a percentage of sales decreased to 27.83% in fiscal 2021 compared to 28.07% in fiscal 2020. Higher margins associated with Fairway increased gross profit (.22%), despite higher costs as we transition and integrate commissary operations into our business. Excluding the impact of Fairway, gross profit as a percentage of sales decreased .46% due primarily to decreased departmental gross margin percentages (.48%) and increased warehouse assessment charges from Wakefern (.34%), partially offset by a favorable change in product mix (0.17%), lower promotional spending (0.16%) and increased patronage dividends and rebates received from Wakefern (.03%). Departmental gross profits decreased due partly to price investments.
OPERATING AND ADMINISTRATION COSTS
Operating and administrative expense as a percentage of sales decreased to 24.57% in fiscal 2021 compared to 24.65% in fiscal 2020. Adjusted operating and administrative expense as a percentage of sales increased to 24.76% in fiscal 2021 compared to 24.63% in fiscal 2020. 13 -------------------------------------------------------------------------------- Adjusted operating and administrative expense increased due primarily to increased occupancy costs due primarily to the Fairway acquisition (.56%) and increased external fees and transportation costs associated with digital sales (.42%), partially offset by decreased costs related to COVID-19, including enhanced wages and benefits, security and outside sanitation services (.62%) and lower payroll and fringe benefit costs (.24%). Payroll and fringe benefits decreased primarily due to leverage from higher sales, reductions in service department offerings, labor shortages and productivity initiatives partially offset by the addition of Fairway, growth of ShopRite from Home and minimum wage and demand driven pay rate increases.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was
$34,195and $31,358in fiscal 2021 and 2020, respectively. Depreciation and amortization expense increased in fiscal 2021 compared to the prior year due to depreciation related to assets acquired as part of the Fairway acquisition.
Impairment of assets includes non-cash charges related to the Fairway trade name of
Interest expense was
$3,943and $2,611in fiscal 2021 and 2020, respectively. Interest expense increased in fiscal 2021 compared to fiscal 2020 due primarily to interest expense related to the credit agreement entered into on May 6, 2020(see note 7 to the consolidated financial statements).
INCOME FROM INTEREST
Interest income was
$3,633and $4,060in fiscal 2021 and 2020, respectively. Interest income decreased in fiscal 2021 compared to fiscal 2020 due primarily to lower interest rates for amounts invested in variable rate notes receivable from Wakefern and demand deposits invested at Wakefern.
The Company’s effective tax rate was 30.7% and 21.4% for fiscal 2021 and 2020, respectively.
Fiscal 2020 includes a
$2,512benefit from a federal net operating loss carryback at a rate higher than the current statutory tax rate. Excluding the impact of these adjustments, the effective income tax rate was 29.3% in fiscal 2020. The increase in the effective tax rate in fiscal 2021 is due primarily to favorable return to provision adjustments in fiscal 2020 and increased state taxable income in higher tax rate jurisdictions.
Net income was
$19,994in fiscal 2021 compared to $24,939in fiscal 2020. Adjusted net income was $18,914in fiscal 2021 compared to $23,087in fiscal 2020. Adjusted net income decreased 18% in fiscal 2021 compared to the prior year due primarily to lower sales volumes in Manhattanand higher costs as we transition and integrate commissary operations into our business. 14 --------------------------------------------------------------------------------
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 preparation of financial statements in accordance with
The Company reviews the carrying values of its long-lived assets, such as property, equipment and fixtures for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review analyzes the undiscounted estimated future net cash flows from asset groups at the store level to determine if the carrying value of such assets are recoverable from their respective cash flows. If impairment is indicated, it is measured by comparing the fair value of the long-lived asset groups to their carrying value.
Goodwilland indefinite-lived intangible assets are tested at the end of each fiscal year, or more frequently if circumstances dictate, for impairment. The Company utilizes valuation techniques, such as earnings multiples, in addition to the Company's market capitalization, to assess goodwill for impairment. Calculating the fair value of a reporting unit requires the use of estimates. Management believes the fair value of Village's one reporting unit exceeds its carrying value at July 31, 2021. Should the Company's carrying value of its one reporting unit exceed its fair value, the amount of any resulting goodwill impairment may be material to the Company's financial position and results of operations. The fair value of indefinite-lived intangible assets are estimated based on the discounted cash flow model using the relief from royalty method. Manhattanstore sales have been impacted by localized residential population migration out of Manhattanand less commuter and tourist traffic during the COVID-19 pandemic. Due to uncertainty regarding the duration and extent of the impact of the COVID-19 pandemic on Manhattan, the Company recognized an impairment charge related to the Fairway trade name of $2,386for year ended July 31, 2021. PATRONAGE DIVIDENDS As a stockholder of Wakefern, Village earns a share of Wakefern's earnings, which are distributed as a "patronage dividend." This dividend is based on a distribution of substantially all of Wakefern's operating profits for its fiscal year (which ends on or about September 30) in proportion to the dollar volume of purchases by each member from Wakefern during that fiscal year. Patronage dividends are recorded as a reduction of cost of sales as merchandise is sold. Village accrues estimated patronage dividends due from Wakefern quarterly based on an estimate of the annual Wakefern patronage dividend and an estimate of Village's share of this annual dividend based on Village's estimated proportional share of the dollar volume of business transacted with Wakefern that year. The patronage dividend receivable based on these estimates was $11,860and $11,204at July 31, 2021and July 25, 2020, respectively.
We account for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed are recorded at their respective fair values at the date of acquisition. The determination of fair values of identifiable assets and liabilities requires estimates and the use of valuation techniques when market value is not readily available. For intangible assets acquired in a business combination, we typically determine the fair value based on the discounted cash flow model, specifically the relief from royalty method for intangible assets related to a trade name. Significant estimates in valuing certain intangible assets include, but are not limited to, the amount and timing of future revenues, cash flows, growth rates, discount rates and useful lives. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill. 15
The determination of the Company's obligation and expense for Company-sponsored pension plans is dependent, in part, on Village's selection of assumptions used by actuaries in calculating those amounts. These assumptions are described in Note 9 to the consolidated financial statements and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rate of increase in compensation costs. Actual results that differ from the Company's assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. While management believes that its assumptions are appropriate, significant differences in actual experience or significant changes in the Company's assumptions may materially affect cash flows, pension obligations and future expense. The objective of the discount rate assumption is to reflect the rate at which the Company's pension obligations could be effectively settled based on the expected timing and amounts of benefits payable to participants under the plans. Our methodology for selecting the discount rate as of
July 31, 2021was to match the plans' cash flows to that of a yield curve on high-quality fixed-income investments. Based on this method, we utilized a weighted-average discount rate of 2.44% at July 31, 2021compared to 2.26% at July 25, 2020. Changes in the discount rate and updated assumptions on mortality tables and improvement scales resulted in a net decrease in the projected benefit obligation by approximately $(1,206)at July 31, 2021. Village evaluated the expected increase in compensation costs of 4.50% and concluded no changes in this assumption was necessary in estimating pension plan obligations and expense. The Company utilizes a liability-driven investment ("LDI") strategy. A LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk. This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability. The investment allocation to fixed income instruments will increase as each plans' funded status increases. Based on the Company's LDI strategy, the Company assumed a weighted-average assumed long-term rate of return on plan assets of 3.36% in fiscal 2021.
The sensitivity to changes in the main assumptions used in the calculation of the Company’s pension plans is as follows:
Projected benefit obligation Expense Percentage decrease decrease point change (increase) (increase) Discount rate + / - 1.0 %
$ 9,693 $ (12,211) $ 376 $ (436)Expected return on assets + / - 1.0 % $ - - $ 589 $ (589)Village made no contributions in both fiscal 2021 and fiscal 2020 to these Company-sponsored pension plans. In fiscal 2020 the Company began the process of terminating the Village Super Market, Inc.Employees' Retirement Plan. Upon satisfaction of all regulatory requirements, which is expected to occur during fiscal 2022, the Company will fully fund and liquidate all plan assets to purchase annuity contracts from an insurance company for all participants who do not elect a lump sum distribution. At the time of settlement, the Company will recognize a non-cash pre-tax charge representing the plan's remaining unrecognized losses within accumulated other comprehensive loss as of the termination date. As of July 31, 2021, the funded status of this plan is a net liability of $3,844and the pre-tax amount included in Accumulated other comprehensive loss is $15,155. Contributions to the remaining plans are expected to be immaterial in fiscal 2022.
RECENTLY ISSUED ACCOUNTING STANDARDS
For information on recently published accounting standards, see Note 1 to the consolidated financial statements.
LIQUIDITY and CAPITAL RESOURCES
Net cash provided by operating activities was
$52,692in fiscal 2021 compared to $83,948in fiscal 2020. The change in cash flows from operating activities in fiscal 2021 was primarily due to changes in working capital and net income adjusted for non-cash items including depreciation and amortization, share-based compensation, deferred taxes, loss on pension settlements, the provision to value inventories at LIFO and the gain on sale of prescription lists and property, equipment and fixtures. 16 -------------------------------------------------------------------------------- Working capital changes, including other assets and other liabilities, decreased net cash provided by operating activities by $1,587in fiscal 2021 compared an increase in net cash provided by operating activities of $1,127in fiscal 2020. This change in impact of working capital is due primarily to lower accounts payable to Wakefern and Accounts payable and accrued expense due to inventory turnover and operations normalizing after the initial impact of the pandemic partially offset by changes in timing of income tax payments.
During fiscal year 2021, Village used cash to fund the capital expenditures of
During fiscal 2020, Village used cash to fund capital expenditures of
$54,495, dividends of $12,965, treasury stock purchases of $4,389and additional investments of $2,800in notes receivable from Wakefern, net of proceeds received on matured notes. The $73,622purchase price for the Fairway acquisition was funded by $50,000drawn on the Company's unsecured revolving line of credit and a $25,500unsecured term loan pursuant to the Company's Credit Facility. Capital expenditures include costs associated with the opening of an 82,000 sq. ft. (52,000 selling sq. ft.) store in Stroudsburg, Pennsylvaniathat replaced our existing 53,000 sq. ft. store, expansion of ShopRite from Home, including the opening of an automated micro-fulfillment center in southern New Jersey, one major store remodel, several smaller remodels and equipment upgrades, including those in the integration of the Fairway acquisition.
LIQUIDITY and DEBT
The working capital was
We have budgeted
$40,000for capital expenditures in fiscal 2022. Planned expenditures include three major remodels, several smaller store remodels, the purchase of the Gallowaystore shopping center, one new Gourmet Garagestore, continued expansion of ShopRite from Home and self-checkout, and various merchandising, technology, equipment and facility upgrades. The Company's primary sources of liquidity in fiscal 2022 are expected to be cash and cash equivalents on hand at July 31, 2021and operating cash flow generated in fiscal 2022. At July 31, 2021, the Company held variable rate notes receivable due from Wakefern of $27,325that earn interest at the prime rate plus 1.25% and mature on August 15, 2022and $27,970that 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.
May 6, 2020, Village entered into a credit agreement (the "Credit Facility") with Wells Fargo National Bank, National Association ("Wells Fargo") that supersedes in its entirety the prior credit agreement with Wells Fargo dated November 9, 2017. The principal purpose of the Credit Facility is to finance general corporate and working capital requirements and Village's acquisition of certain Fairway assets. Among other things, the Credit Facility provides for a maximum loan amount of $150,500as further set forth below: •An unsecured revolving line of credit providing a maximum amount available for borrowing of $125,000. Indebtedness under this agreement bears interest at the applicable LIBOR rate plus 1.10% and expires on May 6, 2025. •An unsecured term loan with a maximum loan amount of $25,500. On May 12, 2020, Village executed a $25,500term note, repayable in equal monthly installments based on a seven-year amortization schedule through May 4, 2027and bearing interest at the applicable LIBOR rate plus 1.35%. Additionally, Village executed an interest rate swap for a notional amount equal to the term loan amount that fixes the base LIBOR rate at .41% per annum through May 4, 2027, resulting in a fixed effective interest rate of 1.76% on the term note. •On September 1, 2020, Village converted $50,000of its revolving line of credit to a secured converted term loan. The conversion reduced the maximum amount available for borrowing under the revolving line of credit from $125,000to $75,000. The term loan bears interest at the applicable LIBOR rate plus 1.50% and is repayable in equal monthly 17 -------------------------------------------------------------------------------- installments based on a fifteen-year amortization schedule beginning on the conversion date. Additionally, Village previously executed a forward interest rate swap, effective on the conversion date, for a notional amount equal to the term loan amount that fixes the base LIBOR rate at 0.69% per annum for 15 years, resulting in a fixed effective interest rate of 2.19% on the converted term loan. The term loan is secured by real properties of Village Super Market, Inc.and its subsidiaries, including the sites of three Village stores. The Credit Facility also provides for up to $25,000of letters of credit ( $7,336outstanding at July 31, 2021), which secure obligations for store leases and construction performance guarantees to municipalities. The Credit Facility contains covenants that, among other conditions, require a minimum tangible net worth, a minimum fixed charge coverage ratio and a maximum adjusted debt to EBITDAR ratio. The Company was in compliance with all covenants of the credit agreement at July 31, 2021. As of July 31, 2021, $67,664remained available under the unsecured revolving line of credit.
During fiscal year 2021, Village paid cash dividends of
During fiscal year 2020, Village paid cash dividends of
This annual report 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: economic conditions; uninsured losses; expected pension plan contributions; projected capital expenditures; expected dividend payments; cash flow requirements; inflation expectations; public health conditions; 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. •Due to continued uncertainties in the extent and duration of the COVID-19 pandemic and its impact on our business, we will not provide same store sales guidance for fiscal 2022. •We have budgeted
$40,000for capital expenditures in fiscal 2022. Planned expenditures include three major remodels, several smaller store remodels, the purchase of the Gallowaystore shopping center, one new Gourmet Garagestore, continued expansion of ShopRite from Home and self-checkout, and various merchandising, technology, equipment and facility upgrades. •The Board's current intention is to continue to pay quarterly dividends in 2022 at the most recent rate of $.25per Class A and $.1625per Class B share. •We believe cash and cash equivalents on hand, operating cash flow and the Company's Credit Facility 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 2022 to be in the range of 30.5% - 31.5%. •We expect approximately $15,891of net periodic pension costs in fiscal 2022 related to the three Company sponsored defined benefit pension plans, including a $15,155non-cash, pre-tax settlement charge representing the remaining unrecognized losses within accumulated other comprehensive loss related to a plan termination expected to occur during fiscal 2022. The Company will fully fund this plan and liquidate all plan assets to purchase annuity contracts from an insurance company for all participants who do not elect a lump sum distribution. As of July 31, 2021, the funded status of this plan is a net liability of $3,844. Contributions to the remaining plans are expected to be immaterial in fiscal 2022. 18 --------------------------------------------------------------------------------
Various uncertainties and other factors could cause actual results to differ from the forward-looking statements contained in this report. These include:
•The Company operates in and around one of the epicenters of the initial COVID-19 health crisis in
the United Stateswith much of our trade area under stay-at-home orders from mid-March 2020through June 2020. The Company is classified as an essential business and has remained open to serve our customers and the communities in which we operate. The continuing impact on our business, including the length and impact of stay-at-home orders and/or regional quarantines, labor shortages and employment trends, disruptions to supply chains, higher operating costs, the form and impact of economic stimulus and general overall economic instability, is uncertain at this time and could have a material adverse effect on our business, results of operations, financial condition and cash flows. Furthermore, the impact of the COVID-19 health crisis may exacerbate other risks and uncertainties included herein, which could have a material effect on the Company. •The Fairway acquisition involves a number of risks, uncertainties and challenges, including under-performance relative to our expectations, additional capital requirements, unforeseen expenses or delays, imprecise assumptions or our inability to achieve projected cost savings or other synergies, competitive factors in the marketplace and difficulties integrating the business, including merging company cultures, cultivating brand strategy, expansion of food production and conforming the acquired company's technology, standards, processes, procedures and controls. Sales and operating profits have underperformed compared to projected amounts due primarily to population migration out of Manhattanand less commuter and tourist traffic during the COVID-19 pandemic. Many of these potential circumstances are outside of our control and any of them could result in an adverse impact on our results of operations, financial condition and cash flows and the diversion of management time and resources. •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, New York, Pennsylvaniaand Maryland. We are vulnerable to economic downturns in these states 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, disturbances due to social unrest 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, workers' compensation, 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 could have an adverse effect on Village's results of operations. •Approximately 89% 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. 19 -------------------------------------------------------------------------------- •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. •The Company uses a combination of insurance and self-insurance to provide for potential liability for workers' compensation, automobile, 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 goodwill and indefinite-lived intangible assets are tested at the end of each fiscal year, or more frequently if circumstances dictate, for impairment. Failure of acquired businesses to achieve their forecasted expectations could result in impairment charges to goodwill and indefinite-lived intangible 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. RELATED PARTY TRANSACTIONS The Company holds an investment in Wakefern, its principal supplier. Village purchases substantially all of its merchandise from Wakefern in accordance with the Wakefern Stockholder Agreement. As part of this agreement, Village is required to purchase certain amounts of Wakefern common stock. At July 31, 2021, the Company's indebtedness to Wakefern for the outstanding amount of this stock subscription was $3,423. The maximum per store investment is currently $975. Wakefern 20 -------------------------------------------------------------------------------- distributes as a "patronage dividend" to each member a share of its earnings in proportion to the dollar volume of purchases by the member from Wakefern during the year. Wakefern provides the Company with support services in numerous areas including advertising, supplies, workers' compensation, liability and property insurance, technology support and other store services. Additional information is provided in Note 3 to the consolidated financial statements. At July 31, 2021, the Company held variable rate notes receivable due from Wakefern of $27,325that earn interest at the prime rate plus 1.25% and mature on August 15, 2022and $27,970that 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.
The Company subleases the
Gallowayand Vinelandstores from Wakefern under sublease agreements which provided for combined annual rents of $1,355in both fiscal 2021 and 2020, and aggregate lease obligations of $2,276at July 31, 2021. Both leases contain normal periodic rent increases and options to extend the lease. The Company leases a supermarket from a realty firm 30% owned by certain officers of Village. The Company paid rent to related parties under this lease of $704and $688in fiscal 2021 and 2020, respectively, and has a related lease obligation of $3,227at July 31, 2021. This lease expires in fiscal 2026 with options to extend at increasing annual rents. The Company has ownership interests in three real estate partnerships. Village paid aggregate rents to two of these partnerships for leased stores of $1,579and $1,455in fiscal 2021 and 2020, respectively, and has aggregate lease obligations of $12,781at July 31, 2021related to these leases. 21
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