# INGLES MARKETS INC (IMKTA) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from INGLES MARKETS INC's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/50493/000005049321000017/imkt-20210925x10k.htm
Accession: 0000050493-21-000017
Filing date: 2021-11-24
Report date: 2021-09-25
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/IMKTA/
All MD&A years: /company/IMKTA/mda/
Next year: /company/IMKTA/mda/fy2022/ (FY 2022)

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Ingles, a leading supermarket chain in the Southeast United States, operates 198 supermarkets in North Carolina (75), Georgia (65), South Carolina (35), Tennessee (21), Virginia (1) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and neighborhood shopping centers. Ingles supermarkets offer customers a wide variety of nationally advertised food products, including grocery, meat and dairy products, produce, frozen foods and other perishables and non-food products. Non-food products include fuel centers, pharmacies, health and beauty care products and general merchandise. The Company offers quality private label items in most of its departments. In addition, the Company focuses on selling high-growth, high-margin products to its customers through the development of certified organic products, bakery departments and prepared foods including delicatessen sections. As of September 25, 2021, the Company operated 111 in-store pharmacies and 107 fuel centers. Ingles also operates a fluid dairy and earns shopping center rentals.

Critical Accounting Policies and Estimates

Critical accounting policies are those accounting policies that management believes are important to the presentation of Ingles’ financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to estimate the effect of matters that are inherently uncertain. Estimates are based on historical experience and other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management estimates, by their nature, involve judgments regarding future uncertainties, and actual results may therefore differ materially from these estimates.

Self-Insurance

The Company is self-insured for workers’ compensation, general liability, and group medical and dental benefits. Risks and uncertainties are associated with self-insurance; however, the Company has limited its exposure by maintaining excess liability coverage of $1,000,000 per occurrence for workers’ compensation and for general liability, and $450,000 per covered person for medical care benefits for a policy year. Self-insurance liabilities are established based on claims filed and estimates of claims incurred but not reported. The estimates are based on data provided by the respective claims administrators which is then applied to appropriate actuarial methods. These estimates can fluctuate if historical trends are not predictive of the future. The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained. The Company’s self-insurance reserves totaled $32.1 million and $34.1 million for employee group insurance, workers’ compensation insurance and general liability insurance at September 25, 2021 and September 26, 2020, respectively. These amounts are inclusive of expected recoveries from excess cost insurance or other sources that are recorded as receivables of $4.2 million at September 25, 2021 and $4.7 million at September 26, 2020.

Asset Impairments

The Company accounts for the impairment of long-lived assets in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 360. Asset groups are primarily comprised of our individual store and shopping center properties. For assets to be held and used, the Company tests for impairment using undiscounted cash flows and calculates the amount of impairment using discounted cash flows. For assets held for sale, impairment is recognized based on the excess of remaining book value over expected recovery value. The recovery value is the fair value as determined by independent quotes or expected sales prices developed by internal associates, net of costs to sell. Estimates of future cash flows and expected sales prices are judgments based upon the Company’s experience and knowledge of local operations and cash flows that are projected for several years into the future. These estimates can fluctuate significantly due to changes in real estate market conditions, the economic environment, capital

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spending decisions and inflation. The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether any indicators of impairment have occurred.

Vendor Allowances

The Company receives funds for a variety of merchandising activities from the many vendors whose products the Company buys for resale in its stores. These incentives and allowances are primarily composed of volume or purchase based incentives, advertising allowances, slotting fees, and promotional discounts. The purpose of these incentives and allowances is generally to help defray the costs incurred by the Company for stocking, advertising, promoting and selling the applicable vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of one month or less and are negotiated on a purchase-by-purchase or transaction-by-transaction basis. Whenever practical, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a reduction of item cost in inventory and recognized in merchandise costs when the item is sold. Due to the use of the retail method for store inventory and the nature of certain allowances, it is sometimes not practicable to apply allowances to the item cost of inventory. In those instances, the allowances are applied as a reduction of merchandise costs using a rational and systematic methodology, which results in the recognition of these incentives when the inventory related to the vendor consideration received is sold. Vendor allowances applied as a reduction of merchandise costs totaled $116.3 million, $107.5 million and $111.7 million for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, respectively. Vendor advertising allowances that represent a reimbursement of specific identifiable incremental costs of advertising the vendor’s specific products are recorded as a reduction to the related expense in the period that the related expense is incurred. Vendor advertising allowances recorded as a reduction of advertising expense totaled $8.1 million, $8.0 million, and $13.8 million for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, respectively. During fiscal years 2021 and 2020, the COVID-19 pandemic increased the Company’s sales. As a result, vendors offered the Company a lower level of incentives to sell their products.

If vendor advertising allowances were substantially reduced or eliminated, the Company would likely consider other methods of advertising as well as the volume and frequency of the Company’s product advertising, which could increase or decrease the Company’s expenditures.

Similarly, the Company is not able to assess the impact of vendor advertising allowances on creating additional revenue, as such allowances do not directly generate revenue for the Company’s stores.

Results of Operations

Fiscal Year

Ingles operates on a 52- or 53-week fiscal year ending on the last Saturday in September. The consolidated statements of income for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, each consisted of 52 weeks of operations.

Comparable Store Sales

Comparable store sales are defined as sales by grocery stores in operation for five full fiscal quarters. The Company has an ongoing renovation and expansion plan to modernize the appearance and layout of its existing stores. Sales from replacement stores, major remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date of completion of the replacement, remodel or addition. A replacement store is a newly opened store that replaces an existing nearby store that is closed. A major remodel entails substantial remodeling of an existing store and may include additional retail square footage. For both the fiscal years ended September 25, 2021 and September 26, 2020 comparable store sales included 196 stores.

The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales.

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[["","","Fiscal Year Ended September"],["","","2021","","2020","","2019"],["Net sales","","100.0%","","100.0%","","100.0%"],["Gross profit","","26.1","","26.0","","24.3"],["Operating and administrative expenses","","19.3","","20.0","","20.8"],["Gain from sale or disposal of assets","","0.2","","0.1","","0.1"],["Income from operations","","7.0","","6.1","","3.6"],["Other income, net","","0.1","","0.1","","\u2014"],["Interest expense","","0.5","","0.9","","1.1"],["Loss on early extinguishment of debt","","\u2014","","0.2","","\u2014"],["Income before income taxes","","6.6","","5.1","","2.5"],["Income tax expense","","1.6","","1.2","","0.6"],["Net income","","5.0","","3.9","","1.9"]]
[[/GREPCENT_TABLE]]

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Fiscal Year Ended September 25, 2021 Compared to the Fiscal Year Ended September 26, 2020

The Company’s fiscal year 2021 performance was heavily influenced by the COVID-19 pandemic, which was declared a national emergency on March 13, 2020. Various stay-at-home measures were enacted, most schools closed to in-person learning, and restaurant dining was severely restricted. Many of these measures, though relaxed, have remained in place during the fall of 2021 and resulted in higher retail grocery sales throughout the United States.

Net income for the fiscal year ended September 25, 2021 was $249.7 million, compared with net income of $178.6 million for the fiscal year ended September 26, 2020, primarily due to the impact of the COVID-19 pandemic, as more persons relied upon their local grocery stores for food and non-food products given travel restrictions and limited options for dining out. Net income as a percentage of sales was 5.0% for fiscal year 2021 compared with 3.9% for fiscal year 2020.

Sales and gross margin increased in the retail segment, including increases in gasoline gross profit. Expenses increased primarily as a result of pandemic-related increases in staffing levels, sanitation expenses and social distancing measures. Fluid dairy income increased over the comparable fiscal year, and real estate income increased as tenants reopened their business after the early part of the pandemic.

Net Sales. Net sales for the fiscal year ended September 25, 2021 totaled $4.99 billion, compared with $4.61 billion for the fiscal year ended September 26, 2020.

Retail comparable sales excluding gasoline increased 5.4% during fiscal 2021 compared with 2020. The number of transactions (excluding gasoline) increased 0.7% while the average transaction size (excluding gasoline) increased by 4.8%. Comparing fiscal 2021 with 2020, gasoline gallons sold increased 5.7% and per gallon gasoline prices increased 20.3%.

Sales by product category for the fiscal years ended September 25, 2021 and September 26, 2020 were as follows:

[[GREPCENT_TABLE]]
[["","","Fiscal Year Ended September"],["","","(dollars in thousands)"],["","","2021","","2020"],["Grocery","","$","1,762,872","","$","1,693,961"],["Non-foods","","","1,136,250","","","1,066,939"],["Perishables","","","1,349,081","","","1,261,537"],["Gasoline","","","583,749","","","459,639"],["Total retail grocery","","$","4,831,952","","$","4,482,076"]]
[[/GREPCENT_TABLE]]

The grocery category includes grocery, dairy and frozen foods.

The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

The perishables category includes meat, produce, deli and bakery.

Changes in retail grocery sales for the fiscal year ended September 25, 2021 are summarized as follows (in thousands):

[[GREPCENT_TABLE]]
[["Total grocery sales for the fiscal year ended September 26, 2020","","$","4,482,076"],["Comparable store sales increase","","","334,236"],["Impact of stores closed in fiscal years 2021 and 2020","","","(1,398)"],["Sales growth stores opened fiscal years 2021 and 2020","","","15,865"],["Other","","","1,173"],["Total retail grocery sales for the fiscal year ended September 25, 2021","","$","4,831,952"]]
[[/GREPCENT_TABLE]]

Sales began to increase during fiscal year 2020 due to the COVID-19 pandemic, as stay at home orders closed schools, limited restaurant options, and increased at-home meal preparation. Even with the availability of vaccines and loosening of restrictions in fiscal year 2021, sales continued to increase. Restaurant traffic, leisure travel, and school attendance have not returned to pre-pandemic levels, and people have continued to be cautious to limit possible exposure to COVID-19. In addition, during fiscal year 2021, inflation has increased top-line sales, including sharp increases in the cost of gasoline. Increased sales were also from new and replacement stores, the introduction of new products and product presentation, especially in higher margin products, effective promotions and cost competitiveness. We continue to improve our use of data gained from The Ingles Advantage Savings and Rewards Card (the “Ingles Advantage Card”) to increase net sales and comparable store sales through enhanced loyalty programs and special offers. Information obtained from holders of the Ingles Advantage Card also assists the Company in optimizing product offerings and promotions specific to customer shopping patterns.

Sales in the 2022 fiscal year compared with fiscal year 2021 will in large part depend upon the duration of the COVID-19 impact on our market area, as well as the impact of inflation on food and gasoline prices. The Company anticipates adding new stores in fiscal year 2022, expects to continue remodeling a significant number of existing stores, and plans to add more fuel stations and pharmacies.

Gross Profit. Gross profit for the fiscal year ended September 25, 2021 increased $105.2 million, or 8.8%, to $1.30 billion compared with $1.20 billion for the fiscal year ended September 26, 2020. As a percentage of sales, gross profit totaled 26.1% for the fiscal year

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ended September 25, 2021 and 26.0% for the fiscal year ended September 26, 2020. Gasoline gross profit increased $6.5 million for fiscal year 2021 compared with 2020.

Grocery segment gross profit as a percentage of total sales (excluding gasoline) increased 66 basis points in fiscal year 2021 compared with fiscal year 2020. The gross margin increase was primarily due to COVID-19 market factors that impacted prices and mix of products sold. In general, product cost inflation was incorporated into higher sales prices.

In addition to the direct product cost, the cost of goods sold line item for the grocery segment includes inbound freight charges and the costs related to the Company’s distribution network.

Operating and Administrative Expenses. Operating and administrative expenses increased $41.6 million, or 4.5%, to $963.3 million for the fiscal year ended September 25, 2021, from $921.7 million for the fiscal year ended September 26, 2020. As a percentage of sales, operating and administrative expenses were 19.3% and 20.0% for fiscal years 2021 and 2020, respectively. Excluding gasoline, which does not have significant direct operating expenses, the ratio of operating expenses to sales was 21.7% for fiscal year 2021 compared with 22.0% for fiscal year 2020. Fiscal year 2021 sales growth resulted in operating expense leverage.

A breakdown of the major increases and (decreases) in operating and administrative expenses is as follows.

[[GREPCENT_TABLE]]
[["","","","","Increase"],["","","Increase","","(decrease)"],["","","(decrease)","","as a % of"],["","","(in millions)","","sales"],["Salaries and wages","","$","12.8","","0.26","%"],["Professional fees","","$","5.5","","0.11","%"],["Bank charges","","$","5.4","","0.11","%"],["Store supplies","","$","4.9","","0.10","%"],["Repairs and maintenance","","$","4.2","","0.08","%"]]
[[/GREPCENT_TABLE]]

Salaries and wages increased due to the addition of labor hours required for the increased sales volume, pandemic-related additional cleaning and sanitizing, and changes to the sales mix to product categories with a higher labor component. In general, the labor market in the Company’s market area has become more competitive.

Professional fees increased in conjunction with improvements to the Company’s information technology platforms.

Bank charges increased due to increased sales and a greater portion of sales settled with credit/debit cards instead of cash or check.

Store supplies increased as a result of increased sales and market costs of certain supplies. The COVID-19 pandemic has resulted in higher usage of cleaning and packaging products to maintain product safety.

Repairs and maintenance increased due to additional safety and sanitation equipment necessitated by COVID-19, a higher level of maintenance required on more sophisticated equipment, and updated lighting in our stores.

Gain from Sale or Disposal of Assets. Gains on sale or disposal of assets totaled $10.0 million for fiscal year 2021 and $4.4 million for fiscal year 2020. During fiscal year 2021, the Company recognized $9.3 million from the sales of two former store properties. During the fiscal year 2020, the Company recognized $3.5 million from the sales of land. There were no other significant sale/disposal transactions in either fiscal year 2021 or 2020.

Other Income, Net. Other income, net totaled $2.9 million and $1.7 million for the fiscal years ended September 25, 2021 and September 26, 2020, respectively. Other income consists primarily of sales of waste paper and packaging. The market cost for each of these increased during fiscal year 2021.

Interest Expense. Interest expense totaled $24.3 million for the fiscal year ended September 25, 2021 and $40.5 million for the fiscal year ended September 26, 2020. Total debt was $589.5 million at the end of fiscal year 2021 compared with $605.5 million at the end of fiscal year 2020. During fiscal year 2021, the Company redeemed $295 million aggregate principal amount of 5.75% Senior Notes, representing 100% of the aggregate principal amount such notes, using a portion of the proceeds from its issuance of the 2031 Notes (as defined below), which have an interest rate of 4.00%, and additionally used a portion of the proceeds of the 2031 notes to repay other debt.

Loss on Early Extinguishment of Debt. Losses on early extinguishment of debt totaled $1.1 million for the fiscal year ended September 25, 2021 and $7.1 million for the fiscal year ended September 26, 2020.

In June 2021, the Company issued at par $350.0 million aggregate principal amount of 4.00% senior notes due in 2031 (the “2031 Notes”). Upon issuance of the 2031 Notes, the Company issued an irrevocable notice to redeem the remaining $295.0 million aggregate principal amount outstanding of its 5.75% senior notes due in 2023 (the “2023 Notes”). The Company wrote off $1.1 million of capitalized loan costs related to this transaction.

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During fiscal year 2020, the Company refinanced or repaid early $405 million of the 2023 notes, incurring debt extinguishment costs totaling $7.1 million.

Income Taxes. Income tax expense totaled $77.9 million for fiscal year 2021, an effective tax rate of 23.8%. This compares with an income tax expense totaling $56.4 million and an effective tax rate of 24.0% for fiscal year 2020.

Net Income. Net income totaled $249.7 million for the fiscal year ended September 25, 2021 compared with net income of $178.6 million for the fiscal year ended September 26, 2020. Basic and diluted earnings per share for Class A Common Stock were $13.06 and $12.73, respectively, for the fiscal year ended September 25, 2021 compared with $9.06 and $8.82, respectively, for the fiscal year ended September 26, 2020. Basic and diluted earnings per share for Class B Common Stock were each $11.87 for the fiscal year ended September 25, 2021 compared with $8.24 of basic and diluted earnings per share for the fiscal year ended September 26, 2020.

Fiscal Year Ended September 26, 2020 Compared to the Fiscal Year Ended September 28, 2019

See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Ingles Annual Report on Form 10-K for the year ended September 26, 2020, filed with the SEC on December 8, 2020, as amended on December 10, 2020, for a discussion of the year ended September 26, 2020 as compared to September 28, 2019.

Liquidity and Capital Resources

Capital Expenditures

The Company believes that a key to its ability to continue to increase sales and develop a loyal customer base is providing conveniently located, clean and modern stores which provide customers with good service and an increasingly diverse selection of competitively priced products. As such, the Company has invested and plans to continue to invest significant amounts of capital toward the modernization of its store base. The Company’s modernization program includes the opening of new stores, the completion of major remodels and expansion of selected existing stores, and the relocation of selected existing stores to larger, more convenient locations.

Capital expenditures totaled $140.6 million and $122.8 million for fiscal years 2021 and 2020, respectively. Major capital expenditures included the following:

[[GREPCENT_TABLE]]
[["","","2021","","2020"],["New stores","","2","","0"],["Store sites/land parcels purchased","","6","","2"],["New fuel stations added","","2","","2"]]
[[/GREPCENT_TABLE]]

Capital expenditures include upgrading and replacing store equipment, technology investments, those related to the Company’s distribution operation and its milk processing plant, and expenditures for stores to open in subsequent fiscal years.

Ingles’ capital expenditure plans for fiscal year 2022 include investments of approximately $120 to $160 million. At this time, the Company does not anticipate that the COVID-19 pandemic will have a long-term adverse impact on its capital expenditure plans, even though there is currently a shortage of some construction materials and labor. The Company currently plans to dedicate the majority of its fiscal 2022 capital expenditures to continued improvement of its store base including the construction of one or more new/remodeled stores. Additionally, the Company’s planned fiscal year 2022 capital expenditures include investments in stores expected to open in fiscal year 2023, as well as technology improvements, upgrading and replacing existing store equipment and warehouse and transportation equipment and improvements to the Company’s milk processing plant. The Company also plans to consider property acquisitions for future store development.

The Company currently expects that its net annual capital expenditures will be in the range of approximately $100 to $160 million going forward in order to maintain a modern store base. Among other things, planned expenditures for any given future fiscal year will be affected by the availability of financing, which can affect both the number of projects pursued at any given time and the cost of those projects. The number of projects may also fluctuate due to the varying costs of the types of projects pursued including new stores, major store remodels/expansions, and build-out of tenant space under the long-term leases. The Company makes decisions on the allocation of capital expenditure dollars based on many factors including the competitive environment, other Company capital initiatives and its financial condition.

In general, the Company finances its capital expenditures to the extent possible from cash on hand and cash flow from operations. Additional financing sources for capital expenditures include borrowings under the Company’s $150 million of committed line of credit (described below), other borrowings that could be collateralized by unencumbered real property and equipment with a net book value of approximately $1.1 billion, and the public debt or equity markets. The Company has used each of these to finance past capital expenditures and expects to have them available in the future.

The Company does not generally enter into commitments for capital expenditures other than on a store-by-store basis at the time it begins construction on a new store or begins a major or minor remodeling project. Construction commitments at September 25, 2021

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totaled $0.1 million. This amount is less than prior years, as the Company has temporarily slowed its real estate construction due to shortages of certain construction materials and labor.

Liquidity

The Company generated $306.3 million of cash from operations in fiscal 2021 compared with $350.1 million for fiscal year 2020. Net income was higher in fiscal year 2021 compared with fiscal 2020, but more funds were utilized in working capital during fiscal year 2021.

Cash used by investing activities for fiscal year 2021 totaled $128.0 million compared with $117.4 million for fiscal year 2020. The Company’s most significant investing activity is capital expenditures, which increased in fiscal year 2021 as compared to fiscal year 2020, which was offset by increased property sales in fiscal year 2021.

The Company’s cash used by net financing activities totaled $114.9 million and $268.0 million for fiscal years 2021 and 2020, respectively. More debt was paid down in fiscal 2020 compared with fiscal year 2021. In fiscal year 2021 there were $80.0 million of stock repurchases compared with none in fiscal year 2020.

In June 2021, the Company issued $350.0 million aggregate principal amount of the 2031 Notes. The 2031 Notes bear an interest rate of 4.00% per annum and were issued at par. Upon issuance of the 2031 Notes, the Company issued an irrevocable notice to redeem the remaining $295.0 million principal amount outstanding of 5.75% 2023 Notes. The 2023 Notes were redeemed at par value on July 16, 2021.

During fiscal year 2020, the Company refinanced or repaid early $405 million of the 2023 notes, incurring debt extinguishment costs totaling $7.1 million.

The Company has a $150.0 million unsecured senior line of credit (the “Line”) that matures in June 2026. The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate (“LIBOR”). The Line allows the Company to issue up to $10.0 million in letters of credit, of which none were issued at September 25, 2021. The Company is not required to maintain compensating balances in connection with the Line. At September 25, 2021, the Company had no borrowings outstanding under the Line.

In December 2010, the Company completed the funding of $99.7 million of Recovery Zone Facility Bonds (the “Bonds”) for construction and equipping of an approximately 830,000 square foot new warehouse and distribution center located in Buncombe County, North Carolina (the “Project”). The final maturity date of the Bonds is January 1, 2036.

Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, such financial institutions hold the Bonds until September 2026, subject to certain events. Mandatory redemption of the Bonds by the Company in the annual amount of $4,530,000 began on January 1, 2014. The Company may redeem the Bonds without penalty or premium at any time prior to September 2026.

The Company has an interest rate swap agreement for a current notional amount of $36.5 million at a fixed rate of 3.92%. Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest rate swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.

The Company has an interest rate swap agreement for a current notional amount of $140.1 million at a fixed rate of 2.95%. Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%. The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap. Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030.

The fair market value of the interest rate swaps is measured quarterly with adjustments recorded in other comprehensive income.

The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under the Company’s Line, Bonds and 2031 Notes indenture in the event of default under any one instrument.

The Bonds and the Line contain provisions that under certain circumstances would permit lending institutions to terminate or withdraw their respective extensions of credit to the Company. Included among the triggering factors permitting the termination or withdrawal of the Bonds and the Line to the Company are certain events of default, including both monetary and non-monetary defaults, the initiation of bankruptcy or insolvency proceedings, and the failure of the Company to meet certain financial covenants designated in its respective loan documents. As of September 25, 2021, the Company was in compliance with these covenants by a significant margin. Under the most restrictive of these covenants, the Company would be able to incur approximately $1.95 billion of additional borrowings (including borrowings under the Line) as of September 25, 2021.

The Company’s principal sources of liquidity are expected to be cash flow from operations, borrowings under the Line and long-term debt financing. The Company believes, based on its current results of operations and financial condition, that its financial resources,

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including cash balances, the existing Line, short- and long-term financing expected to be available to it and internally generated funds, will be sufficient to meet planned capital expenditures and working capital requirements for the foreseeable future, including any debt service requirements of additional borrowings. However, there can be no assurance that any such sources of financing will be available to the Company on acceptable terms, or at all.

It is possible that, in the future, the Company’s results of operations and financial condition will be different from that described in this report based on a number of intangible factors. These factors may include, among others, resolution of the COVID-19 pandemic, increased competition, changing regional and national economic conditions, adverse climatic conditions affecting food production and delivery and changing demographics as well as the additional factors discussed above and elsewhere under “Item 1A. Risk Factors.” It is also possible, for such reasons, that the results of operations from the new, expanded, remodeled and/or replacement stores will not meet or exceed the results of operations from existing stores that are described in this report.

Quarterly Cash Dividends

Since December 27, 1993, the Company has paid regular quarterly cash dividends of $0.165 per share on its Class A Common Stock and $0.15 per share on its Class B Common Stock for an annual rate of $0.66 and $0.60 per share, respectively.

The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors periodically reconsiders the declaration of dividends. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments, the amount of such dividends, and the form in which the dividends are paid (cash or stock) depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant.

Certain of the Company’s long-term debt agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. These covenants have the effect of restricting certain types of transactions, including the payment of cash dividends generally and in excess of current quarterly per share amounts.

New Accounting Pronouncements

For new accounting pronouncements, see Note 1 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.

Outlook and Trends in the Company’s Markets

The COVID-19 pandemic that began in March 2020 has had a significant impact on the Company’s markets for fiscal years 2020 and 2021. We do not know how long and to what extent COVID-19 will impact our markets in fiscal year 2022.

The Company has improved the interior layout and product offerings in a significant number of stores over the past few fiscal years. Economic conditions have remained favorable and the Company continues to increase and improve its total retail square footage.

The Company continually assesses and modifies its business model to meet the changing needs and expectations of its customers. In connection with this review, the Company assesses the trends present in the markets in which it competes. Generally, it is difficult to predict whether a trend will continue for a period of time and it is possible that new trends will develop which will affect an existing trend. The Company believes that the following trends are likely to continue for at least the next fiscal year:

The supermarket industry will remain highly competitive and will be characterized by industry consolidation, fragmented food retail platforms, and continued competition from super centers and other non-supermarket operators.

Traditional supermarket products will be acquired by customers in new and diverse ways, including online ordering, home delivery and pre-picked for customer pickup.

Economic conditions will continue to affect customer behavior. Economic conditions may affect purchasing patterns with regard to meal replacement items, private label purchases, promotions and product variety.

The Company and its customers will continue to become more environmentally aware, evidenced by the Company’s increased recycled waste paper and pallets and customers’ increased usage of reusable shopping bags.

Volatile petroleum costs will impact utility and distribution costs, plastic supplies cost and may change customer shopping and dining behavior.

Retail gasoline costs and retail prices will continue to be volatile, affecting the Company’s gasoline sales and gross margin.

The Company plans to continue to focus on balancing sales growth and gross margin maintenance (excluding the effect of gasoline sales) and will carefully monitor its product mix and customer trends.