WEIS MARKETS INC (WMK) FY 2021 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Company Overview (continued)
The Company continues to innovate and remain relevant to industry trends and offer customer convenience by presenting programs like “Weis 2 Go Online” and home delivery. In 2021, the Company offered Weis 2 Go Online in 187 of its locations, adding 4 stores since the end of 2020. Weis 2 Go Online allows the customer to order on-line and then pick up their order at a drive-thru location at the store. The Company began offering home delivery during the third quarter of 2018 and currently offers this convenience to customers in 182 different locations via Shipt® and DoorDash®.
Strategic Imperatives
The following strategic imperatives continue to be focused upon by the Company to attempt to ensure the success of the Company in the coming years:
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Establish a Sales Driven Culture – The Company continues to focus on sales and profits growth, improved operating practices, increased productivity and positive cash flow. The Company believes disciplined growth will increase its market share and operating profits, resulting in enhanced shareholder value. The Company’s method of driving sales includes focused preparation and execution of sales programs, investing in new stores and remodels, and strategic acquisitions. Communicating clear executable standards and aligning performance measures across the organization will help to instill a sales-driven operating environment. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Build and Support Human Capital – The Company believes that talent is a business differentiator and is committed to creating a sustainable competitive advantage through the selection, development and promotion of talented, highly motivated people. The Company believes that establishing a learning culture supports its commitment to be an employer of choice and helps drive customer engagement with its associates. Improvements in the Company’s talent management and development will help drive business impact while providing internal career opportunities. The Company continues to grow leaders at every level throughout the organization by creating a culture of mentoring, coaching and leveraging on-the-job assignments for continued development. The Company believes that a strong employment brand is necessary to attract and retain top talent and affects its ability to compete and execute strategic plans. The Company will continue to assess and upgrade underlying technologies to support human capital development as a strategic imperative for future growth. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Become More Relevant to Consumers – Understanding the consumer is crucial to the Company’s strategic plan. The Company will develop and cultivate a culture where it’s continually “on trend” with its consumers at the current time and where they are going next. The Company researches and studies the wants and needs of core consumers and casual consumers. It measures customer satisfaction and shares insights across the organization to improve communication between management and its consumers. The Company uses consumer data to measure the value of programs offered and support consumer attraction and retention. The Company believes that its private brand products exceed consumer expectations and will continue to focus on the value and attribute messaging to drive organic growth. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Create Meaningful Differentiation – The Company recognizes the need to offer a compelling reason for customers to choose them over other channels. The Company has identified product pricing and promotion, customer shopping experience, and merchandising strategies as critical components of future success. The Company recognizes that the core of the strategy will focus on alignment of merchandising programs that foster customer engagement supported by a shopping experience that surpasses customers’ expectations. As part of this strategy, management is committed to offering its customers a strong combination of quality, service and value. |
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Company Overview (continued)
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Develop and Align Organizational Capabilities – The Company will elevate organizational capacity to support decision effectiveness and deliver consistent execution. To support this strategy the Company will assess organizational capacity to support the Company’s strategic direction. The Company will align business functions and processes to enhance key capabilities and to support scalability of operations. Continued investments in information technology systems to improve associate engagement, increase productivity, and provide valuable insight into customer behavior/shopping trends will remain a focus of the Company. The Company believes these systems will continue to play a key role in the measurement of the Company’s strategic decisions and financial returns. |
| Column 1 | Column 2 | Column 3 |
|---|---|---|
| ● | Focus on Sustainability Strategies – The Company strives to be good stewards of the environment and makes this an important part of its overall mission. Its sustainability strategy operates under four key pillars: green design, natural resource conservation, food and agricultural impact and social responsibility. The goal of the sustainability strategy is to reduce the Company’s overall carbon footprint by reducing greenhouse gas emissions and reducing the impact on climate change. The Company’s 2020 sustainability report may be found at: https://www.weismarkets.com/sustainability |
Results of Operations
Two-Year Stacked Comparable Store Sales Analysis
Management is providing Comparable Store Sales Two-Year Stacked analysis, a non-GAAP measure, because management believes this metric is useful to investors and analysts. A Comparable Store Sales Two-Year Stacked analysis presents a comparison of results and trends over a longer period of time to demonstrate the effect of the novel coronavirus pandemic on the operating results of the Company. Information presented in the tables below is not intended for use as an alternative to any other measure of performance. It is not recommended that this table be considered a substitute for the Company’s operating results as reported in accordance with GAAP.
Year-over-year and sequential comparisons are the primary calculations used to analyze operating results, however, due to significant fluctuations caused by the novel coronavirus pandemic management believes it is necessary to provide a Two-Year Stacked Comparable Store Sales analysis. The following table provides the two-year stacked comparable store sales, including and excluding fuel, for the fiscal years ended December 25, 2021, and December 26, 2020, as well as fiscal years ended December 26, 2020, and December 28, 2019, respectively.
| | | | | | | | |
|---|---|---|---|---|---|---|---|
| | | Percentage Changes | |||||
| | | 52 Weeks Ended | |||||
| | | | 2021 vs. 2020 | | | 2020 vs. 2019 | |
| Comparable store sales (individual year) | | | 1.7 | % | | 16.4 | % |
| Comparable store sales (two-year stacked) | | | 18.1 | | | | |
| Comparable store sales, excluding fuel (individual year) | | | 0.2 | | | 17.5 | % |
| Comparable store sales, excluding fuel (two-year stacked) | | | 17.7 | % | | | |
When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable after it has been in operation for five full fiscal quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Analysis of Consolidated Statements of Income
| | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | | | | | | | | | | Percentage Changes | | ||
| (amounts in thousands except per share amounts) | | 2021 | | 2020 | | 2019 | | 2021 vs. | | 2020 vs. | | |||
| For the Fiscal Years Ended December 25, 2021, December 26, 2020 and December 28, 2019 | (52 Weeks) | (52 Weeks) | (52 Weeks) | 2020 | 2019 | | ||||||||
| Net sales | | $ | 4,224,417 | | $ | 4,112,601 | | $ | 3,543,299 | | 2.7 | % | 16.1 | % |
| Cost of sales, including advertising, warehousing and distribution expenses | | | 3,108,710 | | | 3,012,167 | | | 2,605,105 | | 3.2 | | 15.6 | |
| Gross profit on sales | | | 1,115,707 | | | 1,100,434 | | | 938,194 | | 1.4 | | 17.3 | |
| Gross profit margin | | | 26.4 | % | | 26.8 | % | | 26.5 | % | | | | |
| Operating, general and administrative expenses | | | 968,996 | | | 937,256 | | | 853,555 | | 3.4 | | 9.8 | |
| O, G & A, percent of net sales | | | 22.9 | % | | 22.8 | % | | 24.1 | % | | | | |
| Income from operations | | | 146,711 | | | 163,178 | | | 84,639 | | (10.1) | | 92.8 | |
| Operating margin | | | 3.5 | % | | 4.0 | % | | 2.4 | % | | | | |
| Investment income (loss) and interest expense | | | 5,007 | | | 3,817 | | | 7,054 | | 31.2 | | (45.9) | |
| Investment income (loss) and interest expense, percent of net sales | | | 0.1 | % | | 0.1 | % | | 0.2 | % | | | | |
| Other income (expense) | | | (3,411) | | | (3,316) | | | (3,049) | | 2.9 | | 8.8 | |
| Other income (expense), percent of net sales | | | (0.1) | % | | (0.1) | % | | (0.1) | % | | | | |
| Income before provision for income taxes | | | 148,307 | | | 163,679 | | | 88,644 | | (9.4) | | 84.6 | |
| Income before provision for income taxes, percent of net sales | | | 3.5 | % | | 4.0 | % | | 2.5 | % | | | | |
| Provision for income taxes | | | 39,458 | | | 44,762 | | | 20,661 | | (11.8) | | 116.6 | |
| Effective income tax rate | | | 26.6 | % | | 27.3 | % | | 23.3 | % | | | | |
| Net income | | $ | 108,849 | | $ | 118,917 | | $ | 67,983 | | (8.5) | % | 74.9 | % |
| Net income, percent of net sales | | | 2.6 | % | | 2.9 | % | | 1.9 | % | | | | |
| Basic and diluted earnings per share | | $ | 4.05 | | $ | 4.42 | | $ | 2.53 | | (8.4) | % | 74.7 | % |
Net Sales
Individual Year-Over-Year Analysis of Sales
| | | | | | |
|---|---|---|---|---|---|
| | Percentage Changes | ||||
| | | 2021 vs. | | 2020 vs. | |
| | 2020 | 2019 | | ||
| Net sales | 2.7 | % | 16.1 | % | |
| Net sales, excluding fuel | | 1.2 | | 17.0 | |
| Comparable store sales | | 1.7 | | 16.4 | |
| Comparable store sales, excluding fuel | | 0.2 | % | 17.5 | % |
When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation after five full quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Net Sales (continued)
According to the latest U.S. Bureau of Labor Statistics’ report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 3.5% in 2021, 3.5% in 2020 and 0.9% in 2019. Even though the U.S. Bureau of Labor Statistics’ index rates may be reflective of a trend, it will not necessarily be indicative of the Company’s actual results. According to the U.S. Department of Energy, the 52-week average price of gasoline in the Central Atlantic States increased 31.2%, or $0.76 per gallon, in 2021 compared to the 52-week average in 2020. The 52-week average price of gasoline in the Central Atlantic States, according to the U.S. Department of Energy, decreased 12.8%, or $0.36 per gallon, in 2020 compared to the 52-week average in 2019.
Comparable store sales increased for all years presented. On a comparable store sales basis fresh, pharmacy services and fuel increased in sales. The Company’s 2021 sales were favorably impacted as a result of increased pharmacy prescription volume, administering COVID-19 vaccines, and higher fuel sales. Comparable store sales for 2021 compared to 2020 increased 1.7% including fuel and .2% excluding fuel. The Company has provided additional product offerings and customer conveniences such as “Weis 2 Go Online,” currently offered at 187 store locations. “Weis 2 Go Online” allows the customer to order on-line and have their order delivered or pick up their order at an expedient store drive-thru.
The Company has experienced retail inflation and deflation in various commodities for the periods presented. Management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors. In addition, impacts of the novel coronavirus pandemic have caused uncertainty about future economic conditions and may change future product mix. Management remains confident in its ability to generate long-term sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company’s competitive position.
Cost of Sales and Gross Profit
Cost of sales consists of direct product costs (net of discounts and allowances), net advertising costs, distribution center and transportation costs, as well as manufacturing facility operations. Increased sales volume resulted in an increase in cost of sales. Both direct product cost and distribution cost increase when sales volume increases.
Gross profit rate was 26.4% in 2021, 26.8% in 2020 and 26.5% in 2019. The decrease in gross profit rate is attributable to the increased pharmacy and fuel sales, which have a lower gross profit margin than grocery sales, and higher product and supply chain costs. Pharmacy gross profit margin continues to be pressured by recent changes in industry practices. The Company cannot predict whether the pharmacy industry practices will change favorably.
The Company experienced an unfavorable non-cash LIFO inventory valuation adjustment, decreasing gross profit by $4.0 million in 2021. Favorable non-cash LIFO inventory valuation adjustments increased gross profit by $275 thousand and $5.8 million in 2020 and 2019, respectively.
The Company has experienced retail inflation and deflation in various commodities for the periods presented. Management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Operating, General and Administrative Expenses
The majority of the expenses were driven by increased sales volume.
Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise approximately 62.2% of the total “Operating, general and administrative expenses.” As a percent of sales, direct store labor decreased 0.1% in 2021 compared to 2020 and decreased 0.6% in 2020 compared to 2019. While direct store labor expenses increased in 2021 compared to 2020, the sales increases have outpaced the labor expense increase causing the rate to fall, primarily due to the fixed component of store labor. Management continues to monitor store labor efficiencies and develop labor standards to reduce costs while maintaining the Company’s customer service expectations. Currently, the Company is continuing a multi-year initiative to install or upgrade self-checkouts in its stores in response to customer preference and labor supply, including adding convertible dual-use checkout lanes.
The Company’s self-insured health care benefit expenses increased by 0.2% in 2021 compared to 2020 and increased by 9.8% in 2020 compared to 2019.
Depreciation and amortization expense charged to “Operating, general and administrative expenses” was $93.8 million, or 2.2% of net sales, for 2021 compared to $90.2 million, or 2.2% of net sales, for 2020 and $85.2 million, or 2.4% of net sales, for 2019. Depreciation and amortization expense as a percent of sales remained the same in 2021 when compared to 2020 and decreased 0.2% in 2020 when compared to 2019. See the Liquidity and Capital Resources section for further information regarding the Company’s capital expansion program.
A breakdown of the material increases (decreases) as a percent of sales in "Operating, general and administrative expenses" is as follows:
| | | | | | | |
|---|---|---|---|---|---|---|
| | | 2021 vs. 2020 | | |||
| (amounts in thousands) | | Increase | | Increase (Decrease) | | |
| December 25, 2021 | (Decrease) | as a % of sales | | |||
| Employee expense | | $ | 5,517 | | (0.2) | % |
| Utilities expense | | | 3,819 | | 0.1 | |
| Fixed expense (amortization, depreciation, insurance expenses, and occupancy costs) | | | 4,007 | | (0.1) | |
| Outside service and information technology expense | | | 11,564 | | 0.2 | |
| | | | | | | |
|---|---|---|---|---|---|---|
| | | 2020 vs. 2019 | | |||
| (amounts in thousands) | | Increase | | Increase (Decrease) | | |
| December 26, 2020 | (Decrease) | as a % of sales | | |||
| Employee expense | | $ | 64,241 | | (0.5) | % |
| Utilities expense | | | (2,385) | | (0.2) | |
| Fixed expense (amortization, depreciation, insurance expenses, and occupancy costs) | | | 9,462 | | (0.4) | |
The Company continues to realize a reduction in workers compensation self-insurance expense as a result a decrease in claims due to improved associate safety programs and claim resolution efforts. The Company is experiencing an increase in subscription and other outside expenses as a result of investing in its information technology.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Provision for Income Taxes
The effective income tax rate was 26.6%, 27.3% and 23.3% in 2021, 2020 and 2019, respectively. The effective income tax rate differs from the federal statutory rate of 21% primarily due to state taxes as well as nondeductible employee expenses. Not all the Company’s tax credits and state deductions are driven proportionately by taxable income levels, due to these items and the significant increase in taxable income from prior years, the result was a higher effective income tax rate for 2020 and 2021 when compared to 2019.
Liquidity and Capital Resources
The primary source of cash is cash flows generated from operations. In addition, the Company has access to a revolving credit agreement entered into on September 1, 2016, and amended on September 29, 2021, with Wells Fargo Bank, NA (the “Credit Agreement”). The Credit Agreement matures on September 1, 2024 and provides for an unsecured revolving credit facility with an aggregate principal amount not to exceed $30.0 million with an additional discretionary amount available of $70.0 million. As of December 25, 2021, the availability under the revolving credit agreement was $25.3 million with $4.7 million of letters of credit outstanding. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company has not had an obligation on the Credit Agreement since the second fiscal quarter of 2018.
The Company’s investment portfolio consists of high-grade bonds with maturity dates between one and 10 years, high grade commercial papers with maturity dates under one year, and three long-held high yield, large capitalized public company equity securities. The portfolio totaled $205.7 million as of December 25, 2021. Management anticipates maintaining the investment portfolio but has the ability to liquidate if needed. See “Item 7a. Quantitative and Qualitative Disclosures about Market Risk” for more details regarding the Company’s market risk.
The Company’s capital expansion program includes the construction of new superstores, the expansion and remodeling of existing units, the acquisition of sites for future expansion, new technology purchases and the continued upgrade of the Company’s distribution facilities and transportation fleet. Management currently plans to invest approximately $150 million in its capital expansion program in 2022.
The Board of Directors’ 2004 resolution authorizing the repurchase of up to one million shares of the Company’s common stock has a remaining balance of 752,468 shares.
Quarterly Cash Dividends
Total cash dividend payments on common stock, on a per share basis, amounted to $1.25 in 2021, $1.24 in 2020 and $1.24 in 2019. The Company increased its quarterly dividend from 31 cents per share to 32 cents per share in the fourth quarter of 2021. The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors reconsiders the declaration of dividends quarterly. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments and the amount of the dividends depends upon the results of operations, the financial condition of the Company and other factors which the Board of Directors deems relevant.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Cash Flow Information
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (amounts in thousands) | | | | | | | | | | | | | | | | |
| For the Fiscal Years Ended December 25, 2021, | | 2021 | | 2020 | | 2019 | | 2021 vs. | | 2020 vs. | | |||||
| December 26, 2020 and December 28, 2019 | (52 Weeks) | | (52 weeks) | | (52 weeks) | | 2020 | | 2019 | | ||||||
| Net cash provided by (used in): | | | | | | | | | | | | | ||||
| Operating activities | | $ | 227,709 | | $ | 277,990 | | $ | 171,686 | | $ | (50,281) | | $ | 106,304 | |
| Investing activities | | | (244,650) | | | (174,895) | | | (109,269) | | | (69,755) | | | (65,626) | |
| Financing activities | | | (33,623) | | | (33,354) | | | (33,354) | | | (269) | | | - | |
Operating
Cash flows from operating activities decreased in 2021 as compared to 2020 and increased in 2020 as compared to 2019, respectively. The decrease in 2021 from 2020 is due to settling working capital obligations. The majority of the increase in 2020 over 2019 is attributed to increased sales volume resulting from the novel coronavirus pandemic and its impact on Net Income.
Investing
Property and equipment purchases totaled $151.8 million in 2021, compared to $131.0 million in 2020 and $101.5 million in 2019. As a percentage of sales, capital expenditures totaled 3.6% in 2021, 3.2% in 2020 and 2.9% in 2019. The Company significantly increased its marketable securities holdings in 2021 by approximately $96.6 million. In 2022, the Company plans to maintain or further increase its marketable securities portfolio.
Financing
The Company paid dividends of $33.6 million in 2021, $33.4 million in 2020 and $33.4 million in 2019. The Company increased its quarterly dividend from 31 cents per share to 32 cents per share in the fourth quarter of 2021.
Contractual Obligations
The following table represents scheduled maturities of the Company’s long-term contractual obligations as of December 25, 2021.
| | | | | | | | | | | | | | | | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | Payments due by period | |||||||||||||
| | | | | | Less than | | | | | | | | More than | ||
| (amounts in thousands) | Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||
| Operating leases | | $ | 227,071 | | $ | 46,661 | | $ | 81,644 | | $ | 51,878 | | $ | 46,888 |
| Total | | $ | 227,071 | | $ | 46,661 | | $ | 81,644 | | $ | 51,878 | | $ | 46,888 |
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations or cash flows.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Critical Accounting Policies and Estimates
The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The Company evaluates these estimates and assumptions on an ongoing basis and may retain outside consultants, lawyers and actuaries to assist in its evaluation. The Company believes the following accounting policies are the most critical because they involve the most significant judgments and estimates used in preparation of its Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or net realizable value, using both the retail inventory and average cost methods. The retail inventory method is commonly used by retail companies to determine cost and calculate gross margin based on applying a cost-to-retail ratio to each similar merchandise category’s ending retail value. The Company’s center store and pharmacy inventories are valued using last in, first out (LIFO). The Company’s fresh inventories are valued using average cost. The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts and to provide for estimated shortages from the last physical count to the financial statement date.
Vendor Allowances
Vendor allowances related to the Company’s buying and merchandising activities are recorded as a reduction of cost of sales as they are earned, in accordance with the underlying agreement. Off-invoice and bill-back allowances are used to reduce direct product costs upon the receipt of goods. Promotional rebates and credits are accounted for as a reduction in the cost of inventory and recognized when the related inventory is sold. Volume incentive discounts are realized as a reduction of cost of sales at the time it is deemed probable and reasonably estimatable that the incentive target will be reached. Long-term contract incentives, which require an exclusive vendor relationship, are allocated over the life of the contract. Promotional allowance funds for specific vendor-sponsored programs are recognized as a reduction of cost of sales as the program occurs and the funds are earned per the agreement. Cash discounts for prompt payment of invoices are realized in cost of sales as invoices are paid. Warehouse and back-haul allowances provided by suppliers for distributing their product through the Company’s distribution system are recorded in cost of sales as the required performance is completed. Warehouse slotting allowances are recorded in cost of sales when new items are initially set up in the Company’s distribution system, which is when the related expenses are incurred and performance under the agreement is complete. Swell allowances for damaged goods are realized in cost of sales as provided by the supplier, helping to offset product shrink losses also recorded in cost of sales.
Income Taxes
Income taxes are inherently complex and require management’s evaluation and estimates, specifically regarding current and deferred income taxes and uncertain tax positions. The Company reviews the tax positions taken, or expected to be taken, on tax returns to determine whether, and to what extent, a benefit can be recognized in its Consolidated Financial Statements. The assessment of the Company’s tax position relies on the judgment of management to estimate the more likely than not merits associated with the Company’s various tax positions.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Critical Accounting Policies and Estimates (continued)
Leases
The Company leases approximately 49% of its open store facilities under operating leases that expire at various dates through 2036, with the remaining store facilities being owned. These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus variable lease costs related to real estate taxes and insurance as well as contingent rentals based on a percentage of annual sales or increases periodically based on inflation. These variable lease costs are not included in the measurement of the operating lease right-to-use assets or lease liabilities and are charged to the related expense category included in “Operating, general and administrative expenses.” Most of the leases contain multiple renewal options, under which the Company may extend the lease terms from 5 to 20 years. Additionally, the Company has operating leases for certain transportation and other equipment. The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.”
Self-Insurance
The Company is self-insured for a majority of its workers’ compensation, general liability, vehicle accident and associate medical benefit claims. The self-insurance liability for most of the medical benefit claims is determined based on historical data and an estimate of claims incurred but not reported. The other self-insurance liabilities including workers’ compensation are determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company is self-insured for certain healthcare claims and stop-loss coverage is maintained for individual annual claim occurrences exceeding a $500 thousand specific deductible. The Company is liable for workers’ compensation claims ranging from $1.0 million to $2.0 million per claim. Property and casualty insurance coverage is maintained with outside carriers at deductible or retention levels ranging from $100 thousand to $1.0 million. Significant assumptions used in the development of the actuarial estimates include reliance on the Company’s historical claims data including average monthly claims and average lag time between incurrence and reporting of the claim.
Forward-Looking Statements
In addition to historical information, this Annual Report may contain forward-looking statements, which are included pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the retail industry; the regulatory environment; rapidly changing technology and competitive factors, including increased competition with regional and national retailers; and price pressures. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files periodically with the Securities and Exchange Commission.