These excerpts taken from the ARDNA 10-K filed Mar 16, 2009.
2008 Compared to 2007
Net income in 2008 decreased 15.5% to $24,667,000 compared to $29,207,000 during 2007. Operating income decreased 10.8% to $40,319,000 in 2008 compared to $45,177,000 in 2007.
Sales from the Companys 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges, were $479,117,000 in 2008 (a 53 week fiscal year). This represents a decrease of 1.4% from 2007 (a 52 week fiscal year), when sales were $485,939,000. Sales during 2008 were negatively impacted by economic conditions, increased competition in our trade area and increased fuel and food prices. The extra week in 2008 compared to the prior year somewhat offset the decrease in sales.
The Companys gross profit as a percent of sales was 38.5% in 2008 compared to 38.7% in 2007. In calculating gross profit, the Company deducts product costs, net of discounts and allowances, and inbound freight charges, as well as warehouse, transportation, purchasing, advertising and occupancy costs in cost of sales. Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since there may be differences in recording certain costs as cost of sales or as SG&A expense.
SG&A expense as a percent of sales was 30.1% in 2008 compared to 29.4% in 2007. The increase in SG&A expense as a percent of sales is primarily due to an increase in UFCW hourly wage rates effective early March 2008 in accordance with the current collective bargaining agreement. To a lesser extent, SG&A expense was also impacted by hourly wage rate increases under collective bargaining agreements with unions other than the UFCW. These increases were partially offset by lower SARs compensation expense in 2008 compared to the prior year. During 2008, the Company recognized $1,823,000 of SARs compensation expense compared to $2,908,000 in 2007.
The Company contributes to several multi-employer union pension and health care plans. Pension and health care payments are determined based on straight-time hours worked and the
contribution rate as stipulated in the Companys various collective bargaining agreements. The Company recognized union pension expense of $5,065,000 in 2008 compared to $5,332,000 in 2007. Union health care expense was $9,258,000 in 2008 compared to $9,788,000 in 2007. Costs decreased due to a reduction in the average hourly contribution rate effective March 2007 as discussed above and in the number of hours eligible for contributions.
The Company is primarily self-insured for losses related to general and auto liability claims as well as for workers compensation in some prior years. The Company has stop-loss insurance coverage to limit its exposure on a per claim basis and is insured for covered costs in excess of per claim limits. Accruals are based on reported claims and an estimate of claims incurred but not reported. While the ultimate amount of claims incurred is dependent on future developments, in managements opinion, recorded reserves for general and auto liability claims and workers compensation are adequate to cover the future payment of claims.
In addition to high deductible coverage for workers compensation and general and auto liability claims, the Company also carries property, business interruption, fiduciary, directors and officers, crime, earthquake, special event and employment practices liability insurance. Management believes, based on recent and past experience, that current insurance coverage meets the reasonable requirements of the Company.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. (SFAS) 123(R) (revised 2004), Share-Based Payment, which requires the measurement and recognition of compensation expense based on the fair value of SARs. SFAS 123(R) requires the Company to remeasure the fair value of SARs each reporting period until the award is settled. Compensation expense must be recognized each reporting period for changes in fair value and vesting. During 2008, the Company recognized $1,823,000 of SARs compensation expense due to an increase in the fair value of SARs at the time of exercise and the additional vesting of SARs. During 2007, the Company recognized $2,908,000 of SARs compensation expense. Compensation expense is recorded under SG&A expense on the Consolidated Statements of Operations and Comprehensive Income. As of January 3, 2009, assuming no change in the SARs fair value, there was approximately $2,886,000 of total unrecognized compensation cost related to outstanding SARs which is expected to be recognized over a weighted average period of 4.7 years. The total intrinsic value of SARs exercised during 2008 and 2007 was approximately $3,443,000 and $5,643,000, respectively. Intrinsic value represents the amount by which the fair value of SARs on the date of exercise exceeds the grant price.
During 2008, the Company procured approximately 16% of its product through Unified, a grocery wholesale cooperative. As a member-patron, the Company is required to provide Unified with certain minimum deposits and credit in order to purchase product from the cooperative. As of January 3, 2009, the Company had approximately $1,676,000 on deposit with Unified, in addition to approximately $625,000 related to ownership of equity shares in Unified. In 2008 and 2007, the Company recorded approximately $251,000 and $253,000, respectively, in patronage dividend income received in the form of cash and Unified equity shares as a reduction of cost of sales.
Interest and dividend income was $2,460,000 in 2008 compared to $3,340,000 for 2007 primarily due to lower interest rates in 2008 partially offset by increased average cash levels. Due to the
special cash dividend paid on December 8, 2008 totaling approximately $79,000,000, the Company anticipates a significant decrease in investment income in fiscal 2009.
SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, requires that unrealized holding gains and losses from available-for-sale securities be included as a component of stockholders equity. Unrealized gains on investments were $188,000 (net of income tax expense of $129,000) in 2008 compared to unrealized gains of $153,000 (net of income tax expense of $106,000) in 2007.
2008 Compared to 2007
SG&A expense as a
The Company contributes
contribution rate as
During 2008, the Company procured approximately 16% of
special cash dividend paid on December 8, 2008 totaling
SFAS 115, Accounting