ARDNA » Topics » 2005 Compared to 2004

This excerpt taken from the ARDNA 10-K filed Mar 13, 2007.

2005 Compared to 2004

Net income in 2005 decreased 12.4% to $19,851,000 compared to $22,672,000 during 2004.  Operating income decreased 8.0% to $31,816,000 in 2005 compared to $34,579,000 in 2004.

Sales from the Company’s 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges, were $470,354,000 in 2005.  This represents an overall decrease of 6.5% from 2004, when sales were $502,898,000 and a same store sales decrease of 6.6%.  The labor dispute in the Company’s trade area contributed to the higher sales in the prior year.  Sales were negatively impacted for three weeks in the second half of 2004 as the Century City store was closed due to construction at the Century City Shopping Center as discussed above.  The store, which was closed for a total of three weeks, reopened on October 18, 2004.  Sales in both 2004 and 2005 were also negatively impacted as a result of ongoing construction near the Century City store.  The Company does not believe that inflation contributed significantly to the change in sales.

The Company’s gross profit as a percent of sales was 38.4% in 2005 compared to 38.2% in 2004 primarily due to a combination of cost reductions and product pricing decisions.  The Company includes 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, thereby reducing gross profit by these amounts.  The gross profit percentages for 2005 and 2004 have been revised to reflect the reclassification of certain costs previously recorded under SG&A expense to cost of sales as discussed under Note 1 to the Consolidated Financial Statements.  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 31.6% in 2005 compared to 31.4% in 2004.  During the labor dispute, the Company achieved significant economies of scale from incremental sales.  SG&A expense as a percent of sales has increased since the conclusion of the labor dispute; however, the Company has succeeded in retaining some of the economies of scale due to the sales retained compared to pre-strike periods.  These economies were partially offset by approximately $2,200,000 of bonus expense recognized and paid in the first half of 2004 to the Company’s UFCW employees and higher compensation expense in 2004 related to the Company’s SARs program.  During 2005, the Company recognized $946,000 of SARs compensation expense compared to $3,658,000 in 2004 due to a reduction in the Company’s Class A price at the end of fiscal 2005 compared to the end of the previous year.

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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 Company’s various collective bargaining agreements.  The Company recognized union pension expense of $6,241,000 in 2005 compared to $6,064,000 in 2004.  Higher pension costs in 2005 resulted from an increase in the average hourly pension contribution rate.  However, the increase was partially offset by a reduction in the number of labor hours worked as sales volumes declined in 2005 compared to 2004.  Union health care expense was $16,047,000 in 2005 compared to $16,977,000 in 2004.  Health care costs decreased due to the reduction in the number of labor hours worked as discussed above.

For a discussion of workers’ compensation, general and auto liability and other types of insurance coverage, see the discussion under the heading “2006 Compared to 2005” presented above.

During 2005 and 2004, stock-based compensation, under the SARs program, was subject to variable accounting in accordance with FIN 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”  For the fiscal year ended December 31, 2005, SARs compensation expense was $946,000 compared to $3,658,000 in fiscal 2004.  The decrease in compensation expense was due to a decrease in the Company’s Class A price during 2005 partially offset by the additional vesting of SARs.

During 2005, the Company procured approximately 18% 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 December 31, 2005, the Company had approximately $1,730,000 on deposit with Unified, in addition to approximately $420,000 related to ownership of equity shares in Unified.  In 2005 and 2004, the Company recorded approximately $451,000 and $569,000, 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 $1,722,000 in 2005 compared to $1,986,000 for 2004 primarily due to lower cash levels in 2005 partially offset by higher interest rates.  Cash available for investment was substantially lower in fiscal 2005 as a result of a special dividend of approximately $67,665,000 paid on December 16, 2004.

Other income includes gains realized on investments of $36,000 and $1,787,000 in 2005 and 2004, respectively.  During 2004, the Company sold an investment in a limited partnership and recognized a gain of approximately $1,570,000.

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 losses on investments were $392,000 (net of income tax benefit of $269,000) in 2005 compared to unrealized losses of $247,000 (net of income tax benefit of $169,000) in 2004.  Management does not believe any of these losses are other-than-temporary.

 

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This excerpt taken from the ARDNA 10-K filed Mar 9, 2006.

2005 Compared to 2004

 

Net income in 2005 decreased 12.4% to $19,851,000 compared to $22,672,000 during 2004. Operating income decreased 8.0% to $31,816,000 in 2005 compared to $34,579,000 in 2004.

 

Sales from the Company’s 18 supermarkets (all of which are located in Southern California), including revenue from licensing arrangements, subleases, leases and finance charges, were $470,354,000 in 2005. This represents an overall decrease of 6.5% from 2004, when sales were

 

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$502,898,000 and a same store sales decrease of 6.6%. The labor dispute in the Company’s trade area contributed to the higher sales in the prior year. Sales were negatively impacted for three weeks in the second half of 2004 as the Century City store was closed due to construction at the Century City Shopping Center as discussed below. The store, which was closed for a total of three weeks, reopened on October 18, 2004. Sales in both 2004 and 2005 were also negatively impacted as a result of ongoing construction near the Century City store. The Company does not believe that inflation contributed significantly to the change in sales.

 

The Company’s gross profit as a percent of sales was 45.6% in 2005 compared to 44.8% in 2004 primarily due to a combination of cost reductions and product pricing decisions. The Company includes product costs, net of discounts and allowances, and inbound freight charges in cost of sales, thereby reducing gross profit by these amounts. Purchasing and receiving costs, inspection costs, internal transfer costs, warehousing costs and other costs of the Company’s distribution network are recorded as Delivery, Selling, General and Administrative (DSG&A) expense. Gross profit as a percent of sales for the Company may not be comparable to those of other companies in the grocery industry since other entities may record purchasing, warehousing and distribution costs in cost of sales.

 

DSG&A expense as a percent of sales was 38.8% in 2005 compared to 37.9% in 2004. During the labor dispute, the Company achieved significant economies of scale from incremental sales. DSG&A expense as a percent of sales has increased since the conclusion of the labor dispute; however, the Company has succeeded in retaining some of the economies of scale due to the sales retained compared to pre-strike periods. These economies were partially offset by approximately $2,200,000 of bonus expense recognized and paid in the first half of 2004 to the Company’s UFCW employees and higher compensation expense in 2004 related to the Company’s SARs program. During 2005, the Company recognized $946,000 of SARs compensation expense compared to $3,658,000 in 2004 due to a reduction in the Company’s Class A price at the end of fiscal 2005 compared to the end of the previous year.

 

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 rate per hour as stipulated in the Company’s various collective bargaining agreements. The Company recognized union pension expense of $6,241,000 in 2005 compared to $6,064,000 in 2004. Higher pension costs in 2005 resulted from an increase in the average hourly pension contribution rate. However, the increase was partially offset by a reduction in the number of labor hours worked as sales volumes declined in 2005 compared to 2004. In addition, pension costs have and will continue to decrease as the Company experiences turnover as employees hired after the ratification of the new UFCW labor agreement must meet age and hours worked requirements prior to becoming eligible to enter the plan, and once in the plan, the Company’s contribution rate for these employees is lower than the rate for employees hired prior to the ratification of the new labor agreement. Union health care expense was $16,047,000 in 2005 compared to $16,977,000 in 2004. Health care costs decreased due to the reduction in the number of labor hours worked as discussed above.

 

The Company reviews the carrying values of its property, plant and equipment on a quarterly basis to determine if any of those assets have become impaired. During the fourth quarter of 2003, the Company recorded a $4,311,000 impairment on long-lived assets including leasehold improvements and equipment at its Pasadena store, which opened in September 2001 and has

 

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performed below management’s expectations. The Company had exercised its right to terminate its lease in the Spring of 2005, but the lease was reinstated by mutual agreement on different terms in April 2005. A termination of the lease in the future may result in an additional write-off of fixed assets and other costs at that time. As of December 31, 2005, the remaining net book value of fixed assets related to the Pasadena store was $376,000.

 

In June 2003, in an effort to control substantially increasing workers’ compensation rates, the Company terminated its guaranteed cost workers’ compensation insurance coverage and purchased a high deductible workers’ compensation policy. The Company has stop-loss coverage to limit its exposure on a per claim basis and is insured for covered costs in excess of per claim limits. Self-insurance accruals for losses up to the purchased stop-loss coverage are based on reported claims and an estimate of claims incurred but not reported. No assurance can be given that this change will ultimately result in a reduction in workers’ compensation expense or limit future increases. The Company devotes substantial time and commitment to maintaining a safe work environment. The ultimate cost of workers’ compensation is highly dependent upon legal and legislative trends, the inflation rate of health care costs and the Company’s ability to manage claims. In April 2004, California passed legislation aimed at reforming the workers’ compensation insurance system in the state. At this point in time, while it is premature to predict the final outcome of claims incurred within recent policy years, it appears that the legislative reform will have a positive effect in the Company’s overall workers’ compensation costs.

 

The Company is also primarily self-insured for losses related to general and auto liability claims for up to $250,000 per claim. 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 management’s opinion, recorded reserves are adequate to cover the future payment of claims.

 

The Company carries property, business interruption, fiduciary, directors and officers, crime, earthquake, special event and employee practices liability insurance. Management believes, based on recent and past experience, that current insurance coverage meets the reasonable requirements of the Company.

 

Stock-based compensation, under the SARs program, is subject to variable accounting in accordance with Financial Accounting Standards Board Interpretation No. (FIN) 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.” For the fiscal year ended December 31, 2005, SARs compensation expense was $946,000 compared to $3,658,000 in fiscal 2004. The decrease in compensation expense was due to a decrease in the Company’s Class A price during 2005 partially offset by the additional vesting of SARs. Effective beginning the first quarter of 2006, the Company will account for the SARs program in accordance with Statement of Financial Accounting Standards No. (SFAS) 123R (revised 2004), “Share-Based Payment,” which will change the amount the Company records for SARs compensation expense. See the discussion under “Recent Accounting Standards” below.

 

During 2005, the Company procured approximately 18% of its product through Unified, a grocery 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 December 31, 2005, the Company had approximately $2,150,000 on deposit with Unified. The minimum deposit requirement is satisfied through ownership of equity shares in Unified. In

 

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2005 and 2004, the Company recorded approximately $451,000 and $569,000, 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 $1,722,000 in 2005 compared to $1,986,000 for 2004 primarily due to lower cash levels in 2005 partially offset by higher interest rates. Cash available for investment was substantially lower in fiscal 2005 as a result of the special dividend of approximately $67,665,000 paid on December 16, 2004.

 

Other income includes gains realized on investments of $36,000 and $1,787,000 in 2005 and 2004, respectively. During 2004, the Company sold an investment in a limited partnership and recognized a gain of approximately $1,570,000.

 

 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 losses on investments were $392,000 (net of income tax benefit of $269,000) in 2005 compared to unrealized losses of $247,000 (net of income tax benefit of $169,000) in 2004. Management does not believe any of these losses are other-than-temporary.

 

A major road improvement project which has been under construction along Santa Monica Boulevard in West Los Angeles, California since March 2003, is presently estimated to be substantially completed in Summer 2006. At times during the project, construction has, and will continue to occur directly in front of, or very close to, the Century City Shopping Center where Gelson’s has its Century City store. In addition, the Century City Shopping Center recently underwent a major construction project which began in March 2004. The project involved the relocation of the movie theaters, food court and other tenants to newly constructed areas immediately adjacent to the Gelson’s store, as well as the expansion of the Gelson’s store. The grand reopening of the Shopping Center, as renovated, occurred in December 2005. The Company was also in the process of remodeling the store beginning in September 2004. The current remodel plans are expected to be complete during 2006. Sales at the Century City store have been negatively affected during the construction on Santa Monica Boulevard and at the Century City Shopping Center. The Company anticipates that sales will continue to be negatively impacted as construction on Santa Monica Boulevard continues. The Company also expects that the parking in the Century City Shopping Center for Gelson’s customers will be adversely affected by the relocation of the theaters, food court and other tenants to the immediate vicinity of the Gelson’s store. However, it also anticipates that the relocation will increase foot traffic in the vicinity of the store which, along with the expanded facilities and services within the store, could increase customer count.

 

EXCERPTS ON THIS PAGE:

10-K
Mar 13, 2007
10-K
Mar 9, 2006
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