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WIKI ANALYSIS
Weis Markets (NYSE:WMK) is a Pensylvania-based supermarket and pet store chain. In fiscal year 2007, Weis's 186 stores posted $2.3 billion in sales and earned $51 million in net income.[1]
As a retailer, Weis Markets' profitability is largely determined by the margins it earns on the products it sells. In fiscal year 2007, gross margins were relatively flat.[2] Also in 2007, food-at-home (grocery) prices increased by 4.2% while wholesale food prices (what Weis pays to manufacturers and wholesalers) increased at a higher rate of 6.5% for the year.[3][4] Since Weis primarily targets middle income customers, it has been reluctant to fully pass on wholesale price increases at the risk of losing business to competitors, but profit margins have suffered as a result. Additionally, since Weis uses its own fleet of trucks to deliver products to its stores, rising oil prices have increased operating costs; in fiscal year 2007, Weis paid 35% more for fuel than it did in 2006.[5]
Company Overview
Supermarket Outlets
Weis markets operates 156 grocery stores, 95% of which are located in Pennsylvania and Maryland.[6] The majority of the stores operate under the names Weis Markets or Mr. Z's Food mart. In fiscal 2007, grocery merchandise accounted for 53% of sales, meat for 16%, produce for 15%, pharmacy merchandise for 10%, and other goods for 3%.[7]
Superpetz
Weis Markets operates 31 Superpetz pet supply stores in the Southeastern United States.[8] Superpetz comprised less than 3% of total revenue in fiscal 2007.[9]
Vertical Integration
The company supports its retail outlets with a centrally located distribution center, transportation fleet, meat processing plant, ice cream plant, ice plant, and milk processing plant.[10] By integrating its retail outlets with these facilities, Weis Markets is able to decrease the costs of producing private labels products and eliminate the added expenses of contracting transportation costs to third parties.
Expansion Plans
In order to increase its revenue streams, Weis Markets has committed $80 million to capital expenditures in 2008, a 23% increase over 2007.[11] As of the beginning of 2Q 2008, the company had 19 projects in progress, including three new stores, two replacement units, nine additions and five remodels.[12] Weis hopes to grow revenue and profits by adding more retail outlets and improving existing ones.
Financials
Weis Markets does not have any long term debt on its balance sheet, indicating management's reluctance to issue debt to finance expansion.[13] Instead, capital expenditure financing comes from current cash flows, showing management's conservative expansion strategy.[14] The chart on the left illustrates revenue and operating income from 2000 to 2007. While revenue increased, operating income remained roughly the same due to rising wholesale food and transportation costs. The chart on the right illustrates Weis Markets' revenue by segment. The majority of the company's revenue comes from grocery, meat, and produce. Although there are 31 retail Superpetz outlets, the stores only contributed 2.34% of total revenue in fiscal 2007.
Key Trends, Risks, and Forces
Wal-Mart Bidding Down Prices
As of May 2008, Wal-Mart had 147 retail stores (including Sam's Club), 4 distribution centers, and 50,526 associates in Pennsylvania alone.[15] In markets that Wal-Mart has entered, grocery prices drop by an average of 10-15%.[16] Additionally, Wal-Mart is able to drop grocery prices 10-30% drastically during promotional periods because it can remain profitable on extremely low margins due to its volume of sales.[17] Weis has to compete with these low prices, which takes a bite out of margins.
Increases in Diesel and Insurance Costs Decrease Weis Markets' Margins
Since Weis Markets uses its own transportation fleet, higher diesel prices will increase cost of goods sold and decrease operating income. In 1Q 2008, the company paid 35.4% more for diesel fuel and 18.1% more for health insurance for its approximately 17,000 employees.[18][19] Unlike other small supermarket chains, Weis Markets is spread over a large geographic area and therefore has relatiely higher fuel costs. Weis Markets cannot raise retail food prices without the risk of losing customers, so it must absorb these price increases and lower margins.
Weis Banking on Success of Expansion Plans
In 2008, Weis Markets announced an $80 million capital expenditure program that would be invested in 19 major projects.[20] By opening new stores, the company can mitigate the effects of smaller margins as the new stores will increase total revenue and net income. If there is not enough consumer demand for these new or remodeled retail outlets, the company will lose money on its investment. New stores will increase shipping and inventory costs during a year in which diesel prices increased 35.4% and wholesale food prices increased 6.5%.[21][22] The new stores will need to increase revenue growth while selling high margin items in order to be successful. However, investors responded positively to the company's announcement of the capital expenditure program, signifying that they believe the new and expanded stores will be successful.
Competition
In 2006, the most recent year for which data is available, US consumers spent a total of $1.1 trillion on food, 51.1% of it on groceries. [23] Consumers spent .3% of this total, or $1.9 billion, at Weis Markets.[24] Although the company has a small market share, it still ranks among the top 50 food and drug retailers in the United States in revenues generated.[25] Weis Markets faces competitive pressures from a number of different sources:
Wal-Mart Stores (WMT) Wal-Mart is the largest food retailer in the US with more than 3,550 stores and supercenters.[26] Wal-Mart is able to provide low prices through its distribution network and economies of scale. Consumers turn to discount stores such as Wal-Mart when their disposable income falls.
Kroger Company (KR) Kroger is the second largest food retailer and largest operator of traditional supermarkets in the US, with 2,400 stores nationwide.[27] The company competes with Weis Markets in Pennsylvania under the banner Turkey Hill.[28]
Safeway (SWY) Safeway is the third largest food retailer and second largest operator of traditional supermarkets in the US, with 1,750 stores nationwide.[29] In 2003, Safeway rebranded its stores to a "Lifestyle" format in order to attract higher-end consumers.
Additionally, Weis Markets competes against several smaller neighborhood markets and niche stores, such as Whole Foods Market (WFMI) .
| Company | Net Sales (m) | Net Income (m) |
|---|---|---|
| Weis Markets | $2,318.55 | $50.99 |
| Wal-Mart Stores (WMT) | $348,650.00 | $11,284.00 |
| Kroger Company (KR) | $66,111.00 | $1,115.00 |
| Safeway (SWY) | $42,286.00 | $888.40 |
References
- ↑ [1]WMK 2007 10-K, Item 6, Page 6
- ↑ [2]WMK 2007 10-K, Item 8, Page 13 - 2006 Gross Income/Net Sales*100%; 2007 Gross Income/Net Sales*100%
- ↑ [3]Weis Markets Announces $80 Million Cap Ex Program at Annual Shareholder Meeting - StreetInsider.com
- ↑ [4]Food CPI, Prices, and Expenditures - US Economic Research Service
- ↑ [5] Weis Markets Reports First Quarter Results
- ↑ [6]WMK 2007 10-K, Item 1, Page 1
- ↑ [7]WMK 2007 10-K, Item 1, Page 1
- ↑ [8]WMK 2007 10-K, Item 1, Page 2
- ↑ [9]WMK 2007 10-K, Item 1, Page 1
- ↑ [10]WMK 2007 10-K, Item 1, Page 1
- ↑ [11]Weis Markets Announces $80 Million Cap Ex Program at Annual Shareholder Meeting - StreetInsider.com
- ↑ [12]Weis Markets Reports First Quarter Results - MSN Money
- ↑ [13]WMK 2007 10-K, Item 8, Page 12
- ↑ [14]WMK 2007 10-K, Item 8, Page 15
- ↑ Wal-Mart Stores, Inc. - Pennsylvania
- ↑ [15] Ideas & Trends: Discount Nation; Is Wal-Mart Good for America? - New York Times
- ↑ [16]Wal-Mart chops prices in bid to lure shoppers - CNN Money
- ↑ [17] Weis Markets Reports First Quarter Results
- ↑ [18]WMK 2007 10-K, Item 1, Page 2
- ↑ [19]Weis Markets Reports First Quarter Results - Reuters.com
- ↑ [20] Weis Markets Reports First Quarter Results
- ↑ [21]Weis Markets Announces $80 Million Cap Ex Program at Annual Shareholder Meeting - StreetInsider.com
- ↑ [22]Food CPI, Prices, and Expenditures - US Economic Research Service
- ↑ [23]WMK 2007 10-K, Item 6, Page 6: 84.5%(food percentage of total revenue)*$2,244,512(total 2006 revenue)
- ↑ [24] WMK 2006 Annual Report, Page 2
- ↑ [25]Wikinvest Wal-Mart Article
- ↑ [26]Wikinvest Kroger Article
- ↑ [27] Kroger Online
- ↑ [28]Wikinvest Safeway Article
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