UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON,  D.C. 20549 

 

 

 

FORM 10-Q

 

 

 

☒        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 28,  2014

 

◻         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                  to                 

 

Commission file number 0-14706.

 

 

 

INGLES MARKETS, INCORPORATED

(Exact name of registrant as specified in its charter)

 

 

 

 

 

(828) 669-2941

Registrant’s telephone number, including area code

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ☒    No ◻.  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒    No ◻.  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one): 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ◻  No  ☒.

  

As of August 6,  2014, the Registrant had 13,519,633 shares of Class A Common Stock, $0.05 par value per share, outstanding and 9,240,143 shares of Class B Common Stock, $0.05 par value per share, outstanding.

 

 

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INGLES MARKETS, INCORPORATED

 

INDEX

 

 

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Part I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS 

 

INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED)

 

NINE MONTHS ENDED JUNE 28,  2014 AND JUNE 29,  2013 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  

 

 

 

See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES

 

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS 

Nine Months Ended June 28,  2014 and June 29,  2013 

 

A. BASIS OF PREPARATION

 

In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the financial position of Ingles Markets, Incorporated and Subsidiaries (the “Company”)  as of June 28,  2014, the results of operations for the three-month and nine-month periods ended June 28,  2014 and June 29,  2013, and the changes in stockholders’ equity and cash flows for the nine-month periods ended June 28,  2014 and June 29,  2013. The adjustments made are of a normal recurring nature. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission for Form 10-Q. It is suggested that these unaudited interim financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Annual Report on Form 10-K for the year ended September 28,  2013 filed by the Company under the Securities Exchange Act of 1934 on December 12, 2013.  

 

The results of operations for the three-month and nine-month periods ended June 28,  2014 are not necessarily indicative of the results to be expected for the full fiscal year.

 

B. NEW ACCOUNTING PRONOUNCEMENTS

 

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-08 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (ASU 2014-08).  ASU 2014-08 is aimed at reducing the frequency of disposals reported as discontinued operations by focusing on strategic shifts that have or are expected to have a major impact on an entity’s operations and financial results.  Such a shift could include the disposal of a major line of business, a major geographical area, a major equity method of investment or other major parts of the entity.  ASU 2014-08 also permits companies to have continuing cash flows and significant continuing involvement with the disposed component.  ASU 2014-08 requires expanded disclosures for discontinued operations and new disclosures for individually material disposals that do not meet the definition of a discontinued operation.  The Company has early adopted ASU effective June 28, 2014.  ASU 2014-08 did not have a material impact on the Company’s financial position or results of operations.

 

C. ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Receivables are presented net of an allowance for doubtful accounts of $763,000 at June 28, 2014 and $773,000 at September 28, 2013. 

 

D. INCOME TAXES

 

The Company’s continuing practice is to recognize interest and penalties related to uncertain tax positions and related matters in income tax expense. As of June 28, 2014, the Company had approximately $52,000 accrued for interest and penalties.

 

The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits.  As of June 28, 2014, the Company had gross unrecognized tax benefits of approximately $140,000, all of which, if recognized, would affect the effective tax rate.  The Company does not expect that the total amounts of unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

The Company files income tax returns with federal and various state jurisdictions.  With few exceptions, the Company is no longer subject to state income tax examinations by tax authorities for the years before 2010. Additionally, the Internal Revenue Service has completed its examination of the Company’s U.S. Federal income tax returns filed through fiscal 2011.  

 

The Company had approximately  $13.8 million of refundable income taxes included in the caption “Other current assets” in the Condensed Consolidated Balance Sheets at September 28, 2013.

On September 13, 2013, the IRS released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code regarding the deduction and capitalization of expenditures related to tangible property as well as dispositions of tangible property.  These regulations will be effective for the Company’s fiscal year ending September 26, 2015.  Taxpayers may elect to apply them to tax years beginning on or after January 1, 2012.  The Company does not anticipate that the regulations will have a material impact on the Company’s consolidated results of operations, cash flows or financial position.

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E. ACCRUED EXPENSES AND CURRENT PORTION OF OTHER LONG-TERM LIABILITIES

 

Accrued expenses and current portion of other long-term liabilities consist of the following:

 

 

 

Self-insurance liabilities are established for general liability claims, workers’ compensation and employee group medical and dental benefits based on claims filed and estimates of claims incurred but not reported. The Company is insured for covered costs in excess of $750,000 per occurrence for workers’ compensation,  $500,000  for general liability and $325,000 per covered person for medical care benefits for a policy year. At June 28, 2014 the Company’s self-insurance reserves totaled $29.8 million.  Of this amount, $13.4 million is accounted for as a current liability and $16.4 million as a long-term liability. Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $8.0 million and $6.7 million for each of the three-month periods ended June 28,  2014 and June 29,  2013, respectively. For the nine-month periods ended June 28,  2014 and June 29,  2013, employee insurance expense, net of employee contributions, totaled $20.0 million and $24.5 million, respectively.

 

F. LONG-TERM DEBT

 

In June 2013, the Company issued $700.0 million aggregate principal amount of senior notes due in 2023 (the “Notes”) in a private placement.  The Notes bear an interest rate of 5.750% per annum and were issued at par. Note proceeds were used to repay $575.0 million aggregate principal amount of senior notes maturing in 2017,  $52.0 million of indebtedness outstanding under the Company’s line of credit, and to pay costs related to the offering of the Notes.  Remaining Note proceeds will be used for general corporate purposes, including future capital expenditures.  

 

The Company filed a registration statement with the Securities and Exchange Commission to exchange the private placement notes with registered notes.  The exchange has been completed. 

 

The Company may redeem all or a portion of the Notes at any time on or after June 15, 2018 at the following redemption prices (expressed as percentages of the principal amount), if redeemed during the 12-month period beginning June 15 of the years indicated below:

 

 

In connection with the offering of the Notes, the Company extended the maturity date of its $175.0 million line of credit from December 29, 2015 to June 12, 2018 and modified certain interest rate options and covenants.  At June 28, 2014, the Company had no borrowings outstanding under the line of credit. 

 

The line of credit provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate. The line allows the Company to issue up to $30.0 million in unused letters of credit, of which $10.9 million of unused letters of credit were issued at June 28, 2014.  The Company is not required to maintain compensating balances in connection with the line of credit.

 

On December 29, 2010, the Company completed the funding of $99.7 million of Recovery Zone Facility Bonds (the “Bonds”) for:  (A) acquisition, construction and equipping of an approximately 830,000 square foot new warehouse and distribution center located in Buncombe County, North Carolina (the “Project”), and (B) the payment of certain expenses incurred in connection with the issuance of the Bonds.  The final maturity date of the Bonds is January 1, 2036.

 

The Bonds were issued by the Buncombe County Industrial Facilities and Pollution Control Financing Authority and were purchased by certain financial institutions.  Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between the financial institutions and the Company, the financial institutions would hold the Bonds until January 2, 2018, 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. 

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In connection with the offering of the Notes, the Company extended the maturity date of the Covenant Agreement from January 2, 2018 to June 30, 2021 and modified certain interest rate options and covenants. The Company may redeem the Bonds without penalty or premium at any time prior to June 30, 2021.

 

Interest earned by bondholders on the Bonds is exempt from Federal and North Carolina income taxation.  The interest rate on the Bonds is equal to one month LIBOR (adjusted monthly) plus a credit spread, adjusted to reflect the income tax exemption.

 

The Company’s obligation to repay the Bonds is collateralized by the Project.  Additional collateral was required in order to meet certain loan to value criteria in the Covenant Agreement.  The Covenant Agreement incorporates substantially all financial covenants included in the line of credit.

 

On June 23, 2014 the Company amended the Line and the Covenant Agreement to a) reduce the Consolidated Net Worth requirement and b) increase the maximum allowed Restricted Payments in both the Line and the Covenant Agreement.

 

The amendments provide additional flexibility for the Company to consider stock repurchases under a plan approved by the Company’s Board of Directors during the year ended September 28, 2013.  Under the plan up to four million shares of the Company’s Class A and Class B Common stock may be repurchased through open market purchases, block trades, purchases from the Company’s Investment/Profit Sharing Plan and in negotiated private transactions.  To date, 1.5 million shares have been repurchased under the plan, leaving 2.5 million shares available for repurchase.

 

The Notes, the Bonds and the line of credit 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 line of credit 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. The Company was in compliance with all financial covenants related to the line of credit at June 28, 2014.  

 

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 of credit, Bond and Notes indenture in the event of default under any one instrument.

 

G. DIVIDENDS

 

The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on October 24, 2013 to stockholders of record on October 10, 2013.

 

The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on January 23, 2014 to stockholders of record on January 9, 2014.

 

The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on April 24, 2014 to stockholders of record on April 10, 2014.  

 

On December 7, 2012, the Company declared a special dividend of $0.66 per share of Class A Common Stock and $0.60 per share of Class B Common Stock payable on December 31, 2012 to shareholders of record on December 21, 2012.  The Company paid cash dividends of $0.165 for each share of Class A Common Stock and $0.15 for each share of Class B Common Stock on December 31, 2012 to stockholders of record on December 21, 2012. 

 

For additional information regarding the dividend rights of the Class A Common Stock and Class B Common Stock, please see Note 8, “Stockholders’ Equity” to the Consolidated Financial Statements of the Annual Report on Form 10-K filed by the Company under the Securities Exchange Act of 1934 on December 12, 2013.

 

H.  EARNINGS PER COMMON SHARE

 

The Company has two classes of common stock:  Class A which is publicly traded, and Class B, which has no public market.  The Class B Common Stock has restrictions on transfer; however, each share is convertible into one share of Class A Common Stock at any time.  Each share of Class A Common Stock has one vote per share and each share of Class B Common Stock has ten votes per share.  Each share of Class A Common Stock is entitled to receive cash dividends equal to 110% of any cash dividend paid on Class B Common Stock. 

 

The Company calculates earnings per share using the two-class method in accordance with FASB ASC Topic 260. 

 

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The two-class method of computing basic earnings per share for each period reflects the cash dividends paid per share for each class of stock, plus the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the dividend rights of each class of stock.  Diluted earnings per share is calculated assuming conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis unless the conversion is anti-dilutive.  For the three months ended June 29, 2013, 11,227,553 shares of convertible Class B Common Stock were not included in the diluted earnings per share calculation.  The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods.

 

 

 

The per share amounts for the third quarter of fiscal 2013 and the nine months ended June 29, 2013 are based on the following amounts:

 

 

 

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I. SEGMENT INFORMATION

 

The Company operates one primary business segment, retail grocery sales.  The “Other” activities include fluid dairy and shopping center rentals.  The Company previously presented the fluid dairy and shopping center rentals as separate segments; however, these have now been combined as neither meets the criteria for separate disclosure in any period presented.  Prior year data has been recast to reflect the current segment presentation.  In addition, the Company has historically presented the revenue and expense of the shopping center rental segment “net” on the condensed consolidated statements of income.  In 2013, the Company concluded that the income and expense amounts associated with shopping center rentals should be presented as “gross” rather than “net”.  Accordingly the prior period condensed consolidated statements of income have been revised to eliminate the amounts presented as rental income, net while increasing net sales by $2.1 million and cost of goods sold by $1.8 million for the three months ended June 29, 2013.  The increase to net sales was $6.3 million and to cost of goods sold was $5.4 million for the nine months ended June 29, 2013.  Management does not believe that these corrections are material to the financial statements.  Information about the Company’s operations by lines of business (amounts in thousands) is as follows:  

 

 

 

 

 

 

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Sales by product category (amounts in thousands) are as follows:

 

 

 

The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

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

 

For the three-month periods ended June 28, 2014 and June 29, 2013, respectively, the fluid dairy operation had $14.4 million and $13.4 million in sales to the grocery sales operation. The fluid dairy operation had $44.5 million and $44.1 million in sales to the grocery sales operation for the nine-month periods ended June 28, 2014 and June 29, 2013, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.

 

J. FAIR VALUES OF FINANCIAL INSTRUMENTS

 

The carrying amounts for cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to the short-term maturity of these instruments.

 

The fair value of the Company’s debt is estimated using valuation techniques under the accounting guidance related to fair value measurements based on observable and unobservable inputs.  Observable inputs reflect readily available data from independent sources, while unobservable inputs reflect the Company’s market assumptions.  These inputs are classified into the following hierarchy:

 

 

The carrying amount and fair value of the Company’s debt at June 28, 2014 is as follows (in thousands):

 

 

 

The fair values for Level 2 measurements were determined primarily using market yields and taking into consideration the underlying terms of the debt.

 

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K. NONQUALIFIED INVESTMENT PLAN

 

The purpose of the Executive Nonqualified Excess Plan is to provide retirement benefits similar to the Company’s Investment/Profit Sharing Plan to certain of the Company’s management employees who are otherwise subject to limited participation in the 401(k) feature of the Company’s Investment/Profit Sharing Plan.  Participant retirement account balances are liabilities of the Company.  Assets of the plan are assets of the Company and are held in trust for employees and distributed upon retirement, death, disability, in-service distributions, or other termination of employment.  In accordance with the trust, the Company may not use these assets for general corporate purposes.  During the nine months ended June 28, 2014, the Company invested a portion of the proceeds of liquidated life insurance policy assets in marketable securities.  These marketable securities will be liquidated and invested in other life insurance policies in future periods.  Life insurance policies and marketable securities held in the trust are included in the caption “Other assets” in the Condensed Consolidated Balance Sheets.

 

L. SUBSEQUENT EVENTS

 

We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements were issued.

 

 

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     

 

Overview

 

Ingles, a leading supermarket chain in the Southeast, operates 203 supermarkets in Georgia (73), North Carolina (70), South Carolina (36), Tennessee (21), Virginia (2) and Alabama (1). The Company locates its supermarkets primarily in suburban areas, small towns and rural communities. 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. 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 June 28,  2014, the Company operated 95 in-store pharmacies and 78 fuel centers. 

 

Ingles also operates a fluid dairy and earns shopping center rentals. The fluid dairy processing operation sells approximately 29% of its products to the retail grocery operation and approximately 71% of its products to third parties. Real estate ownership is an important component of the Company’s operations, providing both operational and economic benefits. 

 

Critical Accounting Policies

 

Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations, and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about 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 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 $750,000 per occurrence for workers’ compensation, $500,000 for general liability, and $325,000 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. 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. At June 28, 2014, the Company’s self insurance reserves totaled $29.8 million for employee group insurance, workers’ compensation insurance and general liability insurance.

 

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

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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. 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 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.  There were no asset impairments during the six-month period ended June 28, 2014.

 

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 comprised 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 vendor’s products. These allowances generally relate to short term arrangements with vendors, often relating to a period of a month or less, and are negotiated on a purchase-by-purchase or transaction-by-transaction basis.  Whenever possible, vendor discounts and allowances that relate to buying and merchandising activities are recorded as a component of item cost in inventory and recognized in merchandise costs when the item is sold. Due to system constraints 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 $31.7 million and $29.4 million for the fiscal quarters ended June 28, 2014 and June 29, 2013, respectively.  For the nine-month periods ended June 28, 2014 and June 29, 2013, vendor allowances applied as a reduction of merchandise costs totaled $95.5 million and $93.1 million, 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 in which the related expense is incurred.  Vendor advertising allowances recorded as a reduction of advertising expense totaled $3.3 million for the fiscal quarters ended June 28, 2014 and June 29, 2013.  For the nine-month periods ended June 28, 2014 and June 29, 2013, vendor advertising allowances recorded as a reduction of advertising expense totaled $6.9 million and $10.8 million, respectively.

 

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.

 

Uncertain Tax Positions 

 

Despite the Company’s belief that its tax positions are consistent with applicable tax laws, the Company believes that certain positions are likely to be challenged by taxing authorities. Settlement of any challenge can result in no change, a complete disallowance, or some partial adjustment reached through negotiations or litigation. Significant judgment is required in evaluating the Company’s tax positions. The Company’s positions are evaluated in light of changing facts and circumstances, such as the progress of its tax audits as well as evolving case law. Income tax expense includes the impact of provisions for and changes to uncertain tax positions as the Company considers appropriate. Unfavorable settlement of any particular position would require use of cash. Favorable resolution would be recognized as a reduction to income tax expense at the time of resolution.

 

Results of Operations

 

Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September. There are 13 and 39 weeks of operations included in the unaudited Condensed Consolidated Statements of Income for the three and nine-month periods ended June 28, 2014 and June 29, 2013.  Comparable store sales are defined as sales by grocery stores in operation for five full fiscal quarters.    Sales from replacement stores, major remodels, minor remodels and the addition of fuel stations to existing stores are included in the comparable store sales calculation from the date thereof. A replacement store is a new store that is opened to replace 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 the three and nine-month periods ended June 28, 2014 and June 29, 2013, comparable store sales include 202 and 203 stores, respectively.  

 

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The following table sets forth, for the periods indicated, selected financial information as a percentage of net sales. For information regarding the various segments of the business, see Note I “Segment Information” to the Condensed Consolidated Financial Statements.

 

 

 

 

Three Months Ended June 28,  2014 Compared to the Three Months Ended June 29,  2013 

 

Net income for the third quarter of fiscal 2014 totaled $13.8 million, compared with a net loss of $14.4 million for the third quarter of fiscal 2013.  During the third quarter of fiscal 2013, the Company incurred $43.1 million of pre-tax debt extinguishment costs in conjunction with refinancing the majority of its borrowing arrangements at lower interest rates and on more favorable terms.

 

Pre-tax income was higher in the fiscal 2014 period compared with the fiscal 2013 period, even after considering the effect of fiscal 2013 debt extinguishment costs and subsequent lower interest expense in the fiscal 2014 period.

 

Net Sales. Net sales increased $44.3 million, or 4.7% to $978.3 million for the three months ended June 28, 2014 compared with  $934.0 million for the three months ended June 29, 2013.   Ingles operated 203 stores at June 28, 2014,  and 204 stores at June 29, 2013. Retail square footage was approximately 11.1 million at each of June 28, 2014 and June 29, 2013.  

 

Easter occurred during the third quarter of fiscal 2014 and occurred in the second quarter of fiscal 2013.  Comparable store sales, excluding the effect of gasoline and including the positive impact of approximately 88 basis points from Easter shifting from the second quarter last year to the third quarter this year, increased 2.1%.  Retail gasoline sales prices decreased approximately 5.2% and the number of gallons sold increased approximately 9.8% during the third quarter of fiscal 2014 compared with the third quarter of fiscal 2013.  The number of customer transactions (excluding gasoline) increased 0.3%, and the average transaction size (excluding gasoline) 1.8%.

 

Sales by product category (amounts in thousands) are as follows:

 

 

 

 

The grocery category includes grocery, dairy, and frozen foods.

The non-foods include alcoholic beverages, tobacco, pharmacy, health and video.

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

 

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Changes in grocery segment sales for the quarter ended June 28, 2014 are summarized as follows (dollars in thousands):