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 March 28, 2020

 

☐         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 every Interactive Data File required to be submitted 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 such files). Yes ☒    No ☐.  

 

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





If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐.



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



Securities registered pursuant to Section 12(b) of the Act:



  

As of May 5, 2020, the Registrant had 14,196,360 shares of Class A Common Stock, $0.05 par value per share, outstanding and 6,063,416 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 AND COMPREHENSIVE INCOME (UNAUDITED)











See notes to unaudited condensed consolidated financial statements.

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INGLES MARKETS, INCORPORATED AND SUBSIDIARIES 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE 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)

 

THREE AND SIX MONTHS ENDED MARCH 28, 2020 AND MARCH 30, 2019









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 

Three Months and Six Months Ended March 28, 2020 and March 30, 2019 

 

A. BASIS OF PREPARATION



In the opinion of management, the accompanying unaudited interim financial statements contain all adjustments necessary to present fairly the Company’s financial position as of March 28, 2020, and the results of operations and changes in stockholders’ equity for the three-month and six-month periods ended March 28, 2020 and March 30, 2019, and cash flows for the  six months ended March 28, 2020 and March 30, 2019. 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, 2019, filed by the Company under the Securities Exchange Act of 1934 on December 10, 2019.

 

The results of operations for the three-month and six-month periods ended March 28, 2020 are not necessarily indicative of the results to be expected for the full fiscal year.



B. NEW ACCOUNTING PRONOUNCEMENTS



On September 29, 2019, the Company adopted Financial Accounting Standards Board Accounting Standards Update ASU 2016-02, “Leases” (ASU 2016-02), which requires the Company as lessee to recognize most leases on the balance sheet thereby resulting in the recognition of right of use assets and lease liabilities for those leases currently classified as operating leases. The accounting for leases where the Company is the lessor remains largely unchanged. As both lessee and lessor, the Company adopted the standard utilizing the transition election to not restate comparative periods for the impact of adopting the standard.  The Company elected the practical expedient related to leases of twelve months or less.  The Company elected the package of transition expedients available for expired or existing contracts, which allowed the carryforward of historical assessments of (1) whether contracts are or contain leases, (2) lease classification and (3) initial direct costs.



The adoption of ASU 2016-02 resulted in the recognition of operating lease assets of $45.0 million and operating lease liabilities of $48.1 million, respectively as of September 29, 2019.  Included in the measurement of the new lease assets is the reclassification of certain balances historically recorded as deferred rent and lease obligations for closed stores.  The adoption of ASU 2016-02 did not materially affect the Company’s consolidated net income or cash flows.



See Note I for additional information required by ASU 2016-02.



C. ALLOWANCE FOR DOUBTFUL ACCOUNTS

 

Receivables are presented net of an allowance for doubtful accounts of $325,000 at March 28, 2020 and $156,000 at September 28, 2019.  



D. INCOME TAXES



The Company’s effective tax rate differs from the federal statutory rate primarily as a result of state income taxes and tax credits.



The Company has unrecognized tax benefits and could incur interest and penalties related to uncertain tax positions. These amounts are insignificant and are not expected to significantly increase or decrease within the next twelve months.



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:





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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. Effective October 1, 2019, the Company is insured for covered costs in excess of $1.0 million per occurrence for workers’ compensation and for general liability and $450,000 per covered person for medical care benefits for a policy year. The Company’s self-insurance reserves totaled $33.6 million and $31.0 million at March 28, 2020 and September 28, 2019, respectively.  Of this amount, $13.6 million is accounted for as a current liability and $20.0 million as a long-term liability, which is inclusive of $5.4 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable at March 28, 2020.  At September 28, 2019, $13.1 million is accounted for as a current liability and $17.9 million as a long-term liability, which is inclusive of $3.6 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.  Employee insurance expense, including workers’ compensation and medical care benefits, net of employee contributions, totaled $7.8 million and $9.4 million for the three-month periods ended March 28, 2020 and March 30, 2019, respectively.  For the six-month periods ended March 28, 2020 and March 30, 2019 employee insurance expense, net of employee contributions totaled $18.3 million and $19.6 million, respectively.



The Company’s fuel operations contain underground tanks for the storage of gasoline and diesel fuel.  The Company reviewed FASB Accounting Standards Codification Topic 410 (“FASB ASC 410”) and determined we have a legal obligation to remove tanks at a point in the future and accordingly determined we have met the requirements of an asset retirement obligation.  The Company followed the FASB ASC 410 model for determining the asset retirement cost and asset retirement obligation.  The amounts recorded are immaterial for each fuel center as well as in the aggregate at March 28, 2020 and September 28, 2019.

 

F. LONG-TERM DEBT

 

In June 2013, the Company issued $700.0 million aggregate principal amount of senior notes due in 2023 (the “Notes”).  The Notes bear an interest rate of 5.750% per annum and were issued at par.



The Company may redeem all or a portion of the Notes at any time 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 November 2019, the Company closed a $155 million ten-year amortizing real estate loan (the “Loan”) and issued notice to redeem a like principal amount of the Notes.  The Loan was funded and the Notes were redeemed thirty days after the redemption notice in December 2019.  The Notes were redeemed at 101.917% of par value, and the Company recognized debt extinguishment costs of approximately $3.7 million during the quarter ended December 28, 2019.  The Loan matures January 31, 2030 and has monthly principal payments of $0.65 million plus floating rate interest based on LIBOR. 



The Company has a $175.0 million line of credit (the “Line”) that matures in September 2022.  The Line provides the Company with various interest rate options based on the prime rate, the Federal Funds Rate, or the London Interbank Offering Rate (“LIBOR”). The Line allows the Company to issue up to $20.0 million in unused letters of credit, of which $9.1 million of unused letters of credit were issued at March 28, 2020.  The Company is not required to maintain compensating balances in connection with the Line.  At March 28, 2020, the Company had no borrowings outstanding under the Line. 



In December 2010, the Company completed the funding of $99.7 million of bonds (the “Bonds”) for construction of new warehouse and distribution space adjacent to its existing space in Buncombe County, North Carolina (the “Project”).  The final maturity date of the Bonds is January 1, 2036.

 

Under a Continuing Covenant and Collateral Agency Agreement (the “Covenant Agreement”) between certain financial institutions and the Company, the financial institutions would hold the Bonds until September 2026, subject to certain events.  Mandatory redemption of the Bonds by the Company in the annual amount of $4.5 million began on January 1, 2014.  The Company may redeem the Bonds without penalty or premium at any time prior to September 26, 2026.

 

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.



The Company has an interest rate swap agreement for a current notional amount of $45.5 million at a fixed rate of 3.92%.  Under this agreement, the Company pays monthly the fixed rate of 3.92% and receives the one-month LIBOR plus 1.65%.  The interest rate swap

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effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap.  Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.5 million and mature October 1, 2027.



The Company has an interest rate swap agreement for a current notional amount of $151.8 million at a fixed rate of 2.95%.  Under this agreement, the Company pays monthly the fixed rate of 2.95% and receives the one-month LIBOR plus 1.50%.  The interest rate swap effectively hedges floating rate debt in the same amount as the current notional amount of the interest swap.  Both the floating rate debt and the interest rate swap have monthly principal amortization of $0.65 million and mature in fiscal year 2030. 

 

The Company recognizes differences between the variable rate interest payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense each period over the life of the swaps.  The Company has designated the swaps as cash flow hedges and records the changes in the estimated fair value of the swaps to other comprehensive income each period.  For the three- and six-month periods ended March 28, 2020, the Company recorded $10.5 million and $8.4 million of other comprehensive expense, respectively, net of income taxes, in its Consolidated Statements of Comprehensive income.  Unrealized losses of $12.8 million are recorded as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of March 28, 2020.  For the three- and six-month periods ended March 30, 2019, the Company recorded $0.5 million and $0.1 million of other comprehensive expense, respectively, net of income taxes, in its Consolidated Statements of Comprehensive income.  Unrealized losses of $0.1 million are recorded as a liability at fair value in the line “Other Long Term Liabilities” on the Consolidated Balance Sheet as of March 30, 2019.



The Company’s long-term debt agreements generally 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 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 at March 28, 2020.  



The Company’s long-term debt agreements generally have cross-default provisions which could result in the acceleration of payments due under all long-term debt agreements in the event of default under any one instrument.



At March 28, 2020, property and equipment with an undepreciated cost of approximately $363.5 million was pledged as collateral for long-term debt. Long-term debt and Line agreements contain various restrictive covenants requiring, among other things, minimum levels of net worth and maintenance of certain financial ratios. At March 28, 2020, the Company had excess net worth totaling $143.4 million calculated under covenants in the Notes, the Bonds, the Loan, and the Line.  This amount is available to pay dividends; however, certain loan agreements containing provisions outlining minimum tangible net worth requirements restrict the ability of the Company to pay cash dividends in excess of the current annual per share dividends paid on the Company’s Class A and Class B Common Stock. Further, the Company is prevented from paying cash dividends at any time that it is in default under the indenture governing the Notes. In addition, the terms of the indenture may restrict the ability of the Company to pay additional cash dividends based on certain financial parameters.



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 17, 2019 to stockholders of record on October 10, 2019. 



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 16,  2020 to stockholders of record on January 9, 2020.



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 10, 2019.



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. 



The two-class method of computing basic earnings per share for each period reflects the cash dividends declared per share for each class of stock, plus allocated undistributed earnings per share computed using the participation percentage which reflects the dividend

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rights of each class of stock.  Diluted earnings per share is calculated assuming the conversion of all shares of Class B Common Stock to shares of Class A Common Stock on a share-for-share basis. The tables below reconcile the numerators and denominators of basic and diluted earnings per share for current and prior periods.

 



























I. LEASES



Leases as Lessee



The Company conducts part of its retail operations from leased facilities. The initial terms of the leases are generally 20 years. The majority of the leases include one or more renewal options and provide that the Company pay property taxes, utilities, repairs and certain other costs incidental to occupation of the premises. Several leases contain clauses calling for percentage rentals based upon gross sales of the supermarket occupying the leased space.  Step rent provisions, escalation clauses and lease incentives are taken into account in computing minimum lease payments.  



Operating lease cost for all operating leases totaled $2.3 million for the three months ended March 28,2020 and $5.0 million for the six- months ending March 28, 2020.  This amount includes short-term (less than one year) leases, common area expenses and variable lease costs, which are insignificant.  Sublease income of $0.2 million is included as a reduction of operating lease cost. Cash paid for lease liabilities in operating activities approximates operating lease cost.



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Maturities of operating lease liabilities as of March 28, 2020 are as follows:





The weighted average remaining lease term for the Company’s operating leases is 14.3 years.  The weighted average discount rate used to determine lease liability balances as of March 28, 2020 is 3.51%, based on recent Company financings collateralized by store properties.



Prior Period Disclosures – Lessee



As a result of the adoption of ASU 2016-02 on September 29, 2019 the Company is required to present future minimum lease payments for operating leases having initial or remaining non-cancelable lease terms in excess of one year.  These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance.  Commitments as of September 28, 2019 were as follows:  





Leases as Lessor



At September 28, 2019, the Company owned and operated 79 shopping centers in conjunction with its supermarket operations. The Company leases to others a portion of its shopping center properties. The leases are non-cancelable operating lease agreements for periods ranging up to 20 years.



Rental income is included in the line item “Net sales” on the Consolidated Statements of Income.  Depreciation on owned properties leased to others and other shopping center expenses are included in the line item “Cost of goods sold” on the Consolidated Statements of Income.





Future minimum operating lease receipts at March 28, 2020 are as follows:





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Prior Period Disclosures – Lessor



As a result of the adoption of ASU 2016-02 on September 29, 2019 the Company is required to present future minimum operating lease income receipts for operating leases having initial or remaining non-cancelable lease terms in excess of one year.  These future minimum lease payments were previously disclosed in our 2019 Annual Report on Form 10-K and accounted for under previous lease guidance.  Future minimum operating lease receipts as of September 28, 2019 were as follows:













J. SEGMENT INFORMATION

 

The Company operates one primary business segment, retail grocery sales.  “Other” includes our remaining operations - fluid dairy and shopping center rentals.  Information about the Company’s operations by lines of business (amounts in thousands) is as follows: 



  







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

The non-foods category includes alcoholic beverages, tobacco, pharmacy, and health/beauty/cosmetic products.

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



For the three-month periods ended March 28, 2020 and March 30, 2019, respectively, the fluid dairy operation had $12.3 million and $10.2 million in sales to the grocery sales segment.  The fluid dairy had $23.8 million and $21.2 million in sales to the retail grocery segment for the six-month periods ended March 28, 2020 and March 30, 2019, respectively. These sales have been eliminated in consolidation and are excluded from the amounts in the table above.



K. 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 and interest rate swaps are 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

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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, interest rate swaps, and non-qualified retirement plan assets at March 28, 2020 are 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 instrument.



L. COMMITMENTS AND CONTINGENCIES



Various legal proceedings and claims arising in the ordinary course of business are pending against the Company.  In the opinion of management, the ultimate liability, if any, from all pending legal proceedings and claims will not materially affect the Company’s financial position, the results of its operations, or its cash flows.



M. RELATED PARTY TRANSACTIONS



In November 2019, the Company sold two land parcels for $4.3 million to a limited liability corporation having Robert P. Ingle II, the Company’s Chairman of the Board, as one of its principals with a financial interest in the transaction.  In accordance with the Company’s Related Party Transaction policy, independent fair market value appraisals were obtained to determine the selling price, and the Company’s Audit Committee approved the transactions. 





Item 1A. RISK FACTORS



The following risk factor disclosure should be read in conjunction with the risk factors described in the Company’s Annual Report on Form 10-K



Coronavirus Pandemic Impact



The coronavirus pandemic was declared a national emergency on March 13, 2020 and the Company was classified as an essential business.  We remained open to safely serve the needs of our customers during various isolation measures imposed to reduce pandemic risks. 



These measures closed schools, restaurants, and many businesses in the Company’s market area.  Sales and customer traffic increased and the Company’s implemented numerous sanitation and social distancing protocols to keep our customers and our associates safe.  These protocols included shortened operating hours, frequent extensive cleaning, personal protective equipment, and measures to maintain safe distances in our stores.  We hired additional associates due to the increased demands on our stores and our distribution center.



At the present time, we do not know how long current national, state and local mandates related to the pandemic will continue, or how mandates will change in the future.  We do not know how our customer base will be impacted by unemployment or various assistance programs.  We do not know what risks may impact or suppliers as a result of plant closures or transportation disruptions.  We do not know the longer-term impact on tenants in Company-owned shopping centers.

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



Overview

 

Ingles, a leading supermarket chain in the Southeast, operates 198 supermarkets in North Carolina (73), Georgia (66), South Carolina (36), Tennessee (21), Virginia (1) 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, as well as quality private label items. 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 March 28, 2020, the Company operated 108 in-store pharmacies and 104 fuel centers. 



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 $1.0 million per occurrence for workers’ compensation and for general liability, and $450,000 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 March 28, 2020 the Company’s self-insurance reserves totaled $33.6 million.  This amount is inclusive of $5.4 million of expected self-insurance recoveries from excess cost insurance or other sources that are recorded as a receivable.

 

Asset Impairments

 

The Company accounts for the impairment of long-lived assets in accordance with FASB ASC Topic 360. 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 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 March 28, 2020.



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 $27.3 million and $28.3 million for the fiscal quarters ended March 28, 2020 and March 30, 2019, respectively.  For the six-month periods ended March 28, 2020 and March 30, 2019,

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vendor allowances applied as a reduction of merchandise costs totaled $55.8 million and $57.3 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 $2.3 million and $3.3 million for the fiscal quarters ended March 28, 2020 and March 30, 2019, respectively. For the six-month periods ended March 28, 2020 and March 30, 2019, vendor advertising allowances recorded as a reduction of advertising expense totaled $5.8 million and $7.7 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.



Results of Operations

 

Ingles operates on a 52 or 53-week fiscal year ending on the last Saturday in September.  There are 13 and 26 weeks of operations included in the Unaudited Condensed Consolidated Statements of Income for the three- and six-month periods ended March 28, 2020 and March 30, 2019, respectively. Comparable store sales are defined as sales by retail stores in operation for five full fiscal quarters. Sales from replacement stores, major 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 includes additional retail square footage. For both the three- and six-month periods ended March 28, 2020 and March 30, 2019, comparable store sales included 197 stores. 



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.