2024-01-04 00:16:33 ET
Summary
- Ingles Markets reports merchandising activities financed by vendors and a decrease in net debt/EBITDA ratio.
- The company's expansion plan, growth in the prepared food market, loyalty programs, and apps could bring new sales growth.
- The apps promoted in Google Play and the Apple Store could also enhance the shopping experience of clients.
Ingles Markets, Incorporated ( IMKTA ) recently reported store renovation, merchandising activities financed by vendors, and a large decrease in the net debt/EBITDA ratio. The current expansion plan, growth of the prepared food market, the effect of loyalty programs, and apps could bring new sales growth. There are obvious risks from failed positioning of new stores, changes in labor conditions, or new regulations, however, IMKTA does look very undervalued.
Ingles Markets
Ingles Markets leads the supermarket industry in the southeastern United States. With a focus on logistics efficiency, nearly all stores are within 280 miles of its main warehouse, facilitating timely delivery of fresh and non-perishable products.
Additionally, its milk processing plant ensures the quality of approximately 72% of the dairy products sold in its supermarkets and generates additional revenue by supplying products to retailers in 17 states. I believe that the company shows strong regional presence with continued expansion plans.
Ingles Markets' business model focuses on providing customers with a comprehensive and satisfying shopping experience, combining value, customer service, variety, and convenience. With a marketing strategy that highlights the quality of perishable products, organic products, and collaboration with local suppliers, in my view, the company seeks to satisfy current customer preferences.
The company also offers prepared foods, home-cooked meal options, bakery, and private brands to serve various needs. With the prepared food market growing at a CAGR of close to 4.70%, I believe that further investments in this segment could bring net sales growth.
The prepared food market is projected to grow from USD 148.67 billion in 2022 to USD 214.71 Billion by 2030, at a CAGR of 4.70% during the forecast period. Source: Vantage Market Research
Successful Renovation And New Modernized Stores Could Bring Significant Net Sales Growth
Ingles Markets' business strategy focuses on store renovation, expansion, and relocation to cultivate and expand its customer base while maintaining high standards of convenience and customer service.
It offers a wide range of food and non-food products, including groceries, meat products, dairy, and more. Its focus on customer service, modern stores, and competitive pricing seeks to develop customer loyalty. With a continuous renovation and expansion plan, its modernized stores adapt to today's lifestyle, offering amenities such as pharmacies and fuel centers. Additionally, the company facilitates online orders for in-store pickup, further enhancing the customer experience.
I believe that organic growth and growth in the total square feet at the end of the year will most likely bring the most net sales. In this regard, it is worth noting that revenue from groceries and perishables increased in the last year. In addition, management reported an increase in the weighted average sales per store in 2023.
Loyalty Programs, Apps, And Other Promotional Strategies Could Bring Net Sales Growth
In my view, the Ingles Curbside service and the Ingles Advantage card strengthen customer loyalty, supporting a reputation for friendly service, quality, and community engagement through diversified advertising and promotional strategies. In addition, other efforts like the app on Google Play or Apple will most likely enhance the shopping experience besides enhancing the brands offered by Ingles. With all these efforts, I believe that we could see net sales growth in the coming years.
Merchandising Activities Financed By Vendors Will Most Likely Not Offer Liquidity, But May Also Enhance The Relationship With Clients And Vendors
In the last quarterly report, Ingles noted that merchandising activities are usually financed by vendors. These efforts do not only include market activities but also slotting fees and promotional discounts. I believe that these funds will most likely be quite beneficial for Ingles’ balance sheet as well as future operations. The company explained all these efforts with the following lines in the last quarterly report.
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 composed 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 applicable vendor’s products. Source: 10-K
Lack Of Coverage Could Explain The Current Valuation
I did not find a single analyst covering the stock. Hence, we do not really receive information about revenue estimates and EPS estimates. Under these circumstances, I usually think that the market tends to push the valuation of companies down. Under these specific cases, I do believe that Ingles is a bit undervalued. In my view, as soon as more news is released, and more analysts are interested in the stock, the stock price could increase.
Balance Sheet
Ingles reports a significant amount of inventory, some cash, and accounts receivable. Total amount of payables is significant, but the company uses some debt to finance the working capital and the total amount of property and equipment. Given the total amount of EBITDA, I am not concerned about the current amount of debt. The recent decrease in the net debt/EBITDA ratio appears quite beneficial.
The company noted cash and cash equivalents worth $328 million, with accounts receivables of $107 million, inventories close to $493 million, and total current assets of $952 million. I am not concerned about liquidity because the liquidity ratio is larger than 1x.
Besides, with property and equipment of about $1.4 billion, total assets stand at $2.4 billion. The asset/liability ratio is larger than 1x. Hence, I believe that the balance sheet appears healthy.
The list of liabilities includes current portion of long-term debt worth $17 million, current portion of operating lease liabilities of close to $7 million, and accounts payable worth $204 million. Besides, with long-term debt worth $532 million and noncurrent operating lease liabilities of $34 million, total liabilities stand at close to $1.014 billion.
Given the total amount of debt, I took a look at the information reported in the last annual report. Ingles has the option to redeem all or part of the Notes before June 15, 2026, and may also redeem up to 40% of the principal amount before June 15, 2024. It has a line of credit of $150.0 million, maturing in June 2026, with interest rate options based on the prime rate, the Federal Funds Rate, or SOFR. Additionally, it issued Recovery Zone Fund Bonds in 2010 to finance a project, maturing in January 2036. The company also refinanced loan obligations in 2017, and closed a loan transaction in 2019, both based on SOFR. The interest rate paid stands at close to 4% and 6.29%. Hence, I think that a cost of capital close to 6% and 11% would make a lot of sense here.
The Company has an interest rate swap agreement for a current notional amount of $26.0 million at a fixed rate of 3.962%. Under this agreement, the Company pays monthly the fixed rate of 3.962% and receives the one-month SOFR plus 1.75%. Source: 10-Q
The Company has an interest rate swap agreement for a current notional amount of $126.6 million at a fixed rate of 2.998%. Under this agreement, the Company pays monthly the fixed rate of 2.998% and receives the one-month SOFR plus 1.60%. Source: 10-Q
DCF Model With My Own Assumptions And Previous Cash Flow Statements
My expectations include 2031 net sales of close to $9.204 billion, net sales growth of about 4.51%, and median sales growth of about 5.3% from 2019 to 2031. 2031 EBITDA would be close to $487 million, with 2031 EBITDA margin of 5.29% and 2031 net income of $113 million. Finally, I assumed 2031 free cash flow of $139 million and FCF margin of 1.51%.
If we assume a WACC of 6%-11%, FCF between $113 million and $141 million, and exit multiple close to 4x-10x EBITDA, the implied valuation would stand between $1.3 and $3.76 billion. The median market capitalization would not be far from $1.9-$2.9 billion. Note that peers report a valuation close to 12x EBITDA, so I believe that my exit multiples are conservative.
If we divide by the share count of 18.994 million, the median implied price would not be far from $101-$154 per share, which is above the current market valuation.
Finally, with the previous results, I obtained a median internal rate of return close to 2.3% and 11%. Other analysts may obtain different results with different assumptions; however, I believe that most financial analysts would assume that Ingles is undervalued.
Risks
The company assumes significant risks by self-insuring workers' compensation, general liability, and group medical and dental benefits, although it limits exposure with excess liability coverage. Estimates of self-insurance obligations are based on claims submitted and estimates of claims incurred. With this in mind, I believe that changes in labor conditions could deteriorate the FCF margins.
Additionally, Ingles faces regulatory risks arising from federal, state, and local laws and regulations related to various aspects of its business, from zoning and workplace safety to pharmaceutical and fuel sales. Changes in these regulations could affect the company's profitability and operating results. As a result, we could see declines in the stock price.
I also dislike the fact that Ingles reports two types of shares and some conversion features included in the class B shares. Investors may only use the total share count of class A shares and may forget class B shares. As a result, the calculation of the implied valuation may not be correctly done.
The Company has two classes of Common Stock: Class A and Class B. Class A Common Stock is listed on The NASDAQ Global Select Market under the symbol “IMKTA”. There is no public market for the Company’s Class B Common Stock. Under the terms of the Company’s Articles of Incorporation, a holder of Class B Common Stock may convert any or all of the holder’s shares of Class B Common Stock into an equal number of shares of Class A Common Stock at any time. Source: 10-K
Competitors
In my opinion, Ingles Markets operates in a highly competitive supermarket industry, with competitors such as Aldi, Food Lion, Kroger, and others. Intensifying competition comes from the expansion of food sections at various retailers and restaurants. The company highlights its competitive advantages, such as convenient locations, quality of service, competitive prices, and product variety. By focusing on a specific geographic region, the company can quickly adapt to changing customer needs. Management closely monitors competitive activity and adjusts strategies as necessary to remain competitive in an ever-changing environment.
My Conclusion
Ingles Markets offers significant logistical efficiency, focus on quality products, solid regional presence, and a lot of know-how accumulated. I believe that the recent store renovation could bring net sales growth as customers establish new connections with Ingles’ markets. In addition, the apps promoted in Google Play and the Apple Store could also enhance the shopping experience of clients. Besides, further merchandising activities financed by vendors may not only offer new liquidity, but they may also contribute to new links with customers. I do believe that intense competition and contractual obligations present risks, and changes in labor conditions may also lower future FCF margins. With that, I do believe that Ingles does trade a bit undervalued.
For further details see:
Ingles Markets: Store Renovation And Undervalued Supermarket Business