Item 1a. Risk Factors:
Competitive and Reputational Risks
The Company’s industry is highly competitive. If the Company is unable to compete effectively, the Company’s financial condition and results of operations could be materially affected.
The retail food industry is intensely price competitive, and the competition the Company encounters may have a negative impact on product retail prices. The operating environment continues to be characterized by aggressive expansion, entry of non-traditional competitors, market consolidation and increasing fragmentation of retail and online formats. The introduction of on-line food retail in recent years has augmented competition in industry. The financial results may be adversely impacted by a competitive environment that could cause the Company to reduce retail prices without a reduction in its product cost to maintain market share; thus, reducing sales and gross profit margins.
Food safety issues could result in the loss of consumer confidence in the Company.
Customers count on the Company to provide them with safe and wholesome food products. Concerns regarding the safety of food products sold in its stores could cause shoppers to avoid purchasing certain products from the Company, or to seek alternative sources of supply for all of their food needs, even if the basis for the concern is outside of the Company’s control. A loss in confidence on the part of its customers would be difficult and costly to reestablish. As such, any issue regarding the safety of any food items sold by the Company, regardless of the cause, could have a substantial and adverse effect on operations.
The Company may be unable to retain key management personnel.
The Company’s success depends to a significant degree upon the continued contributions of senior management. The loss of any key member of management may prevent the Company from implementing its business plans in a timely manner. In addition, employment conditions specifically may affect the Company’s ability to hire and train qualified associates.
Financial, Investments and Infrastructure Risks
The failure to execute expansion plans could have a material adverse effect on the Company’s business and results of its operations.
Circumstances outside the Company’s control could negatively impact anticipated capital investments in store, distribution and manufacturing projects, information technology and equipment. The Company cannot determine with certainty whether its new or acquired stores will meet expected benefits including, among other things, operating efficiencies, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth. Achieving the anticipated benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, the possibility of imprecise assumptions underlying expectations regarding potential
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Item 1a. Risk Factors: (continued)
synergies and the integration process, unforeseen expenses and delays diverting Management’s time and attention and competitive factors in the marketplace.
The Company’s investment portfolio may suffer losses from changes in market interest rates and changes in market conditions which could adversely affect results of operations and liquidity.
The Company’s marketable securities consist of corporate and municipal bonds, commercial paper and equity securities. These investments are subject to general credit, liquidity, market and interest rate risks. As a result, the Company may experience a reduction in value or loss of liquidity from investments, which may have a negative impact on the Company’s financial condition and results of operations.
Unexpected factors affecting self-insurance claims and reserve estimates could adversely affect the Company.
The Company uses a combination of insurance and self-insurance to provide for potential liabilities for workers’ compensation, general liability, vehicle accident, property and associate medical benefit claims. Management estimates the liabilities associated with the risks retained by the Company, in part, by considering historical claims experience, demographic and severity factors and other actuarial assumptions which, by their nature, are subject to a high degree of variability. Any projection of losses concerning workers’ compensation and general liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.
Information Security, Cybersecurity and Data Privacy Risks
Disruptions or cybersecurity breaches in the Company’s information technology systems could adversely affect results of operations.
The Company’s business is highly dependent on complex information technology systems that are vital to its continuing operations. If the Company was to experience difficulties maintaining existing systems or implementing new systems, significant losses could be incurred due to disruptions in its operations. Additionally, these systems contain valuable proprietary data as well as receipt and storage of personal information about its associates and customers, in particular electronic payment data and personal health information that, if breached, would have an adverse effect on the Company. Such an occurrence could adversely affect the Company’s reputation with its customers, associates, and vendors, as well as the Company’s financial condition, results of operations, and liquidity with potential litigation against the Company or the imposition of penalties.
Supply Chain and Third-Party Risks
The Company is affected by certain operating costs which could increase or fluctuate considerably, and other potential disruptions.
Associate expenses contribute to the majority of the Company’s operating costs. The Company’s financial performance is potentially affected by increasing wage and benefit costs, a competitive labor market, regulatory wage increases and the risk of unionized labor disruptions of its non-union workforce. The Company’s profit is particularly sensitive to the cost of oil. Oil prices directly affect the Company’s product transportation costs, as well as its utility and petroleum-based supply costs. It also affects the costs of its suppliers, which impacts its cost of goods. Additionally, disruptions to the Company’s distribution of food products pose significant risks to the Company's operations. Various factors such as adverse weather conditions, food safety, and civil unrest could all contribute to such disruptions.
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Item 1a. Risk Factors: (continued)
Changes in vendor promotions or allowances, including the way vendors target their promotional spending, and the Company’s ability to effectively manage these programs could significantly impact margins and profitability.
The Company cooperatively engages in a variety of promotional programs with its vendors. As the parties assess the results of specific promotions and plan for future promotions, the nature of these programs and the allocation of dollars among them changes over time. The Company manages these programs to maintain or improve margins while at the same time increasing sales. A reduction in overall promotional spending or a shift by vendors in promotional spending away from certain types of promotions that the Company and its customers have historically utilized could have a significant impact on profitability.
Legal, Regulatory and Other External Risks
The trade area of the Company is located within a region and is subject to the economic, social and climate variables of that region.
The majority of the Company’s stores are concentrated in central and northeast Pennsylvania, central Maryland, suburban Washington, DC and Baltimore regions and New York’s Southern Tier. Changes in economic and social conditions in the Company’s operating regions, including fluctuations in the inflation rate along with changes in population and employment and job growth rates and changes in government benefits such as SNAP/EBT or child care credits, affect customer shopping habits. Business disruptions due to weather and catastrophic events may also affect our business. The Company’s geographic regions could receive an extreme variance in the amount of annual snowfall that may materially affect sales and expense results.
Various aspects of the Company’s business are subject to federal, state and local laws and regulations.
The Company is subject to various federal, state and local laws, regulations and administrative practices that affect the Company’s business. The Company must comply with numerous provisions regulating health and sanitation standards, food labeling, equal employment opportunity, minimum wages and licensing for the sale of food, drugs and alcoholic beverages. The Company’s compliance with these regulations may require additional capital expenditures and could adversely affect the Company’s ability to conduct the Company’s business as planned. Management cannot predict either the nature of future laws, regulations, interpretations or applications, or the effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state, and local regulatory schemes would have on the Company’s future business. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling and/or scientific substantiation. Any or all of such requirements could have an adverse effect on the Company’s financial condition, results of operations and liquidity.
Changes in tax laws may result in higher income tax.
The Company’s future effective tax rate may increase from current rates due to changes in laws and the status of pending items with various taxing authorities. Currently, the Company benefits from a combination of its corporate structure and certain state tax laws.
The Company is a controlled Company due to the common stock holdings of the Weis family.
The Weis family’s share ownership represents approximately 65% of the combined voting power of the Company’s common stock as of December 30, 2023. As a result, the Weis family has the power to elect a majority of the Company’s directors and approve any action requiring the approval of the shareholders of the Company, including adopting certain amendments to the Company’s charter and approving mergers or sales of substantially all of the Company’s assets. Currently, one of the Company’s five directors is a member of the Weis family.
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Item 1a. Risk Factors: (continued)
The Company’s business and operations, and the operations of the Company’s suppliers, have been, and may in the future be adversely affected by epidemics or pandemics such as the novel Coronavirus (COVID-19) pandemic outbreak.
The Company may face risks related to health epidemics and pandemics or other outbreaks of communicable diseases. The global spread of COVID-19 created significant volatility, uncertainty and economic disruption. The Company’s business was deemed essential during the novel coronavirus pandemic and the Company is committed to maintaining a safe work and shopping environment. Management cannot assess the ultimate economic impact to the Company, which will be determined by, among other things, the length of time that such circumstances occur, nor can the Company predict the effects of governmental and public responses to changing conditions. The risks and uncertainties surrounding the coronavirus pandemic, as well as any future pandemics, are broad.
Item 1b. Unresolved Staff Comments:
There are no unresolved staff comments.
Item 1c. Cybersecurity:
Risk Management and Strategy
The Company utilizes information systems to support a variety of business processes and activities in its operations. These systems may be subject to cyber-based attacks or breaches. Some examples of the cybersecurity threats that could negatively impact the Company are credit card skimmers, denial of service attacks, excessive port scans, firewall breach and computer virus outbreak.
Cybersecurity risk management is part of Management’s annual risk assessment program. In order to manage the risks associated with cybersecurity threats, the Company maintains a risk-based cybersecurity program consisting of processes, technologies, and controls to assess, identify and manage material risks from cybersecurity threats.
While the Company's information systems are exposed to cybersecurity threats and risks, the Company has not experienced any material cybersecurity incidents affecting its business strategy, results of operations, or financial condition, and any costs or operational impacts related to cybersecurity incidents were immaterial during the period presented.
For additional information related to the risks associated with cybersecurity threats, refer to the Information Security, Cybersecurity and Data Privacy Risks section of Item 1a. Risk Factors.
Governance
Board of Directors Oversight
The Company’s Board of Directors is responsible for providing oversight and strategic guidance to management to support the long-term interests of the Company's shareholders. The Audit Committee is the lead committee of the Board of Directors responsible for oversight of the Company’s risk-based cybersecurity program and bears the primary responsibility for this aspect of the business. As part of this responsibility, the Audit Committee of the Board of Directors annually reviews the Company's Information Security Incident Response Plan.
On a quarterly basis cybersecurity incidents are summarized and reported to the Audit Committee of the Board of Directors which cover any identified cybersecurity incidents, results of third-party vulnerability testing, and key developments in policies.
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Item 1c. Cybersecurity: (continued)
Management’s Role Managing Risk
The Company’s cybersecurity risk management is part of the Company's Information Security Office, led by the Chief Information Officer. In order to manage the risks associated with cybersecurity threats, the Company has implemented an Information Security Incident Response Plan.
The Company engages with a range of third-party experts, including cybersecurity assessors, consultants, and auditors in evaluating and testing its risk management systems. These relationships enable Management to leverage specialized knowledge and insights with respect to the Company’s cybersecurity strategies and processes.
The Company's Information Security Incident Response Plan includes detailed processes and controls related to cybersecurity awareness training for employees, phishing simulations, backup and recovery, response planning, vulnerability management and endpoint protection as well as ongoing cybersecurity requirements for third-party service providers. The framework is regularly reviewed, assessed, and updated. This framework is designed to mitigate risks related to data breaches or other security incidents originating from third parties.
Item 2. Properties:
As of December 30, 2023, the Company owned and operated 101 of its retail food stores and leased and operated 96 stores under operating leases that expire at various dates through 2036. The Company owns all trade fixtures and equipment in its stores and several parcels of vacant land, which are available as locations for possible future stores or other expansion.
The Company owns and operates one distribution center in Milton, Pennsylvania of approximately 1.3 million square feet, and one in Northumberland, Pennsylvania totaling approximately 76 thousand square feet. The Company also owns one warehouse complex in Sunbury, Pennsylvania totaling approximately 535 thousand square feet. The Company utilizes 258 thousand square feet of its Sunbury location to operate its three manufacturing facilities which process milk, ice cream and fresh meat products.
Item 3. Legal Proceedings:
Neither the Company nor any subsidiary is presently a party to, nor is any of their property subject to, any pending legal proceedings, other than routine litigation incidental to the business that would not have a material adverse effect on the financial results. The Company estimates any exposure to these legal proceedings and establishes accruals for the estimated liabilities, where it is reasonably possible to estimate and where an adverse outcome is probable.
Item 4. Mine Safety Disclosures:
Not Applicable.
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Information about Our Executive Officers
The following sets forth the names and ages of the Company’s executive officers as of February 28, 2024, indicating all positions held during the past five years:
Name Age Title
Robert G. Gleeson (a) 58 Senior Vice President of Merchandising and Marketing
David W. Gose II (b) 57 Senior Vice President of Operations
James E. Marcil (e) 65 Senior Vice President of Human Resources
Kurt A. Schertle (h) 52 Chief Operating Officer
Richard G. Zeh Jr. (j) 51 Senior Vice President, Chief Information Officer
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities:
The Company’s stock is traded on the New York Stock Exchange (ticker symbol WMK). The approximate number of shareholders, including individual participants in security position listings on February 28, 2024 was 11,987.
The following line graph compares the yearly percentage change in the cumulative total shareholder return on the Company’s common stock against the cumulative total return of the S&P Composite-500 Stock Index and the cumulative total return of a Company-selected group index that the Company deems most properly represents its “Peer Group”, for the period of five years. The Peer group is made up of five retail grocers that the Company feels most closely relate to its size and business profile, including one national grocer the Company believes to be an industry market leader. The companies making up the Peer Group, in no particular order, are, Ingles Markets, Inc.; Village Super Market, Inc.; Smart & Final Stores, Inc. (included through June 20, 2019 when it was acquired by Apollo Global Management, LLC); Sprouts Farmers Market, Inc. and The Kroger Company. The graph depicts $100 invested at the close of trading on the last trading day preceding the first day of the fifth preceding year in Weis Markets, Inc. common stock, S&P 500, and the Peer Group. The cumulative total return assumes reinvestment of dividends.
Comparative Five-Year Total Returns
Item 6. [Reserved]
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations:
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Weis Markets, Inc., its operations and its present business environment. The MD&A is provided as a supplement to and should be read in conjunction with the Consolidated Financial Statements and the accompanying notes thereto contained in “Item 8. Financial Statements and Supplementary Data” of this report. The following analysis should also be read in conjunction with the Financial Statements included in the Quarterly Reports on Form 10-Q and the Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission, as well as the cautionary statement captioned “Forward-Looking Statements” immediately following this analysis. This overview summarizes the MD&A, which includes the following sections:
Company Overview
General
Weis Markets is a conventional supermarket chain that operates 197 retail stores with approximately 23 thousand associates located in Pennsylvania and six surrounding states: Delaware, Maryland, New Jersey, New York, Virginia, and West Virginia. Approximately 95% of Weis Markets associates are paid an hourly wage. Its products sold include groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services at certain locations, deli products, prepared foods, bakery products, beer and wine, fuel, and general merchandise items, such as health and beauty care and household products. The store product selection includes national, local and private brands and the Company promotes competitive pricing by using Everyday Lower Price; Low Price Guarantee; Low, Low Price; 3 Day Sale; senior and military discounts; and Loyalty programs. The Loyalty program includes reward points that may be redeemed for discounts on items in store, at one of the Company’s fuel stations or one of its third-party fuel station partners.
Utilizing its own strategically located distribution center and transportation fleet, Weis Markets self distributes approximately 56% of product supplied to stores with the remaining being supplied by direct store vendors and regional wholesalers. In addition, the Company has three manufacturing facilities which process milk, water, ice, ice cream and fresh meat products. The corporate offices are located in Sunbury, Pennsylvania where the Company was founded in 1912.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Company Overview (continued)
The Company has provided additional product offerings and customer conveniences such as “Weis 2 Go Online,” currently offered at 188 store locations. “Weis 2 Go Online” allows the customer to order on-line and have their order delivered or picked up at an expedient store drive-thru. The Company also currently offers home delivery to customers in all 197 of its locations via multiple grocery delivery partners.
Strategic Imperatives
The following strategic imperatives continue to be focused upon by the Company to attempt to ensure the success of the Company in the coming years:
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Company Overview (continued)
Results of Operations
Two-Year StackedComparable Store Sales Analysis
Management is providing Comparable Store Sales Two-Year Stacked analysis, a non-GAAP measure, because Management believes this metric is useful to investors and analysts. A Comparable Store Sales Two-Year Stacked analysis presents a comparison of results and trends over a longer period of time to demonstrate the effect of the novel coronavirus pandemic on the operating results of the Company. Information presented in the tables below is not intended for use as an alternative to any other measure of performance. It is not recommended that this table be considered a substitute for the Company’s operating results as reported in accordance with GAAP.
Year-over-year and sequential comparisons are the primary calculations used to analyze operating results, however, due to significant fluctuations caused by the COVID-19 pandemic, inflation and declining government benefits, Management believes it is necessary to provide a Two-Year Stacked Comparable Store Sales analysis. The following table provides the two-year stacked comparable store sales, excluding fuel and adjusted for an additional week in 2022 for the fiscal years ended December 30, 2023, and December 31, 2022, as well as fiscal years ended December 31, 2022, and December 25, 2021, respectively.
Percentage Change
Year Ended
Comparable store sales, excluding fuel (individual year) 0.3 9.5
Comparable store sales, excluding fuel (two-year stacked) 9.8
Comparable store sales (individual year) (0.2) 10.9 %
Comparable store sales (two-year stacked) 10.7 %
The 2023 and 2021 years were comprised of 52 weeks, whereas the 2022 year was comprised of 53 weeks.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable after it has been in operation for five full fiscal quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.
Analysis of Consolidated Statements of Income
Percentage Change
Gross profit margin 24.7 % 25.2 % 26.4 %
O, G & A, percent of net sales 21.8 % 21.8 % 22.9 %
Operating margin 2.9 % 3.3 % 3.5 %
Effective income tax rate 29.2 % 22.1 % 26.6 %
Net income, percent of net sales 2.2 % 2.7 % 2.6 %
Net Sales
Individual Year-Over-Year Analysis of Sales
Percentage Change
Net sales, adjusted for an additional week in 2022, excluding fuel 2.6 % 7.5 %
Net sales, adjusted for an additional week in 2022 1.9 8.8
Net sales, excluding fuel 0.6 9.6
Comparable store sales excluding fuel 0.3 9.5
Comparable store sales (0.2) % 10.9 %
The 2023 and 2021 years were comprised of 52 weeks, whereas the 2022 year was comprised of 53 weeks.
When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation after five full fiscal quarters. Relocated stores and stores with expanded square footage are included in comparable store sales since these units are located in existing markets and are open during construction. Planned store dispositions are excluded from the calculation. The Company only includes retail food stores in the calculation.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Net Sales (continued)
According to the latest U.S. Bureau of Labor Statistics’ report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index increased 5.0% in 2023, 11.4% in 2022, 3.5% in 2021. Even though the U.S. Bureau of Labor Statistics’ index rates may be reflective of a trend, it will not necessarily be indicative of the Company’s actual results. According to the U.S. Department of Energy, the 52-week average price of gasoline in the Central Atlantic States decreased 10.1%, or $0.42 cents per gallon, in 2023 compared to the 53-week average in 2022. The 53-week average price of gasoline in the Central Atlantic States, according to the U.S. Department of Energy, increased 31.4%, or $1.00 per gallon, in 2022 compared to the 52-week average in 2021.
Comparable store sales, excluding fuel and adjusted for the 53rd week in 2022, increased for all years presented. Comparable store sales, including fuel, decreased year over year. On a comparable store sales basis pharmacy services increased in sales. Comparable store sales, adjusted for an additional week in 2022 increased 2.3% excluding fuel and 1.7% including fuel for 2023 compared to 2022. The Company has provided additional product offerings and customer conveniences such as “Weis 2 Go Online,” currently offered at 188 store locations. “Weis 2 Go Online” allows the customer to order on-line and have their order delivered or picked up at an expedient store drive-thru. The Company also currently offers home delivery to customers in all 197 of its locations via multiple grocery delivery partners.
During 2023, the Company’s net sales were negatively impacted by declining government benefits. Although the Company experienced retail inflation and deflation in various commodities for the periods presented, the Company anticipates overall product costs to increase given the recent inflationary indicators in the food retail industry. Management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors. Management remains confident in its ability to generate long-term sales growth in a highly competitive environment, but also understands some competitors have greater financial resources and could use these resources to take measures which could adversely affect the Company’s competitive position.
Cost of Sales and Gross Profit
Cost of sales consists of direct product costs (net of discounts and allowances), net advertising costs, warehousing costs, transportation costs, as well as manufacturing facility costs. Increased sales volume resulted in an increase in cost of sales. Both direct product cost and distribution cost increase when sales volume increases.
Gross profit rate was 24.7% in 2023, 25.2% in 2022, 26.4% in 2021. The decrease in gross profit rate is attributable to increased pharmacy and fuel sales, which have a lower gross profit margin than grocery sales; and higher product and supply chain costs.
The Company experienced unfavorable non-cash LIFO inventory valuation adjustments, decreasing gross profit by $6.7 million, $29.2 million and $4.0 million in 2023, 2022 and 2021, respectively.
The Company has experienced retail inflation and deflation in various commodities for the periods presented. Management cannot accurately measure the full impact of inflation or deflation on retail pricing due to changes in the types of merchandise sold between periods, shifts in customer buying patterns and the fluctuation of competitive factors.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Operating, General and Administrative Expenses
The majority of the expenses were driven by increased sales volume.
Employee-related costs such as wages, employer paid taxes, health care benefits and retirement plans, comprise approximately 59.9% of the total “Operating, general and administrative expenses.” As a percent of sales, direct store labor increased 0.1% in 2023 compared to 2022 and decreased 0.5% in 2022 compared to 2021. Direct store labor expenses increased slightly in 2023 compared to 2022 due to flat net sales results for the same period. Direct store labor increased in 2022 compared to 2021, as sales increases outpaced the labor expense increase causing the rate to fall, primarily due to the fixed component of store labor. Management continues to monitor store labor efficiencies and develop labor standards to reduce costs while maintaining the Company’s customer service expectations. During 2023, the Company completed a multi-year initiative to install or upgrade self-checkouts in its stores in response to customer preference and labor supply, including adding convertible dual-use checkout lanes.
The Company’s self-insured health care benefit expenses decreased by 18.0% and 8.5% in 2023 and 2022, respectively. As a percent of sales, the Company’s self-insured health care benefit expenses decreased by 0.1% and 0.2%, in 2023 and 2022, respectively.
Depreciation and amortization expense charged to “Operating, general and administrative expenses” was $98.0 million, or 2.1% of net sales, for 2023 compared to $94.6 million, or 2.0% of net sales, for 2022 compared to $93.8 million, or 2.2% of net sales, for 2021. See the Liquidity and Capital Resources section for further information regarding the Company’s capital expenditure program.
A breakdown of the material increases (decreases) as a percent of sales in "Operating, general and administrative expenses" is as follows:
(amounts in thousands) Increase Increase (Decrease)
December 30, 2023 (Decrease) as a % of sales
Associate insurance benefits expense $ (6,338) (0.1) %
Repairs and maintenance expense 3,563 0.1
(amounts in thousands) Increase Increase (Decrease)
December 31, 2022 (Decrease) as a % of sales
Employee expense $ 18,910 (1.0) %
Utilities expense 12,375 0.2
The majority of the increases in other expenses from 2022 to 2023 were technology expenses due to more third-party information technology subscription and consulting services and less asset disposals and insurance proceeds. The majority of the increases in other expenses from 2021 to 2022 were higher financial service fees due to more sales transaction dollars paid with debit and credit cards and more third-party information technology subscription and consulting services.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Provision for Income Taxes
The effective income tax rate was 29.2%, 22.1% and 26.6% in 2023, 2022, and 2021, respectively. The effective income tax rate differs from the federal statutory rate of 21% primarily due to state taxes as well as nondeductible employee-related expenses. The Company reduced its provision for income taxes by $5.5 million in 2022 primarily due to the effects of Pennsylvania House Bill 1342 which was enacted on July 8, 2022. The bill made significant changes to the Commonwealth’s corporate income tax laws which included lowering the tax rate gradually from 9.99% in 2022 to 4.99% in 2031.
Liquidity and Capital Resources
The primary source of cash is cash flows generated from operations. In addition, the Company has access to a revolving credit agreement entered into on September 1, 2016, and amended on September 29, 2023, with Wells Fargo Bank, N.A. (the “Credit Agreement”). The Credit Agreement matures on October 1, 2027, and provides for an unsecured revolving credit facility with an aggregate principal amount not to exceed $30.0 million with an additional discretionary amount available of $70.0 million. As of December 30, 2023, the availability under the revolving credit agreement was $22.3 million with $7.7 million of letters of credit outstanding. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company. The Company has not had an obligation on the Credit Agreement since the second quarter of 2018.
The Company’s investment portfolio consists of high-grade bonds with maturity dates between one and 30 years and four high yield, large capitalized public company equity securities. The portfolio totaled $226.0 million as of December 30, 2023. Management anticipates maintaining the investment portfolio but has the ability to liquidate if needed. See “Item 7a. Quantitative and Qualitative Disclosures about Market Risk” for more details regarding the Company’s market risk.
The Company’s capital expenditure program includes the construction of new superstores, the expansion and remodeling of existing units, the acquisition of sites for future expansion, new technology purchases and the continued upgrade of the Company’s distribution facilities and transportation fleet. Management continues to reinvest in its long-term capital expenditure program including plans to complete multiple carryover projects from 2022 and 2023 that were delayed due to labor and supply chain disruptions. The Company anticipates to fund the long-term capital expenditure program, the acquisition of retail stores, the construction of additional distribution facilities, repurchases of common stock, and cash dividends on common stock through its cash and cash equivalents, marketable securities, cash flows from operating activities, and revolving credit agreement.
The Board of Directors’ 2004 resolution authorizing the repurchase of up to one million shares of the Company’s common stock has a remaining balance of 752,468 shares.
Quarterly Cash Dividends
Total cash dividend payments on common stock, on a per share basis, amounted to $1.36 in 2023, $1.30 in 2022 and $1.25 in 2021. The Company increased its quarterly dividend from 32 cents per share to 34 cents per share in the fourth quarter of 2022. The Company expects to continue paying regular cash dividends on a quarterly basis. However, the Board of Directors reconsiders the declaration of dividends quarterly. The Company pays these dividends at the discretion of the Board of Directors and the continuation of these payments and the amount of the dividends depends upon the financial condition of the Company, results of operations and other factors which the Board of Directors deems relevant.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Results of Operations (continued)
Cash Flow Information
(amounts in thousands)
Net cash provided by (used in):
Operating
Cash flows from operating activities decreased in 2023 as compared to 2022 and 2021, respectively. The decrease in 2023 from 2022 is due to lower net income and in 2022 from 2021 is due to increases in inventory.
Investing
Property and equipment purchases totaled $104.0 million in 2023, $122.2 million in 2022 and $151.8 million in 2021. As a percentage of sales, capital expenditures totaled 2.2% in 2023, 2.5% in 2022 and 3.6% in 2021. Multiple projects from 2022 and 2023 are expected to be completed in 2024 due to labor and supply chain disruptions. The Company significantly increased its marketable securities holdings in 2023 by approximately $39.5 million and in 2022 the Company maintained its marketable securities portfolio.
Financing
The Company paid dividends of $36.6 million in 2023, $35.0 million in 2022 and $33.6 million in 2021. The Company increased its quarterly dividend from 32 cents per share to 34 cents per share in the fourth quarter of 2022. The Company previously increased its quarterly dividend from 31 cents per share to 32 cents per share in the fourth quarter of 2021.
Contractual Obligations
The following table represents scheduled maturities of the Company’s long-term contractual obligations as of December 30, 2023.
Payments due by period
Less than More than
(dollars in thousands) Total 1 year 1-3 years 3-5 years 5 years
Off-Balance Sheet Arrangements
The Company is not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations or cash flows.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Critical Accounting Policies and Estimates
The Company has chosen accounting policies that it believes are appropriate to accurately and fairly report its operating results and financial position, and the Company applies those accounting policies in a consistent manner. The Significant Accounting Policies are summarized in Note 1 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that the Company makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The Company evaluates these estimates and assumptions on an ongoing basis and may retain outside consultants, lawyers and actuaries to assist in its evaluation. The Company believes the following accounting policies are the most critical because they involve the most significant judgments and estimates used in preparation of its Consolidated Financial Statements.
Inventories
Inventories are valued at the lower of cost or net realizable value, using both the retail inventory and average cost methods. The retail inventory method is commonly used by retail companies to determine cost and calculate gross margin based on applying a cost-to-retail ratio to each similar merchandise category’s ending retail value. The Company’s center store and pharmacy inventories are valued using last in, first out (LIFO). The Company’s fresh inventories are valued using average cost. The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts and to provide for estimated shortages from the last physical count to the financial statement date.
Vendor Allowances
Vendor allowances related to the Company’s buying and merchandising activities are recorded as a reduction of cost of sales as they are earned, in accordance with the underlying agreement. Off-invoice and bill-back allowances are used to reduce direct product costs upon the receipt of goods. Promotional rebates and credits are accounted for as a reduction in the cost of inventory and recognized when the related inventory is sold. Volume incentive discounts are accounted for as a reduction of cost of sales and realized using estimated amounts at the time it is deemed probable that the incentive target will be reached. Long-term contract incentives, which require an exclusive vendor relationship, are allocated over the life of the contract. Promotional allowance funds for specific vendor-sponsored programs are recognized as a reduction of cost of sales as the program occurs and the funds are earned per the agreement. Cash discounts for prompt payment of invoices are realized in cost of sales as invoices are paid. Warehouse and back-haul allowances provided by suppliers for distributing their product through the Company’s distribution system are recorded in cost of sales as the required performance is completed. Warehouse slotting allowances are recorded in cost of sales when new items are initially set up in the Company’s distribution system, which is when the related expenses are incurred and performance under the agreement is complete. Swell allowances for damaged goods are realized in cost of sales as provided by the supplier, helping to offset product shrink losses also recorded in cost of sales.
Income Taxes
Income taxes are inherently complex and require Management’s evaluation and estimates, specifically regarding current and deferred income taxes and uncertain tax positions. The Company reviews the tax positions taken, or expected to be taken, on tax returns to determine whether, and to what extent, a benefit can be recognized in its Consolidated Financial Statements. The assessment of the Company’s tax position relies on the judgment of Management to estimate the more likely than not merits associated with the Company’s various tax positions.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)
Critical Accounting Policies and Estimates (continued)
Leases
The Company leases approximately 49% of its open store facilities under operating leases that expire at various dates through 2036, with the remaining store facilities being owned. These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus variable lease costs related to real estate taxes and insurance as well as contingent rentals based on a percentage of annual sales or increases periodically based on inflation. These variable lease costs are not included in the measurement of the operating lease right-to-use assets or lease liabilities and are charged to the related expense category included in “Operating, general and administrative expenses.” Most of the leases contain multiple renewal options, under which the Company may extend the lease terms from 5 to 20 years. Additionally, the Company has operating leases for certain transportation and other equipment. The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.”
Self-Insurance
The Company is self-insured for a majority of its workers’ compensation, general liability, vehicle accident and associate medical benefit claims. The self-insurance liability for most of the medical benefit claims is determined based on historical data and an estimate of claims incurred but not reported. The other self-insurance liabilities including workers’ compensation are determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company is self-insured for certain healthcare claims and stop-loss coverage is maintained for individual annual claim occurrences exceeding a $500 thousand specific deductible. The Company is liable for workers’ compensation claims ranging from $1.0 million to $2.0 million per claim. Property and casualty insurance coverage is maintained with outside carriers at deductible or retention levels ranging from $250 thousand to $1.0 million. Significant assumptions used in the development of the actuarial estimates include reliance on the Company’s historical claims data including average monthly claims and average lag time between incurrence and reporting of the claim.
Forward-Looking Statements
In addition to historical information, this Annual Report may contain forward-looking statements, which are included pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. For example, risks and uncertainties can arise with changes in: general economic conditions, including their impact on capital expenditures; business conditions in the retail industry; the regulatory environment; rapidly changing technology and competitive factors, including increased competition with regional and national retailers; and price pressures. Readers are cautioned not to place undue reliance on forward-looking statements, which reflect Management’s analysis only as of the date hereof. The Company undertakes no obligation to publicly revise or update these forward-looking statements to reflect events or circumstances that arise after the date hereof. Readers should carefully review the risk factors described in other documents the Company files periodically with the Securities and Exchange Commission.
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Item 7a. Quantitative and Qualitative Disclosures about Market Risk:
(dollars in thousands) Expected Maturity Dates Fair Value
Rate sensitive assets:
Other Relevant Market Risks
The Company’s equity securities at December 30, 2023 had a fair value of $4.9 million. The dividend yield realized on these equity investments was 6.2% in 2023. By their nature, both the fixed interest rate securities and the equity investments inherently expose the holders to market risk. The extent of the Company’s interest rate and other market risk is not quantifiable or predictable with precision due to the variability of future interest rates and other changes in market conditions. However, the Company believes that its exposure in this area is not material.
The Company’s revolving credit agreement is exposed to interest rate fluctuations to the extent of changes in the SOFR rate. The Company believes this exposure is not material due to availability of liquid assets to eliminate the outstanding credit facility.
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Item 8. Financial Statements and Supplementary Data:
WEIS MARKETS, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except shares) December 30, 2023 December 31, 2022
Assets
Current:
Prepaid expenses and other current assets 34,107 29,921
Intangible and other assets, net 19,527 18,785
Liabilities
Current:
Income taxes payable 516 6,354
Postretirement benefit obligations 29,032 25,270
Shareholders’ Equity
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except shares and per share amounts)
Investment income (loss) and interest expense 13,162 (82) 5,007
Cash dividends per share $ 1.36 $ 1.30 $ 1.25
Basic and diluted earnings per share $ 3.86 $ 4.65 $ 4.05
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
Other comprehensive income (loss) by component, net of tax:
Available-for-sale marketable securities
Other comprehensive income (loss), net of tax 5,255 (8,135) (1,599)
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Accumulated
(amounts in thousands, except shares) Other Total
Dividends paid — — (33,623) — — — (33,623)
Dividends paid — — (34,968) — — — (34,968)
Dividends paid — — (36,582) — — — (36,582)
See accompanying notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
52 Weeks Ended 53 Weeks Ended 52 Weeks Ended
Cash flows from operating activities:
Adjustments to reconcile net income to
net cash provided by operating activities:
(Gain) loss on disposition of fixed assets (46) (2,407) 1,026
Unrealized (gain) loss in value of equity securities 275 1,325 900
Unrealized (gain) loss in SERP (2,834) 5,653 (2,309)
Changes in operating assets and liabilities:
Accounts receivable and prepaid expenses (18,564) 2,436 2,727
Accounts payable and other liabilities 13,095 7,695 174
Cash flows from investing activities:
Proceeds from the sale of property and equipment 867 6,691 5,932
Purchase of intangible assets (1,075) (819) (208)
Change in SERP investment (1,120) (1,290) (1,986)
Cash flows from financing activities:
Net cash used in financing activities (36,582) (34,968) (33,623)
See accompanying notes to Consolidated Financial Statements. Cash paid for income taxes was $43.8 million, $37.4 million, $24.8 million in 2023, 2022 and 2021, respectively. Cash paid for interest related to long-term debt was $41 thousand, $40 thousand, $32 thousand in 2023, 2022 and 2021, respectively.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies utilized in preparing the Company’s Consolidated Financial Statements:
(a) Description of Business
Weis Markets, Inc. is a Pennsylvania business corporation founded in 1912 and incorporated in 1924. The Company is engaged principally in the retail sale of food in Pennsylvania and surrounding states. The Company’s operations are reported as a single reportable segment. There was no material change in the nature of the Company’s business during fiscal 2023.
(b) Definition of Fiscal Year
The Company’s fiscal year ends on the last Saturday in December. Fiscal 2023 was comprised of 52 weeks, ending on December 30, 2023. Fiscal 2022 was comprised of 53 weeks, ending on December 31, 2022. Fiscal 2021 was comprised of 52 weeks, ending on December 25, 2021. References to years in this Annual Report relate to fiscal years.
(c) Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
(d) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.
(e) Cash and Cash Equivalents
The Company maintains its cash balances in the form of core checking accounts and money market accounts. The Company maintains cash deposits with banks that at times exceed applicable insurance limits. The Company reduces its exposure to credit risk by maintaining such deposits with high quality financial institutions that Management believes are creditworthy.
The Company considers investments with an original maturity of three months or less to be cash equivalents. Investment amounts classified as cash equivalents as of December 30, 2023 and December 31, 2022 totaled $118.4 millionand $80.5 million, respectively.
Consumer electronic payments accepted at the point of sale, including all credit card, debit card and electronic benefits transfer transactions that process in three days or less are classified as cash equivalents. Consumer electronic payment amounts classified as cash equivalents as of December 30, 2023 and December 31, 2022 totaled $39.7 million and $42.9 million, respectively.
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Note 1 Summary of Significant Accounting Policies (continued)
(f) Marketable Securities
Marketable securities consist of corporate and municipal bonds, commercial paper and equity securities. The Company invests primarily in high-grade marketable debt securities. The Company classifies all of its marketable securities as available-for-sale.
Available-for-sale securities are recorded at fair value as determined by quoted market price based on national markets. To determine fair value the Company utilizes standard pricing procedures of its investment advisory firm(s), which include various third-party pricing services. If the cost of an investment exceeds its fair value, the Company evaluates general market conditions, credit quality of debt instrument issuers, and the extent to which the fair value is less than cost. Unrealized holding gains and losses, net of the related tax effect, on corporate and municipal bonds and commercial paper are excluded from earnings and are reported as a separate component of shareholders’ equity until realized. Unrealized holding gains and losses on equity securities are recorded in investment income (loss) and interest expense. Dividend and interest income is recognized when earned. Realized gains and losses are included in earnings and are derived using the specific identification method for determining the cost of securities.
Investment amounts classified as marketable securities as of December 30, 2023 and December 31, 2022 totaled $226.0 million and $186.4 million, respectively.
Equity securities are measured at fair value and the unrealized holding gains and losses are recorded in investment income (loss) and interest expense. The Company recognized a $275 thousand loss in 2023 and a $1.3 million loss in 2022.
(g) Accounts Receivable
Accounts receivable are stated net of an allowance for uncollectible accounts of $2.0 million and $4.6 million as of December 30, 2023 and December 31, 2022, respectively. The reserve balance relates to amounts due from pharmacy third party providers, retail customer returned checks, manufacturing customers, vendors and tenants. The Company maintains an allowance for the amount of receivables deemed to be uncollectible and calculates this amount based upon historical collection activity adjusted for current conditions.
(h) Inventories
Inventories are valued at the lower of cost or net realizable value, using both the retail inventory and average cost methods. The retail inventory method is commonly used by retail companies to determine cost and calculate gross margin based on applying a cost-to-retail ratio to each similar merchandise category’s ending retail value. The Company’s center store and pharmacy inventories are valued using last in, first out (LIFO). The Company’s fresh inventories are valued using average cost. The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts and to provide for estimated shortages from the last physical count to the financial statement date.
(i) Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the cost of buildings and improvements and equipment using the straight-line method.
Leasehold improvements are amortized using the straight-line method over the terms of the leases or the useful lives of the assets, whichever is shorter.
Maintenance and repairs are expensed and renewals and betterments are capitalized. When assets are retired or otherwise disposed of, the assets and accumulated depreciation are removed from the respective accounts and any profit or loss on the disposition is credited or charged to “Operating, general and administrative expenses.”
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Note 1 Summary of Significant Accounting Policies (continued)
(j) Leases
The Company leases approximately 49% of its open store facilities under operating leases that expire at various dates through 2036, with the remaining store facilities being owned. These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus variable lease costs related to real estate taxes and insurance as well as contingent rentals based on a percentage of annual sales or increases periodically based on inflation. These variable lease costs are not included in the measurement of the operating lease right-to-use assets or lease liabilities and are charged to the related expense category included in “Operating, general and administrative expenses.” Most of the leases contain multiple renewal options, under which the Company may extend the lease terms from 5 to 20 years. Additionally, the Company has operating leases for certain transportation and other equipment. The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.”
(k) Goodwill and Intangible Assets
Goodwill is not amortized but tested for impairment on an annual basis and between annual tests when indicators of impairment are identified. Intangible assets with an indefinite useful life are not amortized until their useful life is determined to be no longer indefinite and are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.
The Company’s intangible assets and related accumulated amortization at December 30, 2023 and December 31, 2022 consisted of the following:
December 30, 2023 December 31, 2022
Accumulated Accumulated
(amounts in thousands) Gross Amortization Net Gross Amortization Net
Intangible assets with a definite useful life are generally amortized on a straight-line basis over periods up to 10 years for customer lists. Estimated amortization expense for the next five fiscal years is approximately $430 thousand in 2024, $299 thousand in 2025, $265 thousand in 2026, $168 thousand in 2027 and $146 thousand in 2028. As of December 30, 2023, the Company’s intangible assets with indefinite lives consisted of goodwill and liquor licenses.
(l) Impairment of Long-Lived Assets
The Company periodically evaluates the period of depreciation or amortization for long-lived assets to determine whether current circumstances warrant revised estimates of useful lives. The Company completes an impairment test annually. The Company also reviews its property and equipment for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount to the net undiscounted cash flows expected to be generated by the asset. An impairment loss would be recorded for the excess of net book value over the fair value of the asset impaired. The fair value is estimated based on current market values or expected discounted future cash flows.
With respect to owned property and equipment associated with closed stores, the value of the property and equipment would be adjusted to reflect recoverable values if current economic conditions and estimated fair values of the property was less than the net book value.
In accordance with Accounting Standards Codification No. 360, Property, Plant and Equipment,the Company believes that, based on current conditions, materially different reported results are not likely to result from long-lived asset impairments.
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Note 1 Summary of Significant Accounting Policies (continued)
(l) Impairment of Long-Lived Assets (continued)
The results of impairment tests are subject to Management’s estimates and assumptions of projected cash flows and operating results. The Company believes that, based on current conditions, materially different reported results are not likely to result from long-lived asset impairments. However, a change in assumptions or market conditions could result in a change in estimated future cash flows and the likelihood of materially different reported results.
(m) Self-Insurance
The Company is self-insured for a majority of its workers’ compensation, general liability, vehicle accident and associate medical benefit claims. The self-insurance liability for most of the medical benefit claims is determined based on historical data and an estimate of claims incurred but not reported. The other self-insurance liabilities including workers’ compensation are determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company is self-insured for certain healthcare claims and stop-loss coverage is maintained for individual annual claim occurrences exceeding a $500 thousand specific deductible. The Company is liable for workers’ compensation claims ranging from $1.0 million to $2.0 million per claim. Property and casualty insurance coverage is maintained with outside carriers at deductible or retention levels ranging from $250 thousand to $1.0 million. Significant assumptions used in the development of the actuarial estimates include reliance on the Company’s historical claims data including average monthly claims and average lag time between incurrence and reporting of the claim.
(n) Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in the Consolidated Financial Statements. Refer to Note 9 to the Consolidated Financial Statements for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts are accrued and classified as a component of income tax expense.
(o) Earnings Per Share
Earnings per share are based on the weighted-average number of common shares outstanding.
(p) Revenue Recognition
Revenue from the sale of products to the Company’s customers is recognized at the point of sale. Discounts provided to customers at the point of sale through the Weis Club Preferred Shopper loyalty program are recognized as a reduction in sales as products are sold. Periodically, the Company will run a point-based sales incentive program that rewards customers with future sales discounts. The Company makes reasonable and reliable estimates of the amount of future discounts based upon historical experience and its customer data tracking software. Sales are reduced rationally and systematically by these estimates over the life of the program. Discounts to customers at the point of sale provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the discounts are redeemable at any retailer that accepts those discounts. The Company records “Deferred revenue” for the sale of gift cards and revenue is recognized in “Net sales” at the time of customer redemption for products. Gift card breakage income is recognized in “Operating, general and administrative expenses” based upon historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by the customer is remote. Sales tax is excluded from “Net sales.” The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. Merchandise return activity is immaterial to revenues due to products being returned quickly and the relatively low unit cost.
(q) Cost of Sales, Including Advertising, Warehousing and Distribution Expenses
“Cost of sales, including advertising, warehousing and distribution expenses” consists of direct product costs (net of discounts and allowances), advertising (net of vendor paid cooperative advertising credits), distribution center and transportation costs, as well as manufacturing facility operations. Advertising costs, net of vendor paid cooperative advertising credits, are expensed as incurred which are primarily funded by vendor cooperative advertising credits and occur in the same period as the product is sold.
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Note 1 Summary of Significant Accounting Policies (continued)
(r) Vendor Allowances
Vendor allowances related to the Company’s buying and merchandising activities are recorded as a reduction of cost of sales as they are earned, in accordance with the underlying agreement. Off-invoice and bill-back allowances are used to reduce direct product costs upon the receipt of goods. Promotional rebates and credits are accounted for as a reduction in the cost of inventory and recognized when the related inventory is sold. Volume incentive discounts are accounted for as a reduction of cost of sales and realized using estimated amounts at the time it is deemed probable that the incentive target will be reached. Long-term contract incentives, which require an exclusive vendor relationship, are allocated over the life of the contract. Promotional allowance funds for specific vendor-sponsored programs are recognized as a reduction of cost of sales as the program occurs and the funds are earned per the agreement. Cash discounts for prompt payment of invoices are realized in cost of sales as invoices are paid. Warehouse and back-haul allowances provided by suppliers for distributing their product through the Company’s distribution system are recorded in cost of sales offsetting costs incurred. Warehouse slotting allowances are recorded in cost of sales when new items are initially set up in the Company’s distribution system, which is when the related expenses are incurred and performance under the agreement is complete. Swell allowances for damaged goods are realized in cost of sales as provided by the supplier, helping to offset product shrink losses also recorded in cost of sales.
Vendor allowances recorded as credits in cost of sales totaled $106.9 million in 2023, $120.0 million in 2022 and $100.1 million in 2021. Vendor paid cooperative advertising credits totaled $3.1 million in 2023, $2.9 million in 2022 and $3.4 million in 2021. These credits were netted against advertising costs within “Cost of Sales, including Advertising, Warehousing and Distribution expenses.” The Company had accounts receivable due from vendors of $450 thousand and $617 thousand for earned advertising credits and $8.8 million and $3.5 million for earned promotional discounts as of December 30, 2023 and December 31, 2022, respectively. The Company had $2.4 million and $3.3 million in unearned income included in accrued liabilities for unearned vendor programs under long-term contracts for display and shelf space allocation as of December 30, 2023 and December 31, 2022, respectively.
(s) Operating, General and Administrative Expenses
Business operating costs including expenses generated from administration and purchasing functions, are recorded in “Operating, general and administrative expenses” in the Consolidated Statements of Income. Business operating costs include items such as wages, benefits, utilities, repairs and maintenance, rent, insurance, depreciation, leasehold amortization and costs for outside provided services.
(t) Advertising Costs
The Company expenses advertising costs as incurred. The Company recorded advertising expense, before vendor paid cooperative advertising credits, of $24.2 million in 2023, $23.7 million in 2022, $24.9 million in 2021 in “Cost of Sales, including Advertising, Warehousing and Distribution Expenses.”
(u) Rental and Commission Income
The Company leases or subleases space to tenants in owned, vacated and open store facilities. Rental income is recorded when earned as a component of “Operating, general and administrative expenses.” All leases are operating leases. Refer to Note 5 to the Consolidated Financial Statements for further disclosure on operating leases and rental income.
The Company provides a variety of services to its customers, including but not limited to lottery, money orders, third-party gift cards, and third-party bill pay services. Commission income earned from these services are recorded when earned as a component of “Operating, general and administrative expenses.” The Company recorded commission income of $17.6 million in 2023,$18.0 million in 2022, $18.9 million in 2021.
(v) Current Relevant Accounting Standards
The Company regularly monitors recently issued accounting standards and assesses their applicability and impact. The Company believes there is one accounting standard update that has or will have a material or significant impact on the Company’s accounting policies.
The FASB issued ASU 2023-09, Improvements to Income Tax Disclosures (“ASU 2023-09”), that is intended to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09 requires disclosures of reconciliation of the expected tax at the applicable statutory federal income tax rate to the reported tax in a tabular format, using both percentages and amounts, broken out into specific categories with certain reconciling items of five percent or greater of the expected tax further broken out by
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nature and/or jurisdiction, disclosure of income taxes paid, net of refunds received, broken out between federal and state and local income taxes and payments to individual jurisdictions representing five percent or more of the total income tax payments must also be separately disclosed.
The disclosures required by ASU 2023-09 are required in the Company’s annual financial statements beginning with the year ended December 28, 2024, with early adoption permitted.
Note 2 Marketable Securities
The Company’s marketable securities are all classified as available-for-sale within “Current Assets” in the Company’s Consolidated Balance Sheets. Financial Accounting Standards Board (FASB) has established three levels of inputs that may be used to measure fair value:
Level 1Observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2Observable inputs, other than Level 1 inputs in active markets, that are observable either directly or indirectly; and
Level 3Unobservable inputs for which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s marketable securities valued using Level 1 inputs include four public company equity securities, for which quoted market prices are available. The Company’s bond and commercial paper portfolio is valued using Level 2 inputs. The Company’s corporate and municipal bonds and commercial paper are valued using a combination of pricing for similar securities, recently executed transactions, cash flow models with yield curves and other pricing models utilizing observable inputs, which are considered Level 2 inputs.
For Level 2 investment valuation, the Company utilizes standard pricing procedures of its investment advisory firm(s), which include various third-party pricing services. These procedures also require specific price monitoring practices as well as pricing review reports, valuation oversight and pricing challenge procedures to maintain the most accurate representation of investment fair market value.
The Company accrues interest on its bond and commercial paper portfolio throughout the life of each bond and commercial paper held. Dividends from the equity securities are recognized as received. Both interest and dividends are recognized in “Investment income and interest expense” on the Company’s Consolidated Statements of Income. The Company recognized investment income of $9.5 million, $3.8 million and $1.6 million which included unrealized losses of $275 thousand, $1.3 million and $900 thousand in the fiscal years ended December 30, 2023, December 31, 2022 and December 25, 2021, respectively.
Marketable securities, as of December 30, 2023 and December 31, 2022, consisted of:
Gross Gross
(amounts in thousands) Amortized Unrealized Unrealized Fair
December 30, 2023 Cost Holding Gains Holding Losses Value
Available-for-sale:
Level 1
Equity securities $ 4,910
Level 2
Gross
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Gross
(amounts in thousands) Amortized Unrealized Unrealized Fair
December 31, 2022 Cost Holding Gains Holding Losses Value
Available-for-sale:
Level 1
Equity securities $ 5,185
Level 2
Maturities of marketable securities classified as available-for-sale at December 30, 2023, were as follows:
Amortized Fair
(amounts in thousands) Cost Value
Available-for-sale:
Due after one year through five years 77,187 74,573
Due after five years through ten years 16,308 15,351
SERP Investments
The Company also maintains a non-qualified supplemental executive retirement plan (SERP) for certain of its associates which allows them to defer income to future periods. Participants in the plans earn a return on their deferrals based on mutual fund investments. The Company chooses to invest in the underlying mutual fund investments to offset the liability associated with the non-qualified deferred compensation plans. Such investments are reported on the Company’s Consolidated Balance Sheets as “SERP investment,” are classified as trading securities and are measured at fair value using Level 1 inputs with gains and losses included in “Investment income and interest expense” on the Company’s Consolidated Statements of Income. The Company recognized investment income of$3.7 million in the fiscal year ended December 30, 2023, investment loss of $3.8 million in the fiscal year ended December 31, 2022 and investment income of $3.4 million in the fiscal year ended December 25, 2021, respectively. The changes in the underlying liability to the associates are recorded in “Other income (expense).”
Note 3 Inventories
Inventories, as of December 30, 2023 and December 31, 2022, were valued as follows:
Management believes the use of the LIFO method for valuing certain inventories represents the most appropriate matching of costs and revenues in the Company’s circumstances. If all inventories were valued on the average cost method, which approximates current cost, total inventories would have been $110.3 million and $103.6 million higher than as reported on the above methods as of December 30, 2023 and December 31, 2022, respectively.