Ingles Markets: Hurricane Helene Won't Make Things Easy

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Ingles Markets faces significant operational challenges due to hurricane Helene, impacting its distribution center and several stores.The company is self-insured for casualty losses, meaning it will ...

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Tom WernerInvestment Thesis In my previous coverage I commented that although the supermarket chain Ingles Markets (NASDAQ:IMKTA) looked cheap, there didn't seem to be a real growth plan coming in the near-term. Added to this is the news of the recent hurricane Helen, which has severely damaged the company's only distribution center, which delivered 57% of the products sold. For this reason, I think that valuation has already been adjusted and remains compelling, but growth will be even more slowed this year and I would prefer to follow the situation from the outside. Hurricane Helene Affectation At the end of September, hurricane Helene caused damage to the southeastern coast of the United States, starting in Florida. However, the North Carolina area was also especially affected, so it's worth remembering that ALL the stores and operation centers are located in this same area, as can be read in the 10-K: The Company’s warehouse and distribution center and milk processing and packaging plant, as well as all of the Company’s stores, are concentrated in the Southeastern United States. As I mentioned in my previous coverage, management has been comfortable operating in the same area without seeking geographical expansion, as a result they have a very high concentration, with the risk that this entails. This can be seen better in the following image of the Ingles stores: Store location (Ingles Markets) On October 3, the company released a statement commenting that hurricane Helene has impacted both stores and distribution center operations. In addition, they commented that 186 of their 198 stores were open for business, but with a lack of connectivity, however, there're some images collected through X (formerly Twitter) where I'd dare to say that this statement falls somewhat short in terms of the damage is concerned. Credits to the user @OddDiligence for the images, by the way. If my research is correct, the company only has one distribution center which supplies approximately 57% of the goods the company sells, according to the latest annual report. Well, this one looked like this at the beginning of this month. Distribution center (OddDiligence user)Leaving aside the fact that there are stores not operating in the best conditions, it seems that the center that delivers the products to the different stores is severely affected, not only because it's said to have been looted by people, along with some nearby stores that were also in poor condition, but because such a flood entails damage to electrical installations, equipment and so on. As if this weren't enough, in the annual report we can also find information that doesn't favor the situation at all: The majority of the Company’s properties are self-insured for casualty losses and business interruption; however, liability coverage is maintained. The self-insurance reserves totaled $32.9 million. So, the company is in a situation where they won't only see its sales reduced in future quarters due to affected stores and operations centers, but it will also have to pay for all of these damages out of its own pocket because they own the stores but aren't insured (I don't know why they would do that). As if you lost your job and had a car accident, where you will be responsible for the expenses because you didn't have insurance. Ingles Markets 10-KThe key question now is how much will be spent refurbishing stores and distribution centers, in addition to how much will be lost in sales. While I've tried to find the answer, I'm not sure because the company doesn't usually provide much information about the costs of building new stores, for example, and I also don't know the final material damage that the distribution center will have, although the good news is that as of the last report, the company accumulates $355M in cash while the debt is only $575M, so the situation should be manageable. Valuation This year wasn't being easy for the company, since in the first three quarters, revenue had decreased 1.5% compared to the first three quarters of 2023. My estimate is that after these effects, sales may fall 3%, mainly due to the problems of getting products to stores and the time that some of them will be closed. I also think that the net margin will be compressed because the company will have to buy all its products from third parties while the distribution centers recover. In the next few years, things should return to normal because while the problem was serious, I don't think it will be permanent. So at the current price of $61 you could get a good return on doubling the stock price within the next four years according to my assumptions. Valuation model (Author's compilation)Of course, this is because since September 30 the stock has fallen almost 18%. If this hadn't happened and the stock price had remained at the previous $75 per share, the return would be much less attractive considering the damage caused by the hurricane. The Bottom Line I think these problems have a solution, for example:   Affected stores: Each store generates $28.6M per year or $7.1M per quarter. IMKTA commented that 12 stores were being affected, if these remained like this for an entire quarter then this year only $85M would be lost, which I already included in the valuation and this remains compelling.  Distribution Center: It will cost to repair, but the company has plenty of cash and limited debt. The alternative of purchasing products from third parties is viable because 43% of the products were already purchased in this way, and therefore the company already has the relationships and means to distribute them in this way.   Now, I think that the company is in a somewhat turbulent situation that doesn't favor the opinion I stated in the last article, in which I commented that although the company was cheap, I'd prefer to see management willing to develop a growth plan. With the hurricane situation, this possibility will be delayed for at least a while longer. I maintain my hold rating, but it was relevant to share the news about the hurricane so that every investor or interested party in the company has the complete facts.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.4","shortVersion":"4.29.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2474065187"}