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Is Ingles Headed Back Toward Growth?

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A few months back, I touched on regional grocery chain Ingles Markets (NASDAQ: IMKTA  ) . The stores don't have nearly the name recognition of many industry players, but they're growing in number and generating plenty of profit for the corporation. Shareholders aren't doing too badly, either, as the stock is still up more than 15% in 12 months after a recent double-digit selloff. Ingles is coming off a difficult quarter, as costs were high and management chose not to pass on the price increases to customers, but that should only improve investors' view of the company. At less than 11 times earnings and with a long growth runway ahead of it, Ingles remains a top industry pick.

Tough quarter
Top-line sales grew just past the 1% mark for Ingles' fiscal 2014 first quarter, while net income slid down from $11.6 million to $9.5 million. Same-store sales contracted slightly -- down 0.8%. Investors should note that weekly customer store visits actually increased, while transaction amount was down.

In terms of spending, the company made pricing investments (in an effort to keep prices low during the holiday season) that management believes will come back. On a bigger scale, Ingles is putting the pedal down on new store construction. Since 2009, the company has only netted three new stores. Though specific numbers aren't available, recent management comments and the last 10-K note that the company should tack on material square footage in 2014, as compared with prior years.

One thing that has concerned some in the grocery industry is a reduction in Supplemental Nutrition Assistance benefits. For Ingles, at least, the transition hasn't shown up at the registers. Either those using SNAP have switched to cash payments, or they were yet to be affected by the change.

In the long run
Last year, Ingles posted sales growth around 2%. Management expects that number to pick up as the company adds new stores and renovates existing ones. The company's net income grew more than 17% in 2013. It's not growing like a weed, but Ingles is slowly and steadily building its half-century-old business in a conservative, and ultimately beneficial, manner. The company owns 75% of its total real estate, including a 1.6 million-square-foot warehouse in Asheville, N.C.

Compared with other grocers, the company looks appealingly valued. Kroger trades at a fair 11.6 times forward earnings, while Safeway is expensive at 18.3 times earnings. On a sales basis, Ingles is again the lowest at 0.14 times sales, while Safeway sits at 0.17 times and Kroger at 0.19 times.

Ingles has plenty of credit to use if it wants to speed up its growth process. The current $175 million line has only $14 million borrowed.

In all, Ingles remains a compelling long-term investment. It's 2.4% dividend is a modest but a nice addition to the potential for long-term, steady capital appreciation.

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Michael Lewis

Michael is a value-oriented investment analyst with a specific interest in retail and media businesses. Before coming to the Fool, Michael worked with private investment funds focusing on deep value and special situations. Currently living in the media capital of the world--Los Angeles, California.

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