Village Super Market, Inc. (the “Company” or “Village”) was founded in 1937.   Village operates a chain of 29 ShopRite supermarkets, eighteen of which are located in northern New Jersey, eight in southern New Jersey, two in Maryland and one in northeastern Pennsylvania.   The Company is a member of Wakefern Food Corporation ("Wakefern"), the nation's largest retailer-owned food cooperative and owner of the ShopRite name.  This relationship provides Village many of the economies of scale in purchasing, distribution, private label products, advanced retail technology, marketing and advertising associated with chains of greater size and geographic coverage.

 

Village seeks to generate high sales volume by offering a wide variety of high quality products at consistently low prices with superior customer service.  During fiscal 2014,2015, sales per store were $52,367$54,613 and sales per average square foot of selling space were $1,153.$1,177.  The Company gives ongoing attention to the décor and format of its stores and tailors each store's product mix to the preferences of the local community.  Village competes by using low pricing, superior customer service, and a broad range of consistently available quality products, including ShopRite private labeled products.  The ShopRite Price Plus card also strengthens customer loyalty.

 

The remodel and expansion of the Stirling, New Jersey store to 68,000 sq. ft. is expected to be completed in the first quarter of fiscal 2016. On April 30, 2014, Village opened a 59,000 sq. ft. store in Union, New Jersey that replaced our existing 40,000 sq. ft. store in Union.  On November 6, 2013, Village opened a 77,000 sq. ft. store in Hanover Township, New Jersey that serves the greater Morristown area and replaced the 40,000 sq. ft. Morris Plains store.  

 

 

 

 

Village also has on-site registered dieticians in thirteenfifteen stores that provide customers with free, private consultations on healthy meals and proper nutrition, as well as leading health related events both in store and in the community as part of the Live Right with ShopRite program.  Our greater Morristown store offers customers expanded services including a culinary classroom, fitness studio and a learning and childcare center.

 

We have twelvethirteen stores that offer ShopRite from Home covering most of the communities served by our stores.  ShopRite from Home is an online ordering system that provides for in-store pickup or home delivery.  Customers can browse our circular, create and edit shopping lists and use ShopRite from Home through shoprite.com or on their smart phones or tablets through the ShopRite app.  Additionally, we have commenced a mobile shopping pilot program at one store that allows in-store shoppers to scan and express pay for their purchases via our smart phone app.

The following table shows the percentage of the Company's sales allocable to various product categories during each of the periods indicated:

 

 

A variety of factors affect the profitability of each of the Company's stores, including local competitors, size, access and parking, lease terms, management supervision, and the strength of the ShopRite trademark in the local community.  Village continually evaluates individual stores to determine if they should be closed, remodeled or replaced.

 

 

The Company has an ongoing program to upgrade and expand its supermarket chain.  This program has included store remodels as well as the opening or acquisition of additional stores.  When remodeling, Village has sought, whenever possible, to increase the amount of selling space in its stores.

 

Village has budgeted $25 million for capital expenditures for fiscal 2015.2016.  Planned expenditures include threethe completion of the expansion and remodel of the Stirling, New Jersey store, two major remodels and several smaller remodels.

 

In fiscal 2014, Village completed the construction of a replacement store in Union, New Jersey, and a replacement store in Hanover Township, New Jersey that serves the greater Morristown area and replaced the Morris Plains, New Jersey store.  

 

In fiscal 2013, Village began construction of a replacement store in Hanover Township, New Jersey and completed three major remodels.

 

In fiscal 2012, Village completed several smaller remodels and the installation of solar panels on one store.  In addition, on January 29, 2012, Village acquired the store fixtures, lease and other assets of the ShopRite in Old Bridge, New Jersey.

 

In fiscal 2011, Village purchased the land for a replacement store and completed several small remodels.  In addition, on July 7, 2011, Village acquired the store fixtures, leases and pharmacy lists of locations in Silver Spring and Timonium, Maryland.

 

Additional store remodels and sites for new stores are in various stages of development.  Village will also consider additional acquisitions should appropriate opportunities arise.

 

 

The Company is the second largest member of Wakefern and owns 13.7%13.4% of Wakefern’s outstanding stock as of July 26, 2014.25, 2015.  Wakefern, which was organized in 1946, is the nation’s largest retailer-owned food cooperative.  Wakefern and its 49 shareholder members operate 321323 supermarkets and other retail formats, including 8991 stores operated by Wakefern.  Only Wakefern and its members are entitled to use the ShopRite name and trademark, and to participate in ShopRite advertising and promotional programs.

The principal benefits to the Company from its relationship with Wakefern are the use of the ShopRite name and trademark, volume purchasing, ShopRite private label products, distribution and warehousing economies of scale, ShopRite advertising and promotional programs including(including the ShopRite Price Plus card,card) and the development of advanced retail technology.  The Company believes that the ShopRite name is widely recognized by its customers and is a factor in their decisions about where to shop. ShopRite private label products accounted for approximately 10.8%9.7% of sales in fiscal 2014.2015.

 

Wakefern distributes as a "patronage dividend" to each of its stockholders a share of substantially all of its earnings in proportion to the dollar volume of purchases by the stockholder from Wakefern during each fiscal year.

 

While Wakefern has a substantial professional staff, it operates as a member owned cooperative.  Executives of most members make contributions of time to the business of Wakefern.  Executives of the Company spend a significant amount of their time working on various Wakefern committees, which oversee and direct Wakefern purchasing, merchandising and other programs.  JamesNicholas Sumas, the Company’s Chief ExecutiveMarketing Officer, is Vice Chairman of Wakefern, and a member of the Wakefern Board of Directors.

 

Most of the Company's advertising is developed and placed by Wakefern's professional advertising staff.  Wakefern is responsible for all television, radio and major newspaper advertisements. Wakefern bills its members using various formulas which allocate advertising costs in accordance with the estimated proportional benefits to each member from such advertising.  The Company also places Wakefern developed materials with local newspapers.  In addition, Wakefern and its affiliates provide the Company with other services including liability and property insurance, supplies, certain equipment purchasing, coupon processing, certain financial accounting applications, and retail technology support, including shoprite.com and the ShopRite smart phone app.

 

Wakefern operates warehouses and distribution facilities in Elizabeth, Keasbey, Whitehouse, Dayton, Newark and Jamesburg, New Jersey and Gouldsboro and Breinigsville, Pennsylvania.  The Company and all other members of Wakefern are parties to the Wakefern Stockholder’sStockholders' Agreement which provides for certain commitments by, and restrictions on, all shareholders of Wakefern.  This agreement extends until ten years from the date that stockholders representing 75% of Wakefern sales notify Wakefern that those stockholders request the Wakefern StockholderStockholders' Agreement be terminated.  Each member is obligated to purchase from Wakefern a minimum of 85% of its requirements for products offered by Wakefern.  If this purchase obligation is not met, the member is required to pay Wakefern's profit contribution shortfall attributable to this failure.  The Company fulfilled this obligation in fiscal 2015, 2014 2013 and 2012.2013.  This agreement also requires that in the event of unapproved changes in control of the Company or a sale of the Company or of individual Company stores, except to a qualified successor, the Company in such cases must pay Wakefern an amount equal to the annual profit contribution shortfall attributable to the sale of a store or change in control.  No payments are required if the volume lost by a shareholder as a result of the sale of a store is replaced by such shareholder by increased volume in existing or new stores.  A "qualified successor" must be, or agree to become, a member of Wakefern, and may not own or operate any supermarkets, other than ShopRite supermarkets, in the states of New York, New Jersey, Pennsylvania, Delaware, Maryland, Virginia, Connecticut, Massachusetts, Rhode Island, Vermont, New Hampshire, Maine or the District of Columbia, or own or operate more than 25 non-ShopRite supermarkets in any other locations in the United States.

 

Wakefern, under circumstances specified in its bylaws, may refuse to sell merchandise to, and may repurchase the Wakefern stock of, any member.  Such circumstances include a membersmember's bankruptcy filing, certain unapproved transfers by a member of its supermarket business or its capital stock in Wakefern, unapproved acquisition by a member of certain supermarket or grocery wholesale supply businesses, the material breach by a member of any provision of the bylaws of Wakefern or any agreement with Wakefern, or a failure to fulfill financial obligations to Wakefern.

 

Any material change in Wakefern's method of operation or a termination or material modification of the Company's relationship with Wakefern following termination of the above agreements, or otherwise, might have an adverse impact on the conduct of the Company's business and could involve additional expense for the Company.  The failure of any Wakefern member to fulfill its obligations under these agreements or a member's insolvency or withdrawal from Wakefern could result in increased costs to remaining members.

 

Wakefern does not prescribe geographical franchise areas to its members.  The specific locations at which the Company, other members of Wakefern, or Wakefern itself, may open new units under the ShopRite nameand PriceRite names are, however, subject to the approval of Wakefern's Site Development Committee.  This committee is composed of persons who are not employees or members of Wakefern.  Committee decisions to deny a site application may be appealed to the Wakefern Board of Directors.  Wakefern assists its members in their site selection by providing appropriate demographic data, volume projections and estimates of the impact of the proposed store on existing member supermarkets in the area.

 

Each of Wakefern's members is required to make capital contributions to Wakefern based on the number of stores operated by that member and the purchases generated by those stores.  As additional stores are opened or acquired by a member, additional capital must be contributed by it to Wakefern.  The Company’s investment in Wakefern and affiliates was $25,012$25,750 at July 26, 2014.25, 2015.  The

total amount of debt outstanding from all capital pledges to Wakefern is $1,741$1,156 at July 26, 2014.25, 2015.  The maximum per store capital contribution increased from $825$850 to $850$875 in fiscal 2014,2015, resulting in an additional $657$738 capital pledge, which was paid in fiscal 2014.2015.

As required by the Wakefern bylaws, the Company’s investment in Wakefern is pledged to Wakefern to secure the Company’s obligation to Wakefern.  In addition, four members of the Sumas family have guaranteed the Company’s obligations to Wakefern.  These personal guarantees are required of any 5% shareholder of the Company who is active in the operation of the Company.  Wakefern does not own any securities of the Company or its subsidiaries.  The Company’s investment in Wakefern entitles the Company to enough votes to elect one member to the Wakefern Board of Directors due to cumulative voting rights.

 

 

The Company considers automation and information technology important to its operations and competitive position. Village completed the replacement of its point of sale systems in fiscal 2010 to improve the checkout experience and reduce training costs.  Electronic payment options are offered at all checkout locations.  In recent years, we have upgraded our communication network, which is used for secure, reliable, high speed processing of electronic payments and transmission of data.

 

 

Wakefern and Village have responded to customerscustomers' increased use of the internet by creating a smart phone app and shoprite.com to provide weekly advertising and other shopping information.  On-line shopping is available in twelve store locationsthirteen stores, with store pick-up and delivery options servicing our current market.  Additionally, we have commenced a mobile shopping pilot program at one store that allows in-store shoppers to scan and express pay for their purchases via our smart phone app.

 

Eighteen stores use self-checkout systems to provide improved customer service, especially during peak periods, and reduce operating costs.   RFID readers are installed in all checkout lanes to enable contactless payment options for customers to quicken checkout times. Certain in-store department records are computerized, including the records of all pharmacy departments.  In all stores, meat, seafood, delicatessen, and bakery prices are maintained on computer for automatic weighing and pricing. 

 

Village utilizes a computer generated ordering system, which is designed to reduce inventory levels and out of stock conditions, enhance shelf space utilization, and reduce labor costs. This system is also utilized to reduce the cost of taking periodic inventories. The Company utilizes a direct store delivery system, consisting of personal computers and advanced hand held scanners, for product not purchased through Wakefern to provide equivalent cost and retail price control over these products.

 

Village seeks to design its stores to use energy efficiently, including recycling waste heat generated by refrigeration equipment for heating and other purposes.  Most stores utilize computerized energy management systems.  The Company installed solar panels on the roof of one store in 2010 and a second store in 2012, reducing both carbon emissions and energy costs.  

 

The Company has installed computer based training systems in all stores to assist in the training of associates.  Village utilizes a time and attendance system and labor scheduling system to improve scheduling and reduce labor. Automated cash handling systems are utilized in the store back office to improve accuracy and reduce costs.

 

Village uses digital surveillance systems that are integrated with the cashier monitoring systems in all stores to aid shrink reduction, increase productivity and assist in accident investigations.  These systems include electronic monitoring of the bottom of carts to reduce shrink.

 

The Company utilizes a division of Wakefern for data processing services, including financial accounting support.

 

 

The supermarket industry is highly competitive and characterized by narrow profit margins.  The Company competes directly with multiple retail formats, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores.  

 

Some of the Company's principal competitors include Pathmark, A&P, Stop & Shop, Acme, Kings, Wal-Mart, Target, Wegmans, Whole Foods, Costco, BJ’s, Giant, Safeway and Foodtown.  Some of these competitors have financial resources substantially

greater than those of the Company, and some are non-union. In July 2015, A&P filed for Chapter 11 bankruptcy. It is expected that certain A&P and Pathmark stores that compete directly with Village will either be sold or closed in late 2015.

 

 

 

As a member of the Wakefern cooperative, Village relies upon our customer focused website, shoprite.com, for interaction with customers and prospective employees.  This website is maintained by Wakefern for the benefit of all ShopRite supermarkets, and therefore, does not contain any financial information related to the Company.

 

The Company will provide paper copies of the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and press releases free of charge upon request to any shareholder.  In addition, electronic copies of these filings can be obtained at sec.gov.

 

 

The Company’s business requires various licenses and the registration of facilities with state and federal health and drug regulatory agencies.  These licenses and registration requirements obligate the Company to observe certain rules and regulations, and a violation of these rules and regulations could result in a suspension or revocation of licenses or registrations.  In addition, most licenses require periodic renewals.  The Company has not experienced material difficulties with respect to obtaining or retaining licenses and registrations. 

 

 

 

The supermarket business is highly competitive and characterized by narrow profit margins.  Results of operations may be materially adversely impacted by competitive pricing and promotional programs, industry consolidation and competitor store openings.  Village competes directly with multiple retail formats, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Competition with these outlets is based on price, store location, promotion, product assortment, quality and service.  Some of these competitors have greater financial resources, lower merchandise acquisition costs and lower operating expenses than we do.  In addition, Village made investments in lower prices to combat nontraditional competitors beginning in the second half of fiscal 2013.

 

 

The Company’s stores are concentrated in New Jersey, with two stores in Maryland and one store in northeastern Pennsylvania and two in Maryland.Pennsylvania. We are vulnerable to economic downturns in New Jersey in addition to those that may affect the country as a whole.  Economic conditions such as inflation, deflation, interest rates, energy costs and unemployment rates may adversely affect our sales and profits.  Further, since our store base is concentrated in densely populated metropolitan areas, opportunities for future store expansion may be limited, which may adversely affect our business and results of operations.

 

Village acquired two stores in July 2011 in Maryland, a new market for Village where the ShopRite name is less known than in New Jersey. Maryland stores sales, marketing costs and operating performance remain worse than initially projectedour typical store as we continue to build market share and brand awareness.  If these trends continue, the performance of our Maryland stores may negatively impact the Company’s results of operations.

 

 

Village purchases substantially all of its merchandise from Wakefern.  In addition, Wakefern provides the Company with support services in numerous areas including supplies, advertising, liability and property insurance, technology support and other store services.  Further, Village receives patronage dividends and other product incentives from Wakefern.

 

Any material change in Wakefern’s method of operation or a termination or material modification of Village’s relationship with Wakefern could have an adverse impact on the conduct of the Company’s business and could involve additional expense for Village.  The failure of any Wakefern member to fulfill its obligations to Wakefern or a member’s insolvency or withdrawal from Wakefern could result in increased costs to the Company.  Additionally, an adverse change in Wakefern’s results of operations could have an adverse effect on Village’s results of operations.

 

 

 

The Company could be adversely affected if consumers lose confidence in the safety and quality of the food supply chain.  Adverse publicity about these types of concerns, whether or not valid, could discourage consumers from buying our products.  The real or perceived sale of contaminated food products by us could result in a loss of consumer confidence and product liability claims, which could have a material adverse effect on our sales and operations.

 

 

The Company is required to make contributions to multi-employer pension plans in amounts established under collective bargaining agreements.  Pension expense for these plans is recognized as contributions are funded.  Benefits generally are based on a fixed amount for each year of service.   Based on the most recent information available to us, certain of these multi-employer plans are underfunded.  As a result, we expect that contributions to these plans may increase.  Additionally, the benefit levels and related items will be issues in the negotiation of our collective bargaining agreements.  Under current law, an employer that withdraws or partially withdraws from a multi-employer pension plan may incur a withdrawal liability to the plan, which represents the portion of the plan’s underfunding that is allocable to the withdrawing employer under complex actuarial and allocation rules.  The failure of a withdrawing employer to fund these obligations can impact remaining employers.   The amount of any increase or decrease in our required contributions to these multi-employer pension plans will depend upon the outcome of collective bargaining, actions taken by trustees who manage the plans, government regulations and the actual return on assets held in the plans, among other factors. See Note 8 to the Consolidated Financial Statements for more information relating to our participation in multi-employer pension plans.

 

 

Our long-lived assets, primarily stores, are subject to periodic testing for impairment. Failure of our asset groups to achieve sufficient levels of cash flow could result in impairment charges on long-lived assets.

 

 

The Company’s effective tax rate may be impacted by the results of tax examinations and changes in tax laws, including the disputes with the state of New Jersey described in Note 5 to the Consolidated Financial Statements.laws.

 

 

Wakefern provides all members of the cooperative with information system support that enables us to effectively manage our business data, customer transactions, ordering, communications and other business processes.  These information systems are subject to damage or interruption from power outages, computer or telecommunications failures, computer viruses and related malicious software, catastrophic weather events, or human error.  Any material interruption of our or Wakefern’s information systems could have a material adverse impact on our results of operations.

Due to the nature of our business, personal information about our customers, vendors and associates is received and stored in these information systems.  In addition, confidential information is transmitted through our ShopRite from Home online business at shoprite.com and through the ShopRite app.  Unauthorized parties may attempt to access information stored in or to sabotage or

disrupt these systems.  Wakefern and the Company maintain substantial security measures to prevent and detect unauthorized access to such information, including utilizing third-party service providers for monitoring our networks, security reviews, and other functions.  It is possible that computer hackers, cyber terrorists and others may be able to defeat the security measures in place at Wakefern or those of third-party service providers.

 

Any breach of these security measures and loss of confidential information, which could be undetected for a period of time, could damage our reputation with customers, vendors and associates, cause Wakefern and Village to incur significant costs to protect any customers, vendors and associates whose personal data was compromised, cause us to make changes to our information systems and could result in government enforcement actions and litigation against Wakefern and/or Village from outside parties.  Any such breach could have a material adverse impact on our operations, consolidated financial condition, results of operations, and liquidity if the related costs to Wakefern and Village are not covered by or are in excess of carried insurance policies.  In addition, a security breach could require Wakefern and Village to devote significant management resources to address problems created by the security breach and restore our reputation.

 

 

Not applicable.

 

 

As of July 26, 2014,25, 2015, Village owns the sites of six of its supermarkets (containing 412,000 square feet of total space), all of which are freestanding stores, except the Egg Harbor store, which is part of a shopping center.  The remaining 23 supermarkets (containing 1,288,0001,305,000 square feet of total space) and the corporate headquarters are leased, with initial lease terms generally ranging from 20 to 30 years, usually with renewal options.  Sixteen of these leased stores are located in shopping centers and the remaining seven are freestanding stores.  In additionThe Company has entered into a contract to the above, the Company ownssell the land and building of the oldformer Washington store, whichstore. The sale is currently available for sale.expected to close in fall 2015.

 

 

Village is a limited partner in two partnerships, one of which owns a shopping center in which one of our leased stores is located.  The Company is also a general partner in a partnership that is a lessor of one of the Company's freestanding stores.

 

 

Superstorm Sandy devastated our area on October 29, 2012 and resulted in the closure of almost all of our stores for periods of time ranging from a few hours to eight days. Village disposed of substantial amounts of perishable product and also incurred repair, labor and other costs as a result of the storm. The Company has property, casualty and business interruption insurance, subject to deductibles and coverage limits. During fiscal 2013, Wakefern began the process of working with our insurers to recover the damages and Village has recorded estimated insurance recoveries. Netrecoveries of payments received, the related insurance receivable was $2,290 at$4,913. As of July 26, 2014.25, 2015, Village has collected $2,643. In October 2013, Wakefern, as the policy holder, filed suit against the primary carrier seeking payment of the remaining claims due for all Wakefern members. The suit iswas the result of different interpretations of policy terms. Final resolutionterms, including whether the policy's named storm deductible applied. On October 29, 2014, the Court issued their opinion on the matter in favor of our insurance claimthe carrier. While Wakefern is continuing to pursue further recovery of uncollected amounts from the carrier and other sources, as a result of this decision and its related to the storm could have a material impact on our results of operations.

The Company is involved in various legal proceedings.  Village does not believeother litigation incidental to the outcomenormal course of business. Company management is of the opinion that the ultimate resolution of these legal proceedings willshould not have a material adverse effect on the Company’s consolidated financial condition,position, results of operations or liquidity.liquidity of the Company.

 

 

As of October 1, 2014,2015, there were approximately 775780 holders of Class A common stock.

 

During fiscal 2014, Village paid cash dividends of $12,432.  Dividends in fiscal 2014 consist of $1.00 per Class A common share and $0.65$.65 per Class B common share.

 

Set forth below is a graph comparing the cumulative total return on the Company’s Class A stock against the cumulative total return of the S&P 500 Composite Stock Index and the NASDAQ Retail Trade index for the Company’s last five fiscal years.

 

(Dollars in thousands, except per share data and square feet data).

 

Fiscal 2010 contains 53 weeks. All other fiscal years contain 52 weeks.

 

 

(1) Amounts for the year ended July 30, 2011 exclude results of the two stores acquired in Maryland in July 2011.

(Dollars in thousands except per share amounts).

 

 

 

Village Super Market, Inc. (the “Company” or “Village”) operates a chain of 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. On November 6, 2013, Village opened a 77,000 sq. ft. store in Hanover Township, New Jersey that serves the greater Morristown area and replaced the 40,000 sq. ft. Morris Plains store.  On April 30, 2014, Village opened a 59,000 sq. ft. store in Union, New Jersey and closed our existing 40,000 sq. ft. store. The remodel and expansion of the Stirling, New Jersey store to 68,000 sq. ft. is expected to be completed in the first quarter of fiscal 2016.

 

Village is the second largest member of Wakefern Food Corporation (“Wakefern”), the nation’s largest retailer-owned food cooperative and owner of the ShopRite name. This ownership interest in Wakefern provides Village many of the economies of scale in purchasing, distribution, advanced retail technology, marketing and advertising associated with larger chains.

 

The Company’s stores, six of which are owned, average 59,000 total square feet. These larger store sizes enable the Company’s stores to provide a “one-stop” shopping experience and to feature expanded higher margin specialty departments such as an on-site bakery, an expanded delicatessen, a variety of natural and organic foods, ethnic and international foods, prepared foods and pharmacies.  During fiscal 2014,2015, sales per store were $52,367$54,613 and sales per average square foot of selling space were $1,153.$1,177. Management believes these figures are among the highest in the supermarket industry. 

 

The supermarket industry is highly competitive and characterized by narrow profit margins.  The Company competes directly with multiple retail formats, including national, regional and local supermarket chains as well as warehouse clubs, supercenters, drug stores, discount general merchandise stores, fast food chains, restaurants, dollar stores and convenience stores. Village competes by using low pricing, superior customer service, and a broad range of consistently available quality products including(including ShopRite private labeled products.products). The ShopRite Price Plus card also strengthens customer loyalty.

Many of our stores emphasize a Power Alley, which features high margin, fresh, convenience offerings in an area within the store that provides quick customer entry and exit for those customers shopping for today's lunch or dinner. The greater Morristown, Union and UnionStirling stores include the Village Food Garden concept previously introduced in our remodeled Livingston store. Village Food Garden features a restaurant style kitchen, and several kiosks offering a wide variety of store prepared specialty foods for both take-home and in-store dining.  Village also has on-site registered dieticians in thirteenfifteen stores that provide customers with free, private consultations on healthy meals and proper nutrition, as well as leading health related events both in store and in the community as part of the Live Right with ShopRite program.  Wakefern and Village have responded to customerscustomers' increased use of the internet by creating a smart phone app and shoprite.com to provide weekly advertising and other shopping information.  In addition, on-line shopping is available in twelve store locationsthirteen stores with store pick-up and delivery options servicing our current market.

 

We consider a variety of indicators to evaluate our performance, such as same store sales; percentage of total sales by department (mix); shrink; departmental gross profit percentage; sales per labor hour; and hourly labor rates.

 

The Company utilizes a 52 - 53 week fiscal year, ending on the last Saturday in the month of July. Fiscal 2015, 2014 2013 and 20122013 contain 52 weeks.

 

 

The following table sets forth the components of the Consolidated Statements of Operations of the Company as a percentage of sales:

 

 

 

Sales were $1,518,636 in fiscal 2014, an increase of $42,179, or 2.9% from the prior year. Sales increased due to the opening of the greater Morristown replacement store on November 6, 2013 and Union replacement store on April 30, 2014.  Same store sales increased .2% due to increased sales in both Maryland stores and in stores that were closed for periods of up to eight days in the prior year due to superstorm Sandy, partially offset by lower sales due to three store openings by competitors, very high sales in the prior year as customers prepared for superstorm Sandy, and reduced sales in stores that reopened quickly after the storm. New stores and replacement stores are included in same store sales in the quarter after the store has been in operation for four full quarters.  Store renovations are included in same store sales immediately.

 

Sales were $1,476,457Gross profit as a percentage of sales increased .45% in fiscal 2013, an increase of $54,214, or 3.8% from2015 compared to the prior year.  Sales increasedyear primarily due to the acquisition of a store in Old Bridge, NJ on January 29, 2012lower promotional spending (.23%), increased departmental gross margin percentages (.23%) and a same store sales increase of 2.9%decreased warehouse assessment charges from Wakefern (.06%). Same store sales increased due to higher sales as customers prepared for superstorm Sandy, improved sales at the stores that reopened quickly after that storm and higher sales in the two stores in Maryland.  Sales continued to be impactedThese increases were partially offset by economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down.

 

Gross profit as a percentage of sales decreased .04% in fiscal 2014 compared to the prior year primarily due to decreased departmental gross margin percentages (.33%). Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors. This decrease was partially offset by improved product mix (.10%), lower promotional spending (.09%), and higher patronage dividends (.08%).

 

Operating and administrative expense as a percentage of sales decreased .40%.34% in fiscal 20132015 compared to the prior year primarily due to lower payroll (.11%) and advertising spending (.05%). Payroll decreased departmental gross margin percentages (.47%primarily due to sales growth and increased payroll efficiency in the greater Morristown store in its second year of operations. In addition, the prior year included charges for future lease obligations resulting from the closures of the Morris Plains and Union stores (.29%), and pre-opening costs for the greater Morristown and Union replacement stores (.13%). These decreases were partially offset by improved product mix (.06%a charge to write-off all remaining insurance receivables related to Superstorm Sandy (.14%) and increased workers compensation costs (.11%).  Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors.

 

Operating and administrative expense as a percentage of sales increased .90% in fiscal 2014 compared to the prior year primarily due to a charge for future lease obligations resulting from the closures of the Morris Plains and Union stores (.29%), higher payroll (.19%), healthcare (.14%) and repair and snow removal costs (.07%), increased legal and consulting fees (.09%) and pre-opening costs for the greater Morristown and Union replacement stores (.13%).  These increases were partially offset by a reduction in non-union pension expense (.14%).  Payroll costs increased due to efforts to enhance the customer experience and provide additional services, including the addition and expansion of ShopRite from Home in several stores and our Village Food Garden at the greater Morristown and Union replacement stores and the remodeled Livingston store.  In addition, the prior fiscal year included a charge from the settlement of a dispute with a landlord (.04%) and income from settlement of the national credit card lawsuit (.08%).

 

Depreciation and amortization expense was $23,330, $22,274 $20,354 and $19,759$20,354 in fiscal 2015, 2014 2013 and 2012,2013, respectively. Depreciation and amortization expense increased in fiscal 20142015 and 20132014 compared to the prior years due to depreciation related to fixed asset additions.

 

 

Income from partnerships of $1,450 in fiscal 2013 are distributions received from two partnerships that exceeded the invested amounts.  The Company’s partnership interests resulted from its leasing of supermarkets in two shopping centers.  The Company remains a tenant in one of these shopping centers.

 

 

Interest expense was $4,535, $3,602 $3,771 and $4,415,$3,771, in fiscal 2015, 2014 2013 and 2012,2013, respectively. Interest expense decreasedincreased in fiscal 2015 compared to fiscal 2014 and 2013 primarily due to interest costs capitalized of $600 and $560 in fiscal 2014 and 2013, compared to fiscal 2012 due to interest costs capitalized in fiscal 2014 and 2013, and interest incurred on a pension withdrawal liability included in fiscal 2012.respectively.

 

 

Interest income was $2,399, $2,622 $2,783 and $2,571$2,783 in fiscal 2015, 2014 and 2013, respectively. Interest income decreased due primarily to lower interest rates earned on investments and 2012, respectively.less amounts invested.

 

 

The Company’s effective income tax rate was 82.5%26.0%, 82.5% and 42.2% in fiscal 2015, 2014 and 41.5%2013, respectively.

Income taxes in fiscal 2015 includes a tax benefit of $6,452 related to the settlement with the New Jersey Division of Taxation, net of $841 of interest and penalties accrued prior to settlement. Income taxes in fiscal 2014 2013included a $10,052 charge related to tax positions taken in prior years as a result of the unfavorable ruling by the New Jersey Tax Court and 2012, respectively.a higher tax rate due to

$1,557 of interest and penalties related to the New Jersey tax dispute. Excluding these items from both fiscal years, the effective income tax rate was 41.6% in fiscal 2015 as compared to 42.2% in fiscal 2014. The dispute and related settlement with the New Jersey Division of Taxation is described in Note 5 to the Consolidated Financial Statements,Statements.

Net income taxeswas $30,620 in fiscal 2015 compared to $5,045 in fiscal 2014.  Fiscal 2015 includes a charge to write-off all remaining insurance receivables related to Superstorm Sandy of $1,340 (net of tax), a $316 (net of tax) impairment charge related to the property of a closed store that is under contract to be sold in fiscal 2016, and a tax benefit of $6,452 related to settlement of the New Jersey tax dispute, net of interest and penalties accrued in fiscal 2015 prior to settlement. Fiscal 2014 includes a $10,052 charge related to tax positions taken in prior years as a result of the unfavorable ruling by the New Jersey Tax Court.   Excluding this charge, the effectiveCourt, a higher tax rate was 47.6%due to $1,557 of accrued interest and penalties related to the New Jersey tax dispute, a charge for future lease obligations due to the closure of the Morris Plains and Union stores of $2,551 (net of tax) and pre-opening costs for the replacement stores in greater Morristown and Union of $1,141 (net of tax).  Excluding these items from both fiscal years, net income in fiscal 20142015 increased 27% compared to 42.2% in the prior year.  The increase in the effective tax rate isyear primarily due to the impact of New Jersey Tax Court decision including increased accrued interestthe greater Morristown and penalties inUnion replacement stores, the current year.2.1% same store sales increase and higher gross margin percentages.

Net income was $5,045 in fiscal 2014 compared to $25,784 in fiscal 2013.  Fiscal 2014 includes a $11,608 increase$10,052 charge related to income tax expensepositions taken in prior years as a result of the unfavorable ruling by the New Jersey Tax Court, a higher tax rate due to $1,557 of accrued interest and penalties related to the New Jersey tax dispute, a charge for future lease obligations due to the closure of the Morris Plains and Union stores of $2,551 (net of tax) and pre-opening costs for the replacement stores in greater Morristown and Union of $1,141 (net of tax), while fiscal 2013 includes income from the national credit card lawsuit of $693 (net of tax), income from a partnership distribution of $840 (net of tax) and a charge for the settlement of a landlord dispute of $376 (net of tax).  Excluding these items from both fiscal years, net income in fiscal 2014 declined 17% compared to the prior year primarily due to flat same store sales, higher operating expenses as a percentage of sales, and higher depreciation expense.

 

 

Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations. These policies require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

 

The Company reviews the carrying values of its long-lived assets, such as property, equipment and fixtures for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Such review analyzes the undiscounted estimated future cash flows from asset groups at the store level to determine if the carrying value of such assets are recoverable from their respective cash flows. If impairment is indicated, it is measured by comparing the fair value of the long-lived asset groups held for use to their carrying value.

 

Goodwill is tested for impairment at the end of each fiscal year, or more frequently if circumstances dictate. The Company utilizes valuation techniques, such as earnings multiples, in addition to the Company’s market capitalization, to assess goodwill for impairment. Calculating the fair value of a reporting unit requires the use of estimates. Management believes the fair value of Village’s one reporting unit exceeds its carrying value at July 26, 2014.25, 2015. Should the Company’s carrying value of its one reporting unit exceed its fair value, the amount of any resulting goodwill impairment may be material to the Company’s financial position and results of operations.

 

 

As a stockholder of Wakefern, Village earns a share of Wakefern’s earnings, which are distributed as a “patronage dividend” (see Note 3)3 to the Consolidated Financial Statements). This dividend is based on a distribution of substantially all of Wakefern’s operating profits for its fiscal year (which ends September 30) in proportion to the dollar volume of purchases by each member from Wakefern during that fiscal year. Patronage dividends are recorded as a reduction of cost of sales as merchandise is sold. Village accrues estimated patronage dividends due from Wakefern quarterly based on an estimate of the annual Wakefern patronage dividend and an estimate of Village’s share of this annual dividend based on Village’s estimated proportional share of the dollar volume of business transacted with Wakefern that year. The amount of patronage dividends receivable based on these estimates were $12,831 and $12,923 at July 25, 2015 and $11,810 at July 26, 2014, and July 27, 2013, respectively.

 

The determination of the Company’s obligation and expense for Company-sponsored pension plans is dependent, in part, on Village’s selection of assumptions used by actuaries in calculating those amounts. These assumptions are described in Note 8 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets and the rate of increase in compensation costs. Actual results that differ from the Company’s assumptions are accumulated and amortized over future periods and, therefore, generally affect recognized expense in future periods. While management believes that its assumptions are appropriate, significant differences in actual experience or significant changes in the Company’s assumptions may materially affect cash flows, pension obligations and future expense.

 

The objective of the discount rate assumption is to reflect the rate at which the Company’s pension obligations could be effectively settled based on the expected timing and amounts of benefits payable to participants under the plans. Our methodology for selecting the discount rate as of July 26, 201425, 2015 was to match the plansplans' cash flows to that of a yield curve on high-quality fixed-income investments. Based on this method, we utilized a weighted-average discount rate of 4.02% at July 25, 2015 compared to 3.95% at July 26, 2014 compared to 4.43%2014. Approximately $7,779 of the projected benefit obligation increase at July 27, 2013. The .48% decrease25, 2015 is due primarily to changes in the discount rate and a change in the mortality table utilized, increased the projected benefit obligation at July 26, 2014 by approximately $6,337.utilized. Village evaluated the expected long-term rate of return on plan assets of 7.5% and the expected increase in compensation costs of 4 to 4.5% and concluded no changes in these assumptions were necessary in estimating pension plan obligations and expense.

 

Sensitivity to changes in the major assumptions used in the calculation of the Company’s pension plans is as follows:

 

Village contributed $3,320$6,203 and $3,254$3,320 in fiscal 20142015 and 2013,2014, respectively, to these Company-sponsored pension plans. Village expects to contribute $6,000$3,000 in fiscal 20152016 to these plans. The 2015 contributions include $3,113 in benefit payments related to the unfunded, non-qualified supplemental benefit plan. Substantially all other contributions in 2015 and 2014 and 2013 contributions are substantially all voluntary contributions.

 

The Company also contributes to several multi-employer pension plans based on obligations arising from collective bargaining agreements.  These plans provide retirement benefits to participants based on their service to contributing employers.  We recognize expense in connection with these plans as contributions are funded.  

 

 

The Company is subject to periodic audits by various taxing authorities. These audits may challenge certain of the Company’s tax positions such as the timing and amount of deductions and the allocation of income to various tax jurisdictions. Accounting for these uncertain tax positions requires significant management judgment.  Actual results could materially differ from these estimates and could significantly affect the effective tax rate and cash flows in future years.

On February 27, 2015, the Company is currently in the process of appealingreached an unfavorable decision byagreement with the New Jersey Tax Court regarding tax assessments received fromDivision of Taxation to settle the statedisputes related to nexus and the deductibility of New Jersey.  As a result ofcertain payments between subsidiaries for fiscal years 2000 through 2014. See Note 5 to the decision, we have increased our accrued tax liability to reflect the estimated total tax, interest and penalties due if the Company is unable to overturn the Court’s decision upon appeal.  A favorable resolution would result in a material reduction in gross unrecognized tax benefits and related accrued interest and penalties.Consolidated Financial Statements for further information.

 

 

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") No. 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reportingfiscal years, and interim periods within those years, beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted.2017. The Company is currently assessing the potential impact of ASU No. 2014-09 on its financial statements.

 

 

Net cash provided by operating activities was $52,447 in fiscal 2014 compared to $51,273 in the corresponding period of the prior year.

 

During fiscal 2014, Village used cash to fund capital expenditures of $50,322, dividends of $12,432 and invested an additional $18,177 in notes receivable from Wakefern. Capital expenditures include the construction of twothe greater Morristown and Union replacement stores.

 

 

Working capital was $39,747, $16,782, and $94,299 and $71,672 at July 25, 2015, July 26, 2014 and July 27, 2013, respectively. Working capital ratios at the same dates were 1.41, 1.11, and July 28, 2012,1.85 to one, respectively.  The increase in working capital in fiscal 2015 compared to fiscal 2014 is due primarily to operating cash flows in excess of capital expenditures and dividends and the favorable settlement with the New Jersey Division of Taxation in relation to amounts accrued. The decrease in working capital in fiscal 2014 compared to prior yearfiscal 2013 is due primarily to the $40,598 investment in long-term notes receivable, increased income tax liabilities as a result of the New Jersey Tax Court decision and capital expenditures.  Working capital ratios at the same dates were 1.11, 1.85, and 1.72 to one, respectively. The Company’s working capital needs are reduced, since inventories are generally sold by the time payments to Wakefern and other suppliers are due.

 

Village has budgeted approximately $25,000 for capital expenditures in fiscal 2015.2016. Planned expenditures include threethe completion of the expansion and remodel of the Stirling, New Jersey store, two major remodels and several smaller remodels. The Company’s primary sources of liquidity in fiscal 20152016 are expected to be cash and cash equivalents on hand at July 26, 201425, 2015 and operating cash flow generated in fiscal 2015.2016.

 

On February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern.  These notes earned interest at a fixed rate of 7%.  The Company invested the proceeds received and additional funds previously invested in demand deposits

at Wakefern in variable rate notes receivable from Wakefern of $40,000 on February 15, 2014.  Half of these notes earn interest at the prime rate plus .25% and mature in 3.5 yearson August 15, 2017 and half earn interest at the prime rate plus 1.25% and mature in 5 years.on February 15, 2019.  Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.

 

Village has an unsecured revolving credit agreement providing a maximum amount available for borrowing of $25,000.  This loan agreement expires on December 31, 2015. The revolving credit line can be used for general corporate purposes. Indebtedness under this agreement bears interest at the prime rate, or at the Eurodollar rate, at the Company’s option, plus applicable margins based on the Company’s fixed charge coverage ratio. There were no amounts outstanding at July 26, 201425, 2015 or July 27, 201326, 2014 under this facility.

 

The revolving loan agreement contains covenants that, among other conditions, require a maximum liabilities to tangible net worth ratio, a minimum fixed charge coverage ratio and a positive net income. At July 26, 2014,25, 2015, the Company was in compliance with all terms and covenants of the revolving loan agreement. Under the above covenants, Village had approximately $106,152$147,879 of net worth available at July 26, 201425, 2015 for the payment of dividends.

 

During fiscal 2014, Village paid cash dividends of $12,432.  Dividends in fiscal 2014 consist of $1.00 per Class A common share and $.65 per Class B common share.

 

 

The table below presents significant contractual obligations of the Company at July 26, 2014:25, 2015:

 

 

 

The Company holds an investment in Wakefern, its principal supplier. Village purchases substantially all of its merchandise from Wakefern in accordance with the Wakefern Stockholder Agreement. As part of this agreement, Village is required to purchase certain amounts of Wakefern common stock. At July 26, 2014,25, 2015, the Company’s indebtedness to Wakefern for the outstanding amount of this stock subscription was $1,741.$1,156. The maximum per store investment, which is currently $850,$875, increased by $25 in both fiscal 20142015 and 2013,2014, resulting in additional investments of $657$738 and $949,$657, respectively. Wakefern distributes as a “patronage dividend” to each member a share of its earnings in proportion to the dollar volume of purchases by the member from Wakefern during the year. Wakefern provides the Company with support services in numerous areas including advertising, supplies, liability and property insurance, technology support and other store services. Additional information is provided in Note 3 to the consolidated financial statements.Consolidated Financial Statements.

 

On February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern.  These notes earned interest at a fixed rate of 7%.  The Company invested the proceeds received and additional funds previously invested in demand deposits at Wakefern in variable rate notes receivable from Wakefern of $40,000 on February 15, 2014.  Half of these notes earn interest at the prime rate plus .25% and mature in 3.5 yearson August 15, 2017 and half earn interest at the prime rate plus 1.25% and mature in 5 years.on February 15, 2019.  Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.

 

At July 26, 2014,25, 2015, Village had demand deposits invested at Wakefern in the amount of $52,891.$35,428. These deposits earn overnight money market rates.

 

The Company subleases the Galloway and Vineland stores from Wakefern at combined current annual rents of $1,296. Both leases contain normal periodic rent increases and options to extend the lease.

 

The Company leases a supermarket from a realty firm 30% owned by certain officers of Village. The Company paid rent to related parties under this lease of $640 $640in each of the fiscal years 2015, 2014 and $640 in fiscal 2014, 2013 and 2012, respectively.2013. This lease expires in fiscal 20162021 with options to extend at increasing annual rents.

 

The Company has ownership interests in three real estate partnerships. Village paid aggregate rents to two of these partnerships for leased stores of approximately $1,300, $1,008, $834 and $801$834 in fiscal years 2015, 2014 2013 and 2012,2013, respectively. In fiscal 2013, the Company recognized income from partnerships of $1,450 resulting from distributions received from two of these partnerships that exceeded the invested amounts.

 

 

 

Although the Company cannot accurately determine the precise effect of inflation or deflation on its operations, it estimates that product prices overall experienced slight inflation in fiscal 20142015 and 2013.2014. The Company recorded apre-tax LIFO expense of $124 in fiscal 2015 and pre-tax LIFO benefits of $216 and $56 in fiscal 2014 and 2013, respectively, compared to a pre-tax LIFO charge of $601 in fiscal 2012.respectively. The Company calculates LIFO based on CPI indices published by the Department of Labor, which indicated weighted-average CPI changes of (0.6%)0.3%, (0.1%(0.6%) and 2.1%(0.1%), in fiscal 2015, 2014 2013 and 2012,2013, respectively.

 

 

At July 26, 2014,25, 2015, the Company had demand deposits of $52,891$35,428 at Wakefern earning interest at overnight money market rates, which are exposed to the impact of interest rate changes.

 

On February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern.  These notes earned interest at a fixed rate of 7%.  The Company invested the proceeds received and additional funds previously invested in demand deposits at Wakefern in variable rate notes receivable from Wakefern of $40,000 on February 15, 2014.  Half of these notes earn interest at the prime rate plus .25% and mature in 3.5 yearson August 15, 2017 and half earn interest at the prime rate plus 1.25% and mature in 5 years.on February 15, 2019.  Wakefern has the right to prepay these notes at any time. Under certain conditions, the Company can require Wakefern to prepay the notes, although interest earned since inception would be reduced as if it was earned based on overnight money market rates as paid by Wakefern on demand deposits.