PART I



Item 1.Business:



Weis Markets, Inc. is a Pennsylvania business founded by Harry and Sigmund Weis in 1912 and incorporated in 1924.  The Company is engaged principally in the retail sale of food in Pennsylvania and surrounding states.  There was no material change in the nature of the Company's business during fiscal 2014.2017.  The Company’s stock has been traded on the New York Stock Exchange since 1965 under the symbol “WMK.”  The Weis family currently owns approximately 65% of the outstanding shares.  Robert F.Jonathan H. Weis serves as Chairman of the Board of Directors, and Jonathan H. Weis, son of Robert F. Weis, serves as Vice Chairman, President and Chief Executive Officer. 



The Company's retail food stores sell groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, 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 including natural, gluten-free and organic varieties.  The Company advertises its products and promotes its brand through weekly newspaper circulars; radio and television ads; e-mail blasts; and on-line via its website,web site, social media and mobile applications.  Printed circulars are used extensively on a weekly basis to advertise featured items.  The Company promotes by using Everyday Lower Price, Low Price Guarantee and utilizes a loyalty marketing program, “Weis Club Preferred Shopper,” which enables customers to receive discounts, promotions and fuel rewards.  The Company currently owns and operates 163205 retail food stores.stores many of which have on-line order and pick up customer service.  The Company’s operations are reported as a single reportable segment. The majority of the Company’s revenues are generally not seasonal in nature.  However, revenues tend to be higher during the major holidays throughout the year.  Additionally, significant inclement weather systems, particularly winter storms, tend to affect sales trends.



The following table provides additional detail on the percentage of consolidated net sales contributed by product category for fiscal years 2014, 20132017,  2016 and 2012,2015,  respectively:

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(1) Consists primarily of groceries, dairy products, frozen foods, beer and wine, and general merchandise items, such as health and beauty care and household products.

(2) Consists primarily of meats, seafood, fresh produce, floral, deli products, prepared foods and bakery products.



In 2016, Weis Markets acquired five Mars Super Market locations in Baltimore County, MD, 38 Food Lion stores throughout Maryland, Virginia and Delaware, and a Nell's Family Market in East Berlin, PA.  The completion of these individual acquisitions expanded the Company's footprint into Virginia and Delaware, and increased its store count by 25 percent.  Beginning August 1, 2016, the Company converted the 44 stores to Weis Markets stores in 96 days ending in November, during which it interviewed and hired more than 2,000 associates who were previously employed at the acquired locations.  In 2017, the acquired store group is providing a positive cash flow for the Company as management continues to develop the stores using its business model.  Although there are no pending acquisitions, the Company continues to investigate acquisition opportunities as well as grow its existing store base organically.

On March 9, 2017, the Company opened its new 65,000 square-foot prototype store next to a major competitor in Enola, PA.  Designated the “Community Market” format, the store features a brand new store layout and unique features to elevate the shopping experience including a pub, grill and ice cream parlor, featuring the Company’s own ice cream.  The store contains a Pennsylvania foods section and more than 1,900 organic and gluten-free products, along with a mix-and-match pick K-cup 12-packs section and a Chobani Yogurt Bar.  The Company plans to review the success of the new features and utilize them where appropriate in other stores.

At the end of 2014,2017, Weis Markets, Inc. operated 254 stores in Delaware, 51 stores in Maryland, 5 stores in New Jersey, 9 stores in New York, 122121 stores in Pennsylvania, 13 stores in Virginia and 2 stores in West Virginia, for a total of 163205 retail food stores operating under the Weis Markets trade name. 



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Item 1.Business: (continued)



All retail food store locations operate as conventional supermarkets.  The retail food stores range in size from 8,000 to 70,000 square feet, with an average size of approximately 50,00048,000 square feet.  The Company’s store fleet includes a variety of sizes with a few locations in operation since the 1950’s; all stores are branded Weis Markets and provide the same basic offerings scaled to the size of each store.  The new Weis prototype averages approximately 65,000 square feet.  The following summarizes the number of stores by size categories as of year-end:





The Company believes that new stores and remodeling current stores are vital for future Company growth.  The location and appearance of its stores are important components of attracting new and retaining current customers. On an average basis, the Company has five to eight new stores in the process of being developed and dedicates a quarter of its capital budget to new stores annually, excluding acquisitions.  Generally, another fifteen to twenty percent of the capital budget is dedicated to store remodels while the remainder is attributable to smaller in-store sales-driven projects, store maintenance and store support function expenditures.  See the “Liquidity and Capital Resources” section included in “Item 7. Management’s Discussion and Analysis of the Financial Condition and Results of Operations” for more details regarding the Company’s capital expenditures.



The following schedule shows the changes in the number of retail food stores, total square footage and store additions/remodels as of year-end:



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(1)  On June 11, 2012,In the second half of 2016, Weis Markets Inc. acquired threefive former Genuardi’sMars Super Market stores located in Conshohocken, DoylestownBaltimore County, Maryland; 38 former Food Lion Supermarket stores located in Maryland, Virginia and Norristown, Pennsylvania from Safeway Inc.Delaware; and one former Nell’s Family Market store located in East Berlin, Pennsylvania.

Utilizing its own centrally located distribution center and transportation fleet, Weis Markets self distributes approximately 67% of product with the remaining being supplied by direct store vendors.  In addition, the Company has three manufacturing facilities which process milk, ice cream and fresh meat products.  The corporate offices are located in Sunbury, PA. 



The Company supportsstrives to be good stewards of the environment and makes this an important part of its retail operations through a centrally located distribution facility, its own transportation fleet, three manufacturing facilitiesoverall mission.  Its sustainability strategy operates under four key pillars: green design, natural resource conservation, food and its store support center.agricultural impact and social responsibility.  The goal of the sustainability strategy is to reduce the Company’s overall carbon footprint by reducing greenhouse gas emissions and reducing the impact on climate change.  The Company is requiredset a goal in 2008 to usereduce its carbon footprint by 20% by the year 2020.  In 2016, the company exceeded this goal with a significant amountcarbon reduction of working capital22%.  The Company continues to providebe a member of the EPA GreenChill program for advancing environmentally beneficial refrigerant management systems and has ten stores registered under this program.  Additional corporate sustainability goals are: reducing energy usage by 2% each year, replacing 50% of the necessary amounttruck fleet with fuel efficient tractors within three years and increasing recycling 5% each year.  In 2017, the Company recycled 73,000 tons of inventory to meet demand for its products through efficient usematerials, representing a corporate wide recycling rate of buying power and effective utilization66%. 

Item 1.   Business: (continued)



The Company operates in a highly competitive market place.  The number and the variety of competitors vary by market.  The Company’s principal competition consists of international, national, regional and local food chains, as well as independent food stores.  The Company also faces substantial competition from convenience stores, membership warehouse clubs, specialty retailers, supercenters and large-scale drug and pharmaceutical chains.  The Company continues to effectively compete by offering a strong combination of value, quality and service.



The Company currently employs approximately 18,20023,000 full-time and part-time associates.

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Item 1.   Business: (continued)



Trade Names and Trademarks.    The Company has invested significantly in the development and protection of “Weis Markets” both as a trade name and a trademark and considers it to be an important asset.  The Company is the exclusive licensee of more than 60 othernearly 100 trademarks registered and/or pending in the United States Patent and Trademark Office from WMK Holdings, Inc., including trademarks for its product lines and promotions such as Weis, Weis 2 Go, Weis Wonder Chicken, Price Freeze,Weis Great Meals Start Here, Weis Gas-n-Go and Weis Nutri-Facts.  Each trademark registration is for an initial period of 10 years and may be renewed so long as it is in continued use in commerce.



The Company considers its trademarks to be of material importance to its business and actively defends and enforces its rights.



The Company maintains a corporate web site at www.weismarkets.com.   The Company makes available, free of charge, on the “Financial” page of the “Corporate Information” section of its web site, its annual reportsAnnual Reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such material or furnishes it to the U.S. Securities and Exchange Commission (SEC) by clicking on the “SEC Information” link.



The Company’s Corporate Governance materials can be found inon the”Governance” page of the “Corporate Information” section of the Company’sits web site.   These materials include the corporate governance guidelines;Corporate Governance Guidelines; the chartersCharters of the Audit, Compensation and Disclosure Committees; and both the Code of Business Conduct and Ethics and the Code of Ethics for the CEO and CFO.  A copy of the foregoing corporate governance materials is available upon written request to the Company’s principal executive offices.



Item 1a.   Risk Factors:



In addition to risks and uncertainties in the ordinary course of business common to all businesses, important factors are listed below specific to the Company and its industry, which could materially impact its future performance.



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 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.



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, affect customer shopping habits.  These changes may negatively impact sales and earnings.  Business disruptions due to weather and catastrophic events historically have been few.  The Company’s geographic regions could receive an extreme variance in the amount of annual snowfall that may materially affect sales and expense results.



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.

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Item 1a.   Risk Factors: (continued)



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 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 successful.  The failuresubject to expand by successfully opening new stores as planned, or the failure of a significant number of these stores to perform as planned, could have a material adverse effect onsignificant challenges and uncertainties, including, without limitation, the Company’s businesspossibility of imprecise assumptions underlying expectations regarding potential synergies and results of its operations.the integration process, unforeseen expenses and delays diverting management’s time and attention and competitive factors in the marketplace.     



Disruptions or security breaches in the Company’s information technology systems could adversely affect results.    



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 operations, results of operations, financial condition and liquidity, and could result in litigation against the Company or the imposition of penalties. Moreover, a security breach could require the expenditure of significant additional resources to further upgrade the security measures that the Company employs to guard such important personal information against cyberattacks and other attempts to access such information and could result in a disruption of operations. 



The Company is affected by certain operating costs which could increase or fluctuate considerably.    



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. 



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 results of operations and financial condition.



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Item 1a.   Risk Factors: (continued)



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, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns.



The Company was liable for associate health claims up to an annual maximum of $750,000 per member prior to March 1, 2012, $1,250,000 per member prior to March 1, 2013, $2,000,000 per member prior to March 1, 2014 and an unlimited amount per member as of March 1, 2014.  As of March 1, 2014, the Company purchased stop loss insurance which carries a $500,000 specific deductible with a $250,000 aggregating deductible.  The Company is liable for workers' compensation claims up to $2,000,000 per claim.  Property and casualty insurance coverage is maintained with outside carriers at deductible or retention levels ranging from $100,000 to $1,000,000.  The Company, for the benefit of cost savings, has accepted the risk of an unusual amount of independent multiple material claims arising, which could have a significant impact on earnings.

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’s investment portfolio may suffer losses from changes in market interest rates and changes in market conditions which could adversely affect results of operationsincome or liquidity.    



As of December 27, 2014, the Company had $23.0 million in cash and cash equivalents, $74.0 million in marketable securities and $9.1 million in SERP (Supplemental Executive Retirement Plan) investment (level 1 mutual funds).  The Company’s marketable securities consist of municipal bonds and equity securities.  TheseThe municipal bond investments are subject to general credit, liquidity, market and interest rate risks.  Substantially all of these securities are subject to interest rate and credit risk and will decline in value if interest rates increase or one of the issuers’ credit ratings is reduced.  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 results of operations, liquidity and financial condition. The Federal Deposit Insurance Corporation (FDIC) insures amounts up to $250,000 per depositor, per insured bank, for each account ownership category.  The Company has balances in bank accounts that may exceed the insured amount leaving the Company exposed for any amounts over the $250,000 limit.



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 27, 2014.30, 2017.  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, twoone of the Company’s sixfive directors are membersis a member of the Weis family.



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.

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Item 1b.    Unresolved Staff Comments:



There are no unresolved staff comments.

Item 2.    Properties:



As of December 27, 2014,30, 2017, the Company owned and operated 8294 of its retail food stores and leased and operated 81111 stores under operating leases that expire at various dates through 2029.2033.  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 1.11.3 million square feet, and one in Northumberland, Pennsylvania totaling approximately 76,000 square feet.  The Company also owns one warehouse complex in Sunbury, Pennsylvania totaling approximately 551,000541,000 square feet.  The Company utilizes 259,000258,000 square feet of its Sunbury location to operate its ice cream plant, meat processing plant and milk processing plant.



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. 



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Executive Officers of the Registrant 



The following sets forth the names and ages of the Company’s executive officers as of March 12, 2015,15, 2018, indicating all positions held during the past five years:















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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 December 27, 2014 as provided by the Company's transfer agentMarch 14, 2018 was 5,364.6,493.  High and low stock prices and dividends paid per share for the last two fiscal years were:





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 published group index for the Retail Grocery Stores Industry (“Peer Group”), provided by Value Line, Inc., for the period of five years.  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





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Item 6.    Selected Financial Data:



The following selected historical financial information has been derived from the Company's audited consolidated financial statements.Consolidated Financial Statements.  This information should be read in connection with the Company's Consolidated Financial Statements and the Notes thereto, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in Item 7.



Five Year Review of Operations





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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 statementsConsolidated 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 - a general description of the Company’s business and strategic imperatives.



 •   Results of Operations - an analysis of the Company’s consolidated results of operations for the three years presented in the Company’s consolidated financial statements.Consolidated Financial Statements.



 •   Liquidity and Capital Resources - an analysis of cash flows, aggregate contractual obligations, and off-balance sheet

arrangements.



 •   Critical Accounting Policies and Estimates - a discussion of accounting policies that require critical judgments and estimates.



Company Overview



General



Weis Markets Inc. was founded in 1912 by Harry and Sigmund Weis in Sunbury, Pennsylvania.  Today, the Company ranks among the top 50 food and drug retailers in the United States in revenues generated.  As of December 27, 2014, the Company operated 163is a conventional supermarket chain that operates 205 retail food stores with over 23,000 associates located in Pennsylvania and foursix surrounding states: Delaware, Maryland, New Jersey, New York, Virginia, and West Virginia.

Company revenues are generated in its retail food stores from the sale of a wide variety of consumer  Its products includingsold include groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, pharmacy services, 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 supportspromotes by using Everyday Lower Price, Low Price Guarantee and Loyalty programs.  The Loyalty program includes fuel rewards that may be redeemed at the Company’s fuel stations or one of its retail operations through athird-party fuel station partners. 

Utilizing its own centrally located distribution facility, its owncenter and transportation fleet, Weis Markets self distributes approximately 67% of product with the remaining being supplied by direct store vendors.   In addition, the Company has three manufacturing facilities which process milk, ice cream and its administrative offices.fresh meat products.  The Company'scorporate offices are located in Sunbury, PA where the Company was founded in 1912.  The Company’s operations are reported as a single reportable segment.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)



Company Overview, (continued)



Strategic Imperatives



The following strategic imperatives willcontinue 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)



Results of Operations



Analysis of Consolidated Statements of Income

Net Sales



Income is earned by selling merchandise at price levels that produce revenues____________________

(1)  The 2017 and 2015 years were comprised of 52 weeks where the 2016 year was comprised of 53 weeks.  Due to the Company’s 2016 fiscal year being comprised of 53 weeks, the first quarter of 2017 did not include a New Year holiday sales week.  Management estimates the incremental holiday sales impact was approximately $3.0 million in excess of cost of merchandise sold and operating and administrative expenses.  Although the Company may experience short term fluctuations in its earnings due to unforeseen short-term operating cost increases, it historically2016. The $3.0 million holiday impact has been able to increase revenues and maintain stable earningsremoved from year to year.

Net Sales 

The Company's revenues are earned and cash is generated as merchandise is sold to customers at the point of sale.  Discounts provided to customers by the Company at the point of sale are recognized as a reduction in2016 comparable sales as products are sold or over the life of a promotional program if redeemable in the future.  Discounts provided by vendors, usually in the form of paper coupons, are not recognized as a reduction in sales provided the coupons are redeemable at any retailer that accepts coupons.

Total store sales increased 3.1% in 2014  compared to 2013. Excluding fuel sales, total store sales increased 2.8%.  Total store sales decreased 0.3% in 2013 compared to 2012.  Excluding fuel sales, total store sales decreased 0.4% in 2013 compared to 2012. numbers above.    



When calculating the percentage change in comparable store sales, the Company defines a new store to be comparable when it has been in operation for five full 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)



Comparable store salesNet Sales (continued)

According to the latest U.S. Bureau of Labor Statistics’ report, the annual Seasonally Adjusted Food-at-Home Consumer Price Index decreased 0.2% and 1.3% in 2017 and 2016 respectively but increased 2.0%1.1% in 20142015.  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 increased 13.1%, or $0.31 per gallon, in 2017 compared to 2013.  Excluding fuel sales, comparable store sales increased 1.7%.the 53-week average in 2016.  The 2014 sales increase is attributed53-week average price of gasoline in the Central Atlantic States, according to the Company’s current pricing initiatives and sales building programs.  Comparable store salesU.S. Department of Energy, decreased 2.6%10.1%, or $0.26 per gallon, in 20132016 compared to 2012.  Excluding fuel sales, comparable store sales decreased 2.7%the 52-week average in 2013 compared to 2012.  The 2013 sales decline is attributed to increased competition, cycling the 2012 sales impact of Hurricane Sandy and a decline in food stamp/SNAP (the United States Department of Agriculture’s Supplemental Nutrition Assistance Program) spending in its stores, which accelerated in the fourth quarter of 2013 with the reduction in SNAP benefits that went into effect on November 1, 2013.    2015.



The Company continues to make progress in a market impacted by a slowly recovering economy.  It attributes the 2014increased  net sales increaseprimarily to its continued investmentsthe acquisition of 44 locations in lower pricing and disciplinedthe second half of 2016.    Comparable store sales building programs.  In additionincreased for all years presented.  The Company was able to achieve this through targeted, promotional activitytactical marketing programs in key regional markets along with its chain wide sales-driving promotional programs such as its loyalty card.  In conjunction with its marketing initiatives the Company started an aggressive sales building program in 2014, notably its “Three Ways to Save” sales initiative, which included the seasonal “Price Freeze” or “Get Grillin’” promotional program, Everyday Lower Prices (EDLP) and Lowest Price Guarantee program.  On December 29, 2013, the Company launched a twelfth round of its "Price Freeze" program.  This program froze prices on more than 2,000 products for a thirteen-week period. On March 30, 2014, the Company entered into another "Get Grillin'" promotional program. The "Get Grillin'" promotional program was a fifteen-week reduced pricing program on top items throughout the store that our customers found to be the most seasonally relevant. This program lowered prices on approximately 1,200 items.  The EDLP program lowered prices on more than 1,000 regularly purchased items.  The Lowest Price Guarantee program offers discounts on four items every week that the Company guarantees to be the lowest compared to local competitors.  Compared to 2013, the Company generated a 1.5% increase in average sales per customer transaction in 2014, while identical customer store visits increased by 0.6%.  Compared to 2012, the Company generated a 0.7% increase in average sales per customer transaction in 2013, while the number of identical customer store visits declined by 3.3%.

The Company’s results also benefited from increased operational efficiencies and improved in-stock conditions at store level.  In addition, the Company’s Gold Card program, an extension of its existing Preferred Club Shopper program, continues to targetadd additional product offerings and customer conveniences such as “Click and Collect.”  “Click and Collect” allows the Company’s best shoppers with personalized offerscustomer to order on-line and strong values to help them save money.  The Company also continues to offer its "Gas Rewards" program in most markets.  The "Gas Rewards" program allows Weis Preferred Shoppers club card members to earn gas discounts resulting fromthen pick their in-store purchases.  Customers can redeem these gas discountsorder up at Sheetz convenience stores, located in most ofa drive thru location at the Company's markets, at Manley's Mighty Mart Valero locations, instore.  With the Binghamton, NY market or at any of the twenty-seven Weis Gas-n-Go locations.

Comparable center store sales decreased by 0.2% in 2014 compared to 2013.  Comparable center store sales decreased 3.4% in 2013 compared to 2012.  Center store was impacted by stagnant sales performance in key center store categories, increased competitionaforementioned offerings and a decline in food stamp/SNAP spending in its stores, which accelerated in the fourth quarter of 2013 with the reduction in SNAP benefits that went into effect on November 1, 2013.    

Comparable dairy sales increased 3.4% in 2014 compared to 2013. These increases are mainly attributed to commodity price inflation throughout the dairy category, with milk, cheese and butter seeing the largest increases. Despite the significant commodity price inflation,programs, the Company was able to grow unitoffset substantial deflationary pressures in its fresh departments most notably meat and produce.  Pharmacy sales ahead of remaining market in 2014 as compared to 2013, through the continual promotion of dairy products in the EDLP and Lowest Price Guarantee programs.

Comparable fresh salesvolume increased 3.0% in 2014 compared to 2013.  This increase was primarily driven by the meat, seafood, deli and food service departments.

Comparable meat sales increased 3.8% in 2014 compared to 2013.  In January 2014, the Company introduced the “Great Meals Start Here”  program, which focuses on superior customer service along with educating our customers about our quality and our ability to cut fresh meat within the stores. This program coupled with price inflation; more strategic meat advertising; and a focus on improving store conditions and resetting the stores to better serve our customers’ needs has contributed to the increase in meat sales. Comparable meat sales decreased 2.5% in 2013 compared to 2012.  With the cost of meat rising, the Company made the strategic decision to reduce retail prices in order to encourage meat sales.  The Company sold 256,084 more pounds of meat in 2013, compared to 2012.  Although total tonnage of meat sold increased, comparable meat sales decreased over the previous fiscal year due to the retail price reduction strategy.

Comparable seafood sales increased 5.1% in 2014 compared to 2013.  The increase is credited to the Company’s renewed attention to promoting fresh seafood items, enhancing product variety and the Company’s ongoing commitment to the EDLP program.  

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)



Results of Operations (continued)



The Company recognized pre-tax gains of $2.6 million, $2.9 million and $1.7 million in 2014,  2013 and 2012, respectively, from the sale of two properties in 2014 and 2013 and one property in 2012.  In 2013, the Company determined that the asset value of four properties was impaired. As a result, the Company recognized a pre-tax impairment loss of $2.1 million.  See Note 1(l) to the Consolidated Financial Statements included in this Annual Report on Form 10-KProvision for more information on the Company's impairment charges.  Earnings were further impacted in 2013 by a $680,000 adjustment to liabilities for future expenses on closed stores.Income Taxes 



Retail store profitability is sensitiveThe effective income tax rate was (24.5)%, 30.1% and 35.7% in 2017, 2016 and 2015, respectively.  On December 22, 2017, the U.S. Government enacted the Tax Cuts and Jobs Act (the ”Tax Reform”).  The Tax Reform significantly impacted the Company’s effective income tax rate by reducing the U.S. federal corporate tax rate from 35% to volatility21% effective January 1, 2018 and allowing immediate expensing of qualified assets placed into service after September 27, 2017.  Other elements of the Tax Reform have minor impacts, however the above mentioned decreased deferred income tax by $49.3 million.  The effective income tax rate decreased in utility costs2016 due to the amount of electricity and gas required to operate the Company's stores and facilities.  The Company is responding to this volatility in operating costs by employing conservation technologies, procurement strategies and associate energy awareness programs to manage and reduce consumption.  The Company continues to be a memberimpact of the EPA GreenChill program for advancing environmentally beneficial refrigerant management systems.  The Company was awardedbargain purchase gain on the GreenChill Distinguished Partner Award for leadership in refrigerant management due to the demonstrated extraordinary leadership and initiative in achieving GreenChill’s mission in 2013.  This past year, the Company received three additional Gold Level Certified Stores.  In total, the Company has twelve stores registered under the EPA GreenChill program.  In 2012, the Company replaced its existing lighting system at its 1.1 million square-foot distribution center with low watt fluorescent and LED lighting, reducing energy consumption by 80% and operating costs by 30%.  Its new store prototypes contain skylights that harvest natural daylight to reduce lighting costs, LED lighting and motion sensors in its frozen departments and energy management systems.  All Company stores have an assigned Green Leader to promote in-store energy conservation.  Despite these initiatives, the Company’s utility expense increased by $2.1 million or 5.3% in 2014 compared to 2013.  The increase is primarily due to higher capacity charges and below average temperatures38 locations being included in the Mid-Atlantic States,overall gain calculation and not in income tax expense.  The effective tax rate excluding the Company’s operating region, in the first quarter of 2014.  However, the Company’s utility expense decreased by $1.0 million or 2.6% in 2013 compared to 2012, through the aforementioned initiatives, with the added benefit of clement weather and a declining market in electricity costs.bargain purchase gain was 37.2%. 



Investment IncomeLiquidity and Capital Resources

The primary sources of cash are cash flows generated from operations and borrowings under the revolving credit agreement the Company entered into on September 1, 2016 with Wells Fargo Bank, NA.  The Company’s revolving credit agreement has a principal amount of $100.0 million with an additional discretionary availability of $50.0 million.  As of December 30, 2017, the Company’s unused availability under the revolving credit agreement was $46.8 million with $35.0 million of borrowings outstanding and $18.2 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 does not anticipate drawing on any of them.  

  

The Company’s investment portfolio consists of marketable securities, which currently includeshigh grade municipal bonds  with maturity dates between one and 10 years and large capitalized public company equity securities,securities.  The portfolio totaled $63.7 million as well asof December 30, 2017.  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 SERP investment, which is comprised of mutual funds that are maintained within the Company’s non-qualified supplemental executive retirement plan and the non-qualified pharmacist deferred compensation plan.  The Company classifies all of its municipal bonds and equity securities as available-for-sale.  Investment income declined $2.4 million in 2014 compared to 2013.  This decrease is primarily attributed to fewer sales of equity securities and a decline in the Company’s SERP investment.  The Company experienced a $1.4 million decrease in gains recognized on the sale of equity securities in 2014 compared to 2013 and the Company’s SERP investment decreased by $797,000 in 2014 compared to 2013.  Investment income increased by $1.2 million in 2013 compared to 2012, primarily resulting from the $868,000 increase in gains recognized on the sale of equity securities in 2013 compared to 2012.    

Other Income

Upon completion, the Company recognized a gain of $414,000 on the bargain purchase of three former Genuardi locations in the Delaware Valley region of Pennsylvania, from Safeway Inc., in the second quarter of 2012.    

Provision for Income Taxes

The effective income tax rate was 35.1%, 38.1% and 37.0% in 2014, 2013 and 2012, respectively.  In 2014, pre-tax book income decreased significantly.  Tax exempt interest and dividends eligible for a dividends received deduction increased, causing an increase to the net favorable permanent differences.  The combination of the decrease to net income before taxes and increase to the net favorable permanent differences resulted in a drop in the effective rate for 2014.  The rate increased starting in 2012 due to the decrease in the domestic production deduction also referred to as the Section 199 deduction.  The qualifying manufacturing sales decreased during 2012 resulting in a sizeable provision to return adjustment which results in a higher effective tax rate.  The effective income tax rate differs from the federal statutory rate of 35% primarily due to the effect of state taxes, net of permanent differences.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)

Liquidity and Capital Resources

Net cash provided by operating activities was $123.1 million in 2014, compared to $142.6 million in 2013 and $124.0 million in 2012.  In 2013, management implemented new inventory control buying procedures that increased distribution center efficiencies.  Under these new buying procedures, the distribution center inventory level decreased an average of $9.8 million per period during 2014 compared to 2013 and $7.0 million during the last nine fiscal months of 2013 compared to the same period in 2012.  The Company's overall inventory level only decreased by $811,000 in 2014 compared to 2013 and $4.8 million in 2013 compared to 2012 as a result of holding more inventory at year end for the holidays and the addition of larger stores during each year.  Working capital increased 5.8% in 2014, decreased 7.9% in 2013 and increased 2.7% in 2012, in each case compared to the prior year.  The 2014 working capital increase is primarily attributed to the lower investment in the Company’s capital expansion program during 2014 compared to the previous years.  Whereas, the 2013 decrease in working capital is primarily due to the utilization of marketable securities to fund the Company’s capital expansion program.

Net cash used in investing activities was $85.8 million in 2014 compared to $106.8 million in 2013 and $107.8 million in 2012.  These funds were used primarily to purchase marketable securities and property and equipment in the three fiscal years presented.  While the Company purchased marketable securities in all three years presented, the Company’s net marketable securities transactions resulted in the purchase of $8.4 million in 2014, compared to the disposal of $18.7 million in 2013 and the sale of $6.2 million in 2012.  Property and equipment purchases totaled $79.2 million in 2014, compared to $128.1 million in 2013 and $115.9 million in 2012, which included the acquisition of a business in 2012.  The Company acquired three former Genuardi stores for $6.1 million in 2012.  As a percentage of sales, capital expenditures including the acquisition were 2.9%, 4.8% and 4.3% in 2014, 2013 and 2012, respectively.    Proceeds from the sale of property and equipment decreased $837,000 in 2014 compared to 2013 despite the sale of properties in each of the first and third quarters of 2014 for a total of $2.8 million.  Proceeds from the sale of property and equipment increased $1.9 million in 2013 compared to 2012, primarily due to the sale of two properties for $3.2 million in the second quarter of 2013.market risk.



The Company’s capital expansion 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 estimates that its current developmentcurrently plans will require an investment ofto invest approximately $91.8$85.5 million in 2015.its capital expansion program in 2018.



Net cash used in financing activities was $32.3 million in 2014, 2013 and 2012, which solely consisted of dividend payments to shareholders.  At December 27, 2014, the Company had outstanding letters of credit of $19.9 million.  The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.  The Company does not anticipate drawing on any of them. 

Total cash dividend payments on common stock, on a per share basis, amounted to $1.20 in 2014, 2013 and 2012.  No treasury stock was purchased in 2014, 2013 or 2012.  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 $1.20 in 2017,  2016 and 2015.  The Company has no other commitmentexpects to continue paying regular cash dividends on a quarterly basis. However, the Board of capital resources asDirectors reconsiders the declaration of December 27, 2014, other than the lease commitments on its store facilities under operating leases that expire at various dates through 2029.dividends quarterly. The Company anticipates funding its working capital requirementspays these dividends at the discretion of the Board of Directors and its $91.8 million capital expansion program through cashthe continuation of these payments and investment reservesthe amount of the dividends depends upon the results of operations, the financial condition of the Company and future internally generated cash flows from operations.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)



Liquidity and Capital Resources (continued)(Continued)



The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates as they relate to available-for-sale securities and any future long-term debt borrowings.  The Company’s marketable securities portfolio currently consists of municipal bonds and equity securities.  Other short-term investments are classified as cash equivalents on the Consolidated Balance Sheets.Cash Flow Information



Under its current policies, the Company invests

Operating

Cash flows from operating activities increased in high-grade marketable debt securities2017 as compared to 2016 and does not use interest rate derivative instrumentsin 2016 as compared to manage exposure2015 primarily related to interest rate fluctuations.  Currently, the Company’s investment strategyrecent acquisitions.  The acquisitions are summarized in Note 9 of obtaining marketable debt securities with maturity dates between one and ten years helps to minimize market risk and to maintain a balance between risk and return.  The equity securities owned by the Company consist primarily of stock held in large capitalized companies trading on public security exchange markets.  The Company’s management continually monitors the risk associated with its marketable securities.  A quantitative tabular presentation of risk exposure is located in “Item 7a. Quantitative and Qualitative Disclosures about Market Risk” of this report.

By their nature, these financial instruments 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 experienced an unrealized holding gain net of deferred taxes of $927,000 in 2014 and unrealized holding losses net of deferred taxes of $36,000 in 2013 and $9,000 in 2012 (see Consolidated Statements of Comprehensive Income).  As of December 27, 2014, the Company had $8.3 million in gross unrealized holding gains and $96,000 in gross unrealized holding losses related to marketable securities.  See Note 2 Marketable Securities, of Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K10-K.  In addition, in 2017 the negative impact of first quarter long-term incentive payments of $11.8 million were offset by a reduction of $17.1 million of cash paid for more informationincome taxes during the year.     

Investing

Property and equipment purchases totaled $95.9 million in 2017, compared to $142.1 million in 2016 and $90.2 million in 2015.  In the second half of 2016, the Company paid $24.6 million for the purchase of five former Mars Super Market locations in the Baltimore County, MD region; $29.4 million for the purchase of 38 former Food Lion Supermarket locations throughout Virginia, Maryland and Delaware and $9.6 million for the purchase of a former Nell’s Family Market location in East Berlin, PA.   The Company paid $7.9 million for the property and equipment related to the purchase of a store in Hanover, PA in the third quarter of 2015.  As a percentage of sales, capital expenditures, including the 2016 acquisitions, were 2.8% in 2017, 7.0% in 2016, and 3.1% in 2015.  In 2016, the Company sold $42.5 million of marketable securities as it prepared to finance future acquisitions.  In 2017, the Company plans to maintain its marketable securities portfolio at its current level.

Financing

The Company paid dividends of $32.3 million in 2017, 2016 and 2015.  In 2017, payments on the Company’s marketable securities.revolving credit agreement increased net cash used in financing activities by $29.5 million.  In 2016, the funds provided by the revolving credit agreement increased net cash flow provided by financing activities by $64.5 million.  The Company anticipates payments on the revolving credit agreement to continue throughout 2018.  



Contractual Obligations

The following table represents scheduled maturities of the Company’s long-term contractual obligations as of December 27, 2014.30, 2017. 

Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)



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, except for the possibility that the Financial Accounting Standards Board could require the Company's store leaseslease commitments to be recognized on the balance sheet.sheet related to operating leases for its store facilities and transportation equipment, which will be required for annual periods beginning after December 15, 2018 per the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842).  See Note 1(v) Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on ASU 2016-02.



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. In the first quarter of 2012, the Company changed its accounting policy for the depreciation of property and equipment.  See Note 1 (j) to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the Company’s change in accounting estimate related to depreciation expense.

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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)



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.Consolidated Financial Statements.



Inventories

Inventories are valued at the lower of cost or market,net realizable value, using both the last-in, first-out (LIFO) and average cost methods.  The Company’sfor center store and pharmacy inventories are valued usingand average cost methods for fresh inventories.  Under the LIFO and themethod, inventory is stated at cost, which is determined by applying a cost-to-retail to each similar merchandise category’s ending retail value.  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.

Property and Equipment

In the first quarter of 2012, the Company changed its accounting policy for property and equipment.  Property and equipment continue to be recorded at cost.  Prior to January 1, 2012, the Company provided for depreciation of buildings and improvements and equipment using accelerated methods.  Effective January 1, 2012, the Company changed its method of depreciation for this group of assets from the accelerated methods to straight-line.  Management deemed the change preferable because the straight-line method will more accurately reflect the pattern of usage and the expected benefits of such assets.  Management also considered that the change will provide greater consistency with the depreciation methods used by other companies in the Company's industry.  The change was accounted for as a change in accounting estimate effected by a change in accounting principle.  The net book value of assets acquired prior to January 1, 2012 with useful lives remaining will be depreciated using the straight-line method prospectively.  If the Company had continued using accelerated methods, depreciation expense would have been $11.5 million greater in 2012.  Had accelerated methods continued to be used, after considering the impact of income taxes, the effect would decrease net income by $6.8 million or $.25 per share in 2012.

Leasehold improvements are unaffected by the change noted above.  Leasehold improvements continue to be 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.”

Goodwill and Intangible Assets

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.  Goodwill is not amortized but tested for impairment for each reporting unit on an annual basis and between annual tests in certain circumstances.

To derive the fair value of the Company’s sole reporting unit, the Company uses an income approach along with an analysis of its stock value.  Under the income approach, fair value of a reporting unit is determined based on estimated future cash flows discounted by an estimated weighted-average cost of capital, which reflects the overall level of inherent risk of the Company.  Estimated future cash flows are based on the Company’s internal projection model.  The stock value evaluation consists of measuring the average market capitalization of the Company against its total asset value of its sole reporting unit.  The Company completes an impairment test annually.  See Note 1(l) to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information on the Company’s impairment of long-lived assets.

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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)

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 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 unit cost is relatively low.



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 realized as a reduction of cost of sales at the time it is deemed probable and reasonably estimable 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 rack and 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.



Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)

Critical Accounting Policies and Estimates (continued)

Store Closing Costs

The Company provides for closed store liabilities relating to the estimated post-closing lease liabilities and related other exit costs associated with the store closing commitments.  TheAs of December 30, 2017, the remaining closed store liabilities are usually paid overhas a lease term of approximately eight months, and the lease termsliabilities associated with the closed stores having remaining terms ranging from one to four years.  At December 27, 2014, closedstore lease are paid over the term of the lease.  Closed store lease liabilities totaled $955,000.$39,000 and $105,000 as of December 30, 2017 and December 31, 2016, respectively.  The Company estimates the lease liabilities, net of estimated sublease income, using the undiscounted rent payments of closed stores.  Other exit costs include estimated real estate taxes, common area maintenance, insurance and utility costs to be incurred after the store closes over the remaining lease term.  Store closings are generally completed within one year after the decision to close.  Adjustments to closed store liabilities and other exit costs primarily relate to changes in subtenantssublease income and actual exit costs differing from original estimates.  Adjustments are made for changes in estimates in the period in which the changes become known.  Any excess store closing liability remaining upon settlement of the obligation is reversed to income in the period that such settlement is determined.  Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that is no longer needed for its originally intended purpose, is adjusted to income in the proper period.  Inventory write-downs, if any, in connection with store closings, are classified in cost of sales.  Costs to transfer inventory and equipment from closed stores are expensed as incurred. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is no longer needed for its originally intended purpose is reversed to income in the proper period.



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 workers’ compensationmedical 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 was liable for associate health claims up to an annual maximum of $750,000 per member prior to March 1, 2012, $1,250,000 per member prior to March 1, 2013, $2,000,000 per member prior to March 1, 2014 and an unlimited amount per member as of March 1, 2014.  As of March 1, 2014, the Company purchased stop loss insurance which carries a $500,000 specific deductible with a $250,000 aggregating deductible. The Company is liable for workers' compensation claims up to $2,000,000 per claim.  Property and casualty insurance coverage is maintained with outside carriers at deductible or retention levels ranging from $100,000 to $1,000,000. 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.

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Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations: (continued)



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.

Item 7a.    Quantitative and Qualitative Disclosures about Market Risk: