UNITED STATES

SECURITIES & EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.

For the fiscal year ended:  July 28, 201226, 2014

(Exact name of registrant as specified in its charter)

 

Securities registered pursuant to Section 12(g) of the Act:  NONE

PART I

(All (All dollar amounts in this report are in thousands, except per square foot data).

GENERAL

Village Super Market, Inc. (the “Company” or “Village”) was founded in 1937.   Village operates a chain of twenty-nine29 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.prices with superior customer service.  During fiscal 2012,2014, sales per store were $49,903$52,367 and sales per sellingaverage square foot of selling space were $1,112.$1,153.  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 concentrates oncompetes 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.

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 development of superstores.greater Morristown area and replaced the 40,000 sq. ft. Morris Plains store.  

On January 29, 2012, Village acquired the store fixtures, lease and other assets of the ShopRite in Old Bridge, New Jersey (40,000 sq. ft.) for $3,250 plus inventory and other working capital for $1,116.  On July 7, 2011, Village acquired the store fixtures, leases and pharmacy lists of locations in Silver Spring (64,000 sq.ft.) and Timonium, Maryland (57,000 sq.ft.) for $6,595 from SuperFresh.  Village opened the Maryland stores as ShopRites on July 28, 2011 after remodeling.  

 

Village also has on-site registered dieticians in ninethirteen stores to consultthat provide customers with customersfree, 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.

 

The following table shows the percentage of the Company's sales allocable to various product categories during each of the periods indicated, as well as the number of superstores and percentage of selling square feet allocable to these stores during each of these 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.closed, remodeled or replaced.

DEVELOPMENT AND EXPANSION

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 $20$25 million for capital expenditures for fiscal 2013. This includes2015.  Planned expenditures include three major remodels and several smaller remodels.

In fiscal 2014, Village completed the beginning of construction of twoa replacement storesstore 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.

WAKEFERN FOOD CORPORATION

The Company is the second largest member of Wakefern and owns 13.7% of Wakefern’s outstanding stock as of July 28, 2012.26, 2014.  Wakefern, which was organized in 1946, is the nation’s largest retailer-owned food cooperative.  Wakefern and its 4649 shareholder members operate 294321 supermarkets and other retail formats, including 7989 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 the ShopRite Price Plus 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 12.4%10.8% of sales in fiscal 2012.2014.

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.  James Sumas, the Company’s Chief Executive 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.support, including shoprite.com and the ShopRite smart phone app.

Wakefern operates warehouses and distribution facilities in Elizabeth, Keasbey, Whitehouse, Dayton, Edison, Carteret, Newark and Jamesburg, New Jersey and Gouldsboro and Breinigsville, Pennsylvania.  The Company and all other members of Wakefern are parties to the Wakefern Stockholder’s 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 Stockholder 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 2012, 20112014, 2013 and 2010.2012.  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 twenty-five25 non-ShopRite supermarkets in any other locations in the United States.

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.

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 $23,406$25,012 at July 28, 2012.26, 2014.  The total amount of debt outstanding from all capital pledges to Wakefern is $2,830$1,741 at July 28, 2012.26, 2014.  The maximum per store capital contribution increased from $775$825 to $800$850 in fiscal 2012,2014, resulting in an additional $622$657 capital pledge, which was paid in fiscal 2012.2014.

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.

 

TECHNOLOGY

 

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 customers 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-lineOn-line shopping is available in eleventwelve store locations with store pick-up and delivery options.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.  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. 

 

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.

 

In fiscal 2010, Village upgraded itsuses digital surveillance systems whichthat 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.  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.

 

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.

LABOR

 

 

AVAILABLE INFORMATION

 

 

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 www.sec.gov.sec.gov.

 

REGULATORY ENVIRONMENT

 

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. In addition, the Company is subject to the requirements of the Sarbanes-Oxley Act of 2002.

 

 

COMPETITIVE ENVIRONMENT

 

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 regional supermarkets, local supermarkets,supermarket chains as well as warehouse club stores,clubs, supercenters, drug stores, conveniencediscount general merchandise stores, fast food chains, restaurants, dollar stores discount merchandisers, restaurants and other local retailers.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.

 

GEOGRAPHIC CONCENTRATION AND NEW TRADE AREA

 

The Company’s stores are concentrated in New Jersey, with one store in northeastern Pennsylvania and two in Maryland. 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. As the Company beginsMaryland stores sales, marketing costs and operating in this new market, marketing and other costs will be higherperformance remain worse than in established marketsinitially projected as Village attemptswe continue to build market share and brand awareness.  In addition, sales forIf these twotrends continue, the performance of our Maryland stores are initially expected to be lower than the typical Company store.  Potentially higher costs and sales results lower than the Company’s expectations could have a material adverse effect onmay negatively impact the Company’s results of operations.

 

WAKEFERN RELATIONSHIP

 

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 affecteffect on Village’s results of operations.

LABOR RELATIONS

 

We provide health benefits to a large number of our employees, primarily through multi-employer health plans.  Effective January 1, 2015, the Patient Protection and Affordable Care Act will impose new mandates on employers that could significantly increase the number of employees receiving benefits and our required contributions to these multi-employer health plans.  The impact of the law will depend on many factors, including finalization of rules implementing the law, the number of additional employees that we will be required to provide health benefits and the number of eligible employees that enroll for medical benefits, which could be material to our results of operations.

 

FOOD SAFETY

 

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.

 

MULTI-EMPLOYER PENSION PLANS

 

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.

 

On April 15, 2011, Village, along with allOur long-lived assets, primarily stores, are subject to periodic testing for impairment. Failure of the other individual employers trading as ShopRite, permanently withdrew from participatingour asset groups to achieve sufficient levels of cash flow could result in the United Food and Commercial Workers Local 152 Retail Meat Pension Fund (“the Fund”), effective the end of April 2011.  The Fund is a multi-employer defined benefit plan that includes other supermarket operators. Village, along with the other affiliated ShopRite operators, determined to withdraw from the Fund due to exposures to market risks associated with all defined benefit plans and the inability to partition ShopRite’s liabilities from those of the other participating supermarket operators.  Village now provides affected associates with a defined contribution plan for future service, which eliminates market risks and the exposure to shared liabilities of other operators, and is estimated to be less costly than the defined benefit plan in the future, while ensuring that our associates are provided a secure benefit. The Company recorded a pre-tax charge of $7,028 in fiscal 2011 for this withdrawal liability, which represented our estimate of the liability basedimpairment charges on calculations provided by the Fund actuary. The Company settled this obligation in January 2012, resulting in a pre-tax benefit of $646 in fiscal 2012.  Village remains liable for potential additional withdrawal liabilities to the Fund in the event a mass withdrawal, as defined by statute, occurs within two plan years after the plan year of Village’s withdrawal.  Such liabilities could be material to the Company’s consolidated financial statements.

 

TAXES

 

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.

 

 

Not applicable.

 

 

As of July 28, 2012,26, 2014, Village owns the sites of fivesix of its supermarkets (containing 335,000412,000 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 twenty four23 supermarkets (containing 1,309,0001,288,000 square feet of total space) and the corporate headquarters are leased, with initial lease terms generally ranging from twenty20 to thirty30 years, usually with renewal options.  Sixteen of these leased stores are located in shopping centers and the remaining eightseven are freestanding stores.  In addition to the above, on July 30, 2009 the Company purchasedowns the land and building of the old Washington store, which is currently available for sale.

 

 

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.

 

 

PART II

Stock Price and Dividend Information

As of October 1, 2012,2014, there were approximately 750775 holders of Class A common stock.

Performance Graph

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.

Unaudited Quarterly Financial Data

 

Village Super Market, Inc. (the “Company” or “Village”) operates a chain of 29 ShopRite supermarkets in New Jersey, Maryland and northeastern Pennsylvania. On January 29, 2012, Village acquired the store fixtures, lease and other assets of the ShopRite in Old Bridge, New Jersey (40,000 sq. ft.) for $3,250 plus inventory and other working capital for $1,116.  On July 7, 2011, Village acquired the store fixtures, leases and pharmacy lists of locations in Silver Spring, Maryland (64,000 sq.ft.) and Timonium, Maryland (57,000 sq.ft.) for $6,595 from Super Fresh.  In addition, Village purchased pharmacy inventories at cost. Village began operating pharmacies at these locations on July 7, 2011.  These stores opened as ShopRites on July 28, 2011 after remodeling.November 6, 2013, Village opened a replacement77,000 sq. ft. store in Washington, NJ on February 21, 2010.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.

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, fivesix of which are owned, average 57,00059,000 total square feet. LargerThese larger store sizes enable Villagethe Company’s stores to offer theprovide a “one-stop” shopping experience and to feature expanded higher margin specialty departments that customers desire for one-stop shopping, including pharmacies,such as an on-site bakery, an expanded delicatessen, a variety of natural and organic departments,foods, ethnic and international foods, prepared foods and home meal replacement.pharmacies.  During fiscal 2012,2014, sales per store were $49,903$52,367 and sales per average square foot of selling space were $1,112.$1,153. Management believes these figures are among the highest in the supermarket industry. 

We consider a variety of indicators to evaluate our performance, such as same store sales,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 2010 contains 53 weeks. The inclusion of the 53rd week in fiscal 2010 had an estimated positive impact on net income of $1,200. Fiscal2014, 2013 and 2012 and 2011 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 $1,422,243$1,518,636 in fiscal 2012,2014, an increase of $123,315,$42,179, or 9.5%2.9% from the prior year. Sales increased due to the opening of two new stores in Marylandthe greater Morristown replacement store on July 28, 2011, the acquisition of aNovember 6, 2013 and Union replacement store in Old Bridge, NJ on January 29, 2012 and a sameApril 30, 2014.  Same store sales increase of 4.9%.  Same stores sales increased .2% due to higherincreased sales in sevenboth 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 closingsopenings by competitors, inflation, increased customer counts, and improvedvery high sales in the Washingtonprior year as customers prepared for superstorm Sandy, and Marmora stores, which opened in recent fiscal years.  Although Village experienced inflation in fiscal 2012, there was minimal change in the average transaction size during the year.  As expected, the impact of the competitive store closures that began in the second half of fiscal 2011 and inflation both moderated beginning in the third quarter of fiscal 2012, resulting in a fourth quarter same store sales increase of 1.8%.  Sales continue to be impacted by economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down.  The Company expects same storereduced sales in fiscal 2013 to increase from 2.0% to 4.0%, includingstores that reopened quickly after the positive impact from the inclusion of the Maryland stores in same stores sales beginning in the first quarter of fiscal 2013.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 $1,298,928$1,476,457 in fiscal 2011,2013, an increase of $37,103,$54,214, or 2.9%3.8% from the prior year. The prior year included $21,000 of sales attributable to a 53rd week. Excluding the 53rd week from the prior year, fiscal 2011 sales increased $58,103, or 4.7%.  Sales increased due to the openingacquisition of the Washington,a store in Old Bridge, NJ replacement store on February 21, 2010January 29, 2012 and a same store sales increase excluding the 53rd week in the prior year, of 4.0%2.9%.  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 Marmora store, which openedtwo stores in 2009, higher sales in five stores due to store closings by competitors during fiscal 2011, and a substantial increase in transaction counts. Although Village experienced inflation in the second half of fiscal 2011, there was minimal change in the average transaction size during the year.Maryland.  Sales continued to be impacted by changing consumer behavior,economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down. Same store sales in the fourth quarter of fiscal 2011, excluding the impact of the 53rd week in the prior year, accelerated to an increase of 7.7% as this was the first complete quarter to include all the store closings by competitors.

GROSS PROFIT

 

Gross profit as a percentage of sales increased .38%decreased .04% in fiscal 2012 compared to the prior year primarily due to increased departmental gross margin percentages (.15%), decreased warehouse assessment charges from Wakefern (.16%) and higher patronage dividends (.11%).  These improvements were partially offset by higher promotional spending (.06%).

Gross profit as a LIFO chargepercentage of sales decreased .40% in fiscal 20112013 compared to a LIFO benefit in the prior year (.06%primarily due to decreased departmental gross margin percentages (.47%). These declines were, partially offset by decreased warehouse assessment charges from Wakefern (.23%improved product mix (.06%).  Gross margins declined in several departments primarily due to investments in lower prices to combat nontraditional competitors.

 

OPERATING AND ADMINISTRATIVE EXPENSE

 

Operating and administrative expense as percentage of sales decreased .53% compared to the prior year due to the prior year including a $7,028 charge for the withdrawal liability from a multi-employer defined benefit plan (.54%).  In addition, fiscal 2012 benefitted from operating leverage from the 4.9% same store sales increase, partially offset by higher operating costs as a percentage of sales for the two new Maryland stores, including store opening costs.

Operating and administrative expense as a percentage of sales increased .53% in fiscal 2013 compared to the prior year primarily due to higher payroll (.15%) and fringe benefit (.27%) costs, a charge from settlement of a dispute with a landlord (.04%), and the prior fiscal year included a favorable settlement of a pension withdrawal liability (.04%).  These increases were partially offset by income from settlement of the national credit card lawsuit (.08%) in the current fiscal year.  Payroll costs increased due to efforts to enhance the customer experience and provide additional services, including our first Village Food Garden at the remodeled Livingston store sales increase.and the addition of ShopRite from Home in several stores.  Fringe benefit costs increased due to higher costs for health, pension and workers compensation.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense was $19,759, $18,621,$22,274, $20,354 and $16,900$19,759 in fiscal 2012, 2011,2014, 2013 and 2010,2012, respectively. Depreciation and amortization expense increased in fiscal 20122014 and 20112013 compared to the prior years due to depreciation related to fixed asset additions, includingadditions.

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

 

INTEREST EXPENSE

 

Interest expense was $4,415, $4,280,$3,602, $3,771 and $3,660$4,415, in fiscal 2012, 2011,2014, 2013 and 2010,2012, respectively. Interest expense increaseddecreased in 2011fiscal 2014 and 2013 compared to the prior yearfiscal 2012 due to an amendment ofinterest costs capitalized in fiscal 2014 and 2013, and interest incurred on a store lease near the end ofpension withdrawal liability included in fiscal 2010 being treated as a capital lease.2012.

 

INTEREST INCOME

 

Interest income was $2,571, $2,207,$2,622, $2,783 and $2,020$2,571 in fiscal 2014, 2013 and 2012, 2011, and 2010, respectively. Interest income increased in fiscal 2012 and 2011 compared to the prior years due to higher amounts invested.

 

INCOME TAXES

 

The Company’s effective income tax rate was 41.5%82.5%, 42.1%,42.2% and 41.8%41.5% in fiscal 2014, 2013 and 2012, 2011,respectively.

As described in Note 5 to the Consolidated Financial Statements, income taxes in 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 effective tax rate was 47.6% in fiscal 2014 compared to 42.2% in the prior year.  The increase in the effective tax rate is due to the impact of New Jersey Tax Court decision including increased accrued interest and 2010, respectively.penalties in the current year.

NET INCOME

 

Net income was $5,045 in fiscal 2014 compared to $25,784 in fiscal 2013.  Fiscal 2014 includes a $11,608 increase to income tax expense as a result of the unfavorable ruling by the New Jersey Tax Court, 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.

Net income was $25,784 in fiscal 2013 compared to $31,445 in fiscal 2012 compared to $20,982 in2012.  Fiscal 2013 includes income from partnership distributions of $840 (net of tax), income from the prior year.  Excluding a $4,241national credit card lawsuit of $693 (net of tax) and a charge for the settlement of a landlord dispute of $376 (net of tax), while fiscal 2012 includes a favorable settlement of a pension withdrawal liability of $374 (net of tax).   Excluding these items from a multi-employer pension planboth fiscal years, net income in fiscal 2013 declined 21% compared to the prior year net income increased 25%.  Net income increased primarily due to improved same store sales and increasedlower gross profit percentages.  Net income increased despitepercentages and higher operating expenses as a percentage of sales, partially offset by reduced losses in the two new Maryland stores as sales in Maryland are lower than expected and we continuecompared to build market share and brand awareness.

 

CRITICAL ACCOUNTING POLICIES

 

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.

 

IMPAIRMENT

 

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. Since the Company’s stock is not widely traded, managementThe 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 28, 2012.26, 2014. 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.

 

PATRONAGE DIVIDENDS

 

As a stockholder of Wakefern, Village earns a share of Wakefern’s earnings, which are distributed as a “patronage dividend” (see Note 3). 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 $10,774$12,923 and $9,018$11,810 at July 28, 201226, 2014 and July 30, 2011,27, 2013, respectively.

PENSION PLANS

 

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 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 28, 201226, 2014 was to match the plans 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 3.59%3.95% at July 28, 201226, 2014 compared to 4.99%4.43% at July 30, 2011.27, 2013. The 1.40%.48% decrease in the discount rate, and a change in the mortality table utilized, increased the projected benefit obligation at July 28, 201226, 2014 by approximately $8,302.$6,337. 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.

 

Village contributed $3,227$3,320 and $3,115$3,254 in fiscal 20122014 and 2011,2013, respectively, to these Company-sponsored pension plans. Village expects to contribute $3,000$6,000 in fiscal 20132015 to these plans. The 2012, 20112014 and expected 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.  

 

UNCERTAIN TAX POSITIONS

 

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.

 

LIQUIDITY and CAPITAL RESOURCES

 

CASH FLOWS

 

Net cash provided by operating activities was $43,432$52,447 in fiscal 20122014 compared to $64,144$51,273 in the corresponding period of the prior year.

Net cash provided by operating activities was $51,273 in fiscal 2013 compared to $43,432 in the corresponding period of the prior year.  This decreaseincrease is primarily attributable to the prior year including a settlement of a $7,028 pension withdrawal liability in fiscal 2012, a decrease in payablesand changes in the current fiscal year as compared to an increase in the prior fiscal year, and the prior year including a refundtiming of cash the Company had placed in escrow to fund a property acquisition.   These decreases were partially offset by higher net income in the current fiscal year.payables.

 

During fiscal 2012,2013 Village used cash to fund capital expenditures of $16,729, the acquisition of the Old Bridge ShopRite of $4,123$21,888 and dividends of $9,758.$24,048.  Capital expenditures include remodelingsubstantial remodels of three stores and equipment for the acquired Maryland stores, the installationsite work and beginning of solar panels in one store and several small remodels.

 

LIQUIDITY and DEBT

 

Working capital was $16,782, $94,299, and $71,672 $44,448,at July 26, 2014, July 27, 2013 and $41,201 at July 28, 2012, July 30, 2011,respectively.  The decrease in working capital in fiscal 2014 compared to prior year is due primarily to the $40,598 investment in long-term notes receivable, increased income tax liabilities as result of the New Jersey Tax Court decision and July 31, 2010, respectively.capital expenditures.  Working capital ratios at the same dates were 1.72, 1.41,1.11, 1.85, and 1.491.72 to one, respectively.  The Company’s working capital needs are reduced, since inventory isinventories are generally sold beforeby the time payments to Wakefern and other suppliers are due.

 

Village has budgeted approximately $20,000$25,000 for capital expenditures in fiscal 2013.2015. Planned expenditures include the beginning of construction of two replacement storesthree major remodels and three majorseveral smaller remodels. The Company’s primary sources of liquidity in fiscal 20132015 are expected to be cash and cash equivalents on hand at July 28, 201226, 2014 and operating cash flow generated in fiscal 2013.2015.

 

At July 28, 2012, the Company had a $20,918 15-month noteOn February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern earningWakefern.  These notes earned interest at a fixed rate of 7%.  This note is automatically extended forThe Company invested the proceeds received and additional recurring 90-day periods, unless, not later than one year priorfunds 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 years and half earn interest at the prime rate plus 1.25% and mature in 5 years.  Wakefern has the right to the due date,prepay these notes at any time. Under certain conditions, the Company notifiescan require Wakefern requesting paymentto prepay the notes, although interest earned since inception would be reduced as if it was earned based on the due date. This note currently is scheduled to matureovernight money market rates as paid by Wakefern on August ­­19, 2013.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, 2014.2015. 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 28, 201226, 2014 or July 30, 201127, 2013 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 28, 2012,26, 2014, the Company was in compliance with all terms and covenants of the revolving loan agreement. Under the above covenants, Village had approximately $124,534$106,152 of net worth available at July 28, 201226, 2014 for the payment of dividends.

 

During fiscal 2012,2014, Village paid cash dividends of $9,758.$12,432.  Dividends in fiscal 20122014 consist of $.85$1.00 per Class A common share and $.5525$.65 per Class B common share.

 

During fiscal 2011,2013, Village paid cash dividends of $19,086.$24,048. Dividends in fiscal 20112013 consist of $1.70$2.00 per Class A common share and $1.105$1.30 per Class B common share. These amounts include $14,005$12,009 of special dividends paid in December 2010,2012, comprised of $1.25$1.00 per Class A common share and $.8125$0.65 per Class B common share.

This annual report contains certain forward-looking statements about Village’s future performance. These statements are based on management’s assumptions and beliefs in light of information currently available. Such statements relate to, for example: economic conditions; uninsured losses; expected pension plan contributions; projected capital expenditures; expected dividend payments; cash flow requirements; inflation expectations; and legal matters; and are indicated by words such as “will,” “expect,” “should,” “intend,” “anticipates”,“anticipates,” “believes” and similar words or phrases. The Company cautions the reader that there is no assurance that actual results or business conditions will not differ materially from the results expressed, suggested or implied by such forward-looking statements. The Company undertakes no obligation to update forward-looking statements to reflect developments or information obtained after the date hereof.

RELATED PARTY TRANSACTIONS

 

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 28, 2012,26, 2014, the Company’s indebtedness to Wakefern for the outstanding amount of this stock subscription was $2,830.$1,741. The maximum per store investment, which is currently $800,$850, increased by $25 in both fiscal 20122014 and 2011,2013, resulting in additional investments of $622$657 and $648,$949, 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.

 

At July 28, 2012, the Company had a $20,918 15-month noteOn February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern earningWakefern.  These notes earned interest at a fixed rate of 7%.  This note is automatically extended forThe Company invested the proceeds received and additional recurring 90-day periods, unless, not later than one year priorfunds 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 years and half earn interest at the prime rate plus 1.25% and mature in 5 years.  Wakefern has the right to the due date,prepay these notes at any time. Under certain conditions, the Company notifiescan require Wakefern requesting paymentto prepay the notes, although interest earned since inception would be reduced as if it was earned based on the due date. This note currently is scheduled to matureovernight money market rates as paid by Wakefern on August 19, 2013.demand deposits.

 

At July 28, 2012,26, 2014, Village had demand deposits invested at Wakefern in the amount of $82,294.$52,891. These deposits earn overnight money market rates.

 

The Company subleases the Galloway and Vineland stores from Wakefern at combined current annual rents of $1,227.$1,296. Both leases contain normal periodic rent increases and options to extend the lease.

 

VillageThe Company leases a supermarket from a realty firm partly30% owned by certain officers of Village. The Company paid rent to related parties under this related partylease of $640, $615,$640 and $595$640 in fiscal years2014, 2013 and 2012, 2011, and 2010, respectively. This lease expires in fiscal 2016 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 $801, $764,$1,008, $834 and $781$801 in fiscal years 2014, 2013 and 2012, 2011, and 2010, 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 20122014 and 2011, compared to deflation in fiscal 2010.2013. The Company recorded a pre-tax LIFO chargesbenefits of $601$216 and $412$56 in fiscal 20122014 and 2011,2013, respectively, compared to a pre-tax LIFO benefitcharge of $418$601 in fiscal 2010.2012. The Company calculates LIFO based on CPI indices published by the Department of Labor, which indicated weighted-average CPI changes of (0.6%), (0.1%) and 2.1%, 1.3%, and (1.3%) in fiscal 2014, 2013 and 2012, 2011, and 2010, respectively.

 

MARKET RISK

 

At July 28, 2012,26, 2014, the Company had demand deposits of $82,294$52,891 at Wakefern earning interest at overnight money market rates, which are exposed to the impact of interest rate changes.

 

At July 28, 2012 the Company had a $20,918 15-month noteOn February 15, 2014, Village received $23,420 as prepayment of notes receivable due from Wakefern earningWakefern.  These notes earned interest at a fixed rate of 7%.  This note is automatically extended forThe Company invested the proceeds received and additional recurring 90-day periods, unless, not later than one year priorfunds 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 years and half earn interest at the prime rate plus 1.25% and mature in 5 years.  Wakefern has the right to the due date,prepay these notes at any time. Under certain conditions, the Company notifiescan require Wakefern requesting paymentto prepay the notes, although interest earned since inception would be reduced as if it was earned based on the due date. This note currently is scheduled to matureovernight money market rates as paid by Wakefern on August 19, 2013.demand deposits.