Harris Teeter 2012 Annual Report Download - page 17

Income tax expense from discontinued operations for fiscal 2012 includes deferred tax expense of $3.5 million relating
to a valuation allowance for additional capital losses recognized in connection with the sale of A&E.
Outlook
The Company’s operating performance and strong financial position provide the flexibility to continue with its store
development program for new and replacement stores along with the remodeling and expansion of existing stores. During fiscal
2013, the Company plans to open twelve new stores (which includes two replacements and the two store locations acquired
from Lowes Foods that were converted to our 201central format) and complete major remodels on nine stores (three of which
will be expanded in size). The fiscal 2013 new store openings are currently scheduled for three in the first quarter, two in the
third quarter and seven in the fourth quarter. The 2013 store development program is expected to result in a 5.4% increase in
retail square footage as compared to a 4.5% increase realized in fiscal 2012. The Company routinely evaluates its existing store
operations in regards to its overall business strategy and from time to time will close or divest older or underperforming stores.
The new store program anticipates the continued expansion of Harris Teeter’s existing markets, including the Washington,
D.C. metro market area which incorporates northern Virginia, the District of Columbia, southern Maryland and coastal
Delaware. Real estate development by its nature is both unpredictable and subject to external factors including weather,
construction schedules and costs.Any change in the amount and timing of new store development can impact the expected capital
expenditures, sales and operating results.
Startup costs associated with opening new stores can negatively impact operating margins and net income. In the current
competitive environment, promotional costs to maintain market share could also negatively impact operating margins and net
income in future periods. The continued execution of productivity initiatives implemented throughout all stores, maintaining
controls over waste, implementation of operating efficiencies and effective merchandising strategies will dictate the pace at
which the Company’s operating results could improve, if at all.
The Company’s management remains cautious in its expectations for fiscal 2013 due to the current economic environment
and its impact on the Company’s customers. The Company will continue to refine its merchandising strategies to respond to
the changing shopping demands. The retail grocery market remains intensely competitive, including the possibility of new
competitors coming into the Company’s existing markets. Any operating improvement will be dependent on the Company’s
ability to increase market share, control costs and to effectively execute the Company’s strategic expansion plans.
Capital Resources and Liquidity
The Company’s principal source of liquidity has been cash generated from operating activities of Harris Teeter and
borrowings available under the Company’s credit facility. During fiscal 2012, the net cash provided by operating activities was
$207.3 million, compared to $272.2 million in fiscal 2011 and $243.7 million in fiscal 2010. The decrease from fiscal 2011 to
fiscal 2012 was driven by lower earnings and the timing of accruals and related payments associated with normal operations.
Investing activities in fiscal 2012 required net cash of $45.1 million and included among other items approximately $170 million
in cash proceeds from the sale of A&E and $26.3 million of cash paid for the Lowes Foods Transaction. Fiscal 2011 investing
activities were $109.0 million and included Harris Teeter’s sale of its ownership position in five investment properties along
with one owned property which generated $22.6 million of cash and the Company’s sale of a foreign investment which generated
$21.6 million of cash. Historically, capital spending has been financed by cash provided by operating activities and supplemented
with borrowings under the Company’s credit facility. Financing activities in fiscal 2012 utilized $114.5 million of cash and
included $80.0 million for the repayment of the term loan under the Company’s prior credit facility. Financing activity also
included $27.1 million for the payment of dividends in fiscal 2012, compared to $25.6 million in fiscal 2011 and $29.3 million
in fiscal 2010 (consisting of five quarterly payments).
Fiscal 2012 capital expenditures totaled $199.9 million, as compared to $148.0 million in fiscal 2011 and $128.2 million
in fiscal 2010. Fiscal 2010 capital expenditures included $21.5 million for the exchange of the corporate aircraft, which was
partially offset by $14.4 million of proceeds from the sale of the old aircraft. Capital expenditures for fiscal 2013 are expected
to total approximately $235 million. The Company anticipates that its capital investment for new store growth and store remodels
will be concentrated in its existing markets for fiscal 2013, as well as in the foreseeable future. The Company has sufficient
resources through internally generated funds, proceeds from the sale of A&E and borrowings available under the Company’s
credit facility to complete the planned capital investment. Management believes that the Company’s revolving line of credit
provides sufficient liquidity for what management expects the Company will require through the expiration of the line of credit
in January 30, 2017.
On January 30, 2012, the Company amended and restated its then-existing credit agreement that provided financing under
a $100.0 million term loan and a $350.0 million revolving line of credit. The prior credit agreement was due to expire in
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