Natural Grocers by Vitamin Cottage Q3 2023 Earnings Call Transcript

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August 3, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen. Welcome to the Natural Grocers Third Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time. As a reminder, today's call is being recorded.

Operator

I'd like now to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for the Natural Grocers. Ms. Thiessen, you may begin.

Speaker 1

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin 3rd quarter fiscal year 2023 earnings conference call. On the call with me today are Kemper Eiseley, Co President and Todd Dissinger, Chief Financial Officer. As a reminder, certain information provided during this conference call are forward looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10Q and 10 ks. The company undertakes no obligation to update forward looking statements.

Speaker 1

Today's turn the call over to Kemper.

Speaker 2

Thank you, Jessica, and good afternoon, everyone. We appreciate you joining us today. We delivered We're particularly strong. Daily average comparable store sales increased 4.4%, including a 1.9% Increase in daily average transaction count. Moreover, strength was broad based across categories.

Speaker 2

The monthly sales comp was relatively consistent throughout the quarter. We believe that our strong value proposition, especially Our carefully vetted products at always affordable prices aligns with current trends in the market. Sales Also benefited from focused marketing initiatives and leveraging the Npower loyalty program. Our operations and marketing teams have transitioned well post pandemic to focus on execution. I would like to share A few examples of their initiatives that benefited the Q3.

Speaker 2

First, we developed market specific marketing campaigns that have 2nd, effective pricing and promotion contributed The 3rd quarter gross margin improvement of 130 basis points. Finally, higher labor efficiency partially offset increased Wage rates and drove store productivity. Our crews' commitment to operational excellence, ongoing earnings per share of $0.31 an 82.4% growth compared to the Q3 of last year. The strength of our Q3 results prompted us to raise our comparable store sales and earnings per share guidance for the fiscal year. Todd will cover the results and outlook in more detail.

Speaker 2

Next, I would like to highlight 2 milestones achieved during the Q3. The first milestone relates to our Npower loyalty program. We celebrated reaching 2,000,000 Npower members During the Q3, the net sales penetration for Empower was 77% in the 3rd quarter, up from 75% Year ago, the continuing growth in membership and sales penetration demonstrates our customers' appreciation of the benefits and value provided by the program. Npower continues to be an effective tool for optimizing Examples include personalized e mails that tailor promotional offerings to customers' Natural Grocers was founded by my parents in 1955, who were inspired by founding principles To the health and well-being of humans, animals and the planet, we adopted single use bag free checkouts in 2 Turning now to new store development. During the Q3, we relocated our store in Amarillo, Texas.

Speaker 2

Relocations are an important component of our store development strategy as they enable us to leverage an established market presence with A stronger facility and location. Relocations generally realize double digit sales growth off a mature sales base. For fiscal year 2023, we are on track to open 4 new stores and relocate or remodel 3 stores. Finally, I would like to thank And with that, I will turn the call over to Todd to discuss our financial results and guidance.

Speaker 3

Thank you, Kemper, and good afternoon. We are pleased with our strong Q3 results. Net sales increased 5.8% from the prior year period to $281,800,000 Our daily average comparable store sales increase of 4.4% was comprised of a 2.4% increase in daily average transaction size and a 1.9% We observed minimal trade down in the Q3. Our strongest performing departments were dairy, body care, meat and dietary supplements. Our continuing growth of supplements indicates the stickiness of elevated pandemic demand.

Speaker 3

The growth in supplements further reflects our differentiation and strong competitive position in this important category, which is also margin accretive. The Natural Grocers brand represented 7.6% of Total sales, down slightly from 7.7 percent a year ago. For the Q3, gross margin increased 130 basis Store expenses as a percentage of net sales decreased 40 basis points and was primarily driven by expense leverage on sales, partially offset by higher labor expense as a result of increased wage Rates. Administrative expenses as a percentage of net sales increased 50 basis points and was primarily driven by higher for the Q3 of fiscal 20232022, respectively. The decrease in the effective income tax This rate was primarily attributable to increased food donation deductions recorded during the Q3 of fiscal 2023.

Speaker 3

We anticipate our normalized effective income tax rate will be more aligned with the year to date tax rate. Net income Adjusted EBITDA was $16,700,000 Turning to the balance sheet and cash flow. We ended the 3rd quarter in a strong financial position with $8,600,000 of cash and cash equivalents. We had no outstanding borrowings under our $50,000,000 revolving credit facility. During the 1st 9 months Of fiscal year 2023, we generated cash from operations of $36,200,000 and invested 24,300,000 dollars in net capital expenditures, primarily for new and relocated stores, resulting in Free cash flow of $11,900,000 Today, we announced that our Board of Directors has declared a quarterly cash dividend of $0.10 per share.

Speaker 3

The dividend will be paid on September 13, 2023 to all stockholders of record at the close on August 28, 2023. We are raising our fiscal 2023 outlook for comparable store sales and diluted earnings per share based on our strong year to date performance and current trends. We are also refining our outlook for the number of new stores, relocations and remodels. Our guidance now includes the following: Open 4 new stores, relocate or remodel 3 stores, achieve daily average comparable store sales growth between 2% 3%, achieve diluted earnings per share between 0 point 8 $6 and 0.94 and direct $28,000,000 to $35,000,000 towards capital expenditures to support our growth initiatives. In closing, we had a strong quarter that we attribute to many factors, including a loyal and resilient customer base that prioritizes our healthy and sustainably focused offerings at always to continue to drive profitable growth and enhance value for all stakeholders.

Speaker 3

With that, I would like to open the lines for questions. Thank you.

Operator

Our first question comes from Scott Mushkin of R5 Capital. Go ahead.

Speaker 4

Hey, guys. Thanks for taking my questions. And it's clear that your initiatives are obviously having A nice benefit to the business, so congratulations on that.

Speaker 2

Thank you for that.

Speaker 4

The I don't know if you remember our Last call, I was asking you, I think a little bit about how you guys performed during the last recession. I kind of wanted to take that maybe To the next step of as you look at your business and what's going on in the broader market, how much of the center store of a Traditional grocery store is headed maybe to Amazon or Walmart. How do you think like a specialty market like yours fits into that picture?

Speaker 2

Well, I think because we are so differentiated from a conventional grocery store And Walmart or Amazon for that matter that It doesn't have as much of an effect on our business. I mean, you can see it just in our supplement sales. We've had Our supplement sales have actually outperformed our comp. And you would think that supplement sales would just Customer service and to select their supplements and so you can get that at our stores. And so it means that we have a lot of stickiness With our supplement a lot of loyalty and stickiness with our supplement customers and we're actually increasing market share because of that.

Speaker 2

As far as the center of the store goes, our standards just make it a lot easier for our customers to come and shop and not have to Worry about whether or not they're buying something that's kind of that they don't really want to buy because of its ingredients at Walmart Amazon or Costco for that matter. And so and also we have the shopping experience in our stores Very different because we have the smaller format that's easier and not as intimidating to shop.

Speaker 4

Yes. Thanks for that. Where I was going with that actually is that in some ways, I'm starting to think you guys are some like almost complementary, right?

Speaker 2

Like if you're looking for specialty items

Speaker 4

or you want that Right. Like if you're looking for specialty items, you want that consultation, you're going to head to a natural grocers Or maybe a fresh market if you're looking for that type of produce and then really Almost complementary to the online and what Walmart is doing. So that was kind of where I was headed with that. So Let's make the thought process that maybe that's true. Talk about like your real estate plans going forward, many new stores you think you can grow?

Speaker 4

Maybe you said this before, but maybe I just need a reminder. I heard the real estate plans for this year, but as we think about your real estate Plans going forward, is there a thought maybe a little bit acceleration or how should we think about that?

Speaker 2

The last couple of years have been a little bit slow in new store development, but our plan going forward is to do 6 to 8 new stores a year. And then Part of our strategy, of course, is to relocate or remodel stores because we get quite a substantial lift In our comp when we relocate or remodel a store. And so we do 2 to 5 of those a year also.

Speaker 4

And then from a thank you. And then any thoughts of reaccelerating or you just kind of you're happy with that 6% to 8 We're

Speaker 2

right at the moment, we're pretty happy with the 6 to 8. And then the like I said, 2 to 5 relocations It keeps us pretty busy and that means that we can be more selective in our site location and we can also be It's not as dilutive to our earnings to open just piles and piles of stores.

Speaker 4

Right. And then here's probably going to be like an off the wall question a little bit, but even stepping back like strategically, I don't think you guys have done maybe no M and A. I mean, how are you guys thinking about that type of activities? Or is that just not even on the radar?

Speaker 2

Mergers and are you talking about mergers and acquisitions by us? Yes. Yes. We really don't have that as part of our strategy.

Speaker 4

Okay. All right, guys. Well, listen, we have a real solid solid quarter. Congratulations again.

Speaker 2

Thanks. You have a good day now, Scott.

Operator

With no further questions, this concludes our question and answer session. I would like now to turn the conference back over to Kemper Eisele for any closing remarks.

Speaker 2

Thank you very much for joining us to discuss our 3rd quarter results. This month marks our 68th year serving our communities. I encourage you to visit one of our locations between August 17th 19th to help us celebrate our anniversary. We look forward to updating you on our next call regarding the Q4 and full fiscal year 2023 results.

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