Natural Grocers by Vitamin Cottage Q1 2024 Earnings Call Transcript

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Provided by Quartr
February 8, 2024

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 20 24 Earnings Conference Call. At this time, all participants are in a 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 would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Speaker 1

Good afternoon, and thank you for Joining us for the Natural Grocers by Vitamin Cottage First Quarter Fiscal Year 20 24 Earnings Conference Call. On the call with me today are Kemper Isely, Co President and Todd Dissinger, Chief Financial Officer. As a reminder, certain information provided during this 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 filed Forms 10Q and 10 ks. The company undertakes no obligation to update forward looking statements.

Speaker 1

Today's press release is available on the website and a recording of this call will be available on the website at investors. Naturalgrocers.com. Now, I will turn the call over to Kemper.

Speaker 2

Thank you, Jessica, and good afternoon, everyone. Today, I will highlight our Q1 financial results, including key drivers and provide an update on priorities. Then Todd will discuss the Q1 results in greater detail and review our updated fiscal year 2024 guidance. We are very pleased with our start to fiscal 2024. We believe our carefully vetted offering of natural and organic products coupled with our emphasis on value and always affordable pricing differentiate us in the marketplace and continue to drive demand with health conscious consumers.

Speaker 2

Our strong first quarter results reflect a continuation of the positive trends we experienced in recent quarters. Net sales of $301,800,000 increased 7.6% compared to the prior year, driven by a 6.2% increase in daily average comparable store sales, which included a 3 point 4% increase in transaction count. We are very encouraged by the strong customer traffic trends we have experienced over the past several quarters. Diluted earnings per share increased 78.9 percent to $0.34 reflecting strong sales growth, effective pricing and promotions and expense leverage. Turning now to an update on key priorities.

Speaker 2

Our Npower rewards program grew 16% year over year to more than 2,100,000 members by the end of the Q1. The nPower net sales penetration was 78%, up from 76% a year ago. The growth of our Npower Rewards program reflects our deep engagement with these valuable customers. Our Natural Grocers branded products deliver premium quality at compelling prices. In the Q1, our branded products accounted for 8.5% of total sales, up from 7.9% a year ago.

Speaker 2

Our private brand penetration increase is an indication of our customers' appreciation for the quality and value of these products as well as the continued expansion of our offering. Store unit growth and development continues to be a priority for our company. During the Q1, we opened stores in Twin Falls, Idaho in Loveland, Colorado and relocated one of our stores in Albuquerque, New Mexico. Store development timing continues to be impacted by delays in permitting and Construction. Earlier this week, we released our fiscal year 2023 Environmental, Social and Governance Report, Reflecting our long standing commitment to sustainability practices, we believe that our company's Greatest opportunity to positively impact environmental sustainability and human health is through offering over 20,000 high quality natural and organic products at affordable prices.

Speaker 2

Examples of our strict standards include selling only certified organic produce, pasture raised dairy and free Range Eggs. In fiscal year 2023, the company's total sales was comprised of more than 50% organic products and 60% certified to environmental and or social sustainability sourcing standards. We prioritize products sourced from vendors that embrace regenerative and sustainable agricultural practices, 2 of which are spotlighted in our ESG report. Additionally, we make a substantial investment to provide free nutrition education to our customers, Crew and Communities. Our company's ongoing financial success demonstrates that a business model dedicated to affordable, high quality natural and organic products can help deliver positive environmental and social impacts while creating value for all of our stakeholders.

Speaker 2

In closing, I want to thank every member of our Good for You crew for their commitment to operational excellence and exceptional customer service that were instrumental in driving our results. With that, I will turn our call over to Todd to discuss our financial results and guidance.

Speaker 3

Thank you, Kemper, and good afternoon. For the Q1, net sales increased 7.6% from the prior year period to $301,800,000 Our daily average comparable store sales increase of 6.2% was comprised of a 3.4% increase in daily average transaction count and a 2.7% increase in daily average transaction size. We estimate that product cost inflation was approximately 3% on an annualized basis for the Q1, down 200 basis points from the previous quarter. The item count per basket was flat compared to the same period in the prior year, reflecting an improving trend over the past several quarters. Our item count per basket remains above pre pandemic levels.

Speaker 3

Sales growth was broad based across categories. Our strongest performing departments were Meat, Body Care and Dairy. Gross margin increased 130 basis points to 29.4% driven by higher product margin attributed to effective pricing and promotions and store occupancy expense leverage. Store expenses increased 6.9% in the first quarter, primarily driven by higher compensation Store expenses as a percentage of sales decreased 20 basis points, reflecting as elevated sales offset higher labor costs. Administrative expenses as a percentage of sales increased 20 basis points driven by higher compensation expense.

Speaker 3

Net income was $7,800,000 with diluted earnings per share of $0.34 in the first quarter. This compares to net income of 4 point $4,000,000 or $0.19 of diluted earnings per share in the Q1 of last year. Adjusted EBITDA was $18,800,000 in the first quarter. Turning to the balance sheet and cash flow. We ended the Q1 in a strong financial position, including $13,600,000 of cash and cash equivalents.

Speaker 3

We had $18,400,000 in outstanding borrowings on our $75,000,000 revolving credit facility. During the Q1, we generated cash from operations of $16,600,000 and invested $11,800,000 in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $4,800,000 We are raising our fiscal 2024 guidance for daily average comparable store sales growth and diluted earnings per share. Our revised outlook includes the following: open 4 to 6 new stores or remodel 4 to 6 stores achieve daily average comparable store sales growth between 3% 5 percent, achieve diluted earnings per share between $1.02 $1.12 and direct $30,000,000 to 39 dollars towards capital expenditures to support our growth initiatives. Our outlook reflects 1st quarter results, operating trends and the current economic environment. Our current expectation is that sales comps will be at the high comps in the back half of fiscal twenty twenty three.

Speaker 3

Our outlook anticipates that year over year gross margin will be slightly higher in the second quarter and about flat in the second half of the year. Lastly, we expect store expenses as a percentage of sales to increase on a year over year basis, driven by higher labor rates resulting in flat to modest expense deleverage. In closing, we are pleased with the Q1 results. We attribute our strong performance to the relevance of our differentiated business model, including the value proposition of high quality products at always affordable prices. We continue to be encouraged by our recent operating trends and we are confident in our ability to drive growth and enhance value for all stakeholders.

Speaker 3

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

Operator

We will now begin the question and answer Our first question will come from Scott Mushkin with R5 Capital. You may now go ahead.

Speaker 4

Hey, guys. Good afternoon. Thanks for taking the questions.

Operator

So, I

Speaker 4

guess, if I can think of I'm driving right now, believe it or not, out stores, but I kind of had 3 questions for you. 1 is when we look at the gross margin, how much would you just attribute to the strong sales in leverage and how much would you attribute it to mix and other things? And what was the

Speaker 2

Leverage gave us about 11 basis points. So that was nice. And then as far as mix goes, there really wasn't a lot of mix change. Everything was pretty much steady. There wasn't a lot to mix.

Speaker 2

A lot of our gain in margin was attributable to Smart promotions and pulling back on some of our previous Npower promotions.

Speaker 4

And was that preplanned or is that something

Speaker 2

We've been we're about cycling through A year's worth of that coming up here in January of having less aggressive and power promotions on certain items.

Speaker 4

Okay. And then as far as your growth goes, I mean, obviously, it Seems like you're striking a chord with the consumer, like dive into that maybe next. But is there opportunities to increase that growth rate over the next 2 to 3 years in stores. I know that's ramping up, but have you thought about increasing it further? Or where is your where are you guys on that?

Speaker 2

You mean as far as store openings go? Yes. Or just acquiring new customers at existing stores? Well, our goal for store openings. Yes.

Speaker 2

Yes. I mean, our goal this year, we're going to come in somewhere around 10 to 12 new stores and relocations and remodels. Over the next couple of years, our goal is to get back to opening between 6 8 stores a year. We don't really want to go above that because we think that it's more profitable for us to open 6 to 8 stores a year than to ramp up and open 10 to 12 stores a year or even more than that. It's smarter from a profitability standpoint to not have Much more growth than that per year.

Speaker 2

That way you can spend better time picking your sites and managing those new stores as you open them.

Speaker 4

And the remodel part of it?

Speaker 2

Yes. And then the remodels and relocations will probably kind of an acceleration of that because we have a lot of stores that will be anniversarying their 10 year point in 2 years. And so A lot of those stores will be up for remodels and relocations at that point in time. Okay.

Speaker 4

And then I don't know if you threw it out.

Speaker 2

It's about a 10 year to 15 year lifecycle before a store needs a remodel or a facelift.

Speaker 4

Right. So that you think in a couple of years that should it's going to accelerate pretty meaningfully. I think our research showed that too.

Speaker 2

Yes, I mean, it would have

Speaker 4

to. Right. And then did you reference M and A? Is that something you guys would consider or not really?

Speaker 2

We haven't really found that to be a good niche for us. Most We did one acquisition of 1 store a few years back and that really didn't I mean it was all right for us, but it wasn't anything that it was a lot more painful than we would have liked it to be.

Speaker 4

Yes, it usually is. So my last question really gets into you seem to be getting new customers. Is that correct that you are getting new customers? Yes.

Speaker 2

I mean our customer growth was I mean Essentially, our basket growth that equaled inflation and our customer growth was about 3.5% above that.

Speaker 4

So what do you I mean, that's what's driving that? I mean, it's kind of maybe a silly thing to say. Are you guys the other side of the diet till craze where people now have extra money and they can are minding what they eat. I mean, it seems like we're kind of Seeing this acceleration, you're winning customers.

Speaker 2

It's the value of our company. It's the nutrition education, The quality of the products that we sell, only organic produce not having people don't have to come into our store and worry about reading the labels and finding Products that are contaminated and then produce that's contaminated with conventional produce. They don't have to worry about finding a lot of artificial colors and preservatives in the groceries they buy. And then of course, we always have the value proposition of our everyday Always affordable pricing. And so that really helps too.

Speaker 2

And then just engaging with the communities that we're in be our outreach through nutrition education and events that we sponsor and food bank sponsoring and so on and so forth. And then finally, Taking care of our crews so that they can give the customers that come into our stores a very good shopping experience. As we've said in several of our calls, the average wage of our hourly employees is now up to $21 an hour, which is Pretty much industry leading for the grocery business.

Speaker 4

Any sense of who these new customers are? Do you have any data on that at all or

Speaker 2

They're people that value They're they have an active lifestyle and value what they consume and put into their bodies.

Speaker 4

So like married, younger children, like older, you don't have any sense demographically?

Speaker 2

Well, we appeal quite well to the 50 to 60 year range of people and then we have a lot of families that like to shop at our stores. And then on the I mean And then we're starting to appeal more to the younger generation because we have an authentic story and they like authenticity And what they're and where they shop. And so they really appreciate that we stay true to our values and have always had the same values. We don't just go arm wishy washy and wanting to say, well, This is popular now, so let's do it now. We've always said what is intrinsic to our company and people appreciate that.

Speaker 2

And then the value proposition really I mean the value proposition for a lot of people is very important also. They always know that we're going to have a good price on things.

Speaker 4

Perfect. Like I said, I appreciate you taking all my questions and

Speaker 2

good

Speaker 4

luck in the next quarter.

Speaker 2

Thanks.

Speaker 4

You have a good day, Scott.

Operator

It appears there are no further questions. This concludes our question and answer session. I would like turn the conference back over to Kemper Eisele for any closing remarks.

Speaker 2

Thank you for joining us today. We believe our strong first quarter results have positioned us well to leverage this momentum throughout the balance of the fiscal year. Thank you and have a great day. Bye.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
Natural Grocers by Vitamin Cottage Q1 2024
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