Natural Grocers by Vitamin Cottage, Inc.
Q2 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good day ladies and gentlemen. Welcome to the Natural Grocers, Second Quarter Fiscal 2020 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.I would now like to turn the conference over to Mr. David Colson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin.

[David Colson:]

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage, second quarter fiscal year 2020 earnings conference call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, Chief Financial Officer.As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that 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 detailed in the company's most recently filed forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.Today's press release is available on the company's 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.

[Kemper Isely:]

Thank you, David, and good afternoon everyone. Thank you for taking the time to join us today. We appreciate your ongoing support and we hope that all of you are staying safe and healthy during these unprecedented times.I would like to walk you through some highlights of the quarter and give you an update on the current impacted of the COVID-19 pandemic on Natural Grocers, and how we are responding to support our valued good4u Crew and customers and partners. I will then turn the call over to Todd to discuss our financial results in greater detail.During the second quarter we saw a significant acceleration of daily average comparable store sales growth as the quarter progressed, peaking in mid-March as consumers responded to the growing pandemic. For the quarter revenue was up 20.4% and comps increased 17%. We began to see a lift in comps in late February.This trend accelerated further in March as our customers prepared for and responded to the growing health crisis with increased purchases. We saw both, a significant increase in average transaction size which increased 13.1% during the second quarter and an acceleration in transaction accounts, which were up 3.5% during the quarter. This growth included a comp gain of approximately 40% for the month of March over the prior year period.We continue to see elevated comps in April, although the trend moderated from the peak mid-March level. In April we continued to see materially higher transaction size, partially offset by reduced transactions, both relative to the prior year as customers made fewer shopping trips, but made larger purchases when they did shop.As Todd will discuss, the strong comps led to significant expense of leverage, with gross margin improving 100 basis points as a result of improved occupancy leverage, and store expenses declining 130 basis points. This leverage materialized despite increased operating expenses and labor costs, as we hired temporary staff to support, clean and restock our stores. We produced net income growth of 151.8% and adjusted EBITDA growth of 57.7%.Turning to our response to the pandemic, first and foremost our focus is on the safety of our good4u Crew and customers. We've gone to great lengths to protect the health and safety of each of our crew members who are heroes in masks and aprons and our customers within our stores in operations.We have proactively implemented numerous measures in response to the pandemic to provide a safe shopping and working environment. We sourced and repackaged bulk hand sanitizer when none was available, produced more than 6000 facemask with the help of our families, our crew and our communities, and mandated that our crew wear them.We established customer capacity limits in our stores, adjusted store hours to provide extra time for cleaning and restocking, implemented early shopping hours for vulnerable populations, leveraged our package bulk offering as we are one of the few retailers where consumers can continue to buy bulk products, provided immunity and stress support supplements for our crews, expanded leave and medical coverage, installed plexiglas shields at checkout and established social distancing measures in our stores.As noted, we enacted many of these measures proactively, thereby demonstrating our leadership and commitment to our community’s health and safety. We also leveraged our relationship with Instacart to further support our customers, especially vulnerable populations, adjusting to the growing demand for online ordering and delivery. Our Instacart sales ramped-up significantly during March.In addition to safety implementations, we have gone to great lengths to support our crews financially during this difficult time. We implemented Hero Pay, increasing wages for all hourly crew by $2 an hour through May 31. Of this increase, $1 an hour will be permanent as we are one of the few retailers that have made a permanent wage commitment to our crew. Additionally, we paid bonuses during this period in recognition of our crew’s hard work. We are committed to investing an additional $7 million in our crew over the period beginning in March through Sentiment 30, 2020, our fiscal year-end.We are so proud of the Natural Grocers crew who wake up every day and come to work to help ensure that we can continue to deliver the highest quality natural and organic products to the communities that depend on us. I want to thank each and every one of our heroes in masks and aprons for their selfless contributions.With that, let me turn the call over to Todd to discuss our financial results and guidance.

[Todd Dissinger:]

Thank you, Kemper, and good afternoon everyone. As Kemper discussed, we are operating in a rapidly changing and unprecedented period. During the quarter we witnessed a level of daily average compatible store sales gains that we have not experienced in the company's history, reflecting customers accelerated purchases or pantry loading and the impact of a significant shift in consumer behavior to dining at home.We saw strength across all product categories, in particular household products, supplements, grocery and bulk. Additionally, we saw a strong penetration growth of our Natural Grocers branded products. We encountered significant strains to our supply chain and out of stocks late in the quarter as our supply chain was challenged to keep up with an unprecedented level of demand.Today we are seeing improved in-stock levels, although certain items continue to be out of stock. As Kemper noted, we have worked diligently to adapt on a daily basis across our organization, focusing on safety and meeting the needs of our customers and crew members.Now, I would like to review our financial results. During the second quarter net sales increased 20.4% to $277.5 million. Daily average comp store sales increased 17% and mature store comp increased to 15.4%. The second quarter comp increase was driven by a 13.1% increase in average transaction size and a 3.5% increase in daily average transaction count. Prior to the onset of the COVID-19 related acceleration of customer purchases, comps are running at the high end of our original full year guidance range.Gross profit margin during the second quarter was 28% compared to 27% in the prior year period and up sequentially compared to 26.3% in the first quarter of 2020. The increase in gross margin was driven by an improvement in store occupancy and shrink expenses as a percentage of sales, reflecting strong leverage on the 17% comp sales gain, as well as a favorable shift in sales mix.This was partially offset by the adoption of the new lease accounting standard, which negatively impacted gross margin by approximately 20 to 25 basis points. The adoption of the new lease accounting standard has the effect of increasing occupancy and depreciation expense, which was partially offset by reduced interest expense.Store expenses as a percentage of sales decreased to 20.5% during the second quarter compared to 21.8% in the prior year period. The year-over-year decrease in store expenses as a percentage of sales was primarily driven by expense leverage. Note that the leverage on the store expenses came despite increases in wages, bonuses, temporary labor and operating expenses for cleaning and restocking.Pre-opening and relocation expenses increased approximately $500,000 year-over-year, impacted by the timing of new store openings and store relocations. During the quarter we opened two new stores compared to opening one new store and relocating one store in the second quarter of fiscal 2019, two additional new store openings were delayed as a result of COVID-19 precautions.Net income was $9.7 million with diluted earnings per share of $0.43 in the second quarter compared to net income of $3.9 million or $0.17 of diluted earnings per share in the second quarter of last year. EBITDA was $21.1 million in the second quarter, up 57.7% compared to $13.4 million in the second quarter of fiscal 2019.During the first six months of fiscal 2020, we generated cash from operations of $53.4 million and invested $20.1 million in net capital expenditures. We finished the quarter in a strong financial position with $29.4 million in cash and cash equivalents and no debt.As of the quarter end we had $49 million available under our $50 million credit facility and a strong operating cash flow profile. Our balance sheet and liquidity put us in a strong position as we moved forward and faced the challenges and uncertainty of the current macro-economic environment.Reflecting our financial position, our Board of Directors has extended the company's $10 million share repurchase program to May 31, 2022. There is approximately $8.3 million of remaining repurchase capacity under the program. Additionally, as announced today we declared a quarterly cash dividend of $0.07 per share. The dividend will be paid on June 16, 2020 to all stockholders of record at the close of business on June 1, 2020.Now I would like to discuss the company's fiscal 2020 outlook. We are updating our fiscal 2020 outlook to reflect current business trends in light of the rapidly evolving COVID-19 environment. The company cannot predict the duration or severity of the COVID-19 pandemic or how that will impact the economy and our financial results.Our guidance does not contemplate significant additional changes to the current operating environment as a result of further COVID-19 developments, and assumes a moderation of the COVID-19 related elevated sales as the year progresses.Please note that as we monitor the pandemic and its effects on the macro-economic environment, we have decided to suspend signing any new store lease commitments in the near term. Specifically during fiscal 2020, we expect to open six to seven new stores, relocate one store, achieve daily average comparable store sales growth of 5% to 9%, achieved net income margin of 1.1% to 1.5%, achieve diluted earnings per share between $0.54 and $0.62 and we expect capital expenditures for the fiscal year in the range of $28 million to $33 million.The second quarter included unprecedented challenges and we are extremely proud of how our entire crew has responded to meet the needs of our customers and communities. Our crew courageously comes to work every day and works tirelessly to make sure Natural Grocers can continue to provide the highest quality products at always affordable prices to the communities we serve. Our crew members are truly heroes in masks and aprons.With that, I would like to open the lines up for questions. Thank you.

[Operator:]

Yes, thank you. [Operator Instructions]. And the first question comes to Greg Badishkanian with Wolfe.

[Spencer Hanus:]

Good afternoon this is actually Spencer Hanus on for Greg. I think you guys mentioned in your prepared remarks that comps are still elevated in April, but can you quantify the comp that you're seeing in April and then has that momentum continued into the first part of May?

[Kemper Isely:]

The comps in April were very similar to what we saw for the entire quarter, for the entire second quarter and they’ve pretty much stayed the same in May so far.

[Spencer Hanus:]

Okay, that's really helpful. And then can you just talk about sales trends you're seeing in states that have started to reopen, like Texas I think you have about 15% of your stores there. Have you seen trends start to decelerate as restaurants reopen or you’re still seeing a pretty strong sales growth?

[Kemper Isely:]

We are still seeing pretty strong sales growth in Texas. There are some locations that have been under lower deceleration, but overall the state of Texas has been pretty strong for us through April and into May.

[Spencer Hanus:]

Okay, that's great color. And then margin improvement was pretty impressive this quarter. Should we expect the same level of margin improvement over the rest of the year or should we expect just some more incremental costs associated with labor and store safety to start to flow in?

[Kemper Isely:]

I would say that we are not going to get a grade of margin improvement over the rest of the year. It will moderate somewhat. You know a lot of our margin improvement was because of the leverage we got on rent due to the accelerated sales. If sales can continue at the current level, that will help margins somewhat. They are -- margin has been impacted by an increase in Instacart sales, because those sales cost us more than the normal. That’s a headwind to margin. Also we are investing with our wage increases about $600,000 per month in additional wage expenses through the rest of the year, plus some other incremental expenses related to personal protection equipment, etcetera.

[Spencer Hanus:]

Got it. Thank you so much. Congrats on a good quarter.

[Kemper Isely:]

Thanks.

[Operator:]

Thank you. [Operator Instructions]. Alright, there is nothing more at the present time. I would like to return the floor to the speakers for any closing comments.

[Kemper Isely:]

Thank you very much for joining us to discuss our second quarter results. We remain confident in our long history of being a leader in providing natural and organic groceries to consumers, while giving back to the communities that support us. We look forward to speaking with you on our next call to renew our third quarter 2020 result. Please stay healthy and safe and have a great day! Thank you. Bye-bye.

[Operator:]

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