Natural Grocers by Vitamin Cottage, Inc.
Q4 2018 Earnings Call Transcript

Published: 16 Nov 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to Natural Grocers Fourth Quarter Fiscal Year 2018 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. And now, I would like to turn the conference over to Mr. David Colson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin your presentation.

[David Colson:]

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage fourth quarter and fiscal year 2018 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 Web site 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. It is my pleasure to review with you the results of another solid quarter and a strong finish to fiscal 2018. We have worked very hard over the past 12 to 18 months to address the challenges of a competitive environment. We are pleased to report another quarter of improved sales trends stabilized gross margin investment, expense control and our sixth consecutive quarter of positive daily average comparable store sales. With comps up 6.3% and mature store comps up 3.9%. For the full year fiscal 2018, we reported 5.8% comp growth marking over fifteen consecutive years of positive daily average comparable store sales growth. As we begin fiscal 2018, our pricing and promotional strategy had a favorable impact on our sales trends with improved traffic and basket metrics. However, these promotional efforts negatively impacted margins. As the year progressed, we were able to adjust our promotional strategies to moderate their impact on a year-over-year gross margin comparison while maintaining the positive sales momentum. Fundamental to our success this past year was our commitment to our core values. Our promotions emphasized our industry-leading standards in affordable pricing. Our marketing efforts supported the standards and pricing aspect of our promotional offers and continued to message our clear differentiation from the competition. Now I would like to briefly highlight some of our other accomplishments during fiscal 2018. During fiscal 2018, we significantly expanded our Natural Grocers brand offerings. We introduced 43 new Natural Grocers brand products and have 50 plus products planned to launch in fiscal 2019. Our private brand products have been developed consistent with our core value and are positioned as a premium quality brand at an affordable price. In September, we initiated a marketing campaign focused on our expanded private brand offer. Our NPower customer loyalty program continues to resonate with our customers. We ended the year with 750,000 members representing a year-over-year growth of approximately 90%. During the fourth quarter NPower members represented 60% of our sales. We have leveraged the NPower program as an effective marketing tool and directed many of our promotional activities to the NPower program, which is helping to drive customer traffic while moderating our overall price investment. Our marketing team had several significant accomplishments in fiscal 2018. Our monthly store events such as our Anniversary Day and Earth Day enjoyed strong customer participation. Our local store marketing, social and digital media, TV, outdoor advertising and targeted direct mail effort have all been effective. Additionally, in September, our Web site was relaunched with an enhanced functionality and a refreshed appearance. Our store operations team made major strides over the past year in leadership development training and executing operational excellence throughout all of our stores. During fiscal 2018 we saw progress in both our labor and shrink metrics. We opened 8 new stores and relocated 3 stores during fiscal 2018 and are pleased with our new store performance. Our relocations are on average realizing double-digit growth rate in their first year. As we look forward to the opportunity fiscal 2019 presents we will continue to execute the formula that delivered the improvements we realized over the past year. We plan to add new stores at a rate that will allow us to remain focused on our existing stores, grow sales and generate positive cash flow. We will continue to strategically invest in pricing, promotion and marketing to drive awareness and traffic while focusing on continued profit improvement. With that, let me turn the call over to Todd to discuss our financial results.

[Todd Dissinger:]

Thank you very much Kemper and good afternoon everyone. During the fourth quarter of fiscal 2018, net sales increased by 9.6% to $217.5 million and as Kemper mentioned daily average comparable store sales increased by 6.3%. The comp increase was driven by a 3.8% increase in daily average transaction count and a 2.5% increase in average transaction size. The quarter's comp reflects sequential acceleration from the third quarters 5.2% comp and the two-year stacked comp. The comp trends evidenced our ability to continue to drive and retain our traffic and basket gains while maintaining the more moderated level of investment in gross margin, we have seen over the past two quarters. Gross profit margin declined by approximately 50 basis points to 26.3%. Product margin when compared to the prior year period was impacted by both sales mix given the strong comp in grocery and our promotion and pricing initiatives. Recall that we generate a higher gross margin in supplements and body care than in grocery and our promotional and pricing efforts have been focused primarily on grocery, which has impacted our sales mix and thus our gross margin. The year-over-year decline in gross margin has continued to stabilize sequentially. The 50 basis points decline in the fourth quarter is a continuation of the improving trend from the 220 basis point decline we experienced in the first quarter of fiscal 2018. Store expenses as a percentage of sales decreased approximately 60 basis points to 22.1% during the fourth quarter compared to the prior year period. The decrease in store expenses as a percent of sales was primarily driven by leverage on the strong comp sales growth. Note that the fourth quarter store expenses include approximately $600,000 of impairment charges and store closing costs. Pre-opening and relocation expenses increased approximately $300,000 year-over-year. We opened one new store and relocated one store during the fourth quarter of fiscal 2018 compared to opening no new stores and one relocation in the fourth quarter of fiscal 2017. The sales leverage on store and administrative expenses more than offset the lower gross margin rate leading to a 20 basis point improvement in our operating margin during the fourth quarter. Our effective tax rate for federal and state income taxes for the fourth quarter of fiscal 2018 was 8.4% which compares to 26.6% in the fourth quarter of fiscal 2017. The decrease in the effective tax rate for the three month period ended September 30, 2018, is the result of recent federal income tax reform and fiscal year end adjustments related to the reconciliation of the companies deferred income tax assets and liabilities. Net income increased 68.7% to $2.1 million with diluted earnings per share of $0.09 in the fourth quarter of fiscal 2018 compared to $0.06 cents in the fourth quarter of last year. As I noted, EPS was impacted by approximately $0.02 of non-recurring impairment and store closing charges which were offset by an approximate $0.02 benefit from the lower than forecasted income tax rate reported during the quarter. Adjusted EBITDA was $11.3 million in the fourth quarter of fiscal 2018 up 9.8% compared to $10.3 million in the fourth quarter of fiscal 2017. Adjusted EBITDA excludes the impact of $600,000 of impairment charges and store closing costs, I mentioned a moment ago. During fiscal 2018, we generated cash from operations of $42.9 million and invested $23.5 million in capital expenditures. In addition to supporting our new store growth, we reduced the outstanding balance on our revolving credit facility by $15 million during fiscal 2018. Now, I will turn the call back to Kemper to discuss unit development and guidance.

[Kemper Isely:]

Thank you, Todd. During the fourth quarter we opened one new store and relocated one store thus far during the first quarter of fiscal 2019. We have opened two new stores, relocated one store and closed one store. We currently have signed leases for five additional new stores to open in fiscal 2019 and beyond. We continue to monitor new store performance and remain comfortable with our targeted store openings. Now let me introduce our 2019 outlook. During fiscal 2019, we expect to open 7 to 9 new stores resulting in unit growth of 4.7% to 6.1% relocate 5 to 6 stores, achieve daily average comparable store sales growth of 2% to 4%, achieved net income margin of 0.75% to 1%, achieved diluted earnings per share of between $0.33 and $0.40. And we expect the capital expenditures for fiscal 2019 in the range of $27 million to $32 million. We are very encouraged by our growth and progress in fiscal 2018 by driving traffic and moderating our incremental margin investment we create value for our customers while enhancing profitability and shareholder value. We believe we are the market leader in quality standard, affordable prices in nutrition education. Our stores are tailored to provide our customers with a convenient shopping experience and our crew members are trained to be friendly, highly accessible and well-informed about the nutritional value of our products. We will continue to focus our communications on our unrivaled product standard and quality, nutrition education and always affordable pricing with a commitment to our community and good4u Crew. Now, I'd like to open the lines up for questions. Thank you.

[Operator:]

Thank you. And we will now begin the question and answer session. [Operator Instructions] And today's first questioner will be Sean Kras with Barclays. Please go ahead.

[Sean Kras:]

Thank you very much. And appreciate you taking our question. On guidance, can you walk us through some of the factors that would get you to the low-end versus the high-end of the range?

[Kemper Isely:]

I think I'll have Todd answer that question.

[Sean Kras:]

Sure.

[Todd Dissinger:]

Thanks Sean. I guess first the level set off of 2018, we look at 2018 as starting the New Year with EPS of $0.37. And that's really the $0.56 less than $0.19 that we had for the non-recurring remeasurement of our deferred tax assets and liabilities. So 2018 starts about the mid-range of our guidance. On the high end of our guidance, we are anticipating flat year-over-year gross margin, of course that would be at the 4% comp and flat store operating expenses and administrative expenses as a percent of sales. So no leverage and there's no leverage attributed to higher labor costs, minimum wage increases, some labor pressures in the Colorado and Denver market. So on the low-end, but the 2% comp range that we're prepared to support additional price investment if necessary. And so we have some slight margin deterioration and also some higher labor pressures in store expenses.

[Sean Kras:]

That's very helpful. Thank you. I had a question on comps. There was obviously a nice acceleration this quarter even with the more difficult comparison. Can you maybe just talk about the cadence throughout the quarter and how the business is trending so far into the first quarter?

[Kemper Isely:]

On comps we're pretty much the same every month during -- I mean there was a little bit -- September was always the strongest month, but they were pretty much the same every month. So far in this quarter we’re a little bit down from where we were at the end of last.

[Sean Kras:]

Okay. And then one more for me, just on the spending trends between NPower members and non-members it would be great just to get your thoughts on just how those are looking. And also two, if maybe you can discuss some of the things you're doing from a marketing perspective reaching out to these members. Thank you.

[Kemper Isely:]

Well, the NPower members spend significantly more per visit and does it significantly more often than non-members. That answers about that particular question. So the way that we used to market to our NPower members with two email blast per week and we've increased that to about 6 times a week that we market to the members every week with various promotion and sometimes just recipes et cetera. And it seems to be getting a lot of traction as we increase the frequency of our email communication with our members.

[Sean Kras:]

That's great. Thank you.

[Operator:]

The next questioner today will be Scott Mushkin with Wolf Research. Please go ahead.

[Scot Mushkin:]

Hey, guys. Thanks for taking my questions. So I guess I just wanted to think about guidance a little bit more. We just talked about it, so I don't want to over focus on it, but you are guiding 2 to 4 comp, you're kind of very strong, [indiscernible] things have slowed down. Can you just give me a thought process on that part of the guide? Is that just being conservative or because that leads to fairly flat EPS year-over-year, and so it's kind of a obviously a tough investment if there's no growth. So I'm just trying to say, you guys have been overly conservative or is there something leading you to believe that comps will come in there and your EPS will be flat.

[Kemper Isely:]

Well, we think that it's better to be realistic in your comp guidance at the beginning of the year and be somewhat conservative with all the economic and all the uncertainties that are out in the market right now.

[Scott Mushkin:]

Okay. And then, I guess my second question would be just around competition, what you're seeing going on in the market. I mean obviously in the traditional side of things, we've had a couple of companies comment that, we're getting a little bit more competitive. That as we've seen deflation in certain categories it's gone right through. What are you guys seeing on that? I mean how you operate a little bit differently and your customers are real different, but are you feeling that the market is the -- as the competition has ramped up is that part of conservatism?

[Kemper Isely:]

No. I don't not really feel -- we don't really feel like the competition has gotten any more intense than ever since we've been in business. The grocery business has always been a war and we've been fighting it for a long time and have been pretty successful at differentiating ourselves and letting our customers know why we're better and why we're different.

[Scott Mushkin:]

The last one for me, if you guys are going to size the risks to next year, would labor cost be the number one thing that you look at or be gross margin or those two about equally weighted when you think about risks.

[Kemper Isely:]

I will say labor cost is probably the number one risk for this coming year. The labor markets are extremely tight, particularly here in Colorado, it’s inflationary in wages.

[Scott Mushkin:]

All right, guys. Nice quarter and thanks for taking my questions.

[Kemper Isely:]

Thanks.

[Operator:]

[Operator Instructions] And the next questioner today will be Shiyao Ling with RBC Capital Markets. Please go ahead.

[Shiyao Ling:]

Hi. Thank you so much for taking my question. I'm on for Bill Kirk. It sounds like your promotional strategy is aimed more at existing customers and increasing their frequency. Is there a point when it changes to try to attract new customer or is that the current style the best way to generate profitable growth?

[Kemper Isely:]

No. Actually most of our dollars spent in marketing is to attract new customers and we do that in a number of ways. We've increased our out of home [indiscernible] billboard et cetera about 10 times more than what we used to spend. We're spending about $100,000 to $200,000 a month on that right now and that's been very effective to attract new customers. And then we also have targeted about 75 of our stores to get postcard mailing to prospective customers every month. And that's been a very effective marketing tool to attract new customers. And as you can see from our comp numbers, most of our growth came from new customers last year, not from increased spend on existing customers.

[Shiyao Ling:]

Thank you. And my other question is, your comment around the $0.02 impact from relocation. So is that a one-time negative impact on EPS and so for the quarter it would have been $0.11 ex that impact?

[Todd Dissinger:]

To clarify in Q4, I think we had two unusual items we had -- impairment costs and store closing costs that represented about $0.02. And then that was offset by about a $0.02 choice at lower than forecasted tax rate. So we kind of look [Technical Difficulty] and then the only other -- for the year the only other difference would have been the $0.19 for the remeasurement of our tax assets and liabilities.

[Shiyao Ling:]

Got it. Thank you so much that's all I have.

[Kemper Isely:]

Thank you.

[Todd Dissinger:]

Thank you.

[Operator:]

[Operator Instructions] Okay. And there look to be no further questions at this time, so this will conclude our question-and-answer session. I would now like to turn the conference back over to Kemper Isely for any closing remarks.

[Kemper Isely:]

Thank you very much for joining us to discuss our fourth quarter and fiscal year 2018 results. We look forward to speaking with you on our next call to review our first quarter 2019 results. Have a great day. Bye.

[Operator:]

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