Natural Grocers by Vitamin Cottage, Inc.
Q1 2017 Earnings Call Transcript

Published: 3 Feb 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to the Natural Grocers' First Quarter Fiscal Year 2017 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 event is being recorded. At this time, I'd like to turn the conference call over to Mr. Todd Dissinger, Vice President and Treasurer for Natural Grocers. Mr. Dissinger, you may begin.

[Todd Dissinger:]

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal 2017 earnings conference call. On the call with me today are Kemper Isely, our Co-President; and Sandra Buffa, our 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. Our press release is available on our website and a recording of this call will be available on our website at investors.naturalgrocers.com. Now, I will turn the call over to our Co-President, Kemper Isely.

[Kemper Isely:]

Thank you, Todd. Good afternoon, everyone. On today's call, I would like to review our first quarter results and provide an update on our fiscal 2017 initiatives. First quarter sales results were relatively consistent with how we indicated the quarter had begun during our fourth quarter earnings call. The month of November proved to be the low point of the quarter. However, our sales performance remains inconsistent. We continue to face competitive pressure from both our traditional competitors and from the entrance of non-traditional competitors into the natural and organic food segment. We also recognize the challenges facing food retailers broadly, but we still have work to do driving traffic and improving operating margins. I'm confident in our positioning and operational capabilities to execute our strategies. As we discussed on our fiscal 2016 year-end conference call, we established a fiscal 27 (sic) [2017] outlook that provided for flexibility in our store growth, with the level of new store openings that would allow us to largely self-fund our growth. We generated positive free cash flow during the first quarter, and remain on track to achieve our self-funded growth goal this year. Our comparable store sales growth guidance range also provided some cushion to reflect of the current environment. While our comps were toward the lower end of the projected range in quarter one, this was anticipated as the first half of the year was expected to be far more difficult year-over-year comparison. We continue to make progress with our key cost initiatives, including shrink, labor, and inventory reductions. However, so far, we have not achieved the full level we have targeted. Given the negative 0.6% comp during quarter one, we faced additional deleverage, which made it difficult to narrow the year-over-year gap in store expenses. However, we were encouraged to see some sequential improvements in gross margin and free cash flow during the first quarter. Here are the highlights of our first quarter results. We achieved a 9.4% sales increase in the first quarter driven by our unit growth strategy, while comparable store sales decreased 0.6%. The comp decline was driven by a 0.8% decline in transaction count, while average transaction size increased 0.2%. As we discussed in mid-November, first quarter comps were running at the low end of our negative 1% to positive 1% guidance early in the quarter. We remain comfortable with the full year outlook given the first quarter results in the comparisons that we will face as the year progresses. During the first quarter, we opened five new stores, three of these new stores opened in December and one opened in late November. As such, there was a more modest contribution to our first quarter revenues than just taking the average for the quarter might indicate. However, we absorbed a disproportionate level of preopening expenses during the period. As we discussed last quarter, we are implementing a variety of new store opening marketing initiatives and are adjusting our new store labor model and inventory set. Our new unit opening-day sales volume during the first quarter performed consistent with store openings in prior years. Additionally, as I indicated last quarter, we will be testing a new store prototype later this year, with the first unit opening in the third quarter. During the second quarter, we anticipate opening four new stores and relocating one store near the end of the quarter. During the second half of fiscal 2017, we have flexibility in the number and timing of our new store openings, so that we can adapt appropriately to trends as they develop. During the first quarter, our results continue to reflect the impact of regional economic weakness in markets sensitive to lower oil and gas prices. However, we are encouraged by the rise in oil prices over the last couple of months and are hopeful that this will translate into economic strength in those areas. We also saw our stores with new competition moderate slightly, relative to quarter four, although new competition was still higher than a year ago during the first quarter. As expected, internal competition continued to moderate during the first quarter of fiscal 2017. However, there will be some new internal competition later in the fiscal year based on planned store openings and relocations. Turning to our sales and marketing initiatives, we executed several programs and events during the first quarter and remain quite pleased with the progress of our {N}power loyalty program. We launched a new e-commerce site on October 1 focused on pre-selling Thanksgiving Day turkeys and gift cards. This first e-commerce effort can be used as a foundation for future e-commerce opportunities. We continue to execute against our 2017 marketing plan, which is planned to ramp-up in quarter two and quarter three as we expand our outdoor advertising and introduce our 2017 inaugural issue of the refreshed and improved Health Hotline. We also plan to continue expanding our digital and social media campaigns to drive traffic and attract new customers. We have seen positive results from our revamped new store opening strategy, including a pre-opening event, billboards, outdoor advertising, radio, and promotional offers. Turning to gross margin. We continue to see a positive trend in product margins across multiple categories and are benefiting from a favorable mix shift towards the higher margin categories of supplements and body-care. We believe that the improved supplement sales mix was driven by the excellent work our good4u crews are doing in educating our customers about supplements and, in particular, our Nutrient to Know About campaign. However, the negative comparable store sales during the first quarter added to the occupancy cost pressure that largely drove the decline in reported gross margin. Our focus on reducing shrink was interrupted by the comp trend during quarter one. The improvements we began to see in late fourth quarter should be evident as fiscal 2017 progresses. On the topic of product deflation, we have not faced the level of pressure that other food retailers have seen. We continue to monitor the relative pricing differential. Store expenses increased as a percentage of sales during the first quarter, continuing the trend experienced during the last three quarters of fiscal 2016. We have made progress executing on reducing store labor cost. The impact of our efforts is not yet evident in light of sales in the first quarter. We continue to address this trend by seeking to achieve additional operational improvements. We still see an opportunity to improve store labor rates and are targeting to achieve labor rates by quarter four fiscal 2017 that are consistent with 2015 levels. Before I turn the call over to Sandra to highlight our financial results for the first quarter of fiscal 2017, I would like to assure you that we are continuing to thoughtfully develop our executive succession planning. As many of you know, Sandra's employment contract expires on December 31, 2017, and as planned, she intends to retire at the end of her contract. We plan to update you as the succession plan is finalized. With that, let me turn it over to Sandra.

[Sandra M. Buffa:]

Thank you, Kemper, and good afternoon, everyone. As Kemper mentioned, first quarter sales results were fairly consistent with the trends we saw early in the quarter, and we continue to expect comparable store sales performance and quarterly earnings will improve as the year progresses. Please note, the historical seasonality of our earnings per share with the exception of fiscal 2016, where we began to see pressure during the second quarter, earnings per share are generally higher during the second quarter and third quarters of the fiscal year. Our fiscal 2017 earnings guidance implies that this historical earnings seasonality returns this year. Let me provide some details on the first quarter results. During the first quarter of fiscal 2017, net sales increased 9.4% to $184 million and comparable store sales decreased 0.6%. On a two-year stacked basis, average daily two-year comps were 3%. We begin to face more favorable year-over-year comparisons during the second quarter. The comparable store sales decline during the first quarter was driven by a 0.8% decrease in average transaction count, partially offset by a 0.2% increase in average transaction size, during the quarter. Daily average mature store sales decreased 2.3%, primarily reflecting the increased competition and the ongoing effect of regional economic pressures in markets with sensitivity to oil and gas. Among all the stores in the comparable store sales base, the stores that were not facing new competition within the last 12 months collectively posted positive comparable store sales growth. Gross profit margin declined approximately 40 basis points to 28.4%, primarily due to an increase in occupancy costs as a percent of sales, which was partially offset by higher product margins. The increase in occupancy cost as a percent of sales was primarily due to higher average lease expenses at newer and relocated stores and also reflects the decrease in mature store sales and the fixed nature of rent obligations and related occupancy expenses. Store expenses as a percentage of sales rose approximately 140 basis points to 22.8% during the first quarter compared to the prior year period. The increase largely reflects deleveraging of store level salary expenses given the negative comparable store sales performance during the quarter, which accounted for the majority of the year-over-year increase as a percentage of sales. Administrative expenses as a percent of sales decreased approximately 15 basis points, as a result of our cost focus reflecting recent sales trends. Pre-opening and relocation expenses increased $0.3 million to $1.3 million during the first quarter compared to the prior comparable period in fiscal 2016, due to the number and timing of new store openings. During the first quarter of fiscal 2017, we opened five new stores compared to opening four new stores in the first quarter of fiscal 2016. Net income was $2.1 million, with diluted earnings per share of $0.09 in the first quarter of fiscal 2017. EBITDA was $11.3 million in the first quarter of fiscal 2017 compared to $12.7 million in this first quarter of fiscal 2016. We ended the first quarter with $7.1 million in cash and cash equivalents, and $16.9 million available on our revolving credit facility. During the first quarter of fiscal 2017, we generated cash from operations of $14.1 million and invested $13.1 million in capital expenditures. The positive free cash flow during the first quarter is consistent with our expectation to largely self-fund our unit growth during fiscal 2017. Additionally, during the first quarter, we received $2.6 million of net proceeds related to a sale-leaseback of a store building. Before I turn the call back to Kemper to reiterate our previously issued fiscal 2017 guidance, I would like to provide some additional information to aid your revenue modeling in the second quarters and third quarters of fiscal 2017. Please note that the Easter holiday falls in the third quarter this year as compared to the second quarter of fiscal 2016. Our stores are closed on Easter, impacting the number of selling days in a quarter. Also, during the second quarter of fiscal 2016, we benefited from an extra selling day due to leap year. While our average daily comparable store sales metric adjusts for the variations in selling days, the number of selling days does impact reported revenue growth. Now, I will turn the call back to Kemper.

[Kemper Isely:]

Thank you, Sandra. So far during the second quarter, we have opened one additional store in Texas. We have signed leases for 16 new stores to open in 2017 and beyond. At this point, we anticipate opening 10 of these stores in fiscal 2017. Moving to our 2017 outlook, we are reiterating the outlook we issued on November 17. During fiscal 2017, we expect to open 15 to 20 new stores resulting in 12% to 16% unit growth, achieve daily average comparable store sales growth of negative 1% to 1%, achieve net income margin of 1.4% to 1.6%, and achieve diluted earnings per share of between $0.50 and $0.58, and deliver EBITDA margin of 6.4% to 6.8%. We continue to expect capital expenditures for fiscal 2017 in the range of $40 million to $48 million. Our new store opening range provides flexibility to adapt to the operating environment throughout the fiscal year. We remain focused on our founding principles along with our core strategies in positioning, as they continue to differentiate us from the competition. We believe our industry-leading standards, small format stores, and affordable pricing allows our customers to shop with confidence while building value in the communities we touch as well as for our shareholders. We remain excited about the growth opportunities ahead. Now, I would like to open the lines up for questions. Thank you.

[Operator:]

Ladies and gentlemen, at this time, we will now begin the question-and-answer session. And our first comes from Sean Naughton from Piper Jaffray. Please go ahead with your question.

[Sean P. Naughton:]

Thank you and good afternoon.

[Kemper Isely:]

Good afternoon, Sean.

[Sean P. Naughton:]

So you talked a little bit about inflation and deflation not being as bad as some of the others names that you've probably been hearing about there or people have been talking about it. But I guess the question is, one is, did you see deflation in Q1 overall? And then I guess the second part of that is, are you beginning to now see any cost increases in certain categories as energy prices are starting to rise here a little bit?

[Kemper Isely:]

Overall, inflation was fairly flat. According to SPINS, it was less than 1% for the quarter. We definitely saw a little deflation in the price of turkeys this year. And as I've said before, the price of nuts has really dropped dramatically. So, that's affected our sales volumes in bulk, because we sell a lot of nuts in our Bulk Department. So, from that standpoint, that's where we've seen the deflation. As far as seeing it reignites – we really haven't seen a lot of inflation – inflationary pressures as of yet from the increase in energy prices.

[Sean P. Naughton:]

Okay. And then I guess another question just on the top-line. You talked a little bit about still getting some of your stores having competition and some of the cannibalization on your new store openings. Any color on how your stores are performing that might not have some of those impacts from cannibalization and competition? Are those stores performing a little bit better, any color there would be helpful.

[Kemper Isely:]

They're definitely – they're comping positively, they're not comping as robustly positively as they were a year-ago. So, they are comping positively, but not as strongly as they were a year ago.

[Sean P. Naughton:]

Okay. And then just lastly, maybe just a clarification question. I think you talked about getting store expenses back down in line with 2015 level, just curious, just trying to make sure I understand that comment. Does that mean on a rate basis you're expecting your store expenses to get back down to similar levels as 2015 and 2017?

[Kemper Isely:]

In particular, we're expecting to get our labor percentage down to the 2015 percentage level, and also our shrink level down to our 2015 percentage level, which will benefit us greatly...

[Sean P. Naughton:]

Okay. That's great.

[Kemper Isely:]

...in the future.

[Sean P. Naughton:]

Okay. Thanks for taking the questions.

[Operator:]

Our next question comes from Rupesh Parikh from Oppenheimer. Please go ahead with your question.

[Rupesh Parikh:]

...for taking my questions. So the first question I had was just on the new store productivity in the quarter. In our model, it was a little less than we expected. So I was just curious, is that all driven by the timing of the stores opening later in the quarter or just wanted – was there something else going on with the performance of the stores?

[Kemper Isely:]

No, in particular, on the five stores that are opened for the quarter, it was driven by timing entirely. Our 2016 stores that completed their first year in the quarter performed at our projections. The remainder of the 19 stores that we have coming, they'll be comping over the next nine months, those stores will probably come in a little bit light on revenue, probably between 90% and 95% of projection.

[Rupesh Parikh:]

Okay. And then, we should see a benefit then for those five stores in this current quarter...

[Kemper Isely:]

Yeah.

[Rupesh Parikh:]

...that are opened later?

[Kemper Isely:]

They seem to be coming in at projection, right now.

[Rupesh Parikh:]

Okay. And, the other question that we've been getting a lot from investors is just on the border tax. Have you had a chance to look at what percent of your product cost that you either directly import or that you purchase through an intermediary?

[Kemper Isely:]

Well, the border tax will be really complicated. We don't directly import very much of anything. But, a lot of our products – lot of produce, for instance, comes from Mexico. And it won't seem very wise to me to put a border tax on produce so that the consumers in the United States would pay 20% more or 30% more for produce. So, I'm a guy (22

[Rupesh Parikh:]

Okay. Great. And then my final question. Just in terms of – trying to (23

[Kemper Isely:]

It's still very choppy, I would say, that we are on the low-end of our projection right now through January. We had a lot of weather issues at a lot of our stores in January and we even had some stores closed for a couple of days because of the weather. And so, January was a choppy month revenue-wise.

[Rupesh Parikh:]

Okay. Great. Thank you.

[Operator:]

Our next question comes from Bill Kirk from RBC Capital Markets. Please go ahead with your question.

[William Kirk:]

Thank you for taking my question. In the lead up to the holidays, I think there was a program called Holly Deals. Can you tell us a little bit about that program, and what if anything it maybe contributed to December?

[Kemper Isely:]

It was very successful actually. We had unit volume increases on items that we put on sale that were dramatic and it also led to very nice comp sales at our stores, because of the people coming in for those deals. As a matter of fact, we decided that we will, going forward, have at least three days every month with some – about 5 products to 10 products on dramatic – with dramatic sale prices to help drive customer counts into the stores.

[William Kirk:]

Was there a particular product category that would see those deals or is this kind of opportunistic across departments?

[Kemper Isely:]

I would say, it was opportunistic across the departments, I mean we have some body-care items that we would – that we were selling like 100 a day, of that we sold 2,000 of them on that day. We had a chocolate bar that we would sell about 2,000 a day, of that we sold 30,000 of them in a day. So there was a lot of really positive results from those Holly Deals.

[William Kirk:]

Okay. And going a slightly different direction, are there any new categories that are about to get some private label treatments in the store, and kind of expansion of your private label program?

[Kemper Isely:]

No, right now, we have partnered with Damon's International (25

[William Kirk:]

Okay. Perfect. That's all from me.

[Kemper Isely:]

Thanks.

[Operator:]

Our next question comes from Shane Higgins from Deutsche Bank. Please go ahead with your question.

[Shane Higgins:]

Yeah, good evening. And thanks for taking the questions. And, Kemper, did you see any real step-up in price investments and promotional activity from any of your competitors during the quarter or early this year? You did allude to the weather, but I was just wondering, if there were any other factors from your competitors that you could call out?

[Kemper Isely:]

No, during – I would say that people were really aggressive on turkey prices this year, and that was interesting. Other than that, we haven't seen any dramatic investments by others in pricing. We've decided to become more aggressive on pricing certain promotional items in the near future. So we'll see whether that is helpful to – and that's kind of an offshoot of what we've seen with those – what we were talking about just a minute ago about those Holly Deals.

[Shane Higgins:]

Great, great. And then just focusing on your marketing efforts, I know you guys rolled out some interesting initiatives, and I was just curious if you could just give some color, and may be how effective some of the digital and social media campaigns were that you guys launched back in October? May be what you're learning from that, and may be if you could tie that in with your {N}power initiative, and may be how you're targeting those customers?

[Kemper Isely:]

Yeah. As we alluded to in the call, we had launched our e-commerce site where we were selling – pre-selling them turkeys. And essentially we pre-sold 15% of our turkeys via that site. So that was pretty successful. We also sold gift cards on that site and that was also successful. Part of the promotions of the Holly Deals were through digital marketing, and we seem to have gotten a really good response from that digital marketing in regards to the Holly Deals. And I don't remember the rest of the question.

[Shane Higgins:]

No, that's okay. I was just trying to – I'm just trying to get a sense of how effective that was.

[Kemper Isely:]

Oh, {N}power, you asked about {N}power.

[Shane Higgins:]

Oh, yeah.

[Kemper Isely:]

{N}power, we've been really pleased with our targeted offers to our {N}power customers and how it's driving our existing customers back in for more frequent visits. For instance, we'll give $1 off a dozen eggs in a – over a – the offer is for a week, and we'll get several thousand responses. I mean, over – like 9,000 to 15,000 responses of customers coming in just for that $1 off on a dozen eggs. And it increases those customers' visits by about 0.2% of visits. So I mean, it may not seem like a lot, but it actually adds up to quite a bit of money over a week's period of time. And those targeted offers seem to be working really well to increase the loyalty of the {N}power users.

[Shane Higgins:]

And how many {N}power users did you guys have in total at the end of the quarter?

[Kemper Isely:]

Todd, do you remember the number?

[Todd Dissinger:]

280,000.

[Kemper Isely:]

280,000 and we're up, it's enough.

[Shane Higgins:]

Great. Thanks a lot. I'll yield (29

[Kemper Isely:]

Thanks.

[Operator:]

Our next question comes from Ryan Gilligan from Barclays. Please go ahead with your question.

[Ryan Gilligan:]

Hi, thanks for taking the questions. Guidance, obviously, assumes that EBITDA margins inflects higher going forward. Can you maybe talk about what gives you confidence that margins will increase going forward with comps negative currently?

[Kemper Isely:]

I'm not sure that margins will increase so much as that we will get our labor costs down to our – our goal is to get our labor cost down to our 2015 percentage of sales level, and also to get our shrink down to that level, which will add many basis points to our bottom-line profit.

[Ryan Gilligan:]

On those initiatives, can you give us a sense for, maybe how faraway you are from the 2015 levels, or like help us size the basis point opportunity?

[Kemper Isely:]

We seem to be tracking very well in January in regards to hitting our target.

[Ryan Gilligan:]

Okay. And I know you have 16 leases signed for new stores, but, I guess, can you just talk about what it would take for you to dramatically cut-back on new store growth?

[Kemper Isely:]

Well, if we only open 16 stores or 17 stores this year, that will be a 20% or 25% cut-back in growth. Our goal for 2018 will also be conservative and we'll probably be cutting back from the 2015 – the 2016 to 2017 that will open this year. We will be watching our cash flow on a quarterly basis and, as long as our cash flow covers our new store opening, our cadence of openings for this quarter which will be four stores this quarter, four stores next quarter, and four stores in the last quarter of the year, we'll continue at the pace that we have planned now. If our cash flow doesn't seem to be able to cover that then we will probably push some of those stores off into 2018.

[Ryan Gilligan:]

That's helpful. Thank you.

[Operator:]

Our next question comes from Alvin Concepcion from Citi. Please go ahead with your question.

[Alvin Caezar Concepcion:]

Thanks, and thanks for taking my question. What I'm wondering is what do you think drove the uptick in sales trends after November? And related to that, are you seeing evidence of trading up or down among your consumers that they're eating out less or more, just wondering if you have any color on that?

[Kemper Isely:]

One of the – I think that November had a lot of – the real problem we had in November was right around the election, those 10 days before and – the day before the election and then the nine days after the election we had a severe deterioration in same-store sales. And so, the election definitely played, in my opinion, a role in our – we just couldn't recover for the rest of the November from that negative week. And then December was just more normalized, and then, of course, as I spoke about earlier, we had a great promotion with the Holly Deals. And we also did a very good job with our Nutrition Education program in educating our customers about nutritional supplements, and increasing our supplement sales quite nicely in December.

[Alvin Caezar Concepcion:]

Got it. And then, I don't know if you can give any color on your comp trends in the areas that are outside of the oil regions versus what you saw in those oil producing regions?

[Kemper Isely:]

In the oil regions, we were substantially more negative and we were positive outside the oil regions.

[Alvin Caezar Concepcion:]

And in those oil regions, you said negative, did it get a little less negative from last quarter? I'm just wondering if there's any sort of signs of change in that pressure there?

[Kemper Isely:]

Actually, it looks like it's fairly flat from quarter-to-quarter.

[Alvin Caezar Concepcion:]

Got it. Thank you very much.

[Operator:]

Our next question comes from Scott Mushkin from Wolfe Research. Please go ahead with your question.

[Scott A. Mushkin:]

Hey, guys. Thanks for taking my questions. So I wanted to – let me ask a little bit offbeat question, but you did talk about the election kind of slowing sales, and obviously, it's created a lot of emotions, and one of the things that we've been seeing perhaps is that, it's not just for you, I say, it's for Whole Foods, and perhaps places that are a little bit more concerned about the current administration may have been – may see weaker performance. And I was wondering are you seeing that in your store base where stores that maybe are in places that are a little bit more concerned or seeing their sales trail off, and is that part of the problem in January?

[Kemper Isely:]

Yeah, it certainly could be.

[Scott A. Mushkin:]

Okay. So, then the second thing...

[Kemper Isely:]

I think there is a lot of uncertainty out there and when there is uncertainty people tend to hold back on purchasing.

[Scott A. Mushkin:]

So, I mean, if you looked at maybe some of your Colorado stores, I mean, we talked about the oil patch. I mean, do you think that's maybe part of what you're seeing or is that too fine to get into?

[Kemper Isely:]

It'd be really hard to say for sure, but Colorado took the brunt of the negative right after the election.

[Scott A. Mushkin:]

Okay. That's good color. So, then my second question is you seem very optimistic about the labor and gaining labor back to 2015. I guess, I'm just a little bit curious on how that happened when wage rates are rising real quick, and the tension there. And I was just wondering if you could maybe give us a little bit of details on in a quickly rising wage environment how you can get it back to the 2015 levels without, I guess, hurting the store experience and maybe hurting customer flow.

[Kemper Isely:]

Well, we don't base our labor model on having our stores managed to a percentage of sales. We have them managed to how much revenue one hour of work will generate. And, right now, our productivity level at our stores is about 5% lower than it was in 2015. And so, our goal is to get our productivity level back up to those 2015 levels, which will help our labor percentage rate quite a bit. The wage inflation rate at our – it seems to be about, our wages are up about 2% across the board over – our average wage at our stores is up about 2% over 2015 levels. And so, combined with that decline in productivity, it increased our labor percentage levels at our stores quite a bit. The other thing that'll be really helpful is that our new stores aren't as productive as our older stores. And as we decelerate our growth, we'll have fewer new stores putting a drag on our productivity levels, and we had a lot of drag because we opened eight stores in a matter five months essentially, and that put quite a bit of drag on our overall productivity level, that hour of work for our – dollar amount generated. And so, we see that improving in the second half of this year quite a bit.

[Scott A. Mushkin:]

Interesting. Okay. And then I had a final one, I think I might be the last one in the queue, so asking one final one here. You mentioned that nuts were very deflationary and there's tons of nuts, produce is another place, especially organic produce which has seemingly gone deflationary and may stay there with all the rain in California. I was wondering what you could say about produce deflation, are you seeing it? Are you expecting it to continue?

[Kemper Isely:]

We have not seen any deflation in organic produce prices this year. I'm not sure where that's coming from. For instance, last year, avocados, we were selling four for $5, this year, we're selling three for $4. So that's about a 5% increase in price rather than a decrease in price. And avocados are like our second best-selling produce item. Bananas are selling at exactly the same prices as they were last year. So I'm not certain where the...

[Scott A. Mushkin:]

You're not seeing it?

[Kemper Isely:]

We're not...

[Scott A. Mushkin:]

UNFI mentioned it down at ICR.

[Kemper Isely:]

Yeah. And I'm not sure where they got their number from, because I don't see it out in the retail marketplace. We don't see it out in the retail marketplace. I mean, our pricing studies don't show it.

[Scott A. Mushkin:]

Okay. All right, well, listen, good luck, thanks for taking all my questions. I really appreciate it.

[Kemper Isely:]

All right, thanks.

[Kemper Isely:]

I think that's the end of the call. So thank you very much for joining us to discuss our first quarter results. We remain confident in Natural Grocers 62-year history of successfully adapting to an ever-evolving natural products landscape. Our value proposition, industry-leading product standards, unrivaled nutrition education, and superior customer service are the foundation of our long-term success. We look forward to speaking to you again on our second quarter conference call. Have a nice afternoon, everybody. Bye.

[Operator:]

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining. You may now disconnect your telephone lines.