Natural Grocers by Vitamin Cottage, Inc.
Q2 2017 Earnings Call Transcript

Published: 5 May 2017

[Operator:]

Good day, ladies and gentlemen. Welcome to the Natural Grocers' Second 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 call is being recorded. I would now like to turn the conference 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 second quarter fiscal year 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. During the second quarter, we continued to face pressure on our sales, which is evident in the 1.7% decrease in daily average comparable store sales during the quarter. Our most challenging month was January, when we believe results were impacted by customer concerns regarding the political environment. It is also clear that the food retailing environment remains challenging broadly and competition within the natural and organic segment remains high. However, we have had time to adapt to the new environment and are beginning to see the benefits of the operational and marketing initiatives that we have implemented. While the second quarter results did not meet our expectations, I'm pleased with the sequential cost improvements we achieved during the quarter. The results of our recent marketing initiatives and that we have been able to fully self-fund store growth thus far in 2017. Let me discuss the results of these three adjustments to our operating model. First, we saw 70 basis points sequential reduction in store expenses during the second quarter compared to the first quarter of 2017. Despite the softer comp during the second quarter, we have been implementing store labor controls over the past few quarters and the benefits of these initiatives became evident in the second quarter. We continue to address additional store expense improvements and still see an opportunity to achieve store labor rates consistent with 2015 levels by the end of fiscal 2017. In addition to store expenses, we achieved a sequential improvement in shrink and delivered a 10-basis-point sequential improvement in administrative expenses as we continue to hold the administrative expenses relatively flat in dollars. Second, we are seeing the positive results from our marketing initiatives. We recently began a new television advertising campaign in the Denver market. The ads began March 15 and we've seen a measurable lift within the 26 stores in the market relative to that control group. The television advertising will run through June and advertising efforts will broaden beyond the Denver market. We are also utilizing radio and outdoor advertising across many of our markets. The reformatting in the Health Hotline has also been well received. For example, we saw a very strong redemption rate for a coupon program we ran in February in the Health Hotline. We have also been encouraged by the results seen at our recent store openings, which we believe reflect the impact of our new store marketing plan. The new store marketing plan delivered excellent media coverage for our most recent store opening in Davenport, Iowa, a couple of weeks ago. The opening received coverage on local TV and radio including NPR. The relocation of our Boulder store, which is one of the highest volume units in the system, also enjoyed a robust brand opening even by our Boulder store standards. Additionally, we have significant marketing plans for the third quarter, including a very successful Earth Day event a couple of weeks ago. Finally, it's significant to note that our year-to-date new unit development has been entirely self funded by operating cash flow, which has exceeded capital expenditures after considering the sale-leaseback proceeds. As such, we have been able to reduce the borrowings on our revolver while funding the opening of four new stores and the relocation of our Boulder store during the quarter. We will continue to be flexible with our unit growth plans to ensure we self-fund unit growth, although we continue to see opportunities for measured, new unit growth. While comparable store sales were again at the low end of the full year guidance range, we are encouraged by the improvements to our monthly comps as the quarter progressed. The improvements occurred across both total daily average comp and mature stores. These improvements have continued thus far into the third quarter. During the second quarter, we also encountered fewer operating months with new competition, although new competition impacted several of our larger volume stores. While we remain cautious and prudent with our expectations, we are encouraged by recent trends and continue to anticipate improved second half results as our guidance reflects. Now, I'd like to turn the call over to Sandra to discuss our financial results.

[Sandra M. Buffa:]

Thank you very much, Kemper, and good afternoon, everyone. During the second quarter of fiscal 2017, net sales increased 8.3% to $192.2 million and comparable store sales decreased 1.7%. The comparable store sales decline during the second quarter was driven by a 1.4% decrease in daily average transaction count and a 0.4% decrease in average transaction size during the quarter. Daily average mature store sales decreased 3.1% primarily reflecting the challenging food retailing environment and the ongoing effect of regional economic pressures in markets with sensitivity to oil and gas prices. While our month-to-month comparable store sales have been choppy, we did see improvement in February and March compared to January with a roughly flat transaction count. That improvement has continued to-date into April as Kemper mentioned. Gross profit margin declined approximately 90 basis points to 28.2% primarily due to an increase in occupancy costs as a percent of sales. The increase in occupancy costs as a percent of sales was primarily due to higher average lease expenses at newer and relocated stores and also reflecting 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 20 basis points to 22.1% during the second quarter, compared to the prior-year period. The increase largely reflects deleveraging of store level expenses that are less variable, including depreciation, utilities and operations, allocations given the negative comparable store sales performance during the quarter, and a modest increase in labor cost as a percent of revenue. As Kemper mentioned, when compared to the first quarter, store expenses declined sequentially by 70 basis points with the decrease in labor cost as a percentage of revenue, comprising the largest component of the improvement. Administrative expense as a percentage of sales decreased approximately 20 basis points, as a result of our cost focus reflecting recent sales trends. Pre-opening and relocation expenses decreased $0.2 million to $1.3 million during the second quarter compared to the prior comparable period in fiscal 2016, due to the number and timing of new store openings. During the second quarter of fiscal 2017, we opened four new stores and relocated one store compared to opening five new stores in the second quarter of fiscal 2016. Net income was $3 million with diluted earnings per share of $0.13 in the second quarter of fiscal 2017. EBITDA was $12.8 million in the second quarter of fiscal 2017, compared to $12.6 million in the second quarter of fiscal 2016. We ended the second quarter with $4.2 million in cash and cash equivalents, and $17.5 million available on our revolving credit facility. During the first half of 2017, we generated cash from operations of $22.4 million and invested $21 million net in capital expenditures, after reflecting the $2.6 million of sale-leaseback proceeds. The strong cash flow year-to-date is consistent with our expectation to largely self-fund our unit growth during fiscal 2017. Before I turn the call back to Kemper to discuss unit development and fiscal 2017 guidance, please note that our current unit development plans should lead to about five new stores in the third quarter, and two new stores during the fourth quarter, as such we would expect the fourth quarter earnings to benefit from lower pre-opening costs than the prior year.

[Kemper Isely:]

Thank you, Sandra. So far during quarter three of fiscal 2017, we have opened one additional store in Iowa. We have signed leases for 13 additional new stores to open in 2017 and beyond. At this point, we anticipate six of these stores will open in the remainder of fiscal 2017. We continue to monitor new store performance and will remain flexible with new unit development plans going forward to adapt to the operating environment. Moving to our 2017 outlook, we have narrowed the outlook we issued on November 17. During fiscal 2017, we expect to open 15 to 17 new stores, down from 15 to 20 previously, resulting in 12% to 14% unit growth, achieve daily average comparable store sales growth of negative 1% to 1%, achieve net income margin of 1.4% to 1.5% versus 1.4% to 1.6% previously, achieve diluted earnings per share between $0.50 and $0.54 versus $0.50 to $0.58 previously and deliver EBITDA margin of 6.4% to 6.7% versus 6.4% to 6.8% previously. Additionally, we now expect capital expenditures for fiscal 2017 in the range of $40 million to $44 million, versus our prior outlook for $40 million to $48 million. Our founding principles along with our core strategies remain our prime focus as they continue to differentiate us from the competition. We have and are accelerating our efforts to communicate these differences. Now, I'd like to open the lines up for questions. Thank you.

[Operator:]

We will now begin the question-and-answer session.

[Kemper Isely:]

(13

[Operator:]

Our first question is from David Magee with SunTrust. Please go ahead, sir.

[David G. Magee:]

Thank you. Good afternoon.

[Kemper Isely:]

Good afternoon, David.

[David G. Magee:]

Hi, Kemper. You mentioned the tone of (13

[Kemper Isely:]

I'm sorry, David, could you repeat the last part of that question again. I didn't...

[David G. Magee:]

Well, I think that the comparisons get easier in the second half of the year and may have gotten easier throughout the recent quarter, when business seemed to be improving. I'm just curious is that the sole factor involved here or you really thought the marketing is having traction above and beyond that? And in other words, two year comps, is that number that should be improving?

[Kemper Isely:]

Well, during the quarter, we saw improvement each month; January, being a particularly trying month for every aspect of sales. We had significant customer transaction count declines and average ticket declines in January. And we think consumers were holding back a little bit because of political uncertainty. And then in February, we actually saw our average ticket went down, but our customer count, our transaction count was positive for the month, and so that was good. And then in March, we had an extra day, which was helpful as far as the overall for the month, so we had a positive for the month and on an average per day, we were a little bit negative on the customer count and positive on the transaction side. And then, going into April, we've seen sequential – even more improvement so that, year-to-date, we're within our guidance range of 1% to negative 1% on sales, whereas we ended the quarter negative 1.2% on year-to-date sales, and – yeah.

[David G. Magee:]

Go ahead. I'm sorry.

[Kemper Isely:]

And then, I was just going to say, our marketing seems to be driving the customer accounts into our store, our reformatted Health Hotline in particular in February, we believe is the reason for the positive customer transaction counts in February. And then the improved transaction counts in March were also driven by the Health Hotline and then the addition of our television advertising at the end of the month. And then, this month, we've rolled out the television advertising into – I mean in April, we rolled it out to more markets and also radio advertising, so we think it's having a good impact on our transaction accounts.

[David G. Magee:]

Thanks, Kemper. And secondly, you referenced the market as being challenging out there and certainly, everybody is saying that. At the same time, it does appear that at least conventional pricing is improving a bit sequentially and might be better in the second half of this year and the various retailers have slowed square footage growth. Are those reasons for optimism in your business too over the next 12 months?

[Kemper Isely:]

Well, I think that rationalization of square footage growth is good for us as well as everybody else because there is just so much that – so much market out there for groceries. I think that our differentiated messaging that we're going to get out via our marketing will really improve our position in the marketplace over the next six months.

[David G. Magee:]

Thanks.

[Kemper Isely:]

And beyond that to the next couple of years.

[David G. Magee:]

Thanks, Kemper and good luck.

[Kemper Isely:]

Thanks.

[Operator:]

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

[Erica Eiler:]

Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for taking our questions. So, we've heard from a couple of players now that front page ads have been more competitively leased. So, I was just curious what you're seeing on the competitive and promotional front?

[Kemper Isely:]

Well, I would definitely say that the pricing of conventional products has gotten to be incredibly competitive. I mean, the fortunate thing is, is that we don't sell commercial conventional produce, more commercially raised conventional meat. And so, we're not experiencing that same competitive pressure. On the other hand, we found that being very aggressive on our higher standard products really draws customers into stores. And in the experiments we've done with really aggressive pricing on, say, eggs and bacon, it has had a significant impact on driving customer counts into our stores and increasing the overall customer count and average basket size of those stores that we've experimented with that pricing on, and we're going to roll that out a little bit more aggressively during this quarter to see whether it has further benefits.

[Erica Eiler:]

Okay, that's really helpful. And then just switching gears to gross margin, so you called out a decrease in product margins and this definitely marks a change from the improvement in product margins that you guys have called out the past couple of quarters. So maybe you can provide some color on what's going on here, and maybe any additional color on how we should think about gross margins for the balance of the year?

[Kemper Isely:]

Well, what affected our gross margin most significantly this quarter was that we had a decline in our bulk packaged products, and when we did that, it brought more expenses out onto our income statement that were rolled into the price of those bulk products, and we should have that decline in our packaged goods corrected by the end of this quarter and that minor blip should go away.

[Erica Eiler:]

Okay, great. Thank you.

[Kemper Isely:]

Sure.

[Operator:]

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

[William Kirk:]

Thanks for taking the questions. Next week, I think you have a store opening in Arkansas that's going to be a bit different from some of your other stores, I think maybe less of a education center, can you talk about the changes in that store and is that something we can expect going forward and maybe why the changes?

[Kemper Isely:]

Yeah. That's our new prototype store and all of our stores or most of our stores in the future will be in that format. The reason for the change are several-fold, is first off we wanted to standardize how many shelves of grocery, vitamins, et cetera that we have in a store, so that there is less (22

[William Kirk:]

Okay. That makes sense. And a question on the marketing campaign, the here versus here, what is it that you're trying to communicate and I guess how aggressive are you willing to be in communicating that difference?

[Kemper Isely:]

Well, I have Kevin Miller, our Vice President of Marketing here and I'd like him to chime in and answer that question for us. So, I'm going to let him go on that question. He is actually – I'll have to play the Rebel Chicken radio ad so that you can actually hear how aggressive we're going to be.

[Kevin Miller:]

Yeah. So, this is Kevin Miller. So, we really are becoming a little bit more aggressive in our strategic focus to our advertising. And that's really leveraging our competitive approach to the competition and what we've done in the past. So our new TV campaign is based on the following strategies. One, we want to leverage the equity of our legacy campaign. We're going to add a competitive element versus the competition. We are inviting the consumer to think and act, i.e. here versus here, and all this is going to be anchored by driving home our quality standards. So, we can't show you the TV now, but we'll play some of the radio for you. The radio is based on a campaign called Rebel Chicken, which is about a chicken that is a free range chicken and suddenly finds out that most others chickens aren't free range like she is and gets very upset about it and goes on a campaign to let America know that there's a lot of not-so-good things about conventional chicken practices and egg practices. All righty. So right now, we'll play Rebel Chicken.

[Kemper Isely:]

Technical difficulty, here we go.

[Kevin Miller:]

Here we go. [Video presentation] (25

[Kemper Isely:]

All right. So, you can tell from that campaign and that creative that we are getting really a little bit more creative and a little bit more comparative in our approach and really comparing conventional farming practices with our organic and free-range farming practices.

[William Kirk:]

Thank you. I appreciate you playing that for us.

[Kemper Isely:]

Thanks, Bill. Did you have any other questions?

[William Kirk:]

That's all. I'll jump to the back.

[Kemper Isely:]

All right. Thanks.

[Operator:]

Our next question is from Chris Mandeville with Jefferies. Please go ahead.

[Christopher Mandeville:]

Hey, good afternoon. Kemper, could you be a little bit more specific in terms of the quarter as it relates to any type of temporary or one-time impacts whether it'd be cannibalization or Easter possibly some inclement weather that you folks observed during the quarter?

[Kemper Isely:]

The only – yeah, the only one time impact, I think was the political uncertainty in January. Other than that, Easter moved out from March to April. And so, in reality having as strong a March as we did without Easter in it was pretty encouraging to us.

[Christopher Mandeville:]

Okay. And then, so with deflation seemingly abating at least in the conventional world, a little bit more steadily, this should conceivably improve your relative pricing, of course, you guys are playing with the different quality, but nonetheless, it doesn't actually sound as though you guys are seeing any type of uplift. I guess, I'm just kind of curious. Do you anticipate that the end consumer ultimately realizing the price differential as we continue to reflate or could this be somewhat of a new norm where maybe you are of the mind that conventionals continue to remain aggressive in certain categories to keep pricing down?

[Kemper Isely:]

I think conventional are going to remain competitive. I mean I see $0.99 dozens of factory raised eggs out there all the time, right now and I see $1.69 a pound conventionally raised antibiotic drug-laden chicken out there all the time too. So I don't see that going away and I see Sprouts advertising that type of chicken and stuff all the time and I see King Soopers doing it also. So I don't see them stopping doing that because they think it drives customers. As I said, we've decided to become really aggressive on our eggs, and bacon that are of a higher standard and it's driving customer accounts into our stores also in the test markets that we are doing.

[Kemper Isely:]

And, I really haven't seen the re-inflation of food prices yet. The commodities are still pretty low, historically speaking. The proteins prices have spiked up because of shortages, but other commodities such as nuts and beans and stuff, and the basic commodities they're still at pretty low prices compared to where they were a year ago.

[Christopher Mandeville:]

Got it. And, I guess, just on the digital front, any update as it relates to {N}power and actual mobile app ?

[Kemper Isely:]

{N}power is doing very well for us – we're up to approximately 300,000 – 325,000 users. We've gotten really nice cadence on our two weekly offers that we give to our {N}power customers that aren't costing us as much as the offers were last year and they're getting tremendous response from those customers. We're essentially getting a 3% to 4% response from our Thursday offers and I think that's pretty amazing actually for giving a $1 off on a particular category of product.

[Christopher Mandeville:]

Okay. And then the last one for me here. Just trying to frame the back half of the year relative to the updated guidance. I'm still having a little bit of difficulty getting your guidance range with the expectations that comps maybe improved modestly in the back half, but nonetheless it doesn't seem is where you will be at the levels where you can actually leverage on your occupancy and while you mentioned that you are going to make continued sequential progress on the SG&A it seems to be a bit difficult to get their at least from what I'm doing right now anyways. I could be going about it the wrong way, but nonetheless is there anything that I should be observant of whether be the tax rate, is that now lowered to more of a 35% type of number, given where things have shaken out in the first half of year. Anything you would call out that I should be thinking about that gives you the confidence to get that $0.27 in the back half of the year?

[Kemper Isely:]

I think that our comp sales in April give us confidence that we will have substantially better comps over the next five months , and that will help us gain a little bit of leverage on our fixed cost because when you are negative you lose leverage on your fixed cost, which we've been for the last two quarters. And so just getting a little bit of positive – if we can maintain that momentum that we have had through April, and I think we can because of our aggressive marketing, we're planning on doing over the next five months. I think we'll be able to maintain that momentum that we have in April. Todd or Sandra, do you want to answer the question of the tax rate?

[Sandra M. Buffa:]

The tax rate that we have in the model going forward is 35.5%.

[Christopher Mandeville:]

Okay. That's really helpful, guys. Best of luck in Q3.

[Sandra M. Buffa:]

Thank you.

[Kemper Isely:]

Thanks.

[Operator:]

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

[Shane Higgins:]

Yes, good afternoon, and thanks for taking the questions. Just want to get a little bit more color on the kind of the product mix during the quarter. Did you guys see a decent growth in the dietary supplements or the body care segments?

[Kemper Isely:]

Dietary supplements outgrew -- gained market share during the quarter. I think our overall sales were up 8.3% and supplements were up 10% in the quarter.

[Shane Higgins:]

Okay. Great. I was just checking your inventory levels. It looks like those are still down on a per store basis. Just curious as to how that's impacting your overall margins, and shrink during the quarter and kind of how should we think about inventory levels progressing as the year goes on?

[Kemper Isely:]

I think, we'll be able to get more efficiencies and actually get some more reductions in inventory as the year goes on. As far as shrink, it's helping the shrink levels because the lower the inventories, less products we have to shrink of course and we're back now. We actually beat – in this last quarter, we beat last year's second quarter shrink numbers by 5 basis points, but that's still 5 basis points. So, we're happy with that and we think we'll have continued improvement in our shrink numbers as the year progresses. We're trying to push ourselves back to our 2013 levels of shrink and hopefully by next year at this time, we'll even have better news on that front.

[Shane Higgins:]

Okay. And is that inventory that's kind of in the back of the store, or is there any particular categories you guys have been running a little bit leaner?

[Kemper Isely:]

Well, we've cut back the – we're on SAP and we do a replenishment in inventory and we've cut back the number of days on hand in the replenishment and in particular in supplements and body care, so that that's very helpful, and that's where the majority of our inventory is carried. And so that, just cutting back a few days really helps the amount of inventory we have in the stores.

[Shane Higgins:]

Has it affected your out of stocks at all or are those still kind of in line with historical levels?

[Kemper Isely:]

They're staying very close to historical level.

[Shane Higgins:]

Great. Great. And then just last one from me. The TV advertising that you guys are doing in Denver, have you guys run TV ads in the past? I'm just curious as to if you guys are seeing how...

[Kemper Isely:]

Yes, we have.

[Shane Higgins:]

You have?

[Kemper Isely:]

Yes, yes, we have. We ran last year in Denver in April and Kansas City in, I think it was February last year, and then this year, we're running at March, April, May, June in Denver, and several other markets, April, May, June.

[Shane Higgins:]

Great. And so, I guess, you're seeing a similar return on that as you've seen historically, I mean given that you're continuing to roll it out?

[Kemper Isely:]

Yes. We see a nice bump when we roll it out compared to our control group of stores that don't have the same type of marketing going on.

[Shane Higgins:]

Great. Thanks a lot for the color.

[Kemper Isely:]

Thanks.

[Operator:]

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

[Ryan Gilligan:]

Hi, thanks for taking the question. Just a quick follow-up on the new media campaign, are you still thinking marketing cost as a percent of sales will be about flat for the year or how should we think about that?

[Kemper Isely:]

For the entire year they will be about flat, yes. They will be higher during this quarter and next quarter compared to the first quarter and second quarter.

[Ryan Gilligan:]

Got it. And then I guess, can you share the year-over-year basis point improvement in labor and shrink, I know you said they improved sequentially, but just trying to get a feel for how they impacted the year-over-year change in operating margins?

[Sandra M. Buffa:]

Yeah, I'm sorry, we don't have that number right here, do you have?

[Todd Dissinger:]

So, we've seen on a year-over-year basis labor was up a couple of basis points, but sequentially it was down in that 25 basis point to 30 basis point range. And shrink sequentially is down 5 basis points and it's down about 12 basis points year-over-year.

[Ryan Gilligan:]

Got it. And on labor, is sales per labor hour better on a year-over-year basis?

[Todd Dissinger:]

Yeah, we've made some really good improvements in sales per labor hour. We haven't given that metric out, but clearly on a sequential basis we've improved that dramatically.

[Ryan Gilligan:]

Got it, that's helpful. And then I guess lastly, can you just give us an update on what comps are in the energy sensitive markets versus in the non-energy sensitive markets?

[Kemper Isely:]

Well, Texas is our worst performing comp state, so that gives you a good handle of kind of how we look at the energy market.

[Ryan Gilligan:]

Are they improving because it seems like the employment levels are starting to turn?

[Kemper Isely:]

I don't think they're improving as much as – I think the oil companies have become much more efficient in their ability to drill wells and they're not hiring as many people as they used to.

[Ryan Gilligan:]

Got it. Thanks.

[Operator:]

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

[Alvin Caezar Concepcion:]

Thanks, thanks for taking my question. Just want to talk a little bit about the earnings guidance. I know you called out the lower store growth expectations. Are there any other reasons for reducing the top end. I guess what I'm getting at it is, it looked like EBITDA margins are expected to be a little bit lighter at the top end versus what you had previously? And that's we had lower store growth. So I'm wondering why we wouldn't see that at least, stay the same or improve a little bit?

[Sandra M. Buffa:]

As we look at the model that we're putting together, we had always had an anticipation of the range that included a number of stores and while we bring down the top – and the top number of stores, they will show an improvement in the EBITDA flow through.

[Todd Dissinger:]

We'll have lower preopening expenses in the back half of the year and of course we've talked about labor and shrink improvements and we expect to see that continue into the second half of the year.

[Alvin Caezar Concepcion:]

Got it. And you talked about some improvements in April. Was that pretty much stemming from strong underlying results or did the Easter shift kind of boost that a little bit? So, I'm just wondering if you could give us a sense of what the underlying trends were ex-Easter shift in April that give you confidence in maintaining your annual targets for comps?

[Kemper Isely:]

The Easter shift helped some, but we saw generally better transaction counts and improved sales before Easter also. Easter is like almost exactly in the middle of the month. So before we would have had an impact from Easter we were already seeing improved results, and last year we've had a significant bump in April because of our Earth Day promotion. And this year, we maintained that bump. And so we're pretty happy with the way the month played out. We had that snowstorm that rolled through Denver, through Colorado on the last Saturday of the month which was kind of a negative, but other than that the month was pretty steady.

[Alvin Caezar Concepcion:]

Got it. Thank you very much.

[Operator:]

Our next question is from Scott Mushkin with Wolfe Research. Please go ahead, sir.

[Scott A. Mushkin:]

Hey, guys. Thanks for taking my question. So I just want to get back to Kemper, you made a comment that you would do some promotion I think in eggs and bacon, pulling pricing down and it was driving some volumes and you're going to expand that. I guess, my question is, we're getting in our research that the consumer is really sensitive to this price discounting activity and volumes move pretty quickly, how concerned are you about that that the consumer is just getting a little bit used to buying food at a discount even if it's better quality food like you guys provide?

[Kemper Isely:]

Well, I think, that when you provide a good price on a perishable item, it drives them into your store. As long as you're able to maintain the pricing on the rest of your basket, then I don't have a big problem with that issue. And we maintain a pretty tight margin as it is and so we've been able to maintain that tight margin on the rest of our basket without having to discount it significantly.

[Scott A. Mushkin:]

And we've seen a similar approach at a Whole Foods, obviously a pretty big competitor in the Colorado area. Have you noticed a more aggressive stance out of them lately?

[Kemper Isely:]

No, not really.

[Scott A. Mushkin:]

Not really.

[Kemper Isely:]

Not on what we're selling.

[Scott A. Mushkin:]

So then my second question goes to expense control which you cite obviously is a really good area that you guys have done some work on. I guess, I was wondering, as we get to the back half of the year, many markets including your base Denver are seeing significant increases in labor costs. And I was just wondering if you could talk about the push and pull of your expense controls, maybe give us a little bit more color on what you're doing to try to control those expenses and remind us, I think you said it before, but just remind us? And then, also, how it works with these rising costs that you're likely to face that could even accelerate as the year goes on and then I'll yield? Thanks very much.

[Kemper Isely:]

I mean, you're correct, there's definitely a tighter labor market particularly in Denver, but we've always maintained a higher than average starting wage to start with. And so, we haven't had to as of now increase that starting wage in the Denver market. There are a couple of markets that we've had to increase our wages, because of new minimum labor laws; that's an important area for instance to maintain our gap between the minimum wage and our wage. Some of the things that we do is that we offer health insurance and we try to have mainly full-time employees and then we also offer $1 an hour in vitamin book. And so, that adds to how much base compensation we're giving to our employees to start with. And our health insurance is a high quality health plan and so our good4u crews are appreciative of that. And, we've increased our standard of how much productivity we expect out of each employee at our stores, and then at the administrative level, you have to limit how much hiring you do, and that's how you control your general and administrative cost.

[Scott A. Mushkin:]

Thanks very much.

[Kemper Isely:]

Sure.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Isely for any closing remarks.

[Kemper Isely:]

Thank you very much for joining us to discuss our second quarter results. We are pleased to deliver sequential cost improvements during the second quarter, and to have generated positive cash flow year-to-date. We remain confident in Natural Grocers' 62-year history of successfully adapting to an ever evolving natural products landscape. Thanks, everybody. Have a great day. Bye.

[Operator:]

The conference is now concluded. We thank you for attending today's presentation you may now disconnect.