Natural Grocers by Vitamin Cottage, Inc.
Q2 2013 Earnings Call Transcript

Published: 10 May 2013

[Operator:]

Good day, ladies and gentlemen. Welcome to the Natural Grocers Second Quarter and First Half fiscal year 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will be given at that time. As a reminder, today’s call is being recorded. I’d now like to turn the conference over to Mr. Jon Bourne, General Counsel for Natural Grocers. Mr. Bourne, you may begin.

[Jon Bourne:]

Good afternoon everyone and thank you for joining us for the Natural Grocers by Vitamin Cottage second quarter and first half fiscal 2013 earnings conference call. On the call today are Kemper Isely, our Co-President and Sandra Buffa our Chief Financial Officer. Before we start let me remind you that all statements made in 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 because of factors such as industry, business strategy, goals and expectations concerning our market position, the economy, future operations, margins, profitability, capital expenditures, liquidity and capital resources, other financial and operating information and other risks detailed in the Company’s Form 10-K for the year-ended September 30, 2012. The information we present is accurate as of the date of this call. The Company undertakes no obligation to update forward-looking statements. The Company’s earnings release was issued and made available this afternoon. The discussion that follows assumes you’ve had the opportunity to read this release. The release, along with a transcript of a recording of this call and a reconciliation of non-GAAP measures used by us, will be available on our website at Investors.NaturalGrocers.com for a minimum of 30 days. We recommend that you read our release in conjunction with or after this call. Now I will turn the call over to our Co-President, Kemper Isely.

[Kemper Isely:]

Thank you, Jon. Good afternoon everyone. We are pleased to announce our financial and operating results for the second quarter and first half of fiscal 2013. We would like to highlight three points for the second quarter. First, we continue to experience stability in our comparable store sales, which we believe is a direct reflection of our commitment to affordable pricing, nutrition education and customer service. Second, we plan to open 13 stores in fiscal 2013, which increases our unit growth outlook for fiscal 2013 from 20% to 22%. And Third, we continue to increase our footprint as we expanded into Oregon this past quarter. Moving to our results, we are pleased to report, net sales increased 25.4% for the second quarter and 26.6% for the first half of fiscal 2013· Daily average comparable store sales increased 10.6% in the second quarter and increased to 11.6% in the first half of fiscal 2013. We continue to experience strong earnings growth, which Sandra will discuss in more detail later. Finally, we opened four new stores during the second quarter in Omaha, Nebraska; Denton and Lubbock, Texas; and Medford, Oregon, bringing our total store count at the end of the second quarter to 65 stores in 13 states. Now I will turn the call over to Sandra to discuss our financial results in more detail..

[Sandra Buffa:]

Thank you, Kemper. And thank you all for joining us this afternoon. Before moving forward I would like to remind you that in addition to discussing our financial results in conformity with U.S. generally accepted accounting principles, we are providing non-GAAP financial information to allow for what we believe is enhanced comparability. These non-GAAP financial measures, on a pro forma basis illustrate our results as if we had owned 100% of the five Boulder Vitamin Cottage Group, LLC stores during the comparable periods last year. You can find our reconciliation schedules at the end of our earnings release and posted on our website at Investors.NaturalGrocers.com which Jon referred to previously. Turning to our financial results, we are pleased to report net sales in the second quarter of fiscal 2013 increased 25.4% to $106.5 million due to a $14.7 million increase in new store sales and an 8.1% increase in comparable store sales over the same period in fiscal 2012. For the first half of fiscal 2013 net sales increased 26.6% to $202.3 million due to a $26.0 million increase in new store sales and a 10.4% increase in comparable store sales over the same period in fiscal 2012. Daily average comparable store sales grew 10.6% for the second quarter and 11.6% for the first half of fiscal 2013 when compared to the prior year comparable periods. Using daily average sales removes the effect of the loss of two selling days in the second quarter of fiscal 2013 due to leap year in 2012 and the occurrence of Easter in March 2013 rather than April 2012. The 10.6% increase in the second quarter is driven equally by increases in daily average transaction count and average transaction size. The 11.6% increase in the first half of fiscal 2013 is driven by a 6.6% increase in daily average transaction count and a 4.7% increase in average transaction size. Daily average mature store sales increased 5.8% in the second quarter and increased 6.9% during the first half of fiscal 2013 when compared to the prior year comparable periods. For fiscal year 2013, mature stores include stores open during or before fiscal 2008. Gross profit increased 23.9% to $31.8 million during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 and increased 26.2% to $59.7 million in the first half of fiscal 2013 compared to the first half of fiscal 2012. Gross margin decreased to 29.9% of sales in the second quarter of fiscal 2013 compared to 30.2% of sales in the second quarter of fiscal 2012 and 29.5% of sales in the first half of fiscal 2013 compared to 29.6% of sales in the first half of fiscal 2012. In both periods, this decrease was due to a shift in product mix toward products with slightly lower margins, partially offset by purchasing improvements. Additionally, gross margin in the first half of fiscal 2013 was impacted by an increase in bulk production costs as a result of moving to a larger facility in September of 2012. Occupancy costs as a percentage of sales increased in the second quarter and first half of fiscal 2013 when compared to the prior year comparable periods due to more expensive leases. Throughout the first half of fiscal 2012, all of the company’s leases were accounted for as operating leases with rent expense included in occupancy cost. During the second quarter and first half of fiscal 2013, seven of the company’s stores were accounted for as capital leases. If we had accounted for these stores as operating leases, the straight-line rent expense would have been included in occupancy cost, and occupancy costs as a percent of sales would have increased approximately 40 basis points and interest expense as a percent of sales would have decreased approximately 35 basis points in the second quarter of fiscal 2013. Similarly, for the first half of fiscal 2013 occupancy costs as a percent of sales would have increased approximately 35 basis points and interest expense as a percent of sales would have decreased approximately 30 basis points. Store expenses decreased 40 basis points to 20.8% of sales during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 and decreased 70 basis points to 20.9% of sales during the first half of fiscal 2013 compared to the first half of fiscal 2012. These changes were driven for the most part by a decrease in salary related expenses as a percent of sales at comparable stores. Administrative expenses, as a percent of sales decreased 20 basis points, for both the second quarter and the first half of fiscal 2013 when compared to the prior year, as a result of the Company’s ability to support additional store investments and sales without proportionate investments in overhead. Pre-opening and relocation expenses, as a percent of sales increased 20 basis points, for both the second quarter and first half of fiscal 2013 when compared to the prior year comparable periods, due to the increased number of and the timing of new store openings in fiscal 2013. Net income attributable to NGVC increased 29.5% to $3.2 million during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 and increased 56.5% to $5.4 million during the first half of fiscal 2013 compared to the first half of fiscal 2012. Net income attributable to NGVC compared to pro forma net income attributable to NGVC increased 20.6% in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 and increased 42.1% in the first half of fiscal 2013 compared to the first half of fiscal 2012. Pro forma net income reflects net income as if we had owned 100% of the five Boulder stores for the second quarter and the first half of fiscal 2012. EBITDA increased 28.3% to $8.8 million for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 and increased 39.6% to $15.5 million for the first half of fiscal 2013 compared to the first half of fiscal 2012. EBITDA as a percent of sales for the second quarter and first half of fiscal 2013 was 8.2% and 7.7% of sales, respectively. The stores that were accounted for as capital leases rather than being reflected as operating leases increased EBITDA as a percent of sales by approximately 55 basis points in the second quarter of fiscal 2013 and 45 basis points in the first half of fiscal 2013. Now let’s turn to the balance sheet. We ended the second quarter of fiscal 2013 with $9.5 million in cash and cash equivalents, $500,000 in restricted cash and $1.8 million in available for sale of securities. We also had $15 million available under our revolving credit facility. Now I will turn the call back to Kemper to discuss our new store growth and updated outlook for fiscal 2013.

[Kemper Isely:]

Thank you, Sandra. On April 23, 2013, we opened our first new store of the third quarter in Kalispell, Montana. This is the first of three new stores planned to open during the third quarter of fiscal 2013. We have leases signed for the remaining six new stores planned to open in fiscal 2013, and four new stores planned to open in fiscal 2014. These 10 new stores are in Idaho Falls, Idaho; Shawnee and Topeka, Kansas; Omaha, Nebraska; Tulsa, Oklahoma; Beaverton, Bend, Gresham and Salem, Oregon; and Wichita Falls, Texas. We continue to be pleased with how well our new store format is performing in both existing and new markets. I will now provide some additional color on our updated outlook for fiscal 2013. We expect to open 13 new stores, a 22% unit increase over fiscal 2012. Relocate one store and remodel two existing stores. Achieve daily average comparable store sales growth of 8.5% to 9.5%. Deliver EBITDA margins of 7.3% to 7.5%. Achieve net income margins of 2.5% to 2.7%. Achieve diluted earnings per share between $0.46 and $0.49, and incur capital expenditures between $28 million to $33 million which reflects opening 13 new stores in fiscal 2013 compared to prior outlook of 12 new stores and increased capital expenditures on the relocation and remodels planned for the second half of fiscal 2013. We remain focused on our five founding principles which are to provide nutrition education, high quality standards, everyday affordable pricing, and supporting our community and our associates. We will allocate the next 20 minutes to questions. Please limit your questions appropriately so that everyone has an opportunity to participate. Thank you.

[Operator:]

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Sean Naughton of Piper Jaffray. Please go ahead.

[Sean P. Naughton:]

Hi. Thanks for taking the questions and congrats on a strong result here in the second quarter. I guess the question first off would be and maybe this is broader picture question for your Kemper. How does the real estate pipeline feel today as we start to think about 2014? And then, maybe as a follow-up to that, maybe you could just talk about your most recently opened stores, how they are performing and particularly in new markets.

[Kemper Isely:]

Sean, the real estate portfolio is looking very nice for 2014. We pretty much have most of our real estate selected for 2014 already and are distinct various stages of negotiations for leases on those sites. The performance of our new stores has been well up to our expectations and we’re very happy with the performance of the new stores.

[Sean P. Naughton:]

Okay, great. And then, maybe secondly, on the guidance. You took up the comp a little bit and the EBITDA margin expectations and the number of stores maybe you can just talk a little bit about the puts and takes that didn’t potentially flow through to the net income line.

[Kemper Isely:]

Well, I’d say that we’re thinking that won’t be on the low-end of our guidance let’s put it that way.

[Sean P. Naughton:]

So, yeah, maybe just a little bit conservatism there at this point, on the guidance.

[Kemper Isely:]

We would always rather be conservative than overly optimistic.

[Sean P. Naughton:]

Okay, fair enough. And then maybe lastly Sandra you’ve talked about the equal growth from transactions and basket, can you talk about your expectation maybe for that moving-forward, and then maybe any color on inflation potentially moderating in the basket.

[Kemper Isely:]

Well, I don’t know you want Sandra answer that or you want me to answer that, but I’ll take a stab at it. We really haven’t seen a huge increase in inflation in reality of what we saw in the last quarter was an increase in the number of items in a basket and so that was the main driver behind the pulling out of basket transactions, so I think yesterday Home Foods conference call they mentioned that the weather played a part in increasing the basket size where customers were home bound for a day, then they came in and bought more because they want shopping as frequently and we kind of may have had a similar type of effect at our stores.

[Sean P. Naughton:]

Okay, great, thanks and best of luck for the rest of the year.

[Kemper Isely:]

Thanks.

[Operator:]

The next question comes from David Magee of SunTrust Robinson Humphrey. Please go ahead.

[David G. Magee:]

Hi, good afternoon and good quarter.

[Kemper Isely:]

Thanks David.

[David G. Magee:]

Yeah, hi, good afternoon and good quarter.

[Kemper Isely:]

Thanks, David.

[David G. Magee:]

Just a couple of questions, first you mentioned during quarter that the sales growth was stable. Just starting to assume that the cadence versus, inventory in month-to-month about the same did you see much variation there.

[Kemper Isely:]

You mean from like January to February to March.

[David G. Magee:]

That’s right. Yeah just…

[Kemper Isely:]

No they were all fairly similar.

[David G. Magee:]

Okay. And what are you seeing now with respect to promotions in the sector anything different than would have in the term line?

[Kemper Isely:]

You mean as far as putting items on sale.

[David G. Magee:]

Well, competitive activity on the par there are others out there, are you seeing more that or is it unchanged?

[Kemper Isely:]

We really haven’t noticed, I mean our studies of, our competitors as far as basket pricing goes is that we have maintained our advantage on pricing. And we haven’t noticed they’ve gotten that competitors have become any more aggressive in their pricing.

[David G. Magee:]

Okay. And then just lastly on the next issue, can you talk with us a little about that in terms of how long, do you expect that impact to be there. I noticed just sort of modest headwind. But just in terms of the gross margin mixing that you referenced in the quarter.

[Kemper Isely:]

And one of the positives of the quarter was at our mature stores the mix of our dietary supplements we actually had an increase of the percentage point almost of our sales in dietary supplements as a percentage of sales. So, we are actually seeing some really positive results at the mature store level. And the reason, our new stores are opening in these new markets and we haven’t really established our education program in those new market share and so that what’s been primarily driving down the supplement mix overall with our stores. The new stores have just been opening really well in supplement sales and then over the next years as they mature they’ve build up towards where our mature stores are now. And so, at some point it was always our projection that we’d end up somewhere around 25% of sales in the supplement and hopefully it will stabilize at that point in time, and we’ll probably see that point in time some time either this year or next year.

[David G. Magee:]

Great, Thanks Kemper, good luck to you.

[Kemper Isely:]

Thank you.

[Operator:]

The next question comes from Mark Miller of William Blair. Please go ahead.

[Mark R. Miller:]

Hi, good afternoon, Kemper maybe this is follow on to that last point of discussion about the supplement penetration in new stores, were there any changes in the way you, I guess brought in the health coaches and also the process of recruiting these people because I mean you had relatively rapid store growth in the past so, I guess I’m wondering if there is a change in another way of these stores are opening and how that program is rolled out.

[Kemper Isely:]

No, we’re recruiting the health coaches in the same manner and the staffing, I mean sometimes it takes a little while to get a health coaches in the new store by and large we have a health coach hired when the store opens. These new stores haven’t really opened any differently than other new stores have as far as the percentage of sales for supplement, it’s just that they have become so much greater as the percentage of our days that’s affected our overall percentage of supplement sales and as I said if the stores progress along you see really nice I think I feel every month really nice increases out the stores in the supplemental sales and as a percentage of sales of those new stores. I mean we’re quite positive about that issue.

[David G. Magee:]

Okay, great. So I mean assuming the company maintains the same rate of unit growth this shift should moderate.

[Kemper Isely:]

I mean as the 30-some stores we’ve opened over the last two years become mature it will moderate because, that become such as greater percentage of our days.

[David G. Magee:]

Okay, great. I am surprised with rate of comp growth you have, there is occupancy deleverage can you just remind us how the bulk of the leases are configured to what degree of the rents variable relative to fix.

[Kemper Isely:]

The only delever, I mean the mature stores were having great leverage on their leases because they are fixed over the term of the lease. So I mean it’s a fixed amount every month, the real estate that we’ve been acquiring lightly have been really prime real estates so it’s been expensive relative to some of our older real estate. That was with us and we estimate take us quite prime of real estate so as those stores mature it will really help our it’s kind of similar to the dietary supplement explanation I just gave you as those stores mature it will their percentage of rent will go down dramatically compared to the sales because our stores due take good 5 years to 6 years to mature sales level. They are not instantly out there, so it will level when they first open.

[David G. Magee:]

Great, and we just same follow on that then if you maintain the same way to growth at this level of comp rate you would up deleveraging on occupancy

[Kemper Isely:]

At some and point we will.

[David G. Magee:]

Okay.

[Kemper Isely:]

Okay, I can’t give you the exact data and we haven’t quite study at some point in time we will.

[David G. Magee:]

Okay, great. Nice work in the spread.

[Kemper Isely:]

Thank you.

[Operator:]

The next question comes from Scott Van Winkle of Canaccord Genuity. Please go ahead.

[Scott Van Winkle:]

Good afternoon, congrats on the momentum. Typically on the remodels assuming sure you got that right, you talk about 13 new stores plus the remodel is that 13 net or 12 net?

[Kemper Isely:]

We are opening 13 net stores, we are moving one store, it’s not a remodel, it’s a relocation which mean it’s like a new stores, the cost of the new store. And then we have two stores that we expand in the size of the stores, we are expanding the size of the stores on.

[Scott Van Winkle:]

Perfect, so 14 gross, 13 that after the unrealized experience.

[Kemper Isely:]

Correct.

[Scott Van Winkle:]

And when we think about remodel is there an immediate sales left or just something that builds overtime I assume that you get a fairly nice return on that investment on a remodel.

[Kemper Isely:]

Our last two remodels we’ve had significant immediate sales lifts after the remodel.

[Scott Van Winkle:]

And the timing of those, we think about relocation expense?

[Jon Bourne:]

Third or fourth quarter.

[Kemper Isely:]

It will be about the third quarter and fourth quarter

[Scott Van Winkle:]

Great, thank you. And then the leases that you have signed today going in to 2014 any change in store size obviously you talked, a little bit of real estate how about store size.

[Kemper Isely:]

Currently all of the store leases that we’re signing are for stores that will be between 14,000 and 20,000 square feet. That mean 15,000 and 20,000 square feet which is bigger than our old footprint of 12,800 square feet.

[Scott Van Winkle:]

Thank you very much.

[Operator:]

(Operator Instructions) The next question comes from Phil Terpolilli of Longbow Research. Please go ahead.

[Phil D. Terpolilli:]

Yes, good afternoon. A lot of my questions have been answered, but I just wanted to go back to the makeshift that was talked about earlier, some of you competitors in the space has spoken us some choppiness in the nutrition sales, and I was just kind of curious, if you’ve seen that at all?

[Kemper Isely:]

No our nutrition sales have been, they haven’t been growing as fast as our overall sales, but they have been pleasantly nice, I mean they have been strong. We haven’t seen that.

[Phil D. Terpolilli:]

Okay, that’s helpful, and just one quick follow-up, because you just mentioned a 15,000 to 20,000 square feet definitely at the high end of your range, was it just a function of finding strategic locations that fit for you or is this kind of a more of a strategic shift to much higher square footage stores.

[Kemper Isely:]

We have found that the 20,000 square foot footprint performs the best for us.

[Phil D. Terpolilli:]

Okay, perfect, thank you.

[Operator:]

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

[Kemper Isely:]

I thank everybody for being here today and have a pleasant afternoon. Thank you, bye.

[Operator:]

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