Natural Grocers by Vitamin Cottage, Inc.
Q3 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Good day ladies and gentlemen. Welcome to the Natural Grocers third quarter 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 now like to turn the conference over to Mr. John Bourne, General Counsel for Natural Grocers. Mr. Bourne, you may begin.

[John Bourne:]

Good afternoon everyone and thank you for joining us for the Natural Grocers by Vitamin Cottage, Inc. third quarter and year-to-date 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 at 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, John. Good afternoon everyone. We delivered strong financial results again this quarter highlighted by healthy positive comparable store sales growth and an expanded geographic footprint. These results reflect a continued strength of our strategy, which is anchored by our five founding principles. For the third quarter, we delivered 30.5% net sales growth, 10.4% daily average comparable stores sales growth and over 30% NGVC net income in EBITDA growth. In addition, our total store count grew 68 stores in 13 states. We are encouraged by our demonstrated ability to expand our presence geographically while maintaining double-digit cost and solid growth on both the top and bottom line. We anticipate carrying this positive momentum in the fiscal 2014 and we’ve already set the stage for growth next year with the signing of 11 new leases, which I’ll discuss later in the call. These new locations represent both the strengthening of our position in some other markets we are already in as well as further expansion into new areas, where we have not previously had a market presence. I will discuss our outlook in more detail in a moment, but first just I will turn the call over to Sandra to highlight our third quarter financial results.

[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 which 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 John previously referred. As a reminder, the key metrics discussed today can be found in the MD&A portion of the company’s Form 10-Q filed this afternoon. Turning to our financial results, we are pleased to report net sales in the third quarter increased 30.5% to $113.2 million including an 11.6% increase in comparable store sales. Daily average comparable store sales grew 10.4% for the third quarter driven by a 4.7% increase in daily average transaction account and a 5.4% increase in average transactions filed. Daily average comparable store sales remove effect of the extra selling day in the third quarter of fiscal 2013 due to Easter occurring in March of 2013 rather than April of 2012. We continue to see strength in our mature store base with daily average mature store sales increasing 5.7% during the third quarter. Mature stores are storage open during or before fiscal 2008. Gross profit during the third quarter increased 28.3% to $32.6 million driven by strong comparable store sales and new store growth. Gross margin decreased 50 basis points due to a shift in sales mix and a decrease in both product margins. The decrease in both product margins is a result of moving to a larger facility in September of 2012. Occupancy costs as a percent of sales decreased due to the seven new stores accounted for as capital leases. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy cost and gross profit would have been approximately 55 basis points lower. Our disciplined approach to managing expenses is reflected in our continued leverage from both store and administrative expenses. During the third quarter, store expenses as a percent of sales decreased 50 basis points due to a decrease in salary related expenses at comparable stores. Administrative expenses, as a percent of sales decreased 30 basis points, as a result of the company’s continued ability to support sales growth without proportionate investments in overhead. Pre-opening and relocation expenses, as a percent of sales increased 30 basis points, due to the increased number and timing of new store openings and increased per store expense. During the third quarter Net income attributable to NGVC increased 31.1% to $2.9 million and net income attributable to NGVC compared to pro forma net income attributable to NGVC increased 19.5% in the third quarter of fiscal 2013 compared to the third quarter of fiscal 2012. EBITDA increased 33% to $8.7 million or 7.7% of sales for the third quarter, 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. Touching briefly on our year-to-date results, we believe we're on track to meet our projections for the fiscal year. Our solid third quarter top line performance brings us to a year-to-date daily average comparable store sales of 11.2% and has made us more optimistic about our top line growth for the year as Kemper will discuss momentarily. Our bottom line results are also estimated to be on track with net income attributable to NGVC of $8.3 million year-to-date and diluted earnings per share of $0.37. Now let’s turn to the balance sheet. As of June 30, 2013 we had $5.7 million in cash and cash equivalent, $500,000 in restrictive cash and $1.7 million in available for sale securities. We also had $15 million available under our revolving credit facility. This provides the company with ample capital for future store development. Now I will turn the call back to Kemper to discuss our new store growth and updated outlook for the remainder of fiscal 2013 and initial outlook for fiscal 2014.

[Kemper Isely:]

Thank you, Sandra. As I mentioned at the beginning of the call, we have continued to grow at a steady pace through the first nine months of this year and anticipate continuing to grow through the remainder of this year and into fiscal 2014. Since the end of third quarter of June 30, we have opened two new stores, one in Omaha, Nebraska and one in Beaverton, Oregon. We will open two more stores in fiscal 2013. As of today, we have signed leases for 11 of the 15 new stores planned in fiscal 2014. These stores will open in Colorado, Idaho, Kansas, Oklahoma, Oregon, Texas, Utah and Washington. These locations will continue to strengthen our position in current stage while also growing our presence in new markets. We have visibility into the remaining locations planned to open in fiscal 2014. I will now provide some additional color on our updated outlook for this remainder and fiscal 2013. First, I am pleased to announce the company has anticipated fourth quarter restricted stock unit grants to reward certain employees who are not named executive officers for the success and growth we have seen. This will allow us to promote the long-term success of the company and to ultimately create shareholder value. The grants will total approximately $2 million in non-cash stock compensation invest over the next four years, 20% of invest at the grant date and then subject to continuing service 20% invest annually over the next four years. The impact for the fourth quarter would be approximately $400,000 of non-cash stock compensation expense. Moving to our updated fiscal 2013 outlook, we expect to stay within our projections by opening two more stores in addition to 11 already opened in fiscal 2013 resulting in a 22% event increase over fiscal 2012, completing the remodel of two existing stores and relocating one store, achieving daily average comparable store sales growth of 9.5% to 10.5%, which reflects 11.2% year-to-date results delivering EBITDA margins of 7.3% to 7.5%, achieving net income margins of 2.5% to 2.7%, achieving diluted earnings per share between $0.46 and $0.49 and incurring capital expenditures of between $32 million to $34 million, which includes $1 million for two non-store related capital projects, which should automate the area at our distribution center and build out our corporate offices in the warehouse behind the current office. Additionally, I would like to give some color on our initial outlook for the fiscal 2014 which is consistent with our long-term targets. We anticipate unit growth of 20.8% for 15 new stores, sales and EBITDA growth of approximately 25 plus percent and net income growth of approximately 30 plus percent. We remain confident in our strategy and our ability to grow our store base while expanding both the top and bottom line as we carried forward the positive momentum we have generated year-to-date. We look forward to updating you on our progress. We will allocate the next 20 minutes to questions, please limit your questions appropriate so that everyone has an opportunity to participate. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from David Magee of SunTrust.

[David Magee:]

I just had a couple of questions. One is once the company lapse the opening of the bulk facility last year in September, would that mean that the gross margin visibility will improve thereafter and be flatter?

[Kemper Isely:]

As far as the impact from the bulk facility of last year?

[David Magee:]

Yes, that’s right.

[Kemper Isely:]

That’s there.

[David Magee:]

Is that a meaningful number in terms of the headwinds that presented over the past 12 months?

[Kemper Isely:]

It’s been in the first quarter of last year it was pretty substantial, it’s gone down on every quarter since.

[David Magee:]

Okay, and then based on where you kind to opened store and the leases that you signed, your sense that the direct competition will be increasing, decreasing or sort of staying the same?

[Kemper Isely:]

We think that the competition is approximately same; almost every place that we've opened a store in the last year had some sort of competition in it, whether it's a national chain or a local chain. As far as national chains go that are direct competitors to us currently we have about 58% of our stores with direct competitors. We project at this time next year that we'll have 60% of our sub-stores with direct competitors.

[David Magee:]

Great. Thanks Kemper.

[Operator:]

Our next question comes from Sean Naughton of Piper Jaffray.

[Sean Naughton:]

Hi, thanks and congrats on the strong double digit comp sale again this quarter. Can you talk a little bit about the same store sales trends maybe in the most recently completed quarter, just on the cadence of how things progressed, was there a lot of variances between among store variances and in traffic patterns that you saw, was it pretty consistent business?

[Kemper Isely:]

It was almost the same every month last quarter. The only difference was we had that extra day in April, but other than that on a daily basis, it was virtually the same every month.

[Sean Naughton:]

Okay, that's good to hear. And then I guess we continue to hear a little bit about out of stocks in certain categories kind of across the industries. Is there anything you are seeing or you feel like is impacting your business in anyway, I mean could you be driving even higher sales trends than you already are?

[Kemper Isely:]

We have not seen a significant amount of out of stocks at our stores. We're running at or below our 52-week average in every category right now.

[Sean Naughton:]

Okay. And then I guess just in terms of the inflation outlook, organic is a little tougher to forecast and get a good feel for but how do you feel about the inflation impact on the comp and just what you are seeing in grocers?

[Kemper Isely:]

Inflation has been very minor. It hasn’t been anything above normal. As a matter of fact, we're seeing, if I were to forecast, I think we're seeing some positive signs on the commodities front. I am thinking there is going to be not as much price pressure over the next coming month.

[Sean Naughton:]

Okay, and then just lastly on just the capital expenditures, they continue to ramp up a little bit, move higher a little bit every quarter. How do we feel about that number as we look out in to ‘14 and just kind of the liquidity available to the company as we look to open up these stores in 2014?

[Kemper Isely:]

I think that we have a really good handle on our capital expenditures in 2014 and we should be fine as far as liquidity goes.

[Operator:]

The next question is from Mark Miller, William Blair. Please go ahead.

[Mark Miller:]

Could you give us a little more clarity on the components of the gross margin? So it looks like you were down about a 100 basis points on a similar occupancy basis given the change in the capital leases. So what was the impacts in the sales mix and then the decline in margin within bulk and I guess I am wondering about the mark up in the rest of the store absent those two affects is our merchandise margin stable or is that also coming down a little bit?

[Kemper Isely:]

We are actually having positive gains in all categories, in margin the main driver down if the mix has changed somewhat. So we’ve are higher margin category to lost market share although there is still growing substantially they’ve lost a little bit market share and its primarily driven by the fact that we are just opening so many new stores that its driving down our overall, the new stores open up at a lower mix rate in our comp stores and so it drives down overall mix. As you see our sales accelerated to 30% up in the quarter, which opted any of great to have the sales that we have just kind of that was is more so in some of the lower margin departments which is well contribute into the decline in the margin and product mix. But as I said every category we’ve actually gained a little bit in traction and margin by category, in every category.

[Mark Miller:]

Okay. Would you be will into share kind of magnitude of impact from these factors?

[Sandra Buffa:]

We really haven’t share that previously to a great extent, if we do define as we talk through the margin how much the basis point shift is relate into those, but we haven’t typically spoken out in addition to that.

[Mark Miller:]

Okay. May be beyond the accelerated store growth and that impact I mean get that mix of government in the last and the new stores takes time to do but about on that account store basis. And I was wondering your salary related expense was leverage little bit more by I thought on the comparable stores and I was wondering because I know that bonus ties into the sales mix as well, so maybe you can I guess talk to had a great times on comp stores as well?

[Kemper Isely:]

On comp stores washed a little bit of mix margin and again they lost little bit of supplement growth and not a substantial amount they are still.

[Sandra Buffa:]

We had a nice single digit at comp growth in supplement that it just can’t keep up with grocery playing are growing.

[Mark Miller:]

Okay, that looks like the sales are coming in, one other question and then I will turn it over to others, with the transaction count in the mature stores, I guess I am trying to understand that maturation of up lift in the accounts is that predominantly on transactions or is it as much on average taken, thanks?

[Kemper Isely:]

The transaction count was about half of the increased at mature stores comp stores, and mature stores (inaudible) and so it was about 50-50 with the transaction account and average didn’t increase.

[Operator:]

Our next question is from Scott Van Winkle of Canaccord Genuity. Please go ahead.

[Scott Van Winkle:]

I suspect some of the new stores you hope and then had on the pipeline is slightly larger side than the average store, does that have an impact on the sales mix with supplements versus not supplement as well

[Kemper Isely:]

The size of the store doesn't have as much of an effect on the next as does the market we open in. And so there are some cities that are better supplement cities than other cities and some cities that are better grocery cities than other cities.

[Scott Van Winkle:]

Got you.

[Kemper Isely:]

That make sense too.

[Scott Van Winkle:]

No, it definitely does make sense. And I was and also wondering if you could characterize and I hope I have this correct into a little maybe the average space you're taking in new stores is a little more expensive, a little a better market area, if that's true and is that having any kind of measurable impact on your new store performance thus far if you talk about?

[Kemper Isely:]

When you did a good premium stage, the stores seem to perform better than if you take a marginal space that is definitely (Inaudible)

[Scott Van Winkle:]

I was thinking relative to the investment, obviously

[Kemper Isely:]

Yeah, it helps; I mean over the long term it will be a great benefit to us to have upgraded our site selection process.

[Sandra Buffa:]

Well and the new stores opening, their first year sales are higher than what we've been experiencing previously is that what you're asking?

[Scott Van Winkle:]

Yeah, I know that's (Inaudible) I was just looking for any commentary on the return here. But great. Thank you very much.

[Operator:]

The next question is from Phil Terpolilli of Longbow Research. Please go ahead.

[Phil Terpolilli:]

Yes, good afternoon. Just two quick questions first on the timing of the research for next year, can you just talk to cadence to them at all, any sort of indication that is it more back half weighted, front half weighted? Any color you can give us there?

[Kemper Isely:]

I would say that the majority of our stores will open in the first nine months of our fiscal year.

[Phil Terpolilli:]

Okay, that’s helpful and then just from a competitive activity standpoint, have you noticed any changes kind of in your market specifically, one of your larger competitors noted on their last call, some price (inaudible) activity. Just curious, you've seen that all in your markets.

[Kemper Isely:]

We're talking about the same competitor, we have not noticed that. They have been doing that.

[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 everybody for being on the call today. We appreciate it and have a very nice afternoon.

[Operator:]

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