Natural Grocers by Vitamin Cottage, Inc.
Q4 2013 Earnings Call Transcript

Published: 22 Nov 2013

[Operator:]

Good day ladies and gentlemen. Welcome to the Natural Grocers Fourth Quarter and Fiscal Year 2013 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’d 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 fourth quarter and fiscal year 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 as recently filed Form 10-Q, 10-K. 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. If you've not had the opportunity to read this release 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 are very pleased with our performance this fiscal year. Our five founding principles continue to drive our robust sales and we remain focused on our disciplined approach to cost controls. We delivered strong financial results this year and fully anticipate that we will carry this positive momentum into fiscal 2014. For fiscal 2013, we delivered 13 new store openings or 22% unit growth, two store-remodels and one store-relocation, all in the Denver metro area. 28% net sales growth including the healthy 11.1% daily average comparable store sales growth and $26.7 million increase in gross profit significant leverage in both store and administrative expenses, over 35% NGVC adjusted net income and EBITDA growth and diluted earnings per share of $0.47. In addition, we're pleased with our new stores performance. Our comparable store sales continue to surpass our expectations. We believe this strength results from our commitment to nutrition education every day affordable prices and quality standards. Nutrition education and the nutritional health coaches have helped to support our customer count growth allowing our customers to take advantage of our free nutritional education seminars and cooking demonstrations. We have provided a nutritional health coach in every store to empower our customers to improve their health. Our disciplined approach to managing expenses is reflected in our ongoing leverage from both store and administrative expenses. We continue to leverage store labor levels and support additional store investments without proportionate investments in overhead. We are encouraged by our demonstrated ability to expand our presence geographically while maintaining solid growth on both the top and bottom line. We open 13 new stores in fiscal 2013 bringing our total store count to 72 stores in 13 states. Additionally, we are very pleased with the performance of our new and relocated stores and continue to target the same financial returns, which I will discuss later in the call. We believe our dedication to strict quality standards, nutrition education and our commitment to 100% organic products drives initial traffic at new stores and customer loyalty at existing stores. Now I will turn the call over to Sandra to highlight our fiscal 2013 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, on an adjusted basis reflect the impact of certain stock-based and incentive compensation expenses related to the company's July 25, 2012 IPO and subsequent awards of RSUs to certain employees who are not named executive officers in the fourth quarter of fiscal year 2013. Additionally on a pro forma basis we 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. As a reminder, a description of the key metrics discussed today can be found in the MD&A portion of the company’s most recently filed 10-Q and 10-K. Turning to our financial results, we are pleased to report net sales in fiscal 2013 increased 28% to $430.7 million including a 10.8% increase in comparable store sales. Daily average comparable store sales grew 11.1% in fiscal 2013 driven by a 5.9% increase in daily average transaction count and a 4.9% increase in average transactions size. Daily average comparable store sales remove the effect of losing one selling day in fiscal 2013 due to leap year occurring in 2012. We continue to see a shift in sales mix toward grocery products and the shift has helped drive customer traffic which in the long-term will help drive our sales in other departments. We continue to see strength in our mature store base with daily average mature store sales increasing 6.4% in fiscal 2013. Gross profit for fiscal 2013 increased 26.9% to $125.7 million driven by strong comparable store sales and new store growth. Gross margin decreased due to a shift in sales mix offset by purchasing improvements. This anticipated shift in sales mix is due for the most part to stronger sales increases in our grocery department than we experience in other areas. Additionally, there was a decrease in both product margins as a result of moving to a larger facility in September 2012. Occupancy costs as a percent of sales remained flat, due to the nine stores accounted for as capital and financing lease obligations. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs and gross profit would have been approximately 55 basis points lower. Store expenses as a percentage of sales decreased 55 basis points in fiscal 2013 due to a decrease in salary-related expenses. Administrative expenses as a percentage of sales decreased 65 basis points in fiscal 2013. On an adjusted basis, 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. During fiscal of 2013, net income attributable to NGVC increased 58.7% to $10.6 million with diluted earnings per share of $0.47. Adjusted net income attributable to NGVC compared to adjusted pro forma net income attributable to NGVC increased 35% to $10.9 million with diluted earnings per share of $0.48 in fiscal 2013. EBITDA increased 48.5% to $32.6 million or 7.6% of sales in fiscal 2013. Adjusted EBITDA increased 41.7% to $33.1 million or 7.7% of sales in fiscal 2013. 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 60 basis points in fiscal ‘13. Touching briefly on our fourth quarter results. Net sales increased 28.1% including a 10.7% increase in daily average comparable store sales. Net income attributable to NGVC increased 129% to $2.2 million with diluted earnings per share of $0.10 in the fourth quarter. Adjusted net income attributable to NGVC compared to adjusted pro forma net income attributable to NGVC increased 39.9% to $2.5 million with diluted earnings per share of $0.11 in the fourth quarter. Now let’s turn to the balance sheet, as of September 30, 2013 we had $8.1 million in cash and cash equivalence, $0.5 million in restricted cash and $1.1 million in available for sale securities. In fiscal 2013, we generated 25.7 million in cash from operations and invested a net 34.7 million in property and equipment primarily on new stores. We also had 15 million available under our revolving credit facility with no amounts outstanding at year-end. Now I’ll turn the call back to Kemper to discuss our new store growth and outlook for fiscal 2014.

[Kemper Isely:]

Thank you, Sandra. As I mentioned at the beginning of the call, we are pleased with the financial strength and solid execution we have experienced over the past fiscal year. We continue to expand our geographic footprint west of the Mississippi opening stores in Omaha, Nebraska; Beaverton and Ben, Oregon; and Topeka, Kansas during the fourth quarter. At the end of the fourth quarter we've opened two new stores one in Tulsa, Oklahoma and one in Idaho Falls, Idaho. As of today we have signed leases for 10 additional stores scheduled to open in fiscal 2014 for locations in Colorado, Idaho, Kansas, New Mexico, Oregon, Texas, Utah and Washington. These locations will continue to strengthen our position in current state or also growing our presence in new markets. Moving to our new stores, we continue to be very pleased with how well our new stores are performing. We're targeting the same financial returns that we've previously discussed with approximately four years to reduce initial cash investment and approximately 35% cash and cash returns for them at the third year. We anticipate our fiscal 2014 new stores will require an upfront capital investment of approximately $2.5 million. Our new stores include full demo kitchens and community rooms which support our commitment to nutrition education and community outreach. Moving to our fiscal 2014 outlook, we expect to stay within our long-term targets by opening 15 new stores, resulting in a 21% unit growth, remodeling two existing stores, achieving daily average comparable store sales growth of 8.5% to 9.5%, delivering EBITDA margins of 7.8% to 8%, achieving net income margins of 2.4% to 2.6%, achieving diluted earnings per share of between $0.58 and $0.63 and incurring capital expenditures of between $35 to $37 million. We anticipate the cash on hand and cash generated from operations will be sufficient to support our capital requirements. Additionally we're continuing to commit to a strong ERP system to support our 20% unit growth rate and we’ll be implementing the human resource system in fiscal 2014 which will more officially on board and train our employees at all locations. We will deliver this outlook by a continued focus on driving our comparable store sales and maintaining a disciplined approach to cost controls. We remain focused on our five founding principles, we are to provide nutrition education, high quality standards, everyday affordable pricing, supporting our community and our associates. We remain confident to our strategy and our ability to grow our store base as we carry forward the positive momentum we have generated in fiscal 2013. We look forward to updating you on our progress. We will allocate the remaining time 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). The first question comes from Sean Naughton with Piper Jaffray. Please go ahead.

[Unidentified Analyst:]

Hi, this is actually [Gerard Mavlin] on for Sean. Thanks for taking the questions and congrats again on another strong quarter. Just first of all on the comp, another strong performance, just curious of the cadence throughout the quarter, any change within the quarter or no?

[Kemper Isely:]

No, that's pretty much the same every month.

[Unidentified Analyst:]

Okay, great. And could you provide any additional color on EBITDA guidance, what's embedded within that on a gross margin line and maybe store expenses as well?

[Kemper Isely:]

Sandra, do you want to answer that?

[Sandra Buffa:]

Yeah. So, on the EBITDA guidance, what I would say is we've, given the difficulty on the capital and financing leases sort of figuring that number out. We have passed on that, we are including approximately 55 basis points in that EBITDA number to reflect the effect of the leases. So is that what you are asking?

[Unidentified Analyst:]

Yeah, I was just maybe looking for some directional color of where you guys were modeling that internally, but that is helpful. I guess then what is your inflation expectation within the comp for next year as well?

[Kemper Isely:]

Right now inflation is running very flat, so I would say that inflation is going to be moderate. In the comp we’ll have an increase in average ticket, but it isn’t going to be primarily because of inflation in our opinion.

[Unidentified Analyst:]

Okay. And then the three remaining leases that are not signed for the 3

[Kemper Isely:]

Two of them are very close.

[Unidentified Analyst:]

Got it. I will pass it on. Thank you.

[Kemper Isely:]

Thanks.

[Operator:]

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

[David Magee:]

Hi good afternoon and nice quarter guys.

[Kemper Isely:]

Thanks David.

[David Magee:]

Did the floods in September in Colorado have any impact on the comp number?

[Kemper Isely:]

They had a slight impact on a couple of our stores.

[David Magee:]

But not as far as you….

[Kemper Isely:]

No, no.

[David Magee:]

Not a wide sort of impact then.

[Kemper Isely:]

No.

[David Magee:]

I know I ask this almost every quarter but are you seeing any incremental or isolated areas of pricing pressure across your marketplace?

[Kemper Isely:]

This quarter I think the pricing pressures have really moderated, pretty much across the world.

[David Magee:]

Really, so you are seeing much pressure now?

[Kemper Isely:]

Right now it seems to be that way.

[David Magee:]

And then with regard to new store productivity, we are calculating the number to be higher year-over-year. What do you think is the primary factor that’s driving that number higher?

[Kemper Isely:]

Our new store productivity?

[David Magee:]

Yes.

[Kemper Isely:]

Primarily we have really zeroed in on good site selection and making sure that we get into prime locations.

[David Magee:]

Have you seen any incremental competition for good sites as more retailers have begun to grow little bit faster?

[Kemper Isely:]

No, I mean, if you are going into a city that has a scarcity of retail, there is competition but there is no more than there ever was. In many markets in actuality there is quite a bit of secondary retail coming on line right now, retail space coming on line right now.

[David Magee:]

Okay. Great. Thanks Kemper and good luck to you.

[Kemper Isely:]

Thanks.

[Operator:]

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

[Mark Miller:]

Hey, good afternoon, everyone. Nine results. So the gross margin continues to come down for the company and we have discussed those I guess every period here. But can you help us understand on a comparable basis, so you are down more than a 100 basis points year-to-year adjusting for the leases. How much of that is mix? And because you do said purchasing improvements, I am just trying to get my mind around how the two categories are growing and the margin impact could be that large?

[Kemper Isely:]

Well, the main issue is that our supplement and [harbor departed] and if our business is growing not as fast as our grocery which has a lower margin, we have really seen improvement in all of our -- pretty much seen improvement in every category of our -- if you just look at it by margin, in each category we've seen improvement. So we haven’t lost any margin in the category, the mix shift has created some issues with margin, but as Sandra said, the increase in grocery sales drives customer accounts which in and with our nutrition education emphasize will help to support supplement sales over the long run. So we look at it as a positive really.

[Mark Miller:]

I mean have you seen past cycles like this? And I guess, what are the key initiatives to jumpstart the supplement business? I am also curious what kind of customer accounts you have engaged with the nutrition experts in the store, and is that any kind of leading indicator for you?

[Kemper Isely:]

Well, when our sales don’t grow as fast, our supplement sales pick-up substantially as a percentage of sales in the past. And so right now as we’re adding all of these new stores, it puts a lot of pressure on the amount of supplement sales we got. So, one positive thing is that our (inaudible) department almost maintaining its market share last year. It lost very little as a percentage of sales, so that was a real positive and it seems to be holding that trend this year. So that was -- we seem to really be gaining in that particular category. And then as far as your second question goes about nutrition, how many people are seeing our nutritionists? They are pretty much booked full all the time when they’re in the store. So there is a lot of consultations going on which means that there is a lot of education going on with our customers about proper nutrition.

[Mark Miller:]

I might be asking the wrong question on the supplements business, I mean, is it meeting your plan? Are you saying it’s coming down as a percent of revenues because grocery is increasing fast and it’s a longer build time with the new stores, but is supplements to your plan or is it a little bit light?

[Kemper Isely:]

No, I would say it’s to our plan.

[Mark Miller:]

Okay, excellent. CapEx came in quite a bit higher than where you’re seeing it with the third quarter update, I guess $6 million or $8 million higher, what was the reason for that change?

[Kemper Isely:]

Sandra, do you know?

[Sandra Buffa:]

Yeah. Most of that really is timing. The stores are coming in at the capital expenditures that we had expected or projected and it’s really a matter of timing for the build-out, even the home office build-out that we had projected is coming in at the numbers that we had expected.

[Mark Miller:]

Okay. And final question for me is, when do you begin to see leverage on the new distribution facility? When does that headwind begin to turn for you? Thanks.

[Kemper Isely:]

I would say that we will see positive leverage on that starting in our second quarter of this year.

[Mark Miller:]

Excellent. Thanks.

[Operator:]

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

[Scott Van Winkle:]

Hi thanks, congrats on the great results. Kemper, when you talked about the new stores opening in 2014, you talked about the attached kitchen et cetera, and you've done some of that in your last stores opened in ’13, which I don’t think all of them for the year. Can you give us an idea of the class of units in ‘14 versus the class of units in ‘13, where the major differences are?

[Kemper Isely:]

Do you mean as far as the style of the store?

[Scott Van Winkle:]

The style of store, department that you called out differently or square footage, how will you think about the differences between last year and this?

[Kemper Isely:]

I think the stores are pretty much the same in 2014 as they were in 2013. I mean, the stores that we opened in the first quarter of 2013 may have been slightly different than the stores that we're opening right now, but all of the stores that we opened at the end of the year are definitely the same as this year. As far as size goes, they’re all running around 15,000 to 20,000 square feet. We do have one store, the store in Washington that will be like 12,500 square feet. But other than that, I would say that they are all in that desirable size range for us to maximize long-term sales.

[Scott Van Winkle:]

And any indication on the timing of openings throughout the year, should we think about it is relatively straight line in three to four quarter or every quarter?

[Kemper Isely:]

We have four opening in the first quarter, four opening in the second quarter and four or five opening in the third quarter.

[Scott Van Winkle:]

Great. Thank you very much.

[Operator:]

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

[Phil Terpolilli:]

Good afternoon. Just two quick questions. I guess bigger picture and maybe not specific to this quarter, but kind of directionally for the last maybe 12 to 18 months. Have you seen maybe the retail space there you’re looking at as you expanded in new markets hitting maybe more competitive in terms of what you're looking at or maybe people bidding you to potential locations?

[Kemper Isely:]

No, I mean, we have always, I mean, our Denver market is perhaps the most competitive national foods retail market in the country and anywhere we are open we expect that same sort of competition. And so we are well versed in competing with everybody that’s engaged in our space.

[Phil Terpolilli:]

Sure, okay. And then just one other quick question, I thought it was interesting earlier, I think you mentioned that you have seen maybe less price pressure the last couple of months here. Just competitively that’s obviously much different than what we’ve heard from few other of the food retailers. If you could just maybe try to talk a little bit more about that and what do you think is maybe the differentiating factor for you and your markets, any sort of color, additional color would be helpful?

[Kemper Isely:]

Well, first off, I was talking about cost pressure, but if we are talking about competitive pressure, we tend to be the price leader on most items. And so I would say we put the pressure on the competition more than they put the pressure on us.

[Phil Terpolilli:]

That makes sense. Okay, thank you. I appreciate it.

[Operator:]

The next question comes from Kate Wendt with Wells Fargo Securities. Please go ahead.

[Kate Wendt:]

I know you guys said that overall you have been really happy with how your new stores are performing. I am just curious if you could add little color about some of your openings into newer markets for you like the stores in Oregon, how they are performing versus the rest of the base in areas where maybe people aren’t as familiar with your brand?

[Kemper Isely:]

They have opened substantially stronger than when we opened in Texas. So for new market, I would say that Oregon is looking very bright, particularly some of the markets that they have been really good.

[Kate Wendt:]

Okay. Certain things like perfect market for you guys. And then I know in past you talked about moving some things within the stores, like product expansions in areas like gluten-free and Paleo. I was just wondering if you could comment on how that’s going, how many stores that you expanded that in and any other categories that you are testing or expanding the stores?

[Kemper Isely:]

Well, Paleo has been a big focus of our company for the past year that we have always had a lot of products that are Paleo products that we have been emphasizing those products in our nutrition training over the past year. And so I would say that we will continue to do that this year, I mean we put out a calendar that we give away to our customers and that calendar is really focused on that particular category for this coming year, because we think that is probably one of the better diet, [carry] ways of changing, I mean without looking healthy lifestyle of the Paleo diet.

[Kate Wendt:]

Great, and then just one last one. Could you talk a little bit about, as we think about gross margin going forward here and maybe some offset into the various opportunity, the progress that you are making on inventory management, now that you had SAP [other] running for a while, do you think that you have further opportunity especially in areas like supplements?

[Kemper Isely:]

You mean to manage our inventory down?

[Kate Wendt:]

Yes.

[Kemper Isely:]

We have initiated some really good programs in regards to that particular issue and have had some good success with that over the past year. And over the coming year we will continue to have more success with that program.

[Kate Wendt:]

Great. Thanks so much.

[Operator:]

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

[Kemper Isely:]

Thank you everybody for being on the phone with us today. We appreciate it, and have a good afternoon. Good bye.

[Operator:]

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