Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2021. The company operates natural and organic grocery and supplement stores; it had 161 stores in 20 states at quarter-end. Figures below are in millions of dollars except per-share data and percentages.
Financial performance
| Metric | Three months ended June 30, 2021 | Year-over-year change | Nine months ended June 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $258.6 | Down 2.4% | $782.9 | Up 1.3% |
| Gross profit / margin | $71.5 / 27.7% | Margin up from 27.3% | $216.4 / 27.6% | Margin up from 27.3% |
| Operating income | $7.0 | Up 5.4% | $19.0 | Down 16.8% |
| Net income | $5.0 | Up 7.3% | $13.4 | Down 17.9% |
| Diluted EPS | $0.22 | Compared with $0.21 | $0.59 | Compared with $0.72 |
| EBITDA / Adjusted EBITDA | $14.5 / $14.5 | Both down 1.0% | $41.4 / $41.8 | Down 10.5% / 9.7% |
For the nine-month period, operating margin was 2.4% versus 2.9%, and net margin was 1.7% versus 2.1%. EBITDA and Adjusted EBITDA are non-GAAP measures.
Cash flow, balance sheet and debt
- Operating cash flow was $31.0, down from $61.5 in the prior-year period. Management attributed the decline to lower net income adjusted for non-cash items and working-capital cash use, compared with a working-capital source previously.
- Investing cash outflow was $16.8, including $15.5 of property and equipment purchases. Financing cash outflow was $28.2. Cash declined by $14.0 during the nine months, ending at $14.5.
- At June 30, 2021, the company had $24.1 outstanding on its term loan, no revolving borrowings, and $49.0 available under its $50.0 revolving facility after letters of credit. It reported compliance with credit-facility financial covenants.
- Total liabilities were $509.6 and stockholders’ equity was $136.9. Lease liabilities totaled $383.7; the filing also identifies $34.1 of legally binding minimum payments for signed leases whose terms had not commenced.
- The company paid $49.9 in dividends during the nine months, including a $2.00-per-share special dividend partly funded by a $35.0 term loan borrowing. It also paid quarterly dividends of $0.07 per share. A further $0.07 dividend was approved after quarter-end.
Changes and management commentary
- Q3 comparable-store sales fell 3.6%: average transaction size declined 7.4%, partly offset by a 4.1% increase in transaction count. Management said customers were returning toward pre-pandemic shopping patterns, following unusually strong prior-year sales as customers ate more at home.
- Nine-month comparable-store sales increased 0.1%. Transaction size rose 6.6%, while transaction count fell 6.1%; management cited less frequent shopping trips and larger baskets, along with marketing and loyalty-program initiatives.
- Gross margin improved in both periods, primarily from higher product margins and lower shrink as a share of sales. Nine-month store expenses rose 5.4%, outpacing sales growth, with higher labor costs contributing to expense deleverage.
- The company opened two stores and completed three relocations/remodels in the nine months. It planned three store openings for FY2021; two had opened by June 30. No new stores opened in the quarter.
Outlook, risks and unusual items
- No specific numerical sales, earnings or margin guidance was provided. Management stated that cash, operating cash generation and revolving availability should cover working capital and planned capital expenditures for at least the next 12 months. It sees longer-term expansion opportunities, while noting growth and profitability depend on economic and business conditions.
- Management cautioned that the duration and economic effects of COVID-19 remain uncertain and that elevated pandemic-era sales may not persist. Risks discussed include labor availability and costs, inflation and commodity prices, supply and delivery disruptions, competition, changing consumer preferences, and regulatory or product-safety issues.
- The credit facility is secured by substantially all company assets, has a November 2024 maturity, and includes leverage and other covenants. Interest-rate exposure is limited but includes borrowings tied to LIBOR or a successor rate.
- The filing reports routine legal claims and investigations; management did not expect pending matters to have a material adverse effect. It reported no material changes to previously disclosed risk factors and no material changes in internal control over financial reporting.
- Lease exit costs of $0.4 were added back in nine-month Adjusted EBITDA. Separately, a store lease termination involved $0.3 of cash costs and a $0.2 gain in store expenses. The company also disclosed leases with related parties connected to non-independent directors and their families.
Investor verification points
- Assess whether the post-pandemic decline in comparable-store basket size and sales is stabilizing, and how transaction counts and new-store sales are developing.
- Review operating cash generation and working-capital trends against the prior year, planned capital spending and dividend commitments.
- Track debt repayment, covenant headroom, interest-rate terms and the continuing effect of substantial lease obligations.
- Confirm execution of the planned store openings and relocations, and evaluate labor-cost pressure and gross-margin sustainability.
- Review the special-dividend funding, the related-party lease arrangements and the $34.1 of signed but not yet commenced lease commitments.