Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2020 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2020. The interim financial statements are unaudited. The company operated 157 stores in 20 states at quarter-end, up from 152 stores in 19 states at March 31, 2019.
Financial performance
| Metric | Three months ended March 31, 2020 | Six months ended March 31, 2020 |
|---|---|---|
| Net sales | $277.5 million; +20.4% year over year | $507.6 million; +12.3% |
| Comparable-store sales | +18.4% (daily average +17.0%) | +10.3% (daily average +9.7%) |
| Gross profit / gross margin | $77.8 million / 28.0% | $138.3 million / 27.3% |
| Operating income / margin | $13.3 million / 4.8% | $16.1 million / 3.2% |
| Net income / diluted EPS | $9.7 million / $0.43 | $11.6 million / $0.51 |
| EBITDA, non-GAAP | $21.1 million; 7.6% of sales | $31.7 million; 6.2% of sales |
For the six months, operating cash flow was $53.4 million, investing cash use was $20.1 million, and financing cash use was $10.1 million. Cash increased $23.2 million to $29.4 million. Capital expenditures for property and equipment were $18.8 million; the company also spent $1.4 million on other intangibles.
At March 31, cash was $29.4 million and $49.0 million was available under the $50 million revolving credit facility, net of $1.0 million in letters of credit. No revolver borrowings were outstanding; the company reported compliance with facility covenants. Recognized operating and finance lease liabilities totaled $404.6 million, including $34.3 million current. These are lease obligations, not revolver debt. Total liabilities were $509.2 million.
Changes versus the prior comparable period
- Quarterly sales growth accelerated markedly: comparable-store sales increased 18.4%, versus 2.9% a year earlier. Management attributed the acceleration primarily to COVID-19-related stock-up shopping beginning in late February; March comparable sales rose approximately 40% year over year.
- Quarterly gross margin improved to 28.0% from 27.0%; six-month gross margin rose to 27.3% from 26.9%. Management cited lower occupancy and shrink costs as a percentage of sales and a shift toward higher-margin products.
- Quarterly net income rose 151.8%; six-month net income rose 91.3%. Lower net interest expense also supported results, while higher taxes partly offset earnings growth.
- Operating cash flow more than doubled to $53.4 million from $22.6 million, reflecting working-capital effects as well as higher earnings. The company repaid its $5.7 million revolver balance outstanding at September 30, 2019.
- Adoption of lease accounting standard ASC 842 on October 1, 2019 led to recognition of substantial lease assets and liabilities and changed the classification of certain lease costs. This makes some balance-sheet and expense comparisons with the prior period less directly comparable.
Outlook, commentary, and risks
- Management planned six to seven new stores in fiscal 2020; four had opened by March 31. It expected to spend approximately $8 million to $13 million on capital expenditures during the remainder of fiscal 2020, primarily for two to three store openings and one relocation. Management said available cash, operating cash flow, and borrowing capacity should cover working capital and planned capital expenditures for at least 12 months.
- April 2020 comparable-store sales remained significantly above the prior year, but below March’s peak. Transactions declined while average transaction size increased. Management emphasized that the pandemic’s duration and longer-term financial effects were uncertain; it did not provide quantified full-year earnings or sales guidance.
- All stores remained open as essential businesses at the time of the report. COVID-19 measures included added temporary staff, higher wages and bonuses, enhanced cleaning and safety procedures, and limits on store occupancy. Supply shortages and delivery delays had occurred, though management said disruptions had moderated.
- Key pandemic risks include a recession or changes in consumer spending, reduced store traffic or a shift to online competitors, employee illness or store closures, higher operating costs, and further supply-chain disruption. The filing also identifies regulatory and litigation risks related to products containing cannabidiol (CBD).
- The company paid $0.07 per share in each of the first two fiscal 2020 quarters; a further $0.07 dividend was approved after quarter-end. The share-repurchase authorization was extended through May 31, 2022; $8.3 million remained available, although no shares were repurchased during the reported six months.
- Management reported no currently pending legal proceeding expected to have a material adverse effect. It disclosed related-party leases with entities associated with non-independent directors. Disclosure controls were assessed as effective at March 31, 2020.
Important facts for investors to verify
- How much of the exceptional Q2 comparable-sales and margin improvement persists as pandemic-driven stock-up demand normalizes.
- Whether April trends, supply availability, labor costs, and safety-related expenses continue to affect sales and profitability.
- Planned store openings, relocation, and capital spending, particularly if economic or operating conditions change.
- The scale and timing of lease commitments: recognized lease liabilities were $404.6 million, and the filing separately notes $10.7 million of minimum payments on signed leases whose terms had not commenced.
- Dividend and repurchase capacity under credit-facility restrictions and the company’s ongoing cash and capital needs.
- Potential exposure from CBD product regulation or claims, and the terms and governance oversight of related-party leases.