Natural Grocers by Vitamin Cottage, Inc. — FY2018 Form 10-K
Business and reporting period. Natural Grocers operates specialty natural and organic grocery and dietary-supplement stores. This 10-K covers the fiscal year ended September 30, 2018; the fourth quarter ended that date. The company had 148 stores in 19 states at year-end, compared with 140 a year earlier.
Financial and operating results
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $849.0 million | $769.0 million |
| Gross profit / margin | $225.6 million / 26.6% | $212.3 million / 27.6% |
| Operating income / margin | $15.1 million / 1.8% | $14.1 million / 1.8% |
| Net income | $12.7 million | $6.9 million |
| Diluted EPS | $0.56 | $0.31 |
| EBITDA / margin | $44.5 million / 5.2% | $43.6 million / 5.7% |
| Operating cash flow | $42.9 million | $40.8 million |
| Cash and cash equivalents at year-end | $9.4 million | $6.5 million |
| Total debt, including lease obligations | $54.3 million | $61.8 million |
Fourth quarter (unaudited, three months ended September 30): Sales were $217.5 million versus $198.5 million in Q4 FY2017; operating income was $3.5 million versus $2.7 million; net income was $2.1 million versus $1.2 million; diluted EPS was $0.09 versus $0.06.
Liquidity and capital spending. The $50 million credit facility had $13.2 million drawn, $35.8 million available and $1.0 million in letters of credit reserved against availability at year-end. The facility matures January 31, 2021; the company reported covenant compliance. Investing cash outflow was $23.5 million in FY2018. Total current assets were $111.0 million and current liabilities were $79.7 million.
Changes versus the prior comparable period
- Annual sales rose 10.4%, supported by comparable-store sales growth of 5.8% (versus a 0.2% decline in FY2017) and $35.4 million of new-store sales. Comparable-store growth reflected a 1.4% increase in average transaction size and a 4.4% increase in daily transaction count.
- Gross margin fell 1.0 percentage point to 26.6%, as promotional pricing, a mix shift toward lower-margin products and higher occupancy costs weighed on results. Store expenses declined as a share of sales, from 22.7% to 22.0%.
- Net income increased 83.7%, but included a non-cash tax benefit of approximately $4.3 million from remeasuring deferred tax balances after U.S. tax reform. Excluding that adjustment, the company reported an FY2018 effective tax rate of approximately 20.7% versus 33.1% in FY2017.
- Operating cash flow increased $2.0 million. Cash used in investing declined to $23.5 million from $38.5 million; financing activities used $16.4 million, principally reflecting $15.2 million of net credit-facility repayments. Credit-facility borrowings declined from $28.4 million to $13.2 million.
- The company opened eight stores, compared with 14 in FY2017, and relocated three. Adjusted EBITDA was $45.1 million, up 3.3%, while its margin declined from 5.7% to 5.3%.
Outlook, risks and notable items
- Management planned seven to nine new stores and five to six relocations in FY2019, with projected capital expenditures of $27–$32 million. Four new stores and one relocation had occurred before the 10-K filing. Management expected store growth to moderate relative to earlier years.
- Management cited opportunities from consumer interest in natural and organic products, customer loyalty and scale, while noting that competition, regional and general economic conditions, fixed occupancy costs and new-store performance could constrain sales and margins. The company did not provide specific FY2019 earnings or comparable-sales guidance.
- UNFI and its subsidiaries supplied approximately 64% of FY2018 purchases, creating supplier-concentration exposure. The company identified competition, product safety and regulatory compliance, organic supply availability, labor and lease costs, regional concentration, cybersecurity, and execution of store expansion as material risks.
- In Q4, the company recorded $0.5 million of long-lived-asset impairment charges and less than $0.1 million of store-closing costs related to Tulsa-Central, which closed November 9, 2018. The company said pending legal proceedings were not expected to have a material adverse effect.
- Operating leases represented substantial future commitments: disclosed minimum operating-lease payments totaled $496.5 million. The company expected the new lease accounting standard, effective for it in FY2020, to materially increase reported lease assets and liabilities.
- The company repurchased 101,573 shares for approximately $0.6 million in FY2018. The Isely family and related holders controlled approximately 59.4% of common stock; the company did not anticipate paying dividends in the foreseeable future.
Important facts for investors to verify
- Whether FY2018 comparable-sales momentum can persist and whether growth is driven by repeatable traffic and basket trends.
- Whether gross-margin pressure from promotions, product mix and occupancy costs stabilizes or worsens.
- The cash-flow and return profile of planned store openings and relocations, including projected capital spending and lease commitments.
- UNFI supply continuity and the company’s ability to secure alternative suppliers on acceptable terms.
- The tax-benefit impact on reported earnings and the company’s underlying tax rate after the one-time deferred-tax remeasurement.
- The effects of lease-standard adoption on reported liabilities and leverage, and the company’s capacity to meet credit-facility covenants and ongoing fixed obligations.