Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2017 Form 10-Q
Business and period: The company operates natural and organic grocery and dietary-supplement stores. This unaudited filing covers the quarter and nine months ended June 30, 2017; fiscal year-end is September 30. It operated 140 stores in 19 states, versus 118 stores a year earlier.
Financial performance
| Metric | Three months ended June 30, 2017 | Nine months ended June 30, 2017 |
|---|---|---|
| Net sales | $194.7 million; up 8.6% | $570.5 million; up 8.8% |
| Gross profit / gross margin | $52.8 million / 27.1% | $159.1 million / 27.9% |
| Operating income / margin | $1.7 million / 0.9% | $11.4 million / 2.0% |
| Net income / diluted EPS | $0.6 million / $0.03 | $5.7 million / $0.25 |
| EBITDA (non-GAAP) | $9.2 million; 4.7% of sales | $33.3 million; 5.8% of sales |
| Comparable-store sales | Down 0.7%; daily average up 0.4% | Down 1.0%; daily average down 0.7% |
Cash flow and liquidity: Nine-month operating cash flow was $35.9 million, investing cash outflow was $34.2 million, and financing cash outflow was $0.6 million. Cash ended at $5.1 million. The company had $27.5 million drawn on its revolving facility and $16.5 million available to borrow, after $1.0 million of letters of credit. It reported compliance with facility covenants. Capital expenditures were $36.7 million for the nine-month period.
Debt and obligations: In addition to the revolving-facility balance, capital and financing lease obligations totaled $32.0 million, including $0.5 million current. Contractual operating-lease payments totaled $507.7 million over their remaining terms; this is a commitment schedule, not a current balance-sheet liability.
Changes and drivers versus prior-year periods
- Sales growth was driven by new stores: new-store sales added $16.7 million in the quarter and $51.4 million year to date. Comparable-store sales fell $1.3 million and $5.4 million, respectively.
- Profitability weakened: quarterly net income declined 77.7% and nine-month net income declined 43.5%. Operating income fell 58.2% for the quarter and 33.8% year to date; EBITDA fell 11.5% and 6.9%, respectively.
- Gross margin contracted from 28.4% to 27.1% in the quarter and from 28.8% to 27.9% year to date. Management cited higher occupancy costs, newer-store lease costs and fixed rent, and—in the quarter—product mix and increased promotions.
- Store expenses rose 12.3% in the quarter and 12.6% year to date, faster than sales. Interest expense increased 14.1% and 27.1%, primarily due to higher average facility borrowings and more capital leases.
- Operating cash flow increased from $20.7 million to $35.9 million, which management attributed primarily to working-capital movements, including accrued expenses and inventory/purchases; net income declined.
Outlook, risks and notable items
- The company planned no additional store openings for the remainder of FY2017; it had opened 14 stores in the first nine months and expected an FY2017 new-store growth rate of 11.1%. Nine store leases were signed for openings in FY2018 and beyond. Management expected new-store growth to moderate over the foreseeable future.
- Management estimated remaining FY2017 capital expenditures of $2.2–$4.2 million, primarily for a store relocation and unpaid property and equipment. It expected available cash, operating cash flow and facility capacity to cover working capital and planned capital expenditures for at least 12 months. Expected upfront investment per new store was about $2.2 million.
- Management linked comparable-sales weakness to increased competition, cannibalization from openings in existing markets, and economic pressure in some markets, including lingering effects of depressed oil and gas prices. It also identified intensifying grocery competition, changing consumer preferences, product-safety or regulatory issues, and potential import tariffs or trade-policy changes as risks.
- A sale-leaseback of a store building generated approximately $2.6 million of proceeds and a deferred loss of approximately $0.5 million, to be amortized over the 15-year lease term.
- The company disclosed leases with entities owned by board members or related family members; reported rent was approximately $0.9 million to Chalet Properties and $0.2 million to the Isely Family Land Trust for the nine-month period, with less than $0.1 million to FTVC LLC.
- Management did not expect pending legal proceedings to have a material adverse effect, based on information then available. Disclosure controls were deemed effective; no material changes in internal control were reported.
Key facts for investors to verify
- Whether comparable-store sales and mature-store sales recover, given declines in the nine-month period and the company’s stated competitive and regional-economic pressures.
- Whether store growth can support sales and earnings while occupancy costs, store expenses and lease commitments pressure margins.
- Cash conversion and working-capital trends: nine-month operating cash flow benefited from working-capital movements despite lower net income.
- Available borrowing capacity, covenant compliance and planned capital spending as store expansion continues.
- The potential effects of competition, consumer preference shifts, product-safety or regulatory events, and trade or tariff changes on sales and product costs.