Business context and reporting period
Natural Grocers by Vitamin Cottage, Inc. filed this Form 10-K for the fiscal year ended September 30, 2017. The company operates natural and organic grocery and dietary supplement stores; it had 140 stores in 19 states at year-end. Fiscal 2017 fourth-quarter figures are also reported for the three months ended September 30, 2017.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $769.0 million | $705.5 million |
| Gross profit / margin | $212.3 million / 27.6% | $201.8 million / 28.6% |
| Operating income / margin | $14.1 million / 1.8% | $20.4 million / 2.9% |
| Net income | $6.9 million | $11.5 million |
| Diluted EPS | $0.31 | $0.51 |
| EBITDA and margin (non-GAAP) | $43.6 million / 5.7% | $45.9 million / 6.5% |
| Net cash from operating activities | $40.8 million | $28.8 million |
| Net cash used in investing activities | $38.5 million | $53.7 million |
| Cash and cash equivalents at year-end | $6.5 million | $4.0 million |
| Credit facility borrowings at year-end | $28.4 million | $27.4 million |
| Total debt, including capital and financing lease obligations | $61.8 million | $59.3 million |
At September 30, 2017, $20.6 million remained available under the $50.0 million revolving credit facility, net of letters of credit. The company reported compliance with its credit covenants. Current assets were $108.2 million and current liabilities were $71.6 million. Cash flow from operations less cash property-and-equipment purchases was approximately $0.4 million negative.
In FY 2017 Q4, net sales were $198.5 million and net income was $1.2 million, compared with $181.0 million and $1.5 million, respectively, in FY 2016 Q4.
Material changes versus the prior comparable period
- Sales rose 9.0%, mainly from $65.1 million of additional sales from new stores; comparable-store sales declined 0.2%, versus 1.7% growth in FY 2016. Daily average comparable-store sales increased 0.1%, reflecting a 0.4% increase in average transaction size and a 0.3% decline in daily average transaction count.
- Gross margin fell 1.0 percentage point to 27.6%. Management cited higher occupancy costs at newer and relocated stores, lower mature-store sales against fixed rent, promotional pricing, and a slight shift toward lower-margin products.
- Store expenses increased 11.6% and rose to 22.7% of sales from 22.1%, including higher labor, depreciation and utility costs. Operating income declined 30.8%, while net income declined 39.9%.
- EBITDA declined 5.0%. Operating cash flow improved 41.7%, primarily from working-capital changes, including accrued expenses and other purchases; investing outflows fell with fewer store openings and relocations.
- The company opened 14 stores, compared with 23 in FY 2016, and ended the year with 140 stores. The largest supplier, United Natural Foods, Inc. and subsidiaries, represented approximately 62.3% of FY 2017 purchases, up from approximately 59% in FY 2016.
Outlook, risks and unusual items
- Management planned 8–10 new stores and 3–4 relocations in FY 2018, with approximately $25–30 million in capital expenditures. Expected average upfront investment per new store was approximately $2.0 million. One FY 2018 store had opened before the filing, and 12 additional leases were signed for stores planned for FY 2018 and beyond.
- Management expects to pursue margin improvement through scale, sourcing and distribution efficiencies, labor management, reduced inventory shrink, and product and pricing discipline. It also cautioned that competition, fixed occupancy costs and the commitment to affordable pricing may limit near-term margin gains. New-store growth was expected to moderate.
- Management attributed weaker comparable sales to increased competition, cannibalization from new stores, economic uncertainty and the lingering effects of depressed oil and natural-gas prices in some markets; the energy-related pressure moderated in Q4. Competition could intensify with Amazon’s acquisition of Whole Foods, expansion by Aldi and Lidl, and growth in online ordering and delivery.
- Material risks include substantial lease commitments, supplier concentration, dependence on organic and other qualifying product supply, food safety and regulatory exposure, regional concentration in Colorado and Texas, wage and labor costs, cybersecurity, and the possibility that new stores underperform or cannibalize existing locations. Operating lease payments totaled approximately $503.1 million over their remaining terms; capital and financing lease payments were approximately $48.5 million.
- The credit facility is secured by substantially all company assets, has a January 2021 maturity, and restricts additional debt, certain transactions and cash dividends. A hypothetical 100-basis-point interest-rate change would affect annual interest expense by approximately $0.4 million.
- A store-building sale-leaseback in October 2016 generated approximately $2.6 million of proceeds and a $0.5 million loss, deferred over the lease term. The filing states that pending legal matters were not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends stabilized after the FY 2017 decline, and how much subsequent growth came from new stores versus existing stores.
- Whether gross-margin pressure, store labor costs and occupancy costs improved, and whether planned store openings meet targeted returns and payback periods.
- Liquidity and covenant headroom after planned capital spending, share repurchases and scheduled debt and lease payments; evaluate total lease commitments alongside reported borrowings.
- The financial and operational exposure to UNFI, which supplied about 62.3% of purchases, and the practical availability of alternative supply sources.
- Subsequent share repurchases: the company repurchased 101,573 shares from October 1 through December 1, 2017, for approximately $0.6 million, at an average $5.72 per share.