Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2014 10-Q
Reporting period: Quarter and six months ended March 31, 2014. The company operates natural and organic grocery and dietary-supplement stores; it had 81 stores in 13 states at quarter-end, versus 65 a year earlier.
Financial performance
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Net sales | $130.3 million; up 22.4% | $250.9 million; up 24.0% |
| Gross profit / margin | $38.8 million / 29.7% (29.9% prior year) | $74.1 million / 29.5% (unchanged) |
| Operating income / margin | $7.1 million / 5.5% (5.2% prior year) | $12.5 million / 5.0% (4.6% prior year) |
| Net income / diluted EPS | $4.0 million / $0.18 (up 24.3%) | $6.9 million / $0.31 (up 27.3%) |
| EBITDA (non-GAAP) | $11.2 million; 8.6% of sales | $20.6 million; 8.2% of sales |
Quarterly comparable-store sales rose 6.9% (5.7% on a daily-average basis); six-month comparable-store sales rose 8.7% (8.1% daily average). New stores contributed $16.6 million of quarterly sales growth and $31.1 million for the six-month period. In the quarter, daily-average comparable-store sales reflected a 2.0% increase in transaction count and 3.7% growth in average transaction size.
Cash flow, liquidity and obligations
- Six-month operating cash flow was $15.6 million, versus $10.7 million a year earlier. Investing activities used $16.3 million, including $17.9 million of property and equipment purchases; financing activities provided $0.3 million.
- Cash and cash equivalents were $7.8 million at March 31, down $0.3 million from September 30, 2013. Short-term investments were $0.1 million. Inventory increased to $53.1 million from $45.5 million.
- No revolver borrowings were outstanding at quarter-end. The $15.0 million facility had $14.3 million available after a $0.7 million letter of credit; the company was in covenant compliance. The facility matures January 31, 2017.
- Capital and financing lease obligations totaled $19.8 million on the balance sheet. Contractual obligations totaled $292.3 million, including $248.8 million of operating-lease payments and $42.4 million of capital and financing lease payments.
Changes, outlook and risks
Sales and earnings growth reflected new-store expansion and comparable-store gains. Quarterly gross margin slipped 0.2 percentage point, primarily as higher occupancy costs at new stores offset improved product margin and distribution-center efficiencies. Six-month gross margin was flat. Interest expense rose to $1.4 million for six months, primarily due to capital and financing leases. Pre-opening and relocation expense increased to $2.1 million as more stores opened.
Management planned 15 new stores in FY2014; nine had opened by March 31, and two more opened after quarter-end. It planned $18–$20 million of capital expenditures for the remainder of FY2014 and said cash, operating cash flow and revolver availability should fund working capital and planned capital expenditures for at least 12 months. This is not earnings guidance. Management cited growth opportunities but noted that new-store timing, lease costs, consumer demand and general economic conditions can affect results.
The company planned to require dairy products to be pasture-raised and non-confinement by April 2015. It identified risks to the availability and cost of organic and qualifying dairy supplies, changing consumer preferences, and adverse weather or other events affecting suppliers. Bonus depreciation and the Work Opportunity Tax Credit had provided tax benefits, but the relevant legislative authority had expired; management did not anticipate future bonus-depreciation benefits absent reauthorization. Pending legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether store openings and comparable-store growth meet the FY2014 plan, and how much growth depends on new stores versus existing locations.
- Whether new-store occupancy, pre-opening costs and lease commitments pressure margins or cash generation as expansion continues.
- Inventory and working-capital needs, given the increase in inventory and management’s expectation that inventory requirements will rise with store growth.
- Whether organic and pasture-based dairy supply can meet the planned standards at competitive prices, and whether consumer demand or tax-credit changes affect results.
- EBITDA is a non-GAAP measure; assess it alongside GAAP earnings, capital spending, lease payments and cash flow.