Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2013 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; comparisons are to the corresponding 2012 periods. The company operates natural and organic grocery and dietary-supplement stores. It had 68 stores in 13 states at quarter-end, up from 55 a year earlier.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $113.2 million, up 30.5% | $315.5 million, up 28.0% |
| Comparable-store sales | Up 11.6%; daily average up 10.4% | Up 10.8%; daily average up 11.2% |
| Gross profit / margin | $32.6 million / 28.8% (29.3% prior year) | $92.2 million / 29.2% (29.5% prior year) |
| Operating income | $5.2 million; 4.6% of sales | $14.5 million; 4.6% of sales |
| Net income | $2.9 million, up 13.6% | $8.3 million, up 26.6% |
| Net income attributable to Natural Grocers | $2.9 million, up 31.1%; diluted EPS $0.13 | $8.3 million, up 46.7%; diluted EPS $0.37 |
| EBITDA (non-GAAP) | $8.7 million, up 33.0%; 7.7% of sales | $24.2 million, up 37.1%; 7.7% of sales |
| Operating cash flow | $15.1 million for nine months, versus $18.0 million |
Sales growth reflected both new stores and comparable-store gains. For the quarter, comparable-store sales benefited from a 4.7% increase in daily average transactions and a 5.4% increase in average transaction size. The company reported 9 store openings in the first nine months, versus 6 in the prior-year period.
Cash, debt and liquidity
At June 30, cash and cash equivalents were $5.7 million, restricted cash was $0.5 million, and available-for-sale securities were $1.7 million. The $15.0 million revolving credit facility was undrawn; the company said it was covenant-compliant. The facility matures June 30, 2014. The related-party note was fully repaid during the period.
Cash declined $11.6 million from fiscal year-end. Nine-month investing outflows were $26.4 million, primarily reflecting $25.9 million of property and equipment purchases; financing outflows were $0.4 million. Property and equipment, net, rose to $91.8 million from $64.6 million at September 30, 2012. Reported capital lease finance and capital lease obligations totaled approximately $16.0 million at quarter-end. Separately, contractual future payments included $186.6 million of operating leases and $37.3 million of capital-lease payments.
Management believed cash, operating cash generation and borrowing availability would meet working-capital needs and planned capital expenditures for at least the next 12 months.
Changes, outlook and risks
- Gross margin declined year over year, reflecting lower-margin product mix and increased bulk-product production costs following relocation and expansion of the distribution facility. Store and administrative expenses declined as a percentage of sales, while pre-opening and relocation costs increased.
- Interest expense increased, mainly because of interest on capitalized lease obligations. The company attributed higher effective taxes partly to acquiring the remaining 45% interest in Boulder Vitamin Cottage Group in July 2012; no noncontrolling-interest income was reported in 2013.
- Management planned 13 new stores in fiscal 2013, including two opened after quarter-end, and expected approximately $32–$34 million of fiscal-2013 capital expenditures. It also planned two openings for the remainder of fiscal 2013 and 11 locations for fiscal 2014. Management cited expansion opportunities but noted that new stores, higher lease costs, distribution-center costs and public-company expenses could pressure results.
- Management estimated new stores require approximately $2.3 million of initial net cash investment per store and targeted roughly four years to recoup that investment and a 35% cash-on-cash return by the end of year five. These are targets, not guarantees.
- Disclosure controls and procedures were deemed ineffective as of June 30 because of a previously identified material weakness in lease accounting controls. Remediation steps included additional expertise, revised procedures and external assistance; management nevertheless stated it believed the filed financial statements fairly presented results in all material respects.
- The company reported no material change in previously disclosed risk factors and did not expect pending legal proceedings to have a material adverse effect. A July 2013 agreement to purchase the land occupied by its Salem, Oregon store had a stated price of $2.1 million, subject to credits and other costs.
Important facts for investors to verify
- Whether comparable-store growth and new-store performance persist, and how much sales growth comes from stores not yet in the comparable base.
- Whether gross-margin pressure from product mix, bulk costs and expansion leases continues, and how lease accounting affects reported margins and EBITDA.
- Actual cash generation and capital spending against the $32–$34 million fiscal-year plan, given lower operating cash flow and reduced cash balances.
- Progress in remediating the lease-accounting material weakness and whether disclosure controls are subsequently found effective.
- Execution of planned openings and the long-term obligations associated with operating and capital leases; EBITDA is a non-GAAP measure and does not reflect capital spending, working-capital needs or debt service.