Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2023 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2023. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. The company operates 164 natural and organic grocery stores in 21 states.
Financial performance
| Metric | Three months ended June 30, 2023 | Nine months ended June 30, 2023 |
|---|---|---|
| Net sales | $281.8; up 5.8% year over year | $845.5; up 3.7% |
| Comparable-store sales | Daily average up 4.4% | Daily average up 2.5% |
| Gross profit / margin | $81.4 / 28.9%, versus 27.6% | $242.6 / 28.7%, versus 28.1% |
| Operating income | $9.1; up 60.8% | $23.9; down 9.8% |
| Net income / diluted EPS | $7.1 / $0.31, versus $3.9 / $0.17 | $17.4 / $0.76, versus $19.2 / $0.84 |
| EBITDA / Adjusted EBITDA | $16.3 / $16.7 | $45.4 / $47.3 |
Quarterly sales growth reflected higher comparable-store sales and new-store sales. Comparable-store growth came from increases in both transaction size and transaction count. Management attributed the quarterly gross-margin improvement to product margin gains from pricing and promotions. For the nine-month period, higher labor costs, administrative expenses, pre-opening costs and interest expense contributed to lower operating income and net income despite sales and gross-margin growth. EBITDA and Adjusted EBITDA are non-GAAP measures.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $36.2, compared with $29.5 in the prior-year period. Investing cash use was $24.3, principally for property, equipment and intangible assets; financing cash use was $15.3.
- Cash declined to $8.6 at June 30, 2023 from $12.0 at September 30, 2022. The company reported $48.5 available on its $50.0 revolving facility, net of $1.5 in letters of credit, and no revolving borrowings.
- Term-loan debt was $9.7. The facility matures November 13, 2024; the company reported compliance with its covenants. The credit facility is secured by substantially all company assets.
- Reported operating and finance lease liabilities totaled $367.6, including $38.4 current. This is a substantial fixed commitment in addition to term debt.
- The company paid $0.10 per share in quarterly dividends in each of the first three fiscal quarters and repurchased 17,998 shares for $0.2 during the nine months.
Changes, outlook and risks
- Store activity: Two stores opened, one was relocated/remodeled and two closed during the nine months. Management planned two additional openings and two relocations/remodels for the remainder of FY2023; expected remaining-year capital expenditures were $3.7–$10.7. It had signed leases for five additional stores intended for FY2023 and beyond.
- Costs and demand: Management estimated annualized cost inflation of approximately 7% in Q3. It cited labor shortages and wage increases, supply-chain delays, inflation and uncertain consumer behavior. It said pricing strategies had mitigated inflation’s effect to date, but future impacts were uncertain.
- Profitability drivers: Q3 gross margin improved, while nine-month store-expense pressure included higher wages and a $0.9 impairment charge associated with a store closure and early relocation. Administrative expenses rose, primarily due to compensation, software and technology amortization.
- Outlook: Management said cash, operating cash flow and revolver availability should support working capital, planned capital spending, debt repayment, dividends and repurchases over the next 12 months and foreseeable future. It did not provide numerical sales or earnings guidance in the supplied filing text.
- Legal and other matters: A court decertified the FLSA collective action and denied certification of the proposed Colorado class in a wage-and-hour case; individual claims will proceed. The company assessed a material loss contingency as remote. It reported no material changes to its previously disclosed risk factors. Related-party leases with entities associated with non-independent directors remain in place.
Key facts for investors to verify
- Whether comparable-store growth and improved quarterly gross margin persist as inflation, pricing and consumer demand evolve.
- Whether higher labor, administrative and pre-opening costs continue to pressure year-to-date earnings.
- Execution, timing and funding of planned store openings and remodels, alongside the stated capital-spending range.
- Cash generation and liquidity relative to substantial lease commitments and the November 2024 term-loan maturity.
- Developments in the individual wage-and-hour claims and any other legal proceedings or contingencies.