Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2020 10-Q
Business and period: The company operates natural and organic grocery and dietary-supplement stores. This unaudited quarter covers the three months ended December 31, 2019; comparisons are with the three months ended December 31, 2018. It operated 155 stores in 20 states at quarter-end, versus 151 stores a year earlier.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $230.0 million | $221.5 million | +3.8% |
| Gross profit / margin | $60.5 million / 26.3% | $59.1 million / 26.7% | Profit +2.3%; margin -0.4 percentage points |
| Operating income / margin | $2.8 million / 1.2% | $4.0 million / 1.8% | -29.4% |
| Net income | $1.9 million | $2.2 million | -15.0% |
| Diluted EPS | $0.08 | $0.10 | Down $0.02 |
| EBITDA (non-GAAP) | $10.6 million | $11.3 million | -6.8% |
| Cash from operations | $10.5 million | $7.5 million | +39.2% |
Comparable-store sales rose 1.9%, versus 5.5% in the prior-year quarter. Average transaction size increased 2.5%, while transaction count declined 0.6%. Mature-store sales increased 0.8%, compared with 3.6% previously. EBITDA margin was 4.6%, down from 5.1%.
Cash used in investing was $12.0 million, including $11.0 million for property and equipment and $1.0 million for intangibles. Financing provided $0.4 million; the company paid a $1.6 million dividend and ended the quarter with $5.2 million in cash, down from $6.2 million at September 30, 2019.
Liquidity, debt and balance sheet
At December 31, 2019, the company had $8.3 million drawn on its $50 million revolving credit facility and $40.7 million available, net of $1.0 million in letters of credit. The facility matures November 13, 2024, is secured by substantially all company assets, and has financial covenants; the company reported covenant compliance. Total current assets were $116.1 million and current liabilities were $118.0 million.
The company adopted ASC 842 lease accounting on October 1, 2019. At December 31, reported lease liabilities totaled $406.6 million: $373.1 million operating and $33.5 million finance lease liabilities. Adoption brought substantial lease assets and liabilities onto the balance sheet and changed expense classification; the resulting balance-sheet increase should not be read as a comparable-period increase in borrowing. Adoption also increased retained earnings by $1.7 million.
Changes, outlook and risks
- Sales growth reflected $4.1 million of comparable-store growth and $4.6 million from new stores, partly offset by a closed store. Gross margin declined due to higher occupancy expense associated in part with ASC 842 and a shift toward lower-margin products.
- Store expenses rose 4.7% and administrative expenses rose 9.5%; management attributed the increase in store expenses as a share of sales to ASC 842. Lower net interest expense partly offset weaker operating income.
- Management planned five to six store openings in FY2020; two had opened in the quarter and one more had opened after quarter-end by the report date. Planned capital expenditures for the remainder of FY2020 were approximately $16–$21 million, associated with three to four openings and one to two relocations. The company expected cash, operating cash flow and credit availability to cover working capital and planned capital spending for at least 12 months.
- The board initiated a quarterly dividend of $0.07 per share: the first payment was made in December 2019, and a second $0.07 payment was approved for March 2020. The existing $10 million share-repurchase authorization was due to expire May 4, 2020; no shares were repurchased in the quarter.
- Management cited competition, economic and consumer-demand changes, new-store costs, and product-safety or regulatory issues as risks. The filing added specific uncertainty around CBD products, including possible regulatory action or consumer litigation. Management did not expect pending legal proceedings to have a material adverse effect.
Important facts for investors to verify
- Whether the slowdown in comparable-store growth and lower transaction count persist, and whether basket-size gains continue.
- How much of margin and EBITDA pressure reflects ASC 842 presentation/classification changes versus underlying product mix, occupancy and operating trends.
- Whether planned store openings, relocations and $16–$21 million of remaining-year capital spending stay on schedule and within budget.
- Lease commitments and liquidity needs: reported lease liabilities were $406.6 million, with another $17.9 million of legally binding minimum payments for leases not yet commenced.
- Developments in CBD regulation or litigation, and compliance with credit-facility covenants as borrowing and shareholder distributions evolve.