Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2022 10-Q
Reporting period: Quarter and nine months ended June 30, 2022; fiscal year ends September 30. Unaudited results. The company operates natural and organic grocery and supplement stores and had 162 stores in 20 states at quarter-end.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $266.3 | $258.6 | $815.4 | $782.9 |
| Gross profit | $73.6 | $71.5 | $229.1 | $216.4 |
| Gross margin | 27.6% | 27.7% | 28.1% | 27.6% |
| Operating income | $5.7 | $7.0 | $26.5 | $19.0 |
| Net income | $3.9 | $5.0 | $19.2 | $13.4 |
| Diluted EPS | $0.17 | $0.22 | $0.84 | $0.59 |
| Operating cash flow | Not separately stated | Not separately stated | $29.5 | $31.0 |
- Quarterly sales increased 3.0%; daily average comparable-store sales rose 2.5%, reflecting a 2.7% increase in average transaction size and a 0.2% decline in transaction count. Nine-month comparable sales increased 3.5%.
- Quarterly operating income fell 19.8% and net income fell 21.8%. For the nine months, operating income rose 40.0% and net income rose 43.7%.
- Q3 operating margin was 2.1% versus 2.7%; nine-month operating margin was 3.3% versus 2.4%. Net margin was 1.5% versus 1.9% for Q3 and 2.4% versus 1.7% for the nine-month period.
- Non-GAAP EBITDA was $12.7 million for Q3, down 12.0%, and $47.6 million for nine months, up 15.0%. Adjusted EBITDA was $13.0 million for Q3, down 11.0%, and $48.6 million for nine months, up 14.4%. These measures are not substitutes for GAAP results.
Cash, debt and liquidity
- Cash was $19.9 million at June 30, 2022, versus $23.7 million at September 30, 2021. Nine-month operating cash flow of $29.5 million was below $31.0 million a year earlier; investing used $18.0 million and financing used $15.2 million. Cash declined $3.8 million during the period.
- Capital expenditures and intangible asset purchases totaled $18.2 million for the nine months. Management expected a further $10–$17 million of capital expenditures for the remainder of FY2022.
- Term-loan borrowings were $17.7 million; no revolving-facility balance was outstanding. Revolver availability was $48.7 million, net of $1.3 million in letters of credit. The credit facility matures November 2024; the company reported compliance with its financial covenants.
- Lease liabilities totaled $383.5 million, including $333.4 million operating and $50.1 million finance lease liabilities. Total assets were $664.2 million and total liabilities were $508.6 million.
Material changes and management commentary
- Q3 sales gains were driven by comparable-store and new-store sales, retail price inflation, customer behavior associated with the pandemic, marketing and loyalty-program engagement. Management estimated approximately 6% annual cost inflation in Q3.
- Q3 gross margin edged down as higher freight, distribution and shrink costs outweighed occupancy leverage. Store expenses rose 5.3%, faster than sales, mainly due to higher wage rates. For the nine months, gross margin improved on product margin and occupancy leverage, while store expenses as a share of sales declined.
- Management cited labor shortages, wage pressure, supply-chain disruptions and uncertain inflation effects. It also noted that pandemic-related elevated sales may not persist, and that competition, consumer preferences and fixed occupancy costs could affect growth and profitability.
- For FY2022, management planned three to four new store openings and two relocations/remodels. Through June, the company had opened one store, relocated/remodeled one and closed one; it opened another store after quarter-end. Management stated that cash, operating cash flow and revolver availability should meet planned needs for the next 12 months and foreseeable future.
Other notable items, risks and contingencies
- The company paid quarterly dividends of $0.10 per share in each of the first three FY2022 quarters. A further $0.10 dividend was approved after quarter-end for payment September 14, 2022. No shares were repurchased during the period.
- A former assistant store manager’s putative wage-and-hour class action had 101 opt-in plaintiffs and was in discovery. The company disputes the claims and could not reasonably estimate any potential loss. Management did not believe pending proceedings would have a material adverse effect.
- Four store leases and two other operating leases are with entities related to non-independent directors and their families; the filing says lease terms and rents are comparable to market terms.
- Management reported no material changes to the risk factors in its FY2021 10-K, and no material changes in market-risk disclosures. Disclosure controls were assessed as effective.
Investor verification points
- Track whether sales growth and comparable-store gains continue as inflation and pandemic-related buying effects change.
- Monitor gross margin, freight/distribution and shrink costs, wage inflation, and store-expense leverage.
- Assess execution of the planned store openings and $10–$17 million remaining FY2022 capital-spending plan.
- Review operating cash conversion, inventory growth, lease commitments and debt repayment alongside dividends and revolver capacity.
- Follow the wage-and-hour litigation and related-party leases; the filing provides no estimable loss range for the lawsuit.