Natural Grocers by Vitamin Cottage, Inc. — Q1 Fiscal 2015
Reporting period: Three months ended December 31, 2014; comparisons are with the three months ended December 31, 2013 unless otherwise noted. The company operates natural and organic grocery and dietary-supplement stores; it had 91 stores in 15 states at quarter-end, versus 76 stores a year earlier.
Financial and operating performance
| Metric | Q1 FY2015 | Prior year | Change |
|---|---|---|---|
| Net sales | $145.9 million | $120.6 million | +21.0% |
| Gross profit / gross margin | $42.3 million / 29.0% | $35.4 million / 29.3% | Margin down 0.3 percentage points |
| Operating income / margin | $6.4 million / 4.4% | $5.4 million / 4.5% | Income +18.6% |
| Net income / diluted EPS | $3.6 million / $0.16 | $2.9 million / $0.13 | Net income +22.0% |
| EBITDA (non-GAAP) | $11.4 million; 7.8% of sales | $9.4 million; 7.8% of sales | +21.9% |
| Cash from operations | $6.9 million | $5.3 million | +30.1% |
| Cash used in investing | $13.2 million | $7.2 million | Greater use, mainly acquisition |
Comparable-store sales increased 6.2%, versus 10.6% in the prior-year quarter; mature-store sales rose 2.8%, versus 6.9%. Management attributed comparable-store growth to a 3.4% increase in daily average transaction count and a 2.7% increase in average transaction size. New-store sales contributed $17.9 million to sales growth.
Store expenses rose 23.3% and increased to 21.3% of sales from 20.9%, reflecting growth-related depreciation and other costs. Administrative expenses fell to 2.9% of sales from 3.2%; pre-opening and relocation costs were $0.6 million, compared with $0.9 million. The effective tax rate was 37.5%, versus 38.1%.
Liquidity, debt and capital requirements
Quarter-end cash was $1.9 million, down from $5.1 million at September 30, 2014. The company had $3.1 million drawn on its $15.0 million revolving credit facility, $0.7 million of letters of credit, and $11.2 million available to borrow. It reported compliance with credit covenants and said available cash, operating cash flow and borrowing capacity should fund working capital and planned capital spending for at least 12 months.
Capital and financing lease obligations were $25.3 million on the balance sheet. Contractual commitments included $299.7 million of operating lease payments and $44.9 million of capital and financing lease payments. Operating cash flow was more than offset by $13.2 million of investing outflows and the company ended the quarter with a $3.3 million net decrease in cash.
Material developments, outlook and risks
On December 7, 2014, the company acquired substantially all assets and assumed certain liabilities of Nature’s Pantry, a one-store Missouri retailer, for $5.6 million paid in cash, with approximately $0.5 million of contingent consideration accrued. The purchase-price allocation was provisional; approximately $4.8 million was recorded as goodwill.
The company planned 18 new store openings in fiscal 2015, including four opened during the quarter, and two remodels and two relocations. It expected to spend approximately $37–$39 million on capital expenditures during the remaining nine months of fiscal 2015. Estimated upfront investment per new store averaged approximately $2.2 million. Management cited growth opportunities and potential overhead and sourcing efficiencies, while cautioning that efficiencies may not improve near-term gross margin.
Management said increased competition had slowed comparable- and mature-store sales growth. Other identified sensitivities included broader economic conditions, new-store ramp-up and lease costs. The company reported no material change in the risk factors in its FY2014 Form 10-K and did not expect pending legal matters to have a material adverse effect. Disclosure controls were considered effective at quarter-end.
Important facts for investors to verify
- Whether comparable-store growth can be sustained amid increased competition and slowing mature-store sales.
- Whether planned store openings and the $37–$39 million remaining-year capital program can be funded without materially pressuring liquidity or margins.
- The final purchase accounting and payment of contingent consideration for Nature’s Pantry, including the recoverability of acquisition-related goodwill.
- The implications of substantial operating-lease commitments, capital and financing lease obligations, and continued use of the revolving facility.
- How occupancy costs and store expenses affect margins as newer stores mature.