Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Fiscal quarter and nine months ended June 30, 2014; comparisons are with the corresponding 2013 periods. The company operates natural and organic grocery and dietary-supplement stores and had 84 stores in 14 states, versus 68 a year earlier.
Financial performance
| Metric | Three months ended June 30, 2014 | Change year over year | Nine months ended June 30, 2014 | Change year over year |
|---|---|---|---|---|
| Net sales | $134.0 million | +18.4% | $385.0 million | +22.0% |
| Gross profit / margin | $38.6 million / 28.8% | +18.5%; margin unchanged | $112.7 million / 29.3% | +22.2%; margin up 0.1 percentage point |
| Operating income / margin | $6.1 million / 4.5% | +16.8%; margin down 0.1 percentage point | $18.6 million / 4.8% | +28.4%; margin up 0.2 percentage point |
| Net income / diluted EPS | $3.4 million / $0.15 | +16.6%; EPS was $0.13 | $10.3 million / $0.46 | +23.6%; EPS was $0.37 |
| EBITDA (non-GAAP) | $10.6 million | +22.0%; 7.9% of sales vs. 7.7% | $31.2 million | +28.8%; 8.1% of sales vs. 7.7% |
- Sales drivers: In the quarter, new stores added $18.6 million and comparable-store sales rose 2.0%; daily-average comparable sales increased 3.1%, reflecting higher transaction count and average transaction size. For nine months, new stores added $49.8 million and comparable sales rose 6.3%. The comparable-sales increases were slower than the respective 2013 rates of 11.6% and 10.8%.
- Costs and margins: Quarterly store expenses rose 21.7%, faster than sales, and increased to 21.0% of sales from 20.5%, mainly on salaries, depreciation and advertising. Administrative expense declined as a share of sales. Nine-month gross margin improved slightly, while newer-store occupancy costs remained a pressure.
- Cash flow: Nine-month operating cash flow was $23.5 million, versus $15.1 million; investing cash outflow was $25.3 million, including $26.9 million of property and equipment purchases. Cash declined $1.5 million to $6.6 million.
- Liquidity and obligations: The company had no revolving-credit borrowings and $14.3 million available under its $15.0 million facility, net of a $0.7 million letter of credit. It reported $19.7 million of capital and financing lease obligations on the balance sheet. Contractual obligations totaled $302.0 million, including $258.8 million of operating-lease payments and $41.6 million of capital and financing lease payments.
Developments, outlook and risks
- The company opened 12 stores in the first nine months and planned 15 for fiscal 2014; the remaining three were leased for fourth-quarter openings. It had also signed leases for seven locations expected to open after fiscal 2014.
- Management expected to spend $8–$10 million on capital expenditures in the remaining three months of fiscal 2014 and stated that cash, operating cash flow and borrowing availability should cover working capital and planned capital expenditures for at least 12 months. Average upfront investment was estimated at about $2.5 million per new store.
- Management cited growth in consumer interest in health and nutrition, customer loyalty and continued store expansion as opportunities. It cautioned that expansion costs, new-store ramp-up, competitive conditions and higher lease costs could affect results; sourcing efficiencies might not improve near-term gross margins.
- Risks highlighted include shifts in consumer preferences and limited availability or higher costs of organic products and dairy meeting the company’s pasture-based, non-confinement standards. The company planned to transition to those dairy standards by April 2015.
- Interest expense rose 67.2% for the nine-month period, primarily due to capital and financing leases. Credit-facility covenants were met. Management said pending legal matters were not expected to have a material adverse effect; outcomes remain uncertain.
- The company disclosed ongoing leases with entities owned by certain directors and related family members. Rent to those related parties was approximately $1.2 million for the nine months, unchanged year over year.
- Management reported disclosure controls were effective as of June 30, 2014, with no material quarterly change in internal control over financial reporting. The filing provides no formal earnings guidance.
Key facts for investors to verify
- Whether comparable-store sales growth continues, given the marked deceleration from the prior-year comparison and the quarter’s modest mature-store sales increase.
- New-store opening pace, sales ramp, and the effect of lease and occupancy costs on operating margins and cash needs.
- Capital-expenditure execution and working-capital needs, particularly inventory growth, alongside available credit and cash balances.
- The company’s lease commitments and interest burden; EBITDA is non-GAAP and does not reflect capital spending, working capital, lease rent effects, taxes or debt service.
- Availability and pricing of organic and qualifying dairy products, and customer response to the planned dairy-standard transition.