Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2021 10-Q
Reporting period: Three and six months ended March 31, 2021. The company operated 161 natural and organic grocery stores in 20 states and reported one operating segment. Financial statement amounts below are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $259.2 | $277.5 | $524.2 | $507.6 |
| Gross profit / margin | $71.8 / 27.7% | $77.8 / 28.0% | $144.9 / 27.6% | $138.3 / 27.3% |
| Operating income / margin | $6.7 / 2.6% | $13.3 / 4.8% | $11.9 / 2.3% | $16.1 / 3.2% |
| Net income / margin | $4.7 / 1.8% | $9.7 / 3.5% | $8.3 / 1.6% | $11.6 / 2.3% |
| Diluted EPS | $0.21 | $0.43 | $0.37 | $0.51 |
- Q2 sales declined 6.6% year over year; daily average comparable-store sales fell 7.0%. Basket size increased 8.0%, but transaction count fell 13.9%. Management attributed the decline mainly to the unusually high prior-year period, when customers stockpiled groceries early in the pandemic, and to severe cold and ice storms.
- For the six-month period, sales rose 3.3% and comparable-store sales increased 2.0%. Basket size increased 14.1%, offset by a 10.6% decrease in transaction count. New stores contributed to sales growth in both comparison periods.
- Q2 gross margin slipped 0.3 percentage points, primarily due to occupancy costs as a share of sales, partly offset by improved product margin. Six-month gross margin rose 0.3 points, reflecting product margin improvement and lower occupancy and shrink costs as a share of sales.
- Store expenses rose 2.7% in Q2 and 9.6% for six months; as a share of sales, they increased to 22.5% and 22.7%, respectively. Management cited sales deleverage and higher labor costs. Six-month operating income fell 26.1% and net income fell 28.1%.
Cash flow, debt, and liquidity
- For the six months ended March 31, operating cash flow was $17.3 million, versus $53.4 million a year earlier; investing cash outflow was $9.5 million versus $20.1 million; financing cash outflow was $15.3 million versus $10.1 million. Cash declined $7.6 million to $21.0 million.
- Management attributed weaker operating cash flow to lower net income adjusted for noncash items and cash used for working capital, versus a working-capital source in the prior year. Capital expenditures for property and equipment were $8.7 million, down from $18.8 million.
- At March 31, cash was $21.0 million and $48.7 million was available under the $50.0 million revolving facility, net of $1.3 million in letters of credit. No revolver borrowings were outstanding.
- Term-loan borrowings were $34.6 million at period-end, following a $35.0 million borrowing in December 2020 to help fund the special $2.00-per-share dividend. The loan matures November 13, 2024 and requires quarterly principal installments of approximately $0.4 million. The company reported compliance with credit-facility financial covenants.
- Reported lease liabilities totaled $390.3 million, including $349.3 million operating and $41.0 million finance lease liabilities. Another $30.8 million of minimum lease payments related to signed leases whose terms had not commenced.
- Financing cash flows included $48.3 million of dividends paid in the six-month period. The company also paid regular quarterly dividends of $0.07 per share and declared another $0.07 dividend payable June 16, 2021.
Outlook, risks, and unusual items
- The company planned to open three to four stores in FY2021; two had opened by March 31. It also planned four to five relocations or remodels; one had been completed by March 31. Management stated that cash, operating cash flow, and revolver availability should cover working capital and planned capital expenditures for at least the next 12 months.
- No specific full-year sales, earnings, or margin guidance was provided. Management said future growth and profitability depend on economic and business conditions, competition, and the COVID-19 pandemic and related mandates. Elevated pandemic-related sales may not continue as conditions normalize.
- Management cited risks including pandemic-related changes to customer demand, staffing and supply-chain disruption, higher operating costs, severe weather, inflation or deflation, consumer spending, and intensifying competition, including expanded online ordering and delivery.
- The $2.00-per-share special dividend was an unusual capital return funded in part by the term loan. Six-month adjusted EBITDA was $27.4 million, down 13.7%; EBITDA and adjusted EBITDA are non-GAAP measures. The filing added back $0.4 million of lease-exit costs in adjusted EBITDA.
- The company paid $0.3 million in lease termination costs relating to a store closed in FY2019 and recorded a $0.2 million gain on the related lease termination. Management did not expect pending legal proceedings to have a material adverse effect; the filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and comparable-store trends normalize after the pandemic-related comparison effects, and whether transaction counts recover as basket sizes change.
- Whether labor, occupancy, and other store costs continue to pressure margins as sales growth moderates.
- Term-loan repayment, interest-rate exposure, covenant headroom, and the company’s capacity to fund dividends and planned store investment while maintaining liquidity.
- The timing and financial commitments of the five planned new stores and the signed leases totaling $30.8 million whose terms had not yet commenced.
- How much pandemic-related demand, weather disruption, supply-chain conditions, and competitive shifts affect future results; management cautioned that these factors make near-term performance harder to estimate.