Natural Grocers by Vitamin Cottage, Inc. — Fiscal 2016 Second-Quarter 10-Q
Reporting period: Quarter and six months ended March 31, 2016. The company operates natural and organic grocery and dietary-supplement stores; it had 112 stores in 19 states at quarter-end, versus 95 stores in 18 states at September 30, 2015.
Key financial results
Dollars in millions except per-share data. Comparisons are with the corresponding 2015 periods.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $177.4; +12.5% | $345.2; +13.7% |
| Gross profit / gross margin | $51.6 / 29.1% (29.7% prior) | $99.9 / 28.9% (29.4% prior) |
| Operating income / margin | $6.4 / 3.6% (5.9% prior) | $13.1 / 3.8% (5.2% prior) |
| Net income | $3.6 (down 33.8%); diluted EPS $0.16 | $7.3 (down 18.3%); diluted EPS $0.33 |
| EBITDA, non-GAAP | $12.6; down 13.0%; 7.1% of sales | $25.4; down 2.2%; 7.4% of sales |
| Comparable-store sales | +1.0% (5.6% prior) | +2.3% (5.9% prior) |
| Mature-store sales | -1.3% (+2.6% prior) | -0.5% (+2.7% prior) |
For the quarter, comparable-store growth reflected a 1.0% increase in average transaction size while daily average transaction count was flat. For the six months, average transaction size rose 1.4% and daily average transaction count rose 0.9%. New stores contributed approximately $18.0 million of quarterly and $34.7 million of six-month sales growth.
Cash flow, debt and liquidity
- Six-month operating cash flow was $18.0 million, down from $24.3 million. Investing cash outflow was $23.7 million, versus $21.6 million; property and equipment purchases were $23.7 million. Financing provided $8.3 million, principally reflecting net credit-facility borrowings.
- Cash was $5.6 million at March 31, 2016. The company had $8.6 million drawn on its new $30 million revolving facility and $20.4 million available to borrow, net of $1.0 million in letters of credit. It reported compliance with facility covenants.
- The facility, entered into January 28, 2016, is secured by substantially all company assets and matures January 31, 2021. Capital and financing lease obligations totaled $30.2 million. Contractual operating-lease payments totaled $469.2 million.
- Management estimated $28–30 million of capital expenditures for the remainder of fiscal 2016. It stated available cash, operating cash flow and borrowing capacity should cover working capital and planned capital expenditures for at least 12 months.
Material changes, outlook and risks
- Sales grew with store expansion, but profitability and comparable-store momentum weakened. Quarterly store expenses rose 19.4%, faster than sales, and pre-opening/relocation expenses increased 66.0%. Higher occupancy costs at newer and relocated stores, salary-related costs and depreciation contributed to margin pressure.
- The company planned 23 new stores for fiscal 2016; nine had opened by March 31, leaving 14 planned. It also planned two further relocations and one remodel during the fiscal year. As of the filing date, it reported 24 signed leases for stores planned in fiscal 2016 and 2017.
- Management cited stronger competition, low oil and gas prices in some markets, and competition from the company’s own new stores as factors moderating comparable-store growth. A Colorado snowstorm shortly before Easter also affected store traffic. Management noted that new-store costs and higher lease costs may continue to pressure results.
- On May 4, 2016, after quarter-end, the board authorized a two-year repurchase program of up to $10 million. The company expected to fund it by increasing facility capacity from $30 million to $45 million, subject to lender commitments.
- A customer class-action lawsuit related to a 2015 data-security incident remained unresolved. The company said it could not estimate the outcome or potential loss and had accrued no liability. Management did not believe pending proceedings would have a material adverse effect.
- The filing provides store-opening and capital-spending plans but no specific numeric sales or earnings guidance. Forward-looking plans remain subject to competitive, economic, execution and other risks.
Important facts for investors to verify
- Whether comparable-store sales recover and mature-store declines reverse amid increased competition and regional economic pressure.
- Whether occupancy, labor, depreciation and new-store costs continue to compress margins as the company expands.
- Execution and funding of the planned 14 additional fiscal-2016 openings, remaining capital spending and the proposed share repurchases.
- Liquidity, borrowing availability, lease commitments and compliance with credit-facility covenants as expansion continues.
- Developments in the data-security class action and any eventual financial exposure.