Natural Grocers by Vitamin Cottage, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015 (fiscal second quarter and first half). The company operates natural and organic grocery and dietary-supplement stores; it had 95 stores in 16 states, versus 81 stores a year earlier.
Financial performance
| Metric | Three months ended March 31, 2015 | Six months ended March 31, 2015 |
|---|---|---|
| Net sales | $157.7 million; +21.0% year over year | $303.6 million; +21.0% |
| Comparable-store sales | +5.6% | +5.9% |
| Gross profit / gross margin | $46.9 million / 29.7% (29.7% prior year) | $89.2 million / 29.4% (29.5% prior year) |
| Operating income | $9.4 million; +31.8% | $15.8 million; +26.1% |
| Net income / diluted EPS | $5.4 million / $0.24 | $9.0 million / $0.40 |
| EBITDA (non-GAAP) | $14.5 million; 9.2% of sales | $26.0 million; 8.5% of sales |
For the quarter, comparable-store growth reflected a 3.2% increase in daily average transaction count and a 2.2% increase in average transaction size. For the half-year, those increases were 3.3% and 2.5%, respectively. New-store sales contributed $20.2 million of quarterly and $38.1 million of half-year sales growth. Mature-store sales grew 2.6% and 2.7%, respectively.
Cash flow and liquidity: First-half operating cash flow was $24.3 million, versus $15.6 million a year earlier; investing cash outflow was $21.6 million, including $5.6 million for the acquisition; financing cash outflow was $0.7 million. Cash rose to $7.2 million from $5.1 million at September 30, 2014. No credit-facility borrowings were outstanding; $14.0 million was available after $1.0 million of letters of credit. The company reported compliance with facility covenants.
Debt and obligations: Capital and financing lease obligations totaled $25.2 million, of which $24.9 million was long-term. The company also reported $318.1 million of minimum operating-lease payments and $1.8 million of construction-related contractual obligations. These commitments are important alongside the undrawn $15.0 million revolving facility, which matures January 31, 2017.
Material changes and notable items
- Sales rose 21.0% in both comparison periods, while net income rose 35.1% for the quarter and 29.6% for the half-year. Quarterly gross margin was unchanged; half-year margin declined 0.1 percentage point. Management attributed occupancy-cost pressure to newer stores and fixed store costs, partly offset by improved product margins.
- Store expenses as a percentage of sales were flat for the quarter but increased from 20.7% to 20.9% for the half-year. Administrative expenses as a percentage of sales improved, and pre-opening and relocation costs declined in both periods.
- On December 7, 2014, the company acquired substantially all assets and assumed certain liabilities of Nature’s Pantry, a one-store Missouri retailer, for approximately $6.1 million in cash, including $0.5 million of contingent consideration. The acquisition added approximately $4.7 million of goodwill; purchase-price allocation was provisional.
- First-half capital expenditures were $16.0 million. Property and equipment not yet paid totaled $2.4 million; $3.4 million of property was acquired through lease obligations.
Outlook, commentary, and risks
Management planned 18 new store openings in fiscal 2015; eight had opened by March 31. It expected to spend approximately $25–27 million on capital expenditures during the remaining six months for 10 planned openings, one relocation, and two remodels. The company had 12 signed leases for new stores and estimated average upfront investment of approximately $2.2 million per new store. Management believed cash, operating cash generation, and facility availability would cover working capital and planned capital expenditures for at least 12 months.
Management cited consumer interest in health and nutrition, customer loyalty, and store expansion as growth drivers, while noting competition, consumer preference shifts, economic conditions, new-store profitability and higher lease costs as risks. It cautioned that sourcing efficiencies may not improve gross margin in the near term. The company reported no material change in previously disclosed risk factors, no pending legal proceeding expected to have a material adverse effect, and effective disclosure controls as of March 31, 2015. EBITDA is a non-GAAP supplemental measure and does not represent cash available for investment or debt service.
Important facts for investors to verify
- Whether comparable-store sales momentum and transaction growth continue, particularly as competition increases.
- Execution and returns from the planned store openings, signed leases, and remaining fiscal 2015 capital spending.
- Cash generation and liquidity relative to inventory needs, lease commitments, and expansion spending; the revolving facility had $14.0 million available.
- Final acquisition accounting and performance of the Nature’s Pantry store, including the provisional goodwill allocation.
- How lease classification affects reported margins and EBITDA; lease payments and obligations remain substantial.
- Related-party lease arrangements: six operating leases and one capital lease with Chalet Properties, owned by certain non-independent directors and related family members.