Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2019. Fiscal 2019 ends September 30. Financial statements are unaudited. The company operated 152 stores in 19 states at quarter-end.
Financial performance
| Metric | Three months ended March 31, 2019 | Year-over-year | Six months ended March 31, 2019 | Year-over-year |
|---|---|---|---|---|
| Net sales | $230.4 million | +6.7% | $452.0 million | +8.0% |
| Gross profit / margin | $62.2 million / 27.0% | +6.7% / unchanged | $121.4 million / 26.9% | +8.9% / up from 26.6% |
| Operating income / margin | $6.1 million / 2.7% | +8.4% | $10.2 million / 2.2% | +29.6% |
| Net income / diluted EPS | $3.9 million / $0.17 | +13.4% | $6.1 million / $0.27 | -29.4% |
| EBITDA (non-GAAP) | $13.4 million | +2.7% | $24.7 million | +9.1% |
| Operating cash flow | — | — | $22.6 million | Compared with $21.7 million |
Quarterly comparable-store sales rose 2.9%, versus 7.1% a year earlier; six-month comparable-store sales rose 4.2%, versus 5.9%. The quarter’s comparable-store increase reflected 3.5% higher average transaction size, partly offset by a 0.6% decline in transaction count. For the six months, transaction size rose 3.3% and transaction count rose 0.8%.
Quarterly store expenses increased 7.9% and rose to 21.8% of sales from 21.5%, with higher building services, maintenance and marketing costs. Six-month gross margin improved, attributed mainly to more focused promotions and lower occupancy expense as a share of sales, partly offset by sales mix shifting toward lower-margin products.
Liquidity, debt and investment
- Cash and cash equivalents were $11.3 million at March 31, 2019, up from $9.4 million at September 30, 2018. Current assets were $113.7 million and current liabilities $79.7 million.
- The company had $10.2 million outstanding under its $50 million revolving credit facility and $38.8 million available, net of $1.0 million in letters of credit. The facility matures January 31, 2021; the company reported compliance with its covenants.
- Capital and financing lease obligations totaled $45.6 million, including $0.8 million current. Long-term lease obligations increased from $40.4 million at September 30, 2018 to $44.8 million.
- Six-month capital expenditures for property and equipment were $17.6 million. Investing cash use was $17.1 million; financing cash use was $3.6 million. Cash increased by $1.9 million during the period.
- Management expected to spend approximately $9.9 million to $12.9 million on capital expenditures in the third and fourth quarters of FY2019. It stated cash, operating cash flow and borrowing availability should cover working capital and planned capital expenditures for at least 12 months.
Changes, outlook and risks
- Quarterly sales growth reflected $6.2 million of comparable-store sales growth and $9.1 million of new-store sales, partly offset by $0.7 million from a store closed in the first fiscal quarter. Over six months, comparable-store and new-store sales increased $17.3 million and $17.4 million, respectively, partly offset by $1.2 million from the closed store.
- The company opened five stores and closed one during the six months, and relocated two. Management planned seven to eight store openings and five relocations in FY2019; as of the report date, five stores had opened and two had been relocated.
- Six-month net income fell from $8.6 million to $6.1 million, largely because the prior-year period included a $4.3 million non-cash tax benefit from the Tax Cuts and Jobs Act. Excluding that benefit, management reported prior-year net income of $4.3 million and diluted EPS of $0.19.
- Management cited customer loyalty, basket growth, nutrition interest, promotional campaigns and store operating improvements as growth supports. It also noted continued competitive pressure, economic sensitivity, higher lease costs in expansion markets, and the possibility that new stores may take time to become profitable.
- Risks include intense competition across grocery and supplement retail, changes in consumer preferences, product safety concerns or recalls, and disruption or higher costs if access to products sourced from Mexico or Canada is restricted. The company said pending legal proceedings were not expected to have a material adverse effect.
- The company adopted the new revenue recognition standard on October 1, 2018; adoption did not materially affect the reported financial statements. It expected the lease accounting standard, effective for its first quarter of FY2020, to materially increase reported lease liabilities and right-of-use assets.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends improve, given slower growth than the prior-year comparable periods.
- Whether planned store openings and relocations meet stated timing and spending expectations, and how quickly new stores become profitable.
- How lease obligations and adoption of the new lease standard affect reported leverage, expenses and cash flows.
- How much of the six-month earnings comparison reflects the prior-year one-time tax benefit, and whether margins and operating cash generation remain resilient.
- Whether competition, economic conditions, product sourcing and the disclosed Mexico/Canada trade risk affect product availability, costs or customer demand.