Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2019 10-Q
Reporting period: Quarter and nine months ended June 30, 2019. The company operates natural and organic grocery and dietary supplement stores; it reported 152 stores in 19 states, up from 147 a year earlier.
Financial performance and position
Amounts are in millions of dollars unless otherwise stated.
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $224.4 | $213.1 | $676.4 | $631.5 |
| Gross profit / margin | $58.4 / 26.0% | $56.8 / 26.7% | $179.8 / 26.6% | $168.3 / 26.6% |
| Operating income | $3.8 | $3.8 | $14.0 | $11.6 |
| Net income | $2.0 | $2.0 | $8.1 | $10.6 |
| Diluted EPS | $0.09 | $0.09 | $0.36 | $0.47 |
- Q3 sales grew 5.3%; comparable-store sales rose 2.4%. The comparable-sales increase reflected 3.0% higher average transaction size, partly offset by 0.6% fewer transactions. Nine-month sales grew 7.1%, with comparable sales up 3.6%.
- Q3 gross margin fell 0.7 percentage points, attributed to a mix shift toward lower-margin products and higher occupancy costs as a share of sales. Nine-month gross margin was unchanged.
- Nine-month operating income increased 20.7%, while net income fell 23.8%. The prior-year period included a $4.3 million noncash tax benefit from Tax Reform; excluding that benefit, prior-year net income was $6.2 million versus $8.1 million in FY2019.
- EBITDA, a company-defined non-GAAP measure, was $11.0 million in Q3, down 0.5%, and $35.8 million for nine months, up 5.9%. EBITDA margin was 4.9% in Q3 versus 5.2%; nine-month margin was 5.3% in both periods.
- Nine-month operating cash flow was $28.3 million, versus $30.3 million; capital spending and other investing uses were $22.0 million, versus $16.5 million. Cash increased $2.3 million to $11.7 million.
- At June 30, cash was $11.7 million and $38.9 million was available under the $50 million revolving facility, net of $1.0 million in letters of credit. Revolver borrowings were $10.1 million. Capital and financing lease obligations totaled $50.2 million; the company was in covenant compliance. Current assets were $115.0 million and current liabilities $81.2 million.
Changes, outlook and risks
- Five stores opened and four were relocated during the nine months. Management planned seven openings for FY2019, with five already open, and expected $5–8 million of fourth-quarter capital expenditures for two new stores and one relocation. Typical new-store investment was estimated at approximately $2.2 million.
- Management said sales benefited from marketing and promotional pricing, loyalty-program engagement, and stronger store leadership, training and processes. It cited improving conditions in oil- and gas-dependent markets, which continued to lag other markets.
- No earnings or margin guidance was provided. Management expected cash, operating cash generation and available credit to cover working capital and planned capital spending for at least 12 months.
- Key risks include intense competition, consumer preference changes, product safety or regulatory issues, economic and commodity pressures, and the higher lease costs associated with expansion. A newly highlighted risk is possible restrictions on trade with Mexico or Canada, which could affect produce and other sourced products.
- The company expected the new lease standard, effective for it in FY2020, to materially increase reported right-of-use assets and lease liabilities. It anticipated certain financing leases would convert to operating leases, increasing rent expense but reducing depreciation and interest expense; it did not expect a cash-flow impact.
- Management did not expect pending legal proceedings to have a material adverse effect. Disclosure controls were considered effective, with no material changes in internal control reported.
- After quarter-end, the company amended a store lease with Chalet Properties, a related party: fixed rent for the Austin location falls to zero effective August 1, 2019, while operating expenses continue; the lease terminates upon a sale of the property and extension options were removed.
Important facts for investors to verify
- Whether comparable-sales growth and transaction trends persist, particularly the Q3 decline in transaction count.
- Whether product mix and occupancy costs continue to pressure quarterly gross margin.
- Actual store-opening and relocation timing, capital spending, and new-store returns versus management’s plans.
- The effect of lease accounting adoption on reported assets, liabilities, expenses and covenant measures.
- Terms and ongoing costs of related-party leases, including the Austin lease amendment, and exposure to potential Mexico–Canada trade disruption.