Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2018 10-Q
Reporting period: Three and six months ended March 31, 2018; fiscal year ends September 30. The company operates natural and organic grocery and dietary-supplement stores, with 145 stores in 19 states at quarter-end, up from 135 a year earlier.
Financial performance
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 |
|---|---|---|
| Net sales | $215.9 million, +12.3% year over year | $418.4 million, +11.3% |
| Comparable-store sales | +7.1% | +5.9% |
| Gross margin | 27.0%, versus 28.2% | 26.6%, versus 28.3% |
| Operating income | $5.6 million, +2.4% | $7.8 million, −19.0% |
| Net income | $3.4 million; diluted EPS $0.15 | $8.6 million; diluted EPS $0.38 |
| EBITDA, non-GAAP | $13.1 million, +1.7%; 6.0% of sales | $22.7 million, −6.0%; 5.4% of sales |
Quarterly comparable-store sales growth reflected transaction-count growth of 5.0% and average transaction-size growth of 2.0%; six-month growth reflected increases of 4.9% and 0.9%, respectively. Management attributed sales improvement to marketing and promotional pricing, as well as stronger store leadership, training, and operating processes. Promotional pricing, a shift toward lower-margin products, and higher occupancy costs at newer-format and relocated stores reduced gross margin.
For the six months, operating cash flow was $21.7 million, compared with $22.4 million a year earlier. Capital expenditures were $10.6 million, versus $23.6 million; net cash used in investing was $10.5 million. Cash increased $1.6 million to $8.1 million. Current assets were $113.4 million and current liabilities $76.6 million at March 31, 2018.
At quarter-end, $19.6 million was drawn on the $50.0 million revolving credit facility, with $29.4 million available after $1.0 million of letters of credit. The facility matures January 31, 2021, is secured by substantially all company assets, and the company reported compliance with its covenants. Capital and financing lease obligations totaled $37.6 million. Interest expense rose 18.7% for the six-month period, driven by higher facility rates, additional capital leases, and lower capitalized interest.
Material changes and unusual items
- Six-month net income increased 69.8%, but included an approximately $4.3 million non-cash tax benefit from remeasurement of deferred tax balances under the Tax Cuts and Jobs Act. Excluding that benefit, management reported six-month net income of $4.3 million and diluted EPS of $0.19, below the reported $8.6 million and $0.38.
- Six-month gross margin fell 1.7 percentage points, while operating income declined $1.8 million. Store expenses and pre-opening/relocation costs decreased as a percentage of sales, but did not offset gross-margin pressure.
- The company repurchased 101,573 shares during the six months for approximately $0.6 million. On May 2, 2018, the board extended the $10 million repurchase program through May 4, 2020; approximately $8.3 million remained available.
Outlook, risks, and contingencies
Management planned eight to 10 store openings in fiscal 2018; five had opened by March 31, and one additional Oregon store opened afterward. It expected to relocate three to four stores during the year, with one completed by March 31. Planned capital expenditures for the remainder of fiscal 2018 were $14.5 million to $19.5 million, associated with three to five additional openings and two to three relocations. Management expected available cash, operating cash flow, and borrowing capacity to cover working-capital needs and planned capital expenditures for at least 12 months. It anticipated moderating new-store growth compared with recent years.
Management cited competitive pressure, economic and regional conditions, consumer preference changes, product-safety concerns and recalls, new-store ramp-up, and higher lease costs as risks. The company said it expected near-term gross-margin benefits from sourcing efficiencies may be limited by its pricing commitments and competition. It also reported that adoption of the new lease-accounting standard is expected to materially increase reported lease liabilities and right-of-use assets. Routine legal proceedings were disclosed; management did not expect currently pending matters to have a material adverse effect. No material changes to the prior annual-report risk factors were reported.
Important facts for investors to verify
- Whether comparable-store sales momentum persists and how much is driven by promotions versus sustainable traffic and basket growth.
- Whether gross-margin pressure from promotional pricing, product mix, and occupancy costs continues, and whether operating profitability recovers.
- Normalized earnings and cash generation excluding the one-time tax-remeasurement benefit.
- Store-opening and relocation execution, capital spending, and the effect of new stores on returns and liquidity.
- Lease obligations, debt-facility availability and covenant headroom, and the balance-sheet impact of lease-accounting adoption.