Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2017 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2017. The company operates natural and organic grocery and dietary-supplement stores; it had 135 stores in 19 states, up from 112 a year earlier.
Financial performance
| Metric | Three months ended March 31, 2017 | Six months ended March 31, 2017 |
|---|---|---|
| Net sales | $192.2 million; up 8.3% | $375.8 million; up 8.9% |
| Gross profit / margin | $54.2 million / 28.2% | $106.3 million / 28.3% |
| Operating income / margin | $5.5 million / 2.9% | $9.7 million / 2.6% |
| Net income / diluted EPS | $3.0 million / $0.13 | $5.1 million / $0.23 |
| EBITDA (non-GAAP) | $12.8 million | $24.1 million |
For the six months, operating cash flow was $22.4 million, investing cash flow was negative $21.0 million, and financing cash flow was negative $1.2 million. Cash increased $0.2 million to $4.2 million. Capital expenditures were $23.6 million; the company also received $2.6 million from a sale-leaseback.
At March 31, cash was $4.2 million and borrowing availability under the $45 million revolving facility was $17.5 million, after $1.0 million of letters of credit. Facility borrowings were $26.5 million; capital and financing lease obligations were $31.9 million. Current assets were $101.7 million and current liabilities were $75.1 million. The company reported covenant compliance.
Changes versus prior year
- Sales growth came from new stores: new-store sales increased $17.8 million in the quarter and $34.7 million in the six-month period, partly offset by comparable-store sales declines of $3.0 million and $4.1 million, respectively.
- Comparable-store sales fell 1.7% in the quarter and 1.2% for six months; mature-store sales fell 3.1% and 2.7%, respectively. Management cited increased competition, cannibalization from new stores in existing markets, and economic pressure in markets affected by weak oil and gas prices and broader uncertainty.
- Despite higher sales, quarterly gross margin declined from 29.1% to 28.2%, and six-month margin from 28.9% to 28.3%. Higher occupancy costs at newer and relocated stores and lower mature-store sales weighed on margins.
- Net income fell 16.2% in the quarter and 31.0% for six months. Six-month operating income declined 26.3%; higher store expenses and interest expense contributed. EBITDA was up 1.5% for the quarter but down 5.0% for six months.
- Operating cash flow rose from $18.0 million to $22.4 million for six months, principally reflecting working-capital changes, despite lower net income.
Outlook, risks and unusual items
- Management planned 15–17 store openings in FY2017; nine had opened by March 31, and one additional store opened afterward. It expected to spend $16.4–$20.4 million on capital expenditures during the remainder of FY2017 for 6–8 openings and one relocation. Estimated upfront investment averages approximately $2.2 million per new store.
- Management said cash, operating cash flow and available credit should fund working capital and planned capital expenditures for at least the next 12 months. It expects store growth to moderate somewhat over the foreseeable future.
- Risks include intense competition, consumer and regional economic conditions, fixed rent costs, new-store profitability and possible changes to trade agreements, tariffs or a border-adjustment tax that could raise costs on foreign-sourced products. Management warned results may differ materially from forward-looking expectations.
- A store-building sale-leaseback generated approximately $2.6 million of proceeds and a deferred $0.5 million loss, to be amortized over the 15-year initial lease term. The company also disclosed leases with entities related to non-independent directors.
- Operating-lease commitments totaled approximately $522.0 million, including $39.2 million due within one year. Management did not believe pending legal matters would have a material adverse effect.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends stabilize, and how new-store growth affects existing locations.
- Whether margin pressure from occupancy costs and store expenses continues as the company expands.
- Funding needs and covenant headroom relative to planned capital spending, lease obligations and available revolving credit.
- The potential impact of competition, regional economic weakness, and trade or tariff changes on sales and product costs.
- EBITDA is a non-GAAP measure; the filing cautions that it excludes important costs and is not a substitute for GAAP results or cash flow.