Natural Grocers by Vitamin Cottage, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. The company operated natural and organic grocery and dietary-supplement stores, with 118 stores in 19 states at quarter-end, compared with 99 stores a year earlier.
Financial performance
| Metric | Three months ended June 30, 2016 | Year-over-year change | Nine months ended June 30, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $179.3 million | +13.0% | $524.5 million | +13.4% |
| Gross profit / margin | $50.9 million / 28.4% | Margin: 29.1% to 28.4% | $150.8 million / 28.8% | Margin: 29.3% to 28.8% |
| Operating income / margin | $4.0 million / 2.2% | Operating income: -44.5% | $17.2 million / 3.3% | Operating income: -25.6% |
| Net income / diluted EPS | $2.7 million / $0.12 | Net income: -38.3% | $10.0 million / $0.44 | Net income: -24.8% |
| EBITDA (non-GAAP) | $10.4 million | -17.7% | $35.8 million | -7.3% |
Sales growth was primarily attributable to new stores: $17.7 million of quarterly growth and $52.4 million of nine-month growth. Comparable-store sales rose 1.8% in the quarter and 2.1% for nine months, slowing from 5.8% in each prior-year period. Daily average comparable-store sales rose 0.7% and 1.8%, respectively. Mature-store sales declined 0.2% for the quarter and 0.4% for nine months.
Quarterly operating costs grew faster than sales. Store expenses rose 19.7% for the quarter and 18.3% for nine months; pre-opening and relocation expenses rose 86.3% and 74.2%, respectively. The company attributed margin pressure to higher occupancy costs at newer and relocated stores, fixed rent obligations, increased shrink, and higher store labor and depreciation. Product margins improved across most categories, partly offsetting these pressures.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $20.7 million, down from $29.2 million. Investing cash use was $39.3 million, compared with $30.4 million, primarily reflecting higher property and equipment spending. Financing provided $18.3 million, including $18.8 million in net credit-facility borrowings.
- Cash declined $0.2 million during the nine months to $2.7 million. Merchandise inventory was $86.4 million at June 30, 2016, up from $74.8 million at September 30, 2015.
- The amended revolving credit facility provides up to $45 million and matures January 31, 2021. At June 30, $18.8 million was outstanding, $25.2 million was available after reserving $1.0 million for letters of credit, and the company reported compliance with covenants.
- Capital and financing lease obligations totaled $30.9 million. Contractual operating-lease payments were $485.2 million; total contractual obligations disclosed were $554.1 million. The company said it expected cash, operating cash flow and borrowing availability to cover working capital and planned capital expenditures for at least 12 months.
- The company spent $39.3 million on property and equipment in the nine-month period. It planned a further $13–15 million of capital expenditures for the remainder of fiscal 2016.
Outlook, risks and notable items
- Management planned 23 new store openings in fiscal 2016; 15 had opened by June 30, and eight were planned for the fourth quarter. It reported two additional openings after quarter-end and 19 leases signed for planned openings in fiscal 2016 and 2017. Management expected the pace of store growth to moderate somewhat over the foreseeable future. The filing does not provide clear earnings or revenue guidance.
- Management cited competition, new-store cannibalization, and economic pressure in certain markets tied to lower oil and natural-gas prices as factors slowing comparable-store growth; it said some regional pressure appeared to be moderating. New stores, higher lease costs and the time required for stores to become profitable could affect results.
- A two-year share-repurchase program of up to $10 million was authorized in May 2016. The company repurchased 10,300 shares for approximately $139,000 at an average $13.46 per share through June 30.
- A customer class action relating to a 2015 data-security incident had received a magistrate judge’s recommendation to dismiss without prejudice. The company intended to defend the case, could not predict the court’s decision or potential loss, and had accrued no liability.
- The company disclosed related-party leases with entities associated with non-independent directors and their families. It also expected the new lease-accounting standard to have a significant balance-sheet impact because of its operating leases.
- Management concluded disclosure controls were effective at June 30, 2016. No material changes to internal control over financial reporting were reported during the quarter.
Important facts for investors to verify
- Whether comparable-store sales and mature-store sales stabilize amid competition and new-store cannibalization.
- Whether store openings meet management’s plans and achieve expected sales and profitability, and how expansion affects margins and cash needs.
- Capital spending, inventory growth, operating cash flow and borrowing needs; confirm continuing compliance with credit-facility covenants.
- The scale of lease commitments and the eventual balance-sheet effect of adopting the new lease-accounting standard.
- Developments in the data-security litigation and any resulting exposure; review the related-party lease arrangements.