Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended December 31, 2015; comparison is with the three months ended December 31, 2014 unless noted. The company operates natural and organic grocery and dietary-supplement stores and had 107 stores in 18 states at quarter-end, up from 91 a year earlier.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $167.8 million | $145.9 million | +15.0% |
| Gross profit / margin | $48.3 million / 28.8% | $42.3 million / 29.0% | Profit +14.2%; margin -0.2 percentage points |
| Operating income / margin | $6.7 million / 4.0% | $6.4 million / 4.4% | Income +3.9%; margin -0.4 percentage points |
| Net income / diluted EPS | $3.7 million / $0.17 | $3.6 million / $0.16 | Net income +5.2% |
| EBITDA, non-GAAP | $12.7 million; 7.6% of sales | $11.4 million; 7.8% of sales | +11.5%; margin -0.2 percentage points |
| Net cash from operations | $9.5 million | $6.9 million | +37.5% |
| Capital expenditures | $10.2 million | $7.6 million | Higher by $2.6 million |
Sales growth reflected $16.6 million from new stores and a $5.3 million, or 3.6%, increase in comparable-store sales. Comparable-store growth came from transaction count (+1.9%) and average transaction size (+1.7%); comparable-store average transaction size was $36.61. Mature-store sales increased 0.4%, slower than the prior-year 2.8% increase. The company opened four stores and relocated two during the quarter.
Gross margin declined primarily because occupancy costs rose as a share of sales, especially at newer stores; improved product margins partly offset that pressure. Store expenses rose 15.6%, slightly faster than sales, while pre-opening and relocation expenses increased 64.3% to $0.9 million. Administrative expenses increased 12.5%, but declined as a share of sales to 2.8% from 2.9%. The effective tax rate was 38.0%, versus 37.5%.
Cash, liquidity and obligations
- Cash and cash equivalents were $2.1 million at December 31, 2015, down from $2.9 million at September 30, 2015. Operating cash flow was $9.5 million; investing cash outflow was $10.2 million; financing cash outflow was $0.1 million.
- No borrowings were outstanding under the then-current credit facility. Of its $25.0 million capacity, $24.0 million was available after $1.0 million of letters of credit. The company reported compliance with its covenants.
- Capital and financing lease obligations totaled $27.7 million, including $0.4 million current. Total contractual obligations were $459.8 million, including $412.7 million of operating lease payments.
- Deferred income tax liabilities increased to $9.6 million from $6.1 million. Cash flow included $3.5 million of deferred tax expense, a non-cash adjustment.
Outlook, developments and risks
- Management planned 23 new store openings in fiscal 2016, including four opened in the quarter, and expected to spend approximately $44 million to $46 million on capital expenditures during the remainder of the fiscal year for 19 planned openings, one relocation and two remodels. The company estimated an average upfront investment of approximately $2.2 million per new store.
- Management expected cash, operating cash generation and borrowing capacity to meet working-capital needs and planned capital expenditures for at least the next 12 months. This is a forward-looking expectation, not a guarantee.
- On January 28, 2016, after quarter-end, the company entered a new secured revolving credit facility of $30 million, with an option to increase capacity by up to $20 million subject to lender commitments. It matures January 31, 2021 and includes customary covenants, including a leverage ratio.
- Management cited competition and general economic conditions as factors moderating comparable- and mature-store sales growth. Other risks include new-store profitability and higher lease costs, shifts in consumer preferences, product-safety concerns and recalls, and competition for customers, products and locations.
- A putative customer class action related to a fiscal 2015 data-security incident was pending. The company said it would defend the claims, but could not predict class certification, outcome or potential loss. Management said it did not believe pending proceedings would have a material adverse effect.
- The filing also discloses leases with entities owned by board members and related family members. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether comparable-store and mature-store growth, which slowed year over year, sustains or improves amid increased competition.
- Whether planned openings and capital spending meet expectations, and how new-store occupancy and operating costs affect margins and cash needs.
- The effect of the new credit agreement’s covenants, borrowing terms and secured status on financial flexibility.
- Updates on the data-security class action, including certification, potential exposure and any changes in management’s assessment.
- The extent to which operating cash flow benefited from non-cash deferred taxes and working-capital timing; cash flow should be considered alongside substantial lease and capital commitments.