Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2017 Form 10-Q
Period: Three months ended December 31, 2016; comparative period is the three months ended December 31, 2015. Financial statements are unaudited. The company operated 131 stores in 19 states at quarter-end, versus 107 a year earlier.
Financial performance and liquidity
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $183.6 million | $167.8 million | +9.4% |
| Gross profit / margin | $52.2 million / 28.4% | $48.3 million / 28.8% | Margin down 0.4 percentage points |
| Operating income / margin | $4.2 million / 2.3% | $6.7 million / 4.0% | Down 37.8% |
| Net income / diluted EPS | $2.1 million / $0.09 | $3.7 million / $0.17 | Net income down 45.0% |
| EBITDA (non-GAAP) | $11.3 million | $12.7 million | Down 11.4% |
| Cash from operations | $14.1 million | $9.5 million | Up $4.6 million |
Comparable-store and daily average comparable-store sales fell 0.6%, versus growth of 3.6% in the prior-year quarter. Mature-store sales declined 2.3%. The comparable-sales decline reflected lower transaction counts (down 0.8%), partly offset by a 0.2% increase in average transaction size; average comparable-store transaction size was $36.17.
Gross margin contracted as occupancy costs rose relative to sales, reflecting higher lease expenses at newer-format and relocated stores, weaker mature-store sales, and fixed rent costs. Product-margin improvements and a higher dietary-supplement sales mix partly offset higher shrink. Store expenses increased 16.6% and rose to 22.8% of sales from 21.4%, primarily due to salary-related expenses, depreciation, and other store costs. Interest expense increased 50.5%, mainly from higher average revolver borrowings, more capital leases, and less capitalized interest. The effective tax rate declined to 35.2% from 38.0%, partly due to tax credits.
Cash and cash equivalents were $7.1 million at December 31, 2016. The company had $27.1 million drawn on its $45.0 million revolving facility and $16.9 million available, net of $1.0 million in letters of credit; it reported compliance with debt covenants. Capital and financing lease obligations totaled $31.8 million. Contractual operating-lease payments were $515.7 million undiscounted over their stated terms. Operating cash flow benefited from working-capital changes, including accrued expenses; property and equipment purchases were $13.1 million. A sale-leaseback generated $2.6 million of proceeds.
Material changes and unusual items
- Sales growth was driven by $16.9 million of additional sales from new stores, partly offset by a $1.1 million decrease in comparable-store sales. Five stores opened during the quarter.
- Store count increased 22.4% year over year, while weaker comparable and mature-store sales and higher store expenses reduced profitability and margins.
- On October 7, 2016, the company sold a store building and leased it back for an initial 15-year term. The approximately $0.5 million loss was deferred and will be amortized over the lease term.
- The company reported rent payments to entities related to non-independent directors: approximately $0.3 million to Chalet Properties, $0.1 million to the Isely Family Land Trust, and less than $0.1 million to FTVC LLC during the quarter.
Outlook, risks, and contingencies
Management planned 15–20 new store openings in FY2017; five had opened by December 31, and one additional Texas store opened afterward. It also planned three store relocations during FY2017. Planned capital expenditures for the remainder of FY2017 were approximately $26.9–$34.9 million for 10–15 additional openings and the relocations. Management believed cash, operating cash flow, and available borrowing capacity would fund working capital and planned capital expenditures for at least 12 months. A typical new store was expected to require approximately $2.2 million of upfront investment.
Management cited increased competition, internally generated competition from openings in existing markets, and economic pressure in markets affected by lower oil and natural-gas prices as factors weighing on sales. It also noted risks from fixed lease costs, changing consumer preferences, product-safety concerns, recalls, and regulatory changes. A new disclosed risk was that changes to NAFTA or other trade agreements, or higher tariffs, could raise costs or limit availability of foreign-sourced products. The company said pending legal matters were not expected to have a material adverse effect. Disclosure controls were reported effective, with no material quarterly change in internal controls.
Important facts for investors to verify
- Whether comparable-store sales and transaction trends stabilize, and how new-store growth affects existing-store sales and profitability.
- Whether occupancy, labor, and other store-cost increases continue to pressure margins, and whether planned openings meet expected investment and return levels.
- Available revolver capacity, covenant compliance, and the cash demands of capital spending, debt, and substantial lease commitments.
- The effect of trade-policy or tariff changes on sourcing, product availability, and costs.
- The accounting and balance-sheet implications of the company’s lease portfolio; management expected the forthcoming lease standard to have a significant balance-sheet impact.