Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Quarter and six months ended March 31, 2013. The company operates natural and organic grocery and dietary-supplement stores; it had 65 stores in 13 states, versus 53 a year earlier. Results are unaudited and interim.
Financial performance
- Revenue: Second-quarter net sales were $106.5 million, up 25.4%; six-month sales were $202.3 million, up 26.6%. Growth reflected new-store sales and comparable-store sales growth of 8.1% for the quarter and 10.4% for the half year. Adjusted for selling-day and Easter timing, comparable-store sales grew 10.6% and 11.6%, respectively.
- Profit and margins: Second-quarter operating income was $5.5 million, up 24.9%, and net income was $3.2 million, up 15.8% from $2.8 million. Net income attributable to Natural Grocers was $3.2 million versus $2.5 million, reflecting its purchase of BVC’s remaining noncontrolling interest in 2012. Six-month operating income rose 44.6% to $9.3 million; net income rose 34.7% to $5.4 million, and parent-attributable net income rose 56.5% to $5.4 million. Diluted EPS was $0.14 for the quarter and $0.24 for six months, versus $0.11 and $0.16.
- Gross margin was 29.9% for the quarter versus 30.2%, and 29.5% for six months versus 29.6%. Operating margin was 5.2% for the quarter, unchanged, and 4.6% for six months versus 4.0%. Management cited lower-margin product mix and higher occupancy costs; purchasing improvements partly offset these factors. Store and administrative expenses declined as a percentage of sales, while pre-opening costs increased.
- Cash flow: Six-month operating cash flow was $10.7 million, down from $13.9 million. Investing cash use was $18.3 million, mainly reflecting store and distribution-center capital spending; financing cash use was $0.2 million. Cash and cash equivalents declined $7.8 million to $9.5 million.
- Liquidity and obligations: At March 31, cash was $9.5 million, restricted cash $0.5 million, and available-for-sale investments $1.8 million. The $15 million revolving facility was undrawn; the company reported covenant compliance. Related-party debt was $154,000, due October 2013. Recognized capital-lease obligations totaled approximately $16.0 million; contractual payments on operating and capital leases, construction commitments, debt and interest totaled $157.8 million. Total assets were $144.5 million and total liabilities $65.9 million.
Changes, outlook and risks
- The company opened six stores in the first half, versus four in the prior-year period, and reported four openings in the second quarter versus two. It planned 13 openings for FY2013; one additional store opened after March 31. Management also planned a relocation and two remodels during the rest of the fiscal year.
- Management projected $10.3–$15.3 million of capital expenditures for the remaining six months of FY2013 and estimated approximately $2.3 million of initial net investment per new store. It stated that cash, operating cash generation and available credit should cover working capital and planned capital spending for at least 12 months. These are forward-looking estimates, not guarantees.
- Management cited competitive and economic pressures, variability in new-store profitability, and possible near-term cost effects from the expanded distribution facility and public-company expenses. It said sourcing efficiencies may not improve gross margin in the near term. Results are also affected by store-opening timing and lease accounting.
- Control weakness: A previously identified material weakness in accounting for lease transactions remained relevant. Management concluded disclosure controls were ineffective as of March 31, 2013, while stating it believed the financial statements fairly presented results. Remediation included additional personnel, consulting support, improved procedures and development of an internal-audit function.
- The company reported no material change in its Form 10-K risk factors and did not expect pending legal proceedings to have a material adverse effect. It disclosed insurance purchases involving an agency operated by a related person and related-party leases.
Important facts for investors to verify
- Whether comparable-store growth and new-store openings continue, and how store maturation affects margins and cash generation.
- Progress in remediating lease-accounting controls and whether disclosure controls become effective.
- Actual capital spending, lease commitments and financing needs relative to management’s estimates and the undrawn credit facility.
- How product mix, occupancy costs and the expanded distribution facility affect gross margin.
- The effects of BVC’s acquisition on year-over-year earnings comparisons and the company’s effective tax rate.