Natural Grocers by Vitamin Cottage, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. This is an annual filing, not a standalone fourth-quarter filing; fourth-quarter figures below are unaudited. The company operated 72 natural and organic grocery and dietary-supplement stores in 13 states and reported one business segment. KPMG issued an unqualified opinion on the consolidated financial statements.
Financial performance and key metrics
| Metric | FY2013 | FY2012 | Change or context |
|---|---|---|---|
| Net sales | $430.7 million | $336.4 million | Up 28.0%; new stores added $58.2 million and comparable-store sales contributed $36.1 million |
| Comparable-store sales | 10.8% | 11.6% | Growth remained strong but eased year over year |
| Gross profit / margin | $125.7 million / 29.2% | $99.1 million / 29.4% | Profit increased; margin declined 0.2 percentage points |
| Operating income / margin | $19.1 million / 4.4% | $12.0 million / 3.6% | Operating margin improved 0.8 percentage points |
| Net income attributable to Natural Grocers | $10.6 million | $6.6 million | Up 58.7%; diluted EPS was $0.47 versus $0.30 |
| EBITDA | $32.6 million | $21.9 million | Up 48.5%; EBITDA margin was 7.6% versus 6.5%. EBITDA is a non-GAAP measure. |
| Net cash from operations | $25.7 million | $25.2 million | Up 2.0% |
| Cash and cash equivalents | $8.1 million | $17.3 million | Down $9.2 million; FY2013 investing outflows exceeded operating cash generation |
| Total debt, as defined by the company | $19.8 million | $5.8 million | Primarily capital and financing lease obligations; no revolving-credit borrowings at year end |
Fourth-quarter FY2013 net sales were $115.2 million, operating income $4.6 million, and net income $2.2 million. The filing presents quarterly data but does not provide a clear narrative comparison of fourth-quarter results with the prior-year quarter.
Gross margin pressure reflected a shift toward lower-margin products and higher bulk-product production costs following the distribution-center relocation. Store and administrative expenses declined as a share of sales, supporting the improvement in operating margin. Interest expense rose to $2.2 million, largely because more store leases were treated as capital or financing leases; the company noted that this accounting classification also affects reported EBITDA and margins.
Liquidity, investment and obligations
- At September 30, 2013, current assets were $59.9 million and current liabilities were $38.4 million. Cash was $8.1 million, restricted cash $0.5 million, and available-for-sale securities $1.1 million.
- The $15.0 million revolving facility was undrawn at year end. On December 12, 2013, the company amended and extended the facility to January 31, 2017, with an option to seek up to $10.0 million of additional commitments. The filing says the facility is secured and subject to covenants.
- Operating cash flow was $25.7 million; investing cash use was $34.6 million, principally for property and equipment. The company planned $35–$37 million of FY2014 capital expenditures.
- Contractual obligations included $208.9 million of minimum operating-lease payments and $43.8 million of capital and financing lease payments. These commitments are important alongside the reported debt balance.
Material changes, outlook and risks
- The company opened 13 stores in FY2013, taking the total to 72. It planned 15 openings and two remodels in FY2014; three of the planned stores had opened by the filing date, and nine additional leases had been signed.
- Management expected to continue expanding at or above recent levels, improve margins through scale and operating efficiencies, and implement a human-resources information system in FY2014. It cautioned that new stores, higher lease costs and the expanded distribution center could weigh on results in the near term. No specific earnings or comparable-sales guidance was provided.
- Comparable-store sales growth was driven by a 5.9% increase in daily average transaction count and a 4.9% increase in average transaction size. Management cited stronger consumer confidence and spending as supportive factors.
- Key risks include execution and profitability of store expansion; intense competition and changing consumer preferences; reliance on UNFI, which supplied approximately 47% of purchases (and its Albert’s Organics subsidiary approximately 8%); regional concentration in Colorado and Texas; product safety and regulatory exposure; and long-term lease commitments.
- The Isely family controlled 57.6% of common stock, and the company qualified as an NYSE “controlled company,” allowing exemptions from certain governance requirements. The company did not anticipate paying dividends in the foreseeable future.
- Management reported effective internal control over financial reporting as of year end and said a previously identified material weakness related to lease accounting was remediated. The company remained an emerging growth company and its auditor was not required to attest to internal-control effectiveness.
Important facts for investors to verify
- Whether new-store openings achieve targeted sales, payback periods and cash-on-cash returns, and whether the FY2014 expansion plan remains on track.
- Whether comparable-store growth and margins can be sustained as growth moderates and product mix, sourcing, occupancy and distribution costs change.
- The effect of capital and financing lease accounting on reported debt, interest expense, operating margins and non-GAAP EBITDA; also assess total contractual lease commitments.
- Liquidity and covenant capacity under the amended credit facility, including the availability and terms of any additional commitments.
- Exposure to UNFI and regional concentration, as well as any significant product-safety, regulatory, legal or self-insurance developments.