Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended December 31, 2017; comparisons are with the three months ended December 31, 2016 unless otherwise noted. The company operates natural and organic grocery and dietary-supplement stores; it had 142 stores in 19 states at quarter-end.
Financial results
| Metric | Q1 FY2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $202.5 million | $183.6 million | +10.3% |
| Gross profit / gross margin | $53.2 million / 26.3% | $52.2 million / 28.4% | Profit +1.9%; margin down 2.1 percentage points |
| Operating income / margin | $2.2 million / 1.1% | $4.2 million / 2.3% | Income down 47.4% |
| Net income / diluted EPS | $5.2 million / $0.23 | $2.1 million / $0.09 | Net income +151.4% |
| EBITDA (non-GAAP) | $9.6 million | $11.3 million | Down 14.9%; margin 4.7% vs. 6.1% |
| Operating cash flow | $11.0 million | $14.1 million | Down 22.2% |
| Investing cash flow | $(4.9) million | $(10.5) million | Lower capital spending |
| Financing cash flow | $(4.5) million | $(0.5) million | More cash used, including share repurchases |
Comparable-store sales rose 4.7%, versus a 0.6% decline a year earlier. The increase reflected 4.8% growth in daily average transaction count, partly offset by a 0.1% decline in average transaction size; comparable-store average transaction size was $35.54. Mature-store sales increased 1.6%, compared with a 2.3% decrease in the prior-year quarter.
Cost of goods sold and occupancy costs rose 13.6%, faster than sales. Management attributed the gross-margin decline to promotional pricing, a shift toward lower-margin products, and higher occupancy costs at newer-format and relocated stores. Store expenses increased 7.9% but fell to 22.3% of sales from 22.8%; administrative expenses were 2.6% of sales versus 2.7%.
Liquidity, debt and capital
Cash and cash equivalents were $8.1 million at December 31, 2017. The $50.0 million revolving credit facility had $24.6 million outstanding, $24.4 million available after $1.0 million of letters of credit, and matures January 31, 2021. The company reported compliance with its financial covenants. Capital and financing lease obligations totaled $37.7 million, including $0.6 million current. Cash increased $1.6 million during the quarter to $8.1 million.
Quarter capital expenditures were $4.9 million; an additional $1.7 million of property and equipment acquisitions remained unpaid. The company repurchased 101,573 shares for approximately $0.6 million at an average $5.72 per share. The two-year repurchase authorization was up to $10.0 million.
Material changes, outlook and risks
- Reported net income included an approximately $4.3 million non-cash tax benefit from remeasuring deferred tax balances following enactment of the Tax Cuts and Jobs Act. Excluding that benefit, management reported net income of $0.8 million, or $0.04 diluted EPS, versus $2.1 million, or $0.09, a year earlier. The company estimated federal tax rates of approximately 24.3% for FY2018 and 21.0% thereafter; tax calculations remained subject to finalization.
- Management planned eight to 10 new-store openings in FY2018, including two opened in the quarter, and three to four store relocations. One additional store opened after quarter-end. The company planned $20–25 million of capital expenditures for the remainder of FY2018, associated with six to eight additional openings and two to three relocations, and said available cash, operating cash flow and borrowing capacity should fund planned needs for at least 12 months.
- Management cited promotional activity, product mix, new-store occupancy costs and competitive pressure as factors affecting margins and profitability. It also noted economic conditions, consumer preference shifts, product-safety concerns, and new-store ramp-up and lease costs as risks. Competition includes conventional and discount grocers, specialty retailers, online sellers and delivery services.
- The company expects store growth to moderate somewhat from recent years. Adoption of the new lease accounting standard is expected to materially increase reported lease liabilities and right-of-use assets. Management reported no material change in disclosed risk factors, no pending legal proceeding believed likely to have a material adverse effect, and effective disclosure controls as of quarter-end.
Investor facts to verify
- How comparable-store sales and transaction trends develop, and whether promotional activity continues to pressure gross margin.
- Whether operating cash flow can support planned store investment, lease commitments and any further share repurchases.
- Execution of the FY2018 opening and relocation plans, including new-store sales and profitability ramp-up.
- Final tax-reform accounting adjustments and the effect of lease-standard adoption on reported assets, liabilities and results.
- Credit-facility availability, covenant compliance and total obligations, including revolving borrowings and lease liabilities.