Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2023 10-Q
Business context and period. The filing covers the unaudited quarter ended December 31, 2022, compared with the quarter ended December 31, 2021. Natural Grocers operates natural and organic grocery and supplement stores; it had 165 stores in 21 states at quarter-end and one reporting segment.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $280.5 million | $277.3 million | Up 1.1% |
| Gross profit / margin | $78.7 million / 28.1% | $78.7 million / 28.4% | Margin down 0.3 percentage points |
| Operating income / margin | $6.4 million / 2.3% | $12.0 million / 4.3% | Down 46.6% |
| Net income | $4.4 million | $8.9 million | Down 50.6% |
| Diluted EPS | $0.19 | $0.39 | Down $0.20 |
| Operating cash flow | $21.2 million | $12.1 million | Up $9.1 million |
Daily average comparable-store sales rose 0.5%, reflecting a 1.7% increase in average transaction size and a 1.2% decline in transaction count. Comparable-store average transaction size was $46.10. EBITDA, a non-GAAP measure, was $13.5 million, down 29.6%; Adjusted EBITDA was $13.8 million, down 29.1%.
Cash, liquidity and debt
- Cash and cash equivalents were $16.9 million at December 31, 2022, up from $12.0 million at September 30, 2022. Operating cash flow was $21.2 million; investing cash outflow was $11.3 million and financing cash outflow was $5.0 million.
- Capital expenditures on property and equipment were $10.4 million for the quarter. Management attributed stronger operating cash flow mainly to working-capital changes.
- The company had no revolving-facility borrowings and $48.9 million available, net of $1.1 million in letters of credit. Term-loan debt was $13.7 million. The facility matures November 13, 2024; the company reported covenant compliance.
- Reported lease liabilities totaled $371.0 million, including $322.1 million for operating leases and $48.9 million for finance leases. These are substantial obligations alongside debt.
- The company paid a $0.10-per-share quarterly dividend. The board approved another $0.10 dividend for payment in March 2023. No shares were repurchased during the quarter.
Material changes and management commentary
- Sales growth was modest and reflected new-store sales and price inflation, partly offset by a closed store and moderation of strong prior-year pandemic trends. One new store opened during the quarter; three opened year over year, bringing the count to 165.
- Gross margin pressure was attributed primarily to lower product margin from higher shrink, freight and distribution costs. Store expenses rose 7.2%, with higher wage rates contributing to expenses increasing to 22.7% of sales from 21.4%. Administrative expenses increased 13.2%, driven mainly by salaries and benefits, technology amortization and legal expenses.
- Management estimated annualized cost inflation of approximately 8% in Q1 FY2023. It cited labor-market challenges and supply disruptions, and said pricing strategies had helped mitigate inflation to date.
- The credit facility was amended in December 2022 to replace LIBOR-based benchmark provisions with SOFR-based provisions and to permit up to $12.5 million of annual dividends and share repurchases, subject to facility terms.
Outlook, risks and contingencies
- Management planned four to six new store openings in fiscal 2023 and one to two relocations or remodels. It expected $16.7 million to $23.7 million in capital expenditures during the remainder of the fiscal year and estimated average upfront investment of approximately $2.4 million per new store.
- Management said cash, operating cash flow and revolver availability should be sufficient for working capital and planned spending, debt repayment, dividends and repurchases for the next 12 months and foreseeable future. This is forward-looking and subject to business and economic conditions.
- Risks discussed include inflation and recessionary conditions, wage and labor availability, supply-chain interruptions, competition, changing consumer preferences and execution of planned store growth. Fixed rent and occupancy costs may limit cost leverage.
- A putative wage-and-hour class and collective action involves allegations that assistant store managers were misclassified. There were 100 opt-in plaintiffs; the company disputes the claims, and stated it could not reasonably estimate a possible loss range. Management did not believe pending proceedings would materially adversely affect the company.
- No material changes to the risk factors in the FY2022 Form 10-K were reported. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether sales, transaction counts and margins improve as inflation, pricing and consumer behavior evolve.
- Whether higher labor, shrink, freight and distribution costs continue to pressure profitability.
- Execution, timing and funding of planned store openings and the remaining fiscal 2023 capital-expenditure program.
- Liquidity and debt-service capacity, including significant lease obligations and the November 2024 credit-facility maturity.
- Developments in the wage-and-hour litigation and any change in the company’s ability to estimate potential exposure.