Natural Grocers by Vitamin Cottage, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2023. The company operates natural and organic grocery and supplement stores; it had 166 stores in 21 states at quarter-end. Financial amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended March 31, 2023 | Six months ended March 31, 2023 |
|---|---|---|
| Net sales | $283.2 million, up 4.2% year over year | $563.7 million, up 2.7% |
| Gross profit / margin | $82.5 million / 29.1% | $161.2 million / 28.6% |
| Operating income / margin | $8.4 million / 3.0% | $14.8 million / 2.6% |
| Net income / diluted EPS | $5.9 million / $0.26 | $10.3 million / $0.45 |
| Operating cash flow | Not separately reported for the quarter | $34.9 million, versus $27.6 million |
Quarterly comparable-store sales rose 2.7%, driven by 2.7% higher transaction count; average transaction size was unchanged. For the six months, comparable-store sales rose 1.6%, reflecting increases in both transaction size and count. Gross margin improved year over year in both periods, but higher store expenses—particularly labor costs—reduced operating and net margins.
Six-month EBITDA, a non-GAAP measure, was $29.1 million versus $34.9 million; Adjusted EBITDA was $30.6 million versus $35.6 million. For the quarter, EBITDA was $15.6 million versus $15.8 million, while Adjusted EBITDA was $16.8 million versus $16.1 million.
Cash, debt and liquidity
- Cash and cash equivalents were $19.0 million at March 31, 2023, up from $12.0 million at September 30, 2022. Cash from operations was $34.9 million for the half-year; investing activities used $17.8 million and financing activities used $10.2 million.
- The company spent $17.0 million on property and equipment during the six months. It expects to spend a further $10.2 million to $17.2 million on capital expenditures during the remainder of fiscal 2023.
- Term-loan borrowings were $11.7 million; there were no revolver borrowings and $48.9 million was available under the $50 million revolving facility, net of letters of credit. The company reported compliance with its credit-facility covenants. The facility matures November 13, 2024.
- Lease liabilities totaled $361.6 million, including $313.4 million for operating leases and $48.2 million for finance leases. The filing reports $447.4 million of undiscounted future lease payments.
- Management believes cash, operating cash generation and revolver availability will be sufficient for working capital, planned capital expenditures, debt service, dividends and repurchases for the next 12 months and foreseeable future.
Material changes and management commentary
- Sales growth reflected comparable-store and new-store sales, partly offset by sales lost from a store closed in fiscal 2022. Management attributed first-half growth in part to retail price inflation and noted moderation of pandemic-related trends.
- Management estimated annualized cost inflation of approximately 8% in the second quarter. It said pricing strategies had mitigated inflation to date, but future effects on customer behavior, sales and profitability remain uncertain.
- Store expenses rose faster than sales, reflecting higher wage rates and a $0.9 million impairment charge for a store planned to close in June 2023. The company also plans to close a second store in June.
- The company opened two stores in the first half and plans four to six new stores and two to three relocations or remodels in fiscal 2023. It had signed leases for five additional stores planned for fiscal 2023 and beyond.
- The board approved a quarterly dividend of $0.10 per share for payment June 14, 2023. The company repurchased $0.1 million of shares in the quarter.
Risks, contingencies and unusual items
- Management cited labor shortages and wage pressure, supply-chain disruptions and product availability, inflation, competition, and possible changes in consumer preferences as factors that could affect results. Fixed rent and occupancy costs may limit operating leverage.
- A former assistant store manager’s wage-and-hour lawsuit includes 100 opt-in plaintiffs in a federal collective action; 38 individuals also have arbitration claims. A jury trial was scheduled for December 2023. The company disputes the claims and said it cannot reasonably estimate any possible loss.
- Related-party leases with entities associated with Isely family members and non-independent directors are disclosed. On May 3, 2023, two related-party lease amendments extended terms and provided renewal options; annual rent is approximately $0.2 million and $0.3 million, respectively.
- The filing provides operating and capital-spending plans but no full-year sales or earnings forecast. Forward-looking results remain subject to economic, competitive, labor and construction-related uncertainties.
Important facts for investors to verify
- Whether sales and comparable-store growth persist as inflation moderates and pandemic-related comparisons change.
- Whether labor and other store-cost increases continue to outpace sales and pressure operating margins.
- Progress against fiscal 2023 store-opening, closure, relocation and capital-expenditure plans.
- Liquidity, term-loan repayment and refinancing arrangements ahead of the November 2024 credit-facility maturity, together with substantial lease commitments.
- Developments in the wage-and-hour litigation, including class-certification decisions, arbitration claims and any change in the company’s loss assessment.
- Terms and governance of related-party leases, and the sustainability of dividends and share repurchases within credit-facility restrictions.