Natural Grocers by Vitamin Cottage, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended September 30, 2023. This is an annual filing, not a standalone fourth-quarter report; separate Q4 financial results are not clearly provided in the filing text.
Business context
Natural Grocers operates a single reporting segment focused on natural and organic grocery, dietary supplement, and body-care retail. At year-end, it had 165 stores in 21 states, compared with 164 stores a year earlier. It opened three stores, relocated or remodeled three, and closed two during FY2023. Grocery represented 70% of sales, dietary supplements 21%, and body care, pet care and other products 9%.
Financial results and liquidity
| Metric | FY2023 | FY2022 | Change |
|---|---|---|---|
| Net sales | $1,140.6 million | $1,089.6 million | +4.7% |
| Gross profit / margin | $326.9 million / 28.7% | $304.9 million / 28.0% | Margin +0.7 percentage points |
| Operating income / margin | $31.7 million / 2.8% | $30.2 million / 2.8% | Income +5.0% |
| Net income | $23.2 million | $21.4 million | +8.8% |
| Diluted EPS | $1.02 | $0.94 | Increased |
| Operating cash flow | $64.6 million | $39.7 million | +62.8% |
| Cash and cash equivalents at year-end | $18.3 million | $12.0 million | +$6.3 million |
- Daily average comparable-store sales increased 3.6%, comprising a 1.8% increase in average transaction size and a 1.7% increase in transaction count. Average transaction size was $45.92.
- EBITDA, a non-GAAP measure, was $60.6 million (5.3% of sales), up 4.3%. Adjusted EBITDA was $63.4 million (5.6% of sales), up 2.0%, versus 5.7% of sales in FY2022.
- Capital expenditures, reflected in net cash used in investing activities, were $38.0 million. Net cash used in financing activities was $20.4 million.
- At September 30, 2023, the company had $7.7 million of term-loan debt, no revolving borrowings, and $48.5 million available under its revolving facility. It reported $18.3 million in cash. Current assets of $152.6 million were slightly below current liabilities of $154.0 million.
- Reported lease liabilities totaled $362.5 million, including $311.7 million operating and $50.8 million finance lease liabilities. These commitments are significant relative to the company’s cash and funded debt.
Changes and management commentary
- Sales growth reflected comparable-store gains and new-store sales, partly offset by closures. Management attributed growth to retail price increases, transaction growth, new stores, and marketing initiatives.
- Gross margin improved on product pricing and promotions, partly offset by higher shrink. Store expenses rose 6.3%; labor costs and higher wage rates contributed to store expenses rising to 22.6% of sales from 22.2%.
- Administrative expenses increased 14.0%, driven primarily by compensation, technology amortization, software and legal costs. Net interest expense rose to $3.3 million from $2.4 million.
- Management estimated cost inflation of approximately 7% for FY2023 and 5% in the fourth quarter of FY2023. It said pricing strategies had mitigated the impact to date, but the duration and effects of inflation remain uncertain.
- Operating cash flow increased substantially, primarily because of a greater contribution from working-capital changes. This should be distinguished from the more modest increase in net income.
Outlook, risks and unusual items
- For FY2024, management planned to open four to six stores and relocate or remodel four to six stores. Two new stores had opened after year-end and before the filing. Planned FY2024 capital expenditures were approximately $30–$39 million.
- Management said cash, operating cash flow and revolving borrowing capacity should fund working capital and planned capital expenditures, debt service, repurchases and dividends for the next 12 months and foreseeable future. This outlook is subject to operating and economic conditions.
- On November 16, 2023, the company increased its revolving commitment from $50 million to $75 million, extended revolving-facility maturity to November 2028, and amended terms to permit a one-time dividend. The facility is secured by substantially all company assets and includes financial and operational covenants; the company reported covenant compliance at year-end.
- Also after year-end, the board approved a $1.00-per-share special dividend and a $0.10 quarterly dividend, scheduled for December 13, 2023. The special dividend was to be funded using available cash and revolving borrowings.
- Key risks include dependence on UNFI, which supplied approximately 68% of FY2023 purchases; labor availability and wage inflation; competition and consumer sensitivity to prices; product supply disruptions; regulatory, food-safety and product-claim exposure; cyber and information-system risks; and substantial long-term lease commitments. UNFI’s primary-supplier agreement was extended through September 3, 2028, subject to renewal terms.
- The company recorded $1.3 million of long-lived-asset impairment charges in FY2023, versus $2.9 million in FY2022. The auditor identified recoverability testing for certain long-lived asset groups as a critical audit matter, involving management forecasts of sales and operating expenses.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor concluded internal controls were effective as of September 30, 2023.
- The Isely family and related holders controlled approximately 59% of common stock, and the company qualified as a NYSE “controlled company.” Related-party leases with entities associated with Isely family directors generated $1.2 million of lease expense in FY2023.
Important facts for investors to verify
- Whether comparable-store sales, transaction growth and gross-margin gains persist as inflation, pricing and customer demand evolve.
- How much of the operating-cash-flow improvement reflects sustainable operating performance versus working-capital timing.
- The funding and liquidity effects of the special dividend, planned capital expenditures, debt repayments and continuing quarterly dividends.
- UNFI’s delivery performance and the company’s ability to secure alternatives if supply or contract conditions change.
- Store-level returns, impairment assumptions and the ability to manage lease obligations while expanding and remodeling.
- The filing provides annual FY2023 results, but not a clear standalone set of Q4 revenue, profit, cash-flow or margin figures.