Natural Grocers by Vitamin Cottage, Inc. — FY2016 Form 10-K
Business and period. Specialty retailer of natural and organic groceries and dietary supplements, with one reporting segment. This filing covers the fiscal year ended September 30, 2016; quarterly figures below include the fourth quarter. The company operated 126 stores in 19 states, up from 103 stores a year earlier.
Financial performance
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net sales | $705.5 million | $624.7 million | +12.9% |
| Gross profit / margin | $201.8 million / 28.6% | $182.1 million / 29.2% | Margin down 0.6 percentage points |
| Operating income / margin | $20.4 million / 2.9% | $28.6 million / 4.6% | Down 28.8% |
| Net income | $11.5 million | $16.2 million | Down 29.2% |
| Diluted EPS | $0.51 | $0.72 | Down $0.21 |
| EBITDA (non-GAAP) / margin | $45.9 million / 6.5% | $50.0 million / 8.0% | Down 8.1% |
| Operating cash flow | $28.8 million | $41.0 million | Down 29.7% |
| Cash capital expenditures | $53.8 million | $36.8 million | Up $17.0 million |
Comparable-store sales increased 1.7% (1.4% on a daily-average basis), versus 5.9% in FY2015; mature-store sales declined 0.7%. Sales growth was driven mainly by $70.5 million of new-store sales, with $10.3 million from comparable stores. Grocery represented 66.5% of sales, dietary supplements 22.2%, and body care, pet care and other 11.3%.
FY2016 fourth quarter: Sales were $181.0 million versus $162.4 million in Q4 FY2015. Operating income was $3.2 million versus $5.6 million, and net income was $1.5 million versus $2.9 million.
Liquidity, debt and investment
At September 30, 2016, cash was $4.0 million and total assets were $282.2 million. The company had $27.4 million drawn on its $45.0 million revolving credit facility, with $16.6 million available to borrow after facility reservations, including $1.0 million of letters of credit. It reported compliance with facility covenants. The facility is secured by substantially all company assets, matures January 2021, and restricts additional debt, certain transactions and cash dividends.
Total debt as presented in selected financial data was $59.3 million, including the revolver and capital/financing lease obligations; balance-sheet lease obligations were $31.9 million. Operating lease commitments totaled $504.6 million, while total contractual obligations were $586.6 million. Net cash used in investing activities was $53.7 million; financing activities provided $26.0 million, primarily from net revolver borrowings.
Material changes, outlook and risks
- Profitability weakened despite higher sales: gross margin fell, store expenses rose to 22.1% of sales from 21.2%, and pre-opening/relocation costs increased to $6.0 million from $3.8 million. Management cited higher occupancy costs at newer and relocated stores, increased shrink, salary-related costs, and expansion activity.
- Management attributed slower comparable-sales growth to greater competition, cannibalization from new stores, and discounts through the {N}Power loyalty program; depressed oil and gas prices also pressured some markets, with those pressures said to be moderating somewhat.
- For FY2017, management planned 15–20 new stores and three relocations, with three stores already opened after year-end and 18 new-store leases signed for FY2017–FY2018. Planned FY2017 capital expenditures were $40–$48 million; expected average upfront investment per new store was approximately $2.2 million. Management expected available cash, operating cash flow and borrowing capacity to cover working capital and planned capital expenditures for at least 12 months.
- Key risks include execution and returns on rapid store expansion, competition and sales deceleration, significant fixed lease commitments, reliance on United Natural Foods Inc. for approximately 59% of purchases, product supply and regulatory risks, and floating-rate debt. A 100-basis-point interest-rate change was estimated to affect annual interest expense by $0.2 million.
- The company repurchased 67,970 shares for approximately $0.8 million during FY2016 under its $10 million program. It paid no dividends and said it did not anticipate dividends in the foreseeable future.
- A customer class-action complaint relating to a FY2015 data security incident was dismissed without prejudice; in November 2016 the plaintiff agreed not to appeal, and the company agreed not to seek legal-cost reimbursement. The company had begun deploying chip-and-PIN terminals and expected full deployment by FY2017 Q2.
- After year-end, the company completed a sale-leaseback of a store building for approximately $2.6 million and anticipated a $0.3 million loss, deferred over the 15-year lease term. Management expected the new lease accounting standard to significantly affect the balance sheet.
Most important facts for investors to verify
- Whether comparable-store sales and mature-store trends stabilize, and how much new-store growth contributes to revenue and profit.
- Whether gross margin and operating margin recover as occupancy, labor, shrink and pre-opening costs rise.
- Cash generation relative to planned capital spending, share repurchases, lease payments and revolver borrowings; also confirm covenant headroom and borrowing availability.
- The performance and payback of recently opened stores, and the execution pace and capital needs of the FY2017 pipeline.
- Exposure to the dominant supplier, regulatory or product-safety developments, and the consequences of any future data-security event.
The filing reports audited financial statements with an unqualified auditor opinion and management’s conclusion that internal control over financial reporting was effective as of September 30, 2016. EBITDA is a non-GAAP measure and should be considered alongside GAAP results and cash flows.