Business context and reporting period
Natural Grocers by Vitamin Cottage, Inc. operates natural and organic grocery and dietary-supplement stores. This unaudited Form 10-Q covers fiscal Q1 2013, the three months ended December 31, 2012, and compares results with the three months ended December 31, 2011. The company had 61 stores in 12 states at quarter-end, versus 51 a year earlier.
Financial and operating performance
| Metric | Q1 2013 | Prior-year quarter |
|---|---|---|
| Net sales | $95.8 million | $74.8 million |
| Gross profit / gross margin | $27.8 million / 29.0% | $21.6 million / 28.9% |
| Operating income / margin | $3.8 million / 4.0% | $2.0 million / 2.7% |
| Net income | $2.2 million | $1.3 million |
| Net income attributable to Natural Grocers / diluted EPS | $2.2 million / $0.10 | $990,000 / $0.04 |
| Cash provided by operating activities | $2.3 million | $4.3 million |
| Cash used in investing activities | $9.0 million | $4.3 million |
Sales rose 28.1%; comparable-store sales increased 12.9%, reflecting 8.3% transaction-count growth and 4.2% higher average transaction size. Store expenses fell to 21.1% of sales from 22.0%, while administrative expenses declined to 3.5% from 3.6%. EBITDA, a non-GAAP measure, was $6.8 million versus $4.3 million; lease accounting for newer stores increased reported EBITDA as a percentage of sales by about 30 basis points.
At December 31, 2012, cash and cash equivalents were $10.3 million and available-for-sale securities totaled $1.9 million. Working capital was approximately $23.4 million, based on current assets of $53.2 million and current liabilities of $29.8 million. The company had no revolving-credit borrowings and $15.0 million available under its facility. Related-party notes payable were $219,000. Capital lease finance and capital lease obligations totaled approximately $15.8 million on the balance sheet. Total assets were $133.4 million and total liabilities were $58.2 million.
Material changes versus the prior comparable period
- Net income attributable to the company increased 124.3%; the prior-year quarter included $269,686 attributable to BVC’s noncontrolling interest. The company acquired the remaining 45% interest in BVC in July 2012 and owned 100% in the current quarter.
- Gross margin edged up 0.1 percentage point. Management cited improved product margin across departments, partly offset by product mix and higher bulk-product production costs following the distribution-center relocation.
- Operating cash flow declined 46.0%, mainly because of working-capital timing, including accounts-payable payments. Capital expenditures increased, and cash declined by $7.0 million during the quarter.
- Four open stores were accounted for as capital lease finance obligations in the current period; prior-period leases were operating leases. This changed expense presentation and increased interest and depreciation costs.
Outlook, risks and notable items
- Management planned 12 store openings in fiscal 2013: two opened during the quarter, one opened January 22, 2013, and ten additional openings were planned for the remaining nine months. It also planned one relocation and two remodels.
- Planned capital expenditures for the remaining nine months of fiscal 2013 were approximately $16.2 million to $21.2 million. Management expected cash, operating cash flow and available credit to cover working capital and planned capital needs for at least 12 months. No specific sales or earnings guidance was provided.
- Management identified competition, consumer and economic conditions, new-store execution and profitability, and costs related to growth and the expanded distribution center as factors that could affect results. It noted that public-company costs may rise and scale benefits may not improve gross margin in the near term.
- Operating lease commitments totaled $128.2 million; total contractual obligations were $165.7 million, including capital-lease payments, construction commitments and related-party debt. These commitments are not equivalent to balance-sheet debt.
- The company disclosed a material weakness in internal control over financial reporting related to lease accounting and concluded disclosure controls were ineffective at December 31, 2012. Remediation efforts included hiring lease-accounting expertise, consulting support, process improvements and work to establish an internal-audit function.
- Management said pending legal proceedings were not expected to have a material adverse effect. From January 1, 2013, cash deposits were insured by the FDIC only up to $250,000 per financial institution, creating potential exposure for balances above that limit.
Important facts for investors to verify
- Whether the lease-accounting material weakness is remediated and whether controls become effective.
- Execution, timing and funding of the 10 remaining planned fiscal 2013 store openings and related capital expenditures.
- Cash-flow conversion and working-capital trends, given lower operating cash flow and elevated investment spending.
- Lease obligations, operating-lease commitments, credit-facility covenant compliance and the related-party note maturity in October 2013.
- How comparable-store growth, margins and distribution-center costs develop; reported EBITDA is non-GAAP and is affected by lease accounting.