Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2024 10-Q
Reporting period: Three months ended December 31, 2023. The company operates natural and organic grocery and supplement stores and reported one operating segment. It had 167 stores in 21 states at quarter-end, up from 165 a year earlier.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $301.8 million | $280.5 million | +7.6% |
| Gross profit / margin | $88.8 million / 29.4% | $78.7 million / 28.1% | Margin +1.3 percentage points |
| Operating income / margin | $10.8 million / 3.6% | $6.4 million / 2.3% | +68.3% |
| Net income | $7.8 million | $4.4 million | +76.0% |
| Diluted EPS | $0.34 | $0.19 | — |
| Operating cash flow | $16.6 million | $21.2 million | Down $4.6 million |
| Capital expenditures for property and equipment | $11.7 million | $10.4 million | — |
Comparable-store daily average sales rose 6.2%, reflecting a 3.4% increase in transaction count and a 2.7% increase in average transaction size. Comparable-store average transaction size was $47.31. Sales growth also included new-store sales, partly offset by sales lost from closed stores. Grocery represented 70% of sales, dietary supplements 20%, and body care, pet care and other 10%.
Gross margin improved due to product margin gains attributed to pricing and promotions, plus occupancy-cost leverage. Store expenses rose 6.9% but declined as a share of sales to 22.5%; administrative expenses rose 14.0%, primarily on higher compensation, and increased to 3.1% of sales. Net interest expense was $0.9 million, versus $0.8 million. The effective tax rate was approximately 21.7%.
EBITDA, a non-GAAP measure, was $18.3 million, up 35.4%; Adjusted EBITDA was $18.8 million, up 35.5%. Management cautions that these measures have limitations and are not substitutes for GAAP results or measures of cash available for investment.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $13.6 million at December 31, 2023, down from $18.3 million at September 30, 2023. Current assets were $143.3 million versus current liabilities of $158.9 million.
- The company had $18.4 million drawn on its revolving facility and $5.7 million remaining on its term loan. Revolving availability was $55.1 million, net of $1.5 million in letters of credit. The term loan matures November 2024; the revolving facility matures November 2028. The company reported compliance with credit-facility covenants.
- Operating and finance lease liabilities totaled $357.6 million, including $39.6 million current. These lease obligations are significant alongside borrowings.
- Operating cash flow decreased 21.6%, primarily due to less cash generated from working capital. Investing cash use was $11.8 million; financing cash use was $9.5 million. Cash fell by $4.7 million during the quarter.
- The company paid a regular $0.10-per-share quarterly dividend and a special $1.00-per-share dividend. The special dividend was funded with available cash and revolving-facility borrowings. The board subsequently approved another $0.10-per-share dividend, payable March 20, 2024.
Outlook, risks and notable items
- Management plans to open four to six stores and relocate or remodel four to six stores in fiscal 2024. Two stores opened and one was relocated or remodeled during the quarter; one additional store opened after quarter-end. Planned capital expenditures for the remainder of fiscal 2024 are approximately $18.2 million to $27.2 million.
- Management expects cash, operating cash generation and revolver availability to support working capital, planned capital expenditures, debt repayment, repurchases and dividends for the next 12 months and foreseeable future. This is forward-looking and subject to business and economic conditions.
- Management estimated annualized cost inflation of approximately 3% in Q1 FY2024. Labor shortages and wage costs, supply disruptions, competition, consumer spending and preferences, inflation or recession, and construction constraints may affect results. Management said pricing strategies had mitigated inflation’s impact to date but could not predict future effects.
- A November 2023 credit-facility amendment increased revolving commitments from $50 million to $75 million, extended the revolver maturity, and permitted a one-time dividend of up to $25 million. Commitments are scheduled to decline by $2.5 million annually until maturity, subject to the agreement’s terms.
- The quarter included a $0.1 million long-lived-asset impairment charge related to stores closed in June 2023. Management reported no pending legal proceeding expected to have a material adverse effect, and no material change in disclosed risk factors. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Whether comparable-store sales growth and improved gross margin persist, and how much reflects pricing versus transaction growth.
- How operating cash flow, working capital and capital spending develop as store expansion proceeds.
- Revolver utilization, borrowing costs, covenant headroom and repayment or refinancing of the term loan due in November 2024.
- The sustainability of regular and special dividends given the quarter’s substantial dividend outflow and increased revolving borrowings.
- Execution of fiscal 2024 store plans and the effect of labor costs, inflation, competition and supply availability on margins.