Natural Grocers by Vitamin Cottage, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended September 30, 2022. The filing also reports unaudited fourth-quarter results for the three months ended September 30, 2022; this is an annual filing, not a standalone quarterly report.
Business context
Natural Grocers operates specialty natural and organic grocery and dietary-supplement stores. At year-end it had 164 stores in 21 states and one bulk-food repackaging and distribution facility. Grocery represented 70% of FY2022 sales, dietary supplements 21%, and body care, pet care and other products 9%.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $1,089.6 million | $1,055.5 million |
| Gross profit / gross margin | $304.9 million / 28.0% | $292.2 million / 27.7% |
| Operating income / margin | $30.2 million / 2.8% | $28.3 million / 2.7% |
| Net income | $21.4 million | $20.6 million |
| Diluted EPS | $0.94 | $0.91 |
| Operating cash flow | $39.7 million | $53.9 million |
| Cash and cash equivalents at year-end | $12.0 million | $23.7 million |
Sales increased 3.2%; daily average comparable-store sales rose 2.6%, reflecting a 2.1% increase in average transaction size and a 0.4% increase in transaction count. Comparable-store average transaction size was $45.11. Gross margin improved 0.3 percentage points, while store expenses remained 22.2% of sales. Administrative expenses rose 11.3% to $31.6 million. The effective tax rate increased to 23.1% from 21.0%.
Fourth-quarter net sales were $274.2 million and net income was $2.2 million. The quarterly table reports diluted EPS of $0.09; the filing text does not provide a separate narrative discussion of Q4 performance.
Capital expenditures were $28.0 million; net cash used in investing activities was $31.1 million and financing activities used $20.2 million. Operating cash flow fell 26.3%, primarily because working capital provided less cash, including a $13.2 million increase in inventory. EBITDA was $58.1 million and Adjusted EBITDA was $62.2 million; both are non-GAAP measures.
Debt, liquidity and capital allocation
At September 30, 2022, the company had $15.7 million outstanding on its term loan, no revolving-facility borrowings, and $48.9 million available under its $50 million revolving facility after letters of credit. The term loan matures November 2024; the credit facility matures November 2024. The company reported compliance with its financial covenants. Lease liabilities totaled $377.7 million, including $329.8 million operating and $47.9 million finance lease liabilities; these are distinct from the term-loan debt.
Management said cash, operating cash flow and revolving availability should cover working capital and planned expenditures, debt service, dividends and repurchases for the next 12 months and foreseeable future. Quarterly dividends were $0.10 per share in FY2022; a further $0.10 dividend was approved after year-end. No shares were repurchased in FY2022; $8.3 million remained under the authorization.
Changes, outlook and material risks
- Three stores opened, two were relocated or remodeled, and one closed during FY2022; year-end count was 164, versus 162 a year earlier. Management planned four to six new stores and one to two relocations or remodels in FY2023, with $28–35 million of planned capital expenditures.
- Management estimated cost inflation of approximately 5% for FY2022 and 7% in Q4. Higher product, freight, fuel and labor costs, supply disruptions, labor shortages and pricing pressure remain concerns. Management said pricing strategies had mitigated inflation’s effect to date, but future effects on customers and profitability were uncertain.
- United Natural Foods Inc. and subsidiaries supplied approximately 67% of FY2022 purchases. The company was exploring a longer-term extension beyond the automatic renewal term ending May 31, 2023; management cited alternative supply methods, including self-distribution.
- Other key risks include intense competition, economic weakness and changing consumer preferences; product safety, labeling and supplement regulation; weather and supply-chain disruption; geographic concentration in Colorado and Texas; cybersecurity; wage and energy costs; and substantial fixed lease obligations.
- A putative wage-and-hour collective action involving assistant store managers had 101 opt-in plaintiffs and was in discovery. The company disputed the claims and said it could not reasonably estimate a possible loss. Management did not believe pending proceedings would materially affect the financial statements.
- FY2022 included $2.9 million of long-lived asset impairment charges. Auditors identified impairment recoverability as a critical audit matter because forecasts of store sales and operating expenses involved significant judgment. KPMG issued unqualified opinions on the financial statements and internal controls; controls were reported effective.
Important facts for investors to verify
- Whether comparable-store growth and margins hold as inflation, competition and consumer spending evolve.
- Progress on the UNFI supply agreement and the company’s ability to mitigate supplier concentration and product shortages.
- Execution of the FY2023 store-opening and capital-expenditure plans, including new-store returns and any cannibalization.
- Cash generation and working-capital trends, particularly inventory, alongside the ability to fund dividends and investment while meeting debt and lease commitments.
- Developments in the assistant-manager wage-and-hour litigation and any changes to product, dietary-supplement or CBD regulation.