Natural Grocers By Vitamin Cottage, Inc. quarterly report, Q1 FY2022

Natural Grocers by Vitamin Cottage, Inc. — Q1 Fiscal 2022

Business context and period: This unaudited Form 10-Q covers the three months ended December 31, 2021, compared with the three months ended December 31, 2020. Natural Grocers operates natural and organic grocery and dietary-supplement stores; it had 162 stores in 20 states at quarter-end.

Financial performance and liquidity

Metric	Q1 FY2022	Q1 FY2021
Net sales	$277.3 million	$265.0 million
Gross profit / margin	$78.7 million / 28.4%	$73.0 million / 27.6%
Operating income	$12.0 million	$5.2 million
Net income / diluted EPS	$8.9 million / $0.39	$3.6 million / $0.16
Cash from operations	$12.1 million	$12.3 million
Cash used in investing	$5.3 million	$3.7 million
Cash used in financing	$5.1 million	$12.5 million

• Sales rose 4.6%; daily average comparable-store sales increased 3.8%, from 12.7% growth in the prior-year quarter. Comparable sales reflected transaction count growth of 3.0% and average transaction size growth of 0.8%; comparable-store average transaction size was $45.34.
• Gross margin expanded 0.8 percentage points. Store expenses fell to 21.4% of sales from 22.8%, which management attributed to sales leverage and a more normalized operating environment. Operating income increased 131.1% and net income increased 145.5%.
• EBITDA, a non-GAAP measure, was $19.1 million versus $12.8 million; Adjusted EBITDA was $19.5 million versus $13.5 million. The company changed its Adjusted EBITDA definition to exclude share-based compensation and recast the prior-period figure. These measures are not substitutes for GAAP results or cash flow.
• Operating cash flow was slightly lower despite higher earnings, primarily because of increased working-capital requirements. Capital expenditures were $4.7 million for property and equipment, with additional spending on intangibles.
• At December 31, cash was $25.3 million. The company had $49.0 million available under its revolving facility, with no revolving borrowings and $1.0 million of letters of credit. Term-loan borrowings were $21.7 million. The credit facility matures November 2024; the company reported compliance with its financial covenants.
• Lease obligations were substantial: $334.7 million operating and $41.9 million finance lease liabilities, including current portions. Total reported lease liabilities were $376.5 million; the filing also disclosed $34.1 million of binding minimum payments for leases not yet commenced.

Material changes, outlook and risks

• Sales growth was attributed to customer response to pandemic-related trends, marketing and promotions, and increased engagement in the {N}power loyalty program. Management also cited improved product margin and occupancy leverage.
• The company plans four to six new stores and three to four relocations or remodels in fiscal 2022. It expected approximately $22.7 million to $29.7 million of capital expenditures for the remainder of the fiscal year and an average upfront investment of about $2.2 million per new store. No stores opened in the quarter; one was relocated/remodeled. Six additional stores were planned for fiscal 2022 and beyond.
• Management said cash, operating cash generation and available revolver capacity should meet working-capital needs, planned capital expenditures, debt repayment, repurchases and dividends for the next 12 months and foreseeable future. This is forward-looking and subject to risks.
• Risks discussed include COVID-19 uncertainty and possible changes in customer demand; supply-chain shortages and delivery delays; retail labor shortages and costs; inflation and broader economic conditions; competition, consumer preference shifts, and availability of construction materials and equipment. Management cautioned that elevated pandemic-related sales may not continue.
• A former assistant store manager’s wage-and-hour case remains in discovery. The FLSA collective action had 101 plaintiffs after 56 opt-in plaintiffs were ordered to individual arbitration. Plaintiffs had not quantified damages, and the company said it could not estimate a possible loss range; it intends to defend the case. Management did not believe pending proceedings would materially affect the financial statements.
• The prior-year quarter included a $2.00-per-share special dividend, contributing to $46.7 million of dividends paid, versus $2.3 million paid in the current quarter. The current quarter’s regular dividend was $0.10 per share; a further $0.10 dividend was approved after quarter-end for payment in March 2022.
• The company recorded $0.1 million of impairment related to an early store relocation. No share repurchases occurred in the quarter. Disclosure controls were assessed as effective, and the filing reported no material changes in internal control over financial reporting.

Important facts for investors to verify

• Whether comparable-store sales growth and margins persist as pandemic-related demand changes, and how sales, transaction counts and basket size develop.
• Execution and funding of the fiscal 2022 store-opening and remodeling plan, including the stated capital-expenditure range and construction constraints.
• Cash generation and working-capital needs relative to dividends, capital spending, term-loan repayments and substantial lease commitments.
• Developments in the wage-and-hour litigation, including any change in plaintiff count, damages estimates or expected loss assessment.
• The assumptions behind non-GAAP EBITDA and Adjusted EBITDA, including the exclusion of share-based compensation and other specified items.