Natural Grocers by Vitamin Cottage, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020. Although the request refers to 2020 Q4, this is an annual filing; quarterly figures below identify the quarter ended September 30, 2020. The company operates natural and organic grocery and dietary supplement stores, with 159 stores in 20 states at year-end.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,036.8 million | $903.6 million |
| Comparable-store sales growth | 12.0% | 3.1% |
| Gross profit / gross margin | $283.1 million / 27.3% | $238.8 million / 26.4% |
| Operating income / margin | $27.7 million / 2.7% | $16.8 million / 1.9% |
| Net income / diluted EPS | $20.0 million / $0.89 | $9.4 million / $0.42 |
| Operating cash flow | $66.5 million | $37.4 million |
| Capital expenditures | $26.8 million | $30.0 million |
| Cash at year-end | $28.5 million | $6.2 million |
- FY2020 EBITDA was $58.9 million (5.7% of sales) and Adjusted EBITDA was $59.6 million (5.7%). Both are non-GAAP measures; the filing cautions they are not substitutes for GAAP results or cash flow.
- At September 30, 2020, the company had no borrowings under its revolving credit facility and $48.7 million available, net of letters of credit. It reported $400.1 million of total debt in selected data, primarily lease obligations—not outstanding credit-facility borrowings. The balance sheet shows $357.8 million of operating lease liabilities and $42.3 million of finance lease liabilities.
- Current assets were $143.4 million and current liabilities $129.2 million. Cash increased by $22.3 million during the year.
Material changes and quarterly results
- Sales rose 14.7% year over year, driven by $111.0 million of comparable-store sales growth and $22.5 million of new-store sales. Comparable-store growth reflected a 17.2% increase in average transaction size, partly offset by a 4.5% decrease in daily transaction count. Management attributed the strong year substantially to customer response to COVID-19 and related mandates.
- Gross margin improved 0.9 percentage point, primarily due to lower occupancy and shrink costs as a percentage of sales and improved product margin. Operating income increased 65.5%; net income increased 112.5%. Lower interest expense partly reflected the lease-accounting transition and reduced average credit-facility borrowings.
- For the quarter ended September 30, 2020, net sales were $264.2 million and net income was $3.7 million, versus $227.2 million and $1.4 million, respectively, in the prior-year quarter. Diluted EPS was $0.16 versus $0.06.
- The company adopted ASC 842 leases accounting on October 1, 2019, recording $359.6 million of operating lease assets and $377.8 million of operating lease liabilities at transition. Adoption materially increased reported assets and liabilities and changed the classification of certain lease costs.
- Cash dividends of $0.07 per share were paid each quarter in FY2020. After year-end, the board approved a special $2.00-per-share dividend and a regular $0.07 dividend, payable December 16, 2020. The company expected to draw $35.0 million under a newly established term loan to fund part of the special dividend.
Outlook, commentary and risks
- Management planned five to six store openings and three to five relocations in FY2021, with approximately $28 million to $35 million in capital expenditures. One new store had opened after year-end; leases had been signed for three additional locations.
- Management sees longer-term opportunities to expand the store base, comparable sales and profitability, while noting that future sales and margins depend on competition, economic conditions, customer behavior and COVID-19 developments. It cautioned that FY2020’s elevated sales may not persist after the pandemic subsides.
- COVID-19 increased sales and average transaction size, but also raised labor and safety costs and caused product shortages and delivery delays. The company reported that all stores remained open and that supply disruptions had moderated, though some products remained scarce or intermittently unavailable.
- Material risks include reliance on UNFI, which supplied approximately 66% of FY2020 purchases; significant lease commitments; competitive price and online-delivery pressure; regional concentration, especially Colorado and Texas; and potential food-safety, product-labeling, regulatory, cyber and labor risks.
- As of September 30, 2020, the company was in compliance with credit-facility covenants. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Whether the pandemic-driven sales gains, particularly larger baskets and lower shopping frequency, persisted in subsequent periods.
- The post-year-end $2.00 special dividend, the expected $35.0 million term-loan draw, and the effect of the dividend and new debt on liquidity and planned investment.
- The composition and cash burden of lease liabilities, including approximately $500.2 million of undiscounted future lease payments disclosed at year-end.
- UNFI contract renewal and the company’s ability to secure alternative supply if deliveries or vendor relationships are disrupted.
- Execution and returns on the planned store openings, relocations and FY2021 capital spending.