Natural Grocers by Vitamin Cottage, Inc. — Q3 Fiscal 2018 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2018; fiscal year ends September 30. The company operated 147 stores in 19 states, up from 140 stores at September 30, 2017.
Financial performance
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Net sales | $213.1 million; +9.5% year over year | $631.5 million; +10.7% |
| Comparable-store sales | +5.2% | +5.7% |
| Gross profit / margin | $56.8 million / 26.7%, versus 27.1% | $168.3 million / 26.6%, versus 27.9% |
| Operating income | $3.8 million, versus $1.7 million | $11.6 million, versus $11.4 million |
| Net income / diluted EPS | $2.0 million / $0.09, versus $0.6 million / $0.03 | $10.6 million / $0.47, versus $5.7 million / $0.25 |
| EBITDA (non-GAAP) | $11.1 million, +20.7% | $33.8 million, +1.3% |
Quarterly comparable-sales growth reflected higher transaction counts (+4.0%) and average transaction size (+1.1%). For the nine-month period, transaction count rose 4.6% and average transaction size 1.0%. Management attributed sales gains to marketing and promotional pricing, increased {N}power membership, and better store leadership, training, and processes.
Gross margin contracted amid promotional pricing, a shift toward lower-margin products, and—over the nine-month period—higher occupancy costs at newer-format and relocated stores. Store expenses as a share of sales improved to 22.1% from 23.1% in the quarter and to 22.0% from 22.7% year to date. Interest expense increased, primarily from additional capital leases and higher credit-facility rates.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $30.3 million, down from $35.9 million. Capital expenditures were $16.7 million; investing cash outflow was $16.5 million, compared with $34.2 million a year earlier.
- Cash was $7.2 million at June 30, 2018. The company had $16.3 million drawn on its $50 million revolving facility and $32.7 million available, net of $1.0 million in letters of credit. It reported compliance with facility covenants; maturity is January 2021.
- Capital and financing lease obligations totaled $41.2 million, including $0.7 million current. Accounts-payable and accrued-expense balances were $58.2 million and $17.6 million, respectively. Total liabilities were $163.2 million.
- Cash and cash equivalents increased $0.7 million during the nine months. Financing activities used $13.1 million, including net revolver repayments and lease payments.
Changes, outlook, and risks
- Nine-month net income included an approximately $4.3 million non-cash tax benefit from remeasurement of deferred taxes following the Tax Cuts and Jobs Act. Excluding this benefit, management reported net income of $6.2 million and diluted EPS of $0.28. The reported tax benefit drove much of the year-over-year increase in net income.
- Management planned eight to nine new store openings for fiscal 2018; seven had opened by June 30. It expected one to two additional relocations during the rest of the year and $5.3–$8.3 million of remaining fiscal-2018 capital expenditures. Management said available cash, operating cash flow, and revolver capacity should fund working capital and planned capital spending for at least 12 months.
- Management expects store growth to moderate somewhat from recent years. It cited competition, economic conditions, fixed rent commitments, new-store profitability and costs, and consumer preferences as factors that could affect growth and margins. It also noted higher costs for certain metal products from tariffs and warned that additional tariffs or trade-policy changes could affect costs or product availability.
- Pending ordinary-course legal matters were not expected by management to have a material adverse effect. The company disclosed related-party leases with entities owned by non-independent directors and family members; rent expense was broadly consistent with the prior-year period.
- Adoption of the new lease standard was expected to materially increase reported lease assets and liabilities. The company planned to adopt the revenue-recognition standard in fiscal 2019 and was assessing issues including returns, gift-card breakage, and customer incentives.
Important facts for investors to verify
- Whether comparable-sales momentum is sustainable and whether promotional activity continues to pressure product margins.
- How the $4.3 million tax-remeasurement benefit affects comparisons with recurring earnings; reported nine-month EPS was $0.47 versus $0.28 excluding that benefit.
- Store-opening and relocation execution, new-store returns, and the impact of lease costs and capital/financing lease accounting.
- Cash generation relative to capital spending, lease obligations, and planned share repurchases; the repurchase authorization had approximately $8.3 million remaining.
- Potential tariff and trade-policy effects on sourcing costs and availability, and the eventual balance-sheet impact of lease-standard adoption.