Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2019 10-Q
Reporting period: Three months ended December 31, 2018; comparisons are with the three months ended December 31, 2017 unless otherwise noted. Fiscal 2019 ends September 30, 2019. The company operates natural and organic grocery and dietary-supplement stores; it had 151 stores in 19 states at quarter-end.
Financial and operating performance
| Metric | Q1 FY2019 | Prior-year period / change |
|---|---|---|
| Net sales | $221.5 million | $202.5 million; up 9.4% |
| Gross profit / margin | $59.1 million / 26.7% | $53.2 million / 26.3% |
| Operating income / margin | $4.0 million / 1.8% | $2.2 million / 1.1% |
| Net income / diluted EPS | $2.2 million / $0.10 | $5.2 million / $0.23 |
| EBITDA (non-GAAP) | $11.3 million; 5.1% of sales | $9.6 million; 4.7% of sales |
| Operating cash flow | $7.5 million | $11.0 million |
| Capital expenditures, cash paid for property and equipment | $11.5 million | $4.9 million |
Comparable-store sales and daily average comparable-store sales rose 5.5%, versus 4.7% a year earlier. The comparable-store increase reflected transaction count growth of 2.3% and average transaction size growth of 3.2%; average comparable-store transaction size was $36.48. Mature-store sales increased 3.6%, versus 1.6%.
At December 31, 2018, cash was $4.5 million, revolving-credit borrowings were $12.7 million, and $36.3 million remained available under the $50 million facility, after $1.0 million of letters of credit. Capital and financing lease obligations totaled $45.7 million, including the current portion; the facility matures January 31, 2021. The company was in compliance with its financial covenants. Total current assets were $107.3 million and current liabilities were $76.8 million.
Material changes and explanation
- Sales increased $19.0 million, driven by $11.1 million of comparable-store growth and $8.3 million from new stores, partly offset by $0.4 million from a store closure. Four stores opened and one closed during the quarter.
- Gross margin improved 0.4 percentage points, primarily from improved product margins and lower occupancy costs as a percentage of sales, partly offset by a shift toward lower-margin products. Store expenses were 22.2% of sales versus 22.3%; administrative expenses were 2.4% versus 2.6%.
- Operating income rose 84.0% to $4.0 million. Net income nevertheless fell 57.6%, mainly because the prior-year quarter included a $4.3 million non-cash tax benefit from deferred-tax remeasurement following U.S. tax reform. Excluding that benefit, prior-year net income was $0.8 million, or $0.04 diluted EPS.
- Operating cash flow declined $3.4 million, which management attributed primarily to increased working capital. Investing cash use rose $6.7 million, mainly because of higher property-and-equipment spending associated with more new-store openings. Cash declined $4.9 million during the quarter.
Outlook, risks and other notable items
- Management planned seven to nine new-store openings for FY2019, including four opened in the quarter, and five to six store relocations, including one completed in the quarter. It expected $16 million to $21 million of capital expenditures for the remainder of FY2019, including three to five additional openings and four to five relocations.
- Management said cash, operating cash flow and available credit should fund working-capital needs and planned capital expenditures for at least the next 12 months. A typical new store requires approximately $2.2 million of upfront investment, including capital expenditures, initial inventory and pre-opening costs.
- Key risks discussed include competitive pressure, economic and consumer-spending conditions, changes in demand for natural and organic products or supplements, product safety and recalls, and the costs and variable profitability of new stores. Management noted that higher lease costs for prime locations are expected to continue and fixed rent obligations may limit cost leverage.
- The company had ordinary-course employment, customer-injury and other legal matters; management did not expect currently pending proceedings to have a material adverse effect. No material changes to the risk factors in the FY2018 Form 10-K were reported. Related-party leases with entities associated with non-independent directors continued.
- The company adopted the new revenue-recognition standard effective October 1, 2018; adoption had no material impact. It expected adoption of the new lease standard in FY2020 to materially increase balance-sheet lease liabilities and right-of-use assets.
Important facts for investors to verify
- Whether comparable-store sales growth and improved gross margin continue, and how much reflects transactions, basket size, promotions and product mix.
- Whether planned store openings and relocations meet investment, timing and profitability expectations, and whether the stated FY2019 capital-expenditure range remains appropriate.
- Working-capital and capital-spending trends, available credit and covenant compliance, particularly given quarter-end cash of $4.5 million.
- The effect of lease obligations and upcoming lease-standard adoption on reported assets, liabilities, expenses and comparability.
- Interpretation of year-over-year net income: the prior-year result included a material one-time, non-cash tax benefit; EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP results or cash flow.