Natural Grocers by Vitamin Cottage, Inc. — Q3 FY2015 Form 10-Q
Business context and period. The company operates natural and organic grocery and dietary-supplement stores. This unaudited filing covers the fiscal quarter and nine months ended June 30, 2015; comparisons are with the periods ended June 30, 2014. It operated 99 stores in 17 states at quarter-end, up from 84 stores a year earlier.
Financial performance
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Net sales | $158.7 million, up 18.4% | $462.3 million, up 20.1% |
| Comparable-store sales | Up 5.8% | Up 5.8% |
| Gross profit / gross margin | $46.1 million / 29.1% (28.8% prior year) | $135.3 million / 29.3% (unchanged) |
| Operating income / margin | $7.2 million / 4.6% | $23.1 million / 5.0% |
| Net income / diluted EPS | $4.3 million / $0.19 | $13.3 million / $0.59 |
| EBITDA (non-GAAP) | $12.6 million, up 19.4%; 8.0% of sales | $38.6 million, up 23.7%; 8.3% of sales |
For the quarter, comparable-store growth reflected a 3.3% increase in daily average transaction count and a 2.4% increase in average transaction size. For the nine-month period, the corresponding drivers were 3.3% and 2.5%. New-store sales contributed $16.9 million of quarterly and $55.0 million of nine-month sales growth.
Operating cash flow was $29.2 million for the nine months, versus $23.5 million. Investing cash outflow was $30.4 million, including $5.6 million paid for an acquisition and $24.8 million of property and equipment purchases. Cash declined $1.9 million to $3.2 million. At June 30, the company had no credit-facility borrowings, $14.0 million available under its $15.0 million facility after letters of credit, and was in covenant compliance. Capital and financing lease obligations totaled $27.6 million on the balance sheet; scheduled payments were $48.1 million. Operating-lease commitments totaled $363.7 million.
Material changes and notable items
- Store count rose from 84 to 99 year over year. The company opened 12 stores in each nine-month comparison period, and four in the current quarter versus three a year earlier.
- Gross margin improved 0.3 percentage points in the quarter but was flat for the nine-month period. Management cited stronger product margins, partly offset by higher occupancy costs, particularly at newer stores.
- Store expenses increased 18.8% in the quarter and 20.9% year to date; as a share of sales, they edged up to 21.1% and 21.0%, respectively. Administrative expense fell to 2.7% of nine-month sales from 2.9%.
- The December 2014 acquisition of substantially all assets of Nature’s Pantry, a single Missouri store, was recorded with approximately $4.7 million of goodwill. The store was rebranded; acquisition-related cash paid in the nine months was $6.1 million, including contingent consideration.
- Effective tax rates declined to 32.8% for the quarter and 36.1% year to date, largely due to favorable return-to-provision adjustments and tax-credit effects.
Outlook, risks, and contingencies
Management planned 17 store openings in FY2015 and expected five additional openings during the remaining three months, along with one relocation and one remodel. Planned remaining-year capital expenditures were approximately $16–17 million. Management estimated an average upfront investment of approximately $2.2 million per new store and said available cash, operating cash generation, and credit availability should cover working capital and planned capital expenditures for at least 12 months.
Management expects to keep expanding and pursuing comparable-store growth, but noted competition, consumer-preference shifts, broader economic conditions, new-store profitability and rising lease costs could affect results. It anticipated continued higher lease costs; expected near-term sourcing efficiencies might not improve gross margin. The company also described digital initiatives, including home delivery in select markets and planned completion of its customer appreciation program rollout during FY2015.
The filing reports routine legal proceedings and investigations; management did not expect pending matters to have a material adverse effect. No material changes to the prior annual report’s risk factors or market-risk position were reported. Related-party leases with entities associated with non-independent directors and family members remain in place. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether planned FY2015 openings, the remaining-year capital spending estimate, and the stated liquidity outlook were achieved.
- How much sales and profit growth comes from new stores versus comparable-store performance, and whether comparable-store trends persist.
- The impact of occupancy costs, long-term operating-lease commitments, and capital/financing lease obligations on margins and cash needs.
- The final acquisition purchase-price allocation, goodwill assumptions, and performance of the acquired Missouri store.
- The extent to which the lower reported tax rates reflect nonrecurring tax adjustments rather than ongoing operating improvement.
- Related-party lease terms and any material developments in legal matters or other contingencies.