Natural Grocers by Vitamin Cottage, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014; the filing also presents fourth-quarter results. The company operates one reporting segment: natural and organic retail stores. It ended the year with 87 stores in 14 states.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $520.7 million | $430.7 million | +20.9% |
| Gross profit / margin | $151.5 million / 29.1% | $125.7 million / 29.2% | Profit +20.5%; margin down 0.1 percentage point |
| Operating income / margin | $24.2 million / 4.7% | $19.1 million / 4.4% | Income +27.0% |
| Net income / diluted EPS | $13.5 million / $0.60 | $10.6 million / $0.47 | Net income +27.7% |
| EBITDA / margin | $41.5 million / 8.0% | $32.6 million / 7.6% | +27.2% |
| Operating cash flow | $31.7 million | $25.7 million | +23.5% |
Annual sales growth reflected approximately $66.0 million from new stores and $24.0 million from comparable-store growth. Comparable-store sales rose 5.6%, down from 10.8% in FY2013; transaction count increased 2.3% and average transaction size 3.2%. Fifteen stores opened, versus 13 in FY2013.
Fourth-quarter net sales were $135.7 million, operating income $5.6 million, net income $3.2 million and diluted EPS $0.14. The comparable quarter of FY2013 recorded sales of $115.2 million, operating income of $4.6 million, net income of $2.2 million and diluted EPS of $0.10.
Liquidity, cash flow and obligations
- Cash and cash equivalents were $5.1 million at year-end, down from $8.1 million. Current assets were $67.1 million and current liabilities $49.9 million.
- Cash from operations was $31.7 million; investing activities used $34.9 million, including $36.5 million of property and equipment purchases. Financing activities provided $0.1 million. Cash therefore declined $3.0 million during the year.
- Total debt, as defined by the company, was $22.0 million, consisting of capital and financing lease obligations. No credit-facility borrowings were outstanding; $14.3 million remained available after a $0.7 million letter of credit.
- The $15.0 million revolving facility matures January 31, 2017. The company reported compliance with its covenants. Contractual operating-lease payments totaled $269.7 million, in addition to $42.9 million of capital and financing lease payments.
Changes, outlook and material risks
- Gross margin edged lower as occupancy costs rose, reflecting higher lease costs at newer stores; improved product margins and distribution-center efficiencies partly offset this pressure. Administrative expenses fell as a share of sales, from 3.1% to 2.8%.
- Management planned 18 store openings in FY2015, three relocations and two remodels, with expected capital expenditures of $45–$47 million. Four FY2015 stores had opened by the filing date. Management expected cash, operating cash flow and credit availability to fund planned needs for at least 12 months; it anticipated a credit-facility draw around the first quarter because of tax-payment and new-store timing.
- Management cited increasing competition, which had slowed comparable-sales growth in some markets, and noted that sourcing efficiencies might not improve near-term gross margin. The company also described its margin-improvement plans, including scale benefits, cost discipline and labor management. The filing does not provide specific financial guidance for FY2015.
- Key exposures include reliance on UNFI and its Albert’s Organics subsidiary for approximately 56% of purchases combined; geographic concentration in Colorado and Texas; availability and cost of organic and pasture-based dairy products; new-store execution; long-term lease commitments; and food-safety, product-compliance, regulatory and self-insurance risks.
- After year-end, the company completed an acquisition of a Missouri natural-food retailer for approximately $6.2 million before final adjustments. No pending legal proceeding was expected by management to have a material adverse effect. KPMG issued an unqualified audit opinion; management concluded internal controls were effective.
Most important facts for investors to verify
- Whether comparable-store sales and transaction trends remain resilient amid heightened competition.
- Whether new stores meet targeted economics and the FY2015 opening and capital-spending plans are achieved.
- How occupancy costs, lease commitments and capital/financing leases affect reported margins, debt and cash generation.
- Whether the company can maintain supply continuity and pricing given supplier concentration and its stricter product standards.
- The final purchase-price allocation and subsequent performance of the Missouri acquisition, and the effect of planned credit-facility usage on liquidity.