Natural Grocers by Vitamin Cottage, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Quarter ended March 31, 2022; fiscal year ends September 30. Amounts below are in millions of dollars unless stated otherwise. The filing’s interim statements are unaudited.
Business context
Natural Grocers operates natural and organic grocery, body care, and dietary supplement stores. It had 162 stores in 20 states at quarter-end and one reporting segment. No new stores opened in the six months ended March 31; one store was relocated or remodeled. The company reported opening one new store and closing one store after quarter-end.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $271.8 | $259.2 | $549.1 | $524.2 |
| Gross profit | $76.8 | $71.8 | $155.5 | $144.9 |
| Operating income | $8.9 | $6.7 | $20.9 | $11.9 |
| Net income | $6.4 | $4.7 | $15.3 | $8.3 |
| Diluted EPS | $0.28 | $0.21 | $0.67 | $0.37 |
| Operating cash flow | Not separately reported | Not separately reported | $27.6 | $17.3 |
- Q2 sales rose 4.9%; daily average comparable-store sales increased 4.3%, reflecting 2.5% higher average transaction size and 1.8% higher transaction count. For the first half, sales rose 4.7% and comparable sales increased 4.1%.
- Q2 gross margin improved to 28.2% from 27.7%; first-half gross margin was 28.3% versus 27.6%. Management attributed the improvement to product margin and occupancy leverage.
- Q2 operating margin was 3.3% versus 2.6%, and net margin was 2.3% versus 1.8%. First-half operating margin was 3.8% versus 2.3%, and net margin was 2.8% versus 1.6%.
- First-half EBITDA was $34.9 million versus $27.0 million; Adjusted EBITDA was $35.6 million versus $27.9 million. These are non-GAAP measures and should not be treated as substitutes for GAAP results or cash flow.
Cash, debt, and liquidity
- At March 31, cash and cash equivalents were $28.9 million, compared with $23.7 million at September 30, 2021. Current assets were $145.2 million and current liabilities $131.8 million.
- First-half operating cash flow was $27.6 million; investing cash outflow was $12.3 million, including $10.9 million for property and equipment; financing cash outflow was $10.1 million. Cash increased $5.2 million during the period.
- Term-loan borrowings were $19.7 million, with $1.75 million classified as current. No revolving-facility balance was outstanding; $49.0 million remained available after $1.0 million of letters of credit. The credit facility matures November 2024, and the company reported compliance with its financial covenants.
- Lease obligations were substantial: $328.0 million operating and $45.3 million finance lease liabilities. Undiscounted future lease payments totaled $459.9 million; a further $29.9 million of binding minimum payments related to leases not yet commenced.
Changes, outlook, and risks
- Compared with the prior-year quarter, sales, operating income, and net income rose. Administrative expenses increased 28.5% to $8.2 million, while store expenses rose 2.0% to $59.6 million. For the first half, net income increased 83.2%, while administrative expenses increased 13.2%.
- Management cited customer response to pandemic-related trends, retail price inflation, marketing, promotions, and loyalty-program engagement as sales drivers. It said higher inflation had affected product costs and that labor shortages and supply-chain disruptions continued; some products were in short supply or unavailable. Management said pricing strategies had mitigated inflation’s impact to date but could not predict its duration or future effect.
- The company planned four to five new-store openings and two relocations/remodels in FY2022. It expected to spend approximately $15.7–$22.7 million on capital expenditures during the rest of the fiscal year; the filing gave no specific earnings or sales guidance. Management believed cash, operating cash flow, and revolving availability would meet needs for the next 12 months and foreseeable future.
- Key uncertainties include changing consumer demand as pandemic effects subside, inflation and consumer spending, labor availability and costs, product availability, competition, and long-term fixed lease costs. The company warned that pandemic-related effects make near-term performance harder to estimate.
- A pending wage-and-hour case involves alleged assistant-store-manager misclassification. The company disputes the claims and intends to defend the case, but said it cannot reasonably estimate a possible loss range. Management did not believe pending proceedings would materially harm the company.
- After quarter-end, the company approved a $0.10-per-share quarterly dividend and extended its share-repurchase program through May 31, 2024; $8.3 million remained authorized for repurchases. It also entered a 20-year ground lease with Chalet Properties, an Isely-family-related entity, for its Lakewood store and support-center site, with annual rent of approximately $0.3 million and 5% increases every five years.
Most important facts for investors to verify
- Whether comparable-store sales and transaction trends persist as pandemic-related demand changes, and how much sales growth reflects price inflation versus volume.
- Whether gross-margin gains continue amid inflation, supply constraints, and labor-cost pressure, and whether higher administrative expenses persist.
- Actual FY2022 store openings, remodeling activity, capital spending, and the resulting effect on cash flow and liquidity.
- Debt repayment, borrowing availability, covenant compliance, and the company’s capacity to fund dividends and any repurchases while meeting lease and capital commitments.
- Developments in the wage-and-hour litigation and the terms and governance review of the related-party Chalet ground lease.