Natural Grocers by Vitamin Cottage, Inc. (NYSE: NGVC) — Q3 FY2020 10-Q
Reporting period: Quarter and nine months ended June 30, 2020; fiscal year ends September 30. Unaudited results. The company operated 159 stores in 20 states, versus 152 stores a year earlier.
Financial performance
Dollars in millions, except per-share amounts and percentages. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $265.1 | $224.4 | $772.7 | $676.4 |
| Gross profit / margin | $72.4 / 27.3% | $58.4 / 26.0% | $210.7 / 27.3% | $179.8 / 26.6% |
| Operating income / margin | $6.7 / 2.5% | $3.8 / 1.7% | $22.8 / 2.9% | $14.0 / 2.1% |
| Net income / diluted EPS | $4.7 / $0.21 | $2.0 / $0.09 | $16.3 / $0.72 | $8.1 / $0.36 |
| EBITDA (non-GAAP) | $14.6 | $11.0 | $46.3 | $35.8 |
- Q3 sales increased 18.1%; comparable-store sales rose 15.5%. Nine-month sales increased 14.2%; comparable-store sales rose 12.0% (daily average comparable-store sales: 11.6%).
- Q3 average transaction size rose 31.5%, while transaction count fell 12.2%; management attributed the pattern to fewer shopping trips and larger baskets amid social distancing. Nine-month average transaction size rose 15.2%, while daily average transaction count declined 3.1%.
- Gross-margin improvement reflected better product margin and lower occupancy costs as a percentage of sales; nine-month results also benefited from lower shrink expense as a percentage of sales. Higher sales drove profit growth, while pandemic-related labor costs increased store expenses.
- EBITDA margin was 5.5% in Q3 versus 4.9%, and 6.0% for nine months versus 5.3%. EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP results or cash flow.
Cash flow, balance sheet and liquidity
- For the nine months, operating cash flow was $61.5 million, investing cash outflow $25.5 million, and financing cash outflow $12.3 million. Cash increased $23.6 million to $29.9 million.
- Capital expenditures for property and equipment were $23.3 million; intangible-asset purchases were $2.2 million. Operating cash flow increased from $28.3 million in the prior-year period, which management attributed to working-capital benefits and higher income adjusted for noncash items.
- At June 30, cash was $29.9 million and $48.7 million was available on the $50 million revolving credit facility, net of $1.3 million in letters of credit. No facility borrowings were outstanding, compared with $5.7 million at September 30, 2019. The company reported compliance with facility covenants.
- Current assets were $136.1 million and current liabilities $128.6 million. The filing reports $170.6 million of equity and $504.8 million of total liabilities.
- Lease balances at June 30 included $360.3 million of operating lease liabilities and $36.4 million of finance lease liabilities. The company adopted ASC 842 on October 1, 2019; balance-sheet comparisons with September 2019 are substantially affected by the new lease recognition and classification.
Changes, outlook and risks
- COVID-19: Management said all stores remained open as essential businesses and that pandemic-related demand drove higher sales and basket sizes. The company incurred higher labor and safety-related costs and experienced product shortages and delivery delays, which had moderated but had not fully resolved. The duration and longer-term financial impact remained uncertain.
- Store plans: Six stores opened in the first nine months, including two in Q3. The company planned seven openings for FY2020, including one during the remaining period, and one relocation. It expected $3–$6 million in remaining-FY2020 capital expenditures and said available cash, operating cash flow and facility availability should cover working capital and planned spending for at least 12 months. No full-year sales or earnings guidance was provided.
- ASC 842: Adoption recognized $359.6 million of operating lease assets and $377.8 million of operating lease liabilities on October 1, 2019, and increased retained earnings by $1.7 million. It also changed the presentation of certain former capital-financing leases, shifting related costs between occupancy and interest expense.
- Capital returns: The company paid $0.07 per share in each of the first three FY2020 quarters and approved another $0.07 dividend for payment September 15, 2020. It made no share repurchases during the reported periods.
- Risks and contingencies: The filing highlights pandemic-related demand, store access, staffing, costs, supply-chain and recession risks; competition and changing consumer preferences; and regulatory or litigation exposure related to products containing CBD. Management did not expect pending legal proceedings to have a material adverse effect. The company disclosed related-party leases and an August 2020 amended lease with a related-party entity that extends the Pueblo, Colorado lease term by 20 years, subject to further extensions.
Important facts for investors to verify
- Whether unusually strong pandemic-driven sales and larger baskets persist, and how transaction counts and comparable-store sales evolve.
- Whether higher labor, health and safety costs, product availability issues, or a recession pressure margins and cash generation.
- The effect of lease accounting and the distinction between lease liabilities and borrowings when assessing leverage and cash obligations; the filing lists $396.8 million of reported lease liabilities.
- Execution and funding of planned store openings, relocation and capital spending, along with compliance with credit-facility covenants.
- Terms and governance of related-party leases, including the amended Pueblo lease, and developments in CBD product regulation or litigation.