Natural Grocers by Vitamin Cottage, Inc. — Q1 FY2014 10-Q
Reporting period: Three months ended December 31, 2013; comparisons are with the three months ended December 31, 2012 unless noted. The company operates natural and organic grocery and dietary supplement stores and had 76 stores in 13 states at quarter-end, up from 61 a year earlier.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $120.6 million | $95.8 million |
| Gross profit / gross margin | $35.4 million / 29.3% | $27.8 million / 29.0% |
| Operating income / margin | $5.4 million / 4.5% | $3.8 million / 4.0% |
| Net income / diluted EPS | $2.9 million / $0.13 | $2.2 million / $0.10 |
| EBITDA (non-GAAP) / margin | $9.4 million / 7.8% | $6.8 million / 7.1% |
| Operating cash flow | $5.3 million | $2.3 million |
| Capital expenditures | $7.7 million | $8.8 million |
Sales rose 25.8%, driven by $14.6 million of new-store sales and $10.2 million of comparable-store growth. Comparable-store and daily average comparable-store sales increased 10.6%, versus 12.9% in the prior-year quarter; mature-store sales grew 6.9%, versus 8.1%. Comparable-store transaction count increased 5.1% and average transaction size rose 5.3% to $36.58.
Gross margin improved 30 basis points, reflecting higher product margins across departments and distribution-center productivity, partly offset by a lower-margin sales mix and higher occupancy costs at new stores. Store expenses declined to 20.9% of sales from 21.1%; administrative expenses declined to 3.2% from 3.5%. Pre-opening and relocation costs increased to $0.9 million from $0.5 million. Interest expense rose to $0.7 million from $0.3 million, primarily due to capital and financing leases. Effective tax rate was 38.1%, compared with 37.2%.
Liquidity, debt, and cash flows
Cash and cash equivalents were $6.2 million at December 31, down from $8.1 million at September 30, 2013; short-term available-for-sale investments were $1.2 million. The company had no revolver borrowings, with $14.5 million available under its amended $15.0 million revolving facility after a $0.5 million letter of credit. The facility maturity was extended to January 31, 2017, and the company reported covenant compliance.
Capital and financing lease obligations totaled $19.8 million, including $19.6 million long-term. Operating cash flow of $5.3 million was more than offset by $7.7 million of property and equipment purchases; cash declined $1.9 million during the quarter. Total contractual obligations were $279.1 million, including $234.3 million of operating lease payments and $43.1 million of capital and financing lease payments.
Outlook, risks, and notable items
- Management planned 15 new stores in FY2014; four opened in the quarter, and 11 additional openings and two remodels were planned for the remaining nine months. Planned remaining-period capital expenditures were $27 million to $29 million.
- Management said cash, investments, operating cash generation, and revolver availability should cover working capital and planned capital expenditures for at least 12 months. This is a forward-looking assessment, not a guarantee.
- Expansion brings risks including new-store profitability timing, higher lease costs, increased inventory needs, competition, and broader economic and consumer-spending conditions. Management noted that prime locations can raise lease costs and that distribution-center costs may not be offset by volume or pricing in the near term.
- Tax benefits included bonus depreciation and the Work Opportunity Tax Credit. Management did not anticipate continued bonus-depreciation benefits after the relevant provision expired on December 31, 2013; future Work Opportunity Tax Credit benefits depended on possible congressional reauthorization.
- The company disclosed related-party leases: seven leases with Chalet Properties, owned by board members and related family members, with quarterly rent of approximately $0.3 million; rent to Isely Family Land Trust LLC was less than $0.1 million. Management said pending legal matters were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Whether comparable-store growth remains strong, given the decline from 12.9% to 10.6%, and how much future sales growth depends on new stores.
- Execution and returns on the planned 11 additional openings, two remodels, and $27 million to $29 million of remaining FY2014 capital spending.
- Cash generation, inventory investment, and liquidity as expansion continues, alongside substantial lease commitments and $19.8 million of capital and financing lease obligations.
- How much reported margins and EBITDA are affected by capital-lease accounting; EBITDA is non-GAAP and management cautions it does not capture capital spending, working-capital needs, or lease-related cash commitments.
- Whether temporary tax incentives are renewed and whether related-party leasing arrangements remain on appropriate terms.