Natural Grocers by Vitamin Cottage, Inc.

Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will be given at that time. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. David Coulson, Vice President and Treasurer for Natural Grocers. Mr. Coulson, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2020 earnings conference call. On the call with me today are Kemper Isley, co-president, and Todd Dissinger, chief financial officer. As a reminder, all statements made on this conference call, other than statements of historical fact, are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks detailed in the company's most recently filed Forms 10Q and 10K. The company undertakes no obligation to update forward-looking statements. Today's press release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I will turn the call over to Kemper.

Thank you, David, and good afternoon, everyone. We are pleased to report another quarter of continued daily average comparable store sales growth, reflecting our ongoing focus on our customer service and marketing initiatives, while staying true to our founding principles. We are also proud to open our first store in Louisiana, putting us in 20 states. We have steadily maintained store growth, bringing our count at the end of the quarter to 155 stores. Through the first quarter, we are on track to meet our 2020 guidance for comps, new stores, margin, and earnings per share. We saw gains across most product categories during the first quarter, including a 3.4% daily average comparable store sales increase in supplements. Accelerating from the fourth quarter, As we indicated on our last earnings call, we see the supplement product category as an opportunity and an area of focus in fiscal 2020. The comp gain in supplements is attributable to several initiatives in our in-store nutritional education programs. Our NPower program continues to drive loyalty and support our marketing initiatives. With enrollment, growth, and increased NPower penetration contributing to our positive comp in the quarter. As of the first quarter, NPower enrollment increased by 37% year over year, and sales penetration increased to 69% of total sales. Our newly implemented personalized NPower promotions continue to prove effective. adding to our efforts to leverage NPower to enhance the customer experience with personalized offers, recipes, and coupons. We have also recently rolled out new billboard and outdoor creative advertising and expanded our marketing coverage. Our partnership with Steamboat and Winter Park Resorts that started during the fourth quarter of fiscal 2019 has also contributed to our marketing reach, as the impact of this partnership ramped up during the ski season. During the quarter, we reported a 40 basis point decline in gross margin on a year-over-year basis. As Todd will discuss, approximately half of the year-over-year decline simply reflects the change in the lease accounting standard that went into effect at the beginning of the fiscal year. And the remainder of the decrease reflected product mix. In comparison to the second half of fiscal 2019, we saw a meaningful improvement in gross margin trends. we continue to see a relatively stable competitive market and remain confident in our price positioning. As always, we continue to focus on our in-store customer experience to drive sales and build customer loyalty. We pride ourselves on making our customers feel welcomed and valued by providing world-class customer service and quality. Our everyday affordable prices unparalleled nutrition education and superior customer service are some of the foundations of the natural grocer's competitive advantage. We will remain focused on driving growth through new store openings in both existing and new markets, driving consistent comp store sales growth and controlling costs to deliver enhanced profitability, cash flow, and return to our valued shareholders with our quarterly cash dividend. With that, let me turn the call over to Todd to discuss our financial results and guidance.

Thank you, Kemper, and good afternoon, everyone. We are pleased with a solid start to fiscal 2020. In the first quarter, we continued our trend of driving revenue growth with another positive comp of 1.9% and executing on our new store growth plans. We continue to see a favorable response to our marketing initiatives, and importantly, we are seeing accelerated growth in our nutritional supplements offering. As Kemper mentioned, we are on track with our 2020 goals through the first quarter and remain confident with our outlook. Turning to our financial results, during the first quarter, net sales increased 3.8% to $230 million. Daily average comp store sales increased 1.9%, and mature store comp increased 0.8%. On a two-year stack basis, daily average comp store sales were up 7.4%, and mature comps were up 4.4%. The first quarter comp increase was driven by a 2.5% increase in average transaction size, partially offset by a 0.6%, decrease in daily average transaction count compared with the first quarter of last year. While traffic was down modestly in the quarter, note that traffic was up 1.7% on a two-year stack basis as we were comparing to a strong first quarter a year ago. As Kemper noted, while the environment continues to be competitive, it also remains relatively stable and inflation remains low at about 1%. Gross profit margin during the first quarter was 26.3% compared to 26.7% in the prior year and up sequentially over the fourth quarter of fiscal 2019. Approximately half of the gross margin decline in the first quarter reflected an increase in occupancy costs that directly relates to our adoption of the new lease accounting standard. The remainder of the decrease reflected a continued shift in sales mix. As we discussed last quarter, the adoption of the new lease accounting standard has the effect of increasing occupancy and depreciation expense, which is partially offset by reduced interest expense. Store expenses as a percent of sales increased to 22.4% during the first quarter compared to 22.2% in the prior year period. The year-over-year increase in store expenses as a percentage of sales was solely attributable to the company's adoption of the new lease accounting standard. Pre-opening and relocation expenses decreased approximately $240,000 year-over-year impacted by the timing of new store openings and store relocations. During the quarter, we opened two new stores compared to opening four new stores and relocating one store in the first quarter of fiscal 2019. We are excited to have entered Louisiana during the quarter, becoming our 20th state of operation. We believe there is meaningful opportunity for new market growth for natural grocers over the coming years and long term. Net income was $1.9 million, with diluted earnings per share of eight cents in the first quarter, compared to net income of $2.2 million, or 10 cents of diluted earnings per share, in the first quarter of last year. EBITDA was $10.6 million in the first quarter, down 6.8%, compared to $11.3 million in the first quarter of fiscal 2019. The adoption of the new lease accounting standard accounted for a majority of the change in EBITDA. During the first quarter of fiscal 2020, we generated cash from operations of $10.5 million and invested $12 million in net capital expenditures. As noted in our press release today, we have declared a quarterly cash dividend of seven cents per share. The dividend will be paid on March 17th, 2020 to all stockholders of record at the close of business on March 2nd, 2020. Now I would like to review our fiscal 2020 outlook, which we are reiterating today. The 2020 outlook was originally provided on November 14th, 2019. Please note that our 2020 outlook factors in the impact of the new lease accounting standard, which went into effect for us on October 1st, given our September fiscal year end. The new lease accounting change is still expected to have a one to two cent negative impact on our diluted earnings per share as a result of an increase in occupancy expense and depreciation, which will be partially offset by lower interest expense. This shift in the classification of expenses will also negatively impact gross margin by 20 to 25 basis points and result in a two to two and a half million dollar negative impact on EBITDA. Each of these factors are in line with our expectations provided last quarter. During fiscal 2020, we expect to open five to six new stores, relocate one to two stores, achieve daily average comparable store sales growth of 0.5 to 2.5 percent, achieve net income margin of 0.9 to 1.1 percent, achieved diluted earnings per share between 37 cents and 45 cents, and we expect capital expenditures for the fiscal year in the range of $28 to $33 million. We are pleased with our first quarter performance, which is aligned with our fiscal 2020 expectations. We continue to anticipate moderate pressure on gross margin, attributed to the continued impact of an unfavorable shift in mix, as well as the impact of the new lease accounting standard. The anticipated gross margin pressure should be partially offset by an expectation for modest store expense leverage as the year progresses, dependent upon the level of comp sales generated. In closing, we remain focused on leveraging our founding principles to drive performance while creating value for our shareholders. Those principles, which include offering our customers the highest quality products at affordable prices while providing science-based nutrition education and maintaining our commitment to our communities and our Good4U crew, are what sets us apart from the competition and continues to propel our company forward. We remain a committed partner in the pursuit of a healthy lifestyle for our customers and communities. With that, I would like to open the lines up for questions. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster.

Such a big roster.

The first question today comes from Greg Badashkanian from CIDI. Please go ahead.

Hi, this is actually Abigail Lake on for Greg. So comps came in this quarter at 1.9%, which is above the midpoint of your full-year guidance, which is 0.5% to 2.5%. You have easier comps in the back half of the year, so why not tighten that guidance range given the solid performance this quarter?

I think it would be more prudent to wait until after this quarter to do that.

Okay. Is there anything one time we should think about this quarter?

No, I think that we're trending fairly similar to how we trended last quarter. So I think if we keep on that trend, then of course we'll probably tighten the guidance at the end of this quarter.

Okay, great. And then just on the competitive environment, have you seen any acceleration or deceleration of promotion? And are there any categories you've been more or less promotional?

No, I wouldn't say that promotions have been too significant. You know, any acceleration or deceleration in promotions, I think that pricing has gotten slightly more competitive, particularly in the organic produce part of the business.

Okay, great.

Thank you.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Kemper Isley for any closing remarks.

Thank you very much for joining us to discuss our first quarter results. We remain confident in our long history of being a leader in providing natural and organic groceries to consumers. We look forward to speaking with you on our next call to review our second quarter 2020 results. Have a great day. Bye.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.