Natural Grocers by Vitamin Cottage, Inc.

Good day, ladies and gentlemen, and welcome to the Natural Grocers' first quarter fiscal year 2021 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, today's conference call is being recorded. At this time, I'd like to turn the conference call over to Mr. David Coulson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2021 earnings conference call. On the call with me today are Kemper Isley, co-president, and Todd Dissinger, chief financial officer. As a reminder, certain information provided during this conference call are forward-looking statements based on current expectations and assumptions and are subject to risk and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties 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. Thank you for taking the time to join us today. We are pleased with our strong start to fiscal 2021. We continue to see positive operating trends as we effectively navigate the challenges of the COVID pandemic and related government mandates. We remain focused on our founding principles, which have been instrumental to our success and differentiate us from our competition. These principles include supporting our communities and delivering the highest quality natural foods and supplements at always affordable prices. In the first quarter, we saw continued momentum across our business, consistent with our expectations. Customers continued to practice social distancing and follow pandemic safety guidelines, resulting in increased consumption of food at home. We generated 15.2% net sales growth. We achieved 12.7% daily average comparable store sales growth, driven by an increased transaction size. We saw further gross margin expansion driven by cost leverage, an improved product margin, and an inflationary tailwind. And we delivered strong earnings growth with a 94.4% increase in net income. We saw positive results from many of our key initiatives. Our NPower program continues to support our customer loyalty efforts. We realized 69% net sales penetration and ended the quarter with 1.3 million members. The NPower platform enables us to refine and optimize our marketing to members through email campaigns capable of generating customer-specific offers. We also saw further acceptance of our Meal Deals Feed Your Family of Four campaign, which is well-timed for consumers in this uncertain economic environment. This campaign provides simple recipes and shopping lists for healthy, tasty, and affordable meals for under $16. These recipes feature Natural Grocers branded products, which provides great value to our customers. Our National Grocers branded products grew by 23.5% and represented a 7.5% penetration of net sales during the first quarter. We launched two new categories, including 11 new SKUs during the quarter. Our prepackaged bulk offerings are delivering strong growth and resonates with our customers who are focused on preparing healthy meals at home. Out of stocks have remained at levels consistent with the third and fourth quarters of fiscal 2020. which represents an improvement over the levels we experienced at the end of the second quarter of last year. During the first quarter, we launched two new programs, our virtual nutrition education program, which includes personalized sessions with our nutritional health coaches, guest presenter series, and cooking classes. The Rooted in Community Gratitude Giveaway program, which honors community members who spread acts of kindness and good cheer. Throughout the first quarter, we continued to focus on the health and safety of our Good4U crew and our customers. We pride ourselves in providing a clean, safe, and convenient shopping experience to the communities we serve. In support of our commitment to our crew, we continued to pay bonuses to our store and distribution center crew in the first quarter. In addition to the $1 per hour permanent wage increase implemented in March 2020, The year-over-year incremental cost of these wage and bonus enhancements were approximately $3.5 million in the first quarter. I would like to thank our Good For You crew for their continued diligence and commitment. Their positive energy is a driving force behind our business, and their well-being, along with ensuring a safe shopping experience, is our number one priority. 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 delivered another strong quarter with continued favorable trends across our store base. During the first quarter, net sales grew 15.2% to $265 million with daily average comparable store sales growth of 12.7%. Our comp increase was the result of a basket size increase of 21.4%, partially offset by transaction count, which was down 7.1%. Our basket and transaction trends continue to reflect changing consumer dynamics as a result of social distancing and public health measures. We saw these first quarter sales trends continue through January. Looking at some of the key sales drivers during the first quarter, we experienced above average comp growth in meat, frozen, produce, dairy, grocery, and bulk, consistent with recent quarterly trends. Dietary supplements performed well with a 9.3% comp growth rate. Online delivery sales through our partner Instacart represented a low single-digit sales penetration rate, which is consistent with the past several quarters. We experienced an inflation rate consistent with recent quarters at approximately 3%. Gross profit margin during the first quarter was 27.6% compared to 26.3% in the prior year period. The gross margin expansion was driven by leverage of occupancy and shrink expenses as a percentage of sales, as well as an increased product margin. Store expenses as a percentage of sales increased to 22.8% in the first quarter compared to 22.4% in the first quarter of fiscal 2020. Labor-related expenses were the primary driver of the increase. Store expenses also included approximately $400,000 of costs related to exiting a lease associated with a store that closed in fiscal 2019. Net income increased to $3.6 million with diluted earnings per share of 16 cents in the first quarter. This compares to net income of $1.9 million, or 8 cents, of diluted earnings per share in the first quarter of fiscal 2020. Adjusted EBITDA was $13.2 million in the first quarter, up 25.5%, compared to $10.6 million in the prior year period. During the first quarter, we generated cash from operations of $12.3 million, and invested $3.7 million in net capital expenditures. During the quarter, we opened one new store compared to opening two new stores in the prior year period. We ended the first quarter with a strong balance sheet and liquidity position, and we are well positioned to face the uncertain operating environment. As of December 31, 2020, we had $24.7 million in cash and no outstanding balance under our $50 million revolving credit facility. As previously announced, we secured a $35 million term loan, which was fully drawn as of December 31, 2020. Today, we announced that our Board of Directors has declared a quarterly cash dividend of $0.07 per share. The dividend will be paid on March 17, 2021, to all stockholders of record at the close of business on March 1st, 2021. Now, I would like to confirm the company's fiscal 2021 outlook previously announced on November 19th, 2020. Our guidance reflects current trends in light of the rapidly evolving COVID-19 environment and related government mandates. While the company cannot predict the duration or severity of the pandemic and related government mandates, the company expects that these factors will continue to impact our operations and financial performance through the fiscal year. For fiscal 2021, we expect to open five to six new stores, relocate three to five stores, achieve daily average comparable store sales growth, of between negative 2% and 2%, achieve diluted earnings per share between $0.60 and $0.70, and we expect capital expenditures for the fiscal year in the range of $28 to $35 million. In closing, we are pleased to have delivered another quarter of strong performance, supported by the dedication of our Good4U crew. We continue to be guided by our founding principles, which differentiate us in the marketplace. Now, I would like to open the lines up for questions. Thank you.

Ladies and gentlemen, at this time, we'll begin the question and answer session. To ask a question, you may press star and then 1 using your touch-tone telephone. To withdraw your questions, you may press star and 2. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure the best sound quality. Once again, that is star and then 1 to ask a question.

We'll pause momentarily to assemble the roster.

And our first question today comes from Greg Vandischkanian from Wolf Research. Please go ahead with your question.

Good afternoon. This is actually Spencer Hannison for Greg. Nice quarter again, guys. My first question is just on the cadence of comps throughout the quarter. Could you comment on that? And then for the quarter-to-date trends, are you seeing similar results across all regions?

Yeah. The comps were fairly consistent through the quarter. October was the strongest month. November and December were approximately the same. January comp was very similar to what we experienced for the entire quarter.

In terms of state, I'm sorry, Spencer.

Really, we aren't able to really determine any variations there driven by mandates. It's kind of up and down, and there's no – consistency there between mandates and lockdowns.

Got it. That's helpful. And then in terms of the gross margins, I think they took up sequentially versus the fourth quarter. Could you just help us sort of unpack the components there that led to the better performance sequentially? And then have you seen your price gaps? How have they changed versus your peers over the last few months? Thanks.

So we saw an improvement in the gross margin. Part of that was driven by leverage on occupancy and shrink expense and an improved product margin, slightly less promotional, driving the product margin. And I'm sorry, was there another part of the question?

The other part was? in regards to our pricing compared to our competitors. I would say our pricing compared to our competitors is the differential state about the same. We tend to have better pricing except for in produce against one of our competitors.

That's helpful. And then I think you mentioned your out-of-stocks were consistent with 3Q and 4Q. What do you think out-of-stocks will be back to normal levels?

It'll probably be at least another six months. I mean, they have improved quite a bit over last quarter this month, so far this fiscal year, I mean this calendar year, so in January.

Yep. Okay. And in terms of capital allocation, how are you thinking about the right level of leverage for the business and balancing returning capital to shareholders versus reinvesting back in growth and square footage growth? How are you thinking about those levers?

Well, as far as borrowing goes, we'll be very conservative.

Our balance sheet is very not levered, and we'll keep it that way. We will have, you know, moderate store growth as we find premium sites to open stores at.

And once again, if you would like to ask a question, please press star and then 1. To withdraw yourself from the question key, you may press star and 2.

Again, then a star and then 1 to ask a question.

And ladies and gentlemen, at this time, in showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Thank you very much for joining us to discuss our first quarter results. We continue to strive to be the grocer of choice for our health-driven customers and are confident in the opportunities that lie ahead. We look forward to speaking with you on our next call to review our second quarter 2021 results. Please stay healthy and safe and have a great day. Thanks. Goodbye.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.