Natural Grocers by Vitamin Cottage, Inc.

Good day, ladies and gentlemen. Welcome to the Natural Grocers by Vitamin Cottage fourth 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 call is being recorded. I'd now like to turn the conference over to Ms. Jessica Thiessen, Assistant Treasurer for Natural Grocers. Ms. Kusin, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage fourth quarter and 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 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 and uncertainties detailed in the company's most recently filed forms 10-Q and 10-K. 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, Jessica, and good afternoon, everyone. Thank you for joining us today. We had a record performance in fiscal 2021 with net sales of $1.1 billion and diluted earnings per share of 91 cents. Fiscal 2021 marked our 18th consecutive year of positive daily average comparable store sales growth. I take great pride in all of the company's accomplishments this year. We finished the year with a strong fourth quarter, accelerating sales comps, higher margins, and lower store expenses drove 100% earnings per share growth, exceeding our expectations. Our commitment to our founding principles continues to drive our success as evidenced by our strong results. We have seen an increase in customer engagement and loyalty. We believe our carefully vetted offerings of natural and organic products at always affordable prices continue to resonate with consumers as they have developed a strong appreciation for the value of healthy nutrition and dietary supplements as a result of the pandemic. Today, we announced that we are increasing our quarterly cash dividend to 10 cents per share from 7 cents per common share, a 43% increase. The dividend increase reflects our strong operating performance and financial position, our confidence in our business model, and our commitment of returning value to our shareholders. During the quarter, we opened one new store in Springfield, Missouri, relocated our store in Columbia, Missouri, and remodeled one of our stores in Wichita, Kansas. For the fiscal year 2021, we opened a total of three stores and relocated or remodeled five stores. We are pleased with the performance of our new stores and relocations over the past several years. Our unique approach to marketing and promotional activity, including our NPower loyalty program, continued to drive customer engagement as well as sales growth during the fourth quarter. Our 66th anniversary event in August was very successful and featured exciting promotions, free products, and a sweepstakes. In September, our stores and marketing efforts focused on Organic Harvest Month with promotional events, discounts, and a fundraiser to support Beyond Pesticides, which helps cities convert parks to being chemical-free. Our Empower Loyalty Program ended the quarter with over 1.5 million members, up 19% versus a year ago. Net sales penetration for Empower was 72% in the fourth quarter, up slightly from the third quarter, and compared to 68% a year earlier. Consistent with our company branding, our natural grocers brand products, which we position as a premium quality product at an affordable price, remain a key point of differentiation and a sales growth driver. In the fourth quarter, private brands represented 7.1% of sales. In total, for fiscal 2021, we grew our private brand offerings by 185 SKUs. Our total number of natural grocers SKUs was approximately 1,000 at fiscal year end. Our natural grocers brand supplements relaunch began in March of this year. Our branded supplements growth exceeded the category growth in the fourth quarter. demonstrating customers' interest in our high-quality and affordable offerings. Natural Grocers has a legacy of being a values-driven company. Our commitment to building a healthy, sustainable future for our customers, our Good For You crew, and our communities is authentic. We work hard to ensure our stores, operations, and supply chain reflect these values. We have been a value-driven company since 1955. In fiscal 2021, the combination of company donations and customer fundraisers resulted in $1 million in monetary donations and more than $3 million in in-kind food and product donations to local food banks. Beginning in October 2021, we implemented a permanent pay increase for our hourly Good4U store crew of $1 per hour. This increase represents our second $1 per hour increase in the past 18 months and reflects our long-standing commitment to investing in our crew. With the increase, the company-wide average hourly pay for full-time crew is $18.43 an hour, including $1 per hour in vitamin bucks store credit. In closing, I want to thank every member of our Good4U crew for their continued hard work and commitment to helping us deliver the highest quality natural and organic products at always affordable prices. and their commitment to our founding principles. I would also like to take a moment to reflect on Natural Grocers' accomplishments over the past 10 years. In those 10 years, we have grown our sales by four times to over $1 billion. Our store base has grown by three times and earnings by six times. Even more importantly, we have brought healthy nutritional options at affordable prices and free science-based nutrition education to over 100 additional communities and created over 2,500 jobs. While I am very proud of our achievements over the last decade, I am equally excited about the opportunity that lies ahead of us. 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 had an outstanding fourth quarter on top of a strong performance in the fourth quarter of last year. The most recent quarter posted positive sales growth, primarily attributed to increased customer engagement and loyalty and our customers' response to COVID-19 pandemic trends. Net sales during the fourth quarter increased 3.2% from the prior year period to $272.6 million. Daily average comparable store sales increased 2.5% on top of a 13.2% increase in the fourth quarter of 2020. Increased transaction counts continue to drive comps as shopping trips normalize towards pre-pandemic levels. In the fourth quarter, our average daily transaction count increased The count increase was partially offset by a 0.8% decrease in average daily transaction size. However, the basket size remained elevated as compared to the pre-pandemic level, up over 20% compared to the fourth quarter of 2019. Supplements remained a top performing category with a comp of over 10 percent in the fourth quarter and over 20 percent on a two year stacked basis. We believe the success we are seeing in this category is largely attributable to consumers continuing interest in supplementing their nutritional intake associated with the pandemic, coupled with the strong response to our branded supplements. Inflation remained in the 2% to 3% range during the fourth quarter, and we continue to pass along the impact via pricing. Note that our rate of inflation tends to be more stable than the industry in general due to our high product standards, which necessitates a specialized supply chain. Out-of-stock levels in the fourth quarter remain relatively consistent with prior quarters of this year. Out-of-stocks are lower than at the beginning of the pandemic, although still above pre-pandemic levels. We also had a solid performance from a margin and expense standpoint. Fourth quarter gross margin improved 40 basis points, driven by higher product margin and store occupancy leverage. The strong supplements sales comp contributed to a favorable shift in product margin mix. Store expenses in the fourth quarter declined by 130 basis points. The improvement in store expenses reflects a more normalized level of labor-related expenses compared to the prior year. The tight labor market and labor availability were an offset to the impact of higher labor rates. Net income was $7.2 million with diluted earnings per share of 32 cents in the fourth quarter. This compares to net income of $3.7 million or 16 cents of diluted earnings per share in the fourth quarter of last year. Adjusted EBITDA was $17.8 million in the fourth quarter, up 30.6% compared to $13.6 million in the fourth quarter of last year. Please note that beginning with the fiscal 2021 and fourth quarter reporting, adjusted EBITDA excludes share-based compensation expense. Adjusted EBITDA for the fourth quarter of fiscal 2020 has been recast to exclude share-based compensation expense to enhance the comparability of this measure between the fourth quarter of fiscal years 2020 and 2021. A reconciliation and definition of adjusted EBITDA are provided in our earnings release announcement. I would like to briefly touch on our full year results. For fiscal 2021, total revenue increased 1.8% to $1.1 billion. Our daily average comparable store sales growth was 0.7%, resulting in an increase of 12.7% on a two-year stacked basis. Fiscal 2021 gross margin was 40 basis points higher than the prior year due to higher product margin and lower shrink and store occupancy expense as a percentage of net sales. On a two-year stack basis, gross margin increased 130 basis points. Store expense margin increased 30 basis points driven by increased labor-related expenses, primarily in the first half of the year. For fiscal 2021, net income was $20.6 million with diluted earnings per share of 91 cents. This compares to $20 million and 89 cents of diluted earnings per share in fiscal 2020. Adjusted EBITDA in 2021 was $60.3 million. Turning to the balance sheet and cash flows, We finished the year in a strong liquidity position with $23.7 million in cash and cash equivalents, no outstanding borrowings under our $50 million revolving credit facility, and a $23.7 million balance on our term loan. For fiscal 2021, we generated cash from operations of $53.9 million and invested $27.8 million in net capital expenditures. Capital expenditures included the opening of three new stores, five relocated or remodeled stores, and we purchased property for two future store sites. Free cash flow was $26.1 million. Today, we announced that our board of directors has increased our quarterly cash dividend to 10 cents from 7 cents per common share. The dividend will be paid on December 15th, 2021, to all stockholders of record at the close of business on November 29th, 2021. This increase reflects our strong operating performance and financial position, confidence in our future, and is consistent with our objective of enhancing shareholder value by returning capital. Now I would like to introduce the company's outlook for fiscal 2022. Our guidance was developed based upon current trends, including the current COVID-19 environment. While the company cannot predict the duration, severity, or economic impact of the pandemic and related government mandates, the company expects that these factors will continue to impact our operations and financial performance in fiscal 2022. For fiscal 2022, we expect to open four to six new stores, relocate three to four stores, achieve daily average comparable store sales growth between zero and two percent, achieve diluted earnings per share between 75 cents and 87 cents, and direct 28 to 35 million dollars towards capital expenditures to support our growth initiatives. Opening new stores and relocating stores has been challenging due to the delays we are experiencing in the construction process and equipment deliveries. We intend to open four to six stores in fiscal 2022 and thereafter return to opening between six and eight new stores per year, subject to improving conditions for store construction. Our fiscal 2022 outlook reflects our current expectation that sales comps by quarter will generally be in line with the full year guidance range. First quarter fiscal 2022 quarter to date comps have been in line with the comp growth rate in the fourth quarter of 2021 and consistent with the high end of our guidance range. Additionally, our fiscal 2022 comp outlook incorporates cycling a strong fourth quarter in 2021. We anticipate flat to slightly higher year over year gross margin across each quarter. In the first half of fiscal 2022, we anticipate store expenses as a percentage of sales will be lower than the prior year as we cycle higher labor related expenses in 2021 that were driven by pandemic staffing requirements. In the second half of fiscal 2022, we anticipate store expenses as a percentage of sales will increase compared to the prior year driven by higher labor rates and more store labor hours resulting from improved labor availability. In closing, we had another strong, record-setting year that we attribute to many factors, but foremost, our customers' appreciation for our commitment to our principles and values, our consistency, and the dedication of our crew. We continue to strive to be the grocer of choice for the highest quality natural and organic products at always affordable prices. Natural Grocers is very differentiated and uniquely relevant. We are encouraged by our recent operating trends and confident in our ability to continue driving long-term growth and enhance value for all of our stakeholders. 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 touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Greg Battishtanian with Wolf Research. Please go ahead.

Good afternoon. This is Spencer Hannes on for Greg. Can you guys talk a little bit about sequential acceleration in comps in 4Q and what drove that? And then who do you think you guys took share from during the quarter as well?

Thank you, Spencer. This is Todd. So the first part of your question, I believe, was the trend in comps during the fourth quarter.

Yeah. Can you just unpack that a little bit for us? Because I think it's the highest two-year stack you guys have seen since 3Q20. So any additional color there on really what drove the acceleration sequentially would be helpful. Sure.

So as you recall, the comp in Q3 was negative. It was trending favorably through Q3. In July, the comp was slightly negative, and then we saw positive comps in August and September, with August being higher, I'm sorry, with September being higher than August.

Okay, got it. That's helpful. And then just on the margin front, incrementals were pretty strong this quarter. And I think gross margins are up about 180 basis points from 4Q19. So how should we think about the sustainability of just the higher level of profitability that you guys have seen over the last few quarters and this quarter in particular?

Well, one of the key drivers in the fourth quarter was the supplements. The supplement comp was a double-digit figure. So we're seeing that continue into Q1. We think that that trend was likely to support or help margin in the first half of the year. And so we're expecting margins for the full year to be flat to slightly positive, and we'll probably see some pressure on margin on the back half of the year, in particular as we cycle Q4, where we saw this great improvement in supplements.

Okay. That's helpful. And then I think in the script you mentioned that you're seeing 2% to 3% inflation. But could you talk about the cadence of inflation sort of throughout the quarter? And then how are you guys thinking about next year when some of your contracts reset and what inflation could look like? And then I guess along the same lines, have you seen any pushback from customers on pushing through sort of this higher level of inflation than what you've done historically?

Right. So the trend in inflation has been pretty steady. Maybe a slight improvement during Q4, or a slight increase during Q4, but not significant. It's been pretty steady. And then as we build out our guidance and did some sensitivities with inflation, we're anticipating that inflation is going to run

similar to what we experienced in fiscal 21 which would be that 2% approximate range and then as far as this is Kemper as far as our customers absorbing the costs of the higher prices everybody is having to pass along the same or similar or even higher costs and so there isn't much choice I don't think And our customers don't seem to be blinking in regards to that issue.

Okay, got it. And then I think you mentioned also that you raised hourly pay again this quarter. Have the recent pay rises improved the turnover that you guys are seeing from employees? And do you think there's any more investment that's needed on the labor front to retain employees?

I would say that The turnover has been, you know, our core staff isn't turning over significantly. It's the periphery staff that just comes on and then goes off. So that's our biggest. The biggest issue is just when there was the extra unemployment payments out there was just attracting people to apply for jobs. It wasn't really that we had a lot of turnover. I mean, there's always a little bit of turnover, but it was hard to get people to want to come off the couch because they were getting paid more to stay on the couch. Now that that's gone away, we seem to be able to hire people much more easily right now than pre the extra incentive not work payments that were coming from the government. Great.

Thank you, guys.

Thanks, Spencer.

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 fourth quarter in fiscal 2021 results. We are proud of our performance and our history of providing high quality products at always affordable prices and our service to our communities. 18 years we've now had positive comparable store sales growth, which is quite an achievement in my opinion. We look forward to speaking with you on our next call to review our first quarter 2022 results. Please stay healthy and stay safe and have a great day. Thank you.

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