Natural Grocers by Vitamin Cottage, Inc.

Good day, ladies and gentlemen. Welcome to the Natural Grocers' first quarter fiscal year 2022 earnings conference call. At this time, all participants are in 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 would now like to turn the conference over to Ms. Jessica Thiessen, Assistant Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2022 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 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, Jessica, and good afternoon, everyone. Thank you for joining us today. We are pleased with our strong start to fiscal 2022. We continue to see positive operating trends as we effectively navigate a dynamic environment. Our first quarter results included net sales of $277.3 million and diluted earnings per share of 39 cents. increases of 4.6% and 143.8% respectively. We were able to leverage strong sales increases into higher profitability, including a 230 basis point improvement in operating margin. Momentum remained strong across our business. Daily average comparable store sales rose 3.8%, including increases in both transaction count and basket size. On a two-year stacked basis, daily average comparable store sales increased 16.5% in the first quarter. Our unwavering commitment to our founding principles remains a key element in our success. We provide a differentiated offering of natural and organic products at always affordable prices, coupled with free science-based nutrition education. which continues to resonate with consumers who are prioritizing health and wellness more than ever. Our NPower loyalty program continued to grow, evidencing our deep engagement with our customers. We ended the quarter with almost 1.6 million loyalty members, a year-over-year increase of 20%. The net sales penetration for NPower reached 73%, up from 72% in the fourth quarter and 69% a year ago. The first quarter sales were positively impacted by our non-GMO event in October. Strong trends around the Thanksgiving holiday and our annual holiday deals promotion in December. We saw strong consumer demand for our supplement offering continue in the first quarter. For the third consecutive quarter, the supplements category posted sales comps that exceeded the overall company average. Customers continued to be drawn to our natural grocers' branded products, which accounted for 7.5% of total sales in the first quarter, up from 7.1% in the fourth quarter. During the quarter, we launched 13 new branded products, including frozen side dishes and additional dietary supplements. During the quarter, we relocated our store in Greeley, Colorado, and are very pleased with our Greeley customers' response to the move. We remain on track to open four to six new stores and relocate or remodel three to four stores in fiscal 2022. We continue to manage through supply chain challenges, During the first quarter, our out-of-stocks were relatively consistent with recent quarters. However, we saw a slight increase in our out-of-stocks that began in late December and continued through January. We are working closely with our vendors to address these challenges. Earlier this week, we released our inaugural environmental, social, and governance report. Natural Grocers was founded by my parents in 1955. who were inspired by core values that many would recognize today as sustainability principles. The company was built on and remains committed to our five founding principles, quality natural and organic products, always affordable pricing, nutrition education, crew and community. These principles continue to guide our business practices, focusing on the health and well-being of our communities and the planet. Our crew's dedication to these principles ensure our store's operations and supply chain reflect these values. Since its founding, Natural Grocers has embraced practices intended to make our food system more just, sustainable, and equitable. 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 affordable prices. and excellent customer service. With that, let me turn the call over to Todd to discuss our financial results and guidance.

Thank you, Kemper, and good afternoon, everyone. As Kemper indicated, first quarter results were above our expectations, reflecting favorable sales growth and expense leverage. Our first quarter net sales increased 4.6% on a year-over-year basis to $277.3 million. Daily average comparable store sales were up 3.8% on top of a 12.7% increase in the first quarter of fiscal 2021. Average transaction count increased 3%, and average transaction size rose 0.8% for the quarter. We experienced inflation in the 3% to 4% range during the first quarter, a slight uptick from the fourth quarter. We continue to pass along the impact via pricing. The strong sales performance and expense leverage helped drive significant margin expansion. Gross margin increased 80 basis points to 28.4%, driven primarily by improved product margin and store occupancy leverage. Store expenses decreased 1.6% in terms of dollars and 140 basis points in terms of rate. We benefited from our strong sales performance which drove expense leverage. Expenses normalized as we cycled higher incremental pandemic related expenses, including labor hours and pay in the first quarter of fiscal 2021. Like many retailers, we experienced an increased level of constrained labor availability late in the quarter. Operating income more than doubled versus last year, increasing 131.1% to $12 million. and operating margin improved 230 basis points to 4.3%. Net income of $8.9 million was up 145.5% year over year with diluted earnings per share of 39 cents compared to 16 cents a year ago. Adjusted EBITDA increased 44.7% to $19.5 million. Turning to the balance sheet and cash flow. We ended the first quarter in a strong financial position with $25.3 million of cash and cash equivalents. We had no outstanding borrowings under our $50 million revolving credit facility and a $21.7 million balance on our term loan. During the first quarter, we generated cash from operations of $12.1 million and invested $5.3 million in net capital expenditures. resulting in free cash flow of $6.7 million. Today, we announced that our board of directors has declared a quarterly cash dividend of 10 cents per share. The dividend will be paid on March 16th, 2022 to all stockholders of record at the close of business on February 28th, 2022. Now, I would like to review our outlook, which reflects current trends, including the rapidly evolving COVID-19 environment. 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 fiscal 2022. We are confirming our guidance for fiscal year 2022, which we first established in mid-November. While the first quarter's performance exceeded our expectations, We feel it is appropriate to maintain our previously issued guidance at this time in light of the uncertainty around the COVID-19 environment and trends. Our guidance includes the following. Open four to six new stores. Relocate or remodel three to four stores. Achieve daily average comparable store sales growth between 0% and 2%. achieve diluted earnings per share between 75 cents to 87 cents, and direct $28 to $35 million towards capital expenditures to support our growth initiatives. In closing, we had a strong quarter that we attribute to our customers' appreciation for our differentiated business model. We continue to be encouraged by our recent trends, and we are confident in our ability to drive growth, and enhance value for all 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 1 on your telephone keypad. 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 Spencer Haynes with Wolf Research.

You may now go ahead.

Good morning. Good afternoon, guys. Congrats on a great quarter. I guess the profitability really struck out to us this quarter. Maybe just talk a little bit about your confidence that you'll be able to maintain this level of profitability going forward, any one-time things that we should keep in mind. And then I guess as it relates to the supplements,

business and as you start to lap tougher tougher compares there in the second half how should we think about the performance there from a top line perspective well um going forward um we expect you know the first two months of this quarter to be pretty similar well actually january to be pretty similar and february only has 28 days so um that it's very difficult for us to predict our ongoing ability to achieve the same sort of profitability. And then as far as supplement business goes, you know, there's a big tailwind because of the COVID surge that happened here in the fall. It seemed to have carried over

Got it. That's helpful. And then when you think about comps sort of quarter to date, are you expecting sort of 2Q to look similar to what you guys saw in the first quarter, maybe on a two-year stack basis? Are you expecting any moderation there? Maybe just walk us through sort of what you're expecting from a top-line perspective, as much as you have this ability.

It'll be, I mean, for the first, for January, I would expect it to be similar. February and March is much more difficult because March was last year we were on a two-year stack basis. This compared to last March, similar to what we . And then, of course, February .

Got it. And then in the script, you mentioned that you were seeing out of stocks worsen in January. Have you seen any impact on sales from that or promotional intensity? Are you expecting any change there in the second quarter? And then how do you think your in-stock rates are comparing to other peers in the market?

The out-of-stocks in January definitely were a problem. They did affect sales, but our comps were really good in January, even though we are seeing trends that the supply chain is firming up here in February, and it looks like by the end of this month, it should be in much better shape. And then you asked about promotion. I don't see that the promotions are planned way ahead of time, and the orders, et cetera, seem to be available as needed.

Got it. And staying on supply chain for a minute, when you think about new unit growth and the ability to hit that four to six new stores this year, do you need to see any improvement in the supply chain to get to that target? How are you thinking about sort of new unit growth in the context of the tough sort of operating climate here?

The only issue we've had as far as stocking new stores with our equipment supply. We've kind of tackled that by extending out our build-up period, and then we're ordering further ahead on equipment. We've anticipated items that are going to be difficult to get into our stores for construction. And so we're pretty confident in our support of new stores being able to be brought online.

Got it. And then with inflation ticking up in the first quarter here to the 3% to 4% range, are you expecting that to be constant throughout the rest of this year, or could there be any downtick or uptick sort of as we look into the back half from an inflation standpoint?

I definitely do not think it's going to be going down. Got it. Fights. Fights.

Got it. And then one last one for me, but maybe you could talk a little bit about the NPower members that you've recruited over the last couple years and talk how their spending habits look the same and maybe different versus some of the previous cohorts that you've attracted to natural grocers and how you expect that to trend over time.

The customers that shop on a monthly basis And the people that aren't NPower members spend around $25 per person. And it really hasn't fluctuated that much even as we've added. And so we're able to take these new members and convert them into really good customers.

Great. Well, that's a really helpful data point.

I mean, the NPower program has been really helpful. it works really well for us. And we're able to message, you know, we message to those customers three times per week or four times per week.

Oh, great. And thank you so much for the color and I'll jump back in the queue. All right. Thank you.

If you have a question, Please press star then 1 to join the queue. There are no further questions. This concludes our question and answer session. I'd like to turn the conference back over to Ken for any closing remarks.

Thank you very much for joining us to discuss our first quarter results. We are proud of our performance and our history of providing the highest quality natural and organic products at always affordable prices to the communities we serve. We look forward to speaking with you on our next call to review our second quarter 2022 results. Please stay healthy and safe and have a great day. Goodbye.

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