Natural Grocers by Vitamin Cottage, Inc.

Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2024 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 would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms.

Thiessen, you may begin. Thank you.

Good afternoon and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2024 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. Today I will highlight our first quarter financial results, including key drivers, and provide an update on priorities. Then Todd will discuss the first quarter results in greater detail and review our updated fiscal year 2024 guidance. We are very pleased with our start to fiscal 2024. We believe our carefully vetted offering natural and organic products, coupled with our emphasis on value and always affordable pricing, differentiate us in the marketplace and continue to drive demand with health conscious consumers. Our strong first quarter results reflect a continuation of the positive trends we experienced in recent quarters. Net sales of $301.8 million increased 7.6% compared to the prior year, driven by a 6.2% increase in daily average comparable store sales, which included a 3.4% increase in transaction count. We are very encouraged by the strong customer traffic trends we have experienced over the past several quarters. Diluted earnings per share increased 78.9% to 34 cents, reflecting strong sales growth, effective pricing and promotions, and expense leverage. Turning now to an update on key priorities. Our NPower Rewards program grew 16% year-over-year to more than 2.1 million members by the end of the first quarter. The NPower net sales penetration was 78%, up from 76% a year ago. The growth and penetration of our NPower rewards program reflects our deep engagement with these valuable customers. Our Natural Grocers branded products deliver premium quality at compelling prices. In the first quarter, our branded products accounted for 8.5% of total sales, up from 7.9% a year ago. Our private brand penetration increase is an indication of our customers' appreciation for the quality and value of these products, as well as the continued expansion of our offerings. Store unit growth and development continues to be a priority for our company. During the first quarter, we opened stores in Twin Falls, Idaho, and Loveland, Colorado, and relocated one of our stores in Albuquerque, New Mexico. Store development timing continues to be impacted by delays in permitting and construction. Earlier this week, we released our fiscal year 2023 Environmental, Social, and Governance report. reflecting our long-standing commitment to sustainability practices. We believe that our company's greatest opportunity to positively impact environmental sustainability and human health is through offering over 20,000 high-quality natural and organic products at affordable prices. Examples of our strict standards include selling only certified organic produce, pasture-raised dairy, and free-range eggs. In fiscal year 2023, the company's total sales was comprised of more than 50% organic products and 60% certified to environmental and or social sustainability sourcing standards. We prioritize products sourced from vendors that embrace regenerative and sustainable agricultural practices. two of which are spotlighted in our ESG report. Additionally, we make a substantial investment to provide free nutrition education to our customers, crew, and communities. Our company's ongoing financial success demonstrates that a business model dedicated to offering affordable, high-quality, natural and organic products can help deliver positive environmental and social impacts while creating value for all of our stakeholders. In closing, I want to thank every member of our Good4U crew for their commitment to operational excellence and exceptional customer service that were instrumental in driving our results. With that, I will turn our call over to Todd to discuss our financial results and guidance.

Thank you, Kemper, and good afternoon. For the first quarter, net sales increased 7.6% from the prior year period to $301.8 million. Our daily average comparable store sales increase of 6.2% was comprised of a 3.4% increase in daily average transaction count and a 2.7% increase in daily average transaction size. We estimate that product cost inflation was approximately 3% on an annualized basis for the first quarter, down 200 basis points from the previous quarter. The item count per basket was flat compared to the same period in the prior year, reflecting an improving trend over the past several quarters. Our item count per basket remains above pre-pandemic levels. Sales growth was broad-based across categories. Our strongest performing departments were meat, body care, and dairy. Gross margin increased 130 basis points to 29.4% driven by higher product margin attributed to effective pricing and promotions and store occupancy expense leverage. Store expenses increased 6.9% in the first quarter, primarily driven by higher compensation expense. Store expenses as a percentage of sales decreased 20 basis points, reflecting expense leverage as elevated sales offset higher labor costs. Administrative expenses as a percentage of sales increased 20 basis points, driven by higher compensation expense. Net income was $7.8 million with diluted earnings per share of 34 cents in the first quarter. This compares to net income of $4.4 million or 19 cents of diluted earnings per share in the first quarter of last year. Adjusted EBITDA was $18.8 million in the first quarter. Turning to the balance sheet and cash flow, We ended the first quarter in a strong financial position, including $13.6 million of cash and cash equivalents. We had $18.4 million in outstanding borrowings on our $75 million revolving credit facility. During the first quarter, we generated cash from operations of $16.6 million and invested $11.8 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $4.8 million. We are raising our fiscal 2024 guidance for daily average comparable store sales growth and diluted earnings per share. Our revised outlook includes the following. Open four to six new stores, relocate or remodel four to six stores, achieve daily average comparable store sales growth between 3% and 5%, achieve diluted earnings per share between $1.02 and $1.12, and direct $30 to $39 million towards capital expenditures to support our growth initiatives. Our outlook reflects first quarter results, operating trends, and the current economic environment. Our current expectation is that sales comps will be at the high end of our outlook range in the second quarter and will moderate in the second half of the year as we cycle stronger comps in the back half of fiscal 2023. Our outlook anticipates that year-over-year gross margin will be slightly higher in the second quarter and about flat in the second half of the year. Lastly, we expect store expenses as a percentage of sales to increase on a year-over-year basis, driven by higher labor rates resulting in flat to modest expense deleverage. In closing, we are pleased with the first quarter results. We attribute our strong performance to the relevance of our differentiated business model, including the value proposition of high quality products at always affordable prices. We continue to be encouraged by our recent operating 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 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 using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star then 2. At this time, we'll pause momentarily to assemble our roster.

Our first question will come from Scott Mushkin with R5 Capital.

You may now go ahead.

Hey, guys. Thanks for taking the questions. So I guess if I can think of, I'm driving right now, believe it or not, out in stores, but I kind of had three questions for you. One is when we look at the gross margin, how much would you just attribute to the strong sales and leverage and how much would you attribute it to mix and other things?

Well, leverage gave us you know about 11 basis points so that was that was nice and then as far as mix goes there really wasn't a lot of mix change everything was pretty much steady there wasn't a lot to mix a lot of the of our gain and margin was attributable to smart promotions and pulling back on some of our previous NPower promotions. And was that pre-planned or is that something... We've been, you know, we're about cycling through a year's worth of that coming up here in January of having less aggressive NPower promotions on certain items.

As far as your growth goes, I mean, obviously, it seems like you're striking a chord with the consumer, like dive into that maybe next. But, you know, is there opportunities to increase that growth rate over the next two to three years in stores? I know that's ramping up, but have you thought about increasing it further? Where are you guys on that?

You mean as far as store openings go?

Yeah.

Or just acquiring new customers at existing stores? Our goal this year, we're going to come in somewhere around 10 to 12 new stores and relocations and remodels. Over the next couple of years, our goal is to get back to opening between six and eight stores a year. We don't really want to go above that because we think that it's more profitable for us to open six to eight stores a year than to ramp up and open 10 to 12 stores a year or even more than that. It's smarter from a profitability standpoint to not have much more growth than that per year. That way you can spend better time picking your sites and managing those new stores as you open them. And the remodel part of it? Yes. And then the remodels and relocations will probably have kind of an acceleration of that because we have a lot of stores that will be anniversarying their 10-year point in two years. And so a lot of those stores will be up for remodels and relocations at that point in time.

Okay.

You know, it's about a 10-year to 15-year life cycle before a store needs a remodel or a facelift.

Right. So that you think in a couple years it's going to accelerate pretty meaningfully. I think our research showed that, too.

Yeah. I mean, it'll have to.

Right. And then did you reference M&A? Is that something you guys would consider or not really?

We haven't really found that to be... uh, a good niche for us. The most, most, and you know, we did one acquisition of one store a few years back and that really didn't, I mean, it was all right for us, but it wasn't anything that it was a lot more painful than we would have liked it to be.

Yeah, usually it is. Um, so my last question really gets into, you seem to be getting new customers. Um, well, Is that correct that you are getting new customers?

Yeah, I mean, our customer growth was, I mean, essentially our basket growth equaled inflation and our customer growth was about 3.5% above that.

So what do you, I mean, that's, what's driving that? I mean, it's kind of maybe a silly thing to say. Are you guys the other side of the diet pill craze where people now have extra money and they can are minding what they eat. I mean, it seems like we're kind of seeing this acceleration. You're winning customers.

It's the value of our company. You know, it's the nutrition education, the quality of the products that we sell and only organic produce, not having, you know, people don't have to come into our store and worry about reading the labels and finding products that are, um, uh, contaminated. And then, uh, you know, we have, you know, produce that's contaminated with conventional produce. Um, They don't have to worry about finding a lot of artificial colors and preservatives in the groceries they buy. And then, of course, we always have the value proposition of our everyday, always affordable pricing. And so that really helps too. And then, you know, just engaging with the communities that we're in via our outreach through nutrition education and events that we sponsor and food bank sponsoring and so on and so forth. And then finally, taking care of our crews so that they can give the customers that come into our stores a very good shopping experience. As we've said in several of our calls, the average wage of our hourly employees is now up to $21 an hour, which is pretty much industry leading for the grocery business.

Any sense of who these new customers are? Do you have any data on that at all or no?

You know, they're people that value their, they have an active lifestyle and value what they consume and put into their bodies.

Like married younger children, like older, you don't have any sense demographically.

Well, we appeal quite well to the 50 to 60s. 60-year range of people, and then we have a lot of families that like to shop at our stores. And then we're starting to appeal more to the younger generation because we have an authentic story and they like authenticity in where they shop. And so they really appreciate that we stay... true to our values and have always had the same values. We don't just go wishy-washy and wanting to say, well, this is popular now, so let's do it now. We've always said what is intrinsic to our company, and people appreciate that. And then the value proposition really, I mean, the value proposition For a lot of people, it's very important also. They always know that we're going to have a good price on things.

All right. All right, well, perfect. Like I said, I appreciate you taking all my questions, and good luck in the next quarter.

Thanks. Have a good day, Scott. Again, if you have a question, please press star, then 1. It appears there are no further questions.

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 for joining us today. We believe our strong first quarter results have positioned us well to leverage this momentum throughout the balance of the fiscal year. Thank you and have a great day.