Natural Grocers by Vitamin Cottage, Inc.

Ladies and gentlemen, welcome to the Natural Grocers First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question-and-answer session, and the instructions will be given at that time. As a reminder, today's conference 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.

Good afternoon, and thank you for joining us for the Natural Growers by Vitamin Cottage first quarter fiscal year 2026 earnings conference call. On the call with me today are Kemper Isley, co-president, and Richard Halle, chief financial officer. As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains 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. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings 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. During today's call, I will provide an overview of our financial results, highlight the key drivers of our performance, and share an update on our key operational initiatives. Then Rich will discuss the first quarter results in greater detail and review our fiscal year guidance. Our first quarter results were in line with expectations, including daily average comparable store sales growth of 1.7% and diluted earnings per share growth of 14% to 49 cents. Based on our first quarter performance and outlook for the remainder of the fiscal year, we are maintaining our full year guidance. There are several key underlying trends that I would like to highlight. The first quarter sales comp increase of 1.7% was cycling, an 8.9% comp last year. The two-year comp of 10.6% continues to reflect a robust growth rate relative to the broader grocery retail industry. While first quarter sales were consistent with our outlook, we believe these trends reflected cautious consumer spending behaviors observed broadly across the grocery retail sector. Additionally, the sales comp primarily reflected trends with customers who do not participate in our rewards program. We continue to see stronger sales growth by our NPower Rewards Program members. We believe that our differentiated offering of high-quality natural and organic products at always affordable prices continues to deliver strong value for our customers and reinforce our competitive position amid economic uncertainty. Furthermore, we believe that our company's initiatives position us well to achieve sustainable long-term growth. Next, I will review the performance of key operational initiatives. During the first quarter, NPower Rewards Program net sales penetration increased two percentage points to 83%, supported by strong membership gains and higher traffic by NPower customers. The continued expansion of both membership and sales penetration highlights our customers' appreciation for the program's value and benefits. NPower remains an effective tool for optimizing promotional activity and strengthening customer engagement. Our natural grocers brand products represent value through premium quality at compelling prices. In the first quarter, our private label products accounted for 9.6% of total sales, up 70 basis points from a year ago. The strong growth reflects rising customer awareness, driven in part by more prominent marketing efforts as well as the impact of new product introductions. During the first quarter, we relocated one store. Relocations are a key element of our store development strategy, as they typically generate accelerated sales growth off a higher sales base. Additionally, today we are affirming our plan of opening six to eight new stores in fiscal 2026. and are targeting 4-5% annual new store unit growth for the foreseeable future. Yesterday, our company released its fiscal year 2025 sustainability report. The featured topic is our differentiated nutrition education program. Since my parents founded our company in 1955, we have offered free nutrition education, because we believe it empowers our customers, crew, and communities to improve their well-being. This long-standing commitment earned us the Shelby Report 2025 Sustainability in the Food Industry Award for advancing sustainable practices in the food sector and driving meaningful change through our nutrition education program. For further information about our nutrition education program, our rigorous product standards, and commitment to our crew and communities, please refer to our sustainability report or visit our company's website. Last but not least, an important component of our differentiated model is the best-in-class customer service provided by our Good4U crew. I wish to express my deep appreciation to our crew for their continued commitment to delivering an exceptional shopping experience. Now, I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance.

Thank you, Kemper, and good afternoon. Our first quarter net sales increased 1.6% from the prior year period to $335.6 million. Daily average comparable store sales increased 1.7%, and on a two-year basis increased 10.6%. Our daily average comparable transaction count increased 1%. The daily average comparable transaction size increase of 0.7% included annualized product inflation of approximately 2% to 2.5%. Items per basket were down less than half an item year over year. We continue to see the greatest sales growth in meat, dairy, and produce, which are some of our most differentiated offerings. We saw a modest decline in the number of transactions using Snap EBT in the first quarter. Snap represents approximately 2% of net sales, and the reduction in Snap transactions was immaterial to our overall sales comp for the quarter. Gross margin decreased 40 basis points to 29.5%, driven by lower product margin, primarily due to higher inventory shrink, the majority of which was driven by isolated events. Store expenses decreased 0.7%, primarily driven by expense management. Administrative expenses decreased 5.9%, primarily driven by costs incurred in the prior year period related to the chief financial officer transition. Operating income increased 9.7% to 14.6 million dollars. Net income increased 14% to $11.3 million, and diluted earnings per share increased 14% to 49 cents in the first quarter. Adjusted EBITDA increased 3.1% to $23.5 million. Turning to the balance sheet and cash flow, we ended the first quarter in a strong liquidity position, including $23.2 million in cash and cash equivalents, no outstanding borrowings, and $67.6 million available for borrowing on our revolving credit facility. During the first quarter, we generated cash from operations of $21.1 million and invested $9.6 million in net capital expenditures, primarily from new and relocated stores, resulting in free cash flow of $11.6 million. Today, we are affirming the company's fiscal year outlook that we originally provided in November. It continues to reflect both the opportunities we see in our differentiated market position and appropriate caution given the current consumer environment. Our outlook includes the following. Open six to eight new stores with the pace of openings weighted towards the back half of the fiscal year. Relocate or remodel two to three existing stores. Achieve daily average comparable store sales growth between 1.5% and 4%. achieve diluted earnings per share between $2 and $2.15, and direct $50 to $55 million towards capital expenditures to support our growth initiatives. In addition, our current expectation is that sales comps will be at the low end of our outlook range through the second quarter as we cycle strong comps in the prior year, while increasing slightly in the second half of the year as we cycle lower comps. Additionally, the comp range reflects the uncertainty in the consumer environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percentage of net sales will be relatively flat to slightly lower. Lastly, in fiscal 2026, we are investing approximately 12 cents of diluted earnings per share in new store openings, primarily through higher pre-opening expenses and store expenses. Now, we'd like to open the line 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 touch-tone phone If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Scott Mushkin with R5 Capital. Please go ahead.

Hey, guys. Thanks for taking my questions. So I actually wanted to start off where you guys left off on the 12-cent headwind from the new stores. As we think about that going forward, is it going to be as dramatic? I think it wouldn't be as dramatic the headwind as we think about next year and the year after. How should we think about that type of drag as we move out beyond this year?

Well, you know, this year we're accelerating our growth from two new stores to eight, so that definitely gives us quite a bit more pre-opening expense for, you know, six more stores with pre-opening expense. So that's where that 12 basis points came from. Next year, if we open a consistent eight new stores and do a couple remodels, it should be fairly flat. Going forward, if we add, you know, if we accelerate it to $10 or $12, then there would be a little bit more headwind. But it'll probably be flat next year to $8 again, $8 to $9 new stores again next year.

And was it $0.12 or $0.12 basis points? I just want to make sure.

$0.12 basis points. $0.12.

$0.12.

$0.12. Okay. Yeah.

Okay. So, you know, conceivably a pretty – good tailwind, I guess, as you look out, depending on what happens with the rest of the business. Okay, so then switching gears to get some more thoughts on the shrink. I know you guys said that was kind of the biggest issue with the gross margin, and you called out, I think, some one-time isolated events. Can you give any more color on that, and are those isolated events going to continue, or is that it was just, hey, this gross margins actually would have been a lot better if this hadn't happened.

Yeah, Scott, this is Rich.

Hey, Rich.

Hi. And one of the big items was we're cycling fairly low shrink in Q1 of last year. So last year was probably running about 15% below our three-year average. This quarter, we're probably running about 10% above our three-year average. So, you know, I would say a lot of that is sales velocity. And then we had some one-time items related to weather-related power outages that were obviously unexpected. We had some incremental shrink related to store closures as well. So that would be, you know, and then I'd say, you know, a little bit of execution, operational execution that you tend to see quarter to quarter, but nothing overly material.

Do you have any size of that, of the percentage of the decline in gross margins that would be attributed to power averages and stuff like that, or no?

Well, I think in terms of just the cycling, the cycling was about 50% of that variance. And then I would say some of these anomalies were probably another 25%, and then the balance of it would have been, I'd say, just standard variances.

right all right that's great that's great caller um then my final uh question is just around the environment and you know i've been doing this a long time and i think a stack comp is useful but also not necessarily the end-all be-all when a when an industry should be generally growing faster than it is right now and this is not as statement to you guys, just kind of a general thought. If you kind of look at your customer base and you guys gave some good color on the end power, but if you look at it by segment, by age, who's coming in and driving a lot of that growth, are there any consistencies there that you would say, hey, this demographic has definitely pulled back a little bit?

Well, the demographic that's income constrained is pulled back. That's where you're losing customers right now. They're just nervous and their paychecks aren't keeping up with the rate of inflation. They're looking for as inexpensive of alternatives as they possibly can find. That's where we've lost customers right now.

Have you seen an age reflection there? We've seen some data that you know, suggest that the younger households are the most impacted, or are you guys not really seeing that?

Not really. I mean, there's definitely, you know, if they're income constrained, then they're pulling back. Right. If that makes sense, too.

Yeah, but with Democratic-wise, I mean, you know, you know, third-party data that we get, so nothing material there. And I think that, you know, this shrinking basket that we've been seeing is really all around sort of cautious consumers who are very much seeking value. And, you know, the pullback that we've seen has not been in our Empower customers, but our less engaged customers.

All right, guys. Our Empower customers actually were really robust.

Yeah, and it's a tough environment out there, so I'm just glad to see the numbers you put up. So anyway, all righty. Appreciate it. Thanks, Scott. Thanks, Scott.

The next question will come from Chuck Sierankoski with North Coast Research. Please go ahead.

Good afternoon, everyone. I want to dive in a little bit on the new store opening program for this year. You've got six to eight new openings. You've done one reload. so far. Now, that would count as a new opening and a closure. Any net closures for the year, and what's your definition of a reload and a remodel? Are they coincident events as we look at the storing program for this year?

No. We've had the one closure. We had a one closure in our Austin Harbor store in Texas in October, and we don't We won't have any more closures this year. Probably not any next year either. Anyway, the one relocation, that's a relocation. So we'll have 68 actual new stores and one to three relocations or remodels this year. So overall, we'll be from eight to 11. I mean, nine of the... I think I've got eight to 11 actual moves and new stores.

Okay, that's helpful. And as you're talking about the three strongest categories, which tend to be some of the more expensive purchases, how does that square with the cautious consumer, or is that reflected in the reduction in the items per basket?

Well, supplements, which is our highest margin category, had a slight decline in sales for the quarter, but there was zero inflation in the supplement sector, which kind of explains the decline in the category. So we had a very slight drop in items sold in the supplement area because we had zero inflation in that category. Our other, I would guess, what would the other ones be? Body care. Body care was similar. And we actually had good growth.

Growth in units?

Yes.

Okay, great. Thank you.

Yes, I mean, yeah, it was definitely body care and supplements where we saw the biggest decline in units. And then also household items.

Okay. And with supplements being a high gross margin category, that showed up in the overall P&L then?

Yes, it did. It had a slight impact. But I mean, overall, our cash register ring margin was flat for the quarter. So we had some pickup in margin in some of the other categories.

Thank you.

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

Thank you for joining us. We are committed to our differentiated business model of offering high-quality natural and organic products at always affordable prices. and we are confident in our ability to continue to drive profitable long-term growth and enhance value for all our stakeholders. Thank you, and have a great day. Bye now.

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