Good day, ladies and gentlemen. Welcome to the Natural Grocers' Third Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-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'd now like to turn the conference over to Mr. Todd Dissinger, Vice President, Treasurer for Natural Grocers. Mr. Dissinger, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage third quarter fiscal 2016 earnings conference call. On the call with me today are Kemper Isely, our Co-President; Sandra Buffa, our Chief Financial Officer; and Kevin Miller, our Vice President of Marketing. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that 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 detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements. Our press release is available on our website and a recording of this call will be available on our website at investors.naturalgrocers.com. Now, I will turn the call over to our Co-President, Kemper Isely.

Thank you, Todd. Good afternoon, everyone. Our third quarter results were consistent with expectations in our revised guidance established after the second quarter. The trends that impacted us during quarter two largely continued during quarter three. However, we are adapting with a diligent focus on marketing and sales initiatives as well as cost controls. Let me provide some detail on the third quarter results. During the third quarter of fiscal 2016, net sales increased 13% to $179.3 million and comparable store sales increased 1.8%. Daily average comparable store sales increased 0.7% during the quarter. The daily average comparable stores sales growth was driven entirely by average transaction size, as average transaction count was consistent with the third quarter of fiscal 2015. Looking deeper into our comps, we saw a slight reduction in pressure from internal competition during quarter three as compared to quarter two. We expect to see some moderation in this pressure during quarter four, but we expect some ongoing level of internal competition as we continue to build out our presence in existing markets, while driving incremental share in each of these markets. We have also utilized the recent internal competition impacts to further refine our forecasting. Additionally, our comparable store sales growth continues to reflect the impact of regional economic weakness in markets sensitive to the lower oil and natural gas prices. However, we saw some moderation of this pressure when compared to the second quarter. We also continue to track the direct impact from openings of new specialty grocery locations in our trade areas. We saw an increase in the number of store months with new specialty retail competition during quarter three, when compared sequentially to quarter two. However, the measured impact of new competition to our comparable store sales moderated slightly, when compared to quarter two. We continue to believe that our focus on nutritional supplements and nutrition education is one of our key differentiators in this competitive marketplace. During the third quarter, supplements, along with body care, posted a comparable store sales increase that was slightly above our reported comp. We remain focused on our directed sales initiatives, outstanding customer service and operational excellence. With that, I would like to turn the call over to Kevin Miller, our Vice President of Marketing, to discuss some of our initiatives.

Thank you, Kemper. It is my pleasure to join everyone on this call. Since arriving at Natural Grocers in mid-January, we've been on a mission to unlock the enormous potential of the Natural Grocers brand and to leverage the strategic advantages inherent in our business model, business practices and core values. Over the past six months, we have launched a number of test-and-learn innovations across a broad spectrum of marketing, digital, mobile, loyalty and e-commerce platforms. What we've learned confirms that Natural Grocers is well positioned for sales growth and that our new marketing strategy resonates strongly with consumers. It's very agile and highly scalable. Some highlights and a quick update on what's in the pipeline. In February, we re-launched Natural Grocers as the brand of choice for consumers who want products that are good4u, good4 the environment and are always affordable. Since March, we signed a series of highly visible, highly influential brand ambassadors to help champion our new positioning and to spread our good4u revolution across America, including top-100 fitness influencer and New York Times best seller, Ben Greenfield and US speedskater Sugar Todd, both now officially fueled by Natural Grocers. We recently completed our first consumer sweepstakes, the good4u Nutrition Challenge, setting record attendance at our nutrition education classes with over 10,000 consumers, many of them new customers, taking classes at Natural Grocers stores over a four-week period. In August, we are having our 61st anniversary celebration and we'll attempt a Guinness World Record during the celebration designed to generate unprecedented excitement, earn media awareness and traffic to the stores. In early Q1 2017, we will launch our new e-commerce site and our new digital media strategy to drive new customer traffic and generate strong holiday sales. In Q2, we will launch a new TV campaign to introduce America to Natural Grocers and our 100% organic produce advantage, our always affordable pricing advantage, our good4u positioning and to inspire them to join the Natural Grocers good4u Revolution. We are excited and confident in what we have in place thus far, and we look forward to discussing with you the future results of many of our recent initiatives. I will now turn the call back over to Kemper.

Thank you, Kevin. Turning to our margins during the third quarter, which Sandra will discuss in detail in a moment. Our moderated comparable store sales continued to impact both our gross margins and store expense ratio. Our gross margin decreased approximately 70 basis points, due primarily to higher occupancy as a percentage of sales versus the prior year. Store expenses continue to face deleverage, given the sales variance. However, our cost focus allowed us to experience a modest decrease in administrative expenses as a percentage of sales. We will continue to focus on our expense levels and have already made many adjustments to reflect our sales forecast. We chose to implement some initiatives, particularly those around store labor in a more measured manner. Moving to new store growth, we opened six new stores during the third quarter, including two stores each in Texas and Arizona, along with stores in Missouri and Washington. Additionally, during quarter three, we relocated one store and completed the remodel of another store, both in Colorado. Our new stores continue to generate opening volumes in line with our expectations and we remain on track with our new store pipeline. Now, I will turn the call over to Sandra to highlight our financial results for the third quarter of fiscal 2016.

Thank you, Kemper. Good afternoon, everyone. Net sales in the third quarter of fiscal 2016 increased 13% to $179.3 million and comparable store sales increased 1.8%. Daily average comparable store sales increased 0.7%, driven by a 0.7% increase in average transaction size. Daily average mature store sales decreased 1.3%, consistent with the performance in Q2 and largely reflecting the increased internal competition and regional economic pressures. Gross profit margin declined approximately 70 basis points to 28.4%, primarily due to an approximate 60-basis point increase in occupancy costs as a percent of revenue. We also encountered higher shrink expense, which was partially offset by higher product margins across most categories as a percentage of sales versus the prior year. Store expenses increased 19.7% to $40.1 million in the third quarter. As a percentage of sales, store expenses rose approximately 125 basis points to 22.4% during the third quarter compared to the prior year comparable period. The increase largely reflects deleveraging of store-level salary expenses, which accounted for the majority of the year-over-year increase as a percent of sales. Additionally, we saw some deleverage in depreciation expense. Administrative expenses as of percentage of sales, decreased approximately 5 basis points as a result of our cost focus reflecting recent sales trends. Pre-opening and relocation expenses increased over $900,000 to $2 million during the third quarter compared to the prior comparable period in fiscal 2015 due to the number and timing of new store openings. During the third quarter of fiscal 2016, we opened six new stores, relocated one store, and remodeled one store, compared to opening four new stores in the third quarter of 2015. Additionally, we incurred heightened pre-opening expenses as we prepare to open eight new stores during the fourth quarter. Net income was $2.7 million, with diluted earnings per share of $0.12 in the third quarter of fiscal 2016. The tax rate fell to 17.5% during the third quarter. The decrease reflects a revision in our estimated annual federal tax rate from 35% to 34% and favorable return to provision adjustments recognized in the third quarter as a result of higher than previously estimated federal and state tax credits. Utilizing our updated expected full-year tax rate of 35.6%, without discrete items, our earnings per share would have been approximately $0.015 lower for the quarter. EBITDA was $10.4 million in the third quarter of fiscal 2016. We ended the third quarter with $2.7 million in cash and cash equivalents and $25.2 million available on our revolving credit facility. During the third quarter, we repurchased 10,300 shares under our share repurchase authorization for an aggregate purchase price of $139,000. Now, I will turn the call back to Kemper to discuss our new store growth and outlook for fiscal 2016.

Thank you, Sandra. We opened six new stores in the third quarter, bringing our total count to 118 stores in 19 states at the end of the period. So far, during quarter four, we have opened two additional stores in Arizona and relocated our Colorado Springs location. We have signed leases for all of our remaining 2016 planned store openings in Arizona, Idaho, Nevada, North Dakota and Utah. We also have an additional 13 signed leases for stores planned for opening in fiscal 2017. We remain confident with our unit growth plan and new store performance. Moving to our outlook, we are reiterating the updated the outlook we issued on April 20 during fiscal 2016. We expect to open 23 new stores resulting in 22.3% unit growth, achieve daily average comparable store sales growth of 0% to 1.5%, achieve net income margin of 1.6% to 1.8% and achieve diluted earnings per share of between $0.50 and $0.56, and deliver EBITDA margin of 6.7% to 7.0%. We continue to expect capital expenditures in the range of $52 million to $54 million for fiscal 2016. CapEx for new stores, relocations and remodels is approximately 90% of the total. We would also like to provide some preliminary expectations for unit growth for fiscal 2017. The company expects to open 19 to 23 new stores, representing 15% to 18% in new unit growth. We expect this range to narrow as we progress through the fourth quarter and into early fiscal 2017. We anticipate cash on hand, cash generated from operations and availability in our credit facility will be sufficient to support our capital requirements and any contemplated share purchases under our two year $10 million share repurchase program. We remain focused on our founding principles and commitment to our core operating strategies. We continue to engage with our communities and increase awareness around our high-quality standards. We believe our quality standards make us a leader in the grocery and supplement industry and provide our customers with valuable confidence in what we sell at everyday affordable prices. Now, I would like to open the lines up for questions. Thank you.

We'll now begin the question-and-answer session. Our first question comes from David Magee of SunTrust. Please go ahead.

Hi, everybody, good afternoon.

Good afternoon, David.

A couple of questions. One is, can you give a little color regarding the pace of business throughout the quarter, just roughly month-by-month?

It was a bit choppy all quarter long. It was really hard to give an exact pace because of how different holidays fell this year. Mother's Day moved up in May, and then Easter was in March instead of April, and then Memorial Day moved out a full week. So, anyway, the end of the month was a little bit stronger than the beginning. But, as I said, it was definitely choppy and pretty hard to get a real gage on any good continuity.

Thanks. And then secondly, as you thought about the number of stores opening for next year, you are still going to open a lot of stores, and I would bet that – do you think that your business will pick up into that, that you won't be comping at 0% to 1% or 2% next year, is that correct?

At this point in time, we are not really forecasting what we think our comp will be next year.

Fair enough. And can you talk a little bit about inflation/deflation and what you are seeing there as well?

The only thing that we are really seeing any deflationary – deflationary pressure on – is in the bulk commodities, particularly almonds, otherwise everything is kind of inflating at about a 1% to 2% rate.

Great. Thanks, Kemper.

Thanks.

Our next question comes from Sean Naughton of Piper Jaffray. Please go ahead. Sean P. Naughton - Piper Jaffray & Co. (Broker): Hi, good afternoon.

Good afternoon, Sean. Sean P. Naughton - Piper Jaffray & Co. (Broker): So, you mentioned in the release that you felt like you saw some stabilization in Q3. I know David was asking about the cadence throughout the quarter, but maybe what – what did you see in the quarter for your comps? I mean, the traffic was relatively consistent at flat for what you had last quarter. Is it something you are seeing kind of as you're heading into Q4, is it that gives you a little bit more confidence, just curious what gives you that confidence that the stabilization in the sale trends is happening?

Well, we've seen similar sales trends to what we just presented to you starting this month. So, I mean it seems like that's where it's stabilizing now. Sean P. Naughton - Piper Jaffray & Co. (Broker): Okay. And then, I guess on the marketing process, it sounds like you guys are doing a lot of different things and getting some good traction with the current campaign. Can you talk about just maybe funding for these marketing initiatives, how should we – should we expect incremental dollars going in here, or is it kind of a fixed spend and it's just a reallocation? And then maybe as a follow-up there, how many people are now enrolled in {N}power, and what the traction has been like with that program?

As far as funding goes, when Kevin came onboard, we were pretty much budgeted for the year and we're staying within that budget. We've reallocated some of our budget to new programs, not as heavily as we would like to, which we will do next year and the budget will stay as a fixed percentage of our projected revenue for next year, similar to what it was this year. And then you asked about {N}power and how many customers that we have? Sean P. Naughton - Piper Jaffray & Co. (Broker): Yes, and how it's going? Yeah.

As of July 1st, we have around 210,000 participants in {N}power, about 110,000 of them are active on about a biweekly basis. Sean P. Naughton - Piper Jaffray & Co. (Broker): Okay. That's great. And then just lastly, just in terms of the category performance in the stores, any differences throughout some of the categories, how is your vitamin and supplement business, and just maybe dry grocery and kind of the other pieces that you breakout in the Q for us?

At our comp stores, the supplement category has outperformed what our comp has, so that has gained market share, and which you'd expect because of all of our nutrition education programs that we have going on in our stores. And then also, our beauty aids area has also experienced greater growth than our comp. Grocery has had a little bit of a challenge in the last quarter and we look forward, with Kevin's help, to elevate our position in that area, so that we will become the grocery store of choice for people that want to buy natural, organic and healthy foods in the coming year. Sean P. Naughton - Piper Jaffray & Co. (Broker): That's great. Better luck in Q4.

Thanks, Sean.

Our next question comes from Joe Edelstein of Stephens. Please go ahead.

Hey, guys. It's actually John on for Joe. Wanted to touch on the cost cuts you guys talked about last quarter. I was hoping you could quantify any goals you may have or how much you see over the next year or 18 months that you can take out of the system. And then I guess a follow-on to that is, where are you seeing the most opportunity, whether that be store labor or what have you?

What we've focused on is improving our labor productivity in our stores. And we just, at the end of this quarter, rolled out a new labor grid which will improve our productivity coming up over the next three months or so, and we should see some nice results from that. The other area of our focus is shrink at our stores, which has gotten up several basis points higher than what we've typically run, and we've made that a focus and we should start seeing some results from that by the end of this quarter also.

Okay. Cool. And then, I had a question on the store growth and the unit growth. So, you still have a pretty high expectation for unit growth on 2017. At what point does cannibalization and lack of inflation play a role in that? And I guess, what are you guys are assuming that's going to rebound to in 2017? Asked another way, if cannibalization sticks around, inflation doesn't pick up, do you still see yourself growing at that 18% rate?

We're giving a range right now between 19 and 23 stores, so 23 stores would be an 18% growth rate and 19 would be I think a 16% growth rate. So, we believe that in the long run that we need to keep on expanding our base so that we can get the critical mass that we need to have, so that we can become the grocery store of choice for natural and organic in particularly the western half of the country and then later in the eastern half of the country.

Okay. Thanks, guys.

Thanks.

Our next question comes from Rupesh Parikh of Oppenheimer. Please go ahead. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Thank you for taking my question. So, I first wanted to start off with your full-year sales or your comps and EPS guidance. I was curious why you didn't narrow that range for either metric with this release?

We were very comfortable with our range that we gave on our last update and just didn't really want to address that at this point in time. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Okay. Great. And then maybe a question for Sandra. If we look at that 15% to 18% unit growth that you expect next year, what type of comp do you think you need to lever the gross margin and SG&A line on that type of unit growth?

So I think if occupancy is our biggest issue for leverage and we have a rule of thumb that says we kind of like to see a 3% number to really see some comfortable leverage. But we have focused on a number of cost savings initiatives that are going to really we expect and hope to see affect that number to bring it down a bit, but I guess the safe number would be, say, we'd like to see a 3%. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Okay, okay. Great. And then on the consumer, we heard from Whole Foods yesterday that they were seeing trade down from their customers. So just curious, as you look at your business last quarter, are you seeing any evidence of similar type of trade down from your customers in buying cheaper products?

No, we're not seeing that at all. As a matter of fact, our average basket was pretty much flat for the quarter and our consumers are, I mean, our supplement area is actually increasing which would indicate that our customers are actually trading up to good, to vitamins and beauty aids in our stores. Rupesh Parikh - Oppenheimer & Co., Inc. (Broker): Okay. Great. Thank you.

Our next question comes from Mark Wiltamuth of Jefferies. Please, go ahead.

Hi, good afternoon. So, it sounds like if you look at the quarter here, you had slightly less cannibalization, slightly less competitive store openings, and a little less pressure from the oil and gas markets. And I was curious if you could give us a little forward-looking commentary on the cannibalization and competition. Are there any specific quarters where you're going to lap out of some heavier pressure? And if you could just give us an outlook on that, that would be helpful.

Well, we're hopeful that by the end of this quarter, we'll be out of some of the heavier cannibalization that we've had. We still have a couple of our stores that need to lap a year on some of the internal cannibalization before we go to where we want to be in regards to internal cannibalization. So that would be probably in the first quarter of next year. As far as competitive openings, we actually saw an increase in the number of months that we were under – there were more months of competitive opening, I mean the way we measure it, it was actually higher during the quarter than the last, and I don't foresee that changing in the near future.

Okay. And how are your younger stores doing on their maturation curve at this point versus having done in prior years?

As long as they didn't have new competition coming on top of them shortly after they opened, they're hitting what our targets are.

Okay. Thank you very much.

Thanks.

Our next question comes from Scott Mushkin of Wolfe Research. Please, go ahead.

Hi, this is actually Brian calling in on for Scott. Thanks for taking the questions. Just wanted to touch on kind of the inflation/deflation environment, what are you seeing, and maybe especially on the produce side, from both the competitive perspective but also from your sourcing and just any talk about kind of inflation/deflation there?

In regards to produce, we only sell organically-grown produce and there really has not been any deflationary pressure. I mean there is a limited supply of organic produce out there. And so, if anything, there has been somewhat of an inflationary pressure on produce prices. As far as our competition goes, we have not seen them lower their prices substantially on produce any more than they have in the past. We monitor that on a pretty much weekly basis and we're seeing that our pricing is maintaining its advantage over Whole Foods, and about even with the mass market and Sprouts.

Okay. And then, if there is some high/low promotional pricing going on at a specific competitor, do you guys typically go down and match that, or do you kind of let it filter through and kind of continue – keep your stand, how do you typically react to that?

Well, as Kevin says, we have affordable.

Always affordable.

Always affordable. And so, we don't get into the high/low pricing game.

That's great. Thanks for taking the questions.

And this concludes our question-and-answer session. I would now like to turn the conference back over to Kemper Isely for any closing remarks.

Thank you very much for joining us to discuss our third quarter results. Natural Grocers has over 60 years of successfully adapting to an ever-involving natural products landscape. Our value proposition, industry-leading product standards, unrivaled nutrition education and superior customer service are the foundation of our long-term success. We hope you can join us on August 11 as we celebrate our 61st year of improving health by visiting your local Natural Grocers' location, and if not, we look forward to speaking to you again on our fourth quarter and fiscal year 2016 conference call. And I just wanted to add one other note. Kevin mentioned that we had 10,000 people come out to our nutrition classes here in the last four weeks, and we just think that that was an absolute huge success for us. We believe that the positive word of mouth from that 10,000 people coming out will magnify itself exponentially in the coming months as we build momentum to become the premier place for nutrition education, buying natural foods and organic products. Thanks, everybody. Have a great afternoon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.