Good day ladies and gentlemen. And welcome to the Natural Grocers' Fourth Quarter Fiscal Year 2017 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. At this time, I like to turn the conference call over to Mr. Todd Dissinger, Vice President and 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 fourth quarter and fiscal year 2017 earnings conference call. On the call with me today are Kemper Isely, our Co-President; and Sandra Buffa, our Chief Financial Officer. 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 risk 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. Fiscal 2017 was a challenging year but we are pleased to finish on a positive note as we achieved our recent guidance and are encouraged by the continued improvement in comparable store sales trends. During the fourth quarter, daily average comp store sales increased 2.1% including continued improvement in mature store comps reflecting the effectiveness of our marketing and targeted promotional activities. Daily average mature store comps declined slightly at 0.2% during the fourth quarter compared to a 1.8% decrease in the prior year period. Importantly, comps improved month-over-month as the quarter progressed and the trends have continued with further improvement thus far in the first quarter. The improved sales trends along with our focus on cost led to 20 basis point decline in store expense as a percentage of sales during the quarter. We also saw positive year-over-year growth in EBITDA. For the year, we generated 9% revenue growth on a 0.1% daily average comparable store sales increase and 11% new store unit growth. We are also pleased with our improved operating cash flow in fiscal 2017 which allowed us to meet our objective of self-funding new store growth during the year. In addition, moderating our new store growth targets allowed us to fully focus on improving operational efficiencies across our store base. These factors made a positive impact on our financial results during the fourth quarter and we believe we are well positioned for further improvements into fiscal 2018. As you are all aware, the national and organic food landscape has evolved rapidly over the last couple of years. These developments include new format competitors, expanded efforts among traditional food retailers, increased online activity and of course the recent consolidation of the largest format competitor in this sector. We have and will…

Thank you very much Kemper and good afternoon everyone. During the fourth quarter of fiscal 2017, net sales increased 9.7% to $198.5 million and daily average comparable store sales increased 2.1%. The daily average comparable store sales increased during the fourth quarter was driven by 1.2% increase in daily average transaction count, and a 0.9% increase in average transaction size. Daily average mature store sales decreased 0.2% during the quarter. However, as Kemper mentioned, our mature store comp sales are trending in the right direction year-over-year and quarter-over-quarter, to 0.2% mature store daily average comps declined improved from a 0.9% decline during the third quarter and a 1.8% decline a year ago. Gross profit margin declined approximately 130 basis points to 26.8% primarily due to an increase in occupancy cost as a percentage of sales, and to a lesser extent a lower product margin. The increase in occupancy costs, as a percentage of sales was primarily due to higher average lease expenses at newer and relocated stores and also reflects the decrease in mature store sales and the fixed nature of rent obligations and related occupancy expenses. Product margin declined due to focused promotions, targeted at driving additional traffic. Store expenses as a percentage of sales decreased approximately 20 basis points to 22.7% during the fourth quarter compared to the prior year period. The decrease in store expenses as a percentage of sales was primarily due to lower labor related expenses driven by fewer non-comparable stores. Other store expenses, utilities and marketing expenses all as a percentage of sales. Administrative expenses were up modestly year-over-year in total dollars as a result of higher home office administrative costs that remained flat as a percentage of the sales. Pre-opening and relocation expenses decreased $1.3 million during the fourth quarter compared to the prior comparable period in fiscal 2016 due to the reduced number of new store openings as well as the timing of openings and relocations. During the fourth quarter of fiscal 2017, we opened no new stores while relocating one store compared to opening eight new stores and relocating one store in the fourth quarter of fiscal 2016. Net income was $1.2 million with diluted earnings per share of $0.06 in the fourth quarter of fiscal 2017. EBITDA was $10.3 million in the fourth quarter of fiscal 2017, up 1.5% when compared to $10.1 million in the fourth quarter of fiscal 2016. We ended the fiscal year with $6.5 million in cash and cash equivalents and $20.6 million available for on our revolving credit facility. During fiscal 2017 we generating cash from operations of $40.8 million and invested $38.5 million in net capital expenditures, after reflecting $2.6 million of sale-leaseback proceeds earlier in the fiscal year. As Kemper mentioned that the strong cash flow in fiscal 2017 allowed us to meet our objective of self-funding our new store unit growth during the year. Now I will turn the call back over to Kemper to discuss unit development and guidance.

Thank you, Sandra. Thus far during the first quarter of fiscal 2018 we have relocated one store in Colorado and opened one new store in Utah. We have signed leases for 11 new stores to open in 2018 and beyond. We continue to monitor new store performance, plan for a continued moderation on new unit growth in 2018 and we will remain flexible with new unit development plans going forward in order to adapt to the competitive environment as necessary. Now, I will provide our 2018 outlook. During fiscal 2018, we expect to open eight to 10 new stores, resulting in 6% to 7%-unit growth; relocate three to four stores; achieve daily average comparable store sales growth of 0.5% to 2.5%; achieve net income margin of 0.6% to 0.9%; and achieve diluted earnings per share of $0.21 and $0.31. Additionally, we expect capital expenditures for fiscal 2018 to be in the range of $25 million to $30 million. We anticipate cash on hand, cash generated from operations and availability under our credit facility will be sufficient to support our capital requirements and any contemplated share repurchases under our two-year $10 million share repurchase program. We are pleased with the improvement in comparable store sales we were able to generate in the fourth quarter and the favorable sales momentum we are carrying into fiscal 2018. We will remain focused on driving sales performance while monitoring costs with a focus on profitability. We remain confident in our core strategies and positioning, and continue to pride ourselves in providing support for our local communities by offering quality products at affordable prices with outstanding customer service and free nutrition education. We value the strong relationship we have built with our customers and vendors. We sell products with a purpose based on our values and principals and our commitment to our core beliefs is what sets us apart from the competition. Now I'd like to open the lines up for questions. Thank you.

Ladies and gentlemen, we will now begin the Question-and-Answer Session. [Operator Instructions]. Our first question today comes from Bill Kirk from RBC Capital Markets. Please go ahead with your question.

Hi, thank you for taking the question. So, in the fiscal 2018 guidance, do you expect to mature store comparable store sales to turn positive? And would that reverse some of the occupancy cost deleverage that you've seen in recent quarters?

Yes, we expect to mature stores to have positive comp this year. And yes, that would help -- that means you really need to get more than just a turn to positive, but yes, that would help occupancy cost.

Okay. And a slightly different style of question. The Winter Olympics are already around the corner and I believe you still have a sponsored athlete in Sugar Todd. So how will we see that relationship manifest itself? And will you be holding any events related to this sponsorship?

I'm sure that our marketing guru Kevin Miller will have a great plan for utilizing our sponsorship for the Winter Olympics.

Our next question comes from Rupesh Parikh from Oppenheimer. Please go ahead with your question.

Thank you for taking my question. So, as we look at your quarterly trends, are you seeing further improvement this quarter or any color you can provide in terms of what you're seeing in terms of quarter-to-date.

Yes, we've seen improvement over the last quarter.

Great. And then obviously a [indiscernible] about the Whole Foods, Amazon, the announcement that they've had. Have you guys seen any volatility, like when these announcements come out, do you tend to see volatility in your business?

We've seen gross steady increases in our comparable store sales business over the last four months.

Okay. So, you are not seeing anything unusual, okay. And then one more question, clearly Whole Foods on their category management efforts there, they seem to be partnering more with the bigger suppliers. So, I was just curious as the smaller suppliers may not be able sell much the Whole Foods going forward. Are you seeing more interest in smaller suppliers reaching out to Natural Grocers?

We've always had a lot of interest from smaller suppliers in our chain, because we've always been very receptive for smaller suppliers. Celestial Seasoning for instance pretty much got their start in our stores way back when they started and they were a small supplier. And there are many other small suppliers that have also pretty much got [indiscernible] got there started in our stores, when they were a small supplier also. And we have a lot of -- and yes, we'll continue our good relationships with small suppliers, and yes, we are getting more interest.

Our next question comes from Chris Mandeville from Jefferies. Please go ahead with your question.

Hey, guys. This is actually [indiscernible] on for Chris, thanks for taking my questions. So, I guess first starting on the guidance, so just in terms of the comps you guys are guiding to 0.5% to 2.5% after putting up a solid number in Q4 and the further improvement quarter year-to-date. So just wonder if there is some conservatism there or what happened for you to end up at the lower end of that range?

Well I mean last year during this quarter we had negative comps, so of course we would expect to have better higher comps this quarter as been just a lot easier to comp off with the negative comp in the quarter. Then it will be later in the year when we ended up with a 2% on comp in the fourth quarter so we just wanted to make sure that we are keeping a realistic outlook for the year.

Okay, understood. And then just thinking the longer term for the store growth, so 6% to 7% into 2018, is that kind of a rate we should be thinking about longer term as well?

We’ll probably have a very similar growth pattern through 2019 as we’re having this year. So not as a percentage but as a quantity number. 8% to 10% will be our probably going forward number.

Understood and then shifting gears a little bit, one last one from me. Just relates to the egg discounts that you guys are giving out for the Empower members. What are you guys seeing around in terms of uplift for the baskets or the trick frequency for these members?

Well we actually started the egg discount for all of our shoppers in August and we had -- it was one of the primary drivers of our increased customer counts and comp count -- comp increases over the last couple of months. Our Empower members are best customers and they definitely are appreciative of the offer to them and our offers to our empower members definitely drives their visits to our stores and an increase the size of their basket.

Our next question comes from Shane Higgins from Deutsche Bank. Please go ahead with your question.

Yes, thanks for taking the question. Just Kemper I know you guys have run some TV and advertising campaigns over the past year. Did you guys step that up at all in the fourth quarter, did that contribute to the sales lift and can you just kind of speak to how you guys are thinking about your marketing spend in general, TV, the advertising campaign in particular in 2018?

Well television advertising, we did not do any television advertising in the fourth quarter. We were still getting the benefits from advertising as we did in the third quarter, our television advertising builds your brand presence and you get benefit from it for second quarters afterwards. We do plan on having television advertising in our marketing budget starting in either January or February of this year and it will run in the second quarter and third quarter. And in the markets, that we did run television advertising, particularly with some of the markets where we ran television advertising and we have seen very good comps set path at the stores that have had that television advertising. As far as the rest of our marketing spend goes, we have pulled all of our marketing spend out of newspapers, so we're not planning under any marketing spend on newspaper advertising this coming year which is a significant shift for us. And we are now concentrating namely on our healthy pipeline targeted both curves and social media and then television advertising and markets that we believe we can afford that the read is get in.

So, is the aggregate spend going up very much in '18? I know obviously you guys are...

Our aggregate spend will be less '18 than it was in the 2017.

Got it, thanks. And then just a follow up on the gross margins. How much of that was attributable, how much of the decline is attributable to mix. I think last quarter you guys talked about grocery growing a bit faster than supplements and body care. Did that continue during the fourth quarter?

I think Todd will take that question.

So, in the fourth quarter in terms of mix, actually all three categories that we aggregate to had a positive comp. In terms of their share of the market within the company, we saw grocery grow more in the fourth quarter than the other areas. And for the full year grocery has some growth compared to the other areas were down slightly.

Was that a significant contributor to the 130-basis point year-over-year decline?

Well grocery is, of those three categories, grocery is the lower margin category, so yes. And a lot of our promotional effort was directed at products that are the grocery category.

Okay. And so, but I'm just in terms of kind of a parsing out the elements of gross margin. Approximately how much of the one third, I know I guess, give exact numbers, but just in terms of thinking about occupancy deleverage versus merchandising margins et cetera. How should we kind of think about that?

We don't break this two out. Clearly in the fourth quarter there was more erosion in the product margin area. For the year, occupancy would have been responsible for most of the decline in our gross margin.

And what level comp do you guys need approximately to sort of leverage occupancy and other expenses in your P&L.

We really need about 3% comp.

Got it. And then just last one from me it's on tax rate. In your guidance for the year, what do year our guys projecting?

35.6.

Our next question comes from Ryan Gilligan from Barclays. Please go ahead with your question.

Hi thanks for taking the question. Just following up on gross margin. Should we expect this pace of gross margin decline to continue into 2018?

We certainly are going to be investing in price in 2018. And so that's probably why we have some fairly conservative earnings guidance for the year.

The impact from occupancy will moderate a little. I mean we'll still see some increase there, but it's not going to be as much because in 2017, we still had some of the 23 stores from 2016 that were impacting the occupancy cost.

Got it. And then on EBITDA margin, should we expect them to track in line with net margins. So down 30 basis points to flat? If you can give any guidance?

Yes, we aren’t giving EBITDA guidance because we give that as a percent and so the [indiscernible] have really been pushing a lot on providing a reconciliation if you’re going to provide guidance. So, we will still provide actually EBITDA numbers but you know our EBITDA has been always straight forward to calculate. I mean you can just take the depreciation off our financials, interest and the taxes, and you are going to get there. So, we’re not giving guidance for reason other than we don’t want to walk you through those numbers.

Okay, fair enough. And then lastly can you just update us on your private label work with them, and I think that’s a new launch scheduled to come out in recent weeks?

But we haven’t launched yet but we expect to launch in the first quarter -- in the second quarter January to March 2018 quarter in many talks.

How many SKUs?

A minimum of around -- we will get back to you on that. I can’t remember off the top of my head but it’s quite a few.

Our next question comes from Scott Mushkin from Wolfe Research. Please go ahead with your question.

Hey guys. Thanks for taking my call. And congratulations on your sales turn.

Scott, you won on the $5 price point.

So, the extended landscape inflation, any thoughts on that as we are kind of looking out and what you are seeing, I think you kind of made some comments that you guys have been pretty aggressive in some of these commodity areas to drive some traffic. What’s your thought about where things stand in some of your markets and on the inflation outlook?

I think the inflation is pretty tame. As far as margin I think that there is a lot of competition in order to drive traffic you have to be competitive on commodity items to drive customers into your stores.

So, you think it's been getting worse, same, easing up a little bit or any thoughts on the cadence?

The price competition is getting…?

Yes, the price competition in those key areas.

The price competition is getting more severe.

Getting more severe.

I mean Whole Foods being bought by Amazon has brought a whole new dynamic to that.

Indeed, it has, I guess we are seeing in traditional pricing.

That’s just a bunch of smoke but anyway. They’ve said they have cut prices and then they get a $1 billion worth of publicity which is a bunch of smoke.

It’s nice to have that happen though.

Nice for them, yes.

Nice for them, yes, nice for them.

But then people shop and they realize that they really get a price cut when they shop, it kind of irritates them, but anyway.

So, the rents, right, I think you guys are in you said 3% to comps what’s needed to rent. Is there any flexibility, have you guys gone down the road with some of your landlords and say hey because I mean obviously that becomes just like this kind of anchor around your guys neck, it means keep having your rents escalate and it just seems to me that I'll ask you guys the question, I mean is there any flexibility there, have you gone back to some of your landlords to see if you can maybe do something about that or is that just impossible?

Well number one, our rents are flatlined so they don't escalate. The only thing that causes the rent as a percentage of sales to come up is the fact that we have a lot of newer stores with higher rents that have come on and they, in particular our 2016 store didn’t perform -- the out of the box performance what is good as would have thought as our previous experience. As far as our negotiations with landlords I really won't talk about that in a public forum.

Sure. Then what drives the 3% comp needed to overcome the rent. So that you come down overtime as we age the stores or not?

If we can get some good positive comp and rent as a percentage of sales overtime should come down.

Yeah. I think you'll remember that one of the key drivers with occupancy increasing is that percent of our stores that are in the newer format which is the larger format. So, as we open more stores, that's what's causing the deleverage and why we look for the 2.5% to 3% comp to improve that. So as the number of stores that we opened flows down then that gives us a little bit more room compared to a year when we opened 24 stores.

Okay. So, your rent growth on each individual store is not escalating, it's more the build out that's caused us.

Correct.

And our next question comes from Alvin Concepcion from Citi. Please go ahead with your question.

Thanks. Just a follow up on that 3% comp leverage point. Do you see opportunities to lower that bar?

I think we do. We certainly have identified some initiatives that to create more efficiencies in our operations, in the store expense category in labor and in strength. I think we saw a little bit of positive leverage just this fourth quarter where the store expenses were down 20 basis points over prior year.

Got it. And you mentioned your comp trends, sorry go ahead.

And you really get significant leverage and really need to get that 3% plus comp.

Yeah. And I guess I'm sort of talking about comps. I mean accelerated in the first quarter so far. What do you think the pickup beyond the sequential prior year comparison you called out? Was it all producing regions showing a pickup was it maybe a little bit better inflation. Just curious what you attribute to that?

On reality, our basket was impacted by our promotional pricing. So, we had to make up a lot of extra revenues because of our promotional pricing during the first part of this, and during the last part of last quarter and the first part of this quarter. The [way we are] reaching is definitely that area has definitely improved and we are cycling on a year from the last election where there was a lot of political uncertainty that made people very hesitant to shop.

Follow up on the [oil region, the oil region] as we track it actually had a positive comp this quarter versus the last I think six quarters it’s been negative.

And ladies and gentlemen, at this time, we will conclude today’s question-and-answer session. I would like to turn the conference call back over to Kemper Isely for any closing remarks.

Thank you very much for joining us to discuss our fourth quarter results. We remain confident in Natural Grocers 62-year history of successfully adapting to an ever-evolving natural products landscape. We look forward to speaking to you on our next call. Have a nice day. Bye.

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your lines.