Good day, ladies and gentlemen, welcome to the Natural Grocers' Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. [Operator Instructions]. As a reminder, today's call is being recorded.I'd now like to turn the conference over to Mr. David Colson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage Fourth Quarter and Fiscal Year 2019 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, 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 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. Today's press release is available on the company's website and 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, David, and good afternoon, everyone. We are excited to report a solid finish to fiscal 2019, celebrating over 16 consecutive years of positive daily average comparable sales growth, with comps up 1.8% for the fourth quarter and up 3.1% for fiscal 2019. We continue to expand our store base as well as relocate existing stores to drive market share and enter new markets.Our balance of investing in growth and operational excellence is driving both revenue and expense efficiencies, which contributed to 6.4% revenue growth and 11.4% operating income growth during fiscal 2019. During the year, we were able to moderate the pressure on gross margin we saw during the prior year, while driving growth and leveraging store expenses. Today, we announced the initiation of our first quarterly dividend of $0.07 per share. This announcement reflects our continued growth, profit performance and confidence in our business, along with our strong financial position and cash flow. We are also pleased to announce the amendment and extension of our $50 million credit facility.During the year, we were proud to launch 47 new Natural Grocers brand products, in line with our projections. Our private brand products have been developed consistent with our core values and are positioned as a premium quality brand at an affordable price. We remain encouraged by the customer response to date, and we'll continue to expand our Natural Grocers brand offerings. Targeting the launch of an additional 70 products in fiscal 2020. We believe that Natural Grocers brand has significant long-term potential, and we plan to continue to focus on its growth and expansion.We are also identifying key new product categories that resonate with our consumers to drive sales. A recent example is the addition of Hemp-Derived CBD products across the majority of our stores during fiscal 2019,…

Thank you, Kemper, and good afternoon, everyone. We are pleased with our performance in fiscal 2019, driving both growth and improved profit performance in a competitive environment. Our emphasis on balancing our growth investments and a focus on operational excellence contributed to our improved profit and cash flow performance. The initiation of a quarterly dividend is a reflection of our performance, financial position, confidence in our future and is consistent with our goal of further improving shareholder value. During the fourth quarter, net sales increased 4.5% to $227 million. Daily average comp store sales increased 1.8%, and mature store comp increased 1.2%. The comp increase was driven by a 1.8% increase in average transaction size and daily average transaction count consistent with the fourth quarter of last year. While transaction count was flat year-over-year, the 2-year stack growth rate was 3.8%. We continue to face a competitive environment during the fourth quarter. However, the environment remained relatively stable, and our focus has been consistent. In that we believe we have a powerful differentiation story to tell.Additionally, inflation remained low at about 1%, and we experienced stable pricing and supply during the fourth quarter. Gross profit margin during the fourth quarter was 26.0% compared to 26.3% in the prior year. Gross margin during the fourth quarter primarily reflected lower product margin attributable to a shift in the sales mix toward lower-margin product categories. We continue to focus our primary promotional offers on grocery items, which generally carry lower gross margins than supplements and body care. Promoting grocery items has proven to be an effective method of highlighting Natural Grocers, higher-quality standards and affordable prices. However, we are working on a number of initiatives in fiscal 2020 to drive supplement and body care sales in order to mitigate the pressure on gross…

[Operator Instructions]. And our first question comes from Greg Badishkanian of Citigroup.

This is actually Abigail Lake on for Greg. So comps accelerated 50 basis points sequentially this quarter on a two year stack basis. Could you give us some color on what's driving this? And then it looks like next quarter you're expecting a deceleration in comps, given the easier compares you're lapping after the first quarter. Could you give us a little more color on what you're expecting there?

Well, I would say that in the quarter, on a two year basis, we did better. But on -- and on a quarterly basis we were about the same as in the third quarter. So I think that will -- we're expecting to have a similar comp for this quarter. And then we go up against easier comp on a 2-year basis starting in the second quarter of next year. And so hopefully, we'll be able to accelerate our comp growth when we are up against the easier comp amounts in the second quarter of this year.

Okay. Great. And then it looks like you're anticipating a pretty wide range on EPS for 2020 from $0.37 to $0.45. Could you help us bridge the gap between the high and low end of that range?

Sure. Thanks for the question. So on the high end, we're anticipating comps to run similar to Q4 of 2019 or slightly better. And then margin, year-over-year pressure decline would be similar to what we experienced for the full fiscal year in 2019, plus we'll have some negative pressure impact from the lease accounting, which will be about 20 to 25 basis points on gross margin. And then the pressure there is coming from the continuation of the shift in mix as we continue to promote grocery and see higher comp in grocery. And we're anticipating some benefit from supplement and body care sales initiatives. And then store expenses would have leverage comparable to what we realized in 2019. And then on the low end, we would anticipate comps similar to Q4 of 2019 or slightly below. And gross margin on a year-over-year change would be in line with the change that we experienced in Q4 2019, and then, of course, plus the lease accounting impact. And the driver there would be the mix. And then no favorable impact from supplements and body care initiatives. And then store expenses would probably be flat to slight deleverage. And that would be driven by wage pressures and the lower sales volume.

Okay. Great. If I could sneak in one more. So what would you expect for the cadence of the new units next year? And then what kind of return are you targeting for these stores? And how would we expect to accelerate that return further?

Well, in the first quarter of the year we will have -- we will open 2 new units. And then I think in the second quarter, we're scheduled for 2 of them. Yes, 2 in the second quarter. And in the...

I think it's one and one.

And then we have 1 and 1 scheduled for the following 2 quarters. And as far as -- what was -- I don't remember the question.

Our return.

Yes. I'll let you answer that, Todd.

So historically, our return objective has been to realize a cash-on-cash return in the fifth year of 30%. And given the recent -- or the competitive environment over the last couple of years, we're seeing that extend out to the sixth year. So that's our return objective.

Our next question comes from Shawn Collins [ph] of Citigroup Research.

Kemper and Todd, I wanted to ask a question on the cost side. I wanted to ask on your cost of goods. What product areas and categories stand out to you that you're seeing more inflationary type trends, and also deflationary like trends around products and categories, please?

I would say that this year things have been pretty stable as far as inflation goes, particularly on the commodity side. I mean last year we saw quite a lowering in the price on commodities. But this year it's been pretty flat so far. As far as price pressures, there seems to be some price pressure. There's always a lot of fluctuations in produce depending on the growing season. Right now there's a lot of price pressure on lettuce. Price of lettuce has kind of gone up a lot and the same with the price of broccoli. So in produce, we're seeing some price inflation right now. But it'll probably moderate once the growing season switches from Central California down to the desert areas of Arizona and Mexico. And then we've seen avocado prices stabilize. Finally, they went way up in the summertime, and now they're back down to a more reasonable level. And then like I said, the commodities in the bulk area have been pretty flat to just a little bit down this year. And then we haven't seen -- in the food area, we really haven't seen a whole lot of inflation this year so far and with supplement, other than normal like 2% to 3% price increases.

Okay. That's great. That's very helpful color. I appreciate it. Just a second question, if I could. On your private label business. I know that you launched 50 products in 2019. And I think you said you are looking to launch about 70 products in 2020. Can you just talk about some -- I guess when you look back at last year, I know it's only about a year, but can you talk about which products and categories you had some success with? And then can you talk about the 70 products that you're launching in 2020? Where you're focused? Which products and categories you're focused on, please?

Yes. Sure. In this past year, I would say that our biggest success was probably the launch of our chocolate line. And then we also launched a coffee line, both of those were well received over the last year. I mean of the previous -- of the original products we launched, the beans have been our best success so far. As far as what we're looking at in 2020, we're going to have a new paper line and a laundry line. Household products, I think, would be really successful coming up this year. And then we have a new bottled water line that's going to be in aluminum cans, which I think will be very successful during the coming year. Like Italian pizzas that are coming out, and a variety of products that I think will drive the success of the line over the year.

Great. That's helpful color and context. One last question, if I could. You talked about the sale of CBD and hemp-type products, or I guess, cannabis. That's a fairly growing and robust and widely -- a lot of attention around it. It's fairly new for us here at Citigroup. Could you just put a little bit more color and context around its size, scope and the nature of the business? And I guess some of the successes you've seen there and also some of the execution challenges that you might have seen there, please?

Yes. I mean right now it's in 117 of our stores. And so there are some states that are difficult regulatory-wise in selling it. And so we aren't able to sell it in some of the states that we're in. But in the stores that -- in the states that we're in, we're having really good sales growth. I think from the first quarter to the -- we introduced it in January of 2019 -- the January quarter of 2019 into the -- and I think the sales doubled from that quarter to the fourth quarter of the year. And one of the things that we're really focused on are standards around CBD. We require that we get testing on -- from each company that we dealt to make sure that it really has CBD in it and that it also doesn't contain too much THC, so that we don't run into other regulatory problems.

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

Thank you very much for joining us to discuss our fourth quarter results. We hope you enjoy the upcoming holiday season, and we look forward to speaking with you on our next call to review our first quarter 2020 results. Have a great day. Thanks, everybody. Bye.

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