Kemper Isely - Co-President Todd Dissinger - Chief Financial Officer David Colson - Vice President, Treasurer

Good day ladies and gentlemen. Welcome to the Natural Grocers, Second Quarter Fiscal 2020 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 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, second quarter fiscal year 2020 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 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, David, and good afternoon everyone. Thank you for taking the time to join us today. We appreciate your ongoing support and we hope that all of you are staying safe and healthy during these unprecedented times. I would like to walk you through some highlights of the quarter and give you an update on the current impacted of the COVID-19 pandemic on Natural Grocers, and how we are responding to support our valued good4u Crew and customers and partners. I will then turn the call over to Todd to discuss our financial results in greater detail. During the second quarter we saw a significant acceleration of daily average comparable store sales growth as the quarter progressed, peaking in mid-March as consumers responded to the growing pandemic. For the quarter revenue was up 20.4% and comps increased 17%. We began to see a lift in comps in late February. This trend accelerated further in March as our customers prepared for and responded to the growing health crisis with increased purchases. We saw both, a significant increase in average transaction size which increased 13.1% during the second quarter and an acceleration in transaction accounts, which were up 3.5% during the quarter. This growth included a comp gain of approximately 40% for the month of March over the prior year period. We continue to see elevated comps in April, although the trend moderated from the peak mid-March level. In April we continued to see materially higher transaction size, partially offset by reduced transactions, both relative to the prior year as customers made fewer shopping trips, but made larger purchases when they did shop. As Todd will discuss, the strong comps led to significant expense of leverage, with gross margin improving 100 basis points as a result of improved occupancy leverage, and…

Thank you, Kemper, and good afternoon everyone. As Kemper discussed, we are operating in a rapidly changing and unprecedented period. During the quarter we witnessed a level of daily average compatible store sales gains that we have not experienced in the company's history, reflecting customers accelerated purchases or pantry loading and the impact of a significant shift in consumer behavior to dining at home. We saw strength across all product categories, in particular household products, supplements, grocery and bulk. Additionally, we saw a strong penetration growth of our Natural Grocers branded products. We encountered significant strains to our supply chain and out of stocks late in the quarter as our supply chain was challenged to keep up with an unprecedented level of demand. Today we are seeing improved in-stock levels, although certain items continue to be out of stock. As Kemper noted, we have worked diligently to adapt on a daily basis across our organization, focusing on safety and meeting the needs of our customers and crew members. Now, I would like to review our financial results. During the second quarter net sales increased 20.4% to $277.5 million. Daily average comp store sales increased 17% and mature store comp increased to 15.4%. The second quarter comp increase was driven by a 13.1% increase in average transaction size and a 3.5% increase in daily average transaction count. Prior to the onset of the COVID-19 related acceleration of customer purchases, comps are running at the high end of our original full year guidance range. Gross profit margin during the second quarter was 28% compared to 27% in the prior year period and up sequentially compared to 26.3% in the first quarter of 2020. The increase in gross margin was driven by an improvement in store occupancy and shrink expenses as a percentage…

Yes, thank you. [Operator Instructions]. And the first question comes to Greg Badishkanian with Wolfe.

Good afternoon this is actually Spencer Hanus on for Greg. I think you guys mentioned in your prepared remarks that comps are still elevated in April, but can you quantify the comp that you're seeing in April and then has that momentum continued into the first part of May?

The comps in April were very similar to what we saw for the entire quarter, for the entire second quarter and they’ve pretty much stayed the same in May so far.

Okay, that's really helpful. And then can you just talk about sales trends you're seeing in states that have started to reopen, like Texas I think you have about 15% of your stores there. Have you seen trends start to decelerate as restaurants reopen or you’re still seeing a pretty strong sales growth?

We are still seeing pretty strong sales growth in Texas. There are some locations that have been under lower deceleration, but overall the state of Texas has been pretty strong for us through April and into May.

Okay, that's great color. And then margin improvement was pretty impressive this quarter. Should we expect the same level of margin improvement over the rest of the year or should we expect just some more incremental costs associated with labor and store safety to start to flow in?

I would say that we are not going to get a grade of margin improvement over the rest of the year. It will moderate somewhat. You know a lot of our margin improvement was because of the leverage we got on rent due to the accelerated sales. If sales can continue at the current level, that will help margins somewhat. They are -- margin has been impacted by an increase in Instacart sales, because those sales cost us more than the normal. That’s a headwind to margin. Also we are investing with our wage increases about $600,000 per month in additional wage expenses through the rest of the year, plus some other incremental expenses related to personal protection equipment, etcetera.

Got it. Thank you so much. Congrats on a good quarter.

Thanks.

Thank you. [Operator Instructions]. Alright, there is nothing more at the present time. I would like to return the floor to the speakers for any closing comments.

Thank you very much for joining us to discuss our second quarter results. We remain confident in our long history of being a leader in providing natural and organic groceries to consumers, while giving back to the communities that support us. We look forward to speaking with you on our next call to renew our third quarter 2020 result. Please stay healthy and safe and have a great day! Thank you. Bye-bye.

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