Good day, ladies and gentlemen, and welcome to the Natural Grocers' First Quarter Fiscal Year 2021 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. At this time, I'd like to turn the conference call 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 first quarter fiscal year 2021 earnings conference call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, Chief Financial Officer.

Thank you, David, and good afternoon, everyone. Thank you for taking the time to join us today. We are pleased with our strong start to fiscal 2021. We continue to see positive operating trends as we effectively navigate the challenges of the COVID pandemic and related government mandates. We remain focused on our founding principles, which have been instrumental to our success and differentiate us from our competition. These principles include supporting our communities and delivering the highest quality natural foods and supplements at always affordable prices. In the first quarter, we saw continued momentum across our business consistent with our expectations. Customers continued to practice social distancing and follow pandemic safety guidelines, resulting in increased consumption of food at home. We generated 15.2% net sales growth. We achieved 12.7% daily average comparable store sales growth driven by an increased transaction size. We saw further gross margin expansion driven by cost leverage and improved product margin and an inflationary tailwind. And we delivered strong earnings growth with a 94.4% increase in net income. We saw positive results from many of our key initiatives. Our {N}power program continues to support our customer loyalty efforts. We realized 69% net sales penetration and ended the quarter with 1.3 million members. The {N}power platform enables us to refine and optimize our marketing to members through e-mail campaigns capable of generating customer-specific offers. We also saw further acceptance of our meal deals, Feed Your Family of Four campaign, which is well timed for consumers in this uncertain economic environment. This campaign provides simple recipes and shopping lists for healthy tasty and affordable meals for under $16. These recipes feature Natural Grocers' branded products, which provides great value to our customers.

Thank you, Kemper, and good afternoon, everyone. We delivered another strong quarter with continued favorable trends across our store base. During the first quarter, net sales grew 15.2% to $265 million with daily average comparable store sales growth of 12.7%. Our comp increase was the result of a basket size increase of 21.4%, partially offset by transaction count which was down 7.1%. Our basket and transaction trends continue to reflect changing consumer dynamics as a result of social distancing and public health measures. We saw these first quarter sales trends continue through January. Looking at some of the key sales drivers during the first quarter, we experienced above-average comp growth in meat, frozen, produce, dairy, grocery and bulk consistent with recent quarterly trends. Dietary supplements performed well with a 9.3% comp growth rate.

And our first question today comes from Greg Badishkanian from Wolfe Research. Please go ahead with your question.

Good afternoon. This is actually Spencer Hanus on for Greg. Nice quarter again guys. My first question is just on the cadence of comps throughout the quarter. Could you comment on that? And then for the quarter-to-date trends are you seeing similar results across all regions?

Yes. The comps were fairly consistent through the quarter. October was the strongest month. November and December were approximately the same. January comp was very similar to what we experienced for the entire quarter.

And in terms of state, I'm sorry Spencer really we aren't able to really determine any variations there driven by mandates. It's kind of up and down. And there's no consistency there between mandates and lockdowns.

Got it. That's helpful. And then in terms of the gross margins, I think they ticked up sequentially versus the fourth quarter. Could you just help us sort of unpack the components there that led to the better performance sequentially? And then, have you seen your price gaps how have they changed versus your peers over the last few months? Thanks.

Todd, do you want to answer that.

Okay. So we saw an improvement in the gross margin. Part of that was driven by leverage on occupancy and shrink expense. And an improved product margin, slightly less promotional driving the product margin. And I'm sorry was there another part of the question?

The other part was in regards to our pricing compared to our competitors. I would say our pricing compared to our competitors is the differential had stayed about the same. We tend to …

Got it.

-- have better pricing except for in produce against one of our competitors.

That's helpful. And then, I think you mentioned, your out of stocks were consistent with 3Q and 4Q. When do you think out of stocks will be back to normal levels?

It will probably be at least, another six months. I mean, they have improved quite a bit over last quarter this month -- so far this fiscal year. I mean, this calendar year, so in January.

Yes. Okay. And in terms of capital allocation, how are you thinking about the right level of leverage for the business and balancing returning capital to shareholders versus reinvesting back in growth, and square footage growth? How are you thinking about those levers?

Well, as far as borrowing goes, we'll be very conservative. Our balance sheet is very not levered. And we'll keep it that way.

Great. Thank you so much.

We will have moderate store growth, as we find premium sites to open stores at.

And ladies and gentlemen, at this time, I'm showing no additional questions. I'd like to turn the floor back over to management, for any closing remarks.

Thank you very much for joining us to discuss our first quarter results. We continue to strive to be the grocer of choice for, our health-driven customers and are confident in the opportunities that lie ahead. We look forward to speaking with you on our next call, to review our second quarter 2021 results. Please stay healthy and safe. And have a great day. Thanks. Goodbye.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.