Natural Grocers by Vitamin Cottage, Inc. (NGVC) Q1 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2022 Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. I would now like to turn the conference over to Ms. Jessica Thiessen, Assistant Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, everyone and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2022 earnings conference call. On the call with me today are Kemper Isely, Co-President and Todd Dissinger, Chief Financial Officer. As a reminder, certain information provided during this conference call, are forward-looking statements based on current expectations and assumptions and 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 and uncertainties 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, Jessica and good afternoon everyone. Thank you for joining us today. We are pleased with our strong start to fiscal 2022. We continue to see positive operating trends as we effectively navigate a dynamic environment. Our first quarter results included net sales of $277.3 million and diluted earnings per share of $0.39, increases of 4.6% and 143.8% respectively. We were able to leverage strong sales increases into higher profitability, including a 230 basis point improvement in operating margin. Momentum remains strong across our business. Daily average comparable store sales rose 3.8%, including increases in both transaction count and basket size. On a 2-year stack basis, daily average comparable store sales increased 16.5% in the first quarter. Our unwavering commitment to our founding principles remains a key element in our success. We provide a differentiated offering of natural and organic products at always affordable prices, coupled with free science-based nutrition education, which continues to resonate with consumers who are prioritizing health and wellness more than ever. Our {N}power loyalty program continued to grow, evidencing our deep engagement with our customers. We ended the quarter with almost 1.6 million loyalty members, a year-over-year increase of 20%. The net sales penetration for {N}power reached 73%, up from 72% in the fourth quarter and 69% a year ago. The first quarter sales were positively impacted by our non-GMO event in October, strong trends around the Thanksgiving holiday in our annual Holly deals promotion in December. We saw strong consumer demand for our supplement offering continue in the first quarter. For the third consecutive quarter, the supplements category posted sales comps that exceeded the overall company average. Customers continue to be drawn to our Natural Grocers branded products, which accounted for 7.5% of total sales in the first quarter, up from 7.1% in the fourth quarter. During the quarter, we launched 13 new branded products, including frozen side dishes and additional dietary supplements. During the quarter, we relocated our store in Greeley, Colorado and are very pleased with our Greeley customers’ response to the move. We remain on track to open 4 to 6 new stores and relocate or remodel 3 to 4 stores in fiscal 2022. We continue to manage through supply chain challenges. During the first quarter, our out-of-stocks were relatively consistent with recent quarters. However, we saw a slight increase in our out-of-stocks that began in late December and continued through January. We are working closely with our vendors to address these challenges. Earlier this week, we released our inaugural environmental, social and governance report. Natural Grocers was founded by my parents in 1955, who were inspired by core values that many would recognize today is sustainability principles. The company was built on and remains committed to our five founding principles: quality national and organic products; always affordable pricing; nutrition education; crew and community. These principles continue to guide our business practices, focusing on the health and wellbeing of our communities and the planet. Our crew’s dedication to these principles, ensure our stores’ operations, and supply chain reflect these values. Since its founding, Natural Grocers has embraced practices intended to make our food system more just sustainable and equitable. In closing, I want to thank every member of our good4u crew for their continued hard work and commitment to helping us deliver the highest-quality natural and organic products at affordable prices and excellent customer service. With that, let me turn the call over to Todd to discuss our financial results and guidance.

Thank you, Kemper, and good afternoon, everyone. As Kemper indicated, first quarter results were above our expectations, reflecting favorable sales growth and expense leverage. Our first quarter net sales increased 4.6% on a year-over-year basis to $277.3 million. Daily average comparable store sales were up 3.8% on top of a 12.7% increase in the first quarter of fiscal 2021. Average transaction count increased 3% and average transaction size rose 0.8% for the quarter. We experienced inflation in the 3% to 4% range during the first quarter, a slight uptick from the fourth quarter. We continue to pass along the impact via pricing. The strong sales performance and expense leverage helped drive significant margin expansion. Gross margin increased 80 basis points to 28.4% driven primarily by improved product margin and store occupancy leverage. Store expenses decreased 1.6% in terms of dollars and 140 basis points in terms of rate. We benefited from our strong sales performance, which drove expense leverage. Expenses normalized as we cycled higher incremental pandemic-related expenses including labor hours and pay in the first quarter of fiscal 2021. Like many retailers, we experienced an increased level of constrained labor availability late in the quarter. Operating income more than doubled versus last year, increasing 131.1% to $12 million, and operating margin improved 230 basis points to 4.3%. Net income of $8.9 million was up 145.5% year-over-year with diluted earnings per share of $0.39 compared to $0.16 a year ago. Adjusted EBITDA increased 44.7% to $19.5 million. Turning to the balance sheet and cash flow, we ended the first quarter in a strong financial position with $25.3 million of cash and cash equivalents. We had no outstanding borrowings under our $50 million revolving credit facility and a $21.7 million balance on our term loan. During the first quarter, we generated cash from operations of $12.1 million and invested $5.3 million in net capital expenditures, resulting in free cash flow of $6.7 million. Today, we announced that our Board of Directors has declared a quarterly cash dividend of $0.10 per share. The dividend will be paid on March 16, 2022, to all stockholders of record at the close of business on February 28, 2022. Now I would like to review our outlook which reflects current trends, including the rapidly evolving COVID-19 environment. While the company cannot predict the duration or severity of the pandemic and related government mandates, the company expects that these factors will continue to impact our operations and financial performance through fiscal 2022. We are confirming our guidance for fiscal year 2022, which we first established in mid-November. While the first quarter’s performance exceeded our expectations, we feel it is appropriate to maintain our previously issued guidance at this time in light of the uncertainty around the COVID-19 environment and trends. Our guidance includes the following: open four to six new stores; relocate or remodel three to four stores, achieve daily average comparable store sales growth between 0% and 2%, achieve diluted earnings per share between $0.75 to $0.87 and direct $28 million to $35 million towards capital expenditures to support our growth initiatives. In closing, we had a strong quarter that we attribute to our customers appreciation our differentiated business model. We continue to be encouraged by our recent trends, and we are confident in our ability to drive growth and enhance value for all stakeholders. With that, I would like to open the lines up for questions. Thank you.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Spencer Hanus with Wolfe Research. You may now go ahead.

Good afternoon guys. Congrats on a great quarter. I guess the profitability really struck out to us this quarter. Maybe just talk a little bit about your confidence that you will be able to maintain this level of profitability going forward, any one-time things that we should keep in mind? And then I guess as it relates to the supplements business and as you start to lap tougher compares there in the second half, how should we think about the performance there from a top line perspective?

Well, Spencer, going forward, we expect the first two months of this quarter would be pretty similar as well, actually, January pretty similar and February only at 28 days. So, last quarter as far as on a monthly base. Going after that, it’s very difficult for us to predict our ongoing ability to achieve a sort of profitability – our guidance. And then as far as the supplements business goes, there is a big tailwind because of the COVID surge that happened here in the fall. It seems to have carried over to the first part of this year. It’s probably going to be very difficult in the fourth quarter of our fiscal year to achieve the same – to achieve positive subsequent growth in that half. But I would expect this quarter to be similar to [Technical Difficulty].

Got it. That’s helpful. And then when you think about comps sort of quarter-to-date, are you expecting sort of 2Q to look similar to what you guys saw in the first quarter, maybe on a 2-year stack basis? Are you expecting any moderation there? Maybe just walk us through sort of what you are expecting from a top line perspective is as much as you have visibility into it.

It will be – I mean for the first – for January, I would expect it to be February and March, it’s much more difficult because [Technical Difficulty] we were taking on a 2-year stack basis, we may get comp, we expect to have a positive comp this March compared to last March, similar to what we experienced in the last quarter. And then, of course, February, the comp similar to what we have got…

Got it. And then in the script, you mentioned that you are seeing out-of-stocks worsen in January. Have you seen any impact on sales from that or promotional intensity? Are you expecting any change there in the second quarter? And then how do you think your in-stock rates are comparing to other peers in the market?

The out-of-stocks in January definitely were a problem. They did affect sales [Technical Difficulty] comps really good in January, even though we are seeing trends to see the supply chain is firming up here in February. And it looks like by the end of this month, we should be in much better shape or better [Technical Difficulty]. And then you asked about promotions. I don’t see that the promotions are planned way at a time and the orders that are seem to be available as needed.

Got it. And staying on supply chain for a minute, when you think about new unit growth and the ability to hit that four to six new stores this year, do you need to see any improvement in the supply chain to get to that target? Are you seeing any – and how are you thinking about sort of new unit growth in the context of the tough sort of operating climate here?

The only issue we have had as far as stocking new stores, we haven’t really had an issue getting products into the stores where we have had issues with our equipment supply. We have kind of tackled that by extending out our build-out period and then we are ordering further ahead on equipment we have anticipated items that are going to be difficult to get into our store or structure. And so we are pretty confident in our new stores being able to be brought online.

Got it. And then with inflation ticking up in the first quarter here to the 3% to 4% range, are you expecting that to be constant throughout the rest of this year, or could there be any downtick or uptick sort of as we look into the back half from an inflation standpoint?

We definitely do not think it’s going to be going down [Technical Difficulty] price increased notices that we are going to be pretty substantial in the second quarter, I mean in the April quarter.

Got it. And then one last one for me. But maybe you could talk a little bit about the {N}power members that you have recruited over the last couple of years and talk how their spending habits look the same and maybe different versus some of the previous cohorts that you attracted to Natural Grocers and how you expect that to trend over time?

The customers that shop on a monthly basis essentially are spending around $53 per person per visit. And the people that are {N}power members spend around $25 per visit. And it really hasn’t fluctuated that much even as we get it. And so we are able to take these new members and convert them into really good customers.

Great. Well, that’s a really helpful data point.

I mean the {N}power program has been really helpful and us being able to keep our current customers engaged and add new customers. The discounts are compelling [Technical Difficulty]. It works really well for us and we are able to message – we message those customers three times per week or four times per week.

Great. And thank you so much for the color. And I will get back in the queue.

Alright. Thank you.

[Operator Instructions] There are no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Kemper for any closing remarks.

Thank you very much for joining us to discuss our first quarter results. We are proud of our performance in our history of providing the highest-quality natural and organic products at an always supportive price to the communities we serve. We look forward to speaking with you on our next call to review our second quarter 2022 results. Please stay healthy and safe and have a great day. Goodbye.

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