Good day, everyone. Welcome to the Natural Grocers' First Quarter Fiscal Year 2023 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 over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2023 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 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. We are pleased with our start to fiscal 2023. Our first quarter daily average comparable store sales growth was 0.5% as we cycled the lift from strong pandemic trends in the prior year. Comps improved sequentially each month of the first quarter. Our three-year comp was 17.6%, representing a sequential increase in the three-year comp for each of the previous three quarters. Our differentiated offering of the highest quality natural and organic products, coupled with our marketing emphasis on value and always affordable pricing, continues to drive demand as health-conscious consumers balance economic concerns. Always affordable pricing is one of our five founding principles and is particularly relevant in the current inflationary and uncertain economic environment. We believe everyone should be able to afford to empower their nutritional health with high quality products. One facet of our affordability is everyday affordable pricing across our assortment of products. We work hard to source our products at the lowest possible cost and we regularly conduct pricing studies on our core items versus our primary competitors to ensure we meet our always affordable commitment. A second facet of our affordability is special sale pricing on hundreds of items that we offer to our {N}power loyalty members, including promotions to highlight budget-friendly options for family meals. Our {N}power loyalty program grew 18% to more than 1.8 million members by the end of the first quarter. The {N}power net sales penetration was 76%, up from 73% a year ago. The growth of our {N}power loyalty program reflects our customers' awareness of the benefits offered by the program and our deep engagement with these valuable customers. Our Natural Grocers-branded products delivered premium quality at compelling prices and represent a third facet of our affordability. In the first quarter, our…

Thank you, Kemper and good afternoon. The first quarter results were in line with our expectations as we anticipated the challenges of cycling the strong pandemic trends in the first quarter of last year and the impact of higher labor rates this year. Net sales increased 1.1% from the prior year period to $280.5 million. Our daily average comparable store sales increase of 0.5% was comprised of a transaction size increase of 1.7%, partially offset by a transaction count decrease of 1.2%. The 1.2% decrease in transaction count reflects the moderation of pandemic trends year-over-year, more normalized levels of travel and food away-from-home consumption and fewer SNAP EBT customer transactions. The 1.7% increase in transaction size was primarily driven by retail price inflation, partially offset by a fractional reduction in the item count per basket. We estimate that product cost inflation was approximately 8% on an annualized basis for the first quarter, lower than industry trends. Historically, our inflation rate has been more stable than conventional grocers due to our specialized supply chain. In the first quarter, we passed along the impact of product cost inflation through pricing and expect to continue to do so for the foreseeable future. The first quarter item count per basket was down by less than one item compared to the prior year and consistent with the previous four quarters. In the first quarter, our strongest performing departments were dairy, meat and grocery. The supplement comp was down low single digits compared to the prior year as we cycled strong supplement demand driven by the pandemic. However, supplement comp was up mid-single digits on a two-year basis. Gross margin decreased 30 basis points to 28.1%, primarily driven by lower product margin attributed to higher shrink, freight and distribution expenses. Store expenses as a percentage of…

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] Our first question today comes from Spencer Hanus from Wolfe Research. Please go ahead with your question.

Good afternoon. Thank you for taking the question. Can you talk a little bit about the comp momentum that you're seeing in the first quarter to-date? And then in terms of the decline in units per basket that you talked about, is there any specific category that you're seeing customers pull back in terms of that metric?

I didn't catch the first part of your question, Spencer, sorry.

Just the comp momentum that you're seeing quarter-to-date, how -- what did trends look like from a topline perspective?

They're very similar to what we experienced for the entire quarter last quarter.

Okay, that's helpful. And then in terms of the units per transaction, are there any categories where you're seeing customers pull back? You mentioned that it was down less than one unit, but what are you seeing there in terms of where customers are pulling back?

So, the largest categories would have been grocery and produce.

Okay.

Just remind you, it’s a piece of our units.

Okay. And then in terms of inflation, you called out the 800 basis point sort of tailwind from that in the quarter. Do you think we're at peak inflation today? What are you hearing from your suppliers in terms of their price increases that they're trying to take and how that's informing your inflation expectations for the full year?

I think that we'll probably see similar inflation this quarter. The rest of the year, it's really hard to get a clear picture.

Great. Fair enough. Thank you so much for the color.

Our next question comes from Scott Mushkin from R5 Capital. Please go ahead with your question.

Hey guys. Hope you have a good start to the year. Labor expenses, I think you guys flagged them in your press release. Clearly, it's a challenge throughout the economy. I think probably in Colorado area, it's still really tough to get people. So, how do we think about that going forward? I mean, is it a concern? Has it gotten a little bit easier? Like how are you doing that way? And is the 7% increase what we should anticipate?

I think that we hopefully have cycled the annual dollar bump to everybody and won't have to do that this year. I mean, our starting wage in Colorado is now $17 plus $1 an hour [indiscernible]. The only place where you have -- where we're going to see a lot of inflation still in wages is the states and cities that have minimum wages tied to inflation. We have that up in Oregon, Denver, and Washington. Otherwise, I think that this year will be a more normal year for wage inflation. We're seeing that it's easier to staff stores already this year versus at the end of last year.

Okay. So, it's interesting to hear your guys' comments just last questions about -- and in the prepared remarks that things are kind of Steady Eddie with you guys because I'm not sure that's the case in the industry. I think the industry from what we're hearing is slowing down, but you guys actually have obviously a much different model. So, maybe just kind of remind us how the business performs as the rest of not the macro necessarily, but just the rest of the grocery industry maybe has a little bit more trouble. How -- do you feel like you're not as volatile because of the attributes of your business? Or just remind us how we should be thinking about it?

Well, our businesses have -- the base customers are incredibly loyal. So, that our standards -- so we -- I mean they talk about ESG nowadays. And we were kind of ESG before ESG became a popular phrase. We didn't call it as ESG, of course, but having high standards and having affordable pricing, having nutrition education, caring about the environment and caring about the people who work for us has created an environment at our stores where customers become really loyal. And so -- and then it also built because of the word of mouth. And so that makes it so that we don't have as much shifting of customers to other competitors because of that. And also we communicate to our customers through our {N}power loyalty program like three times -- at least three times a week, informing them of all of our standards, affordable prices and other attributes of our company and it really works.

And Kemper, remind -- I don't know if you were public back then, but in the Great Recession, how did the company do?

We did actually pretty well. We had positive comps during the Great Recession that retailers did not. So, we weren't public at the time, but we did have positive comps at the time.

Because I think Whole Foods actually went negative if I can remember correctly.

They did and a bunch of others. We did not.

You did not. You did not. Okay. This is great. I think that does it for me. And it's an interesting discussion of this business actually, but just maybe a little bit more stable as things get rocky anyway. Thanks guys.

Thank you.

And ladies and gentlemen, at this time, we've reached the end of today's question-and-answer session. 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 are proud of our performance and our history of providing the highest quality natural and organic products at always affordable prices to the communities we serve. We look forward to speaking with you on our next call to review our second quarter 2023 results. Thank you, and have a great day. Good bye.

And ladies and gentlemen, that will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.