Good day, ladies and gentlemen. Welcome to the Natural Grocers Second Quarter Fiscal Year 2025 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'd now like to turn the conference over to Miss Jessica Thiessen, Vice President Treasurer for Natural Grocers. Miss Thiessen, you may now begin. Good afternoon. Thank you for joining us for the Natural Grocers by Vitamin Cottage Second Quarter Fiscal Year 2025 Earnings Conference Call.

On the call with me today are Kemper Isely, Co-President, and Richard Helle, Chief Financial Officer. As a reminder, certain information provided during this conference call contains 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-Ks. The company undertakes no obligation to update forward-looking statements. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings 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.

Our second quarter results were exceptional as we delivered record sales and earnings. On today's call, I will highlight financial results including key drivers of our performance, discuss what we are seeing in consumer trends, and provide an update on our initiatives. Then Rich will discuss our second quarter results in greater detail and review our updated fiscal year 2025 guidance. Sales growth remained robust in the second quarter, and we continue to believe that the quality, breadth, and longevity of our sales performance are extraordinary for grocery retail. Daily average comparable store sales increased 8.9% and accelerated to 16.4% on a two-year basis. The transaction count comp increase of 5.9% marked our ninth consecutive quarter with positive traffic. The transaction size comp increased 2.8% and was our fifth consecutive quarter with an increase in items per basket and modest inflation. Additionally, sales performance was strong across vintages. Remarkably, stores five years and older had an 8.5% comp for the quarter, underscoring the strong competitive position of our stores. We are also very pleased with the performance of the newer vintages. We believe the quality, breadth, and duration of our sales performance are indicators of the overall strength of our business model and productivity of our initiatives. We believe there is a continuing trend in consumer prioritization of health and wellness, including a heightened focus on food and nutrition, and that we are well-positioned to capitalize on this dynamic. New customers are increasingly drawn to our relevant value offering of high-quality, natural, and organic products at always affordable prices. Furthermore, we are enhancing customer engagement through our effective marketing initiatives, compelling offers, and the Npower rewards program. We believe that communicating and establishing our differentiated position in the marketplace has been instrumental in generating our strong sales performance over the…

Daily average comparable store sales increased 8.9% and on a two-year basis, the increase accelerated to 16.4%. Our daily average comparable transaction count increased 5.9%. Our daily average comparable transaction size increased 2.8%, including modest product cost inflation of an estimated two percentage points on an annualized basis and an increase in items per basket of approximately one percentage point. For the second quarter, gross margin increased 100 basis points to 30.3%, driven by higher product margin primarily attributed to effective promotions. Store expenses as a percentage of net sales decreased 80 basis points, reflecting expense leverage. Administrative expenses as a percentage of net sales increased 20 basis points, driven by technology expenses and higher compensation. Operating income increased 55.9% to $17.6 million. Operating margin increased 150 basis points. Net income increased 64.6% to $13.1 million, and diluted earnings per share increased 60% to $0.56 in the second quarter. Adjusted EBITDA increased 33.3% to $26.3 million. Turning to the balance sheet and cash flow, we ended the second quarter in a strong liquidity position, including $21.2 million in cash and cash equivalents, no outstanding borrowings, and $70.3 million available to borrow on our revolving credit facility. During the first six months of fiscal 2025, we generated cash from operations of $36.7 million and invested $15.9 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $20.8 million. We are raising our fiscal 2025 outlook for daily average comparable store sales growth and diluted earnings per share and updating our outlook for new stores. Our revised outlook includes the following: three to four new store openings compared to our prior outlook of four to six, two to four store relocations or remodels, daily average comparable store sales growth between 6.5% and 7.5%, an increase…

We will now begin the question and answer session. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Once again, to ask a question, you may press star then 1. Our first question comes from Scott Mushkin with R5 Capital. Please go ahead. Scott Mushkin, your line has been unmuted. You may proceed with your question.

Sorry, guys. This is Ryan on for Scott. Congrats on the great result. So just on the loyalty program, what are you guys doing for the consumer in terms of, you know, perks promos? What type of stuff are you offering?

Well, we have a few things that we do. We send out individualized offers to our members, and those offers, you know, are tailored towards their shopping habits. So if they are a supplement customer, they'll get an offer that offers a certain amount off of a certain amount of purchase in supplements, or they'll get some specific deals that are only offered to them, etcetera. And then on an everyday basis, you earn points in the store. And it essentially works out to a 1% rebate if you click and load the offers. And so that's a big draw for our really loyal customers. And then to get our best pricing on eggs and avocados, you have to be an Npower member. That's a really big draw for our members. And so those are some of the things. And then also the in-store specials are all Npower driven. So essentially, that's what we do.

Okay. Awesome. And then have you seen your consumer's basket size going down just given the economy?

No. Our basket size has stayed very steady. It has been steady for the last several quarters.

Awesome. And then in terms of adding to eight new stores, the next year, do you plan to expand in any other market?

We actually are going into another state and we'll be announcing that location here in the next couple of months.

Okay. Awesome. How were your in-stock levels, inventory, and distribution?

They're about back to where they were pre-pandemic. So they're running about 97% in stock on everything.

Okay. And then do you guys offer pickup and delivery?

Yes. We do via Instacart.

Okay. So are people are your customers using that a lot, and are you offering free delivery, or is that through Instacart?

It's just through Instacart. And it's been steady at about 2% of our sales for the last two years.

Okay. And then will that at any rate, be in-house? Will you change from using Instacart just to Natural Grocers?

No. We'll be using third-party delivery programs for our own money. Delivery services. It's really not it wouldn't be profitable for us to take it in-house.

Gotcha. And then on the remodels, are you guys going to up your remodels next year or in the back half of the year?

We do that on an opportunistic basis. And so it's hard to say how many remodels we'll have for next year. We have two in the queue right now, and it definitely could go it'll probably go two to four more by the time the year rolls through.

Okay. And then last question. So demographically, you know, there's been trends on all sorts of social media, you know, health and wellness, everything like that. Are you seeing your age demographic kinda trend downwards, or is it stable kind of the middle age?

I think that we've picked up quite a few millennials. I mean, there's a lot of people that like our authentic messaging. And so you know, that resonates really well with, you know, with the younger demographic. And so that's definitely helping our traffic growth.

Got it. Thank you so much, guys.

Thanks for the call today. Thanks for the questions. Have a nice rest of the day.

You as well. Thank you.

We have no further questions. I would now like to hand the conference over to Kemper Isely for closing remarks. Thank you.

It's a beautiful day here in Colorado. And we are proud to be a Colorado company. And we are proud of our second quarter results, which reflect a continuation of the positive trends we have experienced for more than two years. Thank you for joining us, and have a great day. Bye.

The conference has now concluded. Thank you for attending the Natural Grocers Second Quarter Fiscal Year 2025 Earnings Conference Call. You may now disconnect.