Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2026 Earnings Conference Call. At this time, all participants will be in a listen-only mode. Later, we will conduct a question and answer session, and the instructions will be given at that time. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Miss Thiessen, you may begin.

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage First Quarter Fiscal Year 2026 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, including the company's outlook for fiscal 2026, 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. During today's call, I will provide an overview of our financial results, highlight the key drivers of our performance, and share an update on our key operational initiatives. Then Rich will discuss the first quarter results in greater detail and review our fiscal year guidance. Our first quarter results were in line with expectations, including daily average comparable store sales growth of 1.7% and diluted earnings per share growth of 14% to $0.49. Based on our first quarter performance and outlook for the remainder of the fiscal year, we are maintaining our full-year guidance. There are several key underlying trends that I would like to highlight. The first quarter sales comp increase of 1.7% was cycling an 8.9% comp last year. The two-year comp of 10.6% continues to reflect a robust growth rate relative to the broader grocery retail industry. While first-quarter sales were consistent with our outlook, we believe these trends reflected cautious consumer spending behaviors, observed broadly across the grocery retail sector. Additionally, the sales comp primarily reflected trends with customers who do not participate in our rewards program. We continue to see stronger sales growth by our Empower Rewards program members. We believe that our differentiated offer of high-quality natural and organic products at always affordable prices continues to deliver strong value for our customers and reinforce our competitive position amid economic uncertainty. Furthermore, we believe that our company's initiatives position us well to achieve sustainable long-term growth. Next, I will review the performance of key operational initiatives. During the first quarter, nPower Rewards program net sales penetration increased two percentage points to 83%, supported by strong membership gains and higher traffic by nPower customers. The continued expansion of both membership and sales penetration highlights our customers' appreciation for the…

Thank you, Kemper, and good afternoon. Our first-quarter net sales increased 1.6% from the prior year period to $335.6 million. Daily average comparable store sales increased 1.7% and on a two-year basis increased 10.6%. Our daily average comparable transaction count increased 1%. The daily average comparable transaction sizing increase of 0.7% included annualized product inflation of approximately 2% to 2.5%. Items per basket were down less than half an item year over year. We continue to see the greatest sales growth in meat, dairy, and produce, which are some of our most differentiated offerings. We saw a modest decline in the number of transactions using SNAP EBT in the first quarter. SNAP represents approximately 2% of net sales, and the reduction in SNAP transactions was immaterial to our overall sales comp for the quarter. Gross margin decreased 40 basis points to 29.5%, driven by lower product margin primarily due to higher inventory shrink, the majority of which was driven by isolated events. Store expenses decreased 0.7%, primarily driven by expense management. Administrative expenses decreased 5.9%, primarily driven by costs incurred in the prior year period related to the Chief Financial Officer transition. Operating income increased 97% to $14.6 million. Net income increased 14% to $11.3 million, and diluted earnings per share increased 14% to $0.49 in the first quarter. Adjusted EBITDA increased 3.1% to $23.5 million. Turning to the balance sheet and cash flow, we ended the first quarter in a strong liquidity position, including $23.2 million in cash and cash equivalents, no outstanding borrowings, and $67.6 million available for borrowing on our revolving credit facility. During the first quarter, we generated cash from operations of $21.1 million and invested $9.6 million in net capital expenditures, primarily from new and relocated stores, resulting in free cash flow of $11.6 million.…

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're 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. And at this time, we'll pause momentarily to attend our roster. And the first question will come from Scott Mushkin with R5 Capital. Please go ahead.

Hey, guys. Thanks for taking my questions. So I actually wanted to start off where you guys left off on the $0.12 headwind from the new stores. As we think about that going forward, is it gonna be as dramatic? I would think it wouldn't be as dramatic the kind of the headwind as we think about next year and the year after. How should we think about that type of drag as we move out beyond this year?

Well, you know, this year, we're accelerating our growth from two new stores to eight. So that definitely gives us quite a bit of more preopening expense for, you know, six more stores with preopening expense. So that's where that 12 basis points came from. Next year, if we open a consistent eight new stores and do a couple remodels, it should be fairly flat going forward. If we add, you know, if we accelerate it to 10 or 12, then there would be a little bit more headwind. But it'll probably be flat next year to eight. Again, eight to nine new stores again next year.

Was it 12¢ or 12 basis points? I just wanna make sure I...

Twelve. Twelve. Wasn't it 12¢? 12¢. 12. Yeah. $12.12 cents. Okay.

Yep.

K. So, you know, conceivably a pretty good tailwind, I guess, as you look out depending on what happens with the rest of the business. Okay. So then switching gears to get some more thoughts on the shrink. I know you guys said that was kind of the biggest issue with the gross margin. And you called out, I think, some onetime isolated events. Can you give any more color on that? And are those isolated events gonna continue, or is that it was just, hey. This gross margin is actually would have been a lot better if it this hadn't happened.

Yeah. Scott, this is Rich.

Hey, Rich.

Hi. And one of the big items was recycling. Fairly low shrink in Q1 of last year. So last year was probably running about 15 below our three-year average. This quarter, we're probably running about 10% above our three-year average. So, you know, I would say a lot of that is sales velocity. And then we had some onetime items related to weather-related power outages that were obviously unexpected. Had some incremental shrink related to store closures as well. So that would be, you know? And then I'd say, yeah, a little bit of execution, operational execution that you tend to see quarter by quarter, but nothing overly material.

So it sounds like a lot do you have any size of that of the percentage of the decline in gross margins that would be attributed to power averages and stuff like that or no?

Well, I think in terms of just the cycling, the cycling was about 50% of that variance. And then, you know, and then I would say some of these anomalies probably another 25%, and then the balance of it would have been, I'd say, just, you know, standard variances.

Right. Alright. That's great that's great color. Then my final question is just around the environment. And, you know, I've been doing this a long time, and I think a stack comp is useful, but also not necessarily the end all be all when a and when an industry should be generally growing faster than it is right now, and this is not as statement to you guys. It's kind of a general thought. And I was just if you kinda look at your customer base, you guys gave some good color on the Npower. But if you look at it, by segment, by age, who's coming in and driving a lot of that growth? Are there any consistencies there that you would say, hey. Like, this demographic has definitely pulled back a little bit.

Well, the demographic that's income constrained has pulled back. And that's where you're losing customers right now. They're just nervous, and their paychecks aren't keeping up with the rate of inflation, and they're looking for as inexpensive of alternatives as they possibly can find. And so that's where you...

Is there an age where we've lost customers right now?

Have you seen an age reflection there? We've seen some data that, you know, suggests that the younger households are the most impacted, or you guys not really seeing that?

Not really. I mean, there's a definite, you know, if they're income constrained, then there's they're pulling back.

Right. Does that make sense too?

Yeah. But with demographic wise, I mean, you know, great data. We haven't seen sort of a shift in our demographics from third-party data that we get. So nothing material there. And I think that, you know, the shrinking basket that we've been seeing is really all around sort of cautious consumers were very much seeking value. And, you know, the pullback that we've seen is not been in our Empower customers, but our less engaged customers.

Okay. Alright, guys. That's our our our our customers actually were really robust.

Yeah. In this tough environment out there, so I was glad to see the numbers you put. So, anyway, alrighty. Appreciate it.

Thanks, Scott.

The next question will come from Chuck Cerankosky with Northcoast Research. Please go ahead.

Good afternoon, everyone. I wanna dive in a little bit on the new store opening program for this year. You've got six to eight new openings. You've done one relo. So far. Now that would that would count as a new opening and a closure. Any net closures for the year and what's your definition of a relo and a remodel? Are they are they coincident events as we as we look at the the storing? Program for this year?

No. We've had the one close we had a one closure in our Austin Arbor store in Texas in October, and we don't we won't have any more closures this year. Probably not any next year either. Anyway, the one relocation, that's a relocation. So we'll have 68 actual new stores then. One, three relocations or remodels. This year. So overall, be from eight to 11 I mean, six ninth Yeah. Think about that. The eight eight to 11 actual remodel moves and new stores.

Okay. That's helpful. And as you're talking about the three strongest categories, which tend to be some of the more expensive purchases, how does that square with the cautious consumer? Or is that reflected in the reduction in the items per basket?

Well, supplements, which is our highest margin category, had a slight decline in sales for the quarter, but there was zero inflation in the supplement sector, which kind of explains the decline in the category. So we had a slight very slight drop in items sold in the supplementary because we had zero inflation in that category. Our other I would guess, what would the other ones be that you would Body care. Body care was similar. And grocery, we actually had good growth.

Growth in units?

Yes.

K. Great.

Yes. I mean, yeah, it was it was definitely body care and supplements where we saw the biggest decline in units. Then also also household items.

Okay. And with the and with supplements being up? A high gross margin category that showed up in the overall p and l then?

Yes. It did.

It had a slight impact.

But, I mean, overall, our our our our cash register ring margin was flat for the quarter. So we got we had some pickup in margin in some of the other categories.

Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Kemper Isely for any closing remarks. Please go ahead.

Thank you for joining us. We are committed to our differentiated business model of offering high-quality natural and organic products at always affordable prices. And we are confident in our ability to continue to drive profitable long-term growth and enhance value for all our stakeholders. Thank you, and have a great day.

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