Natural Grocers by Vitamin Cottage Inc (NGVC) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers fourth-quarter and fiscal-year 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later we will conduct the 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 Mr. Jon Bourne, General Counsel for Natural Grocers. Mr. Bourne, you may begin.

Good afternoon, everyone. Thank you for joining us for the Natural Grocers by Vitamin Cottage fourth-quarter and fiscal-2012 year-end earnings conference call. On the call today are Kemper Isely, our Co-President, and Sandra Buffa, our Chief Financial Officer.

Before we start, let me remind you that all statements made in this conference call, other than statements of historical fact, are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements because of factors such as industry; business strategy; goals and expectations concerning our market position; the economy; future operations, margins, profitability, capital expenditures, liquidity and capital resources; other financial and operating information; and other risks detailed in the Company's prospectus dated July 24, 2012. The information we present is accurate as of the date of this call. The Company undertakes no obligation to update forward-looking statements.

The Company's earnings release was issued and made available this afternoon. The discussion that follows assumes you've had the opportunity to read this release. The release, along with a transcript of a recording of this call, and a reconciliation of non-GAAP measures used by us, will be available on our website at investors.naturalgrocers.com for a minimum of 30 days. We recommend that you read our release in conjunction with or after this call.

Now I will turn the call over to our Co-President, Kemper Isely.

Thank you, John. Good afternoon, everyone. We are pleased with the year we have had. In addition to our solid financial results, we are happy with the success of our IPO. Our financial performance reflects strength in both new-store openings and comparable-store sales growth. Here are the highlights for the quarter and fiscal year.

Comparable-store sales increased 13% for the fourth quarter, and 11.6% for the fiscal year. Net sales increased 28.2% for the fourth quarter, and 27.2% for the fiscal year. We have experienced strong net income and EBITDA growth, which Sandra will discuss in more detail later. In addition, we opened 10 stores in fiscal 2012, with 4 of those stores opening during the fourth quarter. We have experienced over 20% unit growth in fiscal 2011 and 2012, demonstrating the portability of our new store model. We entered five new states during fiscal 2012. We believe the strength of our financial results and positive industry trends have positioned us well for new store growth heading into fiscal 2013.

In connection with our successful IPO, we received $58.1 million in proceeds, allowing us to prepay the outstanding balance on the term loan and revolving credit facility, purchased the remaining non-controlling interest in five Colorado stores, and increased the cash position on our balance sheet. This October we elected Richard Halle as our second Independent Board and Audit Committee member. We expect to add one more Independent Board member in fiscal 2013.

Now I will turn the call over to Sandra to discuss our financial results in more detail.

Thank you, Kemper. And thank you all for joining us this afternoon, and for your interest in our Company. Before moving forward, I would like to remind you that, in addition to discussing our financial results in conformity with US Generally Accepted Accounting Principles, we are providing non-GAAP financial information to allow for what we believe is enhanced comparability. These non-GAAP financial measures remove the impact of compensation charges related to the IPO. And, on a pro forma basis, illustrate our results as if we had owned 100% of Boulder Vitamin Cottage Group LLC for the periods we are discussing. You can find our reconciliation schedules at the end of our press release, and posted on our website at investors.naturalgrocers.com, which Jon referred to at the beginning of this call.

Turning to our financial results. We are pleased to report a 13% comparable-store sales growth for the fourth quarter. And an 11.6% growth for the fiscal year. These increases are driven, for the most part, by increases in the number of transactions, with a 7.9% increase for the quarter and a 7.0% increase for the year. Our comparable-store sales increase was also supported by a 4.7% increase in average ticket for the quarter, and a 4.3% increase for the year.

Although we do not anticipate providing non-quarterly comparable-store sales numbers going forward, given the amount of time since our IPO was filed, we are sharing that fiscal-2013 year to date we continue to experience comparable-store sales increases at a rate similar to what we are reporting for fiscal-year 2012.

Net sales in the quarter increased 28.2% to $89.9 million, with new-store sales increasing $10.8 million. For the year, net sales increased 27.2% to $336.4 million, with new-store sales increasing $41.3 million. For the year, mature-store sales increased 7.6%, highlighting the continued strength in our store base. For fiscal 2012, mature stores are stores opened during or before fiscal 2007.

Looking beyond sales, gross margin for the quarter and year improved 10 basis points. Our product margin remained consistent in both periods, with the improvement in gross margin resulting from a decrease in occupancy cost as a percent of sales at comparable stores. Store expense decreased 60 basis points to 21.3% of sales during the quarter, and decreased 40 basis points to 21.4% of sales during the year. This decrease was driven by a decrease in salary-related expenses as a percent of sales at comparable stores, partially offset by an increase at new stores.

During the fiscal year, we also benefited from bringing our advertising production in-house, partially offset by an increase in depreciation expense as a percent of sales. Administrative expenses increased 62.9% to $4.4 million during the quarter, and increased 22.5% to $12.7 million during the year. Both increases are in part due to the $1.1 million stock-based, and the $286,000 incentive-compensation, expense associated with the IPO. Excluding these IPO expenses, administrative expense was 3.4%, down from 3.9% of sales in both comparable periods. During the fiscal year, the dollar increase in expense was attributable to an increase in general and administrative positions to support store growth.

Net income attributable to NGVC increased 6% to $973,000 during the quarter, and increased 89.8% to $6.6 million for the year. EBITDA increased 7.7% to $4.3 million for the quarter, and increased 45% to $21.9 million for the year. Adjusted pro forma net income, which reflects net income as if we had owned 100% of the five Boulder stores for the periods presented, and excludes the after-tax impact of compensation expenses associated with the IPO, increased 64% to $1.8 million for the quarter, and increased 92% to $8 million for the year. Adjusted EBITDA, excluding the compensation expenses associated with the IPO, increased 42.7% to $5.7 million for the quarter, and increased 54.2% to $23.3 million for the year.

Now let's turn to the balance sheet. As Kemper mentioned, we are very pleased with the success of our IPO. Moving forward, our balance sheet and cash position will help support our future new-store growth. We ended the year with $17.3 million in cash and cash equivalents, and $1.8 million in available-for-sale securities, as well as $21 million available under our revolving credit facility. We recently amended the revolving credit facility, reducing the amount available from $21 million to $15 million, and reducing the unused commitment fee from 0.375% to 0.2%. We entered into four capital leases during fiscal-year 2012. Two of these stores opened during the fourth quarter, and two are scheduled to open in the first quarter of fiscal 2013.

Now I will turn the call back to Kemper to discuss our new-store growth and fiscal-2013 outlook.

Thank you, Sandra. During the quarter, we opened 4 new stores in the following locations. In Arizona we opened in Flagstaff, Prescott, and Sedona. In Colorado, we opened in Steamboat Springs. With these 4 stores, we opened a total of 10 new stores in fiscal 2012. On October 30, 2012, we opened our first new store of fiscal 2013 in Missoula, Montana.

Additionally, we have leases signed for 6 additional locations for stores slated to open in fiscal 2013. The locations for these stores will be Helena and Kalispell, Montana; Denton and Lubbock, Texas; Omaha, Nebraska; and Medford, Oregon. We expect to open 5 more locations for 2013, bringing our new-store growth to 12 for fiscal-year 2013. We believe we are well-positioned to fund our accelerated growth in support of the solid execution.

We continue to be very pleased with how well our new stores are performing. Historically, new stores have had an upfront capital investment of $1.9 million. However, we anticipate our fiscal-2013 new stores will require an up-front capital investment of $2.3 million, with most of the increased cost coming from capital expenses. We are projecting that these stores will experience higher-than-average historical first-year sales. We continue to target approximately four years to recoup the initial cash investment, and approximately 35% cash-on-cash returns by the end of the fifth year. Our new stores include full demo kitchens and lecturing community rooms, which support our commitment to nutrition education and community outreach.

Turning to our fiscal-2013 outlook, we expect to open 12 new stores. A 20% unit increase over fiscal 2012. Remodel 3 existing stores. Achieve comparable-store sales growth of 7.5% to 8.5%. Experience costs associated with being a public company of approximately $1.2 million. Deliver EBITDA margins of 7% to 7.2%. Deliver net income margins of 2.5% to 2.7%. Achieve diluted earnings per share of between $0.46 and $0.49. Incur capital expenditures of between $25 million to $30 million. And we anticipate the cash on our balance sheet, and cash generated from operations, will be sufficient to support our capital requirements.

We believe we will deliver this outlook by continued focus on the following opportunities. First, we intend to drive comparable-store sales by increasing the basket size through nutrition education and affordable pricing, continuing to attract new customers with our health hot line, and by word-of-mouth from positive customer experiences. Second, we will continue to improve our operating margin by maintaining the disciplined focus on cost controls. During the past few years, we have successfully expanded our infrastructure to enable us to support our continued growth, and reduce our overhead costs as a percent of sales. As we continue to experience purchasing efficiencies, some improvements will be shared with our customers.

Third, we will continue to grow by expanding our store base at a 20% compound annual growth rate. We have already proven that we can successfully open new stores at a significant and disciplined pace. We remain focused on our five founding principles, which are to provide nutrition education, high-quality standards, everyday affordable pricing, supporting our community, and our associates.

We will allocate the next 30 minutes to questions. Please limit your questions appropriately, so that everyone has an opportunity to participate. Thank you.

(Operator Instructions)

Chris Rapalje at SunTrust Robinson Humphrey.

Just a few questions. First, glad to see that, with the new store capital investment that you talked about, that you're expecting this to do a higher first-year sales than historic. And I was just wondering what you were basing that on. And if there were any particular areas of the store that you expect to see higher sales activity.

Primarily we base that on our proprietary information that we've received from our demographic company. And how that model projects out when we (inaudible) the site.

Okay. And, again, you mentioned the source of the higher cost is from some additional kitchen community room facilities, that sort of thing, in the stores.

That, and just better site locations.

Okay. And is there anything about that, that might encourage a higher supplements mix when the stores first open? Or is there any greater focus on that category in the stores?

By having a community room, and having a demonstration kitchen where we do nutrition lectures also, we will be able to better educate our customers about the importance of nutritional supplements. Which should lead to better sales from that department.

Okay. And then I believe during the quarter you were moving the bulk food repackaging facility. I was just wondering, if that is complete, how it went? Any update on that?

The facility moved in September and it went flawlessly.

Great. So it is up and running now and completely transferred?

It is up and running and completely transferred. Our out-of-stocks went slightly higher, from about 2.3% to 2.8% in bulk. But now they're back down to under the average for the year. They're down to like 2% on a daily basis.

Okay. And then just one last one and I will give it to someone else. Any updates on the efficiencies you have been getting from the SAP systems? And any thoughts on some opportunities in 2013?

Every quarter we seem to be able to leverage our administrative costs down because of the SAP implementation.

Will you be doing the HR component this year?

It will be one of our goals to look at that component.

All right. Thanks very much.

Sean Naughton, Piper Jaffray.

Congrats on a nice start here. On the guidance for new store openings for the upcoming year, you have six leases, it looks like, signed today. You already have one of those stores opened for FY13. Maybe you could remind us about how long it takes you from the time you sign a lease to get into a store.

It takes between four and six months. It depends whether it is a ground-up building or whether it is an existing building. And it also depends somewhat on the municipality that the lease is signed in. Sometimes it can take a period of time to get a building permit. But usually, by the time we sign a lease, we essentially have our drawings finished and we have submitted our drawings to the building department for a permit. So that's why we are able to very quickly get stores opened after we sign our leases.

Got it. And then it looks like in the fourth quarter, new store productivity was a little bit better than I would've anticipated, based on my calculations. Anything in terms of that suite of stores that you opened in the fourth quarter that was different from what you were doing in the past?

Two of the stores that we opened in the fourth quarter were particularly good locations. They did require extra capital investment because they were older buildings in great locations. And that's part of the reason why we've increased our estimate for capital expenditures, because of those two stores. But they have performed, so far, very well because of their locations.

Got it. And then in the quarter, you had released before some stuff in the filings about performance between grocery and supplements and some other categories. Anything of note on how those particular portions of the store performed in the fourth quarter?

Supplement sales were up by a significant amount. They did lose a little bit of market share, primarily because of the new stores coming on. But, overall, we had, I think, only two stores with down-down on supplements, which means down on sales and down as a department percentage on supplements. Otherwise, all of our stores were up. And I think we had 11 up-ups for the quarter.

Okay, that's great. And then maybe lastly, on the guidance. I'm not sure if Sandra wants to take this one or not. But just when we are thinking about the models for 2013, how should we be thinking about the deltas maybe between potential gross margin expansion? Should it remain relatively consistent? And the same type of thing on SG&A. Just anything we should be thinking about from a year-over-year perspective?

What I would say about the gross margin is it's really pretty consistent to what we have been seeing in the past. Our product margin has been really stable. \And where we are picking up our leverage at the gross margin line really has to do with occupancy, particularly at the comp stores and the mature stores. And that's the way we've modeled moving forward.

Okay. And then any leverage that we should think about for potentially on SG&A, as you continue to generate some of these very strong same-store sales trends?

We are definitely looking for home office leverage, which is why you are seeing the really nice flow-through in the net income and EBITDA lines as a percent of sales.

Got it. That's helpful. Thank you very much and best of luck in the upcoming quarter.

Mark Miller, William Blair.

I was hoping you could elaborate a little bit further on some of the contribution you're seeing in, for example, the store remodel at Colorado and Evans. And what is giving you confidence to commit the extra capital in the new stores going forward. Whatever you can share on that, Kemper, would be helpful.

Our remodel in our Colorado and Evans store, the sales increases have far exceeded our expectations after the remodel. So we are very pleased with that, with those results. As I told Sean for the previous answer, two of our stores in the last quarter were older buildings that were in very good prime locations, that required extra capital for the remodel of them. But the results have been substantially better than expected because of that. And so we think that by finding these great locations and committing the extra capital, that the investment will be well worth it.

And then the CapEx going up by, it looks like, about 20% on the stores, is that a parallel increase in the sales year one? Or how should we think about the return metrics with that additional capital?

I'm not sure that I'm exactly understanding what you are asking. But when the new store comes out of the box, when we are projecting for the return, the cash-on-cash return, we are looking for it to be just slightly over 50% of a mature store level. In the past, the new stores have opened slightly below 50% of a new store. Is that what you're asking for your model?

He wants to know what the boost will be in sales in the first year.

Yes. Slightly above the mature store -- 50% of the mature store levels. It's going to be a little bit over.

Right. I was asked the up-front capital having been under $2 million, and now $2.3 million, so I was trying to get at whether there is a parallel increase in sales. Or whether there are other things that are happening there, and you're getting more leverage on your store operating expenses. And it sounds like the net impact is returns that are equal or above what you were anticipating before.

Right. It really is driven by an increase in our sales expectation. Not that we are looking for better leverage out of labor in the new stores, or gross margin in the new stores. Although, as was discussed a little bit earlier, we may see some movement towards supplements. Right. Okay. Sandra, the accounts payable was up a lot year on year. And it helped the cash flow. I'm curious what contributed to that year-end increase. And how should we think about that going forward? A good piece of the increase in accounts payable had to do with how late we were opening the stores in the quarter. But we also had a lot in accounts payable that has since been paid out. Just normal vendor payables that has since been paid out. Just the timing.

And then what was the portion of the pre-opening expense that was tied to the relocation of the bulk facility distribution center?

We will get that for you in just a second.

Yes, we will take a look and get back. Take a moment and look.

That's fine. We can also follow up later. Nice result overall.

It was $93,000, Mark.

Okay, thanks.

Shane Higgins, Deutsche Bank.

Sandra, could you just clarify some comments that you guys made earlier about the comp trends quarter to date? I think you said they were either running in line with the quarter or with the full year?

With the full year. Actually they're slightly ahead of the full year but they are not at Q4.

I see. Okay, thanks. And how were trends during the fourth quarter? Were they fairly consistent?

As compared to what?

Did you see a pickup during the quarter? Or did things stay fairly constant? Did they slow down?

They were better than the fiscal year. They were at 13% compared to 11%-point-something for our fiscal year.

Are you asking July, August, September?

Yes, exactly. Sequentially.

The trend in the fourth quarter was strong.

Consistent throughout the month. It wasn't moving one way or the other.

Yes. Each month, July, August, and September, were all about the same. 13% increased comparable store sales.

Great, thanks. And how are your older stores comping?

That's what we define as a mature store. So over 7% -- 7.6%.

I'm sorry, how did you guys define that? That's over --?

It's any store that's in its fifth or sixth year.

Okay. And then just a last question on growth in average ticket. That 4.7%, was that driven by units per transaction? Or was there some inflation in there?

It was a combination of both. About half and half.

Okay. Great, thanks. That's it for me.

Ellen Katske at Edward Jones.

I'm a relatively new investor and just getting familiar with your Company. Also a little less data driven. I am curious, didn't hear anything about the percentage of your business that comes from local produce, organics, grocery. What percentage of your business is that? And, going forward, is that part of your strategy, to increase that side of your business? And how do you see yourself either in conflict or interfacing with a Whole Foods type model?

In regards to local and organic, we don't really break out the percentage of our sales by local. And we don't, other than our produce, break out our grocery sales as a percentage of what is organic in the grocery. The emphasis at our stores is always to, first, source products that are organic and local. And as we go into communities, we always make a great effort to find both local and organic products to source at our stores. And, of course, our produce departments only sell organic produce, unlike Whole Foods and most of our competitors. And, so, our commitment to the organic is probably the highest in the industry.

As far as Whole Foods goes, we consider ourselves complementary to Whole Foods rather than fully competitive to Whole Foods. We think that when we are both in the same community, that we both thrive at a much higher level than if we are not both in the same community. So that's how we envision our relationship with Whole Foods to be in the future and currently. Secondly, all of our stores are certified organic produce, and produce handlers, unlike any competitor, that we know of in this industry that has any large presence. And that's a big commitment, to make sure that each one of our stores every year gets that recertification every year. And it just shows our commitment to that organic consumer and to the true natural food consumer in the industry.

I appreciate it. Thank you.

I believe that is all the questions for today. We appreciate everybody being here and listening to our update. Thank you and have a very nice afternoon. Good-bye.

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