Natural Grocers by Vitamin Cottage Inc (NGVC) 2013 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers, first-quarter fiscal year 2013 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, and thank you for joining us for the Natural Grocers by Vitamin Cottage first-quarter fiscal 2013 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 Form 10-K for the year-ended September 30, 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, Jon. Good afternoon everyone. We are pleased to announce a positive start to fiscal 2013, continuing the momentum from year-end. We have produced another quarter of strong sales and earnings growth. We are excited to announce our first Oregon stores opening this spring and summer in Medford and Salem.

For the quarter, we delivered 28.1% net sales growth; 12.9% comparable store sales growth; Strong net income and EBITDA growth, which Sandra will discuss in more detail later; and we opened two stores during the first quarter in Missoula and Helena, Montana, bringing our total store count at the end of this quarter to 61 stores in 12 states.

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 your interest in our Company and for joining us this afternoon. 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, on a pro forma basis, illustrate our results as if we had owned 100% of the five Boulder Vitamin Cottage Group, LLC stores during the comparable quarter last year. You can find our reconciliation schedules at the end of our earnings release and posted on our website at Investors.NaturalGrocers.com, which Jon referred to previously.

Turning to our financial results, we are pleased to report net sales in the quarter increased 28.1% to $95.8 million with new store sales increasing $11.3 million over the same period in fiscal 2012. Comparable store sales grew 12.9% for the first quarter of fiscal 2013. This increase is driven for the most part by an 8.3% increase in the number of transactions and is also supported by a 4.2% increase in average ticket.

Mature store sales increased 8.1% for the quarter. For fiscal 2013, mature stores include stores opened during or before fiscal 2008.

Gross margin improved 10 basis points for the quarter. As you will recall, our gross profit reflects earnings after both product costs and occupancy costs. Our product margin increased across all departments but was offset by a shift in mix and an increase in bulk production costs.

As a result of sales and new store growth our bulk food repackaging and distribution center was relocated to a larger facility in September of 2012 to support increased future production. The larger facility resulted in increased operating costs during the first quarter of fiscal 2013.

Occupancy costs as a percentage of sales were relatively flat due to the new stores that were accounted for as capital lease finance obligations. In the first quarter of fiscal 2012 all of our leases were accounted for as operating leases with rent expense included in occupancy cost.

During the first quarter of fiscal 2013, four of the Company's new stores were accounted for as capital lease finance obligations. If we had accounted for these stores as operating leases the straight-line rent expense would have been included in occupancy costs, and occupancy costs as a percentage of sales would have increased approximately 20 basis points and interest expense would have decreased approximately 20 basis points as a percentage of sales.

Store expenses decreased 90 basis points to 21.1% of sales during the quarter. 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.

Administrative and pre-opening and relocation expenses, as a percent of sales, each decreased 10 basis points, quarter over quarter.

Net income attributable to NGVC increased to $2.2 million, a 124.3% increase compared to the same period in fiscal 2012. Net income attributable to NGVC increased 91.5% compared to pro forma net income attributable to NGVC in the first quarter of fiscal 2012. Pro forma net income reflects net income as if we had owned 100% of the five Boulder stores for the first quarter of fiscal 2012.

EBITDA increased 57.5% to $6.8 million or 7.1% of sales compared to $4.3 million or 5.8% of sales in the same period in fiscal 2012. The new stores that were accounted for as capital lease finance obligations, rather than being reflected as operating leases, increased EBITDA as a percent of sales by approximately 30 basis points.

Now let's turn to the balance sheet. We ended the quarter with $10.3 million in cash and cash equivalents and $1.9 million in available for sale securities. We also had $15 million available under our revolving credit facility.

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

Thank you, Sandra. During the quarter we opened two new stores in Missoula and Helena, Montana. On January 22, 2013, we opened our first new store of the second quarter in Denton, Texas. This is the first of four stores planned to open during the second quarter of fiscal 2013. We have leases signed for five additional locations slated to open in fiscal 2013 in Omaha, Nebraska; Lubbock, Texas; Medford and Salem, Oregon and Kalispell, Montana.

We continue to be pleased with how well our new stores are performing. We continue to target the same new store returns we outlined in last quarter's earnings call.

I will now give some additional color on our updated outlook for fiscal 2013. We expect to -- open 12 new stores, a 20% unit increase over fiscal 2012; relocate one store and remodel two existing stores; achieve comparable store sales growth of 8.0% to 9.0% which reflects our 12.9% comparable store sales growth in the first quarter and reflects that the second quarter of fiscal 2013 will be two days shorter than the prior year's quarter due to leap year providing an extra day last year and the shift in Easter from April to March this year; deliver EBITDA margins of 7.2% to 7.4% which reflects the overall shift from occupancy costs to interest expense, as Sandra discussed; achieve net income margins of 2.5% to 2.7%; achieve diluted earnings per share between $0.46 and $0.49; and incur capital expenditures between $25 to $30 million.

We remain focused on our five founding principles which are to provide nutrition education, high quality standards, everyday affordable pricing, and supporting our community and our associates. We will allocate the next 20 minutes to questions. Please limit your questions appropriately so that everyone has an opportunity to participate. Thank you.

(Operator Instructions). Sean Naughton, Piper Jaffray.

Congratulations on a strong first quarter. A quick question for you guys just on the guidance. You beat the consensus by a couple of cents, were able to raise the full year same-store sales outlook but didn't flow that $0.02 increase through to the full-year estimates on the earnings per share line.

So just curious, was there something internally that had changed in your modeling for the full year or is this just a little bit of conservatism on your part? Just curious any comments on that front.

Sandra, do you want to answer that?

Thanks, Sean. Our overall model wasn't flat for every quarter, so really what we have done when we provided the update in our outlook is say given where we are with the first quarter, and holding our projections and outlook for the remaining three quarters, where we will be for the full year.

So it just wasn't an automatic flow through. The two items that we did change obviously were the EBITDA because of the shift in how we are trading some of our leases and comp sales increases because we came out with higher comp sales than we had for the quarter.

Okay, understood, that makes sense. And then just in terms of the growth -- still targeting the 20% unit growth obviously and it sounds like you're getting a few new stores in the ground in new markets. Can you -- you mentioned that you've got five leases, I think you need a few more to get up to that 12 number. Can you talk about your visibility into getting some of those stores under some lease agreements here before the end of the year to get those stores open?

Currently we have 12 leased -- 12 properties under negotiation and they will fill out our roster for the rest of the year -- those -- the five stores plus the three -- we need four more leases signed and out of those 12 we'll get four more signed that will be open by the end of September of this year.

Okay, so you feel pretty confident about that you are pretty close on some of those then?

Yes, we are really close on some of those.

Okay, great. And one last question -- go ahead, I'm sorry.

They're imminent signings, as a matter of fact, on some of those.

Okay, that is great to hear. And then just one last quick question. Inflation in the channel, are you guys seeing anything from your suppliers or vendor at this point? And then how was that factored into your plan for the full year? Thank you.

We haven't seen any unusual inflation. I mean, the one item that kind of sticks out in our minds is the price of whey protein. But other than that the inflation has been pretty much normal comparatively speaking. As our suppliers pass on price increases to us we work on a fixed margin, so we -- the product goes up by whatever the margin is to the consumer. And we don't seem to have -- be having any issues with that particular issue.

Okay, great. Thank you and best of luck in the second quarter.

David Magee, SunTrust Robinson Humphrey.

Good afternoon and congrats as well for the strong quarter. Just a couple of questions. One is it looked like to me that the business picked up a little bit during the quarter, maybe it was stronger towards the end. I am curious if that is true and which part of the store seemed to be more robust? I guess that is my first question.

I would say that overall, all of our departments did very well during the quarter. There wasn't any particular department that (inaudible). I mean maybe produce kind of was the strongest of the departments for the quarter. But that would be expected because with November and the food sort of thing in December was Christmas, you get a little bit stronger produce sort of thing going on. Go ahead, David.

Does a strong flu season -- does that help your business and people being more proactive about trying to combat that?

That always seems to be good for business when there are a lot of people that aren't well out there. They take their Vitamin D and ossilicosinum and we have a good supply of both of those. So it's definitely helpful. I can't say that it is not.

And are you seeing anything of note in terms of geographical differences in performance with the stores, particularly the newer ones?

Our new stores have opened in new geographies that are very pleasant, right, and we are very happy with those openings in the new geographies.

And then just lastly, I guess the small strike impacted (inaudible), so small it's barely worth mentioning I guess. Is that sort of behind us now do you think (multiple speakers)?

You mean (multiple speakers).

Exactly, yes.

They seem to have all their operational issues ironed out from that strike.

Okay, great. Thank you and good luck here.

Mark Miller, William Blair.

Good work in the quarter as well. I wanted to know a little bit more about the gross margin impacts and specifically you highlighted the shift in department sales mix. So I am gathering that is the faster growth of natural food relative to supplements. But did that trend meaningfully change one way or the other or were there other mix shifts to call out as well?

The biggest mix shift would be from grocery -- I mean from supplements to food end of the business. Although we are very pleased with how well the food supplement end of the business did during the quarter, it was up significantly and at our mature stores it almost equaled the -- I mean at our comp stores it almost equaled comp store comp. So it almost didn't lose any market share at the comp stores for the quarter. So that was very pleasing.

Where we had watched it was -- we were opening so many new stores that they opened at a lower rate and then they ramp up. And so, it just takes a while for them to get up to the rate of our mature stores. Otherwise I wouldn't say that we had a lot of shift in the departments. Like I said, produce was particularly strong, so it gained some market share.

But if I recall the supplements growth hadn't been all the way up to the comp in the past at the mature stores. So is there -- am I recalling correctly, was there a little bit of acceleration in the supplements comp?

Yes, there was.

Okay.

It was a very good quarter for supplements.

Hey, great. On the store operating expenses, the rate of growth in this quarter was 24% and last quarter it was 27%. Yet you had the same rate of total sales in the two periods. So I am wondering what was it that allowed you to get somewhat better leverage on the store operating expenses in the December quarter than the September quarter.

We really manage our costs and we're always trying to keep them at a lower pace than our sales growth. Because that's -- I mean you have to do that to be a competitive retailer. And we just had more focus on it during the quarter.

So was that -- Kemper, was that store managers doing something different or was that something implemented from headquarters?

Our incentive program at our Company really emphasizes cost control. And we really focused on our incentive plan in the quarter. And it showed up in how the stores incented out, so there was a higher percentage of stores hitting all of their incentive comp buttons as compared to the previous December quarter -- the September ending quarter.

Then just a final question on occupancy costs. So the like or comparable lease spaces the occupancy would have been up I guess 20 basis points as a percent of sales. And you've given the strong comp growth, I'm a little bit surprised that you would be deleveraging on occupancy. Is that wholly attributable to these new stores which have demonstration kitchens and better real estate or is there any other factor to consider on that?

That would be the case, it would be the new store leases are a little bit more expensive than our older mature store leases have been in the past. And it takes a while for the sales at the new stores to get up high enough to drop that percentage down. As the mature store base grows that will help that particular issue.

All rights, good work. Thanks again.

Scott Van Winkle, Canaccord Genuity.

I offer my congratulations as well. In the second quarter the commentary about the comparison to leap year last year, when you do a comp for Q2 would you normalize for that extra day last year?

We'll normalize on a daily basis, but overall for the quarter there will be fewer days in the quarter.

Yes, and --.

We will talk about our daily base of sales, how much it -- overall in the quarter it will be -- you have that day, you have two days left.

And if we think about the second quarter, we're going to look back at last year. And last year had that really exceptional gross margin, nice acceleration in the comp. Was there anything last year in the second quarter other than the extra day that we should think about when we look at this year versus last?

Yes, there were a couple things going on. I think maybe the main thing that we believe occurred, and I'm not sure that we could put our finger on it specifically with data, but last year we seemed to receive a number of our price increases from vendors early in the quarter. And so we were able to -- we passed those prices on and then of course we had inventory on hand, so our moving average cost was lower and we did have the opportunity to have a lift in margin, if that makes sense.

It does.

Yes. And this year we are not seeing the same level of price increases early in the quarter. So we are not anticipating that same lift.

Great. And then forgetting about the strike impact and maybe a late delivery here or there early in the quarter. Was there any challenges with -- there was some data that came out recently talking about the natural food industry being up 13% last year I think from spins. With that type of growth has there been any trouble procuring product, any supply chain challenges?

No more than normal. There is always an item here or there that's tough to get, but there really hasn't been any supply-chain issues. For a while there, there was some produce supply-chain issues but that was weather-related and those are gone now.

Excellent, thank you.

Shane Higgins, Deutsche Bank.

Congrats on the quarter. Just looking at the comp trends, you guys have been pretty consistent -- you guys have been running 13%'s now for the last three quarters. Was that a pretty -- was the 13% pretty consistent throughout the first quarter?

I think October was a little bit less than December and January we are right in there.

And I don't know if you guys would speak to a quarter-to-date trends and obviously you are going to be impacted by fewer days later in the quarter. But is there anything you can talk about there if trends change too much?

We are really not going to discuss that today.

Okay, fair enough. And looking at the 8-1 comp for the mature stores, can you guys break that down between grocery and supplements? Are those two categories about in line with that number?

The supplements were slightly below that number and grocery was slightly higher than that number.

Okay, great.

I mean it wasn't a great -- there was like about a 1 point difference between the two.

Okay, okay, that is helpful. And how did that compare to the mature comp in the fourth quarter?

It was about the same.

Okay, great. Thanks a lot.

[Ron Rowell].

What was the dollar cost of the buyout of the five store older operation?

What was the dollar cost? I believe we have that spelled out in our --.

We did cash plus stock.

We did a cash --.

So it was a little low over $10 million for the cash piece.

Got it. Thank you very much.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

We appreciate everybody being here on the phone today with us and we look forward to your continued support. Thank you. Goodbye.

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