Natural Grocers by Vitamin Cottage Inc (NGVC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers second quarter and first half fiscal-year 2013 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 would 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 second quarter and first half 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 that you have 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 our financial and operating results for the second quarter and first half of fiscal 2013. We would like to highlight three points for the second quarter. First, we continue to experience stability in our comparable store sales, which we believe is a direct reflection of our commitment to affordable pricing, interest in education, and customer service. Second, we plan to open 13 stores in fiscal 2013, which increases our unit growth outlook for fiscal 2013 from 20% to 22%. And third, we continue to increase our footprint as we expanded into Oregon this past quarter.

Moving to our results, we are pleased to report net sales increased 25.4% for the second quarter, and 26.6% for the first half of fiscal 2013. Daily average comparable store sales increased 10.6% in the second quarter, and increased 11.6% in the first half of fiscal 2013. We continue to experience strong earnings growth, which Sandra will discuss in more detail later. Finally, we opened four new stores during the second quarter in Omaha Nebraska, Denton and Lubbock, Texas, and Medford Oregon, bringing our total store count at the end of the second quarter to 65 stores in 13 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 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 periods 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 John referred to previously.

Turning to our financial results, we are pleased to report net sales in the second quarter of fiscal 2013 increased 25.4% to $106.5 million, due to a $14.7 million increase in new store sales, and an 8.1% increase in comparable store sales over the same period in fiscal 2012. For the first half of fiscal 2013, net sales increased to 26.6% to $202.3 million, due to a $26 million increase in new store sales, and a 10.4% increase in comparable store sales over the same period in fiscal 2012. Daily average comparable store sales grew 10.6% for the second quarter, and 11.6% for the first half of fiscal 2013 when compared to the prior year comparable periods.

Using daily average sales removes the effect of the loss of two selling days in the second quarter of fiscal 2013 due to leap year in 2012, and the occurrence of Easter in March of 2013 rather than April of 2012. The 10.6% increase in the second quarter is driven equally by increases in daily average transaction count and average transaction size. The 11.6% increase in the first half of fiscal 2013 is driven by a 6.6% increase in daily average transaction count, and a 4.7% increase in average transaction size. Daily average mature store sales increased 5.8% in the second quarter, and increased 6.9% during the first half of 2013 when compared to the prior year comparable periods. For fiscal year 2013, mature stores include stores open during or before fiscal 2008.

Gross profit increased 23.9% to $31.8 million during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. And increased 26.2% to $59.7 million in the first half of fiscal 2013 compared to the first half of fiscal 2012. Gross margin decreased to 29.9% of sales in the second quarter of fiscal 2013, compared to 30.2% of sales in the second quarter of fiscal 2012, and 29.5% of sales in the first half of fiscal '13 compared to 29.6% of sales in the first half of fiscal 2012. In both periods, this decrease was due to a shift in product mix toward products with slightly lower margins, partially offset by purchasing improvements.

Additionally, gross margin in the first half of fiscal 2013 was impacted by an increase in bulk production costs, as a result of moving to a larger facility in September of 2012. Occupancy costs, as a percent of sales, increased in the second quarter and first half of fiscal 2013 when compared to the prior year comparable periods, due to more expensive leases. Throughout the first half of fiscal 2012, all of the Company's leases were accounted for as operating leases, with rent expense included in occupancy costs.

During the second quarter and first half of fiscal 2013, seven of the Company's stores were accounted for as capital leases. 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 percent of sales, would have increased approximately 40 basis points. And interest expense, as a percent of sales, would have decreased approximately 35 basis points in the second quarter of fiscal 2013. Similarly, for the first half of fiscal 2013, occupancy costs, as a percent of sales, would have increased approximately 35 basis points and interest expense, as a percent of sales, would have decreased approximately 30 basis points.

Store expenses decreased 40 basis points to 20.8% of sales during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012 and decreased 70 basis points to 20.9% of sales during the first half of fiscal '13 compared to the first half of fiscal 2012. These changes were driven for the most part by a decrease in salary-related expenses, as a percent of sales, at comparable stores. Administrative expenses, as a percent of sales, decreased 20 basis points for both the second quarter and the first half of fiscal 2013 when compared to the prior year as a result of the Company's ability to support additional store investments and sales without proportionate investments in overhead.

Preopening and relocation expenses, as a percent of sales, increased 20 basis points for both the second quarter and first half of fiscal 2013 when compared to the prior year comparable periods, due to the increased number of, and the timing, of new store openings in fiscal 2013. Net income attributable to NGVC increased 29.5% to $3.2 million during the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. And increased 56.5% to $5.4 million during the first half of fiscal 2013 compared to the first half of fiscal 2012. Net income attributable to NGVC, compared to pro forma net income attributable to NGVC, increased 20.6% in the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. And increased 42.1% in the first half of fiscal 2013 compared to the first half of fiscal 2012.

Pro forma net income reflects net income as if we had owned 100% of the five Boulder stores for the second quarter and the first half of fiscal 2012. EBITDA increased 28.3% to $8.8 million for the second quarter of fiscal 2013 compared to the second quarter of fiscal 2012. And increased 39.6% to $15.5 million for the first half of fiscal 2013 compared to the first half of fiscal 2012. EBITDA, as a percent of sales, for the second quarter and first half of fiscal 2013 was 8.2% and 7.7% of sales respectively.

The stores that were accounted for as capital leases, rather than being reflected as operating leases, increased EBITDA, as a percent of sales, by approximately 55 basis points in the second quarter of fiscal 2013, and 45 basis points in the first half of fiscal 2013. Now, let's turn to the balance sheet. We ended the second quarter of fiscal 2013 with $9.5 million in cash and cash equivalents, $500,000 in restricted cash, and $1.8 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.

On April 23, 2013, we opened our first new store of the third quarter in Kalispell, Montana. This is a first of three new stores planned to open during the third quarter of fiscal 2013. We have leases signed for the remaining six new stores planned to open in fiscal 2013, and four new stores planned to open in fiscal 2014. These 10 new stores are in Idaho Falls, Idaho; Shawnee and Topeka, Kansas; Omaha, Nebraska; Tulsa, Oklahoma; Beaverton, Bend, Gresham and Salem, Oregon; and Wichita Falls, Texas. We continue to be pleased with how well our new stores' format is performing is both existing and new markets.

I will now provide some additional color on our updated outlook for fiscal 2013. We expect to open 13 new stores, a 22% unit increase over fiscal 2012, relocate one store, and remodel two existing stores. Achieve daily average comparable store sales growth of 8.5% to 9.5%. Deliver EBITDA margins of 7.3% to 7.5%. 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 of between $28 million to $32 million, which reflects opening 13 new stores in fiscal 2013 compared to a prior outlook of 12 new stores. And increase capital expenditures on the relocation and remodels planned for the second half of fiscal 2013.

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.

Hi, thanks for taking the questions, and congrats on a strong result here in the second quarter. I guess the question, first off, would be, and maybe this is a broader picture question for you, Kemper. How does the real estate pipeline feel today as we start to think about 2014? And then, maybe as a follow-up to that, maybe you could just talk about your most recently open stores, how they are performing particularly in new markets?

Sean, the real estate portfolio is looking very nice for 2014. We pretty much have most of our real estate selected for 2014 already, and are just in various stages of negotiations for leases on those sites. The performance of our new stores has been well up to our expectations, and we're very happy with the performance of the new stores.

Okay, great. And then maybe second, on the guidance. You took up the comps a little bit, and the EBITDA margins expectations, and the number of stores. Maybe you can just talk a little bit about the puts and takes that did not potentially flow through to the net income line?

Well, I would say that we're thinking that we won't be on the low end of our guidance. Let's put it that way.

Maybe just a little bit of conservatism there at this point on the guide?

We would always rather be conservative than overly optimistic.

Okay, fair enough. And then, maybe lastly, Sandra, you talked about the equal growth from transactions and basket. Can you talk about your expectation, maybe, for that moving forward? And then maybe any color on inflation potentially moderating it in the basket?

Well, I don't know, do you want Sandra to answer that, or do you want me to answer that? I will take a stab at it.

We really have not seen a huge increase in inflation. In reality, what we saw in the last quarter was an increase in the number of items in a basket. And so that was the main driver behind the equaling out of basket and transaction size.

I think yesterday in Whole Foods' conference call, they mentioned that the weather played a part in increasing the basket size where customers were homebound for a day, and then they came in and bought more, because they weren't shopping is frequently. And we may have had a similar type of effect at our stores.

Okay, great. Thanks, and best of luck for the rest of the year.

David Magee, SunTrust Robinson Humphrey.

A couple of questions. First, you mentioned during the quarter that the sales growth was stable. Is it fair to assume that the cadence and your month-to-month about the same? Did you see much variation there?

You mean from like January to February to March?

That is right. Yes.

No. They were all fairly similar.

Okay. And what are you seeing now with respect to promotions in the sector? Anything different than within the turn line?

You mean as far as putting items on sale?

Well just competitive activity on the part of others out there. Are you seeing more of that, or is this unchanged?

We really have not noticed. Our studies of our competitors as far as basket pricing goes is that we have maintained our advantage in pricing. And we have not noticed that our competitors have become any more aggressive in their pricing.

Okay. And then just lastly, on the mix issue, can you talk with us a little bit about that in terms of how long do you expect that impact to be there? I know it is just a modest headwind, but just in terms of the gross margin that you referenced in the quarter?

One of the positives of the quarter was, at our that sure stores the mix of our dietary supplements, we actually had an increase of 1% almost of sales in dietary supplements as a percentage of sales. So, we are actually seeing some really positive results at the mature store level.

And, the reason our new stores are opening in these new markets, and we have not really established our education program in these new markets yet. And, so that is what has been primarily driving down the supplement mix overall at our stores. The new stores have just been opening really low in the supplement sales, and then, over the next five years as they mature, they will build up towards where our mature stores are now.

And so, at some point, it was always our projection that we would end up somewhere around 25% of sales in supplements. Hopefully, it will stabilize at that point in time. We will probably see that point in time some time either this year or next year.

Great, thanks Kemper. Good luck here.

Mark Miller, William Blair.

Hi, good afternoon. Kemper, maybe just a follow-on to that last point of discussion about the supplement penetration in new stores. Were there any changes in the way you brought in the health coaches?

And also the process of recruiting these people? Because, I mean, you have had relatively rapid store growth in the past. So, I'm wondering if there is a change in the way these stores are opening and how that program is rolled out?

No. We are recruiting the health coaches in the same manner and the staffing. I mean sometimes it takes a little while to get a health coach at a new store. But, by and large, we have a health coach hired when the store opens.

These new stores have not really opened any differently than other new stores have as far as the percentage of sales for supplements. It is just that they have become so much greater as a percentage of our base that it has affected our overall percentage of supplements sales. And, as I said, as the stores progress along, you see really nice, I mean I see every month, really nice increases at the stores in the supplement sales, and as a percentage of sales at those new stores. We are quite positive about that issue.

Okay, great. So, I mean assuming the Company maintains the same rate of unit growth, this shift should moderate presumably --

I mean, as the 30-some stores we have opened over the last three years become mature, it will moderate. Because, they will become such a greater percentage of our base.

Okay, great. I am surprised with the rate of comp growth that you have that there is occupancy deleverage. Can you just remind us how the bulk of the leases are configured? To what degree are the rents variable, relative to fix?

The mature stores are having great leverage on their leases because they're fixed over the term of the lease. So, I mean it is a fixed amount every month.

The real estate that we have been acquiring lately has been really prime real estate, so it is been expensive relative to some of our older real estate that was not as -- we used to not take quite as prime of real estate. As those stores mature, it will really help our -- it is similar to the dietary supplement explanation I just gave you.

As those stores mature, their percentage of rent will go down dramatically compared to sales. Because our stores do take a good five to six years to mature to full sales level. They are not instantly at their sales level when they first open.

Great. I mean just the same follow-on to that, that if you maintain the same rate of growth at this level of comp rate, you would not be deleveraging on occupancy -- ?

At some point we will. I can't give you the exact date on it, we haven't quite studied that, but at some point in time we will.

Okay, great. Nice work in the period.

Scott Van Winkle, Canaccord Genuity.

Good afternoon, congrats on the momentum. Kemper, on the remodels, I just want to make sure that I got that correct. You talked about 13 new stores plus a remodel. Is that 13 net or 12 net?

We are opening 13 net stores. We are moving one store, so it is not a remodel, it's a relocation which means it's like a new store. It is the cost of a new store.

Then, we had two stores that we expanded the size of the stores, that we are expanding the size of the stores on.

Perfect, so 14 gross, 13 net after the relo?

Correct.

And, when we think about a remodel, is there an immediate sales lift, or is that something that builds over time? I assume that you get a fairly nice return on that investment on a remodel?

Our last two remodels, we've had significant immediate sales lifts after the remodels.

And the timing of those, if we think about relocation expense?

In the fourth quarter.

It will be about the third quarter or the fourth quarter.

Great thank you. And then the leases that you have signed today, going into 2014, any change in store size? Obviously you talked about a little bit of real estate. How about the store size?

Currently, all of the store leases that we are signing our for stores that will be between 14,000 and 20,000 square feet -- I mean 15,000 and 20,000 square feet, which is bigger than our old footprint of 12,800 square feet.

Great. Thank you very much.

(Operator Instructions)

Phil Tripoli of Longbow research.

Yes, good afternoon. A lot of my questions have been answered, but I just want to go back to the mix shift that was talked about earlier. Some of your competitors in the space have spoken of some choppiness in the nutrition sales. I'm just curious if you have seen that at all?

No. Our nutrition sales have not been growing as fast as our overall sales, but they have been pleasantly nice. I mean, they have been strong. We have not seen that, no.

Okay, that's helpful. And then just one quick follow up, was just you just mentioned the 15,000 to 20,000 square feet, definitely at the high end of your range. Was it just a function of finding strategic locations that fit for you, or is this more of a strategic shift to much higher square footage stores?

We have found that the 20,000 square foot footprint performs the best for us.

Okay, perfect. Thank you.

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

I thank everybody for being here today, and have a pleasant afternoon. Thank you, bye.

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