Natural Grocers by Vitamin Cottage Inc (NGVC) 2013 Q3 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Natural Grocers Third-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 third-quarter and year-to-date 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 reads 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 at 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 delivered strong financial results again this quarter, highlighted by healthy positive comparable store sales growth and an expanded geographic footprint. These results reflect the continued strength of our strategy, which is anchored by our five founding principles. For the third quarter we delivered 30.5% net sales growth, 10.4% daily average comparable store sales growth, and over 30% NGVC net income and EBITDA growth. In addition, our total store count grew to 68 stores in 13 states. We are encouraged by our demonstrated ability to expand our presence geographically, while maintaining double-digit comps and solid growth on both the top and bottom line. We anticipate carrying this positive momentum into fiscal 2014, and have already set the stage for growth next year with the signing of 11 new leases, which I will discuss later in the call. These new locations represent both a strengthening of our position in some of the markets we are already in, as well as further expansion into new areas where we have not previously had a market presence.

I will discuss our outlook in more detail in a moment, but first I will turn the call over to Sandra to highlight our third-quarter financial results.

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, which, 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 to which John previously referred. As a reminder, the key metrics discussed today can be found in the MDNA portion of the Company's Form 10-Q filed this afternoon.

Turning to our financial results, we are pleased to report net sales in the third quarter increased 30.5% to $113.2 million including an 11.6% increase in comparable store sales. Daily average comparable store sales grew 10.4% for the third quarter, driven by a 4.7% increase in daily average transaction count and a 5.4% increase in average transaction size. Daily average comparable store sales removes the effect of the extra selling day in the third quarter of fiscal 2013 due to Easter occurring in March of 2013 rather than in April of 2012. We continue to see strength in our mature store base, with daily average mature store sales increasing 5.7% during the third quarter. Mature stores are stores open during or before fiscal 2008.

Gross profit during the third quarter increased 28.3% to $32.6 million driven by strong comparable store sales and new store growth. Gross margin decreased 50 basis points due to a shift in sales mix and a decrease in bulk product margin. The decrease in bulk product margin is a result of moving to a larger facility in September of 2012. Occupancy costs as a percent of sales decreased due to the seven new stores accounted for as capital leases. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy cost, and gross profit would have been approximately 55 basis points lower.

Our disciplined approach to managing expenses is reflected in our continued leverage from both store and administrative expenses. During the third quarter, store expenses as a percent of sales decreased 50 basis points due to a decrease in salary related expenses at comparable stores. Administrative expenses as a percent of sales decreased 30 basis points as a result of the Company's continued ability to support sales growth without proportionate investments and overhead. Pre-opening and relocation expenses as a percent of sales increased 30 basis points due to the increased number and timing of new store openings and increased per store expense.

During the third quarter, net income attributable to NGVC increased 31.1% to $2.9 million, and net income attributable to NGVC compared to pro forma net income attributable to NGVC increased 19.5% in the third quarter of fiscal 2013, compared to the third quarter of fiscal 2012. EBITDA increased 33% to $8.7 million or 7.7% of sales for the third quarter. 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.

Touching briefly on our year-to-date results, we believe we are on track to meet our projections for the fiscal year. Our solid third quarter top line performance brings us to a year-to-date daily average comparable store sales of 11.2%, and has made us more optimistic about our top line growth for the year as Kemper will discuss momentarily. Our bottom-line results are also estimated to be on track with net income attributable to NGVC of $8.3 million year-to-date, and diluted earnings per share of $0.37.

Now let's turn to the balance sheet. As of June 30, 2013, we had $5.7 million in cash and cash equivalents, $500,000 in restricted cash, and $1.7 million in available-for-sale securities. We also had $15 million available under our revolving credit facility. This provides the Company with ample capital for future store development.

Now I will turn the call back to Kemper to discuss our new store growth, and updated outlook for the remainder of fiscal 2013 and initial outlook for fiscal 2014.

Thank you Sandra.

As I mentioned at the beginning of the call, we have continued to grow at a steady pace through the first nine months of this year, and anticipate continuing to grow through the remainder of this year, and into fiscal 2014. Since the end of the third quarter of June 30, we have opened two new stores, one in Omaha, Nebraska and one in Beaverton, Oregon. We will open two more stores in fiscal 2013. As of today, we have signed leases for 11 of the 15 new stores planned in fiscal 2014. These stores will open in Colorado, Idaho, Kansas, Oklahoma, Oregon, Texas, Utah, and Washington. These locations will continue to strengthen our position in current states, while also growing our presence in new markets. We have visibility into the remaining locations planned to open in fiscal 2014.

I will now provide some additional color on our updated outlook the remainder of fiscal 2013. First, I am pleased to announce the Company's anticipated fourth-quarter restricted stock unit grants to reward certain employees who are not named executive officers for the success and growth we have seen. This will allow us to promote the long-term success of the Company, and to ultimately create shareholder value. The grants will total approximately $2 million in non-cash stock compensation and vest over the next four years. 20% would vest at the grant date, and then subject to continuing service, 20% would vest annually over the next four years. The impact of the fourth quarter would be approximately $400,000 in non-cash stock compensation expense.

Moving to our updated fiscal 2013 outlook, we expect to stay within our projections by opening two more stores in addition to the 11 already open in fiscal 2013, resulting in a 22% unit increase over fiscal 2012; completing the remodel of two existing stores, and relocating one store; achieving daily average comparable store sales growth of 9.5% to 10.5%, which reflects the 11.2% year-to-date results delivering EBITDA margins of 7.3% to 7.5%; achieving net income margins of 2.5% to 2.7%; achieving diluted earnings-per-share of between $0.46 and $0.49; and incurring capital expenditures of between $32 million to $34 million, which includes $1 million for two new non-store related capital projects, which should automate the hand bagging area at our distribution center and build out corporate offices in the warehouse behind the current offices.

Additionally, I would like to give some color on our initial outlook for fiscal 2014, which is consistent with our long-term targets. We anticipate unit growth of 20.8% or 15 new stores. Sales and EBITDA growth of approximately 25% plus, and net income growth of approximately 30% plus. We remain confident in our strategy and our ability to grow our store base, while expanding both the top and bottom line as we carry forward the positive momentum we have generated year-to-date. We look forward to updating you on our progress.

We will allocate the next 20 minutes to questions. Please limit your questions appropriately so that everyone has an opportunity to participate. Thank you.

Thank you we will now begin the question-and-answer session.

(Operator Instructions)

David Magee of SunTrust.

Yes, hello. Good afternoon, and good quarter.

Thanks, David.

I just had a couple of questions. One is, once the Company laps the opening of the bulk facility last year in September, would that mean that the gross margin visibility will improve thereafter in terms -- and wouldn't it be flatter?

As far as the impact from the bulk facility of last year?

Yes, that's right.

That's true.

And is that a meaningful number in terms of the headwind that's presented over the past 12 months?

It's been -- in the first quarter of last year it was pretty substantial, it's gone down every quarter since.

Okay. And then, based on where you plan to open stores and the leases that you've signed, is it your sense that the direct competition will be increasing, decreasing, or staying the same?

We think that the competition is approximately the same. Almost every place that we've opened a store in the last year has had some sort of competition in it, whether it's a national chain or a local chain. As far as national chains go that are direct competitors to us, currently we have about 58% of our stores with direct competitors. We project at this time next year that we'll have 60% of our stores with direct competitors.

Great, thanks Kemper.

Thanks.

Sean Naughton of Piper Jaffray.

Hello thanks, and congrats on the strong double digit comps there again this quarter. Can you talk a little bit about the same-store sales trends maybe in the most recently completed quarter, just on the cadence of how things progressed? Was there a lot of variances between the months or variances in traffic patterns that you saw? Or was it pretty consistent business?

It was almost the same every month last quarter. The only difference was is we had that extra day in April. But other than that on a daily basis, it was virtually the same every month.

Okay. That is good to hear. And then I guess, we continue to hear a little bit about out of stocks, in certain categories, kind of across the industry. Is there anything you're seeing or that you feel like is impacting your business in any way? Could you be driving even higher sales trends than you already are?

We have not seen a significant amount of out of stocks at our stores. We're running at or below our 52 week average in every category right now.

Okay. And then, I guess just in terms of the inflation outlook, organic is a little tougher to forecast and get a good feel for. But how do you feel about the inflation impact on the comp, and just what you're seeing in your store?

Inflation has been very minor, it hasn't been anything above normal. As a matter-of-fact, we're seeing, if I were to forecast, I think we're seeing some positive signs on the commodities front. So I'm thinking there's going to be not as much price pressure over the coming months.

Okay. And then just lastly on just the capital expenditures, they continue to ramp up a little bit, move higher a little bit every quarter. Just how do we feel about that number as we look out into '14, and just kind of the liquidity available to the Company as we look to open up these stores in 2014?

I think that we have a really good handle on our capital expenditures in 2014, and we should be fine as far as liquidity goes.

Okay. All right. Thanks a lot, and best luck in the fourth quarter.

Thank you.

Mark Miller of William Blair.

Yes hello, good afternoon. Could you give us a little more clarity on the components of the gross margin? So it looks like you were down about 100 basis points on a similar occupancy basis given the change in the capital leases. So, what were the impacts in the sales mix, and then the decline in margin within bulk? And I guess I'm wondering about the markup in the rest of the store, absent those two effects. Is your merchandise margin stable, or is that also coming down a little bit?

We're actually having positive gains in all categories, in margin. The main driver down is the mix has changed somewhat. Our higher margin categories have lost market share, although they're still growing substantially, they've lost a little bit more market share. And it's primarily driven by the fact that we're just opening so many new stores that it's driving down our overall, the new stores open at a lower mix rate than our comp stores. And so, it drives down the overall mix. As you see, our sales accelerated to 30% up the quarter, which helped to -- it's great to have the sales that we had, some of it was more so in some of the lower margin departments, which is what contributed to the decline in the margin and in product mix. But as I said, every category we've actually gained a little bit of traction in margin by category. In every category.

Okay. Would you be willing to share magnitude of impact from these factors?

We really haven't shared that previously to a great extent. We do define as we talk through the margin how much the basis point shift is related to those But we haven't typically spoken out in addition to that.

Okay. Maybe beyond the accelerated store growth and that impact, I get that. That the mix of supplements is less in the new stores; it takes time to build. But how about on a comp store basis? Because I was wondering, your sell related expense was leveraged a little bit more than I thought in the comparable stores. And I was wondering, because I know that bonus ties into the sales mix as well. So maybe you can just I guess talk to category trends on comp stores as well.

Our comp stores lost a little bit of mix margin, again, they lost a little bit of supplement growth. Not a substantial amount. They're still --

They had a nice single digit comp growth in supplements, but it just can't keep up with what grocery and produce are growing.

Okay. It looked like the sales were strong there. One other question, and then I'll turn it over to others. What's the transaction count in the mature stores? I guess I'm trying to understand that maturation uplift in the comps, is that predominantly on transactions or is it as much on average ticket? Thanks.

The transaction count was about half of the increase at mature stores. Comp stores. Mature stores, I think that was, yes, mature stores. And so it was about 50/50 transaction count and average ticket increase.

All right. Thanks, Kemper.

Sure.

Scott Van Winkle of Canaccord Genuity.

Hello, thanks. I suspect some of the new stores you've opened and have in the pipeline are of a slightly larger size than the average store. Does that have an impact on the sales mix with supplements versus non-supplements as well?

The size of the store doesn't have as much of a effect on the mix as does the market that we open in. And so, there are some cities that are better supplement cities than other cities. And some cities that are better grocery cities than other cities. If that makes sense to you.

No, it definitely does make sense. And I was also wondering if you could characterize, and I hope I have this correct, that into a little maybe the average space you're taking in new stores is a little more expensive, a little -- a better market area. If that's true, and is that having any kind of measurable impact on your new store performance thus far that you can talk about?

When you get a good premium space, the store seems to perform better than if you take a marginal space. That is definitely a factor.

I was thinking, relative to the investment.

Yes, it helps. Over the long term, it will be of great benefit to us to have upgraded our site selection process.

Well, as the new stores opening their first year sales are higher than what we had been experiencing previously. Is that what you're asking?

Yes, no that's perfect. I was just looking for any commentary on the return here. But great. Thank you very much.

Phil Terpolilli of Longbow Research.

Yes, good afternoon. Just two quick questions. First on the timing of the leases for next year, can you just talk to the cadence of them at all? Any sort of indication of its -- is it more back half weighted, front half weighted, any color you can give us there.

I would say that the majority of our stores will open in the first nine months of our fiscal year next year.

Okay. That's helpful. And then just from a competitive activity standpoint, have you noticed any changes in your market specifically? One of your larger competitors noted on their last call some price matching activity. Just curious if you've seen that at all in your markets?

It that, if you were talking about the same competitor, we have not noticed that they have been doing that.

Okay. Okay. Perfect. Thank you.

This concludes our question-and-answer session, and I'd like to turn the conference back over to Mr. Isley for any closing remarks.

Thank you everybody for being on the call today. We appreciate it, and have a very nice afternoon. Good-bye.

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