Natural Grocers by Vitamin Cottage Inc (NGVC) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers fourth quarter and 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 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 fourth quarter and fiscal year 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 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 most recently filed Form 10-Q and 10-K.

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 have had the opportunity to read this release. The release, along with the 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. If you have not had the opportunity to read this release, 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 very pleased with our performance this fiscal year. Our five founding principles continue to drive our robust sales and we remain focused on our disciplined approach to cost controls.

We delivered strong financial results this year and fully anticipate that we will carry this positive momentum into fiscal 2014. For fiscal 2013 we delivered 13 new store openings, or 22% unit growth; 2 store remodels and 1 store relocation, all in the Denver metro area; 28% net sales growth, including a healthy 11.1% daily average comparable store sales growth; a $26.7 million increase in gross profit; significant leverage in both store and administrative expenses; over 35% NGVC adjusted net income and EBITDA growth; and diluted earnings per share of $0.47.

In addition, we are pleased with our new stores' performance. Our comparable store sales continue to surpass our expectations. We believe this strength results from our commitment to nutrition education, everyday affordable prices and quality standards. Nutrition education and the nutritional health coaches have helped support our customer count growth, allowing our customers to take advantage of our free nutritional education seminars and cooking demonstrations. We provide a nutritional health coach in every store to empower our customers to improve their health.

Our disciplined approach to managing expenses is reflected in our ongoing leverage for both store and administrative expenses. We continue to leverage store labor levels and support additional store investments without proportionate investments in overhead. We are encouraged by our demonstrated ability to expand our presence geographically while maintaining solid growth on both the top and bottom line.

We opened 13 new stores in fiscal 2013, bringing our total store count to 72 stores in 13 states. Additionally, we are very pleased with the performance of our new and relocated stores and continue to target the same financial returns, which I will discuss later in the call. We believe our dedication to strict quality standards, nutrition education, and our commitment to 100% organic produce drives initial traffic at new stores and customer loyalty at existing stores.

Now, I will turn the call over to Sandra to highlight our fiscal 2013 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 on an adjusted basis reflect the impact of certain stock-based and incentive compensation expenses related to the Company's July 25, 2012 IPO and subsequent awards of RSUs to certain employees who are not named executive officers in the fourth quarter of fiscal 2013.

Additionally, on a pro forma basis, we 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. As a reminder, a description of the key metrics discussed today can be found in the MD&A portion of the Company's most recently filed 10-Q and 10-K.

Turning to our financial results, we are pleased to report net sales in fiscal 2013 increased 28% to $430.7 million, including a 10.8% increase in comparable store sales. Daily average comparable store sales grew 11.1% in fiscal 2013, driven by a 5.9% increase in daily average transaction count and a 4.9% increase in average transaction size. Daily average comparable store sales removes the effect of losing one selling day in fiscal 2013 due to leap year occurring in 2012.

We continue to see a shift in sales mix toward grocery products, and the shift has helped drive customer traffic, which in the long-term will help drive our sales in other departments. We continue to see strength in our mature store base with daily average mature store sales increasing 6.4% in fiscal 2013. Gross profit for fiscal 2013 increased 26.9% to $125.7 million, driven by strong comparable store sales and new store growth.

Gross margin decreased due to a shift in sales mix, offset by purchasing improvements. This anticipated shift in sales mix is due for the most part to stronger sales increases in our grocery department than we experienced in other areas. Additionally, that was decrease in bulk product margin as a result of moving to a larger facility in September 2012.

Occupancy costs as a percent of sales remained flat due to the nine stores accounted for as capital and financing lease obligations. If these leases had qualified as operating leases, the straight line rent expense would have been included in occupancy costs and gross profit would have been approximately 55 basis points lower.

Store expenses as a percent of sales decreased 55 basis points in fiscal 2013 due to a decrease in salary-related expenses. Administrative expenses as a percent of sales decreased 65 basis points in fiscal 2013. On an adjusted basis, 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 in overhead.

During fiscal 2013, net income attributable to NGVC increased 58.7% to $10.6 million with diluted earnings per share of $0.47. Adjusted net income attributable to NGVC compared to adjusted pro forma net income attributable to NGVC increased 35% to $10.9 million with diluted earnings per share of $0.48 in fiscal 2013.

EBITDA increased 48.5% to $32.6 million, or 7.6% of sales in fiscal 2013. Adjusted EBITDA increased 41.7% to $33.1 million, or 7.7% of sales in fiscal 2013. 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 60 basis points in fiscal '13.

Touching briefly on our fourth quarter results, net sales increased 28.1% including a 10.7% increase in daily average comparable store sales. Net income attributable to NGVC increased 129% to $2.2 million with diluted earnings per share of $0.10 in the fourth quarter. Adjusted net income attributable to NGVC compared to adjusted pro forma net income attributable to NGVC increased 39.9% to $2.5 million with diluted earnings per share of $0.11 in the fourth quarter.

Now, let's turn to the balance sheet. As of September 30, 2013, we had $8.1 million in cash and cash equivalents, $0.5 million in restricted cash, and $1.1 million in available for sale securities. In fiscal 2013, we generated $25.7 million in cash from operations and invested a net $34.7 million in property and equipment, primarily on new stores. We also had $15 million available under our revolving credit facility with no amounts outstanding at year end.

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

Thank you, Sandra.

As I mentioned at the beginning of the call, we are pleased with the financial strength and solid execution we have experienced over the past fiscal year. We continue to expand our geographic footprint west of the Mississippi, opening stores in Omaha, Nebraska, Beaverton and Bend, Oregon, and Topeka, Kansas, during the fourth quarter. Since the end of the fourth quarter, we have opened two new stores, one in Tulsa, Oklahoma, and one in Idaho Falls, Idaho.

As of today, we have signed leases for 10 additional stores scheduled to open in fiscal 2014 for locations in Colorado, Idaho, Kansas, New Mexico, Oregon, Texas, Utah, and Washington. These locations will continue to strengthen our position in current states, while also growing our presence in new markets.

Moving to our new stores, we continue to be very pleased with how well our new stores are performing. We are targeting the same financial returns that we have previously discussed with approximately four years to recoup the initial cash investment and approximately 35% cash on cash returns by the end of the fifth year. We anticipate our fiscal 2014 new stores will require an upfront capital investment of approximately $2.5 million. Our new stores include full demo kitchens and community rooms which support our commitment to nutrition education and community outreach.

Moving to our fiscal 2014 outlook, we expect to stay within our long-term targets by opening 15 new stores, resulting in a 21% unit growth; remodeling two existing stores; achieving daily average comparable store sales growth of 8.5% to 9.5%; delivering EBITDA margins of 7.8% to 8%; achieving net income margins of 2.4% to 2.6%; achieving diluted earnings per share of between $0.58 and $0.63; and incurring capital expenditures of between $35 million to $37 million. We anticipate the cash on hand and cash generated from operations will be sufficient to support our capital requirements.

Additionally, we are continuing to commit to a strong ERP system to support our 20% unit growth rate, and we'll be implementing the human resources system in fiscal 2014, which will more efficiently on-board and train our employees at all locations. We will deliver this outlook by continued focus on driving our comparable store sales and maintaining a disciplined approach to cost controls.

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 remain confident to our strategy and our ability to grow our store base as we carry forward the positive momentum we have generated in fiscal 2013.

We will look forward to updating you on our progress. We will allocate the remaining time to questions. Please limit your questions appropriately so that everyone has an opportunity to participate. Thank you.

We will now begin the question-and-answer session.

(Operator Instructions)

The first question comes from Sean Naughton with Piper Jaffray.

Hi, this is actually Jared Madlin on for Sean. Thanks for taking the questions, and congrats again on another strong quarter. Just first of all on the comp, another strong performance. Just curious of the cadence throughout the quarter, any change within the quarter or no?

No, it was pretty much the same every month.

Okay, great. And could you provide any additional color on that EBITDA guidance, what's embedded within that on the gross margin line and maybe store expenses as well?

Yes, so on the EBITDA guidance, what I would say is we've -- because of the difficulty on the capital and financing, figuring that number out, we've passed on that. We are including approximately 55 basis points in that EBITDA number to reflect the effect of the leases. Is that what you're asking?

Yes, I was just maybe looking for some directional color of where you guys were modeling that internally, but that is helpful. I guess, then, what is your inflation expectation within the comp for next year as well?

Right now, inflation is running very flat. So, I would say that inflation is going to be moderate. In the comp, we'll have average -- we'll have an increase in average ticket. It isn't going to be primarily because of inflation, in our opinion.

Okay. And then the three remaining leases that are not signed for the -- to reach the 15, how close are those for the coming year?

Two of them are very close.

Got it. I'll pass it on. Thank you.

Thanks.

The next question comes from David McGee of SunTrust Robinson Humphrey. Please go ahead.

Hi, good afternoon, and nice quarter, guys.

Thanks, David.

Did the floods in September in Colorado have any impact on the comp number?

They had a slight impact on a couple of our stores.(multiple speakers)

Not chainwide impact then?

No.

I know I ask this almost every quarter, but are you seeing any incremental or isolated areas of pricing pressure across your marketplace?

This quarter I think that pricing pressures have really moderated, pretty much across the board.

Really? So, you're seeing less pressure now?

Right now, it seems to be that way.

And then with regard to new store productivity, we're calculating the number to be higher year-over-year. What do you think is the primary factor that's driving that number higher?

Our new store productivity?

Yes.

Primarily, we've really zeroed in on good site selection. Making sure that we get into prime locations.

Are you seeing any incremental competition for good sites as more retailers are beginning to grow a little bit faster?

If you're going into a city that has a scarcity of retail, there's competition, but there's no more than there ever was. In many markets, in actuality, there's quite a bit of secondary retail coming online right now. Retail space coming online right now.

Okay, great. Thanks, Kemper. Good luck here.

Thanks.

The next question comes from Mark Miller of William Blair. Please go ahead.

Hi, good afternoon, everyone. Nice results here. The gross margin continues to come down for the Company, and we've discussed this I guess every period here. But can you help us understand, on a comparable basis, so you're down more than 100 basis points year to year, adjusting for the leases. How much of that is mix, and -- because you do cite purchasing improvements. I'm just trying to get my mind around how the two -- the categories are growing and the margin impact could be that large.

Well, the main issue is that our supplement HABA depart -- end of our business is growing not as fast as our grocery end, which has lower margin. We have really seen improvement in all of our -- pretty much seen improvement in every category of our -- if you just look at it by margin, in each category, we've seen improvement. So, we haven't lost any margin in the category, we just -- the mix shift has created some issues with margin. But, as Sandra said, the increase in grocery sales drives customer counts which in the end, with our nutrition education emphasis, will help to support supplement sales over the long run. So, we look at it as positive, really.

Yes. I mean, what -- have you seen past cycles like this, and I guess what are the key initiatives to jump start the supplement business? I'm also curious what kind of customer counts you have engaged with the nutrition experts in the store, and is that any kind of leading indicator for you?

Well, when our sales don't grow as fast, our supplement sales pick up substantially as a percentage of sales in the past. And so right now, as we're adding all of these new stores, it puts a lot of pressure on the amount of supplement sales we have. If there's one positive thing, it's that our HABA department almost maintained its market share last year. It lost very little as a percentage of sales, so that was a real positive, and it seems to be holding that trend this year. So, that was -- we seem to really be gaining in that particular category. And then as far as your second question goes about nutrition, how many people are seeing our nutritionists, they're pretty much booked full all the time when they're in the stores. So, there's a lot of consultations going on, which means that there's a lot of education going on with our customers about proper nutrition.

I might be asking the wrong question on the supplements business. Is it meeting your plan? Are you saying it's coming down as a percent of revenues because grocery is increasing fast, and it's a longer build time with the new stores. But is supplements to your plan, or is it a little bit light?

No, I would say it's to our plan.

Okay, excellent. CapEx came in quite a bit higher than where you were seeing it with the third quarter update. I guess $6 million or $8 million higher. What was the reason for that change?

Sandra, do you have --?

Yes, most of that really is timing. The stores are coming in at the capital expenditures that we had expected or projected, and it's really a matter of timing for the buildout. Even the home office buildout that we had projected as coming in at the numbers that we had expected.

Okay. Final question for me is, when do you begin to see leverage on the new distribution facility? When does that headwind begin to turn for you? Thanks.

I would say that we will see positive leverage on that starting in our second quarter of this year.

Excellent. Thanks.

The next question comes from Scott Van Winkle of Canaccord Genuity. Please go ahead.

Thanks. Congrats on the great results. Kemper, when you talked about the new stores opening in 2014, you talked about the test kitchen, et cetera, and you had done some of that in your last stores opened in 2013, but I don't think all of them for the year. Can you give us an idea of the class of units in 2014 versus the class of units in 2013, where the major differences are?

You mean as far as the style of the store?

The style of store, a department that you've called out differently, or square footage. How will we think about the differences between last year and this?

I think that the stores are pretty much the same in 2014 as they were in 2013. I mean, the stores that we opened in the first quarter of 2013 may have been slightly different than the stores that we're opening right now, but all of the stores that we opened at the end of the year are definitely the same as this year. As far as size goes, they're all running around 15,000 to 20,000 square feet. We do have one store in Washington that will be like 12,500 square feet. But other than that, I would say that they're all in that desirable size range for us to maximize long-term sales.

And any indication on the timing of openings throughout the year? Should we think about it as a relatively straight line in the three to four a quarter every quarter?

We have four opening in the first quarter, four opening in the second quarter, and four or five opening in the third quarter.

Great. Thank you very much.

The next question comes from Phil Terpolilli of Longbow Research. Please go ahead.

Good afternoon. Two quick questions. I guess bigger picture, and maybe not specific to this quarter, but kind of directionally for the last maybe 12 to 18 months, have you seen maybe the retail space that you're looking at as you expand into new markets getting maybe more competitive in terms of what you're looking at or maybe people beating you to potential locations?

No. I mean, we have always -- our Denver market is perhaps the most competitive natural foods retail market in the country, and anywhere we're opening, we expect that same sort of competition. And so we're well versed in competing with everybody that's engaged in our space.

Sure. Okay. Then just one other quick question. I thought it was interesting earlier, I think you mentioned that you've seen maybe less price pressure the last couple of months here. Just competitively, that's obviously much different than what we've heard from a few other of the food retailers. If you could just maybe try to talk a little bit more about that, what you think is maybe the differentiating factor for you and your markets. Any sort of color -- additional color would be helpful.

Well, first off, I was talking about cost pressure, but if we're talking about competitive pressure, our -- we tend to be the price leader on most items. And so I would say we put the pressure on the competition more than they put the pressure on us.

That makes sense. Okay, thank you. I appreciate it.

The next question comes from Kate Wendt with Wells Fargo Securities. Please go ahead.

Yes, thanks. I know you guys said that overall, you have been really happy with how your new stores are performing. I'm just curious if you could add a little color about some of your openings in some newer markets for you, like the stores in Oregon, how they're performing versus the rest of the base in areas where maybe people aren't as familiar with your brand.

They have opened substantially stronger than when we opened in Texas. So, for a new market, I would say that Oregon is looking very bright, particularly some of the markets up there have been really good.

That's great. That certainly seems like perfect markets for you guys. And I know in the past you have talked about doing some things within the stores like product extensions in areas like gluten-free and paleo. I was just wondering if you could comment on how that's going, how many stores that you have expanded that in, and any other categories that you are testing or expanding in the stores.

Well, paleo has been a big focus of our Company for the past year, but we've always had a lot of products that are paleo products. But we've been emphasizing those products in our nutrition training over the past year., and so I would say that we'll continue to do that this year. We put out a calendar that we give away to our customers, and that calendar is really focused on that particular category for this coming year, because we think that's probably one of the better dietary ways of changing your -- of living a healthy lifestyle, the paleo diet.

Great, and then just one last one. Could you talk a little bit about, as we think about gross margin going forward here and maybe some offsets in terms of areas of opportunity, the progress that you're making on inventory management, now that you've had S&P -- sorry, SAP up and running for awhile, do you think that you have further opportunity, especially in areas such as supplements?

You mean to manage our inventory down?

Yes.

We have initiated some really good programs in regard to that particular issue and have had some good success with that over the past year.

Great.

And over the coming year, we will continue to have more success with that program.

Great. Thanks so much.

Thank you.

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

Thank you, everybody, for being on the phone with us today. We appreciate it, and have a good afternoon. Goodbye.

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