Natural Grocers by Vitamin Cottage Inc (NGVC) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2014 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'd now like to turn the conference over to Mr. John 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 year 2014 earnings conference call. On the call with me 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 most recently filed Form 10-Q, 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'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 at our website at investors.naturalgrocers.com for a minimum of 30 days. If you have not had the opportunity to read the 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 pleased to report another quarter of solid financial results and we continue to meet our outlook expectation. We look forward to carrying this positive momentum into the rest of fiscal 2014.

During the quarter, net sales increased 25.8% with comparable store sales increasing 10.6%. Mature store sales continue to be strong, increasing 6.9%. Additionally, we experienced positive sales trends across all departments during the quarter. We believe the increase in comparable and mature store sales reflects the commitment we have to our customers, resulting from our continued focus on our founding principles.

In addition to expanding the top line by 25.8%, we are pleased with our continued leverage as indicated by net income increasing 31.6% quarter-over-quarter. Our diluted earnings per share were $0.13 this quarter, compared to $0.10 in the prior comparable quarter.

During the first quarter, we opened four new stores, expanding our geographic footprint in Idaho, Oklahoma, Oregon and Texas. Our new stores are performing in line with expectations and we remain on track with our new store pipeline.

Now, I will turn the call over to Sandra to highlight our first quarter fiscal 2014 financial results.

Thank you, Kemper and thank you all for joining us this afternoon. Turning to our financial results, we are pleased to report net sales increased in the first quarter of fiscal 2014 to $120.6 million, or 25.8% over the same period in fiscal 2013.

Comparable store sales increased 10.6% quarter-over-quarter, driven by a 5.1% increase in daily average transaction count and a 5.3% increase in average transaction size. Our mature store phase continues to be strong with daily average mature store sales increasing 6.9% quarter-over-quarter.

Gross profit during the first quarter of fiscal year 2014 increased 27.1% to $35.4 million, driven by strong comparable store sales and new store growth. Gross margin increased 30 basis points, due to increases in product margins across all departments, including productivity improvements at the bulk food repackaging facility.

The increases in product margin were partially offset by a shift in sales mix. Occupancy costs as a percent of sales increased during the first quarter, due to increased average lease expenses at new stores. The stores that were accounted for as capital leases, rather than being reflected as operating leases, increased gross margin as a percent of sales by approximately 60 and 25 basis points in the first quarter of fiscal 2014 and 2013, respectively.

Store expenses decreased 20 basis points to 20.9% of sales during the quarter. The decrease was driven by a decrease in salary-related expenses as a percent of sales at stores, partially offset by an increase in depreciation expense at new stores.

Administrative expenses, as a percent of sales, decreased 30 basis points quarter-over-quarter as a result of the company's continued ability to support sales growth without proportionate investments in overhead.

During the quarter, net income increased 31.6% to $2.9 million, with diluted earnings per share of $0.13. EBITDA increased 38.1% to $9.4 million or 7.8% of sales, in the first 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 60 and 40 basis points in the first quarter of fiscal 2014 and 2013, respectively.

Balance sheet and liquidity highlights are as follows: As of December 31, 2013, we had $6.2 million of cash and cash equivalents and $1.2 million in available-for-sale securities, as well as no amounts outstanding on the revolving credit facility. During the quarter, we amended and restated our $15 million facility with improved terms and extend the maturity by three years to January 31, 2017.

During the quarter we generated $5.3 million in cash from operations and invested $7.7 million in property and equipment, primarily on new stores.

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 continue to deliver. During the quarter, we opened four new stores, bringing our total count to 76 stores in 13 states.

We have 10 signed leases for the remaining 11 stores planned to open in fiscal 2014 for locations in Colorado, Idaho, Kansas, New Mexico, Oklahoma, Oregon, Utah, and Washington. Our new stores are located in a mix of urban and suburban areas, as well as new and existing markets. Additionally, we already have good visibility into the fiscal 2015 real estate pipeline.

As we discussed on prior calls, during this quarter, we began implementation of a human resource information system. We believe this system will enhance our ability to support our employees at all locations. We expect to start seeing initial benefits of this implementation third fiscal quarter.

We are consistently focused on managing and controlling our growth and we see this as a positive step to support our growth going forward.

Moving to our outlook. Our first quarter results were in line with expectations and thus, we are reaffirming our previously-announced fiscal 2014 outlook. During fiscal 2014, we expect to open 15 new stores, resulting in a 21% unit growth; remodel 2 existing stores; achieve daily average comparable store sales growth of 8.5% to 9.5%; delivery EBITDA margins of 7.8% to 8.0%; achieve net income margins of 2.4% to 2.6%; achieve diluted earnings per share between $0.58 and $0.63; and, incur capital expenditures of between $35 million to $37 million.

We remain true to our five founding principles and continue to focus on what differentiates us: Our unique natural and organic product offerings at affordable prices. We continue to gain trust and loyalty from our customers through our high-quality standards and nutrition education. We believe these unique differentiating factors help insulate us from economic pressure and will continue to support our solid financial results.

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

Operator: We will now begin the question and answer session. (Operator Instructions). Sean Naughton, Piper Jaffray

Gross margins look really, really nice in the quarter. Can you talk a little bit, maybe, about some of the productivity benefits you got in the expanded bulk facility and is this something that has a line item, potentially, to continue leveraging as you continue to gain scale here through the balance of the year?

Our bulk facility annualized in the first quarter and it showed significant improvement during the quarter and we expect it to continue to improve throughout the year.

You think it should be at a similar rate or because that kind of to annualize that now would be a little bit less of a gross margin driver moving forward?

No, I think it'll be at a similar rate.

Okay, great. And then on the revenue line item, obviously 25% is a terrific number, but just thought it might've been a little stronger, given the nice comps that you guys had there. Was there anything in terms of number of days in the quarter or when the new stores opened that may have impacted that top line number?

Yes, two of our stores opened in mid-, one opened mid-December and one opened towards the end of December, two of the new stores, and so that kind of had an impact, definitely, on the revenue numbers.

Okay, great. And then lastly on competition --

And one of the stores that opened in December opened in the middle of that nasty ice storm down in Texas, just to let you know. Very helpful to it all.

Not good for getting to a store. And then just lastly on the competition. A lot of conversation about a lot of competitors coming into this market. I know Trader Joes is coming to Colorado in February, and I know you compete with them in other markets, but maybe could you just talk about how you do against them in other markets and maybe just generally address the competitive dynamics that you're seeing the marketplace today?

Well specifically about Trader Joes, I would say that they're a food retailer. The number of items that we stock that they stock is very limited and so their impact on our sales usually, when they open near one of our stores, is very limited. I would actually say that we're probably more synergistic than super competitive. I mean that they would be more synergistic to our sales in the long run than super competitive, I mean damaging, to our sales in the long run.

Okay and then just anything on competition that you're seeing out there outside of just more players in the space as you go to new markets or is it relatively unchanged at this point in time, from your perspective?

From our perspective, it's relatively unchanged. I mean Denver is, perhaps, one of the most competitive natural foods markets in the country and we've been dealing with it for a long time.

Okay, great. Thank you and best of luck in Q2.

Thanks.

Operator: Philip Terpolilli, Longbow Research.

Just a couple quick questions. I was just wondering if you could talk a little bit more about -- maybe by category, supplements versus grocery; if you maybe noticed a little bit more of a shift than in the past. I know there's been some kind of discussion out there that maybe supplements have been a little bit slower lately, but curious what you're seeing in your markets.

Supplement sales, we still have positive growth in supplement sales during the quarter. They're just not growing as fast as our grocery sales have been growing. I wouldn't say that we had a deceleration in sales of supplements.

Okay, that's helpful. And then just on the comp, the 10.6%, very good numbers here. Just kind of curious, you know, you're not changing your guidance for the year. Is that maybe you being a little bit conservative or is it just kind of the expectation that maybe comparisons get a little bit tougher in the back half of the year and you're factoring that in.

We want to make sure that our number is achievable and so we have a, what we think is an achievable number out there. As far as -- it's hard to continue to do double-digit increases year in and year out. So that's what I would have to say about that.

Okay, thank you. Congratulations.

Thanks.

Kate Wendt, Wells Fargo Securities.

Yes, thank you. Congrats on a great quarter amidst what has been a pretty awful period for most other retailers. Just wanted to ask you, actually, about some other things in terms of the supply chain -- whether you think the earlier season freeze and now current drought in California, as well as storms in other parts of the country, could impact supply and lead to either inflation or impact margins here as we move throughout the year?

I think that the drought in California is somewhat concerning in regards to nut supplies, that's for sure, and pricing on nuts. As far as the freezes and so forth, I mean mainly that would affect fresh produce and you expect that at this time of year.

Okay, great. So it sounds like not too big of an impact. And then just following up on Sean's question on gross margin: you guys have, last quarter, had margin improvements in all categories and mix that have been hurting you and your overall gross margin was still down. Would you say, then, that the improvement this quarter is mostly the bulk production facility that's starting to kick in or maybe less shrink, on better sales, or maybe supplements performing better than they did last quarter? Any other color there would be helpful.

The distribution center helped, but we had margin improvement in almost all categories over the last quarter, just from -- I mean, like in dairy, we decided to emphasize cheese a little bit more and that has a better margin than milk. And so that improved our margin in dairy substantially. Our produce margin was stronger because we had less shrink in the produce department during the quarter. Supplements did lose a little bit of ground, as has been the trend, but we had a little bit of improvement in the margin there, also.

Okay, that's great. Thanks so much.

Mm-hmm.

Joe Edelstein at Stephens, Inc.

First, to start then, you did mention that you're looking forward to carrying this solid momentum here into the rest of the year. Could you just update us as to where you're tracking so far through January?

You mean as far as our sales go?

Comps, yes.

We really don't discuss sales outside of the end of a quarter.

Okay, that's fair. You also mentioned that you're getting that visibility on the 2015 store openings. Is that really a pickup in developer activity? Are you still finding available existing sites?

Well right now, there's a lot of available existing sites coming available, really good existing sites coming available, due to some consolidation in the office supply business.

Has there been any pick-up in terms of the level competition for those existing sites?

All good sites have a lot of competition and it's always been that way. I mean, at the very bottom of this downturn, good sites had competition for them. I mean, it's tough to get good sites. You have to be aggressive and you have to have your eyes and ears to the ground.

Sure. Maybe one more question for me, then. The leverage, just at the administrative level, continued progress there, and if you were to assume that business continues at a similar pace that what we've seen, maybe even the high end of the guidance range, would there be any sort of catch-up, bonus accruals or anything else that we should consider?

We accrue our incentive compensation by quarter, so there's no catch-up.

Okay, great. Thanks for taking the questions today.

Mm-hmm.

David Magee at Suntrust Robinson Humphrey.

Just a couple of questions. One is you referenced a new HR system and I'm just curious if you could give some more color around that and is that something that's sort of primarily beneficial to the employees or does it help you with the cost side or both?

It'll help us with both areas. I mean, it'll give us a better way to communicate to everybody that works here and it will help us to train people better. It'll help us to just be more efficient on the human resources side of the equation.

Okay. With regard to the drought in California, if it gets worse from here and say it doesn't rain that much this spring, what would be your course of action? Would you source from Mexico or is there things you've done in the past that sort of offset that that you could go to?

Well, I think that a lot of the agriculture out in California is using wells and so even if the drought got worse, I think that the well situation, they're going to drill a bunch more wells that are deeper.

Okay.

That's what I've gotten from talking with various farmers out there is that that seems to be the course of action right now.

I see. Then lastly, as you've gone to new markets like Oregon, are you finding interesting trends with regard to mix of business or the cost of business that might be new to you or that surprise you in any way?

I think every state has its own surprises, except for Wyoming is the best state of all, as far as cost of business goes. They don't have an income tax and they don't have a business franchise tax and they don't regulate you to death. They're really nice in Wyoming.

Great. Thank you and good luck, here.

Thanks.

Mitchell Pinheiro at Imperial Capital.

Just two questions. One, on the supplement side, did you notice any impact on your supplement sales as a result of that flawed study or the flawed conclusions on that vitamin study published a couple months ago?

Fortunately, our customers are very well-educated and it really didn't have much of an impact.

And then second, as it relates to the new store, did you talk about how many, your new stores, for the second quarter and, perhaps, how they're going to be spaced out within the quarter?

We will open four stores this quarter. Two of them are opening in February and two are opening in March.

Okay. Thank you very much.

Sure.

Mike Signore at William Blair

I just had a question on if sales were different at all across geographies and I guess the reason I ask is because the Nielsen data seemed to show that sales of natural and organic grocery products may have slowed during the fourth quarter and obviously you didn't see that, so were there any particular markets it's outside of the growth or maybe even some markets it's a slower growth?

No, I wouldn't say that there was any market that was, in particularly, better than another market. Texas has been particularly strong for us but that's because those stores are younger.

Okay.

So you have more growth potential down there. I think part of the issue with the sales data is that Thanksgiving came a week later in the quarter than it normally does and so that kind of had an impact on December sales a little bit, because there was only four -- there was one week less between Thanksgiving and Christmas this year.

Okay. Yes, that makes sense and just -- you kind of already answered it but on the expectation you have for inflation. I guess before on the last call, you kind of said maybe moderate. Some of the CPI data we show kind of shows that decelerating. I mean, is your expectation for inflation in 2014 changed at all or is it relatively the same?

It's relatively the same. So far we have not seen a lot of price inflation.

Okay and I just have one question on the P&L here. So pre-opening expense of $900,000 in the quarter -- that seemed to be a bit lower than where we were and I guess you had relatively the same amount of stores as last quarter. Is that just because there were later store openings and some of that cost gets pushed into Q2 or is $900,000 kind of the run-rate here for the rest of the year?

Sandra can you answer that question?

Yes, I think some of the difference that was moving along had to do with just the timing of when stores were opening and when we were getting billed and paying for specific costs. There's also some change that you see in that line if the store is a capitalized store or if it's an operating store.

Okay, great. Thanks.

Thank you.

Mark Segal at Canaccord.

Hi, it's Scott Van Winkle here. Thanks. Most of the questions have been asked but the mature comp was, looks like, quite a nice little acceleration at 6.9%, while the comps, overall, have been relatively consistent. Any color you can kind of throw out on why the mature comp accelerated?

It was -- compared to last year, it was a little bit less, but our mature stores just do pretty well as far as keeping on comping. And as we, the mature comp more come on board that are younger every year. So that kind of helps, also. If that makes sense to you.

Stores that are six years old, five years old, start to move in there.

Yes. Are we at a point where maybe that scenario is accelerating, where -- I mean are we six years removed from a significant acceleration in unit growth?

No, I think that it'll be about two more years before we really have that significant unit growth that starts going into the mature comp.

Got you.

I mean it is more than it used to be because at that point, I think there was, like, six stores that probably came on at that point in time.

Right, but that point, the point where you accelerated to kind of this 20% or so unit growth, that might've been four years ago?

That's about right, yes.

Excellent, and then on the gross margin, the commentary about kind of improvements throughout the store, everything from shrink to mix within categories like dairy, etc., is that something that you drive with your store leadership, something that they're measured against? Is this a new emphasis?

No. We've always had our high shrink categories as part of the incentive comp judgments at our store level but we've really put a lot of emphasis on those categories in the last couple quarters and so that helped to change mix in the dairy category, as I said, and then also to lower shrink in the produce category.

Great and then one more, if I could. Everyone's kind of focused on some of these hot categories on your stores and the space in general, like gluten-free or the non-GMO project label that's out there. Any new kind of emerging trends, hot categories, that maybe you're putting a concerted effort to adding shelf space to?

We really have emphasized the Paleolithic diet in our stores lately. And so items that would be food items that would be synergistic with that are having a really good acceleration of sales right now. And then the other thing that we are in the process of doing is really increasing our standards on particular categories so that there's even a higher standard to be in our store and people really like that and having the higher quality products.

Is there a new signage or something you're doing to call that out?

We'll be having a pretty major change in a couple of our product category standards here in the next month or so.

Great. Thank you very much and congratulations.

Thanks.

At this time there are no further questions. I would like to turn the conference back over to management for closing remarks.

I appreciate everybody being on the call today and have a good afternoon. Thanks, bye.

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