Natural Grocers by Vitamin Cottage Inc (NGVC) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers second quarter fiscal year 2014 earnings conference call. (Operator Instructions). I would now like to turn the conference over Mr. Jon Bourne, Vice President and General Counsel of Natural Grocers. Mr. Bourn, 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 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, and goals and expectations concerning our market position, the economy, future operations, margins, profitability, capital expenditures, liquidity, and capital resources, and other financial and operating information and other risks detailed in the Company's most recently filed forms 10-Q and 10-K.

The information we present is accurate 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 a non-GAAP measure 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 it in conjunction with or after this call. Now, I will turn the call over to our co present.

Thank you, John. Good afternoon, everyone. We are pleased with our financial results this quarter.

Our sales increases and disciplined approach toward operating expenses have resulted in strong financial resultswhich allowed us to continue our investments into growth.

During the quarter, net sales increased 22.4% to $130.3 million.

We continue to experience positive sales trends across all departments. Gross profit increased to a record $38.8 million, and wecontinue to see leverage in store and administrative expenses. That income increased 24.3% quarter over quarter in our diluted earnings per share were $0.18 this quarter compared to $0.14 in the prior comparable quarter.

Reflecting healthy gains, our daily average comparable store sales increased 5.7% during the quarter. We believe our comparable store sales are lower than our recent trends due to increased localized competition, some weather events, more cautious consumer spending, and to a certain extent, changes in advertising that we have been testing over the last quarter. Reflecting our commitment to our five founding principals, we are excited to announce that during the quarter we updated our dairy standards further distinguishing us from our competitors.

We plan to sell only pasture-raised non-confinement dairy products. We intend to substantially complete the implementation of these standards by April of 2015. Our customers have provided positive feedback during this transitionas they appreciate our commitment to quality standards. Additionally, starting this April, we have transitioned to non-GMO and organic chickens.

We are very pleased with these high quality standards we are offering to our customers. We continue to invest in growth opening five new stores during the quarter and expanding our geographic footprint in Colorado, Idaho, Kansas, New Mexico and Oregon. 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 financial results.

Thank you, Kemper. Good afternoon, everyone. We are pleased to report net sales increased in the second quarter of fiscal 2014 to $130.3 million or 22.4% over the same period in fiscal 2013.

Comparable store sales increase 6.9% quarter over quarter. Daily average comparable store sales increased 5.7% quarter over quarter driven by a 2% increase in daily average transaction count and a 3.7% increase in average transaction size.

Daily average mature store sales increased 3.7% quarter over quarter. Gross profit during the second quarter of fiscal 2014 increased 21.8% to $38.8 million driven by comparable store sales and new store growth. Gross margin decreased 20 basis points due to increases in occupancy costs partially offset by increases in product margins across most departments as well operating efficiencies at the bulk food packaging facility.

The increases in product margins were partially offset by a shift in sales mix. 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 40 basis points in the second quarter of fiscal 2014 and 2013 respectively. Our disciplined approach to managing expenses is reflected in our continued leverage from both store and administrative expenses. Store expenses decreased 20 basis points to 20.6% of sales during the quarter .

This was driven by a decrease in salary-related expenses as a percent of sales at comparable stores as well as a decrease in advertising expenseprimarily due to lower television advertising during the quarter . The decrease in store expenses is partially offset by an increase in depreciation expense and to a lesser extent an increase in utilitiesall as a percentage of sales. Administrative expenses as a percent of sales decreased 40 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 24.3% to $4 million with diluted earnings per share of $0.18 EBITDA increased 28.4% to $11.2 million or 8.6% of sales in the second quarter.

The stores that were accounted for as capital leases rather than being reflected aspirating leases increased EBITDA as a percent of sale by approximately 60 and 55 basis points in the second quarter of fiscal 2014 and 2013 respectively. Touching briefly on our first half results, net sales increased 24% including an 8.1% increase in daily average comparable store sales.

Net income increased 27.3% to $6.9 million with diluted earnings per share of $.031 in the first half of fiscal 2014.

Balance sheet and liquidity highlights are as follows. As of March 31st, 2014 , we have $7.8 million in cash and cash equivalence and $95,000 in available for sale securities as well as no amounts outstanding on our revolving credit facility.

During the first half of fiscal year 2014 , we generated $15.6 million in cash from operations and invested $17.9 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 updated outlook for fiscal 2014.

Thank you, Sandra. As I mentioned at the beginning of the call, we are pleased with the financial results we delivered. We have continued to grow at a steady pace throughout the first half of fiscal 2014opening nine new stores, bringing our total count to 81 stores in 13 states.

Since the end of the second quarter on March 31st, we have opened two new stores. We have signed leases for the remaining four stores planned to open in fiscal 2014 and have four signed leases for stores planned to open in fiscal 2015. During the quarter, we completed the first phase of our new Human Resource Information Systemcontinuing our strategic initiatives to support future growth. We are consistently focused on managing and controlling our growth and expect to start seeing the initial benefits of this implementation during our third fiscal quarter.

We see this as a positive step to support and enhance our ability to onboard, train, and communicate with our employees. Based on our second quarter results and expectations for the remainder of the fiscal year, we are updating our daily average comparable sales store outlook for fiscal 2014 to 5.5% to 6.5%. Our fiscal 2014 guidance for net income and EBITDA margins, diluted earnings per share, and CapEx will remain unchanged.

We remain true to our five founding principals and continue to focus on what differentiates us, offering unique, natural and organic products at affordable prices. We continue to gain trust and loyalty from our customers through our high quality standards and nutrition education. We remain confident in our strategy and our ability to grow our store base while expanding both the top and bottom line.

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

(Operator Instructions). Our first question comes from David McGee of SunTrust Robinson Humphrey. Please go ahead.

Hello, everyone. Good afternoon.

Hello, David.

Kemper, can you talk a little about the cadence of your same store sales during the quarter and maybe any commentary about the more recent trends.

I would say that it was stronger in January and March and a little bit weaker in February. On a monthly basis. March on a daily basis was weak because we had 31 days compared to 30 days in March.

You had mentioned increased original competition. Could you give us a little more color of what you are seeing there?

Well, last year approximately -- what was the number? 15% of our store base had regional competition and this year approximately 51% of our store base had regional competition. So there was quite a bit more new competition -- we are talking about new competition not existing competition. So substantially more new competition this year than last year which had an impact on our same store sales. We have had similar situations happen in other years , and we have always bounced back quite well from that one.

Do you have a sense for what that ratio might be say by year end?

It will drop significantly by the beginning of -- by January of next year. September it will probably still be -- by October of this year it will probably be similar. By January of next year, we expect it to be back down to like in the 20% range.

Okay. Yes. Thank you.

Our next question comes from Sean Naughton of Piper Jaffray. Please go ahead.

Good afternoon. On the guidance, it does suggest a continued slow down from the most recent quarter in the same store sales trends in the 2% to 4% range is what I am getting here looking at the rest of the year . Is there anything happening outside of the competitive landscape which you touched on s little bit? Can you elaborate maybe a little bit on the marketing changes or promotional cadence and maybe any impact that had in the quarter as well?

I think we are being very realistic about our forecast for the rest of the year. We do not want to get ahead of ourselves. As far as the -- I mean, one of the statistics we have been looking at is stores that did not have competition, new competition as we classified it for the quarter.

We are actually up 13.7% for the quarter on comparable store sales. Those stores are still doing just pretty similarly to what we were doing before. It is a matter of getting through this period of extra competition and for our comparable store sales.

Our sales at stores in new market are meeting and beating our expectations. We are pretty happy with that.

And could you just maybe talk a little more -- I mean, I am very surprised you have been able to hold the line like you did on some of those lower comps . Obviously that speaks to a lot of flexibility you have with expenses and the flexibility with the model and the way it is structured and the ability of that moving forward. Could you continue to hold that level for an extended period of time down here at these -- at some of these higher rates? On the lower comps ? Is the idea that you would like to see those comps obviously start to move back up towards the mid to high-single digit range over time.

If we need to -- we are very disciplined about our cost controls, and we will keep our costs in line and hold our costs down. So we meet our expectations. So we can continue to grow our store base at 20% per year. We believe thatwe will be able to generate similar amounts of cash to fund the growth at the lower comp rates for an extended period of time if necessary . Hopefully, we will not have to do that for an extended period of time.

Real quick. Anything you mentioned on the last call. You were a little worried about nuts and given the drought. Does not sound like things have gotten dramatically better. Any update there would be helpful. Thank you.

I just was reading the Blue Diamond Almond report, and it looks like the crop is going to come -- their prediction it is going to come in at 1.95 million pounds this year compared to 2 million last year. It will be pretty close to last year's crop amount even with the drought. The almond crop will be in pretty good shape for this year anyway.

Super. Thank you.

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

Hello, everyone. A couple of questions. I guess first picking up the other piece of the prior question. Can you talk about what changed with advertising in this period versus prior periods?

Well, primarily we did not do -- we usually run a January , February television spot, and we did not do that this year . It had somewhat of an effect on our customer count in our stores.

And then going back on the competition point. I am trying to understand how that could be so much more impactful this quarter than in prior quarters. Presumably that has been increasing over time. What causes that to be a first order impact here whereas it was not an impact that was notable in the past periods for example?

We had a substantial number of new store openings near stores of ours that it had not had previous competition. That has had a pretty substantial impact on some of those store sales.

This is recent, like in the last couple months that it has had that large of an impact, Kemper?

That is correct.

And the figure you highlighted by January getting that down, if I heard this right, maybe 20% of the stores with a local competitor. You are adding, 10, 12 stores by that point. So even if those stores do not have a similar type of competitive set, how could you get the percent down from 50 plus percent to 20% by that point? Or are you just talking about lapping?

We are talking about new competition. It will cycle out by January of next year .

The difference in the --

And then in our new stores, primarily we are opening in markets right now that have what we classify as our competitors. When we open in their markets, I am sure it has a similar affect upon their stores.

And from the current comp trend to Sean's earlier question. If you take the back half of the year , something like 4% comp being implied in the numbers. If you are coming across if weather's normal and the advertising is comparable year on year. What might cause the comps to further decelerate from the recent experience?

Well as we said, we are wanting to take a cautious, realistic approach to what the comp will be for the rest of the year.

I have more questions, but I will get back in the queue and let somebody else go next. Thanks.

Our next question comes from Mark Siegal from Canaccord.

Hello, guys it is Mark for Scott. Did you quantify the impact of the Easter shift?

Yes, it is in our March sales numbers because - -

Gross the number is 6.9%. And with the average comp day it is 5.7.

Okay.

1.2%of sales.

Okay, 1.2%. Got it. You called out a number of factors on the relatively softer competition whether the change in advertising. Anyway to provide a relative waiting? It sounds like competition was the most impactful, but any sense whether it was two-thirds competition? The other factors you cited or just some magnitude there?

Weather took a percent or so out of our same store sales growth for the quarter. Advertising probably took a percent out. If you do the math from there it will probably be 3% from the competition.

Got it. And is there any appetite or is there any planned increased investment on price in light of what looks like new competition that is descended pretty quickly. What is the sense of the strategy to meet the immediate challenge.

First off in regards to price, our price surveys are showing that we are the best priced natural food chain in each of our markets by 10% to 25%. So we do not believe that we need to invest in price. The one area that some of our competition is close to us on price is in produce. But since we are offering -- but produce has been a huge plus for us. And since we are growing that department faster than our actual sales, we do not believe that we need to invest in price in that area.

The other thing that we are doing to improve our competitive position is to improve our - - increase our standards. I do not know if any of you are familiar with it, but we rolled out this pasture dairy standard starting at the beginning of this month. Our customers are liking that new standard significantly. We think it will be a huge plus for our customer loyalty and increasing our customer counts in the upcoming months.

And then just lastly , on a sequential basis it looks like the mature store comp was down more modestly than the overall comp. Is it the non-mature comp stores that are seeing the most targeted competition right now? And a as a follow on to that -- can you just talk about your new stores that are opening? Are they being impacted? Are they still opening with the same efficiency?

It is some of our newer stores that had some of the heaviest competition this quarter. Our newer stores are opening stronger than projected at the moment.

Great, thank you.

Our next question comes from Kate Wendt of Wells Fargo Security. Please go ahead.

Thank you. So on the competition, we were just under the impression that you already had competitive openings factored into your guidance. Do they just have a bigger impact than expected, or are those companies being more aggressive perhaps with their grand opening prices or something else?

That would be probably an accurate statement. They were somewhat more aggressive than we expected and the impact was higher than we experienced in the past.

Got it. And it seems like the competition has been on the other softer side, but have you seen any softening in trends in supplements given the gross margin mix shift that you mentioned?

The supplement sales have not -- the increase in supplement sales have not been as much on the grocery side of the business, but we other then that, no we have not seen.

So just a continuation of what you have been seeing there.

And then a follow-up on advertising. Looking up head to the rest of this year. Are your advertising plans different than the same periods last year, or would you plan to be the same or ramp that up a little bit?

We are not really planning on a significant change in our advertising strategy for the rest of the year.

Great. And then you did mention weather. Obviously, your states are a little better than what people are seeing on the East Coast, but have trends gotten a little better with improved weather in April?

We do not really comment on same store sales in the current quarter.

Thank you, guys.

Our next question comes from Joe [Edelstein] of Stephens Inc. Please go ahead.

Good afternoon. Thank you for taking my questions.

Hello Joe.

Kemper, in the past, how long have competitors whether they are existing or new competitors been able to hold some of the competitive pricing that you just spoke about and their ability to remain aggressive is really what I am trying to get at here.

Usually That's a one or two-month phenomena. It takes about a year for our stores to start gaining sales again after a new competitor opens in the same market area.

That is helpful. You continued to enhance --

That is why we are saying January of next year. We expect this current new competitor intrusion to minimize .

And as you spoke a little earlier about the competitive positioning, you do have the in store education as a key component of the enhanced product standards. I am curious are there other areas that you are exploring to further improve your offering? Perhaps That in a more private-label, delivery options, ordering on-line, pick up in store? Other functionality that you would consider today?

We are always considering all of those options in trying to figure out how they would fit into our business plan.

But nothing that you are currently working on with respect to any of those options?

We are analyzing several of those type of things right now.

There is no current test, just to be clear?

There is no current test, but we are looking at -- there is some intriguing options out there right now particularly on in home delivery and orders sent into the store to be picked and then delivered to people's homes.

One last question from me, and I will -- you will -- to the rest of the group. You did implement the new HR system. I was hoping you could give us a little early read from that and whether or not you feel it may have been disruptive in anyway as you roll that out to the stores.

It has not been at all disruptive to our employees and to our home office staff. As a matter of fact, it is already starting to help us create efficiencies at the Company.

Great. Thank you for taking my questions.

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, everyone for being on the call today. We hope you have a nice afternoon. Thank you. Bye.

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