Natural Grocers by Vitamin Cottage Inc (NGVC) 2014 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers fourth-quarter FY14 earnings conference call.

(Operator Instructions)

As reminder, today's call is being recorded.

At this time, I would like to turn the conference call over to Ms. Ashley MacLeod, Director of Finance and Investor Relations for Natural Grocers. Ma'am, you may begin.

Good afternoon, everyone. Thank you for joining us for the Natural Grocers by Vitamin Cottage full-year and fourth-quarter FY14 earnings conference call. On the call with me today are Kemper Isely, our Co-President, and Sandra Buffa, our Chief Financial Officer. As a reminder, all statements made on 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 due to a variety of factors, including the risks detailed in the Company's most recently filed Form 10-Q and Form 10-K. The Company undertakes no obligation to update for forward-looking statements. Our press release is available on our website and a recording of this call will be available on our website at investors.naturalgrocers.com.

Now I will turn the call over to our Co-President, Kemper Isely.

Thank you, Ashley. Good afternoon, everyone.

We are excited to reach a significant milestone in FY15 as we approach our 60th anniversary, while crossing the 100 store mark. We believe celebrating this milestone recognizes our position as early pioneers and visionaries in the health and wellness area. This positioning has provided us with a foundation for our growing modern Company.

We opened a record 15 stores in FY14, including three new stores during the fourth quarter, and expanded our geographic presence in both new and existing markets. Our new stores are performing in line with expectations and we remain on track with our new store pipeline. In FY15, we plan to open 18 new stores and expand our geographic presence by entering new states and markets.

We are pleased with our financial performance in FY14. Our increased sales and disciplined approach toward operating expenses have resulted in solid financial results, which allowed us to continue our investments into growing our store base. During the fiscal year, net sales increased approximately 21% to $521 million.

Our daily average comparable store sales increased 5.6% on top of an 11.1% increase last year and we experienced positive sales trends across all departments. Gross profit increased to approximately $152 million and we continue to see leverage in administrative expenses. Net income increased approximately 28%, and our diluted earnings per share FY14 was $0.60, compared to $0.47 last year.

We are seeing encouraging trends in our comparable store sales. During the fourth quarter, daily average comp store sales increased to 3.7% compared to a 3.1% increase in the third quarter. We are experiencing further improvement this current quarter. We are pleased with these recent improvements given the current competitive environment and are seeing positive results from our sales initiatives. We believe we have passed the peak competitive pressure we felt in FY14.

Now I'd like to provide an update on our various sales and marketing efforts. First, we are very excited to announce the recent hiring of Trey Hall, our operating company's Chief Marketing Officer. Trey joins us with over 30 years of world-class marketing experience. He will help lead an overall enhanced branding efforts to help further differentiate our brands' compelling attributes and [accounting] principles. We are very glad to have Trey on board.

We are pleased with the results from our extended store hours, which have been rolled out across our entire chain. New stores, starting with our Eugene, Oregon store, have new in-store decor, emphasizing our unique brand attributes. We continue to see an increase in the number of in-store cooking and educational events and our new stores are opening with various new community and VIP events.

We are seeing promising traffic at these events, which we find help build relationships in our new and existing communities. Our website redesign continues to move forward and we plan to launch the new site during FY15. We also plan to create a dedicated team to support new store marketing, focusing on public relations and social media and enhanced events to create excitement as we enter new markets.

We continue to be a leader in high-quality standards with our updated dairy standards and non-GMO chicken and turkey offerings. In addition to selling only 100% organic produce and not selling any grocery products with artificial colors, flavors, preservatives, sweeteners, or partially hydrogenated or hydrogenated oils, we remain strongly committed to our strict quality standards, nutrition education, everyday affordable prices, supporting our community, and our associates.

Now I will turn the call over to Sandra to highlight our FY14 financial results.

Thank you, Kemper.

Good afternoon, everyone. We are pleased to report net sales in FY14 increased 20.9% to $520.6 million (sic -- see press release "$520.7 million"). Daily average comparable store sales increased 5.6%, driven by a 2.3% increase in daily average transaction count, and a 3.2% increase in average transaction size. Daily average mature store sales increased 3.4%.

Gross profit in FY14 increased 20.5% to $151.5 million, driven by positive comparable store sales and an increase in the number of new stores. Gross margins decreased 10 basis points due to increases in occupancy costs, partially offset by increases in product margin across almost all departments, as well as operating efficiencies at our bulk foods repackaging facility. The increases in product margin were partially offset by a shift in sales mix. Additionally, we experienced minimal inflation during the year.

Store expenses as a percentage of sales remained flat in the fiscal year due to a decrease in salary-related expenses, offset by an increase in depreciation expense, and, to a lesser extent, an increase in utilities. Administrative expense as a percentage of sales decreased 30 basis points as a result of the Company's continued ability to support sales growth without proportionate investments in overhead.

Both store and administrative expenses were favorably impacted in the fiscal year by lower incentive compensation and other discretionary benefits reflecting our pay-for-performance philosophy. Net income increased 27.7% to $13.5 million, with diluted earnings per share of $0.60 in FY14. EBITDA increased 27.2% to $41.5 million, or 8% sales.

Touching briefly on our fourth-quarter results, net sales increased 17.8%, including a 3.7% increase in comparable store sales. Net income increased 43.1% to $3.2 million, with diluted earnings per share of $0.14 in the fourth quarter. Net income in the fourth quarter of FY14 included approximately $100,000 pre-tax of share-based compensation expense for the Chief Financial Officer and certain employees who are not named executive officers compared to approximately $500,000 in the fourth quarter of FY13.

We ended the year with $5.1 million in cash and cash equivalents and no amounts outstanding on our credit facility. We do anticipate being in our line of credit at the end of the first quarter of FY15 due to the timing of new store openings, including the Nature's Pantry transaction and annual income tax payments.

Now I will turn the call back to Kemper to discuss our new store growth and outlook for FY15.

Thank you, Sandra.

As I mentioned at the beginning of the call, we continue to invest in new store growth, opening 15 new stores in FY14, bringing our total store count to 87 stores in 14 states. Since the end of the fourth quarter, we have opened three new stores: one in Golden, Colorado; one in Reno, Nevada; and one in Oklahoma City, Oklahoma.

As of today, we have signed leases for five additional stores, which are scheduled to open in FY15 for locations in Arizona, Arkansas, Colorado, and Kansas. We have good visibility on the remaining FY15 stores. Additionally, we recently agreed to purchase substantially all the assets of national foods retailer Nature's Pantry in Independence, Missouri. The transaction is expected to close on December 7, 2014, at which time the store will start to operate as a Natural Grocers store.

By the end of FY15, we expect our geographic presence will cover at least 16 states west of the Mississippi. Our real estate strategy supports a broad range of communities. We continue to focus on opening new stores in both new and existing locations and in both smaller, rural areas and larger metropolitan areas. We continue to target the same financial returns for our new stores of 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 FY15 new stores will require an average upfront capital investments of approximately $2.2 million, which includes roughly $1.7 million for capital expenditures, $300,000 in initial inventory, and just over $200,000 in pre-opening expenses. We continue to be pleased with how well our new stores are performing. We believe recent new store performance validates the flexibility in our model, positioning us to successfully open in both new and existing markets.

Moving to our FY15 outlook, we expect to open 18 new stores, resulting in 21% unit growth, achieve daily average comparable store sales growth of 5% to 8%, deliver EBITDA margins of 7.3 % to 7.5%, achieve net income margins of 2.1% to 2.3%, achieve diluted earnings per share of between $0.63 and $0.66, incur capital expenditures of between $45 million to $47 million, and we are continuing to update our older stores and are very excited about the plans to relocate three stores and remodel two stores this year.

All of these stores are currently over 15 years old and are high-volume stores. Based on the listed comp store sales we have seen previously, we believe these updates will have a positive impact on our comp store sales later this year and in the FY16. We anticipate cash on hand, cash generated from operations and availability under our credit facility will be sufficient to support our capital requirements.

As we look to FY15, we are excited about increasing our store base and our expectations to grow our top and bottom line. We have already seen encouraging improvements in our comp store sales and our recent new store openings have shown positive results. We are pleased with changes we've made to expand the nutrition health coach position to include hosting cooking and educational events.

The number of NHC and community events continues to increase and drive traffic, while educating our customers. We continue to engage with our communities and increase awareness around our high-quality standards. We believe our quality standards make us a leader in the grocery and supplement industry and provide our customers with valuable confidence in what we sell at everyday affordable prices.

With the addition of 18 new stores this coming fiscal year, we expect to add over 450 new positions. We look forward to welcoming these new employees and especially the employees in Independence, Missouri, once the transaction closes, in early December. Additionally, I want to thank all of our employees who have been an integral part of our growth and success.

As we approach our 60th anniversary and look opening our 100th store, we remain focused more than ever on our founding principles, which have significantly contributed to our success and will help guide us as we grow larger.

Now I would like to open the lines up for questions. Thank you.

(Operator Instructions)

David Magee, SunTrust Robinson Humphrey.

Hi. Good afternoon, everybody.

Hello, David.

I wanted to ask about -- well, first the competitive openings. You mentioned that you think you're past the peak of the impact of that. Is the performance of the stores that are not being impacted and those that are being impacted, are those classes of stores performing as you would have thought?

The stores that have had no impact have been comping at double-digit comps, so, yes, I would say that's the case.

And how far are you able to see in the future with regard to where future openings might be from the competition?

We're looking all the way into 2015 third quarter right now. We're seeing that's the impact of new competition will have diminished significantly by then.

And how much of an impact has it been in recent months by having the store hours be expanded? Has that been -- is that meaningful to the comp number?

It's been somewhat helpful. I wouldn't say that it's been the panacea for the comp number, but it's been somewhat helpful.

Are you open before, early mornings and later in the evening too, or--?

We're open one hour in the morning and one hour later in the evening.

Okay. Then lastly, are you seeing the potential for inflation over the next couple of quarters? It seems like some of the other players have seen that now?

I was thinking about that answer from the other players. My take on it is that they are selling a lot of conventional meat and there's been a lot of inflation in conventional meet and so they are seeing that inflation because the price of beef has really skyrocketed, so it's been hard for them to absorb that. I'm thinking that's where a lot of their inflation is coming from.

There is, as far as we can see, there has been pretty normal inflation at our stores. We've had some things that have gotten expensive, like almonds, and then something that have come down in price, like we switched our chicken supplier and we went to a better quality, non-GMO chicken, and it's less per -- we are selling it for less per pound than we were selling our other chicken for. So like I said, I am not sure where -- the only thing I can figure is it maybe is conventional products that those people are seeing the high inflation in.

Thanks, Kemper, and good luck.

Thank you.

Sean Naughton, Piper Jaffray.

Thanks for taking the question. Just on the competitive environment, I know that in Arizona, you competed with New Frontiers Market in some of your smaller towns for quite some time, since the stores have been open, but they've been now rebranded to Whole Foods banners. Those stores are relatively close to your stores, so just curious if you can talk about some of those markets and if you're seeing any impact on those stores and is that -- and how that's playing out currently?

We had three stores in Arizona, you're right. Sedona, Prescott, and Flagstaff. There was three New Frontiers in each of those -- there was a New Frontier store in each of the cities also that was rebranded as a Whole Foods. Those stores are doing really well for us, so that move to Whole Foods has been somewhat helpful to us.

Okay. Fair enough. Then on the advertising, you made some comments about a new present that you've hired to step up some of the branding and reinforce some of the messaging. Maybe just talk about your spending in this particular area on the advertising side. Maybe just remind us what that is as a percentage of sales and do you expect that to go up a little bit as you are looking to drive traffic and reinforce the brand position?

No. Actually we're going to hold spending at the level it was this year as a percentage of sales. We're just going to deploy our spending so that it's spent in a better manner than it was last year. I don't think we really have ever disclosed our percentage of sales on it, but it's in the 1% range or a little over 1%.

Okay. That's fair. And then just on the supplements business, there has been some puts and takes across the industry where it seems like it's been a little bit more challenging, maybe it's starting to come back a little bit. Just curious on what you've seen in your business from a total growth rate in that particular category and are there any signs of life that there may be some things potentially starting to come back in that particular category?

We are really encouraged by the supplement sales, particularly in October they were really good. Our comp stores actually had an up-up, which means that we had up -- revenues increased and the amount of revenue as a percent -- they increased market share. So we were pretty pleased with that. Overall the Company's decrease in supplement sale business has slowed -- the market share decrease has slowed significantly in the last quarter and in October, in particular.

Okay, any--

And then on another subject, the body care department has actually -- which is another high-margin department for us -- has actually increased market share and dollars share in our stores over the last year. That trend has continued this quarter so we're seeing quite positive, in our opinion, results in both supplements and body care.

That's great. Best of luck in Q1. Thanks.

Thanks.

Mark Miller, William Blair.

Hi. Good afternoon, everyone. There is a little bit of a small diversion trend in the overall comp, which picked up quarter-on-quarter and the mature store comp was flatter, slowed just a little bit. What are the differences between those two sets of stores?

It really relates to the amount of new competition months within the mature stores versus the new -- the comp stores, right? Because there's a number of newer stores, less than five-years-old but older than one store in comp.

Could you look at the group of stores that had no competitor during any of the periods? Would exing out that factor, would the mature stores be doing better as well?

I don't have that right in front of me, but I believe that's true. I'm sorry. I don't have that number.

Okay. We can follow up on that. With your guidance for FY15, the 5% to 8%, could I infer from your comments about the better trend, that you are into that range already, or are you anticipating because of the fewer competitive openings that, that's what takes you into that range?

You could infer that we're at the low end of that range.

Okay. The lift to comps that you anticipate from the relocations and remodels, those are happening later in the year, but is that a material impact on the comp for next year?

Since it is happening so late in the year next year, it is probably not going to have a material impact in this year, but it will probably have a pretty nice impact in 2016.

Great. Thanks. Then on--

Last quarter, it might have a nice impact.

Right. The gross margin decline was a little bit greater than we expected in the quarter and it sounds like their margin trends might be shifting for you in a positive way at the beginning of FY15. But you talked about in the press release the higher occupancy. Maybe you could amplify on that or was there also something outside of the occupancy that made it a little bit tougher this quarter?

I believe that it was primarily driven by occupancy. Otherwise, it was -- our point-of-sale margin increased significantly during the quarter, and it was definitely driven by higher occupancy costs. The comp came down and so that increased our occupancy costs above what we expected them to be. But hopefully

Right. Okay. Go ahead, Kemper.

The other comment is the good real estate has become more expensive lately. It was always expensive, but now it's gotten even more expensive. That's part of the occupancy cost increase.

Okay. Then final question from me. Looking at the FY15 outlook, if we backed out the change in incentive comp in 2015 for your plans versus 2014, ballpark what would that represent as a rate of EPS growth for the Company that you anticipate?

I don't have that right off the top of my head for you, Mark, so maybe we could get back to you with that?

Yes. Okay. Great. Thanks.

Thanks.

Scott Van Winkle, Canaccord Genuity

Thank you very much. Can you talk a little bit more about the Nature's Pantry store, how it compares to your store base, whether it's offering mix, productivity et cetera, et cetera? And should we assume that maybe in the future, single-store acquisitions might be a bigger part of the plan?

Well, first off, speaking of how it looks like one of our stores, it's very similar, the supplements make up a good percentage of their sales. They had high-quality standards in the store, like we do. It's about as close to one of our stores as I've seen an independent store be, so we think that the integration with our stores should be pretty seamless.

Of course they'll be a couple of hiccups, there always are, never can anticipate everything, but we think it'll be a pretty seamless integration. As far as the productivity goals, it is a very productive store and it should be a nice acquisition for us. As far as us acquiring other stores, if we find an interesting store out there and they are interested in selling, we will pursue that opportunity. We don't have that as our main strategy for opening new stores. Our main strategy for stores are to grow them from the ground up.

Okay. Then on the competitive environment, obviously you can maybe anniversary a lot of this in the third quarter of next year. The improvements you have seen over the last couple of quarters sequentially, if you just look at the last quarter, certainly in a two-year stack basis seeing an improvement, is that a function of maybe the new stores came in, had a really strong opening, a honeymoon period, and now it's back to normal or do you credit it more in your response? You mentioned that the extended hours weren't all that significant a contributor, but do you think it's more -- it's a short-term phenomenon or more your response was very effective?

It's a combination of a number of things. It takes about a full year for us to -- it's in the 13th month that we usually notice that our stores' sales start bouncing back after a new competition comes in, so the rate of decline that we would have or the loss of sales usually starts going down a little bit after about six months. In a reality, quarter four was the peak of competition months open for competition, so it was encouraging to see that our store comps came back stronger in quarter four, even though it almost affected 60% of our store base at that point time.

Great. I [would like to take] one more on non-GMOs. You've had all these recent valid efforts, your home state there that haven't gone through, but where does this [certainly risen]? Is the move to non-GMO chicken, I believe it was, another product category, is that seen as a marketing opportunity? You talked about getting lower cost, but are you marketing the non-GMO side a little more aggressively?

Absolutely. Consumers really appreciate the fact that we are offering items like our chickens as a non-GMO option and then this year we also have turkeys that are non-GMO. We're the only chain that can really say that in the country right at the moment. It's definitely a good opportunity to distinguish our difference, our quality difference, between us and many of our competitors.

Thanks.

Thanks, Scott.

Mark, before we take the next question, the EPS growth, if we excluded the incentive comp and the higher match for the 401(k), et cetera, the growth would be at the 20% to 25% range, which is basically where we have seen it before.

Hopefully that answers your question, Mark.

Joe Edelstein, Stephens Incorporated.

Hi. Good afternoon. Thanks for taking the questions.

Hi, Joe.

When you are thinking about the 2015 guidance, and specifically just on that incentive pay, was that done in an effort to get out in front of any declines in employee productivity or satisfaction or frankly ultimately customer satisfaction? Did you start to see some of that? I'm still a little confused on just the timing, as to why you are choosing to ramp that up in 2015?

Well, the reasoning is it that, in 2014, we essentially had to eliminate our incentive comp in our 401(k) match, and of course, that isn't very popular with your employees. Your employees are vital -- the happiness of your employees are vital to the performance of your Company and so you need to be able to provide an incentive to them other than just their salary to perform at a higher level.

With 20% annual growth, it puts a lot of stress on an Organization. If you don't reward your employees somehow for that stress that they are given and the effort they're putting in, you are going to suffer in the long-term. And so we determined that after a difficult year, last year, that we would make this difficult decision to include in our financial numbers an ability to reward them as long as we achieve our financial goals with those new parameters set.

And the new parameters, specifically, reaching the unit growth and the comp expectation ranges that you've put out now?

Well it's to reach revenue -- there's a number of aspects that go into our incentive comp program, the first being that you have to hit a revenue number, the second being that you have to achieve a certain labor productivity level. Then there's various other aspects of the programs, such as having an up-in your new supplement mix, an up-up -- hitting a certain target for your cost of goods sold in various categories and improvement in the bottom line.

Okay. You would still anticipate returning to your more normalized run rates if you look out to 2016, 2018, correct?

Yes.

Okay. If I could just squeeze in one last question, just to clarify, I was interested what the glide path looks like for that competitive store overlap, as you see that into the third quarter? Maybe a percentage of the store base?

In the first quarter, we are looking at -- the quarter we are in, we're at about 51% impacted; second quarter, we're looking at about 35% impacted; and then dropping down to our more normal 20% to 25% impacted in the third quarter.

That's helpful. Thanks again for taking my questions.

Thank you.

(Operator Instructions)

Mitch Pinheiro, Imperial Capital

Hi. Good afternoon. Relative to your comp range, the 5% to 8%, what is it that will drive the range up to the high-end?

Part of it will be just the natural attrition of this new competition fall off and part of it will be that we're going to -- a lot of our initiatives are taking hold and driving sales. Then of course, we have a lot of stores coming in that should comp well over the next year.

Okay. Then in terms of the initiatives, are--?

Later in the year, not this quarter, but later in the year.

Right. The marketing initiatives? Are they primarily the store-based events or are there other things that you are talking about as well?

One of our big initiatives is our redesign of our website and then our management of social media after that redesign of the website would be one of our big initiatives, which launch sometime in the first quarter -- our second quarter, the first quarter of next year. So that would be one of them.

Then our Chief Marketing Officer of our operating company, Trey Hall is an expert at branding companies and getting that message out about the branding. He was one of the people responsible for the branding of Smashburger. That's been a pretty successful launch and so we're pretty happy to have him on board.

I'm just curious. How does website redesign affect store traffic? How are they paired? How should we think about that?

What it does is it allows us to more effectively use social media to get excitement about our brands out there.

Okay.

Advertising is really -- the effectiveness of newspaper advertising and traditional advertising is diminishing, as you know. The effectiveness of creating excitement through blogs and social media is really becoming very important to the branding of a company and the success of a company anymore. So that's why we're transferring a lot of our energies to that initiative.

Okay. Just a couple more things. Was there any tangible comp hit from your new dairy standards in the quarter?

No. Our unit sales in dairy -- in the yogurt area -- are down, but our revenue was actually up for the quarter.

Okay. What's driving body care? Is it just consumer awareness of -- to the same extent that there was slow awareness of natural and organic foods, is the same factor driving body care? And what type of growth rate does body care have, if you could help us with that?

What percent of growth was body care last year?

Last year or--?

[Into] this (inaudible)? [For] the Company, what was our revenue [price]? The body care grew at 24% overall last year compared with the 21% Company growth, so it's somewhat higher. As far as why the growth? We have refined our sets, and in our new stores and in our remodels, we have a really compelling body care section. It is really driving growth because of that.

Okay. All right. Thank you very much. I appreciate your time.

Ladies and gentlemen, at this time, I'm showing no additional questions. I would like to turn the conference call back over for any closing remarks.

Hello, everybody. Thanks for being on the call today. We appreciate your time. Have a very nice rest of the day. Bye.

Ladies and gentlemen, that concludes today's conference call. We do thank you for attending. You may now disconnect your telephone lines.