Natural Grocers by Vitamin Cottage Inc (NGVC) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers first quarter fiscal year 2015 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 Ms. Ashley MacLeod, Director of Finance and Investor Relations for Natural Grocers. Ms. MacLeod, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter Fiscal 2015 earnings conference call. On the call with me today are Kemper Isely, our Co-president, and Sandra Buffa, our Chief Financial Officer.

As 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 forms 10-Q and 10-K. The Company undertakes no obligation to update 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 pleased to report solid financial results this quarter and we continue to meet our outlook expectations. This is a positive start to Fiscal 2015 as we prepare to celebrate our 60th anniversary of empowering health. We look forward to carrying this momentum into the rest of Fiscal 2015. 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 quarter, net sales increased 21% to $145.9 million. We continue to see encouraging trends in our comparable store sales, increasing 6.2% during the quarter on top of a 10.6% increase last year. Gross profit increased to $42.3 million, and we continue to see leverage in administrative expenses. Net income increased 22% and our diluted earnings per share in the first quarter of Fiscal 2015 was $0.16 compared to $0.13 last year.

We are pleased with the improvements in our comparable store sales and are seeing positive results from our sales initiatives. We continue to have a low double-digit growth in comparable store sales in markets without new competition and are reaching a steady-state of store months with new competition. During the quarter, we opened four new stores, entering Nevada for the first time and expanding our geographic footprint in Colorado, Missouri, and Oklahoma. Our new stores are performing in line with expectations and we remain on track with our new store pipeline. We will continue to enter new states and markets, and plan to open 18 new stores in Fiscal 2015. Now, I will turn the call over to Sandra to highlight our first quarter Fiscal 2015 financial results.

Thank you, Kemper. Good afternoon, everyone. We are pleased to report net sales in the first quarter of Fiscal 2015 increased 21% to $145.9 million. Daily average comparable store sales increased 6.2% driven by a 3.4% increase in daily average transaction count and a 2.7% increase in average transaction size. Daily average mature store sales increased 2.8%.

Gross profit during the first quarter of Fiscal 2015 increased 19.5% to $42.3 million driven by positive comparable store sales and an increase in the number of new stores. Gross margin decreased 30 basis points due to increases in occupancy costs, partially offset by increases in product margin. Store expenses as a percentage of sales increased 40 basis points in the first quarter compared to the prior comparable period due to increases in depreciation and other store expenses to support store growth. The increases in store expenses were partially offset by decreases in salary-related expenses as a percentage of sales.

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. Additionally, during the quarter, we were pleased to accrue our pay-for-performance incentive compensation at similar levels the comparable quarter last year. We were also able to accrue a portion of our 401(k) employer match for calendar year 2014.

Net income increased 22% to $3.6 million with diluted earnings per share of $0.16 in the first quarter of Fiscal 2015. EBITDA increased 21.9% to $11.4 million or 7.8% of sales. We ended the first quarter with $1.9 million in cash and cash equivalents and $3.1 million outstanding on our credit facility. Now I will turn the call back to Kemper to discuss our new store growth and outlook for Fiscal 2015.

Thank you, Sandra. As I mentioned at the beginning of the call, we continue to invest in new store growth, opening four new stores in the first quarter, bringing our total count to 91 stores in 15 states. Since the end of the first quarter, we have opened one new store in Tucson, Arizona. As of today, we have signed leases for eight additional stores which are scheduled to open in Fiscal 2015 for locations in Arizona, Arkansas, Colorado, Kansas, Minnesota, Oklahoma, and Texas. We have good visibility on the remaining five stores we plan to open in Fiscal 2015.

Additionally on December 7, 2014, we completed the purchase of substantially all the assets of a natural foods retailer in Independence, Missouri. By the end of Fiscal 2015, we expect our geographic presence will cover 17 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.

Moving to our outlook, our first quarter results were in line with expectations and thus we are reaffirming our previously announced Fiscal 2015 outlook. During Fiscal 2015, we expect to open 18 new stores resulting in a 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 relocate two stores and remodel two stores this year. We previously announced relocating three stores, but the timing of one of the relocations has moved to the first quarter of Fiscal 2016. We anticipate cash on hand, cash generated from operations, and availability under our credit facility will be sufficient to support our capital requirements.

As Fiscal 2015 continues, we are excited about increasing our store base and our expectations to grow our top and bottom line. We have seen encouraging improvements in our comp store sales and our recent new store openings have shown positive results. We continue to engage with our communities and increase awareness around our high quality standards. We believe our quality standards makes us a leader in the grocery and supplement industry and provide our customers with valuable confidence in what we sell at every day affordable prices.

As we approach our 60th anniversary and look to opening are 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 McGee, SunTrust.

Yes. Hi. Good afternoon everybody and good quarter.

Thanks, David.

The same-store sales number was the best in a year it looks like on a one- and two-year basis. If you had to sort of assess the contributing factors, whether it was maybe the sector picking up a bit or your initiatives like store hours a little longer or just the step down in terms of maybe new competition, how would you sort of assess those in terms of importance as far as the comp?

Well, I would say that first I think that our sales building initiatives have built momentum over the quarter. We started to have calls with all of our managers on a weekly basis starting in August of last year and I think that that was very helpful. The increased store hours was helpful. We really didn't have a tremendous number of -- I mean, we still have over 50% of our store base affected by new -- what we call new competition, so that decreased by 8%, but it was still pretty significant for the quarter. And so, I would really say it has more to do with our ability to drive sales through initiatives and store hours.

Do you anticipate that the new competition factor will step down the way you thought it would last fall?

Yes. It appears to be trending that way right now. We're estimating in this quarter that will be -- that 36% of our store base will be facing what we call new store -- new competition, so it should be significantly lower this quarter.

Great job. Thank you.

Sean Naughton, Piper Jaffray.

Yes. Let me add my congratulations on the compliment in referring to the business, very nice to see.

Thanks, Sean.

Yes. Just -- I think you had talked about on your last call some other things just diving into the sales initiatives a little bit further and the branding that's going on that you guys are talking about. Can you just talk a little bit more about when we could see some of the things that you've been investing in, the new website, and then maybe some additional teams to support some in-store marketing and PR events, and just talk about those about where we are in terms of rolling those things out to help to drive top line growth?

Well, we hired a chief marketing officer for our operating company in October of last year and he has been very busy. We've changed the look of all of our media and in-house media so that it's very consistent and that's already happened. He's hired people to set up new events for the new stores as they open. He's assembling a team to work at stores that we call opportunity markets in stores that aren't performing as well as we would like them to so we have a team that does events for those stores also coming up here probably by March, and the new website is set to go live in April of this year.

Okay. That's -- it sounds like those are still on the horizon at this point.

Yes. And it takes a good six months for someone to really get their initiatives going, but I think that a lot of initiatives have been started and are moving forward right now.

Okay. That's great. And then just one quick followup just on the gross margin side. It seems like the product margin continues to march higher. Are you noticing anything in terms of your distribution costs just from lower fuel surcharges? Is that benefiting you in any way or anything from the lower gas prices that you think has helped the business at this point? Thank you.

We didn't really see anything in the last quarter. I would expect that we'll see some fuel surcharges drop off this quarter, so it should have a minor benefit this quarter.

Okay. Great. Thanks and best of luck.

Thanks.

Mark Miller of William Blair.

Yes. Hi. Good afternoon. Could you give a little bit more granularity about the comp performance by product category in the quarter?

Well, our dietary supplements comp at mature stores -- Sandra, do you want to dive into that?

Sure. The mature stores we saw a really positive thing which is that we really had better than slightly positive, I guess is the best way to say it, comp from the standpoint of dietary supplements. I think the really exciting piece that we had at the mature stores was how very strong our body care comp was. So, we really see that as a win and all of that we feel came out of the weekly manager calls that Kemper had been holding with the managers, and I think there was a lot of engagement there and our managers just really stepped up to drive sales at their stores in those areas from the standpoint of comp. We had some really strong comp from dietary supplements as well, probably as good as we've seen over the last year, and the body care was a very, very strong.

Body care gained market share, comp lost -- I mean supplements lost about 1% of the market share at the comp stores. The body care made up for that in actuality.

Okay. Great. And then as you look ahead with the number of stores seeing competition diminishing, it looks like that just quarter on quarter could be about a half point of comp lift or more? Is it fair to think that kind of increase in comps can flow through or is there anything else as we think about the periods ahead beyond the things already discussed?

No. I think that we will see some positive trends in comp in the next quarter -- in this quarter.

Okay. And then I have a question about the expansion to smaller rural markets versus larger metro. Kemper, what are the biggest things that you're doing in your approach to these different types of markets? Whether from assortment, staffing, marketing, what are the different things you're doing differently?

Well, it's easier to market in a smaller rural market then it is into a big metropolitan city, so I mean you go into a smaller city and you're -- it's simpler to become numb. So, as far as marketing goes, it's a little bit easier. You still need to have a location that's prominent so that people can see your store. In the bigger cities we're really ramping up our social media presence and I think that will help us substantially in those new markets, larger cities that we go into.

Okay. I'll turn it over. Thanks.

Thanks.

Scott Van Winkle of Canaccord Genuity.

Thanks. So, I'll also offer my congratulations. Very good job in the quarter. It looks like the new stores contributed kind of more incrementally than we've seen in prior quarters. Is that -- are the stores larger and more productive or is that may be a phenomenon from the acquired unit during the quarter?

The acquisition helped, but it was only in sales for 20-some days of the quarter, so it definitely wasn't the entire contribution. We've had some significant contributions from some of our new stores that have opened. I mean they've opened really well and it's been helpful.

So, when we think about the commentary around higher depreciation, higher occupancy, store cost on the openings, should we think that maybe the next units you open are generally the incremental units are a little more productive maybe than they were a couple of years ago in opening, but they obviously have a little higher cost to operate than they were a couple of years ago at opening?

It really depends on the store, but our goal of course is to have higher productivity at the beginning. So, I think we're working on that goal with our new marketing efforts spearheaded by our new chief marketing officer.

Great. Thank you.

Thanks.

Joe Edelstein of Stephens.

Hi. Joe Edelstein here.

Hi, Joe.

I've got a question just on your geographic exposure. Did you see any pressure or difference as you look across the chain for your sales trends, particularly your stores in Texas, given the state's exposure on the oil and gas side and if there's been any change to that market specifically? I'd be interested in that. Thank you.

No. I think Texas is performing how we expected it to. Some of our -- Texas is a pretty diversified state. We have a lot of stores in Dallas and Austin as well as in some of the other smaller cities that have a big oil presence, and the stores in Texas are doing quite well. We're happy with that and haven't seen really any slowdown in that so far.

That's great to hear. And earlier you had mentioned the strength coming out of that body care segment. As you think about the Natural Grocers brand and really what it stands for, what opportunities do you have to extend that brand really into some other categories? I know you do carry some household products, but maybe there are extensions, things that you can start moving into to further the brand. I'd be curious on your thoughts there.

Well, we really think that we have an opportunity in the dairy section to extend the brand because of our pasture-based dairy standards. I think we'll have some exciting products in that area coming up in private label pretty soon.

That's great. Thank you very much.

Sure.

Rupesh Parikh of Oppenheimer.

Thanks for taking my question. Congrats on a nice quarter. So, I wanted to touch -- dive a little deeper into your traffic during the quarter. We saw a nice pickup to 3% plus versus about 1% last quarter. What do you feel are the key drivers behind that traffic pickup?

For the quarter?

Yes.

We did some tweaking to our health hotline that started in the quarter and I think that that may have contributed to the pickup. We increased of the number of pages in the health hotline and increased the editorial in it, and I think that was really helpful to drive traffic this quarter.

Okay. And then in terms of the sales trajectory, were comp trends fairly stable during the quarter or did they pick up? And also has the momentum continued post December?

December was the best month for comp sales this quarter, so they were definitely good. We're not through January yet, so it's too early to really say how January sales are going to be.

Okay. Maybe just one last question. Just in terms of gas prices, I know there was a question earlier. Do feel that you are seeing any benefit from consumers from lower gas prices from a consumer perspective?

I think that any time consumers put money in their pockets from the savings of not having to spend so much I guess it's helpful for our business.

Okay. Thank you. Good luck for next quarter.

Thank you.

David McGee of SunTrust.

Thank you. Just a quick follow up. Kemper, last quarter you said that inflation was relatively tame. Are you still seeing that trend right now?

Yes. It's still fairly tame. The only thing that we've really seen, like I said last quarter, any real uptick in prices on compared to a year ago is the nuts, but other than that everything else is staying in a pretty good space.

Great. Thanks. Good luck.

Thanks.

Mitch Pinheiro of Imperial Capital.

Yes. Hey, good afternoon. So, just a question on the product margin. What else drove the improvement there? Is there anything in particular? Is it a body care influenced help or were there particular categories that were helpful in the quarter?

Both body care and supplements were helpful.

Any other sub categories?

Our meat category was pretty helpful.

And did that these sort of -- so would we anticipate this kind of trend heading in subsequent quarters or where there -- is this a trend or was it more of a one-time issue?

Well, we intend to keep it a trend.

Okay. And then in the body care side, what -- so I saw your stores and I saw your new sort of in-store merchandising and more attention to body care. Is that being driven by -- are there new products that are improving sort of the whole proposition or is it really just deciding to merchandise better?

Well, I think what it is that we have these phone calls and we talk about what successful at our stores, and we are rolling out those successes at our stores, and body care had some particular items that were particularly successful we rolled out at our stores for the quarter and the trend is continuing. We're getting the collective knowledge of our 91 stores together and looking at trends from the ground up rather than just from a numerical standpoint out of purchasing and getting a lot of buy-in from the stores in regards to what is successful at the store level.

And a latest sort of a last follow up there, but are there any other potential or future body care improvement kind of stories in other areas? Anything that seems to be working that might be promising down the road here?

Well, we're always trying to find the next category item that is helpful to us and, like I said, getting 91 heads together is better than just having a couple heads together and using that collective knowledge to improve your results is better.

Okay. All right. Terrific. Thank you for your time.

Thanks.

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

Thanks, everybody, for being on the call today. Have a very pleasant afternoon. Good bye.

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