Natural Grocers by Vitamin Cottage Inc (NGVC) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers second 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 would now like to turn the conference over to Ms. Ashley MacLeod, Director of Finance at Investor Relations for Natural Grocers. Ms. McLeod, 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 2015 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 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. As we celebrate our 60th year of empowering health, we are pleased to report the following results. Our sales increases and disciplined approach toward operating expenses continued to allow us to invest into future growth. During the second quarter of fiscal 2015 net sales increased 21% to $157.7 million, and daily average comparable store sales increased 5.6%. Gross profit increased to $46.9 million and we continue to see leverage in administrative expenses.

Net income increased 35.1%, and our diluted earnings per share in the second quarter of fiscal 2015 was $0.24 compared to $0.18 last year. Our comparable store sales increased 5.6% in the second quarter driven by a 3.2% increase in daily average transaction count and a 2.2% increase in average ticket.

We continue to focus on our directed sales initiative, outstanding customer service and operational excellence. We are excited to announce that new brand standards are now in place for all our print materials, and the new Natural Grocers website was launched as scheduled on April 1st. Our new website provides intuitive navigation and supports the information consumers told us is most important. Locations, product availability and information on in-store events.

Our new website provides the foundation for our next innovation, our loyalty program called N Power. N power was been designed to provide loyalty points for shopping, Digital coupons for greater value and clubs that create focused offers, education and information. In-market testing of N Power begin soon and we anticipate a rapid rollout thereafter.

Moving to new store growth, we opened four new stores during the second quarter entering Arkansas for the first time, and expanding our geographic footprint in Arizona, Kansas and Texas. 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 financial results for the second quarter of fiscal 2015.

Thank you, Kemper. Good afternoon, everyone. We are pleased to report net sales in the second quarter of fiscal 2015 increased 21% to $157.7 million. Daily average comparable store sales increase 5.6% driven by a 3.2% increase in daily average transaction count and a 2.2% increase in average transaction size.

Daily average mature store sales increased 2.6%. Gross profit during the second quarter of fiscal 2015 increased 20.9% to $46.9 million driven by positive comparable store sales and an increase in the number of new stores. Gross margin remained flat due to increases in product margin offset by increases in occupancy costs. Store expenses increased to 20.8% to $32.5 million in the second quarter.

As a percentage of sales store expenses remained that the in the second quarter compared to the prior comparable period. During the second quarter gross margin and store expenses were positively impacted by the nature of new store openings and a reduction in our new store growth rate.

Administrative expenses of the percentage of sales decreased 10 basis points as a result of the Company's continued ability to support sales growth without proportionate investments in overhead. Additionally, during the second quarter we accrued our full 401(k) match, and also accrued our pay for performance compensation at twice the level of last year and 50% of our maximum target.

Pre-opening and relocation expenses decreased $300,000 during the second quarter compared to the prior comparable period due to the number and timing of new store openings.

During the second quarter of fiscal 2015, we opened four new stores compared to five new stores in the second quarter of fiscal 2014. Net income increased 35.1% to $5.4 million with diluted earnings per share of $0.24 in the second quarter of fiscal 2015. EBITDA increased 29.4% to a $14.5 million or 9.2% of sales.

Touching briefly on our first half results net sales increased 21%, and daily average comparable store sales increased 5.9%. Net income in the first half of fiscal 2015 increased 29.6% to $9 million with diluted earnings per share of $0.40. We opened eight new stores in the first half of fiscal 2015, resulting in a 17.3% trailing 12-month unit growth compared to nine new stores opened in the first half of fiscal 2014 resulting in a 24.6% trailing 12-month unit growth.

We ended the second quarter with $7.2 million in cash and cash equivalence and no amounts 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. We opened four new stores in the second quarter bringing our total count to 95 stores in 16 states. As of today, we have signed leases for eight of the remaining 10 new stores we plan to open in the second half of fiscal 2015 in Arizona, Colorado, Kansas, Minnesota, North Dakota and Oklahoma, and we have four signed leases for stores planned to open after fiscal 2015.

By the end of fiscal 2015 we expect our geographic presence will cover 18 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, based on our first half results and expectations for the remainder of the fiscal year we are not updating our annual guidance; however, we anticipate that our fiscal 2015 results will be on the higher end of net income and EBITDA margins.

During fiscal 2015 we expect to achieve daily average comparable 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% and achieve diluted earnings per share between $0.63 and $0.66. Our fiscal 2015 guidance for the number of new stores and remodels will remain unchanged.

We plan to open 18 new stores resulting in 21% unit growth and remodel two stores. We are moving one of our expected relocations into fiscal 2016, thereby relocating one store rather than two stores in fiscal 2015. We are also updating the capital expenditures outlook to $41 million to $43 million for fiscal 2015.

We anticipate cash on hand, cash generated from operations and availability under our credit facility will be sufficient to support our capital requirements. As our 60th anniversary year continues, we are excited about increasing our store base and look forward to the expected opening of our 100th store.

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.

More than ever we remain focused on our founding principals, which we believe have significantly contributed to our success and will help guide us as we grow. Now, I would like to open the lines up for questions. Thank you.

(Operator Instructions). We will now begin the question-and-answer session. The first question comes from David McGee with SunTrust. Please go ahead.

Yes. Hi, everybody. Congratulations on the good numbers.

Thanks, David.

I just have two questions. One is sort of a big picture. Kemper, what is your feeling about this sector health, right now, in terms of tailwind of consumer demand? And what -- it seems like that we've seen some increasing variability of numbers out there.

You mean in our sector alone or into the whole economy as a whole?

We can talk about that off line. Just more the natural organic sector, thanks.

You know, I think that it is having -- I think the whole economy in the whole is having -- there is a little tailwinds right now to be -- I think that the decrease in the price of oil has had quite on impact in the number of regions in the country and has had kind of a small detrimental effect on consumer confidence. And so I think it's caused a little bit of tailwinds in our sector as well as other sectors in the economy.

And, more specifically, how did the supplement part of the business do, - how do you feel about that tablet there?

You know, it did fairly well overall. We had a 21% increase, and sales supplements were up about 17%. So they came in about how they have been faring over the last couple years that our stores, a view basis points slower than what our overall grosses -- growth has been. I haven't seen a diminishing in -- we haven't seen people not coming in to buy supplements.

Okay. Great, thank you.

Thanks, David.

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

Good afternoon and thanks for taking the questions.

Good afternoon, Sean.

Good afternoon, Kemper. Just a question for you in terms of product availability out there in the market place. How are things going in terms of procuring organic produce? Is there anything on the nut side on the bulk business that is causing a little bit of consternation? I know there is, obviously, pressure in organic dairy, but just some little -- anything across the store that you are having a little bit of trouble getting your hands on at this particular point in time?

No, not really. I mean the price of nuts has gone up substantially, but as long as you are willing to pay the price you are able to get them. As far as organic produce, we haven't had issues other than every once in awhile there's a weather-related issue. I think there was some problem with broccoli about two weeks ago, but other than that we haven't had any issues with that. Other commodities there haven't been any issues with supply at all.

. Okay. So inflation doesn't seem like it's a -- it feels pretty normal for you at this particular point in time?

I would say it is running about the same as it was last year at this time.

Okay. Great. And then maybe just asking a question on the competitive front. I know we've had -- I know are were [anniversarying] still or lapping the sun of the Trader Joe's impacts from last year, and there seems to be some stepped up price investments from a conventional player in your particular region. So just curious, you know, there's a lot of discussions about it out there. Just wondering what you are seeing in terms of your pricing studies on how you are on like items compared to some of the conventional guys at this particular point in time.

I would say the convention and grocers and the retailers have definitely decided to make natural and organic a focus and have decided to invest in pricing in the sector, and so they have become very competitive in pricing. It looks to us from our studies that they are about where they were last year, so I don't think they have stepped it up anymore than they have last year. They have stepped up their marketing campaign, and so that's made the awareness of what they are doing more. The price differential between us and them hasn't really changed from last year to this year.

Okay. And so you feel pretty good about that, you know, your pricing at this point in time.

Yes. We are pretty happy with it. You know, we are not going to match every price that the conventional people come out with the guys it isn't a profitable situation for us. I mean I've seen supers in this area selling bananas at $0.69, and we are just not going to match that price. Our customers know that we sell only organic bananas, and they are happy paying a few cents more for that organic banana rather than going to King Super's and saving $0.06 or $0.10 a pound.

Understood. Best of luck in the quarter. Take care.

Thanks.

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

Hi. Good afternoon. Looks like I'll be the one to ask the question about Whole Foods announcement of the new format underway. I guess you be willing to share your general thoughts, and, specifically, as you addressed your team this morning, I'd be interested in what you said to them along the following that we need to be excellent at what--

And what we do.. We are based on our five founding principals, and that's what we will keep focused on. That's what we've kept focused on for -- that's what our focus has been for 60 years, and what has allowed us to stay if business for 60 years. And so by staying focused on providing everyday affordable pricing, the highest standards in the industry on products, nutrition, education, supporting our staff and supporting our communities we believe if we keep focused on those and keep focusing on operational excellence that we will be able to stay in business for another 60 years and thrive as we have for the last 60 years, particularly, for the last 15 to 17 years since we took over operation of the Company.

All right. We will, obviously, have to see what this all entails, but basically you feel that just by executing your existing game plan, that's all you need to focus on.

You know, I mean, if you are going back to Whole Foods I think that they should focus on what they do best also, because I think that trying to create two things and do them well could be difficult for anybody.

Understood. Let me shift to the numbers in the quarter. The productivity of the new stores looks to be good. Could you help us with the new store [debuts]? I mean on your internal computations, how did the new store productivity come in? I think you said stores were doing well, but was it in line or was it a little better?

It was a little better than expected.

Okay. And then on the store incentive compensation, twice that of the last year, 50% of the next targets. Kemper, (inaudible) if you do would you be willing to elaborate on the areas that you had more incentive comp and also the areas that you didn't quite reach your goals? Thanks. For the highest goals I should say.

Well, you know, I mean it's -- we have particular numbers that are set, and if we don't hit those particular numbers then the incentive comp is reduced, so that is not all of our goals -- you know about half -- not all of our goals were met, and so the incentive comp had about half of what a maximum payout would be.

Okay. I am going to throw in one more. It appears the business did decelerate a little bit in the quarter or that's my perception. I guess would you be willing to give perspective on the cadence through the period? Thanks.

I would say as the quarter went along that the comp sales decelerated a little bit. And, as I said to David at the beginning of the call, I think that the overall economy has had somewhat of a drag on sales and particularly in March, particularly in some of our regions, because of it seems like in April we came back somewhat.

Thanks, Kemper.

The next question comes from Mark Segal with Canaccord Genuity. Please go ahead.

Yes. Hi. Good afternoon. I wanted to just touch a bit more on the comp. If I recall correctly in Q1 December was your strongest comp quarter approaching the upper end of the full guidance range, so it appears the comp deceleration was fairly abrupt. One, would you categorize that as accurate, and two is there anything else you can comment on the deceleration beyond kind of macroeconomic sensitivity? Was there anything abnormal in terms of competitive pricing? I mean it's a bit of a paradoxical dynamic, and like I think your competitive overlap was supposed to be about half of what it had been around peak. Just curious to get kind of color around the comp deceleration.

Well, as I said, I really -- we really attribute the issue primarily to macroeconomic conditions. I don't believe that it has a lot to do with competitive situations. There, as I told Sean, the, you know, King Supers in this area spent a lot of money advertising natural, but we are in a lot of other markets without them, and so we had similar situations in most of the other markets that we had in the Colorado area. So I don't think it was a competitive thing. I think it was more of an economic thing.

And then it looks as though the average ticket decelerated more rapidly on a sequential basis than the transaction count. Are you comfortable with your pricing versus competitors? I know you carry a heritage of low, you know, kind of value everyday pricing, but given you have been building on product gross margin quite nicely, I'm wondering if there was appetite for any adjustments on the pricing side.

No. We are pretty happy with where we are, [particularly], likewise with our competitors. As far as the average ticket goes, we were up slightly from quarter one and so we are pretty happy with that also. And we are actually pretty happy that most of our comp store gain was in customer count, which is important to us. We think that as we roll out our N Power loyalty program over the next two quarters that will be very beneficial to the average ticket. So we are looking forward to that.

And then just lastly, it could be fairly difficult to quantify, but can you talk about the potential impact on the comp that, you know, the full rollout of the extended store hours may have had?

We are still analyzing that, and so we don't have a good answer for that question. We are looking at -- it, from appearances, it had a real nice impact on comp, but we need to look at how much it cannibalized sales from the previous hours and we haven't finished that study yet.

Understood. Okay. Thank you.

The next question comes from Joe Edelstein with Stephens Inc. please go ahead.

Hi. Good afternoon. Thanks for taking the question.

Thanks for asking it, Joe.

Kemper, you mentioned the regional performance. I was just curious how big of a spread did you see, really, across the store base? I imagine that the stores in Texas perhaps softened a bit more than some other regions, but I was hoping you could give us a little more color there, please.

We definitely saw deceleration in Texas quarter. Colorado is pretty big into the energy business also, so -- and so is Wyoming, but, yes. I mean it was --there was definitely send deacceleration across most regions. Not all of them though had the deceleration.

Okay. And if I could just go back to kind of the original guidance for the year and just the trends, I guess, that you put up-to-date. I just want to make sure I fully understand, be clear here the guidance originally assumed you would have 100% accrual of that incentive comp, but at this point you are running, roughly, 50%. At least that's what you did in the second quarter. Is that correct?

Yes.

Okay. Thanks and good luck for the rest of the year.

Thanks.

The next question comes from Mitch Pinheiro with Imperial Capitol. Please go ahead.

Yes. Hi. Good afternoon.

Good afternoon, Mitch.

Hey, and not to belabor the macroeconomic sort of issues, but are we -- you basically saying -- I mean, is it energy related sort of headwind for you? Is that what we see, or is there more than that? Is there anything else that you can attribute it to?

That's what we're seeing. I am not the federal reserve economist, that that's out to oversee it. I mean that's all I can -- I've been reading a lot about it and that's where I'm seeing it.

Okay. Fair enough. And then when I look at your stores and prepared foods, would you ever -- is prepared foods going to remain sort of at the same sort of level that l you have, or would you ever consider a greater emphasis on that?

I'm glad you asked that question. Right now we are in the process of rolling out a thing called Grab and Go at our stores, and what we'll be is we'll be producing salads, sandwiches, wraps, etc., on a daily basis at our stores, at some of our stores, as an experiment to see how that goes and see if that is a successful implementation.

Are you doing that in number of markets, or is it concentrated in any market right now, the test?

The test is concentrated in some of our Arizona stores.

Okay. And I missed the very beginning of the call. I was wondering did you see any impact on gross margin from produce pricing earlier in the quarter?

No, produce was very consistent in contribution as it normally is.

Okay. All right. That's all for me. Thank you very much.

All right. Thank you.

The next question comes from with Oppenheimer. Please go ahead.

Thanks for taking my question. So I just wanted to dive a little deeper into your gross margin performance. It was better performed this quarter. I just want to understand what the drivers were sequentially.

Well primarily we had a really nice shift in -- into our body care department and that helped margin quite a bit, and then just in general making sure we have a focus at our stores of trying to sell products that have -- we've got them on the focus of selling products that have a little bit better margin, and so I think that has been helping to drive gross margin a little bit.

Okay. Was the project margin increase greater than what you saw last quarter?

Sandra, do you have the answer to that?

We saw increases in product margin that was pretty similar quarter-over-quarter.

Okay. And then switching topics to some of your (inaudible) to some of your new stores. In terms of some of your newer markets like Nevada, how is the performance of the stores performing thus far versus expectations and are there any differences you are seeing?

Our new stores that opened since the beginning of this year have done very well.

And within some of those new markets are you seeing differences in terms of consumer purchasing or behavior?

I wouldn't say we are seeing a lot of difference in how our new stores open. I would say they are performing at a higher productivity than-- at a better product - you know, at a higher productive rate than we have seen in the past.

Okay. Thank you.

Yes.

The next question comes from Bill Kirk with RBC Capital Markets. Please go ahead.

Thank you for taking the question. In the quarter administrative expenses were a little lower than I would have thought. Does that start to ramp up next quarter when the website design and those type of things maybe they come to the line item?

The website design has come to that line item. We are filling some key corporate positions, so over the next couple quarters we could have a little bit of a ramp up in administrative expense because of that.

Okay. Thank you. And then kind of back on Whole Foods, in addition to their kind of new format concept that they announced, they mentioned store refreshes in the Colorado market. Is that something you would characterize as less concerning or more concerning than the new store concept that they also announced?

I think, you know, they refreshed their Boulder store a few years ago and it helped our Boulder store, substantially, when they did that, so I would say that when they do the refreshes it is good for our business also.

Okay. That's very useful. That's all I have. Thank you.

All right. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Kemper -- I can't even read my own writing.

Isely.

Isely. My writing is terrible today. I apologize, Mr. Isely. Any closing remarks today?

Yes. Thanks, everybody, for being on the call. I hope you have a great rest of your afternoon. Goodbye.

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