Natural Grocers by Vitamin Cottage Inc (NGVC) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers third quarter fiscal year 2015 earnings conference call. (Operator Instructions)

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. McLeod, you may begin.

Good afternoon, everyone. And thank you for joining us for the Natural Grocers by Vitamin Cottage Third Quarter and year-to-date 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 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.

As we celebrate our 60th anniversary of empowering health, we are pleased to report another quarter of solid results. We continue to surpass previous sales levels which, together with our disciplined approach toward operating expenses, have resulted in record year-to-date net income and earnings-per-share levels. The strength of our results positions us well to continue our investments into future growth.

During the third quarter of fiscal 2015, net sales increased 18.4%, to $158.7 million; and comparable-store sales increased 5.8%. Net income increased 29.2%, to $4.3 million. And our diluted earnings per share in the third quarter of fiscal 2015 were $0.19, compared to $0.15 last year.

Our comparable-store sales increased 5.8% in the third quarter. We continue the focus on our directed sales initiatives, including our free science-based nutrition education programs, outstanding customer service, and operational excellence.

We are excited to announce the rollout of [N]power, our customer appreciation program. [N]power is designed to provide loyalty points for shopping, digital coupons for greater value, and clubs that create focused offers, education and information. We plan to complete the rollout of [N]power at all of our stores by the end of this fiscal year.

We remain focused on new store growth. We opened four new stores during the third quarter, entering North Dakota for the first time and expanding our geographic footprint in Colorado, Kansas and Oklahoma. Our new stores are performing in line with expectations. And we remain on track with our new store pipeline. We plan to open five new stores in the fourth quarter of fiscal 2015, including opening our 100th store next month; and expect to open a record 22 new stores in fiscal 2016.

I will now turn the call over to Sandra to highlight our financial results for the third quarter of fiscal 2015.

Thank you, Kemper. Good afternoon, everyone.

As Kemper indicated, we had another strong quarter. Net sales in the third quarter of fiscal 2015 increased 18.4%, to $158.7 million. Daily average comparable-store sales increased 5.8%, driven by a 3.3% increase in daily average transaction count and a 2.4% increase in average transaction size. Daily average mature-store sales increased 2.3% in the third quarter.

Gross profit during the third quarter of fiscal 2015 increased 19.5%, to $46.1 million, driven by positive comparable-store sales and an increase in the comparable-store base. Gross margin increased 30 basis points due to increases in product margin, partially offset by increases in occupancy cost.

Store expenses increased 18.8%, to $33.5 million in the third quarter. As a percent of sales, store expenses increased 10 basis points in the third quarter compared to the comparable prior-year period, due to increases in other-store expenses and discretionary benefits expense, partially offset by decreases in salary-related expenses.

Administrative expenses increased 20.6%, to $4.3 million in the third quarter. As a percentage of sales, administrative expenses remained flat in the third quarter compared to the comparable prior-year period. Additionally, during the third quarter, we accrued our full 401(k) match and also accrued incentive compensation consistent with our pay-for-performance philosophy.

Preopening and relocation expenses increased $300,000 during the third quarter, compared to the comparable prior-year period, due to the number and timing of new store openings. During the third quarter of fiscal 2015, we opened four new stores, compared to three new stores in the third quarter of fiscal 2014.

Net income increased 29.2%, to $4.3 million, with diluted earnings per share of $0.19 in the third quarter of fiscal 2015; compared to $0.15 in the third quarter of fiscal 2014. In the third quarter of fiscal 2015, EBITDA increased 19.4%, to $12.6 million, or 8% of sales.

Touching briefly on our year-to-date results -- net sales increased 20.1%, and daily average comparable-store sales increased 5.8%. Net income year to date in fiscal 2015 increased 29.4%, to $13.3 million, with diluted earnings per share of $0.59; compared to $0.46 during the comparable prior-year period. We opened 12 new stores year to date in both fiscal 2015 and 2014, resulting in 17.9% and 23.5% trailing 12-month unit growth respectively. We ended the third quarter with $3.2 million in cash and cash equivalents and no amounts outstanding on our credit facility.

I will now turn the call back to Kemper to discuss our new-store growth and updated outlook for the remainder of 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 third quarter, bringing our total count to 99 store in 17 states. As of today, we have signed leases for the remaining five stores we plan to open in 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 year-to-date results and expectations for the remainder of the fiscal year -- we are updating our annual guidance. During fiscal 2015, we expect to open 17 new stores resulting in approximately 20% unit growth, achieve daily average comparable-store sales growth of 5.5% to 6.5%, deliver EBITDA margins of 7.8% to 8%, achieve net income margins of 2.5% to 2.6%, and achieve diluted earnings per share of between $0.69 and $0.72. The 17 new stores expected to open in fiscal 2015 are one less than our previous guidance.

We are also moving one of our expected remodels into fiscal 2016, thereby remodeling one store rather than two stores in fiscal 2015. We are tightening the capital expenditure outlook for fiscal 2015 to $41 million to $42 million.

Additionally, I would like to give some color on our initial outlook for fiscal 2016. In fiscal 2016, we anticipate unit growth of 20%-plus and sales, EBITDA and net income growth of approximately 20%. 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're pleased with the steady growth in our store base. Our 100th store is scheduled to open next month. Also in August, we will celebrate our 60th anniversary at the Company's stores. The celebrations will include many exciting events aimed at showing our appreciation to our customers for their loyalty.

We continue to engage with our communities and increase awareness around our high-quality standards. We continue to 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 principles, 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) David McGee, SunTrust.

This is actually Mitch, in for David.

First, just wanted to touch on competition. And by our account, looking at competitors' pipelines, it appears the overlap from new competition will tick up going forward. Is that consistent with your thinking?

Compared to how it has been over the last couple years, we are expecting it to normalize -- our store base to have competition -- about 25% to 30% of our store base.

Okay.

And then, at what rate have the stores impacted by competition in the year-ago period bounced back? Can I assume they're comping above the company average?

They're bouncing back within parameters that we thought they would. They're not -- they're right around our company average.

Okay.

And then, lastly, was there any impact on the comp from the rain or flooding in Denver and some of your key markets during the latter stages of the quarter?

No.

No? Thank you, guys. I'll turn it over.

Mark Miller, William Blair.

Was hoping you could provide a broader update on the marketing initiatives -- obviously, the loyalty program an important piece of that. But I know you have a number of other tests and initiatives underway as well.

Well, our new store decor has rolled out at our stores since our Wheat Ridge store, so it's in five of our new stores so far, and one remodeled store. Or actually, that's four of our new stores and one remodeled store. And that seems to be getting a very good reception. And the productivity at those stores seems to be having a positive impact on that productivity at those stores.

The [N]power, as we mentioned, is rolling out to all of our stores starting this month. I mean, starting in August, sorry. August 7th, it'll be rolled out to all of our stores. And then we'll start to actively solicit customer enrollment in September.

So far, our test results from the [N]power rollout have been really positive. Up in the Oregon and Washington areas, the average ticket is higher for the [N]power customers than our regular customers. And it seems to be having a positive impact up there, as we've partnered with Instacart to start the home delivery trend at our stores. And the results we've seen from that have been positive. Instacart did a survey of the customers that had received the -- that have received deliveries via Instacart. And 80% of those people were not shoppers at Natural Grocers, which we think is real positive.

And it also improved our -- it improved our -- sorry, I'm blanking on the word -- our likeability by those customers in the markets. So we're real pleased with that.

And then, one of our big pushes right now is our 60th anniversary celebration, which will be August 13th. And we think that'll have a real nice impact on our sales and on our customer appreciation.

I have like five more questions; I don't want to get back in the queue five different times. I'm going to violate the rule and ask a second one --

Go ahead, Mark.

-- if I can.

The gross margin made a nice advance, and you highlighted the improved product margin. How much of that came from mix, and so some color on supplements -- body care would be helpful -- but how much of it is being affected by, I'm thinking possibly, some deflation in some categories which might've helped as well? Thanks.

We really haven't seen deflation. The increase -- I mean, we had a really nice change in our mix. Both supplements were strong in the quarter. They didn't gain market share, but they didn't lost very much market share. But our [Hava] department gained substantial market share. And our general merchandise gained substantial market share. And both of those are really higher-margin departments for us.

So mainly, I would say that the growth in our margin was due to product shift.

Great. Thank you, Kemper.

Scott Van Winkle, Canaccord Genuity.

Congrats on the results.

Thanks, Scott.

Kemper, the guidance -- can we talk about the guidance for Q4? I mean, it looks like the comp range you've given for the year implies you expect kind of Q4 to replicate what Q3 looked like from comps. And Q3 had some margin growth and gross margin -- certainly offset a little higher expense ratio. I recognize the taxes gave you a penny; you're probably not expecting that low tax rate in Q4.

But the high end of your guidance range -- it's really tough to get down to, given what we just saw on the third quarter from margin, from comp, from sales growth. Can you kind of put it in perspective, what we should expect in Q4 relative to Q3? And just to make sure I got it correct -- you fully funded all your incentive comp in Q3. So it's not like it's going to be higher in Q4 as well.

Well, we've funded incentive comp at half of what we would've expected to have funded. I mean, what we'd budgeted for. So it wasn't a full funding. But we expect to be at the higher end of our ranges that we gave you, for sure. And as you said, our comp should come in right about where we've been coming in the last couple quarters. We want to make sure that we are giving realistic conservative forecasts.

Okay. So there's no kind of explicit -- hey, let's be a little cautionary on the gross margin, or something of that nature? You're just trying to set expectations you can achieve?

Correct.

Great.

And then, if I could sneak another one in, and follow the trend here -- everyone's watching, obviously, with what happened with Whole Foods today. And they reported last night competition picking up from the mass-channel traditional supermarkets. I don't expect you to comment on Whole Foods. But more in your business, where do you think we are? Is it just the same it's been for the last year and a half? Has it picked up? A lot of commentary about King Soopers in your market being aggressive in natural and organic. Anything you can kind of expand on us, as we're all looking at this with -- appears to be maybe an accelerating channel shift?

I mean, we feel really positive about how well we're competing with the mass merchandisers right now. I mean, we feel like we have really good differentiated product. And we believe that our differentiated product makes us able to be able to compete very well with them. And we don't necessarily have to compete dime-for-dime on price with them, because of our differentiations in our product offerings. I mean, a year ago, we changed out -- we've talked about this quite a bit -- we changed out our dairy standard, and it changed the look of that department so it doesn't just follow King Soopers' department anymore. It's its own unique department.

And much of our store is the same way. Our produce is only organic. Go into King Soopers, you have to really hunt to find your organic. Although they call it out, but you still have to hunt and find it. You don't at our stores.

So I think that we're doing pretty well, as far as competing with that segment of the market. We don't seem to be having much of an issue there.

And we're aware of them. I'm not going to dismiss them; they are a very good -- they're very good retailers and very good competitors. But like I said, I think we compete well with them.

Great. Thank you very much.

Joe Edelstein, Stephens, Inc.

Just wanted to come back to the sales and comp performance for the quarter. It actually was a little bit lower than what we were looking for. I know that you already commented that the competitive environment -- at least from a store overlap perspective, and comments you just gave relative to some of the other local competitors, and how you're competing against them -- but are there some other factors that might've held you back, at least from what you might've initially expected just from the prior guidance, whether it's lower inflation or just other items?

Well, I mean, the big issue with revenue is really a timing on our opening of new stores. We ended up, because of various construction delays, opening our stores later in every quarter so far this year than we had planned on. And so that's where we've really been hit on revenue is in our new store model.

As far as the comp at our comp stores -- we're pretty happy with where we're at right now at it. I think we might be gaining some momentum. But it's too early in this quarter to tell.

Okay. And also, the shift of that remodel would certainly have impacted the total sales growth expectations, just pushing that into next year as well?

Yes. And [let me just say] we've had just a lot of construction delays this year. It's been some city issues, some -- just a lot of different things. And so unfortunately, it's happened. And we're getting through it, though.

If I could also ask one more question on the product margin -- was hoping you could maybe comment on private-label penetration and how you might be progressing there, and whether or not that positive contributed this quarter.

Private label is the same right at the moment. We are aggressively pursuing new private-level options right now. We haven't really started rolling them out yet. We expect to probably roll some of that out next year.

That's very helpful. Thanks, and good luck.

Thanks.

Mitchell Pinheiro; Imperial Capital.

Curious -- did out-of-stocks in any particular area affect your comps at all?

I don't believe that we had a great number of -- our out-of-stocks are lower this quarter than they were in the first quarter.

Okay.

So I don't think we have much issue with that.

Okay.

And then, looking at the fourth quarter gross margin -- do you see sort of a similar trend relative to the third quarter? Is there any puts or takes or expectations for Q4?

We probably won't have as high of a gain in gross margin in this next quarter as we had in the last quarter, comparatively speaking, to the year-ago quarter. But we're expecting a slight amount of margin improvement.

And so when you have your 60th anniversary event, what does that do? Will that -- where will we see the impact of that event, besides hopefully the sales line?

Well, I mean, hopefully it'll -- when you improve sales, it tends to improve all lines. I mean, sales cure most evils in retail.

(Laughter)

Okay. Well, that's all I had. Thank you.

[All right].

Rupesh Parikh, Oppenheimer.

I had one or two questions just on your 2016 guidance. Would you be able to provide any color on what type of comp assumption you're building in that guidance for next year?

As of yet, no.

Okay. And are there any significant investments planned for next year?

Any significant investments? Did you --

Yes.

You mean, other than in our stores, or --?

Yes, besides stores. I know this year was a big investment area. Just wanted to get a sense of whether there's anything unusual that you expect next year.

Not anything, other than new stores and remodels and relocations of our stores. I mean, we'll give you really good guidance on that coming up here.

Okay.

And then, just one more question on the competitive front -- if you look at your Colorado market -- I know some of the conventional players have been more aggressive with price cuts out there. Have you been able to maintain your pricing gaps over the past few months?

The conventional -- King Soopers in particular, Kroger, has been very aggressive on pricing. And our pricing differential between them is about the same where it was last year. So there hasn't been a lot of change in that.

Great, thank you.

I mean, they are very aggressive.

Thank you.

Yes.

Phillip Terpolilli, Wedbush.

Just two questions -- one, the cadence of the comp in the quarter -- if you could help us at all -- if it was kind of stable or if it accelerated in the back half, that would be helpful.

It was very stable.

Okay. And so you didn't really see any sort of benefit maybe the last four to five weeks here from the Whole Foods negative news headlines around that?

I don't really think we did, no.

Okay. Great.

And then, just one more question to incremental costs for fourth quarter -- I just want to make sure I understood some of the other answers. So you're saying, from an earning perspective, it does look a little bit conservative to us. But there's no sort of major step up that you would call out that we should be aware of, either, on the operating side?

No. Not really.

All right. Thanks, guys.

Thanks.

Bill Kirk, RBC Capital Markets.

So with store count expected in 2016 to be up 21%, I believe, how do you think about managing talent and workforce to keep up with that kind of growth?

Well, I mean, it's 21% on a larger base. So we have essentially -- after this year, we have 17 extra assistant managers. So we have that base to tap into to help us add talent for our -- our goal is always to promote within. And so now we have 100 stores of assistant managers to promote 21 managers to. So it's like 21% of our manager base to move -- assistant manager base to move up to manager base.

And is there an average tenure kind of at assistant manager before they're able to go to their new store as manager?

No, it really depends on the individual. Some assistant managers are ready to go from the moment they come into the store, and some of them -- it takes six months to a year to get ready to go.

Okay. That's all for me.

Okay.

Rachel Cernansky, New Hope Natural Media.

I wanted to ask you about something that you started to mention in the previous answer, about the private-label products. Can you talk a little bit more about -- think I remember earlier this year hearing that you were planning on some private-label dairy. So is that one of the first that you plan to roll out? And what other categories are you looking at private label in?

We have some private-label dairy products in development right now. And we should be rolling them out in the next two quarters. We also have some nice grocery items in development that will be rolling out in the next couple quarters.

Okay.

And then, can you talk about the impact of the Pasteur-based dairy policy? Has that been -- has that boosted sales or impacted the dairy category at all?

Dairy category -- where it had the biggest impact was in our yogurt category. We essentially changed out 75% of our yogurts to different yogurts. And we had a minimal loss in sales, in unit sales. And we've been gaining those back fast, which (inaudible) the supplies have become more steady.

Overall, our dairy department is performing above our company sales growth-wise. I mean, it's up almost 25%. Or actually, for the last 12 months, it's almost up 26% compared to a growth of 19%, almost 20%, of the Company. It's gained some market share in the last 12 months.

Okay. Thank you.

I guess that is all.

There are no further questions at this time.

All right. Thanks, everybody, for being on the call today. Have a great rest of your afternoon. Goodbye.

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