Natural Grocers by Vitamin Cottage Inc (NGVC) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers fourth-quarter FY15 earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. I would now like to turn the conference over to 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 full-year and fourth-quarter FY15 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 facts 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 another fiscal year of solid results. Our five founding principles and focus on operational excellence continue to drive our sales growth as we remain focused on our disciplined approach to cost controls. We delivered strong financial results this year and anticipate that we will carry this positive momentum into FY16.

Our 60th anniversary event in August was a huge success, our largest sales day ever. In addition to strong customer turnout, we had great vendor participation. And our employees did an exceptional job organizing and promoting the biggest event in our 60-year history. Based on the positive energy, we look forward to turning this into an annual celebration.

During FY15 net sales increased 20% to $624.7 million and comparable store sales increased 5.9%. Net income increased 20.3% to $16.2 million. And our diluted earnings per share in FY15 was $0.72 compared to $0.60 last year.

We saw encouraging trends in our comparable store sales in the fourth quarter, with comparable store sales increasing 6.2% compared to 5.8% in the third quarter. This marks at least 53 quarters of positive comparable store sales growth.

We continue to focus on our directed sales initiatives, our free science-based nutrition education, outstanding customer service and operational excellence. We believe our dedication to strict quality standards, nutrition education and our commitment to 1% organic produce drives additional traffic at new stores and strengthens customer loyalty at existing stores.

Now, I would like to share an update on our various sales and marketing efforts. First, we completed the rollout of {[N}power, our customer appreciation program in the fourth quarter. We're very pleased with the initial results. So far we've seen strong customer engagement levels that have exceeded our expectations. We are currently conducting market research through a variety of personalized offers, and we will begin to more aggressively market {N}power during our second fiscal quarter.

Second, we are thoughtfully expanding our private-label offerings by providing more high-quality products at a great value, such as our recent rollout of canned seafood and organic pasteur-raised eggs. We are very proud of our six canned seafood products, all wild and sustainably caught -- tuna, sardines and salmon. Our private-label eggs are certified organic, certified humane and from hens provided with a minimum of 108 square feet of outdoor space.

Third, our online delivery offering continues to grow. Since June our online delivery sales through Instacart have more than doubled. We are currently looking to expand our Instacart offering to additional market, and are also looking into other online ordering options such as click and collect.

Fourth, we continue to increase the number of community events and nutritional health cooks cooking demonstrations offered in our demo kitchens. These events and demonstrations have been a great way for us to engage with our communities, increase awareness around our high-quality standards, and help educate our customers.

Fifth, we are pleased with the customer response to extending our store hours in October 2014. As we continue to listen to our customers' feedback, we plan to move forward with adding an extra half hour at the end of the day on Sunday.

And, finally, we continue to be a leader in high-quality standards with our updated pasteur-based dairy standards, non-GMO chicken and turkey offerings, 100% organic produce, and not selling 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.

I will now turn the call over to Sandra to highlight our financial results for FY15.

Thank you, Kemper. Good afternoon, everyone. As Kemper indicated, we had another strong year. Net sales in FY15 increased 20% to $624.7 million. Daily average comparable store sales increased 5.9%, driven by a 3.6% increase in daily average transaction count and a 2.2% increase in average transaction size. Daily average mature store sales increased 2.6% in FY15.

Gross profit in FY15 increased 20.2% to $182.1 million, driven by positive comparable store sales and an increase in the comparable store base. Gross margin improved 10 basis points due to increases in product margin, partially offset by higher occupancy costs.

Store expenses increased 21.6% to $132.1 million in FY15. As a percentage of sales, store expenses increased 30 basis points in FY15 compared to 2014 due to increases in other store expenses and depreciation, partially offset by decreases in salary related expenses. As discussed in our FY15 guidance, store expenses in FY15 compared to FY14 were also impacted by higher incentive compensation and other discretionary benefits expense, reflecting the Company's pay-for-performance philosophy.

Administrative expenses increased 18.2% to $17.5 million in FY15. As a percent of sales administrative expenses remained flat in FY15 compared to FY14. Pre-opening and relocation expenses were $3.8 million in each of FY15 and FY14.

In FY15, we opened 16 new stores compared to 15 new stores in FY14. Net income increased 20.3% to $16.2 million, with diluted earnings per share of $0.72 in FY15 compared to $0.60 in FY14. In FY15 EBITDA increased 20.5% to $50 million or 8% of sales.

Touching briefly on our fourth-quarter results, net sales increased 19.7% and daily average comparable store sales increased 6.2%. Net income was $2.9 million or 1.8% of sales, with diluted earnings per share of $0.13 in the fourth quarter.

We ended the fourth quarter with $2.9 million in cash and cash equivalents and no amounts outstanding on our credit facility. Subsequent to year end, we exercised the $10 million accordion feature under our credit facility, increasing our commitment to $25 million.

Now I will turn the call back to Kemper discuss our new store growth and outlook for FY16.

Thank you, Sandra. We opened a record 16 stores in FY15, bringing our total count to 103 stores in 18 states. During the fourth quarter we opened four new stores and expanded our geographic presence in both new and existing markets. Since the end of the fourth quarter we've opened three new stores, one in Colorado and two in Utah.

Since July we've relocated two of our mature Colorado stores and have seen positive sales impacts. Our new stores are performing in line with expectations and we remain on track with our new store pipeline. In FY16 we plan to open a record 23 new stores and expand our geographic presidents by entering a new state and new markets.

We have a robust new store pipeline to support a 20% annual unit growth, with 17 signed leases for new stores planned to open in FY16 and FY17, in Arizona, Arkansas, Colorado, Iowa, Oregon, Texas, Utah and Washington. We have good visibility on the remaining FY16 store opportunities.

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 have had successful new store openings, whether in small or large markets. We believe the entire US market can support at least 1,100 National Grocers stores, including over 230 additional stores in the 19 states in which we currently operate or have signed leases.

The strength of our results positions us well to continue our investments into future growth. We anticipate our FY16 new stores will require an average upfront capital investment 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 target approximately four years to recoup the initial cash investment, and expect to achieve approximately 30% cash on cash returns by the end of the fifth year.

Our new stores average 12,000 selling square feet. This efficient and flexible small store format allows us to offer affordable prices in the shopper-friendly retail environment.

Moving to our FY16 outlook, we expect to open 23 new stores resulting in a 22.3% unit growth, relocate four stores and remodel two stores, achieve daily average comparable store sales growth of 5% to 7%, deliver EBITDA margin of 7.8% to 8%, achieve net income margin 2.3% to 2.5%, achieve diluted earnings per share of between $0.79 and $0.83, incur capital expenditures of between $54 million to $56 million. And we anticipate cash on hand cash generated from operations and availability under our credit facility will be sufficient to support our capital requirements.

Our FY16 earnings per share guidance implies net income growth of roughly 15% at the high end. This guidance reflects our continued investment in employees and higher occupancy costs as we seek prime real estate locations.

Over the three years following FY16, we expect our EBITDA and net income growth to return to 20%. As we look to FY16, we are excited about increasing our store base while continuing our top- and bottom-line growth. I am confident we have a strong foundation in place to support our disciplined growth.

I'm very excited to announce the recent hiring of three key Vice President positions -- Vice President of Operations, Vice President and Treasurer, and Vice President of Information Systems. Collectively, these Vice Presidents bring over 40 years of retail industry experience and we look forward to their contributions to the growth of our Company. We are very glad to have them on board.

We have several key systems in place to help support our growth in FY14. We implemented our human resource information system, including a learning management system. We already have over 400 training offerings including online learning, documents, and videos.

Approximately 3,000 employees have completed training using our learning management system. These systems have helped create efficiency, streamline processes, and enhance the support and training of our employees.

Additionally, our robust ERP system allows us to manage pricing and provide replenishment recommendations at store level. I want to thank all of our employees who have been an integral part of our growth and success. With the addition of 23 new stores this coming fiscal year we expect to add approximately 460 new employees.

We look forward to welcoming these new employees. 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, providing 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'd like to open the lines up for questions.

(Operator Instructions)

David McGee, SunTrust Robinson Humphrey.

Good afternoon, everybody. Good quarter. A couple of questions. One is, you are now lapping the extended hours from last year. Did I hear that correctly?

That's correct. In October we started lapping.

Is that something that you would see, do you think, in the numbers? Did you see that in the comps?

For this quarter, you mean?

Yes. I am just curious if there is any deceleration just from that. Maybe a broader question around that, it seems like a lot of retailers have seen some weakness overall in October. But your numbers seem to be pretty solid. So, it's a two-part question. Did you have any deceleration because of the comparison? And then, number two, are you see any macro volatility?

This quarter is probably going to come in on lower than what we are predicting for our year-over-year comps. On the low end we are at 5%. We'll probably come in somewhat lower than that on this quarter. Probably some of that has to do with lapping on the hours. Some of it has to do with just a number of other issues that are going on in macroeconomics in our region. Did that answer your question sufficiently?

It does. Thanks, Kemper. I will get back in the queue and let somebody else ask.

Sean Naughton, Piper Jaffray.

Just following up on that a little bit, Kemper, you had talked I think in, maybe it was in your fiscal Q2, about some macroeconomic pressures in some of the areas that you're competing in. Would you say that those have persisted a little bit into Q4 and then here in Q1? Just trying to understand a little bit more on essentially a little bit lower comps.

I think in this current quarter they have persisted. I think in Q4 we did really well. We're at 6.2% comp which beat our yearly average and was our best quarter for the year.

There seems to be just a little slowing down. That average ticket has not gone up as much as we would expect this quarter. It's trailing the past quarters. And our customer counts are almost the same increase, but not quite.

Okay. And then just another question on that -- can you just elaborate maybe a little bit on the inflation in the quarter? Obviously there is a lot of discussion about deflation in food. I know that you haven't seen it as much in your store. I was just curious how that played out in the quarter and then what you're expecting as we move here into FY16.

So far we really haven't seen any deflation in what we are selling. It's been pretty normal inflation rates of around 2% to 2.5% for the entire year. And that was pretty much what it was last year also. We have, fortunately, seen a little bit of softening in the prices on nuts, so those may come down, I would guess maybe starting in January of this year, which is nice.

Okay. Good to hear. Just one last question for me and I apologize, but any updates on the private-label program that you guys have been rolling out a little bit more? I know that you have been doing some stuff in dairy, but just any additional comments there would be great.

We plan on partnering with a company here starting next year, in our second fiscal quarter, to aggressively address rolling out more private-label items.

Okay, great. Best of luck in the first quarter.

Joe Edelstein, Stephens.

Hi, good afternoon, everyone. Maybe just to tag onto Sean's question there, I was curious a little bit more on the private-label side as you look to roll that out. I was hoping you could maybe just take us back and talk to how long it took to get to where you are today with the new offerings, just from the original conception and now getting it out on the shelf. And then are you also adding some staff to go a little faster there? And then I do have a second unrelated question.

They took way too long from inception to getting them out on the shelf, so we decided to change directions in regards to how we would roll out private label. We are going to partner with a company that has expertise in helping grocery stores roll out private label products at their stores. And we should have a much quicker timeframe of rolling out private-label SKUs once we start the partnership.

That's helpful, thank you. And then, Sandra, I was hoping you could just talk to the incentive comp plans and just what's embedded in the new guidance. I think in the past you fully loaded the incentive comp, although it ends up being tied to a variety of different metrics that would then require that full payout but might actually help you get to a higher top-line growth. Am I thinking about that correctly with the new guidance?

The new guidance outlook number includes a slightly lower incentive comp number, but pretty close to where we landed this year. Hopefully we will beat those numbers and reach our sales goals and then we will be paying more.

Okay, thanks, and good luck.

Rupesh Parikh, Oppenheimer.

Thanks for taking my question. Congrats on a nice quarter. I also wanted to follow up on the prior question just on what you're seeing in October. Last year in your Q1 you had a more difficult comparison -- 6%-plus comp. I just want to get a sense, as you look at the two-year stack trend, has that stayed about consistent with what you saw in Q4 or have you seen a deceleration?

Did you say on the two-year stack trend?

Yes, the two-year stack.

In Q4, Rupesh? Is that is what you are asking?

Yes, Q4 and then October.

On Q4 we had a 10% two-year stack number. So, it was back into the double digits which we had not been in for the prior quarter. And then we really aren't giving more guidance or update on where we are in Q1 other than what Kemper said about we think we will come in at the lower end of the -- or even below -- the comp guidance.

Slightly below the lower end of our comp guidance.

Okay, great. And as your outlook at the competitive environment for this upcoming year, how would you characterize the number of openings in your markets versus what you saw maybe in FY15?

We think that it's stabilizing at about the normal where we will have about 25% of our store base affected by competitive openings in the coming year.

Thank you for all the color.

Our next question comes from Bill Kirk, RBC Capital Markets.

Hi. I think you said there would be four relocations next year and then two this quarter. I don't think you have relocated many stores. So, can you walk us through the decision-making process on why those stores and why now?

A lot of our stores right now are coming up on being 15 years or 20 years old. It is at that point in time it's a good time to give them a facelift and bring them up to the format of our current stores. When we do one of these remodels in our mature -- moves to our mature stores, we tend to have a really nice lift in sales from that move. So, we have picked stores that are near the ends of their leases and it's opportunistic for us to move them and enhance their viability in the marketplace.

Is there any change to store size when you do a move? Do you go bigger? Do you go smaller?

They tend to be all larger stores. One of the stores that's slated for move this year is our Boulder store and it's an 8,000 square foot footprint, and it'll be going to almost a 16,000 square foot footprint.

And then another on real estate, I think the new market you referenced for 2016 is Iowa. How big do you see the opportunity there?

In Iowa? There are several. We consider markets cities. But in Iowa we are looking at several cities right now. I think we have about five of them in planning stages for Iowa.

Okay. That's all from me. Thank you.

Mark Wiltamuth, Jefferies.

Hi, good afternoon. Kemper, I wanted to get your thoughts on the gross margin outlook given that Whole Foods is talking about taking down their gross margin and getting a little more aggressive on price. How do your stores react when they are changing pricing?

And, also, just give us an update on what your conventional grocers are doing in your markets right now.

One of our founding principles has always been to have everyday affordable pricing. So, we have always been a price leader in our industry. As people come down in price they get closer to where we have been in pricing -- our competitors come down in pricing, they get closer to where we have been in pricing. As we grow and we get volume, we lower our prices and maintain our margins.

Then, secondly, a lot of where Whole Foods has been cutting prices has been in their conventional produce, and we don't sell conventional produce, so we're not getting into that particular dive to the bottom. Also, Whole Foods listen, if you listened -- I'm sure you did listen to their call -- they said that they weren't planning on becoming the price leader. They weren't going to go to the bottom. They weren't going to become a bottom dweller on price. They think that they have a better offering and they don't have to go to the bottom on price.

We also think that we have a lot of very good differentiating factors about our Company, so on some things we don't have to necessarily have the best price, but we have to have a competitive price. As far as the supermarkets, they have always been very price competitive and they still are. I have not seen them become any more price competitive than they used to be.

Okay, great. And then on the Instacart offering, how many stores are you servicing with that now? And if you have any rollout plans you could share with us.

Currently we are servicing the Portland market, the Denver market, and the Boulder market. Our plan is to add it to other markets as they become available to us. So, probably some down in Texas, hopefully maybe in Kansas. But that would be our plan.

Okay. Thank you very much.

Scott Mushkin, Wolfe Research.

Good afternoon, everyone. This is actually Mike Otway in for Scott. Thanks for taking the question. Just on the comp guidance for the year, I think, Kemper, you mentioned you guys are running a little bit below that. So, as you cycle some of the added store hours and some of the macro softness that you talked about, what gives you confidence in getting back into that range for the full year?

One of the things that's going to help us is the four store moves we're making. They will have a very positive impact on that comparable store sales growth. So, that would be one thing.

The other thing is that as we go through the year we have just modeled, as our newer stores come into comp, they will have some positive impacts on our comp later in the year. And then the stronger rollout of our {N}power in the second quarter we think will be a benefit. The expansion of our private-label offering and our focus on community events and the nutrition health coaches, we think will also have a positive impact.

Okay. I appreciate that. And then quickly, it looked like you guys took down your cash-on-cash return in your store level economics just a smidge to 30% from 35%, but kept the upfront capital about the same. Can you just talk about some of the drivers behind the lower return there -- slightly lower return?

Primarily it's been that we have had to spend more on our leases for the rent.

The lease rate.

The lease rate has been the primary driver of that. As the economy has improved, land has become more expensive and construction costs for new buildings has become higher, so the rental rates have gone up a little bit.

Got it. So, it's on the expense side rather than the sales side.

Correct.

Okay. Thank you very much.

[Ron Rowel], a private investor.

Thank you. Congratulations on the numbers. What's the timeframe on the Boulder store relocation?

It will probably be in our fourth quarter which would be July through September of this year.

It's badly needed.

Yes, it is. You're right about that. You can go ask the -- it's just taking a long time to get through the building department up in Boulder to get it built.

I know that. I live there. Okay, good. Thank you.

Mark Sigal, Canaccord.

Hi, good evening. It's Mark on for Scott Van Winkle. You talked about resuming the 20% growth algorithm in net income and EBITDA in the out years. Can you talk about what gives you confidence about getting back there? Is it more normalized occupancy and incentive comp in the out years? What pieces of the algorithm do you see falling back into historical place?

I am going to let Sandra take that question, Mark.

Mark, part of what we're seeing in our outlook for 2016 is that we are increasing our growth rate over 20%. So, we're going to a 23% growth rate versus last year when we were at closer to an 18%, just slightly over 18%, growth rate. That decision to be bullish on new store openings and continue to drive that number this year in our outlook, we are looking for that to put some pressure on flow through to the bottom line. So, I would say that's a good piece of it.

There's also some amount that says, yes, we are looking to get more training and our people really focused on what our founding principles are and how to move forward. We have our new VP of Ops in place and I think that's also going to help us just really drive there.

And we have the new VP of Information Systems and Treasury. So, we just have a lot of strength this year, but it's our first year of having what we hope will be soon four VP positions. We're looking to also fill the VP of Marketing.

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

Thank you, everyone, for being on the call today. We appreciate it. We look forward to talking to you on our next call. Have a good afternoon. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.