Natural Grocers by Vitamin Cottage Inc (NGVC) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Natural Grocers' fourth-quarter FY16 earnings conference call.

(Operator Instructions)

As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. Todd Dissinger, Vice President and Treasurer for Natural Grocers.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage fourth-quarter and FY16 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 takes 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, Todd. Good afternoon, everyone.

On today's call, I would like to review our fourth quarter and FY16 results, our strategies and initiatives, and provide our initial outlook for FY17.

FY16 was a challenging year for Natural Grocers. During the year, we faced heightened levels of competitive pressure from both our traditional competitors and from the entrance of non-traditional competitors into the natural and organic food segment, as well as regional and macroeconomic factors.

Of course, this growing competition reflects the continued rapid growth of the natural and organic food sector. As more people recognize the benefits of healthier eating habits, more players have moved into a space that we have been serving for more than 60 years. So while we must navigate competition, we are clearly in the right space.

Following quarter two, we revised our guidance downward, in recognition of the changing environment. Subsequent to quarter two, our team reassessed our business practices and focussed on operating initiatives that would allow us to operate successfully within the parameters of our revised guidance. I am pleased to report that we were able to achieve our revised sales expectations for the back half of the year, and successfully execute on our operating initiatives.

I would like to walk you through our FY16 accomplishments, and share my perspective on the opportunities that FY17 presents. However, before we get started, I want to recognize the hard work and accomplishments of our crew, who embraced the challenge and developed and executed on our plan in FY16. As a result of our crew's efforts, I believe the Company is well-positioned to meet the tasks ahead of us in FY17.

First, let me start with sales. We achieved an 11.5% sales increase in the fourth quarter. This increase was driven primarily by new store growth, and a comparable sales increase of 0.3%.

We are pleased that we were able to drive increased transaction size by 1%, although transaction count was down by 0.7%. We made progress with our marketing initiatives, which I will elaborate on in a few minutes. During the fourth quarter, we opened eight new stores and relocated one store, which is a record number of openings in a single quarter.

Our new store opening process worked smoothly, with two of the stores achieving first week sales volume that ranked in the top six of our openings in FY16. In FY16, we opened a total of 23 new stores, relocated four stores, and remodeled one store, resulting in a 22% increase in our store base. Our FY16 new store opening sales are on average comparable to our new store openings over the past several years.

We also track the performance of our store portfolio by vintage, and this analysis confirms in the case of stores that have opened over the past five years, those stores that have not faced the entrants of new competition are on average meeting or exceeding our investment return objectives. We have seen our new stores with new competition experience difficulty in meeting first-year sales targets.

In response, we are implementing a variety of new store opening marketing initiatives including enhanced signage, radio, digital and social media, direct household promotions, and community outreach, and involvement, led by our nutritional health coaches. We also responded to the challenging sales environment by adjusting our new store labor model and inventory set, which will help new stores achieve our return objectives.

Given the continued economic and competitive pressures on sales, we are moderating our new store growth from the 22% we experienced in FY16 to a still healthy but more conservative unit growth rate of between 12% and 16% in FY17. That translates to between 15 and 20 new stores in FY17. We also plan to relocate three stores during the year.

At these levels, we anticipate that our new store growth can be substantially supported by free cash flow, generated from operations. In quarter four, our results continued to reflect impact of regional economic weakness in markets sensitive to lower oil and gas prices. However, we saw some moderation in this pressure, as compared to the quarter three, and are encouraged that the impact is stabilizing.

We also saw our stores with new competition moderate slightly, driven by less internal competition. However, in comparison to quarter four of 2015, the combination of regional economic weakness and new competition negatively impacted our results.

Turning to gross margin, gross margin declined in quarter four and for the fiscal year, with higher occupancy cost offset improvements in product margin. Increasing occupancy costs are consistent with prior years, and reflect a newer store mix, and a higher percentage of our total store base in the larger-format, higher-visibility locations we have moved towards in FY12.

Recognizing continued pressure on sales levels, we moved quickly in quarter three to bring our shrink expense in line with our sales. By September, our monthly shrink expense rate was back in line with the rates we experienced in quarter one. We expect further improvements in shrink rates in 2017, as we remain focused on this initiative, and rolled out an enhanced inventory management training program to all of our stores.

On a related topic, although we continue to hear of the effect product deflation is having in conventional grocers, we have not experienced significant product deflation in the natural and organic products that we carry. We are cognizant, however, of the effect of this deflationary pressure has caused in conventional retail pricing. We are carefully monitoring general retail prices for signs of deflationary pressure, which could result increased relative price premiums for natural and organic.

Store expenses increased in quarter four and for the fiscal year. We are addressing this trend with tighter control over our labor costs. We have adjusted our sales per labor hour goals to now reset our new stores' labor model.

As I mentioned earlier, by September, our monthly sales per labor results were back in line with quarter one rates. In FY17 we have additional opportunity to improve store labor rates, and are targeting to achieve labor rates by quarter four that are consistent with 2015 levels.

Turning to our marketing initiatives, as we discussed last quarter, our goal is to unlock the potential of Natural Grocers' brand, and leverage the strategic advantages which we believe are inherent in our business model, business practices and core values. We are building an agile and scalable marketing strategy, utilizing multiple forms of media.

During the fourth quarter, we executed several programs and events. In July, we saw good success with our Good For You Nutrition Challenge, our first national consumer sweepstakes, designed to drive traffic toward our nutrition education classes in our stores, educate consumers on what makes Natural Grocers different, and increase sales. This resulted in over 10,000 nutrition education attendees over the four-week promotional period, which is more than double the average attendance.

In August, we were very pleased with the results of our 61st anniversary celebration. This was our second annual Company-wide celebration, designed to drive sales and traffic to our stores, reward our loyal customers, and attract new customers. The event resulted in a good comparable sales increase over the successful 2015 anniversary day.

In September, we launched Natural Grocers as America's organic headquarters. This was a month-long promotion, designed to leverage National Organic Harvest Month, and position Natural Grocers as the only major grocery chain with 100% organic produce. The promotion was launched with a free organic apple give away on September 1, and helped lift comparable sales during the month.

We launched a new e-commerce site on October 1, focussed on pre-selling Thanksgiving Day turkeys and gift cards. Additionally, our first major Company-wide search digital and social paid media campaigns also launched in October. Results so far have been positive.

Our marketing plan for 2017 includes continuing to strongly promote our key differentiators, particularly in our industry-leading standards, always affordable pricing, and nutrition education and our Good For You positioning; driving excitement with product news, targeted promotional news, and expanding and refining our Empower loyalty program; continuing to build on the earlier positive results of our e-commerce platform; and accelerating our positive momentum and results in digital, search and social media to reach new customers and Millennials.

In summary, I am pleased with the progress we have made enhancing our marketing efforts and momentum. Now, I will turn the call over to Sandra to highlight our financial results for the fourth quarter of FY16.

Thank you, Kemper. Good afternoon, everyone.

During the fourth quarter, trends remained relatively consistent with the trends we experienced over the previous two quarters. I am pleased to report that we achieved results in line with the updated guidance we provided after the second quarter.

As Kemper mentioned, we have responded to the recent challenges in natural and organic food retailing, and are navigating the current environment. Let me provide some detail on the fourth quarter results.

During the fourth quarter of FY16, net sales increased 11.5% to $181 million, and comparable store sales increased 0.3%. The fourth quarter comparable store sales growth compares to a 0.7% daily average comparable store sales growth during the third quarter. However, on a two-year stacked basis, daily average two-year comps were in line with the third quarter trend, at 6.5%.

The comparable store sales growth during the fourth quarter was driven by a 1% increase in average transaction size, partially offset by a 0.7% decrease in average transaction count. Daily average mature store sales decreased 1.8%, primarily reflecting the increased internal competition and regional economic pressures.

Gross margin declined approximately 70 basis points to 28.1%, primarily due to an approximate 90-basis-point increase in occupancy costs as a percent of sales, which was partially offset by higher product margins. The increase in occupancy cost as a percent of sales was primarily due to higher average lease expense at newer and relocated stores, and also reflects the decrease in mature store sales, and the fixed nature of rent obligations, and related occupancy expenses.

Store expenses increased 17.9% to $41.4 million in the fourth quarter. As a percent of sales, store expenses rose approximately 130 basis points to 22.9% during the fourth quarter, compared to the prior-year comparable period. The increase largely reflects deleveraging of store-level salary expenses, which accounted for the majority of the year-over-year increase as a percent of sales. Additionally, we saw some deleverage in depreciation and other store expenses.

Administrative expenses as a percentage of sales decreased approximately 40 basis points, as a result of our cost focus, reflecting recent sales trends. Pre-opening and relocation expenses increased $0.3 million to $1.6 million during the fourth quarter, compared to the prior comparable period in FY15, due to the number and timing of new-store openings. During the fourth quarter of FY16, we opened eight new stores, compared to opening four new stores in the fourth quarter of FY15.

Net income was $1.5 million, with diluted earnings per share of $0.07 in the fourth quarter of FY16. EBITDA was $10.1 million in the fourth quarter of FY16. We ended the fourth quarter with $4 million in cash and cash equivalents and $16.6 million available on our revolving credit facility.

During the fourth quarter, we repurchased 57,670 shares under our share repurchase authorization, for an aggregate purchase price of $700,000. For the full year FY16, we generated cash from operations of $28.8 million, and invested $53.8 million in capital expenditures. If we had not invested in new store openings, relocations and remodels, which accounted for approximately 90% of our FY16 capital expenditures, free cash flow would have been approximately $23 million for the fiscal year.

Before I turn the call back to Kemper to discuss our outlook for FY17, I would like to reiterate our new store unit economics. As we enter 2017, we plan to continue to grow our store base. But as Kemper mentioned, we will not be replicating the level of new store growth executed during FY16.

Our new store openings that are not experiencing new competition, on average continue to be on pace to achieve or exceed our payback and five-year cash on cash return targets. Our store development plan is based on the following targets: Up front capital improvements of $2.2 million, including capital expenditures of $1.6 million. Initial inventory of $300,000 and approximately $300,000 of pre-opening expenses.

On average, our new stores generate a four-year payback, and achieve a 30% all-in five-year cash-on-cash return. The average new unit achieves profitability in its 13th month, and is cash flow positive in its second year of operation. Based on our guidance of 12% to 16% unit growth in FY17 plus the 22% growth we achieved during FY16, we expect a more moderated impact on margins from new stores opening during 2017.

We also expect to largely fund new unit development with operating cash flow. Now, I will turn the call back to Kemper.

So far during quarter one of FY17, we have opened one additional store in Missouri. We have signed leases for 19 new stores to open in 2017 and 2018.

Now, let me introduce our FY17 outlook. During FY17, we expect to open 15 to 20 new stores, resulting in 12% to 16% unit growth, achieved daily average comparable sales growth of negative 1% to 1%, achieve net income margin of 1.4% to 1.6%, and achieve diluted earnings per share of between $0.50 and $0.58, and deliver EBITDA margin of 6.4 to 6.8%.

I would like to point out that our guidance incorporates improving quarterly comparable store sales growth rates as the year progresses. As our year-over-year comparable store sales growth rate will be more favorable later in the year relative to current trends, we expect capital expenditures for FY17 in the range of $40 million to $48 million. Our new store opening range provides flexibility to adapt to the operating environment throughout the fiscal year.

We anticipate cash on hand, cash generated from operations, and availability under our credit facility will be sufficient to support our capital requirements, and any contemplated share purchases under our two-year $10 million share repurchase program. We remain confident with our core strategies and positioning.

Our founding principles remain the core driver of our industry-leading quality standards, focused on nutrition education, and value positioning. All differentiating us from the competition. Our small format stores provide convenience to our customers, and allow us tremendous flexibility with our real estate strategy, and the range of markets we can enter. We are optimistic about the growth opportunities that lie ahead.

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

(Operator Instructions)

David Magee, SunTrust.

I just had a couple of questions. One, you mentioned that the impact of new competition may have moderated a bit, and I'm curious, if you look out over the next several months, do you have a sense for does it stay the same, or does it improve further from here?

I think for the first half of this year, it will definitely stay very similar.

Okay. And then secondly, with regard to the marketing, you talked about the messaging, the content of it. I'm curious what you think would be the most effective way to put that out there. What vehicle would be most effective for your messaging?

We believe that there are a lot of -- a great variety of modalities that will work well for us. We're experimenting quite a bit with social media right now, because we think that is -- you have to get into the conversation via the social media, to really get your message out there.

We're revising our Health Hotline to a magazine format, that will allow us to also make it a digital Health Hotline, so that we can distribute it to millions of people rather than just a smaller number of people. We also will have billboards, which we think will be very effective, and we will be having an aggressive radio campaign in the first half of next year, in the calendar year next year.

Kemper, what percent of -- or do you anticipate marketing costs to be higher as a percent of sales this year than last year?

No, we have budgeted them at a similar percent of sales as last year.

Thank you. Good luck.

Rupesh Parikh, Oppenheimer.

Thanks for taking my question. First, Kemper, I want to start, is it possible to get the quarter-to-date comp trends, or what you're seeing the start this quarter?

Well, they're trending at the low end of our range that we gave for full-year guidance. We've definitely seen some softness in sales since the election, and we're hoping that moderates here shortly. We normally -- wouldn't disclose that, but because of the softening of sales after the election, we thought we would mention -- we would disclose that today.

And as you look at that softening, is it any specific category, or are you just seeing less traffic?

We just saw less traffic for a period of time. We seemed to have picked it back up this week.

Okay. Great. And then going back to all your commentary on your real estate plans this year, what is the expectation in terms of competitors opening up new locations near the new locations that you plan to open?

I'm trying to -- actually, I think we're opening more in our competitors' back yards than they're opening in our back yards, as of this moment, over the next year. Although, we are opening in some new markets that don't have established competitors in them over the next year, and during last year, and so there is always the potential for those people, for stores to open in those new markets that we go into, that don't have, a Sprouts or a Whole Foods in them. Most of our store openings are going in markets that already have a Sprouts, a Whole Foods, or a Trader Joe's in them. And as I said earlier, we think the new competition will stay about the same as it was in 2016.

Okay. And my last question, maybe for Sandra, on the gross margin and SG&A line, what type of comp do you need to leverage both of those line items?

I think we've historically said it is a number somewhere around 3%, where it was easier, given where we were running expense-wise before. As we have discussed, however, we are focusing on some initiatives that we are seeing positive results in for reducing shrink, and we're also focusing on a new sales to labor hour grid, and both of those should help to bring that number down.

Okay. Thank you. Best of luck with your efforts.

Bill Kirk, RBC Capital Markets.

I think the tier stack has stayed relatively flat the last few quarters, yet you're guiding to a significant two-year deceleration. Can you help us understand why that would be?

Well, last year, our first quarter was fairly -- well it wasn't great, but it was a lot better than the rest of the year. And so, we believe that we'll have our weakest comp quarter this quarter, because of that. And so it's just been the trend, and then we'll be coming -- going into more favorable -- we had less -- smaller comps in the following three quarters last year, and we'll be going in, comping against them in those quarters. But it is still right now, is the way current economic trends are going and the way sales are going, it's difficult to project a higher comp in those upcoming quarters.

Okay. And I think--

Than what we've given you in the guidance.

Sure, and a slightly different question, maybe for Sandra. I think you said operating cash flow would largely fund next year's unit expansion. Does that imply there is some other source of funding needed to meet the unit count goals?

Well, we -- it really depends so much on how many stores we open, and we're going to be managing that as we watch how the year progresses. If we -- it could be $2 million, $3 million that we would need additional but the revolver is available for that. Just depends on timing.

All right.

Our ongoing goal, Bill, is to finance all of our growth via cash flow rather than through borrowings. So we will be very prudent in how many stores we open this year and in upcoming years, so that we can match our cash flow to our cash needs.

Okay. Very helpful. Thank you.

Chris Mandeville, Jefferies.

You mentioned less internal competition, if you will, during the quarter. I know you guys are lapping probably one of your highest volumes stores, having hit one of your own in early June. Can you just provide us with what type of cannibalization you actually experienced in Q4 itself, and what your expectations are for 2017?

Yes.

Well, in Q2, we indicated that cannibalization impacted our comp by about 200 basis points, and in Q3, we saw some moderation off of that number, and we've seen a small moderation off of Q3. We had a strong store in the Denver market anniversary in late Q3, and that's been a help.

Okay. That is helpful. And then just looking at the actual mature store comps themselves, I believe you mentioned it declined 1.8%. I'm just trying to square the Q comments and how internal competition has actually moderated a bit, but then I think Sandra had mentioned that the decline itself was largely driven by internal competition.

Well, we still have some serious internal competition, moderated it mildly, didn't moderate it a lot. We had our Tennyson store open, I think it was in November of last year. And so we won't -- and that store had some -- it really damaged some of our existing stores' sales when it opened. And that won't moderate until after this quarter.

Okay. And you had mentioned that you are, during your price checks, checking on your competition, as it relates to some of the conventional products that they're selling, relative to what type of premium you may be requiring on your organic side. Are there any specific categories or departments to which you're seeing a greater disparity, or a more meaningful change of late versus what you have seen historically?

No, I would say eggs are a prime example. Eggs got pretty expensive in conventional stores about a year ago and it dropped down to under $1 a dozen or even less right now. So that would be one in particular. The chicken, conventional chicken has gotten really cheap, conventional beef has gotten really cheap.

Okay. That's helpful. And the last one for me, I believe on the last call you had mentioned that {N}power has just over 200,000 users, with nearly half of them actually using the program on a weekly basis.

I was hoping just get an update there. And I would -- maybe longer term, when you expect to be able to truly leverage what data you're amassing behind the scenes, to perform some more targeted marketing? Thanks.

Yes. Currently we have 260,000-plus registered members of {N}power. As far as long-term marketing, we're doing a lot of demographic studies in regards to who are the members, and who is spending the most money, so that we can more intelligently target our social media towards those demographics, et cetera. And we should be able to start doing that sometime in the beginning of next year.

We've also gotten a lot better at the way that we're targeting our current members, to get better sales responses from our {N}power members, and we have learned quite a bit in the last year about how to better message to those members, and not have as much of as an expense to our Company through discounts -- through our messaging.

Scott, Wolfe Research.

So I was wondering what percentage of your stores compete with Kroger? Do you have that handy?

I would say 80% of them do. Kroger or one of their --

Right, one of their divisions.

I don't have an exact, but my guess is at least 80% of our stores. In Denver we have King Soopers, in Dallas you have Kroger. In Arizona you have the Fry's and Oregon and Washington, you've got Fred Meyer, and Dillons in the Kansas area, et cetera.

I guess what makes me a little nervous about the numbers that you are reporting and the outlook is that Kroger in some divisions has been getting much more aggressive on -- forget the delta between conventional, getting much more aggressive on organic prices. We have seen that in their Harris Teeter division clearly. How prepared are you guys to see a big competitor like that start getting significantly more competitive on price, and what would you do about it?

Well, we have been competing with the conventional, Safeway got into our space in 1977, and they had a store across the -- back then we only had a couple stores. And they had a store just across the street from us back then, and we competed quite well with them back then. I agree that it's definitely a concern when a big company like Kroger becomes very price-competitive, but Costco and Walmart are as price-competitive as Kroger, and they have been doing it for a long time, also, more competitively than Kroger has.

And so we have to market to our -- what differentiates is, which is we only sell organic produce, we only sell products that do not -- our grocery products don't contain artificial flavors, colors, preservatives, et cetera. And we have our egg standard, which is free range eggs, compared to whatever (expletive) they sell at Kroger.

And our dairy standard is one of pasture-based, and Kroger will sell anything, as long as it sells. So we intend to really push our quality differences versus Kroger over the next six months, so that becomes known to the consumers, particularly in our stronger markets, such as Denver.

So the other question--

I mean, we're not going to be able to compete price for price with them, but we do compete favorably on a lot of our things. For instance, in our bulk department, we out price Kroger by at least 10% to 15% to 20% on almost every item. And so we do have places where we're extremely better-priced than they are, already. And in produce, we're pretty close to their price, except for when they run a ridiculous sale.

Right. So then the second question, Kemper, is if Thrive Market just got a big round of funding, they're pushing the natural organic, mostly dry grocery.

I wonder how much -- I'm curious about how much money they're willing to lose and keep on losing. But, anyway.

No doubt about that, I think you're right on that one. But do you think you feel them at this stage? Do you think that they're having an impact?

Every new competitor has a small impact. So I mean you have to -- you have to be nimble and you have to keep on innovating to survive, and so that's what we intend to do. At some point on time, Thrive, their business model as far as I can see, isn't one that will ever make money, and so they'll go out of business, unless they get bought by somebody else for some ridiculous reason.

Maybe Kroger will buy them and put it together and put it together with their VITACOST.

VITACOST never made any money, either.

My final question is on the store expense side, and labor.

We have to make money. So we can't compete with people that have a business model of not making money.

Yes, it's very difficult. Labor expense is going up. We see signs all over the place. Help wanted in some of your markets, even bonuses being offered. How much are you feeling that strain? And then I'll yield and just wish you good luck and thanks for taking my questions.

Labor costs are going up and several of the states that we do business in passed new minimum wage laws. And we have factored those into our guidance for the year. Fortunately for us, we have always paid above minimum wage already, and so most of those new minimum wage laws won't affect us this coming year. I guess that would be what we have to say about that.

Thanks again. Really appreciate it.

Shane Higgins, Deutsche Bank.

I just wanted to circle back on the competitive environment. Are you seeing, Kemper, any significant price investments or hot promotions from some of your specialty guys? I know there's been a lot of talk about Sprouts and Whole Foods, but just curious if you have seen any of that in your markets during the quarter?

I would say that Sprouts and Whole Foods have invested a lot of price into their conventional product. To a extent, Sprouts invests a little bit in the organic produce market. But, otherwise, I haven't seen any more than normal from them.

All right. Thanks for that color. How about your comp trends in the more energy-dependent states, Texas, Oklahoma, even Colorado, versus the ones that haven't been as impacted by the slow-down in the energy market?

Our comp trends in those states have been negative, and our comp trends in the states that don't have an energy impact have been positive.

Are you seeing that delta narrow at all?

It has narrowed a little bit during the last quarter.

Okay. Thanks. And just a quick one on sales by category. How are the dietary supplements doing for you?

Dietary supplements are doing very well. They almost gained market share last year as a percentage of sales, they were essentially flat for the year, so that was very positive for us.

Okay. Got it. And in terms of new unit growth cadence, how should we think about modeling that for 2017?

Right now, we have five scheduled to open this quarter, four for next quarter, and then we will be dynamic for the next two quarters after that.

Great. And then just one more from me on your inventories. I noticed that inventories per store were down about 6%. You finished the year pretty lean. Can you just talk about how you're thinking about managing inventories into next year, and working capital in general? And then I'll yield.

We believe we have room to decrease our inventories by at least another 5%.

Got it. Thanks so much.

Ryan Gilligan, Barclays.

Just a quick follow-up on the quarter-to-date trends. I know they were bad for the last week after the election, but can you give us a sense for how they trended for the first five weeks of this quarter?

They were not as strong as the previous quarter.

Okay. Is there anything in the -- in your data that could suggest what's driving that softness, other than just the stepped-up competition?

We were pretty surprised by that, because September was -- in the last quarter, September was our strongest month by far, and so we thought we had a lot of momentum going from September into October.

Got it. And on the new labor grid, can you give us a sense for sales per labor hour are now?

Can I just go back to that one?

Yes.

I think there was a lot, I think the divisiveness of the election was really harmful to the mood of the consumer in October, and I think that could have been part of the problem.

Got it. That makes sense. And I guess my next question, just on the new labor grid, can you give us a sense for where sales per labor hour are now and where they can go?

No, we can't really disclose that, but we are aggressively managing our labor costs, much more aggressively than we did last year.

Okay. And I guess last question, on up-front CapEx for the new stores, is there an opportunity to lower that over time?

We are working on a prototype design for new stores that will -- we will, we hope, will substantially lower our per-store costs.

That's helpful. Thanks.

Alvin Concepcion, Citi.

I'm not sure if you covered this, but I'm wondering what you seeing on inflation, and what's your outlook for next year? And more specifically what are you seeing on the produce side?

For inflation we -- the biggest winner so far is for deflation is the nut category. The prices of almonds and walnuts and pecans, et cetera, has fallen almost in half from their peak. That is great for the consumer and great for us, because we now have these products at a better price for our customers, and they will be able to purchase more.

As far as other products, there really hasn't been a lot of inflation in -- there hasn't been either inflation or deflation in our category pretty much, other than that nut category that I was just speaking of.

Got it. Thanks. And on the discussion about your pricing gaps, I understand there is quality differences, but are you maintaining your pricing gap to competitors, and what are those at this point?

Well it is impossible for us to maintain our pricing gap on a $0.99 egg compared on the quality of the egg that we sell. So what we have had to do is educate our customers about why our eggs deserve the better price. And that seems to be pretty successful when we do that.

Got it.

And that seems to be pretty successful when we do that. That category is actually gaining market share, so we're happy with that.

I wonder if you could also talk about your private label opportunity, what that holds for you in the future?

We have partnered with [Damon] to help us roll out private label at our stores, and hopefully by the end of our next fiscal year, we'll have many more SKUs of private label on our shelves.

Okay. Thank you very much.

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

Thank you very much for joining us to discuss our fourth-quarter results. While 2016 was a challenging year, we were able to adapt to the environment and maintain positive comparable store sales growth, despite our highly competitive landscape. We are confident with our growth strategies and positionings as we enter FY17. Thanks for being on the call today, everyone, have a nice afternoon. Bye.

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