Natural Grocers by Vitamin Cottage Inc (NGVC) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Natural Grocers Fourth Quarter Fiscal Year 2017 Earnings Conference Call. (Operator Instructions)

As a reminder, today's call is being recorded.

At this time, I'd like to turn the conference call over to Mr. Todd Dissinger, Vice President and Treasurer for Natural Grocers. Mr. Dissinger, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage Fourth Quarter and Fiscal Year 2017 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, Todd. Good afternoon, everyone. Fiscal 2017 was a challenging year, but we are pleased to finish on a positive note as we achieved our recent guidance and are encouraged by the continued improvement in comparable store sales trends.

During the fourth quarter, daily average comp store sales increased 2.1%, including continued improvement in mature store comps, reflecting the effectiveness of our marketing and targeted promotional activities. Daily average mature store comps declined slightly at 0.2% during the fourth quarter compared to a 1.8% decrease in the prior-year period. Importantly, comps improved month-over-month as the quarter progressed, and the trends have continued with further improvement thus far in the first quarter. The improved sales trends along with our focus on costs led to a 20 basis-point decline in store expense as a percentage of sales during the quarter. We also saw positive year-over-year growth in EBITDA. For the year, we generated 9% revenue growth on a 0.1% daily average comparable store sales increase and 11% new store unit growth. We are also pleased with our improved operating cash flow in fiscal 2017, which allowed us to meet our objective of self-funding new store growth during the year. In addition, moderating our new store growth targets allowed us to refocus in improving operational efficiencies across our store base. These factors made a positive impact on our financial results during the fourth quarter, and we believe we are well positioned for further improvements into fiscal 2018.

As you are all aware, the natural and organic food landscape has evolved rapidly over the last couple of years. These developments include new format competitors, expanded efforts among traditional food retailers, increased online activity and of course, the recent consolidation of the largest format competitor in this sector. We have and will continue to adapt to the changing competitive landscape. This includes a more moderate level of new store growth, allowing us to focus on operations while controlling costs and improving our operating metrics. However, our strategy, which is based on an unwavering commitment to our core values is unchanged. As we enter fiscal 2018, we will enhance our focus on the core values that differentiate Natural Grocers and have created strong customer relationships. We will continue to raise our product standards, further separating ourselves from our competition and further increasing our customers' confidence in Natural Grocers. We will enhance and communicate our commitment to everyday affordable prices. We will leverage our leadership in nutrition education, both in stores and in our communities. We will further engage our employees, known as the good4u crew, as our commitment to our associates drives customer service and enhances customer relationships. We will continue to support our communities because it is good for the business and the right thing to do, also enhancing our customer relationships. We are not just here to offer products just because they sell. We have a commitment to providing quality nutrition at affordable prices. As other food retailers race to the bottom and dilute the commitment to quality, healthy, natural and organic foods, our differentiation will become even more apparent, and we will continue to communicate this differentiation. As a team, we see the opportunity and we are dedicated to our industry-leading standards and providing consumers an unparalleled food retailing experience. If we remain focused on our customers and differentiated model, I am confident in our long-term success.

Before I turn the call to Sandra, let me update you on the CFO transition we announced earlier this year. We have nothing definitive to report today. However, we are well into the process, having identified candidates and conducted interviews. We anticipate announcing our decision in the coming weeks.

Thank you very much, Kemper, and good afternoon, everyone.

During the fourth quarter of fiscal 2017, net sales increased 9.7% to $198.5 million, and daily average comparable store sales increased 2.1%. The daily average comparable store sales increase during the fourth quarter was driven by a 1.2% increase in daily average transaction count and a 0.9% increase in average transaction size. Daily average mature store sales decreased 0.2% during the quarter. However, as Kemper mentioned, our mature store comp sales are trending in the right direction year-over-year and quarter-over-quarter. The 0.2% mature store daily average comp decline improved from a 0.9% decline during the third quarter and a 1.8% decline a year ago.

Gross profit margin declined approximately 130 basis points to 26.8%, primarily due to an increase in occupancy cost as a percentage of sales and, to a lesser extent, a lower product margin. The increase in occupancy cost as a percentage of sales was primarily due to higher average lease expenses 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.

Product margin declined due to focused promotions targeted at driving additional traffic. Store expenses as a percentage of sales decreased approximately 20 basis points to 22.7% during the fourth quarter compared to the prior-year period. The decrease in store expenses as a percentage of sales was primarily due to lower labor-related expenses, driven by fewer noncomparable stores, other store expenses, utilities and marketing expenses all as a percentage of sales.

Administrative expenses were up modestly year-over-year in total dollars as a result of higher home office administrative costs but remained flat as a percentage of sales.

Preopening and relocation expenses decreased $1.3 million during the fourth quarter compared to the prior comparable period in fiscal 2016 due to the reduced number of new store openings as well as the timing of openings and relocations.

During the fourth quarter of fiscal 2017, we opened no new stores while relocating 1 store compared to opening 8 new stores and relocating 1 store in the fourth quarter of fiscal 2016.

Net income was $1.2 million, with diluted earnings per share of $0.06 in the fourth quarter of fiscal 2017.

EBITDA was $10.3 million in the fourth quarter of fiscal 2017, up 1.5% when compared to $10.1 million in the fourth quarter of fiscal 2016.

We ended the fiscal year with $6.5 million in cash and cash equivalents and $20.6 million available on our revolving credit facility.

During fiscal 2017, we generated cash from operations of $40.8 million and invested $38.5 million in net capital expenditures after reflecting $2.6 million of sale-leaseback proceeds earlier in the fiscal year.

As Kemper mentioned, the strong cash flow in fiscal 2017 allowed us to meet our objective of self-funding our new store and unit growth during the year.

Now, I'll turn the call back over to Kemper to discuss unit development and guidance.

Thank you, Sandra. Thus far, during the first quarter of fiscal 2018, we have relocated 1 store in Colorado and opened 1 new store in Utah. We have signed leases for 11 new stores to open in 2018 and beyond. We continue to monitor new store performance, plan for a continued moderation of new unit growth in 2018 and will remain flexible with new unit development plans going forward in order to adapt to the competitive environment as necessary.

Now, I will provide our 2018 outlook. During fiscal 2018, we expect to open 8 to 10 new stores, resulting in 6% to 7% unit growth, relocate 3 to 4 stores, achieve daily average comparable store sales growth of 0.5% to 2.5%, achieve net income margin of 0.6% to 0.9% and achieve diluted earnings per share of $0.21 to $0.31. Additionally, we expect capital expenditures for fiscal 2018 to be in the range of $25 million to $30 million.

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 repurchases under our 2-year, $10 million share repurchase program.

We are pleased with the improvement of comparable store sales we were able to generate in the fourth quarter and the favorable sales momentum we carry into fiscal 2018. We will remain focused on driving sales performance while monitoring cost with a focus on profitability.

We remain confident in our core strategies and positioning, and continue to pride ourselves in providing support for our local communities by offering quality products at affordable prices with outstanding customer service and free nutrition education.

We value the strong relationships we have built with our customers and vendors. We sell products with a purpose, based on our values and principles, and our commitment to our core beliefs is what sets us apart from the competition.

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

(Operator Instructions) Our first question today comes from Bill Kirk from RBC Capital Markets.

So in the fiscal 2018 guidance, do you expect mature store comparable store sales to turn positive? And would that reverse some of the occupancy cost deleverage that you've seen in recent quarters?

Yes. We expect mature stores to have possible comps this year. And yes, that would help. I mean, you really need to get more than just a minor turn to positive but yes, that would help occupancy costs.

Okay. And a slightly different styled question. The Winter Olympics are already around the corner and I believe you still have a sponsored athlete in Sugar Todd. So how will we see that relationship manifest itself? And will you be holding any events related to the sponsorship?

I'm sure that our marketing guru, Kevin Miller, will have a great plan for utilizing our sponsorship with it for the Winter Olympics.

Our next question comes from Rupesh Parikh from Oppenheimer.

So as we look at your quarter-to-date trends, are you seeing further improvements this quarter or any color you can provide in terms of what you're seeing quarter-to-date?

Yes. We've seen improvement over our last quarter.

Great. And then, obviously, a lot of noise about the Whole Foods and Amazon, the announcement that they've had. Have you guys seen any volatility? Like, when, even now when these announcements come out, do you tend to see volatility in your business?

We've seen very steady increases in our comparable store sales business over the last 4 months.

Okay. So you're not seeing anything unusual?

No.

Okay. And then one more question on -- clearly Whole Foods on their category management efforts there, they seem to be partnering more with the bigger suppliers. So I was just curious, as the smaller suppliers may not be able to sell as much to Whole Foods going forward, are you seeing more interest from smaller suppliers reaching out to Natural Grocers?

We've always had a lot of interest from smaller suppliers in our team because we've always been very receptive towards smaller suppliers. Celestial Seasonings, for instance, pretty much got their start in our stores way back when they started, and they were a small supplier. And there's many other small suppliers that have also pretty much got -- Justin's nut butter pretty much got their start in our stores and they were a small supplier also. And we have a lot of -- yes, we'll continue our good relationships with small suppliers and yes, we are getting more interest.

Our next question comes from Christopher Mandeville from Jefferies.

This is actually Aaron Eisenberg on for Chris. So I guess, first, starting on the guidance. So just in terms of the comps, you guys are guiding to a 0.5% to 2.5% after putting up a solid number in Q4 and the further improvement quarter-to-date. So I just curious if there's some conservatism there or what happened for you to end up at the lower end of that range?

Well I mean, last year during this quarter, we had negative comps. So, of course, we would expect to have better, higher comps this quarter. It's just a lot easier to comp off of a negative comp in the quarter. Then it will be later in the year when we are -- we ended up with a 2% comp in the fourth quarter, so we're just wanting to make sure that we're keeping a realistic outlook for the year.

Okay, understood. And then just thinking longer term for the store growth, so 6% to 7% in 2018. Is that kind of a rate we should be thinking about longer term as well?

We'll probably have a very similar growth pattern through 2019 as we're having this year. So not as a percentage but as a quantity number.

Okay. Sure.

(inaudible) both 8% to 10% will be our probably going forward number.

Understood. And then I guess, shifting gears a little bit one last one for me. Just relates to the egg discounts that you guys are doing now for the {N}power members. What are you guys seeing there in terms of uplift for the basket as well as the trip frequency for these members?

Well, we actually started the egg discounts for all of our shoppers in August. And we had -- it was one of the primary drivers of our increased customer accounts and comp count -- comp increases over the last couple of months. We're seeing our {N}power members are our best customers and they definitely are appreciative of the offer to them. And our offers to our {N}power members definitely drive their visits to our stores and increase in the size of their baskets.

Our next question comes from Shane Higgins from Deutsche Bank.

Just, Kemper, I know you guys have run some TV and advertising campaigns over the past year. Did you guys step that up at all in the fourth quarter? Did that contribute to the sales lift? And can you just kind of speak to how you guys are thinking about your marketing spend in general, TV and advertising campaign in particular, in 2018?

Well, television advertising, we did not do any television advertising in the fourth quarter. We were still getting benefits from the advertising that we did in the third quarter. That television advertising builds your brand presence and you get benefit from it for several quarters afterwards. We do plan on having television advertising in our marketing budget starting in either January or February of this year, and it will run in the second quarter and the third quarter. And in the markets that we did run television advertising, particularly, some of the markets where we ran television advertising, we've seem very, very good comps at the stores that had that television advertising run. As far as the rest of our marketing spend goes, we have pulled all of our marketing spend out of newspapers so we're not planning on doing any marketing spend on newspaper advertising this coming year, which is a significant shift for us. And we are now concentrating mainly on our Health Hotline, targeted postcards and social media and then television advertising in markets that we believe we can afford-- that the reach is good in.

So is the aggregate spend going up very much in '18? I know obviously, you guys are...

Our aggregate spend will be less than in '18 than it was in 2017.

Got it. And then just a follow up on the gross margins. How much of that was attributable -- how much of the decline was attributable to mix? I think last quarter, you guys talked about grocery growing a bit faster than supplements and body care. Did that continue during the fourth quarter?

I think Todd will take that question.

So in the fourth quarter, in terms of mix, actually, all 3 categories that we aggregate to had a positive comp. In terms of their share of the market within the company, we saw grocery grow more in the fourth quarter than the other areas. And for the full year, grocery had some growth compared to the other areas, which were down slightly.

Did that -- was that a significant contributor to the 130 basis point year-over-year decline?

Well, grocery is -- of those 3 categories, grocery is the lower-margin category, so yes. And a lot of our promotional effort was directed at products that are in the grocery category.

Okay. And so -- but I'm just -- in terms of kind of parsing out the elements of gross margin, approximately how much of the 1/3 -- I know you guys don't give exact numbers but just in terms of thinking about occupancy deleverage versus merchandise margins, et cetera, how should we kind of think about that?

Yes. We don't break those two out. Clearly, in the fourth quarter, there was more erosion in the product margin area. For the year, occupancy would have been responsible for most of the decline in our gross margin.

And what level of comp do you guys need approximately to leverage occupancy and other expenses in your P&L?

You really need about 3% comp.

Got it. And then just last one for me is on tax rate and your guidance for the year. What are you guys projecting?

35.6%.

Our next question comes from Ryan Gilligan from Barclays.

Just following up on gross margin. Should we expect this pace of gross margin decline to continue into 2018?

We certainly are going to be investing in price in 2018 and so, that's probably why we have some fairly conservative earnings guidance for the year.

The impact from occupancy will moderate a little. I mean, we'll still see some increase there but it's not going to be as much because of -- in 2017, we still had some of the 23 stores from 2016 that were impacting the occupancy cost.

Got it. And then on EBITDA margin, should we expect them to track in line with net margins, so down 30 basis points to flat? If you'd like [indiscernible] guidance.

Yes, we aren't giving EBITDA guidance because we give that as a percent. And so, the PCOB has really been pushing a lot on providing a reconciliation if you're going to provide guidance. So we'll still provide actual EBITDA numbers, but our EBITDA has been always straightforward to calculate. I mean, you can just take the depreciation off our financials interest and the taxes and you're going to get there. So we're not giving guidance for reasons other than we don't want to walk you through those numbers.

Okay, fair enough. And then lastly, can you just update us on your private label work with Daymon? I think you had some new launches scheduled to come on in the recent weeks?

Well, we haven't launched yet but we expect to launch in the first quarter -- I mean, in the second -- our second quarter, so January to March 2018 quarters, many products.

About how many SKUs?

A minimum of around -- we'll get back to you on that. I can't remember off the top of my head but it's quite a few.

Our next question comes from Scott Mushkin from Wolfe Research.

So the competitive landscape, inflation, any thoughts on that as we're kind of looking out and what you're seeing? I think you kind of made some comments that you guys are pretty aggressive in some of these commodity areas to drive some traffic. What's your thought about where things stand in some of your markets and on the inflation outlook?

I think inflation's pretty tame. As far as margin, I think that there's a lot of competition. In order to drive traffic, you have to be competitive on commodity items to drive customers into your stores.

So do you think it's been getting worse, the same, getting -- easing up a little bit? Or any thoughts on the cadence?

The price competition is getting...

Yes, the price competition in those key areas.

Yes, the price compression is getting more severe.

Getting more severe.

Yes, I mean, Whole Foods being bought by Amazon has brought a whole new dynamic to that.

Indeed it has. I guess, we're just -- were seeing them cut additional pricing. So then my second question...

Well, I mean, that's just a bunch of smoke. But anyway, I mean, they cut a couple of [indiscernible] and they say they've cut prices and then they get $1 billion dollars' worth of publicity, which is a bunch of smoke.

It's nice to have that happen, though.

Nice for them, yes.

Nice for them, yes. Yes, nice for them. So my second question is...

Nice for them but then people shop and they realize that they really didn't get a price cut when they shop, so it kind of irritates them -- but anyway, yes.

Then I guess, that'll be good for you guys. So the rents, right? I think you guys are in you said 3% to comp is really what's needed to rent. So any flexibility, have you guys gone down the road with some of your landlords and say, hey -- because I mean, obviously, that becomes just like this kind of, I don't know, anchor around your guys' neck if you keep having your rents escalate. And it just seems to me that -- well, I'll ask what you have as a question. I mean, is there any flexibility there? Have you gone back to some of your landlords to see if you can maybe do something about that, or is that just impossible?

Well, #1, our rents are flatlined so they don't escalate. The only thing that causes the rent as a percentage of sales to come up is the fact that we have a lot of newer stores with higher rents that have come on. And in particular, our 2016 stores didn't perform -- their out of the box performance wasn't as good as we would have thought -- as our previous experience has been. As far as our negotiations with landlords, I really don't -- won't talk about that in a public forum.

Sure. Then what drives the 3% comp needed to overcome the rents? I mean, so that should come down over time as we age the stores or not?

If we can get some good positive comps, then rent as a percentage of sales over time should come down.

So yes, I think you'll remember that one of the key drivers with occupancy increasing is the percent of our stores that are in the newer format, which is a larger format. So as we open more stores, that's what's causing the deleverage and why we look to the 2.5% to 3% comp to improve that. So as the number of stores that we open slows down, then that gives us a little bit more room compared to a year when we opened 24 stores.

Okay, so your rent grows on each individual stores is not escalating, it's more the buildout that's caused this, correct?

Correct.

And our next question comes from Alvin Concepcion from Citi.

Just a follow-up on that 3% comp leverage point. Do you see opportunities to lower that bar?

I think we do. We certainly have identified some initiatives to create more efficiencies in our operations. In the store expense category and in labor and in shrink, I think we saw a little bit of positive leverage just this fourth quarter, where the store expenses were down 20 basis points over the prior year.

Got it. And you mentioned your comp trends -- sorry go ahead.

I mean to really get significant leverage you really need to get that 3%-plus comp.

Yes. And then, I guess, since we're talking about comps, and you accelerated in the first quarter so far. What do you attribute the pickup to be beyond your sequential prior year -- easier prior year comparisons you called out. I mean, was it oil producing regions showing a pickup, was it maybe a little bit better inflation? Just curious what you attribute to that.

Well, in reality, our basket was impacted by our promotional pricing, so we had to make up a lot of extra revenue because of our promotional pricing during the first part of this -- during the last part of last quarter and the first part of this quarter. The oil region has definitely -- that area has definitely improved and we're cycling on a year from the last election where there was a lot of political uncertainty that made people very hesitant to shop.

Following up on the oil region, the oil region as we track it, actually had a positive comp this quarter versus the last, I think, 6 quarters it's been negative.

And ladies and gentlemen at this time, we'll conclude today's question-and-answer session. I'd like to turn the conference call back over to Kemper Isely for any closing remarks.

Thank you very much for joining us to discuss our fourth quarter results. We remain confident in Natural Grocers' 62-year history of successfully adapting to an ever-evolving natural products landscape. We look forward to speaking to you on our next call. Have a nice day. Bye.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for attending. You may now disconnect your lines.