Natural Grocers by Vitamin Cottage Inc (NGVC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Natural Grocers' Fourth Quarter Fiscal Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, today's call is being recorded.

And I would now like to turn the conference over to Mr. David Colson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin your presentation.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage Fourth Quarter and Fiscal Year 2018 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, 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.

Today's press release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I'll turn the call over to Kemper.

Thank you, David, and good afternoon, everyone. It is my pleasure to review with you the results of another solid quarter and a strong finish to fiscal 2018. We have worked very hard over the past 12 to 18 months to address the challenges of the competitive environment. We are pleased to report another quarter of improved sales trends, stabilized gross margin investment, expense control and our sixth consecutive quarter of positive daily average comparable store sales with comps up 6.3% and mature store comps up 3.9%.

For the full year fiscal 2018, we reported 5.8% comp growth, marking over 15 consecutive years of positive daily average comparable store sales growth. As we began fiscal 2018, our pricing and promotional strategies had a favorable impact on our sales trends with improved traffic and basket metrics, however, these promotional efforts negatively impacted margins. As the year progressed, we were able to adjust our promotional strategies to moderate their impact on the year-over-year gross margin comparison, while maintaining the positive sales momentum.

Fundamental to our success this past year was our commitment to our core values. Our promotions emphasized our industry-leading standards and affordable pricing. Our marketing efforts supported the standards and pricing aspect of our promotional offers and continued to message our clear differentiation from the competition.

Now I would like to briefly highlight some of our other accomplishments during fiscal 2018. During fiscal 2018, we significantly expanded our Natural Grocers brand offerings. We introduced 43 new Natural Grocers brand products and have 50-plus products planned to launch in fiscal 2019. Our private brand products have been developed consistent with our core values and are positioned as a premium quality brand at an affordable price.

In September, we initiated a marketing campaign focused on our expanded private brand offerings. Our {N}power customer loyalty program continues to resonate with our customers. We ended the year with 750,000 members, representing year-over-year growth of approximately 90%. During the fourth quarter, {N}power members represented 60% of our sales. We have leveraged the {N}power program as an effective marketing tool and directed many of our promotional activities to the {N}power program, which is helping to drive customer traffic, while moderating our overall price investment. Our marketing team has several significant accomplishments in fiscal 2018. Our monthly store events, such as our anniversary day and Earth Day enjoyed strong customer participation.

Our local store marketing, social and digital media, TV, outdoor advertising and targeted direct mail efforts have all been effective. Additionally, in September, our website was relaunched with an enhanced functionality and a refreshed appearance. Our store operations team made major strides over the past year in leadership development, training and executing operational excellence throughout all of our stores. During fiscal 2018, we saw progress in both our labor and shrink metrics. We opened 8 new stores and relocated 3 stores during fiscal 2018 and are pleased with our new store performance. Our relocations are in average realizing double-digit growth rates in their first year. And as we look forward to the opportunity fiscal 2019 presents, we will continue to execute the formula that delivered the improvements we realized over the past year. We plan to add new stores at a rate that will allow us to remain focused on our existing stores, grow sales and generate positive cash flow.

We will continue to strategically invest in pricing, promotion and marketing to drive awareness in traffic, while focusing on continued profit improvement.

With that, let me turn the call over to Todd to discuss our financial results.

Thank you very much, Kemper, and good afternoon, everyone. During the fourth quarter of fiscal 2018, net sales increased by 9.6% to $217.5 million and, as Kemper mentioned, daily average comparable store sales increased by 6.3%. The comp increase was driven by a 3.8% increase in daily average transaction count and a 2.5% increase in average transaction size. The quarter's comp reflects sequential acceleration from the third quarter's 5.2% comp and the 2-year stacked comp. The comp trends evidenced our ability to continue to drive and retain our traffic and basket gains, while maintaining the more moderated level of investment in gross margin we have seen over the past 2 quarters.

Gross profit margin declined by approximately 50 basis points to 26.3%. Product margin, when compared to the prior year period, was impacted by both sales mix, given the strong comp in grocery, and our promotion and pricing initiatives. Recall that we generate a higher gross margin in supplements and body care than in grocery, and our promotional and pricing efforts have been focused primarily on grocery, which has impacted our sales mix and thus our gross margin. The year-over-year decline in gross margin has continued to stabilize sequentially.

The 50 basis points decline in the fourth quarter is a continuation of the improving trend from the 220 basis point decline we experienced in the first quarter of fiscal 2018. Store expenses as a percentage of sales decreased approximately 60 basis points to 22.1% during the fourth quarter compared to the prior year period. The decrease in store expenses as a percent of sales was primarily driven by leverage on the strong comp sales growth. Note that the fourth quarter store expenses include approximately $600,000 of impairment charges and store closing costs. Preopening and relocation expenses increased approximately $300,000 year-over-year. We opened one new store and relocated one store during the fourth quarter of fiscal 2018 compared to opening no new stores and one relocation in the fourth quarter of fiscal 2017.

The sales leverage on store and administrative expenses more than offset the lower gross margin rate, leading to a 20 basis point improvement in our operating margin during the fourth quarter. Our effective tax rate for federal and state income taxes for the fourth quarter of fiscal 2018 was 8.4%, which compares to 26.6% in the fourth quarter of fiscal 2017. The decrease in the effective tax rate for the 3-month period ended September 30, 2018, is the result of recent federal income tax reform and fiscal year-end adjustments related to the reconciliation of the company's deferred income tax assets and liabilities.

Net income increased 68.7% to $2.1 million, with diluted earnings per share of $0.09 in the fourth quarter of fiscal 2018 compared to $0.06 in the fourth quarter of last year. As I noted, EPS was impacted by approximately $0.02 of nonrecurring impairment and store closing charges, which were offset by an approximate $0.02 benefit from the lower-than-forecasted income tax rate reported during the quarter.

Adjusted EBITDA was $11.3 million in the fourth quarter of fiscal 2018, up 9.8% compared to $10.3 million in the fourth quarter of fiscal 2017. Adjusted EBITDA excludes the impact of $600,000 of impairment charges and store closing costs I mentioned a moment ago. During fiscal 2018, we generated cash from operations of $42.9 million and invested $23.5 million in capital expenditures. In addition to supporting our new store growth, we reduced the outstanding balance on our revolving credit facility by $15 million during fiscal 2018.

Now I will turn the call back to Kemper to discuss unit development and guidance.

Thank you, Todd. During the fourth quarter, we opened one new store and relocated one store. Thus far, during the first quarter of fiscal 2019, we have opened 2 new stores, relocated one store and closed one store. We currently have signed leases for 5 additional new stores to open in fiscal 2019 and beyond. We continue to monitor new store performance and remain comfortable with our targeted store openings.

Now let me introduce our 2019 outlook. During fiscal 2019, we expect to open 7 to 9 new stores, resulting in unit growth of 4.7% to 6.1%; relocate 5 to 6 stores; achieve daily average comparable store sales growth of 2% to 4%; achieve net income margin of 0.75% to 1%; achieve diluted earnings per share of between $0.33 and $0.40; and we expect capital expenditures for fiscal 2019 in the range of $27 million to $32 million. We are very encouraged by our growth and progress in fiscal 2018. By driving traffic and moderating our incremental margin investment, we create value for our customers, while enhancing profitability and shareholder value.

We believe we are the market leader in quality standards, affordable prices and nutritional education. Our stores are tailored to provide our customers with a convenient shopping experience and our crew members are trained to be friendly, highly accessible and well informed about the nutritional value of our products. We will continue to focus our communications on our unrivaled product standards and quality nutrition education and always affordable pricing, with a commitment to our community and good-for-you crew. Now, I would like to open the lines up for questions. Thank you.

(Operator Instructions) And today's first questioner will be Sean Kras with Barclays.

On guidance, can you walk us through some of the factors which get you to the low end versus the high end of the range?

Sure. I think I'll have Todd answer that question.

Sure. Thanks, Sean. I guess, first to level set off of 2018, we look at 2018 as starting the new year with an EPS of $0.37 and that's really the $0.56 less than '19 that we had for the nonrecurring remeasurement of our deferred tax assets and liabilities. So 2018 starts at about midrange of our guidance. On the high end of our guidance, we are anticipating a flat year-over-year gross margin. Of course, that would be at the 4% comp, and flat store operating expenses and administrative expenses as a percent of sales, so no leverage. And there is no leverage attributed to higher labor costs, minimum wage increases, some labor pressures in the Colorado and Denver market. So on the low end at the 2% comp range, we are prepared to support additional price investment, if necessary. And so we have some slight margin deterioration and also some higher labor pressures and store expenses.

That's very helpful. And I have a question on comps. There was, obviously, a nice acceleration this quarter, even with the more difficult comparison. Can you maybe just talk about the cadence throughout the quarter and how the business is trending so far into the first quarter?

Well, comps were pretty much the same every month during -- I think there was a little bit -- September was probably the strongest month, but they were pretty much the same every month. So far in this quarter, we are a little bit down from where we were at the end of last year.

Okay. And then one more for me. Just on the spending trends between {N}power members and nonmembers, it would be great just to get your thoughts on just how those are looking? And also two, if maybe you could discuss some of the things you're doing from a marketing perspective reaching out to these members?

Well, the {N}power members spend significantly more per visit and visit significantly more often than nonmembers. So hopefully that answers your question about that particular question. The way that we've -- we used to market to our {N}power members with 2 e-mail blasts per week, and we've increased that to about 7 -- about 6 times a week that we market to the members every week with various promotions and sometimes just recipes, et cetera. And it seems to be getting a lot of traction as we increase the frequency of our e-mail communications with our members.

And the next questioner today will be Scott Mushkin with Wolfe Research.

So I guess, I just wanted to think about guidance a little bit more. We've just talked about it, so I don't want to overfocus on it, but you'd gotten to 2% to 4% comp, you're kind of very strong, but you said things have slowed down. Can you just kind of give me a thought process on that part of the guide? Is that just being conservative or -- because that leads to fairly flat EPS year-over-year, and so that's kind of obviously a tough investment, if there's no growth. So I'm just trying to say are you guys being overly conservative? Or is there something leading you to believe that comps will come in there and your EPS will be flat?

Well, we think that it's better to be realistic in your comp guidance at the beginning of the year and be somewhat conservative with all the economic -- all the uncertainties that are out in the market right now.

Okay. And then I guess, my second question would be just around competition. What are you seeing going on in the market? I mean, obviously, in the traditional side of things, we've had a couple of companies comment that we're getting a little bit more competitive, that is, we've seen deflation in certain categories that's going right through. What are you guys seeing on that? I mean, I know you operate a little bit differently and your customers are a little different, but are you feeling that the market is -- the competition has ramped up? Is that part of the conservatism?

I don't really feel -- we don't really feel like the competition has gotten any more intense than it's been ever since we have been in the business. The grocery business has always been a war, and we have been fighting it for a long time and have been pretty successful at differentiating ourselves and letting our customers know why we are better and why we are different.

All right. The last one from me. If you guys are going to size the risks to next year, would labor cost be the #1 thing that you look at? Or it'd be gross margin? Or are those 2 about equally weighted when you think about risks?

I would say labor cost would probably be #1 risk for next -- for this coming year. It's the -- the labor market is extremely tight, and so -- particularly here in Colorado, it's inflationary in wages.

(Operator Instructions) And the next questioner today will be Shiyao Ling with RBC Capital Markets.

I'm on for Bill Kirk. It sounds like your promotional strategy is aimed more at existing customers and increasing their frequency. Is there a point when it changes to try to attract new customer? Or is the current style the best way to generate profitable growth?

No, actually most of our dollar spend in marketing is to attract new customers. And we do that in a number of ways. We have increased our out-of-home marketing via billboards, et cetera, about 10 -- from about -- it's about 10x more than what we used to spend. We are spending about $100,000 to $200,000 a month on that right now, and that's been very effective to attract new customers. And then we also have targeted about 75 of our stores that get postcard mailings to prospective customers every month, and that's been a very effective marketing tool also to attract new customers. And as you can see from our comp numbers, most of our growth came from new customers last year, not from increased spend of existing customers.

And my other question is, the comment around the $0.02 impact from relocations. So is that a onetime negative impact on EPS? And so for the quarter, would have been $0.11 ex that impact?

No. To clarify, in Q4, I think, we had 2 unusual items. We had impairment costs and store closing costs that represented about $0.02. And then that was offset by about a $0.02, shall we say, lower-than-forecasted tax rate. So we kind of looked (inaudible) and then the only other -- for the year, the only other difference would have been the $0.19 for the remeasurement of our tax assets and liabilities.

(Operator Instructions) Okay. And there look to be no further questions at this time. So this will conclude our question-and-answer session. I would now 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 and fiscal year 2018 results. We look forward to speaking with you on our next call to review our first quarter 2019 results. Have a great day. Bye.

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.