Natural Grocers by Vitamin Cottage Inc (NGVC) 2019 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Natural Grocers First Quarter Fiscal Year 2019 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. David Colson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage First Quarter Fiscal Year 2019 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 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. I'm excited to report a strong start to fiscal 2019. Our founding principles continue to drive our business forward with our unsurpassed quality standard, always affordable prices, nutritional education, our commitment to our communities and our good4u crew, all of which differentiate us from our competition. We believe our first quarter results show we are telling the story better than we ever have in the past. We continue to build upon the momentum we achieved in fiscal 2018 and are pleased to report our seventh consecutive quarter of positive daily average comparable store sales, with comps up 5.5% and mature store comps up 3.6%. We generated an improved gross margin this quarter, which increased 40 basis points over the prior year. This improvement primarily reflects the more targeted promotion and pricing strategies we implemented throughout fiscal 2018, and we are now beginning to anniversary the increased price investments we made throughout fiscal 2018.

In the first quarter, we continued to expand and refine our marketing efforts. These efforts included continued leverage of our {N}power loyalty program, which is contributing to the traffic and basket gains. {N}power continues to be an effective resource for our enhanced and targeted marketing and promotion efforts. We were also pleased with the holiday selling period, including improved turkey sales ahead of Thanksgiving and a strong performance throughout the Christmas holiday.

Over the last several quarters, our marketing and promotion efforts have been focused on Natural Grocers differentiation from the competition, and we are realizing positive momentum from that message. We are also focused on building brand awareness and have seen continued positive results from our social media and digital advertising campaigns. Last quarter, we described our initial marketing efforts to support the expansion of our Natural Grocers brand product offerings. We continued to see strong sales in category penetration of our Natural Grocers branded introductions in the first quarter and have approximately 50 new products scheduled to launch during fiscal 2019. We plan to continue to drive growth through a balance of new store openings and comp gains that will allow us to focus on improving our existing storage productivity and generate positive cash flow. We will continue to strategically invest in pricing, promotion and marketing to drive brand awareness and 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 first quarter of fiscal 2019, net sales increased by 9.4% to $221.5 million. And as Kemper mentioned, daily average comparable store sales increased by 5.5%. The comp increase was driven by a 2.3% increase in daily average transaction count and a 3.2% increase in average transaction size. We are very pleased that we have been able to continue to maintain our traffic and basket gains, while moderating our gross margin investment on a year-over-year basis. Gross margin increased by approximately 40 basis points to 26.7% during the first quarter. The improvement primarily reflects higher product margin, driven by more focused promotional pricing campaigns, partially offset by the continued negative impact of a sales mix shift as our promotions continue to drive strong comps in grocery.

As you know, we generate a higher gross margin in dietary supplements and body care than we do in grocery. It is worth noting that both dietary supplements and body care continue to deliver comp gains along with grocery.

Additionally, we also generated modest leverage on our occupancy expense. Store expenses, as a percentage of sales, decreased approximately 10 basis points to 22.2% during the first quarter compared to the prior year period. The decrease in store expenses, as a percentage of sales, was primarily driven by expense leverage on comparable store sales growth, including decreases in depreciation, utilities, marketing and labor-related expenses, partially offset by an increase in other store expenses, all as a percentage of sales.

We have been able to leverage our labor-related expenses, while at the same time, responding to the pressures of a tight labor market. Preopening and relocation expenses increased approximately $130,000 year-over-year. We opened 4 new stores and relocated 1 store during the first quarter of fiscal 2019 compared to opening 2 new stores and 1 relocation in the first quarter of fiscal 2018.

The sales leverage on store and administrative expenses, along with the improved gross margin, led to a 70 basis point improvement in operating margin. Our effective tax rate for federal and state income taxes for the first quarter of fiscal 2019 was 21%. We had an income tax benefit of $4.1 million in the first quarter of fiscal 2018. The income tax benefit for the first quarter of 2018 was primarily the result of a $4.3 million noncash remeasurement of the company's deferred income tax assets and liabilities as a result of the federal tax reform in December 2017.

Net income was $2.2 million with diluted earnings per share of $0.10 in the first quarter of fiscal 2019 compared to net income of $5.2 million and diluted earnings per share of $0.23 in the first quarter of last year. The decrease in net income was driven by the impact of the $4.3 million noncash remeasurement of the company's deferred income tax assets and liabilities, as I just mentioned. Excluding this noncash tax impact, net income for the first quarter of fiscal 2018 was $800,000 with diluted earnings per share of $0.04.

EBITDA was $11.3 million in the first quarter of fiscal 2019, up 17.8% compared to $9.6 million in the first quarter of fiscal 2018. During the first quarter of fiscal 2019, we generated cash from operations of $7.5 million and invested $11.6 million in capital expenditures.

Now I would like to turn the call back over to Kemper to discuss unit development and guidance.

Thank you, Todd. During the first quarter, we opened 4 new stores, relocated 1 store and closed 1 store. Thus far, during the second quarter of fiscal 2019, we have opened 1 new store and relocated 1 store. We currently have signed leases for 2 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 review our 2019 outlook, which is unchanged from our initial 2019 outlook we discussed on the fourth quarter call. 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 pleased with our strong start to fiscal 2019. Our founding principles continue to differentiate us and drive our business forward with our unsurpassed quality standards, always affordable prices, nutritional education, our commitment to our communities and our good4u crew. We believe we are communicating the story better than we ever have in the past. We continue to work hard to achieve our objective of driving traffic, while enhancing profitability and delivering value for our shareholders.

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

(Operator Instructions) The first question comes from Renato Basanta with Barclays.

So first question on comps. Just wondering if you could provide the cadence for the quarter and where we are quarter-to-date? And then just any color on how we should be thinking about the impact in 2Q from the later Easter? That would be helpful.

The quarter essentially, every month, was essentially the same. And we're pretty much 5% to 5.5% to 6% in every month. So it was -- there was no real change month-to-month. As far as this quarter goes, January was a month that was a bit -- we're up against a more challenging quarter a little bit -- we're coming in a little bit lower than we did last quarter so far.

Okay, okay. And just any impact from Easter for 2Q?

There will be an impact, which we've baked into our outlook. We'll have benefit next quarter and a little bit of sales this quarter from it.

Okay, okay. And just to follow up on your, maybe, comments about January. Just on the guidance, so you posted a pretty strong first quarter gross margins well into positive territory. Certainly, the compares get a little harder, but I think your prior guidance was based on flattish to potentially slightly lower margins. So I'm just wondering if there's anything out there that you're sort of seeing that's keeping you within the same range for guidance for the year?

Well, I would say that we're probably not going to be at the low end of our comp guidance for the year. We'll certainly -- we think that our high end is a realistic number.

Okay. And then just you were able to leverage labor, which was impressive in this environment. So just given you've had some minimum wage increases and you also rolled out labor scheduling potentially as an offset or benefit, how should we be thinking about that line item going forward? Should we expect continued leverage?

We think that it's going to be pretty flat for the year. We don't think we're going to get any more leverage this year. As you said, there's a lot of wage pressure right now out there. And even with higher productivity in our stores and higher -- it's going to be hard to leverage for the rest of the year because of the wage pressures.

Okay. And then just last one for me on delivery. I know it's a still smallest part of your business, but just any update there? I think you -- in the past, you've talked about the Instacart stores being flattish in terms of sales. So have you seen any improvement there? And then it would be helpful if you could provide more details, just overall on the Instacart partnership? Maybe color on who gets the data of the fee structure? Just any thoughts on that would be much appreciated.

Do you want to take that, Todd?

Sure. So we're at about 136 stores now that are supported by Instacart. And the volumes through Instacart -- it's good partnership, but it's not a significant driver of our sales. And we think it's a nice offering. We do incur some additional expense and fee sharing with Instacart. So we are sensitive to the profitability of that business.

The next question comes from Scott Mushkin with Wolfe Research.

This is Sid Dandekar on for Scott. You mentioned that dietary supplements in body care is about comp gains. Do you foresee price investment shift a bit to these categories to further improve the product mix sale given your strong comp? I mean, the 2-year stack was pretty impressive here.

No. I don't think that we need to invest more in our pricing in dietary supplements. We're very competitive with price compared to traditional retailers on our dietary supplements already.

Okay. And then related to the competitive environment. You mentioned last quarter, your focus is to attract the incremental {N}power member. Is that now becoming more challenging as Whole Foods and Prime now is expanding -- is overlapped with NGVC increasing? So what are you doing to address that, if that's the case?

We haven't noticed that we are having a lot of issues with Prime members not shopping at our stores. We've increased our {N}power membership up to 800,000 members as of January, and we're gaining about 30,000 to 60,000 per month. So we are not having trouble attracting them, but our membership doesn't cost money, so that's kind of a big benefit. We don't have to ship our product, whereas Amazon has to ship product and lose money every time they do ship product. I don't think it's a big benefit to the Whole Foods members either. Hopefully, they are still having trouble with keeping their prices competitive.

Okay. And then last one from me. Just in terms of the deflationary trends here, what are you seeing in the market in terms of that impacting your gross margins? And what's your outlook from here on out for the rest of the year?

Well, as we said in our guidance, we're looking at trying to keep our margins essentially flat for the rest of this year compared to 2018. And I think that we have a good opportunity to do that. As far as deflationary pricing in product categories, there is always a little bit of that because of competition, and commodity prices have been somewhat flat, so there is deflation in some of the commodity prices, which brings down prices on the retail end in the end, but it doesn't affect margin.

And the next question comes from Greg Badishkanian with Citi.

It's actually Garrett on for Greg. Just following up on the inflation. I think previously you talked about being relatively stable over the last couple of quarters at about 1%, but I was just wondering if you saw any deviation of that in the total 1Q?

No, there is really not -- there's not been any abnormal amount of inflation so far. I think that there is some inflation working its way through because of increased freight costs and so on and so forth from our suppliers. But commodity prices have been going down. So that's helping them to keep their prices more on check, also, I think.

Okay. That's helpful. And then just on kind of the price investments. Wanted to talk about the level of price investments this quarter versus the ones you made in fiscal 4Q? And as we get through the year, do you foresee the magnitude of price investments decreasing or increasing from what you did in the first quarter?

I think that our price investments are pretty much stabilized. So I think we'll be -- we've had a little bit of gain in the first quarter compared to 2018 first quarter. And I think we'll be pretty flat through the rest of this year compared to 2018.

Okay. We see no further questions. 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 first quarter results. We look forward to speaking with you on our next call to review our second quarter 2019 results. Have a great day. Thank you.

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