Q4 2019 Earnings Call
Good day, ladies and gentlemen.
Welcome to the natural grocers fourth quarter and fiscal year 2019 earnings conference call.
At this time all participants are in a listen only mode.
Later, we will conduct a question and answer session and instructions will be given at that time.
As a reminder, today's call is being recorded.
I'd now like to turn the conference over to Mr., David Colson, Vice President I'm trying to sure for natural grocers. Mr. Colson, you may begin.
Good afternoon, everyone and thank you for joining us for the natural grocers by vitamin Cottage fourth quarter and fiscal year 2019 earnings conference call on.
On the call with me today, our Kemper Isely co President and taught 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 Companys. 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 web site at investors Dot natural grocers Dot Com now I will turn the call over to Kemper.
Thank you David and good afternoon, everyone. We're excited to report a solid finish to fiscal 2019.
Celebrating over 16 consecutive years of positive daily average comparable sales growth with comps up 1.8% for the fourth quarter and up 3.1% for fiscal 2019.
We continue to expand our store base as well as relocate existing stores to drive market share and it sure new markets.
Our balance of investing in growth and operational excellence is driving both revenue and expense efficiencies.
Which contributed to 6.4% revenue growth and 11.4% operating.
Income growth during fiscal 2019.
During the year, we were able to moderate the pressure on gross margin we saw during the prior year well driving growth in leveraging store expenses.
Today, we announced the initiation of our first quarterly dividend of seven cents per share. This announcement reflects our continued growth profit performance in confidence in our business along with our strong financial position in cash flow.
We are also pleased to announce that amendment and extension of our 50 million dollar credit facility.
During the year, we were proud to watch 47, new natural grocers brand products inline with our projections.
Our private brand products have been developed consistent with our core values and our position does a premium quality brand at an affordable price.
We remain encouraged by the customer response today, and we'll continue to expand our natural grocers brand offerings.
Targeting the watch sort of an additional 70 products in fiscal 2020, Oh, we believed the natural grocers brand has significant long term potential we plan to continue to focus on its growth and expansion.
We are also identifying key new product categories that resonate with our consumers to drive sales.
A recent example was the addition of him drive CBD products across the majority of our stores during fiscal 2019.
Which have been very well received.
We have worked diligently to source high quality products produced by trusted suppliers and GMP certified facilities.
Now I would like to review a few of the marketing accomplishments from 29 team.
Our initiatives have focused on our differentiation in contributed to our comparable store sales gains.
We enjoyed a very successful 64th anniversary promotion in August accounting for the highest sales Dan the company's history.
We were also proud to have participated for the third consecutive year inorganic harvest month as Americas organic headquarters, we raised over $100000 for their organic farmers Association in September .
In August we celebrated our 1 million and power remember, which we promoted through it and power million members sweepstakes, but ended the year, we increased total mpower enrollment, 39% over the end of fiscal 2018.
And power sales now represents 67% of our total sales and penetration continues to expand.
We believe the program is driving loyalty and providing incremental opportunities to market too and connect with our customers through this platform were able to email personalized offers as well as coupons recipes and other promotions.
Further enhancing the customer experience.
As I've noted before and power customers shop, more frequently and generate a higher average basket size in the mid $40 range compared to the total company average basket in the mid 30 dollar range.
Additionally, we continue to invest in brand awareness are paid media impressions in the fourth quarter were at an all time high.
As we mentioned on our last call. We're also investing in technology with system wide software updates to increase network stability enhance integration to other software platforms in more effectively leveraged data. In addition, we are upgrading network circuits to improve network speed and stuff.
Really create additional redundancy to drive operational efficiencies and enhance performance and customer experience.
We will continue to emphasize the in store customer experience to drive sales and build customer loyalty by making our customers still welcome and value through World class customer service. For example, we're investing in Crewing leadership training closely managing our out of stock inventory cure radian and refining our assortment and have.
Rolled out a new look toward produce department, including new racking that it significantly improves presentation.
We are carefully managing our delivery business to ensure we are not jeopardizing our in store customer experience some of our competitors are experiencing.
We will not have our stores overwhelmed by online delivery teams.
I would like to take a moment to comment on natural grocers history regarding environment, social and governance initiatives.
Which we are pleased our finally, becoming an increasing focus of investors from the very origins of the company. We have always been cognizant that the choices, we make today will impact our future and we should positively benefit the health and wellbeing of our communities and natural grocers are choices to make a difference to support.
Human health and healthy environment as well as our financial help.
Our entire supply chain has always been built upon the goals of choosing vendors products and practices that support these principles.
Select products that are conscientiously produced and nurture the health of people and the planet. We all share let me highlight a few examples of natural grocers alignment with U.S.G. principles and values.
Recently, we launched our new produce back program to reduce the number of single use plastic bags in September we added recycle bull and compostable paper bags made from 100% recycled content, we will completely eliminate single use plastic bags and our Protess department over the next three to six months and replace them with.
Based bio bags that are certified non GM, though and compostable, which will be in addition to continuing to offer compostable paperbacks.
We support our communities in numerous ways, our nutritional health coaches provide free science based education, both in our stores in through community outreach, we have donated over $1 million to local food banks since we eliminated single use plastic bags from checkout lanes in 2009.
Began contributing five cents every time, a customer shops with the reuse of pullback.
In 2019, we raised over $18000 on Earth day from our Lady Buck was bag cells donations and as already mentioned, we raised over 100000 for the organic farmers Association this year.
We estimate that our bank free checkout practices saved an estimated 350 million.
Single use plastic bags from ending up in our planet's soils and waterways, we've expanded our offering of 100% humanely and conscientiously raised meats and sustainable seafood, we support organic and regenerative agriculture practices as evidenced in our 100% organic produce one.
<unk> percent non GM mobile products, 100% pasture based dairy and 100% free range eggs and a wide variety of organic products that nurture the health of people in our planet.
All of our supplements are GMP certified with certificates of analysis required for authenticity of ingredients.
We maintain a list of what we won't carry ingredients many of the supplements found on the Internet and the other retailers contain ingredients, we will not carry or have not gone through an extensive review process.
Our suppliers are thoroughly vetted and we carefully select all of our products consider every ingredient the way the food is grown.
Fair trade inorganic practices, our objective is to offer only the best products to our customers.
We are excited to be recognized by consumer reports is one of America's best grocery stores for healthy eating and cleanest grocery stores. During 2019. Finally diversity has always been important to US we are proud to be recognized by 2020 women on boards for having women comprised 29% of our board of directors.
In addition, women currently account for over 50% of our upper level management positions.
We continue to hold to these principles as the foundations of natural grocers, reflecting our commitment to all of our constituents.
That let me turn the call over to talk to discuss our financial results and guidance.
Thank you Kemper and good afternoon, everyone. We're pleased with our performance in fiscal 2019, driving both growth and improved profit performance in a competitive environment.
Our emphasis on balancing our growth investments and a focus on operational excellence contributed to our improved profit and cash flow performance.
The initiation of a quarterly dividend is a reflection of our performance financial position confidence in our future and is consistent with our goal of further improving shareholder value.
During the fourth quarter net sales increased 4.5% to $227 million.
Daily average comp store sales increased 1.8% and mature store comp increased 1.2%.
The comp increase was driven by a 1.8% increase in average transaction size.
And daily average transaction count consistent with the fourth quarter of last year.
Well transaction count was flat year over year, the two year stack growth rate was 3.8%.
We continue to face a competitive environment during the fourth quarter. However, the environment remained relatively stable and our focus has been consistent in that we believe we have a powerful differentiation story to tell.
Additionally, inflation remained low at about 1% and we experienced stable pricing and supply during the fourth quarter.
Gross profit margin during the fourth quarter was 26.0% compared to 26.3% in the prior year.
Gross margin during the fourth quarter, primarily reflected lower product margin attributable to a shift in the sales mix toward lower margin product categories.
We continue to focus our primary it promotional offers on grocery items, which generally carry lower gross margins than supplements and body care.
Promoting grocery items has proven to be an effective method of highlighting natural grocers higher quality standards and affordable prices.
However, we are working on a number of initiatives in fiscal 2020 to drive supplement and body care sales in order to mitigate the pressure on gross margin.
Store expenses as a percentage of sales decreased to 22.0% during the fourth quarter compared to 22.1% in the prior year period.
The decrease in store expenses was primarily driven by decreases in labor related expenses marketing expenses and depreciation all as a percentage of sales.
Throughout 2019, we have been able to address labor and wage pressures, while still realizing 10 basis points of leverage in the fourth quarter and the fiscal year.
At the store level, we have been implementing initiatives to reduce shrink manage our out of stock items and optimize inventory levels. We have also made investments in our core I T systems and infrastructure, which should also contribute to store efficiencies in the years to come.
Preopening and relocation expenses decreased approximately $270000 year over year impacted by the timing of new store openings and store relocations during the quarter. We opened one store and relocated one store consistent with the fourth quarter fiscal 2018.
One additional store, which was originally anticipated to open late in the fourth quarter was opened early in the first quarter 2020. This is our first store in Louisiana.
We expect one additional store opening in the first quarter fiscal 2020.
Net income was $1.4 million with diluted earnings per share of six cents in the fourth quarter compared to net income of $2.1 million or nine cents of diluted earnings per share in the fourth quarter of last year.
Adjusted EBITDA was $10.3 million in the fourth quarter down, 8.4% compared to $11.3 million in the fourth quarter fiscal 2018.
During fiscal 2019, we generated cash from operations of $37.4 million and invested $31.9 million in net capital expenditures.
These capital expenditures included the purchase of the property for three store locations.
As Kemper mentioned, we have announced the declaration of a quarterly cash dividend of seven cents per share.
The dividend will be paid on December 17th 2019 to all stockholders of record at the close of business on December 2nd 2019.
We have also extended our 50 million dollar credit facility, which extends the maturity date five years to November 13th 2024.
In conjunction with extension the credit agreement was amended to provide the company with the flexibility to pay dividends as well as other improved terms.
Now I would like to review our outlook for the upcoming year first please note that our 2020 outlook factors in the impact of the new lease accounting standard which went into effect for us on October Onest, given our September fiscal year end.
The leasing change is expected to have a one to two cents negative impact on our diluted earnings per share as a result of an increase in occupancy expense and depreciation.
Which will be partially offset by lower interest expense.
This shift in the classification of expenses will also negatively impact gross margin by 20 to 25 basis points and result in a 2 million to 2.5 million dollar negative impact to EBITDA.
During fiscal 2020, we expect to open five to six new stores relocate one to two stores.
She's daily average comparable store sales growth of 5.5% to 2.5%.
Achieved net income margin, a 0.9% to 1.1%.
Achieved diluted earnings per share between 37 cents and 45 cents and we expect capital expenditures for the fiscal year in the range of 28 million to 33 million.
Our guidance reflects the lease accounting change I, just noted as well as our expectation that daily average comparable store sales will continue in a range relatively consistent with the fourth quarter 2019 trend.
We anticipate continued moderate pressure on gross margin similar to the level, we encountered during fiscal 2019 attributed to the continued impact of an unfavorable shift in mix.
Well, we have several initiatives to drive supplement and body care sales, we anticipate slightly stronger comp growth in grocery than in supplement and body care.
The gross margin pressure should be partially offset by an expectation for modest store expense leverage dependent upon the level of comps generated.
In closing we are pleased that in 2019, we continue to deliver sales operating income and adjusted EBITDA growth and strong net income growth excluding the non cash benefit of the tax Reform Act in the prior year.
We remain focused on driving performance and communicating our differentiation through leveraging our founding principles, which include offering our customers the highest quality products at affordable prices, while providing science based nutrition education and maintaining our.
Commitment to our communities and are good for you crew.
We are committed to empowering our customers to take charger their health, while enhancing profitability and delivering value to our shareholders.
With that I would like to open the lines up for questions. Thank you.
We will now begin my question answer session to ask a question Press Star then one on your Touchtone phone.
We are using speakerphone, please pick up your handset before pressing Mickey.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Okay.
First question comes from Greg Badishkanian of Citigroup. Please go ahead.
Hi, This is actually Abigail lake on for crack so.
Accelerated 50 basis points sequentially this quarter on it to your stock based tests could you give us some color on what's driving this and then it looks like next quarter, you're expecting a deceleration and comps given the easier compares you're laughing.
After the first quarter could you give us little more color, what you're expecting there.
Well.
Okay.
I would say that in the quarter.
To your basis.
We did better but.
And on a quarterly basis were about the same as.
Third quarters.
I think that will how we're expecting to have a similar.
Comp for this quarter.
And then we go up against easier comp on a two year basis, starting in second quarter next year. So.
Accelerator, our comp growth when we're up against easier.
Comp amount in the second quarter this year.
Okay great.
Then it looks like you're anticipating pretty wide range.
For tiny tiny 30, 745 cents could you help us bridge the gap between the high and low end of that range.
Sure. Thanks for the question.
So on the high end, we're anticipating comps to run similar to Q4 of 2019 or slightly better and then margin.
Year over year pressure decline would be similar to what we experience for the full fiscal year in 2019.
Plus.
We'll have some negative pressure impact from the lease accounting, which would be about 20 to 25 basis points on gross margin.
And then the pressure there is coming from the continuation of the shift.
In mix.
As we continue to promote grocery and see a higher comp in grocery.
And we're anticipating some benefit from supplemented by and body care sales initiatives.
And then store expenses would have.
Leverage comparable to what we realized in 2019.
Then on the low end.
We would anticipate comps similar to Q4 2019 or slightly.
Hello, and gross margin on a year over year change would be.
In line with the change that we experienced in Q4 2019.
And then of course, plus the lease accounting impact.
And the driver there would be the mix and then no favorable impact from supplements and body care initiatives.
And then store expenses would probably be flat to slight de leverage.
That will be driven by.
Wage pressures and the lower sales volume.
Okay, great if I could see again.
One more so what would you expect for the cadence of new units next year.
And then what kind of our attorney targeting for these stores, how should we expect to accelerate turning further.
Well in the first quarter of the year, we will have we will open to new units and then thinking the second quarter were scheduled for two.
Well.
Yes.
Quarter and.
The.
I think it's one of them one and then we have won them one schedule for the near the following two quarters.
And.
As far as.
A question.
Our return.
I would answer that time so.
Historically, our return objective has been to realize a cash on cash return.
In the fifth year of 30% and.
Given the recent the competitive environment over the last.
A couple of years, we're seeing that.
Extend out to the 60 or.
So that's that's our return on return objectives.
Okay, great. Thank you so much.
Our next question comes from Sean Collins of Citi Research. Please go ahead.
Yes. Thank you thanks for taking my question.
Doing well Kemper and Todd.
I wanted to ask a question on the cost side I wanted to ask on your cost of goods.
What.
Product areas and cat inquiries stand out to you that you're seeing.
More inflationary type trends.
And also deflationary like like trends around products and categories. Please.
I would say this year things have been pretty stable as far as inflation goes, particularly on the commodity side I mean last year, we saw quite.
Lowering the price on commodities, but this year pretty flat so far.
For our.
Price pressures, there seems to be some price pressure.
There's always a lot of fluctuations in coatings depending on.
The the growing season right now, there's a lot of price pressure on weather.
Let us kind of gone up one same with the price of broccoli.
Produce reversing some.
Price inflation right now, but it'll probably.
Moderate one.
Growing season switches from Central California down to the desert areas of Arizona in Mexico.
And then.
Our cotton prices.
Finally, they went way up in the center summertime, another back down to more reasonable level.
And then like I said the commodities in the bulk carrier been pretty pretty flat to just a little bit down this year.
And then.
We haven't seen.
Food area, we really haven't seen a whole lot of inflation this year so far.
So other than normal.
3%.
Nice increases.
Okay that that's great. That's that's very helpful color I appreciate it.
Just a second question if I could.
On Monday on your private label business I know that you launched 50 products in 2019, and I think you. You said you are looking to launch about 70 products. In 2020 can you just talking about some I guess when you look back at last year I know, it's only about a year, but can you talk about which products and cat.
As far as you had some success with and then can you talk about 70 products that you're launching in 2020, where you're focused which products and categories you're focused on.
Please.
Yes sure.
And in this past year I would say that our biggest success was probably the launch of our chocolate line and then we also launched.
Coffee coffee line both.
Well received over the last year.
Previous.
The original products, who wants to be.
Yes.
The success so far.
As far as what we're looking at in.
2020.
Going to have a.
Our.
New paper line.
Laundry line.
Hello household products I think we really successful coming up this year and then we have a new bottled water line, that's going to be in aluminum cans, which I think we'll be very successful during the coming here.
And then we have right.
Like Talya pieces that are coming out.
A variety of.
Products that I think.
Drive the success lineup.
A year.
Great. Okay, that's helpful color and context.
One last question.
If I could you talked about the sale of CBD and.
Type products.
I guess cannabis side, that's a fairly.
Growing handrail Boston.
The lot of attention around that.
It's fairly new for us here.
Could you just put a little bit more.
Color in context around that size scope in the nature of the business and I guess some of that.
Successes, you've seen there and also some of the execution challenges that you might have seen there. Please.
Yes, I mean right now it's in a 117 of our scores and so theres some states that are.
Difficult regulatory wise.
Selling it.
So in some of the states that were in but in the stores that in the states that we're in we're having.
Really good.
Sales growth.
I think from the first quarter two.
We introduced it in January .
Okay.
29.
January quarter 2019 into the and I think the sale doubled from that quarter to the fourth quarter.
Of the year.
And one of the things that were really focused on our standards around.
We're we require that we get test.
From each company that we.
Sell to make sure that it really CVD on it that it also does.
Team.
Too much T.H.C.
So that we don't run into other regulatory problems.
Got you understand that that's helpful Thats, great well Kemper today. Thank you very much for the color I appreciate it.
Thank you.
This concludes our question and answer session I would like to turn the conference over to Kemper Isely for any closing remarks.
Thank you very much for joining us to discuss our fourth quarter results. We hope you enjoy the upcoming holiday season, and we look forward to speaking with you on our next call to review our first quarter 2020 results have a great Dave Thanks, everybody bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.