Q2 2020 Earnings Call

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At this time, all participants are not listen only mode.

Later, well conduct the question answer session and instructions will be given at that time.

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

Well now, let's turn the conference over to Mr., David Carlson, Vice President Treasurer for natural Crushers.

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Good afternoon, everyone and thank you for joining us for the natural grocers by vitamin Cottage second quarter fiscal year 2020 earnings conference call.

On the call with me today, our 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 I'm.

Certainties.

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 web site at investors that natural grocers Dotcom now I will turn the call over to Kemper.

Thank you David and good afternoon, everyone. Thank you for taking the time to join US today. We appreciate your ongoing support and we hope that all of you are staying safe and healthy during these unprecedented times I.

I would like to walk you through some highlights the quarter and give you an update on the current impacted the co. Good 19 pandemic on natural grocers.

And how we are responding to support our valued good for you crew and customers and partners I will then turn the call over to talk to discuss our financial results in greater detail.

During the second quarter, we saw significant acceleration of daily average comparable store sales growth as the quarter progressed, peaking in mid March as consumers responded to the growing pandemic for the quarter revenue was up 20.4% in comps increased 17% began to.

See lifting comps in late February.

This trend accelerated further in March as our customers prepared for and responded to the growing health crisis with increased purchases. We saw both a significant increase in average transaction size, which increased 13.1% during the second quarter and an acceleration and transaction count.

Which were up 3.5% during the quarter. This growth included the comp gain of approximately 40% for the month of March.

Over the prior year period, we continued to see elevated comps in April.

Although the trend moderated from the peak mid March levels in April we continued to see materially higher transaction size, partially offset by reduced transactions both relative to the prior year as customers made fewer shopping trips, but made larger purchases when they did shop.

As Todd will discuss the strong comps led to significant expense leverage with gross margin improving 100 basis points as a result of improved occupancy leverage and store expenses declining 130 basis points.

This leverage materialize, despite increased operating expenses and labor costs as we hired temporary staff to support clean and restock. Our stores. We produced net income growth of 151.8% in adjusted EBITDA growth of 57.7%.

Turning to our response to the pandemic first and foremost our focus is on the safety of are good for you crew and customers. We have gone to great lengths to protect the health and safety of each of our crew members, who are heroes and masks in April and our customers within our stores in operations.

We have proactively implemented numerous measures in response to the pandemic to provide a safe shopping and working environment.

We sourced in repackage spoke hand, sanitizer, when none was available produce more than 6000 face masks with the help of our families. Our crew in our communities and mandated that our crew where them.

We established customer capacity limits in our stores adjusted store hours to provide extra time for cleaning and restocking implemented early shopping hours for vulnerable populations leveraged our package bulk offerings. As we are one of the few retailers where consumers can continue to buy both products.

Provided immunity and stress support supplements for our crews expanded leave and medical coverage.

Installed plexiglass shields at Checkouts in established social distancing measures in our stores.

As noted we enacted many of these measures proactively, thereby demonstrating our leadership and commitment to our communities health and safety. We also leveraged our relationship with Instacart to further support our customers, especially vulnerable populations adjusting to the growing demand for online.

Ordering and delivery, our instacart sales ramped up significantly during March.

In addition to safety implementations.

We have gone to great lengths to support our crews financially during this difficult time, we implemented hero pay increasing wages for all hourly crude by $2 an hour through May 30, Onest of this increase one dollar an hour will be permanent as we are one of the few retailers that.

Have made a permanent wage commitment to our crude. Additionally, we paid bonuses. During this period in recognition of our crews hard work, we have committed to investing an additional $7 million in our crew over the period beginning in March through September 32020, our fiscal yearend we are so.

Proud of the natural grocers crew wakeup everyday income to work to help ensure that we can continue to deliver the highest quality natural and organic products to the communities that depend on us.

I want to thank each and every one of our heroes in masks in April for those selfless contributions.

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

Thank you Kemper and good afternoon, everyone.

As Kemper discussed we are operating in a rapidly changing and unprecedented period during the quarter, we witnessed a level of daily average comparable store sales gains that we have not experienced in the company's history, reflecting customers accelerated purchases were pantry loading and the.

The impact of a significant shift in consumer behavior to dining at home.

We saw strength across all product categories in particular household products supplements grocery and bulk.

Additionally, we saw strong penetration growth of our natural grocers branded products, we encountered significant strains to our supply chain and out of stocks late in the quarter.

As our supply chain was challenged to keep up with an unprecedented level of demand.

Today, we are seeing improved in stock levels, although certain items continue to be out of stock.

As Kemper noted we have worked diligently to adapt on a daily basis across our organization focusing on safety and meeting the needs of our customers and crew members.

Now I would like to review our financial results during the second quarter net sales increased 20.4% to $277.5 million.

Daily average comp store sales increased 17% and mature store comp increased 15.4%.

The second quarter comp increase was driven by a 13.1% increase in average transaction size and a 3.5% increase in daily average transaction count.

Prior to the onset of the covert 19 related acceleration of customer purchases comps are running at the high end of our original full year guidance range.

Gross profit margin during the second quarter was 28% compared to 27% in the prior year period and up sequentially compared to 26.3% in the first quarter of 2020.

The increase in gross margin was driven by an improvement in store occupancy and shrink expenses as a percentage of sales, reflecting strong leverage on the 17% comp sales gain as well as a favorable shift in sales mix.

This was partially offset by the adoption of the new lease accounting standard, which negatively impacted gross margin by approximately 20 to 25 basis points.

The adoption of the new lease accounting standard has the effect of increasing occupancy and depreciation expense, which is partially offset by reduced interest expense.

Store expenses as a percentage of sales decreased to 20.5% during the second quarter compared to 21.8% in the prior year period.

The year over year decrease in store expenses as a percentage of sales was primarily driven by expense leverage note that the leverage on the store expenses came despite increases in wages bonuses temporary labor and operating expenses for cleaning and restocking.

Preopening and relocation expenses increased approximately $500000 year over year.

Impacted by the timing of new store openings and store relocations.

During the quarter, we opened two new stores compared to opening one new store and relocating one store in the second quarter fiscal 2019, two additional new store openings were delayed as the result of cobot 19 precautions.

Net income was $9.7 million with diluted earnings per share of 43 cents in the second quarter compared to net income of $3.9 million or 17 cents of diluted earnings per share in the second quarter of last year.

EBITDA was $21.1 million in the second quarter up 57.7% compared to $13.4 million in the second quarter of fiscal 2019.

During the first six months of fiscal 2020, we generated cash from operations of $53.4 million and invested $20.1 million in net capital expenditures.

We finished the quarter in a strong financial position with $29.4 million in cash and cash equivalents and no debt.

As of the quarter end, we had $49 million available under our $50 million credit facility and a strong operating cash flow profile.

Our balance sheet and liquidity put us in a strong position as we move forward and face the challenges and uncertainty of the current macroeconomic environment.

Reflecting our financial position our board of directors has extended the company's 10 million dollar share repurchase program to May 30, Onest 2022.

There is approximately $8.3 million of remaining repurchase capacity under the program.

Additionally, as announced today, we declared a quarterly cash dividend of seven cents per share the dividend will be paid on June 16th 2020 to all stockholders of record at the close of business on June 1st 2020, now I would like to discuss the Companys fiscal 2000.

And in 20 outlook, we're updating our fiscal 2020 outlook to reflect current business trends in light of the rapidly evolving cobot 19 environment.

The company cannot predict the duration or severity of the cobot 19, pandemic or how that will impact the economy and our financial results.

Guidance does not contemplate significant additional changes to the current operating environment. As a result of further covered 19 developments and assumes a moderation of the cobot 19 related elevated sales as the year progresses.

Please note that as we monitor the pandemic and its effects on the macroeconomic environment, we have decided to suspend signing any new store lease commitments in the near term.

Specifically during fiscal 2020, we expect to open six to seven new stores relocate one store achieved daily average comparable store sales growth of 5% to 9% achieved net income margin of 1.1% to 1.5%.

Achieved diluted earnings per share between 54 cents and 62 cents and we expect capital expenditures for the fiscal year in the range of $28 million to $33 million.

The second quarter included unprecedented challenges and we are extremely proud of how our entire crew has responded to meet the needs of our customers and communities.

Our crew courageously comes to work every day and works tirelessly to make sure natural grocers can continue to provide the highest quality products had always affordable prices to the communities we serve.

Our crew members are truly heroes in masks and aprons.

With that I would like to open the lines up for questions. Thank you.

Yes. Thank you we will now begin the question and answer session.

I'll ask your question you May have Star then one on your Touchtone phone.

If you're using a speakerphone please pick up your handset before prosigna he's.

Just to your question. Please press Star then.

At this time, we'll pause momentarily to assemble a roster.

And the first question comes from Rick Best came in with Wolfe.

Good afternoon, and this is actually Spencer Ns on for Greg I think you guys mentioned in your prepared remarks that comps are still elevated in April but can you quantify the comp that youre seeing in April and then has that momentum continued into the first part of bank.

The conference in April we are very similar to what we offer our quarter for the entire second quarter.

And they're pretty much.

Frame in May so far.

Okay Thats really helpful. And then can you just talk about sales trends you're seeing in states that have started to reopen like Texas I think you've got 15% of your stores. There have you seen trends start to decelerate as restaurants Riocan are you still seems pretty strong sales growth.

We're still.

Produced strong sales growth.

There are some.

Some locations that have around a little deceleration, but overall.

Pretty strong works through rate oriented.

Okay. That's that's great color and then margin improvement was pretty impressive this quarter should we expect the same level of margin improvement over the rest of the year or should we expect to some more incremental costs associated with labor and store safety to start to flow end.

I would say that we're not going to get great margin improvement over the rest of the year moderate Vermont.

A lot of our margin improvement because.

Leverage we've got on iron on rent due to the accelerated sales.

Phil.

Can you at the current level that'll help margins.

They are margin is being impacted by.

An increase in Instacart fills because both filled cost us more.

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Not after headwind marker.

Also.

We're investing.

With our wage increases about $600000 per month.

An additional wage expenses through through the rest of the year plus.

Other incremental.