Q3 2020 Natural Grocers By Vitamin Cottage Inc Earnings Call

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Good day, ladies and gentlemen, welcome to the natural grocers third quarter fiscal year 2020 earnings conference call. At this time, all participants are any 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 Cohen, Vice President and Treasurer for natural Grocers Mr. Kolstad, maybe get.

Good afternoon, everyone and thank you for joining us for the natural grocers by vitamin Cottage third quarter fiscal year 2020, <unk> earnings Conference call.

On the call with me today, our Kemper Isely co President and Todd Dissinger, Chief Financial Officer.

As a reminder, certain information provided during this conference call are forward looking statements based on current expectations and assumptions and 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 and uncertainties 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 companies.

Site and a recording of this call will be available on the web site at investors Dot 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 hope you are all well in staying safe as we continue to navigate these unprecedented times together and we appreciate your continued support.

The entire natural grocers family has worked diligently to support our communities and customers by supplying the highest.

Quality natural and organic products in a safe and convenient shopping environment I.

Im extremely proud of the diligent work of our heroes and masks in neighborhoods.

Our successfully navigating these challenging times as we provided and valuable service to all of our customers.

The loyalty of our customers as a direct reflection of the entire organizations commitment executing at the highest level in terms of safety funniness product availability quality and customer service.

I would like to walk through some of the highlights of the quarter and provide an update on how we are responding in natural grocers to the cobot 19 pandemic related government mandates I will then turn the call over to talk to discuss our financial results in greater detail.

During the third quarter, our strong sales trends continued with daily average comparable sales growth of 15.5% we have seen consistently robust sales trends since late February.

Stay at home orders were implemented and food away from home offerings with limited in response to the onset of Cobot 19 and government mandates.

After the initial pantry loading period, which peaked in mid March our sales levels have continued at an elevated rate remained relatively consistent throughout the third quarter. It is clear that consumers are reducing their frequency of shopping trips well purchasing higher volumes per visit.

Our comp for the third quarter was driven by a 31.5% increase in basket size, partially offset by a 12.2% decrease in transaction count.

Collecting customers social distancing efforts as the quarter progressed average basket growth moderated from a 40.4% increase in April two or 31.6 increase in May followed by 23.3% increase in June well averaged traffic declines improved from negative 17.9% to negative 10 point.

8% negative 7.8% by month for the same three respective months, we have seen these trends continue into July with comps holding relatively stable with the prior three months.

Reflecting the strong comparable store sales, we generated gross margin expansion of 130 basis points. During the quarter. We also more than doubled net income and generated 32% EBITDA growth.

We remain focused on delivering exceptional value to our consumers, which is more important now than ever given the economic challenges facing many of our customers in communities.

Part of our efforts to deliver value include our most recent marketing campaign focused on providing customers the ability to create a meal for family and for using natural grocers products for under $12. We have seen an increase in our inflation rates of about 2% to 3% during the quarter, which is more modest than the industry overall.

Now I'd like to walk through how we continue to support our good for you crew and communities we serve when they need us most in March we permanently increased wages by one dollar per hour for all of our store hourly crew. We also increased our starting wages by one dollar per hour for our store crew and have provided here okay in the form.

Monthly bonuses collectively all of these wage and bonus enhancement represented approximately $3.9 million and 82% of our third quarter net income we remain focused on the safety of are good for you crew and customers and continue to enhance our extensive in store safety, including measures.

We are also committed to helping get back to our community. During this time of great need as part of our in store efforts to commemorate the Fiftyth anniversary of Earth day in April we donated over $50000 and gift cards to local food banks. This donation was an addition to our ongoing daily donations to local food banks.

Finally, I want to again, thank each and every one of our crew continue to help ensure that we are serving the communities that depend on us with the safest most convenient shopping environment with the highest quality natural and organic products at always affordable prices.

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're working hard to provide the safest and most convenient shopping experience for our customers. We've adapted quickly to the dynamic landscape and we are so proud of our crew who continue to work selflessly to support our customers and community.

Yes.

During the third quarter, we saw strength across all product categories with above average comp increases in grocery, including meat dairy frozen foods produce and bulk.

Conversely, we saw comps in supplements and body care normalize compared to the strong second quarter.

We saw further penetration of natural grocers brand products as we continue to expand our offering throughout the year.

We have generally recovered from the initial supply and out of stock challenges, we faced in the second quarter.

We continue to work closely with our supply chain partners as they are still addressing elevated levels of demand.

We anticipate ongoing out of stocks in certain items as our manufacturers prioritize their portfolio of products.

Net sales during the third quarter increased 18.1% to $265.1 million.

Daily average comp store sales increased 15.5% and mature store comp increased 12.5%.

The third quarter comp increase was driven by 31.5% increase in average transaction size, partially offset by a 12.2% decrease in daily average transaction count.

Additionally, we continue to see an increase in online in delivery sales through our partner Instacart.

Gross profit margin during the third quarter was 27.3% compared to 26% in the prior year period.

The increase in gross margin year over year was driven by an improvement in store occupancy expense as a percentage of sales, reflecting our strong daily average comparable store sales growth. In addition, we saw an improved product margin, which included higher margins across most product categories.

Partially offset by an unfavorable shift in sales mix.

The occupancy leverage and product margin improvements were partially offset by the adoption of the new lease accounting standard, which negatively impacted gross margin by approximately 20 to 25 basis points.

Store expenses as a percentage of sales increased to 22.1% during the third quarter compared to 21.6% in the prior year period.

The year over year increase in store expenses as a percentage of sales was primarily driven by increases in labor related expenses, partially offset by lower marketing expense.

The increases in labor related expenses reflect both higher wage rates and bonuses as well as higher cost of store operations attributable to the coven 19 pandemic and government mandates.

Preopening and relocation expenses increased approximately $100000 year over year impacted by the timing of new store openings and store relocations.

During the quarter, we opened two new stores compared with opening no new stores and relocating to stores in the third quarter fiscal 2019.

Net income was $4.7 million with diluted earnings per share of 21 cents in the third quarter compared to net income of $2 million.09 of diluted earnings per share in the third quarter of last year.

EBITDA was $14.6 million in the third quarter up 32.2% compared to $11 million in the third quarter of last year.

During the first nine months of fiscal 2020, we generated cash from operations of $61.5 million.

And invested $25.5 million in net capital expenditures, which resulted in free cash flow of $36 million.

We finished the quarter in a strong liquidity position with $29.9 million in cash and cash equivalents and no debt as of the quarter end, we had $48.7 million available under our $50 million credit facility.

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

Today, we announced that our board of directors has declared a quarterly cash dividend of seven cents per share.

The dividend will be paid on September 15th 2020 to all stockholders of record at the close of business on August 31 2020.

Now I would like to discuss the company's fiscal 2020 outlook, we're updating our fiscal 2020 outlook to reflect current business trends in light of the rapidly evolving coated 19 environment and government mandates.

The company cannot predict the duration or the severity of the pandemic and government measures.

Or how they will impact the economy and our financial results.

Our guidance does not contemplate significant additional changes to the current operating environment.

Specifically during fiscal 2020, we expect to opened seven new stores relocate one store.

Achieved daily average comparable store sales growth of 11% to 13%.

Achieved net income margin of 1.6% to 2%.

Achieved diluted earnings per share between 79 cents and 83 cents and we expect capital expenditures for the fiscal year in the range of $28 million to $31 million.

The third quarter was our first full quarter of the pandemic in our entire organization has been working tirelessly to deliver the highest quality products that always affordable prices.

We continue to lead and providing a safe and convenient shopping environment with exceptional service.

Lastly, we are excited to celebrate our 60 fiveth anniversary with a three day event August 30 through August 15th.

We are taking all the necessary precautions to ensure the safety of our customers and our crew as we celebrate this milestone.

I hope you can join us at one of our locations to help US Mark 65 years of improving lives.

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

Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your Touchtone phone.

You are using his speakerphone. Please pick up your handset this more pressing the Keith.

Joe Your question. Please press Star then to.

At this time, we will talk momentarily to assemble our roster.

So first question today comes from Greg Faddis Canyon.

Research. Please go ahead.

Good afternoon. This is actually Spencer handsets on for great. Congrats on another another nice quarter guys.

Thank you. Thank you.

My first question is just on gross margins can you just talk about the puts and takes to the improvement this quarter and then we've heard from some of your competitors about stepping up promotions in June. Our you did you see any impact from that and are you expecting promotions to pick up or kicked down over the next few quarters.

I would say the promotions have moderated.

Since the beginning of.

Of the.

Government shutdowns.

And.

They didn't really pickup in June.

As far as future promotions go.

We believe that are always affordable pricing strategy.

Doesnt really.

Necessitate, having a lot of product on arm.

Promotional pricing, we have started to promote meal deals out our stores, where you can feed your family of four for under $10 under $12 are under $16 and those seem to be resonating pretty well with customers.

Todd I'll, let you answer the question about margin.

Sure so.

As I mentioned earlier, we did see a shift in mix, but we saw improvements and unfavorable shift in mix and we saw improvements and.

The margin rate in just about all categories.

So.

We were able to offset the.

The larger sales and the grocery categories.

Supplements were.

Down relative to.

The second quarter, which is where we have.

Very strong margin and we're seeing an improvement and supplements in June and into July.

That's helpful.

And then can you just talked about the covered related costs you guys incurred in the order and and what proportion of those are you expecting to return in future periods, and what which portion of those or maybe more variable in nature and should go away.

We're primarily the.

Covert costs were wage wage related so I mean, we paid out essentially.

$3.9 million an additional.

Compensation to our crew during during the quarter.

And as we've said in the past we.

At one dollar permanent.

Dollar increase in.

Our starting wages and also to all of our good for you crew that.

Adds up to about $7.2 million per year and additional wages pay now.

Ongoing.

The other costs are minimal compared to that.

On the other costs I think we probably have some puts and takes in terms of.

Lastly supplies are up but travels down those those types of trade offs and we did have more hours over prior year, yes.

Okay.

Okay. That's that's really helpful as well and then I guess on your guidance. It looks like the midpoint implies NPS is going to be roughly flat next quarter can you talk about what is what is driving that.

Well.

We're certainly anticipating higher levels of sales.

Than.

Our view back in May when we updated our outlook.

At that point in time.

Yes, certainly in Q4, we.

Anticipate higher covet related and government mandate related sales than we did a couple of months ago.

We also expect that we'll probably see.

Margin.

Increases year over year similar to what we experienced in Q3.

And then we're dealing with higher labor costs that Kemper just detail.

Those are the key drivers.

Got it that's really helpful. Thanks, guys best of luck.

Thank you thanks.

This concludes our question and answer session I would like to turn the conference back over to comprise Brian.

Thanks, very much for joining us to discuss our third quarter result, as Todd mentioned, we encourage you to join us at any of our locations to help US celebrated an amazing 65 years of serving our communities.

We are having this event starting on August 13th which would be my mother's 99 birthday.

And a very bright future for us we look forward to speaking with you on our next call to review our fourth quarter 2020 results. Please stay healthy in safe and have a great.

Bye.

Okay.

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