Q2 2021 Natural Grocers By Vitamin Cottage Inc Earnings Call

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Good day, ladies and gentlemen, welcome to the natural grocers second quarter of fiscal year 2021 earnings conference call. At this time all participants are in a listen only mode. Later, we will conduct the question answer session and instructions will be given at that time as a reminder, today's call is being recorded.

I'd now like the turn the conference over to Mr. Jonathan Feeling General counsel for natural grocers. Mr. Dillon you may begin.

Good afternoon, everyone and thank you for joining us for the natural grocers by the vitamin Cottage second quarter of fiscal year 2021 earnings Conference call.

On the call with me today are Kemper Isley 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 company's website and a recording of this call will be available on the website at investors that natural grocers the dotcom.

Now I'll turn the call over to Kemper.

Thank you Jonathan and good afternoon, everyone.

Thank you for joining us today, we had a solid performance in the second quarter executing against our strategic objectives I'm very proud of how our entire organization performed delivering on our promise of the highest quality natural foods at always affordable prices.

As well as responding to the needs of our communities. While we continued to face challenges stemming from the COVID-19 pandemic and related government mandates, our focused approach and commitment to our founding principles.

The key points of differentiation in the marketplace.

Our second quarter results demonstrate the strength of our model and a disciplined operating approach, enabling us to drive solid profitability, despite very difficult revenue comparisons and weather related disruptions.

Daily average comparable store sales on a two year stacked basis increased 10% daily average comparable store sales for the second quarter were down 7% as we lap the 17% increase from the second quarter of last year.

Our second quarter comparable sales were negatively impacted from the severe cold and ice storms during the February by an estimated 70 basis point.

Transaction size continue to track positively rising, 8%, which was offset by a decline of 13, 9% in the transaction count.

Late in the quarter, we saw the transaction count comp turned positive which continued through April.

Earnings per share of 21 cents was in line with our expectations and supports our previously announced full year guidance range.

Our key initiatives remained a focus and continue to drive positive results.

Our end power program continued to strengthen customer engagement and loyalty driving transaction activity by providing a compelling platform for optimizing marketing.

Promotions and enhancing the customer experience.

We ended the second quarter with $1 4 million end power members up 17% versus a year ago end up 5% sequentially.

On.

Our net sales penetration for end power with 70% in the second quarter compared to 69% of year ago.

We saw a positive customer response to our ongoing marketing events and promotions this quarter, including resolution of reset the Valentine's day promotion and our meal deals campaign, we generated additional engagement with our keto reset the first Daniel body care of of the beauty of Bonanza and $500000. Good.

For you give away.

The second quarter was an exciting quarter for natural grocers brand products, we began a category relaunch in the supplement.

By the end of the fiscal third quarter, we expect to have of over 150 newly formulated supplements on.

For the natural grocers brand in our stores.

Couple of months are an important component of our branded portfolio as they reflect our key principles of nutrition quality and value and represents a competitive differentiation.

In addition, we added six new grocery products to our natural grocers brand at assortment, including the introduction of bottled kombucha.

For the quarter the sales penetration rate of our natural grocers brand products was seven 3%.

Supporting our communities and crew our core values at natural grocers during the second quarter of many of our markets in the south Central and Pacific Northwest States experienced severe winter storms, we implemented disaster relief efforts to help many affected communities for example in Texas natural gas.

<unk> offered free filtered water to communities without access to clean water due to the storms and we sponsored a companywide campaign for food banks facing a surge of neat, including raising over $100000 for the feeding Texas nonprofit organization.

We also provided severe weather financial relief in the form of additional pay and bonuses during the store closures for our impact of crew members.

Throughout the pandemic, we have supported our crew with higher wages and incentives our second quarter results included incremental wages of $1 $6 million.

Before I turn the call over to Todd I would like to thank our good for you crew for their unwavering commitment to our mission and communities. We support our crew continues to be the key two of positive store experience.

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

Thank you Kemper and good afternoon, everyone. We overcame a number of headwinds during the second quarter to deliver solid results in line with our expectations, especially as we began to lap the unprecedented sales increases associated with customer pantry loading at the start of the pandemic.

Net sales declined 6.6% to $259 $2 million in the second quarter.

Daily average comparable store sales was down 7% as we cycled of 17% increase in the prior year period, which included a comp of approximately 40% in March of 2020.

During the quarter, we saw continued trends of customers practicing social distancing and the impact of safety guidelines, resulting in a continuation of elevated levels of food at home.

Following recent quarterly trends basket size increased 8%, while transaction count was down 13, 9%.

On a two year stacked basis daily average comparable store sales increased 10%.

Basket size increased 21, 1% while transaction count was down 10, 4%.

Weather related disruptions, specifically, the severe cold and ice storms during February.

Resulted in store closures power outages higher shrink and supply chain disruptions in many of our south central and Pacific Northwest markets adversely impacting the second quarter comp by an estimated 70 basis points.

During the second quarter, we experienced an inflation rate of approximately 3%.

Gross profit margin during the second quarter was 27, 7% versus 28% in the second quarter of last year.

Occupancy deleverage was the primary factor that drove the 30 basis point decline in gross margin, reflecting the impact of lower sales volume.

We saw a slight improvement in product margin.

Store expenses as a percentage of sales increased to 22, 5% in the second quarter compared to 25% in the second quarter of fiscal 2020.

The majority of the increase in store expenses as a percentage of sales was attributable to labor related expenses due to increased labor hours and wage rates.

Coupled with the deleverage from the expected decrease in sales volume.

We did realize leverage on store expenses, when comparing the second quarter to the first quarter of 2021.

Net income of $4 $7 million or 21 cents per diluted share in the second quarter compared to net income of $9 $7 million for 43 cents per diluted share in the prior year period.

Earnings per share was lower as the result of the anticipated decline in sales volume and the deleverage of store expenses.

We estimate the severe weather in February adversely impacted EPS by approximately three to four cents due to lost sales as well as incremental shrink and weather driven store labor costs.

Second quarter EPS was in line with our expectations and supports the fiscal year guidance range.

Adjusted EBITDA was $14 $1 million in the second quarter versus $21 $1 million in the prior year period.

During the first half of fiscal 2021, we generated cash from operations of $17 $3 million and invested $9 $5 million and net capital expenditures.

We opened one new store in Jefferson City, Missouri, and remodeled and expanded one store in Dallas, Texas during the quarter, bringing.

Bringing our total store count to 161 at the end of the second quarter.

Our balance sheet remains strong with $21 million in cash and no outstanding borrowings under our $50 million revolving credit facility.

And of $34 6 million dollar balance on our fully drawn term loan today.

Today, we announced at our board of Directors has declared a quarterly cash dividend of seven cents per common share.

Reflecting our ongoing commitment to returning capital to shareholders.

The dividend will be paid on June 16th 2021 to all stockholders of record at the close of business on June <unk> 2021.

Now turning to our outlook for fiscal 2021.

We are lowering our expectations for new store openings and store relocations Remodels during fiscal 2021.

And our otherwise reiterating our full year guidance range previously established on November 19th 2020.

The adjustment in new store and relocation remodel expectations is driven by delays we are experiencing in the construction process and equipment deliveries.

Our guidance reflects current trends in light of the rapidly evolving COVID-19 environment and related government mandates.

While the company cannot predict the duration or severity of the pandemic and related government mandates. The company expects that these factors will continue to impact our operations and financial performance through the fiscal year.

For fiscal 2021, we expect to opened three to four new stores.

Relocate remodel four to five stores.

Achieve daily average comparable store sales growth of between negative, 2% and 2%.

Achieved diluted earnings per share between 60, and 70 cents and we expect capital expenditures for the fiscal year in the range of $28 million to $35 million.

In closing we are pleased to have delivered another quarter of strong performance.

As we worked through our modeling and developed our guidance six months ago. There was a great deal of uncertainty around the year over year impact of March 2020.

Our results for the second quarter were in line with our expectations and support our fiscal year outlook with the challenges and uncertainty of the second quarter now behind US we look forward to the opportunities ahead in the second half of the year.

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

Thank you.

Well now begin the question and answer session. If you would like to register for the question Chris. The one followed by the for on your Touchtone phone, you'll hear of treat them from two acknowledged you request. If your question has been on chip and you liked with some of your registration press. The one followed by.

The free.

One moment please for the first question.

Our first question comes from the line of Brett Greg that the she came in from Wolfe Research. Please proceed with your question.

Good afternoon. This is transfer Hannah on for Greg.

Can you just talk about at the quarter day comps that you guys are seeing and how that varies by states that are more opened and then as consumers start to cash partial basket shop again, how do you think that will flow through to your results.

Well speaking of comps so far this quarter the.

They are in line with our guidance.

We haven't seen any significant.

Change by the state.

Comps, so whether it's Texas, which is more opened or Colorado, Oregon, which is less opened or new Mexico, which is let's open the comps are trending fairly similar similarly to what we would've expected and from what we had the scene.

The second quarter.

As far as the basket size goes.

So far we have not seen a tremendous decrease in basket size, we have seen.

Somewhat of an uptick in customer accounts, so far since the beginning the end of March through April we've had positive customer account.

Until the office workers come back.

Working at the office I don't think we're going to see that you can pull at the smaller baskets.

Come back to our stores, we did a study of our basket composition of the <unk>.

From the first quarter and what we found was where we've lost baskets where at the small.

Small site, so people coming in for lunch by the San Juan should drink.

Snack.

That's where we lost our customer counts.

True last year, and so and so far this year, we're not seeing a huge uptick in that category.

We're still seeing the larger baskets from our.

Customers, they got used to shopping less frequently and buying larger baskets.

Got it that's helpful. And then I think you mentioned that inflation and QQ was running at around 3%. What is your outlook for inflation for all of <unk> of 'twenty 'twenty. One end and are you seeing any signs of increased cost pressures from CPG trying to trying to pass through some of these these cost increase than you think.

You'll be able to pass all of those through.

Your to your customers.

Yeah, I mean, our products are based on the margin. So whenever one of our suppliers increases the cost of goods, we pass that along at our margin out of add on.

Our margin.

It's very seldom that we don't do that I mean, they're at a few select products, who will keep at it.

At a particular price just because of the price point is particularly good but.

By and large we're able to pass those costs for them I would guess the.

As of right now hopefully we will see the the 3% trend.

For the rest of the year, but the pricing that we're seeing on for.

The equipment at our stores.

We're getting at like 20%, 30% surcharges right now.

I'm guessing that.

Everybody else is seeing those type of the.

The price increases on their capital goods, so they're gonna have to there's probably going to have to be the acceleration and how much they charge for products coming out in the.

On the maybe six months from now or something.

Okay.

That makes sense and then.

And then I think you mentioned that there's a slight improvement in product margin. This quarter can you just talk about what drove that and then how should we think about the gross margin line at the cadence of that through the rest of the year.

Yes, so most of the the deterioration in our gross margin was was driven by.

Occupancy deleverage, we had a slight increase in product margin.

I would say that's mostly.

The increases in product margin across most categories and we only had a few categories that store.

On a slight margin decrease.

So more or less across the board we're seeing increases.

And.

In terms of thinking about.

Our guidance on the remainder of the year, we would expect to see on the high end of our guidance.

Our gross margin.

The increase.

At a consistent with what we've seen year to date.

It's really driven by.

Product margin improvement.

Then some leverage on occupancy.

Given that on the high end we'd have.

Positive comp and then on the low end, we would expect to see gross margin be more or less flat on a year over year basis.

And that's some.

Some improvement in product margin, but because of the sales decline.

The decline on the.

A low end of our guidance, we would probably see some deleverage on occupancy is at.

Inflation increases, we'll see better product margins for the year, because as inflation increases our prices go up.

Faster than our cost of goods go up because the old product.

Of course, the at the older gold price of the new product will be at or at a higher at the higher price for it at a higher margin.

Did that make sense at that.

Yes that totally makes sense and then on on the new store development I understand that you guys are pulling that down a little bit this year, but should we expect you guys to get those new units back next year and maybe see a.

A little bit higher growth.

For us in 2022.

The I would expect that we will have.

More new stores in 2022 of them we've had in 2021.

And we kind of pulled back a little bit on our real estate.

Search is.

In 2020 because of the uncertainty in the markets. So we didn't have as many of the pipeline.

Then when we've run into construction delays end.

Equipment.

Shipments have gone from eight weeks 16 weeks, so its really extended out our construction timeline substantially to get the stores new stores opened.

Got it.

I also think that the.

We will also have a lot of good real estate opportunities coming up in the coming year, just because of the fallout from the pandemic in the retail sector.

Yes.

Makes sense makes sense. Thank you so much.

Mhm.

Thank you for your question on.

I'll now turn the conference back to Mr. Kemper Islip for his concluding remarks, thank you Sir.

Yeah. Thank you very much for joining us to discuss our second quarter results. We remain committed to delivering the same value driven trusted shopping experience for the communities that support us we believe the opportunity is greater than ever to help consumers live healthier lives and we're excited for the opportunities ahead, we look.

Forward to speaking with you on our next call to review our third quarter of 2021 results. Please stay healthy and safe and have a great day Goodbye.

Goodbye.

Thank you and that does conclude the conference call for today, we thank you for your participation and ask.

That you. Please disconnect. Your line. Thank you once again have a go.

Great day, everyone.

Okay.

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