Q3 2021 Natural Grocers By Vitamin Cottage Inc Earnings Call

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Excuse me. This is the conference operator, thank you for holding the call. It will begin shortly for natural grocers again. Please continue to hold the call will begin shortly thank you.

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Good day, ladies and gentlemen, and welcome to the natural grocers third quarter fiscal year 2021 earnings conference call at.

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 if you require operator assistance. Please press Star then zero.

I'd now like to turn the conference over to MS. Jessica Teson at.

Assistant Treasurer for natural Grocers Mathijsen you may begin.

Good afternoon, and thank you for joining us for the natural grocers by vitamin Cottage third quarter of fiscal year 2021earnings conference call on the line 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 and the company and most recently filed forms 10-Q and 10-K the company undertakes no obligation to update forward looking.

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Today's press release is available on the company's website and at recording of this call will be available on the website at investors day natural grocers stopped com.

Now I will turn the call over at the Kemper.

Thank you Jessica and good afternoon, everyone.

Thank you for joining us today, we delivered another strong performance and the third quarter exceeding our expectations, we saw sales trends improve sequentially, well continuing to face difficult year over year comparisons and our focus on delivering the highest quality natural and organic products.

At always affordable prices as well as being a resource for science based nutritional education continues to drive high levels of engagement with our customers.

First I would like to highlight a few key performance metrics from the third quarter.

Daily average comparable store sales for the third quarter were down 3.6% against a 15.5 per cent increase and the third quarter of last year.

And a 2 year stack basis daily average comparable store sales accelerated to 11.9% and the third quarter up from 10% and the second quarter.

On our second quarter earnings call. We noted that the transaction count comp had turned positive in April transaction count comps remained positive through the balance of the third quarter.

Creating a new inflection point with transaction count comp up $4.1 per cent for the quarter of basket size comp was down 7.4% as customers began to return to pre pandemic of patterns.

And the basket has remained elevated as compared to the pre pandemic level.

Up over 20 per cent compared to the third quarter of 2019.

Operating income increased by 5.4% as compared to the third quarter of 2020, driven by lower store expenses and 40 basis points of gross margin expansion at.

And earnings per share of 22 cents.

Was above our expectations and higher than the third quarter of last year. We were focused on several key initiatives and the third quarter, which contributed to our positive results during the quarter and we were excited to open and relocated stores and the communities of play blow, Colorado, and Midland, Texas opening new stores.

And relocating stores has been challenging this year due to delays, we are experiencing and the construction process and equipment deliveries and.

We intend to return to opening between 6 and 8 new stores per year as these conditions improve.

The end power loyalty program remains an important tool for optimizing promotional activity and driving customer engagement. We ended the third quarter with over $1.4 million and power members up 17% versus a year ago and up 4% sequentially.

Our net sales penetration for empower was 71% and the third quarter compared to 68% of year ago and up slightly from the second quarter.

During the third quarter, we continued to strengthen our portfolio of natural grocers brand products, a key point of differentiation versus our competitors.

And the relaunch of our private brands and supplements that began in March grew and the third quarter to include a comprehensive range of over 115, vitamins herbs minerals and precision formulas.

Our branded supplements are made from high quality ingredients are good manufacturing practices of certified and affordably priced.

Additional branded supplements are under development and we expect to have approximately 150 skus at the completion of the initial rollout.

We plan to further expand the number of skus over the coming years.

In addition to supplement we added 40, new products to our brand assortment, including jarred, olives, and vegetables and liquid dish soap.

For the quarter of the sales penetration rate of our natural grocers brand products was 7.1%. We are also very excited to highlight our recent launch of garden box, which brings fresh hydroponic organic produce to the individual's store location we are piloting.

At this program at our Green Mountain and store and Lakewood, Colorado.

Starting with an assortment of lettuce is priced at a $1.99 per head.

On the outside of the garden box looks like a regular shipping container inside of innovative technology controls every aspect of the growing process, including water temperature light and nutrients to optimize growth and nutrition.

1 of our core values and supporting our communities and good for you crew during the quarter, we launched our natural grocers Heroes and Aprons Fund. This fund is at 501 C..3 charitable entity, providing financial assistance to both our crew who experience and anticipated hardships.

And direct grants to natural grocers charity partners in the community.

We are excited and proud to have established of fun to oversee our legacy of providing support for our crew and communities.

Finally, I would like to thank our good for you crew for their continued hard work and commitment they.

They are the key to delivering on our goals, while staying true to our founding principles.

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

Thank you Kemper and good afternoon, everyone. Our third quarter sales were in line with our expectations, reflecting the impact of our initiatives as well as strong store level execution.

Net sales of $258.6 million were down 2.4% from the prior year period.

Daily average comparable store sales decreased 3.6% as we cycled of $15, 5% increase and the third quarter of fiscal 2020.

On a sequential basis, the third quarter improved from the negative 7% comp and the second quarter.

Our supplements business continued its strong trend with a 6.2% comp and the third quarter, which represents an 11, 2% comp on a 2 year stack basis.

Meat dairy and bulk were the weakest performing categories and the third quarter as those categories cycled exceptional demand last year.

It is worth noting that all of our major product categories had a strong performance on a 2 year stacked comp basis.

Our grocery delivery sales as a percentage of net sales remained and the low single digits and were down slightly from previous quarters, the adoption rate and trend reflect the importance of our brick and mortar and store experience to our customers as many of our core customers.

Visit our stores multiple times per week.

Inflation remained in the 2% to 3% range during the third quarter, which we continue to pass along the of pricing <unk>.

Transitioning now to expenses, we drove a 40 basis point improvement in gross margin during the third quarter.

The increase was primarily driven by a higher product margin and lower shrink expense, partially offset by deleverage of occupancy expense the.

The strong supplement sales comp contributed to a favorable shift in product margin mix.

On a 2 year stacked basis gross margin increased 170 basis points.

Store expenses were 22, 1% of sales and the third quarter flat on a relative basis to last year.

Labor related expenses normalized and the third quarter consistent with the lower sales volume.

On a sequential basis compared to the second quarter, we leveraged store expenses by 40 basis points, despite marginally lower net sales.

Net income of $5 million or 22 cents per diluted share in the third quarter compared to net income of $4.7 million or 21 cents per diluted share and the prior year period.

Lower store expenses and the gross margin improvement were the primary factors behind the increase in earnings per share.

Third quarter EPS was ahead of our expectations.

EBITDA was $14.5 million and the third quarter.

During the first 9 months of fiscal 2021, we generated cash from operations of $31 million and invested $16.8 million and net capital expenditures.

We relocated 2 stores and the third quarter and the store count remained unchanged at 161, and net increase of 2 stores versus a year earlier.

Our balance sheet remains strong with $14.5 million in cash and no outstanding borrowings under our $50 million revolving credit facility.

And at a $24.1 million balance on our term loan.

Our strong cash flow allowed us to accelerate the repayment of $10 million of principal on our $35 million term loan.

Today, we announced that at our board of Directors has declared a quarterly cash dividend of 7 cents per common share.

The dividend will be paid on September 15th 2021 to all stockholders of record at the close of business on August 30th 2021.

Now turning to our outlook for fiscal 2021, we are updating our full year guidance range previously established on November 19th 2020, and raising our diluted earnings per share guidance based upon the third quarter results and our expectations for the fourth quarter.

I would also like to note that our guidance reflects current trends in light of the evolving COVID-19 environment and related government mandates the company cannot predict the duration or severity of the pandemic. We expect that these factors will continue to impact our operations and financial performance.

Formats through the balance of the fiscal year.

For fiscal 2021, we expect to opened 3 new stores.

Relocate remodel 4 to 5 stores at.

<unk> daily average comparable store sales growth of between negative, 1% and 1%.

Achieved diluted earnings per share between 68.

And 74 cents and we expect capital expenditures for the fiscal year and the range of $28 million to $35 million.

We are very proud of our performance and the third quarter in the face of and uncertain environment as the dynamics of the pandemic continue to evolve and as consumers return to pre pandemic shopping habits.

It is our unwavering commitment to our founding principles that sets us apart from the competition.

As we close of the year, we continue to strive to be the grocer of choice for the highest quality natural and organic products at always affordable prices.

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

We will now begin the question and answer session to ask a question you May Press Star then 1 on your telephone keypad at.

If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw. Your question. Please press Star then 2 at this time, we will pause momentarily to assemble our roster.

The first question comes from Greg that is Kenyan with Wolfe research.

Please go ahead.

Hey, good afternoon, guys and sponsor of homeless on for Greg and thanks.

And quarter again, and I guess I wanted to ask on gross margin was up 40 basis points. This quarter, how sustainable do you think the higher margins are as we sort of get into a more normalized environment.

And I think that will continue to have momentum with margin for.

At least of probably the next year.

Yeah.

Okay, and then in terms of inflation and I think you mentioned 2 of 3% and the prepared remarks are you seeing any challenges with passing some of those increases and then and then we looked at 2022 and you start to get sort of price increases from your from your CPG partners.

1 of those look like and and how sticky do you think this higher and placements.

And I think the higher inflation is here for a while.

Stickiness of it.

Hmm.

We are.

Essentially we base our we sell.

All of our products at a margin so when we get a price increase we.

Just increase the price based on our margin and we've not had an issue with.

And being able to pass 1 of the majority of those price increases.

And there are some products and she has to be particularly price conscious of it you can.

95% of at 99% of the products and we feel we can.

Yeah.

That's helpful and then.

Although you guys raised guidance I think it still implies that EPS is going to be down and and for Q could you just talk about sort of what you're seeing quarter to date from of comps and I guess, maybe gross margin perspective that sort of leads to lead to not raising guidance, even raising EPS even more.

And I would say that.

Currently the.

Com.

Okay.

I mean, the July comp was was very close to.

Zero, so we almost.

And we were slightly negative.

And we've seen and improvement in comp.

In June and July compared to the rest of it.

The other 2 months and a quarter or so.

We're predicting will should be somewhere in that range on comp for the rest of the quarter.

As far as.

Our guidance on was it did you catch that.

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And.

I think the second expense for the second part of your question.

Had to do with the lower EPS for the fourth quarter is that correct, yes, yes, and the EPS guidance and sort of what's driving that.

Yes.

So.

We.

And we don't anticipate quite as higher margin in the fourth quarter as we experienced in the third quarter.

And at this point also we have some risk in terms of we have some major events and the fourth quarter and until we've.

Gone through those events.

We're cautious we have the big anniversary sale Thats, a 3 day event net.

We're very optimistic about but and this new environment.

We're careful in terms of our building the sales into our guidance and then we have.

Built into our guidance of lot of upside in.

September when we have the organic months headquarter event.

Once the entire month.

Last year September.

September was the weakest performing month of the 3 months and the fourth quarter. So.

And we're hopeful we'll have a strong.

September, but we're being careful and our guidance.

Yes.

Makes sense and then I guess.

And there's been increased Covid cases, with the delta bearing interest at any change in consumer behavior in terms of traffic or basket sizes as cases and started to rise.

I would say that it's too early to see any trends, yet and regards to that particular issue.

Okay, great well, thanks, guys and nice quarter.

Alright. Thank you. Thank you.

This concludes our question and answer session I would like to turn the conference back over to Kemper Isley for any closing remarks.

Thank you very much for joining us to discuss our third quarter results. This month marks our 66th year, serving our communities I encourage you to visit 1 of our locations between August 12 and.

And August 14th to help celebrate our anniversary and our founder and Margaret eyes are Margaret Icily his birthday.

We look forward to updating you on our next call regarding the fourth quarter and full fiscal year 2021 results. Please stay healthy and safe and have a great day. Thank you.

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

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