Q2 2022 Natural Grocers By Vitamin Cottage Inc Earnings Call

Business model to effectively respond to a dynamic operating environment, we were able to grow daily average comparable store sales by four 3% gross margin by 50 basis points and diluted earnings per share by 33, 3% while comp sales was positively impacted.

<unk> by retail price inflation. It is important to note that transaction count comp has had eight year over year increase for four consecutive quarters.

Our second quarter comp sales was up a strong 13, 5% relative to 2019 or pre pandemic levels.

Collecting consumers continuing demand for our differentiated offering.

Our unwavering commitment to our founding principles, including offering the highest quality natural and organic products at always affordable prices, coupled with free science based nutrition education remain a key element of our success. These principles are particularly relevant as consumers are demonstrating the sustained.

<unk>, two prioritizing health and wellness.

Our unique approach to marketing and promotional activity continues to drive high levels of customer engagement and sales growth. For example in the second quarter. We offered a 21 days to a healthier U program, which featured a three series of nutrition education classes, each with an accompanying seven day challenge.

The program was developed by our nutrition education experts and covered several key topics, including eating for health and vitality kicking sugar cravings and a healthy approach to detoxifying.

Customers, who attended in person or live virtual class led by the stores nutritional health coach received a customized coupon book featuring natural grocers brand products curated to support participants.

In achieving each nutritional challenge. This cross functional program is a good example of our differentiated marketing and offering.

Our empower loyalty program continued to grow evidence in our deep and ongoing engagement with our customers. We ended the quarter with more than $1 6 million loyalty members a year over year increase of 19%.

Second quarter net sales penetration for empower was 73% consistent with the first quarter and up from 70% a year ago.

Aligned with our company branding, our natural grocers brand products fuse premium quality products with affordable prices, creating a key point of differentiation.

That drives loyalty and sales growth, our natural grocers brand products accounted for seven 7% of net sales in the second quarter up from seven 3% in the second quarter of last year.

During the quarter, we launched eight new branded products, including a line of truffles maiden, France and additional dietary supplement three weeks ago, We opened a store in Canyon City, Colorado, and we are very pleased with the community's response to our first store in their market.

Opening new stores and relocating stores has been challenging over the last two years due to delays related to the construction process and equipment availability.

Accordingly, our fiscal 2022, new store opening schedule has always been back end weighted to reflect these challenges. We are pleased with our progress on the fiscal year 2022 stores and we remain on track to open four to five new locations and relocate two stores in future years, we expect to reach.

Turn to opening between six to eight new stores per year subject to improving construction conditions.

In closing I want to thank every member of our good for you crew for their execution of our operating strategy, including our commitment to exceptional customer service, which was instrumental in driving our strong quarterly results with that let me turn the call over to Todd to discuss our financial results and guidance.

Thank you Kemper and good afternoon, the strong second quarter results were above our expectations, reflecting favorable sales growth and expense leverage.

Our second quarter net sales increased four 9% on a year over year basis to $271 $8 million.

Daily average comparable store sales were up four 3% average.

<unk> size rose two 5% and average transaction count increased one 8%.

We experienced product cost inflation of approximately 5% during the second quarter, a slight uptick from the first quarter.

Historically, our specialized supply chain has yielded more stable inflation rates than conventional grocery.

We continue to pass along the cost inflation impact via pricing and to date, we have not observed customer trade down in response to the inflationary trends.

Out of stock levels at the end of the quarter were in line with the levels, we have been experiencing over the previous four quarters.

Although out of stock levels did increase for a few weeks in January .

The strong sales performance and expense leverage helped drive margin expansion in the second quarter.

Gross margin increased 50 basis points to 28, 2%, which was primarily driven by improved product margin and store occupancy leverage.

Store expenses as a percentage of sales decreased 60 basis points as our strong sales performance drove expense leverage.

Like many retailers, we experienced an increased level of constrained labor availability in January which improved in February and March overall, the quarter had lower labor hours compared to the second quarter of last year, which offset higher labor rates.

Operating income increased 32, 2% to $8 9 million and operating margin improved 70 basis points to three 3%.

Net income of $6 $4 million was up 35, 1% year over year with diluted earnings per share of <unk> 28.

Compared to 21, a year ago.

Adjusted EBITDA increased 11, 8% to $16 1 million.

Turning to the balance sheet and cash flow our financial position remains strong at the end of the second quarter with $28 $9 million of cash and cash equivalents, we had no outstanding borrowings under our $50 million revolving credit facility and a $19 $7 million balance on our term loan.

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During the first six months of fiscal 2022, we generated cash from operations of $27 $6 million and invested $12 $3 million and net capital expenditures, resulting in free cash flow of $15 $3 million.

Today, we announced that our board of directors has declared a quarterly cash dividend of <unk> 10 per share of common stock the dividend will be paid on June 15, 2022 to all stockholders of record at the close of business on May 31 2022.

Now turning to our outlook for fiscal 2022.

We are raising our full year sales and earnings outlook previously established on November 18th 2021.

Our updated outlook is based upon the strong first half results current trends and our expectations for the second half of the fiscal year.

The outlook considers the uncertainty of the pandemic.

Economic and inflationary factors and.

In supply chain trends, which are expected to impact our operations and financial performance through the balance of fiscal 2022.

Our full year guidance includes the following <unk>.

Opened four to five new stores.

Relocate or remodel two stores.

<unk> daily average comparable store sales growth between 1% and 3% achieve.

Achieve diluted earnings per share between <unk> 85, and 96.

And direct 28% to $35 million towards capital expenditures to support our growth initiatives in closing we had another strong quarter that we attribute to many factors, but foremost our customers' high levels of engagement with our differentiated and relevant business model.

Our consistency and the dedication of our crew we continue to be encouraged by our operating trends and are confident in our ability to drive growth and enhance value for all stakeholders.

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

Thank you.

We will now begin the question and answer question.

To ask a question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Your question. Please press Star then two.

At this time, we will pause to assemble our roster.

The first question comes from Greg <unk> with Wolfe Research. Please go ahead.

Hi, good afternoon.

This is Spencer hanus on for Greg can you just talk about your unit trends throughout the second quarter.

Okay.

To our unit.

Yes.

And basket and basket size or.

Yes, and basket size.

It was very consistent with our last quarter earnings up about 12% compared to 2019.

So we had we didn't really see any decline.

Barry.

That number of units.

Or per per transaction in our basket.

Got it that's helpful. And then how are you guys thinking about inflation as we go throughout the rest of the year are you expecting a moderation or do you think it will continue to move higher as we look into <unk>.

I think it's going to probably stay about where it has been.

We've been seeing about 5% inflation and I would expect that we will see that for the remainder of the year.

I don't see it moderating very much.

That's helpful. And then how are you thinking about.

Gross margins throughout the year, obviously, you're protected margins again this quarter, but how should we think about sustainability is the comps in the supplements category as it gets tougher later this year.

I think we'll probably be able to be about flat compared to last year. I don't think we'll have a lot of gain.

How hard it will be two comp.

In the supplement category coming up.

The fourth quarter of this year, but I think we should be at least <unk>.

To maintain our margin for the rest of the year and we're able to pay our price inflation is actually kind of a tailwind to our margin.

We should be able to keep with that price with the steady price increases we should be able to keep our R. R margin pretty steady for the rest of the year.

Sure.

Okay, great. Thank you.

Great. Thank you so much.

Thank you.

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

Yes. Thank you very much for joining us today, we are proud of our performance in the second quarter, including the four 3% sales comp and four consecutive quarters of positive transaction count comps in the quarter, we were able to pass along our cost inflation of approximately 5% through product, which also well.

Also generating gross margin growth of 50 basis points the size of the basket over the past four quarters has been consistent at approximately $45 in the second quarter item count or basket was in line with the average count we have seen over the last four quarters, our item count per basket has increased by 12% compared to <unk>.

Pandemic level in 2019. Additionally, we did not see customer trade down for example in eggs, where our minimum standard is three range customers have a choice to trade down from pasture to organic or free range in quantities held up across each category.

This is.

Culminated in our net income growth of 35, 1%.

We are proud of our history of providing the highest quality natural and organic products at always affordable prices to the communities. We serve we look forward to speaking with you on our next call to review our third quarter 2022 results. Please stay healthy and have a great day. Thank you goodbye.

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

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