Q4 2022 Natural Grocers By Vitamin Cottage Inc Earnings Call
Good day, ladies and gentlemen, welcome to the natural grocers fourth quarter and full fiscal year 2022 earnings conference call. 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.
Now I'd like to turn the conference over to Jessica Hansen, Vice President Treasurer for natural grocers.
Thank you Sir you may begin.
Good afternoon, and thank you for joining us for the natural grocers by vitamin Cottage fourth quarter and fiscal year 2022 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.
They 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.
Recording of this call will be available on the website and investors Dot natural grocers Dot com now I will turn the call over to Kemper.
Thank you Jessica and good afternoon, everyone.
We are a static to report that we had record earnings in fiscal year 2022.
Teething our guidance for daily average comparable store sales growth and diluted earnings per share. We had net sales of $1 1 billion and diluted earnings per share of <unk> 90 for fiscal year 2022 marked our 19th consecutive year of positive daily average comparable store sales growth, we take great pride in all of the.
These accomplishments this year.
We have experienced sustained growth over the past several years since fiscal 2019 were pre pandemic levels. Our daily average comparable store sales have increased 15, 7%. The basket is up over 20% and diluted earnings per share have grown 124%.
Demonstrating the relevance and enduring strength of our business model.
Three years ago, we instituted a cash dividend that has cumulatively returned $2.96 per common share of capital to our stockholders. The dividend reflects our strong operating performance and financial position.
<unk> in our business model and commitment to returning value to our stockholders.
Fourth quarter results were in line with our expectations as we cycled strong performance in the fourth quarter last year, Todd will cover the results in more detail. After I highlight a few key company initiatives.
Our empower loyalty program continues to be an effective tool for optimizing promotional activity and driving customer engagement. We ended the quarter with 1.8 million loyalty members a year over year increase of 18% to fourth quarter net sales penetration for empower was 76% up.
From 72% a year ago.
Evidently our customers' appreciation of the benefits provided by this program.
Our natural grocers brand products remain a key point of differentiation and a sales driver.
As consumers are increasingly focused on prioritizing value.
In the fourth quarter private label brands represented seven 6% of total sales up from seven 1% in the fourth quarter of last year.
During the quarter, we launched 12, new branded products, including four varieties of wild caught seafood, there are pre seasoned and ready to cook and they are quite good tasting and.
In fiscal year 2022 we grew our private brand offerings by 41 S. Skus.
For the year the sales growth of our natural grocers brand products exceeded the company's growth rate. We attribute this higher growth to our customers' awareness with a strong value proposition of our premium quality offerings at compelling prices.
Turning now to new store development during the fourth quarter, we opened our first South Dakota store in Sioux Falls opened a new store in Brighton, Colorado and relocated our store in Cheyenne Wyoming.
In fiscal year 2022, we opened a total of three stores and relocated two stores. We are very pleased with the performance of these new stores and relocations.
Our new store development was constrained in fiscal year, 2021, and 2022 by delays in construction permitting and the availability of materials and equipment.
Over the next several years, we expect to return to opening between six and eight new stores per year subject to improving construction and supply chain conditions natural grocers has a legacy of being a values driven company our commitment to building a healthy sustainable future for our customers are good for you crew.
And our communities is long standing and authentic we work hard to ensure our product offering stores' operations corporate practices and supply chain reflect these values.
In fiscal year 2022, the combination of company donations and customer fundraisers resulted in more than $1 million monetary donations and more than $4 million of being kind of food and product donations to local food banks.
We are the only national grocery chain that offers the resources of a full time nutritional health coach in each store.
Whose primary responsibility is providing free science based nutrition education to our customers and the surrounding community and fiscal year 2022, our investment to provide free nutrition education was more than $4 million.
Earlier this month, we implemented another wage rate increase of $1 per hour for hourly store crew. This increase.
Represents our third one dollar per hour increase since the beginning of the pandemic our company wide average hourly wage rate for full time store crew now exceeds $20 per hour, including one dollar per hour and vitamin Bucks. This compares to the November 2019 average wage rate of approximately $15 50.
Per hour and reflects our longstanding commitment to investing in our crew in closing I want to recognize every member of our good for you crew for their continued hard work and commitment to our founding principles, including delivering the highest quality products at always affordable prices to the communities we.
Serve.
With that let me turn the call over to Todd to discuss our financial results and guidance.
Thank you Kemper and good afternoon, everyone. The fourth quarter results were in line with our expectations as we cycled strong performance in the fourth quarter of last year experienced a shift in consumer behavior and managed inflationary pressures impacting our business.
Net sales increased <unk>, 6% from the prior year period to $274 $2 million.
Our daily average comparable store sales were essentially flat decreasing <unk>, 2%.
The fourth quarter, three year comp improved sequentially to 15.8% as compared to 14.1% in the third quarter and 13, 5% in the second quarter.
The 0.2% comp decline was comprised of a transaction count decrease of 2.6%.
Offset by a transaction size increase of 2.5%.
The 2.6% decrease in transaction count reflected the moderation of pandemic trends, including more normalized levels of summer travel and food away from home consumption.
Additionally, in the fourth quarter, approximately 20% of the transaction decline was attributed to fewer snap EBT purchases.
Snap EBT represents a low single digit percentage of total sales.
The two 5% increase in transaction size was primarily driven by retail price inflation, partially offset by a reduction in the number of items per basket.
We estimate the product cost inflation was approximately 7% for the fourth quarter and 5% for the fiscal year historically, our inflation rate has been more stable than conventional grocers due to our specialized supply chain.
In the last year, our inflation rate was lower than our peers and did not contribute to our comparable store sales to the same magnitude as our peers.
In the fourth quarter, we passed along the impact of product cost inflation through pricing and expect to continue to do so for the foreseeable future.
The fourth quarter item count per basket was down by less than one item compared to the prior year, while difficult to quantify there are many concurrent factors that could be influencing the decline in item count.
These factors likely include consumers' response to price inflation within their food and non food purchases.
Consumer shift to food away from home and consumers' response to macroeconomic concerns.
Note that our item count per basket was up more than 10% on a three year basis.
In line with our expectations the fourth quarter supplements sales comp was lower than the company sales comp as we cycled a strong supplements comp last year in general supplements have experienced lower inflation in food on.
On a two year basis, the supplements comp was a positive high single digit.
In the fourth quarter, our strongest performing departments were dairy meat and grocery.
In the fourth quarter, we saw limited evidence of trade down.
Some customers switched from branded products to private label equivalents.
Our natural grocers brand offers customers premium quality at a compelling price during the fourth quarter, our private brand products that had a higher unit growth than the comparable branded offering included bread.
Walgreens and supplements.
It is important to note that we continue to see accelerated growth in select premium offerings, such as pasture raised eggs and grass fed milk, suggesting that many of our customers are still prioritizing product attributes overprice.
In stock levels in the fourth quarter return to pre pandemic levels.
Turning now to the rest of the P&L fourth quarter gross margin decreased 20 basis points to 27.6% driven by lower product margin attributed to higher freight distribution and shrink expenses.
Store expenses as a percentage of sales in the fourth quarter increased 150 basis points driven by higher labor expense as a result of increased wage rates.
Store expenses included long lived asset impairment charges of $2.8 million in the fourth quarter of fiscal year 2022 related to two stores.
Compared to $1.1 million in the fourth quarter of fiscal year 2021.
Net income was $2 $2 million with diluted earnings per share of nine cents in the fourth quarter. This.
This compares to net income of $7 $2 million or 32 cents of diluted earnings per share in the fourth quarter of last year.
Adjusted EBITDA was $13.6 million in the fourth quarter.
Briefly touching on the full year results for fiscal year 2022, total revenue increased 3.2% to $1.1 billion. Our daily average comparable store sales growth was 2.6%, resulting in an increase of 15.7.
1% on a three year basis.
Fiscal year 2022, gross margin was 30 basis points higher than the prior year, driven by improved product margin and store occupancy cost leverage.
Store expenses as a percentage of sales were flat year over year as leverage from higher sales offset higher labor expense attributable to increased wage rates.
Store expenses include as long lived asset impairment charges of $2 $9 million in fiscal year, 2022, and long lived asset impairment charges and store closing costs of $1.5 million in fiscal year 2021 for.
For fiscal year 2022, net income was 21 $4 million with diluted earnings per share of 94 cents.
This compares to $26 million.91 of diluted earnings per share in fiscal year 2021.
Adjusted EBITDA in the fiscal year, 2022 was $62 $2 million.
Turning to the balance sheet and cash flows.
We finished the year in a strong liquidity position with $12 million in cash and cash equivalents no outstanding borrowings under our $50 million revolving credit facility.
Any 15.7 million dollar balance on our term loan.
During the fiscal year total inventory increased 13% driven by product in stock levels, returning to pre pandemic levels.
Product cost inflation in inventory additions for new and relocated stores.
We feel our current inventory level is appropriate.
For fiscal year 2022, we generated cash from operations of $39 $7 million and invested $31.1 million in net capital expenditures capital expenditures included the opening of three new stores, two relocated stores and the purchase of <unk>.
Previously leased property.
Free cash flow was $8 $6 million.
Today, the company announced the declaration of a quarterly cash dividend of 10 cents per common share the dividend will be paid on December 14th 2022 to stockholders of record at the close of business on November 28 2022.
Now I would like to introduce the company's outlook for fiscal year 2023.
Our guidance was developed based upon consideration of current operating trends consumer trends and the uncertainty of the economic environment, including inflationary pressures and the risk of a recession.
Our outlook includes the benefits of new store growth marketing focused on our value proposition and store productivity initiatives.
Our current expectation is that sales comps will be more challenging in the first half of the year as we cycled strong comps driven by Delta and omicron.
Lastly, our outlook anticipates that year over year gross margin will be flat in store expenses as a percentage of sales will increase driven by higher labor rates for fiscal year 2023, we expect to open four to six new stores relocate one to two stores.
<unk> achieve daily average comparable store sales growth between negative, 2% and positive 1% achieved diluted earnings per share between 70.
And 90 cents and direct $28 million to $35 million towards capital expenditures to support our growth initiatives.
In closing we had another strong record setting year that we attribute to many factors, but foremost our customers' appreciation for our commitment to our principles and values, our consistency and the dedication of our crew.
We continue to strive to be the grocer of choice for the highest quality natural and organic products at always affordable prices.
We believe that natural grocers continues to be very differentiated in the market and uniquely relevant to consumers.
We look forward to the many opportunities in fiscal year 2000 and twenty-three.
With that I would like to open the lines up for questions. Thank you.
We will now begin the question and answer session.
Can I ask a question you May press Star then one on your touch 10 pounds.
If youre using a speakerphone please pick up your handset before pressing the cool.
To withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble them all.
The first question comes from Greg Eddish, Kenny with Wolfe Research. Please go ahead.
Hi, This is Johnny fault on for Greg today. Thanks for taking the question for 2020 three comp guide is negative 2% to 1% can you just talk a little bit about your assumptions there sort of for cost inflation are you expecting mid single digits going into 2023 and sort of what promotional activity you think he might see thanks.
So thanks for the question a couple of points so.
We're anticipating.
Inflation to be.
That study at least in the first half of the year.
And then some drivers.
Sales would be.
In addition to the benefit of the inflation.
Marketing efforts on our value proposition.
And new store productivity.
And then some risks and uncertainties that are built into our forecast would be.
Some of the consumer trends that we're seeing with food away from home.
Travel continuing.
And then.
Economic uncertainty around inflation and yep.
Probably in the back half of the year.
The risk of it.
Recession.
And then if you think about the first half versus the second half of the year in the first half we're up against.
Yeah, good comps last year in Q1 and Q2.
With some.
No tailwind last year from yes.
That.
We're not seeing at this point in time.
<unk>.
Gotcha that makes sense. Thanks for the color there and then gone back under the long term store growth target of six to eight stores, how should we think about like the benefit to the comps once we get into the out years. When you add these stores into the sort of existing mix, how do how should we think about the comp lift there. Thanks.
Well when we.
Have new stores, they have higher comps in their first five years is not mature stores.
It should be a good tailwind once we start getting our.
Inventory of new stores up and running.
And we were seeing pretty good clarity.
This you're probably getting up probably six new stores and two relocations.
Hopefully I'm not you end up with a lot of the issues. We ended up with at the end of last year.
City.
Your office et cetera, and getting our stores open.
Right well thanks, a lot that's all I have I'll hop back in the queue.
Thank you.
Again, if you'd like to ask a question. Please press Star then one at this time.
Our next question comes from Scott <unk> with RBC capital. Please go ahead.
Hey, guys nice to be talking to you again.
Talking to you Scott.
So it's been a while.
I just wanted to I think you mentioned consumer behavior shifting.
We've heard from other retailers that.
October progressed in the guidance in November .
The consumer really seems to be changing its behaviour or their behavior and I was wondering if you have any thoughts around that and any more detail you could offer around that what you referenced.
Well one thing that we've noticed in particular that the vacation cycle really.
He emerged again.
Before the pandemic, we always had a mall in October .
Schools tend to go out for two weeks at fault break end of October now.
Notice that lull and then there was a pick up right after that role.
School breaks in October so we've really notice.
And during the summer months, we've really noticed the.
Vacation trends is really.
It had an impact on customer accounts in the stores when the when the vacations are really high.
The other thing that we've noticed compared to last year as Todd mentioned, we have the tailwind.
The end of the.
So the pandemic last year in our supplement sales really skyrocketed quite a bit this year they've moderated.
Compared to that.
We've noticed that.
And.
And then again.
Now people eating out at restaurants seem to.
Taking a little bit away from our sale of food in the stores.
But as you think about the consumer and the last one.
Want to show you the weakening up or are you really don't have because I think you guys said that they.
They seem still pretty strong, but I wonder if any flavor as we worked through the quarter.
Well the thing that the thing that we've really noticed the weakening in the lower end the low end of our consumers.
Tumors that are on snap.
We've seen a 20% decline in our snap.
Purchases at our stores.
I mean, they're not a significant amount of our sales, but they definitely on the lower end.
That's definitely moderated substantially.
Sure.
Our normal or regular customer.
Our.
Primary customers are still staying pretty consistent in their purchases except for like I said the vacations.
Right.
So kind of remind us a little bit.
So your products are much better for you, but with that comes a lot.
Higher expense, how do you guys think about it I agree with what was said, we're probably headed into a recession the end of 'twenty three.
Remind us how the business performs when unemployment rates goes up.
And and things get a little tighter and then.
Assuming that that makes it harder but might it outperforms what can you guys do to mitigate some of that.
Hmm.
One of the things that you do is you definitely focus your promotions.
<unk>.
Staple items, so that people understand that you have affordable items that you sell.
For instance, we have $1 99.
Free range eggs.
Essentially as beating everybody to take pricing in the market and then we have organic avocado 99 cents every day.
Actually.
That price also.
And then one of our big marketing pushes right now our meal deal, where we bundle together several products and have a.
A meal deal for <unk>.
Feed a family of $415 or feed a family of four for under $16 or something of that nature. So we really focus our marketing on that.
Affordable.
Offerings as far as a win win.
Recession happened.
A lot.
It actually can be good for our business to an extent because people tend to eat out west and tend to go on vacation less so that means that they are eating more at home and so that helps us with food sales.
They might pull back a little bit on the supplement and body care.
On the other two months it can be very helpful.
It depends.
If we can make sure that we get are the correct promotions out there in <unk>.
Make them resonate with the consumers, which I think our marketing department is really good at doing.
And also the fact that we have 80% of our sales now about.
Our empower customers. So we are able to market two are our core customers three or four times a week.
Our empower email.
Yes, very powerful big increase.
So.
My last question is on new store performance how.
How are you guys feeling about that and then I'll yield.
I I'm really bullish on our new store performance I think we've got some really good exciting sites coming up over the next year and I think we will have.
<unk>.
Alright, guys, thanks, very much and again im glad to be back talking to you.
Okay I appreciate it.
This concludes our question and answer session I would like to turn the conference back over to Kim to Ashley for any closing remarks.
Okay.
In 2022, we marked the 10 year anniversary of our initial public offering.
During the last 10 years, we have nearly tripled our store base and created and increased sales and earnings at an even faster rate. Additionally, we have created over 2500 jobs more importantly, we have enabled our over 100 additional communities to have local access to the highest quality.
Healthy nutritional products.
At affordable prices and free science based nutrition education, we are very proud of our achievements over the last decade and equally excited about the opportunities that lie ahead. We look forward to speaking with you on our next call to review our first quarter of 2023 results. Thank you and have a great day.
Hi.
Yes.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.