Natural Grocers by Vitamin Cottage Inc. Q2 2023 Earnings Call

Good day, ladies and gentlemen, welcome to the National Grocers second quarter fiscal year 2023 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's being recorded I'd like to turn the conference over to MS. Jessica Schoen, Vice President Treasurer for natural grocers precision you may begin.

Okay.

Good afternoon, and thank you for joining us for the natural grocers by vitamin Cottage second quarter fiscal year 2023 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 Form 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.

Investors that natural grocers dotcom.

Now I will turn the call over to Kemper.

Thank you Jessica and good afternoon, everyone.

We are pleased with our second quarter results sales growth was particularly strong and exceeded our expectations.

And as a result, we are raising our comparable store sales guidance for the year.

Daily average comparable store sales increased two 7% or 7% on a two year basis.

The comp exceeded our expectations as we cycled strong pandemic related trends and a labor strike at one of our competitors in the Denver market in the second quarter last year.

Customer count increased two 7% for the quarter and.

And four 5% on a two year basis item count per basket was down by less than one item compared to the prior year.

And in line with recent quarters.

We observed minimal trade down in the second quarter, the monthly sales comp accelerated sequentially through this quarter.

Comp in April was just under the March comp.

Our diluted earnings per share was 26 sets, including a three sat impairment charge related to a store closure.

Net of the three cents per share impairment charge diluted earnings per share would have exceeded the prior year period earnings per share or 28 cents.

During the quarter, we made the decision to close two stores as part of our ongoing efforts to drive higher store productivity.

The strength of our sales trend indicates that we have a loyal and resilient customer base that prioritizes, our healthy and sustainably focused offerings.

We believe that our high product standards marketing emphasis on the strong value proposition always affordable prices and excellent customer service and a convenient and friendly shopping experience continues to resonate with consumers and position us as a leading destination for natural and organic.

Products in our markets.

One contributor to our success is our natural grocers branded products, which represent value and uncompromising quality.

In the second quarter, our natural grocers brand accounted for eight 1% of total sales up from seven 7% a year ago, we believe that our natural grocers brand has a long runway and we are targeting sales penetration to grow by approximately one percentage point annually.

Our team is working hard to identify new products and vendors that meet our rigorous standards.

The second quarter, we were excited to open one new store in my call. Idaho, We are on track to open four to six new stores and relocate two to three stores in fiscal 2023.

Over the next several years, we expect to return to opening between six and eight new stores per year.

As we anticipate improving construction and supply chain conditions.

During the second quarter labor availability pressures moderated for the majority of our stores. We provided a one dollar per hour wage rate increase for all hourly store crew in the first quarter of fiscal 2023, following that increase our companywide average hourly wage rate for full time store.

Crew exceeds $20 per hour, including one dollar per hour and vitamin Bucks, we do not anticipate additional blanket wage increases for the balance of this fiscal year.

In February we released our fiscal year 2022 environmental social and governance report.

The report tells the story of our legacy as a sustainably focused company and our long record of prioritizing initiatives and practices that positively impact the sustainability of our business and the environment. This year's report highlights our commitment to regenerative agriculture as an important practice with.

The ability to mitigate climate change I encourage you to review our latest ESG report is another tool to better understand the differentiation of our business.

Lastly, I would like to thank every member of our good for you crew for their continued hard work and commitment to delivering the highest quality natural and organic products had always affordable prices and excellent customer service with that I will turn the call over to Todd to discuss our financial results and guidance.

Thank you Kemper and good afternoon, we are pleased with our second quarter results net sales increased four 2% from the prior year period to $283 $2 million, our daily average comparable store sales increase of two 7%.

It was comprised of a 2.7% increase in daily average transaction count and a flat daily average transaction size.

We estimate the product cost inflation was approximately 8% on an annualized basis for the second quarter in.

In the quarter, we passed along the cost inflation through pricing and expect to continue this strategy for the foreseeable future.

In the second quarter, our strongest performing departments were dairy meat and grocery the.

The supplement sales comp was similar to the total company comp.

Our empower loyalty program membership grew 18% to more than 1.9 million members by the end of the second quarter.

The empower net sales penetration was 76% up from 73% a year ago.

Gross margin increased 90 basis points to 29, 1% and was driven by higher product margin, which again reflects our ability to offset cost inflation through increased pricing.

Store expenses as a percentage of sales in the second quarter increased 110 basis points and was primarily driven by higher labor expense as a result of increased wage rates and an impairment charge related to a store closure.

Administrative expenses as a percentage of sales were consistent with the second quarter last year.

Net income was $5 $9 million with diluted earnings per share of 26 cents in the second quarter diluted earnings per share was impacted by a three cent per share impairment expense.

This compares to net income of $6 $4 million or 28 cents of diluted earnings per share in the second quarter of last year.

Adjusted EBITDA was $16.8 million in the second quarter, turning to the balance sheet and cash flow. We ended the second quarter in a strong financial position with $19 million of cash and cash equivalents, we had no outstanding borrowings under our $50 million revolving credit facility.

During the first six months of fiscal 2000, and twenty-three we generated cash from operations of $34 $9 million and invested $17 $8 million and net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $17 $1 million.

Today, we announced that our board of directors has declared a quarterly cash dividend of <unk> 10 per share.

The dividend will be paid on June 14th 2000, and twenty-three to all stockholders of record at the close of business on May 30th 2000 and twenty-three.

The dividend reflects our strong operating performance and financial position and confidence in our business model and commitment to returning value to our stockholders.

We are raising our fiscal 2000 and twenty-three outlook for comparable store sales based upon year to date performance and current trends.

We are also increasing our outlook for the number of relocations and Remodels.

All other aspects of our guidance are unchanged.

We plan to close two stores in June 2023, and all related costs are incorporated into guidance.

The updated outlook reflects recent results current operating trends consumer trends and the uncertainty of the economic environment, including inflationary factors.

Our guidance includes the following.

Opened four to six new stores relocate or remodel two to three stores achieve daily average comparable store sales growth between 1% and 2% achieved.

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 a strong quarter that we attribute to many factors, but foremost our customers high level of engagement with our differentiated and relevant business model.

We continue to be encouraged by our operating trends and are confident in our ability to continue to drive growth and enhance value for all stakeholders.

With that I would like to open the lines up for questions. Thank you. Yes. Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your house John phone, if you're using a speakerphone. Please pick up your handset before pressing the case just try your question. Please press Star then two at this time we have.

Pause momentarily to assemble the roster.

And the first question comes from Scott <unk> with our five capital.

Hey, guys.

Thanks for taking my question and obviously tremendous performance given the environment. So the first thing I wanted to ask a little bit about <unk>.

It's kind of more of I guess kind of a strategic longer term kind of business operating question. You know one of the things we're running into in our in our consulting business is just.

With the companies, we're working with getting quality labor, maybe it's getting a little easier to get labor, but a lot of people are struggling with getting quality labor.

It always thought I always thought that you guys, maybe had an advantage that way and I wanted you to maybe speak to that do you think you have an advantage.

And how does that kind of.

Work its way through maybe sales and just kind of the company go.

Go into market.

Well I think over the last couple of years.

It's been challenging to get.

Labor, particularly quality labor I think that that's kind of changed in the last six months.

And that our ability to attract labor and quality labor has improved substantially and then of course R. R.

Getting up to $20 per hour for hourly people has really helped.

Enhance our ability to keep quality labor at the stores.

As far as being able to attract quality labor I think that because of our foundational principles, we're able to attract labor.

People too to the quality labor to our company because.

They are attracted to the fact that we have that we are a company that has its values and <unk>.

Life style.

Attributes that they would like to live and be part of.

And so.

At our home office, we're able to keep our staff, we've been able to keep our staff really consistent with a lot of really high quality people.

The store level, it's a little bit harder just because the wage levels are a lot lower but now that we're up at this $20 per hour.

Average wage it's become a lot easier to keep the staff at the store level.

And then Kevin do you have any like Europe like at the store how many people are kind of committed to the healthier lifestyle and or are there because it's part of their kind of ethos.

You mean, the crew members at the store Yeah, Yeah. The crew members I would say that over half of the crew members at each stores is there because of the ethos and.

Quality lifestyle that they are able to live because of working at our company.

Okay, and then turning to the gross margin performance in the quarter. I know you guys talked about I guess I think it is.

Product mix.

Obviously you hope.

Pretty significant plus 90 bps.

How should we think about that going forward.

And you know what.

And any more kind of insight into what drove that drove that performance in more details and how we should think about gross margin.

As we move forward.

Especially if the economy were to weaken up.

Well I think that in this inflationary environment that we're able to do.

Get a little bit of boost just because of the inflationary environment.

<unk> product at all.

Yeah, you have a higher retail and it takes a little while for the average cost to catch up to that to the higher retail. So you get a little you get a little bump there, but going forward for the next two quarters. We are projecting that we should be in a similar type of situation that we are right now as far as 90.

90 basis points up to 100 basis points over the next two quarters.

Okay.

And then Barb and then as far as ongoing goes.

Youre not going to.

Once.

You get through the inflationary period, it'll probably be we'll try to get incremental.

Smaller.

Increases in our in our margin through through efficiencies.

Okay.

And then I guess, turning my last one and I don't know if you went on to college, hopefully not dominating here, but the.

Obviously sales came in.

I think at or above our thought process.

We are seeing kind of the economy weaken up but you guys should take feel pretty good about.

Things going forward, maybe a little better than coming into this quarter.

You know what why do you think that's happening like in and how do you feel the business is likely to perform something we asked last quarter.

We get into the back half of 'twenty three in unemployment rate goes up in the economy. We can further how should we think about your particular business in that type of environment.

Well.

We always strive to have affordable prices and so.

That has always been one of our defining characteristics. So were not considered a whole paycheck sort of company.

I think that's very helpful, particularly in Asia.

Recessionary period of time.

And then secondly.

We're getting.

We have one point.

1 million customers on our empower program and so we're able to market to them.

Four times a week.

Our value proposition and also our quality proposition.

And.

It's really helping to increase our customer count at the moment and also to just.

Get us through increased.

Increased sales in general.

Okay, great I'll yield actually have one more if there's not too many people and I'll get back in.

Go ahead and ask the other one.

Okay. So.

Obviously, we have a big merger taking place in one of your core markets.

There's likely to probably be a spin I mean do you think that just didn't the merger itself is likely to help your business do you do you have any feel of what the overlap of your customer base is with.

Safeway in and I guess, King Soopers with Kroger.

Well I think it's pretty substantial.

I think that.

Yes.

If the merger goes through they'll probably make them spin off quite a few of the Safeway locations that are in our market.

Areas.

I don't think that that's going to make the new spinoff company stronger. So I think in the overall end to end of things would be beneficial to us.

Alright, guys, thanks very much.

Yeah.

Thank you and then ask crushing US best Canyon with Wolfe Research.

Hey, this is Johnny Baldwin on for Greg I, just have a quick one on inflation. It seemed like it was roughly in line with last quarter at the 8% just curious how youre thinking about inflation to play through the back half of the year should we think about maybe like a low single digit exit rate for Q any commentary there would be helpful. Thanks.

I would guess that for this quarter, it'll probably be very similar to last quarter.

We're hoping that.

<unk> in the fourth quarter, our fourth quarter that it.

Moderate somewhat I don't think that youre going to get rid of it because theres still a lot of.

Inflationary pressures out there, particularly in the building trades area and.

There is entirely possible that energy prices could go up again.

There's going to be.

Probably some more wage inflation.

Next year, so I think the best that youre going to get up to.

And the 5% range by the end of the year, but I don't think it's going to go below that level.

Got you that's helpful. And then just one more for me just on the 2023 guidance raising the comp guide, but then leaving EPS at 70 to 90 cents, just curious sort of what you're seeing there to to not flow that through on the on the bottom line.

Well, we haven't really broad range on that.

On the 70 to 90.

So.

Perhaps we could have tightened that up a little bit on the low end, but we just wanted to.

There's always uncertainty going forward and so we just wanted to keep that range broad for the moment hopefully at the end of this next quarter, we will be able to tighten it up.

Yeah.

Gotcha. Thanks, I appreciate the color and that's it for me.

Alright, thank you.

Thank you. Thank you and this concludes our question and answer session I would like to kind of call. It comprises a frank closing comments.

Thank you for joining us to discuss our second quarter results. We are encouraged by our performance. We look forward to speaking with you on our next call to review our third quarter 2023 results. Thank you and have a great day. Thank.

Thank you.

France has now concluded thank you for attending today's presentation.

Centralized.