Q4 2024 Natural Grocers by Vitamin Cottage Inc Earnings Call
Speaker Change: Good day, ladies and gentlemen. Welcome to the Natural Grocers fourth quarter and fiscal year 2024 earnings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Later, we will conduct the question and answer session and instructions will be given at that time. As a reminder, today's call is being recorded. I would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker Change: Good afternoon and thank you for joining us for the Natural Grocers by Vitamin Cottage fourth quarter and fiscal year 2024 earnings conference call. On the call with me today are Kemper Isely, co-president, Todd Dissinger, chief financial officer, and Richard Halle, our incoming chief financial officer.
Speaker Change: As a reminder, certain information provided during this conference call contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties.
Speaker Change: 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.
Kemper Isely: 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.naturalgrocers.com. Now I will turn the call over to Kemper.
Kemper Isely: Thank you, Jessica, and good afternoon, everyone. Thank you for joining us for our fourth quarter call. Today, I will highlight our financial results, including key drivers of our performance, and provide an update on our priorities.
Kemper Isely: Then Todd will discuss the fourth quarter results in greater detail and introduce our fiscal year 2025 guidance.
Kemper Isely: We are pleased with our strong performance in the fourth quarter, particularly the balanced nature of our growth. We add 7.1% daily average comparable store sales growth and 14% on a two-year basis.
Kemper Isely: Sales growth included increases in transaction counts and items per transaction, modest price inflation and sales contribution from the new stores.
Kemper Isely: Additionally, gross margin increased 100 basis points, driven by both store occupancy cost leverage and higher product margin.
Kemper Isely: The full fiscal year performance was also balanced, including a daily average comparable store sales increase of 7% and gross margin improvement of 70 basis points.
Furthermore, we delivered operating margin expansion of 100 basis points.
Kemper Isely: underscore our customers appreciation for our commitment to the exceptional quality, value, and convenience provided by our innovative business model.
Kemper Isely: Additionally, we continue to benefit from consumers' increasing prioritization of products that support health and sustainability.
Kemper Isely: We provide a differentiated merchandising strategy that delivers affordable, high quality, natural and organic grocery products and dietary supplements.
Kemper Isely: In the fourth quarter, and for the fiscal year, the departments with the highest sales growth were meat, dairy, and produce.
Kemper Isely: We believe our high product standards in these departments resonate with consumers now more than ever.
Kemper Isely: Our meat product standards prioritize humanely raised and sustainably sourced offerings. For example, our chicken product standard has always prohibited the use of antibiotics, hormones, and other growth promotants.
Our dairy department standards require pasture-raised, non-confinement dairy products.
and our minimum egg standard is free range.
Kemper Isely: Our produce offering is 100% certified organic and was organic even before there was an official USDA organic designation. Our commitment to offering high quality products at always affordable prices creates a compelling value proposition that is distinctive within the market.
Our marketing initiatives consistently emphasize these key characteristics.
Kemper Isely: to drive customer engagement. We believe that communicating and reinforcing our distinct position in the marketplace.
Kemper Isely: has been instrumental in generating our strong sales performance over the past several quarters.
Kemper Isely: As we reflect upon our performance over a longer horizon, we have achieved sustained growth by consistently executing our founding principles and focusing on customer engagement and operational initiatives.
Additionally, we have benefited from favorable category and consumer trends.
Kemper Isely: Over the previous five years, we have grown net sales by 37% and more than tripled diluted earnings per share.
Kemper Isely: Furthermore, during this period, we returned $108 million in capital to our stockholders through $4.76 of cumulative dividends per common share. We take great pride in our sustained and balanced growth.
Kemper Isely: Consistent with our focus on returning capital to our stockholders, today we announced that our Board of Directors has approved increasing our quarterly cash dividend to 12 cents per common share, representing a 20% increase.
Kemper Isely: Turning now to an update on key priorities for our business. We believe that our initiatives drove growth in fiscal 2024 and will continue to provide growth opportunities in the future.
Kemper Isely: We continue to leverage our NPower Rewards Program, as reflected in the fourth quarter net sales penetration of 81%, up from 77% a year ago. NPower has been an effective tool for increasing customer loyalty and engagement.
Kemper Isely: Our National Grocer's branded products continue to experience elevated growth in the fourth quarter. Our branded products accounted for 8.4% of total sales, up from 7.8% a year ago.
Kemper Isely: During the quarter, we launched 19 new Natural Grocers brand items, including limited edition flavors of our organic coffee, expanded our household products line, and added new gourmet varieties of frozen pizza.
Kemper Isely: For the year, we launched 80 new products, which, like all our Natural Grocers brand products, represent premium quality at compelling prices.
Kemper Isely: Store unit growth and development continues to be a priority for our company.
Kemper Isely: During the fourth quarter, we opened a store in Incline Village, Nevada, which is in the Lake Tahoe region.
Kemper Isely: During fiscal 2024, we opened a total of 4 new stores and relocated or remodeled 4 stores. We are pleased with their early performance.
Kemper Isely: In closing, I would like to thank our Good4U crew, their commitment to operational excellence, and exceptional customer service.
Kemper Isely: were instrumental in driving our strong results. We are fortunate to have crew who share an affinity for our founding principles and are dedicated to ensuring that our stores, operations, and supply chain reflect these values.
Kemper Isely: Our record earnings in fiscal 2024 supported the award of significant discretionary incentives for our Good4U crew.
Speaker Change: Our history of paying discretionary incentives tied to the company's performance unites the organization in driving profitable growth and reflects our commitment to our crew. With that, I will turn our call over to Todd to discuss our financial results and guidance.
Todd Dissinger: Thank you, Kemper, and good afternoon. During the fourth quarter, we generated strong financial results, consistent with our trends throughout the year.
Todd Dissinger: For the fourth quarter, net sales increased 9.3% from the prior year period to $322.7 million.
Todd Dissinger: Our daily average comparable transaction count increased 3.6%. This marks our 7th consecutive quarter with positive customer traffic comps.
Todd Dissinger: Our daily average comparable transaction size increased 3.4%. The transaction size comp included an increase in items per basket of approximately 2 percentage points.
Todd Dissinger: Importantly, this was the third consecutive quarter with an increase in items per basket. Every major product category had an increase in items per basket. The transaction size comp also included product cost inflation of approximately one percentage point.
Todd Dissinger: Sales growth continued to be broad-based across product categories. Our strongest performing departments were meat, dairy, and produce. The dietary supplements sales comp was slightly positive.
Todd Dissinger: For the fourth quarter, gross margin increased 100 basis points to 29.6%, driven by store occupancy cost leverage and higher product margin.
Todd Dissinger: Store expenses increased 10.2% in the fourth quarter, primarily driven by higher compensation expenses and long-lived asset impairment charges related to a store closure.
Todd Dissinger: Store expenses as a percentage of sales increased 20 basis points, primarily driven by higher long-lived asset impairment charges, partially offset by expense leverage.
Todd Dissinger: Administrative expenses as a percentage of sales decreased 10 basis points reflecting expense leverage.
operating income increased 56% to 12.1 million dollars
Todd Dissinger: Net income was $9 million, with diluted earnings per share of $0.39 in the fourth quarter. This compares to net income of $5.9 million, or $0.26 of diluted earnings per share, in the fourth quarter of last year.
Todd Dissinger: Our daily average comparable store sales growth was 7%, resulting in an increase of 10.6% on a two-year basis.
Todd Dissinger: Gross margin was 70 basis points higher than the prior year. Store expenses as a percentage of sales were 30 basis points lower than the prior year and primarily reflects expense leverage.
Todd Dissinger: For fiscal 2024, diluted earnings per share were $1.47 compared to $1.02 in fiscal 2023. Adjusted EBITDA in fiscal 2024 was $83.3 million.
Todd Dissinger: Turning to the balance sheet and cash flow, we ended the fourth quarter in a strong liquidity position, including $8.9 million of cash and cash equivalents and no outstanding borrowings on our $75 million revolving credit facility.
Todd Dissinger: During fiscal 2024, we generated cash from operations of $73.8 million.
Todd Dissinger: and invested $38.6 million in net capital expenditures primarily for new and relocated stores resulting in free cash flow of $35.2 million.
Todd Dissinger: Today, we announce that our Board of Directors has increased our quarterly cash dividend to $0.12 from $0.10 per common share.
Todd Dissinger: The dividend will be paid on December 18, 2024 to all stockholders of record at the close of business on December 2, 2024.
Todd Dissinger: This increase reflects our strong operating performance and financial position, confidence in our future, and is consistent with our objective of enhancing stockholder value by returning capital.
Speaker Change: Now, I would like to review the company's outlook, which was developed based upon the current operating momentum we are experiencing, consumer trends, as well as consideration of the uncertainty of the economic environment.
Speaker Change: For fiscal 2025, we expect to open 4-6 new stores, relocate or remodel 2-4 stores,
Speaker Change: Achieved daily average comparable store sales growth between 4% and 6%.
Speaker Change: achieve diluted earnings per share between $1.52 and $1.60 and direct 36 to 44 million dollars towards capital expenditures to support our growth initiatives.
Speaker Change: In addition, our outlook includes the benefits of our new store growth, targeted marketing focused on our value proposition, differentiation, and customer engagement, and operating initiatives focused on driving higher productivity in our stores.
Speaker Change: Our current expectation is that sales comps will be at the high end of our outlook range in the first half of the year while moderating somewhat in the second half of the year as we continue to cycle relatively strong comps in the prior year.
Speaker Change: We expect modest inflation throughout the year in line with current trends.
Speaker Change: Our outlook anticipates that year-over-year gross margin will be relatively flat.
Speaker Change: Lastly, we expect that year-over-year store expenses as a percentage of sales will be relatively flat to slightly lower.
Speaker Change: Considering fiscal 2025 and beyond, we believe we have opportunity for growth from our alignment with consumer trends.
Strong customer engagement through our Empower Rewards Program.
Speaker Change: expansion of the Natural Grocers branded products, new store development, and driving existing store productivity.
Speaker Change: In closing, we had a strong quarter to conclude a record-setting fiscal year.
With that, I turn our call back to Kemper.
Kemper Isely: Thank You Todd. In late June Todd announced his intention to retire at the end of the year. Since his appointment as CFO in 2017, Todd has been an invaluable member of our executive team, helping Natural Grocers to execute to our founding principles while achieving record financial performance and enhancing shareholder value.
Kemper Isely: Stepping into the CFO role on January 1st is Richard Helle.
Kemper Isely: who served as a member of Natural Grocers Board of Directors and Audit Committee since 2012.
Speaker Change: Rich's deep, strategic knowledge of our company and strong background as a seasoned finance executive makes him the ideal fit as we continue to execute to our founding principles. I'm thrilled to welcome Rich to our executive team.
Speaker Change: Todd will continue in the CFO role through year end to ensure a successful transition. Todd, I want to thank you for your many contributions to our success and wish you well in retirement. Now I would like to open the lines for questions. Thank you.
We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone. 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 and then 2.
Speaker Change: Our first question comes from Scott Mushkin with R5 Capital. Please go ahead.
Great. Hey, guys.
Speaker Change: Todd, congratulations on retirement, and I'm jealous, I think. Thank you, Scott.
Speaker Change: So, I guess I just wanted to, I hate talking short term, but I guess I'll start off that way. Since one of your competitor, you know, kind of commented that
Speaker Change: They've seen acceleration September, October, like maybe into a little November. I mean, are you guys
Speaker Change: I know the cops get tougher but I mean are you are you seeing the same and you know kind of continuous acceleration that they're seeing in the business?
Speaker Change: Well, their acceleration was off of a lower comp in the previous quarter than ours, but our comp for, we don't really give good, but we were very similar to how we did throughout the year in October.
Speaker Change: Okay, that's a good caller. Sticking with this type of theme,
Speaker Change: You guys overlapped in a number of markets, I think. Well, at least in the in the Colorado market, but also down in Texas. Do you see any difference in store performance, you know, whether you're competing with Sprouts or not competing with Sprouts?
Not really, you know, they...
Our store performance is pretty even throughout, wherever we're located.
Speaker Change: I mean, one of our stronger markets right now is down in Arizona, Tucson and Phoenix area. So that's their headquarters area.
Speaker Change: and actually Texas. Texas is actually pretty strong too right now.
Thank you.
And then.
Speaker Change: Kemper, I don't know how much you put into the idea that some of the acceleration in the industry has to do with these weight loss drugs.
Kemper Isely: Maybe you don't put any credence on that. I'd really like to get your input on that. But do you think that that burns out after a while if you think it's...
helping propel the industry or are you...
Speaker Change: You know thinking it can keep going longer again if you think that's part of what's going on
Speaker Change: No, I don't really think the weight loss drugs have, I mean they might be having somewhat of an effect just from the standpoint that people are more aware of what they're putting into their body, so that's good for our business, but I think that's an overall.
Speaker Change: throughout the country sort of thing that people are more worried about what they're consuming rather than just the people that are on the weight loss drug. I actually think weight loss drugs probably are less likely to be our customers just because
They want something, they want to
solve their problem.
Speaker Change: of weight without actually addressing what the underlying cause of the weight gain is.
Bye.
Speaker Change: And then, how do you view the... I don't know if there's anyone else here to ask questions, so I figured I'll just keep throwing them out unless there is, and I'll get off.
Speaker Change: No, we're good. We're good, okay. So how do you think about, obviously there's...
Health and Human Services person.
Help you or hurt you?
Speaker Change: It would be helpful if he succeeds in making people more aware of what they're putting into their bodies because we have an authentic story of not allowing
Speaker Change: artificial food additives into the products that we sell in our stores so that
Speaker Change: That, you know, it just reaffirms that we're authentic and that we're the original player in the field of actual natural foods.
Speaker Change: Yeah, okay. That makes sense. I was trying to frame it. I think that helps. I mean, I think to the degree he draws more and more attention to it.
Speaker Change: It obviously helps. I agree with what you said. I mean, it's going to be... I mean, even if he is nominated, it's going to be a big struggle for him to get a lot of stuff taken care of that probably should be taken care of in this country. I mean, the way we grow food and the way...
Speaker Change: The way we manufacture food, etc., is quite problematic. I mean, it's part of the reason why so many people have weight issues and have to take the weight loss drugs.
Speaker Change: That's amazing, some of the stuff. When I first was a young analyst, I did a lot of work around the chemicals and additives back in the 2000s.
Speaker Change: early 2000s and it just amazed me as I did the research on some of the stuffs in our food and the fact that a lot of it's known carcinogens and
and it's still there.
Bye. Bye.
Speaker Change: And then you have the artificial colors and flavors that they put into the candies for the kids, so they're not super hyperactive.
Speaker Change: and the plastics in the black oh yeah all of you guys you guys have plastic I don't think so right or you do you have are you allowed do you allow plastics in
No, we don't allow plastics into the foods.
Dr. Dissinger, Dr. Dissinger
All right, we digress just a little bit.
Speaker Change: So if you're going to look at 25, you went over, Kemper, you went over some of the initiatives that you're excited about, but if you're looking at the top things for 25, especially on the revenue drive side, but I guess also maybe the efficiency side, how, like, you know, if I was going to look at something for 25, like, hey, this is really a focus for the company.
Well, we're really focused...
Speaker Change: as far as revenue driving is just marketing to our in-power customers because that's the most cost effective way for us to market. So getting even a higher percentage of our sales.
Speaker Change: people, higher percentage of our customer base signed up as NPower members is super effective in driving.
Speaker Change: the top line of sales. And so, you know, if we can drive that from 81% and we went from 78 to 81, so we can go from 81 to 84 this year, that would be a tremendous driver of sales.
Speaker Change: Because I mean, the Empower members just spend a lot more for transactions than other customers do because we're marketing to them.
Speaker Change: and telling them about all of our good benefits, you know, five times a week.
and some really good propositions on this topic.
Speaker Change: So are the efforts to get people to sign up, like we just had the most tremendous, my partner and I, she does a lot of the consulting for R5, we were actually in Keller, Texas, we were in your store.
Speaker Change: And we just had the most positive interaction with the, actually it was the cashier, who actually had to sign up. And is that how you're getting it done? Is it just, you know, is that how you get from 79 to 81? Is it just like...
Associates engaging with people, anyway. Exactly, exactly.
Speaker Change: Okay. And then we're running, you know, we have in-store friendly contests in each region, so the stores, you know, once a quarter we run a contest to see which store can sign up the most.
Speaker Change: and our members in a quarter, and just things like that, just to drive the signups. And you need to be in the program to take advantage of promotions.
Yeah.
Right.
Speaker Change: I mean, you can't get your eggs at the really good price unless you're in the N-POWER program. And eggs seem to be a driver again because there's an egg shortage again. It's amazing.
Speaker Change: I've got to tell you, I was definitely impressed with that interaction. We both were.
Speaker Change: And we were kind of bummed that we weren't going to be there for it, but we weren't.
Speaker Change: I think that's what I told you, are you ever going to open a natural grocers down here in Florida? But you said no.
Not, not right now, I'm not.
Speaker Change: We still have a lot to do to sell west of the Mississippi.
Speaker Change: There is a competitor down here, but they're not nearly as good as you, or someone that does the same thing, but they're not nearly as good.
All right, uh...
I think that's it.
I think that's it for me. I appreciate it.
Speaker Change: It's nice to see the company doing so well. Thanks for the dividend. I own the stock, so I appreciate it.
Speaker Change: You're welcome. I mean quite a few dollars given back in dividends over the last few years.
Speaker Change: Yeah, that's the one one good thing about having a smaller company We can actually it's in our disclosures. This will probably be in print, but we can actually put our money where our mouth is so Yeah Appreciate it
Speaker Change: We appreciate your coverage. Thank you. Thanks. Thanks, guys. Bye. Thanks, Scott. Bye.
Speaker Change: This concludes our question and answer session. I would like to turn the conference back over to Kemper Isely for any closing remarks.
Thank you.
Kemper Isely: Thank you for joining us to discuss our fourth quarter results. We take great pride in our sustained and balanced growth in fiscal 2024 and over the past several years. We are committed to maximizing value for our stockholders.
Kemper Isely: as we look forward to fiscal year 2025. We expect to build upon our momentum by executing to our founding principles, leveraging our differentiated models, and emphasizing operational excellence to drive profitable growth.
Kemper Isely: at App in an Authentic Company. Thank you and have a great day. Bye.