Natural Foods Merchandiser
Natural Grocers by Vitamin Cottage announces second quarter and first half fiscal year 2014 results

Natural Grocers by Vitamin Cottage announces second quarter and first half fiscal year 2014 results

Natural Grocers by Vitamin Cottage, Inc. (NYSE: NGVC) today announced results for its second quarter and first half of fiscal year 2014 ended March 31, 2014 and updated its outlook for fiscal year 2014.

In addition to presenting the financial results of Natural Grocers by Vitamin Cottage, Inc. and its subsidiaries (collectively, the Company) for the second quarter and first half of fiscal year 2014 and 2013 in conformity with U.S. generally accepted accounting principles (GAAP), the Company has presented EBITDA, which is a non-GAAP financial measure.  The reconciliation from GAAP to this non-GAAP financial measure is provided at the end of this earnings release. 

Highlights for Second Quarter and First Half Fiscal Year 2014 Compared to Second Quarter and First Half Fiscal Year 2013

  • Net sales increased 22.4% to $130.3 million in the second quarter and increased 24.0% to $250.9 million in the first half of fiscal 2014
  • Daily average comparable store sales increased 5.7% in the second quarter and increased 8.1% in the first half of fiscal 2014
  • Net income increased 24.3% to $4.0 million with diluted earnings per share of $0.18 in the second quarter and increased 27.3% to $6.9 million with diluted earnings per share of $0.31 in the first half of fiscal 2014
  • EBITDA increased 28.4% to $11.2 million in the second quarter and increased 32.6% to $20.6 million in the first half of fiscal 2014

"Our sales increases and disciplined approach toward operating expenses have resulted in strong financial results this quarter which allowed us to continue our investments into growth," said Kemper Isely, Co-President. "Additionally, reflecting our commitment to our five founding principles, we are excited to announce that during the quarter we updated our dairy standards. Further distinguishing us from our competitors, we plan to sell only pasture-raised, non-confinement dairy products.  We intend to substantially complete the implementation of these standards by April 2015. Our customers have provided positive feedback during this transition, as they appreciate our commitment to quality standards."

Operating Results — Second Quarter Fiscal Year 2014 Compared to Second Quarter Fiscal Year 2013

During the second quarter of fiscal year 2014, net sales increased $23.9 million, or 22.4% over the same period in fiscal year 2013 to $130.3 million due to a $16.6 million increase in sales from new stores and a $7.3 million, or 6.9%, increase in comparable store sales. Daily average comparable store sales increased 5.7% in the second quarter of fiscal year 2014 compared to a 10.6% increase in the second quarter of fiscal year 2013. The 5.7% increase in the second quarter of fiscal year 2014 was driven by a 2.0% increase in daily average transaction count and a 3.7% increase in average transaction size. Daily average mature store sales increased 3.7% in the second quarter of fiscal year 2014.

Gross profit during the second quarter of fiscal year 2014 increased 21.8% over the same period in fiscal year 2013 to $38.8 million driven by positive comparable store sales and new store growth. Gross profit reflects earnings after both product and occupancy costs. Gross margin was 29.7% during the second quarter of fiscal year 2014 compared to 29.9% in the second quarter of fiscal year 2013. Gross margin decreased due to increases in occupancy costs partially offset by increases in product margin. The increases in product margin are due to increases in product margin across most departments, partially offset by a shift in sales mix towards products with lower margin. Additionally, gross margin benefited from operating efficiencies at the bulk food repackaging and distribution center. Occupancy costs as a percentage of sales increased during the second quarter of fiscal year 2014 compared to the second quarter of last year primarily driven by increased average lease expenses at new stores (1).

Store expenses as a percentage of sales decreased 20 basis points during the second quarter compared to the comparable period of fiscal year 2013 driven by a decrease in salary-related expenses as a percentage of sales at comparable stores as well as a decrease in advertising expense, primarily due to lower television advertising during the quarter. The decrease in store expenses was partially offset by an increase in depreciation expense and to a lesser extent an increase in utilities, all as a percentage of sales.

Administrative expenses as a percentage of sales decreased 40 basis points during the second quarter compared to the comparable period as a result of the Company's ability to support additional store investments and sales without proportionate increases in the cost of overhead.

Pre-opening and relocation expenses as a percentage of sales increased 20 basis points during the second quarter compared to the comparable period primarily due to the increased number of new store openings and the timing of new store openings. During the second quarter of fiscal year 2014 five new stores opened compared to four new stores opened during the second quarter of fiscal year 2013.

Interest expense increased $0.3 million in the second quarter compared to the comparable period, primarily due to interest expense related to capital and financing lease obligations.

Net income increased 24.3% to $4.0 million compared to the same period in fiscal year 2013 with diluted earnings per share of $0.18 in the second quarter of fiscal year 2014.

EBITDA increased $2.5 million, or 28.4%, to $11.2 million, or 8.6% of sales, for the second quarter of fiscal year 2014 compared to the same period in fiscal year 2013. 

Operating Results — First Half Fiscal Year 2014 Compared to First Half Fiscal Year 2013

During the first half of fiscal year 2014, net sales increased $48.6 million, or 24.0% over the same period in fiscal year 2013 to $250.9 million due to a $31.1 million increase in sales from new stores and a $17.5 million, or 8.7%, increase in comparable store sales. Daily average comparable store sales increased 8.1% in the first half of fiscal year 2014 compared to an 11.6% increase in the first half of fiscal year 2013. The 8.1% increase in the first half of fiscal year 2014 was driven by a 3.5% increase in daily average transaction count and a 4.4% increase in average transaction size. Daily average mature store sales increased 5.3% in the first half of fiscal year 2014.

Gross profit during the first half of fiscal year 2014 increased 24.3% over the same period in fiscal year 2013 to $74.1 million driven by positive comparable store sales and new store growth. Gross profit reflects earnings after both product and occupancy costs. Gross margin was 29.5% during the first half of fiscal year 2014 and the first half of fiscal year 2013. Gross margin was positively impacted by increases in product margin across almost all departments, partially offset by a shift in sales mix towards products with lower margin. Additionally, gross margin benefited from operating efficiencies at the bulk food repackaging and distribution center. Occupancy costs as a percentage of sales increased during the first half of fiscal year 2014 compared to the first half of last year primarily driven by increased average lease expenses at new stores (1).

Store expenses as a percentage of sales decreased 20 basis points during the first half of fiscal year 2014 compared to the comparable period of fiscal year 2013 driven by a decrease in salary-related expenses as a percentage of sales at comparable stores partially offset by an increase in depreciation expense.

Administrative expenses as a percentage of sales decreased 30 basis points during the first half of fiscal year 2014 compared to the comparable period as a result of the Company's ability to support additional store investments and sales without proportionate increases in the cost of overhead.

Pre-opening and relocation expenses as a percentage of sales increased 10 basis points during the first half of fiscal year 2014 compared to the comparable period primarily due to the increased number of new store openings and the timing of new store openings. During the first half of fiscal year 2014 nine new stores opened compared to six new stores opened during the first half of fiscal year 2013.

Interest expense increased $0.8 million in the first half of fiscal year 2014 compared to the comparable period, primarily due to interest expense related to capital and financing lease obligations.

Net income increased 27.3% to $6.9 million compared to the same period in fiscal year 2013 with diluted earnings per share of $0.31 in the first half of fiscal year 2014.

EBITDA increased $5.1 million, or 32.6%, to $20.6 million, or 8.2% of sales, for the first half of fiscal year 2014 compared to the same period in fiscal year 2013. 

(1)

The Company had nine and seven stores accounted for as capital and financing lease obligations for the second quarter of fiscal year 2014 and 2013, respectively, and for the first half of fiscal year 2014 and 2013, respectively. For leases accounted for as capital and financing lease obligations, the Company does not record straight-line rent expense in cost of goods sold and occupancy costs, but rather rental payments are recognized as a reduction of the capital and financing lease obligations and as interest expense. The stores that were accounted for as capital and financing lease obligations rather than being reflected as operating leases increased gross margin as a percentage of sales by approximately 60 and 40 basis points in the second quarter of fiscal year 2014 and 2013, respectively, and 60 and 35 basis points in the first half of fiscal year 2014 and 2013, respectively. Additionally, accounting for these stores as capital and financing lease obligations rather than operating leases increased EBITDA as a percentage of sales by approximately 60 and 55 basis points in the second quarter of fiscal year 2014 and 2013, respectively and 60 and 45 basis points in the first half of fiscal year 2014 and 2013, respectively, due to the impact on gross profit, as well as occupancy costs that would have been included in pre-opening expenses.

Balance Sheet and Cash Flow

As of March 31, 2014, the Company had $7.8 million in cash and cash equivalents and $95,000 in available-for-sale securities, and no amounts outstanding on the revolving credit facility.

During the first half of fiscal year 2014, the Company generated $15.6 million in cash from operations and invested $17.9 million in capital expenditures primarily for new stores.

Growth and Development

During the second quarter of fiscal year 2014, the Company opened five new stores, bringing the total store count to 81 stores located in 13 states as of March 31, 2014.

The Company plans to open a total 15 stores in fiscal year 2014 and expects to remodel two existing stores. One of the remodels was completed in the first half of fiscal year 2014.

As of this release, the Company opened two of the three stores planned to open during the third quarter of fiscal year 2014, has signed leases for the remaining three stores it plans to open in the fourth quarter of fiscal year 2014 and has four signed leases for stores planned to open in fiscal year 2015. Leases have been signed for locations in Colorado, Kansas, Nevada, Oklahoma, Oregon and Washington.

Fiscal Year 2014 Outlook

The following table provides information on the Company's updated fiscal year 2014 outlook:

 

   

Prior Fiscal
2014 Outlook

 

Current Fiscal
2014 Outlook

 

First Half FY'14
Actual

Number of new stores

 

15

 

*

 

9

Number of remodels

 

2

 

*

 

1

Daily average comparable store sales growth

 

8.5% to 9.5%

 

5.5% to 6.5%

 

8.1%

EBITDA as a percent of sales

 

7.8% to 8.0%

(1)

*

 

8.2%

Net income as a percent of sales

 

2.4% to 2.6%

 

*

 

2.8%

Diluted earnings per share

 

  $0.58 to $0.63

 

*

 

$0.31

Capital expenditures (in millions)

 

     $35 to $37

 

*

 

$17.9

*No Change from prior outlook.

 

(1) Includes approximately 55 basis points of EBITDA improvement from the nine capital and financing lease obligations.

 

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