Natural Grocers by Vitamin Cottage Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 16, 2023

There are 5 speakers on the call.

Operator

Good day, ladies and gentlemen. Welcome to the National Grocers 4th Quarter and 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 is being recorded.

Operator

I'd like now to turn the conference over to Ms. Jessica Thiesen, Vice President, Treasurer for Natural Grocers. Ms. Thiesen, you may begin.

Speaker 1

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage 4th Quarter and Fiscal Year 2023 Earnings Conference Call. On the call with me today are Kemper Eisele, Co Ed 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 statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10Q and 10 ks. The company undertakes no obligation to update forward looking statements.

Speaker 1

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.

Speaker 2

Thank you, Jessica, and good afternoon, everyone. Thank you for joining us for our Q4 call. Today, I would like to Highlight our financial results, outline several key drivers and accomplishments and review our priorities and initiatives. Then Todd will discuss the 4th quarter results in greater detail and introduce our fiscal year 2024 guidance. Our fiscal year 2023 daily average comparable store sales growth of 3.6% marked our 20th consecutive year of positive comparable store sales.

Speaker 2

We are proud of this extraordinary accomplishment. For the fiscal year, we achieved record diluted earnings per share of $1.02 an 8 point 5% increase compared to last year. Our 4th quarter sales trends were particularly strong. Daily average comparable store sales Increased 6.9%, including a 3.6% increase in daily average transaction count. Moreover, the strength was broad based across our product categories.

Speaker 2

We attribute the strong 4th quarter and Fiscal year sales to our differentiated business model and our responsiveness to the industry dynamics. During fiscal 2023, our targeted marketing and promotions effectively drove customer engagement. Our percentage of sales on promotion has been relatively stable over recent quarters. Further, our emphasis on the in store shopping has been an important contributor to driving our strong traffic trends. I would like to recognize our operations, Purchasing and marketing teams for how they have nimbly transitioned from pandemic conditions to focus on core execution and navigating the current macro environment.

Speaker 2

Our company's commitment to operational excellence and continuous improvement We're instrumental in driving our strong 4th quarter and fiscal year performance. We developed and executed market specific campaigns that accelerated 70 basis points. Higher labor efficiency partially offset increased wage rates and drove store productivity. In particular, we featured NPower promotions with a focus on local store marketing. In August, we launched the National Grocers mobile app, which provides Npower members with enhanced access to exclusive offers, digital coupons, recipes and articles.

Speaker 2

We believe these initiatives Collectively drove 17% increase in Npower membership and were a major contributor to our broad based sales growth. Our Natural Grocers brand products remain a key point of differentiation due to their emphasis on quality and price. In the Q4, private label brands represented 7.8% of total sales, up from 7.6% in the Q4 of last year. During fiscal year 2023, we expanded our line of Natural Grocers brand products with 59 new offerings, Including a distinctive offering of organic eggs from regenerative farms launched in the 4th quarter. We believe that we are the 1st national grocery chain to offer private label, regenerative Our Our all in average hourly wage rate for full time store crew now exceeds $21 per hour.

Speaker 2

To partially offset higher labor rates, we continue to implement productivity initiatives. Recent projects Improvements to the receiving process, enhancements to automated replenishment and point of sale system updates Designed to create labor efficiencies, improve inventory accuracy and provide more pricing flexibility. These initiatives have enabled us to streamline and automate certain in store tasks, while maintaining a high level of customer service. New store development continues to be a priority for our company. During the Q4, we opened a store in Kennywick, Washington, relocated our in Beaverton, Oregon and remodeled our store in Norman, Oklahoma.

Speaker 2

In fiscal year 2023, we opened a total of 3 stores, relocated 2 stores and remodeled 1 store. We are pleased with the performance of these stores. Our new store development was constrained in fiscal year 2021 through Over the next several years, we are targeting a return to opening between 6 8 new stores per year, subject to improving construction and supply chain conditions. I am pleased to announce that our Board has declared a special cash dividend of $1 per common share, in addition to our quarterly cash dividend of $0.10 per common share to be paid in December. The special dividend reflects our strong operating trends, financial position, confidence in our business outlook and commitment to returning value to our stockholders.

Speaker 2

Including the special and quarterly dividends announced today, execution and exceptional customer service, which were instrumental in driving our strong performance in the 4th quarter that culminated in a record setting year. With that, I will turn the call over to Todd to discuss our financial results and guidance.

Speaker 3

Thank you, Kemper, and good afternoon. For the Q4, net sales increased 7.6% from the prior year period to $295,100,000 Our daily average comparable store sales increase of 6.9 And daily average transaction size, we are very encouraged by the strong customer traffic trends The Q4, down 200 basis points from the 3rd quarter and was approximately 7% for the fiscal year 2023. Our product cost inflation and disinflation have been less volatile than conventional grocery as a result of our specialized supply chain. The item count per basket was down Less than one half of an item compared to the same period in the prior year, reflecting an improving trend over the past several quarters. Our item count remains above pre pandemic levels.

Speaker 3

Sales growth was broad based across categories. Our strongest performing departments were dairy, body care, meat and dietary supplements. Which is margin accretive. The Npower Rewards program represented 77% of net sales, reflecting the strength of our relationships with so many of our customers. For the 4th quarter, gross margin increased 100 basis points to 28.6 percent and was driven by higher product margin attributed to effective pricing and promotions, partially offset by higher shrink expense.

Speaker 3

Store expenses as a percentage of net sales decreased 70 basis points and was primarily driven by lower long lived asset impairment charges as compared to the prior year period. Administrative expenses as a percentage of net sales increased 10 basis points and was primarily driven by higher compensation Our operating income increased 114 Percent TO 7,700,000 The decrease in effective income tax rate was primarily attributable to increased food donation deductions. Net income was $5,900,000 with diluted earnings per share of $0.26 in the 4th quarter. This compares to net income of $2,200,000 or 0 point 0 $9 of diluted earnings per share in the 4th Quarter of last year. Adjusted EBITDA increased 18.5 percent to $16,100,000 Briefly touching on the full year results.

Speaker 3

For fiscal year 2023, total revenue increased 4.7% to $1,100,000,000 Our daily average comparable store sales growth was 3.6%, resulting in an increase of 6.2% on a 2 year basis. Gross margin was 70 basis points higher than the prior year. Store expenses as a percentage of sales were 40 basis The effective income tax rate was 18.1% 23.1% For the fiscal year 2023 2022, respectively, the decrease was primarily attributable to increased food donations. We anticipate our normalized effective income tax rate will be between 20% 21% during fiscal 2024. For fiscal year 2023, diluted earnings per share was $1.02 compared to $0.94 in fiscal 2022.

Speaker 3

Adjusted EBITDA in the fiscal year 2023 was $63,400,000 Turning to the balance sheet and cash flow. For fiscal year 2023, we generated cash from operations of $64,600,000 and invested $38,000,000 In net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $26,700,000 We finished the year in a strong liquidity position With $18,300,000 of cash and cash equivalents, we had no outstanding borrowings under our $50,000,000 revolving credit facility. Additionally, today we announced that we have amended our credit facility to increase the revolving credit facility commitment to $75,000,000 and extend the maturity to November 16, 2028 to further enhance our liquidity. As Kemper noted, our Board of Directors has declared a special cash dividend of $1 per common share, In addition to a quarterly cash dividend of $0.10 per common share, the special dividend reflects our commitment to returning capital and maximizing value for our stockholders, recognizing our strong cash flow, cash position and modest financial leverage. To fund the dividend, we will use cash on hand and borrowings under the revolving credit facility.

Speaker 3

We expect to continue investing in profitable growth and development initiatives, including new stores and store relocation opportunities. Both dividends are payable on December 13, 2023 to all stockholders of record at the close of business on November 27, 2023. Now I would like to introduce the company's outlook for fiscal year 2024. Our guidance was developed based upon consideration of current operating trends, consumer trends and the uncertainty of the economic environment. Our outlook includes the benefits of new store growth, Targeted marketing focused on our value proposition and customer engagement and operating initiatives.

Speaker 3

Our current expectation is that sales comps will be at the high end of our outlook range in the first half of the year and more challenging in the second half of the year as we cycle stronger comps in the back half of fiscal 2023. Decelerating inflation will likely be a factor as the year progresses. Our outlook anticipates Year over year gross margin will be higher in the first half of the year and flat in the second half. Lastly, we expect store expenses as a percentage of sales to increase driven by higher labor rates resulting in modest deleverage. For fiscal year 2024, we expect to open 4 to 6 new stores, relocate or remodel 4 to 6 stores, Achieved daily average comparable store sales growth between 2% 4%, Achieve diluted earnings per share between $1 $1.10 and direct $30,000,000 to $39,000,000 towards capital expenditures to support our growth initiatives.

Speaker 3

In closing, we had another strong quarter and record setting year. During 2023, our team transitioned from the challenges of the pandemic and redirected their focus to driving customer engagement and store productivity. Over the past 4 years, Daily average comparable store sales have increased 19.9%, gross margin has improved 2.30 basis points and diluted earnings per share has grown 143%. We have effectively managed the challenges over With that, I would like to open the lines for questions. Thank you.

Operator

Our first question comes from Scott Mushkin of R5 Capital. Please go ahead.

Speaker 4

Hey, guys. Wow, unbelievable. Incredible, kind of along the lines where we talked about last quarter about Maybe the specialty Europe format resonating a bit more as we come out of the pandemic. So It does though if I look at it, you obviously had a real easy compare. I go back and forth on stacks, but how much do you think that played Into the big acceleration of the comp in the 4th quarter versus the 3rd?

Speaker 2

It played a certain it definitely played a little bit into that acceleration because as you said, we had Pretty sad comps last year, but I don't think I think we had really strong consumer customer count growth. And so I think that's the real positive out of what we got for the quarter.

Speaker 4

And remind me what the Count growth was in the 3rd quarter, did it accelerate year over quarter to quarter sequentially?

Speaker 2

Yes. It was you have that there handy, Todd or Jessica?

Speaker 1

1.9 to 3.6.

Speaker 2

Yes, it went from 1.9 to 3.6 in the quarter. So it was a substantial acceleration of customer count growth in our stores.

Speaker 4

So if you had to frame it as, okay, this is what we're doing that's driving It's really good performance on sales. And this is kind of what we think is macro related, our How would you break that down? And then when you look at your own drivers, what do you think the top ones are?

Speaker 2

Well, I mean our primary driver is that we're communicating with our 78% of our customer base 4 or 5 times a week via our Npower promotions and emails to those customers. And so That's really helping to get those customers more engaged and then word-of-mouth is getting out there and then we're doing Effective job without a home promotion with our billboards and targeted social advertising to get new customers into the stores. And then the third thing is, our pricing strategy is one of affordability, so customers like that quite a bit. And then 4th, we just have our standards resonate in this World we live in now and people appreciate the fact that we are well over 50% organic in all the products we sell. Our produce is 100% organic and we're using we're promoting pasture based Animal products, which are actually beneficial to the to Climate change rather than a negative, which is what most other of the retailers have with their animal products, Because they're raising them in confined quarters and that actually has a negative connotation for climate change.

Speaker 2

And so our customers, I think it really resonates with our customers because we're able to communicate with them effectively through our Npower program.

Speaker 4

And then Kevin, go ahead.

Speaker 3

Scott, I think I'd add to that too that we've got pretty diverse customer base, but we may be less And on the lower income customer, one data point that we have is the SNAP EBT, which is really only about 2% of our total business and we saw

Speaker 4

And then that's actually a good segue. I'm usually like one of the only people on this call. So if I'm you guys just tell me to shut up, I have a couple more questions. So hopefully that's okay. But it's a good segue into demographics.

Speaker 4

Have you seen a notable shift maybe younger in the last couple of years to your demographics that are

Speaker 2

We definitely have a good group Millennials coming into the store and families coming into the store. Although, as Todd said, we kind of do skew a little bit On a higher income basis and the baby boomers who have less financial strain are definitely the backbone of our business.

Speaker 4

Have there been any big changes as you look through your frequency chopper data or has it kind of been steady?

Speaker 2

It's been pretty steady.

Speaker 4

Okay. All right. Last but not least is my special dividend question, which it seems like You guys are I wouldn't consider you under levered. It seems like your adjusted leverage is about 3 times. I don't know if you agree with that.

Speaker 4

The using up all the cash and putting out a little bit more debt to pay a special dividend, I just wanted to understand kind of It seems I'm going to call it aggressive, but it seems a little bit more that way and kind of just Walk me through what the thought process is and walk me through if you think I'm right or wrong about what I said.

Speaker 2

Well, the way we look at it is that if we could we had 2 ways of going. We could have increased The size of our quarterly dividend, we issued a special dividend. And then we also look at stock buybacks. So we don't look we don't we're not going No, we don't you'd have to spend a significant amount, a significantly more money on stock buybacks to get the impact of a special dividend to our shareholders. But if you look at it on a cash flow basis, the special dividend will be paid off Fairly rapidly and it won't cause any difference in our cash flow over the next 3 years.

Speaker 2

Whereas if we had done the increase and it gives a really good value back to our shareholders. And then whereas if we Done the increase in the quarterly dividend, that's just a constant outflow of the cash. I don't

Speaker 4

know if

Speaker 2

that makes sense to you, but that's the way we look at it. We looked at it from our cash, How fast are we going to be able to regenerate that cash from the special dividend into the company. And it really has no effect whatsoever on our cash outlays compared to where we would have been before. So we thought

Speaker 4

it was

Speaker 2

well worth doing.

Speaker 4

Sounds good guys. You've got another just great quarter. So, thanks. All right. Thanks.

Speaker 4

Yes.

Operator

This concludes our question and answer session. Would like to turn the conference back over to Kemper Eisele for any closing remarks.

Speaker 2

Thank you for joining us to discuss our 4th quarter results. We take great pride in all of the company's accomplishments in fiscal 2023. We are committed to maximizing value for our stockholders. Today's declaration of our 2nd special cash dividend yields a cumulative payout of 4.46 Since the dividend program's inception 4 years ago. We look forward to many opportunities in fiscal year 2024.

Speaker 2

Thank you and have a great day. Bye.

Powered by Quartr
Earnings Conference Call
Natural Grocers by Vitamin Cottage Q4 2023
00:00 / 00:00