Natural Grocers by Vitamin Cottage (NGVC) Q4 2016 Results - Earnings Call Transcript

| About: Natural Grocers (NGVC)

Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC)

Q4 2016 Earnings Conference Call

November 17, 2016 4:30 pm ET

Executives

Todd Dissinger - Vice President, Treasurer

Kemper Isely - Chairman and Co-President

Sandra Buffa - Chief Financial Officer

Analysts

David Magee - SunTrust Robinson Humphrey

Rupesh Parikh - Oppenheimer

Bill Kirk - RBC Capital Markets

Chris Mandeville - Jefferies

Scott Mushkin - Wolfe Research

Shane Higgins - Deutsche Bank

Ryan Gilligan - Barclays Capital

Alvin Concepcion - Citigroup

Operator

Good day, ladies and gentlemen. Welcome to the Natural Grocers' Fourth Quarter Fiscal Year 2016 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.

I'd now like to turn the conference over to Mr. Todd Dissinger, Vice President and Treasurer for Natural Grocers. Mr. Dissinger, you may begin.

Todd Dissinger

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage fourth quarter and fiscal year 2016 earnings conference call. On the call with me today are Kemper Isely, our Co-President and Sandra Buffa, our Chief Financial Officer.

As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that 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 detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.

Our press release is available on our website and a recording of this call will be available on our website at investors.naturalgrocers.com.

Now, I will turn the call over to our Co-President, Kemper Isely.

Kemper Isely

Thank you, Todd. Good afternoon, everyone. On today’s call I would like to review our fourth quarter and fiscal 2016 results, our strategies and initiatives and provide our initial outlook for fiscal 2017.

Fiscal 2016 was a challenging year for National Grocers. During the year we faced heightened levels of competitive pressure from both our traditional competitors and from the entrance of non-traditional competitors into the natural and organic food segment, as well as regional and macro-economic factors. Of course, this growing competition reflects the continued rapid growth of the natural and organic food sector. As more people recognize the benefits of healthier eating habits, more players have moved into a space that we have been serving for more than 60 years. So while we must navigate competition, we are clearly in the right space.

Following quarter two we revised our guidance downward in recognition of the changing environment. Subsequent to quarter two our team reassessed our business practices and focused on operating initiatives that would allow us to operate successfully within the parameters of our revised guidance. I am pleased to report that we were able to achieve our revised sales expectations for the back half of the year and successfully execute on our operating initiatives. I would like to walk you through our fiscal 2016 accomplishments and share my perspective on the opportunities that fiscal 2017 present.

However before we get started I want to recognize the hard work and accomplishments of our crew who embraced the challenge and developed and executed on our plan in fiscal 2016. As a result of our crews’ efforts I believe the company is well positioned to meet the task ahead of us in fiscal 2017.

First, let me start with sales. We achieved an 11.5% sales increase in the fourth quarter. This increase was driven primarily by new store growth and a comparable sales increase of 0.3%. We are pleased that we were able to drive increased transaction size by 1%, although transaction count was down by 0.7%. We’ve made progress with our marketing initiatives which I will elaborate on in a few minutes.

During the fourth quarter we opened eight new stores and relocated one store, which is a record number of openings in a single quarter. Our new store opening process works smoothly with two of the stores achieving first week sales volume that ranked in the top six of our openings in fiscal 2016.

In fiscal 2016 we opened a total of 23 new stores, relocated four stores and remodeled one store resulting in a 22% increase in our store base. Our fiscal 2016 new store opening sales are on average comparable to our new store openings over the past several years.

We also track the performance of our store portfolio by vintage and this analysis confirms that in the case of stores that have opened over the past five years those stores that have not faced the entrance of new competition are on average meeting or exceeding our investment return objective. We've seen our new stores with new competition experience difficulty in meeting first year sales targets. In response we are implementing a variety of new store opening marketing initiatives including enhanced signage, radio, digital and social media, direct household promotion and community outreach and involvement led by our nutritional health coaches.

We have also responded to the challenging sales environment by adjusting our new store labor model and inventory set which will help new stores achieve our return objectives. Given the continued economic and competitive pressures on sales we are moderating our new store growth from the 22% we experienced in fiscal 2016 to a still healthy but more conservative unit growth rate of between 12% and 16% in fiscal 2017. That translates to between 15 and 20 new stores in fiscal 2017. We also plan to relocate three stores during the year. At these levels we anticipate that our new store growth can be substantially supported by free cash flow generated from operations.

In quarter four our results continued to reflect the impact of regional economic weakness in markets sensitive to lower oil and gas prices. However we saw some moderation in this pressure as compared to the quarter three and are encouraged that the impact is stabilizing. We also saw our stores with new competition moderate slightly driven by less internal competition. However in comparison to quarter four of 2015 the combination of regional economic weakness and new competition negatively impacted our results.

Turning to gross margin. Gross margin declined in quarter four and for the fiscal year. The higher occupancy cost offset improvements in product margin. Increasing occupancy costs are consistent with prior years and reflect a newer store mix and a higher percentage of our total store base in the larger format, higher visibility locations we moved toward in fiscal 2012. Recognizing continued pressure on sales levels we moved quickly in quarter three to bring our shrink expense back in line with our sales. By September our monthly shrink expense rate was back in line with the rates we experienced in quarter one. We expect further improvements in shrink rates in 2017 as we remain focused on this initiative and roll out an enhanced inventory management training program to all of our stores.

On a related topic, although we continue to hear of the effect product deflation is having in conventional grocers we have not experienced significant product deflation in the natural and organic products that we carry. We are cognizant, however, of the effect of this deflationary pressure has caused in conventional retail pricing. We are carefully monitoring general retail prices for signs of deflationary pressure which could result in increased relative price premiums for natural and organic.

Store expenses increased in quarter four and for the fiscal year. We are addressing this trend with tighter control over our labor costs. We have adjusted our sales per labor hour goals to now reset our new stores labor model. As I mentioned earlier by September our monthly sales per labor results were back in line with quarter one rate. In fiscal 2017 we have additional opportunity to improve store labor rates and are targeting to achieve labor rates by quarter four that are consistent with 2015 levels.

Turning to our marketing initiatives. As we discussed last quarter our goal is to unlock the potential of Natural Grocers brand and to leverage the strategic advantages which we believe are inherent in our business model, business practices and core value.

We are building an agile and scalable marketing strategy utilizing multiple forms of media. During the fourth quarter we executed several programs and events. In July we saw a good success with our good4u Nutrition Challenge, our first national consumer sweepstakes designed to drive traffic to our nutrition education classes in our stores, educate consumers on what makes Natural Grocers different and increase sales. This resulted in over 10,000 nutrition education attendees over the four week promotional period, which is more than double the average attendance.

In August, we were very pleased with the results of our 61st anniversary celebration. This was our second annual company-wide celebration designed to drive sales and traffic to our stores, reward our loyal customers and attract new customers. The events resulted in a good comparable sales increase over the successful 2015 anniversary day.

In September we launched Natural Grocers as America's organic headquarters. This was a month long promotion designed to leverage national organic harvest month and position Natural Grocers as the only major grocery chain with 100% organic produce. The promotion was launched with a free organic apple giveaway on September 1 and helped lift comparable sales during the month. We launched a new e-commerce site on October 1 focused on pre-selling Thanksgiving Day turkeys and gift cards. Additionally our first major company-wide search, digital and social paid media campaigns also launched in October. Results so far have been positive.

Our marketing plan for 2017 includes continuing to strongly promote our key differentiators particularly in our industry leading standards, always affordable pricing and nutrition education and our good4u positioning, driving excitement with product news, targeted promotional news and expanding and refining our {N}power loyalty program, continuing to build on the earlier positive results of our e-commerce platform and accelerating our positive momentum and results in digital, search and social media to reach new customers and millennials.

In summary, I am pleased with the progress we have made in enhancing our marketing efforts and momentum. Now I will turn the call over to Sandra to highlight our financial results for the fourth quarter of fiscal 2016.

Sandra Buffa

Thank you, Kemper. Good afternoon everyone. During the fourth quarter trends remained relatively consistent with the trends we experienced over the previous two quarters. I am pleased to report that we achieved results in line with the updated guidance we provided after the second quarter. As Kemper mentioned, we have responded to the recent challenges in natural and organic food retailing and are navigating the current environment. Let me provide some detail on the fourth quarter results.

During the fourth quarter of fiscal 2016 net sales increased 11.5% to $181 million and comparable store sales increased 0.34%. The fourth quarter comparable store sales growth compares to a 0.7% daily average comparable store sales growth during the third quarter. However on a two years stacked basis daily average two year comps were in line with the third quarter trend at 6.5%. The comparable store sales growth during the fourth quarter was driven by a 1% increase in average transaction size, partially offset by a 0.7% decrease in average transaction count. Daily average mature store sales decreased 1.8% primarily reflecting the increased internal competition and regional economic pressures.

Gross margin declined approximately 70 basis points to 28.1% primarily due to an approximate 90 basis point increase in occupancy costs as a percent of sales which was partially offset by higher product margin. The increase in occupancy cost as a percent of sales was primarily due to higher average lease expense at newer and relocated stores and also reflects the decrease in mature store sales and the fixed nature of rent obligation and related occupancy expenses.

Store expenses increased 17.9% to $41.4 million in the fourth quarter. As a percent of sales store expenses rose approximately 130 basis points to 22.9% during the fourth quarter compared to the prior year comparable period. The increase largely reflects deleveraging of store level salary expenses which accounted for the majority of the year over year increase as a percent of sales. Additionally we saw some deleverage in depreciation and other store expenses.

Administrative expenses as a percentage of sales decreased approximately 40 basis points as a result of our cost focus, reflecting recent sales trends. Pre-opening and relocation expenses increased $0.3 million to $1.6 million during the fourth quarter compared to the prior comparable period in fiscal 2015 due to the number and timing of new store openings.

During the fourth quarter of fiscal 2016 we opened eight new stores compared to opening four new stores in the fourth quarter of fiscal 2015. Net income was $1.5 million with diluted earnings per share of $0.07 in the fourth quarter of fiscal 2016. EBITDA was $10.1 million in the fourth quarter of fiscal 2016. We ended the fourth quarter with $4 million in cash and cash equivalents and $16.6 million available on our revolving credit facility. During the fourth quarter we repurchased 57,670 shares under our share repurchase authorization for an aggregate purchase price of $700,000.

For the full year fiscal 2016 we generated cash from operations of $28.8 million and invested $53.8 million in capital expenditures. If we had not invested in new store openings, relocations and remodels which accounted for approximately 90% of our fiscal 2016 capital expenditures, free cash flow would have been approximately $23 million for the fiscal year.

Before I turn the call back to Kemper to discuss our outlook for fiscal 2017, I would like to reiterate our new store unit economics. As we enter 2017 we plan to continue to grow our store base. But as Kemper mentioned we will not be replicating the level of new store growth executed during fiscal 2016. Our new store openings that are not experiencing new competition on average continue to be on pace to achieve or exceed our payback and five year cash on cash return target.

Our store development plan is based on the following targets: upfront capital improvements of $2.2 million including capital expenditures of $1.6 million, initial inventory of $300,000 and approximately $300,000 of pre-opening expenses. On average our new stores generate a four year payback and achieve a 30% all-in five year cash on cash return. The average new unit achieves profitability in its thirteenth month and is cash flow positive in its second year of operation.

Based on our guidance of 12% to 16% unit growth in fiscal year 2017 versus the 22% growth we achieved during fiscal 2016 we expect a more moderated impact on margins from new stores opening during 2017. We also expect to largely fund new unit development with operating cash flow.

Now I will turn the call back to Kemper.

Kemper Isely

So far during quarter one of fiscal 2017 we have opened one additional store in Missouri. We have signed leases for 19 new stores to open in 2017 and 2018.

Now let me introduce our fiscal 2017 outlook. During fiscal 2017 we expect to open 15 to 20 new stores, resulting in 12% to 16% unit growth, achieve daily average comparable store sales growth of negative 1% to 1%, achieve net income margin of 1.4% to 1.6% and achieve diluted earnings per share of between $0.50 and $0.58, and deliver EBITDA margin of 6.4% to 6.8%.

I would like to point out that our guidance incorporates improving quarterly comparable store sales growth rates as the year progresses, as our year over year comparable store sales growth rates will be more favorable later in the year relative to current trends. We expect capital expenditures for fiscal 2017 in the range of $40 million to $48 million. Our new store opening range provides flexibility to adapt to the operating environment throughout the fiscal year. We anticipate cash on hand, cash generated from operations and availability under our credit facility will be sufficient to support our capital requirements and any contemplated share purchases under our two year $10 million share repurchase program.

We remain confident with our core strategies and positioning. Our founding principles remain the core driver of our industry leading quality standards focused on nutrition education and value positioning, all differentiating us from the competition. Our small format stores provide convenience to our customers and allow us tremendous flexibility with our real estate strategy and the range of markets we can enter. We are optimistic about the growth opportunities that lie ahead.

Now I would like to open the lines up for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from David Magee with Sun Trust.

David Magee

I just had a couple of questions. One, you mentioned that the impact of new competition may have moderated a bit, and I'm curious, if you look out over the next several months, do you have a sense for does it stay the same, or does it improve further from here?

Kemper Isely

I think for the first half of this year it will definitely stay very similar.

David Magee

Okay. And then secondly, with regard to the marketing, you talked about the messaging the content of it. I'm curious what you think would be the most effective way to put that out there. What vehicle would be most effective for your messaging?

Kemper Isely

We believe that there are a lot of great variety of modalities that work well for us. We're experimenting quite a bit with social media right now, because we think that, that is -- you have to get into the conversation via the social media to really get your message out there. We're revising our help hotline to a magazine format that will allow us to also make it a digital help hotline so that we can distribute it to millions of people rather than just a smaller number of people. We also will have billboards which we think will be very effective and we will be having an aggressive radio campaigns in the first half of next year -- in the calendar year next year.

David Magee

Kemper, what percent of -- or do you anticipate marketing costs to be a higher percent of sales this year than last year?

Kemper Isely

No, we budgeted on that at a similar percentage bill for last year.

Operator

The next question comes from Rupesh Parikh with Oppenheimer.

Rupesh Parikh

Thanks for taking my question. First, Kemper, I want to start, is it possible to get the quarter-to-date comp trends, or what you're seeing the start this quarter?

Kemper Isely

Well they are trending at the low end of our range that we gave for full year guidance. We've definitely seen some softness in sales since the election. And we're hoping that that moderate here shortly. We normally wouldn’t disclose that but because of the new sales after the election we thought we would mention -- we would disclose that today.

Rupesh Parikh

And as you look at that softening, is it any specific category, or are you just seeing less traffic? Is there any more color to that –

Kemper Isely

We just saw less traffic for a period of time, we seem to pick it back up this week.

Rupesh Parikh

And then going back to all your commentary on your real estate plans this year, what's the expectation in terms of competitors opening up new locations near the new location that you plan to open?

Kemper Isely

I'm trying to -- actually I think we're opening more in our competitors’ backyards than they're opening in our backyard as of this moment over the next year. Although we are opening in some new markets that don't have established competitors and over the next year and during last year and so there's always the potential for those -- for stores to open in those new markets that we go into that don't have Sprouts or Whole Foods. Most of our store openings are going in markets that already have a Sprouts, Whole Foods or Trader Joe's. And as I said earlier we think this new competition will stay about the same as it was in 2016.

Rupesh Parikh

And my last question maybe for Sandra. On the gross margin and SG&A line what type of comp do you need to leverage both of those line items?

Sandra Buffa

I think we’ve historically said it’s a number somewhere around 3% where it was easier -- given where we were running expense wise before. As we discussed, however, we are focusing on some initiatives that we are seeing positive results in for reducing shrink and we're also focusing on a sales to labor hour grid and both of those should help to bring that number down.

Operator

The next question comes from Bill Kirk with RBC Capital Markets.

Bill Kirk

Thanks for taking the question. I think the tier stack has stayed relatively flat the last few quarters, yet you're guiding to a significant two-year deceleration. Can you help us understand why that would be?

Kemper Isely

Well last year our first quarter was fairly -- well it wasn't great but it was a lot better than the rest of the year. And so we believe that we'll have our weakest quarter, this quarter because of that. And so it's just been the trend and then we'll be coming -- going into more favorable -- we have less smaller comps in the following three quarters, last year and we will be going in comping against them in those quarters but it's still -- right now the way current economic trends are going and the way sales are going it’s difficult to project a higher comp in those upcoming quarters than what we’ve given you in the guidance.

Bill Kirk

Sure. And a slightly different question, maybe for Sandra. I think you said operating cash flow would largely fund next year's unit expansion. Does that imply there is some other source of funding needed to meet the unit count goals?

Sandra Buffa

Well, it really depends so much on how many stores we open and we're going to be managing that as we watch how the year progresses. If we -- it could be $2 million to $3 million that we would need additional but the revolver is available for that, just depends on timing.

Kemper Isely

Our ongoing goal, Bill, is to finance all of our growth via cash flow rather than through borrowings. And so we will be very prudent in how many stores we open this year and in upcoming years so that we can kind of match our cash flow to our cash needs.

Operator

The next question comes from Chris Mandeville with Jefferies.

Chris Mandeville

Hey good afternoon. So Kemper, you mentioned less internal competition, if you will, during the quarter. I know you guys are lapping probably one of your high volume stores having hit one of your own in early June. Can you just provide us with what type of cannibalization you actually experienced in Q4 itself and what your expectations are for 2017?

Todd Dissinger

Well in Q2 we indicated that cannibalization impacted our comp by about 200 basis points and in Q3 we saw some moderation off of that number and we’ve seen a small moderation off of Q3. We had strong store in the Denver market anniversary in late Q3 and that's going to help.

Chris Mandeville

Okay, that's helpful. And then just kind of looking at the actual mature store comps themselves, I believe you mentioned that they have declined 1.8%. I'm just trying to square the two comments and now internal competition has actually moderated a bit but then I think Sandra had mentioned that the decline itself was largely driven by internal competition.

Kemper Isely

Well, we still have some serious internal competition, it moderated mildly, didn’t moderate a lot. We had our Tennyson store open, I think it was November of last year. And so we won't -- that store had some – it really damaged some of our existing stores sales when it opened and that won't moderate until after this quarter.

Chris Mandeville

And you had mentioned that you are doing your price checks -- checking on your competition as it relates to some of the conventional products that they're selling relative to what type of premium you may be requiring on your organic side. Are there any specific categories or departments to which you're seeing greater disparity or more meaningful change of late versus what you've seen historically?

Kemper Isely

No, I'd say eggs are a prime example. Eggs are pretty expensive in conventional stores a year ago and they’ve dropped down to under a dollar a dozen or even less right now. So that would be -- one in particular I mean chicken -- conventional chicken has gotten really cheap, conventional beef has gotten really cheap.

Chris Mandeville

And then the last one for me, I believe on the last call you had mentioned that {N} Power is just over about 200,000 users with nearly half of them actually using the program on a weekly basis. I was hoping to just kind of get an update there. And I guess maybe longer term when you expect to be able to truly leverage what data you're amassing behind the scenes to perform some more targeted marketing?

Kemper Isely

Yeah. Currently we have 260,000 plus registered members of {N} Power. As far as long term marketing we're doing a lot of demographic studies in regards to who are the members and who is spending the most money so that we can more intelligently target our social media toward those demographics better. And we should be able to start doing that sometime in the beginning of next year. We've also gotten a lot better at the way that we're targeting our current members to get better sales responses from our {N} Power members. And we’ve learned quite a bit in the last year about how to better message to those members and not have as much of an expense to our company through just counting -- through our messaging.

Operator

The next question comes from Scott Mushkin with Wolfe Research.

Scott Mushkin

Hey guys. Thanks for taking my question. So I was wondering what percentage of your stores that compete with Kroger? Do you have that handy?

Kemper Isely

I would say 80% of them do. Kroger, one of their – I don’t have it exact but my guess is at least 80% of our – I mean in Denver, we have King Soopers, in Dallas you have Kroger and in Arizona, you’ve got the Fry's, in Oregon and Washington you’ve got Fred Meyers, and Dillons in the Kansas area et cetera.

Scott Mushkin

I mean so I guess what makes me a little nervous about the numbers that you guys are reporting and the outlook is Kroger in some divisions has been getting much more aggressive on -- forget the delta between conventional – getting much more aggressive on organic prices. We've seen that in their Harris Teeter division clearly. I mean how prepared are you guys to see a big competitor like that start getting significantly more competitive on price and what would you do about it?

Kemper Isely

Well, we've been competing with the conventional, Safeway got into our space in 1977. And they had a store across -- back then we only had a couple stores and they got a store just across the street from us back then, we competed quite well with them back then. I agree that it's definitely a concern when a big company like Kroger becomes very price competitive but Costco and Wal-Mart are as price competitive as Kroger and they've been doing it for a long time also, I mean more competitive than Kroger has. And so we have to market to our -- what differentiates us which is we sell only organic produce, we only sell products that do not -- our grocery products don't contain artificial flavours, colors, preservatives et cetera. And we have our egg standard which is free range eggs compared to whatever Kraft, they sell at Kroger and our dairy standard is one of pasture based and Kroger will sell anything as long as it sells. So we intend to really push our quality differences versus Kroger over the next six months so that that becomes known to the consumers particularly in our stronger markets such as Denver.

Scott Mushkin

So the other question –

Kemper Isely

I mean we're not going to be able to compete price for price with them but we do compete pretty favorably on a lot of our things. For instance in our bulk department we outprice Kroger by at least 10% to 15% to 20% on almost every item. And so we do have places where we're extremely better priced than they are already. And in produce we're pretty close to their price except for when they run a ridiculous sale.

Scott Mushkin

Right. So then the second question, Kemper, is if Thrive Market just got a big round of funding. They're pushing kind of a natural organic, most dry grocery –

Kemper Isely

I wonder how much money -- yeah I'm serious about how much money they're willing to lose and keep on losing.

Scott Mushkin

I have no doubt about that. I think you're right on that one. But do you think you feel them at this stage, do you think that they're having an impact or –

Kemper Isely

Every new competitor has a small impact. So I mean you have to be nimble and you have to keep on innovating to survive. And that's what we intend to do. At some point in time Thrive, their business model as far as I can see isn’t one that will ever make money and so they'll go out of business unless they get bought by somebody else for some ridiculous reason.

Scott Mushkin

Maybe Kroger will buy them and put it together with their VITACOST. Then my final question --

Kemper Isely

VITACOST never made any money either, so.

Scott Mushkin

My final question is on the store expense side and labor.

Kemper Isely

I mean we haven’t made money, so we can't compete with people that did have a business model and not making money.

Scott Mushkin

Yes, very very difficult. Labor expense is going up, we see signs all over the place Help Wanted in some of your markets, even bonuses being offered. How much are you feeling that strain and then I'll yield and just wish you guys good luck and thank you for taking my questions.

Kemper Isely

Labor costs are going up and several of the states that we do business in passed new minimum wage laws. And they will have – we’ve factored those into our guidance for the year. Fortunately for us we have always paid above minimum wage already and so most of those new minimum wage laws won't affect us this coming year. I guess that would be what we have to say about that.

Operator

The next question comes from Shane Higgins with Deutsche Bank.

Shane Higgins

Yeah thanks taking my questions. Guys, I just wanted to circle back on the competitive environment. Are you seeing, Kemper, any kind of significant price investments or hot promotions from some of your specialty guys? I know there has been a lot of talk about Sprouts and Whole Foods. But just curious if you saw any of that in any of your markets during the quarter.

Kemper Isely

I would say that Sprouts and Whole Foods have invested a lot of price into their conventional product. To an extent Sprouts invests a little bit in the organic produce market but otherwise I haven't seen any more than normal from them.

Shane Higgins

All right. Thanks for that color. How about your comp trends in more energy dependent states Texas, Oklahoma, even Colorado versus the ones that haven't been as impacted by the slowdown in the energy market?

Kemper Isely

Our comp trends in those states have been negative and our comp trends in the states that don't have an energy impact have been positive.

Shane Higgins

Are you seeing that delta narrow at all?

Kemper Isely

It has narrowed a little bit during the last quarter.

Shane Higgins

Okay, thanks. And just a quick one on sales by category. How are the dietary supplements doing for you guys?

Kemper Isely

Dietary supplements are doing very well. They almost gained market share last year as a percentage of sales, they are essentially flat for the year, so that was very positive.

Shane Higgins

And in terms of new unit growth cadence how should we think about modeling that for 2017?

Kemper Isely

Well right now we have five scheduled to open this quarter, four for next quarter and then we will be dynamic for the next two quarters after that.

Shane Higgins

And then just one more for me on your inventories. I notice that inventories per store were down about 6%, you finished it pretty lean. Can just talk about kind of how you're thinking about managing inventories into next year and working capital in general?

Kemper Isely

We believe that we have room to decrease our inventories by at least another 5%.

Operator

The next question comes from Ryan Gilligan with Barclays.

Ryan Gilligan

Hi thanks for taking the question. Just a quick follow-up on the quarter-to-date trends. I know they were bad for the last week after the election, but can you give us a sense for how they trended for the first five weeks of this quarter?

Kemper Isely

They were not as strong as the previous quarter.

Ryan Gilligan

Okay. Is there anything in your data that could suggest what's driving that softness, other than just the stepped-up competition at some --?

Kemper Isely

No, we were pretty surprised by that because September -- in the last quarter September was our strongest month by far and so we thought we had a lot of momentum going for September and October.

Ryan Gilligan

And on the new labor grid, can you give us a sense for where sales per labor hour are now?

Kemper Isely

Can I just go back to that one?

Ryan Gilligan

Yes.

Kemper Isely

I think there is a lot -- I think that the divisiveness of the election was really harmful to the mood of the consumer in October and I think that could have been part of the problem.

Ryan Gilligan

Got it. That makes sense. And I guess my next question, just on the new labor grid, can you give us a sense for where sales per labor hour are now and where they can go?

Kemper Isely

No, we can't really disclose that one. But we are aggressively managing our labor costs, much more aggressively than we did last year.

Ryan Gilligan

And I guess last question on upfront CapEx for the new stores, is there an opportunity to lower that over time?

Kemper Isely

We are working on a prototype designs for new stores that will -- we hope will substantially lower our per store costs.

Operator

The next question comes from Alvin Concepcion with Citi.

Alvin Concepcion

Great, thanks for taking my question. I'm not sure if you covered this. But I'm wondering what you’re seeing on inflation, and what's your outlook for next year? And more specifically what are you seeing on the produce side?

Kemper Isely

For inflation -- I mean the biggest winner so far for deflation is the nut category. The prices of almonds and walnuts and pecans et cetera has fallen almost in half from their peak. And so that's great for the consumer and great for us because we now have these products at a better price for our customers and they will be able to buy, purchase more. As far as other products, there really hasn't been a lot of inflation in – there hasn’t been either inflation or deflation in our category pretty much other than that nut category that I was just speaking of.

Alvin Concepcion

And on the discussion about your pricing gaps, I understand there is quality differences but are you maintaining your pricing gap to competitors, and what are those at this point?

Kemper Isely

Well it's impossible for us to maintain our pricing gap on a $0.99 egg compared to the quality of the egg that we sell. So what we've had to do is educate our customers about why our eggs is at a better price. And that seems to be pretty successful when we do that. We’re actually gaining market share. So we’re happy with that.

Alvin Concepcion

I am wondering if you could also talk about your private label opportunity, what that holds for you in the future?

Kemper Isely

We have partnered with Daimon to help us roll out private label at our stores and hopefully by the end of our next fiscal year we'll have many more SKUs of private label on our shelf.

End of Q&A

Operator

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

Kemper Isely

Thank you very much for joining us to discuss our fourth quarter results. While 2016 was a challenging year we were able to adapt to the environment and maintain positive comparable store sales growth despite a highly competitive landscape. We are confident with our growth strategies and positioning as we enter -- we are confident with our growth strategies and positioning as we enter fiscal 2017. Thanks for being on the call today. Everyone have a nice afternoon. Bye.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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