Natural Grocers by Vitamin Cottage, Inc. (NGVC) Q4 2021 Results - Earnings Call Transcript

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Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) Q4 2021 Earnings Conference Call November 18, 2021 4:30 PM ET

Company Participants

Kemper Isely - Co-President

Todd Dissinger - Chief Financial Officer

Conference Call Participants

Spencer Hanus - Wolfe Research

Operator

Good day, ladies and gentlemen. Welcome to the Natural Grocers by Vitamin Cottage Fourth Quarter Fiscal Year 2021 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 Ms. Jessica Teason [ph], Assistant Treasurer for Natural Grocers. Ms. Teason, you may begin.

Unidentified Company Representative

Good afternoon, everyone. And thank you for joining us for the Natural Grocers by Vitamin Cottage fourth quarter and fiscal year 2021 earnings conference call. On the line with me today are Kemper Isely, Co-President; and Todd Dissinger, Chief Financial Officer.

As a reminder, certain information provided during this conference call are forward-looking statements based on current expectations and assumptions, and are subject to risks and uncertainties.

Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company’s most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.

Today’s press release is available on the company’s website and a recording of this call will be available on the website 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 today. We had record performance in fiscal 2021 with net sales of $1.1 billion and diluted earnings per share of $0.91. Fiscal 2021 marked our 18th consecutive year of positive daily average comparable store sales growth. I take great pride in all of the company’s accomplishments this year.

We finished the year with a strong fourth quarter, accelerating sales comps, higher margins and lower store expenses drove 100% earnings per share growth exceeding our expectations. Our commitment to our founding principles continues to drive our success, as evidenced by our strong results.

We have seen an increase in customer engagement and loyalty. We believe our carefully vetted offerings of natural and organic products, at always affordable prices continue to resonate with consumers as they have developed a strong appreciation for the value of healthy nutrition and dietary supplements as a result of the pandemic.

Today we announced that we are increasing our quarterly cash dividend to $0.10 per share from $0.07 per common share, a 43% increase. The dividend increase reflects our strong operating performance and financial position, our confidence in our business model and our commitment of returning value to our shareholders.

During the quarter, we opened one new store in Springfield, Missouri, relocated our store in Columbia, Missouri, and remodeled one of our stores in Wichita, Kansas. For the fiscal year 2021, we opened a total of three stores and relocated or remodel five stores. We’re pleased with the performance of our new stores and relocations over the past several years.

Our unique approach to marketing and promotional activity, including our {N}power Loyalty program continued to drive customer engagement, as well as sales growth during the fourth quarter.

Our 66th anniversary event in August was very successful and featured exciting promotions, free products and a sweepstakes. In September, our stores and marketing efforts focused on Organic Harvest Month with promotional events, discounts and a fundraiser to support beyond pesticides, which helps cities convert parks to being chemical free.

Our {N}power Loyalty program ended the quarter with over 1.5 million members, up 19% versus a year ago and net sales penetration for {N}power was 72% in the fourth quarter, up slightly from the third quarter and compared to 68% a year earlier.

Consistent with our company branding our Natural Grocers brand products, which we position as a premium quality product at an affordable price remain a key point of differentiation and a sales growth driver.

In the fourth quarter private brands represented 7.1% of sales. In total for fiscal 2021, we grew our private brands offerings by 195 SKUs. Our total number of Natural Grocers SKUs was approximately 1,000 at fiscal year end. Our Natural Grocers brand supplements relaunch began in March of this year. Our branded supplements growth exceeded the category growth in the fourth quarter, demonstrating customer’s interest in our high quality and affordable offerings.

Natural Grocers has a legacy of being a values driven company. Our commitment to building a healthy, sustainable future for our customers, our good4u Crew and our communities is authentic. We work hard to ensure our stores operations and supply chain reflect these values. We have been a value driven company since 1955.

In fiscal 2021, the combination of company donations and customer fundraisers resulted in $1 million and monetary donations more than $3 million and in-kind food and product donations to local food banks.

Beginning in October 2021, we implemented a permanent pay increase for our hourly good4u store crew of $1 per hour. This increase represents our second $1 per hour increase in the past 18 months and reflects our longstanding commitment to investing in our crew. With the increase, the company wide average hourly pay for full-time crew is $18.43 an hour, including $1 per hour in Vitamin Bucks store credit.

In closing, I want to thank every member of our good4u Crew for their continued hard work and commitment to helping us deliver the highest quality, natural and organic products at always affordable prices and their commitment to our founding principles.

I would also like to take a moment to reflect on Natural Grocers accomplishments over the past 10 years. In those 10 years, we have grown our sales by 4 times to over $1 billion dollars. Our store base has grown by 3 times and earnings by 6 times.

Even more importantly, we have brought healthy nutritional options at affordable prices and free science-based nutrition education to over 100 additional communities and created over 2,500 jobs. While I am very proud of our achievements over the last decade, I’m equally excited about the opportunity that lies ahead of us.

With that, let me turn the call over to Todd to discuss our financial results and guidance.

Todd Dissinger

Thank you, Kemper, and good afternoon, everyone. We had an outstanding fourth quarter on top of a strong performance in the fourth quarter of last year. The most recent quarter posted positive sales growth, primarily attributed to increased customer engagement and loyalty, and our customer’s response to COVID 19 pandemic trends.

Net sales during the fourth quarter increased 3.2% from the prior year period to $272.6 million. Daily average comparable store sales increased 2.5% on top of a 13.2% increase in the fourth quarter of 2020. The increased transaction counts continue to drive comps as shopping trips normalized towards pre-pandemic levels.

In the fourth quarter, our average daily transaction count increased 3.4%. The count increase was partially offset by a 0.8% decrease in average daily transaction size. However, the basket size remained elevated as compared to the pre-pandemic level up over 20%, compared to the fourth quarter of 2019.

Supplements remained a top performing category, with a comp of over 10% in the fourth quarter and over 20% on a two-year stacked basis. We believe the success we are seeing in this category is largely attributable to consumers continuing interest in supplementing their nutritional intake associated with the pandemic, coupled with the strong response to our branded supplements.

Inflation remained in the 2% to 3% range during the fourth quarter and we continue to pass along the impact via pricing. Note that our rate of inflation tends to be more stable than the industry in general due to our high product standards, which necessitates a specialized supply chain.

Out of stock levels in the fourth quarter remained relatively consistent with prior quarters of this year. Out of stocks are lower than at the beginning of the pandemic, although still above pre-pandemic levels.

We also had a solid performance from a margin and expense standpoint. Fourth quarter gross margin improved 40 basis points, driven by higher product margin and store occupancy leverage. The strong supplements sales comp contributed to a favorable shift in product margin mix.

Store expenses in the fourth quarter decline by 130 basis points. The improvement in store expenses reflects a more normalized level of labor related expenses compared to the prior year. The tight labor market and labor availability were an offset to the impact of higher labor rates.

Net income was $7.2 million, with diluted earnings per share of $0.32 in the fourth quarter. This compares to net income of $3.7 million or $0.16 of diluted earnings per share in the fourth quarter of last year.

Adjusted EBITDA was $17.8 million in the fourth quarter, up 30.6%, compared to $13.6 million in the fourth quarter of last year. Please note that beginning with the fiscal 2021 and fourth quarter reporting, adjusted EBITDA excludes share based compensation expense. Adjusted EBITDA for the fourth quarter of fiscal 2020 has been recast to exclude share based compensation expense to enhance the comparability of this measure between the fourth quarter of fiscal years 2020 and 2021. A reconciliation and definition of adjusted EBITDA are provided in our earnings release announcement.

I would like to briefly touch on our full year results. For fiscal 2021, total revenue increased 1.8% to $1.1 billion. Our daily average comparable store sales growth was 0.7%, resulting in an increase of 12.7% on a two-year stacked basis.

Fiscal 2021 gross margin was 40 basis points higher than the prior year due to higher product margin and lower shrink and store occupancy expense as a percentage of net sales. On a two-year stack basis, gross margin increased to 130 basis points. Store expense margin increased 30 basis points, driven by increased labor-related expenses, primarily in the first half of the year.

For fiscal 2021, net income was $20.6 million, with diluted earnings per share of $0.91. This compares to $20 million and $0.89 of diluted earnings per share in fiscal 2020. Adjusted EBITDA in 2021 was $60.3 million.

Turning to the balance sheet and cash flows. We finished the year in a strong liquidity position with $23.7 million in cash and cash equivalents, no outstanding borrowings under our $50 million revolving credit facility and a $23.7 million balance on our term loan.

For fiscal 2021, we generated cash from operations of $53.9 million and invested $27.8 million in net capital expenditures. Capital expenditures included the opening of three new stores, five relocated or remodeled stores and we purchased property for two future store sites. Free cash flow was $26.1 million.

Today, we announced that our Board of Directors has increased our quarterly cash dividend to $0.10 from $0.07 per common share. The dividend will be paid on December 15, 2021 to all stockholders of record at the close of business on November 29, 2021. This increase reflects our strong operating performance and financial position, confidence in our future and is consistent with our objective of enhancing shareholder value by returning capital.

Now, I would like to introduce the company’s outlook for fiscal 2022. Our guidance was developed based upon current trends, including the current COVID-19 environment. While the company cannot predict the duration, severity or economic impact of the pandemic and related government mandates, the company expects that these factors will continue to impact our operations and financial performance in fiscal 2022.

For fiscal 2022, we expect to open four to six new stores, relocate three to four stores, achieve daily average comparable store sales growth between zero and 2%, achieve diluted earnings per share between $0.75 and $0.87, and direct $28 million to $35 million towards capital expenditures to support our growth initiatives.

Opening new stores and relocating stores has been challenging due to the delays we are experiencing in the construction process and equipment deliveries. We intend to open four to six stores in fiscal 2022 and thereafter returned to opening between six and eight new stores per year, subjected to improving conditions for store construction.

Our fiscal 2022 outlook reflects our current expectation that sales comps by quarter will generally be in line with the full year guidance range. First quarter fiscal 2022 quarter-to-date comps have been in line with the comp growth rate in the fourth quarter of 2021 and consistent with the high end of our guidance range. Additionally, our fiscal 2022 comp outlook incorporates cycling a strong fourth quarter in 2021.

We anticipate flat to slightly higher year-over-year gross margin across each quarter. In the first half of fiscal 2022, we anticipate store expenses as a percentage of sales will be lower than the prior year as we cycle higher labor-related expenses in 2021 that were driven by pandemic staffing requirements.

In the second half of fiscal 2022, we anticipate store expenses as a percentage of sales will increase compared to the prior year, driven by higher labor rates and more store labor hours, resulting from improved labor availability.

In closing, we had another strong record setting year that we attribute to many factors, but foremost, our customer’s appreciation for our commitment to our principles and values, our consistency and the dedication of our crew. We continue to strive to be the grocer of choice for the highest quality natural and organic products at always affordable prices.

Natural Grocers is very differentiated and uniquely relevant. We are encouraged by our recent operating trends and confident in our ability to continue driving long-term growth and enhance value for all of our stakeholders.

With that, I would like to open the lines up for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Greg Badishkanian with Wolfe Research. Please go ahead.

Spencer Hanus

Good afternoon. This is Spencer Hanus on for Greg. Can you just talk a little bit about sequential acceleration in comps in 4Q and what drove that? And then who do you think you guys took share from during the quarter as well?

Todd Dissinger

So the --thank you, Spencer. This is Todd. So the first part of your question, I believe was the trend in comps during the fourth quarter?

Spencer Hanus

Yeah. Yeah. Can you just unpack that a little bit for us, because I think it’s the highest to your stack, you guys have seen since 3Q 2020. So any additional color there on really what drove the acceleration sequentially would…

Todd Dissinger

Sure.

Spencer Hanus

…be helpful?

Todd Dissinger

So if you recall, the comp in Q3 was negative. It was trending favorably through Q3. In July, the comp was slightly negative and then we saw positive comps in August and September, with August being higher, I’m sorry, with September being higher than August.

Spencer Hanus

Okay. Got it. That’s helpful. And then just on the margin front, incrementals were pretty strong this quarter and I think gross margins are up about 180 basis points from 4Q 2019. So how should we think about the sustainability of just the higher level of profitability that you guys have seen over the last few quarters and this quarter in particular?

Todd Dissinger

Well, one of the key drivers in the fourth quarter was the supplements. The supplement comp was over -- was a double-digit figure. So we’re seeing that continue into Q1. We think that that trend was likely to support or help margin in the first half of the year and so we’re expecting margins for the full year to be flat to slightly positive and we’ll probably see some pressure on margin on the back half of the year, in particular, as we cycle Q4, where we saw this great improvement in supplements.

Spencer Hanus

Okay. That’s helpful. And then, I think in the script, you mentioned that you’re seeing 2% to 3% inflation. But could you talk about the cadence of inflation sort of throughout the quarter? And then how are you guys thinking about next year when some of your contracts reset and what inflation could look like? And then, I guess, along the same lines, have you seen any pushback from customers on pushing through sort of this higher level of inflation than what you’ve done historically?

Todd Dissinger

Okay. So the trend in inflation has been pretty steady, maybe a slight improvement in --during Q -- or a slight increase during Q4, but not significant, it’s been pretty steady. And then as we build out our guidance and did some sensitivities with inflation, we’re anticipating that inflation is going to run similar to what we experienced in fiscal 2021, which would be that 2% approximate range.

Kemper Isely

And then, as far as, this is Kemper, as far as our customers absorbing the costs of the higher prices, everybody is having to pass along the same or similar or even higher costs and so there isn’t much choice, I don’t think and our customers don’t seem to be blinking in regards to that issue.

Spencer Hanus

Okay. Got it. And then I think you mentioned also you raised hourly pay again this quarter, have the recent pay rises improved the turnover you guys are seeing from employees? And do you think there’s any more investment that’s needed on the labor front to retain employees?

Kemper Isely

I would say that the turnover has been -- our core staff isn’t turning over significantly. It’s the periphery the staff that just comes on and then goes off. So that’s our biggest, the biggest issue is just was, when there was the extra unemployment payments out there was just attracting people to apply for jobs. It wasn’t really that we had a lot of turnover. I mean, there’s always a little bit of turnover, but it was hard to get people to want to come off the couch, because they were getting paid more to stay on the couch. Now that that’s gone away, we seem to be able to hire people much more easily right now than pre -- the extra instead of not work payments that were coming from the government.

Spencer Hanus

Great. Thank you guys.

Kemper Isely

Thanks.

Todd Dissinger

Thanks, Spencer.

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 and fiscal 2021 results. We are proud of our performance and our history of providing high quality products at always affordable prices and our service to our communities. 18 years we’ve now had positive comparable store sales growth, which is quite an achievement in my opinion. We look forward to speaking with you on our next call to review our first quarter 2022 results. Please stay healthy and stay safe and have a great day. Thank you.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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