Natural Grocers By Vitamin Cottage Will Have Upside Potential If It Can Boost Margins

| About: Natural Grocers (NGVC)
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Shares of Natural Grocers by Vitamin Cottage (NYSE:NGVC) saw a successful public debut on Wednesday. Shares of the specialty retailer of natural and organic groceries ended the week at $19.90, up 33% above the offering price of $15 per share.

The public offering

Natural Grocers by Vitamin Cottage, the specialty retailer of natural and organic groceries and dietary supplements, sold 7.1 million shares for $15 a piece. The firm sold 3.6 million shares in the offering, with selling shareholders selling another 3.6 million shares. Natural Grocers raised $54 million in gross proceeds in the offering process. Based on the offer price of $15 per share, the firm is valued at $327 million. Initially the firm and its bankers set an offer price range of $14-$16 per share. In total the firm sold a third of its shares outstanding. At Friday's closing price of $19.90 the firm is valued at $434 million. Major banks which brought the company public were William Blair, Canaccord Genuity and Piper Jaffray.


Natural Grocers operates 55 stores throughout 11 states by the end of June 2012. It already opened 6 new stores in the first six months of 2012, with another 4 new openings planned in the second half of 2012. Natural Grocers reported annual revenues of $264.5 million for its annual year of 2011, up 17% on the year before. Net income fell 18% to $4.6 million. For the first six months of 2012 the company generated $159.7 million in revenues, up 26% compared to the first half of 2011. Net income almost doubled to $4.0 million.

For the full year of 2011 the company reported a 4.9% increase in comparable sales growth, and the growth pace accelerated to 10.2% in the first half of 2012. The company operates without any debt and holds a pro forma cash position of $13 million. Based on a rough annual revenue estimate of $300 million, the market values Natural Grocers around 1.4 times annual revenues. The firm is valued around 45 times annual earnings, based on a $10 million annual net profit estimate.

Investment Thesis

Natural Grocers' public offering was a great success with shares trading up 33% compared to its public offering price. Its larger competitor Whole Foods Market (WFM) is a great example that "organic" grocery stores do have a right of existence in the grocery industry. Shares of Whole Foods Market jumped over 10% over the last week on the back of a strong earnings report.

Whole Foods trades at 1.7 times annual revenues, double the revenue multiple of Natural Grocers which trades at 1.4 times its annual revenues. Whole Foods Market had annual net profit margins of 3.4% valuing the firm at 40 times annual earnings. Natural Grocers is valued at 45 times its estimated annual earnings as the company has a mere 1.9% net profit margin.

Look for hints or comments indicating that the company can expand its net profit margins. If margin improvement materializes the company trades at a sizable discount to its major competitor, making it potentially interesting for long term investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.