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Edited Transcript of NGVC.N earnings conference call or presentation 19-Nov-20 9:30pm GMT

·16 min read

Q4 2020 Natural Grocers By Vitamin Cottage Inc Earnings Call Lakewood Nov 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Natural Grocers By Vitamin Cottage Inc earnings conference call or presentation Thursday, November 19, 2020 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David Colson Natural Grocers by Vitamin Cottage, Inc. - VP & Treasurer * Kemper Isely Natural Grocers by Vitamin Cottage, Inc. - Chairman & Co-President * Todd Dissinger Natural Grocers by Vitamin Cottage, Inc. - CFO ================================================================================ Conference Call Participants ================================================================================ * Spencer Christian Hanus Wolfe Research, LLC - Research Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Welcome to the Natural Grocers' Fourth Quarter and Fiscal Year 2020 Earnings Conference Call. (Operator Instructions) As a reminder, this call is being recorded. I would now like to turn the conference over to Mr. David Colson, Vice President and Treasurer for Natural Grocers. Mr. Colson, you may begin. -------------------------------------------------------------------------------- David Colson, Natural Grocers by Vitamin Cottage, Inc. - VP & Treasurer [2] -------------------------------------------------------------------------------- Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage Fourth Quarter Fiscal Year 2020 Earnings Conference Call. On the call 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, Natural Grocers by Vitamin Cottage, Inc. - Chairman & Co-President [3] -------------------------------------------------------------------------------- Thank you, David, and good afternoon, everyone. Thank you for joining us today. We faced many challenges and opportunities in fiscal 2020, and our response resulted in a record performance, including achieving over $1 billion in net sales and $0.89 in diluted earnings per share. Fiscal 2020 was also our 17th consecutive year of positive daily average comparable store sales growth. Our fourth quarter comp was up 13.2%, and the full fiscal year comp was 12%. Our strong comp trends have continued through October. During fiscal year 2020, we also continued to enhance store performance with our margin expansion efforts. Supported by the strong sales momentum, we realized significant improvement to adjusted EBITDA during the year with 28.1% growth in the fourth quarter and 29.1% growth for the full fiscal year. We are pleased to announce that we are declaring a special cash dividend of $2 per common share in addition to our quarterly cash dividend of $0.07 per common share. The special dividend reflects our strong business performance, financial position, cash flow and our commitment to return value to our shareholders. Fiscal 2020 was an unprecedented year, presenting numerous challenges amid the global pandemic and related government mandates. We are very proud of our strong response and performance. Our entire Natural Grocers family adapted quickly and successfully to these challenges, while staying true to our founding principles. We navigated through the toughest of operating environments, while delivering the highest quality, natural and organic foods to our valued customers. Our strong results in both the fourth quarter and full year reflect our ability to leverage our core competencies and values. Our long-standing focus on health is an important differentiator and on-trend given the current environment where customers are focused on making informed health and nutrition choices, including an emphasis on strengthening their immune system. Our quality offerings, coupled with our always affordable value proposition is very relevant in today's uncertain economic environment. Additionally, customer confidence in our products, store cleanliness and safety measures are driving our growth. Our differentiated model includes industry-leading quality standards and focus on providing free science-based nutrition education, strong alignment with our customers' and communities' shared values, only offering 100% organic produce, prepackaged bulk offering that is more relevant today than ever, a focus on providing ingredients and recipes for healthy cooking at home and a convenient store layout supported by exceptional customer service. Let me highlight a few of our recent marketing initiatives, which continue to drive customer excitement and interest and contributed to our strong sales performance. In July, we promoted the Art of Burgering, focused on healthy grilling techniques and ingredients. In August, we celebrated our 65th anniversary with a highly successful anniversary event that featured a sweepstakes, free products and exciting promotions. This sale was extended to a 3-day event this year to facilitate social distancing. In September, which was national Organic Harvest Month, we highlighted our commitment to organic farming with our organic month event, utilizing special promotional offers, activities and a fundraiser supporting Beyond Pesticides. Our {N}power customer loyalty program continues to contribute to growth, drive loyalty and enhance our ability to market to our customer base. {N}power membership has now reached 1.3 million customers and represented 68% of sales in the fourth quarter. Additionally, our ongoing Feed Your Family of Four initiative, which is a promotion aimed at feeding a family of 4 for under $10 to $16 has been timely and well received. This promotion highlights and educates families so they can cook affordable high-quality meals even in challenging economic times. We offer both the ingredients and recipes for families to follow, many featuring our Natural Grocers' brand products. We are seeing continued growth of our Natural Grocers' brand products. We have grown our private brand offerings by 54 SKUs during 2020, bringing our total number of Natural Grocers SKUs, including bulk prepackaged products and supplements to over 1,000 at fiscal year-end. In the fourth quarter, private brand sales represented 7.3% of total sales compared to 6.8% in the same period of the prior year. Our private brand products have been developed and sourced, consistent with our core values and are positioned as a premium quality brand at an always affordable price. We continue to be encouraged by the adoption of our branded products with strong category penetration rates. We believe our Natural Grocers' brand has significant growth potential in the years to come. In 2020, we continue to support our communities in many ways. During the fourth quarter, Natural Grocers and our customers partnered to raised over $500,000 for charitable purposes. These efforts focused on many important causes and included raising approximately $250,000 for local food banks, in addition to our own ongoing commitment to donating food. In September, we launched our Ladybug Love Your Neighborhoods partnership with Beyond Pesticides. In honor of National Organic Harvest month and raised over 120,000 to reduce pesticides in neighborhood parks. As we have discussed before, these recent efforts are just a small part of how Natural Grocers brand is deeply rooted in a history of environmental and social leadership to benefit all stakeholders. At Natural Grocers, we believe the sustainable choices we make today directly impact the world tomorrow, and we work hard to ensure our stores, operations and supply chain reflect these values. We are committed to building a healthy sustainable future for our customers, our good4u Crew and our broader communities. Lastly, I would like to highlight our commitment to our good4u Crew during 2020. We've been proactive throughout the pandemic, focused on implementing safety measures for our crew. We are supporting our crew through a permanent $1 per hour wage increase for our hourly crew, which was implemented in March 2020, and we have paid periodic discretionary bonuses throughout the pandemic. Our wage and bonus enhancements represented approximately $3.3 million of incremental expense in the fourth quarter, which was the equivalent of 87% of quarterly net income. For the full year, the pay enhancements were approximately $10.3 million or 52% of fiscal 2020 net income. In closing, I want to thank each and every crew member for their commitment to helping us deliver the highest quality natural and organic products at always affordable prices. I am confident in our ability to continue to drive growth and value for all of our stakeholders. With that, let me turn the call over to Todd to discuss our financial results and guidance. -------------------------------------------------------------------------------- Todd Dissinger, Natural Grocers by Vitamin Cottage, Inc. - CFO [4] -------------------------------------------------------------------------------- Thank you, Kemper, and good afternoon, everyone. As Kemper mentioned, we had an outstanding fourth quarter and fiscal year amid a challenging operating environment. Our financial results reflect the commitment of our good4u Crew to our customers and the communities we serve. Net sales during the fourth quarter increased 16.3% to $264.2 million, with daily average comparable store sales increasing 13.2%. The fourth quarter comp increase was driven by a 23.7% increase in average transaction size. This strong transaction size was partially offset by an 8.5% decrease in daily average transaction count, reflecting a continuation of the trend of less frequent shopping trips as customers practice social distancing. Meat, frozen, produce, bulk and dairy categories outperformed the company average comp. Supplements also performed well with a fourth quarter comp of 8%. Additionally, we saw continued penetration of online and delivery sales through our partner, Instacart, although volume moderated compared to the third quarter. We continue to see modest inflation, which was approximately 3% during the fourth quarter. I would like to also note that we have seen an improvement in vendor out of stocks as our partners continue to adapt to the environment. Gross profit margin during the fourth quarter was 27.4% compared to 26% in the prior year period. The improvement in gross margin over the fourth quarter 2019 was primarily attributable to higher product margin as a result of reduced promotions. We also saw improvement in store occupancy leverage and shrink expense as a percentage of sales. The product margin, occupancy leverage and shrink expense improvements were partially offset by the adoption of the new lease accounting standard, which negatively impacted gross margin by approximately 20 basis points. Store expenses as a percentage of sales increased to 22.8% during the fourth quarter compared to 22% in the prior year period. The year-over-year increase in-store expenses as a percentage of sales was attributable to increased labor-related expenses, which were partially offset by lower marketing and depreciation expenses, all as a percentage of sales. The increase in labor-related expenses was driven by a $1 permanent increase in all hourly wages, which was implemented in March and periodic discretionary bonuses to our hourly crew. Additionally, we are operating with increased store labor hours to support operational requirements to comply with government mandates related to the pandemic. Net income was $3.7 million with diluted earnings per share of $0.16 in the fourth quarter. This compares to net income of $1.4 million or $0.06 of diluted earnings per share in the fourth quarter of last year. Adjusted EBITDA was $13.3 million in the fourth quarter, up 28.1% compared to $10.3 million in the fourth quarter of last year. For full fiscal 2020, we generated cash from operations of $66.5 million and invested $29.6 million in net capital expenditures. Capital expenditures included the opening of 6 new stores and 1 relocation during the fiscal year. Free cash flow was $36.9 million. We finished the year in a strong liquidity position with $28.5 million in cash and cash equivalents and no debt. As of year-end, we had $48.7 million available under our $50 million revolving credit facility. Additionally, we have secured a $35 million term loan facility from our existing lender to provide financial flexibility and support our special dividend. Our balance sheet and liquidity remains strong and positions us to face an uncertain operating environment. As Kemper noted, our Board of Directors has declared a special cash dividend of $2 per common share or a total of approximately $45 million in the aggregate. Our Board has also declared a quarterly cash dividend of $0.07 per common share. Both dividends will be payable on December 16, 2020, to all shareholders of record at the close of business on November 30, 2020. Given our strong cash flow, cash position and modest leverage, the special dividend provides an opportunity to return capital and maximize value for our shareholders. To fund the dividend, we will use cash on hand as well as the new $35 million term loan facility. The new term loan facility preserves our revolver availability to maintain financial flexibility. We expect to continue investing in profitable growth initiatives and anticipate a continued trend of favorable cash flow. Now I would like to introduce the company's fiscal 2021 outlook. Our guidance reflects current trends in light of the rapidly evolving COVID-19 environment and related government mandates. While the company cannot predict the duration or severity of the pandemic and related government mandates, the company expects these factors will continue to impact our operations and financial performance through fiscal 2021. For fiscal 2021, we expect to open 5 to 6 new stores, relocate 3 to 5 stores, achieve daily average comparable store sales growth of between negative 2% and 2%, achieve diluted earnings per share between $0.60 and $0.70, and we expect capital expenditures for the fiscal year in the range of $28 million to $35 million. Our current expectation for new store growth in 2021 and over the next several years is consistent with recent trends. Our 2021 outlook reflects our expectation that comps in the first quarter and in January and February of the second quarter, will remain consistent with the comp trend in the fourth quarter of 2020. In March, we will anniversary the start of the COVID-19 pandemic. As you will recall, our comp was over 40% in March of 2020. In the second half of the fiscal year, we anticipate comp to be roughly flat. We anticipate slightly higher year-over-year gross margins in the first half and flat year-over-year margins in the second half of the fiscal year. We anticipate store expenses as a percentage of sales will be higher as a result of higher labor-related expenses through the second quarter, and then will level off as we anniversary increases implemented in the second half of 2020. In closing, we had a strong record-setting year that we attribute to our commitment to our principles and values and the dedication of our crew. We are confident in our outlook for 2021. With that, I would like to open the lines up for questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from Greg Badishkanian with Wolfe Research. -------------------------------------------------------------------------------- Spencer Christian Hanus, Wolfe Research, LLC - Research Analyst [2] -------------------------------------------------------------------------------- This is Spencer Hanus on for Greg. Congrats on a nice quarter, guys. -------------------------------------------------------------------------------- Todd Dissinger, Natural Grocers by Vitamin Cottage, Inc. - CFO [3] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Spencer Christian Hanus, Wolfe Research, LLC - Research Analyst [4] -------------------------------------------------------------------------------- So I guess my question was just on the comp trends that you're seeing quarter to date. Can you quantify what those are running currently? And then, are you seeing any signs of consumers stocking up again as the virus rises in parts of the country? And has the supply chain shown any signs of weakness, given the rising cases? -------------------------------------------------------------------------------- Kemper Isely, Natural Grocers by Vitamin Cottage, Inc. - Chairman & Co-President [5] -------------------------------------------------------------------------------- Well, currently, comp trends are running similar to how they ran in quarter 4. As far as supply chain, we haven't seen -- we've actually seen improvement in supply chain in the stock over every month, essentially since about May. As far as people stocking up, they are stocking up slightly but not significantly compared to how they did in March of this year. -------------------------------------------------------------------------------- Spencer Christian Hanus, Wolfe Research, LLC - Research Analyst [6] -------------------------------------------------------------------------------- That's really helpful. And then can you talk about the components of the gross margin expansion that you saw during 4Q? And as we look to 2021, how much of the gross margin benefit that you saw in 2020 should we expect to stick next year? -------------------------------------------------------------------------------- Todd Dissinger, Natural Grocers by Vitamin Cottage, Inc. - CFO [7] -------------------------------------------------------------------------------- Thank you, Spencer. So the drivers have been less promotional activity. Most of the promotional activity has been supported by vendors. We see that continuing into the first half of 2021. We would expect to see elevated margins similar to where we were in Q4 through the first half. And then margins should -- when we hit March level off. And March would probably be down on a year-over-year basis because of how strong March of 2020 was. And then the second half of the year, we would expect to be about flat on a year-over-year basis. -------------------------------------------------------------------------------- Spencer Christian Hanus, Wolfe Research, LLC - Research Analyst [8] -------------------------------------------------------------------------------- Okay. And I think you mentioned that e-commerce sales slowed a little bit on Instacart. Can you talk about what the percent of sales e-commerce represents today? And how sticky do you think those sales will be next year in that channel? -------------------------------------------------------------------------------- Todd Dissinger, Natural Grocers by Vitamin Cottage, Inc. - CFO [9] -------------------------------------------------------------------------------- Sure, Spencer. So we don't give the exact data out on our Instacart sales. It represents a couple percent of our total company sales, and that would compare to a little bit less than 1% in the prior year, like I said, fourth quarter. And we've seen that moderate in Q4 versus Q3. So it's hard to say long term, how sticky that will be. Certainly, while the COVID environment is challenging, there will be some customers opting for delivery. -------------------------------------------------------------------------------- Spencer Christian Hanus, Wolfe Research, LLC - Research Analyst [10] -------------------------------------------------------------------------------- And then the final 1 is just on unit growth. I think your guidance calls for 5 to 6 new stores next year, which is less than 5% growth that you've run in some years in the past. When do you think there'll be an acceleration in new units? And how are you thinking about the unit growth here? -------------------------------------------------------------------------------- Kemper Isely, Natural Grocers by Vitamin Cottage, Inc. - Chairman & Co-President [11] -------------------------------------------------------------------------------- Right at this moment, we don't anticipate accelerating our growth beyond the 5 to 6 units that we're planning on growing next year. We think that moderated growth is prudent and is helpful to us so that we can make sure that we pick premium sites and that we can keep on giving operational excellence in our new stores. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) I'm showing no further questions. 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, Natural Grocers by Vitamin Cottage, Inc. - Chairman & Co-President [13] -------------------------------------------------------------------------------- Thank you very much for joining us to discuss our fourth quarter results. We remain confident in our business based upon our 65 year history. We look forward to speaking with you on our next call to review our first quarter 2021 results. Please stay healthy and safe, and have a great day. Thanks. Goodbye. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.