Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) Q1 2024 Earnings Call Transcript
Natural Grocers by Vitamin Cottage, Inc. (NYSE:NGVC) Q1 2024 Earnings Call Transcript February 8, 2024
Natural Grocers by Vitamin Cottage, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2024 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, today’s call is being recorded. I’d now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.
Jessica Thiessen: Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2024 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: Thank you, Jessica, and good afternoon, everyone. Today, I will highlight our first quarter financial results, including key drivers and provide an update on priorities. Then Todd will discuss the first quarter results in greater detail and review our updated fiscal year 2024 guidance. We are very pleased with our start to fiscal 2024. We believe our carefully vetted offering of natural and organic products coupled with our emphasis on value and always affordable pricing, differentiate us in the marketplace and continue to drive demand with health-conscious consumers. Our strong first quarter results reflect a continuation of the positive trends we experienced in recent quarters. Net sales of $301.8 million increased 7.6% compared to the prior year, driven by a 6.2% increase in daily average comparable store sales, which included a 3.4% increase in transaction count.
We are very encouraged by the strong customer traffic trends we have experienced over the past several quarters. Diluted earnings per share increased 78.9% to $0.34, reflecting strong sales growth, effective pricing and promotions and expense leverage. Turning now to an update on key priorities. Our {N}power rewards program grew 16% year-over-year to more than 2.1 million members by the end of the first quarter. The {N}power net sales penetration was 78%, up from 76% a year ago. The growth and penetration of our {N}power rewards program reflects our deep engagement with these valuable customers. Our Natural Grocers branded products deliver premium quality at compelling prices. In the first quarter, our branded products accounted for 8.5% of total sales, up from 7.9% a year ago.
Our private brand penetration increase is an indication of our customers’ appreciation for the quality and value of these products as well as the continued expansion of our offering. Store unit growth and development continues to be a priority for our company. During the first quarter, we opened stores in Twin Falls, Idaho, and Loveland, Colorado and relocated one of our stores in Albuquerque, New Mexico. Store development timing continues to be impacted by delays in permitting and construction. Earlier this week, we released our fiscal year 2023 environmental, social and governance report reflecting our long-standing commitment to sustainability practices. We believe that our company’s greatest opportunity to positively impact environmental sustainability and human health is through offering over 20,000 high-quality natural and organic products at affordable prices.
Examples of our strict standards include selling only certified organic produce, pasture-raised dairy and free-range eggs. In fiscal year 2023, the company’s total sales was comprised of more than 50% organic products and 60% certified to environmental and/or social sustainability sourcing standards. We prioritized products sourced from vendors that embrace regenerative and sustainable agricultural practices, two of which are spotlighted in our ESG report. Additionally, we make a substantial investment to provide free nutrition education to our customers, crew and communities. Our company’s ongoing financial success demonstrates that a business model dedicated to offering affordable, high-quality natural and organic products can help deliver positive environmental and social impacts while creating value for all of our stakeholders.
In closing, I want to thank every member of our good4u crew for their commitment to operational excellence and exceptional customer service that were instrumental in driving our results. With that, I will turn our call over to Todd to discuss our financial results and guidance.
Todd Dissinger: Thank you, Kemper, and good afternoon. For the first quarter, net sales increased 7.6% from the prior year period to $301.8 million. Our daily average comparable store sales increase of 6.2% was comprised of a 3.4% increase in daily average transaction count and a 2.7% increase in daily average transaction size. We estimate that product cost inflation was approximately 3% on an annualized basis for the first quarter down 200 basis points from the previous quarter. The item count per basket was flat compared to the same period in the prior year, reflecting an improving trend over the past several quarters. Our item count per basket remains above pre-pandemic levels. Sales growth was broad-based across categories.
Our strongest performing departments were meat, body care and dairy. Gross margin increased 130 basis points to 29.4%, driven by higher product margin attributed to effective pricing and promotions, and store occupancy expense leverage. Store expenses increased 6.9% in the first quarter primarily driven by higher compensation expense. Store expenses as a percentage of sales decreased 20 basis points, reflecting expense leverage as elevated sales offset higher labor costs. Administrative expenses as a percentage of sales increased 20 basis points, driven by higher compensation expense. Net income was $7.8 million with diluted earnings per share of $0.34 in the first quarter. This compares to net income of $4.4 million or $0.19 of diluted earnings per share in the first quarter of last year.
Adjusted EBITDA was $18.8 million in the first quarter. Turning to the balance sheet and cash flow. We ended the first quarter in a strong financial position, including $13.6 million of cash and cash equivalents, we had $18.4 million in outstanding borrowings on our $75 million revolving credit facility. During the first quarter, we generated cash from operations of $16.6 million and invested $11.8 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $4.8 million. We are raising our fiscal 2024 guidance for daily average comparable store sales growth and diluted earnings per share. Our revised outlook includes the following: open four to six new stores, relocate or remodel four to six stores; achieve daily average comparable store sales growth between 3% and 5%; achieve diluted earnings per share between $1.02 and $1.12; and direct $30 million to $39 million towards capital expenditures to support our growth initiatives.
Our outlook reflects first quarter results, operating trends and the current economic environment. Our current expectation is that sales comps will be at the high end of our outlook range in the second quarter and will moderate in the second half of the year as we cycle stronger comps in the back half of fiscal 2023. Our outlook anticipates that year-over-year gross margin will be slightly higher in the second quarter and about flat in the second half of the year. Lastly, we expect store expenses as a percentage of sales to increase on a year-over-year basis driven by higher labor rates, resulting in flat to modest expense deleverage. In closing, we are pleased with the first quarter results. We attribute our strong performance to the relevance of our differentiated business model, including the value proposition of high-quality products at always affordable prices.
We continue to be encouraged by our recent operating trends, and we are confident in our ability to drive growth and enhance value for all stakeholders. With that, I would like to open the lines for questions. Thank you.
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