Q1 2024 Natural Grocers By Vitamin Cottage Inc Earnings Call
Participants
Jessica Thiessen; VP and Treasurer; Natural Grocers by Vitamin Cottage Inc
Kemper Isely; Chairman of the Board, Co-President; Natural Grocers by Vitamin Cottage Inc
Todd Dissinger; Chief Financial Officer; Natural Grocers by Vitamin Cottage Inc
Scott Mushkin; Analyst; R5 Capital LLC
Presentation
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. 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 would now like to turn the conference over to Ms. Jessica Deason, Vice President and Treasurer for Natural Grocers. Just decent you 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 in 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 dot Natural Grocers.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 Empower rewards program grew 16% year over year to more than 2.1 million members by the end of the first quarter. Empower net sales penetration was 78%, up from 76% a year ago. The growth in penetration of our Empower 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 properties. Pasture raised dairy in three range eight. 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 prioritize 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 good-for-you 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 $1.2 and $1.12 and directs $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 cycled 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.
Question and Answer Session
Operator
We will now begin the question and answer session. To ask question. You may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. Louis draw from the question queue, please press star then two time. We'll pause momentarily to assemble our roster. Our first question will come from Scott Mushkin with R5 Capital.
You may now go ahead.
Scott Mushkin
Pay guys. They have dealt with our students. So I guess a if I can think of them driving right now, believe it or not outlet stores. But I kind of have three questions for you. One is when we look at the gross margin, how much would you just attribute to the strong sales leverage and how much would you attribute it to mix and other things?
Kemper Isely
And what will leverage gave us?
It's about 11 basis points, so that was that was nice. And then as far as mix goes, I there really wasn't a lot of mix change. Everything was pretty much steady. There wasn't a lot to mix a lot of the of our gain in margin was attributable to smart promotions and pulling back on some of our previous IMpower promotion.
Scott Mushkin
And was that preplanned or is that something.
Kemper Isely
we can we're about cycling through a year's worth of that coming up here in January of having less aggressive and power promotions on certain lines.
Scott Mushkin
And then as far as your growth goes. I mean, obviously, it seems like you're striking a chord with the consumer. I'd like to dive into that maybe next. But is there opportunities to increase that growth rate over the next two to three years on its stores. I know that's ramping up, but it being Have you thought about increasing it further where sure where are you where you are you guys on.
Kemper Isely
You mean as far as store openings go?
Scott Mushkin
Yes.
Kemper Isely
or yes, there were just acquiring new customers that existing stores were opening? (multiple speakers)
Well, our goal over store on August 51?
Scott Mushkin
Yes.
Kemper Isely
Tes. I mean, you know our goal, our goal this year, we were going to come in somewhere around 10 to 12 new stores and relocations and remodel over the next couple of years. Our goal is to get back to opening between six and eight stores a year. We don't really want to go above that because we think that it's more profitable for us to open six to eight stores a year than did it ramp up and opened 10 to 12 stores a year or even more than that. It's just it's smarter from a profitability standpoint to not have it's much more growth than that per year that where you can spend better time picking your sites and not managing those new stores as you opened up.
Scott Mushkin
and the remodel part of it.
Kemper Isely
Yes. And then the remodels, you know, with remodels and relocations will probably have kind of an acceleration of that because we have a lot of stores that will be anniversarying their 10 year point in two years. And so a lot of those stores will be up for remodels and relocations at that point in time.
Scott Mushkin
Okay. (multiple speakers)
Kemper Isely
Now in order to evaluate the it's about a 10-year to 15-year life cycle before store need to remodel or facelift price so that you think.
Scott Mushkin
there's a couple of years, it should it's going to accelerate meaningfully.
I think our research showed that tails.
Kemper Isely
Yes.
Scott Mushkin
I mean it we're going to go after year five and then you referenced M&A, is that something you guys would consider or not?
Kemper Isely
Really, we haven't really found that to be a good niche for us. The most most we did one acquisition of one store a few years back. And that really didn't I mean, it was all right for us, but it wasn't anything that was a lot more painful than we would have liked it to be hugely US.
Scott Mushkin
So my last question really gets into you seem to be getting new customers. Is that correct that you are getting new customer?
Kemper Isely
Yes, I mean our customer growth was I mean, essentially our basket growth that equals inflation and our customer growth was about 3.5% above that.
Scott Mushkin
What do you mean that's what's driving that. I mean, it's kind of maybe a silly thing to say is are you guys the other side of the diet pill craze where people now have extra money? And they can minding what they eat. I mean, it seems like we're kind of seeing this acceleration. You're winning customers.
Kemper Isely
It's the value of our company notes, the nutrition education, the quality of the products that we sell on the organic produce, not having people don't have to come into our store and worry about reading the labels and finding products that are not contaminated. And then you have a produce that's contaminated with conventional produce. They don't have to worry about finding a lot of artificial colors and preservatives and the groceries they buy and then, of course, we always have the value proposition of our every day, always affordable prices. And so that really helps to and then just engaging with the communities that we're in the RVR. outreach through at nutrition education events that we sponsor and food bank sponsoring and so on and so forth. And then finally, taking care of our crews. So that they can give the customers that come into our stores. A very good shopping experience, as we've talked said, not yet in several of our calls, average wage of our hourly employees is now up to $21 an hour, which is pretty much industry leading for the grocery business.
Scott Mushkin
Any sense of who these new customers are?
Kemper Isely
Do you have any data on that at all or for now, you know, they're people that value there. They're there. They have an active lifestyle and value what they consume and put into their bodies like,.
Scott Mushkin
Barry, younger children like older, you don't have any sense demographically?
Kemper Isely
Well, we appeal quite well to the 52, 60 year range of people. And then we have a lot of families that like to shop at our stores. And then on the I mean, then we're starting to appeal more to the younger generation because we have an authentic story and they like authenticity, authenticity in what and what they're what more they shop. And so they really appreciate we stay true to our values and have always had the same values we don't just go are wishy-washy in wanting to say, well, this is popular now, so let's do it now. We've always we've always said what we what is it what is intrinsic to our company and people appreciate that. And then I have the value prop in automation and real quick. I mean, the value proposition for a lot of people it's very important also, they always know that we're going to have a good price.
Scott Mushkin
I will Perfect. Like I said, I appreciate you taking all my questions and good luck in the next quarter.
Kemper Isely
Thanks. Have a good day, Scott.
Operator
Again, if you have a question, please press star then one. It appears there are 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
Thank you for joining us today. We believe our strong first quarter results have positioned us well to leverage this momentum throughout the balance of the fiscal year. Thank you and have a great day.
Todd Dissinger
Bye.
Operator
Conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.
