Natural Grocers by Vitamin Cottage, Inc. Price & Performance (NGVC)

Today's earnings release is available on the company's website and a recording of this call will be available on the website at investors.naturalgrocers.com Natural. Now, I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. Thank you for joining us for our first quarter call. Today, I will highlight our financial results, including key drivers of our [indiscernible] And provide an update on our initiatives. Then Rich will discuss the first quarter results in greater detail. And review our updated fiscal year twenty twenty five guidance. We are very pleased with the strong start to our fiscal year. Our first quarter results are accelerating growth and continuation of the two years, including broad based growth across product categories and geographic regions. Moreover, comparable store sales growth has remained balanced between transaction counts, transaction size and item per basket. We believe that many of our performance metrics are among the highest in grocery retail. Our daily average comparable store sales in increased accelerated to 8.9% for the first quarter.

And was 15.1% on a two year basis.

Additionally, we have had eight consecutive quarters of positive count comps and four consecutive quarters with both an increase in items per basket and modest inflation. Our sales growth in recent years in ex [indiscernible] Consumers are increasingly creating tailwinds for our business. Our offering of high quality products at always affordable price is distinctive within the marketplace. Robust and balanced sales growth combined with effective expense management drove significant operating leverage and generated a 26.55% year over year increase in diluted earnings We believe our growth in fiscal twenty twenty five in beyond will benefit from our close alignment with consumer trends, strong customer engagement through our [indiscernible] expansion of the Natural Grocers brand products, new store development and driving existing store productivity. During the first quarter, net sales penetration of our NPower rewards program was 81%, up from 78% a year ago. Reflecting continued positive trends in customer loyalty and engagement. Natural Grocers Natural products represent premium quality at compelling prices. In the first quarter, our branded products accounted for 8.9% of total sales. Up from 8.5% a year ago. Helped in part by new products, During the quarter, we launched 23 new Natural grocers brand items that all meet our high standards for nutritional health, and sustainability, including organic variety of tomato sauce, pasta, During the first quarter, we relocated two stores and closed two stores.

Subsequent to the quarter, we opened a new store in Brownsville, Texas. Store unit growth and development continues to be a priority for our company. During fiscal twenty twenty five, we plan to open four to six new stores and relocate or remodel two to four stores. Earlier this week, we released our fiscal year 2024 sustainability report. Since my parents founded the company in 1955, Natural Grocers has prioritized offering quality products at affordable prices. Nutrition, education and caring for our crew and communities. We believe that grocery stores play a pivotal role in the food chain, a system that is essential to health and well-being. We choose to positively impact the ways that food in this nation is grown, raised and sold. We aim to offer nutritionally sound environmentally responsible products and prioritize vendors and farmers who are as passionate about human health animal welfare and the health of our planet as we are. Furthermore, we believe that 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 impact. While creating value for all of our stakeholders. In closing, I would like to thank our Good four You crew for their commitment to operational execution and exceptional customer service.

They have been essential to our sustained success. With that, I will turn our call over to Rich to discuss our financial results and guidance. Thank you, Kemper, and good afternoon. For the first quarter, net sales increased 9.4% from the prior year period to $330,200,000 Daily average comparable store sales increased 8.9% and increased 15.1% on a two year basis. Our daily average comparable transaction count increased 5.3%. This marks our eighth consecutive quarter with positive customer traffic comps. Our daily average comparable transaction size increased 3.4% The transaction size comp included an increase in items per basket of approximately two percentage points. We estimate that the transaction size comp also included modest product cost inflation of approximately one to two percentage points on an annualized basis. Importantly, this was the fourth consecutive quarter with both an increase in items per basket and modest inflation. Sales growth continued to be broad based across product categories. Our strongest performing departments were dairy, Meet and produce, The dietary supplement sales comp was also positive. For the first quarter, gross margin increased 50 basis points to 29.9% driven by store occupancy cost leverage and higher product margin. Store expenses increased 8.1% in the first quarter primarily driven by higher compensation expenses.

Store expenses as a percentage of net sales decreased 20 basis points reflecting expense leverage. Administrative expenses as a percentage of net sales increased 40 basis points driven by higher compensation technology expenses. Compensation expenses included the costs related to our Chief Financial Officer transition. Operating income increased 23.6% to $13,300,000 Net income increased 28.1% to $9,900,000 and diluted earnings per share increased 26.5% to $0.43 in the first quarter. Adjusted EBITDA increased 21.7% to $22,800,000 Turning to the balance sheet and cash flow. We ended the first quarter in a strong liquidity position including $6,300,000 of cash and cash equivalents, and $61,400,000 available to borrow on our $72,500,000 revolving credit facility. We had $8,900,000 in outstanding borrowings on our credit facility. During the first quarter, we invested 9 point primarily for new and relocated stores. Based on the strong start to our fiscal year, coupled with confidence in our business trends and execution, we are increasing our fiscal twenty twenty five outlook for daily average comparable store sales growth and diluted earnings per share. Our revised outlook includes the following: four to six new store openings, two to four store relocations or remodels, daily average comparable store sales growth between 57% an increase compared to our prior outlook of between 46%.

Diluted earnings per share between 1.57 an increase compared to our prior outlook of 1.52 to $1.6 and capital expenditures of $36,000,000 to $44,000,000 to support our growth initiatives. Our outlook reflects the first quarter results and considers both the current operating momentum we are experiencing and consumer trends. Our outlook includes the benefits of our new store growth, targeted marketing focused on our value proposition, differentiation, and customer engagement and operating initiatives focused on driving higher productivity in our stores. Our current expectation is that sales comps will be at at the high end of our outlook range in the second quarter while moderating somewhat in the second half of the year as we continue to cycle relatively strong comps in the prior year. We We expect modest inflation throughout the year in line with current trends, although we acknowledge the uncertainty of the impact of possible tariffs. Our outlook anticipates that year over year gross margin will be relatively flat. Lastly, we expect that year over year store expenses as a percentage of In closing, we are pleased with the strong start to the fiscal year. 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.

Now we'd like to open the line for questions. Thank you. We will now begin the question and answer session. Our first question comes from Scott Mushkin with R5 Capital. Please go ahead. Scott, your line may be muted. Hey, guys. Sorry about that. It was muted. No problem. So my first question is kind of how we left that you guys left off your prepared remarks. You obviously had a good amount of leverage on rent and gross margin. With the cost being so strong, what are the off They wouldn't improve. In other words, your gross margin rate wouldn't move higher. As you leverage the rent. Think runs through it. Hey, Scott, this is Rich. Yes, we did see an improvement of 50 basis points in the margin A significant percentage of that was related to store occupancy costs. And then some of that for product margin improvements, Yes, as we move forward, as we talked in our outlook, we expect that comps in the second half will start to The lower as we will be at lower end of our range as we start to cycle also pretty strong comps in the prior year.

So we'll see less benefit from store occupancy leverage And I think obviously, a little bit uncertain as to the tariff environment and its potential impact on product costs. And so we're in a little bit of a wait and see [indiscernible] Got it. So appropriately conservative, I guess is how I would kind of think of how you guys are thinking about it. Is that Makes sense.

Yes. I think that's a fair statement.

I mean, I think the next question is my other questions are more longer term. Actually, before I get to that, I actually did have a one kind of shorter term question on free cash flow. There were some working capital movements there. Between the years and I was wondering is it some timing things going on when we think about free cash the quarter, Yes. It's all trunk timing driven. It was predominantly accounts payable and the timing of payment for goods and services. Okay. That's my last shorter term one.

So kind of on a longer term basis, if we step back and look at the business, I think you guys were at 4% operating margin in the quarter. Obviously, your nearest competitor Sprout type of much higher margin than you guys. What the why can't it continue to climb as you Assuming, I always say assuming is not a good idea, but thinking is probably a better word that comps remain strong, maybe not as strong as they've been. You continue to increase the penetration of owned brands or your branded product as you continue to reap the benefits of NPower like why shouldn't that just again thinking comps can stay above the 3% to 4% range, Should that continue to rise and is there in your minds a a limit to where it will go. [indiscernible] so think that as we continue to see sales leverage, right, sales expansion, as we move forward, we should continue to see some expansion in our margins. I mean that's to be expected. Obviously, depending on unit growth of stores, that also will have some impact in damping down some of that expansion. But I think it's a reasonable assumption In terms of comparing it to comps, that's a little bit of a different story as we're very focused on on product quality and affordable pricing.

And affordable pricing is a competitive point for the company, competitive strength. And we know that we are priced lower than our competition. And so that will continue to have as we stay true to our values, that will have some impact.

I love that, by the way, such a great answer. So then the final thing, Kemper, I think we talked about this before, like the last piece is like I just got to be repetitive, but four to six stores, could you do seven to nine? Is that possible? Are you is that anything that you thought about a little bit more trying to get I think as we've said in our guidance, this year we're focused on 4% to six And then next year, we're hoping that we'll be able to the pipeline will open up a little bit more and we'll be able to do six to eight stores.

And then going forward, that would be kind of the plan to do six to eight stores.

All right. I don't know if there's anyone on line. It's usually just me. So I really appreciate it. And I'm just going to say it one more time. I know you're not interested, but we'd love to have a store in Florida. Okay. Thanks, Scott. Part is a little bit off of our path right at the moment. I love the stores so much. It's such a unique offering. I love the fact the way you price if you were a consultant client of ours, I'd say you're doing and you're doing most things right. And I think it's great. Obviously, the trend is your friend right now. And hopefully, I shouldn't say that on a conference call, so I won't say that. But could say something political a little bit, but I won't do that. But it looks like there's going to be an increased focus on healthy eating. How about if I just say that?

I think there will be. I agree with you. And it will be to the benefit of this industry for sure. Absolutely. Absolutely. Okay, guys. Thanks so much. All right. Thanks, Yevgena. Have a nice afternoon. Yes. You too. Bye bye. This concludes our question and answer session. I would like to turn the conference back over to Kemper Eisley for any closing remarks. Thank you for joining us. We believe that Natural Grocers continues to be well aligned with consumer and category tailwinds. Helping to feel our momentum and putting us in a strong position for the remainder of the fiscal year. [indiscernible] The conference is now concluded. Thank you for attending the Natural Grocers First Quarter Fiscal Year twenty twenty five Earnings Conference Call. You may now disconnect.