Natural Grocers by Vitamin tage(NGVC) - 2023 Q3 - Quarterly Report

PART I. Financial Information This section provides Natural Grocers' interim financial statements and management's analysis of financial performance Item 1. Financial Statements This section presents Natural Grocers' unaudited consolidated financial statements and detailed notes for the periods ended June 30, 2023, and September 30, 2022 Consolidated Balance Sheets This section presents the company's consolidated balance sheets as of June 30, 2023, and September 30, 2022 | Metric | June 30, 2023 (in thousands) | September 30, 2022 (in thousands) | | :-------------------------------- | :----------------------------- | :-------------------------------- | | Total current assets | $140,229 | $140,660 | | Total assets | $656,096 | $663,108 | | Total current liabilities | $135,834 | $137,728 | | Total liabilities | $489,160 | $507,296 | | Total stockholders' equity | $166,936 | $155,812 | - Total assets decreased by $7.012 million from September 30, 2022, to June 30, 2023, while total stockholders' equity increased by $11.124 million over the same period[17] Consolidated Statements of Income This section details the company's consolidated statements of income for the three and nine months ended June 30, 2023 and 2022 | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net sales | $281,791 | $266,309 | $845,493 | $815,419 | | Gross profit | $81,390 | $73,559 | $242,586 | $229,078 | | Operating income | $9,084 | $5,651 | $23,932 | $26,539 | | Net income | $7,072 | $3,933 | $17,363 | $19,205 | | Basic EPS | $0.31 | $0.17 | $0.76 | $0.85 | | Diluted EPS | $0.31 | $0.17 | $0.76 | $0.84 | - Net income for the three months ended June 30, 2023, increased by 79.8% year-over-year, while for the nine months ended June 30, 2023, it decreased by 9.6% year-over-year[19] Consolidated Statements of Cash Flows This section outlines the company's consolidated statements of cash flows for the nine months ended June 30, 2023 and 2022 | Cash Flow Activity (in thousands) | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :-------------------------------- | :------------------------------ | :------------------------------ | | Net cash provided by operating activities | $36,159 | $29,505 | | Net cash used in investing activities | $(24,298) | $(18,018) | | Net cash used in financing activities | $(15,324) | $(15,249) | | Net decrease in cash and cash equivalents | $(3,463) | $(3,762) | | Cash and cash equivalents, end of period | $8,576 | $19,916 | - Net cash provided by operating activities increased by $6.654 million (22.6%) for the nine months ended June 30, 2023, compared to the same period in 2022[22] Consolidated Statements of Changes in Stockholders' Equity This section presents the company's consolidated statements of changes in stockholders' equity from September 30, 2022, to June 30, 2023 | Metric (in thousands) | Balances September 30, 2022 | Balances June 30, 2023 | | :-------------------- | :-------------------------- | :--------------------- | | Common stock | $23 | $23 | | Additional paid-in capital | $58,072 | $58,725 | | Retained earnings | $97,717 | $108,264 | | Treasury stock | $— | $(76) | | Total stockholders' equity | $155,812 | $166,936 | - Total stockholders' equity increased by $11.124 million from September 30, 2022, to June 30, 2023, primarily driven by net income and share-based compensation, partially offset by cash dividends and stock repurchases[24] Notes to Unaudited Interim Consolidated Financial Statements This section provides detailed notes to the unaudited interim consolidated financial statements, explaining accounting policies and specific financial components 1. Organization This note describes Natural Grocers' business operations, including its store count and product focus - Natural Grocers operates 164 retail stores specializing in natural and organic groceries, dietary supplements, and body care products across 21 states as of June 30, 2023[26] 2. Basis of Presentation and Summary of Significant Accounting Policies This note outlines the basis of financial statement presentation and summarizes significant accounting policies, including recent accounting pronouncements - The financial statements are prepared in accordance with GAAP for interim reporting, reflecting all necessary adjustments, with the Company operating as one reporting segment[27][29] - The Company adopted ASU 2020-04 (Reference Rate Reform) in Q1 FY2023, replacing LIBOR with SOFR for its Credit Facility, which did not have a material impact[32] - ASU 2016-13 (Credit Losses) will be effective for the Company's Q1 FY2024, with no anticipated material impact[33] 3. Revenue Recognition This note details the company's revenue recognition policies and provides a breakdown of net sales by product category - Revenue is recognized at the point of sale when control of goods is transferred to the customer, with gift card proceeds recorded as a liability until redemption[34][36] | Product Category | Three months ended June 30, 2023 (in thousands) | % of Net Sales (2023) | Three months ended June 30, 2022 (in thousands) | % of Net Sales (2022) | | :----------------- | :------------------------------------ | :-------------------- | :------------------------------------ | :-------------------- | | Grocery | $196,162 | 69% | $186,626 | 70% | | Dietary supplements | $58,183 | 21% | $54,461 | 20% | | Body care, pet care and other | $27,446 | 10% | $25,222 | 10% | | Total | $281,791 | 100% | $266,309 | 100% | | Product Category | Nine months ended June 30, 2023 (in thousands) | % of Net Sales (2023) | Nine months ended June 30, 2022 (in thousands) | % of Net Sales (2022) | | :----------------- | :----------------------------------- | :-------------------- | :----------------------------------- | :-------------------- | | Grocery | $590,650 | 70% | $567,469 | 70% | | Dietary supplements | $174,860 | 21% | $170,668 | 21% | | Body care, pet care and other | $79,983 | 9% | $77,282 | 9% | | Total | $845,493 | 100% | $815,419 | 100% | 4. Earnings Per Share This note presents the basic and diluted earnings per share calculations for the reported periods | EPS Metric | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :----------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Basic EPS | $0.31 | $0.17 | $0.76 | $0.85 | | Diluted EPS | $0.31 | $0.17 | $0.76 | $0.84 | - Diluted EPS increased by $0.14 (82.4%) for the three months ended June 30, 2023, but decreased by $0.08 (9.5%) for the nine months ended June 30, 2023, compared to the respective prior periods[40] 5. Debt This note describes the company's debt structure, including its Credit Facility and compliance with covenants - The Company's Credit Facility includes a $50.0 million Revolving Facility and a $35.0 million Term Loan Facility, maturing on November 13, 2024, with interest rates based on SOFR[41][43] | Debt Metric (in millions) | June 30, 2023 | September 30, 2022 | | :------------------------ | :------------ | :----------------- | | Revolving Facility outstanding | $0.0 | $0.0 | | Available for borrowing (Revolving Facility) | $48.5 | $48.9 | | Term Loan Facility outstanding | $9.7 | $13.9 (implied from current/long-term portions) | - The Company was in compliance with all Credit Facility covenants as of June 30, 2023[45] 6. Stockholders' Equity This note details changes in stockholders' equity, including share repurchase programs and dividend declarations - The Board authorized a share repurchase program up to $10.0 million, extended to May 31, 2024, with $8.1 million remaining available as of June 30, 2023[48][51] | Share Repurchase Activity | Three months ended June 30, 2023 | Nine months ended June 30, 2023 | | :------------------------ | :------------------------------- | :------------------------------ | | Number of common shares acquired | 9,452 | 17,998 | | Average price per common share acquired | $10.12 | $10.07 | | Total cost of common shares acquired | $95 thousand | $181 thousand | - The Company paid quarterly cash dividends of $0.10 per share of common stock in each of the first three quarters of fiscal years 2023 and 2022, and approved another $0.10 dividend for September 2023[52][75] 7. Lease Obligations This note outlines the company's lease obligations, including lease terms, costs, and weighted-average remaining lease terms - The Company leases most of its stores, a repackaging facility, and administrative offices, with lease terms generally ranging from 10 to 25 years[53] | Lease Cost Component (in thousands) | Three months ended June 30, 2023 | Nine months ended June 30, 2023 | | :---------------------------------- | :------------------------------- | :------------------------------ | | Operating lease cost | $11,204 | $33,546 | | Finance lease cost | $1,674 | $4,438 | | Short-term lease cost | $826 | $2,267 | | Variable lease cost | $1,747 | $4,852 | | Sublease income | $(84) | $(230) | | Total lease cost | $15,407 | $45,273 | - The weighted-average remaining lease term for operating leases was 10.4 years (3.8% discount rate) and for finance leases was 14.3 years (4.9% discount rate) as of June 30, 2023[63] 8. Property and Equipment This note provides a breakdown of property and equipment, net, and related depreciation and amortization expenses | Property and Equipment (in thousands) | June 30, 2023 | September 30, 2022 | | :------------------------------------ | :------------ | :----------------- | | Construction in process | $13,178 | $8,651 | | Total gross property and equipment | $420,588 | $400,737 | | Accumulated depreciation and amortization | $(258,276) | $(243,558) | | Property and equipment, net | $162,312 | $157,179 | | Depreciation and Amortization (in thousands) | Three months ended June 30, 2023 | Nine months ended June 30, 2023 | | :------------------------------------------- | :------------------------------- | :------------------------------ | | Total depreciation and amortization expense | $7,210 | $21,426 | 9. Goodwill and Other Intangible Assets This note presents the company's goodwill and other intangible assets, net, as of the reported periods | Intangible Assets (in thousands) | June 30, 2023 | September 30, 2022 | | :------------------------------- | :------------ | :----------------- | | Amortizable intangible assets, net | $8,025 | $8,138 | | Goodwill | $5,198 | $5,198 | | Total goodwill and other intangibles, net | $14,134 | $14,131 | 10. Accrued Expenses This note details the components of accrued expenses and their changes between periods | Accrued Expense (in thousands) | June 30, 2023 | September 30, 2022 | | :----------------------------- | :------------ | :----------------- | | Payroll and employee-related expenses | $10,868 | $14,527 | | Accrued property, sales, and use tax payable | $7,289 | $8,450 | | Deferred revenue | $2,045 | $1,757 | | Total accrued expenses | $22,938 | $26,737 | - Total accrued expenses decreased by $3.799 million from September 30, 2022, to June 30, 2023, primarily due to lower payroll and employee-related expenses[67] 11. Income Taxes This note presents the effective income tax rates and factors influencing them for the reported periods | Effective Income Tax Rate | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :------------------------ | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Rate | 14.1% | 22.1% | 19.1% | 22.7% | - The effective income tax rate decreased for both the three and nine months ended June 30, 2023, primarily due to increased food donation deductions[69] 12. Related Party Transactions This note discloses operating lease agreements and rent payments with related parties - The Company has operating leases with related parties, including Chalet Properties, LLC, with rent paid to Chalet being $0.2 million for the three months and $0.6 million for the nine months ended June 30, 2023[70][71][72] 13. Commitments and Contingencies This note outlines the company's legal proceedings and management's assessment of potential financial impacts - A class action lawsuit alleging FLSA and Colorado labor law violations was largely decertified in May 2023, reducing the likelihood of a material loss contingency[73] - Management does not believe any currently pending legal proceedings will have a material adverse effect on the Company's financial statements[74] 14. Subsequent Event This note describes a significant event occurring after the reporting period, specifically a dividend approval - On August 2, 2023, the Board approved a quarterly cash dividend of $0.10 per share, payable on September 13, 2023[75] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and results of operations for the three and nine months ended June 30, 2023 Company Overview This section provides an overview of Natural Grocers' operations, store count, and strategic focus - Natural Grocers operates 164 stores in 21 states as of June 30, 2023, focusing on high-quality natural and organic products, customer service, and nutrition education[78] - The Company plans to open four new stores and relocate/remodel three stores in fiscal year 2023, with two new stores opened and one relocated/remodelled during the nine months ended June 30, 2023[80] Performance Highlights This section summarizes key financial performance metrics for the three and nine months ended June 30, 2023 | Metric (in millions) | Three months ended June 30, 2023 | Change (%) | Nine months ended June 30, 2023 | Change (%) | | :------------------- | :------------------------------- | :--------- | :------------------------------ | :--------- | | Net sales | $281.8 | 5.8% | $845.5 | 3.7% | | Daily average comparable store sales | 4.4% | N/A | 2.5% | N/A | | Net income | $7.1 | 79.8% | $17.4 | -9.6% | | EBITDA | $16.3 | 28.1% | $45.4 | -4.8% | | Adjusted EBITDA | $16.7 | 28.2% | $47.3 | -2.6% | Industry Trends and Economics This section discusses industry trends, economic factors, and their impact on the company's operations and strategies - The Company experienced approximately 7% annualized cost inflation in Q3 FY2023, impacting product costs, shipping, and labor, which it has mitigated through pricing strategies[84] - Labor shortages continue to challenge the retail industry, leading to increased wage investments for store Crew members[84] - The natural and organic grocery and dietary supplements industry continues to grow due to increased public interest in health and nutrition, providing expansion opportunities[84] Outlook This section outlines key success factors and potential challenges affecting future sales growth and profitability - Key success factors include a loyal customer base, increasing basket size, growing consumer interest in nutrition, a differentiated shopping experience, and focus on high-quality, affordable products[87] - Future sales growth and profitability may be affected by increasing competitive conditions, regional and general economic conditions, and the fixed nature of certain costs[88] Key Financial Metrics in Our Business This section defines key financial metrics used in the business and discusses factors influencing them - Net sales are gross sales net of discounts, coupons, returns, and allowances, with comparable store sales including stores open for at least 13 full months[90][95] - Gross margin is impacted by retail prices, product costs, occupancy costs, product mix, and new store openings, while store expenses are primarily labor-related[93][94] - The grocery industry is highly competitive, with potential intensification from industry consolidation and expanding delivery options, alongside evolving consumer preferences[90] Results of Operations This section provides a detailed analysis of the company's operating results, including net sales, gross profit, and net income | Metric (% of Net Sales) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :---------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | Net sales | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of goods sold and occupancy costs | 71.1% | 72.4% | 71.3% | 71.9% | | Gross profit | 28.9% | 27.6% | 28.7% | 28.1% | | Operating income | 3.2% | 2.1% | 2.8% | 3.3% | | Net income | 2.5% | 1.5% | 2.1% | 2.4% | - For the three months ended June 30, 2023, net sales increased 5.8% to $281.8 million, driven by a 4.4% increase in daily average comparable store sales, and gross margin improved to 28.9%[100][101][102] - For the nine months ended June 30, 2023, net sales increased 3.7% to $845.5 million, with daily average comparable store sales up 2.5%, but net income decreased 9.6% to $17.4 million due to higher expenses[109][110][111][112][113][115][117] Non-GAAP financial measures This section defines and reconciles non-GAAP financial measures like EBITDA and Adjusted EBITDA, used to assess operating performance - EBITDA and Adjusted EBITDA are non-GAAP measures used by management to assess operating performance by excluding non-cash depreciation/amortization, interest, taxes, and certain non-recurring items[118][121] | Metric (in thousands) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Nine months ended June 30, 2023 | Nine months ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :------------------------------ | :------------------------------ | | EBITDA | $16,294 | $12,719 | $45,358 | $47,627 | | Adjusted EBITDA | $16,686 | $13,016 | $47,334 | $48,609 | - EBITDA increased 28.1% for the three months but decreased 4.8% for the nine months ended June 30, 2023, while Adjusted EBITDA increased 28.2% and decreased 2.6% respectively[119][120] Liquidity and Capital Resources This section discusses the company's liquidity sources, cash flow activities, and capital expenditure plans - Primary liquidity sources are cash from operations, cash and cash equivalents, and the $50.0 million Revolving Facility, with $8.6 million in cash and $48.5 million available as of June 30, 2023[126] - Net cash provided by operating activities increased by $6.7 million (22.6%) to $36.2 million for the nine months ended June 30, 2023, primarily due to increased working capital[131] - Capital expenditures for the remainder of fiscal year 2023 are projected to be $3.7 million to $10.7 million, mainly for new store openings and relocations/remodels, with new stores averaging $2.4 million upfront investment[133] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company's market risk position has not materially changed from its Form 10-K, with the transition from LIBOR to SOFR for its Credit Facility not expected to materially affect liquidity or credit access - The transition from LIBOR to SOFR as the reference rate for the Credit Facility has not had, and is not expected to have, a material effect on the Company's liquidity or access to credit[145] Item 4. Controls and Procedures Management evaluated the effectiveness of disclosure controls and procedures, concluding they were effective as of June 30, 2023, with no material changes in internal control over financial reporting - Disclosure controls and procedures were evaluated and deemed effective at a reasonable assurance level as of June 30, 2023[147] - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[148] PART II. Other Information This section covers legal proceedings, risk factors, equity sales, and other supplementary information for the company Item 1. Legal Proceedings The Company is involved in various legal proceedings incidental to its business, including employment and customer injury claims. Management does not believe any currently pending legal proceeding will have a material adverse effect on its financial condition or results of operations - The Company is involved in various legal proceedings, but management does not anticipate any material adverse effect on its financial statements[150] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the Company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Company's Form 10-K[151] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company's Board authorized a share repurchase program up to $10.0 million, extended to May 31, 2024. During the three months ended June 30, 2023, the Company repurchased 9,452 shares at an average price of $10.12 per share - The share repurchase program, authorized for up to $10.0 million, was extended to May 31, 2024[152] | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :-------------------------- | :------------------------------- | :--------------------------- | | May 1, 2023 to May 31, 2023 | 7,725 | $10.03 | | June 1, 2023 to June 30, 2023 | 1,727 | $10.53 | | Total | 9,452 | N/A | - As of June 30, 2023, approximately $8.1 million remained available for repurchases under the program[153] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including organizational documents, executive certifications, and XBRL financial statements - Exhibits include Amended and Restated Certificate of Incorporation and Bylaws, Section 302(a) and 906 certifications, and Inline XBRL formatted financial statements[155] SIGNATURES The report is duly signed on behalf of Natural Grocers by Vitamin Cottage, Inc. by Kemper Isely, Co-President, and Todd Dissinger, Chief Financial Officer on August 3, 2023 - The report was signed by Kemper Isely, Co-President, and Todd Dissinger, Chief Financial Officer, on August 3, 2023[160]