10-Q 1 ngvc20240331_10q.htm FORM 10-Q ngvc20240331_10q.htm
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Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2024

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER: 001-35608

logo01.jpg

 

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

45-5034161

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification No.)

 

12612 West Alameda Parkway

 

80228

Lakewood, Colorado

(Address of principal executive offices)

 

(Zip code)

 

(303) 986-4600

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading symbol

Name of each exchange on which registered

Common Stock, $0.001 par value

 

NGVC

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐

 

Accelerated filer

Non –accelerated filer ☐

 

Smaller reporting company

   

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ☒

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of May 6, 2024 was 22,791,945.

 

 

 

 

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2024

 

Table of Contents

 

   

Page

Number

     
 

PART I. Financial Information

 
     

Item 1.

Financial Statements

4

 

Consolidated Balance Sheets as of March 31, 2024 and September 30, 2023 (unaudited)

4

 

Consolidated Statements of Income for the three and six months ended March 31, 2024 and 2023 (unaudited)

5

 

Consolidated Statements of Cash Flows for the six months ended March 31, 2024 and 2023 (unaudited)

6

 

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2024 and 2023 (unaudited)

7

 

Notes to Unaudited Interim Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

     
 

PART II. Other Information

 
     

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

 

Item 5.

Other Information

31

Item 6.

Exhibits

32

     

SIGNATURES

33

 

 

Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and the Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries and (ii) all references to a fiscal year refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example, fiscal year 2024 refers to the year from October 1, 2023 to September 30, 2024).

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (this Form 10-Q) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in addition to historical information. These forward-looking statements are included throughout this Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements that are not statements of historical fact, including those that relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources, future growth, pending legal proceedings and other financial and operating information, are forward looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in this Form 10-Q.

 

The forward-looking statements contained in this Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, national, regional or local political, economic, inflationary, deflationary, recessionary, business, interest rate, labor market, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023 (the Form 10-K). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

 

Any forward-looking statement made by us in this Form 10-Q speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. You are advised, however, to consult any disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC). Our reports and other filings with the SEC are available at the SEC’s website at www.sec.gov. Our reports and other filings with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.

 

 

 

PART I. Financial Information

 

Item 1. Financial Statements

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

 

   

March 31,

2024

   

September 30,

2023

 

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 10,970       18,342  

Accounts receivable, net

    8,741       10,797  

Merchandise inventory

    117,352       119,260  

Prepaid expenses and other current assets

    3,806       4,151  

Total current assets

    140,869       152,550  

Property and equipment, net

    178,339       169,060  

Other assets:

               

Operating lease assets, net

    280,165       287,941  

Finance lease assets, net

    42,908       45,110  

Deposits and other assets

    288       395  

Goodwill and other intangible assets, net

    14,002       14,129  

Total other assets

    337,363       347,575  

Total assets

  $ 656,571       669,185  
                 

Liabilities and Stockholders Equity

               

Current liabilities:

               

Accounts payable

  $ 84,176       80,675  

Accrued expenses

    32,312       33,064  

Term loan facility, current portion

    3,688       1,750  

Operating lease obligations, current portion

    35,859       34,850  

Finance lease obligations, current portion

    3,860       3,690  

Total current liabilities

    159,895       154,029  

Long-term liabilities:

               

Term loan facility, net of current portion

          5,938  

Revolving facility

    11,400        

Operating lease obligations, net of current portion

    267,293       276,808  

Finance lease obligations, net of current portion

    45,220       47,142  

Deferred income tax liabilities, net

    12,789       14,427  

Total long-term liabilities

    336,702       344,315  

Total liabilities

    496,597       498,344  

Commitments (Note 13)

               

Stockholders’ equity:

               

Common stock, $0.001 par value, 50,000,000 shares authorized, 22,771,969 and 22,745,412 shares issued at March 31, 2024 and September 30, 2023, respectively, and 22,771,969 and 22,738,915 shares outstanding at March 31, 2024 and September 30, 2023, respectively

    23       23  

Additional paid-in capital

    59,706       59,013  

Retained earnings

    100,245       111,871  

Common stock in treasury at cost, 6,497 shares at September 30, 2023

          (66 )

Total stockholders’ equity

    159,974       170,841  

Total liabilities and stockholders’ equity

  $ 656,571       669,185  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Net sales

  $ 308,092       283,245       609,842       563,702  

Cost of goods sold and occupancy costs

    217,735       200,768       430,725       402,506  

Gross profit

    90,357       82,477       179,117       161,196  

Store expenses

    69,204       65,192       137,216       128,788  

Administrative expenses

    9,522       8,605       18,929       16,858  

Pre-opening expenses

    370       249       908       702  

Operating income

    11,261       8,431       22,064       14,848  

Interest expense, net

    (1,177

)

    (834

)

    (2,071 )     (1,630 )

Income before income taxes

    10,084       7,597       19,993       13,218  

Provision for income taxes

    (2,123

)

    (1,713

)

    (4,277 )     (2,927 )

Net income

  $ 7,961       5,884       15,716       10,291  
                                 

Net income per share of common stock:

                               

Basic

  $ 0.35       0.26       0.69       0.45  

Diluted

  $ 0.35       0.26       0.68       0.45  

Weighted average number of shares of common stock outstanding:

                               

Basic

    22,759,131       22,725,462       22,755,307       22,716,880  

Diluted

    23,061,119       22,824,673       23,015,842       22,809,189  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Statements of Cash Flows

(Unaudited)

(Dollars in thousands)

 

   

Six months ended March 31,

 
   

2024

   

2023

 

Operating activities:

               

Net income

  $ 15,716       10,291  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    15,153       14,216  

(Gain) loss on impairment of long-lived assets and store closures

    (3 )     871  

Loss on disposal of property and equipment

    30       3  

Share-based compensation

    838       713  

Deferred income tax (benefit) expense

    (1,639

)

    149  

Non-cash interest expense

    9       9  

Changes in operating assets and liabilities:

               

Decrease (increase) in:

               

Accounts receivable, net

    1,358       3,358  

Merchandise inventory

    1,908       (2,297 )

Prepaid expenses and other assets

    423       373  

Income tax receivable

    30       166  

Operating lease assets

    16,661       16,406  

(Decrease) increase in:

               

Operating lease liabilities

    (16,768

)

    (16,940

)

Accounts payable

    3,883       9,270  

Accrued expenses

    (752 )     (1,731 )

Net cash provided by operating activities

    36,847       34,857  

Investing activities:

               

Acquisition of property and equipment

    (22,183

)

    (16,978

)

Acquisition of other intangibles

    (371

)

    (859

)

Proceeds from sale of property and equipment

    3       72  

Proceeds from property insurance settlements

    41        

Net cash used in investing activities

    (22,510

)

    (17,765

)

Financing activities:

               

Borrowings under revolving facility

    293,800       246,500  

Repayments under revolving facility

    (282,400

)

    (246,500

)

Repayments under term loan facility

    (4,000 )     (4,000 )

Finance lease obligation payments

    (1,706

)

    (1,357

)

Dividends to shareholders

    (27,306

)

    (4,543

)

Payments of deferred financing costs

    (18

)

     

Repurchase of common stock

          (86 )

Payments on withholding tax for restricted stock unit vesting

    (79

)

    (180

)

Net cash used in financing activities

    (21,709

)

    (10,166

)

Net (decrease) increase in cash and cash equivalents

    (7,372 )     6,926  

Cash and cash equivalents, beginning of period

    18,342       12,039  

Cash and cash equivalents, end of period

  $ 10,970       18,965  

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 989       639  

Cash paid for interest on finance lease obligations, net of capitalized interest of $199 and $122, respectively

    961       1,005  

Income taxes paid

    6,466       2,625  

Supplemental disclosures of non-cash investing and financing activities:

               

Acquisition of property and equipment not yet paid

  $ 5,353       2,033  

Acquisition of other intangibles not yet paid

    283       103  

Property acquired through operating lease obligations

    9,432       756  

Property acquired through finance lease obligations

    (45 )     1,652  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Consolidated Statements of Changes in Stockholders Equity

For the Six Months Ended March 31, 2024 and 2023

(Unaudited)

(Dollars in thousands, except per share data)

 

   

Common stock –

                                 
   

$0.001 par value

   

Additional

                   

Total

 
   

Shares

outstanding

   

Amount

   

paid-in

capital

   

Retained

earnings

   

Treasury

stock

   

stockholders’

equity

 

Balances September 30, 2023

    22,738,915     $ 23     $ 59,013     $ 111,871     $ (66 )   $ 170,841  

Net income

                      7,755             7,755  

Share-based compensation

                262             66       328  

Issuance of common stock

    13,498                                

Adoption of accounting standard

                      (36 )           (36 )

Cash dividend

                      (25,028

)

          (25,028

)

Balances December 31, 2023

    22,752,413       23       59,275       94,562             153,860  

Net income

                      7,961             7,961  

Share-based compensation

                431                   431  

Issuance of common stock

    19,556                                

Cash dividend

                      (2,278 )           (2,278 )

Balances March 31, 2024

    22,771,969     $ 23     $ 59,706     $ 100,245     $     $ 159,974  

 

   

Common stock –

                                 
   

$0.001 par value

   

Additional

                   

Total

 
   

Shares

outstanding

   

Amount

   

paid-in

capital

   

Retained

earnings

   

Treasury

stock

   

stockholders’

equity

 

Balances September 30, 2022

    22,690,188     $ 23     $ 58,072     $ 97,717     $     $ 155,812  

Net income

                      4,407             4,407  

Share-based compensation

                239                   239  

Issuance of common stock

    22,261                                

Cash dividend

                      (2,272

)

          (2,272 )

Balances December 31, 2022

    22,712,449       23       58,311       99,852             158,186  

Net income

                      5,884             5,884  

Share-based compensation

                208             86       294  

Issuance of common stock

    23,076                                

Repurchase of common stock

    (8,546 )                       (86 )     (86 )

Cash dividend

                      (2,271 )           (2,271 )

Balances March 31, 2023

    22,726,979     $ 23     $ 58,519     $ 103,465     $     $ 162,007  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements

March 31, 2024 and 2023

 

 

1. Organization

 

Nature of Business

 

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries, dietary supplements and body care products. The Company operated 168 and 165 stores as of March 31, 2024 and September 30, 2023, respectively, in 21 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado.

 

 

2. Basis of Presentation and Summary of Significant Accounting Policies

 

Consolidated Financial Statements

 

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial statements and are in the form prescribed by Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-K. The accompanying unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fiscal year ending September 30.

 

The accompanying unaudited consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company) and Vitamin Cottage Two Ltd. Liability Company (VC2). All significant intercompany balances and transactions have been eliminated in consolidation.

 

The Company has one reporting segment: natural and organic retail stores.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to valuation of inventories, useful lives of long-lived assets for depreciation and amortization, impairment of finite-lived intangible assets, long-lived assets, and goodwill, lease assumptions, allowances for self-insurance reserves, deferred tax assets and liabilities, and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

 

Recently Adopted Accounting Pronouncements

 

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, “Reference Rate Reform,” Accounting Standards Codification (ASC) Topic 848, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 2020-04), which was subsequently amended by a standard update in December 2022. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. As amended, the guidance only applies to modifications made prior to December 31, 2024. On December 15, 2022, the Company amended the Credit Facility (as defined in Note 5 below) to, among other things, replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on the Secured Overnight Financing Rate (SOFR). The Company elected to apply ASU 2020-04’s amendments for contract modifications during the first quarter of the fiscal year ending September 30, 2023.

 

 

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” ASC Topic 326, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when determining credit loss estimates. ASU 2016-13 also requires financial assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the effective date of ASU 2016-13 for smaller reporting companies such as the Company. The Company adopted ASU 2016-13 effective October 1, 2023 by recognizing the cumulative effect of initially applying the new credit loss standard as an adjustment to the opening balance of retained earnings.

 

Recent Accounting Pronouncements

 

In March 2023, the FASB issued ASU 2023-01, “Common Control Arrangements,” ASC Topic 842, “Leases” (ASU 2023-01). Issue 1, Terms and Conditions to Be Considered, of ASU 2023-01 is not applicable to public entities. Issue 2, Accounting for Leasehold Improvements, of ASU 2023-01 requires leasehold improvements associated with common control leases to be amortized over the useful life of the improvements and certain disclosures when the useful life of leasehold improvements to the common control group exceeds the related lease term. The provisions of ASU 2023-01, Issue 2, will be effective for the Company’s first quarter of the fiscal year ending September 30, 2025. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

 

In November 2023, the FASB issued ASU 2023-07, “Improvements to Reportable Segment Disclosures,” ASC Topic 280, “Segment Reporting” (ASU 2023-07). The ASU 2023-07 provisions require enhanced disclosures primarily about significant segment expenses. In addition, the provisions enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The provisions of ASU 2023-07 will be effective for the Company’s fiscal year ending September 30, 2025. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

 

In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures,” ASC Topic 740, “Income Taxes” (ASU 2023-09). The ASU 2023-09 provisions require entities, on an annual basis, to disclose specific categories in the rate reconciliation and provide additional information for reconciling items equal to or greater than 5% of the statutory income tax rate amount. ASU 2023-09 also requires that entities disclose on an annual basis information about the amount of income taxes paid disaggregated by federal, state, and foreign taxes and disaggregated by individual jurisdictions in which income taxes paid is equal to or greater than 5% of total income taxes paid. In addition, ASU 2023-09 eliminates some disclosures relating to estimates of the change in unrecognized tax benefits reasonably possible within 12 months. The provisions of ASU 2023-09 will be effective for the Company’s fiscal year ending September 30, 2026. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

 

No other new accounting pronouncements issued or effective during the three months ended March 31, 2024 had, or are expected to have, a material impact on the Company’s consolidated financial statements.

 

 

3. Revenue Recognition

 

The nature of the goods the Company transfers to customers at the point of sale consists of merchandise purchased for resale. In these transactions, the Company acts as a principal and recognizes revenue (net sales) from the sale of goods when control of the promised goods is transferred to the customer. Control refers to the ability of the customer to direct the use of, and obtain substantially all the remaining benefits from, the transferred goods.

 

The Company’s performance obligations are satisfied upon the transfer of goods to the customer (at the point of sale), and payment from the customer is also due at that time. Transaction prices are considered fixed. Discounts provided to customers at the point of sale are recognized as a reduction in revenue as the goods are sold. Revenue excludes sales and usage-based taxes collected.

 

Proceeds from the sale of the Company’s gift cards are recorded as a liability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company.

 

 

The balance of contract liabilities related to unredeemed gift cards was $1.5 million as of March 31, 2024 and September 30, 2023. Revenue for each of the three months ended March 31, 2024 and 2023 includes $0.1 million, that was included in the contract liability balance of unredeemed gift cards at September 30, 2023 and 2022, respectively. Revenue for the six months ended March 31, 2024 and 2023 includes approximately $0.5 million and $0.4 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2023 and 2022, respectively.

 

Rewards program points are accrued as deferred revenue at the retail value per point, net of estimated breakage based on historical redemption rates experienced within the rewards program. Rewards points are forfeited at the end of each calendar year.

 

The following table disaggregates the Company’s revenue by product category for the three and six months ended March 31, 2024 and 2023, dollars in thousands and as a percentage of net sales:

 

   

Three months ended

March 31,

   

Six months ended

March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Grocery

  $ 217,120       71

%

    197,130       70       429,255       70       394,488       70  

Dietary supplements

    61,950       20       60,094       21       121,924       20       116,677       21  

Body care, pet care and other

    29,022       9       26,021       9       58,663       10       52,537       9  
    $ 308,092       100

%

    283,245       100       609,842       100       563,702       100  

 

 

4. Earnings Per Share

 

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed using the treasury stock method and reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units (RSUs) were to vest, resulting in the issuance of common stock that would then share in the earnings of the Company.

 

The following table presents the Company’s basic and diluted EPS for the three and six months ended March 31, 2024 and 2023, dollars in thousands, except per share data:

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Net income

  $ 7,961       5,884       15,716       10,291  
                                 

Weighted average number of shares of common stock outstanding

    22,759,131       22,725,462       22,755,307       22,716,880  

Effect of dilutive securities

    301,988       99,211       260,535       92,309  

Weighted average number of shares of common stock outstanding including effect of dilutive securities

    23,061,119       22,824,673       23,015,842       22,809,189  
                                 

Basic earnings per share

  $ 0.35       0.26       0.69       0.45  

Diluted earnings per share

  $ 0.35       0.26       0.68       0.45  

 

There were 14,944 and 34,220 non-vested RSUs for the three and six months ended March 31, 2024, respectively, excluded from the calculation of diluted EPS as they were antidilutive. There were 145,805 and 146,005 non-vested RSUs for the three and six months ended March 31, 2023, respectively, excluded from the calculation of diluted EPS as they were antidilutive.

 

 

 

5. Debt

 

Credit Facility

 

The Company is party to a Credit Facility, originally entered into on January 28, 2016, as subsequently amended, consisting of a $75.0 million revolving loan facility (the Revolving Facility) and a $35.0 million term loan facility (the Term Loan Facility, and together with the Revolving Facility, the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The revolving commitment amount under the Revolving Facility is $75.0 million, including a $5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time prior to the maturity date without premium or penalty. The Term Loan Facility matures on November 13, 2024 and the Revolving Facility matures on November 16, 2028. Base rate loans under the Credit Facility bear interest at a fluctuating base rate, as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of: (i) the federal funds rate plus 0.50%; (ii) the prime rate; and (iii) Term SOFR plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Term SOFR borrowings under the Credit Facility bear interest based on Term SOFR for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is based upon the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal installments of approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.

 

The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, provided that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $15.0 million during any fiscal year.

 

On November 16, 2023, the Company amended the Credit Facility to: (i) increase its aggregate revolving commitments from $50.0 million to $75.0 million; (ii) extend the maturity date of the Revolving Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million by no later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $15.0 million during any fiscal year. The aggregate revolving commitment amount will be automatically and permanently reduced by $2.5 million annually until the Revolving Facility matures in November 2028, unless the Company has previously exercised its option to reduce the aggregate revolving commitments to a lower amount.

 

The Company had $11.4 million and no amounts outstanding under the Revolving Facility as of March 31, 2024 and September 30, 2023, respectively. The Company had undrawn, issued and outstanding letters of credit of $1.5 million as of March 31, 2024 and September 30, 2023, which were reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had $62.1 million and $48.5 million available for borrowing under the Revolving Facility as of March 31, 2024 and September 30, 2023, respectively. The Company had $3.7 million outstanding under its fully drawn Term Loan Facility as of March 31, 2024.

 

As of March 31, 2024 and September 30, 2023, the Company was in compliance with all covenants under the Credit Facility.

 

Lease Obligations

 

The Company had 24 leases that were classified as finance leases as of March 31, 2024 and September 30, 2023. No rent expense is recorded for these finance leases; rather, rental payments under such leases are recognized as a reduction of the lease obligation and as interest expense. The interest rate on finance lease obligations is determined at the commencement of the lease.

 

 

Interest

 

The Company incurred gross interest expense of $1.2 million and $0.9 million for the three months ended March 31, 2024 and 2023, respectively, and $2.3 million and $1.8 million for the six months ended March 31, 2024 and 2023, respectively. Interest expense for the three and six months ended March 31, 2024 and 2023 relates primarily to interest on finance lease obligations and the Credit Facility. The Company capitalized interest of $0.1 million and less than $0.1 million for the three months ended March 31, 2024 and 2023, respectively, and $0.2 million and $0.1 million for the six months ended March 31, 2024 and 2023, respectively.

 

 

6. Stockholders Equity

 

Share Repurchases

 

In May 2016, the Board of Directors (the Board) authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase program – most recently in May 2024 – and the program will terminate on May 31, 2026. Repurchases under the Company’s share repurchase program may be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.

 

The following table summarizes share repurchase activity for the three and six months ended March 31, 2024 and 2023 (in thousands, except number of shares acquired and average per share cost):

 

   

Three months ended

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Number of common shares acquired

          8,546             8,546  

Average price per common share acquired (including commissions)

  $       10.02             10.02  

Total cost of common shares acquired

  $       86             86  

 

During the three months ended December 31, 2023 and March 31, 2023, the Company reissued 6,497 and 8,546 treasury shares, respectively, each at a cost of $0.1 million, to partially satisfy the issuance of common stock pursuant to the vesting of certain restricted stock unit awards and the award of stock grants. At March 31, 2024 and September 30, 2023, the Company held no shares and 6,497 shares in treasury, respectively. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.1 million.

 

Dividends

 

The Company paid a quarterly cash dividend of $0.10 per share of common stock in each of the first two quarters of fiscal years 2024 and 2023, and a special cash dividend of $1.00 per share of common stock in the first quarter of fiscal year 2024.

 

 

7. Lease Obligations

 

The Company leases most of its stores, a bulk food repackaging facility and distribution center, and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from 10 to 25 years, with scheduled increases in minimum rent payments.

 

Operating and finance lease liabilities represent the present value of lease payments not yet paid. Operating and finance lease assets represent the Company’s right to use an underlying asset and are based upon the operating and finance lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating and finance lease assets.

 

Most leases include one or more options to renew, with renewal terms normally expressed in periods of five to ten-year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.

 

Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.

 

 

As most of the Company’s lease agreements do not provide an implicit discount rate, the Company uses an estimated incremental borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. The Company uses other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.

 

Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 months or less (short-term leases) are not presented on the balance sheet. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.

 

The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

 

The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining sublease terms extend through fiscal year 2033. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.

 

The Company has four operating leases with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through May 2042 and include various options to renew. The terms and rental rates of these leases have been approved by our audit committee in accordance with our related party transaction policy. As of March 31, 2024, these leases accounted for $8.0 million of operating lease assets and $8.1 million of operating lease liabilities, of which $0.9 million was current, and are included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for each of the three months ended March 31, 2024 and 2023 and $0.6 million for each of the six months ended March 31, 2024 and 2023.

 

The components of total lease cost for the three and six months ended March 31, 2024 and 2023 were as follows, dollars in thousands:

 

     

Three months ended

   

Six months ended

 
     

March 31,

   

March 31,

 

Lease cost

Classification

 

2024

   

2023

   

2024

   

2023

 

Operating lease cost:

                                 
 

Cost of goods sold and occupancy costs

  $ 11,009       10,968       22,036       21,871  
 

Store expenses

    116       80       231       178  
 

Administrative expenses

    99       82       197       159  
 

Pre-opening expenses

    78       14       137       94  

Finance lease cost:

                                 

Depreciation of lease assets

Store expenses

    1,028       945       2,037       1,852  
 

Pre-opening expenses

    49       73       119       186  

Interest on lease liabilities

Interest expense, net

    514       473       1,016       916  
 

Pre-opening expenses

    61       86       145       210  

Short-term lease cost

Store expenses

    905       770       1,659       1,441  

Variable lease cost

Cost of goods sold and occupancy costs (1)

    1,676       1,601       3,258       3,105  

Sublease income

      (18 )     (72 )     (106 )     (146 )

Total lease cost

  $ 15,517       15,020       30,729       29,866  

 

1 Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.

 

 

Additional information related to the Company’s leases for the three and six months ended March 31, 2024 and 2023 were as follows, dollars in thousands:

 

   

Three months ended

   

Six months ended

 
   

March 31,

   

March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Cash paid for amounts included in the measurement of lease liabilities:

                               

Operating cash flows from operating leases

  $ 11,327       11,569       22,707       22,836  

Operating cash flows from finance leases

    575       559       1,160       1,127  

Financing cash flows from finance leases

    891       715       1,706       1,357  

Lease assets obtained in exchange for new lease liabilities:

                               

Operating leases

    4,752             9,432       756  

Finance leases

    7       (42 )     (45 )     1,652  

 

Additional information related to the Company’s leases as of March 31, 2024 and 2023 was as follows:

 

   

March 31,

 
   

2024

   

2023

 

Weighted-average remaining lease term (in years):

               

Operating leases

    9.9       10.4  

Finance leases

    13.9       14.2  

Weighted-average discount rate:

               

Operating leases

    3.9

%

    3.7  

Finance leases

    4.8

%

    4.8  

 

During the three months ended March 31, 2024, the Company paid $0.3 million to early terminate the operating lease associated with a store that closed in fiscal year 2023. As a result of this lease termination, the Company wrote off $0.4 million of operating lease assets and $0.6 million of operating lease liabilities and recorded a $0.2 million loss in store expenses. In addition, during the three and six months ended March 31, 2024, the Company incurred additional impairment charges of $0.1 million related to operating lease assets associated with store closures that occurred in fiscal years 2022 and 2023. During the three and six months ended March 31, 2023, the Company incurred an impairment charge of $0.9 million related to an operating lease asset associated with a store closure in fiscal year 2023.

 

Future lease payments under non-cancellable leases as of March 31, 2024 were as follows, dollars in thousands:

 

Fiscal year

 

Operating

leases

   

Finance

leases

   

Total

 

Remainder of 2024

  $ 23,520       3,021       26,541  

2025

    46,175       6,051       52,226  

2026

    43,520       6,093       49,613  

2027

    41,883       6,138       48,021  

2028

    39,055       5,053       44,108  

Thereafter

    174,612       40,930       215,542  

Total future undiscounted lease payments

    368,765       67,286       436,051  

Less imputed interest

    (65,613

)

    (18,206

)

    (83,819

)

Total reported lease liability

    303,152       49,080       352,232  

Less current portion

    (35,859

)

    (3,860

)

    (39,719

)

Noncurrent lease liability

  $ 267,293       45,220       312,513  

 

The table above excludes $7.4 million of legally binding minimum lease payments for leases that had been executed as of March 31, 2024 but whose terms had not yet commenced.

 

 

 

8. Property and Equipment

 

The Company had the following property and equipment balances as of March 31, 2024 and September 30, 2023, dollars in thousands:

 

             

As of

 
    Useful lives

(in years)

   

March 31,

2024

   

September 30,

2023

 

Construction in process

    n/a       $ 9,091       15,221  

Land

    n/a         6,746       6,746  

Buildings

  16 40       56,058       46,412  

Land improvements

  1 24       2,184       2,112  

Leasehold and building improvements

  1 25       178,927       173,407  

Fixtures and equipment

  5 7       164,267       157,710  

Computer hardware and software

  3 5       30,059       27,080  
                447,332       428,688  

Less accumulated depreciation and amortization

              (268,993

)

    (259,628

)

Property and equipment, net

            $ 178,339       169,060  

 

Depreciation and amortization expense for the three and six months ended March 31, 2024 and 2023 is summarized as follows, dollars in thousands:

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Depreciation and amortization expense included in cost of goods sold and occupancy costs

  $ 216       266       357       524  

Depreciation and amortization expense included in store expenses

    6,994       6,410       13,839       12,713  

Depreciation and amortization expense included in administrative expenses

    443       405       838       793  

Depreciation and amortization expense included in pre-opening expenses

    49       73       119       186  

Total depreciation and amortization expense

  $ 7,702       7,154       15,153       14,216  

 

 

9. Goodwill and Other Intangible Assets

 

The Company had the following goodwill and other intangible asset balances as of March 31, 2024 and September 30, 2023, dollars in thousands:

 

             

As of

 
   

Useful lives
(in years)

   

March 31,

2024

   

September 30,

2023

 

Amortizable intangible assets:

                         

Other intangibles

  0.5 7     $ 13,291       13,207  

Less accumulated amortization

              (6,114

)

    (5,326

)

Amortizable intangible assets, net

              7,177       7,881  

Other intangibles in process 

              1,211       643  

Trademarks

 

Indefinite

      389       389  

Deferred financing costs, net

  3 5       27       18  

Total other intangibles, net

              8,804       8,931  

Goodwill

 

Indefinite

      5,198       5,198  

Total goodwill and other intangibles, net

            $ 14,002       14,129  

 

 

 

10. Accrued Expenses

 

The composition of accrued expenses as of March 31, 2024 and September 30, 2023 is summarized as follows, dollars in thousands:

 

   

As of

 
   

March 31,

   

September 30,

 
   

2024

   

2023

 

Payroll and employee-related expenses

  $ 18,516       17,719  

Accrued property, sales, and use tax payable

    8,414       9,844  

Accrued marketing expenses

    587       466  

Deferred revenue

    1,866       1,866  

Other

    2,929       3,169  

Total accrued expenses

  $ 32,312       33,064  

 

 

11. Income Taxes

 

Income taxes are accounted for in accordance with the provisions of ASC Topic 740 “Income Taxes” (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.

 

 

12. Related Party Transactions

 

The Company has ongoing relationships with related entities as noted below:

 

Chalet Properties, LLC: The Company has four operating leases (see Note 7) with Chalet. Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was $0.2 million for each of the three months ended March 31, 2024 and 2023, and $0.4 million for each of the six months ended March 31, 2024 and 2023.

 

Isely Family Land Trust LLC: The Company has one operating lease (see Note 7) with the Land Trust. The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was $0.1 million for each of the three months ended March 31, 2024 and 2023 and was $0.2 million for each of the six months ended March 31, 2024 and 2023.

 

FTVC LLC: The Company has one operating lease (see Note 7) with FTVC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC was less than $0.1 million for each of the three months ended March 31, 2024 and 2023 and was less than $0.1 million for each of the six months ended March 31, 2024 and 2023.

 

 

13. Commitments and Contingencies

 

Self-Insurance

 

The Company is self-insured for certain losses, liabilities and employee benefit costs, subject to a stop loss policy or deductible limits. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering an analysis of actual claims, historical claims experience, demographic factors and other actuarial assumptions. While the Company believes that its assumptions are appropriate, the estimated accrual for these liabilities could be significantly affected if future occurrences and claims materially differ from these assumptions and historical trends.

 

 

Legal Proceedings

 

The Company is periodically involved in legal proceedings that are incidental to the conduct of its business, including but not limited to employment discrimination claims, customer injury claims, and investigations. When the potential liability from a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations, and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict with certainty the ultimate resolution of any lawsuits, investigations, and claims asserted against it, management does not believe any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its financial statements.

 

 

14. Subsequent Event

 

On May 8, 2024, the Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June 19, 2024 to stockholders of record as of the close of business on June 3, 2024.

 

On May 8, 2024, the Board authorized an extension of the Company's share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2026.

 

 

 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto, which are included elsewhere in this Form 10-Q, and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements at the beginning of this Form 10-Q for an explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes, may not sum due to the effects of rounding.

 

Company Overview

 

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, dietary supplements and body care products that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of March 31, 2024, we operated 168 stores in 21 states, including Colorado, Arizona, Arkansas, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

 

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. The sizes of our stores range from approximately 7,000 to 16,000 selling square feet.

 

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2023, we increased our store count at a compound annual growth rate of 2.2%. In fiscal year 2023, we opened three new stores, relocated/remodeled three existing stores and closed two stores. We plan to open four to six new stores and relocate/remodel four to six existing stores in fiscal year 2024. During the six months ended March 31, 2024, we opened three new stores and relocated/remodeled one existing store. Between April 1, 2024 and the date of this Form 10-Q, we did not open any new stores and relocated/remodeled one existing store.

 

Performance Highlights

 

Key highlights of our performance for the three and six months ended March 31, 2024 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, daily average comparable store sales, are defined in the section “Key Financial Metrics in Our Business,” presented later in this MD&A.

 

 

Net sales. Net sales were $308.1 million for the three months ended March 31, 2024, an increase of $24.8 million, or 8.8%, compared to net sales of $283.2 million for the three months ended March 31, 2023. Net sales were $609.8 million for the six months ended March 31, 2024, an increase of $46.1 million, or 8.2%, compared to net sales of $563.7 million for the six months ended March 31, 2023.

 

 

Daily average comparable store sales. Daily average comparable store sales for the three months ended March 31, 2024 increased 7.5% compared to the three months ended March 31, 2023. Daily average comparable store sales for the six months ended March 31, 2024 increased 6.9% compared to the six months ended March 31, 2023.

 

 

Net income. Net income was $8.0 million for the three months ended March 31, 2024, an increase of $2.1 million, or 35.3%, compared to net income of $5.9 million for the three months ended March 31, 2023. Net income was $15.7 million for the six months ended March 31, 2024, an increase of $5.4 million, or 52.7%, compared to net income of $10.3 million for the six months ended March 31, 2023.

 

 

EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $19.0 million for the three months ended March 31, 2024, an increase of $3.4 million, or 21.7%, compared to $15.6 million for the three months ended March 31, 2023. EBITDA was $37.2 million for the six months ended March 31, 2024, an increase of $8.2 million, or 28.1%, compared to $29.1 million for the six months ended March 31, 2023. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

 

 

 

Adjusted EBITDA. Adjusted EBITDA was $19.7 million for the three months ended March 31, 2024, an increase of $2.9 million, or 17.4%, compared to $16.8 million for the three months ended March 31, 2023. Adjusted EBITDA was $38.5 million for the six months ended March 31, 2024, an increase of $7.8 million, or 25.6%, compared to $30.6 million for the six months ended March 31, 2023. Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.

 

 

Liquidity. As of March 31, 2024, cash and cash equivalents was $11.0 million, and there was $62.1 million available for borrowing under our Revolving Facility, net of outstanding borrowings of $11.4 million and undrawn, issued and outstanding letters of credit of $1.5 million.

 

Industry Trends and Economics

 

We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:

 

 

Impact of broader economic trends and political environment. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, levels of disposable consumer income, consumer debt, interest rates, inflation or deflation, periods of recession and growth, the price of commodities, the political environment and consumer confidence. Furthermore, our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation, including unemployment benefits. A number of macroeconomic and global trends have impacted our business. The current labor market has impacted our ability to retain and attract store Crew members, and we continue to be challenged by labor shortages broadly impacting the retail industry. We have invested in increased wages for our store Crew members and may be required to do so in the future. As a result of current global supply chain issues, we have on occasion experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain, although certain products may be in relatively short supply or unavailable from time to time.

 

 

 

During fiscal year 2023 and the first half of fiscal year 2024, the costs of certain goods we sell were impacted by levels of inflation higher than we have experienced in recent years, resulting in part from supply disruptions, ongoing global conflicts, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain, monetary policy actions, other disruptions and the uncertain economic environment. In the aggregate, management estimates that the Company experienced annualized cost inflation of approximately 2% in the second quarter of fiscal year 2024. Cost inflation estimates are based on individual like items sold during the periods being compared. The impact of inflation on our sales and profitability is influenced in part by our ability to adjust our retail prices accordingly. While we have been able to mitigate this impact to date through our pricing strategies, we are unable to predict how long the current inflationary environment will continue or the impact of inflationary trends on consumer behavior and our sales and profitability in the future.

 

 

Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including construction permitting and the availability of construction materials, equipment and labor.

 

 

Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up, and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutrition education, differentiate us in the industry and provide a competitive advantage.

 

 

 

Consumer preferences. Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from higher retail prices for our products due to inflation, or reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or stricter regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.

 

Outlook

 

We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store sales and continue to profitably expand. These factors include a loyal customer base, increasing transaction size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education, a convenient, clean and shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries, dietary supplements and body care products.

 

We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including construction permitting and the availability of construction materials, equipment and labor. We believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industries and regional and general economic conditions, including inflationary or recessionary trends. We believe there are opportunities for increased leverage of costs and increased economies of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy costs), our ability to leverage costs may be limited.

 

Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form 10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.

 

Key Financial Metrics in Our Business

 

In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:

 

Net sales

 

Our net sales are comprised of gross sales net of discounts, in-house coupons, returns, and allowances. In comparing net sales between periods, we monitor the following:

 

 

Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior fiscal year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).

 

 

Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, returned, and exchanged.

 

 

Average transaction size. Average transaction size is calculated by dividing net sales by transaction count for a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction.

 

 

Cost of goods sold and occupancy costs

 

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and, as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically decrease as new stores mature and sales increase. Rent payments for leases classified as finance lease obligations are not recorded in cost of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense.

 

Gross profit and gross margin

 

Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.

 

Store expenses

 

Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and technology. Depreciation expenses on the lease assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations, as well as store closing costs. Store expenses also include long-lived asset impairment charges. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.

 

Administrative expenses

 

Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment, and computer hardware and software.

 

Pre-opening expenses

 

Pre-opening expenses for new stores and relocations/remodels may include rent expense, salaries, advertising, supplies, and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as finance leases, we recognize pre-opening interest and depreciation expense. Other pre-opening expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening costs are expensed as incurred. Pre-opening expenses for remodels are incurred if the store is required to be closed due to the remodel.

 

Interest expense, net

 

Interest expense consists of the interest associated with finance lease obligations, net of capitalized interest, and our Credit Facility.

 

 

Income tax expense

 

Income taxes are accounted for in accordance with the provisions of ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Income tax expense also includes excess tax benefits and deficiencies related to the vesting of restricted stock units.

 

Results of Operations

 

The following table presents key components of our results of operations expressed as a percentage of net sales for the periods presented:

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2024

   

2023

   

2024

   

2023

 

Statements of Income Data: *

                               

Net sales

    100.0 %     100.0       100.0       100.0  

Cost of goods sold and occupancy costs

    70.7       70.9       70.6       71.4  

Gross profit

    29.3       29.1       29.4       28.6  

Store expenses

    22.5       23.0       22.5       22.8  

Administrative expenses

    3.1       3.0       3.1       3.0  

Pre-opening expenses

    0.1       0.1       0.1       0.1  

Operating income

    3.7       3.0       3.6       2.6  

Interest expense, net

    (0.4 )     (0.3 )     (0.3 )     (0.3 )

Income before income taxes

    3.3       2.7       3.3       2.3  

Provision for income taxes

    (0.7 )     (0.6 )     (0.7 )     (0.5 )

Net income

    2.6 %     2.1       2.6       1.8  

__________________________

                               

*Figures may not sum due to rounding.

                               
                                 

Other Operating Data:

                               

Number of stores at end of period

    168       166       168       166  

Number of new stores opened during the period

    1       1       3       2  

Number of stores relocated/remodeled during the period

                1        

Twelve-month store unit growth rate

    1.2 %     2.5       1.2       2.5  

Change in daily average comparable store sales

    7.5 %     2.7       6.9       1.6  

 

22

 

Three months ended March 31, 2024 compared to the three months ended March 31, 2023

 

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

 

   

Three months ended

March 31,

   

Change In

 
   

2024

   

2023

   

Dollars

   

Percent

 

Statements of Income Data:

                               

Net sales

  $ 308,092       283,245       24,847       8.8 %

Cost of goods sold and occupancy costs

    217,735       200,768       16,967       8.5  

Gross profit

    90,357       82,477       7,880       9.6  

Store expenses

    69,204       65,192       4,012       6.2  

Administrative expenses

    9,522       8,605       917       10.7  

Pre-opening expenses

    370       249       121       48.6  

Operating income

    11,261       8,431       2,830       33.6  

Interest expense, net

    (1,177 )     (834 )     (343 )     41.1  

Income before income taxes

    10,084       7,597       2,487       32.7  

Provision for income taxes

    (2,123 )     (1,713 )     (410 )     23.9  

Net income

  $ 7,961       5,884       2,077       35.3 %

 

Net sales

 

Net sales increased $24.8 million, or 8.8%, to $308.1 million for the three months ended March 31, 2024 compared to $283.2 million for the three months ended March 31, 2023, due to a $21.1 million increase in comparable store sales and a $5.2 million increase in new store sales, partially offset by a $1.5 million decrease in net sales related to closed stores. Daily average comparable store sales increased 7.5% for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The daily average comparable store sales increase resulted from a 3.9% increase in daily average transaction size and a 3.5% increase in daily average transaction count. Comparable store average transaction size was $47.54 for the three months ended March 31, 2024. The increase in net sales during the three months ended March 31, 2024 was driven by increases in transaction counts, items per transaction, retail prices, and new store sales. Marketing initiatives, including {N}power® rewards program offers and market-specific campaigns, enhanced customer engagement, which contributed to sales growth.

 

Gross profit

 

Gross profit increased $7.9 million, or 9.6%, to $90.4 million for the three months ended March 31, 2024 compared to $82.5 million for the three months ended March 31, 2023. Gross profit reflects earnings after product and store occupancy costs. Gross margin increased to 29.3% for the three months ended March 31, 2024 compared to 29.1% for the three months ended March 31, 2023. The increase in gross margin during the three months ended March 31, 2024 was driven by store occupancy cost leverage, partially offset by lower product margin attributable to product mix.

 

Store expenses

 

Store expenses increased $4.0 million, or 6.2%, to $69.2 million for the three months ended March 31, 2024 compared to $65.2 million for the three months ended March 31, 2023. The increase in store expenses was primarily driven by higher compensation expenses. Store expenses as a percentage of net sales were 22.5% and 23.0% for the three months ended March 31, 2024 and 2023, respectively. The decrease in store expenses as a percentage of net sales reflects expense leverage.

 

Administrative expenses

 

Administrative expenses increased $0.9 million, or 10.7%, to $9.5 million for the three months ended March 31, 2024 compared to $8.6 million for the three months ended March 31, 2023. The increase in administrative expenses was driven by higher compensation expenses. Administrative expenses as a percentage of net sales were 3.1% and 3.0% for the three months ended March 31, 2024 and 2023, respectively.

 

 

Pre-opening expenses

 

Pre-opening expenses were $0.4 million for the three months ended March 31, 2024 compared to $0.2 million for the three months ended March 31, 2023.

 

Interest expense, net

 

Interest expense, net of capitalized interest, was $1.2 million for the three months ended March 31, 2024 compared to $0.8 million for the three months ended March 31, 2023.

 

Income taxes

 

Income tax expense increased $0.4 million for the three months ended March 31, 2024 to $2.1 million compared to $1.7 million for the three months ended March 31, 2023. The Company’s effective income tax rate was 21.1% and 22.5% for the three months ended March 31, 2024 and 2023, respectively.

 

Net income

 

Net income was $8.0 million, or $0.35 diluted earnings per share, for the three months ended March 31, 2024 compared to $5.9 million, or $0.26 diluted earnings per share, for the three months ended March 31, 2023.

 

Six months ended March 31, 2024 compared to the six months ended March 31, 2023

 

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

 

   

Six months ended

March 31,

   

Change In

 
   

2024

   

2023

   

Dollars

   

Percent

 

Statements of Income Data:

                               

Net sales

  $ 609,842       563,702       46,140       8.2 %

Cost of goods sold and occupancy costs

    430,725       402,506       28,219       7.0  

Gross profit

    179,117       161,196       17,921       11.1  

Store expenses