For its second quarter ended March 31, Natural Grocers by Vitamin Cottage Inc. said its net sales increased 6.7 percent to $230.4 million vs. the same period last year; daily average comparable store sales increased 2.9 percent vs. 7.1 percent in the prior-year quarter; operating income increased 8.4 percent to $6.1 million; net income increased 13.4 percent to $3.9 million with diluted earnings per share of $0.17; and EBITDA increased 2.7 percent to $13.4 million. The grocer opened one new store and relocated one store in the second quarter, resulting in a 4.8 percent unit growth rate for the 12-month period ended March 31.
“Our strong results for the second quarter were driven by continued positive trends in comparable store sales and consistent year-on-year gross margin performance,” said Kemper Isely, co-president of Natural Grocers by Vitamin Cottage, headquartered in Lakewood, Colorado. “As a result of our year-to-date performance, our outlook for fiscal 2019 daily average comparable store sales growth remains in line with expectations, and we are raising our fiscal 2019 diluted earnings per share outlook.”
The net sales increase in the quarter primarily was driven by a $6.2 million increase in comparable store sales and a $9.1 million increase in new store sales, partially offset by a $0.7 million decrease in sales from one store that closed during the first quarter of fiscal 2019, Natural Grocers said. The daily average comparable store sales increase of 2.9 percent reflected a 3.5 percent increase in daily average transaction size partially offset by a 0.6 percent decrease in daily average transaction count. Severe winter weather across several of the company’s markets impacted performance during the second quarter of fiscal 2019 compared to the prior year period, including negatively affecting transaction count. Daily average mature store sales increased 1.8 percent in the second quarter this year compared to a 4.3 percent increase in the second quarter of fiscal 2018. For fiscal 2019, mature stores include all stores open during or before fiscal 2014.
Gross profit during the second quarter of fiscal 2019 increased 6.7 percent over the same period in fiscal 2018 to $62.2 million. Gross profit reflects earnings after both product and occupancy costs. Gross margin was 27.0 percent of sales for the second quarter of fiscal 2019, consistent with the second quarter of fiscal 2018. The gross margin reflected a decrease in occupancy costs as a percentage of sales, offset by a lower product margin attributable to a shift in sales mix to lower margin products.
Store expenses during the second quarter of fiscal 2019 increased $3.7 million, or 7.9 percent, to $50.2 million. Store expenses as a percentage of sales increased to 21.8 percent during the second quarter of fiscal 2019 compared to 21.5 percent in the second quarter of fiscal 2018. This increase was primarily driven by increases in marketing expenses and building services and maintenance expenses, including a $0.4 million increase in snow removal costs, partially offset by a decrease in depreciation and labor-related expenses, all as a percentage of sales.
Net income for the second quarter was $3.9 million, or $0.17 of diluted earnings per share, compared to $3.4 million, or $0.15 of diluted earnings per share, for the second quarter of fiscal 2018.
EBITDA increased 2.7 percent to $13.4 million in the second quarter of fiscal 2019 compared to $13.1 million in the second quarter of fiscal 2018.
Results for the first half
During the first half of fiscal 2019, net sales increased $33.6 million, or 8.0 percent, to $452.0 million compared to the same period in fiscal 2018, primarily driven by a $17.3 million increase in comparable store sales and a $17.4 million increase in new store sales, partially offset by a $1.2 million decrease in sales from one store that closed during the first quarter of 2019. Daily average comparable store sales increased 4.2 percent in the first half of fiscal 2019 compared to a 5.9 percent increase in the first half of fiscal 2018. The daily average comparable store sales increase during the first half of fiscal 2019 reflected a 3.3 percent increase in average transaction size and a 0.8 percent increase in daily average transaction count. Daily average mature store sales increased 2.7 percent in the first half of fiscal 2019 compared to a 3.0 percent increase in the first half of fiscal 2018. For fiscal 2019, mature stores include all stores open during or before fiscal 2014.
Gross profit during the first half of fiscal 2019 increased 8.9 percent over the same period in fiscal 2018 to $121.4 million. Gross profit reflects earnings after both product and occupancy costs. Gross margin was 26.9 percent of sales for the first half of fiscal 2019 compared to 26.6 percent of sales for the first half of fiscal 2018. The increase in gross margin was primarily driven by improved product margin, attributable to more focused promotional pricing campaigns, and a decrease in occupancy costs as a percentage of sales, partially offset by a shift in sales mix to lower margin products.
Store expenses during the first half of fiscal 2019 increased $7.7 million, or 8.3 percent, to $99.3 million. Store expenses as a percentage of sales increased to 22.0 percent during the first half of fiscal 2019 compared to 21.9 percent in the first half of fiscal 2018. This increase was primarily driven by increases in building services and maintenance expenses and marketing expenses, partially offset by depreciation, labor-related and utilities expenses, all as a percentage of sales.
Administrative expenses during the first half of fiscal 2019 increased 3.4 percent to $11.1 million compared to the same period in 2018. Administrative expenses as a percentage of sales were 2.5 percent during the first half of fiscal 2019, compared to 2.6 percent in the same period in fiscal 2018.
Pre-opening and relocation expenses decreased $0.4 million to $0.8 million during the first half of fiscal 2019 compared to the comparable period in fiscal 2018. This decrease was due to the impact of the number and timing of new store openings and relocations. During the first half of fiscal 2019, the Company opened five new stores and relocated two stores compared to opening five new stores and relocating one store in the first half of fiscal 2018.
Operating income increased 29.6 percent to $10.2 million during the first half of fiscal 2019 compared to $7.8 million for the comparable period in fiscal 2018. Operating margin increased 40 basis points to 2.2 percent compared to 1.9 percent in the same period in fiscal 2018.
Interest expense during the first half of fiscal 2019 increased $0.3 million compared to the comparable period in fiscal 2018, primarily due to an increase in the number of capital leases.
Income tax expense increased $4.5 million during the first half of fiscal 2019 to $1.6 million compared to a tax benefit of $3.0 million in the first half of fiscal 2018. Income taxes for the six months ended March 31, 2018 reflected the favorable impact of a $4.3 million non-cash remeasurement of the company’s deferred income tax assets and liabilities as a result of the enactment of the Tax Cuts and Jobs Act (the Tax Reform Act) in December 2017. The company’s effective income tax rate for the first half of fiscal 2019 was approximately 20.5 percent compared to 24.5 percent for the six months ended March 31, 2018. The decrease in the effective income tax rate is primarily due to the decrease in the federal corporate tax rate as a result of the Tax Reform Act.
Net income for the first half of fiscal 2019 was $6.1 million, or $0.27 of diluted earnings per share, compared to $8.6 million, or $0.38 of diluted earnings per share, for the first half of fiscal 2018. The decrease in net income compared to the prior year was driven by the impact of the $4.3 million non-cash remeasurement of the company’s deferred income tax assets and liabilities mentioned above as a result of the enactment of the Tax Reform Act. Excluding the favorable impact of the remeasurement of the company’s deferred tax assets and liabilities, net income for the six months ended March 31, 2018 was $4.3 million, or $0.19 diluted earnings per share.
EBITDA increased 9.1 percent to $24.7 million in the first half of fiscal 2019 compared to $22.7 million in the first half of fiscal 2018.
As of March 31, 2019, the company had $11.3 million in cash and cash equivalents and $38.8 million available for borrowing under its $50 million revolving credit facility. Credit facility usage was comprised of $10.2 million of direct borrowings and $1.0 million of letters of credit as of March 31, 2019.
During the first six months of fiscal 2019, Natural Grocers by Vitamin Cottage generated $22.6 million in cash from operations and invested $17.1 million in net capital expenditures, primarily for new stores and relocations.
Growth and development
During the second quarter of fiscal 2019, the company opened one new store and relocated one store, bringing the total store count as of March 31, 2019 to 152 stores in 19 states. Natural Grocers by Vitamin Cottage’s one new store opening and one relocation during the second quarter of fiscal 2019 compared to opening three new stores in the second quarter of fiscal 2018, resulting in 4.8% and 7.4% unit growth rates for the twelve month periods ended March 31, 2019 and March 31, 2018, respectively.
Since April 1, 2019, Natural Grocers by Vitamin Cottage has relocated one store. In addition, the company has signed leases for five new stores and acquired the land and building for one additional new store; these stores will be located in Colorado, Louisiana, North Dakota and Oregon and are planned to open during fiscal 2019 and beyond.
Fiscal 2019 outlook
For fiscal 2019, the company has updated its fiscal 2019 outlook, reflecting an increase in expected diluted earnings per share. The company expects:
Fiscal 2019 Outlook
Number of new stores 7 to 8
Number of relocations 5
Daily average comparable store sales growth 2-4 percent
Net income as a percentage of sales 0.80-1 percent
Diluted earnings per share $0.35-$0.41
Capital expenditures $27-$30 million
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