Natural Grocers by Vitamin Cottage, Inc. (NGVC) on Q2 2021 Results - Earnings Call Transcript
Operator: Good day, ladies and gentlemen. Welcome to the Natural Grocers' Second Quarter Fiscal Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. Jonathan Dhillon, General Counsel for Natural Grocers. Mr. Dhillon, you may begin.
Jonathan Dhillon: Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage second quarter fiscal year 2021 earnings conference call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger Chief Financial Officer.
Kemper Isely: Thank you, Jonathan, and good afternoon, everyone. Thank you for joining us today. We had a solid performance in the second quarter executing against our strategic objectives. I'm very proud of how our entire organization performed, delivering on our promise of the highest quality natural foods at always affordable prices, as well as responding to the needs of our communities. While we continue to face challenges stemming from the COVID pandemic and related government mandates, our focused approach and commitment to our founding principles serve as key points of differentiation in the marketplace. Our second quarter results demonstrate the strength of our model and disciplined operating approach, enabling us to drive solid profitability despite very difficult revenue comparisons and weather-related disruptions. Daily average comparable store sales on a two-year stack basis increased 10%. Daily average comparable store sales for the second quarter were down 7% as we lapped a 17% increase in the second quarter of last year. Our second quarter comparable sales were negatively impacted from the severe cold and ice storms during February by an estimated 70 basis points. Transaction size continued to track positively rising 8%, which was offset by a decline of 13.9% in the transaction count. Late in the quarter, we saw the transaction count comp turn positive, which continued through April. Earnings per share of $0.21 was in line with our expectations and supports our previously announced full year guidance range. Our key initiatives remained a focus and continue to drive positive results. Our {N}power program continued to strengthen customer engagement and loyalty, driving transaction activity by providing a compelling platform for optimizing marketing, promotions and enhancing the customer experience. We ended the second quarter with 1.4 million {N}power members, up 17% versus a year ago and up 5% sequentially. Our net sales penetration for {N}power was 70% in the second quarter compared to 69% a year ago.
Todd Dissinger: Thank you Kemper and good afternoon, everyone. We overcame a number of headwinds during the second quarter to deliver solid results in line with our expectations, especially as we began to lap the unprecedented sales increases associated with customer pantry loading at the start of the pandemic. Net sales declined 6.6% to $259.2 million in the second quarter. Daily average comparable store sales was down 7% as we cycled a 17% increase in the prior year period, which included a comp of approximately 40% in March of 2020. During the quarter, we saw continued trends of customers practicing social distancing and the impact of safety guidelines, resulting in a continuation of elevated levels of food-at-home.
Operator: Thank you. We’ll now begin the question-and-answer session. Our first question comes from the line of Greg Badishkanian from Wolfe Research. Please proceed with your question.
Spencer Hanus: Good afternoon. This is Spencer Hanus on for Greg. Can you just talk about the quarter-to-date comps that you guys are seeing? And how that varies by states that are more open? And then, as consumers start to partial basket shop again, how do you think that will flow through to your results?
Kemper Isely: Well, speaking of comps so far this quarter, they are in line with our guidance. We haven't seen any significant change by state in comps. So, whether it's Texas, which is more opened or Colorado or Oregon, which is less opened or New Mexico, which is less opened, the comps are trending fairly similarly to what we would have expected and from what we had seen in the second quarter.
Spencer Hanus: Got it. That's helpful. And then I think you mentioned that inflation in 2Q was running at around 3%. What is your outlook for inflation for all of 2021? And are you seeing any signs of increased cost pressures from CPGs trying to pass-through some of these cost increases? Then do you think you'll be able to pass all those through to your customers?
Kemper Isely: Yeah. I mean, our products are based on a margin. So whenever one of our suppliers increases the cost of goods, we pass that along at our margin. And it's very seldom that we don't do that. I mean, there are a few select products that we'll keep at a particular price, just because the price point is particularly good. But by and large, we're able to pass those costs along. I would guess that, as of right now, hopefully, we'll see the 3% trend for the rest of the year. But the pricing that, we're seeing on – for equipment at our stores is we're getting like 20% and 30% surcharges right now. And so I'm guessing that, everybody else is seeing those type of price increases on their capital goods so they're going to have to – there's probably going to have to be an acceleration in how much they charge for products coming out in the maybe six months from now or something.
Spencer Hanus: That makes sense. And then I think you mentioned that, there saw a slight improvement in product margin this quarter. Can you just talk about what drove that? And then how should we think about the gross margin line and the cadence of that through the rest of the year?
Todd Dissinger: Yeah. So most of the deterioration in our gross margin was driven by occupancy deleverage. We had a slight increase in product margin. I would say, that's mostly increases in product margin across most categories. We only had a few categories that saw a slight margin decrease. So more or less across, the board we're seeing increases. And in terms of thinking about our guidance in the remainder of the year, we would expect to see on the high end of our guidance, our gross margin increase sort of consistent with what we've seen year-to-date, and that's really driven by product margin improvement, and some leverage on occupancy given that on the high-end we have positive comp, and then on the low end we would expect to see gross margin be more or less flat on a year-over-year basis. And that's some improvement in product margin, but because of the sales decline in the low end of our guidance, we would probably see some deleverage on occupancy.
Kemper Isely: If inflation increases, we'll see better product margins through the year because as inflation increases our prices go up faster than our cost of goods go up, because old product would of course be at the older – old price and the new product to be at the higher price, but at a higher margin. Did that make sense?
Spencer Hanus: Yeah. That totally makes sense. And then on the new store development, I understand that you guys are pulling that down a little bit this year, but should we expect you guys to get those new units back next year and maybe see a little bit higher growth in the new stores in 2022?
Kemper Isely: I would expect that, we'll have more new stores in 2022 than we've had in 2021. And we kind of pulled back a little bit on our real estate search in 2020, because of the uncertainty in the markets. So we didn't have as many in the pipeline. And then when we run into construction delays and equipment shipments have gone from eight weeks to 16 weeks. So it's really extended out our construction time line substantially to get stores – new stores open.
Spencer Hanus: Got it. Its been really helpful.
Kemper Isely: I also think that, we'll also have a lot of good real estate opportunities coming up in the coming year, just because of the fallout from the pandemic in the retail sector.
Spencer Hanus: Makes sense, makes sense. Thank you so much.
Operator: Thank you for your question. I'll now turn the conference back to Mr. Kemper Isely for his concluding remarks. Thank you, sir.
Kemper Isely: Yeah. Thank you very much for joining us to discuss our second quarter results. We remain committed to delivering a safe value-driven trusted shopping experience to the communities that support us. We believe the opportunity is greater than ever to help consumers with healthier lives, and we-are excited for the opportunities ahead. We look forward to speaking with you on our next call to review our third quarter 2021 results. Please stay healthy and safe, and have a great day. Thank you. Goodbye.
Operator: Thank you. And that does conclude the conference call for today. We thank you all for your participation, and ask that you please disconnect your line. Thank you once again. Have a great day everyone.
