Natural Grocers by Vitamin Cottage, Inc. (NGVC) Earnings Call Transcript & Summary

Good day, ladies and gentlemen. Welcome to the Natural Grocers Third Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I'd now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage Third Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Richard Hallé, Chief Financial Officer. As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings release will be available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results and highlight key initiatives supporting long-term growth. Rich will then review our third quarter results in greater detail and discuss our fiscal year guidance. We delivered positive daily average comparable store sales growth in the third quarter despite a challenging consumer environment, with comp growth accelerating to 1.2% from 0.5% in the second quarter. We believe third quarter sales trends reflected continued economic uncertainty and sustained focus on value among consumers, consistent with trends observed across the grocery retail sector. In the third quarter, we continued to see strong membership gains in our {N}power Rewards program. Net sales penetration increased 2 percentage points from the prior year period to 84%, highlighting our customers' appreciation for the program's value and benefits. Sales engagement with {N}power members also outperformed in key metrics, generating growth in sales, traffic and basket size during the quarter. {N}power remains an effective tool for optimizing promotions, strengthening customer engagement and building loyalty. As the value leader in natural and organic grocery retail, we continue to emphasize our always affordable pricing through initiatives such as our Even More Affordable campaign, which features rotating everyday staples, including our Natural Grocers brand products. We believe growing consumer prioritization of health and wellness remains a durable trend and creates a meaningful long-term growth opportunity. By pairing rigorous product standards with our always affordable pricing strategy, we deliver exceptional value, strengthen customer loyalty and reinforce our competitive differentiation. Our unit growth strategy continues to gain momentum with 6 stores opened fiscal year-to-date. During the third quarter, we opened three new stores, including our first store in Wisconsin and relocated one store. In July, we opened two new stores and expect to open one additional new store later in the fourth quarter. All six new store openings this year and the two from last year for that matter, rank among our strongest opening day sales performances, a testament to the effectiveness of our marketing efforts. We see significant opportunities to expand our store footprint and remain focused on delivering annual unit growth of 4% to 5% for the foreseeable future. A new initiative we are very excited about is our expanding e-commerce capabilities. In mid-July, we launched a new partnership with DoorDash, extending delivery access across our entire store base with in-store pricing on delivery orders made through DoorDash. Later this month, we will integrate our {N}power Rewards program into DoorDash and further enhance online shopping through the Natural Grocers website, creating additional opportunities to serve customers however they choose to shop. In the coming months, we will phase in curbside pickup across all stores. We continue to partner with Instacart to offer delivery service and pickup at select stores. We believe these enhancements to our e-commerce offering will expand customer access to Natural Grocers, driving incremental transactions from existing customers and attracting new shoppers. While we're still in the initial phase of this new partnership, we view these initiatives as an important step in supporting long-term sales growth and enhancing operating leverage while remaining committed to delivering the differentiated in-store experience that defines our brand. Finally, I want to thank our good4u Crew for their continued dedication to serving our customers. Their commitment to delivering exceptional service is a cornerstone of our differentiated model and one of the key reasons customers choose Natural Grocers. Now I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance.

Thank you, Kemper, and good afternoon. Third quarter net sales increased 1.8% from the prior year period to $334.7 million. Daily average comparable store sales increased 1.2%, comprised of a 3.1% increase in basket size and a 1.8% decrease in transaction count. We saw a sequential improvement in comp through the quarter. Our most differentiated categories, produce, dairy and meat continued to lead sales growth. Furthermore, Natural Grocers brand penetration increased 110 basis points year-over-year to 9.7% of total sales. Gross margin decreased 60 basis points to 29.3%, driven by lower product margin, primarily due to an unfavorable change in sales mix as well as higher merchandise inventory shrink and freight costs. Our primary distributor cybersecurity incident in the third quarter of fiscal 2025 affected the year-over-year comparability of product margin mix and shrink for the current period. Higher shrink was also partially attributable to temporary operational impacts related to our ERP system upgrade completed in the previous quarter. Store expenses as a percentage of net sales decreased 20 basis points from the prior year, driven by expense management. Administrative expenses were $9.5 million compared to $10.9 million in the third quarter of fiscal 2025. Administrative expenses during the third quarter of fiscal 2026 included a business interruption insurance recovery gain of $2 million related to the cybersecurity incident for the company's primary distributor in June and July of 2025. Preopening expenses increased $1.3 million or 40 basis points as a percentage of net sales year-over-year, driven by the acceleration of new store openings. Our investment in preopening expenses impacted diluted earnings per share by approximately $0.04. Net income was $11.1 million or $0.48 diluted earnings per share compared to net income of $11.6 million or $0.50 diluted earnings per share for the third quarter of fiscal 2025. Adjusted EBITDA decreased $1.8 million or 7.6% to $22.5 million, including a reduction for the $2 million business interruption recovery gain. Turning to the balance sheet and cash flow. We ended the third quarter in a strong liquidity position, including $17.5 million in cash and cash equivalents, no outstanding credit facility borrowings and $67.3 million available for borrowing on our revolving credit facility. During the first nine months of fiscal 2026, we generated cash from operations of $55.1 million and invested $40.3 million in net capital expenditures, primarily for new and relocated stores and real property acquisitions, resulting in free cash flow of $14.8 million. Today, we are refining the company's fiscal year outlook to reflect our third quarter results while remaining thoughtful about the evolving consumer environment. Our outlook includes the following: open 6 to 7 new stores compared to our prior outlook of between 6 and 8, relocate or remodel 2 existing stores compared to our prior outlook of between 2 and 3 stores; achieve daily average comparable store sales growth between 1.5% and 2% compared to our prior outlook of between 1.5% and 2.5%. Diluted earnings per share between $2.07 and $2.11, including incremental investment related to new stores of $0.08 compared to our prior outlook of between $2.07 and $2.15. And capital expenditures of $45 million to $50 million, unchanged from our prior outlook. One additional note regarding our fourth quarter, we have elected to close stores on Labor Day this year, resulting in one fewer selling day in the fourth quarter compared to last year. We expect the majority of sales that otherwise would have occurred on Labor Day to shift to adjacent days. In closing, based on our year-to-date performance and full year outlook, we are pleased with the comparable store sales growth achieved in a challenging consumer environment and the earnings growth delivered through disciplined expense management while continuing to invest in accelerated new store expansion. We believe our differentiated customer value proposition, accelerating unit growth and exposure to favorable health and wellness trends position Natural Grocers to generate sustainable long-term growth and stockholder value. Now we'd like to open the line for questions. Thank you.

[Operator Instructions] Our first question comes from Aaron Grey of Alliance Global.

First question for me, I just want to ask broader impacts you might be seeing from downtrade in the category and how we should think about the gross margin? It sounded like some of the impacts on the quarter might have been more onetime in nature. So how should we think about the evolution of the gross margin given some downtrade we might be seeing in the category and some price action you might be seeing from your competitors?

Well, as far as downtrading, we haven't really seen a lot of downtrading at our stores. I mean our products are pretty consistently of high quality and affordable price. There really isn't a lot of trading for lower quality or lower price items at our stores. As far as promotional activity by our competitors, we've always been the price leader compared to our closest competitors in our industry, and we still are. And so we haven't really seen a lot of -- a whole lot of dramatic price changes. And we've always been focused on keeping prices on high-profile items like eggs and avocados at a very competitive and best price in the industry. As far as the margin issue, yes, we think that it will be isolated to this quarter. We had some unusual circumstances that caused some comparisons to last year to be a little bit unfavorable.

Appreciate that color. Second one for me, just on some of the new store initial sales that you talked about being company records. Can you maybe provide some of the color you talked about in terms of attributing it to marketing? And maybe bigger picture, if you would attribute that to some of the broader brand awareness that you're seeing for Natural Grocers, not just in existing markets, but maybe even in new markets such as Wisconsin that you called out?

Yes. Our marketing department is excellent, and they do a very good job of getting us well known in the communities before we open. And our brand resonates in new communities such as Wisconsin. That store that opened there was our second best opening day ever and then it was our best opening day ever, and then it was opening in Rapid City eclipsed it a couple of weeks later. And that would be a new community in South Dakota. I mean we have one on the east end of South Dakota. Now we have a store on the west end of South Dakota. We've been well received in both communities and then very well received in the Lake Geneva community in Wisconsin. And it just goes to show how our differentiated selling of products resonates with those communities.

Our next question comes from Scott Mushkin of R5 Capital.

So I wanted to dig into {N}power a little bit more. I actually got a question from an investor, and I was actually a little bit embarrassed because I couldn't actually answer it as well as I wanted to. So it was actually -- the question was, what do you think are the top things that differentiate {N}power from other programs that are out there? Why is it so effective, I guess, is the crux of the question?

It's so effective because we have learned what our customers want in a loyalty program. And we give them a little bit -- instead of just giving them a discount on gas like most of the supermarket programs do, we give them special discounts on certain commodities that like eggs and avocados that they value that's very valuable to them. And then we give them special offers that are tailored toward their shopping patterns that they very much value. And then we offer games that they like to play and people enjoy playing games. And so it encourages shopping, the games that we offer to them.

And then my second question actually goes to just the environment in the industry. The economy is clearly complicated. Obviously, there's some pressures there with the gas prices. But on the flip side is you have a massive wealth effect going on. And so -- and then, of course, the industry dynamics are fairly complicated, too, right? We got the GLP-1 craze, the population issues as far as growth in population. So I was just wondering like -- are you seeing different dynamics through it? It seems to me that you could make a case that the economy is actually better than a lot of people are -- or the news -- is in the news flow. And how much do you attribute to straight out the economy? And how much is it some of the challenges related to what's going on in the industry with the different trends as far as the eating habits and other things? So I just wonder if you guys could dive into that a little bit. I know Kemper, you've been in the business forever. I'd love to hear your insights.

Well, our most loyal customers have stayed extremely loyal and everybody that we've added to {N}power is becoming loyal. And as you heard in the call, our penetration is increasing. And so with those customers, we're doing really well, and there doesn't seem to be any issues. The people that we've lost a little bit on are the marginal customers. And they probably have some economic distress going on because of the price of gasoline, the price of heating and the summer air conditioning it's been really hot. And so those customers have pulled back a little bit. But we're very optimistic that our differentiated brand will continue to attract people that are coming to the MAHA, Make America Healthy Again, sort of conclusion that they need to become healthy. And so as more and more people become aware of eating properly and taking nutritional supplements, they will naturally migrate towards our stores because we're really the only authentic national chain that has the offering for those type of people crave and want.

Yes, I keep waiting for you guys to open up a store in Florida, but I don't know, I might have to wait a bit.