10-Q 1 ngvc20190331_10q.htm FORM 10-Q ngvc20190331_10q.htm
 

 

 

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, 2019

 

OR

 

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

COMMISSION FILE NUMBER: 001-35608 

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 Number)

 

     

12612 West Alameda Parkway

 

80228

Lakewood, Colorado

(Address of principal executive offices)

 

(Zip code)

 

(303) 986-4600

Registrant’s telephone number, including area code)

 

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 ☒

 

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

 

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of April 29, 2019 was 22,438,589.

 

 

 

 

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended March 31, 2019

 

Table of Contents

 

   

Page Number

     
 

PART I. Financial Information

 
     

Item 1.

Financial Statements

 
 

Consolidated Balance Sheets as of March 31, 2019 (unaudited) and September 30, 2018

3

 

Consolidated Statements of Income for the three and six months ended March 31, 2019 and 2018 (unaudited)

4

 

Consolidated Statements of Cash Flows for the six months ended March 31, 2019 and 2018 (unaudited)

5

 

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2019 and 2018 (unaudited)

6

 

Notes to Unaudited Interim Consolidated Financial Statements

7

Item 2.

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

14

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

25

Item 4.

Controls and Procedures

25

     
 

PART II. Other Information

 
     

Item 1.

Legal Proceedings

26

Item 1A.

Risk Factors

26

Item 6.

Exhibits

27

     

SIGNATURES

28

  

 

 

Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and theCompany’’ 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 2019” refers to the year from October 1, 2018 to September 30, 2019).

 

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 we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe 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, 2018 (the Form 10-K) and Part II, Item 1A - “Risk Factors” in this Form 10-Q. 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

(Dollars in thousands, except per share data)

 

   

March 31,

2019

   

September 30,

2018

 
    (unaudited)          

Assets

 

 

         

Current assets:

               

Cash and cash equivalents

  $ 11,283       9,398  

Accounts receivable, net

    4,501       4,738  

Merchandise inventory

    95,335       94,228  

Prepaid expenses and other current assets

    2,544       2,590  

Total current assets

    113,663       110,954  

Property and equipment, net

    191,439       188,768  

Other assets:

               

Deposits and other assets

    1,671       1,682  

Goodwill and other intangible assets, net

    6,464       5,648  

Deferred financing costs, net

    24       31  

Total other assets

    8,159       7,361  

Total assets

  $ 313,261       307,083  
                 

Liabilities and Stockholders’ Equity

               

Current liabilities:

               

Accounts payable

  $ 61,547       61,104  

Accrued expenses

    17,325       17,851  

Capital and financing lease obligations, current portion

    843       736  

Total current liabilities

    79,715       79,691  

Long-term liabilities:

               

Capital and financing lease obligations, net of current portion

    44,780       40,406  

Revolving credit facility

    10,192       13,192  

Deferred income tax liabilities, net

    5,901       6,447  

Deferred compensation

          688  

Deferred rent

    11,175       11,038  

Leasehold incentives

    8,317       8,895  

Total long-term liabilities

    80,365       80,666  

Total liabilities

    160,080       160,357  

Commitments (Notes 7 and 13)

               

Stockholders’ equity:

               

Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at March 31, 2019 and September 30, 2018 and 22,431,553 and 22,373,382 outstanding at March 31, 2019 and September 30, 2018, respectively

    23       23  

Additional paid-in capital

    56,192       56,236  

Retained earnings

    97,564       91,507  

Common stock in treasury at cost, 78,726 and 136,897 shares, at March 31, 2019 and September 30, 2018, respectively

    (598

)

    (1,040

)

Total stockholders’ equity

    153,181       146,726  

Total liabilities and stockholders’ equity

  $ 313,261       307,083  

 

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,

 
   

2019

   

2018

   

2019

   

2018

 

Net sales

  $ 230,447       215,911       451,962       418,391  

Cost of goods sold and occupancy costs

    168,233       157,630       330,602       306,951  

Gross profit

    62,214       58,281       121,360       111,440  

Store expenses

    50,175       46,480       99,298       91,646  

Administrative expenses

    5,761       5,458       11,076       10,715  

Pre-opening and relocation expenses

    157       697       829       1,240  

Operating income

    6,121       5,646       10,157       7,839  

Interest expense, net

    (1,280

)

    (1,122

)

    (2,535

)

    (2,211

)

Income before income taxes

    4,841       4,524       7,622       5,628  

(Provision for) benefit from income taxes

    (981

)

    (1,120

)

    (1,565

)

    2,957  

Net income

  $ 3,860       3,404       6,057       8,585  
                                 

Net income per common share:

                               

Basic

  $ 0.17       0.15       0.27       0.38  

Diluted

  $ 0.17       0.15       0.27       0.38  

Weighted average number of shares of common stock outstanding:

                               

Basic

    22,413,055       22,353,993       22,399,665       22,356,943  

Diluted

    22,561,825       22,444,808       22,579,733       22,419,056  

 

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,

 
   

2019

   

2018

 
                 

Operating activities:

               

Net income

  $ 6,057       8,585  

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

               

Depreciation and amortization

    14,576       14,825  

Gain on disposal of property and equipment

    (165

)

    (28

)

Share-based compensation

    663       362  

Deferred income tax benefit

    (546

)

    (4,171

)

Non-cash interest expense

    6       6  

Changes in operating assets and liabilities

               

Decrease (increase) in:

               

Accounts receivable, net

    254       (832

)

Merchandise inventory

    (1,107

)

    (3,261

)

Prepaid expenses and other assets(1)

    97       (635

)

Income tax receivable(1)

    (65

)

    1,082  

Increase (decrease) in:

               

Accounts payable

    4,469       4,181  

Accrued expenses

    (517

)

    1,276  

Deferred compensation

    (688

)

    (566

)

Deferred rent and leasehold incentives

    (441

)

    914  

Net cash provided by operating activities

    22,593       21,738  

Investing activities:

               

Acquisition of property and equipment(1)

    (17,644

)

    (10,530

)

Acquisition of other intangibles(1)

    (251

)

    (29

)

Proceeds from sale of property and equipment

    792       34  

Proceeds from property insurance settlements

    22        

Net cash used in investing activities

    (17,081

)

    (10,525

)

Financing activities:

               

Borrowings under credit facility

    185,200       176,000  

Repayments under credit facility

    (188,200

)

    (184,800

)

Capital and financing lease obligations payments

    (362

)

    (271

)

Repurchases of common stock

          (581

)

Payments on withholding tax for restricted stock unit vesting

    (265

)

    (11

)

Net cash used in financing activities

    (3,627

)

    (9,663

)

Net increase in cash and cash equivalents

    1,885       1,550  

Cash and cash equivalents, beginning of period

    9,398       6,521  

Cash and cash equivalents, end of period

  $ 11,283       8,071  

Supplemental disclosures of cash flow information:

               

Cash paid for interest

  $ 439       431  

Cash paid for interest on capital and financing lease obligations, net of capitalized interest of $59 and $49, respectively

    2,087       1,748  

Income taxes paid

    2,962       90  

Deferred compensation paid

    700       700  

Supplemental disclosures of non-cash investing and financing activities:

               

Acquisition of property and equipment not yet paid

  $ 1,228       2,377  

Property acquired through capital and financing lease obligations

    4,842       4,428  

 

(1) Certain prior year amounts have been separated for consistency with current year presentation.

 

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, 2019 and March 31, 2018

(Unaudited)

(Dollars in thousands, except per share data)

 

   

Common stock –$0.001 par

                                 
   

value

                                 
   

Shares

outstanding

   

Amount

   

Additional

paid-in

capital

   

Retained

earnings

   

 

Treasury

stock

   

Total

stockholders’ equity

 

Balances September 30, 2018

    22,373,382     $ 23     $ 56,236     $ 91,507     $ (1,040

)

  $ 146,726  

Net income

                      2,197             2,197  

Share-based compensation

    18,928             101             144       245  

Balances December 31, 2018

    22,392,310       23       56,337       93,704       (896

)

    149,168  

Net income

                      3,860             3,860  

Share-based compensation

    39,243             (145

)

          298       153  

Balances March 31, 2019

    22,431,553     $ 23     $ 56,192     $ 97,564     $ (598

)

  $ 153,181  

  

 

 

   

Common stock –$0.001 par

                                 
   

value

                                 
   

Shares

outstanding

   

Amount

   

Additional

paid-in

capital

   

Retained

earnings

   

 

Treasury

stock

   

Total

stockholders’ equity

 

Balances September 30, 2017

    22,448,056     $ 23     $ 55,678     $ 78,846     $ (664

)

  $ 133,883  

Net income

                      5,181             5,181  

Share-based compensation

    1,226             147             9       156  

Repurchase of common stock

    (101,573

)

                      (581

)

    (581

)

Balances December 31, 2017

    22,347,709       23       55,825       84,027       (1,236

)

    138,639  

Net income

                      3,404             3,404  

Share-based compensation

    16,571             69             127       196  

Repurchase of common stock

                                   

Balances March 31, 2018

    22,364,280     $ 23     $ 55,894     $ 87,431     $ (1,109

)

  $ 142,239  

 

See accompanying notes to unaudited interim consolidated financial statements.

 

 

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

 

Notes to Unaudited Interim Consolidated Financial Statements

 

March 31, 2019 and 2018

 

 

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 and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. As of March 31, 2019, the Company operated 152 stores in 19 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 148 stores in 19 states as of September 30, 2018.

 

 

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. Sales from the Company’s natural and organic retail stores are derived from sales of the following product categories, which are presented as a percentage of sales for the three and six months ended March 31, 2019 and 2018, as follows:

 

   

Three months ended

March 31,

   

Six months ended

March 31,

 
   

2019

   

2018

   

2019

   

2018

 

Grocery

    68

%

    67       68       67  

Dietary supplements

    22       23       21       22  

Other

    10       10       11       11  
      100

%

    100       100       100  

 

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 (including the fair value of assets acquired and liabilities assumed in a business combination), 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: allowances for self-insurance reserves; valuation of inventories; useful lives of property and equipment for depreciation and amortization; impairment of finite-lived intangible assets, long-lived assets, and goodwill; lease assumptions; 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.

 

U.S. Tax Reform

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform Act). The Tax Reform Act significantly revised the ongoing federal income tax by, among other things, lowering U.S. corporate income tax rates effective January 1, 2018. The Company has a U.S. federal income tax rate of 21.0% for the fiscal year ending September 30, 2019. The Tax Reform Act resulted in a blended U.S. federal income tax rate of approximately 24.3% for the fiscal year ended September 30, 2018. Remeasurement of the Company’s deferred tax balance under the Tax Reform Act resulted in a non-cash tax benefit of approximately $4.3 million for the six months ended March 31, 2018 and the fiscal year ended September 30, 2018.

 

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue from Contracts with Customers,” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. The Company adopted this ASU and related amendments on October 1, 2018, using the modified retrospective approach. Additionally, upon adoption of this ASU, the Company elected the following practical expedients:

 

  - ASU 2016-09, pursuant to which the incremental costs of obtaining a contract are recognized as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.
     
  - ASU 2016-12, pursuant to which sales taxes and other similar taxes collected from customers are presented net of sales.
     
  - ASU 2016-20, pursuant to which the transaction price allocated to performance obligations is not disclosed when the related contract has a duration of one year or less.

 

Updated accounting policies and other disclosures are discussed below in Recent Accounting Pronouncements in this Note 2. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements for the three or six months ended March 31, 2019.

 

Recent Accounting Pronouncements 

 

In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 simplify the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017, and the ASU is effective for the Company’s first quarter of the fiscal year ending September 30, 2020. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, “Leases,” Topic 842, “Leases” (ASU 2016-02). ASU No. 2016-02 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. ASU 2016-02 also requires certain quantitative and qualitative disclosures. The provisions of ASU 2016-02 are effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. The Company will apply the transition provisions of ASU 2016-02 at its adoption date, whereby prior periods will continue to be reported in accordance with the historical accounting guidance then in effect, as permitted by ASU 2018-11, “Leases,” Topic 842, “Targeted Improvements,” released in July 2018.

 

The adoption of ASU 2016-02 will result in a material increase to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets. The Company is also performing a comprehensive review of its current processes to determine and implement changes required to support the adoption of this standard. As part of this review process, the Company is implementing new software solutions to support the lease reporting upon adoption. The Company is currently evaluating the other effects the adoption of ASU 2016-02 will have on its consolidated financial statements.

 

In January 2018, the FASB issued ASU 2018-01, “Leases,” Topic 842, “Land Easement Practical Expedient for Transition to Topic 842” (ASU 2018-01). ASU 2018-01 permits an entity to elect a transition practical expedient to not assess, under Accounting Standards Codification (ASC) 842, land easements that exist or expired before the standard’s effective date that were not previously accounted for as leases under ASC 840. The Company plans to elect this practical expedient in implementing ASU 2016-02.

 

In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Nonemployee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting for share-based payments to non-employees. ASU 2018-07 expands the scope of Topic 718 to more closely align share-based payment transactions for acquiring goods and services from non-employees with the accounting for share-based payments to employees, with certain exceptions. The provisions of ASU 2018-07 are effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. This ASU is not 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 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 Company also recognizes revenue for a portion of gift card values that is not expected to be redeemed (“breakage”). The estimated breakage takes into consideration several factors, including the laws and regulations applicable to each jurisdiction. The Company determines the amount of breakage income to be recognized on gift cards using historical experience to estimate amounts that will ultimately not be redeemed. The Company recognizes such breakage income in proportion to redemption rates of the overall population of gift cards.

 

 

As of each of March 31, 2019 and September 30, 2018, the balance of contract liabilities related to unredeemed gift cards was $1.0 million. Revenue for the three months ended March 31, 2019 includes approximately $0.2 million that was included in the contract liability balance of unredeemed gift cards at September 30, 2018. Revenue for the six months ended March 31, 2019 includes approximately $0.5 million that was included in the contract liability balance of unredeemed gift cards at September 30, 2018.

 

The following table disaggregates our revenue by product category for the three months and six months ended March 31, 2019 and 2018, dollars in thousands:

 

   

Three months ended

March 31,

   

Six months ended

March 31,

 
   

2019

   

2018

   

2019

   

2018

 

Grocery

  $ 157,802       144,467       309,103       280,568  

Dietary supplements

    49,700       48,830       95,484       92,395  

Other

    22,945       22,614       47,375       45,428  
    $ 230,447       215,911       451,962       418,391  

 

 

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 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 Company’s earnings.

 

Presented below are basic and diluted EPS for the three and six months ended March 31, 2019 and 2018, dollars in thousands, except per share data:

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2019

   

2018

   

2019

   

2018

 

Net income

  $ 3,860       3,404       6,057       8,585  
                                 

Weighted average number of shares of common stock outstanding

    22,413,055       22,353,993       22,399,665       22,356,943  

Effect of dilutive securities

    148,770       90,815       180,068       62,113  

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

    22,561,825       22,444,808       22,579,733       22,419,056  
                                 

Basic earnings per share

  $ 0.17       0.15       0.27       0.38  

Diluted earnings per share

  $ 0.17       0.15       0.27       0.38  

 

There were 72,599 and 27,574 non-vested RSUs for the three and six months ended March 31, 2019, respectively, excluded from the calculation of diluted EPS as they are antidilutive. There were 75,169 and 172,356 non-vested RSUs for the three and six months ended March 31, 2018, respectively, excluded from the calculation of diluted EPS as they are antidilutive.

 

The Company did not declare any dividends in the three or six months ended March 31, 2019 or 2018.

 

 

5. Debt

 

Credit Facility 

 

On January 28, 2016, the Company entered into a credit 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 amount available for borrowing under the Credit Facility is $50.0 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 Credit Facility at any time prior to the maturity date. The Credit Facility matures on January 31, 2021. For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

 

 

The Credit Facility requires compliance with certain customary operational and financial covenants, including a 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, except when no default or event of default exists. If no default or event of default exists, dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business, including cash dividends to the holding company for the repurchase of shares of common stock in an amount not to exceed $10.0 million.

 

The Company had $10.2 million and $13.2 million outstanding under the Credit Facility as of March 31, 2019 and September 30, 2018, respectively. As of each of March 31, 2019 and September 30, 2018, the Company had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. The Company had $38.8 million and $35.8 million available for borrowing under the Credit Facility as of March 31, 2019 and September 30, 2018, respectively.

 

As of March 31, 2019 and September 30, 2018, the Company was in compliance with the financial covenants under the Credit Facility.

 

Capital and Financing Lease Obligations

 

The Company had 21 and 20 leases as of March 31, 2019 and September 30, 2018, respectively, that are included in capital and financing lease obligations (see Note 7). No rent expense is recorded for these capitalized real estate leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligation and as interest expense. The interest rate on capital and financing lease obligations is determined at the inception of the lease.

 

Interest

 

The Company incurred gross interest expense of approximately $1.3 million and $1.1 million for the three months ended March 31, 2019 and 2018, respectively, and approximately $2.6 million and $2.3 million for the six months ended March 31, 2019 and 2018, respectively. Interest expense for the three and six months ended March 31, 2019 and 2018 relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of less than $0.1 million for each of the three months ended March 31, 2019 and 2018, respectively, and approximately $0.1 million and less than $0.1 million for the six months ended March 31, 2019 and 2018, respectively.

 

 

6. Stockholders’ Equity

 

Share Repurchases

 

On May 4, 2016, the Company’s 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. On May 2, 2018, the Board authorized a two-year extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 4, 2020. Repurchases under the Company’s share repurchase program are 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 would permit 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.

 

Prior to October 1, 2018, the Company repurchased 199,543 shares under the share repurchase program. The Company did not repurchase any shares during the six months ended March 31, 2019. During the six months ended March 31, 2018, the Company repurchased 101,573 shares under the share repurchase program. The dollar value of the shares of the Company’s common stock that may yet be purchased under the share repurchase program is approximately $8.3 million.

 

Prior to October 1, 2018, the Company reissued 62,646 treasury shares at a cost of approximately $0.6 million to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of stock grants. During the three and six months ended March 31, 2019, the Company reissued 39,243 treasury shares at a cost of approximately $0.3 million and 58,171 treasury shares at a cost of approximately $0.4 million, respectively, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. During the three and six months ended March 31, 2018, the Company reissued 16,571 and 17,797 treasury shares, respectively, at a cost of approximately $0.1 million for each period, to satisfy the issuance of common stock pursuant to the vesting of certain RSUs and the award of common stock grants. At March 31, 2019 and September 30, 2018, the Company held in treasury 78,726 shares and 136,897 shares, respectively, totaling approximately $0.6 million and $1.0 million, respectively.

 

 

 

7. Lease Commitments

 

Capital and financing lease obligations as of March 31, 2019 and September 30, 2018, were as follows, dollars in thousands:

 

   

As of

 
   

March 31,

2019

   

September 30,

2018

 

Capital lease finance obligations, due in monthly installments through fiscal year 2033

  $ 34,992       32,523  

Capital lease obligations, due in monthly installments through fiscal year 2041

    6,126       4,763  

Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2034

    4,505       2,350  

Capital lease obligations for assets under construction, due in monthly installments through fiscal year 2034

          1,506  

Total capital and financing lease obligations

    45,623       41,142  

Less current portion

    (843

)

    (736

)

Total capital and financing lease obligations, net of current portion

  $ 44,780       40,406  

 

 

8. Property and Equipment

 

The Company had the following property and equipment balances as of March 31, 2019 and September 30, 2018, dollars in thousands:

 

             

As of

 
   

Useful lives

(in years)

   

March 31,

2019

   

September 30,

2018

 

Construction in process

    n/a       $ 7,986       15,879  

Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively

    40         37,970       35,700  

Capitalized real estate leases

    15         7,241       5,735  

Land

    n/a         1,230       192  

Buildings

    40         23,481       19,262  

Land improvements

   5 24       1,335       1,016  

Leasehold and building improvements

   1 25       139,312       131,474  

Fixtures and equipment

   5 7       128,610       122,984  

Computer hardware and software

   3 5       20,401       21,181  
                367,566       353,423  

Less accumulated depreciation and amortization

              (176,127

)

    (164,655

)

Property and equipment, net

            $ 191,439       188,768  

 

Capitalized real estate leases for build-to-suit stores includes the assets for the Company’s buildings under capital lease finance obligations, and capitalized real estate leases includes assets for the Company’s buildings under capital lease obligations (see Note 7).

 

 

Depreciation and amortization expense for the three and six months ended March 31, 2019 and 2018 is summarized as follows, dollars in thousands:

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2019

   

2018

   

2019

   

2018

 

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

  $ 185       196       367       392  

Depreciation and amortization expense included in store expenses

    6,848       6,835       13,690       13,685  

Depreciation and amortization expense included in administrative expenses

    257       379       519       748  

Total depreciation and amortization expense

  $ 7,290       7,410       14,576       14,825  

 

 

9. Goodwill and Other Intangible Assets

 

The Company had the following goodwill and other intangible asset balances as of March 31, 2019 and September 30, 2018, dollars in thousands:

 

   

Useful lives

   

As of

 
   

(in years)

   

March 31,

2019

   

September 30,

2018

 

Amortizable intangible assets:

                         

Other intangibles

   0.5 - 3     $ 2,197       138  

Amortizable intangible assets

              2,197       138  

Less accumulated amortization

              (1,320

)

    (77

)

Amortizable intangible assets, net

              877       61  

Trademark

  Indefinite       389       389  

Total other intangibles, net

              1,266       450  

Goodwill

  Indefinite       5,198       5,198  

Total goodwill and other intangibles, net

            $ 6,464       5,648  

 

 

10. Accrued Expenses

 

The composition of accrued expenses as of March 31, 2019 and September 30, 2018 is summarized as follows, dollars in thousands:

 

   

As of

 
   

March 31,

   

September 30,

 
   

2019

   

2018

 

Accrued property, sales and use tax payable

  $ 6,361       7,043  

Income tax payable

    102       903  

Payroll and employee-related expenses

    7,683       6,992  

Accrued marketing expenses

    591       335  

Deferred revenue related to gift card sales

    1,361       1,453  

Other

    1,227       1,125  

Total accrued expenses

  $ 17,325       17,851  

 

 

11. Income Taxes

 

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 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.

 

Remeasurement of the Company’s deferred tax balance as a result of the Tax Reform Act resulted in a non-cash tax benefit of approximately $4.3 million for the six months ended March 31, 2018.

 

 

 

12. Related Party Transactions

 

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

 

Chalet Properties, LLC: The Company has five operating leases and one capital lease with Chalet Properties, LLC (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 approximately $0.3 million for each of the three months ended March 31, 2019 and 2018. Rent paid to Chalet was approximately $0.6 million for each of the six months ended March 31, 2019 and 2018.

 

Isely Family Land Trust LLC: The Company has one operating lease with the Isely Family Land Trust LLC (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 approximately $0.1 million for each of the three months ended March 31, 2019 and 2018. Rent paid to the Land Trust was approximately $0.2 million for each of the six months ended March 31, 2019 and 2018.

 

FTVC LLC: The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for each of the three months ended March 31, 2019 and 2018. Rent paid to FTVC LLC was less than $0.1 million for each of the six months ended March 31, 2019 and 2018.

 

 

13. Commitments and Contingencies

 

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment-related 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 business, prospects, financial condition, cash flows or results of operations.

 

 

 

Item 2. Management’s 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 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 and dietary supplements 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, 2019, we operated 152 stores in 19 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, 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 size of our stores varies from approximately 5,000 to 16,000 selling square feet. During the twelve months ended March 31, 2019, our new stores averaged approximately 10,000 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, 2018, we increased our store count at a compound annual growth rate of 15.5%. In fiscal year 2018, we opened eight new stores. We currently plan to open seven to eight new stores in fiscal year 2019, five of which opened during the six months ended March 31, 2019. Since March 31, 2019, we have not opened any new stores. As of the date of this report, we have signed leases for five new stores that we plan to open in fiscal years 2019 and beyond. In addition, since March 31, 2019, we have purchased the land and building at which we plan to open one new store. We plan to relocate five stores in fiscal year 2019, two of which were relocated during the six months ended March 31, 2019. Since March 31, 2019, we have relocated one store.

 

Performance Highlights

 

Key highlights of our performance for the three and six months ended March 31, 2019 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, comparable store sales, daily average comparable store sales, mature store sales and daily average mature store sales are defined under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.

 

 

Net sales. Net sales were $230.4 million for the three months ended March 31, 2019, an increase of $14.5 million, or 6.7%, compared to net sales of $215.9 million for the three months ended March 31, 2018. Net sales were $452.0 million for the six months ended March 31, 2019, an increase of $33.6 million, or 8.0%, compared to net sales of $418.4 million for the six months ended March 31, 2018.

 

 

Comparable store sales and daily average comparable store sales. Comparable store sales and daily average comparable store sales for the three months ended March 31, 2019 each increased 2.9% compared to the three months ended March 31, 2018. Comparable store sales and daily average comparable store sales for the six months ended March 31, 2019 each increased 4.2% compared to the six months ended March 31, 2018.

 

 

Mature store sales and daily average mature store sales. Mature store sales and daily average mature store sales for the three months ended March 31, 2019 each increased 1.8% compared to the three months ended March 31, 2018. Mature store sales and daily average mature store sales for the six months ended March 31, 2019 each increased 2.7% compared to the six months ended March 31, 2018.

 

 

Net income. Net income was $3.9 million for the three months ended March 31, 2019, an increase of $0.5 million, or 13.4%, compared to net income of $3.4 million for the three months ended March 31, 2018. Net income was $6.1 million for the six months ended March 31, 2019, a decrease of $2.5 million, or 29.4%, compared to net income of $8.6 million for the six months ended March 31, 2018. Net income for the six months ended March 31, 2018 was favorably impacted by $4.3 million due to the non-cash remeasurement of deferred tax assets and liabilities.

 

 

 

EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $13.4 million for the three months ended March 31, 2019, an increase of $0.4 million, or 2.7%, compared to $13.1 million for the three months ended March 31, 2018. EBITDA was $24.7 million for the six months ended March 31, 2019, an increase of $2.1 million, or 9.1%, compared to $22.7 million for the six months ended March 31, 2018. 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.

 

 

Liquidity. As of March 31, 2019, cash and cash equivalents was $11.3 million, and there was $38.8 million available for borrowing under our Credit Facility, net of undrawn, issued and outstanding letters of credit of $1.0 million.

 

 

New store growth. We opened one new store during the three months ended March 31, 2019. We opened five new stores and closed one store during the six months ended March 31, 2019. We operated a total of 152 stores as of March 31, 2019. We plan to open a total of seven to eight new stores in fiscal year 2019, which would result in an annual new store growth rate of 4.7% to 5.4% for fiscal year 2019.

     
  Store Relocations and Remodels. We relocated two stores during the six months ended March 31, 2019. We plan to relocate a total of five stores during fiscal year 2019.

 

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. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence. In this regard, we believe our financial results for the three and six months ended March 31, 2019 reflected improvement in the oil and gas markets we serve, although they generally continue to lag behind our non-oil and gas markets.

 

 

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. As we open new stores, our results of operations have been and may continue to be materially adversely affected based on the timing and number of new stores we open, their initial sales and new lease costs. The length of time it takes for a new store to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market, the strength of store management and general economic conditions. Once a new store is open, it typically grows at a faster rate than mature stores for several years. Mature stores are stores that have been open for any part of five fiscal years or longer.

     
    As we expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue into the foreseeable future. Our financial results for the three and six months ended March 31, 2019 reflect the effects of these factors, and we anticipate future periods will be similarly impacted.
     
   

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 reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.

 

 

Increased Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway; mass or discount retailers such as Wal-Mart and Target; natural and gourmet markets such as Whole Foods and The Fresh Market; foreign-based discount retailers such as Aldi and Lidl; specialty food retailers such as Sprouts and Trader Joe’s; warehouse clubs such as Sam’s Club and Costco; dietary supplement retailers such as GNC and The Vitamin Shoppe; online retailers such as Amazon; meal delivery services such as Blue Apron; independent health food stores; drug stores; farmers’ markets; food co-ops; and multi-level marketers. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, Amazon’s acquisition of Whole Foods, the plans of Aldi and Lidl to expand their presence in the United States and the expanding availability of grocery ordering, pick-up and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, 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 nutritional education, differentiate us in the industry and provide a competitive advantage.

 

 

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 basket size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education and a shopper friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.

 

We plan for the foreseeable future to continue opening new stores and entering new markets. The rate of new store growth will depend on economic and business conditions and other factors. We continue to enhance our infrastructure to enable us to support our growth. In addition, in recent years we believe we have enhanced customer loyalty and increased customer engagement by expanding our digital and social media presence and further developing the {N}power® customer loyalty program. In September 2018, we launched a new website (www.naturalgrocers.com) which was designed to offer a more personalized and convenient online experience for our customers. The new website features more advanced ecommerce capabilities, enhanced product and recipe search interfaces and improved functionality with mobile and tablet devices.

 

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 industry and regional and general economic conditions. As we continue to expand our store base, we believe there are opportunities for increased leverage in costs, such as administrative expenses, as well as increased economies of scale in sourcing products. However, due to our commitment to providing high-quality products at affordable prices and increased competition, such sourcing economies and efficiencies at our bulk food repackaging facility and distribution center may not be reflected in our gross margin in the near term. In addition, our ability to leverage costs may be limited due to the fixed nature of our rent obligations and related occupancy expenses.

 

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 and returns and allowances. In comparing net sales between periods, we monitor the following:

 

 

Change in 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 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.

 

 

Change in daily average comparable store sales. 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).

 

 

 

Change in mature store sales. We begin to include sales from a store in mature store sales after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2019 are stores that opened during or before fiscal year 2014). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature 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 year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.

 

 

Change in daily average mature store sales. Daily average mature store sales are mature 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 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, return transactions and exchange transactions.

 

 

Average transaction size. Average transaction size, or basket 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 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 sales typically decrease as new stores mature and increase sales. Rent payments for leases classified as capital and financing 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. Additionally, depreciation expense related to the capitalized asset is recorded in store expenses.

 

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 capitalized real estate leases, land improvements, leasehold improvements, fixtures and equipment and computer hardware and software. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations. 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 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 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 being a public company, 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 and relocation expenses

 

Pre-opening and relocation expenses 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 capital or financing leases, no pre-opening rent expense is recognized. Other pre-opening and relocation 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 and relocation costs are expensed as incurred.

 

Interest expense, net

 

Interest expense consists of the interest associated with capital and financing lease obligations, net of capitalized interest. Interest expense also includes interest we incur on our outstanding indebtedness, including under our Credit Facility.

 

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,

 
   

2019

   

2018

   

2019

   

2018

 

Statements of Income Data:*

                               

Net sales

    100.0

%

    100.0       100.0       100.0  

Cost of goods sold and occupancy costs

    73.0       73.0       73.1       73.4  

Gross profit

    27.0       27.0       26.9       26.6  

Store expenses

    21.8       21.5       22.0       21.9  

Administrative expenses

    2.5       2.5       2.5       2.6  

Pre-opening and relocation expenses

    0.1       0.3       0.2       0.3  

Operating income

    2.7       2.6       2.2       1.9  

Interest expense, net

    (0.6

)

    (0.5

)

    (0.6

)

    (0.5

)

Income before income taxes

    2.1       2.1       1.7       1.3  

(Provision for) benefit from income taxes

    (0.4

)

    (0.5

)

    (0.3

)

    0.7  

Net income

    1.7

%

    1.6       1.3       2.1  

__________________________

                               

*Figures may not sum due to rounding.

                               
                                 

Number of stores at end of period

    152       145       152       145  

Number of new stores opened during the period

    1       3       5       5  
                                 

Twelve-month store unit growth rate

    4.8

%

    7.4       4.8       7.4  

Change in comparable store sales

    2.9       7.1       4.2       5.9  

Change in daily average comparable store sales

    2.9       7.1       4.2       5.9  

Change in mature store sales

    1.8       4.3       2.7       3.0  

Change in daily average mature store sales

    1.8       4.3       2.7       3.0  

 

 

Three months ended March 31, 2019 compared to the three months ended March 31, 2018

 

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

 
   

2019

   

2018

   

Dollars

   

Percent

 

Statements of Income Data:

                               

Net sales

  $ 230,447       215,911       14,536       6.7

%

Cost of goods sold and occupancy costs

    168,233       157,630       10,603       6.7  

Gross profit

    62,214       58,281       3,933       6.7  

Store expenses

    50,175       46,480       3,695       7.9  

Administrative expenses

    5,761       5,458       303       5.6  

Pre-opening and relocation expenses

    157       697       (540

)

    (77.5

)

Operating income

    6,121       5,646       475       8.4  

Interest expense, net

    (1,280

)

    (1,122

)

    (158

)

    14.1  

Income before income taxes

    4,841       4,524       317       7.0  

Provision for income taxes

    (981

)

    (1,120

)

    139       (12.4

)

Net income

  $ 3,860       3,404       456       13.4  

 

Net sales

 

Net sales increased $14.5 million, or 6.7%, to $230.4 million for the three months ended March 31, 2019 compared to $215.9 million for the three months ended March 31, 2018, primarily due to 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. Daily average comparable store sales increased 2.9% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The daily average comparable store sales increase resulted from a 3.5% increase in daily average transaction size, partially offset by a 0.6% decrease in average transaction count. Comparable store average transaction size was $36.89 for the three months ended March 31, 2019. Daily average mature store sales increased 1.8% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase in comparable store sales during the three months ended March 31, 2019 was primarily driven by several marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program. In addition, we believe the increase in comparable store sales during the three months ended March 31, 2019 reflected enhanced focus on leadership, training and improved operating processes in our stores.

 

Gross profit

 

Gross profit increased $3.9 million, or 6.7%, to $62.2 million for the three months ended March 31, 2019 compared to $58.3 million for the three months ended March 31, 2018, primarily driven by an increase in the number of comparable stores. Gross margin remained unchanged at 27.0% for the three months ended March 31, 2019 and 2018. Gross margin for the three months ended March 31, 2019 reflects a decrease in occupancy expenses as a percentage of sales, offset by a lower product margin attributed to a shift in sales mix to lower margin products.

 

We had 21 and 18 store leases that were classified as capital and financing lease obligations for the three months ended March 31, 2019 and 2018, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the three months ended March 31, 2019 and 2018 would have been approximately 60 and 55 basis points higher, respectively, than as reported for each period.

 

Store expenses

 

Store expenses increased $3.7 million, or 7.9%, to $50.2 million for the three months ended March 31, 2019 compared to $46.5 million for the three months ended March 31, 2018. Store expenses as a percentage of sales were 21.8% and 21.5% for the three months ended March 31, 2019 and 2018, respectively. The increase in store expenses as a percentage of sales was primarily due to increases in building services and maintenance expenses and marketing expenses, partially offset by decreases in depreciation and labor-related expenses, all as a percentage of sales.

 

 

Administrative expenses

 

Administrative expenses increased $0.3 million, or 5.6%, to $5.8 million for the three months ended March 31, 2019 compared to $5.5 million for the three months ended March 31, 2018. Administrative expenses as a percentage of sales were unchanged at 2.5% for the three months ended March 31, 2019 and 2018.

 

Pre-opening and relocation expenses

 

Pre-opening and relocation expenses decreased $0.5 million, or 77.5%, to $0.2 million for the three months ended March 31, 2019 compared to $0.7 million for the three months ended March 31, 2018, due to the impact of the number and timing of new store openings and relocations. We opened one new store and relocated one store during the three months ended March 31, 2019 compared to opening three new stores during the three months ended March 31, 2018. Pre-opening and relocation expenses as a percentage of sales were 0.1% and 0.3% for the three months ended March 31, 2019 and 2018, respectively.

 

Interest expense

 

Interest expense, net of capitalized interest, increased $0.2 million, or 14.1%, for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase in interest expense is primarily due to an increase in the number of capital leases during the three months ended March 31, 2019. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percentage of sales would have been approximately 45 basis points lower than as reported for each of the three months ended March 31, 2019 and 2018.

 

Income taxes

 

Income tax expense decreased $0.1 million for the three months ended March 31, 2019 to $1.0 million compared to $1.1 million for the three months ended March 31, 2018. The Company’s effective income tax rate for the three months ended March 31, 2019 was approximately 20.3% compared to 24.8% for the three months ended March 31, 2018. The decrease in the effective income tax rate for the three months ended March 31, 2019 is primarily due to the decrease in the federal corporate tax rate as a result of the Tax Reform Act.

 

Net income

 

Net income was $3.9 million, or $0.17 diluted earnings per share, for the three months ended March 31, 2019 compared to $3.4 million, or $0.15 diluted earnings per share, for the three months ended March 31, 2018.

 

Six months ended March 31, 2019 compared to the six months ended March 31, 2018

 

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

 
   

2019

   

2018

   

Dollars

   

Percent

 

Statements of Income Data:

                               

Net sales

  $ 451,962       418,391       33,571       8.0

%

Cost of goods sold and occupancy costs

    330,602       306,951       23,651       7.7  

Gross profit

    121,360       111,440       9,920       8.9  

Store expenses

    99,298       91,646       7,652       8.3  

Administrative expenses

    11,076       10,715       361       3.4  

Pre-opening and relocation expenses

    829       1,240       (411

)

    (33.1

)

Operating income

    10,157       7,839       2,318       29.6  

Interest expense, net

    (2,535

)

    (2,211

)

    (324

)

    14.7  

Income before income taxes

    7,622       5,628       1,994       35.4  

(Provision for) benefit from income taxes

    (1,565

)

    2,957       (4,522

)

    152.9  

Net income

  $ 6,057       8,585       (2,528

)

    (29.4

)

 

Net sales

 

Net sales increased $33.6 million, or 8.0%, to $452.0 million for the six months ended March 31, 2019 compared to $418.4 million for the six months ended March 31, 2018, primarily due to 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 fiscal 2019. Daily average comparable store sales increased 4.2% for the six months ended March 31, 2019 compared to the six months ended March 31, 2018. The daily average comparable store sales increase resulted from a 3.3% increase in average transaction size and a 0.8% increase in daily average transaction count. Comparable store average transaction size was $36.69 for the six months ended March 31, 2019. Daily average mature store sales increased 2.7% for the six months ended March 31, 2019 compared to the six months ended March 31, 2018. The increase in comparable store sales during the six months ended March 31, 2019 was primarily driven by several marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program. In addition, we believe the increase in comparable store sales during the six months ended March 31, 2019 reflected enhanced focus on leadership, training and improved operating processes in our stores.

 

 

Gross profit

 

Gross profit increased $9.9 million, or 8.9%, to $121.4 million for the six months ended March 31, 2019 compared to $111.4 million for the six months ended March 31, 2018, primarily driven by an increase in the number of comparable stores. Gross margin increased to 26.9% for the six months ended March 31, 2019 from 26.6% for the six months ended March 31, 2018. Gross margin during the six months ended March 31, 2019 increased primarily due to improved product margins, attributed to more focused promotional pricing campaigns, and to a decrease in occupancy expense as a percentage of sales, partially offset by a shift in sales mix to lower margin products.

 

We had 21 and 18 store leases that were classified as capital and financing lease obligations for the six months ended March 31, 2019 and 2018, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the six months ended March 31, 2019 and 2018 would have been approximately 60 and 55 basis points higher, respectively, than as reported.

 

Store expenses

 

Store expenses increased $7.7 million, or 8.3%, to $99.3 million for the six months ended March 31, 2019 compared to $91.6 million for the six months ended March 31, 2018. Store expenses as a percentage of sales were 22.0% and 21.9% for the six months ended March 31, 2019 and 2018, respectively. The increase in store expenses as a percentage of sales was primarily due to increases in building services and maintenance expenses and marketing expenses, partially offset by decreases in depreciation, labor-related and utilities expenses, all as a percentage of sales.

 

Administrative expenses

 

Administrative expenses increased $0.4 million, or 3.4%, to $11.1 million for the six months ended March 31, 2019 compared to $10.7 million for the six months ended March 31, 2018. Administrative expenses as a percentage of sales were 2.5% and 2.6% the six months ended March 31, 2019 and 2018, respectively.

 

Pre-opening and relocation expenses

 

Pre-opening and relocation expenses decreased $0.4 million, or 33.1%, to $0.8 million for the six months ended March 31, 2019 compared to $1.2 million for the six months ended March 31, 2018, due to the impact of the number and timing of new store openings and relocations. We opened five new stores and relocated two stores during the six months ended March 31, 2019 compared to opening five new stores and relocating one store during the six months ended March 31, 2018. Pre-opening and relocation expenses as a percentage of sales were 0.2% and 0.3% for the six months ended March 31, 2019 and 2018, respectively.

 

Interest expense

 

Interest expense, net of capitalized interest, increased $0.3 million, or 14.7%, for the six months ended March 31, 2019 compared to the six months ended March 31, 2018. The increase in interest expense is primarily due an increase in the number of capital leases during the six months ended March 31, 2019. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percentage of sales would have been approximately 50 and 45 basis points lower than as reported for the six months ended March 31, 2019 and 2018, respectively.

 

Income taxes

 

Income tax expense increased $4.5 million for the six months ended March 31, 2019 to $1.6 million compared to a $3.0 million benefit for the six months ended March 31, 2018. Income taxes for the six months ended March 31, 2018 reflected the favorable impact of a $4.3 million non-cash remeasurement of our deferred tax assets and liabilities as a result of the enactment of the Tax Reform Act. The Company’s effective income tax rate for the six months ended March 31, 2019 was approximately 20.5%. Exclusive of the adjustment to deferred income tax assets and liabilities, the Company’s effective income tax rate for the six months ended March 31, 2018 was approximately 24.5%. The decrease in the effective income tax rate for the six months ended March 31, 2019 is primarily due to the decrease in the federal corporate tax rate as a result of the Tax Reform Act.

 

 

Net income

 

Net income was $6.1 million, or $0.27 diluted earnings per share, for the six months ended March 31, 2019 compared to $8.6 million, or $0.38 diluted earnings per share, for the six months ended March 31, 2018. Excluding the favorable impact of the remeasurement of our deferred tax assets and liabilities as a result of the enactment of the Tax Reform Act, net income for the six months ended March 31, 2018 was $4.3 million, or $0.19 diluted earnings per share.

 

Non-GAAP financial measures 

 

EBITDA

 

EBITDA is not a measure of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes and depreciation and amortization. The following table reconciles net income to EBITDA for the periods presented, dollars in thousands:

 

   

Three months ended
March 31,

   

Six months ended
March 31,

 
   

2019

   

2018

   

2019

   

2018

 

Net income

  $ 3,860       3,404       6,057       8,585  

Interest expense, net

    1,280       1,122       2,535       2,211  

Provision for (benefit from) income taxes

    981       1,120       1,565       (2,957

)

Depreciation and amortization

    7,290       7,410       14,576       14,825  

EBITDA

  $ 13,411       13,056       24,733       22,664  

 

EBITDA increased 2.7% to $13.4 million in the three months ended March 31, 2019 compared to $13.1 million for the three months ended March 31, 2018. EBITDA increased 9.1% to $24.7 million in the six months ended March 31, 2019 compared to $22.7 million for the six months ended March 31, 2018. EBITDA as a percentage of sales was 5.8% and 6.0% in the three months ended March 31, 2019 and 2018, respectively. EBITDA as a percentage of sales was 5.5% and 5.4% in the six months ended March 31, 2019 and 2018, respectively. Stores with leases that are classified as capital and financing lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of sales by approximately 60 and 55 basis points for the three months ended March 31, 2019 and 2018, respectively, and by approximately 60 and 55 basis points for the six months ended March 31, 2019 and 2018, respectively, due to the impact on cost of goods sold and occupancy costs as discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening dates if these leases had been accounted for as operating leases.

 

Management believes some investors’ understanding of our performance is enhanced by including EBITDA, a non-GAAP financial measure. We believe EBITDA provides additional information about: (i) our operating performance, because it assists us in comparing the operating performance of our stores on a consistent basis, as it removes the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility.

 

Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes some investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. By providing this non-GAAP financial measure, together with a reconciliation from net income, we believe we are enhancing analysts’ and investors’ understanding of our business and our results of operations, as well as assisting analysts and investors in evaluating how well we are executing our strategic initiatives.

 

Our competitors may define EBITDA differently, and as a result, our measure of EBITDA may not be directly comparable to those of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a supplemental measure of operating performance that does not represent, and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as an alternative to, or as a substitute for, analysis of our results as reported under GAAP. Some of the limitations are:

 

 

EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

 

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

 

 

 

EBITDA does not reflect any impact for straight-line rent expense for leases classified as capital and financing lease obligations;

 

 

EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

 

 

EBITDA does not reflect our tax expense or the cash requirements to pay our taxes; and

 

 

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA does not reflect any cash requirements for such replacements.

 

Due to these limitations, EBITDA should not be considered as a measure of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA as supplemental information.

 

Liquidity and Capital Resources

 

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under the Credit Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, interest and principal payments for outstanding indebtedness and corporate taxes. As of March 31, 2019, we had $11.3 million in cash and cash equivalents, as well as $38.8 million available for borrowing under our Credit Facility.

 

On May 4, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may expend up to $10.0 million to repurchase shares of the Company’s common stock. On May 2, 2018, our Board authorized a two-year extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 4, 2020. We did not repurchase any shares during the six months ended March 31, 2019. Between April 1, 2019 and April 29, 2019 (the latest practicable date for making the determination), we did not repurchase any additional shares of our common stock. The dollar value of the shares of common stock that may yet be purchased under the share repurchase program is approximately $8.3 million. We expect funding for any future share repurchases will come from operating cash flow, excess cash and/or borrowings under our Credit Facility. The timing and amount of shares repurchased will be dictated by our capital needs and stock market conditions.

 

We plan to continue to open new stores, which may require us to borrow additional amounts under the Credit Facility. We plan to spend approximately $9.9 million to $12.9 million on capital expenditures during the third and fourth quarters of fiscal year 2019 in connection with two to three new store openings and three store relocations. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Credit Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs for at least the next twelve months. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

 

Typically, our new stores require an upfront capital investment of approximately $2.2 million per store consisting of capital expenditures of approximately $1.6 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.3 million.

 

Following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:

 

   

Six months ended

March 31,

 
   

2019

   

2018

 

Net cash provided by operating activities

  $ 22,593       21,738  

Net cash used in investing activities

    (17,081

)

    (10,525

)

Net cash used in financing activities

    (3,627

)

    (9,663

)

Net increase in cash and cash equivalents

    1,885       1,550  

Cash and cash equivalents, beginning of period

    9,398       6,521  

Cash and cash equivalents, end of period

  $ 11,283       8,071  

 

Operating Activities

 

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $0.9 million, or 3.9%, to $22.6 million for the six months ended March 31, 2019 compared to $21.7 million for the six months ended March 31, 2018. The increase in cash provided by operating activities was primarily due to an increase in net income adjusted for non-cash items, partially offset by a decrease in cash provided by working capital. Our working capital requirements for inventory will likely increase as we continue to open new stores.

 

 

Investing Activities

 

Net cash used in investing activities increased $6.6 million, or 62.3%, to $17.1 million for the six months ended March 31, 2019 compared to $10.5 million for the six months ended March 31, 2018. This increase was primarily due to a $7.1 million increase in cash paid for property and equipment, which was due to the timing of payments related to new store openings and relocations in the six months ended March 31, 2019.

 

Financing Activities

 

Cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and payments of capital and financing lease obligations. Cash used in financing activities was $3.6 million and $9.7 million for the six months ended March 31, 2019 and 2018, respectively.

 

Credit Facility

 

The amount available for borrowing under the Credit Facility is $50.0 million, including a $5.0 million sublimit for standby letters of credit. 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 Company has the right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date. The Credit Facility matures on January 31, 2021.

 

For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent based on the most recent compliance certificate of the operating company and stated at the base rate less the lender spread based upon certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread based upon certain financial measures. The unused commitment fee is based upon certain financial measures.

 

The Credit Facility requires compliance with certain customary operational and financial covenants, including a 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, except that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business, and for repurchases of shares of common stock in an amount not to exceed $10.0 million.

 

We had $10.2 million and $13.2 million outstanding under the Credit Facility as of March 31, 2019 and September 30, 2018, respectively. As of each of March 31, 2019 and September 30, 2018, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the Credit Facility. We had $38.8 million and $35.8 million available for borrowing under the Credit Facility as of March 31, 2019 and September 30, 2018, respectively.

 

As of March 31, 2019 and September 30, 2018, the Company was in compliance with the debt covenants under the Credit Facility.

 

Share Repurchases

 

Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 6 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10- Q.

 

Off-Balance Sheet Arrangements 

 

As of March 31, 2019, our off-balance sheet arrangements consisted of operating leases and the undrawn portion of our Credit Facility. The majority of our stores and facilities are leased, with varying terms and renewal options. As of March 31, 2019, we owned the buildings in which six of our stores are located; of those buildings, five are located on land that is leased pursuant to a ground lease. As of March 31, 2019, 21 store leases were classified as capital and financing lease obligations, and the remaining leases were classified as operating leases in our consolidated financial statements. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

 

 

Recent Accounting Pronouncements

 

See Note 2 to the consolidated financial statements included in this Form 10-Q.

 

Critical Accounting Policies

 

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to make adjustments we consider appropriate under the facts and circumstances. 

 

Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements include accounting for income taxes, accounting for impairment of long-lived assets and accounting for leases, which are discussed in more detail under the caption “Critical Accounting Policies” under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

To a limited extent, we are exposed to interest rate changes with respect to our Credit Facility. We do not use financial instruments for trading or other speculative purposes. There have been no material changes regarding our market risk position from the information provided under Item 7A – “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our principal executive officers and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective as of March 31, 2019.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. Other Information

 

Item 1. Legal Proceedings

 

We periodically are involved in various legal proceedings, including discrimination and other employment-related claims, customer personal injury claims, investigations and other proceedings arising in the ordinary course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from our estimates. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.

 

Item 1A. Risk Factors

 

The risk factor below updates those disclosed in Part I, “Item 1A-Risk Factors,” of our Form 10-K.

 

Executive, legislative or regulatory action that restricts or closes access to the United States market from Mexico or Canada could have a material adverse effect on our business, financial condition and results of operations.

 

Certain of the produce and other products that we sell at our stores are purchased, or contain ingredients sourced, from suppliers in Mexico and Canada. Since President Trump took office, tensions with Mexico and Canada over trade, immigration and other issues have increased. Such tensions could lead to executive, legislative, or regulatory action to restrict or close access to the United States market from Mexico or Canada. If action were taken to restrict or close access to the United States market from Mexico or Canada, the produce and other products that we source from those countries may no longer be available or may not be available at commercially attractive prices, which in turn could have a material adverse effect on our business, financial condition and results of operations.

 

 

Item 6. Exhibits

 

EXHIBIT INDEX

 

Exhibit Number

 

 

Description

31.1

 

Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2

 

Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002

31.3

 

Certification of Todd Dissinger, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1†

 

Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101

 

The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2019 (unaudited) and September 30, 2018, (ii) Consolidated Statements of Income for the three and six months ended March 31, 2019 and 2018 (unaudited), (iii) Consolidated Statements of Cash Flows for the six months ended March 31, 2019 and 2018 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2019 and 2018 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements. 

 


 

† The certifications attached as Exhibit 32.1 that accompany this Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

 

 

SIGNATURES

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on May 2, 2019.

 

 

 

Natural Grocers by Vitamin Cottage, Inc.

     
     
 

By:

/s/ KEMPER ISELY

   

Kemper Isely, Co-President

   

(Principal Executive Officer)

     
     
 

By:

/s/ TODD DISSINGER

   

Todd Dissinger, Chief Financial Officer

   

(Principal Financial and Accounting Officer)

 

 

 

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