Natural Grocers by Vitamin Cottage - Earnings Call - Q4 2025

Transcript

Operator (participant)

Good day, ladies and gentlemen. Welcome to the Natural Grocers by Vitamin Cottage fourth quarter and fiscal year 2025 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session, and instructions will be given at that time. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers by Vitamin Cottage. Ms. Thiessen, you may begin.

Jessica Thiessen (VP and Treasurer)

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage fourth quarter and fiscal year 2025 earnings conference call. On the call with me today are Kemper Isely, Co-President, and Richard Halle, Chief Financial Officer. As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed forms 10Q and 10K. The company undertakes no obligation to update forward-looking statements. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income.

Today's earnings release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now, I will turn the call over to Kemper.

Kemper Isely (Director and Co-President)

Thank you, Jessica, and good afternoon, everyone. We are pleased with our 4th quarter performance, with sales in line with guidance and diluted earnings per share above guidance. On today's call, I will highlight our financial results, including performance drivers, and provide an update on our key operational initiatives. Rich will discuss our 4th quarter results in greater detail and review our fiscal year 2026 outlook. Our 4th quarter sales were in line with guidance. Daily average comparable store sales increased 4.2%, and on a two-year basis, increased 11.3%. The moderation in 4th quarter sales comps compared to the 3rd quarter was driven by several factors. We cycled 7% comps in each of the 4th quarters of the previous two fiscal years.

As previously disclosed, UNFI's June 2025 cybersecurity incident constrained UNFI's ability to fulfill orders and distribute products to our stores and had a direct impact on our sales in June and July. Additionally, uncertainty in the economic environment has persisted, and we saw consumer behavior shift toward more cautious retail spending in the 4th quarter. Over the past several years, we have focused on operational execution, including refining targeted promotions and store productivity initiatives. That ongoing effort, combined with expense leverage from higher sales, resulted in an operating margin improvement of 90 basis points for the 4th quarter, driving our fiscal year 2025 diluted earnings per share to a record $2 per share. We are proud that fiscal 2025 represented another year of record sales and earnings. Additionally, fiscal 2025 was our 22nd consecutive year of positive comparable store sales growth.

Consumers continued to be drawn to our differentiated offering of high-quality natural and organic products, reflecting their prioritization of health and wellness, including food and nutrition. We believe that consumers' prioritization of health and wellness will prove to be resilient. While we are seeing some macro pressures affecting the broader retail landscape, we believe that our commitment to always affordable prices provides compelling value for our customers, strengthening our competitive position during periods of economic uncertainty. Next, I will share an update on our key priorities that have fueled recent growth and are expected to drive our long-term success. We continue to enhance the personalization and interactivity of our NPower Rewards program offerings. During the 4th quarter, NPower net sales penetration held strong at 82%.

The maturity and high penetration of our NPower Rewards program enables efficient and relevant customer engagement, including communicating our differentiation to new members, personalizing offers to tenured members, or presenting special offers to customers who have not engaged with us recently. Our Natural Grocers branded products continue to experience elevated growth. In the 4th quarter, our house-branded products accounted for 8.8% of total sales, up from 8.4% a year ago. During fiscal 2025, we extended our Natural Grocers brand offerings with the launch of 119 new items, all of which exhibit premium quality at compelling prices. Accelerating new store growth is another core element of our strategy. In fiscal 2025, we opened two new stores, relocated two stores, and remodeled one store. Today, we are reiterating our plan of opening six to eight new stores in fiscal 2026, underscoring the quality of our pipeline and execution capabilities.

We are committed to 4%-5% annual new store unit growth for the foreseeable future. We also remain committed to enhancing value for our stockholders by maintaining a balanced approach to capital allocation. In addition to investing in our business to drive faster unit growth, we are proud to announce that we are increasing the quarterly cash dividend by 25% to $0.15 per common share, reflecting our strong fiscal 2025 operating performance and financial position, as well as confidence in our ability to create long-term stockholder value. In closing, I would like to thank our Good4U crew, their commitment to operational excellence, and exceptional customer service, which were instrumental in driving our strong results. We are fortunate to have a crew who share an affinity for our founding principles and are dedicated to ensuring that our stores, operations, and supply chain reflect these values.

Operator (participant)

Now, I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance.

Richard Hallé (CFO)

Thank you, Kemper, and good afternoon. We are pleased with our 4th quarter results. Sales were in line with expectations, and diluted earnings per share exceeded our outlook. Net sales increased 4.2% from the prior year period to $336.1 million. Daily average comparable store sales increased 4.2%, and on a two-year basis, increased 11.3%. Comps were at the lower end of our guidance range, which we believe primarily reflects the shift in consumer retail spending. Our daily average comparable transaction count increased 2.4%, and our daily average comparable transaction size increased 1.8%, primarily due to annualized product inflation of approximately 2%. Items per basket were relatively flat year-over-year. In consideration of the broader macro environment, we continue to monitor consumer trends closely. We continue to see greatest sales growth in our most differentiated offerings, including meat and dairy.

These are often considered premium offerings because our product standards include humanely and sustainably sourced meat, pasture-raised and non-confinement dairy, and a minimum standard of free-range eggs. We saw a modest decline in the number of transactions using SNAP EBT in the 4th quarter. SNAP represents approximately 2% of net sales, and the reduction in SNAP transactions was immaterial to our overall sales comp for the quarter. Gross margin decreased 10 basis points to 29.5%, driven by lower product margin. Store expenses as a percentage of net sales decreased 90 basis points, primarily driven by lower long-lived asset impairment charges and expense leverage. These culminated in a net income increase of 31% to $11.8 million and diluted earnings per share of $0.51. Adjusted EBITDA increased 7.7% to $24.4 million. Briefly touching on the full-year results, in fiscal 2025, total revenue increased 7.2% to $1.33 billion.

Our daily average comparable store sales growth was 7.3% and 14.3% on a two-year basis. Gross margin improved 50 basis points compared to the prior year, driven by higher product margin, primarily attributed to effective promotions and store occupancy cost leverage. Store expenses as a percentage of sales were 50 basis points lower than the prior year, driven by expense leverage and lower long-lived asset impairment charges. For fiscal 2025, diluted earnings per share increased 36.1% to $2.00 compared to $1.47 in fiscal 2024. Adjusted EBITDA increased 17.5% to $97.9 million. Turning to the balance sheet and cash flow, we ended the 4th quarter in a strong liquidity position, including $17.1 million in cash and cash equivalents, no outstanding borrowings, and $70.1 million available for borrowing on our revolving credit facility.

During fiscal 2025, we generated cash from operations of $55.3 million and invested $31 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $24.3 million. Now, I would like to review the company's outlook, which reflects both the opportunities we see in our differentiated market position and appropriate caution given the current consumer environment. We believe our value proposition will continue to be compelling during periods of economic uncertainty. For fiscal year 2026, we expect to open six to eight new stores, relocate or remodel two to three existing stores, achieve daily average comparable store sales growth between 1.5% and 4%, achieve diluted earnings per share between $2 and $2.15, and direct $50-$55 million towards capital expenditures to support our growth initiatives.

In addition, our outlook includes the benefits of our new store growth, targeted marketing focused on our value proposition and differentiation, and initiatives focused on driving higher productivity across our operations. The pace of new store openings will be weighted towards the back half of the fiscal year. Our current expectation is that sales comps will be at the low end of our outlook range in the first half of the year as we cycle relatively strong comps in the prior year, while increasing slightly in the second half of the year as we cycle lower comps. Additionally, the comp range reflects the uncertainty in the consumer environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity.

We expect that year-over-year store expenses as a percentage of net sales will be relatively flat to slightly lower. Lastly, we are investing approximately $0.12 of diluted earnings per share in new store openings, primarily through higher pre-opening expenses and store expenses. We continue to believe that we have significant opportunity to achieve sustainable long-term growth due to our alignment with consumer trends, strong customer engagement through our NPower Rewards program, expansion of the Natural Grocers branded products, existing store productivity initiatives, and investment in new store unit growth. In closing, we had a solid quarter to conclude a record-setting fiscal year. We are confident in our ability to continue to drive profitable long-term growth and enhance value for all stakeholders. Now, we'd like to open the line for questions. Thank you.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. If you are using a speakerphone, please pick up the handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble the roster. Our first question today comes from Chuck Cerankosky with North Coast Research. Please go ahead.

Chuck Cerankosky (Managing Director and Principal)

Good afternoon, everyone. Nice quarter.

Kemper Isely (Director and Co-President)

Thanks, Chuck.

Chuck Cerankosky (Managing Director and Principal)

Given the increased price sensitivity right now in the consumer environment and the company's 8.8% own brands penetration, is this a good time to get that number higher and to make customers more aware of the value in the Natural Grocers brands?

Kemper Isely (Director and Co-President)

Yeah, I think that that would be true. I mean, we definitely are marketing our own brand extensively right now, and we have some really compelling prices, particularly in our bulk items that we are promoting aggressively, and we do not have to discount those prices because they are already substantially better priced than our competitors.

Chuck Cerankosky (Managing Director and Principal)

Do you have any particular goals for the penetration over the next couple of years, like maybe 10%? I don't want to put words.

Kemper Isely (Director and Co-President)

Our goal is to increase the penetration by one full percentage point per year. We're at 8.8%. In two years from now, we should be at 10.8% or even 11%.

Operator (participant)

The next question is from Scott Mushkin with R5 Capital. Please go ahead.

Scott Mushkin (Founder and Managing Partner)

Hey, guys. Thanks for taking my questions. One of the things we hear from investors about just kind of generally the space of natural organic is that it's not the macro, that it's similar to what we saw last decade, that kind of traditional supermarkets and others in the marketplace kind of caught up, given what they saw with how strong your sales and others have been and are offering a lot of the same products at lower prices. What do you think about that thought process?

Kemper Isely (Director and Co-President)

I think that that's been going on since 1978, and we've done a really good job of differentiating ourselves from the other supermarkets and having an authentic story and an authentic brand that resonates with consumers. It's helped us to build our business to over a billion-dollar business. The conventional supermarkets and Costco and Walmart, they only sell the product because it sells. It isn't because of the story of the product. We sell the product because it is what we are. It makes a huge difference to our customers and keeps our customers incredibly loyal, and it also helps us to keep on growing and expanding our customer base.

Companies like Whole Foods are kind of losing track of that by becoming, as they said, the amination, whatever it was, the Wall Street Journal article was the other day, and then the Forbes article that followed up on it. That is making our brand all the stronger. You have the wannabes like Sprouts who does not really—I mean, they sell stuff because it sells, but they do not really have the standards that we do or the ethics that we do about the products that we sell.

Scott Mushkin (Founder and Managing Partner)

Kemper, what specifically—or Richard, what specifically in the business do you see that would kind of make you gravitate towards, "Hey, things have become much more challenging in the economy," and that's the root of some of the more cautious comments?

Kemper Isely (Director and Co-President)

The people that are on the periphery of shopping in our stores that aren't our most loyal customers have definitely pulled back and gone—I don't know where they're shopping, but they've pulled back. That has made it so that we're just a little bit more cautious about our growth. I think that some of our new marketing initiatives will start to gain traction in not this quarter, but next quarter, and we should see an uptick again in our growth because of that.

Richard Hallé (CFO)

I mean, it's no doubt, Scott, that the economy is playing a factor today. I mean, we have massive economic uncertainty. Consumer sentiment is at historic lows. We've seen announcements of significant job layoffs at the government shutdown, the loss of government benefits, tariffs and their impact on inflation. I mean, a majority of Americans are expecting that tariffs will result in higher prices. You've had a pretty large—

Kemper Isely (Director and Co-President)

They are resulting in higher prices.

Richard Hallé (CFO)

There is an expectation of future higher prices from tariffs. All of it is kind of creating this uncertainty. There is definitely, as you have heard, across all retail, a pullback by lower and middle-income consumers and a bifurcation in the consumer segment where higher households are continuing to spend. As we even heard this morning from Walmart, everybody is looking for value. We are going to lean into our differentiation. Everybody is looking for value. Part of our founding principles is always affordable prices, and we are going to continue to lean hard into that. As Kemper said, we are also very highly differentiated in terms of the quality of our shopping experience. We provide access to nutrition education, and we have high product standards that you can trust. We are going to continue to lean into those things. Our core customer base is resilient.

Our core customer base is growing at a healthy rate. We have a lot of confidence that there is a lot of economic uncertainty. That is certainly a driver. The natural and organic segment, yes, is pulling back, but so is the entire, I think, segment overall. We still believe in the health and wellness trends. I mean, you look at GLP-1 penetration rates, they've doubled over the last year. There's significant interest in continuing for many more Americans to try those drugs. We understand that those individuals are looking for more nutritious options post that. It's not linear, right? I mean, as Kemper said, natural and organic has been going through multiple cycles over the last four or five decades and will continue to do that.

We believe the trends, the long-term trends, that it will continue to have 4%-6% industry growth. It's just not going to be a straight line.

Scott Mushkin (Founder and Managing Partner)

Thanks for that color. I actually had just one more, and I apologize because my model's not in front of me, so I probably should know this answer off the top of my head. Are you guys thinking free cash flow next year will be positive, flat? What's your thought process around 2026 free cash flow?

Richard Hallé (CFO)

Yeah, free cash flow will be positive next year. Yeah, that's our expectation. Yes, we are investing more in CapEx, right? We are talking about increasing store openings, continuing to do relocations and remodels. We are looking at—we're guiding $50million-$55 million in CapEx to support those initiatives. We're excited about the real estate pipeline that we have and about the growth prospects. We've really refined our site selection process and are excited about the communities that we're going in and the positive impact that those communities will have to the overall business.

Kemper Isely (Director and Co-President)

We are also strategically buying some of our buildings, so just to add a little bit more color to the CapEx.

Scott Mushkin (Founder and Managing Partner)

All right. Guys, I appreciate it. For the record, I kind of—I definitely agree with you guys on the economy. I think it's a little bit tough sliding out there right now, but thanks for all the color.

Kemper Isely (Director and Co-President)

Sure. Thanks, Scott.

Operator (participant)

Again, if you have a question, please press star, then one. Please stand by as we pull for questions. Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Kemper Isely for any closing remarks.

Kemper Isely (Director and Co-President)

Thank you for joining us to discuss our 4th quarter results. We take great pride in our sales and profitability growth in fiscal year 2025 and in recent years. We are committed to maximizing value for our stockholders. As we look forward to fiscal year 2026, we expect to build upon our momentum by executing to our founding principles, including highlighting our always affordable pricing strategy and differentiated product offering, emphasizing operational excellence, and delivering on our new store unit growth plans. Thank you and have a great day. Bye now.

Operator (participant)

The conference call is now concluded. Thank you for attending the Natural Grocers 4th quarter and fiscal year 2025 earnings conference call. You may now disconnect.