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NGVC > SEC Filings for NGVC > Form 10-K on 12-Dec-2013All Recent SEC Filings

Show all filings for NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Form 10-K for NATURAL GROCERS BY VITAMIN COTTAGE, INC.


12-Dec-2013

Annual Report


Item 7. 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 consolidated financial statements and notes thereto and "Selected Financial Data," which are included elsewhere in this report on Form 10-K. This discussion and analysis contains forward-looking statements. Refer to "Forward-Looking Statements" at the beginning of this report on Form 10-K for an explanation of these types of statements. 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 2013" refers to the year from October 1, 2012 to September 30, 2013). 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 believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado, and as of September 30, 2013, we operated 72 stores in 13 states, including Colorado, Arizona, Idaho, Kansas, Missouri, Montana, Nebraska, New Mexico, Oklahoma, Oregon, Texas, Utah and Wyoming, as well as a bulk food repackaging facility and distribution center in 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 5,000 to 16,000 selling square feet. For the year ended September 30, 2013, our new stores averaged approximately 11,500 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition has enabled us to continue to open new stores and enter new markets. In fiscal year 2013, we opened 13 new stores, in each of fiscal years 2012 and 2011, we opened ten new stores, and in each of fiscal years 2010 and 2009, we opened six new stores. We currently plan to open 15 new stores in fiscal year 2014, three of which we opened in Oklahoma, Idaho and Texas between September 30, 2013 and the date of the filing of this report on Form 10-K. As of the date of this report, we have signed leases for an additional nine new store locations expected to open in fiscal year 2014 in Colorado, Idaho, Kansas, New Mexico, Oregon, Utah and Washington.

Performance Highlights

Key highlights of our recent performance are discussed briefly below and are discussed 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 $430.7 million for the year ended September 30, 2013, which is a $94.3 million, or 28.0%, increase compared to net sales of $336.4 million for the year ended September 30, 2012. Net sales increased at a compound annual growth rate of 27.6% from fiscal year 2011 to fiscal year 2013.

Comparable store sales. Comparable store sales for the year ended September 30, 2013 increased 10.8% over the year ended September 30, 2012. As of September 30, 2013, we have had over 45 consecutive quarters of positive comparable store sales growth.

Daily average comparable store sales. Daily average comparable store sales for the year ended September 30, 2013 increased 11.1% over the year ended September 30, 2012.

Mature store sales. Mature store sales for the year ended September 30, 2013 increased 6.1% over the year ended September 30, 2012. For fiscal year 2013, mature stores include all stores open during or before fiscal year 2008.


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Daily average mature store sales. Daily average mature store sales for the year ended September 30, 2013 increased 6.4% over the year ended September 30, 2012.

Net income. Net income was $10.6 million for the year ended September 30, 2013 which increased $3.1 million, or 41.1%, when compared to net income of $7.5 million for the year ended September 30, 2012.

Net income attributable to Natural Grocers by Vitamin Cottage, Inc. Net income attributable to Natural Grocers by Vitamin Cottage, Inc. was $10.6 million for the year ended September 30, 2013, an increase of $3.9 million, or 58.7%, when compared to net income attributable to Natural Grocers by Vitamin Cottage, Inc. of $6.6 million for the year ended September 30, 2012.

EBITDA. EBITDA was $32.6 million in the year ended September 30, 2013, which increased $10.6 million, or 48.5%, from $21.9 million in the year ended September 30, 2012. EBITDA is not a measure of financial performance under GAAP. Refer to the "Selected Financial Data" section of this report on Form 10-K for a definition of EBITDA and a reconciliation of net income attributable to Natural Grocers by Vitamin Cottage, Inc. to EBITDA.

Liquidity. As of September 30, 2013, cash and cash equivalents was $8.1 million, restricted cash was $0.5 million, available-for-sale securities was $1.1 million, and there was $15.0 million available under our $15.0 million revolving credit facility.

New store growth. We have opened 45 new stores since the beginning of fiscal year 2009, ending with 72 stores as of September 30, 2013. We opened 13, ten and ten new stores in the years ended September 30, 2013, 2012 and 2011, respectively. New store compound annual growth rate was 21.2% from fiscal year 2011 to fiscal year 2013.

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:

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 continued to open new stores, including 13 new stores during the year ended September 30, 2013, and expanded into new geographies, including Oregon. 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, general economic conditions, and the amount of time it takes for the store to become "mature". New stores generally have lower sales compared to stores that have been open for longer than five years. Once a new store is open, it typically grows at a faster rate than mature stores for several years after its opening date. Mature stores are stores that have been open for any part of five fiscal years or longer.

In addition, as we expand across the U.S. 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 in the year ended September 30, 2013 and we anticipate these increased costs continuing into the foreseeable future. Our financial results for the year ended September 30, 2013 reflect the effects of these factors, and we anticipate future periods will be impacted likewise.

Impact of broader economic trends. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, economic conditions, the level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence. During the year ended September 30, 2013, consumer confidence and consumer spending continued to increase, and these positive economic trends were reflected in our results of operations during the year ended September 30, 2013. In the twelve months ended September 30, 2013, 2012 and 2011 our comparable store sales grew 10.8%, 11.6% and 4.9%, respectively.

Outlook

We believe there are several key factors that have contributed to our success and will enable us to continue to expand profitably and increase our comparable store sales, including 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.


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We plan for the foreseeable future to continue opening new stores and entering new markets at or above recent levels of growth. During the past few years, we have successfully expanded our infrastructure to enable us to support our continued growth. This has included successfully implementing our ERP system, hiring key personnel and developing efficient, effective new store opening construction and operations processes and relocating and expanding our bulk food repackaging facility and distribution center in September of fiscal year 2012. We plan to implement a HRIS in fiscal year 2014 which we believe will allow us to more efficiently and effectively onboard and train our employees at all locations.

We believe there are attractive opportunities for us to continue to expand our store base and focus on increasing comparable store sales. As we continue to expand our store base, we believe there are opportunities for increased leverage in fixed 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, such sourcing economies may not be reflected in our gross margin in the near term. Additionally, higher fixed costs of our bulk food repackaging facility and distribution center resulting from the September 2012 relocation and expansion may not be offset by retail price changes or volume increases in the near term.

Our operating results may be affected by a variety of internal and external factors and trends described more fully in the section "Risk Factors" contained elsewhere in this report on Form 10-K.

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, 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. The year ended September 30, 2013 had one less selling day than the year ended September 30, 2012 due to the occurrence of leap year in the year ended September 30, 2012.

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 2013 are stores that opened during or before fiscal year 2008). 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. The year ended September 30, 2013 had one less selling day than the year ended September 30, 2012 due to the occurrence of leap year in the year ended September 30, 2012.

Transaction count. Transaction count represents the number of transactions reported at our stores over such period and includes transactions that are voided, return transactions and exchange transactions.

Average transaction size. Average transaction 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.


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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 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 report on Form 10-K 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. We do not record straight-line rent expense in cost of goods sold and occupancy costs for the leases classified as capital and financing lease obligations, but rather 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 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 are comprised of salary 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 certain 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 our board 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. We expect that our administrative expenses will continue to increase in future periods due to additional legal, accounting, insurance, share-based compensation and other expenses we have incurred and will continue to incur as a result of being a public company.

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.

Operating income

Operating income consists of gross profit less store expenses, administrative expenses and pre-opening and relocation expenses. Operating income can be impacted by a number of factors, including the timing of new store openings and store relocations, whether or not a store lease is classified as an operating or a capital or financing lease, as well as increases in store expenses and administrative expenses. The amount of time it takes for new stores 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, general economic conditions and the amount of time it takes a new store to become mature.


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Interest expense

Interest expense consists of the interest associated with capital and financing lease obligations. Interest expense also includes interest we pay on our outstanding indebtedness, which includes our revolving credit facility and related party notes payable. As of September 30, 2012, the term loan was fully repaid. As of September 30, 2013, the notes payable to related parties was fully repaid. As of both September 30, 2013 and September 30, 2102, no amounts were outstanding under our revolving 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:

                                                 Year ended September 30,
                                            2013           2012           2011

Statements of Income Data:*
Net sales                                      100.0 %        100.0          100.0
Cost of goods sold and occupancy
costs                                           70.8           70.6           70.7
Gross profit                                    29.2           29.4           29.3
Store expenses                                  20.9           21.5           21.8
Administrative expenses                          3.1            3.8            3.9
Pre-opening and relocation expenses              0.8            0.6            0.7
Operating income                                 4.4            3.6            2.9
Interest expense                                (0.5 )         (0.2 )         (0.3 )
Income before income taxes                       3.9            3.4            2.6
Provision for income taxes                      (1.5 )         (1.2 )         (0.9 )
Net income                                       2.5            2.2            1.7
Net income attributable to
noncontrolling interest                            -           (0.2 )         (0.4 )
Net income attributable to Natural
Grocers by Vitamin Cottage, Inc.                 2.5 %          2.0            1.3


*Figures may not sum due to rounding.

Other Operating Data:
Number of stores at end of period                  72     59     49
Store unit count increase period over period     22.0 % 20.4   25.6
Change in comparable store sales                 10.8 % 11.6    4.9
Change in daily average comparable store sales   11.1 % 11.3    4.9
Change in mature store sales                      6.1 %  7.6    2.0
Change in daily average mature store sales        6.4 %  7.3    2.0

Year ended September 30, 2013 compared to the year ended September 30, 2012

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

                                      Year ended September 30,        Increase (Decrease)
                                         2013            2012         Dollars      Percent
Statements of Income Data:
Net sales                           $      430,655        336,385       94,270         28.0 %
Cost of goods sold and occupancy
costs                                      304,922        237,328       67,594         28.5
Gross profit                               125,733         99,057       26,676         26.9
Store expenses                              89,935         72,157       17,778         24.6
Administrative expenses                     13,479         12,733          746          5.9
Pre-opening and relocation
expenses                                     3,231          2,173        1,058         48.7
Operating income                            19,088         11,994        7,094         59.1

Other income (expense):
Dividends and interest income                    9              6            3         50.0
Interest expense                            (2,166 )         (568 )     (1,598 )      281.3
Income before income taxes                  16,931         11,432        5,499         48.1
Provision for income taxes                  (6,379 )       (3,955 )     (2,424 )       61.3
Net income                                  10,552          7,477        3,075         41.1
Net income attributable to
noncontrolling interest                          -           (828 )        828       (100.0 )
Net income attributable to
Natural Grocers by Vitamin
Cottage, Inc.                       $       10,552          6,649        3,903         58.7 %


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Net sales

Net sales increased $94.3 million, or 28.0%, to $430.7 million for the year ended September 30, 2013 compared to $336.4 million for the year ended September 30, 2012 primarily due to a $58.2 million increase in new store sales and a $36.1 million, or 10.8%, increase in comparable store sales. Daily average comparable store sales increased 11.1% for the year ended September 30, 2013 as compared to the year ended September 30, 2012. The daily average comparable store sales increase was primarily driven by a 5.9% increase in daily average transaction count and a 4.9% increase in average transaction size. Comparable store average transaction size was $35.96 in the year ended September 30, 2013 compared to $34.88 in the year ended September 30, 2012.

Gross profit

Gross profit increased $26.7 million, or 26.9%, to $125.7 million for the year ended September 30, 2013 compared to $99.1 million for the year ended September 30, 2012 primarily driven by positive comparable store sales and new store growth. Gross margin decreased to 29.2% for the year ended September 30, 2013 from 29.4% for the year ended September 30, 2012 due to a shift in sales mix toward products with lower margins, partially offset by purchasing improvements. Additionally, there was a decrease in product margin for bulk products due to increased production costs as a result of the relocation to a larger bulk food repackaging and distribution center in September 2012. Occupancy costs as a percentage of sales for the year ended September 30, 2013 remained flat as compared to the year ended September 30, 2012. For the year ended September 30, 2013, the Company had nine leases for stores which were classified as capital and financing lease obligations, one of which was under construction as of September 30, 2013 and opened in the first quarter of fiscal year 2014. For the year ended September 30, 2012, the Company had four leases for stores which were classified as capital and financing lease obligations, two of which were opened in the fourth quarter of fiscal year 2012 and two of which were under construction as of September 30, 2012 and opened in the first quarter of fiscal year 2013. If these leases had qualified as operating leases, the straight-line expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the year ended September 30, 2013 would have been approximately 55 basis points higher than as reported.

Store expenses

Store expenses increased $17.8 million, or 24.6%, to $89.9 million in the year ended September 30, 2013 from $72.2 million in the year ended September 30, 2012. Store expenses as a percentage of sales were 20.9% and 21.5% for the years ended September 30, 2013 and 2012, respectively. The decrease in store expenses as a percentage of sales was primarily due to a decrease in salary related expenses as a percentage of sales, due to leverage from the increase in sales, as the increased salary related expenses required to support the sales growth was less than the increase in sales. Advertising and other expense as a percentage of sales decreased in fiscal year 2013 as compared to fiscal year 2012 due to leverage from the increase in sales, partially offset by an increase in depreciation expense as a percentage of sales.

Administrative expenses

Administrative expenses increased $0.7 million, or 5.9%, to $13.5 million for the year ended September 30, 2013 compared to the year ended September 30, 2012, primarily due to the increased costs as a result of being a public company for a full year in fiscal year 2013, including $0.1 million of share-based . . .

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