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Natural Grocers by Vitamin Cottage (NYSE:NGVC)
Q2 2019 Earnings Call
May. 02, 2019, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen. Welcome to the Natural Grocers second-quarter fiscal-year 2019 earnings conference call. [Operator instructions] As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr.

David Colson, vice president and treasurer for Natural Grocers. Mr. Colson, you may begin.

David Colson -- Vice President and Treasurer

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage second-quarter fiscal-year 2019 earnings conference call. On the call with me today are Kemper Isely, co-president; and Todd Dissinger, chief financial officer. As a reminder, all statements made on this conference call other than statements of historical fact are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that 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 detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements. Today's press 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'll turn the call over to Kemper.

Kemper Isely -- Co-President

Thank you, David, and good afternoon, everyone. We had a strong second quarter with continued positive sales trends and a stable gross margin. The competitive environment continues to evolve. As our competition endeavors to find their position in grocery landscape.

This evolution had created an opportunity for Natural Grocers, as we are focused on leveraging our values and differentiation. Our founding principles continue to service well and drive our business forward with unsurpassed quality standards, always affordable prices, nutrition education and commitment to our communities and our good4u crew. These principles are what differentiate us from our competition and are the foundation of our marketing initiatives. During the second quarter, comp store sales increased 2.9% and mature store comp was up 1.8%.

We continue to see positive gross margin performance with margin consistent with the prior year and up from the first quarter. The margin stability reflects our continuing efforts to refine and target the promotional and pricing strategies that we implemented throughout fiscal 2018. Although, our comp moderated somewhat as compared to recent quarters, it reflect strong performance in the light of 7.1% comp increase in the prior-year period. We are pleased with the results from our marketing efforts, including further growth of our Npower loyalty program, which represents a growing percentage of our sales.

We remain focused on leveraging Npower, building brand awareness and educating consumers on our differentiation through a range of advertising campaigns. In this regard, our out of home advertising, television and social digital initiatives are all performing well. During the quarter, we had a number of successful in-store events, including our big game event, Texas Independence Day event and several Npower-only events. We are pleased with the performance of our new Natural Grocers-branded product offerings, which now include approximately 75 new SKUs, since the rollout began last year.

With that, let me turn the call over to Todd to discuss our financial results.

Todd Dissinger -- Chief Financial Officer

Thank you very much, Kemper, and good afternoon, everyone. During the second quarter of fiscal 2019, net sales increased by 6.7% to $230.4 million. And as Kemper mentioned, daily average comparable store sales increased by 2.9%. The comp increase was driven by a 3.5% increase in average transaction size, slightly offset by a 0.6% decrease in daily average transaction count.

We are pleased with the comp performance. The comp performed within our guidance range for the year and anniversaried the most difficult quarterly comparison of the prior year. Additionally, severe winter weather across several of our markets during the second quarter resulted in a significant increase in snow-related impact compared to the prior-year period, including negatively impacting transaction count. We are particularly pleased with the continued positive comp sales trends considering we were able to hold gross margins stable on a year-over-year basis.

Gross profit margin during the second quarter was consistent with the prior year at 27%. Gross margin during the second quarter benefited from leverage on occupancy, but was offset by the continued impact of sales mix shift, as we continue to drive strong comps in grocery through our promotional efforts. As we noted on previous calls, we generate a higher gross margin in dietary supplements and body care than we do in grocery. We saw an improvement in the grocery margin along with the strong comp in grocery.

However, dietary supplement sales, traffic and margin were negatively impacted by the mild flu season this year. Store expenses as a percentage of sales increased approximately 30 basis points to 21.8% during the second quarter compared to the prior-year period. The increase in store expenses as a percentage of sales was primarily driven by increases in building services and maintenance expenses, including significantly higher snow removal expense of approximately $435,000 or $0.02 per diluted share, as well as higher marketing expenses, which were partially offset by leverage on depreciation and labor-related expenses all as a percentage of sales. Preopening and relocation expenses decreased approximately $540,000 year over year.

We opened one new store and relocated one store during the second quarter of fiscal 2019 compared to opening three new stores in the second quarter of fiscal 2018. We realized a modest improvement in operating margin attributable to leverage on administrative and preopening expenses, partially offset by higher store expenses all as a percentage of sales. Net income was $3.9 million with diluted earnings per share of $0.17 in the second quarter of fiscal 2019, compared to net income of $3.4 million and diluted earnings per share of $0.15 in the second quarter of last year. EBITDA was $13.4 million in the second quarter of fiscal 2019, up 2.7%, compared to $13.1 million in the second quarter of fiscal 2018.

During the first six months of fiscal 2019, we generated cash from operations of $22.6 million and invested $17.1 million in net capital expenditures. Now I will turn the call back to Kemper to discuss unit development and guidance.

Kemper Isely -- Co-President

Thank you, Todd. During the second quarter, we opened one new store and relocated one store. So far during the third quarter of fiscal 2019, we have relocated one store. We currently have signed leases for five additional new stores and have acquired the land and building for one additional new store.

These stores will open in fiscal 2019 and beyond. We continue to monitor new store performance and remain comfortable with our targeted store openings. Now let me review our 2019 outlook, which reflects an increase in our diluted earnings per share guidance compared to our initial 2019 outlook. During fiscal 2019, we expect to open seven to eight new stores, resulting in unit growth of 4.7% to 5.4%, relocate five stores, achieve daily average comparable store sales growth of 2% to 4%, achieve net income margin of 0.8% to 1%, achieve diluted earnings per share of between $0.35 and $0.41, and we expect capital expenditures for fiscal 2019 in the range of $27 million to $30 million.

We are pleased with our continued sales momentum and margin performance through the first half of fiscal 2019. Our performance continues to be driven by our unsurpassed quality standards, always affordable prices, nutrition education and our commitment to our communities and our good4u crew. It is our commitment to these founding principles that continues to drive our business and set us apart from the competition. We believe it is these defining characteristics that make it appealing for our customers to return time and time again.

We are working hard to achieve all of our objectives while enhancing profitability and delivering value for our shareholders. Now I would like to open the lines up for questions. Thank you.

Questions & Answers:


Operator

[Operator instructions] And our first question will come from Renato Basanta of Barclays.

Renato Basanta -- Barclays -- Analyst

My first question is really related to, sort of, the competitive environment you had across this morning talk about difficulty in passing through inflation particularly in produce. Whole Foods has made headlines about its price drops in perishables. But your performance seems to suggest that you've, sort of, steered clear of much of that. But I'm just curious, what you're seeing as far as the competitive intensity or environment out there? And have you noticed any step-up in competitive intensity in 3Q so far?

Kemper Isely -- Co-President

Well, I would say that the grocery business is perhaps the most competitive area of retail, and it always has been. So I don't think that it's changed any from this quarter to the next quarter or from this year to another year. As far as being able to pass along price increases, I think, that we're still able to maintain our margins and pass along -- when we have price increases, pass them along. At the same time, we have to always be very aware and cognizant of how other -- how our competitors are pricing, and we're very aggressive at making sure that we're -- we are -- always have a affordable pricing concept in place and that we are the price leader in our categories.

As far as Whole Food goes and their supposed price decreases, mainly those were sale items, and they didn't really keep those prices down. So we did notice the -- that our differential on produce pricing has decreased somewhat from where it was before, but it's still essentially -- we still have essentially a double-digit price advantage over Whole Foods on organic produce right now at our stores.

Renato Basanta -- Barclays -- Analyst

OK. That's helpful. And then can you just talk a little bit about the cadence of sales and traffic in the quarter? I mean you talked about the weather a bit. Was there anything else unusual to call out with regards to maybe calendar shift such as Easter, anything else that may have impacted the traffic? And then if you could provide color on April trends, that would also be helpful.

Kemper Isely -- Co-President

Yes. The traffic trends were -- essentially, it was 2.9%. I mean, our comp was 2.9% almost every month for the quarter. As far as traffic counts, we have -- the major impact was because of weather on one in particular, on one event day, we had our Resolution Reset Day in January and that happened to coincide with the snowstorm in many of our markets.

The other thing we noticed that had an impact on traffic was the government shutdown tended to -- when employees stop getting their paychecks, we noticed a decline in the traffic after that. And it seems to bottomed out and it's back up since the shutdown ended. As far Easter goes, I would say that there really wasn't a huge impact from the Easter shift from this year to -- I mean this year being an April for -- I mean last year being April 1 to this year being as late as it can be possibly be in April. As far as the traffic counts go in April, we're within our guidance on those comps, our comp count percent up.

Renato Basanta -- Barclays -- Analyst

OK. That's all very helpful. And then just last one from me on your labor cost. Looks like you've been able to absorb a good amount of increase given what we've seen in the marketplace.

But can you talk a little bit about what's made you successful there on that line item? Maybe touch on any benefit from labor scheduling? And then what sort of expectations have you baked into your guidance for the second half on labor?

Kemper Isely -- Co-President

Yes. We've been -- as our comp has been going up, we've been able to gain leverage on our hours, our stills per hour worked. So that's been helpful. And what's been a headwind is there's -- the wage increases have been pretty substantial this year, definitely higher than inflation by far.

And then baked into our forecast going forward, we have a slight increase in the second half of the year. We tend to become less efficient labor-wise in the second half of the year. And we have that baked into our forecast for the rest of the year.

Operator

[Operator instructions] Our next question will come from Scott Mushkin of Wolfe Research.

Sid Dandekar -- Wolfe Research -- Analyst

This is Sid Dandekar on for Scott. Can you just talk a bit or share some color, if it's qualitative, that's great, but even just qualitatively on how you are thinking about omnichannel, specifically delivery for you going forward, given the economics of it are still not that attractive. Just wanted to get your latest thinking on that?

Kemper Isely -- Co-President

Well, we've partnered with Instacart in regards to that. And they've rolled out delivery in most of our markets. It's still not a significant amount of our business. We believe that the business that we are doing with them is incremental to our business.

And so even though it's expensive it's incrementally profitable because of that. As far as pushing it, we're not planning on pushing it because if it takes away from our in-store business, that it would be not incrementally be profitable because it's not -- it's expensive to do the delivery.

Sid Dandekar -- Wolfe Research -- Analyst

OK. Great. And then secondly, can you talk about your -- the in-house Natural Grocers brand. So you mentioned 75 new SKUs.

What's the target for this year? And how's the uptake been for that particular product?

Kemper Isely -- Co-President

Our target is to add a 100 SKUs this year, so more than double the number of SKUs that we added last year. And we'll probably roll out a similar amount next year and the year after and the year after that.

Operator

And 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 -- Co-President

Thank you very much for joining us to discuss our second-quarter results. We look forward to speaking with you on our next call to review our third-quarter 2019 results. Have a great day.

Operator

[Operator signoff]

Duration: 18 minutes

Call participants:

David Colson -- Vice President and Treasurer

Kemper Isely -- Co-President

Todd Dissinger -- Chief Financial Officer

Renato Basanta -- Barclays -- Analyst

Sid Dandekar -- Wolfe Research -- Analyst

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