Specialty organic and health-food grocer Natural Grocers by Vitamin Cottage (NGVC 0.20%) saw sales increase 3% in the third fiscal quarter. Known for its affordable prices on organic provisions, the company has a loyal customer base that seems undeterred by inflationary pressures.

In order to remain competitive and gain more share of a growing organic-food market, Natural Grocers must endure supply chain struggles and onboarding expenses while keeping growth a priority. Let's look at its prospects ahead.

Powerful customer loyalty

Founded in 1955, Natural Grocers has grown into a thriving business with over 163 stores in 20 states. A founding principle of Natural Grocers -- its "always affordable" prices -- has been indispensable to the company's success.

Other keys to its growth include an expansive loyalty program that has drawn in new consumers and a wide range of products, including organic groceries, dietary supplements, body-care products, and more. Natural Grocers has made itself into a lifestyle.

The company ended the third fiscal quarter with over 1.7 million loyalty members, an increase of 19% year over year. The loyalty program has strengthened an already dedicated following, and helps the company optimize promotions and customer engagement.

grocery shopping shopper mobile phone app

Image source: Getty Images.

Sales penetration from loyalty members jumped 75% in the third fiscal quarter, demonstrating customers' appreciation. The average loyalty member also has a 50% larger basket size than an average non-member.

A challenging environment

A combination of lower product margins, higher freight costs, and inventory loss pressured margins in the fiscal third quarter. As a result, Natural Grocers saw a drop in gross margin of 10 basis points to 27.6%. Store expenses as a percentage of net sales also rose to 22.6%, compared to 22.1% in the year-ago third quarter, driven primarily by higher labor costs due to increased wages.

Another founding principle of Natural Grocers is taking care of its employees, and the company has invested over $14 million in fiscal 2022 to develop and retain its workforce. To attract workers for select jobs, the company increased wages at all locations during a July hiring push for nearly 500 positions. With stores well-staffed, margins should return to normal levels in subsequent quarters.

Natural Grocers has taken pandemic-related uncertainty and inflationary patterns into account. The company reduced the number of new stores it expects to open this year from four or five to three or four, citing inflation as well as other economic factors.

Steady organic growth

The third quarter had a 3% increase in net sales, up $7.7 million compared to the same period last year. Comparable-store sales also saw a 2.5% jump, and the average transaction size grew 2.7% during the quarter.

Since the same quarter in pre-pandemic 2019, the company's diluted earnings per share have grown 88.9%. Not only has Natural Grocers endured the pandemic, it also has become a more robust company. It eventually expects to open six to eight new stores per year if supply chain and construction conditions improve.

In an effort to stay committed to its "always affordable" pledge on prices, Natural Grocers has used its specialized supply chain to reduce inflationary price increases, helped by long-established relationships with its suppliers to control prices. By passing price hikes on to customers only when necessary, the grocery chain was largely unaffected by inflation in the third quarter.

Natural Grocers announced a $0.10 quarterly dividend per share last month for a current yield of 2.84% -- just one more reason to like this up-and-coming company.