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Item 2. Management’s’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’sManagement’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 qualityhigh-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 and body care products 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 DecemberMarch 31, 2017,2023, we operated 142166 stores in 1921 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, 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 ourOur stores variesrange from 5,000approximately 7,000 to 16,000 selling square feet. During the twelve months ended December 31, 2017, our new stores averagedfeet, and average approximately 11,000 selling square feet. Our new prototype store has approximately 10,000 square feet of selling space. We anticipate that in the future, a majority of our new stores will use the new prototype layout.
The growth in the organic and natural foods industry and growing consumer interest in health and nutrition havehave enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2017,2022, we increased our store count at a compound annual growth rate of 18.9%3.2%. In fiscal year 2017,2022, we opened 14three new stores, relocated/remodeled two stores and closed one store. We plan to open four to six new stores and we currently planrelocate/remodel two to open eight to 10 newthree stores in fiscal year 2018,2023. We plan to close two of which opened during the three months ended December 31, 2017. Since December 31, 2017, we have opened one new storestores in Texas.June 2023. As of the date of this report, we have signed leases for 10an additional five new stores that we plan to open in fiscal years 20182023 and beyond. During fiscal year 2018,the six months ended March 31, 2023, we plan to relocate three to fouropened two new stores and did not relocate/remodel any stores. DuringBetween April 1, 2023 and the quarter ended December 31, 2017,date of this Form 10-Q, we relocated one store.did not open any new stores or relocate/remodel any stores.
Performance Highlights
Key highlights of our performance for the three and six months ended DecemberMarch 31, 20172023 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 underin the captionsection “Key Financial Metrics in Our Business,” presented later in this MD&A.
| | ● | Net sales. Net sales were $202.5$283.2 million for the three months ended DecemberMarch 31, 2017,2023, an increase of $18.9$11.4 million, or 10.3%4.2%, compared to net sales of $183.6$271.8 million for the three months ended DecemberMarch 31, 2016.2022. Net sales were $563.7 million for the six months ended March 31, 2023, an increase of $14.6 million, or 2.7%, compared to net sales of $549.1 million for the six months ended March 31, 2022. |
| | ● | Comparable store sales and dailyDaily average comparable store salessales. . Comparable store sales and dailyDaily average comparable store sales for the three months ended DecemberMarch 31, 2017 each2023 increased 4.7%2.7% compared to the three months ended DecemberMarch 31, 2016.
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| Mature store sales and daily2022. Daily average mature store sales. Mature store sales and daily average maturecomparable store sales for the threesix months ended DecemberMarch 31, 2017 each2023 increased 1.6% compared to the threesix months ended DecemberMarch 31, 2016.2022.
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| | ● | Net income. Net income was $5.2$5.9 million for the three months ended DecemberMarch 31, 2017, an increase2023, a decrease of $3.1$0.5 million, or 151.4%7.4%, compared to net income of $2.1$6.4 million for the three months ended DecemberMarch 31, 2016.2022. Net income was favorably impacted by $4.3$10.3 million duefor the six months ended March 31, 2023, a decrease of $5.0 million, or 32.6%, compared to net income of $15.3 million for the non-cash remeasurement of deferred tax assets and liabilities.six months ended March 31, 2022. |
| | ● | EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $9.6$15.6 million for the three months ended DecemberMarch 31, 2017,2023, a decrease of $1.7$0.2 million, or 14.9%1.2%, from $11.3compared to $15.8 million for the three months ended DecemberMarch 31, 2016.2022. EBITDA was $29.1 million for the six months ended March 31, 2023, a decrease of $5.8 million, or 16.7%, compared to $34.9 million for the six months ended March 31, 2022. 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. |
| | ● | Adjusted EBITDA. AdjustedEBITDA was $16.8 million for the three months ended March 31, 2023, an increase of $0.7 million, or 4.6%, compared to $16.1 million for the three months ended March 31, 2022. Adjusted EBITDA was $30.6 million for the six months ended March 31, 2023, a decrease of $4.9 million, or 13.9%, compared to $35.6 million for the six months ended March 31, 2022. Adjusted 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 Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA. |
| ● | Liquidity. As of DecemberMarch 31, 2017,2023, cash and cash equivalents was $8.1$19.0 million, and there was $24.4$48.9 million available for borrowing under our $50.0 million CreditRevolving Facility, net of undrawn, issued and outstanding letters of credit of $1.0$1.1 million. |
| | ● | New store growth. We opened two new stores during the threesix months ended DecemberMarch 31, 2017.2023. We operated a total of 142166 stores as of DecemberMarch 31, 2017.2023. We plan to open a total of eightfour to 10six new stores in fiscal year 2018,2023, which would result in an annual new store growth rate of 5.7% to 7.1%between 2.4% and 3.7% for fiscal year 2018.2023. |
| | ● | Store Relocations and Relocations/Remodels.DuringWe did not relocate/remodel any stores during the six months ended March 31, 2023. We plan to relocate/remodel two to three stores in fiscal year 2018, we plan to relocate three to four stores. During the quarter ended December 31, 2017, we relocated one store.2023. |
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. and political environment. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the levellevels of disposable consumer income, consumer debt, interest rates, inflation or deflation, periods of recession and growth, the price of commodities, the political environment and consumer confidence. In this regard, we believeFurthermore, our financial results forability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the three months ended December 31, 2017 reflected improvementavailability of a sufficient number of qualified persons in the oilworkforce in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and gas marketsother insurance costs and changes in employment legislation, including unemployment benefits. A number of macroeconomic and global trends have impacted our business. The current labor market has impacted our ability to retain and attract store Crew members, and we serve, although they generally continue to lag behindbe challenged by labor shortages broadly impacting the retail industry. We have invested in increased wages for our non-oilstore Crew members and gas markets.may be required to do so in the future. As a result of current global supply chain issues, partially attributable to the COVID-19 pandemic and the war in Ukraine, we have on occasion experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain, although certain products may be in relatively short supply or unavailable from time to time. |
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| During fiscal year 2022 and the first half of fiscal year 2023, the costs of certain goods we sell were impacted by levels of inflation higher than we have experienced in recent years, resulting in part from supply disruptions, the military conflict between Ukraine and Russia, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain, monetary policy actions, disruptions caused by the COVID‐19 pandemic and the uncertain economic environment. In the aggregate, management estimates that the Company experienced annualized cost inflation of approximately 8% in the second quarter of fiscal year 2023. Cost inflation estimates are based on individual like items sold during the periods being compared. The impact of inflation on our sales and profitability is influenced in part by our ability to adjust our retail prices accordingly. While we have been able to mitigate this impact to date through our pricing strategies, we are unable to predict how long the current inflationary environment will continue or the impact of inflationary trends on consumer behavior and our sales and profitability in the future. |
| ● | 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 openWe expect the rate of new stores, our results of operations have been and may continuestore unit growth in the foreseeable future to be materially adversely affected based on the timingdependent upon economic and number of new stores we open, their initial salesbusiness conditions and new lease costs. The length of time it takes for a new store to become profitable can vary depending on a number ofother factors, including location, competition, a new market versus an existing market,construction permitting and the strengthavailability of store managementconstruction materials 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.equipment. |
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 for the foreseeable future. Our financial results for the three months ended December 31, 2017 reflect the effects18
Table 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.
Contents
| | ● | Increased Competition.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, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, online retailers such as Amazon, meal delivery services 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 in August 2017, the plans of Aldi and Lidl to expand their presence in the United Statesindustry consolidation, expansion by existing competitors, and the expandingincreasing availability of grocery ordering, pick-up, and delivery options. In particular, the proposed merger of The Kroger Co. and Albertsons Companies, Inc., if consummated, would create a larger conventional supermarket retailer that could alter the competitive landscape of the grocery industry and adversely impact our ability to compete. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, 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 nutritionalnutrition education, differentiate us in the industry and provide a competitive advantage. In addition, we face internally generated competition when we open new stores in markets we already serve.
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| ● | Consumer preferences. 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 higher retail prices for our products due to inflation, or reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or stricter regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations. |
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 expand profitably.profitably expand. These factors include a loyal customer base, increasing transaction count and/or basket size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education, a convenient, clean and a shopper friendlyshopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries, dietary supplements and dietary supplements.body care products.
We plan forexpect the foreseeable future to continue opening new stores and entering new markets. The rate of new store unit growth in the foreseeable future is expected to moderate somewhat compared to recent years, depending onbe dependent upon economic and business conditions and other factors. Duringfactors, including construction permitting and the past few years, we have expanded our infrastructure to enable us to support our continued unit growth. This has included implementing our enterprise resource planning system, hiring key personnel, developing efficient new store openingavailability of construction materials and operations processes and relocating and expanding our bulk food repackaging facility and distribution center. In addition, we have taken a number of actions in recent years which we believe have enhanced customer loyalty and increased customer engagement, including redesigning our website (www.naturalgrocers.com), enhancing digital and social media presence, and introducing the {N}power® customer appreciation program at all of our stores.
equipment. 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 industryand body care products industries and regional and general economic conditions. As we continue to expand our store base, weconditions, including inflationary or recessionary trends. We believe there are opportunities for increased leverage inof costs such as administrative expenses, as well asand increased economies of scale in sourcing products. However, due to the fixed nature of certain of our commitment to providing high-quality products at affordable pricescosts (in particular, our rent obligations and increased competition, such sourcing economies and efficiencies at our bulk food repacking facility and distribution center may not be reflected in our gross margin in the near term. In addition,related occupancy costs), our ability to leverage costs may be limited due to the fixed nature of our rent obligations and related occupancy expenses.limited.
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 daily average 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 fiscal 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. |
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| 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).
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| 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 2018 are stores that opened during or before fiscal year 2013). 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.
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| | ● | 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).
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| Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, return transactionsreturned, and exchange transactions.exchanged. |
| | ● | 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, third-party delivery fees 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 net sales typically decrease as new stores mature and increase sales.sales increase. Rent payments for leases classified as capital and financingfinance 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 levelstore-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.technology. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations.relocations, as well as store closing costs. Store expenses also include long-lived asset impairment charges. 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 net sales tend to be higher at new stores compared to comparable stores, as new stores require a certainminimum 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 net sales typically decrease.
Administrative expenses
Administrative expenses consist of home office-relatedoffice-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,our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, 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 expenses for new stores and relocation expensesrelocations/remodels 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 financingfinance leases, nowe recognize pre-opening rent expense is recognized.interest and depreciation expense. 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 Pre-opening expenses for remodels are incurred if the store expenses, administrative expenses and pre-opening and relocation expenses. Operating income canis required to be impacted by a number of factors, includingclosed due to the timing of new store openings and store relocations, whether or not a store lease is classified as an operating, capital or financing lease, as well as fluctuations 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 and the strength of store management.remodel.
Interest expense, net
Interest expense consists of the interest associated with capital and financingfinance lease obligations, and interest we incur on outstanding indebtedness, including under our Credit Facility, all net of capitalized interest.interest, and our Credit Facility.
Income tax expense
Income taxes are accounted for in accordance with the provisions of Income Taxes (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. Income tax expense also includes excess tax benefits and deficiencies related to the vesting of restricted stock units.
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
December 31, | | | Three months ended
March 31, | | | Six months ended
March 31, | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Statements of Income Data:* | | | | | | | | | |
Statements of Income Data: * | | | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | | | 100.0 | % | | 100.0 | | | 100.0 | | | 100.0 | |
Cost of goods sold and occupancy costs | | | 73.7 | | | | 71.6 | | | | 70.9 | | | | 71.8 | | | | 71.4 | | | | 71.7 | |
Gross profit | | | 26.3 | | | | 28.4 | | | 29.1 | | | 28.2 | | | 28.6 | | | 28.3 | |
Store expenses | | | 22.3 | | | | 22.8 | | | 23.0 | | | 21.9 | | | 22.8 | | | 21.7 | |
Administrative expenses | | | 2.6 | | | | 2.7 | | | 3.0 | | | 3.0 | | | 3.0 | | | 2.8 | |
Pre-opening and relocation expenses | | | 0.3 | | | | 0.7 | | |
Pre-opening expenses | | | | 0.1 | | | | 0.1 | | | | 0.1 | | | | 0.0 | |
Operating income | | | 1.1 | | | | 2.3 | | | 3.0 | | | 3.3 | | | 2.6 | | | 3.8 | |
Interest expense | | | (0.5 | ) | | | (0.5 | ) | |
Interest expense, net | | | | (0.3 | ) | | | (0.2 | ) | | | (0.3 | ) | | | (0.2 | ) |
Income before income taxes | | | 0.5 | | | | 1.7 | | | 2.7 | | | 3.1 | | | 2.3 | | | 3.6 | |
Benefit from (provision for) income taxes | | | 2.0 | | | | (0.6 | ) | |
Provision for income taxes | | | | (0.6 | ) | | | (0.7 | ) | | | (0.5 | ) | | | (0.8 | ) |
Net income | | | 2.6 | % | | | 1.1 | | | | 2.1 | % | | | 2.3 | | | | 1.8 | | | | 2.8 | |
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*Figures may not sum due to rounding. | | | | | | | | | | | | | | | | |
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Number of stores at end of period | | | 142 | | | | 131 | | | 166 | | | 162 | | | 166 | | | 162 | |
Number of stores opened during the period | | | 2 | | | | 5 | | |
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Total store unit count increase period over period | | | 8.4 | % | | | 22.4 | | |
Change in comparable store sales | | | 4.7 | | | | (0.6 | ) | |
Number of new stores opened during the period | | | 1 | | | — | | | 2 | | | — | |
Number of stores relocated/remodeled during the period | | | — | | | — | | | — | | | 1 | |
Twelve-month store unit growth rate | | | 2.5 | % | | 0.6 | | | 2.5 | | | 0.6 | |
Change in daily average comparable store sales | | | 4.7 | | | | (0.6 | ) | | 2.7 | % | | 4.3 | | | 1.6 | | | 4.1 | |
Change in mature store sales | | | 1.6 | | | | (2.3 | ) | |
Change in daily average mature store sales | | | 1.6 | | | | (2.3 | ) | |
Three months ended DecemberMarch 31,, 2017 2023 compared to the three months ended March 31, 2022December 31, 2016
The following table summarizes our results of operations and other operating data for the periods presented,, dollars in thousands:
| | | Three months ended December 31, | | | Change In | | | Three months ended March 31, | | | Change In | |
| | | 2017 | | | 2016 | | | Dollars | | | Percent | | | 2023 | | | 2022 | | | Dollars | | | Percent | |
Statements of Income Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 202,480 | | | | 183,577 | | | | 18,903 | | | | 10.3 | % | | $ | 283,245 | | | 271,822 | | | 11,423 | | | 4.2 | % |
Cost of goods sold and occupancy costs | | | 149,321 | | | | 131,424 | | | | 17,897 | | | | 13.6 | | | | 200,768 | | | | 195,040 | | | | 5,728 | | | 2.9 | |
Gross profit | | | 53,159 | | | | 52,153 | | | | 1,006 | | | | 1.9 | | | 82,477 | | | 76,782 | | | 5,695 | | | 7.4 | |
Store expenses | | | 45,166 | | | | 41,843 | | | | 3,323 | | | | 7.9 | | | 65,192 | | | 59,605 | | | 5,587 | | | 9.4 | |
Administrative expenses | | | 5,257 | | | | 4,883 | | | | 374 | | | | 7.6 | | | 8,605 | | | 8,172 | | | 433 | | | 5.3 | |
Pre-opening and relocation expenses | | | 543 | | | | 1,261 | | | | (718 | ) | | | (56.9 | ) | |
Pre-opening expenses | | | | 249 | | | | 141 | | | | 108 | | | 76.6 | |
Operating income | | | 2,193 | | | | 4,166 | | | | (1,973 | ) | | | (47.4 | ) | | 8,431 | | | 8,864 | | | (433 | ) | | (4.9 | ) |
Interest expense | | | (1,089 | ) | | | (983 | ) | | | (106 | ) | | | 10.8 | | |
Interest expense, net | | | | (834 | ) | | | (545 | ) | | | (289 | ) | | 53.0 | |
Income before income taxes | | | 1,104 | | | | 3,183 | | | | (2,079 | ) | | | (65.3 | ) | | 7,597 | | | 8,319 | | | (722 | ) | | (8.7 | ) |
Benefit from (provision for) income taxes | | | 4,077 | | | | (1,122 | ) | | | 5,199 | | | | (463.4 | ) | |
Provision for income taxes | | | | (1,713 | ) | | | (1,962 | ) | | | 249 | | | (12.7 | ) |
Net income | | $ | 5,181 | | | | 2,061 | | | | 3,120 | | | | 151.4 | | | $ | 5,884 | | | | 6,357 | | | | (473 | ) | | (7.4 | )% |
Net sales
Net sales increased $18.9$11.4 million, or 10.3%4.2%, to $202.5$283.2 million for the three months ended DecemberMarch 31, 20172023 compared to $183.6$271.8 million for the three months ended DecemberMarch 31, 2016,2022, due to a $10.3 million increase in sales from new stores and a $8.6$7.4 million increase in comparable store sales.sales and a $4.9 million increase in new store sales, partially offset by a $0.9 million decrease in net sales related to one store that closed in fiscal year 2022. Daily average comparable store sales increased 4.7%2.7% for the three months ended DecemberMarch 31, 20172023 compared to the three months ended DecemberMarch 31, 2016.2022. The daily average comparable store sales increase resulted from a 4.8%2.7% increase in daily average transaction count offset by a 0.1% decreaseand no change in daily average transaction size. Comparable store average transaction size was $35.54$45.79 for the three months ended DecemberMarch 31, 2017. Daily average mature store sales increased 1.6% for the three months ended December 31, 2017 compared to the three months ended December 31, 2016.2023. The increase in comparable storenet sales during the three months ended DecemberMarch 31, 20172023 was primarily driven by severaltransaction count, new store sales and marketing initiatives, and promotional pricing campaigns. In addition,partially offset by a moderation of the pandemic trends we believeexperienced in the increase in comparable store sales during the three months ended December 31, 2017 reflected enhanced focus on leadership, training, and improved operating processes in our stores.second quarter of fiscal year 2022.
Gross profit
Gross profit increased $1.0$5.7 million, or 1.9%7.4%, to $53.2$82.5 million for the three months ended DecemberMarch 31, 20172023 compared to $52.2$76.8 million for the three months ended DecemberMarch 31, 2016, primarily driven by an increase in the number of comparable stores.2022. Gross profit reflects earnings after product and occupancy costs. Gross margin decreasedincreased to 26.3%29.1% for the three months ended DecemberMarch 31, 2017 from 28.4%2023 compared to 28.2% for the three months ended DecemberMarch 31, 2016. Product margin as a percentage of sales during the three months ended December 31, 2017 decreased due to our promotional pricing campaigns and a shift2022. The increase in sales mix to lower margin products. Additionally, gross margin during the three months ended DecemberMarch 31, 20172023 was negatively impacteddriven by an increase in occupancy costs as a percentage of sales, primarily due to the higher average lease expenses experienced at newer format stores opened since fiscal year 2013 and at relocated stores.
We had 18 and 16 store leases that were classified as capital and financing lease obligations for the three months ended December 31, 2017 and 2016, 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 December 31, 2017 and 2016, would have been approximately 55 basis points higher for each period.product margin.
Store expenses
Store expenses increased $3.3$5.6 million, or 7.9%9.4%, to $45.2$65.2 million for the three months ended DecemberMarch 31, 20172023 compared to $41.8$59.6 million for the three months ended DecemberMarch 31, 2016.2022. Store expenses included an impairment charge of $0.9 million in the three months ended March 31, 2023 related to a planned store closure in June 2023. Store expenses as a percentage of net sales were 22.3%23.0% and 22.8%21.9% for the three months ended DecemberMarch 31, 20172023 and 2016,2022, respectively. The decreaseincrease in store expenses as a percentage of net sales was primarily due to decreases in labor-related expenses, marketingdriven by higher labor expense as a result of increased wage rates, and depreciation, offset by an increase in utilities.the impairment charge.
Administrative expenses
Administrative expenses increased $0.4$0.4 million, or 7.6%5.3%, to $5.3$8.6 million for the three months ended DecemberMarch 31, 20172023 compared to $4.9$8.2 million for the three months ended DecemberMarch 31, 2016.2022. The increase in administrative expenses was due primarily to increaseddriven by higher compensation expenses.expense. Administrative expenses as a percentage of net sales were 2.6% and 2.7%3.0% for each of the three months ended DecemberMarch 31, 20172023 and 2016, respectively.2022.
Pre-opening and relocation expenses
Pre-opening and relocation expenses decreased $0.7 million, or 56.9%, for the three months ended December 31, 2017 to $0.5 million compared to $1.3were $0.2 million for the three months ended DecemberMarch 31, 2016, due2023 compared to the impact of the number and timing of new store openings and relocations. We opened two new stores and relocated one store during$0.1 million for the three months ended DecemberMarch 31, 2017 and opened five new stores and relocated no stores during2022.
Interest expense, net
Interest expense, net of capitalized interest, was $0.8 million for the three months ended DecemberMarch 31, 2016.
2023 compared to $0.5 million for the three months ended March 31, 2022.
Income taxes
Income tax expense decreased $0.2 million for the three months ended March 31, 2023 to $1.7 million compared to $2.0 million for the three months ended March 31, 2022. The Company’s effective income tax rate was 22.5% and 23.6% for the three months ended March 31, 2023 and 2022, respectively.
Net income
Net income was $5.9 million, or $0.26 diluted earnings per share, for the three months ended March 31, 2023 compared to $6.4 million, or $0.28 diluted earnings per share, for the three months ended March 31, 2022.
Six months ended March 31, 2023 compared to the six months ended March 31, 2022
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 | |
| | | 2023 | | | 2022 | | | Dollars | | | Percent | |
Statements of Income Data: | | | | | | | | | | | | | | | | |
Net sales | | $ | 563,702 | | | | 549,110 | | | | 14,592 | | | | 2.7 | % |
Cost of goods sold and occupancy costs | | | 402,506 | | | | 393,591 | | | | 8,915 | | | | 2.3 | |
Gross profit | | | 161,196 | | | | 155,519 | | | | 5,677 | | | | 3.7 | |
Store expenses | | | 128,788 | | | | 118,941 | | | | 9,847 | | | | 8.3 | |
Administrative expenses | | | 16,858 | | | | 15,465 | | | | 1,393 | | | | 9.0 | |
Pre-opening expenses | | | 702 | | | | 225 | | | | 477 | | | | 212.0 | |
Operating income | | | 14,848 | | | | 20,888 | | | | (6,040 | ) | | | (28.9 | ) |
Interest expense, net | | | (1,630 | ) | | | (1,089 | ) | | | (541 | ) | | | 49.7 | |
Income before income taxes | | | 13,218 | | | | 19,799 | | | | (6,581 | ) | | | (33.2 | ) |
Provision for income taxes | | | (2,927 | ) | | | (4,527 | ) | | | 1,600 | | | | (35.3 | ) |
Net income | | $ | 10,291 | | | | 15,272 | | | | (4,981 | ) | | | (32.6 | )% |
Net sales
Net sales increased $14.6 million, or 2.7%, to $563.7 million for the six months ended March 31, 2023 compared to $549.1 million for the six months ended March 31, 2022, due to an $8.7 million increase in comparable store sales and a $7.7 million increase in new store sales, partially offset by a $1.8 million decrease in net sales related to one store that closed in fiscal year 2022. Daily average comparable store sales increased 1.6% for the six months ended March 31, 2023 compared to the six months ended March 31, 2022. The daily average comparable store sales increase resulted from a 0.9% increase in daily average transaction size and a 0.7% increase in daily average transaction count. Comparable store average transaction size was $45.94 for the six months ended March 31, 2023. The increase in net sales during the six months ended March 31, 2023 was primarily driven by retail price inflation, new store sales and marketing initiatives, partially offset by a moderation of the pandemic trends we experienced in the first half of fiscal year 2022.
Gross profit
Gross profit increased $5.7 million, or 3.7%, to $161.2 million for the six months ended March 31, 2023 compared to $155.5 million for the six months ended March 31, 2022. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 28.6% for the six months ended March 31, 2023 compared to 28.3% for the six months ended March 31, 2022. The increase in gross margin during the six months ended March 31, 2023 was driven by higher product margin.
Store expenses
Store expenses increased $9.8 million, or 8.3%, to $128.8 million for the six months ended March 31, 2023 compared to $118.9 million for the six months ended March 31, 2022. Store expenses included an impairment charge of $0.9 million in the six months ended March 31, 2023 related to a planned store closure in June 2023. Store expenses as a percentage of net sales were 22.8% and 21.7% for the six months ended March 31, 2023 and 2022, respectively. The increase in store expenses as a percentage of net sales was primarily driven by higher labor expense as a result of increased wage rates.
Administrative expenses
Administrative expenses increased $1.4 million, or 9.0%, to $16.9 million for the six months ended March 31, 2023 compared to $15.5 million for the six months ended March 31, 2022. The increase in administrative expenses was primarily driven by higher technology amortization, legal expense, and compensation expense. Administrative expenses as a percentage of net sales were 3.0% and 2.8% for the six months ended March 31, 2023 and 2022, respectively.
Pre-opening expenses
Pre-opening expenses were $0.7 million for the six months ended March 31, 2023 compared to $0.2 million for the six months ended March 31, 2022.
Interest expense
Interest expense,, net of capitalized interest, increased $0.1was $1.6 million or 10.8%, for the threesix months ended DecemberMarch 31, 20172023 compared to $1.1 million for the threesix months ended DecemberMarch 31, 2016. The increase in interest expense is primarily due to higher average borrowings under our Credit Facility and an increase in the number of capital leases during the three months ended December 31, 2017. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 45 and 40 basis points lower than as reported for the three months ended December 31, 2017 and 2016, respectively.2022.
Income taxes
Income taxestax expense decreased $5.2$1.6 million for the threesix months ended DecemberMarch 31, 20172023 to a $4.1$2.9 million benefit compared to $1.1$4.5 million expense for the threesix months ended DecemberMarch 31, 2016. Exclusive of the adjustment to deferred income tax assets and liabilities, the Company’s2022. The Company’s effective income tax rate was 22.1% and 22.9% for the threesix months ended DecemberMarch 31, 2017 was approximately 23.5% as compared to 35.2% for the three months ended December 31, 2016. The decrease in the effective income tax rate for the three months ended December 31, 2017 is a result of the recent tax reform.2023 and 2022, respectively.
Net income
Net income was $5.2$10.3 million, or $0.23$0.45 diluted earnings per share, for the threesix months ended DecemberMarch 31, 20172023 compared to $2.1$15.3 million, or $0.09$0.67 diluted earnings per share, for the threesix months ended DecemberMarch 31, 2016. 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 was $0.8 million or $0.04 diluted earnings per share for the three months ended December 31, 2017 compared to $2.1 million, or $0.09 diluted earnings per share, for the three months ended December 31, 2016.2022.
Non-GAAP financial measures
EBITDA and Adjusted EBITDA
EBITDA isand Adjusted EBITDA are not a measuremeasures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes andtaxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance, including certain items such as impairment charges, store closing costs, share-based compensation and non-recurring items.
The following table reconciles net income to EBITDA for the periods presented,and Adjusted EBITDA, dollars in thousands:
| | | Three months ended
December 31, | | | Three months ended
March 31, | | | Six months ended
March 31, | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | | | 2023 | | | 2022 | |
Net income | | $ | 5,181 | | | | 2,061 | | | $ | 5,884 | | | 6,357 | | | 10,291 | | | 15,272 | |
Interest expense | | | 1,089 | | | | 983 | | |
Benefit from (provision for) income taxes | | | (4,077 | ) | | | 1,122 | | |
Interest expense, net | | | 834 | | | 545 | | | 1,630 | | | 1,089 | |
Provision for income taxes | | | 1,713 | | | 1,962 | | | 2,927 | | | 4,527 | |
Depreciation and amortization | | | 7,415 | | | | 7,121 | | | | 7,154 | | | | 6,907 | | | | 14,216 | | | | 14,020 | |
EBITDA | | $ | 9,608 | | | | 11,287 | | | 15,585 | | | 15,771 | | | 29,064 | | | 34,908 | |
Impairment of long-lived assets | | | 871 | | | — | | | 871 | | | 95 | |
Share-based compensation | | | | 356 | | | | 296 | | | | 713 | | | | 590 | |
Adjusted EBITDA | | | $ | 16,812 | | | | 16,067 | | | | 30,648 | | | | 35,593 | |
EBITDAEBITDA decreased 14.9%1.2% to $9.6 million in the three months ended December 31, 2017 compared to $11.3$15.6 million for the three months ended DecemberMarch 31, 2016.2023 compared to $15.8 million for the three months ended March 31, 2022. EBITDA decreased 16.7% to $29.1 million for the six months ended March 31, 2023 compared to $34.9 million for the six months ended March 31, 2022. EBITDA as a percentage of net sales was 4.7%5.5% and 6.1% in5.8% for the three months ended DecemberMarch 31, 20172023 and 2016,2022, 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 net sales by approximately 55 basis pointswas 5.2% and 6.4% for the six months ended March 31, 2023 and 2022, respectively.
Adjusted EBITDA increased 4.6% to $16.8 million for the three months ended March 31, 2023 compared to $16.1 million for the three months ended March 31, 2022. Adjusted EBITDA decreased 13.9% to $30.6 million for the six months ended March 31, 2023 compared to $35.6 million for the six months ended March 31, 2022. Adjusted EBITDA as a percentage of net sales was 5.9% for each of the three months ended DecemberMarch 31, 20172023 and 2016, due to2022. Adjusted EBITDA as a percentage of net sales was 5.4% and 6.5% for the impact on cost of goods soldsix months ended March 31, 2023 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.2022, respectively.
Management believes that some investors’ understanding of our performance is enhanced by including EBITDA aand Adjusted EBITDA, which are non-GAAP financial measure.measures. We believe EBITDA providesand Adjusted EBITDA provide additional information about: (i) our operating performance, because it assiststhey assist us in comparing the operating performance of our stores on a consistent basis, as it removesthey remove 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. Further, our incentive compensation plan bases incentive compensation payments on EBITDA, among other measures.
Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as a supplemental measuremeasures to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including thisthese non-GAAP financial measuremeasures as a reasonable basis for comparing our ongoing results of operations. By providing thisthese non-GAAP financial measure,measures, 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 and Adjusted EBITDA differently, and as a result, our measuremeasures of EBITDA and Adjusted EBITDA may not be directly comparable to thoseEBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA is aand Adjusted EBITDA are supplemental measuremeasures of operating performance that doesdo 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 hasand Adjusted EBITDA have limitations as an analytical tool,tools, 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 doesand Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or future requirements for capital expenditures or contractual commitments; |
| | ● | EBITDA doesand Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; |
| | ● | EBITDA doesand Adjusted EBITDA do not reflect any impact for straight-line rentdepreciation or interest expense for leases classified as capital and financing lease obligations;finance leases; |
| | ● | EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| ● | Adjusted EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;share-based compensation, impairment charges, and store closing costs; |
| | ● | EBITDA doesand Adjusted EBITDA do 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 doesand Adjusted EBITDA do not reflect any cash requirements for such replacements. |
Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as a measuremeasures 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 and Adjusted 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 our Revolving Facility. Our Credit Facility consists of the Credit$50.0 million Revolving Facility and the fully drawn $35.0 million Term Loan 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 indebtednessdebt service, cash dividends, share repurchases and corporate taxes. As of DecemberMarch 31, 2017,2023, we had $8.1$19.0 million in cash and cash equivalents as well as $24.4and $48.9 million available for borrowing under our CreditRevolving Facility. On November 18, 2020, we entered into the $35.0 million Term Loan Facility maturing November 13, 2024.
OnIn May 5, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may expendrepurchase up to $10.0 million to repurchasein shares of the Company’s common stock. DuringOur Board subsequently extended the share repurchase program – most recently in May 2022 – and the program will terminate on May 31, 2024. We repurchased 8,546 shares at a cost of $0.1 million during the three months ended DecemberMarch 31, 2017, we repurchased 101,5732023. The dollar value of the shares of ourthe Company’s common stock that may yet be repurchased under the share repurchase program. We expect funding for anyprogram is $8.2 million. Potential future share repurchases will come fromunder the share repurchase program could be funded by operating cash flow, excess cash and/balances or borrowings under our CreditRevolving Facility. The timing and the amountnumber of shares repurchased, if any, will be dictated by our capital needs and stock market conditions.
On May 3, 2023, our Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June 14, 2023 to stockholders of record as of the close of business on May 30, 2023. We paid quarterly cash dividends of $0.10 per share of common stock in each of the first two quarters of fiscal year 2023.
We plan to continue to open new stores in the future, which may require us to borrow additional amounts under the Credit Facility. We planRevolving Facility from time to spend approximately $20 million to $25 million on capital expenditures during the remainder of fiscal year 2018 in connection with six to eight additional new store openings and two to three additional store relocations.time. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our CreditRevolving Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs, repayment of debt, stock repurchases and dividends for at least the next twelve months.12 months and the foreseeable future. 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.
We anticipate that our new stores will require, on average, 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 The following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:
| | | Three months ended December 31, | | | Six months ended March 31, | |
| | | 2017 | | | 2016 | | | 2023 | | | 2022 | |
Net cash provided by operating activities | | $ | 10,969 | | | | 14,094 | | | $ | 34,857 | | | 27,581 | |
Net cash used in investing activities | | | (4,884 | ) | | | (10,493 | ) | | (17,765 | ) | | (12,295 | ) |
Net cash used in financing activities | | | (4,517 | ) | | | (476 | ) | | | (10,166 | ) | | | (10,075 | ) |
Net increase in cash and cash equivalents | | | 1,568 | | | | 3,125 | | | 6,926 | | | 5,211 | |
Cash and cash equivalents, beginning of period | | | 6,521 | | | | 4,017 | | | | 12,039 | | | | 23,678 | |
Cash and cash equivalents, end of period | | $ | 8,089 | | | | 7,142 | | | $ | 18,965 | | | | 28,889 | |
OperatingOperating Activities
Net cashcash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, impairment of long-lived assets, share-based compensation, and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities decreased $3.1increased $7.3 million, or 22.2%26.4%, to $11.0$34.9 million for the threesix months ended DecemberMarch 31, 20172023 compared to $14.1$27.6 million for the threesix months ended DecemberMarch 31, 2016.2022. The decreaseincrease in cash provided by operating activities was primarily due to a decreasean increase in accounts payable,cash provided by working capital, partially offset by a decrease in inventory,cash provided by net income as adjusted for non-cash items such as depreciation and amortization resulting from the additionitems.
Investing Activities
Net cashcash used in investing activities decreased $5.6increased $5.5 million, or 53.4%44.5%, to $4.9$17.8 million for the threesix months ended DecemberMarch 31, 20172023 compared to $10.5$12.3 million for the threesix months ended DecemberMarch 31, 2016.2022. This decreaseincrease was due toprimarily the result of an $8.1 million decreaseincrease in cash paid for property and equipment which was drivenacquisitions of $6.1 million, partially offset by fewera decrease in other intangibles acquisitions of $0.7 million during the six months ended March 31, 2023 compared to the six months ended March 31, 2022, primarily due to the impact of the timing of new store openings, relocationsrelocations/remodels, and remodelssoftware projects under development.
We plan to spend approximately $10.2 million to $17.2 million on capital expenditures during the remainder of fiscal year 2023 primarily in connection with two to four new store openings and two to three store relocations/remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.4 million per store.
Acquisition of property and equipment not yet paid decreased $0.1 million to $2.0 million for the quartersix months ended DecemberMarch 31, 2017. This decrease was partially offset by $2.62023 compared to $2.1 million proceeds, netfor the six months ended March 31, 2022 primarily due to the timing of commissions,payments related to the sale/leaseback on onenew store building in the quarter ended December 31, 2016.openings and relocations/remodels.
Financing Activities
Cash Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and payments of capital and financing lease obligations. Cashdividends paid to stockholders. Net cash used in financing activities was $4.5 million and $0.5$10.2 million for the threesix months ended DecemberMarch 31, 2017 and 2016, respectively.2023 compared to $10.1 million for the six months ended March 31, 2022.
Credit FacilityFacility
The revolving commitment amount available for borrowing under the CreditRevolving Facility is $50.0 million, including a $5.0 million sublimitsub-limit for standby letters of credit. We borrowed $35.0 million under the Term Loan Facility in December 2020. 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.Vitamin Cottage Two Ltd. Liability Company (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 CreditRevolving Facility at any time prior to the maturity date. Thedate without premium or penalty. On November 18, 2020, we amended the Credit Facility maturesto provide for the Term Loan Facility and permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020. On December 15, 2022, we further amended the Credit Facility to (i) remove and replace the LIBOR-based interest rate benchmark provisions with interest rate benchmark provisions based on January 31, 2021.SOFR and (ii) increase the Company’s restricted payment capacity, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $12.5 million during any fiscal year.
For floatingBase rate borrowings under the Credit Facility bear interest isat a fluctuating base rate as determined by the lender’slenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the basehighest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon certain financial measures. For fixedthe Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest is determined by quoted LIBOR ratesbased on SOFR for the interest period plus the lender spread based upon certain financial measures.the Company’s consolidated leverage ratio. The unused commitment fee is also based upon certain financial measures.the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million on the last day of each fiscal quarter, commencing on March 31, 2021 and ending on September 30, 2024. Amounts repaid on the Term Loan Facility may not be reborrowed.
The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’sCompany’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 exceptto the holding company from the operating company without the required lenders’ consent, provided 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 forin an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and for repurchases of(ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million.$12.5 million during any fiscal year.
We had $24.6 millionno amounts outstanding under the CreditRevolving Facility as of DecemberMarch 31, 2017 and $28.4 million outstanding under the Credit Facility as of September 30, 2017. As of each of December 31, 20172023 and September 30, 2017,2022. As of March 31, 2023 and September 30, 2022, we had undrawn, issued and outstanding letters of credit of $1.0$1.1 million, which were reserved against the amount available for borrowing under the terms of the CreditRevolving Facility. We had $24.4$48.9 million available for borrowing under the CreditRevolving Facility as of Decembereach of March 31, 20172023 and $20.6September 30, 2022. We had $11.7 million available for borrowingof outstanding borrowings under the Creditfully drawn Term Loan Facility as of September 30, 2017.March 31, 2023.
As of DecemberMarch 31, 20172023 and September 30, 2017,2022, the Company was in compliance with the financialall 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 56 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q and in Part II, Item 2 of this Form 10-Q.
Off-Balance Sheet Arrangements
As of December 31, 2017, our off-balance sheet arrangements consisted of operating leases and the undrawn portion of our Credit Facility. All of our stores and facilities, with one exception, are leased. We own buildings in which five of our stores are located; those buildings are located on land that is leased pursuant to a ground lease. As of December 31, 2017, 18 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 judgmentsjudgments 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 exposedAs disclosed above, on December 15, 2022, the Company amended the Credit Facility to, among other things, remove and replace the LIBOR-based interest rate changesbenchmark provisions with respectinterest rate benchmark provisions based on SOFR. The transition from LIBOR to ourSOFR as the reference rate under the Credit Facility. We doFacility has not use financial instruments for tradinghad, and is not expected to have in the future, a material effect on the Company’s liquidity or other speculative purposes.access to credit. There have been no other 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 effectiveeffective at a reasonable assurance level as of DecemberMarch 31, 2017.2023.
Changes in Internal Control over Financial Reporting
Management implemented additional internal controls over financial reporting to ensure compliance with the Tax Reform Act. There were no other 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.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. 1A. Risk Factors
There have been no material changes from the risk factors disclosed in Part I, “Item 1A-Risk Factors,”Item 1A, of our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds5. Other Information
The following table presents information with respect to purchasesOn May 3, 2023, the Company and Chalet, a related party owned by members of the Company’s common stock duringIsely family, entered into the three months ended December 31, 2017 byFirst Amendment to Lease (the Amended Lafayette Lease) modifying the terms of the previously disclosed Lease dated July 1, 2011, between the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act.
Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share(1) | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | |
October 1, 2017 to October 31, 2017 | | | 87,950 | | | | $5.69 | | | | 185,920 | | | | $8,410 | |
November 1, 2017 to November 30, 2017 | | | 13,623 | | | | 5.91 | | | | 199,543 | | | | 8,329 | |
December 1, 2017 to December 31, 2017 | | | — | | | | — | | | | 199,543 | | | | 8,329 | |
Total | | | 101,573 | | | | $5.72 | | | | 199,543 | | | | $8,329 | |
(1) Average price paid per share includes commissions paid.
(2) On May 5, 2016, our Board authorized a two-year share repurchase programand Chalet, pursuant to which the Company may repurchase upleases real property in Lafayette, Colorado. The Amended Lafayette Lease extends the lease term for an additional 84 months and provides for three renewal options of five years each. The Company will pay annual rent of approximately $0.2 million pursuant to $10.0 million in sharesthe Amended Lafayette Lease. On May 3, 2023, the Company and Chalet also entered into the Amendment to Commercial Lease (the Amended Arvada Lease) modifying the terms of the previously disclosed Commercial Lease dated June 1, 2006, between the Company and Chalet. The Amended Arvada Lease extends the lease term for an additional 85 months and provides for three renewal options of five years each. The Company will pay annual rent of approximately $0.3 million pursuant to the Amended Arvada Lease. As required under the Company’s common stock.related party transaction policy, the Company’s audit committee approved the terms of these transactions. This disclosure is responsive to Item 1.01 of Form 8-K.
Item 6.Exhibits
EXHIBITINDEX
Exhibit Number | | Description |
10.463.1
| | Employment offer letterAmended and Restated Certificate of Incorporation (incorporated by reference to Todd Dissinger dated DecemberExhibit 3.1 to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 5, 20172012, File No. 333-182186)
|
10.473.2
| | Notice of Grant of Stock Unit AwardAmended and Restated Bylaws (incorporated by reference to Todd DissingerExhibit 3.2 to the Company’s Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186)
|
10.1 | | First Amendment to Lease, dated January 2, 2018May 3, 2023, by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc. |
10.2 | | Amendment to Commercial Lease, dated May 3, 2023, by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc. |
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 OfficerOfficer 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†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 DecemberMarch 31, 2017,2023, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of DecemberMarch 31, 2017 (unaudited)2023 and September 30, 2017,2022 (unaudited), (ii) Consolidated Statements of Income for the three and six months ended DecemberMarch 31, 20172023 and 20162022 (unaudited), (iii) Consolidated Statements of Cash Flows for the threesix months ended DecemberMarch 31, 20172023 and 20162022 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 2023 and 2022 (unaudited) and (iv)(v) Notes to Unaudited Interim Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† The certifications attachedattached 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 February 1, 2018.May 4, 2023.
| | NaturalNatural 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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