Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units (RSUs) were to vest, resulting in the issuance of common stock that would then share in the Company’s earnings.
12.12. Related Party Transactions
The Company has ongoing relationships with related entities as noted below:
Chalet Properties, LLC: The Company has fivefour operating leases and one finance lease with Chalet Properties, LLC (Chalet).Chalet. Chalet is owned by the Company’s four non-independent Board members: Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $0.2 million and $0.3 million for each of the three months ended March 31, 2020 2021 and 2019, respectively.2020. Rent paid to Chalet was approximately $0.5 million and $0.6 million for each of the six months ended March 31, 2020 2021 and 2019, respectively. 2020.
Isely Family Land Trust LLC: The Company has one operating lease with the Isely Familythe Land Trust LLC (the Land Trust).Trust. The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.1 million for each of the three months ended March 31, 2020 2021 and 2019.2020. Rent paid to the Land Trust was approximately $0.2 million for each of the six months ended March 31, 2020 2021 and 2019.2020.
FTVC LLC: The Company has one operating lease for a store location with FTVC, LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for each of the three months ended March 31, 2020 2021 and 2019.2020. Rent paid to FTVC LLC was less than $0.1 million for each of the six months ended March 31, 2020 2021 and 2019.2020.
13.13. Commitments and Contingencies
The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment-related claims, customer injury claims and investigations. When the potential liability from a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against it, management does not believe any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, prospects, financial condition, cash flows or results of operations.
14.14. Subsequent Event
On May 4, 2020, the Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022.
On May 6, 2020, 5, 2021, the Board approved the payment of a cash dividend of $0.07 per share of common stock to be paid on June 16, 2020 2021to stockholders of record as of the close of business on June 1, 2020.2021.
Item 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our 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-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements 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 March 31, 2020,2021, we operated 157161 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, 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. Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000 selling square feet.
The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2019,2020, we increased our store count at a compound annual growth rate of 12%9.1%. In fiscal year 2019,2020, we opened six new stores. We plan to open sixthree to sevenfour new stores in fiscal year 2020, four2021, two of which opened during the six months ended March 31, 2020. No new stores were opened between March 31, 2020 and the date of this Form 10-Q.2021. As of the date of this report, we have signed leases for an additional threefive new stores that we plan to open in fiscal years 20202021 and beyond. We have also purchased the property for one additional new store. We plan to relocate one storerelocate/remodel four to five stores in fiscal year 2020. We have2021, one of which opened in the six months ended March 31, 2021. Between April 1, 2021 and the date of this Form 10-Q, we did not open any new stores and we relocated any stores so far in fiscal year 2020.one store.
Performance Highlights
Key highlights of our performance for the three and six months ended March 31, 20202021 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 under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.
| | ● | Net sales. Net sales were $259.2 million for the three months ended March 31, 2021, a decrease of $18.3 million, or 6.6%, compared to net sales of $277.5 million for the three months ended March 31, 2020,2020. Net sales were $524.2 million for the six months ended March 31, 2021, an increase of $47.1$16.7 million, or 20.4%3.3%, compared to net sales of $230.4 million for the three months ended March 31, 2019. Net sales were $507.6 million for the six months ended March 31, 2020, an increase of $55.6 million, or 12.3%, compared to net sales of $452.0 million for the six months ended March 31, 2019.2020. |
| | ● | Comparable store sales and dailyDaily average comparable store sales. Comparable store sales and dailyDaily average comparable store sales for the three months ended March 31, 2020 increased 18.4% and 17.0%, respectively,2021 decreased 7.0% compared to the three months ended March 31, 2019. Comparable store sales and daily2020. Daily average comparable store sales for the six months ended March 31, 20202021 increased 10.3% and 9.7%, respectively,2.0% compared to the six months ended March 31, 2019.2020.
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| | ● | Mature store sales and daily average mature store sales.Net income. Mature store sales and daily average mature store salesNet income was $4.7 million for the three months ended March 31, 2020 increased 16.7% and 15.4%2021, a decrease of $5.0 million, or 51.6%, respectively, compared to the three months ended March 31, 2019. Mature store sales and daily average mature store sales for the six months ended March 31, 2020 increased 8.8% and 8.2%, respectively, compared to the six months ended March 31, 2019.
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| Net income. Netnet income wasof $9.7 million for the three months ended March 31, 2020, an increase2020. Net income was $8.3 million for the six months ended March 31, 2021, a decrease of $5.9$3.3 million, or 151.8%28.1%, compared to net income of $3.9 million for the three months ended March 31, 2019. Net income was $11.6 million for the six months ended March 31, 2020, an increase of $5.5 million, or 91.3%, compared to net income of $6.1 million for the six months ended March 31, 2019.2020.
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| | ● | EBITDA. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $14.1 million for the three months ended March 31, 2021, a decrease of $7.0 million, or 33.2%, compared to $21.1 million for the three months ended March 31, 2020, an increase of $7.7 million, or 57.7%, compared to $13.42020. EBITDA was $27.0 million for the threesix months ended March 31, 2019. EBITDA was2021, a decrease of $4.7 million, or 14.9%, compared to $31.7 million for the six months ended March 31, 2020, an increase2020. 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 $14.1 million for the three months ended March 31, 2021, a decrease of $7.0 million, or 28.2%33.2%, compared to $24.7$21.1 million for the three months ended March 31, 2020. Adjusted EBITDA was $27.4 million for the six months ended March 31, 2019.2021, a decrease of $4.3 million, or 13.7%, compared to $31.7 million for the six months ended March 31, 2020. 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 March 31, 2020,2021, cash and cash equivalents was $29.4$21.0 million, and there was $49.0$48.7 million available for borrowing under our CreditRevolving Facility, net of undrawn, issued and outstanding letters of credit of $1.0$1.3 million. |
| | ● | New store growth. We opened twoone new storesstore during the three months ended March 31, 2020.2021. We opened fourtwo new stores during the six months ended March 31, 2020.2021. We operated a total of 157161 stores as of March 31, 2020.2021. We plan to open a total of sixthree to sevenfour new stores in fiscal year 2020,2021, which would result in an annual new store growth rate of 3.9%1.9% to 4.6%2.5% for fiscal year 2020. 2021. |
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| ● | Store Relocations and Relocations/Remodels. We did not relocate or remodel any storesrelocated/remodeled one store during the three and six months ended March 31, 2020.2021. |
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:
| ● | COVID-19 pandemic. On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. In response to the COVID-19 pandemic, federal, state and local authorities have implemented a number of public health mandates intended to prevent the spread of the virus, including social distancing, quarantine, wearing face coverings, and “stay-at-home” measures. While significant efforts to distribute COVID-19 vaccines to the public have commenced across the United States and many states have reopened their economies by easing restrictions, certain of these public health mandates have had an adverse impact on the U.S. economy. The long-term economic impact of the COVID-19 pandemic is unknown at this time. |
| | ● | Impact of the COVID-19 pandemic on our operations. We believe we have acted proactively in response to the COVID-19 pandemic and the resulting government mandates. To date, all of our stores have been deemed “essential businesses” by relevant government authorities and have continued operating since the start of the COVID-19 pandemic. We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public health measures have been implemented by states across our footprint and customers have adjusted to these new circumstances by consuming more food at home as restaurants have not fully reopened to pre-pandemic levels. The COVID-19 pandemic and government mandates have also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party. |
| ● | Future impact of the COVID-19 pandemic. We believe our proactive response to the COVID-19 pandemic has resulted in increased customer loyalty, but there can be no assurance we will continue to experience elevated levels of net sales, in particular, when the pandemic subsides and government mandates are lifted. We expect the impact of the COVID-19 pandemic and government mandates on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, including economic stabilization efforts, and the long-term effect the pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic and government mandates make it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.- Risk Factors” in our Form 10-K. Additional information regarding the impact of the COVID-19 pandemic and government mandates on our business and results of operations is provided below in this MD&A. |
| ● | Impact of broader economic trends.trends and political environment. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer debt, interest rates, periods of recession and growth, the price of commodities, (including oil prices), the political environment and consumer confidence. See “COVID-19 Pandemic” below for a discussion of the impact of the COVID-19 pandemic on the U.S. economy and our business. |
| | ● | 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. AsWe expect the rate of new store unit growth in the foreseeable future to be comparable to recent years, depending on economic and business conditions and other factors, including the impact of the COVID-19 pandemic and related government mandates. |
| ● | Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up and delivery options. 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 results of operations have beencommitment to carrying only carefully vetted, affordably priced and may continue to be materially adversely affected basedhigh-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the timingindustry and number of new stores we open, their initial sales and new lease costs. The length of time it takes forprovide a new store to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market, the strength of store management 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 defined as stores that have been open for any part of five fiscal years or longer.competitive advantage. |
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| | 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 into the foreseeable future. Our financial results for the three and six months ended March 31, 2020 reflect the effects of these factors, and we anticipate future periods will be similarly impacted. |
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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 reductions or changes in our offerings, wouldcould 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. |
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| Increased 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; dietary supplement retailers such as GNC and The Vitamin Shoppe; online retailers such as Amazon; meal delivery services; independent health food stores; drug stores; farmers’ markets; food co-ops; 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, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up and delivery options. 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 nutritional education, differentiate us in the industry and provide a competitive advantage.
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COVID-19 Pandemic
On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. National, state and local authorities have recommended social distancing and imposed or recommended quarantine, isolation and “stay-at-home” measures on large portions of the population, including mandatory business closures. These measures are expected to have a serious adverse impact on the U.S. economy. Many economists expect the United States to enter a recession as a result of the pandemic. The duration and severity of such recession are unknown at this time. The effectiveness of the U.S government’s economic stabilization efforts in response to the pandemic, including proposed government payments to affected citizens and industries, is uncertain.
To date, all of our stores have been deemed an “essential business” by relevant government authorities and have continued operating since the start of the COVID-19 pandemic. We believe we have acted proactively in response to the COVID-19 pandemic. The steps we have taken to protect the health and wellbeing of our customers and employees (whom we refer to as the “good4u Crew” or “Crew”) as a result of the pandemic include:
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| Enforcing social distancing in all parts of our stores, including in checkout lines;
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| Sourcing and repackaging bulk hand sanitizer for use by Crew members in our stores;
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| Hiring approximately 650 temporary Crew members to handle increased customer traffic and operational demands at our stores and to assist with cleaning and stocking our stores;
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| Paying higher wages and bonuses to our Crew members;
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| Expanding the healthcare coverage and leave and paid time off options made available to our Crew members;
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| Providing daily immune and stress support supplements to our Crew members at no cost;
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| Assigning a store Crew member to clean and sanitize shopping carts at the entrance to our stores;
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| Producing more than 6,000 face masks and requiring store Crew members to wear them while working;
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| Providing disposable gloves to our store Crew members;
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| Installing plexiglass shields at substantially all checkout registers;
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| Frequently cleaning the most touched surfaces in all stores, including the checkout areas and payment keypads;
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| Limiting the number of customers allowed in the company’s stores at one time;
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| Requiring customers to bag their own purchases;
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| Closing all stores early so they can be restocked and thoroughly cleaned;
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| Designating specific shopping hours for higher risk individuals twice a week; and
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| Establishing guidelines and practices to protect our corporate office Crew members.
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Starting in late February 2020 through March 31, 2020, we experienced unprecedented levels of net sales due to the COVID-19 outbreak as stay-at-home measures were implemented by states across our footprint, customers stocked-up on essential items and dining out options were constrained or eliminated. During the three months ended March 31, 2020, the COVID-19 pandemic also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party.
Although net sales in April 2020 moderated from the peak levels experienced in March 2020, comparable store sales for April 2020 were significantly higher than in the same period in fiscal year 2019. During April 2020, average transaction count declined compared to April 2019, as stay-at-home directives generally remained in place in our markets, resulting in less frequent customer shopping trips. However, the decline in average transaction count during April 2020 was more than offset by an increase in average transaction size.
Since the COVID-19 outbreak, we have 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 and such disruptions have moderated, although certain products remain in relatively short supply or are unavailable.
While we are closely monitoring the economic impact of the COVID-19 pandemic on our business, the long-term impact of the pandemic is unknown at this time. We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic makes it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.-Risk Factors.”
Additional information regarding the impact of the COVID-19 pandemic on our business and results of operations is provided below in this MD&A.
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 profitably expand. These factors include a loyal customer base, increasing basket size, reputation for cleanliness, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education and a convenient and efficient shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.
We currently expect the rate of new store unit growth in the foreseeable future to dependbe comparable to recent years, depending on economic and business conditions and other factors, including the impact of the COVID-19 pandemic. During the past few years, we have enhanced our infrastructure to enable us to support growth. In addition, in recent years we believe we have enhanced customer loyalty through our {N}power®customer loyalty program.
pandemic and related government mandates. Over the long term, 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 industry and regional and general economic conditions. In the future, we believe there are opportunities for increased leverage inof costs such as administrative expenses, as well asand increased economieseconomics of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy expenses)costs), our ability to leverage costs may be 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.10-K.
Key Financial Metrics in Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:
Net sales
Our net sales are comprised of gross sales net of discounts, in-house coupons 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 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 2020 are stores that opened during or before fiscal year 2015). 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 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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| | ● | Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, return transactions and exchange transactions. |
| | ● | 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. Rent payments for leases classified as finance lease obligations (previously classified as capital and financing 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.
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-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 land improvements, leasehold improvements, fixtures and equipment and computer hardware and software. 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, generally related to store relocations.relocations, as well as store closure and lease termination costs. 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 minimum 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-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of Sarbanes-Oxley,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 and relocation expenses may include rent expense, salaries, advertising, supplies and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as capital or financingfinance leases, nowe recognize pre-opening rent expense is recognized.interest 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.
Interest expense,, net
Interest expense consists of the interest associated with finance lease obligations (previously classified as capital and financing lease obligations) and our Credit Facility, net of capitalized interest, and interest income.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:
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| | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
Statements of Income Data:* | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | | 100.0 | % | | | 100.0 | | | | 100.0 | | | | 100.0 | | | 100.0 | % | | 100.0 | | | 100.0 | | | 100.0 | |
Cost of goods sold and occupancy costs | | | 72.0 | | | | 73.0 | | | | 72.7 | | | | 73.1 | | | | 72.3 | | | | 72.0 | | | | 72.4 | | | | 72.7 | |
Gross profit | | | 28.0 | | | | 27.0 | | | | 27.3 | | | | 26.9 | | | 27.7 | | | 28.0 | | | 27.6 | | | 27.3 | |
Store expenses | | 20.5 | | | | 21.8 | | | | 21.3 | | | | 22.0 | | | 22.5 | | | 20.5 | | | 22.7 | | | 21.3 | |
Administrative expenses | | | 2.5 | | | | 2.5 | | | | 2.5 | | | | 2.5 | | | 2.5 | | | 2.5 | | | 2.6 | | | 2.5 | |
Pre-opening and relocation expenses | | | 0.2 | | | | 0.1 | | | | 0.2 | | | | 0.2 | | | | 0.1 | | | | 0.2 | | | | 0.1 | | | | 0.2 | |
Operating income | | | 4.8 | | | | 2.7 | | | | 3.2 | | | | 2.2 | | | 2.6 | | | 4.8 | | | 2.3 | | | 3.2 | |
Interest expense, net | | | (0.2 | ) | | | (0.6 | ) | | | (0.2 | ) | | | (0.6 | ) | | | (0.2 | ) | | | (0.2 | ) | | | (0.2 | ) | | | (0.2 | ) |
Income before income taxes | | | 4.6 | | | | 2.1 | | | | 3.0 | | | | 1.7 | | | 2.4 | | | 4.6 | | | 2.1 | | | 3.0 | |
Provision for income taxes | | | (1.1 | ) | | | (0.4 | ) | | | (0.7 | ) | | | (0.3 | ) | | | (0.5 | ) | | | (1.1 | ) | | | (0.5 | ) | | | (0.7 | ) |
Net income | | | 3.5 | % | | | 1.7 | | | | 2.3 | | | | 1.3 | | | | 1.8 | % | | | 3.5 | | | | 1.6 | | | | 2.3 | |
__________________________ | | | | | | | | | | | | | | | | | | | | | | | | |
*Figures may not sum due to rounding. | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Number of stores at end of period | | | 157 | | | | 152 | | | | 157 | | | | 152 | | | 161 | | | 157 | | | 161 | | | 157 | |
Number of new stores opened during the period | | | 2 | | | | 1 | | | | 4 | | | | 5 | | | 1 | | | 2 | | | 2 | | | 4 | |
Number of stores relocated or remodeled during the period | | | 0 | | | | 1 | | | | 0 | | | | 2 | | |
| | | |
Number of stores relocated/remodeled during the period | | | 1 | | | 0 | | | 1 | | | 0 | |
Number of stores closed during the period | | | 0 | | | | 0 | | | | 0 | | | | 1 | | | 0 | | | 0 | | | 0 | | | 0 | |
Twelve-month store unit growth rate | | | 3.3 | % | | | 4.8 | | | | 3.3 | | | | 4.8 | | | 2.5 | % | | 3.3 | | | 2.5 | | | 3.3 | |
Change in comparable store sales | | | 18.4 | | | | 2.9 | | | | 10.3 | | | | 4.2 | | |
Change in daily average comparable store sales | | | 17.0 | | | | 2.9 | | | | 9.7 | | | | 4.2 | | | (7.0 | ) % | | 17.0 | | | 2.0 | | | 9.7 | |
Change in mature store sales | | | 16.7 | | | | 1.8 | | | | 8.8 | | | | 2.7 | | |
Change in daily average mature store sales | | | 15.4 | | | | 1.8 | | | | 8.2 | | | | 2.7 | | |
Three months ended March 31, 20202021 compared to the three months ended March 31, 20192020
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
| | | Three months ended March 31, | | | Change In | | | Three months ended March 31, | | | Change In | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | | | 2021 | | | 2020 | | | Dollars | | | Percent | |
Statements of Income Data: | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | | $ | 277,524 | | | | 230,447 | | | | 47,077 | | | | 20.4 | % | | $ | 259,198 | | | 277,524 | | | (18,326 | ) | | (6.6 | )% |
Cost of goods sold and occupancy costs | | | 199,701 | | | | 168,233 | | | | 31,468 | | | | 18.7 | | | | 187,371 | | | | 199,701 | | | | (12,330 | ) | | (6.2 | ) |
Gross profit | | | 77,823 | | | | 62,214 | | | | 15,609 | | | | 25.1 | | | 71,827 | | | 77,823 | | | (5,996 | ) | | (7.7 | ) |
Store expenses | | | 56,878 | | | | 50,175 | | | | 6,703 | | | | 13.4 | | | 58,422 | | | 56,878 | | | 1,544 | | | 2.7 | |
Administrative expenses | | | 7,038 | | | | 5,761 | | | | 1,277 | | | | 22.2 | | | 6,358 | | | 7,038 | | | (680 | ) | | (9.7 | ) |
Pre-opening and relocation expenses | | | 650 | | | | 157 | | | | 493 | | | | 314.0 | | | | 341 | | | | 650 | | | | (309 | ) | | (47.5 | ) |
Operating income | | | 13,257 | | | | 6,121 | | | | 7,136 | | | | 116.6 | | | 6,706 | | | 13,257 | | | (6,551 | ) | | (49.4 | ) |
Interest expense, net | | | (516 | ) | | | (1,280 | ) | | | 764 | | | | (59.7 | ) | | | (603 | ) | | | (516 | ) | | | (87 | ) | | | 16.9 | |
Income before income taxes | | | 12,741 | | | | 4,841 | | | | 7,900 | | | | 163.2 | | | 6,103 | | | 12,741 | | | (6,638 | ) | | (52.1 | ) |
Provision for income taxes | | | (3,023 | ) | | | (981 | ) | | | (2,042 | ) | | | 208.2 | | | | (1,399 | ) | | | (3,023 | ) | | | 1,624 | | | (53.7 | ) |
Net income | | $ | 9,718 | | | | 3,860 | | | | 5,858 | | | | 151.8 | | | $ | 4,704 | | | | 9,718 | | | | (5,014 | ) | | (51.6 | ) |
Net sales
Net sales increased $47.1decreased $18.3 million, or 20.4%6.6%, to $259.2 million for the three months ended March 31, 2021 compared to $277.5 million for the three months ended March 31, 2020, primarily due to a $22.1 million decrease in comparable store sales and a $3.8 million increase in new store sales. Daily average comparable store sales decreased 7.0% for the three months ended March 31, 2021 compared to $230.4the three months ended March 31, 2020. The daily average comparable store sales decrease resulted from an 8.0% increase in daily average transaction size, offset by a 13.9% decrease in daily average transaction count. In the three months ended March 31, 2021, customers reduced their frequency of shopping trips as a result of social distancing practices associated with the COVID-19 pandemic and related government mandates, but increased their overall basket size per shopping trip. Comparable store average transaction size was $44.81 for the three months ended March 31, 2021. The decrease in net sales during the three months ended March 31, 2021 was primarily driven by the unprecedented level of net sales we experienced during the three months ended March 31, 2020, as our customers stockpiled groceries during the initial phase of the COVID-19 pandemic. While our net sales during the three months ended March 31, 2021 benefited from customers’ response to the COVID-19 pandemic and related government mandates, this trend moderated from the unprecedented levels experienced during the prior year period. Also contributing to the decrease in net sales during the three months ended March 31, 2021 was the adverse impact of severe cold and ice storms on our operations in the South Central and Pacific Northwest states.
Gross profit
Gross profit decreased $6.0 million, or 7.7%, to $71.8 million for the three months ended March 31, 2019,2021 compared to $77.8 million for the three months ended March 31, 2020, primarily driven by the decreased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin decreased to 27.7% for the three months ended March 31, 2021 compared to 28.0% for the three months ended March 31, 2020. The decrease in gross margin during the three months ended March 31, 2021 was primarily driven by an increase in store occupancy expenses, as a percentage of net sales, partially offset by a modest improvement in product margin.
Store expenses
Store expenses increased $1.5 million, or 2.7%, to $58.4 million for the three months ended March 31, 2021 compared to $56.9 million for the three months ended March 31, 2020. Store expenses as a percentage of net sales were 22.5% and 20.5% for the three months ended March 31, 2021 and 2020, respectively. The increase in store expenses as a percentage of net sales is attributed to the deleverage associated with the decrease in sales volume and increased labor related expenses.
Administrative expenses
Administrative expenses decreased $0.7 million, or 9.7%, to $6.4 million for the three months ended March 31, 2021 compared to $7.0 million for the three months ended March 31, 2020. Administrative expenses as a percentage of net sales were 2.5% for each of the three months ended March 31, 2021 and 2020.
Pre-opening and relocation expenses
Pre-opening and relocation expenses decreased $0.3 million, or 47.5%, to $0.3 million for the three months ended March 31, 2021 compared to $0.7 million for the three months ended March 31, 2020, due to the impact of the number and timing of new store openings and relocations. We opened one new store during the three months ended March 31, 2021 compared to opening two new stores during the three months ended March 31, 2020. We did not relocate any stores during each of the three months ended March 31, 2021 and 2020. Pre-opening and relocation expenses as a percentage of net sales were 0.1% and 0.2% for the three months ended March 31, 2021 and 2020, respectively.
Interest expense, net
Interest expense, net of capitalized interest, was $0.6 million in the three months ended March 31, 2021 compared to $0.5 million in the three months ended March 31, 2020.
Income taxes
Income tax expense decreased $1.6 million for the three months ended March 31, 2021 to $1.4 million compared to $3.0 million for the three months ended March 31, 2020. The Company’s effective income tax rate was approximately 22.9% and 23.7% for the three months ended March 31, 2021 and 2020, respectively.
Net income
Net income was $4.7 million, or $0.21 diluted earnings per share, for the three months ended March 31, 2021 compared to $9.7 million, or $0.43 diluted earnings per share, for the three months ended March 31, 2020 primarily driven by the decrease in sales volumes and increase in store expenses.
Six months ended March 31, 2021 compared to the six months ended March 31, 2020
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 | |
| | | 2021 | | | 2020 | | | Dollars | | | Percent | |
Statements of Income Data: | | | | | | | | | | | | | | | | |
Net sales | | $ | 524,243 | | | | 507,554 | | | | 16,689 | | | | 3.3 | % |
Cost of goods sold and occupancy costs | | | 379,391 | | | | 369,207 | | | | 10,184 | | | | 2.8 | |
Gross profit | | | 144,852 | | | | 138,347 | | | | 6,505 | | | | 4.7 | |
Store expenses | | | 118,752 | | | | 108,305 | | | | 10,447 | | | | 9.6 | |
Administrative expenses | | | 13,662 | | | | 12,857 | | | | 805 | | | | 6.3 | |
Pre-opening and relocation expenses | | | 530 | | | | 1,080 | | | | (550 | ) | | | (50.9 | ) |
Operating income | | | 11,908 | | | | 16,105 | | | | (4,197 | ) | | | (26.1 | ) |
Interest expense, net | | | (1,113 | ) | | | (1,052 | ) | | | (61 | ) | | | 5.8 | |
Income before income taxes | | | 10,795 | | | | 15,053 | | | | (4,258 | ) | | | (28.3 | ) |
Provision for income taxes | | | (2,459 | ) | | | (3,467 | ) | | | 1,008 | | | | (29.1 | ) |
Net income | | $ | 8,336 | | | | 11,586 | | | | (3,250 | ) | | | (28.1 | ) |
Net sales
Net sales increased $16.7 million, or 3.3%, to $524.2 million for the six months ended March 31, 2021 compared to $507.6 million for the six months ended March 31, 2020, primarily due to a $42.3$7.1 million increase in comparable store sales and a $4.8$9.6 million increase in new store sales. Daily average comparable store sales increased 17.0%2.0% for the threesix months ended March 31, 20202021 compared to the threesix months ended March 31, 2019.2020. The daily average comparable store sales increase resulted from a 13.1%14.1% increase in daily average transaction size, andpartially offset by a 3.5% increase10.6% decrease in daily average transaction count. In the six months ended March 31, 2021, customers reduced their frequency of shopping trips as a result of social distancing practices associated with the COVID-19 pandemic and related government mandates, but increased their overall basket size per shopping trip. Comparable store average transaction size was $41.60$44.98 for the threesix months ended March 31, 2020. Daily average mature store2021. The increase in net sales increased 15.4% forduring the threesix months ended March 31, 2020 compared to the three months ended March 31, 2019. The increase in comparable store sales during the three months ended March 31, 20202021 was primarily driven by significantly increased net sales starting in late February 2020 as a result of the COVID-19 outbreak. Prior to late February 2020, comparable store sales for the second quarter were generally consistent with the prior fiscal quarter. During March 2020, our comparable store sales increased by approximately 40% compared to March 2019, driven by our customers’ response to the COVID-19 outbreak.pandemic and related government mandates, partially offset by the adverse impact of severe cold and ice storms on our operations in the South Central and Pacific Northwest states. Also contributing to the increase in comparable storenet sales during the threesix months ended March 31, 20202021 were marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.
Gross profit
Gross profit increased $15.6$6.5 million, or 25.1%4.7%, to $77.8$144.9 million for the threesix months ended March 31, 20202021 compared to $62.2$138.3 million for the threesix months ended March 31, 2019,2020, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic. To a lesser extent, the increase in grossvolumes. Gross profit reflected an increase in the number of stores.reflects earnings after product and occupancy costs. Gross margin increased to 28.0%27.6% for the threesix months ended March 31, 20202021 compared to 27.0%27.3% for the threesix months ended March 31, 2019.2020. The increase in gross margin during the threesix months ended March 31, 20202021 was primarily driven by an improved product margin and a decrease in store occupancy and shrink expenses, both as a percentage of sales, and a shift in sales mix to higher margin products.net sales.
We had 21 store leases that were classified as capital and financing lease obligations for the three months ended March 31, 2019. As of September 30, 2019, 23 leases were classified as capital and financing lease obligations. As a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and (iii) six previous capital lease obligations were classified as finance leases. As of March 31, 2020, we had 17 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as interest expense.
Store expenses
Store expenses increased $6.7$10.4 million, or 13.4%9.6%, to $56.9$118.8 million for the threesix months ended March 31, 20202021 compared to $50.2$108.3 million for the threesix months ended March 31, 2019. The increase in store expenses during2020. In the threesix months ended March 31, 2020 was2021, we recorded $0.4 million in lease exit costs, primarily driven by our hiring of approximately 650 temporary Crew members to support operational demands and wage increases and bonuses for our store Crew members, all related to a lease termination fee, associated with one store that closed in the COVID-19 pandemic.first quarter of fiscal year 2019. Store expenses as a percentage of net sales were 20.5%22.7% and 21.8%21.3% for the threesix months ended March 31, 20202021 and 2019,2020, respectively. The decreaseincrease in store expenses as a percentage of net sales wasis primarily attributableattributed to enhanced leverage of store expenses due to the increased sales volumes resulting from the COVID-19 pandemic, partially offset by the adoption of ASC 842.labor related expenses.
Administrative expenses
Administrative expenses increased $1.3$0.8 million, or 22.2%6.3%, to $7.0$13.7 million for the threesix months ended March 31, 20202021 compared to $5.8$12.9 million for the threesix months ended March 31, 2019. The increase in administrative expenses during the three months ended March 31, 2020 was primarily driven by higher compensation, including bonus expense, and an increase in hardware, software and communications expenses.2020. Administrative expenses as a percentage of net sales were 2.6% and 2.5% for each of the threesix months ended March 31, 2021 and 2020, and 2019. respectively.
Pre-opening and relocation expenses
Pre-opening and relocation expenses increased $0.5decreased $0.6 million, or 314.0%50.9%, to $0.7$0.5 million for the threesix months ended March 31, 20202021 compared to $0.2$1.1 million for the threesix months ended March 31, 2019,2020, due to the impact of the number and timing of new store openings and relocations. We opened two new stores during the three months ended March 31, 2020 compared to opening one new store and relocating one store during the three months ended March 31, 2019. Pre-opening and relocation expenses as a percentage of sales were 0.2% and 0.1% for the three months ended March 31, 2020 and 2019, respectively.
Interest expense, net
Interest expense, net of capitalized interest, decreased $0.8 million, or 59.7%, for the three months ended March 31, 2020 compared to the three months ended March 31, 2019. The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the three months ended March 31, 2020 as well as a decrease in the average outstanding balance owing under our Credit Facility. The decrease in interest expense attributable to the lower number of finance leases is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.
Income taxes
Income tax expense increased $2.0 million for the three months ended March 31, 2020 to $3.0 million compared to $1.0 million for the three months ended March 31, 2019. The Company’s effective income tax rate was approximately 23.7% and 20.3% for the three months ended March 31, 2020 and 2019, respectively.
Net income
Net income was $9.7 million, or $0.43 diluted earnings per share, for the three months ended March 31, 2020 compared to $3.9 million, or $0.17 diluted earnings per share, for the three months ended March 31, 2019. The increase in net income during the three months ended March 31, 2020 was primarily attributable to the significant growth in net sales and margin improvement as a result of the impact of the COVID-19 outbreak.
Six months ended March 31, 2020 compared to the six months ended March 31, 2019
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 | |
| | | 2020 | | | 2019 | | | Dollars | | | Percent | |
Statements of Income Data: | | | | | | | | | | | | | | | | |
Net sales | | $ | 507,554 | | | | 451,962 | | | | 55,592 | | | | 12.3 | % |
Cost of goods sold and occupancy costs | | | 369,207 | | | | 330,602 | | | | 38,605 | | | | 11.7 | |
Gross profit | | | 138,347 | | | | 121,360 | | | | 16,987 | | | | 14.0 | |
Store expenses | | | 108,305 | | | | 99,298 | | | | 9,007 | | | | 9.1 | |
Administrative expenses | | | 12,857 | | | | 11,076 | | | | 1,781 | | | | 16.1 | |
Pre-opening and relocation expenses | | | 1,080 | | | | 829 | | | | 251 | | | | 30.3 | |
Operating income | | | 16,105 | | | | 10,157 | | | | 5,948 | | | | 58.6 | |
Interest expense, net | | | (1,052 | ) | | | (2,535 | ) | | | 1,483 | | | | (58.5 | ) |
Income before income taxes | | | 15,053 | | | | 7,622 | | | | 7,431 | | | | 97.5 | |
Provision for income taxes | | | (3,467 | ) | | | (1,565 | ) | | | (1,902 | ) | | | 121.5 | |
Net income | | $ | 11,586 | | | | 6,057 | | | | 5,529 | | | | 91.3 | |
Net sales
Net sales increased $55.6 million, or 12.3%, to $507.6 million for the six months ended March 31, 20202021 compared to $452.0 million for the six months ended March 31, 2019, primarily due to a $46.4 million increase in comparable store sales and a $9.4 million increase in new store sales, partially offset by a $0.2 million decrease in sales from one store that closed during the first quarter of fiscal 2019. Daily average comparable store sales increased 9.7% for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The daily average comparable store sales increase resulted from a 8.1% increase in average transaction size and a 1.5% increase in daily average transaction count. Comparable store average transaction size was $39.50 for the six months ended March 31, 2020. Daily average mature store sales increased 8.2% for the six months ended March 31, 2020 compared to the six months ended March 31, 2019. The increase in comparable store sales during the six months ended March 31, 2020 was primarily driven by significantly increased net sales starting in late February 2020 as a result of the COVID-19 outbreak. Also contributing to the increase in comparable store sales during the six months ended March 31, 2020 were marketing initiatives, promotional pricing campaigns and increased membership in and usage of the {N}power customer loyalty program.
Gross profit
Gross profit increased $17.0 million, or 14.0%, to $138.3 million for the six months ended March 31, 2020 compared to $121.4 million for the six months ended March 31, 2019, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic. To a lesser extent, the increased in gross profit reflected an increase in the number of stores. Gross margin increased to 27.3% for the six months ended March 31, 2020 from 26.9% for the six months ended March 31, 2019. The increase in gross margin during the six months ended March 31, 2020 was primarily driven by a decrease in store occupancy and shrink expenses, both as a percentage of sales, and a shift in sales mix to higher margin products.
We had 21 store leases that were classified as capital and financing lease obligations for the six months ended March 31, 2019. As of September 30, 2019, 23 leases were classified as capital and financing lease obligations. As a result of our adoption of ASC 842 effective October 1, 2019: (i) eight previous capital financing lease obligations were derecognized and reclassified as operating leases; (ii) 10 previous capital finance leases were classified as finance leases; and (iii) six previous capital lease obligations were classified as finance leases. As of March 31, 2020, we had 17 leases that were classified as finance leases. The leases that were reclassified to operating leases now generate rent expense, which is recorded as occupancy expense, rather than a reduction of the lease obligation and as interest expense.
Store expenses
Store expenses increased $9.0 million, or 9.1%, to $108.3 million for the six months ended March 31, 2020 compared to $99.3 million for the six months ended March 31, 2019. The increase in store expenses during the six months ended March 31, 2020 was primarily driven by our hiring of approximately 650 temporary Crew members to support operational demands and wage increases and bonuses for our store Crew members, all related to the COVID-19 pandemic. Store expenses as a percentage of sales were 21.3% and 22.0% for the six months ended March 31, 2020 and 2019, respectively. The decrease in store expenses as a percentage of sales was primarily attributable to enhanced leverage of store expenses due to the increased sales volumes resulting from the COVID-19 pandemic, partially offset by the adoption of ASC 842.
Administrative expenses
Administrative expenses increased $1.8 million, or 16.1%, to $12.9 million for the six months ended March 31, 2020 compared to $11.1 million for the six months ended March 31, 2019. The increase in administrative expenses during the six months ended March 31, 2020 was primarily driven by higher compensation, including bonus expense, and an increase in hardware, software and communication expenses. Administrative expenses as a percentage of sales were 2.5% for each of the six months ended March 31, 2020 and 2019.
Pre-opening and relocation expenses
Pre-opening and relocation expenses increased $0.3 million, or 30.3%, to $1.1 million for the six months ended March 31, 2020 compared to $0.8 million for the six months ended March 31, 2019, due to the impact of the number and timing of new store openings and relocations. We openedopening four new stores during the six months ended March 31, 2020 compared to opening five new2020. We did not relocate any stores and relocating two stores during each of the six months ended March 31, 2019.2021 and 2020. Pre-opening and relocation expenses as a percentage of net sales were 0.1% and 0.2% for each of the six months ended March 31, 2021 and 2020, and 2019. respectively.
Interest expense
Interest expense, net of capitalized interest, decreased $1.5remained flat at $1.1 million or 58.5%, for each of the six months ended March 31, 2020 compared to the six months ended2021 and March 31, 2019. The decrease in interest expense is primarily due to a decrease in the number of finance leases (formerly classified as capital and financing leases) during the six months ended March 31, 2020 as well as a decrease in the average outstanding balance owing under our Credit Facility. The decrease in interest expense attributable to the lower number of finance leases is consistent with the increase in occupancy costs referred to above given the number of derecognized previous capital finance leases that have been reclassified as operating leases and that now generate straight-line rent expense rather than reduction of the lease obligation and interest expense.2020.
Income taxes
Income tax expense increased $1.9decreased $1.0 million for the six months ended March 31, 20202021 to $3.5$2.5 million compared to $1.6$3.5 million for the six months ended March 31, 2019.2020. The Company’s effective income tax rate was approximately 23.0%22.8% and 20.5%23.0% for the six months ended March 31, 20202021 and 2019,2020, respectively.
Net income
Net income was $8.3 million, or $0.37 diluted earnings per share, for the six months ended March 31, 2021 compared to $11.6 million, or $0.51 diluted earnings per share, for the six months ended March 31, 2020 compared to $6.1 million, or $0.27 diluted earnings per share, for the six months ended March 31, 2019. The increase in net income during the six months ended March 31, 2020 was primarily attributable to the significant growth in net sales and margin improvement as a result of the impact of the COVID-19 outbreak.2020.
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, and 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 and lease exit costs and non-recurring items. The adjustment to EBITDA for the six months ended March 31, 2021 related to lease exit costs associated with one store that closed in the first quarter of fiscal year 2019.
The following table reconciles net income to EBITDA for the periods presented,and Adjusted EBITDA, dollars in thousands:
| | | Three months ended
March 31, | | | Six months ended
March 31, | | | Three months ended
March 31, | | | Six months ended
March 31, | |
| | | 2020 | | | 2019 | | | 2020 | | | 2019 | | | 2021 | | | 2020 | | | 2021 | | | 2020 | |
Net income | | $ | 9,718 | | | | 3,860 | | | | 11,586 | | | | 6,057 | | | $ | 4,704 | | | 9,718 | | | 8,336 | | | 11,586 | |
Interest expense, net | | | 516 | | | | 1,280 | | | | 1,052 | | | | 2,535 | | | 603 | | | 516 | | | 1,113 | | | 1,052 | |
Provision for income taxes | | | 3,023 | | | | 981 | | | | 3,467 | | | | 1,565 | | | 1,399 | | | 3,023 | | | 2,459 | | | 3,467 | |
Depreciation and amortization | | | 7,888 | | | | 7,290 | | | | 15,595 | | | | 14,576 | | | | 7,420 | | | | 7,888 | | | | 15,057 | | | | 15,595 | |
EBITDA | | $ | 21,145 | | | | 13,411 | | | | 31,700 | | | | 24,733 | | | 14,126 | | | 21,145 | | | 26,965 | | | 31,700 | |
Lease exit costs | | | | — | | | | — | | | | 405 | | | | — | |
Adjusted EBITDA | | | $ | 14,126 | | | | 21,145 | | | | 27,370 | | | | 31,700 | |
EBITDA decreased 33.2% to $14.1 million in the three months ended March 31, 2021 compared to $21.1 million for the three months ended March 31, 2020. EBITDA decreased 14.9% to $27.0 million in the six months ended March 31, 2021 compared to $31.7 million for the six months ended March 31, 2020. EBITDA as a percentage of net sales was 5.4% and 7.6% in the three months ended March 31, 2021 and 2020, respectively. EBITDA as a percentage of net sales was 5.1% and 6.2% in the six months ended March 31, 2021 and 2020, respectively.
Adjusted EBITDA decreased 33.2% to $14.1 million in the three months ended March 31, 2021 compared to $21.1 million for the three months ended March 31, 2020. Adjusted EBITDA decreased 13.7% to $27.4 million in the six months ended March 31, 2021 compared to $31.7 million for the six months ended March 31, 2020. Adjusted EBITDA as a percentage of net sales was 5.4% and 7.6% in the three months ended March 31, 2021 and 2020, respectively. Adjusted EBITDA as a percentage of net sales was 5.2% and 6.2% in the six months ended March 31, 2021 and 2020, respectively.
EBITDA increased 57.7% to $21.1 million in the three months ended March 31, 2020 compared to $13.4 million for the three months ended March 31, 2019. EBITDA increased 28.2% to $31.7 million in the six months ended March 31, 2020 compared to $24.7 million for the six months ended March 31, 2019. The increase in EBITDA was primarily driven by the significant growth in net income resulting from the increase in net sales starting in late February 2020 as a result of the COVID-19 outbreak.and Adjusted EBITDA as a percentage of sales was 7.6% and 5.8% in the three months ended March 31, 2020 and 2019, respectively. EBITDA as a percentage of sales was 6.2% and 5.5% in the six months ended March 31, 2020 and 2019, respectively. The number of stores with finance leases (previously classified as capital and financing lease obligations) decreased from 21 as of March 31, 2019 to 17 as of March 31, 2020 as a result of our adoption of ASC 842 effective October 1, 2019. Finance leases have a positive impact on EBITDA because, as discussed above, they result in lower cost of goods sold and occupancy costs. Conversely, the greater number of stores with operating leases during the six months ended March 31, 2020, led to higher cost of goods sold and occupancy costs, which negatively impacted both EBITDA and EBITDA as a percentage of sales.supplemental measures
Management believes some investors’ understanding of our performance is enhanced by including EBITDA aand Adjusted EBITDA, non-GAAP financial measure.measures. We believe EBITDA providesand Adjusted EBITDA provide additional information about: (i) our operating performance, because it assists us in comparing the operating performance of our stores on a consistent basis, as it removes 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.
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 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 measure of EBITDA and Adjusted EBITDA may not be directly comparable to those of other companies. Items excluded from 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, 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 rentsingle lease expense for leases classified as capital and financing lease obligations;finance leases; |
| | ● | EBITDA doesand Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| | ● | 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 measure 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 the Credit Facility. Our Credit Facility consists of the $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, debt service, corporate taxes and corporate taxes.cash dividends. As of March 31, 2020,2021, we had $29.4$21.0 million in cash and cash equivalents, as well as $49.0$48.7 million available for borrowing under our CreditRevolving Facility. We are not currently receiving, and do not currently intend to apply for, direct financial assistance under any federal or state programs implemented as a result ofOn November 18, 2020, we entered into the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security (CARES) Act.$35.0 million Term Loan Facility maturing November 13, 2024.
In May 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. In May 2018, ourOur Board authorized a two-year extension ofsubsequently extended the share repurchase program. On May 4, 2020, our Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program, which will terminate on May 31, 2022. We did not repurchase any shares during the three or six months ended March 31, 2020. Between April 1, 2020 and May 4, 2020 (the latest practicable date for making the determination), we did not repurchase any additional shares of our common stock.2021. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million. We expect funding ofPotential future share repurchases will come fromunder the share repurchase program could be funded by operating cash flow, excess cash and/balances or borrowings under the Creditour Revolving Facility. The timing and the number of shares repurchased will be dictated by our capital needs and stock market conditions.
We paid a special cash dividend of $2.00 per share and a quarterly cash dividend of $0.07 per share of common stock in eachthe three months ended December 31, 2020. We paid a quarterly cash dividend of $0.07 per share of common stock in the first two quarters of fiscal year 2020.three months ended March 31, 2021. On May 6, 2020,5, 2021, our Board approved the payment of a quarterly cash dividend of $0.07 per share of common stock to be paid on June 16, 20202021 to stockholders of record as of the close of business on June 1, 2020.2021.
The opening ofWe plan to continue to open new stores, which may require us to borrow additional amounts under the CreditRevolving Facility. Subject to economic and business conditions, we plan to spend approximately $8 million to $13 million on capital expenditures during the remainder of fiscal year 2020 in connection with two to three new store openings and one store relocation. We are closely monitoring the impact of the COVID-19 pandemic on our liquidity and cash generated from operations. Currently, 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 for at least the next twelve months. 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.
Typically, our new stores require an upfront capital investment of approximately $2.1 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 $0.2 million.
Set out belowThe following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:
| | | Six months ended March 31, | | | Six months ended March 31, | |
| | | 2020 | | | 2019 | | | 2021 | | | 2020 | |
Net cash provided by operating activities | | $ | 53,360 | | | | 22,593 | | | $ | 17,305 | | | 53,360 | |
Net cash used in investing activities | | | (20,131 | ) | | | (17,081 | ) | | (9,541 | ) | | (20,131 | ) |
Net cash used in financing activities | | | (10,069 | ) | | | (3,627 | ) | | | (15,321 | ) | | | (10,069 | ) |
Net increase in cash and cash equivalents | | | 23,160 | | | | 1,885 | | |
Net (decrease) increase in cash and cash equivalents | | | (7,557 | ) | | 23,160 | |
Cash and cash equivalents, beginning of period | | | 6,214 | | | | 9,398 | | | | 28,534 | | | | 6,214 | |
Cash and cash equivalents, end of period | | $ | 29,374 | | | | 11,283 | | | $ | 20,977 | | | | 29,374 | |
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $30.8decreased $36.1 million, or 136.2%67.6%, to $17.3 million for the six months ended March 31, 2021 compared to $53.4 million for the six months ended March 31, 2020 compared to $22.6 million for the six months ended March 31, 2019.2020. The increasedecrease in cash provided by operating activities was primarily due to an increase in cash provided by working capital, as well as an increasea decrease in net income adjusted for non-cash items. Ouritems as well as cash used for working capital requirements, for inventory will likely increase as we continuecompared to open new stores.cash provided from working capital in the prior year.
Investing Activities
Net cash used in investing activities increased $3.1decreased $10.6 million, or 17.9%52.6%, to $9.5 million for the six months ended March 31, 2021 compared to $20.1 million for the six months ended March 31, 2020 compared to $17.1 million for the six months ended March 31, 2019.2020. This increasedecrease was primarily due to a $1.1$10.0 million increase in software investments for internal use and a $1.1 million increasedecrease in property and equipment acquisitions during the six months ended March 31, 20202021 compared to the six months ended March 31, 2019.2020 due to the impact of the number and timing of new store openings and relocations/remodels.
Financing Activities
Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility.Facility and dividends paid to stockholders. Cash used in financing activities was $15.3 million for the six months ended March 31, 2021 compared to $10.1 million for the six months ended March 31, 2020 compared to $3.6 million of cash used in financing activities for the six months ended March 31, 2019.2020. During the six months ended March 31, 2020,2021, the Company used cash generated from operations to repay the outstanding balance owingborrowed $35.0 million under the Credit Facility. Notwithstanding our repaymentTerm Loan Facility which was used to partially fund the $48.3 million of the outstanding balance owing under the Credit Facility as of March 31, 2020, the Credit Facility remains in full force and effect.dividends paid to stockholders.
Credit FacilityFacility
The maximum amount available for borrowingfinancing commitment 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 to partially fund the previously announced special cash dividend of $2.00 per common share. The operating company is the borrower under the Credit Facility and its obligations thereunderunder 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. TheOn November 13, 2019, the Company amended the Credit Facility matures onto extend the maturity date to November 13, 2024.2024 and permit the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year. On November 18, 2020, the Company amended the Credit Facility to 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.
For floating
Base 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 the London Interbank Offered Rate, or its successor rate (LIBOR), 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 will 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, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. 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’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 to 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 in 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 (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.
We had $0 and $5.7 millionno amounts outstanding under the CreditRevolving Facility as of March 31, 20202021 and September 30, 2019,2020, respectively. As of each of March 31, 20202021 and September 30, 2019,2020, we had undrawn, issued and outstanding letters of credit of $1.0$1.3 million, which were reserved against the amount available for borrowing under the terms of the CreditRevolving Facility. We had $49.0 million and $43.3$48.7 million available for borrowing under the CreditRevolving Facility as of March 31, 20202021 and September 30, 2019, respectively.2020. We had $34.6 million of outstanding borrowings under the fully drawn Term Loan Facility as of March 31, 2021.
As of each of March 31, 20202021 and September 30, 2019,2020, the Company was in compliance with the debtfinancial 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 6 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.
Off-Balance Sheet Arrangements
As of March 31, 2020,2021, our off-balance sheet arrangements consisted of: (i) the undrawn portion of our Revolving Credit Facility and (ii) leases that have been signed but whose terms have not yet commenced. As of March 31, 2020,2021, the Company had signed twoseven leases whose terms have not yet commenced; such leases are for five new stores, one new store relocation and one relocated store remodel in fiscal year 20202021 and beyond. The contractual obligation related to these leases is $10.7$30.8 million (see Note 7). 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 judgments 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 exposed to interest rate changes with respect to our Credit Facility. We do not use financial instruments for trading or other speculative purposes. There have been no 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 effective as of March 31, 2020.2021.
Changes in Internal Control over Financial Reporting
During the six months ended March 31, 2020, we implemented controls to ensure we adequately evaluated our contracts and properly assessed the impact of the new lease accounting standard on our financial statements to facilitate the adoption of that standard effective October 1, 2019.
There were no 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. 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. Risk Factors
TheThere have been no material changes from the risk factors below update those disclosed in Part I, “Item 1A-Risk Factors,”Item 1A, of our Form 10-K.
The ongoing COVID-19pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition.
The COVID-19 outbreak has had a significant impact on our operations. For so long as it continues, and in the event there is another widespread regional, national or global health epidemic or pandemic, our business could be severely impacted. While we are closely monitoring the economic impact of the COVID-19 pandemic on our business, the long-term financial impact of the COVID-19 pandemic is unknown at this time. We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on the U.S. economy.
The impacts of the COVID-19 outbreak could include some or all of the following:
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| Customers who are infected by the COVID-19 virus may not be able to visit and shop at our stores. Even if infected customers are physically able to shop, we have urged any individual who displays symptoms of the virus not to shop in our stores until they have recovered fully. An increase in the number of our customers who are infected by COVID-19 could therefore negatively impact our sales.
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| The COVID-19 outbreak may cause consumers to avoid public gathering places such as our stores or otherwise change their shopping behaviors. For example, the practice of social distancing may cause fewer customers to frequent our stores at any given time. In addition, the COVID-19 pandemic may lead to a permanent shift towards more online shopping for groceries, which may lead consumers to purchase groceries and nutritional supplements online from competitors that offer more extensive online shopping options than we do.
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| Quarantine, isolation or stay-at-home orders issued by local, state or federal authorities may make it more difficult or impossible for customers to shop at our stores. In addition, limitations imposed by national, state or local authorities on the number of customers who may shop at our stores at any given time could impact those stores’ transaction count. Further, national, state or local authorities could take action to ban in-store grocery shopping in favor of home delivery and curbside pick-ups. Depending on the length and severity of the COVID-19 pandemic, such restrictions and limitations could become progressively more severe. Any such governmental actions could negatively impact our sales.
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| Our costs may continue to increase as a result of the COVID-19 pandemic. For example, since the outbreak commenced we have hired more temporary Crew members in order to handle increased customer traffic at our stores; to monitor customers entering and exiting our stores to comply with maximum occupancy limitations; and to assist with cleaning and stocking our stores. Depending on the duration of the COVID-19 pandemic, we may be required to incur additional labor and other costs to meet the challenges posed by the pandemic.
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| If a store Crew member contracts the COVID-19 virus, or if an infected customer spreads the virus at a store, that store may have to be temporarily closed for cleaning and sanitizing. Such temporary store closures could affect multiple stores at the same time.
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| Widespread infections at any store may make it impossible to adequately staff that store, which would lead to the temporary closure of that store. Such temporary store closures could affect multiple stores at the same time.
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| Many economists expect the United States to enter a recession as a result of the COVID-19 pandemic. Since the COVID-19 outbreak, levels of unemployment have increased significantly. If the COVID-19 outbreak causes an economic slowdown or recession, consumer spending could be adversely affected, which in turn could lead to a decrease in spending by consumers, cause our customers to avoid visiting our stores and cause us to experience lower net sales than expected. In addition, customers may shift purchases to lower-priced or other perceived value offerings during economic downturns. In particular, customers may reduce the amount of natural and organic products that they purchase and instead purchase conventional offerings, which generally have lower retail prices, at other stores.
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| The products we sell are sourced from a wide variety of domestic and international suppliers. Since the COVID-19 outbreak, we have experienced shortages and delays in the delivery of certain products to our stores. The COVID-19 outbreak could: (i) adversely impact our business by disrupting or delaying the production and delivery of products to our stores; (ii) adversely impact transport availability and cost; (iii) impact the financial stability of our suppliers; and (iv) cause our suppliers to prioritize the supply of scarce products to our competitors.
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| We could be subject to legal proceedings brought by customers or Crew members alleging they contracted the COVID-19 virus at one of our locations.
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Any of the foregoing impacts of the COVID-19 outbreak could have a material adverse effect on our business, financial position and results of operations. The duration of any such impacts cannot be predicted because of the unprecedented nature of the COVID-19 pandemic.
Our sale of products containing cannabidiol (CBD) could lead to regulatory action by federal, state and/or local authorities or legal proceedings brought by or on behalf of consumers.
The Agricultural Improvement Act of 2018 (the 2018 Farm Bill) legalized the cultivation, processing and sale of “industrial hemp” (i.e., hemp containing no more than 0.3% tetrahydrocannabinol, or THC). Industrial hemp is used to produce CBD, a non-psychoactive compound. Despite the provisions of the 2018 Farm Bill and subsequent U.S. Department of Agriculture rules, uncertainty exists concerning the legal and regulatory status of finished products containing CBD. The Food and Drug Administration (FDA) has yet to establish a regulatory framework for the manufacture and sale of products containing CBD, and has sent warning letters to certain CBD manufacturers that are alleged to have marketed their products in violation of the federal Food, Drug, and Cosmetic Act (the FDCA) and the rules promulgated thereunder. The FDA also announced that it cannot conclude based on current published studies that CBD is generally recognized as safe (GRAS) for use in human and animal food products. Food and beverage products, including nutritional supplements, that contain non-GRAS ingredients are considered to be adulterated under the FDCA. In addition, certain state and local governments have taken action to restrict or prohibit the sale of products containing CBD. Further, class action lawsuits have been filed against certain CBD manufacturers alleging that their products are mislabeled and falsely advertised under state consumer protection laws.
We sell products containing CBD at certain of our stores. While we strive to sell products containing CBD only in states and localities where such sale is permissible, state and local authorities in those areas may adopt new laws and regulations, or adopt interpretations of existing laws and regulations, that restrict or prohibit the sale of products containing CBD. Further, we could be subject to regulatory action brought by federal, state and/or local authorities, or legal proceedings brought by or on behalf of consumers, that allege, among other things, that: (i) our sale of products containing CBD violates applicable federal or state law (including applicable state consumer protection laws); (ii) the products we sell that contain CBD are adulterated or have been misbranded or labeled in violation of applicable rules, regulations or standards of the FDA, the FDCA or any other federal or state law or agency; (iii) the products we sell that contain CBD have been labeled with (a) express or implied health claims that are not supported by appropriate scientific evidence or (b) claims that are difficult or impossible to verify; (iv) the products we sell that contain CBD have been labeled with inappropriate dosing instructions or use recommendations; (v) the products we sell that contain CBD have been improperly tested or evaluated or do not contain the stated concentration of CBD; and (vi) the products we sell that contain CBD contain more than the legally allowable concentration of THC. Any such regulatory action or legal proceeding could have a material adverse effect on our business, financial position and results of operations.
Item 5. Other Information
On May 4, 2020, our Board authorized an extension of the Company’s previously announced share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2022. The dollar value of the shares of common stock that may yet be repurchased under the share repurchase program is approximately $8.3 million. Repurchases will be made from time to time at management's discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.
Item 6. Exhibits
EXHIBITINDEX
Exhibit Number | | Description |
3.1 | | Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186) |
3.2 | | Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on July 5, 2012, File No. 333-182186) |
10.1# | | Customer Distribution Agreement by and among United Natural Foods, Inc., Tony’s Fine Foods, Albert’s Organics and Vitamin Cottage Natural Food Markets, Inc. dated as of June 21, 2016 |
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 Officer 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† | | 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 March 31, 2020,2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2020 (unaudited)2021 and September 30, 2019,2020 (unaudited), (ii) Consolidated Statements of Income for the three and six months ended March 31, 20202021 and 20192020 (unaudited), (iii) Consolidated Statements of Cash Flows for the six months ended March 31, 20202021 and 20192020 (unaudited), (iv) Consolidated Statements of Changes in Stockholders’ Equity for the six months ended March 31, 20202021 and 20192020 (unaudited) and (v) Notes to Unaudited Interim Consolidated Financial Statements. |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
# Certain portions of this exhibit have been omitted pursuant to Item 601(b)(10) of Regulation S-K. This exhibit was subject to a confidential treatment request previously granted by the Securities and Exchange Commission (SEC), which is effective through May 31, 2021. The Company is filing this exhibit to transition to the new confidential treatment rules promulgated by the SEC in Item 601(b) of Regulation S-K.
† The certifications attached as Exhibit 32.1 that accompany this Form 10-Q are not deemed filed with the Securities and Exchange CommissionSEC 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 May 7, 2020.6, 2021.
| | Natural Grocers by Vitamin Cottage, Inc. |
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| By: | /s/ KEMPER ISELY |
| | Kemper Isely, Co-President |
| | (Principal Executive Officer) |
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| | By: | /s/ KEMPER ISELYTODD DISSINGER |
| | | Kemper Isely, Co-PresidentTodd Dissinger, Chief Financial Officer
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| | | (Principal Executive Officer) |
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| By:
| /s/ TODD DISSINGER
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| | Todd Dissinger, Chief Financial Officer
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| | (Principal Financial and Accounting Officer)
|
