Natural Grocers by Vitamin Cottage, Inc. Aktie

Good day, ladies and gentlemen. Welcome to the Natural Grocers Second Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded.

I would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage Second Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Richard Halle, Chief Financial Officer.

As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.

Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings release will be available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com.

Now I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results and highlight progress on initiatives driving long-term value creation. Then Rich will discuss the second quarter results in greater detail and review our fiscal year guidance.

We performed well in a challenging environment, driven by strong store-level execution and disciplined expense management, delivering diluted earnings per share growth of 3.6%. There are a few underlying trends I want to highlight. In the second quarter, comparable store sales increased 0.5% while cycling an 8.9% comp last year. On a 2-year basis, comps of 9.4% continued to demonstrate solid growth relative to the broader grocery retail industry. We believe the second quarter sales trends reflected continued economic uncertainty and value-seeking consumer spending behaviors observed broadly across the grocery retail sector.

Furthermore, in the second quarter, we continued to see strong membership gains in our {N}power rewards program and net sales penetration increased 3 percentage points to 84%, highlighting our customers' appreciation for the program's value and benefits. {N}power remains an effective tool for optimizing promotional activity and strengthening customer engagement. Natural Grocers is the value option in natural and organic grocery retail. Our marketing and communications continue to feature our always-affordable prices, including the even more affordable campaign, which highlights a rotating assortment of staples, including our Natural Grocers brand products.

We believe the consumer prioritization of health and wellness, including food and nutrition, is growing and enduring. Our differentiated natural and organic offering, supported by rigorous standards and our always-affordable pricing strategy continues to deliver strong value and reinforce our competitive positioning.

Next, I will highlight an important milestone, which is consistent with management's long-term focus. During the second quarter, we successfully completed a major upgrade to our enterprise resource planning system. The ERP platform supports the majority of our functional areas, making this the most comprehensive systems implementation the company has undertaken to date. The successful execution reflects the dedication and cross-functional collaboration of our teams. The upgraded system enhances operational efficiency, improves data visibility and provides a scalable foundation to support future growth and expand functionality, including data analytics and operational efficiencies, leveraging business intelligence tools.

We've also made progress on store development as another lever driving our long-term value. During the second quarter, we opened 1 new store and subsequent to the quarter, we relocated 1 store and opened an additional store. We're encouraged by the productivity of our new stores and relocations. We are on track to open 6 to 8 new stores in fiscal 2026. We believe we have significant opportunities to expand our store footprint and are targeting a 4% to 5% annual new store unit growth rate for the foreseeable future.

Finally, I would like to express my appreciation to our crew for their continued commitment to delivering an exceptional shopping experience. The best-in-class customer service provided by our good4u crew is a key element of our differentiated offering.

Now I will turn our call over to Rich to discuss our financial results in greater detail and our fiscal 2026 guidance.

Thank you, Kemper, and good afternoon. Second quarter net sales increased 0.5% from the prior year period to $337.4 million. Daily average comparable store sales increased 0.5%, comprised of a 1.6% increase in basket size and a 1.1% decrease in transaction count. The basket comp included a decline of less than half an item per basket. We continue to see the highest sales growth in dairy, produce and meat, which are some of our most differentiated offerings. And our Natural Grocers brand penetration was 9.8% of total sales, up 120 basis points from a year ago.

Gross margin increased 10 basis points to 30.4%, driven by lower store occupancy costs as a percentage of net sales and stable product margin, including inventory shrink. Store expenses decreased 1.6%, primarily driven by expense management. Administrative expenses increased 10%, primarily driven by higher technology expenses, including expenses related to the completion of the ERP upgrade project.

Net income increased 2.5% to $13.4 million and diluted earnings per share increased 3.6% to $0.58 in the second quarter. Adjusted EBITDA increased 4% to $27.4 million.

Turning to the balance sheet and cash flow. We ended the second quarter in a strong liquidity position, including $20.7 million in cash and cash equivalents, no outstanding borrowings and $67.6 million available for borrowing on our revolving credit facility. During the first 6 months of fiscal 2026, we generated cash from operations of $43.8 million and invested $30.3 million in net capital expenditures, primarily for new and relocated stores and real property acquisitions, resulting in free cash flow of $13.5 million.

Subsequent to the second quarter, we received a $2 million recovery from our insurance carrier for business interruption related to the June 2025 cybersecurity incident that temporarily impacted our main distributor's ability to fulfill orders and distribute products to our stores, resulting in product shortages and lost sales in June and July. The $2 million recovery equates to approximately $0.065 of diluted earnings per share impacting our expectations for Q3 and has been incorporated into our updated guidance that follows.

Today, we are refining the company's fiscal year outlook to reflect our second quarter results and the significant opportunities we see in our differentiated market position while remaining thoughtful about the evolving consumer environment. Our outlook includes the following: open 6 to 8 new stores and relocate or remodel 2 to 3 existing stores; achieve daily average comparable store sales growth between 1.5% and 2.5% compared to our prior outlook of between 1.5% and 4%; diluted earnings per share between $2.07 and $2.15 compared to our prior outlook of between $2 and $2.15; and capital expenditures of $45 million to $50 million compared to our prior outlook of $50 million to $55 million.

Capital expenditures primarily support growth initiatives such as new and relocated stores and include maintenance CapEx of approximately 75 basis points of net sales. In addition, our current expectation is that sales comps will be 2% to 4% in the second half of fiscal 2026, at the lower end of our outlook range in the third quarter as we cycle strong comps in the prior year and increasing slightly in the fourth quarter as we cycle moderated comps. Additionally, the comp range reflects consumer uncertainty in the current macro environment.

We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percentage of net sales will be relatively flat to slightly lower. Our outlook anticipates that year-over-year administrative expenses as a percentage of net sales will be relatively flat in the second half, excluding the impact of the insurance recovery. Lastly, in fiscal 2026, we have incremental investment of approximately $0.09 of diluted earnings per share in new store openings, primarily through higher preopening expenses and store expenses.

Now we'd like to open the line for questions. Thank you.

[Operator Instructions] The first question comes from Aaron Grey with Alliance Global Partners.

First question I want to ask about is the margin profile, which was good for you guys this quarter. And I want to think about how that is going forward, particularly given you utilize the ERP to drive some cost savings. You seem to have had one of the higher gross margins in a couple of years. So as we think about efficiencies going forward, do you reinvest those back into the business given the softer consumer environment, let that drop to the bottom line? So just how we think about the profit versus sales growth as we reinvest potentially those cost savings?

I would say that the cost savings immediately from our investment in the ERP are going to be minimal. It will take a little while to get efficiencies from the new system and to work out bugs to the new system. Any cost savings that we do see, we usually reinvest in competitive pricing. And we look at every item that we sell and compare it to our competitors and decide where we should be in pricing, and we like to be on the leading edge of affordable pricing.

Appreciate that commentary. Second question for me. Just as we think about the comps, I know a lot of the commentary in terms of the trends has been based off the 2-year stack and some of the softer comps you see in the back half of the year. But maybe outside of just thinking off the 2-year stack, anything that you're seeing to get more comfortability in terms of that stack starting to improve in the back half of the year and as you go into fiscal year 2027?

Yes. I mean the first 2 quarters of this year were particularly difficult to comp well against last year because they were -- we had such strong comps last year. Starting in June of this year, our comps were substantially softer for the last 4 months of the year -- of our fiscal year. And we're pretty confident that we will see sales similar to what we have been seeing currently through those months, which gives us confidence that we will have substantially better comps from June through September of this year.

The next question comes from Chuck Cerankosky with Northcoast Research.

I was wondering how you would describe the consumer behavior in the most recently reported quarter to what you saw a year earlier and how things have changed since war in Iran broke out and how it's been trending since then?

Well, March was a particularly difficult month, and I think that the conflict in Iran was not helpful to the consumer sentiment in March. April was much better than March. And I think as we get further away from the conflict, the consumer sentiment will improve. And as compared to last year, definitely, consumers were more -- there was more robust consumer enthusiasm last year at this time.

How did that, call it, consumer distress manifest itself? Was it fewer items, fewer trips, more price sensitivity? Any insight on that?

As we reported, there was a 0.3% -- wasn't it 0.3%?

0.3 items.

Yes, 0.3 items per basket that we lost, which works out to about 3% of comp sales. And then there was definitely on the -- on our less loyal customers, definitely some pullback from those consumers. Our loyal customers shopped as normal.

We continue to see very good growth from that customer base. As you know, our {N}power now makes up 84% of revenue, just continuing to see great success, and we had really good numbers out of that, as Kemper said, on less loyal customers where we're seeing really kind of a slowdown.

Yes. And just to add on, as we were starting a program where we're working on really getting the penetration of our {N}power sales higher and also the number of customers into the -- that are current -- the 30% of customers that aren't currently {N}power members enrolled in {N}power, and I think we'll have some really good results towards our goals in regards to that issue starting in June.

This concludes our question-and-answer session. I would like to turn the conference back over to Kemper Isely for any closing remarks.

Thank you for joining us. We are committed to maximizing value for our stockholders. We believe that our offering of high-quality natural and organic products supported by rigorous product standards and always-affordable prices is differentiated and will support growing consumer demand over the long term. Continued investment in store development, people, processes and system support operational -- system support, operational discipline and long-term value creation. Thank you, and have a great day. Goodbye.

Thank you. The conference call has now concluded. Thank you for attending the Natural Grocers Second Quarter Fiscal Year 2026 Earnings Conference Call. You may now disconnect. Thank you.

Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2026 Earnings Conference Call. [Operator Instructions] As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage First Quarter Fiscal Year 2026 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Richard Hall�, Chief Financial Officer.

As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.

Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results, highlight the key drivers of our performance and share an update on our key operational initiatives. Then Rich will discuss the first quarter results in greater detail and review our fiscal year guidance.

Our first quarter results were in line with expectations, including daily average comparable store sales growth of 1.7% and diluted earnings per share growth of 14% to $0.49. Based on our first quarter performance and outlook for the remainder of the fiscal year, we are maintaining our full year guidance. There are several key underlying trends that I would like to highlight. The first quarter sales comp increase of 1.7% was cycling an 8.9% comp last year. The 2-year comp of 10.6% continues to reflect a robust growth rate relative to the broader grocery retail industry. While first quarter sales were consistent with our outlook, we believe these trends reflected cautious consumer spending behaviors observed broadly across the grocery retail sector.

Additionally, the sales comp primarily reflected trends with customers who do not participate in our rewards program. We continue to see stronger sales growth by our {N}power Rewards Program members. We believe that our differentiated offering of high-quality natural and organic products at always affordable prices continues to deliver strong value for our customers and reinforce our competitive position amid economic uncertainty. Furthermore, we believe that our company's initiatives position us well to achieve sustainable long-term growth.

Next, I will review the performance of key operational initiatives. During the first quarter, {N}power Rewards Program net sales penetration increased 2 percentage points to 83%, supported by strong membership gains and higher traffic by {N}power customers. The continued expansion of both membership and sales penetration highlights our customers' appreciation for the program's value and benefits. {N}power remains an effective tool for optimizing promotional activity and strengthening customer engagement. Our Natural Grocers brand products represent value through premium quality at compelling prices. In the first quarter, our private label products accounted for 9.6% of total sales, up 70 basis points from a year ago. The strong growth reflects rising customer awareness, driven in part by more prominent marketing efforts as well as the impact of new product introductions. During the first quarter, we relocated 1 store. Relocations are a key element of our store development strategy as they typically generate accelerated sales growth off a higher sales base. Additionally, today, we are affirming our plan of opening 6 to 8 new stores in fiscal 2026 and are targeting 4% to 5% annual new store unit growth for the foreseeable future.

Yesterday, our company released its fiscal year 2025 sustainability report. The featured topic is our differentiated nutrition education program. Since my parents founded our company in 1955, we have offered free nutrition education because we believe it empowers our customers, crew and communities to improve their well-being. This long-standing commitment earned us the Shelby Report 2025 Sustainability in the Food Industry Award for advancing sustainable practices in the food sector and driving meaningful change through our nutrition education program. For further information about our nutrition education program, our rigorous product standards and commitment to our crew and communities, please refer to our sustainability report or visit our company's website.

Last but not least, an important component of our differentiated model is the best-in-class customer service provided by our good4u crew. I wish to express my deep appreciation to our crew for their continued commitment to delivering an exceptional shopping experience. Now I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance.

Thank you, Kemper, and good afternoon. Our first quarter net sales increased 1.6% from the prior year period to $335.6 million. Daily average comparable store sales increased 1.7% and on a 2-year basis increased 10.6%. Our daily average comparable transaction count increased 1%. The daily average comparable transaction size increase of 0.7% included annualized product inflation of approximately 2% to 2.5%. Items per basket were down less than 0.5 an item year-over-year.

We continue to see the greatest sales growth in meat, dairy and produce, which are some of our most differentiated offerings. We saw a modest decline in the number of transactions using SNAP EBT in the first quarter. SNAP represents approximately 2% of net sales and the reduction in SNAP transactions was immaterial to our overall sales comp for the quarter.

Gross margin decreased 40 basis points to 29.5%, driven by lower product margin, primarily due to higher inventory shrink, the majority of which was driven by isolated events. Store expenses decreased 0.7%, primarily driven by expense management. Administrative expenses decreased 5.9%, primarily driven by costs incurred in the prior year period related to the Chief Financial Officer transition. Operating income increased 9.7% to $14.6 million. Net income increased 14% to $11.3 million and diluted earnings per share increased 14% to $0.49 in the first quarter. Adjusted EBITDA increased 3.1% to $23.5 million.

Turning to the balance sheet and cash flow. We ended the first quarter in a strong liquidity position, including $23.2 million in cash and cash equivalents, no outstanding borrowings and $67.6 million available for borrowing on our revolving credit facility. During the first quarter, we generated cash from operations of $21.1 million and invested $9.6 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $11.6 million.

Today, we are affirming the company's fiscal year outlook that we originally provided in November. It continues to reflect both the opportunities we see in our differentiated market position and appropriate caution given the current consumer environment. Our outlook includes the following: open 6 to 8 new stores with the pace of openings weighted towards the back half of the fiscal year; relocate or remodel 2 to 3 existing stores; achieve daily average comparable store sales growth between 1.5% and 4%; achieve diluted earnings per share between $2 and $2.15; and direct $50 million to $55 million towards capital expenditures to support our growth initiatives.

In addition, our current expectation is that sales comps will be at the low end of our outlook range through the second quarter as we cycle strong comps in the prior year, while increasing slightly in the second half of the year as we cycle lower comps. Additionally, the comp range reflects the uncertainty in the consumer environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percentage of net sales will be relatively flat to slightly lower.

Lastly, in fiscal 2026, we are investing approximately $0.12 of diluted earnings per share in new store openings, primarily through higher preopening expenses and store expenses.

Now we'd like to open the line for questions. Thank you.

[Operator Instructions] The first question will come from Scott Mushkin with R5 Capital.

So I actually wanted to start off where you guys left off on the $0.12 headwind from the new stores. As we think about that going forward, is it going to be as dramatic? I think it wouldn't be as dramatic kind of the headwind as we think about next year and the year after. How should we think about that type of drag as we move out beyond this year?

Well, this year, we're accelerating our growth from 2 new stores to 8. So that definitely gives us quite a bit of more preopening expense for 6 more stores with preopening expense. So that's where that 12 basis points came from. Next year, if we open consistent 8 new stores and do a couple of remodels, it should be fairly flat going forward. If we add -- if we accelerate it to 10 or 12, then there would be a little bit more headwind. But it will probably be flat next year to 8 -- again, 8 to 9 new stores again next year.

And was it $0.12 or 12 basis points? So I just want to make sure I...

12 basis points. 11 basis points to 12 basis points.

$0.12.

$0.12.

Okay. So conceivably a pretty good tailwind, I guess, as you look out, depending on what happens with the rest of the business. Okay. So then switching gears to get some more thoughts on the shrink. I know you guys said that was kind of the biggest issue with the gross margin. And you called out, I think, some onetime isolated events. Can you give any more color on that? And are those isolated events going to continue? Or is that -- it was just, hey, gross margins actually would have been a lot better if this hadn't happened?

Yes, Scott, this is Rich. And one of the big items is we're cycling fairly low shrink in Q1 of last year. So last year was probably running about 15% below our 3-year average. This quarter, we're probably running about 10% above our 3-year average. So I would say a lot of that is sales velocity. And then we had some onetime items related to weather-related power outages that were obviously unexpected. We had some incremental shrink related to store closures as well. So that would be -- and then I'd say, a little bit of execution, operational execution that you tend to see quarter-over-quarter, but nothing overly material.

So it sounds like a lot -- do you have any size of that of the percentage of the decline in gross margins that would be attributed to power outages and stuff like that or no?

Well, I think in terms of just the cycling, the cycling was about 50% of that variance. And then I would say some of these anomalies were probably another 25% and then the balance of it would have been, I'd say, just standard variances.

All right. That's great color. Then my final question is just around the environment. And I've been doing this a long time, and I think a stack comp is useful, but also not necessarily the end all be all when an industry should be generally growing faster than it is right now, and this is not a statement to you guys, just kind of a general thought. And I was just -- if you kind of look at your customer base and you guys gave some good color on the {N}power. But if you look at it by segment, by age, who is coming in and driving a lot of that growth, are there any consistencies there that you would say, hey, like this demographic has definitely pulled back a little bit.

Well, the demographic that's income constrained is pulled back. And that's where you're losing customers right now. They're just nervous and their paychecks aren't keeping up with the rate of inflation, and they're looking for as inexpensive of alternatives as they possibly can find. And so that's where we've lost customers right now.

Have you seen an age reflection there? We've seen some data that suggests that the younger households are the most impacted? Or are you guys not really seeing that?

Not really. I mean there's definitely -- if they're income constrained, then they're pulling back. Does that make sense, too?

Yes. But with demographic wise, I mean, great data. We haven't seen sort of a shift in our demographics from third-party data that we get. So nothing material there. And I think that the shrinking basket that we've been seeing is really all around sort of cautious consumers who are very much seeking value. And the pullback that we've seen has not been in our {N}power customers, but our less engaged customers.

Our {N}power customers actually were really robust.

Yes. In this tough environment out there. So I was glad to see the numbers you put up. So anyway. All righty. Appreciate it.

The next question will come from Chuck Cerankosky with Northcoast Research.

I want to dive in a little bit on the new store opening program for this year. You've got 6 to 8 new openings. You've done 1 relo so far. Now that would count as a new opening and a closure. Any net closures for the year? And what's your definition of a relo and a remodel? Are they coincident events as we look at the storing program for this year?

No. We've had the closure -- we had a closure in our Austin Harbor store in Texas in October. And we don't -- we won't have any more closures this year, probably not any next year either. Anyway, the one relocation, that's a relocation. So we'll have 6 to 8 actual new stores and 1 to 3 relocations or remodels this year. So overall, we'll be from 8 to 11 -- I mean 8 to 11 actual remodel -- moves and new stores.

Okay. That's helpful. And as you're talking about the 3 strongest categories, which tend to be some of the more expensive purchases, how does that square with the cautious consumer? Or is that reflected in the reduction in the items per basket?

Well, supplements, which is our highest margin category, had a slight decline in sales for the quarter, but there was 0 inflation in the supplement sector, which kind of explains the decline in the category. So we had a slight -- very slight drop in items sold in the supplement area because we had 0 inflation in that category. Our other I would guess -- what the other ones be the two?

Body care.

Body care was similar and grocery, we actually had good growth.

Growth in units?

Yes. So I mean, yes, it was definitely body care and supplements where we saw the biggest decline in units. And then also household items.

Okay. And with supplements being a high gross margin category that showed up in the overall P&L then?

Yes, it did. It had a slight impact. And I mean, overall, our cash register ring margin was flat for the quarter. So we got -- we had some pickup in margin in some of the other categories.

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kemper Isely for any closing remarks. Please go ahead.

Thank you for joining us. We are committed to our differentiated business model of offering high-quality natural and organic products at always affordable prices. And we are confident in our ability to continue to drive profitable long-term growth and enhance value for all our stakeholders. Thank you, and have a great day. Bye now.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, ladies and gentlemen. Welcome to the Natural Grocers Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded.

I'd now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Richard Hallé, Chief Financial Officer.

As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026 contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.

Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income.

Today's earnings release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. We are pleased with our fourth quarter performance with sales in line with guidance and diluted earnings per share above guidance. On today's call, I will highlight our financial results, including performance drivers and provide an update on our key operational initiatives. Then Rich will discuss our fourth quarter results in greater detail and review our fiscal year 2026 outlook.

Our fourth quarter sales were in line with guidance. Daily average comparable store sales increased 4.2%, and on a 2-year basis, increased 11.3%. The moderation in fourth quarter sales comps compared to the third quarter was driven by several factors. We cycled 7% comps in each of the fourth quarters of the previous two fiscal years.

As previously disclosed, UNFI's June 2025 cybersecurity incident constrained UNFI's ability to fulfill orders and distribute products to our stores and had a direct impact on our sales in June and July. Additionally, uncertainty in the economic environment has persisted and we saw consumer behavior shift toward more cautious retail spending in the fourth quarter.

Over the past several years, we have focused on operational execution, including refining targeted promotions and store productivity initiatives. That ongoing effort combined with expense leverage from higher sales resulted in an operating margin improvement of 90 basis points for the fourth quarter, driving our fiscal year 2025 diluted earnings per share to a record $2 per share.

We are proud that fiscal 2025 represented another year of record sales and earnings. Additionally, fiscal 2025 was our 22nd consecutive year of positive comparable store sales growth. Consumers continue to be drawn to our differentiated offering of high-quality natural and organic products, reflecting their prioritization of health and wellness, including food and nutrition. We believe that consumers' prioritization of health and wellness will prove to be resilient.

While we are seeing some macro pressures affecting the broader retail landscape, we believe that our commitment to always affordable prices provides compelling value for our customers, strengthening our competitive position during periods of economic uncertainty.

Next, I will share an update on our key priorities that have fueled recent growth and are expected to drive our long-term success. We continue to enhance the personalization and interactivity of our {N}power rewards program offerings. During the fourth quarter, {N}power net sales penetration held strong at 82%. The maturity and high penetration of our {N}power Rewards program enables efficient and relevant customer engagement, including communicating our differentiation to new members, personalizing offers to tenured members or presenting special offers to customers who haven't engaged with us recently.

Our Natural Grocers branded products continue to experience elevated growth. In the fourth quarter, our House branded products accounted for 8.8% of total sales, up from 8.4% a year ago. During fiscal 2025, we extended our Natural Grocers brand offerings with the launch of 119 new items, all of which exhibit premium quality at compelling prices.

Accelerating new store growth is another core element of our strategy. In fiscal 2025, we opened two new stores, relocated two stores and remodeled one store. Today, we are reiterating our plan of opening 6 to 8 new stores in fiscal 2026, underscoring the quality of our pipeline and execution capabilities. We are committed to 4% to 5% annual new store unit growth for the foreseeable future.

We also remain committed to enhancing value for our stockholders by maintaining a balanced approach to capital allocation. In addition to investing in our business to drive faster unit growth, we are proud to announce that we are increasing the quarterly cash dividend by 25% to $0.15 per common share, reflecting our strong fiscal 2025 operating performance and financial position as well as confidence in our ability to create long-term stockholder value.

In closing, I would like to thank our good4u crew, their commitment to operational excellence and exceptional customer service were instrumental in driving our strong results. We are fortunate to have crew who share an affinity for our founding principles and are dedicated to ensuring that our stores, operations and supply chain reflect these values.

Now I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance.

Thank you, Kemper, and good afternoon. We are pleased with our fourth quarter results. Sales were in line with expectations and diluted earnings per share exceeded our outlook.

Net sales increased 4.2% from the prior year period to $336.1 million. Daily average comparable store sales increased 4.2%, and on a 2-year basis, increased 11.3%. Comps were at the lower end of our guidance range which we believe primarily reflects the shift in consumer retail spending. Our daily average comparable transaction count increased 2.4%, and our daily average comparable transaction size increased 1.8% primarily due to annualized product inflation of approximately 2%. Items for basket were relatively flat year-over-year.

In consideration of the broader macro environment, we continue to monitor consumer trends closely. We continued to see greater sales growth in our most differentiated offerings, including meat and dairy. These are often considered premium offerings because our product standards include humanely and sustainably sourced meat, pasture-raised in non-confinement dairy and a minimum standard of free-range eggs.

We saw a modest decline in the number of transactions using SNAP EBT in the fourth quarter. SNAP represents approximately 2% of net sales and the reduction in SNAP transactions was immaterial to our overall sales comp for the quarter.

Gross margin decreased 10 basis points to 29.5% driven by lower product margin. Store expenses as a percentage of net sales decreased 90 basis points primarily driven by lower long-lived asset impairment charges and expense leverage. This culminated in a net income increase of 31% to $11.8 million and diluted earnings per share of $0.51. Adjusted EBITDA increased 7.7% to $24.4 million.

Briefly touching on the full year results. In fiscal 2025, total revenue increased 7.2% to $1.33 billion. Our daily average comparable store sales growth was 7.3% and 14.3% on a 2-year basis. Gross margin improved 50 basis points compared to the prior year, driven by higher product margin primarily attributed to effective promotions, and store occupancy cost leverage. Store expenses as a percentage of sales were 50 basis points lower than the prior year, driven by expense leverage and lower long-lived asset impairment charges. For fiscal 2025, diluted earnings per share increased 36.1% to $2 compared to $1.47 in fiscal 2024. And adjusted EBITDA increased 17.5% to $97.9 million.

Turning to the balance sheet and cash flow. We ended the fourth quarter in a strong liquidity position including $17.1 million in cash and cash equivalents, no outstanding borrowings and $70.1 million available for borrowing on our revolving credit facility. During fiscal 2025, we generated cash from operations of $55.3 million and invested $31 million in net capital expenditures primarily for new and relocated stores, resulting in free cash flow of $24.3 million.

Now I would like to review the company's outlook, which reflects both the opportunities we see in our differentiated market position and appropriate caution given the current consumer environment. We believe our value proposition will continue to be compelling during periods of economic uncertainty. For fiscal year 2026, we expect to open 6 to 8 new stores, relocate or remodel 2 to 3 existing stores, achieve daily average comparable store sales growth between 1.5% and 4%, achieve diluted earnings per share between $2 and $2.15 and direct $50 million to $55 million towards capital expenditures to support our growth initiatives.

In addition, our outlook includes the benefits of our new store growth, targeted marketing focused on our value proposition and differentiation and initiatives focused on driving higher productivity across our operations. The pace of new store openings will be weighted towards the back half of the fiscal year. Our current expectation is that sales comps will be at the low end of our outlook range in the first half of the year as we cycle relatively strong comps in the prior year while increasing slightly in the second half of the year as we cycle lower comps.

Additionally, the comp range reflects the uncertainty in the consumer environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percentage of net sales will be relatively flat to slightly lower. Lastly, we are investing approximately $0.12 of diluted earnings per share in new store openings, primarily through higher preopening expenses and store expenses.

We continue to believe that we have significant opportunity to achieve sustainable long-term growth due to our alignment with consumer trends, strong customer engagement through our {N}power Rewards program, expansion of the Natural Grocers branded products, existing store productivity initiatives and investment in new store unit growth.

In closing, we had a solid quarter to conclude a record-setting fiscal year. We are confident in our ability to continue to drive profitable long-term growth and enhance value for all stakeholders. Now we'd like to open the line for questions. Thank you.

[Operator Instructions] Our first question today comes from Chuck Cerankosky with Northcoast Research.

Given the increased price sensitivity right now in the consumer environment and the company's 8.8% owned brands penetration, is this a good time to get that number higher and to make customers more aware of the value in the Natural Grocers brands?

Yes. I think that, that would be true. I mean, we definitely are marketing our own brand extensively right now. And we have some really compelling prices, particularly in our bulk items that we are promoting aggressively, and we don't have to discount those prices because they're already substantially better priced than our competitors.

Do you have any particular goals for the penetration over the next couple of years, like maybe 10%? I don't...

Our goal is to increase the penetration by 1 full percentage point per year. So we're at 8.8%, so in two years from now, we should be at 10.8% or even 11%.

The next question is from Scott Mushkin with R5 Capital.

So one of the things we hear from investors about just kind of generally the space of natural organic is that it's not the macro that it's similar to what we saw last decade that's kind of traditional supermarkets and others in the marketplace kind of caught up given what they saw with how stronger sales and others have been and are offering a lot of the same products at lower prices. What do you think about that thought process?

I think that, that's been going on since 1978. And we've done a really good job of differentiating ourselves from those -- from the other supermarkets and have enough an authentic story and an authentic brand that resonates with consumers, and it's helped us to build our business to over $1 billion business.

The conventional supermarkets in Costco and Walmart, they only sell the product because it sells. It isn't because of the story of the product. We sell the product because it is what we are. And so it makes a huge difference to our customers and keeps our customers incredibly loyal, and it also helps us to keep on growing and expanding our customer base. And companies like Whole Foods are kind of losing track of that by becoming, as they said, the Amazonification or whatever it was the Wall Street Journal article was the other day. And then the Forbes article that followed up on it. And so that's making our brand all the stronger. And then you have the wannabes like Sprouts who doesn't really -- I mean they sell stuff because they -- it sells, but they don't really have the standards that we do or the ethics that we do about the products that we sell.

And then Kemper, what specifically -- or Richard, what specifically in the business do you see that would kind of make you gravitate towards, "Hey, it's things have become much more challenging in the economy.", and that's the root of some of the more cautious comments?

Well, the people that are on the periphery of shopping in our stores that aren't our most loyal customers have definitely pulled back and gone. I don't know where they're shopping, but they pulled back. And that's made it so that we're just a little bit more cautious about our growth. But I think that some of our new marketing initiatives will start to gain traction in not this quarter, but next quarter, and we should see an uptick again in our growth.

I mean because it's no doubt, Scott, the economy is playing a factor today. I mean, we have massive economic uncertainty. Consumer sentiment is at historic lows, we've seen announcement of significant job layoffs, had the government shutdown, the loss of government benefits, tariffs and their impact on inflation. I mean the majority of Americans are expecting the tariffs will result in higher prices. You've had a pretty large...

Well, they are resulting in higher prices.

And they are. But there's an expectation of future higher prices from tariffs all of it is kind of creating this uncertainty, there's definitely, as you've heard, across all retail, a pullback by lower middle income consumers in a bifurcation in the consumer segment, where higher households are continuing to spend. But as we even heard this morning from Walmart, everybody is looking for value. And so we are going to lean in to our differentiation. Everybody is looking for value, part of our filing principles is always affordable prices. And we're going to continue to lean hard into that. And as Kemper said, we're also very highly differentiated in terms of the quality of our shopping experience. We provide access to nutrition education and we have high product standards that you can trust. So we're going to continue to lean into those things.

Our core customer base is resilient. Our core customer base is growing at a healthy rate. So we have a lot of confidence that there is a lot of economic uncertainty that is certainly a driver. The natural and organics segment, yes, is pulling back. But so is the entire, I think, segment overall. And we still believe in the health and wellness trends. I mean you look at GLP-1 penetration rates, they've doubled over the last year. There's significant interest in continuing for many more Americans to try those drugs. We understand that those individuals are looking for more nutritious options post that. And so it's not linear, right? I mean as Kemper said, Natural & Organic has been going through multiple cycles over the last 4, 5 decades, and we'll continue to do that. But we believe the trends, the long-term trends that they will continue to have 4% to 6% industry growth, it's just not going to be a straight line.

Thanks for that color. And then I actually had just one more, and I apologize because my model is not in front of me. So I probably should know this answer off the top of my head. But are you guys thinking free cash flow next year will be positive, flat? And what's your thought process around '26 free cash flow?

Yes. Free cash flow will be positive next year. Yes, that's our expectation. Yes, we are investing more in CapEx, right? We are talking about increasing store openings, continuing to do relocations and remodels. We are looking at -- we're guiding $50 million to $55 million in CapEx to support those initiatives. We're excited about the real estate pipeline that we have and about the growth prospects. And we've really refined our site selection process and are excited about the communities that we're going in and the positive impact that those communities will have to the overall business.

And then also, we're strategically buying some of our buildings so just to add a little bit more color to the CapEx.

Yes.

All right. Well, guys, I appreciate it. And for the record, I kind of -- I definitely agree with you guys on the economy. I think it's a little bit tough sliding out there right now. But thanks for all the color.

I'm showing no further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Kemper Isely for any closing remarks.

Thank you for joining us to discuss our fourth quarter results. We take great pride in our sales and profitability growth in fiscal year 2025 and in recent years. We are committed to maximizing value for our stockholders. As we look forward to fiscal year 2026, we expect to build upon our momentum by executing to our founding principles, including highlighting our always affordable pricing strategy and differentiated product offering, emphasizing operational excellence and delivering on our new store unit growth plans.

Thank you, and have a great day. Bye now.

The conference call is now concluded. Thank you for attending the Natural Grocers Fourth Quarter and Fiscal Year 2025 Earnings Conference Call. You may now disconnect.

Good day, ladies and gentlemen. Welcome to the Natural Grocers Third Quarter Fiscal Year 2025 Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded.

I'd now like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage Third Quarter Fiscal Year 2025 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Richard Hallé, Chief Financial Officer.

As a reminder, certain information provided during this conference call contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed Forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements.

Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income. Today's earnings release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com.

Now I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. Our third quarter performance exceeded expectations, and we again delivered outstanding results across all key metrics. On today's call, I will highlight financial results, including drivers of our performance and provide an update on our initiatives. Then Rich will discuss our third quarter results in greater detail and review our updated fiscal year 2025 guidance.

Sales growth in the third quarter continued the strong trends of the previous 2 years. Third quarter daily average comparable store sales increased 7.4%. This was our 10th consecutive quarter with positive transaction count comp and our sixth consecutive quarter with an increase in items per basket, driving transaction size comp growth. Sales performance was strong across geographies and vintages.

Furthermore, sales remained strong across product categories with our highest comparable store sales growth in our most differentiated offerings, including meat, dairy and produce. We believe our strong sales performance over the past 2 years is evidence of the relevance of our offering for an increasing number of consumers, the overall strength of our business model and productivity of our initiatives.

For the third quarter, our ongoing focus on operational execution, including effective promotions and store productivity initiatives, combined with expense leverage from higher sales resulted in an operating margin improvement of 50 basis points and a 25% increase in diluted earnings per share.

Based on our strong third quarter results, we are raising our fiscal 2025 outlook for daily average comparable store sales growth and diluted earnings per share. In June, our primary distributor, UNFI, experienced a cybersecurity incident that temporarily impacted UNFI's ability to fulfill orders and distribute products to our stores, resulting in product shortages in June and July. In the weeks following the incident, we collaborated with UNFI to minimize disruptions and restore normalized levels of product distribution to our stores.

We estimate that the disruption to our operations adversely impacted our third quarter net sales by $3.5 million to $4 million, daily average comparable store sales by 1 to 1.5 percentage points and diluted earnings per share by $0.04 to $0.05. Our operations have substantially normalized, and we do not expect the disruption to materially impact our operations or financial performance in the future.

I will now highlight the third quarter performance of key initiatives, which continue to contribute to our growth. During the third quarter, net sales penetration of our {N}power Rewards program was 82%, up from 80% a year ago, reflecting continued positive trends in customer loyalty and engagement.

To date, during fiscal 2025, we have opened 2 new stores, relocated 2 stores and remodeled 1 store. Store unit growth and development is a company priority. I am pleased to announce that we are accelerating store unit growth and plan to open 6 to 8 new stores in fiscal 2026. With a consistent track record of strong financial and operating performance over the past several years, we are well positioned to execute this plan. We have already signed leases for 5 future new stores and are in negotiations on another 5 sites. Moreover, our new store pipeline includes approximately 75 vetted and approved communities in which we are actively pursuing real estate opportunities.

In closing, I would like to thank our good4u crew for their ongoing commitment to our operational execution and exceptional customer service that have been instrumental in driving our results in the third quarter and over the past several years.

With that, I will turn our call over to Rich to discuss our financial results and outlook.

Thank you, Kemper, and good afternoon. We are very pleased with the continuation of our strong performance through the third quarter. Net sales increased 6.3% from the prior year period to $328.7 million. Note, the third quarter of fiscal 2025 had 1 less selling day than the third quarter of fiscal 2024 due to the Easter shift.

Daily average comparable store sales increased 7.4%, and on a 2-year basis increased 14.6%. Our daily average comparable transaction count increased 4.8%. Our daily average comparable transaction size increased 2.4%, composed mostly of modest product cost inflation of an estimated 2 percentage points on an annualized basis and a slight increase in items per basket. In light of the broader macro environment, we continue to monitor consumer trends closely. To date, we have not observed any indicators of softer demand for our products, trade down or fewer items per basket.

Gross margin increased 70 basis points to 29.9%, driven by higher product margin primarily attributed to effective promotions. Store expenses as a percentage of net sales decreased 10 basis points, reflecting expense leverage. Administrative expenses as a percentage of net sales increased 20 basis points, primarily driven by higher technology expenses. Operating income increased 21.3% to $15.6 million. Operating margin increased 50 basis points. Net income increased 26% to $11.6 million and diluted earnings per share increased 25% to $0.50. Adjusted EBITDA increased 10.1% to $24.4 million.

Turning to the balance sheet and cash flow. We ended the third quarter in a strong liquidity position, including $13.2 million in cash and cash equivalents, no outstanding borrowings and $69.5 million available to borrow on our revolving credit facility. During the first 9 months of fiscal 2025, we generated cash from operations of $39.7 million and invested $22.9 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $16.8 million.

We are raising our fiscal 2025 outlook for daily average comparable store sales growth and diluted earnings per share. We are also updating our outlook for the count of new stores and relocations and remodels and capital expenditures. Our revised outlook includes the following: 2 new store openings compared to our prior outlook of 3 to 4; 3 store relocations or remodels compared to our prior outlook of 2 to 4; daily average comparable store sales growth between 7.25% and 7.75%, an increase compared to our prior outlook of 6.5% and 7.5%.

Diluted earnings per share between $1.90 and $1.95, an increase compared to our prior outlook of $1.78 and $1.86 and capital expenditures of $30 million to $33 million to support our growth initiatives, a reduction from our prior outlook of $36 million to $44 million, primarily due to new store delays.

Finally, as Kemper mentioned in his prepared remarks, we are planning to accelerate store growth in fiscal 2026 and expect to open 6 to 8 new stores. Please review our investor presentation on our company's Investor Relations website for more information about our store growth plans.

As we look to the remainder of fiscal 2025 and beyond, we will continue to focus on our key priorities to drive growth, including communicating our differentiated offering, further enhancing customer engagement through our {N}power Rewards program, expanding our selection of Natural Grocers brand products and driving new store development and existing store productivity.

Now we'd like to open the line for questions. Thank you.

[Operator Instructions] At this time, I'm showing no questions. So this concludes our question-and-answer session. I'd like to return the call to Kemper Isely for closing remarks.

Thank you very much for joining us to discuss our third quarter results. This month marks our company's 70th year serving our communities. I encourage you to visit one of our locations between August 14th and August 16th to celebrate our anniversary with us. We look forward to updating you on our next call regarding the fourth quarter and full fiscal year 2025 results. Thank you. Goodbye.

The conference call has now concluded. Thank you for attending the Natural Grocers Third Quarter Fiscal Year 2025 Earnings Conference Call. You may now disconnect.