UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED~~JUNE 30,~~DECEMBER 31, 2014;

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 001-35608

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

Delaware		45-5034161
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

12612 West Alameda Parkway

80228

Lakewood, Colorado

(Address of principal executive offices)

(Zip code)

(303) 986-4600

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No☐

Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act).

Large accelerated filer ☐		Accelerated filer ☒

Non –accelerated filer ☐		Smaller Reporting Company ☐
(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of ~~July 29, 2014~~January 26, 2015 was ~~22,477,930.~~22,487,600.

Table Of Contents

Natural Grocers by Vitamin Cottage, Inc.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended ~~June 30,~~December 31, 2014

Table of Contents

		Page Number

	PART I. Financial Information

Item 1.	Financial Statements
	Consolidated Balance Sheets as of ~~June 30,~~December 31, 2014 and September 30, ~~2013~~2014 (unaudited)	3
	Consolidated Statements of Income for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013 (unaudited)	4
	Consolidated Statements of ~~Comprehensive Income~~Cash Flows for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013 (unaudited)	5
	~~Consolidated Statements of Cash Flows for the nine months ended June 30, 2014 and 2013 (unaudited)~~	6
	Notes to Unaudited Interim Consolidated Financial Statements	76

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1312
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2522
Item 4.	Controls and Procedures	2522

	PART II. Other Information
Item 1.	Legal Proceedings	2522
Item 1A.	Risk Factors	2522
Item 6.	Exhibits	2622

SIGNATURES		2723

EXHIBIT INDEX		2824

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Except where the context otherwise requires or where otherwise indicated, all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘~~our,~~our,’’ ‘‘Natural Grocers,’’ and ‘‘the ~~Company’~~‘‘Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries.

Forward-Looking Statements

This report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in addition to historical information. These forward-looking statements are included throughout this report on Form 10-Q, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements that are not statements of historical fact, including those that relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information are forward-looking statements. We ~~have used~~may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future” and similar terms and phrases to identify forward-looking statements in this report on Form 10-Q.

The forward-looking statements contained in this report on Form 10-Q are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those referenced in “Risk Factors” in our report on Form 10-K for the fiscal year ended September 30, ~~2013~~2014 (our ~~“Form 10-K”), as amended in our reports on~~ Form ~~10-Q.~~10-K). Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this report on Form 10-Q speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by any applicable securities laws. You are advised, however, to consult any further disclosures we may make in our future reports to the Securities and Exchange Commission, on our website or otherwise.

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PART I. Financial Information

Item~~Item~~ 1.Financial Statements

NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)

	June 30, 2014		September 30, 2013		December 31, 2014		September 30, 2014
Assets
Current assets:
Cash and cash equivalents	$	6,634		8,132	$	1,855		5,113
Restricted cash		—		500
Short term investments — available-for-sale securities		—		1,149
Accounts receivable, net		1,706		2,401		1,650		2,146
Merchandise inventory		56,017		45,472		61,807		58,381
Prepaid expenses and other current assets		872		1,097		967		641
Deferred income tax assets		855		1,114		729		832
Total current assets		66,084		59,865		67,008		67,113
Property and equipment, net		113,268		98,910		126,934		120,224
Other assets:
Deposits and other assets		739		203		716		712
Goodwill and other intangible assets, net of accumulated amortization of $654 and $654, respectively		900		900
Goodwill and other intangible assets, net						5,789		900
Deferred financing costs, net		40		25		32		36
Total other assets		1,679		1,128		6,537		1,648
Total assets	$	181,031		159,903	$	200,479		188,985

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	35,718		28,918	$	36,185		33,835
Accrued expenses		11,340		9,306		14,535		15,822
Revolving credit facility						3,082		—
Contingent consideration for acquisition						536		—
Capital and financing lease obligations, current portion		201		174		279		229
Total current liabilities		47,259		38,398		54,617		49,886
Long-term liabilities:
Capital and financing lease obligations, net of current portion		19,508		19,648		25,011		21,748
Deferred income tax liabilities		5,904		6,877		4,742		5,409
Deferred rent		5,542		4,731		5,968		5,842
Leasehold incentives		7,126		5,716		7,564		7,246
Total long-term liabilities		38,080		36,972		43,285		40,245
Total liabilities		85,339		75,370		97,902		90,131
Commitments (Note 12)
Commitments (Note13)
Stockholders’ equity:
Common stock, $0.001 par value. Authorized 50,000,000 shares, 22,476,986 and 22,441,253 issued and outstanding, respectively		22		22
Common stock, $0.001 par value. Authorized 50,000,000 shares, 22,487,600 and 22,485,488 issued and outstanding, respectively						22		22
Additional paid in capital		54,578		53,704		54,711		54,552
Retained earnings		41,092		30,807		47,844		44,280
Total stockholders’ equity		95,692		84,533		102,577		98,854
Total liabilities and stockholders’ equity	$	181,031		159,903	$	200,479		188,985

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Statements of Income

(Unaudited)

(Dollars in thousands, except per share data)

													Three months ended December 31,
	Three months ended June 30,						Nine months ended June 30,						2014			2013
	2014			2013			2014			2013
Net sales	$	134,036			113,164			384,959			315,480		$	145,887			120,580
Cost of goods sold and occupancy costs		95,424			80,571			272,213			223,233			103,593			85,199
Gross profit		38,612			32,593			112,746			92,247			42,294			35,381
Store expenses		28,213			23,181			80,263			65,547			31,049			25,173
Administrative expenses		3,585			3,242			11,022			9,910			4,227			3,889
Pre-opening and relocation expenses		729			961			2,829			2,276			577			889
Operating income		6,085			5,209			18,632			14,514			6,441			5,430
Other (expense) income:
Dividends and interest income														—			1
Interest expense		(706	)		(610	)		(2,117	)		(1,266	)		(735	)		(707	)
Other income, net		—			3			2			7
Total other expense		(706	)		(607	)		(2,115	)		(1,259	)
Total other expense, net														(735	)		(706	)
Income before income taxes		5,379			4,602			16,517			13,255			5,706			4,724
Provision for income taxes		(2,015	)		(1,716	)		(6,232	)		(4,931	)		(2,142	)		(1,802	)
Net income	$	3,364			2,886			10,285			8,324		$	3,564			2,922

Net income per common share:
Basic	$	0.15			0.13			0.46			0.37		$	0.16			0.13
Diluted	$	0.15			0.13			0.46			0.37		$	0.16			0.13
Weighted average common shares outstanding:
Basic		22,476,986			22,401,924			22,461,289			22,389,287			22,487,118			22,442,191
Diluted		22,482,352			22,443,576			22,478,980			22,437,429			22,494,373			22,470,979

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

ConsolidatedC~~onsolidated~~ Statements of ~~Comprehensive Income~~Cash Flows

(Unaudited)

(Dollars in thousands)

Three months ended
June 30,

Nine months ended
June 30,

2014

2013

2014

2013

Net income
$ 3,364 2,886 10,285 8,324
Other comprehensive income, net of tax:

Unrealized gain on available-for-sale securities, net of tax
— — — 2
Other comprehensive income
— — — 2
Comprehensive income
$ 3,364 2,886 10,285 8,326

	Three months ended December 31,
	2014			2013
Operating activities:
Net income	$	3,564			2,922
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,981			3,938
Gain on disposal of property and equipment		(4	)		—
Share-based compensation		181			130
Excess tax benefit from share-based compensation		—			(7	)
Deferred income tax (benefit) expense		(564	)		215
Non-cash interest expense		4			7
Interest accrued on investments and amortization of premium		—			(1	)
Changes in operating assets and liabilities
Decrease (increase) in:
Accounts receivable, net		496			703
Income tax receivable		—			575
Merchandise inventory		(2,702	)		(3,100	)
Prepaid expenses and other assets		(328	)		(334	)
Increase (decrease) in:
Accounts payable		2,141			(961	)
Accrued expenses		(1,308	)		734
Deferred rent and leasehold incentives		445			489
Net cash provided by operating activities		6,906			5,310
Investing activities:
Acquisition of property and equipment		(7,572	)		(7,684	)
Proceeds from sale of property and equipment		4			—
Payment for acquisition		(5,601	)		—
Decrease in restricted cash		—			500
Net cash used in investing activities		(13,169	)		(7,184	)
Financing activities:
Borrowings under credit facility		24,590			—
Repayments under credit facility		(21,508	)		—
Capital and financing lease obligations payments		(55	)		(43	)
Excess tax benefit from share-based compensation		—			7
Payments on withholding tax for restricted stock unit vesting		(22	)		—
Net cash provided by (used in) financing activities		3,005			(36	)
Net decrease in cash and cash equivalents		(3,258	)		(1,910	)
Cash and cash equivalents, beginning of period		5,113			8,132
Cash and cash equivalents, end of period	$	1,855			6,222
Supplemental disclosures of cash flow information:
Cash paid for interest	$	8			—
Cash paid for interest on capital and financing lease obligations		762			693
Income taxes paid		4,270			22
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	3,468			3,646
Property acquired through capital and financing lease obligations		3,355			14

See accompanying notes to unaudited interim consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, ~~INC.~~

~~Consolidated Statements of Cash Flows~~

~~(Unaudited)~~

~~(Dollars in thousands)~~

Nine months endedJune 30,

2014

2013

Operating activities:

Net income
$ 10,285 8,324
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization
12,556 9,689
Loss on disposal of property and equipment
— 10
Share-based compensation
402 87
Excess tax benefit from share-based compensation
(472
)
(211
)
Deferred income tax (benefit) expense
(714
)
1,222
Non-cash interest expense
15 39
Interest accrued on investments and amortization of premium
9 15
Other amortization
— 26
Changes in operating assets and liabilities

Decrease (increase) in:

Accounts receivable, net
695 (126
)
Income tax receivable
612 (15
)
Merchandise inventory
(10,545
)
(5,829
)
Prepaid expenses and other assets
(923
)
193
Increase in:

Accounts payable
6,820 397
Accrued expenses
2,514 1,017
Deferred rent and leasehold incentives
2,221 307
Net cash provided by operating activities
23,475 15,145
Investing activities:

Acquisition of property and equipment
(26,920
)
(25,863
)
Proceeds from sale of property and equipment
— 3
Purchase of available-for-sale securities
— (521
)
Proceeds from the sale of available-for-sale securities
— 90
Proceeds from maturity of available-for-sale securities
1,140 435
Decrease (increase) in restricted cash
500 (500
)
Net cash used in investing activities
(25,280
)
(26,356
)
Financing activities:

Borrowings under credit facility
12,892 —
Repayments under credit facility
(12,892
)
—
Repayments under notes payable, related party
— (282
)
Capital and financing lease obligations payments
(135
)
(71
)
Excess tax benefit from share-based compensation
472 211
Equity issuance costs
— (268
)
Credit facility fees paid
(30
)
(18
)
Net cash provided by (used in) financing activities
307 (428
)
Net decrease in cash and cash equivalents
(1,498
)
(11,639
)
Cash and cash equivalents, beginning of period
8,132 17,291
Cash and cash equivalents, end of period
$ 6,634 5,652
Supplemental disclosures of cash flow information:

Cash paid for interest
$ 4 7
Cash paid for interest on capital and financing lease obligations
2,090 1,220
Income taxes paid
3,750 2,889
Supplemental disclosures of non-cash investing and financing activities:

Acquisition of property and equipment not yet paid
$ 3,525 5,558
Property acquired through capital and financing lease obligations
14 10,523

~~See accompanying notes to unaudited interim consolidated financial statements.~~

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~~NATURAL GROCERS BY VITAMIN COTTAGE~~, INC.

Notes~~Notes~~ toUnaudited InterimConsolidated Financial Statements

~~June 30,~~December 31, 2014 and 2013

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries and dietary supplements. The Company typically operates its retail stores under its trademarkNatural Grocers by Vitamin Cottage® ~~with 84~~. As of December 31, 2014, the Company operated 91 stores ~~as of June 30, 2014,~~in 15 states, including 3233 stores in Colorado, 13 in Texas, ~~seven~~eight in Oregon, six in Kansas, five each in ~~Kansas~~New Mexico and ~~New Mexico,~~Oklahoma, four in Montana, three each in Arizona, Idaho ~~Nebraska~~ and ~~Oklahoma,~~Nebraska, two each in Missouri, Utah and Wyoming, and one each in ~~Missouri~~Nevada and ~~Washington, as well as~~Washington. The Company also has a bulk food repackaging facility and distribution center in Colorado. The Company had 7287 stores in 14 states as of September 30, ~~2013.~~2014.

2. Basis of Presentation and Summary of Significant Accounting Policies

Consolidated Financial Statements

The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial statements and are in the form prescribed by the Securities and Exchange Commission in Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information included in this report on Form 10-Q should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and notes thereto included in the Company’s Form 10-K for the fiscal year ended September 30, ~~2013.~~2014. The accompanying consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation of the Company’s financial results. Interim results are not necessarily indicative of results for any other interim period or for a full fiscal year. The Company reports its results of operations on a fiscal year ending September 30.

The holding company was incorporated in Delaware on April 9, 2012. The accompanying consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company), Vitamin Cottage Two Ltd. Liability Company and Natural Systems, LLC. The operating company formed the holding company in order to facilitate the purchase of the remaining noncontrolling interest in Boulder Vitamin Cottage Group, LLC and consummation of the Company’s initial public offering (IPO) during fiscal year 2012. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company has one reporting segment, natural and organic retail stores. Sales from the Company’s natural and organic retail stores are derived from sales of the following products, which are presented as a percentage of sales for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013 as follows:

	Three months ended June 30,					Nine months ended June 30,				Three months ended December 31,
	2014			2013		2014		2013		2014			2013
Grocery		67.3	%		66.1		66.7		64.9		66.5	%		66.6
Dietary supplements		22.7			24.0		23.3		25.0		22.2			23.3
Other		10.0			9.9		10.0		10.1		11.3			10.1
		100.0	%		100.0		100.0		100.0		100.0	%		100.0

Business Combinations

Business combinations are accounted for using the acquisition method of accounting, which requires that the purchase price paid for an acquisition be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the acquisition, with the excess of the purchase price over the net assets being reported as goodwill. Acquisition-related costs are considered separate transactions and are expensed as incurred.

Use ofEstimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (including the fair value of assets acquired and liabilities assumed in a business combination), the disclosure of contingent assets and liabilities at the ~~balance sheet~~ date of the financial statements and the reported amounts of ~~revenue~~revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for self-insurance reserves, valuation of inventories, useful lives of property and equipment for depreciation and amortization, ~~of property and equipment,~~ valuation allowances for deferred ~~taxes~~tax assets and liabilities and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

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Recent Accounting Pronouncements

~~In February 2013,~~InMay 2014, the Financial Accounting Standards Board ~~or FASB,~~(FASB) issued Accounting Standards Update or ASU, No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 supersedes the presentation requirements for reclassifications out of accumulated other comprehensive income in both ASU No. 2011-12 and 2011-05. ASU No. 2013-02 requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the income statement or as a separate disclosure in the notes. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. This update was effective for the Company beginning in the quarter ended December 31, 2013. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.

~~InMay 2014, the FASB issued ASU~~(ASU) 2014-09, “Revenue from Contracts with ~~Customers”.~~Customers.” ASU No 2014-09 provides guidance for revenue ~~recognition.~~recognition and will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. This guidance will be effective for the Company beginning on October 1, 2017 and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently in the process of evaluating the impact of adoption of this ASU on the Company’s consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 defines management’s responsibility to perform interim and annual assessments on whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year of the date the financial statements are issued and to provide related footnote disclosures, if required. The guidance will be effective for the Company beginning with its fiscal year ending September 30, 2017, and early application is permitted. The Company ~~has~~does not ~~yet selected~~expect the adoption of this standard to have a ~~transition method nor has it determined the~~material effect ~~of the standard~~ on its ~~ongoing~~consolidated financial ~~reporting.~~statements or disclosures.

3. Earnings Per Share

Basic earnings per share (EPS) excludes dilution and is computed by dividing net income by the weighted average shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units were to vest, resulting in the issuance of common stock that would then share in the earnings of the Company. Presented below are basic and diluted EPS for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013, dollars in thousands, except per share data:

	Three months ended June 30,				Nine months ended June 30,				Three months ended December 31,
	2014		2013		2014		2013		2014		2013
Net income	$	3,364		2,886		10,285		8,324	$	3,564		2,922

Weighted average common shares outstanding		22,476,986		22,401,924		22,461,289		22,389,287		22,487,118		22,442,191
Effect of dilutive securities		5,366		41,652		17,691		48,142		7,255		28,788
Weighted average common shares outstanding including effect of dilutive securities		22,482,352		22,443,576		22,478,980		22,437,429		22,494,373		22,470,979

Basic earnings per share	$	0.15		0.13		0.46		0.37	$	0.16		0.13
Diluted earnings per share	$	0.15		0.13		0.46		0.37	$	0.16		0.13

There were ~~3,558 non-vested~~29,943 and zeronon-vested restricted stock units (RSUs) for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013, respectively, excluded from the calculation as they are antidilutive. ~~There were no antidilutive non-vested RSUs for the three and nine months ended June 30, 2013.~~

The Company did not declare any dividends in the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 or 2013.

4. ~~Long-Term~~ Debt

Credit Facility

The Company has a secured revolving credit ~~facility.~~facility (the Credit Facility). The operating company is the borrower under the ~~credit facility,~~Credit Facility and its obligations under the ~~credit facility~~Credit Facility are guaranteed by the holding company.

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On December 12, 2013, the Company ~~entered into an~~ amended and restated its then-existing $15.0 million credit agreement, ~~that,~~as a result of which, among other things, (i) ~~extended~~ the maturity date of the Company’s ~~revolving credit facility~~Credit Facility was extended by three years to January 31, 2017, (ii) ~~provides~~ the Company ~~with~~has the right to request the issuance of letters of credit under the ~~credit facility~~Credit Facility of up to $3.0 million, (iii) ~~allows~~ the Company is allowed to increase the amount available under the revolving credit facility, by an additional amount that may not exceed $10.0 million, by obtaining an additional commitment or commitments, (iv) ~~eliminated~~ a requirement for a consolidated earnings before interest, taxes, depreciation and amortization to revenue ratio was eliminated and (v) ~~amended~~ the unused commitment fee was changed from 0.20% to amounts ranging from 0.15% to 0.35% based on certain conditions. The Company may borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date.

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The Company had ~~no amounts~~$3.1 million andzero outstanding on the ~~revolving credit facility~~Credit Facility as of ~~June 30,~~December 31, 2014 and September 30, ~~2013. During the nine months ended June~~2014, respectively. As of both December 31, 2014 and September 30, 2014, the Company ~~made and repaid draws on the revolving credit facility. As of June 30, 2014, the Company had an~~has undrawn, issued and outstanding ~~letter~~letters of credit of approximately $0.7 million, which was reserved against the amount available for borrowing under the terms of the ~~revolving credit facility.~~Credit Facility. There was ~~$14.3~~approximately $11.2 million and ~~$15.0~~$14.3 million as of ~~June 30,~~December 31, 2014 and September 30, ~~2013,~~2014, respectively, available for borrowing under the ~~revolving credit facility.~~Credit Facility.

As of ~~June 30,~~December 31, 2014 and September 30, ~~2013,~~2014, the Company was in compliance with the debt covenants under the ~~credit facility.~~Credit Facility.

Capital and Financing Lease Obligations

From time to time, the Company enters into various leases that are included in capital and financing lease obligations. The Company does not record rent expense for these capitalized real estate leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligation and as interest expense (see Note 5).

Interest

The Company incurred gross interest expense of approximately $0.7 million ~~and approximately $0.6 million~~ in both the three months ended ~~June 30,~~December 31, 2014 and 2013. Interest expense for the three months ended December 31, 2014 and 2013 ~~respectively, and approximately $2.1 million and approximately $1.3 million in the nine months ended June 30, 2014 and 2013, respectively, related~~relates primarily to interest on capital and financing lease ~~obligations, and to a lesser extent, interest on the revolving credit facility.~~obligations. The Company ~~did not capitalize any~~capitalized interest of less than $0.1 million and zero for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and ~~2013. The Company had insignificant amounts of amortization of deferred financing costs for the three and nine months ended June 30, 2014 and 2013.~~2013, respectively.

5.Lease Commitments

Capital and financing lease obligations as of ~~June 30,~~December 31, 2014 and September 30, ~~2013,~~2014, are as follows, dollars in thousands:

	As of						As of
	June 30, 2014			September 30, 2013			December 31, 2014			September 30, 2014
Capital lease finance obligations, due in monthly installments through fiscal year 2028	$	15,006			13,746		$	17,292			14,989
Capital lease obligations, due in monthly installments through fiscal year 2028		4,703			4,792			4,640			4,672
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2028		—			1,284
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year2026								3,358			2,316
Total capital and financing lease obligations		19,709			19,822			25,290			21,977
Less current portion		(201	)		(174	)		(279	)		(229	)
Total capital and financing lease obligations, net of current portion	$	19,508			19,648		$	25,011			21,748

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6. Property and Equipment

The Company had the following property and equipment balances as of ~~June 30,~~December 31, 2014 and September 30, ~~2013,~~2014, dollars in thousands:

As of

Useful lives
(in years)

June 30,
2014

September 30,
2013

Construction in process

n/a
$ 5,477 5,421
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively
40 17,107 15,774
Capitalized real estate leases
15 4,866 4,866
Land improvements
5 - 15 1,000 1,000
Leasehold and building improvements
2 - 20 71,775 59,058
Fixtures and equipment
5 - 7 67,222 56,459
Computer hardware and software
3 - 5 10,297 8,252
177,744 150,830
Less accumulated depreciation and amortization
(64,476
)
(51,920
)
Property and equipment, net
$ 113,268 98,910

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				As of
	Useful lives (in years)			December 31, 2014			September 30, 2014
Construction in process		n/a		$	7,695			6,867
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively		40			19,512			17,107
Capitalized real estate leases		15			4,866			4,866
Land		n/a			192			192
Buildings		40			4,750			3,985
Land improvements	5	-	15		1,012			1,000
Leasehold and building improvements	1	-	25		78,750			74,691
Fixtures and equipment	5	-	7		72,967			69,894
Computer hardware and software	3	-	5		11,261			10,740
					201,005			189,342
Less accumulated depreciation and amortization					(74,071	)		(69,118	)
Property and equipment, net				$	126,934			120,224

~~As of June 30, 2014 and September 30, 2013, respectively, capitalized~~Capitalized real estate leases for build-to-suit stores includes the assets for the Company’s buildings ~~for build-to-suit stores~~ under capital lease finance obligations, and capitalized real estate leases includes assets for the Company’s buildings under capital ~~leases~~lease obligations (see Note 5).

Construction in process includes ~~zero and~~$3.3 millionand approximately ~~$1.3~~ $2.3million as of ~~June 30,~~December 31, 2014 and September 30, ~~2013,~~2014, respectively, related to construction costs for ~~build-to-suit~~ leases in process for which the Company was deemed the owner during the construction period.

Depreciation and amortization expense for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013 is summarized as follows, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,				Three months ended December 31,
	2014		2013		2014		2013		2014		2013
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	195		177		572		532	$	199		186
Depreciation and amortization expense included in store expenses		4,143		3,185		11,585		8,835		4,595		3,643
Depreciation and amortization expense included in administrative expenses		164		102		399		322		187		109
Total depreciation and amortization expense	$	4,502		3,464		12,556		9,689	$	4,981		3,938

7~~. Supplementary Balance Sheet Information~~7. Goodwill and Other Intangible Assets

~~Restricted Cash~~Goodwill and other intangible assets as of December 31, 2014 and September 30, 2014, are summarized as follows, dollars in thousands:

				As of
	Useful lives (in years)			December 31, 2014			September 30, 2014
Amortizable intangible assets:
Covenants not to compete	2	-	5	$	353			293
Favorable operating lease		5			339			339
Other intangibles	0.5	-	1		27			22
Amortizable intangible assets					719			654
Less accumulated amortization					(657	)		(654	)
Amortizable intangible assets, net					62			—
Trademark	Indefinite				389			389
Total other intangibles, net					451			389
Goodwill	Indefinite				5,338			511
Total goodwill and other intangibles, net				$	5,789			900

Amortization expense was less than $0.1 million for each of ~~September 30, 2013,~~ the ~~Company held $0.5 million~~three months ended December 31, 2014 and 2013. The increase in ~~restricted cash which represented cash that~~goodwill and intangible assets in the three months ended December 31, 2014 was ~~pledged as collateral for a standby letter of credit related~~due to the ~~Company’s workers’ compensation insurance. As of June 30,~~acquisition which closed on December 7, 2014 ~~the Company had released the restricted cash balance which existed as of September 30, 2013, and had no restricted cash balance outstanding.~~(see Note 12).

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8.Accrued Expenses

The composition of accrued expenses ~~is summarized as follows~~ as of ~~June 30,~~December 31, 2014 and September 30, ~~2013,~~2014 is summarized as follows, dollars in thousands:

As of

June 30,

September 30,

2014

2013

Accrued income, property, sales and use tax payable
$ 4,944 2,686
Payroll and employee-related expenses
4,252 5,247
Deferred revenue related to gift card sales
682 625
Other
1,462 748
Total accrued expenses
$ 11,340 9,306

8.~~Investments~~

The Company had no available-for-sale securities as of June 30, 2014. The Company had available-for-sale securities generally consisting of certificates of deposit, corporate bonds and municipal bonds of approximately $1.1 million as of September 30, 2013, which were classified as short-term. At September 30, 2013, the average maturity of the Company’s short-term investments was approximately five months. There was no other-than-temporary impairment on available-for-sale securities as of September 30, 2013.

~~During the three and nine months ended June 30, 2014 and 2013, the Company recorded insignificant amounts of interest income and expense relating to amortized premiums paid.~~

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	As of
	December 31,		September 30,
	2014		2014
Payroll and employee-related expenses	$	5,664		5,886
Accrued income taxes payable		3,316		4,868
Accrued property, sales and use tax payable		3,691		3,409
Deferred revenue related to gift card sales		981		725
Other		883		934
Total accrued expenses	$	14,535		15,822

9. Fair Value Measurements

The Company records its financial assets and liabilities ~~at fair value~~ in accordance with the framework for measuring fair value in authoritative guidance. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and market ~~participants’ own~~participant’s assumptions (unobservable inputs). ~~The three levels are defined as follows:~~

~~Level 1—~~	~~Inputs are unadjusted quoted prices for identical assets or liabilities in active markets;~~
~~Level 2—~~	Inputs include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
~~Level 3—~~	~~Inputs are unobservable and are considered significant to the fair value measurement.~~

Non-financial assets, such as goodwill and long-lived assets, are accounted for at fair value, if determined to be impaired, on a non-recurring basis. These items are tested for impairment on the occurrence of a triggering event or in the case of goodwill, at least on an annual basis.

The carrying amounts of financial instruments ~~not included in the table below,~~ including ~~cash, restricted~~ cash, accounts receivable, accounts payable and other accrued expenses, approximate fair value because of the short maturity of those instruments.

As of June 30, 2014 and September 30, 2013, the Company had the following financial assets and liabilities that were subject to fair value measurements according to the fair value hierarchy, dollars in thousands:

As of

June 30, 2014

September 30,2013

Fair Value Hierarchy
Level

Carrying
Amount

Fair Value

Carrying
Amount

Fair Value

Cash equivalents:

Money market fund
1 $ — — 501 501

Investments — available-for-sale securities:

Certificates of deposit
2 — — 585 585
Corporate bonds
2 — — 376 376
Municipal bonds
2 — — 188 188

The money market fund and available-for-sale securities are carried at fair value. For debt securities for which quoted market prices are not available, the fair value is determined using an income approach valuation technique that considers, among other things, rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk. During the three and nine months ended June 30, 2014, the Company made no purchases of available-for-sale securities. During the three and nine months ended June 30, 2013, the Company made purchases of approximately $0.1 million and $0.5 million, respectively, of available-for-sale securities. During the three and nine months ended June 30, 2014, the Company had approximately $0.1 million and $1.1 million of maturities of available-for-sale securities, respectively. During the three and nine months ended June 30, 2013, the Company had approximately $0.1 million and $0.4 million of maturities of available-for-sale securities, respectively. During the three and nine months ended June 30, 2013, the Company had approximately $0.1 million and $0.1 million of proceeds from the sale of available-for-sale securities, respectively. During the three and nine months ended June 30, 2014 and 2013, and for the fiscal year ended September 30, 2013, there were no transfers between levels and the Company had no Level 3 instruments. See Note 8 for additional disclosures.

10. Share-based Compensation

The Company adopted an Omnibus Incentive Plan (the Plan) on July 17, 2012. RSUs granted pursuant to the Plan, if they vest, will be settled in shares of the Company’s common stock. Changes in the number of non-vested RSUs outstanding under the Plan during the ~~nine~~three months ended ~~June 30,~~December 31, 2014 were as follows:

RSUs

Weighted average grant date fair value

Non-vested as of September 30, 2013
86,053 $ 21.80
Granted
3,558 42.16
Forfeited
(940
)
34.07
Vested
(35,733
)
4.60
Non-vested as of June 30, 2014
52,938 34.56

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	RSUs			Weighted average grant date fair value
Non-vested as of September 30, 2014		37,194		$	34.77
Granted		16,828			17.52
Forfeited		(3,693	)		34.07
Vested		(3,365	)		17.52
Non-vested as of December 31, 2014		46,964			29.88

~~Each~~As of December 31, 2014, all outstanding RSUs have been granted either to independent ~~member~~members of the Company’s Board of Directors ~~is granted a number of RSUs under the Plan each year equal~~or to the number of shares of common stock having a value of $50,000 based on the closing price of common stock on the New York Stock Exchange (NYSE) on the date of grant. All of these RSUs are granted on the date of the Company’s annual meeting of stockholders or, in the case of a mid-year appointment, a pro rata portion is granted at the time of appointment. In either case, the RSUs vest over a twelve month period and are expensed straight-line over that period. The Company held its annual meeting of stockholders on March 5, 2014, and each independent member of the Company’s Board of Directors received awards based on the closing price of common stock on the NYSE on that date. The RSU’s granted to the independent members of the Board of Directors at the Company’s annual meeting on March 6, 2013 vested on March 6, 2014.

The RSU grant to the Chief Financial Officer (CFO Award) was in accordance with the terms of her employment agreement that was signed in June 2008, which stated she was entitled to receive a grant of RSUs equal to 1.2% of the fully diluted sharescertain employees of the Company in connection with an IPO. Two-thirds of the CFO Award vested immediately upon completion of the IPO and was settled in a combination of common stock and cash. The remaining one-third was settled 100% in shares of common stock and vested, in three equal parts over a six, 12 and 18 month period following the IPO. In January 2014, which was 18 months after the IPO, the final portion vested.who are not named executive officers.

The Company recorded total share-based compensation expense before income taxes of approximately ~~$0.1~~$0.2 million and ~~$0.4 million in the three and nine months ended June 30, 2014, respectively, and recorded less than $0.1 million and approximately~~ $0.1 million in the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 and 2013, respectively. The share-based compensation expense is included in cost of goods sold and occupancy expenses, store expenses or administrative expenses in the consolidated statements of income consistent with the manner in which the ~~applicable officer,~~independent board member or ~~key~~ employee’s compensation expense is ~~recorded.~~ presented.

As of ~~June 30,~~December 31, 2014, there was approximately ~~$1.3~~$1.1 million ofin unrecognized share-based compensation expense related to non-vested RSUs net of estimated forfeitures, which the Company anticipates will be recognized over a weighted average period of approximately ~~three~~2.8 years.

11. Related Party Transactions

The Company has ongoing relationships with related entities as noted below:

Chalet Properties, LLC: The Company has ~~seven~~six operating leases and one capital lease with Chalet Properties, LLC (Chalet). Chalet is owned by four of 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 $0.3 million for each of the three months ended ~~June 30,~~December 31, 2014 and 2013. ~~Rent paid to Chalet was approximately $1.0 million for each of~~During the ~~nine~~three months ended ~~June 30,~~December 31, 2014, ~~and 2013.~~the Company amended an existing lease with Chalet to obtain additional square footage at one Company store. Due to the Company’s involvement with construction for the additional space, the amended lease was deemed to be a capital financing lease in the three months ended December 31, 2014.

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Isely Family Land Trust LLC: The Company has one operating lease with the Isely Family Land Trust LLC (Land 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 ~~$0.1~~$.01 million for each of the three months ended ~~June 30, 2014 and 2013. Rent paid to the Land Trust was approximately $0.2 million for each of the nine months ended June 30,~~December 31, 2014 and 2013.

12. Business Combination

On December 7, 2014, the Company purchased substantially all of the assets and assumed certain liabilities of natural foods retailer Nature’s Pantry, Inc., which operated one retail store in Independence, Missouri. Pursuant to the acquisition, the store now operates as a Natural Grocers by Vitamin Cottage store. The transaction has been recorded in accordance with Accounting Standards Codification 805, “Business Combinations.” Assets acquired included, but were not limited to, inventory, property and equipment and certain intangible assets, including the Nature’s Pantry internet domain name and a covenant not to compete. The purchase price has been provisionally allocated to tangible and identifiable intangible assets totaling approximately $1.3 million based on their estimated fair values at the date of acquisition, summarized as follows, dollars in thousands:

Inventory and supplies	$	726
Property and equipment		553
Other		65
Total provisionally allocated to tangible and identifiable intangible assets	$	1,344

Total costs in excess of tangible and identifiable intangible assets acquired of approximately $4.8 million have been recorded as goodwill and reflects the value the Company sees in a similar long-term commitment to nutrition education and natural and organic products. A significant portion of the goodwill recognized is expected to be deductible for income tax purposes. During the three months ended December 31, 2014, the Company paid cash of $5.6 million for the acquisition and has accrued approximately $0.5 million in contingent consideration related to the remaining acquisition price that is expected to be paid during the three months ended March 31, 2015, after certain terms are met in accordance with the purchase agreement.

13. Commitments and Contingencies

~~Legal~~

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment discrimination 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.

~~13. Subsequent Events~~

~~Share Issuances~~

~~Subsequent to June 30, 2014, the vesting of certain RSUs resulted in the issuance of a total of 944 shares of the Company’s common stock.~~

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Item ~~2. Management’s~~2. Management’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 report on Form 10-Q and with our Form 10-K.This discussion and analysis contains forward-looking statements. Refer to “Forward-Looking Statements”at the beginning of this report on Form 10-Q for an explanation of these types of statements. All references to a “fiscal year” refer to a year beginning on October 1 of the previous year, and ending on September 30 of such year (for example “fiscal year ~~2014”~~2015” refers to the fiscal year from October 1, ~~2013~~2014 to September 30, ~~2014)~~2015).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 believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, ~~Colorado, and as~~Colorado. As of ~~June 30,~~December 31, 2014, we operated 8491 stores in 1415 states, including Colorado, Arizona, Idaho, Kansas, Missouri, Montana, Nebraska, Nevada, New Mexico, Oklahoma, Oregon, Texas, Utah, Washington and ~~Wyoming, as well as~~Wyoming. We also operate a bulk food repackaging facility and distribution center in Colorado.

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality standards. We regularly review and update these standards. ~~During the three months ended March 31, 2014, for example, we updated our dairy standards and, as a result, plan by April 2015 to sell only pasture-raised, non-confinement dairy products.~~

The size of our stores varies from 5,000 to 16,000 selling square feet. During the twelve months ended ~~June 30,~~December 31, 2014, our new stores averaged approximately 11,000 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition ~~has~~have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, ~~2013,~~2014, we increased our store count at a compound annual growth rate of ~~21.7%~~21.4%. In fiscal year ~~2013,~~2014, we opened 1315 new stores, and we currently plan to open 1518 new stores in fiscal year ~~2014, 12~~2015, four of which we opened during the ~~nine~~three months ended ~~June 30,~~December 31, 2014. As of the date of this report we have opened one additional new store in Arizona and have a total of eight signed leases for ~~the remaining three~~new stores, which we plan to open in ~~the fourth quarter of~~ fiscal year ~~2014, and have signed leases for seven newstore locations expected to open after fiscal year 2014~~2015 in Arizona, Arkansas, Colorado, Kansas, ~~Nevada~~Minnesota, Oklahoma and ~~Oklahoma.~~Texas. Additionally, we ~~completed the~~plan to remodel ~~of one~~two existing store ~~location in the nine months ended June 30, 2014~~locations and ~~plan to complete the remodel of one additional~~relocate two existing store locations in ~~the fourth quarter of~~ fiscal year ~~2014.~~2015.

Performance Highlights

Key highlights of our recent performance are discussed briefly below and are discussed 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 ~~$134.0~~$145.9 million for the three months ended ~~June 30,~~December 31, 2014, which is an increase of ~~$20.9~~$25.3 million, or ~~18.4%~~21.0%, compared to net sales of ~~$113.2~~$120.6 million for the three months ended June 30, 2013. We reported net sales of $385.0 million for the nine months ended June 30, 2014, which is an increase of $69.5 million, or 22.0%, compared to net sales of $315.5 million for the nine months ended June 30,December 31, 2013.

●

Comparable store ~~sales.~~sales and daily average comparable store sales.Comparable store sales and daily average comparable store sales for the three ~~and nine~~ months ended ~~June 30,~~December 31, 2014 each increased ~~2.0% and 6.3%, respectively,~~6.2% over ~~the three and nine months ended June 30, 2013.~~

●

~~Daily average c~~~~omparable store sales.~~~~Daily average comparable store sales, which removes the effect of one less selling day in~~ the three months ended June 30, 2014, as a result of the occurrence of Easter in April of 2014 versus March of 2013, increased 3.1% and 6.3%, respectively, in the three and nine months ended June 30, 2014 over the three and nine months ended June 30,December 31, 2013.

●

Mature store ~~sales~~sales and daily average mature store sales.Mature store sales ~~for the three~~ and ~~nine months ended June 30, 2014 increased 0.4% and 4.0%, respectively, over the three and nine months ended June 30, 2013.~~

●

~~Daily average mature~~ ~~store sales.~~~~Daily~~daily average mature store sales ~~which removes the effect of one less selling day in~~for the three months ended ~~June 30,~~December 31, 2014 ~~as a result of the occurrence of Easter in April of 2014 versus March of 2013,~~each increased ~~1.6% and 4.0%, respectively, in the three and nine months ended June 30, 2014~~2.8% over the three ~~and nine~~ months ended ~~June 30,~~December 31, 2013.

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●

Net income.Net income was ~~$3.4~~$3.6 million for the three months ended ~~June 30,~~December 31, 2014, which increased ~~$0.5~~$0.6 million, or ~~16.6%~~22.0%, when compared to net income of $2.9 million for the three months ended June 30, 2013. We reported net income of $10.3 million for the nine months ended June 30, 2014, which increased $2.0 million, or 23.6%, when compared to net income of $8.3 million for the nine months ended June 30,December 31, 2013.

●

EBITDA.Earnings before interest, taxes, depreciation and amortization (EBITDA) was ~~$10.6~~$11.4 million in the three months ended ~~June 30,~~December 31, 2014, which increased ~~$1.9~~$2.1 million, or ~~22.0%~~21.9%, from ~~$8.7~~$9.4 million in the three months ended ~~June 30, 2013. We generated EBITDA of $31.2 million in the nine months ended June 30, 2014, which increased $7.0 million, or 28.8%, from $24.2 million in the nine months ended June 30,~~December 31, 2013. EBITDA is not a measure of financial performance under GAAP. Refer to the end of this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.

●

Liquidity.As of ~~June 30,~~December 31, 2014, cash and cash equivalents was ~~$6.6~~$1.9 million, and there was ~~$14.3~~$11.2 million available under our $15.0 million amended and restated ~~revolving~~secured credit ~~facility.~~facility (our Credit Facility). As of ~~June 30,~~December 31, 2014, ~~the Company~~we had an$3.1 million outstanding ~~letter~~on our Credit Facility and $0.7 million outstanding in letters of credit, ~~of $0.7 million~~ which ~~was~~were reserved against the amount available for borrowing under the terms of our ~~revolving credit facility. The Company had no amounts outstanding on the revolving credit facility as of June 30, 2014.~~Credit Facility.

●

New store growth.We opened ~~three~~four new stores during the three months ended ~~June 30, 2014, and opened 12 new stores during the nine months ended June 30,~~December 31, 2014. We operated a total of 8491 stores as of ~~June 30,~~December 31, 2014. We plan to open a total of 1518 new stores in fiscal year ~~2014,~~2015, which would result in an annual new store growth rate of ~~20.8%~~20.7% for fiscal year ~~2014.~~2015.

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Industry Trends and Economics

We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:

•●

Impact of broader economic trends.The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, economic conditions, the level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence.

	●	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 have continued to open new stores and enter new markets. As we open new stores, our results of operations have been, and may continue to be, materially adversely affected based on the timing and number of new stores we open, their initial sales and new lease costs. The length of time it takes for 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 after its opening date. Mature stores are stores that have been open for any part of five fiscal years or longer.

		As we continue to expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue for the foreseeable future. Our financial results for the three months ended December 31, 2014 reflect the effects of these factors, and we anticipate future periods will be impacted likewise.

As we expand across the U.S. 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 continuing into the foreseeable future. Our financial results for the three and nine months ended June 30, 2014 reflect the effects of these factors, and we anticipate future periods will be impacted likewise.

●

~~Impact of broader economic trends.~~Competition.The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry. Our competition varies by market and includes conventional supermarkets, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers markets, food co-ops, mail order and online retailers and multi-level marketers. We have recently faced increased competition as a result of the opening of natural and organic, gourmet and/or specialty food retailers, as well as the increased offering of natural and organic foods at conventional grocers. In some cases, the impact of these competitive changes has caused the rate of growth in our net sales to decelerate. The longer term impact is more difficult to predict and is dependent on a number of factors in a particular market. 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 exceptional customer service and operational excellence, differentiate us in the industry and ~~our sales are affected by general economic conditions, including, but not limited~~provide us the competitive advantage to ~~consumer spending, economic conditions,~~effectively respond to the ~~level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence.~~increased competition.

Outlook

We believe there are several key factors that have contributed to our success and will enable us to continue to expand profitably and increase our comparable store sales, including a loyal customer base, increasing basket size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education and a shopper friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.

We plan for the foreseeable future to continue opening new stores and entering new markets at or above recent levels of growth. During the past few years, we have successfully expanded our infrastructure to enable us to support our continued growth. This has included successfully implementing our ~~enterprise resource planning~~ERP system, hiring key personnel and developing efficient ~~effective~~ new store opening ~~construction and operations~~ processes and relocating and expanding our bulk food repackaging facility and distribution center. WeIn fiscal year 2014, we substantially completed the implementation of a human resources information and learning management system, ~~in the quarter ended June 30, 2014~~ which we believe will allow us to more efficiently and effectively onboard and train our employees at all locations. In fiscal year 2015, we plan to redesign our website to enhance functionality and create a more engaging user experience, as well as explore options to include additional services through other digital platforms, such as digital coupons, home delivery services and a loyalty program.

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We believe there are opportunities for us to continue to expand our store base and focus on increasing comparable store sales. Future sales growth, including comparable store sales, could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry. As we continue to expand our store base, we believe there are opportunities for increased leverage in costs as a percentage of sales, such as administrative expenses, as well as increased economies of scale in sourcing products. However, due to our commitment to providing high-quality products at affordable prices and increased competition, such sourcing economies and efficiencies at our bulk food repacking facility and distribution center may not be reflected in our gross margin in the near term. Additionally, higher fixed costs of our bulk food repackaging facility and distribution center resulting from the September 2012 relocation and expansion may not be offset by retail price changes or volume increases.

Our operating results may be affected by a variety of internal and external factors and trends described more fully in the section “Risk Factors” contained in our Form ~~10-K, as amended by Part II, Item 1A of this report on 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 ~~returns~~ and ~~allowances.~~returns. In comparing net sales between periods we monitor the following:

●

Change in 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.

●

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.

●

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 ~~2014~~2015 are stores that opened during or before fiscal year ~~2009)~~2010). 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.

●

Change in daily average mature store sales.Daily average mature store sales are mature store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days during the comparable periods.

●

Transaction count.Transaction count represents the number of transactions reported at our stores over such 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.

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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 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 report on 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 sales typically decrease as new stores mature and increase sales. We do not record straight-line rent expense in cost of goods sold and occupancy costs for the leases classified as capital and financing lease obligations, but rather rent payments are recognized as a reduction of the related obligations and as interest expense. Additionally, depreciation expense related to the capitalized asset is recorded in store expenses.

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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 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 capitalized real estate leases, land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations. The majority of store expenses are comprised of salary related expenses which we closely manage and which trend closely with sales. Labor related expenses as a percentage of sales tend to be higher at new stores compared to comparable stores, as new stores require a certain 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 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 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 financing leases, no pre-opening rent expense is recognized. Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening and relocation costs are expensed as incurred.

Operating income

Operating income consists of gross profit less store expenses, administrative expenses and pre-opening and relocation expenses. Operating income can be impacted by a number of factors, including the timing of new store openings and store relocations, whether or not a store lease is classified as an operating or a capital or financing lease, as well as increases in store expenses and administrative expenses. The amount of time it takes for new stores to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market and the strength of store ~~management and general economic conditions.~~management.

Interest expense

Interest expense consists of the interest associated with capital and financing lease obligations. Interest expense also includes interest we pay on our outstanding indebtedness, which includes our ~~revolving credit facility.~~Credit Facility.

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Results of Operations

The following table presents key components of our results of operations expressed as a percentage of net sales for the periods presented:

Three months ended
June 30,

Nine months ended
June 30,

2014

2013

2014

2013

Statements of Income Data:*

Net sales
100.0
%
100.0 100.0 100.0
Cost of goods sold and occupancy costs
71.2 71.2 70.7 70.8
Gross profit
28.8 28.8 29.3 29.2
Store expenses
21.0 20.5 20.8 20.8
Administrative expenses
2.7 2.9 2.9 3.1
Pre-opening and relocation expenses
0.5 0.8 0.7 0.7
Operating income
4.5 4.6 4.8 4.6
Interest expense
(0.5
)
(0.5
)
(0.5
)
(0.4
)
Income before income taxes
4.0 4.1 4.3 4.2
Provision for income taxes
(1.5
)
(1.5
)
(1.6
)
(1.6
)
Net income
2.5
%
2.6 2.7 2.6
__________________________

*Figures may not sum due to rounding.

Number of stores at end of period
84 68 84 68
Number of stores opened during the period
3 3 12 9

Total store unit count increase period over period
23.5
%
23.6 23.5 23.6
Change in comparable store sales
2.0 11.6 6.3 10.8
Change in daily average comparable store sales
3.1 10.4 6.3 11.2
Change in mature store sales
0.4 6.8 4.0 6.1
Change in daily average mature store sales
1.6 5.7 4.0 6.5

	Three months ended December 31,
	2014			2013
Statements of Income Data:*
Net sales		100.0	%		100.0
Cost of goods sold and occupancy costs		71.0			70.7
Gross profit		29.0			29.3
Store expenses		21.3			20.9
Administrative expenses		2.9			3.2
Pre-opening and relocation expenses		0.4			0.7
Operating income		4.4			4.5
Interest expense		(0.5	)		(0.6	)
Income before income taxes		3.9			3.9
Provision for income taxes		(1.5	)		(1.5	)
Net income		2.4	%		2.4
__________________________
*Figures may not sum due to rounding.

Number of stores at end of period		91			76
Number of stores opened during the period		4			4

Total store unit count increase period over period		19.7	%		24.6
Change in comparable store sales		6.2			10.6
Change in daily average comparable store sales		6.2			10.6
Change in mature store sales		2.8			6.9
Change in daily average mature store sales		2.8			6.9

Three months ended~~June 30,~~December 31, 2014 compared to thethree months ended~~June 30,~~December 31, 2013

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

	Three monthsended June 30,						Increase (Decrease)						Three monthsended December 31,						Increase (Decrease)
	2014			2013			Dollars			Percent			2014			2013			Dollars			Percent
Statements of Income Data:
Net sales	$	134,036			113,164			20,872			18.4	%	$	145,887			120,580			25,307			21.0	%
Cost of goods sold and occupancy costs		95,424			80,571			14,853			18.4			103,593			85,199			18,394			21.6
Gross profit		38,612			32,593			6,019			18.5			42,294			35,381			6,913			19.5
Store expenses		28,213			23,181			5,032			21.7			31,049			25,173			5,876			23.3
Administrative expenses		3,585			3,242			343			10.6			4,227			3,889			338			8.7
Pre-opening and relocation expenses		729			961			(232	)		(24.1	)		577			889			(312	)		(35.1	)
Operating income		6,085			5,209			876			16.8			6,441			5,430			1,011			18.6
Other (expense) income:
Interest expense		(706	)		(610	)		(96	)		15.7			(735	)		(707	)		(28	)		4.0
Other income, net		—			3			(3	)		(100.0	)		—			1			(1	)		(100.0	)
Income before income taxes		5,379			4,602			777			16.9			5,706			4,724			982			20.8
Provision for income taxes		(2,015	)		(1,716	)		(299	)		17.4			(2,142	)		(1,802	)		(340	)		18.9
Net income	$	3,364			2,886			478			16.6		$	3,564			2,922			642			22.0

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Net sales

Net sales increased ~~$20.9~~$25.3 million, or ~~18.4%~~21.0%, to ~~$134.0~~$145.9 million for the three months ended ~~June 30,~~December 31, 2014 compared to ~~$113.2~~$120.6 million for the three months ended ~~June 30,~~December 31, 2013, primarily due to ~~an $18.6~~a $17.9 million increase in sales from new stores and a ~~$2.3~~$7.4 million, or ~~2.0%~~6.2%, increase in comparable store sales. ~~Daily average comparable store sales increased 3.1% for the three months ended June 30, 2014 as compared to the three months ended June 30, 2013.~~ The ~~daily average~~ comparable store sales increase was primarily driven by a ~~1.3%~~3.4% increase in daily average transaction count and a ~~1.8%~~2.7% increase in average transaction size. Comparable store average transaction size was ~~$35.74~~$36.77 in the three months ended ~~June 30,~~December 31, 2014. ~~Daily average mature~~Mature store sales increased ~~1.6%~~2.8% in the three months ended ~~June 30,~~December 31, 2014 as compared to the three months ended ~~June 30,~~December 31, 2013. The rate of growth in our comparable and mature store sales, while positive, has been slowed in part by the impact of increased competition.

Gross profit

Gross profit increased ~~$6.0~~$6.9 million, or ~~18.5%~~19.5%, to ~~$38.6~~$42.3 million for the three months ended ~~June 30,~~December 31, 2014 compared to ~~$32.6~~$35.4 million for the three months ended ~~June 30,~~December 31, 2013, primarily driven by positive comparable store sales and an increase in the number of stores. Gross ~~profit was negatively impacted in the three months ended June 30, 2014 by one less selling day compared~~margin decreased to ~~the same period in 2013 due to the occurrence of Easter in April of 2014 versus March of 2013. Gross margin was 28.8%~~29.0% for the three months ended ~~June 30,~~December 31, 2014 ~~and~~from 29.3% for the three months ended December 31, 2013. Gross margin in the three months ended ~~June 30,~~December 31, 2014 was positively impacted by an increase in product gross margin, offset by an increase in occupancy costs as a percentage of sales for the three months ended ~~June 30,~~December 31, 2014 as compared to the three months ended ~~June 30,~~December 31, 2013. The positive impact in product margin is due to increases in product margin across ~~almost all~~most departments, ~~partially offset by a shift in sales mix towards products with lower margin~~ in the three months ended ~~June 30,~~December 31, 2014 as compared to the three months ended ~~June 30,~~December 31, 2013. Gross margin benefited from operating efficiencies at the bulk food repackaging and distribution center in the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The increase in occupancyOccupancy costs as a percentage of sales ~~was~~increased in the quarter ended December 31, 2014 as compared to the quarter ended December 31, 2013 primarily due to increased average lease expenses at newer stores and the fixed nature of occupancy costs per store.

The Company had ~~nine~~11 and ~~seven~~nine leases for stores which were classified as capital and financing lease obligations for the three months ended ~~June 30,~~December 31, 2014 and 2013, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the three months ended ~~June 30,~~December 31, 2014 and 2013 ~~each~~ would have each been approximately ~~55basis~~60 basis points higher, than as ~~reported.~~reported, all as a percentage of sales

Store expenses

Store expenses increased ~~$5.0million,~~$5.9million, or ~~21.7%~~23.3%, to ~~$28.2~~$31.0 million in the three months ended ~~June 30,~~December 31, 2014 from ~~$23.2~~$25.2 million in the three months ended ~~June 30,~~December 31, 2013. Store expenses as a percentage of sales were ~~21.0%~~21.3% and ~~20.5%~~20.9% for the three months ended ~~June 30,~~December 31, 2014 and 2013, respectively. The increase in store expenses as a percentage of sales was primarily due to ~~an increase~~increases in ~~salaries, benefits and related expenses,~~ depreciation and ~~advertising~~other store expenses ~~and, to a lesser extent, utilities expense. The increase in salaries, benefits and related expenses was due to those salaries and related expenses required~~ to support ~~the sales~~store growth, ~~including that at comparable stores, slightly outpacing the increase in sales. The increases in salaries, benefits and related expenses were~~ partially offset by ~~lower incentive compensation and other discretionary benefits expense, reflecting our pay-for-performance philosophy.~~decreases in salary related expenses.

Administrative expenses

Administrative expenses increased $0.3 million, or ~~10.6%~~8.7%, to ~~$3.6~~$4.2 million for the three months ended ~~June 30,~~December 31, 2014 compared to ~~$3.2~~$3.9 million for the three months ended ~~June 30,~~December 31, 2013, primarily due to the addition of general and administrative positions to support our store growth, as well as increased share-based compensation costs due to the award of restricted stock units (RSUs) to certain employees in the quarter ended September 30, 2013. The increases in expense due to the addition of positions were partially offset by lower incentive compensation and other discretionary benefits expense, reflecting our pay-for-performance philosophy.growth. Administrative expenses as a percentage of sales were ~~2.7%~~2.9% and ~~2.9%~~3.2% for the three months ended ~~June 30,~~December 31, 2014 and 2013, respectively. The decrease in administrative expenses as a percentage of sales was a result of our ability to support additional store investment and sales without proportionate investments in overhead.

Pre-opening and relocation expenses

Pre-opening and relocation expenses decreased ~~$0.2~~$0.3 million, or ~~24.1%~~35.1%, in the three months ended ~~June 30,~~December 31, 2014 to ~~$0.7~~$0.6 million compared to ~~$1.0~~$0.9 million for the three months ended ~~June 30,~~December 31, 2013, due to the impact of the timing, nature and location of the new store ~~openings and possession of stores that are not yet opened.~~openings. We opened ~~three~~four new stores in ~~both~~each of the three months ended ~~June 30,~~December 31, 2014 and ~~2013, all of which are classified as operating leases.~~2013. Pre-opening and relocation expenses as a percentage of sales were ~~0.5%~~0.4% and ~~0.8%~~0.7% for the three months ended ~~June 30,~~December 31, 2014 and 2013, respectively.

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Interest expense

Interest expense, net of capitalized interest, increased less than $0.1 million, or ~~15.7%~~4.0%, ~~to $0.7 million~~ in the three months ended ~~June 30,~~December 31, 2014 compared to ~~$0.6 million for~~ the three months ended ~~June 30,~~December 31, 2013 primarily due to ana $0.1 million increase in interest expense related to capital and financing lease obligations, ~~and to~~partially offset by a ~~lesser extent, interest related to borrowings on our revolving credit facility.~~$0.1 million increase in capitalized interest. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 50 and ~~55basis~~60 basis points lower than as reported in the three months ended ~~June 30, 2014 and 2013, respectively.~~

~~Table Of Contents~~

~~Income taxes~~

Our effective income tax rate for the three months ended June 30, 2014 and 2013 was 37.5% and 37.3%, respectively. The increase in our effective income tax rate was primarily due to an increase in federal income taxes, partially offset by favorable return to provision adjustments recognized in the quarter ended June 30, 2014. Our federal income taxes increased because of additional taxable net income and a consequential higher tax rate. Our additional taxable net income was due in part to the impact of prior deductions for bonus depreciation.

~~Net income~~

Net income increased 16.6% to $3.4 million, or $0.15 diluted earnings per share, in the three months ended June 30, 2014 from $2.9 million, or $0.13 diluted earnings per share, in the three months ended June 30, 2013.

~~Nine months~~ ~~ended~~~~June 30, 2014~~ ~~compared to the~~~~nine months~~ ~~ended~~~~June 30, 2013~~

~~The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:~~

Nine monthsended
June 30,

Increase (Decrease)

2014

2013

Dollars

Percent

Statements of Income Data:

Net sales
$ 384,959 315,480 69,479 22.0
%
Cost of goods sold and occupancy costs
272,213 223,233 48,980 21.9
Gross profit
112,746 92,247 20,499 22.2
Store expenses
80,263 65,547 14,716 22.5
Administrative expenses
11,022 9,910 1,112 11.2
Pre-opening and relocation expenses
2,829 2,276 553 24.3
Operating income
18,632 14,514 4,118 28.4
Other (expense) income:

Interest expense
(2,117
)
(1,266
)
(851
)
67.2
Other income, net
2 7 (5
)
(71.4
)
Income before income taxes
16,517 13,255 3,262 24.6
Provision for income taxes
(6,232
)
(4,931
)
(1,301
)
26.4
Net income
$ 10,285 8,324 1,961 23.6

~~Net sales~~

Net sales increased $69.5 million, or 22.0%, to $385.0 million for the nine months ended June 30, 2014 compared to $315.5 million for the nine months ended June 30, 2013 primarily due to a $49.8 million increase in sales from new stores and a $19.7 million, or 6.3%, increase in comparable store sales. Daily average comparable store sales increased 6.3% for the nine months ended June 30, 2014 as compared to the nine months ended June 30, 2013. The daily average comparable store sales increase was primarily driven by a 2.7% increase in daily average transaction count and a 3.5% increase in average transaction size. Comparable store average transaction size was $36.34 in the nine months ended June 30, 2014 compared to $36.08 in the nine months ended June 30, 2013.

~~Gross profit~~

Gross profit increased $20.5 million, or 22.2%, to $112.7 million for the nine months ended June 30, 2014 compared to $92.2 million for the nine months ended June 30, 2013, primarily driven by an increase in the number of stores. Gross margin increased to 29.3% for the nine months ended June 30, 2014 from 29.2% for the nine months ended June 30, 2013. Gross margin was positively impacted by an increase in product gross margin, partially offset by an increase in occupancy costs as a percentage of sales for the nine months ended June 30, 2014 as compared to the nine months ended June 30, 2013. The positive impact in product margin in the nine months ended June 30, 2014 as compared to the nine months ended June 30, 2013, is due to increases in product margin across almost all departments, partially offset by a shift in sales mix towards products with lower margin. The increase in occupancy costs as a percentage of sales for the nine months ended June 30, 2014 as compared to the nine months ended June 30, 2013 was primarily due to increased average lease expenses at newer stores and the fixed nature of occupancy costs per store.

~~Table Of Contents~~

The Company had nine and seven leases for stores which were classified as capital and financing lease obligations for the nine months ended June 30, 2014 and 2013, respectively. If these leases had qualified as operating leases, the straight-line expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the nine months ended June 30, 2014 and 2013 would have been approximately 60and 40 basis points higher, respectively, than as reported.

~~Store expenses~~

Store expenses increased $14.7 million, or 22.5%, to $80.3 million in the nine months ended June 30, 2014 from $65.5 million in the nine months ended June 30, 2013. Store expenses as a percentage of sales were 20.8% for each of the nine months ended June 30, 2014 and 2013. The consistency in store expenses as a percentage of sales was primarily due to a decrease in salaries, benefits and related expenses, offset by increases in depreciation expense. The decreases in salaries, benefits and related expenses was primarily due to lower incentive compensation and other discretionary benefits expense, reflecting our pay-for-performance philosophy, partially offset by increases in those salaries and related expenses required to support the sales growth.

~~Administrative expenses~~

Administrative expenses increased $1.1 million, or 11.2%, to $11.0 million for the nine months ended June 30, 2014 compared to $9.9 million for the nine months ended June 30, 2013, primarily due to the addition of general and administrative positions to support our store growth, as well as increased share-based compensation costs due to the award of RSUs to certain employees in the quarter ended September 30, 2013. The increase in expenses due to the addition of positions was partially offset by lower incentive compensation and other discretionary benefits expense, reflecting our pay-for-performance philosophy. Administrative expenses as a percentage of sales were 2.9% and 3.1% for the nine months ended June 30, 2014 and 2013, respectively.

~~Pre-opening and relocation expenses~~

Pre-opening and relocation expenses increased $0.6 million, or 24.3%, in the nine months ended June 30, 2014 to $2.8 million compared to $2.3 million for the nine months ended June 30, 2013, due to the increased number of new store openings, the impact of the timing of the openings and possession of stores that are not yet opened, and the lease classification for those stores that were opened. We opened 12 new stores for the nine months ended June 30, 2014, one of which was classified as a capital and financing lease obligation with no straight-line rent expense included in pre-opening and relocation expenses. We opened nine new stores for the nine months ended June 30, 2013, five of which were classified as capital and financing lease obligations with no straight-line rent expense included in pre-opening and relocation expenses. Pre-opening and relocation expenses as a percentage of sales were 0.7% for each of the nine months ended June 30, 2014 and 2013.

~~Interest expense~~

Interest expense increased $0.9 million, or 67.2%, to $2.1 million in the nine months ended June 30, 2014 compared to $1.3 million for the nine months ended June 30, 2013 due to an increase in interest expense related to capital and financing lease obligations. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 55 and 40 basis points lower than as reported in the nine months ended June 30,December 31, 2014 and 2013, respectively.

Income taxes

Our effective income tax rate for the ~~nine~~three months ended ~~June 30,~~December 31, 2014 and 2013 was ~~37.7%~~37.5% and ~~37.2%~~38.1%, respectively. The ~~increase~~decrease in our effective income tax rate was primarily due ~~to an increase in federal income taxes, partially offset by favorable return to provision adjustments recognized~~toa reduction in the ~~nine months ended June 30, 2014. Our federal income taxes increased because~~blended state tax rate, tax benefits resulting from the extension of ~~additional taxable net income~~the Federal Enhanced Food Deduction (IRC Section 170(e)(3)(C)), and ~~a consequential higher~~prior fiscal year tax ~~rate. Our additional taxable net income was due in part~~benefits relating to the ~~impact~~retroactive extension of ~~prior deductions for bonus depreciation.~~the Federal Work Opportunity Tax Credit and Bonus Depreciation.

During the ~~first quarter of fiscal year~~three months ended December 31, 2014, the Company experienced benefits from the American Taxpayer Relief Act of 2012, which extended the 50% bonus depreciation on qualifying assets and the special 15 year life for qualified leasehold property and qualified retail improvement property for property acquired from January 1, ~~2013~~2014 through December 31, 2013. The Company does not anticipate future benefits from the American Taxpayer Relief Act of 2012 because its provisions expired as of December 31, 2013 and no precedent exists for it being retroactively reauthorized by Congress.2014.

The Company also benefited from the extension of the Work Opportunity Tax Credit during the ~~quarter~~three months ended December 31, ~~2013. Although~~2014 and 2013 and the ~~legislative authority for this credit expired~~extension of the Enhanced Food Deduction during the three months ended December 31, ~~2013,~~2014. As these provisions were retroactively extended through December 31, 2014, the Company ~~believes it may~~has recognized a tax benefit ~~from~~for the ~~credit in~~quarter. In addition, the ~~future if Congress reauthorizes it.~~Company has recognized a tax benefit relating to Work Opportunity Tax Credit relating to fiscal year 2014.

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Net income

Net income increased ~~23.6%~~22.0% to ~~$10.3~~$3.6 million, or ~~$0.46~~$0.16 diluted earnings per share, in the ~~nine~~three months ended ~~June 30,~~December 31, 2014 ~~from $8.3~~compared to $2.9 million, or ~~$0.37~~$0.13 diluted earnings per share, in the ~~nine~~three months ended ~~June 30,~~December 31, 2013.

Non-GAAP financial measures

EBITDA

EBITDA increased ~~22.0%~~21.9% to ~~$10.6~~$11.4 million in the three months ended ~~June 30,~~December 31, 2014 compared to ~~$8.7~~$9.4 million in the three months ended ~~June 30, 2013. EBITDA increased 28.8% to $31.2 million in the nine months ended June 30, 2014 compared to $24.2 million in the nine months ended June 30,~~December 31, 2013. EBITDA as a percent of sales was ~~7.9% and 7.7% for~~7.8% in each of the three months ended ~~June 30,~~December 31, 2014 and ~~2013, respectively. EBITDA as a percent of sales was 8.1% and 7.7% for the nine months ended June 30, 2014 and 2013, respectively.~~2013. The stores with leases that are classified as capital and financing lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of sales by approximately 5560 basis points ~~for~~in each of the three months ended ~~June 30,~~December 31, 2014 and 2013, ~~and by approximately 60 and 50 basis points for the nine months ended June 30, 2014 and 2013, respectively,~~ due to the impact on cost of goods sold and occupancy costs as discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening dates if these leases had been accounted for as operating leases.

EBITDA is not a measure of financial performance under GAAP. We define EBITDA as net income before interest ~~taxes,~~expense, provision for income tax, depreciation and amortization. We believe EBITDA provides 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 ~~performance~~ is a measure in our debt covenants under our Credit Facility. In addition, EBITDA performance is one of the factors upon which funding of our incentive compensation ~~payments.~~plans is based.

Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. By providing this non-GAAP financial measure, together with a reconciliation from net income, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives. Our competitors may define EBITDA differently, and as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a supplemental measure of operating performance that does 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 our consolidated financial statements as indicators of financial performance. EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

●

EBITDA does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

●

EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

●

EBITDA does not reflect any impact for straight-line rent expense for leases classified as capital and financing lease obligations;

●

EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

●

EBITDA does 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 does not reflect any cash requirements for such replacements.

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Due to these limitations, 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 as supplemental information. We further believe that our presentation of this non-GAAP financial measurement provides information that is useful to analysts and investors because it is an important indicator of the strength of our operations and the performance of our business.

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The following table reconciles net income to EBITDA for the periods presented, dollars in thousands:

	Three months ended June 30,				Nine months ended June 30,				Three months ended December 31,
	2014		2013		2014		2013		2014		2013
Net income	$	3,364		2,886		10,285		8,324	$	3,564		2,922
Interest expense		706		610		2,117		1,266		735		707
Provision for income taxes		2,015		1,716		6,232		4,931		2,142		1,802
Depreciation and amortization		4,502		3,464		12,556		9,689		4,981		3,938
EBITDA	$	10,587		8,676		31,190		24,210	$	11,422		9,369

Liquidity and Capital Resources

Our primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and ~~availability~~borrowings under our ~~revolving credit facility.~~Credit Facility.

Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening new stores and relocating and remodeling certain existing stores, ~~purchases of inventory, operating expense,~~ debt service and corporate taxes. Additionally, in the three months ended December 31, 2014, our uses of cash included the acquisition of substantially all of the assets and the assumption of certain liabilities of a natural food retailer located in Independence, Missouri.

As of ~~June 30,~~December 31, 2014, we had ~~$6.6~~$1.9 million in cash and cash equivalents, ~~as well as $14.3~~$3.1 million ~~available under~~outstanding on our ~~amended and restated revolving~~Credit Facility, letters of credit ~~facility. As of June 30, 2014, we had an undrawn, issued and outstanding letter of credit~~in the amount of $0.7 million which ~~was~~were reserved against the amount available for borrowing under the terms of our ~~revolving credit facility. The Company had no amounts outstanding on the revolving credit facility as of June 30, 2014.~~Credit Facility, and $11.2 million available under our Credit Facility.

~~On December 12, 2013, we entered into an amended and restated~~We currently have a $15.0 million credit agreement ~~that, among other things, (i) extended the~~with a maturity date of ~~the Company’s revolving credit facility by three years to~~ January 31, ~~2017, (ii) provides the Company with~~2017. We have the right to request the issuance of letters of credit under ~~the credit facility~~our Credit Facility up to $3.0 ~~million, (iii) allows the Company to~~million. We can increase the amount available under ~~the revolving credit facility,~~our Credit Facility up to an additional amount that may not exceed $10.0 million by obtaining an additional commitment or ~~commitments, (iv) eliminated a requirement for a consolidated EBITDA to revenue ratio and (v) amended the~~commitments. The unused commitment fee ~~from 0.20% to amounts ranging~~ranges from 0.15% to 0.35% based on certain conditions.

We plan to continue to open new stores, which has previously required, and may ~~in the future~~continue to require, us to borrow additional amounts under our ~~revolving credit facility.~~Credit Facility in the future. We plan to spend approximately ~~$8.0~~$37 million to ~~$10.0~~$39 million on capital expenditures during the remaining ~~three~~nine months of fiscal year ~~2014.~~2015 in association with the 14 planned new stores and two relocations and two remodels. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our ~~revolving credit facility~~Credit Facility will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new ~~stores~~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.

We anticipate that our new stores will require, on average, an upfront capital investment of approximately ~~$2.5~~$2.2 million per store consisting of capital expenditures of approximately ~~$1.9~~$1.7 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately ~~$0.3~~$0.2 million.

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Following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:

	Nine months ended June 30,						Three months ended December 31,
	2014			2013			2014			2013
Net cash provided by operating activities	$	23,475			15,145		$	6,906			5,310
Net cash used in investing activities		(25,280	)		(26,356	)		(13,169	)		(7,184	)
Net cash provided by (used in) financing activities		307			(428	)		3,005			(36	)
Net decrease in cash and cash equivalents		(1,498	)		(11,639	)		(3,258	)		(1,910	)
Cash and cash equivalents, beginning of period		8,132			17,291			5,113			8,132
Cash and cash equivalents, end of period	$	6,634			5,652		$	1,855			6,222

Operating Activities

Cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased ~~$8.3~~$1.6 million, or ~~55.0%~~30.1%, to ~~$23.5~~$6.9 million in the ~~nine~~three months ended ~~June 30,~~December 31, 2014, ~~from $15.1~~compared to $5.3 million in the ~~nine~~three months ended ~~June 30,~~December 31, 2013. The increase in cash provided by operating activities was primarily due to an increase in net income, as adjusted for depreciation and amortization resulting from the addition of new stores, offset by changes in working capital driven by the timing of payment on inventory and other purchases. Our working capital requirements for inventory will likely continue to increase as we continue to open new stores.

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Investing Activities

Cash used in investing activities ~~decreased $1.1~~increased $6.0 million, or ~~4.1%~~83.3%, to ~~$25.3~~$13.2 million in the ~~nine~~three months ended ~~June 30,~~December 31, 2014 ~~from $26.4~~compared to $7.2 million in the ~~nine~~three months ended ~~June 30, 2013.~~December 31, 2013 due to the acquisition on December 7, 2014 of substantially all of the assets and certain liabilities of a natural food retailer located in Independence, Missouri. We paid $5.6 million for that acquisition during the three months ended December 31, 2014. Cash ~~used in investing activities consists primarily of~~paid for capital expenditures ~~which increased $1.1~~decreased $0.1 million ~~to $26.9 million for~~in the ~~nine~~three months ended ~~June 30, 2014 as compared to $25.9 million for the nine months ended June 30, 2013. We opened 12 new stores during the nine months ended June 30,~~December 31, 2014 compared to ~~nine new stores during the nine months ended June 30, 2013. In the nine months ended June 30,~~December 31, 2013, capital expenditures included approximately $5.0 million of capital expenditures for assets acquired in the fourth quarter of fiscal year 2012, but paid during the first quarter of fiscal year 2013, including amounts related to our bulk food repackaging and ~~distribution center. The remaining change in cash used for capital expenditures was due in part to~~is driven by the timing ~~costs and number~~ of new stores opened during the nine months ended June 30, 2014 as compared to the nine months ended June 30, 2013. The cash used for capital expenditures was partially offset by a $1.1 million reduction in our short term investments – available-for-sale, as well as a $0.5 million reduction in our restricted cash balance in the nine months ended June 30, 2014.store openings.

Financing Activities

Cash provided by (used in) financing activities consists primarily of borrowings and repayments under our Credit Facility, excess tax benefits on vested share-based compensation ~~offset by~~and payments of capital and financing lease ~~obligations for the nine months ended June 30, 2014.~~obligations. Cash provided by financing activities was ~~$0.3~~$3.0 million for the ~~nine~~three months ended ~~June 30,~~December 31, 2014, as compared to cash used in financing activities of ~~$0.4~~less than $0.1 million in the ~~nine~~three months ended ~~June 30,~~December 31, 2013. The increase in cash provided by financing activities for the ~~nine~~three months ended ~~June 30,~~December 31, 2014 was primarily due to ~~an increase in excess tax benefits for vested share-based compensation,~~net borrowing of $3.1 million on our Credit Facility to fund the December 7, 2014 acquisition and ~~a decrease in equity issuance costs paid.~~ to pay income taxes.

Credit Facility

Credit Facility

~~We are a party to the~~Our $15.0 million ~~amended and restated revolving credit facility, which we~~Credit Facility, may ~~increase~~be increased by ~~an additional amount that may not exceed~~up to $10.0 million, as further described above in “Liquidity and Capital Resources.” The operating company is the borrower under ~~the credit facility,~~our Credit Facility, and its obligations under ~~the credit facility~~our Credit Facility are guaranteed by the holding company.

As of ~~June 30,~~December 31, 2014, we had ~~no amounts~~$3.1 million outstanding on our Credit Facility, letters of credit in the ~~revolving credit facility, with a~~amount of $0.7 million ~~letter of credit issued~~reserved against the amount available for borrowing under our Credit Facility, and ~~outstanding and $14.3~~$11.2 million available for ~~borrowing.~~borrowing under our Credit Facility. For floating rate borrowings under ~~the credit facility,~~our Credit Facility, interest is determined by the lender’s administrative agent and is stated at the prime rate less the lender spread, subject to the Company meeting certain financial measures. For fixed rate borrowings under ~~the credit facility,~~our Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread, subject to us meeting certain financial measures.

~~The amended and restated revolving credit facility~~Our Credit Facility requires compliance with certain operational and financial covenants (including a leverage ratio and a fixed charge coverage ratio). ~~The revolving credit facility~~Our Credit Facility also contains certain other limitations on our ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the agreement. Additionally, ~~the revolving credit facility~~our Credit Facility prohibits the payment of cash dividends to the holding company from the operating company, without the ~~bank’s~~administrative agent’s consent except when no default or event of default exists. If no default or event of default exists, dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary course of business. We do not expect such restrictions to impact our ability to meet our cash obligations. The terms and conditions of the agreement for ~~the revolving credit facility~~our Credit Facility and associated documents are customary and include, among other things, guarantees, security interest grants, pledges and subordinations. As of ~~June 30,~~December 31, 2014, we were in compliance with the debt covenants of our ~~credit facility.~~Credit Facility.

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Contractual Obligations

The following table summarizes our contractual obligations as of ~~June 30,~~December 31, 2014, dollars in thousands:

	Payments Due by Period										Payments Due by Period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years		Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

Interest payments (1)	$	56		22		34		—		—	$	156		75		81		—		—
Operating leases (2)		258,771		19,853		41,762		40,196		156,960		299,689		22,078		47,102		45,120		185,389
Capital and financing lease obligations, including principal and interest payments (3)		41,606		2,977		5,955		5,993		26,681		44,917		3,384		6,831		6,908		27,794
Contractual obligations for construction related activities (4)		1,576		1,576		—		—		—		1,505		1,505		—		—		—
	$	302,009		24,428		47,751		46,189		183,641	$	346,267		27,042		54,014		52,028		213,183

(1)

We assumed the interest payments to be paid during the remainder of ~~the revolving credit facility~~our Credit Facility using (i) an annual interest rate of 1.85% on amounts outstanding as of December 31, 2014 and (ii) an unused commitment fee of 0.15% for amounts not borrowed as of ~~June 30,~~December 31, 2014. For purposes of this table, current amounts were considered outstanding until January 31, 2017, which is the maturity date of the Credit Facility.

(2)	Represents the minimum lease payments due under our operating leases, excluding annual common area maintenance, insurance and taxes related to our operating lease obligations.

(3)

Represents the payments due under our capital and financing lease obligations for ~~nine~~11 stores, all of which were open as of ~~June 30,~~December 31, 2014. We do not record rent expense for these capital leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligations and interest expense.

(4)	Contractual obligations for construction related activities include future payments to general contractors that are legally binding as of ~~June 30,~~December 31, 2014 and relate to new store construction, relocations and remodels.

Off-Balance Sheet Arrangements

As of ~~June 30,~~December 31, 2014, our off-balance sheet arrangements ~~consist~~consisted of operating leases and the undrawn portion of our ~~amended and restated revolving credit facility.~~Credit Facility. All of our stores, bulk food repackaging facility and distribution center and administrative facilities are leased, and as of ~~June 30,~~December 31, 2014, ~~nine~~11 leases were classified as capital and financing lease obligations, and the remaining leases were classified as operating leases in our consolidated financial statements. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.

Recent Accounting Pronouncements

See Note 2 to the consolidated financial statements included in this report on Form 10-Q.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with U.S. 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” in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II of our Form 10-K.

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Item 3. ~~Qualitative~~ Qualitative and Quantitative Disclosures About Market Risk

We are exposed to interest rate changes of our long-term debt, and, to a limited extent, our revolving 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. Controlsand 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 Securities Exchange Act of 1934 as of the end of the period covered by this report on 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 ~~June 30,~~December 31, 2014.

Changes in Internal Control over Financial Reporting

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 that are incidental to the conduct of our business, including but not limited to employment discrimination claims, customer injury claims and investigations. 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

There have been no material changes from the risk factors disclosed in Part I, Item 1A, of our Form ~~10-K, other than the changes to the risk factors set forth below.~~10-K.

~~If we are unable to successfully identify market trends and react to changing consumer preferences in a timely manner, our sales may decrease.~~

~~We believe our success depends, in substantial part, on our ability to:~~

●

~~anticipate, identify and react to natural and organic grocery and dietary supplement trends and changing consumer preferences in a timely manner;~~

●

~~translate market trends into appropriate, saleable product and service offerings in our stores before our competitors; and~~

●

~~develop and maintain vendor relationships that provide us access to the newest merchandise, and dairy products that satisfy upgraded standards, on reasonable terms.~~

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Consumer preferences often change rapidly and without warning, moving from one trend to another among many products or retail concepts. Our performance is 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, reduced or changed consumer choices and the cost of these products. Our store offerings remain composed of natural and organic products and dietary supplements. A change in consumer preferences away from our offerings including as a result of, among other things, reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity over the safety of any such items, or upgraded standards that reduce or change consumer choices, may adversely affect demand for our products and could result in lower customer traffic, sales and results of operations. Reduced or changed consumer choices may result from, among other things, our implementation of requirements for dairy products that satisfy our pasture-based, non-confinement standards.

If we are unable to anticipate and satisfy consumer merchandise preferences in the regions where we operate, our net sales may decrease, and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition and results of operations.

~~Our future business, results of operations and financial condition may be adversely affected by reduced availability of organic products or~~~~dairy products that satisfy our pasture-based, non-confinement standards~~.

Our ability to ensure a continuing supply of organic products and dairy products that satisfy our pasture-based, non-confinement standards at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow organic crops or raise organic livestock or satisfy our pasture-based, non-confinement standards, the vagaries of these farming businesses and our ability to accurately forecast our sourcing requirements. The organic ingredients used in many of the products we sell are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of, or increase the price of, organic ingredients. Certain products we purchase from our suppliers include organic ingredients sourced offshore, and the availability of such ingredients may be affected by events in other countries. In addition, we and our suppliers compete with other food producers in the procurement of organic ingredients and dairy products that satisfy our pasture-based, non-confinement standards, which are often less plentiful in the open market than conventional ingredients and products. This competition may increase in the future if consumer demand increases for organic products and dairy products that satisfy our pasture-based, non-confinement standards. If supplies of organic ingredients and dairy products that satisfy our pasture-based, non-confinement standards are reduced or there is greater demand for such ingredients from us and others, we may not be able to obtain sufficient supply on favorable terms, or at all, which could impact our ability to supply products to our stores and may adversely affect our business, results of operations and financial condition.

The organic products we sell rely on independent certification and must comply with the requirements of independent organizations or certification authorities in order to be labeled as such. Certain products we sell in our stores can lose their “organic” certification if a contract manufacturing plant becomes contaminated with non-organic materials or if it is not properly cleaned after a production run, among other issues. The loss of any independent certifications could reduce the availability of organic products that we can sell in our stores and harm our business.

Item6.Exhibits

See Exhibit Index.

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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 ~~July 31, 2014.~~

January 29, 2015.

	Natural Grocers by Vitamin Cottage, Inc.


	By:	/s/ KEMPER ISELY
		Kemper Isely, Co-President
		(Principal Executive Officer)


	By:	/s/ SANDRA BUFFA
		Sandra Buffa, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

Exhibit Number		Description
~~31.1~~10.1		Second Amended and Restated Employment Agreement by and between Sandra M. Buffa and Vitamin Cottage Natural Food Markets, Inc., dated January 14, 2015.
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 Sandra Buffa, 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 ~~June 30,~~December 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of ~~Comprehensive Income (unaudited), (iv) Consolidated Statements of~~ Cash Flows (unaudited) and ~~(v)~~(iv) notes to Unaudited Interim Consolidated Financial Statements.

† The certifications attached as Exhibit 32.1 that accompany this report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

^ Furnished, not filed. Users of this data submitted electronically herewith are advised pursuant to Rule 406T of Regulation S-T that the interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Act of 1933, and otherwise are not subject to liability under these sections.

	Nine months endedJune 30,
	2014			2013
Operating activities:
Net income	$	10,285			8,324
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		12,556			9,689
Loss on disposal of property and equipment		—			10
Share-based compensation		402			87
Excess tax benefit from share-based compensation		(472	)		(211	)
Deferred income tax (benefit) expense		(714	)		1,222
Non-cash interest expense		15			39
Interest accrued on investments and amortization of premium		9			15
Other amortization		—			26
Changes in operating assets and liabilities
Decrease (increase) in:
Accounts receivable, net		695			(126	)
Income tax receivable		612			(15	)
Merchandise inventory		(10,545	)		(5,829	)
Prepaid expenses and other assets		(923	)		193
Increase in:
Accounts payable		6,820			397
Accrued expenses		2,514			1,017
Deferred rent and leasehold incentives		2,221			307
Net cash provided by operating activities		23,475			15,145
Investing activities:
Acquisition of property and equipment		(26,920	)		(25,863	)
Proceeds from sale of property and equipment		—			3
Purchase of available-for-sale securities		—			(521	)
Proceeds from the sale of available-for-sale securities		—			90
Proceeds from maturity of available-for-sale securities		1,140			435
Decrease (increase) in restricted cash		500			(500	)
Net cash used in investing activities		(25,280	)		(26,356	)
Financing activities:
Borrowings under credit facility		12,892			—
Repayments under credit facility		(12,892	)		—
Repayments under notes payable, related party		—			(282	)
Capital and financing lease obligations payments		(135	)		(71	)
Excess tax benefit from share-based compensation		472			211
Equity issuance costs		—			(268	)
Credit facility fees paid		(30	)		(18	)
Net cash provided by (used in) financing activities		307			(428	)
Net decrease in cash and cash equivalents		(1,498	)		(11,639	)
Cash and cash equivalents, beginning of period		8,132			17,291
Cash and cash equivalents, end of period	$	6,634			5,652
Supplemental disclosures of cash flow information:
Cash paid for interest	$	4			7
Cash paid for interest on capital and financing lease obligations		2,090			1,220
Income taxes paid		3,750			2,889
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	3,525			5,558
Property acquired through capital and financing lease obligations		14			10,523

	As of
	June 30,		September 30,
	2014		2013
Accrued income, property, sales and use tax payable	$	4,944		2,686
Payroll and employee-related expenses		4,252		5,247
Deferred revenue related to gift card sales		682		625
Other		1,462		748
Total accrued expenses	$	11,340		9,306

			As of
			June 30, 2014				September 30,2013
	Fair Value Hierarchy Level		Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash equivalents:
Money market fund		1	$	—		—		501		501

Investments — available-for-sale securities:

Certificates of deposit		2		—		—		585		585
Corporate bonds		2		—		—		376		376
Municipal bonds		2		—		—		188		188

	RSUs			Weighted average grant date fair value
Non-vested as of September 30, 2013		86,053		$	21.80
Granted		3,558			42.16
Forfeited		(940	)		34.07
Vested		(35,733	)		4.60
Non-vested as of June 30, 2014		52,938			34.56

	Nine monthsended June 30,						Increase (Decrease)
	2014			2013			Dollars			Percent
Statements of Income Data:
Net sales	$	384,959			315,480			69,479			22.0	%
Cost of goods sold and occupancy costs		272,213			223,233			48,980			21.9
Gross profit		112,746			92,247			20,499			22.2
Store expenses		80,263			65,547			14,716			22.5
Administrative expenses		11,022			9,910			1,112			11.2
Pre-opening and relocation expenses		2,829			2,276			553			24.3
Operating income		18,632			14,514			4,118			28.4
Other (expense) income:
Interest expense		(2,117	)		(1,266	)		(851	)		67.2
Other income, net		2			7			(5	)		(71.4	)
Income before income taxes		16,517			13,255			3,262			24.6
Provision for income taxes		(6,232	)		(4,931	)		(1,301	)		26.4
Net income	$	10,285			8,324			1,961			23.6