UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form10-Q
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FOR THE QUARTERLY PERIOD ENDED DECEMBERMARCH 31,, 2017; 2022
OR
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COMMISSION FILE NUMBER: 001-35608
NaturalNatural Grocers by Vitamin Cottage, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 45-5034161 | |
(State or other jurisdiction of | (I.R.S. Employer |
12612 West Alameda Parkway | 80228 | |
Lakewood, Colorado (Address of principal executive offices) | (Zip code) |
(303) 986-4600
(Registrant’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
Common Stock, $0.001 par value | NGVC | New York Stock Exchange |
Indicate by check mark 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 check mark 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☒ | |
Non | Smaller reporting company | |
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Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
IndicateIndicate by check mark 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’sregistrant’s common stock, $0.001 par value, outstanding as of January 31, 2018May 2, 2022 was 22,349,282.22,676,827.
Natural Grocers by Vitamin Cottage, Inc.
Quarterly Report on Form 10-Q
For the Quarterly Period Ended DecemberMarch 31,, 2017 2022
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Item 1. | 4 | |
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Notes to Unaudited Interim Consolidated Financial Statements |
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Except where the context otherwise requires or where otherwise indicated:indicated: (i) all references herein to ‘‘‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers’’ and ‘‘theus,’’ ‘‘our,’’‘‘Natural Grocers’’ and the “Company’’Company’’ refer collectively to NaturalNatural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiariesand (ii) all references to a “fiscal year”“fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such year (for example,“, “fiscalfiscal year 2022”2018” refers to the year from October 1, 20172021 to September 30, 2018)2022).
Forward-LookingForward-Looking Statements
This Quarterly Report on Form 10-Q (this 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 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, future growth, pending legal proceedings and other financial and operating information, are forward looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in this Form 10-Q.
The forward-looking statements contained in this 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, national, regional or local political, economic, inflationary, business, labor market, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those referenced in Item 1A - “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 20172021 (the Form 10-K) and Item 1A – “Risk Factors” in this Form 10-Q.. 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.
In addition, our actual results could differ materially from the forward-looking statements in this Form 10-Q due to risks and challenges related to the COVID-19 pandemic and the resulting government mandates, including: the length of time the COVID-19 pandemic continues; the inability of customers to shop due to illness or quarantine, isolation or stay-at-home orders; shifts in demand to more online shopping or to lower-priced or other perceived value offerings; the temporary inability of our employees to work due to illness; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; temporary store closures due to infections at our stores or government mandates; stay-at-home measures, safety directives and operating requirements imposed by local, state or federal governmental authorities; the extent and duration of adverse economic conditions resulting, directly or indirectly, from the COVID-19 pandemic and government mandates, including levels of consumer spending, the unemployment rate, interest rates and inflationary and deflationary trends; increased operating costs; and the extent and effectiveness of any COVID-19-related stimulus packages implemented by the federal and state governments. We believe these factors include those described in “Risk Factors.” 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 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 applicable securities laws. You are advised, however, to consult any disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC). SuchOur reports may be read and copiedother filings with the SEC are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and may also be accessed on the SEC’s website at www.sec.gov. Our reports and other filings with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.
NATURALNATURAL GROCERS BY VITAMIN COTTAGE, INC.
(Unaudited)
(Dollars in thousands, except per share data)
December 31, 2017 | September 30, 2017 | |||||||||||||||
(unaudited) | March 31, 2022 | September 30, 2021 | ||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 8,089 | 6,521 | $ | 28,889 | 23,678 | ||||||||||
Accounts receivable, net | 4,477 | 4,860 | 6,207 | 8,489 | ||||||||||||
Merchandise inventory | 91,422 | 93,612 | 106,650 | 100,546 | ||||||||||||
Prepaid expenses and other current assets | 2,761 | 3,222 | 3,462 | 2,914 | ||||||||||||
Total current assets | 106,749 | 108,215 | 145,208 | 135,627 | ||||||||||||
Property and equipment, net | 185,189 | 184,417 | 147,786 | 151,399 | ||||||||||||
Other assets: | ||||||||||||||||
Operating lease assets, net | 307,078 | 316,388 | ||||||||||||||
Finance lease assets, net | 41,508 | 39,367 | ||||||||||||||
Deposits and other assets | 1,688 | 1,642 | 475 | 530 | ||||||||||||
Goodwill and other intangible assets, net of accumulated amortization of $402 and $394, respectively | 5,673 | 5,655 | ||||||||||||||
Deferred financing costs, net | 40 | 62 | ||||||||||||||
Goodwill and other intangible assets, net | 13,045 | 11,768 | ||||||||||||||
Total other assets | 7,401 | 7,359 | 362,106 | 368,053 | ||||||||||||
Total assets | $ | 299,339 | 299,991 | $ | 655,100 | 655,079 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 52,163 | 56,849 | $ | 68,028 | 68,949 | ||||||||||
Accrued expenses | 17,177 | 14,164 | 24,903 | 26,589 | ||||||||||||
Capital and financing lease obligations, current portion | 604 | 548 | ||||||||||||||
Term loan facility, current portion | 1,750 | 1,750 | ||||||||||||||
Operating lease obligations, current portion | 33,836 | 33,308 | ||||||||||||||
Finance lease obligations, current portion | 3,313 | 3,176 | ||||||||||||||
Total current liabilities | 69,944 | 71,561 | 131,830 | 133,772 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Capital and financing lease obligations, net of current portion | 37,120 | 32,880 | ||||||||||||||
Revolving credit facility | 24,592 | 28,392 | ||||||||||||||
Deferred income tax liabilities | 7,973 | 12,419 | ||||||||||||||
Deferred compensation | 1,355 | 1,231 | ||||||||||||||
Deferred rent | 10,593 | 10,465 | ||||||||||||||
Leasehold incentives | 9,122 | 9,160 | ||||||||||||||
Term loan facility, net of current portion | 17,938 | 21,938 | ||||||||||||||
Operating lease obligations, net of current portion | 294,146 | 301,895 | ||||||||||||||
Finance lease obligations, net of current portion | 41,940 | 39,450 | ||||||||||||||
Deferred income tax liabilities, net | 15,401 | 15,293 | ||||||||||||||
Total long-term liabilities | 90,755 | 94,547 | 369,425 | 378,576 | ||||||||||||
Total liabilities | 160,699 | 166,108 | 501,255 | 512,348 | ||||||||||||
Commitments (Note 6 and 11) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.001 par value, 50,000,000 shares authorized, 22,510,279 shares issued at December 31, 2017 and September 30, 2017, respectively, and 22,347,709 and 22,448,056 outstanding at December 31, 2017 and September 30, 2017, respectively | 23 | 23 | ||||||||||||||
Additional paid-in capital | 55,826 | 55,678 | ||||||||||||||
Commitments (Note 13) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Common stock, $0.001 par value, 50,000,000 shares authorized, and 22,669,038 and 22,620,417 shares issued and outstanding at March 31, 2022 and September 30, 2021, respectively | 23 | 23 | ||||||||||||||
Additional paid-in capital | 57,661 | 57,289 | ||||||||||||||
Retained earnings | 84,026 | 78,846 | 96,161 | 85,419 | ||||||||||||
Common stock in treasury at cost, 162,570 and 62,223 shares at December 31, 2017 and September 30, 2017, respectively | (1,235 | ) | (664 | ) | ||||||||||||
Total stockholders’ equity | 138,640 | 133,883 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 299,339 | 299,991 | |||||||||||||
Total stockholders’ equity | 153,845 | 142,731 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 655,100 | 655,079 |
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE,INC.
Consolidated Statements of Income
(Unaudited)
(Dollars in thousands, except per share data)
Three months ended | ||||||||||||||||||||||||
2017 | 2016 | Three months ended | Six months ended | |||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||
Net sales | $ | 202,480 | 183,577 | $ | 271,822 | 259,198 | 549,110 | 524,243 | ||||||||||||||||
Cost of goods sold and occupancy costs | 149,321 | 131,424 | 195,040 | 187,371 | 393,591 | 379,391 | ||||||||||||||||||
Gross profit | 53,159 | 52,153 | 76,782 | 71,827 | 155,519 | 144,852 | ||||||||||||||||||
Store expenses | 45,166 | 41,843 | 59,605 | 58,422 | 118,941 | 118,752 | ||||||||||||||||||
Administrative expenses | 5,257 | 4,883 | 8,172 | 6,358 | 15,465 | 13,662 | ||||||||||||||||||
Pre-opening and relocation expenses | 543 | 1,261 | ||||||||||||||||||||||
Pre-opening expenses | 141 | 341 | 225 | 530 | ||||||||||||||||||||
Operating income | 2,193 | 4,166 | 8,864 | 6,706 | 20,888 | 11,908 | ||||||||||||||||||
Interest expense | (1,089 | ) | (983 | ) | ||||||||||||||||||||
Interest expense, net | (545 | ) | (603 | ) | (1,089 | ) | (1,113 | ) | ||||||||||||||||
Income before income taxes | 1,104 | 3,183 | 8,319 | 6,103 | 19,799 | 10,795 | ||||||||||||||||||
Benefit from (provision for) income taxes | 4,077 | (1,122 | ) | |||||||||||||||||||||
Provision for income taxes | (1,962 | ) | (1,399 | ) | (4,527 | ) | (2,459 | ) | ||||||||||||||||
Net income | $ | 5,181 | 2,061 | $ | 6,357 | 4,704 | 15,272 | 8,336 | ||||||||||||||||
Net income per common share: | ||||||||||||||||||||||||
Net income per share of common stock: | ||||||||||||||||||||||||
Basic | $ | 0.23 | 0.09 | $ | 0.28 | 0.21 | 0.67 | 0.37 | ||||||||||||||||
Diluted | $ | 0.23 | 0.09 | $ | 0.28 | 0.21 | 0.67 | 0.37 | ||||||||||||||||
Weighted average number of shares of common stock outstanding: | ||||||||||||||||||||||||
Basic | 22,359,828 | 22,453,459 | 22,660,477 | 22,581,916 | 22,650,123 | 22,570,305 | ||||||||||||||||||
Diluted | 22,366,749 | 22,461,094 | 22,819,526 | 22,737,646 | 22,790,114 | 22,715,098 |
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE,, INC.
Consolidated Statements of Cash Flows
(Unaudited)(Unaudited)
(Dollars in thousands)
Three months ended December 31, | ||||||||||||||||
2017 | 2016 | Six months ended March 31, | ||||||||||||||
2022 | 2021 | |||||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 5,181 | 2,061 | $ | 15,272 | 8,336 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 7,415 | 7,121 | 14,020 | 15,057 | ||||||||||||
Impairment of long-lived assets and store closing costs | 95 | 105 | ||||||||||||||
Loss on disposal of property and equipment | 48 | — | 85 | 0 | ||||||||||||
Share-based compensation | 160 | 217 | 590 | 487 | ||||||||||||
Deferred income tax benefit | (4,446 | ) | (170 | ) | ||||||||||||
Deferred income tax expense | 107 | 1,089 | ||||||||||||||
Non-cash interest expense | 3 | 2 | 12 | 11 | ||||||||||||
Changes in operating assets and liabilities | ||||||||||||||||
Decrease (increase) in: | ||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Decrease (increase) in: | ||||||||||||||||
Accounts receivable, net | 383 | 1,128 | 1,062 | (477 | ) | |||||||||||
Merchandise inventory | 2,190 | (1,657 | ) | (6,104 | ) | 1,719 | ||||||||||
Prepaid expenses and other assets | 22 | 1,395 | (623 | ) | (922 | ) | ||||||||||
Income tax receivable | 351 | — | 0 | 3,004 | ||||||||||||
(Decrease) increase in: | ||||||||||||||||
Operating lease assets | 15,787 | 15,402 | ||||||||||||||
(Decrease) increase in: | ||||||||||||||||
Operating lease liabilities | (12,748 | ) | (15,861 | ) | ||||||||||||
Accounts payable | (3,564 | ) | (286 | ) | 1,712 | (7,142 | ) | |||||||||
Accrued expenses | 3,013 | 3,927 | (1,686 | ) | (3,503 | ) | ||||||||||
Deferred compensation | 124 | 116 | ||||||||||||||
Deferred rent and leasehold incentives | 89 | 240 | ||||||||||||||
Net cash provided by operating activities | 10,969 | 14,094 | 27,581 | 17,305 | ||||||||||||
Investing activities: | ||||||||||||||||
Acquisition of property and equipment | (4,925 | ) | (13,057 | ) | (10,855 | ) | (8,673 | ) | ||||||||
Acquisition of other intangibles | (1,586 | ) | (926 | ) | ||||||||||||
Proceeds from sale of property and equipment | 41 | 2,564 | 16 | 0 | ||||||||||||
Proceeds from property insurance settlements | 130 | 58 | ||||||||||||||
Net cash used in investing activities | (4,884 | ) | (10,493 | ) | (12,295 | ) | (9,541 | ) | ||||||||
Financing activities: | ||||||||||||||||
Borrowings under credit facility | 87,500 | 67,350 | ||||||||||||||
Repayments under credit facility | (91,300 | ) | (67,701 | ) | ||||||||||||
Capital and financing lease obligations payments | (132 | ) | (113 | ) | ||||||||||||
Repurchases of common stock | (581 | ) | — | |||||||||||||
Borrowings under revolving facility | 4,000 | 0 | ||||||||||||||
Repayments under revolving facility | (4,000 | ) | 0 | |||||||||||||
Borrowings under term loan facility | 0 | 35,000 | ||||||||||||||
Repayments under term loan facility | (4,000 | ) | (438 | ) | ||||||||||||
Finance lease obligation payments | (1,327 | ) | (1,369 | ) | ||||||||||||
Dividends to shareholders | (4,530 | ) | (48,288 | ) | ||||||||||||
Loan fees paid | 0 | (52 | ) | |||||||||||||
Payments on withholding tax for restricted stock unit vesting | (4 | ) | (12 | ) | (218 | ) | (174 | ) | ||||||||
Net cash used in financing activities | (4,517 | ) | (476 | ) | (10,075 | ) | (15,321 | ) | ||||||||
Net increase in cash and cash equivalents | 1,568 | 3,125 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 5,211 | (7,557 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 6,521 | 4,017 | 23,678 | 28,534 | ||||||||||||
Cash and cash equivalents, end of period | $ | 8,089 | 7,142 | $ | 28,889 | 20,977 | ||||||||||
Supplemental disclosures of cash flow information: | ||||||||||||||||
Cash paid for interest | $ | 217 | 121 | $ | 290 | 165 | ||||||||||
Cash paid for interest on capital and financing lease obligations, net of capitalized interest of $25 and $63, respectively | 848 | 784 | ||||||||||||||
Cash paid for interest on finance lease obligations, net of capitalized interest of $146 and $83, respectively | 865 | 910 | ||||||||||||||
Income taxes paid | 19 | 11 | 3,721 | 4,777 | ||||||||||||
Supplemental disclosures of non-cash investing and financing activities: | ||||||||||||||||
Acquisition of property and equipment not yet paid | $ | 1,722 | 7,243 | $ | 2,103 | 4,435 | ||||||||||
Property acquired through capital and financing lease obligations | 4,428 | — | ||||||||||||||
Acquisition of other intangibles not yet paid | 354 | 233 | ||||||||||||||
Property acquired through operating lease obligations | 6,571 | 7,287 | ||||||||||||||
Property acquired through finance lease obligations | 4,129 | 106 |
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
, Consolidated Statements of Changes in Stockholders’INC Equity
For the Six Months Ended March 31, 2022 and March 31, 2021
(Unaudited)
.(Dollars in thousands, except per share data)
Common stock – $0.001 par value | ||||||||||||||||||||
Shares outstanding | Amount | Additional paid-in capital | Retained earnings | Total stockholders’ equity | ||||||||||||||||
Balances September 30, 2021 | 22,620,417 | $ | 23 | $ | 57,289 | $ | 85,419 | $ | 142,731 | |||||||||||
Net income | — | 0 | 0 | 8,915 | 8,915 | |||||||||||||||
Cash dividends | — | 0 | 0 | (2,263 | ) | (2,263 | ) | |||||||||||||
Issuance of common stock | 23,473 | 0 | 0 | 0 | 0 | |||||||||||||||
Share-based compensation | 0 | 0 | 171 | 0 | 171 | |||||||||||||||
Balances December 31, 2021 | 22,643,890 | 23 | 57,460 | 92,071 | 149,554 | |||||||||||||||
Net income | — | 0 | 0 | 6,357 | 6,357 | |||||||||||||||
Cash dividends | — | 0 | 0 | (2,267 | ) | (2,267 | ) | |||||||||||||
Issuance of common stock | 25,148 | 0 | 0 | 0 | 0 | |||||||||||||||
Share-based compensation | 0 | 0 | 201 | 0 | 201 | |||||||||||||||
Balances March 31, 2022 | 22,669,038 | $ | 23 | $ | 57,661 | $ | 96,161 | $ | 153,845 |
Common stock – $0.001 par value | ||||||||||||||||||||
Shares outstanding | Amount | Additional paid-in capital | Retained earnings | Total stockholders’ equity | ||||||||||||||||
Balances September 30, 2020 | 22,546,765 | $ | 23 | $ | 56,752 | $ | 116,291 | $ | 173,066 | |||||||||||
Net income | — | 0 | 0 | 3,632 | 3,632 | |||||||||||||||
Cash dividends | — | 0 | 0 | (46,706 | ) | (46,706 | ) | |||||||||||||
Issuance of common stock | 16,884 | 0 | 0 | 0 | 0 | |||||||||||||||
Share-based compensation | — | 0 | 166 | 0 | 166 | |||||||||||||||
Balances December 31, 2020 | 22,563,649 | 23 | 56,918 | 73,217 | 130,158 | |||||||||||||||
Net income | — | 0 | 0 | 4,704 | 4,704 | |||||||||||||||
Cash dividends | — | 0 | 0 | (1,582 | ) | (1,582 | ) | |||||||||||||
Issuance of common stock | 31,818 | 0 | 0 | 0 | 0 | |||||||||||||||
Share-based compensation | — | 0 | 147 | 0 | 147 | |||||||||||||||
Balances March 31, 2021 | 22,595,467 | $ | 23 | $ | 57,065 | $ | 76,339 | $ | 133,427 |
See accompanying notes to unaudited interim consolidated financial statements.
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Notes to Unaudited Interim Consolidated Financial Statements
DecemberMarch 31,, 2017 2022 and 20162021
1.Organization
Nature of Business
Natural Grocers by VitaminVitamin 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, body care products and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage®. AsThe Company operated 162 stores in 20 states as of each of DecemberMarch 31, 2017,2022 the Company operatedand 142September 30, 2021. stores in 19 states. The Company also has a bulk food repackaging facility and distribution center in Golden, Colorado. The Company had 140 stores in 19 states as of September 30, 2017.
22.. 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 interiminterim financial statements and are in the form prescribed by Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for annual financial statements. The information included in this Form 10-Q should be read in conjunction with Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in the Form 10-K.-K. The accompanying unaudited 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 accompanying unaudited consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company) and Vitamin Cottage Two Ltd. Liability Company (VC2). All significant intercompany balances and transactions have been eliminated in consolidation.
The Company has one reporting segment:segment: natural and organic retail stores. Sales from the Company’s natural and organic retail stores are derived from sales of the following product categories, which are presented as a percentage of sales for the three months ended December 31, 2017 and 2016, as follows:
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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 date of the financial statements, and the reported amounts of 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 equipmentlong-lived assets for depreciation and amortization, impairment of finite-lived intangible assets, long-lived assets, and goodwill, lease assumptions, valuation allowances for self-insurance reserves, deferred 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.
U.S Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the Tax Reform Act). The Tax Reform Act significantly revises the future ongoing federal income tax by, among other things, lowering U.S. corporate income tax rates effective January 1, 2018. The Company has calculated a blended U.S. federal income tax rate of approximately 24.3% for our fiscal year ending September 30, 2018 and 21.0% for subsequent fiscal years. For the three months ended December 31, 2017, these impacts resulted in a net non-cash tax benefit of approximately $4.3 million due to the favorable impact of the lower blended federal income tax rate and the remeasurement of our deferred tax balances.
The changes included in the Tax Reform Act are broad and complex. The final transition impacts of the Tax Reform Act may differ from the above estimate, due to, among other things, changes in interpretations of the Tax Reform Act, any legislative action to address questions that arise because of the Tax Reform Act and any changes in accounting standards for income taxes or related interpretations in response to the Tax Reform Act. The SEC has issued Staff Accounting Bulletin 118 (SAB 118), which expresses the SEC’s views regarding the application of Accounting Standards Codification 740, “Income Taxes,” (ASC 740) in the reporting period that includes December 22, 2017 (the date the Tax Reform Act was signed into law). SAB 118 allows for a measurement period of up to one year after the enactment date of the Tax Reform Act to finalize the recording of the related tax impacts. The Company currently anticipates finalizing and recording any resulting adjustments by the end of the fiscal year ending September 30, 2018.
Recently Adopted Accounting Pronouncements
In July 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-11, “Simplifying the Measurement of Inventory,” Topic 330, “Inventory” (ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 should be applied on a prospective basis. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The Company adopted the amendments of ASU 2015-11 effective October 1, 2017. The adoption of this standard did not have a material impact on its consolidated financial statements.
In March 2016,2019, the FASB issued ASU 20162019-09,12, “Improvements to Employee Share-Based Payment Accounting,“Income Taxes,” Topic 718, “Compensation-Stock Compensation” (ASU 2016-09). ASU 2016-09 includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the Company’s financial statements, including income tax consequences, forfeitures and classification on the statement of cash flows. Under previous guidance, excess tax benefits and deficiencies from share-based compensation arrangements were recorded in equity when the awards vested or were settled. ASU 2016-09 requires prospective recognition of excess tax benefits and deficiencies in income tax expense, rather than paid-in-capital. The adoption of the standard did not have a material impact on the Company’s consolidated statements of income for the three months ended December 31, 2017.
In addition, under ASU 2016-09, excess tax income tax benefits from share-based compensation arrangements are classified as cash flow from operations, rather than as cash flow from financing activities. For the three months ended December 31, 2017, there were no excess income tax benefits.
The Company has elected to continue to estimate the number of share-based awards expected to vest, as permitted by ASU 2016-09, rather than electing to account for forfeitures as they occur.
ASU 2016-09 requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares, resulting in a decrease in diluted weighted average shares outstanding of 2,879 shares for the three months ended December 31, 2017.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04,740, “Simplifying the TestAccounting for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other”Income Taxes” (ASU 20172019-0412). The amendments in ASU 2017-04 simplifynew guidance simplified the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis goodwill, impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. Early adoption is permitted for annualseparate entity financial statements, and interim goodwill impairment testing dates afterrecognition of enactment of tax laws or rate changes. The provisions of ASU January 1, 2017 2019and is-12 were effective for the Company’s first quarter of the fiscal year ending September 30, 2020.2022. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for the three and six months ended March 31, 2022.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” Topic 326, “Measurement of Credit Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information when determining credit loss estimates. ASU 2016-13 also requires financial assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the effective date of ASU 2016-13 for smaller reporting companies such as the Company. The provisions of ASU 2016-13 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of these provisions will have on its consolidated financial statements, but does not anticipate that these provisions will have material impacts on its consolidated financial statements.
In February 2016,March 2020, the FASB issued ASU 20162020-02,04, “Leases,“Reference Rate Reform,” Topic 842,848, “Leases”“Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (ASU 20162020-0204). ASU No.2016-02 requires lesseesThe new guidance provides optional expedients and exceptions for applying GAAP to recognize a right-of-use assetcontracts, hedging relationships and corresponding lease liability for all leases withother transactions affected by reference rate reform if certain criteria are met. The guidance applies only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR; however, the terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification asour Credit Facility provide for a finance or operating lease. ASU 2016-02 also requires certain quantitative and qualitative disclosures.LIBOR successor rate once LIBOR is discontinued. The provisions of ASU 2016-02 should be applied on a modified retrospective basis and are effective for the Company’s first quarter of the fiscal year ending September 30, 2020, with early adoption permitted. However, duringguidance only applies to modifications made prior to December 2017,31, 2022. the FASB proposed amending ASU 2016-02 such that restatement of fiscal years 2018 and 2019 wouldThe Company does not be required upon adoption. The adoption ofanticipate that this ASU 2016-02will result inhave a material increase to the Company’s consolidated balance sheets for lease liabilities and right-of-use assets. The Company is also performing a comprehensive review of its current processes to determine and implement changes required to support the adoption of this standard. As part of this review process, the Company is implementing new software solutions to support the lease reporting upon adoption. The Company is currently evaluating the other effects the adoption of ASU 2016-02 will haveimpact on its consolidated financial statements.
3. Revenue Recognition
The nature of the goods the Company transfers to customers at the point of sale consists of merchandise purchased for resale. In May 2014, these transactions, the FASB issued ASU 2014-09, “RevenueCompany acts as a principal and recognizes revenue (net sales) from Contracts with Customers,” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAPthe sale of goods when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transferscontrol of the 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. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However, earlier adoption is permitted only for annual reporting periods beginning after December 15, 2016. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU No.2016-08, “Revenue from Contracts with Customers,” Topic 606, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” (“ASU 2016-08”) in March 2016 and ASU No.2016-12, “Revenue from Contracts with Customers,” Topic 606, “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”) in May 2016. The amendments in ASU 2016-08 clarify the implementation guidance on principal versus agent considerations, including indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customers. ASU 2016-12 addresses narrow-scope improvementscustomer. Control refers to the guidance on collectability, non-cash consideration,ability of the customer to direct the use of, and completed contractsobtain substantially all the remaining benefits from, the transferred goods.
The Company’s performance obligations are satisfied upon the transfer of goods to the customer (at the point of sale), and payment from the customer is also due at transition. Additionally,that time. Transaction prices are considered fixed. Discounts provided to customers at the amendmentspoint of sale are recognized as a reduction in this ASU providerevenue as the goods are sold. Revenue excludes sales and usage-based taxes collected.
Proceeds from the sale of the Company’s gift cards are recorded as a practical expedient forliability at the time of sale and recognized as revenue when the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company.
The balance of contract modifications at transition and an accounting policy electionliabilities related to unredeemed gift cards was $1.5 million as of each of March 31, 2022 and September 30, 2021. Revenue for the presentationthree months ended March 31, 2022 and 2021 includes $0.2 million and $0.1 million, respectively, that was included in the contract liability balance of sales taxes unredeemed gift cards at September 30, 2021 and other similar taxes collected from customers. 2020, respectively. Revenue for the six months ended March 31, 2022 and 2021 includes approximately $0.7 million and $0.4 million, respectively, that was included in the contract liability balance of unredeemed gift cards at September 30, 2021 and 2020, respectively.
The effective date and transition requirementsfollowing table disaggregates our revenue by product category for ASUthe 2016-08three and ASU 2016-12six are the samemonths ended March 31, 2022 and 2021, dollars in thousands and as ASU 2014-09. The Company is currently in the processa percentage of evaluating the impact of the adoption of ASU 2014-09, ASU 2016-08 and ASU 2016-12 on its consolidated financial statements. The Company currently does not plan to early adopt ASU 2014-09, ASU 2016-08 or ASU 2016-12.net sales:
Three months ended March 31, | Six months ended March 31, | |||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
Grocery | $ | 188,814 | 70 | % | 180,457 | 70 | 380,843 | 69 | 366,072 | 70 | ||||||||||||||||||||||
Dietary supplements | 58,135 | 21 | 53,901 | 21 | 116,207 | 21 | 107,125 | 20 | ||||||||||||||||||||||||
Other | 24,873 | 9 | 24,840 | 9 | 52,060 | 10 | 51,046 | 10 | ||||||||||||||||||||||||
$ | 271,822 | 100 | % | 259,198 | 100 | 549,110 | 100 | 524,243 | 100 |
34.. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted EPS reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units (RSUs) were to vest, resulting in the issuance of common stock that would then share in the Company’s earnings.
Presented below are basic and diluted EPS for the three and sixmonths ended DecemberMarch 31, 20172022 and 2016,2021, dollars in thousands, except per share data:
Three months ended | ||||||||
2017 | 2016 | |||||||
Net income | $ | 5,181 | 2,061 | |||||
Weighted average number of shares of common stock outstanding | 22,359,828 | 22,453,459 | ||||||
Effect of dilutive securities | 6,921 | 7,635 | ||||||
Weighted average number of shares of common stock outstanding including effect of dilutive securities | 22,366,749 | 22,461,094 | ||||||
Basic earnings per share | $ | 0.23 | 0.09 | |||||
Diluted earnings per share | $ | 0.23 | 0.09 |
Three months ended | Six months ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net income | $ | 6,357 | 4,704 | 15,272 | 8,336 | |||||||||||
Weighted average number of shares of common stock outstanding | 22,660,477 | 22,581,916 | 22,650,123 | 22,570,305 | ||||||||||||
Effect of dilutive securities | 159,049 | 155,730 | 139,991 | 144,793 | ||||||||||||
Weighted average number of shares of common stock outstanding including effect of dilutive securities | 22,819,526 | 22,737,646 | 22,790,114 | 22,715,098 | ||||||||||||
Basic earnings per share | $ | 0.28 | 0.21 | 0.67 | 0.37 | |||||||||||
Diluted earnings per share | $ | 0.28 | 0.21 | 0.67 | 0.37 |
There were 157,87911,466 and 71,25711,866 non-vested RSUs for the three and sixmonths ended DecemberMarch 31, 20172022, and 2016,respectively, excluded from the calculation of diluted EPS as they arewere antidilutive.
The Company did There were 4,296 and 2,973 non-vested RSUs for the notthree declare any dividends in the and threesix months ended DecemberMarch 31, 20172021, or 2016.respectively, excluded from the calculation of diluted EPS as they were antidilutive.
45.. Debt
Credit Facility
OnThe Company is party to a Credit Facility, entered into on January 28, 2016 the Company entered intoand subsequently amended, consisting of a credit$50.0 million revolving loan facility (the Revolving Facility) and a $35.0 million term loan facility (the Term Loan Facility, and together with the Revolving Facility, the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The revolving commitment amount available for borrowing under the CreditRevolving Facility is $50.0$50.0 million, including a $5.0$5.0 million sublimit for standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the CreditRevolving Facility at any time prior to the maturity date.date without premium or penalty. The Credit Facility matures on January 31, 2021.November 13, 2024. For floatingBase rate borrowingsloans under the Credit Facility bear interest isat a fluctuating base rate, as determined by the lender’slenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the basehighest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon certain financial measures. For fixedthe Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest is determined by quoted LIBOR ratesbased on the London Interbank Offered Rate, or its successor (LIBOR), for the interest period plus the lender spread based upon certain financial measures.the Company’s consolidated leverage ratio. The unused commitment fee is based upon certain financial measures.the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal installments of approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.
The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’sCompany’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, except when no default or event of default exists. Ifprovided that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends are allowed forto the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business including cash dividends to the holding company for theand (ii) repurchase of shares of common stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $10.0 million.$10.0 million during any fiscal year.
On November 18, 2020, the Company entered into the Fourth Amendment to the Credit Facility (the Fourth Amendment) to provide for the Term Loan Facility and to permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.
The Company had $24.6 million and $28.4 million0 amounts outstanding under the CreditRevolving Facility as of each of DecemberMarch 31, 20172022 and September 30, 2017,2021. respectively. As of each of December 31, 2017 and September 30, 2017, theThe Company had undrawn, issued and outstanding letters of credit of $1.0$1.0 million as of each of March 31, 2022 and September 30, 2021, which were reserved against the amount available for borrowing under the terms of the CreditRevolving Facility. The Company had $24.4 million and $20.6$49.0 million available for borrowing under the CreditRevolving Facility as of each of DecemberMarch 31, 20172022 and September 30, 2017,2021. respectively.The Company had $19.7 million outstanding under its fully drawn Term Loan Facility as of March 31, 2022.
As of DecemberMarch 31, 20172022 and September 30, 2017,2021, the Company was in compliance with the financial covenants under the Credit Facility.
Capital and Financing Lease Obligations
The Company had 18 and 17 leases asAs of DecemberMarch 31, 20172022 and September 30, 2017,2021, respectively,the Company had 21 and 20 leases that are included in capital and financing lease obligations (see Note 6).were classified as finance leases, respectively. No rent expense is recorded for these capitalized real estate leases, butfinance leases; rather, rental payments under the capitalsuch leases are recognized as a reduction of the capital and financing lease obligation and as interest expense. The interest rate on capital and financingfinance lease obligations is determined at the inception of the lease.
Interest
The Company incurred gross interest expense of approximately $0.6 million and $0.7 million for the $1.1three months ended March 31, 2022 and 2021, respectively, and approximately $1.2 million for each of the six months ended March 31, 2022 and 2021. Interest expense for the three and six months ended March 31, 2022 and 2021 relates primarily to interest on finance lease obligations and the Credit Facility. The Company capitalized interest of less than $0.1 million for each of the three months ended DecemberMarch 31, 20172022 and 2016.2021, Interest expenseand $0.1 million for each of the threesix months ended DecemberMarch 31, 20172022 and 20162021. relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of less than $0.1 million and approximately $0.1 million for the three months ended December 31, 2017 and 2016, respectively.
56. Stockholders’. Shareholders’ Equity
Share Repurchases
OnIn May 52016, , 2016,the Company’s Board of Directors (the Board) authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0$10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase program, including most recently in May 2022, and the program will terminate on May 31, 2024. Repurchases under the Company’s share repurchase program aremay be made from time to time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under the Securities Exchange Act of 1934, as amended (the(the Exchange Act), subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which would permitpermits common stock to be repurchased when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company without prior notice.
The Company did not repurchase any shares of common stock during the three and six months ended March 31, 2022 and 2021. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.
During the three and six months ended March 31, 2022 and 2021, the Company reissued 0 treasury shares. As of each of March 31, 2022 and September 30, 2021, the Company held 0 treasury shares.
Dividends
The Company paid quarterly cash dividends of $0.10 and $0.07 per share of common stock in each of the firsttwo quarters of fiscal years 2022 and 2021, respectively, and a special cash dividend of $2.00 per share of common stock in the first quarter of fiscal year 2021.
7. Lease Obligations
The Company leases most of its stores, a bulk food repackaging facility and distribution center, and its administrative offices. The Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from 10 to 25 years, with scheduled increases in minimum rent payments.
Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of operating lease assets.
Most leases include one or more options to renew, with renewal terms normally expressed in periods of five year increments. The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option.
PriorVariable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as Consumer Price Index are October 1, not included in the measurement of the lease liability or asset and are expensed as incurred.
As most of the Company’s lease agreements do 201not7, provide an implicit discount rate, the Company repurchaseduses an estimated incremental borrowing rate, which is derived from 97,970third-party lenders, to determine the present value of lease payments. We use other observable market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing rate for a secured loan with a term similar to the expected term of the lease.
Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 shares undermonths or less (short-term leases) are not presented on the share repurchase program. Duringbalance sheet. The Company has elected to account for the lease and non-lease components as a single lease component for all current classes of leases.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases. Remaining lease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.
The Company has 4 operating leases and 1 finance lease with Chalet Properties, LLC (Chalet), 1 operating lease with the Isely Family Land Trust LLC (Land Trust) and 1 operating lease with FTVC, LLC (FTVC), each of which is a related party (see Note 12). The leases began at various times with the earliest commencing in November 1999, continue for various terms through July 2040 and include various options to renew. The terms and rental rates of these leases are similar to leases that would be entered into with nonrelated parties and are at prevailing market rental rates. As of March 31, 2022, these leases accounted for $7.1 million of right-of-use assets and $7.4 million of lease liabilities included in the disclosures below. Lease expense is recognized on a straight-line basis and was $0.3 million for each of the three months ended DecemberMarch 31, 2017,2022 the Company repurchasedand 101,5732021 shares under the share repurchase program. The Company did not repurchase any shares duringand $0.7 million for each of the threesix months ended DecemberMarch 31, 2016.2022 and 2021.
Prior to October 1, 2017, the Company reissued 35,747 treasury shares at aThe components of total lease cost of $0.4 million to satisfy the issuance of common stock pursuant to the vesting of certain restricted stock unit awards and the award of stock grants. Duringfor the three and sixmonths ended DecemberMarch 31, 2022 ,and 20172021 were as follows, dollars in thousands:
Three months ended March 31, | Six months ended March 31, | |||||||||||||||||
Lease cost | Classification | 2022 | 2021 | 2022 | 2021 | |||||||||||||
Operating lease cost: | ||||||||||||||||||
Cost of goods sold and occupancy costs | $ | 10,720 | 10,603 | 21,450 | 21,239 | |||||||||||||
Store expenses | 98 | 79 | 178 | 159 | ||||||||||||||
Administrative expenses | 71 | 76 | 147 | 152 | ||||||||||||||
Pre-opening expenses | 0 | 128 | 0 | 154 | ||||||||||||||
Finance lease cost: | ||||||||||||||||||
Depreciation of right-of-use assets | Store expenses | 973 | 926 | 1,947 | 1,809 | |||||||||||||
Pre-opening expenses (2) | 40 | 0 | 40 | 22 | ||||||||||||||
Interest on lease liabilities | Store expenses | 482 | 506 | 972 | 993 | |||||||||||||
Pre-opening expenses (2) | 39 | 0 | 39 | 0 | ||||||||||||||
Short-term lease cost | Store expenses | 601 | 621 | 1,210 | 1,158 | |||||||||||||
Variable lease cost | Cost of goods sold and occupancy costs (1) | 1,470 | 891 | 2,868 | 2,707 | |||||||||||||
Sublease income | Store expenses | (46 | ) | (70 | ) | (154 | ) | (163 | ) | |||||||||
Total lease cost | $ | 14,448 | 13,760 | 28,697 | 28,230 |
1 Immaterial balances related to corporate headquarters and distribution center are included in administrative expenses and store expenses, respectively.
2 Pre-opening expenses for prior periods have been reclassified from store expenses to be consistent with the current period presentation.
Additional information related to the Company’s leases for the three and 2016,six the Company reissued months ended 1,226March 31, 2022 treasury shares at a cost of less than $0.1 million and 1,8672021 treasury shares at a cost of less than $0.1 million, respectively, to satisfy the issuance of common stock pursuantwere as follows, dollars in thousands:
Three months ended March 31, | Six months ended March 31, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||||||||||
Operating cash flows from operating leases | $ | 7,576 | 11,052 | 18,735 | 22,189 | |||||||||||
Operating cash flows from finance leases | 521 | 493 | 1,011 | 993 | ||||||||||||
Financing cash flows from finance leases | 588 | 694 | 1,327 | 1,369 | ||||||||||||
Right-of-use assets obtained in exchange for new lease liabilities: | ||||||||||||||||
Operating leases | 1,519 | 4,518 | 6,571 | 7,287 | ||||||||||||
Finance leases | 4,129 | 0 | 4,129 | 106 |
Additional information related to the vestingCompany’s leases as of certain restricted stock unit awards and the award of common stock grants. At DecemberMarch 31, 20172022 and September 30, 2017,2021 was as follows:
March 31, 2022 | March 31, 2021 | |||||||
Weighted-average remaining lease term (in years): | ||||||||
Operating leases | 10.8 | 11.4 | ||||||
Finance leases | 12.8 | 12.0 | ||||||
Weighted-average discount rate: | ||||||||
Operating leases | 3.6 | % | 3.6 | |||||
Finance leases | 4.9 | % | 5.1 |
In the six months ended March 31, 2022, the Company heldincurred a charge of $0.1 million related to operating right-of-use assets associated with an early store relocation. In the six months ended March 31, 2021, the Company paid $0.3 million in treasurylease termination costs to terminate the lease associated with 162,570one sharesstore that closed in the first quarter of fiscal year 2019. In association with the lease termination, the Company wrote off $0.6 million in operating right-of-use assets and 62,223 shares, respectively, totaling approximately $1.2$0.8 million in operating lease liabilities and $0.7recorded a $0.2 million respectively.gain in store expenses.
Between January 1, 2018 and January 29,2018 (the latest practicable date for making the determination), the Company has not repurchased any additional shares of the Company’s common stock.
6. Lease Commitments
Capital and financingFuture lease obligationspayments under non-cancellable leases as of DecemberMarch 31, 2017 and September 30, 2017,2022 were as follows, dollars in thousands:
Fiscal Year | Operating leases | Finance leases | Total | |||||||||
Remainder of 2022 | $ | 22,629 | 2,579 | 25,208 | ||||||||
2023 | 44,655 | 5,423 | 50,078 | |||||||||
2024 | 43,057 | 5,489 | 48,546 | |||||||||
2025 | 41,406 | 5,499 | 46,905 | |||||||||
2026 | 38,197 | 5,542 | 43,739 | |||||||||
Thereafter | 209,633 | 35,789 | 245,422 | |||||||||
Total future undiscounted lease payments | 399,577 | 60,321 | 459,898 | |||||||||
Less imputed interest | (71,595 | ) | (15,068 | ) | (86,663 | ) | ||||||
Total reported lease liability | 327,982 | 45,253 | 373,235 | |||||||||
Less current portion | (33,836 | ) | (3,313 | ) | (37,149 | ) | ||||||
Noncurrent lease liability | $ | 294,146 | 41,940 | 336,086 |
The table above excludes $29.9 million of legally binding minimum lease payments for leases that had been executed as of March 31, 2022 but whose terms had not yet commenced.
As of | ||||||||
December 31, 2017 | September 30, 2017 | |||||||
Capital lease finance obligations, due in monthly installments through fiscal year 2033 | $ | 28,981 | 26,930 | |||||
Capital lease obligations, due in monthly installments through fiscal year 2041 | 4,943 | 4,999 | ||||||
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2033 | 3,800 | 1,499 | ||||||
Total capital and financing lease obligations | 37,724 | 33,428 | ||||||
Less current portion | (604 | ) | (548 | ) | ||||
Total capital and financing lease obligations, net of current portion | $ | 37,120 | 32,880 |
78.. Property and Equipment
The Company had the following property and equipment balances as of DecemberMarch 31, 20172022 and September 30, 2017,2021, dollars in thousands:
As of | |||||||||||||
Useful lives (in years) | December 31, 2017 | September 30, 2017 | |||||||||||
Construction in process | n/a | $ | 7,373 | 5,286 | |||||||||
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively | 40 | 31,926 | 29,548 | ||||||||||
Capitalized real estate leases | 15 | - | 25 | 5,735 | 5,735 | ||||||||
Land | n/a | 192 | 192 | ||||||||||
Buildings | 40 | 19,259 | 19,259 | ||||||||||
Land improvements | 5 | - | 24 | 1,160 | 1,159 | ||||||||
Leasehold and building improvements | 1 | - | 25 | 132,647 | 131,679 | ||||||||
Fixtures and equipment | 5 | - | 7 | 117,834 | 115,888 | ||||||||
Computer hardware and software | 3 | - | 5 | 19,504 | 19,108 | ||||||||
335,630 | 327,854 | ||||||||||||
Less accumulated depreciation and amortization | (150,441 | ) | (143,437 | ) | |||||||||
Property and equipment, net | $ | 185,189 | 184,417 |
Capitalized real estate leases for build-to-suit stores includes the assets for the Company’s buildings under capital lease finance obligations, and capitalized real estate leases includes assets for the Company’s buildings under capital lease obligations (see Note 6).
As of | ||||||||||||||
Useful lives (in years) | March 31, 2022 | September 30, 2021 | ||||||||||||
Construction in process | n/a | $ | 6,009 | 2,268 | ||||||||||
Land | n/a | 6,272 | 6,062 | |||||||||||
Buildings | 16 | – | 40 | 34,481 | 34,531 | |||||||||
Land improvements | 1 | – | 24 | 1,792 | 1,782 | |||||||||
Leasehold and building improvements | 1 | – | 25 | 160,199 | 159,800 | |||||||||
Fixtures and equipment | 5 | – | 7 | 147,695 | 145,754 | |||||||||
Computer hardware and software | 3 | – | 5 | 25,297 | 25,068 | |||||||||
381,745 | 375,265 | |||||||||||||
Less accumulated depreciation and amortization | (233,959 | ) | (223,866 | ) | ||||||||||
Property and equipment, net | $ | 147,786 | 151,399 |
Depreciation and amortization expense for the three and six months ended DecemberMarch 31, 20172022 and 20162021 is summarized as follows, dollars in thousands:
Three months ended | Six months ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Depreciation and amortization expense included in cost of goods sold and occupancy costs | $ | 242 | 213 | 481 | 428 | |||||||||||
Depreciation and amortization expense included in store expenses | 6,278 | 6,913 | 12,805 | 14,019 | ||||||||||||
Depreciation and amortization expense included in administrative expenses | 347 | 294 | 694 | 588 | ||||||||||||
Depreciation and amortization expense included in pre-opening expenses (1) | 40 | 0 | 40 | 22 | ||||||||||||
Total depreciation and amortization expense | $ | 6,907 | 7,420 | 14,020 | 15,057 |
1 Pre-opening depreciation and amortization expenses for prior periods have been reclassified from store expenses to be consistent with the current period presentation.
Three months ended | ||||||||
2017 | 2016 | |||||||
Depreciation and amortization expense included in cost of goods sold and occupancy costs | $ | 196 | 248 | |||||
Depreciation and amortization expense included in store expenses | 6,850 | 6,519 | ||||||
Depreciation and amortization expense included in administrative expenses | 369 | 354 | ||||||
Total depreciation and amortization expense | $ | 7,415 | 7,121 |
9. Goodwill and Other Intangible Assets
The Company had the following goodwill and other intangible asset balances as of March 31, 2022 and September 30, 2021, dollars in thousands:
As of | ||||||||||||||
Useful lives (in years) | March 31, 2022 | September 30, 2021 | ||||||||||||
Amortizable intangible assets: | ||||||||||||||
Other intangibles | 0.5 | – | 3 | $ | 4,200 | 3,754 | ||||||||
Less accumulated amortization | (3,446 | ) | (3,139 | ) | ||||||||||
Amortizable intangible assets, net | 754 | 615 | ||||||||||||
Other intangibles in process | 6,657 | 5,507 | ||||||||||||
Trademark |
| Indefinite | 389 | 389 | ||||||||||
Deferred financing costs, net | 47 | 59 | ||||||||||||
Total other intangibles, net | 7,847 | 6,570 | ||||||||||||
Goodwill |
| Indefinite | 5,198 | 5,198 | ||||||||||
Total goodwill and other intangibles, net | $ | 13,045 | 11,768 |
810.. Accrued Expenses
The composition of accrued expenses as of DecemberMarch 31, 20172022 and September 30, 20172021 is summarized as follows, dollars in thousands:
As of | As of | |||||||||||||||
December 31, | September 30, | March 31, | September 30, | |||||||||||||
2017 | 2017 | 2022 | 2021 | |||||||||||||
Payroll and employee-related expenses | $ | 7,849 | 5,391 | $ | 12,323 | 13,243 | ||||||||||
Accrued property, sales and use tax payable | 6,440 | 6,399 | ||||||||||||||
Accrued property, sales, and use tax payable | 6,949 | 8,322 | ||||||||||||||
Accrued marketing expenses | 454 | 648 | 746 | 713 | ||||||||||||
Deferred revenue related to gift card sales | 1,558 | 906 | 1,772 | 2,157 | ||||||||||||
Other | 876 | 820 | 3,113 | 2,154 | ||||||||||||
Total accrued expenses | $ | 17,177 | 14,164 | $ | 24,903 | 26,589 |
911.. Income Taxes
Income taxes are accounted for in accordance with the provisions of ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis.basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in fiscal year 2018 at the blended federal rate of approximately 24.3%; those expected to reverse in future years, are remeasured at the new federal statutory rate of 21.0%.
Additionally, in calculating our annual effective tax rate, the Company has used assumptions and estimates that may change as a result of future guidance, interpretation, and rule-making from the Internal Revenue Service, the SEC, and the FASB and/or various other taxing jurisdictions. For example, the Company anticipates that state jurisdictions will continue to determine and announce their conformity to the Tax Reform Act, which could have an impact on its annual effective tax rate.
The remeasurement of the Company’s deferred tax balance resulted in a non-cash tax benefit of approximately $4.3 million for the three months ended December 31, 2017.
10.12. Related Party Transactions
The Company has ongoing relationships with related entities as noted below:
Chalet Properties, LLC:LLC: The Company has fivefour operating leases and one capital finance lease with Chalet Properties, LLC (Chalet).Chalet. Chalet is owned by the Company’s four non-independent Board members,members: Kemper Isely, Zephyr Isely, Heather Isely, and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $0.3 million and $0.2 million for the $0.3three months ended March 31, 2022 and 2021, respectively, and $0.5 million for each of the threesix months ended DecemberMarch 31, 20172022 and 2016.2021.
Isely Family Land TrustLLC: The Company has one operating lease with the Isely Family Land Trust LLC (the Land Trust).Trust. The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was less than $0.1approximately $0.1 million for each of the three months ended DecemberMarch 31, 20172022 and 2016.2021 and was approximately $0.2 million for each of the six months ended March 31, 2022 and 2021.
FTVCLLC: The Company has one operating lease for a store location with FTVC, LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1$0.1 million for each of the three months ended DecemberMarch 31, 20172022 and 2016.2021 and was less than $0.1 million for each of the six months ended March 31, 2022 and 2021.
113.1. Commitments and Contingencies
In January 2020, a former assistant store manager filed a purported class action lawsuit in the United States District Court for the District of Colorado on behalf of current and former assistant store managers alleging that the Company violated the Fair Labor Standards Act (FLSA) and Colorado labor laws by misclassifying the assistant store managers as exempt. The alleged violations relate to failure to pay for overtime work. In November 2020, the court granted plaintiffs’ motion for conditional certification with regard to the FLSA claim. In September 2021, the court ordered 56 opt-in plaintiffs to individual arbitration, leaving 101 FLSA plaintiffs in the FLSA collective action. The litigation is currently in the discovery stage. The Company believes these claims are without merit and intends to defend the matter vigorously. Given the preliminary stage of the case and the legal standards that must be met for, among other things, class certification, the Company is unable to reasonably estimate at this time the possible range of loss, if any, that may result from this action.
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 financial statements.
14. Subsequent Events
On May 4, 2022, the Board authorized an extension of the Company’s share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2024.
On May 4, 2022, the Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June 15, 2022to stockholders of record as of the close of business prospects, financial condition, cash flows or results of operations.on May 31, 2022.
Item 2. Management’s’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto included elsewhere in this Form 10-Q and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes, may not sum due to the effects of rounding.
Company Overview
We operate natural and organic grocery and dietary supplement stores that are focused on providing high qualityhigh-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, body care products and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of DecemberMarch 31, 2017,2022, we operated 142162 stores in 1920 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.
We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. The size of ourOur stores variesrange from approximately 5,000 to 16,000 selling square feet. During the twelve months ended December 31, 2017, our new stores averagedfeet, and average approximately 11,000 selling square feet. Our new prototype store has approximately 10,000 square feet of selling space. We anticipate that in the future, a majority of our new stores will use the new prototype layout.
The growth in the organic and natural foods industry and growing consumer interest in health and nutrition havehave enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2017,2021, we increased our store count at a compound annual growth rate of 18.9%5.2%. In fiscal year 2017,2021, we opened 14three new stores and we currentlyrelocated/remodeled five existing stores. We plan to open eightfour to 10five new stores and relocate/remodel two stores in fiscal year 2018, two of which opened during the three months ended December 31, 2017. Since December 31, 2017, we have opened one new store in Texas.2022. As of the date of this report, we have signed leases or acquired property for 10an additional six new stores that we plan to open in fiscal years 20182022 and beyond. During fiscal year 2018,the six months ended March 31, 2022, we plan to relocate three to four stores. Duringrelocated/remodeled one store. Between April 1, 2022 and the quarter ended December 31, 2017,date of this Form 10-Q, we relocatedopened one new store and closed one store.
Performance Highlights
Key highlights of our performance for the three and six months ended DecemberMarch 31, 20172022 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, comparable store sales, daily average comparable store sales, mature store sales and daily average mature store sales are defined underin the captionsection “Key Financial Metrics in Our Business,” presented later in this MD&A.
● | Net sales. Net sales were |
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● | Net income. Net income was |
● | EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was |
● | Adjusted EBITDA. AdjustedEBITDA was $16.1 million for the three months ended March 31, 2022, an increase of $1.7 million, or 11.8%, compared to $14.4 million for the three months ended March 31, 2021. Adjusted EBITDA was $35.6 million for the six months ended March 31, 2022, an increase of $7.7 million, or 27.8%, compared to $27.9 million for the six months ended March 31, 2021. Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA. |
● | Liquidity. As of |
● | New store growth. We opened |
● | Store |
Industry Trends and Economics
We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:
● | COVID-19 pandemic. On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. During the course of the COVID-19 pandemic, federal, state and local authorities have imposed, from time to time, a number of public health mandates intended to prevent the spread of the virus, including vaccination mandates, social distancing, quarantine, wearing face coverings, and “stay-at-home” measures and certain of these public health mandates have had an adverse impact on the U.S. economy. Additional negative financial markets and industry-specific impacts could result from future case surges, outbreaks, COVID-19 virus variants, the potential that current vaccines may be less effective or ineffective against future COVID-19 virus variants, and the risk that large groups of the population may not receive vaccinations against COVID-19. The long-term economic impact of the COVID-19 pandemic is unknown at this time. |
● | Impact of the COVID-19 pandemic on our operations. We believe we have acted proactively in response to the COVID-19 pandemic and the resulting government mandates. To date, all of our stores have continued operating since the start of the COVID-19 pandemic. We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public health measures have been implemented across our footprint from time to time and customers have adjusted to these new circumstances by consuming more food at home. The COVID-19 pandemic and government mandates have also led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third party. As a result of current global supply chain issues, partially attributable to the COVID-19 pandemic, we have experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain, although certain products remain in relatively short supply or are unavailable from time to time. |
● | Future impact of the COVID-19 pandemic. We believe our proactive response to the COVID-19 pandemic has resulted in increased customer loyalty, but there can be no assurance we will continue to experience elevated levels of net sales, in particular, when the COVID-19 pandemic subsides. We expect the impact of the COVID-19 pandemic and government mandates on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the COVID-19 pandemic, the governmental and public actions taken in response, including economic stabilization efforts, and the long-term effect the COVID-19 pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic and government mandates make it more challenging for management to estimate future performance of our business, particularly over the near term. See “The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of operations and financial condition” under “Item 1A.- Risk Factors” in our Form 10-K. Additional information regarding the impact of the COVID-19 pandemic and government mandates on our business and results of operations is provided below in this MD&A. |
● | Impact of broader economic trends |
● | Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. |
As we expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue for the foreseeable future. Our financial results for the three months ended December 31, 2017 reflect the effects of these factors, and we anticipate future periods will be similarly impacted.
Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.
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● | Consumer preferences. Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or stricter regulatory standards may adversely affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations. |
Outlook
We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store sales and continue to expand profitably.profitably expand. These factors include a loyal customer base, increasing transaction count and/or basket size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education, a convenient, clean and a shopper friendlyshopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries and dietary supplements.
We plan forexpect the foreseeable future to continue opening new stores and entering new markets. The rate of new store unit growth in the foreseeable future is expected to moderate somewhat compared to recent years, depending onbe dependent upon economic and business conditions and other factors. Duringfactors, including the past few years,impact of the COVID-19 pandemic and the availability of construction materials and equipment. Over the long term, we have expanded our infrastructure to enable us to support our continued unit growth. This has included implementing our enterprise resource planning system, hiring key personnel, developing efficient new store opening construction and operations processes and relocating and expanding our bulk food repackaging facility and distribution center. In addition, we have taken a number of actions in recent years which we believe have enhanced customer loyalty and increased customer engagement, including redesigning our website (www.naturalgrocers.com), enhancing digital and social media presence, and introducing the {N}power® customer appreciation program at all of our stores.
We believe there are opportunities for us to continue to expand our store base,, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic conditions. As we continue to expand our store base,conditions, including inflationary trends. In the future, we believe there are opportunities for increased leverage inof costs such as administrative expenses, as well asand increased economies of scale in sourcing products. However, due to the fixed nature of certain of our commitment to providing high-quality products at affordable pricescosts (in particular, our rent obligations and increased competition, such sourcing economies and efficiencies at our bulk food repacking facility and distribution center may not be reflected in our gross margin in the near term. In addition,related occupancy costs), our ability to leverage costs may be limited due to the fixed naturelimited.
Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A - “Risk Factors” in our Form 10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.
Key Financial Metrics in Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:
Net sales
Our net sales are comprised of gross sales net of discounts, in-house coupons, and returns, and allowances. In comparing net sales between periods, we monitor the following:
● | Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior fiscal year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months. |
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| Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, |
● | Average transaction size. Average transaction size, or basket size, is calculated by dividing net sales by transaction count for a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction. |
Cost of goods sold and occupancy costs
Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically decrease as new stores mature and increase sales.sales increase. Rent payments for leases classified as capital and financingfinance lease obligations are not recorded in cost of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense. Additionally, depreciation expense related to the capitalized asset is recorded in store expenses.
Gross profit and gross margin
Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.
Store expenses
Store expenses consist of store levelstore-level expenses, such as salary and benefits,, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on capitalized real estate leases, land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.technology. Depreciation expenses on the right-of-use assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations.relocations, as well as store closure and lease termination costs. Store expenses also include long-lived asset impairment charges. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to comparable stores, as new stores require a certainminimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.
Administrative expenses
Administrative expenses consist of home office-relatedoffice-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses, expenses associated with being a public company,our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment, and computer hardware and software.
Pre-opening and relocation expenses
Pre-opening expenses for new stores and relocation expensesrelocations/remodels may include rent expense, salaries, advertising, supplies, and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as capital or financingfinance leases, nowe recognize pre-opening rent expense is recognized.interest and depreciation expense. Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening and relocation costs are expensed as incurred.
Operating income
Operating income consists of gross profit less Pre-opening expenses for remodels are incurred if the store expenses, administrative expenses and pre-opening and relocation expenses. Operating income canis required to be impacted by a number of factors, includingclosed due to the timing of new store openings and store relocations, whether or not a store lease is classified as an operating, capital or financing lease, as well as fluctuations in store expenses and administrative expenses. The amount of time it takes for new stores to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market and the strength of store management.remodel.
Interest expense, net
Interest expense consists of the interest associated with capital and financingfinance lease obligations, and interest we incur on outstanding indebtedness, including under our Credit Facility, all net of capitalized interest.interest, and our Credit Facility.
Income tax expense
Income taxes are accounted for in accordance with the provisions of Income Taxes (ASC 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Income tax expense also includes excess tax benefits and deficiencies related to the vesting of restricted stock units.
Results of Operations
The following table presents key components of our results of operations expressed as a percentage of net sales for the periods presented:
Three months ended | ||||||||
2017 | 2016 | |||||||
Statements of Income Data:* | ||||||||
Net sales | 100.0 | % | 100.0 | |||||
Cost of goods sold and occupancy costs | 73.7 | 71.6 | ||||||
Gross profit | 26.3 | 28.4 | ||||||
Store expenses | 22.3 | 22.8 | ||||||
Administrative expenses | 2.6 | 2.7 | ||||||
Pre-opening and relocation expenses | 0.3 | 0.7 | ||||||
Operating income | 1.1 | 2.3 | ||||||
Interest expense | (0.5 | ) | (0.5 | ) | ||||
Income before income taxes | 0.5 | 1.7 | ||||||
Benefit from (provision for) income taxes | 2.0 | (0.6 | ) | |||||
Net income | 2.6 | % | 1.1 | |||||
__________________________ | ||||||||
*Figures may not sum due to rounding. | ||||||||
Number of stores at end of period | 142 | 131 | ||||||
Number of stores opened during the period | 2 | 5 | ||||||
Total store unit count increase period over period | 8.4 | % | 22.4 | |||||
Change in comparable store sales | 4.7 | (0.6 | ) | |||||
Change in daily average comparable store sales | 4.7 | (0.6 | ) | |||||
Change in mature store sales | 1.6 | (2.3 | ) | |||||
Change in daily average mature store sales | 1.6 | (2.3 | ) |
Three months ended | Six months ended | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Statements of Income Data: * | �� | |||||||||||||||
Net sales | 100.0 | % | 100.0 | 100.0 | 100.0 | |||||||||||
Cost of goods sold and occupancy costs | 71.8 | 72.3 | 71.7 | 72.4 | ||||||||||||
Gross profit | 28.2 | 27.7 | 28.3 | 27.6 | ||||||||||||
Store expenses | 21.9 | 22.5 | 21.7 | 22.7 | ||||||||||||
Administrative expenses | 3.0 | 2.5 | 2.8 | 2.6 | ||||||||||||
Pre-opening expenses | 0.1 | 0.1 | 0.0 | 0.1 | ||||||||||||
Operating income | 3.3 | 2.6 | 3.8 | 2.3 | ||||||||||||
Interest expense, net | (0.2 | ) | (0.2 | ) | (0.2 | ) | (0.2 | ) | ||||||||
Income before income taxes | 3.1 | 2.4 | 3.6 | 2.1 | ||||||||||||
Provision for income taxes | (0.7 | ) | (0.5 | ) | (0.8 | ) | (0.5 | ) | ||||||||
Net income | 2.3 | % | 1.8 | 2.8 | 1.6 | |||||||||||
__________________________ | ||||||||||||||||
*Figures may not sum due to rounding. | ||||||||||||||||
Number of stores at end of period | 162 | 161 | 162 | 161 | ||||||||||||
Number of new stores opened during the period | 0 | 1 | 0 | 2 | ||||||||||||
Number of stores relocated/remodeled during the period | 0 | 1 | 1 | 1 | ||||||||||||
Number of stores closed during the period | 0 | 0 | 0 | 0 | ||||||||||||
Twelve-month store unit growth rate | 0.6 | % | 2.5 | 0.6 | 2.5 | |||||||||||
Change in daily average comparable store sales | 4.3 | % | (7.0 | ) | 4.1 | 2.0 |
Three months ended DecemberMarch 31,, 2017 2022 compared to the three months ended March 31, 2021December 31, 2016
The following table summarizes our results of operations and other operating data for the periods presented,, dollars in thousands:
Three months ended December 31, | Change In | Three months ended March 31, | Change In | |||||||||||||||||||||||||||||
2017 | 2016 | Dollars | Percent | 2022 | 2021 | Dollars | Percent | |||||||||||||||||||||||||
Statements of Income Data: | ||||||||||||||||||||||||||||||||
Net sales | $ | 202,480 | 183,577 | 18,903 | 10.3 | % | $ | 271,822 | 259,198 | 12,624 | 4.9 | % | ||||||||||||||||||||
Cost of goods sold and occupancy costs | 149,321 | 131,424 | 17,897 | 13.6 | 195,040 | 187,371 | 7,669 | 4.1 | ||||||||||||||||||||||||
Gross profit | 53,159 | 52,153 | 1,006 | 1.9 | 76,782 | 71,827 | 4,955 | 6.9 | ||||||||||||||||||||||||
Store expenses | 45,166 | 41,843 | 3,323 | 7.9 | 59,605 | 58,422 | 1,183 | 2.0 | ||||||||||||||||||||||||
Administrative expenses | 5,257 | 4,883 | 374 | 7.6 | 8,172 | 6,358 | 1,814 | 28.5 | ||||||||||||||||||||||||
Pre-opening and relocation expenses | 543 | 1,261 | (718 | ) | (56.9 | ) | ||||||||||||||||||||||||||
Pre-opening expenses | 141 | 341 | (200 | ) | (58.7 | ) | ||||||||||||||||||||||||||
Operating income | 2,193 | 4,166 | (1,973 | ) | (47.4 | ) | 8,864 | 6,706 | 2,158 | 32.2 | ||||||||||||||||||||||
Interest expense | (1,089 | ) | (983 | ) | (106 | ) | 10.8 | |||||||||||||||||||||||||
Interest expense, net | (545 | ) | (603 | ) | 58 | (9.6 | ) | |||||||||||||||||||||||||
Income before income taxes | 1,104 | 3,183 | (2,079 | ) | (65.3 | ) | 8,319 | 6,103 | 2,216 | 36.3 | ||||||||||||||||||||||
Benefit from (provision for) income taxes | 4,077 | (1,122 | ) | 5,199 | (463.4 | ) | ||||||||||||||||||||||||||
Provision for income taxes | (1,962 | ) | (1,399 | ) | (563 | ) | 40.2 | |||||||||||||||||||||||||
Net income | $ | 5,181 | 2,061 | 3,120 | 151.4 | $ | 6,357 | 4,704 | 1,653 | 35.1 | % |
Net sales
Net sales increased $18.9$12.6 million, or 10.3%4.9%, to $202.5$271.8 million for the three months ended DecemberMarch 31, 20172022 compared to $183.6$259.2 million for the three months ended DecemberMarch 31, 2016,2021, due to a $10.3an $11.1 million increase in comparable store sales from new stores and a $8.6$1.5 million increase in comparablenew store sales. Daily average comparable store sales increased 4.7%4.3% for the three months ended DecemberMarch 31, 20172022 compared to the three months ended DecemberMarch 31, 2016.2021. The daily average comparable store sales increase resulted from a 4.8%2.5% increase in daily average transaction count offset bysize and a 0.1% decrease1.8% increase in daily average transaction size.count. Comparable store average transaction size was $35.54$45.80 for the three months ended DecemberMarch 31, 2017. Daily average mature store sales increased 1.6% for the three months ended December 31, 2017 compared to the three months ended December 31, 2016.2022. The increase in comparable storenet sales during the three months ended DecemberMarch 31, 20172022 was primarily driven by severalour customers’ response to COVID-19 pandemic trends early in the quarter, retail price inflation, marketing initiatives, promotional campaigns and promotional pricing campaigns. In addition, we believe the increase in comparable store sales during the three months ended December 31, 2017 reflected enhanced focus on leadership, training, and improved operating processesincreased engagement in our stores.{N}power® customer loyalty program.
Gross profit
Gross profit increased $1.0$5.0 million, or 1.9%6.9%, to $53.2$76.8 million for the three months ended DecemberMarch 31, 20172022 compared to $52.2$71.8 million for the three months ended DecemberMarch 31, 2016,2021, primarily driven by an increase in the number of comparable stores.increased sales volume. Gross profit reflects earnings after product and occupancy costs. Gross margin decreasedincreased to 26.3%28.2% for the three months ended DecemberMarch 31, 2017 from 28.4%2022 compared to 27.7% for the three months ended DecemberMarch 31, 2016. Product margin as a percentage of sales during the three months ended December 31, 2017 decreased due to our promotional pricing campaigns and a shift2021. The increase in sales mix to lower margin products. Additionally, gross margin during the three months ended DecemberMarch 31, 20172022 was negatively impactedprimarily driven by an increase inimproved product margin and store occupancy costs as a percentage of sales, primarily due to the higher average lease expenses experienced at newer format stores opened since fiscal year 2013 and at relocated stores.
We had 18 and 16 store leases that were classified as capital and financing lease obligations for the three months ended December 31, 2017 and 2016, respectively. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the three months ended December 31, 2017 and 2016, would have been approximately 55 basis points higher for each period.leverage.
Store expenses
Store expenses increased $3.3$1.2 million, or 7.9%2.0%, to $45.2$59.6 million for the three months ended DecemberMarch 31, 20172022 compared to $41.8$58.4 million for the three months ended DecemberMarch 31, 2016.2021. Store expenses as a percentage of net sales were 22.3%21.9% and 22.8%22.5% for the three months ended DecemberMarch 31, 20172022 and 2016,2021, respectively. The decreasereduction in store expenses as a percentage of net sales was primarily duereflects leverage created by higher sales and a more normalized operating environment compared to decreases in labor-related expenses, marketing and depreciation, offset by an increase in utilities.the prior fiscal year period.
Administrative expenses
Administrative expenses increased $0.4$1.8 million or 7.6%, to $5.3$8.2 million for the three months ended DecemberMarch 31, 20172022 compared to $4.9$6.4 million for the three months ended DecemberMarch 31, 2016. The increase in administrative expenses was due primarily to increased compensation expenses.2021. Administrative expenses as a percentage of net sales were 2.6%3.0% and 2.7%2.5% for the three months ended DecemberMarch 31, 20172022 and 2016,2021, respectively.
Pre-opening and relocation expenses
Pre-opening and relocation expenses decreased $0.7 million, or 56.9%, for the three months ended December 31, 2017 to $0.5 million compared to $1.3were $0.1 million for the three months ended DecemberMarch 31, 2016, due2022 compared to the impact of the number and timing of new store openings and relocations. We opened two new stores and relocated one store during$0.3 million for the three months ended DecemberMarch 31, 2017 and opened five new stores and relocated no stores during2021.
Interest expense, net
Interest expense, net of capitalized interest, was $0.5 million in the three months ended DecemberMarch 31, 2016.2022 compared to $0.6 million in the three months ended March 31, 2021.
Income taxes
Income tax expense increased $0.6 million for the three months ended March 31, 2022 to $2.0 million compared to $1.4 million for the three months ended March 31, 2021. The Company’s effective income tax rate was approximately 23.6% and 22.9% for the three months ended March 31, 2022 and 2021, respectively.
Net income
Net income was $6.4 million, or $0.28 diluted earnings per share, for the three months ended March 31, 2022 compared to $4.7 million, or $0.21 diluted earnings per share, for the three months ended March 31, 2021.
Six months ended March 31, 2022 compared to the six months ended March 31, 2021
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
Six months ended March 31, | Change In | |||||||||||||||
2022 | 2021 | Dollars | Percent | |||||||||||||
Statements of Income Data: | ||||||||||||||||
Net sales | $ | 549,110 | 524,243 | 24,867 | 4.7 | % | ||||||||||
Cost of goods sold and occupancy costs | 393,591 | 379,391 | 14,200 | 3.7 | ||||||||||||
Gross profit | 155,519 | 144,852 | 10,667 | 7.4 | ||||||||||||
Store expenses | 118,941 | 118,752 | 189 | 0.2 | ||||||||||||
Administrative expenses | 15,465 | 13,662 | 1,803 | 13.2 | ||||||||||||
Pre-opening expenses | 225 | 530 | (305 | ) | (57.5 | ) | ||||||||||
Operating income | 20,888 | 11,908 | 8,980 | 75.4 | ||||||||||||
Interest expense, net | (1,089 | ) | (1,113 | ) | 24 | (2.2 | ) | |||||||||
Income before income taxes | 19,799 | 10,795 | 9,004 | 83.4 | ||||||||||||
Provision for income taxes | (4,527 | ) | (2,459 | ) | (2,068 | ) | 84.1 | |||||||||
Net income | $ | 15,272 | 8,336 | 6,936 | 83.2 | % |
Net sales
Net sales increased $24.9 million, or 4.7%, to $549.1 million for the six months ended March 31, 2022 compared to $524.2 million for the six months ended March 31, 2021, due to a $21.3 million increase in comparable store sales and a $3.6 million increase in new store sales. Daily average comparable store sales increased 4.1% for the six months ended March 31, 2022 compared to the six months ended March 31, 2021. The daily average comparable store sales increase resulted from a 2.4% increase in daily average transaction count and a 1.6% increase in daily average transaction size. Comparable store average transaction size was $45.57 for the six months ended March 31, 2022. The increase in net sales during the six months ended March 31, 2022 was primarily driven by our customers’ response to COVID-19 pandemic trends, retail price inflation, marketing initiatives, promotional campaigns and increased engagement in our {N}power® customer loyalty program.
Gross profit
Gross profit increased $10.7 million, or 7.4%, to $155.5 million for the six months ended March 31, 2022 compared to $144.9 million for the six months ended March 31, 2021, primarily driven by increased sales volumes. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 28.3% for the six months ended March 31, 2022 compared to 27.6% for the six months ended March 31, 2021. The increase in gross margin during the six months ended March 31, 2022 was primarily driven by improved product margin and store occupancy leverage.
Store expenses
Store expenses increased $0.2 million, or 0.2%, to $118.9 million for the six months ended March 31, 2022 compared to $118.8 million for the six months ended March 31, 2021. In the six months ended March 31, 2022, we recorded $0.1 million in operating lease asset impairment charges as a result of an early store relocation. In the six months ended March 31, 2021, we recorded $0.4 million in lease exit costs, primarily related to a lease termination fee associated with one store that closed in fiscal year 2019. Store expenses as a percentage of net sales were 21.7% and 22.7% for the six months ended March 31, 2022 and 2021, respectively. The reduction in store expenses as a percentage of net sales reflects leverage created by higher sales and a more normalized operating environment compared to the prior fiscal year period.
Administrative expenses
Administrative expenses increased $1.8 million to $15.5 million for the six months ended March 31, 2022 compared to $13.7 million for the six months ended March 31, 2021. Administrative expenses as a percentage of net sales were 2.8% and 2.6% for the six months ended March 31, 2022 and 2021, respectively.
Pre-opening expenses
Pre-opening expenses were $0.2 million for the six months ended March 31, 2022 compared to $0.5 million for the six months ended March 31, 2021.
Interest expense
Interest expense,, net of capitalized interest, increased $0.1remained flat at $1.1 million or 10.8%, for each of the threesix months ended DecemberMarch 31, 2017 compared to the three months ended December 31, 2016. The increase in interest expense is primarily due to higher average borrowings under our Credit Facility2022 and an increase in the number of capital leases during the three months ended December 31, 2017. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 45 and 40 basis points lower than as reported for the three months ended December 31, 2017 and 2016, respectively.2021.
Income taxes
Income taxes decreased $5.2tax expense increased $2.1 million for the threesix months ended DecemberMarch 31, 20172022 to a $4.1$4.5 million benefit compared to $1.1$2.5 million expense for the threesix months ended DecemberMarch 31, 2016. Exclusive of the adjustment to deferred income tax assets and liabilities, the Company’s2021. The Company’s effective income tax rate was approximately 22.9% and 22.8% for the threesix months ended DecemberMarch 31, 2017 was approximately 23.5% as compared to 35.2% for the three months ended December 31, 2016. The decrease in the effective income tax rate for the three months ended December 31, 2017 is a result of the recent tax reform.2022 and 2021, respectively.
Net income
Net income was $5.2$15.3 million, or $0.23$0.67 diluted earnings per share, for the threesix months ended DecemberMarch 31, 20172022 compared to $2.1$8.3 million, or $0.09$0.37 diluted earnings per share, for the threesix months ended DecemberMarch 31, 2016. Excluding the favorable impact of the remeasurement of our deferred tax assets and liabilities as a result of the enactment of the Tax Reform Act, net income was $0.8 million or $0.04 diluted earnings per share for the three months ended December 31, 2017 compared to $2.1 million, or $0.09 diluted earnings per share, for the three months ended December 31, 2016.2021.
Non-GAAP financial measures
EBITDA and Adjusted EBITDA
EBITDA isand Adjusted EBITDA are not a measuremeasures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes andtaxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance, including certain items such as impairment charges, store closing costs, lease exit costs, share-based compensation and non-recurring items. The adjustments to EBITDA for the six months ended March 31, 2022 included $0.1 million in operating lease asset impairment charges as a result of an early store relocation. The adjustments to EBITDA for the six months ended March 31, 2021 included $0.4 million in lease exit costs associated with one store that closed in fiscal year 2019.
The following table reconciles net income to EBITDA for the periods presented,and Adjusted EBITDA, dollars in thousands:
Three months ended | Three months ended | Six months ended | ||||||||||||||||||||||
2017 | 2016 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
Net income | $ | 5,181 | 2,061 | $ | 6,357 | 4,704 | 15,272 | 8,336 | ||||||||||||||||
Interest expense | 1,089 | 983 | ||||||||||||||||||||||
Benefit from (provision for) income taxes | (4,077 | ) | 1,122 | |||||||||||||||||||||
Interest expense, net | 545 | 603 | 1,089 | 1,113 | ||||||||||||||||||||
Provision for income taxes | 1,962 | 1,399 | 4,527 | 2,459 | ||||||||||||||||||||
Depreciation and amortization | 7,415 | 7,121 | 6,907 | 7,420 | 14,020 | 15,057 | ||||||||||||||||||
EBITDA | $ | 9,608 | 11,287 | 15,771 | 14,126 | 34,908 | 26,965 | |||||||||||||||||
Impairment of long-lived assets and store closing costs | — | — | 95 | 405 | ||||||||||||||||||||
Share-based compensation | 296 | 239 | 590 | 487 | ||||||||||||||||||||
Adjusted EBITDA (1) | $ | 16,067 | 14,365 | 35,593 | 27,857 |
EBITDA decreased 14.9% to $9.6 million in(1) Adjusted EBITDA for the three and six months ended DecemberMarch 31, 2017 compared2021, as presented, has been recast to $11.3exclude share-based compensation to enhance the comparability of this measure between fiscal periods.
EBITDA increased 11.6% to $15.8 million for the three months ended DecemberMarch 31, 2016.2022 compared to $14.1 million for the three months ended March 31, 2021. EBITDA increased 29.5% to $34.9 million for the six months ended March 31, 2022 compared to $27.0 million for the six months ended March 31, 2021. EBITDA as a percentage of net sales was 4.7%5.8% and 6.1% in5.4% for the three months ended DecemberMarch 31, 20172022 and 2016,2021, respectively. Stores with leases that are classified as capital and financing lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of net sales by approximately 55 basis pointswas 6.4% and 5.1% for each ofthe six months ended March 31, 2022 and 2021, respectively.
Adjusted EBITDA increased 11.8% to $16.1 million for the three months ended DecemberMarch 31, 20172022 compared to $14.4 million for the three months ended March 31, 2021. Adjusted EBITDA increased 27.8% to $35.6 million for the six months ended March 31, 2022 compared to $27.9 million for the six months ended March 31, 2021. Adjusted EBITDA as a percentage of net sales was 5.9% and 2016, due to5.5% for the impact on costthree months ended March 31, 2022 and 2021, respectively. Adjusted EBITDA as a percentage of goods soldnet sales was 6.5% and occupancy costs as discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to5.3% for the stores’ opening dates if these leases had been accounted for as operating leases.six months ended March 31, 2022 and 2021, respectively.
Management believes that some investors’ understanding of our performance is enhanced by including EBITDA aand Adjusted EBITDA, which are non-GAAP financial measure.measures. We believe EBITDA providesand Adjusted EBITDA provide additional information about: (i) our operating performance, because it assiststhey assist us in comparing the operating performance of our stores on a consistent basis, as it removesthey remove the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations, such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility. Further, our incentive compensation plan bases incentive compensation payments on EBITDA, among other measures.
Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as a supplemental measuremeasures to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including thisthese non-GAAP financial measuremeasures as a reasonable basis for comparing our ongoing results of operations. By providing thisthese non-GAAP financial measure,measures, together with a reconciliation from net income, we believe we are enhancing analysts’ and investors’ understanding of our business and our results of operations, as well as assisting analysts and investors in evaluating how well we are executing our strategic initiatives. Commencing with its financial reporting for fiscal year 2021, the Company revised its definition of Adjusted EBITDA to exclude share-based compensation. The Company’s historical presentation of Adjusted EBITDA, including for the three and six months ended March 31, 2021, did not exclude share-based compensation. However, Adjusted EBITDA for the three and six months ended March 31, 2021, as presented in this report, has been recast to exclude share-based compensation to enhance the comparability of this measure between fiscal periods. Management believes that excluding share-based compensation from Adjusted EBITDA will enhance investors’ ability to assess period-to-period comparisons of the Company’s operating performance and make more meaningful comparisons between our operating performance and the operating performance of our competitors.
Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measure of EBITDA and Adjusted EBITDA may not be directly comparable to thoseEBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA is aand Adjusted EBITDA are supplemental measuremeasures of operating performance that doesdo not represent, and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA hasand Adjusted EBITDA have limitations as an analytical tool,tools, and should not be considered in isolation, or as an alternative to, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:
● | EBITDA |
● | EBITDA |
● | EBITDA |
● | EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
● | Adjusted EBITDA does not reflect |
● | EBITDA |
● | 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 |
Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as a measuremeasures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.
Liquidity and Capital Resources
Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under our Revolving Facility. Our Credit Facility consists of the Credit$50.0 million Revolving Facility and the fully drawn $35.0 million Term Loan Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, interest and principal payments for outstanding indebtednessdebt service, cash dividends and corporate taxes. As of DecemberMarch 31, 2017,2022, we had $8.1$28.9 million in cash and cash equivalents as well as $24.4and $49.0 million available for borrowing under our CreditRevolving Facility. On November 18, 2020, we entered into the $35.0 million Term Loan Facility maturing November 13, 2024.
OnIn May 5, 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may expendrepurchase up to $10.0 million to repurchasein shares of the Company’s common stock. DuringOur Board subsequently extended the threeshare repurchase program, including most recently in May 2022, and the program will terminate on May 31, 2024. We did not repurchase any shares during the six months ended DecemberMarch 31, 2017, we repurchased 101,5732022. The dollar value of the shares of ourthe Company’s common stock that may yet be repurchased under the share repurchase program. We expect funding for anyprogram is $8.3 million. Potential future share repurchases will come fromunder the share repurchase program could be funded by operating cash flow, excess cash and/balances or borrowings under our CreditRevolving Facility. The timing and the amountnumber of shares repurchased, if any, will be dictated by our capital needs and stock market conditions.
On May 4, 2022, our Board approved the payment of a quarterly cash dividend of $0.10 per share of common stock to be paid on June 15, 2022 to stockholders of record as of the close of business on May 31, 2022. We paid quarterly cash dividends of $0.10 per share of common stock in each of the first two quarters of fiscal year 2022.
We plan to continue to open new stores in the future, which may require us to borrow additional amounts under the Credit Facility. We planRevolving Facility from time to spend approximately $20 million to $25 million on capital expenditures during the remainder of fiscal year 2018 in connection with six to eight additional new store openings and two to three additional store relocations.time. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our CreditRevolving Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs, repayment of debt, stock repurchases and dividends for at least the next twelve months.12 months and foreseeable future. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.
We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.2 million per store consisting of capital expenditures of approximately $1.6 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.3 million.
Following The following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:
Three months ended December 31, | Six months ended March 31, | |||||||||||||||
2017 | 2016 | 2022 | 2021 | |||||||||||||
Net cash provided by operating activities | $ | 10,969 | 14,094 | $ | 27,581 | 17,305 | ||||||||||
Net cash used in investing activities | (4,884 | ) | (10,493 | ) | (12,295 | ) | (9,541 | ) | ||||||||
Net cash used in financing activities | (4,517 | ) | (476 | ) | (10,075 | ) | (15,321 | ) | ||||||||
Net increase in cash and cash equivalents | 1,568 | 3,125 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | 5,211 | (7,557 | ) | |||||||||||||
Cash and cash equivalents, beginning of period | 6,521 | 4,017 | 23,678 | 28,534 | ||||||||||||
Cash and cash equivalents, end of period | $ | 8,089 | 7,142 | $ | 28,889 | 20,977 |
OperatingOperating Activities
Net cashcash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, share-based compensation, and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities decreased $3.1increased $10.3 million, or 22.2%59.4%, to $11.0$27.6 million for the threesix months ended DecemberMarch 31, 20172022 compared to $14.1$17.3 million for the threesix months ended DecemberMarch 31, 2016.2021. The decreaseincrease in cash provided by operating activities was primarily due to a decreasean increase in accounts payable, partially offset by a decrease in inventory, asnet income adjusted for non-cash items such as depreciation and amortization resulting fromwell as a reduction in the additionamount of new stores. Ourcash used for working capital requirements, as compared to the amount of cash used for inventory will likely increase as we continue to open new stores.working capital in the prior fiscal year.
Investing Activities
Net cashcash used in investing activities decreased $5.6increased $2.8 million, or 53.4%28.9%, to $4.9$12.3 million for the threesix months ended DecemberMarch 31, 20172022 compared to $10.5$9.5 million for the threesix months ended DecemberMarch 31, 2016.2021. This decreaseincrease was due to an $8.1primarily the result of increases of $2.2 million decreaseand $0.7 million in cash paid for property and equipment which was driven by fewerand other intangibles acquisitions during the six months ended March 31, 2022 compared to the six months ended March 31, 2021, respectively, due to the impact of the timing of new store, relocation/remodel, and software projects under development.
We plan to spend approximately $15.7 million to $22.7 million on capital expenditures during the remainder of fiscal year 2022 in connection with four to five new store openings relocations and remodels intwo store relocations/remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.2 million per store.
Acquisition of property and equipment not yet paid decreased $2.3 million to $2.1 million for the quartersix months ended DecemberMarch 31, 2017. This decrease was partially offset by $2.62022 compared to $4.4 million proceeds, netfor the six months ended March 31, 2021 due to the timing of commissions,payments related to the sale/leaseback on onenew store building in the quarter ended December 31, 2016.openings and relocations/remodels.
Financing Activities
Cash Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and payments of capital and financing lease obligations. Cashdividends paid to stockholders. Net cash used in financing activities was $4.5 million and $0.5$10.1 million for the threesix months ended DecemberMarch 31, 2017 and 2016, respectively.2022 compared to $15.3 million for the six months ended March 31, 2021
Credit FacilityFacility
The revolving commitment amount available for borrowing under the CreditRevolving Facility is $50.0 million, including a $5.0 million sublimitsub-limit for standby letters of credit. We borrowed $35.0 million under the Term Loan Facility in December 2020. The operating company is the borrower under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and VC2.Vitamin Cottage Two Ltd. Liability Company (VC2). The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow amounts under the CreditRevolving Facility at any time prior to the maturity date. The Creditdate without premium or penalty. On November 18, 2020, we entered into the Fourth Amendment to provide for the Term Loan Facility matures on Januaryand permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2021.2020.
For floatingBase rate borrowings under the Credit Facility bear interest isat a fluctuating base rate as determined by the lender’slenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the basehighest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon certain financial measures. For fixedthe Company’s consolidated leverage ratio. Eurodollar rate borrowings under the Credit Facility bear interest is determined by quoted LIBOR ratesbased on the London Interbank Offered Rate, or its successor rate (LIBOR), for the interest period plus the lender spread based upon certain financial measures.the Company’s consolidated leverage ratio. The unused commitment fee is also based upon certain financial measures.the Company’s consolidated leverage ratio. The Company is required to repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million on the last day of each fiscal quarter, commencing on March 31, 2021 and ending on September 30, 2024. Amounts repaid on the Term Loan Facility may not be reborrowed.
The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’sCompany’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends exceptto the holding company from the operating company without the required lenders’ consent, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company forin an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and for repurchases of(ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million.million during any fiscal year.
We had $24.6 millionno amounts outstanding under the CreditRevolving Facility as of Decembereach of March 31, 20172022 and $28.4 million outstanding under the Credit Facility as of September 30, 2017.2021. As of each of DecemberMarch 31, 20172022 and September 30, 2017,2021, we had undrawn, issued and outstanding letters of credit of $1.0 million, which were reserved against the amount available for borrowing under the terms of the CreditRevolving Facility. We had $24.4$49.0 million available for borrowing under the CreditRevolving Facility as of Decembereach of March 31, 20172022 and $20.6September 30, 2021. We had $19.7 million available for borrowingof outstanding borrowings under the Creditfully drawn Term Loan Facility as of September 30, 2017.March 31, 2022.
As of Decembereach of March 31, 20172022 and September 30, 2017,2021, the Company was in compliance with the financial covenants under the Credit Facility.
Share Repurchases
Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 56 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q and in Part II, Item 2 of this Form 10-Q.
Off-Balance Sheet Arrangements
As of December 31, 2017, our off-balance sheet arrangements consisted of operating leases and the undrawn portion of our Credit Facility. All of our stores and facilities, with one exception, are leased. We own buildings in which five of our stores are located; those buildings are located on land that is leased pursuant to a ground lease. As of December 31, 2017, 18 store leases were classified as capital and financing lease obligations, and the remaining leases were classified as operating leases in our consolidated financial statements. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements included in this Form 10-Q.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to make adjustments we consider appropriate under the facts and circumstances.
Critical accounting policies that affect our more significant judgmentsjudgments and estimates used in the preparation of our financial statements include accounting for income taxes, accounting for impairment of long-lived assets and accounting for leases, which are discussed in more detail under the caption “Critical Accounting Policies” under Item 7 -– “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
To a limited extent, we are exposed to interest rate changes with respect to our Credit Facility. We do not use financial instruments for trading or other speculative purposes. There have been no material changes regarding our market risk position from the information provided under Item 7A -– “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officers and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective at a reasonable assurance leveleffective as of DecemberMarch 31, 2017.2022.
Changes in Internal Control over Financial Reporting
Management implemented additional internal controls over financial reporting to ensure compliance with the Tax Reform Act. There were no other changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We periodically are involved in various legal proceedings,, including discrimination and other employment-related claims, customer personal injury claims, investigations and other proceedings arising in the ordinary course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from our estimates. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.
There have been no material changes from the risk factors disclosed in Part I, “Item 1A-Risk Factors,”Item 1A, of our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds5. Other Information
The following table presents information with respect to purchasesRelated Party Lease
On May 4, 2022, the Company and Chalet, a related party owned by members of the Isely family, entered into a ground lease for the Company’s store location and store support center in Lakewood, Colorado (the “Lease”) and terminated the previously disclosed Sublease, dated June 1, 2006, between the Company’s and Chalet for the same location. The Lease permits the Company to construct a new building on the property to replace its existing store and provides for an initial term of 20 years, subject to additional extensions. The Company will pay annual rent of approximately $0.3 million with a 5% increase every five years. As required under the Company’s Related Party Transaction policy, the Company’s Audit Committee approved the terms of the transaction. This disclosure is responsive to Items 1.01 and 1.02 of Form 8-K.
Extension of Share Repurchase Program
On May 4, 2022, our Board authorized an extension of the Company’s previously announced share repurchase program. As a result of such extension, the share repurchase program will terminate on May 31, 2024. The dollar value of the shares of common stock duringthat may yet be repurchased under the three months ended December 31, 2017share repurchase program is approximately $8.3 million. Repurchases may be made from time to time at management's discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended, subject to market conditions, applicable legal requirements and other relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan. The share repurchase program does not obligate the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company or any affiliated purchaser, as defined in Rule 10b-18(a)(3) under the Exchange Act.
Period |
Total Number of Shares Purchased |
Average Price Paid Per Share(1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in thousands) | ||||||||||||
October 1, 2017 to October 31, 2017 | 87,950 | $5.69 | 185,920 | $8,410 | ||||||||||||
November 1, 2017 to November 30, 2017 | 13,623 | 5.91 | 199,543 | 8,329 | ||||||||||||
December 1, 2017 to December 31, 2017 | — | — | 199,543 | 8,329 | ||||||||||||
Total | 101,573 | $5.72 | 199,543 | $8,329 |
(1) Average price paid per share includes commissions paid.
(2) On May 5, 2016, our Board authorized a two-year share repurchase program pursuantwithout prior notice. This disclosure is responsive to which the Company may repurchase up to $10.0 million in sharesItem 8.01 of the Company’s common stock.Form 8-K.
EXHIBITINDEX
Exhibit Number | Description | |
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10.1 | ||
31.1 | ||
31.2 | ||
31.3 | ||
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101 | The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Quarterly Report on Form 10-Q for the quarter ended | |
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
† The certifications attachedattached as Exhibit 32.1 that accompany this Form 10-Q are not deemed filed with the Securities and Exchange CommissionSEC and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on February 1, 2018.May 5, 2022.
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By: | /s/ KEMPER ISELY | ||
Kemper Isely, Co-President | |||
(Principal Executive Officer) | |||
By: | /s/ TODD DISSINGER | ||
Todd Dissinger, | |||
(Principal Financial and Accounting Officer) |
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