The next phase of the pandemic, which shows signs of a return to “normalcy” in some areas like an uptick in store traffic, but not in others—like the office worker lunch rush—is proving less profitable for some.
Natural Grocers net sales decreased $18.3 million, or 6.6%, to $259.2 million in the second quarter of fiscal 2021 compared to the same period in fiscal 2020, the company reported during a May 6 earnings call. The decline was driven by a $22.1 million decrease in comparable-store sales and a $3.8 million increase in new-store sales, said the Lakewood, Colo.-based company.
“We had a solid performance in the second quarter, executing against our strategic objectives,” said Chairman and co-President Kemper Isely during the earnings call, according to a Sentieo transcript. “I am very proud of how our entire organization performed, delivering on our promise of the highest-quality natural foods at always affordable prices as well as responding to the needs of our communities.”
Citing continued challenges stemming from the COVID pandemic and related government mandates, Isely added, “Our second quarter results demonstrate the strength of our model and disciplined operating approach, enabling us to drive solid profitability despite very difficult revenue comparisons and weather-related disruptions [in the form of severe cold and ice storms during February].”
As shoppers are no longer visiting stores less frequently for bigger basket stock up trips as they did in March 2020 when average comparable-store sales were up some 40%, Natural Grocers said daily average comparable-store sales decreased 7% in the second quarter of fiscal 2021, compared to a 17% increase in the second quarter of fiscal 2020. The daily average comparable-store sales decrease during the second quarter of fiscal 2021 reflected a 13.9% decrease in daily average transaction count, partially offset by an 8% increase in daily average transaction size, the company reports.
“We overcame a number of headwinds during the second quarter to deliver solid results in line with our expectations, especially as we began to lap the unprecedented sales increases associated with customer pantry loading at the start of the pandemic,” said Chief Financial Officer Todd Dissinger.
While Isely said Natural Grocers has experienced a bit of an uptick in customer count in March and April and has not seen a “tremendous decrease in basket size,” smaller basket sizes are suffering.
Natural Grocers recently conducted a study of its basket composition in the first quarter, which revealed a loss in smaller basket trips. “So people coming in for lunch buying a sandwich, a drink and maybe a snack—that’s where we lost our customer counts through last year,” noted Isely. “Until the office workers come back in working at the office, I do not think we are going to see that impulse of smaller baskets come back to our stores.”
Gross profit during the second quarter of fiscal 2021 decreased 7.7% to $71.8 million. Gross profit reflects earnings after both product and occupancy expenses. Gross margin decreased to 27.7% during the second quarter of fiscal 2021, compared to 28% in the second quarter of fiscal 2020. The decrease in gross margin was primarily driven by occupancy deleverage, reflecting decreased sales volume, partially offset by a modest improvement in product margin, said the company.
Shopper Loyalty, Store Brands
Natural Grocers’ N Power loyalty program remains a key initiative, said the company. “Our N Power program continued to strengthen customer engagement and loyalty, driving transaction activity by providing a compelling platform for optimizing marketing, promotions and enhancing the customer experience,” said Isely. “We ended the second quarter with 1.4 million N Power members, up 17% vs. a year ago and up 5% sequentially.”
On the store brands front, Natural Grocers recently relaunched a line of supplements, vitamins, herbs and more. It also added six new grocery products to its Natural Grocers branded assortment, including the introduction of bottled kombucha. For the quarter, the sales penetration rate of its Natural Grocers brand products was 7.3%, said Isely.
Inflation and Expenses
Store expenses at Natural Grocers increased 2.7% to $58.4 million during the second quarter of fiscal 2021, due to a decrease in sales volume and increased labor-related expenses. Store expenses as a percentage of net sales increased to 22.5% during the second quarter of fiscal 2021, compared to 20.5% in the second quarter of fiscal 2020.
When asked during the earnings call about the impact of inflation, Isely said he hopes to see the 3% trend for the rest of the year, which would have little to no impact on pricing in stores. However, pricing for store equipment is where costs are escalating.
“We are getting like 20% and 30% surcharges right now,” said Isely. “And so I am guessing that everybody else is seeing those type of price increases on their capital goods, so … there is probably going to have to be an acceleration in how much they charge for products coming out … six months from now.”
What’s Ahead for Natural Grocers
“Our balance sheet remains strong with $21 million in cash, no outstanding borrowings under our $50 million revolving credit facility and a $34.6 million balance on our fully drawn term loan,” said Dissinger, who added Natural Grocers board of directors has declared a quarterly cash dividend of 7 cents per common share. The dividend will be paid on June 16, 2021, to all stockholders of record at the close of business on June 1, 2021.
Despite the strong balance sheet, Natural Grocer has scaled back its expansion plans in 2021. In light of “the rapidly evolving COVID-19 environment and related government mandates," said Dissinger, “We are lowering our expectations for new store openings and store relocations/remodels during fiscal 2021 and are otherwise reiterating our full-year guidance range previously established on Nov. 19, 2020.” The adjustment in new stores was driven by construction and equipment delivery delays, he added.
Natural Grocers opened one new store and remodeled one store during the second quarter of 2021, resulting in a 2.5% new store growth rate for the 12-month period ending March 31, 2021. The company anticipates opening three to four new stores and relocating or remodeling four to five stores in 2021.