Supplement sales buoy Natural Grocers during revenue slowdown

By Hank Schultz

- Last updated on GMT

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Supplement sales buoy Natural Grocers during revenue slowdown
Sales of dietary supplements was a bright spot for Natural Grocers in what was otherwise a disappointing earnings report.

The company reported its first quarter earnings recently and like some other purveyors of natural and organic products has found that increasing competition has seriously eaten into profits. 

“Our sales performance remains inconsistent. We continue to face competitive pressure from both our traditional competitors and from the entrance of non-traditional competitors into the natural and organic food segment,”​ said CEO Kemper Isley in an earnings call with analysts. The transcript of the call was posted on the site​.

Natural Grocers by Vitamin Cottage, (the formal name of the company) has a unique model in that it devotes a much larger percentage of store floor space toward the display of dietary supplements than do its competitors such as Sprouts or Whole Foods. Since going public in 2011, the company has pursued an aggressive policy of expansion, and now operates more than 130 stores mostly in the western US. The company started in 1955 with a lone store in Lakewood, CO. 

The chain reported disappointing same store sales, reflective of the increasing competition. Comparable store sales decreased 0.6% during the quarter.  But the company was able to record a 9.4% overall growth in sales to $184 million, driven largely by the opening of new stores. The company opened five new stores in the quarter, and Isley said that strategy will continue, because the company is generating enough cash to “largely”​ self fund that growth.

Education key to supplement sales

Isley said the company’s education and engagement initiatives with customers are showing results in the sales of supplements and other product categories, even as competition erodes results in the food sectors. This has enabled the company to compete effectively in supplement sales both with brick-and-mortar competitors as well as the threat from online sales.

“We continue to see a positive trend in product margins across multiple categories and are benefiting from a favorable mix shift towards the higher margin categories of supplements and body-care. We believe that the improved supplement sales mix was driven by the excellent work our Good4u crews are doing in educating our customers about supplements and, in particular, our Nutrient to Know About campaign,” ​Isley said.

Earnings details

Natural Grocers reported $184 million in sales in the quarter, a 9.4% year-over-year gain. But costs rose too. Net income was $2.1 million, with diluted earnings per share of $0.09 in the first quarter of fiscal 2017. EBITDA was $11.3 million in the first quarter of fiscal 2017 compared to $12.7 million in this first quarter of fiscal 2016. 

Analysts were expecting better performance.  The predictions had put EPS at $0.14 per share, and revenue at slightly more than $190 million. Stock traders reacted by sending the stock price down by about 8%, from about $13 a share to about $12.  The stock remains significantly off its 52-week high of $21.63 achieved last April. Around that time, citing increasing competition, the company lowered its guidance for the rest of the year and the stock lost almost half its value.

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