Natural Grocers slows new store pace in effort to control costs, shore up existing outlets

By Hank Schultz

- Last updated on GMT

Natural Grocers slows new store pace in effort to control costs, shore up existing outlets

Related tags Comparable store sales Sales Revenue 2016

Natural Grocers will slash the pace of new store openings to focus more on shoring up the performance of existing outlets, the company announced recently.

The company, whose full name is Natural Grocers by Vitamin Cottage, is a chain based in Lakewood, CO with 130 stores, mostly in states west of the Mississippi.  The company’s store footprint devotes a significant amounnt of square footage to the sale of dietary supplements along with the sale of organic produce and dairy.

The company went public in 2012, relying in part on a research report that said that there was room in the US market for an additional 1,000 health food stores.  The company set about vigorously to fill that niche, opening as many as 23 new stores a year. And that strategy worked well for a while, as sales rose quickly in the 2012-2014 time frame and the company’s stock reached an all-time high of almost $44 a share. But even then, most of the sales increase came from new stores, with comparable sales in mature stores lagging. Those comparable store sales numbers started to fall into negative territory late 2016 extending into fiscal 2017.

Slowing the pace

In the company’s recent year-end earnings report, CEO Kemper Isley said that new store openings will be reined in. The company opened 23 new stores in fiscal 2016 and 14 in fiscal 2017 during a period when comparable sales for mature stores continued to slide. The company is now looking to open 8 to 10 new stores and relocate four in the coming fiscal year.

“We have and will continue to adapt to the changing competitive landscape. This includes a more moderate level of new store growth allowing us to focus on operations while controlling costs and improving our operating metrics,​ Isley said in an earnings call with analysts.  The call was posted in transcript form on the site​.

“Our mature store comp sales are trending in the right direction year-over-year and quarter-over-quarter, to 0.2% mature store daily average comps declined improved from a 0.9% decline during the third quarter and a 1.8% decline a year ago,​ said CFO Sandra Buffa.

One issue the company’s rapid expansion has exposed it to is rising costs associated with the recovery of the commercial real estate markets.  Commercial real estate was hit harder than even residential housing during the 2008-2009 financial collapse, and now that strip malls and other retail developments are finally starting to fill back up, rents are on the rise.

“The increase in occupancy costs, as a percentage of sales was primarily due to higher average lease expenses at newer and relocated stores and also reflects the decrease in mature store sales and the fixed nature of rent obligations and related occupancy expenses,​ Buffa said.

The company had little to say about product sales breakdown.  But Todd Dissinger, vice president and treasurer, did say that grocery sales rose faster than did sales of dietary supplements or personal care items.

Earnings details

During the fourth quarter of fiscal 2017, net sales increased 9.7% to $198.5 million and daily average comparable store sales increased 2.1%. The daily average comparable store sales increased during the fourth quarter was driven by 1.2% increase in daily average transaction count, and a 0.9% increase in average transaction size. Daily average mature store sales decreased 0.2% during the quarter.

For the full year, net sales increased $63.5 million, or 9.0%, over the same period in fiscal 2016 to $769.0 million, primarily due to a $65.1 million increase in new store sales. Daily average comparable store sales increased 0.1% during fiscal 2017, which followed a 1.4% increase in fiscal 2016.

Stock traders reacted positively to the company’s renewed focus on improving in-store metrics and achieving better margins.  The stock price improved from $4.97 before the announcement to $7.91 today.  That reversed an almost uninterrupted slide that spanned two-and-a-half years.  The company’s stock was trading at $31.30 in early February 2015, after hitting its all-time high of $43.96 in March of 2014.

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