Natural Grocers navigates changing retail landscape with focus on profitability, not store growth

The brick and mortar retailing of dietary supplements has undergone a radical shift in recent years.  The giants of the space—GNC and The Vitamin Shoppe—have struggled with profitability in recent quarters and are in contraction and restructuring phases.  The shares of both companies are trading at pennies on the dollar compared with their all time highs.

Store model as differentiator

Natural Grocers by Vitamin Cottage (the chain’s somewhat unwieldy formal name) pursues a slightly different model in that it splits the square footage between natural and organic foods and dietary supplements. Natural Grocers stores devote more space to supplements than do competitors such as Whole Foods or Sprouts. On the other hand, they feature a much larger array of packaged foods than do GNC or Vitamin Shoppe stores and have extensive organic produce sections to boot.

In the case of GNC, as recently as five or six years ago the chain was still in expansion mode. But the company’s huge footprint left it with many stores located in underperforming shopping malls.  The retailer is now left with trying to restructure its store footprint while at the same time dealing with the changing nature of supplement retailing which has seen an increasing share of sales move online.

Renovation, relocation phase

Natural Grocers started more than 50 years ago in Lakewood, CO as Vitamin Cottage, a small string of stores owned by the same family. When the company went public in 2014, it released market data that showed room for 1,000 health food stores in the US market.  It set about trying to fill that white space with a breakneck pace of store openings that at one time saw the company inaugurate five or more new stores per quarter.

The company is now close to 150 stores located in 19 states, mostly west of the Mississippi.  While that is a paltry number of stores compared to the giants of the sector, the company shares some of their issues. It is old enough to have stores in places like aging strip malls, which has required it to now consider renovating or moving older stores.

In the most recent earnings call with stock analysts detailing the company’s third quarter 2019 results, Natural Grocers’ CFO Todd Dissinger signaled a shift in the growth at all costs strategy.

“During the third quarter, we relocated two stores and did not have any new store openings. So far, in the fourth quarter, we have relocated one store, and we anticipate two new store openings during the remainder of the fourth quarter. In total, we currently have signed leases for six additional new stores and have acquired the land and building for two more new stores, which we plan to open in 2019 and beyond,”​ he said.

Promise in supplement retailing

In the quarter, the company recorded a net sales increased of 5.3% to $224.4 million, with daily average comp store sales growth of 2.4% and a mature store comp increase of 1.7%.

CEO Kemper Isley said that brick and mortar dietary supplement retailing still holds huge promise as long as a company’s store footprint and customer experience matches well with the market.

“We have now posted nine consecutive quarters of comparable store sales growth, which is a reflection of our favorable positioning in the market and the continued growth of natural and organic foods, and nutritional supplements,”​ he said.

The transcript of the earnings call was posted on the site seekingalpha.com​.