NYSE:NGVC Natural Grocers by Vitamin Cottage
Sector financial performance:
This company, who primarily sells natural and organic groceries, perishable food, and dairy products and as well dietary supplements to consumers through its retail stores, has been grouped into natural and organic grocers sector in food retail industry.
There is no doubt that this is a sector that has been growing fast. And there are many favourable factors behind it driving its growth in demand for natural and organic food. However, in terms of existing companies in this sector, what we see is that comparable store sales/number of transactions had decreased in 2016/17, a radical change considering that they are used to have 5-10% growth rate three years ago. It is certainly a result of the increased competition, particularly increased stores or avail abilities for natural and organic food attracted by high margin of this sector. However, it may also be because the growth in demand has failed to match the increase in availability temporarily and regionally since the demand as indicated by comparable sales picked up in 2018 as newly opened stores in 2016/17 are matured gradually.
While this mismatch may be only temporary, which means that demand is very likely to catch up fast in the future, companies in this sector are currently experiencing shrinking sales. As sales decreased, it added more pressure on price, which is considered as the main reason that caused companies’ margins shrink. At the same time, to capitalize growth trend of organic food and deal with competition, some of companies accelerated its opening of new stores resulting in even deeper deleveraging of their existing stores’ margin. However, as sales caught up from its newly opened stores, we are seeing that the margin is rebounding back.
The typical decrease in comparable store sales among companies is between 1-2.5% in fiscal 2017. The typical gross margin is currently down to 27% and operating margin is down to 2%.
According our analysis, companies’ enterprise price/adjusted EBI is around 39 with interest/EBI ratio of 10%.
Growth in comparable stores sales had slowed down between 2016 and 2017 and turned into negative range in fiscal 2017, primarily due to increasing competition externally and internally (new store and existing stores). However, it seems demand is picking up in 2017 as indicated by increasing comparable store sales.
For fiscal 2018 compared with 2017(ended 20180930)
The sales of this company increased 10% primarily attributable to increase in sales from new stores. Comparable stores sales increase 6% primarily due to increase in transactions.
For fiscal 2017 compared with 2016(ended 20170930)
The sales of this company increased 9% primarily attributable to increase in sales from new stores. Comparable stores sales decrease 0.2% primarily due to decrease in transactions.
The sales of this company increased 8.8% in the first nine months of fiscal 2017 compared with the same period of 2016, primarily attributable to increase in sales from new stores. Comparable stores sales and daily average comparable stores sales decrease 1% and 0.7% respectively, primarily due to decrease in transactions. Mature stores sales and daily average mature stores sales decreased 2.5% and 2.1% respectively.
The sales of this company increased 12.9% in fiscal 2016 compared with 2015, primarily attributable to increase in sales from new stores and increase of 1.7 in comparable stores sales. Comparable stores sales and daily average comparable stores sales increased 1.7% and 1.4% respectively. Mature stores sales and daily average mature stores sales decreased 0.7% and 1% respectively.
The sales of this company increased 20% in fiscal 2015 compared with 2014, primarily attributable to increase in sales from new stores and increase of 5.9% in comparable stores sales. Both more transactions and increased transaction size contributed to the increase in comparable stores sales.
While new opened stores of this company have been able to bring positive revenues it seems the sales from new opened stores have been partially grabbed from its own existing stores. What more important is that accelerating opening of new stores dragged down the average gross margin across all stores. Therefore, when the growth in the existing stores’ sales slowed down and failed to offset the deleveraging of new added stores the whole gross margin of this company was contaminated. This is why we see this company’ gross margins (including warehousing, transportation, and store rental costs) decreased from about 29% of 2014 to about 27% of 2018. For the same reason, since SG&A as percentage of sales for new opened stores is higher compared with existing stores this company’s total operating margin as percentage of sales even went down more than its gross margin ( down to 2% in 2018 from 5.4% of 2014).
This stock currently has an enterprise price/EBI ratio of 39($19/share), which we think, is relatively fairly valued considering that acceleration of opening of new store, while hurt its margin in short term, will probably benefit this company in future as the whole sector grows at faster pace than before. In addition, it is too early to evaluate the impacts on the market from acquisition activities.
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