NATURAL GROCERS BY VITAMIN COTTAGE, INC 2026 Q3 Earnings Call

Good afternoon, and thank you for joining us for the Natural Grocers by Vitamin Cottage third quarter fiscal year 2026 earnings conference call. On the call with me today are Kemper Isely, Co-President, and Richard Hallé, Chief Financial Officer. As a reminder, certain information provided during this conference call, including the company's outlook for fiscal 2026, contains forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements. Our remarks today include references to adjusted EBITDA, which is a non-GAAP measure. Please see our earnings release for a reconciliation of adjusted EBITDA to net income.

Today's earnings release will be available on the company's website, and recording of this call will be available on the website at investors.naturalgrocers.com. Now, I will turn the call over to Kemper.

Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results and highlight key initiatives supporting long-term growth. Rich will then review our third quarter results in greater detail and discuss our fiscal year guidance. We delivered positive daily average comparable store sales growth in the third quarter, despite a challenging consumer environment, with comp growth accelerating to 1.2% from 0.5% in the second quarter. We believe third quarter sales trends reflected continued economic uncertainty and sustained focus on value among consumers, consistent with trends observed across the grocery retail sector. In the third quarter, we continued to see strong membership gains in our {N}power Rewards program. Net sales penetration increased two percentage points from the prior year period to 84%, highlighting our customers' appreciation for the program's value and benefits.

Sales engagement with {N}power members also outperformed in key metrics, generating growth in sales, traffic, and basket size during the quarter. {N}power remains an effective tool for optimizing promotions, strengthening customer engagement, and building loyalty. As the value leader in natural and organic grocery retail, we continue to emphasize our always affordable pricing through initiatives such as our Even More Affordable campaign, which features rotating everyday staples, including our Natural Grocers Brand products. We believe growing consumer prioritization of health and wellness remains a durable trend and creates a meaningful long-term growth opportunity. By pairing rigorous product standards with our always affordable pricing strategy, we deliver exceptional value, strengthen customer loyalty, and reinforce our competitive differentiation. Our unit growth strategy continues to gain momentum, with six stores opened fiscal year-to-date.

During the third quarter, we opened three new stores, including our first store in Wisconsin, and relocated one store. In July, we opened two new stores and expect to open one additional new store later in the fourth quarter. All six new store openings this year, and the two from last year for that matter, rank among our strongest opening day sales performances, a testament to the effectiveness of our marketing efforts. We see significant opportunities to expand our store footprint and remain focused on delivering annual unit growth of 4%-5% for the foreseeable future. A new initiative we are very excited about is our expanding e-commerce capabilities. In mid-July, we launched a new partnership with DoorDash, extending delivery access across our entire store base with in-store pricing on delivery orders made through DoorDash.

Later this month, we will integrate our {N}power Rewards program into DoorDash and further enhance online shopping through the Natural Grocers website, creating additional opportunities to serve customers however they choose to shop. In the coming months, we will phase in curbside pickup across all stores. We continue to partner with Instacart to offer delivery service and pickup at select stores. We believe these enhancements to our e-commerce offering will expand customer access to Natural Grocers, driving incremental transactions from existing customers and attracting new shoppers. While we're still in the initial phase of this new partnership, we view these initiatives as an important step in supporting long-term sales growth and enhancing operating leverage while remaining committed to delivering the differentiated in-store experience that defines our brand. Finally, I want to thank our Good For You Crew for their continued dedication to serving our customers.

Their commitment to delivering exceptional service is a cornerstone of our differentiated model and one of the key reasons customers choose Natural Grocers. Now I will turn our call over to Rich to discuss our financial results in greater detail and fiscal 2026 guidance.

Thank you, Kemper, and good afternoon. Third quarter net sales increased 1.8% from the prior year period to $334.7 million. Daily average comparable store sales increased 1.2%, comprised of a 3.1% increase in basket size and a 1.8% decrease in transaction count. We saw a sequential improvement in comp through the quarter. Our most differentiated categories, produce, dairy, and meat, continued to lead sales growth. Furthermore, Natural Grocers Brand penetration increased 110 basis points year-over-year to 9.7% of total sales. Gross margin decreased 60 basis points to 29.3%, driven by lower product margin, primarily due to an unfavorable change in sales mix, as well as higher merchandise inventory shrink and freight costs. Our primary distributor's cybersecurity incident in the third quarter of fiscal 2025 affected the year-over-year comparability of product margin mix and shrink for the current period.

Higher shrink was also partially attributable to temporary operational impacts related to our ERP system upgrade completed in the previous quarter. Store expenses as a percentage of net sales decreased 20 basis points from the prior year, driven by expense management. Administrative expenses were $9.5 million compared to $10.9 million in the third quarter of fiscal 2025. Administrative expenses during the third quarter of fiscal 2026 included a business interruption insurance recovery gain of $2 million related to the cybersecurity incident for the company's primary distributor in June and July of 2025. Pre-opening expenses increased $1.3 million, or 40 basis points as a percentage of net sales year-over-year, driven by the acceleration of new store openings. Our investment in pre-opening expenses impacted diluted earnings per share by approximately $0.04.

Net income was $11.1 million, or $0.48 diluted earnings per share, compared to net income of $11.6 million, or $0.50 diluted earnings per share for the third quarter of fiscal 2025. adjusted EBITDA decreased $1.8 million, or 7.6%, to $22.5 million, including a reduction for the $2 million business interruption recovery gain. Turning to the balance sheet and cash flow. We ended the third quarter in a strong liquidity position, including $17.5 million in cash and cash equivalents, no outstanding credit facility borrowings, and $67.3 million available for borrowing on our revolving credit facility. During the first nine months of fiscal 2026, we generated cash from operations of $55.1 million and invested $40.3 million in net capital expenditures, primarily for new and relocated stores and real property acquisitions, resulting in free cash flow of $14.8 million.

Today, we are refining the company's fiscal year outlook to reflect our third quarter results while remaining thoughtful about the evolving consumer environment. Our outlook includes the following: Open six to seven new stores compared to our prior outlook of between six and eight. Relocate or remodel two existing stores compared to our prior outlook of between two and three stores. Achieve daily average comparable store sales growth between 1.5%-2% compared to our prior outlook of between 1.5%-2.5%. Diluted earnings per share between $2.07-$2.11, including incremental investment related to new stores of $0.08 compared to our prior outlook of between $2.07-$2.15. Capital expenditures of $45 million-$50 million, unchanged from our prior outlook.

One additional note regarding our fourth quarter, we have elected to close stores on Labor Day this year, resulting in one fewer selling day in the fourth quarter compared to last year. We expect the majority of sales that otherwise would have occurred on Labor Day to shift to adjacent days. In closing, based on our year-to-date performance and full-year outlook, we are pleased with the comparable store sales growth achieved in the challenging consumer environment and the earnings growth delivered through disciplined expense management while continuing to invest in accelerated new store expansion. We believe our differentiated customer value proposition, accelerating unit growth, and exposure to favorable health and wellness trends position Natural Grocers to generate sustainable long-term growth and stockholder value. Now we'd like to open the line for questions.