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Natural Grocers trims unit plans after soft sales in Q2

CEO cites momentum from new ad campaign, aggressive prices

On the heels of softer-than-expected financial results in its fiscal second quarter, Natural Grocers by Vitamin Cottage said it would build fewer stores this year than initially anticipated but maintained that sales would rebound in the second half.

The Lakewood, Colo.-based natural foods retailer now projects it will open between 15 and 17 stores this year, putting off at least three new units from when it previously forecast its new store growth earlier this year. That indicates Natural Grocers would open six more stores through the end of its fiscal year on Sept. 30. CEO Kemper Isley in a conference call late Thursday said the company had 13 signed leases and said it would be “flexible” with unit growth plans.

Natural and organic retailers have come under some pressure to reel in growth as saturated markets and additional competition for healthier food has slowed. In its second quarter, which ended March 31, Natural Grocers said same-store sales decreased by 1.7% while total revenues improved 8.3% to $375.8 million. Net income of $3 million, or 13 cents per share, fell by 16.2%.

Those figures came in slightly below expectations, although Isley said the cadence of sales improved during the course of the quarter after a slow January he attributed to consumer anxiety over the election as well as deflation in produce. The latter concern also eased as the period went on, he said.

“It is clear that the food retailing environment remains challenging broadly and competition within the natural and organic segment remains high,” Isley said. “However, we have had time to adapt to the new environment and are beginning to see the benefits of the operational and marketing initiatives that we have implemented. While the second quarter results did not meet our expectations, I'm pleased with the sequential cost improvements we achieved during the quarter – the results of our recent marketing initiatives and that we have been able to fully self-fund store growth thus far in 2017.”

Isley said store expenses decreased by 70 basis points in the quarter and that a newly launched advertising campaign, which kicked off March 15 in Denver, has already contributed to a sales lift at 26 stores in that market. The ads – known as the “Here vs. Here” campaign – challenge consumers to consider the differences between Natural Grocers’ standards for items its sells vs. competitors. Those ads are now expanding beyond Denver and are expected to run through June.

“We really are becoming a little bit more aggressive in our strategic focus to our advertising,” Kevin Miller, VP of advertising, said in the conference call Thursday. “And that's really leveraging our competitive approach to the competition and what we've done in the past. So our new TV campaign is based on the following strategies. One, we want to leverage the equity of our legacy campaign. We're going to add a competitive element versus the competition. We are inviting the consumer to think and act, i.e. Here vs. Here, and all this is going to be anchored by driving home our quality standards.”

Natural Grocers is also pricing key items like eggs more aggressively, Isley noted.

Given the softer results in the quarter, Natural Grocers trimmed the top ends of its earnings guidance for the year, and is now expecting EPS of 50 cents to 54 cents (down from 58 cents), while maintaining expectations that comp sales would finish the year between -1% and +1%.

In a research note, Deutsche Bank analyst Shane Higgins said the marketing initiatives as well as cycling rough results a year ago should improve second-half comps and productivity initiatives could help the bottom line. “However, given the still-challenging competitive environment for natural/organic grocers, we are cautious on expecting a sharp earnings inflection, particularly given choppy (albeit improving) sales trends and some pockets of weakness in the more energy-dependent markets,” he wrote.

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