How Consumer Loyalty Is Driving Sales for Natural Grocers

Natural Grocers by Vitamin Cottage Inc. exceeded expectations for its third quarter of fiscal 2023 ended June 30, and raised its outlook for fiscal 2023.

The specialty market’s third-quarter sales trends were particularly strong. Net sales jumped $15.5 million, or 5.8%, to $281.8 million, compared with the third quarter of fiscal 2022, due to an $11.7 million bump in comparable-store sales and a $3.8 million increase in new-store sales. Daily average comps rose 4.4% in the third quarter, comprising a 2.4% increase in daily average transaction size and a 1.9% increase in daily average transaction count. The main growth drivers of net sales were marketing initiatives and {N}power loyalty program offers that drove customer engagement.

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Natural Grocers reached 2 million {N}power members during the third quarter. According to the company, the net sales penetration for {N}power was 77% in the third quarter, up from 75% a year ago. “The continuing growth in membership and sales penetration demonstrates our customers' appreciation of the benefits and value provided by the program,” noted Kemper Isely, co-president of Natural Grocers, during the company's third-quarter earnings call.

“{N}power continues to be an effective tool for optimizing promotional activity and driving customer engagement,” continued Isely. “Examples include personalized e-mails that tailored promotional offerings to customers' preferences, market-specific marketing campaigns and value-focused meal deals." These marketing campaigns have been able to accelerate sales growth in underperforming stores without diluting margin.

According to Isely, on average an {N}power member basket is almost twice the size of a nonmember basket.

The company's strongest performing departments in Q3 were dairy, body care, meat and dietary supplements. “Our continuing growth of supplements indicates the stickiness of elevated pandemic demand,” said CFO Todd Dissinger. “The growth in supplements further reflects our differentiation and strong competitive position in this important category, which is also margin accretive.”

However, the Natural Grocers store brand represented 7.6% of total sales, down slightly from 7.7%, a year ago.

Meanwhile, gross profit during Q3 of fiscal 2023 increased $7.8 million, or 10.6%, to $81.4 million, compared with $73.6 million in the third quarter of fiscal 2022. Isely pointed out that effective pricing and promotion contributed to the third-quarter gross margin improvement of 130 basis points to 28.9%, compared with 27.6% in the third quarter of fiscal 2022.

Store expenses rose $2.5 million, or 4.2%, to $62.6 million. Store expenses as a percentage of net sales were 22.2%, down from 22.6% in the third quarter of fiscal 2022. The decrease was primarily driven by expense leverage on sales, partly offset by higher labor expense as a result of increased wage rates.

Administrative expenses increased $1.8 million, or 24.8%, to $9.3 million, primarily driven by higher compensation expense, software expense and technology amortization. 

Net income for Q3 of fiscal 2023 was $7.1 million, or 31 cents diluted earnings per share, compared with net income of $3.9 million, or 17 cents diluted earnings per share, for the third quarter of fiscal 2022.

Adjusted EBITDA for Q3 also jumped 28.2% to $16.7 million, compared with last year’s $13.0 million.

In regard to the balance sheet and cash flow, the natural and organic grocer ended the third quarter in a strong financial position, with $8.6 million of cash and cash equivalents. “We had no outstanding borrowings under our $50 million revolving credit facility,” noted Dissinger. 

The strength of its third-quarter results prompted Natural Grocers to raise its comparable-store sales and earnings per share guidance for the fiscal year. Guidance now includes achieving daily average comparable-store sales growth of between 2% and 3%, achieving diluted earnings per share between 86 cents and 94 cents, and directing $28 million to $35 million toward capital expenditures to support growth initiatives.

“We continue to be encouraged by our operating trends and are confident in our ability to continue to drive profitable growth and enhance value for all stakeholders,” said Dissinger.

When it comes to new stores, Isely acknowledged that the past couple of years have been a little bit slow in new store development, but the plan going forward is to open six to eight new stores a year. “And then, part of our strategy, of course, is to relocate or remodel stores, because we get quite a substantial lift in our comp when we relocate or remodel a store,” he said. “And so, we do two to five of those a year also.”

For fiscal year 2023, the company is on track to open four new stores and relocate or remodel three stores. On Aug. 8, Natural Grocers relocated its Beaverton, Ore., store to a newly renovated and larger space at 3805 SW 117th Avenue.

Family-operated Natural Grocers operates over 160 stores in 21 states. The Lakewood, Colo.-based natural and organic grocer is No. 95 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America. PG also named Natural Grocers one of its 10 Most Sustainable Grocers.