Natural Grocers (NGVC) Q2 2026 Earnings Transcript

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DATE

Thursday, May 7, 2026 at 4:30 p.m. ET

CALL PARTICIPANTS

• Co-President — Kemper Isely
• Chief Financial Officer — Richard Hallé

TAKEAWAYS

• Diluted Earnings per Share -- Grew 3.6% to $0.58, reflecting improved profitability.
• Net Sales -- Increased 0.5% to $337.4 million, indicating modest top-line growth.
• Comparable Store Sales -- Rose 0.5%, with basket size up 1.6% and transaction count down 1.1%, showing growth from larger purchases per visit, offset by fewer transactions.
• Gross Margin -- Expanded 10 basis points to 30.4%, driven by lower store occupancy costs and stable product margin.
• Store Expenses -- Decreased 1.6% due to disciplined expense management.
• Administrative Expenses -- Rose 10%, primarily from higher technology expenses related to the ERP upgrade.
• Net Income -- Grew 2.5% to $13.4 million, supported by improved operational performance.
• Adjusted EBITDA -- Increased 4% to $27.4 million, reflecting stronger cash profitability.
• Cash and Liquidity -- Ended the quarter with $20.7 million in cash and no outstanding borrowings; $67.6 million remained available on the revolving credit facility.
• Free Cash Flow -- Generated $13.5 million, after $30.3 million in net capital expenditures and $43.8 million in operating cash flow for the first six months.
• ERP Upgrade -- Completed a major enterprise resource planning system implementation, enhancing operational efficiency and data capabilities.
• {N}power Rewards Program -- Achieved 3-point net sales penetration increase to 84%, signaling higher member engagement.
• Brand Penetration -- Natural Grocers private label reached 9.8% of total sales, up 120 basis points from the previous year.
• Store Footprint Growth -- Opened 1 new store, relocated 1, and opened another subsequent to quarter-end; on track for 6-8 new stores in fiscal 2026 and targeting 4%-5% annual unit growth.
• Insurance Recovery -- Received $2 million post-quarter as business interruption recovery from the June 2025 cybersecurity incident, adding approximately $0.065 per diluted share to Q3 guidance.
• Fiscal-Year Guidance Update -- Refined daily average comparable store sales outlook to 1.5%-2.5%, tightened diluted EPS to $2.07-$2.15, and lowered capital expenditures estimate to $45 million-$50 million.
• Second-Half Comp Expectations -- Projected 2%-4% comparable sales growth in the second half, with the third quarter at the lower end of the range, rebounding slightly in the fourth quarter as comps ease.
• Gross Margin and Expense Outlook -- Anticipated flat year over year gross margin and largely stable store and administrative expense rates, excluding insurance recovery.
• Incremental Store Investment -- Incorporated $0.09 per share of increased costs related to new store openings in fiscal 2026.

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RISKS

• Kemper Isely stated, "March was a particularly difficult month, and I think that the conflict in Iran was not helpful to the consumer sentiment in March," directly linking geopolitical instability to softer sales.
• Management cited a 1.1% decline in transaction count and a loss of approximately 0.3 items per basket, attributed to reduced spending by less loyal customers amid economic uncertainty.
• Comparable store sales guidance narrowed to a lower range, reflecting ongoing consumer uncertainty and heightened value-conscious shopping behavior.
• Administrative expenses rose 10%, primarily from technology investments for the ERP upgrade.

SUMMARY

Natural Grocers by Vitamin Cottage (NYSE:NGVC) delivered modest sales and earnings growth in a shifting consumer environment, highlighted by operational improvements and disciplined expense management. Management executed a comprehensive ERP system upgrade, positioning the company for future efficiencies and analytics-led growth. The firm expanded the {N}power rewards program to cover a larger share of sales, while also growing private label penetration and advancing store development plans. Guidance was refined to reflect prevailing consumer headwinds, with updated targets for comparable sales, earnings, and capital expenditures. Recent insurance recoveries offset losses from a prior cybersecurity event, partially supporting third-quarter results.

• Daily average comparable store sales growth was concentrated in basket size gains, while transaction count declined, suggesting consumers made fewer, but larger, purchases.
• Sales trends were strongest in dairy, produce, and meat categories, identified as differentiated offerings relative to peers.
• Company leadership indicated that comp sales should improve meaningfully in the last four months of fiscal 2026 as comparison periods ease, stating, "we will have substantially better comps from June through September of this year."
• Incremental cost from new store openings will impact diluted earnings per share by approximately $0.09 in the current fiscal year.

INDUSTRY GLOSSARY

• ERP (Enterprise Resource Planning): An integrated suite of business management software that streamlines operations across core company functions, including finance, supply chain, and merchandising.
• {N}power: Natural Grocers’ proprietary customer loyalty and rewards program designed to drive member engagement, repeat visits, and promotional optimization.

Full Conference Call Transcript

Kemper Isely: Thank you, Jessica, and good afternoon, everyone. During today's call, I will provide an overview of our financial results and highlight progress on initiatives driving long-term value creation. Then Rich will discuss the second quarter results in greater detail and review our fiscal year guidance. We performed well in a challenging environment, driven by strong store-level execution and disciplined expense management, delivering diluted earnings per share growth of 3.6%. There are a few underlying trends I want to highlight. In the second quarter, comparable store sales increased 0.5% while cycling an 8.9% comp last year. On a 2-year basis, comps of 9.4% continued to demonstrate solid growth relative to the broader grocery retail industry.

We believe the second quarter sales trends reflected continued economic uncertainty and value-seeking consumer spending behaviors observed broadly across the grocery retail sector. Furthermore, in the second quarter, we continued to see strong membership gains in our {N}power rewards program and net sales penetration increased 3 percentage points to 84%, highlighting our customers' appreciation for the program's value and benefits. {N}power remains an effective tool for optimizing promotional activity and strengthening customer engagement. Natural Grocers is the value option in natural and organic grocery retail. Our marketing and communications continue to feature our always-affordable prices, including the even more affordable campaign, which highlights a rotating assortment of staples, including our Natural Grocers brand products.

We believe the consumer prioritization of health and wellness, including food and nutrition, is growing and enduring. Our differentiated natural and organic offering, supported by rigorous standards and our always-affordable pricing strategy continues to deliver strong value and reinforce our competitive positioning. Next, I will highlight an important milestone, which is consistent with management's long-term focus. During the second quarter, we successfully completed a major upgrade to our enterprise resource planning system. The ERP platform supports the majority of our functional areas, making this the most comprehensive systems implementation the company has undertaken to date. The successful execution reflects the dedication and cross-functional collaboration of our teams.

The upgraded system enhances operational efficiency, improves data visibility and provides a scalable foundation to support future growth and expand functionality, including data analytics and operational efficiencies, leveraging business intelligence tools. We've also made progress on store development as another lever driving our long-term value. During the second quarter, we opened 1 new store and subsequent to the quarter, we relocated 1 store and opened an additional store. We're encouraged by the productivity of our new stores and relocations. We are on track to open 6 to 8 new stores in fiscal 2026.

We believe we have significant opportunities to expand our store footprint and are targeting a 4% to 5% annual new store unit growth rate for the foreseeable future. Finally, I would like to express my appreciation to our crew for their continued commitment to delivering an exceptional shopping experience. The best-in-class customer service provided by our good4u crew is a key element of our differentiated offering. Now I will turn our call over to Rich to discuss our financial results in greater detail and our fiscal 2026 guidance.

Richard Hallé: Thank you, Kemper, and good afternoon. Second quarter net sales increased 0.5% from the prior year period to $337.4 million. Daily average comparable store sales increased 0.5%, comprised of a 1.6% increase in basket size and a 1.1% decrease in transaction count. The basket comp included a decline of less than half an item per basket. We continue to see the highest sales growth in dairy, produce and meat, which are some of our most differentiated offerings. And our Natural Grocers brand penetration was 9.8% of total sales, up 120 basis points from a year ago.

Gross margin increased 10 basis points to 30.4%, driven by lower store occupancy costs as a percentage of net sales and stable product margin, including inventory shrink. Store expenses decreased 1.6%, primarily driven by expense management. Administrative expenses increased 10%, primarily driven by higher technology expenses, including expenses related to the completion of the ERP upgrade project. Net income increased 2.5% to $13.4 million and diluted earnings per share increased 3.6% to $0.58 in the second quarter. Adjusted EBITDA increased 4% to $27.4 million. Turning to the balance sheet and cash flow.

We ended the second quarter in a strong liquidity position, including $20.7 million in cash and cash equivalents, no outstanding borrowings and $67.6 million available for borrowing on our revolving credit facility. During the first 6 months of fiscal 2026, we generated cash from operations of $43.8 million and invested $30.3 million in net capital expenditures, primarily for new and relocated stores and real property acquisitions, resulting in free cash flow of $13.5 million.

Subsequent to the second quarter, we received a $2 million recovery from our insurance carrier for business interruption related to the June 2025 cybersecurity incident that temporarily impacted our main distributor's ability to fulfill orders and distribute products to our stores, resulting in product shortages and lost sales in June and July. The $2 million recovery equates to approximately $0.065 of diluted earnings per share impacting our expectations for Q3 and has been incorporated into our updated guidance that follows. Today, we are refining the company's fiscal year outlook to reflect our second quarter results and the significant opportunities we see in our differentiated market position while remaining thoughtful about the evolving consumer environment.

Our outlook includes the following: open 6 to 8 new stores and relocate or remodel 2 to 3 existing stores; achieve daily average comparable store sales growth between 1.5% and 2.5% compared to our prior outlook of between 1.5% and 4%; diluted earnings per share between $2.07 and $2.15 compared to our prior outlook of between $2 and $2.15; and capital expenditures of $45 million to $50 million compared to our prior outlook of $50 million to $55 million. Capital expenditures primarily support growth initiatives such as new and relocated stores and include maintenance CapEx of approximately 75 basis points of net sales.

In addition, our current expectation is that sales comps will be 2% to 4% in the second half of fiscal 2026, at the lower end of our outlook range in the third quarter as we cycle strong comps in the prior year and increasing slightly in the fourth quarter as we cycle moderated comps. Additionally, the comp range reflects consumer uncertainty in the current macro environment. We expect modest inflation throughout the year in line with current trends. Our outlook anticipates that year-over-year gross margin will be relatively flat, primarily depending on the level of promotional activity. We expect that year-over-year store expenses as a percentage of net sales will be relatively flat to slightly lower.

Our outlook anticipates that year-over-year administrative expenses as a percentage of net sales will be relatively flat in the second half, excluding the impact of the insurance recovery. Lastly, in fiscal 2026, we have incremental investment of approximately $0.09 of diluted earnings per share in new store openings, primarily through higher preopening expenses and store expenses. Now we'd like to open the line for questions. Thank you.

Operator: [Operator Instructions] The first question comes from Aaron Grey with Alliance Global Partners.

Aaron Grey: First question I want to ask about is the margin profile, which was good for you guys this quarter. And I want to think about how that is going forward, particularly given you utilize the ERP to drive some cost savings. You seem to have had one of the higher gross margins in a couple of years. So as we think about efficiencies going forward, do you reinvest those back into the business given the softer consumer environment, let that drop to the bottom line? So just how we think about the profit versus sales growth as we reinvest potentially those cost savings?

Kemper Isely: I would say that the cost savings immediately from our investment in the ERP are going to be minimal. It will take a little while to get efficiencies from the new system and to work out bugs to the new system. Any cost savings that we do see, we usually reinvest in competitive pricing. And we look at every item that we sell and compare it to our competitors and decide where we should be in pricing, and we like to be on the leading edge of affordable pricing.

Aaron Grey: Appreciate that commentary. Second question for me. Just as we think about the comps, I know a lot of the commentary in terms of the trends has been based off the 2-year stack and some of the softer comps you see in the back half of the year. But maybe outside of just thinking off the 2-year stack, anything that you're seeing to get more comfortability in terms of that stack starting to improve in the back half of the year and as you go into fiscal year 2027?

Kemper Isely: Yes. I mean the first 2 quarters of this year were particularly difficult to comp well against last year because they were -- we had such strong comps last year. Starting in June of this year, our comps were substantially softer for the last 4 months of the year -- of our fiscal year. And we're pretty confident that we will see sales similar to what we have been seeing currently through those months, which gives us confidence that we will have substantially better comps from June through September of this year.

Operator: The next question comes from Chuck Cerankosky with Northcoast Research.

Charles Cerankosky: I was wondering how you would describe the consumer behavior in the most recently reported quarter to what you saw a year earlier and how things have changed since war in Iran broke out and how it's been trending since then?

Kemper Isely: Well, March was a particularly difficult month, and I think that the conflict in Iran was not helpful to the consumer sentiment in March. April was much better than March. And I think as we get further away from the conflict, the consumer sentiment will improve. And as compared to last year, definitely, consumers were more -- there was more robust consumer enthusiasm last year at this time.

Charles Cerankosky: How did that, call it, consumer distress manifest itself? Was it fewer items, fewer trips, more price sensitivity? Any insight on that?

Kemper Isely: As we reported, there was a 0.3% -- wasn't it 0.3%?

Richard Hallé: 0.3 items.

Kemper Isely: Yes, 0.3 items per basket that we lost, which works out to about 3% of comp sales. And then there was definitely on the -- on our less loyal customers, definitely some pullback from those consumers. Our loyal customers shopped as normal.

Richard Hallé: We continue to see very good growth from that customer base. As you know, our {N}power now makes up 84% of revenue, just continuing to see great success, and we had really good numbers out of that, as Kemper said, on less loyal customers where we're seeing really kind of a slowdown.

Kemper Isely: Yes. And just to add on, as we were starting a program where we're working on really getting the penetration of our {N}power sales higher and also the number of customers into the -- that are current -- the 30% of customers that aren't currently {N}power members enrolled in {N}power, and I think we'll have some really good results towards our goals in regards to that issue starting in June.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Kemper Isely for any closing remarks.

Kemper Isely: Thank you for joining us. We are committed to maximizing value for our stockholders. We believe that our offering of high-quality natural and organic products supported by rigorous product standards and always-affordable prices is differentiated and will support growing consumer demand over the long term. Continued investment in store development, people, processes and system support operational -- system support, operational discipline and long-term value creation. Thank you, and have a great day. Goodbye.

Operator: Thank you. The conference call has now concluded. Thank you for attending the Natural Grocers Second Quarter Fiscal Year 2026 Earnings Conference Call. You may now disconnect. Thank you.

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