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Operator: Good day, everyone. Welcome to the Natural Grocers’ First Quarter Fiscal Year 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today’s call is being recorded. At this time, I’d like to turn the conference over to Ms. Jessica Thiessen, Vice President, Treasurer for Natural Grocers. Ms. Thiessen, you may begin.

Jessica Thiessen: Good afternoon and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal year 2023 earnings conference call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, Chief Financial Officer. As a reminder, certain information provided during this conference call are 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 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. Today’s press release is available on the company’s website and a recording of this call will be available on the website at investors.naturalgrocers.com. Now, I will turn the call over to Kemper.

Kemper Isely: Thank you, Jessica and good afternoon everyone. We are pleased with our start to fiscal 2023. Our first quarter daily average comparable store sales growth was 0.5% as we cycled the lift from strong pandemic trends in the prior year. Comps improved sequentially each month of the first quarter. Our three-year comp was 17.6%, representing a sequential increase in the three-year comp for each of the previous three quarters. Our differentiated offering of the highest quality natural and organic products, coupled with our marketing emphasis on value and always affordable pricing, continues to drive demand as health-conscious consumers balance economic concerns. Always affordable pricing is one of our five founding principles and is particularly relevant in the current inflationary and uncertain economic environment.

We believe everyone should be able to afford to empower their nutritional health with high quality products. One facet of our affordability is everyday affordable pricing across our assortment of products. We work hard to source our products at the lowest possible cost and we regularly conduct pricing studies on our core items versus our primary competitors to ensure we meet our always affordable commitment. A second facet of our affordability is special sale pricing on hundreds of items that we offer to our {N}power loyalty members, including promotions to highlight budget-friendly options for family meals. Our {N}power loyalty program grew 18% to more than 1.8 million members by the end of the first quarter. The {N}power net sales penetration was 76%, up from 73% a year ago.

The growth of our {N}power loyalty program reflects our customers’ awareness of the benefits offered by the program and our deep engagement with these valuable customers. Our Natural Grocers-branded products delivered premium quality at compelling prices and represent a third facet of our affordability. In the first quarter, our Natural Grocers-branded products accounted for 7.9% of total sales, up from 7.5% a year ago, reflecting heightened customer interest in the quality and value of our entire offering as well as continued expansion of our Natural Grocers-branded assortment. During the first quarter, we launched eight new Natural Grocers-branded products. Creating access to high-quality and affordable products and nutrition education has been a part of our legacy and is fundamental to our growth.

Our business model is flexible and has consistently proven successful in urban, suburban and rural communities. Reflecting this market diversity, our two newest stores include our eighth store in Denver, Colorado, which opened during the first quarter and our fifth store in Idaho in the Mountain Town of McCall. That opened in January. We are excited about serving both of these markets. We are on track to open four to six new stores and relocate one to two stores in fiscal 2023. Over the next several years, we expect to return to opening between six and eight new stores per year as we anticipate improving construction and supply chain conditions. In closing, I want to thank every member of our good4u crew for their continued hard work and commitment to delivering the highest quality natural and organic products at affordable prices and excellent customer service.

With that, I turn the call over to Todd to discuss our financial results and guidance.

Todd Dissinger: Thank you, Kemper and good afternoon. The first quarter results were in line with our expectations as we anticipated the challenges of cycling the strong pandemic trends in the first quarter of last year and the impact of higher labor rates this year. Net sales increased 1.1% from the prior year period to $280.5 million. Our daily average comparable store sales increase of 0.5% was comprised of a transaction size increase of 1.7%, partially offset by a transaction count decrease of 1.2%. The 1.2% decrease in transaction count reflects the moderation of pandemic trends year-over-year, more normalized levels of travel and food away-from-home consumption and fewer SNAP EBT customer transactions. The 1.7% increase in transaction size was primarily driven by retail price inflation, partially offset by a fractional reduction in the item count per basket.

We estimate that product cost inflation was approximately 8% on an annualized basis for the first quarter, lower than industry trends. Historically, our inflation rate has been more stable than conventional grocers due to our specialized supply chain. In the first quarter, we passed along the impact of product cost inflation through pricing and expect to continue to do so for the foreseeable future. The first quarter item count per basket was down by less than one item compared to the prior year and consistent with the previous four quarters. In the first quarter, our strongest performing departments were dairy, meat and grocery. The supplement comp was down low single digits compared to the prior year as we cycled strong supplement demand driven by the pandemic.

However, supplement comp was up mid-single digits on a two-year basis. Gross margin decreased 30 basis points to 28.1%, primarily driven by lower product margin attributed to higher shrink, freight and distribution expenses. Store expenses as a percentage of sales in the first quarter increased 130 basis points, primarily driven by higher labor expense as a result of increased wage rates. Administrative expenses as a percentage of sales increased 30 basis points, primarily driven by higher salaries and benefits, technology amortization, and legal expenses. Net income was $4.4 million with diluted earnings per share of $0.19 in the first quarter. This compares to net income of $8.9 million or $0.39 of diluted earnings per share in the first quarter of last year.

Adjusted EBITDA was $13.8 million in the first quarter. Turning to the balance sheet and cash flow, we ended the first quarter in a strong financial position with $16.9 million of cash and cash equivalents. We had no outstanding borrowings under our $50 million revolving credit facility and $13.7 million outstanding on our term loan. During the first quarter, we generated cash from operations of $21.2 million and invested $11.3 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $9.9 million. Today, we announced that our Board of Directors has declared a quarterly cash dividend of $0.10 per share. The dividend will be paid on March 15th, 2023, to all stockholders of record at the close of business on February 27th, 2023.

The dividend reflects our strong operating performance and financial position, confidence in our business model and commitment to returning value to our stockholders. We are reaffirming our guidance for fiscal 2023, which we first established in mid-November. Our outlook reflects first quarter results that were in line with our expectations, current operating trends, consumer trends and the uncertainty of the economic environment, including inflationary factors. Our guidance includes the following; open four to six new stores, relocate or remodel one to two stores, achieve daily average comparable store sales growth between negative 2% and positive 1%, achieve diluted earnings per share between $0.70 and $0.90, and direct $28 million to $35 million towards capital expenditures to support our growth initiatives.

In closing, we are pleased with the first quarter results that were consistent with our expectations and in line with our full year guidance. We attribute our performance to our customers’ appreciation for our differentiated business model, including the value proposition of high quality products at always affordable prices. We continue to be encouraged by our recent operating trends, and we are confident in our ability to drive growth and enhance value for all stakeholders. With that, I would like to open the lines up for questions. Thank you.

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Operator: Ladies and gentlemen, at this time, we’ll begin the question-and-answer session. Our first question today comes from Spencer Hanus from Wolfe Research. Please go ahead with your question.

Spencer Hanus: Good afternoon. Thank you for taking the question. Can you talk a little bit about the comp momentum that you’re seeing in the first quarter to-date? And then in terms of the decline in units per basket that you talked about, is there any specific category that you’re seeing customers pull back in terms of that metric?

Kemper Isely: I didn’t catch the first part of your question, Spencer, sorry.

Spencer Hanus: Just the comp momentum that you’re seeing quarter-to-date, how — what did trends look like from a topline perspective?

Kemper Isely: They’re very similar to what we experienced for the entire quarter last quarter.

Spencer Hanus: Okay, that’s helpful. And then in terms of the units per transaction, are there any categories where you’re seeing customers pull back? You mentioned that it was down less than one unit, but what are you seeing there in terms of where customers are pulling back?

Todd Dissinger: So, the largest categories would have been grocery and produce.

Spencer Hanus: Okay.

Kemper Isely: Just remind you, it’s a piece of our units.

Spencer Hanus: Okay. And then in terms of inflation, you called out the 800 basis point sort of tailwind from that in the quarter. Do you think we’re at peak inflation today? What are you hearing from your suppliers in terms of their price increases that they’re trying to take and how that’s informing your inflation expectations for the full year?

Kemper Isely: I think that we’ll probably see similar inflation this quarter. The rest of the year, it’s really hard to get a clear picture.

Spencer Hanus: Great. Fair enough. Thank you so much for the color.

Operator: Our next question comes from Scott Mushkin from R5 Capital. Please go ahead with your question.

Scott Mushkin: Hey guys. Hope you have a good start to the year. Labor expenses, I think you guys flagged them in your press release. Clearly, it’s a challenge throughout the economy. I think probably in Colorado area, it’s still really tough to get people. So, how do we think about that going forward? I mean, is it a concern? Has it gotten a little bit easier? Like how are you doing that way? And is the 7% increase what we should anticipate?

Kemper Isely: I think that we hopefully have cycled the annual dollar bump to everybody and won’t have to do that this year. I mean, our starting wage in Colorado is now $17 plus $1 an hour . The only place where you have — where we’re going to see a lot of inflation still in wages is the states and cities that have minimum wages tied to inflation. We have that up in Oregon, Denver, and Washington. Otherwise, I think that this year will be a more normal year for wage inflation. We’re seeing that it’s easier to staff stores already this year versus at the end of last year.

Scott Mushkin: Okay. So, it’s interesting to hear your guys’ comments just last questions about — and in the prepared remarks that things are kind of Steady Eddie with you guys because I’m not sure that’s the case in the industry. I think the industry from what we’re hearing is slowing down, but you guys actually have obviously a much different model. So, maybe just kind of remind us how the business performs as the rest of not the macro necessarily, but just the rest of the grocery industry maybe has a little bit more trouble. How — do you feel like you’re not as volatile because of the attributes of your business? Or just remind us how we should be thinking about it?

Kemper Isely: Well, our businesses have — the base customers are incredibly loyal. So, that our standards — so we — I mean they talk about ESG nowadays. And we were kind of ESG before ESG became a popular phrase. We didn’t call it as ESG, of course, but having high standards and having affordable pricing, having nutrition education, caring about the environment and caring about the people who work for us has created an environment at our stores where customers become really loyal. And so — and then it also built because of the word of mouth. And so that makes it so that we don’t have as much shifting of customers to other competitors because of that. And also we communicate to our customers through our {N}power loyalty program like three times — at least three times a week, informing them of all of our standards, affordable prices and other attributes of our company and it really works.

Scott Mushkin: And Kemper, remind — I don’t know if you were public back then, but in the Great Recession, how did the company do?

Kemper Isely: We did actually pretty well. We had positive comps during the Great Recession that retailers did not. So, we weren’t public at the time, but we did have positive comps at the time.

Scott Mushkin: Because I think Whole Foods actually went negative if I can remember correctly.

Kemper Isely: They did and a bunch of others. We did not.

Scott Mushkin: You did not. You did not. Okay. This is great. I think that does it for me. And it’s an interesting discussion of this business actually, but just maybe a little bit more stable as things get rocky anyway. Thanks guys.

Kemper Isely: Thank you.

Operator: And ladies and gentlemen, at this time, we’ve reached the end of today’s question-and-answer session. I’d like to turn the floor back over to management for any closing remarks.

Kemper Isely: Thank you very much for joining us to discuss our first quarter results. We are proud of our performance and our history of providing the highest quality natural and organic products at always affordable prices to the communities we serve. We look forward to speaking with you on our next call to review our second quarter 2023 results. Thank you, and have a great day. Good bye.

Operator: And ladies and gentlemen, that will conclude today’s conference call and presentation. We thank you for joining. You may now disconnect your lines.