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Operator: Good day, ladies and gentlemen. Welcome to the Natural Grocers Third Quarter Fiscal Year 2024 Earnings Conference Call. [Operator Instructions] As a reminder, today’s call is being recorded. [Operator Instructions] I’d now 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 Third Quarter Fiscal Year 2024 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 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. 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. Today, I will highlight our third quarter financial results, including key drivers of our performance and provide an update on priorities. Then Todd will discuss the results in greater detail and review our updated fiscal year 2024 guidance. We are very pleased with our financial results for the third quarter and year-to-date, including record sales, operating margin expansion and diluted earnings per share growth. We believe that our customers, more than ever, understand and appreciate our compelling value proposition comprised of a carefully vetted offering of high-quality natural and organic products at always affordable prices. Our marketing initiatives consistently emphasize these key characteristics to drive customer engagement.

We believe that communicating and establishing our unique position in the marketplace has been instrumental in generating our strong sales performance over the past several quarters. In the third quarter, we realized a 7.2% daily average comparable store sales growth comprised of a 4.7% increase in transaction count and a 2.4% increase in transaction size. This was the second consecutive quarter with items count growth. Furthermore, the third quarter represents our fourth consecutive quarter of comparable store sales growth in excess of 6%. Our focus on operational execution, including effectively managing expenses and productivity initiatives once again enabled us to leverage elevated sales trends, resulting in a 100 basis point improvement in the operating margin and a 29% increase in diluted earnings per share.

These strong results, coupled with our confidence in our business trends and execution prompted us to increase our fiscal year 2024 outlook for comparable store sales and diluted earnings per share. Natural Grocers continues to resonate with a loyal and resilient customer base. Our customers are diverse and range from an older demographic with a relatively higher household income and focus on a healthy lifespan to a younger demographic who prioritizes health and sustainability. We believe that our customers strongly prefer our in-store shopping experience to our online option, which is primarily delivery. Approximately 98% of our sales occur in store. Our in-store customer experience is convenient easy to shop, clean and offers friendly and knowledgeable customer service.

Our online sales have been relatively stable after normalizing post pandemic. The economics of our online offering has improved and is now margin neutral compared to the in-store margin. Our company’s fiscal 2024 sales growth, comparable store sales growth and margin expansion have been driven by in-store sales. Our sales and margin results have not been impacted by the volatility often associated with adding new delivery services or delivery-related promotional incentives. Turning now to an update on key priorities. We continue to leverage our {N}power Rewards program as reflected in the third quarter net sales penetration of 80%, up from 77% a year ago. Our Natural Grocers branded products deliver premium quality at compelling prices. In the third quarter, our branded products accounted for 8.5% of total sales, up from 7.6% a year ago.

During the quarter, we launched 33 new Natural Grocers brand items, including a cereal line that is certified organic, certified gluten-free and crafted in Italy by a fifth generation family business. Store unit growth and development continues to be a priority for our company. During the third quarter, we relocated one of our Oklahoma City stores and completed major remodels of our Temple, Texas and Independence, Missouri stores. Subsequent to the quarter, we opened a new store in Incline Village, Nevada, which is in the Lake Tahoe area. In closing, I would like to thank our good4u crew for their commitment to operational excellence and exceptional customer service that were instrumental in driving our strong results. We are fortunate to have a crew who share an affinity for our founding principles and are dedicated to ensuring that our stores, operations and supply chain reflect these values.

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

Todd Dissinger : Thank you, Kemper, and good afternoon. We are very pleased with the continuation of our strong performance through the third quarter. Net sales increased 9.7% from the prior year period to $309.1 million. Daily average comparable store sales increased 7.2% and increased 11.6% on a 2-year basis. Our daily average transaction count increased 4.7%. This marks our sixth consecutive quarter with positive customer traffic comps. Our daily average transaction size increased 2.4%. About half of the transaction size comp was attributed to an increase in items per basket. This was the second consecutive quarter with an item count increase. Every major product category had an increase in item count. The other half of the transaction size comp was attributed to product cost inflation.

We estimate that our annualized cost inflation for the third quarter was approximately 1%. Sales growth continued to be broad-based across product categories. Our strongest performing departments were meat, dairy and produce. The dietary supplement sales comp was in the low single digits. Gross margin increased 30 basis points to 29.2%, driven by store occupancy leverage, partially offset by lower product margin, primarily attributable to a lower supplement sales mix. Store expenses increased 7.9% in the third quarter, primarily driven by higher compensation expenses. Store expenses, as a percentage of sales, decreased 30 basis points, reflecting expense leverage as elevated sales more than offset higher labor costs. Administrative expenses, as a percentage of sales decreased 20 basis points, reflecting expense leverage.

Operating income increased 41.4% to $12.8 million. The effective tax rate was 21.9% and 14.1% for the third quarter of fiscal 2024 and 2023, respectively. The increase in the effective tax rate was primarily attributable to lower food donation deductions during the third quarter of fiscal 2024. Net income was $9.2 million with diluted earnings per share of $0.40 in the third quarter. This compares to net income of $7.1 million or $0.31 of diluted earnings per share in the third quarter of last year. Adjusted EBITDA increased 32.8% to $22.2 million in the third quarter. Turning to the balance sheet and cash flow. We ended the third quarter in a strong financial position, including $13.9 million of cash and cash equivalents. We had $16.6 million in outstanding borrowings on our $75 million revolving credit facility.

During the first 9 months of fiscal 2024, we generated cash from operations of $49.3 million and invested $31.8 million in net capital expenditures, primarily for new and relocated stores, resulting in free cash flow of $17.5 million. We are raising our fiscal 2024 guidance for daily average comparable store sales growth and diluted earnings per share. Additionally, we are refining our outlook for the number of new stores and relocation remodels and narrowing our capital expenditures range. Our revised guidance includes the following: Opened 4 new stores, relocate or remodel 5 stores, achieve daily average comparable store sales growth between 6% and 7%, achieved diluted earnings per share between $1.27 and $1.34 and direct $35 million to $39 million towards capital expenditures to support our growth initiatives.

In closing, we had a strong quarter and are encouraged by our operating trends. We are confident in our ability to continue to drive profitable growth and enhance value for all stakeholders. Now I would like to open up the lines for questions. Thank you.

Operator:

Kemper Isely : Thank you very much for joining us to discuss our third quarter results. This month marks our 69th year serving our communities. I encourage you to visit one of our locations between August 15 and August 17 to help us celebrate our anniversary. We look forward to updating you on our next call regarding the fourth quarter and full fiscal year 2024 results. Thank you, and goodbye.

Operator: The conference has now concluded. Thank you for attending the Natural Grocers third quarter fiscal year 2024 earnings conference call. You may now disconnect.