NATURAL GROCERS BY VITAMIN COTTAGE, INC.
2021 ANNUAL REPORT
Pueblo, CO
OUR 5 FOUNDING PRINCIPLES
1. NUTRITION EDUCATION
2. HIGHEST QUALITY PRODUCTS
3. ALWAYS AFFORDABLE
SM
PRICING
4. COMMITMENT TO OUR COMMUNITIES
5. COMMITMENT TO OUR good4uSM CREW
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
2021 ANNUAL REPORT
$1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
NET SALES (IN MILLIONS)
$769
$849
$904
$1,037
$1,056
FY 2017
FY 2018
FY 2019
FY 2020
FY 2021
DAILY AVERAGE COMPARABLE STORE SALES GROWTH
12%
11
10
9
8
7
6
5
4
3
2
1
0
0.1%
5.8%
3.1%
12.0%
0.7%
FY 2017
FY 2018
FY 2019
FY 2020
FY 2021
WE OPERATE 162 STORES IN 20 STATES*
4
14
3
4
3
4
9
12
2
41
6
3
8
6
25
1
6
7
3
1
*as of September 30, 2021
2021 ANNUAL REPORT
DEAR FELLOW STOCKHOLDERS:
Fiscal 2021 was a record setting year of financial performance for Natural Grocers. We attribute
our success to many factors, but primarily to our customers’ appreciation for our commitment to our
founding principles and values, our consistency, and the dedication of our Crew members. Consumers are
more focused than ever on health and wellness, and our steadfast commitment to being a leading source
of high-quality natural and organic products and science-based nutrition education in the communities we
serve has been instrumental to our success.
During fiscal 2021, our record financial performance included an increase in net sales of 1.8% to
$1.1 billion and diluted earnings per share of $0.91. Fiscal 2021 marked our eighteenth consecutive
year of positive daily average comparable store sales growth.
Our strong operating results and confidence in our business model enabled us to increase our
quarterly cash dividend by 43% to $0.10 per common share effective December 2021. We continue to
focus on maintaining a strong balance sheet to support our growth strategies and enhance value for
our stockholders.
In fiscal 2021, we opened three new stores and relocated/remodeled five stores. The number and timing of
our new store openings have been adversely impacted by the COVID-19 pandemic and subsequent supply
chain disruptions, which have resulted in delays in the construction process and impacted equipment
availability. We intend to open four to six new stores in fiscal 2022, and thereafter return to opening
between six and eight new stores per year, subject to improving conditions for store construction.
Natural Grocers has a legacy of being a values-driven company since its founding in 1955. Our Five
Founding Principles include a commitment to our Crew members and communities. We want to recognize
our Crew members for their hard work and dedication, which drive our success. Our Crew members’
wellbeing is our priority and we are passionate about ensuring that they are able to live a healthy, balanced
lifestyle. We fulfill our commitment to our Crew members by offering a positive work environment,
good pay, excellent benefits including discounts and store credit, free nutrition education programs and
opportunities for growth and advancement. In turn, our Crew members provide world-class customer
service and an exceptional experience to our customers. In the last year we expanded our support for
our Crew and communities in many ways, including:
• We launched our Natural Grocers Heroes in Aprons Fund. This is a 501(c)(3) charitable entity
providing short-term financial assistance to qualifying Crew members or their immediate family
members who experience unanticipated hardships. We are excited and proud to have established
a fund to oversee the company’s legacy of providing support to Crew members.
• Through company donations and customer fundraisers, we directed $1 million in monetary donations
and more than $3 million in in-kind food and product donations to local food banks.
• The company implemented a permanent pay increase of $1 per hour for hourly store Crew members.
This increase represented our second $1 per hour increase in the previous 18 months and reflects our
longstanding commitment to investing in our Crew members. With this increase, the company-wide
average hourly pay for full-time store Crew members is now more than $18.00 per hour, including $1.00
per hour in Vitamin Bucks store credit.
We believe our commitment to carrying carefully vetted, high-quality natural and organic products
and dietary supplements at Always Affordable Prices™, as well as our focus on providing free nutrition
education to our customers, differentiate us in the marketplace. Our model continues to resonate with
consumers as they have developed a stronger appreciation for the value of healthy nutrition and dietary
supplements during the COVID-19 pandemic. While challenges remain in the current operating
environment, we are proud of our accomplishments during fiscal 2021 and are confident in our ability
to adapt and effectively manage our business while remaining committed to all of our stakeholders.
KEMPER ISELY, CO-PRESIDENT
ZEPHYR ISELY, CO-PRESIDENT
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 001-35608
Natural Grocers by Vitamin Cottage, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
45-5034161
(I.R.S. Employer Identification Number)
12612 West Alameda Parkway
Lakewood, Colorado 80228
(Address of principal executive offices)
(303) 986-4600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading symbol
NGVC
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Based on the closing price of the registrant’s common stock on March 31, 2021, the aggregate market value of the voting and non-voting common
stock held by non-affiliates was $169,112,362.
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of December 6, 2021 was 22,643,890.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from the
registrant’s Definitive Proxy Statement on Schedule 14A for the 2022 Annual Meeting of the Stockholders, which will be filed with the Securities and
Exchange Commission not later than 120 days after September 30, 2021.
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Natural Grocers by Vitamin Cottage, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2021
Table of Contents
Page
Number
PART I
Item 1.
Business .......................................................................................................................................................................
Item 1A. Risk Factors ..................................................................................................................................................................
Item 1B. Unresolved Staff Comments .........................................................................................................................................
Properties ......................................................................................................................................................................
Item 2.
Legal Proceedings .........................................................................................................................................................
Item 3.
Mine Safety Disclosures ...............................................................................................................................................
Item 4.
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ....
Item 5.
Reserved .......................................................................................................................................................................
Item 6.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations ........................................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ......................................................................................
Financial Statements and Supplementary Data .............................................................................................................
Item 8.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........................................
Item 9.
Item 9A. Controls and Procedures ...............................................................................................................................................
Item 9B. Other Information .........................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance ............................................................................................
Executive Compensation ..............................................................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ......................
Item 12.
Certain Relationships and Related Transactions, and Director Independence ..............................................................
Item 13.
Principal Accounting Fees and Services .......................................................................................................................
Item 14.
PART III
Item 15.
PART IV
Exhibits, Financial Statement Schedules ......................................................................................................................
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SIGNATURES .................................................................................................................................................................................
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i
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Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’
‘‘Natural Grocers’’ or the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries
and (ii) all references to a “fiscal year” refer to a year beginning on October 1 of the previous year and ending on September 30 of such
year (for example “fiscal year 2021” refers to the year from October 1, 2020 to September 30, 2021).
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (this Form 10-K) includes forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 in addition to historical information. These forward-looking statements are included throughout
this Form 10-K, including in the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” All statements that are not statements of historical fact, including those that relate to matters such as
our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital
expenditures, liquidity and capital resources, future growth, pending legal proceedings and other financial and operating information, are
forward looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,”
“may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in
this Form 10-K.
The forward-looking statements contained in this Form 10-K are based on management’s current expectations and are subject to
uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have
anticipated. Actual results may differ materially from these expectations due to changes in global, national, regional or local political,
economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. In addition, our actual results
could differ materially from the forward-looking statements in this Form 10-K due to risks and challenges related to the COVID-19
pandemic and the resulting government mandates, including: the length of time that the COVID-19 pandemic continues; the inability of
customers to shop due to illness or quarantine, isolation or stay-at-home orders; shifts in demand to more online shopping or to lower-
priced or other perceived value offerings; the temporary inability of our employees to work due to illness; temporary store closures due to
infections at our stores or government mandates; stay-at-home measures, safety directives and operating requirements imposed by local,
state or federal governmental authorities; the extent and duration of adverse economic conditions resulting from the COVID-19 pandemic
and government mandates, including its impact on consumer spending, the unemployment rate, interest rates and inflationary and
deflationary trends; disruptions in the production of the products we sell; disruptions in the delivery of products to our stores; increased
operating costs; and the extent and effectiveness of any COVID-19-related stimulus packages implemented by the federal and state
governments. We believe that these factors include those described in “Risk Factors.” Should one or more of these risks or uncertainties
materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these
forward-looking statements.
Any forward-looking statement made by us in this Form 10-K speaks only as of the date of this report. Factors or events that
could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no
obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise,
except as may be required by applicable securities laws. You are advised, however, to consult any disclosures we may make in our future
reports filed with the Securities and Exchange Commission (the SEC). Our reports and other filings with the SEC are available at the SEC’s
website at www.sec.gov. Our reports and other filings with the SEC are also available, free of charge, through our website at
www.naturalgrocers.com.
PART I
Item 1. Business.
General
Natural Grocers is an expanding specialty retailer of natural and organic groceries and dietary supplements. We focus on
providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive
to generate long-term relationships with our customers based on transparency and trust by:
●
●
selling only natural and organic groceries, body care products and dietary supplements that meet our strict quality guidelines
- we do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners
or partially hydrogenated or hydrogenated oils;
utilizing an efficient and flexible smaller-store format to offer affordable prices and a convenient, clean and shopper-friendly
retail environment;
1
●
enhancing our customers’ shopping experience by providing free science-based nutrition education to help our customers
make well-informed health and nutrition choices; and
●
incorporating principles of ecological sustainability into our product standards and Company practices.
Our History and Founding Principles
Our founders, Margaret and Philip Isely, were early proponents of the connection between health and the use of natural and
organic products and dietary supplements. In the mid-1950’s, Margaret transformed her health and the health of her family by applying
concepts and principles she learned from books on nutrition. This inspired the Iselys to provide the same type of nutrition education to
their community. The Iselys started by lending books on nutrition and providing samples of whole grain bread door-to-door in Golden,
Colorado and subsequently concluded they could develop a viable business that would also improve their customers’ wellbeing. Over time,
they fostered relationships through nutrition education and began taking orders for dietary supplements, whole grain bread and unprocessed
foods. As their customers gained more knowledge about nutrition, they were empowered to make changes to their diets with the objective
of supporting their health. Using this model as the foundation for their business, the Iselys opened their first store in 1958.
We are committed to maintaining the following founding principles, which have helped foster our growth:
● Nutrition Education. We provide nutrition education in the communities we serve. Empowering our customers and our
employees (or our Crew members) to take charge of their lives and their health is the foundation upon which our business
is built.
● Quality. Every product on our shelves must go through a rigorous screening and approval process. Our mission includes
providing the highest quality groceries and supplements, Natural Grocers branded products and only United States
Department of Agriculture (USDA) certified organic, fresh produce.
● Always Affordable PriceSM. We work hard to secure the best possible prices on all of our customers’ favorite natural and
organic foods and supplements. We believe everyone should be able to afford to help take care of their health by buying
high-quality competitively priced natural and organic products.
● Community. From free nutrition education lectures, to bag-free checkouts, to sourcing local products, to our fundraising
and donation programs, we strive to serve the communities that help shape our world.
● Our Crew members. Our Crew members make our Company great. We work hard to ensure that our Crew members are
able to live a healthy, balanced lifestyle. We support them with free nutrition education programs, good pay and excellent
benefits.
In 1998, the second generation of the Isely family, including Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely,
purchased our predecessor and the Vitamin Cottage® trademark and assumed control of the business. Since then, we have grown our store
count from 11 stores in Colorado to 162 stores in 20 states as of September 30, 2021. We have also implemented numerous organizational
and operational improvements that have enhanced our ability to scale our operations. We believe that by staying true to our founding
principles, we have been able to continue to attract new customers, extend our geographic reach and further solidify our competitive
position.
Our Markets
We operate within the natural products retail industry, which is a subset of the United States grocery industry and the dietary
supplement business. This industry includes conventional supermarkets, natural, gourmet and specialty food markets, domestic and
foreign-based mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores,
farmers’ markets, food co-ops, online retailers, meal delivery services and multi-level marketers. Industry-wide sales of natural and organic
foods and dietary supplements have grown over the past several years, and we believe that growth will continue for the foreseeable future.
We believe the growth in sales of natural and organic foods and dietary supplements continues to be driven by numerous factors,
including:
●
●
greater consumer focus on high-quality nutritional products;
an increased awareness of the importance of good nutrition to long-term wellness;
2
●
●
●
●
●
increased awareness by consumers of the importance of building and maintaining a strong immune system to mitigate health
risks;
an aging United States population seeking to support healthy aging;
heightened consumer awareness about the importance of food quality and a desire to avoid toxic residues, hormones, growth
promoters, artificial ingredients and genetically engineered ingredients in foods;
concerns regarding antibiotic resistance caused by industrial livestock production practices;
growing consumer concerns over the use of harmful chemical additives in body care and household cleaning supplies;
● well-established natural and organic brands, which generate additional industry awareness and credibility with consumers;
●
●
the growth in the number of consumers with unique dietary requirements as a result of allergies, chemical sensitivities, auto-
immune disorders and other conditions; and
concerns about the cumulative environmental impact of relying on non-renewable resources and the effects on the global
climate of carbon release from conventional agriculture.
Our Competitive Strengths
We believe we are well-positioned to capitalize on favorable natural and organic grocery and dietary supplement industry
dynamics as a result of the following competitive strengths:
Strict focus on high-quality natural and organic grocery products and dietary supplements. We offer high-quality products and
brands, including an extensive selection of widely recognized natural and organic food, dietary supplements, body care products, pet care
products and books. We offer our customers an average of approximately 21,000 Stock Keeping Units (SKUs) of natural and organic
products per comparable store (stores open for 13 months or longer), including an average of approximately 6,900 SKUs of dietary
supplements. We believe our broad product offering enables our customers to shop our stores for substantially all of their grocery and
dietary supplement purchases. In our grocery departments, we only sell USDA certified organic produce and do not approve for sale grocery
products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. In
addition, we only sell pasture-raised, non-confinement dairy products, free-range eggs (i.e., from chickens that are not only cage-free but
also provided with sufficient space to move) and naturally raised meats (i.e., from animals that are not known to have been treated with
antibiotics, hormones or growth promoters, or fed animal by-products). Consistent with this strategy, our product selection does not include
items that do not meet our strict quality guidelines. Our store managers enhance our robust product offering by customizing their stores’
selections to address the preferences of local customers. All products undergo a stringent review process to ensure the products we sell
meet our strict quality guidelines, which we believe helps us generate long-term relationships with our customers based on transparency
and trust.
Engaging customer service experience based on education and empowerment. We strive to offer consistently exceptional
customer service in a convenient, clean and shopper-friendly environment, which we believe creates a differentiated shopping experience,
enhances customer loyalty and generates repeat visits from our clientele. A key aspect of our customer service model is to provide free
nutrition education to our customers. We believe this focus provides an engaging retail experience while also empowering our customers
to make informed decisions about their health. We offer our science-based nutrition education through our trained Crew members, our
Health Hotline® magazine, community outreach programs, one-on-one nutrition health coaching, nutrition classes, cooking demonstrations
and our website. Our commitment to nutrition education and customer empowerment is emphasized throughout our entire organization,
from executive management to store Crew members. Every store also maintains a Nutritional Health Coach (NHC) position. The NHC is
responsible for educating our customers about good nutrition and for training our store employees on how to assist customers in compliance
with applicable local, state and federal regulations. Each NHC must have earned a degree or certificate in nutrition or a related field from
an accredited school, complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. Substantially all
of our NHCs are full-time Crew members. We believe our NHC position represents a key element of our customer service model.
Scalable operations and replicable, cost-effective store model. We believe our scalable operating structure, attractive new store
model, flexible real estate strategy and disciplined approach to new store development allow us to maximize store performance and continue
to grow our store base. Our store model has been successful in highly competitive markets and has supported significant growth outside of
our original Colorado geography. We believe our supply chain and infrastructure are scalable and will accommodate growth based on the
ability of our primary distribution relationships to effectively service our planned store locations. Our investments in overhead and
information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting,
reporting and financial systems, support this growth. We also have a comprehensive human resources information and learning management
system (HRIS) to further support the scalability of our operations. In addition, we have established effective site selection guidelines, as
well as scalable procedures to enable us to efficiently open new stores after lease execution. The smaller-store footprint made possible by
our limited offering of prepared foods reduces real estate costs, labor costs and perishable inventory shrink and allows us to leverage our
new store opening costs.
3
Commitment to sustainable products and practices. We have put in place product standards for dairy, eggs, meat, seafood and
produce that support sustainable and ecologically responsible production methods. We believe our standards help to enhance the health of
our customers, promote animal welfare, reduce antibiotic resistance and protect the environment. We have also instituted measures to
eliminate food waste, divert usable products to food banks, reduce single use plastic bags and reduce the use of toxic pesticides and
antimicrobial products. We believe these efforts reflect our commitment to corporate social responsibility and demonstrate our support for
sustainable regenerative agricultural practices.
Experienced and committed management team with proven track record. Our executive management team has an average of 36
years of experience in the natural grocery industry, while our entire management team has an average of 31 years of relevant experience.
Since the second generation of the Isely family assumed control of the business in 1998, we have grown our store count from 11 stores to
162 stores as of September 30, 2021 by remaining dedicated to our founding principles. Over their tenure, members of our executive
management team have been instrumental in establishing a successful, scalable operating model, generating consistently strong financial
results and developing an effective site selection and store opening process. The depth of our management experience extends beyond our
home office. As of September 30, 2021, our store managers and assistant managers at comparable stores had average tenures of
approximately five years with us. In addition, we have a track record of promoting store management personnel from within. We believe
our management’s experience at all levels will allow us to continue to grow our store base while maintaining operational excellence by
driving efficiencies in store and back room operations, managing inventory levels and focusing on exceptional customer service.
Our Growth Strategies
We are pursuing several strategies to continue our profitable growth, including:
Expand our store base. We intend to continue expanding our store base through new store openings in existing markets, as well
as penetrating new markets, by leveraging our core competencies of site selection and efficient store openings. In fiscal year 2021, we
opened three new stores and in fiscal year 2020, we opened six new stores. We plan to open four to six new stores in fiscal year 2022, none
of which opened during the first quarter of fiscal year 2022 prior to the filing of this Form 10-K. As of the date of this report, we have
signed leases or acquired property for an additional five new stores that we plan to open in fiscal years 2022 and beyond.
Store locations as of September 30, 2021.
4
Increase sales from existing customers. In order to increase our average ticket and the number of customer transactions, we plan
to continue offering an engaging customer experience by providing science-based nutrition education and a differentiated merchandising
strategy that delivers affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to continue to
utilize targeted marketing efforts to reach our existing customers, including through the {N}power® customer loyalty program
({N}power®), which we anticipate will drive customer transactions, increase the average ticket and convert occasional, single-category
customers into core, multi-category customers.
Grow our customer base. We plan to continue building our brand awareness, which we anticipate will grow our customer base.
During fiscal year 2021, the measures we took that were aimed at enhancing our brand awareness included: (i) implementing marketing
outreach efforts to inform customers of the health and safety measures we have implemented to protect the wellbeing of our customers and
Crew members in response to the COVID-19 pandemic; (ii) featuring new {N}power® promotions to highlight affordable family meals;
(iii) utilizing {N}power® to identify and send personalized offers to our customers; (iv) continuing to make enhancements to our monthly
Health Hotline magazine; (v) organizing month-long topical special promotions; (vi) expanding our social media reach through increased
investment in paid and organic placements on platforms such as Facebook, Twitter, Instagram and YouTube; (vii) conducting television,
radio, outdoor advertising and targeted direct mail campaigns in select markets; and (viii) continuation of home delivery services. We
believe offering nutrition education has historically been one of our most effective marketing strategies for reaching new customers and
increasing the demand for natural and organic groceries and dietary supplements in our markets. To maximize their impact, we encourage
our NHCs to focus on relationship-building opportunities in our communities and with our customers, including promotions, educational
cooking events, lectures and classes in our stores. Additionally, we seek to attract new customers by enhancing their nutrition knowledge
through the distribution of printed and digital versions of our broad range of educational resources, including the Health Hotline magazine.
In addition to offering nutrition education, our strategy is to attract new customers with our Always Affordable Price and to build community
awareness through our support of local vendors and charities.
Improve operating margins. We expect to continue our focus on improving our operating margins as we benefit from investments
we have made or are making in fixed overhead and technology. We anticipate these investments will support our long-term growth strategy.
To improve operating margins, we also intend to further optimize performance, maintain appropriate store labor levels, reduce inventory
shrink and effectively manage product selection and pricing. In addition, we expect to achieve greater economies of scale through sourcing
and distribution as we add more stores.
Our Stores
Our stores offer a comprehensive selection of natural and organic groceries and dietary supplements in a smaller-store format
that aims to provide a convenient, clean and easily shopped environment for our customers. Our store design emphasizes a clutter-free,
organized feel, a quiet ambience accented with warm lighting and the absence of aromas from meat and seafood counters present in many
of our competitors’ stores. We believe our core customers consider us a destination stop for their nutritional education and information,
natural and organic products and dietary supplements.
5
Our Store Format. Our stores range from approximately 5,000 to 16,000 selling square feet, and average approximately 11,000
selling square feet. In fiscal year 2021, our three new stores and five relocations/remodels averaged approximately 10,000 selling square
feet. Approximately one quarter of our stores’ selling square footage is dedicated to dietary supplements. Most of our stores also include a
dedicated community room available for public gatherings, a demonstration kitchen for cooking education and/or lecture space. Our
comparable stores sell an average of approximately 21,000 SKUs of natural and organic products per store, including an average of
approximately 6,900 SKUs of dietary supplements. Set out below is the layout for our new stores:
Site Selection. Our real estate strategy is adaptable to a variety of market conditions. When selecting locations for new stores, we
use analytical models, based on research and data provided by third parties and our extensive experience, to identify promising store
locations. We typically locate new stores in prime locations which offer easy customer access and high visibility. Many of our stores are
near other supermarkets or gourmet food retailers, and we complement their conventional product offerings with high-quality, affordable
natural and organic groceries and dietary supplements in an efficient and convenient retail setting. Our model for selecting viable new store
locations incorporates factors such as target demographics, community characteristics, nearby retail activity and other measures and is
based on first-hand observation of the community’s characteristics surrounding each site. We have Crew members dedicated to opening
new stores efficiently and quickly, typically within approximately nine months from the time of lease execution.
Store-Level Economics. Our new stores typically require an average upfront capital investment of approximately $2.2 million,
consisting of capital expenditures of approximately $1.7 million, net of tenant allowances, initial inventory of approximately $0.3 million,
net of payables, and pre-opening expenses of approximately $0.2 million. We target approximately five years to recoup our initial net cash
investments and approximately 30% cash-on-cash returns by the end of the sixth year following the opening. Our actual payback period
averages approximately six years.
Individual new store investment levels and the performance of new store locations may differ widely from originally targeted
levels and from store-to-store due to competitive considerations and a variety of other factors, and these differences may be material. In
particular, investments in individual stores, store-level sales, profit margins, payback periods and cash-on-cash return levels are impacted
by a range of risks and uncertainties beyond our control, including those described under the caption “Risk Factors.”
Our Focus on Nutrition Education
Nutrition education is one of our founding principles and is a primary focus for all Crew members. We believe our emphasis on
science-based nutrition education differentiates us from our competitors and creates a unique shopping experience for our customers.
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Our NHCs are a core element of our nutrition education program. Every store has a NHC position to educate customers and train
Crew members on nutrition. NHCs must have earned a degree or certificate in nutrition or a related field from an accredited school,
complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. To educate and empower customers to
make informed nutrition choices, our NHCs are available for complimentary one-on-one nutrition health coaching sessions. Each NHC is
also responsible for various relationship-building opportunities in our communities and with our customers, including educational activities
such as nutrition classes, lectures, seminars, health fairs and store tours. To maximize the impact of our NHCs, we stress the importance
of their focusing on in-store educational events, offering health coaching sessions and holding nutrition classes in the community by
partnering with school, municipal and corporate wellness programs. During fiscal year 2021, while our NHCs suspended in-person health
coaching sessions, community nutrition classes and in-store education events in response to the COVID-19 pandemic, we offered remote
nutrition education and cooking classes to customers through virtual platforms. We believe that our NHCs’ focus on relationship-building
opportunities in our communities and with our customers helps to enhance our marketing and branding initiatives. Additionally, our NHCs
are an onsite resource for nutrition training and education for our Crew members. Each NHC trains our Crew members to use a compliant
educational approach to customer service without attempting to diagnose or treat specific conditions or ailments. We believe our NHC
position is a competitive differentiator and represents a key element of our customer service model.
Our training and education programs are supplemented by outside experts, online materials and printed handouts. We also use
our Health Hotline magazine to educate our customers. The Health Hotline magazine, which was published 11 times in fiscal year 2021,
includes in-depth articles on health and nutrition, along with a selection of sale items. The printed version of the Health Hotline magazine
is mailed to subscribers and distributed in our stores. In addition, an electronic version of the Health Hotline magazine is distributed to
subscribers via the internet and posted on our website.
Our Products
Product Selection Guidelines. We have a set of strict quality guidelines covering all products we sell. For example:
● we do not approve for sale food known to contain artificial colors, flavors, preservatives or sweeteners or partially
hydrogenated or hydrogenated oils, regardless of the proportion of its natural or organic ingredients;
● we only sell USDA certified organic produce;
● we only sell dairy products from pasture-raised, non-confined livestock and only sell eggs from free-range or pastured hens;
● we only sell meats from naturally raised animals that are not known to have been treated with antibiotics, hormones or
growth promoters, or fed animal by-products;
● we only sell seafood from sustainable fisheries or ecologically responsible farm-raised operations; and
● we do not sell distilled spirits, tobacco products or e-cigarettes.
Our product review team analyzes all new products and approves them for sale based on ingredients, price and uniqueness within
the current product set. We actively research new products in the marketplace through our product vendors, private label manufacturers,
scientific findings, customer requests and general trends in popular media. Our stores are able to fully merchandise all departments by
providing an extensive assortment of natural and organic products. We do not believe we need to sell conventional products to fill our
selection, increase our margins or attract more customers.
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What We Sell. We operate both a full-service natural and organic grocery store and a dietary supplement store within a single
retail location. The following is a breakdown of our sales mix for the fiscal year ended September 30, 2021:
The products in our stores include:
● Grocery. We offer a broad selection of natural and organic grocery products with an emphasis on minimally processed and
single ingredient products that are not known to contain artificial colors, flavors, preservatives or sweeteners or partially
hydrogenated or hydrogenated oils. Additionally, we carry a wide variety of products associated with special diets such as
gluten free, vegetarian and non-dairy. Our grocery products include:
■ Produce. We sell only USDA certified organic produce and source from local, organic producers whenever
feasible. Our selection varies based on seasonal availability, and we strive to offer a variety of organic produce
offerings that are not typically found at conventional food retailers.
■ Bulk Food. We sell a wide selection of private label repackaged bulk products, including dried fruits, nuts, grains,
granolas, teas, herbs and spices. We also sell peanut and almond butters, freshly ground in-store under the Natural
Grocers brand.
■ Natural Grocers Brand Products. We sell an expanding range of Natural Grocers brand private label products,
including pasta, pasta sauce, ketchup, canned beans and vegetables, frozen vegetables, frozen fruit, frozen meals,
frozen pizza, bread, baking mixes, plant based butter, olives, olive oil, coconut oil, coconut milk, honey, maple
syrup, preserves, chocolate, coffee, kombucha, bacon, beef jerky, canned seafood, popcorn, tortilla chips, taco
shells, eggs, cheese, apple sauce, apple cider vinegar, spring water, paper products, cleaning products, and other
products.
■ Dry, Frozen and Canned Groceries. We offer a wide variety of natural and organic dry, frozen and canned
groceries, including cereals, soups, baby foods, frozen entrees and snack items. We offer a broad selection of
natural chocolate bars and energy, protein and food bars.
■ Meats and Seafood. We only offer naturally raised or organic meat products. The naturally raised meat products
we offer come from animals that are not known to have been treated with antibiotics, hormones or growth
promoters, fed animal by-products or raised in concentrated animal feeding operations. Additionally, we only buy
from companies we believe employ humane animal-raising practices. Our seafood items are generally frozen at
the time of processing and sold from our freezer section, thereby ensuring freshness and reducing food spoilage
and safety issues. The seafood we sell is generally sourced from sustainable fisheries or ecologically responsible
farm-raised operations and excludes endangered species.
■ Dairy Products, Dairy Substitutes and Eggs. We offer a broad selection of natural and organic dairy products
such as milk, cheeses, yogurts and beverages, as well as eggs and non-dairy substitutes made from almonds,
coconuts, rice and soy. Our stores sell only pasture-raised, non-confinement dairy products and free-range eggs
(i.e., from chickens that are not only cage-free but also provided with sufficient space to move).
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■ Prepared Foods. Our stores have a convenient selection of refrigerated prepared fresh food items, including
salads, sandwiches, salsa, hummus and wraps. The size of this offering varies by location.
■ Bread and Baked Goods. We receive regular deliveries of a wide selection of bakery products for our bakery
section, which includes an extensive selection of gluten-free items.
■ Beverages. We offer a wide variety of beverages containing natural and organic ingredients. We also offer low-
cost, self-serve filtered drinking water that is dispensed into one-gallon or larger containers provided by our
customers.
■ Beer, Wine and Hard Cider. We sell craft beer, craft hard cider and/or organic and biodynamic wine at certain
stores in Arizona, Colorado, Kansas, Louisiana, Missouri, Oklahoma, Oregon and Texas.
● Dietary Supplements. Our dietary supplement department primarily sells name-brand supplements, as well as a line of
Natural Grocers brand private label dietary supplements. The department is carefully organized to help both Crew members
and customers find products efficiently. We generally offer several different formulations and potencies for each type of
product in order to meet our customers’ varying needs.
● Other.
■ Body Care. We offer a full range of cosmetics, skin care, hair care, fragrance and personal care products
containing natural and organic ingredients. Our body care offerings range from bargain-priced basics to high-end
formulations.
■ Pet Care. We offer a full line of natural pet care and food products that comply with our human food guidelines.
■ Household and General Merchandise. Our offerings include sustainable, hypo-allergenic and fragrance-free
household products, including cleaning supplies, paper products, dish and laundry soap and other common
household products, including diapers. We also offer Natural Grocers branded paper products, cleaning products,
and other household products.
■ Books and Handouts. We stock approximately 300 titles in each store’s book department. Titles cover various
approaches to diet, lifestyle and health. Additionally, we offer hundreds of handouts on various health topics and
dietary supplements to our customers free of charge.
Quality Assurance. We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe are
compliant with established regulatory and industry guidelines. Our purchasing department requires a complete supplier and product profile
as part of the approval process. Our dietary supplement suppliers must follow Food and Drug Administration (FDA) current good
manufacturing practices supported by quality assurance testing for both the base ingredients and the finished product. We expect our
suppliers to comply with industry best practices for food safety.
Many of our suppliers are inspected and certified under the USDA National Organic Program, through voluntary industry
standards and by other third-party auditing programs with regard to additional ingredients, manufacturing and handling standards. Each
Natural Grocers store is certified as an organic handler and processor by an accredited USDA certifier in the calendar year after it opens,
and annually thereafter. We operate all our stores in compliance with the National Organic Program standards, which restrict the use of
certain substances for cleaning and pest control and require rigorous recordkeeping and methods to prevent co-mingling and contamination,
among other requirements.
Our Pricing Strategy
We have an Always Affordable Price designation on many products, while also providing special sale pricing on hundreds of
additional items. We believe our pricing strategy allows our customers to shop our stores on a regular basis for their groceries and dietary
supplements.
The key elements of our pricing strategy include:
● Always Affordable Price throughout our stores;
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heavily advertised Health Hotline deals supported by manufacturer participation;
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discounts offered to {N}power® members;
short term price promotions related to holidays, targeted campaigns and other events;
in-store specials generally lasting for one month and not advertised outside the store;
● managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and
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specials on seasonally harvested produce.
As we continue to expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as
administrative expenses, as well as increased economies of scale in sourcing products. We strive to keep our product, operating and general
and administrative costs low, which allows us to continue to offer attractive pricing for our customers.
Our Store Operations
Store Hours. Our stores typically are open from 8:30 a.m. to 9:06 p.m., Monday through Saturday, and from 9:00 a.m. to 8:06
p.m. on Sunday.
Store Management and Staffing. Our typical store staffing includes a manager and assistant manager, with department managers
in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments, as well as several non-
management Crew members. Each store manager is responsible for monthly store profit and loss, including labor, merchandising and
inventory costs. We also employ regional managers to oversee all store operations for regions consisting of approximately 10 to 15 stores.
Each regional manager reports to, and is supported by, a director of store operations and other staff.
To ensure a high level of service, all employees receive training and guidance on customer service skills, product attributes and
nutrition education. Crew members are carefully trained and evaluated based on a requirement that they present nutrition information in an
appropriate and legally compliant educational context while interacting with customers. Additionally, store Crew members are cross-trained
in various functions, including cashier duties, stocking and receiving product.
Every store also maintains a NHC position. The NHC is responsible for training our store Crew members and educating our
customers in accordance with applicable local, state and federal regulations. Each NHC must have earned a degree or certificate in nutrition
or a related field from an accredited school, complete continuing education in nutrition and be thoroughly committed to fulfilling our
mission. Substantially all of our NHCs are full-time Crew members. The NHCs are overseen by Regional Nutritional Health Coach
Managers.
Bulk Food Repackaging Facility and Distribution Center. We lease a 150,000 square foot bulk food repackaging facility and
distribution center located in Golden, Colorado. That facility also houses a training center and certain administrative support functions.
Inventory. We use a robust merchandise management and perpetual inventory system that values goods at moving average cost.
We manage most shelf stock based on weeks-on-hand relative to sales, resupply time and minimum economic order quantity.
Sourcing and Vendors. We source from approximately 1,100 suppliers and offer approximately 3,200 brands. These suppliers
range from small independent businesses to multi-national conglomerates. As of September 30, 2021, we purchased approximately 78%
of the goods we sell from our top 20 suppliers. For the fiscal year ended September 30, 2021, approximately 67% of our total purchases
were from United Natural Foods Inc. and its subsidiaries (UNFI). In fiscal year 2016, we extended our long-term relationship with UNFI
as our primary supplier of dry grocery and frozen food products through May 31, 2021, subject to automatic renewals for successive one-
year periods unless otherwise terminated by either party, and we are currently operating under the automatic renewal term. In May 2018,
we entered into an amendment to our agreement with UNFI pursuant to which we appointed Albert’s Organics, a wholly owned subsidiary
of UNFI, as our primary supplier of organic produce products for the majority of our stores. We maintain good relations with UNFI and
while we are exploring a longer-term extension of our relationship with UNFI beyond the expiration of the current annual auto renewal
term on May 31, 2022, we believe we have adequate alternative supply methods, including self-distribution. As a result of current global
supply chain issues, partially attributable to the COVID-19 pandemic, we have experienced shortages and delays in the delivery of certain
products to our stores. We have taken steps to mitigate these disruptions to our supply chain and such disruptions have moderated, although
certain products remain in relatively short supply or are unavailable from time to time.
We have contracts with third-party manufacturers to produce groceries and dietary supplements under the Natural Grocers brand.
We have longstanding relationships with our suppliers, and we require disclosure from them regarding quality, freshness, potency and
safety data information. Our bulk food private label products are packaged by us in pre-packed sealed bags to help prevent contamination
while in transit and in our stores. Unlike most of our competitors, most of our private label nuts, trail mix and flours are refrigerated in our
warehouse and stores to maintain freshness.
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Our Crew Members and Our Approach to Human Capital Resources
We believe our Crew members make our Company great. We offer benefits, resources and training to our Crew members, and
support a healthy, balanced lifestyle. We support Crew members wellness through free nutrition education programs, competitive pay and
benefits and a culture that offers the opportunity to improve the lives of others. As part of our commitment to our founding principles, we
are focused on the engagement, development, retention, and health and wellbeing of our Crew members.
As of September 30, 2021, we employed 3,218 full-time and 974 part-time (less than 30 hours per week) Crew members,
including a total of 333 Crew members at our home office and our bulk food repackaging facility and distribution center. None of our Crew
members are subject to a collective bargaining agreement. We believe we have good relations with our Crew members. We have an
established set of standard operating procedures to manage our human capital management function, including hiring and human resource
policies, training practices and operational instruction manuals. This allows each store to operate with strict accountability and still maintain
independence to respond to its unique circumstances.
Culture and Engagement. Our Company strives to empower healthier communities by cultivating a culture focused on our core
values, including caring for our customers and Crew members, having fun at work, inclusivity, working with passion, and being authentic.
Our leadership reinforces our founding principles and core values by providing significant training on these topics to new store managers.
We have also undertaken a number of initiatives designed to engage our workforce, including conducting an annual employee survey to
solicit feedback from our Crew members, conducting regular focus groups with our store Crew members to identify opportunities for
process improvement at our stores, and conducting monthly calls with our store leadership to celebrate accomplishments and highlight
sales initiatives.
Crew Member Development and Promotion. Investing in the development of our Crew members is an important area of focus to
ensure the sustainability of our business. We prioritize promoting leaders from within our organization and strive to support career
development through regular training and leadership development opportunities. During fiscal year 2021, we promoted internal candidates
to fill 100% of our vacant regional manager positions, 87% of our vacant store manager and assistant store manager positions, and
approximately 78% of our vacant department manager positions. We are committed to inclusion and diversity in our approach to hiring
and promotion, including among our store management. As of September 30, 2021, approximately 48% of our store managers and
approximately 50% of our assistant store managers were women.
We believe that setting Crew members up for success begins with a strong foundation. Our accelerated store manager training
program provides high-potential store Crew members with management training, including leadership skills and financial aspects of
management, equipping participants for potential management roles within the Company upon completion. We provide all new store
managers and assistant store managers with four weeks of in-person operational and managerial training at our facility in Golden, Colorado.
We also conduct over 20 hours of virtual and in-person training on an annual basis for our store Crew members covering a wide array of
topics, including nutrition education, store operations, company culture and values, brand education, safety and compliance.
Wellness and Benefits. Our Crew members are eligible for health, long-term disability, vision and dental insurance coverage, as
well as Company paid short-term disability and life insurance benefits, after they meet eligibility requirements. We also provide our Crew
members with access to clinical counseling resources through our employee assistance program. Additionally, our Crew members are
offered a 401(k) retirement savings plan with discretionary contribution matching opportunities. We believe we pay above average retail
wages. In addition, all Crew members receive in store discounts and earn an additional $1.00 per hour, up to $40 per week, in “Vitamin
Bucks,” which can be used to purchase products in our stores. It is important to us that our Crew members live a healthy, balanced lifestyle,
and we believe that the discounts we offer our Crew members and the Vitamin Bucks benefit provide an additional resource for our Crew
members to purchase natural and organic products. We provide our Crew members with monthly free nutrition education trainings and
other opportunities to earn rewards by learning about nutrition. Every Crew member also receives one day of additional pay on their
birthday to express the Company’s appreciation for their service. We believe these and other factors have a positive impact on retention
rates and encourage our Crew members to appreciate our culture, which helps them better promote our brand.
Caring for our Crew members during the COVID-19 pandemic. During the COVID-19 pandemic, we have taken a number of
actions to promote the health and wellbeing of our Crew members, and to reward our Crew members for their contributions to our success.
These actions have included permanent wage increases and paying discretionary bonuses to our Crew members during the COVID-19
pandemic, providing personal protective equipment, daily immune and stress support supplements to our Crew members at no cost, and
expanding healthcare benefits and paid leave for our Crew members. During fiscal 2021, the Company also established The Natural Grocers
Heroes in Aprons Fund, a nonprofit organization that provides short-term financial assistance to qualifying Crew members or their
immediate family members who experience unanticipated hardships.
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Our Customers
The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and
nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary supplements
are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core customers prefer
a retail store environment that offers carefully selected natural and organic products and dietary supplements and supports environmentally
sustainable products and practices. Our customers tend to be interested in health and nutrition, and expect our store Crew members to be
highly knowledgeable about these topics and related products.
An analysis of our Health Hotline subscriber list indicates that our customers come from broad geographic segments, including
urban, suburban and rural areas, which reflects the varied characteristics and portability of our store locations.
Our Communities
One of our founding principles is to be an active member and steward of the communities we serve. As a commitment to this
principle, we:
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provide extensive free educational services to customers in the form of lectures, classes, printed resources, online resources,
publications and one-on-one nutrition coaching;
participate in health fairs, school outreach, community wellness events and other activities to engage with and educate the
community;
partner with community and corporate wellness programs;
disseminate new research on nutrition information;
participate in the legislative and regulatory process at local, state and federal levels so that our customers have access to
quality food and dietary supplements and the educational resources to guide their own wellness;
continually strive to source products and services from local producers and vendors;
carefully collect all of our excess or distressed food and merchandise and donate it to local non-profit organizations;
do not provide single-use paper or plastic bags at our registers and encourage the use of reusable totes;
provide cash to local food banks, making donation determinations based on the number of customers who shop our stores
with their own bags;
reduce our energy costs and carbon footprint using efficient heating, ventilation and air conditioning, lighting, and
refrigerating systems;
implement strategies to eliminate excess packaging, energy and transportation costs;
recycle and reuse paper, plastic, glass and electronic products whenever possible;
● manage the waste stream services at all of our stores in order to optimize our diversion of waste to recycling and compost
and increase the environmental sustainability of our operations;
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offer compostable paper bags for produce purchases;
use healthy and environmentally responsible building materials and finishes in our new stores and remodels;
promote environmentally responsible and sustainable practices in our supply chain;
undertake fundraisers for organizations whose missions align with ours;
support the economic vitality of small producers and agricultural communities; and
implement health and safety measures to protect the health and wellbeing of our customers and Crew members during the
COVID-19 pandemic.
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Marketing and Advertising
A significant portion of our marketing efforts is focused on educating our customers on the benefits of natural and organic grocery
products, dietary supplements and our quality standards. Our customer outreach programs provide practical general nutrition knowledge to
a variety of groups and individuals, schools, businesses, families and seniors. These educational efforts fulfill one of our founding principles
and also offer us the opportunity to build relationships with customers and community influencers. During fiscal year 2021, in response to
the COVID-19 pandemic we continued our marketing outreach efforts to inform customers of the health and safety measures we have
implemented in our stores to protect the health and wellbeing of our customers and our Crew.
{N}power® Customer Loyalty Program. We introduced the {N}power® customer loyalty program in fiscal year 2015.
{N}power® members receive digital coupons, discounted pricing on certain staple items (such as free-range eggs), personalized offers and
other rewards, all by providing their phone number at the time of checkout. We believe the {N}power® program has enhanced customer
loyalty and increased customer traffic and engagement levels. During fiscal year 2021, we implemented a new reward points system
intended to simplify the accumulation of rewards for {N}power® users and improve the customer loyalty program experience. We also
continued to enhance the personalization, frequency and range of our {N}power® offerings and featured {N}power® promotions
highlighting affordable family meals. We sponsored sweepstakes and digital scavenger hunts for {N}power® members to promote program
membership and sales, with an emphasis on dietary supplement sales. We believe these steps helped to increase membership in the
{N}power® program during fiscal year 2021. We had approximately 1.5 million registered {N}power® members as of September 30,
2021 compared to approximately 1.3 million {N}power® members as of September 30, 2020.
Health Hotline. The Health Hotline is a four-color magazine that contains a mix of in-depth health and nutrition articles, along
with a selection of popular sale items. The articles aim to be relevant, science-based and written to reflect the most recent research findings.
During fiscal year 2021, we continued to enhance our Health Hotline magazine. The Health Hotline magazine was published 11 times
during fiscal year 2021, and we expect comparable publication frequency during fiscal year 2021. The printed version of the Health Hotline
magazine is mailed to subscribers and distributed in our stores. In addition, an electronic version of the Health Hotline magazine and a
weekly electronic Health Hotline newsletter are distributed to subscribers via the internet. Generally, we negotiate with our suppliers for
significantly lower costs on Health Hotline featured sale items, which in turn allows us to offer lower sale prices to our customers. Focused
staff training at all locations occurs concurrently with the release of each Health Hotline to ensure that store staff are familiar with the
content in each issue.
Special Promotions and Sponsorships During fiscal year 2021, we organized special promotions to coincide with certain calendar
events, such as Resolution Reset Day in January, Earth Day in April, and on the 66th anniversary of the Company’s founding in August.
We also organized month-long special promotions such as the “Beauty Bonanza” in February, the “Art of Burgering” campaign during
July and the “Organic Harvest Month” campaign during September. Our special promotions frequently include product discounts,
sweepstakes, charitable fundraisers and nutrition education classes. During fiscal 2021, we featured a number of events intended to promote
sales to friends and family of our Crew members. We expect to continue offering similar special promotions and events in the future.
During fiscal year 2021, we organized a number of charitable sponsorships, including collecting donations from customers on behalf of
local food banks and an environmental non-profit organization. In addition, we donated 1% of all our sales on one day during our 66th
anniversary to our Natural Grocers Heroes in Aprons Fund, which provides emergency relief to our Crew members.
Website and Social Media. We maintain www.naturalgrocers.com as our official Company website to host store information,
sale and discount offers, educational materials, product and standards information, policies and contact forms, advocacy and news items
and e-commerce capabilities. Our website is intended to be part of an overall enhanced branding strategy to more effectively communicate
our brand’s unique and compelling attributes, including our founding principles. Our website features enhanced product and recipe search
interfaces and improved functionality with mobile and tablet devices. We believe the continued growth of site visitors, page views and
other metrics of our website activity indicates that our content is timely and informative to the communities we serve. Our website is
interlinked with other online and social media outlets, including Facebook, Instagram, Twitter, Pinterest and YouTube. During fiscal year
2021, we continued to increase our investment in paid and organic placements on platforms such as Facebook, Twitter, Instagram and
YouTube, resulting in enhanced social media reach, and organized social media campaigns designed to engage with millennials. We expect
to continue investing in digital engagement activities during fiscal year 2022.
Advertising. Our advertising activities in fiscal year 2021 included: (i) conducting television advertising campaigns; (ii)
conducting radio advertising campaigns in support of new store openings and store relocations; (iii) conducting outdoor advertising
campaigns; (iv) conducting targeted direct mail campaigns, and (v) utilizing organic search, search engine marketing, search engine
optimization and display advertisements to deliver more customer traffic to our website and stores.
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Home Delivery Services. As of September 30, 2021, we offered online ordering and home delivery services at 157 of our stores
in partnership with a third party.
New Store Openings. We use various targeted marketing efforts to support the successful introduction of our new stores in their
individual markets. In addition to the distribution of our Health Hotline magazine and Internet and social media efforts targeted to the
region, we utilize direct mail distribution of introductory booklets and postcards promoting our brand and providing discounts and other
incentives for new customers. We also focus on community relationship-building activities, including a series of lectures and cooking and
other demonstrations in each new store’s community room and/or demonstration kitchen. Other new store promotional activities include
gift card and prize giveaways, sweepstakes, musical performances, appearances by our sponsorship partners and participation by local
community leaders and organizations.
Online Pre-Ordering of Holiday Turkeys. We offer an online process to pre-order organic and free-range turkeys for the
Thanksgiving and Christmas holidays.
Competition
The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to
entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway; domestic mass or discount
retailers such as Wal-Mart and Target; natural and gourmet markets such as Whole Foods and The Fresh Market; foreign-based discount
retailers such as Aldi, Lidl and Ahold Delhaize; specialty food retailers such as Sprouts and Trader Joe’s; warehouse clubs such as Sam’s
Club and Costco; dietary supplement retailers such as GNC and The Vitamin Shoppe; online retailers; meal delivery services; independent
health food stores; drug stores; farmers’ markets; food co-ops; and multi-level marketers. Competition in the grocery industry may intensify,
and shopping dynamics may shift, as a result of, among other things, industry consolidation, new technologies, expansion by existing
competitors and the increasing availability of grocery ordering, pick-up and delivery options. These businesses compete with us on the
basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery
or any combination of these or other factors. They may also compete with us for products and locations. In addition, some of our competitors
are expanding to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores
in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and
organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and
provide a competitive advantage.
Seasonality
Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal changes
in consumer purchasing.
COVID-19 Pandemic
On March 11, 2020, the World Health Organization announced that COVID-19 infections had become a pandemic, and on March
13, 2020, the U.S. President announced a National Emergency relating to the disease. During the course of the COVID-19 pandemic,
federal, state and local authorities have imposed, from time to time, a number of public health mandates intended to prevent the spread of
the virus, including vaccine mandates, social distancing, quarantine, wearing face coverings, and “stay-at-home” measures. While
significant efforts to distribute COVID-19 vaccines to the public have commenced across the United States and states have reopened their
economies by easing restrictions, certain of these public health mandates have had an adverse impact on the U.S. economy. Additional
negative financial markets and industry-specific impacts could result from future case surges, outbreaks, COVID-19 virus variants, the
potential that current vaccines may be less effective or ineffective against future COVID-19 virus variants, and the risk that large groups
of the population may not receive vaccinations against COVID-19. The long-term economic impact of the COVID-19 pandemic is unknown
at this time. We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public health
measures have been implemented by states across our footprint and customers have adjusted to these new circumstances by consuming
more food at home. We believe our proactive response to the COVID-19 pandemic has resulted in increased customer loyalty, but there
can be no assurance we will continue to experience elevated levels of net sales, in particular, when the COVID-19 pandemic subsides. The
impact of the COVID-19 pandemic and government mandates on our business and results of operations is discussed throughout this Form
10-K, including under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
below.
Insurance and Risk Management
We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability, director
and officers’ liability, cyber risk, employment practices liability, employee healthcare benefits and other casualty and property risks.
Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit
level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect ultimate
settlements of claims. We evaluate our insurance requirements and providers on an ongoing basis.
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Trademarks and Other Intellectual Property
We believe that our intellectual property is important to the success of our business. We have received the registration of
trademarks not only for Natural Grocers®, Vitamin Cottage and Health Hotline but also for our logo, Natural Grocers by Vitamin Cottage®
and Vitamin Cottage Natural Grocers® for appropriate categories of trade. In addition, we have received the registration of service marks
for EDAP – Every Day Affordable Price, {N}power®, Organic Headquarters®, Organic Month Headquarters®, Organic Produce
Headquarters®, Natural Grocers Cottage Wine and Craft Beer® and Resolution Reset Day® and registrations of trademarks for These
Came First® and Natural Grocers Top 10 Nutrition Trends®. We do not own or license for use any patents, franchises or concessions that
are material to our business. Our trademarks are generally valid and may be renewed indefinitely as long as they are in use and their
registrations are properly maintained.
Information Technology Systems
We have made significant investments in overhead and information technology infrastructure, including purchasing, receiving,
inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems. We use an ERP system with an integrated
merchandise management, reporting and accounting system at all of our stores, as well as at our bulk food repackaging facility and
distribution center and for corporate functions including accounting, reporting and purchasing. Our ERP system application support and
hardware functions are outsourced, which allows us to focus on our core business. We also have an enterprise-wide HRIS, which has
enabled us to more efficiently and effectively manage our human resources and payroll needs at all locations. In recent years, we have
implemented a Company-wide scheduling system for our stores, deployed new handheld technology and VoIP telephony solutions at all
our stores, and increasingly leveraged cloud technology in our information technology systems. We have also invested in upgrading
communication circuits and refreshing network and security hardware and systems at all our stores and our corporate headquarters. We
plan to continue investing in our information technology infrastructure with systems that scale with and add efficiencies to our operations
as we continue to grow.
Regulatory Compliance
We are subject to various federal, state and local laws, regulations and administrative practices that affect our business. The
safety, formulation, manufacturing, processing, packaging, importation, labeling, promotion, advertising and distribution of products we
sell in our stores, including private label products, are subject to regulation by several federal agencies, including the FDA, the Federal
Trade Commission (the FTC), the USDA, the Consumer Product Safety Commission (the CPSC) and the Environmental Protection Agency
(the EPA), as well as by various state and local agencies.
Food Products. The FDA has comprehensive authority to regulate the safety of food and food ingredients (including pet food
and pet food ingredients but excluding meat, poultry, catfish and certain egg products, which are regulated by USDA) under the Federal
Food, Drug, and Cosmetic Act (the FDCA). The USDA’s Food Safety Inspection Service regulates and regularly inspects meat, poultry,
catfish and certain egg products to assure that these products are safe, wholesome and correctly labeled and packaged under the Federal
Meat Inspection Act and the Poultry Products Inspection Act.
The Food Safety Modernization Act (the FSMA), enacted in 2011, amended the FDCA and significantly expanded food safety
requirements and the FDA’s regulatory authority over food safety. The FSMA requires the FDA to impose comprehensive, prevention-
based controls across the food supply chain, further regulates food products imported into the United States and provides the FDA with
authority to enforce mandatory recalls. In addition, the FSMA requires the FDA to undertake numerous rulemakings and to issue numerous
guidance documents, as well as reports, plans, standards, notices and other tasks. Further, even provisions that have been enacted, such as
nutritional labeling, are periodically reviewed and updated with new requirements. As a result, final implementation of the legislation
remains ongoing.
The FDA also exercises broad jurisdiction over the labeling and promotion of cosmetics, food and dietary supplements. Labeling
is a broad concept that, under most circumstances, extends even to product-related claims and representations made on a company’s website
and printed or digital media. All foods, including dietary supplements, must bear labeling that provides consumers with essential
information with respect to standards of product identity, net quantity/weight, nutrition facts labeling, ingredient statements, contact
information for the manufacturer/packer/distributor, allergen, and certain other disclosures. Similarly, cosmetic products labeling must also
contain certain information, including the nature and use of the product such as net quantity/weight, ingredient statements, and contact
information for the manufacturer/packer/distributor. The FDA also regulates the use of claims made about these products, including
structure/function claims (e.g., “calcium builds strong bones”), qualified health claims (e.g., "adequate calcium throughout life may reduce
the risk of osteoporosis"), and nutrient content claims (e.g., “high in antioxidants”), and others. “Organic” claims, however, are primarily
regulated by the USDA. Certain new food labeling requirements, primarily related to the Nutrition Facts Label, went into full effect on
January 1, 2021.
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Dietary Supplements. The FDA also has comprehensive authority to regulate the safety of dietary supplements, dietary ingredients,
labeling and current good manufacturing practices. The Dietary Supplement Health and Education Act (DSHEA), enacted in 1994, greatly
expanded the FDA’s regulatory authority over dietary supplements. Through DSHEA, dietary supplements became a separately regulated
subcategory of food and the FDA was empowered to establish good manufacturing practice regulations governing key aspects of the
production of dietary supplements, including quality control, packaging and labeling. DSHEA also expressly permits dietary supplements
to make label claims and promotional statements describing how a product affects the structure, function and general well-being of the
body if adequate scientific evidence exists to support the claim, although no statement may expressly or implicitly represent that a dietary
supplement will diagnose, cure, treat or prevent a disease, which are claims reserved for drug products that are regulated separately by the
FDA.
FDA Enforcement. The FDA has broad authority to enforce the provisions of the FDCA applicable to the safety, labeling,
manufacturing, transport and promotion of cosmetics, foods and dietary supplements, including powers to issue a public warning letter to
a company, publicize information about illegal products, institute an administrative detention of food, request or order a recall of illegal
food products from the market, and request the Department of Justice to initiate a seizure action, an injunction action or a criminal
prosecution. Pursuant to the FSMA, the FDA also has the power to deny the import of any food or dietary supplement from a foreign
supplier that is not appropriately verified as being compliant with all FDA laws and regulations. Moreover, the FDA has the authority to
administratively suspend the registration of any facility that produces or processes food, including supplements, that it deems to present a
reasonable probability of causing serious adverse health consequences. In the past few years, the FDA has commenced enforcement actions
against nutritional supplement companies by issuing warning letters regarding products that make impermissible claims related to
treatments and cures for various diseases.
Food and Dietary Supplement Advertising. In addition to the FDA’s regulatory control over product labeling, the FTC also
exercises jurisdiction over the advertising of foods and dietary supplements, including health benefit claims, general claims about
environmental benefits, and claims about the geographic origin of products (e.g. “Made in the USA”) and claims about whether product
packaging is recyclable or compostable, as well as deceptive advertising methods. The FTC has the power to levy monetary sanctions and
impose “consent decrees” and penalties that can severely limit a company’s business practices. In recent years, the FTC has instituted
numerous enforcement actions against dietary supplement companies for failure to have adequate substantiation for claims made in
advertising or for the use of false or misleading advertising claims. In addition, private parties are increasingly initiating broad consumer
class actions against food and dietary supplement manufacturers for false or misleading labeling and/or advertising.
Compliance. As is common in our industry, we rely on our suppliers and contract manufacturers to ensure that the products they
manufacture and sell to us comply with all applicable regulatory and statutory requirements. In general, we seek certifications of
compliance, representations and warranties, indemnification and insurance from our suppliers and contract manufacturers. However, even
with adequate certifications, representations and warranties, insurance and indemnification, any claims of non-compliance could
significantly damage our reputation and consumer confidence in the products we sell. In addition, the failure of such products to comply
with applicable regulatory and legislative requirements could prevent us from marketing the products or require us to recall or withdraw
such products from our stores. In order to comply with applicable statutes and regulations, our suppliers and contract manufacturers have
from time to time reformulated, eliminated or relabeled certain of their products and we have revised certain provisions of our sales and
marketing program.
We regularly train our in-store Crew members to provide an educational customer service approach that is ethical, honest and
accurate and that does not cross over into a scope of practice reserved for licensed healthcare professionals. For example, our Crew members
are not allowed to discuss any “disease” or “cure.” Instead, we focus on how the structure and function of the body is affected by lifestyle
choices and the different nutritional components of an individual’s diet, including those contained in dietary supplements. Our customers
are encouraged to make informed decisions about their diet, lifestyle and possible need for supplementation. Our NHCs are responsible for
overseeing compliance with FDA, USDA and FTC regulations in our stores. While we believe that our nutrition education practices are
compliant with federal and state requirements, a finding to the contrary could pose significant issues with respect to our business and our
reputation among our customers or otherwise have a material adverse effect on our business.
New or revised federal, state and local laws and regulations affecting our business or our industry, such as those relating to
industrial hemp products and genetically modified (bioengineered) foods, could result in additional compliance costs and civil remedies.
In some instances, laws and regulations may be amended in the future to allow for private rights of action to enforce laws and regulations
through lawsuits. The risks associated with these laws and regulations are further described under the caption “Risk Factors.”
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Segment Information
We have one reporting segment, natural and organic retail stores, through which we conduct all of our business. Please see the
Consolidated Financial Statements of the Company for the fiscal year ended September 30, 2021, set forth in Part IV of this Form 10-K,
for financial information regarding this segment.
Available Information
Our website is located at www.naturalgrocers.com. We make our periodic reports and other information filed with or furnished
to the SEC available, free of charge, through our website as soon as reasonably practicable after those reports and other information are
electronically filed with or furnished to the SEC. In addition, our Corporate Governance Guidelines, the charters for our Audit Committee
and Compensation Committee, and our Code of Ethics are publicly available on our website at www.naturalgrocers.com under the “Investor
Relations – Corporate Governance” section, and we will post any amendments to, or waivers from, a provision of this Code of Ethics on
our website at the address and location specified above. A printed copy of this information is also available without charge by sending a
written request to Corporate Secretary, Natural Grocers by Vitamin Cottage, Inc., 12612 West Alameda Parkway, Lakewood, CO 80228.
The SEC also maintains a website that contains our reports and other information at www.sec.gov. Information on our website or any other
website is not incorporated by reference into this Form 10-K.
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Item 1A. Risk Factors.
Risk Factor Summary
We are providing the following summary of the risk factors contained in our Form 10-K to enhance the readability and
accessibility of our risk factor disclosures. We encourage our stockholders to carefully review the full risk factors contained in this Form
10-K in their entirety for additional information regarding the risks and uncertainties that could cause our actual results to vary materially
from recent results or from our anticipated future results.
Risks related to our business and operations
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We may not be successful in our efforts to grow;
Our newly opened stores may negatively impact our financial results in the short-term, and may not achieve sales and
operating levels consistent with our more mature stores on a timely basis or at all;
If we are unable to successfully identify market trends and react to changing consumer preferences in a timely manner, our
sales may decrease;
Our store sales growth and quarterly financial performance may fluctuate for a variety of reasons;
Adverse economic conditions and political instability could adversely affect our business, results of operations and financial
condition and could negatively impact our ability to execute our growth strategy;
The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact
our business, results of operations and financial condition;
We may be unable to compete effectively in our markets, which are highly competitive;
An inability to maintain or increase our operating margins could adversely affect our results of operations;
A reduction in traffic to anchor stores in the shopping areas in close proximity to our stores could significantly reduce our
sales and leave us with unsold inventory, which could have a material adverse effect on our business, financial condition and
results of operations;
We may experience product recalls, withdrawals or seizures which could reduce our sales and adversely affect our results of
operations;
Our future business, results of operations and financial condition may be adversely affected by reduced availability of
certified organic products or products that meet our other internal standards;
Disruptions affecting our significant suppliers, or our relationships with such suppliers, could negatively affect our business;
Adverse weather conditions, natural disasters and the effects of climate change could disrupt our supply chain and adversely
impact our sales and financial performance;
Acts of violence at or threatened against our stores or the shopping centers in which they are located, including active shooter
situations and terrorist acts, could adversely impact our sales, which could materially adversely affect our financial
performance;
The current geographic concentration of our stores creates exposure to local economies, regional downturns, severe weather
and other catastrophic occurrences;
If we fail to maintain our reputation and the value of our brand, our sales may decline;
Perishable food product losses could materially impact our results of operations;
The decision by certain of our suppliers to distribute their specialty products through other retail distribution channels could
negatively impact our revenue from the sale of such products;
Our ability to operate our business effectively could be impaired if we fail to retain or attract key personnel or are unable to
attract, train and retain qualified employees;
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Any significant interruption in the operations of our bulk food repackaging facility and distribution center or our supply
chain network could disrupt our ability to deliver our merchandise in a timely manner;
Higher wage and benefit costs could adversely affect our business;
Union activity at third-party transportation companies or labor organizing activities among our Crew members could disrupt
our operations and harm our business;
Future events could result in impairment of long-lived assets, which may result in charges that adversely affect our results
of operations and capitalization;
We have significant lease obligations, which may adversely affect our liquidity and require us to raise additional capital or
continue paying rent for store locations that we no longer operate;
Any material disruption to or failure of our information systems could negatively impact our operations;
Failure to protect our information systems against cyber-attacks or information security breaches, including failure to protect
the integrity and security of individually identifiable data of our customers and Crew members, could expose us to litigation,
damage our reputation and have a material adverse effect on our business;
Claims under our self-insurance program may differ from our estimates, which could negatively impact our results of
operations;
If we are unable to protect our intellectual property rights, our ability to compete and the value of our brand could be harmed;
Inflation or deflation could adversely affect our business;
Energy costs are a significant component of our operating expenses and increasing energy costs, unless offset by more
efficient usage or other operational responses, may impact our profitability;
Increases in certain costs affecting our marketing, advertising and promotions may adversely impact our ability to advertise
effectively and reduce our profitability;
Legal proceedings could adversely affect our business, financial condition and results of operations;
Effective tax rate changes and results of examinations by taxing authorities could materially impact our results of operations;
Failure to maintain effective internal control over financial reporting could lead to material misstatements in our financial
statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the
market price of our common stock may decline; and
Changes in accounting standards may materially impact reporting of our financial condition and reported results of
operations.
Risks related to government regulations and policies
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If we or our third-party suppliers fail to comply with regulatory requirements, or are unable to provide products that meet
our specifications, our business and our reputation could suffer;
We, as well as our suppliers, are subject to numerous federal, state and local laws and regulations and our compliance with
these laws and regulations, as they currently exist or as modified in the future, may increase our costs, limit or eliminate our
ability to sell certain products, require recalls of certain products, raise regulatory enforcement risks not present in the past
or otherwise adversely affect our business, results of operations and financial condition;
Our sale of products containing cannabidiol (CBD) could lead to regulatory action by federal, state and/or local authorities
or legal proceedings brought by or on behalf of consumers;
The activities of our NHCs and our nutrition education services may be impacted by government regulation or an inability
to secure adequate liability insurance;
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Consumers or regulatory agencies may challenge certain claims made regarding the products we sell;
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The products we sell could suffer from real or perceived quality or food safety concerns and may cause unexpected side
effects, illness, injury or death that could result in their discontinuance or expose us to lawsuits, any of which could result in
unexpected costs and damage to our reputation; and
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Our political advocacy activities may reduce our customer count and sales.
Risks related to our indebtedness and liquidity
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Our credit facility could limit our operational flexibility;
We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could adversely impact our
business;
Our liquidity needs may require us to raise additional capital through debt or equity financings; and
Our share repurchase program may adversely affect our liquidity and cause fluctuations in our stock price.
General risks related to our common stock
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The market price of our common stock has been volatile and may continue to be volatile, and our stockholders may not be
able to sell our common stock at a favorable price or at all;
An inability to maintain or improve levels of sales growth could cause our stock price to decline;
Our current principal stockholders have significant influence over us, and they could delay, deter or prevent a change of
control or other business combination or otherwise cause us to take action with which our stockholders might not agree;
We may not be able to continue paying dividends on our common stock;
If securities or industry analysts do not publish research or reports about our business, if they adversely change their
recommendations regarding our common stock or if our operating results do not meet their expectations, our common stock
price could decline;
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control,
even if a sale of the Company could be beneficial to our stockholders, which could cause our stock price to decline and
prevent attempts by our stockholders to replace or remove our current management; and
We are a “controlled company” within the meaning of the NYSE Listed Company Manual, and, as a result, rely on
exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
Risk Factors
Our business, financial condition and results of operations can be materially impacted by a number of factors which could cause
our actual results to vary materially from recent results or from our anticipated future results. If any of the following risks actually occurs,
our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result,
the trading price of our common stock could decline and our stockholders could lose all or part of their investment in our common stock.
Accordingly, our stockholders should carefully consider the risks described below as well as the other information and data included in
this Form 10-K.
Risks related to our business and operations
We may not be successful in our efforts to grow.
Our continued growth largely depends on our ability to increase sales in our existing stores and successfully open and operate
new stores on a profitable basis. Our comparable store sales growth could be lower than our historical average for various reasons, including
the opening of new stores that cannibalize sales in existing stores, increased competition, general economic conditions, regulatory changes,
price changes as a result of competitive factors and product pricing and availability.
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During fiscal years 2021 and 2020, we opened three and six new stores, respectively. We plan to open four to six new stores and
relocate three to four existing stores in fiscal year 2022. We expect our rate of new store unit growth in the foreseeable future to be
dependent on economic and business conditions and other factors, including the impact of the COVID-19 pandemic and related government
mandates. Delays or failures in opening new stores, or achieving lower than expected sales in new stores, could materially and adversely
affect our growth. Our plans for continued expansion could place increased demands on our financial, managerial, operational and
administrative resources. For example, our planned expansion will require us to increase the number of people we employ and may require
us to upgrade our management information system and our distribution infrastructure. We currently operate a single bulk food repackaging
facility and distribution center, which houses our bulk food repackaging operation. In order to support our recent and expected future
growth and to maintain the efficient operation of our business, we may need to add additional capacity in the future. These increased
demands and operating complexities could cause us to operate our business less efficiently, which could materially and adversely affect
our operations, financial performance and future growth.
We may not be able to open new stores on schedule or operate them successfully. Our ability to successfully open new stores
depends upon a number of factors, including our ability to select suitable sites for our new store locations; to negotiate and execute leases
on acceptable terms; to coordinate the contracting work on our new stores; to identify, recruit and train store managers, NHCs and other
staff; to secure and manage the inventory necessary for the launch and successful operation of our new stores; and to effectively promote
and market our new stores. If we are ineffective in performing these activities, our efforts to open and operate new stores may be
unsuccessful or unprofitable, which could materially and adversely affect our operations, financial performance and future growth.
Our newly opened stores may negatively impact our financial results in the short-term, and may not achieve sales and
operating levels consistent with our more mature stores on a timely basis or at all.
We have actively pursued new store growth and plan to continue doing so in the future. We expect the rate of new store unit
growth in the foreseeable future to be dependent on economic and business conditions and other factors, including the impact of the COVID-
19 pandemic and related government mandates. Our new store openings may not be successful or reach the sales and profitability levels of
our existing stores. Although we target particular levels of cash-on-cash returns and capital investment for each of our new stores, new
stores may not meet these targets. Any store we open may not be profitable or achieve operating results similar to those of our existing
stores. New store openings may negatively impact our financial results in the short-term due to the effect of store opening costs and lower
sales and contribution to overall profitability during the initial period following opening. New stores build their sales volume and their
customer base over time and, as a result, generally have lower margins and higher operating expenses, as a percentage of net sales, than
our existing stores. New stores may not achieve sustained sales and operating levels consistent with our more mature store base on a timely
basis or at all. This may have an adverse effect on our business, financial condition and operating results.
In addition, we may not be able to successfully integrate new stores into our existing store base and those new stores may not be
as profitable as our existing stores. Further, we have experienced in the past, and expect to experience in the future, some sales volume
transfer from our existing stores to our new stores as some of our existing customers switch to new, closer locations. If our new stores are
less profitable than our existing stores, or if we experience sales volume transfer from our existing stores, our business, financial condition
and operating results may be adversely affected.
If we are unable to successfully identify market trends and react to changing consumer preferences in a timely manner, our
sales may decrease.
We believe our success depends, in substantial part, on our ability to:
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anticipate, identify and react to natural and organic grocery and dietary supplement trends and changing consumer
preferences in a timely manner;
translate market trends into appropriate, saleable product and service offerings in our stores; and
develop and maintain vendor relationships that provide us access to the newest merchandise, and products that satisfy our
standards, on reasonable terms.
Consumer preferences often change rapidly and without warning, moving from one trend to another among many product or
retail concepts. Our performance is impacted by trends regarding healthy lifestyles, dietary preferences, convenient meal options, natural
and organic products, dietary supplements, ingredient transparency and sustainability and at-home meal preparation. Consumer preferences
towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food
safety perceptions, scientific research or findings regarding the benefits or efficacy of these products, reduced or changed consumer choices
and the cost or sustainability of these products. Our store offerings are comprised of natural and organic products and dietary supplements.
A change in consumer preferences away from our offerings, including as a result of, among other things, reductions or changes in our
offerings, could have a material adverse effect on our business. Additionally, negative publicity regarding the safety of natural and organic
products or dietary supplements, or new or upgraded regulatory standards, may adversely affect demand for the products we sell and could
result in lower customer traffic, sales and results of operations.
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If we are unable to anticipate and satisfy consumer merchandise preferences in the regions where we operate, our net sales may
decrease, and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect
on our business, financial condition and results of operations.
Our store sales growth and quarterly financial performance may fluctuate for a variety of reasons.
Our store sales growth and quarterly results of operations have fluctuated in the past, and we expect them to continue to fluctuate
in the future. A variety of factors affect our store sales growth and quarterly financial performance, including:
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changes in our merchandising strategy or product mix;
the performance of our newer and remodeled stores;
the effectiveness of our inventory management;
the timing and concentration of new store openings, and the related additional human resource requirements and pre-opening
and other start-up costs;
slowing in the natural and organic retail sector;
the cannibalization of existing store sales by our new store openings;
levels of pre-opening expenses associated with new stores;
the timing and effectiveness of our marketing activities;
consumer preferences, buying trends and spending levels;
food and commodity price inflation or deflation;
the number and dollar amount of customer transactions in our stores;
seasonal fluctuations due to weather conditions and extreme weather-related disruptions;
our ability to generate new and repeat visits to our stores and adequate levels of customer engagement;
actions by our existing or new competitors, including pricing changes and delivery and fulfillment options;
regulatory changes affecting availability and marketability of products;
supply shortages or other operational disruptions;
general United States economic conditions and, in particular, the retail sales environment;
executive, legislative or regulatory actions that restrict or limit our access to foreign-sourced goods; and
the impact of the COVID-19 pandemic on our operations and the U.S. economy.
Accordingly, our results for any one fiscal year or quarter are not necessarily indicative of the results to be expected for any other
year or quarter. Our comparable store sales during any particular future period may decrease. In the event of any future decrease, the price
of our common stock could decline. For more information on our results of operations for fiscal years 2021 and 2020, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
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Adverse economic conditions and political instability could adversely affect our business, results of operations and financial
condition and could negatively impact our ability to execute our growth strategy.
Adverse and uncertain economic conditions could adversely impact demand for the products we sell in our stores. Consumer
spending and levels of disposable income, including spending for natural and organic grocery and dietary supplement products that we sell,
are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wages, inflation, interest rates, the
availability of credit, tax rates, fuel and energy costs, housing market conditions, general business conditions, consumer confidence and
consumer perceptions of economic conditions. In the event of an economic slowdown or recession, consumer spending could be adversely
affected, and we could experience lower net sales than expected. We could be forced to delay or slow our new store growth plans, which
could have a material adverse effect on our business, financial condition and results of operations. In addition, our ability to manage normal
commercial relationships with our suppliers, manufacturers of our private label products, distributors, customers and creditors may suffer.
Customers may shift purchases to lower-priced or other perceived value offerings during economic downturns. In particular, customers
may reduce the amount of natural and organic products that they purchase and instead purchase conventional offerings, which generally
have lower retail prices, at other stores. In addition, consumers may choose to purchase private label products at other stores rather than
branded products because they are generally less expensive. Suppliers may become more conservative in response to these conditions and
seek to reduce their production.
Economic conditions and consumer spending may also be adversely impacted by political instability. The outbreak or escalation
of war, the occurrence of terrorist acts or other hostilities in or affecting the United States, or concerns regarding epidemics in the United
States or in international markets could also lead to a decrease in spending by consumers or may cause our customers to avoid visiting our
stores. The COVID-19 pandemic and related government mandates have adversely impacted the United States economy. See “The ongoing
COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact our business, results of
operations and financial condition” below. Our results of operations depend upon, among other things, our ability to maintain and increase
sales volume with our existing customers, to attract new customers and to provide products that appeal to customers at prices they are
willing and able to pay. Prolonged unfavorable economic conditions or political instability may have an adverse effect on our sales and
profitability.
The ongoing COVID-19 pandemic has impacted our operations and this or other future pandemics could materially impact
our business, results of operations and financial condition.
The COVID-19 pandemic and the resulting government mandates have had a significant impact on our operations. For as long
as it continues, and in the event there is another widespread regional, national or global health epidemic or pandemic, our business could
be severely impacted. While we are closely monitoring the economic impact of the COVID-19 pandemic and government mandates on our
business, the long-term financial impact of the COVID-19 pandemic and government mandates is unknown at this time. Although our
operations have generally stabilized since the onset of the COVID-19 pandemic, we expect the long-term impact of the COVID-19
pandemic and government mandates on our financial condition, results of operations and cash flows will largely depend on the extent and
duration of the COVID-19 pandemic, the governmental and public actions taken in response, and the effect the COVID-19 pandemic will
have on the U.S. economy and consumer behavior.
The impacts of the COVID-19 pandemic and government mandates could include some or all of the following:
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Customers who are infected by the COVID-19 virus may not be able to visit and shop at our stores. Even if infected customers
are physically able to shop, we have urged any individual who displays or is experiencing symptoms of the virus not to shop
in our stores until they have recovered fully. An increase in the number of our customers who are infected by COVID-19
could therefore negatively impact our sales.
The COVID-19 pandemic and government mandates may cause consumers to avoid public gathering places such as our
stores or otherwise change their shopping behaviors. For example, the practice of social distancing may cause fewer
customers to frequent our stores at any given time. In addition, the COVID-19 pandemic and government mandates may lead
to a permanent shift towards more online shopping for groceries, which may lead consumers to purchase groceries and
nutritional supplements online from competitors that offer more extensive online shopping options than we do.
While all of our stores have continued operating since the start of the COVID-19 pandemic, government mandates issued by
local, state or federal authorities in the future may make it more difficult or impossible for customers to shop at our stores.
In addition, limitations imposed by federal, state or local authorities on the number of customers who may shop at our stores
at any given time could impact those stores’ transaction count. Further, federal, state or local authorities could take action to
ban in-store grocery shopping in favor of home delivery and curbside pick-ups. Any such governmental actions could
negatively impact our sales.
Our costs may increase as a result of the COVID-19 pandemic and government mandates. For example, from time to time
during the COVID-19 pandemic, we have hired more Crew members to handle increased operational demands at our stores.
Depending on the duration of the COVID-19 pandemic and government mandates, we may be required to incur additional
labor and other costs to meet the challenges posed by the COVID-19 pandemic.
If a store Crew member contracts the COVID-19 virus, or if an infected customer spreads the virus at a store, that store may
need to be temporarily closed for cleaning and sanitizing. Such temporary store closures could affect multiple stores at the
same time.
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The impact of the COVID-19 pandemic may make it challenging to adequately staff our stores.
The COVID-19 pandemic and related government mandates have adversely impacted the United States economy. In the
event of a prolonged economic downturn, consumer spending could be adversely affected, which in turn could lead to a
decrease in spending by consumers, cause our customers to avoid visiting our stores and cause us to experience lower than
expected net sales. In addition, customers may shift purchases to lower-priced or other perceived value offerings during
economic downturns. In particular, customers may reduce the amount of natural and organic products that they purchase and
instead purchase conventional offerings, which generally have lower retail prices, at other stores.
We have experienced increased levels of net sales and average transaction size due to the COVID-19 pandemic as public
health measures have been implemented by states across our footprint and customers have adjusted to these new
circumstances by consuming more food at home. While we believe that our proactive response to the COVID-19 pandemic
has resulted in increased customer loyalty, there can be no assurance that the Company will continue to experience elevated
levels of net sales once the COVID-19 pandemic subsides.
The products we sell are sourced from a wide variety of domestic and international suppliers. Since the outbreak of the
COVID-19 pandemic, we have experienced shortages of certain products and delays in the delivery of certain products to
our stores. While we have taken steps to mitigate these disruptions, the COVID-19 pandemic could: (i) adversely impact our
business by disrupting or delaying the production and delivery of products to our stores; (ii) adversely impact transport
availability and cost; (iii) impact the financial stability of our suppliers; and (iv) cause our suppliers to prioritize the supply
of scarce products to our competitors.
●
We could be subject to legal proceedings brought by customers or Crew members related to the COVID-19 pandemic or
government mandates.
Any of the foregoing impacts of the COVID-19 pandemic and government mandates could have a material adverse effect on our
business, financial position and results of operations. The duration of any such impacts cannot be predicted because of the unpredictable
nature of the COVID-19 pandemic and government mandates. Additionally, our business could be severely impacted by widespread
regional, national or global health epidemics unrelated to COVID-19 in the future, which could adversely impact our business.
We may be unable to compete effectively in our markets, which are highly competitive.
The markets for natural and organic groceries and dietary supplements are large, fragmented and highly competitive, with few
barriers to entry. Our competition varies by market and includes conventional supermarkets, natural, gourmet and specialty food markets,
mass and discount retailers, foreign-based discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers,
drug stores, farmers’ markets, food co-ops, online retailers and multi-level marketers. These businesses compete with us on the basis of
price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any
combination of these or other factors. They also compete with us for products and locations. To the extent our competitors lower their
prices, our ability to maintain sales levels and operating margins may be negatively impacted. In addition, some of our competitors are
expanding their natural and organic food offerings, increasing the space allocated to natural and organic foods and enhancing options of
engaging with and delivering their products to customers. Many of our competitors are larger, more established and have greater financial,
marketing and other resources than we do, and may be able to adapt to changes in consumer preferences more quickly, devote greater
resources to the marketing and sale of their products, or generate greater brand recognition. In addition, we face internally generated
competition when we open new stores in markets we already serve. An inability to compete effectively may cause us to lose market share
to our competitors and could have a material adverse effect on our business, financial condition and results of operations.
An inability to maintain or increase our operating margins could adversely affect our results of operations.
We intend to continue our focus on improving our operating margins by leveraging more efficiencies of scale, additional
improved systems, further cost discipline, added focus on appropriate store labor levels and even more disciplined product selection. If we
are unable to successfully manage the potential difficulties associated with store growth, we may not be able to capture the efficiencies of
scale that we expect from expansion. If we are not able to capture greater efficiencies of scale, improve our systems, further enhance our
cost discipline and increase our focus on appropriate store labor levels and disciplined product selection, we may not be able to achieve our
goals with respect to operating margins. In addition, if we do not adequately refine and improve our various ordering, tracking and allocation
systems, we may not be able to increase sales and reduce inventory shrink. Further, pricing pressures from competitors and the impact of
the product discounts offered by the {N}power® customer loyalty program may also adversely impact our operating margins. As a result,
our operating margins may stagnate or decline, which could have a material adverse effect on our business, financial condition and results
of operations and adversely affect the price of our common stock.
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A reduction in traffic to anchor stores in the shopping areas in close proximity to our stores could significantly reduce our
sales and leave us with unsold inventory, which could have a material adverse effect on our business, financial condition and results
of operations.
Many of our stores are located in close proximity to shopping areas that may also accommodate other well-known anchor stores.
Sales at our stores are derived, in part, from the volume of traffic generated by the other anchor stores in the shopping areas where our
stores are located. Customer traffic may be adversely affected by enhanced customer reliance on ecommerce to meet their shopping needs,
regional economic downturns, a general downturn in the local area where our store is located, long-term nearby road construction projects,
the closing of nearby anchor stores or other nearby stores or the decline of the shopping environment in a particular shopping area. Any of
these events could reduce our sales and leave us with excess inventory, which could have a material adverse effect on our business, financial
condition and results of operations. In response to such events, we may be required to increase markdowns or initiate marketing promotions
to reduce excess inventory, which could further decrease our gross profits and net income.
We may experience product recalls, withdrawals or seizures which could reduce our sales and adversely affect our results of
operations.
We may be subject to product recalls, withdrawals or seizures if any of the products we sell is believed to cause injury or illness
or if we are alleged to have violated governmental regulations in the labeling, promotion, sale or distribution of any such products. A
significant recall, withdrawal or seizure of any of the products we sell may require significant management attention, could result in
substantial and unexpected costs and may adversely affect our business, financial condition or results of operations. Furthermore, a recall,
withdrawal or seizure of any of the products we sell may adversely affect consumer confidence in our brands and thus decrease consumer
demand for the products we sell. We rely on our suppliers to ensure that the products they manufacture and sell to us comply with all
applicable regulatory and legislative requirements. In general, we seek representation and warranties, indemnification and/or insurance
from our suppliers. However, even with adequate insurance and indemnification, any claims of non-compliance could significantly damage
our reputation and consumer confidence in the products we sell. In addition, the failure of those products to comply with applicable
regulatory and legislative requirements could prevent us from marketing the products or require us to recall or remove such products from
the market, which in certain cases could materially and adversely affect our business, financial condition and results of operations.
Our future business, results of operations and financial condition may be adversely affected by reduced availability of certified
organic products or products that meet our other internal standards.
Our ability to ensure a continuing supply of products and ingredients at competitive prices that satisfy our minimum standards
depends on many factors beyond our control, such as the number and size of farms that grow organic crops, operate pasture-based dairies,
maintain free-range laying hens and undertake to raise livestock without the use of growth hormones, antibiotics or concentrated livestock
feeding; the vagaries of these farming businesses; and our ability to accurately forecast our sourcing requirements. The organic ingredients
used in many of the products we sell are vulnerable to adverse weather conditions, the effects of climate change and natural disasters, such
as floods, droughts, frosts, earthquakes, tornadoes, hurricanes and pestilences. Adverse weather conditions and natural disasters can lower
herd, flock and crop yields and reduce size and quality, which in turn could reduce the available supply of, or increase the price of, organic
ingredients. Certain products we purchase from our suppliers include organic ingredients sourced offshore, and the availability of such
ingredients may be affected by events in other countries.
For our organic produce suppliers, there is some concern that implementation of the FSMA may impact the ability of produce
growers to farm organically. In the final Produce Safety Rule, the FDA stated that it would exercise enforcement discretion regarding
farmers complying with the USDA National Organic Program (NOP) standards for the application of biological soil amendments, which
are a significant source of fertility input for organic production. But at the same time, the FDA stated that the NOP standard is not a food
safety standard and that it would study and set a science based minimum standard at a later date and may promulgate a standard for the
application of biological soil amendments that limits the ability of organic growers to use these inputs. The increased regulation and cost
of growing produce due to the Produce Safety Rule may impact organic produce suppliers.
In addition, we and our suppliers compete with other food producers in the procurement of products that satisfy our minimum
standards for organic produce, dairy products, eggs and meat, which are often less plentiful in the open market than conventional ingredients
and products. This competition may increase in the future if consumer demand increases for organic produce, dairy products from pasture-
raised animals, eggs from free-range or pastured hens, and meat from naturally raised livestock. If supplies of these products are reduced,
or there is greater demand for such ingredients and products from us and others, we may not be able to obtain sufficient supply on favorable
terms, or at all, which could impact our ability to supply products to our stores and may adversely affect our business, results of operations
and financial condition.
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The certified organic products we sell must be produced in compliance with government regulations and must comply with the
requirements of the NOP in order to be labeled as such. Certain products we sell in our stores could lose their “organic” certification if their
operation does not comply with the applicable standards and required practices of the NOP, including foreign operations using practices
allowed under their country’s respective organic equivalency agreement. The loss of any certifications could reduce the availability of
organic products that we can sell in our stores and harm our business.
Disruptions affecting our significant suppliers, or our relationships with such suppliers, could negatively affect our business.
UNFI is our single largest third-party supplier, accounting for approximately 67% of our total purchases in fiscal year 2021. In
fiscal year 2016, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products
through May 31, 2021, subject to automatic renewals for successive one-year periods unless otherwise terminated by either party. In May
2018, we entered into an amendment to our agreement with UNFI pursuant to which we appointed Albert’s Organics, a wholly owned
subsidiary of UNFI, as our primary supplier of organic produce products for the majority of our stores. While we are exploring a longer-
term extension of our relationship with UNFI beyond the expiration of the current annual auto renewal term on May 31, 2022, if our
distribution agreement with UNFI were terminated or not renewed, we may be unable to establish alternative distribution channels on
reasonable terms or at all. Due to this concentration of purchases from a single third-party supplier, the cancellation or non-renewal of our
distribution agreement with UNFI, or the disruption, delay or inability of UNFI to deliver product to our stores, could materially and
adversely affect our business, financial condition and results of operations. In addition, if UNFI or any of our other suppliers fail to comply
with food safety, labeling or other laws and regulations, or face allegations of non-compliance, that supplier’s operations may be disrupted,
which in turn could have a material adverse effect on our business, financial condition and results of operations.
We and certain of our vendors use overseas sourcing to varying degrees to manufacture some or all of the products we sell. Any
event causing a sudden disruption of manufacturing or imports from such foreign countries, including changes in the United States’ foreign
trade policies resulting in the imposition of additional import restrictions, withdrawal from, or material modifications to, international trade
agreements, unanticipated political changes, increased customs duties or tariffs, labor disputes, health epidemics, adverse weather
conditions, crop failure, acts of war or terrorism, legal or economic restrictions on overseas suppliers’ ability to produce and deliver
products, and natural disasters, could increase our costs and materially harm our business, financial condition and results of operations.
Our business is also subject to a variety of other risks generally associated with indirectly sourcing goods from abroad, such as political
instability, disruption of imports by labor disputes, currency fluctuations and local business practices. In addition, requirements imposed
by the FSMA compel importers to verify that food products and ingredients produced by a foreign supplier comply with all applicable legal
and regulatory requirements enforced by the FDA, which could result in certain products being deemed ineligible for import. In addition,
the Department of Homeland Security may at times prevent the importation or customs clearance of certain products and ingredients for
reasons unrelated to food safety.
Adverse weather conditions, natural disasters and the effects of climate change could disrupt our supply chain and adversely
impact our sales and financial performance.
Adverse weather conditions and natural disasters could impact customer traffic at our stores, make it more difficult to fully staff
our stores and, in more severe cases, such as hurricanes, earthquakes, floods, droughts, tornadoes or blizzards, eliminate the availability, or
significantly increase the cost, of the products we sell, reduce or eliminate our ability to deliver supplies to the affected stores and cause
closures of the affected stores, sometimes for prolonged periods of time. In addition, climate change could reduce or eliminate the
availability, or significantly increase the cost, of the products we sell at our stores. The increasing frequency and unpredictability of adverse
weather conditions may result in decreased customer traffic, less accurate year-to-year comparisons in sales, supply disruptions and other
factors affecting our financial performance. The response of federal, state and local governmental bodies and agencies to climate change
through regulations, mandates, taxes or levies could materially increase our cost to operate, obtain products at a reasonable price or build
and operate our store facilities, resulting in a material adverse effect on our financial results. Any of these situations could have a material
adverse effect on our business, financial condition and results of operations.
Acts of violence at or threatened against our stores or the shopping centers in which they are located, including active shooter
situations and terrorist acts, could adversely impact our sales, which could materially adversely affect our financial performance.
Any act of violence at or threatened against our stores or the shopping centers in which they are located, including active shooter
situations and terrorist acts, may result in restricted access to our stores or store closures in the short-term and, in the long-term, may cause
our customers and Crew members to avoid our stores. Any such situation could adversely impact customer traffic and make it more difficult
to fully staff our stores, which could have a material adverse effect on our business, financial condition and results of operations.
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The current geographic concentration of our stores creates exposure to local economies, regional downturns, severe weather
and other catastrophic occurrences.
As of September 30, 2021, we had primary store concentration in Colorado and Texas, operating 41 stores and 25 stores in those
states, respectively. As a result, our business is currently more susceptible to regional conditions than the operations of more geographically
diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that
negatively affect these areas could materially adversely affect our revenue and profitability. These factors include, among other things,
changes in demographics, population, competition, consumer preferences, wage increases, new or revised laws or regulations, fires, floods
or other natural disasters in these regions. Such conditions may result in reduced customer traffic and spending in our stores, physical
damage to our stores, loss of inventory, closure of one or more of our stores, inadequate work force in our markets, temporary disruption
in the supply of products, delays in the delivery of goods to our stores and a reduction in the availability of products in our stores. Any of
these factors may disrupt our business and materially adversely affect our business, financial condition and results of operations.
If we fail to maintain our reputation and the value of our brand, our sales may decline.
We believe our continued success depends on our ability to maintain and grow the value of the Natural Grocers brand.
Maintaining, promoting and positioning our brand and reputation will depend largely on the success of our marketing and merchandising
efforts and our ability to provide a consistent, high-quality customer experience. Brand value is based in large part on perceptions of
subjective qualities, and business incidents, whether isolated or recurring, can erode consumer trust and confidence, particularly if they
result in adverse publicity, governmental investigations or litigation. Our failure, or perceived failure, to achieve these objectives, or the
tarnishing of our public image or reputation by negative publicity, could significantly reduce our brand value, trigger boycotts of our stores
or products or demonstrations at our stores and have a materially adverse effect on our business, financial condition and results of
operations. Sources of negative publicity may include, among others, social media posts, investment or financial community posts, concerns
regarding the safety of natural and organic products or dietary supplements and poor reviews of our stores, products, customer service and
employment environment.
Perishable food product losses could materially impact our results of operations.
Our stores offer a significant number of perishable products. Our offering of perishable products may result in significant product
inventory losses in the event of extended power or other utility outages, natural disasters or other catastrophic occurrences.
The decision by certain of our suppliers to distribute their specialty products through other retail distribution channels could
negatively impact our revenue from the sale of such products.
Some of the specialty retail products that we sell in our stores are not generally available through other retail distribution channels
such as drug stores, conventional grocery stores or mass merchandisers. In the future, our suppliers could decide to distribute such products
through other retail distribution channels, allowing more of our competitors to offer these products to our core customers, which could
negatively impact our revenue.
Our ability to operate our business effectively could be impaired if we fail to retain or attract key personnel or are unable to
attract, train and retain qualified employees.
Our business requires disciplined execution at all levels of our organization. This execution requires an experienced and talented
management team. The loss of any member of our senior management team, particularly Kemper Isely or Zephyr Isely, our Co-Presidents
since 1998, or Heather Isely or Elizabeth Isely, our Executive Vice Presidents since 1998, could have a material adverse effect on our
ability to operate our business, financial condition and results of operations, unless, and until, we are able to find a qualified replacement.
Furthermore, our ability to manage our new store growth will require us to attract, motivate and retain qualified managers, NHCs and store
employees who understand and appreciate our culture and are able to represent our brand effectively in our stores. Competition for such
personnel is intense, and we may be unable to attract, assimilate and retain the personnel required to grow and operate our business
profitably. Our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors,
including the availability of a sufficient number of qualified persons in the work force in the markets in which we are located, unemployment
levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment
legislation, including unemployment benefits. If we are unable to offer competitive wages, it may be more difficult for us identify, hire and
retain qualified personnel or the quality of our workforce could decline, causing customer service to suffer.
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Any significant interruption in the operations of our bulk food repackaging facility and distribution center or our supply
chain network could disrupt our ability to deliver our merchandise in a timely manner.
We repackage and distribute some of the products we sell through our bulk food repackaging facility and distribution center in
Golden, Colorado. Any significant interruption in the operation of our bulk food repackaging and distribution center infrastructure, such as
disruptions due to fire, severe weather or other catastrophic events, power outages, labor disagreements, pathogen or toxic contamination,
or shipping problems, could adversely impact our ability to receive and process orders, and distribute products to our stores. Such
interruptions could result in lost sales, cancelled sales and a loss of customer loyalty to our brand. While we maintain business interruption
and property insurance, if the operation of our distribution facility were interrupted for any reason causing delays in shipment of
merchandise to our stores, our insurance may not be sufficient to cover losses we experience. This could have a material adverse effect on
our business, financial condition and results of operations.
In addition, unexpected, prolonged delays in deliveries from vendors that ship directly to our stores or increases in transportation
costs (including as a result of increased fuel costs) could have a material adverse effect on our business, financial condition and results of
operations. Further, labor shortages or work stoppages in the transportation industry, long-term disruptions to the national and international
transportation infrastructure, reductions in capacity and industry-specific regulations such as hours-of-service rules that lead to delays or
interruptions of deliveries could adversely affect our business, financial condition and results of operations.
Higher wage and benefit costs could adversely affect our business.
Changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional
wage and benefits costs. Increased labor costs brought about by changes in minimum wage laws, other regulations or prevailing market
conditions could increase our expenses, which could have an adverse impact on our profitability, or decrease the number of employees we
are able to employ, which could decrease customer service levels and therefore adversely impact sales.
Union activity at third-party transportation companies or labor organizing activities among our Crew members could disrupt
our operations and harm our business.
Independent third-party transportation companies deliver the majority of our merchandise to our stores and to our customers.
Some of these third parties employ personnel represented by labor unions. Disruptions in the delivery of merchandise or work stoppages
by employees of these third parties could delay the timely receipt of merchandise, which could result in reduced sales, a loss of loyalty to
our stores and excess inventory.
While all of our Crew members are currently non-union, our Crew members may attempt to organize and join a union. In recent
years, the United Food and Commercial Workers Union sought unsuccessfully to organize workers at two of our stores. We could face
union organizing activities at other locations. The unionization of all or a portion of our workforce could result in work slowdowns, could
increase our overall costs and reduce the efficiency of our operations at the affected locations, could adversely affect our flexibility to run
our business competitively, and could otherwise have a material adverse effect on our business, financial condition and results of operations.
Future events could result in impairment of long-lived assets, which may result in charges that adversely affect our results of
operations and capitalization.
Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount
of the assets may not be recoverable. Our impairment evaluations require use of financial estimates of future cash flows. Application of
alternative assumptions could produce significantly different results. We may be required to recognize impairments of long-lived assets
based on future economic factors such as unfavorable changes in estimated future undiscounted cash flows of an asset group.
We have significant lease obligations, which may adversely affect our liquidity and require us to raise additional capital or
continue paying rent for store locations that we no longer operate.
We lease our stores, administrative facility and bulk food repackaging facility and distribution center. Our significant level of
fixed lease obligations requires us to use a portion of cash generated by our operations to satisfy these obligations, which could create
liquidity problems and require us to raise additional capital through debt or equity financings, which may not be available on terms
satisfactory to us or at all. We require substantial cash flows from operations to make payments under our leases, all of which provide for
periodic increases in rent. If we are unable to make the required payments under the leases, the owners of the relevant locations may, among
other things, repossess those assets, which could adversely affect our ability to conduct our operations. Further, the termination of a lease
due to the non-payment of rent under such lease would trigger an event of default under our credit facility if such termination could
reasonably be expected to have a material adverse effect on our business or our ability to meet our obligations thereunder.
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In addition, our lease costs could increase because of changes in the real estate markets and supply or demand for real estate sites.
We generally cannot cancel our leases, so if we decide to close or relocate a location, we may nonetheless be committed to perform our
obligations under the applicable lease including paying the base rent for the remaining lease term. As each lease expires, we may fail to
negotiate renewals, either on commercially acceptable terms or any terms at all, and may not be able to find replacement locations that will
provide for the same success as current store locations. Of the current leases for our stores, two expire in fiscal year 2022, three expire in
fiscal year 2023,eight expire in fiscal year 2024, twelve expire in fiscal 2025 and the remainder expire between fiscal years 2026 and 2062.
Any material disruption to or failure of our information systems could negatively impact our operations.
We rely extensively on a variety of information systems to effectively manage the operations of our growing store base, including
for point-of-sale processing in our stores, supply chain, financial reporting, human resources and various other processes and transactions.
Our information systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer
viruses, security breaches, catastrophic events and usage errors by our Crew members. In addition, our information technology systems
may also fail to perform as anticipated, and we may encounter difficulties in implementing new systems, adapting these systems to changing
technologies or expanding them to meet the future needs and growth of our business. If our information systems are breached, disrupted,
damaged, encrypted by ransomware, or fail to perform as designed, we may have to make significant investments to repair or replace them;
suffer interruptions in our operations; experience data loss; incur liability to our customers, Crew members and others; face costly litigation,
enforcement actions and penalties; and suffer harm to our reputation with our customers. Furthermore, changes in technology could cause
our information systems to become obsolete, as a result of which it may be necessary to incur additional costs to upgrade such systems. If
our information systems prove inadequate to handle our growth, we could lose customers, which could have a material adverse effect on
our business, financial condition and results of operations. We are also vulnerable to certain risks and uncertainties associated with our
website, including changes in required technology interfaces, website downtime and other technical failures and consumer privacy
concerns.
Various third parties, such as our suppliers and payment processors, also rely heavily on information technology systems, and
any failure of these third-party systems could also cause loss of sales, transactional or other data and significant interruptions to our business.
Any material interruption in the information technology systems we rely on could have a material adverse effect on our business, operating
results and financial condition.
Failure to protect our information systems against cyber-attacks or information security breaches, including failure to protect
the integrity and security of individually identifiable data of our customers and Crew members, could expose us to litigation, damage
our reputation and have a material adverse effect on our business.
We rely on computer systems and information technology to conduct our business, including to securely transmit data associated
with cashless payments. These systems and technology are increasingly complex and vital to our operations, which has resulted in an
expansion of our technological presence and corresponding risk exposure. In addition, these systems are inherently vulnerable to disruption
or failure, as well as internal and external security breaches, denial of service attacks and other disruptive problems caused by hackers. If
we were to experience difficulties maintaining or operating existing systems or implementing new systems, or were subject to a significant
security breach or attack, we could incur significant losses due to disruptions in our operations.
In addition, we receive and maintain certain personal information about our customers and Crew members. The use of this
information by us is regulated by applicable law. Privacy and information security laws and regulations change, and compliance with
updates may result in cost increases due to necessary systems changes and the development of new administrative processes.
Although we have implemented procedures to protect our information, we cannot be certain that our security systems will
successfully defend against rapidly evolving, increasingly sophisticated cyber-attacks as they become more difficult to detect and defend
against. Our continued investment in our information technology systems may not effectively insulate us from potential attacks, breaches
or disruptions to our business operations. If our security and information systems are breached or compromised, or if our Crew members
fail to comply with applicable laws and regulations, and personal or other confidential information is obtained by unauthorized persons or
used inappropriately, it could interrupt our business, resulting in a slowdown of our normal business activities or limitations on our ability
to process credit card transactions, and could adversely affect our reputation, ability to compete in the food retail marketplace, financial
condition and results of operations. Additionally, a data security breach could subject us to litigation, customer demands for indemnification
for third party claims and/or the imposition of penalties, fines or other assessments. In such event, our liability could exceed our insurance
coverage or our ability to pay. In addition, a data security breach could require that we expend significant amounts to remediate the breach,
including changes in our information security systems.
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In recent years, we have implemented numerous additional security protocols in order to further enhance security, including the
installation of EMV, or chip and PIN, point-of-sale terminals at all our stores. However, there can be no assurance that data security
breaches will not occur in the future, or that any such data security breach will be detected in a timely manner.
Claims under our self-insurance program may differ from our estimates, which could negatively impact our results of
operations.
We currently maintain insurance customary for businesses of our size and type using a combination of insurance and self-
insurance plans to provide for the potential liabilities for workers’ compensation, general liability, professional liability, property insurance,
director and officers’ liability insurance, cyber risk, vehicle liability and employee health-care benefits. There are types of losses we may
incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse
effect on our business and results of operations. In addition, liabilities associated with the risks that are retained by us are estimated, in part,
by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results could be
materially impacted by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and
historical trends.
If we are unable to protect our intellectual property rights, our ability to compete and the value of our brand could be harmed.
We believe that our trademarks or service marks, trade dress, copyrights, trade secrets, know-how and similar intellectual property
are important to our success. In particular, we believe that the Natural Grocers name is important to our business, as well as to the
implementation of our growth strategy. Our principal intellectual property rights include registered marks on Natural Grocers, Vitamin
Cottage, Health Hotline, Natural Grocers by Vitamin Cottage, Vitamin Cottage Natural Grocers, EDAP - Every Day Affordable Price,
{N}power®, Organic Headquarters, Organic Month Headquarters, Organic Produce Headquarters, Natural Grocers Cottage Wine and
Craft Beer, Resolution Reset Day, These Came First and Natural Grocers Top 10 Nutrition Trends, common law intellectual property
rights in certain other marks used in our business, copyrights of our website content, rights to our domain names, including
www.naturalgrocers.com and www.vitamincottage.com, and trade secrets and know-how with respect to our product sourcing, sales and
marketing and other aspects of our business. As such, we rely on trademark or service mark and copyright law, trade secret protection and
confidentiality agreements with our Crew members and certain of our consultants, suppliers and others to protect our proprietary rights. If
we are unable to defend or protect or preserve the value of our trademarks or service marks, copyrights, trade secrets or other proprietary
rights for any reason, our brand and reputation could be impaired and we could lose customers.
Although several of our brand names are registered in the United States, we may not be successful in asserting trademark or
service mark or trade name protection and the costs required to protect our trademarks or service marks and trade names may be substantial.
In addition, the relationship between regulations governing domain names and laws protecting trademarks or service marks and similar
proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe
upon or otherwise decrease the value of our trademarks or service marks and other proprietary rights. Additionally, other parties may
infringe on our intellectual property rights and may thereby dilute our brand in the marketplace. Third parties could also bring additional
intellectual property infringement suits against us from time to time to challenge our intellectual property rights. Any such infringement of
our intellectual property rights by others, or claims by third parties against us, could likely result in a commitment of our time and resources
to protect these rights through litigation or otherwise. If we were to receive an adverse judgment in such a matter, we could suffer further
dilution of our trademarks or service marks and other rights, which could harm our ability to compete as well as our business prospects,
financial condition and results of operations.
Inflation or deflation could adversely affect our business.
Our financial performance could be adversely impacted by relative rates of inflation or deflation, which are subject to market
conditions. Inflationary or deflationary pressures on the products we sell could impact our net sales and earnings. If the price of goods
changes as a result of inflation or deflation, we may be unable to adjust our retail prices accordingly, which could adversely impact our
sales or earnings. Commodities used in many of our products, including our Natural Grocers brand products, can be subject to availability
constraints and price volatility caused by weather, supply conditions, government regulations, tariffs, energy prices and general economic
conditions and other unpredictable factors. Changes in food and commodity prices could also negatively impact our sales and earnings if
our competitors react more aggressively. Additionally, the cost of construction materials we use to build and remodel our stores is also
subject to price volatility based on market and economic conditions. Higher construction material prices could increase the capital
expenditures needed to construct a new store or remodel an existing store and, as a result, could increase the investment required and our
rent obligations.
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Energy costs are a significant component of our operating expenses and increasing energy costs, unless offset by more
efficient usage or other operational responses, may impact our profitability.
We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in our trucks that deliver products to
our stores. Increases in energy costs, whether driven by increased demand, decreased or disrupted supply or an anticipation of any such
events will increase the costs of operating our stores. Our shipping costs have also increased due to fuel and freight prices, and these costs
may continue to increase. We may not be able to recover these rising costs through increased prices charged to our customers, and any
increased prices may exacerbate the risk of customers choosing lower-cost alternatives. In addition, if we are unsuccessful in attempts to
protect against these increases in energy costs through long-term energy contracts, improved energy procurement, improved efficiency and
other operational improvements, the overall costs of operating our stores will increase which could impact our profitability, financial
condition and results of operations.
Increases in certain costs affecting our marketing, advertising and promotions may adversely impact our ability to advertise
effectively and reduce our profitability.
Postage, paper and printing costs affect the cost of our promotional mailings. Previous changes in postal rates increased the cost
of our Health Hotline mailings and previous increases in paper and printing costs increased the cost of producing our Health Hotline
newspaper inserts. In response to any future increase in mailing costs, we may consider reducing the number and size of certain promotional
pieces. In addition, we rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting by zip code
and carrier routes. We are not party to any long-term contracts for the supply of paper.
We are also affected by increases in billboard costs and the cost of producing and broadcasting our television, radio, internet and
social media advertising. Previous changes in broadcast rates resulted in an increase in the cost of our television commercials. In response
to any future increase in broadcast costs, we may consider reducing the frequency, placement and length of certain promotional pieces. We
are not party to any long-term contracts for broadcast time. Future increases in costs affecting our marketing, advertising and promotions
could adversely impact our ability to advertise effectively and our profitability.
Legal proceedings could adversely affect our business, financial condition and results of operations.
Our operations, which are characterized by transactions involving a high volume of customer traffic and a wide variety of product
selections, carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in certain other
industries. Consequently, we may become a party to individual personal injury, product liability and other legal actions in the ordinary
course of our business, including litigation arising from food-related illness or product labeling. In addition, our Crew members may from
time to time bring lawsuits against us regarding injury, hostile work environment, discrimination, wage and hour disputes, sexual
harassment or other employment-related issues. In recent years, there has been an increase in the number of discrimination and harassment
claims across the United States generally. While these actions are generally routine in nature, incidental to the operation of our business
and immaterial in scope, the outcome of litigation is difficult to assess or quantify. Additionally, we could be exposed to industry-wide or
class-action claims arising from the products we carry or industry-specific business practices. While we maintain insurance, such coverage
may not be adequate or may not cover a specific legal claim. Moreover, the cost to defend against litigation may be significant. There may
also be adverse publicity associated with litigation that may decrease consumer confidence in or perceptions of our business, regardless of
whether the allegations are valid or whether we are ultimately found liable. As a result, litigation could have a material adverse effect on
our business, financial position and results of operations.
Effective tax rate changes and results of examinations by taxing authorities could materially impact our results of operations.
Our future effective tax rates could be adversely affected by our earnings mix being lower than historical results in states where
we have lower statutory rates and higher than historical results in states where we have higher statutory rates, by changes in the valuation
of our deferred tax assets and liabilities or by changes in tax laws or interpretations thereof. President Biden has provided informal guidance
on what tax law changes he would support. Among other things, his proposals would raise the rate on both domestic and foreign income
and impose a new alternative minimum tax on book income. If these proposals are ultimately enacted into legislation, they could materially
impact our tax provision, cash tax liability and effective tax rate. If any or all of these (or similar) proposals are ultimately enacted into law,
in whole or in part, they could have a negative impact on the Company’s effective tax rate. In addition, we are subject to periodic audits
and examinations by the Internal Revenue Service (IRS) and other state and local taxing authorities. Our results could be materially
impacted by the determinations and expenses related to proceedings by the IRS and other state and local taxing authorities.
Failure to maintain effective internal control over financial reporting could lead to material misstatements in our financial
statements, in which case investors may lose confidence in the accuracy and completeness of our financial reports and the market price
of our common stock may decline.
As a public company, we are required to maintain internal control over financial reporting. Pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002, as amended (Sarbanes-Oxley), we are required to file a report by management on the effectiveness of our
internal control over financial reporting, and our independent registered public accounting firm is required to attest to the effectiveness of
our internal control over financial reporting.
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If we are unable to maintain effective internal control over financial reporting, if we identify any material weaknesses therein, if
we are unsuccessful in our efforts to remediate any such material weakness, if our management is unable to report that our internal control
over financial reporting is effective when required, or if our independent registered public accounting firm is unable to express an opinion
as to the effectiveness of our internal control over financial reporting when required, investors may lose confidence in the accuracy and
completeness of our financial reports and the market price of our common stock could be negatively affected. In addition, we could become
subject to investigations by the SEC, the NYSE or other regulatory authorities, which could require additional financial and management
resources.
Changes in accounting standards may materially impact reporting of our financial condition and reported results of
operations.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations
for many aspects of our business, such as accounting for leases, inventories, useful lives of long-lived assets for depreciation and
amortization, goodwill and intangible assets, impairment of finite-lived intangible and long-lived assets, self-insurance reserves, income
taxes and share-based compensation assumptions, are highly complex and involve subjective judgments. Changes in these rules or their
interpretation or changes in underlying estimates, assumptions or judgments could significantly change or add significant volatility to our
reported earnings without a comparable underlying change in cash flow from operations. As a result, changes in accounting standards may
materially impact our reported results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Recent Accounting Pronouncements.”
Risks related to government regulations and policies
If we or our third-party suppliers fail to comply with regulatory requirements, or are unable to provide products that meet our
specifications, our business and our reputation could suffer.
If we or our third-party suppliers, including suppliers of our Natural Grocers brand private label products, fail to comply with
applicable regulatory requirements or to meet our quality specifications, we could be required to take costly corrective action and our
reputation could suffer. We do not own or operate any manufacturing facilities, except for our bulk food repackaging facility and
distribution center discussed below, and therefore depend upon independent third-party vendors to produce our private label branded
products, such as vitamins, minerals, dietary supplements, body care products, food products and bottled water. Third-party suppliers may
not maintain adequate controls, including USDA and FDA mandated good manufacturing practices, with respect to product specifications
and quality. Such suppliers may be unable to produce products on a timely basis or in a manner consistent with regulatory requirements.
We depend upon our bulk food repackaging facility and distribution center for the majority of our private label bulk food products. We
may also be unable to maintain adequate product specification and quality controls at our bulk food repackaging facility and distribution
center, or produce products on a timely basis and in a manner consistent with regulatory requirements. In addition, we may be required to
find new third-party suppliers of our private label products or to find third-party suppliers to source our bulk foods. There can be no
assurance that we would be successful in finding such third-party suppliers that meet our quality guidelines.
We, as well as our suppliers, are subject to numerous federal, state and local laws and regulations and our compliance with
these laws and regulations, as they currently exist or as modified in the future, may increase our costs, limit or eliminate our ability to
sell certain products, require recalls of certain products, raise regulatory enforcement risks not present in the past or otherwise adversely
affect our business, results of operations and financial condition.
We are subject to various federal, state and local laws, regulations and administrative practices that affect our business. Our
suppliers and contract manufacturers are also subject to such laws and regulations. The safety, formulation, manufacturing, processing,
packaging, importation, labeling, promotion, advertising and distribution of products we sell in our stores, including private label products,
are subject to regulation by several federal agencies, including the FDA, the FTC, the USDA, the CPSC and the EPA, as well as by various
state and local agencies.
Dietary Supplement Risks. Our sale of dietary supplements is subject to the FDA’s comprehensive regulatory authority under the
FDCA, as amended by DSHEA. DSHEA greatly expanded the FDA’s regulatory authority over dietary supplements and empowered the
FDA to establish good manufacturing practice regulations governing key aspects of the production of dietary supplements, including quality
control, packaging and labeling. Under DSHEA, no dietary supplement may bear a statement that expressly or implicitly represents that
such supplement will diagnose, cure, treat or prevent a disease. If these laws and regulations were violated by our management, Crew
members, suppliers, distributors or vendors, we could be subject to regulatory enforcement action, public warning letters, product recalls,
fines, penalties and sanctions, including injunctions against the future shipment and sale of products, seizure and confiscation of products,
prohibition on the operation of our stores, restitution and disgorgement of profits, operating restrictions and even criminal prosecution in
some circumstances. In addition, other public and private actors are increasingly targeting dietary supplement retailers and manufacturers
with class action lawsuits for selling products that allegedly fail to adhere to the requirements of FDCA and DSHEA, including for failing
to adhere to current good manufacturing practices, making false or misleading product statements, providing inaccurate ingredient identity
and potency, and failing to control or disclose contaminants, residues and adulterants, as well as for state common and statutory laws
regarding deceptive trade practices.
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In addition, DSHEA differentiates between old dietary ingredients, or ODIs (i.e., those ingredients present in the food supply
prior to October 15, 1994, which require no pre-market notification to the FDA), and new dietary ingredients, or NDIs (i.e., those ingredients
not proven to be present in the food supply prior to October 15, 1994, which do require pre-market notification to the FDA). The FDA has
not yet issued final guidance regarding the identification of a NDI or the evidence needed to document a NDI’s safety, but when it does
such guidance may increase the cost of compliance in establishing the identity and safety of a NDI. In addition, the FDA has not yet
promulgated a definitive list of ODIs, but if it does, such a list of ODIs could disrupt the supply of any dietary supplements made from
ingredients that are currently believed to pre-date DSHEA but are not ultimately classified as an ODI. Accordingly, changes in dietary
supplement regulation could also materially adversely affect the cost and availability of the dietary supplement products that we sell.
Advertising and Products Claims Risks. We could also be the target of claims relating to false or deceptive advertising in
connection with the marketing and advertising of the products we sell, including under the auspices of the FTC, the consumer protection
statutes of some states and some non-government watchdog groups. In addition, the FDA has aggressively enforced its regulations with
respect to structure/function claims (e.g., “calcium builds strong bones”), health claims (e.g., "adequate calcium throughout life may reduce
the risk of osteoporosis"), nutrient content claims (e.g., “high in antioxidants”) and other claims that impermissibly suggest therapeutic
benefits for certain foods or food components. In addition, the number of private consumer class actions relating to false or deceptive
advertising against cosmetic, food, beverage and nutritional supplement manufacturers has increased in recent years. These events could
interrupt the marketing and sales of products in our stores, including our private label products, severely damage our brand reputation and
public image, increase the cost of products in our stores, result in product recalls or litigation, and impede our ability to deliver merchandise
in sufficient quantities or quality to our stores, which could result in a material adverse effect on our business, financial condition, results
of operations and cash flows.
Our reputation could also suffer from real or perceived issues involving the labeling or marketing of products we sell as “natural.”
Although the FDA and the USDA have each issued statements regarding the appropriate use of the word “natural,” and the FDA has
indicated it intends to define the term, there is currently no single U.S. government-regulated definition of the term “natural” for use in the
food industry. The resulting uncertainty has led to consumer confusion, distrust and a growing number of legal challenges. Plaintiffs have
commenced class action litigation against a number of food companies and retailers that market “natural” products, asserting false,
misleading and deceptive advertising and labeling claims. Should we become subject to similar lawsuits or claims, consumers may avoid
purchasing products from us or seek alternatives, even if the basis for the claim is ultimately determined to be unfounded. Adverse publicity
about these matters may discourage consumers from buying our products. Further, the cost of defending against any such class actions
could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be
difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation
and brand and decrease our sales, which could have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Organic and GMO Claims. We are also subject to the requirements of the USDA’s National Organic Program (NOP), which
establishes federal standards for organically produced agricultural products. The NOP regulations assure our customers that products with
the “USDA Organic” seal meet consistent and uniform standards. The failure of one or more of our suppliers to comply with the NOP
regulations could cause a disruption in the supply of our product offerings. In addition, the USDA has recently set forth final rules on the
labeling of food produced with bioengineering. Voluntary compliance with these rules began in January 2020 and the deadline for
mandatory compliance is January 1, 2022.
FSMA Implementation Risks. The FSMA significantly expanded food safety requirements and the FDA’s regulatory authority
over food safety. Voluminous regulations and rules issued under the FSMA are in varying degrees of implementation. In addition, the
FSMA required the FDA to establish science-based minimum standards for the safe production and harvesting of produce and increase
inspection of foreign and domestic facilities. With respect to both food products and dietary supplements, the FSMA meaningfully
augmented the FDA’s ability to access both producers’ and suppliers’ records and added new records that must be created and maintained.
The FSMA also requires the implementation of enhanced tracking and tracing of food and dietary supplements through production and
distribution and, as a result, added recordkeeping burdens upon our suppliers. In addition, under the FSMA, the FDA now has the authority
to inspect facilities, certifications and supplier documentation to evaluate whether foods and ingredients from our suppliers are compliant
with applicable regulatory requirements. Such FDA inspections, and regulatory actions resulting therefrom, may require product recalls,
delay the supply of certain products or result in certain products being unavailable to us for sale in our stores. The implementation of the
FSMA requirements may be too expensive or too complicated for some of our suppliers, which may increase the cost, or curtail or eliminate
the supply, of certain products that we purchase from small and/or local suppliers.
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Homeopathic Products. In recent years, the FDA and FTC have increased their regulatory scrutiny of homeopathic drug products.
In October 2019, the FDA released new draft guidance on homeopathic drugs, stating that the agency intends to take a risk-based approach
to reviewing how some homeopathic drug products are marketed, under which it will prioritize enforcement and regulatory actions
involving certain categories of homeopathic drug products marketed without the required FDA approval. Although no final guidance has
yet been issued, such guidance may require homeopathic products to be approved for sale under a new approval or review regimen or
otherwise lessen their availability for us to sell in our stores.
Third-Party Risks. We rely on our suppliers and contract manufacturers to ensure that the products they manufacture and sell to
us comply with all applicable regulatory requirements and are made using FDA-mandated good manufacturing practices. In general, we
seek certifications of compliance, representations and warranties, indemnification and/or insurance from our suppliers and contract
manufacturers. However, even with adequate insurance and indemnification, the failure of any products to comply with applicable
regulatory requirements could prevent us from marketing such products or require us to recall or remove such products from our stores. In
addition, any claims of non-compliance could significantly damage our reputation and consumer confidence in the products we sell.
Other Regulatory Risks. We are also subject to laws and regulations more generally applicable to retailers, including labor and
employment, taxation, zoning and land use, environmental protection, workplace safety, public health, advertising and selling practices,
alcoholic beverage sales and handling and transport of products derived from industrial hemp. We cannot predict the nature of future laws,
regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders,
when and if promulgated, or disparate federal, state and local regulatory schemes could have on our business in the future. They could,
however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to
be reformulated, additional recordkeeping, expanded documentation of the properties of certain products, expanded or different labeling
and scientific substantiation. Any or all of such requirements could materially and adversely affect our business, financial condition and
results of operations.
Our sale of products containing cannabidiol (CBD) could lead to regulatory action by federal, state and/or local authorities
or legal proceedings brought by or on behalf of consumers.
The Agricultural Improvement Act of 2018 (the 2018 Farm Bill) legalized the cultivation, processing and sale of “industrial hemp”
(i.e., cannabis containing no more than 0.3% tetrahydrocannabinol, or THC). Industrial hemp contains CBD, a non-psychoactive
compound. Despite the provisions of the 2018 Farm Bill and subsequent U.S. Department of Agriculture rules, uncertainty exists concerning
the legal and regulatory status of finished products containing CBD. The FDA prohibits the inclusion of CBD in the food supply and dietary
supplements even if they are derived from industrial hemp on the basis that CBD is an active ingredient in FDA-approved drugs, and,
therefore, its addition to foods and dietary supplements is unlawful under the federal Food, Drug, and Cosmetic Act (the FDCA). The FDA
has yet to establish a regulatory framework for the manufacture and sale of products containing CBD, and has sent warning letters,
sometimes in concert with the Federal Trade Commission (FTC), to certain CBD manufacturers that are alleged to have marketed their
products in violation of the FDCA. The warning letters focus on allegations that the CBD manufacturers have marketed the products
through unsubstantiated health claims. The FDA also announced that it cannot conclude based on current published studies that CBD is
generally recognized as safe (GRAS) for use in human and animal food products. Food and beverage products, including nutritional
supplements, that contain non-GRAS ingredients are considered to be adulterated under the FDCA. In addition, certain state and local
governments have taken action to restrict or prohibit the sale of products containing CBD. Further, class action lawsuits have been filed
against certain CBD manufacturers alleging that their products are misbranded, mislabeled and falsely advertised under state consumer
protection laws.
We sell products containing CBD at certain of our stores. While we strive to sell products containing CBD only in states and
localities where such sale is permissible, state and local authorities in those areas may adopt new laws and regulations, or adopt
interpretations of existing laws and regulations, that restrict or prohibit the sale of products containing CBD. Further, we could be subject
to regulatory action brought by federal, state and/or local authorities, or legal proceedings brought by or on behalf of consumers, that allege,
among other things, that: (i) our sale of products containing CBD violates applicable federal or state law (including applicable state
consumer protection laws); (ii) the products we sell that contain CBD are adulterated, contaminated, or have been misbranded or labeled
in violation of applicable rules, regulations or standards of the FDA, the FDCA or any other federal or state law or agency; (iii) the products
we sell that contain CBD have been labeled with (a) express or implied health claims that are not supported by appropriate scientific
evidence or (b) claims that are difficult or impossible to verify; (iv) the products we sell that contain CBD have been labeled with
inappropriate dosing instructions or use recommendations; (v) the products we sell that contain CBD have been improperly tested or
evaluated or do not contain the stated concentration of CBD; and (vi) the products we sell that contain CBD contain more than the legally
allowable concentration of THC. Any such regulatory action or legal proceeding could have a material adverse effect on our business,
financial position and results of operations.
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The activities of our Nutritional Health Coaches and our nutrition education services may be impacted by government
regulation or an inability to secure adequate liability insurance.
Some of the activities of our NHCs, who, among other duties, provide nutrition oriented educational services to our customers,
may be subject to state and federal regulation and oversight by professional organizations, or may be misconstrued by our customers as
medical advice. In the past, the FDA has expressed concerns regarding summarized health and nutrition-related information that: (i) does
not, in the FDA’s view, accurately present such information; (ii) diverts a consumer’s attention and focus from FDA-required nutrition
labeling and information; or (iii) impermissibly promotes drug-type disease-related benefits. Although we provide training to our NHCs
on relevant regulatory requirements, we cannot control the actions of such individuals, and our NHCs may not act in accordance with such
regulations. If our NHCs or other Crew members do not act in accordance with regulatory requirements, we may become subject to penalties
or litigation, which could have a material adverse effect on our business. We believe we are currently compliant with relevant regulatory
requirements, and we maintain professional liability insurance on behalf of our NHCs in order to mitigate risks associated with our NHCs’
nutrition oriented educational activities. However, we cannot predict the nature of future government regulation and oversight, including
the potential impact of any such regulation on the services currently provided by our NHCs. Furthermore, the availability of professional
liability insurance or the scope of such coverage may change, or our insurance coverage may prove inadequate, which may adversely
impact the ability of our NHCs to provide some services to our customers. The occurrence of any such developments could negatively
impact the perception of our brand, our sales, our ability to attract new customers and liability for governmental or third party claims.
Consumers or regulatory agencies may challenge certain claims made regarding the products we sell.
Our reputation could also suffer from real or perceived issues involving the labeling or marketing of the products we sell. Products
that we sell may carry claims as to the origin, purity, potency, and identify of ingredients, and claims regarding efficacy or health benefits,
one example is the use of the term “natural.” Although the FDA and USDA each has issued statements regarding the appropriate use of the
word “natural,” there is no single United States government-regulated definition of the term “natural” for use in the food industry. The
resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against a number
of food companies that market “natural” products, asserting false, misleading and deceptive advertising and labeling claims, including
claims related to genetically modified ingredients. In limited circumstances, the FDA and state attorneys general have taken regulatory
action against products labeled “natural” but that nonetheless contain synthetic ingredients or components. Another example is products
not made from animal ingredients but identified on their labels as “meat” or “milk” or similar terms may also be subject to new regulatory
constraints or legal challenges regarding the accuracy and legality of these terms. Should we become subject to similar claims, consumers
may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these
matters may discourage consumers from buying the products we sell. The cost of defending against any such claims could be significant.
Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims could be difficult and costly to
overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease
our sales, which could have a material adverse effect on our business, financial condition and results of operations.
The products we sell could suffer from real or perceived quality or food safety concerns and may cause unexpected side effects,
illness, injury or death that could result in their discontinuance or expose us to lawsuits, any of which could result in unexpected costs
and damage to our reputation.
We could be materially, adversely affected if consumers lose confidence in the safety and quality of products we sell. There is
substantial governmental scrutiny of and public awareness regarding food, cosmetics and dietary supplement safety. We believe that many
customers hold us to a higher quality standard than other retailers. Many of the products we sell are vitamins, herbs and other ingredients
that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. The products
we sell could contain contaminated substances, and some of the products we sell contain ingredients that do not have long histories of
human consumption. Previously unknown adverse reactions resulting from human use or consumption of these ingredients could occur.
Unexpected side effects, illness, injury or death caused by the products we sell could result in the discontinuance of sales of the products
we sell or prevent us from achieving market acceptance of the affected products. Such side effects, illnesses, injuries and death could also
expose us to product liability or negligence lawsuits. Any claims brought against us may exceed our existing or future insurance policy
coverage or limits. Any judgment against us that is in excess of our policy limits would have to be paid from our cash reserves, which
would reduce our capital resources. Further, we may not have sufficient capital resources to pay a judgment in which case our creditors
could levy against our assets. The real or perceived sale of contaminated or harmful products could result in government enforcement
action, private litigation and product recalls. Such an occurrence could also cause negative publicity regarding our Company, brand or
products, including negative publicity in social media. The real or perceived sale of contaminated or harmful products could therefore harm
our reputation and net sales, have a material adverse effect on our business, financial condition and results of operations, or result in our
insolvency.
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Our political advocacy activities may reduce our customer count and sales.
We believe our ability to profitably operate our business depends, in part, upon our access to natural and organic products and
dietary supplements. We attempt to protect our interest in this access through ongoing and proactive political advocacy campaigns,
including participation in education programs, petitions, letter writing, phone calls, policy conferences, advisory boards, industry groups,
public commentary and meetings with trade groups, office holders and regulators. We may publicly ally with and support trade groups,
political candidates, government officials and regulators who support a particular policy we consider important to our business and in
alignment with our principles regarding access to natural and organic products and dietary supplements. We may, from time to time,
publicly oppose other trade groups, candidates, officeholders and regulators whose point of view we believe will harm our business, or
impede access to nutritious food and dietary supplements. In some cases, we may lose customers and sales because our political advocacy
activities are perceived to be contrary to those customers’ points of view, political affiliations, political beliefs or voting preferences.
Risks related to our indebtedness and liquidity
Our credit facility could limit our operational flexibility.
We are party to a credit facility consisting of a $50.0 million revolving loan facility (our Revolving Facility) and a fully drawn
$35.0 million term loan facility (our Term Loan Facility, and together with our Revolving Facility, our Credit Facility). Our Credit Facility
is secured by a lien on substantially all of our assets and contains usual and customary restrictive covenants relating to our management
and the operation of our business. These covenants, among other things, restrict our ability to incur additional indebtedness; grant liens;
engage in certain merger, consolidation or asset sale transactions; make certain investments; make loans, advances, guarantees or
acquisitions; engage in certain transactions with affiliates; pay dividends or repurchase shares of our common stock; and permit certain
sale and leaseback transactions without lender consent. We are also required to maintain certain financial measurements under our Credit
Facility, including a consolidated leverage ratio. These covenants could restrict our operational flexibility and any failure to comply with
these covenants or our payment obligations could limit our ability to borrow under our Credit Facility and, in certain circumstances, may
allow the lender thereunder to require repayment.
We may be unable to generate sufficient cash flow to satisfy our debt service obligations, which could adversely impact our
business.
As of September 30, 2021, we had no outstanding indebtedness under our Revolving Facility and $23.7 million of outstanding
indebtedness under our Term Loan Facility. We may incur additional indebtedness in the future, including borrowings under our Credit
Facility. Satisfying our debt repayment obligations may require us to divert funds identified for other purposes and could impair our
liquidity position. Our inability to generate sufficient cash flow to satisfy our debt service obligations could have important consequences,
including:
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impacting our ability to continue to execute our operational strategies in existing stores;
impairing our liquidity position;
impacting our ability to obtain merchandise from our vendors;
requiring us to delay capital expenditures and divert funds intended for other purposes;
increasing our vulnerability to competitive and general economic conditions;
placing us at a competitive disadvantage compared to our competitors that have less debt;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
adversely affecting our ability to borrow additional funds for working capital, capital expenditures, acquisitions, share
repurchases, dividends or other general corporate purposes.
If we cannot generate sufficient cash flow from operations to service our debt, we may need to refinance our debt, dispose of
assets or issue equity to obtain necessary funds. We do not know whether we will be able to take any of such actions on a timely basis, on
terms satisfactory to us or at all. In addition, if we fail to comply with any of the financial covenants or the other restrictions contained in
our Credit Facility, an event of default could occur, which may result in the acceleration of all amounts owing under our Credit Facility.
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Our ability to obtain necessary funds through borrowing will depend on our ability to generate cash flow from operations. Our
ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our
control. If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us under our
Credit Facility or otherwise in amounts sufficient to enable us to fund our liquidity needs, our business, financial condition and results of
operations may be adversely affected.
Our liquidity needs may require us to raise additional capital through debt or equity financings.
We depend upon cash flow from our operations and borrowings from our Credit Facility to fund our business and execute on
our growth strategy. In the absence of sufficient cash flow from operations, available cash and available borrowing capacity under our
Credit Facility, we may be unable to meet our liquidity needs. In that event, we may be required to seek additional equity or debt financing
in order to fund capital expenditures, to provide additional working capital for our business or to fund the execution of our growth strategy.
In addition, changes in economic conditions, or market conditions requiring a shift in our business model could result in our need for
additional debt or equity financing. We cannot predict the timing or amount of any such capital requirements. We do not know whether
we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all. If financing is not available to us on
satisfactory terms, or at all, we may be unable to operate or expand our business or to successfully pursue our growth strategy, and our
results of operations may suffer. Pursuant to the New York Stock Exchange (NYSE) Listed Company Manual, in order to rely on the
“controlled company” corporate governance exemptions, the Isely family is, or entities controlled by the Isely family are, required to retain
more than 50% of the total voting power of our shares of common stock for the election of directors. As long as we intend to remain a
“controlled company,” these voting requirements will constrain our ability to issue additional shares of our common stock in the future.
Our share repurchase program may adversely affect our liquidity and cause fluctuations in our stock price.
In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to
$10.0 million in shares of our common stock. Our Board subsequently extended the share repurchase program, which will terminate on
May 31, 2022. Potential future share repurchases under the share repurchase program could be funded by operating cash flow, excess cash
balances or borrowings under our Credit Facility. The dollar value of the shares of the Company’s common stock that may yet be
repurchased under the share repurchase program is $8.3 million. Such borrowings will reduce the amount of capital available under our
Credit Facility for other purposes, including our working capital needs, capital expenditures and funding the execution of our growth
strategy. Repurchases under the share repurchase program may therefore adversely affect our liquidity, which in turn could impact our
profitability, financial condition and results of operations. In addition, repurchases under the share repurchase program will reduce the
number of shares of our common stock available for purchase and sale in the public market, which could affect the market price of our
common stock.
General risks related to our common stock
The market price of our common stock has been volatile and may continue to be volatile, and our stockholders may not be
able to sell our common stock at a favorable price or at all.
The market price of our common stock is likely to fluctuate significantly from time to time in response to a number of factors,
most of which we cannot control, including those described under “—Risks related to our business” and the following:
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differences between our actual financial and operating results and those expected by investors;
fluctuations in our quarterly comparable store sales growth;
changes in our new store growth rate;
competitive conditions in our industry;
general economic conditions;
changes in our earnings guidance;
a reduction in the amount of cash dividends on our common stock, the suspension of those dividends or a failure to meet
market expectations regarding potential dividend increases;
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a change in the recommendation by any research analyst that follows our stock or any failure to meet the estimates made by
research analysts;
the level and quality of securities research analyst coverage for our common stock;
investor perceptions of our prospects and the prospects of the grocery and dietary supplement industries;
the performance of our key vendors;
announcements by us, our vendors or our competitors regarding performance, strategy, significant acquisitions, divestitures,
strategic partnerships, joint ventures or capital commitments;
introductions of new product or new pricing policies by us or our competitors; and
failure to recruit or retain key personnel.
In addition, extreme price and volume fluctuations in the stock markets could affect the market price of equity securities.
An inability to maintain or improve levels of sales growth could cause our stock price to decline.
We may not be able to maintain or improve the levels of sales growth that we have experienced in the past. Our overall sales
growth has fluctuated in the past and may fluctuate in the future. A variety of factors affect sales growth, including:
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our ability to execute our business strategy effectively, including successfully opening new stores that achieve sales
consistent with our existing stores;
consumer preferences;
competitive conditions in our industry;
general economic conditions;
the impact of the product discounts offered by the {N}power® customer loyalty program;
internally generated competition when we open new stores in markets we already serve;
regulatory changes;
product pricing and availability;
in-store merchandising-related activities;
consumer confidence;
initial sales performance at our new stores; and
our ability to source and distribute products efficiently.
Many specialty retailers have been unable to sustain high levels of store sales growth during and after periods of substantial
expansion. These factors may cause our store sales growth results to be materially lower than in prior periods, which could have a material
adverse effect on our business, financial condition and results of operations, and could result in a decline in the price of our common stock.
Our current principal stockholders have significant influence over us, and they could delay, deter or prevent a change of
control or other business combination or otherwise cause us to take action with which our stockholders might not agree.
Members of the Isely family and certain persons, entities and accounts subject to a stockholders agreement relating to voting and
limitations on the sale of shares, own or control approximately 59% of our common stock. Due to their holdings of common stock, members
of the Isely family are able to continue to determine the outcome of virtually all matters submitted to stockholders for approval, including
the election of directors, an amendment of our certificate of incorporation (except when a class vote is required by law), any merger or
consolidation requiring common stockholder approval, and a sale of all or substantially all of the Company’s assets. Members of the Isely
family have the ability to prevent change-in-control transactions as long as they maintain voting control of the Company. In addition,
members of the Isely family and trusts controlled by them entered into a stockholders agreement by which they agreed to aggregate their
voting power with regard to the election of directors.
38
In addition, because these holders have the ability to elect all of our directors, they are able to control our policies and operations,
including the appointment of management, future issuances of our common stock or other securities, the payments of dividends on our
common stock and entering into extraordinary transactions, and their interests may not in all cases be aligned with our stockholders’
interests.
We may not be able to continue paying dividends on our common stock.
We paid a quarterly cash dividend of $0.07 per share of common stock during each quarter of fiscal year 2021 and 2020. We
paid a special cash dividend of $2.00 per share in December 2020. On November 18, 2021, our Board approved the payment of a quarterly
cash dividend of $0.10 per share of common stock to be paid on December 15, 2021 to stockholders of record as of the close of business
on November 29, 2021. The timing, declaration, amount and payment of any future cash dividends are at the discretion of the Board and
will depend on many factors, including our available cash, working capital, financial condition, earnings, results of operations and capital
requirements; the covenants in our credit agreement; applicable law; and other business considerations that our Board considers relevant.
A reduction in the amount of cash dividends on our common stock, the suspension of those dividends or a failure to meet market
expectations regarding our dividends could have a material adverse effect on the market price of our common stock. If we do not pay cash
dividends on our common stock in the future, realization of a gain on an investment in our common stock will depend entirely on the
appreciation of the price of our common stock, which may not occur.
If securities or industry analysts do not publish research or reports about our business, if they adversely change their
recommendations regarding our common stock or if our operating results do not meet their expectations, our common stock price could
decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish
about us or our business. One analyst currently covers our stock. If one or more analysts cease to cover our Company or fail to publish
reports on us regularly, we may lose visibility in the financial markets, which could cause our stock price or trading volume to decline.
Moreover, if one or more analysts who cover our Company downgrade our common stock, or if our operating results do not meet their
expectations, our common stock price could decline.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control,
even if a sale of the Company could be beneficial to our stockholders, which could cause our stock price to decline and prevent attempts
by our stockholders to replace or remove our current management.
Several provisions of our certificate of incorporation and amended and restated bylaws could make it difficult for our stockholders
to change the composition of our Board, preventing them from changing the composition of management. In addition, the same provisions
may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable.
These provisions include:
a staggered, or classified, Board;
authorizing our Board to issue “blank check” preferred stock without stockholder approval;
prohibiting cumulative voting in the election of directors;
limiting the persons who may call special meetings of stockholders;
prohibiting stockholders from acting by written consent after the Isely family ceases to own more than 50% of the total voting
power of our shares; and
establishing advance notice requirements for nominations for election to our Board or for proposing matters that can be acted
on by stockholders at stockholder meetings.
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These anti-takeover provisions could substantially impede the ability of our common stockholders to benefit from a change in
control and, as a result, could materially adversely affect the market price of our common stock and our stockholders’ ability to realize any
potential change-in-control premium.
39
We are a “controlled company” within the meaning of the NYSE Listed Company Manual, and, as a result, rely on exemptions
from certain corporate governance requirements that provide protection to stockholders of other companies.
The Isely family, or entities controlled by the Isely family, own more than 50% of the total voting power of our common shares
for the election of directors, and therefore, we are considered a “controlled company” under the corporate governance standards set forth
in the NYSE Listed Company Manual. As a “controlled company,” certain exemptions under NYSE standards free us from the obligation
to comply with certain corporate governance requirements of the NYSE, including the requirements:
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that a majority of our Board consists of “independent directors,” as defined under the rules of the NYSE;
that our director nominees be selected, or recommended for our Board’s selection, either: (i) by a majority of independent
directors in a vote by independent directors, pursuant to a nominations process adopted by a Board resolution or (ii) by a
nominating and governance committee composed solely of independent directors with a written charter addressing the
nominations process; and
that the compensation of our executive officers be determined, or recommended to the Board for determination, by a majority
of independent directors in a vote by independent directors, or a compensation committee composed solely of independent
directors.
Accordingly, for so long as we are a “controlled company,” stockholders will not have the same protections afforded to
stockholders of companies that are subject to all of the NYSE corporate governance requirements.
Item 1B. Unresolved Staff Comments.
None.
40
Item 2. Properties.
As of September 30, 2021, we had 162 stores located in 20 states, as shown in the following chart:
State
Arizona ..................................................................................................................................................................
Arkansas ................................................................................................................................................................
Colorado ................................................................................................................................................................
Idaho ......................................................................................................................................................................
Iowa .......................................................................................................................................................................
Kansas ....................................................................................................................................................................
Louisiana ...............................................................................................................................................................
Minnesota ..............................................................................................................................................................
Missouri .................................................................................................................................................................
Montana .................................................................................................................................................................
Nebraska ................................................................................................................................................................
Nevada ...................................................................................................................................................................
New Mexico ...........................................................................................................................................................
North Dakota .........................................................................................................................................................
Oklahoma ...............................................................................................................................................................
Oregon ...................................................................................................................................................................
Texas ......................................................................................................................................................................
Utah .......................................................................................................................................................................
Washington ............................................................................................................................................................
Wyoming ...............................................................................................................................................................
Number
of Stores
12
3
41
4
6
8
1
1
7
4
3
3
6
3
6
14
25
9
4
2
Our home office is located in Lakewood, Colorado. We occupy our home office under a lease covering approximately 35,000
square feet; this facility is co-located with one of our stores. Additionally, we lease a 150,000 square foot bulk food repackaging facility
and distribution center located in Golden, Colorado. That facility also houses a training center and certain administrative support functions.
As of September 30, 2021, we owned buildings in which ten of our stores are located. Seven of those buildings are located on
land that is leased pursuant to a ground lease; the remaining three stores are on land owned by the Company. Additionally, in fiscal year
2021 we purchased property for one new store and one store relocation scheduled to open in fiscal year 2022 and beyond. Lease terms
typically range between 10 and 20 years, with additional renewal options. Of the current leases for our stores, two expire in fiscal year
2022, three expire in fiscal year 2023, eight expire in fiscal year 2024, twelve expire in 2025 and the remainder expire between fiscal years
2026 and 2062. We expect that we will be able to renegotiate these leases or relocate these stores as necessary.
Item 3. Legal Proceedings.
We periodically are involved in legal proceedings, including discrimination and other employment-related claims, customer
personal injury claims, investigations and other proceedings arising in the ordinary course of business. When the potential liability from a
matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of
lawsuits, investigations and claims, the ultimate outcome may differ from our estimates. Although we cannot predict with certainty the
ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding
to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.
Item 4. Mine Safety Disclosures.
Not applicable.
41
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Market Information
Our common stock is traded on the NYSE under the symbol “NGVC.”
Holders of Record
As of December 6, 2021, there were 188 holders of record of our common stock, and the closing price of our common stock was
$13.39.
Dividend Policy
We paid a quarterly cash dividend of $0.07 per share of common stock during each quarter of fiscal year 2021 and 2020. We
paid a special cash dividend of $2.00 per share in December 2020. On November 18, 2021, our Board approved a quarterly cash dividend
of $0.10 per share, which will be paid on December 15, 2021 to stockholders of record as of the close of business on November 29, 2021.
The timing, declaration, amount and payment of any future cash dividends are at the discretion of the Board and will depend on many
factors, including our available cash, working capital, financial condition, earnings, results of operations and capital requirements; the
covenants in our credit agreement; applicable law; and other business considerations that our Board considers relevant. Subject to these
factors, we currently expect to continue to pay comparable quarterly cash dividends. See “We may not be able to continue paying dividends
on our common stock” under “Item 1A. Risk Factors.”
Use of Proceeds From Registered Securities
None.
Unregistered Sales of Equity Securities
None.
Issuer Purchases of Equity Securities
The Company did not repurchase any shares of its common stock between June 30, 2021 and September 30, 2021.
Item 6. Reserved.
42
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be
read in conjunction with our consolidated financial statements and notes thereto which are included elsewhere in this Form 10-K. This
MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-K for an
explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes
may not sum due to the effects of rounding.
Company Overview
We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at
affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic
groceries and dietary supplements that meet our strict quality standards. We believe we have been at the forefront of the natural and organic
foods movement since our founding. We are headquartered in Lakewood, Colorado. As of September 30, 2021, we operated 162 stores in
20 states, including Colorado, Arizona, Arkansas, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New
Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and
distribution center in Colorado.
We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. The size of
our stores varies from approximately 5,000 to 16,000 selling square feet. For the year ended September 30, 2021, our new stores averaged
approximately 10,000 selling square feet.
The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to
continue to open new stores and enter new markets. Over the last five fiscal years, our store base has grown at a compound annual growth
rate of 5.2%. We opened three new stores and relocated/remodeled five existing stores in fiscal year 2021. We plan to open four to six new
stores and relocate/remodel three to four stores in fiscal year 2022. As of the date of this report, we also have signed leases or acquired
property for an additional five new stores and four relocations/remodels that we plan to open in fiscal years 2022 and beyond. Between
October 1, 2021 and the date of this Form 10-K, we did not open any new stores or relocate/remodel any stores.
Performance Highlights
Key highlights of our recent performance are discussed briefly below and are discussed in further detail throughout this MD&A.
Key financial metrics, including, but not limited to, daily average comparable store sales, are defined under the caption “Key Financial
Metrics in Our Business,” presented later in this MD&A.
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Net sales. Net sales were $1,055.5 million for the year ended September 30, 2021, an increase of $18.7 million, or 1.8%,
compared to net sales of $1,036.8 million for the year ended September 30, 2020.
Daily average comparable store sales. Daily average comparable store sales for the year ended September 30, 2021 increased
0.7% from the year ended September 30, 2020.
Net income. Net income was $20.6 million for the year ended September 30, 2021, an increase of $0.6 million, or 2.9%,
compared to net income of $20.0 million for the year ended September 30, 2020.
EBITDA. EBITDA was $58.0 million in the year ended September 30, 2021, a decrease of $1.0 million, or 1.7%, compared
to EBITDA of $58.9 million for the year ended September 30, 2020. EBITDA is not a measure of financial performance
under GAAP. Refer to the “Non-GAAP Financial Measures” section of this MD&A for a definition of EBITDA and a
reconciliation of the Company’s net income to EBITDA.
Adjusted EBITDA. Adjusted EBITDA was $60.3 million in the year ended September 30, 2021, a decrease of $0.4 million,
or 0.6%, compared to Adjusted EBITDA of $60.7 million for the year ended September 30, 2020. Adjusted EBITDA is not
a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section of this MD&A for
a definition of Adjusted EBITDA and a reconciliation of the Company’s net income to Adjusted EBITDA.
Liquidity. We had cash and cash equivalents of $23.7 million as of September 30, 2021 and $49.0 million was available for
borrowing under our $50.0 million Credit Facility. As of September 30, 2021, the Company had outstanding letters of credit
of $1.0 million, which amount was reserved against the amount available for borrowing under the terms of our Credit Facility.
43
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New store growth. We opened 37 new stores between the beginning of fiscal year 2017 and the end of fiscal year 2021, with
162 stores open as of September 30, 2021. We opened three new stores in fiscal year 2021. We plan to open a total of four
to six new stores in fiscal year 2022, which would result in an annual new store growth rate of between 2.5% and 3.7% for
fiscal year 2022.
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Store Relocations and Remodels. We relocated/remodeled 17 stores between the beginning of fiscal year 2017 and the end
of fiscal year 2021. We relocated/remodeled five existing stores in fiscal year 2021.
Industry Trends and Economics
We have identified the following recent trends and factors that have impacted and may continue to impact our results of
operations and financial condition:
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COVID-19 pandemic. On March 11, 2020, the World Health Organization announced that COVID-19 infections had become
a pandemic, and on March 13, 2020, the U.S. President announced a National Emergency relating to the disease. During the
course of the COVID-19 pandemic, federal, state and local authorities have imposed, from time to time, a number of public
health mandates intended to prevent the spread of the virus, including vaccination mandates, social distancing, quarantine,
wearing face coverings, and “stay-at-home” measures. While significant efforts to distribute COVID-19 vaccines to the
public are ongoing across the United States and states have reopened their economies by easing restrictions, certain of these
public health mandates have had an adverse impact on the U.S. economy. Additional negative financial markets and industry-
specific impacts could result from future case surges, outbreaks, COVID-19 virus variants, the potential that current vaccines
may be less effective or ineffective against future COVID-19 virus variants, and the risk that large groups of the population
may not receive vaccinations against COVID-19. The long-term economic impact of the COVID-19 pandemic is unknown
at this time.
Impact of the COVID-19 pandemic on our operations. We believe we have acted proactively in response to the COVID-19
pandemic and the resulting government mandates. To date, all of our stores have continued operating since the start of the
COVID-19 pandemic. We have experienced increased levels of net sales and average transaction size due to the COVID-19
pandemic as public health measures have been implemented by states across our footprint and customers have adjusted to
these new circumstances by consuming more food at home. The COVID-19 pandemic and government mandates have also
led to an increase in online orders for home delivery, which we offer at substantially all our stores in partnership with a third
party.
Future impact of the COVID-19 pandemic. We believe our proactive response to the COVID-19 pandemic has resulted in
increased customer loyalty, but there can be no assurance we will continue to experience elevated levels of net sales, in
particular, when the COVID-19 pandemic subsides. We expect the impact of the COVID-19 pandemic and government
mandates on our financial condition, results of operations and cash flows will largely depend on the extent and duration of
the COVID-19 pandemic, the governmental and public actions taken in response, including economic stabilization efforts,
and the long-term effect the COVID-19 pandemic will have on the U.S. economy. Moreover, the COVID-19 pandemic and
government mandates make it more challenging for management to estimate future performance of our business, particularly
over the near term. See “Item 1A.- Risk Factors”. Additional information regarding the impact of the COVID-19 pandemic
and government mandates on our business and results of operations is provided below in this MD&A.
Impact of broader economic trends and political environment. The grocery industry and our sales are affected by general
economic conditions, including, but not limited to, consumer spending, the level of disposable consumer income, consumer
debt, interest rates, inflation or deflation, periods of recession and growth, the price of commodities, the political environment
and consumer confidence. Furthermore, our ability to meet our labor needs, while controlling wage and labor-related costs,
is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the work
force in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing
demographics, health and other insurance costs and changes in employment legislation, including unemployment benefits.
Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes
organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public
interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. We
expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions
and other factors, including the impact of the COVID-19 pandemic and related government mandates.
44
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Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry with
few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result
of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery
ordering, pick-up and delivery options. These businesses compete with us on the basis of price, selection, quality, customer
service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these
or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding
to offer a greater range of natural and organic foods. We also face internally generated competition when we open new stores
in markets we already serve. We believe our commitment to carrying only carefully vetted, affordably priced and high-
quality natural and organic products and dietary supplements, as well as our focus on providing nutrition education,
differentiate us in the industry and provide a competitive advantage.
Consumer preferences. Our performance is also impacted by trends regarding natural and organic products, dietary
supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food
products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer
choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting
from reductions or changes in our offerings, could have a material adverse effect on our business. Additionally, negative
publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely
affect demand for the products we sell and could result in lower consumer traffic, sales and results of operations.
Outlook
We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store
sales and continue to profitably expand. These factors include a loyal customer base, increasing basket size, growing consumer interest in
nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education, a convenient, clean, and
shopper-friendly retail environment, and our focus on high-quality, affordable natural and organic groceries and dietary supplements.
We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions
and other factors, including the impact of the COVID-19 pandemic and related government mandates.
Over the long term, we believe there are opportunities for us to continue to expand our store base, expand profitability and
increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to
increasing competitive conditions in the natural and organic grocery and dietary supplement industry and regional and general economic
conditions. In the future, we believe there are opportunities for increased leverage of costs and increased economies of scale in sourcing
products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy costs), our
ability to leverage costs may be limited.
Our operating results may be affected by a variety of internal and external factors and trends, which are described more fully in
the section entitled “Risk Factors” appearing elsewhere in this Form 10-K.
Key Financial Metrics in Our Business
In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:
Net sales
Our net sales are comprised of gross sales net of discounts, in-house coupons, returns and allowances. In comparing net sales
between periods, we monitor the following:
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Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the
first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store
sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores
for the same number of operating months in the comparable reporting period of the prior year. When a store that is included
in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store
sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new
stores” to refer to stores that have been open for less than thirteen months. Daily average comparable store sales are
comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of
differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years
or the Easter holiday shift between quarters).
45
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Transaction count. Transaction count represents the number of transactions reported at our stores during the period and
includes transactions that are voided, return transactions and exchange transactions.
Average transaction size. Average transaction size, or basket size, is calculated by dividing net sales by transaction count for
a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction.
Cost of goods sold and occupancy costs
Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances),
shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs,
shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and
real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food
repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and
as a result, our cost of goods sold and occupancy costs data included in this Form 10-K may not be identical to those of our competitors,
and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically
decrease as new stores mature and sales increase. Rent payments for leases classified as finance lease obligations are not recorded in cost
of goods sold and occupancy costs. Rather, these rent payments are recognized as a reduction of the related obligations and as interest
expense.
Gross profit and gross margin
Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage
of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as
the rate at which we open new stores.
Store expenses
Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities,
depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation
expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land
improvements, leasehold improvements, fixtures and equipment and technology. Depreciation expenses on the right-of-use assets related
to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the
disposal of fixed assets, primarily related to store relocations, as well as store closure and lease termination costs. Store expenses also
include long-lived asset impairment charges. The majority of store expenses consist of labor-related expenses, which we closely manage
and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to
comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined
with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.
Administrative expenses
Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office
supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area
maintenance, real estate taxes and utilities), professional services expenses, expenses associated with our Board, expenses related to
compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses.
Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including
depreciation on land improvements, leasehold improvements, fixtures and equipment and computer hardware and software.
Pre-opening expenses
Pre-opening expenses for new stores and relocations/remodels may include rent expense, salaries, advertising, supplies and other
miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s
opening date for store leases classified as operating. For store leases classified as finance leases, we recognize pre-opening interest expense.
Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. Certain advertising and
promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening costs are
expensed as incurred. Pre-opening expenses for remodels are incurred if the store is required to be closed due to the remodel.
46
Interest expense, net
Interest expense consists of the interest associated with finance lease obligations net of capitalized interest and our Credit Facility.
Income tax expense
Income taxes are accounted for in accordance with the provisions of Income Taxes (ASC 740). Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances
are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law. Intended to
provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act, among other things, includes provisions
addressing the carryback of net operating losses for specific periods, temporary modifications to the limitations placed on the tax
deductibility of net interest expenses, and technical amendments for qualified improvement property (QIP).
Results of Operations
The following table presents key components of our results of operations expressed as a percentage of net sales for the periods
presented:
Statements of Income Data:*
Net sales ...........................................................................................
Cost of goods sold and occupancy costs ..........................................
Gross profit ..................................................................................
Store expenses ..................................................................................
Administrative expenses ..................................................................
Pre-opening expenses .......................................................................
Operating income .........................................................................
Interest expense, net .........................................................................
Income before income taxes .........................................................
Provision for income taxes ...............................................................
Net income ...................................................................................
__________________________
*Figures may not sum due to rounding.
Other Operating Data (Unaudited):
Number of stores at end of period ....................................................
Store unit count increase period over period ....................................
Change in daily average comparable store sales ..............................
Number of stores opened during the period .....................................
Number of stores relocated and remodeled during the period ..........
Gross square footage at end of period(1) ...........................................
Selling square footage at end of period(1) .........................................
2021
Year ended September 30,
2020
2019
100.0%
72.3
27.7
22.2
2.7
0.1
2.7
(0.2)
2.5
(0.5)
1.9%
100.0
72.7
27.3
21.9
2.6
0.1
2.7
(0.2)
2.5
(0.5)
1.9
100.0
73.6
26.4
21.9
2.5
0.2
1.9
(0.5)
1.3
(0.3)
1.0
162
1.9%
0.7%
3
5
2,649,532
1,719,813
159
3.9
12.0
6
2
2,599,649
1,687,196
153
3.4
3.1
6
5
2,522,906
1,637,150
(1) Gross square footage and selling square footage at the end of the period include the square footage for all stores that were open as of the
end of the period presented.
47
Year ended September 30, 2021 compared to Year ended September 30, 2020
The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:
Year ended September 30,
Change in
2021
2020
Dollars
Percent
Statements of Income Data:
Net sales .................................................................................................. $ 1,055,516 1,036,842
753,701
Cost of goods sold and occupancy costs .................................................
283,141
Gross profit .....................................................................................
227,069
Store expenses .........................................................................................
26,780
Administrative expenses .........................................................................
Pre-opening expenses ..............................................................................
1,543
Operating income ............................................................................
27,749
(2,048)
Interest expense, net ................................................................................
25,701
Income before income taxes ............................................................
(5,692)
Provision for income taxes ......................................................................
20,009
Net income ...................................................................................... $
763,328
292,188
234,586
28,355
920
28,327
(2,271)
26,056
(5,475)
20,581
18,674
9,627
9,047
7,517
1,575
(623)
578
(223)
355
217
572
1.8%
1.3
3.2
3.3
5.9
(40.4)
2.1
10.9
1.4
(3.8)
2.9%
Net sales
Net sales increased $18.7 million, or 1.8%, to $1,055.5 million for the year ended September 30, 2021 compared to $1,036.8
million for the year ended September 30, 2020, primarily due to a $4.2 million increase in comparable store sales, and a $14.5 million
increase in new store sales. Daily average comparable store sales increased 0.7% for the year ended September 30, 2021 compared to an
increase of 12.0% for the year ended September 30, 2020. The daily average comparable store sales increase in fiscal year 2021 resulted
from a 4.7% increase in average transaction size, partially offset by a 3.8% decrease in daily average transaction count. In the year ended
September 30, 2021, customers reduced their frequency of shopping trips in response to the COVID-19 pandemic and related government
mandates, but increased their overall basket size per shopping trip. Comparable store average transaction size was $44.24 for the year ended
September 30, 2021. The increase in net sales during the year ended September 30, 2021 is attributable to our customers’ response to the
COVID-19 pandemic and related government mandates, inflationary pressure on our retail prices, marketing initiatives, promotional
campaigns and increased membership in and usage of the {N}power® customer loyalty program.
Gross profit
Gross profit increased $9.0 million, or 3.2%, to $292.2 million for the year ended September 30, 2021 compared to $283.1 million
for the year ended September 30, 2020, primarily driven by the increased sales volumes resulting from the COVID-19 pandemic and related
government mandates. Gross profit reflects earnings after product and occupancy costs. Gross margin increased to 27.7% for the year ended
September 30, 2021 from 27.3% for the year ended September 30, 2020. The increase in gross margin during the year ended September
30, 2021 was primarily driven by improved product margin, and lower shrink and store occupancy expenses as a percentage of net sales.
Store expenses
Store expenses increased $7.5 million, or 3.3%, to $234.6 million in the year ended September 30, 2021 compared to $227.1
million in the year ended September 30, 2020. Store expenses as a percentage of net sales were 22.2% and 21.9% for the years ended
September 30, 2021 and 2020, respectively. Store expenses as a percentage of net sales increased during the year ended September 30,
2021 due to higher labor-related expenses in the first half of the year. Store expenses included long-lived asset impairment charges and
lease termination costs of $1.5 million in fiscal year 2021 and long-lived asset impairment charges of $0.6 million in fiscal year 2020.
Administrative expenses
Administrative expenses increased $1.6 million, or 5.9%, to $28.4 million for the year ended September 30, 2021 compared to
$26.8 million for the year ended September 30, 2020. Administrative expenses as a percentage of net sales were 2.7% and 2.6% for the
years ended September 30, 2021 and 2020, respectively.
48
Pre-opening expenses
Pre-opening expenses decreased $0.6 million, or 40.4%, to $0.9 million for the year ended September 30, 2021 compared to $1.5
million for the year ended September 30, 2020. The change in pre-opening expenses was primarily due to the impact of the number and
timing of new store openings and relocations/remodels. The numbers of stores opened and relocated/remodeled were as follows for the
periods presented:
New stores ........................................................................................................................
Relocated/remodeled stores ..............................................................................................
Year ended September 30,
2020
2021
3
5
8
6
2
8
Interest expense, net
Interest expense, net of capitalized interest, increased $0.2 million, or 10.9%, in the year ended September 30, 2021 compared to
the year ended September 30, 2020.
Income taxes
Provision for income taxes decreased $0.2 million to $5.5 million for the year ended September 30, 2021 compared to $5.7
million for the year ended September 30, 2020. The Company’s effective income tax rate was approximately 21.0% and 22.1% for the
years ended September 30, 2021 and 2020, respectively.
Net income
Net income for the year ended September 30, 2021 was $20.6 million, or $0.91 in diluted earnings per share compared to $20.0
million, or $0.89 in diluted earnings per share, in the year ended September 30, 2020.
Year ended September 30, 2020 compared to Year ended September 30, 2019
A comparative discussion of our results of operations and other operating data for the years ended September 30, 2020 and
September 30, 2019 is set out in our Annual Report on Form 10-K for the year ended September 30, 2020 under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations - Year ended September 30, 2020
compared to Year ended September 30, 2019.”
Non-GAAP financial measures
EBITDA and Adjusted EBITDA
Management believes some investors’ understanding of our performance is enhanced by including EBITDA and Adjusted
EBITDA, which are non-GAAP financial measures. EBITDA is defined as earnings before interest, taxes, depreciation and amortization.
Adjusted EBITDA is defined as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes
make it more difficult to assess the Company’s actual operating performance, including certain items such as share-based compensation,
impairment charges, store closing costs and non-recurring items. EBITDA and Adjusted EBITDA are not measures of financial
performance under GAAP. We believe EBITDA and Adjusted EBITDA provide additional information about: (i) our operating
performance, because they assist us in comparing the operating performance of our stores on a consistent basis, as they remove the impact
of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations, such as interest expense
and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a
measure in our financial covenants under our Credit Facility.
Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate
the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our
performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of
operations. By providing these non-GAAP financial measures, together with a reconciliation from net income, we believe we are enhancing
investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing
our strategic initiatives. Commencing with its financial reporting for fiscal year 2021, the Company has revised its definition of Adjusted
EBITDA to exclude share-based compensation expense. The Company’s historical presentation of Adjusted EBITDA, including for fiscal
year 2020, did not exclude share-based compensation expense. However, Adjusted EBITDA for fiscal year 2020, as presented in this report,
has been recast to exclude share-based compensation expense to enhance the comparability of this measure between fiscal year 2020 and
fiscal year 2021. Management believes that excluding share-based compensation expense from Adjusted EBITDA will enhance investors’
ability to assess period-to-period comparisons of the Company’s operating performance and make more meaningful comparisons between
our operating performance and the operating performance of our competitors.
49
Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measure of EBITDA and Adjusted
EBITDA may not be directly comparable to EBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and
Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA and Adjusted EBITDA are
supplemental measures of operating performance that do not represent, and should not be considered in isolation or as an alternative to, or
substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial
performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a
substitute for analysis of our results as reported under GAAP. Some of the limitations are:
●
●
●
●
●
●
●
EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or
contractual commitments;
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
EBITDA and Adjusted EBITDA do not reflect any impact for single lease expense for leases classified as finance leases;
EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or
principal payments on our debt;
Adjusted EBITDA does not reflect share-based compensation expense, impairment and store closing costs;
EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes; and
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to
be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.
Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available
to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using
EBITDA and Adjusted EBITDA as supplemental information.
The following table reconciles net income to EBITDA and Adjusted EBITDA, dollars in thousands:
Year ended September 30,
2021
2020
Net income .................................................................................................................... $
Interest expense, net ..................................................................................................
Provision for income taxes ........................................................................................
Depreciation and amortization ..................................................................................
EBITDA ........................................................................................................................
Impairment of long-lived assets and store closing costs ...........................................
Share-based compensation ........................................................................................
Adjusted EBITDA(1) ..................................................................................................... $
20,581
2,271
5,475
29,633
57,960
1,455
877
60,292
20,009
2,048
5,692
31,193
58,942
612
1,129
60,683
(1) Adjusted EBITDA for fiscal year 2020, as presented, has been recast to exclude share-based compensation expense to enhance the
comparability of this measure between fiscal year 2020 and fiscal year 2021.
Year ended September 30, 2021 compared to Year ended September 30, 2020
EBITDA decreased 1.7% to $58.0 million in the year ended September 30, 2021 compared to $58.9 million in the year ended
September 30, 2020. EBITDA as a percentage of net sales was 5.5% and 5.7% for the years ended September 30, 2021 and 2020,
respectively.
Adjusted EBITDA decreased 0.6% to $60.3 million in the year ended September 30, 2021 compared to $60.7 million in the year
ended September 30, 2020. Adjusted EBITDA as a percentage of net sales was 5.7% and 5.9% for the years ended September 30, 2021
and 2020, respectively.
50
Year ended September 30, 2020 compared to Year ended September 30, 2019
A comparative discussion of EBITDA and Adjusted EBITDA for the years ended September 30, 2020 and September 30, 2019
is set out in our Annual Report on Form 10-K for the year ended September 30, 2020 under the heading “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Non-GAAP financial measures – EBITDA and Adjusted EBITDA.”
Liquidity and Capital Resources
Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and
borrowings under our Revolving Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures
predominantly in connection with opening, relocating and remodeling stores, debt service and corporate taxes. As of September 30, 2021,
we had $23.7 million in cash and cash equivalents and $49.0 million available for borrowing under our Revolving Facility. On November
18, 2020, we entered into a $35.0 million Term Loan Facility maturing November 13, 2024, which was used to partially fund the special
cash dividend paid in December 2020.
In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to
$10.0 million in shares of the Company’s common stock. Our Board subsequently extended the share repurchase program, which will
terminate on May 31, 2022. We did not repurchase any shares during the year ended September 30, 2021. Between October 1, 2021 and
December 6, 2021 (the latest practicable date for making the determination), we did not repurchase any additional shares of our common
stock. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is
$8.3 million. Potential future share repurchases under the share repurchase program could be funded by operating cash flow, excess cash
balances or borrowings under our Revolving Facility. The timing and the number of shares repurchased, if any, will be dictated by our
capital needs and stock market conditions.
We paid a quarterly cash dividend of $0.07 per share of common stock during each quarter of fiscal year 2021 and we paid a
special cash dividend of $2.00 per share of common stock in December 2020. On November 18, 2021, our Board approved a quarterly cash
dividend of $0.10 per share, which will be paid on December 15, 2021 to stockholders of record as of the close of business on November
29, 2021.
We plan to continue to open new stores in the future, which may require us to borrow additional amounts under our Revolving
Facility from time to time. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing
availability under our Revolving Facility will be sufficient to meet our working capital needs and planned capital expenditures, including
capital expenditures related to new store needs, repayment of debt, stock repurchases and dividends for the next 12 months and the
foreseeable future. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day
or, in the case of credit or debit card transactions, within days from the related sale.
The following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:
Year ended September 30,
2021
2020
Net cash provided by operating activities ..................................................................... $
Net cash used in investing activities ..............................................................................
Net cash used in financing activities .............................................................................
Net (decrease) increase in cash and cash equivalents ....................................................
Cash and cash equivalents, beginning of year ...............................................................
Cash and cash equivalents, end of year ......................................................................... $
53,880
(27,755)
(30,981)
(4,856)
28,534
23,678
66,503
(29,557)
(14,626)
22,320
6,214
28,534
Year ended September 30, 2021 compared to Year ended September 30, 2020
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation
and amortization and changes in deferred taxes, and the effect of working capital changes. Net cash provided by operating activities
decreased $12.6 million, or 19.0%, to $53.9 million in the year ended September 30, 2021, from $66.5 million in the year ended September
30, 2020. The decrease in cash provided by operating activities was primarily due to a decrease in cash provided by working capital and a
decrease in net income adjusted for non-cash items.
51
Investing Activities
Net cash used in investing activities consists primarily of capital expenditures. Net cash used in investing activities decreased
$1.8 million, or 6.1%, to $27.8 million in the year ended September 30, 2021 compared to $29.6 million in the year ended September 30,
2020. Cash paid for capital expenditures decreased $0.4 million in the year ended September 30, 2021 compared to the year ended
September 30, 2020, driven by the number and the timing of new store openings and store relocations.
During the year ended September 30, 2021, we opened three new stores, relocated three stores and remodeled two stores,
compared to opening six new stores, relocating one store and remodeling one store during the year ended September 30, 2020. We plan to
spend approximately $28 million to $35 million on capital expenditures during fiscal year 2022 in connection with the opening of four to
six planned new stores and three to four store relocations. We anticipate that our new stores will require, on average, an upfront capital
investment of approximately $2.2 million per store.
Acquisition of property and equipment not yet paid increased $2.4 million to $4.8 million in fiscal year 2021 compared to $2.4
million in fiscal year 2020 due to the timing of payments related to new store openings and relocations.
Financing Activities
Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility, payments of
finance lease obligations, and dividends paid to shareholders. Net cash used in financing activities was $31.0 million for the year ended
September 30, 2021 compared to $14.6 million for the year ended September 30, 2020. The increase in cash used in financing activities
for the year ended September 30, 2021 was primarily due to dividends paid to shareholders of $51.5 million partially offset by net
incremental borrowing under our Credit Facility of $23.7 million during the year ended September 30, 2021, compared to net incremental
repayments of $5.7 million during the year ended September 30, 2020.
Year ended September 30, 2020 compared to Year ended September 30, 2019
A comparative discussion of operating, investing and financing activities for the years ended September 30, 2020 and September
30, 2019 is set out in our Annual Report on Form 10-K for the year ended September 30, 2020 under the heading “Management’s Discussion
and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Credit Facility
The revolving commitment amount under the Revolving Facility is $50.0 million, including a $5.0 million sub-limit for standby
letters of credit. We borrowed $35.0 million under the Term Loan Facility in December 2020. The operating company is the borrower
under the Credit Facility and its obligations under the Credit Facility are guaranteed by the holding company and Vitamin Cottage Two
Ltd. Liability Company (VC2). The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the
right to borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date without premium or penalty.
On November 13, 2019, the Company amended the Credit Facility to extend the maturity date to November 13, 2024 and permit the
operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of
common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year. On
November 18, 2020, we entered into the Fourth Amendment to the Credit Facility (the Fourth Amendment) to provide for the Term Loan
Facility and to permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.
Base rate borrowings under the Credit Facility bear interest at a fluctuating base rate as determined by the lenders’ administrative
agent based on the most recent compliance certificate of the operating company and stated at the highest of (i) the federal funds rate plus
0.50%, (ii) the prime rate, and (iii) the Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage
ratio. Eurodollar rate borrowings under the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor rate
(LIBOR), for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment
fee is also based upon the Company’s consolidated leverage ratio. At the Company’s election, the Credit Facility currently bears interest
at the Eurodollar rate. The Company will repay principal amounts outstanding under the Term Loan Facility in equal quarterly installments
of approximately $0.4 million commencing on the last day of each fiscal quarter commencing on March 31, 2021 and ending on September
30, 2024. Amounts repaid on the Term Loan Facility may not be reborrowed.
52
The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated
leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt,
guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit
Facility prohibits the payment of cash dividends to the holding company from the operating company without the required lenders’ consent,
provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding
company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification,
reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common
stock and pay dividends on our common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.
We had no amounts outstanding under the Revolving Facility as of September 30, 2021 and 2020. We had $23.7 million of
outstanding borrowings under the Term Loan Facility as of September 30, 2021. As of September 30, 2021 and September 30, 2020, we
had undrawn, issued and outstanding letters of credit of $1.0 million and $1.3 million, respectively, which were reserved against the amount
available for borrowing under the terms of the Revolving Facility. We had $49.0 million and $48.7 million available for borrowing under
the Credit Facility as of September 30, 2021 and September 30, 2020, respectively.
As of each of September 30, 2021 and September 30, 2020, the Company was in compliance with the debt covenants under the
Credit Facility.
Recent Accounting Pronouncements
For a description of new applicable accounting pronouncements, including those recently adopted, see Note 2, Basis of
Presentation and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements, included in Item
8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.
Critical Accounting Policies
The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures of contingent assets and liabilities. Actual
amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that
we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to
make adjustments we consider appropriate under the facts and circumstances.
We have chosen accounting policies we believe are appropriate to report accurately and fairly our operating results and financial
position, and we apply those accounting policies in a consistent manner. Refer to our consolidated financial statements and related notes
for a summary of our significant accounting policies. We believe the following accounting policies are the most critical in the preparation
of our consolidated financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters
that are inherently uncertain.
Income Taxes
We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and
liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting
basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in
which we operate. We consider the need to establish valuation allowances to reduce deferred income tax assets to the amounts that we
believe are more likely than not to be recovered.
We recognize the effect of income tax positions only if those positions are more likely than not of being sustained by the relevant
taxing authority. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized.
Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.
Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax
assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain.
In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities. Although we believe
that our estimates are reasonable, actual results could differ from these estimates.
To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our
reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement
would require the use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable
tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.
53
Goodwill and Intangible Assets
We assess our goodwill and intangible assets primarily consisting of trademarks, favorable operating leases and covenants-not-
to-compete at least annually. The Company’s annual impairment testing of goodwill is performed as of July 1. In performing the Company’s
analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it
is more likely than not that the fair value of a reporting unit is less than its carrying amount. In January 2017, the FASB issued ASU 2017-
04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). Early adoption is
permitted and the Company early adopted for the year ended September 30, 2020. The amendments in ASU 2017-04 simplify the
accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step
impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be
recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. There are
significant judgments and estimates within the processes; it is therefore possible that materially different amounts could be recorded if we
used different assumptions or if the underlying circumstances were to change. As of September 30, 2021, the Company has recorded no
impairment charges related to goodwill.
Impairment of Long-Lived Assets and Store Closing Costs
We assess our long-lived assets, principally property and equipment and lease right of use assets, for possible impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These events or changes
primarily include a significant change in current period performance combined with a history of losses and a projection of continuing
losses, or a decision to close or relocate a store. The Company assesses the recoverability of the assets at an individual store level which
we consider to be the lowest level in the organization for which independent identifiable cash flows are available. If the carrying value of
such assets over their respective remaining lives is not recoverable through projected undiscounted future cash flows, impairment is
recognized for any excess of the carrying value over the estimated fair value of the asset group. The fair value of the asset group is estimated
based on either: (i) discounted future cash flows using a market participant’s discount rate; or (ii) an appropriate third-party market appraisal
or other valuation technique.
Our judgment regarding events or changes in circumstances that indicate the assets carrying value may not be recoverable is
based on several factors such as historical and forecasted operating results, significant industry trends and other economic factors. Further,
determining whether an impairment exists requires that we use estimates and assumptions in calculating the future undiscounted cash flows
expected to be generated by the assets. These estimates and assumptions look several years into the future and include assumptions on
future store revenue growth, potential impact of operational changes, competitive factors, inflation and the economy. Application of
alternative assumptions could produce materially different results.
If the Company commits to a plan to dispose of a long-lived asset before the end of its previously estimated useful life, estimated
cash flows are revised accordingly, and the Company may be required to record an asset impairment write-down. Additionally, related
liabilities arise, such as severance, contractual obligations and other accruals associated with store closings from decisions to dispose of
assets. The Company estimates these liabilities based on the facts and circumstances in existence for each restructuring decision. The
amounts the Company will ultimately realize or disburse could differ from the amounts assumed in arriving at the asset impairment and
restructuring charge recorded.
Leases
We lease retail stores, a bulk food repackaging facility and distribution center, land and administrative offices under long-term
operating leases or finance leases. Accounting for leased properties requires compliance with technical accounting rules and significant
judgment by management. Application of these accounting rules and assumptions made by management will determine whether the lease
is accounted for as an operating lease, whether we are considered the owner for accounting purposes or whether the lease is accounted for
as a finance lease.
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”
in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize
a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months. Under ASC 842, recognition,
measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.
We adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the modified retrospective transition approach.
In addition, we elected the package of practical expedients permitted under the transition guidance within the new standard, which, among
other things, permits companies not to reassess prior conclusions on lease identification, lease classification and initial direct costs. We did
not elect the hindsight practical expedient.
54
Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the
Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease
payments, initial direct costs, lease incentives and impairment of operating lease assets.
Most leases include one or more options to renew, with renewal terms normally expressed in periods of five-year increments.
The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as
any options to extend the lease when it is reasonably certain that the Company will exercise that option.
As most of the Company’s lease agreements do not provide an implicit discount rate, the Company uses an estimated incremental
borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. We use other observable
market data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the
borrowing rate for a secured loan with a term similar to the expected term of the lease.
Significant accounting judgment and assumptions are required in determining the accounting for leases, including:
●
fair market value of the leased asset, which is generally estimated based on project costs or comparable market data. Fair
market value is used as a factor in determining whether the lease is accounted for as an operating or finance lease, and is
used for recording the leased asset when we are determined to be the owner for accounting purposes;
● minimum lease term that includes contractual lease periods, and may also include the exercise of renewal options if the
exercise of the option is determined to be reasonably assured or where failure to exercise such options would result in an
economic penalty. The minimum lease term is used as a factor in determining whether the lease is accounted for as an
operating lease or a finance lease and in determining the period over which to depreciate the finance lease asset; and
●
incremental borrowing rate which is estimated based on treasury rates for debt with maturities comparable to the minimum
lease term and our credit spread and other premiums. The incremental borrowing rate is used as a factor in determining the
present value of the minimum lease payments which is then used in determining whether the lease is accounted for as an
operating lease or finance lease, as well as for allocating our rental payments on operating and finance leases between
interest expense and a reduction of the outstanding obligation.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to interest rate changes of our long-term debt. We do not use financial instruments for trading or other speculative
purposes.
Interest Rate Risk
Our principal exposure to market risk relates to changes in interest rates with respect to our Credit Facility. As of September 30,
2021, no amounts were outstanding under our Revolving Facility and $23.7 million was outstanding under our Term Loan Facility. Our
Credit Facility carries floating interest rates that are tied to the Eurodollar rate, and therefore, our statements of income and our cash flows
are exposed to changes in interest rates. Based upon a sensitivity analysis at September 30, 2021, a hypothetical 100 basis point change in
interest rates would change our annual interest expense by $0.3 million in the year ended September 30, 2021.
55
Item 8. Financial Statements and Supplementary Data.
Natural Grocers by Vitamin Cottage, Inc.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm .....................................................................................................
Consolidated Balance Sheets as of September 30, 2021 and 2020 .............................................................................................
Consolidated Statements of Income for the years ended September 30, 2021, 2020 and 2019 ..................................................
Consolidated Statements of Cash Flows for the years ended September 30, 2021, 2020 and 2019 ...........................................
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2021, 2020 and 2019 ..........
Notes to Consolidated Financial Statements ..............................................................................................................................
Page
Number
57
59
60
61
62
63
56
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Natural Grocers by Vitamin Cottage, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries (the Company) as of
September 30, 2021 and 2020, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year
period ended September 30, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company as of September 30, 2021 and 2020, and the results of its operations
and its cash flows for each of the years in the three-year period ended September 30, 2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
internal control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 9, 2021 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases as of October 1, 2019 due to
the adoption of ASU 2016-02, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated
or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements
and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate
opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Impairment of Long-Lived Assets
As discussed in Notes 2 and 7 to the consolidated financial statements, the Company reviews its long-lived assets for possible impairment
whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Company assesses the
recoverability of the assets at an asset group level (with each store representing an individual asset group) by determining whether the carrying
value of such assets can be recovered through projected undiscounted future cash flows over the assets’ respective remaining lives. As of
September 30, 2021, the Company’s long-lived assets included property and equipment, operating lease assets, and finance lease assets of $151.4
million, $316.4 million, and $39.4 million, respectively.
We identified the assessment of the recoverability of long-lived assets associated with certain store locations, including property and equipment,
operating lease assets, and finance lease assets, as a critical audit matter. A high degree of auditor judgment was applied in evaluating certain
inputs to the assessment. These inputs included forecasted sales and forecasted operating expenses as a percentage of forecasted sales attributable
to individual asset groups, for which there was limited observable market information.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating
effectiveness of certain internal controls related to the Company’s process to assess the recoverability of long-lived assets, including controls
related to development of the inputs of forecasted sales and forecasted operating expenses as a percentage of forecasted sales. We performed
sensitivity analyses to assess the impact of changes in forecasted sales and forecasted operating expenses as a percentage of forecasted sales on
the recoverability analysis. We evaluated management’s ability to effectively forecast sales and operating expenses as a percentage of sales by
comparing actual results to management’s historical forecasts. We evaluated the reasonableness of forecasted sales and forecasted operating
expenses as a percentage of forecasted sales by comparing the inputs to available industry reports, historical financial data, and budgets.
We have served as the Company’s auditor since 2010.
Denver, Colorado
December 9, 2021
/s/ KPMG LLP
57
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Natural Grocers by Vitamin Cottage, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Natural Grocers by Vitamin Cottage, Inc. and subsidiaries' (the Company) internal control over financial reporting as of
September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of September 30, 2021, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of September 30, 2021 and 2020, the related consolidated statements of income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2021, and the related notes
(collectively, the consolidated financial statements), and our report dated December 9, 2021 expressed an unqualified opinion on those
consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Denver, Colorado
December 9, 2021
/s/ KPMG LLP
58
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
Current assets:
Assets
Cash and cash equivalents .......................................................................................................... $
Accounts receivable, net ............................................................................................................
Merchandise inventory ...............................................................................................................
Prepaid expenses and other current assets ..................................................................................
Total current assets .................................................................................................................
Property and equipment, net...........................................................................................................
Other assets:
Operating lease assets, net ..........................................................................................................
Finance lease assets, net .............................................................................................................
Deposits and other assets............................................................................................................
Goodwill and other intangible assets, net ...................................................................................
Total other assets ....................................................................................................................
Total assets ............................................................................................................................. $
Current liabilities:
Liabilities and Stockholders’ Equity
Accounts payable ....................................................................................................................... $
Accrued expenses .......................................................................................................................
Term loan facility, current portion .............................................................................................
Operating lease obligations, current portion ...............................................................................
Finance lease obligations, current portion ..................................................................................
Total current liabilities ...........................................................................................................
Long-term liabilities:
Term loan facility, net of current portion ...................................................................................
Operating lease obligations, net of current portion ....................................................................
Finance lease obligations, net of current portion ........................................................................
Deferred income tax liabilities, net ............................................................................................
Total long-term liabilities ...........................................................................................................
Total liabilities .......................................................................................................................
Commitments (Notes 11 and 18)
Stockholders’ equity:
Common stock, $0.001 par value. 50,000,000 shares authorized, 22,620,417 and 22,546,765
shares issued at 2021 and 2020, respectively .........................................................................
Additional paid-in capital ...........................................................................................................
Retained earnings .......................................................................................................................
Total stockholders’ equity ..........................................................................................................
Total liabilities and stockholders’ equity ................................................................................ $
See accompanying notes to consolidated financial statements.
September 30,
2021
2020
23,678
8,489
100,546
2,914
135,627
151,399
316,388
39,367
530
11,768
368,053
655,079
68,949
26,589
1,750
33,308
3,176
133,772
21,938
301,895
39,450
15,293
378,576
512,348
23
57,289
85,419
142,731
655,079
28,534
8,519
100,175
6,185
143,413
147,929
339,239
40,096
616
10,499
390,450
681,792
69,163
24,995
—
32,156
2,836
129,150
—
325,641
39,506
14,429
379,576
508,726
23
56,752
116,291
173,066
681,792
59
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Income
(Dollars in thousands, except per share data)
Year ended September 30,
2020
2021
2019
Net sales ......................................................................................................... $
Cost of goods sold and occupancy costs ........................................................
Gross profit ............................................................................................
Store expenses ................................................................................................
Administrative expenses ................................................................................
Pre-opening expenses .....................................................................................
Operating income ...................................................................................
Interest expense, net .......................................................................................
Income before income taxes ...................................................................
Provision for income taxes .............................................................................
Net income ............................................................................................. $
1,055,516
763,328
292,188
234,586
28,355
920
28,327
(2,271)
26,056
(5,475)
20,581
1,036,842
753,701
283,141
227,069
26,780
1,543
27,749
(2,048)
25,701
(5,692)
20,009
903,582
664,829
238,753
197,792
22,837
1,358
16,766
(4,952)
11,814
(2,398)
9,416
Net income per share of common stock:
Basic ....................................................................................................... $
Diluted.................................................................................................... $
0.91
0.91
0.89
0.89
0.42
0.42
Weighted average number of shares of common stock outstanding:
Basic .......................................................................................................
Diluted....................................................................................................
22,591,816
22,711,003
22,501,779
22,577,646
22,424,328
22,554,603
See accompanying notes to consolidated financial statements.
60
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
2021
Year ended September 30,
2020
2019
Operating activities:
Net income .................................................................................................................. $
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ...............................................................................
Impairment of long-lived assets and store closing costs ........................................
Loss (gain) on disposal of property and equipment ...............................................
Share-based compensation .....................................................................................
Deferred income tax expense .................................................................................
Non-cash interest expense ......................................................................................
Changes in operating assets and liabilities
Decrease (increase) in:
Accounts receivable, net ...............................................................................
Income tax receivable ....................................................................................
Merchandise inventory ..................................................................................
Prepaid expenses and other assets .................................................................
Operating lease asset .....................................................................................
(Decrease) increase in:
Operating lease liability ................................................................................
Accounts payable ..........................................................................................
Accrued expenses ..........................................................................................
Deferred compensation .................................................................................
Deferred rent and leasehold incentives .........................................................
Net cash provided by operating activities ................................................
Investing activities:
Acquisition of property and equipment ......................................................................
Acquisition of other intangibles ..................................................................................
Proceeds from sale of property and equipment ..........................................................
Proceeds from property insurance settlements ...........................................................
Net cash used in investing activities .........................................................
Financing activities:
Borrowings under revolving facility ...........................................................................
Repayments under revolving facility ..........................................................................
Borrowings under term loan facility ...........................................................................
Repayments under term loan facility ..........................................................................
Capital and financing lease obligations payments ......................................................
Finance lease obligation payments .............................................................................
Dividends to shareholders ...........................................................................................
Loan fees paid .............................................................................................................
Payments on withholding tax for restricted stock unit vesting ..................................
Net cash used in financing activities ........................................................
Net (decrease) increase in cash and cash equivalents ..............................
Cash and cash equivalents, beginning of year ................................................................
Cash and cash equivalents, end of year ........................................................................... $
Supplemental disclosures of cash flow information:
Cash paid for interest .................................................................................................. $
Cash paid for interest on finance or capital and financing lease obligations, net of
capitalized interest of $194, $102 and $268, respectively .....................................
Income taxes paid .......................................................................................................
Deferred compensation paid .......................................................................................
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid .................................................. $
Acquisition of other intangibles not yet paid..............................................................
Proceeds from sale of property and equipment not yet received ...............................
Property acquired through capital and capital financing lease obligations ................
Property acquired through operating lease obligations ..............................................
Property acquired through finance lease obligations..................................................
20,581
20,009
29,633
1,155
209
877
864
24
30
3,004
(371)
(141)
31,090
(32,030)
(2,639)
1,594
—
—
53,880
(26,350)
(1,937)
89
443
(27,755)
65,900
(65,900)
35,000
(11,313)
—
(2,823)
(51,453)
(52)
(340)
(30,981)
(4,856)
28,534
23,678
370
1,782
6,747
—
4,770
319
—
—
9,216
3,025
31,193
612
(42)
1,129
3,742
12
(3,418)
2,350
(3,996)
(762)
30,206
(30,569)
10,103
5,934
—
—
66,503
(26,752)
(2,832)
—
27
(29,557)
236,100
(241,792)
—
—
—
(2,271)
(6,301)
(25)
(337)
(14,626)
22,320
6,214
28,534
354
1,690
3,305
—
2,407
255
42
—
13,204
11,625
9,416
28,977
380
(131)
1,185
3,973
13
(315)
(5,174)
(1,951)
42
—
—
1,024
1,211
(688)
(580)
37,382
(30,030)
(2,703)
836
32
(31,865)
405,900
(413,400)
—
—
(780)
—
—
—
(421)
(8,701)
(3,184)
9,398
6,214
787
4,148
4,734
700
6,289
476
6
12,156
—
—
See accompanying notes to consolidated financial statements.
61
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Fiscal Years Ended September 30, 2021, 2020 and 2019
(Dollars in thousands, except per share data)
Common stock –$0.001 par
value
Shares
outstanding Amount
Additional
paid-in
capital
Retained
earnings
Treasury
stock
Total
stockholders’
equity
Net income ......................................
Share-based compensation ..............
Net income ......................................
Share-based compensation ..............
Issuance of common stock ..............
Topic 842 transition impact .............
Cash dividends ................................
Balances September 30, 2018 ............. 22,373,382 $
—
89,675
Balances September 30, 2019 ............. 22,463,057
—
47,222
36,486
—
—
Balances September 30, 2020 ............. 22,546,765
—
—
73,652
—
Balances September 30, 2021 ............. 22,620,417 $
Net income ......................................
Share-based compensation ..............
Issuance of common stock ..............
Cash dividends ................................
23 $
—
—
23
—
—
—
—
—
23
—
—
—
—
23 $
56,236 $
—
83
56,319
—
433
—
—
—
56,752
—
537
—
—
57,289 $
91,507 $
9,416
—
100,923
20,009
—
—
1,660
(6,301)
116,291
20,581
—
—
(51,453)
85,419 $
(1,040) $
—
681
(359)
—
359
—
—
—
—
—
—
—
—
— $
146,726
9,416
764
156,906
20,009
792
—
1,660
(6,301 )
173,066
20,581
537
—
(51,453 )
142,731
See accompanying notes to consolidated financial statements.
62
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Notes to Consolidated Financial Statements
September 30, 2021 and 2020
1. Organization
Nature of Business
Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries
(collectively, the Company) operate retail stores that specialize in natural and organic groceries and dietary supplements. The Company
operates its retail stores under its trademark Natural Grocers by Vitamin Cottage® with 162 stores as of September 30, 2021, including 41
stores in Colorado, 25 in Texas, 14 in Oregon, 12 in Arizona, nine in Utah, eight in Kansas, seven in Missouri, six each in Iowa, New
Mexico and Oklahoma, four each in Idaho, Montana and Washington, three each in Arkansas, Nebraska, Nevada and North Dakota, two
in Wyoming, and one in Minnesota and Louisiana. The Company also has a bulk food repackaging facility and distribution center in
Colorado. The Company had 162 and 159 stores as of September 30, 2021 and 2020, respectively.
2. Basis of Presentation and Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include all the accounts of the holding company’s wholly owned
subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company) and Vitamin Cottage Two Ltd. Liability Company
(VC2). All significant intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of
America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Management reviews its estimates on an ongoing basis, including those related to valuation of inventories,
useful lives of long-lived assets for depreciation and amortization, impairment of finite-lived intangible, long-lived assets, and goodwill,
lease assumptions, allowances for self-insurance reserves, deferred tax assets and liabilities and litigation based on currently available
information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.
Segment Information
The Company has one reporting segment, natural and organic retail stores.
Other Comprehensive Income
The Company has no other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents include currency on hand, demand deposits with banks, money market funds and credit and debit card
transactions which typically settle within three business days. The Company considers all highly liquid investments with a remaining
maturity of 90 days or less when acquired to be cash equivalents.
Accounts Receivable
Accounts receivable consists primarily of receivables from vendors for certain promotional programs, magazine advertising and
other miscellaneous receivables and are presented net of any allowances for doubtful accounts. Accounts receivable also includes
receivables from Landlords for tenant improvement allowances. Vendor receivable balances are generally presented on a gross basis
separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience and application of the
specific identification method. Allowance for doubtful accounts totaled $0.1 million as of each of September 30, 2021 and 2020.
63
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments in
cash and cash equivalents. The Company’s cash and cash equivalent account balances, which are held in major financial institutions,
exceeded the Federal Deposit Insurance Corporation’s federally insured limits by approximately $22.6 million as of September 30, 2021.
Vendor Concentration
For the years ended September 30, 2021 and 2020, purchases from the Company’s largest vendor and its subsidiaries represented
approximately 67% and 66%, respectively, of all product purchases made during such periods. However, the Company believes that, if
necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.
Merchandise Inventory
Merchandise inventory consists of goods held for sale. The cost of inventory includes certain costs associated with the preparation
of inventory for sale, including inventory overhead costs. Merchandise inventory is carried at the lower of cost or net realizable value. Cost
is determined using the weighted average cost method.
Long-Lived Assets
Depreciable long-lived assets primarily consist of leasehold and building improvements, which are stated at historical cost less
accumulated depreciation. Depreciation is provided using the straight-line method over the useful life of the relevant asset. For land
improvements and leasehold and building improvements, depreciation is recorded over the shorter of the assets’ useful lives or the lease
terms. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong its life are charged to expense
as incurred. Gains and losses on disposition of property and equipment are included in store expenses in the year of disposition, and
primarily relate to store relocations.
The Company capitalizes interest, if applicable, as part of the historical costs of buildings and leasehold and building
improvements.
Impairment of Finite-Lived Intangible and Long-Lived Assets
We assess our long-lived assets, principally property and equipment, lease right of use assets and purchased intangible assets
subject to amortization, for possible impairment whenever events or changes in circumstances indicate the carrying amount of an asset may
not be recoverable. These events or changes primarily include a significant change in current period performance combined with a history
of losses and a projection of continuing losses, or a decision to close or relocate a store. If the carrying value of such assets over their
respective remaining lives is not recoverable through projected undiscounted future cash flows, impairment is recognized for any excess
of the carrying value over the estimated fair value of the asset group. The fair value of the asset group is estimated based on either: (i)
discounted future cash flows using a market participant’s discount rate; or (ii) an appropriate third-party market appraisal or other valuation
technique.
The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market
value, significant industry trends and other economic and regulatory factors in performing these analyses. As of September 30, 2021 and
2020, the Company had property and equipment assets of $151.4 million and $147.9 million, respectively, operating lease assets of $316.4
million and $339.2 million, respectively, finance lease assets of $39.4 million and $40.1 million, respectively, and purchased intangible
assets subject to amortization of $6.1 million and $4.9 million, respectively. The Company recorded impairment charges related to long-
lived assets of $1.1 million, $0.6 million and $0.4 million in fiscal years 2021, 2020 and 2019, respectively.
Goodwill and Intangible Assets
Intangible assets primarily consist of goodwill and trademarks. Goodwill and the Vitamin Cottage trademark have indefinite lives
and are not amortized; rather, they are tested for impairment at least annually. Intangible assets with definite lives are amortized over their
estimated useful lives. The Company evaluates the reasonableness of the useful lives of these intangibles at least annually.
The Company’s annual impairment testing of goodwill is performed as of July 1. In performing the Company’s analysis of
goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount. In January 2017, the FASB issued ASU 2017-04,
“Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles – Goodwill and Other” (ASU 2017-04). Early adoption is
permitted and the Company early adopted for the year ended September 30, 2020. The amendments in ASU 2017-04 simplify the
accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step
impairment test. An impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value should be
recognized; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. As of September
30, 2021, the Company has recorded no impairment charges related to goodwill.
64
The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Capitalized software costs
are included in intangible assets in the consolidated balance sheets and are amortized over the estimated useful lives of the software.
Software costs that do not meet capitalization criteria are expensed as incurred.
Deferred Financing Costs
Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the life
of the credit facility using the straight-line method.
Leases
The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-
term operating or finance leases. These leases include scheduled increases in minimum rents and renewal provisions at the option of the
Company. The lease term for accounting purposes commences with the date the Company takes possession of the space and ends on the
later of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the
lease.
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”
in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize
a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months. Under ASC 842, recognition,
measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.
The Company adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the modified retrospective transition
approach.
Operating Leases
Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the
Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease
payments, initial direct costs, lease incentives and impairment of operating lease assets. The rent payment pursuant to the lease agreement
is recorded as a reduction in the operating lease liability and as a reduction in the right of use asset and as single lease expense over the
term of the remaining lease.
Finance Leases
Finance lease liabilities represent the present value of lease payments not yet paid. Finance lease assets represent the Company’s
right to use an underlying asset and are based upon the lease liabilities adjusted for prepayments or accrued lease payments, initial direct
costs, lease incentives and impairment of lease assets. The Company does not record single lease expense for the rental payments under
finance leases, but rather payments under the finance lease obligations are recognized as a reduction of the finance lease obligation and as
interest expense. The right of use asset is depreciated over the term of the related lease.
Leases –prior to adoption of ASC 842
Operating Leases
Prior to the adoption of ASC 842 in fiscal year 2020, the Company accounted for operating leases with rent holidays and
escalating payment terms by recognizing the associated expense on a straight-line basis over the lease term, and the difference between the
average rental amount charged to expense and amounts payable under the leases are included in deferred rent. For certain leases, the
Company has received cash from landlords to compensate for costs incurred by the Company in making the store locations ready for
operation (leasehold incentives). Leasehold incentives received from a landlord were deferred and recognized on a straight-line basis as a
reduction to rent expense over the lease term.
65
Capital Financing Leases
From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution, the
Company analyzed its involvement during the construction period. As a result of defined forms of lessee involvement, the Company could
be deemed the “owner” for accounting purposes during the construction period, and may be required to capitalize the project costs on its
balance sheet. If the project costs were capitalized, the Company performed a sale-leaseback analysis upon completion of the construction
to determine if the Company should remove the assets from its balance sheet. If the asset should not be removed from the balance sheet,
the fair market value of the building remained recognized as an asset on the balance sheet, along with a corresponding capital lease financing
obligation equal to the fair market value of the building less any amount the Company contributed towards construction. The Company did
not record rent expense for the rental payments under capital financing leases, but rather payments under the capital financing lease
obligations were recognized as a reduction of the capital lease financing obligation and as interest expense. The capital financing lease
assets were depreciated on a straight-line basis over the estimated useful life of the asset.
Capital Leases
Occasionally, the Company entered into leases that were deemed to be capital leases. For these leases, the Company capitalized
the lower of the present value of the minimum lease payments or the fair value of the leased asset at inception and recorded a corresponding
capital lease obligation. The Company did not record rent expense for the rental payments under capital leases, but rather payments under
the capital lease obligations were recognized as a reduction of the capital lease obligation and as interest expense. The capital lease asset
was depreciated on a straight-line basis over the term of the related lease.
Self-Insurance
The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation. Stop-
loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses are accrued based upon the
Company’s estimates of the aggregate claims incurred but not reported using historical experience. The estimated accruals for these
liabilities could be significantly affected if future occurrences and claims differ from historical trends.
Revenue Recognition
Revenue is recognized at the point of sale, net of in-house coupons, discounts and returns. Sales taxes are not included in sales.
The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction.
The Company records a contract liability within accrued expenses when it sells the Company’s gift cards and records a sale when a customer
redeems the gift card.
Cost of Goods Sold and Occupancy Costs
Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and allowances, as
well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging facility and distribution
center. The amount shown is net of various rebates from third-party vendors in the form of quantity discounts and payments. Vendor
consideration associated with product discounts is recorded as a reduction in the cost of the product. Store occupancy costs include rent,
common area maintenance and real estate taxes. Store occupancy costs do not include any rent amounts for the store leases classified as
finance leases (previously classified as capital and financing lease obligations).
Store Expenses
Store expenses consist of store-level expenses such as salaries, benefits and share-based compensation, supplies, utilities,
depreciation, gain or loss on disposal of assets, long-lived asset impairment charges, store closing costs and other related expenses
associated with operations support. Store expenses also include purchasing support services and advertising and marketing costs.
Administrative Expenses
Administrative expenses consist of salaries, benefits and share-based compensation, occupancy costs, depreciation, office
supplies, hardware and software expenses, professional services expenses and other general and administrative expenses.
Pre-Opening Expenses
Costs associated with the opening of new stores or relocating/remodeling existing stores are expensed as incurred.
Advertising and Marketing
Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening expenses in the
consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2021, 2020 and 2019 were
$6.3 million, $6.6 million and $8.2 million, respectively, net of vendor reimbursements of $5.4 million, $4.5 million and $4.6 million for
the years ended September 30, 2021, 2020 and 2019, respectively.
66
Share-Based Compensation
The Company adopted the 2012 Omnibus Incentive Plan in connection with its initial public offering on July 25, 2012. Restricted
stock units are granted at the market price of the Company’s common stock on the date of grant and expensed over the applicable vesting
period.
The excess tax benefits for recognized compensation costs are reported as a credit to income tax expense and as operating cash
outflows when such excess tax benefits are realized by a reduction to current taxes payable.
Income Taxes
The Company accounts for income taxes using the asset and liability method. This method requires recognition of deferred tax
assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial
reporting basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the
respective jurisdictions in which the Company operates.
The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the
Company believes are more likely than not to be recovered.
The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained.
Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition
or measurement are reflected in the period in which the change in judgment occurs. Although the Company believes that its estimates are
reasonable, actual results could differ from these estimates. In addition, the Company is subject to periodic audits and examinations by the
Internal Revenue Service (IRS) and other state and local taxing authorities.
Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent differences for tax
purposes.
U.S. Tax Reform
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law. Intended to
provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act, among other things, includes provisions
addressing the carryback of net operating losses for specific periods, temporary modifications to the limitations placed on the tax
deductibility of net interest expenses, and technical amendments for qualified improvement property (QIP).
As a result of the technical amendments made by the CARES Act to QIP, the Company accelerated tax depreciation expenses of
approximately $9.3 million for the year ended September 30, 2019, representing primarily temporary book-to-tax timing differences for
income tax purposes. The impacts of the CARES Act are recorded as components within the Company’s deferred income tax liabilities
and income tax receivable on the Company’s consolidated balance sheets.
Recently Adopted Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, “Leases (Topic 842)”
in February 2016 and subsequently issued related ASUs in 2018 and 2019 (collectively, “ASC 842”). ASC 842 requires lessees to recognize
a right-of-use asset and corresponding lease liability for all leases with terms greater than 12 months. Under ASC 842, recognition,
measurement and presentation of lease expenses depend on whether the lease is classified as a finance or operating lease.
The Company adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the modified retrospective transition
approach. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new
standard, which, among other things, permits companies not to reassess prior conclusions on lease identification, lease classification and
initial direct costs. The Company did not elect the hindsight practical expedient.
The adoption of ASC 842 resulted in the recognition of operating lease assets and operating lease liabilities of $359.6 million
and $377.8 million, respectively, as of October 1, 2019. Included in the measurement of the new lease assets is the reclassification of certain
balances, including those historically recorded as deferred rent and leasehold incentives.
Additionally, the Company recognized a cumulative effect adjustment, which increased retained earnings by $1.7 million for the
year ended September 30, 2020. This adjustment was primarily driven by the derecognition of $41.9 million of lease obligations and $40.2
million of net assets related to leases that had been classified as capital financing lease obligations under the former failed-sale leaseback
guidance. These leases were reclassified as operating or finance leases as of October 1, 2019, the transition date. See Note 11 for additional
information related to the Company’s lease accounting policy.
67
In June 2018, the FASB issued ASU 2018-07, “Compensation-Stock Compensation,” Topic 718, “Improvements to Non-
employee Share-Based Payment Accounting” (ASU 2018-07) as part of its Simplification Initiative to reduce complexity when accounting
for share-based payments to non-employees. ASU 2018-07 expands the scope of Topic 718 to more closely align share-based payment
transactions for acquiring goods and services from non-employees with the accounting for share-based payments to employees, with certain
exceptions. The provisions of ASU 2018-07 were effective for the Company’s first quarter of the fiscal year ending September 30, 2020,
with early adoption permitted. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements for
the year ended September 30, 2020.
In January 2017, the FASB issued ASU 2017-04, “Simplifying the Test for Goodwill Impairment,” Topic 350, “Intangibles –
Goodwill and Other” (ASU 2017-04). The amendments in ASU 2017-04 simplify the accounting for goodwill impairment for all entities
by requiring impairment charges to be based on the first step in the current two-step impairment test. An impairment charge for the amount
by which the carrying amount exceeds the reporting unit’s fair value should be recognized; however, the loss recognized should not exceed
the total amount of goodwill allocated to that reporting unit. The amendments should be applied on a prospective basis. ASU 2019-10
delayed the effective date of this ASU to align with the effective date of ASU 2016-13 (referred to above). Because the Company is a
smaller reporting company, the provisions of ASU 2017-04 will be effective for the Company’s first quarter of the fiscal year ending
September 30, 2024. Early adoption is permitted and the Company early adopted for the year ended September 30, 2020. ASU 2017-04
did not have an impact on the Company’s consolidated financial statements for the year ended September 30, 2020.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, “Revenue
from Contracts with Customers,” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance
for revenue recognition and replaced most existing revenue recognition guidance in GAAP. ASU 2014-09’s core principle is that a company
recognizes revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the
company expects to be entitled for the transfer of those goods or services. The Company adopted this ASU and related amendments on
October 1, 2018, using the modified retrospective approach. Additionally, upon adoption of this ASU, the Company elected the following
practical expedients:
- ASU 2016-09, pursuant to which the incremental costs of obtaining a contract are recognized as an expense when incurred if the
amortization period of the asset that the entity otherwise would have recognized is one year or less.
- ASU 2016-12, pursuant to which sales taxes and other similar taxes collected from customers are presented net of sales.
- ASU 2016-20, pursuant to which the transaction price allocated to performance obligations is not disclosed when the related
contract has a duration of one year or less.
The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements for the year
ended September 30, 2019.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses,” Topic 326, “Measurement of Credit
Losses on Financial Instruments” (ASU 2016-13), subsequently amended by various standard updates. ASU 2016-13 replaces the incurred
loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a
broader range of reasonable and supportable information when determining credit loss estimates. ASU 2016-13 also requires financial
assets to be measured net of expected credit losses at the time of initial recognition. ASU 2019-10, issued in November 2019, delayed the
effective date of ASU 2016-13 for smaller reporting companies such as the Company. The provisions of ASU 2016-13 will be effective
for the Company’s first quarter of the fiscal year ending September 30, 2024. Early adoption is permitted. The Company is currently
evaluating the impact that the adoption of these provisions will have on its consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, “Income Taxes,” Topic 740, “Simplifying the Accounting for Income Taxes”
(ASU 2019-12). The new guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and
also simplifies areas such as franchise taxes, step-up in tax basis goodwill, separate entity financial statements and interim recognition of
enactment of tax laws or rate changes. The provisions of ASU 2019-12 will be effective for the Company’s first quarter of the fiscal year
ending September 30, 2022 with early adoption permitted. The Company does not anticipate that the adoption of these provisions will have
a material impact on its consolidated financial statements.
68
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform,” Topic 848, “Facilitation of the Effects of Reference
Rate Reform on Financial Reporting” (ASU 2020-04). The new guidance provides optional expedients and exceptions for applying GAAP
to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The guidance applies
only to contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued
because of reference rate reform. The interest rate currently payable under the Company’s Credit Facility is based on LIBOR, but recent
amendments provide for a LIBOR successor rate once LIBOR is discontinued. The amendments in this update only apply to modifications
made prior to December 31, 2022. The Company does not anticipate that this ASU will have a material impact on its consolidated financial
statements.
3. Revenue Recognition
The nature of the goods the Company transfers to customers at the point of sale consists of merchandise purchased for resale. In
these transactions, the Company acts as a principal and recognizes revenue (net sales) from the sale of goods when control of the promised
goods is transferred to the customer. Control refers to the ability of the customer to direct the use of, and obtain substantially all the
remaining benefits from, the transferred goods.
The Company’s performance obligations are satisfied upon the transfer of goods to the customer (at the point of sale), and
payment from the customer is also due at that time. Transaction prices are considered fixed. Discounts provided to customers at the point
of sale are recognized as a reduction in revenue as the goods are sold. Revenue excludes sales and usage-based taxes collected.
Proceeds from the sales of the Company’s gift cards are recorded as a liability at the time of sale and recognized as revenue when
the gift cards are redeemed by the customer and the performance obligation is satisfied by the Company.
As of each September 30, 2021 and September 30, 2020, the balance of contract liabilities related to unredeemed gift cards was
$1.5 million and $1.3 million, respectively. Revenue for the fiscal year ended September 30, 2021 includes $0.7 million that was included
in the contract liability balance of unredeemed gift cards at September 30, 2020.
The following table disaggregates the Company’s revenue by product category for the fiscal years ended September 30, 2021,
2020 and 2019, dollars in thousands:
Grocery ........................................................................ $
Dietary supplements .....................................................
Body care, pet care and other .......................................
2021
731,894
220,000
103,622
$ 1,055,516
Year ended September 30,
2020
720,185
213,182
103,475
100 % 1,036,842
69 %
21
10
2019
69 619,825
21 188,913
94,844
10
100 903,582
69
21
10
100
4. Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if the Company’s
granted but unvested restricted stock units were to vest, resulting in the issuance of common stock that would then share in the earnings of
the Company. The following table presents the Company’s basic and diluted earnings per share for the years ended September 30, 2021,
2020 and 2019, dollars in thousands, except per share data:
Net income ........................................................................................ $
Weighted average number of shares of common stock outstanding ..
Effect of dilutive securities ...............................................................
Weighted average number of shares of common stock outstanding
2021
Year ended September 30,
2020
20,581
22,591,816
119,187
20,009
22,501,779
75,867
2019
9,416
22,424,328
130,275
including the effect of dilutive securities ......................................
22,711,003
22,577,646
22,554,603
Basic earnings per share .................................................................... $
Diluted earnings per share ................................................................. $
0.91
0.91
0.89
0.89
0.42
0.42
There were 166,362, 94,497 and 56,510 non-vested restricted stock units for the years ended September 30, 2021, 2020 and 2019,
respectively, excluded from the calculation as they are antidilutive.
69
The Company paid a quarterly cash dividend of $0.07 per share of common stock in each quarter of fiscal year 2021 and 2020.
The Company paid a special cash dividend of $2.00 per share of common stock in December 2020. The Company did not declare or pay
any dividends in the year ended September 30, 2019.
As of September 30, 2021, the Company had 50,000,000 shares of common stock authorized, of which 22,620,417 shares were
issued and outstanding, as well as 10,000,000 shares of preferred common stock authorized, of which none was issued and outstanding.
5. Fair Value Measurements
The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value.
The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and
market participant’s assumptions (unobservable inputs). Non-financial assets, such as goodwill and long-lived assets, are accounted for at
fair value on a non-recurring basis. These items are tested for impairment on the occurrence of a triggering event or, in the case of goodwill,
at least on an annual basis.
During fiscal year 2021, long-lived assets, including Right of Use Assets, with a carrying value of $3.3 million were written
down to their fair value of $2.1 million, resulting in asset impairment charges of $1.1 million. During fiscal year 2020, long-lived assets
with a carrying value of $1.1 million were written down to their fair value of $0.5 million, resulting in asset impairment charges of $0.6
million. During fiscal year 2019, long-lived assets with a carrying value of $0.8 million were written down to their fair value of $0.4
million, resulting in asset impairment charges of $0.4 million. The carrying amounts of the Company’s financial assets and liabilities,
including cash and cash equivalents, accounts receivable, accounts payable and other accrued expenses, approximate fair value because of
the short maturity of those assets and liabilities.
6. Property and Equipment
The Company had the following property and equipment balances as of September 30, 2021 and 2020, dollars in thousands:
Construction in process ....................................................................................
Land .................................................................................................................
Buildings ..........................................................................................................
Land improvements .........................................................................................
Leasehold and building improvements .............................................................
Fixtures and equipment ....................................................................................
Computer hardware and software ....................................................................
Useful lives
(in years)
n/a
n/a
16 - 40
1 - 24
1 - 25
5 - 7
3 - 5
$
Less accumulated depreciation and amortization .............................................
Property and equipment, net ........................................................................
$
As of September 30,
2021
2020
2,268
6,062
34,531
1,782
159,800
145,754
25,068
375,265
(223,866)
151,399
6,717
1,390
26,732
1,575
153,438
139,965
23,628
353,445
(205,516)
147,929
Total costs capitalized for qualifying construction projects of leasehold and building improvements included $0.5 million and
$0.4 million the years ended September 30, 2021 and 2020, respectively, related to internal staff compensation. Depreciation expense
related to capitalized internal staff compensation was $0.6 million for each of the years ended September 30, 2021, 2020, and 2019. Interest
costs of $0.2 million, $0.1 million and $0.3 million were capitalized for the years ended September 30, 2021, 2020 and 2019, respectively.
Depreciation and amortization expense for the years ended September 30, 2021, 2020 and 2019 is summarized as follows, dollars
in thousands:
Depreciation and amortization expense included in cost of goods
sold and occupancy costs .............................................................. $
Depreciation and amortization expense included in store expenses ..
Depreciation and amortization expense included in administrative
expenses ........................................................................................
Total depreciation and amortization expenses............................... $
2021
Year ended September 30,
2020
2019
873
27,542
1,218
29,633
793
29,225
1,175
31,193
736
27,150
1,091
28,977
70
7. Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, lease right of use assets and purchased intangible assets subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. The Company assesses the recoverability of the assets at an individual store level which we consider to be the
lowest level in the organization for which independent identifiable cash flows are available. If the carrying value of such assets over their
respective remaining lives is not recoverable through projected undiscounted future cash flows, impairment is recognized. The amount of
impairment is measured based on projected discounted future cash flows using a market participant’s discount rate . The Company considers
factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends and
other economic and regulatory factors in performing these analyses.
As of September 30, 2021 and 2020, the Company had property and equipment assets of $151.4 million and $147.9, respectively,
and lease right-of-use assets of $355.8 million and $379.3, respectively. In the fourth quarter of fiscal years 2021 and 2020, the Company
concluded, as a result of its review of potential long-lived asset impairment, that certain long-lived assets were impaired. The Company
recorded impairments of $1.1 million, $0.6 million and $0.4 million for the years ended September 30, 2021, 2020 and 2019, respectively.
Such charges are reflected within store expenses on the consolidated statement of income for the years ended September 30, 2021 and
2020.
8. Goodwill and Other Intangible Assets
Goodwill and other intangible assets as of September 30, 2021 and 2020, are summarized as follows, dollars in thousands:
Useful lives
(in years)
As of September 30,
2021
2020
Amortizable intangible assets:
Other intangibles ..........................................................................................
Less accumulated amortization ....................................................................
Amortizable intangible assets, net ............................................................
Other intangibles in process .............................................................................
Trademark ........................................................................................................
Deferred financing costs, net (1) .......................................................................
Total other intangibles, net .......................................................................
0.5 - 3
$
Indefinite
Goodwill ..........................................................................................................
Indefinite
Total goodwill and other intangibles, net .................................................
$
3,754
(3,139)
615
5,507
389
59
6,570
5,198
11,768
3,634
(2,378)
1,256
3,625
389
31
5,301
5,198
10,499
(1) Certain prior year amounts have been reclassified for consistency with current year presentation.
Amortization expense was $0.8, $0.8 and $0.5 million for the years ended September 30, 2021, 2020 and 2019, respectively.
Capitalized costs for internal-use software development were $2.0 million and $2.6 million for the years ended September 30,
2021 and 2020, respectively, primarily due to capitalization of expenses related to external consultants.
9. Accrued Expenses
The composition of accrued expenses as of September 30, 2021 and 2020, is summarized as follows, dollars in thousands:
Payroll and employee-related expenses .............................................................................. $
Accrued property, sales and use tax payable ......................................................................
Accrued marketing expenses ..............................................................................................
Deferred revenue related to gift card sales ..........................................................................
Other ...................................................................................................................................
Total accrued expenses ................................................................................................... $
13,243
8,322
713
2,157
2,154
26,589
13,569
7,912
407
1,819
1,288
24,995
As of September 30,
2021
2020
71
10. Long-Term Debt
Credit Facility
The Company is a party to a Credit Facility, entered into on January 28, 2016 and subsequently amended, consisting of a $50.0
million revolving loan facility (the Revolving Facility) and a $35.0 million term loan facility (the Term Loan Facility, and together with
the Revolving Facility, the Credit Facility). The operating company is the borrower under the Credit Facility and its obligations under the
Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the
Company’s assets. The revolving commitment amount under the Revolving Facility is $50.0 million, including a $5.0 million sublimit for
standby letters of credit. The Company has the right to borrow, prepay and re-borrow amounts under the Revolving Facility at any time
prior to the maturity date without premium or penalty. The Credit Facility matures on November 13, 2024. Base rate loans under the Credit
Facility bear interest at a fluctuating base rate, as determined by the lenders’ administrative agent based on the most recent compliance
certificate of the operating company and stated at the highest of (i) the federal funds rate plus 0.50%, (ii) the prime rate, and (iii) the
Eurodollar rate plus 1.00%, less the lender spread based upon the Company’s consolidated leverage ratio. Eurodollar rate borrowings under
the Credit Facility bear interest based on the London Interbank Offered Rate, or its successor (LIBOR), for the interest period plus the
lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is based upon the Company’s
consolidated leverage ratio. The Company will repay principal amounts outstanding under the Term Loan Facility in equal installments of
approximately $0.4 million on the last day of each fiscal quarter, beginning on March 31, 2021 and ending on September 30, 2024, with
the remaining principal amount payable on the maturity date. Amounts repaid on the Term Loan Facility may not be reborrowed.
The Credit Facility requires compliance with certain customary operational and financial covenants, including a leverage ratio.
The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other
obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits
the payment of cash dividends to the holding company from the operating company without the administrative agent’s consent, provided
that so long as no default or event of default exists or would arise as a result thereof, the operating company may pay cash dividends to the
holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification,
reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common
stock and pay dividends on the Company’s common stock in an aggregate amount not to exceed $10.0 million during any fiscal year.
The Company had no amounts outstanding under the Revolving Facility as of September 30, 2021 and 2020. The Company had
$23.7 million of outstanding borrowings under the Term Loan Facility as of September 30, 2021. As of September 30, 2021 and September
30, 2020, the Company had undrawn, issued and outstanding letters of credit of $1.0 million and $1.3 million, respectively, which were
reserved against the amount available for borrowing under the terms of the Revolving Facility. The Company had $49.0 million and $48.7
million available for borrowing under the Revolving Facility as of September 30, 2021 and September 30, 2020, respectively.
On November 13, 2019, the Company amended the Credit Facility to extend the maturity date to November 13, 2024 and permit
the operating company to pay cash dividends to Natural Grocers in an amount sufficient to allow Natural Grocers to repurchase shares of
common stock and pay dividends on its common stock in an aggregate amount not to exceed $10.0 million during any fiscal year. On
November 18, 2020, the Company entered into the Fourth Amendment to the Credit Facility to provide for the Term Loan Facility and to
permit payment of a one-time dividend of up to $50.0 million no later than December 31, 2020.
Lease Obligations
The Company had 20 and 19 leases that were classified as finance leases as of September 30, 2021 and 2020, respectively. No
rent expense is recorded for these finance leases; rather, rental payments under such leases are recognized as a reduction of the lease
obligation and as interest expense. The interest rate on finance lease obligations is determined at the inception of the lease.
Interest
The Company incurred gross interest expense of $2.5 million, $2.2 million and $5.2 million in the years ended September 30,
2021, 2020 and 2019, respectively. Interest expense for the year ended September 30, 2021 and 2020 relates primarily to interest on finance
lease obligations. Interest expense for the years ended September 30, 2019 relates primarily to interest on capital and financing lease
obligations. The Company capitalized interest of $0.2 million, $0.1 million and $0.3 million for the years ended September 30, 2021, 2020
and 2019, respectively.
11. Lease Commitments
The Company leases most of its stores, a bulk food repackaging facility and distribution center and its administrative offices. The
Company determines if an arrangement is a lease or contains a lease at inception. Lease terms generally range from 10 to 25 years, with
scheduled increases in minimum rent payments.
72
The FASB issued ASU 2016-02, “Leases (Topic 842)” in February 2016 and subsequently issued related ASUs in 2018 and 2019
(collectively, “ASC 842”). ASC 842 requires lessees to recognize a right-of-use asset and corresponding lease liability for all leases with
terms greater than 12 months. Under ASC 842, recognition, measurement and presentation of lease expenses depend on whether the lease
is classified as a finance or operating lease. The Company adopted ASC 842 on October 1, 2019, the first day of fiscal year 2020, using the
modified retrospective transition approach.
Operating lease liabilities represent the present value of lease payments not yet paid. Operating lease assets represent the
Company’s right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments or accrued lease
payments, initial direct costs, lease incentives and impairment of operating lease assets.
Most leases include one or more options to renew, with renewal terms normally expressed in periods of five-year increments.
The exercise of lease renewal options is at the Company’s sole discretion. The lease term includes the initial contractual term as well as
any options to extend the lease when it is reasonably certain that the Company will exercise that option.
Variable payments related to pass-through costs for maintenance, taxes and insurance or adjustments based on an index such as
Consumer Price Index are not included in the measurement of the lease liability or asset and are expensed as incurred.
As most of the Company’s lease agreements do not provide an implicit discount rate, the Company uses an estimated incremental
borrowing rate, which is derived from third-party lenders, to determine the present value of lease payments. We use other observable market
data to evaluate the appropriateness of the rate derived from the lenders. The estimated incremental borrowing rate is based on the borrowing
rate for a secured loan with a term similar to the expected term of the lease.
Leases are recorded at the commencement date (the date the underlying asset becomes available for use) for the present value of
lease payments, less tenant improvement allowances received or receivable. Leases with a term of 12 months or less (short-term leases) are
not presented on the balance sheet. The Company’s short-term leases relate primarily to embedded leases. The Company has elected to
account for the lease and non-lease components as a single lease component for all current classes of leases.
The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants. The
Company subleases certain real estate or portions thereof to third parties. Such subleases have all been classified as operating leases.
Remaining lease terms extend through fiscal year 2030. Although some sublease arrangements provide renewal options, the exercise of
sublease renewal options is at the sole discretion of the subtenant. The Company recognizes sublease income on a straight-line basis.
The Company has four operating leases and one finance lease with Chalet Properties, LLC (Chalet), one operating lease with the
Isely Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC, each of which is a related party (see Note 14). The
leases began at various times with the earliest commencing in November 1999, continue for various terms through July 2040 and include
various options to renew. The terms and rental rates of these leases are similar to leases that would be entered into with nonrelated parties
and are at prevailing market rental rates. These leases account for $7.6 million of right-of-use assets and $7.9 million of lease liabilities
included in the disclosures below. Cash rent paid pursuant to the related party leases was $1.3 million, $1.3 million and $1.5 million for
the years ended September 30, 2021, 2020 and 2019, respectively.
The components of total lease cost for the year ended September 30, 2021 and 2020 are as follows, dollars in thousands:
Lease cost
Operating lease cost:
Classification
Year ended September 30,
2020
2021
Cost of goods sold and occupancy costs ....... $
Store expenses ..............................................
Administrative expenses ...............................
Pre-opening expenses ...................................
Finance lease cost:
Store expenses(1) ...........................................
Depreciation of right-of-use assets ........
Interest expense, net (1) .................................
Interest on lease liabilities .....................
Store expenses ..............................................
Short-term lease cost .................................
Cost of goods sold and occupancy costs(2) ....
Variable lease cost ....................................
Sublease income........................................ Store expenses ...................................................
Total lease cost ....................................................................................................................... $
42,652
319
305
233
3,686
1,953
326
5,611
(313)
54,772
42,634
319
311
154
3,139
1,698
2,016
5,367
(368)
55,270
1 Immaterial balances related to stores not yet open are included in pre-opening expenses.
2 Immaterial balances related to the corporate headquarters and distribution center are included in administrative expenses and
store expenses, respectively.
73
Additional information related to the Company’s leases for the year ended September 30, 2021 and 2020 are as follows, dollars
in thousands:
Year ended September 30,
2020
2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases .................................................................. $
Operating cash flows from finance leases .....................................................................
Financing cash flows from finance leases .....................................................................
Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases ............................................................................................................
Finance leases ...............................................................................................................
44,473
1,976
2,823
9,216
3,025
Additional information related to the Company’s leases as of September 30, 2021 and 2020 were as follows:
Weighted-average remaining lease term (in years):
Operating leases ............................................................................................................
Finance leases ...............................................................................................................
Weighted-average discount rate:
Operating leases ............................................................................................................
Finance leases ...............................................................................................................
11.1
11.9
3.6%
5.0%
September 30,
2021
2020
44,281
1,792
2,271
13,204
11,625
11.7
12.5
3.6
5.1
In addition, during the year ended September 30, 2020, the Company purchased one store building that had previously been
leased. This resulted in: (i) a $2.5 million reduction in operating lease liability and (ii) the reclassification of $2.4 million of corresponding
operating right-of-use asset to property and equipment.
Future lease payments under non-cancellable leases as of September 30, 2021 were as follows, dollars in thousands:
Fiscal Year
2022 .................................................................................. $
2023 ..................................................................................
2024 ..................................................................................
2025 ..................................................................................
2026 ..................................................................................
Thereafter .........................................................................
Total future undiscounted lease payments ....................
Less imputed interest ........................................................
Total reported lease liability .........................................
Less current portion ..........................................................
Noncurrent lease liability .............................................. $
Operating
leases
Finance
leases
Total
44,717
43,946
42,120
40,417
37,202
201,831
410,233
(75,030 )
335,203
(33,308 )
301,895
5,080
5,176
5,242
5,252
5,295
30,157
56,202
(13,576 )
42,626
(3,176 )
39,450
49,797
49,122
47,362
45,669
42,497
231,988
466,435
(88,606 )
377,829
(36,484 )
341,345
The table above excludes $28.2 million of legally binding minimum lease payments for leases that had been executed as of
September 30, 2021 but whose terms had not yet commenced.
74
Future minimum rental commitments and sublease rental income under the terms of the Company’s operating and finance leases
were as follows as of September 30, 2021, dollars in thousands:
Fiscal Year
2022 ................................................................... $
2023 ...................................................................
2024 ...................................................................
2025 ...................................................................
2026 ...................................................................
Thereafter ..........................................................
Total payments .................................................. $
Third
parties
Related
parties
Sublease
rental
income
Total
leases
48,457
47,781
46,021
44,323
41,428
229,303
457,313
1,341
1,341
1,341
1,346
1,069
2,684
9,122
(353 )
(343 )
(275 )
(274 )
(273 )
(339 )
(1,857 )
49,445
48,779
47,087
45,395
42,224
231,648
464,578
Future minimum rental commitments under the terms of the Company’s related party leases include $3.4 million pursuant to a
finance lease and $5.7 million pursuant to operating leases as of September 30, 2021.
Prior to the Company’s adoption of ASC 842 as of October 1, 2019, the Company’s leases were designated as either capital,
financing or operating. Consistent with the guidance provided in ASC 842, previously designated capital lease obligations are now classified
as finance leases, while previously designated capital lease finance obligations have been derecognized and reclassified as operating or
finance leases. The designation of operating leases remains substantially unchanged under ASC 842.
Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2021, 2020, and
2019 totaled $55.3 million, $54.6 million and $51.6 million, respectively, which is included in cost of goods sold and occupancy costs and
administrative expenses in the consolidated statements of income. In addition, $0.2 million, $0.2 million and $0.3 million is included in
pre-opening expense associated with rent expense for stores prior to their opening date for the years ended September 30, 2021, 2020 and
2019, respectively.
12. Share-Based Compensation
The Company adopted the 2012 Omnibus Incentive Plan (as amended, the Plan) on July 17, 2012. Restricted stock unit awards
granted pursuant to the Plan, if they vest, will be settled in new shares of the Company’s common stock or shares of common stock held in
treasury. At the adoption of the Plan, there were 1,090,151 shares of common stock available for issuance or delivery under the Plan. In
March 2019, the Company’s stockholders approved a proposal to amend the Plan to: (i) increase the number of shares of common stock
reserved for issuance thereunder by 600,000 shares and (ii) extend its term by five years. As of September 30, 2021, 407,746 shares of
common stock remain available for grants under the Plan. The Plan provides for awards of options, stock appreciation rights, stock grants,
restricted stock units, other share-based awards and cash-based incentive awards to officers, members of the Board and certain employees
who are not named executive officers and consultants. As of September 30, 2021, restricted stock units had been granted under the Plan,
at no out-of-pocket cost to officers, Board members and key employees. These restricted stock units vest subject to requisite service
requirements, immediately in part or annually in installments over a one-to-five-year period. The award recipients are not entitled to cash
dividends or to vote with regard to non-vested restricted stock units, and the units are subject to forfeiture during the vesting period.
Restricted stock units are granted at the market price of the Company’s stock on the date of grant and are expensed on a straight-line basis
over the vesting period.
The shares of non-vested restricted stock units as of September 30, 2021 were as follows:
Shares
Weighted
average grant
date fair value
Non-vested as of September 30, 2019 ...........................................................................
Granted .........................................................................................................................
Forfeited ........................................................................................................................
Vested ...........................................................................................................................
Non-vested as of September 30, 2020 ...........................................................................
Granted .........................................................................................................................
Forfeited ........................................................................................................................
Vested ...........................................................................................................................
Non-vested as of September 30, 2021 ...........................................................................
316,356 $
124,239
(40,052 )
(115,286 )
285,257
225,660
(22,974 )
(99,804 )
388,139
10.18
8.93
10.53
11.22
9.17
11.22
8.87
9.18
10.38
During the year ended September 30, 2021, the Company awarded stock grants totaling 4,000 shares of the Company’s common
stock to 40 employees who were not named executive officers. Such shares were fully vested on the grant date.
75
Share-based compensation expense for restricted stock unit awards to certain employees who are not named executive officers
was $0.5 million, $0.8 million and $0.8 million for the years ended September 30, 2021, 2020 and 2019, respectively. Share-based
compensation expense for restricted stock unit awards to one named executive officer was $0.2 million, $0.2 million and $0.2 million for
the years ended September 30, 2021, 2020 and 2019, respectively.
Each independent member of the Board receives an annual grant of restricted stock units equal to $60,000 (based on the closing
price of common stock on the New York Stock Exchange on the date of grant). Such grants are made each year on the date of the Company’s
annual meeting of stockholders, or on a pro rata basis in the case of a mid-year appointment. Share-based compensation expense for the
Company’s awards to its Board members was $0.2 million for each of the years ended September 30, 2021, 2020 and 2019.
The Company recorded total share-based compensation expense before income taxes of $0.9 million, $1.1 million and $1.2
million in the years ended September 30, 2021, 2020 and 2019, respectively. The share-based compensation expense is included in cost of
goods sold and occupancy costs, store expenses or administrative expenses in the consolidated statements of income consistent with the
manner in which the applicable officer, Board member or key employee’s compensation expense is presented. The Company realized a tax
benefit from share-based compensation of $0.1 million in the year ended September 30, 2021, and did not realize a tax benefit from share-
based compensation expense in the years ended September 30, 2020 and 2019.
As of September 30, 2021, there was $2.5 million of unrecognized share-based compensation expense related to non-vested
restricted stock units, net of estimated forfeitures, which the Company anticipates will be recognized over a weighted average period of
approximately three years.
13. Stockholders’ Equity
Share Repurchases
In May 2016, the Board of Directors (the Board) authorized a two-year share repurchase program pursuant to which the Company
may repurchase up to $10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase
program, which will terminate on May 31, 2022. Repurchases under the Company’s share repurchase program may be made from time to
time at management’s discretion on the open market or through privately negotiated transactions in compliance with Rule 10b-18 under
the Securities Exchange Act of 1934, as amended (the Exchange Act), subject to market conditions, applicable legal requirements and other
relevant factors. Repurchases of common stock may also be made under a Rule 10b5-1 plan, which permits common stock to be repurchased
when the Company might otherwise be precluded from doing so under insider trading laws. The share repurchase program does not obligate
the Company to purchase any particular amount of common stock and may be suspended, modified or discontinued by the Company
without prior notice.
The Company did not repurchase any shares during the years ended September 30, 2021 and 2020. The dollar value of the shares
of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.3 million.
During fiscal year 2021, the Company reissued no treasury shares. During fiscal year 2020, the Company reissued 47,222 treasury
shares at a cost of $0.4 million to satisfy the issuance of common stock pursuant to the vesting of certain restricted stock unit awards and
the award of stock grants. At September 30, 2021 and 2020 the Company held no shares in treasury.
14. Related Party Transactions
The Company has ongoing relationships with related parties as noted:
Chalet Properties, LLC: The Company has four operating leases and one finance lease (see Note 11) with Chalet. Chalet is owned
by the Company’s four non-independent Board members, Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other family
members. Rent paid to Chalet was $1.0 million for the year ended September 30, 2021 and 2020, and $1.2 million for the year ended
September 30, 2019.
Isely Family Land Trust LLC: The Company has one operating lease (see Note 11) with Land Trust. The Land Trust is owned by
the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was $0.3 million for each of the years
ended September 30, 2021, 2020 and 2019.
FTVC LLC: The Company has one operating lease (see Note 11) for a store location with FTVC LLC, which is owned by the
Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million
for each of the years ended September 30, 2021, 2020 and 2019.
76
15. Income Taxes
The following are the components of the provision for income taxes as of September 30, 2021, 2020 and 2019, respectively,
dollars in thousands:
2021
Year ended September 30,
2020
2019
Current federal income tax expense (benefit) ............................ $
Current state income tax expense ...............................................
Total current income tax expense (benefit) ................................
Deferred federal income tax expense .........................................
Deferred state income tax expense .............................................
Total deferred income tax expense ............................................
3,859
752
4,611
836
28
864
Total provision for income taxes ............................................ $
5,475
1,317
633
1,950
3,157
585
3,742
5,692
(1,981)
406
(1,575)
3,760
213
3,973
2,398
The differences between the United States federal statutory income tax rate and the Company’s effective tax rate are as follows:
Statutory tax rate ........................................................................
State income taxes, net of federal income tax expense ..............
Enhanced food deduction ...........................................................
Deferred tax liability adjustment ................................................
Other, net ...................................................................................
Effective tax rate ....................................................................
21.0%
3.6
(0.5)
0.8
(3.9)
21.0%
21.0
4.0
(0.6)
(0.3)
(2.0)
22.1
21.0
3.7
(1.3)
(0.5)
(2.6)
20.3
2021
Year ended September 30,
2020
2019
The Company’s effective tax rate was 21.0% in the year ended September 30, 2021 compared to 22.1% in the year ended
September 30, 2020. The Company’s effective tax rate increased from 20.3% in the year ended September 30, 2019 to 22.1% in the year
ended September 30, 2020 primarily due to a cost segregation study performed resulting in a tax benefit of approximately $0.5 million for
the year ended September 30, 2019. The Company had a similar tax benefit as a result of the accelerated depreciation allowed under the
CARES Act related to Qualified Improvement Property for the year ended September 30, 2020. However, due to higher pre-tax income in
the year ended September 30, 2020, this resulted in a lower impact on the effective rate.
Deferred taxes have been classified on the consolidated balance sheets as follows, dollars in thousands:
Long-term assets ............................................................................................................... $
Long-term liabilities ..........................................................................................................
Net deferred tax liabilities ............................................................................................. $
—
(15,293)
(15,293)
—
(14,429)
(14,429)
As of September 30,
2021
2020
77
The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are
as follows, dollars in thousands:
Deferred tax assets
As of September 30,
2021
2020
Goodwill ............................................................................................................................ $
Trademarks ........................................................................................................................
Finance lease obligations ...................................................................................................
Operating lease obligations ................................................................................................
Accrued paid time off ........................................................................................................
Other ..................................................................................................................................
Gross deferred tax assets ................................................................................................
Deferred tax liabilities
Property and equipment .....................................................................................................
Finance lease assets ............................................................................................................
Operating lease assets ........................................................................................................
Leasehold improvements ...................................................................................................
Subleases ............................................................................................................................
Other ..................................................................................................................................
Gross deferred tax liabilities ..........................................................................................
Net deferred tax liabilities .............................................................................................. $
238
613
10,443
82,119
682
649
94,744
(20,477)
(9,645)
(77,867)
(1,652)
—
(396)
(110,037)
(15,293)
475
623
10,453
87,947
771
821
101,090
(19,929)
(9,855)
(83,508)
(1,900)
(99)
(228)
(115,519)
(14,429)
The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of future deductions
based on the nature of the deductible temporary differences and expected future taxable income.
The Company did not utilize federal income tax carryforwards or federal tax credit carryforwards in the year ended September
30, 2021. The Company utilized approximately $0.2 million in tax effected federal income tax carryforwards and approximately $0.4
million in federal tax credit carryforwards in the year ended September 30, 2020. The Company utilized less than $0.1 million in tax
effected state income tax carryforwards in the years ended September 30, 2021 and 2020.
The Company did not have any uncertain tax positions as of September 30, 2021 and 2020.
The Company files income tax returns with federal, state and local tax authorities. With limited exceptions, the Company is no
longer subject to federal income tax examinations for fiscal years 2017 and prior and is no longer subject to state and local income tax
examinations for fiscal years 2016 and prior.
16. Defined Contribution Plan
The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees who meet
certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral provisions of Section
401(k) of the Internal Revenue Code of 1986, as amended (the Code). Employees may defer up to the annual maximum limit prescribed
by the Code. The Company, on a discretionary basis, may match up to 25% of participant contributions up to a maximum annual employer
match of $2,500. During the year ended September 30, 2021, the Company accrued $0.9 million for matching contributions to be paid out
after the plan year ending December 31, 2021. In January 2021, the Company funded matching contributions of $1.2 million to participants’
accounts for the plan year ended December 31, 2020.
17. Segment Reporting
The Company has one reporting segment, natural and organic retail stores. The Company’s revenue is derived from the sale of
natural and organic products at its stores. All existing operations are domestic.
18. Commitments and Contingencies
Self-Insurance
The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation,
subject to a stop loss policy. The self-insurance liability related to claims under the Company’s health benefit plans is determined based on
analysis of actual claims. The amounts related to these claims are included as a component of payroll and employee-related expenses in
accrued expenses. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical
claims experience, demographic factors and other actuarial assumptions. While the Company believes that its assumptions are appropriate,
the estimated accrual for these liabilities could be significantly affected if future occurrences and claims materially differ from these
assumptions and historical trends.
78
Legal
In January 2020, a former assistant store manager filed a purported class action lawsuit in the United States District Court for the
District of Colorado on behalf of current and former assistant store managers alleging that the Company violated the Fair Labor Standards
Act (“FLSA”) and Colorado labor laws by misclassifying the assistant store managers as exempt. The alleged violations relate to failure to
pay for overtime work. In November 2020, the court granted plaintiffs’ motion for conditional certification with regard to the FLSA claim.
In September 2021, the court ordered 56 opt-in plaintiffs to individual arbitration, leaving 101 FLSA plaintiffs in the FLSA collective
action. The litigation is currently in the discovery stage. The plaintiffs did not quantify any alleged damages. The Company believes these
claims are without merit and intends to defend the matter vigorously. Given the preliminary stage of the case and the legal standards that
must be met for, among other things, class certification, the Company is unable to reasonably estimate at this time the possible range of
loss, if any, that may result from this action.
The Company is otherwise periodically involved in various legal proceedings that are incidental to the conduct of its business,
including but not limited to employment discrimination claims, customer injury claims and investigations. When the potential liability from
a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the
resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict
with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against it, management does not believe any
currently pending legal proceeding to which the Company is a party will have a material adverse effect on its financial statements.
19. Selected Quarterly Financial Data (Unaudited)
The summarized unaudited quarterly financial data presented below reflect all adjustments, which in the opinion of management
are of a normal and recurring nature, necessary to present fairly the results of operations for the periods presented.
Summarized unaudited quarterly financial data for each fiscal year is as follows, dollars in thousands, except per share data:
Fiscal Year Ended September 30, 2021
Three months ended
December 31,
2020
March 31,
2021
June 30,
2021
September 30,
2021
Net sales ...................................................................................................... $
Cost of goods sold and occupancy costs ....................................................
Gross profit ........................................................................................
Store expenses ............................................................................................
Administrative expenses .............................................................................
Pre-opening expenses .................................................................................
Operating income ..............................................................................
Interest expense, net ...................................................................................
Income before income taxes ..............................................................
Provision for income taxes .........................................................................
Net income ......................................................................................... $
265,045
192,020
73,025
60,330
7,304
189
5,202
(510)
4,692
(1,060)
3,632
259,198
187,371
71,827
58,422
6,358
341
6,706
(603 )
6,103
(1,399 )
4,704
258,624
187,082
71,542
57,086
7,273
135
7,048
(586 )
6,462
(1,430 )
5,032
Basic earnings per share ............................................................................. $
Diluted earnings per share .......................................................................... $
0.16
0.16
0.21
0.21
0.22
0.22
Fiscal Year Ended September 30, 2020
Three months ended
272,649
196,855
75,794
58,748
7,420
255
9,371
(572 )
8,799
(1,586 )
7,213
0.32
0.32
December 31,
2019
March 31,
2020
June 30,
2020
September 30,
2020
Net sales ...................................................................................................... $
Cost of goods sold and occupancy costs ....................................................
Gross profit ........................................................................................
Store expenses ............................................................................................
Administrative expenses .............................................................................
Pre-opening expenses .................................................................................
Operating income ..............................................................................
Interest expense, net ...................................................................................
Income before income taxes ..............................................................
Provision for income taxes .........................................................................
Net income ......................................................................................... $
230,030
169,506
60,524
51,427
5,819
430
2,848
(536)
2,312
(444)
1,868
277,524
199,701
77,823
56,878
7,038
650
13,257
(516 )
12,741
(3,023 )
9,718
265,110
192,729
72,381
58,577
6,818
300
6,686
(505 )
6,181
(1,490 )
4,691
Basic earnings per share ............................................................................. $
Diluted earnings per share .......................................................................... $
0.08
0.08
0.43
0.43
0.21
0.21
264,178
191,765
72,413
60,187
7,105
163
4,958
(491 )
4,467
(735 )
3,732
0.17
0.16
20. Subsequent Events
On November 18, 2021, the Board approved a quarterly cash dividend of $0.10 per share, which will be paid on December 15,
2021 to stockholders of record as of the close of business on November 29, 2021.
79
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule
13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and preparation of consolidated financial statements for external purposes in accordance
with GAAP. Our internal control over financial reporting includes those policies and procedures that:
●
●
●
pertain to the maintenance of records that, in a reasonable detail, accurately and fairly reflect the dispositions of our
transactions and assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial
statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material adverse effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have assessed the effectiveness of our internal control over financial reporting as of September 30, 2021 using the criteria
described in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our assessment of the design and related testing of the internal control over financial reporting, management
concluded that, as of September 30, 2021, we maintained effective internal control over financial reporting.
Our independent registered public accounting firm, KPMG LLP, audited the effectiveness of our internal control over financial
reporting. KPMG LLP’s attestation report is included in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2021 that
materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officers and principal financial and accounting officer,
evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the
period covered by this Form 10-K. The evaluation included certain internal control areas in which we have made and are continuing to
make changes to improve and enhance controls. In designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource
constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative
to their costs.
Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our
disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2021.
Item 9B. Other Information.
None.
80
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this item is incorporated herein by reference to the information provided under the headings
“Executive Officers and Directors,” “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our
Definitive Proxy Statement on Schedule 14A for the 2022 Annual Meeting of Stockholders to be filed with the SEC within 120 days of
September 30, 2021 (the 2022 Proxy Statement). We have adopted a Code of Ethics that establishes the standards of ethical conduct
applicable to all of our directors, officers, including our principal executive, financial and accounting officers, employees, consultants and
contractors. Our Code of Ethics is publicly available on our website at www.naturalgrocers.com and we will post any amendments to, or
waivers from, a provision of this Code of Ethics by posting such information on our website, at the address specified above.
Item 11. Executive Compensation.
The information required by this item is incorporated herein by reference to the information in the 2022 Proxy Statement under
the headings “Executive Compensation” and “Director Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this item concerning securities authorized for issuance under equity compensation plans and security
ownership of certain beneficial owners and management is incorporated by reference to the information in the 2022 Proxy Statement under
the headings “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial
Owners and Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this item concerning transactions with related persons and director independence is incorporated by
reference to the information in the 2022 Proxy Statement under the headings “Certain Relationships and Related Party Transactions” and
“Corporate Governance.”
Item 14. Principal Accounting Fees and Services.
The information required by this item is incorporated by reference to the information in the 2022 Proxy Statement under the
heading “Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”
81
Item 15. Exhibits and Financial Statement Schedules.
1.
Financial Statements: See Part II, Item 8 of this Form 10-K.
PART IV
2.
Financial Statement Schedules: Schedules not listed above have been omitted because the information required to be set forth therein
is not applicable or is shown in the financial statements or notes herein.
3.
Exhibits
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
EXHIBIT INDEX
Description
Form
Form S-1 333-
Exhibit
File No. Number
Filing Date
3.1
July 5, 2012
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Form S-1 333-
3.2
July 5, 2012
182186
Reference is made to Exhibits 3.1 and 3.2
Specimen Common Stock Certificate
182186
Form S-1 333-
4.2
July 20, 2012
182186
Form of Notice of Grant of Stock Unit Award
Form S-8 333-
4.2
July 27, 2012
Form of Registration Rights Agreement
Form S-1 333-
4.3
July 5, 2012
182886
Form of Notice of Stock Grant Award
Description of Capital Stock
10.1
10.2
Second Amended and Restated Employment Agreement by and between
Vitamin Cottage Natural Food Markets, Inc., Natural Grocers by Vitamin
Cottage, Inc. and Sandra M. Buffa, dated June 26, 2012*
Form of Omnibus Incentive Plan*
Form 10-
K
Form 10-
K
Form 10-
Q
182186
001-
35608
001-
35608
001-
35608
4.5
4.6
December 5, 2019
December 5, 2019
10.1
June 29, 2012
Form S-1 333-
10.16
July 5, 2012
182186
10.3
Summary of Compensation Arrangements for Non-Employee Directors*
Form S-1 333-
10.17
June 29, 2012
10.4
Form of Indemnification Agreement*
Form S-1 333-
10.18
June 29, 2012
182186
182186
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
Shopping Center Lease by and between Chalet Properties, LLC and
Vitamin Cottage Natural Food Markets, Inc., dated January 1, 2010
Ground lease by and between 3801 East Second Avenue, LLC and
Vitamin Cottage Natural Food Markets, Inc., dated March 1, 2001
Commercial Lease by and between Chalet Properties, LLC and Vitamin
Cottage Natural Food Markets, Inc., dated June 1, 2006
Sublease by and between Chalet Properties, LLC and Vitamin Cottage
Natural Food Markets, Inc., dated June 1, 2006
Lease by and between Chalet Properties, LLC and Vitamin Cottage
Natural Food Markets, Inc., dated September 1, 2011
Lease by and between Chalet Properties, LLC and Boulder Vitamin
Cottage Group, LLC, dated July 1, 2011
Lease by and between Isely Family Land Trust, LLC and Vitamin Cottage
Natural Food Markets, Inc., dated February 29, 2012
Lease by and between Chalet Properties, Austin, LLC and Vitamin
Cottage Natural Food Markets, Inc., dated February 29, 2012
Building Lease by and between Chalet Properties, LLC and Vitamin
Cottage Natural Food Markets, Inc., dated December 8, 2010
Distribution Agreement between United Natural Foods, Inc. and Vitamin
Cottage Natural Food Markets, Inc., dated May 20, 2008#
Form S-1 333-
Form S-1 333-
Form S-1 333-
182186
182186
182186
182186
182186
182186
182186
182186
182186
182186
Form S-1 333-
Form S-1 333-
Form S-1 333-
Form S-1 333-
Form S-1 333-
Form S-1 333-
Form S-1 333-
10.19
June 29, 2012
10.2
June 29, 2012
10.21
June 29, 2012
10.22
June 29, 2012
10.23
June 29, 2012
10.24
June 29, 2012
10.25
June 29, 2012
10.26
June 29, 2012
10.27
June 29, 2012
10.28
June 29, 2012
82
10.15 Addendum A to Distribution Agreement between United Natural Foods, Inc.
Form S-1
333-182186 10.29 June 29,
and Vitamin Cottage Natural Food Markets, Inc., dated February 27, 2009#
10.16 Agreement Addendum to Distribution Agreement between United Natural
Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated March 10,
2012#
Form S-1
333-182186 10.3
2012
June 29,
2012
10.17 Third Amendment to Distribution Agreement between United Natural Foods,
Form S-1
333-182186 10.31 June 29,
Inc. and Vitamin Cottage Natural Food Markets, Inc., dated June 3, 2012#
2012
10.18 Form of Stockholders Agreement, by, between and among Natural Grocers by
Form S-1
333-182186 10.32 July 12,
Vitamin Cottage, Inc. and the stockholders to be named therein
10.19 Credit Agreement dated as of January 28, 2016 by and among Vitamin
Form 10-Q
001-35608
Cottage Natural Food Markets, Inc., the Guarantors party thereto, the Lenders
Party thereto and Bank of America, N.A., as Administrative Agent and L/C
Issuer
2012
10.39 January
28, 2016
10.20 Security and Pledge Agreement dated as of January 28, 2016 by and among
Form 10-Q
001-35608
10.4
Vitamin Cottage Natural Food Markets, Inc., Natural Grocers by Vitamin
Cottage, Inc., Vitamin Cottage Two Ltd. Liability Company, the other
Obligors thereunder and Bank of America, N.A.
10.21 Customer Distribution Agreement by and among United Natural Foods, Inc.,
Form 10-Q
001-35608
10.1
January
28, 2016
May 6,
2021
Tony’s Fine Foods, Albert’s Organics and Vitamin Cottage Natural Food
Markets, Inc. dated as of June 21, 2016#
10.22 First Amendment to Credit Agreement dated as of May 10, 2016, by and
among Vitamin Cottage Natural Food Markets, Inc., the Guarantors party
thereto, the Lenders Party thereto and Bank of America, N.A., as
Administrative Agent and L/C Issuer
Form 10-Q
001-35608
10.42 July 28,
2016
10.23 Incentive Compensation Program*
Form 10-Q
001-35608
10.43 February
2, 2017
10.24 Second Amendment to Credit Agreement dated as of September 6, 2018, by
Form 10-K
001-35608
10.44 December
and among Vitamin Cottage Natural Food Markets, Inc., the Guarantors party
thereto, the Lenders Party thereto and Bank of America, N.A., as
Administrative Agent, L/C Issuer and Swing Line Lender
7, 2018
10.25 Autoborrow Agreement dated as of September 6, 2018, by and between
Vitamin Cottage Natural Food Markets, Inc. and Bank of America, N.A.
Form 10-K
001-35608
10.45 December
7, 2018
10.26 Employment offer letter to Todd Dissinger dated December 5, 2017*
Form 10-Q
001-35608
10.46 February
1, 2018
10.27 Notice of Grant of Stock Unit Award to Todd Dissinger dated January 2,
Form 10-Q
001-35608
10.47 February
2018*
10.28 Amendment dated as of May 25, 2018 to Customer Distribution Agreement
dated as of June 21, 2016 by and among United Natural Foods, Inc., Tony’s
Fine Foods, Albert’s Organics and Vitamin Cottage Natural Food Markets,
Inc.#
Form 10-Q
001-35608
10.48 August 2,
1, 2018
2018
10.29 Natural Grocers by Vitamin Cottage, Inc. 2012 Omnibus Incentive Plan, as
Form 8-K
001-35608
10.49 March 8,
amended*
2019
10.30 First Amendment to Lease dated as of July 31, 2019 by and between Chalet
Form 10-Q
001-35608
10.5
August 1,
Properties, Austin, LLC and Vitamin Cottage Natural Food Markets, Inc.
2019
10.31 Third Amendment to Credit Agreement dated as of November 13, 2019, by
Form 10-K
001-35608
10.51 December
and among Vitamin Cottage Natural Food Markets, Inc., the Guarantors party
thereto, the Lenders Party thereto and Bank of America, N.A., as
Administrative Agent, L/C Issuer and Swing Line Lender
5, 2019
83
10.32 Amended and Restated Lease, dated August 3, 2020, between Chalet
Form 10-Q
001-35608
10.1
August 6,
Properties of Pueblo, LLC and Vitamin Cottage Natural Food Markets, Inc.
10.34 Fourth Amendment to Credit Agreement dated as of November 18, 2020, by
and among Vitamin Cottage Natural Food Markets, Inc., the Guarantors party
thereto, the Lenders Party thereto and Bank of America, N.A., as
Administrative Agent, L/C Issuer and Swing Line Lender
Form 8-K
001-35608
10.1
10.35 Fifth Amendment to Credit Agreement dated as of September 16, 2021, by
Form 8-K
001-35608
10.1
and among Vitamin Cottage Natural Food Markets, Inc., the Guarantors party
thereto, the Lenders Party thereto and Bank of America, N.A., as
Administrative Agent, L/C Issuer and Swing Line Lender
14
Code of Ethics
21.1
List of subsidiaries
Form 10-K
001-35608
14
Form 10-K
001-35608
21.1
2020
November
24, 2020
September
22, 2021
December
13, 2012
December
13, 2012
23.1
31.1
Consent of KPMG LLP
Certification of Kemper Isely, a Principal Executive Officer Required Under
—
—
Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2
Certification of Zephyr Isely, a Principal Executive Officer Required Under
—
Section 302(a) of the Sarbanes-Oxley Act of 2002
31.3
Certification of Todd Dissinger, Principal Financial Officer Required Under
—
Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1
Certification of Principal Executive Officers and Principal Financial Officer
Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002†
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
101
The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Annual Report on Form 10-K for the year ended
September 30, 2021, formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Income, (iii) Consolidated Statements of Cash Flows, (iv) Consolidated Statements of Changes in
Stockholders’ Equity, and (v) Notes to Consolidated Financial Statements.
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
*Indicates a management contract or compensatory plan or arrangement
# Confidential portions have been omitted pursuant to a request for confidential treatment.
† The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities
and Exchange Commission and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under
the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of
this Form 10-K, irrespective of any general incorporation language contained in such filing.
84
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized on December 9, 2021.
SIGNATURES
Natural Grocers by Vitamin Cottage, Inc.
By:
/s/ KEMPER ISELY
Kemper Isely,
Its Co-President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
in the capacities and on the dates indicated.
Name
Title
Date
/s/ KEMPER ISELY
Kemper Isely
(Principal Executive Officer, Co-President,
Director)
December 9, 2021
/s/ ZEPHYR ISELY
Zephyr Isely
(Principal Executive Officer, Co-President,
Director)
December 9, 2021
/s/ TODD DISSINGER
Todd Dissinger
(Principal Financial and Accounting Officer,
Chief Financial Officer)
December 9, 2021
/s/ ELIZABETH ISELY
Elizabeth Isely
/s/ HEATHER ISELY
Heather Isely
Director
Director
/s/ EDWARD CERKOVNIK
Edward Cerkovnik
Director
/s/ RICHARD HALLÉ
Richard Hallé
/s/ DAVID ROONEY
David Rooney
Director
Director
December 9, 2021
December 9, 2021
December 9, 2021
December 9, 2021
December 9, 2021
85
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BOARD OF DIRECTORS
KEMPER ISELY Chairman of the Board
HEATHER ISELY Corporate Secretary
Chair of the Compensation Committee
DAVID ROONEY Chair of the Audit Committee
EDWARD CERKOVNIK
RICHARD HALLÉ
ELIZABETH ISELY
ZEPHYR ISELY
EXECUTIVE OFFICERS
KEMPER ISELY Co-President
ZEPHYR ISELY Co-President
ELIZABETH ISELY Executive Vice President
HEATHER ISELY Executive Vice President
TODD DISSINGER Chief Financial Officer
ORDERING FINANCIAL STATEMENTS
A copy of our 2021 Annual Report and Form 10-K may be obtained
by written, phone or email requests to:
Mail:
Investor Relations
Natural Grocers by Vitamin Cottage, Inc.
12612 West Alameda Parkway
Lakewood, Colorado 80228
Email: IR@NaturalGrocers.com
Phone: 303-986-4600
VIRTUAL ANNUAL MEETING
March 2, 2022
1:00 pm Mountain Time
The 2022 Annual Meeting of Stockholders will be held virtually and a live
webcast will be available via the Internet at:
www.virtualshareholdermeeting.com/NGVC2022
TRANSFER AGENT AND REGISTRAR
Information about stock certificates, address changes, ownership transfers or other stock
matters can be obtained from American Stock Transfer & Trust Company, LLC via:
Mail: American Stock Transfer & Trust Company
6201 15th Avenue,
Brooklyn, NY 11219
Email: help@astfinancial.com
Phone: 1-800-937-5449
Hearing Impaired (TTY): 1-866-703-9077 or 718-921-8386
Web: www.ASTfinancial.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
TRADING INFORMATION
The common stock of Natural Grocers by Vitamin Cottage, Inc.
is traded on the New York Stock Exchange (symbol: NGVC).
Columbia, MO
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