NATURAL GROCERS BY VITAMIN COTTAGE, INC.
2023 ANNUAL REPORT
DEAR FELLOW STOCKHOLDERS:
Fiscal 2023 was an outstanding year for Natural Grocers and we take great pride in the Company’s many
accomplishments. We achieved record financial performance including net sales of $1.14 billion and diluted earnings
per share of $1.02. Additionally, we delivered our twentieth consecutive year of positive daily average comparable
store sales growth.
We attribute the strong 2023 results to our differentiated business model, commitment to operational excellence
and our responsiveness to industry dynamics. Consumers continue prioritizing their health and wellness, and we
are well positioned to benefit from this ongoing trend. In addition, we believe that our value proposition of high-
quality products at Always AffordableSM prices resonates with consumers, particularly in an uncertain economic
environment. Marketing initiatives, including our {N}power® rewards program, drove customer engagement, and
strong traffic trends reflected our emphasis on the in-store shopping experience. Lastly, we believe our earnings
growth was driven by our nimble transition from pandemic conditions to focus on core execution and navigating
the current macro environment.
We would like to thank every member of our good4U Crew for their commitment to operational execution and
exceptional customer service, which were instrumental in driving our record setting year.
UPDATES ON KEY INITIATIVES
Customer engagement continues to be a top priority. During fiscal 2023, we enhanced the personalization, frequency
and range of our {N}power rewards program offers, including an emphasis on localized store promotions. In August,
we launched a Natural Grocers mobile app, which provides {N}power members with enhanced access to exclusive
offers, digital coupons, recipes and articles. We believe these initiatives collectively drove the {N}power membership
increase of 17% and net sales penetration of 77%, and were a major contributor to our broad-based sales growth.
Our Natural Grocers brand products remain a key point of differentiation due to their emphasis on quality and price.
In fiscal 2023, private label products represented 7.9% of our total sales, up from 7.6% the previous year. During the
year, we expanded our line of Natural Grocers brand products with 59 new offerings, including a distinctive offering
of organic eggs from regenerative farms. We feel strongly that regenerative agriculture is an important practice with
the potential to mitigate the impact of climate change. We believe that we are the first national grocery retailer to
offer private label organic eggs from regenerative certified farms.
Our Company has a longstanding commitment to investing in our Crew. In November 2023, we implemented a
company-wide wage increase that lifted the average rate for full-time store Crew, including Vitamin Bucks, to over
$21.00 per hour. To partially offset higher labor costs, we continue to leverage technology to drive productivity,
enabling us to streamline and automate certain in-store tasks while maintaining a high level of customer service.
We opened three new stores in fiscal 2023, relocated two stores and remodeled one store. New store development
continues to be a priority but was constrained over the past several years due to delays in permitting and
construction, and the availability of materials. In fiscal 2024 we expect to open four to six new stores, and
relocate or remodel four to six stores.
THE SPECIAL DIVIDEND
Our Board of Directors declared a special cash dividend of $1.00 per common share that was paid in December 2023.
The special dividend reflects our strong operating trends, financial position, confidence in our business outlook, and
commitment to returning value to our stockholders. Including the regular and special dividends paid in December
2023, the Company has cumulatively returned $4.46 in cash per share to stockholders since initiating our dividend
program four years ago.
LOOKING AHEAD
Our success continues to demonstrate that a business model dedicated to offering affordable, high-quality
natural and organic products can help deliver positive social and environmental impact, while creating value
for all stakeholders. As we look forward to the many opportunities in fiscal 2024 and beyond, we remain focused
on enhancing shareholder value by executing to our Founding Principles, leveraging our differentiated model,
emphasizing operational excellence, and driving profitable growth.
2
KEMPER ISELY, CO-PRESIDENT
ZEPHYR ISELY, CO-PRESIDENT
2023 ANNUAL REPORT 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, 2023
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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. Yes ☐ No ☒
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by
any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes ☐ No ☒
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, 2023, the aggregate market value of the voting and non-voting common stock held by
non-affiliates was $108,522,084.
The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of December 4, 2023 was 22,752,413.
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 2024 Annual Meeting of the Stockholders, which will be filed with the Securities and Exchange Commission not
later than 120 days after September 30, 2023.
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Natural Grocers by Vitamin Cottage, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 2023
Table of Contents
Page
Number
PART I
Item 1. Business ................................................................................................................................................
Item 1A. Risk Factors ..........................................................................................................................................
Item 1B. Unresolved Staff Comments ..................................................................................................................
Item 2. Properties ...............................................................................................................................................
Item 3. Legal Proceedings ..................................................................................................................................
Item 4. Mine Safety Disclosures ........................................................................................................................
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities .................................................................................................................................
Item 6. Reserved .................................................................................................................................................
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .................
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ...............................................................
Item 8. Financial Statements and Supplementary Data ......................................................................................
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................
Item 9A. Controls and Procedures ........................................................................................................................
Item 9B. Other Information ..................................................................................................................................
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ...................................................
PART III
Item 10. Directors, Executive Officers and Corporate Governance .....................................................................
Item 11. Executive Compensation ........................................................................................................................
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters ................................................................................................................................................
Item 13. Certain Relationships and Related Transactions, and Director Independence .......................................
Item 14. Principal Accounting Fees and Services ................................................................................................
Item 15. Exhibits, Financial Statement Schedules ...............................................................................................
Item 16. Form 10-K Summary .............................................................................................................................
PART IV
SIGNATURES ......................................................................................................................................................
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Except where the context otherwise requires or where otherwise indicated: (i) all references herein to ‘‘we,’’ ‘‘us,’’
‘‘our,’’ ‘‘Natural Grocers’’ and 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 2023” refers to the year from October 1, 2022 to September
30, 2023).
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, inflationary, deflationary, recessionary, business, interest rate, labor market,
competitive, market, regulatory and other factors, many of which are beyond our control. 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;
●
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.
1
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 free 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, 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 healthy, balanced lifestyles. 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 165 stores in 21 states as of September 30, 2023. 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;
●
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;
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● 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 6,700 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.
3
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 enables us to
leverage our new store opening costs.
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 reduce food waste, divert usable products to food banks, reduce single use plastic bags
and reduce the use of 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 38 years of experience in the natural grocery industry, while our entire management team has an average of 33
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 165 stores as of September 30, 2023 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, developing an effective site selection and store
opening process and implementing operational efficiencies. The depth of our management experience extends beyond our
home office. As of September 30, 2023, 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 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 each of the fiscal years 2023 and 2022, we opened three new stores. We plan to open four to six new stores in
fiscal year 2024, two of which opened during the first quarter of fiscal year 2024 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 two new stores that we plan to open in
fiscal years 2024 and beyond.
4
Store locations as of September 30, 2023.
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 rewards 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 2023, the measures we took that were aimed at enhancing our brand awareness included:
(i) featuring {N}power promotions, with a focus on local store marketing to drive customer traffic; (ii) utilizing {N}power
to identify and send personalized offers to our customers, including through our new Natural Grocers mobile application;
(iii) continuing to make enhancements to our monthly Health Hotline magazine; (iv) organizing month-long seasonal and
topical special promotions; (v) expanding our social media reach through increased investment in paid and organic
placements on platforms, such as Instagram, TikTok, Facebook, X, and YouTube and social media influencer campaigns;
(vi) conducting television, radio, newspaper, outdoor advertising and targeted direct mail campaigns in select markets; and
(vii) 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 7,000 to 16,000 selling square feet, and average
approximately 11,000 selling square feet. In fiscal year 2023, our three new stores and three 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 6,700 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. We strive to open new stores within approximately nine to twelve months from the time of lease execution,
subject to construction permitting and the availability of construction materials and equipment.
6
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.
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 2023, our NHCs introduced a free, in-store personalized shopping
experience to customers, including a store walkthrough and product recommendations. 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 2023, 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 fully
merchandised with an extensive assortment of natural and organic products. We believe we do not need to sell conventional
products to fill our selection, increase our margins or attract more customers.
7
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, 2023:
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 grocery staples, household products, bulk foods, and vitamins and dietary
supplements. We believe our Natural Grocers brand private label products provide our customers with
high-quality, affordable offerings that satisfy our rigorous product standards. During fiscal year 2023,
we expanded our line of Natural Grocers brand products with a number of new offerings, including
organic eggs from regenerative farms, organic flavored coffee, and organic mustard.
■ 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.
8
■ 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).
■ 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, South Dakota
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 200 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.
9
The key elements of our pricing strategy include:
●
an Always Affordable Price throughout our stores;
● heavily advertised Health Hotline deals supported by manufacturer participation;
● discounts offered exclusively to {N}power members, including promotions to highlight affordable family
meals;
●
●
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
●
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 8:27 a.m. to 8:36 p.m., Monday through Saturday, and from 8:57
a.m. to 7:36 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 7 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.
Each of our stores provides in-store access to a NHC. 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 1,000 suppliers and offer approximately 2,900 brands. These
suppliers range from small independent businesses to multinational conglomerates. As of September 30, 2023, we purchased
approximately 78% of the goods we sell from our top 20 suppliers. For the fiscal year ended September 30, 2023,
approximately 68% of our total purchases were from United Natural Foods Inc. and its subsidiaries (UNFI). We strive to
maintain good relations with UNFI and, in August 2023, we extended our long-term relationship with UNFI as our primary
supplier of products in the natural, fresh and produce categories through September 3, 2028, subject to automatic renewals
for successive one-year periods unless otherwise terminated by either party. As a result of global supply chain issues, we
have on occasion 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, although certain products may be in relatively short supply or are unavailable
from time to time.
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We have contracts with third-party manufacturers to produce groceries and dietary supplements under the Natural
Grocers brand. We have longstanding relationships with many of 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.
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, 2023, we employed 3,235 full-time and 938 part-time (less than 30 hours per week) Crew
members, including a total of 373 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 and assistant 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 review priorities and celebrate accomplishments.
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
2023, we promoted internal candidates to fill approximately 64% of our vacant store manager positions, approximately 71%
of our vacant assistant store manager positions, and approximately 67% 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, 2023, approximately 45% of our store managers and approximately 58% 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 department managers 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 five 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 company culture and values, store
operations, nutrition 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. In 2021, the Company established The Natural Grocers
Heroes in Aprons Fund, a non-profit organization that provides short-term financial assistance to qualifying Crew members
or their immediate family members who have experienced unanticipated hardships. 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.
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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:
● 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;
● offer plant-based, compostable plastic bags and 100% recycled, recyclable and 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; and
●
support the economic vitality of small producers and agricultural communities.
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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 offer us the opportunity to build relationships with customers
and community influencers.
{N}power Customer Rewards Program. We introduced the {N}power customer rewards 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 engagement while increasing customer traffic and average basket size. In recent years,
we have enhanced the {N}power program to simplify the accumulation of rewards for users and improve the customer
rewards program experience. During fiscal year 2023, we continued to enhance the personalization, frequency and range of
our {N}power offerings and featured {N}power promotions, with a focus on local store marketing. In August 2023, we
launched a new Natural Grocers mobile application, which provides {N}power members with enhanced access to exclusive
{N}power offers, digital coupons, recipes and articles through their smartphones and tablets. We believe these steps helped
to increase membership in the {N}power program during fiscal year 2023. We had approximately 2.1 million registered
{N}power members as of September 30, 2023 compared to approximately 1.8 million {N}power members as of September
30, 2022.
Health Hotline and Holly Deals. 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 2023, we continued to enhance our Health Hotline magazine.
The Health Hotline magazine was published 11 times during fiscal year 2023, and we expect comparable publication
frequency during fiscal year 2024. 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. Each December, in lieu of our Health Hotline magazine, we publish and mail our Holly Deals
magazine, which features holiday recipes, gift ideas and promotions available at our December Holly Deals sales event.
Special Promotions and Sponsorships During fiscal year 2023, we organized special promotions to coincide with
certain calendar events, such as Resolution Reset Week in January, Earth Day in April, and on the 68th anniversary of the
Company’s founding in August. We also organized month-long special promotions such as the “Non-GMO Month” campaign
in October, the “Body Care & Beauty Bonanza” in May, the “Rock the Grill” campaign during June, the “Splash into Savings”
and “{N}power 2-Day Sale” campaigns in July, and the “Organic Month” campaign during September. Our special
promotions frequently include product discounts, sweepstakes, charitable fundraisers and nutrition education classes. During
fiscal year 2023, 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 2023, 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 in February for Crew member
appreciation month and one day during our 68th anniversary to our Natural Grocers Heroes in Aprons Fund.
Website and Social Media. We maintain 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, TikTok, X, Pinterest and YouTube. During fiscal year 2023, we continued to
increase our investment in paid and organic placements on platforms such as Facebook, Instagram, TikTok, YouTube and
mobile in-app display, resulting in enhanced brand reach. We also organized social media influencer campaigns in key
markets. We expect to continue investing in digital engagement activities during fiscal year 2024. Our recently launched
Natural Grocers mobile application provides a new marketing channel to deliver the same content strategy already in place
for our website.
13
Advertising. Our advertising activities in fiscal year 2023 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; (v) newspaper advertising; (vi) utilizing organic
search, search engine marketing, search engine optimization and display advertisements to deliver more customer traffic to
our website and stores; and (vii) investments in paid and organic placements on social media platforms.
Home Delivery Services. As of September 30, 2023, we offered online ordering and home delivery services at 160
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, cash donations to local food banks, and participation by local
community leaders and organizations.
Pre-Ordering of Holiday Turkeys. We offer an in-store and 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.
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®, Natural Grocers Cottage 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 new point of sale system and 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 statutes and regulations that have been enacted or promulgated, 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 specific information with respect to standards of product identity, net
quantity/weight, nutrition or supplement
the
manufacturer/packer/distributor, allergens, 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.
ingredient statements, contact
information
labeling,
facts
for
15
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,
record keeping, packaging and labeling. DSHEA also expressly permits dietary supplements to make label claims and
promotional statements describing how a product affects the structure, function or general well-being of the body if adequate
scientific evidence exists to substantiate 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. Recently, pharmaceutical industry participants have engaged in advocacy to compel the FDA to ban
certain dietary supplements based on the Drug Exclusion Provision contained in DSHEA. The Drug Exclusion Provision
states that a dietary supplement may not be marketed if a dietary supplement ingredient was an ingredient in a drug or the
subject of a clinical investigation for drug use prior to the marketing of the supplement. The FDA has taken certain steps to
exclude certain dietary supplements under this provision. If the FDA increases enforcement of the Drug Exclusion Provision,
certain of the dietary supplements we sell may no longer be available.
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 dietary 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.
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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. At present, many consumer class action lawsuits are based on
violations of federal laws, regulations, rules and guidance where the claim is that the alleged violation results in consumer
deception. The risks associated with these laws and regulations are further described under the caption “Risk Factors.”
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, 2023, 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 on the “Investors” page, under Corporate Governance – Governance Documents”
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
● We may not be successful in our efforts to grow profitably;
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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;
●
Inflation or deflation could adversely affect our business;
● Widespread health 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;
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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;
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If we are unable to protect our intellectual property rights, our ability to compete and the value of our brand could
be harmed;
● 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;
● 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;
● Consumers or regulatory agencies may challenge certain claims made regarding the products we sell;
● 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
● Our political advocacy activities may reduce our customer count and sales.
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Risks related to our indebtedness and liquidity
● 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
● 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 profitably.
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.
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 construction permitting and the availability of construction materials and equipment.
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.
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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. Additionally, our new store openings may
not be successful or reach the sales and profitability levels of our existing stores. 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. As a result, 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.
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, higher retail prices for our products due to inflation, or
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.
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;
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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 global health pandemics 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 2023 and 2022, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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. In particular, recent global events have disrupted commodity markets,
including for energy and agricultural products, and have contributed to global supply chain disruption and inflation. We may
experience continued volatility with respect to these trends. 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.
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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 cost 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. During fiscal years 2022 and 2023, we experienced levels of inflation
that are higher than we have experienced in recent years, resulting in part from various supply disruptions, the conflict
between Ukraine and Russia, increased shipping and transportation costs, increased commodity costs, increased labor costs
in the supply chain, monetary policy actions, other disruptions and the uncertain economic environment. We have been able
to mitigate this impact to date through our pricing strategies. We are unable to predict how long the current inflationary
environment will continue or the long-term impact of inflationary or deflationary trends on consumer behavior and our sales
and profitability in the future. Additionally, 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, political
instability, 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.
Widespread health pandemics could materially impact our business, results of operations and financial condition.
The COVID-19 pandemic and resulting government mandates significantly impacted our operations. Although our
operations have stabilized since the height of the pandemic, in the event there is a widespread regional, national or global
health epidemic or pandemic in the future, including outbreaks of COVID-19 variants, our business could be severely
impacted. Although the potential effects that COVID-19 may continue to have on us, or that global health pandemics
unrelated to COVID-19 may have in the future, are not clear, such impacts could materially adversely affect our business,
financial condition and results of operations.
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 rewards 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 representations 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 68% of our total purchases in fiscal
year 2023. In fiscal year 2023, we extended our long-term relationship with UNFI as our primary supplier of products in the
natural, fresh and produce categories through September 3, 2028, subject to automatic renewals thereafter for successive one-
year periods unless otherwise terminated by either party. While we strive to maintain good relations with UNFI, 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,
reporting and disclosure requirements, 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, 2023, we had primary store concentration in Colorado and Texas, operating 44 stores and 23
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 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. The current labor market has impacted our ability to retain and attract store Crew members and we
continue to be challenged by labor shortages broadly impacting the retail industry. If we are unable to offer competitive
wages, it may be more difficult for us to identify, hire and retain qualified personnel or the quality of our workforce could
decline, causing customer service to be adversely impacted.
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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 reduce customer service levels and
therefore adversely impact sales. During fiscal year 2023, we invested in increased wages for our store Crew members and
may be required to do so in the future.
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 has sought unsuccessfully to organize workers at
certain 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. During fiscal year 2023, we
recognized long-lived asset impairment charges of $1.3 million. We may be required to recognize impairments of long-lived
assets based on future economic factors such as unfavorable changes in estimated future cash flows of an asset group, which
may adversely affect our results of operations and capitalization.
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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.
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.
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.
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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.
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, and point-to-point encryption on our 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®, Natural Grocers
Cottage 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.
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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. From time to time, we have experienced
increased shipping costs due to higher fuel and freight prices, and these costs may continue to be volatile. 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.
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. 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.
If we are unable to maintain effective internal control over financial reporting, 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.”
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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, a person or firm that
markets a dietary supplement with structure, function, general well-being or nutrient deficiency claims on the product labeling
must notify FDA about the claim within thirty days after first marketing the dietary supplement with the claim and 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, DSHEA, and other federal and state statutes and requirements, 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 allergens, contaminants, residues and adulterants, as well as for state common and statutory
laws regarding deceptive trade practices.
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 requires the submission of a premarket notification (NDIN) to the FDA at least
75 days before a product containing an NDI is sold. In draft guidance, the FDA has stated that it is aware that some
manufacturers and distributors have marketed dietary supplements for which premarket NDINs were required, but never
submitted. The FDA has stated that it will exercise enforcement discretion on such products marketed before May 20, 2022,
for which no NDINs were submitted, until 180 days after a final rule is published in the Federal Register. This Policy reflects
the FDA’s intent to begin more robust enforcement of the pre-market notification requirements for NDIs, which could result
in the removal of certain dietary supplement products that we sell. 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 ODIs. Accordingly, changes in dietary
supplement regulation could also materially adversely affect the cost and availability of the dietary supplement products that
we sell.
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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 as well as certain non-government watchdog groups and class action law
firms. 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 Non-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 called the National
Bioengineered Food Disclosure Standard. Voluntary compliance with these rules began in January 2020 and the deadline for
mandatory compliance was January 1, 2022. The Agricultural Marketing Service (AMS) of the USDA authorizes AMS to
enforce compliance with the standard through records audits and examinations, hearings, and public disclosure of the
summary of the results of audits, examinations, and similar activities. Public disclosure of our suppliers’ violations of the
National Bioengineered Food Disclosure Standard could result in a loss of confidence on the part of consumers in the
truthfulness of our labeling or ingredient claims.
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.
Homeopathic Products. In recent years, the FDA and FTC have increased their regulatory scrutiny of homeopathic
drug products. On December 6, 2022, the FDA issued final 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 for homeopathic products posing the greatest risk to patients. According to the FDA,
homeopathic products posing the greatest risk are those with reported safety concerns, that contain or purport to contain
ingredients associated with potentially significant safety concerns, that are administered via routes other than orally or
topically, that claim to treat or prevent serious and/or life-threatening diseases and conditions, are marketed to vulnerable
populations (e.g., children, pregnant women, and the elderly), or that have significant quality issues. This guidance and related
enforcement action may adversely impact the availability of certain homeopathic products for sale in our stores.
32
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, which 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.
33
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 current
state regulatory constraints and 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.
34
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 are aligned 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 $75.0 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, 2023, we had no outstanding indebtedness under our Revolving Facility and $7.7 million of
outstanding indebtedness under our Term Loan Facility. We expect to use available cash and borrowings under our Revolving
Facility to fund our previously announced special cash dividend of $1.00 per common share, which was approved by our
Board of Directors (the Board) on November 16, 2023. 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:
●
reducing our ability to execute our growth strategy and open new stores, 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.
35
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.
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 – most recently in May 2022 – and the program will terminate (unless further extended) on May 31, 2024. 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 $8.1 million. During fiscal year 2023, we repurchased 17,998 shares of
common stock at a cost of $0.2 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. Furthermore, the Inflation Reduction Act of 2022, which was signed into
law in August 2022, imposes a non-deductible 1% excise tax on the fair market value of stock repurchases after December
31, 2022 that exceed $1.0 million in a taxable year, which may impact the tax efficiency of our share repurchase program.
General risks related to 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.
36
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 $0.10 per share of common stock during each quarter of fiscal years 2023 and
2022. On November 16, 2023, our Board approved the payment of a special cash dividend of $1.00 per share of common
stock and a quarterly cash dividend of $0.10 per share of common stock to be paid on December 13, 2023 to stockholders of
record as of the close of business on November 27, 2023. 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. Two analysts currently cover 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.
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.
37
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:
●
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.
38
Item 2. Properties.
As of September 30, 2023, we had 165 stores located in 21 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 ........................................................................................................................................................
South Dakota ..............................................................................................................................................
Texas ..........................................................................................................................................................
Utah ............................................................................................................................................................
Washington ................................................................................................................................................
Wyoming ....................................................................................................................................................
Number
of Stores
12
3
44
5
6
8
1
1
7
4
3
3
6
3
6
14
1
23
8
5
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, 2023, we owned buildings in which thirteen of our stores are located. Eight of those buildings
are located on land that is leased pursuant to a ground lease; the remaining five stores are on land owned by the Company.
Lease terms typically range between 10 and 25 years, with additional renewal options. Of the current leases for our stores,
four expire in fiscal year 2024, eleven expire in fiscal year 2025, twelve expire in fiscal year 2026, eleven expire in fiscal
year 2027, twelve expire in fiscal year 2028 and the remainder expire between fiscal years 2029 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.
39
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 4, 2023, there were 172 holders of record of our common stock, and the closing price of our common
stock was $16.66.
Dividend Policy
We paid a quarterly cash dividend of $0.10 per share of common stock during each quarter of fiscal years 2023 and
2022. We paid a special cash dividend of $2.00 per share in December 2020. On November 16, 2023, our Board approved a
special cash dividend of $1.00 per share and a quarterly cash dividend of $0.10 per share, which will be paid on December
13, 2023 to stockholders of record as of the close of business on November 27, 2023. 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
In May 2016, the Board authorized a two-year share repurchase program pursuant to which we could repurchase up
to $10.0 million in shares of the Company’s common stock. The Board subsequently extended the share repurchase program
– most recently in May 2022 – and the program will terminate on May 31, 2024. The Company did not repurchase any shares
of its common stock during the fourth quarter ended September 30, 2023.
Item 6. Reserved.
40
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, dietary supplements and body care products 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, 2023, we operated 165 stores in 21 states, including Colorado, Arizona, Arkansas,
Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma,
Oregon, South Dakota, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and
distribution center in Golden, Colorado.
We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines.
The sizes of our stores range from approximately 7,000 to 16,000 selling square feet. For the year ended September 30, 2023,
our new stores averaged approximately 9,000 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. During the five fiscal years ended September 30, 2023, we
increased our store count at a compound annual growth rate of 2.2%. In fiscal year 2023, we opened three new stores,
relocated/remodeled three existing stores and closed two stores. We plan to open four to six new stores and relocate/remodel
four to six stores in fiscal year 2024. As of the date of this report, we have signed leases or acquired property for an additional
two new stores and five relocations/remodels that we plan to open in fiscal years 2024 and beyond. Between October 1, 2023
and the date of this Form 10-K, we opened two new stores and did not relocate/remodel any stores.
Performance Highlights
Key highlights of our recent performance are discussed briefly below and in further detail throughout this MD&A.
Key financial metrics, including, but not limited to, daily average comparable store sales, are defined in the section “Key
Financial Metrics in Our Business,” presented later in this MD&A.
● Net sales. Net sales were $1,140.6 million for the year ended September 30, 2023, an increase of $50.9 million,
or 4.7%, compared to net sales of $1,089.6 million for the year ended September 30, 2022.
● Daily average comparable store sales. Daily average comparable store sales for the year ended September 30,
2023 increased 3.6% from the year ended September 30, 2022.
● Net income. Net income was $23.2 million for the year ended September 30, 2023, an increase of $1.9 million,
or 8.8%, compared to net income of $21.4 million for the year ended September 30, 2022.
● EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $60.6 million for the
year ended September 30, 2023, an increase of $2.5 million, or 4.3%, compared to EBITDA of $58.1 million
for the year ended September 30, 2022. EBITDA is not a measure of financial performance under generally
accepted accounting principles in the United State of America (GAAP). Refer to the “Non-GAAP Financial
Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.
● Adjusted EBITDA. Adjusted EBITDA was $63.4 million for the year ended September 30, 2023, an increase of
$1.2 million, or 2.0%, compared to Adjusted EBITDA of $62.2 million for the year ended September 30, 2022.
Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial
Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to
Adjusted EBITDA.
● Liquidity. As of September 30, 2023, cash and cash equivalents was $18.3 million, and there was $48.5 million
available for borrowing under our Revolving Facility, net of undrawn, issued and outstanding letters of credit
of $1.5 million.
41
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:
●
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, levels 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 workforce 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. A number of
macroeconomic and global trends have impacted our business. The current labor market has impacted our
ability to retain and attract store Crew members and we continue to be challenged by labor shortages broadly
impacting the retail industry. We have invested in increased wages for our store Crew members and may be
required to do so in the future. As a result of current global supply chain issues, we have on occasion
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, although certain products may be in relatively short supply or
unavailable from time to time.
During fiscal years 2023 and 2022, the costs of certain goods we sell were impacted by levels of inflation higher
than we have experienced in recent years, resulting in part from supply disruptions, the conflict between Ukraine
and Russia, increased shipping and transportation costs, increased commodity costs, increased labor costs in
the supply chain, monetary policy actions, other disruptions and the uncertain economic environment. In the
aggregate, management estimates that the Company experienced annualized cost inflation of approximately 7%
in fiscal year 2023 and approximately 5% in the fourth quarter of fiscal year 2023. Cost inflation estimates are
based on individual like items sold during the periods being compared. The impact of inflation on our sales and
profitability is influenced in part by our ability to adjust our retail prices accordingly. While we have been able
to mitigate this impact to date through our pricing strategies, we are unable to predict how long the current
inflationary environment will continue or the impact of inflationary trends on consumer behavior and our sales
and profitability in the future.
● 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 construction permitting
and the availability of construction materials and equipment.
● 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 higher retail prices for our products due to
inflation, or 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 stricter
regulatory standards may adversely affect demand for the products we sell and could result in lower consumer
traffic, sales and results of operations.
42
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, dietary supplements and body care products.
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 construction permitting and the availability of construction materials and equipment.
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 industries and regional and general
economic conditions, including inflationary or recessionary trends. 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 the above-described factors as well as a variety of other internal and
external factors and trends described more fully in Item 1A - “Risk Factors” 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:
● 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 fiscal 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).
● Transaction count. Transaction count represents the number of transactions reported at our stores during the
period and includes transactions that are voided, returned, and exchanged.
● 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.
43
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 lease 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 closing
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 and depreciation expense. Other pre-opening 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.
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 Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 740 “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 bases. 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. Income tax expense also includes excess tax benefits and deficiencies related to the vesting
of restricted stock units.
44
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 new stores opened during the period ....................
Number of stores relocated/remodeled during the period ......
Number of stores closed during the period .............................
Gross square footage at end of period(1) .................................
Selling square footage at end of period(1) ...............................
2023
Year ended September 30,
2022
2021
100.0%
71.3
28.7
22.6
3.2
0.2
2.8
(0.3)
2.5
(0.4)
2.0%
100.0
72.0
28.0
22.2
2.9
0.1
2.8
(0.2)
2.5
(0.6)
2.0
100.0
72.3
27.7
22.2
2.7
0.1
2.7
(0.2)
2.5
(0.5)
1.9
165
0.6%
3.6%
3
3
2
2,676,607
1,745,701
164
1.2
2.6
3
2
1
2,688,589
1,742,623
162
1.9
0.7
3
5
—
2,649,532
1,719,813
(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 fiscal year presented.
Year ended September 30, 2023 compared to Year ended September 30, 2022
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
2023
2022
Dollars
Percent
Statements of Income Data:
Net sales ......................................................................... $ 1,140,568 1,089,625
784,744
Cost of goods sold and occupancy costs ........................
Gross profit .............................................................
304,881
242,057
Store expenses ................................................................
31,562
Administrative expenses .................................................
1,107
Pre-opening expenses .....................................................
30,155
Operating income ....................................................
(2,371)
Interest expense, net .......................................................
27,784
Income before income taxes ....................................
(6,419)
Provision for income taxes .............................................
21,365
Net income .............................................................. $
813,637
326,931
257,282
35,973
2,007
31,669
(3,299)
28,370
(5,127)
23,243
50,943
28,893
22,050
15,225
4,411
900
1,514
(928)
586
1,292
1,878
4.7 %
3.7
7.2
6.3
14.0
81.3
5.0
39.1
2.1
(20.1 )
8.8 %
45
Net sales
Net sales increased $50.9 million, or 4.7%, to $1,140.6 million for the year ended September 30, 2023 compared to
$1,089.6 million for the year ended September 30, 2022, due to a $39.3 million increase in comparable store sales and a $14.8
million increase in new store sales, partially offset by a $3.2 million decrease in net sales related to store closures. Daily
average comparable store sales increased 3.6% for the year ended September 30, 2023 compared to an increase of 2.6% for
the year ended September 30, 2022. The daily average comparable store sales increase in fiscal year 2023 resulted from a
1.8% increase in average transaction size and a 1.7% increase in daily average transaction count. Comparable store average
transaction size was $45.92 for the year ended September 30, 2023. The increase in net sales during the year ended September
30, 2023 was primarily driven by retail price increases, transaction count, new store sales, and marketing initiatives, including
market-specific campaigns and {N}power rewards program offers that drove customer engagement, partially offset by a
moderation of the pandemic trends experienced in the first half of fiscal year 2022.
Gross profit
Gross profit increased $22.1 million, or 7.2%, to $326.9 million for the year ended September 30, 2023 compared
to $304.9 million for the year ended September 30, 2022. Gross profit reflects earnings after product and store occupancy
costs. Gross margin increased to 28.7% for the year ended September 30, 2023 from 28.0% for the year ended September 30,
2022. The increase in gross margin during the year ended September 30, 2023 was driven by higher product margin attributed
to effective pricing and promotions, partially offset by higher shrink expense.
Store expenses
Store expenses increased $15.2 million, or 6.3%, to $257.3 million for the year ended September 30, 2023 compared
to $242.1 million for the year ended September 30, 2022. Store expenses as a percentage of net sales were 22.6% and 22.2%
for the years ended September 30, 2023 and 2022, respectively. The increase in store expenses as a percentage of net sales
was primarily driven by higher labor expenses as a result of increased wage rates. Store expenses included long-lived asset
impairment charges of $1.3 million and $2.9 million for fiscal years 2023 and 2022, respectively.
Administrative expenses
Administrative expenses increased $4.4 million, or 14.0%, to $36.0 million for the year ended September 30, 2023
compared to $31.6 million for the year ended September 30, 2022. The increase in administrative expenses was primarily
driven by higher compensation expenses, technology amortization, software expenses and legal expenses. Administrative
expenses as a percentage of net sales were 3.2% and 2.9% for the years ended September 30, 2023 and 2022, respectively.
Pre-opening expenses
Pre-opening expenses were $2.0 million for the year ended September 30, 2023 compared to $1.1 million for the
year ended September 30, 2022.
Interest expense, net
Interest expense, net of capitalized interest, was $3.3 million for the year ended September 30, 2023 compared to
$2.4 million for the year ended September 30, 2022.
Income taxes
Income tax expense decreased $1.3 million to $5.1 million for the year ended September 30, 2023 compared to $6.4
million for the year ended September 30, 2022. The Company’s effective income tax rate was 18.1% and 23.1% for the years
ended September 30, 2023 and 2022, respectively. The decrease in the effective income tax rate was primarily attributable to
increased food donation deductions recorded during fiscal year 2023.
Net income
Net income was $23.2 million, or $1.02 diluted earnings per share, for the year ended September 30, 2023 compared
to $21.4 million, or $0.94 diluted earnings per share, for the year ended September 30, 2022.
46
Year ended September 30, 2022 compared to Year ended September 30, 2021
A comparative discussion of our results of operations and other operating data for the years ended September 30,
2022 and September 30, 2021 is set out in our Annual Report on Form 10-K for the year ended September 30, 2022 under
the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of
Operations – Year ended September 30, 2022 compared to Year ended September 30, 2021.”
Non-GAAP financial measures
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as
net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA
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 impairment charges, store
closing costs, share-based compensation and non-recurring items.
The following table reconciles net income to EBITDA and Adjusted EBITDA, dollars in thousands:
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 ............................................................................................... $
Year ended September 30, 2023 compared to Year ended September 30, 2022
Year ended September 30,
2022
2023
23,243
3,299
5,127
28,906
60,575
1,464
1,360
63,399
21,365
2,371
6,419
27,906
58,061
2,920
1,186
62,167
EBITDA increased 4.3% to $60.6 million for the year ended September 30, 2023 compared to $58.1 million for the
year ended September 30, 2022. EBITDA as a percentage of net sales was 5.3% for each of the years ended September 30,
2023 and 2022.
Adjusted EBITDA increased 2.0% to $63.4 million for the year ended September 30, 2023 compared to $62.2
million for the year ended September 30, 2022. Adjusted EBITDA as a percentage of net sales was 5.6% and 5.7% for the
years ended September 30, 2023 and 2022, respectively.
Year ended September 30, 2022 compared to Year ended September 30, 2021
A comparative discussion of EBITDA and Adjusted EBITDA for the years ended September 30, 2022 and
September 30, 2021 is set out in our Annual Report on Form 10-K for the year ended September 30, 2022 under the heading
“Management’s Discussion and Analysis of Financial Condition and Results of Operations – 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. 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.
47
Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measures 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 depreciation or interest 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, impairment charges, 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.
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 Credit Facility consists of the $75.0 million Revolving Facility,
which we increased on November 16, 2023 from $50.0 million to $75.0 million, and the fully drawn $35.0 million Term
Loan 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, cash dividends, share repurchases
and corporate taxes. As of September 30, 2023, we had $18.3 million in cash and cash equivalents and $48.5 million available
for borrowing under our Revolving Facility.
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 – most recently in May 2022 – and the program will terminate on May 31, 2024. During the year ended
September 30, 2023, we repurchased 17,998 shares at a cost of $0.2 million. The dollar value of the shares of the Company’s
common stock that may yet be repurchased under the share repurchase program is $8.1 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 quarterly cash dividends of $0.10 per share of common stock in each quarter of fiscal year 2023. On
November 16, 2023, our Board approved the payment of a special cash dividend of $1.00 per share and a quarterly cash
dividend of $0.10 per share, which will be paid on December 13, 2023 to stockholders of record as of the close of business
on November 27, 2023. The special cash dividend will be funded through available cash and borrowings under our Revolving
Facility.
We plan to continue to open new stores in the future, which may require us to borrow additional amounts under the
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.
48
The following is a summary of our operating, investing and financing activities for the periods presented, dollars in
thousands:
Net cash provided by operating activities ......................................................... $
Net cash used in investing activities .................................................................
Net cash used in financing activities ................................................................
Net increase (decrease) in cash and cash equivalents .......................................
Cash and cash equivalents, beginning of year ..................................................
Cash and cash equivalents, end of year ............................................................ $
64,606
(37,950)
(20,353)
6,303
12,039
18,342
39,693
(31,143)
(20,189)
(11,639)
23,678
12,039
Year ended September 30,
2022
2023
Year ended September 30, 2023 compared to Year ended September 30, 2022
Operating Activities
Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including
depreciation and amortization, impairment of long-lived assets, share-based compensation, and changes in deferred taxes,
and the effect of working capital changes. Cash provided by operating activities increased $24.9 million, or 62.8%, to $64.6
million for the year ended September 30, 2023 compared to $39.7 million for the year ended September 30, 2022. The increase
in cash provided by operating activities was due to an increase in cash provided by working capital, partially offset by a
decrease in cash provided by net income as adjusted for non-cash items.
Investing Activities
Net cash used in investing activities increased $6.8 million, or 21.9%, to $38.0 million for the year ended September
30, 2023 compared to $31.1 million for the year ended September 30, 2022. This increase was primarily the result of an
increase in property and equipment acquisitions of $8.5 million, partially offset by a decrease in other intangibles acquisitions
of $1.9 million during the fiscal year ended September 30, 2023 compared to the fiscal year ended September 30, 2022,
attributed to the timing of new store openings, relocations/remodels, and software projects under development.
We plan to spend approximately $30.0 million to $39.0 million on capital expenditures during fiscal year 2024
primarily in connection with expected new store openings and store relocations/remodels.
Acquisition of property and equipment not yet paid decreased $0.9 million to $6.0 million in fiscal year 2023
compared to $7.0 million in fiscal year 2022 due to the timing of payments related to new store openings and
relocations/remodels.
Financing Activities
Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and
dividends paid to stockholders. Net cash used in financing activities was $20.4 million for the year ended September 30, 2023
compared to $20.2 million for the year ended September 30, 2022.
Year ended September 30, 2022 compared to Year ended September 30, 2021
A comparative discussion of operating, investing and financing activities for the years ended September 30, 2022
and September 30, 2021 is set out in our Annual Report on Form 10-K for the year ended September 30, 2021 under the
heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital
Resources.”
49
Credit Facility
The revolving commitment amount under the Revolving Facility is $75.0 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 Revolving
Facility at any time prior to the maturity date without premium or penalty. On November 16, 2023, we amended the Credit
Facility to (i) increase our aggregate revolving commitments from $50.0 million to $75.0 million; (ii) extend the maturity
date of the Revolving Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million
no later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the
Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed
$15.0 million during any fiscal year. The aggregate revolving commitment amount will be automatically and permanently
reduced by $2,500,000 annually until the Revolving Facility matures on November 16, 2028, unless we have previously
exercised our option to reduce the aggregate revolving commitments to a lower amount.
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) Term SOFR plus 1.00%, less the lender spread based upon the
Company’s consolidated leverage ratio. Term SOFR loans under the Credit Facility bear interest based on Term SOFR 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. The Company is required to repay principal amounts
outstanding under the Term Loan Facility in equal quarterly installments of approximately $0.4 million 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.
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 $15.0 million during any fiscal year.
We had no amounts outstanding under the Revolving Facility as of September 30, 2023 and 2022. As of September
30, 2023 and September 30, 2022, we had undrawn, issued and outstanding letters of credit of $1.5 million and $1.1 million,
respectively, which were reserved against the amount available for borrowing under the Revolving Facility. We had $48.5
million and $48.9 million available for borrowing under the Revolving Facility as of September 30, 2023 and September 30,
2022, respectively. We had $7.7 million of outstanding borrowings under the fully drawn Term Loan Facility as of September
30, 2023.
As of September 30, 2023 and September 30, 2022, the Company was in compliance with all covenants under the
Credit Facility.
Share Repurchases
Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in
Note 13, Stockholders’ Equity, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, Financial
Statements and Supplementary Data, of this Annual Report on Form 10-K.
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.
50
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.
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. 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, 2023, 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 assets, for possible impairment at
least annually, or 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.
51
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 or finance lease.
The Company recognizes a lease asset and corresponding lease liability for all leases with terms greater than 12
months, with the recognition, measurement, and presentation of lease expenses dependent on whether the lease is classified
as an operating or finance lease. Lease liabilities represent the present value of lease payments not yet paid. 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.
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.
52
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, 2023, no amounts were outstanding under our Revolving Facility and $7.7 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, 2023, a hypothetical 100 basis point change in interest rates would change our annual interest expense by $0.2
million for the year ended September 30, 2023.
53
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, 2023 and 2022 .........................................................................
Consolidated Statements of Income for the years ended September 30, 2023, 2022 and 2021 .............................
Consolidated Statements of Cash Flows for the years ended September 30, 2023, 2022 and 2021 ........................
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2023, 2022
Page
Number
55
58
59
60
and 2021 .............................................................................................................................................................
Notes to Consolidated Financial Statements ..........................................................................................................
61
62
54
Report of Independent Registered Public Accounting Firm
To the Stockholders and the 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, 2023 and 2022, the related consolidated statements of income, cash flows, and changes
in stockholders’ equity for each of the years in the three-year period ended September 30, 2023, 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, 2023 and 2022, and the results of its
operations and its cash flows for each of the years in the three-year period ended September 30, 2023, 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, 2023, 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 7, 2023 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
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.
55
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 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, 2023, the Company’s long-lived assets included property and equipment, operating lease assets, and
finance lease assets of $169.1 million, $287.9 million, and $45.1 million, respectively.
We identified the assessment of the recoverability of long-lived assets associated with certain asset groups, 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 for certain asset groups 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 for certain asset groups by comparing these inputs to available industry
reports, historical financial data, and budgets.
/s/ KPMG LLP
We have served as the Company’s auditor since 2010.
Denver, Colorado
December 7, 2023
56
Report of Independent Registered Public Accounting Firm
To the Stockholders and the 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, 2023, 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, 2023, 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, 2023 and 2022, the related consolidated
statements of income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended
September 30, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated
December 7, 2023 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 7, 2023
/s/ KPMG LLP
57
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, 22,745,412 and
22,690,188 shares issued at September 30, 2023 and 2022, and 22,738,915 and
22,690,188 shares outstanding at September 30, 2023 and 2022, respectively ........
Additional paid-in capital ............................................................................................
Retained earnings .........................................................................................................
Common stock in treasury at cost, 6,497 shares at September 30, 2023 .....................
Total stockholders’ equity ........................................................................................
Total liabilities and stockholders’ equity ................................................................. $
See accompanying notes to consolidated financial statements.
September 30,
2023
2022
18,342
10,797
119,260
4,151
152,550
169,060
287,941
45,110
395
14,129
347,575
669,185
80,675
33,064
1,750
34,850
3,690
154,029
5,938
276,808
47,142
14,427
344,315
498,344
23
59,013
111,871
(66 )
170,841
669,185
12,039
10,496
113,756
4,369
140,660
157,179
307,132
43,554
452
14,131
365,269
663,108
71,283
26,737
1,750
34,735
3,223
137,728
13,938
295,064
44,664
15,902
369,568
507,296
23
58,072
97,717
—
155,812
663,108
58
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Income
(Dollars in thousands, except per share 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 .................................................................................. $
Net income per share of common stock:
Basic ............................................................................................ $
Diluted ......................................................................................... $
Weighted average number of shares of common stock outstanding:
Year ended September 30,
2022
1,089,625
784,744
304,881
242,057
31,562
1,107
30,155
(2,371)
27,784
(6,419)
21,365
2023
1,140,568
813,637
326,931
257,282
35,973
2,007
31,669
(3,299)
28,370
(5,127)
23,243
2021
1,055,516
763,328
292,188
234,586
28,355
920
28,327
(2,271)
26,056
(5,475)
20,581
1.02
1.02
0.94
0.94
0.91
0.91
Basic ............................................................................................
Diluted .........................................................................................
22,725,088
22,834,316
22,666,773
22,816,614
22,591,816
22,711,003
See accompanying notes to consolidated financial statements.
59
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Cash Flows
(Dollars in thousands)
Year ended September 30,
2022
2023
2021
23,243
21,365
20,581
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 on disposal of property and equipment ....................................
Share-based compensation ...............................................................
Deferred income tax (benefit) 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 assets ...............................................................
(Decrease) increase in:
Operating lease liabilities .........................................................
Accounts payable .....................................................................
Accrued expenses .....................................................................
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 ...................................................
Finance lease obligation payments ......................................................
Dividends to shareholders ...................................................................
Repurchase of common stock ..............................................................
Loan fees paid .....................................................................................
Payments on withholding tax for restricted stock unit vesting ............
Net cash used in financing activities ....................................
Net increase (decrease) 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 financing lease obligations, net of
capitalized interest of $318, $313 and $194, respectively ...............
Income taxes paid ................................................................................
Supplemental disclosures of non-cash investing and financing
activities:
28,906
1,268
379
1,360
(1,475)
19
315
378
(5,504)
(128)
33,067
(33,899)
10,350
6,327
64,606
(36,568)
(1,525)
107
36
(37,950)
531,100
(531,100)
—
(8,000)
(2,779)
(9,089)
(181)
—
(304)
(20,353)
6,303
12,039
18,342
27,906
2,920
78
1,186
609
22
(2,973)
(631)
(13,210)
(1,025)
31,895
(29,044)
447
148
39,693
(28,038)
(3,406)
21
280
(31,143)
129,000
(129,000)
—
(8,000)
(2,719)
(9,067)
—
—
(403)
(20,189)
(11,639)
23,678
12,039
1,305
627
2,002
5,048
1,801
7,012
Acquisition of property and equipment not yet paid............................ $
Acquisition of other intangibles not yet paid .......................................
Property acquired through operating lease obligations ........................
Property acquired through finance lease obligations ...........................
6,016
3
15,274
5,724
6,965
12
24,429
9,625
See accompanying notes to consolidated financial statements.
60
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
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended September 30, 2023, 2022 and 2021
(Dollars in thousands, except per share data)
Common stock –$0.001
par value
Shares
outstanding Amount
22,546,765 $
Additional
paid-in
capital
Retained
earnings
Treasury
stock
Total
stockholders’
equity
Balances at September 30, 2020 ....
Net income .................................
Share-based compensation .........
Issuance of common stock .........
Cash dividends ...........................
Balances at September 30, 2021 ....
Net income .................................
Share-based compensation .........
Issuance of common stock .........
Cash dividends ...........................
Balances at September 30, 2022 ....
Net income .................................
Share-based compensation .........
Issuance of common stock .........
Repurchase of common stock ....
Cash dividends ...........................
Balances at September 30, 2023 ....
22,620,417
23 $
— —
— —
73,652 —
— —
23
— —
— —
69,771 —
— —
23
— —
— —
66,725 —
(17,998) —
— —
23 $
22,738,915 $
22,690,188
—
537
—
—
57,289
—
783
—
—
58,072
—
941
—
—
—
56,752 $ 116,291 $
20,581
—
—
(51,453)
85,419
21,365
—
—
(9,067)
97,717
23,243
—
—
—
(9,089)
59,013 $ 111,871 $
— $
—
—
—
—
—
—
—
—
—
—
—
115
—
(181)
—
(66) $
173,066
20,581
537
—
(51,453)
142,731
21,365
783
—
(9,067)
155,812
23,243
1,056
—
(181)
(9,089)
170,841
See accompanying notes to consolidated financial statements.
61
NATURAL GROCERS BY VITAMIN COTTAGE, INC.
Notes to Consolidated Financial Statements
September 30, 2023 and 2022
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, dietary supplements and
body care products. The Company operated 165 retail stores as of September 30, 2023, including 44 stores in Colorado, 23
in Texas, 14 in Oregon, 12 in Arizona, eight each in Utah and Kansas, seven in Missouri, six each in Iowa, New Mexico and
Oklahoma, five each in Idaho and Washington, four in Montana, three each in Arkansas, Nebraska, Nevada and North Dakota,
two in Wyoming, and one each in Louisiana, Minnesota, and South Dakota. The Company also has a bulk food repackaging
facility and distribution center in Golden, Colorado. The Company had 164 stores as of September 30, 2022.
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 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 revenues 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 assets, 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 that 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
$0.2 million and $0.1 million as of September 30, 2023 and 2022, respectively.
62
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 $17.2
million as of September 30, 2023.
Vendor Concentration
For each of the years ended September 30, 2023 and 2022, purchases from the Company’s largest vendor and its
subsidiaries represented approximately 68% 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 and closures.
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 assets, and 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, 2023 and 2022, the Company had property and equipment assets of $169.1 million and $157.2 million,
respectively, operating lease assets of $287.9 million and $307.1 million, respectively, finance lease assets of $45.1 million
and $43.6 million, respectively, and intangible assets subject to amortization of $8.5 million. The Company recorded
impairment charges related to long-lived assets of $1.3 million, $2.9 million and $1.1 million in fiscal years 2023, 2022 and
2021, respectively.
Goodwill and Other Intangible Assets
Intangible assets primarily consist of goodwill, internal-use software, and trademarks. Goodwill and the Company’s
trademarks have indefinite lives and are not amortized; rather, they are tested for impairment at least annually on July 1. The
Company capitalizes certain costs incurred with developing or obtaining internal-use software. Software costs that do not
meet capitalization criteria are expensed as incurred. 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.
63
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. 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, 2023, the Company has recorded no impairment charges related to goodwill.
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 Company recognizes a lease asset and corresponding lease
liability for all leases with terms greater than 12 months, with the recognition, measurement, and presentation of lease
expenses dependent on whether the lease is classified as an operating or finance lease.
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 of the operating lease liability and lease asset and as single lease
expense over the remaining term of the applicable 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 finance 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 over the remaining term of the lease. The
lease asset is depreciated on a straight-line basis over the remaining term of the applicable 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.
64
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, 2023, 2022 and 2021 were $6.9 million, $6.2 million and $6.3 million, respectively, net of vendor reimbursements of
$7.1 million, $6.3 million and $5.4 million for the years ended September 30, 2023, 2022 and 2021, respectively.
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.
65
Recently Adopted Accounting Pronouncements
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), which was subsequently amended by a standard update
in December 2022. 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 the London Interbank Offered Rate (LIBOR) or another
reference rate expected to be discontinued because of reference rate reform. As amended, the guidance only applies to
modifications made prior to December 31, 2024. On December 15, 2022, the Company amended the Credit Facility (as
defined in Note 10 below) to, among other things, replace the LIBOR-based interest rate benchmark provisions with interest
rate benchmark provisions based on the Secured Overnight Financing Rate (SOFR). The Company elected to apply ASU
2020-04’s amendments for contract modifications during the first quarter of the fiscal year ending September 30, 2023. The
adoption of this ASU did not have a material impact on the Company’s consolidated financial statements for the year ended
September 30, 2023.
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 simplified the accounting for income taxes by removing certain exceptions
to the general principles and also simplified 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 were
effective for the Company’s first quarter of the fiscal year ended September 30, 2022. The adoption of this ASU did not have
an impact on the Company’s consolidated financial statements for the year ended September 30, 2022.
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. The Company is evaluating the impact that the adoption of these provisions will have
on its consolidated financial statements but does not anticipate that these provisions will have material impacts on its
consolidated financial statements.
No other new accounting pronouncements issued or effective during fiscal year 2023 had, or are expected to have,
a material impact on the Company’s 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 sale 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 September 30, 2023 and 2022, 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, 2023 includes $0.6 million that was
included in the contract liability balance of unredeemed gift cards at September 30, 2022.
Rewards program points are accrued as deferred revenue at the retail value per point, net of estimated breakage
based on historical redemption rates experienced within the rewards program. Rewards points are forfeited at the end of each
calendar year.
66
The following table disaggregates the Company’s revenue by product category for the fiscal years ended September
30, 2023, 2022 and 2021, dollars in thousands and as a percentage of net sales:
Grocery ....................... $
Dietary supplements ...
Body care, pet care
2023
796,241
235,714
Year ended September 30,
2022
759,328
227,220
70
21
70 %
21
2021
731,894
220,000
and other ..................
108,613
$ 1,140,568
9
103,077
100 % 1,089,625
9
103,622
100 1,055,516
69
21
10
100
4. Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of shares of
common stock outstanding during the period. Diluted EPS is computed using the treasury stock method and 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 EPS for the years ended September 30, 2023, 2022
and 2021, 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
2023
Year ended September 30,
2022
2021
23,243
21,365
20,581
22,725,088
109,228
22,666,773
149,841
22,591,816
119,187
outstanding including the effect of dilutive securities ....
22,834,316
22,816,614
22,711,003
Basic earnings per share ..................................................... $
Diluted earnings per share ................................................. $
1.02
1.02
0.94
0.94
0.91
0.91
There were 62,752, 43,542 and 166,362 non-vested restricted stock units for the years ended September 30, 2023,
2022 and 2021, respectively, excluded from the calculation as they are antidilutive.
As of September 30, 2023, the Company had 50,000,000 shares of common stock authorized, of which 22,745,412
shares were issued and 22,738,915 shares were outstanding, as well as 6,497 shares of treasury common stock that was not
outstanding, and 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 and intangibles with indefinite lives, at least on an annual basis.
During fiscal year 2023, long-lived assets, including lease assets, with an aggregate carrying value of $5.9 million
were written down to their fair value of $4.6 million, resulting in asset impairment charges of $1.3 million. During fiscal year
2022, long-lived assets with an aggregate carrying value of $7.4 million were written down to their fair value of $4.5 million,
resulting in asset impairment charges of $2.9 million. During fiscal year 2021, long-lived assets with an aggregate 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. 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.
67
6. Property and Equipment
The Company had the following property and equipment balances as of September 30, 2023 and 2022, 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,
2023
2022
15,221
6,746
46,412
2,112
173,407
157,710
27,080
428,688
(259,628 )
169,060
8,651
6,746
43,010
1,822
163,721
151,242
25,545
400,737
(243,558 )
157,179
Total costs capitalized for qualifying construction projects of leasehold and building improvements included $0.5
million for each of the years ended September 30, 2023 and 2021 and $0.4 million for the year ended September 30, 2022,
related to internal staff compensation. Depreciation expense related to capitalized internal staff compensation was $0.7
million for the year ended September 30, 2023 and $0.6 million for each of the years ended September 30, 2022 and 2021.
Capitalized interest costs were $0.3 million for each of the years ended September 30, 2023 and 2022 and $0.2 million for
the year ended September 30, 2021.
Depreciation and amortization expense for the years ended September 30, 2023, 2022 and 2021 is summarized as
follows, dollars in thousands:
2023
Year ended September 30,
2022
2021
Depreciation and amortization expense included in cost
of goods sold and occupancy costs ................................. $
1,083
1,029
873
Depreciation and amortization expense included in store
expenses .........................................................................
25,770
25,257
27,476
Depreciation and amortization expense included in
administrative expenses ..................................................
1,607
1,410
Depreciation and amortization expense included in pre-
opening expenses (1) ........................................................
Total depreciation and amortization expenses ................ $
446
28,906
210
27,906
1,218
66
29,633
1 Pre-opening depreciation and amortization expenses for fiscal year 2021 have been reclassified from store
expenses to be consistent with the presentation for fiscal years 2023 and 2022.
7. Impairment of Long-Lived Assets
Long-lived assets, such as property and equipment, lease assets, and 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, 2023 and 2022, the Company had property and equipment assets of $169.1 million and $157.2
million, respectively, and lease assets of $333.1 million and $350.7 million, respectively. In fiscal years 2023, 2022 and 2021,
the Company concluded, as a result of its review of potential long-lived asset impairments, that certain long-lived assets were
impaired. The Company recorded impairments of $1.3 million, $2.9 million and $1.1 million for the years ended September
30, 2023, 2022 and 2021, respectively. Such charges are reflected within store expenses on the consolidated statements of
income.
68
8. Goodwill and Other Intangible Assets
Goodwill and other intangible assets as of September 30, 2023 and 2022, are summarized as follows, dollars in
thousands:
Useful lives
(in years)
As of September 30,
2023
2022
Amortizable intangible assets:
Other intangibles .....................................................................
Less accumulated amortization ...............................................
Amortizable intangible assets, net .......................................
Other intangibles in process .......................................................
Trademarks .................................................................................
Deferred financing costs, net ......................................................
Total other intangibles, net ..................................................
Goodwill .....................................................................................
Total goodwill and other intangibles, net ............................
0.5 - 7
$
Indefinite
3 - 5
Indefinite
$
13,207
(5,326)
7,881
643
389
18
8,931
5,198
14,129
11,965
(3,827)
8,138
369
389
37
8,933
5,198
14,131
Amortization expense was $1.5 million, $0.7 million and $0.8 million for the years ended September 30, 2023, 2022
and 2021, respectively.
Future aggregate amortization expense associated with intangibles assets for the fiscal years subsequent to 2023 is
estimated to be approximately as follows, dollars in thousands:
Fiscal year
2024 ....................................................................................................................................................... $
2025 .......................................................................................................................................................
2026 .......................................................................................................................................................
2027 .......................................................................................................................................................
2028 .......................................................................................................................................................
Thereafter ..............................................................................................................................................
Total amortization expense ................................................................................................................... $
Amortization
expense
1,684
1,659
1,550
1,314
1,194
1,141
8,542
Capitalized costs for internal-use software development were $1.1 million, $3.1 million and $2.0 million for the
years ended September 30, 2023, 2022 and 2021, respectively, primarily due to capitalization of expenses related to external
consultants.
9. Accrued Expenses
The composition of accrued expenses as of September 30, 2023 and 2022 is summarized as follows, dollars in
thousands:
Payroll and employee-related expenses ........................................................... $
Accrued property, sales and use tax payable ....................................................
Accrued marketing expenses ...........................................................................
Deferred revenue ..............................................................................................
Other ................................................................................................................
Total accrued expenses ................................................................................. $
17,719
9,844
466
1,866
3,169
33,064
14,527
8,450
153
1,757
1,850
26,737
As of September 30,
2023
2022
69
10. Debt
Credit Facility
The Company is party to a Credit Facility, entered into on January 28, 2016 and subsequently amended, consisting
of a $75.0 million revolving loan facility (the Revolving Facility), which was increased on November 16, 2023 from $50.0
million to $75.0 million, 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 $75.0 million, subject to
reduction as described below, 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 Term Loan Facility matures on November 13, 2024 and the Revolving Facility matures on November 16,
2028. 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) Term SOFR plus 1.00%, less the lender spread based upon the
Company’s consolidated leverage ratio. Term SOFR borrowings under the Credit Facility bear interest based on Term SOFR
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 is required to 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
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 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 $15.0 million during any
fiscal year.
On November 16, 2023, the Company amended the Credit Facility to (i) increase its aggregate revolving
commitments from $50.0 million to $75.0 million; (ii) extend the maturity date of the Revolving Facility to November 16,
2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million no later than December 31, 2023; and (iv)
increase the Company’s restricted payment capacity by $2.5 million, allowing the Company to repurchase shares of common
stock and pay dividends on its common stock in an aggregate amount not to exceed $15.0 million during any fiscal year. The
aggregate revolving commitment amount will be automatically and permanently reduced by $2,500,000 annually until the
Revolving Facility matures in November 2028, unless the Company has previously exercised its option to reduce the
aggregate revolving commitments to a lower amount.
The Company had no amounts outstanding under the Revolving Facility as of September 30, 2023 and 2022. The
Company had undrawn, issued and outstanding letters of credit of $1.5 million and $1.1 million as of September 30, 2023
and 2022, respectively, which were reserved against the amount available for borrowing under the terms of the Revolving
Facility. The Company had $48.5 million and $48.9 million available for borrowing under the Revolving Facility as of
September 30, 2023 and 2022, respectively. The Company had $7.7 million outstanding under its fully drawn Term Loan
Facility as of September 30, 2023.
As of September 30, 2023 and 2022, the Company was in compliance with all covenants under the Credit Facility.
Lease Obligations
The Company had 24 and 21 leases that were classified as finance leases as of September 30, 2023 and 2022,
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 commencement of the lease.
Interest
The Company incurred gross interest expense of $3.6 million, $2.7 million and $2.5 million for the years ended
September 30, 2023, 2022 and 2021, respectively. Interest expense relates primarily to interest on finance lease obligations
and the Credit Facility. The Company capitalized interest of $0.3 million for each of the years ended September 30, 2023 and
2022 and $0.2 million for the year ended September 30, 2021.
70
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.
Operating and finance lease liabilities represent the present value of lease payments not yet paid. Operating and
finance lease assets represent the Company’s right to use an underlying asset and are based upon the operating and finance
lease liabilities adjusted for prepayments or accrued lease payments, initial direct costs, lease incentives and impairment of
operating and finance lease assets.
Most leases include one or more options to renew, with renewal terms normally expressed in periods of five-to-ten
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. The
Company uses 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 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 with Chalet Properties, LLC (Chalet), one operating lease with the Isely
Family Land Trust LLC (Land Trust) and one operating lease with FTVC, LLC (FTVC), 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 May 2042 and include various options to renew. The terms and rental rates of these leases have been approved by
our audit committee in accordance with our related party transaction policy. As of September 30, 2023, these leases accounted
for $8.4 million of operating lease assets and $8.5 million of operating lease liabilities, of which $0.9 million was current,
and are included in the disclosures below. Lease expense is recognized on a straight-line basis and was $1.2 million for the
year ended September 30, 2023 and $1.3 million for each of the years ended September 30, 2022 and 2021.
71
The components of total lease cost for the years ended September 30, 2023, 2022 and 2021 were as follows, dollars
in thousands:
Lease cost
Operating lease cost:
Finance lease cost:
Classification
Year ended September 30,
2023
2022
2021
Cost of goods sold and occupancy costs ................ $ 43,913 42,979 42,652
319
Store expenses .......................................................
305
Administrative expenses ........................................
233
Pre-opening expenses ............................................
319
327
269
337
309
275
Depreciation of lease assets .......... Store expenses .......................................................
Pre-opening expenses (1) ........................................
Interest on lease liabilities ............. Interest expense, net ...............................................
Pre-opening expenses (1) ........................................
Short-term lease cost ........................ Store expenses .......................................................
Variable lease cost ............................ Cost of goods sold and occupancy costs (2) ............
Sublease income ............................... Store expenses .......................................................
3,618
68
1,931
22
326
5,611
(313)
Total lease cost ................................................................................................................. $ 60,516 58,505 54,772
3,832
210
1,896
218
2,900
5,851
(302 )
3,746
446
1,837
482
3,071
6,429
(323)
1 Pre-opening expenses for fiscal year 2021 have been reclassified from store expenses and interest expense, net to
be consistent with the presentation for fiscal years 2023 and 2022.
2 Immaterial balances related to corporate headquarters and distribution center are included in administrative
expenses and store expenses, respectively.
Additional information related to the Company’s leases for the years ended September 30, 2023, 2022 and 2021 was
as follows, dollars in thousands:
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 ....................
Lease assets obtained in exchange for new lease
liabilities:
Operating leases ............................................................
Finance leases ...............................................................
2023
Year ended September 30,
2022
2021
45,661
2,320
2,779
41,050
2,114
2,719
15,274
5,724
24,429
9,625
44,473
1,976
2,823
9,216
3,025
Additional information related to the Company’s leases as of September 30, 2023 and 2022 was as follows:
Weighted-average remaining lease term (in years):
Operating leases ............................................................................................
Finance leases ...............................................................................................
Weighted-average discount rate:
Operating leases ............................................................................................
Finance leases ...............................................................................................
September 30,
2023
2022
10.3
14.2
3.8 %
4.9 %
10.7
14.2
3.7
4.8
72
During the year ended September 30, 2023, the Company paid $0.2 million in lease termination costs to early
terminate the lease associated with a store that closed in fiscal year 2022. As a result of this lease termination, the Company
wrote off $0.1 million in operating lease assets and $0.2 million in operating lease liabilities and recorded a $0.1 loss in store
expenses. In addition, during the year ended September 30, 2022, the Company purchased one store’s building and land that
had previously been leased. This resulted in a $1.5 million reduction in finance lease liability and the reclassification of $1.4
million of corresponding finance lease assets to property and equipment.
Future lease payments under non-cancellable leases as of September 30, 2023 were as follows, dollars in thousands:
Fiscal year
2024 ............................................................................ $
2025 ............................................................................
2026 ............................................................................
2027 ............................................................................
2028 ............................................................................
Thereafter ...................................................................
Total future undiscounted lease payments ..............
Less imputed interest ..................................................
Total reported lease liability ...................................
Less current portion ....................................................
Noncurrent lease liability ........................................ $
Operating
leases
Finance
leases
Total
45,966
44,628
41,777
39,983
37,151
170,998
380,503
(68,845)
311,658
(34,850)
276,808
5,961
6,051
6,093
6,138
5,053
40,841
70,137
(19,305)
50,832
(3,690)
47,142
51,927
50,679
47,870
46,121
42,204
211,839
450,640
(88,150)
362,490
(38,540)
323,950
The table above excludes $2.4 million of legally binding minimum lease payments for leases that had been executed
as of September 30, 2023 but whose terms had not yet commenced.
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, 2023, dollars in thousands:
Fiscal year
2024 .............................................................. $
2025 ..............................................................
2026 ..............................................................
2027 ..............................................................
2028 ..............................................................
Thereafter .....................................................
Total payments ............................................. $
Third
parties
Related
parties
Sublease
rental
income
Total
leases
50,709
49,461
46,730
45,275
41,474
205,755
439,404
1,218
1,218
1,140
846
730
6,084
11,236
(353)
(277)
(279)
(192)
(85)
(67)
(1,253)
51,574
50,402
47,591
45,929
42,119
211,772
449,387
Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2023,
2022 and 2021 totaled $58.4 million, $56.0 million and $55.3 million, respectively, which is included in cost of goods sold
and occupancy costs and administrative expenses in the consolidated statements of income. In addition, $0.3 million, $0.3
million and $0.2 million is included in pre-opening expense associated with rent expense for stores prior to their opening date
for the years ended September 30, 2023, 2022 and 2021, respectively.
73
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, 2023, 253,544 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, certain employees who are not named executive officers
and consultants. As of September 30, 2023, 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 generally vest, subject to requisite service
requirements, annually in installments over a five-year period or in full following a three-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, 2023 were as follows:
Shares
Weighted
average grant
date fair value
Non-vested as of September 30, 2021 ..............................................................
Granted .............................................................................................................
Forfeited ...........................................................................................................
Vested ..............................................................................................................
Non-vested as of September 30, 2022 ..............................................................
Granted .............................................................................................................
Forfeited ...........................................................................................................
Vested ..............................................................................................................
Non-vested as of September 30, 2023 ..............................................................
388,139 $
45,542
(6,168 )
(96,719 )
330,794
195,067
(17,213 )
(93,698 )
414,950
10.38
12.87
9.93
10.29
10.68
11.74
11.16
10.41
11.28
During the year ended September 30, 2023, the Company awarded fully vested stock grants totaling 2,000 shares of
the Company’s common stock to 20 employees who were not named executive officers.
Share-based compensation expense for restricted stock unit awards to certain employees who are not named
executive officers was $0.9 million, $0.8 million and $0.5 million for the years ended September 30, 2023, 2022 and 2021,
respectively. Share-based compensation expense for restricted stock unit awards to one named executive officer was $0.3
million for the year ended September 30, 2023 and $0.2 million for each of the years ended September 30, 2022 and 2021.
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, 2023, 2022 and 2021.
The Company recorded total share-based compensation expense before income taxes of $1.4 million, $1.2 million
and $0.9 million for the years ended September 30, 2023, 2022 and 2021, 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 less than $0.1
million for the year ended September 30, 2023 and $0.1 million for each of the years ended September 30, 2022 and 2021.
As of September 30, 2023, there was $2.1 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 two years.
74
13. Stockholders’ Equity
Share Repurchases
In May 2016, 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 – most recently in May 2022 – and the program will terminate on May 31, 2024. 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 following table summarizes share repurchase activity for the years ended September 30, 2023, 2022 and 2021,
dollars in thousands, except average price per common share acquired:
Year Ended September 30,
2022
2023
2021
Number of common shares acquired ......................................
Average price per common share acquired (including
commissions) ...................................................................... $
Total cost of common shares acquired ................................... $
17,998
10.07
181
—
—
—
—
—
—
During fiscal year 2023, the Company reissued 11,501 treasury shares at a cost of $0.1 million to satisfy the issuance
of common stock pursuant to the vesting of certain restricted stock unit awards and the award of stock grants. During fiscal
years 2022 and 2021, the Company did not reissue any treasury shares. At September 30, 2023 and 2022, the Company held
6,497 and no shares in treasury, respectively.
Between October 1, 2023 and December 4, 2023 (the latest practical date for making the determination), the
Company has not repurchased any additional shares of the Company’s 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 $8.1 million.
Dividends
The Company paid a quarterly cash dividend of $0.10, $0.10 and $0.07 per share of common stock in each quarter
of fiscal years 2023, 2022 and 2021, respectively, and a special cash dividend of $2.00 per share of common stock in the first
quarter of fiscal year 2021.
14. Related Party Transactions
The Company has ongoing relationships with related entities as noted below:
Chalet Properties, LLC: The Company has four operating leases (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
related family members. Rent paid to Chalet was $0.9 million for each of the years ended September 30, 2023 and 2022 and
$1.0 million for the year ended September 30, 2021.
Isely Family Land Trust LLC: The Company has one operating lease (see Note 11) with the 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, 2023, 2022 and 2021.
FTVC LLC: The Company has one operating lease (see Note 11) with FTVC, which is owned by the Company’s
four non-independent Board members and other related family members. Rent paid to FTVC was less than $0.1 million for
each of the years ended September 30, 2023, 2022 and 2021.
75
15. Income Taxes
The following are the components of the provision for income taxes for the years ended September 30, 2023, 2022
and 2021, respectively, dollars in thousands:
2023
Year ended September 30,
2022
2021
Current federal income tax expense ........................... $
Current state income tax expense ...............................
Total current income tax expense ...............................
Deferred federal income tax (benefit) expense ..........
Deferred state income tax (benefit) expense ..............
Total deferred income tax (benefit) expense ..............
5,291
1,311
6,602
(1,334)
(141)
(1,475)
4,667
1,143
5,810
559
50
609
3,859
752
4,611
836
28
864
Total provision for income taxes ............................ $
5,127
6,419
5,475
The differences between the United States federal statutory income tax rate and the Company’s effective tax rate are
as follows:
2023
Year ended September 30,
2022
2021
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%
3.1
(3.1)
—
(2.9)
18.1%
21.0
3.4
(0.5 )
1.0
(1.8 )
23.1
21.0
3.6
(0.5)
0.8
(3.9)
21.0
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 ............................................................................ $
—
(14,427 )
(14,427 )
—
(15,902)
(15,902)
As of September 30,
2023
2022
76
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:
Trademarks ................................................................................................... $
Finance lease obligations ..............................................................................
Operating lease obligations ..........................................................................
Research and experimental expenditures ......................................................
Accrued paid time off ...................................................................................
Other .............................................................................................................
Gross deferred tax assets ...........................................................................
Deferred tax liabilities:
Property and equipment ................................................................................
Finance lease assets ......................................................................................
Operating lease assets ...................................................................................
Leasehold improvements ..............................................................................
Other .............................................................................................................
Gross deferred tax liabilities .....................................................................
Net deferred tax liabilities ......................................................................... $
As of September 30,
2023
2022
576
12,403
76,045
963
708
764
91,459
(21,539 )
(11,003 )
(70,517 )
(2,095 )
(732 )
(105,886 )
(14,427 )
593
11,684
80,468
—
750
666
94,161
(21,654)
(10,627)
(75,055)
(2,217)
(510)
(110,063)
(15,902)
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 for the years ended
September 30, 2023, 2022 and 2021. The Company utilized $0.1 million in tax effected state income tax carryforwards for
each of the years ended September 30, 2023, 2022 and 2021.
The Company did not have any uncertain tax positions as of September 30, 2023 and 2022.
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 2019 and prior and is no longer subject to
state and local income tax examinations for fiscal years 2018 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. As of September 30, 2023, the Company had accrued $0.9
million for matching contributions to be paid out after the plan year ending December 31, 2023. Subsequent to plan years
ending December 31, 2022 and 2021, the Company funded matching contributions to participants’ accounts of $1.1 and $1.2
million, respectively.
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.
77
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.
Legal
The Company is 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. Subsequent Events
On November 16, 2023, the Board approved a special cash dividend of $1.00 per share and a quarterly cash dividend
of $0.10 per share, which will be paid on December 13, 2023 to stockholders of record as of the close of business on November
27, 2023. The special cash dividend will be funded through available cash and borrowings under the Company’s Revolving
Facility.
On November 16, 2023, the Company entered into the Seventh Amendment to the Credit Facility to (i) increase its
aggregate revolving commitments from $50.0 million to $75.0 million, subject to reductions; (ii) extend the maturity date of
the Revolving Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million no
later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the
Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed
$15.0 million during any fiscal year. See Note 10, Debt for additional information.
78
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, 2023 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, 2023, 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, 2023
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. 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, 2023.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
None.
79
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 2024 Annual Meeting of Stockholders to be filed
with the SEC within 120 days of September 30, 2023 (the 2024 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 2024 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
2024 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 2024 Proxy Statement under the headings “Certain Relationships and
Related Party Transactions” and “Corporate Governance.”
Item 14. Principal Accounting Fees and Services.
Our independent registered accounting firm is KPMG LLP, Denver, CO, Auditor Firm ID: 185. The information
required by this item is incorporated by reference to the information in the 2024 Proxy Statement under the heading
“Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”
80
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 INDEX
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
Description
Amended and Restated Certificate of Incorporation
Amended and Restated Bylaws
Reference is made to Exhibits 3.1 and 3.2
Specimen Common Stock Certificate
Form of Notice of Grant of Stock Unit Award
Form of Registration Rights Agreement
Form of Notice of Stock Grant Award
Form
Form S-1
Form S-1
File No.
333-182186
333-182186
Form S-1
Form S-8
Form S-1
Form 10-K
333-182186
333-182886
333-182186
001-35608
Exhibit
Number
3.1
3.2
4.2
4.2
4.3
4.5
4.6
Description of Capital Stock
Form 10-K
001-35608
4.6
Form 10-Q
001-35608
10.1
Filing Date
July 5, 2012
July 5, 2012
July 20, 2012
July 27, 2012
July 5, 2012
December 5,
2019
December 5,
2019
January 29,
2015
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
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*
Summary of Compensation Arrangements for Non-
Employee Directors*
Form of Indemnification Agreement*
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
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#
Addendum A to Distribution Agreement between United
Natural Foods, Inc. and Vitamin Cottage Natural Food
Markets, Inc., dated February 27, 2009#
Form S-1
—
Form S-1
Form S-1
333-182186
—
10.16
—
July 5, 2012
—
333-182186
333-182186
10.18
10.19
June 29, 2012
June 29, 2012
Form S-1
333-182186
10.20
June 29, 2012
Form S-1
333-182186
10.21
June 29, 2012
Form S-1
333-182186
10.24
June 29, 2012
Form S-1
333-182186
10.25
June 29, 2012
Form S-1
333-182186
10.26
June 29, 2012
Form S-1
333-182186
10.27
June 29, 2012
Form S-1
333-182186
10.28
June 29, 2012
Form S-1
333-182186
10.29
June 29, 2012
81
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
Agreement Addendum to Distribution Agreement
between United Natural Foods, Inc. and Vitamin Cottage
Natural Food Markets, Inc., dated March 10, 2012#
Third Amendment to Distribution Agreement between
United Natural Foods, Inc. and Vitamin Cottage Natural
Food Markets, Inc., dated June 3, 2012#
Form of Stockholders Agreement, by, between and
among Natural Grocers by Vitamin Cottage, Inc. and the
stockholders to be named therein
Credit Agreement dated as of January 28, 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
Security and Pledge Agreement dated as of January 28,
2016 by and among 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.
Customer Distribution Agreement by and among United
Natural Foods, Inc., Tony’s Fine Foods, Albert’s
Organics and Vitamin Cottage Natural Food Markets,
Inc. dated as of June 21, 2016#
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
Incentive Compensation Program*
Second Amendment to Credit Agreement dated as of
September 6, 2017, 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
Autoborrow Agreement dated as of September 6, 2017,
by and between Vitamin Cottage Natural Food Markets,
Inc. and Bank of America, N.A.
Employment offer letter to Todd Dissinger dated
December 5, 2017*
Notice of Grant of Stock Unit Award to Todd Dissinger
dated January 2, 2018*
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.#
Natural Grocers by Vitamin Cottage, Inc. 2012 Omnibus
Incentive Plan, as amended*
First Amendment to Lease dated as of July 31, 2019 by
and between Chalet Properties, Austin, LLC and Vitamin
Cottage Natural Food Markets, Inc.
Third Amendment to Credit Agreement dated as of
November 13, 2019, 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 S-1
333-182186
10.30
June 29, 2012
Form S-1
333-182186
10.31
June 29, 2012
Form S-1
333-182186
10.32
July 12, 2012
Form 10-Q
001-35608
10.39
Form 10-Q
001-35608
10.40
January 28,
2016
January 28,
2016
Form 10-Q
001-35608
10.1
May 6, 2021
Form 10-Q
001-35608
10.42
July 28, 2016
Form 10-Q
001-35608
10.43
Form 10-K
001-35608
10.44
Form 10-K
001-35608
10.45
Form 10-Q
001-35608
10.46
Form 10-Q
001-35608
10.47
Form 10-Q
001-35608
10.48
February 2,
2017
December 7,
2017
December 7,
2017
February 1,
2018
February 1,
2018
August 2,
2018
Form 8-K
001-35608
10.49
March 8, 2019
Form 10-Q
001-35608
10.49
Form 10-K
001-35608
10.51
August 1,
2019
December 5,
2019
82
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37#
14
Amended and Restated Lease, dated August 3, 2020,
between Chalet Properties of Pueblo, LLC and Vitamin
Cottage Natural Food Markets, Inc.
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
Fifth Amendment to Credit Agreement dated as of
September 16, 2021, 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
Lease, dated May 4, 2022, between Chalet Properties,
LLC and Vitamin Cottage Natural Food Markets, Inc.
Sixth Amendment to Credit Agreement dated as of
December 15, 2022, by and among Vitamin Cottage
Natural Food Markets, Inc., the Guarantors party thereto,
the lenders party, and Bank of America, N.A as
Administrative Agent, L/C Issuer and Swing Line Lender
First Amendment to Lease, dated May 3, 2023, by and
between Chalet Properties, LLC and Vitamin Cottage
Natural Food Markets, Inc.
Amendment to Commercial Lease, dated May 3, 2023,
by and between Chalet Properties, LLC and Vitamin
Cottage Natural Food Markets, Inc.
Amended and Restated Customer Distribution
Agreement, dated August 23, 2023, between Vitamin
Cottage Natural Food Markets, Inc. and United Natural
Foods, Inc.
Code of Ethics
Form 10-Q
001-35608
10.1
Form 8-K
001-35608
10.1
Form 8-K
001-35608
10.1
August 6,
2020
November 24,
2020
September 16,
2021
Form 10-Q
001-35608
10.1
May 5, 2022
Form 8-K
001-35608
10.1
December 21,
2022
Form 10-Q
001-35608
10.1
May 4, 2023
Form 10-Q
001-35608
10.2
May 4, 2023
—
—
—
—
Form 10-K
001-35608
14
December 13,
2012
December 13,
2012
21.1
List of subsidiaries
Form 10-K
001-35608
21.1
23.1
31.1
31.2
31.3
32.1
Consent of KPMG LLP
Certification of Kemper Isely, a Principal Executive
Officer Required Under Section 302(a) of the Sarbanes-
Oxley Act of 2002
Certification of Zephyr Isely, a Principal Executive
Officer Required Under Section 302(a) of the Sarbanes-
Oxley Act of 2002
Certification of Todd Dissinger, Principal Financial
Officer Required Under Section 302(a) of the Sarbanes-
Oxley Act of 2002
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†
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
97
Incentive Compensation Recoupment Policy
—
—
—
—
101
104
The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Annual Report on Form 10-K for the year ended
September 30, 2023, 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.
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
83
*Indicates a management contract or compensatory plan or arrangement
# Confidential portions have been omitted.
† 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.
Item 16. Form 10-K Summary
Not applicable.
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 7, 2023.
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 7, 2023
/s/ ZEPHYR ISELY
Zephyr Isely
(Principal Executive Officer, Co-President,
Director)
December 7, 2023
/s/ TODD DISSINGER
Todd Dissinger
(Principal Financial and Accounting Officer,
Chief Financial Officer)
December 7, 2023
/s/ ELIZABETH ISELY
Elizabeth Isely
Director
/s/ HEATHER ISELY
Heather Isely
Director
/s/ SANDRA BUFFA
Sandra Buffa
Director
/s/ EDWARD CERKOVNIK
Edward Cerkovnik
Director
/s/ RICHARD HALLÉ
Richard Hallé
Director
/s/ DAVID ROONEY
David Rooney
Director
85
December 7, 2023
December 7, 2023
December 7, 2023
December 7, 2023
December 7, 2023
December 7, 2023
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2023 ANNUAL REPORT
OUR 5 FOUNDING PRINCIPLES
1. Nutrition Education
2. Highest Quality Products
3. Always Affordablesm Pricing
4. Commitment To Our Communities
5. Commitment To Our Good4usm Crew
WE OPERATE 165 STORES IN 21 STATES*
*as of September 30, 2023
NET SALES (IN MILLIONS)
DAILY AVERAGE COMPARABLE STORE SALES GROWTH
$1,200
1,100
1,000
900
800
700
600
500
400
300
200
100
0
$904
$1,037
$1,056
$1,090
$1,141
3.1%
12.0%
0.7%
2.6%
3.6%
FY 2019
FY 2020
FY 2021
FY 2022
FY 2023
FY 2019
FY 2020
FY 2021
FY 2022
FY 2023
ORDERING FINANCIAL STATEMENTS
A copy of our 2023 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 6, 2024
1:00 pm Mountain Time
The 2024 Annual Meeting of Stockholders will be held virtually and a
live webcast will be available via the Internet at:
www.virtualshareholdermeeting.com/NGVC2024
TRANSFER AGENT AND REGISTRAR
Information about stock certificates, address changes, ownership transfers or other
stock matters can be obtained from Equiniti Trust Company, LLC via:
Mail: Equiniti Trust Company, LLC
PO Box 500
Newark, NJ 07101
Email: helpAST@equiniti.com
Phone: 1-800-937-5449
Hearing Impaired (TTY): 1-866-703-9077 or 718-921-8386
Web: www.equiniti.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).
3
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
SANDRA BUFFA
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
A pasture-raised chicken on an Egg Innovations farm in
Kentucky. Egg Innovations produces the Natural Grocers®
Brand eggs from regenerative certified farms.
4
2023 ANNUAL REPORT