Good day, ladies and gentlemen. Welcome to the Natural Grocers Second Quarter Fiscal Year 2021 Earnings Conference Call. As a reminder, today's call is being recorded. I'd now like to turn the conference over to Mr. Jonathan Dhillon, General Counsel for Natural Grocers. Mr. Dhillon, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage Second Quarter Fiscal Year 2021 Earnings Conference Call. On the call with me today are Kemper Isely, Co-President; and Todd Dissinger, Chief Financial Officer. As a reminder, certain information provided during this conference call are forward-looking statements based on current expectations and assumptions and are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks and uncertainties detailed in the company's most recently filed forms 10-Q and 10-K. The company undertakes no obligation to update forward-looking statements. Today's press release is available on the company's website, and a recording of this call will be available on the website at investors.naturalgrocers.com. Now I'll turn the call over to Kemper.

Thank you, Jonathan, and good afternoon, everyone. Thank you for joining us today. We had a solid performance in the second quarter, executing against our strategic objectives. I'm very proud of how our entire organization performed, delivering on our promise of the highest-quality natural foods at always affordable prices as well as responding to the needs of our communities. While we continue to face challenges stemming from the COVID pandemic and related government mandates, our focused approach and commitment to our founding principles serve as key points of differentiation in the marketplace. Our second quarter results demonstrate the strength of our model and disciplined operating approach, enabling us to drive solid profitability despite very difficult revenue comparisons and weather-related disruptions. Daily average comparable store sales on a two-year stack basis increased 10%. Daily average comparable store sales for the second quarter were down 7% as we lapped a 17% increase in the second quarter of last year. Our second quarter comparable sales were negatively impacted by the severe cold and ice storms during February by an estimated 70 basis points. Transaction size continued to track positively, rising 8%, which was offset by a decline of 13.9% in the transaction count. Late in the quarter, we saw the transaction count comp turn positive, which continued through April. Earnings per share of $0.21 was in line with our expectations and supports our previously announced full-year guidance range. Our key initiatives remained a focus and continue to drive positive results. Our Npower program continued to strengthen customer engagement and loyalty, driving transaction activity by providing a compelling platform for optimizing marketing, promotions, and enhancing the customer experience. We ended the second quarter with 1.4 million Npower members, up 17% versus a year ago and up 5% sequentially. Our net sales penetration for Npower was 70% in the second quarter compared to 69% a year ago. We saw positive customer response to our ongoing marketing events and promotions this quarter, including resolution reset, the Valentine's Day promotion, and our meal deals campaign. We generated additional engagement with our Keto Reset, first annual body care and beauty bonanza and a $500,000 good4u giveaway. The second quarter was an exciting quarter for Natural Grocers' brand products. We began a category relaunch in supplements. By the end of the fiscal third quarter, we expect to have over 150 newly formulated supplements under the Natural Grocers brand in our stores. Supplements are an important component of our branded portfolio as they reflect our key principles of nutrition, quality, and value, and represent a competitive differentiation. In addition, we added six new grocery products to our Natural Grocers branded assortment, including the introduction of bottled kombucha. For the quarter, the sales penetration rate of our Natural Grocers brand products was 7.3%. Supporting our communities and crew are core values at Natural Grocers. During the second quarter, many of our markets in the South Central and Pacific Northwest states experienced severe winter storms. We implemented disaster relief efforts to help many affected communities. For example, in Texas, Natural Grocers offered free filtered water to communities without access to clean water due to the storms, and we sponsored a company-wide campaign for food banks facing a surge in need, including raising over $100,000 for the Feeding Texas nonprofit organization. We also provided severe weather financial relief in the form of additional pay and bonuses during store closures for our impacted crew members. Throughout the pandemic, we have supported our crew with higher wages and incentives. Our second quarter results included incremental wages of $1.6 million. Before I turn the call over to Todd, I would like to thank our good4u crew for their unwavering commitment to our mission and communities we support. Our crew continues to be the key to a positive store experience. With that, let me turn the call over to Todd to discuss our financial results and guidance.

Thank you, Kemper, and good afternoon, everyone. We overcame a number of headwinds during the second quarter to deliver solid results in line with our expectations, especially as we began to lap the unprecedented sales increases associated with customer pantry loading at the start of the pandemic. Net sales declined 6.6% to $259.2 million in the second quarter. Daily average comparable store sales was down 7% as we cycled a 17% increase in the prior year period, which included a comp of approximately 40% in March of 2020. During the quarter, we saw continued trends of customers practicing social distancing and the impact of safety guidelines, resulting in a continuation of elevated levels of food at home. Following recent quarterly trends, basket size increased 8%, while transaction count was down 13.9%. On a two-year stacked basis, daily average comparable store sales increased 10%. Basket size increased 21.1%, while transaction count was down 10.4%. Weather-related disruptions, specifically the severe cold and ice storms during February resulted in store closures, power outages, higher shrink, and supply chain disruptions in many of our South Central and Pacific Northwest markets, adversely impacting the second quarter comp by an estimated 70 basis points. During the second quarter, we experienced an inflation rate of approximately 3%. Gross profit margin during the second quarter was 27.7% versus 28% in the second quarter of last year. Occupancy deleverage was the primary factor that drove the 30 basis point decline in gross margin, reflecting the impact of lower sales volume. We saw a slight improvement in product margin. Store expenses as a percentage of sales increased to 22.5% in the second quarter compared to 20.5% in the second quarter of fiscal 2020. The majority of the increase in store expenses as a percentage of sales was attributable to labor-related expenses due to increased labor hours and wage rates, coupled with the deleverage from the expected decrease in sales volume. We did realize leverage on store expenses when comparing the second quarter to the first quarter of 2021. Net income of $4.7 million or $0.21 per diluted share in the second quarter compared to net income of $9.7 million or $0.43 per diluted share in the prior year period. Earnings per share was lower as a result of the anticipated decline in sales volume and the deleverage of store expenses. We estimate the severe weather in February adversely impacted EPS by approximately $0.03 to $0.04 due to lost sales as well as incremental shrink and weather-driven store labor costs. Second quarter EPS was in line with our expectations and supports the fiscal year guidance range. Adjusted EBITDA was $14.1 million in the second quarter versus $21.1 million in the prior year period. During the first half of fiscal 2021, we generated cash from operations of $17.3 million and invested $9.5 million in net capital expenditures. We opened one new store in Jefferson City, Missouri and remodeled and expanded one store in Dallas, Texas during the quarter, bringing our total store count to 161 at the end of the second quarter. Our balance sheet remains strong with $21 million in cash, no outstanding borrowings under our $50 million revolving credit facility, and a $34.6 million balance on our fully drawn term loan. Today, we announced that our Board of Directors has declared a quarterly cash dividend of $0.07 per common share, reflecting our ongoing commitment to returning capital to shareholders. The dividend will be paid on June 16, 2021, to all stockholders of record at the close of business on June 1, 2021. Now turning to our outlook for fiscal 2021. We are lowering our expectations for new store openings and store relocations/remodels during fiscal 2021 and are otherwise reiterating our full-year guidance range previously established on November 19, 2020. The adjustment in new store and relocation/remodel expectations is driven by delays we are experiencing in the construction process and equipment deliveries. Our guidance reflects current trends in light of the rapidly evolving COVID-19 environment and related government mandates. While the company cannot predict the duration or severity of the pandemic and related government mandates, the company expects that these factors will continue to impact our operations and financial performance through the fiscal year. For fiscal 2021, we expect to open 3 to 4 new stores, relocate/remodel 4 to 5 stores, achieve daily average comparable store sales growth of between negative 2% and 2%, achieve diluted earnings per share between $0.60 and $0.70, and we expect capital expenditures for the fiscal year in the range of $28 million to $35 million. In closing, we are pleased to have delivered another quarter of strong performance. As we worked through our modeling and developed our guidance six months ago, there was a great deal of uncertainty around the year-over-year impact of March 2020. Our results for the second quarter were in line with our expectations and support our fiscal year outlook. With the challenges and uncertainty of the second quarter now behind us, we look forward to the opportunities ahead in the second half of the year. Now I would like to open the lines up for questions. Thank you.

Our first question comes from the line of Greg Badishkanian from Wolfe Research.

This is Spencer Hanus on for Greg. Can you just talk about the quarter-to-date comps that you guys are seeing? And how that varies by states that are more open? And then as consumers start to partial basket shop again, how do you think that will flow through to your results?

Well, speaking of comps so far this quarter, they are in line with our guidance. We haven't seen any significant change by state in comps. So whether it's Texas, which is more opened, or Colorado, or Oregon, which is less opened, or New Mexico, which is less opened, the comps are trending fairly similarly to what we would have expected and from what we had seen in the second quarter. As far as the basket size goes, so far, we have not seen a tremendous decrease in basket size. We have seen somewhat of an uptick in customer count so far since the end of March and through April, we've had positive customer count. Until the office workers come back and work at the office, I don't think we're going to see that impulse of smaller baskets come back to our stores. We did a study of our basket composition from the first quarter, and what we found was where we lost baskets were the small size. So people coming in for lunch buying a sandwich, a drink, and maybe a snack. That's where we lost our customer counts through last year. And so far this year, we're not seeing a huge uptick in that category. We're still seeing the larger baskets from our customers that got used to shopping less frequently and buying larger baskets.

Got it. That's helpful. And then I think you mentioned that inflation in 2Q was running at around 3%. What is your outlook for inflation for all of 2021? And are you seeing any signs of increased cost pressures from CPGs trying to pass through some of these cost increases? Then do you think you'll be able to pass all those through to your customers?

Yes. I mean, our products are based on a margin. So whenever one of our suppliers increases the cost of goods, we pass that along at our margin. It is very seldom that we don't do that. I mean, there are a few select products that we'll keep at a particular price just because the price point is particularly good. But by and large, we're able to pass those costs along. I would guess that as of right now, hopefully, we'll see the 3% trend for the rest of the year. But the pricing that we're seeing on for equipment at our stores is we're getting like 20% and 30% surcharges right now. And so I'm guessing that everybody else is seeing those types of price increases on their capital goods, so they're going to have to, there's probably going to have to be an acceleration in how much they charge for products coming out in maybe six months from now or something.

That makes sense. And then I think you mentioned that there saw a slight improvement in product margin this quarter. Can you just talk about what drove that? And then how should we think about the gross margin line and the cadence of that through the rest of the year?

Yes. So most of the deterioration in our gross margin was driven by occupancy deleverage. We had a slight increase in product margin. I would say that's mostly increases in product margin across most categories. We only had a few categories that saw a slight margin decrease. So more or less across the board, we're seeing increases. And in terms of thinking about our guidance in the remainder of the year, we would expect to see on the high end of our guidance, our gross margin increase, sort of consistent with what we've seen year-to-date, and that's really driven by product margin improvement and some leverage on occupancy given that on the high end, we have positive comp, and then on the low end, we would expect to see gross margin be more or less flat on a year-over-year basis. And that's some improvement in product margin, but because of the sales decline in the low end of our guidance, we would probably see some deleverage on occupancy.

If inflation increases, we'll see better product margins through the year because as inflation increases, our prices go up faster than our cost of goods go up because old product would, of course, be at the older price and the new product to be at the higher price but at a higher margin. Did that make sense?

Yes. That totally makes sense. And then on the new store development. I understand that you guys are pulling that down a little bit this year, but should we expect you guys to get those new units back next year and maybe see a little bit higher growth in the new stores in 2022?

I would expect that we'll have more new stores in 2022 than we've had in 2021. We kind of pulled back a little bit on our real estate search in 2020 because of the uncertainty in the markets. So we didn't have as many in the pipeline. And then when we run into construction delays and equipment shipments have gone from eight weeks to sixteen weeks. So it's really extended out our construction timeline substantially to get stores, new stores open. I also think that we'll also have a lot of good real estate opportunities coming up in the coming year just because of the fallout from the pandemic in the retail sector.

Thank you for your question. I'll now turn the conference back to Mr. Kemper Isely for his concluding remarks. Thank you, sir.

Yes. Thank you very much for joining us to discuss our second quarter results. We remain committed to delivering a safe, value-driven, trusted shopping experience to the communities that support us. We believe the opportunity is greater than ever to help consumers with healthier lives, and we are excited for the opportunities ahead. We look forward to speaking with you on our next call to review our third quarter 2021 results. Please stay healthy and safe, and have a great day. Thank you. Goodbye.

Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your line. Thank you once again. Have a great day, everyone.