Natural Grocers Has Plenty Of Room To Sprout


Shopping for natural and organic products can be impractical at times if one constantly needs to read labels and ingredients. Now, health-conscious people don't have to.

They can go to aNatural Grocers by Vitamin Cottage ( NGVC ) store and buy products off the shelves without ever having to look at the labels.

Why is that?

It's because the natural and organic products specialty retailer pre-selects its products to make sure they don't contain artificial colors, preservatives, flavors, sweeteners and hydrogenated oils before putting them on the shelves.

In fact, that's one of the five founding principles of the Lakewood, Colo.-based company, which went public just this July. However, it's been a family-operated business since 1955.

Affordable Prices

"We focus every day on having affordable pricing so that everybody, regardless of income level, can purchase what we sell. Secondly, it's the quality standards of the products we sell. People can shop at our stores and don't necessarily have to read the labels because they know we've already prescreened the products," said CEO Kemper Isely. "Third, we have a pretty extensive, science-based nutrition education program in our stores to help our customers make well-informed health and nutrition choices.

"And because of these three factors, we have a lot of customer loyalty, and it creates a lot of very good word-of-mouth and helps to keep ourselves going even during the recession. And then after the recession, the sales have really taken off."

Currently, Natural Grocers has 59 stores in 12 states. It opened 10 new stores in each of fiscal 2011 and 2012 and plans to open a similar number in future years. Its largest presence is in Colorado with more than 30 stores, and Texas with 10 stores.

"Our growth plans are to grow the store base by a compounded 20% per year," said Isely. "Our first priority is to find cities that are underserved as far as natural foods go and locating those cities."

According to research by the Buxton Co., the entire U.S. market can support at least 1,100 Natural Grocers stores, including an additional 180 stores in existing markets.

"I think there is an opportunity for them to be much larger than they are today," said Sean Naughton, an analyst at Piper Jaffray. "For starters, they are looking at going to adjacent states, inside of the Rocky Mountains."

"I do believe that it is a concept that can translate into many geographic areas; it's just managing the growth appropriately," he added.

Whole Foods Market ( WFM ) is Natural Grocers' largest public competitor. But Natural Grocers' pricing is 8% to 10% below Whole Foods'. It also has a high penetration of vitamins and supplements in the store, at 28%, vs. 10% at Whole Foods, estimates Naughton.

Natural Grocers stores are much smaller in size, at an average 10,000 square feet, while Whole Foods stores typically run four times larger. Earnings have also been growing more quickly at Natural Grocers than its competitors.

"I think the company is in a very solid financial footing and they have some capital for growth," said Naughton. "That's going to be a matter of generating free cash flow to fund the working capital and fund the growth of the business, and I think they are in a good position to do that."

The company paid off all of its bank debt after it went public in July.

Natural Grocers had 40 straight quarters of positive comparable store sales, even during the recession. This is in contrast to their competitors, who did have negative numbers during the downturn.

Management and analysts expect earnings to grow at a 30% pace in future years, driven by unit growth, expanding operating margins and strong secular trends in the organic food industry.

Conventional Eating

"Our industry is in a good position because people are looking for alternatives for eating the conventional way," said Isely. "Demographically, you have baby boomers coming into their retirement, and as you get older, you have more health issues and you look for more alternatives to stay healthy.

"There is definitely substantially more consumers aware of natural foods and eating well and nutritional supplements than there were 30 to 50 years ago when my parents got into this business," added Isely.

"And it seems to be growing exponentially. It's now probably 10% of the population. There is still a lot of room for growth because it is still a small percentage of the population that shops at natural food stores."

Management has a proven track record and has been focusing on cost controls and efficiencies at its repackaging and distribution centers.

"Management has done a very good job over the years of executing the growth of this business," said Naughton.

CEO Isely said: "Our founding principles (are the) driving focus of our company -- and also growing at a sustainable pace rather than at a breakneck pace."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Investing Ideas

Referenced Stocks: NGVC , WFM

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