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 (
) 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.
"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
"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
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 (
) 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
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
"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
"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."