Guests we have from Natural Grocers by Vitamin Cottage, CFO Richard Hallé. Richard, thanks so much for joining us today. Thank you, Aaron. I appreciate it. I appreciate the invite and happy to be here with you. Absolutely. We're looking forward to it as well. I'd love to kick things off for the audience, for some who might be new to the story. Why don't you give an introduction to Natural Grocers by Vitamin Cottage, the story, and what brings you here today to talk about the stock? Yeah. Okay. That's great. Yeah, I mean, Natural Grocers is an expanding specialty retailer in the natural and organic grocery space. You know, the company was founded in 1955. It's still family controlled but public, trading on the New York Stock Exchange. It has 169 stores in 21 states, all west of the Mississippi, and excluding California. TTM revenue of about $1.3 billion, and TTM adjusted EBITDA of about $96 million. You know, again, it's a family-founded company. You know, culture is really critical, and the culture of the company is founded by, it's based on its founding principles, and it starts with nutrition education. The company provides extensive free science-based nutrition education programs to help customers make informed health and nutrition choices. Every store has a Nutritional Health Coach that provides one-on-one health coaching sessions and personalized shopping experiences for our customers. We also hold in-store events for the community. We also provide our crew with nutrition education to drive a better customer experience. Nutrition is very critical to what we do. That's followed by our product standards. You know, we believe we have the highest product standards in the industry. We have very strict quality guidelines. Our produce offering is 100% organic. Our minimum egg standard is free range. Our dairy department standards require pasture-raised, non-confinement dairy products. Our meat standards prioritize humanely raised and sustainably sourced offerings. We do not allow artificial flavors, sweeteners, synthetic colors, other products, anything that we believe that could be potentially harmful to human health. If you go to our website, you'll see a document that's called Things We Won't Carry. We offer our high-quality products at always affordable pricing. I mean, we believe that we're the value offering in natural and organic. You know, we do a lot of pricing studies. We tend to be lower than our competition for light baskets. We also believe in supporting our communities and our crew. You know, we have about 4,000 employees. You know, we're very focused on the engagement, development, retention, and wellbeing of our crew members. We're very committed to promoting from within the company for store management. Crew members are carefully trained to present nutrition information to customers. We've got a very deep bench at the company. I mean, a very experienced, outside of the executive group, a very experienced management team made up of VPs that have been here with significant tenure, directors with significant tenure. A lot of people are here and believe in the mission. With respect to our communities, in 2024, we made more than $4 million of product donations to food banks and made almost $1 million in monetary donations to various causes. We definitely believe that grocery stores play a pivotal role in the food chain, and our products have a purpose to support the health and wellbeing of our communities. I'd say that some of our differentiation is around, we have a very sort of unique store format. We have a small store format. It's a shopper-friendly environment. Our store format is about 10,500 square feet of selling space, and really a very friendly, clean, convenient retail environment to shop in. It also allows us to have really close contact with the customer base, providing great customer service. It really allows us a lot of flexibility in the types of communities that we can go into. We are successful across all market types. We're in urban markets, we're in suburban markets, we're in rural markets. We tend to do very well in smaller communities, and our format allows us to go and extend our reach into the smaller communities and be profitable. I'll stop here. This is kind of just a general overview and happy to take any questions from you, Aaron. No, I appreciate that. That was a very helpful, detailed overview of the story. You mentioned community a lot. Let's start there. Talk about, a lot of people on the call here are probably in the coastal urban cities, so we haven't had the pleasure of maybe seeing a Natural Grocers. Talk about that community aspect. You know, what's unique about maybe some of the communities you're in versus maybe some of the specialty organic retailers that come to mind for people on the call? Talk to us about what might be different about those communities. You mentioned they're pretty broad in terms of rural, suburban, or urban even, but it also sounds like it's a little bit different than what we might think of. Give us a little bit more detail in terms of those core communities they look for. Yeah, I mean, we are in all community types. I would say we tend to lean a little bit more rural and rural plus. We operate in urban markets. We're in Denver, we're in Dallas, we're in Austin, but we also are in suburban markets around those communities. We extend our reach because of our smaller store format into what we call rural plus communities. That would look very much like some of the new communities we've opened into recently. This year we opened in Brownsville, Texas. We also opened in Waco, Texas. We are planning to expand our footprint into an adjacent state early next year. We're going to go into Lake Geneva. Those are, in Colorado, for example, we opened in Loveland, Colorado. We opened in Gunnison, Colorado. It gives you a sense for the type of community in terms of size. We tend to do well also with kind of health-oriented outdoor communities. Those types of communities allow us to go actually pretty small. We'll go into mountain communities in Colorado and do very well in those communities because of a focus on health and outdoors. Those small communities also allow us to be, it's a little easier for us to establish our brand in terms of getting the word out. We tend to face a little bit less competition. There are less choices. We know there are a lot of great communities on the east that we'd love to be in. Obviously, that's going to take some time for us. We're starting to move eastward. We're looking at adjacent states. We obviously have a distribution relationship with UNFI that has a national footprint that gives us a lot of flexibility in terms of where we can open stores. That was awfully covered there. One thing that you brought up was Natural Grocers having not only its organic products, but also at affordable prices. How are you able to offer consumers the affordable prices while still generating a healthy profit and providing the organic produce and other products? Yeah, I mean, I think part of that comes from the small store format. It really allows us to be very, very efficient, right? It's expensive. We don't operate delis. We don't have meat counters, fish counters. We don't do prepared foods. We'll partner and provide prepared packaged foods in our stores, but we don't do any prepared foods. Those are difficult activities to be profitable in. Given our small store format, it's something that we've decided not to do. It allows us to be in smaller communities, and it gives us more flexibility from a pricing perspective. We just have a really efficient formula, and that efficient formula really allows us to bring products at a very competitive price and still be able to drive some leverage to the bottom line. No, that's helpful. If we think about the stores, who are you seeing as maybe your primary competition? Who are you looking to source share from? It sounds like it could be a number of different people. As you're entering a new community, where has that shopper historically been going to where you might be starting to garner some share from? Yeah, I mean, we certainly have been, I mean, you look at the stats, you look at what's happening with the conventional grocers, you know, it's clear that we're taking share away from them. You know, you're seeing a very strong wellness trend, you know, towards healthy eating, healthy living. I think people realize that they need to take control of their health. The way to do that is through a strong foundation of good, healthy nutrition and supplementation. That allows us, you know, we're obviously a very authentic player and we're well positioned to take advantage of that. You know, I think that we obviously face strong competition from folks like Sprouts. You know, we believe that we're more authentic. We have higher product standards, and of course, we're a much more value-oriented offering. When you think about our product standards, again, I would point you to our website of the things we won't carry. You know, we've gained the trust of our customers that they walk in and they know that what they pick up off the shelves, you know, it's not going to have any potential products that's not healthy for you. That allows us to provide a highly differentiated offering from the customer and allows us to be, I think, very competitive and have a strong presence in the markets that we operate in. It's helpful. You touched on it a bit, so I want to make sure we kind of drill down. Anything else that you'd point to in terms of that kind of special sauce that provides you with a competitive advantage, touching on kind of product selection, which you just mentioned, and also the supply chain, which you alluded to as well? Maybe you can just provide further color on that in terms of how that helps to give you that competitive advantage. Yeah, I mean, it starts, of course, with nutrition education, right? You can walk into our stores, you can set up a one-on-one with a Nutritional Health Coach. We have a Nutritional Health Coach in every store. If you're looking to adopt, maybe, a new type of, you know, you're interested in becoming gluten-free, for example, how do you find the things that can help you on your journey to this new diet? Nutrition education is a very foundational value for us. Then our product selection, right? Really high-quality product selection. Also, we do look at new products. New products that may be trending. We see it on social media, right? A lot of times there's new trends, whether protein, protein-based products. We turned over our SKU count with new products last year, about 15%. For us, it has to meet our product standards, right? That's the critical part, right? We're not going to chase fads. We're not going to chase products that don't meet our product standards. When you look at our comps, we've been really pleased with the strength of our comps and the depth of our comps. We're seeing really strong growth in our most differentiated offering, right? That would be meat, dairy, and produce, right? We talked about our produce, 100% organic. That's where we're seeing the highest comps across categories. That's our most differentiated offering. I would say that again, the small store format, easy to shop in, allows us close contact with the customer, right? You only tend to have 10,500 sq ft. It really allows us to provide great customer service. I'd say that's another strong differentiator. We have a loyalty program called {N}power rewards program. About 82% of our sales last quarter came through our {N}power rewards program. It's been in place since 2015. We've learned a tremendous amount over the years with that program. That program allows us to stay in touch with our customer base. It allows us to personalize the offerings to our customer base. That's what has enabled us to, I think, have very effective promotions. It's been a component of why our margins have grown this year. It's been part of the leverage that we've seen, is our loyalty program and the ability to be very effective and targeted with our customer base. Thanks. That's helpful. Just a quick reminder to the audience, feel free to type in any questions that you have for Richard. We will have some Q&A time at the end of the session. Diving into some of your proprietary products, you have your Natural Grocers brand products. I believe it's nearly 9% of sales today, over 800 SKUs. Can you talk about some of your branded products, some of the margin benefits you get from private label versus third-party brands, and where that stands for the company? Yeah, I mean, we have, you know, like you said, we have 800+ SKUs, lots of options throughout the store, kind of covering all categories, product categories. We also do bulk where we package nuts, dried fruit, spices. That is a big part of our private label offering. We are very focused, again, at high product standards and offering that at an affordable price. Today, it is predominantly margin-neutral to the company. We're very focused on increasing adoption. Because of our product standards, trying to find the vendors that can meet our standards can create more challenges than others. They tend to be vendors that are on the smaller side. We expect that over time, as adoption increases, we'll see some benefits through volume in terms of driving costs down and improving margins. Today, that's margin-neutral for the company. Okay. No, I appreciate that. Same-store sales have been showing for you guys, over 8%, you know, store comps through the nine months of the fiscal year that ends September. That's accelerating from 7% prior year. What have been some of the key drivers that have helped you with that strong same-store sales and maybe provide some color in terms of traffic and ticket and how that's differed? Yeah, sure. I mean, through Q3, year-to-date sales comps, 8.4%. Traffic, 5.4%. Q3 was the 10th consecutive quarter with positive traffic comp. Basket, year-to-date 2.9%. Q3 was the sixth consecutive quarter with increases in items per basket. We've had modest inflation. We are seeing really strong comps across the entire portfolio. Over the last few years, as we slowed unit growth down, we turned our attention to store productivity and really allowed us to fine-tune and enhance productivity across the portfolio. In Q2, we stated that mature stores, stores that are five years and older, had an 8.5% comp compared to the company comp of 8.9%. I think very few grocers would have similar broad-based growth. Other key drivers of our growth, obviously, consumer preferences are changing, right? If you talked to a lot of analysts and investors, a lot of folks believe that it's a structural change in the consumer habits towards healthy living, healthy eating. I think that trend is very enduring. Obviously, a lot of attention to health in the media. I think, again, we're very well positioned to take advantage of that. Certainly, that's what we've seen. We've seen good growth, as we said, in traffic count, but we're seeing good growth overall in the customer base. Our {N}power rewards program, which I just talked about, is a very effective tool to really drive engagement. Continuous focus on store productivity has also been a big driver. Our Natural Grocers brand products private label also, another differentiating factor. I think a lot of things have come to play here. We've been really happy with the company's performance. Indeed, you touched on it a bit, but how should we think about the store economics, that four-wall EBITDA? Can you provide any color on new store economics or cash-on-cash returns that you're seeing? Yeah, we published our store economics on our website in our investor presentation at the end of the quarter. You know, the way, you know, average investment in the stores is around $3.6 million. That includes CapEx, inventory, pre-opening expenses. We tend to see year-one sales are around $5 million, and then experience lower double-digit comps through year five. We typically see maturity at around year six. Four-wall EBITDA margins in the 10.5%, 11% range by year five, and seeing 25%- 30% cash-on-cash returns by the end of year five. A lot of that has been based on more recent vintages. Obviously, over the last few years, as we've seen through COVID and post-COVID, we saw a fair amount of inflation in construction costs. We wanted to make sure that we captured the right cost structure, but we've been really very happy and have a lot of confidence based on the performance of recent vintages on these metrics. Fantastic. Yeah, great metrics there. Let's dive into that in terms of that confidence. So, 169 stores today, 21 states, current fiscal year, planning to open two more stores, but you announced next fiscal year you're going to accelerate that, six to eight. What gave you the confidence to accelerate that store growth? I think you just alluded to some of it because you had slowed down the store unit growth the past couple of years. It sounds like you're now in a position to accelerate that. Can you talk about some of the things that led to that change? Yeah, I think that, you know, we did, late teens, early twenties, kind of back off on store growth, turned our attention to store productivity, feel really good about where we are. You know, the addressable market is very significant. You know, we've already identified, you know, we've talked about how we have, you know, we're looking to do six, eight new stores. We have six leases signed. We have another four in negotiations. We have another 75 communities that we vetted and have identified and are now just looking for real estate opportunities. You know, we feel good about our competitive positioning, and we feel good about our format. It's a very, it's a good formula. We're now at a point, you know, we talk to folks like yourselves, we talk to investors, and obviously, this has been an area of focus for many investors. Yes, we're doing terrific, you know, on our comps the last couple of years with small unit growth, but we know that to continue to drive low double-digit revenue growth, some of that's going to have to come from store growth. We're focused on sort of a 4%- 5% growth rate and something that's manageable. Again, you know, we're a little bit more prudent. We want to make sure that we can self-fund all of our CapEx activity. I think we have a lot of confidence. We get a lot of inflow, a lot of requests for store openings from our customer base, and so we have a lot of confidence that the addressable market is pretty significant. If you were to look at, obviously, Sprouts, right, over 450 stores, we're at 169, you know, Whole Foods Market 550. Sprouts has talked about taking their store count to 1,200, 1,400, you know, across the states. I mean, we have a lot of opportunity to grow here. I think our plan is just to be very prudent, but we're at a stage where we have a lot of confidence in our ability to execute on this growth plan. Yeah. To that point, you mentioned in the last earnings call, you identified, I believe, 75 communities that Natural Grocers could fit. It speaks to that, Tim. Maybe tell me a bit about that. What went into that analysis? Is that within existing states? Is that including some of the additional states? Was that all-encompassing? Maybe just provide some color in terms of what went into the analysis, where you identified those 75 incremental communities. Yeah, I mean, we have a real estate selection group, and they're constantly on the road, looking at communities. They'll go into communities, look at the competitive landscape. Some communities, it'll be a grocery desert, and the demographics are healthy, and the right sort of population size. We may back away where the competitive pressure is just too high. Sometimes it's not necessarily a Sprouts or Whole Foods. It's going to be a local co-op, a strong local co-op, because the loyalty factor is pretty high. We've looked at communities where we thought it would be a good fit, but once we learned more and saw kind of the co-op landscape, we've made the decision that that's not a good market for us. Again, it's a laborious process, community by community, having boots on the ground and evaluating the market dynamics and whether it's an appropriate market for us. Great. As we think about store openings going forward, six to eight next year, but the years ahead, I think you said 4%- 5% unit growth. Are there any bottlenecks we should think about in terms of a limit of an absolute number of stores you'd be able to open within a year? Any potential human capital that would need to bring on to, as you get bigger and bigger, obviously a lot of numbers hit that percentage, the number of stores are going to have to continually increase. Any type of bottlenecks to think about there? Yeah, and I think when I, you know, we talk about 4%- 5%, obviously that's where we are today. Right. We will continue to evaluate that, and yeah, I could see our store growth continuing to increase modestly. I think that there are limits to kind of the growth that we will want to execute on. You know, we're going to continue, I think we have probably a little bit more of a conservative bent in terms of our capital allocation. You know, we still are focused on delivering a return of capital to shareholders via the dividend, right? We instituted the dividend in 2019, we returned $116 million to our shareholders. In terms of bottlenecks, it's just an investment in various resources. We have a really strong real estate selection group. We have a good construction group and that possibly would require in the future a little bit more investment. Obviously, you're going to have some step variable functions like regional management that you'd have to improve. You know, we do have a crew that does only opening new stores, and so that's another area where we would invest. We're not, you know, we're fully staffed there and are in good shape for the next couple of years. Those would be the areas as we grew the footprint and grew the annual store count that would require some attention. Okay, great. Talking about some of these funding initiatives, funding these CapEx, you've generally done it in a self-funded manner. Can you speak to the strategy that you guys have to fund these growth initiatives, as I believe it's been self-funded over the past couple of years? Is that going to continue going forward, per se? Yeah, that continues to be our plan. Okay, fantastic. Another point, shareholder returns. Given the company's healthy cash flow generation, can you speak to the company's historical approach to shareholder returns? You mentioned, you know, dividends. I believe there's also been some time for some special dividends as well. How do we think about shareholder returns going forward? Does the potential for elevated CapEx as you accelerate store openings, you know, change any of the approach to shareholder returns? No, I think that we have a good, balanced approach to capital allocation today, and so we are committed to returning value to our stockholders in the form of top line, bottom line growth and appreciation in the stock, as well as the dividend. I don't see that really changing. We have a small share repurchase plan in place. We've used it opportunistically, but I would say it's not much of a tool for us at this point in terms of driving returns. Part of that is a function of the family ownership and the percentage of float compared to the stock that's in family hands. Yeah, and we'll continue, you know, we have a pretty conservative approach. We'll continue to self-fund unit growth. Okay, fantastic. All right, we're going to dive into some Q&A now. We have a couple of questions that have come in, and if you guys have any other additional questions, please go ahead and type them in, and we'll be sure to get them addressed. First, marketing, where does marketing fall into play? Is it a big need for you? Maybe just talk about the overall marketing strategy that you guys have for Natural Grocers. Yeah, I mean, we do a fair amount of brand advertising, and that can come in the form of billboards, can come form. We do a little bit of TV advertising. It's fairly limited. We have a hotline magazine that we publish and mail out, with a lot of our offerings. I would say a lot of our marketing comes from our {N}power rewards program and really focused on driving the existing membership to drive an increase in the Basket and an increase in the frequency of shopping, right? We segment our customers across, you know, frequent shoppers, sort of, and all the way down to kind of part-time shoppers. We're seeing good growth, sort of movement across our segmented customer base, moving up the chain in terms of larger baskets, enhanced frequency. Obviously, we're also very focused on increasing the numbers, the numbers of members in our program. Today we have about 82% penetration. We have some stores in the 90s, some stores in the 70s. We're very focused. Every cashier is trained to ask every customer if they're an {N}power member. If not, they're trained to sign them up on the spot. That's going to continue to be a very big focus for us because we know we're just, you know, we're having so much success there. Does the marketing differ potentially in the larger markets where you might have an existing Sprouts or Whole Foods versus some of your smaller, more rural markets where you're the first kind of organic specialty grocer offering? Yeah, it differs because it's harder to establish brand recognition in larger markets. Our marketing will look a little bit different. We'll try to do more mass marketing like billboards in larger markets to build that brand awareness. Smaller markets are just a lot easier. That's going to be more focused on community events, reach out events, or again, our nutritional health coach going out into the community to establish contact with the community and to drive people into the store. It's a little bit of a different approach. Mm-hmm. Okay, fantastic. You talked a lot about the loyalty program. Maybe provide some color in terms of, you know, how do you get your customers signed up? Sounds like you have a very high, you know, sales mix, 80% over 90% for some stores. Talk to us a bit about the program. How does the rewards work? Yeah, you can only take advantage of the discounts that we offer through the {N}power rewards program. We will not offer, for example, our great pricing on eggs to anybody that's not an {N}power member. There's a lot of incentive to sign up because of that. We offer $2 back for $200 of spend, and many of our rewards are click-to-load, right? The customer needs to be engaged, needs to be engaged with the program. We also have a mobile app where you can find unique deals, and we're trying to drive engagement through that as well. Social media is another important component of what we do, and that's a good place to target kind of the younger audience. We're seeing the younger audience more and more focused on health. You're seeing a lot of young people stop drinking alcohol, for example, right? The focus on health is kind of across the board. Definitely the younger community, it's something that certainly when I was that age was not focused on. Social media is a great place to target that audience. I appreciate that. That's all for color. As we think about expansion into new states, how long until we get more to the East Coast? It looks like if you look at the map, it looks like you've been growing at the fingertips, each adjacent state, moving east. Is that a fair way to think about it? Obviously, there's some logic to it. What's the benefit of maybe growing more at the fingertips versus going out east to maybe some larger markets where you can build the brand equity at least more on a national level? If you could talk to us more about the geographic plan there. Yeah, I mean, we're going to continue to grow in sort of contiguous markets. You know, it makes sense for us to grow. I talked about our partnership with Unified. They have a national footprint, but it's more effective to grow out of existing distribution locations. We start there and we look for communities that we don't serve that meet kind of our requirements. We're going to grow into adjacent states outside of our current footprint. We talked about Wisconsin, and there are other states that we're looking at that are adjacent to us. When we talk about kind of all the communities that we vetted, there's a portion that's within existing states where we're going to continue to build our density. We've opened Texas and Colorado are our biggest markets. We've recently opened stores in Colorado, opened stores in Texas, and we have many states where we're underpenetrated. We'll continue to focus on that. We've got contiguous states where we see great opportunities. You're going to see a balanced approach from us within our existing geographical footprint and the geographies that are adjacent to us. Appreciate that. One more question from me, and again, go ahead and dial anything to the Q&A if you guys have any more within the audience. As you look at some of the markets where you have Whole Foods or Sprouts, as you guys are getting bigger and bigger, have you started to see any reaction to you guys coming in and offering more affordable prices, you know, similar organic selection? Have you started to see any reaction from those competitors, or are you still not of size enough yet to where you really made any type of dent there? Yeah, I mean, you know, you think about Whole Foods. Whole Foods' mission has changed since their ownership by Amazon. Now they're very focused on being more integrated into the e-commerce machine of Amazon and have sort of moved away from their core mission. They are driving some pricing down to attract a wider, a wider audience, but now you're finding things in their stores that you wouldn't have historically found. We don't view them as overly competitive. We view them as, you know, some people will use them. Some of our customers will shop there for, let's say, their meat counter, right? Deli's or prepared foods and come to us for their other shopping. Sprouts, obviously, is a strong competitor when they come into markets where you are in. We have to be very prepared, but they're not a value offering. I mean, they're focused on, you know, a lot of offering a very diverse and new sort of product offering. That's one of their things that they tout quite a bit, but they're not a value player. I think anybody who does the homework is going to see that we're significantly better priced. I don't see Sprouts moving down the value chain, I think, from a pricing perspective. They're very focused on driving margin improvements in their business. Okay, fantastic. All right. That's all the questions we have today. Richard, I'll go ahead and kick it off to you for any closing remarks before I close things out. Aaron, thanks for inviting us. Appreciate the opportunity to speak with you and speak with your investor audience. We're also very happy to host anybody over a call. If there are more questions, you know, you can contact our investor relations group, but we'd be happy to sit down with you and do one-on-ones. Fantastic. Thank you, Richard Hallé, CFO, Natural Grocers by Vitamin Cottage, traded on the New York Stock Exchange, ticker NGVC. Thanks so much for joining. Thanks everyone for tuning in.