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Faisal Humayun
Faisal Humayun
Articles (681) 

Natural Grocers Will Look Interesting On Further Correction

April 12, 2014 | About:

Natural Grocers by Vitamin Cottage (NYSE:NGVC) operates natural and organic grocery and dietary supplement stores in the United States. Natural Grocers sells grocery products that contain no artificial colours, flavours, preservatives, sweeteners or partially hydrogenated or hydrogenated oils. This sets it apart from most grocery stores.

This article looks at the reasons to be positive on Natural Grocers for long-term. In the near-term, investors can consider exposure to the stock on some correction, which is likely along with a broad market correction.

Growth Is Aggressive...

Natural Grocers is a fast expanding specialty retailer of natural and organic groceries and dietary supplements. The company currently operates 76 stores in 13 states providing high-quality products at affordable prices.

To put the company’s aggressive growth into perspective, Natural Grocers has opened ten new stores opened in each of fiscal 2011 and 2012, 13 opened in fiscal 2013 and plans to open 15 stores in fiscal 2014. The growth in the number of stores has been associated with a growth in sales.

The company’s revenue has increased to $431 million in 2013 from $265 million in 2011. During the same period, the company’s diluted EPS has increased to $0.48 from $0.19. Sales have therefore increased at a CAGR of 27.6% and for new stores at 21.2% from fiscal 2011 to fiscal 2013.

Further, the company has positive comparable store sales growth for over 46 consecutive quarters. Clearly, the company is on a high growth trajectory and with 15 new stores slated to open in 2014; the growth is expected to remain robust for Natural Grocers.

But Valuations, A Bit Stretched...

There is no doubt that Natural Grocers is a good stock to consider. The numbers I discussed above might add some perspective to my argument. I will further explain the reason for being bullish on Natural Grocers for the long-term.

However, the current valuations might be stretched and I believe that investors can consider exposure to the stock on some correction. My view is supported by the point that the broad markets might also have run up too fast and a correction in the broad markets can result in a correction in this stock as well.

Looking at the numbers, Natural Grocers reported an EPS of $0.48 for 2013. At a current price of $36, the stock is trading at a PE of 75. This is certainly expensive even considering the point that Natural Grocers is growing rapidly.

For 2014, the company expects the EPS to be in the range of $0.58 to $0.63. Even if I consider the higher range of the guidance, Natural Grocers is trading at a forward (2014) PE ratio of 57 and a PEG of 1.8 considering earnings growth of 31% for 2014. Both the parameters indicate overvaluation, even when considering the future earnings potential.

However, Market Potential is Huge...

The natural and organic food segment as a percentage of total food sales in the United States was just 7% in 2010. This points to the huge market that still remains untapped for Natural Grocers.

To put things in terms of numbers, US natural and organic food sales have grown at a CAGR of 12.3%in the last decade and the US dietary supplement sales have increased at a CAGR of 5% during the same period. With increasing health consciousness, the growth is expected to continue in both the segments.

It is therefore not surprising to see the company witness 46 consecutive quarters of same store growth. Even for the first quarter of 2014, Natural Grocers witnessed a sales growth of 25.8% and a comparable store sales growth of 10.6%. I am emphasizing on the comparable sales growth as it underscores the fact that the company’s business model is differentiated and scalable.

I believe that the opening of new stores will remain strong over the next few years as the company still needs to expand its footprint and cater to the full US market. The company’s current grographic footprint is shown below.

Another critical point, which is positive for future earnings growth is the pace of expansion of new stores. With an initial investment of $2.3 million needed for one store, the EBITDA margin might be lower in the initial years of growth as the company embarks on an aggressive expansion strategy. Once the consolidation phase begins, the EBITDA margins will improve as the company starts to focus on per store sales growth.

The Stock Is Therefore A Buy On Corrections...

Over the years, Natural Grocers has proved that the business model is scalable and that the growth potential for organic food is significant. Natural Grocers intends to continue to expand its footprint in an aggressive fashion and this should support revenue and earnings growth for the company.

46 consecutive quarters of same store sales growth shows that the company’s products are well received in their existing markets.

I therefore recommend Natural Grocers as a buy on correction. As explained above, the valuations look bit stretched and a correction can give investors a good opportunity to buy this high growth stock. I believe that Natural Grocers will start to look attractive at levels of $30 and below.

About the author:

Faisal Humayun
Faisal is a Senior Research Analyst with ten years of experience in equity research, credit research, economic research and financial modeling.

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