Natural Grocers by Vitamin Cottage, Inc. Q3 FY2026 earnings call

• Customer Loyalty Program (NPower Rewards) Update

  • Continued strong net membership gains in Q3 FY2026, with net sales penetration increasing 2 percentage points year-over-year to 84%
  • NPower Rewards members outperform non-members in core metrics, generating growth in sales, customer traffic, and average basket size
  • The program enables optimized promotions, strengthens customer engagement and long-term brand loyalty

• Pricing and Competitive Positioning

  • Maintains position as the value leader in natural and organic grocery retail, with a sustained focus on affordable everyday pricing
  • The ongoing Even More Affordable campaign highlights rotating everyday staples, including private-label Natural Grocers brand products
  • Leverages a value proposition of rigorous product quality standards paired with low pricing to reinforce competitive differentiation

• Store Growth Strategy

  • Accelerated new store openings, with 6 new stores opened fiscal year to date (3 opened in Q3 FY2026, including the company's first location in Wisconsin, plus 1 store relocation)
  • All recent new store openings rank among the company's strongest opening day sales performances, demonstrating effective pre-opening marketing
  • Management maintains a long-term target of 4-5% annual unit growth, with significant untapped opportunity for geographic footprint expansion

• E-commerce Expansion

  • Launched a new delivery partnership with DoorDash in mid-July, extending delivery access to the entire store base with in-store pricing for DoorDash orders
  • Planned near-term enhancements include NPower Rewards integration with DoorDash, upgrades to the Natural Grocers website, and phased rollout of curbside pickup across all locations
  • Continues existing partnership with Instacart for delivery and pickup at select stores; e-commerce investments aim to drive incremental sales from existing customers and attract new shoppers while preserving the brand's core differentiated in-store experience

• Financial and Operational Highlights

  • Ended Q3 FY2026 with a strong liquidity position: $17.5 million in cash and cash equivalents, no outstanding credit facility borrowings, and $67.3 million available under the revolving credit facility
  • For the first nine months of FY2026, generated $55.1 million in operating cash flow, with $40.3 million in net capital expenditures, resulting in $14.8 million in free cash flow
  • Received industry recognition as 2026 Sustainability Retailer of the Year from Produce Business for its commitment to organic produce, regenerative agriculture, and environmental stewardship

Natural Grocers is a single-operating segment grocery retail company focused on natural and organic products. For Q3 FY2026, overall net sales increased 1.8% year-over-year to $334.7 million, with daily average comparable store sales growth of 1.2% (accelerating from 0.5% in Q2 FY2026). The top-performing differentiated categories (produce, dairy, and meat) led overall sales growth. Natural Grocers brand penetration increased 110 basis points year-over-year to 9.7% of total net sales. Gross margin decreased 60 basis points to 29.3% year-over-year. Net income was $11.1 million, or 48 cents diluted earnings per share, compared to $11.6 million (50 cents diluted EPS) in Q3 FY2025. Adjusted EBITDA decreased 7.6% year-over-year to $22.5 million.

• New store opening guidance is revised downward to 6 to 7 new stores for full fiscal year 2026, from the prior guidance of 6 to 8 new stores
• Full year diluted earnings per share guidance is refined to a range centered at $2.11, including 8 cents of incremental investment tied to new store expansion, which falls within the prior guidance range of $2.07 to $2.15
• Full year capital expenditure guidance is maintained at $45 to $50 million, unchanged from prior guidance
• Q4 FY2026 will have one fewer selling day than the prior year period due to the decision to close all stores on Labor Day; management expects most of the lost Labor Day sales will shift to adjacent days

• Ongoing macroeconomic uncertainty and weak consumer sentiment have created a challenging retail operating environment, with pressure on discretionary spending that has impacted transaction counts
• Higher merchandise inventory shrink and freight costs contributed to gross margin decline in Q3; shrink was partially driven by temporary operational disruptions from the prior quarter's ERP system upgrade
• Year-over-year gross margin comparability is impacted by a cybersecurity incident at the company's primary distributor in Q3 FY2025, which distorts current period margin comparisons
• Marginal customers have reduced spending due to economic pressures from higher energy costs (gasoline, heating, and summer cooling costs)
• Forward-looking statements are inherently uncertain, and actual results may differ materially from projections due to unforeseen risks and changes in market conditions, as detailed in the company's recent 10-Q and 10-K filings

Q: Given reported industry down-trading and competitor promotional activity, how will gross margin evolve in coming quarters, and what impacts are you seeing from these trends? / A: Natural Grocers has not seen meaningful down-trading, as its core product offering is consistently high quality and already affordably priced, with no lower-tier product lines for customers to trade down to. The company remains the price leader in the natural organic segment, and has not observed dramatic competitor price changes that impact its positioning. Management attributes Q3's gross margin pressure to one-time, temporary factors, and expects the impact to be isolated to the third quarter.

Q: Recent new stores have delivered record opening day sales — what is driving this strong performance, and how is the brand resonating in new markets? / A: Strong opening performance is largely driven by effective pre-opening marketing that builds local brand awareness before a new store launches. The company's differentiated product and value proposition has resonated extremely well in new markets, including its first location in Wisconsin (which delivered the second-best opening day in company history) and a new location in Rapid City, South Dakota that set a new opening day sales record. This demonstrates broad appeal for Natural Grocers across new untapped communities.

Q: What factors make the NPower Rewards program so much more effective than competing grocery loyalty programs? / A: NPower is designed around what Natural Grocers customers actually value, unlike most supermarket programs which only offer gas discounts. Key benefits include exclusive discounts on high-demand staple products customers prioritize (such as eggs and avocados), customized special offers tailored to individual shopping patterns, and engaging interactive games that encourage repeat store visits. This customer-centric design drives higher engagement and loyalty.

Q: How is Natural Grocers being impacted by mixed macroeconomic conditions and emerging industry trends like the GLP-1 weight loss craze? / A: Core loyal NPower members remain highly engaged, with increasing program penetration and no meaningful spending declines. The only impact has been slightly reduced spending from marginal customers, who face economic stress from higher energy costs. Management remains optimistic long-term, as growing consumer focus on health and wellness will continue to drive new customers to Natural Grocers, which is the only authentic national natural organic grocery chain meeting the demand for clean, healthy products.

Q: How will the new federal court ruling mandating GMO ingredient disclosure impact Natural Grocers? / A: Natural Grocers was actually a plaintiff in the court case that led to this ruling. Management believes the ruling is a major positive that plays directly to the company's strengths, as it increases consumer awareness of GMO ingredients in mainstream products, which will drive more consumers seeking non-GMO clean diets to Natural Grocers' product offering.