Stock of natural grocers: the bullish thesis is convincing (NYSE: NGVC)


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Investment thesis

Natural Grocers by Vitamin Cottage (NYSE:NGVC) is an attractive investment opportunity at the moment. The stock has performed poorly since the company’s IPO 10 years ago against the S&P 500, and is now trading below its introductory price of $15 per share. However, there are good reasons to believe that we are at an inflection point. NGVC is now a much better and bigger company than it was when it went public, and the company is continuously expanding its store base at the rate of 3-5% per year. Additionally, the company operates in a dynamic market that has strong tailwinds and is likely to grow faster than the traditional retail grocery market. In terms of valuation, the company is currently trading at around 14x free cash flow LTM, which makes it quite valued compared to its peers. Overall, I think NGVC offers a good risk-reward opportunity at the current price.

NGVC Growth Chart

Refinitiv Eikon

Company presentation

Natural Grocers by Vitamin Cottage is a Colorado-based health food chain specializing in the retail of natural and organic groceries, dietary supplements and natural body care products. The company also offers a line of natural pet care and nutrition, household and general products. It also operates a bulk food repackaging facility and distribution center in Golden, Colorado. The company operates 162 stores in 20 states, including Colorado, Arkansas, Arizona, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming.

NGVC: State Attendance Table

NGVC FY21 10-K

The market opportunity

The organic food market includes sales of organic food, beverages and related services. Organic food production involves practices that promote ecological balance and aim to conserve biodiversity. These food products generally do not use any food additives.

The size of the global food and grocery market was valued at $11.7 trillion in 2019 and is expected to grow at a compound annual growth rate of 5.0% from 2020 to 2027. The global organic food market represents only a small fraction of this and is expected to grow at a CAGR of approximately 13.5% from $201.77 billion in 2020 to $380.84 billion in 2025. The main reasons Behind this growth are growing health concerns due to an increasing number of cases of chemical poisoning around the world and increasingly health-conscious consumers.

In the United States, the organic market is estimated at around USD 56.4 billion and is expected to grow at a CAGR of 4.5% to reach USD 70.4 billion by 2025. The major factors driving this market are growing awareness and growing availability in more than 20,000 natural food stores and conventional grocery stores across the country.

NGVC: sales of organic food in the United States

Investor Presentation November 2021

Business strategy

NGVC is pursuing several strategies to continue its profitable growth:

  • Expand store base. NGVC intends to continue to expand its store base by opening new stores in existing markets, as well as entering new markets. In FY21, NGVC opened three new stores compared to six new stores in FY20. The company plans to open four to six new stores in FY22. Although growth is slowing Compared to before 2016, I am confident that unit growth can still grow by 3-5% per year in the future, which is more or less in line with the growth rate of the organic food market.

NGVC: table of number of stores

Investor Presentation November 2021

  • Increase sales from existing customers. In order to increase its average ticket and the number of customer transactions, NGVC plans to continue to provide an engaging customer experience by offering science-based nutrition education and a differentiated merchandising strategy. The company also plans to continue using targeted marketing efforts to reach existing customers, including through the {N}power customer loyalty program. The customer loyalty program is growing rapidly, adding an additional 100,000 million members beginning in the second quarter of FY22, representing a 20% year-over-year increase.

NGVC: customer loyalty program

Investor Presentation November 2021

  • Improved operating margins. In recent years, the operating margin has decreased and is now around 3% compared to more than 5% before 2016. Several measures have been taken to mitigate this decline. For example, NGVC has expanded its private label offering, which now includes groceries, dairy, frozen foods, bulk prepackaged goods, dietary supplements and household products. This business model is similar to Sprouts Farmers Markets. (NASDAQ:SFM), and SFM has higher margins on its private label products. These products accounted for 7.2% of NGVC’s total sales in FY21 and there are currently approximately 1,000 private label products.

NGVC: Operating Margin Chart

Refinitiv Eikon

NGVC competes for consumer spending in a highly fragmented market that encompasses a wide range of food retailers, including large conventional supermarkets, warehouse clubs and small grocery stores. SFM competes with traditional retail giants like Kroger (NYSE: KR), Albertsons (NYSE: ACI) Whole Foods or SFM, as well as online retailers like Amazon (NASDAQ: AMZN).

The company recently released FY22 first quarter results. The business performed strongly in the first quarter, with sales up about 5% year-on-year. In addition, comparable store sales increased 3.8% over last year and 16.5% over two years ago. Additionally, NGVC was able to leverage strong sales increases to boost profitability and improved its operating margin by 230 basis points, which is a lot for a retailer. Overall, NGVC had an excellent quarter.

We continue to see positive operational trends as we navigate effectively in a dynamic environment. Our first quarter results included net sales of $277.3 million and diluted earnings per share of $0.39, increases of 4.6% and 143.8% respectively. We were able to take advantage of strong sales increases to increase our profitability, including a 230 basis point improvement in operating margin. Momentum remains strong in all of our activities. Average daily same-store sales increased 3.8%, including increases in the number of transactions and basket size. On a 2-year year-to-date basis, average daily same-store sales increased 16.5% in the first quarter.

Kemper Isely – Co-Chairman – Q1 2022 results


Based on 22.6 million shares outstanding and a price of $14.75 per share, the company has a market capitalization of approximately $333 million. In this part, I used a discounted free cash flow model to value the business. The following assumptions were made in the model:

  • Estimated free cash flow for FY22 of $29 million.
  • A growth rate of 4% over the next four years to FY25, matching the industry growth rate.
  • A terminal growth rate of 2%.
  • A discount rate of 7%.

NGVC: valuation table

Author’s DCF model

Based on the model, I found a value close to ~$22.5 per share. Given the current price, NGVC is undervalued in my opinion, and investing in this stock at the current price is likely to generate an annual return of 8-9% over the long term. Additionally, if unit growth accelerates and margins improve, NGVC will grow even faster, which is positive for the bullish thesis.

Key points to remember

In summary, NGVC has an attractive business model which should continue to provide stable cash flow. I think revenue could realistically grow 3-5% per year over the next 5 years as the company focuses on expanding the store base and improving engagement customer. In terms of valuation, the company is currently trading at around 14x free cash flow LTM. I think the stock is reasonably priced for a long-term return of over 7% per year.


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