Hot Promotions Drive Traffic at Natural Grocers, but Profits Suffer

Aggressive pricing investments and promotional programs succeeded in drawing more shoppers to Natural Grocers stores during its fiscal first quarter—but the traffic left a mark on the retailer’s profit line.

The Lakewood, Colo.-based natural foods chain said comparable-store sales spiked by 4.7% in the quarter ending Dec. 31, and are trending even higher in the current period, although that figure benefits from a trough in the same quarter a year ago. The chain’s pricing action in October and November—including direct mail, Npower loyalty promotions, a revamped Health Hotline magazine, local store marketing and companywide events—resulted in a traffic increase of 4.8%, and a 1.6% comp increase in the chain’s more sluggish stores, but accompanied a 220 basis point decline in gross margin as a percentage of sales, which fell to 26.3% in the quarter.

A shift in sales mix, and higher occupancy costs as a percentage of sales, also contributed to the slipping margins, CEO Kemper Isely said in a conference call discussing results. And though the chain will look to better manage the financial impact of its traffic-driving initiatives, Isely said he was anticipating investing its expected tax savings into further price promotion—a signal of his expectation that competition will remain sharp in the year ahead.

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“The reason that it's important to spend on price is to build customer accounts at our stores, so that we can remain vital and viable in the future. Without price promotion, you can do all the marketing you want to do, but it isn't going to drive customers into your store,” Isely told analysts in a conference call. “We need to get our customer accounts going up, and we believe that the targeted price promotion on stable goods will continue to increase our customer accounts favorably over the coming year.”

Net income of $5.2 million, or 23 cents per share, increased by 151% from last year’s first quarter, but included a favorable non-cash impact of $4.3 million from a reassessment of deferred tax liabilities following lower corporate tax code. Excluding that, earnings would have been down by 61.2%.

Isely said the price and promotions had made Natural Grocers “substantially more competitive,” but said the company was moving to better mitigate hits to profit. One way, he said, was directing more of its pricing benefits exclusively to its Npower loyalty members, who now number nearly half a million—up by 200,000 from a year ago.

Reported inventory challenges at Whole Foods, the CEO said, appeared to have further benefitted Natural Grocers sales. Comp sales at stores competing with Whole Foods outperformed the company overall, “so I think it's possible that we are receiving from the benefit of their inventory issues,” he said.