Natural Grocers by Vita Cottage (NYSE:NGVC)

CAPS Rating: 5 out of 5

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Member Avatar moonlightsail (20.99) Submitted: 3/17/2014 1:24:02 PM : Outperform Start Price: $42.43 NGVC Score: -17.11

A Colorado organic grocer that has been doing very well this past year.

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Member Avatar chileman13 (< 20) Submitted: 2/1/2014 1:52:47 PM : Outperform Start Price: $38.00 NGVC Score: -12.11

It has already blown the market away since I bought it a year ago. It will continue to be a gem.

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Member Avatar smith972 (84.60) Submitted: 1/23/2014 9:35:11 AM : Outperform Start Price: $41.78 NGVC Score: -17.55

Expensive, but has a lot of growth ahead of them. I will be watching them and if there is any dips I will open a real position.

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Member Avatar TMFPencils (99.81) Submitted: 1/22/2014 6:56:07 PM : Outperform Start Price: $41.83 NGVC Score: -16.98

Sales of organic products in the U.S. increased at an average annual rate of 17.86% -- between 1990 and 2011 -- to nearly $32 billion. Organics are only a portion of the health-conscious movement in the U.S., but signify increased interest from the public in healthier products. Natural Grocers by Vitamin Cottage is poised to benefit from growing interest in healthy living and healthy eating.

A principled family business

In 1955, Natural Grocers by Vitamin Cottage was founded by Margaret and Philip Isely in Colorado. Margaret and Philip believed that the more health and nutrition information was made available to people, the healthier people would want to eat and live. Natural Grocers by Vitamin Cottage was founded upon five core principles that the company follows to this day:

1. Nutrition Education. "Empowering our customers and our employees to take charge of their lives and their health is the foundation upon which our business is built."

2. Quality. "Providing the highest quality groceries and supplements; Natural Grocers branded products; and only USDA certified organic fresh produce at the best prices in the industry is part of our mission."

3. Every Day Low Pricing. "We work hard to secure the best possible pricing on all of your favorite natural foods and supplements."

4. Community. "From free nutrition education lectures, to bag-free checkouts, to sourcing local products... we work hard to make sure that we are serving the communities that help shape our world."

5. Employees. "Supporting [employees] with free nutrition education programs, good pay and excellent benefits is what helps us to ensure happy, healthy employees who deliver world-class customer service to our customers."

Nearly 60 years after its founding, Natural Grocers serves as a specialty retailer -- only offering organic and natural products -- including produce, meat, vitamins and supplements, body care, and pet care products.

Natural Grocers by Vitamin Cottage is still in the hands of the Isely family. Half of the company's board of directors is made up of the Iselys, all of whom have served in their executive positions since 1998, and spent many years prior working in lower-level positions within the company. Kemper Isely, Chairman and Co-President, joined the company as an employee at the age of 14 in 1977.

Committed management and superb financial growth

The four Iselys on the company's board own a combined 37.6% of Natural Grocers. Given that Natural Grocers remains a principled family business -- most of the Iselys have already spent well more than 20 years with the company -- I have confidence that this family and managerial team is focused on the long-term success of the business.

Perhaps most importantly, the financial results confirm the validity of the Natural Grocers concept. In 2013, Natural Grocers' total sales increased 28% to $430.7 million, same-store-sales increased 11.1%, and adjusted net income increased 35% to $10.9 million. This is a concept firing on all cylinders.

Extensive room for future expansion

Currently, Natural Grocers operates 72 stores in 13 states. The company has increased its store count by an average annual rate of 21.2% over the past three fiscal years. The average Natural Grocers store comes in at 12,300 square feet, roughly a third the size of a typical Whole Foods store. This smaller store size will enable Natural Grocers to enter markets not feasible for its larger-store competitors.

In the company's 2012 IPO prospectus, management outlined its belief that the U.S. market can support 1,100 Natural Grocers stores. This represents more than a 15-fold increase from current store levels. Not too shabby, if anything close to that level of expansion can be pulled off over the next two decades.

To contrast, Whole Foods currently has 367 stores in operation in the U.S., Canada, and the U.K. combined. Whole Foods' CEO John Mackey believes the U.S. market can support 1,200 Whole Foods stores.

The Fresh Market operates 146 stores in 26 states, while Sprouts Farmers Market operates 167 stores in 8 states. Natural Grocers has the smallest stores, on a square footage basis, compared to these competitors.

Natural Grocers is yet to set foot in California, Washington, or Pennsylvania, the top three states in terms of organic sales. The company's financial success thus far has been the result of careful expansion out of Natural Grocers' home turf in Colorado.

Foolish bottom line

Shares of Natural Grocers have more than doubled in 2013, with the stock currently sitting at a P/E just below 90. While the company's high rates of financial growth and store expansion may justify the stock's premium, the business is not without its financial flaws. The company has struggled to produce positive free cash flow over the past several years, pressuring future expansion to be financed through debt, until cash flow production measurably improves.

With that said, in the most recent quarterly conference call, co-president Kemper Isely explained the company's outlook for 2014: "We anticipate the cash on hand and cash generated from operations will be sufficient to support our capital requirements."

In other words, the company should at least be free cash flow neutral in 2014, heading the right direction toward positive free cash flow. Earnings are expected to grow between 20% and 34% in fiscal 2014. Keep in mind that the company's profit margin increased from 2% in fiscal 2012 to 2.5% in fiscal 2013. If operating cash flow does indeed cover CapEx in 2014, as management is forecasting, Natural Grocers will be in solid financial condition -- quite capable of fueling its ambitious growth plans in the U.S.

The stock isn't cheap, but there is a great deal of upside for Natural Grocers over the long-term. With a strong level of insider ownership and dedication to the business, I am confident the Isely management team is prepared to further Natural Grocers' expansion into the national spotlight.

Outperform.

http://www.fool.com/investing/general/2013/12/28/why-natural-grocers-by-vitamin-cottage-should-be-o.aspx

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Member Avatar mbz113 (33.91) Submitted: 10/25/2013 10:05:23 AM : Outperform Start Price: $38.30 NGVC Score: -14.23

In sweet spot with overall interest in natural/ healthy foods, will chip away at WFM's market share.

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Member Avatar NoDoughBro (70.24) Submitted: 6/25/2013 2:00:00 PM : Outperform Start Price: $34.33 NGVC Score: -15.18

Everyone loves Organic PERIOD.

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Member Avatar twotoadstools (64.08) Submitted: 1/18/2013 2:57:46 PM : Outperform Start Price: $19.13 NGVC Score: +58.08

Natural foods rising star. Simple.

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