Good day, ladies and gentlemen. Welcome to the Natural Grocers First Quarter Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call is being recorded. I’d now like to turn the conference over to Ms. Ashley McLeod, Director of Finance and Investor Relations for Natural Grocers. Miss McLeod, you may begin.

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage first quarter fiscal 2016 earnings conference call. On the call with me today are Kemper Isely, our Co-President; and Sandra Buffa, our Chief Financial Officer. As a reminder, all statements made on this conference call other than statements of historical facts are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially from those described in the forward-looking statements due to a variety of factors, including the risks detailed in the Company’s most recently filed Forms 10-Q and 10-K. The Company undertakes no obligation to update forward-looking statements. Our press release is available on our website and a recording of this call will be available on our website at investors.naturalgrocers.com. Now I’ll turn the call over to our Co-President, Kemper Isely.

Thank you, Ashley. Good afternoon, everyone. We are pleased with our first quarter financial results. Our increased sales although lower than our outlook range whereas expected and our disciplined approach toward operating expenses resulted in solid financial results which allowed us to continue our investments in growth. During the quarter, net sales increased 15% to $167.8 million. Gross profit increased to $48.3 million and we continue to see leverage in administrative expenses. Net income increased 5.2%, quarter-over-quarter and diluted earnings per share for quarter was $0.17 compared to $0.16 in the prior comparable quarter. Our daily average comparable store sales increased 3.6% during the quarter. As anticipated, our comparable store sales are somewhat lower than recent trends. We believe this is due impart to increased competition in the natural and organic sector and general economic conditions in some of our markets. We continue to focus on our directed sales initiatives pre-science based nutrition education, outstanding customer service and operational excellence. We believe our dedication to strict quality standards, nutrition education and our commitment to 100% organic produce drives initial traffic at new stores and strengthens customer loyalty at existing stores. Our directed sales initiatives remain on track. We are very pleased with the initial results from {N}power, our customer appreciation program. We have started to aggressively market {N}power at our registers and the initial push with customers has produced encouraging results. Additionally, our {N}power personalized offers are exceeding expectations. We therefore believe we are on track to meet our goals on this initiative. In addition, we just completed our first annual system-wide promotional sales event calendar, which is designed to execute national sales promotion efforts across all stores. This initiative is expected to provide scale and leverage across all stores through a comprehensive alignment of marketing, operations, training and vendor support on a continuous basis. We saw the power of this system-wide promotional sales events of last year’s 60th anniversary celebration and have system-wide events planned for the remainder of fiscal 2016. At the core of our marketing efforts I am very excited to announce the recent hiring of Kevin Miller, our Vice President of Marketing. Kevin joins us with over 30 years of world-class retail and brand marketing experience with Fortune-500 companies. Kevin will help drive innovation and sales growth across all segments of our business with a focus on data analytics, tech and mobile with an objective of significantly increasing our reach, revenue and customer satisfaction. We are very glad to have Kevin on board. During the quarter, we opened four new stores expanding our geographic footprint in Colorado and Utah. Our new stores are performing inline with expectations and we remain on track with our new store pipeline. We will continue to enter new states and markets and plan to open 23 new stores in fiscal 2016. Now, I will turn the call over to Sandra to highlight our first quarter fiscal 2016 financial results.

Thank you, Kemper. Good afternoon, everyone. As Kemper indicated, net sales in the first quarter of fiscal 2016 increased 15% to $167.8 million. Daily average comparable store sales increased 3.6% driven by a 1.9% increase in daily average transaction count and a 1.7% increase in average transaction size. Daily average mature store sales increased to 0.4%. Gross profit during the first quarter of fiscal 2016 increased 14.2% to $48.3 million driven by an increase in the number of comparable stores. Gross margin decreased 20 basis points due to increases in occupancy costs, partially offset by improved product margins. Store expenses as a percentage of sales increased 10 basis points in the first quarter compared to the prior comparable period due to increases in salary-related expenses, depreciation and other store expenses. Administrative expenses as a percentage of sales decreased 10 basis points as a result of the Company’s continued ability to support sales growth without proportionate investments in overhead. Additionally, during the first quarter both store and administrative expenses were favorably impacted by lower incentive comp and other discretionary benefit expense, reflecting the company’s pay-for-performance philosophy. The favorable impact to administrative expenses was partially offset by deferred compensation expense and to a lesser extent, stocks compensation expenses. Pre-opening and relocation expenses increased $400,000 in the first quarter of fiscal 2016 due to the timing, nature, and location of new store openings and relocations. We opened four new stores and relocated two stores during the first quarter of 2016 compared to opening four new stores during the first quarter of fiscal 2015. Net income increased 5.2% to $3.7 million with diluted earnings per share of $0.17 in the first quarter of fiscal 2016. EBITDA increased 11.5% to $12.47 million or 7.6% of sales. We ended the first quarter with $2.1 million in cash and cash equivalents and no amounts outstanding on our credit facility. Furthermore, earlier today, we entered into a new $30 million revolving credit facility with a five-year maturity and improved terns and conditions. Now I will turn the call back to Kemper to discuss our new store growth and outlook for fiscal 2016.

Thank you, Sandra. As I mentioned at the beginning of the call, we continued to invest in new store growth. We opened four new stores in the first, bringing our total count to 107 stores in 18 states. Since the end of the first quarter we have opened one new store in Littlerock, Arkansas. As of today, we have signed leases for 21 stores which are scheduled to open in fiscal 2016 and 2017 for locations in Arizona, Arkansas, Colorado, Idaho, Iowa, Missouri, Oregon, Texas, Utah, and Washington. We have good visibility on the remaining stores we plan to open in fiscal 2016. By the end of fiscal 2016, we expect our geographic presence will cover 19 states west of the Mississippi. Our real estate strategy supports a broad range of communities we continue to focus on opening new stores in both new and existing locations and in both smaller rural areas and larger metropolitan areas. Moving to our outlook, our first quarter results were inline with expectations and thus we are reaffirming our previously announce fiscal 2016 outlook. During fiscal 2016, we expect to open 23 new stores resulting in a 22.3% unit growth, achieve daily average comparable store sales growth of 5% to 7%, deliver EBITDA margins of 7.8% to 8%, achieve net income margin of 2.3% to 2.5%, achieve diluted earnings per share of between $0.79 and $0.83 and incur capital expenditures of between $54 million to $56 million. Given recent sales trends, we currently anticipate we will come in at the lower end of our outlook. Additionally, we expect our quarter two comp sales to be below the outlook range. We are moving one of our expected relocations in the fiscal 2017 thereby relocating three stores rather than four stores in fiscal 2016. As Sandra mentioned, we completed the relocation for two of the stores during the first quarter. Our fiscal 2016 guidance for the remodels remains unchanged at two remodels. We anticipate cash on hand, cash generated from operations and availability under our credit facility will be sufficient to support our capital requirements. As fiscal 2016 continues, we are excited about increasing our store base and our expectations to grow our top and bottom-line. We continue to engage with our communities and increase awareness around our high-quality standards. We believe our quality standards make us a leader in the grocery and supplement industry and provide our customers with valuable confidence in what we sell at everyday affordable prices. More than ever, we remain focused on our founding principles and our mission of building healthier communities in the ecosystems, which have significantly contributed to our success and will help guide us as we grow larger. Now I would like to open the lines up for questions. Thank you.

[Operator Instructions] And the first question comes from David McGee of SunTrust. Please go ahead.

Yes, hi, good afternoon everybody.

Good afternoon, David.

Hi, David.

I just had a couple questions on the pace of same-store sales growth that and I guess, you just firstly answer my question regarding the second quarter. But to the degree it picks up in the second half of the year to get back within the range, what do you think takes place to drive that, that our comp momentum?

We believe that many of our sales initiatives will be in place in help and then secondly, we have some of our busier stores coming out of that will be annualizing some competition and that will be helpful also and then of course, there is extra – there is an extra – the way Easter falls this year is better than the way it fell last year.

Okay.

It will help also.

Are you seeing any additional drag coming from stores near oil producing areas?

The stores that are in states that have a lot of oil production are definitely having more challenges than stores that aren’t in those states.

Is that a drag that's changing at all or is it sort of a…?

Seems to be getting – it seems to be getting not any better for sure.

And can you talk a little bit about supplement and what you saw there during the quarter as well?

We are really excited about our result of supplements. We essentially have comp stores, we ended up flat – we didn’t lose any market share in supplements. So they essentially grew at our sales rates in the quarter. And so, we believe that our nutrients know about education program that’s really driving that part of our business and we are seeing really substantial growth in the nutrients that we educate our customers about sales growth in those nutrients, not only in the quarter that we educate them but in follow-on quarters afterwards. I mean, significant up to 200% growth in those particular nutrients in the quarter and then almost 100% growth in the follow-on quarters. That’s been very positive.

Great, thank you and good luck.

Thanks.

The next question comes from Sean Naughton of Piper Jaffray. Please go ahead.

Good afternoon.

Good afternoon, Sean.

Can you just talk a little bit more about same-store sales? Can you just elaborate just in general terms, kind of what the – what the monthly cadence was, kind of throughout the quarter? Just, were you seeing any changes from one month to the next or it was relatively consistent?

Actually in the beginning – because as the middle of the quarter was the weakest and the end of the quarter was the strongest.

Okay, and then, on the - you did also talk a little bit about some of the competitive dynamics as being a little bit of the reasons for the slowdown and I think David, you know, got the heart of some of the economic issues that you were describing, but, anything on any additional commentary on the competitive dynamics. Is this more stores or is it current retailers just increasing their offerings on shelf and having a more similar item overlap for the products that you are offering?

Well, part of our issues is that we’ve opened stores in our own markets that have cannibalized a lot of our – bunch of our larger store sales and that has an outflow. And then some of our – as I said, to David, some of our larger stores, larger sales stores have had some competitors, competitive impacts that have been pretty significant and we should be annualizing some of those starting in later this year. And that will be helpful.

Yes, and then anything on the gross margin side, that the product margin seems to be steadily increasing. I did notice that it looks like the mix of other and supplements just went up a touch, but it sounds like it's more than that. Can you just elaborate a little bit more about the product margin increases you are seeing?

Well, mainly it’s a mix move. We are able to ring out as we gain sales a little bit better margin in our food categories just from our volume discounts growing. We also are seeing some nice increases in some of our perishable, for instance in eggs because of our new private-label egg and so that’s helpful also.

And then, last question from me is, could you just elaborate just a little bit more? We did see in some of your stores recently, it does look like a little bit more of the private-label is hitting on shelves. Just anything you can elaborate on there, and that’d be helpful. Thank you.

You know, as I mentioned in our previous call in December, we are going to aggressively expand private-label over the coming three years and so, by the end of this year you will see a significant number of new private-label offerings in our stores and I think that will be definitely beneficial to margin and also beneficial because, we are going to have really good private-label items in our stores. So, it’s like our private-label pasture-based egg which is the highest standard and at the best price in our industry right now for pasture-based eggs. That’s what will be happening.

Okay, great, thank you and best of luck.

Thank you.

The next question comes from Mark Sigal of Canaccord Genuity. Please go ahead.

Yes, hi, good afternoon. Just curious, on the comp break down, it looks like in the prior quarter, your count was plus 4.5. It looks like the count came down fairly significantly in Q1 and I think some commentary on the Q4 call was ticket was down and count was running somewhat similar. So is there anything identifiable kind of intra-quarter from a count standpoint that changed?

Do you mean customer count standpoint?

Correct, yes.

The growth was fairly evenly split between average ticket and average customer count per day, which was – I believe similar to last quarter also. Let me just look real quick. Yes, the customer count definitely decreased a little bit during the quarter.

Right, okay. And then, with regards to mature store comp came down as well. Is that a function of mature stores perhaps be more concentrated in oil affected states or what do you attribute the slowdown in mature stores to?

It’s that and also as I said, we’ve opened some of our stores and are heavily in the Denver area that – when we opened, like when we opened our Wheatridge store, we effected three of our mature stores significantly and then we just recently opened our Tennyson store and that effected a couple of our mature stores that were doing quite a bit of volume substantially. So, those disruptions didn’t help.

Okay and based on you guys confirming the store outlook for this year, I am assuming that any issue of cannibalization doesn't impact the way that you are thinking about the ultimate store opportunity over the next several years, but perhaps impacts in states and cities where you are looking?

Yes, we have – when we have opportunities to infill in our existing markets, we have to infill and then over the long run, our stores have a – sometimes it takes a long time for to get up to full productivity at our stores and over the long run, when we infill it really helps us to stay competitive and short-term we’ll have an effect, but long run, it’s really positive for us. And then as far as the rest of our stores, most of our new stores are not going - for the rest of this year are going into exist where we have existing stores in position. We have a lot of cannibalization from that.

Okay, and then just lastly, is there any quantifiable impact from lapping extended store hours on the comp this quarter?

There certainly could have been. We – it was really hard for us to judge what the impact was of those extended hours, because some of the people that were shopping in those extended hours were just shopping earlier or later at our stores and so, it was hard for us to really quantify exactly what the benefits that we did get from those extended hours, but it probably did have somewhat of an impact on the comp this quarter.

Okay, thank you.

But one thing we did do is we added a half-an hour on Sunday, so that will be helpful for the rest of this year.

Thank you.

Thanks.

The next question is from Joe Edelstein of Stephens. Please go ahead.

Hi, good afternoon, everyone.

Good afternoon, Joe.

Kemper, I know that you kind of opened the comments and said that you had expected the first quarter of performance to be lower than the guidance range, I know you spoke about that on the last call. But I was hoping you could just provide a little more color around how the 3.6 comp really came in relative to where your more internal number was, I mean, I am looking at our model that we were, looking for a 4 comp and I think consensus was closer to a 4.5. I mean, it's a pretty big delta and perhaps we were just all overestimating there, but where does that 3.6 come in relative to some of your own expectations?

It came in slightly below our expectations, but we are really encouraged by how the quarter ended.

Okay and I was hoping also if you could just come back to the competition comments and I know that Sean was trying to ask around, a number of new stores coming into markets or just others that are expanding stores and you've also now mentioned the cannibalization but, in terms of a percentage overlap, I know that's a number that you've talked about in the past, is that a number that you’d have handy to be able to give us today and just what that outlook could look like going forward?

I mean, from a straight standpoint, it’s running at about 23% for the last quarter and then 20% looking like in quarter two and so on and so forth that, sometimes if it impact – it depends on the stores that impacts – I mean, you can’t just look at it as how many of our stores are impacted, you have to look at which stores also and if it’s some of our more productive stores that are impacted, then the impact is greater than if it’s not our most productive stores. Does that make sense?

Yes, it does, it’s helpful. And obviously, Sandra, there was some talk unfolds here and really I was wondering if you are also starting to see more wage pressures perhaps something that might be coming in a little bit greater than expected? You are certainly adding a lot of new headcount at the store levels. I just want to check on what you are seeing at the wage pressure side right now?

I think our wage pressure has more to do our comp runrate than it does with adding new people. Our stores are having – holds about the same…

Labor to sales.

Capping levels, yes, labor to sales levels.

Okay and if I could just ask one more, Sandra, you mentioned the new credit facility. Do you think the company will be in a position to more fully fund the store growth just from the internally generated cash of the business? Or are you looking to take advantage of a big portion of that new $30 million credit facility?

It all depends on where the quarter ends or the month ends as to how far we’ll be in or out of the facility, but, when you look at the statement of changes, you can see that we’ve been in and out more regularly and that’s been consistent over the last several quarters. We’ve really increased the size of the revolver more because the pricing was outstanding and because we were able to have pricing that didn’t have an unused commitment fee. So, why not sort of get ourselves some room now?

No, I know you certainly go in and out of the facility. Would you expect to be debt free at the end of the year? I know that’s something you talked about in the past.

My expectation is, it’s really depending on the timing we maybe in or out of the revolver.

Okay.

We get [Multiple Speakers] yes.

Okay. Thanks for taking my questions.

Thanks.

The next question is from Rupesh Parikh of Oppenheimer. Please go ahead.

Good afternoon. Thank you for taking my question. So the first topic I wanted to ask about was inflation. What are you seeing out there right now on the inflation front?

For the quarter, it was very mild and in actuality, we are seeing some early good movement down in the price of the bulk commodities, particularly nuts right now. This is the first time seeing movement down on the price of nuts in almost three years and substantial movement down..

And would you say Kemper, going forward, that you still inspect inflation for your business, or maybe you can help us quantify?

Just normal, it hasn’t been significant and I think that in reality, we are seeing some deflationary pressures on some of the bulk commodities right now.

Okay, great, and then, on new stores and I know you've lowered the comp guidance or you expect it at the lower-end of the comp guidance for the full year? When you look at your plans for your new stores, do you still - has there been any changes to your expectations for what your new stores can contribute this year?

No. We expect them to be right in line with where we’ve projected them to be.

Okay and my last question, on the competitive front, you talked about some of the increased competitive pressures out there. Are you seeing any changes on the pricing front from some of your conventional players or other competitors in the market?

No, not really, I mean, the pricing has been competitive for a number of years now and the conventional players in this industry are very competitive particularly in our in this region that we have – most concentration of our stores and in some of the other regions were substantially better priced than our competitors.

Okay. Thank you

And then we are adding stores to those regions, so that’s kind of nice.

Okay, thank you.

The next question comes from Phil Terpolili of Wedbush. Please go ahead.

Yes, good afternoon.

Good afternoon.

Just wanted to ask two things real quick, and first on the sales initiative side, I think you mentioned a few times you expect kind of a more meaningful benefit from some of those items towards the second half of the fiscal year. Can you kind of highlight maybe one or two things that you are looking at that you are optimistic about? And then in that vein, I guess are some of the things you are talking about actually in place now and they just sort of take time to build or there are things maybe associated with - for example the {N}power program that we haven't seen yet?

Yes, well, right now, we are signing up about a 1000 people a day on to the {N}power program and hopefully by the end of this quarter, we’ll be at around 200,000 people on the {N}power program and what we’ve noticed is, with our directed offers to those people that are on the program that they will increase their average basket size substantially. And so, we are hoping that, starting in the second – the April quarter of this year, that – with those offers to those customers we’ll be able to increase basket size pretty substantially because we’ll have three times as many people on the program as we did in December when we first started experimenting with those offers. And then, the second thing is that we – as we mentioned, we have our event calendar that we are going to be doing where we do company-wide events, where we’ve had some stores doing those events and had very good success within and years passed and now we are going to roll it out for 100 stores to 108 stores do it at a time or how many other stores we have open at that time do those and we see substantial growth in sales when we do those events. And so, we think that will be very helpful starting in the – actually starting March through the rest of the year. We have at least one event per month planned and those are helpful to our sales and then, as we mentioned, we’ve just brought Kevin Miller on board and he has some really good marketing plans to help with both our new stores and existing stores in getting excitement about what we do out and the word out to the public so that they can understand what we do better.

That's very helpful. And then just one more question on the supplement side, I think you mentioned earlier that for the quarter itself, you really didn't see any changes kind of inline with sales growth. Can you talk specifically about quarter-to-date for supplements, I know there has been some concern regarding some of the TV spots that have ran and things like that, so, if you could just talk to what you've seen the last few weeks?

I don’t really have good numbers for this month yet. I’ll have those later in April, I mean, in February – at the very beginning of February. But, I don’t think that it’s had much, and we haven’t heard any negative feedback coming in from the stores about those television – whatever it was – do whatever ran on the television. I mean, our customers are – I accept, we have a really strong initiative to educate our customers about the benefits of various new trends and also we have a good reputation for making sure that we sell supplements that aren’t faddish and aren’t – and should make meet label potency and we do a little bit of testing ourselves just to make sure that our companies are fitting label potency and stuff.

Right, okay. I appreciate it. Thanks, Kemper.

The next question is from Scott Mushkin of Wolfe Research please go ahead.

Hey, good afternoon, everyone. This is actually Mike Otway in for Scott. Thanks for taking my questions. Just in terms of the second half and some of the sales initiatives and other factors that get you there, are you assuming that the kind of company-specific sales initiatives are the biggest from a magnitude perspective to get you back into the low-end of that range? Are you also assuming, more stores are cycling competition? How are you thinking about the economy? Do you assume it stays the same? Just kind of frame the magnitude of - kind of the buckets that get you back there.

Well, I think that both the initiatives and the cycling of competition gets us back there. As far as the economy goes, we – the economy does, if it continues on its – it has more issues that would definitely affect how things play out for the rest of the year and we don’t have much control over that particular issue.

Okay, and then, Kemper, you mentioned the, the event calendar. Could you frame something – the - like what you've seen from a lift, comp lift perspective and some of the ones – some of the stores you've done before now that you are rolling them out?

Yes, well, like for instance in December we had – this is a company-wide initiative that we haven’t really done with it, the 12 Holly deals, 12 days of Holly deals and that had a really nice impact on our sales over those 12 days. Typically, it really slowed time a year for us and so, this year, we have a Valentines event going on and then we have Easter event going and then we have a really strong Earth Day event going on and then a Mother's Day event going on. And another thing that we are doing is we are doing like four stores a month, we do a Spa day at our stores. And that we just done sporadically at the stores and usually we’ll see like a 20% lift on those Spa days at our stores that do those. And so – and then like on the Easter Egg thing, that shows like about a 20% jump at that store and then it also – it brings in a bunch of young families to the store that get to know our store and it creates a lot of excitement in the community about the store. And so, things like that just builds on themselves, builds your customer base and builds excitement for the store.

That's really helpful. I appreciate it. Thank you.

The next question is from Karen Short of Deutsche Bank. Please go ahead.

Hi, I had three questions. I guess, Sandra, the first question on compensation. I was just confused because, you said that, I guess, comps kind of came in or results this quarter were in line, but expenses were favorably impacted by lower incentive compensation. So is that comment, year-over-year or just I guess, it doesn’t makes sense if your results were inline? And then I have two other questions.

It’s a year-over-year comment.

Okay. And then, I guess following back up on the inflation deflation question, I know you commented on nuts. But, any other color more broadly on what else you are seeing in the rest of the store and what your expectations would be for 2016 in terms of inflation deflation?

I would expect it to be normal inflation deflation of about 2% inflation. So – but I mean, if commodity prices keep falling the way the nut prices are following them, there could definitely be deflation in the food sector this year. I mean, we are seeing significant drops in the bulk pricing on almonds right now.

And - but what are you seeing in the rest of the categories today inside the store?

Just normal, the manufacturers usually try to get about a 2% increase about this time a year so.

Okay. Sorry, except nuts?

Yes, except for nuts.

Okay. And then, I guess the last question, if I remember correctly in last year's quarter, you had this significant benefit from diffusers. So, I was actually just wondering if you had any color if you exclude diffusers in general in terms of the comp’s impact last year, what your comp might have been in this year's quarter or maybe I am just wrong on that assumption but I thought where …

Well, the diffusers last year, yes, we equaled ourselves in this diffusers this year. So, it didn’t really have an effect on comp this year compared to last year.

Like, neutral to comp?

And it’s pretty neutral to comp.

Okay. Thanks very much.

There are no additional questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Kemper Isely for closing remarks.

I appreciate everybody being on the call this afternoon. Have a great rest of the day. Bye.