This article is proudly sponsored by the Business Ethics Team at the University of Texas at Austin!
About Natural Grocers
When it comes to grocery shopping and shopping in general, I am so uninterested.
While I don’t consider myself to be a snob when it comes to fetching my own groceries, I feel comfortable admitting that it sometimes feels like an all too menial, boring task that is typically filled with congestion and stress, whether it is me anxiously patrolling for a parking spot somewhat close to the front of the store in question, cutting in and out aisles to find the items I need or sitting in a long line with other consumers waiting to get my items scanned, paid and eaten.
The cycle is a vicious one. At least, this has predominantly been my experience with large national grocery chains and retailers such as the Walmarts and the Krogers of the world.
Not Natural Grocers though.
No way, no how.
When I used to live approximately 180 miles south of the Canadian border (it’s a long story), I’d often take trips to one of my local grocery establishments by the name of, you guessed it, Natural Grocers.
For those who aren’t as familiar with the chain, it can be viewed as a sort of Sprouts Farmers Market or Trader Joe’s but smaller, both in terms of scale and also individual unit store size.
For those who aren’t familiar with Sprouts and/or Trader Joe’s, they are really just a slightly upscale grocery alternative to some of the more national, broader assortment players such as the Walmarts and the Costcos of the world.
From vitamins to fresh produce along with seemingly healthier snacks and meals, Natural Grocers has you covered nearly from head to toe.
I might also feel so inclined as to add that whether it was in a small town such as Grand Forks, North Dakota or a growing, bustling metropolitan region like Austin, Texas, the ambiance of each Natural Grocers I’ve stepped foot in has been eerily consistent; simple and stress-free.
This is frankly not the status quo when it comes to other grocery venues such as busier outlets like Target and Walmart, which is both good in some ways and bad in others.
For example, with respect to the general customer experience, I for one enjoy a calmer atmosphere as it allows me to peruse the aisles at my leisure in a more lax fashion, however, viewing the store from of an investor’s point of view, a relatively empty store doesn’t sound all that compelling nor encouraging, as one would hope that, like Walmart, for instance, it would be buzzing with customers day in and day out.
While this may be the case for Natural Grocers, we assume that this company has healthier margins than most of its aforementioned competitors given that its sourcing and procurement might be more selective than that of its foes and/or that its price tags are a bit higher than its competitors due to the quality of the goods it sells, not to mention the fact that the company operates seemingly most of its stores in more upscale, affluent neighborhoods.
At least, we hope that we find this to be the case.
At any rate, we’ve sure done a lot of talking about this company and we presume it’s just about time to let this company’s core financial figures and other pertinent metrics do some of the talking, so sit back, relax and enjoy this stock analysis article on Natural Grocers.
Natural Grocers’ stock financials
To get things kicked off in a natural fashion (see what we did there?), the company’s shares (NYSE: NGVC) are trading at a present price of $12.53 with an associated market capitalization of $284.86 million, a price-to-earnings (P/E) ratio of 17.72 as well as an annual dividend that it issues to its shareholder base of $0.40.
All things initially considered, this isn’t a bad start at all as the company, being a relatively small one (given its market capitalization, as we routinely find ourselves analyzing companies that are worth well over a billion dollars) with its shares trading a bit below that of their actual, intrinsic, fair value (according to its displayed price-to-earnings ratio at the time of this writing), not to mention the fact that it dishes out an annual dividend of nearly two quarters to its shareholders.
In getting a little more intimate with Natural Grocers and its financial footing, let’s take a peek at the overall state of the company’s balance sheet, as its executives are tasked with tending to and managing $663 million in terms of total assets as well as $507 million in terms of total liabilities, which is also a plus, for the most part, as it has been seen and discussed in previous stock analysis articles done on grocery chains that margins tend to be rather slim and there are a lot of moving parts (and with that, costs) to be eaten (pun certainly intended) by operators, including Natural Grocers.
Frankly, we are just happy to find that the company isn’t rapidly closing in on overleveraged territory (i.e., having more total liabilities than total assets), as, again, it operates in a very tough, competitive, pinch your pennies type of industry, however, it does certainly help that it has developed and sustained some competitive edges and differentiators in relation to its competitors, including its carefully determined store locations, its selective spread of foods and other supplemental products, among many other facets.
Regarding Natural Grocers’ revenues in the past handful of years, the company’s total annual revenues stood at $849 million in 2018, $904 million in 2019, continuing to creep up to its latest reported total annual revenue figure of just under $1.1 billion, as reported in 2022.
This certainly isn’t a bad thing (Big Grocery, for the most part, is known for being consistent in terms of total annual revenues, especially over relatively short spurts of time) and it is also sensible given that this grocery chain is particularly well known for being quite picky regarding where it lays down its new store locations, which to us is a great thing, as we view this company and brand as being quite niche, all of this largely accounting for its relatively slow (but stable) growth in revenues in recent years.
Onto the state of the company’s cash flow statement, Natural Grocers’ net income and total cash from operations have been as consistent as a cucumber (yeah, it’s a weird comparison, we know) since 2018, which is a huge plus, especially given the state of the world over the last few years with COVID-19, supply chain complications and other unprecedented incidents that continue to impact the world and consumers today.
Thankfully, however, it seems as though the folks over at Natural Grocers have been able to take it in stride, generating consistent figures and cash flows since 2018.
Natural Grocers’ stock fundamentals
In searching for a little more insight with respect to the company’s margins, according to the figures shown on TD Ameritrade’s platform, Natural Grocers’ trailing twelve month (TTM) net profit margin is on the lower end of the spectrum, which is really saying something in an already low margin-filled space such as grocery.
Specifically, the company’s TTM net profit margin is listed at 1.48% to the industry’s respective average of 2.17%, which isn’t all that far off from the industry’s average and we still view it as being somewhat competitive, however, we would’ve hoped that the company’s TTM net profit margin would have been a bit more competitive or perhaps slightly greater than the average of its peers given its relatively small assortment and the (more than likely) premium prices it slaps on its goods.
It’s not the end of the world by any means, but it is merely something to note and deal with.
On the returns side of things, the company’s TTM returns on both assets and investment(s) (also according to the figures displayed on TD Ameritrade’s platform) are also lower than the average of its peers.
As an example, the company’s TTM return on investment is listed as 3.17% to the industry’s listed respective average of 10.24%, which is definitely a notable discrepancy that we hope is narrowed sooner rather than later.
A consideration for Natural Grocers
With all of this being the case, Natural Grocers is in good shape, not great shape, at least from where we and the aforementioned figures stand.
Nevertheless, given its relatively low valuation and some prevailing positives such as its balance sheet, its stable revenues and cash flows and its somewhat competitive TTM net profit margin, we think this company should be a buyout target if it frankly isn’t one already.
With an already established brand, a more affluent, resilient, price inelastic and loyal customer base (for the most part), great geographical differentiation around the United States and considerable amounts of grocery consolidation already occurring, namely, with Kroger’s currently in the works deal to take fellow grocery chain Albertsons off the market, we think a few companies ought to be looking into targeting Natural Grocers.
To name one of a few potential bidders that would make sense, Arizona-headquartered Sprouts Farmers Market operates largely in the same categories and niches Natural Grocers does, just at a larger scale, however, it might make a lot of sense for Sprouts to consider taking Natural Grocers in order to further expand its presence and product lines as well as its technologies and other intellectual properties.
Although a few might perceive this to be a deal that might garner a lot of regulatory scrutiny, we actually don’t think it would get much (if anything) more than the normal procedures, research and other due diligence performed by the relevant regulatory agencies given that there is a relatively easy case to be made that with the rise of other grocers and general retailers and their increased market share, it is only fair that companies such as Natural Grocers and, say, Sprouts Farmers Market get together and make life a bit easier for the consumer by putting more competitive pressure on, say, a Walmart, a Kroger, a Target, a Publix or a host of other grocery companies that already hold a lot of market share.
Additionally, other potential merger suitors that we think might make sense include the likes of Trader Joe’s, which runs a fairly similar business model to that of Natural Grocers given its carefully determined physical store locations as well as its relatively small, specific assortment and the quality and category of the goods it sells.
This is literally just food for thought.
Should you buy Natural Grocers stock?
At this juncture, the company’s stock is in a good place in terms of valuation, as it is slightly undervalued relative to the standard price-to-earnings ratio fair value benchmark, its balance sheet is in good condition (all things considered), its revenues and cash flows are both in solid condition and its TTM net profit margin is competitive (for the most part) with its peers, although, again, we would like to see this figure improve in the coming years.
Acquisition target or not, Natural Grocers seems to be a great company in a good line of business, as the margins aren’t naturally all that abundant but as long as the company continues to modestly scale within the parameters of its proven geographical profile across the United States, we think this is a company that won’t distribute double or triple-digit shareholder returns anytime soon but will be a channel through which investors can potentially store and preserve their investable capital and not worry all that much.
Putting all of this information together, we give the company’s stock a “hold” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.