Dive Brief:

• Natural Grocers by Vitamin Cottage reported a net sales increase of 8.6%, to $194.6 million, while comp-store sales increased 0.4%, according to a company release. Earnings per share was 3 cents, well below the 12-cent estimate set by Wall Street.
• Net income for the quarter was $600,000. The company also opened 14 stores in the first three quarters of fiscal year 2017, compared to 15 store openings during the same period last year.
• "While we had a challenging third quarter in terms of margin and earnings performance, I am encouraged by the improvements in our daily average comparable store sales and by mature store sales trends during the third quarter," Kemper Isely, co-president of Natural Grocers, said in the release. “Looking ahead, we have moderated new unit growth to reflect the challenging competitive environment and have no additional new store openings planned for the fourth quarter of fiscal 2017.”

Dive Insight:

Natural Grocer’s earnings disappointment reflects the company's struggles to grow in a competitive natural and organic retailing environment. Since it went public in 2012, the retailer has gone from 55 stores in 11 states to 140 stores in 19 states — an ambitious growth rate that’s struggled to produce returns in markets saturated with specialty grocers as well as mainstream retailers like Kroger and Hy-Vee, which have increased their assortment of natural and organic products in recent years.  

So rapidly has Natural Grocers grown — the chain opened 23 stores last year alone — that in some markets its stores have cannibalized sales from one another.

“We were growing at 20% compounded per annum through last year. We have slowed down a little bit,” Natural Grocers co-president Kemper Isely recently told the Denver Post. “We’re going to be a little more strategic in the locations we pick in the future.”

To that end, the company won’t be opening any stores the rest of this year. Looking ahead, Isely said, Natural Grocers plans to open around 12 per year and focus on reducing expenses while also paying down its debt.

During a conference call that followed the earnings release, Natural Grocers’ executives noted that comp-store sales growth, while modest at 0.4%, reversed a string of declining comps for the company. They also noted that drops in sales at mature stores had slowed considerably. Taken together, officials said, these metrics indicated positive momentum for the company.

While the grocer plans to rein in store growth and expenses, it does plan to increase marketing initiatives like television ads and direct mailers. Isely noted that television ads in the Denver market have helped drive store traffic. Earlier this year, Natural Grocers launched a pro-organic ad campaign that compared its natural and organic product standards with conventional competitors. The company also recently retooled its monthly store circular to include more health and nutrition content, along with interactive features for online readers. The circular, called good4u Health Hotline Magazine, reaches an estimated 750,000 customers each month.

Like many other natural and organic retailers whose growth has slowed of late, Natural Grocers has struggled to adjust to the new competitive landscape. By slowing growth and focusing more on its operations, it can hope to better compete with the likes of mainstream stores, discount operators like Sprouts, and a potentially resurgent Whole Foods.