Buying Traffic Has Hammered Natural Grocers' Results

When I last wrote about Natural Grocers (NGVC) roughly 18 months ago, I said that I believed the shares would continue to head lower if the company couldn't reverse weak traffic trends. Management has in fact struggled to revive store traffic, and the shares are 50% lower now. Although the company is making decisions that make sense from a long-term perspective (getting more aggressive on price to drive traffic, reorienting marketing around what makes the stores different, and significantly reducing new store openings), it is still very much an open question as to whether Natural Grocers can find the right mix that will bring back traffic and allow for worthwhile margins.

I believe this latest disappointment (after fiscal first quarter earnings) has pushed the shares down to an interesting level, but there are outsized risks here. A multiple of 6.5x my 2018 EBITDA estimate will support a fair value around $8, and my DCF model suggests an even higher target, but models are not guarantees - there's a reason one of the most common words in conjunction with "earnings" is "surprise" - and this is a risky call at this point.

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Buying Traffic Has Hammered Natural Grocers' Results