Natural Grocers Up On Strong Traffic, But Margin Follow-Through Is Crucial

I thought Natural Grocers by Vitamin Cottage (NGVC) ("Natural Grocers") held some appeal for more risk-seeking investors back in February, as the company's decision to "reinvest" in lower prices seemed likely to spur improving comps. The shares have done exceptionally well since then, with the shares shooting up about 70% since fiscal second quarter earnings in early May on the strongest comps in roughly four years and less gross margin pressure than feared.

As is often the case with low-margin business models, even small changes in margin modeling assumptions can drive big changes in the resulting fair value. I'm still skeptical that Natural Grocers can recapture the margins they're giving up to bring traffic in through the door; while using price to get people familiar with the brand isn't a terrible idea, I believe price-conscious shoppers are liable to leave if and when management tries to raise prices. Although Natural Grocers could offset its pricing action with more back-office efficiency, I think the company's modest scale works against it, and I think the risk/reward trade-off is much more balanced now than before.

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Natural Grocers Up On Strong Traffic, But Margin Follow-Through Is Crucial