The Big Idea
It was the mid-1950s in Colorado. Margaret and Philip Isley had just welcomed their second child into the world. It should have been a very happy time.
But soon afterward Margaret became sick, and conventional medicines were not working.
Searching for answers, the Isleys turned to a book about healing the body with nutrition by eating nutrient-dense, natural foods and taking dietary supplements.
That book, Let’s Get Well, by Adelle Davis, combined with an incredible improvement in Margaret’s health, launched the couple into a nutrition education crusade.
They borrowed 200 bucks and went door-to-door in Golden, Colorado, giving out samples of whole-grain bread and lending out nutrition books. A week later, they’d go back, talk nutrition and take orders for supplements, breads and other natural foods.
It soon became clear that they had a viable business. They opened their first store in 1958.
This was the humble beginning of a small, Colorado-based company on a mission to spread health and wellness in communities by offering high-quality natural products at affordable prices.
Today, Margaret and Philip’s vision has become reality. The business and founding principles, continued by their children and grandchildren, have helped the company grow to over 160 stores spread across 21 states.
This is a good time for this type of business as the younger generations, Gen Z, Millennials and even Gen X, are spending significantly more on healthy foods and supplements than older demographics.
We pick up the story nearly 75 years after it began …
The Company
National Grocers by Vitamin Cottage (NGVC) is a $937 million market cap specialty retailer selling natural and organic groceries and dietary supplements.
The company focuses on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach.
In addition to the usual assortment of national brands, the company has a variety of Natural Grocers branded products, sources some products locally, and treats employees (called Crew members) well enough to ensure they are part of its competitive advantage.
As of the end of 2024, the company had 167 stores across 21 states, as well as a bulk food repackaging facility and distribution center in Golden, Colorado.
While this is still a relatively small chain, it’s come a long way since the first store opened in 1958. Most of the growth has come since the second generation of the Isely family, Kemper, Zephyr, Heather and Elizabeth, took over in 1998.
That was the year they bought the predecessor company and its 11 stores, as well as the Vitamin Cottage trademark, and officially took over.
We will start by buying a half-sized position.
The Store
Natural Grocers was built on a foundational belief that grocery stores play a pivotal role in the food chain, a system that is essential to health and well-being. The company tries to positively impact the ways that food in the U.S. is grown, raised and sold.
That means selling nutritionally sound, environmentally responsible products sourced, as much as possible, from vendors and farmers that prioritize human health, animal welfare and the health of our planet.
Natural Grocers has been built on a pricing strategy similar to Walmart’s (WMT). It prices items lower than the competition. It is willing to give up some margin in exchange for customer loyalty, higher shopping frequency and more items purchased per trip.
Small Footprint Format
National Grocers uses a small store format that presents as a clean and shopper-friendly environment. Newer locations average 10,000 - 11,000 square feet. They feature roughly 21,000 natural and organic product SKUs, of which about a quarter are dietary supplements. This format is highly adaptable to a wide variety of markets. The image below likely requires zooming in to see clearly and gives an idea of the store layout.
{N}power Customer Rewards Program
{N}power and the program’s mobile app are intended to drive higher customer loyalty and higher average transaction size while also providing an efficient marketing channel to reach customers and provide easy-to-access rewards, coupons and recipes. As of the end of 2024, the reward program had over 2.4 million members, a 14% increase over the end of 2023.
Natural Grocers Brand Products
The company’s branded products include a diverse assortment of products, placed throughout the store, presented as premium quality at compelling prices. They accounted for almost 9% of sales in Q1. They do very well in the bulk, dietary supplements, cheese, coffee, bacon and frozen fruit categories.
Growth Initiatives
Right Market, Right Time: Consumers are increasingly choosing natural and organic products, as well as supplements. These trends provide a tailwind for Natural Grocers to implement a variety of growth initiatives.
Branded Items: The company’s Natural Grocers brand items carry attractive margins and are gaining a larger share of customer spend, reaching 8.9% in Q1 fiscal 2025, up modestly from 8.5% a year ago. There were 23 new brand items to hit the shelves in Q1, including organic varieties of tomato sauce, pasta and soup.
Open New Stores: Management plans to open four to six new stores in fiscal 2025 and relocate or remodel two to four additional stores. Looking out further, the plan is to be able to open six to eight stores a year.
Rewards Program: Natural Grocers’ {N}power rewards program is helping to drive customer loyalty, and it appears to be reaching more customers. In Q1 fiscal 2025, net sales penetration was 81%, up from 78% a year ago.
Share Repurchase Program: The company has a $10 million share repurchase program that doesn’t expire until May 2026 and has $8.1 million remaining. This should help to support the stock.
Business Model
Natural Grocers’ business model is to offer affordable, high-quality, natural and organic products while having a positive environmental and social impact. The store caters to consumers with a heightened awareness about the importance of food quality and a desire to avoid toxic residues, hormones, growth promoters, artificial ingredients, and GMO foods. In fiscal 2024, 71% of revenue came from grocery items, 20% came from dietary supplements and 10% came from body and pet care products.
The Bottom Line
Natural Grocers grew revenue by 8.9% to $1.24 billion in fiscal 2024, which ended last September. Adjusted EPS grew by 48.5% to $1.47.
In Q1 fiscal 2025 (ended in December, reported on February 6), revenue grew by 9.4% to $330.2 million while adjusted EPS grew 26.5% to $0.43.
On the conference call, management talked about how the positive trends of the last two years continued, with comparable store sales +8.9%, eight consecutive quarters of positive daily customer traffic, four consecutive quarters of growth in items per basket, higher penetration of the rewards program (now at 81%) and continued growth in branded products.
Natural Grocers invested $9.4 million in net capital expenditures in the quarter, mainly to relocate two stores (two other stores were closed) and open a new store in Brownsville, Texas, which opened right after Q1 ended.
The company ended the quarter with $6.3 million in cash and cash equivalents and $61.4 million in borrowing availability on a $72.5 million revolving credit line.
The company is currently expected to grow revenue by 7.8% to $1.34 billion this fiscal year and deliver adjusted EPS growth of 18.4% to $1.74. This reflects management’s upwardly revised comparable store sales growth outlook of 5% to 7% (up from 4% to 6%) after a strong Q1.
Risk
- Consumer confidence is falling and could negatively impact consumer spending. That said, healthy eating and lower-priced groceries are exactly what customers want these days, and that’s what Natural Grocers offers.
- Inflation could become a bigger problem and dent gross margins, which management currently expects to be flat as compared to fiscal 2024.
- Tariffs could drive some product costs higher.
- This is a small company with a market cap under $1 billion. These types of stocks can swing wildly at times, often for no clear reason.
- Investors are looking for store count to grow. If management can’t hit its guidance, the stock could suffer.
Competition
Competition depends on location and runs the gamut from large mass-market discount retailers to gourmet markets and specialty food retailers. Sprouts Farmers Market (SFM) is the largest direct competitor. The Fresh Market, Trader Joe’s, GNC, The Vitamin Shoppe, Walmart (WMT), Target (TGT) and Whole Foods (AMZN) are also competitors.
The Stock
Trading Volume: NGVC trades an average of 150,000 shares daily and has a market cap of $940 million. We are not likely to impact on the stock’s price.
Historical Price: NGVC came public at 15 in July 2012 and did very well for a couple years before topping out in the low 40s in early 2014. The stock had a tough few years (it fell below 5 in 2017) then experienced some impressive rallies and equally impressive drawdowns for several more. A sustained focus on profitable growth took time to translate to better share price performance, but NGVC launched off the 10 level near the end of 2022 and has made reasonably steady upside progress since. It broke out to multi-year highs above 25 last summer, then to all-time highs above 47 last November. An end-of-year pullback to around 40 set up a rally into the Q1 fiscal 2024 report on February 6, after which NGVC hit a new all-time high of 50.9. Shares pulled back in February and early March but found support at 35. They’ve ground higher for the last three weeks and are now looking to move back above their 50-day moving average line at 42.2, which is just above yesterday’s close.
Valuation: NGVC trades with a current-year PE of 24, well below that of Sprout Farmers Market (SFM), which has a current-year PE of 33.6 (SFM is also growing more quickly, so a premium is warranted).
Short Term Buy Range: Expect to buy in the 37 to 46 range in the near term. BUY HALF
The Next Event: Expected Q2 Fiscal 2025 earnings date around May 1.
Current Recommendations
| Ticker | Stock Name | Date Bought | Price Bought | 4/3/25 | Profit | Rating |
| ALKT | Alkami Technology | 1/8/25 & 2/28/25 | 32.3 | 25.5 | -21% | Buy |
| AORT | Artivion | 6/5/24 | 23.3 | 24.3 | 4% | Buy |
| AVPT | AvePoint | 9/5/24 | 11.6 | 14.4 | 24% | Hold |
| AXGN | Axogen | 3/5/25 | 17.8 | 16.9 | -5% | Buy Half |
| DCTH | Delcath Systems | 2/6/25 | 16.3 | 12 | -26% | Buy Half |
| ENVX | Enovix | 10/6/22 | 20.4 | 6.8 | -67% | Buy |
| FIP | FTAI Infrastructure | 8/1/24 | 10.2 | 4.1 | -59% | Hold |
| NGVC | Natural Grocers | 4/3/25 | NEW | 42.1 | NEW | Buy Half |
| PTON | Peloton | 11/7/24 & 3/4/25 | 7.4 | 5.5 (est.) | -26% (est.) | SOLD |
| PPTA | Perpetua Resources | 12/4/24 | 10.7 | 11 | 3% | Buy Half |
| WEAV | Weave Communications | 1/4/24 & 5/9/24 | 10.1 | 10.3 (est.) | 2% (est.) | SOLD |
Glossary
Buy means accumulate shares at or around the current price.
Hold means just that; hold what you have. Don’t buy, or sell, shares.
Sell means the original reasons for buying the stock no longer apply, and I recommend exiting the position.
Sell a Half means it’s time to take partial profits. Sell half (or whatever portion feels right to you) to lock in a gain, and hold on to the rest until another ratings change is issued.
Disclosure: Tyler Laundon owns shares in one or more of the stocks mentioned. He will only buy shares after he has shared his recommendation with Cabot Small-Cap Confidential members and will follow his rating guidelines.
Please note that, unless otherwise credited, all images in this Issue are sourced from Natural Grocers’ latest Investor Presentation, which can be found here.
The next Cabot Small-Cap Confidential issue is scheduled for May 1, 2025.
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