John Bourne – General Counsel Kemper Isely – Chairman and Co-President Sandra Buffa – CFO

David G. Magee – SunTrust Robinson Humphrey Sean P.

Naughton – Piper Jaffray Mark Miller – William Blair Scott Van Winkle – Canaccord Genuity Kate Wendt – Wells Fargo Securities Joe Edelstein – Stephens

Good afternoon, everyone, and thank you for joining us for the Natural Grocers by Vitamin Cottage third quarter and year-to-date fiscal year 2014 earnings conference call. On the call with me today are Kemper Isely, our Co-President and Sandra Buffa, our Chief Financial Officer as well as Ashley MacLeod, our Director of Investor Relations.

Before we start let me remind you that all statements made in this conference call other than statements of historical facts are forward-looking statements. All forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties.

Actual results could differ materially from those described in the forward-looking statements because of factors such as industry, business strategy, goals and expectations concerning our market position, the economy, future operations, margins, profitability, capital expenditures, liquidity and capital resources, other financial and operating information and other risks detailed in the company’s most recently filed Forms 10-Q and10-K. The information we present is accurate as of the date of this call.

The company undertakes no obligation to update forward-looking statements. The company’s earnings release was issued and made available this afternoon.

The discussion that follows assumes you’ve had the opportunity to read this release. The release along with a transcript of a recording of this call and a reconciliation of the non-GAAP measures used by us will be available at our website at investors.naturalgrocers.com for a minimum of 30 days.

If you have not had the opportunity to read the release we recommend that you read it in conjunction with or after this call. Now I will turn the call over to our Co-President, Kemper Isely.

Thank you, John. Good afternoon, everyone.

We are pleased with our financial results this quarter. Our increased sales and disciplined approach toward operating expenses have resulted in strong financial results, which allowed us to continue our investments into growth.

During the quarter, net sales increased 18.4% to a $134 million. Our daily average comparable store sales increased 3.1% during the quarter and experienced positive sales trends across all departments.

Gross profit increased to $38.6 million and we continued to see leverage and administrative expenses. Net income increased 16.6% quarter-over-quarter and our diluted earnings per share were $0.15 this quarter compared to $0.13 in the prior comparable quarter.

We opened three new stores during the quarter and expanded our geographic footprint in Oregon, Utah and Washington. Our new stores are performing in line with expectations and we remain on-track with our new store pipeline.

We plan to continue our 20% unit growth in the fiscal 2015 by opening 18 new stores. We are excited about the increasing demands in natural and organic food and believe this will forward the growth opportunity we see ahead of us.

As discussed last quarter, our comparable store sales had recently been impacted by increased localized competition. We are currently testing different marketing and advertising initiatives to address this.

Additionally, our operational excellence continues to be a priority. We continue to be the leader in high quality standards to further distinguish ourselves from our competitors.

This quarter we changed our chickens prior to selling non-GMO and organic chickens that are better priced than before. The lower price on chickens impacted our daily average comp sales by 15 basis points during the quarter.

Additionally, our update daily standard continue to receive very positive feedback and our customers appreciate our commitment to quality standards. Now I will turn the call over to Sandra to highlight our financial results.

Thank you, Kemper and good afternoon [inaudible] 18.4% over the same period in fiscal 2013. Comparable store sales increased 2% quarter-over-quarter.

Daily average comparable stores sales increased 3.1% quarter-over-quarter driven by a 1.3% increase in daily average transaction count and a 1.8% increase in average transaction size. Daily average mature store sales increased 1.6% quarter-over-quarter.

Gross profit during the third quarter of fiscal 2014 increased 18.5% to $38.6 million driven by an increase in the number of new stores. Gross profit was negatively decreased impacted in the three months ended June 30, 2014 by one less selling day for the occurrence of Easter in April of 2014 versus March of 2013.

Gross margin was consistent quarter-over-quarter due to increases in product margins across almost all departments as well as operating efficiencies at the bulk food repackaging facility offset by an increasing occupancy cost as a percent of sales. The increases in product margins were partially offset by a shift in sales mix.

The stores that were accounted for as capital leases rather than being reflected as operating leases increased gross margin as a percent of sales by approximately 55 basis points in the third quarter of fiscal 2013 and 2014. Store expenses increased 50 basis points to 21% of sales during the quarter.

This was driven by an increase in salary-related expenses, depreciation and advertising expenses and to a lesser extent an increase in utilities all as a percent of sales. Administrative expenses as a percent of sales decreased 20 basis point quarter-over-quarter as a result of the company’s continued ability to support sales growth without proportionate investments in overhead.

During the third quarter of fiscal quarter 2014, both store and administrative expenses were favorably impacted by lower incentive compensation and another discretionary benefits expense reflecting our paper performance philosophy. During the quarter, net income increased to 16.6% to $3.4 million with diluted earnings per share of $0.15.

EBITDA increased 22% to $10.6 million or 7.9% of sales in the third quarter. The stores that were accounted for as capital leases rather being reflected as operating leases increased EBITDA as a percent of sales by approximately 55 basis points in the third quarter of fiscal ‘14 and 2013.

Turning briefly on to our year-to-date results, net sales increased 22%, including a 6.3% increase in daily average comparable store sales. Net income increased 23.6% to 10.3 million with diluted earnings per share of $0.46 year-to-date fiscal 2014.

Balance sheet and liquidity highlights are as follows: As of June 30, 2014 we had $6.6 million in cash and cash equivalents with no amounts outstanding on our revolving credit facility. Year-to-date fiscal 2014 we generated $23.5 million in cash from operations and we invested $26.9 million in property and equipment primarily on new stores.

Now I will turn the call back to Kemper to discuss our new store growth and updated outlook for the remainder of fiscal 2014.

Thank you, Sandra. As I mentioned at the beginning of the call we continue to invest into new store growth opening 12 new stores year-to-date bringing our total count to 84 stores in 14 states.

We have signed leases for the remaining three stores planned to open in fiscal 2014 and have seven signed leases for stores planned to open after fiscal 2014, which include two new states, Arkansas and Nevada. At the end of fiscal 2015 we expect our geographic presence will expand to at least 16 states west of Mississippi.

We are pleased to announce that during the quarter we substantially completed the implementation of our new human resource information system continuing our strategic initiatives to support future growth. We are consistently focused on managing and controlling our growth and we see this as a positive step to support and enhance our ability to onboard, train and communicate with our employees.

Moving now to our updated outlook for fiscal year 2014. We remain confidence in our previous guidance and our narrowing two ranges based on our third quarter results and expectations for the remainder of the fiscal year.

Specifically, we are updating our daily average comparable storage sales outlook for fiscal 2014 to 5.5% to 6% and updating our diluted earnings per share outlook for fiscal year 2014 to $0.58 to $0.61. Our fiscal 2014 guidance for net income and EBITDA margins and CapEx will remain unchanged.

We have clear direction on how we intend to manage expenses and margins going forward while we work on various initiatives to increase sales. Additionally, I would like to give some color to our initial outlook for fiscal 2015.

In fiscal 2015, we anticipate unit growth of 20.7% or 18 new stores, sales growth will be approximately 20%, EBITDA growth of approximately 8% to 12% and net income growth of approximately 6% to 9%. Our fiscal 2015 outlook for EBITDA and net income growth reflects the company’s ability to grow our store base at 20% and also get signed the incentive compensation and other discretionary benefits above the fiscal 2014 levels to recognize the important contribution our employees make to the company’s growth and success.

Over the three years following fiscal 2013, we expect our EBITDA and net income growth to average 20%. Based on our initiatives to drive sales growth, we believe that we will return to the growth levels I had just outlined.

These opportunities include reviewing online delivery opportunities, redesigning our website and more wholly utilizing our demonstration kitchens. We are confident in these future growth opportunities and believe the demand of national and organic foods is only expanding.

We are encouraged by our demonstrated ability to expand our presence geographically while expanding the top and bottom line. We remain true to our five accounting principles and continue to focus on what differentiates us offering unique, national and organic products at affordable prices.

We continue to gain trust and loyalty from our customers through our high quality standards and nutrition education.

I have a few additional items to highlight. First and foremost, we remain committed to our 20% unit growth rate with the plans to open 18 new stores in fiscal 2015.

We are also continuing to update our older stores and now plans to remodel two stores next year and relocate three stores, all of which are over 15 years old. We expect to continue to remodel and relocate stores in further years.

Second, we will more fully utilize our demonstration kitchens. We recently expanded the nutritional health coach job description to include hosting cooking and educational events.

We have already seen an increase in the number of events and plan to see this continue. We are also implementing more community events.

These are relationship-building opportunities. These events include doctors, practitioners, nutritionists, healthy living bloggers and authors, cooks and activists living in our communities.

This is a great way for us to engage with the community, increase awareness around our high quality standards and how to educate our customers. Third, we continue to be the leader in high quality standards with our updated dairy standards and non-GMO chicken offerings.

Fourth, we have very sales initiatives in place, which include improving and updating new signings in our stores and clearly emphasize our standards and help educate our customers. We are currently redesigning our website to help simplifying create a more user-friendly environment.

We are also currently bidding partners for digital coupons and home delivery options. Additionally, we have recently tested extended hours at certain stores in response to customer requests and have already seen positive results.

And lastly, we remain focused on our employees. Our fiscal 2015 outlook includes our plan if performance in financial goals are met to fund incentive compensation and another discretionary benefits above the fiscal 2014 levels.

Our employees are huge contribution to our growth and success and it’s very important to recognize them. One final point I would like to make is that one of our greatest strengths is that we have a plan to grow our company at a rapid pace and we have infrastructure in place to implement this plan.

Now I would like to open the lines up for questions. Thank you.

Yeah, hi everybody. My first question just has to do with the rate of EBIT growth that you’re forecasting for next year being well below that they anticipate sales gain.

I’m coming up with a number of differential maybe about $3.5 million as far the extra cost that maybe in the [ph] next year. Is that all related to the discretionary expenses or items that you did refer to?

Is it the thought that folks haven’t been compensated fairly the last year or so and this is a catch-up effort never guard?

So this doesn’t reflect any change in your thinking about how the stores are performing?

Do you still anticipate they step down in terms of the competitive headwinds, the new headwinds?

Middle of calendar of 2015.

Next year. I guess that’s clear?

Okay.

And you think your stores all respond in line of your expectations as that competition is lessened?

Okay, John. Thank you.

Hi, thanks for taking the questions. John, Buffa [pf] and hi Kemper.

When we just look at the categories you guys are competing in, the grocery sales, stuff women sales, other sales, it looks like supplements took another step down in growth. Was there anything specific there or was that more..

Are you seeing anything in the basket that would be due as to believe that there may be some slowdown in that category or is it more function of just the transactions being a little bit more challenge in the stores? Well, the growth for the category through the quarter was around 13% and overall our sales grew up 18% so does the loss in the category as it’s all part of our sales.

I think it has a percentage.. It’s trending similar to how it would have all year.

That’s been about going at about 75% of what our overall growth has been. Because our overall growth slowed a little bit, it slowed a little bit for the quarter.

Did that make sense to you?

It does and that’s helpful. And then when we talk in a little bit more about 2015 line as a guidance, I think you’ve got approximate 20% top line growth number in there.

Can it have a comp that you’re about thinking about that would patch up with that 20% number?

Okay. And then anything on our..

You’re talking a little bit about some additional.. Maybe not additional but some more remodelling and some potentially more spending on some of those stores.

Any idea on where CapEx shacks out for next year or are we still little slow earlier on that number at this point?

Okay, that’s helpful. And then one last question.

Just in the quarter it looks like some pretty nice product margin gains offset by some negative mixes there. Anyway to kind of bucket the impact from rate gains like products versus the decline in occupancy just looking for orders of magnitude here?

I want to answer. Yeah.

Hi, Sean. It’s basically in the quarter since external margin remains flat.

It really was the product margin increase and then occupancy cost decrease at the same rate.

Okay, so those were kind of a two big ones?

Yes.

Okay. Thank you.

Hi everyone. I’m looking for a little bit more color on the incentive comp and the discretionary benefits.

Roughly how much of the benefit was that on the expense line perhaps in basis points and are you anticipating a similar reduction in the fiscal fourth quarter? And I’m trying to make the connection between this year and next, so if that’s going to be an added cost year on year.

Does that basically represent you going back to normal and that fiscal ’14 is just lower?

I mean is it the right way to think about, Kemper, the difference between the sales growth and the profit growth next year. You’re saying it’s more free channel compensation.

So if we calculated that drag on profitability, that’s basically the amount by which it’s going down in ’14?

It includes the other discretion?

Yeah, it includes the other discretionary benefits.

Okay. And then in terms of sales driving initiatives in your mind, which of these are most impactful and have the most immediacy to them?

And then specifically on the demonstration kitchens, maybe you could bring us up-to-date on to what extent those are being leveraged and where we had the greatest success with that? Thanks.

Let me just one follow-up on that. Thanks.

The follow-up is similar that having a linear impact to the sales and whatever sales come on to that by quadrupling that, you expect some more expect on sales and as you think about that relative to the operating cost from that is this just viewed as a high margin activity or just important-to-drive traffic? Thanks.

It’s not really. It’s not a high margin activity, but what it does is it educates the customer about the products in our stores and how to use the products in our stores and so it exponentially drives sale from an average ticket because when the customers go to those events.

Yeah. The three locations you mentioned, Kemper, for next year.

Is that incremental to the [ph] change or gross new opening of 21, net 18 or is that 18 gross, net 15?

The three that we mentioned that are upcoming are opening in this quarter. So we have two stores opening here in August one in [ph], Kansas, one in Oklahoma City, Oklahoma and then in September we have our Eugene Oregon store open and all we are planning on opening 18 stores in 2015.

We are planning on moving three of our existing locations in 2015 and we’re planning on remodelling two of our existing locations in 2015.

Great. Yeah, I [ph].

Thank you very much. And then if you look at your comps here in the third quarter, if you look at a two-year comp just rope numbers, it went from 25 in Q1 to 17 in Q2, to 14 in Q3 and your guidance is kind of lowering the ranges just about this 14 level.

So [ph] assume that maybe we can correlate that with the percentage of your stores would have any competition that 53% number you through [ph] is the peak before we trimmed down towards 28 next year?

Correct.

Right. Thank you.

Yeah. Thanks.

I’m still, I guess, pretty confused about this incentive comp situation next year. If you’re going to have similar rates of revenue growth, why your incentive comp budget would need to go up so much than really past year and [ph] significantly next year and maybe you can help off to provide?

I mean in the past when you’ve done actually really extraordinary performance you still did not know how to get really good leverage on your definite expense lines. I understand the piece of that is from higher sale flow through, but I would imagine that there should be some sort of balance internally between the amount of the patterns in the comp in regard of growth that you’re going to deliver on the bottom line.

So if you can just kind of help as further understand the philosophy there and then perhaps what’s the dollar amount of the incentive compensation has been over the past couple of years versus what they’re expected to be in ’15. Thanks.

Well. Essentially, what has happened this year is that incentive comp has been funded at about a quarter of what it normally has been running.

Next year we’re budgeting incentive comp and other discretionary benefits. And next year we think that it’s very important to keep our employees engaged to increase the amount of incentive comp funding in the budget as long as our sales and financial goals are met.

If we don’t meet our sales and financial goals, then of course those incentive comp and discretionary benefits wouldn’t be funded again next year, but we took this year’s budget and then added those two mix years so that we could get some funding into there and that’s the reason why there was a drop in our projected earnings growth and EBITDA growth.

Okay. So you just said on top line growth targets internally and not bottom line targets?

Both we said all three internally and as I said we made a decision that we would for one year not try to achieve the higher bottom line numbers so that we could get forward to bond incentive comp because of how important it is to these employees at our company. If we don’t have happy employees, we’re not going to be able to achieve our long-term goals and our long-term goals are growth on the top line and bottom line, but short-term sometimes you have to look at where your long-term goal is.

Okay.

As far as the dollar amounts, which is on our previous question, I think that he did think he was pretty accurate to his number that he is through out there.

Okay. And then obviously one of the main issues in terms of a competition has been in our home state of Colorado and if you could just talk about to what trends have been sensed to grand openings of some of those stores that opened again still in Colorado?

Six months after opening we are noticing positive sales trends at many of the stores that were affected by the Eugene Store in Colorado, which is typical of what happens in the cycle and usually it takes about a year for sales trends to reverse themselves and start to trend and our stores did start gain traction again after new competitor opens.

Okay. That’s good year, but you found out your fourth quarter guidance doesn’t really seem to imply any improvement, in fact maybe a little bit of further deceleration to other events that are going on in other areas or perhaps is there a slowdown in comps outside of stores with new competition?

That’s also correct?

Our third quarter stores did have competition and were up around 11% with 2% is point slower than it was earlier in the year, but it’s slow in double digits. So we’re still doing pretty well with stores that didn’t have additional competition.

I think there was a little bit of deceleration in the quarter because a lot of our customers are independent. They owned independent businesses and they probably ended up having to pay a lot of extra taxes on April 15th because of the new taxes that went into [ph] 2013 and so that piping kind of little bit of negative impact in [ph] quarter.

Okay, got it. Thanks so much.

Hi, good afternoon. Thanks for taking my questions.

Joe, how are you doing today?

I’m great. Thank you.

Can you just help us better understand on this incentive comp. What level of the organization it’s really targeted at?

I mean is this a broad-based incentive plan all the way down to the store level or if it’s mostly directed at corporate?

Our incentive comp program is comprehensive to everybody that works with the company. So if you work here and you’d been depending on your length of service, etc., you are included in the plan.

Okay.

Both full time, part time and the amount of comp depends on the level that you are with company to.

Okay. And you may have just answered the question in regards to Kate’s question, but in the consumer environment that has been pretty choppy and so I was wondering if I be just sort of walk at through the cadence of your same store sales during the quarter.

It sounded like April up to a rough start, but have we kind of stabilize from here?

I would say that we’re looking better this month than we did during the last quarter.

Is that some other result of running these summer hours that I understand is just went into place just a few weeks ago only in a few select stores? But is that part of the driver?

And also are you considering rolling those out to other stores perhaps even keeping those hours beyond the summer months?

We will know the results of the initiative by the end of August. It’s looking very promising right now that we’ll probably roll about all of our stores, which is our intention to open our new stores with the new hours.

Okay. And just maybe one last question if I can.

We have been out visiting other companies in the natural organic retailing space and it certainly seems competitive trends [ph] brought indoor and in some cases plan to brought in their offerings. I know that you adhere to very strict product standards, but do you feel like you’re operating at just too small of a niche market today?

No, not at all. As a matter of fact, we believe the tightening our standard increases our customer loyalty and will increase our sales long term at a greater rate and that’s why we introduced our past year based dairy standard.

When we did that we had to give further 50% of our yogurt [ph] in our stores and it changed our yogurt makeup substantially. We lost in unit volume but our overall sales volume was essentially flat after we did that, but it’s increased the customer loyalty of our current customers substantially.

Great to hear. Thanks for taking my questions.

Hi, guys. Good afternoon.

Just a quick question. With your competitor we spoke with yesterday had mentioned expanding maybe changing some of their stores as they do their remodels expanding freezers, some of the produce, couple of your other competitors had success in some of those areas.

If you kind of look across the store maybe back to Sean’s question earlier about supplements of maybe adjusting the mix little bit to store whether more produce or some other categories, do you feel like very comfortable where you are right now?

Okay, great. And then just one last thing, Kemper.

I think you’d mentioned before percentage of stores without incremental competition. Could you share that with us?

I think you’re referencing it but..

The percentage is towards the down or incremental comp?

Yeah, it’s of the total base. How many stores haven’t seen any incremental competitors open nearby?

Maybe about 45% of our stores.

45? Okay, perfect.

Thank you.

Yeah, just a quick question. Looking at the fourth quarter, in my calculating it’s right that the comps like they would accelerate from the third quarter level.

Is that implied in your guidance?

That will be slight. We’re estimating that will be slightly higher than our third quarter level.

Yes.

Okay. That’s all I have.

Thank you.

Thanks for taking my question. I just want to deal a little further into a longer-term guidance.

I know there has been a number of questions just on the intent of comp in 2015, but maybe you can help us understand what drives a re-acceleration maybe in 2016 and beyond. Is it just an incentive comp being normalized or is their other factors that give you confidence or you see a restructured disorder growth in 2016 and beyond?

Well. Number one, incentive comp would be normalized and then number two, we’re forecasting slightly higher comps growth over 2015.

Okay, if I get...

And not lot... It’s slightly… we’re mid single digit.

Okay. If I can speak one quick one, outside of new competitor openings in our market, are you guys seeing any other changes in that competitive environment from last quarter?

No, no, really no.

Okay, thank you.

Thanks.

I would like to thank everybody for being on the call with any draw of their questions. Thanks and have a very nice afternoon.

Bye.