Natural Grocers by Vitamin Cottage, Inc.: Form 10-Q for the period ended Mar 31, 2025

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our unaudited consolidated financial statements and notes thereto, which are included elsewhere in this Form 10-Q, and with the audited consolidated financial statements and notes thereto in our Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-Q for an explanation of these types of statements. Summarized numbers included in this section, and corresponding percentage or basis point changes, may not sum due to the effects of rounding.

Company Overview

We operate natural and organic grocery and dietary supplement stores that are focused on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We offer a variety of natural and organic groceries, dietary supplements and body care products that meet our strict quality standards. We believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado. As of March 31, 2025, we operated 169 stores in 21 states, including Colorado, Arizona, Arkansas, Idaho, Iowa, Kansas, Louisiana, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Golden, Colorado.

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. The sizes of our stores range from approximately 7,000 to 17,000 selling square feet.

The growth in the organic and natural foods industry and growing consumer interest in health and nutrition have enabled us to continue to open new stores and enter new markets. During the five fiscal years ended September 30, 2024, we increased our store count at a compound annual growth rate of 2.0%. In fiscal year 2024, we opened four new stores and relocated/remodeled four existing stores. We plan to open three to four new stores and relocate/remodel two to four existing stores in fiscal year 2025. During the six months ended March 31, 2025, we opened two new stores, relocated/remodeled two existing stores and closed two stores. Between April 1, 2025 and the date of this Form 10-Q, we did not open any new stores nor relocate/remodel any existing stores.

Performance Highlights

Key highlights of our performance for the three and six months ended March 31, 2025 are discussed briefly below and in further detail throughout this MD&A. Key financial metrics, including, but not limited to, daily average comparable store sales, are defined in the section “Key Financial Metrics in Our Business,” presented later in this MD&A.

• Net sales. Net sales were $335.8 million for the three months ended March 31, 2025, an increase of $27.7 million, or 9.0%, compared to net sales of $308.1 million for the three months ended March 31, 2024. Net sales were $666.0 million for the six months ended March 31, 2025, an increase of $56.1 million, or 9.2%, compared to net sales of $609.8 million for the six months ended March 31, 2024.
• Daily average comparable store sales. Daily average comparable store sales for the three months ended March 31, 2025 increased 8.9% compared to the three months ended March 31, 2024. Daily average comparable store sales for the six months ended March 31, 2025 increased 8.9% compared to the six months ended March 31, 2024.
• Net income. Net income was $13.1 million for the three months ended March 31, 2025, an increase of $5.1 million, or 64.6%, compared to net income of $8.0 million for the three months ended March 31, 2024. Net income was $23.0 million for the six months ended March 31, 2025, an increase of $7.3 million, or 46.6%, compared to net income of $15.7 million for the six months ended March 31, 2024.
• EBITDA. Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $25.4 million for the three months ended March 31, 2025, an increase of $6.5 million, or 34.2%, compared to $19.0 million for the three months ended March 31, 2024. EBITDA was $46.7 million for the six months ended March 31, 2025, an increase of $9.5 million, or 25.6%, compared to $37.2 million for the six months ended March 31, 2024. EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of EBITDA and a reconciliation of net income to EBITDA.
• Adjusted EBITDA. Adjusted EBITDA was $26.3 million for the three months ended March 31, 2025, an increase of $6.6 million, or 33.3%, compared to $19.7 million for the three months ended March 31, 2024. Adjusted EBITDA was $49.1 million for the six months ended March 31, 2025, an increase of $10.6 million, or 27.6%, compared to $38.5 million for the six months ended March 31, 2024. Adjusted EBITDA is not a measure of financial performance under GAAP. Refer to the “Non-GAAP Financial Measures” section in this MD&A for a definition of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA.
• Liquidity. As of March 31, 2025, cash and cash equivalents was $21.2 million, and there was $70.3 million available for borrowing under our Credit Facility, net of undrawn, issued and outstanding letters of credit of $2.2 million.

Industry Trends and Economics

We have identified the following recent trends and factors that have impacted and may continue to impact our results of operations and financial condition:

• Impact of broader economic trends and political environment. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, levels of disposable consumer income, consumer debt, interest rates, inflation or deflation, periods of recession and growth, the price of commodities, tariffs and trade restrictions, the political environment and consumer confidence. Furthermore, our ability to meet our labor needs, while controlling wage and labor-related costs, is subject to numerous external factors, including the availability of a sufficient number of qualified persons in the workforce in the markets in which we are located, unemployment levels within those markets, prevailing wage rates, changing demographics, health and other insurance costs and changes in employment legislation, including unemployment benefits. Over the past several years, a number of macroeconomic and global trends have impacted our business. The labor market has impacted our ability to retain and attract store Crew members, and in certain markets we continue to be challenged by labor shortages broadly impacting the retail industry. We have invested in increased wages for our store Crew members and may be required to do so in the future. As a result of current global supply chain issues, we have on occasion experienced shortages and delays in the delivery of certain products to our stores. We have taken steps to mitigate these disruptions to our supply chain, although certain products may be in relatively short supply or unavailable from time to time.

In recent years, the costs of certain goods we sell were impacted by levels of inflation higher than we have historically experienced, resulting in part from supply disruptions, geopolitical instability, including the conflicts in Ukraine and the Middle East, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain, monetary policy actions, other disruptions and the uncertain economic environment. While levels of inflation moderated during fiscal year 2024, we are unable to predict the impact of inflationary or disinflationary trends on consumer behavior and our sales and profitability in the future. In addition, the United States recently has imposed, or has proposed, tariffs on a broad range of foreign-sourced products and materials. Although the tariffs imposed have not had a material impact on our business, financial condition and results of operations, there can be no assurance that this will continue to be the case. The imposition of additional tariffs and trade restrictions, or a prolonged trade conflict between the United States and its trade partners, could result in adverse and uncertain economic conditions and adversely impact demand for our products.

• Opportunities in the growing natural and organic grocery and dietary supplements industry. Our industry, which includes organic and natural foods and dietary supplements, continues to experience growth driven primarily by increased public interest in health and nutrition. Capitalizing on this opportunity, we continue to open new stores and enter new markets. We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including construction permitting and the availability of construction materials, equipment and labor.
• Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Competition in the grocery industry is likely to intensify, and shopping dynamics may shift, as a result of, among other things, industry consolidation, expansion by existing competitors, and the increasing availability of grocery ordering, pick-up, and delivery options. These businesses compete with us on the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, ease of ordering and delivery or any combination of these or other factors. They also compete with us for products and locations. In addition, many of our competitors increasingly offer a broad range of natural and organic foods. We also face internally generated competition when we open new stores in markets we already serve. We believe our commitment to carrying carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutrition education, differentiate us and can provide a competitive advantage.
• Consumer preferences. Our performance is also impacted by trends regarding natural and organic products, dietary supplements and at-home meal preparation. Consumer preferences towards dietary supplements or natural and organic food products might shift as a result of, among other things, economic conditions, food safety perceptions, changing consumer choices and the cost of these products. A change in consumer preferences away from our offerings, including those resulting from higher retail prices for our products due to inflation or tariffs, or reductions or changes in our offerings, could have a material adverse effect on our business.

Outlook

We believe there are several key factors that have contributed to our success and will enable us to increase our comparable store sales and continue to profitably expand. These factors include a loyal customer base, increasing transaction size, growing consumer interest in nutrition and wellness, a differentiated shopping experience that focuses on customer service, nutrition education, a convenient, clean and shopper-friendly retail environment, and our focus on high quality, affordable natural and organic groceries, dietary supplements and body care products.

We expect the rate of new store unit growth in the foreseeable future to be dependent upon economic and business conditions and other factors, including construction permitting and the availability of construction materials, equipment and labor. We believe there are opportunities for us to continue to expand our store base, expand profitability and increase comparable store sales. However, future sales growth, including comparable store sales, and our profitability could vary due to increasing competitive conditions in the natural and organic grocery and dietary supplement industries and regional and general economic conditions, including inflationary or recessionary trends. We believe there are opportunities for increased leverage of costs and increased economies of scale in sourcing products. However, due to the fixed nature of certain of our costs (in particular, our rent obligations and related occupancy costs), our ability to leverage costs may be limited.

Our operating results may be affected by the above-described factors as well as a variety of other internal and external factors and trends described more fully in Item 1A – “Risk Factors” in our Form 10-K and Part II, Item 1A – “Risk Factors” in this Form 10-Q.

Key Financial Metrics in Our Business

In assessing our performance, we consider a variety of performance and financial measures. The key measures are as follows:

Net sales

Our net sales are comprised of gross sales net of discounts, in-house coupons, returns, and allowances. In comparing net sales between periods, we monitor the following:

• Change in daily average comparable store sales. We begin to include sales from a store in comparable store sales on the first day of the thirteenth full month following the store’s opening. We monitor the percentage change in comparable store sales by comparing sales from all stores in our comparable store base for a reporting period against sales from the same stores for the same number of operating months in the comparable reporting period of the prior fiscal year. When a store that is included in comparable store sales is remodeled or relocated, we continue to consider sales from that store to be comparable store sales. Our comparable store sales data may not be presented on the same basis as our competitors. We use the term “new stores” to refer to stores that have been open for less than thirteen months. Daily average comparable store sales are comparable store sales divided by the number of selling days in each period. We use this metric to remove the effect of differences in the number of selling days we are open during the comparable periods (for example, as a result of leap years or the Easter holiday shift between quarters).
• Transaction count. Transaction count represents the number of transactions reported at our stores during the period and includes transactions that are voided, returned, and exchanged.
• Average transaction size. Average transaction size is calculated by dividing net sales by transaction count for a given time period. We use this metric to track the trends in average dollars spent in our stores per customer transaction.

Cost of goods sold and occupancy costs

Our cost of goods sold and occupancy costs include the cost of inventory sold during the period (net of discounts and allowances), shipping and handling costs, distribution and supply chain costs (including the costs of our bulk food repackaging facility), buying costs, shrink expense, third-party delivery fees and store occupancy costs. Store occupancy costs include rent, common area maintenance and real estate taxes. Depreciation expense included in cost of goods sold relates to depreciation of assets directly used at our bulk food repackaging facility. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors, and, as a result, our cost of goods sold and occupancy costs data included in this Form 10-Q may not be identical to those of our competitors and may not be comparable to similar data made available by our competitors. Occupancy costs as a percentage of net sales typically decrease as new stores mature and sales increase. Lease payments for leases classified as finance lease obligations are not recorded in cost of goods sold and occupancy costs. Rather, these lease payments are recognized as a reduction of the related obligations and as interest expense.

Gross profit and gross margin

Gross profit is equal to our net sales less our cost of goods sold and occupancy costs. Gross margin is gross profit as a percentage of net sales. Gross margin is impacted by changes in retail prices, product costs, occupancy costs and the mix of products sold, as well as the rate at which we open new stores.

Store expenses

Store expenses consist of store-level expenses, such as salary and benefits, share-based compensation, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. Depreciation expense included in store expenses relates to depreciation for assets directly used at the stores, including depreciation on land improvements, leasehold improvements, fixtures and equipment and technology. Depreciation expenses on the lease assets related to the finance leases of the stores are also considered store expenses. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets and lease terminations, primarily related to store relocations, as well as store closing costs. Store expenses also include long-lived asset impairment charges. The majority of store expenses consist of labor-related expenses, which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of net sales tend to be higher at new stores compared to comparable stores, as new stores require a minimum level of staffing in order to maintain adequate levels of customer service combined with lower sales. As new stores increase their sales, labor-related expenses as a percentage of net sales typically decrease.

Administrative expenses

Administrative expenses consist of home office-related expenses, such as salary and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), software services expenses, professional services expenses, expenses associated with our Board, expenses related to compliance with the requirements of regulations applicable to publicly traded companies, and other general and administrative expenses. Depreciation expense included in administrative expenses relates to depreciation for assets directly used at the home office including depreciation on land improvements, leasehold improvements, fixtures and equipment, and computer hardware and software.

Pre-opening expenses

Pre-opening expenses for new stores and relocations/remodels may include rent expense, salaries, advertising, supplies, and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from three to six months prior to a store’s opening date for store leases classified as operating. For store leases classified as finance leases, we recognize pre-opening depreciation expense. Other pre-opening expenses are generally incurred in the four to seven months prior to the store opening. Certain advertising and promotional costs associated with opening a new store may be incurred both before and after the store opens. All pre-opening costs are expensed as incurred. Pre-opening expenses for remodels are incurred if the store is required to be closed due to the remodel.

Interest expense, net

Interest expense consists of the interest associated with finance lease obligations and our Credit Facility, net of capitalized interest.

Income tax expense

Income taxes are accounted for in accordance with the provisions of ASC 740. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the fiscal years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. Income tax expense also includes excess tax benefits and deficiencies related to the vesting of RSUs.

Results of Operations

The following table presents key components of our results of operations expressed as a percentage of net sales for the periods presented:

*Figures may not sum due to rounding.

22

Three months ended March 31, 2025 compared to the three months ended March 31, 2024

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

Net sales

Net sales increased $27.7 million, or 9.0%, to $335.8 million for the three months ended March 31, 2025 compared to $308.1 million for the three months ended March 31, 2024, due to a $27.2 million increase in comparable store sales and a $3.5 million increase in new store sales, partially offset by a $2.9 million decrease in net sales related to closed stores. Daily average comparable store sales increased 8.9% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The daily average comparable store sales increase resulted from a 5.9% increase in daily average transaction count and a 2.8% increase in daily average transaction size. Comparable store average transaction size was $48.94 for the three months ended March 31, 2025.

Gross profit

Gross profit increased $11.4 million, or 12.6%, to $101.7 million for the three months ended March 31, 2025 compared to $90.4 million for the three months ended March 31, 2024. Gross profit reflects earnings after product and store occupancy costs. Gross margin increased to 30.3% for the three months ended March 31, 2025 compared to 29.3% for the three months ended March 31, 2024. The increase in gross margin during the three months ended March 31, 2025 was driven by higher product margin primarily attributed to effective promotions.

Store expenses

Store expenses increased $3.6 million, or 5.1%, to $72.8 million for the three months ended March 31, 2025 compared to $69.2 million for the three months ended March 31, 2024. The increase in store expenses was primarily driven by higher compensation expenses. Store expenses as a percentage of net sales were 21.7% and 22.5% for the three months ended March 31, 2025 and 2024, respectively. The decrease in store expenses as a percentage of net sales reflects expense leverage.

Administrative expenses

Administrative expenses increased $1.5 million, or 15.8%, to $11.0 million for the three months ended March 31, 2025 compared to $9.5 million for the three months ended March 31, 2024. The increase in administrative expenses was driven by higher compensation expenses and technology expenses. Administrative expenses as a percentage of net sales were 3.3% and 3.1% for the three months ended March 31, 2025 and 2024, respectively.

Pre-opening expenses

Pre-opening expenses were $0.4 million for each of the three months ended March 31, 2025 and 2024.

Interest expense, net

Interest expense, net of capitalized interest, was $0.8 million for the three months ended March 31, 2025 compared to $1.2 million for the three months ended March 31, 2024.

Income taxes

Income tax expense increased $1.6 million for the three months ended March 31, 2025 to $3.7 million compared to $2.1 million for the three months ended March 31, 2024. The Company’s effective income tax rate was 22.0% and 21.1% for the three months ended March 31, 2025 and 2024, respectively.

Net income

Net income was $13.1 million, or $0.56 diluted earnings per share, for the three months ended March 31, 2025 compared to $8.0 million, or $0.35 diluted earnings per share, for the three months ended March 31, 2024.

Six months ended March 31, 2025 compared to the six months ended March 31, 2024

The following table summarizes our results of operations and other operating data for the periods presented, dollars in thousands:

Net sales

Net sales increased $56.1 million, or 9.2%, to $666.0 million for the six months ended March 31, 2025 compared to $609.8 million for the six months ended March 31, 2024, due to a $53.8 million increase in comparable store sales and a $6.4 million increase in new store sales, partially offset by a $4.1 million decrease in net sales related to closed stores. Daily average comparable store sales increased 8.9% for the six months ended March 31, 2025 compared to the six months ended March 31, 2024. The daily average comparable store sales increase for the six months ended March 31, 2025 resulted from a 5.6% increase in daily average transaction count and a 3.1% increase in daily average transaction size. Comparable store average transaction size was $48.94 for the six months ended March 31, 2025.

Gross profit

Gross profit increased $21.5 million, or 12.0%, to $200.6 million for the six months ended March 31, 2025 compared to $179.1 million for the six months ended March 31, 2024. Gross profit reflects earnings after product and store occupancy costs. Gross margin increased to 30.1% for the six months ended March 31, 2025 compared to 29.4% for the six months ended March 31, 2024. The increase in gross margin during the six months ended March 31, 2025 was driven by higher product margin primarily attributed to effective promotions, and store occupancy cost leverage.

Store expenses

Store expenses increased $9.1 million, or 6.6%, to $146.3 million for the six months ended March 31, 2025 compared to $137.2 million for the six months ended March 31, 2024. The increase in store expenses was primarily driven by higher compensation expenses. Store expenses as a percentage of net sales were 22.0% and 22.5% for the six months ended March 31, 2025 and 2024, respectively. The decrease in store expenses as a percentage of net sales reflects expense leverage.

Administrative expenses

Administrative expenses increased $3.6 million, or 19.1%, to $22.5 million for the six months ended March 31, 2025 compared to $18.9 million for the six months ended March 31, 2024. The increase in administrative expenses was driven by higher compensation expenses, including costs related to our Chief Financial Officer transition, and technology expenses. Administrative expenses as a percentage of net sales were 3.4% and 3.1% for the six months ended March 31, 2025 and 2024, respectively.

Pre-opening expenses

Pre-opening expenses were $0.9 million for each of the six months ended March 31, 2025 and 2024.

Interest expense, net

Interest expense, net of capitalized interest, was $1.7 million for the six months ended March 31, 2025 compared to $2.1 million for the six months ended March 31, 2024.

Income taxes

Income tax expense increased $1.9 million for the six months ended March 31, 2025 to $6.2 million compared to $4.3 million for the six months ended March 31, 2024. The Company’s effective income tax rate was 21.2% and 21.4% for the six months ended March 31, 2025 and 2024, respectively.

Net income

Net income was $23.0 million, or $0.99 diluted earnings per share, for the six months ended March 31, 2025 compared to $15.7 million, or $0.68 diluted earnings per share, for the six months ended March 31, 2024.

Non-GAAP financial measures

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are not measures of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization. We define Adjusted EBITDA as EBITDA as adjusted to exclude the effects of certain income and expense items that management believes make it more difficult to assess the Company’s actual operating performance, including certain items such as impairment charges, store closing costs, share-based compensation, amortization of software hosting arrangement (SaaS) implementation costs and non-recurring items.

The following table reconciles net income to EBITDA and Adjusted EBITDA, dollars in thousands:

25

EBITDA increased 34.2% to $25.4 million for the three months ended March 31, 2025 compared to $19.0 million for the three months ended March 31, 2024. EBITDA increased 25.6% to $46.7 million for the six months ended March 31, 2025 compared to $37.2 million for the six months ended March 31, 2024. EBITDA as a percentage of net sales was 7.6% and 6.2% for the three months ended March 31, 2025 and 2024, respectively. EBITDA as a percentage of net sales was 7.0% and 6.1% for the six months ended March 31, 2025 and 2024, respectively.

Adjusted EBITDA increased 33.3% to $26.3 million for the three months ended March 31, 2025 compared to $19.7 million for the three months ended March 31, 2024. Adjusted EBITDA increased 27.6% to $49.1 million for the six months ended March 31, 2025 compared to $38.5 million for the six months ended March 31, 2024. Adjusted EBITDA as a percentage of net sales was 7.8% and 6.4% for the three months ended March 31, 2025 and 2024, respectively. Adjusted EBITDA as a percentage of net sales was 7.4% and 6.3% for the six months ended March 31, 2025 and 2024, respectively.

Management believes some investors’ understanding of our performance is enhanced by including EBITDA and Adjusted EBITDA, which are non-GAAP financial measures. We believe EBITDA and Adjusted EBITDA provide additional information about: (i) our operating performance, because they assist us in comparing the operating performance of our stores on a consistent basis, as they remove the impact of non-cash depreciation and amortization expense as well as items not directly resulting from our core operations, such as interest expense and income taxes and (ii) our performance and the effectiveness of our operational strategies. Additionally, EBITDA is a component of a measure in our financial covenants under our Credit Facility.

Furthermore, management believes some investors use EBITDA and Adjusted EBITDA as supplemental measures to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. By providing these non-GAAP financial measures, together with a reconciliation from net income, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing our strategic initiatives.

Our competitors may define EBITDA and Adjusted EBITDA differently, and as a result, our measures of EBITDA and Adjusted EBITDA may not be directly comparable to EBITDA and Adjusted EBITDA of other companies. Items excluded from EBITDA and Adjusted EBITDA are significant components in understanding and assessing financial performance. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered in isolation or as an alternative to, or substitute for, net income or other financial statement data presented in the consolidated financial statements as indicators of financial performance. EBITDA and Adjusted EBITDA have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of the limitations are:

• EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;
• EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
• EBITDA and Adjusted EBITDA do not reflect any depreciation or interest expense for leases classified as finance leases;
• EBITDA and Adjusted EBITDA do not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;
• Adjusted EBITDA does not reflect share-based compensation, impairment of long-lived assets, store closing costs and amortization of SaaS implementation costs;
• EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes; and
• although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements.

Due to these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using EBITDA and Adjusted EBITDA as supplemental information.

Liquidity and Capital Resources

Our ongoing primary sources of liquidity are cash generated from operations, current balances of cash and cash equivalents and borrowings under our Credit Facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures predominantly in connection with opening, relocating and remodeling stores, debt service, cash dividends, share repurchases and corporate taxes. As of March 31, 2025, we had $21.2 million in cash and cash equivalents and $70.3 million available for borrowing under our Credit Facility.

In May 2016, our Board authorized a two-year share repurchase program pursuant to which the Company may repurchase up to $10.0 million in shares of the Company’s common stock. Our Board subsequently extended the share repurchase program – most recently in May 2024 – and the current program will terminate on May 31, 2026. We did not repurchase any shares of our common stock during the three months ended March 31, 2025. The dollar value of the shares of the Company’s common stock that may yet be repurchased under the share repurchase program is $8.1 million. Potential future share repurchases under the share repurchase program could be funded by operating cash flow, excess cash balances or borrowings under our Credit Facility. The timing and the number of shares repurchased, if any, will be dictated by our capital needs and stock market conditions.

We paid a quarterly cash dividend of $0.12 per share of common stock in each of the first two quarters of fiscal year 2025. On May 7, 2025, our Board approved the payment of a quarterly cash dividend of $0.12 per share of common stock to be paid on June 11, 2025 to stockholders of record as of the close of business on May 27, 2025.

We plan to continue to open new stores and relocate/remodel existing stores in the future, which may require us to borrow additional amounts under the Credit Facility from time to time. We believe that cash and cash equivalents, together with the cash generated from operations and the borrowing availability under our Credit Facility, will be sufficient to meet our working capital needs and planned capital expenditures, including capital expenditures related to new store needs, repayment of debt, stock repurchases and dividends for the next 12 months and the foreseeable future. Our working capital position benefits from the fact that we generally collect cash from sales to customers the same day or, in the case of credit or debit card transactions, within days from the related sale.

The following is a summary of our operating, investing and financing activities for the periods presented, dollars in thousands:

Operating Activities

Net cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization, impairment of long-lived assets and store closures, share-based compensation, and changes in deferred taxes, and the effect of changes in operating assets and liabilities. Cash provided by operating activities decreased $0.1 million, or 0.3%, to $36.7 million for the six months ended March 31, 2025 compared to $36.8 million for the six months ended March 31, 2024. The decrease in cash provided by operating activities was the result of a decrease in cash provided by operating assets and liabilities, partially offset by an increase in cash provided by net income as adjusted for non-cash items.

Investing Activities

Net cash used in investing activities decreased $6.6 million, or 29.5%, to $15.9 million for the six months ended March 31, 2025 compared to $22.5 million for the six months ended March 31, 2024. This decrease was primarily the result of decreases in acquisitions of property and equipment of $6.1 million and other intangibles of $0.2 million during the six months ended March 31, 2025 compared to the six months ended March 31, 2024, and was attributed to the timing of new store openings, relocations/remodels, and software projects under development.

We plan to spend approximately $20.1 million to $28.1 million on capital expenditures during the remainder of fiscal year 2025 primarily in connection with expected new store openings and store relocations/remodels.

Acquisition of property and equipment not yet paid decreased $2.7 million to $2.7 million for the six months ended March 31, 2025 compared to $5.4 million for the six months ended March 31, 2024 due to the timing of payments related to new store openings and relocations/remodels.

Financing Activities

Net cash used in financing activities consists primarily of borrowings and repayments under our Credit Facility and dividends paid to stockholders. Net cash used in financing activities was $8.5 million for the six months ended March 31, 2025 compared to $21.7 million for the six months ended March 31, 2024. During the six months ended March 31, 2024, we paid a special cash dividend to stockholders of $22.7 million.

Credit Facility

The aggregate revolving commitment amount available under the Credit Facility is $72.5 million, including a $5.0 million sub-limit for standby letters of credit. The operating company is the borrower under the Credit Facility, and its obligations under the Credit Facility are guaranteed by the holding company and VC2. The Credit Facility is secured by a lien on substantially all of the Company’s assets. The Company has the right to borrow, prepay and re-borrow revolving amounts under the Credit Facility at any time prior to the maturity date without premium or penalty. On November 16, 2023, we amended the Credit Facility to: (i) increase our aggregate revolving commitments from $50.0 million to $75.0 million; (ii) extend the maturity date of the revolving commitments under the Credit Facility to November 16, 2028; (iii) permit payment of a one-time cash dividend of up to $25.0 million no later than December 31, 2023; and (iv) increase the Company’s restricted payment capacity by $2.5 million, allowing the Company to repurchase shares of common stock and pay dividends on its common stock in an aggregate amount not to exceed $15.0 million during any fiscal year. The aggregate revolving commitment amount is automatically and permanently reduced by $2.5 million on each anniversary date until the Credit Facility matures on November 16, 2028, unless we have previously exercised our option to reduce the aggregate revolving commitments to a lower amount.

Base rate loans under the Credit Facility bear interest at a fluctuating base rate as determined by the lenders’ administrative agent based on the most recent compliance certificate of the operating company and stated at the highest of: (i) the federal funds rate plus 0.50%; (ii) the prime rate; and (iii) Term SOFR plus 1.00%, subject to the applicable interest rate floor, less the lender spread based upon the Company’s consolidated leverage ratio. Term SOFR loans under the Credit Facility bear interest based on Term SOFR for the interest period plus the lender spread based upon the Company’s consolidated leverage ratio. The unused commitment fee is also based upon the Company’s consolidated leverage ratio.

The Credit Facility requires compliance with certain customary operational and financial covenants, including a consolidated leverage ratio. The Credit Facility also contains certain other customary limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions, among other limitations. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company without the required lenders’ consent, provided that so long as no default exists or would arise as a result thereof, the operating company may pay cash dividends to the holding company in an amount sufficient to allow the holding company to: (i) pay various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses incurred in the ordinary course of business and (ii) repurchase shares of common stock and pay dividends on our common stock in an aggregate amount not to exceed $15.0 million during any fiscal year.

We had no revolving loan amounts outstanding under the Credit Facility as of March 31, 2025 and September 30, 2024. As of March 31, 2025 and September 30, 2024, we had undrawn, issued and outstanding letters of credit of $2.2 million, which were reserved against the amount available for borrowing under the Credit Facility. We had $70.3 million and $72.8 million available for borrowing under the Credit Facility as of March 31, 2025 and September 30, 2024, respectively.

As of March 31, 2025 and September 30, 2024, the Company was in compliance with all covenants under the Credit Facility.

Share Repurchases

Certain information about the Company's share repurchases is set forth under the heading "Share Repurchases" in Note 6 of Notes to Unaudited Interim Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q.

Recent Accounting Pronouncements

See Note 2 to the consolidated financial statements included in this Form 10-Q.

Critical Accounting Policies

The preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. Actual amounts may differ from these estimates. We base our estimates on historical experience and on various other assumptions and factors that we believe to be reasonable under the circumstances. We evaluate our accounting policies and resulting estimates on an ongoing basis to make adjustments we consider appropriate under the facts and circumstances.

Critical accounting policies that affect our more significant judgments and estimates used in the preparation of our financial statements include accounting for income taxes, accounting for impairment of long-lived assets and accounting for leases, which are discussed in more detail under the caption “Critical Accounting Policies” under Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K.

There have been no material changes regarding our market risk position from the information provided under Item 7A – “Quantitative and Qualitative Disclosures about Market Risk” in our Form 10-K.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officers and principal financial and accounting officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act, as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on that evaluation, our principal executive officers and principal financial and accounting officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2025.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The risk factor below updates those disclosed in Part I, “Item 1A-Risk Factors,” of our Form 10-K.

New or increased tariffs on the foreign-sourced goods that we sell or the foreign-sourced materials incorporated into such goods could have a material adverse effect on our business, financial condition and results of operations.

We rely on foreign suppliers to source certain of the products that we sell. The United States recently has imposed, or has proposed, tariffs on a broad range of foreign-sourced products and materials including tariffs on products imported from China, Mexico and Canada. In response, certain trading partners of the United States, including China, have imposed retaliatory tariffs and other measures on goods manufactured in the United States. Although the tariffs imposed have not had a material impact on our business, financial condition and results of operations, there can be no assurance that this will continue to be the case. The imposition of additional tariffs and trade restrictions on the foreign-sourced goods that we sell, or the foreign-sourced materials that are incorporated into such goods, may cause us to incur higher costs to procure certain products we offer, which may require us to raise prices on such products. If our competitors do not keep pace with any such price increases or are able to offset the impact of tariffs through other actions, our competitive position may be adversely affected. In addition, a prolonged trade conflict between the United States and its trade partners could result in adverse and uncertain economic conditions and adversely impact demand for our products. Any of these factors could have a material adverse effect on our business, financial condition and results of operations.