10-K

Table Of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2015

COMMISSION FILE NUMBER: 001-35608

 

Natural Grocers by Vitamin Cottage, Inc.

(Exact name of registrant as specified in its charter)

Delaware	45-5034161
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)

12612 West Alameda Parkway

Lakewood, Colorado 80228

(Address of principal executive offices)

(303) 986-4600

(Registrant’s telephone number, including area code)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☒
Non-accelerated filer ☐	Smaller reporting company ☐
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Based on the closing price of the registrant’s common stock on March 31, 2015, the aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $265,209,539.

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of December 8, 2015 was 22,498,336.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference from the registrant’s Definitive Proxy Statement on Schedule 14A for the 2016 Annual Meeting of the Stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2015.

Natural Grocers by Vitamin Cottage, Inc.

Annual Report on Form 10-K

For the Fiscal Year Ended September 30, 2015

Table of Contents

		Page Number
	PART I
Item 1.	Business	1
Item 1A.	Risk Factors	15
Item 1B.	Unresolved Staff Comments	30
Item 2.	Properties	31
Item 3.	Legal Proceedings	31
Item 4.	Mine Safety Disclosures	32
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	32
Item 6.	Selected Financial Data	34
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 8.	Financial Statements and Supplementary Data	54
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	79
Item 9A.	Controls and Procedures	79
Item 9B.	Other Information	79
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	80
Item 11.	Executive Compensation	80
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	80
Item 13.	Certain Relationships and Related Transactions, and Director Independence	80
Item 14.	Principal Accounting Fees and Services	80
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	80
SIGNATURES		81

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Except where the context otherwise requires or where otherwise indicated, all references herein to ‘‘we,’’ ‘‘us,’’ ‘‘our,’’ ‘‘Natural Grocers,’’ and the “Company’’ refer collectively to Natural Grocers by Vitamin Cottage, Inc. and its consolidated subsidiaries.

FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K (the Form 10-K) includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 in addition to historical information. These forward-looking statements are included throughout this Form 10-K, including in the sections entitled “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements that are not statements of historical fact, including those that relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information, are forward looking statements. We may use the words “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “future,” “target” and similar terms and phrases to identify forward-looking statements in this Form 10-K.

The forward-looking statements contained in this Form 10-K are based on management’s current expectations and are subject to uncertainty and changes in circumstances. We cannot assure you that future developments affecting us will be those that we have anticipated. Actual results may differ materially from these expectations due to changes in global, regional or local political, economic, business, competitive, market, regulatory and other factors, many of which are beyond our control. We believe that these factors include those described in “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, our actual results may vary in material respects from those projected in these forward-looking statements.

Any forward-looking statement made by us in this Form 10-K speaks only as of the date of this report. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by applicable securities laws. You are advised, however, to consult any disclosures we may make in our future reports filed with the Securities and Exchange Commission (the SEC). Such reports may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 and may also be accessed on the SEC’s website at www.sec.gov. Our filings with the SEC are also available, free of charge, through our website at www.naturalgrocers.com.

PART I

Item 1. Business.

General

Natural Grocers is an expanding specialty retailer of natural and organic groceries and dietary supplements. We focus on providing high-quality products at affordable prices, exceptional customer service, nutrition education and community outreach. We strive to generate long-term relationships with our customers based on transparency and trust by:

● selling only natural and organic groceries and dietary supplements that meet our strict quality guidelines - we do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils;

● utilizing an efficient and flexible smaller-store format to offer affordable prices and a shopper-friendly retail environment; and

● enhancing our customers’ shopping experience by providing free science-based nutrition education to help our customers make well-informed health and nutrition choices.

Our History and Founding Principles

Our founders, Margaret and Philip Isely, were early proponents of the connection between health and the use of natural and organic products and dietary supplements. In the mid-1950’s, Margaret transformed her health and the health of her family by applying concepts and principles she learned from books on nutrition. This inspired the Iselys to provide the same type of nutrition education to their community. The Iselys started by lending books on nutrition and providing samples of whole grain bread door-to-door in Golden, Colorado and subsequently concluded they could develop a viable business that would also improve their customers’ well-being. Over time, they fostered relationships through nutrition education and began taking orders for dietary supplements, whole grain bread and unprocessed foods. As their customers gained more knowledge about nutrition, they were empowered to make changes to their diets with the objective of supporting their health. Using this model as the foundation for their business, the Iselys opened their first store in 1958, which they later moved to a modest cottage.

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We are committed to maintaining the following founding principles, which have helped foster our growth:

● Nutrition Education. We provide nutrition education in the communities we serve. Empowering our customers and our employees to take charge of their lives and their health is the foundation upon which our business is built.

● Quality. Every product on our shelves must go through a rigorous screening and approval process. Our mission includes providing the highest quality groceries and supplements, Natural Grocers branded products and only United States Department of Agriculture (USDA) certified organic, fresh produce at the best prices in the industry.

● EDAP - Every Day Affordable Price®. We work hard to secure the best possible prices on all of our customers’ favorite natural and organic foods and supplements. We believe everyone should be able to afford to help take care of their health by buying high quality competitively priced natural and organic products.

● Community. From free nutrition education lectures, to bag-free checkouts, to sourcing local products, to our donation program, we work hard to serve the communities that help shape our world.

● Employees. Our employees make our company great. We work hard to ensure that our employees are able to live a healthy, balanced lifestyle. We support them with free nutrition education programs, good pay and excellent benefits.

In 1998, the second generation of the family, including Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, purchased our predecessor and the Vitamin Cottage® trademark and assumed control of the business. Since then, we have grown our store count from 11 stores in Colorado to 103 stores in 18 states as of September 30, 2015. We have also implemented numerous organizational and operational improvements that have enhanced our ability to scale our operations. We believe that by staying true to our founding principles, we have been able to continue to attract new customers, extend our geographic reach and further solidify our competitive position.

Our Markets

We operate within the natural products retail industry, which is a subset of the United States grocery industry and the dietary supplement business. This industry includes conventional supermarkets, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. Industry-wide sales of natural and organic foods and dietary supplements have experienced meaningful growth over the past several years, and we believe that growth will continue for the foreseeable future.

We believe the growth in sales of natural and organic foods and dietary supplements continues to be driven by numerous factors, including:

● greater consumer focus on high-quality nutritional products;

● an increased awareness of the importance of good nutrition to long-term wellness;

● an aging United States population seeking to support healthy aging;

● heightened consumer awareness about the importance of food quality and a desire to avoid pesticide residues, growth hormones, artificial ingredients and genetically engineered ingredients in foods;

● growing consumer concerns over the use of harmful chemical additives in body care and household cleaning supplies;

● well-established natural and organic brands, which generate additional industry awareness and credibility with consumers; and

● the growth in the number of consumers with unique dietary requirements as a result of allergies, chemical sensitivities, auto-immune disorders and other conditions.

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Our Competitive Strengths

We believe we are well-positioned to capitalize on favorable natural and organic grocery and dietary supplement industry dynamics as a result of the following competitive strengths:

Strict focus on high-quality natural and organic grocery products and dietary supplements. We offer high-quality products and brands, including an extensive selection of widely-recognized natural and organic food, dietary supplements, body care products, pet care products and books. We offer our customers an average of approximately 20,700 Stock Keeping Units (SKUs) of natural and organic products per comparable store (stores open for 13 months or longer), including an average of approximately 6,500 SKUs of dietary supplements. We believe our broad product offering enables our customers to shop our stores for substantially all of their grocery and dietary supplement purchases. In our grocery departments, we only sell USDA certified organic produce and do not approve for sale grocery products that are known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. In addition, we only sell pasture-raised, non-confinement dairy products. Consistent with this strategy, our product selection does not include items that do not meet our strict quality guidelines. Our store managers enhance our robust product offering by customizing their stores’ selections to address the preferences of local customers. All products undergo a stringent review process to ensure the products we sell meet our strict quality guidelines, which we believe helps us generate long-term relationships with our customers based on transparency and trust.

Engaging customer service experience based on education and empowerment. We strive to offer consistently exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience, enhances customer loyalty and generates repeat visits from our clientele. A key aspect of our customer service model is to provide free nutrition education to our customers. We believe this focus provides an engaging retail experience while also empowering our customers to make informed decisions about their health. We offer our science-based nutrition education through our trained employees, our Health Hotline® newsletter and sales flyer, community out-reach programs, one-on-one nutrition health coaching, nutrition classes and cooking demonstrations. Our commitment to nutrition education and customer empowerment is emphasized throughout our entire organization, from executive management to store employees. Every store also maintains a Nutritional Health Coach, or NHC, position. The NHC is responsible for training our store employees and educating our customers about nutrition in accordance with applicable local, state and federal regulations. Each NHC must have earned a degree or certificate in nutrition or a related field from an accredited school, complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. Substantially all of our NHCs are full-time employees. We believe our NHC position represents a key element of our customer service model.

Scalable operations and replicable, cost-effective store model. We believe our scalable operating structure, attractive new store model, flexible real estate strategy and disciplined approach to new store development allow us to maximize store performance and continue to grow our store base. Our store model has been successful in highly competitive markets and has supported significant growth outside of our original Colorado geography. We believe our supply chain and infrastructure are scalable and will accommodate significant growth based on the ability of our primary distribution relationships to effectively service our planned store locations. Our investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems support this growth. We have also implemented a human resources information and learning management system (HRIS) to further support the scalability of our operations. In addition, we have established effective site selection guidelines, as well as scalable procedures, to enable us to open a new store within approximately nine months from the time of lease execution. The smaller-store footprint made possible by our limited offering of prepared foods reduces real estate costs, labor costs and perishable inventory shrink and allows us to leverage our new store opening costs.

Experienced and committed management team with proven track record. Our executive management team has an average of 37 years of experience in the natural grocery industry, while our entire management team has an average of over 29 years of relevant experience. Since the second generation of the Isely family assumed control of the business in 1998, we have grown our store count from 11 stores to 103 stores as of September 30, 2015 by remaining dedicated to our founding principles. Over their tenure, members of our executive management team have been instrumental in establishing a successful, scalable operating model, generating consistently strong financial results and developing an effective site selection and store opening process. The depth of our management experience extends beyond our home office. As of September 30, 2015, approximately 45% of our store managers at comparable stores had tenures of over four years with us, and our store and department managers at these stores had average tenures of over three years with us. In addition, we have a track record of promoting store management personnel from within. We believe our management’s experience at all levels will allow us to continue to grow our store base while maintaining operational excellence by driving efficiencies in store and back room operations, managing inventory levels and focusing on exceptional customer service.

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Our Growth Strategies

We are pursuing several strategies to continue our profitable growth, including:

Expand our store base. We intend to continue expanding our store base through new store openings in existing markets, as well as penetrating new markets, by leveraging our core competencies of site selection and efficient store openings. Based upon our operating experience and research conducted for us by The Buxton Company, a customer analytics firm, we believe the entire United States market can support over 1,100 Natural Grocers stores, including approximately 230 additional Natural Grocers stores in the 19 states in which we currently operate or have signed leases. In fiscal years 2015 and 2014, we opened 16 and 15 new stores, respectively, and we plan to open 23 new stores in fiscal year 2016, of which three have opened during the first quarter of fiscal year 2016 prior to the filing of this Form 10-K. We intend to target new store openings at or above our current levels over the near term.

Current store locations, signed leases and new store locations.

*Includes signed leases for stores to be opened subsequent to fiscal year 2015. We have 18 signed leases for stores planned to open in fiscal 2016 and 2017.

Increase sales from existing customers. We have achieved positive comparable store sales growth for over 53 consecutive quarters. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging customer experience by providing science-based nutrition education and a differentiated merchandising strategy that delivers affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to continue to utilize targeted marketing efforts to reach our existing customers, which we anticipate will drive customer transactions and convert occasional, single-category customers into core, multi-category customers.

Grow our customer base. During fiscal year 2015, we implemented several measures aimed at building our brand awareness and growing our customer base, including: (i) redesigning our website (www.naturalgrocers.com) to enhance functionality, create a more engaging user experience and increase its reach and effectiveness; (ii) introducing the{N}power^SM customer appreciation program at all our stores; (iii) offering home delivery services in select markets; and (iv) developing new collateral marketing materials. We believe offering nutrition education has historically been one of our most effective marketing strategies for reaching new customers and increasing the demand for natural and organic groceries and dietary supplements in our markets. To maximize the impact of our Nutritional Health Coaches, we have increased their focus on relationship-building opportunities in our communities and with our customers, including hosting additional educational cooking events, lectures and classes in our stores. Additionally, we seek to attract new customers by enhancing their nutrition knowledge through printed and digital versions of our broad range of educational resources, including the distribution of our Health Hotline newsletter and sales flyer, and via the internet and social media. In addition to offering nutrition education, our strategy is to attract new customers with our EDAP - Every Day Affordable Price and to build community awareness through our support of local vendors and charities.

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Improve operating margins. We expect to continue to improve our operating margins as we benefit from investments we have made or are making in fixed overhead and information technology, including the implementation of our enterprise resource planning (ERP) system in fiscal year 2010 and the implementation of the HRIS in fiscal year 2014. We anticipate these investments will support our long-term growth strategy with only a modest amount of additional capital. We expect to achieve greater economies of scale through sourcing and distribution as we add more stores. In addition, to achieve additional operating margin expansion, we intend to further optimize performance, maintain appropriate store labor levels and effectively manage product selection and pricing.

Our Stores

Our stores offer a comprehensive selection of natural and organic groceries and dietary supplements in a smaller-store format that aims to provide a convenient, easily shopped and relaxed environment for our customers. Our store design emphasizes a clutter-free, organized feel, a quiet ambience accented with warm lighting and the absence of aromas from meat and seafood counters present in many of our competitors’ stores. We believe our core customers consider us a destination stop for their nutritional education and information, natural and organic products and dietary supplements.

Our Store Format. Our stores range from 5,000 to 16,000 selling square feet, and average approximately 10,000 selling square feet. In fiscal year 2015, our 16 new stores averaged approximately 12,000 selling square feet. Approximately one quarter of our stores’ selling square footage is dedicated to dietary supplements. Some of our stores also include a dedicated community room available for public gatherings, a demonstration kitchen for cooking education and/or lecture space. Our comparable stores sell an average of approximately 20,700 SKUs of natural and organic products per store, including an average of approximately 6,500 SKUs of dietary supplements.

The following diagram depicts a typical new store layout:

Site Selection. Our real estate strategy is adaptable to a variety of market conditions. When selecting locations for new stores, we use analytical models, based on research provided by The Buxton Company and our extensive experience, to identify promising store locations. We typically locate new stores in prime locations which offer easy customer access and high visibility. Many of our stores are near other supermarkets or gourmet food retailers, and we complement their conventional product offerings with high-quality, affordable natural and organic groceries and dietary supplements in an efficient and convenient retail setting. Our model for selecting viable new store locations incorporates factors such as target demographics, community characteristics, nearby retail activity and other measures and is based on first-hand observation of the community’s characteristics surrounding each site. We have teams of employees dedicated to opening new stores efficiently and quickly, typically within approximately nine months from the time of lease execution.

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Store-Level Economics. Since January 1, 2005, opening new stores has required an average upfront capital investment of approximately $2.1 million. We anticipate that our fiscal year 2016 new stores will require an average upfront capital investment of approximately $2.2 million, consisting of capital expenditures of approximately $1.7 million, net of tenant allowances, initial inventory of approximately $0.3 million, net of payables, and pre-opening expenses of approximately $0.2 million. We target approximately four years to recoup our initial net cash investments and expect to achieve approximately 30% cash-on-cash returns by the end of the fifth year following the opening.

Individual new store investment levels and the performance of new store locations may differ widely from originally targeted levels and from store-to-store due to a variety of factors, and these differences may be material. In particular, investments in individual stores, store-level sales, profit margins, payback periods and cash-on-cash return levels are impacted by a range of risks and uncertainties beyond our control, including those described under the caption “Risk Factors.”

Our Focus on Nutrition Education

Nutrition education is one of our founding principles and is a primary focus for all employees. We believe our emphasis on science-based nutrition education differentiates us from our competitors and creates a unique shopping experience for our customers.

Our Nutritional Health Coaches, or NHCs, are a core element of our nutrition education program. Every store has a full-time NHC position to educate customers and train employees on nutrition. NHCs must have earned a degree or certificate in nutrition or a related field from an accredited school, complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. To educate and empower customers to make informed nutrition choices, our NHCs are available for complimentary one-on-one nutrition health coaching sessions. Each NHC is also responsible for various relationship-building opportunities in our communities and with our customers, including educational activities such as nutrition classes, lectures, seminars, health fairs and store tours. To maximize the impact of our NHCs, we have increased their focus on hosting cooking events (at our stores with demonstration kitchens) and have increased the number of in-store educational events they conduct. We believe that our NHCs’ focus on relationship-building opportunities in our communities and with our customers helps to enhance our marketing and branding initiatives. Additionally, our NHCs are an onsite resource for nutrition training and education for our employees. Each NHC trains our employees to use a compliant educational approach to customer service without attempting to diagnose or treat specific conditions or ailments. We believe our NHC position is a competitive differentiator and represents a key element of our customer service model.

Our training and education programs are supplemented by outside experts, online materials and printed handouts. We also use our Health Hotline to educate our customers. The Health Hotline is a newsletter and sales flyer which is published eight times per year and includes in-depth articles on health and nutrition, along with a selection of sale items. During fiscal year 2015, we redesigned the www.naturalgrocers.com website to enhance functionality and create a more engaging user experience, including readily accessible additional nutritional education information and resources.

Our Products 

Product Selection Guidelines. We have a set of strict quality guidelines covering all products we sell. For example:

● we do not approve for sale food known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils, regardless of the proportion of its natural or organic ingredients;

● we only sell USDA certified organic produce;

● we only sell pasture-raised, non-confinement dairy products;

● we only sell meats naturally raised without hormones, antibiotics or treatments and that were not fed animal by-products; and

● we do not sell wine, beer, liquor or tobacco.

Our product review team analyzes all new products and approves them for sale based on ingredients, price and uniqueness within the current product set. We actively research new products in the marketplace through our product vendors, private label manufacturers, scientific findings, customer requests and general trends in popular media. Our stores are able to fully merchandise all departments by providing an extensive assortment of natural and organic products. We do not believe we need to sell conventional products to fill our selection, increase our margins or attract more customers.

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What We Sell. We operate both a full-service natural and organic grocery store and a dietary supplement store within a single retail location. The following is a breakdown of our sales mix for the fiscal year ended September 30, 2015:

The products in our stores include:

● Grocery. We offer a broad selection of natural and organic grocery products with an emphasis on minimally processed and single ingredient products that are not known to contain artificial colors, flavors, preservatives or sweeteners or partially hydrogenated or hydrogenated oils. Additionally, we carry a wide variety of products associated with special diets such as gluten free, vegetarian and non-dairy. Our grocery products include:

■ Produce. We sell only USDA certified organic produce and source from local, organic producers whenever feasible. Our selection varies based on seasonal availability, and we offer a variety of organic produce offerings that are not typically found at conventional food retailers.

■ Bulk Food and Private Label Products. We sell a wide selection of private label repackaged bulk and other products, including nuts, water, pasta, canned seafood, dried fruits, grains, granolas, honey, eggs, herbs, spices and teas. We also sell peanut and almond butters, freshly ground in-store under the Natural Grocers brand.

■ Dry, Frozen and Canned Groceries. We offer a wide variety of natural and organic dry, frozen and canned groceries, including cereals, soups, baby foods, frozen entrees and snack items. We offer a broad selection of natural chocolate bars, and energy, protein and food bars.

■ Meats and Seafood. We only offer naturally-raised or organic meat products. The meat products we offer come from animals that have never been treated with antibiotics or hormones or fed animal by-products. Additionally, we only buy from companies we believe employ humane animal-raising practices. Our seafood items are generally frozen at the time of processing and sold from our freezer section, thereby ensuring freshness and reducing food spoilage and safety issues.

■ Dairy Products and Dairy Substitutes. We offer a broad selection of natural and organic dairy products such as milk, eggs, cheeses, yogurts and beverages, as well as non-dairy substitutes made from almonds, coconuts, rice and soy. During fiscal year 2015, we began to sell only pasture-raised, non-confinement dairy products at all our stores.

■ Prepared Foods. Our stores have a convenient selection of refrigerated prepared fresh food items, including salads, sandwiches, salsa, humus and wraps. The size of this offering varies by location.

■ Bread and Baked Goods. We receive regular deliveries of a wide selection of bakery products for our bakery section, which includes an extensive selection of gluten-free items.

■ Beverages. We offer a wide variety of beverages containing natural and organic ingredients. We also offer low-cost, self-serve filtered drinking water that is dispensed into one-gallon or larger containers provided by our customers.

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● Dietary Supplements. Our dietary supplement department primarily sells name-brand supplements, as well as a line of private label dietary supplements. The department is carefully organized to help both employees and customers find products efficiently. We generally offer several different formulations and potencies for each type of product in order to meet our customers’ varying needs.

● Other.

■ Body Care. We offer a full range of cosmetics, skin care, hair care, fragrance and personal care products containing natural and organic ingredients. Our body care offerings range from bargain-priced basics to high-end formulations.

■ Pet Care. We offer a full line of natural pet care and food products that comply with our human food guidelines.

■ Household and General Merchandise. Our offerings include sustainable, hypo-allergenic and fragrance-free household products, including cleaning supplies, paper products, dish and laundry soap and other common household products, including diapers.

■ Books and Handouts. We stock approximately 400 titles in each store’s book department. Titles cover various approaches to diet, lifestyle and health. Additionally, we offer hundreds of handouts on various health topics and dietary supplements to our customers free of charge.

Quality Assurance. We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe are compliant with established regulatory and industry guidelines. Our purchasing department requires a complete supplier and product profile as part of the approval process. Our dietary supplement suppliers must follow Food and Drug Administration (FDA) current good manufacturing practices supported by quality assurance testing for both the base ingredients and the finished product. We expect our suppliers to comply with industry best practices for food safety.

Many of our suppliers are inspected and certified under the USDA National Organic Program, voluntary industry associations, and other third party auditing programs with regard to additional ingredients, manufacturing and handling standards. Each Natural Grocers store is certified as an organic handler and processor by an accredited USDA certifier in the calendar year after it opens, and annually thereafter. We operate all our stores in compliance with the National Organic Program standards, which restricts the use of certain substances for cleaning and pest control and requires rigorous recordkeeping, among other requirements.

Our Pricing Strategy

We have an EDAP - Every Day Affordable Price designation on many products, while also providing special sale pricing on hundreds of additional items. We believe our pricing strategy allows our customers to shop our stores on a regular basis for their groceries and dietary supplements.

The key elements of our pricing strategy include:

● EDAP - Every Day Affordable Price throughout our stores;

● heavily advertised Health Hotline deals supported by manufacturer participation;

● in-store specials generally lasting for one month and not advertised outside the store;

● managers’ specials, such as clearance, overstock, short-dated or promotional incentives; and

● specials on seasonally harvested produce.

As we continue to expand our store base, we believe there are opportunities for increased leverage in fixed costs, such as administrative expenses, as well as increased economies of scale in sourcing products. We strive to keep our product, operating and general and administrative costs low, which allows us to continue to offer attractive pricing for our customers.

Our Store Operations

Store Hours. Our stores are open from 8:00 a.m. to 9:04 p.m., Monday through Saturday, and from 8:00 a.m. to 7:35 p.m. on Sunday.

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Store Management and Staffing. Our typical store staffing includes a manager and assistant manager, with department managers in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments, as well as several non-management employees. Each store manager is responsible for monthly store profit and loss, including labor, merchandising and inventory costs. We also employ regional managers to oversee all store operations for regions consisting of approximately 13 to 15 stores.

To ensure a high level of service, all employees receive training and guidance on customer service skills, product attributes and nutrition education. Employees are carefully trained and evaluated based on a requirement that they present nutrition information in an appropriate and legally compliant educational context while interacting with customers. Additionally, store employees are cross-trained in various functions, including cashier duties, stocking and receiving product.

Every store also maintains a Nutritional Health Coach, or NHC, position. The NHC is responsible for training our store employees and educating our customers in accordance with applicable local, state and federal regulations. Each NHC must have earned a degree or certificate in nutrition or a related field from an accredited school, complete continuing education in nutrition and be thoroughly committed to fulfilling our mission. Substantially all of our NHCs are full-time employees. The NHCs are overseen by Regional Nutritional Health Coach Managers.

Bulk Food Repackaging Facility and Distribution Center. We lease a 107,000 square foot bulk food repackaging facility and distribution center located in Golden, Colorado. That facility also houses a training center and certain administrative support functions. During fiscal year 2015, we exercised an option to lease additional space in the building that houses the bulk food repackaging facility and distribution center. As a result of our exercise of that option, we plan to expand the bulk food repackaging facility and distribution center to approximately 150,000 square feet.

Inventory. We use a robust merchandise management and perpetual inventory system that values goods at moving average cost. We manage shelf stock based on weeks-on-hand relative to sales, resupply time and minimum economic order quantity.

Sourcing and Vendors. We source from approximately 1,200 suppliers, and offer over 3,100 brands. These suppliers range from small independent businesses to multi-national conglomerates. As of September 30, 2015, we purchased approximately 79% of the goods we sell from our top 20 suppliers. For the fiscal year ended September 30, 2015, approximately 57% of our total purchases were from United Natural Foods Inc. and its subsidiaries (UNFI). We maintain good relations with UNFI and believe we have adequate alternative supply methods, including self-distribution.

We contract with third-party manufacturers to produce groceries and dietary supplements under our private labels, which include the Natural Grocers and Vitamin Cottage brands. We have longstanding relationships with our suppliers, and we require disclosure from them regarding quality, freshness, potency and safety data information. Our bulk food private label products are packaged by us in pre-packed sealed bags to help prevent contamination while in transit and in our stores. Unlike most of our competitors, most of our private label nuts, trail mix and flours are refrigerated in our warehouse and stores to maintain freshness.

Our Employees

Commitment to our employees is one of our five founding principles. Employees are eligible for health, long-term disability, vision and dental insurance coverage, as well as Company paid short-term disability and life insurance benefits, after they meet eligibility requirements. Additionally, our employees are offered a 401(k) retirement savings plan with discretionary contribution matching opportunities. We believe we pay above average retail wages, and all employees earn an additional $0.75 per hour, up to $30 a week, in “Vitamin Bucks” which can be used to purchase products in our stores. It is important to us that our employees live a healthy, balanced lifestyle, and we believe the Vitamin Bucks incentive provides an additional resource for our employees to purchase natural and organic products. This further offers our employees the opportunity to become more familiar with our products, which we believe improves the customer service our employees are able to provide. We believe these and other factors result in higher retention rates and encourage our employees to appreciate our culture, which helps them better promote our brand.

All employees are eligible to participate in our discretionary pay-for-performance incentive compensation plan after meeting certain length of service requirements. The pay-for-performance incentive compensation plan sets certain Company-level financial goals that must be met before it can be funded. If the financial goals are achieved, additional criteria for store-level incentive compensation include meeting sales projections, sales to labor hour goals and cost of goods sold metrics. We believe these criteria help align all store employees with both corporate and store-level financial goals. We have an established set of standard operating procedures, including hiring and human resource policies, training practices and operational instruction manuals. This allows each store to operate with strict accountability and still maintain independence to respond to its unique circumstances.

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As of September 30, 2015, we employed 2,447 full-time and 383 part-time (less than 30 hours per week) employees, including a total of 201 employees at our home office and our bulk food repackaging facility and distribution center. None of our employees is subject to a collective bargaining agreement. We believe we have good relations with our employees.

Our Customers

The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and nutrition have led to an increase in our core customer base. We believe the demands for affordable, nutritious food and dietary supplements are shared attributes of our core customers, regardless of their socio-economic status. Additionally, we believe our core customers prefer a retail store environment that offers carefully selected natural and organic products and dietary supplements. Our customers tend to be interested in health and nutrition, and expect our store employees to be highly knowledgeable about these topics and related products.

An analysis of our Health Hotline subscriber list indicates that our customers come from broad geographic segments, including urban, suburban and rural areas, which reflects the varied characteristics and portability of our store locations.

Our Communities

One of our founding principles is to be an active member and steward of the communities we serve. As a commitment to this principle, we:

● provide extensive free educational services to customers in the form of lectures, classes, printed resources, online resources, publications and one-on-one nutrition coaching;

● participate in health fairs, school outreach, community wellness events and other activities to engage with and educate the community;

● disseminate new research on nutrition information;

● participate in the legislative and regulatory process at local, state and national levels so that our customers have access to quality food and dietary supplements and the educational resources to guide their own wellness;

● continually strive to source products and services from local producers and vendors;

● carefully collect all of our excess or distressed food and merchandise and donate it to local non-profit organizations;

● provide cash to local food banks, making donation determinations based on the number of customers who shop our stores with their own bags;

● do not provide paper or plastic bags at our registers and encourage the use of reusable totes;

● reduce our energy costs and carbon footprint using efficient heating, ventilation and air conditioning, lighting, and refrigerating systems;

● implement strategies to eliminate excess packaging, energy and transportation costs;

● recycle and reuse paper, plastic, glass and electronic products whenever possible; and

● use healthy and environmentally responsible building materials and finishes in our new stores and remodels.

Marketing and Advertising

A significant portion of our marketing efforts is focused on educating our customers on the benefits of natural and organic grocery products and dietary supplements. Our customer outreach programs provide practical general nutrition knowledge to a variety of groups and individuals, schools, businesses, families and seniors. These educational efforts fulfill one of our founding principles and also offer us the opportunity to build relationships with customers and community influencers.

Health Hotline. At the heart of our marketing efforts is our Health Hotline, a 28-page newsletter and sales flyer which contains a mix of in-depth health and nutrition articles, along with a selection of popular sale items. The articles aim to be relevant, science-based and written to reflect the most recent research findings. The full version of the Health Hotline is published eight times per year and is mailed to over 350,000 subscribers by United States mail. Additionally, approximately 160,000 copies of each release are distributed in our stores. Over 6.3 million copies of a condensed version of the Health Hotline, which typically emphasizes only one article or topic, are inserted into the newspaper in many of our communities approximately 35 times per year. In addition, an electronic version of the condensed Health Hotline is distributed to over 90,000 subscribers. Generally, we negotiate with our suppliers for significantly lower costs on Health Hotline sale items, which in turn allows us to offer low sale prices to our customers. Focused staff training at all locations occurs congruent with the release of each Health Hotline to ensure that store staff are familiar with the content in each issue.

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Web Sites and Social Media. We maintain www.naturalgrocers.com as our official company website to host store information, sales flyers, educational materials, product information, policies and contact forms, advocacy and news items and e-commerce activities. We redesigned our website in fiscal year 2015 to enhance functionality, create a more engaging user experience and increase its reach and effectiveness. The website redesign was intended to be part of an overall enhanced branding strategy to more effectively communicate our brand’s unique and compelling attributes, including our founding principles. We believe the continued growth of site visitors, page views and other metrics of our website activity indicates that our content is timely and informative to the communities we serve. Our website is interlinked with other online and social media outlets, including Facebook, Instagram, Twitter, Pinterest and YouTube. During fiscal year 2015, we started to use digital engagement methods to increase awareness of an affinity for our brand among consumers, bloggers and on-line influencers. We expect to increase such digital engagement activities during fiscal year 2016.

{N}power Customer Appreciation Program. During fiscal year 2015, we completed the introduction of the {N}power customer appreciation program at all our stores. Registered users of {N}power receive digital coupons, personalized offers and other rewards, all by providing their phone number at the time of checkout. We believe the {N}power customer appreciation program will enhance customer loyalty and increase customer engagement levels.

Home Delivery Services. During fiscal year 2015, we began home delivery services in select markets in partnership with a third party. We currently provide home delivery services in the Portland, Oregon and Denver and Boulder, Colorado markets.

Other Marketing Activities. We occasionally use television, radio and billboards as part of our marketing activities.

New Store Openings. We use various targeted marketing efforts to support the successful introduction of our new stores in their individual markets. In addition to the distribution of our Health Hotline newsletter and Internet and social media efforts targeted to the region, we utilize direct mail distribution of a series of introductory postcards promoting our brand and providing discounts and other incentives for new customers. We also focus on community relationship-building activities, including a series of lectures and cooking and other demonstrations in each new store’s community room and/or demonstration kitchen. During the second quarter of fiscal year 2015, we introduced new promotional initiatives to increase customer awareness of and participation at new store openings. These initiatives include gift card giveaways, performances by local bands and participation by local community leaders and organizations.

Competition

The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway, mass or discount retailers such as Wal-Mart and Target, natural and gourmet markets such as Whole Foods and The Fresh Market, specialty food retailers such as Sprouts and Trader Joe’s, warehouse clubs such as Sam’s Club and Costco, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us for customers on the basis of price, selection, quality, customer service, shopping experience or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.

Seasonality

Our business is active throughout the calendar year and does not experience significant fluctuation caused by seasonal changes in consumer purchasing.

Insurance and Risk Management 

We use a combination of insurance and self-insurance to cover workers’ compensation, general liability, product liability, director and officers’ liability, employment practices liability, associate healthcare benefits and other casualty and property risks. Changes in legal trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers and changes in discount rates could all affect ultimate settlements of claims. We evaluate our insurance requirements and providers on an ongoing basis.

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Trademarks and Other Intellectual Property

We believe that our intellectual property is important to the success of our business. We have received the registration of trademarks not only for Vitamin Cottage and Health Hotline but also for our logo, Natural Grocers by Vitamin Cottage ® and Vitamin Cottage Natural Grocers® for appropriate categories of trade. In addition, we have received the registration of a service mark for EDAP - Every Day Affordable Price. We do not own or license for use any patents, franchises or concessions that are material to our business. Our trademarks are generally valid and may be renewed indefinitely as long as they are in use and their registrations are properly maintained.

Information Technology Systems

We have made significant investments in overhead and information technology infrastructure, including purchasing, receiving, inventory, point of sale, warehousing, distribution, accounting, reporting and financial systems. We use an ERP system with integrated merchandise management, reporting and accounting system at all of our stores, as well as at our bulk food repackaging facility and distribution center and for corporate functions including accounting, reporting and purchasing. Our ERP system application support and hardware functions are outsourced, which allows us to focus on our core business. We completed the implementation of an enterprise-wide HRIS, which has enabled us to more efficiently and effectively onboard and train our employees at all locations.

Regulatory Compliance 

The safety, formulation, manufacturing, processing, packaging, importation, labeling, promotion, advertising and distribution of products we sell in our stores, including private label products, are subject to regulation by several federal agencies, including the FDA, the Federal Trade Commission (the FTC), the USDA, the Consumer Product Safety Commission and the Environmental Protection Agency and various agencies of the states and localities. Pursuant to the Food, Drug, and Cosmetic Act (the FDCA), the FDA regulates the safety, formulation, manufacturing, processing, packaging, labeling, importation and distribution of food and dietary supplements (including vitamins, minerals, amino acids and herbs). In addition, the FTC has jurisdiction to regulate the promotion and advertising of these products.

Dietary Supplements. The FDCA has been amended several times with respect to dietary supplements, in particular by the Dietary Supplement Health and Education Act of 1994 (DSHEA). DSHEA established a framework governing the composition, safety, labeling, manufacturing and marketing of dietary supplements, defined “dietary supplement” and “new dietary ingredient” and established new statutory criteria for evaluating the safety of substances meeting the respective definitions. In the process, DSHEA removed dietary supplements and new dietary ingredients from pre-market approval requirements that apply to food additives and pharmaceuticals and established a combination of “notification” and “post marketing controls” for regulating product safety. Notwithstanding, non-dietary ingredients in a dietary supplement remain subject to the FDA’s food additive authorities. The FDA does not require notification to market a dietary supplement if it contains only dietary ingredients that were present in the United States food supply prior to DSHEA’s enactment on October 15, 1994. However, for a dietary ingredient not present in the food supply prior to this date, the manufacturer must provide the FDA with information supporting the conclusion that the ingredient will reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into interstate commerce. As required by the Food Safety Modernization Act (FSMA), the FDA issued draft guidance in July 2011, which attempted to clarify when an ingredient would be considered a “new dietary ingredient,” the evidence needed to document the safety of a new dietary ingredient and appropriate methods for establishing the identity of a new dietary ingredient. The draft guidance has not been finalized. If finalized, the draft guidance may cause dietary supplement products available in the market before DSHEA to be classified to include a “new dietary ingredient” if the dietary supplement product was produced using manufacturing processes different from those used in 1994.

In certain circumstances, the FDA’s guidance regarding applications for approval of Investigational New Drugs (INDs) applies to the food and dietary supplement industry. The FDA’s guidance states that certain dietary supplements should not be marketed if they contain a substance that is undergoing substantial clinical investigations intended to evaluate the dietary supplement’s ability to diagnose, cure, mitigate, treat, or prevent a disease when such investigations are public knowledge, unless the article was marketed as a dietary supplement before the IND application became effective and before any such investigations began. Although the boundaries of the FDA’s enforcement activities regarding alleged violations of its guidance are not clear at this time, some dietary supplements might have to be immediately withdrawn from the market if they were not marketed as a dietary supplement before initiation of substantial clinical investigations, the existence of which has been made public. The potential need for withdrawal could negatively affect the supply chain for certain products.

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DSHEA also empowered the FDA to establish good manufacturing practice regulations governing key aspects of the production of dietary supplements. DSHEA expressly permits dietary supplements to bear statements describing how a product affects the structure, function and general well-being of the body. Currently, although manufacturers must be able to substantiate any such statement, no pre-market approval authorization is required for such statements and manufacturers need only notify FDA that they are employing a given claim. No statement may expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat or prevent a disease. DSHEA does, however, authorize supplement sellers to provide “third-party literature,” (e.g., a reprint of a peer-reviewed scientific publication linking a particular dietary ingredient with health benefits) in connection with the sale of a dietary supplement to consumers. This provision is an exception to the FDA’s broad powers over the promotion of regulated products. Accordingly, the authorization is limited and applies only if the publication is printed in its entirety, is not false or misleading, presents a balanced view of the available scientific information and does not “promote” a particular manufacturer or brand of dietary supplement and is displayed in an area physically separate from the dietary supplements.

Food. The FDA has comprehensive authority to regulate the safety of food and food ingredients, other than dietary supplements. Food additives and food contact substances are subject to pre-market approvals or notification requirements. The FDA’s overall food safety authority was dramatically enhanced in 2011 with the passage of the FSMA. The FSMA required the FDA to issue regulations mandating that risk-based preventive controls be observed by the majority of food producers. Regulations and rules issued under FSMA are in varying degrees of finalization. Regardless, the FDA’s authority under FSMA applies to all domestic food facilities and, by way of imported food supplier verification requirements, to all foreign facilities that supply us with food products. In addition, the FSMA required the FDA to establish science-based minimum standards for the safe production and harvesting of produce, to identify “high risk” foods and “high risk” facilities and instructed the FDA to set goals for the frequency of FDA inspections of such high risk facilities as well as non-high risk facilities and foreign facilities from which food is imported into the United States. With respect to both foods and dietary supplements, the FSMA meaningfully augmented the FDA’s ability to access producers’ records and suppliers’ records. This increased access could cause the FDA to identify areas of concern it had not previously considered to be problematic for our suppliers and contract manufacturers. The FSMA also gives the FDA authority to require food producers, distributors and sellers to recall adulterated or misbranded food if the FDA determines that there is a reasonable probability that the food will cause serious adverse health consequences to persons or animals. Additionally, the FSMA increases the FDA’s authority for administrative detentions of adulterated and misbranded foods. The FSMA also could cause enhanced tracking and tracing of food requirements and, as a result, added recordkeeping burdens upon our suppliers and contract manufacturers.

The FDA also exercises broad jurisdiction over the labeling and promotion of food. Labeling is a broad concept that, under certain circumstances, extends even to product-related claims and representations made on a company’s website or similar printed or graphic medium. All foods, including dietary supplements, must bear labeling that provides consumers with essential information with respect to ingredients, product weight, etc. The FDA administers a pre-market authorization program applicable to foods and supplements alike regarding the use of “nutrient content” claims (e.g., “high in antioxidants,” “low in fat,” etc.), “health” claims (claims describing the relationship between a food substance and a health or disease condition), and “natural and “all natural” claims. “Organic” claims, however, are primarily regulated by the USDA. In addition, the FDA has authority over products falsely or misleadingly labeled “organic.” Products labeled “organic” must be certified by an accredited agent as compliant with USDA-established standards.

FDA Enforcement. The FDA has broad authority to enforce the provisions of the FDCA applicable to the safety, labeling, manufacturing and promotion of foods and dietary supplements, including powers to issue a public warning letter to a company, publicize information about illegal products, institute an administrative detention of food, request or order a recall of illegal products from the market, and request the Department of Justice to initiate a seizure action, an injunction action or a criminal prosecution in the United States courts. Pursuant to the FSMA, the FDA also has the power to refuse the import of any food or dietary supplement from a foreign supplier that is not appropriately verified as in compliance with all FDA laws and regulations. Moreover, the FDA has the authority to administratively suspend the registration of any facility producing food, including supplements, deemed to present a reasonable probability of causing serious adverse health consequences.

Food and Dietary Supplement Advertising. The FTC exercises jurisdiction over the advertising of foods and dietary supplements. The FTC has the power to institute monetary sanctions and the imposition of “consent decrees” and penalties that can severely limit a company’s business practices. In recent years, the FTC has instituted numerous enforcement actions against dietary supplement companies for failure to have adequate substantiation for claims made in advertising or for the use of false or misleading advertising claims.

The FTC and FDA have authority to regulate the marketing and label claims of foods, functional foods, dietary supplements, probiotic preparations and homeopathic remedies. The agencies have suggested in published comments and court filings that health claims for these products should be based on two Random Controlled Trials (RTCs) or similar investigational research methods. It is not clear that RTCs designed to measure the effects and side effects of a medical drug on a human population suffering a disease are appropriate for measuring the efficacy of foods, functional foods, dietary supplements, probiotic preparations and homeopathic remedies to help maintain an individual’s healthy non-diseased state. If the FTC and FDA final guidance do not reflect these concerns, and if RTCs or similar methods are required in the future, the high cost and delays of RTCs or other investigational methods may disrupt the supply chain for these products or cause their removal from the market.

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Compliance. As is common in our industry, we rely on our suppliers and contract manufacturers to ensure that the products they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, we seek certifications of compliance, representations and warranties, indemnification and insurance from our suppliers and contract manufacturers. However, even with adequate certifications, representations and warranties, insurance and indemnification, any claims of non-compliance could significantly damage our reputation and consumer confidence in our products. In addition, the failure of such products to comply with applicable regulatory and legislative requirements could prevent us from marketing the products or require us to recall or remove such products from our stores. In order to comply with applicable statutes and regulations, our suppliers and contract manufacturers have from time to time reformulated, eliminated or relabeled certain of their products and we have revised certain provisions of our sales and marketing program.

Furthermore, to ensure compliant practices, our employees working in our stores are trained regularly on how to provide customer service using an educational approach that is ethical, honest, accurate and does not cross over into a scope of practice reserved for licensed healthcare professionals. For instance, we do not allow discussion of any “disease” or “cure.” Instead, we focus on how the structure and function of the body is affected by lifestyle choices and the different nutritional components of an individual’s diet, including those contained in dietary supplements. Our customers are encouraged to make informed decisions about their diet, lifestyle, and possible need for supplementation. We also conduct internal compliance reviews on all free nutrition literature that we make available to our customers upon request with the goal of ensuring that these materials only reference relevant dietary supplement ingredients and not any particular brands or products. One responsibility of the Nutritional Health Coach is to oversee our FDA and FTC compliance measures. We believe that our nutrition education practices are in compliance with federal and state requirements, but a finding to the contrary could pose significant issues with respect to our business and reputation among our customers or otherwise have a material adverse effect on our business.

New or revised government laws and regulations affecting our business or our industry, such as those relating to genetically modified foods, could result in additional compliance costs and civil remedies. The risks associated with these laws and regulations are further described under the caption “Risk Factors.”

Segment Information

We have one reporting segment, natural and organic retail stores, through which we conduct all of our business. Please see the Consolidated Financial Statements of the Company for the fiscal year ended September 30, 2015, set forth in Part IV of this Form 10-K, for financial information regarding this segment.

Available Information

Our website is located at www.naturalgrocers.com. We make our periodic reports and other information filed with or furnished to the SEC, available, free of charge, through our website as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. In addition, our Corporate Governance Guidelines, the charters for our Audit Committee and Compensation Committee, and our Code of Ethics are publicly available on our website at www.naturalgrocers.com under the “Investor Relations – Corporate Governance” section, and we will post any amendments to, or waivers from, a provision of this Code of Ethics on our website, at the address and location specified above. A printed copy of this information is also available without charge by sending a written request to Corporate Secretary, Natural Grocers by Vitamin Cottage, Inc., 12612 West Alameda Parkway, Lakewood, CO 80228. You may read and copy any materials we file with the SEC at the Securities and Exchange Commission Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The SEC also maintains a website that contains our reports and other information at www.sec.gov. Information on our website or any other website is not incorporated by reference into this Form 10-K.

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Item 1A. Risk Factors.

Our business, financial condition and results of operations can be materially impacted by a number of factors which could cause our actual results to vary materially from recent results or from our anticipated future results. If any of the following risks actually occurs, our business, financial condition, results of operations, cash flow and prospects could be materially and adversely affected. As a result, the trading price of our common stock could decline and you could lose all or part of your investment in our common stock. Accordingly, you should carefully consider the risks described below as well as the other information and data included in this Form 10-K.

Risks related to our business

We may not be successful in our efforts to grow.

Our continued growth largely depends on our ability to increase sales in our existing stores and successfully open and operate new stores on a profitable basis. Our comparable store sales growth could be lower than our historical average for various reasons, including the opening of new stores that cannibalize sales in existing stores, increased competition, general economic conditions, regulatory changes, price changes as a result of competitive factors and product pricing and availability.

During fiscal years 2015 and 2014, we opened 16 and 15 new stores, respectively. We plan to open 23 new stores, relocate four existing stores and remodel two stores in fiscal year 2016. Delays or failures in opening new stores, or achieving lower than expected sales in new stores, could materially and adversely affect our growth. Our plans for continued expansion could place increased demands on our financial, managerial, operational and administrative resources. For example, our planned expansion will require us to increase the number of people we employ and may require us to upgrade our management information system and our distribution infrastructure. We currently operate a single bulk food repackaging facility and distribution center, which houses our bulk food repackaging operation. In order to support our recent and expected future growth and to maintain the efficient operation of our business, we may need to add additional capacity in the future. These increased demands and operating complexities could cause us to operate our business less efficiently, which could materially and adversely affect our operations, financial performance and future growth.

We may not be able to open new stores on schedule or operate them successfully. Our ability to successfully open new stores depends upon a number of factors, including our ability to select suitable sites for our new store locations, to negotiate and execute leases, to coordinate the contracting work on our new stores, to identify and recruit store managers, Nutritional Health Coaches and other staff, to secure and manage the inventory necessary for the launch and successful operation of our new stores and to effectively promote and market our new stores. If we are ineffective in performing these activities, our efforts to open and operate new stores may be unsuccessful or unprofitable, which could materially and adversely affect our operations, financial performance and future growth.

Our newly opened stores may negatively impact our financial results in the short-term, and may not achieve sales and operating levels consistent with our more mature stores on a timely basis or at all.

We have actively pursued new store growth and plan to continue doing so in the future. Our new store openings may not be successful or reach the sales and profitability levels of our existing stores. Although we target particular levels of cash-on-cash returns and capital investment for each of our new stores, new stores may not meet these targets. Any store we open may not be profitable or achieve operating results similar to those of our existing stores. New store openings may negatively impact our financial results in the short-term due to the effect of store opening costs and lower sales and contribution to overall profitability during the initial period following opening. New stores build their sales volume and their customer base over time and, as a result, generally have lower margins and higher operating expenses, as a percentage of net sales, than our existing stores. New stores may not achieve sustained sales and operating levels consistent with our more mature store base on a timely basis or at all. This may have an adverse effect on our financial condition and operating results.

In addition, we may not be able to successfully integrate new stores into our existing store base and those new stores may not be as profitable as our existing stores. Further, we have experienced in the past, and expect to experience in the future, some sales volume transfer from our existing stores to our new stores as some of our existing customers switch to new, closer locations. If our new stores are less profitable than our existing stores, or if we experience sales volume transfer from our existing stores, our financial condition and operating results may be adversely affected.

If we are unable to successfully identify market trends and react to changing consumer preferences in a timely manner, our sales may decrease.

We believe our success depends, in substantial part, on our ability to:

● anticipate, identify and react to natural and organic grocery and dietary supplement trends and changing consumer preferences in a timely manner;

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● translate market trends into appropriate, saleable product and service offerings in our stores before our competitors; and

● develop and maintain vendor relationships that provide us access to the newest merchandise, and dairy products that satisfy upgraded standards, on reasonable terms.

Consumer preferences often change rapidly and without warning, moving from one trend to another among many product or retail concepts. Our performance is 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, reduced or changed consumer choices and the cost of these products. Our store offerings are comprised of natural and organic products and dietary supplements. A change in consumer preferences away from our offerings, including as a result of, among other things, reductions or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of natural and organic products or dietary supplements, or new or upgraded regulatory standards may adversely affect demand for our products and could result in lower customer traffic, sales and results of operations. In addition, reduced or changed consumer choices may result from, among other things, the implementation of our requirements for dairy products that satisfy our pasture-based, non-confinement standards.

If we are unable to anticipate and satisfy consumer merchandise preferences in the regions where we operate, our net sales may decrease, and we may be forced to increase markdowns of slow-moving merchandise, either of which could have a material adverse effect on our business, financial condition and results of operations.

Our comparable store sales and quarterly financial performance may fluctuate for a variety of reasons.

Our comparable store sales and quarterly results of operations have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of other factors affect our comparable store sales and quarterly financial performance, including:

● changes in our merchandising strategy or product mix;

● performance of our newer and remodeled stores;

● the effectiveness of our inventory management;

● the timing and concentration of new store openings, and the related additional human resource requirements and pre-opening and other start-up costs;

● the cannibalization of existing store sales by new store openings;

● levels of pre-opening expenses associated with new stores;

● timing and effectiveness of our marketing activities;

● seasonal fluctuations due to weather conditions and extreme weather-related disruptions;

● actions by our existing or new competitors, including pricing changes;

● regulatory changes affecting availability and marketability of products;

● supply shortages; and

● general United States economic conditions and, in particular, the retail sales environment.

Accordingly, our results for any one fiscal year or quarter are not necessarily indicative of the results to be expected for any other year or quarter, and comparable store sales of any particular future period may decrease. In the event of such a decrease, the price of our common stock would likely decline. For more information on our results of operations for the fiscal year 2015, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Disruptions in the worldwide economy may adversely affect our business, results of operations and financial condition and could negatively impact our ability to execute our growth strategy.

Adverse and uncertain economic conditions may impact demand for the products we sell in our stores. Consumer spending and levels of disposable income, including spending for natural and organic grocery and dietary supplement products that we sell, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wages, interest rates, the availability of credit, tax rates, fuel and energy costs, housing market conditions, general business conditions, consumer confidence, political instability and consumer perception of economic conditions. Natural disasters, the outbreak or escalation of war, the occurrence of terrorist acts or other hostilities in or affecting the United States, or concern regarding epidemics in the United States or in international markets could also lead to a decrease in spending by consumers. In the event of an economic slowdown, consumer spending could be adversely affected, and we could experience lower net sales than expected. We could be forced to delay or slow our new store growth plans, which could have a material adverse effect on our business, financial condition and results of operations. In addition, our ability to manage normal commercial relationships with our suppliers, manufacturers of our private label products, distributors, customers and creditors may suffer. Customers may shift purchases to lower-priced or other perceived value offerings during economic downturns. In particular, customers may reduce the amount of natural and organic products that they purchase and instead purchase conventional offerings, which generally have lower retail prices, at other stores. In addition, consumers may choose to purchase private label products at other stores rather than branded products because they are generally less expensive. Suppliers may become more conservative in response to these conditions and seek to reduce their production. Our results of operations depend upon, among other things, our ability to maintain and increase sales volume with our existing customers, to attract new customers and to provide products that appeal to customers at prices they are willing and able to pay. Prolonged unfavorable economic conditions may have an adverse effect on our sales and profitability.

We may be unable to compete effectively in our markets, which are highly competitive.

The markets for natural and organic groceries and dietary supplements are large, fragmented and highly competitive, with few barriers to entry. Our competition varies by market and includes conventional supermarkets, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us for customers on the basis of price, selection, quality, customer service, shopping experience or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. Many of our competitors are larger, more established and have greater financial, marketing and other resources than us, and may be able to adapt to changes in consumer preferences more quickly, devote greater resources to the marketing and sale of their products, or generate greater brand recognition. An inability to compete effectively may cause us to lose market share to our competitors and could have a material adverse effect on our business, financial condition and results of operations.

An inability to maintain or increase our operating margins could adversely affect our results of operations.

We intend to increase our operating margins by leveraging more efficiencies of scale, additional improved systems, further cost discipline, added focus on appropriate store labor levels and even more disciplined product selection. If we are unable to successfully manage the potential difficulties associated with store growth, we may not be able to capture the efficiencies of scale that we expect from expansion. If we are not able to continue to capture greater efficiencies of scale, improve our systems, further enhance our cost discipline and increase our focus on appropriate store labor levels and disciplined product selection, we may not be able to achieve our goals with respect to operating margins. In addition, if we do not adequately refine and improve our various ordering, tracking and allocation systems, we may not be able to increase sales and reduce inventory shrink. As a result, our operating margins may stagnate or decline, which could have a material adverse effect on our business, financial condition and results of operations and adversely affect the price of our common stock.

A reduction in traffic to anchor stores in the shopping areas in close proximity to our stores could significantly reduce our sales and leave us with unsold inventory, which could have a material adverse effect on our business, financial condition and results of operations.

Many of our stores are located in close proximity to shopping areas that may also accommodate other well-known anchor stores. Sales at our stores are derived, in part, from the volume of traffic generated by the other anchor stores in the shopping areas where our stores are located. Customer traffic may be adversely affected by regional economic downturns, a general downturn in the local area where our store is located, long-term nearby road construction projects, the closing of nearby anchor stores or other nearby stores or the decline of the shopping environment in a particular shopping area. Any of these events would reduce our sales and leave us with excess inventory, which could have a material adverse effect on our business, financial condition and results of operations. In response to such events, we may be required to increase markdowns or initiate marketing promotions to reduce excess inventory, which would further decrease our gross profits and net income.

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If we or our third-party suppliers fail to comply with regulatory requirements, or are unable to provide products that meet our specifications, our business and our reputation could suffer.

If we or our third-party suppliers, including suppliers of our private label products, fail to comply with applicable regulatory requirements or to meet our quality specifications, we could be required to take costly corrective action and our reputation could suffer. We do not own or operate any manufacturing facilities, except for our bulk food repackaging facility and distribution center discussed below, and therefore depend upon independent third-party vendors to produce our private label branded products, such as vitamins, minerals, dietary supplements, body care products, food products and bottled water. Third-party suppliers of our private label products may not maintain adequate controls with respect to product specifications and quality. Such suppliers may be unable to produce products on a timely basis or in a manner consistent with regulatory requirements. We depend upon our bulk food repackaging facility and distribution center for the majority of our private label bulk food products. We may also be unable to maintain adequate product specification and quality controls at our bulk food repackaging facility and distribution center, or produce products on a timely basis and in a manner consistent with regulatory requirements. In addition, we may be required to find new third-party suppliers of our private label products or to find third-party suppliers to source our bulk foods. There can be no assurance that we would be successful in finding such third-party suppliers that meet our quality guidelines.

We, as well as our vendors, are subject to numerous laws and regulations and our compliance with these laws and regulations, as they currently exist or as modified in the future, may increase our costs, limit or eliminate our ability to sell certain products, raise regulatory enforcement risks not present in the past or otherwise adversely affect our business, results of operations and financial condition.

As a retailer of food and dietary supplements and a seller of many of our own private label products, we are subject to numerous federal and state health and safety laws and regulations. Our suppliers and contract manufacturers are also subject to such laws and regulations. These laws and regulations apply to many aspects of our business, including the manufacturing, packaging, labeling, distribution, advertising, sale, quality and safety of our products, as well as the health and safety of our employees and the protection of the environment. In the United States, we are subject to regulation by various federal government agencies, including the FDA, the USDA, the FTC, the Occupational Safety and Health Administration, the Consumer Product Safety Commission and the Environmental Protection Agency, as well as various state and local agencies. We are also subject to the USDA’s Organic Rule, which facilitates interstate commerce and the marketing of organically produced food, and provides assurance to our customers that such products meet consistent, uniform standards. Compliance with the USDA’s Organic Rule also places a significant burden on some of our suppliers, which may cause a disruption in some of our product offerings. In addition, our sales of dietary supplements are regulated under DSHEA. DSHEA expressly permits dietary supplements to bear statements describing how a product affects the structure, function and general well-being of the body. However, no statement may expressly or implicitly represent that a dietary supplement will diagnose, cure, mitigate, treat or prevent a disease. If these laws and regulations were violated by our management, employees, suppliers, distributors or vendors, we could be subject to fines, penalties and sanctions, including injunctions against future shipment and sale of products, seizure and confiscation of products, prohibition on the operation of our stores, restitution and disgorgement of profits, operating restrictions and criminal prosecution.

In connection with the marketing and advertisement of our products, we could be the target of claims relating to false or deceptive advertising, including under the auspices of the FTC and the consumer protection statutes of some states. These events could interrupt the marketing and sales of products in our stores, including our private label products, severely damage our brand reputation and public image, increase the cost of products in our stores, result in product recalls or litigation, and impede our ability to deliver merchandise in sufficient quantities or quality to our stores, which could result in a material adverse effect on our business, financial condition and results of operations.

New or revised government laws and regulations have been adopted in recent years, such as those relating to genetically modified foods, could result in additional compliance costs and the increased use of civil remedies to enforce such laws and regulations. Additionally, increased enforcement by government agencies could result in such costs and remedies, as well as the payment of fines or penalties imposed by such agencies.

The FSMA passed in January 2011, granted the FDA greater authority over the safety of the national food supply and required the FDA to issue regulations mandating that risk-based preventive controls be observed by the majority of food producers. Regulations and rules issued under FSMA are in varying degrees of finalization. Regardless, the FDA’s authority under FSMA applies to all domestic food facilities and, by way of imported food supplier verification requirements, to all foreign facilities that supply food products. In addition, the FSMA required the FDA to establish science based minimum standards for the safe production and harvesting of produce, required the FDA to identify “high risk” foods and “high risk” facilities and instructed the FDA to set goals for the frequency of FDA inspections of such high risk facilities as well as non-high risk facilities and foreign facilities from which food is imported into the United States. With respect to both food and dietary supplements, the FSMA meaningfully augmented the FDA’s ability to access a producer’s records and a supplier’s records. This increased access could permit the FDA to identify areas of concern it had not previously considered to be problematic either for us or for our suppliers. The FSMA also could result in the implementation of enhanced tracking and tracing of food requirements and, as a result, added recordkeeping burdens upon our suppliers. In addition, under the FSMA, the FDA now has the authority to inspect certifications and therefore evaluate whether foods and ingredients from our suppliers are compliant with the FDA’s regulatory requirements. Such inspections may delay the supply of certain products or result in certain products being unavailable to us for sale in our stores. The implementation of FSMA requirements may be too expensive or too complicated for some of our suppliers, which may result in certain products from small and/or local suppliers being unavailable to us for sale in our stores.

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DSHEA established that no notification to the FDA is required to market a dietary supplement if it contains only dietary ingredients that were present in the United States food supply prior to DSHEA’s enactment. However, for a dietary ingredient not present in the food supply prior to DSHEA’s enactment, the manufacturer is required to provide the FDA with information supporting the conclusion that the ingredient will reasonably be expected to be safe at least 75 days before introducing a new dietary ingredient into interstate commerce. As required by the FSMA, the FDA issued draft guidance in July 2011, which attempted to clarify when an ingredient would be considered a “new dietary ingredient,” the evidence needed to document the safety of a new dietary ingredient and appropriate methods for establishing the identity of a new dietary ingredient. The draft guidance has not yet been finalized. If finalized, the draft guidance may cause dietary supplement products available in the market before DSHEA to be classified to include a new dietary ingredient if the dietary supplement product was produced using manufacturing processes different from those used in 1994. Accordingly, the finalization and adoption of the draft FDA guidance or similar guidance could materially adversely affect the availability of dietary supplement products.

The FDA also issued draft guidance on Investigational New Drugs (INDs) in 2015. The guidance could classify a food or dietary supplement ingredient as an investigational new drug and simultaneously force the ingredient to be removed from commerce if the ingredient is being investigated as a potential drug treatment for a disease. The guidance has not been finalized. If the guidance is finalized in its present form, some food and dietary supplement products containing certain ingredients may not be available to us to sell in our stores.

The FDA and FTC have increased their regulatory scrutiny of homeopathic products through a public stakeholder workgroup process. Although no guidance has been issued at this time, the stakeholder process may result in guidance that reclassifies homeopathic products as drugs, requires homeopathic products to be approved for sale under a new approval or review regimen, or otherwise lessens their availability to us to sell in our stores.

Furthermore, in recent years, the FDA has been and continues to be aggressive in enforcing its regulations with respect to nutrient content claims (e.g., “low fat,” “good source of,” “calorie free,” etc.), unauthorized “health claims” (claims that characterize the relationship between a food or food ingredient and a disease or health condition) and other claims that impermissibly suggest therapeutic benefits for certain foods or food components. Such FDA enforcement with respect to such promotional practices could result in costly product changes, potential private litigation, bad publicity and loss of consumer goodwill.

We are also subject to laws and regulations more generally applicable to retailers, including labor and employment, taxation, zoning and land use. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefits costs, which could hurt our profitability.

We cannot predict the nature of future laws, regulations, interpretations or applications, or determine what effect either additional government regulations or administrative orders, when and if promulgated, or disparate federal, state and local regulatory schemes would have on our business in the future. They could, however, require the reformulation of certain products to meet new standards, the recall or discontinuance of certain products not able to be reformulated, additional recordkeeping, expanded documentation of the properties of certain products, expanded or different labeling and scientific substantiation. Any or all of such requirements could have an adverse effect on our operating results.

We may experience product recalls, withdrawals or seizures which could reduce our sales and adversely affect our results of operations.

We may be subject to product recalls, withdrawals or seizures if any of the products we sell is believed to cause injury or illness or if we are alleged to have violated governmental regulations in the labeling, promotion, sale or distribution of those products. A significant recall, withdrawal or seizure of any of the products we sell may require significant management attention, would likely result in substantial and unexpected costs and may adversely affect our business, financial condition or results of operations. Furthermore, a recall, withdrawal or seizure of any of our products may adversely affect consumer confidence in our brands and thus decrease consumer demand for our products. We rely on our suppliers to ensure that the products they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, we seek representation and warranties, indemnification and/or insurance from our suppliers. However, even with adequate insurance and indemnification, any claims of non-compliance could significantly damage our reputation and consumer confidence in our products. In addition, the failure of those products to comply with applicable regulatory and legislative requirements could prevent us from marketing the products or require us to recall or remove such products from the market, which in certain cases could materially and adversely affect our business, financial condition and results of operations.

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The activities of our Nutritional Health Coaches and our nutrition education services may be impacted by government regulation or an inability to secure adequate liability insurance.

Some of the activities of our NHCs, who, among other duties, provide nutrition oriented educational services to our customers, may be subject to state and federal regulation, and oversight by professional organizations. In the past, the FDA has expressed concerns regarding summarized health and nutrition-related information that: (i) does not, in the FDA’s view, accurately present such information (ii) diverts a consumer’s attention and focus from FDA-required nutrition labeling and information; or (iii) impermissibly promotes drug-type disease-related benefits. Although we have provided training to our NHCs on relevant regulatory requirements, we cannot control the actions of such individuals, and our NHCs may not act in accordance with such regulations. If our NHCs or other employees do not act in accordance with regulatory requirements, we may become subject to penalties which could have a material adverse effect on our business. We believe we are currently in compliance with relevant regulatory requirements, and we maintain professional liability insurance on behalf of our NHCs in order to mitigate risks associated with our NHCs’ nutrition oriented educational activities. However, we cannot predict the nature of future government regulation and oversight, including the potential impact of any such regulation on the services currently provided by our NHCs. Furthermore, the availability of professional liability insurance or the scope of such coverage may change, or our insurance coverage may prove inadequate, which may adversely impact the ability of our NHCs to provide some services to our customers. The occurrence of any such developments could negatively impact the perception of our brand, our sales and our ability to attract new customers.

Our future business, results of operations and financial condition may be adversely affected by reduced availability of organic products or dairy products that satisfy our pasture-based, non-confinement standards.

Our ability to ensure a continuing supply of organic products and dairy products that satisfy our pasture-based, non-confinement standards at competitive prices depends on many factors beyond our control, such as the number and size of farms that grow organic crops or raise organic livestock or satisfy our pasture-based, non-confinement standards, the vagaries of these farming businesses and our ability to accurately forecast our sourcing requirements. The organic ingredients used in many of the products we sell are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes, hurricanes and pestilences. Adverse weather conditions and natural disasters can lower crop yields and reduce crop size and quality, which in turn could reduce the available supply of, or increase the price of, organic ingredients. Certain products we purchase from our suppliers include organic ingredients sourced offshore, and the availability of such ingredients may be affected by events in other countries. In addition, we and our suppliers compete with other food producers in the procurement of organic ingredients and dairy products that satisfy our pasture-based, non-confinement standards, which are often less plentiful in the open market than conventional ingredients and products. This competition may increase in the future if consumer demand increases for organic products and dairy products that satisfy our pasture-based, non-confinement standards. If supplies of organic ingredients and dairy products that satisfy our pasture-based, non-confinement standards are reduced or there is greater demand for such ingredients from us and others, we may not be able to obtain sufficient supply on favorable terms, or at all, which could impact our ability to supply products to our stores and may adversely affect our business, results of operations and financial condition.

The organic products we sell rely on independent certification and must comply with the requirements of independent organizations or certification authorities in order to be labeled as such. Certain products we sell in our stores can lose their “organic” certification if a contract manufacturing plant becomes contaminated with non-organic materials or if it is not properly cleaned after a production run, among other issues. The loss of any independent certifications could reduce the availability of organic products that we can sell in our stores and harm our business.

Disruptions affecting our significant suppliers, or our relationships with such suppliers, could negatively affect our business.

UNFI is our single largest third-party supplier, accounting for approximately 57% of our total purchases in fiscal year 2015. In fiscal year 2012, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products into 2016. Due to this concentration of purchases from a single third-party supplier, the cancellation or non-renewal of our distribution agreement or the disruption, delay or inability of UNFI to deliver product to our stores may materially and adversely affect our operating results and we may be unable to establish alternative distribution channels on reasonable terms or at all.

Certain of our vendors use overseas sourcing to varying degrees to manufacture some or all of their products. Any event causing a sudden disruption of manufacturing or imports from such foreign countries, including the imposition of additional import restrictions, unanticipated political changes, increased customs duties, labor disputes, health epidemics, adverse weather conditions, crop failure, acts of war or terrorism, legal or economic restrictions on overseas suppliers’ ability to produce and deliver products, and natural disasters, could increase our costs and materially harm our business and financial condition and results of operations. Our business is also subject to a variety of other risks generally associated with indirectly sourcing goods from abroad, such as political instability, disruption of imports by labor disputes and local business practices. In addition, requirements imposed by the FSMA compel importers to verify that food products and ingredients produced by a foreign supplier comply with all applicable legal and regulatory requirements enforced by the FDA, which could result in certain products being deemed inadequate for import.

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The current geographic concentration of our stores creates exposure to local economies, regional downturns or severe weather or catastrophic occurrences.

As of September 30, 2015, we had primary store concentration in Colorado and Texas, operating 34 stores and 14 stores in those states, respectively, accounting for a total of 46.6% of our stores. As a result, our business is currently more susceptible to regional conditions than the operations of more geographically diversified competitors, and we are vulnerable to economic downturns in those regions. Any unforeseen events or circumstances that negatively affect these areas could materially adversely affect our revenues and profitability. These factors include, among other things, changes in demographics, population, competition, consumer preferences, new or revised laws or regulations, fires, floods or other natural disasters in these regions.

If we fail to maintain our reputation and the value of our brand, our sales may decline.

We believe our continued success depends on our ability to maintain and grow the value of the Natural Grocers by Vitamin Cottage brand. Maintaining, promoting and positioning our brand and reputation will depend largely on the success of our marketing and merchandising efforts and our ability to provide a consistent, high quality customer experience. Brand value is based in large part on perceptions of subjective qualities, and even isolated incidents can erode trust and confidence, particularly if they result in adverse publicity, governmental investigations or litigation. Our brand could be adversely affected if we fail to achieve these objectives, or if our public image or reputation were to be tarnished by negative publicity. Sources of negative publicity may include, among others, social media posts, investment or financial community posts and poor reviews of stores, products, customer service and employment.

Consumers or regulatory agencies may challenge certain claims made regarding our products.

Our reputation could also suffer from real or perceived issues involving the labeling or marketing of our products. Products that we sell may carry claims as to their origin, ingredients or health benefits, including, by way of example, the use of the term “natural.” Although the FDA and USDA each has issued statements regarding the appropriate use of the word “natural,” there is no single, United States government regulated definition of the term “natural” for use in the food industry. The resulting uncertainty has led to consumer confusion, distrust and legal challenges. Plaintiffs have commenced legal actions against a number of food companies that market “natural” products, asserting false, misleading and deceptive advertising and labeling claims, including claims related to genetically modified ingredients. In limited circumstances, the FDA has taken regulatory action against products labeled “natural” but that nonetheless contain synthetic ingredients or components. Should we become subject to similar claims, consumers may avoid purchasing products from us or seek alternatives, even if the basis for the claim is unfounded. Adverse publicity about these matters may discourage consumers from buying our products. The cost of defending against any such claims could be significant. Any loss of confidence on the part of consumers in the truthfulness of our labeling or ingredient claims would be difficult and costly to overcome and may significantly reduce our brand value. Any of these events could adversely affect our reputation and brand and decrease our sales, which would have a material adverse effect on our business, financial condition and results of operations.

Perishable food product losses could materially impact our results of operations.

Our stores offer a significant number of perishable products. Our offering of perishable products may result in significant product inventory losses in the event of extended power or other utility outages, natural disasters or other catastrophic occurrences.

The decision by certain of our suppliers to distribute their specialty products through other retail distribution channels could negatively impact our revenue from the sale of such products.

Some of the specialty retail products that we sell in our stores are not generally available through other retail distribution channels such as drug stores, conventional grocery stores or mass merchandisers. In the future, our suppliers could decide to distribute such products through other retail distribution channels, allowing more of our competitors to offer these products, and adversely affecting the desirability of these products to our core customers, which could negatively impact our revenues.

Our ability to operate our business effectively could be impaired if we fail to retain or attract key personnel or are unable to attract, train and retain qualified employees.

Our business requires disciplined execution at all levels of our organization. This execution requires an experienced and talented management team. The loss of any member of our senior management team, particularly Kemper Isely or Zephyr Isely, our Co-Presidents since 1998, or Heather Isely or Elizabeth Isely, our Executive Vice Presidents since 1998, could have a material adverse effect on our ability to operate our business, financial condition and results of operations, unless, and until, we are able to find a qualified replacement. Furthermore, our ability to manage our new store growth will require us to attract, motivate and retain qualified managers, NHCs and store employees who understand and appreciate our culture and are able to represent our brand effectively in our stores. Competition for such personnel is intense, and we may be unable to attract, assimilate and retain the personnel required to grow and operate our business profitably.

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Any significant interruption in the operations of our bulk food repackaging facility and distribution center could disrupt our ability to deliver our merchandise in a timely manner.

We repackage and distribute some of the products we sell through our bulk food repackaging facility and distribution center in Golden, Colorado. Any significant interruption in the operation of our bulk food repackaging and distribution center infrastructure, such as disruptions due to fire, severe weather or other catastrophic events, power outages, labor disagreements, or shipping problems, could adversely impact our ability to receive and process orders, and distribute products to our stores. Such interruptions could result in lost sales, cancelled sales and a loss of customer loyalty to our brand. While we maintain business interruption and property insurance, if the operation of our distribution facility were interrupted for any reason causing delays in shipment of merchandise to our stores, our insurance may not be sufficient to cover losses we experience. This could have a material adverse effect on our business, financial condition and results of operations.

A widespread health epidemic could materially impact our business.

Our business could be severely impacted by a widespread regional, national or global health epidemic. A widespread health epidemic may cause customers to avoid public gathering places such as our stores or otherwise change their shopping behaviors. Additionally, a widespread health epidemic could adversely impact our business by disrupting production and delivery of products to our stores and by impacting our ability to appropriately staff our stores.

Union activity at third-party transportation companies or labor organizing activities among our employees could disrupt our operations and harm our business.

Independent third-party transportation companies deliver the majority of our merchandise to our stores and to our customers. Some of these third parties employ personnel represented by labor unions. Disruptions in the delivery of merchandise or work stoppages by employees of these third parties could delay the timely receipt of merchandise, which could result in cancelled sales, a loss of loyalty to our stores and excess inventory.

While all of our employees are currently non-union, our employees may attempt to organize and join a union. The United Food and Commercial Workers Union recently sought to organize workers at one of our stores in Idaho. That effort was unsuccessful. We could face union organizing activities at other locations. The unionization of all or a portion of our workforce could result in work slowdowns, could increase our overall costs and reduce the efficiency of our operations at the affected locations, could adversely affect our flexibility to run our business competitively, and could otherwise have a material adverse effect on our business, financial condition and results of operations.

Our management has limited experience managing a public company.

We are subject to various regulatory requirements, including those of the SEC and The New York Stock Exchange (NYSE). These requirements include, among other things, record keeping, financial reporting and corporate governance rules and regulations. Our management has been managing a public company since the Company’s initial public offering (IPO) in fiscal year 2012, and therefore its overall experience in managing a public company remains limited. Our public company reporting obligations have increased, and continue to impose, demands on our internal infrastructure and resources. Although we have hired additional staff in order to comply with these requirements, we may be unable to retain the staff necessary to comply with these requirements in the future. In certain continuing respects, we rely on outside consultants and professionals to supplement our capacity to meet these requirements. Our business could be adversely affected if we are unable to fulfill our public company obligations.

Future events could result in impairment of long-lived assets, which may result in charges that adversely affect our results of operations and capitalization.

Long-lived assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Our impairment evaluations require use of financial estimates of future cash flows. Application of alternative assumptions could produce significantly different results. We may be required to recognize impairments of long-lived assets based on future economic factors such as unfavorable changes in estimated future undiscounted cash flows of an asset group.

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We have significant lease obligations, which may require us to continue paying rent for store locations that we no longer operate.

Our stores, bulk food repackaging facility and distribution center and administrative facility are leased. We are subject to risks associated with our current and future real estate leases. Our costs could increase because of changes in the real estate markets and supply or demand for real estate sites. We generally cannot cancel our leases, so if we decide to close or relocate a location, we may nonetheless be committed to perform our obligations under the applicable lease including paying the base rent for the remaining lease term. As each lease expires, we may fail to negotiate renewals, either on commercially acceptable terms or any terms at all and may not be able to find replacement locations that will provide for the same success as current store locations. Of the current leases for our stores, five expire in fiscal year 2016, one expires in fiscal year 2017, four expire in fiscal year 2018, seven expire in fiscal year 2019 and the remainder expire between fiscal years 2020 and 2062.

Our fixed lease obligations could adversely affect our business.

We will require substantial cash flows to make required payments under our leases, which generally provide for periodic increases in rent. If we are not able to make the required payments under the leases, the owners of the relevant properties may, among other things, repossess those properties, which could adversely affect our ability to conduct our operations. In addition, the termination of a lease due to the non-payment of rent under such lease would trigger an event of default under our amended and restated credit facility if such termination could reasonably be expected to have a material adverse effect on our business or our ability to meet our obligations thereunder.

Any material failure of our information systems could negatively impact our operations. 

We are increasingly dependent on a variety of information systems to effectively manage the operations of our growing store base, including our supply chain. The failure of our information systems to perform as designed, including the failure of our vendors to maintain and make available software or the failure of our warehouse management software system to operate as expected or to support our distribution facility, could have a material adverse effect on our business and results of operations. Any material failure or slowdown of our systems could disrupt our ability to track, record and analyze our merchandise, and could negatively impact our operations, including, among other things, our ability to process and receive shipments of goods and process financial and credit card transactions. Additionally, changes in technology could cause our information systems to become obsolete and it may be necessary to incur additional costs to upgrade such systems, and if our information systems prove inadequate to handle our growth, we could lose customers, which could have a material adverse effect on our business, financial condition and results of operations. We are also vulnerable to certain risks and uncertainties associated with our websites, including changes in required technology interfaces, website downtime and other technical failures, security breaches and consumer privacy concerns. Our failure to successfully respond to these risks could damage our reputation.

Claims under our self-insurance program may differ from our estimates, which could materially impact our results of operations.

We currently maintain insurance customary for businesses of our size and type using a combination of insurance and self-insurance plans to provide for the potential liabilities for workers’ compensation, general liability, professional liability, property insurance, director and officers’ liability insurance, vehicle liability and employee health-care benefits. There are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure. Such losses could have a material adverse effect on our business and results of operations. In addition, liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. Our results could be materially impacted by claims and other expenses related to such plans if future occurrences and claims differ from these assumptions and historical trends.

If we are unable to protect our intellectual property rights, our ability to compete and the value of our brand could be harmed.

We believe that our trademarks or service marks, trade dress, copyrights, trade secrets, know-how and similar intellectual property are important to our success. In particular, we believe that the Natural Grocers by Vitamin Cottage name is important to our business, as well as to the implementation of our growth strategy. Our principal intellectual property rights include registered marks on Vitamin Cottage, Natural Grocers by Vitamin Cottage, Vitamin Cottage Natural Grocers and EDAP - Every Day Affordable Price, copyrights of our website content, rights to our domain names including www.naturalgrocers.com and www.vitamincottage.com, and trade secrets and know-how with respect to our product sourcing, sales and marketing and other aspects of our business. As such, we rely on trademark or service mark and copyright law, trade secret protection and confidentiality agreements with our employees and certain of our consultants, suppliers and others to protect our proprietary rights. If we are unable to defend or protect or preserve the value of our trademarks or service marks, copyrights, trade secrets or other proprietary rights for any reason, our brand and reputation could be impaired and we could lose customers.

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Although several of our brand names are registered in the United States, we may not be successful in asserting trademark or service mark or trade name protection and the costs required to protect our trademarks or service marks and trade names may be substantial. In addition, the relationship between regulations governing domain names and laws protecting trademarks or service marks and similar proprietary rights is unclear. Therefore, we may be unable to prevent third parties from acquiring domain names that are similar to, infringe upon or otherwise decrease the value of our trademarks or service marks and other proprietary rights. Additionally, other parties may infringe on our intellectual property rights and may thereby dilute our brand in the marketplace. Third parties could also bring additional intellectual property infringement suits against us from time to time to challenge our intellectual property rights. Any such infringement of our intellectual property rights by others, or claims by third parties against us, would likely result in a commitment of our time and resources to protect these rights through litigation or otherwise. If we were to receive an adverse judgment in such a matter, we could suffer further dilution of our trademarks or service marks and other rights, which could harm our ability to compete as well as our business prospects, financial condition and results of operations.

Our products could suffer from real or perceived quality or food safety concerns and may cause unexpected side effects, illness, injury or death that could result in their discontinuance or expose us to lawsuits, any of which could result in unexpected costs and damage to our reputation.

We could be materially, adversely affected if consumers lose confidence in the safety and quality of products we sell. There is substantial governmental scrutiny of and public awareness regarding food safety. We believe that many customers hold us to a higher quality standard than other retailers. Many of our products are vitamins, herbs and other ingredients that are classified as foods or dietary supplements and are not subject to pre-market regulatory approval in the United States. Our products could contain contaminated substances, and some of our products contain ingredients that do not have long histories of human consumption. Previously unknown adverse reactions resulting from human consumption of these ingredients could occur. Unexpected side effects, illness, injury or death caused by our products could result in the discontinuance of sales of our products or prevent us from achieving market acceptance of the affected products. Such side effects, illnesses, injuries and death could also expose us to product liability or negligence lawsuits. Any claims brought against us may exceed our existing or future insurance policy coverage or limits. Any judgment against us that is in excess of our policy limits would have to be paid from our cash reserves, which would reduce our capital resources. Further, we may not have sufficient capital resources to pay a judgment in which case our creditors could levy against our assets. The real or perceived sale of contaminated or harmful products would cause negative publicity regarding our company, brand or products, including negative publicity in social media, which could in turn harm our reputation and net sales and could have a material adverse effect on our business, financial condition and results of operations, or result in our insolvency.

Increases in the cost of raw materials could hurt our sales and profitability.

Costs of the raw agricultural commodities used in our private label products, including our bulk repackaged products, could increase. Such commodities are generally subject to availability constraints and price volatility caused by weather, supply conditions, government regulations, energy prices, price inflation and general economic conditions and other unpredictable factors. An increase in the demand for or a reduced supply of raw agricultural commodities could cause our vendors to seek price increases from us, which could cause the retail price we charge for certain products to increase, in turn decreasing our sales of such products. Supply shortages may cause certain items to be unavailable, which could negatively affect our sales. Our profitability may be adversely impacted as a result of such developments through reduced gross margins or a decline in the number and average size of customer transactions. The cost of construction materials we use to build and remodel our stores is also subject to significant price volatility based on market and economic conditions. Higher construction material prices would increase the capital expenditures needed to construct a new store or remodel an existing store and, as a result, could increase the rent payable by the Company under its leases.

Energy costs are a significant component of our operating expenses and increasing energy costs, unless offset by more efficient usage or other operational responses, may impact our profitability.

We utilize natural gas, water, sewer and electricity in our stores and use gasoline and diesel in our trucks that deliver products to our stores. Increases in energy costs, whether driven by increased demand, decreased or disrupted supply or an anticipation of any such events will increase the costs of operating our stores. Our shipping costs have also increased due to fuel and freight prices, and these costs may continue to increase. We may not be able to recover these rising costs through increased prices charged to our customers, and any increased prices may exacerbate the risk of customers choosing lower-cost alternatives. In addition, if we are unsuccessful in attempts to protect against these increases in energy costs through long-term energy contracts, improved energy procurement, improved efficiency and other operational improvements, the overall costs of operating our stores will increase which would impact our profitability, financial condition and results of operations.

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Increases in certain costs affecting our marketing, advertising and promotions may adversely impact our ability to advertise effectively and reduce our profitability.

Postal rate increases, and increasing paper and printing costs affect the cost of our promotional mailings. Previous changes in postal rates increased the cost of our Health Hotline mailings and previous increases in paper and printing costs increased the cost of producing our Health Hotline newspaper inserts. In response to any future increase in mailing costs, we may consider reducing the number and size of certain promotional pieces. In addition, we rely on discounts from the basic postal rate structure, such as discounts for bulk mailings and sorting by zip code and carrier routes. We are not party to any long-term contracts for the supply of paper. We are also affected by increases in billboard costs and the cost of producing and broadcasting our television, radio and internet advertising pieces. Previous changes in broadcast rates resulted in an increase in the cost of our television commercials. In response to any future increase in broadcast costs, we may consider reducing the frequency, placement and length of certain promotional pieces. We are not party to any long-term contracts for broadcast time. Future increases in costs affecting our marketing, advertising and promotions could adversely impact our ability to advertise effectively and our profitability.

Legal proceedings could adversely affect our business, financial condition and results of operations.

Our operations, which are characterized by transactions involving a high volume of customer traffic and a wide variety of product selections, carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in certain other industries. Consequently, we have been, are, and may in the future become a party to individual personal injury, product liability and other legal actions in the ordinary course of our business. While these actions are generally routine in nature, incidental to the operation of our business and immaterial in scope, the outcome of litigation is difficult to assess or quantify. Additionally, we could be exposed to industry-wide or class-action claims arising from the products we carry or industry-specific business practices. Further, we have been, are and may in the future become subject to claims for discrimination, harassment, wages and hours and other federal or state employment matters. While we maintain insurance, such coverage may not be adequate or may not cover a specific legal claim. Moreover, the cost to defend against litigation may be significant. As a result, litigation could have a material adverse effect on our business, financial position and results of operations.

See “Legal Proceedings” for a description of a purported class action lawsuit filed against the Company in connection with a data security incident that affected the Company, which description is incorporated herein by reference.

Failure to protect our information systems against cyber-attacks or information security breaches, including failure to protect the integrity and security of individually identifiable data of our customers and employees, could expose us to litigation, damage our reputation and have a material adverse effect on our business.

We rely on computer systems and information technology to conduct our business, including to securely transmit data associated with cashless payments. These systems are inherently vulnerable to disruption or failure, as well as internal and external security breaches, denial of service attacks and other disruptive problems caused by hackers.

In addition, we receive and maintain certain personal information about our customers and employees. The use of this information by us is regulated by applicable law. Privacy and information security laws and regulations change, and compliance with updates may result in cost increases due to necessary systems changes and the development of new administrative processes.

If our security and information systems are compromised or our employees fail to comply with applicable laws and regulations and personal or other confidential information is obtained by unauthorized persons or used inappropriately, it could interrupt our business, resulting in a slowdown of our normal business activities or limitations on our ability to process credit card transactions, and could adversely affect our reputation, ability to compete in the food retail marketplace, financial condition and results of operations. Additionally, a data security breach could subject us to litigation, customer demands for indemnification for third party claims and/or the imposition of penalties, fines or other assessments. In such event, our liability could exceed our insurance coverage or our ability to pay. In addition, a security breach could require that we expend significant amounts to remediate the breach, including changes in our information security systems.

We were affected by a data security incident during fiscal year 2015. See “Legal Proceedings” for a description of a purported class action lawsuit filed against the Company in connection with that data security incident, which description is incorporated herein by reference.

Our credit facility could limit our operational flexibility. 

We have a credit agreement (our Credit Facility) that allows us to borrow up to $25.0 million. Our Credit Facility is secured by a lien on substantially all of our assets and contains usual and customary restrictive covenants relating to our management and the operation of our business. These covenants, among other things, restrict our ability to incur additional indebtedness, grant liens, engage in certain merger, consolidation or asset sale transactions, make certain investments, make loans, advances, guarantees or acquisitions, engage in certain transactions with affiliates or permit certain sale and leaseback transactions without lender consent. We are also required to maintain certain financial ratios under our Credit Facility, including a consolidated leverage ratio and a consolidated fixed charge ratio. These covenants could restrict our operational flexibility, including our ability to open stores, and any failure to comply with these covenants or our payment obligations would limit our ability to borrow under our Credit Facility and, in certain circumstances, may allow the lender thereunder to require repayment.

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We may need to raise additional debt or equity capital.

We have depended primarily on cash flow from our operations and borrowings from our Credit Facility to fund our business and execute on our growth strategy. From time to time, we may be required to seek additional equity or debt financing in order to fund capital expenditures or to provide additional working capital for our business, or to fund the execution of our growth strategy. In addition, changes in economic conditions, or market conditions requiring a shift in our business model could result in our need for additional debt or equity financing. We cannot predict the timing or amount of any such capital requirements. We do not know whether we will be able to take any of such actions on a timely basis, on terms satisfactory to us or at all. If financing is not available to us on satisfactory terms, or at all, we may be unable to operate or expand our business or to successfully pursue our growth strategy, and our results of operations may suffer. Pursuant to the NYSE Listed Company Manual, in order to rely on the “controlled company” corporate governance exemptions, the Isely family is, or entities controlled by the Isely family are, required to retain more than 50% of the total voting power of our shares of common stock for the election of directors. As long as we intend to remain a “controlled company,” these voting requirements will constrain our ability to issue additional shares of our common stock in the future.

Our political advocacy activities may reduce our customer count and sales.

We believe our ability to profitably operate our business depends, in part, upon our access to natural and organic products and dietary supplements. We attempt to protect our interest in this access through ongoing and proactive political advocacy campaigns, including participation in education programs, petitions, letter writing, phone calls, policy conferences, advisory boards, industry groups, public commentary and meetings with trade groups, office holders and regulators. We may publicly ally with and support trade groups, political candidates, government officials and regulators who support a particular policy we consider important to our business and in alignment with our principles regarding access to natural and organic products and dietary supplements. We may, from time to time, publicly oppose other trade groups, candidates, officeholders and regulators whose point of view we believe will harm our business, or impede access to nutritious food and dietary supplements. In some cases, we may lose customers and sales because our political advocacy activities are perceived to be contrary to those customers’ points of view, political affiliations, political beliefs or voting preferences.

Effective tax rate changes and results of examinations by taxing authorities could materially impact our results of operations.

Our future effective tax rates could be adversely affected by our earnings mix being lower than historical results in states where we have lower statutory rates and higher than historical results in states where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities or by changes in tax laws or interpretations thereof. In addition, we are subject to periodic audits and examinations by the Internal Revenue Service (IRS), and other state and local taxing authorities. Our results could be materially impacted by the determinations and expenses related to proceedings by the IRS and other state and local taxing authorities.

Failure to maintain adequate financial and management processes and controls could lead to errors in our financial reporting and could harm our ability to manage our expenses.

Our anticipated growth, and continuing reporting obligations as a public company, are placing a continuing and considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company, we are required to document and test our internal controls over financial reporting pursuant to Section 404 of Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley), so that our management can periodically certify the effectiveness of such controls. As an “emerging growth company,” we have opted to take advantage of certain exemptions contained in the Jumpstart Our Business Startups Act, or JOBS Act, and as a result, our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the date we are no longer an “emerging growth company” as defined in the JOBS Act. We will remain an “emerging growth company” until the earliest of (a) September 30, 2017, (b) the last day of our fiscal year in which we have annual gross revenue of $1.0 billion or more, (c) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt, or (d) the date on which we are deemed to be a “large accelerated filer,” which will occur at such time as we have: (i) an aggregate worldwide market value of common equity securities held by non-affiliates of $700 million or more as of the last business day of our most recently completed second fiscal quarter, (ii) been required to file annual, quarterly and current reports under the Securities Exchange Act of 1934, as amended (the Exchange Act) for a period of at least 12 calendar months and (iii) filed at least one annual report pursuant to the Exchange Act. As a result, we may qualify as an “emerging growth company” until as late as September 30, 2017. At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating. If our senior management is unable to conclude that we have effective internal control over financial reporting, or to certify the effectiveness of such controls, or if our independent registered public accounting firm cannot render an unqualified opinion on management’s assessment and the effectiveness of our internal control over financial reporting, or if material weaknesses in our internal control over financial reporting are identified, we could be subject to regulatory scrutiny and a loss of public confidence, which could have a material adverse effect on our business and our stock price.

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Changes in accounting standards may materially impact reporting of our financial condition and reported results of operations.

Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations for many aspects of our business, such as accounting for inventories, goodwill and intangible assets, store closures, leases, insurance, income taxes, stock-based compensation and mergers and acquisitions, are highly complex and involve subjective judgments. Changes in these rules or their interpretation or changes in underlying estimates, assumptions or judgments could significantly change or add significant volatility to our reported earnings without a comparable underlying change in cash flow from operations. As a result, changes in accounting standards may materially impact our reported results of operations.

We are an “emerging growth company” and, although we do not now believe that investors have found our common stock less attractive since our IPO as a result, we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors in the future.

We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from various reporting and other requirements that are applicable to other public companies that are not “emerging growth companies.” For so long as we are an “emerging growth company,” we will, among other things:

● not be required to comply with the auditor attestation requirements of Section 404(b) of Sarbanes-Oxley;

● not be required to hold a nonbinding advisory stockholder vote on executive compensation pursuant to Section 14A(a) of the Exchange Act;

● not be required to seek stockholder approval of any golden parachute payments not previously approved pursuant to Section 14A(b) of the Exchange Act;

● be exempt from any rule adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplemental auditor discussion and analysis; and

● be subject to reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

Although we do not now believe that investors have found our common stock less attractive since our IPO because we rely on certain of these exemptions, we cannot predict if investors may in the future view our common stock less favorably as a result of our “emerging growth company” status. If some investors in the future find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.

In addition, Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the Securities Act), for complying with new or revised accounting standards. An “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, we chose to “opt out” of such extended transition period, and as a result, we have complied and will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

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Risks related to our common stock

The market price of our common stock has been volatile and may continue to be volatile, and you may not be able to sell our common stock at a favorable price or at all.

The market price of our common stock is likely to fluctuate significantly from time to time in response to a number of factors, most of which we cannot control, including those described under “—Risks related to our business” and the following:

● differences between our actual financial and operating results and those expected by investors;

● fluctuations in our quarterly comparable store sales operating results;

● market conditions in our industry and the economy as a whole;

● changes in our earnings guidance;

● a change in the recommendation by any research analyst that follows our stock or any failure to meet the estimates made by research analysts;

● investor perceptions of our prospects and the prospects of the grocery and dietary supplement industries;

● the performance of our key vendors;

● announcements by us, our vendors or our competitors regarding performance, strategy, significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

● introductions of new product or new pricing policies by us or our competitors;

● failure to recruit or retain key personnel; and

● the level and quality of securities research analyst coverage for our common stock.

In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market price of equity securities.

An inability to maintain or improve levels of comparable store sales could cause our stock price to decline.

We may not be able to maintain or improve the levels of comparable store sales that we have experienced in the past. In addition, our overall comparable store sales may fluctuate in the future. A variety of factors affect comparable store sales, including:

● our ability to execute our business strategy effectively, including successfully opening new stores that achieve sales consistent with our existing stores;

● consumer preferences;

● competition;

● economic conditions;

● regulatory changes;

● product pricing and availability;

● in-store merchandising-related activities;

● consumer confidence;

● initial sales performance at our new stores; and

● our ability to source and distribute products efficiently.

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In addition, many specialty retailers have been unable to sustain high levels of comparable store sales during and after periods of substantial expansion. These factors may cause our comparable store sales results to be materially lower than in recent periods, which could have a material adverse effect on our business, financial condition and results of operations, and could result in a decline in the price of our common stock.

Our current principal stockholders have significant influence over us, and they could delay, deter or prevent a change of control or other business combination or otherwise cause us to take action with which you might not agree.

Members of the Isely family and certain persons, entities and accounts subject to a stockholders agreement relating to voting and limitations on the sale of shares, own or control approximately 57.3% of our common stock. Due to their holdings of common stock, members of the Isely family are able to continue to determine the outcome of virtually all matters submitted to stockholders for approval, including the election of directors, an amendment of our certificate of incorporation (except when a class vote is required by law), any merger or consolidation requiring common stockholder approval, and a sale of all or substantially all of the Company’s assets. Members of the Isely family have the ability to prevent change-in-control transactions as long as they maintain voting control of the Company. In addition, members of the Isely family and trusts controlled by them entered into a stockholders agreement by which they agreed to aggregate their voting power with regard to the election of directors.

In addition, because these holders have the ability to elect all of our directors, they are able to control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payments of dividends on our common stock and entering into extraordinary transactions, and their interests may not in all cases be aligned with your interests.

A substantial number of shares of our common stock are eligible for sale, and their sale could adversely affect our stock price and could impair our ability to raise capital through the sale of equity securities.

If certain of our stockholders sell, or the market perceives that certain of our stockholders intend to sell, in the public market, substantial amounts of our common stock, the market price of our common stock could decline significantly. These sales also might make it more difficult for us to sell equity or equity-related securities in the future at a time and price we deem appropriate. As of December 8, 2015, we had a total of 22,498,336 shares of common stock outstanding, of which 8,214,285 shares of common stock were issued in the IPO and 317,338 shares had been issued in connection with the vesting of restricted stock units issued under the 2012 Omnibus Incentive Plan, are registered and freely tradable without restriction under the Securities Act. The Company is aware that 34,947 shares have been sold, and believes approximately 440,000 additional shares could be sold, in exempt transactions. Up to approximately 13,491,766 additional shares of common stock could be sold, subject to compliance with the requirements of the Securities Act and the stockholders agreement among members of the Isely family and certain persons, entities and accounts related to them. The market price of our common stock could drop significantly if the holders of restricted stock sell them or are perceived by the market as intending to sell them. Also, in the future, we may issue shares of our common stock as a result of the vesting of up to 130,601 additional restricted stock units or in connection with investments or acquisitions. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then outstanding shares of our common stock.    

We do not anticipate paying dividends on our capital stock in the foreseeable future and capital appreciation may be your sole source of potential gain.

We anticipate that we will retain our future earnings, for the foreseeable future, in order to fund our growth strategy and for general corporate purposes. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors (our Board) and will depend upon many factors, including our financial condition, earnings, legal requirements, restrictions in our debt agreements and other factors our Board deems relevant. As a result, we can make no assurance that we will pay cash dividends to our stockholders in the future. Capital appreciation, if any, of our common stock will be your sole source of potential gain for the foreseeable future.

If securities or industry analysts do not publish research or reports about our business, if they adversely change their recommendations regarding our common stock or if our operating results do not meet their expectations, our common stock price could decline.

The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts cease to cover our company or fail to publish reports on us regularly, we may lose visibility in the financial markets, which could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our common stock, or if our operating results do not meet their expectations, our common stock price could decline.

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Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change in control, even if a sale of the Company would be beneficial to our stockholders, which could cause our stock price to decline and prevent attempts by our stockholders to replace or remove our current management.

Several provisions of our certificate of incorporation and amended and restated bylaws could make it difficult for our stockholders to change the composition of our Board, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay or prevent a merger or acquisition that our stockholders may consider favorable.

These provisions include:

● a staggered, or classified, Board;

● authorizing our Board to issue “blank check” preferred stock without stockholder approval;

● prohibiting cumulative voting in the election of directors;

● limiting the persons who may call special meetings of stockholders;

● prohibiting stockholders from acting by written consent after the Isely family ceases to own more than 50% of the total voting power of our shares; and

● establishing advance notice requirements for nominations for election to our Board or for proposing matters that can be acted on by stockholders at stockholder meetings.

These anti-takeover provisions could substantially impede the ability of our common stockholders to benefit from a change in control and, as a result, could materially adversely affect the market price of our common stock and your ability to realize any potential change-in-control premium.

We are a “controlled company” within the meaning of the NYSE Listed Company Manual, and, as a result, rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

The Isely family, or entities controlled by the Isely family, own more than 50% of the total voting power of our common shares for the election of directors, and therefore, we are considered a “controlled company” under the corporate governance standards set forth in the NYSE Listed Company Manual. As a “controlled company,” certain exemptions under NYSE standards free us from the obligation to comply with certain corporate governance requirements of the NYSE, including the requirements:

● that a majority of our Board consists of “independent directors,” as defined under the rules of the NYSE;

● that our director nominees be selected, or recommended for our Board’s selection, either: (i) by a majority of independent directors in a vote by independent directors, pursuant to a nominations process adopted by a Board resolution or (ii) by a nominating and governance committee composed solely of independent directors with a written charter addressing the nominations process; and

● that the compensation of our executive officers be determined, or recommended to the Board for determination, by a majority of independent directors in a vote by independent directors, or a compensation committee composed solely of independent directors.

Accordingly, for so long as we are a “controlled company,” stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the NYSE corporate governance requirements.

Item 1B. Unresolved Staff Comments.

Not applicable.

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Item 2. Properties.

As of September 30, 2015, we had 103 stores located in 18 states, as shown in the following chart:

State	Number of Stores
Arizona	6
Arkansas	1
Colorado	34
Idaho	3
Kansas	8
Minnesota	1
Missouri	2
Montana	4
Nebraska	3
Nevada	1
New Mexico	5
North Dakota	1
Oklahoma	7
Oregon	8
Texas	14
Utah	2
Washington	1
Wyoming	2

During the fiscal years ended September 30, 2015 and 2014, we opened 16 and 15 new stores, respectively. During fiscal year 2016, through the date of this Form 10-K, we have opened a total of three stores in Colorado and Utah. We have signed leases for an additional 18 new stores that we expect to open in fiscal year 2016 and 2017.

Our home office is located in Lakewood, Colorado. We occupy our home office under a lease covering approximately 35,000 square feet that expires in 2026; this facility is co-located with one of our stores. Additionally, we lease a 107,000 square foot bulk food repackaging facility and distribution center located in Golden, Colorado.  That facility also houses a training center and certain administrative support functions. During fiscal year 2015, we exercised an option to lease additional space in the building that houses the bulk food repackaging facility and distribution center. As a result of our exercise of that option, we plan to expand the bulk food repackaging facility and distribution center to approximately 150,000 square feet.

All of our stores and facilities, with one exception, are leased, with varying terms and renewal options. We own one store that is located on leased property. Lease terms typically range between ten and 20 years, with additional renewal options. We do not believe that any individual store property is material to our financial condition or results of operations. Of the current leases for our stores, five expire in fiscal year 2016, one expires in fiscal year 2017, four expire in fiscal year 2018, seven expire in fiscal year 2019; and the remainder will expire between fiscal years 2020 and 2062. We expect that we will be able to renegotiate these leases or relocate these stores as necessary.

In addition to new store openings, we periodically relocate or remodel stores. For fiscal year 2016, we plan to relocate four stores and remodel two stores.

Item 3. Legal Proceedings.

We periodically are involved in legal proceedings, including discrimination and other employment-related claims, customer personal injury claims, investigations and other proceedings arising in the ordinary course of business. When the potential liability from a matter can be estimated and the loss is considered probable, we record the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from our estimates. Although we cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against us, we do not believe any currently pending legal proceeding to which we are a party will have a material adverse effect on our business, prospects, financial condition, cash flows or results of operations.

In Bernhard Engl v. Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc., filed on September 25, 2015 in the United States District Court for the District of Colorado, the plaintiff filed a lawsuit against the Company in connection with a data security incident that affected the Company during fiscal year 2015. The complaint purports to state an action on behalf of a class of customers who used debit or credit cards at our stores. We believe the plaintiff's claims are without merit and intend to vigorously defend ourselves in this proceeding. At this time, we cannot predict: (i) whether the Court will certify plaintiff’s claims for class-wide treatment; (ii) how the Court will rule on the merits of the plaintiff’s claims; or (iii) the scope of the potential loss in the event of an adverse outcome.

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Item 4. Mine Safety Disclosures.

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is traded on the NYSE under the symbol “NGVC.”

Price Range of Our Common Stock

The following table shows the high and low sale prices per share of our common stock as quoted by the NYSE for the periods indicated:

Fiscal year ended September 30, 2015	High		Low
First Quarter (October 1, 2014 – December 31, 2014)	$	28.72	$	15.89
Second Quarter (January 1, 2015 – March 31, 2015)		35.00		24.84
Third Quarter (April 1, 2015 – June 30, 2015)		29.90		22.55
Fourth Quarter (July 1, 2015 – September 30, 2015)		28.67		19.82

Fiscal year ended September 30, 2014	High		Low
First Quarter (October 1, 2013 – December 31, 2013)	$	42.68	$	34.47
Second Quarter (January 1, 2014 – March 31, 2014)		44.60		33.51
Third Quarter (April 1, 2014 – June 30, 2014)		44.00		18.95
Fourth Quarter (July 1, 2014 – September 30, 2014)		24.27		16.01

Holders of Record

As of December 8, 2015, there were 100 holders of record of our common stock, and the closing price of our common stock was $20.01.

Dividend Policy

We anticipate that we will retain our future earnings, for the foreseeable future, in order to fund our growth strategy and for general corporate purposes. The declaration and payment of future dividends to holders of our common stock will be at the discretion of our Board and will depend upon many factors, including our financial condition, earnings, legal requirements, and restrictions in our debt agreements and other factors our Board deems relevant. Additionally, our Credit Facility prohibits the payment of cash dividends to Natural Grocers by Vitamin Cottage, Inc., the holding company, from Vitamin Cottage Natural Food Markets, Inc., the operating company, without the administrative agent’s consent except when no default or event of default exists. If no default or event of default exists, dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary course of business.

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Performance Graph

The graph below compares the cumulative return to shareholders of our common stock relative to the cumulative total returns of the NYSE Composite Index and the S&P Food Retail Index from July 25, 2012 to September 30, 2015, which is the amount of time our stock has been trading publicly following our IPO on July 25, 2012. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes from July 25, 2012 to September 30, 2015. The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Use of Proceeds From Registered Securities

None.

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

None.

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Item 6. Selected Financial Data.

The following selected financial data presented below is derived from the Company’s consolidated financial statements and should be read in conjunction with “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.” Our historical results set forth below are not necessarily indicative of results to be expected for any future period.

	Year ended September 30,
	2015			2014			2013			2012			2011
Statements of Income Data (dollars in thousands):
Net sales	$	624,678			520,674			430,655			336,385			264,544
Cost of goods sold and occupancy costs		442,582			369,172			304,922			237,328			187,162
Gross profit		182,096			151,502			125,733			99,057			77,382
Store expenses		132,131			108,657			89,935			72,157			57,610
Administrative expenses		17,514			14,823			13,479			12,733			10,397
Pre-opening and relocation expenses		3,822			3,774			3,231			2,173			1,964
Operating income		28,629			24,248			19,088			11,994			7,411
Other (expense) income:
Interest expense		(2,993	)		(2,496	)		(2,166	)		(568	)		(669	)
Other income, net		—			2			9			6			35
Income before income taxes		25,636			21,754			16,931			11,432			6,777
Provision for income taxes		(9,432	)		(8,281	)		(6,379	)		(3,955	)		(2,167	)
Net income		16,204			13,473			10,552			7,477			4,610
Net income attributable to noncontrolling interest		—			—			—			(828	)		(1,106	)
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	16,204			13,473			10,552			6,649			3,504
Per Share Data:
Net income attributable to Natural Grocers by Vitamin Cottage, Inc. per share of common stock (EPS)
Basic	$	0.72			0.60			0.47			0.30			0.16
Diluted	$	0.72			0.60			0.47			0.30			0.16
Shares used in computation of EPS
Basic		22,490,260			22,466,432			22,399,346			22,372,184			22,372,184
Diluted		22,500,833			22,479,835			22,441,382			22,463,093			22,461,405
Pro Forma Statements of Income Data (Unaudited) (dollars in thousands)(1):
Income before income taxes	$	25,636			21,754			16,931			11,432			6,777
Pro forma provision for income taxes		(9,432	)		(8,281	)		(6,379	)		(4,264	)		(2,589	)
Pro forma net income	$	16,204			13,473			10,552			7,168			4,188
Pro Forma Per Share Data (Unaudited)(2):
Pro forma net income per share of common stock
Basic	$	0.72			0.60			0.47			0.32			0.19
Diluted	$	0.72			0.60			0.47			0.32			0.19
Other Financial Data (Unaudited) (dollars in thousands):
EBITDA(3)	$	49,966			41,462			32,593			21,949			15,137
EBITDA margin(4)		8.0	%		8.0			7.6			6.5			5.7

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Other Operating Data (Unaudited):
Number of stores at end of period		103		87	72	59	49
Number of stores opened during the period		16		15	13	10	10
Number of stores relocated and remodeled during the period		2		2	3	1	1
Change in comparable store sales(5)		5.9	%	5.6	10.8	11.6	4.9
Change in daily average comparable store sales(5)		5.9	%	5.6	11.1	11.3	4.9
Change in mature store sales(6)		2.6	%	3.4	6.1	7.6	2.0
Change in daily average mature store sales(6)		2.6	%	3.4	6.4	7.3	2.0
Gross square footage at end of period(7)		1,668,534		1,354.204	1,097,708	801,914	619,172
Selling square footage at end of period(7)		1,089,020		892,908	728,609	572,132	459,435
Average comparable store size (gross square feet)(8)		15,579		15,250	13,900	12,816	12,239
Average comparable store size (selling square feet)(8)		10,250		10,125	9,872	9,458	9,284
Comparable store sales per selling square foot during period(9)	$	678		708	729	734	720

	As of September 30,
	2015		2014		2013		2012		2011
Selected Balance Sheet Data (dollars in thousands):
Cash and cash equivalents	$	2,915		5,113		8,132		17,291		378
Total assets		233,924		188,985		159,903		125,662		78,915
Total debt(10)		27,607		21,977		19,822		5,808		28,442
Total stockholders’ equity		115,488		98,854		84,533		72,949		15,927

(1) In connection with our IPO in the fourth quarter of fiscal year 2012, we purchased the 45% noncontrolling interest in Boulder Vitamin Cottage Group, LLC (BVC) not previously owned by us. Prior to the purchase of the noncontrolling interest, we held a controlling 55% interest in BVC for all periods presented. As such, our consolidated statements of income include the revenues and expenses of BVC for the fiscal years ended September 30, 2012 and 2011 as required by generally accepted accounting principles in the United States of America (GAAP). We previously reported the 45% of BVC’s net income as net income attributable to noncontrolling interest in our consolidated statements of income for the periods in which we did not own 100% of BVC. The pro forma financial data presented above illustrates what our net income would have been had we owned 100% of BVC for the fiscal years ended September 30, 2012 and 2011. Pro forma net income attributable to Natural Grocers by Vitamin Cottage, Inc., is not a measure of financial performance under GAAP. Management believes that investors’ understanding of our performance is enhanced by including this non-GAAP financial measure of pro forma net income, together with a reconciliation from net income attributable to Natural Grocers by Vitamin Cottage, Inc., as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations period over period, and we believe this non-GAAP measure provides investors with comparable data period over period to illustrate pro forma results had we owned 100% of BVC for all periods presented. We further believe that our presentation of this non-GAAP financial measure provides information that is useful to analysts and investors because it is an important indicator of the strength of our operations and the performance of our business. This non-GAAP measure is a supplemental measure of operating performance that does not represent and should not be considered in isolation or as an alternative to, or substitute for, net income attributable to Natural Grocers by Vitamin Cottage, Inc. or other financial statement data presented in the consolidated financial statements as indicators of financial performance. This non-GAAP financial measure has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP.

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The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to pro forma net income, dollars in thousands, except per share data:

	Year ended September 30,
	2015			2014			2013			2012			2011
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	16,204			13,473			10,552			6,649			3,504
Net income attributable to noncontrolling interest		—			—			—			828			1,106
Net income		16,204			13,473			10,552			7,477			4,610
Provision for income taxes		9,432			8,281			6,379			3,955			2,167
Income before income taxes		25,636			21,754			16,931			11,432			6,777
Pro forma provision for income taxes		(9,432	)		(8,281	)		(6,379	)		(4,264	)		(2,589	)
Pro forma net income	$	16,204			13,473			10,552			7,168			4,188
Per Share Data:
Pro forma net income per share of common stock
Basic	$	0.72			0.60			0.47			0.32			0.19
Diluted	$	0.72			0.60			0.47			0.32			0.19

Our effective tax rate increased as a result of the BVC acquisition, as the income attributable to the noncontrolling interest was nontaxable income prior to the acquisition, but is included in our taxable income after the acquisition. The following table reconciles our effective tax rate to our pro forma effective tax rate had we owned 100% of BVC for the fiscal years ended September 30, 2012 and 2011:

	Year ended September 30,
	2015			2014		2013		2012			2011
Statutory tax rate		35.0	%		35.0		34.0		34.0			34.0
Nontaxable net income attributable to noncontrolling interest		—			—		—		(2.7	)		(6.2	)
State income taxes, net of federal income tax expense		2.9			3.0		3.3		3.0			3.4
Other, net		(1.1	)		0.1		0.4		0.3			0.8
Effective tax rate		36.8			38.1		37.7		34.6			32.0
Pro forma adjustment to exclude nontaxable net income attributable to noncontrolling interest		—			—		—		2.7			6.2
Pro forma effective tax rate		36.8	%		38.1		37.7		37.3			38.2

Effective October 31, 2012, BVC merged with and into our operating company and ceased to exist.

(2) Pro forma per share data is calculated using pro forma net income had we owned 100% of BVC for the fiscal years ended September 30, 2012 and 2011, as discussed above, divided by basic and diluted weighted average shares of common stock outstanding for those fiscal periods.

(3) Earnings before interest, taxes, depreciation and amortization (EBITDA) is not a measure of financial performance under GAAP. We define EBITDA as net income attributable to Natural Grocers by Vitamin Cottage, Inc. before interest expense, provision for income tax, depreciation and amortization, and for the fiscal years ended September 30, 2012 and 2011, net income attributable to the noncontrolling interest. We believe EBITDA provides additional information about: (i) our operating performance, because it assists us in comparing the operating performance of our stores on a consistent basis, as it removes 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 measure in our financial covenants under our Credit Facility. In addition, EBITDA performance is one of the factors upon which funding of our incentive compensation plans is based.

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Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for comparing our ongoing results of operations. By providing this non-GAAP financial measure, together with a reconciliation from net income attributable to Natural Grocers by Vitamin Cottage, Inc., 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 differently, and as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a supplemental measure of operating performance that should not be considered in isolation and that does not represent, and should not be considered as an alternative to, or substitute for net income or other financial statement data presented in our consolidated financial statements as indicators of financial performance. EBITDA has limitations as an analytical tool, 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 does not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

● EBITDA does not reflect changes in, or cash requirements for, our working capital needs;

● EBITDA does not reflect any impact for straight-line rent expense for leases classified as capital and financing lease obligations;

● EBITDA does not reflect the interest expense, or the cash requirements necessary to service interest or principal payments on our debt;

● EBITDA does 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 does not reflect any cash requirements for such replacements.

Due to these limitations, EBITDA should not be considered as a measure 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 as supplemental information. We further believe that our presentation of this non-GAAP financial measurement provides information that is useful to analysts and investors because it is an important indicator of the strength of our operations and the performance of our business.

The following table reconciles net income attributable to Natural Grocers by Vitamin Cottage, Inc. to EBITDA, dollars in thousands:

	Year ended September 30,
	2015		2014		2013		2012		2011
Net income attributable to Natural Grocers by Vitamin Cottage, Inc.	$	16,204		13,473		10,552		6,649		3,504
Net income attributable to noncontrolling interest		—		—		—		828		1,106
Net income		16,204		13,473		10,552		7,477		4,610
Interest expense		2,993		2,496		2,166		568		669
Provision for income taxes		9,432		8,281		6,379		3,955		2,167
Depreciation and amortization		21,337		17,212		13,496		9,949		7,691
EBITDA	$	49,966		41,462		32,593		21,949		15,137

(4) EBITDA margin is defined as the ratio of EBITDA to net sales. We present EBITDA margin because it is used by management as a performance measurement of EBITDA generated from net sales. See footnote (3) above for a discussion of EBITDA as a non-GAAP financial measure and a reconciliation of net income to EBITDA.

(5) When calculating change in comparable store sales, we begin to include sales from a store in our comparable store base 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 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. When calculating daily average comparable store sales, we include the 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.

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(6) When calculating change in mature store sales, we begin to include sales from a store in our mature store base after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2015 are stores that opened during or before fiscal year 2010). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature 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 year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. When calculating daily average mature store sales, we include the mature 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.

(7) Gross square footage and selling square footage at the end of the period include the square footage for all stores that were open as of the end of the period presented.

(8) Average comparable store size for gross square feet and selling square feet are calculated using the average store size for all stores that were in the comparable store base as of the end of the period presented.

(9) Comparable store sales per selling square foot is calculated using comparable store sales for the period divided by the weighted average selling square feet per store based on the amount of time the store was included in the comparable store base during the period.

(10) Total debt includes capital and financing lease obligations, notes payable to related parties, the outstanding principal balance of our term loan and outstanding borrowings under our Credit Facility. As of September 30, 2012, the term loan was fully repaid. As of September 30, 2013, the notes payable to related parties were fully repaid. As of September 30, 2015, 2014 and 2013, no amounts were outstanding under our Credit Facility.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with our consolidated financial statements and notes thereto and “Selected Financial Data,” which are included elsewhere in this Form 10-K. This MD&A contains forward-looking statements. Refer to “Forward-Looking Statements” at the beginning of this Form 10-K for an explanation of these types of statements. All references to a “fiscal year” refer to a year beginning on October 1 of the previous year, and ending on September 30 of such year (for example “fiscal year 2015” refers to the year from October 1, 2014 to September 30, 2015). 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 believe we have been at the forefront of the natural and organic foods movement since our founding. We are headquartered in Lakewood, Colorado, and as of September 30, 2015, we operated 103 stores in 18 states, including Colorado, Arizona, Arkansas, Idaho, Kansas, Minnesota, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, Texas, Utah, Washington and Wyoming. We also operate a bulk food repackaging facility and distribution center in Colorado.

We offer a variety of natural and organic groceries and dietary supplements that meet our strict quality guidelines. The size of our stores varies from 5,000 to 16,000 selling square feet. For the year ended September 30, 2015, our new stores averaged approximately 12,000 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. Over the last five fiscal years, our store base has grown at a compound annual growth rate of 21.4%, including 16, 15 and 13 new stores in fiscal year 2015, 2014 and 2013, respectively. We currently plan to open 23 new stores in fiscal year 2016. Between September 30, 2015 and the date of this Form 10-K, we have opened a total of three stores in Colorado and Utah. As of the date of this report, we also have signed leases for an additional 18 new store locations expected to open in fiscal years 2016 and 2017 in Arkansas, Arizona, Colorado, Iowa, Oregon, Texas, Utah and Washington.

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Performance Highlights

Key highlights of our recent performance are discussed briefly below and are discussed in further detail throughout this MD&A. Key financial metrics, including, but not limited to, comparable store sales, daily average comparable store sales, mature store sales and daily average mature store sales are defined under the caption “Key Financial Metrics in Our Business,” presented later in this MD&A.

● Net sales. Net sales were $624.7 million for the year ended September 30, 2015, an increase of $104.0 million, or 20.0%, compared to net sales of $520.7 million for the year ended September 30, 2014. Net sales increased at a compound annual growth rate of 20.4% from fiscal year 2013 to fiscal year 2015.

● Comparable store sales and daily average comparable store sales. Comparable store sales and daily average comparable store sales for the year ended September 30, 2015 each increased 5.9% over the year ended September 30, 2014. As of September 30, 2015, we have had over 53 consecutive quarters of positive comparable store sales growth.

● Mature store sales and daily average mature store sales. Mature store sales and daily average mature store sales for the year ended September 30, 2015 each increased 2.6% over the year ended September 30, 2014. For fiscal year 2015, mature stores include all stores open during or before fiscal year 2010.

● Net income. Net income was $16.2 million for the year ended September 30, 2015, an increase of $2.7 million, or 20.3%, compared to net income of $13.5 million for the year ended September 30, 2014.

● EBITDA. EBITDA was $50.0 million in the year ended September 30, 2015, an increase of $8.5 million, or 20.5%, compared to EBITDA of $41.5 million for the year ended September 30, 2014. EBITDA is not a measure of financial performance under GAAP. Refer to the “Selected Financial Data” section of this Form 10-K for a definition of EBITDA and a reconciliation of the Company’s net income to EBITDA.

● Liquidity. As of September 30, 2015, cash and cash equivalents was $2.9 million, and there was $14.0 million available under our then-existing $15.0 million credit agreement. As of September 30, 2015, the Company had outstanding letters of credit of $1.0 million, which amount was reserved against the amount available for borrowing under the terms of the credit agreement. The Company had no amounts outstanding under its credit agreement as of September 30, 2015.

● New store growth. We have opened 64 new stores since the beginning of fiscal year 2011, with 103 stores open as of September 30, 2015. Our new store compound annual growth rate was 19.6% from fiscal year 2013 to fiscal year 2015.

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. The grocery industry and our sales are affected by general economic conditions, including, but not limited to, consumer spending, economic conditions, the level of disposable consumer income, consumer debt, interest rates, the price of commodities, the political environment and consumer confidence.

● 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. As we open new stores, our results of operations have been and may continue to be materially adversely affected based on the timing and number of new stores we open, their initial sales and new lease costs. The length of time it takes for a new store to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market, the strength of store management and general economic conditions. Once a new store is open, it typically grows at a faster rate than mature stores for several years. Mature stores are stores that have been open for any part of five fiscal years or longer.

As we expand across the United States and enter markets where consumers may not be as familiar with our brand, we seek to secure prime real estate locations for our stores to establish greater visibility with consumers in those markets. This strategy has resulted in higher lease costs, and we anticipate these increased costs will continue into the foreseeable future. Our financial results for the year ended September 30, 2015 reflect the effects of these factors, and we anticipate future periods will be similarly impacted. 

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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. Our store offerings consist of natural and organic products and dietary supplements. A change in consumer preferences away from our offerings, including those resulting from reductions to or changes in our offerings, would have a material adverse effect on our business. Additionally, negative publicity regarding the safety of dietary supplements, product recalls or new or upgraded regulatory standards may adversely affect demand for our products and could result in lower consumer traffic, sales and results of operations.

● Increased Competition. The grocery and dietary supplement retail business is a large, fragmented and highly competitive industry, with few barriers to entry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway, mass or discount retailers such as Wal-Mart and Target, natural and gourmet markets such as Whole Foods and The Fresh Market, specialty food retailers such as Sprouts and Trader Joe’s, warehouse clubs such as Sam’s Club and Costco, independent health food stores, dietary supplement retailers, drug stores, farmers’ markets, food co-ops, mail order and online retailers and multi-level marketers. These businesses compete with us on the basis of price, selection, quality, customer service, shopping experience or any combination of these or other factors. They also compete with us for products and locations. In addition, some of our competitors are expanding to offer a greater range of natural and organic foods. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements, as well as our focus on providing nutritional education, differentiate us in the industry and provide a competitive advantage.

Outlook

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

We plan for the foreseeable future to continue opening new stores and entering new markets at or above recent levels of growth. During the past few years, we have successfully expanded our infrastructure to enable us to support our continued growth. This has included successfully implementing our ERP system, hiring key personnel, developing efficient new store opening construction and operations processes and relocating and expanding our bulk food repackaging facility and distribution center. We believe the implementation of our HRIS system has enabled us to more efficiently and effectively onboard and train our employees at all locations. During fiscal year 2015, we redesigned our website (www.naturalgrocers.com) to enhance functionality, create a more engaging user experience and increase its reach and effectiveness. In addition, in fiscal year 2015 we introduced the {N}power customer appreciation program at all our stores which we believe will enhance customer loyalty and increase customer engagement levels.

We believe there are opportunities for us to continue to expand our store base and focus on increasing comparable store sales. However, future sales growth, including comparable store sales, could vary due to increasingly competitive conditions in the natural and organic grocery and dietary supplement industry. As we continue to expand our store base, we believe there are opportunities for increased leverage in costs, such as administrative expenses, as well as increased economies of scale in sourcing products. However, due to our commitment to providing high-quality products at affordable prices and increased competition, such sourcing economies and efficiencies at our bulk food repacking facility and distribution center may not be reflected in our gross margin in the near term.

Our operating results may be affected by a variety of internal and external factors and trends, which are described more fully in the section entitled “Risk Factors” appearing elsewhere in this Form 10-K.

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 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 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.

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● Change in daily average comparable store sales. 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).

● Change in mature store sales. We begin to include sales from a store in mature store sales after the store has been open for any part of five fiscal years (for example, our mature stores for fiscal year 2015 are stores that opened during or before fiscal year 2010). We monitor the percentage change in mature store sales by comparing sales from all stores in our mature 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 year. When a store that is included in mature store sales is remodeled or relocated, we continue to consider sales from that store to be mature store sales. Our mature store sales data may not be presented on the same basis as our competitors.

● Change in daily average mature store sales. Daily average mature store sales are mature 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 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, return transactions and exchange transactions.

● Average transaction size. Average transaction size, or basket 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 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-K 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 sales typically decrease as new stores mature and increase sales. We do not record in cost of goods sold and occupancy costs rent payments for leases classified as capital and financing lease obligations. Rather, these rent payments are recognized as a reduction of the related obligations and as interest expense. Additionally, depreciation expense related to the capitalized asset is recorded in store expenses.

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 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 capitalized real estate leases, land improvements, leasehold improvements, fixtures and equipment and computer hardware and software. Additionally, store expenses include any gain or loss recorded on the disposal of fixed assets, primarily related to store relocations. The majority of store expenses are comprised of salary-related expenses which we closely manage and which trend closely with sales. Labor-related expenses as a percentage of sales tend to be higher at new stores compared to comparable stores, as new stores require a certain 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 sales typically decrease.

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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), professional services expenses, expenses associated with our Board 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 and relocation expenses

Pre-opening and relocation expenses may include rent expense, salaries, advertising, supplies and other miscellaneous costs incurred prior to the store opening. Rent expense is generally incurred from one to four months prior to a store’s opening date for store leases classified as operating. For store leases classified as capital or financing leases, no pre-opening rent expense is recognized. Other pre-opening and relocation expenses are generally incurred in the 60 days 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 and relocation costs are expensed as incurred.

Operating income

Operating income consists of gross profit less store expenses, administrative expenses and pre-opening and relocation expenses. Operating income can be impacted by a number of factors, including the timing of new store openings and store relocations, whether or not a store lease is classified as an operating or a capital or financing lease, as well as increases in store expenses and administrative expenses. The amount of time it takes for new stores to become profitable can vary depending on a number of factors, including location, competition, a new market versus an existing market and the strength of store management.

Interest expense

Interest expense consists of the interest associated with capital and financing lease obligations, net of capitalized interest. Interest expense also includes interest we incur on our outstanding indebtedness, including under our Credit Facility. As of September 30, 2015, 2014 and 2013, no amounts were outstanding under our Credit Facility.

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:

	Year ended September 30,
	2015			2014			2013
Statements of Income Data:*
Net sales		100.0	%		100.0			100.0
Cost of goods sold and occupancy costs		70.8			70.9			70.8
Gross profit		29.2			29.1			29.2
Store expenses		21.2			20.9			20.9
Administrative expenses		2.8			2.8			3.1
Pre-opening and relocation expenses		0.6			0.7			0.8
Operating income		4.6			4.7			4.4
Interest expense		(0.5	)		(0.5	)		(0.5	)
Income before income taxes		4.1			4.2			3.9
Provision for income taxes		(1.5	)		(1.6	)		(1.5	)
Net income		2.6	%		2.6			2.5

__________________________

*Figures may not sum due to rounding.

Other Operating Data:
Number of stores at end of period	103		87	72
Store unit count increase period over period	18.4	%	20.8	22.0
Change in comparable store sales	5.9	%	5.6	10.8
Change in daily average comparable store sales	5.9	%	5.6	11.1
Change in mature store sales	2.6	%	3.4	6.1
Change in daily average mature store sales	2.6	%	3.4	6.4

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Year ended September 30, 2015 compared to Year ended September 30, 2014

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

	Year ended September 30,						Change in
	2015			2014			Dollars			Percent
Statements of Income Data:
Net sales	$	624,678			520,674			104,004			20.0	%
Cost of goods sold and occupancy costs		442,582			369,172			73,410			19.9
Gross profit		182,096			151,502			30,594			20.2
Store expenses		132,131			108,657			23,474			21.6
Administrative expenses		17,514			14,823			2,691			18.2
Pre-opening and relocation expenses		3,822			3,774			48			1.3
Operating income		28,629			24,248			4,381			18.1
Other income (expense):
Dividends and interest income		—			2			(2	)		(100.0	)
Interest expense		(2,993	)		(2,496	)		(497	)		19.9
Income before income taxes		25,636			21,754			3,882			17.8
Provision for income taxes		(9,432	)		(8,281	)		(1,151	)		13.9
Net income	$	16,204			13,473			2,731			20.3	%

Net sales

Net sales increased $104.0 million, or 20.0%, to $624.7 million for the year ended September 30, 2015 compared to $520.7 million for the year ended September 30, 2014, primarily due to a $73.3 million increase in new store sales and a $30.7 million, or 5.9%, increase in comparable store sales. The comparable store sales increase was driven by a 3.6% increase in daily average transaction count and a 2.2% increase in average transaction size. Comparable store average transaction size was $35.98 in the year ended September 30, 2015.

Gross profit

Gross profit increased $30.6 million, or 20.2%, to $182.1 million for the year ended September 30, 2015 compared to $151.5 million for the year ended September 30, 2014, primarily driven by positive comparable store sales and an increase in the number of stores. Gross margin increased to 29.2% for the year ended September 30, 2015 from 29.1% for the year ended September 30, 2014. Gross margin was positively impacted by an increase in product gross margin, partially offset by an increase in occupancy costs as a percentage of sales for the year ended September 30, 2015 as compared to the year ended September 30, 2014. The positive impact in product margin is due to increases in product margin across most departments in the year ended September 30, 2015 as compared to the year ended September 30, 2014. Occupancy costs as a percentage of sales increased in the year ended September 30, 2015 as compared to the year ended September 30, 2014, primarily due to increased average lease expenses at newer stores.

For the years ended September 30, 2015 and 2014, the Company had 13 and ten leases respectively, for stores which were classified as capital and financing lease obligations. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the years ended September 30, 2015 and 2014 would have been approximately 60 basis points higher than as reported.

Store expenses

Store expenses increased $23.5 million, or 21.6%, to $132.1 million in the year ended September 30, 2015 from $108.7 million in the year ended September 30, 2014, primarily due to increases in salary related expenses, depreciation, and other store expenses related for the most part to increases in store count. Store expenses as a percentage of sales were 21.2% and 20.9% for the years ended September 30, 2015 and 2014, respectively. The increase in store expenses as a percentage of sales was primarily due to increases in other store expense and depreciation expense, partially offset by decreases in salary related expenses, all as a percentage of sales. The increase in other store expense as a percentage of sales was primarily driven by increases in ongoing facilities maintenance, other promotions and marketing support. Store expenses for the year ended September 30, 2015 were also impacted by higher incentive compensation and other discretionary benefit expense, reflecting our pay-for-performance philosophy.

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Administrative expenses

Administrative expenses increased $2.7 million, or 18.2%, to $17.5 million for the year ended September 30, 2015 compared to $14.8 million for the year ended September 30, 2014, primarily due to increases in salary-related expenses, various professional fees and other administrative expenses. Administrative expenses as a percentage of sales were 2.8% for each of the years ended September 30, 2015 and 2014.

Pre-opening and relocation expenses 

Pre-opening and relocation expenses were $3.8 million in each of the years ended September 30, 2015 and 2014. Pre-opening and relocation expenses as a percentage of sales were 0.6% and 0.7% for the years ended September 30, 2015 and 2014, respectively. The numbers of stores opened, relocated and remodeled were as follows for the periods presented:

	Year ended September 30,
	2015		2014
New stores		16		15
Relocated stores		1	─
Remodeled stores		1		2
		18		17

Interest expense

Interest expense, net of capitalized interest, increased $0.5 million, or 19.9%, in the year ended September 30, 2015 compared to the year ended September 30, 2014, primarily due to a $0.4 million increase in interest expense related to capital and financing lease obligations. If our capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 50 and 45 basis points lower than as reported in the years ended September 30, 2015 and 2014, respectively.

Income taxes

Provision for income taxes increased $1.2 million, or 13.9%, in the year ended September 30, 2015 compared to the year ended September 30, 2014, primarily due to a $3.9 million increase in income before income taxes, partially offset by favorable return to provision adjustments recognized in the year ended September 30, 2015. The effective tax rate decreased from 38.1% in the year ended September 30, 2014 to 36.8% in the year ended September 30, 2015, primarily due to the favorable return to provision adjustments resulting from lower federal taxable income due to the extension of the American Taxpayer Relief Act of 2012, which extended the 50% bonus depreciation on qualifying assets and the special 15 year life for qualified leasehold property and qualified retail improvement property acquired from January 1, 2014 through December 31, 2014. The lower taxable income reduced our actual federal income tax rate for fiscal year 2014 to 34.4%, compared to 35.0% estimated in our fiscal year 2014 tax provision. In addition, our return to provision adjustments were also favorably impacted by extension of the Work Opportunity Tax Credit (WOTC) through December 31, 2014 and other state tax credits.

Net income

Net income increased 20.3% to $16.2 million, or $0.72 per diluted earnings per share, in the year ended September 30, 2015 from $13.5 million, or $0.60 per diluted earnings per share, in the year ended September 30, 2014.

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Year ended September 30, 2014 compared to the year ended September 30, 2013

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

	Year ended September 30,						Change in
	2014			2013			Dollars			Percent
Statements of Income Data:
Net sales	$	520,674			430,655			90,019			20.9	%
Cost of goods sold and occupancy costs		369,172			304,922			64,250			21.1
Gross profit		151,502			125,733			25,769			20.5
Store expenses		108,657			89,935			18,722			20.8
Administrative expenses		14,823			13,479			1,344			10.0
Pre-opening and relocation expenses		3,774			3,231			543			16.8
Operating income		24,248			19,088			5,160			27.0
Other income (expense):
Dividends and interest income		2			9			(7	)		(77.8	)
Interest expense		(2,496	)		(2,166	)		(330	)		15.2
Income before income taxes		21,754			16,931			4,823			28.5
Provision for income taxes		(8,281	)		(6,379	)		(1,902	)		29.8
Net income	$	13,473			10,552			2,921			27.7	%

Net sales

Net sales increased $90.0 million, or 20.9%, to $520.7 million for the year ended September 30, 2014 compared to $430.7 million for the year ended September 30, 2013, primarily due to a $66.0 million increase in new store sales and a $24.0 million, or 5.6%, increase in comparable store sales. The comparable store sales increase was driven by a 2.3% increase in daily average transaction count and a 3.2% increase in average transaction size. Comparable store average transaction size was $36.09 in the year ended September 30, 2014. The rate of growth in our comparable store sales, while positive, has been slowed by the impact of increased competition.

Gross profit

Gross profit increased $25.8 million, or 20.5%, to $151.5 million for the year ended September 30, 2014 compared to $125.7 million for the year ended September 30, 2013, primarily driven by positive comparable store sales and an increase in the number of stores. Gross margin decreased to 29.1% for the year ended September 30, 2014 from 29.2% for the year ended September 30, 2013. The decrease in gross margin was due to an increase in occupancy costs as a percentage of sales, partially offset by an increase in product margin. The positive impact in product margin was due to increases in product margin across almost all departments, partially offset by a shift in sales mix towards products with lower margin for the year ended September 30, 2014 as compared to the year ended September 30, 2013. Gross margin benefitted from operating efficiencies at the bulk food repackaging and distribution center for the year ended September 30, 2014 as compared to the year ended September 30, 2013. Occupancy costs as a percentage of sales increased in the year ended September 30, 2014 as compared to the year ended September 30, 2013, primarily due to increased average lease expenses at newer stores and the fixed nature of occupancy costs per store.

For the years ended September 30, 2014 and 2013, the Company had ten and nine leases for stores which were classified as capital and financing lease obligations. If these leases had qualified as operating leases, the straight-line rent expense would have been included in occupancy costs, and our costs of goods sold and occupancy costs as a percentage of sales during the years ended September 30, 2014 and 2013 would have been approximately 60 and 55 basis points higher than as reported, respectively.

Store expenses

Store expenses increased $18.7 million, or 20.8%, to $108.7 million in the year ended September 30, 2014 from $89.9 million in the year ended September 30, 2013. Store expenses as a percentage of sales were 20.9% for both of the years ended September 30, 2014 and 2013. The consistency of store expenses as a percentage of sales was primarily due to an overall decrease in salaries, benefits and related expenses, offset by increases in depreciation expense and, to a lesser extent, utilities expense. The decreases in salaries, benefits and related expenses was primarily due to lower incentive compensation and other discretionary benefits expense, reflecting our pay-for-performance philosophy, partially offset by increases in salaries, benefits and related expenses required to support store growth. Salaries, benefits and related expense increased as a percentage of sales at comparable stores. Depreciation expense as a percentage of sales increased due to stores opened in fiscal year 2014.

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Administrative expenses

Administrative expenses increased $1.3 million, or 10.0%, to $14.8 million for the year ended September 30, 2014 compared to $13.5 million for the year ended September 30, 2013, primarily due to the addition of general and administrative positions to support our store growth, partially offset by lower incentive compensation and other discretionary benefits expense, reflecting our pay-for-performance philosophy. Administrative expenses as a percentage of sales were 2.8% and 3.1% for the years ended September 30, 2014 and 2013, respectively. The decrease in administrative expenses as a percentage of sales was a result of our ability to support additional store investment and sales without proportionate investments in overhead.

Pre-opening and relocation expenses 

Pre-opening and relocation expenses increased $0.5 million, or 16.8%, in the year ended September 30, 2014 to $3.8 million compared to $3.2 million in the year ended September 30, 2013 due to the increased number of new store openings in fiscal year 2014, as well as the timing of new store openings and possession of stores that are not yet opened, and the lease classification for those stores that were opened. Pre-opening and relocation expenses as a percentage of sales were 0.7% and 0.8% for the years ended September 30, 2014 and 2013, respectively. The numbers of stores opened, relocated and remodeled were as follows for the periods presented:

	Year ended September 30,
	2014		2013
New stores		15		13
Relocated stores	─			1
Remodeled stores		2		2
		17		16

Interest expense

Interest expense, net of capitalized interest, increased $0.3 million, or 15.2%, in the year ended September 30, 2014 compared to the year ended September 30, 2013, primarily due to a $0.7 million increase in interest expense primarily related to capital and financing lease obligations, offset by a $0.4 million increase in capitalized interest. If the capital and financing lease obligations had qualified as operating leases, interest expense as a percent of sales would have been approximately 45 and 50 basis points lower than as reported in the years ended September 30, 2014 and 2013, respectively.

Income taxes

Our effective income tax rate for the years ended September 30, 2014 and 2013 was 38.1% and 37.7%, respectively. The increase in our effective income tax rate was primarily due to an increase in federal income taxes, and to a lesser extent to changes in the blended state tax rates. Our federal income taxes increased because of additional taxable income and a consequential higher tax rate. Our additional taxable income was due in part to the impact of prior deductions for bonus depreciation.

During the first quarter of fiscal year 2014, the Company experienced benefits from the American Taxpayer Relief Act of 2012, which extended the 50% bonus depreciation on qualifying assets and the special 15 year life for qualified leasehold property and qualified retail improvement property for property acquired from January 1, 2013 through December 31, 2013. The Company also benefited from the extension of the Work Opportunity Tax Credit during the quarter ended December 31, 2013.

Net income

Net income increased 27.7% to $13.5 million, or $0.60 per diluted earnings per share, in the year ended September 30, 2014 from $10.6 million, or $0.47 per diluted earnings per share, in the year ended September 30, 2013.

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Non-GAAP financial measure

EBITDA

EBITDA is not a measure of financial performance under GAAP. We define EBITDA as net income before interest expense, provision for income taxes, depreciation and amortization. The following table reconciles net income to EBITDA, dollars in thousands:

	Year ended September 30,
	2015		2014		2013
Net income	$	16,204		13,473		10,552
Interest expense		2,993		2,496		2,166
Provision for income taxes		9,432		8,281		6,379
Depreciation and amortization		21,337		17,212		13,496
EBITDA	$	49,966		41,462		32,593

EBITDA increased 20.5% to $50.0 million in the year ended September 30, 2015 compared to $41.5 million in the year ended September 30, 2014. EBITDA as a percent of sales was 8.0% for each of the years ended September 30, 2015 and 2014, respectively. The stores with leases that are classified as capital and financing lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of sales by approximately 60 basis points for each of the years ended September 30, 2015 and 2014 due to the impact on cost of goods sold and occupancy costs as discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening date if these leases had been accounted for as operating leases.

EBITDA increased 27.2% to $41.5 million in the year ended September 30, 2014 compared to $32.6 million in the year ended September 30, 2013. EBITDA as a percent of sales was 8.0% and 7.6% for the year ended September 30, 2014 and 2013, respectively. The stores with leases that are classified as capital and financing lease obligations, rather than being reflected as operating leases, increased EBITDA as a percentage of sales by approximately 60 basis points for each of the years ended September 30, 2014 and 2013, due to the impact on cost of goods sold and occupancy costs as discussed above, as well as occupancy costs that would have been included in pre-opening expenses prior to the stores’ opening date if these leases had been accounted for as operating leases.

Management believes that some investors’ understanding of our performance is enhanced by including EBITDA, a non-GAAP financial measure. We believe EBITDA provides additional information about: (i) our operating performance, because it assists us in comparing the operating performance of our stores on a consistent basis, as it removes 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 measure in our financial covenants under our Credit Facility, and our incentive compensation plans base incentive compensation payments on our EBITDA performance. Furthermore, management believes some investors use EBITDA as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that some investors’ understanding of our performance is enhanced by including EBITDA as a reasonable basis for comparing our ongoing results of operations. By providing EBITDA, 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 differently, and as a result, our measure of EBITDA may not be directly comparable to those of other companies. Items excluded from EBITDA are significant components in understanding and assessing financial performance. EBITDA is a supplemental measure of operating performance that does 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 has limitations as analytical tools, and should not be considered in isolation, or as an alternative to, or as a substitute for, analysis of our results as reported under GAAP. For additional discussion of our use of EBITDA, and some of the limitations, please refer to the “Selected Financial Data” section of this Form 10-K.

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.

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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 and corporate taxes. As of September 30, 2015, we had $2.9 million in cash and cash equivalents, as well as $14.0 million available under our then-existing $15.0 million credit agreement. On November 17, 2015, as provided for in our Credit Facility, we obtained a commitment to increase the amount available for borrowing under our Credit Facility from $15.0 million to $25.0 million.

We plan to continue to open new stores, which has previously required and may continue to require us to borrow additional amounts under our Credit Facility in the future. 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 for at least the next twelve months. 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:

	Year ended September 30,
	2015			2014			2013
Net cash provided by operating activities	$	41,003			31,749			25,717
Net cash used in investing activities		(42,338	)		(34,872	)		(34,624	)
Net cash (used in) provided by financing activities		(863	)		104			(252	)
Net decrease in cash and cash equivalents		(2,198	)		(3,019	)		(9,159	)
Cash and cash equivalents, beginning of year		5,113			8,132			17,291
Cash and cash equivalents, end of year	$	2,915			5,113			8,132

Operating Activities

Cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation and amortization and changes in deferred taxes, and the effect of working capital changes. Cash provided by operating activities increased $9.3 million, or 29.1%, to $41.0 million in the year ended September 30, 2015, from $31.7 million in the year ended September 30, 2014. Cash provided by operating activities increased $6.0 million, or 23.5%, to $31.7 million in the year ended September 30, 2014, from $25.7 million in the year ended September 30, 2013. The increase in cash provided by operating activities was primarily due to an increase in net income, as adjusted for depreciation and amortization resulting from the addition of new stores, offset by changes in working capital driven by the timing of payment on inventory and other purchases. Our working capital requirements for inventory will likely continue to increase as we continue to open new stores.

Investing Activities

Cash used in investing activities consists primarily of capital expenditures. Cash used in investing activities increased $7.5 million, or 21.4%, to $42.3 million in the year ended September 30, 2015 compared to $34.9 million in the year ended September 30, 2014 due to the Company’s purchase of substantially all the assets and assumption of certain liabilities of natural foods retailer Nature’s Pantry, Inc. (the Store Acquisition), which operated one retail store in Independence, Missouri. We paid $5.6 million during the year ended September 30, 2015 related to the Store Acquisition. Cash paid for capital expenditures increased $0.2 million in the year ended September 30, 2015 compared to the year ended September 30, 2014, and is driven by the number and the timing of new store openings.

During the year ended September 30, 2015, we opened 16 new stores, relocated one store and remodeled one store. We plan to spend approximately $54 million to $56 million on capital expenditures during fiscal year 2016 in connection with the 23 planned new stores, the four store relocations and the two store remodels. We anticipate that our new stores will require, on average, an upfront capital investment of approximately $2.2 million per store.

Acquisition of property and equipment not yet paid increased $3.2 million to $6.4 million in fiscal year 2015 compared to fiscal year 2014 due to the timing of new store openings and relocations. We opened four new stores in the fourth quarter of fiscal year 2015 compared to opening three new stores in the fourth quarter of fiscal year 2014.

Cash used in investing activities increased $0.2 million, or 0.7%, to $34.9 million in the year ended September 30, 2014 from $34.6 million in the year ended September 30, 2013. The increase in capital expenditures from the year ended September 30, 2014 compared to the year ended September 30, 2013, was primarily driven by the timing and increased number of new stores opened during the year ended September 30, 2014. In the year ended September 30, 2014, we had proceeds from the maturity of available-for-sale securities of $1.1 million and a reduction in our restricted cash balance of $0.5 million.

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Financing Activities

Cash used in or provided by financing activities consists primarily of borrowings and repayments under our Credit Facility, excess tax benefits on vested share-based compensation and payments of capital and financing lease obligations. Cash used in financing activities was $0.9 million for the year ended September 30, 2015, compared to cash provided by financing activities of $0.1 million in the year ended September 30, 2014. The decrease in cash provided by financing activities for the year ended September 30, 2015 was primarily due to the payment of $0.5 million of contingent consideration related to the Store Acquisition and a $0.4 million decrease in the excess tax benefit from share-based compensation.

Cash provided by financing activities was $0.1 million for the year ended September 30, 2014, as compared to cash used in financing activities of $0.3 million in the year ended September 30, 2013. The increase in cash provided by financing activities for the year ended September 30, 2014 was primarily due to a decrease in repayments of related party notes payable and equity issuance costs paid, partially offset by a decrease in excess tax benefits for vested share based compensation.   

Credit Facility

Credit Facility 

We are a party to an amended and restated revolving Credit Facility.

We had no amounts outstanding under our then-existing $15.0 million credit agreement at September 30, 2015 or 2014, and $14.0 million available for borrowing as of September 30, 2015. As of September 30, 2015, we had undrawn, issued and outstanding letters of credit of $1.0 million, which amount was reserved against the amount available for borrowing under the terms of the credit agreement. On November 17, 2015, as provided for in our Credit Facility, we obtained a commitment to increase the amount available for borrowing under our Credit Facility from $15.0 million to $25.0 million.

For floating rate borrowings under our Credit Facility, interest is determined by the lender’s administrative agent and is stated at the prime rate less the lender spread, subject to the Company meeting certain financial measures. For fixed rate borrowings under our Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread, subject to us meeting certain financial measures.

Our Credit Facility is secured by a lien on substantially all of our assets. Our Credit Facility requires compliance with certain operational and financial covenants (including a leverage ratio and a fixed charge coverage ratio). Our Credit Facility also contains certain other limitations on our ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the agreement. Additionally, our Credit Facility prohibits the payment of cash dividends to the holding company from the operating company, without the administrative agent’s consent except when no default or event of default exists. If no default or event of default exists, dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary course of business. We do not expect such restrictions to impact our ability to meet our cash obligations. The terms and conditions of the Credit Facility and associated documents are customary and include, among other things, guarantees, security interest grants, pledges and subordinations. As of September 30, 2015, we were in compliance with the debt covenants of our credit agreement.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2015, dollars in thousands:

	Payments Due by Period
	Total		Less than 1 year		1–3 years		3-5 years		More than 5 years
Interest payments (1)	$	29		16		13	─		─
Operating leases (2)		387,906		27,172		59,809		57,069		243,856
Capital and financing lease obligations, including principal and interest payments (3)		47,206		3,692		7,439		7,526		28,549
Contractual obligations for construction related activities (4)		3,422		3,422	─		─		─
	$	438,563		34,302		67,261		64,595		272,405

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(1) We assumed the interest payments to be paid during the remainder of our Credit Facility using an unused commitment fee of 0.15% for amounts not borrowed as of September 30, 2015.

(2) Represents the minimum lease payments due under our operating leases, excluding annual common area maintenance, insurance and taxes related to our operating lease obligations.

(3) Represents the payments due under our 13 capital and financing lease obligations, 12 of which were open as of September 30, 2015. We do not record rent expense for these capital leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligations and interest expense.

(4) Contractual obligations for construction-related activities include future payments to general contractors that are legally binding as of September 30, 2015 and relate to new store construction, relocations and remodels.

Off-Balance Sheet Arrangements

As of September 30, 2015, our off-balance sheet arrangements consisted of operating leases and the undrawn portion of our Credit Facility. All of our stores and facilities, with one exception, are leased. We own one store that is located on leased property. As of September 30, 2015, 13 store leases were classified as capital and financing lease obligations, and the remaining leases were classified as operating leases in our consolidated financial statements. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material effect on our consolidated financial statements or financial condition.

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-17 “Income Taxes” Topic 740, “Income Taxes.” (ASU 2015-17). ASU 2015-17 addresses the balance sheet classification of deferred taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The guidance will be effective for our first quarter of the fiscal year ending September 30, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. We are currently evaluating the impact that the adoption of ASU 2015-17 will have on our consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments” Topic 805, “Business Combinations” (ASU 2015-16). The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retrospectively revise prior periods. Additionally, an acquirer should record in the same period the effects on earnings of any changes in the provisional accounts, calculated as if the accounting had been completed at the acquisition date. The amendments should be applied on a prospective basis. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The guidance in ASU 2015-16 will be effective for our first quarter of the fiscal year ending September 30, 2017.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” Topic 330, “Inventory” (ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 should be applied on a prospective basis. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The provisions of ASU 2015-11 are effective for our first quarter of the fiscal year ending September 30, 2018. We are currently evaluating the impact that the adoption of ASU 2015-11 will have on our consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software” (ASU 2015-05). ASU 2015-05 provides guidance as to whether a cloud computing arrangement (such as software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. The amendments in ASU 2015-05 may be applied on either a prospective or retrospective basis and early adoption is permitted. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The provisions of ASU 2015-05 are effective for our first quarter of the fiscal year ending September 30, 2017. We are currently evaluating the impact that the adoption of ASU 2015-05 will have on our consolidated financial statements.

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In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” Topic 835, “Interest” (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest,” Subtopic 835-30, “Interest” (ASU 2015-15). The guidance in ASU 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line of credit arrangements and ASU 2015-15 was issued to clarify that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line of credit arrangement, regardless of whether there are any outstanding borrowings on the line of credit arrangements. The amendments in ASU 2015-03 should be applied on a retrospective basis and early adoption is permitted. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The guidance in ASU 2015-03 will be effective for us in the first quarter of the fiscal year ending September 30, 2017. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However, earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The guidance in ASU 2014-09 will be effective for us in the first quarter of the fiscal year ending September 30, 2019. We have not yet selected a transition method and are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated financial statements and related disclosures.

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.

We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Refer to our consolidated financial statements and related notes for a summary of our significant accounting policies. We believe that the following accounting policies are the most critical in the preparation of our consolidated financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.

Income Taxes

We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which we operate. We consider the need to establish valuation allowances to reduce deferred income tax assets to the amounts that we believe are more likely than not to be recovered.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained by the relevant taxing authority. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Significant accounting judgment is required in determining the provision for income taxes and related accruals, deferred tax assets and liabilities. In the ordinary course of business, there are transactions and calculations where the ultimate tax outcome is uncertain. In addition, we are subject to periodic audits and examinations by the IRS and other state and local taxing authorities. Although we believe that our estimates are reasonable, actual results could differ from these estimates.

To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective income tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement would require the use of our cash and would result in an increase in our effective income tax rate in the period of resolution. A favorable tax settlement would be recognized as a reduction in our effective income tax rate in the period of resolution.

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Goodwill and Intangible Assets

We assess our goodwill and intangible assets primarily consisting of trademarks, favorable operating leases and covenants-not-to-compete at least annually. The Company’s annual impairment testing of goodwill is performed as of September 30. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not necessary. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the two-step impairment test. There are significant judgments and estimates within the processes; it is therefore possible that materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change.

Impairment of Long-Lived Assets

We assess our long-lived assets, principally property and equipment, for possible impairment at least annually, or whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. We aggregate long-lived assets at the store level which we consider to be the lowest level in the organization for which independent identifiable cash flows are available. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent the carrying value exceeds its fair value.

Our judgment regarding events or changes in circumstances that indicate an asset’s carrying value may not be recoverable is based on several factors such as historical and forecasted operating results, significant industry trends and other economic factors. Further, determining whether an impairment exists requires that we use estimates and assumptions in calculating the future undiscounted cash flows expected to be generated by the assets. These estimates and assumptions look several years into the future and include assumptions on future store revenue growth, potential impact of operational changes, competitive factors, inflation and the economy. Application of alternative assumptions could produce materially different results.

Leases 

We lease retail stores, a bulk food repackaging facility and distribution center, land and administrative offices under long-term operating, capital financing leases or capital leases. Accounting for leased properties requires compliance with technical accounting rules and significant judgment by management. Application of these accounting rules and assumptions made by management will determine whether the lease is accounted for as an operating lease, whether we are considered the owner for accounting purposes or whether the lease is accounted for as a capital lease.

If the lease is classified as an operating lease, it is not recognized on our consolidated balance sheet, and rent expense, including rent holidays and escalating payment terms, is recognized on a straight-line basis over the expected lease term.

If we are determined to be the owner for accounting purposes, we record the fair market value of the leased asset and a related capital lease finance obligation on our consolidated balance sheet. The leased asset is then depreciated over the estimated useful life of the asset. Rent payments for these properties are not recorded as rent expense, but rather are recognized as a reduction of the capital lease finance obligation and as interest expense.

If the lease is classified as a capital lease, we record the present value of the minimum lease payments and a related capital lease obligation on our consolidated balance sheet. The asset is then depreciated over the expected lease term. Rent payments for these properties are not recorded as rent expense, but rather are recognized as a reduction of the capital lease obligation and as interest expense.

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Significant accounting judgment and assumptions are required in determining the accounting for leases, including:

● fair market value of the leased asset, which is generally estimated based on project costs or comparable market data. Fair market value is used as a factor in determining whether the lease is accounted for as an operating or capital lease, and is used for recording the leased asset when we are determined to be the owner for accounting purposes;

● minimum lease term that includes contractual lease periods, and may also include the exercise of renewal options if the exercise of the option is determined to be reasonably assured or where failure to exercise such options would result in an economic penalty. The minimum lease term is used as a factor in determining whether the lease is accounted for as an operating lease or a capital lease and in determining the period over which to depreciate the capital lease asset; and

● incremental borrowing rate which is estimated based on treasury rates for debt with maturities comparable to the minimum lease term and our credit spread and other premiums. The incremental borrowing rate is used as a factor in determining the present value of the minimum lease payments which is then used in determining whether the lease is accounted for as an operating lease or capital lease, as well as for allocating our rental payments on capital leases between interest expense and a reduction of the outstanding obligation.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to interest rate changes of our long-term debt. We do not use financial instruments for trading or other speculative purposes.

Interest Rate Risk

Our principal exposure to market risk relates to changes in interest rates with respect to our Credit Facility. As of September 30, 2015, we had no amounts outstanding under our Credit Facility. Our Credit Facility carries floating interest rates that are tied to the prime rate, and therefore, our statements of income and our cash flows are exposed to changes in interest rates. Based upon a sensitivity analysis at September 30, 2015, a hypothetical 100 basis point change in interest rates would change our annual interest expense by less than $0.1 million in the year ended September 30, 2015.

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Item 8. Financial Statements and Supplementary Data.

Natural Grocers by Vitamin Cottage, Inc.

Index to Consolidated Financial Statements

	Page Number
Report of Independent Registered Public Accounting Firm	55
Consolidated Balance Sheets as of September 30, 2015 and 2014	56
Consolidated Statements of Income for the years ended September 30, 2015, 2014 and 2013	57
Consolidated Statements of Comprehensive Income for the years ended September 30, 2015, 2014 and 2013	58
Consolidated Statements of Cash Flows for the years ended September 30, 2015, 2014 and 2013	59
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2015, 2014 and 2013	60
Notes to Consolidated Financial Statements	61

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Natural Grocers by Vitamin Cottage, Inc.:

We have audited the accompanying consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries (the Company) as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows, and changes in stockholders’ equity for each of the years in the three-year period ended September 30, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Natural Grocers by Vitamin Cottage, Inc. and subsidiaries as of September 30, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended September 30, 2015, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

Denver, Colorado

December 10, 2015

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Consolidated Balance Sheets

(Dollars in thousands, except per share data)

	September 30,
	2015		2014
Assets
Current assets:
Cash and cash equivalents	$	2,915		5,113
Accounts receivable, net		2,576		2,146
Merchandise inventory		74,818		58,381
Prepaid expenses and other current assets		1,108		641
Deferred income tax assets		866		832
Total current assets		82,283		67,113
Property and equipment, net		145,219		120,224
Other assets:
Deposits and other assets		778		712
Goodwill and other intangible assets, net		5,623		900
Deferred financing costs, net		21		36
Total other assets		6,422		1,648
Total assets	$	233,924		188,985
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	49,896		33,835
Accrued expenses		19,649		15,822
Capital and financing lease obligations, current portion		333		229
Total current liabilities		69,878		49,886
Long-term liabilities:
Capital and financing lease obligations, net of current portion		27,274		21,748
Deferred income tax liabilities		6,073		5,409
Deferred compensation		314		—
Deferred rent		6,922		5,842
Leasehold incentives		7,975		7,246
Total long-term liabilities		48,558		40,245
Total liabilities		118,436		90,131
Commitments (Notes 11 and 18)
Stockholders’ equity:
Common stock, $0.001 par value. 50,000,000 shares authorized, 22,496,628 and 22,485,488 shares issued and outstanding, respectively		22		22
Additional paid-in capital		54,982		54,552
Retained earnings		60,484		44,280
Total stockholders’ equity		115,488		98,854
Total liabilities and stockholders’ equity	$	233,924		188,985

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Income

(Dollars in thousands, except per share data)

	Year ended September 30,
	2015			2014			2013
Net sales	$	624,678			520,674			430,655
Cost of goods sold and occupancy costs		442,582			369,172			304,922
Gross profit		182,096			151,502			125,733
Store expenses		132,131			108,657			89,935
Administrative expenses		17,514			14,823			13,479
Pre-opening and relocation expenses		3,822			3,774			3,231
Operating income		28,629			24,248			19,088
Other income (expense):
Dividends and interest income		—			2			9
Interest expense		(2,993	)		(2,496	)		(2,166	)
Total other expense, net		(2,993	)		(2,494	)		(2,157	)
Income before income taxes		25,636			21,754			16,931
Provision for income taxes		(9,432	)		(8,281	)		(6,379	)
Net income	$	16,204			13,473			10,552
Net income per share of common stock:
Basic	$	0.72			0.60			0.47
Diluted	$	0.72			0.60			0.47
Weighted average number of shares of common stock outstanding:
Basic		22,490,260			22,466,432			22,399,346
Diluted		22,500,833			22,479,835			22,441,382

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Comprehensive Income

(Dollars in thousands)

	Year ended September 30,
	2015		2014		2013
Net income	$	16,204		13,473		10,552
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities, net of tax benefit		—		—		4
Other comprehensive income		—		—		4
Comprehensive income	$	16,204		13,473		10,556

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Cash Flows

(Dollars in thousands)

	Year ended September 30,
	2015			2014			2013
Operating activities:
Net income	$	16,204			13,473			10,552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		21,337			17,212			13,496
Loss on disposal of property and equipment		56			1			43
Share-based compensation		573			532			602
Excess tax benefit from share-based compensation		—			(399	)		(592	)
Deferred income tax expense (benefit)		630			(1,186	)		2,452
Non-cash interest expense		15			19			47
Interest accrued on investments and amortization of premium		—			9			27
Other amortization		—			—			26
Changes in operating assets and liabilities
(Increase) decrease in:
Accounts receivable, net		(430	)		255			(546	)
Income tax receivable		—			612			(601	)
Merchandise inventory		(15,711	)		(12,909	)		(7,928	)
Prepaid expenses and other assets		(533	)		(665	)		105
Increase in:
Accounts payable		12,891			5,202			4,480
Accrued expenses		3,848			6,952			2,283
Deferred compensation		314			—			—
Deferred rent and leasehold incentives		1,809			2,641			1,271
Net cash provided by operating activities		41,003			31,749			25,717
Investing activities:
Acquisition of property and equipment		(36,750	)		(36,512	)		(39,708	)
Proceeds from sale of property and equipment		13			—			5,005
Payment for acquisition		(5,601	)		—			—
Purchase of available-for-sale securities		—			—			(521	)
Proceeds from sale of available-for-sale securities		—			—			90
Proceeds from maturity of available-for-sale securities		—			1,140			1,010
Decrease (increase) in restricted cash		—			500			(500	)
Net cash used in investing activities		(42,338	)		(34,872	)		(34,624	)
Financing activities:
Borrowings under credit facility		202,878			46,440			81
Repayments under credit facility		(202,878	)		(46,440	)		(81	)
Repayments under notes payable, related party		—			—			(282	)
Capital and financing lease obligations payments		(247	)		(182	)		(121	)
Contingent consideration payments for acquisition		(514	)		—			—
Excess tax benefit from share-based compensation		—			399			592
Equity issuance costs		—			—			(268	)
Payments on withholding tax for restricted stock unit vesting		(102	)		(83	)		(155	)
Loan fees paid		—			(30	)		(18	)
Net cash (used in) provided by financing activities		(863	)		104			(252	)
Net decrease in cash and cash equivalents		(2,198	)		(3,019	)		(9,159	)
Cash and cash equivalents, beginning of year		5,113			8,132			17,291
Cash and cash equivalents, end of year	$	2,915			5,113			8,132
Supplemental disclosures of cash flow information:
Cash paid for interest	$	63			16			7
Cash paid for interest on capital and financing lease obligations, net of capitalized interest of $309, $364 and $0, respectively		2,809			2,423			2,036
Income taxes paid		8,194			3,762			3,916
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	$	6,429			3,260			3,545
Property acquired through capital and financing lease obligations		5,772			2,300			14,372

See accompanying notes to consolidated financial statements.

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Consolidated Statements of Changes in Stockholders’ Equity

Fiscal years ended September 30, 2015, 2014 and 2013

(Dollars in thousands, except per share data)

	Common Stock –$0.001				Accumulated other			Additional					Total
	par value				comprehensive			paid-in			Retained		stockholders’
	Shares		Amount		(loss) income			capital			earnings		equity
Balances September 30, 2012		22,372,184	$	22	$	(4	)	$	52,676		$	20,255	$	72,949
Net income.		—		—		—			—			10,552		10,552
Accumulated other comprehensive income		—		—		4			—			—		4
Issuance costs		—		—		—			(12	)		—		(12	)
Share-based compensation		69,069		—		—			448			—		448
Excess tax benefit of share-based compensation		—		—		—			592			—		592
Balances September 30, 2013		22,441,253		22		—			53,704			30,807		84,533
Net income		—		—		—			—			13,473		13,473
Share-based compensation		44,235		—		—			449			—		449
Excess tax benefit of share-based compensation		—		—		—			399			—		399
Balances September 30, 2014		22,485,488		22		—			54,552			44,280		98,854
Net income		—		—		—			—			16,204		16,204
Share-based compensation		11,140		—		—			471			—		471
Tax shortfall related to share-based compensation		—		—		—			(41	)		—		(41	)
Balances September 30, 2015		22,496,628	$	22	$	—		$	54,982		$	60,484	$	115,488

See accompanying notes to consolidated financial statements.

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NATURAL GROCERS BY VITAMIN COTTAGE, INC.

Notes to Consolidated Financial Statements

September 30, 2015 and 2014

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries and dietary supplements. The Company operates its retail stores under its trademark Natural Grocers by Vitamin Cottage® with 103 stores as of September 30, 2015, including 34 stores in Colorado, 14 in Texas, eight each in Oregon and Kansas, seven in Oklahoma, six in Arizona, five in New Mexico, four in Montana, three each in Idaho and Nebraska, two each in Missouri, Utah and Wyoming, and one each in Arkansas, Minnesota, Nevada, North Dakota and Washington. The Company also has a bulk food repackaging facility and distribution center in Colorado. The Company had 87 and 72 stores as of September 30, 2014 and 2013, respectively.

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company), Vitamin Cottage Two Ltd. Liability Company and Natural Systems, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for self-insurance reserves, valuation of inventories, useful lives of property and equipment for depreciation and amortization, deferred tax assets and liabilities and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

Segment Information

The Company has one reporting segment, natural and organic retail stores.

Cash and Cash Equivalents

Cash and cash equivalents include currency on hand, demand deposits with banks, money market funds and credit and debit card transactions which typically settle within three business days. The Company considers all highly liquid investments with a remaining maturity of 90 days or less when acquired to be cash equivalents.

Investments

Available-for-sale investments are recorded at fair value. Unrealized holding gains and losses on available-for-sale investments are excluded from earnings and are reported as a component of other comprehensive income until realized. A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary for a period greater than two fiscal quarters results in a reduction of the fair value. Declines in fair value deemed to be other-than-temporary are charged against net earnings. Investments that have an original maturity date of less than one year are classified as short-term assets, and investments that have an original maturity date of greater than one year are classified as long-term assets.

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, newsletter advertising and other miscellaneous receivables and are presented net of any allowances for doubtful accounts. Vendor receivable balances are generally presented on a gross basis separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience and application of the specific identification method. Allowance for doubtful accounts totaled less than $0.1 million at each of September 30, 2015 and 2014.

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Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments in cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalent account balances, which are held in major financial institutions, exceeded the Federal Deposit Insurance Corporation’s federally insured limits by approximately $1.1 million as of September 30, 2015.

Vendor Concentration

For the years ended September 30, 2015, 2014 and 2013, purchases from the Company’s largest vendor and one of its subsidiaries represented approximately 57%, 56% and 55%, respectively, of all product purchases made during such periods. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.

Merchandise Inventory

Merchandise inventory consists of goods held for sale. The cost of inventory includes certain costs associated with the preparation of inventory for sale, including inventory overhead costs. Merchandise inventory is carried at the lower of cost or market value. Cost is determined using the weighted average cost method.

Property and Equipment

Property and equipment is stated at historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the following estimated useful lives of the related assets. 

	Useful lives (in years)
Land improvements	5	–	15
Buildings		40
Leasehold and building improvements	1	–	25
Capitalized real estate leases for build-to-suit stores		40
Capitalized real estate leases		15
Fixtures and equipment	5	–	7
Computer hardware and software	3	–	5

For land improvements and leasehold and building improvements, depreciation is recorded over the shorter of the assets’ useful lives or the lease terms. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains and losses on disposition of property and equipment are included in store expenses in the year of disposition, and primarily relate to store relocations.

The Company capitalizes interest, if applicable, as part of the historical costs of buildings and leasehold and building improvements. The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Capitalized software costs are included in property and equipment in the consolidated balance sheets and are amortized over the estimated useful lives of the software. Software costs that do not meet capitalization criteria are expensed as incurred.

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in authoritative guidance. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The three levels are defined as follows:

Level 1 —	Inputs are unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 —	Inputs include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 —	Inputs are unobservable and are considered significant to the fair value measurement.

Transfers between levels of the fair value hierarchy are deemed to have occurred as of the date of the event or transfer.

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Goodwill and Intangible Assets

Intangible assets primarily consist of goodwill, trademarks, favorable operating leases and covenants-not-to-compete. Goodwill and the Vitamin Cottage trademark have indefinite lives and are not amortized; rather, they are tested for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates the reasonableness of the useful lives of these intangibles at least annually.

The Company’s annual impairment testing of goodwill is performed as of September 30. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not necessary. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the two-step impairment test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. To date, the Company has recorded no impairment charges related to goodwill.

Impairment of Finite-Lived Intangible and Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company aggregates long-lived assets at the store level, which the Company considers to be the lowest level in the organization for which independent identifiable cash flows are available. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that store to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory factors in performing these analyses. To date, the Company has recorded no impairment charges related to finite-lived intangible or long-lived assets.

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the life of the borrowing or the life of the credit facility using the straight-line methods.

Leases 

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating or capital and financing leases. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. The lease term for accounting purposes commences with the date the Company takes possession of the space and ends on the later of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the lease.

Operating leases 

The Company accounts for operating leases with rent holidays and escalating payment terms by recognizing the associated expense on a straight-line basis over the lease term, and the difference between the average rental amount charged to expense and amounts payable under the leases are included in deferred rent. For certain leases, the Company has also received cash from landlords to compensate for costs incurred by the Company in making the store locations ready for operation (leasehold incentives or tenant allowances). Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term.

Capital financing leases

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution, the Company analyzes its involvement during the construction period. As a result of defined forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and may be required to capitalize the project costs on its balance sheet. If the project costs are capitalized, the Company performs a sale-leaseback analysis upon completion of the construction to determine if the Company can remove the assets from its balance sheet. If the asset cannot be removed from the balance sheet, the fair market value of the building remains recognized as an asset on the balance sheet, along with a corresponding capital lease financing obligation equal to the fair market value of the building less any amount the Company contributed towards construction. The Company does not record rent expense for the rental payments under capital financing leases, but rather payments under the capital financing lease obligations are recognized as a reduction of the capital lease financing obligation and as interest expense. The capital financing lease asset is depreciated on a straight-line basis over the estimated useful life of the asset.

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Capital leases

Occasionally, the Company enters into leases that are deemed to be capital leases. For these leases, the Company capitalizes the lower of the present value of the minimum lease payments or the fair value of the leased asset at inception and records a corresponding capital lease obligation. The Company does not record rent expense for the rental payments under capital leases, but rather payments under the capital lease obligations are recognized as a reduction of the capital lease obligation and as interest expense. The capital lease asset is depreciated on a straight-line basis over the term of the related lease.

Self-Insurance

The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation. Stop-loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate claims incurred but not reported using historical experience. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from historical trends.

Revenue Recognition

Revenue is recognized at the point of sale, net of in-house coupons, discounts and returns. Sales taxes are not included in sales. The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. The Company records a deferred revenue liability within accrued expenses when it sells the Company’s gift cards or issues gift cards for award or promotional purposes, and records a sale when a customer redeems the gift card. Generally, the gift cards do not expire. The Company currently does not record breakage for unused portions of gift cards.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and allowances, as well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging facility and distribution center. The amount shown is net of various rebates from third-party vendors in the form of quantity discounts and payments. Vendor consideration associated with product discounts is recorded as either a reduction of merchandise inventory or cost of goods sold. Store occupancy costs include rent, common area maintenance and real estate taxes. Store occupancy costs do not include any rent amounts for the store leases classified as capital and financing lease obligations.

Store Expenses

Store expenses consist of store-level expenses such as salaries, benefits and share-based compensation, supplies, utilities, depreciation, gain or loss on disposal of assets and other related costs associated with operations support. Store expenses also include purchasing support services and advertising and marketing costs.

Administrative Expenses

Administrative expenses consist of salaries, benefits and share-based compensation, occupancy costs, depreciation, office supplies, hardware and software expenses, professional services expenses and other general and administrative expenses.

Pre-Opening and Relocation Expenses

Costs associated with the opening of new stores or relocating existing stores are expensed as incurred.

Advertising and Marketing

Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening and relocation expenses in the consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2015, 2014 and 2013 were approximately $9.3 million, $7.8 million and $6.2 million, respectively, net of vendor reimbursements received for newsletter advertising. Advertising expense reimbursements received from vendors totaled approximately $2.5 million, $1.9 million and $1.5 million for the years ended September 30, 2015, 2014 and 2013, respectively.

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Share-Based Compensation

The Company adopted the 2012 Omnibus Incentive Plan in connection with the IPO on July 25, 2012. Restricted common stock units are granted at the market price of the Company’s common stock on the date of grant and expensed over the applicable vesting period.

The excess tax benefits for recognized compensation costs are reported as a credit to additional-paid-in capital and as operating cash outflows when such excess tax benefits are realized by a reduction to current taxes payable.

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which the Company operates.

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the Company believes are more likely than not to be recovered.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service (IRS) and other state and local taxing authorities.

Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent differences for tax purposes.

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-17 “Income Taxes” Topic 740, “Income Taxes.” (ASU 2015-17). ASU 2015-17 addresses the balance sheet classification of deferred taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The guidance will be effective for the Company’s first quarter of the fiscal year ending September 30, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact that the adoption of ASU 2015-17 will have on its consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments” Topic 805, “Business Combinations” (ASU 2015-16). The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retrospectively revise prior periods. Additionally, an acquirer should record in the same period the effects on earnings of any changes in the provisional accounts, calculated as if the accounting had been completed at the acquisition date. The amendments should be applied on a prospective basis. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The guidance in ASU 2015-16 will be effective for the Company’s first quarter of the fiscal year ending September 30, 2017.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” Topic 330, “Inventory” (ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 should be applied on a prospective basis. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The provisions of ASU 2015-11 are effective for the Company’s first quarter of the fiscal year ending September 30, 2018. The Company is currently evaluating the impact that the adoption of ASU 2015-11 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software” (ASU 2015-05). ASU 2015-05 provides guidance as to whether a cloud computing arrangement (such as software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. The amendments in ASU 2015-05 may be applied on either a prospective or retrospective basis and early adoption is permitted. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. The provisions of ASU 2015-05 are effective for the Company’s first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of ASU 2015-05 will have on its consolidated financial statements.

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In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” Topic 835, “Interest” (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest,” Subtopic 835-30, “Interest” (ASU 2015-15). The guidance in ASU 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements and ASU 2015-15 was issued to clarify that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangements. The amendments in ASU 2015-03 should be applied on a retrospective basis and early adoption is permitted. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 , and interim periods within those fiscal years. The guidance in ASU 2015-03 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of ASU 2015-03 will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However, earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company has not yet selected a transition method and is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements and related disclosures.

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3. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units were to vest, resulting in the issuance of common stock that would then share in the earnings of the Company. Presented below is basic and diluted earnings per share for the years ended September 30, 2015, 2014 and 2013, dollars in thousands, except per share data:

	Year ended September 30,
	2015		2014		2013
Net income	$	16,204		13,473		10,552
Weighted average number of shares of common stock outstanding		22,490,260		22,466,432		22,399,346
Effect of dilutive securities		10,573		13,403		42,036
Weighted average number of shares of common stock outstanding including the effect of dilutive securities		22,500,833		22,479,835		22,441,382
Basic earnings per share	$	0.72		0.60		0.47
Diluted earnings per share	$	0.72		0.60		0.47

There were 120,674, 3,558 and 50,320 non-vested restricted stock units (RSUs) for the years ended September 30, 2015, 2014 and 2013, respectively, excluded from the calculation as they are antidilutive.

The Company did not declare or pay any dividends in the years ended September 30, 2015, 2014 or 2013.

As of September 30, 2015, the Company had 50,000,000 shares of common stock authorized, of which 22,496,628 shares were issued and outstanding, as well as 10,000,000 shares of preferred common stock authorized, of which none was issued and outstanding.

4. Investments 

The Company had no investments as of September 30, 2015 or 2014. During the years ended September 30, 2014 and 2013, the Company recorded insignificant amounts of interest income.

5. Fair Value Measurements

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and market participant’s assumptions (unobservable inputs). Non-financial assets, such as goodwill and long-lived assets, are accounted for at fair value on a non-recurring basis. These items are tested for impairment on the occurrence of a triggering event or in the case of goodwill, at least on an annual basis.

As of September 30, 2015 and 2014, the Company did not have any financial assets or liabilities that were subject to fair value measurements.

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6. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2015 and 2014, dollars in thousands:

	Useful lives			As of September 30,
	(in years)			2015			2014
Construction in process		n/a		$	10,150			6,867
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively		40			24,774			17,107
Capitalized real estate leases		15			4,866			4,866
Land		n/a			192			192
Buildings		40			4,980			3,985
Land improvements	5	-	15		1,015			1,000
Leasehold and building improvements	1	-	25		91,865			74,691
Fixtures and equipment	5	-	7		83,932			69,894
Computer hardware and software	3	-	5		13,834			10,740
					235,608			189,342
Less accumulated depreciation and amortization					(90,389	)		(69,118	)
Property and equipment, net				$	145,219			120,224

As of September 30, 2015 and 2014, construction in process included $0 and approximately $2.3 million, respectively, related to construction costs for build-to-suit leases in process for which the Company was deemed the owner during the construction period. As of September 30, 2015 and 2014, construction in process included $0.9 million and $0, respectively, for capital real estate leases.

Capitalized costs for computer software development were $0.2 million and $0.1 million for the years ended September 30, 2015 and 2014, respectively, primarily due to capitalization of internal staff compensation. Total costs capitalized for qualifying construction projects on leasehold and building improvements and fixtures and equipment included approximately $0.6 million and $0.5 million, for the years ended September 30, 2015 and 2014, respectively, related to internal staff compensation. Interest costs of approximately $0.3 million and $0.4 million were capitalized for the years ended September 30, 2015 and 2014, respectively; no amounts of interest were capitalized for the year ended September 30, 2013. Depreciation expense related to capitalized internal staff compensation was approximately $0.4 million, $0.3 million and $0.3 million for the years ended September 30, 2015, 2014, and 2013, respectively.

Depreciation and amortization expense for the years ended September 30, 2015, 2014 and 2013 is summarized as follows, dollars in thousands:

	Year ended September 30,
	2015		2014		2013
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	796		770		709
Depreciation and amortization expense included in store expenses		19,635		15,861		12,365
Depreciation and amortization expense included in administrative expenses		906		581		422
Total depreciation and amortization expense	$	21,337		17,212		13,496

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7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of September 30, 2015 and 2014, are summarized as follows, dollars in thousands:

	Useful lives			As of September 30,
	(in years)			2015			2014
Amortizable intangible assets:
Covenants-not-to-compete	2	-	5	$	353			293
Favorable operating lease		5			339			339
Other intangibles	0.5	-	1		27			22
Amortized intangible assets					719			654
Less accumulated amortization					(683	)		(654	)
Amortized intangible assets, net					36			—
Trademark	Indefinite				389			389
Total other intangibles, net					425			389
Goodwill	Indefinite				5,198			511
Total goodwill and other intangibles, net				$	5,623			900

Amortization expense was less than $0.1 million, $0 and less than $0.1 million for the years ended September 30, 2015, 2014 and 2013, respectively. The aggregate estimated amortization expense for the years ending September 30, 2016 and 2017 is less than $0.1 million. There is no estimated amortization expense for the years ending September 30, 2018, 2019 and 2020. The increase in goodwill and intangible assets in the year ended September 30, 2015 was due to the Store Acquisition described in Note 17.

8. Accrued Expenses

The composition of accrued expenses as of September 30, 2015 and 2014, is summarized as follows, dollars in thousands:

	As of September 30,
	2015		2014
Payroll and employee-related expenses	$	7,795		5,886
Accrued income taxes payable		5,540		4,868
Accrued property, sales and use tax payable		4,365		3,409
Accrued marketing expenses		532		421
Deferred revenue related to gift card sales		864		725
Other		553		513
Total accrued expenses	$	19,649		15,822

9. Deferred Financing Costs

The Company has capitalized costs incurred in securing its Credit Facility (see Note 10). Deferred financing costs, net of accumulated amortization were less than $0.1 million as of September 30, 2015 and 2014. Accumulated amortization was approximately $0.9 million as of both September 30, 2015 and 2014, respectively.

Total amortization expense for deferred financing costs was less than $0.1 million for each of the years ended September 30, 2015, 2014 and 2013.

10. Long-Term Debt 

Credit Facility

The Company is party to a credit agreement (the Credit Facility). The operating company is the borrower under the Credit Facility, and its obligations under the Credit Facility are guaranteed by the holding company. The Credit Facility is secured by a lien on substantially all of the Company’s assets.

The Credit Facility requires compliance with certain operational and financial covenants including a leverage ratio and fixed charge coverage ratio. The Credit Facility also contains certain other limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the Credit Facility. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company, without the administrative agent’s consent except when no default or event of default exists.

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If no default or event of default exists dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary course of business. The Company does not expect such restrictions to impact its ability to meet cash obligations. The terms and conditions of the Credit Facility and associated documents are customary and include, among other things, guarantees, pledges and subordinations. At September 30, 2015 and 2014, the Company was in compliance with the debt covenants.

On December 12, 2013, the Company amended and restated its $15.0 million credit agreement, as a result of which, among other things: (i) the maturity date of the Credit Facility was extended by three years to January 31, 2017; (ii) the Company has the right to request the issuance of letters of credit under the Credit Facility of up to $3.0 million; (iii) the Company is allowed to increase the amount available under the revolving credit facility, by an additional amount that may not exceed $10.0 million, by obtaining an additional commitment or commitments; (iv) a requirement for a consolidated earnings before interest, taxes, depreciation and amortization to revenue ratio was eliminated; and (v) the unused commitment fee was changed from 0.20% to amounts ranging from 0.15% to 0.35% based on certain conditions. The Company may borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date.

On November 17, 2015, as provided for in the Credit Facility, the Company obtained a commitment to increase the amount available for borrowing under the Credit Facility from $15.0 million to $25.0 million.

The Company had no amounts outstanding on its credit agreement as of September 30, 2015 and 2014. During the years ended September 30, 2015 and 2014, the Company made and repaid borrowings under the credit agreement. As of September 30, 2015, the Company had undrawn, issued and outstanding letters of credit of $1.0 million which were reserved against the amount available for borrowing under the terms of the credit agreement. As of each of September 30, 2015 and 2014, there was $14.0 million available under the then-existing $15.0 million credit agreement.

For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent and is stated at the prime rate less the lender spread, subject to the Company meeting certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread, subject to the Company meeting certain financial measures.

Capital and Financing Lease Obligations

The Company had 13 and ten leases as of September 30, 2015 and 2014, respectively, that are included in capital and financing lease obligations (see Notes 2 and 11). The Company does not record rent expense for these capitalized real estate leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligation and as interest expense (see Note 11). The interest rate on capital and financing lease obligations is determined at the inception of the lease.

Interest

The Company incurred gross interest expense of approximately $3.3 million, $2.9 million and $2.2 million in the years ended September 30, 2015, 2014 and 2013, respectively. Interest expense for the years ended September 30, 2015, 2014 and 2013 relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of approximately $0.3 million and $0.4 million for the years ended September 30, 2015 and 2014, respectively, and had no amounts of capitalized interest for the year ended September 30, 2013.

11. Lease Commitments

Operating Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating leases through 2062. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. Deferred rent expense as of September 30, 2015 and 2014 was approximately $6.9 million and $5.8 million, respectively. Tenant improvement allowances received from landlords (leasehold incentives) are recorded as liabilities and recognized evenly as a reduction to rent expense over the lease term. Leasehold incentives at September 30, 2015 and 2014 were approximately $8.0 million and $7.2 million, respectively. Sublease rental income was less than $0.1 million for each of the years ended September 30, 2015 and 2014. The Company had no sublease rental income during the year ended September 30, 2013.

The Company has five operating leases with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC and one operating lease with FTVC, LLC, all related parties (see Note 13). The terms and rental rates of these related party leases are similar to leases with nonrelated parties and are at market rental rates. The leases began at various times with the earliest occurring in November 1999, continue for various terms through February 2027 and include various options to renew. Currently, annual lease payments range from less than $0.1 million to approximately $0.3 million per lease.

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Minimum rental commitments and sublease rental income under the terms of the Company’s operating leases are as follows, dollars in thousands:

Fiscal Year	Third parties		Related parties		Sublease Rental Income			Total Operating Leases
2016	$	25,889		1,283		(125	)		27,047
2017		28,458		1,281		(134	)		29,605
2018		28,789		1,281		(134	)		29,936
2019		27,588		1,281		(124	)		28,745
2020		26,915		1,285		(121	)		28,079
Thereafter		235,971		7,885		(338	)		243,518
	$	373,610		14,296		(976	)		386,930

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2015, 2014, and 2013 totaled approximately $26.3 million, $20.5 million and $14.8 million, respectively, which is included in cost of goods sold and occupancy costs and administrative expenses in the consolidated statements of income. In addition, approximately $0.8 million, $1.0 million and $0.6 million is included in pre-opening and relocation expense associated with rent expense for stores prior to their opening date for the years ended September 30, 2015, 2014 and 2013, respectively.

For the year ended September 30, 2013, the Company completed one sale-leaseback transaction with an unrelated party for proceeds of approximately $5.0 million, with a gain on the sale of approximately $0.2 million which has been deferred and will be amortized over the initial lease term. Concurrent with the sale, the Company entered into an agreement to lease the property back from the purchaser over an initial lease term of 15 years. The Company classified the lease as operating and considers the transaction as a normal leaseback with no other continuing involvement.

Capital and Financing Lease Obligations

Capital and financing lease obligations as of September 30, 2015 and 2014, were as follows, dollars in thousands:

	As of September 30,
	2015			2014
Capital lease finance obligations, due in monthly installments through fiscal year 2029	$	22,096			14,989
Capital lease obligations due in monthly installments through fiscal year 2028		4,539			4,672
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2024		—			2,316
Capital lease obligations for assets under construction, due in monthly installments through fiscal year 2041		972			—
Total capital and financing lease obligations		27,607			21,977
Less current portion		(333	)		(229	)
Total capital and financing lease obligations, net of current portion	$	27,274			21,748

Capital lease finance obligations

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution, the Company analyzes its involvement during the construction period. As a result of defined forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and would be required to capitalize construction costs on its balance sheet. If the project costs were capitalized, the Company performs a sale-leaseback analysis upon completion of the project to determine if the Company can remove the asset from its balance sheet. If the asset cannot be removed from the balance sheet, the fair market value of the building remains on the balance sheet along with a corresponding capital lease finance obligation equal to the fair market value of the building less any amounts the Company contributed toward construction. The Company had capital lease finance obligations totaling approximately $22.1 million and $15.0 million as of September 30, 2015 and 2014, respectively. The leases that created the obligations expire or become subject to renewal clauses at various dates through fiscal year 2029. The Company does not record rent expense for capital lease finance obligations, but rather rent payments per the leases are recognized as a reduction of the related capital lease finance obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and capital lease finance obligation will be derecognized.

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During the quarter ended December 31, 2014, the Company amended an existing lease with Chalet Properties, LLC, a related party (see Note 13) to obtain additional square footage at one Company store. Due to the Company’s involvement with construction for the additional space, the amended lease was deemed to be a capital financing lease in the quarter ended December 31, 2014. The Company capitalized a building asset and related capital lease finance obligation of $3.3 million. Per the lease terms, the Company will pay $2.8 million in cash for rent during the remaining term of the lease, of which $1.8 million will be recorded as interest expense and $1.0 million will be recorded as principal payments. Additionally, the Company will record $1.0 million in depreciation expense related to the building asset.

Capital lease obligations

The Company had capital lease obligations totaling approximately $4.5 million and $4.7 million as of September 30, 2015 and 2014, respectively. Certain of the Company’s leases for store locations are considered capital leases, and as such, the Company has capitalized the present value of the minimum lease payments under the leases for the stores and recorded related capital lease obligations. The leases that created the obligation expire or become subject to renewal clauses at various dates through fiscal year 2028. The Company does not record rent expense for capital lease obligations, but rather rent payments per the leases are recognized as a reduction of the related capital lease obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income.

Capital lease finance obligations for assets under construction

As of September 30, 2015, the Company had no construction in process related to capital lease finance obligations. As of September 30, 2014, the Company had recorded approximately $2.3 million in capital lease finance obligations for assets under construction. Once construction is completed, the Company was deemed to have continuing involvement and capitalized any additional costs of construction. The lease that created the obligation as of September 30, 2014 expires or becomes subject to renewal clauses in fiscal year 2024. The Company will not record rent expense for these leases, but rather rental payments under the leases will be recognized as a reduction of the capital lease finance obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and the capital lease finance obligation will be derecognized.

Capital lease obligations for assets under construction

As of September 30, 2015, the Company had recorded approximately $0.9 million for capital lease obligations for assets under construction. As of September 30, 2014, the Company had no construction in process related to capital lease obligations. The lease that created the obligation as of September 30, 2015 expires or becomes subject to renewal clauses in fiscal year 2041. The Company will not record rent expense for these leases, but rather rental payments under the leases will be recognized as a reduction of the capital lease obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and the capital lease obligation will be $0.

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Future payments for capital lease finance obligations and capital lease obligations

Future payments under the terms of the leases for opened stores included in capital lease finance obligations and capital lease obligations as of September 30, 2015 are as follows, dollars in thousands:

	Interest expense on capital lease finance obligations		Principal payments on capital lease finance obligations		Interest expense on capital lease obligations		Principal payments on capital lease obligations		Total future payments on capital lease finance and capital lease obligations
2016	$	2,643		177		650		151		3,621
2017		2,625		199		631		170		3,625
2018		2,604		234		609		192		3,639
2019		2,578		295		584		217		3,674
2020		2,546		329		554		247		3,676
Thereafter		15,836		4,464		2,460		3,561		26,321
Non-cash derecognition of capital lease finance obligations at end of lease term		—		16,399		—		—		16,399
	$	28,832		22,097		5,488		4,538		60,955

Future payments under the terms of the lease for the store location at which construction was in progress as of September 30, 2015, based on the store opening date in the first quarter of fiscal 2016, are as follows, dollars in thousands:

	Interest expense on capital lease obligations for assets under construction		Principal payments on capital lease obligations for assets under construction			Total future payments on capital lease obligations for assets under construction
2016	$	85		(14	)		71
2017		85		3			88
2018		85		3			88
2019		85		3			88
2020		85		3			88
Thereafter		1,253		974			2,227
	$	1,678		972			2,650

12. Share-Based Compensation

The Company adopted the 2012 Omnibus Incentive Plan (the Plan) on July 17, 2012. Restricted stock unit awards granted pursuant to the Plan, if they vest, will be settled in new shares of the Company’s common stock. At the adoption of the Plan, there were 1,090,151 shares of common stock available for issuance or delivery under the Plan, of which 620,580 remain available for grants as of September 30, 2015. The Plan provides for awards of options, stock appreciation rights, stock grants, restricted stock units, other share-based awards and cash-based incentive awards to officers, members of the Board of Directors (the Board) and certain employees who are not named executive officers and consultants. As of September 30, 2015, only restricted stock units had been granted under the Plan, at no out-of-pocket cost to officers, Board members and key employees. These restricted stock units vest subject to requisite service requirements, immediately in part or annually in installments over a one-to-five year period. The award recipients are not entitled to cash dividends or to vote with regard to non-vested restricted stock units, and the units are subject to forfeiture during the vesting period. Restricted stock units are granted at the market price of the Company’s stock on the date of grant and are expensed on a straight-line basis over the vesting period.

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The shares of non-vested restricted stock units as of September 30, 2015 were as follows:

	Shares			Weighted average grant date fair value
Non-vested as of September 30, 2013		86,053		$	21.80
Granted		3,558			42.16
Forfeited		(3,868	)		34.07
Vested		(48,549	)		12.38
Non-vested as of September 30, 2014		37,194			34.77
Granted		127,751			24.14
Forfeited		(17,560	)		25.04
Vested		(15,529	)		32.34
Non-vested as of September 30, 2015		131,856			26.05

Share-based compensation expense for awards to certain employees who are not named executive officers was approximately $0.4 million, $0.4 million, and $0.5 million for the years ended September 30, 2015, 2014, and 2013, respectively. 

Prior to fiscal year 2015, each independent member of the Board was annually granted a number of non-vested restricted stock units under the Plan equal to the number of shares of common stock having a value equal to $50,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant). In December 2014, the disinterested members of the Board increased the value of the annual grant of restricted stock to each independent director to $60,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant). Such grants are made each year on the date of the Company’s annual meeting of stockholders, or on a pro rata basis in the case of a mid-year appointment. Share-based compensation expense for the Company’s awards to its Board members was approximately $0.2 million, $0.1 million, and $0.1 million for the years ended September 30, 2015, 2014, and 2013, respectively.

The Company recorded total share-based compensation expense before income taxes of approximately $0.6 million, $0.5 million, and $0.6 million in the years ended September 30, 2015, 2014, and 2013, respectively. The share-based compensation expense is included in cost of goods sold and occupancy expenses, store expenses or administrative expenses in the consolidated statements of income consistent with the manner in which the applicable officer, Board member or key employee’s compensation expense is presented. The Company recognized a tax benefit from share-based compensation expense of approximately $0.2 million in each of the years ended September 30, 2015, 2014 and 2013.

As of September 30, 2015, there was approximately $3.0 million of unrecognized share-based compensation expense related to non-vested restricted stock units, net of estimated forfeitures, which the Company anticipates will be recognized over a weighted average period of approximately four years.

13. Related Party Transactions

The Company has ongoing relationships with related parties as noted:

Chalet Properties, LLC: The Company has five operating leases and one capital lease finance obligation (see Note 11) with Chalet Properties, LLC (Chalet). Chalet is owned by the Company’s four non-independent Board members, Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $1.1, million, $1.3 million and $1.3 million for the years ended September 30, 2015, 2014, and 2013, respectively. During the year ended September 30, 2015, Chalet sold one property to a third party in connection with one of the Company’s planned store relocations for the year ended September 30, 2016. The Company leased a new property with a non-related party for the relocated store’s new location. During the quarter ended December 31, 2014, the Company amended an existing lease with Chalet to obtain additional square footage at one Company store. Due to the Company’s involvement with construction for the additional space, the amended lease was deemed to be a capital financing lease in the quarter ended December 31, 2014.

Isely Family Land Trust LLC: The Company has one operating lease (see Note 11) with the Isely Family Land Trust LLC (Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.3 million for each of the years ended September 30, 2015, 2014, and 2013.

FTVC LLC: The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for the year ended September 30, 2015.

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14. Income Taxes

The following are the components of the provision for income taxes as of September 30, 2015, 2014 and 2013, respectively, dollars in thousands:

	Year ended September 30,
	2015		2014			2013
Current federal income tax expense	$	7,769		8,304			3,376
Current state income tax expense		1,033		1,163			551
		8,802		9,467			3,927
Deferred federal income tax expense (benefit)		514		(1,112	)		2,156
Deferred state income tax expense (benefit)		116		(74	)		296
		630		(1,186	)		2,452
Total provision for income taxes	$	9,432		8,281			6,379

The differences between the United States federal statutory income tax rate and the Company’s effective tax rate are as follows:

	Year ended September 30,
	2015			2014		2013
Statutory tax rate		35.0	%		35.0		34.0
State income taxes, net of federal income tax expense		2.9			3.0		3.3
Other, net		(1.1	)		0.1		0.4
Effective tax rate		36.8	%		38.1		37.7

Deferred taxes have been classified on the consolidated balance sheets as follows, dollars in thousands:

	As of September 30,
	2015			2014
Current assets	$	866			832
Long-term liabilities		(6,073	)		(5,409	)
Net deferred tax liabilities	$	(5,207	)		(4,577	)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows, dollars in thousands:

	As of September 30,
	2015			2014
Deferred tax assets
Capital and financing lease obligations	$	10,473			8,330
Goodwill		2,582			2,937
Leasehold incentives		3,025			2,746
Deferred rent		2,627			2,214
Trademarks		1,018			1,018
Accrued employee benefits		729			590
Other		363			322
Gross deferred tax assets		20,817			18,157
Deferred tax liabilities
Property and equipment		(22,909	)		(19,930	)
Leasehold improvements		(3,087	)		(2,804	)
Other		(28	)		—
Gross deferred tax liabilities		(26,024	)		(22,734	)
Net deferred tax liabilities	$	(5,207	)		(4,577	)

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The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of future deductions based on the nature of the deductible temporary differences and expected future taxable income.

The Company had $0 and approximately $0.1 million as of September 30, 2015 and 2014, respectively, in tax effected operating loss carryforwards related to state income taxes. The Company utilized the remaining operating loss carryforwards, of approximately $0.1 million, on its tax return for the year ended September 30, 2015. The Company utilized less than $0.1 million in tax effected state income tax carryforwards in the year ended September 30, 2014.

The Company files income tax returns with federal, state and local tax authorities. With limited exceptions, the Company is no longer subject to federal income tax examinations for fiscal years 2011 and prior and is no longer subject to state and local income tax examinations for fiscal years 2010 and prior.

15. Defined Contribution Plan

The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code). Employees may defer up to the annual maximum limit prescribed by the Code. The Company, on a discretionary basis, may match 25% of participant contributions up to a maximum annual employer match of $2,500. The Company’s matching contribution included in administrative expenses was approximately $0.6 million, $0.1 million and $0.4 million for the years ended September 30, 2015, 2014 and 2013 respectively.

16. Segment Reporting

The Company has one reporting segment, natural and organic retail stores. The Company’s revenues are derived from the sale of natural and organic products at its stores. All existing operations are domestic.

Sales from the Company’s natural and organic retail stores are derived from sales of the following products which are presented as a percentage of sales for the years ended September 30, 2015, 2014 and 2013 as follows:

	As of September 30,
	2015			2014		2013
Grocery		66.4	%		66.7		65.2
Dietary supplements		22.5			23.2		24.8
Body care, pet care and other		11.1			10.1		10.0
		100.0	%		100.0		100.0

17. Business Combination

On December 7, 2014, the Company purchased substantially all of the assets and assumed certain liabilities of natural foods retailer Nature’s Pantry, Inc. (the Store Acquisition), which operated one retail store in Independence, Missouri. Following the Store Acquisition, the store was rebranded as a Natural Grocers by Vitamin Cottage store. The transaction has been recorded in accordance with Accounting Standards Codification 805, “Business Combinations.” Assets acquired included, but were not limited to, inventory, property and equipment and certain intangible assets, including the Nature’s Pantry internet domain name and a covenant not to compete. The purchase price has been provisionally allocated to tangible and identifiable intangible assets totaling approximately $1.5 million based on their estimated fair values at the date of acquisition, summarized as follows, dollars in thousands:

Inventory and supplies	$	726
Property and equipment		680
Other intangible assets		65
Total provisionally allocated to tangible and identifiable intangible assets	$	1,471

Other intangible assets is primarily comprised of a covenant not to compete that will be amortized over a period of two years (see Note 7). During the year ended September 30, 2015, the Company adjusted the provisional fair value measurement as of the date of acquisition for property and equipment, resulting in an increase of $0.1 million in the purchase price allocated to property and equipment and a decrease of $0.1 million in goodwill. Total costs in excess of tangible and identifiable intangible assets acquired of approximately $4.7 million have been recorded as goodwill and reflect the value the Company sees in a similar long-term commitment to nutrition education and natural and organic products. A significant portion of the goodwill recognized is expected to be deductible for income tax purposes. During the year ended September 30, 2015, the Company paid cash of $6.1 million related to the Store Acquisition, which includes the payment during the three months ended March 31, 2015 of $0.5 million of contingent consideration, which had been accrued in the three months ended December 31, 2014.

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Results of this acquired operation are included in the Company’s consolidated statements of income beginning December 7, 2014.

18. Commitments and Contingencies

Self-Insurance

The Company is self-insured for claims under its health benefit plans, subject to a stop loss policy. The self-insurance liability related to claims under the Company’s health benefit plans is determined based on analysis of actual claims. The amounts related to these claims are included as a component of payroll and employee-related expenses in accrued expenses. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. While the Company believes that its assumptions are appropriate, the estimated accrual for these liabilities could be significantly affected if future occurrences and claims materially differ from these assumptions and historical trends.

Legal

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment discrimination claims, customer injury claims and investigations. When the potential liability from a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against it, management does not believe any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, prospects, financial condition, cash flows or results of operations.

In Bernhard Engl v. Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc., filed on September 25, 2015 in the United States District Court for the District of Colorado, the plaintiff filed a lawsuit against the Company in connection with a data security incident that affected the Company during fiscal year 2015. The complaint purports to state an action on behalf of a class of customers who used debit or credit cards at the Company’s stores. The Company believes the plaintiff's claims are without merit and intends to vigorously defend itself in this proceeding. At this time, the Company cannot predict: (i) whether the Court will certify plaintiff’s claims for class-wide treatment; (ii) how the Court will rule on the merits of the plaintiff’s claims; or (iii) the scope of the potential loss in the event of an adverse outcome.

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19. Selected Quarterly Financial Data (Unaudited)

The summarized unaudited quarterly financial data presented below reflect all adjustments, which in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.

Summarized unaudited quarterly financial data for each fiscal year is as follows, dollars in thousands, except per share data:

Fiscal Year Ended September 30, 2015	Three months ended
	December 31, 2014			March 31, 2015			June 30, 2015			September 30, 2015
Net sales	$	145,887			157,744			158,650			162,397
Cost of goods sold and occupancy costs		103,593			110,874			112,508			115,607
Gross profit		42,294			46,870			46,142			46,790
Store expenses		31,049			32,461			33,508			35,113
Administrative expenses		4,227			4,156			4,322			4,809
Pre-opening and relocation expenses		577			870			1,078			1,297
Operating income		6,441			9,383			7,234			5,571
Interest expense		(735	)		(714	)		(768	)		(776	)
Income before income taxes		5,706			8,669			6,466			4,795
Provision for income taxes		(2,142	)		(3,266	)		(2,121	)		(1,903	)
Net income	$	3,564			5,403			4,345			2,892
Basic earnings per share	$	0.16			0.24			0.19			0.13
Diluted earnings per share		0.16			0.24			0.19			0.13

Fiscal Year Ended September 30, 2014	Three months ended
	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014
Net sales	$	120,580			130,343			134,036			135,715
Cost of goods sold and occupancy costs		85,199			91,590			95,424			96,959
Gross profit		35,381			38,753			38,612			38,756
Store expenses		25,173			26,877			28,213			28,394
Administrative expenses		3,889			3,548			3,585			3,801
Pre-opening and relocation expenses		889			1,211			729			945
Operating income		5,430			7,117			6,085			5,616
Other income (expense):
Dividends and interest income		1			1			—			—
Interest expense		(707	)		(704	)		(706	)		(379	)
Total other expense		(706	)		(703	)		(706	)		(379	)
Income before income taxes		4,724			6,414			5,379			5,237
Provision for income taxes		(1,802	)		(2,415	)		(2,015	)		(2,049	)
Net income .	$	2,922			3,999			3,364			3,188
Basic earnings per share	$	0.13			0.18			0.15			0.14
Diluted earnings per share		0.13			0.18			0.15			0.14

20. Subsequent Events

On November 17, 2015, as provided for in the Credit Facility, the Company obtained a commitment to increase the amount available for borrowing under its Credit Facility from $15.0 million to $25.0 million.

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) promulgated under the Exchange Act. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of consolidated financial statements for external purposes in accordance with GAAP. Our internal control over financial reporting includes those policies and procedures that:

● pertain to the maintenance of records that, in a reasonable detail, accurately and fairly reflect the dispositions of our transactions and assets;

● provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of our assets that could have a material adverse effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have assessed the effectiveness of our internal control over financial reporting as of September 30, 2015 using the criteria described in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment of the design and related testing of the internal control over financial reporting, management concluded that, as of September 30, 2015, we maintained effective internal control over financial reporting.

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-K. The evaluation included certain internal control areas in which we have made and are continuing to make changes to improve and enhance controls. 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 as of September 30, 2015.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2015 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information.

None.

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PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item is incorporated herein by reference to the information provided under the headings “Executive Officers and Directors," “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our Definitive Proxy Statement on Schedule 14A for the 2016 Annual Meeting of Stockholders to be filed with the SEC within 120 days of September 30, 2015 (the “2016 Proxy Statement”). We have adopted a code of business conduct and ethics that establishes the standards of ethical conduct applicable to all of our directors, officers, including our principal executive, financial and accounting officers, employees, consultants and contractors. Our code of business conduct and ethics is publicly available on our website at www.naturalgrocers.com and we will post any amendments to, or waivers from, a provision of this Code of Business Conduct and Ethics by posting such information on our website, at the address and location specified above.

Item 11. Executive Compensation.

The information required by this item is incorporated herein by reference to the information in the 2016 Proxy Statement under the headings “Executive Compensation” and “Director Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information required by this item concerning securities authorized for issuance under equity compensation plans and security ownership of certain beneficial owners and management is incorporated by reference to the information in the 2016 Proxy Statement under the headings “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management.”

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information required by this item concerning transactions with related persons and director independence is incorporated by reference to the information in the 2016 Proxy Statement under the headings “Certain Relationships and Related Party Transactions” and “Corporate Governance.”

Item 14. Principal Accounting Fees and Services.

The information required by this item is incorporated by reference to the information in the 2016 Proxy Statement under the heading “Ratification of Independent Registered Public Accounting Firm—Principal Accounting Fees and Services.”

PART IV

Item 15. Exhibits and Financial Statement Schedules.

1.	Financial Statements: See Part II, Item 8 of this Form 10-K.
2.	Financial Statement Schedules: Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes herein.
3.	Exhibits: The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-K.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 10, 2015.

Natural Grocers by Vitamin Cottage, Inc.
By:	/s/ KEMPER ISELY
	Kemper Isely,
	Its Co-President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated.

Name	Title	Date
/s/ KEMPER ISELY	(Principal Executive Officer, Co-President,
Kemper Isely	Director)	December 10, 2015
/s/ ZEPHYR ISELY	(Principal Executive Officer, Co-President,
Zephyr Isely	Director)	December 10, 2015
/s/ SANDRA BUFFA	(Principal Financial and Accounting Officer,
Sandra Buffa	Chief Financial Officer)	December 10, 2015
/s/ ELIZABETH ISELY	Director
Elizabeth Isely		December 10, 2015
/s/ HEATHER ISELY	Director
Heather Isely		December 10, 2015
/s/ MICHAEL CAMPBELL	Director
Michael Campbell		December 10, 2015
/s/ EDWARD CERKOVNIK	Director
Edward Cerkovnik		December 10, 2015
/s/ RICHARD HALLé	Director
Richard Hallé		December 10, 2015

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EXHIBIT INDEX

Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
3.1	Amended and Restated Certificate of Incorporation	Form S-1	333-182186	3.1	July 5, 2012
3.2	Amended and Restated Bylaws	Form S-1	333-182186	3.2	July 5, 2012
4.1	Reference is made to Exhibits 3.1 and 3.2
4.2	Specimen Common Stock Certificate	Form S-1	333-182186	4.2	July 20, 2012
4.3	Form of Notice of Grant of Stock Unit Award	Form S-8	333-182886	4.2	July 27, 2012
4.4	Form of Registration Rights Agreement	Form S-1	333-182186	4.3	July 5, 2012
10.1	Second Amended and Restated Employment Agreement by and between Vitamin Cottage Natural Food Markets, Inc., Natural Grocers by Vitamin Cottage, Inc. and Sandra M. Buffa, dated June 26, 2012*	Form 10-Q	001-35608	10.1	January 29, 2015
10.2	Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders Party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, dated September 29, 2006	Form S-1	333-182186	10.2	June 29, 2012
10.3	First Amendment to Credit Agreement by and among Vitamin Cottage Natural Food Markets, Inc. and JPMorgan Chase Bank, N.A., dated November 2, 2006	Form S-1	333-182186	10.3	June 29, 2012
10.4	Second Amendment to Credit Agreement by and among Vitamin Cottage Natural Food Markets, Inc. and JPMorgan Chase Bank, N.A., dated December 13, 2006	Form S-1	333-182186	10.4	June 29, 2012
10.5	Third Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc. the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated June 26, 2007	Form S-1	333-182186	10.5	June 29, 2012
10.6	Fourth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated November 30, 2008	Form S-1	333-182186	10.6	June 29, 2012
10.7	Fifth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated June 30, 2009	Form S-1	333-182186	10.7	June 29, 2012
10.8	Sixth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated June 30, 2010	Form S-1	333-182186	10.8	June 29, 2012
10.9	Seventh Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated December 21, 2010	Form S-1	333-182186	10.9	June 29, 2012
10.10	Eighth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated May 13, 2011	Form S-1	333-182186	10.10	June 29, 2012
10.11	Ninth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated July 11, 2011	Form S-1	333-182186	10.11	June 29, 2012
10.12	Tenth Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated January 26, 2012	Form S-1	333-182186	10.12	June 29, 2012
10.13	Subordination Agreement by and among Vitamin Cottage Two Ltd. Liability Company, and Vitamin Cottage Natural Food Markets, Inc., in favor of JPMorgan Chase Bank, N.A., as administrative agent, dated September 29, 2006	Form S-1	333-182186	10.13	June 29, 2012

82

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Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
10.14	First Amendment to Subordination Agreement by and between Vitamin Cottage Two Ltd. Liability Company, and Vitamin Cottage Natural Food Markets, Inc., in favor of JPMorgan Chase Bank, N.A., as administrative agent, dated June 26, 2007	Form S-1	333-182186	10.14	June 29, 2012
10.15	Amended and Restated Promissory Note by Vitamin Cottage Natural Food Markets, Inc., for the benefit of JPMorgan Chase Bank, N.A., as Lender, dated December 21, 2010	Form S-1	333-182186	10.15	June 29, 2012
10.16	Form of Omnibus Incentive Plan*	Form S-1	333-182186	10.16	July 5, 2012
10.17	Summary of Compensation Arrangements for Non-Employee Directors*	Form S-1	333-182186	10.17	June 29, 2012
10.18	Form of Indemnification Agreement*	Form S-1	333-182186	10.18	June 29, 2012
10.19	Shopping Center Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated January 1, 2010	Form S-1	333-182186	10.19	June 29, 2012
10.20	Ground lease by and between 3801 East Second Avenue, LLC and Vitamin Cottage Natural Food Markets, Inc., dated March 1, 2001	Form S-1	333-182186	10.20	June 29, 2012
10.21	Commercial Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated June 1, 2006	Form S-1	333-182186	10.21	July 5, 2012
10.22	Sublease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated June 1, 2006	Form S-1	333-182186	10.22	June 29, 2012
10.23	Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated September 1, 2011	Form S-1	333-182186	10.23	June 29, 2012
10.24	Lease by and between Chalet Properties, LLC and Boulder Vitamin Cottage Group, LLC, dated July 1, 2011	Form S-1	333-182186	10.24	June 29, 2012
10.25	Lease by and between Isely Family Land Trust, LLC and Vitamin Cottage Natural Food Markets, Inc., dated February 29, 2012	Form S-1	333-182186	10.25	June 29, 2012
10.26	Lease by and between Chalet Properties, Austin, LLC and Vitamin Cottage Natural Food Markets, Inc., dated February 29, 2012	Form S-1	333-182186	10.26	June 29, 2012
10.27	Building Lease by and between Chalet Properties, LLC and Vitamin Cottage Natural Food Markets, Inc., dated December 8, 2010	Form S-1	333-182186	10.27	June 29, 2012
10.28	Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated May 20, 2008#	Form S-1	333-182186	10.28	June 29, 2012
10.29	Addendum A to Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated February 27, 2009#	Form S-1	333-182186	10.29	June 29, 2012
10.30	Agreement Addendum to Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated March 10, 2012#	Form S-1	333-182186	10.30	June 29, 2012
10.31	Third Amendment to Distribution Agreement between United Natural Foods, Inc. and Vitamin Cottage Natural Food Markets, Inc., dated June 3, 2012#	Form S-1	333-182186	10.31	June 29, 2012
10.32	Form of Stockholders Agreement, by, between and among Natural Grocers by Vitamin Cottage, Inc. and the stockholders to be named therein	Form S-1	333-182186	10.32	July 12, 2012
10.33	Eleventh Amendment to Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders under the Credit Agreement and JPMorgan Chase Bank, N.A., as Lender and Administrative Agent, dated October 31, 2012	Form 10-K	001-35608	10.33	December 13, 2012

83

Table Of Contents

Exhibit Number	Description	Form	File No.	Exhibit Number	Filing Date
10.34	Third Amended and Restated Promissory Note by Vitamin Cottage Natural Food Markets, Inc., for the benefit of JPMorgan Chase Bank, N.A., as Lender, dated October 31, 2012	Form 10-K	001-35608	10.34	December 13, 2012
10.35	Pledge and Security Agreement by and between Natural Grocers by Vitamin Cottage, Inc. and JP Morgan Chase Bank, N.A., as Administrative Agent, for the ratable benefit of the Secured Parties, dated October 31, 2012	Form 10-K	001-35608	10.35	December 13, 2012
10.36	Guaranty made by Natural Grocers by Vitamin Cottage, Inc. in favor of JP Morgan Chase Bank, N.A., as Administrative Agent, for the ratable benefit of the Secured Parties, dated October 31, 2012	Form 10-K	001-35608	10.36	December 13, 2012
10.37	Amended and Restated Credit Agreement among Vitamin Cottage Natural Food Markets, Inc., the Lenders Party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, dated December 12, 2013	Form 10-K	001-35608	10.37	December 12, 2013
10.38	Amendment and Reaffirmation of Loan Documents dated December 12, 2013 among Vitamin Cottage Natural Food Markets, Inc., Natural Grocers by Vitamin Cottage, Inc., Natural Systems, LLC, Vitamin Cottage Two Ltd. Liability Company and JPMorgan Chase Bank, N.A., as Administrative Agent for the Lenders and each other Secured Party under the Amended and Restated Credit Agreement referred to above	Form 10-K	001-35608	10.38	December 12, 2013
14	Code of Ethics	Form 10-K	001-35608	14	December 13, 2012
21.1	List of subsidiaries	Form 10-K	001-35608	21.1	December 13, 2012
23.1	Consent of KPMG LLP	—	—	—	—
31.1	Certification of Kemper Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002	—	—	—	—
31.2	Certification of Zephyr Isely, a Principal Executive Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002	—	—	—	—
31.3	Certification of Sandra Buffa, Principal Financial Officer Required Under Section 302(a) of the Sarbanes-Oxley Act of 2002	—	—	—	—
32.1	Certification of Principal Executive Officers and Principal Financial Officer Required Under 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†	—	—	—	—

84

Table Of Contents

101 The following materials from Natural Grocers by Vitamin Cottage, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Changes in Shareholders’ Equity, and (vi) Notes to Consolidated Financial Statements.

*Indicates a management contract or compensatory plan or arrangement

# Confidential portions have been omitted pursuant to a request for confidential treatment.

† The certifications attached as Exhibit 32.1 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Natural Grocers by Vitamin Cottage, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K, irrespective of any general incorporation language contained in such filing.

 85

EX-23.1

Exhibit 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors
Natural Grocers by Vitamin Cottage, Inc:

We consent to the incorporation by reference in the registration statement (No. 333-182886) on Form S-8 of Natural Grocers by Vitamin Cottage, Inc. of our report dated December 10, 2015, with respect to the consolidated balance sheets of Natural Grocers by Vitamin Cottage, Inc. as of September 30, 2015 and 2014, and the related consolidated statements of income, comprehensive income, cash flows, and stockholders’ equity for each of the years in the three-year period ended September 30, 2015 which report appears in the September 30, 2015 annual report on Form 10-K of Natural Grocers by Vitamin Cottage, Inc..

/s/ KPMG LLP

Denver, Colorado
December 10, 2015

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Kemper Isely, certify that:

1. I have reviewed this Annual Report on Form 10-K of Natural Grocers by Vitamin Cottage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 10, 2015

/s/ Kemper Isely

Kemper Isely

Co-President and a Principal Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Zephyr Isely, certify that:

1. I have reviewed this Annual Report on Form 10-K of Natural Grocers by Vitamin Cottage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 10, 2015

/s/ Zephyr Isely

Zephyr Isely

Co-President and a Principal Executive Officer

EX-31.3

Exhibit 31.3

CERTIFICATION

I, Sandra Buffa, certify that:

1. I have reviewed this Annual Report on Form 10-K of Natural Grocers by Vitamin Cottage, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: December 10, 2015

/s/ Sandra Buffa

Sandra Buffa

Chief Financial Officer and Principal Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. Section 1350,

as adopted pursuant to

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Natural Grocers by Vitamin Cottage, Inc. (the “Company”) for the fiscal year ended September 30, 2015 (the “Report”), Kemper Isely, Co-President and a Principal Executive Officer of the Company, Zephyr Isely, Co-President and a Principal Executive Officer of the Company, and Sandra Buffa, Chief Financial Officer and Principal Financial Officer of the Company, do each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:

● The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

● The information in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: December 10, 2015

/s/ Kemper Isely

Kemper Isely

Co-President and a Principal Executive Officer

/s/ Zephyr Isely

Zephyr Isely

Co-President and a Principal Executive Officer

/s/ Sandra Buffa

Sandra Buffa

Chief Financial Officer and Principal Financial Officer

XML

Note 17 - Business Combination (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Business Acquisitions, by Acquisition [Table Text Block]

Inventory and supplies	$	726
Property and equipment		680
Other intangible assets		65
Total provisionally allocated to tangible and identifiable intangible assets	$	1,471

XML

Note 10 - Long-Term Debt (Details Textual)		12 Months Ended
	Dec. 12, 2013 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2013 USD ($)	Nov. 17, 2015 USD ($)	Nov. 16, 2015 USD ($)
Revolving Credit Facility [Member] | Minimum [Member]
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage	0.15%
Revolving Credit Facility [Member] | Maximum [Member]
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage	0.35%
Revolving Credit Facility [Member] | Subsequent Event [Member]
Line of Credit Facility, Maximum Borrowing Capacity					$ 25,000,000	$ 15,000,000
Revolving Credit Facility [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 15,000,000
Line of Credit Facility Period by Which Maturity Date Extended	3 years
Line of Credit Facility Additional Maximum Borrowing Capacity	$ 10,000,000
Line of Credit Facility, Remaining Borrowing Capacity		$ 14,000,000	$ 14,000,000
Letter of Credit [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 3,000,000
Letters of Credit Outstanding, Amount		1,000,000
Long-term Line of Credit		0	0
Interest Costs Capitalized		$ 300,000	$ 400,000	$ 0
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage	0.20%
Capital and Financing Lease Obligations Number of Leases		13	10
Interest Expense, Debt, Excluding Amortization		$ 3,300,000	$ 2,900,000	$ 2,200,000

XML

Note 6 - Property and Equipment Components (Details) (Parentheticals) - USD ($) $ in Thousands	Sep. 30, 2015	Sep. 30, 2014
Unamortized Land [Member]
Property, Plant and Equipment, Gross	$ 617	$ 617
Property, Plant and Equipment, Gross	$ 235,608	$ 189,342

XML

Note 11 - Lease Commitments (Details Textual)	3 Months Ended	12 Months Ended
	Dec. 31, 2014 USD ($)	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2013 USD ($)
Maximum [Member]
Operating Leases, Income Statement, Sublease Revenue		$ 100,000	$ 100,000	$ 0
Build to Suit Lease in Process [Member]
Construction in Progress, Gross		0
Capital Lease Finance Obligations			2,300,000
Assets Held under Capital Leases [Member]
Construction in Progress, Gross			0
Capital Lease Obligations		900,000
Building Asset and Related Capital Lease Finance Obligation [Member] | Capital Lease, Interest Expense [Member]
Capital Leases, Future Minimum Payments Due		1,800,000
Building Asset and Related Capital Lease Finance Obligation [Member] | Capital Lease, Principal Payments [Member]
Capital Leases, Future Minimum Payments Due		1,000,000
Building Asset and Related Capital Lease Finance Obligation [Member]
Property, Plant and Equipment, Additions	$ 3,300,000
Capital Leases, Future Minimum Payments Due		2,800,000
Depreciation		$ 1,000,000
Chalet [Member]
Number of Properties Leased		5
Isely Family Land Trust LLC [Member]
Number of Properties Leased		1
FTVC, LLC [Member]
Number of Properties Leased		1
Related Parties [Member]
Operating Leases Future Minimum Payments Due Per Lease Agreement Low End of Range		$ 100,000
Operating Leases Future Minimum Payments Due Per Lease Agreement High End of Range		300,000
At the End of the Lease Term [Member]
Capital Lease Obligations		0
Deferred Rent Credit, Noncurrent		6,922,000	5,842,000
Incentive from Lessor		7,975,000	7,246,000
Operating Leases, Rent Expense, Net		26,300,000	20,500,000	14,800,000
Pre-Opening Costs and Relocation Expenses for Stores Not Yet Opened Rent Expense		800,000	1,000,000	$ 600,000
Number of Sale-Leaseback Transactions				1
Sale Leaseback Transaction, Net Proceeds, Financing Activities				$ 5,000,000
Sale Leaseback Transaction, Deferred Gain, Gross				$ 200,000
Sale Leaseback Transaction Lease Term				15 years
Capital Lease Finance Obligations		22,100,000	15,000,000
Capital Lease Obligations		$ 4,500,000	$ 4,700,000

XML

Note 6 - Property and Equipment (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Capital and Financing Lease Obligations [Member]
Interest Paid, Capitalized	$ 300,000	$ 400,000	$ 0
Construction in Progress [Member] | Build to Suit Lease in Process [Member]
Property, Plant and Equipment, Gross	0	2,300,000
Construction in Progress [Member] | Assets Held under Capital Leases [Member]
Property, Plant and Equipment, Gross	900,000	0
Construction in Progress [Member]
Property, Plant and Equipment, Gross	10,150,000	6,867,000
Software Development [Member]
Property, Plant and Equipment, Additions	200,000	100,000
Leasehold and Building Improvements and Fixtures and Equipment [Member]
Property, Plant and Equipment, Additions	600,000	500,000
Property, Plant and Equipment, Additions, Capitalized Internal Staff Compensation [Member]
Depreciation	400,000	300,000	300,000
Interest Paid, Capitalized	309	364	$ 0
Property, Plant and Equipment, Gross	$ 235,608,000	$ 189,342,000

XML

Note 7 - Goodwill and Other Intangible Assets (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Intangible Assets and Goodwill [Table Text Block]

	Useful lives			As of September 30,
	(in years)			201 5			201 4
Amortizable intangible assets:
Covenants-not-to-compete	2	-	5	$	353			293
Favorable operating lease		5			339			339
Other intangibles	0.5	-	1		27			22
Amortized intangible assets					719			654
Less accumulated amortization					(683	)		(654	)
Amortized intangible assets, net					36			—
Trademark	Indefinite				389			389
Total other intangibles, net					425			389
Goodwill	Indefinite				5,198			511
Total goodwill and other intangibles, net				$	5,623			900

XML

Note 19 - Unaudited Quarterly Financial Data (Details) - USD ($) $ in Thousands	3 Months Ended								12 Months Ended
	Sep. 30, 2015	Jun. 30, 2015	Mar. 31, 2015	Dec. 31, 2014	Sep. 30, 2014	Jun. 30, 2014	Mar. 31, 2014	Dec. 31, 2013	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Net sales	$ 162,397	$ 158,650	$ 157,744	$ 145,887	$ 135,715	$ 134,036	$ 130,343	$ 120,580	$ 624,678	$ 520,674	$ 430,655
Cost of goods sold and occupancy costs	115,607	112,508	110,874	103,593	96,959	95,424	91,590	85,199	442,582	369,172	304,922
Gross profit	46,790	46,142	46,870	42,294	38,756	38,612	38,753	35,381	182,096	151,502	125,733
Store expenses	35,113	33,508	32,461	31,049	28,394	28,213	26,877	25,173	132,131	108,657	89,935
Administrative expenses	4,809	4,322	4,156	4,227	3,801	3,585	3,548	3,889	17,514	14,823	13,479
Pre-opening and relocation expenses	1,297	1,078	870	577	945	729	1,211	889	3,822	3,774	3,231
Operating income	5,571	7,234	9,383	6,441	5,616	6,085	7,117	5,430	28,629	24,248	19,088
Interest expense	776	768	714	735	379	706	704	707	2,993	2,496	2,166
Income before income taxes	4,795	6,466	8,669	5,706	5,237	5,379	6,414	4,724	25,636	21,754	16,931
Provision for income taxes	1,903	2,121	3,266	2,142	2,049	2,015	2,415	1,802	9,432	8,281	6,379
Net income	$ 2,892	$ 4,345	$ 5,403	$ 3,564	$ 3,188	$ 3,364	$ 3,999	$ 2,922	$ 16,204	$ 13,473	$ 10,552
Basic earnings per share (in dollars per share)	$ 0.13	$ 0.19	$ 0.24	$ 0.16	$ 0.14	$ 0.15	$ 0.18	$ 0.13	$ 0.72	$ 0.60	$ 0.47
Diluted earnings per share (in dollars per share)	$ 0.13	$ 0.19	$ 0.24	$ 0.16	$ 0.14	$ 0.15	$ 0.18	$ 0.13	$ 0.72	$ 0.60	$ 0.47
Other income (expense):
Dividends and interest income							$ 1	$ 1		$ 2	$ 9
Interest expense	$ (776)	$ (768)	$ (714)	$ (735)	$ (379)	$ (706)	(704)	(707)	$ (2,993)	(2,496)	(2,166)
Total other expense					(379)	(706)	(703)	(706)	(2,993)	(2,494)	(2,157)
Income before income taxes	4,795	6,466	8,669	5,706	5,237	5,379	6,414	4,724	25,636	21,754	16,931
Provision for income taxes	(1,903)	(2,121)	(3,266)	(2,142)	(2,049)	(2,015)	(2,415)	(1,802)	(9,432)	(8,281)	(6,379)
Net income	$ 2,892	$ 4,345	$ 5,403	$ 3,564	$ 3,188	$ 3,364	$ 3,999	$ 2,922	$ 16,204	$ 13,473	$ 10,552
Basic earnings per share (in dollars per share)	$ 0.13	$ 0.19	$ 0.24	$ 0.16	$ 0.14	$ 0.15	$ 0.18	$ 0.13	$ 0.72	$ 0.60	$ 0.47
Diluted earnings per share (in dollars per share)	$ 0.13	$ 0.19	$ 0.24	$ 0.16	$ 0.14	$ 0.15	$ 0.18	$ 0.13	$ 0.72	$ 0.60	$ 0.47

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Note 11 - Capital and Financing Lease Obligations (Details) - USD ($)	Sep. 30, 2015	Sep. 30, 2014
Due in Monthly Installments through Fiscal Year 2029 [Member]
Capital lease finance obligations	$ 22,096,000	$ 14,989,000
Due in Monthly Installments through Fiscal Year 2028 [Member]
Capital lease obligations	$ 4,539,000	4,672,000
Due in Monthly Installments through Fiscal Year 2024 [Member]
Capital lease finance obligations		$ 2,316,000
Due in Monthly Installments through Fiscal Year 2041 [Member]
Capital lease obligations	$ 972,000
Capital lease finance obligations	22,100,000	$ 15,000,000
Capital lease obligations	4,500,000	4,700,000
Total capital and financing lease obligations	27,607,000	21,977,000
Less current portion	(333,000)	(229,000)
Total capital and financing lease obligations, net of current portion	$ 27,274,000	$ 21,748,000

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Note 17 - Business Combination (Details Textual) $ in Thousands	3 Months Ended	12 Months Ended
	Mar. 31, 2015 USD ($)	Sep. 30, 2015 USD ($)	Dec. 07, 2014 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2013
Nature's Pantry Inc. [Member]
Number of Stores			1
Nature's Pantry Inc. [Member]
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Assets		$ 1,471	$ 1,500
Business Combination, Recognized Identifiable Assets Acquired and Liabilities Assumed, Property, Plant, and Equipment, Adjustment		100
Goodwill, Period Increase (Decrease)		(100)
Goodwill		4,700
Payments to Acquire Businesses, Gross	$ 500	$ 6,100
Noncompete Agreements [Member]
Finite-Lived Intangible Asset, Useful Life		2 years
Number of Stores		103		87	72
Goodwill		$ 5,198		$ 511
Payments to Acquire Businesses, Gross		$ 5,601

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Note 17 - Business Combination

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Business Combination Disclosure [Text Block]

1

7

.

Business Combination

On December 7, 2014, the Company purchased substantially all of the assets and assumed certain liabilities of natural foods retailer Nature’s Pantry, Inc. (the Store Acquisition), which operated one retail store in Independence, Missouri. Following the Store Acquisition, the store was rebranded as a Natural Grocers by Vitamin Cottage store. The transaction has been recorded in accordance with Accounting Standards Codification 805, “Business Combinations.” Assets acquired included, but were not limited to, inventory, property and equipment and certain intangible assets, including the Nature’s Pantry internet domain name and a covenant not to compete. The purchase price has been provisionally allocated to tangible and identifiable intangible assets totaling approximately $1.5 million based on their estimated fair values at the date of acquisition, summarized as follows, dollars in thousands:

Inventory and supplies	$	726
Property and equipment		680
Other intangible assets		65
Total provisionally allocated to tangible and identifiable intangible assets	$	1,471

Other intangible assets is primarily comprised of a covenant not to compete that will be amortized over a period of two years (see Note 7). During the year ended September 30, 2015, the Company adjusted the provisional fair value measurement as of the date of acquisition for property and equipment, resulting in an increase of $0.1 million in the purchase price allocated to property and equipment and a decrease of $0.1 million in goodwill. Total costs in excess of tangible and identifiable intangible assets acquired of approximately $4.7 million have been recorded as goodwill and reflect the value the Company sees in a similar long-term commitment to nutrition education and natural and organic products. A significant portion of the goodwill recognized is expected to be deductible for income tax purposes. During the year ended September 30, 2015, the Company paid cash of $6.1 million related to the Store Acquisition, which includes the payment during the three months ended March 31, 2015 of $0.5 million of contingent consideration, which had been accrued in the three months ended December 31, 2014.

Results of this acquired operation are included in the Company’s consolidated statements of income beginning December 7, 2014.

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Note 7 - Goodwill and Other Intangible Assets (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Maximum [Member]
Finite-Lived Intangible Assets, Amortization Expense, Year Two	$ 100,000
Amortization of Intangible Assets	100,000		$ 100,000
Finite-Lived Intangible Assets, Amortization Expense, Next Twelve Months	100,000
Finite-Lived Intangible Assets, Amortization Expense, Year Three	0
Finite-Lived Intangible Assets, Amortization Expense, Year Four	0
Finite-Lived Intangible Assets, Amortization Expense, Year Five	$ 0
Amortization of Intangible Assets		$ 0

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Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Supplier Concentration Risk [Member] | Cost of Goods, Product Line [Member]
Concentration Risk, Percentage	57.00%	56.00%	55.00%
Allowance for Doubtful Accounts Receivable, Current	$ 100,000	$ 100,000
Goodwill, Impairment Loss	0
Asset Impairment Charges	$ 0
Number of Reportable Segments	1
Cash, Uninsured Amount	$ 1,100,000
Marketing and Advertising Expense	9,300,000	7,800,000	$ 6,200,000
Reimbursement Revenue	$ 2,500,000	$ 1,900,000	$ 1,500,000

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Note 14 - Income Taxes (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Components of Income Tax Expense (Benefit) [Table Text Block]

	Year ended September 30,
	201 5		201 4			201 3
Current federal income tax expense	$	7,769		8,304			3,376
Current state income tax expense		1,033		1,163			551
		8,802		9,467			3,927
Deferred federal income tax expense (benefit)		514		(1,112	)		2,156
Deferred state income tax expense (benefit)		116		(74	)		296
		630		(1,186	)		2,452
Total provision for income taxes	$	9,432		8,281			6,379

Schedule of Effective Income Tax Rate Reconciliation [Table Text Block]

	Year ended September 30,
	201 5			201 4		201 3
Statutory tax rate		35.0	%		35.0		34.0
State income taxes, net of federal income tax expense		2.9			3.0		3.3
Other, net		(1.1	)		0.1		0.4
Effective tax rate		36.8	%		38.1		37.7

Schedule of Classification of Deferred Tax Assets and Liabilities [Table Text Block]

	As of September 30,
	201 5			201 4
Current assets	$	866			832
Long-term liabilities		(6,073	)		(5,409	)
Net deferred tax liabilities	$	(5,207	)		(4,577	)

Schedule of Deferred Tax Assets and Liabilities [Table Text Block]

	As of September 30,
	201 5			201 4
Deferred tax assets
Capital and financing lease obligations	$	10,473			8,330
Goodwill		2,582			2,937
Leasehold incentives		3,025			2,746
Deferred rent		2,627			2,214
Trademarks		1,018			1,018
Accrued employee benefits		729			590
Other		363			322
Gross deferred tax assets		20,817			18,157
Deferred tax liabilities
Property and equipment		(22,909	)		(19,930	)
Leasehold improvements		(3,087	)		(2,804	)
Other		(28	)		—
Gross deferred tax liabilities		(26,024	)		(22,734	)
Net deferred tax liabilities	$	(5,207	)		(4,577	)

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Note 8 - Composition of Accrued Expenses (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Sep. 30, 2014
Payroll and employee-related expenses	$ 7,795	$ 5,886
Accrued income taxes payable	5,540	4,868
Accrued property, sales and use tax payable	4,365	3,409
Accrued marketing expenses	532	421
Deferred revenue related to gift card sales	864	725
Other	553	513
Total accrued expenses	$ 19,649	$ 15,822

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Note 14 - Tax Effects of Temporary Differences That Give Rise to Deferred Tax Assets and Liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Sep. 30, 2014
Deferred tax assets
Capital and financing lease obligations	$ 10,473	$ 8,330
Goodwill	2,582	2,937
Leasehold incentives	3,025	2,746
Deferred rent	2,627	2,214
Trademarks	1,018	1,018
Accrued employee benefits	729	590
Other	363	322
Gross deferred tax assets	20,817	18,157
Deferred tax liabilities
Property and equipment	22,909	19,930
Leasehold improvements	3,087	$ 2,804
Other	28
Gross deferred tax liabilities	(26,024)	$ (22,734)
Net deferred tax liabilities	$ (5,207)	$ (4,577)

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Note 12 - Changes in Non-Vested RSUs Outstanding (Details) - Restricted Stock Units (RSUs) [Member] - $ / shares	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Non-vested balance (in shares)	37,194	86,053
Non-vested Weighted Average Grant Date Fair Value (in dollars per share)	$ 34.77	$ 21.80
Granted (in shares)	127,751	3,558
Granted (in dollars per share)	$ 24.14	$ 42.16
Forfeited (in shares)	(17,560)	(3,868)
Forfeited (in dollars per share)	$ 25.04	$ 34.07
Vested (in shares)	(15,529)	(48,549)
Vested (in dollars per share)	$ 32.34	$ 12.38
Non-vested balance (in shares)	131,856	37,194
Non-vested Weighted Average Grant Date Fair Value (in dollars per share)	$ 26.05	$ 34.77

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Note 6 - Property and Equipment Components (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Construction in Progress [Member]
Property, Plant and Equipment, Gross	$ 10,150	$ 6,867
Assets Held Under Real Estate Leases for Build to Suit Stores [Member]
Property, Plant and Equipment, Gross	$ 24,774	17,107
Useful lives	40 years
Assets Held under Capital Leases [Member]
Property, Plant and Equipment, Gross	$ 4,866	4,866
Useful lives	15 years
Land [Member]
Property, Plant and Equipment, Gross	$ 192	192
Building [Member]
Property, Plant and Equipment, Gross	$ 4,980	3,985
Useful lives	40 years
Land Improvements [Member] | Minimum [Member]
Useful lives	5 years
Land Improvements [Member] | Maximum [Member]
Useful lives	15 years
Land Improvements [Member]
Property, Plant and Equipment, Gross	$ 1,015	1,000
Leasehold and Building Improvements [Member] | Minimum [Member]
Useful lives	1 year
Leasehold and Building Improvements [Member] | Maximum [Member]
Useful lives	25 years
Leasehold and Building Improvements [Member]
Property, Plant and Equipment, Gross	$ 91,865	74,691
Furniture and Fixtures [Member] | Minimum [Member]
Useful lives	5 years
Furniture and Fixtures [Member] | Maximum [Member]
Useful lives	7 years
Furniture and Fixtures [Member]
Property, Plant and Equipment, Gross	$ 83,932	69,894
Computer Hardware and Software [Member] | Minimum [Member]
Useful lives	3 years
Computer Hardware and Software [Member] | Maximum [Member]
Useful lives	5 years
Computer Hardware and Software [Member]
Property, Plant and Equipment, Gross	$ 13,834	10,740
Property, Plant and Equipment, Gross	235,608	189,342
Less accumulated depreciation and amortization	(90,389)	(69,118)
Property and equipment, net	$ 145,219	$ 120,224

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Note 1 - Organization

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Nature of Operations [Text Block]

1. Organization

Nature of Business

Natural Grocers by Vitamin Cottage, Inc. (Natural Grocers or the holding company) and its consolidated subsidiaries (collectively, the Company) operate retail stores that specialize in natural and organic groceries and dietary supplements. The Company operates its retail stores under its trademark

Natural Grocers by Vitamin Cottage

®

with 103 stores as of September 30, 2015, including 34 stores in Colorado, 14 in Texas, eight each in Oregon and Kansas, seven in Oklahoma, six in Arizona, five in New Mexico, four in Montana, three each in Idaho and Nebraska, two each in Missouri, Utah and Wyoming, and one each in Arkansas, Minnesota, Nevada, North Dakota and Washington. The Company also has a bulk food repackaging facility and distribution center in Colorado. The Company had 87 and 72 stores as of September 30, 2014 and 2013, respectively.

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Note 13 - Related Party Transactions (Details Textual) $ in Millions	12 Months Ended
	Sep. 30, 2015 USD ($)	Sep. 30, 2014 USD ($)	Sep. 30, 2013 USD ($)
Isely Family Land Trust LLC [Member]
Related Party Transaction, Expenses from Transactions with Related Party	$ 0.3	$ 0.3	$ 0.3
Number of Operating Leases	1
Chalet [Member]
Related Party Transaction, Expenses from Transactions with Related Party	$ 1.1	$ 1.3	$ 1.3
Number of Operating Leases	5
Number of Capital Leases	1
Related Party Transaction Number of Owners That Are Non-Independent Board Members of the Entity	4
FTVC, LLC [Member]
Related Party Transaction, Expenses from Transactions with Related Party	$ 0.1
Number of Operating Leases	1

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Note 2 - Estimated Useful Lives of the Related Assets (Details)	12 Months Ended
	Sep. 30, 2015
Land Improvements [Member] | Minimum [Member]
Useful lives	5 years
Land Improvements [Member] | Maximum [Member]
Useful lives	15 years
Building [Member]
Useful lives	40 years
Leasehold and Building Improvements [Member] | Minimum [Member]
Useful lives	1 year
Leasehold and Building Improvements [Member] | Maximum [Member]
Useful lives	25 years
Capitalized Real Estate Leases for Build-to-suit Stores [Member]
Useful lives	40 years
Assets Held under Capital Leases [Member]
Useful lives	15 years
Furniture and Fixtures [Member] | Minimum [Member]
Useful lives	5 years
Furniture and Fixtures [Member] | Maximum [Member]
Useful lives	7 years
Computer Hardware and Software [Member] | Minimum [Member]
Useful lives	3 years
Computer Hardware and Software [Member] | Maximum [Member]
Useful lives	5 years

XML

Significant Accounting Policies (Policies)

12 Months Ended

Sep. 30, 2015

Accounting Policies [Abstract]

Consolidation, Policy [Policy Text Block]

Principles of Consolidation

The accompanying consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company), Vitamin Cottage Two Ltd. Liability Company and Natural Systems, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for self-insurance reserves, valuation of inventories, useful lives of property and equipment for depreciation and amortization, deferred tax assets and liabilities and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

Segment Reporting, Policy [Policy Text Block]

Segment Information

The Company has one reporting segment, natural and organic retail stores.

Cash and Cash Equivalents, Unrestricted Cash and Cash Equivalents, Policy [Policy Text Block]

Cash and Cash Equivalents

Cash and cash equivalents include currency on hand, demand deposits with banks, money market funds and credit and debit card transactions which typically settle within three business days. The Company considers all highly liquid investments with a remaining maturity of 90 days or less when acquired to be cash equivalents.

Investment, Policy [Policy Text Block]

Investments

Available-for-sale investments are recorded at fair value. Unrealized holding gains and losses on available-for-sale investments are excluded from earnings and are reported as a component of other comprehensive income until realized. A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary for a period greater than two fiscal quarters results in a reduction of the fair value. Declines in fair value deemed to be other-than-temporary are charged against net earnings. Investments that have an original maturity date of less than one year are classified as short-term assets, and investments that have an original maturity date of greater than one year are classified as long-term assets.

Trade and Other Accounts Receivable, Policy [Policy Text Block]

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, newsletter advertising and other miscellaneous receivables and are presented net of any allowances for doubtful accounts. Vendor receivable balances are generally presented on a gross basis separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience and application of the specific identification method. Allowance for doubtful accounts totaled less than $0.1 million at each of September 30, 2015 and 2014.

Concentration Risk, Credit Risk, Policy [Policy Text Block]

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments in cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalent account balances, which are held in major financial institutions, exceeded the Federal Deposit Insurance Corporation’s federally insured limits by approximately $1.1 million as of September 30, 2015.

Vendor Concentration [Policy Text Block]

Vendor Concentration

For the years ended September 30, 2015, 2014 and 2013, purchases from the Company’s largest vendor and one of its subsidiaries represented approximately 57%, 56% and 55%, respectively, of all product purchases made during such periods. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.

Inventory, Policy [Policy Text Block]

Merchandise Inventory

Merchandise inventory consists of goods held for sale. The cost of inventory includes certain costs associated with the preparation of inventory for sale, including inventory overhead costs. Merchandise inventory is carried at the lower of cost or market value. Cost is determined using the weighted average cost method.

Property, Plant and Equipment, Policy [Policy Text Block]

Property and Equipment

Property and equipment is stated at historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the following estimated useful lives of the related assets. 

	Useful lives (in years)
Land improvements	5	–	15
Buildings		40
Leasehold and building improvements	1	–	25
Capitalized real estate leases for build-to-suit stores		40
Capitalized real estate leases		15
Fixtures and equipment	5	–	7
Computer hardware and software	3	–	5

For land improvements and leasehold and building improvements, depreciation is recorded over the shorter of the assets’ useful lives or the lease terms. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains and losses on disposition of property and equipment are included in store expenses in the year of disposition, and primarily relate to store relocations.

The Company capitalizes interest, if applicable, as part of the historical costs of buildings and leasehold and building improvements. The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Capitalized software costs are included in property and equipment in the consolidated balance sheets and are amortized over the estimated useful lives of the software. Software costs that do not meet capitalization criteria are expensed as incurred.

Fair Value of Financial Instruments, Policy [Policy Text Block]

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in authoritative guidance. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The three levels are defined as follows:

Level 1 —	Inputs are unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 —	Inputs include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 —	Inputs are unobservable and are considered significant to the fair value measurement.

Transfers between levels of the fair value hierarchy are deemed to have occurred as of the date of the event or transfer.

Goodwill and Intangible Assets, Policy [Policy Text Block]

Goodwill and Intangible Assets

Intangible assets primarily consist of goodwill, trademarks, favorable operating leases and covenants-not-to-compete. Goodwill and the

Vitamin Cottage

trademark have indefinite lives and are not amortized; rather, they are tested for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates the reasonableness of the useful lives of these intangibles at least annually.

The Company’s annual impairment testing of goodwill is performed as of September 30. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not necessary. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the two-step impairment test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. To date, the Company has recorded no impairment charges related to goodwill.

Impairment or Disposal of Long-Lived Assets, Including Intangible Assets, Policy [Policy Text Block]

Impairment of

Finite-Lived

Intangible and Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company aggregates long-lived assets at the store level, which the Company considers to be the lowest level in the organization for which independent identifiable cash flows are available. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that store to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory factors in performing these analyses. To date, the Company has recorded no impairment charges related to finite-lived intangible or long-lived assets.

Deferred Charges, Policy [Policy Text Block]

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the life of the borrowing or the life of the credit facility using the straight-line methods.

Lease, Policy [Policy Text Block]

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating or capital and financing leases. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. The lease term for accounting purposes commences with the date the Company takes possession of the space and ends on the later of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the lease.

Operating leases

 

The Company accounts for operating leases with rent holidays and escalating payment terms by recognizing the associated expense on a straight-line basis over the lease term, and the difference between the average rental amount charged to expense and amounts payable under the leases are included in deferred rent. For certain leases, the Company has also received cash from landlords to compensate for costs incurred by the Company in making the store locations ready for operation (leasehold incentives or tenant allowances). Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term.

Capital financing leases

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution, the Company analyzes its involvement during the construction period.As a result of defined forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and may be required to capitalize the project costs on its balance sheet. If the project costs are capitalized, the Company performs a sale-leaseback analysis upon completion of the constructionto determine if the Company can remove the assets from its balance sheet. If the asset cannot be removed from the balance sheet, the fair market value of the building remains recognized as an asset on the balance sheet, along with a corresponding capital lease financing obligation equal to the fair market value of the building less any amount the Company contributed towards construction. The Company does not record rent expense for the rental payments under capital financing leases, but rather payments under the capital financing lease obligations are recognized as a reduction of the capital lease financing obligation and as interest expense. The capital financing lease asset is depreciated on a straight-line basis over the estimated useful life of the asset.

Capital leases

Occasionally, the Company enters into leases that are deemed to be capital leases. For these leases, the Company capitalizes the lower of the present value of the minimum lease payments or the fair value of the leased asset at inception and records a corresponding capital lease obligation. The Company does not record rent expense for the rental payments under capital leases, but rather payments under the capital lease obligations are recognized as a reduction of the capital lease obligation and as interest expense. The capital lease asset is depreciated on a straight-line basis over the term of the related lease.

Self Insurance Reserve [Policy Text Block]

Self-Insurance

The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation. Stop-loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate claims incurred but not reported using historical experience. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from historical trends.

Revenue Recognition, Policy [Policy Text Block]

Revenue Recognition

Revenue is recognized at the point of sale, net of in-house coupons, discounts and returns. Sales taxes are not included in sales. The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. The Company records a deferred revenue liability within accrued expenses when it sells the Company’s gift cards or issues gift cards for award or promotional purposes, and records a sale when a customer redeems the gift card. Generally, the gift cards do not expire. The Company currently does not record breakage for unused portions of gift cards.

Cost of Goods Sold and Occupancy Costs [Policy Text Block]

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and allowances, as well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging facility and distribution center. The amount shown is net of various rebates from third-party vendors in the form of quantity discounts and payments. Vendor consideration associated with product discounts is recorded as either a reduction of merchandise inventory or cost of goods sold. Store occupancy costs include rent, common area maintenance and real estate taxes. Store occupancy costs do not include any rent amounts for the store leases classified as capital and financing lease obligations.

Store Expenses [Policy Text Block]

Store Expenses

Store expenses consist of store-level expenses such as salaries, benefits and share-based compensation, supplies, utilities, depreciation, gain or loss on disposal of assets and other related costs associated with operations support. Store expenses also include purchasing support services and advertising and marketing costs.

Selling, General and Administrative Expenses, Policy [Policy Text Block]

Administrative Expenses

Administrative expenses consist of salaries, benefits and share-based compensation, occupancy costs, depreciation, office supplies, hardware and software expenses, professional services expenses and other general and administrative expenses.

Pre-Opening Costs and Relocation Expenses [Policy Text Block]

Pre-Opening and Relocation Expenses

Costs associated with the opening of new stores or relocating existing stores are expensed as incurred.

Advertising Cost, Policy, Expensed Advertising Cost [Policy Text Block]

Advertising and Marketing

Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening and relocation expenses in the consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2015, 2014 and 2013 were approximately $9.3 million, $7.8 million and $6.2 million, respectively, net of vendor reimbursements received for newsletter advertising. Advertising expense reimbursements received from vendors totaled approximately $2.5 million, $1.9 million and $1.5 million for the years ended September 30, 2015, 2014 and 2013, respectively.

Share-based Compensation, Option and Incentive Plans Policy [Policy Text Block]

S

hare

-

B

ased

C

ompensation

The Company adopted the 2012 Omnibus Incentive Plan in connection with the IPO on July 25, 2012. Restricted common stock units are granted at the market price of the Company’s common stock on the date of grant and expensed over the applicable vesting period.

The excess tax benefits for recognized compensation costs are reported as a credit to additional-paid-in capital and as operating cash outflows when such excess tax benefits are realized by a reduction to current taxes payable.

Income Tax, Policy [Policy Text Block]

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which the Company operates.

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the Company believes are more likely than not to be recovered.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service (IRS) and other state and local taxing authorities.

Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent differences for tax purposes.

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-17 “Income Taxes” Topic 740, “Income Taxes.” (ASU 2015-17). ASU 2015-17 addresses the balance sheet classification of deferred taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The guidance will be effective for the Company’s first quarter of the fiscal year ending September 30, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact that the adoption of ASU 2015-17 will have on its consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments” Topic 805, “Business Combinations” (ASU 2015-16). The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retrospectively revise prior periods. Additionally, an acquirer should record in the same period the effects on earnings of any changes in the provisional accounts, calculated as if the accounting had been completed at the acquisition date. The amendments should be applied on a prospective basis. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years.

The guidance in ASU 2015-16

will be effective for the Company’s first quarter of the fiscal year ending September 30, 2017.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” Topic 330, “Inventory” (ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 should be applied on a prospective basis. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The provisions of ASU 2015-11 are effective for the Company’s first quarter of the fiscal year ending September 30, 2018. The Company is currently evaluating the impact that the adoption of ASU 2015-11 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software” (ASU 2015-05). ASU 2015-05 provides guidance as to whether a cloud computing arrangement (such as software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. The amendments in ASU 2015-05 may be applied on either a prospective or retrospective basis and early adoption is permitted. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015

and interim periods within those fiscal years. The provisions of

ASU 2015-05 are effective for the Company’s first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of

ASU 2015-05 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” Topic 835, “Interest” (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest,” Subtopic 835-30, “Interest” (ASU 2015-15). The guidance in ASU 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements and ASU 2015-15 was issued to clarify that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangements. The amendments in ASU 2015-03 should be applied on a retrospective basis and early adoption is permitted. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 , and interim periods within those fiscal years. The guidance in ASU 2015-03 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of ASU 2015-03 will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However, earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company has not yet selected a transition method and is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements and related disclosures.

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Note 20 - Subsequent Events

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Subsequent Events [Text Block]

20

. Subsequent Events

On November 17, 2015, as provided for in the Credit Facility, the Company obtained a commitment to increase the amount available for borrowing under its Credit Facility from $15.0 million to $25.0 million.

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Note 11 - Future Minimum Annual Payments under Operating Leases (Details) $ in Thousands	Sep. 30, 2015 USD ($)
Third Parties [Member]
2016	$ 25,889
2017	28,458
2018	28,789
2019	27,588
2020	26,915
Thereafter	235,971
	373,610
Related Parties [Member]
2016	1,283
2017	1,281
2018	1,281
2019	1,281
2020	1,285
Thereafter	7,885
	14,296
2016, Sublease Rental Income	(125)
2016, Total OperatingLeases	27,047
2017, Sublease Rental Income	(134)
2017, Total OperatingLeases	29,605
2018, Sublease Rental Income	(134)
2018, Total OperatingLeases	29,936
2019, Sublease Rental Income	(124)
2019, Total OperatingLeases	28,745
2020, Sublease Rental Income	(121)
2020, Total OperatingLeases	28,079
Thereafter, Sublease Rental Income	(338)
Thereafter, Total OperatingLeases	243,518
Total Sublease Rental Income	(976)
Total OperatingLeases	$ 386,930

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Note 3 - Earnings Per Share (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Restricted Stock Units (RSUs) [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share, Amount	120,674	3,558	50,320
Dividends	$ 0	$ 0	$ 0
Common Stock, Shares, Issued	22,496,628	22,485,488
Preferred Stock, Shares Issued	0
Preferred Stock, Shares Outstanding	0
Common Stock, Shares Authorized	50,000,000	50,000,000
Common Stock, Shares, Outstanding	22,496,628	22,485,488
Preferred Stock, Shares Authorized	10,000,000

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Note 2 - Basis of Presentation and Summary of Significant Accounting Policies (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Property, Plant and Equipment [Table Text Block]

	Useful lives (in years)
Land improvements	5	–	15
Buildings		40
Leasehold and building improvements	1	–	25
Capitalized real estate leases for build-to-suit stores		40
Capitalized real estate leases		15
Fixtures and equipment	5	–	7
Computer hardware and software	3	–	5

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Note 3 - Earnings Per Share (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Year ended September 30,
	2015		2014		2013
Net income	$	16,204		13,473		10,552
Weighted average number of shares of common stock outstanding		22,490,260		22,466,432		22,399,346
Effect of dilutive securities		10,573		13,403		42,036
Weighted average number of shares of common stock outstanding including the effect of dilutive securities		22,500,833		22,479,835		22,441,382
Basic earnings per share	$	0.72		0.60		0.47
Diluted earnings per share	$	0.72		0.60		0.47

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Consolidated Statements of Changes in Stockholders' Equity - USD ($) $ in Thousands	Common Stock [Member]	AOCI Attributable to Parent [Member]	Additional Paid-in Capital [Member]	Retained Earnings [Member]	Total
Balances (in shares) at Sep. 30, 2012	22,372,184
Balances at Sep. 30, 2012	$ 22	$ (4)	$ 52,676	$ 20,255	$ 72,949
Net income				$ 10,552	10,552
Unrealized gain on available-for-sale securities, net of tax benefit		$ 4			4
Issuance costs			$ (12)		(12)
Share-based compensation (in shares)	69,069
Share-based compensation			448		448
Income Tax Effect from Share-based Compensation			592		592
Balances (in shares) at Sep. 30, 2013	22,441,253
Balances at Sep. 30, 2013	$ 22		$ 53,704	$ 30,807	84,533
Net income				$ 13,473	$ 13,473
Unrealized gain on available-for-sale securities, net of tax benefit
Share-based compensation (in shares)	44,235
Share-based compensation			$ 449		$ 449
Income Tax Effect from Share-based Compensation			399		$ 399
Balances (in shares) at Sep. 30, 2014	22,485,488				22,485,488
Balances at Sep. 30, 2014	$ 22		$ 54,552	$ 44,280	$ 98,854
Net income				$ 16,204	$ 16,204
Unrealized gain on available-for-sale securities, net of tax benefit
Share-based compensation (in shares)	11,140
Share-based compensation			$ 471		$ 471
Income Tax Effect from Share-based Compensation			(41)		$ (41)
Balances (in shares) at Sep. 30, 2015	22,496,628				22,496,628
Balances at Sep. 30, 2015	$ 22		$ 54,982	$ 60,484	$ 115,488

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Note 6 - Property and Equipment (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Property Plant and Equipment Components [Table Text Block]

	Useful lives			As of September 30,
	(in years)			2015			2014
Construction in process		n/a		$	10,150			6,867
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively		40			24,774			17,107
Capitalized real estate leases		15			4,866			4,866
Land		n/a			192			192
Buildings		40			4,980			3,985
Land improvements	5	-	15		1,015			1,000
Leasehold and building improvements	1	-	25		91,865			74,691
Fixtures and equipment	5	-	7		83,932			69,894
Computer hardware and software	3	-	5		13,834			10,740
					235,608			189,342
Less accumulated depreciation and amortization					(90,389	)		(69,118	)
Property and equipment, net				$	145,219			120,224

Depreciation and Amortization Expense [Table Text Block]

	Year ended September 30,
	2015		2014		2013
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	796		770		709
Depreciation and amortization expense included in store expenses		19,635		15,861		12,365
Depreciation and amortization expense included in administrative expenses		906		581		422
Total depreciation and amortization expense	$	21,337		17,212		13,496

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Note 19 - Selected Quarterly Financial Data (Unaudited) (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Quarterly Financial Information [Table Text Block]

Fiscal Year Ended September 30, 2015	Three months ended
	December 31, 2014			March 31, 2015			June 30, 2015			September 30, 2015
Net sales	$	145,887			157,744			158,650			162,397
Cost of goods sold and occupancy costs		103,593			110,874			112,508			115,607
Gross profit		42,294			46,870			46,142			46,790
Store expenses		31,049			32,461			33,508			35,113
Administrative expenses		4,227			4,156			4,322			4,809
Pre-opening and relocation expenses		577			870			1,078			1,297
Operating income		6,441			9,383			7,234			5,571
Interest expense		(735	)		(714	)		(768	)		(776	)
Income before income taxes		5,706			8,669			6,466			4,795
Provision for income taxes		(2,142	)		(3,266	)		(2,121	)		(1,903	)
Net income	$	3,564			5,403			4,345			2,892
Basic earnings per share	$	0.16			0.24			0.19			0.13
Diluted earnings per share		0.16			0.24			0.19			0.13

Fiscal Year Ended September 30, 2014	Three months ended
	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014
Net sales	$	120,580			130,343			134,036			135,715
Cost of goods sold and occupancy costs		85,199			91,590			95,424			96,959
Gross profit		35,381			38,753			38,612			38,756
Store expenses		25,173			26,877			28,213			28,394
Administrative expenses		3,889			3,548			3,585			3,801
Pre-opening and relocation expenses		889			1,211			729			945
Operating income		5,430			7,117			6,085			5,616
Other income (expense):
Dividends and interest income		1			1			—			—
Interest expense		(707	)		(704	)		(706	)		(379	)
Total other expense		(706	)		(703	)		(706	)		(379	)
Income before income taxes		4,724			6,414			5,379			5,237
Provision for income taxes		(1,802	)		(2,415	)		(2,015	)		(2,049	)
Net income .	$	2,922			3,999			3,364			3,188
Basic earnings per share	$	0.13			0.18			0.15			0.14
Diluted earnings per share		0.13			0.18			0.15			0.14

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Note 9 - Deferred Financing Costs (Details Textual) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Maximum [Member]
Deferred Finance Costs, Noncurrent, Net	$ 100	$ 100
Amortization of Financing Costs	100	100	$ 100
Deferred Finance Costs, Noncurrent, Net	21	36
Accumulated Amortization of Noncurrent Deferred Finance Costs	900	900
Amortization of Financing Costs	$ 15	$ 19	$ 47

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Note 17 - Tangible and Intangible Assets Acquired (Details) $ in Thousands	Sep. 30, 2015 USD ($)
Nature's Pantry Inc. [Member]
Inventory and supplies	$ 726
Property and equipment	680
Total provisionally allocated to tangible and identifiable intangible assets	1,471
Other intangible assets	$ 65

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Consolidated Balance Sheets - USD ($) $ in Thousands	Sep. 30, 2015	Sep. 30, 2014
Current assets:
Cash and cash equivalents	$ 2,915	$ 5,113
Accounts receivable, net	2,576	2,146
Merchandise inventory	74,818	58,381
Prepaid expenses and other current assets	1,108	641
Deferred income tax assets	866	832
Total current assets	82,283	67,113
Property and equipment, net	145,219	120,224
Other assets:
Deposits and other assets	778	712
Goodwill and other intangible assets, net	5,623	900
Deferred financing costs, net	21	36
Total other assets	6,422	1,648
Total assets	233,924	188,985
Current liabilities:
Accounts payable	49,896	33,835
Accrued expenses	19,649	15,822
Capital and financing lease obligations, current portion	333	229
Total current liabilities	69,878	49,886
Long-term liabilities:
Capital and financing lease obligations, net of current portion	27,274	21,748
Deferred income tax liabilities	6,073	$ 5,409
Deferred compensation	314
Deferred rent	6,922	$ 5,842
Leasehold incentives	7,975	7,246
Total long-term liabilities	48,558	40,245
Total liabilities	$ 118,436	$ 90,131
Commitments (Notes 11 and 18)
Stockholders’ equity:
Common stock, $0.001 par value. 50,000,000 shares authorized, 22,496,628 and 22,485,488 shares issued and outstanding, respectively	$ 22	$ 22
Additional paid-in capital	54,982	54,552
Retained earnings	60,484	44,280
Total stockholders’ equity	115,488	98,854
Total liabilities and stockholders’ equity	$ 233,924	$ 188,985

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Note 3 - Basic and Diluted Earnings Per Share (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Net income	$ 16,204	$ 13,473	$ 10,552
Basic (in shares)	22,490,260	22,466,432	22,399,346
Effect of dilutive securities (in shares)	10,573	13,403	42,036
Weighted average number of shares of common stock outstanding including the effect of dilutive securities (in shares)	22,500,833	22,479,835	22,441,382
Basic earnings per share (in dollars per share)	$ 0.72	$ 0.60	$ 0.47
Diluted earnings per share (in dollars per share)	$ 0.72	$ 0.60	$ 0.47

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Consolidated Statements of Cash Flows - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Operating activities:
Net income	$ 16,204	$ 13,473	$ 10,552
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	21,337	17,212	13,496
Loss on disposal of property and equipment	56	1	43
Share-based compensation	$ 573	532	602
Excess tax benefit from share-based compensation		(399)	(592)
Deferred income tax expense (benefit)	$ 630	(1,186)	2,452
Amortization of Financing Costs	$ 15	19	47
Interest accrued on investments and amortization of premium		$ 9	27
Other amortization			26
Changes in operating assets and liabilities
Accounts receivable, net	$ (430)	$ 255	(546)
Income tax receivable		612	(601)
Merchandise inventory	$ (15,711)	(12,909)	(7,928)
Prepaid expenses and other assets	(533)	(665)	105
Accounts payable	12,891	5,202	4,480
Accrued expenses	3,848	$ 6,952	$ 2,283
Deferred compensation	314
Deferred rent and leasehold incentives	1,809	$ 2,641	$ 1,271
Net cash provided by operating activities	41,003	31,749	25,717
Investing activities:
Acquisition of property and equipment	(36,750)	$ (36,512)	(39,708)
Proceeds from sale of property and equipment	13		5,005
Payment for acquisition	$ (5,601)
Purchase of available-for-sale securities			(521)
Proceeds from sale of available-for-sale securities			90
Proceeds from maturity of available-for-sale securities		$ 1,140	1,010
Decrease (increase) in restricted cash		500	(500)
Net cash used in investing activities	$ (42,338)	(34,872)	(34,624)
Financing activities:
Borrowings under credit facility	202,878	46,440	81
Repayments under credit facility	$ (202,878)	$ (46,440)	(81)
Repayments under notes payable, related party			(282)
Capital and financing lease obligations payments	$ (247)	$ (182)	$ (121)
Contingent consideration payments for acquisition	$ (514)
Excess tax benefit from share-based compensation		$ 399	$ 592
Equity issuance costs			(268)
Payments on withholding tax for restricted stock unit vesting	$ (102)	$ (83)	(155)
Loan fees paid		(30)	(18)
Net cash (used in) provided by financing activities	$ (863)	104	(252)
Net decrease in cash and cash equivalents	(2,198)	(3,019)	(9,159)
Cash and cash equivalents, beginning of year	5,113	8,132	17,291
Cash and cash equivalents, end of year	2,915	5,113	8,132
Supplemental disclosures of cash flow information:
Cash paid for interest	63	16	7
Cash paid for interest on capital and financing lease obligations, net of capitalized interest of $309, $364 and $0, respectively	2,809	2,423	2,036
Income taxes paid	8,194	3,762	3,916
Supplemental disclosures of non-cash investing and financing activities:
Acquisition of property and equipment not yet paid	6,429	3,260	3,545
Property acquired through capital and financing lease obligations	$ 5,772	$ 2,300	$ 14,372

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Note 11 - Future Minimum Lease Payments for Stores Under Construction (Details) - Capital Lease Finance Obligations [Member] - Build to Suit Lease in Process [Member] $ in Thousands	Sep. 30, 2015 USD ($)
2016, Interest expense on capital lease obligations for assets under construction	$ 85
2016, Principal payments on capital lease obligations for assets under construction	(14)
2016, Total future payments on capital lease obligations for assets under construction	71
2017, Interest expense on capital lease obligations for assets under construction	85
2017, Principal payments on capital lease obligations for assets under construction	3
2017, Total future payments on capital lease obligations for assets under construction	88
2018, Interest expense on capital lease obligations for assets under construction	85
2018, Principal payments on capital lease obligations for assets under construction	3
2018, Total future payments on capital lease obligations for assets under construction	88
2019, Interest expense on capital lease obligations for assets under construction	85
2019, Principal payments on capital lease obligations for assets under construction	3
2019, Total future payments on capital lease obligations for assets under construction	88
2020, Interest expense on capital lease obligations for assets under construction	85
2020, Principal payments on capital lease obligations for assets under construction	3
2020, Total future payments on capital lease obligations for assets under construction	88
Thereafter, Interest expense on capital lease obligations for assets under construction	1,253
Thereafter, Principal payments on capital lease obligations for assets under construction	974
Thereafter, Total future payments on capital lease obligations for assets under construction	2,227
Total Interest expense on capital lease obligations for assets under construction	1,678
Total Principal payments on capital lease obligations for assets under construction	972
Total future payments on capital lease obligations for assets under construction	$ 2,650

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Note 11 - Lease Commitments (Tables)

12 Months Ended

Sep. 30, 2015

Capital Lease Finance Obligations [Member] | Construction in Progress [Member]

Notes Tables

Schedule of Future Minimum Lease Payments for Capital and Finance Lease Obligations [Table Text Block]

	Interest expense on capital lease obligation s for assets under construction		Principal payments on cap ital lease obligations for assets under construction			Total future payments on capital lease o bligation s for asset s under construction
2016	$	85		(14	)		71
2017		85		3			88
2018		85		3			88
2019		85		3			88
2020		85		3			88
Thereafter		1,253		974			2,227
	$	1,678		972			2,650

Capital Lease Finance Obligations [Member] | Assets Held Under Real Estate Leases for Build to Suit Stores [Member]

Notes Tables

Schedule of Future Minimum Lease Payments for Capital and Finance Lease Obligations [Table Text Block]

	Interest expense on capital lease finance obligations		Principal payment s on capital lease finance obligations		Interest expense on capital lease obligations		Principal payments on capital lease obligations		Total future payments on capital lease finance and capital lease obligations
2016	$	2,643		177		650		151		3,621
2017		2,625		199		631		170		3,625
2018		2,604		234		609		192		3,639
2019		2,578		295		584		217		3,674
2020		2,546		329		554		247		3,676
Thereafter		15,836		4,464		2,460		3,561		26,321
Non-cash derecognition of capital lease finance obligations at end of lease term		—		16,399		—		—		16,399
	$	28,832		22,097		5,488		4,538		60,955

Schedule of Future Minimum Rental Payments for Operating Leases [Table Text Block]

Fiscal Year	Third parties		Related parties		Sublease Rental Income			Total Operating Leases
2016	$	25,889		1,283		(125	)		27,047
2017		28,458		1,281		(134	)		29,605
2018		28,789		1,281		(134	)		29,936
2019		27,588		1,281		(124	)		28,745
2020		26,915		1,285		(121	)		28,079
Thereafter		235,971		7,885		(338	)		243,518
	$	373,610		14,296		(976	)		386,930

Schedule of Debt [Table Text Block]

	As of September 30,
	201 5			201 4
Capital lease finance obligations, due in monthly installments through fiscal year 2029	$	22,096			14,989
Capital lease obligations due in monthly installments through fiscal year 2028		4,539			4,672
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2024		—			2,316
Capital lease obligations for assets under construction, due in monthly installments through fiscal year 2041		972			—
Total capital and financing lease obligations		27,607			21,977
Less current portion		(333	)		(229	)
Total capital and financing lease obligations, net of current portion	$	27,274			21,748

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Note 14 - Reconciliation between the U.S. Federal Statutory Income Tax Rate and the Company's Effective Tax Rate (Details)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Statutory tax rate	35.00%	35.00%	34.00%
State income taxes, net of federal income tax expense	2.90%	3.00%	3.30%
Other, net	(1.10%)	0.10%	0.40%
Effective tax rate	36.80%	38.10%	37.70%

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Note 14 - Income Taxes

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Income Tax Disclosure [Text Block]

1

4

. Income Taxes

The following are the components of the provision for income taxes as of September 30, 2015, 2014 and 2013, respectively, dollars in thousands:

	Year ended September 30,
	201 5		201 4			201 3
Current federal income tax expense	$	7,769		8,304			3,376
Current state income tax expense		1,033		1,163			551
		8,802		9,467			3,927
Deferred federal income tax expense (benefit)		514		(1,112	)		2,156
Deferred state income tax expense (benefit)		116		(74	)		296
		630		(1,186	)		2,452
Total provision for income taxes	$	9,432		8,281			6,379

The differences between the United States federal statutory income tax rate and the Company’s effective tax rate are as follows:

	Year ended September 30,
	201 5			201 4		201 3
Statutory tax rate		35.0	%		35.0		34.0
State income taxes, net of federal income tax expense		2.9			3.0		3.3
Other, net		(1.1	)		0.1		0.4
Effective tax rate		36.8	%		38.1		37.7

Deferred taxes have been classified on the consolidated balance sheets as follows, dollars in thousands:

	As of September 30,
	201 5			201 4
Current assets	$	866			832
Long-term liabilities		(6,073	)		(5,409	)
Net deferred tax liabilities	$	(5,207	)		(4,577	)

The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities are as follows, dollars in thousands:

	As of September 30,
	201 5			201 4
Deferred tax assets
Capital and financing lease obligations	$	10,473			8,330
Goodwill		2,582			2,937
Leasehold incentives		3,025			2,746
Deferred rent		2,627			2,214
Trademarks		1,018			1,018
Accrued employee benefits		729			590
Other		363			322
Gross deferred tax assets		20,817			18,157
Deferred tax liabilities
Property and equipment		(22,909	)		(19,930	)
Leasehold improvements		(3,087	)		(2,804	)
Other		(28	)		—
Gross deferred tax liabilities		(26,024	)		(22,734	)
Net deferred tax liabilities	$	(5,207	)		(4,577	)

The Company believes that it is more likely than not that it will fully realize all deferred tax assets in the form of future deductions based on the nature of the deductible temporary differences and expected future taxable income.

The Company had $0 and approximately $0.1 million as of September 30, 2015 and 2014, respectively, in tax effected operating loss carryforwards related to state income taxes. The Company utilized the remaining operating loss carryforwards, of approximately $0.1 million, on its tax return for the year ended September 30, 2015. The Company utilized less than $0.1 million in tax effected state income tax carryforwards in the year ended September 30, 2014.

The Company files income tax returns with federal, state and local tax authorities. With limited exceptions, the Company is no longer subject to federal income tax examinations for fiscal years 2011 and prior and is no longer subject to state and local income tax examinations for fiscal years 2010 and prior.

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Note 12 - Share-based Compensation (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Nonvested Restricted Stock Units Activity [Table Text Block]

	Shares			Weighted average grant date fair value
Non-vested as of September 30, 2013		86,053		$	21.80
Granted		3,558			42.16
Forfeited		(3,868	)		34.07
Vested		(48,549	)		12.38
Non-vested as of September 30, 2014		37,194			34.77
Granted		127,751			24.14
Forfeited		(17,560	)		25.04
Vested		(15,529	)		32.34
Non-vested as of September 30, 2015		131,856			26.05

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Note 16 - Segment Reporting

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Segment Reporting Disclosure [Text Block]

1

6

. Segment Reporting

The Company has one reporting segment, natural and organic retail stores. The Company’s revenues are derived from the sale of natural and organic products at its stores. All existing operations are domestic.

Sales from the Company’s natural and organic retail stores are derived from sales of the following products which are presented as a percentage of sales for the years ended September 30, 2015, 2014 and 2013 as follows:

	As of September 30,
	201 5			201 4		201 3
Grocery		66.4	%		66.7		65.2
Dietary supplements		22.5			23.2		24.8
Body care, pet care and other		11.1			10.1		10.0
		100.0	%		100.0		100.0

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Note 15 - Defined Contribution Plan (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Defined Contribution Plan, Employer Matching Contribution, Percent of Match	25.00%
Defined Contribution Plan Employer Maximum Discretionary Contribution Amount per Employee	$ 2,500
Defined Contribution Plan, Cost Recognized	$ 600,000	$ 100,000	$ 400,000

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Consolidated Statements of Cash Flows (Parentheticals) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Capitalized interest	$ 309	$ 364	$ 0

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Consolidated Balance Sheets (Parentheticals) - $ / shares	Sep. 30, 2015	Sep. 30, 2014
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized (in shares)	50,000,000	50,000,000
Common stock, shares issued (in shares)	22,496,628	22,485,488
Common stock, shares outstanding (in shares)	22,496,628	22,485,488

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Note 9 - Deferred Financing Costs

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Table Text Block]

9. Deferred Financing Costs

The Company has capitalized costs incurred in securing its Credit Facility (see Note 10). Deferred financing costs, net of accumulated amortization were less than $0.1 million as of September 30, 2015 and 2014. Accumulated amortization was approximately $0.9 million as of both September 30, 2015 and 2014, respectively.

Total amortization expense for deferred financing costs was less than $0.1 million for each of the years ended September 30, 2015, 2014 and 2013.

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Document And Entity Information - USD ($)	12 Months Ended
	Sep. 30, 2015	Dec. 08, 2015	Mar. 31, 2015
Entity Registrant Name	Natural Grocers by Vitamin Cottage, Inc.
Entity Central Index Key	0001547459
Trading Symbol	ngvc
Current Fiscal Year End Date	--09-30
Entity Filer Category	Accelerated Filer
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Well-known Seasoned Issuer	No
Entity Common Stock, Shares Outstanding (in shares)		22,498,336
Entity Public Float			$ 265,209,539
Document Type	10-K
Document Period End Date	Sep. 30, 2015
Document Fiscal Year Focus	2015
Document Fiscal Period Focus	FY
Amendment Flag	false

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Note 10 - Long-Term Debt

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Debt and Capital Leases Disclosures [Text Block]

10. Long-Term Debt

Credit Facility

The Company is party to a credit agreement (the Credit Facility). The operating company is the borrower under the Credit Facility, and its obligations under the Credit Facility are guaranteed by the holding company. The Credit Facility is secured by a lien on substantially all of the Company’s assets.

The Credit Facility requires compliance with certain operational and financial covenants including a leverage ratio and fixed charge coverage ratio. The Credit Facility also contains certain other limitations on the Company’s ability to incur additional debt, guarantee other obligations, grant liens on assets and make investments or acquisitions as defined in the Credit Facility. Additionally, the Credit Facility prohibits the payment of cash dividends to the holding company from the operating company, without the administrative agent’s consent except when no default or event of default exists.

If no default or event of default exists dividends are allowed for various audit, accounting, tax, securities, indemnification, reimbursement, insurance and other reasonable expenses in the ordinary course of business. The Company does not expect such restrictions to impact its ability to meet cash obligations. The terms and conditions of the Credit Facility and associated documents are customary and include, among other things, guarantees, pledges and subordinations. At September 30, 2015 and 2014, the Company was in compliance with the debt covenants.

On December 12, 2013, the Company amended and restated its $15.0 million credit agreement, as a result of which, among other things: (i) the maturity date of the Credit Facility was extended by three years to January 31, 2017; (ii) the Company has the right to request the issuance of letters of credit under the Credit Facility of up to $3.0 million; (iii) the Company is allowed to increase the amount available under the revolving credit facility, by an additional amount that may not exceed $10.0 million, by obtaining an additional commitment or commitments; (iv) a requirement for a consolidated earnings before interest, taxes, depreciation and amortization to revenue ratio was eliminated; and (v) the unused commitment fee was changed from 0.20% to amounts ranging from 0.15% to 0.35% based on certain conditions. The Company may borrow, prepay and re-borrow amounts under the Credit Facility at any time prior to the maturity date.

On November 17, 2015, as provided for in the Credit Facility, the Company obtained a commitment to increase the amount available for borrowing under the Credit Facility from $15.0 million to $25.0 million.

The Company had no amounts outstanding on its credit agreement as of September 30, 2015 and 2014. During the years ended September 30, 2015 and 2014, the Company made and repaid borrowings under the credit agreement. As of September 30, 2015, the Company had undrawn, issued and outstanding letters of credit of $1.0 million which were reserved against the amount available for borrowing under the terms of the credit agreement. As of each of September 30, 2015 and 2014, there was $14.0 million available under the then-existing $15.0 million credit agreement.

For floating rate borrowings under the Credit Facility, interest is determined by the lender’s administrative agent and is stated at the prime rate less the lender spread, subject to the Company meeting certain financial measures. For fixed rate borrowings under the Credit Facility, interest is determined by quoted LIBOR rates for the interest period plus the lender spread, subject to the Company meeting certain financial measures.

Capital

and Financing Lease

Obligation

s

The Company had 13 and ten leases as of September 30, 2015 and 2014, respectively, that are included in capital and financing lease obligations (see Notes 2 and 11). The Company does not record rent expense for these capitalized real estate leases, but rather rental payments under the capital leases are recognized as a reduction of the capital and financing lease obligation and as interest expense (see Note 11). The interest rate on capital and financing lease obligations is determined at the inception of the lease.

Inter

est

The Company incurred gross interest expense of approximately $3.3 million, $2.9 million and $2.2 million in the years ended September 30

, 2015, 2014 and 2013, respectively. Interest expense for the years ended September 30, 2015, 2014 and 2013 relates primarily to interest on capital and financing lease obligations. The Company capitalized interest of approximately $0.3 million and $0.4 million for the years ended September 30, 2015 and 2014, respectively, and had no amounts of capitalized interest for the year ended September 30, 2013

.

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Consolidated Statements of Income - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Net sales	$ 624,678	$ 520,674	$ 430,655
Cost of goods sold and occupancy costs	442,582	369,172	304,922
Gross profit	182,096	151,502	125,733
Store expenses	132,131	108,657	89,935
Administrative expenses	17,514	14,823	13,479
Pre-opening and relocation expenses	3,822	3,774	3,231
Operating income	$ 28,629	24,248	19,088
Other income (expense):
Dividends and interest income		2	9
Interest expense	$ (2,993)	(2,496)	(2,166)
Total other expense, net	(2,993)	(2,494)	(2,157)
Income before income taxes	25,636	21,754	16,931
Provision for income taxes	(9,432)	(8,281)	(6,379)
Net income	$ 16,204	$ 13,473	$ 10,552
Net income per share of common stock:
Basic (in dollars per share)	$ 0.72	$ 0.60	$ 0.47
Diluted (in dollars per share)	$ 0.72	$ 0.60	$ 0.47
Weighted average number of shares of common stock outstanding:
Basic (in shares)	22,490,260	22,466,432	22,399,346
Diluted (in shares)	22,500,833	22,479,835	22,441,382

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Note 4 - Investments

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Summary of Investment Holdings, Schedule of Investments [Text Block]

4. Investments

The Company had no investments as of September 30, 2015 or 2014. During the years ended September 30, 2014 and 2013, the Company recorded insignificant amounts of interest income.

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Note 3 - Earnings Per Share

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Earnings Per Share [Text Block]

3. Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if the Company’s granted but unvested restricted stock units were to vest, resulting in the issuance of common stock that would then share in the earnings of the Company. Presented below is basic and diluted earnings per share for the years ended September 30, 2015, 2014 and 2013, dollars in thousands, except per share data:

	Year ended September 30,
	2015		2014		2013
Net income	$	16,204		13,473		10,552
Weighted average number of shares of common stock outstanding		22,490,260		22,466,432		22,399,346
Effect of dilutive securities		10,573		13,403		42,036
Weighted average number of shares of common stock outstanding including the effect of dilutive securities		22,500,833		22,479,835		22,441,382
Basic earnings per share	$	0.72		0.60		0.47
Diluted earnings per share	$	0.72		0.60		0.47

There were 120,674, 3,558 and 50,320 non-vested restricted stock units (RSUs) for the years ended September 30, 2015, 2014 and 2013, respectively, excluded from the calculation as they are antidilutive.

The Company did not declare or pay any dividends in the years ended September 30, 2015, 2014 or 2013.

As of September 30, 2015, the Company had 50,000,000 shares of common stock authorized, of which 22,496,628 shares were issued and outstanding, as well as 10,000,000 shares of preferred common stock authorized, of which none was issued and outstanding.

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Note 15 - Defined Contribution Plan

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Pension and Other Postretirement Benefits Disclosure [Text Block]

1

5

. Defined Contribution Plan

The Company has a defined contribution retirement plan (the Retirement Plan) covering substantially all employees who meet certain eligibility requirements as to age and length of service. The Retirement Plan incorporates the salary deferral provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended (the Code). Employees may defer up to the annual maximum limit prescribed by the Code. The Company, on a discretionary basis, may match 25% of participant contributions up to a maximum annual employer match of $2,500. The Company’s matching contribution included in administrative expenses was approximately $0.6 million, $0.1 million and $0.4 million for the years ended September 30, 2015, 2014 and 2013 respectively.

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Note 11 - Lease Commitments

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Leases of Lessee Disclosure [Text Block]

1

1

. Lease Commitments

Operating Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating leases through 2062. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. Deferred rent expense as of September 30, 2015 and 2014 was approximately $6.9 million and $5.8 million, respectively. Tenant improvement allowances received from landlords (leasehold incentives) are recorded as liabilities and recognized evenly as a reduction to rent expense over the lease term. Leasehold incentives at September 30, 2015 and 2014 were approximately $8.0 million and $7.2 million, respectively. Sublease rental income was less than $0.1 million for each of the years ended September 30, 2015 and 2014. The Company had no sublease rental income during the year ended September 30, 2013.

The Company has five operating leases with Chalet Properties, LLC (Chalet), one operating lease with the Isely Family Land Trust LLC and one operating lease with FTVC, LLC, all related parties (see Note 13). The terms and rental rates of these related party leases are similar to leases with nonrelated parties and are at market rental rates. The leases began at various times with the earliest occurring in November 1999, continue for various terms through February 2027 and include various options to renew. Currently, annual lease payments range from less than $0.1 million to approximately $0.3 million per lease.

Minimum rental commitments and sublease rental income under the terms of the Company’s operating leases are as follows, dollars in thousands:

Fiscal Year	Third parties		Related parties		Sublease Rental Income			Total Operating Leases
2016	$	25,889		1,283		(125	)		27,047
2017		28,458		1,281		(134	)		29,605
2018		28,789		1,281		(134	)		29,936
2019		27,588		1,281		(124	)		28,745
2020		26,915		1,285		(121	)		28,079
Thereafter		235,971		7,885		(338	)		243,518
	$	373,610		14,296		(976	)		386,930

Total rent expense, including common area expenses and warehouse rent, for the years ended September 30, 2015, 2014, and 2013 totaled approximately $26.3 million, $20.5 million and $14.8 million, respectively, which is included in cost of goods sold and occupancy costs and administrative expenses in the consolidated statements of income. In addition, approximately $0.8 million, $1.0 million and $0.6 million is included in pre-opening and relocation expense associated with rent expense for stores prior to their opening date for the years ended September 30, 2015, 2014 and 2013, respectively.

For the year ended September 30, 2013, the Company completed one sale-leaseback transaction with an unrelated party for proceeds of approximately $5.0 million, with a gain on the sale of approximately $0.2 million which has been deferred and will be amortized over the initial lease term. Concurrent with the sale, the Company entered into an agreement to lease the property back from the purchaser over an initial lease term of 15 years. The Company classified the lease as operating and considers the transaction as a normal leaseback with no other continuing involvement.

Capital and Financing Lease Obligations

Capital and financing lease obligations as of September 30, 2015 and 2014, were as follows, dollars in thousands:

	As of September 30,
	201 5			201 4
Capital lease finance obligations, due in monthly installments through fiscal year 2029	$	22,096			14,989
Capital lease obligations due in monthly installments through fiscal year 2028		4,539			4,672
Capital lease finance obligations for assets under construction, due in monthly installments through fiscal year 2024		—			2,316
Capital lease obligations for assets under construction, due in monthly installments through fiscal year 2041		972			—
Total capital and financing lease obligations		27,607			21,977
Less current portion		(333	)		(229	)
Total capital and financing lease obligations, net of current portion	$	27,274			21,748

Capital lease finance obligations

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution, the Company analyzes its involvement during the construction period

.

As a result of defined forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and would be required to capitalize construction costs on its balance sheet. If the project costs were capitalized, the Company performs a sale-leaseback analysis upon completion of the project to determine if the Company can remove the asset from its balance sheet. If the asset cannot be removed from the balance sheet, the fair market value of the building remains on the balance sheet along with a corresponding capital lease finance obligation equal to the fair market value of the building less any amounts the Company

contributed toward construction. The Company had capital lease finance obligations totaling approximately $22.1 million and $15.0 million as of September 30, 2015 and 2014, respectively. The leases that created the obligations expire or become subject to renewal clauses at various dates through fiscal year 2029. The Company does not record rent expense for capital lease finance obligations, but rather rent payments per the leases are recognized as a reduction of the related capital lease finance obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and capital lease finance obligation will be derecognized.

During the quarter ended December 31, 2014, the Company amended an existing lease with Chalet Properties, LLC, a related party (see Note 13) to obtain additional square footage at one Company store. Due to the Company’s involvement with construction for the additional space, the amended lease was deemed to be a capital financing lease in the quarter ended December 31, 2014. The Company capitalized a building asset and related capital lease finance obligation of $3.3 million. Per the lease terms, the Company will pay $2.8 million in cash for rent during the remaining term of the lease, of which $1.8 million will be recorded as interest expense and $1.0 million will be recorded as principal payments. Additionally, the Company will record $1.0 million in depreciation expense related to the building asset.

Capital lease obligations

The Company had capital lease obligations totaling approximately $4.5 million and $4.7 million as of September 30, 2015 and 2014, respectively. Certain of the Company’s leases for store locations are considered capital leases, and as such, the Company has capitalized the present value of the minimum lease payments under the leases for the stores and recorded related capital lease obligations. The leases that created the obligation expire or become subject to renewal clauses at various dates through fiscal year 2028. The Company does not record rent expense for capital lease obligations, but rather rent payments per the leases are recognized as a reduction of the related capital lease obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income.

Capital lease finance obligation

s

for assets under construction

As of September 30, 2015, the Company had no construction in process related to capital lease finance obligations. As of September 30, 2014, the Company had recorded approximately $2.3 million in capital lease finance obligations for assets under construction. Once construction is completed, the Company was deemed to have continuing involvement and capitalized any additional costs of construction. The lease that created the obligation as of September 30, 2014 expires or becomes subject to renewal clauses in fiscal year 2024. The Company will not record rent expense for these leases, but rather rental payments under the leases will be recognized as a reduction of the capital lease finance obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and the capital lease finance obligation will be derecognized.

Capital lease

obligation

s

for assets under construction

As of September 30, 2015, the Company had recorded approximately $0.9 million for capital lease obligations for assets under construction. As of September 30, 2014, the Company had no construction in process related to capital lease obligations

. The lease that created the obligation as of September 30, 2015 expires or becomes subject to renewal clauses in fiscal year 2041. The Company will not record rent expense for these leases, but rather rental payments under the leases will be recognized as a reduction of the capital lease obligation and as interest expense. Depreciation expense for the related capitalized lease assets is included in store expenses in the consolidated statements of income. At the end of the lease term, the offsetting balances of the capitalized assets, net of accumulated depreciation, and the capital lease obligation will be $0.

Future payments for capital

lease finance obligations and capital

lease obligations

Future payments

under the terms of the leases for opened stores included in capital lease finance obligations and capital lease obligations as of September 30, 2015 are as follows, dollars in thousands:

	Interest expense on capital lease finance obligations		Principal payment s on capital lease finance obligations		Interest expense on capital lease obligations		Principal payments on capital lease obligations		Total future payments on capital lease finance and capital lease obligations
2016	$	2,643		177		650		151		3,621
2017		2,625		199		631		170		3,625
2018		2,604		234		609		192		3,639
2019		2,578		295		584		217		3,674
2020		2,546		329		554		247		3,676
Thereafter		15,836		4,464		2,460		3,561		26,321
Non-cash derecognition of capital lease finance obligations at end of lease term		—		16,399		—		—		16,399
	$	28,832		22,097		5,488		4,538		60,955

Future payments

under the terms of the lease for the store location at which construction was in progress as of September 30, 2015, based on the store opening date in the first quarter of fiscal 2016, are as follows, dollars in thousands:

	Interest expense on capital lease obligation s for assets under construction		Principal payments on cap ital lease obligations for assets under construction			Total future payments on capital lease o bligation s for asset s under construction
2016	$	85		(14	)		71
2017		85		3			88
2018		85		3			88
2019		85		3			88
2020		85		3			88
Thereafter		1,253		974			2,227
	$	1,678		972			2,650

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Note 7 - Goodwill and Other Intangible Assets

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Goodwill and Intangible Assets Disclosure [Text Block]

7. Goodwill and Other Intangible Assets

Goodwill and other intangible assets as of September 30, 2015 and 2014, are summarized as follows, dollars in thousands:

	Useful lives			As of September 30,
	(in years)			201 5			201 4
Amortizable intangible assets:
Covenants-not-to-compete	2	-	5	$	353			293
Favorable operating lease		5			339			339
Other intangibles	0.5	-	1		27			22
Amortized intangible assets					719			654
Less accumulated amortization					(683	)		(654	)
Amortized intangible assets, net					36			—
Trademark	Indefinite				389			389
Total other intangibles, net					425			389
Goodwill	Indefinite				5,198			511
Total goodwill and other intangibles, net				$	5,623			900

Amortization expense was less than $0.1 million, $0 and less than $0.1 million for the years ended September 30, 2015, 2014 and 2013, respectively. The aggregate estimated amortization expense for the years ending September 30, 2016 and 2017 is less than $0.1 million. There is no estimated amortization expense for the years ending September 30, 2018, 2019 and 2020. The increase in goodwill and intangible assets in the year ended September 30, 2015 was due to the Store Acquisition described in Note 17.

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Note 12 - Share-based Compensation (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Dec. 31, 2014	Sep. 30, 2014	Sep. 30, 2013	Jul. 17, 2012
Maximum [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	5 years
Maximum [Member]
Employee Service Share-based Compensation, Tax Benefit from Compensation Expense			$ 200,000	$ 200,000
Minimum [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	1 year
Restricted Stock Units (RSUs) [Member] | Board [Member]
Share-Based Compensation Arrangement by Share-Based Payment Award Equivalent Value of Shares Authorized to Grant		$ 60,000	50,000
Restricted Stock Units (RSUs) [Member]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Not yet Recognized, Share-based Awards Other than Options	$ 3,000,000
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition	4 years
Certain Employees [Member]
Allocated Share-based Compensation Expense	$ 400,000		400,000	500,000
Board [Member]
Allocated Share-based Compensation Expense	200,000		100,000	100,000
Employee Service Share-based Compensation, Tax Benefit from Compensation Expense	$ 200,000
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Authorized					1,090,151
Share-based Compensation Arrangement by Share-based Payment Award, Number of Shares Available for Grant	620,580
Allocated Share-based Compensation Expense	$ 600,000		$ 500,000	$ 600,000

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Note 5 - Fair Value Measurements

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Fair Value Disclosures [Text Block]

5. Fair Value Measurements

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and market participant’s assumptions (unobservable inputs). Non-financial assets, such as goodwill and long-lived assets, are accounted for at fair value on a non-recurring basis. These items are tested for impairment on the occurrence of a triggering event or in the case of goodwill, at least on an annual basis.

As of September 30, 2015 and 2014, the Company did not have any financial assets or liabilities that were subject to fair value measurements.

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Note 6 - Property and Equipment

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Property, Plant and Equipment Disclosure [Text Block]

6. Property and Equipment

The Company had the following property and equipment balances as of September 30, 2015 and 2014, dollars in thousands:

	Useful lives			As of September 30,
	(in years)			2015			2014
Construction in process		n/a		$	10,150			6,867
Capitalized real estate leases for build-to-suit stores, including unamortized land of $617 and $617, respectively		40			24,774			17,107
Capitalized real estate leases		15			4,866			4,866
Land		n/a			192			192
Buildings		40			4,980			3,985
Land improvements	5	-	15		1,015			1,000
Leasehold and building improvements	1	-	25		91,865			74,691
Fixtures and equipment	5	-	7		83,932			69,894
Computer hardware and software	3	-	5		13,834			10,740
					235,608			189,342
Less accumulated depreciation and amortization					(90,389	)		(69,118	)
Property and equipment, net				$	145,219			120,224

As of September 30, 2015 and 2014, construction in process included $0 and approximately $2.3 million, respectively, related to construction costs for build-to-suit leases in process for which the Company was deemed the owner during the construction period. As of September 30, 2015 and 2014, construction in process included $0.9 million and $0, respectively, for capital real estate leases.

Capitalized costs for computer software development were $0.2 million and $0.1 million for the years ended September 30, 2015 and 2014, respectively, primarily due to capitalization of internal staff compensation. Total costs capitalized for qualifying construction projects on leasehold and building improvements and fixtures and equipment included approximately $0.6 million and $0.5 million, for the years ended September 30, 2015 and 2014, respectively, related to internal staff compensation. Interest costs of approximately $0.3 million and $0.4 million were capitalized for the years ended September 30, 2015 and 2014, respectively; no amounts of interest were capitalized for the year ended September 30, 2013. Depreciation expense related to capitalized internal staff compensation was approximately $0.4 million, $0.3 million and $0.3 million for the years ended September 30, 2015, 2014, and 2013, respectively.

Depreciation and amortization expense for the years ended September 30, 2015, 2014 and 2013 is summarized as follows, dollars in thousands:

	Year ended September 30,
	2015		2014		2013
Depreciation and amortization expense included in cost of goods sold and occupancy costs	$	796		770		709
Depreciation and amortization expense included in store expenses		19,635		15,861		12,365
Depreciation and amortization expense included in administrative expenses		906		581		422
Total depreciation and amortization expense	$	21,337		17,212		13,496

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Note 8 - Accrued Expenses

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Accounts Payable and Accrued Liabilities Disclosure [Text Block]

8.

Accrued Expenses

The composition of accrued expenses as of September 30, 2015 and 2014, is summarized as follows, dollars in thousands:

	As of September 30,
	201 5		201 4
Payroll and employee-related expenses	$	7,795		5,886
Accrued income taxes payable		5,540		4,868
Accrued property, sales and use tax payable		4,365		3,409
Accrued marketing expenses		532		421
Deferred revenue related to gift card sales		864		725
Other		553		513
Total accrued expenses	$	19,649		15,822

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Note 14 - Components of the Provision for Income Taxes (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Current federal income tax expense	$ 7,769	$ 8,304	$ 3,376
Current state income tax expense	1,033	1,163	551
	8,802	9,467	3,927
Deferred federal income tax expense (benefit)	514	(1,112)	2,156
Deferred state income tax expense (benefit)	116	(74)	296
	630	(1,186)	2,452
Total provision for income taxes	$ 9,432	$ 8,281	$ 6,379

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Note 14 - Deferred Taxes (Details) - USD ($) $ in Thousands	Sep. 30, 2015	Sep. 30, 2014
Current assets	$ 866	$ 832
Long-term liabilities	(6,073)	(5,409)
Net deferred tax liabilities	$ (5,207)	$ (4,577)

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Note 14 - Income Taxes (Details Textual) - USD ($)	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
State and Local Jurisdiction [Member]
Operating Loss Carryforwards	$ 0	$ 100,000
Operating Loss Carryforwards Utilized		$ 100,000
Operating Loss Carryforwards Utilized	$ 100,000

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Note 8 - Accrued Expenses (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Accrued Liabilities [Table Text Block]

	As of September 30,
	201 5		201 4
Payroll and employee-related expenses	$	7,795		5,886
Accrued income taxes payable		5,540		4,868
Accrued property, sales and use tax payable		4,365		3,409
Accrued marketing expenses		532		421
Deferred revenue related to gift card sales		864		725
Other		553		513
Total accrued expenses	$	19,649		15,822

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Note 7 - Summary of Goodwill and Other Intangible Assets (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014
Noncompete Agreements [Member] | Minimum [Member]
Amortizable intangible assets:
Finite-Lived Intangible Asset, Useful Life	2 years
Noncompete Agreements [Member] | Maximum [Member]
Amortizable intangible assets:
Finite-Lived Intangible Asset, Useful Life	5 years
Noncompete Agreements [Member]
Amortizable intangible assets:
Finite-Lived Intangible Asset, Useful Life	2 years
Finite-lived intangible assets, gross	$ 353	$ 293
Favorable Operating Leases [Member]
Amortizable intangible assets:
Finite-Lived Intangible Asset, Useful Life	5 years
Finite-lived intangible assets, gross	$ 339	339
Other Intangible Assets [Member] | Minimum [Member]
Amortizable intangible assets:
Finite-Lived Intangible Asset, Useful Life	182 days
Other Intangible Assets [Member] | Maximum [Member]
Amortizable intangible assets:
Finite-Lived Intangible Asset, Useful Life	1 year
Other Intangible Assets [Member]
Amortizable intangible assets:
Finite-lived intangible assets, gross	$ 27	22
Finite-lived intangible assets, gross	719	654
Less accumulated amortization	(683)	$ (654)
Amortized intangible assets, net	36
Trademark	389	$ 389
Total other intangibles, net	425	389
Goodwill	5,198	511
Total goodwill and other intangibles, net	$ 5,623	$ 900

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Note 13 - Related Party Transactions

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Related Party Transactions Disclosure [Text Block]

1

3

. Related Party Transactions

The Company has ongoing relationships with related parties as noted:

Chalet

Properties, LLC

:

The Company has five operating leases and one capital lease finance obligation (see Note 11) with Chalet Properties, LLC (Chalet). Chalet is owned by the Company’s four non-independent Board members, Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely, and other related family members. Rent paid to Chalet was approximately $1.1, million, $1.3 million and $1.3 million for the years ended September 30, 2015, 2014, and 2013, respectively. During the year ended September 30, 2015, Chalet sold one property to a third party in connection with one of the Company’s planned store relocations for the year ended September 30, 2016. The Company leased a new property with a non-related party for the relocated store’s new location. During the quarter ended December 31, 2014, the Company amended an existing lease with Chalet to obtain additional square footage at one Company store. Due to the Company’s involvement with construction for the additional space, the amended lease was deemed to be a capital financing lease in the quarter ended December 31, 2014.

Isely Family Land Trust LLC:

The Company has one operating lease (see Note 11) with the Isely Family Land Trust LLC (Land Trust). The Land Trust is owned by the Isely Children’s Trust and by the Margaret A. Isely Family Trust. Rent paid to the Land Trust was approximately $0.3 million for each of the years ended September 30, 2015, 2014, and 2013.

FTVC LLC:

The Company has one operating lease for a store location with FTVC LLC, which is owned by the Company’s four non-independent Board members and other related family members. Rent paid to FTVC LLC was less than $0.1 million for the year ended September 30, 2015.

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Note 18 - Commitments and Contingencies

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Commitments and Contingencies Disclosure [Text Block]

18

. Commitments and Contingencies

Self-Insurance

The Company is self-insured for claims under its health benefit plans, subject to a stop loss policy. The self-insurance liability related to claims under the Company’s health benefit plans is determined based on analysis of actual claims. The amounts related to these claims are included as a component of payroll and employee-related expenses in accrued expenses. Liabilities associated with the risks that are retained by the Company are estimated, in part, by considering historical claims experience, demographic factors and other actuarial assumptions. While the Company believes that its assumptions are appropriate, the estimated accrual for these liabilities could be significantly affected if future occurrences and claims materially differ from these assumptions and historical trends.

Legal

The Company is periodically involved in various legal proceedings that are incidental to the conduct of its business, including but not limited to employment discrimination claims, customer injury claims and investigations. When the potential liability from a matter can be estimated and the loss is considered probable, the Company records the estimated loss. Due to uncertainties related to the resolution of lawsuits, investigations and claims, the ultimate outcome may differ from the estimates. Although the Company cannot predict with certainty the ultimate resolution of any lawsuits, investigations and claims asserted against it, management does not believe any currently pending legal proceeding to which the Company is a party will have a material adverse effect on its business, prospects, financial condition, cash flows or results of operations.

In

Bernhard Engl v. Natural Grocers by Vitamin Cottage, Inc. and Vitamin Cottage Natural Food Markets, Inc.

, filed on September 25, 2015 in the United States District Court for the District of Colorado, the plaintiff filed a lawsuit against the Company in connection with a data security incident that affected the Company during fiscal year 2015. The complaint purports to state an action on behalf of a class of customers who used debit or credit cards at the Company’s stores. The Company believes the plaintiff's claims are without merit and intends to vigorously defend itself in this proceeding. At this time, the Company cannot predict: (i) whether the Court will certify plaintiff’s claims for class-wide treatment; (ii) how the Court will rule on the merits of the plaintiff’s claims; or (iii) the scope of the potential loss in the event of an adverse outcome.

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Note 6 - Depreciation and Amortization Expense (Details) - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Cost of Sales [Member]
Depreciation and amortization	$ 796	$ 770	$ 709
Stores [Member]
Depreciation and amortization	19,635	15,861	12,365
General and Administrative Expense [Member]
Depreciation and amortization	906	581	422
Depreciation and amortization	$ 21,337	$ 17,212	$ 13,496

XML

Note 1 - Organization (Details Textual)	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Kansas [Member]
Number of Stores	8
Idaho [Member]
Number of Stores	3
Utah [Member]
Number of Stores	2
Wyoming [Member]
Number of Stores	2
Arkansas [Member]
Number of Stores	1
Nevada [Member]
Number of Stores	1
North Dakota [Member]
Number of Stores	1
Washington [Member]
Number of Stores	1
Colorado [Member]
Number of Stores	34
Texas [Member]
Number of Stores	14
Oregon [Member]
Number of Stores	8
Oklahoma [Member]
Number of Stores	7
Arizona [Member]
Number of Stores	6
New Mexico [Member]
Number of Stores	5
Montana [Member]
Number of Stores	4
Nebraska [Member]
Number of Stores	3
Missouri [Member]
Number of Stores	2
Minnesota [Member]
Number of Stores	1
Number of Stores	103	87	72

XML

Consolidated Statements of Comprehensive Income - USD ($) $ in Thousands	12 Months Ended
	Sep. 30, 2015	Sep. 30, 2014	Sep. 30, 2013
Net income	$ 16,204	$ 13,473	$ 10,552
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities, net of tax benefit			4
Other comprehensive income			4
Comprehensive income	$ 16,204	$ 13,473	$ 10,556

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Note 2 - Basis of Presentation and Summary of Significant Accounting Policies

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Organization, Consolidation, Basis of Presentation, Business Description and Accounting Policies [Text Block]

2. Basis of Presentation and Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include all the accounts of the holding company’s wholly owned subsidiaries, Vitamin Cottage Natural Food Markets, Inc. (the operating company), Vitamin Cottage Two Ltd. Liability Company and Natural Systems, LLC. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management reviews its estimates on an ongoing basis, including those related to allowances for self-insurance reserves, valuation of inventories, useful lives of property and equipment for depreciation and amortization, deferred tax assets and liabilities and litigation based on currently available information. Changes in facts and circumstances may result in revised estimates and actual results could differ from those estimates.

Segment Information

The Company has one reporting segment, natural and organic retail stores.

Cash and Cash Equivalents

Cash and cash equivalents include currency on hand, demand deposits with banks, money market funds and credit and debit card transactions which typically settle within three business days. The Company considers all highly liquid investments with a remaining maturity of 90 days or less when acquired to be cash equivalents.

Investments

Available-for-sale investments are recorded at fair value. Unrealized holding gains and losses on available-for-sale investments are excluded from earnings and are reported as a component of other comprehensive income until realized. A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary for a period greater than two fiscal quarters results in a reduction of the fair value. Declines in fair value deemed to be other-than-temporary are charged against net earnings. Investments that have an original maturity date of less than one year are classified as short-term assets, and investments that have an original maturity date of greater than one year are classified as long-term assets.

Accounts Receivable

Accounts receivable consists primarily of receivables from vendors for certain promotional programs, newsletter advertising and other miscellaneous receivables and are presented net of any allowances for doubtful accounts. Vendor receivable balances are generally presented on a gross basis separate from any related payable due. Allowance for doubtful accounts is calculated based on historical experience and application of the specific identification method. Allowance for doubtful accounts totaled less than $0.1 million at each of September 30, 2015 and 2014.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of investments in cash and cash equivalents and accounts receivable. The Company’s cash and cash equivalent account balances, which are held in major financial institutions, exceeded the Federal Deposit Insurance Corporation’s federally insured limits by approximately $1.1 million as of September 30, 2015.

Vendor Concentration

For the years ended September 30, 2015, 2014 and 2013, purchases from the Company’s largest vendor and one of its subsidiaries represented approximately 57%, 56% and 55%, respectively, of all product purchases made during such periods. However, the Company believes that, if necessary, alternate vendors could supply similar products in adequate quantities to avoid material disruptions to operations.

Merchandise Inventory

Merchandise inventory consists of goods held for sale. The cost of inventory includes certain costs associated with the preparation of inventory for sale, including inventory overhead costs. Merchandise inventory is carried at the lower of cost or market value. Cost is determined using the weighted average cost method.

Property and Equipment

Property and equipment is stated at historical cost less accumulated depreciation. Depreciation is provided using the straight-line method over the following estimated useful lives of the related assets. 

	Useful lives (in years)
Land improvements	5	–	15
Buildings		40
Leasehold and building improvements	1	–	25
Capitalized real estate leases for build-to-suit stores		40
Capitalized real estate leases		15
Fixtures and equipment	5	–	7
Computer hardware and software	3	–	5

For land improvements and leasehold and building improvements, depreciation is recorded over the shorter of the assets’ useful lives or the lease terms. Maintenance, repairs and renewals that neither add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Gains and losses on disposition of property and equipment are included in store expenses in the year of disposition, and primarily relate to store relocations.

The Company capitalizes interest, if applicable, as part of the historical costs of buildings and leasehold and building improvements. The Company capitalizes certain costs incurred with developing or obtaining internal-use software. Capitalized software costs are included in property and equipment in the consolidated balance sheets and are amortized over the estimated useful lives of the software. Software costs that do not meet capitalization criteria are expensed as incurred.

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in authoritative guidance. The framework establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). The three levels are defined as follows:

Level 1 —	Inputs are unadjusted quoted prices for identical assets or liabilities in active markets;
Level 2 —	Inputs include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 —	Inputs are unobservable and are considered significant to the fair value measurement.

Transfers between levels of the fair value hierarchy are deemed to have occurred as of the date of the event or transfer.

Goodwill and Intangible Assets

Intangible assets primarily consist of goodwill, trademarks, favorable operating leases and covenants-not-to-compete. Goodwill and the

Vitamin Cottage

trademark have indefinite lives and are not amortized; rather, they are tested for impairment at least annually. Intangible assets with definite lives are amortized over their estimated useful lives. The Company evaluates the reasonableness of the useful lives of these intangibles at least annually.

The Company’s annual impairment testing of goodwill is performed as of September 30. In performing the Company’s analysis of goodwill, the Company first evaluates qualitative factors, including relevant events and circumstances, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, the two-step impairment test is not necessary. If it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company performs the two-step impairment test. Under the first step, the fair value of the reporting unit is compared with its carrying value (including goodwill). If the fair value of the reporting unit is less than its carrying value, an indication of goodwill impairment exists for the reporting unit and the Company must perform step two of the impairment test (measurement). Under step two, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of that goodwill. To date, the Company has recorded no impairment charges related to goodwill.

Impairment of

Finite-Lived

Intangible and Long-Lived Assets

Long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company aggregates long-lived assets at the store level, which the Company considers to be the lowest level in the organization for which independent identifiable cash flows are available. If circumstances require a long-lived asset or asset group to be tested for possible impairment, the Company first compares undiscounted cash flows expected to be generated by that store to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, impairment is recognized to the extent that the carrying value exceeds its fair value. The Company considers factors such as historic and forecasted operating results, trends and future prospects, current market value, significant industry trends and other economic and regulatory factors in performing these analyses. To date, the Company has recorded no impairment charges related to finite-lived intangible or long-lived assets.

Deferred Financing Costs

Certain costs incurred with borrowings or establishment of credit facilities are deferred. These costs are amortized over the life of the borrowing or the life of the credit facility using the straight-line methods.

Leases

The Company leases retail stores, a bulk food repackaging facility and distribution center and administrative offices under long-term operating or capital and financing leases. These leases include scheduled increases in minimum rents and renewal provisions at the option of the Company. The lease term for accounting purposes commences with the date the Company takes possession of the space and ends on the later of the primary lease term or the expiration of any renewal periods that are deemed to be reasonably assured at the inception of the lease.

Operating leases

 

The Company accounts for operating leases with rent holidays and escalating payment terms by recognizing the associated expense on a straight-line basis over the lease term, and the difference between the average rental amount charged to expense and amounts payable under the leases are included in deferred rent. For certain leases, the Company has also received cash from landlords to compensate for costs incurred by the Company in making the store locations ready for operation (leasehold incentives or tenant allowances). Leasehold incentives received from a landlord are deferred and recognized on a straight-line basis as a reduction to rent expense over the lease term.

Capital financing leases

From time to time, the Company enters into leases with developers for build-to-suit store locations. Upon lease execution, the Company analyzes its involvement during the construction period.As a result of defined forms of lessee involvement, the Company could be deemed the “owner” for accounting purposes during the construction period, and may be required to capitalize the project costs on its balance sheet. If the project costs are capitalized, the Company performs a sale-leaseback analysis upon completion of the constructionto determine if the Company can remove the assets from its balance sheet. If the asset cannot be removed from the balance sheet, the fair market value of the building remains recognized as an asset on the balance sheet, along with a corresponding capital lease financing obligation equal to the fair market value of the building less any amount the Company contributed towards construction. The Company does not record rent expense for the rental payments under capital financing leases, but rather payments under the capital financing lease obligations are recognized as a reduction of the capital lease financing obligation and as interest expense. The capital financing lease asset is depreciated on a straight-line basis over the estimated useful life of the asset.

Capital leases

Occasionally, the Company enters into leases that are deemed to be capital leases. For these leases, the Company capitalizes the lower of the present value of the minimum lease payments or the fair value of the leased asset at inception and records a corresponding capital lease obligation. The Company does not record rent expense for the rental payments under capital leases, but rather payments under the capital lease obligations are recognized as a reduction of the capital lease obligation and as interest expense. The capital lease asset is depreciated on a straight-line basis over the term of the related lease.

Self-Insurance

The Company is self-insured for certain losses relating to employee medical and dental benefits and workers compensation. Stop-loss coverage has been purchased to limit exposure to any significant level of claims. Self-insured losses are accrued based upon the Company’s estimates of the aggregate claims incurred but not reported using historical experience. The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from historical trends.

Revenue Recognition

Revenue is recognized at the point of sale, net of in-house coupons, discounts and returns. Sales taxes are not included in sales. The Company charges sales tax on all taxable customer purchases and remits these taxes monthly to the appropriate taxing jurisdiction. The Company records a deferred revenue liability within accrued expenses when it sells the Company’s gift cards or issues gift cards for award or promotional purposes, and records a sale when a customer redeems the gift card. Generally, the gift cards do not expire. The Company currently does not record breakage for unused portions of gift cards.

Cost of Goods Sold and Occupancy Costs

Cost of goods sold and occupancy costs includes the cost of inventory sold during the period net of discounts and allowances, as well as, distribution, shipping and handling costs, store occupancy costs and costs of the bulk food repackaging facility and distribution center. The amount shown is net of various rebates from third-party vendors in the form of quantity discounts and payments. Vendor consideration associated with product discounts is recorded as either a reduction of merchandise inventory or cost of goods sold. Store occupancy costs include rent, common area maintenance and real estate taxes. Store occupancy costs do not include any rent amounts for the store leases classified as capital and financing lease obligations.

Store Expenses

Store expenses consist of store-level expenses such as salaries, benefits and share-based compensation, supplies, utilities, depreciation, gain or loss on disposal of assets and other related costs associated with operations support. Store expenses also include purchasing support services and advertising and marketing costs.

Administrative Expenses

Administrative expenses consist of salaries, benefits and share-based compensation, occupancy costs, depreciation, office supplies, hardware and software expenses, professional services expenses and other general and administrative expenses.

Pre-Opening and Relocation Expenses

Costs associated with the opening of new stores or relocating existing stores are expensed as incurred.

Advertising and Marketing

Advertising and marketing costs are expensed as incurred and are included in store expenses and pre-opening and relocation expenses in the consolidated statements of income. Total advertising and marketing expenses for the years ended September 30, 2015, 2014 and 2013 were approximately $9.3 million, $7.8 million and $6.2 million, respectively, net of vendor reimbursements received for newsletter advertising. Advertising expense reimbursements received from vendors totaled approximately $2.5 million, $1.9 million and $1.5 million for the years ended September 30, 2015, 2014 and 2013, respectively.

S

hare

-

B

ased

C

ompensation

The Company adopted the 2012 Omnibus Incentive Plan in connection with the IPO on July 25, 2012. Restricted common stock units are granted at the market price of the Company’s common stock on the date of grant and expensed over the applicable vesting period.

The excess tax benefits for recognized compensation costs are reported as a credit to additional-paid-in capital and as operating cash outflows when such excess tax benefits are realized by a reduction to current taxes payable.

Income Taxes

The Company accounts for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between the tax basis and financial reporting basis of the Company’s assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates in the respective jurisdictions in which the Company operates.

The Company considers the need to establish valuation allowances to reduce deferred income tax assets to the amounts the Company believes are more likely than not to be recovered.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Although the Company believes that its estimates are reasonable, actual results could differ from these estimates. In addition, the Company is subject to periodic audits and examinations by the Internal Revenue Service (IRS) and other state and local taxing authorities.

Any interest or penalties incurred related to income taxes are expensed as incurred and treated as permanent differences for tax purposes.

Recent Accounting Pronouncements

In November 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2015-17 “Income Taxes” Topic 740, “Income Taxes.” (ASU 2015-17). ASU 2015-17 addresses the balance sheet classification of deferred taxes. Current GAAP requires an entity to separate deferred income tax liabilities and assets into current and noncurrent amounts in a classified statement of financial position. The amendments in ASU 2015-17 require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 will be effective for financial statements issued for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The guidance will be effective for the Company’s first quarter of the fiscal year ending September 30, 2018. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact that the adoption of ASU 2015-17 will have on its consolidated financial statements.

In September 2015, the FASB issued Accounting Standards Update 2015-16 “Simplifying the Accounting for Measurement-Period Adjustments” Topic 805, “Business Combinations” (ASU 2015-16). The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts identified during the measurement period in the reporting period in which the adjustments are determined and eliminates the requirement to retrospectively revise prior periods. Additionally, an acquirer should record in the same period the effects on earnings of any changes in the provisional accounts, calculated as if the accounting had been completed at the acquisition date. The amendments should be applied on a prospective basis. ASU 2015-16 is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years.

The guidance in ASU 2015-16

will be effective for the Company’s first quarter of the fiscal year ending September 30, 2017.

In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory,” Topic 330, “Inventory” (ASU 2015-11). The amendments in ASU 2015-11, which apply to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, require that entities measure inventory at the lower of cost and net realizable value. The amendments in ASU 2015-11 should be applied on a prospective basis. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016 and interim periods within those years. The provisions of ASU 2015-11 are effective for the Company’s first quarter of the fiscal year ending September 30, 2018. The Company is currently evaluating the impact that the adoption of ASU 2015-11 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” Subtopic 350-40, “Intangibles-Goodwill and Other – Internal-Use Software” (ASU 2015-05). ASU 2015-05 provides guidance as to whether a cloud computing arrangement (such as software as a service, platform as a service, infrastructure as a service, and other similar hosting arrangements) includes a software license and, based on that determination, how to account for such arrangements. The amendments in ASU 2015-05 may be applied on either a prospective or retrospective basis and early adoption is permitted. ASU 2015-05 is effective for fiscal years beginning after December 15, 2015

and interim periods within those fiscal years. The provisions of

ASU 2015-05 are effective for the Company’s first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of

ASU 2015-05 will have on its consolidated financial statements.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs” Topic 835, “Interest” (ASU 2015-03). ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU 2015-15, “Interest – Imputation of Interest,” Subtopic 835-30, “Interest” (ASU 2015-15). The guidance in ASU 2015-03 did not address the presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements and ASU 2015-15 was issued to clarify that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangements. The amendments in ASU 2015-03 should be applied on a retrospective basis and early adoption is permitted. ASU 2015-03 is effective for fiscal years beginning after December 15, 2015 , and interim periods within those fiscal years. The guidance in ASU 2015-03 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2017. The Company is currently evaluating the impact that the adoption of ASU 2015-03 will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” Topic 606, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 provides guidance for revenue recognition and will replace most existing revenue recognition guidance in GAAP when it becomes effective. ASU 2014-09’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled for the transfer of those goods or services. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. In July 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers – Deferral of the Effective Date.” The FASB approved the deferral of ASU 2014-09, by extending the new revenue recognition standard’s mandatory effective date by one year and permitting public companies to apply the new revenue standard to annual reporting periods beginning after December 15, 2017. However, earlier application is permitted only as of annual reporting periods beginning after December 15, 2016. The guidance in ASU 2014-09 will be effective for the Company in the first quarter of the fiscal year ending September 30, 2019. The Company has not yet selected a transition method and is currently in the process of evaluating the impact of the adoption of ASU 2014-09 on the Company’s consolidated financial statements and related disclosures.

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Note 11 - Schedule of Future Payments under the Terms of the Leases (Details) (Assets Held Under Real Estate Leases for Build to Suit Stores (Details) - Assets Held Under Real Estate Leases for Build to Suit Stores [Member] $ in Thousands	Sep. 30, 2015 USD ($)
Capital Lease Finance Obligations [Member]
2016	$ 2,643
2016	177
2017	2,625
2017	199
2018	2,604
2018	234
2019	2,578
2019	295
2020	2,546
2020	329
Thereafter	15,836
Thereafter	4,464
Non-cash derecognition of capital lease finance obligations at end of lease term	16,399
Non-cash derecognition of capital lease finance obligations at end of lease term	16,399
	28,832
	22,097
Total Interest expense oncapital lease obligations	28,832
Capital Lease Obligations [Member]
2016, Interest expense oncapital lease obligations	650
2016, Principal payments on capital lease obligations	151
2017, Interest expense oncapital lease obligations	631
2017, Principal payments on capital lease obligations	170
2018, Interest expense oncapital lease obligations	609
2018, Principal payments on capital lease obligations	192
2019, Interest expense oncapital lease obligations	584
2019, Principal payments on capital lease obligations	217
2020, Interest expense oncapital lease obligations	554
2020, Principal payments on capital lease obligations	247
Thereafter, Interest expense oncapital lease obligations	2,460
Thereafter, Principal payments on capital lease obligations	3,561
	5,488
Total Interest expense oncapital lease obligations	5,488
Total Principal payments on capital lease obligations	4,538
Capital and Financing Lease Obligations [Member]
2016	3,621
2017	3,625
2018	3,639
2019	3,674
2020	3,676
Thereafter	26,321
Non-cash derecognition of capital lease finance obligations at end of lease term	16,399
Non-cash derecognition of capital lease finance obligations at end of lease term	16,399
	$ 60,955

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Note 16 - Segment Reporting (Details Textual)	12 Months Ended
	Sep. 30, 2015
Number of Reportable Segments	1

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Note 19 - Selected Quarterly Financial Data (Unaudited)

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Quarterly Financial Information [Text Block]

19

. Selected Quarterly Financial Data (Unaudited)

The summarized unaudited quarterly financial data presented below reflect all adjustments, which in the opinion of management, are of a normal and recurring nature necessary to present fairly the results of operations for the periods presented.

Summarized unaudited quarterly financial data for each fiscal year is as follows, dollars in thousands, except per share data:

Fiscal Year Ended September 30, 2015	Three months ended
	December 31, 2014			March 31, 2015			June 30, 2015			September 30, 2015
Net sales	$	145,887			157,744			158,650			162,397
Cost of goods sold and occupancy costs		103,593			110,874			112,508			115,607
Gross profit		42,294			46,870			46,142			46,790
Store expenses		31,049			32,461			33,508			35,113
Administrative expenses		4,227			4,156			4,322			4,809
Pre-opening and relocation expenses		577			870			1,078			1,297
Operating income		6,441			9,383			7,234			5,571
Interest expense		(735	)		(714	)		(768	)		(776	)
Income before income taxes		5,706			8,669			6,466			4,795
Provision for income taxes		(2,142	)		(3,266	)		(2,121	)		(1,903	)
Net income	$	3,564			5,403			4,345			2,892
Basic earnings per share	$	0.16			0.24			0.19			0.13
Diluted earnings per share		0.16			0.24			0.19			0.13

Fiscal Year Ended September 30, 2014	Three months ended
	December 31, 2013			March 31, 2014			June 30, 2014			September 30, 2014
Net sales	$	120,580			130,343			134,036			135,715
Cost of goods sold and occupancy costs		85,199			91,590			95,424			96,959
Gross profit		35,381			38,753			38,612			38,756
Store expenses		25,173			26,877			28,213			28,394
Administrative expenses		3,889			3,548			3,585			3,801
Pre-opening and relocation expenses		889			1,211			729			945
Operating income		5,430			7,117			6,085			5,616
Other income (expense):
Dividends and interest income		1			1			—			—
Interest expense		(707	)		(704	)		(706	)		(379	)
Total other expense		(706	)		(703	)		(706	)		(379	)
Income before income taxes		4,724			6,414			5,379			5,237
Provision for income taxes		(1,802	)		(2,415	)		(2,015	)		(2,049	)
Net income .	$	2,922			3,999			3,364			3,188
Basic earnings per share	$	0.13			0.18			0.15			0.14
Diluted earnings per share		0.13			0.18			0.15			0.14

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Note 20 - Subsequent Events (Details Textual) - Revolving Credit Facility [Member] - USD ($)	Nov. 17, 2015	Nov. 16, 2015	Dec. 12, 2013
Subsequent Event [Member]
Line of Credit Facility, Maximum Borrowing Capacity	$ 25,000,000	$ 15,000,000
Line of Credit Facility, Maximum Borrowing Capacity			$ 15,000,000

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Note 16 - Segment Reporting (Tables)

12 Months Ended

Sep. 30, 2015

Notes Tables

Schedule of Product Information [Table Text Block]

	As of September 30,
	201 5			201 4		201 3
Grocery		66.4	%		66.7		65.2
Dietary supplements		22.5			23.2		24.8
Body care, pet care and other		11.1			10.1		10.0
		100.0	%		100.0		100.0

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Note 12 - Share-based Compensation

12 Months Ended

Sep. 30, 2015

Notes to Financial Statements

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

1

2

. S

hare

-Based Compensation

The Company adopted the 2012 Omnibus Incentive Plan (the Plan) on July 17, 2012. Restricted stock unit awards granted pursuant to the Plan, if they vest, will be settled in new shares of the Company’s common stock. At the adoption of the Plan, there were 1,090,151 shares of common stock available for issuance or delivery under the Plan, of which 620,580 remain available for grants as of September 30, 2015. The Plan provides for awards of options, stock appreciation rights, stock grants, restricted stock units, other share-based awards and cash-based incentive awards to officers, members of the Board of Directors (the Board) and certain employees who are not named executive officers and consultants. As of September 30, 2015, only restricted stock units had been granted under the Plan, at no out-of-pocket cost to officers, Board members and key employees. These restricted stock units vest subject to requisite service requirements, immediately in part or annually in installments over a one-to-five year period. The award recipients are not entitled to cash dividends or to vote with regard to non-vested restricted stock units, and the units are subject to forfeiture during the vesting period. Restricted stock units are granted at the market price of the Company’s stock on the date of grant and are expensed on a straight-line basis over the vesting period.

The shares of non-vested restricted stock units as of September 30, 2015 were as follows:

	Shares			Weighted average grant date fair value
Non-vested as of September 30, 2013		86,053		$	21.80
Granted		3,558			42.16
Forfeited		(3,868	)		34.07
Vested		(48,549	)		12.38
Non-vested as of September 30, 2014		37,194			34.77
Granted		127,751			24.14
Forfeited		(17,560	)		25.04
Vested		(15,529	)		32.34
Non-vested as of September 30, 2015		131,856			26.05

Share-based compensation expense for awards to certain employees who are not named executive officers was approximately $0.4 million, $0.4 million, and $0.5 million for the years ended September 30, 2015, 2014, and 2013, respectively. 

Prior to fiscal year 2015, each independent member of the Board was annually granted a number of non-vested restricted stock units under the Plan equal to the number of shares of common stock having a value equal to $50,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant). In December 2014, the disinterested members of the Board increased the value of the annual grant of restricted stock to each independent director to $60,000 (based on the closing price of common stock on the New York Stock Exchange on the date of grant). Such grants are made each year on the date of the Company’s annual meeting of stockholders, or on a pro rata basis in the case of a mid-year appointment. Share-based compensation expense for the Company’s awards to its Board members was approximately $0.2 million, $0.1 million, and $0.1 million for the years ended September 30, 2015, 2014, and 2013, respectively.

The Company recorded total share-based compensation expense before income taxes of approximately $0.6 million, $0.5 million, and $0.6 million in the years ended September 30, 2015, 2014, and 2013, respectively. The share-based compensation expense is included in cost of goods sold and occupancy expenses, store expenses or administrative expenses in the consolidated statements of income consistent with the manner in which the applicable officer, Board member or key employee’s compensation expense is presented. The Company recognized a tax benefit from share-based compensation expense of approximately $0.2 million in each of the years ended September 30, 2015, 2014 and 2013.

As of September 30, 2015, there was approximately $3.0 million of unrecognized share-based compensation expense related to non-vested restricted stock units, net of estimated forfeitures, which the Company anticipates will be recognized over a weighted average period of approximately four years.