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TABLE OF CONTENTS
INDEX TO FINANCIAL STATEMENTS

Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-182186

PROSPECTUS

7,142,857 Shares

LOGO

        This is Natural Grocers by Vitamin Cottage, Inc.'s initial public offering. We are selling 3,623,793 shares of common stock and the selling stockholders identified in this prospectus, including certain of our officers, are selling 3,519,064 shares of common stock. We will not receive any proceeds from the sale of shares by the selling stockholders.

        Prior to the completion of this offering, the existing stockholders of Vitamin Cottage Natural Food Markets, Inc. will exchange the capital stock of that entity for our common stock, and we will acquire the minority interests in a controlled subsidiary not previously owned by us for a combination of cash and shares of our common stock. These transactions will result in our owning all of the outstanding capital stock of Vitamin Cottage Natural Food Markets, Inc., our operating company. See "The Reorganization" for more information about these transactions.

        We qualify as an "emerging growth company" pursuant to the provisions of the Jumpstart Our Business Startups Act, or the JOBS Act, enacted on April 5, 2012.

        Prior to this offering, there has been no public market for our common stock. Our common stock has been approved for listing on The New York Stock Exchange under the symbol "NGVC."

        Investing in our common stock involves risks. Please read "Risk Factors" beginning on page 16.

                         
   
 
  Price to Public
  Underwriting
Discounts and
Commissions

  Proceeds, before
expenses, to us

  Proceeds, before
expenses, to the
selling stockholders

 
   

Per share

  $ 15.00   $ 1.05   $ 13.95   $ 13.95  
   

Total

  $ 107,142,855   $ 7,500,000   $ 50,551,912   $ 49,090,943  

 

 

        We and the selling stockholders have granted the underwriters a 30-day option to purchase up to an additional 543,574 shares of common stock from us and 527,854 shares of common stock from the selling stockholders on the same terms and conditions as set forth above.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

        The underwriters expect to deliver the shares on or about July 30, 2012.



SunTrust Robinson Humphrey   Piper Jaffray

William Blair

 

Canaccord Genuity

   

        The date of this prospectus is July 24, 2012


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GRAPHIC


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TABLE OF CONTENTS

SUMMARY

    1  

RISK FACTORS

    16  

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

    35  

USE OF PROCEEDS

    36  

DIVIDEND POLICY

    36  

CAPITALIZATION

    37  

THE REORGANIZATION

    39  

DILUTION

    42  

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

    43  

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    48  

BUSINESS

    71  

MANAGEMENT

    88  

EXECUTIVE COMPENSATION

    93  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

    105  

PRINCIPAL AND SELLING STOCKHOLDERS

    109  

DESCRIPTION OF CAPITAL STOCK

    112  

SHARES ELIGIBLE FOR FUTURE SALE

    117  

MATERIAL U.S. FEDERAL INCOME AND ESTATE TAX CONSIDERATIONS FOR NON-U.S. HOLDERS OF COMMON STOCK

    118  

UNDERWRITING

    121  

LEGAL MATTERS

    126  

EXPERTS

    126  

WHERE YOU CAN FIND MORE INFORMATION

    126  

INDEX TO FINANCIAL STATEMENTS

    F-1  



        Until August 18, 2012 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This delivery requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.

        You should rely only on the information contained in this prospectus or in any free-writing prospectus we may specifically authorize to be delivered or made available to you. Neither we, the selling stockholders nor the underwriters have authorized anyone to provide you with information that is in addition to or different from that contained in this prospectus or any free-writing prospectus prepared by us or on our behalf. We do not, and the selling stockholders and the underwriters do not, take any responsibility for, and can provide no assurances as to, the reliability of any information that others provide to you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of its date, regardless of its time of delivery or of any sale of our common stock.



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SUMMARY

        This summary provides a brief overview of information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including "Risk Factors" beginning on page 15 and the historical consolidated financial statements. Unless indicated otherwise, the information presented in this prospectus assumes that the underwriters do not exercise their option to purchase additional shares of common stock. Natural Grocers by Vitamin Cottage, Inc. will be a holding company with no operations of its own. All of our operations will be conducted by Vitamin Cottage Natural Food Markets, Inc., which we refer to as the operating company, and its subsidiaries. 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, prior to the completion of this offering, Vitamin Cottage Natural Food Markets, Inc. and its consolidated subsidiaries and, after the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. and our consolidated subsidiaries. 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 2011" refers to the year from October 1, 2010 to September 30, 2011).


Overview

        Natural Grocers is a rapidly 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:

        We have significantly expanded from 27 stores in three states as of September 30, 2008 to 55 stores in 11 states as of June 30, 2012, including Colorado, Idaho, Kansas, Missouri, Montana, Nebraska, New Mexico, Oklahoma, Texas, Utah and Wyoming. We successfully opened six, six and ten new stores during the fiscal years ended September 30, 2009, 2010 and 2011, respectively, and six new stores in the nine months ended June 30, 2012. We plan to open four new stores in the remainder of fiscal year 2012. As of June 30, 2012, we had over 40 consecutive quarters of positive comparable store sales growth, including comparable store sales growth of 2.6%, 2.1% and 4.9% for the fiscal years ended September 30, 2009, 2010 and 2011, respectively, and 11.1% for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. Our growth has been further evident during the recent economic cycle, with attractive compound annual growth rates of 13.3% and 10.4% in net sales and EBITDA (a non-GAAP measure), respectively, from fiscal year 2009 to fiscal year 2011. Over the same period, our net sales increased from $206.1 million to $264.5 million, net income decreased from $5.1 million to $4.6 million and EBITDA increased from $12.4 million to $15.1 million.


Our History

        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 initially started by lending books on nutrition and providing samples of

 

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whole grain bread door-to-door in Golden, Colorado and ultimately 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 in order to support 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.

        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 55 stores in 11 states as of June 30, 2012. 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 large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers. According to the Nutrition Business Journal, a nutrition industry publication, total food sales in the U.S. were $631.9 billion in 2010, an increase of 0.7% over 2009.

        Natural and organic food and dietary supplement sales in the U.S. have grown at a faster rate than total food sales, according to the Nutrition Business Journal.

U.S. Natural & Organic Food Sales, 2000-2010   U.S. Dietary Supplement Sales, 2000-2010
$ in billions   $ in billions


GRAPHIC

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 18,000 SKUs of natural and organic products per store, including an average of approximately 7,000 SKUs of dietary supplements. We believe this product offering enables our customers to utilize our stores for 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 products that are known to contain artificial colors, flavors, preservatives, sweeteners,

 

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or partially hydrogenated or hydrogenated oils. Consistent with this strategy, our merchandise selection does not include conventional products or merchandise that does 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 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 consistently offer exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience and generates repeat visits from our loyal customer base. Our customer service model is focused on providing free nutrition education to our customers. 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 associates, Health Hotline® newsletter and sales flyer, one-on-one nutrition health coaching and nutrition classes. Our commitment to nutrition education and customer empowerment is emphasized throughout our entire organization, from executive management to store associates. Every store also maintains a Nutritional Health Coach™ position. The Nutritional Health Coach is responsible for training our store associates and educating our customers in accordance with applicable local, state and federal regulations. Each Nutritional Health Coach must have earned a degree or certificate in nutrition, human sciences 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 Nutritional Health Coaches are full-time employees. We believe our Nutritional Health Coach position is unique within our industry and 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 quickly grow our store base. Our store model is 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. 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 site selection. Our limited offering of prepared foods also reduces real estate costs, labor costs and perishable inventory shrink, and allows us to quickly leverage our new store opening costs.

        Experienced and committed team with proven track record.    Our executive management team has an average of 35 years of experience in the natural grocery industry, while our entire management team has an average of over 27 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 to 55 stores as of June 30, 2012 while 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 June 30, 2012, 39% of our store managers at stores open for 13 months or longer have tenures of over four years with us, and our store and department managers at these stores have average tenures of three to four 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 improving operations and driving efficiencies.

 

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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 customer analytics firm The Buxton Company, we believe the entire U.S. market can support at least 1,100 Natural Grocers stores, including over 180 additional Natural Grocers stores in the 12 states in which we currently operate or have signed leases. In fiscal year 2011, we opened ten new stores, and we plan to open a total of ten new stores in fiscal year 2012. We intend to target new store openings at or above these levels over the near term.

        Increase sales from existing customers.    We have achieved positive comparable store sales growth for over 40 consecutive quarters. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging customer experience through science-based nutrition education and a differentiated merchandising strategy of delivering affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to utilize targeted marketing efforts to 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.    We plan to continue building our brand awareness, which we anticipate will grow our customer base. We believe offering nutrition education has historically been one of our most effective marketing efforts to reach new customers and increase the demand for natural and organic groceries and dietary supplements in our markets. We intend to enhance potential customers' nutrition knowledge through targeted marketing efforts, including the distribution of our Health Hotline newsletter and sales flyer, the Internet and social media, as well as an expansion of our educational outreach efforts in schools, businesses and communities, offering lectures, classes, printed and online educational resources and publications, health fairs and community wellness events. In addition to offering nutrition education, we intend to attract new customers with our everyday affordable pricing and to build community awareness through our support of local vendors and charities.

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

Risk Factors

        An investment in our common stock involves risks associated with our business and our corporate structure that you should carefully consider before making an investment in our common stock. Some of the principal challenges or risks facing us include, among others:

 

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        In addition to the foregoing, you should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific risks set forth in this prospectus under the heading "Risk Factors" in deciding whether to invest in our common stock.


The Reorganization

        In connection with, and immediately prior to the completion of this offering, we will enter into the reorganization transactions described below:

 

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        We refer to these transactions collectively in this prospectus as the Reorganization. The consummation of the Delaware Merger and the Boulder Contribution are conditions to the completion of the offering. The diagram below illustrates our corporate structure immediately following completion of the Reorganization and this offering:

GRAPHIC


Principal Stockholders

        Immediately following the offering, Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely will, in the aggregate, own and control approximately 40.94% of our common stock, or approximately 37.80% if the underwriters exercise their overallotment option in full. In addition, these shares will be subject to a stockholders agreement, pursuant to which these and certain other Isely family member stockholders holding in the aggregate more than 50% of our common stock will agree to vote their shares of common stock together on all matters related to the election of directors. Accordingly, we will be a "controlled company" within the meaning of The New York Stock Exchange governance standards.


Principal Executive Offices and Internet Address

        Our principal executive offices are located at 12612 West Alameda Parkway, Lakewood, Colorado 80228, and our telephone number is (303) 986-4600. Our website is located at www.naturalgrocers.com. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or 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. Information on our website or any other website is not incorporated by reference into this prospectus or the registration statement of which this prospectus is a part and does not constitute a part of this prospectus. Potential investors should not rely on such information in making a decision to purchase our common stock in this offering.

 

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Industry and Market Data

        Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including our general expectations and market opportunity, is based on information from independent industry organizations, such as the Nutrition Business Journal, The Buxton Company and other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, as well as data from our internal research, and are based on assumptions made by us based on such data and our knowledge of such industry and markets, which we believe to be reasonable. We have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are subject to a high degree of uncertainty and risk due to a variety of factors, including those described in "Risk Factors." These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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The Offering

Common Stock Offered by Us

  3,623,793 shares

Common Stock Offered by the Selling Stockholders

 

3,519,064 shares

Common Stock to be Outstanding Immediately following this Offering

 

21,803,031 shares or 22,349,879 shares if the underwriters exercise their option to purchase additional shares from us and the selling stockholders.

Overallotment Option

 

The underwriters have an option to purchase a maximum of 543,574 additional shares of our common stock from us and 527,854 from the selling stockholders to cover overallotments. The underwriters could exercise this option at any time within 30 days from the date of this prospectus.

Use of Proceeds

 

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $48.1 million.

 

We will not receive any proceeds from the sale of shares by the selling stockholders.

 

We intend to use the net proceeds from this offering to repay our term loan and all outstanding amounts under our revolving credit facility, fund the payment of the cash portion of the purchase price for the Boulder Contribution, settle the cash portion of restricted stock units granted to our Chief Financial Officer, fund working capital and for general corporate purposes. See "Use of Proceeds."

Dividend Policy

 

We currently expect to retain future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. See "Dividend Policy."

 

Because Natural Grocers by Vitamin Cottage, Inc. is a holding company, its cash flows and ability to pay dividends are dependent upon the financial results and cash flows of the operating company and its subsidiaries and the distribution or other payment of cash to Natural Grocers by Vitamin Cottage, Inc. in the form of dividends or otherwise.

New York Stock Exchange Listing

 

Our common stock has been approved for listing on The New York Stock Exchange under the symbol "NGVC."

 

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        Unless otherwise indicated, all information in this prospectus relating to the number of shares of common stock that will be outstanding immediately following this offering:

 

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SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

        Natural Grocers by Vitamin Cottage, Inc. was incorporated in Delaware on April 9, 2012. Prior to the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. will have no material assets. Following the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. will be a holding company with no material assets other than its direct 100% ownership of Vitamin Cottage Natural Food Markets, Inc., which is our operating company. The consolidated financial statements of Natural Grocers by Vitamin Cottage, Inc. will reflect the assets, liabilities and results of operations of the operating company. Accordingly, the following tables set forth the summary historical consolidated financial and other data of the operating company as of the dates and for the periods indicated.

        The summary historical consolidated statements of income data for the years ended September 30, 2009, 2010 and 2011 have been derived from the audited consolidated financial statements of the operating company, which are included elsewhere in this prospectus.

        The summary historical unaudited consolidated statements of income data for the three and nine months ended June 30, 2011 and 2012 and the summary unaudited consolidated balance sheet data as of June 30, 2012 have been derived from the unaudited consolidated financial statements of the operating company, which are included elsewhere in this prospectus. The unaudited consolidated financial statements of the operating company have been prepared on the same basis as the audited consolidated financial statements of the operating company and, in the opinion of management, include all adjustments necessary for a fair presentation. Interim results are not necessarily indicative of results that may be expected for a full fiscal year.

        The summary historical consolidated data presented below should be read in conjunction with the information included in the sections entitled "Risk Factors," "The Reorganization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto and other financial data included elsewhere in this prospectus. The historical results of Vitamin Cottage Natural Food Markets, Inc. set forth below are not necessarily indicative of results to be expected for any future period.

 

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  Year ended September 30,   Three months
ended June 30,
  Nine months
ended June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 
 
  (dollars in thousands, except for per share and other operating data)
 

Statements of Income Data:

                                           

Net sales

  $ 206,080     226,910     264,544     67,578     86,707     194,407     246,453  

Cost of goods sold and occupancy costs

    145,937     159,797     187,162     47,828     61,307     137,474     173,769  
                               

Gross profit

    60,143     67,113     77,382     19,750     25,400     56,933     72,684  

Store expenses

    41,992     47,162     57,610     14,634     18,199     42,218     52,667  

Administrative expenses

    8,619     9,631     10,397     2,575     2,760     7,667     8,285  

Pre-opening and relocation expenses

    1,236     1,293     1,964     448     458     1,470     1,312  
                               

Operating income

    8,296     9,027     7,411     2,093     3,983     5,578     10,420  

Other (expense) income:

                                           

Interest expense

    (1,146 )   (967 )   (669 )   (181 )   (144 )   (574 )   (474 )

Other (expense) income, net

    (60 )   3     35     3     1     26     4  
                               

Income before income taxes

    7,090     8,063     6,777     1,915     3,840     5,030     9,950  

Provision for income taxes

    (2,039 )   (2,466 )   (2,167 )   (674 )   (1,300 )   (1,623 )   (3,372 )
                               

Net income

    5,051     5,597     4,610     1,241     2,540     3,407     6,578  
                               

Net income attributable to noncontrolling interest

    (1,513 )   (1,189 )   (1,106 )   (255 )   (339 )   (821 )   (902 )
                               

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 3,538     4,408     3,504     986     2,201     2,586     5,676  
                               

Per Share Data:

                                           

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. per common share

                                           

Basic and diluted

  $ 5.65     7.04     5.60     1.57     3.52     4.13     9.07  
                               

Weighted average shares outstanding

                                           

Basic and diluted

    626,112     626,112     626,112     626,112     626,112     626,112     626,112  
                               

Pro Forma Statements of Income Data (Unaudited)(1):

                                           

Income before income taxes

  $ 7,090     8,063     6,777     1,915     3,840     5,030     9,950  

Pro forma provision for income taxes

    (2,592 )   (2,892 )   (2,589 )   (778 )   (1,426 )   (1,940 )   (3,709 )
                               

Pro forma net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 4,498     5,171     4,188     1,137     2,414     3,090     6,241  
                               

Pro Forma Per Share Data (Unaudited)(2):

                                           

Pro forma net income per common share

                                           

Basic

  $ 0.21     0.24     0.19     0.05     0.11     0.14     0.29  

Diluted

  $ 0.21     0.24     0.19     0.05     0.11     0.14     0.29  

Pro forma weighted average shares outstanding

                                           

Basic

    21,803,031     21,803,031     21,803,031     21,803,031     21,803,031     21,803,031     21,803,031  

Diluted

    21,890,069     21,890,069     21,890,069     21,890,069     21,890,069     21,890,069     21,890,069  

Other Financial Data:

                                           

EBITDA(3)

  $ 12,442     14,540     15,137     4,085     6,524     11,150     17,653  
                               

EBITDA margin(4)

    6.0 %   6.4     5.7     6.0     7.5     5.7     7.2  
                               

 

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  Year ended September 30,   Three months
ended June 30,
  Nine months
ended June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 
 
  (dollars in thousands, except for per share and other operating data)
 

Other Operating Data (Unaudited):

                                           

Number of stores at end of period

    33     39     49     46     55     46     55  

Change in comparable store sales(5)

    2.6 %   2.1     4.9     5.5     13.0     4.5     11.1  

Gross square footage at end of period(6)

    401,919     472,393     619,172     564,492     737,332     564,492     737,332  

Selling square footage at end of period(6)

    309,792     360,764     459,435     424,585     531,428     424,585     531,428  

Average comparable store size (gross square feet)(7)

    12,189     12,328     12,239     12,331     12,272     12,331     12,272  

Average comparable store size (selling square feet)(7)

    9,640     9,483     9,284     9,337     9,230     9,337     9,230  

Comparable store sales per selling square foot during period(8)

  $ 773     730     720     180     185     542     555  

 

 
  As of June 30, 2012  
 
  Actual   Pro
forma(11)(12)
 
 
  (Unaudited)
 
 
  (in thousands)
 

Selected Balance Sheet Data:

             

Cash and cash equivalents

  $ 3,301     15,026  

Total assets(9)

    90,721     105,948  

Total debt(10)

    26,410     787  

Total stockholders' equity

    22,055     63,272  

(1)
As part of the Reorganization, BVC will become our wholly owned subsidiary. We have held a controlling interest in BVC for all periods presented, as such, our consolidated statements of income include the revenues and expenses of BVC for all periods presented as required by U.S. GAAP. 45% of BVC's net income has been reported as net income attributable to noncontrolling interest in our consolidated statements of income for all periods presented. The pro forma financial data presented above illustrates what our net income would have been had we owned 100% of BVC for the periods presented. Our effective tax rate will increase as a result of the Boulder Contribution, as the income attributable to the noncontrolling interest was nontaxable income prior to the Boulder Contribution, but will be included in our taxable income after the Boulder Contribution. The following table reconciles our effective tax rate to our pro forma effective tax rate had we owned 100% of BVC for all periods presented:

 
  Year ended
September 30,
  Three months
ended
June 30,
  Nine months ended June 30,  
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 

Statutory tax rate

    34.0 %   34.0     34.0     34.0     34.0     34.0     34.0  

Nontaxable net income attributable to noncontrolling interest

    (7.7 )   (5.3 )   (6.2 )   (5.4 )   (3.2 )   (6.3 )   (3.4 )

State income taxes, net of federal income tax expense

    3.1     2.5     3.4     3.4     3.1     3.4     3.2  

Other, net

    (0.6 )   (0.6 )   0.8     3.2         1.2     0.1  
                               

Effective tax rate

    28.8     30.6     32.0     35.2     33.9     32.3     33.9  

Pro forma adjustment to exclude nontaxable net income attributable to noncontrolling interest

    7.7     5.3     6.2     5.4     3.2     6.3     3.4  
                               

Pro forma effective tax rate

    36.5 %   35.9     38.2     40.6     37.1     38.6     37.3  
                               

        See "The Reorganization" for additional information regarding the Boulder Contribution.

(2)
Pro forma per share data gives effect to the Reorganization, including the issuance of 17,378,625 shares in connection with the Delaware Merger, 670,057 shares in connection with the Boulder Contribution, and 130,556

 

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  Basic   Diluted

Pro forma weighted average number of common shares:

         

Shares and restricted stock units issued in the Reorganization

    18,179,238   18,266,276

Shares issued in this offering

    3,623,793   3,623,793
         

Pro forma weighted average number of common shares

    21,803,031   21,890,069
(3)
EBITDA is not a measure of financial performance under U.S. GAAP. EBITDA is defined as net income attributable to Vitamin Cottage Natural Food Markets, Inc. before interest expense, provision for income tax, net income attributable to the noncontrolling interest and depreciation and amortization. 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 used as a measure in our debt covenants under the credit facility, and our incentive compensation plans base incentive compensation payments on our EBITDA performance. Furthermore, EBITDA is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that 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. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations period over period and would ordinarily add back non-cash expenses such as depreciation and amortization as well as items that are not part of normal day-to-day operations of our business such as interest expense and income taxes. By providing this non-GAAP financial measure, together with a reconciliation, 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 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 of the operating company 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 U.S. 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 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 U.S. GAAP results and using EBITDA only supplementally. We further believe that our presentation of these U.S. GAAP and non-GAAP financial measurements provide information that is useful to analysts and investors because they are important indicators of the strength of our operations and the performance of our business.

 

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  Year ended
September 30,
  Three
months
ended
June 30,
  Nine
months
ended
June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 
 
  (in thousands)
 

Net income attributable to Vitamin Cottage Natural Food Markets, Inc

  $ 3,538     4,408     3,504     986     2,201     2,586     5,676  

Net income attributable to noncontrolling interest

    1,513     1,189     1,106     255     339     821     902  
                               

Net income

    5,051     5,597     4,610     1,241     2,540     3,407     6,578  

Interest expense

    1,146     967     669     181     144     574     474  

Income taxes

    2,039     2,466     2,167     674     1,300     1,623     3,372  

Depreciation and amortization

    4,206     5,510     7,691     1,989     2,540     5,546     7,229  
                               

EBITDA

  $ 12,442     14,540     15,137     4,085     6,524     11,150     17,653  
                               
(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.

(6)
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.

(7)
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.

(8)
Comparable store sales per selling square foot is calculated using comparable store sales for the period divided by the weighted average square feet per store based on the amount of time the store was included in the comparable store base during the period.

(9)
Assumes the net proceeds from this offering to us are approximately $48.1 million, that the cash portion of the purchase price payable to the minority owners of BVC in connection with the Boulder Contribution is $10,050,855, and the 25% cash settled portion of the award of restricted stock units to our Chief Financial Officer is $652,785. Further assumes a $25,622,843 repayment of amounts outstanding under the credit facility, a deferred income tax asset of $3,465,587 recognized in connection with the Boulder Contribution due to the anticipated step up in tax basis that will result in future tax deductions to us, and a deferred income tax asset of $35,683 for the deferred tax consequences of a portion of the award of restricted stock units to our Chief Financial Officer. The following table reconciles actual total assets as of June 30, 2012 to pro forma total assets as of June 30, 2012:

 
  As of June 30,
2012
 
 
  (Unaudited)
(in thousands)

 

Actual total assets

  $ 90,721  

Pro forma adjustments:

       

Net proceeds from this offering

    48,052  

Cash portion of Boulder Contribution

    (10,051 )

Cash portion of CFO Award

    (653 )

Repayment of credit facility

    (25,623 )

Deferred income tax asset associated with Boulder Contribution

    3,466  

Deferred income tax asset associated with CFO Award

    36  
       

Pro forma total assets

  $ 105,948  
       

 

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(10)
Total debt includes the outstanding principal balance of our term loan, outstanding borrowings on our revolving credit facility and notes payable to related parties.

(11)
The pro forma column in the selected balance sheet data table above reflects the balance sheet data after giving effect to (i) the sale by us of 3,623,793 shares of our common stock in this offering, after deducting underwriting discounts and commissions and estimated expenses payable by us, (ii) the application of the net proceeds from this offering as described in "Use of Proceeds" and (iii) the Reorganization.

(12)
Assumes the net proceeds from this offering to us are approximately $48.1 million, and that the cash payable in connection with the Reorganization is approximately $10.7 million.

 

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RISK FACTORS

        This offering and an investment in our common stock involve a high degree of risk. You should carefully consider the risks described below, together with the financial and other information contained in this prospectus, before you decide to purchase shares of our common stock. 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.

Risks related to our business

        Our continued growth largely depends on our ability to successfully open and operate new stores on a profitable basis. During fiscal year 2011, we opened ten new stores, and we plan to open approximately ten new stores in fiscal year 2012, of which we have opened six as of June 30, 2012. 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 distribution centers 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 ability to grow in the future.

        Our ability to successfully open new stores is dependent 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, then our efforts to open and operate new stores may be unsuccessful or unprofitable, and we may be unable to execute our growth plans.

        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. There is also the potential that some of our new stores will be located near areas where we have existing stores, thereby reducing the sales of such existing stores.

         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:

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        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 and the cost of these products. Our store offerings are currently comprised of natural and organic products and dietary supplements. A change in consumer preferences away from our offerings would have a material adverse effect on our business. Additionally, negative publicity over the safety of any such items may adversely affect demand for our products and could result in lower customer traffic, sales and results of operations.

        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 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:

        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 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:

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        Accordingly, our results for any one fiscal quarter are not necessarily indicative of the results to be expected for any other 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 quarterly results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations."

         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, housing market conditions, consumer confidence, political instability and consumer perception of economic conditions. 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 highly competitive markets.

        The markets for natural and organic groceries and dietary supplements are highly competitive with few barriers to entry. Our competition varies by market and includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers and multi-level marketers. Many of our competitors are larger, more established and have greater financial,

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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. As a result, we may lose market share to our competitors, which could have a material adverse effect on our business, financial condition and results of operations.

         Our inability to maintain or increase our operating margins could adversely affect our results of operations and the price of our stock.

        We intend to continue to increase our operating margins by leveraging efficiencies of scale, improved systems, continued cost discipline, focus on appropriate store labor levels and 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 efficiencies of scale, improve our systems, continue our cost discipline, and maintain 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 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 operation. 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.

         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 specifications for quality, 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.

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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 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 U.S., we are subject to regulation by various government agencies, including the FDA, the USDA, Federal Trade Commission, or the FTC, 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 the Dietary Supplement Health and Education Act of 1994, or DSHEA. DSHEA expressly permits dietary supplements to bear statements describing how a product affects the structure, function and/or 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, associates, 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, such as the FDA Food Safety Modernization Act, or FSMA, passed in January 2011, which grants the FDA greater authority over the safety of the national food supply, as well as increased enforcement by government agencies, could result in additional compliance costs and civil remedies. Specifically, the FSMA requires the FDA to issue regulations mandating that risk-based preventive controls be observed by the majority of food producers. This authority 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 requires the FDA to establish science-based minimum standards for the safe production and harvesting of produce, requires the FDA to identify "high risk" foods and "high risk" facilities and instructs 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 augments the FDA's ability to access a producer's records and a supplier's records. This increased access could permit the

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FDA to identify areas of concern it had not previously considered to be problematic either for us or for our suppliers. The FSMA is also likely to result in enhanced tracking and tracing of food requirements and, as a result, added recordkeeping burdens upon our suppliers. In addition, effective July 2012, under the FSMA, the FDA will have 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.

        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 U.S. 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 attempts to clarify when an ingredient will 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. In particular, the new guidance may cause dietary supplement products available in the market before DSHEA to now 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 adoption of the draft FDA guidance or similar guidance could materially adversely affect the availability of dietary supplement products.

        Furthermore, in recent years, the FDA has been 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 actions with respect to such promotional practices can 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/or scientific substantiation. Any or all of such requirements could have an adverse effect on our operating results.

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

        Some of the activities of our Nutritional Health Coaches, or 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 (1) does not, in the FDA's view, accurately present such information, (2) diverts a consumer's attention and focus from FDA-required nutrition labeling and information or (3) impermissibly promotes drug-type disease-related benefits. Although we have provided training to our NHCs on relevant regulatory requirements, we cannot

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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 NHC's 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.

        Our ability to ensure a continuing supply of organic products 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, 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, which are often less plentiful in the open market than conventional ingredients. This competition may increase in the future if consumer demand for organic products increases. If supplies of organic ingredients 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.

        United Natural Foods Inc., or UNFI, is our single largest third-party supplier, accounting for approximately 46.4% of our total purchases in fiscal year 2011. Another 6.6% of our purchases were made through Albert's Organics, a subsidiary of UNFI that distributes fresh produce and meat. During fiscal year 2012, we extended our long-term relationship with UNFI as our primary supplier of dry grocery and frozen food products through 2016. Due to this concentration of purchases from a single third-party supplier, the cancellation 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.

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        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 operations, business and financial condition. 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, new requirements imposed by the FSMA require 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.

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

        As of June 30, 2012, we have store concentration in Colorado and Texas, operating 30 stores and ten stores in those states, respectively, or a total of 72.7% 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. Our reputation could also suffer from real or perceived issues involving the labeling or marketing of our products as "natural." Although the FDA and USDA have each issued statements regarding the appropriate use of the word "natural," there is no single, U.S. 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.

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         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 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 and Zephyr Isely, our Co-Presidents since 1998, and Heather Isely and Elizabeth Isely, our Executive Vice Presidents since 1998, could have a material adverse effect on our ability to operate our business, our financial condition and results of operations, unless, and until, we are able to find a qualified replacement. For more information on our management team, see "Management." Furthermore, our ability to manage our new store growth will require us to attract, motivate and retain qualified managers, Nutritional Health Coaches and store associates 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.

         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.

        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, which 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 also adversely impact our business by disrupting production and delivery of products to our stores and by impacting our ability to appropriately staff our stores.

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         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, attempts on the part of our employees to organize labor or union activities among our employees could result in work slowdowns, reducing the efficiency of our operations, which could have a material adverse effect on our business, financial condition and results of operations.

         Our management has limited experience managing a public company, and our current resources may not be sufficient to fulfill our public company obligations.

        Following the completion of this offering, we will be subject to various regulatory requirements, including those of the Securities and Exchange Commission, or the SEC, and The New York Stock Exchange, or the NYSE. These requirements include record keeping, financial reporting and corporate governance rules and regulations. Our management team has limited experience in managing a public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our increased reporting obligations, and we may be unable to hire, train or retain necessary staff and may initially be reliant on engaging outside consultants or professionals to overcome our lack of experience. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants, or are otherwise 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.

        Our total assets included long-lived assets totaling $48.4 million at June 30, 2012. 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.

         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 a current store location. Of the current leases for our stores, four expire in fiscal 2013, two expire in fiscal 2014 and the remainder expire between fiscal 2015 and 2028.

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         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, and to fulfill customer orders from our Internet business. The failure of our information systems to perform as designed, including the failure of our warehouse management software system to operate as expected or to support an expanded distribution facility, could have an 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, process financial and credit card transactions and receive and process orders through our Internet business. Any security breaches of our information systems could disrupt our operational systems, resulting in a slowdown of our normal business activities or limitations on our ability to process credit card transactions. Moreover, leaks of proprietary information, including leaks of customers' private data, could weaken customer confidence in our company and our ability to compete in the food retail marketplace, which could have a material adverse effect on our business, financial condition and results of operations. 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. Our Internet operations, while relatively small, are increasingly important to our business. 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 reduce Internet sales and 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, 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 trademarks on our names, Vitamin Cottage, Natural Grocers by Vitamin Cottage and Vitamin Cottage Natural Grocers, copyrights of our website content, rights to our domain names including www.vitamincottage.com and www.naturalgrocers.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 and copyright law, trade secret protection and confidentially agreements with certain of our employees, consultants, suppliers and others to protect our proprietary rights. If we are unable to defend or protect or preserve the value

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of our trademarks, copyrights, trade secrets or other proprietary rights for any reason, our brand and reputation could be impaired and we could lose customers.

        Although our brand names are registered in the United States, we may not be successful in asserting trademark or trade name protection and the costs required to protect our trademarks and trade names may be substantial. In addition, the relationship between regulations governing domain names and laws protecting trademarks 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 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 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 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 cause unexpected side effects, illness, injury or death that could result in their discontinuance or expose us to lawsuits, either of which could result in unexpected costs and damage to our reputation.

        There is increasing governmental scrutiny of and public awareness regarding food safety. We believe that many customers hold us to a higher quality standard than other retailers. 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, which could in turn harm our reputation and net sales, which could have a material adverse effect on our business, financial condition and results or operation, or result in our insolvency.

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

        The raw agricultural commodities used to make our private label products, including our bulk repackaged products, increased globally during 2011, and 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 the price of, raw agricultural commodities could cause our vendors to seek price increases from us, or may cause the retail price we charge for certain products to increase, in turn decreasing our sales of such products. As a result, our profitability may be adversely impacted 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.

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         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 recently due to rising 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.

         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. Recent changes in postal rates have increased the cost of our Health Hotline mailings and increasing paper and printing costs have 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 the cost of producing and broadcasting our television, radio and Internet advertising pieces. Recent changes in broadcast rates have 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.

         Our credit facility could limit our operational flexibility.

        Following this offering we expect to have approximately $21.0 million of availability under our credit facility. Substantially all of our assets are pledged as collateral for outstanding borrowings under the facility. Our credit facility 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 sale and leaseback transactions. We are also required to maintain certain financial ratios under our credit agreement, including a consolidated leverage ratio, a consolidated fixed charge ratio and a consolidated EBITDA to revenue 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 revolving credit facility and, in certain circumstances, may allow the lender thereunder to require repayment.

         We may need to raise additional debt or equity capital.

        We depend 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, after the completion of this offering, 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.

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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 at this time. 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.

         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 these interests 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, or the IRS, and other state and local taxing authorities. Our effective tax rate is likely to change following the Boulder Contribution. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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.

        Reporting obligations as a public company and our anticipated growth are likely to place a considerable strain on our financial and management systems, processes and controls, as well as on our personnel. In addition, as a public company, we will be required to document and test our internal controls over financial reporting pursuant to Section 404 of Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, so that our management can periodically certify the effectiveness of such controls. Our independent registered public accounting firm will not be required to formally attest to the effectiveness of our internal control over financial reporting pursuant to Section 404 until the later of the year following our first annual report required to be filed with the SEC, or the date we are no longer an "emerging growth company" as defined in the JOBS Act, if we take advantage of the exemptions contained in the JOBS Act. We expect that we will remain an "emerging growth company" until the earliest of (a) the last day of our fiscal year following the fifth anniversary of this offering; (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; and (d) the date on which we are deemed to be a "large accelerated filer," which

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will occur at such time as we have (1) 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, (2) been required to file annual, quarterly and current reports under the Exchange Act for a period of at least 12 calendar months, and (3) 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 controls 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.

         We are an "emerging growth company" and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.

        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:

        We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors 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 also 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 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 are choosing to "opt out" of such extended transition period, and as a result, we 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 this offering

        The market price of our common stock may be volatile, and you may not be able to sell our 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:

        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.

         Our current principal stockholders will continue to have significant influence over us after this offering, 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 controlled all of the voting power of our outstanding common stock prior to this offering. Immediately following the offering, members of the Isely family and certain persons, entities and accounts that own or control approximately 61.77% of our common stock will enter into a stockholders agreement by which they will agree to aggregate their voting power with regard to the election of directors. Due to their holdings of common stock, members of the Isely family will be 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, because these holders will have the ability to elect all of our directors, they will be 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.

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         No public market for our common stock currently exists, and we cannot assure you that an active, liquid trading market will develop or be sustained following this offering.

        Prior to this offering, there has been no public market for shares of our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of a trading market on the NYSE or otherwise, or how liquid that market might become. If an active market does not develop, you may have difficulty selling any shares of our common stock that you purchase in this initial public offering. The initial public offering price for the shares of our common stock was determined by negotiations between us, the selling stockholders and the representatives of the underwriters, and may not be indicative of prices that will prevail in the open market following this offering. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price.

         You will experience an immediate and substantial book value dilution after this offering.

        The initial public offering price of our common stock is substantially higher than the net tangible book value per share attributable to our existing shareholders immediately after the offering. You will incur immediate and substantial dilution in the amount of $12.14 after the consummation of this offering. See "Dilution" included elsewhere in this prospectus.

         A substantial number of shares of our common stock will be eligible for sale in the near future, which could adversely affect our stock price and could impair our ability to raise capital through the sale of equity securities.

        If our stockholders sell, or the market perceives that our stockholders intend to sell, in the public market following this offering, 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. Upon completion of this offering, 21,803,031 shares of our common stock, or 22,349,879 shares of our common stock if the underwriters' option is exercised in full, will be outstanding. The shares of common stock affected in this offering will be freely tradable without restriction under the Securities Act of 1933, as amended, or Securities Act, except for any shares held by our "affiliates" as defined in Rule 144 under the Securities Act. Up to approximately 11,735,580 additional shares of our common stock could be sold upon the expiration of the 180-day lock-up period described in "Underwriting—Lock-Up Agreements." As restrictions on resale end, the market price of our common stock could drop significantly if the holders of restricted shares 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 in connection with investments or acquisitions. The amount 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, or 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. 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. In addition, the market price for our common stock after this offering might not exceed the price that you pay for our common stock in this offering.

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

        The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts do not 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 stock, or if our operating results do not meet their expectations, our stock price could decline.

         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, each of which will be in effect upon the consummation of this offering, 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. See "Description of Capital Stock."

        These provisions include:

        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 will be a "controlled company" within the meaning of the NYSE Listed Company rules, and, as a result, will rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.

        Upon completion of this offering, the Isely family, or entities controlled by the Isely family, will own more than 50% of the total voting power of our common shares for the election of directors and we will be a "controlled company" under NYSE corporate governance standards. As a controlled company, certain exemptions under NYSE standards will free us from the obligation to comply with certain corporate governance requirements of the NYSE, including the requirements:

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

         Our costs will increase significantly as a result of operating as a public company, and our management will be required to devote substantial time to complying with public company regulations.

        We historically have operated our business as a private company. As a public company, we will incur additional legal, accounting, compliance and other expenses that we have not incurred as a private company. After this offering, we will become obligated to file with the SEC annual and quarterly reports and other reports that are specified in Section 13 and other sections of the Securities Exchange Act of 1934, as amended, or the Exchange Act. In addition, we will also become subject to other reporting and corporate governance requirements, including certain requirements of the NYSE, and certain provisions of Sarbanes-Oxley and the Dodd Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, which will impose significant compliance obligations upon us. We will need to institute a comprehensive compliance function, establish internal policies, ensure that we have the ability to prepare financial statements that are fully compliant with all SEC reporting requirements on a timely basis and design, establish, evaluate and maintain internal controls over financial reporting in compliance with Sarbanes-Oxley.

        Sarbanes-Oxley and Dodd-Frank, as well as rules subsequently implemented by the SEC and the NYSE, have imposed enhanced corporate governance and disclosure practices for public companies. Our efforts to comply with evolving laws, regulations and standards in this regard are likely to result in increased administrative expenses and a diversion of management's time and attention from revenue-generating activities to compliance activities. These changes will require a significant commitment of additional capital and resources. We may not be successful in implementing these requirements, and implementing them could materially adversely affect our business, results of operations and financial condition. In addition, if we fail to implement the requirements with respect to our internal accounting and audit functions, our ability to report our operating results on a timely and accurate basis could be impaired. If we do not implement such requirements in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or the NYSE. Any such action could harm our reputation and the confidence of investors and customers in our company and materially adversely affect our business and cause our share price to fall.

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This prospectus includes forward-looking statements in addition to historical information. These forward-looking statements are included throughout this prospectus, including in the sections entitled "Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business," "Executive Compensation," and "Certain Relationships and Related Party Transactions," and 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. We have used the words "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "future" and similar terms and phrases to identify forward-looking statements in this prospectus.

        The forward-looking statements contained in this prospectus 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 prospectus speaks only as of the date on which we make it. 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 any applicable securities laws.

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USE OF PROCEEDS

        We estimate that we will receive net proceeds from this offering of approximately $48.1 million after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

        We intend to use the net proceeds to us from this offering to repay our term loan and all outstanding amounts under our revolving credit facility, fund the payment of the cash portion of the purchase price for the Boulder Contribution, settle the cash portion of restricted stock units granted to our Chief Financial Officer, fund working capital and for general corporate purposes. The amount and timing of actual requirements for working capital or funds for general corporate purposes will depend on numerous factors related to the implementation of our business strategy. Our executive management will have broad discretion in the application of the net proceeds, and investors in our common stock will be relying on the judgment of our management regarding the application of the net proceeds from this offering.

        As of June 30, 2012, we had approximately $15.8 million of indebtedness under our term loan and approximately $9.8 million of indebtedness under our revolving credit facility, which was used to fund new store growth and working capital. The average annual interest rate on our term loan and revolving credit facility for the nine months ended June 30, 2012 was 2.05% and 2.54%, respectively. Our term loan and revolving credit facility mature on June 30, 2014. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" for more information.

        The cash portion of the purchase price payable to the minority owners of BVC in connection with the Boulder Contribution is based on the public offering price of the shares sold in this offering. The minority owners of BVC will receive $10,050,855 in cash in connection with the Boulder Contribution. For additional information regarding the Boulder Contribution, see "The Reorganization—The Boulder Contribution."

        We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders, including any shares that may be sold by the selling stockholders in connection with the exercise of the underwriters' overallotment option.


DIVIDEND POLICY

        Natural Grocers by Vitamin Cottage, Inc. will be a holding company with no operations of its own. It will depend on payments, dividends and distributions from the operating company, its wholly-owned subsidiary, for funds to pay dividends to our stockholders. The operating company currently expects to retain future earnings for use in the operation and expansion of our business and does not anticipate paying any cash dividends for the foreseeable future. In addition, our ability and the ability of our operating company to declare and pay cash dividends is prohibited by our credit facility. Furthermore, 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, restrictions in the operating company's debt agreements and other factors deemed relevant by our board. The operating company did not pay any dividends during fiscal years 2009, 2010 and 2011.

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CAPITALIZATION

        The following table sets forth our cash and cash equivalents and capitalization as of June 30, 2012, on:

        You should read this table in conjunction with "Use of Proceeds," "Selected Historical Consolidated Financial and Other Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the audited and unaudited consolidated financial statements and related notes included elsewhere in this prospectus.

 
  As of June 30, 2012  
 
  Actual   As Adjusted(1)  
 
  (unaudited)
 

Cash and cash equivalents(1)

  $ 3,300,505     15,025,934  
           

Debt:

             

Revolving credit facility

    9,797,843      

Term loan

    15,825,000      

Notes payable—related party

    787,218     787,218  
           

Total debt

    26,410,061     787,218  

Stockholders' equity:

             

Common stock, Class A, voting, no par value per share, 1,000 shares authorized, issued and outstanding (actual)(2)

    1,679      

Common stock, Class B, nonvoting, no par value per share, 1,000,000 shares authorized, 625,112 shares issued and outstanding (actual)(2)

    792,676      

Common stock, par value $0.001 per share, 50,000,000 shares authorized, 21,803,031 shares issued and outstanding (as adjusted)

        21,803  

Retained earnings

    19,281,961     18,604,024  

Additional paid-in capital(1)

        44,645,865  

Noncontrolling interest(3)

    1,978,215      
           

Total stockholders' equity(1)

    22,054,531     63,271,692  
           

Total capitalization

  $ 48,464,592     64,058,910  
           

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(1)
Based on the public offering price of $15.00 per share and net proceeds from this offering to us of approximately $48.1 million, the transactions associated with the Reorganization are as follows to reconcile to as adjusted balances as of June 30, 2012:

 
  Actual as of
June 30, 2012
  Boulder
Contribution
(a)
  Proceeds from
this offering
  Repayment of
Credit Facility
  CFO Award   As Adjusted
as of
June 30, 2012
 

Cash and cash equivalents

  $ 3,300,505     (10,050,855 )   48,051,912     (25,622,843 )   (652,785 )   15,025,934  
                                   

Deferred income tax assets

    715,165     3,465,587                 35,683     4,216,435  
                                   

Accrued expenses

    8,483,984                       (367,619 )   8,116,365  
                                   

Total debt

    26,410,061                 (25,622,843 )         787,218  

Stockholders' equity:

                                     

Common stock

    794,355     670     (773,353 )         131     21,803  

Retained earnings(b)

    19,281,961                       (677,937 )   18,604,024  

Additional paid-in capital

        (4,607,723 )   48,825,265           428,323     44,645,865  

Noncontrolling interest

    1,978,215     (1,978,215 )                      
                           

Total stockholders' equity

    22,054,531     (6,585,268 )   48,051,912         (249,483 )   63,271,692  
                           

Total capitalization

  $ 48,464,592     (6,585,268 )   48,051,912     (25,622,843 )   (249,483 )   64,058,910  
                           
(2)
The existing Class A and Class B common stock of Vitamin Cottage Natural Food Markets, Inc. will be converted into shares of common stock of Natural Grocers by Vitamin Cottage, Inc. in connection with the Reorganization. See "The Reorganization."

(3)
We held a controlling financial interest in BVC as of June 30, 2012. As such, in accordance with U.S. GAAP, our consolidated balance sheet as of June 30, 2012 includes the assets, liabilities and stockholders equity of BVC, and 45% of BVC's stockholders equity is reported as noncontrolling interest. As a result of the Boulder Contribution, BVC will become our wholly-owned subsidiary and we will no longer report a noncontrolling interest as part of stockholders' equity.

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THE REORGANIZATION

        Natural Grocers by Vitamin Cottage, Inc. was incorporated on April 9, 2012, in anticipation of this offering. Prior to this offering, Natural Grocers by Vitamin Cottage, Inc. is a wholly-owned subsidiary of Vitamin Cottage Natural Food Markets, Inc. In connection with, and immediately prior to the completion of this offering, we will complete a reorganization that includes: (1) the Delaware Merger, (2) the Boulder Contribution and (3) the issuance of restricted stock units to our Chief Financial Officer. The Delaware Merger and the Boulder Contribution are conditions to the consummation of this offering. The diagram below reflects our corporate structure immediately prior to the Reorganization:

GRAPHIC

        The Reorganization includes the following transactions:

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        In addition to the lock-up agreements entered into with the underwriters in connection with this offering, the minority owners of BVC have agreed that they will not sell or otherwise dispose of the shares of common stock of Natural Grocers by Vitamin Cottage, Inc. that they will receive in connection with the Boulder Contribution for a period of 180 days following the completion of this offering.

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        The diagram below illustrates our corporate structure immediately following completion of the Reorganization and this offering:

GRAPHIC

        The preceding diagram assumes that the underwriters will not exercise their overallotment option. If the underwriters exercise their overallotment option in full, former BVC minority investors would own 670,057 shares or 3.00% of our common stock, former shareholders of Vitamin Cottage Natural Food Markets, Inc. would own 13,331,707 shares or 59.66% of our common stock, and purchasers of stock in this offering would own 8,214,285 shares or 36.76% of our common stock.

        Immediately following the offering, Kemper Isely, Zephyr Isely, Heather Isely and Elizabeth Isely will, in the aggregate, own and control approximately 40.94% of our common stock, or approximately 37.80% if the underwriters exercise their overallotment option in full. In addition, these shares will be subject to a stockholders agreement, pursuant to which these and other Isely family stockholders holding in the aggregate more than 50% of our common stock will agree to vote their shares of common stock together on all matters related to the election of directors. Accordingly, we will be a "controlled company" within the meaning of The New York Stock Exchange governance standards.

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DILUTION

        Dilution is the amount by which the initial public offering price paid by purchasers of common stock sold in this offering will exceed the net tangible book value per share of common stock after this offering. Net tangible book value per share is determined by dividing the total tangible assets of Natural Grocers by Vitamin Cottage, Inc. less its total liabilities by the number of shares of its common stock outstanding. The historical as adjusted net tangible book value as of June 30, 2012, before giving effect to the Reorganization and before giving effect to the offering was $21.1 million, or $1.21 per share. All amounts presented below reflect the shares as adjusted for the Delaware Merger.

        After giving effect to the Reorganization and the sale of shares of our common stock in this offering and the application of the estimated net proceeds from this offering as described in "Use of Proceeds," after deducting the estimated underwriting discounts and commissions and estimated expenses payable by us, the as adjusted net tangible book value as of June 30, 2012 would have been $62.3 million, or $2.86 per share of common stock. Purchasers of common stock in this offering will experience substantial and immediate dilution in net tangible book value per share of common stock for financial accounting purposes, as illustrated in the following table.

Initial public offering price per common share

        $ 15.00  

Historical net tangible book value per common share before giving effect to this offering and the Reorganization

  $ 1.21        

Increase in net tangible book value per common share resulting from this offering and the Reorganization

  $ 1.65        

As adjusted net tangible book value per common share after giving effect to this offering and the Reorganization

        $ 2.86  

Dilution per share to new investors

        $ 12.14  

        The discussion and tables above also exclude shares of common stock reserved for issuance under our omnibus incentive plan that we intend to adopt in connection with this offering.

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SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA

        Natural Grocers by Vitamin Cottage, Inc. was incorporated in Delaware on April 9, 2012. Prior to the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. will have no material assets. Following the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. will be a holding company with no material assets other than its direct 100% ownership of Vitamin Cottage Natural Food Markets, Inc., which is our operating company. The consolidated financial statements of Natural Grocers by Vitamin Cottage, Inc. will reflect the assets, liabilities and results of operations of the operating company. Accordingly, the following tables set forth the selected historical consolidated financial and other data of the operating company as of the dates and for the periods indicated.

        The selected historical consolidated financial data for the year ended September 30, 2009, and as of and for the years ended September 30, 2010 and 2011 have been derived from the audited consolidated financial statements of the operating company, which are included elsewhere in this prospectus. The selected consolidated balance sheet data as of September 30, 2009 has been derived from audited consolidated financial statements not included in this prospectus.

        The selected historical unaudited consolidated financial data as of June 30, 2012 and for the three and nine months ended June 30, 2011 and 2012 have been derived from the unaudited consolidated financial statements of the operating company, which are included elsewhere in this prospectus. The unaudited consolidated financial statements of the operating company have been prepared on the same basis as the audited consolidated financial statements of the operating company and, in the opinion of management, include all adjustments necessary for a fair presentation. Interim results are not necessarily indicative of results that may be expected for a full fiscal year.

        The selected historical consolidated data presented below should be read in conjunction with the information included in the sections entitled "Risk Factors," "The Reorganization," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes thereto and other financial data included elsewhere in this prospectus. The historical results of Vitamin Cottage Natural Food Markets, Inc. set forth below are not necessarily indicative of results to be expected for any future period.

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  Year ended September 30,   Three months
ended June 30,
  Nine months
ended June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 
 
  (dollars in thousands, except for per share and other operating data)
 

Statements of Income Data:

                                           

Net sales

  $ 206,080     226,910     264,544     67,578     86,707     194,407     246,453  

Cost of goods sold and occupancy costs

    145,937     159,797     187,162     47,828     61,307     137,474     173,769  
                               

Gross profit

    60,143     67,113     77,382     19,750     25,400     56,933     72,684  

Store expenses

    41,992     47,162     57,610     14,634     18,199     42,218     52,667  

Administrative expenses

    8,619     9,631     10,397     2,575     2,760     7,667     8,285  

Pre-opening and relocation expenses

    1,236     1,293     1,964     448     458     1,470     1,312  
                               

Operating income

    8,296     9,027     7,411     2,093     3,983     5,578     10,420  

Other (expense) income:

                                           

Interest expense

    (1,146 )   (967 )   (669 )   (181 )   (144 )   (574 )   (474 )

Other (expense) income, net

    (60 )   3     35     3     1     26     4  
                               

Income before income taxes

    7,090     8,063     6,777     1,915     3,840     5,030     9,950  

Provision for income taxes

    (2,039 )   (2,466 )   (2,167 )   (674 )   (1,300 )   (1,623 )   (3,372 )
                               

Net income

    5,051     5,597     4,610     1,241     2,540     3,407     6,578  
                               

Net income attributable to noncontrolling interest

    (1,513 )   (1,189 )   (1,106 )   (255 )   (339 )   (821 )   (902 )
                               

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 3,538     4,408     3,504     986     2,201     2,586     5,676  
                               

Per Share Data:

                                           

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. per common share

                                           

Basic and diluted

  $ 5.65     7.04     5.60     1.57     3.52     4.13     9.07  
                               

Weighted average shares outstanding

                                           

Basic and diluted

    626,112     626,112     626,112     626,112     626,112     626,112     626,112  
                               

Pro Forma Statements of Income Data (Unaudited)(1):

                                           

Income before income taxes

  $ 7,090     8,063     6,777     1,915     3,840     5,030     9,950  

Pro forma provision for income taxes

    (2,592 )   (2,892 )   (2,589 )   (778 )   (1,426 )   (1,940 )   (3,709 )
                               

Pro forma net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 4,498     5,171     4,188     1,137     2,414     3,090     6,241  
                               

Pro Forma Per Share Data (Unaudited)(2):

                                           

Pro forma net income per common share

                                           

Basic

  $ 0.21     0.24     0.19     0.05     0.11     0.14     0.29  

Diluted

  $ 0.21     0.24     0.19     0.05     0.11     0.14     0.29  

Pro forma weighted average shares outstanding

                                           

Basic

    21,803,031     21,803,031     21,803,031     21,803,031     21,803,031     21,803,031     21,803,031  

Diluted

    21,890,069     21,890,069     21,890,069     21,890,069     21,890,069     21,890,069     21,890,069  

Other Financial Data:

                                           

EBITDA(3)

  $ 12,442     14,540     15,137     4,085     6,524     11,150     17,653  
                               

EBITDA margin(4)

    6.0 %   6.4     5.7     6.0     7.5     5.7     7.2  
                               

Other Operating Data (Unaudited):

                                           

Number of stores at end of period

    33     39     49     46     55     46     55  

Change in comparable store sales(5)

    2.6 %   2.1     4.9     5.5     13.0     4.5     11.1  

Gross square footage at end of period(6)

    401,919     472,393     619,172     564,492     737,332     564,492     737,332  

Selling square footage at end of period(6)

    309,792     360,764     459,435     424,585     531,428     424,585     531,428  

Average comparable store size (gross square feet)(7)

    12,189     12,328     12,239     12,331     12,272     12,331     12,272  

Average comparable store size (selling square feet)(7)

    9,640     9,483     9,284     9,337     9,230     9,337     9,230  

Comparable store sales per selling square foot during period(8)

  $ 773     730     720     180     185     542     555  

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  As of September 30,    
 
 
  As of
June 30,
2012
 
 
  2009   2010   2011  
 
   
   
   
  (Unaudited)
 
 
  (in thousands)
 

Selected Balance Sheet Data:

                         

Cash and cash equivalents

  $ 2,140     446     378     3,301  

Total assets

    48,565     60,272     78,915     90,721  

Total debt(9)

    20,410     23,748     28,442     26,410  

Total stockholders' equity

    7,791     12,307     15,927     22,055  

(1)
As part of the Reorganization, BVC will become our wholly owned subsidiary. We have held a controlling interest in BVC for all periods presented, as such, our consolidated statements of income include the revenues and expenses of BVC for all periods presented as required by U.S. GAAP. 45% of BVC's net income has been reported as net income attributable to noncontrolling interest in our consolidated statements of income for all periods presented above. The pro forma financial data presented above illustrates what our net income would have been had we owned 100% of BVC for the periods presented. Our effective tax rate will increase as a result of the Boulder Contribution, as the income attributable to the noncontrolling interest was nontaxable income prior to the Boulder Contribution, but will be included in our taxable income after the Boulder Contribution. The following table reconciles our effective tax rate to our pro forma effective tax rate had we owned 100% of BVC for all periods presented:

 
  Year ended
September 30,
  Three months
ended
June 30,
  Nine
months
ended
June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 

Statutory tax rate

    34.0 %   34.0     34.0     34.0     34.0     34.0     34.0  

Nontaxable net income attributable to noncontrolling interest

    (7.7 )   (5.3 )   (6.2 )   (5.4 )   (3.2 )   (6.3 )   (3.4 )

State income taxes, net of federal income tax expense

    3.1     2.5     3.4     3.4     3.1     3.4     3.2  

Other, net

    (0.6 )   (0.6 )   0.8     3.2         1.2     0.1  
                               

Effective tax rate

    28.8     30.6     32.0     35.2     33.9     32.3     33.9  

Pro forma adjustment to exclude nontaxable net income attributable to noncontrolling interest

    7.7     5.3     6.2     5.4     3.2     6.3     3.4  
                               

Pro forma effective tax rate

    36.5 %   35.9     38.2     40.6     37.1     38.6     37.3  
                               

        See "The Reorganization" for additional information regarding the Boulder Contribution.

(2)
Pro forma per share data gives effect to the Reorganization, including the issuance of 17,378,625 shares in connection with the Delaware Merger, 670,057 shares in connection with the Boulder Contribution, and 130,556 shares to our Chief Financial Officer immediately following this offering. The following table sets forth the computation of pro forma basic and diluted weighted average common shares:

 
  Basic   Diluted

Pro forma weighted average number of common shares:

         

Shares and restricted stock units issued in the Reorganization

    18,179,238   18,266,276

Shares issued in this offering

    3,623,793   3,623,793
         

Pro forma weighted average number of common shares

    21,803,031   21,890,069

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(3)
EBITDA is not a measure of financial performance under U.S. GAAP. EBITDA is defined as net income attributable to Vitamin Cottage Natural Food Markets, Inc. before interest expense, provision for income tax, net income attributable to the noncontrolling interest and depreciation and amortization. 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 used as a measure in our debt covenants under the credit facility, and our incentive compensation plans base incentive compensation payments on our EBITDA performance. Furthermore, EBITDA is used by investors as a supplemental measure to evaluate the overall operating performance of companies in our industry. Management believes that 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. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations period over period and would ordinarily add back non-cash expenses such as depreciation and amortization as well as items that are not part of normal day-to-day operations of our business such as interest expense and income taxes. By providing this non-GAAP financial measure, together with a reconciliation, 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 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 of the operating company 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 U.S. 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 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.

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  Year ended September 30,   Three months
ended
June 30,
  Nine
months
ended
June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 
 
  (in thousands)
 

Net income attributable to Vitamin Cottage Natural Food Markets, Inc

  $ 3,538     4,408     3,504     986     2,201     2,586     5,676  

Net income attributable to noncontrolling interest

    1,513     1,189     1,106     255     339     821     902  
                               

Net income

    5,051     5,597     4,610     1,241     2,540     3,407     6,578  

Interest expense

    1,146     967     669     181     144     574     474  

Income taxes

    2,039     2,466     2,167     674     1,300     1,623     3,372  

Depreciation and amortization

    4,206     5,510     7,691     1,989     2,540     5,546     7,229  
                               

EBITDA

  $ 12,442     14,540     15,137     4,085     6,524     11,150     17,653  
                               
(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.

(6)
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.

(7)
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.

(8)
Comparable store sales per selling square foot is calculated using comparable store sales for the period divided by the weighted average square feet per store based on the amount of time the store was included in the comparable store base during the period.

(9)
Total debt includes the outstanding principal balance of our term loan, outstanding borrowings on our revolving credit facility and notes payable to related parties.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

        The following is a discussion of the financial position and results of operations for our operating company, Vitamin Cottage Natural Food Markets, Inc., and its consolidated subsidiaries for each of the years ended September 30, 2009, 2010 and 2011, and the three and nine months ended June 30, 2011 and 2012. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and notes thereto and "Selected Historical Consolidated Financial and Other Data," which are included elsewhere in this prospectus. To the extent that the following Management's Discussion and Analysis contains statements which are not of a historical nature, such statements are forward-looking statements which involve risks and uncertainties. These risks include, but are not limited to, those discussed under "Risk Factors" and included in other portions of this prospectus. Such forward-looking statements are often identified with such words as "anticipate," "assume," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "potential," "predict," "project," "future" or similar words concerning future events. Actual results could differ materially from these forward-looking 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 2011" refers to the year from October 1, 2010 to September 30, 2011).

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. Since our founding, we have been at the forefront of the natural and organic foods movement. We are headquartered in Lakewood, Colorado, and as of June 30, 2012, we operated 55 stores in 11 states, including Colorado, Idaho, Kansas, Missouri, Montana, Nebraska, New Mexico, Oklahoma, Texas, Utah and Wyoming as well as 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 selling square feet to 14,500 selling square feet, and a typical new store averages 9,500 selling square feet.

        The growth in the organic and natural foods industry and growing consumer interest in health and nutrition has enabled us to continue to open new stores and enter new markets. In fiscal year 2011, we opened ten new stores, and in each of fiscal years 2009 and 2010, we opened six new stores. During the nine months ended June 30, 2012, we opened six new stores, and we currently plan to open four new stores in the remaining three months of fiscal year 2012.

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:

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Performance Highlights

        Key highlights of our recent performance are discussed briefly below and are discussed in further detail throughout this Management's Discussion and Analysis of Financial Condition and Results of Operations.

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Outlook

        We believe there are several key factors that have contributed to our success and will enable us to continue to expand profitably, including a loyal customer base, 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 an enterprise resource planning, or ERP, system in fiscal year 2010, hiring key personnel and developing efficient and effective new store opening construction and operations processes. We believe there are attractive opportunities for us to continue to expand our store base and focus on increasing comparable store sales. 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 expect that our expenses will increase in future periods due to additional legal, accounting, insurance, stock-based compensation and other expenses we expect to incur as a result of being a public company. Additionally, we expect to expense approximately $1.1 million in stock-based compensation expense associated with the Officer Grant as part of the Reorganization and approximately $275,000 in the three months ended September 30, 2012 for an incentive payment to certain non-executive working team members to be paid within 30 days of a successful initial public offering which results in a closing, subject to active participation and continued employment conditions.

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:

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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 and distribution center), buying costs, shrink and store occupancy costs. Store occupancy costs include rent payments, common area maintenance and real estate taxes. The components of our cost of goods sold and occupancy costs may not be identical to those of our competitors. As a result, our cost of goods sold and occupancy costs data included in this prospectus may not be comparable to similar data made available by our competitors. New stores typically have higher occupancy costs as a percentage of sales compared to comparable stores, as new stores generally experience lower sales combined with fixed occupancy costs. Occupancy costs as a percentage of sales typically decrease as new stores increase sales and mature.

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 product costs, occupancy costs, changes in the mix of products sold and the rate at which we open new stores.

Store expenses

        Store expenses consist of store-level expenses, such as salary and benefits, supplies, utilities, depreciation, advertising, bank credit card charges and other related costs associated with operations and purchasing support. 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.

Administrative expenses

        Administrative expenses consist of home office related expenses, such as salary and benefits, office supplies, hardware and software expenses, depreciation expense, occupancy costs (including rent, common area maintenance, real estate taxes and utilities), professional services expenses and other general and administrative expenses. We expect that our administrative expenses will increase in future periods due to additional legal, accounting, insurance and other expenses we expect to incur as a result of being a public company.

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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 approximately two to four months prior to a store's opening date. Other pre-opening and relocation expenses are generally incurred in the 60 days prior to the store opening. 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 which impacts the level of pre-opening and relocation expenses period over period, as well as increases in store expenses and administrative expenses as a percentage of sales. The amount of time it takes for new stores to become profitable can vary depending on a number of factors, including location, competition and general economic conditions.

Interest expense

        Interest expense consists of the interest we pay on our outstanding indebtedness, which currently includes our revolving credit facility, term loan and related party notes payable. We expect to repay the term loan and amounts outstanding under our revolving credit facility with the proceeds of this offering.

Reorganization Transactions

The Boulder Contribution

        BVC, of which we own 55%, owns five stores in Colorado. In connection with the Reorganization, we have agreed to purchase the 45% noncontrolling interest in BVC concurrent with this offering. The net income attributable to noncontrolling interest amount reported in our consolidated financial statements represents the 45% noncontrolling interest in the net income of BVC. As a result of the Reorganization, BVC will become our wholly owned subsidiary. We have held a controlling interest in BVC for all periods presented in our consolidated statements of income, as such, our consolidated statements of income include the revenues and expenses of BVC for all periods presented as required by U.S. GAAP. 45% of BVC's net income has been reported as net income attributable to noncontrolling interest in our consolidated statements of income for all periods presented. Our effective tax rate will increase as a result of the Boulder Contribution as the income attributable to noncontrolling interest was nontaxable income prior to the Boulder Contribution, but will be included in our taxable income after the Boulder Contribution. See footnote 1 to "Selected Historical Consolidated Financial and Other Data" for pro forma effective tax rate presentation.

        We currently manage the day-to-day operations of the BVC stores, as well as provide all administrative support services, including payroll, human resources, information systems and accounting functions. The associates who work at the BVC stores are currently employed by us. As such, we expect that the Boulder Contribution will have a minimal impact on our current operations.

The Delaware Merger

        Natural Grocers by Vitamin Cottage, Inc. was incorporated in Delaware on April 9, 2012. Prior to the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. will have no material assets. Following the completion of this offering, Natural Grocers by Vitamin Cottage, Inc. will own all of the outstanding capital stock of Vitamin Cottage Natural Food Markets, Inc., which is our operating

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company, and the consolidated financial statements of Natural Grocers by Vitamin Cottage, Inc. will reflect the assets, liabilities and results of operations of the operating company. Accordingly, this section discusses the historical consolidated financial results of the operating company.

        See "The Reorganization" for additional information regarding these transactions as well as "Selected Historical Consolidated Financial and Other Data" for pro forma presentation illustrating the pro forma impact of this transaction on prior periods.

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,   Three months
ended
June 30,
  Nine months
ended
June 30,
 
 
  2009   2010   2011   2011   2012   2011   2012  
 
   
   
   
  (Unaudited)
 

Statements of Income Data:

                                           

Net sales

    100.0 %   100.0     100.0     100.0     100.0     100.0     100.0  

Cost of goods sold and occupancy costs

    70.8     70.4     70.7     70.8     70.7     70.7     70.5  
                               

Gross profit

    29.2     29.6     29.3     29.2     29.3     29.3     29.5  

Store expenses

    20.4     20.8     21.8     21.7     21.0     21.7     21.4  

Administrative expenses

    4.2     4.2     3.9     3.8     3.2     3.9     3.4  

Pre-opening and relocation expenses

    0.6     0.6     0.7     0.6     0.5     0.8     0.5  
                               

Operating income

    4.0     4.0     2.9     3.1     4.6     2.9     4.2  

Other income (expense):

                                           

Interest expense

    (0.6 )   (0.4 )   (0.3 )   (0.3 )   (0.2 )   (0.3 )   (0.2 )
                               

Income before income taxes

    3.4     3.6     2.6     2.8     4.4     2.6     4.0  

Provision for income taxes

    (1.0 )   (1.1 )   (0.9 )   (1.0 )   (1.5 )   (0.8 )   (1.3 )
                               

Net income

    2.4     2.5     1.7     1.8     2.9     1.8     2.7  

Net income attributable to noncontrolling interest

    (0.7 )   (0.6 )   (0.4 )   (0.3 )   (0.4 )   (0.5 )   (0.4 )
                               

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

    1.7 %   1.9     1.3     1.5     2.5     1.3     2.3  
                               

Other Operating Data:

                                           

Number of stores at end of period

    33     39     49     46     55     46     55  

Store unit count increase period over period

    22.2 %   18.2     25.6     27.8     19.6     27.8     19.6  

Change in comparable store sales

    2.6 %   2.1     4.9     5.5     13.0     4.5     11.1  

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Three months ended June 30, 2011 compared to the three months ended June 30, 2012

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

 
  Three months
ended
June 30,
  Increase
(Decrease)
 
 
  2011   2012   Dollars   Percent  
 
  (Unaudited)
 
 
  (dollars in thousands)
 

Statements of Income Data:

                         

Net sales

  $ 67,578     86,707     19,129     28.3 %

Cost of goods sold and occupancy costs

    47,828     61,307     13,479     28.2  
                     

Gross profit

    19,750     25,400     5,650     28.6  

Store expenses

    14,634     18,199     3,565     24.4  

Administrative expenses

    2,575     2,760     185     7.2  

Pre-opening and relocation expenses

    448     458     10     2.2  
                     

Operating income

    2,093     3,983     1,890     90.3  

Other income (expense):

                         

Dividends and interest income

    1     1          

Interest expense

    (181 )   (144 )   37     (20.4 )

Other income, net

    2         (2 )   n/a  
                     

Income before income taxes

    1,915     3,840     1,925     100.5  

Provision for income taxes

    (674 )   (1,300 )   (626 )   92.9  
                     

Net income

    1,241     2,540     1,299     104.7  

Net income attributable to noncontrolling interest

    (255 )   (339 )   (84 )   32.9  
                     

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 986     2,201     1,215     123.2 %
                     

Other Operating Data:

                         

Number of stores at end of period

    46     55              

Store unit count increase period over period

    27.8 %   19.6              

Change in comparable store sales

    5.5 %   13.0              

Net sales

        Net sales increased $19.1 million, or 28.3%, to $86.7 million for the three months ended June 30, 2012 compared to $67.6 million for the three months ended June 30, 2011, due to a $10.4 million increase in non-comparable store sales and an $8.7 million, or 13.0%, increase in comparable store sales. The increase in comparable store sales was driven by an 8.6% increase in transaction count and a 4.4% increase in average transaction size at comparable stores. Comparable store average transaction size increased to $34.96 in the three months ended June 30, 2012 from $33.48 in the three months ended June 30, 2011.

Gross profit

        Gross profit totaled approximately $25.4 million for the three months ended June 30, 2012, compared to $19.8 million for the three months ended June 30, 2011. Cost of goods sold and occupancy costs increased $13.5 million, or 28.2%, to $61.3 million for the three months ended June 30, 2012 compared to $47.8 million for the three months ended June 30, 2011, primarily due to an increase in cost of goods sold and occupancy costs from non-comparable stores. Gross margin increased from 29.2% for the three months ended June 30, 2011 to 29.3% for the three months ended June 30,

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2012. The increase in gross margin period over period is due to a 0.2% decrease in occupancy costs as a percentage of sales, as certain fixed costs, primarily occupancy costs, did not increase at the same rate as comparable store sales. The decrease in occupancy costs as a percentage of sales was offset by a 0.1% decrease in product margin due to a shift in mix period over period.

Store expenses

        Store expenses increased $3.6 million, or 24.4%, to $18.2 million in the three months ended June 30, 2012 from $14.6 million in the three months ended June 30, 2011, primarily due to a $2.2 million increase in salary related expenses and a $0.6 million increase in depreciation expense, both directly related to new store growth. Store expenses as a percentage of sales were 21.0% and 21.7% for the three months ended June 30, 2012 and 2011, respectively. The decrease in store expenses as a percentage of sales was primarily due to a 0.4% decrease in direct store advertising expense as a percentage of sales resulting from a decrease in production costs as we began producing our Health Hotline newsletter and sales flyer in-house in fiscal year 2012. Direct store advertising expense quarter over quarter can further be impacted by the timing and number of newspaper and TV advertisements that occur within the quarter compared to prior quarters. Additionally, store labor related expenses as a percentage of sales decreased by 0.4% for the three months ended June 30, 2012 compared to the same period in the prior year. The above decreases were offset by a 0.1% increase in depreciation expense as a percentage of sales due to the increase in new stores period over period.

Administrative expenses

        Administrative expenses increased $185,000, or 7.2%, to $2.8 million for the three months ended June 30, 2012 compared to $2.6 million for the three months ended June 30, 2011, due to the addition of general and administrative positions to support our store growth. Administrative expenses as a percentage of sales were 3.2% and 3.8% for the three months ended June 30, 2012 and 2011, respectively. The decrease in administrative expenses as a percentage of sales reflects that our general administrative infrastructure is able to support additional store investments and sales without proportionate investments in additional overhead.

Pre-opening and relocation expenses

        Pre-opening and relocation expenses increased $10,000, or 2.2%, in the three months ended June 30, 2012 compared to the same period in the prior year due to the timing of new store openings.

        The number of stores opened, relocated and remodeled were as follows for the periods presented:

 
  Three
months
ended
June 30,
 
 
  2011   2012  

New stores

    3     2  

Relocated stores

         

Remodeled stores

         
           

    3     2  
           

Interest expense

        Interest expense decreased $37,000, or 20.4%, in the three months ended June 30, 2012 compared to the three months ended June 30, 2011 due to a decrease in average borrowings outstanding in the three months ended June 30, 2012, compared to the three months ended June 30, 2011.

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Income taxes

        Our effective tax rate for the three months ended June 30, 2012 and 2011 was 33.9% and 35.2%, respectively. The decrease in our effective income tax rate was due to minor adjustments to the tax provision in the prior year as well as changes in our effective state income tax rate due to different state income tax rates in the states where we operate, the mix of our earnings in those states, and changes in nontaxable net income attributable to noncontrolling interest.

Nine months ended June 30, 2011 compared to the nine months ended June 30, 2012

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

 
  Nine months
ended
June 30,
  Increase
(Decrease)
 
 
  2011   2012   Dollars   Percent  
 
  (Unaudited)
 
 
  (dollars in thousands)
 

Statements of Income Data:

                         

Net sales

  $ 194,407     246,453     52,046     26.8 %

Cost of goods sold and occupancy costs

    137,474     173,769     36,295     26.4  
                     

Gross profit

    56,933     72,684     15,751     27.7  

Store expenses

    42,218     52,667     10,449     24.8  

Administrative expenses

    7,667     8,285     618     8.1  

Pre-opening and relocation expenses

    1,470     1,312     (158 )   (10.7 )
                     

Operating income

    5,578     10,420     4,842     86.8  

Other income (expense):

                         

Dividends and interest income

    8     4     (4 )   (50.0 )

Interest expense

    (574 )   (474 )   100     (17.4 )

Other income, net

    18         (18 )   n/a  
                     

Income before income taxes

    5,030     9,950     4,920     97.8  

Provision for income taxes

    (1,623 )   (3,372 )   (1,749 )   107.8  
                     

Net income

    3,407     6,578     3,171     93.1  

Net income attributable to noncontrolling interest

    (821 )   (902 )   (81 )   9.9  
                     

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 2,586     5,676     3,090     119.5 %
                     

Other Operating Data:

                         

Number of stores at end of period

    46     55              

Store unit count increase period over period

    27.8 %   19.6              

Change in comparable store sales

    4.5 %   11.1              

Net sales

        Net sales increased $52.0 million, or 26.8%, to $246.4 million for the nine months ended June 30, 2012 compared to $194.4 million for the nine months ended June 30, 2011, due to a $30.4 million increase in non-comparable store sales and a $21.6 million, or 11.1%, increase in comparable store sales. The increase in comparable store sales was driven by a 6.9% increase in transaction count and a 4.2% increase in average transaction size at comparable stores. Comparable store average transaction size increased to $34.98 in the nine months ended June 30, 2012 from $33.57 in the nine months ended June 30, 2011.

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Gross profit

        Gross profit totaled approximately $72.7 million for the nine months ended June 30, 2012, compared to $56.9 million for the nine months ended June 30, 2011. Cost of goods sold and occupancy costs increased $36.3 million, or 26.4%, to $173.8 million for the nine months ended June 30, 2012 compared to $137.5 million for the nine months ended June 30, 2011, primarily due to an increase in cost of goods sold and occupancy costs from non-comparable stores. Gross margin increased from 29.3% for the nine months ended June 30, 2011 to 29.5% for the nine months ended June 30, 2012. The increase in gross margin period over period is due to a 0.1% increase in product margin and a 0.1% decrease in occupancy costs as a percentage of sales. Our gross margin increased due to the growth in comparable store sales period over period, as certain fixed costs, primarily occupancy costs, did not increase at the same rate as comparable store sales.

Store expenses

        Store expenses increased $10.5 million, or 24.8%, to $52.7 million in the nine months ended June 30, 2012 from $42.2 million in the nine months ended June 30, 2011 primarily due to expenses associated with new store growth including a $6.2 million increase in salary related expense, a $1.7 million increase in depreciation expense and a $0.4 million increase in utilities. Store expenses as a percentage of sales were 21.4% and 21.7% for the nine months ended June 30, 2012 and 2011, respectively. The decrease was primarily due to a 0.2% decrease in store labor related expenses as a percentage of sales in the nine months ended June 30, 2012 compared to the same period in the prior year. Additionally, direct store advertising expense decreased 0.1% as a percentage of sales resulting from a decrease in production costs as we began producing our Health Hotline newsletter and sales flyer in-house in fiscal year 2012.

Administrative expenses

        Administrative expenses increased $618,000, or 8.1%, to $8.3 million for the nine months ended June 30, 2012 compared to $7.7 million for the nine months ended June 30, 2011, due to the addition of general and administrative positions to support our store growth. Administrative expenses as a percentage of sales were 3.4% and 3.9% for the nine months ended June 30, 2012 and 2011, respectively. The decrease in administrative expenses as a percentage of sales reflects that our general administrative infrastructure is able to support additional store investments and sales without proportionate investments in additional overhead.

Pre-opening and relocation expenses

        Pre-opening and relocation expenses decreased $158,000, or 10.7%, in the nine months ended June 30, 2012 compared to the same period in the prior year due to the timing of new store openings.

        The number of stores opened, relocated and remodeled were as follows for the periods presented:

 
  Nine months
ended
June 30,
 
 
  2011   2012  

New stores

    7     6  

Relocated stores

         

Remodeled stores

    1      
           

    8     6  
           

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Interest expense

        Interest expense decreased $100,000, or 17.4%, in the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011 due to a decrease in average borrowings outstanding in the nine months ended June 30, 2012, compared to the nine months ended June 30, 2011.

Income taxes

        Our effective tax rate for the nine months ended June 30, 2012 and 2011 was 33.9% and 32.3%, respectively. The increase in our effective income tax rate was primarily due to a 2.9% decrease in the percent of our nontaxable net income attributable to noncontrolling interest offset by a decrease in our effective state income tax rate due to different state income tax rates where we operate, and the mix of our earnings in those states, as well as minor adjustments to the tax provision recorded in the prior year.

Year ended September 30, 2010 compared to the year ended September 30, 2011

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

 
  Year ended
September 30,
  Increase (Decrease)  
 
  2010   2011   Dollars   Percent  
 
  (dollars in thousands)
 

Statements of Income Data:

                         

Net sales

  $ 226,910     264,544     37,634     16.6 %

Cost of goods sold and occupancy costs

    159,797     187,162     27,365     17.1  
                     

Gross profit

    67,113     77,382     10,269     15.3  

Store expenses

   
47,162
   
57,610
   
10,448
   
22.2
 

Administrative expenses

    9,631     10,397     766     8.0  

Pre-opening and relocation expenses

    1,293     1,964     671     51.9  
                     

Operating income

    9,027     7,411     (1,616 )   (17.9 )

Other income (expense):

                         

Dividends and interest income

    7     10     3     42.9  

Interest expense

    (967 )   (669 )   298     (30.8 )

Other (expense) income, net

    (4 )   25     29     n/a  
                     

Income before income taxes

    8,063     6,777     (1,286 )   (15.9 )

Provision for income taxes

   
(2,466

)
 
(2,167

)
 
299
   
(12.1

)
                     

Net income

    5,597     4,610     (987 )   (17.6 )

Net income attributable to noncontrolling interest

    (1,189 )   (1,106 )   83     (7.0 )
                     

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 4,408     3,504     (904 )   (20.5 )
                     

Other Operating Data:

                         

Number of stores at end of period

    39     49              

Store unit count increase period over period

    18.2 %   25.6              

Change in comparable store sales

    2.1 %   4.9              

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Net sales

        Net sales increased $37.6 million, or 16.6%, to $264.5 million for the year ended September 30, 2011 compared to $226.9 million for the year ended September 30, 2010 due to a $26.6 million increase in non-comparable store sales and an $11.0 million, or 4.9%, increase in comparable store sales. The increase in comparable store sales was due to a 2.5% increase in transaction count and a 2.4% increase in average transaction size at comparable stores. Comparable store average transaction size increased to $33.92 in the year ended September 30, 2011 from $33.12 in the year ended September 30, 2010.

Gross profit

        Gross profit totaled $77.4 million for the year ended September 30, 2011 compared to $67.1 million for the year ended September 30, 2010. Cost of goods sold and occupancy costs increased $27.4 million, or 17.1%, to $187.2 million for the year ended September 30, 2011 compared to $159.8 million for the year ended September 30, 2010 primarily due to an increase in cost of goods sold and occupancy costs from non-comparable stores. Gross margin decreased from 29.6% for the year ended September 30, 2010 to 29.3% for the year ended September 30, 2011. The decrease in gross margin year over year is primarily due to a 0.2% decrease in product gross margin and a 0.1% increase in occupancy costs as a percentage of sales. The decrease in product gross margin year over year is primarily due to a shift in sales mix at comparable stores. The increase in occupancy costs as a percentage of sales was driven by an increase in non-comparable stores which typically have higher occupancy costs as a percentage of sales.

Store expenses

        Store expenses increased $10.4 million, or 22.2%, to $57.6 million in the year ended September 30, 2011 from $47.2 million in the year ended September 30, 2010. Store expenses as a percentage of sales were 21.8% and 20.8% for the years ended September 30, 2011 and 2010, respectively. The increase in store expenses as a percentage of sales was primary due to an increase in depreciation expense as a percentage of sales, and to a lesser extent, an increase in advertising expense. Depreciation expense as a percentage of sales increased due to the increase in new stores during fiscal year 2011. Direct store advertising expense increased due to an increase in the volume of newspaper advertising as a result of entering new markets. Store labor related expenses as a percentage of sales increased 0.3% for the year ended September 30, 2011 compared to the same period in the prior year.

Administrative expenses

        Administrative expenses increased $766,000, or 8.0%, to $10.4 million for the year ended September 30, 2011 compared to the year ended September 30, 2010, due to the addition of general and administrative positions to support our store growth. Administrative expenses as a percentage of sales were 3.9% and 4.2% for the years ended September 30, 2011 and 2010, respectively. The decrease in administrative expenses as a percentage of sales was less than the percentage increase in sales, as our general administrative infrastructure is able to support additional store investments and sales without proportionate investments in additional overhead.

Pre-opening and relocation expenses

        Pre-opening and relocation expenses increased $671,000, or 51.9%, in the year ended September 30, 2011 compared to the same period in the prior year due to the timing of new store openings. The increase in pre-opening and relocation expenses period over period is primarily due to an increase in the number of new stores in fiscal year 2011 versus fiscal year 2010. Pre-opening and relocation expenses as a percentage of sales was 0.7% and 0.6% for the years ended September 30,

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2011 and 2010, respectively. The number of stores opened, relocated and remodeled were as follows for the periods presented:

 
  Year ended
September 30,
 
 
  2010   2011  

New stores

    6     10  

Relocated stores

    2      

Remodeled stores

        1  
           

    8     11  
           

Interest expense

        Interest expense decreased $298,000, or 30.8%, in the year ended September 30, 2011 compared to the year ended September 30, 2010 due to lower interest rates on the term loan and revolving credit facility. The effect of the decrease in interest rates was partially offset by an increase in average borrowings outstanding in the year ended September 30, 2011, compared to the year ended September 30, 2010.

Income taxes

        Our effective income tax rate for the years ended September 30, 2011 and 2010 was 32.0% and 30.6%, respectively. The increase in our effective income tax rate was primarily due to different state income tax rates in the states where we operate, and the mix of our earnings in those states as well as changes in nontaxable net income attributable to noncontrolling interest.

Net income attributable to noncontrolling interest

        Net income attributable to noncontrolling interest decreased $83,000, or 7.0%, in the year ended September 30, 2011 compared to the year ended September 30, 2010, primarily due to an increase in depreciation expense associated with one store remodel and one store relocation in the year ended September 30, 2010.

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Year ended September 30, 2009 compared to the year ended September 30, 2010

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

 
  Year ended
September 30,
  Increase (Decrease)  
 
  2009   2010   Dollars   Percent  
 
  (dollars in thousands)
 

Statements of Income Data:

                         

Net sales

  $ 206,080     226,910     20,830     10.1 %

Cost of goods sold and occupancy costs

    145,937     159,797     13,860     9.5  
                     

Gross profit

    60,143     67,113     6,970     11.6  

Store expenses

   
41,992
   
47,162
   
5,170
   
12.3
 

Administrative expenses

    8,619     9,631     1,012     11.7  

Pre-opening and relocation expenses

    1,236     1,293     57     4.6  
                     

Operating income

    8,296     9,027     731     8.8  

Other income (expense):

                         

Dividends and interest income

    12     7     (5 )   (41.7 )

Interest expense

    (1,146 )   (967 )   179     (15.6 )

Other (expense) income, net

    (72 )   (4 )   68     (94.4 )
                     

Income before income taxes

    7,090     8,063     973     13.7  

Provision for income taxes

   
(2,039

)
 
(2,466

)
 
(427

)
 
20.9
 
                     

Net income

    5,051     5,597     546     10.8  

Net income attributable to noncontrolling interest

    (1,513 )   (1,189 )   324     (21.4 )
                     

Net income attributable to Vitamin Cottage Natural Food Markets, Inc. 

  $ 3,538     4,408     870     24.6  
                     

Other Operating Data:

                         

Number of stores at end of period

    33     39              

Store unit count increase period over period

    22.2 %   18.2              

Change in comparable store sales

    2.6 %   2.1              

Net sales

        Net sales increased $20.8 million, or 10.1%, to $226.9 million for the year ended September 30, 2010 compared to $206.1 million for the year ended September 30, 2009, driven by a $16.6 million increase in non-comparable store sales and a $4.2 million, or 2.1%, increase in comparable store sales. The increase in comparable store sales was due to a 2.5% increase in transaction count and a 0.4% decrease in average transaction size driven primarily by the effects of the overall economic recession. Comparable store average transaction size decreased to $33.35 in the year ended September 30, 2010 from $33.50 in the year ended September 30, 2009.

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Gross profit

        Gross profit totaled $67.1 million for the year ended September 30, 2010 compared to $60.1 million for the year ended September 30, 2009. Cost of goods sold and occupancy costs increased $13.9 million, or 9.5%, to $159.8 million for the year ended September 30, 2010 compared to $145.9 million for the year ended September 30, 2009, primarily due to an increase in cost of goods sold and occupancy costs from non-comparable stores. Gross margin increased from 29.2% for the year ended September 30, 2009 to 29.6% for the year ended September 30, 2010. The increase in gross margin year over year is primarily due to an increase in product gross margin. Occupancy costs increased 0.1% in the year ended September 30, 2010 compared to the year ended September 30, 2009, the increase in fiscal year 2010 resulted from the increase in new store openings, which typically have higher occupancy costs as a percentage of sales.

Store expenses

        Store expenses increased $5.2 million, or 12.3%, to $47.2 million in the year ended September 30, 2010 from $42.0 million in the year ended September 30, 2009. Store expenses as a percentage of sales were 20.8% and 20.4% for the years ended September 30, 2010 and 2009, respectively. The increase in store expenses as a percentage of sales was primarily due to an increase in depreciation expense as a percentage of sales, and to a lesser extent, an increase in advertising expense as a percentage of sales. Depreciation expense as a percentage of sales increased due to the number of new and relocated stores in fiscal year 2010. Direct store advertising expense increased due to an increase in the volume of newspaper advertising as a result of entering new markets. These increases were offset by a 0.2% decrease in store labor related expenses as a percentage of sales for the year ended September 30, 2010 compared to the same period in the prior year.

Administrative expenses

        Administrative expenses increased $1.0 million, or 11.7%, to $9.6 million for the year ended September 30, 2010 compared to the year ended September 30, 2009, driven by an increase in general and administrative labor related expenses and an increase in software related expenses. Labor related expenses increased due to the addition of general and administrative positions to support our store growth. The increase in software related expenses was driven by our implementation of an ERP system which was completed during fiscal year 2010. Administrative expenses as a percentage of sales was 4.2% for both the years ended September 30, 2010 and 2009. Administrative expenses as a percentage of sales remained flat year over year as the increase in software related expense was offset by a decrease in general and administrative labor related expense as a percentage of sales.

Pre-opening and relocation expenses

        Pre-opening and relocation expenses increased $57,000, or 4.6%, to $1.3 million in the year ended September 30, 2010 compared to the year ended September 30, 2009 due to the timing of new store openings. The increase in pre-opening and relocation expenses period over period is primarily due to an increase in the number of new and relocated stores in fiscal year 2010 versus fiscal year 2009. Pre-opening and relocation expenses as a percentage of sales was 0.6% for both the years ended September 30, 2010 and 2009.

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        The number of stores opened, relocated and remodeled were as follows for the periods presented:

 
  Year ended
September 30,
 
 
  2009   2010  

New stores

    6     6  

Relocated stores

        2  

Remodeled stores

         
           

    6     8  
           

Interest expense

        Interest expense decreased $179,000, or 15.6%, in the year ended September 30, 2010 compared to the year ended September 30, 2009 due to lower interest rates on the term loan and revolving credit facility resulting from an amendment to our credit facility in June 2010. The effect of the decrease in interest rates was partially offset by an increase in average borrowings outstanding in the year ended September 30, 2010 compared to the year ended September 30, 2009.

Income taxes

        Our effective income tax rate for the year ended September 30, 2010 and 2009 was 30.6% and 28.8%, respectively. The increase in our effective income tax rate was primarily due to different state income tax rates in the states where we operate and the mix of our earnings in those states as well as changes in nontaxable net income attributable to noncontrolling interest.

Net income attributable to noncontrolling interest

        Net income attributable to noncontrolling interest decreased $324,000, or 21.4%, in the year ended September 30, 2010 compared to the year ended September 30, 2009 due to an increase in the management fee paid by BVC to the operating company in the year ended September 30, 2010. Additionally, BVC incurred pre-opening and relocation expenses in the year ended September 30, 2010 in connection with the remodel of one store and the relocation of a second store.

Quarterly Results

        The following table sets forth certain unaudited financial data and other operating data in each fiscal quarter during fiscal years 2010 and 2011 and the first and second quarters of fiscal year 2012. The unaudited quarterly information includes all normal recurring adjustments that we consider necessary for a fair presentation of the information shown. This information should be read in conjunction with the audited consolidated and unaudited consolidated financial statements and related notes thereto appearing elsewhere in this prospectus.

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  Fiscal Year 2010   Fiscal Year 2011   Fiscal Year 2012  
 
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  First
Quarter
  Second
Quarter
  Third
Quarter
  Fourth
Quarter
  First
Quarter
  Second
Quarter
  Third
Quarter
 
 
  (Unaudited)
 
 
  (dollars in thousands)
 

Statements of Income Data:

                                                                   

Net sales

  $ 54,619     57,502     57,050     57,739     60,618     66,211     67,578     70,137     74,839     84,907     86,707  

Gross profit

    15,961     17,041     16,925     17,186     17,657     19,526     19,750     20,449     21,600     25,684     25,400  

Operating income

    2,262     2,757     2,231     1,777     1,610     1,875     2,093     1,833     2,020     4,417     3,983  

Other Operating Data:

                                                                   

Change in comparable store sales

    2.7 %   0.8     2.1     2.6     3.1     4.8     5.5     6.1     8.6     11.6     13.0  

Number of stores at end of period

    34     35     36     39     41     43     46     49     51     53     55  

Liquidity and Capital Resources

        Our primary sources of liquidity are cash generated from operations and borrowings under our revolving credit facility. Our primary uses of cash are for purchases of inventory, operating expenses, capital expenditures primarily for opening new stores, debt service and corporate taxes. As of June 30, 2012, we had $3.3 million in cash and cash equivalents as well as $11.2 million available under our revolving credit facility. We plan to continue to open new stores, which has and may require us to borrow additional amounts under our revolving credit facility in the future. We plan to spend approximately $7 million to $9 million on capital expenditures during the remaining three months of fiscal year 2012 in association with the opening of four new stores, one store relocation and the relocation of our bulk food repackaging facility and distribution center. We believe that the cash generated from operations, together with the borrowing availability under our revolving credit facility, will be sufficient to meet our working capital needs and 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.

        As discussed below, a portion of the proceeds from our initial public offering will be used to repay our term loan and all outstanding amounts under our revolving credit facility.

        Following is a summary of our operating, investing and financing activities for the periods presented:

 
  Year ended September 30,   Nine months ended
June 30,
 
 
  2009   2010   2011   2011   2012  
 
   
   
   
  (Unaudited)
 
 
  (in thousands)
 

Net cash provided by operating activities

  $ 11,605     7,648     16,741     10,783     18,040  

Net cash used in investing activities

    (9,002 )   (11,598 )   (20,512 )   (14,011 )   (12,072 )

Net cash (used in) provided by financing activities

    (4,182 )   2,256     3,703     3,342     (3,045 )
                       

Net (decrease) increase in cash and cash equivalents

    (1,579 )   (1,694 )   (68 )   114     2,923  
                       

Cash and cash equivalents, beginning of period

    3,719     2,140     446     446     378  
                       

Cash and cash equivalents, end of period

  $ 2,140     446     378     560     3,301  
                       

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Operating Activities

        Cash provided by operating activities consists primarily of net income adjusted for non-cash items, including depreciation, changes in deferred taxes and the effect of working capital changes. Cash provided by operating activities increased $7.3 million, or 67.3%, to $18.0 million in the nine months ended June 30, 2012, from $10.8 million in the nine months ended June 30, 2011. The increase in cash provided by operating activities was primarily due to an increase in net income adjusted for non-cash items as well as changes in working capital driven by fluctuations in the timing of payment on accounts payable, accrued expenses and inventory purchases.

        Cash provided by operating activities increased $9.1 million, or 118.9%, to $16.7 million in the year ended September 30, 2011 compared to $7.6 million in the year ended September 30, 2010. The increase in cash provided by operating activities period over period was due to an increase in net income adjusted for non-cash items and changes in working capital. The changes in working capital period over period were driven by fluctuations in the timing of accounts payable, inventory and the timing of amounts received for tenant allowances. Our working capital requirements for inventory will likely continue to increase as we continue to open new stores.

        Cash provided by operating activities decreased $4.0 million, or 34.1%, to $7.6 million in the year ended September 30, 2010 compared to $11.6 million in the year ended September 30, 2009. The decrease in cash provided by operating activities was primarily due to changes in working capital driven by fluctuations in the timing of payments on accounts payable, income tax receivables and the timing of amounts received for tenant allowances, offset by an increase in net income adjusted for non-cash items.

Investing Activities

        Cash used in investing activities consists primarily of capital expenditures. Cash used in investing activities decreased $1.9 million, or 13.8%, to $12.1 million in the nine months ended June 30, 2012 from $14.0 million in the nine months ended June 30, 2011. The decrease is primarily due to a $459,000 decrease in capital expenditures in the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011, driven by the timing of capital expenditures related to new stores that opened in and around the nine months ended June 30, 2012 and 2011. Additionally, we received approximately $596,000 in proceeds from the sale of land and $930,153 in payments received on notes payable—related party and split dollar life insurance premiums in the nine months ended June 30, 2012, refer to Notes 3 and 5, respectively, of our unaudited interim financial statements included elsewhere in this prospectus.

        We opened six new stores in the nine months ended June 30, 2012 and currently plan to open an additional four new stores, relocate one store and move our bulk food repackaging facility and distribution center to a larger space in the remaining three months of fiscal year 2012. We plan to spend approximately $7 million to $9 million on capital expenditures during the remaining three months of fiscal year 2012 in association with the four new stores and two relocations.

        Cash used in investing activities increased $8.9 million, or 76.9%, to $20.5 million in the year ended September 30, 2011 from $11.6 million in the year ended September 30, 2010 and is directly attributed to a $9.0 million increase in capital expenditures associated with the increase in new and remodeled stores period over period.

        Cash used in investing activities increased $2.6 million, or 28.8%, to $11.6 million in the year ended September 30, 2010 from $9.0 million in the year ended September 30, 2009 and is directly attributed to a $2.5 million increase in capital expenditures associated with the increase in new and relocated stores period over period.

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Financing Activities

        Cash used in and provided by financing activities consists primarily of borrowings and payments under our revolving credit facility. Cash used in financing activities increased $6.4 million to $3.0 million in the nine months ended June 30, 2012 compared to $3.3 million in cash provided by financing activities in the nine months ended June 30, 2011. The increase in cash used in financing activities period over period is primarily due to a $1.2 million increase in repayments and a $5.0 million decrease in borrowings under our credit facility. Distributions to noncontrolling interests decreased $360,000 in the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. Additionally, we paid $558,000 in equity issuance costs associated with this offering in the nine months ended June 30, 2012.

        Cash provided by financing activities increased $1.4 million, or 64.1%, to $3.7 million in the year ended September 30, 2011 compared to $2.3 million in the year ended September 30, 2010. The increase in cash provided by financing activities period over period is primarily due to a $658,000 increase in borrowings and a $500,000 decrease in repayments under our credit facility.

        Cash provided by financing activities increased $6.4 million to $2.3 million in year ended September 30, 2010 compared to $4.2 million of cash used in financing activities for the year ended September 30, 2009. The increase in cash provided by financing activities period over period is primarily due to a $3.2 million increase in borrowings and a $2.3 million decrease in repayments under our credit facility and a $945,000 decrease in distributions to noncontrolling interest.

        For the fiscal years ended September 30, 2011, 2010 and 2009, we made distributions of $1.0 million, $1.1 million and $2.0 million, respectively, to noncontrolling interests. We made distributions to noncontrolling interests of $810,000 and $450,000 in the nine months ended June 30, 2011 and 2012, respectively. Following our acquisition of the 45% noncontrolling interest in BVC in connection with this offering, these distributions will cease.

Credit Facility and Notes Payable—Related Party

Credit Facility

        We are a party to a credit facility consisting of a revolving credit facility and a term loan. JPMorgan Chase Bank, N.A. serves as the lender and administrative agent under the credit facility.

        We intend to use a portion of the proceeds from this offering to repay the term loan and all outstanding amounts under our revolving credit facility, as described in "Use of Proceeds."

        The credit facility requires compliance with certain operational and financial covenants (including a leverage ratio, a fixed charge coverage ratio and a revenue ratio). The 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. The agreement also prohibits us from declaring and paying cash dividends. As of June 30, 2012 we were in compliance with the debt covenants.

        Following the Reorganization, Natural Grocers by Vitamin Cottage, Inc. will become a party to the credit facility.

        Revolving Credit Facility.    We have a $21.0 million revolving credit facility which matures on June 30, 2014. We had approximately $9.8 million outstanding on the revolving credit facility and $11.2 million available for borrowing as of June 30, 2012. The commitment fee is 0.375% for any amounts not borrowed under the revolving credit facility. Interest is determined by the lender's administrative agent and is stated at the adjusted LIBOR rate for the interest period plus the lender spread. The lender spread can also be reduced by the lender subject to us meeting certain financial

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measures. The average annual interest rate for the nine months ended June 30, 2011 and 2012 was 2.72% and 2.54%, respectively.

        Term Loan.    The term loan commitment was initially set at $21.0 million. We had approximately $15.8 million outstanding as of June 30, 2012. We are required to make quarterly principal payments of $125,000 on the term loan. Interest is determined by the lender's administrative agent and is stated at the base rate for the interest period plus the applicable lender spread. The average annual interest rate for the nine months ended June 30, 2011 and 2012 was 2.21% and 2.05%, respectively. As noted above, we intend to pay off the term loan with proceeds from this offering.

Notes Payable—Related Party

        We have two outstanding unsecured notes payable to related parties, which bear interest at 5.33% annually and mature in October 2013. As of June 30, 2012, $442,000 remained outstanding under the note payable to Philip Isely and $345,000 remained outstanding under the note payable to The Margaret A. Isely Spouse's Trust.

Contractual Obligations

        The following table summarizes our contractual obligations as of June 30, 2012:

 
  Payments Due by Period  
 
  Total   Less than
1 year
  1 - 3 years   3 - 5 years   More than
5 years
 
 
  (in thousands)
 

Long-term debt obligations(1)

  $ 26,410     1,085     25,325          

Interest payments(2)

    1,168     602     566          

Operating leases(3)

    123,290     11,986     23,312     22,243     65,749  

Contractual obligations for construction-related activities(4)

    3,829     3,829              
                       

  $ 154,697     17,502     49,203     22,243     65,749  
                       

(1)
Reflects the outstanding balance under our revolving credit facility, term loan and related party notes payable as of June 30, 2012. Our revolving credit facility balance fluctuates as we routinely draw new advances or make payments against outstanding advances based on our liquidity. We intend to use a portion of the proceeds from this offering to repay the term loan and all outstanding amounts under our revolving credit facility. See "Use of Proceeds."

(2)
The outstanding balances under the term loan and revolving credit facility bear interest at the one-month LIBOR plus an applicable margin. For purposes of this table, we assumed the interest payments to be paid during the remainder of the term loan using an interest rate of 2.05%, which was the average annual interest rate for the nine months ended June 30, 2012. We assumed the interest payments to be paid during the remainder of the revolving credit facility using (i) an interest rate of 2.16% on amounts outstanding as of June 30, 2012, which was the average annual interest rate for the nine months ended June 30, 2012 and (ii) an unused commitment fee of 0.375% for amounts not borrowed as of June 30, 2012. We assumed an interest rate of 5.33% annually on the notes payable to related parties. In addition, amounts do not give effect to the expected repayment of the term loan and outstanding amounts under our revolving credit facility with the proceeds from this offering.

(3)
Represents the minimum lease payments due under our operating leases, excluding annual common area maintenance, insurance and taxes related to our operating lease obligations. For a

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(4)
Construction obligations for construction-related activities include future payments to general contractors that are legally binding on us as of June 30, 2012 and relate to new store construction.

Off-Balance Sheet Arrangements

        As of June 30, 2012, our off-balance sheet arrangements consist of operating leases and the undrawn portion of our revolving credit facility, refer to Note 2 of our unaudited consolidated financial statements included elsewhere in this prospectus. All of our stores, bulk food repackaging facility and distribution center and administrative facilities are leased, and as of June 30, 2012, all leased properties were classified as operating leases in our consolidated financial statements. Refer to Note 11 to our audited consolidated financial statements included elsewhere in this prospectus for detailed information regarding our operating leases. We have no other off-balance sheet arrangements that have had, or are reasonably likely to have, a material current or future effect on our consolidated financial statements or financial condition.

Recent Accounting Pronouncements

        In May 2011, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, which amends Accounting Standards Codification, or ASC, 820, Fair Value Measurement. The amended guidance changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, the amendments clarify the FASB's intent about the application of existing fair value measurement requirements. The guidance provided in ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011 and is applied prospectively. The provisions were effective in our second quarter of fiscal year 2012. The adoption of these provisions did not have a significant effect on our consolidated financial statements.

        In June 2011, the FASB issued ASU No. 2011-05, Presentations of Comprehensive Income, which amends ASC 220, Comprehensive Income. The update eliminates the option of presenting the components of other comprehensive income as part of the statement of stockholders' equity. Instead, comprehensive income must be reported either in a single continuous statement of comprehensive income, which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the implementation requirement in ASU No. 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. The amended guidance specifies that entities should continue to report reclassifications out of accumulated other comprehensive income consistent with presentation requirements in effect before ASU No. 2011-05. The guidance provided in ASU No. 2011-05 and ASU No. 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The provisions were effective in our second quarter of fiscal year 2012. The adoption of these provisions had no effect on our consolidated financial statements.

Critical Accounting Policies

        The preparation of our consolidated financial statements in conformity with U.S. 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

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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. 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 Internal Revenue Service 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 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.

Impairment of Long-Lived Assets

        We assess our long-lived assets, principally property and equipment, for possible impairment 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

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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.

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 term loan and revolving credit facility. Our term loan and revolving credit facility carry floating interest rates that are tied to one month LIBOR, and therefore, our statements of income and our cash flows are exposed to changes in interest rates. Based upon a sensitivity analysis at June 30, 2012, a hypothetical 100 basis point change in interest rates would change our annual interest expense by approximately $260,000.

        As noted above, we expect to use the proceeds from this offering to pay off our term loan and repay outstanding amounts under our revolving credit facility. Accordingly, we expect our interest rate exposure to decrease following this offering until we borrow additional amounts under our revolving credit facility. We do not use derivative financial instruments for speculative or trading purposes; however, this does not preclude our adoption of specific hedging strategies in the future.

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BUSINESS

Our Company

        Natural Grocers is a rapidly 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:

        We have significantly expanded from 27 stores in three states as of September 30, 2008 to 55 stores in 11 states as of June 30, 2012, including Colorado, Idaho, Kansas, Missouri, Montana, Nebraska, New Mexico, Oklahoma, Texas, Utah and Wyoming. We successfully opened six, six and ten new stores during the fiscal years ended September 30, 2009, 2010 and 2011, respectively, and six new stores in the nine months ended June 30, 2012. We plan to open four new stores in the remainder of fiscal year 2012. As of June 30, 2012, we had over 40 consecutive quarters of positive comparable store sales growth, including comparable store sales growth of 2.6%, 2.1% and 4.9% for the fiscal years ended September 30, 2009, 2010 and 2011, respectively, and 11.1% for the nine months ended June 30, 2012 compared to the nine months ended June 30, 2011. Our growth has been further evident during the recent economic cycle, with attractive compound annual growth rates of 13.3% and 10.4% in net sales and EBITDA (a non-GAAP measure), respectively, from fiscal year 2009 to fiscal year 2011. Over the same period, our net sales increased from $206.1 million to $264.5 million, net income decreased from $5.1 million to $4.6 million and EBITDA increased from $12.4 million to $15.1 million.

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 initially started by lending books on nutrition and providing samples of whole grain bread door-to-door in Golden, Colorado and ultimately 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 in order to support 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.

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

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        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 55 stores in 11 states as of June 30, 2012. 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 large and stable U.S. grocery industry. This industry includes conventional, natural, gourmet and specialty food markets, mass and discount retailers, warehouse clubs, independent health food stores, dietary supplement retailers, drug stores, farmers markets, mail order and online retailers, and multi-level marketers. According to the Nutrition Business Journal, a nutrition industry publication, total food sales in the U.S. were $631.9 billion in 2010, an increase of 0.7% over 2009.

        Natural and organic food sales in the U.S. have grown at a faster rate than total food sales in the U.S. According to the Nutrition Business Journal:

        The dietary supplement industry has also experienced significant sales growth. According to the Nutrition Business Journal:

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

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 18,000 SKUs of natural and organic products per store, including an average of approximately 7,000 SKUs of dietary supplements. We believe this product offering enables our customers to utilize our stores for 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 products that are known to contain artificial colors, flavors, preservatives, sweeteners, or partially hydrogenated or hydrogenated oils. Consistent with this strategy, our merchandise selection does not include conventional products or merchandise that does 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 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 consistently offer exceptional customer service in a shopper-friendly environment, which we believe creates a differentiated shopping experience and generates repeat visits from our loyal customer base. Our customer service model is focused on providing free nutrition education to our customers. 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 associates, Health Hotline newsletter and sales flyer, one-on-one nutrition health coaching and nutrition classes. Our commitment to nutrition education and customer empowerment is emphasized throughout our entire organization, from executive management to store associates. Every store also maintains a Nutritional Health Coach position. The Nutritional Health Coach is responsible for training our store associates and educating our customers in accordance with applicable local, state and federal regulations. Each Nutritional Health Coach must have earned a degree or certificate in nutrition, human sciences or a related field from an accredited school, complete continuing education in

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nutrition, and be thoroughly committed to fulfilling our mission. Substantially all of our Nutritional Health Coaches are full-time employees. We believe our Nutritional Health Coach position is unique within our industry and 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 quickly grow our store base. Our store model is 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. 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 site selection. Our limited offering of prepared foods also reduces real estate costs, labor costs and perishable inventory shrink and allows us to quickly leverage our new store opening costs.

        Experienced and committed team with proven track record.    Our executive management team has an average of 35 years of experience in the natural grocery industry, while our entire management team has an average of over 27 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 to 55 stores as of June 30, 2012 while 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 June 30, 2012, 39% of our store managers at stores open for 13 months or longer have tenures of over four years with us, and our store and department managers at these stores have average tenures of three to four 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 improving operations and driving efficiencies.

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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 customer analytics firm The Buxton Company, we believe the entire U.S. market can support at least 1,100 Natural Grocers stores, including over 180 additional Natural Grocers stores in the 12 states in which we currently operate or have signed leases. In fiscal year 2011, we opened ten new stores, and we plan to open a total of ten new stores in fiscal year 2012. We intend to target new store openings at or above these levels over the near term.

GRAPHIC

        *Includes signed leases: three leases in Arizona, two leases in Montana, one lease in Colorado, one lease in Texas and one lease in Nebraska.

        Increase sales from existing customers.    We have achieved positive comparable store sales growth for over 40 consecutive quarters. In order to increase our average ticket and the number of customer transactions, we plan to continue offering an engaging customer experience through science-based nutrition education and a differentiated merchandising strategy of delivering affordable, high-quality natural and organic grocery products and dietary supplements. We also plan to utilize targeted marketing efforts to 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.    We plan to continue building our brand awareness, which we anticipate will grow our customer base. We believe offering nutrition education has historically been one of our most effective marketing efforts to reach new customers and increase the demand for natural and organic groceries and dietary supplements in our markets. We intend to enhance potential customers' nutrition knowledge through targeted marketing efforts, including the distribution of our Health Hotline newsletter and sales flyer, the Internet and social media, as well as an expansion of our educational outreach efforts in schools, businesses and communities, offering lectures, classes, printed and online educational resources and publications, health fairs and community wellness events. In addition to offering nutrition education, we intend to attract new customers with our everyday affordable pricing and to build community awareness through our support of local vendors and charities.

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

Our Stores

        Our stores offer a comprehensive selection of natural and organic groceries and dietary supplements in a small-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 natural and organic products and that we are their primary choice for natural and organic groceries and dietary supplements.

        Our Store Format.    Our stores range from 5,000 to 14,500 selling square feet, and a typical new store averages approximately 9,500 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 and lecture space. Our stores sell an average of approximately 18,000 SKUs of natural and organic products per store, including an average of approximately 7,000 SKUs of dietary supplements.

        The following diagram depicts a typical new store layout:

GRAPHIC

        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 site selection model incorporates factors such as target

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demographics, community characteristics, nearby retail activity and other measures in determining viable new store locations and is based on first-hand observation of the community's characteristics surrounding each site. We have a team of associates dedicated to opening new stores efficiently and quickly, typically within nine months from the time of site selection.

        Store Level Economics.    Our new stores require an upfront capital investment of approximately $1.9 million, consisting of capital expenditures of approximately $1.5 million, net of tenant allowances, initial inventory of approximately $300,000, net of payables and pre-opening expenses of approximately $150,000. For our new stores, we target: (1) approximately four years to recoup our initial net cash investment and (2) over 35% cash-on-cash returns by the end of the fifth year following the opening. Our payback period and cash-on-cash return targets assume average annual store-level profit and new store investment levels consistent with our stores that have been opened since January 1, 2005 that satisfy our current site selection guidelines.

        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 associates. 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 are a core element of our nutrition education program. Most of our stores are staffed with a full-time Nutritional Health Coach to educate customers and train associates on nutrition. Nutritional Health Coaches must have earned a degree or certificate in nutrition, human sciences or a related field from an accredited school, complete continuing education in nutrition, and be thoroughly committed to fulfilling our mission. Our Nutritional Health Coaches provide free one-on-one nutrition health coaching to educate and empower customers to make informed nutrition choices. Each Nutritional Health Coach is also responsible for various educational outreach activities, such as nutrition classes, lectures, seminars, health fairs and store tours. Our training and education programs are supplemented by outside experts, online materials and printed handouts. For our associates, our Nutritional Health Coaches are an onsite resource for nutrition training and education. Each Nutritional Health Coach trains our associates on using a compliant educational approach to customer service without attempting to diagnose or treat.

        Additionally, we 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.

Our Products

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

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        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 via 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 need to sell conventional products to fill our selection, increase our margins, or draw in more customers.

        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 year ended September 30, 2011:

GRAPHIC

        The products in our stores include:

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        Quality Assurance.    We endeavor to ensure the quality of the products we sell. We work with reputable suppliers we believe to be in compliance 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 FDA 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.

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        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. We operate all of our stores in compliance with National Organic Program standards, which require segregation of organic and conventional products, restricted use of certain substances for cleaning and pest control, and rigorous recordkeeping, among other requirements.

Our Pricing Strategy

        We have an everyday affordable pricing strategy, while also providing special sale pricing on hundreds of additional items. We believe our everyday affordable pricing strategy allows our customers to shop our stores on a regular basis for their groceries and dietary supplements.

        Our pricing strategies include the following:

        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 continually strive to keep our product, operating and general and administrative costs low in order to continue to offer attractive pricing for our customers.

Our Store Operations

        Store Hours.    Our stores are open seven days a week, generally from 8:56 a.m. to 8:04 p.m. Monday through Saturday, and Sunday from 9:56 a.m. to 6:06 p.m.

        Store Management and Staffing.    Our stores are managed by a manager and assistant manager, with department managers in each of the dietary supplement, grocery, dairy and frozen, produce, body care and receiving departments. Each store manager is responsible for managing their 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 12 to 15 stores.

        Each store is staffed with several non-management associates. To ensure a high level of service, associates receive ongoing nutrition training. Associates are carefully trained and evaluated to ensure they present nutrition information in an appropriate and legally compliant educational context while interacting with customers. Additionally, store associates are cross-trained in various functions, including cashier duties, stocking and receiving product.

        All associates are eligible to participate in our incentive compensation plan after 90 days of employment for management level associates and after one year of employment for non-management level associates. The criteria for incentive compensation include meeting sales projections, sales to labor hour goals and cost of goods sold metrics, which help align all store associates with both corporate and store-level financial goals. We have an established set of operating procedures, which includes 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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        Every store also maintains a Nutritional Health Coach position. The Nutritional Health Coach is responsible for training our store associates and educating our customers in accordance with applicable local, state and federal regulations. Substantially all of our Nutritional Health Coaches are full-time employees.

        Bulk Food Repackaging Facility and Distribution Center.    We operate a 42,000 square foot bulk food repackaging facility and distribution center in Englewood, Colorado. The facility handles several different operational functions, including distribution of a limited number of grocery and dietary supplement lines. The facility also houses our private label bulk foods repackaging lines. We plan to move to a new 107,000 square foot bulk food repackaging facility and distribution center in Golden, Colorado during the fourth quarter of fiscal year 2012. The distribution center maintains a small fleet of commercial delivery trucks for use primarily within Colorado.

        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 over 500 suppliers, which include over 1,950 brands. These suppliers range from small mom-and-pop businesses to multi-national conglomerates. As of September 30, 2011, we purchased approximately 78.4% of the goods we sell from our top 20 suppliers.

        We contract with third-party manufacturers to produce groceries and dietary supplements under our private labels, which include the Natural Grocers, Vitamin Cottage, Clarion and Builders Foundation 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.

        For the year ended September 30, 2011, approximately 46.4% of our total purchases were from United Natural Foods Inc., or UNFI. In addition, 6.6% of our purchases were from Albert's Organics, a subsidiary of UNFI that distributes fresh produce and meat. We maintain good relations with UNFI and believe we have adequate alternative supply methods, including self-distribution.

Our Associates

        Commitment to our associates is one of our five founding principles. Associates are eligible for health, disability and dental insurance coverage after they meet eligibility requirements. We believe we pay above average retail wages, and all associates 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 associates live a healthy, balanced lifestyle, and we believe the Vitamin Bucks incentive provides an additional resource for our associates to purchase natural and organic products. This further offers our associates the opportunity to become more familiar with our products, which we believe improves the customer service our associates are able to provide. Additionally, associates are offered a 401(k) retirement savings plan. We believe these and other factors result in higher retention rates and encourage our associates to appreciate our culture, which helps them better promote our brand.

        As of June 30, 2012, we employed 1,290 full-time and 264 part-time (less than 30 hours per week) associates, including 147 associates at our home office. None of our associates are subject to a collective bargaining agreement. We believe we have good relations with our associates.

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Our Customers

        The growth in the natural and organic grocery and dietary supplement industries and growing consumer interest in health and nutrition has led to an increase in our core customer base. We believe the demand 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 customer prefers 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 associates to be highly knowledgeable about these topics and related products.

        An analysis of our Health Hotline subscriber database indicates that our customers come from broad geographic segments, including urban, suburban, second city 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:

Marketing, Advertising and Online Sales

        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 our customers.

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        Health Hotline.    At the heart of our marketing efforts is our Health Hotline, a 20-page newsletter and sales flyer which is published eight times a year and mailed to nearly 140,000 subscribers by U.S. Mail. In addition, over 1.5 million abridged versions of the Health Hotline are inserted into the Sunday newspaper of many of our communities 35 times per year, and an email version is distributed approximately twice a month to over 36,000 subscribers. The Health Hotline contains a mix of six to eight in-depth health and nutrition articles, along with a selection of popular sale items. The articles are relevant, science-based and written to reflect the most recent research findings. 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. We believe both store visits and online sales increase when the Health Hotline is published.

        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 believe the continued growth of site visitors, page views and other metrics of our website shows that our content is timely and compelling to our communities. Our website is interlinked with other online and social media outlets, including Facebook, Foursquare, Google Places, YELP, Twitter, Pinterest and others.

        Television Commercials.    We occasionally run television commercials in our markets. The spots are shot locally and primarily feature members of the Isely family.

        Online Sales.    Our e-commerce sales department provides customers with access to an extensive selection of dietary supplements, body care, dry grocery and bulk food products primarily through www.naturalgrocers.com and www.vitamincottage.com. Internet sales accounted for less than 1% of our total sales in fiscal year 2011. All orders and inquiries generated via the Internet are handled by our Internet sales associates. Our Internet sales associates receive the same high level of education and training as our store associates, and they provide our online customers the same high-quality customer service offered in our stores.

Properties

        As of June 30, 2012, we had 55 stores located in 11 states, as shown in the chart below:

State
  Number
of Stores
 
State
  Number
of Stores
 
Colorado     30   New Mexico     4  
Idaho     1   Oklahoma     1  
Kansas     3   Texas     10  
Missouri     1   Utah     1  
Montana     1   Wyoming     2  
Nebraska     1            

        In fiscal year 2011, we opened ten new stores, and we plan to open a total of ten new stores in fiscal year 2012. We opened six new stores in the nine months ended June 30, 2012 and plan to open an additional four new stores in the remaining three months of fiscal year 2012. We have signed leases for all four of the new stores expected to open in fiscal year 2012 and four additional leases signed for stores expected to open in fiscal year 2013.

        Our home office is located in Lakewood, Colorado. We occupy our home office under a lease for approximately 35,000 square feet that expires in 2026; this facility is co-located with one of our stores.

        All of our stores and facilities are leased, with varying terms and renewal options. The typical lease term is between ten and 15 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

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leases for our stores, none expire in fiscal 2012, four expire in fiscal 2013, two expire in fiscal 2014 and the remainder will expire between fiscal 2015 and 2028. We expect that we will be able to renegotiate these leases or relocate these stores as necessary.

        In addition to new store openings, we remodel or relocate stores periodically in order to improve performance. For fiscal year 2012, we have no stores scheduled for remodel and one store scheduled to be relocated.

Competition

        The food retail business is a large, highly-fragmented and competitive industry. Our competition varies by market and includes conventional supermarkets such as Kroger and Safeway, mass or discount retailers such as Walmart 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, mail order and online retailers, and multi-level marketers. Each of these outlets competes with us on the basis of price, selection, quality, customer service, shopping experience or any combination of these factors. We believe our commitment to carrying only carefully vetted, affordably priced and high-quality natural and organic products and dietary supplements differentiates us in the industry.

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, automobile and general liability, product liability, director and officers' 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 on an ongoing basis to ensure we maintain adequate levels of coverage.

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 for "Vitamin Cottage," "Vitamin Cottage Natural Grocers" and "Health Hotline" for appropriate categories of trade. We do not own or license for use any patents, franchises or concessions on which our business depends. Our trademarks are generally valid and may be renewed indefinitely as long as they are in use and/or their registrations are property 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 SAP enterprise resource planning 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. We completed our Company-wide SAP implementation in fiscal year 2010 including software to manage inventory management capability, such as purchasing, planning, receiving and production planning, and increased accounting and reporting functions, aided by the implementation of

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a data warehouse. Our ERP system application support and hardware are outsourced which allows us to focus on our core business.

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 Food and Drug Administration, or the FDA, the Federal Trade Commission, or the FTC, the United States Department of Agriculture, or 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, or 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, or 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, however, 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 U.S. 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 FSMA, the FDA issued draft guidance in July of 2011, which attempts to clarify when an ingredient will 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. In particular, the new guidance may cause dietary supplement products available in the market before DSHEA to now be classified to include a "new dietary ingredient" if the dietary supplement product was produced using manufacturing processes different from those used in 1994.

        DSHEA also empowered the FDA to establish binding 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/or general well-being of the body. 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.

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        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 Food Safety Modernization Act, or FSMA. The FSMA requires the FDA to issue regulations mandating that risk-based preventive controls be observed by the majority of food producers. This authority 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 requires 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 instructs 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 augments the FDA's ability to access producers' records and suppliers' records which could permit the FDA to identify areas of concern it had not previously considered to be problematic for our suppliers and contract manufacturers. The FSMA 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 is also likely to result in 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.

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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/or insurance from our suppliers and contract manufacturers. 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 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 associates 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 role 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.

Legal Proceedings

        We periodically are involved in various legal proceedings that are incidental to the conduct of our business, including but not limited to employment discrimination claims and customer injury claims. 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 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.

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MANAGEMENT

Executive Officers and Directors

        Set forth below is information concerning our current executive officers and directors as of June 30, 2012. The business address of all of our executive officers and directors is 12612 West Alameda Parkway, Lakewood, CO 80228.

Name
  Age   Position(s)

Kemper Isely

    50   Chairman, Director and Co-President

Zephyr Isely

    63   Director and Co-President

Heather Isely

    46   Director, Executive Vice President and Corporate Secretary

Elizabeth Isely

    57   Director and Executive Vice President

Michael T. Campbell

    67   Director Nominee*

Sandra Buffa

    59   Chief Financial Officer

*
Appointment to our board effective upon the consummation of this offering.

        Kemper Isely has been a director and our Co-President since 1998. He joined the Company as an employee in 1977 and during his tenure with our company has functioned as Store Manager, Warehouse Manager, Director of Marketing, Director of Purchasing, Director of Operations and Director of Finance.

        We believe Mr. Kemper Isely's qualifications to serve on our board include his knowledge of our company and the food retail industry and his years of leadership at our company.

        Zephyr Isely has been a director and our Co-President since 1998. He joined the Company as an employee in 1969 and during his tenure with our company has functioned as Store Manager, Director of Receiving, Warehouse Manager, Director of Op