Grocery Outlet caps off fiscal 2020 with strong Q4

Grocery Outlet Holding Corp. enters its 75th year in business in 2021 after notching double-digit net and comparable sales gains for fiscal 2020, as well as fourth-quarter adjusted earnings that topped Wall Street’s forecast.

For the 14-week quarter ended Jan. 2, net sales surged 23.1% to $806.8 million from $655.5 million a year earlier, Grocery Outlet said in reporting results after yesterday’s market close. The sales total reflects $53.3 million from the extra week, according to the company. On a 13-week comparable basis, sales rose 7.9% year over year, up from a 5.1% comp-sales increase in the fiscal 2019 quarter.

Fiscal 2020 net sales, covering 53 weeks, climbed 22.5% to $3.13 billion from $2.56 billion in 2019. Comparable-store sales advanced 12.7% on a 52-week basis versus a 5.2% gain a year ago.

Emeryville, Calif.-based Grocery Outlet The Company opened 35 new stores during fiscal 2020, including eight in the fourth quarter, and closed out the year with 380 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.

“Our financial performance throughout this year demonstrates the strength and flexibility of our business model. For the full year 2020, we delivered new store growth of 10% and 35 stores opened, despite the difficulties created by the pandemic,” CEO Eric Lindberg told analysts in a conference call late Tuesday. “We also exceeded our long-term targets across key financial metrics, including top-store sales growth of 12.7%, gross-margin expansion of 30 basis points to 31.1%, and adjusted EBITDA [earnings before interest, taxes, depreciation and amortization] growth of 32%.

Related:Grocery Outlet expands board of directors

“We achieved those results by staying true to our business model, providing our customers with treasure hunt and ever-changing deals, friendly customer service, and a locally curated assortment provided by the independent operators,” he explained. “We work closely with our supplier partners and leveraged our operational agility to meet consumers need, delighting them with unexpected deals each and every time they walked into a Grocery Outlet.”

As with other grocery retailers, Grocery Outlet saw larger basket size from customers but fewer store visits during fiscal 2020.

Describing itself as the nation’s fastest-growing extreme-value grocery retailer, Grocery Outlet touts big discounts on brand-name products. Stores, which average about 50,000 square feet, are run by independent owner-operators (IOs) from the communities they serve and carry a full range of groceries, including fresh produce, meat and deli; dairy; beer and wine; natural and organic items; health and beauty aids; and seasonal items. The company said it’s able to offer savings of 40% to 70% versus conventional retailers through a sourcing model of purchasing surplus inventory and product overruns directly from thousands of supplier partners. That includes a changing assortment of products with “WOW!” prices highlighted in-store and digitally, with alerts notifying customers of the hottest deals.

Related:Grocery Outlet fuels expansion as third-quarter sales climb

“The pipeline of opportunistic supply remains healthy. Current market disruption continues to deliver a steady supply of surplus inventory, and our long and proven track record makes us a valuable resource and trusted partner for our suppliers. Our focus on strategic partnerships and flexibility, combined with our growing scale, positions us as the preferred partner in the secondary market,” President R.J. Sheedy said in the call.

“Turning to marketing, we maintain consistent communication of ever-changing, store-specific WOW! deals through our email distribution list and other digital platforms,” he added. “We also continue to drive brand awareness through digital and social media, supported by select traditional print ads, radio and TV. At the local level, our IOs communicate product availability and WOW! deals and engage with customers through social media and grassroots efforts to drive awareness and repeat visits.”

At the bottom line, fourth-quarter net income came in at $24.3 million, or 24 cents per diluted share, compared with $9.8 million, or 11 cents per diluted share, in the year-ago quarter. Fiscal 2020 net earnings totaled $106.7 million, or $1.08 per diluted share, versus $15.4 million, or 19 cents per diluted share, in 2019.

Grocery Outlet noted that, starting with the fiscal 2020 fourth quarter, its definitions of adjusted earnings and other non-GAAP financial measures were updated simplify presentation and improve comparability between periods.

As a result, fourth-quarter adjusted net income was $24.2 million, or 24 cents per diluted share, compared with $16.6 million, or 18 cents per diluted year, in the 2019 quarter. Full-year 2020 adjusted net earnings were $112.7 million, or $1.14 per diluted share, versus $60.3 million, or 74 cents per diluted share, in fiscal 2019.

Analysts, on average, had projected fourth-quarter adjusted earnings per share of 23 cents, with estimates ranging from 21 cents to 27 cents, according to Refinitiv. For fiscal 2020, the consensus adjusted EPS forecast was $1.49, with projections running from $1.27 to $1.56.

Grocery Outlet tallied capital expenditures, net of tenant improvement allowances, of $150 million in fiscal 2021 and expects capital spending of $130 million in 2021.

“We continue to make progress in investing in infrastructure to position us for successful expansion in our existing West Coast markets, as well as in our Mid-Atlantic region,” Lindberg said in the call. “This year, we plan to open 36 to 38 stores and are excited to be reaching the 400-store mark this summer. These openings will include three to five new stores in the Mid-Atlantic region.”

Grocery Outlet's stores are run by independent owner-operators from the communities they serve, enabling the chain to cater to local shoppers.

Looking ahead to fiscal 2021, Chief Financial Officer Charles Bracher noted that Grocery Outlet, like its fellow food retailers, will be cycling hefty same-store sales gains triggered by the COVID-19 pandemic.

“In terms of existing store sales trends, January comp sales were in the positive mid single digits, driven by continued larger basket sizes offsetting reduced traffic. February comp sales moderated to the positive low single digits as we began to anniversary the onset of last year’s COVID demand surge towards the end of the month,” Bracher told analysts. “That initial wave of customer demand peaked in March of last year, where we saw comps increase 37% as consumers aggressively stocked up on product. As we fully cycle prior-year March results, we expect comps for the first quarter in total to be in the negative high single digits.”

Lindberg also highlighted a milestone for Grocery Outlet: the 75th year since its founding. “We’ve come a long way since Jim Reed founded the company in 1946, and 2021 marks our 75th anniversary. The business has evolved, but we remain centered on delivering value through our unique business model,” he said. “Our focus on execution and our commitment to our mission of touching lives for the better. As we reflect on our history, we’re very proud of the impact we’ve been able to have over the past 75 years on the lives of our employees, independent operators, customers, suppliers and all of those whom we’ve touched.”

Jefferies analyst Randal Konik said the negative comp-sales outlook and COVID-related cost pressures don’t cloud Grocery Outlet’s longer-term prospects.

“Value retailers are continuing to gain market share, and the backdrop remains conducive to unit growth for retailers such as Grocery Outlet,” Konik wrote in a research note on Wednesday. “In addition, the company’s business model flexibility should lead to relatively stable margins and predictable cash flow. A company with ample growth opportunity, predictability and stability is rare in the consumer retail industry, and with decades of growth ahead, we maintain Grocery Outlet as one of our top long-term ideas [for investors].”