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Grocery Outlet eyes more growth after strong Q3

Full-year outlook raised amid robust sales and earnings gains

Grocery Outlet Holding Corp. lifted its full-year guidance after posting a double-digit sales gain in the fiscal 2019 third quarter and beating analysts’ earnings estimates.

For the quarter ended Sept. 28, Grocery Outlet reported total sales of $652.5 million, up 13.1% from $576.8 million a year earlier. The extreme-value grocer said same-store sales rose 5.8% year over year, compared with a 4.2% gain in the prior-year period.

“With our comp growth, the strength was once again broad-based across product categories, regions and store vintages as we continued to deliver across our three primary growth drivers,” CEO Eric Lindberg told analysts in a conference call late yesterday. “First and foremost, we are committed to providing our customers deep value and unique treasure-hunt shopping experiences in the stores. We continue to strengthen our relationships with our current suppliers as well as seek out and develop new relationships to procure brand-name products at amazing values. The pipeline of opportunistic product remains very strong, and we continue to generate excitement for our customers.”

On the earnings side, net income came in at $12.4 million, or 13 cents per diluted share, compared with $7.7 million, or 11 cents per diluted share, a year ago. Adjusted net earnings were $20.6 million, or 22 cents per diluted share, versus $13 million, or 19 cents per diluted share, in the 2018 quarter.

Analysts, on average, had forecast adjusted earnings per share of 19 cents, with projections ranging from 18 cents to 20 cents, according to Refinitiv/Thomson Reuters.

Third-quarter adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose 13.2% to $44.2 million from $39 million in the prior-year period.

“Notably, this increase was burdened by an estimated $1.8 million in public company costs, which we did not incur in the same period last year,” Lindberg noted, referring to Grocery Outlet’s initial public offering in June.

Capital spending in the third quarter totaled about $31.6 million, excluding landlord allowances, Grocery Outlet said. The Emeryville, Calif.-based company opened eight new stores and closed one, ending the quarter with 337 stores in California, Idaho, Nevada, Oregon, Pennsylvania and Washington.

“We remain pleased with the performance of our new stores. During the quarter, we opened eight new sites, bringing the year-to-date total to 24 new locations,” said Lindberg. “These new stores are a balance of existing mature markets and developing markets, and they continue to form in line with our expectations.”

Grocery Outlet aims to provide a “WOW!” shopping experience, combining big discounts on brand-name products with the excitement of finding bargains. The retailer has said a typical shopper basket is priced about 40% lower than that of conventional grocers and 20% lower than leading discounters. Stores, which average about 50,000 square feet, are run by independent owner-operators 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.

Grocery Outlet Holding Corp.Grocery Outlet store interior_WOW deals-Copy.jpg

“We remained focused on the execution of our differentiated business model. It's the combination of the opportunistic sourcing and the local independent operator that allows us to ‘out-local’ the chains and ‘out-chain’ the locals,” Lindberg explained. “We believe that this is the formula behind the consistency in our comp-store growth and our history of strong, stable financial performance.”

President R.J. Sheedy noted in the call that Grocery Outlet continues to bolster support of its independent operators (IOs), who select about 75% of their assortment and have merchandising autonomy. “This strengthens the local feel of each store,” he said, pointing out that opportunistic products represent about half of the retailer’s assortment.

“A real-time order guide is one example of a critical business tool that we continue to invest in,” Sheedy told analysts. “It is a custom-developed proprietary system that optimally manages the flow of products between the warehouses and stores. Recent enhancements to this ordering platform provide greater visibility to product availability, product information and relevant selling statistics for smarter and faster decision-making. By investing in ordering technology and supply chain improvements, we can better equip the IOs to optimize their inventory, while continuing to strengthen the WOW! shopping experience for their customers.”

Looking ahead, Grocery Outlet raised its adjusted EPS (diluted) for the 2019 fiscal year to 73 cents to 74 cents, compared with its previous guidance of 68 cents to 71 cents. Net sales are projected to be “slightly above” $2.55 billion, up from a range of $2.50 billion to $2.53 billion. Same-store sales growth is pegged at roughly 4.9%, compared with the earlier forecast of 3% to 4%.

The company also now expects capital expenditures of $90 million to $95 million for the year, up from $85 million to $90 million. That includes 33 new store openings, net of three expected closings.

“We have begun building the corporate structure needed to support our long-term growth objectives in the Mid-Atlantic region,” said Vice Chairman MacGregor Read. “To that end, we hired Heather Mayo for the newly created leadership role of executive vice president of our East region. Heather brings 23 years of experience in the retail club channel and will lead our efforts to expand our existing Mid-Atlantic store base and future expansion. We look forward to leveraging her operational and merchandising expertise as we develop our long-term plans for this market.”

Grocery Outlet plans to open another nine stores in fiscal 2019. “We also have a high level of visibility into our 2020 lease opportunities,” Read added, “and are on track to deliver approximately 10% unit growth, with a strong pipeline of future real estate locations.”

According to Jefferies analyst Randal Konik, Grocery Outlet’s WOW! shopping experience positions the company for robust growth as value retailers across the consumer space build up market share.

“Third-quarter results showed comps remain well above industry trend and stable/growing margins, which is hard to come by in this hypercompetitive space,” Konik said in a research note Tuesday. “These quarterly outputs continue to demonstrate that Grocery Outlet is taking share and has massive white space to grow. We believe Grocery Outlet will benefit not only from new unit expansion, but also from continuous gains in existing store productivity, while its business has a defensible moat with its unique buying model.”

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