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Grocery_Outlet_storefront_widescreen.png Grocery Outlet Holding Corp.

Grocery Outlet follows IPO with strong second quarter

Executives tout appeal of extreme-value grocer’s “treasure hunt” shopping experience

In its first quarterly report as a public company, Grocery Outlet Holding Corp. posted double-digit sales gains and topped Wall Street’s earnings forecast for its fiscal 2019 second quarter.

The operator of Grocery Outlet Bargain Market stores said sales for the quarter ended June 29 surged 12.2% to $645.3 million from $575.1 million a year earlier. Comparable-store sales grew 5.8% year over year, more than doubling the 2.7% increase for the 2018 quarter.

At the bottom line, Emeryville, Calif.-based Grocery Outlet reported a net loss of $10.6 million, or 15 cents per diluted share, compared with net income of $7.3 million, or 11 cents per diluted share, a year ago. The company said the result reflects $22.8 million in stock-based compensation expenses in connection with its June 20 initial public offering, $5.2 million in debt extinguishment costs, and $3.8 million in amortization of purchase accounting assets and deferred financing costs, among other items.

On an adjusted basis, the retailer had net earnings of $14.5 million, or 20 cents per diluted share, compared with $12.9 million, or 19 cents per diluted share, in the prior-year period.

Analysts, on average, had projected adjusted earnings per share of 13 cents, with estimates ranging from a low of 12 cents to a high of 14 cents, according to Refinitiv/Thomson Reuters.

Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) came in at $45 million, up 15% from $39.1 million a year earlier.

Trading under the symbol “GO” on the Nasdaq Global Select Market exchange, Grocery Outlet consummated its IPO on June 24 at $22 per share of common stock, selling a total of 19.8 million shares for net proceeds of $400.5 million. The funds were used toward the repayment of $398 million in debt, plus interest, on a pair of term loans.

As of mid-morning trading on Wednesday, Grocery Outlet’s share price was up 10.3% to $41.46.

“Looking back at our second quarter, we're very pleased with our results. We delivered top-line, year-over-year growth of 12.2% driven by a 5.8% increase in comp-store sales. In addition, we've opened 30 new stores since the end of the second quarter last year, and we're pleased with their performance,” CEO Eric Lindberg told analysts late Tuesday in a conference call.

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Nasdaq's Nelson Griggs with Grocery Outlet Vice Chairman Macgregor Read and CEO Eric Lindberg at the company's IPO in Manhattan.

“Our comp growth reflects broad-based strength across product categories and store vintages, as well as a modest benefit from a later Easter. We attribute our comp result to three primary drivers; one, the deep value and treasure hunt experience our assortment offers customers; second, the WOW! Shopping experience delivered by the independent operators; and third, the strong customer awareness and engagement resulting from our corporate and our operating and marketing efforts.”

Grocery Outlet describes itself as the nation’s largest and fastest-growing extreme-value grocery retailer. The company said it offers savings of 40% to 70% versus conventional retailers via 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, including alerts to notify customers of the hottest deals.

“The power of our business model is clearly demonstrated by our long track record of strong financial performance,” Lindberg said. “We have achieved 15 consecutive years of positive comps, delivering steady sales growth and consistent gross margins throughout economic and inflationary cycles.”

Grocery Outlet opened eight new stores and closed one location during the second quarter, ending the period with 330 stores in California, Idaho, Nevada, Oregon, Pennsylvania and Washington. Averaging about 50,000 square feet, Grocery Outlet stores 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.

“One of our more powerful marketing tools has been our WOW! Alert emails. We have developed a strong following of email subscribers that have opted to receive these daily WOW! Alerts, which are aimed at highlighting our best products at the local level, taking the treasure hunt experience to our customers outside of the store,” President R.J. Sheedy said in the call.

“Our email database grew to over 1.1 million subscribers in the second quarter, an increase of over 20% since last year. In the future, we see an opportunity to further personalize our digital communications to increase engagement with existing customers and to introduce new customers to our stores,” he noted. “Our combined sourcing and distribution, aisle support and marketing initiatives serve to strengthen our compelling value proposition. This fuels our sales growth and enables us to maintain consistent gross margins over time. We will continue to seek out, identify and implement initiatives that position us for long-term same store sales growth and margin stability.”

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For the fiscal 2019 first half, Grocery Outlet totaled net sales of $1.25 billion, up 11.2% from $1.13 billion in the year-ago period. Same-store rose 5%.

The company posted a net loss was $6.9 million, or 10 cents per diluted share, for the 26 weeks compared with net income of $12.8 million, or 19 cents per diluted share, in the 2018 period. Adjusted net earnings were $24.4 million, or 35 cents per diluted share, versus $24.4 million, or 36 cents per diluted share, a year earlier.

Looking ahead, Grocery Outlet forecasts adjusted EPS (diluted) of 68 cents to 71 cents for the full 2019 fiscal year. Net sales are projected at $2.5 billion to $2.53 billion, with same-store sales growth of 3% to 4%.

The company said it plans to open 32 new stores and close three locations as part of expected capital expenditures of $85 million to $90 million for the year.

“We believe Grocery Outlet has created a defendable moat, with strong supply lines and an efficient buying model that well position this business to become the next national closeout/off-price retailer,” Jefferies analyst Randal Konik wrote in a research note on Wednesday.

“Value retailers continue to gain market share across the consumer space, speaking to the increasingly pervasive bargain-mindedness among consumers,” Konik noted. “Given Grocery Outlet delivers a WOW! shopping experience, selling products at 40% to 70% off conventional retail prices, we believe Grocery Outlet is well-positioned to benefit from this growing trend.”

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