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Grocery Outlet Holding Corp. (GO) Down 9.5% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Grocery Outlet Holding Corp. (GO). Shares have lost about 9.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Grocery Outlet Holding Corp. due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Grocery Outlet Q2 Earnings Meet Estimates, Sales Down

Grocery Outlet posted second-quarter 2021 results. It delivered adjusted earnings of 23 cents a share, in line with the Zacks Consensus Estimate. The bottom line plunged 27.1% from 32 cents reported in the prior-year quarter.

Net sales of $775.5 million surpassed the Zacks Consensus Estimate of $770.5 million. The top line fell 3.5% from the year-ago quarter’s level. The downside was partly offset by sales contribution from 38 net stores opened since the end of the second quarter of last year.

Comparable store sales (comps) went down 10% against a rise of 16.7% witnessed in the prior-year quarter. Dismal comps performance reflects decline in average ticket and lower traffic. Sequentially, traffic was moderately up in the second quarter.

Margins & Costs

Gross profit dropped 6.3% year over year to $237.8 million. Also, gross margin contracted 90 basis points (bps) to 30.7% due to the impacts of inflation and normalization of inventory turns. During the quarter, adjusted EBITDA tumbled 15.7% to $50.8 million.

Selling, general and administrative (SG&A) expenses declined 2.5% to $193 million owing to reduced variable commissions to independent operators and lower incentive compensation expenses. The upsides were partially offset by store occupancy and maintenance costs.

Store Update

Grocery Outlet opened 11 new stores during the quarter, taking the total count to 400 stores in six states. Management remains pleased with the performance of newly-opened stores.

The company intends to open 36-38 stores and close one during 2021. Well, it remains consistent with its 10% annual target.

Other Financial Aspects

Grocery Outlet ended second-quarter 2021 with cash and cash equivalents of $126.6 million. Net long-term debt was $450.3 million, while stockholders’ equity amounted to $973.9 million.

Net cash provided by operating activities were $85.1 million for the six months ended Jul 3, 2021. For the second quarter, the company generated $58.7 million in net cash from operating activities.

The company incurred capital expenditures $29.9 million (excluding tenant improvement allowances) during the second quarter. It continued to invest in new and existing store fleet as well in infrastructure and technology developments.

Management continues to envision capital expenditures (net of tenant improvement allowances) of about $130 million for 2021.

Outlook

Management highlighted that sales trends in the third quarter are consistent with the second quarter, including similar traffic and ticket patterns. On a quarter-to-date basis, comps are down 6%. Management expects such trends to persist through the third quarter and thereby anticipates comps to be in the negative mid-single digits. With limited visibility, the company expects comps in the fourth quarter to be consistent with third-quarter levels, on a 2-year stack basis.

Gross margin in the third quarter is expected to be at nearly 30.6%, reflecting higher inflationary headwinds in commodity and freight costs. The company projects adjusted EBITDA margin at nearly 6.5% of sales for the third quarter.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -6.55% due to these changes.

VGM Scores

Currently, Grocery Outlet Holding Corp. has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Grocery Outlet Holding Corp. has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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