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Grocery Outlet (GO) Q3 Earnings Top Estimates, Comps Fall 4.3%

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Grocery Outlet Holding Corp. GO reported third-quarter 2021 results, wherein the top line fell short of the Zacks Consensus Estimate, while the bottom line beat the same. We note that net sales showcased a marginal improvement from the year-ago period but earnings declined on a year-over-year basis.

This California-based company registered dismal comparable store sales performance during the quarter under review, stemming from soft traffic trends. Management expects the metric to decline in the fourth quarter as well.

Nevertheless, this Zacks Rank #2 (Buy) company continues to navigate through the challenging operating environment on the back of strategic growth efforts. Grocery Outlet’s flexible sourcing and distribution business model, which helps it in offering products at exceptional values as well as excellent service from independent operators, bodes well. The company’s opportunistic purchasing strategy, marketing initiatives, store-growth endeavors and test of new digital opportunities to deepen customer reach also appear encouraging.

Shares of Grocery Outlet have fallen 16.3% in the past three months compared with the industry’s decline of 6.9%.

Grocery Outlet Holding Corp. Price, Consensus and EPS Surprise

Grocery Outlet Holding Corp. Price, Consensus and EPS Surprise
Grocery Outlet Holding Corp. Price, Consensus and EPS Surprise

Grocery Outlet Holding Corp. price-consensus-eps-surprise-chart | Grocery Outlet Holding Corp. Quote

Q3 Insights

The extreme value retailer of quality, name-brand consumables and fresh products reported adjusted earnings of 24 cents a share that beat the Zacks Consensus Estimate by a couple of cents. However, the bottom line fell from 28 cents reported in the prior-year quarter.

Net sales of $768.9 million rose 0.6% year over year but missed the Zacks Consensus Estimate of $781.2 million. Sales contribution from 35 net new stores opened since the end of the third quarter last year favorably impacted the top line.

Comparable store sales declined 4.3% against a 9.1% jump witnessed in the year-ago period due to lower traffic. Sequentially, traffic and basket size were stable.

Margins & Costs

Gross profit dropped slightly 0.4% year over year to $237.1 million. Also, gross margin contracted 40 basis points (bps) to 30.8% due to the normalization of inventory turns and higher supply chain, freight and fuel costs. During the quarter, adjusted EBITDA tumbled 6.2% to $51.4 million, while adjusted EBITDA margin shrunk 50 basis points to 6.7%.

SG&A expenses increased 0.9% to $191.6 million owing to increased store occupancy and independent operator commission expense related to store growth, offset by lower incentive compensation expense.

Store Update

Grocery Outlet opened seven new stores during the quarter, taking the total count to 407 stores in six states. The company plans to open eight stores during the final quarter for a total of 36 new stores opened in 2021.

Other Financial Aspects

Grocery Outlet ended the quarter with cash and cash equivalents of $156 million. Net long-term debt was $450.9 million, while stockholders’ equity amounted to $994 million. The company’s board of directors has authorized a $100 million share-repurchase program.

Net cash provided by operating activities during the third quarter was $56.6 million. The company incurred capital expenditures of $26.5 million (excluding the impact of tenant improvement allowances) during the quarter under discussion. 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 comparable store sales for the month of October were flat. Based on current trends, it expects fourth-quarter comparable store sales to decline in the band of 2.5-3.5%. Grocery Outlet envisions total sales between $770 million and $775 million in the final quarter.

Gross margin in the fourth quarter is expected to be approximately 30.5%. The company informed that fourth-quarter margin projection represents performance in line with pre-COVID levels despite ongoing inflationary pressures in commodity and freight costs. The company guided adjusted EBITDA margin of approximately 6.1% of sales.

3 Other Stocks to Consider

Sanderson Farms SAFM, currently sporting a Zacks Rank #1 (Strong Buy), has a trailing four-quarter earnings surprise of 496.3%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

Kroger KR has a long-term earnings growth rate of 8.9%. It currently caries a Zacks Rank #2.

Costco COST has a long-term earnings growth rate of 8.6%. It presently carries a Zacks Rank #2.


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