Image Shown: Discount grocer Grocery Outlet Holdings Corporation has stores in six states; Washington, Oregon, California, Idaho, Nevada, and Pennsylvania. Image Source: Grocery Outlet – December 2019 IR Presentation
By Callum Turcan
On March 24, discount grocer Grocery Outlet Holdings Corporation (GO) reported fourth-quarter and full fiscal-year earnings for fiscal 2019 (period ended December 28, 2019) and the firm beat both consensus top- and bottom-line estimates (albeit only marginally on the top-line). In the fiscal fourth quarter, the grocer’s GAAP net sales were up 12% year-over-year while Grocery Outlet went from a GAAP net loss of $5 million in the same quarter last fiscal year to a GAAP net profit of $10 million in the fourth quarter of fiscal 2019. That was partially due to Grocery Outlet utilizing the proceeds from its IPO in June 2019 to pay down its relatively large debt load, which in turn cut its quarterly interest expenses down by more than half year-over-year. From the end of fiscal 2018 to the end of fiscal 2019, Grocery Outlet’s total debt load (inclusive of short-term debt) fell from over $857 million to just below $448 million.
Preparing for the Worst
For all of fiscal 2019, Grocery Outlet generated $133 million in net operating cash flow and spent $97 million on capital expenditures, allowing for $36 million in free cash flow. Grocery Outlet is investing heavily in building out its store count, which grew from 316 at the end of fiscal 2018 to 347 at the end of fiscal 2019 (according to its latest earnings report and S-1 filing). Grocery Outlet now has stores in six US states, primarily along the West Coast (and in Pennsylvania). Additionally, please note that at the end of fiscal 2016 (period ended December 31, 2016), Grocery Outlet had 265 open stores. Looking ahead, Grocery Outlet intends to keep growing its store count, but management did note the firm is shifting towards a more cautious stance given the ongoing novel coronavirus (‘COVID-19’) pandemic.
In March 2020, the firm borrowed $90 million from its “revolving credit facility of its First Lien Credit Agreement, the proceeds of which are to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the current COVID-19 pandemic” and please note Grocery Outlet exited fiscal 2019 with $28 million in cash on hand. The firm’s current ratio stood at ~1.3x at the end of fiscal 2019, providing Grocery Outlet with some flexibility, but its net debt load of $420 million at the end of its latest fiscal year is a key concern. While smaller than it has been in the recent past, we caution our members that net debt loads can become very hard to refinance during times of economic upheaval. Management mentioned during Grocery Outlet’s latest quarterly conference call that the firm had over $150 million in cash on hand.
As an aside, some of Grocery Outlet’s investors, including a stockholder affiliated with Hellman & Friedman LLC, sold a material amount of the grocer’s stock via a secondary offering in which Grocery Outlet did not receive any proceeds back in January 2020.
Quality Growth Trajectory
Same-store sales growth underpins Grocery Outlet’s long-term ambitions. In the fourth quarter of fiscal 2019, its same-store sales growth clocked in at 5.1% year-over-year, up from 4.1% a year-ago. That’s quite the growth rate and highlights the kind of pull Grocery Outlet’s discounted grocery business model has. The company did not issue out guidance for fiscal 2020, which includes a 53rd week, but its CFO Charles Bracher did note in the earnings press release that (emphasis added):
“As we operate our business through this unprecedented time, our primary focus is working together across the organization in order to serve our customers and keep pace with accelerated demand. Looking forward, it is incredibly challenging to predict the human and economic impact of the Coronavirus and the related change in customer shopping behavior. Although we are not providing formal 2020 earnings guidance at this time, we are encouraged by the strength of our liquidity position and the unique advantages of our business model. And while we’re adapting to the current operating environment, we continue to invest in our long-term growth opportunities.”
Furthermore, during Grocery Outlet’s latest quarterly conference call, its CFO did provide some longer-term guidance (emphasis added):
“Given the uncertainty surrounding the operating environment, we are not providing formal annual guidance at this time. However, we wanted to share with you how we’re managing the business. With respect to comp sales, while we are currently operating at elevated levels, we continue to believe in our growth algorithm of a 1% to 3% comp range over the long-term. With respect to unit growth so far in 2020, we will have 10 stores open by the end of this week and have approved sites and signed leases for 2020 openings consistent with our 10% annual unit growth target.
That said we expect that our 2020 openings are likely to be negatively impacted like delays in acquiring permits and the availability construction resources given a growing mandate to shelter in place. Despite those potential near-term disruptions, we continue to search for new sites to build our longer-term real estate pipeline.”
We appreciate management providing some level of guidance to create a framework for what to expect going forward, even if those forecasts come with a wide range of potential outcomes.
Concluding Thoughts
Grocery Outlet’s near-term performance will likely benefit from the ongoing “panic buying” of consumer staples goods seen in the US and elsewhere. However, what matters most is its medium- and long-term performance, which appears to be on a solid trajectory given that the company’s same-store sales are growing at a very nice clip and considering the discount grocer has room to grow its physical presence given that it only operates stores in six states. We will continue to monitor Grocery Outlet going forward to get a sense of how US economic activity is changing in light of the ongoing COVID-19 pandemic.
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Dollar Store and Department Store Industries – KSS M JWN BIG DG DLTR PSMT
Food Products (Small/Mid-Cap): CALM FLO FDP HAIN HRL JJSF LANC MKC SJM THS TSN
Food Products (Large/Mid-Cap): ADM BG CPB CAG GIS HSY K KHC MDLZ NSRGY UL UN
Food Retailing Industry – CASY COST CVS KR SYY TGT WBA WMT
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Callum Turcan does not own shares in any of the securities mentioned above. Dollar General Corporation (DG) is included in Valuentum’s simulated Best Ideas Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.