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Discount retailer Grocery Outlet shares rise in public debut

Popular West Coast discount retailer Grocery Outlet (GO) proved it’s no slacker, debuting as a public company the same day as Slack (WORK).

“We think there’s a lot of room to grow beyond just our footprint,” CEO Eric Lindberg told Yahoo Finance’s On the Move. Shares of Grocery Outlet opened Thursday at $31. It closed at $28.51, up 29.59% from its IPO price of $22 a share.

The company calls itself a “high-growth, extreme value retailer of quality, name-brand consumables and fresh products” in documents it filed with the SEC.

Emeryville, California-based Grocery Outlet has grown to 323 stores since it was founded in 1946. Most of the stores are on the West Coast and in Pennsylvania. It sells name brand products at discount prices between 40% and 70% off retail prices. Lindberg said its business model differs from competitors like Aldi because its stores are run by independent operators. The independent operators are responsible for store operations, ordering, merchandising, inventory, marketing, and hiring.

“We have an independent operator that in each one of the stores, is part of the community, delivering customer service,” he said. The operators buy into the Grocery Outlet organization which Lindberg said uses its size to buy at a scale that most independent operators can’t leverage and competitors can’t replicate.

“We buy those products at a discount and then pass that on at a pretty healthy margin to the store unit operator,” he said, adding that it has worked really well so far. The company has reported 15 years of consecutive comparable store sales growth. Since 2014, comparable store sales grew at an average annual rate of 4.2%.

Revenue last year exceeded $2.28 billion and net income was $15.8 million. Grocery Outlet’s East Coast outpost in Pennsylvania will be a good place to launch future growth but right now there are no plans to take the discount chain online.

“Fundamentally we don’t believe our customers, who are value seekers, are going to trade the value that they get inside the store for the cost of delivery and that’s a really hard place to make a lot of money,” Lindberg said.

Expansion plans

Grocery Outlet’s S1 says it will open 32 new stores this year and plans to expand its store base 10% annually. “Over the long term, we believe the market potential exists to establish 4,800 locations nationally” although it sets no timeline on completing its growth strategy.

The company says a new store costs about $2.0 million to open with a payback on the investment within four years. Almost 98% of products sold in Grocery Outlet stores are domestically sourced so Lindberg said there’s not much pressure on margins from the trade war underway between China and the United States.

But as Grocery Outlet grows, so do its expenses, up more than $17 million in the first quarter of this year compared to the same quarter in 2018. At the same time net income is falling, down almost $2 million compared to first quarter 2018.

Still, when it comes to other IPOs, Grocery Outlet is making a profit and investors used to big name unicorns like Slack, Uber (UBER) and Lyft (LYFT), debuting with millions and billions of dollars of losses, can go shopping for a money-making bargain at a discount price.

Adam Shapiro is co-anchor of Yahoo Finance On the Move.

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