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Grocery Outlet Holding Corp. Announces First Quarter Fiscal 2020 Financial Results

Net sales increased 25.4% to $760.3 million 
Comparable store sales increased 17.4% 
Net income increased 235.0% to $12.6 million; Adjusted net income (1) increased 242.2% to $34.0 million 
Adjusted EBITDA (1) increased 45.8% to $57.0 million

EMERYVILLE, Calif., May 11, 2020 (GLOBE NEWSWIRE) -- Grocery Outlet Holding Corp. (GO) (“Grocery Outlet” or the “Company”) today announced financial results for the first quarter of fiscal 2020 ended March 28, 2020.

For the First Quarter Ended March 28, 2020:

  • Net sales increased by 25.4% to $760.3 million from $606.3 million in the first quarter of fiscal 2019; comparable store sales increased by 17.4% compared to a 4.2% increase in the same period last year.

  • The Company opened eight net new stores ending the quarter with 355 stores in six states.

  • Net income increased by 235.0% to $12.6 million, or $0.13 per diluted share, compared to $3.8 million, or $0.06 per diluted share, in the first quarter of fiscal 2019.

  • Adjusted EBITDA (1) increased 45.8% to $57.0 million compared to $39.1 million in the first quarter of fiscal 2019.

  • Adjusted net income (1) increased 242.2% to $34.0 million, or $0.36 per non-GAAP diluted share, compared to $9.9 million, or $0.15 per non-GAAP diluted share, in the first quarter of fiscal 2019.

Eric Lindberg, CEO of Grocery Outlet, stated, “Our strong first quarter performance reflects the tremendous efforts of our corporate and Independent Operator teams, our suppliers, and other partner companies. We continue to leverage the many strengths of our business model and adapt processes to meet the demands of the current environment. Our top priorities remain centered around ensuring the safety of our team and communities, supporting IOs, working with suppliers to purchase product, and continuing to deliver strong operational execution.”

Mr. Lindberg continued, “While we continue to focus on our response to COVID-19, we are incorporating learnings to capture opportunities that we believe will arise as we emerge from this pandemic. We are confident in the long-term potential of our business and remain committed to making investments that will support our future growth.”

(1) Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures, which exclude the impact of certain special items. See the Non-GAAP Financial Measures section of this release for additional information about these items.

Balance Sheet and Cash Flow:

  • Cash and cash equivalents totaled $160.9 million at the end of the first quarter of fiscal 2020 compared to $19.6 million at the end of the same period in fiscal 2019.

  • Total debt, including the $90.0 million drawn on the revolving credit facility of our First Lien Credit Agreement, was $550.2 million at the end of the first quarter, compared to $873.7 million at the end of the same period in fiscal 2019. The decrease was due to the prepayment of debt in conjunction with our initial public offering in June 2019 and an additional voluntary prepayment of debt in October 2019.

  • Net cash provided by operations during the first quarter of fiscal 2020 was $67.8 million compared to $22.2 million in the same period in fiscal 2019.

  • Capital expenditures for the first quarter of fiscal 2020, excluding the impact of landlord allowances, were $28.2 million.

Recent Developments:

  • Grocery Outlet currently expects to open between 28 and 30 stores this year with no additional closures planned. The Company continues to build its real estate pipeline to support 10% annual unit growth in the future.

  • Quarter-to-date comparable store sales growth is tracking in the mid-teens driven by an increase in average basket size partially offset by declines in store traffic due to shelter-in-place restrictions. The impact of the COVID-19 situation remains fluid and therefore it is difficult to predict the impact of potential changes to shelter-in-place restrictions.

  • The Company expects to incur incremental operational expenses, primarily in the second quarter, related to COVID-19, including additional cleaning and safety measures, corporate and distribution center personnel expense including premium pay, overtime and temporary labor, and costs for protective equipment and supplies at its stores and facilities.

  • The Company expects weighted average diluted share count for fiscal 2020 to be approximately 100 million shares. This reflects the impact of 5.8 million performance-based stock options related to its 2014 equity plan, of which 70% vested concurrent with its February 2020 secondary offering and the remainder of which vested concurrent with its secondary offering on April 27, 2020.

  • On April 27, 2020, the Company priced its secondary offering of 15.0 million shares at $34.00 per share. The underwriters exercised their option to purchase an additional 2,250,000 shares of the Company’s common stock from a selling stockholder at the public offering price less the underwriting discount.

Fiscal 2020 Outlook:

Charles Bracher, Chief Financial Officer commented, “As we continue to operate our business through this unprecedented time, we are incredibly proud of the dedication of our independent operators, their employees, and our team members in service to our local communities and customers. Our performance and liquidity position remain strong, allowing us to continue investing in pursuit of our long term growth strategies.  Although we are not providing formal 2020 earnings guidance at this time due to the uncertainty related to COVID-19, we remain confident in our ability to execute in this fluid environment and in the strength of our business model.”

Conference Call Information:

A conference call to discuss the first quarter fiscal 2020 financial results is scheduled for today, May 11, 2020 at 4:30 p.m. Eastern Time. Investors and analysts interested in participating in the call are invited to dial 877-407-9208 approximately 10 minutes prior to the start of the call. A live audio webcast of the conference call will be available online at https://investors.groceryoutlet.com.

A taped replay of the conference call will be available within two hours of the conclusion of the call and can be accessed both online and by dialing 412-317-6671. The pin number to access the telephone replay is 13702665. The replay will be available for approximately two weeks after the call.

Non-GAAP Financial Information:

In addition to reporting financial results in accordance with accounting principles generally accepted in the United States (“GAAP”), the Company uses EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted earnings per share measures of performance to evaluate the effectiveness of its business strategies, to make budgeting decisions and to compare its performance against that of other peer companies using similar measures. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results.

Adjusted EBITDA is defined as net income before interest expense, taxes, depreciation and amortization (“EBITDA”) and other adjustments noted in the “Reconciliation of GAAP Net Income to Adjusted EBITDA” table below. Adjusted net income is defined as net income before the adjustments noted in table “Reconciliation of GAAP Net Income to Adjusted Net Income” below.

Adjusted EBITDA and adjusted net income are non-GAAP measures and may not be comparable to similar measures reported by other companies. Adjusted EBITDA and adjusted net income have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

Forward-Looking Statements:

This news release includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect management's current views and estimates regarding the prospects of the industry and the Company’s prospects, plans, business, results of operations, financial position, future financial performance and business strategy. These forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, the Company cannot provide any assurance that these expectations will prove to be correct.

The following factors are among those that may cause actual results to differ materially from the forward-looking statements: failure of suppliers to consistently supply us with opportunistic products at attractive pricing; inability to successfully identify trends and maintain a consistent level of opportunistic products; failure to maintain or increase comparable store sales; changes affecting the market prices of the products we sell; failure to open, relocate or remodel stores on schedule; risks associated with newly opened stores; risks associated with economic conditions; competition in the retail food industry; inability to retain the loyalty of our customers; costs and implementation difficulties associated with marketing, advertising and promotions; failure to maintain our reputation and the value of our brand, including protecting our intellectual property; any significant disruption to our distribution network, the operations of our distributions centers and our timely receipt of inventory; movement of consumer trends toward private labels and away from name-brand products; inability to maintain sufficient levels of cash flow from our operations; risks associated with leasing substantial amounts of space; failure to maintain the security of information we hold relating to personal information or payment card data of our customers, employees and suppliers; failure to participate effectively or at all in the growing online retail marketplace; material disruption to our information technology systems; risks associated with products we and our independent operators (“IOs”) sell; risks associated with laws and regulations generally applicable to retailers; legal proceedings from customers, suppliers, employees, governments or competitors; unexpected costs and negative effects associated with our insurance program; inability to attract, train and retain highly qualified employees; difficulties associated with labor relations; loss of our key personnel or inability to hire additional qualified personnel; changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters; impairment of goodwill and other intangible assets; any significant decline in our operating profit and taxable income; risks associated with tax matters; natural disasters and unusual weather conditions (whether or not caused by climate change), power outages, pandemic outbreaks, terrorist acts, global political events and other serious catastrophic events; major health epidemics, such as a coronavirus, and other outbreaks; economic downturns or natural or man-made disasters in geographies where our stores are located; time required to comply with public company regulations; management’s limited experience managing a public company; risks associated with IOs being consolidated into our financial statements; failure of our IOs to successfully manage their business; failure of our IOs to repay notes outstanding to us; inability to attract and retain qualified IOs; inability of our IOs to avoid excess inventory shrink; any loss or changeover of an IO; legal proceedings initiated against our IOs; legal challenges to the independent contractor business model; failure to maintain positive relationships with our IOs; risks associated with actions our IOs could take that could harm our business; the significant influence of certain significant investors over us; our ability to generate cash flow to service our substantial debt obligations; and the other factors discussed under “Risk Factors” in the Company’s prospectus filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 23, 2020.

For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” the Company previously disclosed in its prospectus filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 23, 2020, as such risk factors may be updated from time to time in the Company’s periodic filings with the SEC. The Company’s prospectus and periodic filings are accessible on the SEC’s website at www.sec.gov. You should not rely upon forward-looking statements as predictions of future events. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by applicable law, the Company undertakes no obligation to update publicly any forward-looking statements for any reason after the date of this news release to conform these statements to actual results or to changes in our expectations. 

About Grocery Outlet:

Based in Emeryville, California, Grocery Outlet is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. Grocery Outlet has more than 350 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME 
(in thousands, except per share data) 
(unaudited)

  13 Weeks Ended
  March 28, 
2020
  March 30,
2019
Net sales $ 760,308     $ 606,271  
Cost of sales 523,282     419,254  
Gross profit 237,026     187,017  
Operating expenses:      
Selling, general and administrative 186,931     152,854  
Depreciation and amortization 12,945     12,296  
Share-based compensation 20,277     211  
Total operating expenses 220,153     165,361  
Income from operations 16,873     21,656  
Other expenses:      
Interest expense, net 5,834     16,438  
Debt extinguishment and modification costs 198      
Total other expenses 6,032     16,438  
Income before income taxes 10,841     5,218  
Income tax expense (benefit) (1,801 )   1,444  
Net income and comprehensive income $ 12,642     $ 3,774  
Basic earnings per share $ 0.14     $ 0.06  
Diluted earnings per share $ 0.13     $ 0.06  
Weighted average shares outstanding:      
Basic 89,481     68,514  
Diluted 94,869     68,553  

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

  March 28, 
2020
  December 28, 
2019
Assets      
Current assets:      
Cash and cash equivalents $ 160,936     $ 28,101  
Independent operator receivables and current portion of independent operator notes, net of allowance 7,736     7,003  
Other accounts receivable, net of allowance 3,470     2,849  
Merchandise inventories 188,346     219,420  
Prepaid expenses and other current assets 12,606     13,453  
Total current assets 373,094     270,826  
Independent operator notes, net of allowance 22,137     20,331  
Property and equipment, net 366,429     356,614  
Operating lease right-of-use assets 754,444     734,327  
Intangible assets, net 47,526     47,792  
Goodwill 747,943     747,943  
Other assets 7,524     7,696  
Total assets $ 2,319,097     $ 2,185,529  
Liabilities and Stockholders’ Equity      
Current liabilities:      
Trade accounts payable $ 101,066     $ 119,217  
Accrued expenses 29,877     31,363  
Accrued compensation 14,724     14,915  
Current portion of long-term debt 179     246  
Current lease liabilities 41,281     38,245  
Income and other taxes payable 5,363     4,641  
Total current liabilities 192,490     208,627  
Long-term debt, net 537,487     447,743  
Deferred income taxes 14,218     16,020  
Long-term lease liabilities 790,274     767,755  
Total liabilities 1,534,469     1,440,145  
Stockholders’ equity:      
Voting common stock 90     89  
Series A preferred stock      
Additional paid-in capital 743,444     717,282  
Retained earnings 41,094     28,013  
Total stockholders’ equity 784,628     745,384  
Total liabilities and stockholders’ equity $ 2,319,097     $ 2,185,529  

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

  13 Weeks Ended
  March 28, 
2020
  March 30, 
2019
Cash flows from operating activities:      
Net income $ 12,642     $ 3,774  
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation of property and equipment 11,788     10,287  
Amortization of intangible and other assets 1,782     2,562  
Amortization of debt issuance costs and bond discounts 502     762  
Debt extinguishment and modification costs 198      
Loss on disposal of assets 1,053     182  
Share-based compensation 20,277     211  
Provision for accounts receivable 848     1,483  
Deferred income taxes (1,801 )   1,436  
Other 2      
Changes in operating assets and liabilities:      
Independent operator and other accounts receivable (3,219 )   (29 )
Merchandise inventories 31,073     (14,216 )
Prepaid expenses and other current assets 847     988  
Income and other taxes payable 722     (439 )
Trade accounts payable, accrued compensation and other accrued expenses (14,412 )   13,760  
Changes in operating lease assets and liabilities, net 5,518     1,479  
Net cash provided by operating activities 67,820     22,240  
Cash flows from investing activities:      
Cash advances to independent operators (1,485 )   (2,171 )
Repayments of cash advances from independent operators 1,136     893  
Purchase of property and equipment (28,173 )   (18,399 )
Proceeds from sales of assets 79     401  
Intangible assets and licenses (1,350 )   (721 )
Net cash used in investing activities (29,793 )   (19,997 )
Cash flows from financing activities:      
Proceeds from exercise of share-based compensation awards 6,033      
Proceeds from loans 90,000      
Other direct costs paid related to the initial public offering     (1,442 )
Principal payments on term loans (187 )   (1,813 )
Principal payments on other borrowings (191 )   (201 )
Dividends paid (147 )   (254 )
Debt issuance costs paid (700 )    
Net cash provided by (used in) financing activities 94,808     (3,710 )
Net increase in cash and cash equivalents 132,835     (1,467 )
Cash and cash equivalents at beginning of period 28,101     21,063  
Cash and cash equivalents at end of period $ 160,936     $ 19,596  

GROCERY OUTLET HOLDING CORP.
RECONCILIATION OF GAAP NET INCOME TO ADJUSTED EBITDA
(in thousands)
(unaudited)

  13 Weeks Ended
  March 28, 
2020
  March 30, 
2019
Net income $ 12,642     $ 3,774  
Interest expense, net 5,834     16,438  
Income tax expense (benefit) (1,801 )   1,444  
Depreciation and amortization expenses (a) 13,570     12,849  
EBITDA 30,245     34,505  
Share-based compensation expenses (b) 20,277     211  
Debt extinguishment and modification costs (c) 198      
Non-cash rent (d) 2,214     1,862  
Asset impairment and gain or loss on disposition (e) 975     182  
New store pre-opening expenses (f) 406     421  
Provision for accounts receivable reserves (g) 848     1,483  
Other (h) 1,864     459  
Adjusted EBITDA $ 57,027     $ 39,123  

GROCERY OUTLET HOLDING CORP.
RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET INCOME
(in thousands, except per share data)
(unaudited)

  13 Weeks Ended
  March 28, 
2020
  March 30, 
2019
Net income $ 12,642     $ 3,774  
Share-based compensation expenses (b) 20,277     211  
Debt extinguishment and modification costs (c) 198      
Non-cash rent (d) 2,214     1,862  
Asset impairment and gain or loss on disposition (e) 975     182  
New store pre-opening expenses (f) 406     421  
Provision for accounts receivable reserves (g) 848     1,483  
Other (h) 1,864     459  
Amortization of purchase accounting assets and deferred financing costs (i) 2,936     3,916  
Tax effect of total adjustments (j) (8,321 )   (2,361 )
Non-GAAP adjusted net income $ 34,039     $ 9,947  
GAAP earnings per share      
Basic $ 0.14     $ 0.06  
Diluted $ 0.13     $ 0.06  
Non-GAAP adjusted earnings per share      
Basic $ 0.38     $ 0.15  
Diluted $ 0.36     $ 0.15  
GAAP weighted average shares outstanding      
Basic 89,481     68,514  
Diluted 94,869     68,553  
Non-GAAP weighted average shares outstanding      
Basic 89,481     68,514  
Diluted (k) 94,869     68,553  

__________________________

(a) Includes depreciation related to our distribution centers which is included within the cost of sales line item in our condensed consolidated statements of operations and comprehensive income.

(b) Represents non-cash share-based compensation expense of $20.1 million and $0.1 million in the 13 weeks ended March 28, 2020 and March 30, 2019, respectively. During the first quarter of fiscal 2020, we incurred $18.5 million in share-based compensation expense related to March 30, 2019 performance-based stock options that vested in conjunction with the closing of the February 3, 2020 secondary offering. Includes immaterial cash dividends paid on vested share-based awards during the first quarter of fiscal 2020 and 2019 for cash dividends declared in connection with our recapitalizations in fiscal 2018 and 2016.

(c) Represents the write-off of debt issuance costs and debt discounts related to the repricing and/or repayment of our credit facilities.

(d) Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments. The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth in recent years.

(e) Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs.

(f) Includes marketing, occupancy and other expenses incurred in connection with store grand openings, including costs that will be the IO’s responsibility after store opening.

(g) Represents non-cash changes in reserves related to our IO notes and accounts receivable. The first quarter of 2020 reflects the adoption of ASU 2016-13.

(h) Other non-recurring, non-cash or discrete items as determined by management, such as transaction related costs including costs related to the February 3, 2020 secondary offering, personnel-related costs, store closing costs, legal expenses, strategic project costs, and miscellaneous costs.

(i) Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases. 

(j) Represents the tax effect of the total adjustments. Because of the increased impact of discrete items on our effective tax rate including the excess tax benefits from the exercise and vest of share-based awards, beginning in the fourth quarter of fiscal 2019, we changed our methodology to calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items. Prior to the fourth quarter of fiscal 2019, the methodology we used was to calculate the tax effect of the total adjustments using our quarterly effective tax rate.

(k) To calculate diluted non-GAAP adjusted earnings per share, we adjusted the weighted-average shares outstanding for the dilutive effect of all potential shares of common stock.

INVESTOR RELATIONS CONTACT:
Jean Fontana
646-277-1214
Jean.Fontana@icrinc.com

MEDIA CONTACT:
Layla Kasha
510-379-2176
lkasha@cfgo.com