Grocery Outlet Holding Corp. (GO) Down 13.2% Since Last Earnings Report: Can It Rebound?
It has been about a month since the last earnings report for Grocery Outlet Holding Corp. (GO). Shares have lost about 13.2% 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 its most recent earnings report in order to get a better handle on the important catalysts.
Grocery Outlet Q2 Earnings Beat, FY23 Outlook Raised
Grocery Outlet Holding Corp. reported second-quarter 2023 results, wherein both top and bottom lines beat the Zacks Consensus Estimate and also improved year over year. The company registered a solid comparable store sales performance in the quarter. Following the results, management raised its full-year view.
This California-based company continues to navigate through the challenging operating environment with strategic growth efforts. Grocery Outlet’s flexible sourcing and distribution business model, which helps it offer products at an exceptional value and excellent service from independent operators, bodes well.
The company’s opportunistic purchasing strategy, marketing efforts, store-growth endeavors and e-commerce initiatives to deepen customer reach appear encouraging.
Q2 Insights
GO reported adjusted earnings of 32 cents per share, which comfortably surpassed the Zacks Consensus Estimate of 26 cents. The bottom line also increased from 27 cents delivered in the year-ago quarter.
Net sales of $1,010.3 million beat the Zacks Consensus Estimate of $975 million. The top line grew 12.5% year over year. The outperformance was driven by stellar comparable store sales performance.
Comparable store sales increased 9.2% in the second quarter compared with 11.2% growth registered in the year-ago period. In the reported quarter, the increase in the metric was driven by a 9.1% growth in the number of transactions, while the average transaction size was stable.
Margins & Costs
The gross profit jumped 16.9% year over year to $326.6 million. The gross margin expanded 120 basis points to 32.3%. Adjusted EBITDA came in at $70.5 million compared with $57.5 million in the year-ago period. We note that the adjusted EBITDA margin expanded 60 basis points to 7%.
SG&A expenses jumped 14.9% to $290.1 million due to increased independent operator commission expenses and store occupancy costs. As a percentage of net sales, SG&A expenses expanded 60 basis points to 28.7% due to increased variable commission expenses.
Store Update
During the quarter, Grocery Outlet opened four new stores and closed one store, bringing the total count to 447 stores in eight states. In the third quarter, the company plans to open eight stores, with balance openings in the fourth quarter. It intends to open 25 to 28 stores in 2023.
Other Financial Aspects
Grocery Outlet ended the quarter with cash and cash equivalents of $87.6 million, long-term debt of $290.7 million and stockholders’ equity of $1,164.8 million.
Net cash provided by operating activities during the second quarter was $69.5 million. The company incurred capital expenditures of $35.4 million (net of tenant improvement allowances). Management envisions capital expenditures (net of tenant improvement allowances) of about $155 million for 2023.
Outlook
Management now expects 2023 net sales of $3.95 billion compared with $3.58 billion in 2022. It currently expects comparable store sales growth of 7% to 8% compared with an 11.8% increase registered in 2022. Grocery Outlet had earlier projected 2023 net sales of $3.90 billion and comparable store sales growth of 5% to 6%.
The company guided a full-year gross margin of 31.3% compared with 30.5% reported in 2022. It projected adjusted EBITDA between $254 million and $260 million in 2023. Grocery Outlet reported adjusted EBITDA of $214.7 million in 2022. The company had previously expected a full-year gross margin of 30.7% and adjusted EBITDA between $240 million and $246 million.
Grocery Outlet now envisions adjusted earnings in the band of $1.04-$1.08 per share for 2023 compared with the 94 cents reported in 2022. It had earlier guided adjusted earnings in the range of 96 cents-$1.00 per share for 2023.
Management expects third-quarter 2023 comparable store sales to be approximately 6.5% compared with 15.4% growth registered in the year-ago period. Grocery Outlet foresees third-quarter 2023 gross margin to be approximately 31.3% compared with 30.6% reported in the year-ago period. The company estimates third-quarter adjusted EBITDA to be roughly 6.4% of sales.
How Have Estimates Been Moving Since Then?
It turns out, estimates review have trended upward during the past month.
The consensus estimate has shifted 9.32% due to these changes.
VGM Scores
At this time, Grocery Outlet Holding Corp. has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a C. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Grocery Outlet Holding Corp. has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.
Performance of an Industry Player
Grocery Outlet Holding Corp. belongs to the Zacks Consumer Products - Staples industry. Another stock from the same industry, International Flavors (IFF), has gained 11.3% over the past month. More than a month has passed since the company reported results for the quarter ended June 2023.
International Flavors reported revenues of $2.93 billion in the last reported quarter, representing a year-over-year change of -11.4%. EPS of $0.86 for the same period compares with $1.54 a year ago.
International Flavors is expected to post earnings of $0.84 per share for the current quarter, representing a year-over-year change of -38.2%. Over the last 30 days, the Zacks Consensus Estimate has changed -32.6%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #5 (Strong Sell) for International Flavors. Also, the stock has a VGM Score of F.
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