Grocery Outlet Holding Corp. (NASDAQ:GO) Q4 2023 Earnings Call Transcript
Grocery Outlet Holding Corp. (NASDAQ:GO) Q4 2023 Earnings Call Transcript February 27, 2024
Grocery Outlet Holding Corp. beats earnings expectations. Reported EPS is $0.18, expectations were $0.16. Grocery Outlet Holding Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. And welcome to Grocery Outlet Full-Year 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note participants are restricted to one question at a time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christine Chen, Head of Investor Relations. Please go ahead, ma'am.
Christine Chen: Good afternoon. And welcome to Grocery Outlet’s call to discuss financial results for the fourth quarter and fiscal year for the period ending December 30, 2023. Speaking from management on today’s call will be RJ Sheedy, President and Chief Executive Officer; and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live and a recording will be available via telephone playback and on the Investor Relations section of the company’s website. Participants on this call may make forward-looking statements within the meaning of federal securities laws. All statements that address future operating, financial or business performance or the company’s strategies or expectations are forward-looking statements.
These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. A description of these factors can be found in this afternoon’s press release, as well as the company’s periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company’s website or at sec.gov.
RJ Sheedy: Good afternoon, everyone, and thank you for joining us. We are happy to be speaking to you today about our business results, acquisition of United Grocery Outlet and outlook for 2024. Let me start by providing some commentary on business performance and notable growth initiatives over the next few years. First, our fourth quarter results were slightly ahead of our expectations and traffic and customer acquisition remains strong. We continue to deliver unbeatable value with an exciting treasure hunt experience and our underlying business fundamentals remain healthy. Second, we are excited to be acquiring United Grocery Outlet, which adds 40 stores to our network. This is an ideal strategic fit given our similar business models, customer value propositions and shared mission of serving and helping others.
This acquisition provides Grocery Outlet which scale in a new geography as well as a platform for future expansion in the Southeast. We are thrilled to welcome the United Grocery Outlet team into the Grocery Outlet family and we look forward to working together on the many growth opportunities ahead. Third, we are making good progress on a number of strategic initiatives that we believe will strengthen our value proposition and contribute to future growth. Our personalization app is now rolling out to all stores and we will soon begin to invest in marketing to drive downloads and adoption. We are also looking forward to the launch of our new private label program later this year. Finally, we are excited to welcome Ramesh Chikkala to Grocery Outlet in the new role of Chief Operations Officer.
I have known Ramesh for a number of years and he is familiar with our business through previous consulting work. Ramesh is leading our business technology and supply chain teams to help us scale and improve our capabilities to support growth. Let me now expand on each of these with more details. Fourth quarter sales increased 6.3% driven by a 2.7% increase in comparable store sales, which was ahead of our expectations. Transaction count remains strong at 7.5% increasing throughout the quarter. While food inflation has been moderating, consumers still face higher food prices and other financial burdens. Our compelling savings and ever-changing assortment of high quality wow items continue to drive healthy traffic increases and market share gains.
Fourth quarter gross margin was also ahead of our expectations at 30.2%. The closeout market remains strong in our growing size and scale provide increasing access to products with strong customer value and healthy margin. We opened 13 new stores in the fourth quarter, including our first store in Ohio, ending the year with 468 locations. Recent vintages continue to ramp well and we are pleased with new store performance. We have made steady progress with our systems implementation work, though data integration efforts are taking longer than expected and are still impacting our business results. The largest remaining issues are related to warehouse product expiry data and store level reporting for IOs. We expect these to be resolved soon after which the P&L impact will be behind us.
Charles will provide more details in his comments. Despite the systems disruption, business fundamentals are healthy and our new applications are supporting daily operations well. We are proud to have delivered strong results during 2023 growing sales by 11% to a record $4 billion. This was driven by comp store sales growth of 7.5% and a customer count increase of 8.3%. We also leveraged gross profit by 76 basis points and grew adjusted EBITDA by 18%. Now let's turn to the acquisition. United Grocery Outlet is a healthy, profitable and growing business. Their opportunistic buying model, similar company values and adjacent geographic footprint make it an ideal strategic fit. Founded 50 years ago, United Grocery Outlet offers customers’ tremendous savings within a treasure hunt shopping environment.
Strong partnerships with national and regional brands enable it to provide quality food at unbeatable prices to its loyal customer base. United Grocery Outlet also operates as a local business with a mission of giving back and making a positive impact on their community. Their stores averaged 17,000 square feet and have seen healthy same-store sales growth in recent years driven by both transaction count and ring. This acquisition provides Grocery Outlet a great entry point into the Southeast region with 40 stores across the six states of Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia. United Grocery Outlet also operates a distribution center, which can support additional new store growth in the broader Southeast region.
This is an exciting addition as we pursue our white space opportunity of over 4,000 stores across the U.S. Distribution center infrastructure in this region also provides us with better access to opportunistic product that can benefit all grocery outlet stores. We have many levers to accelerate sales growth in partnership with the United Grocery Outlet team. Some of these opportunities include assortment expansion, additional store fixtures and improvements and technology and marketing investments. We also see our independent operator model as another lever for growth. It is an important differentiator for us and we believe that it can have a positive impact in this region as well. We look forward to updating you on integration progress as we go.
In addition to the United Grocery Outlet stores, we plan to open 15 to 20 stores for a total of 55 to 60 net new stores this year. Our real estate pipeline is healthy with approved sites for 2025 in good position to deliver our 10% annual growth goal. Given this, most of our recent real estate efforts have been focused on building the 2026 pipeline. This will add to what is currently over 100 approved sites for 2025 and 2026 combined. We continue to pursue organic growth combined with additional real estate opportunities that align with our long-term geographic expansion and store growth strategies. We are expanding strategic relationships with large property owners, evaluating opportunistic real estate lists and exploring additional strategic regional acquisitions.
The combination of these activities will help us deliver on our tremendous long-term store growth and geographic expansion opportunities. Let's turn now to other strategic initiatives. Our personalization app is on track to be active in all stores by the end of the first quarter. This app will allow us to communicate our weekly deals to customers and customize their treasure hunt experience. This will increase customer engagement with Grocery Outlet and help drive trip frequency and share of wallet. We are also looking forward to launching our first new private label products later in the second half of the year with a goal of 100 SKUs by year end. Our assortment will initially focus on everyday value commodity categories that deliver better value and margin and complete the full shop.
These items will help us capture larger baskets and create a stickier customer relationship. Our private label strategy will also include NOSH categories and unique items that will serve as another differentiator enhancing the customer shopping experience. Next, for people update, we welcomed Ramesh Chikkala last month in the new role of Chief Operations Officer. Ramesh's experience in retail and operations organizations includes 14 years at Walmart, whereas SVP, he led its global supply chain and food manufacturing operations, as well as its global technology organization. Most recently, Ramesh has been a Senior Advisor to Kearney in their operations, supply chain technology and consumer industry and retail practices. I look forward to working with him to further optimize our supply chain and technology infrastructure to support our long-term growth.
We are in process with our search for a new CFO and I'm happy to have Lindsay Gray, our SVP of Accounting and Principal Accounting Officer stepping into the role of Interim CFO effective March 1. Lindsay has been with Grocery Outlets for the last eight years leading our accounting team. She is an experienced financial executive with deep knowledge of Grocery Outlets business and over 14 years of leadership in finance. She also is well connected throughout the business and a strong supporter of the IO model. In closing, I would like to thank the Grocery Outlet team and our IOs for their dedication and many contributions. The entrepreneurial spirit of our IOs combined with the buying power of our team, creates a powerfully unique customer experience, which positions us well to continue to grow our market share.
I also want to thank Charles for his invaluable contributions to Grocery Outlet. Thank you, Charles for all that you've done over the past 12 years. You'll be greatly missed by everyone and we wish you the best of luck in the next chapter of your career. And with that, I'll turn it over to Charles.
Charles Bracher: Thanks, RJ, and good afternoon, everyone. Our fourth quarter results slightly exceeded our expectations reflecting continued strength in transaction growth which improved throughout the quarter. For fiscal 2023 in total, we delivered strong top-line growth with comp sales increasing 7.5% yielding $4 billion in total sales. We also drove healthy bottom-line growth with adjusted EBITDA up 17.7% and adjusted net income increasing 15.2%. For the quarter, net sales increased 6.3% to $989.8 million due to a 2.7% increase in comparable store sales and the impact of new stores opened over the past 12 months. Comp transaction growth of 7.5% was partially offset by a 4.5% decline in our average basket. We estimate the system transition impacted comp sales by approximately 200 basis points for the quarter.
We opened 13 new stores during the quarter, including seven in the East and one in Southern California, ending the year with 468 locations. We remain pleased with the performance of our new stores which are ramping in line with our expectations. Gross profit increased 6.3% to $298.9 million, representing a 30.2% gross margin rate, slightly better than our expectations. We continue to experience healthy deal flow, which helped offset the margin impact of our system integration, which we estimate was approximately 130 basis points in the quarter. Turning to expenses, fourth quarter SG&A increased 8.8% to $279.9 million. As a percentage of sales, SG&A increased 65 basis points. The increase was driven by higher commission payments to IOs, store occupancy due to new unit growth and D&A expense.
This was partially offset by lower incentive and stock based compensation accruals. The higher commission expense reflects gross profit growth along with additional commission support we elected to provide our IOs in connection with our system transition. Net interest expense decreased 74.2% to $1.5 million in the quarter. This reflects a reduction in net borrowing versus the prior year, partially offset by higher average rates. In addition, we recorded a reduction of approximately $2 million in the quarter to reflect full year capitalized interest costs related to store construction and other capital projects. Our effective GAAP tax rate during the quarter was 19.3%. For non-GAAP purposes, our normalized tax rate was approximately 31% in the quarter, which reflects a 30% rate for the full fiscal year.
As a result of these factors, GAAP net income for the fourth quarter was $14.1 million or $0.14 per diluted share. For the fourth quarter, adjusted EBITDA was $50.9 million or 5.1% of sales, slightly better than expected. Adjusted net income was $18.2 million for the quarter or $0.18 per diluted share. Turning to our balance sheet, we ended the quarter with $115 million of cash. Our inventory position improved throughout the quarter ending at $350 million. Total debt was $292.7 million at the end of the fourth quarter with net leverage less than 1x adjusted EBITDA. For fiscal 2023, we generated $303.5 million of operating cash flow and we invested $175.6 million in CapEx net of tenant improvement allowances. This was higher than initially planned due to the timing of payments for new stores and costs related to our systems implementation.
Now let me provide you with some commentary on our fiscal 2024 guidance, which includes the impacts of the United Grocery Outlet acquisition and the system transition. We expect the acquisition to close at the beginning of second quarter. Our first quarter guidance assumes no financial impact from the acquisition and our full year guidance assumes nine months of financial results from United Grocery Outlet. As a result, our fiscal 2024 guidance assumes incremental sales of approximately $125 million adjusted EBITDA of $7 million and a modest benefit to adjusted EPS. With respect to our system transition, while we have made progress, the data integration efforts have taken longer than anticipated. Because of this, we expect we'll continue to experience P&L impacts during the first quarter.
With that as background, let me provide you with our expectations for fiscal 2024. For the full year, we are projecting comp sales growth in the range of 3% to 4%. We expect comp growth in the first quarter to be approximately 2% which includes an estimated 50 basis point impact from the system transition. We expect to add a total of 55 to 60 net new stores this year. This includes the 40 newly acquired United Grocery Outlet stores as well as 15 to 20 new stores on our existing markets evenly split by quarter. In total, we project fiscal 2024 net sales of $4.3 billion to $4.35 billion. For the full fiscal year, we project gross margin of approximately 31.3%. We expect gross margin for the first quarter of approximately 30.4%, which includes an estimated 100 basis point impact from the system transition.
We expect sequential improvement in gross margins into the back half of the year. For the full fiscal year, we expect adjusted EBITDA to be in the range of $275 million to $283 million. We expect first quarter adjusted EBITDA margin of approximately 5% reflecting lower gross margin and higher IO commission support. For the year, we expect G&A to grow in the mid-teens on a percentage basis reflecting the impact of store growth, the United Grocery Outlet acquisition and infrastructure reinvestments. We expect stock-based compensation of approximately $32 million for the year. Net-interest expense is anticipated to be approximately $17 million. We forecast a normalized tax rate of 30% and average diluted shares outstanding of approximately $102 million.
We expect CapEx net of tenant improvement allowances of approximately $170 million reflecting new store growth, upgrades to our existing fleet including approximately $15 million of anticipated United Grocery Outlet store capital improvements as well as ongoing investments in technology, supply chain and infrastructure. We expect resulting full year adjusted EPS to be in the range of $1.14 to $1.20 per diluted share. In closing, I want to thank the Grocery Outlet team and operator community for an incredible past 12 years. Grocery Outlet is truly a unique company and I will miss being part of this organization. I'm incredibly proud of all that we have accomplished and I want to thank RJ, the Board and the leadership team for their fantastic partnership along the way.
We will now open the call up to your questions. Operator?
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