Grocery Outlet (NASDAQ:GO) Misses Q3 Sales Targets, Stock Drops
Discount grocery store chain Grocery Outlet (NASDAQ:GO) missed analysts' expectations in Q3 FY2023, with revenue up 9.3% year on year to $1 billion. Its full-year revenue guidance of $4 billion at the midpoint came in slightly below analysts' estimates. Turning to EPS, Grocery Outlet made a non-GAAP profit of $0.31 per share, improving from its profit of $0.27 per share in the same quarter last year.
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Grocery Outlet (GO) Q3 FY2023 Highlights:
Revenue: $1 billion vs analyst estimates of $1 billion (small miss)
EPS (non-GAAP): $0.31 vs analyst estimates of $0.27 (15.5% beat)
The company reconfirmed its revenue guidance for the full year of $4 billion at the midpoint
Free Cash Flow of $6.2 million, down 78% from the same quarter last year
Gross Margin (GAAP): 31.4%, up from 30.6% in the same quarter last year
Same-Store Sales were up 6.4% year on year
Store Locations: 455 at quarter end, increasing by 24 over the last 12 months
"We are pleased with our third quarter performance and the underlying trends in our business," said RJ Sheedy, CEO of Grocery Outlet.
Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ:GO) is a discount grocery store chain that offers substantial discounts on name-brand products.
Grocery Store
Grocery stores are non-discretionary because they sell food, an essential staple for life (maybe not that ice cream?). Selling food, however, is a notoriously tough business as grocers must deal with the costs of procuring and transporting oftentimes perishable products. Plus, the costs of operating stores to sell everything from raw meat to ice cream and fresh fruit are high. Competition is also fierce because grocers and other peers such as wholesale clubs tend to sell very similar brands and products. On the bright side, grocery is one of the least penetrated categories in e-commerce because customers prefer to buy their food in person. Still, the online threat exists and will likely increase over time rather than dwindle.
Sales Growth
Grocery Outlet is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.
As you can see below, the company's annualized revenue growth rate of 12% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was impressive as it opened new stores and grew sales at existing, established stores.
This quarter, Grocery Outlet grew its revenue by 9.3% year on year, missing analysts' expectations. Looking ahead, the analysts covering the company expect sales to grow 8.1% over the next 12 months.
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Number of Stores
When a retailer like Grocery Outlet is opening new stores, it usually means it's investing for growth because demand is greater than supply. Grocery Outlet's store count increased by 24 locations, or 5.6%, over the last 12 months to 455 total retail locations in the most recently reported quarter.
Over the last two years, the company has opened new stores quickly and averaged 6.5% annual growth in new locations, meaningfully higher than other consumer retail businesses. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.
Same-Store Sales
Same-store sales growth is an important metric that tracks demand for a retailer's established brick-and-mortar stores and e-commerce platform.
Grocery Outlet's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 9.5% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Grocery Outlet is reaching more customers and growing sales.
In the latest quarter, Grocery Outlet's same-store sales rose 6.4% year on year. By the company's standards, this growth was a meaningful deceleration from the 15.4% year-on-year increase it posted 12 months ago. One quarter fluctuations aren't material for the long-term prospects of a business, but we'll watch Grocery Outlet closely to see if it can reaccelerate growth.
Key Takeaways from Grocery Outlet's Q3 Results
With a market capitalization of $2.8 billion, Grocery Outlet is among smaller companies, but its $155.7 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.
We enjoyed seeing Grocery Outlet exceed analysts' adjusted EBITDA and EPS expectations this quarter. On the other hand, its revenue missed Wall Street's estimates, driven by worse-than-expected same-store sales. The company also lowered its full-year adjusted EBITDA and EPS guidance, likely because it's investing in new technology platforms to synchronize its operations. Overall, this was a mixed quarter for Grocery Outlet. The company is down 7.1% on the results and currently trades at $26.47 per share.
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The author has no position in any of the stocks mentioned in this report.
