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It has been about a month since the last earnings report for Grocery Outlet Holding Corp. (GO). Shares have added about 5.2% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Grocery Outlet Holding Corp. due for a pullback? 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 drivers.
Grocery Outlet Q1 Earnings Beat, Margins a Concern
Grocery Outlet Holding Corp. reported first-quarter 2022 results, wherein both the top and the bottom lines beat the Zacks Consensus Estimate. While net sales increased year over year, earnings per share declined from the year-ago period. The company registered solid comparable store sales performance in the quarter under discussion. The better-than-expected results and robust traffic trends in the second quarter prompted management to lift the net sales and earnings view for 2022.
This California-based company continues to navigate through the challenging operating environment on the back of strategic growth efforts. Grocery Outlet’s flexible sourcing and distribution business model, which helps it in offering products at exceptional values as well as 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.
The extreme value retailer of quality, name-brand consumables and fresh products reported adjusted earnings of 22 cents a share that surpassed the Zacks Consensus Estimate of 20 cents. However, the bottom line fell from 23 cents reported in the prior-year quarter.
Net sales of $831.4 million beat the Zacks Consensus Estimate of $810.9 million and improved 10.5% year over year, driven by stellar comparable store sales performance combined with the impact of 29 net new stores opened since the first quarter of 2021. Comparable store sales increased 5.2% during the first quarter against a decline of 8.2% in the year-ago period. Average ticket and positive year-over-year traffic trends were primary drivers behind comparable store sales growth.
Margins & Costs
Gross profit jumped 8.2% year over year to $250.9 million. However, gross margin contracted 60 basis points (bps) to 30.2%. During the quarter, adjusted EBITDA rose 0.8% to $49.3 million, while adjusted EBITDA margin shrunk 60 basis points to 5.9%.
SG&A expenses increased 10% to $207.4 million owing to increased independent operator commission expenses and store occupancy costs related to new store growth as well as higher personnel expenses.
Grocery Outlet opened four new stores and closed one during the quarter, taking the total count to 418 stores in seven states. It remains on track to open 28 net new stores in 2022. During second-quarter 2022, the company plans to open seven new stores, including one store opening that shifted from the first quarter.
Other Financial Aspects
Grocery Outlet ended the quarter with cash and cash equivalents of $138 million, long-term debt of $452 million and stockholders’ equity of $1,024.1 million. Net cash provided by operating activities during the first quarter was $36.3 million. The company incurred capital expenditures of $27.2 million (net of tenant improvement allowances). Management envisions capital expenditures (net of tenant improvement allowances) of about $115 million for 2022.
Management expects 2022 net sales between $3.39 billion and $3.42 billion (versus $3.08 billion in 2021) as well as comparable store sales growth of 5.5% to 6.5% (against a decline of 6% in 2021).
The company had earlier projected net sales in the range of $3.33 billion to $3.38 billion and comparable store sales increase in the band of 4% to 5% for 2022.
Grocery Outlet guided a full-year gross margin of 30.6% compared with 30.8% reported in 2021. It projected adjusted EBITDA between $213 million and $220 million compared with $198.5 million in 2021. The company forecast adjusted earnings in the bracket of 94 cents to 99 cents a share for 2022, suggesting an increase from 90 cents reported in 2021.
The company had earlier forecast 2022 adjusted EBITDA between $210 million and $217 million and adjusted earnings per share in the range of 92 cents to 97 cents.
Management envisions second-quarter 2022 net sales to be approximately $855 million compared with $775.5 million reported in second-quarter 2021. It guided comparable store sales growth of 6% against a decline of 10% witnessed in the prior-year quarter.
It expects second-quarter 2022 gross margin to be approximately 30.6% and an adjusted EBITDA margin of about 6.3%. The company had reported a gross margin of 30.7% and an adjusted EBITDA margin of 6.6% in the year-ago period. With respect to second-quarter expenses, Grocery Outlet expects modest SG&A deleverage.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -32.28% due to these changes.
Currently, Grocery Outlet Holding Corp. has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Grocery Outlet Holding Corp. has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
Performance of an Industry Player
Grocery Outlet Holding Corp. is part of the Zacks Consumer Products - Staples industry. Over the past month, International Flavors (IFF), a stock from the same industry, has gained 3.8%. The company reported its results for the quarter ended March 2022 more than a month ago.
International Flavors reported revenues of $3.23 billion in the last reported quarter, representing a year-over-year change of +30.9%. EPS of $1.69 for the same period compares with $1.60 a year ago.
International Flavors is expected to post earnings of $1.42 per share for the current quarter, representing a year-over-year change of -5.3%. Over the last 30 days, the Zacks Consensus Estimate has changed +3%.
The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for International Flavors. Also, the stock has a VGM Score of C.
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