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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 4.6% 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 the most recent earnings report in order to get a better handle on the important drivers.
Grocery Outlet's Q4 Earnings Beat Estimates, Comps Rise
Grocery Outlet Holding Corp. sustained its upbeat performance in fourth-quarter 2020, with the top and the bottom line surpassing the Zacks Consensus Estimate. Both the metrics improved on a year-over-year basis.
The owner and operator of grocery store chains delivered adjusted earnings of 24 cents a share that beat the Zacks Consensus Estimate of 23 cents and increased from 18 cents (based on revised definition) reported in the prior-year quarter. This was the seventh straight quarter of positive earnings surprise.
Net sales of $806.8 million surged 23.1% from the year-ago quarter’s levels and surpassed the Zacks Consensus Estimate of $788 million. The top line includes sales worth $53.3 million from the 53rd week. Growth in comparable sales and contribution from 33 net additional stores opened since the end of the fourth quarter last year drove the top line in the reported quarter.
Notably, this Emeryville, CA-based company registered comparable-store sales growth of 7.9% during the quarter under review. This followed an increase of 9.1% in the preceding quarter. We note that the company’s comparable-store sales rose 5.1% during fourth-quarter last year. The increase in comparable-store sales reflects rise in average basket size, partly offset by lower store traffic as customers continue to consolidate trips.
Margins & Costs
We note that gross profit improved 22% year over year to $244.4 million. However, gross margin contracted 30 basis points (bps) to 30.3% due to impacts from holiday product mix. During the quarter, adjusted EBITDA surged 24.7% to $51.2 million, while EBITDA margin remained flat at 6.3%.
Selling, general and administrative (SG&A) expenses rose 17.7% to $197.6 million due to increased variable commissions to independent operators, higher investments in personnel and infrastructure, higher store occupancy costs emerging from store expansions as well as expenses related to COVID-19. As a percentage of net sales, the SG&A expenses dropped 110 bps to 24.5%.
Grocery Outlet opened eight new stores during the fourth quarter, taking the total count to 380 stores in six states. The company opened 35 stores during 2020. The company intends to open 36-38 stores during 2021. Management plans to hit the 400-store mark by summer this year.
Other Financial Aspects
Grocery Outlet ended fourth-quarter 2020 with cash and cash equivalents of $105.3 million. Total long-term debt was $449.2 million, while stockholders’ equity amounted to $922.3 million.
Net cash provided by operating activities were $181.2 million during 2020. The company incurred capital expenditures (excluding the impact of tenant improvement allowances) of $39.1 million during the quarter under review and $150 million for the year. Management envisions capital expenditures (net of tenant improvement allowances) to be about $130 million in 2021.
Grocery Outlet highlighted that January comp sales were up in the mid-single digits owing to continued larger basket sizes offsetting sluggish traffic. In the month of February comp sales moderated, and rose in the low single digits, as the company began to anniversary the onset of last year's COVID-19 related demand spike toward the end of the month.
Management expects first-quarter 2021 comparable sales to decline in the high-single digits. This is largely due to the impact of cycling the initial demand surge witnessed in March 2020, due to the COVID-19 pandemic. Additionally, the company anticipates gross margin in 2021 to be in line with the pre-pandemic levels, as the company returns to normalized levels of inventory shrink. We note that the company also expects SG&A as a percentage of sales to be consistent with pre-COVID levels.
With respect to adjusted EBITDA margin, the company anticipates full-year 2021 results as a percentage of sales to be in line with 2019 performance. Management envisions first-half 2021 adjusted EBITDA margin to be marginally below the 2019 benchmark. Further, as the company continues to open new stores and makes infrastructure investments, depreciation and amortization expense is likely to increase in the high teens on a percentage basis versus the prior year.
How Have Estimates Been Moving Since Then?
Estimates revision followed an upward path over the past two months. The consensus estimate has shifted -21.3% due to these changes.
At this time, Grocery Outlet Holding Corp. has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Grocery Outlet Holding Corp. has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.
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