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Why Is Grocery Outlet Holding Corp. (GO) Down 6.2% Since Last Earnings Report?

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A month has gone by since the last earnings report for Grocery Outlet Holding Corp. (GO). Shares have lost about 6.2% 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 the most recent earnings report in order to get a better handle on the important drivers.

Grocery Outlet's Q3 Earnings Beat Estimates, Comps Rise

Grocery Outlet sustained its upbeat performance in third-quarter 2020 with both the top and the bottom lines not only surpassing the Zacks Consensus Estimate but also improving year over year. The company gained from coronavirus-induced spike in demand. With people dining at home and maintaining social distancing, they have been stocking essential items.

Additionally, the company’s flexible sourcing and distribution business model that helps it in offering quality, name-brand consumables and fresh products at exceptional values is commendable.

Let’s Take an Insight

The owner and operator of grocery store chains reported adjusted earnings of 50 cents a share that comfortably beat the Zacks Consensus Estimate of 23 cents and improved significantly from 22 cents in the prior-year period. Higher net sales and lower interest expense contributed to the bottom line. This was the sixth straight quarter of positive earnings surprise.

Net sales of $764.1 million surged 17.1% from year-ago quarter, courtesy of comparable-store sales growth and contribution from 35 net additional stores opened since the end of the third quarter last year. The top line also surpassed the Zacks Consensus Estimate of $753.7 million.

Notably, this Emeryville, CA-based company registered comparable-store sales growth of 9.1% during the quarter under review on account of increase in average transaction size, partially offset by decline in traffic. This followed an increase of 16.7% in the preceding quarter. We note that the company’s comparable-store sales rose a meager 5.8% in the third quarter last year.

Management notified that for the fourth quarter to-date comparable store sales growth is tracking in the mid-single digits. The increase in comparable-store sales reflects rise in average basket size, partly negated by lower store traffic as customers continue to consolidate trips. Taking into account current trends, management anticipates comparable store results for the final quarter to remain consistent at these levels.

Margins & Costs

We note that gross profit improved 18.4% year over year to $238.2 million, while gross margin expanded 40 basis points to 31.2% courtesy of reduced markdowns. Management anticipates gross margin rate in the fourth quarter to be at or marginally below prior-year levels due to ongoing headwinds from COVID-19 related distribution expenses and commodity cost pressures. Management continues to expect incremental expenses related to the coronavirus outbreak.
 
During the quarter, adjusted EBITDA surged 25.1% to $55.3 million owing to gross margin expansion, partially offset by SG&A deleverage. Adjusted EBITDA margin increased 40 basis points to 7.2%. Management envisions fourth-quarter adjusted EBITDA margin to be modestly below prior-year levels.

SG&A expenses rose 17.9% to $189.9 million. Again, as a percentage of net sales, the same jumped 20 basis points to 24.9%. The increase in SG&A expenses led to a jump of 17.3% in overall operating expenses of $207.9 million. As a percentage of net sales, operating expenses increased 10 basis points to 27.2%.

Store Update

Grocery Outlet opened 10 new stores during the third quarter, taking the total count to 372 stores in six states. The company intends to open seven stores in the fourth quarter with no additional closures. This would result in 34 new outlets for the year. The company continues to build its real estate pipeline to support 10% annual unit growth.

Other Financial Aspects

Grocery Outlet ended third-quarter 2020 with cash and cash equivalents of $59.1 million compared with $44 million at the end of the same period in fiscal 2019. Total debt was $460.1 million at the end of the quarter under review compared with $475.5 million at the end of the prior-year period.

The company incurred capital expenditures (excluding the impact of landlord allowances) of $35.9 million during the quarter under review. Management envisions capital expenditures to be about $105 million for the full year.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 7.48% due to these changes.

VGM Scores

At this time, Grocery Outlet Holding Corp. has an average Growth Score of C, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the lowest 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.

Outlook

Estimates have been 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 #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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