Grocery Outlet to refocus on value to right the ship

Less than a week after the resignation of Grocery Outlet President and CEO RJ Sheedy, Chairman of the Board Eric Lindberg said in an earnings call Tuesday that the company is not changing its underlying strategy. 

Lindberg, who is stepping in as interim president and CEO, said in the earnings call that system upgrades for the retailer that began in August 2023 led to significant troubles for the Grocery Outlet, “including poor data visibility, slow system speeds, and a loss of tools and functionality.”

“These issues hurt our buyers’ ability to write purchase orders efficiently, our inventory planning and supply chain teams’ ability to accurately manage inventory, and our operators’ ability to see real-time inventory in their order guide to bring product into their stores. The impact on the business has been significant,” Lindberg said. 

Lindberg said Grocery Outlet “missed the mark” earlier in 2024 due to “a combination of pricing we took to reestablish healthy margins that coincided with competitive pricings that picked up.”

Grocery Outlet reported that in the third quarter net sales increased 10.4% to $1.11 billion, but comparable store sales grew a mere 1.2%, which was driven by a 2% increase in the number of total transactions. 

That bump in total transactions was partially offset by a reduction in transaction size of 0.7%, according to the retailer. 

Meanwhile, gross margin dropped 30 basis points to 31.1%, and administrative expenses jumped 9.5% to $304.6 billion, representing 27.5% of net sales. 

Adjusted EBITDA increased 6% to $72.3 million during the quarter. 

“While we were disappointed with our weaker comp store sales of 1.2%, given the execution issues I mentioned above, we delivered strong double-digit top line growth,” Lindberg said in the earnings call. 

Grocery Outlet opened five new stores during the quarter, bringing its total store count to 529 locations.

Lindberg said the retailer is refocusing on its core principle of providing value to customers. 

“As mentioned, we must consistently deliver across our key value metrics to create an exciting treasure hunt shop every time the customer steps foot in one of our stores,” he said. “Consumers continue to prioritize value, and we are well positioned to capture growth in this environment.”

Though Grocery Outlet has faced setbacks due to competitors offering lower prices, Lindberg said the chain does not believe the competition is “a fundamental impediment to getting back to where we want to be on value.”

“We have a strong history of navigating changing competitive environments, and we will continue to balance value and margin with our opportunistic buying model,” he said.

Grocery Outlet Chief Financial Interim Officer Lindsay Gray said in the earnings call that looking forward, the retailer expects comparative store sales growth of 2% in the fourth quarter and 2.4% for the full year. 

Gray added that Grocery Outlet expects to add 66 new stores this year, which includes the 40 locations purchased from United Grocery Outlet in April and 26 organically opened stores.

That purchase expanded the grocer’s brick-and-mortar footprint into the Southern states of Tennessee, North Carolina, Georgia, Alabama, Kentucky, and Virginia.

That 66-store addition is up from the 60-store figure Grocery Outlet said in late February that it planned to add by the end of the year. 

“Broadly speaking, at this point, we believe the full year of fiscal 2025 should be framed around a return to our long-term growth and algorithm targets, which, as a reminder, are comparable store sales growth of 1% to 3%, gross margin of approximately 30.5% and adjusted EBITDA margin of approximately 6%, building to this full-year number as the year progresses,” Gray said. 

Lindberg spoke at greater length on Sheedy’s recent departure during the question-and-answer portion of the earnings call, reiterating that “this last year has been really difficult” due to operational challenges associated with its systems transition. 

“You know, working with RJ for many, many years, we were patient. We felt like that was the right thing to do, to be patient, but I can tell you the same way that you all might have been feeling about our performance, we were feeling that internally as well,” Lindberg said. “So we finally got to a point after the last board meeting where we sat down, we had a frank conversation, and we had an agreement to move forward.”

He emphasized that Grocery Outlet’s executive leadership had no major disagreement with Sheedy that led to his departure. 

“There’s no new finding that you guys will learn about later; there’s no other shoe to drop,” he said. “This was just a little bit of inconvenient timing and sort of a function of how things played out, nothing more.”