Grocery Outlet cites Q2 pressures as profits drop 42.8%

Grocery Outlet said ongoing disruptions from the implementation of new technology platforms drove down its profitability in the second quarter, despite an 11.7% increase in sales, according to a conference call with investors on Tuesday.

Comparable-store sales have also been under pressure from competitors’ aggressive pricing, the company said.

Net income for the 13-week quarter, which ended June 29, was down 42.8%, to $14 million, compared with the year-ago period. The company said its gross margins as a percent of sales fell 140 basis points, to 30.9%, which included 100 basis points because of the technology disruptions. In addition, selling, general and administrative expenses increased by 11.4% to $323.1 million, or 28.6% of sales, which included $3.8 million provided to store operators in connection with the company’s system upgrades.

Grocery Outlet said it did not expect any further disruptions that would have a material impact throughout the remainder of the year.

The Q2 gross margins and net income actually came in better than the company had expected, said RJ Sheedy, president and CEO.

“We continue to make good progress with our systems transition work and are happy to now have the material negative [profit and loss] impact behind us,” he said.

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Comparable-store sales were up 2.9% in the quarter, driven by a 5.1% increase in transactions, partially offset by a 2.1% decrease in average transaction size.

Sheedy said comp-store sales were under pressure late in the second quarter and early in the third quarter in part because of difficult comparisons with last year and in part because of aggressive pricing from competitors. As a result, the company is expecting lower comp-store sales gains of 1.5% in the third quarter.

Grocery Outlet added that it expected comps for the full year to come in about 3.5%, at the low end of the 3.5%-4.5% range the company had previously projected.

“We are confident in the adjustments we are making to drive value for customers,” Sheedy said in the conference call Tuesday.

These adjustments include sharpened pricing and new marketing efforts, he said.

“This is a very flexible and dynamic business model, and we are able to pivot [quickly],” Sheedy said.

He also said that despite the technology disruptions, the new platforms the company has installed would lay the groundwork for future efficiencies.

The company also introduced a handful of products from its first private label brand, Simply GO, during the quarter. The line includes staples in the beverage, dairy, pasta categories, among others.

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Two additional private label brands, GO Home & Haven, and GO Paw & Pamper, which will include household and pet products, respectively, are expected to roll out later this year.

Sheedy also said Grocery Outlet has increased its expectations for total new store openings for the year, which include the addition of 40 stores acquired from United Grocery Outlet. It now expects between 62 and 64 new locations, up from previous guidance of 60-62 new stores.

“The team is executing really, really well, in terms of getting new stores open,” he said.

The company picked up a few stores from shuttered 99 Cents Only in the Las Vegas market, and also sees potential opportunities from some closed Rite Aid locations in some markets, Sheedy said.

The company had some 524 locations at the end of the second quarter.