Grocery Outlet Preps for an Unpredictable Anniversary

Call it a diamond anniversary in the rough.

As Grocery Outlet embarks on its 75th birthday year, its leaders are preparing to cycle COVID-aided sales and margin benefits of its 74th year, while keeping an eye on comparisons with its 73rd.

And while the fast-growing extreme discounter remains confident in its market position and long-term growth prospects, there remains much uncertainty in the near term.

“There are a lot of things that we just don’t have great visibility into at this point and continue, I think, to change by the day, such as the pace of vaccine rollouts, what the cadence of reopening looks like and then what are consumer behaviors as that reopening unfolds,” Chief Financial Officer Charles Bracher told analysts in a conference call this week, according to a Sentieo transcript. “And of course, you add to that the macro backdrop and the impact of stimulus. So with so many moving pieces, I think the best way to share our approach with you is that we’re looking at a number of metrics internally to track the business. We're looking at sales velocity on a two-year basis. Of course, we’re looking at customer satisfaction, which we know has been very much validated by our recent Q4 surveys that we’re engaging with the customers. And then also looking at traffic and ticket trends on an absolute basis.

“So as we think about all of those metrics, we’re feeling really good about where we stand,” he continued. “But again, there’s just so much we don’t know about the year. The good news for us is that our business model is built on flexibility. And so as we progress over the next several quarters, we'll just remain focused on satisfying our customers, being really nimble regardless of the operating environment. But overall, I think we very much like how we’re positioned in our orientation towards value.”

Q4 Sales Beat Forecast

Bracher’s remarks came as the Emeryville, Calif.-based discounter reviewed what is likely to be its last lusty sales quarter for a while—but those results came in ahead of analyst expectations. For the 14-week period, which ended Jan. 2, sales improved by 23% from last year’s 13-week fourth quarter, to $806.8 million including $53.3 million for the extra week, and comps on a 13-week basis jumped by 7.9%. Analysts had anticipated 5.7% comps, based in part on modest guidance the retailer delivered in the third quarter. Quarterly gross margins of 30.3% decreased by 30 basis points but were in-line with historical quarterly levels, officials said.

Quarterly net income increased by 146.8% to $24.3 million, and earnings of 24 cents per share also came in ahead of expectations. For the fiscal year, net sales increased 22.5% to $3.1 billion and comparable-store sales grew 12.7%. Gross margin rate expanded by 30 basis points vs. the prior year, helping to drive the bottom line: net earnings of $106.7 million, and adjusted EBITDA increasing by 32% to nearly $223 million.

The outlook for fiscal 2021, in the meantime, will be complicated as Grocery Outlet cycles soaring sales—and improved profits—that came with COVID-sparked stock-up and lockdown sales trends of 2020. Officials said comps in the current first quarter would likely decrease in the high single-digits.

Bracher said the company anticipated that its 2021 gross margin rate would track in line with pre-COVID levels as sales velocity that brought shrink benefits in 2020 recedes. In the meantime, some of the health and safety costs incurred last year will remain, putting additional pressure on costs as a percent of sales.

In the current quarter, COVID shopping trends toward trip consolidation and larger basket sizes have continued, but Bracher noted that trend could begin to invert as it laps last year's results. 

East Coast Coming

Grocery Outlet, in the meantime, will focus investment on technology, including efforts on data and personalization, inventory management and a $130 million capital budget that will support 36 to 38 new stores, including three to five new stores on the East Coast, an important development for the West Coast company’s long-term growth story but one that will likely bring additional uncertainty to 2021, analyst Karen Short of Barclays said in a note to clients this week.

“While we continue to believe [Grocery Outlet’s] long-term growth trajectory is intact, the near-term setup remains challenging, especially when we layer in a much more competitive grocery backdrop once comps turn negative for the sector,” Short said.

The chain’s 75th birthday, in the meantime, will provide an opportunity to build on growing awareness of a brand that is highly dependent on store traffic and customer discovery. The company and its independent store operators are planning celebration events and giveaways during the year, which marks the establishment of the company as a military surplus outlet by Jim Read in 1946.

“We've come a long way,” said CEO Eric Lindberg, a relative by marriage into the founding Read family. “The business has evolved. But we remain centered on delivering value through our unique business model, our focus on execution and our commitment to our mission of touching lives for the better. As we reflect on our history, we're very proud of the impact we've been able to have over the past 75 years on the lives of our employees, independent operators, customers, suppliers and all of those whom we've touched. As we look forward, we are energized by the opportunity to continue to expand this impact long into the future.”