Grocery Outlet Seeking $250M in IPO

Fast-growing extreme discounter Grocery Outlet Holding said it is seeking to raise $250 million in its forthcoming initial public offering.

The retailer, based in Emeryville, Calif., intends to use the proceeds of the public stock sale to reduce debts in roughly the same amount.

An updated S-1 registration form indicated the company would sell 17.2 million shares at a price of $15 to $17 per share and trade on the Nasdaq exchange under the symbol GO.

The company estimates that net proceeds from the offering, after deducting assumed underwriting discounts, commissions and estimated expenses, will be about $249.8 million, based on the $16-per-share midpoint of the set price range.

Grocery Outlet said it intends to use the net proceeds from to repay a term loan outstanding under its second lien credit agreement totaling $150 million, plus about $3.8 million of interest. The remaining proceeds would go toward repaying a term loan outstanding under its first lien credit agreement totaling $99.8 million, plus accrued interest of $1.6 million. Additional proceeds, if any, would be used for general corporate purchases including further debt repayment.

Grocery Outlet, which reported sales of $2.3 billion in fiscal 2018, carried $854 million in debt as of March 30, the end of its fiscal first quarter. The IPO proceeds would reduce that to about $610 million, the company said in its prospectus.

Grocery Outlet’s debts relate in part to recapitalizations in 2016 and 2018 that, among other things, provided dividends to its owner, the private investment group Hellman & Friedman.

Hellman & Friedman will continue to control the company following the IPO, retaining between 61.9% and 63.8% of the company’s outstanding shares.

Utilizing a unique business model that provides independent store owners with deeply discounted brand-name groceries on consignment, Grocery Outlet has grown rapidly and profitably, doubling its stores since 2011. Average stores achieve profitability during their first year of operations, reach maturity in four to five years and realize a payback on investment within four years, according to the company. Stores opened since 2011 with at least four years of operating history have produced year-four cash-on-cash returns of more than 40%, outperforming underwriting hurdles.

The company opened 26 new stores in fiscal 2008 and 29 new stores in each of 2016 and 2017. Gross-profit margins from 2016 to 2018 totaled 30.6%, 30.4% and 30.4%, respectively. Comparable-store sales totaled 3.6%, 5.3% and 3.9%, respectively, in those years. Comps in the first quarter of 2019 totaled 4.2%.

Although Grocery Outlet is cashing in on many of the trends propelling hard discounters like Aldi, its approach is distinct in that it relies nearly entirely on brand-name goods where Aldi utilizes private brands. Grocery Outlet achieves savings by buying opportunistically, typically through buying order cancellations, manufacturer overruns, packaging changes and items approaching “sell by” dates, sourced by an internal buying team. The discounters also differ in that Grocery Outlet’s stores are operated by independent contractors as opposed to employees.