Grocery Outlet sees net income more than double in first quarter

Grocery Outlet Holding Corp. surged past earnings projections for the fiscal 2020 first quarter and, as previously forecast, saw sales grow more than 25%, fueled by heightened consumer demand from the coronavirus outbreak.

For the quarter ended March 28, net income came in at $12.6 million, or 13 cents per diluted share, up 235% from $3.8 million, or 6 cents per diluted share, a year earlier, Grocery Outlet said yesterday after the market close. In reporting preliminary results on April 20, Grocery Outlet had estimated first-quarter net income of $8.8 million to $9.9 million.

Adjusted net earnings rose 242.2% to $34 million, or 36 cents per diluted share, from $9.9 million, or 15 cents per diluted share, a year ago. Among other items, the result reflects $20.3 million in stock-based compensation costs, largely related to a secondary share offering on Feb. 3, partially offset by an $8.3 million tax effect from total adjustments, Grocery Outlet reported.

Analysts, on average, had projected adjusted net earnings per share (EPS) of 25 cents, with estimates ranging from 19 cents to 32 cents, according to Refinitiv/Thomson Reuters.

First-quarter net sales climbed 25.4% to $760.3 million from $606.3 million in the fiscal 2019 quarter, as Grocery Outlet had said in its preliminary report. Likewise, comparable-store sales swelled 17.4% versus a 4.2% gain in the prior-year period.

Related:Grocery Outlet projects 25% first-quarter sales jump

Plexiglass barriers (left) at checkout are one of the social distancing measures that Grocery Outlet has put in place.

In a conference call on quarterly results late Monday, Chief Financial Officer and Treasurer Charles Bracher said net sales were powered by the jump in comp-store sales and the contribution from 32 net new stores opened over the past year.

“Our comp performance in the quarter was a result of both higher store traffic and larger average baskets. Comps were strong across all regions, including mature geographies, as well as our Southern California and Mid-Atlantic stores,” he told analysts. “We opened 10 new stores and closed two during the first quarter. We continue to be pleased with the performance of our newer stores, which like our mature sites experienced elevated customer demand.”

COVID-19’s impact has continued into the second quarter, with comp sales growth “tracking in the mid-teens” through the first five weeks, according to Bracher.

“We are seeing customers consolidate their trips to stores, resulting in lower traffic, which has been more than offset by larger baskets. Note, however, that we are less than halfway through the quarter, and it is difficult to predict the impact on purchasing behaviors if shelter-in-place restrictions ease,” he explained. “We have been actively purchasing and receiving product in response to customer demand and have now rebuilt to a healthy inventory position in our stores and warehouses.”

Related:Grocery Outlet sees strong finish to fiscal year

Grocery Outlet’s business model proved flexible to the new demands that emerged when the coronavirus outbreak hit, CEO Eric Lindberg and President RJ Sheedy noted.

“We have leveraged the many strengths of our business model and have adapted processes to meet the demands of the current environment. We reacted quickly to the unprecedented surge in consumer demand. Adjustments were made to our buying process, ordering platform, warehouse operations and distribution system to keep pace with this sudden sales increase. The result was greater supply-chain capacity and efficiency and the rapid product replenishment necessary to support increased demand,” Sheedy said in the call.

“I’m happy to say that our current inventory position at stores and warehouses is very healthy and puts us in great shape overall to continue to support IOs [independent owners] and serve customers,” he added. “Our ability to execute through this heightened demand period is the result of our buying model, flexible supply chain, entrepreneurial independent operators and the amazing talent that supports these and other parts of the business.”

Describing itself as an “extreme value” retailer, Grocery Outlet touts big discounts on brand-name products and has said a typical shopper basket is priced about 40% lower than that of conventional grocers and 20% lower than leading discounters. Stores are run by independent owner-operators from the communities they serve, enabling locations to cater closely to changing customer preferences. According to Grocery Outlet, the shopper savings is achieved via a sourcing model of purchasing surplus inventory and product overruns directly from thousands of supplier partners. That includes a changing assortment of products with “WOW!” prices.

“Our purchasing teams have done just an amazing job of leveraging their vendor relationships to keep up with demand for opportunistic and everyday products. We have been working closely with our supplier partners to buy product to meet customer demand throughout the pandemic, while at the same time finding new sources of supply,” Lindberg told analysts. “We cannot overstate the value of our long-standing partnerships, and we continuously strive to be a great solution provider for our suppliers.”

Grocery Outlet ramped up its supply chain in response to a “significant increase in demand” starting in mid-March,” Lindberg reported.

“We increased the frequency of deliveries to stores and made necessary adjustments within our distribution center operations in order to handle the higher volumes. Our entire distribution network, including DC workers and fleet drivers, worked tirelessly to get products to stores as quickly and safely as possible. Overall, we feel really good about the current quantity and quality of inventory in our stores and distribution centers,” he said. “Our flexible business model, value orientation and localized approach to product offering have enabled us to effectively navigate through the initial stages of the pandemic and deliver a 17% comp growth in the first quarter. We are all extremely proud of the team’s success in managing through this difficult period.”

As part of expanded cleaning efforts, Grocery Outlet independent owners have sanitized shopping carts and positioned cleaning stations at the store entrance.

During the first quarter, Grocery Outlet opened eight net new stores, finishing the period with 355 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada, compared with 323 stores a year ago.

“We have been working closely with our developers to get the remainder of our planned stores open by year-end. Despite the delays related to COVID-19, we still expect to open 28 to 30 stores this year. We feel good about the opportunities in front of us and continue to build our pipeline to a 10% annual unit growth,” Lindberg said in the call. “While we continue to focus on our response to COVID-19, we have not lost sight of our growth strategies and remain committed to making investments that will enable us to capture the long-term potential of our business.”

In a research note on Tuesday, Jefferies analyst Randal Konik pointed out that Grocery Outlet has posted 16 straight years of rising comp sales, and he said the retailer “has outperformed through recessions,” as its value focus makes it counter-cyclical.

“Comps increased 17% in the first quarter, but what was even more encouraging was the strong momentum in quarter-to-date comps of mid-teens percentage growth driven by higher average basket,” he wrote. “In-store traffic was down due to shelter-in-place restrictions, but we believe the COVID-19 pandemic is also driving increased new customer growth, which should drive long-term comp upside above the long-term targets.”

Konik also reaffirmed Grocery Outlet’s long runway for growth as the chain continues to expand into new geographies. “We see potential for national expansion to over 4,800 locations over the long term, growing store count annually by about 10% into the foreseeable future. Today, the company has less than 400 stores in less than 10 states.”

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