Grocery Outlet sees strong finish to fiscal year

Grocery Outlet Holding Corp. topped Wall Street’s earnings forecast for its 2019 fourth quarter and fiscal year, with net sales climbing by double digits in both periods.

CEO Eric Lindberg (left) and President RJ Sheedy also said in a conference call with analysts late Tuesday that Grocery Outlet is adapting to soaring demand from the coronavirus (COVID-19) outbreak. They credited employees and vendor partners for helping the Emeryville, Calif.-based retailer go the extra mile to meet customers’ needs during the health crisis.

For the fourth quarter ended Dec. 28, 2019, net sales surged 12% to $655.5 million from $585.2 million a year earlier. Same-store sales rose 5.1%, compared with a 4.1% year-over-year gain in the fiscal 2018 quarter.

The 53-week fiscal year saw similar growth, with net sales up 11.9% to $2.56 billion from $2.29 billion in 2018. Comparable-store sales advanced 5.2% versus the 3.9% increase reported for the previous fiscal year.

Both quarterly and full-year sales growth were in line with preliminary results that Grocery Outlet reported in late January. Meanwhile, bottom-line results exceeded the company’s preliminary projections for both periods.

On the earnings side, 2019 fourth-quarter net income came in at $9.8 million, or 11 cents per diluted share, compared with a net loss of $4.6 million, or 7 cents per diluted share, a year ago. Adjusted net earnings were $19.9 million, or 21 cents per diluted share, versus $11.9 million, 17 cents per diluted share, in the 2018 quarter. The adjusted net income result for the 2019 quarter reflects the impact of share-based compensation expenses, non-cash rent and asset impairment costs, among other items, the company reported.

Related:Grocery Outlet expects robust fiscal 2019 sales growth

Analysts, on average, had forecast adjusted net earnings per share (EPS) of 17 cents for the quarter, with estimates ranging from 16 cents to 20 cents, according to Refinitiv/Thomson Reuters.

Full-year 2019 net earnings totaled $15.4 million, or 19 cents per diluted share, down from $15.9 million, or 23 cents per diluted share, in 2018. On an adjusted basis, net income was $65 million, or 79 cents per diluted share, for fiscal 2019 versus $49.3 million, or 72 cents per diluted share, in the prior year.

Wall Street’s consensus estimate was for 2019 adjusted EPS of 75 cents, with projections running from 70 cents to 77 cents.

In its preliminary results report, Grocery Outlet had pegged fourth-quarter net earnings of $6.3 million to $6.7 million and full-year 2019 net income of $11.9 million to $12.3 million.

Related:Grocery Outlet’s MacGregor Read named nonexecutive vice chairman

Grocery Outlet noted that, because of its initial public offering in June 2019, its non-GAAP diluted weighted average shares outstanding rose to 81.9 million from 68.5 million in fiscal 2018.

Coronavirus impact

Also, in a precautionary measure, the company on March 19 borrowed $90 million under a revolving credit facility to provide reserve funding for working capital needs amid the economic uncertainty around the COVID-19 situation.

“Due to our significantly higher customer demand, our buying organizations, supply chain teams and IOs [independent owners] are working around the clock to keep shelves stocked for our customers. Our purchasing team is intently focused on working with our vendor partners to replenish the high-demand products for our stores,” Lindberg told analysts in the conference call.

Grocery Outlet aims to stick with its store growth plans, but the retailer acknowledged that the COVID-19 situation is likely to cause delays.

“We have been working very closely with suppliers to purchase these basic needs, such as water, paper supplies, rice and beans, and canned goods. We are, amongst many others, experiencing some delay for those items. But broadly speaking, we continue to have good access to product and are purchasing aggressively to keep our warehouses full,” he said. “We are incredibly grateful for the support we’ve been seeing from our vendors as well as the diligence of our buying team in this effort. It’s a real testament to the value of the longstanding relationships we have with our partners.

“As for the supply chain,” he added, “we are working hard to get products into stores as quickly as possible. We’ve made several adjustments in the past week based on sudden spikes in demand that we’ve seen. I want to recognize everyone in our logistics network for their dedication to supporting stores and customers. That includes our distribution center employees, our transportation fleet drivers, our third-party vendors, our DSD suppliers and their drivers, all of whom are working nonstop to keep goods on the shelves.”

Sheedy noted that while the “sudden sales increase” has created challenges, the Grocery Outlet team has “risen to the occasion” to support the retailer’s independent owners and customers.

“As we work together through this rapidly changing environment, we are currently prioritizing our efforts and resources to address the immediate needs of the business,” he said. “At the same time, we haven’t lost sight of our long-term strategy. Our approach has been and will continue to be focused on making smart, disciplined investments to support our growth.”

Due to the coronavirus pandemic, comp sales have surged in the latter part of the 2020 first quarter, according to Chief Financial Officer Charles Bracher.

“For the first eight weeks of the quarter, comp sales trends remained healthy, consistent with our fourth-quarter performance. Beginning in March, we saw customer demand, both traffic and ticket, begin to build in conjunction with concerns surrounding the coronavirus,” Bracher said.

“As a result, comp sales increases have been significant across regions, and as we discussed, the entire organization is working hard to satisfy customer demand. With less than one week remaining in our fiscal first quarter, we are currently standing at a quarter-to-date comp that is in the mid-teens,” he explained. “That said, the operating environment is quite fluid, and it’s impossible to predict the magnitude and duration of the coronavirus impact, including if and for how long elevated sales trends might continue, as well as the potential impacts if demand normalizes.”

For now, Grocery Outlet aims to stick with its store growth plans, but Bracher said the COVID-19 situation is likely to cause delays.

“With respect to unit growth, so far in 2020, we will have 10 stores opened by the end of this week and have approved sites and signed leases for 2020 openings, consistent with our 10% annual unit growth target,” he said. “That said, we expect that our 2020 openings are likely to be negatively impacted by delays in acquiring permits and the availability of construction resources, given the growing mandate to shelter in place. Despite those potential near-term disruptions, we continue to search for new sites to build our longer-term real estate pipeline.”

As of the fiscal 2019 year-end, Grocery Outlet had 347 stores, including 10 new locations opened during the year, compared with 316 stores and 11 new locations at the fiscal 2018 year-end. The retailer’s stores are located in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.