Grocery Outlet Holding Corp. recently reported impressive third-quarter results, with a 10.4% increase in net sales, reaching $1.11 billion for the period ending September 28. This growth is attributed to the company’s strategic approach, which includes opening new stores and a modest 1.2% rise in comparable-store sales, translating to a noteworthy 7.6% growth when looking over a two-year period.
Interestingly, the company recorded a 2% growth in transaction numbers despite a 0.7% decrease in the average basket size. Seasonal fluctuations were evident, as the company faced challenges in comparable sales during the summer months before a recovery took place in September, where sales rose to 3.8%. Eric Lindberg, chairman and interim president, emphasized that “value continues to win in the market,” allowing Grocery Outlet to expand its share of consumer nondiscretionary spending.
While the results were encouraging, Lindberg acknowledged limitations in their execution that impacted growth and earnings. The hurdles associated with a systems conversion have posed challenges throughout the year. Lindberg underscored the importance of refocusing on core business operations and executing well, particularly through their network of dedicated independent operators.
This recent shakeup in leadership came shortly before the Q3 earnings release, as Lindberg stepped into his role as interim president following R.J. Sheedy’s resignation from the board of directors. He assured stakeholders that he would align the leadership team’s efforts with the right set of priorities for sustained success.
A breakdown of the financials presents a nuanced picture. The gross margin slightly declined by 30 basis points, landing at 31.1%. Meanwhile, selling, general and administrative expenses rose by 9.5% to $304.6 million, representing 27.5% of net sales. The company’s net income also fell by 10.9% to $24.2 million, translating to 24 cents per diluted share.
In terms of profitability, adjusted EBITDA witnessed a 6.0% increase to $72.3 million, marking a 6.5% share of net sales. However, adjusted net income saw a decrease of 10.1%, settling at $27.9 million or 28 cents per adjusted diluted share. The rising interest expense, which surged 52.4% to $6.4 million, can be attributed to an increase in average principal debt used for share repurchases and cash outflows essential for the company’s continued growth trajectory.
Despite acknowledging the current competitive challenges, Lindberg remains optimistic about the company’s capacity to restore its value proposition swiftly. The restructuring has taken longer than expected, but he asserted that the current competitive landscape would not fundamentally impede progress.
As a result of these findings, Grocery Outlet has updated its forecasts: they anticipate comparable store sales growth of approximately 2.4% for the full year, with a slight dip in Q4 estimates at around 2%. In an encouraging adjustment, the company plans to add a total of 66 net new stores this year, up from its earlier prediction of 62 to 64. This expansion includes 40 stores acquired from United Grocery Outlet and 26 organically opened outlets.
The company’s ambitious fiscal outlook has set net sales expectations for 2024 at slightly above $4.35 billion. For the entire year, adjusted EBITDA is expected to lie between $237 million to $242 million, indicating that Q4 adjusted EBITDA will likely range from $57 million to $62 million. The adjustments in EBITDA forecasts reflect the impact of lower comparable sales and gross margin, accompanied by higher SG&A costs than earlier projected.
Grocery Outlet, rooted in Emeryville, California, operates independently run stores exceeding 520 locations across 15 states, including California, Washington, and Pennsylvania. The company ranks No. 66 on Progressive Grocer’s 2024 list of top food and consumable retailers in North America, demonstrating its significant presence in the competitive grocery sector.
In conclusion, while Grocery Outlet encounters various operational hurdles, its growth in net sales signals a strong consumer appetite for value-oriented products. The strategic opening of new stores and a commitment to enhancing core operational priorities may solidify its position in the marketplace, pointing towards a promising trajectory ahead.
