Grocery Outlet Holding Corp. (GO) Down 6.1% Since Last Earnings Report: Can It Rebound?

A month has passed since Grocery Outlet Holding Corp.’s last earnings report. (HIM). Shares have lost about 6.1% in that time, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or will Grocery Outlet Holding Corp. waiting for a breakout? Before we dive into how investors and analysts have reacted as of late, let’s take a quick look at the most recent earnings report in order to better understand the important catalysts.

Grocery store achieves better results in the second quarter, revenues increase y/y

Grocery Outlet Holding Corp. maintained strong performance in the second quarter of 2020, with both revenues and earnings not only surpassing the Zacks Consensus Estimate but also improving year over year. The company benefited from the increase in demand caused by the coronavirus. As people started eating at home and practicing social distancing, they began stockpiling essentials.

Let’s take an insight

The owner and operator of the grocery store chain reported adjusted earnings of 42 cents per share, well ahead of the Zacks Consensus Estimate of 23 cents and improving significantly from 20 cents in the prior-year period. The financial result was influenced by higher net sales and lower interest costs. It was the fifth quarter in a row in which the company surprised with positive results.

Net sales were $803.4 million, up 24.5% from the prior-year quarter, driven by comparable store sales growth and contributions from 32 new store openings since the end of last year’s second quarter.

Notably, the Emeryville, California-based company reported a 16.7% increase in comparable store sales during the quarter, driven by an increase in average transaction size, partially offset by a decline in traffic. We note that the company’s comparable store sales increased by just 5.8% compared to the previous year.

The management board reported that since the third quarter, sales growth in comparable stores has been around 10%. The increase in comparable store sales reflects an increase in average basket size, partially offset by lower store traffic as customers continue to consolidate their trips. Management expects comparable store sales growth to be moderate as the economy reopens.

Margins and costs

We note that gross profit increased 27.7% year-over-year to $253.8 million, while gross margin increased 80 basis points to 31.6% due to reduced markdowns. Management expects that the gross margin rate in the second half of the year will be approximately in line with the previous year’s quarter.

During the quarter, adjusted EBITDA increased 34.7% to $60.6 million driven by gross margin expansion, partially offset by a moderate reduction in SG&A debt. Adjusted EBITDA margin increased 50 basis points to 7.5%. Management anticipates that adjusted EBITDA margin for the second half of 2020 will be slightly lower than prior year levels.

Selling, general and administrative expenses increased 25.6% to $198 million. Again, as a percentage of net sales, the same increased by 20 basis points to 24.6%. The increase in SG&A expenses led to a 14.7% increase in total operating expenses to $221.4 million. However, as a percentage of net sales, operating expenses decreased 230 basis points to 27.6%.

The Management Board continues to expect rising expenses in the second half of the year due to the coronavirus outbreak. These include cleaning and safety costs, corporate and distribution center staffing expenses, protective equipment costs and supply chain expenses.
Store update

During the quarter, Grocery Outlet opened seven new stores, bringing the total to 362 stores in six states. This year, the company plans to open 30-32 branches, with no plans to close any further stores. The company remains optimistic about 10% annual unit growth.

Other financial aspects

Grocery Outlet ended the second quarter of 2020 with cash and cash equivalents of $79.8 million, compared to $18.7 million at the end of the same period in fiscal 2019.

At the end of the quarter under review, total debt was $460.1 million, compared to $475.5 million at the end of the previous year. During this quarter, the company repaid in full the amount of USD 90 million drawn under the revolving credit facility under the mortgage loan agreement.

Net cash flow from operations for the quarter was $22.2 million. In the quarter under discussion, the company incurred capital expenditure (excluding the impact of owner allowances) in the amount of USD 21.8 million. Management anticipates full-year capital expenditures of $95 million to $105 million.

How have estimates changed since then?

It turns out, revision estimates have flattened over the past month.

VGM results

Currently, Grocery Outlet Holding Corp. it has an average growth score of C, but its momentum score performs much better at an A. However, the stock is rated F on the value side, putting it in the bottom quintile for this investment strategy.

Overall, the stock has a Total VGM Score of D. If you’re not focused on one strategy, this score should interest you.

Perspectives

Grocery Outlet Holding Corp. It has a Zacks Rank #1 (Strong Buy). We expect an above-average rate of return on shares in the coming months.

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