Business context and reporting period
Grocery Outlet Holding Corp. is an extreme-value grocery retailer operating through independently operated stores. This Form 10-Q covers the 13 weeks ended March 30, 2024 (fiscal Q1 2024); this differs from the “2023 Q1” period in the request metadata. The company had 474 stores in nine states at quarter-end and operated as one reportable segment.
Financial and operating performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Net sales | $1,036.9 million | $965.5 million |
| Gross profit / margin | $303.9 million / 29.3% | $300.5 million / 31.1% |
| SG&A / % of sales | $303.4 million / 29.3% | $267.7 million / 27.7% |
| Operating income | $0.6 million | $32.8 million |
| Net income (loss) | $(1.0) million | $13.7 million |
| Diluted EPS | $(0.01) | $0.14 |
| Operating cash flow | $7.8 million | $87.6 million |
| Capital expenditures, net of tenant allowances | $46.5 million | Not stated |
Comparable-store sales rose 3.9%, comprising 7.0% more transactions and a 2.9% decline in average transaction size. Adjusted EBITDA, a non-GAAP measure, was $39.4 million versus $63.1 million; adjusted net income was $8.8 million versus $27.0 million.
Liquidity, debt and cash flow
Cash was $66.9 million at March 30, down from $115.0 million at year-end. Net cash decreased $48.1 million during the quarter. Investing used $50.9 million, including $46.3 million for property and equipment; financing used $5.1 million. The company had $292.5 million of gross term-loan principal outstanding, with a 7.43% variable rate, and no revolver borrowings at quarter-end. Of the $400 million revolving facility, $395.8 million remained available after letters of credit. In April, after quarter-end, the company borrowed $80 million under the revolver. It reported compliance with its financial covenants.
Material changes and management commentary
Sales increased 7.4%, supported by comparable-store growth and stores opened over the prior 12 months. Management attributed significant pressure on margins and earnings to disruption from ERP-system upgrades begun in August 2023: inventory-management tools and data visibility remained impaired. The company estimated the disruption reduced gross margin by 210 basis points in Q1. It also provided $12.4 million of incremental commission support to independent operators. Management said some disruption could continue to affect results into the second half of fiscal 2024.
Outlook, risks and unusual items
The company planned to open approximately 18–22 stores in fiscal 2024, in addition to the 40-store United Grocery Outlet acquisition, which closed April 1, 2024 for approximately $62 million, subject to post-closing adjustments. It expected fiscal 2024 capital expenditures, net of tenant allowances, of approximately $175 million. Management cited supply-chain, labor, inflation and utility-cost pressures, construction delays and costs, and changing consumer behavior. Variable-rate debt creates interest-rate exposure; the filing estimates a hypothetical 10% relative rate change would affect next-12-month interest expense by approximately $2.2 million.
Disclosure controls were deemed ineffective at March 30 because of a material weakness in IT general controls linked to the ERP-system replacement, including user access, program change management and IT operations. Remediation was underway and expected to be completed during fiscal 2024 after testing. Management reported no material financial-statement misstatements identified for the quarter. The company reported no pending litigation expected to have a material adverse effect and no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether ERP-related inventory and control issues are remediated on schedule, and whether the estimated gross-margin impact and expected duration change.
- Whether sales growth, transaction trends and margins improve while SG&A and operator-support costs normalize.
- Post-acquisition United Grocery Outlet integration, purchase-price adjustments, operating contribution and funding needs.
- Cash generation, planned capital spending, the subsequent $80 million revolver borrowing, variable-rate exposure and covenant headroom.
- Progress in remediating the material weakness and evidence that disclosure and financial-reporting controls operate effectively.