Grocery Outlet Holding Corp. — Form 10-Q Summary
Reporting period: Quarter ended July 3, 2021 (13 weeks) and first half of fiscal 2021 (26 weeks), compared with the corresponding 2020 periods. The filing covers 2021, notwithstanding the request metadata referring to 2020.
Business context
Grocery Outlet operates an extreme-value grocery business through independently operated stores. It had 400 stores across six states at quarter-end and opened 11 stores during the quarter. The company recognizes merchandise revenue at the point of sale and reports as one operating segment.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $775.5 million | $803.4 million | $1,528.0 million | $1,563.7 million |
| Comparable-store sales | (10.0)% | 16.7% | (9.1)% | 17.0% |
| Gross profit / margin | $237.8 million / 30.7% | $253.8 million / 31.6% | $469.7 million / 30.7% | $490.8 million / 31.4% |
| Operating income | $23.7 million | $32.4 million | $47.5 million | $49.2 million |
| Net income | $19.6 million | $29.3 million | $38.5 million | $42.0 million |
| Diluted EPS | $0.20 | $0.30 | $0.39 | $0.43 |
| Adjusted EBITDA | $50.8 million | $60.3 million | $99.7 million | $116.9 million |
For the first half, operating cash flow was $85.1 million, investing cash outflow was $68.2 million, and financing cash inflow was $4.4 million. Cash increased by $21.3 million to $126.6 million. Property and equipment purchases were $64.0 million.
At July 3, 2021, long-term debt was $450.3 million net ($460.0 million gross), with a 2.84% term-loan rate and maturity in October 2025. The company had no revolver borrowings, $96.5 million of remaining revolver capacity after letters of credit, and was in compliance with its financial covenants. Operating lease liabilities totaled $971.4 million, including current and long-term amounts. Management said cash, operating cash generation, and available revolver capacity were expected to cover planned needs and debt service over the next 12 months.
Changes versus prior comparable periods
- Quarterly sales fell 3.5%; first-half sales fell 2.3%. New-store sales growth partly offset comparable-store declines; the company cited lower traffic and, in Q2, lower average transaction size.
- Gross margin declined 0.9 percentage points in Q2 and 0.7 points in the first half. Management attributed pressure to product inflation, higher fuel and freight costs, and inventory turns returning toward historical levels; 2020 had benefited from unusually fast turns and fewer markdowns and throwaways.
- Quarterly net income decreased 33.0%; first-half net income decreased 8.2%. Lower sales and margins weighed on results, while lower interest expense and substantially lower share-based compensation partly offset the pressure. The prior-year periods included significant expense from performance-based stock awards.
- First-half operating cash flow decreased $4.9 million year over year, while investing outflow increased $16.0 million, primarily due to store construction and other capital investment.
Outlook, risks and unusual items
- The filing provides no quantified financial guidance. Management said near-term sales trends were difficult to predict as the business cycled elevated pandemic-related demand from 2020.
- COVID-19-related risks included changing consumer behavior, Delta-variant uncertainty, staffing constraints, added personnel and safety costs, intermittent product shortages, longer equipment and construction lead times, and potential store or facility closures. Management said the pandemic could materially adversely affect fiscal 2021 results, financial position, or cash flows.
- Q2 results included a $4.0 million insurance-recovery gain related to the 2018 loss of the Paradise, California store in a wildfire; insurance proceeds also included $2.1 million for business interruption and inventory and $1.9 million for property and equipment during the first half.
- Interest-rate exposure remains: the term loan carries a variable rate, and the filing estimates a hypothetical 10% relative rate change would alter interest expense by approximately $1.3 million over the next 12 months.
- Management reported no material changes to risk factors, no material off-balance-sheet arrangements, and no litigation expected to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether comparable-store sales and traffic stabilize as pandemic-era comparisons normalize, and whether new-store growth offsets any continued weakness.
- Whether gross-margin pressure from inflation, freight, fuel, and inventory costs persists.
- Capital spending and store-opening plans relative to operating cash generation and available liquidity.
- Variable-rate debt exposure, covenant compliance, and the company’s ability to refinance or repay the $460.0 million term loan at its 2025 maturity.
- The contribution of the $4.0 million insurance gain and other adjustments to reported and non-GAAP earnings; adjusted EBITDA and adjusted net income are company-defined non-GAAP measures and are not substitutes for GAAP results.