Business context and reporting period
Grocery Outlet Holding Corp. operates an extreme-value grocery retail business through independently operated stores. It reported results for the 13 weeks ended April 1, 2023, compared with the 13 weeks ended April 2, 2022. The request metadata labels the filing “2022 Q1,” but the filing itself is for fiscal 2023 Q1.
The company had 444 stores in eight states at quarter-end, including three stores opened during the quarter. The company reports as one operating segment.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $965.5 million | $831.4 million | +16.1% |
| Comparable-store sales | +12.1% | +5.2% | — |
| Gross profit / margin | $300.5 million / 31.1% | $250.9 million / 30.2% | Margin +0.9 percentage points |
| SG&A | $267.7 million | $231.5 million | +15.7% |
| Operating income / margin | $32.8 million / 3.4% | $19.4 million / 2.3% | — |
| Net income / diluted EPS | $13.7 million / $0.14 | $11.6 million / $0.12 | Net income +18.5% |
| Adjusted EBITDA (non-GAAP) | $63.1 million | $46.1 million | +36.9% |
| Adjusted net income (non-GAAP) | $27.0 million | $19.2 million | +40.7% |
Comparable-store sales growth reflected transactions up 7.9% and average transaction size up 3.9%. Management attributed gross-margin improvement to opportunistic product mix, distribution-cost leverage and higher retail pricing to offset product-cost inflation. SG&A rose with higher independent-operator commissions, occupancy costs, personnel costs, travel and the resumption of the annual operator conference; SG&A as a share of sales was broadly stable.
Cash flow, debt and liquidity
- Operating cash flow was $87.6 million, versus $36.3 million a year earlier. Investing cash outflow was $40.3 million, including capital spending and software investments. Financing cash outflow was $67.9 million, primarily reflecting refinancing activity and share repurchases.
- Cash and cash equivalents were $82.1 million at April 1, 2023, down from $102.7 million at December 31, 2022. Net cash declined $20.6 million during the quarter.
- Gross debt was $325.0 million at quarter-end: a $300.0 million term loan and $25.0 million drawn on a $400.0 million revolving facility. The company reported $371.5 million of remaining revolver capacity after $3.5 million of letters of credit. It repaid the $25.0 million revolver draw on April 21, 2023.
- The February 2023 refinancing replaced the prior $385.0 million term loan. The new term loan matures in February 2028; the reported interest rate on term and revolver borrowings was 7.11%. The refinancing resulted in a $5.3 million debt extinguishment and modification loss. Scheduled term-loan amortization begins in June 2023.
- Operating lease liabilities totaled approximately $1.06 billion, including current and long-term obligations. The company said it was in compliance with applicable credit-agreement covenants as of April 1, 2023.
Outlook, risks and unusual items
Management expects fiscal 2023 capital expenditures, net of tenant improvement allowances, of approximately $155 million; first-quarter spending on that basis was $38.5 million. It expects to fund cash requirements through cash, operating cash flow and revolver capacity, while noting that additional financing may be needed if those sources prove insufficient.
Management cited inflation, product and supply-chain costs, transportation expenses, labor and utility costs, changing consumer behavior, and delays or higher costs in store construction and openings as ongoing uncertainties. Variable interest rates also expose results to rate changes; the filing estimates that a hypothetical 10% relative rate increase or decrease would change interest expense by approximately $2.3 million over the next 12 months, based on quarter-end borrowings.
Other notable items include a higher effective tax rate of 36.4%, primarily due to excess tax expense on equity-award vesting, and $3.3 million of share repurchases during the quarter. Management reported no pending litigation expected to have a material adverse effect and no material changes to the risk factors disclosed in its 2022 Form 10-K. Adjusted EBITDA and adjusted net income are non-GAAP measures; the company cautions they are supplemental, not substitutes for GAAP results.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2023 Q1, notwithstanding the request metadata’s 2022 Q1 label.
- Review the new credit agreement’s variable-rate exposure, amortization schedule, covenant thresholds and available revolver capacity.
- Assess whether comparable-store sales and gross-margin gains can persist as inflation, labor costs and consumer behavior evolve.
- Compare GAAP earnings with non-GAAP adjusted results and examine the exclusions, especially refinancing costs and other adjustments.
- Monitor the allowance and collectability of independent-operator notes and receivables; gross exposure was $49.6 million, with a $16.0 million allowance.
- Track execution of the store-opening plan and the approximately $155 million fiscal 2023 capital-spending outlook.