Business context and reporting period
Grocery Outlet Holding Corp. operates a U.S. network of independently operated extreme-value grocery stores. This 10-Q covers the 13 weeks ended April 3, 2021 (fiscal 2021 first quarter); comparisons are with the 13 weeks ended March 28, 2020. The company had 389 stores in six states at quarter-end.
Financial and operating performance
| Metric | Q1 2021 | Prior-year quarter |
|---|---|---|
| Net sales | $752.5 million | $760.3 million |
| Gross profit / margin | $231.9 million / 30.8% | $237.0 million / 31.2% |
| Operating income / margin | $23.8 million / 3.2% | $16.9 million / 2.2% |
| Net income | $18.9 million | $12.6 million |
| Diluted EPS | $0.19 | $0.13 |
| Operating cash flow | $26.4 million | $67.8 million |
| Capital expenditures | $36.6 million | $28.2 million |
- Comparable store sales fell 8.2%, following a 17.4% increase in the prior-year quarter. Net sales declined 1.0%, with growth from stores opened over the preceding year partly offsetting lower comparable sales.
- Adjusted EBITDA, a non-GAAP measure, declined 13.7% to $48.8 million; non-GAAP adjusted net income fell 19.6% to $23.1 million, or $0.23 per diluted share. These measures supplement, and are not substitutes for, GAAP results.
- Cash and equivalents were $95.3 million at quarter-end, down from $105.3 million at fiscal year-end. Net cash used in investing was $39.2 million; net cash provided by financing was $2.7 million.
- Long-term debt, net, was $449.7 million, representing a $460 million term loan bearing 2.86% interest and maturing October 2025. The company had $96.5 million of available revolver capacity and reported compliance with applicable debt covenants. Lease liabilities totaled approximately $939.2 million, including current and long-term obligations.
Material changes and unusual items
GAAP net income increased 49.4%, despite weaker sales and lower adjusted EBITDA. The comparison was affected by $18.5 million of share-based compensation expense in the prior-year quarter related to performance-based options vesting; current-quarter share-based compensation was $3.9 million. Lower interest expense also supported earnings. The effective tax rate was 5.3%, primarily reflecting excess tax benefits from stock awards and option exercises.
Gross margin declined 0.4 percentage points, with management citing product inflation and higher fuel and freight costs, and inventory turns returning closer to historical levels. SG&A rose 0.9%, driven by store occupancy and maintenance, infrastructure investment, and COVID-related costs, partly offset by lower operator commissions.
Outlook, risks and contingencies
No specific financial guidance was provided. Management said cash, operating cash generation, and revolver availability were expected to fund working capital, planned capital expenditures, and debt service for the next 12 months; additional financing may be needed if those sources prove insufficient.
Management cited ongoing COVID-related staffing challenges, possible hazard-pay requirements, employee benefit costs, store closures for cleaning or quarantine, safety and cleaning expenses, inventory shortages, and delays to store construction and openings. It said the pandemic’s duration and severity could materially affect fiscal 2021 results, financial position, and cash flows. Product inflation and freight and fuel costs are additional margin pressures. The company reported no material change in risk factors, no material off-balance-sheet arrangements, and no litigation expected to have a material adverse effect. Its gross exposure to independent-operator notes and receivables was $35.6 million.
Investor verification points
- Track comparable-store sales against the unusually strong pandemic-driven prior-year comparison and assess whether new-store growth offsets continued softness.
- Monitor gross margin, inflation and freight costs, COVID-related operating expenses, and the trend in adjusted EBITDA alongside GAAP earnings.
- Reconcile operating cash flow with capital spending and confirm liquidity, revolver availability, and covenant compliance.
- Review term-loan refinancing and interest-rate exposure, as well as independent-operator receivable quality and allowances.
- Assess the assumptions behind management’s 12-month liquidity statement and its exposure to pandemic-related disruptions and store-opening delays.