Grocery Outlet Holding Corp. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 weeks ended April 2, 2022, not 2021 Q1. It compares results with the 13 weeks ended April 3, 2021. Amounts below are in U.S. dollars.
Business context and reporting period
Grocery Outlet is an extreme-value retailer of branded consumables and fresh products, operating through independently operated stores. At April 2, 2022, it had 418 stores in seven states. The company opened four stores and closed one during the quarter. Most stores are operated by independent operators; the company generally owns the merchandise and sales proceeds and pays operators commissions.
Financial and operating results
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $831.4 million | $752.5 million | +10.5% |
| Comparable store sales | +5.2% | -8.2% | Improved |
| Gross profit / margin | $250.9 million / 30.2% | $231.9 million / 30.8% | Profit +8.2%; margin down 0.6 points |
| Operating income / margin | $19.4 million / 2.3% | $23.8 million / 3.2% | Down |
| Net income | $11.6 million | $18.9 million | -38.7% |
| Diluted EPS | $0.12 | $0.19 | Down |
| Adjusted EBITDA | $49.3 million | $48.8 million | +0.8% |
| Adjusted net income | $21.5 million | $23.1 million | -7.0% |
Adjusted EBITDA, adjusted net income and adjusted EPS are non-GAAP measures; the company cautions they supplement, and are not substitutes for, GAAP results.
Operating cash flow was $36.3 million, versus $26.4 million. Investing cash outflow was $35.5 million, primarily reflecting capital spending; financing cash outflow was $2.9 million, including $3.5 million of share repurchases. Cash declined $2.1 million to $138.0 million. Inventory rose to $297.4 million from $275.5 million at fiscal year-end.
At quarter-end, long-term debt, net, was $452.0 million, representing a $460.0 million term loan before discounts and issuance costs. The company had $96.5 million of undrawn revolving capacity after $3.5 million of standby letters of credit, and reported compliance with applicable covenants. In April 2022, after quarter-end, it prepaid $75.0 million of term-loan principal.
Material changes and management commentary
- Sales growth reflected a 5.2% comparable-sales increase, driven by higher average transaction size and transactions, plus net store growth over the prior 12 months.
- Cost of sales increased 11.5%, faster than sales; gross margin declined from 30.8% to 30.2%. Management cited inflation in goods, labor and transportation and supply-chain constraints, which price increases had only partly offset.
- Net income was pressured by lower gross margin and a higher effective tax rate (26.5% versus 5.3%). Management attributed the tax-rate increase mainly to fewer excess tax benefits from stock-option exercises and RSU vesting.
- COVID-related staffing challenges, higher labor costs, cleaning and safety expenses, logistics constraints and elevated delivery costs continued to affect operations. Management said these pressures could persist during fiscal 2022.
Outlook, risks and contingencies
Management expected fiscal 2022 capital expenditures, net of tenant-improvement allowances, of approximately $115 million; $27.2 million had been spent on that basis in Q1. Store construction and openings faced longer material, permitting and licensing lead times. The company planned lower fiscal 2022 new-store growth than its long-term 10% goal, with more openings weighted toward the second half; no specific full-year opening target was provided in the supplied text.
Management said cash, operating cash generation and revolving-credit availability were expected to support liquidity needs, while noting that additional financing could be required if those sources proved insufficient. Risks highlighted include inflation, supply-chain and labor pressures, fuel and transportation costs, store-opening delays, competition, and interest-rate exposure. The company reported no pending litigation expected to have a material adverse effect and no material changes to risk factors from its 2021 Form 10-K. Disclosure controls were assessed as effective at a reasonable assurance level.
Important facts for investors to verify
- Confirm the intended reporting period: the filing is Q1 2022, despite the request metadata stating 2021 Q1.
- Track whether inflation, freight, labor and supply constraints continue to pressure gross margin and whether price actions offset those costs.
- Monitor comparable sales, new-store timing and the company’s progress toward its fiscal 2022 capital-spending outlook.
- Review the impact of the $75 million post-quarter debt prepayment on interest expense, liquidity and remaining debt maturity obligations.
- Assess GAAP results separately from management’s non-GAAP adjusted measures and review the reconciliation items.