Grocery Outlet Holding Corp. Form 8-K Summary
Business Context and Reporting Period
Filed January 27, 2020, under Items 2.02 and 8.01. The filing provides preliminary, unaudited operating results for the 13 weeks and fiscal year ended December 28, 2019, compared with the periods ended December 29, 2018. It also announces a secondary offering of common stock by certain selling stockholders.
Financial and Operating Metrics
| Metric | 13 Weeks 2019 | 13 Weeks 2018 | Fiscal 2019 | Fiscal 2018 |
|---|---|---|---|---|
| Net sales | $655.5 million | $585.2 million | $2.560 billion | $2.288 billion |
| Income from operations | $15.6–$16.1 million | $13.9 million | $66.9–$67.4 million | $82.5 million |
| Net income/(loss) | $6.3–$6.7 million | $(4.6) million | $11.9–$12.3 million | $15.9 million |
| Adjusted EBITDA | $40.5–$41.0 million | $39.3 million | $168.8–$169.3 million | $153.6 million |
| Comparable-store sales growth | 5.1% | 4.1% | 5.2% | 3.9% |
| Stores at period end | 347 | 316 | 347 | 316 |
Fiscal 2019 gross margin was expected to be substantially consistent with the 30.8% reported for the 39 weeks ended September 28, 2019. Fourth-quarter gross margin was expected to increase at a rate consistent with the year-over-year increase reported in the third quarter. The filing does not provide a clear preliminary value for cash flow, cash balances, liquidity, or total debt. Net interest expense was estimated at $46.0 million for fiscal 2019 versus $55.4 million in fiscal 2018.
Material Changes Versus Prior Comparable Period
- Fourth-quarter net sales increased approximately 12.0%, primarily from 31 net stores opened over the prior 12 months and 5.1% comparable-store sales growth.
- Fiscal-year net sales increased approximately 11.9%, with comparable-store sales growth rising to 5.2% from 3.9%.
- The company opened 10 stores and closed none in the fourth quarter, compared with 11 openings and two closures in the prior-year quarter.
- Fourth-quarter operating income was expected to increase approximately 14.1% at the midpoint, while fiscal-year operating income was expected to decline approximately 18.6%.
- Fiscal-year net income was expected to decline approximately 23.7%, despite higher sales and adjusted EBITDA.
- Fiscal-year adjusted EBITDA was expected to increase approximately 10.1%. Excluding estimated public-company compliance costs, management estimated adjusted EBITDA growth of approximately 13.0%.
- Fiscal 2019 operating income included approximately $31.9 million of stock-based compensation expense, primarily non-cash and largely associated with the June 2019 initial public offering.
Outlook, Commentary, Risks, and Unusual Items
Management expected continued sales growth from store expansion and positive comparable-store sales, driven by increases in customer transactions and average transaction size. Estimated adjusted EBITDA included approximately $2.0 million of additional public-company costs in the fourth quarter and approximately $4.5 million for the full year, including insurance, accounting, legal, and Sarbanes-Oxley compliance expenses.
The estimates were prepared before completion of closing procedures, account reconciliations, expense accrual reviews, and the year-end audit. Deloitte & Touche LLP had not audited, reviewed, or compiled the preliminary results, and actual results could differ materially. Management noted potential adjustments related to cash, inventory, leases, deferred taxes, cost-of-sales accruals, insurance reserves, stock compensation, and operating expenses.
Other unusual or non-GAAP adjustments included stock-based compensation, debt modification costs, non-cash rent, impairment and disposition items, new-store pre-opening expenses, accounts-receivable reserves, and other non-recurring costs. The company refinanced its first-lien credit facility and estimated fiscal 2019 debt modification costs of $5.6 million.
Key disclosed risks include supplier availability and pricing, comparable-store sales performance, store execution, competition, distribution or information-technology disruptions, labor and regulatory matters, independent-operator risks, substantial debt-service obligations, cash-flow sufficiency, tax and accounting matters, catastrophic events, and the company’s limited experience operating as a public company.
Important Facts for Investors to Verify
- Verify the final audited fiscal 2019 results and any changes from the preliminary ranges.
- Verify reported cash flow, cash balances, liquidity, borrowing capacity, and total debt in the annual report.
- Assess the effect of the $31.9 million estimated stock-based compensation expense on GAAP operating results.
- Reconcile adjusted EBITDA to GAAP results and evaluate whether excluded costs are recurring.
- Review the terms, size, and selling-stockholder impact of the announced secondary offering.
- Review the refinancing terms and debt covenants associated with the first-lien credit facility.
- Confirm store openings, closures, comparable-store sales, and gross margin in the final filing.