Business Context and Reporting Period
Grocery Outlet Holding Corp. filed this Form 8-K on April 20, 2020, reporting preliminary financial and operating expectations for the thirteen weeks ended March 28, 2020. Results were affected by COVID-19-related pantry loading, shelter-in-place requirements, supply-chain conditions and the February 2020 secondary offering. The estimates had not been finalized, audited, reviewed or compiled.
Key Financial and Operating Metrics
| Metric | Q1 2020 Preliminary | Q1 2019 Actual | Change |
|---|---|---|---|
| Net sales | $760.3 million | $606.3 million | +25.4% |
| Comparable store sales | +17.4% | +4.2% | +13.2 percentage points |
| Income from operations | $14.3–$15.3 million | $21.7 million | Down 31.9% at midpoint |
| Net income | $8.8–$9.9 million | $3.8 million | Up 147.7% at midpoint |
| Adjusted EBITDA | $55.0–$56.0 million | $39.1 million | Up 41.9% at midpoint |
| Adjusted net income | $30.3–$31.4 million | $9.9 million | Up 209.6% at midpoint |
| Cash | Approximately $160.9 million | Not provided | Not determinable |
| Gross debt | Approximately $550.0 million | Not provided | Not determinable |
| Revolving credit facility borrowings | $90.0 million | Not provided | Not determinable |
The filing does not provide a clear cash-flow figure, finalized gross margin percentage, or finalized balance sheet. Management expected gross margin as a percentage of net sales to increase at a rate consistent with the year-over-year increase realized in the comparable 2019 period.
Fully diluted weighted-average shares were estimated at approximately 96.0 million, up 2.9 million from the thirteen weeks ended December 28, 2019. The company estimated $20.5 million of stock-based compensation expense, primarily non-cash, including $18.5 million related to vesting of performance-based options following the February 2020 offering.
Material Changes Versus the Prior Comparable Period
- Net sales increased by approximately $154.0 million, driven by a 17.4% comparable-store sales increase and 32 net new stores opened over the prior twelve months.
- Comparable-store sales benefited from increases in both customer transactions and average transaction size during the quarter.
- Income from operations declined despite higher sales, primarily reflecting approximately $20.5 million of stock-based compensation expense and other costs.
- Net income and adjusted measures increased substantially, partly because the prior-year period included higher interest expense and because stock compensation and other items were excluded from adjusted measures.
- Adjusted EBITDA included approximately $2.3 million of incremental public-company compliance costs, including insurance, accounting, legal and Sarbanes-Oxley compliance expenses.
- The company opened 10 stores and closed two during the quarter, ending with approximately 355 stores compared with 323 at the end of the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Comparable-store sales for the first three fiscal weeks of April were in the positive high-single digits, but had moderated from March pantry-loading levels.
- Customer traffic declined year over year under shelter-in-place requirements, while larger average transaction sizes more than offset the decline in visits to date.
- Supply remained difficult for certain high-velocity products, including toilet paper, although the company stated that it continued purchasing opportunistic and everyday products and was managing overall inventory to meet demand.
- COVID-19-related expenses, including cleaning and safety costs, protective equipment, personnel, distribution and supply-chain costs, were expected to weigh more heavily on second-quarter results.
- New-store openings were expected to be delayed by shelter-in-place requirements, although construction for most stores under development continued.
- The company cautioned that consumer demand, shopping behavior, governmental requirements, supply availability, distribution operations and future COVID-19 developments could materially affect results.
- Approximately 1.7 million unvested performance-based options remained outstanding at March 28, 2020, with approximately $7.7 million of related stock-based compensation expense not yet recognized.
- The filing also announced a secondary offering of common stock by certain selling stockholders; the filing text does not provide the offering size or proceeds.
- Management emphasized that EBITDA, adjusted EBITDA and adjusted net income are non-GAAP measures and may not be comparable with similarly titled measures used by other companies.
Important Facts for Investors to Verify
- Verify the finalized unaudited quarterly results in the subsequent Form 10-Q, including actual sales, operating income, net income, margins, cash flow and balance-sheet amounts.
- Confirm the final effect of the February 2020 offering, including shares issued or sold, option vesting, dilution and stock-based compensation.
- Assess second-quarter COVID-19 costs, store traffic, average transaction size, inventory availability and comparable-store sales trends.
- Review liquidity, revolver borrowings, debt maturities, covenant compliance and the company’s ability to generate cash to service approximately $550.0 million of gross debt.
- Confirm the timing and economic impact of delayed store openings and any additional store closures.
- Reconcile adjusted EBITDA and adjusted net income to finalized GAAP results and evaluate the recurring nature of the excluded costs.