Business context and reporting period
Grocery Outlet Holding Corp. is an extreme-value grocery retailer operating through independently operated stores. This filing covers the 13 and 26 weeks ended July 2, 2022, compared with the periods ended July 3, 2021. Although the request metadata says 2021 Q2, the filing itself is for fiscal 2022 Q2. The company had 425 stores in eight states at quarter-end.
Financial and operating performance
| Metric | 13 weeks ended July 2, 2022 | Change vs. prior year | 26 weeks ended July 2, 2022 | Change vs. prior year |
|---|---|---|---|---|
| Net sales | $897.7 million | +15.7% | $1.729 billion | +13.2% |
| Comparable-store sales | +11.2% | Prior year: -10.0% | +8.2% | Prior year: -9.1% |
| Gross margin | 31.1% | +0.4 percentage points | 30.7% | Flat |
| Operating income | $26.9 million | +$3.2 million | $46.3 million | -$1.2 million |
| Net income | $20.1 million | +2.3% | $31.7 million | -17.8% |
| Diluted EPS | $0.20 | Unchanged | $0.32 | Prior year: $0.39 |
| Adjusted EBITDA (non-GAAP) | $60.1 million | +18.3% | $109.4 million | +9.7% |
Quarterly operating margin was 3.0% versus 3.1%; first-half operating margin was 2.7% versus 3.1%. First-half net margin declined to 1.8% from 2.5%. Adjusted net income, a non-GAAP measure, was $28.9 million for Q2 (+23.6%) and $50.4 million for the first half (+8.4%).
For the first half, operating cash flow was $84.7 million, compared with $85.1 million. Investing cash use was $65.4 million, mainly reflecting capital spending; financing cash use was $75.2 million, primarily the term-loan prepayment and share repurchases. Cash declined by $55.8 million to $84.3 million. Capital expenditures were $64.3 million before tenant-improvement allowances and $52.8 million net of those allowances.
At July 2, 2022, long-term debt net of issuance costs and discounts was $378.8 million, following a $75.0 million principal prepayment in April. The $100 million revolving facility had $96.5 million of remaining capacity after standby letters of credit; no revolver borrowings were outstanding. The term loan’s effective rate was 4.42%, and it matures in October 2025. The company reported covenant compliance. Operating lease liabilities totaled approximately $1.033 billion.
Material changes, outlook and risks
- Sales growth reflected comparable-store gains and 25 net store openings over the prior 12 months. The company opened seven stores in Q2 and 11 in the first half, versus 11 and 21, respectively, in the prior-year periods.
- Management attributed Q2 gross-margin improvement to favorable purchasing and inventory management more than offsetting inflation. First-half gross margin was flat year over year. Inflation, supply disruption, shipping and commodity costs, and labor costs continued to pressure the business.
- Management expected lower fiscal 2022 store growth than its long-term 10% goal, with more openings weighted to the second half, citing construction, materials, permitting and licensing delays. Fiscal 2022 capital expenditures, net of tenant-improvement allowances, were expected to be approximately $115 million. No specific full-year earnings or sales guidance is provided in the filing text.
- Q2 net income included a $1.3 million debt-extinguishment loss related to the term-loan prepayment. The prior-year comparison included a $4.0 million insurance-recovery gain. Higher share-based compensation also weighed on operating results; it rose 125% in Q2 year over year.
- Management cited consumer behavior and discretionary-income changes as uncertainties and said inflation could continue to affect results. A hypothetical 10% relative change in the term-loan effective rate would change interest expense by approximately $1.7 million over the next 12 months. Management reported no pending litigation expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether comparable-store growth and new-store contributions persist, particularly as fiscal 2022 openings are delayed and weighted toward the second half.
- Whether inflation, labor and supply-chain costs continue to pressure margins, and whether favorable purchasing conditions and inventory management can offset them.
- How much of adjusted EBITDA and adjusted net income growth reflects recurring operating performance versus exclusions; these are non-GAAP measures and may not be comparable across companies.
- Cash needs for planned capital expenditures, inventory, and debt service, as well as the effect of variable interest rates and the $385 million term-loan balance.
- Credit exposure to independent operators: notes and receivables totaled approximately $43.0 million gross at quarter-end, subject to allowances.