Grocery Outlet Holding Corp. — Form 10-Q Summary
Business context and reporting period
Grocery Outlet is an extreme-value grocery retailer operating through independently operated stores. This filing covers the 13 and 26 weeks ended June 27, 2020; the comparable periods ended June 29, 2019. The company had 362 stores in six states at quarter-end.
Financial and operating performance
| Metric | 13 weeks ended June 27, 2020 | Comparable 2019 period |
|---|---|---|
| Net sales | $803.4 million | $645.3 million |
| Comparable-store sales growth | 16.7% | 5.8% |
| Gross profit / gross margin | $253.8 million / 31.6% | $198.7 million / 30.8% |
| Operating income | $32.4 million | $5.7 million |
| Net income (loss) | $29.3 million | $(10.6) million |
| Diluted EPS | $0.30 | $(0.15) |
| Adjusted EBITDA (non-GAAP) | $60.6 million | $45.0 million |
For the 26 weeks ended June 27, 2020, net sales were $1.564 billion, net income was $42.0 million, and adjusted EBITDA was $117.7 million. Operating cash flow was $90.1 million, capital expenditures were included in $52.2 million of net investing outflows, and cash increased by $51.7 million to $79.8 million.
At June 27, 2020, the company reported $79.8 million cash, $334.8 million current assets, and $207.9 million current liabilities. Long-term debt, net, was $448.0 million; the term loan had $460.0 million principal outstanding and matured in October 2025. The company reported $96.5 million of unused revolving capacity and compliance with applicable debt covenants. Total lease liabilities were $867.1 million, distinct from debt.
Material changes versus the prior comparable periods
- Second-quarter sales rose 24.5%; management attributed growth to strong comparable-store sales and 32 net store openings over the prior 12 months. Comparable-store growth reflected larger average transactions, partly offset by lower traffic amid changed COVID-19 shopping behavior.
- Gross margin expanded 0.8 percentage points to 31.6%, with lower markdowns and throwaways from faster inventory turnover partly offset by higher distribution costs.
- SG&A increased 25.6% in dollars and was 24.6% of sales, versus 24.4%. Costs included higher operator commissions, occupancy, pandemic-related safety and personnel expenses, and offering costs.
- Quarterly share-based compensation fell to $10.2 million from $22.8 million, while first-half expense rose to $30.5 million from $23.0 million. First-half 2020 included $26.1 million related to performance-based options vesting after secondary offerings.
- Interest expense declined substantially, partly reflecting lower borrowings after prior-year debt repayment and refinancing. The 2020 effective tax benefit included significant excess tax benefits from option exercises and restricted-stock vesting, boosting reported net income.
Outlook, risks, contingencies, and unusual items
- The filing provides no full-year numerical guidance. Management expected second-half cost of sales to rise due to commodity costs, moderating inventory turnover, and seasonal product mix. It also expected third-quarter adjusted EBITDA to face added COVID-19-related costs.
- COVID-19 risks included staffing constraints, product and protective-supply shortages, temporary store closures, higher cleaning and safety expenses, and possible delays to store construction and openings. The company said the pandemic’s duration and financial impact could not be reasonably estimated and could materially affect fiscal 2020 results, financial position, and cash flows.
- The company borrowed $90.0 million on its revolver in March 2020 as a precautionary liquidity reserve and repaid it in full in May 2020.
- Management expected available cash, operating cash flow, and revolver availability to fund working capital, planned capital spending, and debt service for the next 12 months, while noting future financing might be needed if those sources prove insufficient.
- There were no material pending legal proceedings identified and no material off-balance-sheet arrangements reported. The company disclosed related-party leases and an aircraft lease with an entity controlled by its CEO; aircraft lease costs were immaterial for the reported periods.
Important facts for investors to verify
- Whether unusually strong pandemic-era comparable sales persist, and how traffic, basket size, and store openings evolve.
- Whether inventory availability, commodity inflation, and higher operating and safety costs pressure margins in subsequent quarters.
- The extent to which reported earnings depend on non-recurring share-based compensation effects and excess tax benefits; compare GAAP results with management’s non-GAAP measures.
- Liquidity and covenant headroom, variable-rate debt exposure, and the company’s substantial long-term lease commitments.
- The filing’s reporting period is 2020 Q2, despite the request metadata indicating 2019 Q2.