Business context and reporting period
Grocery Outlet Holding Corp. is an extreme-value grocery retailer operating through independently operated stores. The supplied filing is a Form 10-Q for the 13 and 39 weeks ended September 26, 2020—not 2019 Q3 as stated in the request metadata. Results are compared with the periods ended September 28, 2019. The company had 372 stores in six states at quarter-end.
Financial and operating performance
| Metric | 13 weeks ended September 26, 2020 | 39 weeks ended September 26, 2020 |
|---|---|---|
| Net sales | $764.1 million, up 17.1% year over year | $2.328 billion, up 22.3% |
| Comparable-store sales growth | 9.1%, versus 5.8% | 14.3%, versus 5.3% |
| Gross profit / gross margin | $238.2 million / 31.2%, versus 30.8% | $729.0 million / 31.3%, versus 30.8% |
| Operating income / margin | $30.3 million / 4.0%, versus $23.9 million / 3.7% | $79.5 million / 3.4%, versus $51.3 million / 2.7% |
| Net income | $40.5 million, versus $12.4 million | $82.4 million, versus $5.6 million |
| Diluted GAAP EPS | $0.41, versus $0.13 | $0.84, versus $0.07 |
| Adjusted EBITDA (non-GAAP) | $55.3 million, up 25.1% | $172.9 million, up 34.8% |
Sales gains reflected higher comparable-store sales and the net addition of 35 stores over the prior 12 months. Comparable-store growth was driven by larger average transactions, partly offset by lower traffic. Gross margin improved as faster inventory turnover reduced markdowns and throwaways and freight costs declined. SG&A increased with sales, store costs, COVID-related expenses, and investment in infrastructure.
Cash flow, debt and liquidity
For the 39-week period, operating cash flow was $99.3 million, down from $104.5 million; investing cash outflow was $92.9 million, mainly reflecting capital spending; financing cash inflow was $24.6 million. Cash increased $31.0 million to $59.1 million. Capital expenditures were $85.8 million.
At September 26, 2020, long-term debt, net of discounts and issuance costs, was $448.6 million; the term loan’s gross principal was $460.0 million and matures October 22, 2025. Its stated interest rate was 2.90%. The company had $96.5 million of available revolver capacity, was in compliance with applicable financial covenants, and reported $59.1 million cash. Management said existing cash, operating cash generation and revolver availability should cover working capital, planned capital expenditures and debt service for the next 12 months. Lease liabilities totaled $906.6 million, including $900.4 million for operating leases.
Changes, outlook, risks and unusual items
- Net income growth was amplified by income-tax benefits from stock-option exercises and restricted-stock vesting: $21.9 million in the quarter and $36.5 million year to date. The filing reports a $15.0 million quarterly tax benefit and a $19.0 million year-to-date benefit.
- Year-to-date share-based compensation included $26.1 million related to performance-based options that vested in connection with secondary offerings. These offerings were by selling stockholders; the company received no proceeds from the share sales.
- The company expects cost of sales to rise for the remainder of the year due to commodity-cost pressures, moderating inventory turnover and seasonal product mix. No specific earnings or sales guidance is provided.
- COVID-19 may create staffing and supply shortages, additional safety and personnel costs, temporary closures, construction delays and disruption to suppliers. Management said the pandemic’s duration and financial impact were uncertain and that 2020 results may not indicate future performance.
- The company drew $90 million on its revolver as a precaution in March 2020 and repaid it in full in May. It adopted the expected-credit-loss standard, recording a $0.4 million opening retained-earnings adjustment.
- Management reported no pending litigation expected to materially affect the company and no material off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- Confirm the period: this filing covers Q3 2020, despite the request metadata identifying 2019 Q3.
- Assess how much reported earnings growth depended on discrete tax benefits and share-based compensation, and compare GAAP results with the company’s non-GAAP measures.
- Track comparable-store sales, traffic versus transaction size, gross margin, and the effects of commodity costs and inventory normalization.
- Monitor COVID-19 effects on store staffing, product availability, operating costs and new-store openings.
- Review liquidity and leverage alongside substantial lease commitments, capital spending plans and the company’s ability to maintain covenant compliance.