Business context and reporting period
Grocery Outlet Holding Corp. is an extreme-value grocery retailer operating through independently operated stores. This 10-Q covers the 13 and 26 weeks ended June 29, 2019, compared with periods ended June 30, 2018. The request labels the period “2018 Q2,” but the filing is for 2019 Q2. The company had 330 stores in six states at quarter-end.
Financial and operating highlights
| Metric | Q2 2019 | Q2 2018 |
|---|---|---|
| Net sales | $645.3 million | $575.1 million |
| Comparable-store sales growth | 5.8% | 2.7% |
| Gross profit / margin | $198.7 million / 30.8% | $175.1 million / 30.5% |
| Operating income | $5.7 million | $24.0 million |
| Net income (loss) | $(10.6) million | $7.3 million |
| Adjusted EBITDA | $45.0 million | $39.1 million |
| Adjusted net income | $14.5 million | $12.9 million |
For the first half, sales rose 11.2% to $1.252 billion, while GAAP net loss was $6.9 million versus net income of $12.8 million. Adjusted EBITDA was $84.1 million versus $75.2 million; adjusted net income was $24.4 million, essentially flat year over year. Adjusted measures are non-GAAP.
Q2 GAAP gross margin improved 0.3 percentage point to 30.8%; SG&A was 24.4% of sales versus 24.3%. Operating margin fell to 0.9% from 4.2%, reflecting substantially higher stock-based compensation following the IPO. Q2 stock-based compensation was $22.8 million, including $22.4 million related to pre-IPO time-based options. Debt extinguishment costs were $5.2 million. Interest expense was $15.5 million, up 10.6%.
First-half operating cash flow was $39.7 million, down from $55.2 million; investing cash outflow was $44.5 million, versus $25.5 million. Capital expenditures were $39.8 million. Cash declined by $2.4 million to $18.7 million.
At June 29, 2019, long-term debt, net, was $462.4 million and cash was $18.7 million. The IPO generated $407.7 million net proceeds; the company repaid its $150 million second-lien loan and prepaid $248 million of first-lien principal. It reported $96.4 million available on its $100 million revolver, net of letters of credit, and compliance with applicable covenants. Current assets were $247.6 million and current liabilities $176.3 million. Adoption of lease accounting added substantial recognized obligations: total lease liabilities were about $750.3 million at quarter-end.
Material changes, outlook, and risks
- Sales growth reflected 30 net store openings over the prior 12 months, higher comparable sales, and modest benefit from later Easter. The company opened eight stores and closed one in Q2; it opened 16 in the first half.
- Management cited strong purchasing and inventory management for modest gross-margin expansion, and digital marketing and growth in natural, organic, specialty and healthy products as sales drivers.
- The June IPO also triggered recognition of previously deferred option compensation, materially reducing reported GAAP earnings. In July 2019, after quarter-end, the company refinanced its remaining $475.2 million first-lien term loan at lower applicable margins, with maturity unchanged at October 2025. Management expected lower interest expense in the remainder of fiscal 2019.
- Management planned fiscal 2019 capital expenditures of $85–$90 million, net of tenant improvement allowances, with approximately 65% directed to 32 planned new stores and one relocation. It stated available cash, operating cash flow, and revolver capacity should fund working capital, planned capital expenditures, and debt service for the next 12 months; no formal earnings guidance is provided in the supplied filing text.
- Management expects SG&A to rise in the remainder of 2019 due to public-company costs, including insurance, accounting, legal, and Sarbanes-Oxley compliance. A hypothetical 1% interest-rate change would alter annual interest cost by approximately $4.8 million based on quarter-end variable-rate debt.
- Key disclosed risks include sourcing opportunistic products at attractive prices, comparable-sales performance, store-opening execution, competition, distribution or IT disruption, labor and lease costs, independent-operator performance and credit exposure, and ability to generate cash to service debt. The filing reports no material change to previously disclosed risk factors and no litigation expected to have a material adverse effect.
Most important facts for investors to verify
- Reconcile strong sales, comparable-store growth, and adjusted EBITDA with the GAAP operating-profit decline and net loss, particularly the recurring impact of stock compensation and public-company costs.
- Confirm the July 2019 refinancing terms and resulting interest expense, and monitor floating-rate exposure, covenant terms, and remaining debt.
- Assess whether operating cash flow can support the $85–$90 million capital-spending plan, store growth, and lease and debt commitments.
- Review comparable-store trends, new-store returns, and margin performance; Q2 sales growth included new stores and a modest calendar benefit.
- Evaluate the independent-operator notes and receivables: gross exposure was $33.1 million, with reported allowances, and collection depends in part on operator performance.