Business context and reporting period
Grocery Outlet Holding Corp. is an extreme-value grocery retailer operating through independently operated stores. The filing is a Form 10-Q for the 13 and 39 weeks ended September 28, 2019; the filing’s comparable periods ended September 29, 2018. This differs from the request metadata identifying 2018 Q3.
At quarter-end, the company operated 337 stores in six states. Its June 2019 IPO generated $407.7 million in net proceeds, which were used substantially to repay debt.
Financial and operating performance
| Metric | 13 weeks ended September 28, 2019 | 39 weeks ended September 28, 2019 |
|---|---|---|
| Net sales | $652.5 million; +13.1% | $1,904.1 million; +11.8% |
| Comparable-store sales growth | 5.8% (4.2% prior year) | 5.3% (3.8% prior year) |
| Gross profit / margin | $201.1 million / 30.8% (30.4% prior year) | $586.8 million / 30.8% (30.5% prior year) |
| Operating income / margin | $23.9 million / 3.7% (4.2% prior year) | $51.3 million / 2.7% (4.0% prior year) |
| Net income | $12.4 million; diluted EPS $0.13 | $5.6 million; diluted EPS $0.07 |
| Adjusted EBITDA (non-GAAP) | $44.2 million; +13.2% | $128.3 million; +12.3% |
Quarterly SG&A was 24.7% of sales, up from 24.2%; for the 39-week period it was 24.8%, versus 24.5%. Quarterly interest expense, net, fell to $7.3 million from $13.5 million. For 39 weeks, net interest expense was $39.2 million versus $40.4 million. The 39-week net income comparison was affected by $25.9 million of stock-based compensation, largely recognized in connection with the IPO.
For the 39 weeks, operating cash flow was $104.5 million (up from $85.4 million), investing cash outflow was $79.9 million (versus $46.2 million), and financing cash outflow was $1.6 million. Cash increased $23.0 million to $44.0 million.
Balance sheet, debt and liquidity
At September 28, 2019, reported long-term debt, net, was $462.5 million, including $267,000 current; gross debt was $475.5 million. The company had no revolver borrowings and reported $96.4 million of available capacity after letters of credit. It reported compliance with applicable debt covenants and was not subject to the revolving-facility leverage test.
The company repaid its $150 million second-lien loan and prepaid $248 million of first-lien principal with IPO proceeds, then refinanced the remaining first-lien loan in July. The replacement $475.2 million term loan matures in October 2025 and has variable interest rates. A further $15 million principal prepayment occurred October 23, 2019, after quarter-end.
Adoption of lease accounting added a $680.2 million operating lease right-of-use asset and $754.3 million of operating lease liabilities at quarter-end. Total lease liabilities, including finance leases, were $758.6 million. This accounting adoption did not materially affect reported operating results or cash flows.
Changes, outlook and risks
- Sales growth reflected 30 net store additions over the preceding 12 months and stronger comparable sales; management cited opportunistic and everyday product purchasing, growth in natural, organic, specialty and healthy products, and digital marketing.
- Management attributed modest gross-margin improvement to purchasing and inventory management. SG&A rose faster than sales, and management expected SG&A as a percentage of sales to increase during the remainder of 2019, partly due to public-company and Sarbanes-Oxley compliance costs.
- Management expected interest expense to decline in the remainder of fiscal 2019 following debt repayment and repricing. Planned full-year capital expenditures were $90–$95 million, excluding approximately $10 million of landlord allowances; about 65% was expected to support 33 new stores and one relocation.
- Management said cash, operating cash generation and available revolver capacity should fund working capital, planned capital spending and debt service for the next 12 months, while noting future financing might be needed if those resources prove insufficient.
- Risks include supplier access to attractively priced opportunistic products, comparable-sales execution, competition, store openings, distribution and technology disruptions, variable-rate debt, and the independent-operator model and operator credit exposure. The company’s stated maximum exposure to independent operators was generally limited to gross notes and receivables of $35.3 million.
- The company disclosed ordinary-course litigation that management did not believe would materially affect results, financial condition or cash flows. It reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether comparable-sales growth and new-store expansion can continue without further pressure on SG&A and operating margins.
- The effects of variable interest rates on the $475.2 million term loan; management estimated a 1% rate change would alter next-12-month interest cost by approximately $4.8 million.
- Cash conversion and investment needs, including capital spending, lease commitments and the expected $30.7 million fresh-meat purchase commitment.
- How much of reported earnings growth is reflected in GAAP results versus management’s non-GAAP adjusted measures and related exclusions.
- Independent-operator receivable collectability, stock-based compensation, and execution of planned store openings and public-company compliance spending.