Grocery Outlet Holding Corp. — Form 10-K Summary
Reporting period: The supplied filing is the annual report for the fiscal year ended December 28, 2019, not a 2018 Q4 filing. Fiscal 2018 ended December 29, 2018. The filing also provides unaudited fourth-quarter results for fiscal 2019 and fiscal 2018.
Business context and results
Grocery Outlet is an extreme-value grocery retailer operating through independently operated stores. Its opportunistic buying model offers name-brand products at discounts, with independent operators responsible for local merchandising and store staffing. At fiscal year-end, the company had 347 stores in six states; it opened 34 and closed three during fiscal 2019.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net sales | $2,559.6 million | $2,287.7 million | +11.9% |
| Comparable-store sales growth | 5.2% | 3.9% | +1.3 percentage points |
| Gross profit / gross margin | $787.1 million / 30.8% | $695.4 million / 30.4% | Margin +0.4 points |
| Operating income / margin | $68.3 million / 2.7% | $82.5 million / 3.6% | Income decreased |
| Net income | $15.4 million | $15.9 million | -2.8% |
| Diluted GAAP EPS | $0.19 | $0.23 | Decreased |
| Adjusted EBITDA (non-GAAP) | $169.8 million | $153.6 million | +10.6% |
| Non-GAAP adjusted net income | $65.0 million | $49.3 million | +31.7% |
Management attributed sales growth to new stores and higher comparable sales, citing opportunistic and everyday-product purchasing, NOSH product growth, and marketing. Gross-margin improvement was attributed to purchasing and inventory management. SG&A rose 14.8% to $639.4 million and increased from 24.4% to 25.0% of sales, reflecting store growth, infrastructure investment and approximately $4.5 million of public-company costs. Share-based compensation rose to $31.4 million, including a $24.3 million charge related to pre-IPO options becoming probable of vesting after the IPO. Interest expense declined to $45.9 million from $55.4 million following debt repayments and refinancing.
Fiscal 2019 fourth-quarter net sales were $655.5 million versus $585.2 million in fiscal 2018 Q4; operating income was $17.0 million versus $13.9 million; and net income was $9.8 million versus a $4.6 million loss. Quarterly results are unaudited.
Cash flow, debt and liquidity
- Operating cash flow was $132.8 million, up from $105.8 million. Investing cash outflow was $108.0 million, including $97.2 million of property and equipment purchases. Financing cash outflow was $17.8 million.
- Year-end cash was $28.1 million, compared with $21.1 million; working capital was $62.2 million, down from $89.4 million.
- At December 28, 2019, gross principal under the first-lien term loan was $460.2 million; reported debt net of discounts and issuance costs was $448.0 million. The company had $96.4 million of revolving-credit availability after letters of credit and reported covenant compliance.
- After year-end, the company refinanced the term loan at lower stated margins and, on March 19, 2020, drew $90 million on the revolver as a precautionary working-capital reserve amid COVID-19 uncertainty.
- Adoption of lease accounting added $734.3 million of operating right-of-use assets and contributed to total lease liabilities of approximately $806.0 million at year-end. The filing reports $1.249 billion of undiscounted lease payments, including $99.4 million due in fiscal 2020.
Outlook, risks and unusual items
- The company stated a goal of approximately 10% annual store-base growth, targeted approximately $110–$120 million of fiscal 2020 capital expenditures (net of tenant allowances), and described potential for more than 1,500 additional locations in current and neighboring states. These are plans and targets, not guaranteed results.
- Management said COVID-19 could materially adversely affect fiscal 2020 results, cash flows and financial position. Potential disruptions included operator staffing, shortages of certain products and protective supplies, store closures, and delays to construction and openings. The filing said the pandemic’s duration and impact could not be reasonably estimated.
- Key business risks include dependence on opportunistic merchandise supply, competitive pricing and comparable-sales performance, store expansion and potential cannibalization, geographic concentration (California represented 57% of stores), and execution of distribution and technology systems.
- The independent-operator model faces legal and regulatory uncertainty, including California AB-5 and potential worker-classification, joint-employer or franchise challenges. The company also disclosed $37.7 million of gross IO notes and receivables, with $10.4 million of related allowances.
- Debt bears variable interest; the filing estimated that a 1 percentage-point rate change would change annual interest cost by approximately $4.6 million based on year-end term debt. The company reported no pending litigation expected to have a material adverse effect.
- Other notable items: the company completed its IPO in June 2019 and used proceeds substantially to repay debt; a February 2020 secondary offering triggered vesting of 4.1 million performance-based shares, with approximately $18.5 million of compensation expense expected in fiscal 2020. Secondary-offering proceeds went to selling stockholders, not the company.
No formal fiscal 2020 revenue or earnings guidance is provided in the filing.
Important facts for investors to verify
- Whether comparable-sales growth, gross-margin gains and store-opening returns continue, especially in newer markets.
- How COVID-19 affected subsequent sales, labor availability, product supply, capital spending and liquidity; the filing gives no quantified forecast.
- The impact of the $90 million revolver draw, refinancing terms and variable-rate debt on interest expense and available liquidity.
- Whether the $18.5 million expected performance-award expense and other equity awards materially affect reported earnings and dilution.
- Lease commitments, IO receivable collectability and any developments in worker-classification or joint-employer regulation.