Grocery Outlet Holding Corp. Form 8-K Summary
Business Context and Reporting Period
Grocery Outlet Holding Corp. filed this Current Report on October 1, 2019. The filing provides preliminary financial and operating estimates for the thirteen weeks ended September 28, 2019, compared with the thirteen weeks ended September 29, 2018. It also announces a lock-up waiver and a secondary offering by certain selling stockholders.
Key Financial and Operating Metrics
| Metric | Q3 2018 | Q3 2019 Preliminary | Change |
|---|---|---|---|
| Net sales | $576.8 million | $652.5 million | +$75.7 million; +13.1% |
| Net income | $7.7 million | $8.9 million–$9.6 million | Approximately +21.1% at midpoint |
| Adjusted EBITDA | $39.0 million | $42.0 million–$43.0 million | Approximately +8.9% at midpoint |
| Comparable-store sales growth | 4.2% | 5.8% | +1.6 percentage points |
| Stores open at period end | 307 | 337 | +30 stores |
Net sales growth was attributed primarily to the net addition of 30 stores over the prior twelve months and higher comparable-store sales. Comparable-store growth was driven by increases in customer transactions and average transaction size. The company opened eight stores and closed one during the period, consistent with the prior-year period.
Preliminary 2019 EBITDA was estimated at $33.9 million–$34.9 million, compared with $36.0 million in 2018. Adjusted EBITDA included approximately $2.0 million of additional public-company compliance costs, including insurance, accounting, legal and Sarbanes-Oxley compliance expenses.
The filing does not provide a clear preliminary cash-flow, cash-balance, liquidity, debt-balance or debt-to-capital value. Interest expense was preliminarily estimated at $7.5 million, compared with $13.5 million in the prior-year period.
Material Changes and Corporate Actions
- Lead book-running managers BofA Merrill Lynch and Morgan Stanley waived lock-up restrictions for certain shares held by H&F Globe Investor LP and certain officers and directors.
- The company announced a secondary offering of common stock by certain selling stockholders. The filing text does not provide the offering size or pricing terms.
- Adjusted EBITDA included estimated stock-based compensation of $3.0 million, debt modification costs of $0.5 million, and other adjustments, including non-cash rent, store-opening costs and other discrete items.
- The company expects to pay an additional $4.2 million in aggregate on option-related dividends as options vest, including approximately $3.4 million during the remainder of fiscal 2019.
Outlook, Risks and Unusual Items
The company provided preliminary estimates rather than formal full-year guidance. Results had not been finalized, audited, reviewed or compiled, and the company cautioned that completed reconciliations, accrual reviews and other closing procedures could cause actual results to differ materially.
California enacted AB-5 on September 18, 2019, narrowing the standard for classifying workers as independent contractors. Grocery Outlet stated that it believes its California independent operators remain appropriately classified as independent contractors, but noted that application guidance was not yet available.
Key risks identified include product-supply and pricing challenges, comparable-store sales performance, competition, distribution and information-technology disruptions, labor and regulatory changes, legal challenges to the independent-contractor model, dependence on independent operators, substantial debt-servicing requirements, cash-flow sufficiency, lease obligations, economic conditions and natural disasters.
Investor Verification Checklist
- Verify final third-quarter 2019 results in the subsequent Form 10-Q, including revenue, net income, margins, cash flow, debt and liquidity.
- Confirm whether the preliminary net income and adjusted EBITDA ranges were achieved and review any changes to the reconciliation items.
- Review the final terms, size and selling-stockholder details of the secondary offering.
- Assess the financial and operating impact of AB-5 on independent operators and labor classification.
- Review the company’s debt maturities, refinancing terms and ability to generate cash to service debt.
- Evaluate the sustainability of comparable-store sales growth and the economics of the store expansion program.