Grocery Outlet Holding Corp. — Form 10-Q Summary
Period clarification: The filing is for the third quarter of fiscal 2022, the 13 weeks ended October 1, 2022, and year to date (39 weeks) through that date. It compares with the periods ended October 2, 2021; it is not a 2021 Q3 filing.
Business context
Grocery Outlet is an extreme-value retailer operating through independently operated stores. It had 431 stores in eight states at quarter-end and opened six stores during the quarter. The company reports one operating segment.
Financial and operating performance
| Metric | Q3 2022 | Q3 2021 | 39 weeks 2022 | 39 weeks 2021 |
|---|---|---|---|---|
| Net sales | $918.2 million | $768.9 million | $2,647.3 million | $2,296.9 million |
| Gross margin | 30.6% | 30.8% | 30.6% | 30.8% |
| Operating income | $24.7 million | $26.1 million | $71.0 million | $73.7 million |
| Net income | $17.5 million | $17.1 million | $49.2 million | $55.7 million |
| Diluted GAAP EPS | $0.17 | $0.17 | $0.49 | $0.56 |
| Adjusted EBITDA (non-GAAP) | $59.1 million | $51.4 million | $168.5 million | $151.1 million |
- Quarterly sales rose 19.4%; comparable-store sales increased 15.4%, reflecting transaction growth and higher average transaction size. Year-to-date sales rose 15.3%, with comparable-store sales up 10.6%.
- Quarterly gross profit increased 18.4%, but cost of sales grew faster than sales and gross margin declined 0.2 percentage points. Operating income fell 5.6% in the quarter as higher operating costs, including substantially higher share-based compensation, outweighed sales growth.
- Year-to-date net income declined 11.7%. The prior-year period included a $4.0 million insurance recovery gain; 2022 included a $1.3 million debt-extinguishment loss from a term-loan prepayment.
- Operating cash flow was $139.9 million for the 39 weeks, versus $141.8 million. Investing cash outflow was $99.2 million; financing cash outflow was $73.4 million, principally reflecting $75.0 million of term-loan principal repayment.
Balance sheet and liquidity
- At October 1, 2022, cash was $107.3 million, down from $140.1 million at fiscal year-end. Current assets were $468.6 million and current liabilities were $287.4 million; inventory was $331.9 million, up from $275.5 million at year-end.
- Long-term debt was $379.3 million net of issuance costs and discounts ($385.0 million gross). The term loan’s effective interest rate was 5.87%, and it matures in October 2025. The company had no revolver borrowings and reported $96.5 million of remaining revolver capacity.
- Long-term lease liabilities were $982.0 million. The company said it was in compliance with applicable debt covenants.
Outlook, risks, and unusual items
- Management cited inflation in merchandise, transportation, labor, and operating costs; supply-chain and staffing challenges; and changing consumer behavior. Inflationary costs pressured gross margin, partly offset by higher retail pricing.
- Construction costs, materials lead times, permits, and licenses affected store development. Management expected lower new-store growth in fiscal 2022 than its long-term strategic goal of 10%. It reported 17 openings year to date, compared with 28 in the prior-year period.
- Management expected fiscal 2022 capital expenditures, net of tenant improvement allowances, of approximately $115 million. The filing provides no clear full-year sales or earnings guidance.
- A hypothetical 10% relative change in the term loan’s effective interest rate would change interest expense by approximately $2.3 million over the following 12 months. Management reported no pending litigation expected to have a material adverse effect and no material change to the risk factors in its last annual report.
- Non-GAAP adjusted EBITDA and adjusted net income exclude specified items and should be considered alongside, not instead of, GAAP results. Disclosure controls were judged effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether comparable-store sales and transaction growth persist as inflation and consumer behavior evolve.
- Whether pricing can continue to offset merchandise and supply-chain cost increases without further gross-margin pressure.
- Inventory growth, working-capital needs, and operating cash generation relative to store investment and planned capital expenditures.
- Variable-rate debt exposure, the term-loan maturity, and continued covenant compliance.
- The composition and recurrence of adjustments in non-GAAP results, including elevated share-based compensation and other excluded items.