Business context and reporting period
Grocery Outlet Holding Corp. filed this Form 10-Q for the 13 and 39 weeks ended October 2, 2021; the filing is not for 2020 Q3 as indicated in the request metadata. Comparatives are the periods ended September 26, 2020. The company operates an extreme-value grocery business through independently operated stores and had 407 stores across six states at quarter-end.
Key financial metrics
| Metric | 13 weeks ended Oct. 2, 2021 | 39 weeks ended Oct. 2, 2021 |
|---|---|---|
| Net sales | $768.9 million | $2,296.9 million |
| Gross profit / margin | $237.1 million / 30.8% | $706.8 million / 30.8% |
| Operating income / margin | $26.1 million / 3.4% | $73.7 million / 3.2% |
| Net income | $17.1 million | $55.7 million |
| Diluted EPS | $0.17 | $0.56 |
| Adjusted EBITDA (non-GAAP) | $51.4 million | $151.1 million |
| Comparable-store sales | (4.3)% | (7.6)% |
For the 39 weeks, operating cash flow was $141.8 million, investing cash outflow was $96.3 million, and financing cash inflow was $5.2 million. Cash increased $50.7 million to $156.0 million.
At October 2, 2021, the company had $430.4 million in current assets and $228.5 million in current liabilities. Long-term debt, net, was $450.9 million; gross term debt was $460.0 million. The $100 million revolving facility had no borrowings and $96.5 million of available capacity after standby letters of credit. Lease liabilities totaled $984.8 million. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Third-quarter sales rose 0.6%, but comparable-store sales fell 4.3%, following 9.1% growth in the prior-year quarter. For the 39-week period, sales declined 1.3% and comparable-store sales fell 7.6%.
- Third-quarter gross margin decreased to 30.8% from 31.2%; operating margin fell to 3.4% from 4.0%. Net income declined 57.7%, to $17.1 million, and adjusted EBITDA declined 6.2%.
- For the 39 weeks, net income fell 32.5% and adjusted EBITDA fell 12.0%. Prior-year results included much larger tax benefits from equity-award exercises and vesting; 2021 also included a $4.0 million insurance-recovery gain.
- Operating cash flow increased to $141.8 million from $99.3 million, principally reflecting lower cash use for inventory and increases in payables and accrued expenses. Capital spending remained substantial at $89.6 million.
- The company opened seven stores in the quarter and 28 in the 39-week period, versus 10 and 27, respectively, in the comparable periods.
Outlook, management commentary, risks and unusual items
- Management said cash on hand, operating cash generation and revolver availability should fund working capital, planned capital expenditures and debt service for the next 12 months. No specific earnings or sales guidance was provided.
- Management attributed weaker comparable sales mainly to lower customer traffic as the company cycled elevated pandemic-era demand and consumers resumed travel and dining out. It said near-term consumer behavior and sales trends remain difficult to predict.
- COVID-related staffing shortages, labor costs, supply-chain delays, product availability constraints, higher freight, fuel and carrier costs, and longer construction lead times could pressure operations, margins and store growth. Inflation and competitive pricing may limit the company’s ability to pass on cost increases.
- Other key risks include dependence on opportunistic merchandise sourcing, inventory forecasting and markdowns, recruiting and retaining staff and independent operators, online-grocery competition, and geographic concentration: California accounted for 59% of stores.
- A $4.0 million insurance-recovery gain related to the 2018 Paradise, California wildfire was recorded in the 39-week period. The filing says ordinary-course litigation is not expected to have a material adverse effect and reports no material changes to contractual obligations outside the ordinary course.
- Subsequent to quarter-end, the board approved a share-repurchase program effective November 5, 2021, authorizing repurchases of up to $100 million. Repurchases are subject to credit-agreement restrictions and other considerations.
Adjusted EBITDA, adjusted net income and adjusted EPS are non-GAAP measures; the company cautions that they are supplemental and may not be comparable with similarly named measures at other companies.
Important facts for investors to verify
- Confirm the filing period: October 2, 2021, rather than 2020 Q3.
- Monitor comparable-store sales, customer traffic, transaction size and the contribution from new stores as pandemic comparisons normalize.
- Track gross margin and freight, fuel, distribution, labor and inventory costs for evidence of continued pressure or recovery.
- Review operating cash flow alongside capital expenditures, store-opening plans and working-capital movements.
- Assess debt service, variable-rate exposure, covenant headroom, lease commitments and the terms and execution of the $100 million repurchase authorization.
- Evaluate management’s adjusted results against GAAP performance, including the effects of tax benefits, share-based compensation and other excluded items.