Grocery Outlet Holding Corp. — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended March 28, 2020 (fiscal 2020 first quarter), compared with the 13 weeks ended March 30, 2019. This differs from the “2019 Q1” period in the request metadata.
Business context
Grocery Outlet is an extreme-value retailer selling name-brand and fresh products through independently operated stores. At quarter-end, it operated 355 stores in six states, including 350 independent-operator stores. The company opened 10 stores and closed two during the quarter.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $760.3 million | $606.3 million | +25.4% |
| Comparable-store sales | +17.4% | +4.2% | Increase |
| Gross profit / margin | $237.0 million / 31.2% | $187.0 million / 30.8% | Margin +0.4 percentage points |
| Operating income / margin | $16.9 million / 2.2% | $21.7 million / 3.6% | Income declined |
| Net income | $12.6 million | $3.8 million | +235.0% |
| Diluted GAAP EPS | $0.13 | $0.06 | Increased |
| Adjusted EBITDA (non-GAAP) | $57.0 million | $39.1 million | +45.8% |
Gross margin improved as markdowns and throwaways declined with faster inventory turnover and distribution costs fell as a share of sales. SG&A decreased to 24.6% of sales from 25.2%, but operating income fell as share-based compensation rose to $20.3 million from $0.2 million, including $18.5 million tied to performance-option vesting. Lower interest expense also supported net income: it was $5.8 million versus $16.4 million. A $1.8 million income-tax benefit, primarily from excess tax benefits on equity awards, further boosted reported earnings; the prior-year period had $1.4 million of tax expense.
Net cash from operations was $67.8 million, versus $22.2 million. The company attributed the increase partly to inventory reductions amid pandemic-driven sales. Investing activities used $29.8 million, including $28.2 million for property and equipment. Financing activities provided $94.8 million, including a $90.0 million revolving-credit draw. Cash ended the quarter at $160.9 million, up from $28.1 million; approximately $90.0 million of quarter-end cash came from that borrowing.
Debt, liquidity, and balance sheet
At March 28, 2020, gross debt was $550.2 million: a $460.0 million senior secured term loan and a $90.0 million revolving-credit borrowing. The term loan matured October 22, 2025, and the revolver matured October 23, 2023. Reported long-term debt, net of discounts and issuance costs, was $537.5 million. The company was in compliance with applicable credit covenants. Management said cash, operating cash flows, and revolver borrowings were expected to meet working-capital, capital-expenditure, and debt-service needs for the next 12 months. Operating lease liabilities totaled $831.6 million.
Changes, outlook, and risks
Management attributed sales growth to 17.4% comparable-store growth and 32 net stores added over the prior 12 months. Comparable sales gains were driven by increases in transactions and average transaction size as customer behavior changed during COVID-19. The company did not provide formal full-year earnings or sales guidance in the supplied filing text.
Management warned that COVID-19 could materially adversely affect fiscal 2020 results, cash flows, and financial position. Risks included staffing shortages, supply constraints for certain foods and protective supplies, store or facility closures, disruption to new-store construction, and higher cleaning, safety, personnel, and supply-chain costs. It expected these costs to pressure second-quarter SG&A and adjusted EBITDA; it also expected second-quarter distribution costs to rise as inventories were replenished. The duration and severity of the pandemic were uncertain.
Other notable items: the company borrowed $90.0 million on its revolver as a precautionary working-capital reserve; it repriced its term loan in January 2020, with a 4.38% rate at quarter-end. A 10% relative change in effective interest rates was estimated to change interest expense by approximately $2.1 million over the next 12 months. After quarter-end, April 27, 2020, performance criteria were met for another 1.7 million options, with approximately $7.7 million of related compensation expense expected in Q2. The company also disclosed an aircraft lease with an entity controlled by its CEO. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of the exceptional comparable-store sales increase persisted after the initial pandemic-related change in shopping behavior.
- Whether inventory availability, staffing, store operations, and new-store openings were affected by COVID-19, and the resulting effect on margins and cash flow.
- The sustainability of earnings after excluding the $18.5 million Q1 performance-option charge and the benefit from excess tax deductions; review the company’s non-GAAP adjustments alongside GAAP results.
- Revolver availability and liquidity after the $90.0 million draw, as well as covenant headroom and debt-service capacity.
- The expected timing and cost of the additional Q2 option vesting, and the terms and governance of the related-party aircraft lease.