Grocery Outlet Holding Corp. — Form 10-K summary
Reporting period: Fiscal year ended January 1, 2022 (52 weeks), filed March 2, 2022. Although the request metadata says “2020 Q4,” this filing reports fiscal 2021 annual results, with fiscal 2020 (ended January 2, 2021; 53 weeks) as the principal comparison.
Business context
Grocery Outlet is an extreme-value grocery retailer using opportunistic purchasing and independently operated stores. It had 415 stores in seven states at year-end; 411 were operated by independent operators (IOs). The company generally shares store-level gross profit with IOs and retains ownership of consigned merchandise until sale.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 |
|---|---|---|
| Net sales | $3,079.6 million | $3,134.6 million |
| Gross profit / gross margin | $948.8 million / 30.8% | $973.3 million / 31.1% |
| Operating income / margin | $89.1 million / 2.9% | $107.4 million / 3.4% |
| Net income / diluted EPS | $62.3 million / $0.63 | $106.7 million / $1.08 |
| Operating cash flow | $165.6 million | $181.2 million |
| Adjusted EBITDA (non-GAAP) | $198.5 million | $222.9 million |
| Adjusted net income (non-GAAP) | $89.9 million | $112.7 million |
- Comparable-store sales declined 6.0% in fiscal 2021, versus growth of 12.7% in fiscal 2020. The fiscal 2020 year included an additional week, which generated $53.3 million of sales.
- Cost of sales was 69.2% of sales, up from 68.9%; SG&A was 25.1% of sales, up from 24.6%. Depreciation and amortization rose 23.2% to $68.4 million, while share-based compensation fell 53.7% to $17.6 million.
- Cash and cash equivalents were $140.1 million. Current assets were $442.7 million and current liabilities were $237.9 million. Operating cash flow was $165.6 million; investing cash outflow was $136.7 million, including $123.4 million of property and equipment purchases before tenant improvement allowances.
- Term-loan borrowings were $460.0 million gross ($451.5 million net of discounts and issuance costs), at a 2.85% rate, maturing October 2025. The $100 million revolver was undrawn, with $96.5 million available after letters of credit. The company reported compliance with applicable debt covenants.
- Lease liabilities totaled $1.013 billion, including $1.006 billion operating lease liabilities. Fiscal 2022 lease payments were approximately $114.8 million across operating and finance leases.
Changes, outlook and commentary
- Sales fell 1.8% year over year despite 36 new store openings and one closure. The 6.0% comparable-sales decline was driven mainly by lower customer traffic, partly offset by larger average transactions. Fiscal 2020’s extra week also affected the comparison.
- Management attributed weaker results and margin pressure to post-pandemic changes in shopping behavior, reduced traffic, higher food-away-from-home spending, e-commerce use, supply constraints, and higher labor, freight, fuel and product costs. Price increases only partly offset inflation.
- Management expects these consumer trends and elevated staffing, fuel, freight and distribution costs to potentially continue into fiscal 2022. Store construction and openings face delays; management expected 2022 growth below its approximately 10% annual target and weighted more toward the second half. It did not provide a specific revised store-opening target in the supplied text.
- Fiscal 2022 capital expenditures were expected to be approximately $115 million, net of tenant improvement allowances. Longer term, the company sees about 1,900 potential stores in existing and contiguous regions and a national potential of 4,800 locations; these are estimates, not commitments.
- The company began an Instacart online-shopping pilot at 68 California stores. A $100 million share-repurchase authorization was approved in November 2021; no shares were repurchased by year-end. Through February 24, 2022, it repurchased 139,718 shares for $3.5 million. No common-stock dividends were expected in the foreseeable future.
Risks, contingencies and unusual items
- Key risks include reliance on the variable supply and pricing of opportunistic inventory; inflation and competition; labor and distribution disruptions; COVID-19 effects; store-development delays; and limited online-retail experience.
- The IO model carries classification and joint-employer legal risks, as well as dependence on IO performance and repayment of company loans. Gross IO notes and receivables were $40.6 million, with an $11.9 million allowance at year-end.
- California represented 59% of stores, creating geographic concentration exposure. The filing also notes that California store inventory was not insured against earthquake losses and describes wildfire-related disruption and insurance-market pressures.
- Variable-rate debt exposes the company to interest-rate increases. The filing states that the credit agreement used USD LIBOR, scheduled for discontinuation in mid-2023, and anticipated an amendment.
- Fiscal 2021 included a $4.0 million insurance-recovery gain related to a 2018 wildfire loss. Fiscal 2020 net income benefited from $44.1 million of excess tax benefits tied to equity awards, versus $8.0 million in fiscal 2021; this contributed to the year-over-year earnings comparison.
- Management reported no pending litigation expected to have a material adverse effect. Deloitte issued unqualified opinions on the financial statements and internal control; the critical audit matter concerned long-lived store-asset impairment estimates, particularly sales-growth and gross-margin forecasts.
Important facts for investors to verify
- Whether customer traffic and comparable-store sales stabilize after the sharp fiscal 2021 decline.
- Whether inflation, freight and labor costs continue to pressure gross margin, and how much can be offset through sourcing or pricing.
- Fiscal 2022 store openings, construction delays, capital spending and returns on newly opened stores.
- Debt repayment or refinancing plans ahead of the October 2025 term-loan maturity, including variable-rate exposure and covenant capacity.
- Performance and expansion plans for the Instacart pilot, and whether online sales support growth without undermining store economics.
- Changes in IO-note allowances, IO financial health, lease commitments and exposure to wildfire, earthquake and other uninsured losses.