Grocery Outlet Holding Corp. — Form 10-K Summary
Reporting period: Fiscal 2020, ended January 2, 2021, comprising 53 weeks. The comparable fiscal 2019 ended December 28, 2019 and comprised 52 weeks. Although the request metadata says “2019 Q4,” this filing reports fiscal 2020 results; it does not represent a standalone 2019 fourth quarter.
Business context
Grocery Outlet is an extreme-value retailer of branded groceries and fresh products, using opportunistic buying and independently operated stores. At year-end it had 380 stores in six states, including 375 operated by independent operators (IOs). The company generally shares store-level gross profit with IOs, while retaining ownership of consigned merchandise and bearing store occupancy costs.
Financial performance
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net sales | $3,134.6 million | $2,559.6 million |
| Comparable sales growth | 12.7% (52-week basis) | 5.2% |
| Gross profit / gross margin | $973.3 million / 31.1% | $787.1 million / 30.8% |
| Operating income / margin | $107.4 million / 3.4% | $68.3 million / 2.7% |
| Net income / diluted EPS | $106.7 million / $1.08 | $15.4 million / $0.19 |
| Adjusted EBITDA | $222.9 million | $168.3 million |
| Operating cash flow | $181.2 million | $132.8 million |
- Sales increased 22.5%; the extra 53rd week contributed $53.3 million. Comparable-sales growth was driven mainly by higher average transaction size, partly offset by lower traffic as shopping behavior changed during COVID-19.
- Gross margin improved 0.3 percentage points, reflecting lower markdowns and throwaways from faster inventory turnover and lower freight expense to stores. SG&A rose 20.8% in dollars but declined to 24.6% of sales from 25.0%.
- Net income growth was substantially affected by a $19.6 million income-tax benefit, including $44.1 million of excess tax benefits from stock-option exercises and RSU vesting. Share-based compensation was $38.1 million, including $26.1 million tied to performance-based options vesting around secondary offerings. Adjusted EBITDA is non-GAAP; the company revised its definition during fiscal 2020.
- Cash used in investing was $133.8 million, primarily for property and equipment, store growth and IO advances. Cash provided by financing was $29.8 million, including equity-award exercise proceeds; the company also drew and repaid a $90 million revolver loan during the year.
Liquidity, debt and capital commitments
- Year-end cash was $105.3 million, working capital was $149.3 million, and reported debt net of discounts and issuance costs was $449.2 million; gross term-loan principal was $460.0 million.
- The $460 million secured term loan carried a 2.90% rate at year-end and matures October 2025. The $100 million revolving facility had $96.5 million available after letters of credit. The company reported compliance with applicable debt covenants and said liquidity should be adequate for the next 12 months.
- Operating and finance lease payments totaled $1.389 billion undiscounted, including $113.5 million due in fiscal 2021. Management expects approximately $130 million of fiscal 2021 capital expenditures, net of tenant improvement allowances.
- Operating cash flow exceeded investing outflows by $47.5 million. The company does not expect to pay common-stock dividends in the foreseeable future.
Outlook, commentary and risks
- Management targets approximately 10% annual store-base growth, with an estimated potential of approximately 1,900 stores in existing and neighboring states and 4,800 nationally. It opened 35 stores and closed two in fiscal 2020. Management cited an average new-store net cash investment of approximately $2.0 million and a target payback within four years.
- COVID-19 drove unusually strong sales but also created inventory shortages, staffing challenges, store-closure risk, additional cleaning and protective-supply costs, and potential wage and hazard-pay exposure. Management cautioned that fiscal 2020 results may not indicate future performance and said the pandemic could materially affect fiscal 2021 results.
- Key risks include dependence on opportunistic product supply and IO performance; competition and changing consumer preferences; store-opening execution and cannibalization; the legal classification of IOs and potential joint-employer exposure; geographic concentration (58% of stores were in California); cybersecurity and systems risk; and substantial lease commitments and variable-rate debt.
- Management reported no pending litigation expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal controls; the critical audit matter was store-level long-lived asset impairment. No long-lived asset impairment was recorded in fiscal 2020.
- No specific consolidated financial forecast was provided. The filing notes the planned store-growth pace and fiscal 2021 capital-expenditure estimate above.
Most important facts for investors to verify
- Whether comparable-sales momentum persists after the pandemic-driven demand shift, and how traffic and basket size evolve.
- How much reported earnings growth reflects core operations versus the tax benefit and share-based compensation; compare GAAP results with the company’s revised non-GAAP measures.
- Whether gross-margin improvement and inventory turnover are sustainable as supply conditions and freight costs change.
- Cash generation and funding capacity against store-expansion spending, lease obligations, and the October 2025 term-loan maturity.
- Progress on the approximately 10% store-growth target, new-store returns, and performance in newer markets such as Southern California.
- Potential effects of COVID-19 costs, IO legal-classification developments, regional concentration, and other disclosed operating risks.