Bank Of America Likes Grocery Outlet Holdings Unique Business Model

Newly-public Grocery Outlet Holding Corp GO has scored an initiation of coverage from Bank of America.

The Analyst

Bank of America analyst Robert Ohmes initiated coverage with a Neutral rating and a $37 price target.

The Thesis

Ohmes says there's upside potential in Grocery Outlet due to its unique, hard-to-replicate independent operator model that aligns incentives while reducing costs and risks.

Grocery Outlet recruits, trains and signs consignment agreements with Indepedent Operators who manage stores, select ~75% of the inventory, and are responsible for the majority of store level costs, says Ohmes.

“This reduces GO’s fixed cost burden and exposure to wage pressure and allows for highly localized assortments, while Independent Operators benefit from Grocery Outlet’s scale, sourcing, and support tools,” said Ohmes.

The analyst says Grocery Outlet’s hard-to-replicate “opportunistic sourcing” model lverages its long-standing relationships with blue chip CPG companies to source ~50% of products at a deep discount, ~50% off wholesale.

“This allows Grocery Outlet to manage consistent margins while delivering extreme value to customers in a traffic-driving treasure hunt format, with average savings of ~40% vs. supermarket competitors and ~20% vs. discounters,” he said.

Grocery Outlet has a 30-year growth record with 15 years of positive same-store sales growth and Ohmes says he expects impressive comp momentum to continue.