Grocery Outlet To Gain From Defensive Product Mix In Q2 Amid Improvement In Product Assortment: Analyst

Telsey Advisory Group analyst Joseph Feldman reiterated an Outperform rating on Grocery Outlet Holding Corp. GO, raising the price target to $40 from $34.

Grocery Outlet will report 2Q23 earnings in the afternoon on Tuesday, August 8. 

Telsey highlights Grocery Outlet's defensive product mix, value-focused offering, and multi-year store growth, likely creating a successful small business at scale model.

The analyst maintains solid 2Q23 sales and EPS estimates, given expected gains from continued elevated food inflation and at-home consumption trends.  

Grocery Outlet also should benefit from strategic initiatives, including new store openings, improvement in the product assortment, and partnerships to provide an online offering, Telsey adds. 

For FY23, the analyst expects continued positive comps and earnings growth as consumers search for value in this inflationary, tight income environment.

While continued moderation of inflation should temper sales growth in the coming months, this headwind is already baked into the estimates and stock price, the analyst adds. 

The analyst sees inline 2Q23 adjusted EPS of $0.26 vs. $0.27 last year, reflecting a comp of 5.0%.

On the 1Q23 earnings call on May 9, Grocery Outlet commented that business momentum remained strong in 2Q23-to-date. Telsey believes grocery sales remained strong in the rest of the quarter, driven by continued inflation, elevated at-home consumption, and gains from initiatives—like the expansion of Natural, Organic, Specialty, and Healthy (NOSH) products.

The analyst project inline adjusted EBITDA margin contraction of 10 bps to 6.3%, reflecting expected inline gross margin compression of 40 bps to 30.7%.

For Q2, the adjusted SG&A expense ratio, excluding depreciation, should leverage ~30 bps to ~24.4% on a solid anticipated comp. 

Price Action: GO shares are trading higher by 0.56% to $33.51 on the last check Wednesday.