Grocery Outlet's Q2 Earnings Beat, Comps Jump 2.9% Y/Y

Shares of Grocery Outlet Holding Corp. GO advanced 11.9% during the after-market trading session on Aug 6 following second-quarter 2024 results. Both the top and bottom lines surpassed the Zacks Consensus Estimate. While net sales improved, earnings declined from the year-ago period. Management did highlight that disruptions due to the implementation of new technology platforms hurt the gross margin in the quarter, but it anticipates no adverse impacts on operations in the second half of 2024.

Q2 Insights

Grocery Outlet's adjusted earnings of 25 cents a share beat the Zacks Consensus Estimate of 20 cents but declined from 32 cents delivered in the year-ago quarter.

Net sales of $1,128.5 million came ahead of the Zacks Consensus Estimate of $1,109 million. The top line grew 11.7% year over year. The outperformance was driven by decent comparable store sales performance and new stores opened.

Comparable store sales increased 2.9% in the quarter, driven by a 5.1% jump in the number of transactions, partly offset by a 2.1% decline in the average transaction size. We had anticipated 3.2% growth in the metric. In the year-ago period, the company had reported a comparable store sales increase of 9.2%.

Margins & Costs

The gross profit rose 6.9% year over year to $349.2 million. However, the gross margin contracted 140 basis points to 30.9% due to the disruptions as a result of the implementation of new technology platforms that hurt the metric by 100 basis points. Adjusted EBITDA came in at $67.9 million, down from $70.5 million in the year-ago period. The adjusted EBITDA margin of this Zacks Rank #4 (Sell) company shrunk 100 basis points to 6%.

We had anticipated a 230-basis point and 160-basis point contraction in the gross margin and the adjusted EBITDA margin, respectively.

SG&A expenses jumped 11.4% to $323.1 million during the quarter. As a percentage of net sales, SG&A expenses decreased 10 basis points to 28.6%.

Store Update

During the quarter, Grocery Outlet expanded its footprint with the opening of 11 new stores, complementing the 40 stores acquired through the United Grocery Outlet acquisition. However, the company also closed one outlet. This brings the total count to 524 stores in 16 states.

The company aims to inaugurate 62-64 net new stores in 2024. This encompasses the addition of 40 United Grocery Outlet stores, alongside the opening of 22 to 24 new Grocery Outlet stores in its existing markets.

Other Financial Aspects

Grocery Outlet ended the quarter with cash and cash equivalents of $67.1 million, long-term debt of $373.6 million and stockholders' equity of $1,220.8 million.

Net cash provided by operating activities during the quarter was $41.6 million. The company incurred capital expenditures of $40.2 million (net of tenant improvement allowances). Management envisions capital expenditures (net of tenant improvement allowances) of about $200 million for 2024.

Outlook

Management continues to foresee 2024 net sales between $4.30 billion and $4.35 billion compared with $3.97 billion reported in 2023. The company now expects comparable store sales growth of 3.5%. The company had reported a 7.5% increase registered in 2023. Grocery Outlet guided a full-year gross margin of 30.5%, down from 31.3% guided earlier. The current projection showed an 80-basis point contraction in the gross margin from the year-ago period.

It expects adjusted EBITDA between $252 million and $260 million in 2024. The company had reported adjusted EBITDA of $252.6 million in 2023.

Grocery Outlet envisions adjusted earnings in the band of 89-95 cents. The company reported adjusted earnings of $1.07 per share in 2023.

Management expects third-quarter 2024 comparable store sales growth of approximately 1.5%. Grocery Outlet envisions the gross margin to be approximately 31%. It estimates the adjusted EBITDA margin to be roughly 6.4%.

Shares of this extreme-value retailer of quality, name-brand consumables and fresh products have fallen 11.2% in the past three months against the industry's rise of 0.5%.

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The Zacks Consensus Estimate for Vital Farms' current financial-year sales and earnings suggests growth of around 24.9% and 66.1%, respectively, from the year-ago reported numbers.

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The Zacks Consensus Estimate for Sprouts Farmers' current financial-year sales and earnings implies growth of around 9.6% and 17.3%, respectively, from the year-ago reported numbers.

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