Grocery Outlet Hits a Bump in Q1

Systems conversion issues result in higher-than-expected adverse profit impact

5/7/2024

Grocery Outlet's gross margin decreased by 180 basis points to 29.3% in its first quarter.

While Grocery Outlet Holding Corp. increased net sales in its first quarter of fiscal 2024 by 7.4% to $1.04 billion, the company's adjusted EBITDA dropped 37.5% to $39.4 million, or 3.8% of net sales. Gross margin decreased by 180 basis points to 29.3% in Q1, which ended March 30.

As previously disclosed, the company experienced disruptions as a result of the implementation of new technology platforms in late August 2023. Such disruptions are estimated to have negatively affected gross margin by 210 basis points.

Net loss was $1.0 million, or $(0.01) per share. Adjusted net income plummeted 67.4% to $8.8 million, or $0.09 per adjusted diluted share.

However, Grocery Outlet's comparable-store sales rose by 3.9%, driven by a 7.0% increase in the number of transactions, partly offset by a 2.9% decrease in average transaction size.

Selling, general and administrative expenses increased by 13.3% to $303.4 million, or 29.3% of net sales. This included $12.4 million of commission support the company provided operators in connection with system upgrades.

"Our sales momentum remained strong during the first quarter as we continue to deliver unbeatable value with an exciting treasure-hunt experience, driving continued growth in traffic and sales," said RJ Sheedy, president and CEO of Grocery Outlet. "Despite progress with our systems transition and ending the operator commission support program as planned, we are disappointed that additional systems conversion issues resulted in a higher-than-expected adverse profit impact. Our long-term growth potential remains intact, and we look forward to returning to more normalized business results as we near the end of our systems transition."

On April 1, Grocery Outlet completed the acquisition of United Grocery Outlet, an extreme-value discount grocery retailer with 40 stores located in the southeastern United States and a distribution center in Tennessee at the time of the acquisition. This acquisition expanded Grocery Outlet’s store reach into the new states of Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia.

During Q1, the company opened six new stores, ending the quarter with 474 stores in nine states.

Looking ahead, Grocery Outlet expects to open 58 to 62 new stores in fiscal 2024. It anticipates net sales between $4.30 billion and $4.35 billion and a comparable-store sales increase of 3.5% to 4.5%. Adjusted EBITDA is expected to be $252 million to $260 million.

Emeryville, Calif.-based Grocery Outlet offers products sold through a network of independently operated stores at more than 470 locations in nine states. The company is No. 66 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America.