Grocery Outlet’s Sales Remain Strong Amid Challenges
Grocery Outlet Holding Corp.’s net sales increased 10.4% to $1.11 billion during the third quarter ended Sept. 28, due to new store sales and a 1.2% increase in comparable-store sales, which represents 7.6% comp growth on a two-year basis. Comp transaction growth of 2% was partly offset by a 0.7% decline in average basket. Comps during the summer were challenging but accelerated in September to 3.8%.
“Our double-digit third quarter net sales growth reflects the strong positioning of our consumer offering – value continues to win in the market and we continue to grow our share of consumer nondiscretionary spending,” said Eric Lindberg, chairman and interim president and CEO of Grocery Outlet.
Lindberg continued: “While these results were generally consistent with our expectations, our execution limited growth and earnings during the period. Challenges with the systems conversion have hindered our performance over the past year, and while we have made substantial progress on the implementation, it is critical that we return our focus to what we do best: executing well on the fundamentals and delivering outstanding value to our customers through our dedicated independent operators.”
Lindberg was named interim president just a few days before the release of Q3 earnings as R.J. Sheedy stepped away from the position and resigned from the company’s board of directors.
Lindberg addressed the abrupt change while discussing the company's earnings, saying, “I'll take the time in the coming weeks working with the leadership team to take a step back and ensure that we are hyperfocused on the right set of priorities that will enable us to be successful.”
For Q3, Grocery Outlet's gross margin decreased by 30 basis points to 31.1%. Selling, general and administrative expenses increased by 9.5% to $304.6 million, or 27.5% of net sales. Net income dropped 10.9% to $24.2 million, or 24 cents per diluted share.
Adjusted EBITDA rose by 6.0% to $72.3 million, or 6.5% of net sales, but adjusted net income also dropped by 10.1% to $27.9 million, or 28 cents per adjusted diluted share.
Net interest expense increased 52.4% to $6.4 million, driven by higher average principal debt to enable share repurchases and other cash outlays to support the continued growth of the business after the acquisition of United Grocery Outlet earlier this year.
“While we made strong progress on our relative value proposition, in Q3, we recognize that we are not fully where we need to be,” noted Lindberg. “Restoring our value proposition has taken longer than expected, due to the systems inefficiencies discussed in the competitive environment. We do not see the competitive environment as a fundamental impediment to getting back to where we want to be on value. We have a strong history of navigating changing competitive environments, and we will continue to balance value and margin with our opportunistic buying model.”
As a result, Grocery Outlet has released revised guidance.: The full year includes comp-store sales growth of approximately 2.4%, while comp-store sales growth in Q4 is expected to be approximately 2%.
The company now expects to add a total of 66 net new stores this year, up from the previous range of 62 to 64. This includes the 40 acquired United Grocery Outlet stores and 26 net new organic store openings. In total, Grocery Outlet now expects fiscal 2024 net sales of slightly above $4.35 billion.
For the full year, the company anticipates adjusted EBITDA to be in the range of $237 million to $242 million, which implies Q4 adjusted EBITDA of $57 million to $62 million. The lowered forecast for adjusted EBITDA reflects the impact of lower comps and gross margins, as well as higher SG&A than previously anticipated.
Emeryville, Calif.-based Grocery Outlet offers products sold through a network of independently operated stores at more than 520 locations in California, Washington, Oregon, Pennsylvania, Tennessee, Idaho, Nevada, Maryland, North Carolina, New Jersey, Georgia, Ohio, Alabama, Delaware, Kentucky and Virginia. The company is No. 66 on The PG 100, Progressive Grocer’s 2024 list of the top food and consumables retailers in North America.
