Grocery Outlet (GO) Q2 Earnings Beat, Revenues Increase Y/Y

Grocery Outlet Holding Corp. GO sustained its upbeat performance in second-quarter 2020 with both the top and the bottom lines not only surpassing the Zacks Consensus Estimate but also improving year over year. The company gained from coronavirus-induced spike in demand. As people started dining at home and maintaining social distancing, they have been stocking essential items.

Notably, shares of this Zacks Rank #2 (Buy) company have surged 18.2% in the past three months compared with the industry’s gain of 0.1%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s Take an Insight

The owner and operator of grocery store chains reported adjusted earnings of 42 cents a share that comfortably beat the Zacks Consensus Estimate of 23 cents and improved significantly from 20 cents in the prior-year period. Higher net sales and lower interest expense contributed to the bottom line. This was the fifth straight quarter of positive earnings surprise.

Net sales were $803.4 million, up 24.5% from year-ago quarter courtesy of comparable-store sales growth and contribution from 32 new store openings since the end of the second quarter last year.

Notably, this Emeryville, CA-based company registered comparable-store sales growth of 16.7% during the quarter under review on account of increase in average transaction size, partially offset by decline in traffic. We note that the company’s comparable-store sales rose a meager 5.8% in the prior-year period.

Management notified that for the third quarter to-date comparable store sales growth is tracking at approximately 10%. The increase in comparable-store sales reflects rise in average basket size, partly offset by lower store traffic as customers continue to consolidate trips. Management expects comparable store sales growth to moderate as the economy reopens.

Grocery Outlet Holding Corp. Price, Consensus and EPS Surprise

Grocery Outlet Holding Corp. price-consensus-eps-surprise-chart | Grocery Outlet Holding Corp. Quote

Margins & Costs

We note that gross profit improved 27.7% year over year to $253.8 million, while gross margin expanded 80 basis points to 31.6% courtesy of reduced markdowns. Management anticipates gross margin rate in the back half to be roughly in line with prior-year quarter.

During the quarter, adjusted EBITDA surged 34.7% to $60.6 million owing to gross margin expansion, partially offset by modest SG&A deleverage. Adjusted EBITDA margin increased 50 basis points to 7.5%. Management envisions adjusted EBITDA margin for the second half of 2020 to be modestly below prior-year levels.

SG&A expenses rose 25.6% to $198 million. Again, as a percentage of net sales, the same increased 20 basis points to 24.6%. The increase in SG&A expenses led to a jump of 14.7% in overall operating expenses of $221.4 million. However, as a percentage of net sales, operating expenses contracted 230 basis points to 27.6%.

Management continues to expect incremental expenses in the back half of the year related to the coronavirus outbreak. These include cleaning and safety costs, corporate and distribution center personnel expenditures, costs for protective equipment, and supply chain expenses.

Store Update

During the quarter under review, Grocery Outlet opened seven new stores taking the total count to 362 stores in six states. The company plans to open 30-32 outlets this year with no additional store closure planned. The company remains optimistic about 10% annual unit growth.

Other Financial Aspects

Grocery Outlet ended second-quarter 2020 with cash and cash equivalents of $79.8 million compared with $18.7 million at the end of the same period in fiscal 2019.

Total debt was $460.1 million at the end of the quarter under review compared with $475.5 million at the end of the prior-year period. During the quarter, the company repaid in full the $90 million drawn on the revolving credit facility of its First Lien Credit Agreement.

Net cash provided by operations during the quarter was $22.2 million. The company incurred capital expenditures (excluding the impact of landlord allowances) of $21.8 million during the quarter under review. Management envisions capital expenditures between $95 million and $105 million for the full year.

Here are 3 More Key Stocks for You

Sprouts Farmers Market SFM has a trailing four-quarter earnings surprise of 49.9%, on average. The stock carries a Zacks Rank #2.

Campbell Soup Company CPB has long-term earnings per share growth rate of 8.3% and a Zacks Rank #2.

Ollies Bargain Outlet OLLI has long-term earnings per share growth rate of 21.5% and a Zacks Rank #2.

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