Grocery Outlet (NASDAQ:GO) Exceeds Q2 Expectations, Stock Soars

Max Juang /
2023/08/08 4:27 pm EDT

Discount grocery store chain Grocery Outlet (NASDAQ:GO) reported Q2 FY2023 results beating Wall Street analysts' expectations, with revenue up 12.5% year on year to $1.01 billion. Grocery Outlet made a GAAP profit of $24.5 million, improving from its profit of $20.1 million in the same quarter last year.

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Grocery Outlet (GO) Q2 FY2023 Highlights:

  • Revenue: $1.01 billion vs analyst estimates of $976.4 million (3.47% beat)
  • EPS: $0.24 vs analyst estimates of $0.19 (29% beat)
  • The company lifted revenue guidance for the full year from $3.88 billion to $3.95 billion at the midpoint, a 1.94% increase
  • Free Cash Flow was -$66 million, down from $22.2 million in the same quarter last year
  • Gross Margin (GAAP): 32.3%, up from 31.1% in the same quarter last year
  • Same-Store Sales were up 9.2% year on year
  • Store Locations: 447 at quarter end, increasing by 22 over the last 12 months

"Our second quarter results came in ahead of our expectations and were driven by strong same store sales growth and gross margin expansion. Our differentiated model and compelling value proposition are resonating with both new and existing customers, and our performance is being driven by strong transaction growth," said RJ Sheedy, CEO of Grocery Outlet.

Due to its differentiated procurement and buying approach, Grocery Outlet (NASDAQ:GO) is a discount grocery store chain that offers substantial discounts on name-brand products.

Food is non-discretionary because it is essential for life (maybe not that ice cream?), and grocery stores cater to this need. Selling food is a notoriously tough business, as grocers must deal with the costs of procuring and transporting oftentimes perishable products. Plus, the costs of operating stores fit to sell everything from raw meat to ice cream to fresh fruit are high. Competition is also fierce because grocers and other peers such as wholesale clubs tend to sell very similar brands and products. While online competition threatens all of retail, grocery is one of the least penetrated because of the nature of buying food. Still, the online threat exists and will likely increase over time rather than dwindle.

Sales Growth

Grocery Outlet is a mid-sized retailer, which sometimes brings disadvantages compared to larger competitors benefiting from better economies of scale. On the other hand, it has an edge over smaller competitors with fewer resources and can still flex high growth rates because it's growing off a smaller base than its larger counterparts.

As you can see below, the company's annualized revenue growth rate of 12.2% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was impressive as it opened new stores and grew sales at existing, established stores.

Grocery Outlet Total Revenue

This quarter, Grocery Outlet reported robust year-on-year revenue growth of 12.5% and its revenue of $1.01 billion exceeded analysts' expectations by 3.47%. Looking ahead, the analysts covering the company expect sales to grow 6.92% over the next 12 months.

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Number of Stores

When a retailer like Grocery Outlet is opening new stores, it usually means that demand is greater than supply, and in turn, it's investing for growth. Grocery Outlet's store count increased by 22 locations, or 5.18%, over the last 12 months to 447 total retail locations in the most recently reported quarter.

Grocery Outlet Operating Retail Locations

Over the last two years, the company has opened new stores quickly and averaged meaningfully higher store growth than other consumer retail businesses. With an expanding store base and demand, revenue growth can come from multiple vectors: sales from new stores, sales from e-commerce, or increased foot traffic and higher sales per customer at existing stores.

Same-Store Sales

Grocery Outlet's demand within its existing stores has generally risen over the last two years but lagged behind the broader consumer retail sector. On average, the company's same-store sales have grown by 9.21% year on year. With positive same-store sales growth amid an increasing physical footprint of stores, Grocery Outlet is reaching more customers and growing sales.

Grocery Outlet Year On Year Same Store Sales Growth

In the latest quarter, Grocery Outlet's same-store sales rose 9.2% year on year. This growth was a deceleration from the 11.2% year-on-year increase it had posted 12 months ago, showing that the business has momentum but lost a bit of steam.

Key Takeaways from Grocery Outlet's Q2 Results

With a market capitalization of $3.26 billion, Grocery Outlet is among smaller companies, but its $87.6 million cash balance and positive free cash flow over the last 12 months give us confidence that it has the resources needed to pursue a high-growth business strategy.

We were impressed by how significantly Grocery Outlet blew past analysts' EPS expectations this quarter, driven by strong growth in same-store sales (which beat analysts' estimates by a wide margin). The company also raised its revenue, same-store sales, gross margin, adjusted EBITDA, and EPS guidance for the full year. That really stood out as a positive in these results. The market seems quite happy and the stock is up 5.37% after reporting, trading at $34.92 per share.

So should you invest in Grocery Outlet right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.

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The author has no position in any of the stocks mentioned in this report.