Grocery Outlet Sales Surge as Real Risks Loom

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Grocery Outlet Sales Surge as Real Risks Loom

By Mike Troy - 04/23/2020
Grocery Outlet sales surge
Grocery Outlet's sales surged in the first quarter, but near term growth is slowing and private equity investors are unloading shares are longer term risks are disclosed.

Private equity investors in Grocery Outlet are selling 15 million shares at $34 apiece and their timing appears opportune. The operator of 355 off-price food stores preannounced a 17.4% first quarter same store sales increase and it is operating in a space where a rising tide of consumer spending related to COVID-19 has lifted all essential retailers’ boats.

Grocery Outlet’s first quarter comp increase of 17.4% for the period ended March 28, helped drive an overall sales increase of 25.4% to $760.3 million, according to pre-announced financial results contained in a filing with the Securities and Exchange Commission related to the share sale. The early disclosure of results came just a few weeks after the company reported impressive fourth-quarter sales.

Aside from the topline performance, the company also said it foresees a considerable increase in expenses related to the pandemic. These include cleaning and safety costs, corporate and distribution center personnel expenditures, costs for protective equipment, and supply chain expenses. While these costs didn't affect the first quarter much, the second quarter is likely to bear the burden, according to the company.

“In addition, our results may be impacted by existing or possible future governmental requirements concerning the operations of our stores or distribution facilities,” the company said.

It also indicated that although construction activities for the majority of new stores under development continue, it expects the timing of new store openings to be negatively impacted. While the near term impact of a slower pace of expansion is concerning, it’s what the company said about two key competitive weaknesses that is more noteworthy long term.

"We do not currently compete in the growing online retail marketplace, and any online retail services or e-commerce activities that we may launch in the future may require substantial investment and may not be successful," is how Grocery Outlet described its lack of digital capabilities in its registration statement related to the stock sale. "Increased competition from online grocery retailers and our lack of an online retail presence may reduce our customers’ desire to purchase products from us and could have a material adverse effect on our business, financial condition and results of operations."

Indeed, grocery pick up and delivery were already the two fastest growing parts of the business for most food retailers prior to COVID-19 and their usage has exploded since the outbreak.

The other major risk area the company references relates to store brands. Grocery Outlet, like its name suggests, is dependent on a steady flow of branded goods that it purchases opportunistically from various suppliers.

“If consumer trends move toward private label and away from name-brand products, our competitive position in the market may weaken and our sales may be materially adversely affected. Our business model has traditionally relied on the sale of name-brand products at meaningful discounts,” according to the company.

Well, it is not a matter of “if” consumer trends shift because they already have. Every major food retailer has aggressive goals in place to grow their store brand business and some have already achieved a 20% to 30% penetration rate. Grocery Outlet concedes as much in its filing.

“Consumer acceptance of, and even preference for, private label products has been increasing, however, and a trend away from name-brand products could weaken our competitive position in the market,” the company said. “While we may invest more in the future in developing our own private labels, there can be no assurance that the performance of any such private label products would be sufficient to offset the potential decreased sales of name-brand products.”

Often timed the risk factors companies list in annual reports and regulatory filings are so generic they can apply to an company. However, Grocery Outlet has offered two specific and very real risks to its business given current industry trends.

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