Grocery Outlet’s comp slow (GO)
Grocery Outlet reported Q3 EPS of $.50 vs. consensus of $.23. SSS increased by 9.1% vs. consensus estimates of 8.7%. Gross margins expanded 40bps, 20bps higher than consensus estimates. SG&A expense slightly deleveraged. Inventory increased by 16.8%, slightly more than the COGS increase of 15.4%. As we noted previously, the company will start to grow the store base on the East coast with 3-5 planned in 2021.
Shares are indicating lower this morning due to the sales deceleration in Q4. Management’s guidance is for SSS to be up MSD% for the rest of Q4. We think there are several reasons behind the sales underperformance compared to the conventional grocers, which we currently estimate to be ~4%:
1. Grocery traffic trends in California lag the rest of the country. Management said the deceleration in Q4 was from basket size and not traffic.
2. Conventional supermarkets are benefiting from being a one-stop grocery destination. As vaccines are distributed and consumers increase their shopping trip, the trend favoring conventional supermarkets will reverse.
3. Online sales contribution. As a close-out retailer Grocery Outlet has not pursued e-commerce due to inventory management complexities and the inherent sell-out nature of close-out deals. This causes Grocery Outlet to miss out on a comp boost but avoids the margin drag.
We believe the pullback in shares this morning to be a compelling entry point. We are raising Grocery Outlet on our Best Idea Long list. The sales deceleration is a result of the current grocery/COVID-19 environment. Still, we are looking out to 2021, which will have difficult stockpiling comparisons, a more difficult consumer spending environment, and, most likely, a vaccine. The current recession has not been like past recessions for consumer spending due to the significant government support and limitations on what the consumer can spend. Grocery Outlet has the best ability to comp the comp in 2021, but it also has 10% store growth.
