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Grocery Outlet Might Become the Next Great Discount Retailer

Stock (Symbol)

Grocery Outlet (GO)

Stock Price

$37

Sector
Food & Necessities
Data is as of
July 23, 2020
Expected to Report
August 11, 2020
Company Description
Grocery Outlet Holding Corp. is a supermarket company that owns and operates retail stores. The Company’s stores offer a fun, treasure hunt shopping experience. The Company offers a discount, overstocked and closeout products from name brand and private label suppliers. The Company offers products at prices generally 40% to 70% below those of conventional retailers. The Company has stores in California, Oregon, Washington, Idaho, Nevada and Pennsylvania.Source: Thomson Financial
Sharek’s Take
David SharekGrocery Outlet (GO) just might have what it takes to become the next great discount retailer. And with the Coronavirus shaking up the retail space, GO might come out of the pandemic with enough momentum to send the stock on a long-term move higher.

Grocery Outlet bargain market is a discount supermarket that sells its grocery items at an extreme discount (40% to 70% off). The store traces its roots back to 1946 when its founder sold military supplies at deep discount prices. The company is still family owned, and now has more than 320 stores in 6 states across America. Grocery Outlet’s are in the west-most states, California, Oregon, Washington, Nevada and Idaho, as well as Pennsylvania. Although Grocery Outlet is a deep discounter, it really focuses on brand name items including Kraft, Kellogg’s Tropicana, Tyson, Campbell’s and Amy’s. Half of its purchases are opportunistic, which is excess inventory from food manufacturers, while the other 50% includes staples such as milk and sugar which ca’t be bought on-sale but are still prices at or below other supermarkets. 95% of stores are independently owned and the company has delivered 16 consecutive years of positive same store sales and works with top-notch tech companies internally including ServiceNow, Salesforce, and Ultimate Software. Here’s a cute video that explains the concept.

GO just went public a year ago, and the stock is around where it was when it IPO’d. The stock has a P/E of 43 (which is high for a grocery store) and an Estimated Long-Term Growth Rate of 12% a year (which is low for a growing retailer) but expects anjusted net income to grow in the mid-teens. The company also grew sales and EBITA 12% per year from 2015 – 2019. The company says it offers a treasure hunt experience, which is what Ollie’s Bargain Outlet says. Grocery Outlet management also likens itself to other discount retailers I own in client portfolios, including Ollie’s, Five Below, TJ Maxx, and Ross Stores. This is my first research report on GO, and I’m a fan of the stock. My only holdup is the P/E is high for the growth you’re getting. GO is on the radar for the Growth Portfolio.

One Year Chart
This stock has the ability to break out and go on a run higher. Profits should come in WAY above expectations this qtr and since this is a recent IPO from June 2019, there could be accumulation of the stock by money managers.

The Est. LTG of 12% isn’t great, especially for me. In my Growth Portfolio, I like 20% growers but would settle for 15% growers with certainty and consistency. Since this is a recent IPO, we don’t have consistency. Management says this is a mid-teens grower, and I believe them more than the analysts that say its a 12% grower.

The P/E of 43 is fine for a young and growing company. But supermarkets might earn a P/E of 20. So if investors buy now, the stock could drop into the $20s and you would have to sit and wait (or bail out at a loss).

Earnings Table
Last qtr GO delivered 227% profit growth and beat estimates of 191%. Sales increased 25% with 17% same store sales growth. The sales figures are impressive, but some of that was from COVID-19 putting people in panic mode during March (the qtr was Jan-Mar). The company opened 8 new stores last qtr to bring its total to 355.

Annual Profit Estimates show the company is expected to earn just one penny more next year than this year. I think GO will be beating these estimates, but this still doesn’t look good.

Qtrly profit Estimates are for 10%, -5%, 5% and -31% growth the next 4 qtrs. The 4QtrsOut estimate has a tough comparison (last qtr). One of my concerns with this stock is once there is a vaccine for COVID-19, people will go out to eat more, and this company’s sales/profits could suffer.

Fair Value
I give this stock a Fair Value P/E of $35, which makes my 2020 and 2021 Fair Values $35 a share. With the stock at $43, it seems pricey.
Bottom Line
I’ve been looking at Grocery Outlet (GO) since May, and I’m very impressed with the company. I think the deep-discount route is a road to success.

My holdup with buying the stock is mainly that the company is expanding its store count only 10% a year. So maybe profits can grow 12-15% a year. That’s below what I prefer in a growth stock. In addition to that this stock isn’t cheap with a P/E of 43.

GO is on the radar for the Growth Portfolio. If the stock market comes down, I will look to buy in the low-$30s.

Power Rankings
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