Grocery Outlet Holding Corp

GO Details

Grocery Outlet Holding Corp (NASDAQ: GO) is engaged in the retailing business with a high-growth, extreme value retailer in terms of quality. The company is engaged in selling name-brand consumables and fresh products through a combination of independently owned and operated stores.

Q2FY21 Result Performance (For the Period Ended 3 July 2021)

• GO has registered a 3.5% YoY decline in net sales to $775.5 million in Q2FY21 whereby comparable-store sales reduced by 10% against a growth of 16.7% in the PCP. The decline in sales was mainly due to a decline in comparable-store sales.
• Due to the impact of the higher cost of sales in terms of percentage, the company recorded a decline in its gross margin to 30.7% from 31.6% in the same period in fiscal 2020.
• GO witnessed a decline in its net income by 33% to $19.6 million with its diluted earnings per share decreasing to $0.20 from $0.30 in the PCP.

Financial Highlights (Source: Company Reports)

Outlook

The company opened 11 new stores during the second-quarter period, thereby,  taking the overall stores to 400.  It is expecting to open between 36 and 38 stores and the closure of one store in FY21. Owing to the negative comparable store sales of 6% from the quarter-to-date, the company is estimating its comparable-store sales to stay in the negative mid-single digits in Q3FY21. Further, it expects capital expenditures, net of tenant improvement allowances to remain at around $130.0 million in FY21. Besides, the company is mulling on innovative ways to increase its share of wallet and widen its customer base.

Key Risks

Volatility in interest rate will impact its credit facilities, which bear variable interest rates. The pandemic outbreaks could disrupt and adversely affect its business as well as its operations and financial condition. Further, intense competition in the retail food industry along with the shift in consumer trends towards private labels from name-brand products pose greater concerns.

Valuation Methodology: EV/Sales Based Relative Valuation (Illustrative)

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Stock Recommendation

The stock has been valued using EV/Sales multiple- based relative valuation method (on an illustrative basis) and the target price so arrived reflects a rise of low double-digit (in % terms). A slight premium has been applied to peer average EV/Sales multiple (NTM basis), considering its sustained drive towards store expansion as well as the better current ratio at 1.88x in Q2FY21 compared to the Industry Median at 1.28x and lower Debt to Equity Ratio at 0.46x in Q2FY21 versus the Industry Median at 0.84x.

For the purposes of relative valuation, peers like Sprouts Farmers Market Inc (SFM.OQ), BJ's Wholesale Club Holdings Inc (BJ.N), among others have been considered.

Considering the aforementioned factors along with its healthy liquidity position and expansion growth strategies, we give a “Buy” recommendation on the stock at the current market price of $23.21 per share, down by 0.47% on 21^st September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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