Grocery Outlet Holding Corp. 

GO Details

Robust Operating and Financial Performance in Q1FY21: Grocery Outlet Holding Corp. (NASDAQ: GO) is involved in the retail point of sales business of food and staples via a network of independently operated stores. GO has exhibited strong and disciplined fundamentals with a net sales 5-year CAGR of 14% and adjusted EBITDA 5-year CAGR of 16%. For Q1FY21, GO reported net sales of ~$752.5 million, down by 1% relative to Q1FY20, followed by a decline in comparable-store sales of 8.2% on pcp basis. Adjusted EBITDA declined by 13.7% on a pcp basis, as a result of significant decline in share-based compensation, partially offset by higher reported net income. From an operational standpoint, GO commenced with the successful opening of 10 stores and the closing of one store across US. Despite recent COVID-19 turmoil and social distancing norms in place, GO maintained its gross margins at sustainable levels of 30.8% with respect to 31.2% in Q1FY20, attributed to management efforts on product mix optimization, distribution & transportation costs, and prudent buying approach.

Revenue and Gross Margin Trend (Source: Analysis by Kalkine Group)

Key Risks: GO is susceptible to supply chain disruptions with possible inability to determine trends and maintain an optimal product mix. With fierce industry completion, any complacence in online retail presence may dilute GO’s potential competitive edge. Moreover, COVID-19 pandemic scenario may lead to changing consumer policies and hence give rise to extreme uncertainties.

Outlook: For FY21, GO continues to anticipate the opening of 36 to 38 stores with one closure. The company’s comparable store sales for Q2FY21 are expected to be in negative low double-digits. Considering GO’s avidity for organic growth, the capital expenditure (net of tenant improvement allowances) is estimated at $130.0 million for FY21. Considering the key growth identifiers, GO has manifested positive comparable store sales growth for 17 consecutive years on an annual basis. GO’s long-term growth strategies are to exploit comparable store sales growth, execute store expansion plans and reinvestments in operational efficiency. However, with the recent COVID-19 uncertainties, GO may foresee supply chain and demand side challenges.

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

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last month, the stock of GO went down by ~14.04%. The stock is trading below the 52-weeks’ average price level band of $31.81 - $48.87. On the technical analysis front, the stock has a support level of ~$32.58 and a resistance level of ~$37.18. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digit (in percentage terms). We believe that the company can trade at a slight premium as compared to its peer’s average considering its stable operational efficiency, store expansion strategies and promising fundaments. We have taken peers like Costco Wholesale Corp (NASDAQ: COST), Target Corp (NYSE: TGT), Caseys General Stores Inc (NASDAQ: CASY), to name a few. Considering the company’s organic growth strategies, stable gross margins, current trading level and valuation, we give a ‘Buy’ recommendation on the stock at the closing price of $33.97, up by ~0.27% as on 26 May 2021.

GO Daily Technical Chart, Data Source: REFINITIV

 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.