Grocery Outlet Holding Corp.

GO Details

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.

Result Performance for the Third Quarter Ended 2 October 2021 (Q3FY21)

• The net sales of the company stood at $768.9 million in Q3FY21, up 0.6% YoY. In addition, comparable-store sales fell by 4.3% in Q3FY21 versus an increase of 9.1% in Q3FY20.

• Adjusted EBITDA stood at $51.4 million in Q3FY21, down 6.2% YoY. Therefore, net income for the period stood at $17.1 million in Q3FY21, a decrease of 57.7% YoY.
• Adjusted net income fell 15.3% YoY to $23.4 million in Q3FY21 or $0.24 per adjusted diluted share.
• Cash and cash equivalents stood at $156.0 million, and total debt stood at $450.9 million (post unamortized debt discounts and debt issuance costs) as of 2 October 2021.

Source: Company Reports, Analysis by Kalkine Group

Key Update

• On 21 October 2021, the company announced a partnership with Instacart on a pilot program for shopping experiences available online.

Outlook:

The company plans to open eight stores in Q4FY21 for 36 new stores opened in FY21. It closed one store in Q1FY21. Further, the comparable store sales for October 2021 were flat. Based on existing trends, the company anticipates comparable store sales for Q4FY21 in the range of negative 3.5% to negative 2.5%. As a result, the company will report 13 weeks of operating results in Q4FY21 versus 14 weeks in Q4FY20. The extra fiscal week contributed sales of $53.3 million in the corresponding period.

Key Risks: 

The company is susceptible to supply chain disruptions, possibly unable to determine trends and maintain an optimal product mix. Moreover, with fierce industry completion, any complacence in online retail presence may dilute GO’s potential competitive edge. Further, the COVID-19 pandemic may lead to changing consumer policies and hence extreme uncertainties.

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

Stock Recommendation:

The company has delivered a 6-month and 1-year return of ~-19.73% and ~-26.93%, respectively. In addition, the stock is trading below the average of the 52-week high price of $46.58 and the 52-week low price of $21.01.

The stock is valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price that reflects a low double-digit decline (in % terms). Accordingly, a slight discount has been applied to EV/Sales Multiple (NTM) (Peer Average), considering a longer cash conversion cycle at 23.4 days in Q3FY21 versus an industry median of 12.0 days and a decreased fixed asset turnover at 0.57x in Q3FY21 versus 0.64x in Q3FY20.

Considering the factors above, current trading levels, and the associated business risks, we advise the investors to book profits. Accordingly, we give a “Sell” rating on the stock at the current market price of $29.07 per share as of 1^st December 2021 (Time: 9:47 AM, NY, USA).

Technical Analysis

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

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