Grocery Outlet(GO) - 2019 Q4 - Annual Report

Part I Business Grocery Outlet is a high-growth, extreme value retailer leveraging opportunistic buying and independent operators for consistent sales growth and expansion Our Company & Competitive Strengths - The company is a high-growth, extreme value retailer utilizing opportunistic buying and Independent Operators (IOs)[25] - This model has driven 16 consecutive years of positive comparable store sales growth, with sales increasing from approximately $640 million in fiscal 2006 to $2.56 billion in fiscal 2019[26][30] - Key strengths include a powerful customer value proposition, flexible sourcing, the IO model, and new store economics with payback within four years[32][33][34][35] Our Growth Strategies & Expansion - Primary growth strategies include driving comparable sales, executing store expansion, and implementing productivity improvements[39] - The company targets approximately 10% annual store base expansion, with potential for over 1,500 additional locations in current/neighboring states and 4,800 long-term national locations[41][76] - New stores typically require an average net cash investment of approximately $2.0 million and target payback within four years[41][75] Procurement, Supply Chain, and Independent Operators - Opportunistically sourced products, offering 40% to 70% discounts, constitute about half of the purchasing mix[49][50] - The supply chain is supported by eight primary distribution centers (three in-house, five third-party) for efficient delivery[54] - The Independent Operator (IO) model is central, with IOs sharing approximately 50% of gross profit and managing local merchandising, inventory, and hiring[58][65] - As of December 28, 2019, 342 of 347 stores were IO-operated[61] Competition, Regulation, and Employees - The company competes with mass discounters and conventional grocery stores, focusing on in-store value rather than e-commerce[83][84] - The business is subject to federal regulations from agencies like the FDA, FTC, and USDA, covering food safety, labeling, and advertising[96][97] - As of December 28, 2019, the company had 847 employees, including 114 union employees at two company-operated stores[108] Risk Factors The company faces risks from supplier dependence, competition, IO model challenges, substantial debt, cybersecurity, health epidemics, and California store concentration - Business risks include supplier dependence for opportunistic products, maintaining comparable store sales, intense competition, and economic conditions[125][131][142] - The IO model faces risks related to IO financial health, operator retention, and legal challenges to independent contractor status, especially under California's AB-5[198][209] - As of December 28, 2019, the company had significant indebtedness of $460.2 million under its First Lien Credit Agreement[218][223] - The company acknowledges risks from major health epidemics, including COVID-19, potentially disrupting operations, staffing, and supply chains[190] - A significant concentration of 197 stores (57% of total) in California exposes the company to regional economic downturns and natural disasters[192] Properties As of December 28, 2019, the company leased 345 of 347 stores, its corporate headquarters, and all four self-operated distribution centers - The company leases the vast majority of its properties, including 345 of 347 stores and all primary self-operated distribution centers as of year-end 2019[255] - The corporate headquarters in Emeryville, CA, is leased under an agreement expiring in 2023 with renewal options[255] Legal Proceedings The company is involved in ordinary course litigation but believes no pending cases will materially adversely affect its financial results - Management does not believe any pending litigation will have a material adverse effect on the company's financial results[258] Part II Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities The company's common stock began trading on Nasdaq under 'GO' on June 20, 2019, with no current plans for dividends as earnings are reinvested for growth - Common stock began trading on the Nasdaq Global Select Market under symbol "GO" on June 20, 2019[263] - The company does not currently intend to pay dividends, planning to reinvest all earnings into the business[265] - In Q4 fiscal 2019, 14,358 shares were withheld from employees for tax obligations related to restricted stock unit vesting[271] Selected Financial Data This section summarizes five years of consolidated financial data, showing consistent net sales growth, fluctuating net income, and significant balance sheet changes due to lease accounting and IPO debt repayment Selected Consolidated Financial Data (in thousands) | Fiscal Year Ended | Dec 28, 2019 | Dec 29, 2018 | Dec 30, 2017 | | :--- | :--- | :--- | :--- | | Statements of Operations Data: | | | | | Net sales | $2,559,617 | $2,287,660 | $2,075,465 | | Gross profit | $787,102 | $695,397 | $631,883 | | Income from operations | $68,343 | $82,467 | $76,936 | | Net income | $15,419 | $15,868 | $20,601 | | Balance Sheet Data (End of Period): | | | | | Total assets | $2,185,529 | $1,376,862 | $1,317,871 | | Total debt | $447,989 | $857,368 | $710,886 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2019 saw net sales grow 11.9% to $2.56 billion, driven by comparable sales and new stores, with net income impacted by IPO-related share-based compensation and debt reduction Results of Operations Fiscal 2019 vs. Fiscal 2018 Performance (in thousands) | Metric | Fiscal 2019 | Fiscal 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,559,617 | $2,287,660 | 11.9% | | Comparable Store Sales | 5.2% | 3.9% | N/A | | Gross Profit | $787,102 | $695,397 | 13.2% | | Gross Margin | 30.8% | 30.4% | N/A | | Net Income | $15,419 | $15,868 | (2.8)% | | Adjusted EBITDA | $169,842 | $153,578 | 10.6% | - The 11.9% increase in net sales for fiscal 2019 was driven by a 5.2% increase in comparable store sales and 31 net new stores[314][315] - Share-based compensation expense increased by $21.0 million (202.0%) in fiscal 2019, primarily due to $24.3 million in expense for pre-IPO options whose vesting became probable upon IPO completion[321][322] - Interest expense decreased by 17.0% in fiscal 2019 due to lower total borrowings from IPO debt repayments[324] Liquidity and Capital Resources - Primary liquidity sources are cash from operations and a $100.0 million revolving credit facility with $96.4 million availability as of December 28, 2019[348] - The June 2019 IPO raised $407.7 million in net proceeds, used to repay the $150.0 million second lien term loan and prepay $248.0 million of the first lien term loan[350][353] - Net cash from operating activities increased to $132.8 million in fiscal 2019 from $105.8 million in fiscal 2018, driven by sales growth[366] - Capital expenditures are projected between $110.0 million and $120.0 million in fiscal 2020, primarily for new store openings and maintenance[369] Critical Accounting Policies and Estimates - Key critical accounting policies involve judgment in long-lived asset impairment, leases, share-based compensation, and Variable Interest Entities (VIEs) assessment[380] - Independent Operator (IO) entities are deemed VIEs, but the company is not the primary beneficiary as IOs direct key economic activities, thus IOs are not consolidated[396][397] - Maximum exposure to loss from IOs is limited to the gross receivable of $37.7 million as of December 28, 2019[398] Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk from its $460.2 million variable-rate debt, where a 1% rate change impacts annual interest by $4.6 million - The company is exposed to interest rate risk from its $460.2 million variable rate term loan outstanding as of December 28, 2019[400] - A hypothetical 1% change in the effective interest rate would alter annual interest expense by approximately $4.6 million[400] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for fiscal years 2017-2019, reflecting the adoption of ASC 842 which materially impacted assets and liabilities Consolidated Financial Statements Consolidated Balance Sheet Highlights (in thousands) | | Dec 28, 2019 | Dec 29, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $28,101 | $21,063 | | Total current assets | $270,826 | $240,372 | | Total assets | $2,185,529 | $1,376,862 | | Total current liabilities | $208,627 | $150,924 | | Long-term debt, net | $447,743 | $850,019 | | Total liabilities | $1,440,145 | $1,076,911 | | Total stockholders' equity | $745,384 | $299,951 | Consolidated Statement of Operations Highlights (in thousands) | | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | | :--- | :--- | :--- | :--- | | Net sales | $2,559,617 | $2,287,660 | $2,075,465 | | Gross profit | $787,102 | $695,397 | $631,883 | | Income from operations | $68,343 | $82,467 | $76,936 | | Net income | $15,419 | $15,868 | $20,601 | Notes to Consolidated Financial Statements - The company adopted ASC 842 on December 30, 2018, recognizing $664.9 million in lease assets and $709.0 million in lease liabilities[477] - Post-IPO, the company fully repaid its $150.0 million Second Lien Credit Agreement and prepaid $263.0 million on its First Lien Credit Agreement in fiscal 2019[431][501][503] - Share-based compensation expense of $31.4 million was recognized in fiscal 2019, including a significant charge for pre-IPO time-based options whose vesting became probable upon IPO completion; 5.8 million performance-based options were not deemed probable of vesting at year-end[524][525][526] - In February 2020, a secondary offering triggered vesting of 4.1 million performance-based shares, resulting in approximately $18.5 million share-based compensation expense in Q1 2020[559] Controls and Procedures Management concluded disclosure controls were effective as of December 28, 2019, with no internal control report included due to the newly public company transition period - The CEO and CFO concluded the company's disclosure controls and procedures were effective as of December 28, 2019[565] - A management assessment of internal control over financial reporting is not included, as permitted for newly public companies during their transition period[566] Other Information This section details fiscal 2019 cash bonus payments for named executive officers, based on performance objectives including Bonus EBITDA and comparable store sales, achieving 114% of target Fiscal 2019 Annual Incentive Awards | Name | Target Bonus Amount ($) | Actual Bonus Achieved ($) | | :--- | :--- | :--- | | Eric J. Lindberg, Jr. | 667,149 | 761,772 | | Charles C. Bracher | 313,619 | 358,345 | | S. MacGregor Read, Jr. | 584,298 | 667,626 | | Robert Joseph Sheedy, Jr. | 389,719 | 445,154 | | Thomas H. McMahon | 179,109 | 204,651 | Part III Directors, Executive Officers, Compensation, and Other Matters Information for Items 10-14, covering directors, executive officers, compensation, and related matters, is incorporated by reference from the company's 2020 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2020 Proxy Statement[580][581][582][583][584] Part IV Exhibits and Financial Statement Schedules This section lists exhibits filed with the Form 10-K, including corporate governance documents, material contracts, and Schedule I with parent-company-only financial statements - This section lists all exhibits filed with the annual report, including credit agreements, incentive plans, and certifications[589] - Includes Schedule I, providing condensed financial information for the registrant (parent company only)[587] Schedule I—Condensed Financial Information of Registrant (Parent Company Only) - As a holding company, the Parent Company has no operations, with its principal asset being a $746.6 million investment in its wholly-owned subsidiary at year-end 2019[597][603] - The Parent Company's net income of $15.4 million for fiscal 2019 is derived from equity in its subsidiary's net income[599]