Grocery Outlet(GO) - 2023 Q4 - Annual Results

Executive Summary & Business Highlights Summarizes Q4 and FY23 financial results, details the UGO acquisition, and presents the fiscal 2024 outlook Fourth Quarter Fiscal 2023 Highlights Q4 fiscal 2023 net sales increased 6.3% to $989.8 million, while net income decreased 11.2% to $14.1 million, impacted by technology disruptions Fourth Quarter Fiscal 2023 Financial Highlights (vs. Q4 Fiscal 2022) | Metric | Q4 2023 | Change | | :--------------------------------- | :---------- | :------- | | Net sales | $989.8 million | +6.3% | | Comparable store sales | +2.7% | | | - Transactions | +7.5% | | | - Average transaction size | -4.5% | | | Gross margin | 30.2% | Flat | | Net income | $14.1 million | -11.2% | | Diluted EPS | $0.14 | -12.5% | | Adjusted EBITDA | $50.9 million | -6.3% | | Adjusted net income | $18.2 million | -19.6% | | Adjusted diluted EPS | $0.18 | -18.2% | - Disruptions from new technology platforms negatively impacted comparable store sales by approximately 200 basis points and gross margin by 130 basis points in Q4 2023[4] - The Company opened 13 new stores in Q4 2023, ending the quarter with 468 stores in nine states[4] Fiscal 2023 Full Year Highlights Fiscal 2023 saw record net sales of $3.97 billion, up 10.9%, with net income increasing 22.1% to $79.4 million and Adjusted EBITDA growing 17.7% Fiscal 2023 Full Year Financial Highlights (vs. FY 2022) | Metric | FY 2023 | Change | | :--------------------------------- | :---------- | :------- | | Net sales | $3.97 billion | +10.9% | | Comparable store sales | +7.5% | | | - Transactions | +8.3% | | | - Average transaction size | -0.8% | | | Gross margin | 31.3% | +80 bps | | Net income | $79.4 million | +22.1% | | Diluted EPS | $0.79 | +21.5% | | Adjusted EBITDA | $252.6 million | +17.7% | | Adjusted net income | $108.1 million | +15.2% | | Adjusted diluted EPS | $1.07 | +13.1% | - Disruptions from new technology platforms negatively impacted comparable store sales by approximately 90 basis points and gross margin by 50 basis points in fiscal 2023[9] - The Company opened 28 new stores and closed one store during fiscal 2023[9] Fiscal 2023 Balance Sheet & Cash Flow Highlights | Metric | FY 2023 End | FY 2022 End | | :--------------------------------- | :---------- | :---------- | | Cash and cash equivalents | $115.0 million | $102.7 million | | Total debt (net of unamortized costs) | $292.7 million | $379.65 million | | Net cash provided by operating activities | $303.4 million | $185.5 million | | Capital expenditures (net of TI allowances) | $175.6 million | $149.9 million | Strategic Developments: United Grocery Outlet Acquisition Grocery Outlet acquired United Grocery Outlet (UGO), expanding its presence into six new Southeastern U.S. states with 40 stores - Grocery Outlet agreed to acquire United Grocery Outlet (UGO), an extreme value, discount grocery retailer[3][7] - UGO operates 40 stores in the Southeastern United States and a distribution center in Tennessee[7] - The acquisition will expand Grocery Outlet's store reach into six new states: Tennessee, North Carolina, Georgia, Alabama, Kentucky, and Virginia[7] - The transaction is expected to close early in the second quarter of fiscal 2024[7] Fiscal 2024 Outlook Fiscal 2024 outlook projects net sales of $4.30 billion to $4.35 billion, comparable store sales growth of 3.0% to 4.0%, and 55 to 60 new store openings Fiscal 2024 Outlook (assuming UGO acquisition early Q2 2024) | Metric | Guidance | | :------------------------------------------ | :-------------------------- | | New store openings, net | 55 to 60 (includes 40 UGO stores) | | Net sales | $4.30 billion to $4.35 billion (includes $125M from UGO) | | Comparable store sales increase | 3.0% to 4.0% | | Gross margin | ~31.3% | | Adjusted EBITDA | $275 million to $283 million (includes $7M from UGO) | | Adjusted earnings per share — diluted | $1.14 to $1.20 | | Capital expenditures (net of TI allowances) | ~$170 million (includes $15M for UGO improvements) | - The outlook reflects an estimated negative impact of systems implementation to first quarter comparable store sales of approximately 50 basis points and gross margin of 100 basis points[10] Financial Statements This section presents Grocery Outlet's condensed consolidated statements of operations, balance sheets, and cash flows for fiscal 2023 and prior periods Condensed Consolidated Statements of Operations and Comprehensive Income For fiscal 2023, net sales increased to $3,969,453 thousand, with net income of $79,437 thousand and diluted EPS of $0.79 Condensed Consolidated Statements of Operations (in thousands) | Metric | 13 Weeks Ended Dec 30, 2023 | 13 Weeks Ended Dec 31, 2022 | 52 Weeks Ended Dec 30, 2023 | 52 Weeks Ended Dec 31, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net sales | $989,818 | $930,830 | $3,969,453 | $3,578,101 | | Cost of sales | $690,943 | $649,666 | $2,727,774 | $2,486,002 | | Gross profit | $298,875 | $281,164 | $1,241,679 | $1,092,099 | | Selling, general and administrative expenses | $279,949 | $257,200 | $1,115,897 | $997,109 | | Operating income | $18,926 | $23,964 | $125,782 | $94,990 | | Income before income taxes | $17,476 | $18,352 | $104,081 | $75,749 | | Income tax expense | $3,370 | $2,463 | $24,644 | $10,697 | | Net income and comprehensive income | $14,106 | $15,889 | $79,437 | $65,052 | | Diluted earnings per share | $0.14 | $0.16 | $0.79 | $0.65 | Condensed Consolidated Balance Sheets As of December 30, 2023, total assets increased to $2,969,586 thousand, with total stockholders' equity reaching $1,219,339 thousand Condensed Consolidated Balance Sheets (in thousands) | Metric | December 30, 2023 | December 31, 2022 | | :--------------------------------- | :------------------ | :------------------ | | Cash and cash equivalents | $114,987 | $102,728 | | Merchandise inventories | $349,993 | $334,319 | | Total current assets | $516,551 | $467,357 | | Property and equipment, net | $642,462 | $560,746 | | Total assets | $2,969,586 | $2,772,404 | | Trade accounts payable | $209,354 | $137,631 | | Total current liabilities | $383,965 | $280,514 | | Long-term debt, net | $287,107 | $379,650 | | Total liabilities | $1,750,247 | $1,662,190 | | Total stockholders' equity | $1,219,339 | $1,110,214 | Condensed Consolidated Statements of Cash Flows Fiscal 2023 net cash from operating activities significantly increased to $303,447 thousand, while cash used in investing and financing also rose Condensed Consolidated Statements of Cash Flows (in thousands) | Metric | 52 Weeks Ended Dec 30, 2023 | 52 Weeks Ended Dec 31, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | | Net income | $79,437 | $65,052 | | Net cash provided by operating activities | $303,447 | $185,511 | | Net cash used in investing activities | $(194,165) | $(149,931) | | Net cash used in financing activities | $(97,023) | $(72,937) | | Net increase (decrease) in cash and cash equivalents | $12,259 | $(37,357) | | Cash and cash equivalents at end of period | $114,987 | $102,728 | Non-GAAP Financial Measures & Reconciliations This section reconciles GAAP net income to Adjusted EBITDA and Adjusted Net Income, defining non-GAAP measures and their limitations Reconciliation of GAAP Net Income to Adjusted EBITDA Adjusted EBITDA for fiscal 2023 increased to $252,621 thousand, up from $214,682 thousand in the prior year, reflecting various adjustments Reconciliation of GAAP Net Income to Adjusted EBITDA (in thousands) | Metric | 13 Weeks Ended Dec 30, 2023 | 13 Weeks Ended Dec 31, 2022 | 52 Weeks Ended Dec 30, 2023 | 52 Weeks Ended Dec 31, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $14,106 | $15,889 | $79,437 | $65,052 | | Interest expense, net | $1,450 | $5,612 | $16,361 | $17,967 | | Income tax expense | $3,370 | $2,463 | $24,644 | $10,697 | | Depreciation and amortization expenses | $24,301 | $19,553 | $87,982 | $78,251 | | EBITDA | $43,227 | $43,517 | $208,424 | $171,967 | | Share-based compensation expenses | $5,575 | $8,193 | $31,091 | $32,556 | | Loss on debt extinguishment and modification | — | — | $5,340 | $1,274 | | Asset impairment and gain or loss on disposition | $25 | $288 | $485 | $1,176 | | Acquisition costs | $459 | — | $459 | — | | Other adjustments | $1,595 | $2,331 | $6,822 | $7,709 | | Adjusted EBITDA | $50,881 | $54,329 | $252,621 | $214,682 | Reconciliation of GAAP Net Income to Adjusted Net Income Fiscal 2023 Adjusted Net Income reached $108,113 thousand, with Adjusted Diluted EPS of $1.07, after various adjustments Reconciliation of GAAP Net Income to Adjusted Net Income (in thousands, except per share data) | Metric | 13 Weeks Ended Dec 30, 2023 | 13 Weeks Ended Dec 31, 2022 | 52 Weeks Ended Dec 30, 2023 | 52 Weeks Ended Dec 31, 2022 | | :--------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $14,106 | $15,889 | $79,437 | $65,052 | | Share-based compensation expenses | $5,575 | $8,193 | $31,091 | $32,556 | | Loss on debt extinguishment and modification | — | — | $5,340 | $1,274 | | Asset impairment and gain or loss on disposition | $25 | $288 | $485 | $1,176 | | Acquisition costs | $459 | — | $459 | — | | Other adjustments | $1,595 | $2,331 | $6,822 | $7,709 | | Amortization of purchase accounting assets and deferred financing costs | $1,423 | $1,679 | $5,838 | $10,877 | | Tax adjustment to normalize effective tax rate | $(2,149) | $(2,435) | $(6,423) | $(10,084) | | Tax effect of total adjustments | $(2,853) | $(3,330) | $(14,936) | $(14,702) | | Adjusted net income | $18,181 | $22,615 | $108,113 | $93,858 | | GAAP diluted earnings per share | $0.14 | $0.16 | $0.79 | $0.65 | | Adjusted diluted earnings per share | $0.18 | $0.22 | $1.07 | $0.94 | Non-GAAP Financial Information Definition and Limitations This section defines non-GAAP measures, outlining their use by management and emphasizing their analytical limitations - Management uses non-GAAP financial measures (EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted EPS) to evaluate business strategies, make budgeting decisions, and compare performance with peers[14] - Adjusted EBITDA is defined as net income before net interest expense, income taxes, depreciation and amortization, further adjusted for share-based compensation, loss on debt extinguishment, asset impairment, acquisition costs, and other non-core expenses[15] - Adjusted net income further adjusts for amortization of purchase accounting assets and deferred financing costs, tax adjustments to normalize the effective tax rate, and the tax effect of total adjustments[15] - Non-GAAP measures have limitations as analytical tools and should not be considered in isolation or as a substitute for GAAP results. The company does not reconcile forward-looking non-GAAP guidance to GAAP due to the variability and low visibility of certain items[16][17] Additional Information This section covers conference call details, reclassification of financial items, forward-looking statements, and a company overview Conference Call Information Grocery Outlet scheduled a conference call for February 27, 2024, to discuss Q4 and full fiscal 2023 results, with access details provided - A conference call to discuss Q4 and full fiscal 2023 financial results was scheduled for February 27, 2024, at 4:30 p.m. Eastern Time[11] - Investors and analysts can participate via dial-in (877) 407-9208 or a live audio webcast at https://investors.groceryoutlet.com[11](index=11&type=chunk) - A taped replay will be available for approximately two weeks online and by dialing (844) 512-2921 with access code 13742808[12] Reclassification of Certain Statements of Operations and Comprehensive Income Items In Q1 fiscal 2023, the company reclassified certain expenses to enhance comparability, with no impact on net income - In Q1 fiscal 2023, the company reclassified depreciation and amortization expenses and share-based compensation expenses within selling, general and administrative expenses[13] - The reclassification was done to enhance comparability with peers[13] - This reclassification had no impact on net income, earnings per share, or retained earnings in current or prior periods[13] Forward-Looking Statements This section contains cautionary forward-looking statements subject to various risks and uncertainties that could cause actual results to differ - The news release contains forward-looking statements regarding future operating results, financial position, business strategy, and market trends[18] - These statements are subject to risks and uncertainties, including failure of suppliers, inability to maintain comparable store sales, distribution disruptions, inflation, risks with new stores and acquisitions, IT system issues, labor shortages, economic conditions, and competition[18] - The company does not undertake any duty to update these forward-looking statements after the release date, except as required by law[19] About Grocery Outlet Grocery Outlet is a high-growth, extreme value retailer operating over 460 independently owned stores across nine states - Grocery Outlet is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products[20] - It operates through a network of independently operated stores, with more than 460 stores[20] - The company's stores are located in California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland, New Jersey, and Ohio (nine states)[20]