Grocery Outlet: Q2, Profitability Has Started Normalizing

Core Viewpoint - Grocery Outlet Holding Corp. reported strong Q2 results, showing sequential improvement in profitability despite previous margin declines, driven by effective comparable sales growth and aggressive expansion strategies [1][10]. Financial Performance - Q2 revenues increased by 11.7% to $1.13 billion, exceeding Wall Street estimates by $26.4 million, with adjusted EPS of $0.25 beating analyst expectations by $0.05 [4]. - Comparable sales grew by 2.9% during Q2, with a 5.1% increase in transactions, although transaction size decreased by 2.1% [4]. - The gross margin contracted by 140 basis points, primarily due to new technology platform implementations, but profitability is expected to rebound as these costs subside [5][10]. Margin Analysis - The operating margin fell significantly in previous quarters, with Q4 at 1.9% and Q1 at just 0.1%, largely due to temporary improvement measures and increased SG&A costs [2][3]. - SG&A as a percentage of sales increased to 28.3% in Q2, but profitability is anticipated to improve as technology implementation costs are expected to diminish in H2 [5][10]. Expansion Strategy - The company continues its aggressive expansion, raising its 2024 store opening guidance to 62-64 stores and increasing capital expenditure guidance to $200 million [6]. - The acquisition of United Grocery Outlet added 40 new stores, enhancing the company's presence in the Southeast and contributing to its growth strategy [6]. Valuation Insights - The updated DCF model estimates Grocery Outlet's fair value at $27.05, indicating a 30% undervaluation compared to the current stock price, despite a slight decrease from a previous estimate of $29.42 [8]. - The company’s EBIT margin is now estimated to stabilize at 3.2%, reflecting a more conservative outlook due to SG&A inflation and higher capital expenditures [7]. Competitive Position - Grocery Outlet's comparable sales growth outperformed competitors like Kroger and Albertsons, indicating a strong market position despite a slight guidance cut for future sales growth [4][10].