Grocery Outlet Holding: Poor SSS Growth Outlook For The Near Term

Investment Overview - Grocery Outlet Holding (NASDAQ:GO) has been rated as a sell due to uncertainty regarding same-store sales (SSS) performance and potential misses on FY24 guidance, leading to a decline in share price [2] - The company is expected to continue facing poor SSS growth in the near term as the trade-down motion has ended and competition in the industry is intensifying [2] 2Q24 Earnings - In 2Q24, GO reported net sales of $1.128 billion, reflecting an 11.7% year-over-year growth, with SSS growth at 2.9% [3] - Gross profit increased by 6.9% to $349.2 million, resulting in a gross margin of 30.9%, which is a 140 basis points decline from 2Q23 [3] - The EBIT margin decreased by 80 basis points from 3.9% in 2Q23 to 3.1% in 2Q24, influenced by a high tax rate of 32.5% compared to 30.7% in the previous year, leading to a net income decline of 17% from $24.1 million to $20 million [3] SSS Growth Challenges - SSS growth in 2Q24 was supported by lower pricing, which contributed negatively by -2.1%, while consumer traffic contributed positively by 5.1% [4] - The macroeconomic environment is less favorable for GO, with food at home inflation at only 1% year-to-date and real wage growth at 4-5%, reducing the incentive for consumers to trade down [4] - Management indicated a slowdown in traffic starting in June, with guidance for 3Q24 SSS growth at approximately 1.5%, indicating further deceleration [4] Competitive Environment - The end of the trade-down motion has led to increased competition, with competitors ramping up promotions, which negatively impacts GO's margins [5] - GO's management noted heightened promotional pressure from competitors throughout 2Q24, which is expected to continue [5] - GO's revenue of approximately $4.2 billion is significantly smaller compared to competitors like Kroger ($150 billion) and Walmart ($665 billion), limiting its ability to compete on pricing [5] Valuation - If GO continues to report poor SSS growth, its valuation is likely to face further pressure, with the forward PE ratio declining from approximately 27x to 18x over the past year [7] - Comparatively, Kroger and Albertsons Cos are valued at around 12x and 9x respectively, indicating potential for GO's valuation to decrease further [7] Conclusion - A sell rating is maintained for GO as the trade-down motion has largely ended and the demand environment is becoming more promotional [9] - SSS growth is expected to continue slowing, and the company's smaller scale relative to larger competitors puts profit margins at risk [9] - There is significant room for valuation decline, especially with ongoing earnings pressure anticipated [9]