Grocery Outlet Holding Corp. (GO): A Bull Case Theory

Core Thesis - Grocery Outlet Holding Corp. (GO) is viewed positively due to its unique business model and growth potential, with shares trading at $16.71 as of September 17th, and a trailing P/E of 222.12 and forward P/E of 18.15 [1][2] Business Model - GO operates as an extreme-value grocery retailer with 533 stores across 17 states, primarily on the West Coast, utilizing a "treasure hunt" model similar to TJ Maxx, offering branded consumables and fresh items at significant discounts [2] - The inventory is sourced from manufacturer overruns and closeouts, creating a sense of urgency for customers and encouraging repeat visits [2] - Stores are managed by independent operators (IOs), which aligns incentives, reduces corporate overhead, and ensures strong unit economics [2] Operational Challenges and Leadership Changes - Despite having a competitive advantage in supplier relationships and logistics, GO has encountered operational issues, including a failed ERP rollout, high shrinkage rates, and underperformance in new markets [3] - These challenges have led to leadership changes and a strategic shift towards disciplined expansion and system stabilization [3] - Early indicators under new CEO Jason Potter show positive progress, with raised guidance and reduced restructuring costs [3] Growth and Financial Outlook - The company aims to open 30–35 net new stores annually, with expected store-level returns exceeding 20% by year four, potentially reaching 30% as execution improves [4] - GO's normalized free cash flow is projected to be between $140 million and $170 million, with an additional potential of $100 million FCF from 150 new stores, indicating attractive long-term returns [4] - Valuation appears reasonable at a 20x forward P/E and 12–13x FY25 adjusted EBITDA, considering growth opportunities and margin recovery potential [4] Risks and Resilience - Risks include execution challenges, competition from Aldi and Lidl, and difficulties in recruiting independent operators, but improved systems and inventory visibility could lead to significant upside [5] - GO has a history of resilience during economic downturns and potential for capital allocation through buybacks and M&A, presenting a favorable risk/reward scenario [5] - The bullish thesis remains intact, emphasizing leadership changes and ERP stabilization as key factors for future growth [6]