Home » Grocery Outlet Holding Corp. Releases Q1 Fiscal 2020 Financial Results

Grocery Outlet Holding Corp. Releases Q1 Fiscal 2020 Financial Results

Grocery Outlet Holding Corp. fiscal 2020

Grocery Outlet Holding Corp., based in Emeryville, California, has announced its financial results for the first quarter of fiscal 2020, ended March 28.

Net sales increased by 25.4 percent to $760.3 million from $606.3 million in the first quarter of fiscal 2019; comparable store sales increased by 17.4 percent compared to a 4.2 percent increase in the same period last year.

Grocery Outlet opened eight net new stores, ending the quarter with 355 stores in six states.

Net income increased by 235.0 percent to $12.6 million, or $0.13 per diluted share, compared to $3.8 million, or $0.06 per diluted share, in the first quarter of fiscal 2019.

Adjusted EBITDA increased 45.8 percent to $57.0 million compared to $39.1 million in the first quarter of fiscal 2019. Adjusted net income increased 242.2 percent to $34.0 million, or $0.36 per non-GAAP diluted share, compared to $9.9 million, or $0.15 per non-GAAP diluted share, in the first quarter of fiscal 2019. (Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures, which exclude the impact of certain special items.)

“Our strong first quarter performance reflects the tremendous efforts of our corporate and independent operator teams, our suppliers and other partner companies,” said Eric Lindberg, CEO of Grocery Outlet. “We continue to leverage the many strengths of our business model and adapt processes to meet the demands of the current environment. Our top priorities remain centered around ensuring the safety of our team and communities, supporting IOs, working with suppliers to purchase product and continuing to deliver strong operational execution.

“While we continue to focus on our response to COVID-19, we are incorporating learnings to capture opportunities that we believe will arise as we emerge from this pandemic. We are confident in the long-term potential of our business and remain committed to making investments that will support our future growth,” he said.

Balance sheet and cash flow: Cash and cash equivalents totaled $160.9 million at the end of the first quarter of fiscal 2020 compared to $19.6 million at the end of the same period in fiscal 2019.

Total debt, including the $90.0 million drawn on the revolving credit facility of the First Lien Credit Agreement, was $550.2 million at the end of the first quarter, compared to $873.7 million at the end of the same period in fiscal 2019. The decrease was due to the prepayment of debt in conjunction with the company’s initial public offering in June 2019 and an additional voluntary prepayment of debt in October 2019.

Net cash provided by operations during the first quarter of fiscal 2020 was $67.8 million compared to $22.2 million in the same period in fiscal 2019.
Capital expenditures for the first quarter of fiscal 2020, excluding the impact of landlord allowances, were $28.2 million.

 

Recent developments

Grocery Outlet currently expects to open between 28 and 30 stores this year with no additional closures planned. The company continues to build its real estate pipeline to support 10 percent annual unit growth in the future.

Quarter-to-date comparable store sales growth is tracking in the mid-teens, driven by an increase in average basket size partially offset by declines in store traffic due to shelter-in-place restrictions. The impact of the COVID-19 situation remains fluid and therefore it is difficult to predict the impact of potential changes to shelter-in-place restrictions.

The company expects to incur incremental operational expenses, primarily in the second quarter, related to COVID-19, including additional cleaning and safety measures, corporate and distribution center personnel expense including premium pay, overtime and temporary labor, and costs for protective equipment and supplies at its stores and facilities.

The company expects weighted average diluted share count for fiscal 2020 to be approximately 100 million shares. This reflects the impact of 5.8 million performance-based stock options related to its 2014 equity plan, of which 70 percent vested concurrent with its February 2020 secondary offering and the remainder of which vested concurrent with its secondary offering on April 27, 2020.

On April 27, 2020, Grocery Outlet priced its secondary offering of 15.0 million shares at $34.00 per share. The underwriters exercised their option to purchase an additional 2,250,000 shares of the company’s common stock from a selling stockholder at the public offering price less the underwriting discount.

 

Fiscal 2020 outlook

“As we continue to operate our business through this unprecedented time, we are incredibly proud of the dedication of our independent operators, their employees and our team members in service to our local communities and customers. Our performance and liquidity position remain strong, allowing us to continue investing in pursuit of our long-term growth strategies,” said CFO Charles Bracher. “Although we are not providing formal 2020 earnings guidance at this time due to the uncertainty related to COVID-19, we remain confident in our ability to execute in this fluid environment and in the strength of our business model.”

 

Non-GAAP financial information

In addition to reporting financial results in accordance with accounting principles generally accepted in the United States (GAAP), the company uses EBITDA, adjusted EBITDA, adjusted net income and adjusted diluted earnings per share measures of performance to evaluate the effectiveness of its business strategies, to make budgeting decisions and to compare its performance against that of other peer companies using similar measures. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results.

Adjusted EBITDA is defined as net income before interest expense, taxes, depreciation and amortization (EBITDA) and other adjustments noted in the “Reconciliation of GAAP Net Income to Adjusted EBITDA” table below. Adjusted net income is defined as net income before the adjustments noted in table “Reconciliation of GAAP Net Income to Adjusted Net Income” below.

Adjusted EBITDA and adjusted net income are non-GAAP measures and may not be comparable to similar measures reported by other companies. Adjusted EBITDA and adjusted net income have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP.

Grocery Outlet is a high-growth, extreme value retailer of name-brand consumables and fresh products sold through a network of independently operated stores. Grocery Outlet has more than 350 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.

 

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)

13 Weeks Ended
March 28,
2020
March 30,
2019
Net sales $ 760,308 $ 606,271
Cost of sales 523,282 419,254
Gross profit 237,026 187,017
Operating expenses:
Selling, general and administrative 186,931 152,854
Depreciation and amortization 12,945 12,296
Share-based compensation 20,277 211
Total operating expenses 220,153 165,361
Income from operations 16,873 21,656
Other expenses:
Interest expense, net 5,834 16,438
Debt extinguishment and modification costs 198
Total other expenses 6,032 16,438
Income before income taxes 10,841 5,218
Income tax expense (benefit) (1,801) 1,444
Net income and comprehensive income $ 12,642 $ 3,774
Basic earnings per share $ 0.14 $ 0.06
Diluted earnings per share $ 0.13 $ 0.06
Weighted average shares outstanding:
Basic 89,481 68,514
Diluted 94,869 68,553

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

March 28,
2020
December 28,
2019
Assets
Current assets:
Cash and cash equivalents $ 160,936 $ 28,101
Independent operator receivables and current portion of independent operator notes, net of allowance 7,736 7,003
Other accounts receivable, net of allowance 3,470 2,849
Merchandise inventories 188,346 219,420
Prepaid expenses and other current assets 12,606 13,453
Total current assets 373,094 270,826
Independent operator notes, net of allowance 22,137 20,331
Property and equipment, net 366,429 356,614
Operating lease right-of-use assets 754,444 734,327
Intangible assets, net 47,526 47,792
Goodwill 747,943 747,943
Other assets 7,524 7,696
Total assets $ 2,319,097 $ 2,185,529
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable $ 101,066 $ 119,217
Accrued expenses 29,877 31,363
Accrued compensation 14,724 14,915
Current portion of long-term debt 179 246
Current lease liabilities 41,281 38,245
Income and other taxes payable 5,363 4,641
Total current liabilities 192,490 208,627
Long-term debt, net 537,487 447,743
Deferred income taxes 14,218 16,020
Long-term lease liabilities 790,274 767,755
Total liabilities 1,534,469 1,440,145
Stockholders’ equity:
Voting common stock 90 89
Series A preferred stock
Additional paid-in capital 743,444 717,282
Retained earnings 41,094 28,013
Total stockholders’ equity 784,628 745,384
Total liabilities and stockholders’ equity $ 2,319,097 $ 2,185,529

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

13 Weeks Ended
March 28,
2020
March 30,
2019
Cash flows from operating activities:
Net income $ 12,642 $ 3,774
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment 11,788 10,287
Amortization of intangible and other assets 1,782 2,562
Amortization of debt issuance costs and bond discounts 502 762
Debt extinguishment and modification costs 198
Loss on disposal of assets 1,053 182
Share-based compensation 20,277 211
Provision for accounts receivable 848 1,483
Deferred income taxes (1,801) 1,436
Other 2
Changes in operating assets and liabilities:
Independent operator and other accounts receivable (3,219) (29 )
Merchandise inventories 31,073 (14,216 )
Prepaid expenses and other current assets 847 988
Income and other taxes payable 722 (439 )
Trade accounts payable, accrued compensation and other accrued expenses (14,412) 13,760
Changes in operating lease assets and liabilities, net 5,518 1,479
Net cash provided by operating activities 67,820 22,240
Cash flows from investing activities:
Cash advances to independent operators (1,485) (2,171 )
Repayments of cash advances from independent operators 1,136 893
Purchase of property and equipment (28,173) (18,399 )
Proceeds from sales of assets 79 401
Intangible assets and licenses (1,350) (721 )
Net cash used in investing activities (29,793) (19,997 )
Cash flows from financing activities:
Proceeds from exercise of share-based compensation awards 6,033
Proceeds from loans 90,000
Other direct costs paid related to the initial public offering (1,442)
Principal payments on term loans (187) (1,813)
Principal payments on other borrowings (191) (201)
Dividends paid (147) (254)
Debt issuance costs paid (700)
Net cash provided by (used in) financing activities 94,808 (3,710)
Net increase in cash and cash equivalents 132,835 (1,467)
Cash and cash equivalents at beginning of period 28,101 21,063
Cash and cash equivalents at end of period $ 160,936 $ 19,596

GROCERY OUTLET HOLDING CORP.
RECONCILIATION OF GAAP NET INCOME TO ADJUSTED EBITDA
(in thousands)
(unaudited)

13 Weeks Ended
March 28,
2020
March 30,
2019
Net income $ 12,642 $ 3,774
Interest expense, net 5,834 16,438
Income tax expense (benefit) (1,801) 1,444
Depreciation and amortization expenses (a) 13,570 12,849
EBITDA 30,245 34,505
Share-based compensation expenses (b) 20,277 211
Debt extinguishment and modification costs (c) 198
Non-cash rent (d) 2,214 1,862
Asset impairment and gain or loss on disposition (e) 975 182
New store pre-opening expenses (f) 406 421
Provision for accounts receivable reserves (g) 848 1,483
Other (h) 1,864 459
Adjusted EBITDA $ 57,027 $ 39,123

GROCERY OUTLET HOLDING CORP.
RECONCILIATION OF GAAP NET INCOME TO ADJUSTED NET INCOME
(in thousands, except per share data)
(unaudited)

13 Weeks Ended
March 28,
2020
March 30,
2019
Net income $ 12,642 $ 3,774
Share-based compensation expenses (b) 20,277 211
Debt extinguishment and modification costs (c) 198
Non-cash rent (d) 2,214 1,862
Asset impairment and gain or loss on disposition (e) 975 182
New store pre-opening expenses (f) 406 421
Provision for accounts receivable reserves (g) 848 1,483
Other (h) 1,864 459
Amortization of purchase accounting assets and deferred financing costs (i) 2,936 3,916
Tax effect of total adjustments (j) (8,321) (2,361)
Non-GAAP adjusted net income $ 34,039 $ 9,947
GAAP earnings per share
Basic $ 0.14 $ 0.06
Diluted $ 0.13 $ 0.06
Non-GAAP adjusted earnings per share
Basic $ 0.38 $ 0.15
Diluted $ 0.36 $ 0.15
GAAP weighted average shares outstanding
Basic 89,481 68,514
Diluted 94,869 68,553
Non-GAAP weighted average shares outstanding
Basic 89,481 68,514
Diluted (k) 94,869 68,553

__________________________

(a) Includes depreciation related to our distribution centers which is included within the cost of sales line item in our condensed consolidated statements of operations and comprehensive income.

(b) Represents non-cash share-based compensation expense of $20.1 million and $0.1 million in the 13 weeks ended March 28, 2020 and March 30, 2019, respectively. During the first quarter of fiscal 2020, we incurred $18.5 million in share-based compensation expense related to March 30, 2019 performance-based stock options that vested in conjunction with the closing of the February 3, 2020 secondary offering. Includes immaterial cash dividends paid on vested share-based awards during the first quarter of fiscal 2020 and 2019 for cash dividends declared in connection with our recapitalizations in fiscal 2018 and 2016.

(c) Represents the write-off of debt issuance costs and debt discounts related to the repricing and/or repayment of our credit facilities.

(d) Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments. The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant growth in recent years.

(e) Represents impairment charges with respect to planned store closures and gains or losses on dispositions of assets in connection with store transitions to new IOs.

(f) Includes marketing, occupancy and other expenses incurred in connection with store grand openings, including costs that will be the IO’s responsibility after store opening.

(g) Represents non-cash changes in reserves related to our IO notes and accounts receivable. The first quarter of 2020 reflects the adoption of ASU 2016-13.

(h) Other non-recurring, non-cash or discrete items as determined by management, such as transaction related costs including costs related to the February 3, 2020 secondary offering, personnel-related costs, store closing costs, legal expenses, strategic project costs, and miscellaneous costs.

(i) Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases. 

(j) Represents the tax effect of the total adjustments. Because of the increased impact of discrete items on our effective tax rate including the excess tax benefits from the exercise and vest of share-based awards, beginning in the fourth quarter of fiscal 2019, we changed our methodology to calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items. Prior to the fourth quarter of fiscal 2019, the methodology we used was to calculate the tax effect of the total adjustments using our quarterly effective tax rate.

(k) To calculate diluted non-GAAP adjusted earnings per share, we adjusted the weighted-average shares outstanding for the dilutive effect of all potential shares of common stock.

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