Grocery Outlet Holding Corp.

GO Details

Grocery Outlet Holding Corp. (NASDAQ: GO) is involved in the retail point of sales business of food and staples via a network of independently operated stores.

Result Performance for the Second Quarter Ended 3 July 2021 (Q2FY21)

• The net sales stood at $775.5 million in Q2FY21, down 3.5% YoY. In line with this, comparable-store sales fell by 10.0% in Q2FY21 versus a 16.7% increase in Q2FY20.

• Adjusted EBITDA stood at $50.8 million in Q2FY21, down 15.7% YoY. Accordingly, net income for the period stood at $19.6 million in Q2FY21, a decrease of 33.0% YoY.
• Cash and cash equivalents stood at $126.6 million as of 3 July 2021, and total debt stood at $450.3 million at the end of Q2FY21, post unamortized debt discounts and debt issuance costs.

Income Statement (Source: Company Reports)

Outlook:

The company opened 11 new stores in Q2FY21 (Plans to open 36-38 stores in FY21), bringing 400 stores in six states. As a result, the comparable-store sales for Q3FY21 will be in the negative mid-single digits. In addition, quarter-to-date comparable store sales for Q3FY21 are negative 6%. Considering the company’s avidity for organic growth, the capital expenditure (net of tenant improvement allowances) will be $130.0 million for FY21.

Key Risks: 

The company is susceptible to supply chain disruptions, possibly unable to determine trends and maintain an optimal product mix. Moreover, with fierce industry completion, any complacence in online retail presence may dilute GO’s potential competitive edge. Further, the COVID-19 pandemic may lead to changing consumer policies and hence extreme uncertainties.

Valuation Methodology: EV/Sales Value Multiple Based Relative Valuation (Illustrative) 

Technical Analysis

Daily Price Chart

Source: REFINITIV, Note: Purple color line reflects Relative Strength Index (14-Period)

Stock Recommendation:

The company has delivered a 6-month and 9-month return of ~-38.07% and ~-36.64%, respectively. The stock is trading below the average of the 52-week high price of $48.87 and the 52-week low price of $21.01.

The stock is valued using an EV/Sales multiple-based illustrative relative valuation, and a target price so arrived reflects a rise of low double-digit (in % terms). Accordingly, a slight premium has been applied to EV/Sales Multiple (NTM) (Peer Average), considering a higher gross margin at 30.7% in Q2FY21 versus the industry median of 21.5% and net margin at part with an industry median of 2.5% reported in Q2FY21.

Considering the facts above and current trading levels, a “Buy” recommendation has been assigned on the stock at the closing market price of $23.98 per share, up 6.86% as of 14^th October 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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