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.
