An Update On A Grocery Store Stock To Buy Now - InvestingChannel

An Update On A Grocery Store Stock To Buy Now

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An Update On A Grocery Store Stock To Buy Now

Earlier this month, The Juice highlighted five under-the-radar retail stocks to put on your watchlist. 

Here’s what we said about the under-the-radar grocery store that made the cut – Grocery Outlet (GO):

Stock is up 5.9% YTD. Another success story in discount retail, Grocery Outlet increased visits by 10.1% in Q3/2022 compared to Q3/2021. The raw number of visitors popped 11.8% over the same period, thanks largely to bargain prices amid high inflation. 

Here’s the update: 

  • GO is now up 6.0% YTD. So basically unchanged.
  • While Grocery Outlet doesn’t explicitly report number of visits (that data came from a third party), it did say net sales increased 16.1% in Q1 in its recent earnings report. 
  • Customer count increased 8% year over year. 
  • Average basket size popped 4%. 
  • Adjusted EBITDA was up 37% to $63 million. 

A relatively small chain with 444 stores across eight states, including 258 in California, Grocery Outlet is on pace to open another 25 to 28 locations this year. In Q1, comparable store sales increased 12%. Add in new openings and you get the 16.1% rise in sales. 

However, it’s not just new stores helping drive growth. It’s also a mix of cash-strapped consumers flocking to discount retailers and higher-income shoppers looking for bargains. Here’s what the company had to say about this on last week’s earnings call (emphasis added): 

First, seeing strength across all customer types, all income levels. We do continue to see, as we noted, more new customers shopping our stores. Our survey data shows a higher average income customer shopping with us, which suggests that more customers are changing behaviors. They’re looking for value.

They’re coming to us where they may have not shopped Grocery Outlet previously for the great value we provide on the many brands and items that we have throughout the stores. So those are all positive trends. And then, together with that, we’ve seen an increase in trip frequency and spend with existing customers. When they’re in our store shopping, as we survey them regularly, the satisfaction levels are high, and there’s a high intent to shop with us and spend more with us over the next six to 12 months as we ask in our survey.

In terms of online customer satisfaction, a recent survey of 1,000 shoppers by the Feedback Group puts Grocery Outlet in the mix with the big boys in the large grocery space. 

Large supermarkets topped the list with a 4.40 rating on a 5-five point scale, followed by:

  • (AMZN): 4.30
  • Walmart (WMT) and Target (TGT): 4.26
  • Aldi, Lidl and Grocery Outlet: 4.11
  • Club stores: 3.99
  • Dollar stores: 3.90

Here again, this survey measured online customer satisfaction. For better or worse, Grocery Outlet is new to the digital landscape, having only recently piloted an app in Washington State. The company still considers itself new on delivery platforms such as DoorDash (DASH). So the pessimistic view is Grocery Outlet is late to the online party. Whereas the optimist might say this is an untapped area that can propel growth as the company continues to grow its digital presence. 


The Bottom Line: On its Q1 call, Grocery Outlet upped full-year guidance to just above or closer to the top end of previous guidance on pretty much all key metrics. Like many discounters looking to keep the new customers inflation helped bring in, Grocery Outlet has considerable opportunity both in and coming out of the present economic environment. 

While up 6% YTD, GO is off nearly 18.0% over the last year. This could present an opportunity for investors, particularly as the chain expands its brick and mortar and online presences. We wouldn’t make GO the cornerstone of our portfolio, however it might be worth a spot in the consumer defensive segment of your long-term investment strategy.

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