We came across a bullish thesis on Grocery Outlet Holding Corp. (GO) on Directionally Correct Research’s Substack by Will Powers. In this article, we will summarize the bulls’ thesis on GO. GO Outlet Holding Corp.’s share was trading at $16.16 as of October 9th. GO’s trailing and forward P/E were 29.93 and 14.77 respectively according to Yahoo Finance.
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Grocery Outlet (GO) is a discount retailer with over 520 stores mainly in the Western and Northeastern U.S. It offers significant discounts on brand-name products, creating a “treasure hunt” shopping experience with prices 40-70% lower than traditional grocery stores. In February 2024, GO expanded by acquiring United Grocery Outlet (UGO), adding 40 stores in the Southeast.
GO operates a unique quasi-franchise model where Independent Operators (IOs) manage the daily operations of individual stores. These operators handle ordering, merchandising, and staffing while GO leases the real estate, funds store build-outs, and supplies inventory on a consignment basis. GO and the IO split gross profits evenly, with IOs earning around 50% of store-level profits. This model allows GO to scale efficiently without taking on the operational burden of running individual stores. GO sources much of its inventory at deep discounts, purchasing surplus, short-dated, or overrun products from suppliers, creating a rotating assortment that encourages frequent customer visits.
Despite recent challenges like implementing a new ERP system, GO is an interesting investment opportunity. Short-term growth has slowed due to labor shortages and construction delays, but long-term prospects remain strong. GO aims to expand to 4,800 stores nationwide, benefiting from inflation-driven consumer shifts toward lower-cost options. GO’s financial health is solid. While new unit growth has slowed to around 6% in recent years, it is expected to recover as construction challenges ease. The company is aiming for 10% annual unit growth, with low-single-digit comps and high-single-digit topline growth. Once its ERP issues fully subside, margins are expected to normalize at around 30.5%, with EBITDA margins in the low 6% range. This implies steady profitability, which should improve further as the company digests the UGO acquisition and scales in new regions.
GO’s current valuation offers a compelling entry point for long-term investors. At 9x 2024 consensus EBITDA, the company presents a favorable risk/reward profile. By 2026, projected EBITDA of $320 million and a conservative 10x multiple could yield a share price of $29.50, representing a 20% internal rate of return over three years. GO is expected to generate positive free cash flow in 2025, reducing leverage while supporting growth. Investing in GO provides exposure to a defensive, consumer-staple business with substantial growth potential. The company’s unique model, strong expansion plans, and ability to self-finance make it an attractive investment in the discount retail space. As operational disruptions fade and unit growth returns to target levels, GO is well-positioned to benefit from trends favoring discount grocery formats.
Grocery Outlet Holding Corp. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 26 hedge fund portfolios held GO at the end of the second quarter which was 28 in the previous quarter. While we acknowledge the risk and potential of GO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than GO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.