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Grocery Outlet Sets Strategic Course for Sustainable Growth

Leadership Changes and Operational Focus

In a recent briefing, Jason D. B. Green, the newly appointed CEO of Grocery Outlet, shared his eagerness to collaborate with the team, independent operators, the board, and suppliers to tap into the full potential of the company.

Eric Lindberg — Chairman

Thank you, Jason. Along with Jason, we welcomed our new CFO and CIO in January. Chris Miller has joined as CFO, bringing over 40 years of finance and accounting experience, including 20 years in the public company sector focused on wholesale and retail. Lindsay Gray, who served as interim CFO since March of last year, will stay on as senior vice president of accounting and principal accounting officer. We appreciate her leadership during this pivotal time.

Kumar Mishra, our new CIO, adds 25 years of IT leadership experience to the team, with a strong background in implementing SAP systems. Previously, he served as VP of Information Technology at Reynolds Consumer Products and has had roles at Nielsen and OLAM Group.

Positive Sales Trends and Marketing Strategies

During the fourth quarter, comparable store sales rose by 2.9%, driven partly by a 3% increase in customer traffic. This growth can be attributed to our extensive range of value items offering significant discounts. While our value metrics show improvement, we recognize that we must better communicate the exceptional value we provide to our customers.

Our marketing team is developing targeted messaging focused on value and weekly deals, while operations are enhancing in-store merchandising efforts to support our independent operators. Furthermore, we are working on improving our back-end finance systems to better aid inventory management for both stores and warehouses.

Enhancing Technology and Systems

We anticipate launching an upgraded real-time order guide in the second quarter, a vital tool that will support our independent operators in managing inventory and merchandise effectively. Improving operational data visibility and reporting tools remains a core priority for our new CIO, who aims to streamline capital allocation and optimize efficiency across the business.

Our previous rapid growth led to challenges, including the implementation of new systems and expansion into new markets. We aim to take a more disciplined approach to growth, focusing on improving capital allocation strategies for new store openings.

Focused Expansion Strategy

To maximize returns on new store openings, we are refining our approach. New stores launched in established markets tend to perform better due to brand recognition. For our near-term strategy, we will concentrate on opening new locations primarily in existing markets and select new adjacent areas. This revision aims to enhance sales productivity and boost returns on investment.

Despite new constraints, we believe there is still vast potential, with opportunities to open over 4,000 new stores nationwide. In 2025, we plan to open 33 to 35 new stores while closing leases in less-than-ideal locations. Chris Miller will elaborate on these strategic shifts later.

Streamlining Supply Chain Operations

We are reassessing our distribution network to ensure we are using capital efficiently as we scale. After careful consideration, we have chosen not to expand into multi-temperature distribution due to the complexity and investment required. Instead, we are refining our regional supply chain strategy to improve operational efficiencies and inventory management.

For instance, we recently opened a 680,000 square-foot distribution center in Vancouver, Washington. This facility will consolidate five older warehouses into a modern space, optimizing service for stores in Washington, Oregon, and Idaho. By the end of 2025, we expect to be fully operational in this new center, which aims to increase efficiency and lower costs.

Workforce Modification and Future Outlook

As part of assessing and streamlining our general and administrative cost structure, we have made workforce reductions, a prudent step towards building a more scalable operating model. We will continue to explore additional opportunities for scaling G&A costs through automation and process improvements.

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Grocery Outlet Sees Growth Potential Amid Challenges

As we develop new capabilities, we recognize the importance of building a solid foundation for future scaling. Over the past three months, we identified crucial steps to enhance the business’s profitability and strategic capital allocation, which we anticipate will yield strong returns.

We believe in our significant long-term growth potential and feel confident that we are taking the right measures to achieve sustainable growth and profitability. As I transition from my role as interim CEO back to chairman, I want to share my views on our company’s direction. Leadership is paramount, and I trust that Jason and Chris are the ideal individuals to lead us forward.

They bring extensive experience and a solid track record in operational execution, capable of advancing this unique business model to new heights. Focused on new store return economics, wise capital deployment, and a scalable cost structure, we are positioning ourselves for sustained growth. While challenges remain, we are making progress.

Reinforced by firsthand experience in daily operations, my confidence in Grocery Outlet remains unwavering. Although recent financial results were affected by temporary setbacks from systems upgrades and execution issues, I am steadfast in my belief in our potential to generate exceptional long-term value for all stakeholders. Before transitioning to Chris, I want to express my gratitude to the team and independent operators for their dedication throughout this challenging period. Your commitment to our stores and communities inspires me every day. Now, I’ll hand it over to Chris.

Thank you.

Christopher Miller — Executive Vice President, Chief Financial Officer

Thank you, Eric, and good afternoon to everyone. I am excited to be part of Grocery Outlet and to work alongside Jason and the team as we move the business forward. The reason I joined Grocery Outlet is its distinctive business model and the substantial growth opportunities we see in the market. With a solid balance sheet, our strategies are in place to optimize our model and pursue profitable growth while enhancing returns on capital over the long term.

We are pleased with the progress made in the fourth quarter. We met our key value metrics, and customer traffic remained strong, indicating that our model resonates with consumers. Our buyers successfully capitalized on the availability of opportunistic goods, which helped us exceed our comparable store sales guidance, while earnings were within our forecast.

Now, let’s delve into our fourth-quarter results in detail, followed by our outlook for 2025, which includes a 53rd week. Net sales rose 10.9% to $1.1 billion due to new store performance and a 2.9% increase in comparable store sales—showing a 5.6% growth over a two-year span. The number of transactions rose by 3%, while the average basket remained unchanged. We opened five new stores, concluding the year with 533 locations, marking approximately a 14% growth in units.

Gross profit for the fourth quarter climbed 8.4% to $323.9 million, with a gross margin of 29.5%, slightly down by 70 basis points year over year. While opportunistic sales aided margins this quarter, they were offset by lower margins in our deli category due to ongoing issues with egg supply and pricing, alongside increased inventory shrinkage linked to systems problems.

Selling, general, and administrative (SG&A) expenses rose by $32.6 million, or 11.6%, totaling $312.5 million compared to the same quarter last year. This increase was primarily related to $15.9 million in restructuring charges, along with higher store-related costs, although these were moderated by lower incentive compensation. The restructuring costs included roughly $9.2 million tied to discontinuing store leases in specific new markets, as mentioned by Eric, and a remaining $6.7 million for paused supply chain projects.

Net interest expenses reached $7 million, up by $5.5 million from the last year’s fourth quarter, driven mainly by higher average principal debt to fund share repurchases and operational capital needs following the acquisition of United Grocery Outlet (UGO). The effective tax rate for the quarter was 47.4%, significantly up from 19.3% last year, largely due to reduced excess tax benefits from stock option exercises and non-deductible costs from the UGO acquisition. The net income for the quarter stood at $2.3 million or $0.02 per fully diluted share.

Adjusted net income was reported at $14.5 million, translating to $0.15 per fully diluted share, while adjusted EBITDA increased by 12.5% to $57.2 million, representing an adjusted EBITDA margin of 5.2% of net sales. On the balance sheet side, we concluded the quarter with $62.8 million in cash and an inventory balance of $394.2 million, reflecting a 12.6% increase compared to the previous year. Progress was made in reducing inventory during the fourth quarter, and we see further enhancement opportunities as we rectify our systems and tools throughout the year.

Cash flow from operations totaled $112 million, primarily allocated towards capital investments of $185.7 million net of tenant allowances for fiscal 2024, focused largely on new stores, maintenance, systems, and infrastructure projects. Ending the quarter, total debt, net of issuance costs, stood at $477.5 million, with a net leverage ratio of 1.75 times adjusted EBITDA. In the previous quarter, approximately 1.5 million shares were repurchased, totaling $25 million at an average price of $16.62.

Throughout the year, we repurchased 3.98 million shares at an average of $20.23 per share, costing $80.4 million in total. Our board recently approved a new $100 million share repurchase plan in November. Moving on to our forecast for fiscal 2025, it is important to note that this year has a 53rd week, which will not factor into our same-store sales calculations.

For the full year, we project comparable store sales growth between 2% and 3%. In the first quarter, we anticipate comparable store sales to be flat, influenced by the timing of the Easter holiday and broader economic conditions. Last year, Easter was on March 31st; this year, it falls on April 20th, which we estimate will affect comps by around 100 basis points. We expect to add between 33 and 35 net new stores evenly across the quarters, with total net sales for fiscal 2025 projected at between $4.7 billion and $4.8 billion, including about $75 million from the 53rd week.

For gross margins, we expect them to fall between 30% and 30.5% for the entire fiscal year, with the first quarter margins projected around 29.5% to 30%. While anticipated value penetration will support margins, challenges from egg prices and inventory shrinkage may continue to exert pressure.

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Grocery Outlet Prepares for Growth Amid Restructuring Challenges

Grocery Outlet is taking measures to optimize its operations and improve profitability despite facing ongoing challenges with inventory management and system upgrades. The company is seeing signs of improvement in shrinkage rates, but levels remain higher than before recent system changes.

Restructuring Charges and Financial Outlook

The company anticipates restructuring charges between $36 million and $45 million in 2025. This includes costs associated with exiting store leases and organizational restructuring. Most of these charges are expected to be recorded in the first half of the fiscal year. Grocery Outlet projects adjusted EBITDA for the year to fall within the range of $260 million to $270 million, with the first quarter’s adjusted EBITDA expected to be between $45 million and $50 million.

For 2025, depreciation and amortization are forecasted at approximately $130 million, primarily driven by capital expenditures of about $210 million. Planned investments include new store openings and renovations, distribution center enhancements, and maintenance projects. Net interest expense is expected to rise to about $38 million, an increase of approximately $16 million compared to 2024. This increase is largely due to last year’s debt acquisition which supported share repurchases and capital expenditures.

Focusing on Long-Term Goals

The company plans to allocate most of its cash flow toward maintaining and expanding the business, meaning there will likely be no significant reduction in debt for 2025. Share-based compensation is estimated at around $24 million, with a normalized tax rate of 32%. Grocery Outlet expects an average fully diluted share count of approximately 99 million, leading to an anticipated full-year adjusted EPS between $0.70 and $0.75 and a first-quarter adjusted EPS of approximately $0.05 to $0.10.

Despite the challenges faced, Grocery Outlet has a solid track record of consistent growth, and the company believes it still has significant opportunities for expansion. Executives are focused on strategic priorities that empower independent operators to better serve customers, emphasizing a commitment to achieving profitability and returns on capital over the long term.

Q&A Session with Analysts

During the earnings call, questions were raised regarding leadership transitions, operational challenges, and financial projections. Analyst Krisztina Katai from Deutsche Bank inquired about what attracted the new leadership to Grocery Outlet, and how the company plans to bridge their 2025 EBITDA outlook to EPS amid rising restructuring charges and interest expenses.

In response, Jason Potter, President and CEO, noted his enthusiasm for the company’s unique business model and community-focused approach. CFO Christopher Miller elaborated on how rising interest, depreciation, and amortization impact EPS growth compared to adjusted EBITDA. Furthermore, Chairman Eric Lindberg discussed the shift in the company’s approach to new store openings to focus on markets where performance needs improvement and highlighted an intention to execute a more manageable number of new store openings this year to enhance operational efficiency.

Overall, the call underscored the company’s determination to navigate its current challenges while positioning for future success. As Grocery Outlet continues to refine its systems and processes, its leaders are optimistic about achieving solid growth moving forward.

Next Questions from Analysts

One analyst addressed concerns regarding the gross margin, which fell short of expectations. Christopher Miller explained that margins were impacted by external pressures, including supply chain issues and ongoing system inefficiencies, while also mentioning improved value offerings that benefited the fourth-quarter performance.

As the call continued, analyst Robbie Ohmes from Bank of America posed questions about the anticipated improvements with new operational tools set to roll out in the second quarter, inquiring if these enhancements would surpass the performance of legacy systems.

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Company Leaders Discuss System Challenges and Future Opportunities

Eric Lindberg — Chairman

In response to Robbie’s question about potential losses, I want to clarify that we haven’t lost operators due to the system disruptions. It has been a tough year, especially from ’23 to ’24, but turnover remains consistent with our historical averages over the past decade.

We aim to restore most systems by Q2, making our operations more efficient and effective. We’ve transitioned from an unsupported legacy system to a new platform aimed at enhancing our performance. By the end of this year, we hope to report that things are running smoothly, ensuring efficiency with new tools that will benefit our operators and financial teams. Our progress looks promising.

Operator

Thank you. Our next question comes from the line of Oliver Chen with TD Cowen. Please proceed.

Tom Nass — TD Cowen — Analyst

Hi, it’s Tom Nass, stepping in for Oliver. Could you elaborate on the company’s performance during the quarter and the exit rate? Additionally, how should we balance investments in pricing while maintaining consistent margins moving forward?

Eric Lindberg — Chairman

Hi Tom, Q4 showed positive results. We maintained a healthy customer count, with transactions rising across all regions. This improvement is largely credited to the efforts of our buyers who restored and communicated value more effectively than in much of 2024.

However, we need to focus on enhancing our product assortment to address variability in basket composition. As we transition into Q1, the early sales figures are below expectations, mirroring wider retail trends—strong in January but slowing down in February. We recognize that some of this is linked to broader economic patterns, and we have work ahead of us.

Moreover, as Chris pointed out, the guidance for the quarter considers this start along with the impact of the Easter season, which is projected to lower our quarterly performance by about 100 basis points.

Operator

Thank you. Our next question comes from Mark Carden with UBS. Please proceed.

Mark Carden — Analyst

Good afternoon. Thanks for taking the questions, and welcome, Jason and Chris. Jason, you’ve successfully led a turnaround at Fresh Market, which targets a different market. Have you identified any similarities between the two companies, especially regarding potential areas for improvement?

Jason Potter — President and Chief Executive Officer

Thanks for the question. My initial weeks have been focused on listening and gathering insights, which will shape my long-term strategy. At Fresh Market, we achieved growth in both sales and profitability through teamwork and a clear strategy.

Key to our success was enhancing service quality and fostering a strong team-oriented culture. The recognition we received, including the Reader’s Choice Award from USA Today for Best in America from 2021 through 2023, reflects our commitment to guest experience—principles I aim to bring forward here. Nonetheless, we must prioritize and focus on immediate objectives.

Operator

Thank you. Our next question comes from John Heinbockel with Guggenheim. Please proceed.

John Heinbockel — Analyst

Hi Eric, two quick inquiries. Historically, you’ve gained market share during challenging economic conditions. Is the current issue with UPT primarily inflationary, rather than a direct operational problem? Secondly, what is the status of the UGO integration and the potential shift to an IO model? Can certain regions remain company-operated instead of transitioning to IO?

Eric Lindberg — Chairman

Let’s first address market share. Our traffic and customer transactions have been strong historically, although we currently need to focus on improving basket size. We face more questions than answers at this stage, and it’s been fruitful to have Jason onboard asking critical questions. We’ll look into this more deeply and provide an update next quarter.

On the UGO integration, the power of this model is its flexibility for experimentation. We don’t have a specific deadline for implementing the IO model but are considering it as we move forward. With 41 stores and a solid presence in the southeast, we see significant potential to apply lessons learned from our existing operations.

Dorian Bertsch — Senior Vice President, Strategy and Finance

We’re actively addressing several key areas, including store refreshes and product expansions. Recently, we completed about five store refreshes, which have yielded positive sales increases. We’re consistently introducing new products to fill assortment gaps and enhance offerings for our customers.

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UGO’s Plan for Recovery: Navigating Challenges and Opportunities

Streamlining Operations to Boost Sales

In recent discussions, executives at UGO emphasized the need for a shift in approach to enhance sales. Acknowledging the past connections with markets is crucial as they attempt to integrate a broader operator model that aims to improve business performance.

Corey’s Inquiry on Restructuring’s Impact

Corey Tarlowe from Jefferies asked Eric about the company’s restructuring plan. Eric responded that while the plan did not alter his views on store openings or profit margins, it did highlight the need for a change in strategy due to previous underperformance. He stressed focusing on key priorities and narrowing down operations to maximize efficiency in execution.

Eric explained that the ambition to open numerous stores in markets that lacked connections was misguided. He identified essential factors for success, including market awareness, workforce recruitment and training, distribution synergies, and effective messaging. The reorganization effort arose from a necessity to improve these elements.

Focus on Value Compared to Competitors

Next, Anthony Chukumba of Loop Capital sought Dorian’s perspective regarding UGO’s value proposition. Dorian noted improvements in value metrics throughout Q4. He specified goals for delivering a 40% savings on baskets compared to conventional grocers, and 20% compared to discount retailers. The company also aims to emphasize items with significant savings that attract customer referrals. Recent efforts resulted in a 3% traffic increase during Q4, indicating a positive response to value-driven strategies.

Capital Expenditure Plans for Growth

Joe Feldman from Telsey Advisory Group inquired about the upcoming year’s capital expenditures, which are projected at $210 million, up from last year’s $185 million. Christopher Miller explained that this increase primarily supports more store openings and investments in a new distribution center in the Pacific Northwest.

Long-term Margin Goals Amid Challenges

Mike Baker from D.A. Davidson wanted clarity on UGO’s long-term margin goals. Christopher noted that while UGO historically maintained a 6% EBITDA margin, the current focus is on optimizing operations and targeting existing markets. He refrained from making specific future projections but expressed confidence in the company’s potential for recovery.

Understanding Comp Guidance and Competitive Landscape

Leah Jordan from Goldman Sachs raised concerns over UGO’s 2% to 3% comparable sales growth guidance, which is below the company’s historical performance. Dorian addressed the competitive environment, stating that it remains stable yet challenging, reinforcing the continued need for promotional efforts and value improvements in their merchandising strategies.

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Grocery Outlet Shares Insights on Business Strategy and Future Growth Plans

Focus on Systems and Competitive Landscape

Grocery Outlet has reported that its promotional environment has returned to pre-COVID standards. The company aims for pricing targets of 40% on general products and over 70% on key deals, demonstrating a strong value proposition for customers. Their adaptable business model has allowed them to thrive in changing competitive environments, and they remain confident about their performance in the upcoming year.

Addressing System Challenges

Simeon Gutman from Morgan Stanley prompted a discussion about ongoing systems issues, which the company initially thought were temporary. Eric Lindberg, Chairman, stated that by 2025, they expect to resolve these challenges and enhance their operational capabilities. While some inventory management tools are not yet fully functional, improvements are ongoing. The company is also making strides in addressing inventory shrink issues, though it is not yet at optimal levels.

Leadership’s Focus on Store Optimization

Eric emphasized that CEO Jason Potter is actively evaluating how customers interact with Grocery Outlet. Potter’s hands-on approach focuses on improving store operations and data management, which he believes will lead to significant enhancements in their business model. As he integrates himself into the operations, he is prioritizing issues related to merchandise and customer experience.

Private-Label Products Showing Promise

Dorian Bertsch, Senior Vice President of Strategy and Finance, discussed the positive reception of Grocery Outlet’s private-label products, which have expanded more than initially planned. With around 180 items launched by the end of last year and 150 additional items anticipated this year, these products are becoming top sellers in their categories. This strategy not only enhances customer value but also improves margins for the store operators.

Plans for Future Expansion

Jacob Aiken-Phillips from Melius Research inquired about unit growth and future store openings. Eric Lindberg confirmed that there is a healthy pipeline for new stores and independent operators. While the company had to scale back on new markets to manage execution risks, they remain optimistic about their plans beyond 2025, focusing on selecting capable operators and ensuring successful new store deployments.

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Gearing Up for Growth: Insights from the Latest Conference Call

Overview of Future Plans for ROIC Improvement

During the call, participants discussed strategies aimed at enhancing Return on Invested Capital (ROIC) within the company’s model. Key decisions and actions will be taken to optimize performance in this area.

Closing Remarks by Chairman

Eric Lindberg — Chairman

Thank you, Haley. I appreciate everyone’s questions and contributions today. I look forward to further discussions with you and Chris and Jason shortly. We’ll reconnect with you soon.

Thanks to the operator and everyone involved. Goodbye.

Operator

[Operator signoff]

Call Participants:

• Christine Chen — Vice President, Investor Relations
• Eric Lindberg — Chairman
• Jason Potter — President and Chief Executive Officer
• Christopher Miller — Executive Vice President, Chief Financial Officer
• Krisztina Katai — Analyst
• Chris Miller — Executive Vice President, Chief Financial Officer
• Anthony Bonadio — Analyst
• Robert Ohmes — Analyst
• Tom Nass — TD Cowen — Analyst
• Mark Carden — Analyst
• John Heinbockel — Analyst
• Dorian Bertsch — Senior Vice President, Strategy and Finance
• Corey Tarlowe — Analyst
• Anthony Chukumba — Analyst
• Joe Feldman — Analyst
• Mike Baker — D.A. Davidson — Analyst
• Leah Jordan — Analyst
• Simeon Gutman — Analyst
• Unknown speaker — — Analyst
• Jacob Aiken-Phillips — Melius Research — Analyst

This article provides a transcript of the conference call generated for The Motley Fool. We aim for accuracy, but please note that errors or inaccuracies may occur. The Motley Fool encourages you to conduct your own research, listen to the call, and review the company’s SEC filings. Visit our Terms and Conditions for further details, including necessary disclaimers.

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