Grocery Outlet Holding Corp. stock fell nearly 11% in Wednesday trading after the retailer reported an earnings miss and was downgraded at MKM Partners.
reported second-quarter net income of $19.6 million, or 20 cents per share, down from $29.3 million, or 30 cents per share, last year. Adjusted EPS of 23 cents was below the FactSet consensus for 24 cents.
Sales totaled $775.5 million down from $803.4 million but in line with the FactSet consensus. Same-store sales dropped 10% beating the FactSet consensus for an 11.1% drop.
For the quarter-to-date, Grocery Outlet has seen a 6% same-store sales decline. The company expects the quarter to finish at a mid-single-digit decline. The FactSet consensus is for a 2.8% decline.
“With 2Q and 3Q QTD comparable-store sales below our expectations… we don’t have confidence in Grocery Outlet’s ability to retain business won during the period of COVID-related disruption,” wrote Bill Kirk, executive director at MKM Partners.
MKM downgraded Grocery Outlet to neutral from buy and cut its fair value estimate to $29 from $45.
“Grocery Outlet’s value proposition does not play well in an environment where consumers’ financial health and low-end wage prospects are improving,” Kirk wrote. “Absent a negative macro shock or channel shift via increased COVID case counts, we worry that Grocery Outlet’s two-year stack comparable-store sales will continue to decelerate and profitability will be pressured.”
Quo Vadis is also pessimistic about the company’s future.
“Grocery Outlet shares continue to trade at legacy post-IPO premium multiples (15x EV to EBITDA) that do not reflect the company’s fundamentals, in our view,” wrote John Zolidis, president of Quo Vadis.
Grocery Outlet began trading in June 2019.
“The company is a low-margin (mid-3% EBIT), low-return business (M-HSD% ROIC), with mediocre growth (LDD% annual EPS) and limited free cash flow generation.”
Quo Vadis rates Grocery Outlet sell.
Cowen analysts maintained their outperform stock rating, though they cut their price target to $36 from $42.
“Implementation of e-comm and new delivery options, broadening the product assortment, and building East Coast infrastructure and talent bode well for long-term customer engagement and reach,” analysts said.
Grocery Outlet said on the earnings call that three to five store openings planned this year will be in the East, including the company’s first New Jersey location. The company is planning as many as 38 store openings.
And the company is testing e-commerce models.
“Grocery Outlet was previously hesitant to pilot e-comm as the treasure hunt model does not translate well to online,” analysts wrote.
Grocery Outlet stock has fallen 29.8% for the year to date while the S&P 500 index
is up 18.3% for the period.