Grocery Outlet Holding Corp. Q2 FY2025 earnings call

Key Points

• Delivered solid second quarter results exceeding outlook: Net sales grew 4.5%, adjusted EBITDA and adjusted EPS above guidance; comp store sales grew 1.1% and 9 net new stores opened.
• Gross margin was 30.6%, ahead of outlook due to improved inventory management and merchandising. SG&A as a percentage of net sales declined 10 basis points.
• Progress on 4 strategic imperatives:
  • Tackling new store performance: Rebalancing store growth, adjusting site selection criteria, testing commercial pilots; 2025 cohort of new stores performing ahead of plan, expecting cash-on-cash returns above 20% in year 4 for '25 and '26 cohorts.
  • Securing top talent: Welcomed new leaders like Matt Delly, added 2 new Board members with deep experience.
  • Addressing execution gaps: Made steady progress on systems work, expect to complete last major systems update for IOs by end of third quarter; completed real-time order guide rollout, leading to improved inventory visibility; made progress on private brands with launch of Second Cheapest wines; supply chain transition to 1 DC in Pacific Northwest executed flawlessly, next DC conversion in East to begin in Q4.
  • Improving execution at scale: Work on model store and sharing best practices with IOs; in Oakland test store, made enhancements contributing to middle single-digit comp lift; rolling out improvements to pilot stores; focusing on customer perception, reaffirming value proposition resonates with core guests, working on improving execution-related areas like product availability.

Net sales were $1.18 billion, growing 4.5% over the previous year. Adjusted EBITDA was $68 million and adjusted EPS was $0.23, both above their respective guidance ranges. Comp store sales grew 1.1% from last year. 9 net new stores were opened. Gross margin was 30.6%, ahead of the outlook. Net sales contribution: net sales of $1.18 billion is the total, with comp store sales growth and new store openings contributing to the overall performance.

Full Year Guidance

• Reaffirm all previous guidance ranges except adjusted EPS, which is increased due to favorable interest expense.
• 2025 outlook: Comp store sales growth between 1% and 2%; add 33 to 35 net new stores; gross margin in the range of 30% to 30.5%; adjusted EBITDA $260 million to $270 million; adjusted EPS $0.75 to $0.80 per fully diluted share.

Third Quarter Guidance

• Comp store sales between 1.5% and 2%; open 9 net new stores; gross margin between 30% and 30.5%; adjusted EBITDA in the range of $63 million to $67 million; diluted adjusted earnings per share between $0.17 and $0.19.

Risks

• Forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Factors include those described in the press release and periodic reports filed with the SEC, such as market uncertainties, operational execution risks, and risks related to systems implementation and integration.

Q: Anthony Bonadio asked about the comp guidance and confidence level, especially given what's seen into July and August.

A: Jason Potter responded that they're feeling good, citing improvements in value perception, in-stock on fastest selling SKUs, implementation of new arrival guide, consolidation in Pacific Northwest, and rolling out of forecasting tool in meat and produce contributing to positive sales.

Q: Corey Tarlowe asked about newer cohorts of stores performing better and the opportunity based on test stores.

A: Jason Potter said the pilot work in Oakland is showing positive results, they've adjusted store mix, spent time on site selection, and see healthy returns building in '25 and '26.

Q: Robby Ohmes asked about the new arrivals guide and SG&A commission support.

A: Jason Potter explained the new arrivals guide will help IOs reserve product and build merchandising plans, and Chris Miller stated there's no more commission support provided.

Q: Jeremy Hamblin asked about new unit development and infill markets.

A: Jason Potter said they're focused on improving returns, with an aspiration to get over 30% returns, and aim for around 50% or better infill in '26 and beyond.

Q: Michael Baker asked about the pacing in the second quarter and fourth quarter guidance.

A: Jason Potter explained it's consistent with guidance, with improvement in run rate on comps and the benefit of the 53rd week in Q4.