Grocery Outlet’s Q1: A Look at What Went Wrong
While Grocery Outlet Holding Corp.’s sales momentum remained strong during its first quarter ended March 30, its 29.3% gross margin was 110 basis points below expectations.
President and CEO RJ Sheedy explained during the company’s Q1 earnings call that its low first-quarter margins were the result of both expected and unexpected impacts from its systems transition: “Our results were incrementally impacted by unforeseen systems transition costs that surfaced at the end of the quarter. We are all very disappointed with our poor Q1 results, and we are committed to getting these system impacts behind us very soon.”
In late August 2023, Grocery Outlet upgraded its product, inventory, financial and reporting platforms. This transition disrupted business operationally and financially over the past eight months, as the company opening discussed during its last two financial reports.
In February 2024, there were two large remaining system issues impacting profit. One was related to warehouse product expiry data and the other related to store-level reporting. “We have since resolved both of these and the negative impact to first-quarter gross margin came in as expected at about 100 basis points,” explained Sheedy. “We've reduced warehouse shrink close to normal levels with better data visibility and accurate store-level reporting enabled us to end the commission support program in March.”
Grocery Outlet continues to work through remaining system functionality and performance enhancements under the leadership of its new COO Ramesh Chikkala.
Nonetheless, Sheedy expressed his disappointment that the company did not foresee the additional 110 basis points of margin impact. “This was quantified during catch-up invoice processing and final margin reconciliation at the end of the quarter,” he said. “Delayed payment processes during Q1, combined with poor data visibility, contributed to this miss versus guidance.”
Sheedy continued, “We are all frustrated by the size and duration of this disruption. It has been costly, and our recent execution is well below our expectations. But this disruption is also temporary and fixable, and we are on the right path forward.”
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Now for the good news: Grocery Outlet is experiencing increases in satisfaction and spend across all customer segments, with particular strength among middle to higher-income customers. “The closeout buying environment remains very strong,” commented Sheedy.
The company’s Q1 sales exceeded expectations, increasing 7.4%, driven by a 3.9% increase in comparable-store sales, which accelerated throughout the quarter. Transaction count growth remained strong at 7%.
During Q1, Grocery Outlet completed the rollout of its personalization app to all stores. The app communicates weekly deals to customers and customizes their shopping experience. Initial customer response has been positive with over 400,000 total downloads thus far and Q1 sales penetration of 6%. “Over time, we believe the app will create increased customer loyalty through greater engagement, which will help drive trip frequency and share of wallet,” said Sheedy.
The company also completed the United Grocery Outlet (UGO) acquisition on April 1, which added 40 stores across six new states. Grocery Outlet expects to add a total of 58 to 62 new stores this year, this includes the newly acquired UGO stores.
“Fully integrating the business and rebranding the stores will take time, but we are very encouraged by the progress so far,” explained Sheedy. “We have many levers to accelerate sales growth in partnership with the United Grocery Outlet team. Our near-term integration focus is on expanding the assortment, investing in store refreshes and new fixtures, and introducing some of our marketing programs to the Southeast region. We also look forward to leveraging the multi-temp distribution center to access more opportunistic products that can benefit both Grocery Outlet and UGO stores.”
Opportunities also abound for Grocery Outlet as a result of 99 Cents Only Stores recently entering Chapter 11 bankruptcy. Sheedy said his company is excited about helping 99 Cents Only suppliers with surplus inventory and looking into whether 99 Cents Only real estate would be a good fit for Grocery Outlet's store growth.
The retailer has been working to attract 99 Cents Only customers, as well as store operators and store employees. “We think there are a number of areas where we could benefit from those stores closing,” said Sheedy.
In addition, Grocery Outlet plans to introduce its private label program in Q3. The first items to hit stores will be in the beverage and grocery categories.
The extreme-value retailer projects fiscal 2024 net sales of $4.3 billion to $4.35 billion. For the full fiscal year, it projects gross margin of approximately 30.5%.
Emeryville, Calif.-based Grocery Outlet offers products sold through a network of independently operated stores at more than 470 locations in nine states. The company is No. 66 on The PG 100, Progressive Grocer’s 2023 list of the top food and consumables retailers in North America.
