Grocery Outlet's Q2 Earnings on Deck: What Investors Should Brace For

Grocery Outlet has a trailing four-quarter earnings surprise of 46.6%, on average. In the last reported quarter, this Emeryville, CA-based company surpassed the Zacks Consensus Estimate by 150%. 

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What the Zacks Model Indicates for GO’s Q2 Earnings

As investors prepare for Grocery Outlet’s second-quarter results, the question looms regarding an earnings beat or miss. Our proven model does not conclusively predict an earnings beat for Grocery Outlet this time. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. However, that’s not the case here. You can see the complete list of today’s Zacks #1 Rank stocks here.

Grocery Outlet has a Zacks Rank #4 (Sell) and an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Factors Likely to Have Shaped Grocery Outlet's Q2 Outcome

Grocery Outlet’s second-quarter top line is likely to have remained under pressure from soft comparable-store sales. We expect comparable-store sales to decline 1.5% during the quarter under review. Management entered the quarter expecting continued comp weakness, with the Easter calendar shift creating an additional headwind. Management had indicated that improving traffic had not yet fully translated into stronger spending per trip, as lower units per transaction continued to weigh on average transaction size. The company is also rebuilding its opportunistic merchandise mix, as a lower mix of these products had previously weighed on ticket size. 

Continued promotional investments aimed at supporting traffic and rebuilding value perception, along with additional inventory liquidation activity related to store closures, are likely to have weighed on margins. We expect gross margin to decline 70 basis points in the second quarter.

Grocery Outlet entered the quarter with encouraging signs that its efforts to restore its core value proposition are gaining traction. Management had increased its focus on branded opportunistic merchandise, supported by broader supplier outreach, improved product visibility, faster delivery times and better systems and reporting. This merchandise is central to Grocery Outlet’s differentiated model because compelling branded deals reinforce its treasure-hunt shopping experience. The company has also been sharpening its extreme-value messaging through digital and awareness-based marketing and making savings more visible in stores. These initiatives had already generated a favorable customer response and improved traffic trends, providing a foundation for better sales productivity as the opportunistic assortment continued to strengthen. 

The company continued to boost store-level execution and the quality of its portfolio. Its store-refresh efforts focused on better layouts, signage and merchandising, while enhanced analytical tools, benchmarking and the annual business review process are designed to help independent operators improve sales mix, shrink and operating efficiency. At the same time, the completion of closures involving underperforming locations should help improve overall fleet quality and allow management to concentrate resources on more productive stores.

GO Stock Price Performance

Grocery Outlet, which competes with Sprouts Farmers Market, Inc. SFM and The Kroger Co. KR, has seen its shares jump 23.5% over the past three months compared with the industry’s 5.3% rise. Shares of Sprouts Farmers and Kroger have fallen 1.8% and 12.6%, respectively, over the said period.

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Does GO’s Valuation Look Attractive?

Grocery Outlet appears inexpensive relative to the broader industry and key peers. The stock currently trades at a forward 12-month price-to-sales (P/S) multiple of 0.20, substantially below the industry average of 2.27.

GO also trades at a discount to Sprouts Farmers Market, which carries a forward 12-month P/S multiple of 0.80, and slightly below Kroger’s multiple of 0.23.

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Final Words on Grocery Outlet

Grocery Outlet appears to be making meaningful progress in restoring its value proposition and improving execution, but the second quarter is still likely to have witnessed soft comparable-store sales, lingering basket pressure and margin headwinds from promotional support and closure-related activity. Encouraging traffic trends, a stronger opportunistic merchandise pipeline, sharper value messaging and portfolio optimization provide reasons for longer-term optimism, yet these positives may not be enough to drive a clear near-term earnings upside. With the Zacks model not signaling a convincing beat and the stock already having rallied meaningfully in recent months, investors may be better served by staying cautious ahead of the release. 

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This article originally published on Zacks Investment Research (zacks.com).

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