Grocery Outlet’s off-price model is poised for growth — as long as the shelves stay stocked
Grocery Outlet Holding Corp. is poised for growth, according to Morgan Stanley analysts led by Simeon Gutman, as long as the off-price grocer can keep goods on the shelves.
Morgan Stanley was among at least four analyst initiations for Grocery Outlet GO, +4.64% on Monday; analysts there rate the stock equal-weight with a $30 price target.
Grocery Outlet shares began trading on June 20, opening 41% above the initial public offering price of $22. The stock closed Monday up 4.6% to $35.38, up more than 24% from the closing price of $28.51 on its first trading day.
Grocery Outlet stock is up 7.6% for the month to date while the S&P 500 index SPX, +0.02% has gained 2.5% for the period.
“Through its distinctive closeout sourcing model and significant expansion potential (runway to 5X its store count), we believe Grocery Outlet is capable of generating consistent low-double-digit top-line and Ebitda [earnings before interest, taxes, depreciation and amortization] growth,” the Morgan Stanley note said.
However, analysts leave the door open for trouble ahead.
“Finding enough availability of the right merchandise at the appropriate prices is critical to Grocery Outlet’s value proposition and competition positioning,” the note said. “If the available supply of closeout in grocery is smaller than we think, it could impact Grocery Outlet’s otherwise robust growth outlook and margin stability and limit how much share Grocery Outlet can ultimately take.”
Guggenheim analysts think Grocery Outlet is “a unique small-box value growth retailer” that could help drive disruption of the $1.4 trillion food retail market. The top 10 names only have 41% of share even after “decades of consolidation.”
Smaller-format grocers could double their share to 10%, according to Guggenheim.
“Grocery Outlet, with only 330 stores in six states and a national share of just 18 basis points, is especially well positioned to participate in this share shift,” the note said.
Guggenheim analysts highlight that Grocery Outlet is “the only retailer that utilizes an independent operator, or IO, approach, essentially a more capital-intense license model,” in which IOs kick in 10% of capital costs, split gross profit equally with Grocery Outlet, and keep what’s left after expenses and advertising.
Guggenheim calls these IOs “talented, experienced and motivated.” Analysts rate Grocery Outlet shares neutral.
“Grocery Outlet possesses the rarest of company qualities, with high-growth that is still early innings, predictable and stable financials that are counter-cyclical, a best-in-class leadership team with a unique Independent Operator model that can scale and a business that benefits from the consumer shift towards value,” wrote Jefferies analysts.
Jefferies thinks Grocery Outlet could benefit from the dual trends towards “value,” a result of the Great Recession, and wellness. The company can also trace its origins back to 1946, giving it time to “perfect the closeout/off-price buying model for groceries.”
Jefferies rates Grocery Outlet shares buy with a $41 price target.
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“Cowen believes Grocery Outlet is well positioned to grow for the long-term given a compelling product offering at a strong value underpinned by a talented and well-tested buying team,” wrote Cowen in a note.
Analysts say overall pricing at Grocery Outlet can run 40% below conventional grocers and 20% below discount grocers. Conventional grocers include Walmart Inc. WMT, +0.33% and Kroger Co. KR, +0.87% , while discount grocers can include Aldi’s and Trader Joe’s.
It also has features that separate it from Amazon.com Inc. AMZN, +0.50% , which owns Whole Foods Market, including a treasure hunt experience akin to other off-price retailers like Burlington Stores Inc. BURL, -1.96% and a merchandise mix of both well-known and up-and-coming brands.
Cowen rates Grocery Outlet stock outperform with a $42 price target.
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