The Ratings Game: Grocery Outlet’s inability to grow online is a ‘competitive disadvantage’ that will be hard to overcome


Grocery Outlet Holding Corp.’s business model presents a number of challenges, including hurdles to diving into the soaring online grocery business, according to Quo Vadis Capital.

Shares of Grocery Outlet slumped 11.9% in Wednesday trading after the discount grocer reported sales that missed expectations and said comparable-store sales for the second quarter so far are in the negative low double digits.

Grocery Outlet has an off-price business model that is unique to the grocery business. Executives speaking on the late Tuesday earnings call expressed confidence in that model and the system the company has in place to grow and thrive.

“We are seeing healthy deal flow as changing customer demand, product innovation and ramping production are all contributing to excess supply,” said Robert Joseph Sheedy, president of Grocery Outlet, according to a FactSet transcript.

“Our longstanding supplier relationships combined with our approach to supplier acquisition and development give us a competitive advantage and preferred access to surplus product as it becomes available.”

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Quo Vadis says the company’s model is “maladapted,” and rate the stock sell.

“Bulls want Grocery Outlet to be a long-term high-ROIC compounder with an enormous total addressable market. This is simply not the case,” wrote John Zolidis, president of Quo Vadis.

“There is no ‘white space’ where consumers do not already have options to buy discounted food. Grocery Outlet will have to enter new markets where its brand is unknown, consumer preferences are different, and entrenched competitors are in place with superior real estate. It’s not going to be easy.”

Moreover, Quo Vadis says the company’s business model makes it difficult to jump into the online grocery space, which has accelerated during the pandemic. The JLL Grocery Tracker 2021 report shows online grocery growth was 52% in 2020.

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“There are also idiosyncratic risks to the grocery outlet model related to its 50% closeout mix, which precludes it from participating in the significant secular shift to online shopping/digital ordering in the space,” the Quo Vadis note said.

“First-half 2021 results seem to show this, as traffic is negative and sales productivity is tracking below 2019. This is a permanent competitive disadvantage, in our opinion.”

Grocery Outlet discussed its expansion plans, with 10 new stores opening in the first quarter, bringing the total number of locations to 389. The company has already added six location in the second quarter, and plans to open between 36 and 38 stores in 2021. Three to five stores will be in the east.

Grocery Outlet locations are in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.

Cowen forecasts near-term volatility but remains upbeat about Grocery Outlet’s prospects, forecasting improving comp trends in the second half of the year.

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Comps fell 8.2% in the first quarter.

“In our view, Grocery Outlet’s competitive advantages will persist over the longer-term, management possesses one of the most compelling unit opening opportunities in retail, along with opportunities around exclusive products will support unit growth and margins,” analysts led by Oliver Chen wrote.

Cowen rates Grocery Outlet shares outperform with a $42 price target.

Grocery Outlet stock has fallen 9% for the year to date while the S&P 500 index

is up 9.8% for the period.

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