Digital And Discount Trends Will Reshape Grocery Retail

Key Takeaways

• Shifts toward discount retail and private label growth are expected to boost revenue, margins, and customer loyalty amid continued economic uncertainty.
  
• Efficient expansion and advanced supply chain investments should drive operational savings, faster store performance, and sustained competitive advantages over less agile rivals.
  
• Geographic expansion, supply chain risks, digital disruption, labor cost pressures, and rising competition challenge Grocery Outlet’s ability to sustain growth and maintain margins.

Catalysts

Operates as a retailer of consumables and fresh products sold through independently operated stores in the United States.

• Grocery Outlet is expected to benefit from ongoing shifts in consumer behavior toward discount retailing and value, especially as economic uncertainty and inflation continue to impact household budgets. This alignment with a growing demand for affordable grocery options is likely to boost future revenue growth as shoppers increasingly seek out discounted, treasure-hunt-style experiences over traditional stores.
  
• The company's sharpened focus on disciplined, adjacent market expansion—prioritizing clustered store openings where brand recognition and distribution synergies already exist—should lead to faster store ramp-up, higher per-unit sales productivity, and improved return on invested capital, which will ultimately drive higher earnings and stronger net margins over time.
  
• Major investments in next-generation supply chain systems, real-time inventory management, and an expanded, modernized distribution network are projected to yield significant improvements in operational efficiency, lower costs, and reduced shrinkage, which together should support an increase in gross margins in future quarters.
  
• Ongoing private label expansion, with a growing assortment of high-margin and differentiated items, is set to bolster gross profit as private label offerings both increase customer loyalty and deliver above-average margins relative to national brands, strengthening the bottom line and enhancing earnings growth.
  
• Grocery Outlet’s ability to opportunistically source surplus and discounted inventory is uniquely positioned to thrive as consolidation within the grocery sector pressures smaller, less agile competitors, providing sustained advantages in supply negotiations and shopper value that can increase long-term revenue and reinforce EBITDA margins.

Grocery Outlet Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Grocery Outlet Holding compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Grocery Outlet Holding's revenue will grow by 7.6% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 0.9% today to 1.5% in 3 years time.
• The bullish analysts expect earnings to reach $80.9 million (and earnings per share of $0.65) by about May 2028, up from $39.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 27.7x on those 2028 earnings, down from 40.5x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 2.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.98%, as per the Simply Wall St company report.

Grocery Outlet Holding Future Earnings Per Share Growth

Risks

• Grocery Outlet’s limited expansion beyond its core West Coast markets highlights concerns about the scalability of its opportunistic sourcing model, which may constrain long-term revenue growth if the company cannot efficiently replicate its model in new regions.
  
• The ongoing shift toward e-commerce and digital grocery shopping poses a meaningful threat, as Grocery Outlet’s business is reliant on brick-and-mortar foot traffic; this long-term trend could steadily erode store visits and dampen comparable sales performance over time.
  
• Increasing wage pressures and the potential for persistent labor market tightness may elevate operating costs, shrinking net margins as Grocery Outlet faces higher wage bills for both its own staff and independent operators.
  
• Continued reliance on the availability of surplus and overstock inventory leaves Grocery Outlet exposed to risk from supplier consolidation and more efficient supply chain management by manufacturers, which could restrict access to deeply discounted goods and compress gross margins.
  
• The store’s focus on value through a treasure hunt experience may be challenged by intensified price competition from discounters, dollar stores and big-box retailers that are rapidly expanding and able to sustain even lower prices, threatening market share and pressuring both revenue and profitability.

Valuation

• The assumed bullish price target for Grocery Outlet Holding is $19.77, which represents two standard deviations above the consensus price target of $14.43. This valuation is based on what can be assumed as the expectations of Grocery Outlet Holding's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $5.5 billion, earnings will come to $80.9 million, and it would be trading on a PE ratio of 27.7x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $16.3, the bullish analyst price target of $19.77 is 17.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.