E-commerce Shift Will Shrink Discount Grocers' Foot Traffic And Margins

Key Takeaways

• Structural underinvestment in digital and reliance on opportunistic inventory threaten growth, value differentiation, and market share amid evolving consumer and supplier behaviors.
  
• Heightened cost pressures, expansion risks, and intense competition challenge margin sustainability and the effectiveness of the independent operator business model.
  
• Focused site selection, operational improvements, and technology upgrades are driving stronger sales growth, margin expansion, and sustainable long-term profitability through disciplined execution and scalable local models.

Catalysts

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

• The accelerating shift of grocery shopping towards e-commerce and delivery platforms is expected to limit future foot traffic at physical discount grocers, which remains an area where Grocery Outlet is structurally underinvested; this digital gap could restrict top-line revenue growth and gradually erode market share over time.
  
• An overreliance on opportunistic inventory sourcing is likely to become a material headwind as suppliers further optimize their own supply chains or redirect excess inventory to online channels, which would reduce the availability of attractive surplus goods for Grocery Outlet and weaken core value differentiation, ultimately limiting comp sales growth and compressing gross margins.
  
• Wage inflation and ongoing regulatory changes, particularly around minimum wage and benefits for retail and logistics workers, are poised to drive up operating expenses industrywide, but will be especially impactful for a low-margin format like Grocery Outlet, putting sustained pressure on net margins and earnings expansion.
  
• Geographic expansion efforts beyond the legacy West Coast region may dilute the independent operator business model, increase logistical complexity, and expose the company to execution risks in unfamiliar territories, resulting in lower return on invested capital, weaker new store economics, and potential margin compression in outlying years.
  
• Discount grocery is facing mounting competition from more aggressive hard discounters and mass merchants investing heavily in price, assortment, and convenience, increasing the likelihood of price competition and customer churn, which would negatively impact both long-term revenue growth and sustainability of unit economics for Grocery Outlet.

Grocery Outlet Holding Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Grocery Outlet Holding compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Grocery Outlet Holding's revenue will grow by 6.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.2% today to 1.2% in 3 years time.
• The bearish analysts expect earnings to reach $63.6 million (and earnings per share of $0.73) by about August 2028, up from $8.1 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 bearish analyst cohort, the company would need to trade at a PE ratio of 23.5x on those 2028 earnings, down from 223.6x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 22.3x.
• Analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Grocery Outlet Holding Future Earnings Per Share Growth

Risks

• The company is executing a disciplined and data-driven approach to new store openings, emphasizing infill markets with high returns and optimizing site selection, which is already leading to improved new store performance and is expected to steadily increase returns on invested capital and long-term revenue growth.
  
• Recent test stores have demonstrated mid-single digit lifts in comparable sales and double-digit increases in fresh departments like meat and produce, driven by operational and merchandising improvements rather than price cuts, which, if scaled across the network, could materially boost same-store sales and earnings.
  
• Major technology and systems upgrades, such as real-time order guides and new arrival guides, are enabling better inventory management and in-stock rates, resulting in higher transaction counts, increased basket sizes, and streamlined operations that should support gross margin improvement and operating expense leverage over time.
  
• Strategic investments in private label brands and opportunistic product sourcing are expanding value offerings and improving gross margin, while supply chain consolidation and ongoing cost control initiatives are expected to generate meaningful G&A and supply chain savings, all supporting higher net margins and EBITDA.
  
• The independent operator model remains healthy and is being further strengthened with enhanced support, training, and best practice sharing, sustaining low turnover rates and providing a scalable model for local optimization that should underpin long-term comp growth, margin stability, and consistent earnings expansion.

Valuation

• The assumed bearish price target for Grocery Outlet Holding is $12.0, which represents the lowest price target estimate amongst analysts. 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 more bearish 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 $12.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $63.6 million, and it would be trading on a PE ratio of 23.5x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $18.54, the bearish analyst price target of $12.0 is 54.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.