Consumer Trends Will Constrain Margins But Spur Efficiency

Key Takeaways

• Reliance on persistent value-driven consumer behavior and margin expansion faces risks from shifting economic conditions, supply chain pressures, and intensified labor costs.
  
• Expansion and tech upgrades may fall short if digital lag, store cannibalization, and heightened competition impact foot traffic and long-term earnings growth.
  
• Executing operational improvements, disciplined expansion, cost controls, and private-label focus are strengthening margins and growth potential, while the independent operator model supports scalability and store-level performance.

Catalysts

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

• Investor optimism appears grounded in the expectation that Grocery Outlet will continue to benefit from persistent value-seeking consumer behavior and enduring inflation, both of which may drive sustained customer traffic and support robust revenue growth; if these expectations are overly aggressive or if consumer dynamics shift (e.g., easing inflation or improved economic conditions), actual revenue growth could underwhelm.
  
• The market seems to be pricing in further margin expansion from improved private label penetration and opportunistic inventory buying, yet long-term industry dynamics-such as CPG supply chain tightening and greater supplier consolidation-could constrain the supply of discounted branded inventory and compress gross margins.
  
• Recent investments to upgrade technology and inventory management are assumed to drive ongoing improvements in store productivity and labor efficiency, but persistent wage inflation and tightening labor markets may continue to pressure SG&A expenses and limit operating leverage, ultimately weighing on net margins.
  
• Investors are assuming that ongoing physical store expansion-especially outside core West Coast markets-will yield substantial new-market revenue, despite historical challenges of entering new geographies, heightened risks of store cannibalization, and the potential for weaker-than-anticipated same-store sales growth, all of which may temper long-term earnings growth.
  
• The stock may reflect an expectation that Grocery Outlet will successfully navigate the accelerating shift to online grocery, but their lagging digital presence and the rise of larger, tech-enabled competitors could erode foot traffic, lower transaction frequency, and ultimately impair top-line revenue growth and earnings potential.

Grocery Outlet Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grocery Outlet Holding's revenue will grow by 8.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 1.5% in 3 years time.
• Analysts expect earnings to reach $88.1 million (and earnings per share of $0.57) by about August 2028, up from $8.1 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $51.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 224.0x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 22.2x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.02%, as per the Simply Wall St company report.

Grocery Outlet Holding Future Earnings Per Share Growth

Risks

• The company is demonstrating consistent improvement in store execution, including new inventory management tools and merchandising pilots, leading to material increases in comps, basket size, and double-digit growth in key departments like fresh meat and produce; successful rollout of these initiatives across the fleet could drive higher revenues and earnings.
  
• Management is prioritizing disciplined and data-driven store expansion, emphasizing infill markets with strong brand awareness and clustering strategies, aiming for higher store-level returns (targeting cash-on-cash returns above 20% in year 4 and aspiring for 30%), which could meaningfully boost long-term profitability and returns on invested capital.
  
• SG&A leverage is improving with cost discipline, a cost reduction program, and expected meaningful net savings in 2026, potentially strengthening net margins and overall operating leverage even as new investments are made to support growth.
  
• Private label innovation and execution of unique, high-value opportunistic buys (e.g., "Second Cheapest" wine and no issues sourcing surplus/opportunity inventory) allow for margin-accretive revenue streams and reinforce the differentiation of Grocery Outlet's value proposition, supporting margin expansion over time.
  
• The company's independent operator (IO) model is healthy, with low turnover and active engagement on training, best practice sharing, and operational support; this ensures localized execution, strong store performance, and scalability, increasing the likelihood of sustainable top-line and earnings growth as secular trends continue to favor value-oriented grocers.

Valuation

• The analysts have a consensus price target of $16.077 for Grocery Outlet Holding based on their expectations of its future earnings growth, profit margins and other risk factors. 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 analyst's consensus, you'd need to believe that by 2028, revenues will be $5.7 billion, earnings will come to $88.1 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of $18.58, the analyst price target of $16.08 is 15.6% 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.