Expanding Customer Base And Innovative Strategies Poised To Bolster Revenue And Profit Margins

Key Takeaways

• Expansion through acquisition, aggressive store openings, and private label programs suggests a robust strategy for growth and margin improvement.
  
• Introduction of a personalization app and customer base growth indicate efforts towards enhancing customer engagement and loyalty.
  
• Recent softening in sales, pricing strategies affecting customer value perception, competitive pressures, system transitions, and inventory model risks pose threats to revenue, market share, and margins.

Catalysts

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

• Strong customer count indicates a growing customer base, which could drive future revenue increases if coupled with improvements in basket size and transaction value.
  
• The successful acquisition and integration of United Grocery Outlet could contribute to geographic expansion and revenue growth through additional store locations and customer base expansion.
  
• The introduction and ramping adoption of a personalization app can boost customer engagement and loyalty, leading to increased sales, higher basket sizes, and more frequent shopping trips.
  
• Launching a private label program with new brands like Simply GO can enhance margins by offering high-quality staples at affordable prices, boosting gross profit margins through cheaper sourcing and higher customer appeal.
  
• Commitment to opening new stores ahead of schedule, including 62 to 64 new stores this year, implies aggressive expansion and store count increase, which can significantly raise future revenue and market share.

Assumptions

• Analysts are assuming Grocery Outlet Holding's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.3% today to 1.8% in 3 years time.
• Analysts expect earnings to reach $96.4 million (and earnings per share of $0.95) by about October 2027, up from $54.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.3x on those 2027 earnings, down from 29.7x 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 1.21% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.85%, as per the Simply Wall St company report.

Risks

• The late June softening in comparable store sales and the continued trend thus far into the quarter suggest a potential risk to sustained revenue growth if not adequately addressed.
  
• The company's over-indexing on price in an effort to return to healthy margins might negatively impact customer perception of value, potentially affecting both traffic and basket size.
  
• Increased promotional and pricing activities from key competitors could put additional pressure on the company's relative value proposition, potentially affecting market share and revenues.
  
• The transition to new system platforms, despite most material P&L impact being behind, still presents ongoing challenges to employees and operators. If these challenges lead to operational inefficiencies, they could impact net margins.
  
• The reliance on opportunistic buying and the dynamic nature of inventory due to the treasure hunt model may pose risks to consistency in offering competitive pricing and value, possibly impacting earnings if customer engagement decreases.

Valuation

• The analysts have a consensus price target of $22.92 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 $29.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.4 billion, earnings will come to $96.4 million, and it would be trading on a PE ratio of 29.3x, assuming you use a discount rate of 6.9%.
• Given the current share price of $16.45, the analyst's price target of $22.92 is 28.2% 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.