New Leadership Will Improve Operational Efficiency

Key Takeaways

• New leadership and leveraged business model aim to drive revenue growth and operational efficiency, enhancing market share and customer experience.
  
• Strategic focus on improving inventory systems and store expansion in familiar markets is expected to bolster profitability and margins.
  
• Rapid market expansion and executional challenges may hinder revenue growth, strain margins, and impact earnings amid restructuring costs and increased financial pressure.

Catalysts

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

• The appointment of new leadership, including a CEO with turnaround experience, a CFO with decades of public company experience, and a CIO with IT expertise, is expected to enhance operational execution and strategic focus, potentially driving revenue growth and improving operational efficiency.
  
• The company's focus on leveraging its unique business model, which combines opportunistic buying at scale with local execution by independent operators, is seen as a catalyst for future revenue growth by enhancing customer experience and expanding market share.
  
• Progress towards refining and enhancing business systems and tools, particularly in improving inventory management and operational efficiencies, is anticipated to aid in margin recovery and boost long-term profitability.
  
• A revised store expansion strategy prioritizing existing and adjacent markets over less developed new markets is expected to improve new store productivity and return on invested capital, impacting earnings positively.
  
• Initiatives to optimize the supply chain and reassess the cost structure, including workforce reductions and more cost-effective infrastructure investments, are aimed at scaling operations efficiently, likely leading to improved net margins and long-term earnings growth.

Grocery Outlet Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Grocery Outlet Holding's revenue will grow by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.9% today to 1.1% in 3 years time.
• Analysts expect earnings to reach $60.6 million (and earnings per share of $0.52) by about March 2028, up from $39.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $80.9 million in earnings, and the most bearish expecting $37.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.9x on those 2028 earnings, down from 31.7x today. This future PE is greater than the current PE for the US Consumer Retailing industry at 24.3x.
• 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 7.83%, as per the Simply Wall St company report.

Grocery Outlet Holding Future Earnings Per Share Growth

Risks

• The company experienced executional challenges due to rapid expansion into new markets, leading to underperformance in non-adjacent markets, which could negatively impact revenue growth and return on invested capital (ROIC).
  
• Operational issues related to systems conversions have led to inefficiencies such as inventory shrinkage, which could pressure gross margins and net earnings.
  
• There's considerable restructuring costs expected in 2025, including charges for exiting store leases and organizational restructuring, potentially impacting net earnings.
  
• Increasing pressure on build-out costs for new store openings and higher depreciation impact long-term capital allocation and earnings potential.
  
• Higher debt levels to support share repurchases and capital spending, coupled with rising interest expenses, could negatively impact net margins and earnings per share (EPS).

Valuation

• The analysts have a consensus price target of $13.929 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 $18.0, and the most bearish reporting a price target of just $10.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $60.6 million, and it would be trading on a PE ratio of 25.9x, assuming you use a discount rate of 7.8%.
• Given the current share price of $12.83, the analyst price target of $13.93 is 7.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.