Q2 2024 Earnings Summary
- Grocery Outlet increased its guidance for net new store openings this year to 62 to 64 stores, up from 58 to 62, demonstrating strong execution and confidence in its expansion plans.
- The integration of the United Grocery Outlet (UGO) acquisition is proceeding well, with progress in product integration, store refreshes, and marketing, expected to contribute positively to future growth.
- Grocery Outlet has launched its private label program, with initial products introduced to stores, which are expected to provide better value to customers and healthier margins for the company and operators, supporting profitability improvements.
- Softening comparable store sales and customer traffic: Management acknowledged that comparable store sales (comps) softened at the end of the second quarter and continued into July and early August. Customer traffic remains positive but is softer than previously, coming off a high number of 5%. This indicates potential challenges in maintaining sales momentum.
- Increased competitive pressures impacting pricing and margins: The company observed increased promotional activity from competitors between May and July. Competitors have been more aggressive with promotions and some discount retailers are lowering everyday prices, which could pressure Grocery Outlet to invest more in pricing strategies, potentially affecting margins.
- Ongoing system challenges may affect operations: Despite progress, management noted that system challenges continue, with ongoing work needed to enhance operational data visibility, system speed, and functionality. Some tasks still require manual workarounds, posing operational risks until fully resolved.
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Margin Outlook
Q: What drove EPS upside and strong margins in Q2?
A: The EPS upside was due to strong margins, with gross margin 90 basis points ahead of plan. This was driven by over-indexing on price and a strong environment. For the full year, we're holding gross margin guidance at 30.5% to reflect investments in price in the second half to drive traffic and comp. -
Comp Acceleration in Back Half
Q: How will you achieve comp acceleration in the second half?
A: We plan to invest in price and sharpen negotiations to deliver the best value while maintaining healthy margins. We're also leaning into marketing to highlight our values and treasure hunt experience. In September, we start to anniversary the system impact from last year, which should benefit comps. -
Traffic Trends and Pricing Impact
Q: Are you seeing impacts on traffic and basket due to pricing?
A: It's been a mix, but more on traffic, with some customers shopping us less frequently. Units per transaction softened slightly as well. To address this, we're sharpening pricing and delivering better value to customers, which has already shown positive indicators. -
Competitive Environment
Q: How is the competitive pricing environment affecting you?
A: We've noticed increased promotional activity from competitors, with levels now back close to 2019. However, promotional levels are rational, and we're confident in our ability to offer great value and excitement. The impact is balanced across regions, with no significant geographical differences. -
New Store Growth
Q: What's driving the increased outlook for new store growth?
A: Our team has been executing well, allowing us to increase guidance for the number of stores opened this year. We maintain our 10% growth target for 2025 and beyond. New stores are performing in line with expectations in both infill and developing markets. -
Private Label Introduction
Q: Can you provide more details on your private label launch?
A: We've introduced three brands: Simply GO (food), GO Home & Haven (household products and personal care), and a pet brand coming later. These items offer better value and healthier margins. We'll feature them prominently in marketing and in-store signage to enhance customer awareness. -
App Adoption
Q: How is the app performing and impacting customer behavior?
A: We've seen over 700,000 downloads, with the app accounting for 8% of sales, up from 6%. Customers are using it as both a traffic driver and a basket builder, and app users have higher-than-average baskets. While it's too early for detailed transaction data, we're excited about its potential. -
Closeout Pipeline
Q: How is the closeout buying environment currently?
A: The closeout buying environment remains healthy across categories. We have good availability of product and variety, and supplier relationships are strong. Our stores are showing good variety, supporting growth.
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