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Wednesday, Craig-Hallum analysts reduced their price target on Grocery Outlet Holding (NASDAQ: NASDAQ:GO) shares to $13.50 from $17.00, while maintaining a Hold rating on the stock. Currently trading at $10.53 with a market capitalization of $1.03 billion, the stock has declined nearly 40% over the past year. The analysts cited a mix of positive and negative outcomes in the company’s fourth-quarter results, which saw sales and same-store sales (SSS) exceed expectations. According to InvestingPro analysis, the company maintains profitability despite recent challenges. However, profitability did not meet forecasts due to ongoing issues with systems and higher-than-anticipated selling, general, and administrative expenses (SG&A).
The industry’s high inflationary environment contributed to the SSS growth, but unexpected product loss, referred to as shrink, resulted in a 70 basis points gross margin (GM) miss. Grocery Outlet’s earnings were further impacted by costs associated with a new restructuring plan aimed at optimizing unit growth and streamlining the supply chain.
The restructuring plan outlined by management includes store closures, lease exits, workforce reductions, and distribution network consolidation. These changes are expected to negatively affect profitability in the short term, particularly throughout the first half of 2025. The company’s leadership anticipates that these initiatives will enhance unit economics and long-term returns once fully implemented.
Grocery Outlet is also grappling with systemic challenges, with a focus on improving real-time order guides to enhance inventory management and opportunistic buying capabilities. The analysts noted that the ongoing system issues continue to pose an overhang on the company’s performance.
Given the uncertainty surrounding Grocery Outlet’s profitability and unit growth, Craig-Hallum analysts have reiterated their Hold rating. They emphasized the impact of the restructuring plan and system challenges on the company’s near-term financial performance, leading to the lowered price target of $13.50. InvestingPro analysis suggests the stock is currently undervalued, with additional insights available in the comprehensive Pro Research Report, which provides deep-dive analysis of over 1,400 US stocks.
In other recent news, Grocery Outlet Holding Corp reported its fourth-quarter 2024 earnings, revealing an earnings per share (EPS) of $0.15, which was below analyst expectations of $0.17. However, the company exceeded revenue forecasts, achieving $1.1 billion compared to the anticipated $1.09 billion. Despite strong sales, profitability concerns emerged due to a lower-than-expected adjusted EBITDA margin of 5.2%. The company also reported a positive comparable store sales increase of 2.9%, surpassing some analyst forecasts. Analysts from Telsey Advisory Group and DA Davidson adjusted their price targets for Grocery Outlet, lowering them to $16 and $15, respectively, citing ongoing execution challenges and system integration issues. DA Davidson’s analyst noted that while comparable store sales had accelerated, operational challenges, particularly higher shrink, continued to impact margins. Grocery Outlet’s management has decided to slow down expansion efforts to address these operational issues, which may affect the company’s growth algorithm and earnings in the near term. These developments indicate the company’s strategic pivot to focus on resolving system-related challenges and improving operational efficiency.
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