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On Wednesday, DA Davidson analyst Katy Hallberg adjusted the price target for Grocery Outlet Holding (NASDAQ: NASDAQ:GO), reducing it to $15.00 from the previous $17.00, while keeping a Neutral rating on the stock. The company’s shares, which have declined nearly 40% over the past year according to InvestingPro data, currently trade at $15.74. Hallberg noted that Grocery Outlet’s comparable store sales had accelerated and surpassed consensus, aligning with DA Davidson’s data checks and the recent uptick in forecasts. The company maintains a 30.4% gross profit margin and has achieved 9% revenue growth over the last twelve months. Despite this, Hallberg pointed out that execution problems persist, particularly with higher shrink due to ongoing system integration issues, which have undermined the improved product margins and resulted in a gross margin shortfall. InvestingPro analysis reveals 7 additional key insights about GO’s performance and outlook, available to subscribers.
The analyst also remarked on the strategic decisions by Grocery Outlet’s new management team, highlighting their choice to slow down expansion to address operational challenges. This shift entails a significant reduction in square footage growth, which Hallberg believes is likely a prudent decision for the long term. However, she also mentioned that this approach will impact the company’s growth algorithm, and consequently, its earnings and valuation multiples for at least the upcoming year, if not longer.
Hallberg’s revised price target of $15 is based on a 6x enterprise value to EBITDA multiple applied to DA Davidson’s lowered forecasts for 2026. Currently trading at an EV/EBITDA of 15.8x and a P/E ratio of 30.6x, InvestingPro’s Fair Value analysis suggests the stock is slightly undervalued. The analyst’s commentary indicates that while Grocery Outlet’s top-line performance has been strong, concerns about operational efficiency and the recent strategic pivot to focus on fixing these issues are expected to influence the company’s financial outlook in the near term. For a comprehensive analysis of GO’s valuation and future prospects, access the detailed Pro Research Report, available exclusively on InvestingPro.
Grocery Outlet, known for its discounted, overstocked, and closeout products from name brand and private label suppliers, has faced several challenges that have affected its stock performance. The company’s decision to address these operational issues by slowing down growth reflects a strategic move that may stabilize the business in the future but presents short-term hurdles in terms of earnings potential and stock valuation.
In other recent news, Grocery Outlet Holding Corp reported its fourth-quarter 2024 earnings, revealing a slight miss on earnings per share (EPS) compared to analyst expectations. The company posted an EPS of $0.15, falling short of the forecasted $0.17. Despite this, revenue surpassed expectations, reaching $1.1 billion against a forecasted $1.09 billion. The company demonstrated a solid revenue performance with a 10.9% increase year-over-year. Comparable store sales increased by 2.9%, and transaction counts were up by 3%.
Grocery Outlet’s gross margin decreased by 70 basis points to 29.5%, and the net income stood at $2.3 million, translating to $0.02 per diluted share. Adjusted net income was $14.5 million or $0.15 per share. The company anticipates full-year 2025 comparable store sales growth between 2-3%, with total net sales projected to reach between $4.7 billion and $4.8 billion. Additionally, Grocery Outlet expects gross margins to be in the range of 30-30.5% and adjusted EBITDA to fall between $260 million and $270 million.
New product launches and operational changes are underway, and the company plans for 33-35 net new store openings in 2025. The market reacted negatively to the earnings release, reflecting investor disappointment in the EPS miss.
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