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On Wednesday, Jefferies analyst Corey Tarlowe upgraded Grocery Outlet Holding Corp (NASDAQ:GO) stock rating from Hold to Buy, while also increasing the price target to $18.00, up from the previous $13.00. The analyst cited a favorable outlook for value retailers with grocery exposure in the current economic climate, with Grocery Outlet well-positioned to capitalize on this trend. According to InvestingPro data, the company’s stock has shown strong momentum over the last month, though it remains significantly below its 52-week high of $27.64. The stock currently trades at a P/E ratio of approximately 30x, reflecting investors’ expectations for future growth.
Grocery Outlet, known for its value-based business model, is in the midst of a turnaround following a period of operational challenges and management changes. These issues had led to subpar same-store sales (SSS) and EBITDA margins. The company generated $211 million in EBITDA over the last twelve months, with revenue growing at 10.1%. While its current gross profit margin stands at 30.2%, the company’s history of outperforming during tough economic times, such as the Global Financial Crisis when it reported a 27% increase in comps over a two-year stack compared to the grocery peer average of approximately 6%, suggests potential for a strong recovery.
The analyst’s optimism is further bolstered by the company’s competitive pricing. According to Tarlowe’s pricing study, Grocery Outlet’s product basket is more affordable than those of Wegmans, Giant, and Target (NYSE:TGT), with only Walmart (NYSE:WMT) offering lower prices by 8%. This price advantage is expected to drive an increase in same-store sales, with projections for 2.9% growth in 2025 and 3.2% in 2026, both figures surpassing the consensus estimates of 2.4% and 2.8%, respectively.
Tarlowe’s analysis indicates that Grocery Outlet’s efforts to improve its price gaps relative to competitors are starting to bear fruit, as noted by management’s comments on improvements in the fourth quarter. The company’s ability to offer lower prices is seen as a key driver for outperformance in the coming years.
The upgrade and price target adjustment reflect Jefferies’ confidence in Grocery Outlet’s trajectory as it continues to refine its operations and pricing strategies to better serve value-conscious consumers. For deeper insights into Grocery Outlet’s financial health and growth potential, InvestingPro subscribers can access comprehensive analysis, including 8 additional ProTips and detailed valuation metrics in our Pro Research Report, helping investors make more informed decisions about this evolving retail story.
In other recent news, Grocery Outlet Holding Corp reported its fourth-quarter 2024 earnings, revealing earnings per share (EPS) of $0.15, which fell short of the expected $0.17. Despite the EPS miss, revenue exceeded forecasts, reaching $1.1 billion compared to the anticipated $1.09 billion. The company also recorded a 2.9% increase in comparable store sales, although profitability was impacted by higher shrinkage due to ongoing system issues. Analysts at Craig-Hallum, Telsey Advisory Group, and DA Davidson have all adjusted their price targets for Grocery Outlet, citing these profitability concerns and operational challenges. Craig-Hallum reduced its target to $13.50, Telsey to $16.00, and DA Davidson to $15.00, each maintaining a hold or neutral rating on the stock. The company has announced a restructuring plan that includes store closures and supply chain consolidation, which is expected to negatively affect short-term profitability. Management is optimistic that these initiatives will enhance long-term returns and improve unit economics once fully implemented.
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