|Shares Out. (in M):||97||P/E||28.5||25|
|Market Cap (in $M):||2,763||P/FCF||22||20|
|Net Debt (in $M):||272||EBIT||140||155|
|TEV (in $M):||3,035||TEV/EBIT||22||20|
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Grocery Outlet (GO) is an extreme value grocery retailer offering a broad range of brand-name consumables and fresh products at ~40%-70% discount. Similar to TJ Maxx and Marshalls, GO offers a treasure hunt experience of grocery items. They offer these deep discounts with no membership fees or large purchases.
The Company was founded by Jim Read in 1946. GO accelerated its new store openings under the 3rd generation of the Read family in 2006 (from 128 stores). Since then, GO has grown to over 430 stores in 6 states, mostly on the west coast. A typical GO store is ~14k sq. ft. (vs Whole Foods at ~ 39k sq. ft.) and carries only ~5,000 items at a time based on local preferences. Most of these stores are conveniently located in neighborhoods and are managed by local Independent Operators (IO). IOs are franchisees like owners of a GO store.
Walmart (now ~11k stores) started off by making purchases in large volume to negotiate the lowest price possible; passing that benefit to the consumers, and generating high sales volumes and rapid inventory turnover. Costco (~800 stores) offered similar value to its paying members by applying the same concept of low-cost on a very limited selection of bulk goods. Both companies created an empire around offering better value to their customer. While it is no Walmart or Costco, GO is in the process of building its business with its own version of extreme value offerings to consumers and opening new stores. Below are the key reasons why I like GO:
1. Unique Business Model: Centralized purchasing and localized selling.
The company is responsible for investing in the stores, securing the lease, and providing (as consignment) all the merchandise inventory required for the store. They add value by using a centralized sourcing and distribution model and decades-long relationships with suppliers to constantly access an ever-changing assortment of products that they can put on the local store shelves.
In this relationship, once the store is open, GO splits the store’s gross profit in half (50%) with the IO. A mature store should generate over $2M of gross profit, of which $1M goes to the IO and $1M goes to GO. This $1M of gross profit should cover the store's operating cost, employee wages, benefits, etc. and the remaining amount will be the IOs profit. The other $1M of gross profit covers GO’s rent and local marketing spend - the remaining amount is contribution profit to the parent company.
Illustrative Example: Say Coca-Cola had 1 million seasonal bottles of soda with Santa Claus on the packaging in January – most traditional retailers would not take this product/packaging. So, instead of discarding 1 million bottles, Coca-Cola will sell thm to GO for $0.20 per bottle. GO will then mark it up to make ~30% gross profit and sell it for $0.30 per bottle. The GO consumer saves 70% (vs paying $1 per bottle at say Walmart); The IO and GO split the $0.10 of profit per bottle; and Coca-Cola earns $200k for its excess inventory. GO repeats this process with +85,000 items from its +1,600 suppliers throughout its 400 stores. And growing…
2. Competitive Advantage: GO has a unique competitive advantage that should get better over time.
3. Attractive Unit Economics:
4. Long Runway for Growth:
5. Valuation: GO trades at a sensible valuation due to a fear of inflation and online grocery threats. GO currently trades at ~$28.50 per share and has ~100m shares outstanding.
Key Risk to Consider:
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