Consistent with our deep dive on the grocery industry a few weeks ago, Grocery Outlet reported a strong set of Q1 2023 results this past week, including a comparable-store sales increase of +12.1%, which built upon last year’s +5.2%. (For perspective, the industry has grown at roughly a +6% rate YTD.) As we've said throughout the year, there is a significant consumer shift into the value channel as they seek out lower prices during this period of significant food price inflation. Within the Placer.ai platform, one can see this across several brands.
For Grocery Outlet, this shift yielded a +8% comparable-store traffic gain, again building upon last year’s increase. For the year, trailing-twelve-month (TTM) sales per store and square foot is likely to reach $8.8M and $631, respectively, up from $7.7M and $552 in 2019. Grocery Outlet CEO RJ Sheedy stated, “Our compelling WOW! shopping experience is attracting new customers and existing customers are spending more with us. Consumers are feeling the strain of higher prices throughout the economy, and we are helping them save money by offering high-quality food at industry-leading values. We are seeing healthy trends across all customer income levels, and satisfaction levels are high with most customers expecting to maintain or increase their spend with us in the future." Within that context, we would point to Grocery Outlet's building 2-year comparable-store sales CAGR, which is likely to be in the range of +11% for Q2 2023, up +600 basis points from the prior year. Walmart should see a similar improvement, while conventional grocers are likely to experience -100 basis points or more of degradation. Part of that fade is a deceleration in grocery inflation, but another part is visitor loss to hard-discount grocers. Also of note, is the added pandemic benefits to SNAP ended March, and so, April is the first month that these households had to stretch more to make means end.
Grocery Outlet adjusted EBITDA grew +37% on better gross margins, and cash generation was strong. The company opened three new stores as part of this year’s 25-28 target, ending the period with 444 stores across eight states. Sheedy noted that the company continues, "to work towards the 10% annual target into 2024 and years looking forward. We do have a good lineup of stores.”
Southern California and the Mid-Atlantic markets are in the retailer's sights. Traffic to its California stores outperform the nationwide average. That outperformance is driven by the markets outside of Southern California, including a very strong Bay Area. We are not aware of any structural differences in grocery between the Bay Area and Southern California; as such, we suspect that the large gap is the consequence of younger store and brand maturity in Southern California. And so, the current moment of high food price inflation is a big opportunity for Grocery Outlet to introduce itself to families in Southern California. Given the Los Angeles region’s higher growth than the California and Bay Area average, it appears that Grocery Outlet is taking advantage of that opportunity.
As it relates to private label, Sheedy noted that the company “is still excited about this as a long-term opportunity. We are building capabilities and setting the foundation this year. Think of it as an enhancement to the everyday assortment. This is not a replacement for opportunistic. There continues to be more than available for us to buy and to support growth, as we've talked about. But within the everyday side of the business, private label can really help us deliver more value. It can create more excitement for the customer. It can offer an additional reason to visit a store, think about unique destination items. And they can also serve to strengthen the treasure hunt. We're going to do this in a way that is appropriate and unique for us, and we're all excited about that as really a next step forward in terms of what the assortment provides. Too early to give anything more specifically than that as we're really just forming the strategy and doing some foundational work, but we'll certainly keep you up to date as we move through the year and into next year.” (Recall that we expect private label to be the driver of industry growth later this year and into the medium term.)