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DOW   35,911.81 (-0.56%)
S&P 500   4,662.85 (+0.08%)
DOW   35,911.81 (-0.56%)
S&P 500   4,662.85 (+0.08%)
DOW   35,911.81 (-0.56%)
S&P 500   4,662.85 (+0.08%)
DOW   35,911.81 (-0.56%)

Go Grocery Outlet (NYSE:GO) Is A Mid-Cap Growth Story With Legs

Thursday, November 12, 2020 | Thomas Hughes
Go Grocery Outlet (NYSE:GO) Is A Mid-Cap Growth Story With LegsGo Grocery Cashes In On Packaged Foods

If the data from Nielson is to be believed trends sparked by the COVID pandemic within the food space are still alive and strong. The latest data shows sales of packaged foods are up 7.5% for the first month of the 4th quarter with a marked acceleration at the end of the month.

The biggest winners are the food manufacturers by far. Kraft-Heinz (NASDAQ:KHC), Flowers Foods (NYSE:FLO), Conagra (NYSE:CAG), and McCormick (NYSE:MKC) all saw double-digit increases in sales but those aren’t the only winners. There are also retailers to consider. Retailers like Go Grocery Outlet (NYSE:GO) that are not only growing organic sales but the business footprint as well. If you are looking for a mid-cap growth stock with years of gains ahead of it Go Grocery Outlet may be your stock.

Go Grocery Beats, Raises, Invests In Growth

Go Grocery Outlets reported a strong quarter, gave us some positive guidance, and laid out a plan to produce a sustained 10% annual growth rate. And yet the shares are falling but don’t read too much into that. The price action in GO was bearish days before the release of 3Q results and seems to be losing momentum in its wake.

On the top line, the 17.1% YOY increase in revenue was strong, about 700 basis points stronger than expected to be exact. The revenue was driven by a 9.1% increase in comps, an increase that is also larger than expected, and a 7.5% benefit from expansion. The comps rose on an increase in basket size that was partially offset by a reduction in headcounts but again, don’t read too much into that. A headcount reduction is a natural consequence of larger basket sizes. When shoppers load up they don’t need to come as often. The takeaway is that revenue is up double-digits with the aid of higher comps.

Part of the gains is due to the company’s expansion. The company opened 10 new stores over the course of the quarter bringing the total to 372 or 7.2% from the previous year and 2.6% sequentially. Moving down, the margins expanded as well. Gross margin came in at 31.2%, slightly above consensus, to drive strong gains on the bottom line. On the bottom line, the GAAP EPS of $0.41 and adjusted $0.50 both beat by roughly $0.25 and are up double the last year’s earnings.

Looking forward, the company expects to open a total of 34 stores in fiscal 2020 and is on track to sustain a 10% growth rate in the future. The company has been investing in its real estate pipeline with that in mind. As for guidance, the company is projecting a mid-single-digit increase in comps to go along with this year’s expansion. They declined to provide hard numbers but based on the trend it looks like Go Grocery Outlook is on track to soundly beat the Q4 and FY2020 consensus targets.

Go Grocery Outlook Valuation Comes Back In Line

The Go Grocery Outlook was trading at a high 27X to 30X earnings in the days prior to the 3Q release and that may explain the price action. And there is a high 8% short interest to consider as well. The thing is, now that the selling has happened and the earnings are out the valuation looks a lot better. Based on the YTD results and outlook for the fourth quarter the stock is trading closer to 23X earnings and more in line with the broad market. Extrapolating that out to next year, the valuation comes closer to 20X or 21X earnings and the outlook for growth extends well beyond next year.

Looking at the charts it appears as if a bottom is in play. The price action fell to a six-week low on the news but bounced and bounced hard. The indicators are still bearish so I would expect to see price action retest support but there is no guarantee that will happen. The 2nd quarter results are strong, the outlook is strong, and the company has growth in its eyesights. If the shorts get scared, or just start taking profits, this stock could continue to rebound. In either case, this company is growing and this stock on track to set new all-time highs.

Go Grocery Outlet (NYSE:GO) Is A Mid-Cap Growth Story With Legs


Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
McCormick & Company, Incorporated (MKC)2.8$96.35+0.9%1.54%34.29Hold$92.00
Flowers Foods (FLO)2.5$29.07+2.8%2.89%27.95Hold$27.25
McCormick & Company, Incorporated (MKC)2.8$96.35+0.9%1.54%34.29Hold$92.00
Conagra Brands (CAG)2.4$35.11+2.2%3.56%15.40Hold$36.13
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