![]() The estimated growth represents a CAGR of 5.4% from 2022 to 2032. After the year, I estimate growth to slow down in steps into a perpetual growth rate of 2%. In the model, I estimate a growth of 11% for the current year, in line with the company’s outlook. To estimate a rough fair value for the stock, I constructed a discounted cash flow model in my usual manner. Grocery Outlet’s operations are very low-risk in their nature, and the company has achieved a good amount of growth in its history through a large amount of capital expenditures. I believe that the P/E ratio doesn’t tell the whole story, though. Although the current ratio is below the company’s historical average, the P/E still seems high compared to most small cap companies. The stock currently trades at a forward P/E of 24.4. The margin is very thin, and has stayed surprisingly stable in the company’s history with only a single percentage point of variance.Īuthor's Calculation Using Seeking Alpha Data ValuationĪt first glance, Grocery Outlet seems very aggressively priced. From 2016 to 2022, the company’s average EBIT margin was 3.2%, with a high of 3.7% and a low of 2.7%. Grocery Outlet has had a very stable EBIT margin in the company’s history. Still, the achieved growth does tie up the company’s cash flows – although Grocery Outlet’s net working capital has stayed relatively stable, the company has a significant amount of capital expenditures with a trailing figure of $138 million. ![]() The achieved growth is completely organic, as Grocery Outlet doesn’t have any cash acquisitions in the company’s public financial history. From 2016 to LTM figures as of Q2/2023, the company’s achieved compounded annual growth rate has been 12.0%:Īuthor's Calculation Using Seeking Alpha Data ![]() Grocery Outlet has achieved a good amount of growth in the company’s medium-term history. Stock Chart From IPO (Seeking Alpha) Financials The stock has fallen by about -17% in price, despite the company not paying any dividend: Grocery Outlet August Investor PresentationĪfter an IPO in 2019, Grocery Outlet’s stock hasn’t performed very well. Demonstrating the defensiveness, Grocery Outlet’s performance in the great financial crisis was exceptional: The company’s competitive pricing creates demand for the company in recessions, in addition to an already defensive grocery market industry. Grocery Outlet’s business model is highly resistant to macroeconomic turbulence, making the stock interesting. I believe that the defensiveness is a highly valuable prospect as the economy remains very uncertain. The business model makes Grocery Outlet’s operations adaptive to a single store’s local market, but creates benefits of scale through central sourcing and corporate functions. On the other hand, Grocery Outlet’s chosen independent operators are responsible for daily operations in a store – for example, the operators take care of hiring, operating working capital, local marketing, managing inventories and modifying pricing as well as a specific store’s product offering. On top, Grocery Outlet is responsible for capital expenditures in the process of a store opening, making the company’s growth quite CapEx-heavy. Grocery Outlet is responsible for corporate expenses, rent, central inventories, sourcing, real estate, logistics and initial pricing. The company’s operating model relies on independent store operators. Grocery Outlet's Pricing Strategy (Grocery Outlet August Investor Presentation) The company has good long-term supplier relationships with suppliers such as General Mills, Nestle, Unilever, Chosen Foods, Quest Nutrition, and Chobani the suppliers are a mix of well-known and emerging names. The company’s strategy revolves around extreme value – Grocery Outlet prides itself in providing good value to customers through a well-structured purchasing team. Grocery Outlet differentiates itself from competition with aggressive pricing. In this text, I analyze the stock’s valuation through a DCF model to determine whether the current risk-to-reward seems intriguing. As a very low-risk stock, Grocery Outlet’s investors aren’t going to look at a very high return. The company is focusing on growing through new store openings. The company focuses on providing low-price groceries through independently operated grocery stores, making Grocery Outlet an incredibly low-risk stock. ( NASDAQ: GO) operates independent grocery stores in the United States.
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