2 Grocery Outlet Analysts Remain Sidelined Despite Praising Q3 Print

Two Grocery Outlet Holding Corp GO analysts had plenty of praise for the extreme value grocery chain's third-quarter report, but fell short of recommending the stock to investors.

The Analysts

UBS analyst Michael Lasser maintains a Neutral rating on Grocery Outlet  with a $38 price target.

Bank of America analyst Robert Ohmes maintains at Neutral, unchanged $40 price target.

UBS: 'Solid' Quarter

Grocery Outlet's "solid" print includes certain metrics among "the finest results" in the entire consumable retail space, Lasser wrote in a note. For example, same-store sales growth accelerated by 150 basis points on a two-year stack to 5.8% from a combination of traffic and ticket growth.

Gross margins were also 38 basis points higher in the quarter due to opportunistic purchasing, improved efficiencies, product delivery savings and inventory management improvements. It may be difficult to sustain gross margin expansion over time, but the company's exposure to the secondary channel offers a form of protection from pressures its competitors face.

Grocery Outlet's stock is trading at around 40 times 2020 estimates, which Lasser said implies investors aren't "pricing in a meaningful slowdown" in the near term. As such, shares offer a "balanced" risk-reward profile at current levels.

BofA: 'Firing On All Cylinders'

Grocery Outlet's business is "firing on all cylinders" as the company saw broad-based strength across all regions and product categories, Ohmes wrote in a note. Behind the scenes, management deserves credit for solid expense controls and initiatives to improve inventory.

The company continues to see a large supply of product availability which can grow to as much as four times its current size, the analyst wrote. Multiple bullish catalysts, including a differentiated business model, extreme customer value proposition, a path to establish 4,000 stores in the U.S., and expectations for comps to come in above current guidance of 1% to 3% are already "well-appreciated by investors" at current levels.

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