Analysts Remain Sidelined After Grocery Outlet's 'Impressive' Quarter

Value retailer Grocery Outlet Holding Corp GO reported second-quarter results that were encouraging but two analysts aren't ready to recommend investors buy the stock.

The Analysts

Bank of America's Robert Ohmes maintains a Neutral rating on Grocery Outlet with a price target lifted from $37 to $40.

UBS analyst Michael Lasser maintains at Neutral, price target lifted from $35 to $38.

BofA: Valuation Concerns

Grocery Outlet's "impressive" quarter is highlighted by a comps beat of 5.8% versus expectations of 3%, Ohmes said. The comp outperformance was broad-based across multiple product categories, regions and a benefit from a later Easter. Adjusted EBITDA margins of 7% also beat expectations of 6.7% from expense controls and a 35 basis point gross margin expansion.

The second quarter prompted Ohmes to revise 2019 estimates higher. Grocery Outlet is now expected to earn 70 cents per share for the full year 2019 and adjusted EBITDA of $166 million. This compares to prior estimates of 57 cents per share and $163 million, respectively.

"However, we view GO shares as nearly fairly valued at current levels as the company's differentiated model, extreme customer value proposition, and potentially very long-term and low-risk sustainable growth horizon (with an opportunity to establish over 4,000 stores in the US) appear well-appreciated by investors," Ohmes wrote in a note.

UBS: Conservative Outlook

Grocery Outlet benefited in the quarter from an Easter shift, but even excluding this one-time gain Lasser said comps would have still come in better than expected by more than 200 basis points. On a two year-stacked basis comps came in higher by more than 8% for the sixth consecutive quarter which is nearly unheard of in the grocery space today.

The company expects to see 3% to 4% same-store sales growth for the year. The math behind the outlook implies a 1% to 3% growth in the back half of the year, which implies an 80 basis point slowdown on a two-year stack.

"The company's SSS remain robust, its gross margin expansion was solid, and its new store outlook remains healthy," Lasser wrote. "Still, we believe much of this is already priced into its shares."

Price Action

Shares of Grocery Outlet hit an all-time high of $42.31 Wednesday morning. The stock debuted in June.