Dive Brief:

• Grocery Outlet recorded $1.04 billion in net sales during its first quarter of fiscal year 2024, a 7.4% year-over-year increase, the discounter reported Tuesday. The company’s comparable store sales increased 3.9% during the period compared with the same quarter last year. 
• The discount grocer is continuing to face headwinds from system changes made roughly eight months ago that resulted in ongoing business disruptions, Grocery Outlet President and CEO RJ Sheedy told investors. 
• “We are all frustrated by the size and duration of this disruption,” Sheedy said. “It has been costly and our recent execution is well below our expectations. But this disruption is also temporary and we are on the right path forward.”

Dive Insight:

In late August, Grocery Outlet upgraded its product inventory as well as its financial and reporting platforms. However, that tech transition disrupted the company’s operations and finances. 

The company has since resolved two “large” system issues impacting profit — one related to warehouse product expiry and the other related to store-level reporting, Sheedy said. 

As the discount grocer works through its technology woes, its gross margin took a hit in Q1, decreasing by 180 basis points to just above 29%. Sheedy said Grocery Outlet has reduced warehouse shrink to normal levels and improved store-level reporting. However, he noted the company is expecting impacts from the transition to continue into the second half of the year. 

“We continue to be really pleased with business fundamentals. They are healthy. We’re seeing great top-line growth,” Sheedy said. “Our new systems, while still impacting us on the [profit and loss], they are supporting daily business operations as well.”

The company’s comp-store sales increase in Q1 was driven by a 7% bump in the number of transactions but hit by a nearly 3% decline in average transaction size. 

Grocery Outlet opened six new stores in Q1, ending the quarter with 474 stores across nine states. On April 1, the company completed its acquisition of discount grocery chain United Grocery Outlet (UGO), adding 40 stores across six new states to Grocery Outlet’s footprint, Sheedy said. The company has opened six stores so far during its second quarter, with plans to open between 58 and 62 new stores, including the UGO locations, in 2024, he added.  

Looking to 2025, the company is in “a strong position” to deliver 10% new store growth next year, Sheedy said. 

During Q1, Grocery Outlet completed the rollout of its mobile app to all of its stores, allowing the discounter to offer weekly deals to customers and customize their shopping trips, Sheedy said. 

“We are encouraged by the initial customer response, with over 400,000 total downloads so far and Q1 sales penetration of 6%,” Sheedy said. “Over time, we believe the app will create increased customer loyalty through greater engagement, which will help drive trip frequency and share of wallet.

Grocery Outlet is gearing up to debut its private label program in Q3, with initial items in the beverage and grocery followed by additional items in those categories as well as within dairy, household and baking categories, Sheedy said. The company is on track to have approximately 100 private label SKUs by the end of 2024, he said. 

“In addition to better value and inventory consistency for our customers, these initial products will deliver better margin for Grocery Outlet and [independent operators],” Sheedy said. 

Grocery Outlet adjusted its expectations for fiscal year 2024. The company is keeping its original forecast for net sales to range between $4.3 billion and $4.35 billion and raising its forecasts for same-store sales, which it now expects will range between 3.5% to 4.5%. The company has lowered expectations for its gross margin, adjusted EBITDA and adjusted earnings per share. 

Due to the tech transition and compounding issues with data integration woes, forecasting has been “difficult” for the company, Lindsay Gray, the discounter’s interim CFO and senior vice president of accounting, said on the earnings call.