Grocery Outlet Holding Corp. (GO) owns and manages a chain of independently owned and operated stores in the United States. The company operates approximately 400 shops in California, Washington, Oregon, Pennsylvania, Idaho, and Nevada.

The company’s shares rose 15.6% over the past three months, fueled by the rising retail sales ahead of the holiday season. Influenced by news of supply chains being choked and rising prices, consumers began their holiday shopping well before Thanksgiving.

However, the stock has declined 27.6% over the past year. Grocery costs reaching their all-time high in over a decade has led to shifting consumer behavior. Furthermore, escalating COVID-19 cases throughout the country have increased government mandates, which might hurt GO's revenues.

Here's what could shape GO's performance in the near term:

Rising Prices

Increased grocery prices are placing a strain on many Americans' shopping budgets, pushing people to rethink how they buy food and other necessities. Grocery costs rose 6.4% last month from the year-ago value, the highest jump in almost a decade. In addition, consumer price inflation rose 6.8% for the 12 months ended November. Rising costs and supply chain constraints might significantly impact GO’s performance in the near-term.

Inadequate Financials

GO's operating income declined 7.4% year-over-year to $73.66 million for the third quarter ended October 02, 2021. Its net income decreased 32.5% from the year-ago value to $55.67 million, while its EPS decreased 33.4% from the prior-year quarter to $0.56. In addition, the company's adjusted EBITDA declined 12% year-over-year to $151.06 million.

Weak Profitability

GO's trailing-12-months gross profit margin of 30.7% is 11.3% lower than the industry average of 34.6%. Also, its ROC, net income margin and ROA of 2.7%, 2.6%, and 3.1% are 60.3%, 51.6%, and 33.5%, lower than their respective industry averages. Furthermore, its trailing-12-months cash from operations of $223.74 million is 54.5% lower than the industry average of $526 million.

POWR Ratings Reflect Uncertainty

GO has an overall D rating, equating to Sell in our proprietary POWR Ratings system. The POWR ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight different categories. GO has a D grade for Growth and C for Quality. The company's poor financials and weak profitability are in sync with these grades.

Of the 40 stocks in the A-rated Grocery/Big Box Retailers industry, GO is ranked last.

Beyond what I've stated above, you can view GO ratings for Stability, Value, Momentum, and Sentiment here.

Bottom Line

GO’s shares have slumped 16% over the past six months. Rising inflation, supply chain constraints, and shifting consumer behavior have negatively impacted the company’s fundamentals. In addition, considering the rising COVID-19 cases and increasing government mandates, the company could further suffer in terms of revenue generation. So, we believe this stock is best avoided now.

How Does Grocery Outlet Holding Corp. (GO) Stack Up Against its Peers?

While GO has an overall D rating, one might want to consider its industry peers, Natural Grocers by Vitamin Cottage Inc. (NGVC), Albertsons Companies Inc. (ACI), and Ingles Markets Incorporated (IMKTA), having an overall A (Strong Buy) rating.

GO shares were trading at $28.38 per share on Thursday afternoon, down $0.08 (-0.28%). Year-to-date, GO has declined -27.69%, versus a 25.66% rise in the benchmark S&P 500 index during the same period.

Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.

More...