GROCERY OUTLET HOLDING CORP. Item 2.02 Results of Operations and Financial Condition.
Preliminary Financial and Operational Information
The following information reflects our preliminary expectations of results for the thirteen weeks and fiscal year endedDecember 28, 2019 , based on currently available information. We have provided ranges, rather than specific amounts, for the financial results below, primarily because our financial closing procedures for the thirteen weeks and fiscal year endedDecember 28, 2019 have just commenced and, as a result, we expect that our final results upon completion of our closing procedures may vary from the preliminary estimates included herein. For instance, we have not begun review of most account reconciliations or expense accruals, or prepared notes to our financial statements, and our year-end financial audit has just commenced. These reconciliations and reviews include financial statement accounts such as cash, inventory, lease-related assets and liabilities and deferred income tax, as well as expense accruals including our cost of sales accruals, insurance claim reserves, stock-based compensation, public company costs and other operating expenses, which we are currently estimating. Our consolidated financial statements for the fiscal year endedDecember 28, 2019 will be included in our annual report filed with theSecurities and Exchange Commission (the "SEC") following the date of this Current Report on Form 8-k.
Preliminary Financial Results
Although the financial results for the thirteen weeks and fiscal year endedDecember 28, 2019 are not yet finalized, we estimate that the financial results will fall within the following ranges, as compared to the thirteen weeks and fiscal year endedDecember 29, 2018 : Thirteen Weeks Ended Fiscal Year Ended December 29, December 28, December 29, December 28, 2018 2019 2018 2019 Actual Low High Actual Low High (dollars in thousands) Net sales$ 585,201 $ 655,517 $ 655,517 $ 2,287,660 $ 2,559,617 $ 2,559,617 Income from operations$ 13,851 $ 15,550 $ 16,050 $ 82,467 $ 66,888 $ 67,388 Net income(loss)$ (4,612 ) $ 6,336 $ 6,696 $ 15,868 $ 11,922 $ 12,282 Adjusted EBITDA$ 39,318 $ 40,500 $
41,000
4.1 % 5.1 % 5.1 % 3.9 % 5.2 % 5.2 %
Thirteen Weeks Ended
We expect to report net sales of$655.5 million compared to$585.2 million for the thirteen weeks endedDecember 29, 2018 , an increase of$70.3 million or 12.0%. The increase in net sales is primarily due to non-comparable store sales growth attributable to the net 31 stores opened over the last 12 months as well as an increase in comparable store sales. We expect to report that comparable store sales increased 5.1% compared to the thirteen weeks endedDecember 29, 2018 , driven by increases in both the number of customer transactions and average transaction size. We expect our gross margin as a percent of sales to have increased at a rate consistent with the year-over-year increase in gross margin as a percent of sales realized in the thirteen weeks endedSeptember 28, 2019 . We expect to report income from operations of between$15.6 million and$16.1 million , compared to$13.9 million for the thirteen weeks ended 1 --------------------------------------------------------------------------------December 29, 2018 , an increase of 14.1%, calculated using the midpoint of the range. We estimate that net income will be between$6.3 million and$6.7 million , compared to a loss of$4.6 million for the thirteen weeks endedDecember 29, 2018 , an increase of$11.1 million , calculated using the midpoint of the range. We estimate that adjusted EBITDA will be between$40.5 million and$41.0 million , compared to$39.3 million for the thirteen weeks endedDecember 29, 2018 , an increase of$1.4 million or 3.6% calculated using the midpoint of the range. Our adjusted EBITDA estimate includes approximately$2.0 million of additional costs to comply with public company requirements including incremental insurance, accounting and legal expense as well as costs required to comply with the Sarbanes-Oxley Act that were not incurred in the prior year. Excluding public company costs, adjusted EBITDA grew an estimated$3.4 million or 8.7%, calculated using the midpoint of the range.
Fiscal Year Ended
We expect to report net sales of$2.56 billion compared to$2.29 billion for the fiscal year endedDecember 29, 2018 , an increase of$272.0 million or 11.9%. The increase in net sales is primarily due to non-comparable store sales growth attributable to the net 31 stores opened over the last 12 months as well as an increase in comparable store sales. We expect to report that comparable store sales increased 5.2% compared to the fiscal year endedDecember 29, 2018 driven by increases in both the number of customer transactions and average transaction size. We expect our gross margin as a percent of sales to be substantially consistent with our gross margin as a percent of sales of 30.8% for the thirty nine weeks endedSeptember 28, 2019 . We expect to report income from operations of between$66.9 million and$67.4 million , compared to$82.5 million for the fiscal year endedDecember 29, 2018 , a decrease of$15.4 million or 18.6%, calculated using the midpoint of the range. Income from operations for the fiscal year endedDecember 28, 2019 reflects an estimated$31.9 million of stock-based compensation expense, which primarily consisted of non-cash stock compensation expense that is now recognized as a result of our initial public offering inJune 2019 . We estimate that net income will be between$11.9 million and$12.3 million , compared to$15.9 million for the fiscal year endedDecember 29, 2018 , a decrease of$3.8 million or 23.7%, calculated using the midpoint of the range. We estimate that adjusted EBITDA will be between$168.8 million and$169.3 million , compared to$153.6 million for the fiscal year endedDecember 29, 2018 , an increase of$15.5 million or 10.1% calculated using the midpoint of the range. Our adjusted EBITDA estimate includes approximately$4.5 million of additional costs to comply with public company requirements including incremental insurance, accounting and legal expense as well as costs required to comply with the Sarbanes-Oxley Act that were not incurred in the prior year. Excluding public company costs, adjusted EBITDA grew an estimated$20.0 million or 13.0% calculated using the midpoint of the range.
Operational Results
Although the operational results for the thirteen weeks ended
Thirteen Weeks Ended
December 29, December 28,
2018 2019
Number of new stores 11 10
Number of stores open at end of period 316 347
We opened ten new stores and closed no stores during the thirteen weeks ended
December 28, 2019 , compared to eleven new stores opened and two closures during
the thirteen weeks ended December 29, 2018 . As of December 28, 2019 , we operated
347 stores compared to 316 stores as of December 29, 2018 .
Adjusted EBITDA Reconciliation
Adjusted EBITDA is a non-GAAP measure used by management to measure our operating performance. The following table provides a reconciliation from our preliminary estimates of net income to preliminary estimates of EBITDA and preliminary estimates of adjusted EBITDA for the thirteen weeks and fiscal year endedDecember 28, 2019 (at the low end and high end of the estimated ranges set forth above) and the thirteen weeks and fiscal year endedDecember 29, 2018 . In addition, please see below under "EBITDA and Adjusted EBITDA" for additional information as to how we define EBITDA and adjusted EBITDA, the reasons why we include these measures and certain limitations to their use. 2 -------------------------------------------------------------------------------- Thirteen Weeks Ended Fiscal Year Ended December 29, December 29, December 29, December 29, 2018 2019 2018 2019 Actual Low High Actual Low High (dollars in thousands) Net income$ (4,612 ) $ 6,336 $ 6,696 $ 15,868 $ 11,922 $ 12,282 Interest expense, net 14,950 6,750 6,750 55,362 45,983 45,983 . . . Item 8.01 Other Events. (a) OnJanuary 27, 2020 , the Company issued a press release announcing a secondary offering of shares of its common stock, par value$0.001 per share, held by certain selling stockholders of the Company. A copy of this press release is attached as Exhibit 99.1 to this Current Report on Form 8-K and is incorporated herein by reference. (b) OnJanuary 27, 2020 , the Company issued a press release regarding preliminary expectations of results for the thirteen weeks and fiscal year endedDecember 28, 2019 , based on currently available information. A copy of this press release is attached as Exhibit 99.2 to this Current Report on Form 8-K and is incorporated herein by reference.
Forward-Looking Statements
This Current Report on Form 8-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 as contained in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect management's current views and estimates regarding the prospects of the industry and the Company's prospects, plans, business, results of operations, financial position, future financial performance and business strategy. These forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "should," "expect," "intend," "will," "estimate," "anticipate," "believe," "predict," "potential" or "continue" or the negatives of these terms or variations of them or similar terminology. Forward-looking statements include our expectations regarding our financial and operational information as of and for the thirteen weeks and fiscal year endedDecember 28, 2019 after the completion of our closing procedures. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, the Company cannot provide any assurance that these expectations will prove to be correct. The following factors are among those that may cause actual results to differ materially from the forward looking statements: failure of suppliers to consistently supply us with opportunistic products at attractive pricing; inability to successfully identify trends and maintain a consistent level of opportunistic products; failure to maintain or increase comparable store sales; changes affecting the market prices of the products we sell; failure to open, relocate or remodel stores on schedule; risks associated with newly opened stores; risks associated with economic conditions; competition in the retail food industry; inability to retain the loyalty of our customers; costs and implementation difficulties associated with marketing, advertising and promotions; failure to maintain our reputation and the value of our brand, including protecting our intellectual property; any significant disruption to our distribution network, the operations of our distributions centers and our timely receipt of inventory; movement of consumer trends toward private labels and away from name-brand products; inability to maintain sufficient levels of cash flow from our operations; risks associated with leasing substantial amounts of space; failure to maintain the security of information we hold relating to personal information or payment card data of our customers, employees and suppliers; failure to participate effectively or at all in the growing online retail marketplace; material disruption to our information technology systems; risks associated with products we and our IOs sell; risks associated with laws and regulations generally applicable to retailers; legal proceedings from customers, suppliers, employees, governments or competitors; unexpected costs and negative effects associated with our insurance program; inability to attract, train and retain highly qualified employees; difficulties associated with labor relations; loss of our key personnel or inability to hire additional qualified personnel; changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters; impairment of goodwill and other intangible assets; any significant decline in our operating profit and taxable income; risks associated with tax matters; natural disasters and unusual weather conditions (whether or not caused by climate change), pandemic outbreaks, terrorist acts, global political events and other serious catastrophic 4
-------------------------------------------------------------------------------- events; economic downturns or natural or man-made disasters in geographies where our stores are located; management's limited experience managing a public company; risks associated with IOs being consolidated into our financial statements; failure of our IOs to successfully manage their business; failure of our IOs to repay notes outstanding to us; inability to attract and retain qualified IOs; inability of our IOs to avoid excess inventory shrink; any loss or changeover of an IO; legal proceedings initiated against our IOs; legal challenges to the independent contractor business model; failure to maintain positive relationships with our IOs; risks associated with actions our IOs could take that could harm our business; the significant influence of certain significant investors over us; our ability to generate cash flow to service our substantial debt obligations; and the other factors discussed under "Risk Factors" in the Company's prospectus filed with theSEC onOctober 4, 2019 . For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the "Risk Factors" the Company previously disclosed in its prospectus filed with theSEC onOctober 4, 2019 , and in its Quarterly Report on Form 10-Q for the quarterly period endedSeptember 28, 2019 , as such risk factors may be updated from time to time in the Company's periodic filings with theSEC . The Company's prospectus and periodic filings are accessible on theSEC's website at www.sec.gov. You should not rely upon forward-looking statements as predictions of future events. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by applicable law, the Company undertakes no obligation to update publicly any forward-looking statements for any reason after the date of this Current Report on Form 8-K to conform these statements to actual results or to changes in our expectations.
Item 9.01 Financial Statements and Exhibits.
(d) Exhibits. Exhibit No. Description 99.1 Press release entitled "Grocery Outlet Holding Corp. Announces Secondary Offering of Shares of Common Stock" 99.2 Press release entitled "Grocery Outlet Holding Corp. Announces Preliminary Fourth Quarter and Full Year 2019 Results" 104 The cover page from this Current Report on Form 8-K, formatted in Inline XBRL (included as Exhibit 104) 5
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