10-Q: Grocery Outlet Reports Q1 2026 Results, Faces Significant Goodwill Impairment

Grocery Outlet Holding Corp. reported a net loss of $180.3 million for Q1 2026, impacted by a substantial $158 million goodwill impairment charge and ongoing restructuring efforts.

Summary

• Grocery Outlet Holding Corp. reported a net loss of $180.3 million for the first quarter of fiscal year 2026, a significant increase from a net loss of $23.3 million in the same period of fiscal year 2025.
• The company's net sales increased by 3.6% to $1.17 billion, driven by the addition of 33 net new stores over the past 12 months.
• Comparable store sales decreased by 1.0%, attributed to a 3.1% decline in average transaction size, though the number of transactions increased by 2.1%.
• Gross profit increased slightly to $345.2 million, but gross margin declined by 80 basis points to 29.6%, partly due to inventory markdowns related to store closures.
• Selling, general, and administrative (SG&A) expenses rose by 4.8% to $347.0 million, increasing as a percentage of net sales.
• A significant goodwill impairment charge of $158.0 million was recorded in the first quarter of fiscal 2026, impacting the company's operating and net loss figures.
• Restructuring charges decreased by 46.3% to $18.2 million, primarily related to the company's Optimization Plan, which includes store closures and operator agreement terminations.
• Adjusted EBITDA decreased by 16.9% to $43.1 million, and adjusted net income fell by 64.6% to $4.6 million, reflecting lower gross margins and higher SG&A expenses.
• The company ended the quarter with 549 stores, having closed 27 underperforming stores as part of its Optimization Plan and opened 7 new stores.
• The company expects to incur between $20 million and $27 million in net total restructuring charges in fiscal years 2026 and 2027 related to the Optimization Plan.

Sentiment

Score: 3

Explanation: StockSavvy.ai views this filing as negative due to the significant net loss, goodwill impairment, and declining comparable store sales, despite some top-line growth from new store openings.

Positives

• Net sales increased by 3.6% to $1.17 billion, driven by the addition of 33 net new stores over the last 12 months.
• The number of transactions increased by 2.1%, indicating continued customer traffic.
• The company ended the quarter with 549 stores, demonstrating continued expansion efforts.
• The company remains compliant with its debt covenants as of April 4, 2026.
• The company has $174.9 million of remaining borrowing capacity under its revolving credit facility.

Negatives

• A significant net loss of $180.3 million was reported for the quarter, compared to a net loss of $23.3 million in the prior year.
• Comparable store sales declined by 1.0%, primarily due to a 3.1% decrease in average transaction size.
• Gross margin decreased by 80 basis points to 29.6%, impacted by inventory markdowns and promotional activities.
• SG&A expenses increased as a percentage of net sales.
• A substantial goodwill impairment charge of $158.0 million was recognized, indicating a significant decline in the carrying value of goodwill.
• Adjusted EBITDA decreased by 16.9% to $43.1 million.
• Adjusted net income decreased by 64.6% to $4.6 million.
• The company closed 27 financially underperforming stores as part of its Optimization Plan.

Risks

• The company's business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, varying rates of inflation, tariffs, fuel price increases, and changes in consumer behavior.
• Comparable store sales have been negatively impacted by decreased average transaction size.
• Tariffs may result in cost increases on some products and negatively affect consumer sentiment.
• Increased promotional and pricing activities from key competitors are putting pressure on the company's value proposition.
• The company is investing in additional promotional activity which adversely impacted gross margin in the first quarter of fiscal 2026 and is expected to continue to do so.
• The Optimization Plan involves closing 36 financially underperforming stores, terminating operator agreements, and incurring significant restructuring charges.
• The company's goodwill impairment charge of $158.0 million suggests potential future impairments if performance does not improve.
• The company's ability to obtain additional equity or debt financing on satisfactory terms cannot be assured if operating cash flow is insufficient.
• The company is subject to interest rate risk on its variable rate debt.
• The company is involved in multiple federal securities class action lawsuits and stockholder derivative lawsuits, which could result in significant monetary damages and legal costs.

Future Outlook

The company plans to open 30 to 33 net new stores in fiscal 2026, excluding closures from the Optimization Plan, focusing on a clustered location model in new markets. They expect to incur between $20 million and $27 million in net total restructuring charges in fiscal years 2026 and 2027 related to the Optimization Plan, with substantial completion by the first quarter of fiscal 2027. Capital expenditures are expected to be approximately $170.0 million for fiscal 2026, covering new store openings, maintenance, supply chain, and systems investments.

Management Comments

• We are actively pursuing initiatives to increase average transaction size through our deployment of enhanced in-store merchandising and execution to further improve the shopping experience.
• We are working to increase opportunistic product levels to what we believe is necessary to improve the perception of our value leadership and drive sales.
• We plan to open 30 to 33 net new stores in fiscal 2026, excluding the Closure Stores related to the Optimization Plan.
• We are making adjustments to how we go to market, including piloting new approaches to store openings and underwriting to stricter standards.

Industry Context

StockSavvy.ai notes that Grocery Outlet's Q1 2026 results reflect the ongoing challenges faced by value-oriented retailers, including increased competition, inflationary pressures, and the need for strategic adjustments like store rationalization. The significant goodwill impairment highlights the company's efforts to align its asset values with current market realities and operational performance, a move that, while painful, is often necessary for long-term financial health.

Comparison to Industry Standards

• The decline in comparable store sales and average transaction size is a concern, as many retailers are experiencing increased consumer spending, albeit with a shift towards value.
• The gross margin decline, while partially attributed to restructuring, is also a point of attention, as efficient inventory management and pricing strategies are crucial in the competitive grocery sector.
• The company's strategy of opening new stores while closing underperforming ones is a common approach in the retail industry to optimize store portfolios and focus on profitable growth areas.

Legal Proceedings

• Two federal securities class action lawsuits filed in January and March 2025, consolidated into one, alleging violations of federal securities laws related to transition to new internal systems. An amended complaint was filed, and the company's motion to dismiss is under review.
• Two federal stockholder derivative lawsuits filed in April and May 2025, consolidated into one, alleging breach of fiduciary duty and other claims based on similar allegations to the class action. These were stayed pending resolution of the class action motion to dismiss.
• Two additional stockholder derivative lawsuits filed in March 2026, asserting claims for breach of fiduciary duty and related claims based on similar allegations to the class action and prior derivative lawsuits. One was dismissed without prejudice.
• A separate federal securities class action lawsuit filed in March 2026, alleging violations of federal securities laws regarding growth strategy, financial performance, and restructuring plan effectiveness.
• A federal stockholder derivative lawsuit filed in April 2026, asserting claims for breach of fiduciary duty and related claims based on similar allegations to the 2026 Class Action.
• The company intends to defend these lawsuits vigorously. Currently, these lawsuits do not present loss contingencies that are both probable and reasonably estimable, and a range of reasonably possible losses cannot be estimated.

Related Party Transactions

• The company leases 14 store locations and one warehouse from entities in which Eric Lindberg, Jr., Chairman of the Board and former CEO, or his family, have a financial interest. Right-of-use assets and lease liabilities for these properties were $44.2 million and $49.3 million, respectively, as of April 4, 2026.
• Aggregate lease payments to these related parties were $1.9 million for the first quarter of fiscal 2026 and fiscal 2025.
• The company offers interest-bearing notes to Independent Operators (IOs), with gross amounts of IO operating notes and receivables totaling $84.4 million as of April 4, 2026.

Stakeholder Impact

• Shareholders: The significant net loss, goodwill impairment, and decline in adjusted EBITDA and net income are likely to negatively impact shareholder value and sentiment.
• Independent Operators (IOs): The Optimization Plan involves terminating operator agreements for 36 stores, which will directly impact the affected IOs. The company also increased its provision for IO notes and receivables due to these terminations.
• Employees: While not explicitly detailed, restructuring plans and store closures can lead to workforce reductions or changes.
• Creditors: The company's compliance with debt covenants and its available borrowing capacity provide some assurance, but the overall financial performance could impact future credit availability.
• Suppliers: Increased promotional activity and inventory markdowns may affect supplier relationships and terms.

Next Steps

• Complete the closure of the remaining 9 stores associated with the Optimization Plan in the second quarter of fiscal 2026.
• Continue to implement the Optimization Plan, including operator agreement terminations and lease exits.
• Focus on increasing opportunistic product levels and promotional activity to improve value perception and drive sales.
• Execute the new store growth strategy, opening 30 to 33 net new stores in fiscal 2026 with a clustered location model.
• Pilot new approaches to store openings and underwriting, including operating certain new stores as Company-operated initially.

Key Dates

Recommendation

While the company is expanding its store footprint, the significant net loss, substantial goodwill impairment, declining comparable store sales, and ongoing legal challenges present considerable headwinds. The company's ability to execute its Optimization Plan and improve profitability will be critical. Given the uncertainties and negative financial trends, a 'hold' recommendation is appropriate, pending clearer signs of operational improvement and stabilization.

Keywords

Grocery Outlet, 10-Q, Quarterly Report, Financial Results, Goodwill Impairment, Restructuring, Optimization Plan, Net Sales, Gross Margin, EBITDA, Independent Operators, Retail