10-Q: Grocery Outlet Reports Q2 Loss Amid Restructuring

Grocery Outlet Holding Corp. reported a net loss for the first half of fiscal 2025, driven by significant restructuring charges and ongoing operational challenges.

Summary

• Net sales increased by 4.5% to $1.18 billion for the 13 weeks ended June 28, 2025, and by 6.5% to $2.31 billion for the 26 weeks ended June 28, 2025, compared to the prior year periods.
• Comparable store sales increased by 1.1% for the 13 weeks and 0.7% for the 26 weeks ended June 28, 2025, primarily due to increased transactions, partially offset by a decrease in average transaction size.
• Gross margin decreased by 30 basis points to 30.6% for the 13 weeks, but increased by 30 basis points to 30.5% for the 26 weeks ended June 28, 2025.
• Operating income for the 13 weeks ended June 28, 2025, was $12.8 million, a 51.1% decrease from $26.1 million in the prior year, primarily due to $11.2 million in restructuring charges.
• The company reported a net loss of $18.4 million for the 26 weeks ended June 28, 2025, compared to a net income of $13.0 million in the prior year period.
• Diluted earnings per share for the 13 weeks ended June 28, 2025, was $0.05, down from $0.14 in the prior year, and diluted net loss per share for the 26 weeks was $0.19, compared to earnings of $0.13 in the prior year.
• Adjusted EBITDA decreased slightly by 0.2% to $67.7 million for the 13 weeks, but increased by 11.5% to $119.6 million for the 26 weeks ended June 28, 2025.
• A restructuring plan initiated in Q4 2024 incurred $11.2 million in charges during Q2 2025 and $45.0 million for the first half of fiscal 2025, with total estimated costs of approximately $63 million.
• The company opened 11 new stores and closed 2 in Q2 2025, ending the quarter with 552 stores across 16 states.

Sentiment

Score: 3

Explanation: The sentiment is negative due to a reported net loss for the first half of the fiscal year, significant restructuring charges, and ongoing operational disruptions from a prior ERP system upgrade. While sales increased, profitability metrics declined, and the company faces multiple legal proceedings and an ongoing material weakness in internal controls. The low comparable store sales growth further contributes to the negative outlook.

Positives

• Net sales increased by 4.5% in Q2 and 6.5% in H1, driven by new store additions and comparable store sales growth.
• Comparable store sales increased by 1.1% in Q2 and 0.7% in H1, indicating continued customer traffic growth.
• Net cash provided by operating activities significantly increased to $132.6 million for the 26 weeks ended June 28, 2025, up from $49.4 million in the prior year.
• The company's restructuring plan actions were substantially completed in Q2 2025, aiming for long-term profitability and optimized growth.
• Introduction of approximately 250 new private-label SKUs is expected to provide better value for customers and higher margins for the company and independent operators.
• Improved data visibility from ERP system upgrades is helping manage and forecast the business.

Negatives

• Net income decreased by 64.6% to $5.0 million for the 13 weeks ended June 28, 2025, and the company reported a net loss of $18.4 million for the 26 weeks ended June 28, 2025.
• Operating income declined by 51.1% for the 13 weeks ended June 28, 2025, primarily due to significant restructuring charges.
• Gross margin declined by 30 basis points in Q2 2025, largely due to pricing adjustments on everyday staples.
• Interest expense, net, increased by 17.7% in Q2 and 49.6% in H1, driven by higher average principal debt outstanding.
• The company's disclosure controls and procedures were not effective as of June 28, 2025, due to an ongoing material weakness in internal control over financial reporting related to ERP system deficiencies.
• Comparable store sales were negatively impacted by a decrease in average transaction size (0.4% in Q2, 1.2% in H1).
• The company faces multiple federal securities class action and stockholder derivative lawsuits related to alleged false statements and internal system issues.

Risks

• Macroeconomic conditions, including supply chain and labor challenges, inflation, disinflation, and tariffs, continue to impact business operations and independent operators' costs.
• Increased promotional and pricing activities from competitors are putting pressure on the company's value proposition.
• Planned construction and opening of new stores may continue to be negatively impacted by increased lead times for materials, permits, and utilities, as well as higher construction and development costs.
• The ERP system upgrades implemented in August 2023 resulted in significant disruption to business operations, including ordering, inventory, and payment processing, adversely impacting results through fiscal 2025.
• The material weakness in internal control over financial reporting, related to IT general computer controls, is ongoing and could affect the ability to prevent or detect material misstatements.
• The company is unable to determine the probability or reasonably estimate the range of losses from ongoing federal securities class action and stockholder derivative lawsuits.

Future Outlook

The company plans to open 33 to 35 net new stores in fiscal 2025, focusing on existing and high-priority adjacent markets. Investments in distribution infrastructure will shift towards lower-cost dry goods centers to enhance capacity and improve inventory management. The remediation plan for the material weakness in internal control over financial reporting is expected to be fully completed during fiscal 2025. The company is assessing the impact of the newly signed One Big Beautiful Bill Act and expects to reflect its effects in the third quarter of fiscal 2025.

Management Comments

• We are actively pursuing initiatives to increase average basket size through our deployment of enhanced in-store merchandising and execution to further improve the shopping experience.
• While we continue to believe in our long-term growth potential, we reviewed our strategic initiatives and priorities in late fiscal 2024 and determined to simplify our near-term growth strategy in order to build a stronger foundation from which to scale in the future and to drive sustainable and disciplined growth.
• Our near-term integration focus is expanding the assortment, investing in store refreshes and new fixtures and introducing some of our marketing programs to the Southeast region (regarding United Grocery Outlet acquisition).
• We have since improved the data visibility to help us manage and forecast the business and we continue to work to further improve visibility into additional operating data, and to increase the speed and efficiency of the tools that we and our IOs use to manage the business (regarding ERP system).
• Our disciplined buying approach has produced consistent gross margins throughout economic cycles, which we believe has helped to mitigate adverse impacts on gross profit and results of operations.
• We continue to closely manage our expenses and monitor SG&A as a percentage of net sales.
• Management believes that we do not have any pending legal proceedings that, separately or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows (excluding the disclosed lawsuits where outcome is uncertain and loss not estimable).

Industry Context

The company's business continues to be impacted by broader macroeconomic conditions, including supply chain and labor challenges, inflation, and subsequent disinflation, which affect consumer behavior and operating costs. There has been an observed increase in promotional and pricing activities from key competitors, intensifying pressure on the company's relative value proposition. The company's extreme value model has historically benefited from periods of economic uncertainty, suggesting a counter-cyclical advantage in a challenging economic environment.

Comparison to Industry Standards

• The filing does not provide specific comparable companies, projects, or results for direct industry standard assessment.

Management Changes

Corporate Governance

Legal Proceedings

• A federal securities class action lawsuit, Liberato v. Grocery Outlet Holding Corp., et al., was filed on January 30, 2025, alleging violations of federal securities laws due to materially false and misleading statements and/or failure to disclose material adverse facts regarding the transition to new internal systems.
• A second related federal securities class action lawsuit, Cavanaugh v. Grocery Outlet Holding Corp., et al., was filed on March 28, 2025, with similar allegations.
• These class action lawsuits were consolidated on June 3, 2025 (Consolidated Class Action Lawsuit), with an amended complaint due August 19, 2025, and the company's motion to dismiss due October 21, 2025.
• A federal stockholder derivative lawsuit, Conners v. Sheedy, et al., was filed on April 28, 2025, against certain directors and former officers, alleging breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement, waste of corporate assets, and Exchange Act violations, based on similar allegations to the class actions.
• A second federal stockholder derivative lawsuit, Jackson v. Lindberg, et. al., was filed on May 2, 2025, with similar allegations.
• These derivative lawsuits were consolidated and stayed on July 29, 2025, pending resolution of the company's motion to dismiss in the Consolidated Class Action Lawsuit.
• The company intends to vigorously defend against these lawsuits, but is currently unable to determine the probability of the outcome or reasonably estimate the possible range of losses.

Related Party Transactions

• Leases for 14 store locations and one warehouse location from entities in which Eric Lindberg, Jr. (Chairman of the Board and former CEO) or his family had a direct or indirect financial interest. Lease payments totaled $1.9 million for the 13 weeks and $3.8 million for the 26 weeks ended June 28, 2025.
• Independent operator notes and receivables, representing funds loaned to independent operators, totaled $79.0 million gross as of June 28, 2025.

Stakeholder Impact

• Shareholders: Negative impact due to net loss, decreased EPS, ongoing legal proceedings, and potential share price volatility.
• Employees: Approximately 40 full-time employees were reduced in Q1 2025 as part of the restructuring plan.
• Customers: Benefit from pricing adjustments on everyday staples and the introduction of private label products aimed at providing better value and consistency.
• Independent Operators (IOs): Continue to face staffing, labor, and utility cost challenges; some receive assistance through the Temporary Commission Adjustment Program (TCAP); their businesses were also impacted by ERP system disruptions.
• Creditors: The company remains in compliance with all financial covenants under its 2023 Credit Agreement, indicating continued ability to meet debt obligations.

Next Steps

• Open 33 to 35 net new stores in fiscal 2025, focusing on existing and high-priority adjacent markets.
• Continue to invest in lower cost distribution centers for dry goods to enhance capacity and improve inventory management.
• Complete the full remediation of the material weakness in internal control over financial reporting during fiscal 2025.
• Assess the effects of the One Big Beautiful Bill Act (OBBBA) and expect to reflect them in the 13 weeks ended September 27, 2025.
• The lead plaintiffs' amended complaint in the Consolidated Class Action Lawsuit is due August 19, 2025.
• The company's motion to dismiss in the Consolidated Class Action Lawsuit is due October 21, 2025.

Key Dates

Recommendation

The company's reported net loss for the first half of fiscal 2025, significant restructuring charges, and ongoing material weakness in internal controls indicate substantial operational and financial headwinds. While sales growth is present, it is overshadowed by declining profitability and modest comparable store sales. The unresolved legal proceedings add further uncertainty and potential financial burden. These factors suggest a challenging near-term outlook, making the stock a less attractive investment at this time.

Keywords

Grocery Outlet, Retail, Extreme Value, Discount Grocery, SEC Filing, 10-Q, Financial Results, Restructuring, ERP System, Legal Proceedings, Comparable Sales, Net Sales, Profitability, Cash Flow, Independent Operators