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Bull of the Day: Grocery Outlet Holding (GO)

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Grocery Outlet Holding Corp (GO - Free Report)  is a Zacks Rank #1 (Strong Buy) that owns and operates a chain of grocery stores in the United States. That might not sound exciting, but the company is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products that sells its products through a network of independently owned and operated stores. The company has a niche, offering discounted, overstocked and closeout products from name brand suppliers.

Grocery Outlet has just under 7000 full-time employees and is headquartered in Emeryville, CA. The company is mainly located on the west coast and Pennsylvania. After a big EPS beat and 17 new store openings, there are signs the company's goal to grow is panning out.

A Recent IPO

The company has been around since 1946 and decided to finally IPO in 2019 to grow the business. The stock opened up in the low $30s and is up about 35% since the debut price. While it has failed to print all-time highs in the recent up move, it was close.

Since the IPO, the company has beaten on EPS five out of five times. However, the last report was the biggest beat yet and should propel the stock to new highs before years end.

Surprise Beat on Q2 EPS

Earlier this week the company reported an 82% surprise beat on EPS along with a beat on revenues. Same store sales came in at +17%, while EBITDA was up 38% year over year. The company added 17 new stores in the quarter, bringing GO up to 362 locations in six states.

CEO Eric Lindberg had some comments on the quarter:

"We are very pleased with our strong operational execution in the second quarter. Our financial results reflect incredible teamwork across the organization including our independent operators, distribution center teams, and our corporate staff. While the safety of our communities and the entire Grocery Outlet team is our number one priority, we remain committed to delivering exceptional value to our customers while continuing to extend our reach."

Growth and Rising Estimates

The company is in its early stages of growth and excelling in a tough environment. With long-term plans to open up 4,800 stores, investors see massive potential for growth. Because of the great quarter and growth potential, analysts are hiking estimates and price targets.

Over the last 7 days, estimates for next year have ticked higher by 3%, from $1.01 to $1.04.

The quarter was very positive, but there was a big negative an analyst cited as a headwind. While the company is doing well in the pandemic environment, COVID related cost have cut into profitability. However, consumers see value in the company’s products, which is helping them gain market share. If those two factors can cancel each other out, earnings can continue and the long-term growth story is solid.

The Technical Take

The stock has been steadily grinding higher since the IPO. The previous quarter saw an earnings beat sold, only to be met with buying a month later. The current earnings report was impressive, so the stock has stalled after pulling back from all-time highs. The 21-day moving average seems to be support for now.

If the stock falls further, look to buyers to step in at the 50-day at $40. If the current levels hold, that means buyers defended the 61.8% retracement drawn from July lows to August highs. A move back over $45 would signal the bulls are in full control and should target the $48-50 area.

The stock will need to grow into its valuation for longer-term targets to work out. For those looking to hold the stock into its expansion, look for the $60 and $79 Fibonacci levels.

In Summary

Grocery Outlet Holdings has big potential to grow and reward investors that get in at current levels. 300 plus stores to almost 5,000 is a lofty goal, but if the earnings story continues, the growth aspect can accelerate. For those investors familiar with Ollies Bargain Outlet and the stock performance there, they should most certainly get familiar with GO.

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