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Grocery Outlet Holding Corp. GO has faced a tough period, with its stock declining significantly by 19.4% over the past three months. This decline is notably steeper compared to the industry's marginal growth of 0.6%, and the substantial 7.6% increase in the S&P 500 during the same timeframe. The current stock price is also down 40% from its 52-week high of $36.54.

Grocery Outlet is currently trading below both its 50-day and 200-day moving averages, which highlights the company’s potential bearish sentiment, suggesting that investors are cautious about its near-term and long-term performance. This underperformance relative to these moving averages often signals that the stock is lagging behind its recent historical price trends, reflecting worries about the company's operations.

From a valuation standpoint, Grocery Outlet is trading at a premium compared to the industry average. The company's shares are currently priced at a forward price/earnings (P/E) ratio of 20.90x, which is higher than the industry average of 17.80x.

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Factors Impacting the Stock Performance

Grocery Outlet has been grappling with a system transition to new inventory and financial platforms, resulting in significant operational disruptions and unforeseen costs. This has led to a decline in gross margin and has impacted the company's financial results. Specifically, the system transition had a notable impact on the first-quarter gross margin, reducing it by 210 basis points to 29.3%. This decline underscores challenges related to managing warehouse product expiry data and store-level reporting effectively.

Moving on, the company is contending with rising SG&A expenses, driven significantly by increased costs related to independent operator commissions, store occupancy and incentive compensation. This uptick led to a 13.3% rise in SG&A costs to $303.4 million in the first quarter, with SG&A expenses as a percentage of net sales deleveraging by 160 basis points to 29.3%.

Looking ahead to the full year, the company expects a gross margin contraction of 80 basis points, prompting a downward revision in its earnings forecast. System integration disruptions pose risks to near-term performance, with an anticipated impact of 100 basis points on second-quarter gross margin. The company foresees adjusted earnings to fall within the range of 89 to 95 cents per share for 2024 compared to the previously projected range of $1.14 to $1.20 per share.

Downward Trend in Estimates

Over the past 60 days, the Zacks Consensus estimate for the current fiscal year has declined 21% to 93 cents per share. This forecast suggests a decrease of 13.1% from the year-ago levels, highlighting the company’s cautious outlook and the difficulties of market uncertainties.

Final Thought

Grocery Outlet faces a daunting road ahead, characterized by operational turbulence and financial strain. The company's recent underperformance relative to industry benchmarks and its premium valuation underscore significant investor caution. While efforts to stabilize operations and manage costs continue, the downward revisions in earnings forecasts and consensus estimates reflect ongoing challenges. Presently, the stock carries a Zacks Rank #4 (Sell).

3 Picks You Can’t Miss

Here, we have highlighted three better-ranked stocks, namely, Vital Farms VITL, Ollie's Bargain Outlet OLLI and Colgate-Palmolive CL.

Vital Farms offers a range of produced pasture-raised foods. It currently sports a Zacks Rank #1 (Strong Buy). VITL has a trailing four-quarter average earnings surprise of 102.1%. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Vital Farms’ current financial-year sales and earnings suggests growth of 22.6% and 62.7%, respectively, from the year-ago reported numbers.

Ollie's Bargain, the extreme-value retailer of brand-name merchandise, currently carries a Zacks Rank #2 (Buy). OLLI has a trailing four-quarter earnings surprise of 10.4%, on average.

The Zacks Consensus Estimate for Ollie's Bargain’s current financial-year sales and earnings indicates a rise of around 7.9% and 12.0%, respectively, from the year-earlier levels.

Colgate-Palmolive, a leading oral care company, currently carries a Zacks Rank #2 (Buy). CL delivered an earnings surprise of 4.4% in the trailing four quarters, on average.

The Zacks Consensus Estimate for Colgate’s current fiscal-year sales and earnings suggests growth of 3.9% and nearly 9.3%, respectively, from the year-earlier reported figures.

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Colgate-Palmolive Company (CL) : Free Stock Analysis Report

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Grocery Outlet Holding Corp. (GO) : Free Stock Analysis Report

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