Grocery Outlet's 3^rd secondary

Yesterday a holder of Grocery Outlet announced a secondary offering consisting of 10M shares plus an over-allotment of 1.5M. The shares are not primary. It was the company's third secondary offering since it went public last year. Grocery Outlet's focus on extreme value consumables is well-positioned for the recessionary consumer spending environment we will be in. The company provided a financial update in conjunction with the offering. Q1 comps accelerated to 17.4% from 5.1% sequentially. Operating profit is guided to be down 32% YOY due to non-cash stock compensation vesting. Otherwise, margins expanded some 100bps. Comps in the first three weeks of April have moderated to +HSD%.

Grocery Outlet has roughly 355 locally operated stores primarily in the West coast, which equates to a penetration rate below 10%. It sources 50% of its goods "opportunistically," purporting to save shoppers 40% on average. We need to vet the depth of its sourcing, the independent operator model, and the ability to expand on the East coast (acquired a small chain in P.A.). The company's steady financial performance certainly looks impressive, as seen below.

(VIEW LARGER IMAGE)

There is a strong investment case here with close to D.D. % store growth, the potential to expand nationally, MSD% comps that are accelerating, an ideal environment to locate new stores, and a consumer environment to drive customers to the concept. We are adding the company to our Long Bias list. Some may be put off by the 40x multiple despite the accelerating trends and tailwinds from the economic environment. We would then point you towards Sprouts Farmers Market, which has several similarities, but note that it is not focused on value groceries and is also missing the recession-driven traffic increases.

Coca-Cola hurt by channel shift

Coca-Cola reported a seven cent EPS beat of $.51, the largest headline beat in many years, but operating margins contracted 30bps. Coca-Cola reported flat organic growth with N.A. up 4% while the Asia Pacific was down 7%. Through the end of February, volumes were up 3%, ex. China. March was negatively impacted in the away from the home channel but benefited from pantry loading in the at-home channel. The company said April MTD volumes had declined 25% due to declines in the away from the home channel. 50% of company sales are away from the home channel. Consumers order beverages much less frequently when ordering to-go or delivery, and events drive consumption. We are disappointed the company has not seen more of an offsetting demand increase in the home channel as consumers shift more calorie consumption there. We think analyst's estimates are too bullish on the speed of the recovery of dine-in sales. While we appreciate the strength of the company's brands globally at this valuation, we think companies that will benefit from the current environment at lower valuations are more attractive. We are removing Coca-Cola from our Long Bias list.

(VIEW LARGER IMAGE)

The cannabis black Friday

April 20^th or 420 for cannabis consumers is the industry's largest sales day. Last year Americans purchased $90M of cannabis for 420, three times normal sales figures according to research firm BDSA. Cannabis is an example of an industry that is benefiting from the current stay at home restrictions despite the changes to where the product is consumed. Cannabis sales spiked with the beginning of the stay at home orders in mid-March. After consuming the stockpiles, purchases have returned to an elevated rate, as seen in the following chart. Many states have designated dispensaries as essential businesses. Last week the order volume at Weedmaps, which enables online ordering and logistics for dispensaries was up 7x compared to last year. The cannabis industry may also prove to investors its recession resiliency with the much better data availability currently. Contact us if you are interested in our industry trackers.

(VIEW LARGER IMAGE)