On Thursday, Wells Fargo (NYSE:WFC) initiated coverage on Grocery Outlet Holding Corp (NASDAQ:GO) stock with an Overweight rating and set a price target of $28.00. The firm highlighted the potential for earnings growth and multiple expansion as key drivers for the positive outlook on the discount supermarket chain's stock.
The analyst pointed to the current low market sentiment towards Grocery Outlet as an opportunity, noting the potential for a considerable upside to estimates. The firm acknowledged there are concerns regarding the company's business model and anticipates a possibly rough second half of the year.
However, the potential rewards are deemed to outweigh the risks, with a scenario analysis suggesting a price range between a 20% decrease and an 85% increase from the current level.
Grocery Outlet, known for its deep discount deals, has been identified as having a defensive demand-driven unit, which could be appealing during economic downturns. The firm also finds the stock's valuation attractive, citing the mid-teens earnings growth algorithm and a price-to-earnings ratio of 18 times projected for the year 2025.
The analyst's comments underscore the belief that as Grocery Outlet resolves its issues and gains better earnings visibility, the stock could experience significant price appreciation. The Overweight rating suggests that Wells Fargo sees Grocery Outlet's stock as a better value than the average stock in the analyst's coverage universe.
In other recent news, Grocery Outlet Holding Corp. reported a 7.4% increase in sales for the first quarter of 2024, reaching $1.04 billion, while facing a net loss due to system transition costs. Notably, the company's comparable store sales grew by 3.9%, surpassing the consensus estimate of 2.3%.
Despite these positive sales trends, Roth/MKM, UBS, and DA Davidson have all reduced their price targets for Grocery Outlet, maintaining a Neutral rating due to ongoing system-related issues and operational challenges. The company's system disruptions have resulted in lower-than-anticipated gross margins and profitability, impacting financial guidance for the year.
However, Grocery Outlet continues to expand, opening six new stores this quarter and planning to open 58 to 62 more throughout the year. These recent developments underscore the company's resilience amid operational challenges and its commitment to long-term growth.
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