Shares of Grocery Outlet (GO 0.26%) fell 10.5% on Wednesday, following the release of the discount supermarket chain's second-quarter earnings report.
Grocery Outlet's net sales declined 3.5% year over year to $775.5 million. New store openings only partially offset a 10% drop in comparable-store sales.
Higher commodity and freight costs are also weighing on Grocery Outlet's profit margins. The company's adjusted net income, in turn, plunged 27.1% to $23.3 million, or $0.23 per share.
Quarter to date, Grocery Outlet's same-store sales are down 6%. Management expects to end the third quarter with comps down "mid-single digits" on a percentage basis. Wall Street was expecting the company's Q3 comps to fall roughly 2.8%.
To offset sluggish store traffic, Grocery Outlet is testing new e-commerce systems, including delivery and in-store pickup options. Some analysts, however, view this change in strategy as a tacit admission from management that Grocery Outlet's in-store shopping format -- which relies on heavy discounts and a constantly changing assortment of goods -- is not working as well during the pandemic. "Grocery Outlet was previously hesitant to pilot e-commerce as the treasure hunt model does not translate well to online," analysts at investment bank Cowen said.
With the success of these new online initiatives also uncertain, many investors decided to reduce their risk and sell their shares of Grocery Outlet today.