Dive Brief:

• Grocery Outlet posted $764 million in net sales during the third quarter, a 17.1% year-over-year increase, the discount food retailer announced Tuesday.
• The chain saw identical store sales increase at a 9.1% clip during the period, down from 16.7% during the second quarter. Net income hit $40.5 million in Q3, more than three times the level the company recorded during the same period in 2019.
• ​Like other grocers, Grocery Outlet is seeing the lofty sales increases it experienced at the height of the pandemic decelerate as people boost their spending on food from sources other than supermarkets.

Dive Insight:

Grocery Outlet's Q3 results are another sign the extraordinary sales gains food retailers have enjoyed in 2020 are beginning to come down to Earth. 

The discounter saw average transaction sizes increase during the period, which ended Sept. 26, but recorded a decrease in store traffic as customers made fewer shopping trips, Chief Financial Officer Charles Bracher said Tuesday during the company's Q3 earnings call.

Grocery Outlet is not alone among grocers in seeing identical-store sales growth come down from the frothy levels recorded earlier in the year. Chains like Kroger and Albertsons have also recently reported slowing comps, although both of those companies, which operate larger stores with assortments that are more conducive to stock-up shopping, posted year-over-year same-store sales gains that were higher than the level Grocery Outlet saw.

Grocery Outlet, which has defined itself by scouring suppliers for sharp discounts and attracting consumers with a rotating "treasure hunt" of low-priced goods, has its eyes on significant expansion even as the at-home eating trend that has driven spending at grocery stores loosens its grip on the nation. The company, which as of the end of Q3 counted 372 stores in California, Idaho, Nevada, Oregon, Pennsylvania and Washington, believes the areas where it already operates and neighboring markets could support more than 1,500 new Grocery Outlet locations, CEO Eric Lindberg said during the call.

Grocery Outlet opened 10 new stores during Q3 and expects to debut seven more during the current quarter, which would bring the total number of new Grocery Outlet locations in 2020 to 34.

"We're continuing just to play the game that we play. We're buying products. We're investing in the infrastructure and the team. We're really working on the IOs to make sure the experience in the store is unbeatable value," Lindberg said, referring to the independent operators Grocery Outlet partners with to run its stores.

In a note to investors late Tuesday, analysts with R5 Capital Markets noted Grocery Outlet's comps came in below expectations, and indicated that elevated purchasing driven by the pandemic could eventually pressure the discounter's ability to obtain product deals.

"In our view, the sustainability of trip consolidation and closeout purchasing availability clearly need to be monitored. If they become established trends it would, in our opinion, put pressure on the equity," analysts Scott Mushkin and Matt Siler wrote.

While it has its sights set on growing its fleet of stores, Grocery Outlet has no plans to start tapping the roaring online grocery demand that is driving revenue for other grocers. Asked during the call why the company is opting to stay out of e-commerce, President R.J. Sheedy said its business model is not well-suited to digital sales.

"With regards to e-commerce, we have not changed our position, which is to say that it is not a priority for us right now," Sheedy said. "It's really hard to replicate the treasure hunt experience online. And then on top of that, just the close connection customers have with the operator and the overall in-store ... shopping experience" works better when people visit physical stores.