Dive Brief:
- Grocery Outlet has filed a court motion to dismiss a class action lawsuit accusing it of misleading investors about difficulties the retailer encountered when it transitioned to an updated technology platform.
- The suit, filed earlier this year in U.S. District Court for the Northern District of California, alleges that the discount grocery chain harmed shareholders because it did not disclose the problems it had encountered, which the plaintiff says hurt the company’s results and caused its stock price to drop.
- The case should not be allowed to proceed because it does not “allege adequately a single false or misleading statement” on the part of the retailer’s executives, Grocery Outlet claimed in the motion.
Dive Insight:
The suit Grocery Outlet is challenging stems from the company’s decision to replace an aging technology platform with an upgraded system from SAP intended to streamline its operations and provide it with modern reporting, product, inventory and financial platforms. The new system got off to a shaky start when it went live in August 2023, which Grocery Outlet acknowledged in the motion.
“The SAP launch did not progress as smoothly as Grocery Outlet had hoped. During Q3 2023, it became clear that the systems transition had caused inventory and ordering management issues, hurting Grocery Outlet’s Q3 results,” the company said in its motion, filed Tuesday.
Grocery Outlet reported that the technology-related issues brought its gross margin down by almost 2 percentage points during the first quarter of fiscal 2024. The company’s stock price has lost more than half of its value since the SAP system began running.
The suit claims that Grocery Outlet was aware before the new system went into operation that it was not ready, adding that it had not properly tested how the technology would affect interactions between various aspects of its business, including procurement, inventory and warehouse management, and store-level reporting.
“Defendants touted the numerous benefits the new systems would provide, but concealed from investors that the Company had not yet completed critical preparations for implementing the SAP systems, yet they were planning to launch the Systems Transition anyway and attempt to troubleshoot on the fly,” according to the suit, which was filed in January and amended in August.
The suit also alleges that Grocery Outlet downplayed the extent of the hurdles the company faced: “As Defendants provided piecemeal admissions and disclosed the financial damage that the Systems Transition was inflicting on the Company, the stock price repeatedly declined even as investors were repeatedly, misleadingly told that the worst was behind them.”
In addition to the company itself, the suit names as defendants former Grocery Outlet CEO RJ Sheedy, who abruptly left the retailer in October 2024, and former CFO Charles Bracher, who departed in March 2024.
Although the tech rollout did not go as planned, Grocery Outlet claims that its leaders were transparent with investors and analysts about the problems the company was facing. The company also said that while its executives expressed optimism that the new system would improve the company’s operations, they were simply exercising their legal rights to make forward-looking statements.
“What Plaintiff alleges is not fraud at all, but hindsight disagreement with how Defendants executed a complex IT systems transition. The federal securities laws, however, do not punish imperfect execution or forecasts, or even executive optimism,” Grocery Outlet said in the motion.
Grocery Outlet also contends that its executives were upfront about the difficulties the company faced and acted properly when describing its actions and prospects.
“A company, like Grocery Outlet, that candidly acknowledges problems, reports their impact on the company’s bottom-line, and continues to guide investors based on its best, known expectations for the future is the exact opposite of one attempting to commit ‘fraud,’” the company said.
Grocery Outlet also claims in its motion that the plaintiff relied on details provided by former employees whom the retailer said are unreliable because they did not have first-hand access to the information they provided.
“The [former employees’] anecdotes describe internal friction familiar to any large IT implementation. … These allegations amount to little more than corporate water cooler talk, not evidence of fraudulent intent,” Grocery Outlet said in the filing.
The plaintiff is seeking a jury trial.
