Grocery Outlet Holding Corp.

Greetings and welcome to the Grocery Outlet second quarter fiscal 2019 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joe Pellin, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon, everyone, and thank you for joining us on today's call to discuss Grocery Outlet's second quarter 2019 results. Participants on this call will make forward-looking statements which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such items, including our outlook for fiscal 2019 and future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A description of these factors can be found in this morning's press release as well as in our registration statement and quarterly reports on Form 10-Q filings with the SEC, all of which can be found on our website at investors.groceryoutlet.com. We undertake no obligation to revise or update any forward-looking statements or information. During our call, we may reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure can be found in the supplemental financial tables included in this afternoon's press release and in our filings. We use non-GAAP measures as a lead in some of our financial discussions and we believe they more accurately represent true operational performance and underlying results of our business. Presenting on today's call will be Grocery Outlet's Chief Executive Officer, Eric Lindberg, Vice Chairman, McGregor Reed, President, RJ Sheedy, and Chief Financial Officer, Charles Brocker. Following our prepared remarks, we will open the call for questions. With that, I will turn it over to Eric.

Thank you, Joe, and good afternoon, everyone. Thank you for joining us today. McGregor, RJ, and I will share highlights from our second quarter, an overview of our differentiated business model, and an outline of our growth strategies. Charles will then review our financial results and provide outlook for our fiscal 2019. We're all really excited to be speaking to you today on our first call as a public company. But before we jump into it, I want to take a moment and thank our entire corporate team and our family of independent operators for their contributions in getting us to where we are today. Thank you. Looking back at our second quarter, we're very pleased with our results. We delivered top-line year-over-year growth of 12.2%, driven by a 5.8% increase in comp store sales. In addition, we've opened 30 new stores since the end of the second quarter last year and we're pleased with their performance. Our comp growth reflects broad-based strength across product categories and store vintages, as well as a modest benefit from a later Easter. We attribute our comp result to three primary drivers. One, the deep value and treasure hunt experience our assortment offers customers. Second, the wow shopping experience delivered by the independent operators. and third, the strong customer awareness and engagement resulting from our corporate and our operator marketing efforts. We'll talk about each one of these today. In addition to our strong top line growth, second quarter adjusted EBITDA increased 15% to 45 million and adjusted net income grew 12.1% to 14.5 million. We achieved a strong growth through gross margin expansion and tight expense controls while reinvesting in areas of our business that will support future growth such as new store development, buying, business technology. Power of our business model is clearly demonstrated by our long track record of strong financial performance. We have achieved 15 consecutive years of positive comps, delivering steady sales growth and consistent gross margins throughout economic and inflationary cycles. Our business model is unique in two primary ways. One, the way we buy, and two, the way we sell. We buy name brand consumables and fresh products directly from over 1,500 suppliers annually at significant discounts, and we pass those savings on to our customers through prices that are up to 40% to 70% below those of conventional retailers. Combination of extreme savings, the treasure hunt of ever-changing and unexpected deals, a locally curated assortment, and a friendly customer service creates what we call We sell through a network of independently owned and operated stores. Our independent operators, or IOs for short, are merchants and community members who are closely connected to the local customer. They are highly incentivized to grow sales and maximize margins, given that they share the gross profit 50-50 and there's no cap to their earning potential. This incentive keeps them highly engaged and fuels our collective success while reducing our fixed cost burden. We love the enthusiasm of the independent operators, which is reflected in their initiative and creativity as well as their sharing of best practices with one another. The combination of local decision-making supported by our corporate scale and resources allows us, as we say, to out-chain the locals and out-local the chains. This entrepreneurial model combined with our track record of growth attracts a lot of great I.O. talent to the organization. We continuously receive inbound interest from high quality candidates and are extremely pleased with the strong pipeline of qualified aspiring operators and training. Looking ahead, we remain committed to advancing the strategic initiatives that brought us to where we are today. First, we expect to deliver consistent long-term comp store sales growth of one to 3% annually, primarily through these drivers I mentioned earlier. delivering deep value and better treasure hunt experience with more WOW deals, supporting IOs and enhancing the WOW shopping experience, and driving increased customer awareness and engagement with marketing, both at the local and the corporate level. Second, our value proposition has broad appeal, and as such, our stores perform well across geographies and demographics. We see tremendous white space in front of us and plan to grow our store base at 10% annually with a healthy balance of openings across mature markets where we have high level of brand recognition and developing markets where we are building brand awareness. Third, we are committed to reinvesting our productivity savings back into the business to support future growth. We have a long history of consistent comp and gross margin performance, which has allowed us to continually reinvest back into the business to support future growth while maintaining steady bottom line margins. We remain committed to delivering consistent financial performance by staying true to our unique business model.