Grocery Outlet Holding Corp.

together with expansion into new geographies. We also see opportunities to further develop newer sales channels, such as e-commerce, to grow our brand and accelerate our reach to new customers. We are pleased with the current trends in our business, and we continue to offer consumers the best value in food retail at a time when they need it most. Our compelling WOW shopping experience is attracting new customers, and existing customers are spending more with us. Consumers are feeling the strain of higher prices throughout the economy and we are helping them save money by offering high quality food at industry leading values. We are seeing healthy trends across all customer income levels and satisfaction levels are high with most customers expecting to maintain or increase their spend with us in the future. Moving now to product, we are seeing an increase in the breadth and depth of offers as we expand and strengthen our supplier relationships. There is a lot of disruption in the marketplace today, which is leading to a very strong closeout environment. We recently held our annual supplier conference where we met with many of our key suppliers. Some attendees were longstanding relationships, while others were newer to the GEO family. We came away very encouraged with the opportunities in front of us and how we can partner more strategically to grow our shared businesses. Let me provide a couple of examples from the many deals that we have recently purchased to illustrate the types of opportunities we are seeing. Example number one is the purchase of 170,000 cases of frozen chicken. This came from a supplier we've been doing business with for over 25 years. Our partner was left with excess inventory due to lower than expected promotional sales, and we were able to help them move the additional volume. We bought all of their excess inventory, moved it quickly through our supply chain, and were able to offer it to customers at a 60% savings. Example number two is the purchase of 120,000 cases of a leading brand of nutritional bars and drinks. In this situation, production ramped up through the pandemic, resulting in inventory that exceeded moderating demand levels. We partnered with the supplier to provide them with cost recovery while clearing out necessary space in their warehouse. We worked creatively to alleviate them of their supply chain challenge And in turn, we're able to offer our customers great items at a 70% savings to elsewhere pricing. These are just two examples of the thousands of WOW deals that excite customers and drive trips and baskets with new and existing shoppers. Equally important to compelling products are the independent operators who are at the heart of what makes Grocery Outlet unique and successful. They wow customers in their stores with localized deals, and they set themselves apart with their friendly service and community connection. Our IOs are energized by the current sales momentum, the new customers shopping their stores, and the healthy mix of variety and amazing deals from our supplier partners. We remain focused on supporting operators to drive sales and margin while improving their operating efficiency. One way we do this is by utilizing technology to modernize and simplify store processes and decision making. We recently rolled out a new handheld technology application to improve how operators receive product and manage inventory levels. This new technology system reduces manual product receiving work and improves data accuracy, leading to greater efficiencies in stores. Later this year, we will be deploying new enhancements to our proprietary ordering platform which will provide IOs additional data and insights to improve productivity and drive sales and margin. We also continue to invest in training to better support our IOs to help them grow their businesses. We actively develop a library of online content and modules as a resource for IOs to learn new systems and best practices throughout the store. We also facilitate regional workshops where operators collaborate on a variety of topics such as fresh merchandising, marketing, and community partnership. Turning now to store growth, we are pleased with the performance of our new stores, particularly those in developing markets, and we remain on track to open 25 to 28 net new stores this year. We continue to invest in real estate and construction resources, both internally and externally, to support our store growth and new market expansions. We are also actively engaging with new brokers and landlords and are considering opportunistic real estate as it becomes available from other retailers. Recruiting and training new operators is equally important to successful store growth. Our pipeline of aspiring operators and training, or AOTs, is healthy. We continue to enhance our training program, recently hosting a group of AOTs in our office for the return of GEO University. This is a multi-day program where AOTs are immersed in training sessions with our Emeryville team as well as experienced operators. They learn everything from the history of Grocery Outlet to current best practices and everything in between. The group left with a deeper understanding of our business and culture and a high level of excitement for success in their future stores. Let me now share an example of an operator who is successfully growing awareness and sales for positive impact. Dante Rose is the operator of our Sharswood Philadelphia store that opened last year. He grew up in the neighborhood and now, working with his family, is providing fresh, affordable food to consumers living in this urban community. Dante was recently recognized for his efforts and invited to the White House Conference for Health, Hunger, and Nutrition. He spoke about the grocery outlet model and how it enables him to run a successful business supporting an underserved area. Dante's entrepreneurial spirit and commitment to his community embody the power of our unique business model and our mission of touching lives for the better. In closing, I would like to thank Dante and all of our independent operators for their hard work and dedication to making Grocery Outlet an amazing experience for our customers. I am excited about the current momentum in our business and the many opportunities in front of us. We remain focused on executing our strategic plan to drive long-term growth and positive impact. I will now turn the call over to Charles to discuss our financials.

Thanks, RJ, and good afternoon, everyone. Our first quarter results exceeded our expectations as we delivered strong same-store sales growth, margin expansion, and expense leverage. Comparable store sales increased 12.1% driven by 7.9% growth in transactions and a 3.9% increase in average basket. Net sales increased 16.1% to $965.5 million as a result of our strong comp performance combined with the impact of 26 net new stores opened since the first quarter of 2022. During the quarter, we opened three new stores as planned, ending with 444 locations. We remain pleased with the performance of new stores, including sales volumes in newly opened sites, as well as the growth of recent vintages. Our first quarter gross margin increased 90 basis points to 31.1%, and gross profit increased 19.8% to $300.5 million. Gross margin came in ahead of our expectations and was driven by favorable buying and strong execution throughout the supply chain. SG&A expense increased 15.7% to $267.7 million compared to the first quarter of 2022. SG&A growth was driven by increased IO commission expense resulting from higher gross profit, store occupancy costs related to new store growth, and costs related to resuming our annual IO conference. As a percentage of sales, SG&A decreased 10 basis points versus the prior year, primarily due to occupancy and fixed cost leverage. Please note that we are now including depreciation and amortization in stock-based compensation expense in SG&A. Net interest expense increased 60.8% to $5.9 million due to the impact of higher interest rates on our variable cost debt partially offset by a reduction in average borrowings outstanding versus the prior year. Our effective tax rate during the quarter was 36.4%, which was above our normalized rate due to the impact of equity awards that vested below their grant price. Gap net income for the first quarter increased to $13.7 million, or 14 cents per diluted share. Adjusted EBITDA increased 36.9% to $63.1 million for the quarter, and our adjusted EBITDA margin increased 100 basis points from the same period last year to 6.5% of sales. Adjusted net income increased 40.7% to $27 million, or 27 cents per diluted share. During the quarter, we enhanced our financial flexibility and lowered our borrowing costs by entering into a new $300 million term loan and a $400 million revolving credit facility. As part of the refinancing, we paid down $60 million in debt, ending the quarter with $82.1 million of cash and $325 million of drawn debt. We generated $87.6 million in operating cash flow during the quarter and invested $38.5 million in CapEx, net of tenant improvement allowances, reflecting new store growth, upgrades to our existing fleet, and ongoing technology and infrastructure investments. Our inventory balance at quarter end was $316.4 million and remains healthy in terms of quantity, mix, and turnover. Next, let me provide some commentary on our outlook for the balance of the year. Given our strong first quarter performance and continued momentum, we are raising our guidance for the fiscal year. For the second quarter, we expect comp growth to be approximately 5% as we anniversary higher prior year growth. For the full year, we are raising our comp sales guidance to be in the range of 5% to 6%. Consistent with previous guidance, we expect to open between 25 and 28 net new stores for the year, with openings weighted towards the back half. In the second quarter, we expect to open two stores and close one store, with the balance of our new stores evenly split between the third and fourth quarters. In total, we now project fiscal 2023 net sales of approximately $3.9 billion. We expect gross margin for the second quarter and full year of approximately 30.7%. This represents an increase in our full year guidance reflecting our strong Q1 performance along with normal seasonal margin moderation in the back half of the year. With respect to the bottom line, we expect second quarter adjusted EBITDA of approximately 6.3% of sales. For the full year, we are raising our guidance for adjusted EBITDA to be in the range of $240 to $246 million. Moving down the P&L, we continue to expect net interest expense of approximately $22 million for the year, which reflects projected forward interest rates on $300 million of outstanding debt. We forecast a normalized tax rate of 28% in average diluted shares outstanding of approximately 101.5 million. As a result, we are raising our full year adjusted EPS guidance to a range of 96 cents to $1 per diluted share. With respect to CapEx, we continue to project approximately $155 million net of tenant improvement allowances, reflecting new store growth and continued investments in our store base and business infrastructure. As a reminder, our CapEx guidance includes build-out costs for stores that will open over the next 18 to 24 months. In closing, I want to thank our entire Grocery Outlet team and operator family for executing at a high level on behalf of our customers. We continue to deliver the best value in grocery retail, and we are excited about the growth runway ahead of us. We will now open the call up to your questions. Operator?

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please note to limit your questions to one question and one follow-up question. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from Robbie Owens from Bank of America. Please proceed with your question Robbie.