Grocery Outlet Holding Corp.

And welcome to Grocery Outlet F2Q 2023 Earnings Result Conference Call. At this time, all participants are in the listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require upgrade assistance during the conference, please press star zero on the telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Lynn Walter from ICR. Thank you, Ms. Walter. You may begin.

Good afternoon and welcome to Grocery Outlet's call to discuss financial results for the second quarter ending July 1st, 2023. Speaking from management on today's call will be RJ Sheedy, President and Chief Executive Officer, and Charles Brocker, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live and a recording will be available via telephone playback on the investor relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of the federal securities law. All statements that address future operating, financial, or business performance or the company's strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release, as well as the company's periodic reports filed with the SEC, all of which may be found on the investor relations section of the company's website or on sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information except as required by law. These statements are estimates only and not a guarantee of future performance. During today's call, the company will also reference certain non-GAAP financial information, including adjusted items, reconciliation of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release and the company's SEC filing. With that out of the way, I would now like to turn the call over to RJ.

Good afternoon, everyone, and thank you for joining us. We are very pleased with our second quarter results and the continued momentum in our business. Our differentiated model and strong value proposition are driving industry-leading sales growth, and we are fulfilling our mission of touching lives for the better. More customers are shopping us for the first time, existing customers are spending more with us, and overall customer satisfaction continues to increase. Second quarter sales grew 13%, driven by a 9% increase in comparable store sales, and total quarterly sales reached a new record of over $1 billion. Traffic remained very strong in the quarter, increasing 9%, and average basket remained high and consistent with last year. Gross margin was also very strong in the quarter, up 120 basis points to 32.3%. This, together with sales growth, drove a 23% increase in adjusted EBITDA to $71 million. At the end of the second quarter, we operated 447 stores across eight states. We remain pleased with the performance of our newer stores, with sales levels and growth in line with our historical performance and underwriting model. We continue to see positive momentum in our newer markets, particularly in the east, where we are increasing awareness in our customer base through targeted marketing investments, strong IO execution, and expanding store count. Our strong performance is driven by our differentiated model and compelling value proposition. We save customers an average of 40% compared to conventional grocery retailers, with our best WOW items saving customers 70% or more. Shopping at Grocery Outlet combines a fun treasure hunt experience with the convenience of a small box format. And our independent operators provide a localized assortment and personalized customer service while giving back to the communities in which they live and operate. We are a unique, high growth, specialty discount retailer. We have delivered strong and consistent performance with an average annual same store sales increase of 5% over the past 20 years. As a result, we have steadily increased our market share and touched countless lives for the better. Providing access to high-quality food, saving customers money, and giving back to our communities is a formula that works across demographics, geographies, and macroeconomic environments. And we are still in the early stages of our growth story. Our model is unique in two distinct ways, opportunistic purchasing and independent operators. Our opportunistic purchasing model delivers an ever-changing assortment of high-quality items at prices that are well below our competitors. We have a talented and tenured team of specialized buyers who work in close partnership with suppliers to deliver wow items to our customers. We work strategically and creatively to provide solutions to our partners while strengthening the trusted relationships that we share. We also manage a flexible and agile supply chain to quickly move all types of products from suppliers to stores and customers. This business was built from the ground up around the opportunistic purchasing model, and we have been perfecting and expanding upon it for more than 75 years. Our growing size and scale make us a stronger partner with even better access to products. The independent operator model is equally important to our success. Our IOs are entrepreneurs, merchants, business owners, and community leaders. We partner with them to deliver the wow shopping experience to customers, and we support them in every aspect of the business. Operators enjoy the autonomy of running their own stores, selecting localized product, making merchandising decisions, and providing outstanding service to their customers every day. Operators also offer employment and career growth opportunities for their teams, and they demonstrate community leadership by giving back. Running a store is hard work, but independent operators are incredibly talented and resourceful. They are true entrepreneurs in every sense of the word. Throughout our history, operators have navigated numerous changes in the business environment, always meeting challenges head on. Current operator satisfaction and engagement levels are high, and voluntary turnover remains consistently low. The grocery outlet model offers very attractive operator economics with a low upfront investment, healthy annual income potential, and unlimited upside. We split gross profit with our operators in the form of commission payments, and we therefore both benefit from sales and margin growth. In the second quarter, comparable store operator commission payments increased by more than 10% versus the prior year. Since 2019, average operator net income has grown in the low single digits on an annual percentage basis. Strong commission growth combined with labor and operating efficiencies have more than offset higher store level expenses such as wages and utilities. And last year, average mature store operator net income exceeded $250,000. We are always investing to support long-term operator success. We deploy capital to build new stores, we can sign inventory to operators, and we market to customers across many channels. We also provide financing to help IOs with new store startup costs, and we offer cash flow support as needed during the early years as stores ramp. We are continually reinvesting capital to upgrade fixtures, implement new technology, and deliver tools that help IOs grow sales and profit. For example, we offer platforms and support to help operators with local marketing and community engagement that complement our company-wide marketing initiatives. Another example is our forthcoming store portal, which is a new platform that will provide operators with better analytics and easier access to information to make smarter business decisions. We look forward to delivering this new application to operators this quarter. Interest in becoming an operator is at an all-time high. We received nearly 30,000 leads last year, which is up 50% over the past four years. Becoming an I.O. is a highly selective process as we accepted less than 1% of interested candidates to the GEO family last year. Our selective recruiting process combined with a comprehensive training program continues to produce high-quality operators to support store growth. Our unique independent operating model demonstrates the power and differentiation of small business at scale. And the strong partnership we have with operators allows us, as we say, to out-chain the locals and out-local the chains. There is nothing else quite like it. Looking ahead, we have tremendous white space with the potential to operate over 4,000 stores in the US. We are continuing to invest in real estate and construction resources to fulfill our future store potential. We've recently hired new people to the team, and we are expanding strategic relationships with external partners, including large property owners. We are also considering opportunistic real estate and small regional acquisition opportunities that align with our geographic expansion and store growth strategies. We are excited about the many activities underway and our store growth potential in both infill and developing markets. Before turning the call over to Charles, let me finish with what matters most, our mission of touching lives for the better. We just completed our annual Independence from Hunger campaign. This is an event where our IOs partner with local nonprofits to provide critical food resources to their communities at the time of year when they need it most. In addition to the incredible efforts from our operators, our supplier partners also contribute by donating food and collaborating on events. I'm very proud to share that we raised a record $4 million this year, benefiting over 500 local organizations. We are equally proud of the $20 million that we've raised over the 13-year history of this program. In closing, I would like to thank our entire team and our I.O. partners for going above and beyond to serve our customers and communities. We appreciate all that you do to make the geo shopping experience one of a kind. We are well positioned to build on this current momentum, and we are pleased to be raising our guidance for the year. Looking forward, we are excited for the growth ahead and the positive impact we will have on an ever-expanding group of customers.