Grocery Outlet Holding Corp.

operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Christine Chen. Thank you. You may begin.

Christine Chen Good afternoon and welcome to Grocery Outlet's call to discuss financial results for the second quarter for the period ending June 29, 2024. Speaking from management on today's call will be R.J. Sheedy, President and Chief Executive Officer, and Lindsey Gray, Interim Chief Financial Officer and SVP of Accounting. Following prepared remarks from R.J. and Lindsey, we will open the call for questions. Please note that this conference call is being webcast live and 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 laws. All statements that address future operating, financial, or business statements performance, or the company's strategies or expectations or 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. And now I will turn it over to RJ.

Good afternoon, everyone, and thank you for joining us. We are pleased with our second quarter performance with gross margins and earnings coming in better than expected. Strong customer count continued throughout the quarter, even though comp store sales softened in late June, finishing slightly below our expectations. We made good progress with our systems transition work over the past three months, and the material P&L impact from this is now behind us. We are executing new store openings very well and ahead of schedule. We successfully completed the United Grocery Outlet acquisition on April 1st, and integration work is progressing nicely. Finally, we are excited by the ramping adoption of our personalization app, as well as the recent launch of our private label program. Our second quarter sales grew 12%, while comparable store sales increased 2.9%, which represents 12% growth on a two-year basis. Transaction count remains strong in the quarter, increasing 5%, which was partially offset by a 2% decrease in average basket. Traffic increases continue to be a combination of more new customers and existing customers shopping with us more frequently as we continue to deliver a compelling assortment of high-quality WOW items within an exciting treasure hunt experience. In addition to the 40 stores we acquired from UGO, we opened 10 net new stores in the quarter and recent vintage performance continues to ramp well and in line with expectations. Growth margin of 30.9% was 90 basis points ahead of expectations and a 160 basis point improvement from the first quarter. This was a very strong margin performance considering that it was net of about 100 basis points of residual systems transition impact, which came in as expected. Resulting adjusted EBITDA was $68 million, reflecting a 6% adjusted EBITDA margin. This was 60 basis points ahead of our expectations and a 220 basis points sequential improvement from the first quarter. Altogether, we are very pleased with our progress in returning gross margin and adjusted EBITDA to healthier levels. As a reminder, at the end of August last year, we upgraded our product, inventory, financial, and reporting platforms. This transition has disrupted our business operationally and financially since September, as we've discussed on our last three calls. In May, we announced that we had resolved the last two large remaining system issues impacting profit and that warehouse shrink had returned back to normal levels and we ended the commission support program for our operators in March. We also discussed how poor data visibility had resulted in lower than expected first quarter margins. Importantly, at that time, we had recently improved our payables process and restored data visibility for future margin management and forecasting. This enabled us to return the business to the healthy gross profit levels we are reporting for the second quarter, and I'm proud of how the team was able to execute on this. We continue to make good progress with ongoing systems transition work. Our effort is currently focused on improving visibility to additional operating data, increasing system speed, enhancing functionality, and optimizing the system for efficiencies. While these enhancements will improve aspects of our new systems that are still challenging to employees and operators, none of what remains should have a negative material impact to our future financial results. To support these efforts, we continue to bring on additional new resources and capabilities. We recently hired Sandeep Cholwa as our new SVP Chief Information Officer, reporting to our COO, Ramesh Chakala. Sandeep brings over 20 years of experience in developing, implementing, and managing technology and business strategy. Throughout his career, Sandeep has led several strategic technology and operational transformations and brings strong experience in enterprise platform development and management, including SAP. We also continue to bring on additional new resources to increase our in-house capabilities and further decrease our reliance on third party consultants. We implemented this new system platform to provide a modern foundation for future growth and scalability of our business model. We also had a strong business case to enhance earnings with improvements in our technology capabilities and business processes. While the implementation has proven to be significantly more challenging than we had planned, we continue to believe that the systems will provide all the fundamental business benefits we underwrote around efficiencies, capabilities, and improvements to inventory management, ordering, and merchandise mix for both GEO and IOs. While food inflation has been moderating, consumers are still challenged with higher food prices and other financial burdens. We continue to offer the best value in food, saving customers 40% on an average basket with many WOW items at 50% or more savings compared to conventional grocery retailers. While we continue to be positioned well, our comp sales softened at the end of June, which has continued thus far in the quarter. We believe the comp softening is the result of a slight year-over-year moderation in the value we provide to customers. There are three reasons for this. First, we are currently lapping our strongest opportunistic buying months last year when our value to customers was particularly strong. Second, in an effort to return the business to healthy margins, we over-indexed in some instances to price, which impacted customer value. Third, as we were making these adjustments, we experienced increases in promotional and pricing activities from key competitors, putting further pressure on our relative value. Improving customer value is within our control through our everyday business processes. We've been actively negotiating costs and adjusting prices to sharpen our value proposition in reaction to competitive dynamics, and we are quickly returning to our targeted values across the many metrics that we track and manage the business by. This model is extremely flexible, and we are able to pivot quickly given our nimble and dynamic buying and pricing model. And we have a long history of successfully navigating changing competitive environments. I'm confident that we will do the same in this instance as we continue to reinforce our value and strengthen our WOW shopping experience in the coming days and weeks. Our customer survey still show that low prices and value remain the most important criteria for store visits, and that satisfaction with GEO remains high. Customers also continue to indicate a high intent to spend the same or more at Grocery Outlet in the next 12 months as they search for value. We also continue to see good product availability across all categories and the closeout buying environment remains healthy. Our growing size and scale make us an even better partner as we were able to take more variety and volume across a wider geography. Turning now to store growth, We are opening new stores ahead of schedule and they are performing to plan. We opened 10 net new stores during the second quarter, increasing our store count to 524 locations at quarter end. This includes the UGO acquisition, which was completed during the second quarter, adding 40 stores to the network. We opened our first store in Delaware and our second store in Ohio with our entry into the Cincinnati market and we are now operating in 16 states. New market store economics are healthy, and we are pleased with the portability of our customer value proposition. We've also seen nice progress with ramping sales and profit for new market stores opened over the past several years. We've opened two additional stores so far in the third quarter, and we are on track for our remaining openings between now and the end of the year. Given the health of our store opening schedule, we now expect to add between 62 and 64 new stores this year, including the UGO acquisition. This range represents store growth of approximately 13% over last year. Our future store pipeline is very robust, and we are in a great position to deliver 10% new store growth in 2025. Our organic real estate activities are now focused on 2026 and 2027 store openings. We also continue to evaluate opportunistic real estate as a complement to our organic growth efforts. We are realizing our growth potential through extensive store openings and geographic expansion. And in so doing, we are offering affordable and healthy food at unbeatable value, touching more lives and communities for the better. Turning now to our recent acquisition, the integration of UGO is proceeding well. Our integration focus this year is on expanding the assortment, investing in store refreshes and new fixtures, and introducing some of our marketing programs to the Southeast region. We have already begun coordinating on buys and recently added new everyday low-priced products as well as incremental opportunistic items into the UGO stores. We are pleased with how the teams have integrated and we look forward to sharing our accomplishments with product sourcing and store improvements on our future calls. We continue to see high levels of customer engagement with our personalization app. Customer response has been strong with over 700,000 total downloads so far in sales penetration of 8% at the end of the second quarter up from 6% at the end of the first quarter. Our app allows us to communicate our weekly deals to customers, provide early access to special offers, and customize their treasure hunt experience. We are pleased to see that app basket size continues to be consistently higher than non-app transactions. We already see high customer engagement with our marketing. We believe that this app will increase engagement even further and lead to greater customer loyalty, which should accelerate trip frequency and share of wallet growth. Finally, we are very excited for the launch of our private label program with our first items recently introduced to stores. The first brand to hit stores is Simply Go. This brand represents our high quality food staples at extremely affordable prices. Our initial categories include beverage, dairy, baking, and pasta. This will be followed by two additional brands, Go Home and Haven and Go Paw and Pamper. Go Home and Haven will be used for household essentials as well as personal care categories. Go Paw and Pamper is our pet brand and will feature both pet food and accessories. We remain on track to introduce approximately 100 new private label SKUs by the end of this year. In addition to better value and inventory consistency for our customers, these initial products will deliver better margin for grocery outlet and operators. We enjoyed being together with all our operators during our annual regional roadshow in May where we updated them on our business initiatives and listened to their feedback. I would like to personally say thank you to our owner-operators for their grit, determination, and support through what has been a challenging year of systems, issues, and solutions. You all are amazing partners, and I appreciate you. I would also like to thank the entire Grocery Outlet team for their dedication and perseverance, which enable us to support our I.O. partners and customers. I'm humbled and inspired every day by the amazing people that are part of this Grocery Outlet family. Before turning the call over to Lindsay, Let me finish with what matters most, our mission of touching lives for the better. We just completed our annual Independence from Hunger campaign. During this event, our IOs partner with local nonprofits to provide critical food resources to their communities at the time of year when they need it most. Our supplier partners also contribute by donating food and collaborating on events with our IOs. I'm very proud to share that we reached a new record and raised $4.9 million this year, the equivalent of approximately 10 million meals benefiting over 450 local organizations. We are equally proud of the over $25 million that we've raised over the 14-year history of this program. That's a wow. In closing, I remain very confident in our business fundamentals and our ability to realize our near and long-term growth potential. Our differentiated model and value proposition continue to be the drivers of our sales growth. We are a unique specialty discount retailer with a long history of consistently high top-line sales growth. We are aggressively pursuing the tremendous white space in front of us of operating over 4,000 stores in the U.S., and we look forward to introducing our brand to new communities as we expand. And now, I would like to turn it over to Lindsay to discuss our financials.

Thanks, RJ, and good afternoon, everyone. Net sales increased 11.7% to $1.13 billion during the second quarter due to new store sales and a 2.9% increase in comparable store sales, which represents 12% growth on a two-year basis. Comp transaction growth of 5.1% was partially offset by a 2.1% decline in our average basket. We opened 10 net new stores during the quarter, ending with 524 locations, including the UGO acquisition. As RJ mentioned, we remain pleased with the performance of new stores and store openings continue to track ahead of schedule. Our second quarter gross profit increased 6.9% to $349.2 million. Gross margin rate of 30.9% was 90 basis points ahead of expectations. This includes approximately 100 basis points of residual impact from our systems transition, which came in as expected. SG&A expense increased 11.4% to $323.1 million compared to the second quarter of 2023. This includes a $3.8 million residual impact from systems-related commission support, which came in as expected. Net interest expense increased 16.6% to $5.6 million, driven by higher interest rates and higher net borrowings versus the prior year. Our effective GAAP tax rate during the quarter was 31.9%. GAAP net income for the second quarter was $14 million, or 14 cents per share. Adjusted EBITDA was $67.9 million for the quarter, and our adjusted EBITDA margin was 6.0% of sales, 60 basis points ahead of our expectations. Adjusted net income was $25.1 million for the quarter, or 25 cents per diluted share. Turning to our balance sheet, we ended the quarter with $67.1 million of cash. Inventory at the end of the quarter totaled $367.3 million. Total debt was $379.2 million at the end of the second quarter, with net leverage of about 1.4x. During the second quarter, we repurchased 1.1 million shares of stock, totaling $25 million at an average price of $22.66. Now on to guidance. For the full year, we now expect comp store sales growth of approximately 3.5%. We expect comp growth in the third quarter to be approximately 1.5%. We now expect to add a total of 62 to 64 net new stores this year, up from 58 to 62. This includes the 40 newly acquired United Grocery Outlet stores, as well as 22 to 24 new grocery outlet stores. In total, we continue to expect fiscal 2024 net sales between 4.3 to 4.35 billion dollars. For the full fiscal year, we continue to expect gross margin of approximately 30.5 percent. We expect gross margin for the third quarter of approximately 31.0 percent. For the full fiscal year, we continue to expect adjusted EBITDA to be in the range of 252 to 260 million dollars. We expect third quarter adjusted EBITDA margin of approximately 6.4%. For the year, we continue to expect DNA to grow in the mid-20s on a percentage basis. We continue to expect share-based compensation of approximately $34 million. Net interest expense is still anticipated to be approximately $21 million. We are now forecasting a normalized tax rate of about 32% due to higher non-deductible share-based compensation expense. We now expect average diluted shares outstanding of approximately $100.5 million down from $101 million due primarily to lower share count from share repurchases. We now expect CapEx net of tenant allowances of approximately $200 million up from $175 million, reflecting higher new store growth for both this year and 2025. We continue to expect full-year adjusted EPS of $0.89 to $0.95 per diluted share. In closing, I want to reiterate that our underlying business remains strong and we are well positioned for long-term growth. I would also like to thank our independent operators for all that you have done and continue to do on a daily basis to support and execute our mission of touching lives for the better. A big thank you as well to the Grocery Outlet team for continuing to support IOs and customers during a challenging systems transition year. We will now open the call up to your questions.

Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. We ask that you please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Christina Katai with Deutsche Bank. Please proceed with your question.

Hi, good afternoon and great to see the systems integration issues are finally behind us. I wanted to ask about the EPS upside that you saw in the quarter. So what works better in the second quarter that allows gross margin to be that 90 basis points ahead of plan? And as we think about the reiterated 30.5% gross margin for the year, How should we think about how much of that is conservatism versus anything you might have seen in the competitive environment or any investment that you might have to make in price? And then I'll have a follow-up.

Yeah. Hi, Christina. This is Lindsay. I can take that. So as RJ mentioned, yeah, we definitely had some EPS upside during the quarter. A few things lending to that, definitely strong margins is the first one, and so a few factors at play there, as RJ mentioned. Some strong margin coming in, a little bit of over-indexing on price, which we mentioned, and a few other factors at play, just a strong environment. So that margin definitely flowed through down healthy SG&A as well. some different decent leverage there, and then down to EPS. So that was where we saw the EPS upside in the quarter. But when you look at the full year and our guidance for Q3 of 31, and then the full year guidance of 30.5 that we're holding, we're holding growth margin guidance for the year at 30.5 to reflect investments in price. We'll be making in the second half to drive traffic and comp. So this combined with the lowered comp expectations roughly kind of offsets the adjusted EBITDA and EPS upside in the second quarter that we had. And so as a reminder, as we find margin improvements through buying, IO ordering, allocating, et cetera, we prioritize reinvesting in value. So that's sort of how it tracks through to the 30.5 for the year.

Thank you for that, Lindsay. And then just my follow-up is transactions came in really strong in the second quarter, but you did note some softness that you saw later on. Maybe can you talk a bit more about July and early August trends relative to that implied 3.5% back half comp and just how GEO is positioned, again, in a potentially more competitive environment and you said some price investments. How should we think about the magnitude? Thank you.

Yeah, happy to take that as well. So we usually don't comment on intra-quarterly trends, but we were pleased with April and May, and we saw comp soften at the end of the quarter. And so as we're looking on the go-forward basis, just as a reminder, July and August, we're comping against some pretty healthy levels from last year, and then September is really when we start lapping the systems impacted. And so that all is baked into our comp forecast and our guide for Q3.

Okay, great. Thank you. Best of luck.

Thank you. Our next question comes from Oliver Chen with TD Cowen. Please proceed with your question.

Hi, RJ and Lauren. Regarding the commentary on softening in the quarter, you gave those three helpful points. What will happen in 3Q and 4Q? How do the opportunistic comparisons look? And also in your comments on promotions, that might be out of your control, as well as over-indexing to price. Just would love your thoughts as we think about our comp forecast. And the average basket being negative, will that trend continue? Is that in line with what you expected for what your guidance calls for? Lastly, you mentioned, if I heard it correctly, new systems are still challenging or getting acquainted with new systems. What did you mean there, and will that, you know, add risk factors to what you see unfolding? Thank you.

Okay, sure. Hey, Oliver, thanks for the question. I'll take a couple of those, and I'll ask Lindsay to address your question about basket. In terms of the calm softness, it's really think about the confluence of the three factors that I mentioned. in my comments that made this a more dynamic and, you know, I'll say just challenging to manage than anticipated. We always balance value with margin. It's what we do on a daily basis. It was very unique to have these shifts internally and externally happening in such a short period of time, as was the case over these past few months. Important to note that the business is healthy, 2.9% comp. 5% customer count, really healthy two-year stack of 12%, and even more so when you look at customer count on a two-year basis, which is 14%. So we feel really good about the underlying health of the business. We also are confident, as mentioned, in the adjustments that we've already been making to return the customer value to even deeper levels and really increase the level of excitement. The promotional activity, we did notice an increase activity from May, June, into July. competitors have been more aggressive with promotions to turn some of their negative customer count and volume around. We've also seen some discount retailers lowering everyday prices recently. Overall, though, promotional levels are rational. They're now back close to where they were in 2019. So nothing overly concerning to us about the current level of promotional activity. And then as we move forward through the rest of this year, our ability to continue to offer great value and excitement and continue to drive healthy comp and customer count. As far as the system challenges go, yes, work still does continue. Noted in my comments those areas that we're working to enhance around bringing on more operating data, increasing system speed, enhancing functionality and others. This work will improve on some of these things that are still challenging, harder with some manual work rounds in certain cases for the team here as well as for operators. We don't expect any of them to have a meaning negative P&L impact. We're past what we've talked about, those impacts in this most recent quarter and then looking further back as well. And as we roll out these enhancements, additional fixes, we will begin to realize the many benefits that were part of the initial underwriting and why we're excited to be part of this new modern platform to support growth and introduce new capabilities. And Lindsay, on Oliver's question about the basket.

Yeah. Hey, Oliver. It's Lindsay. So I can talk to you a little bit about the basket. So obviously, pleased with the continued... strength in transactions up 5.1%. Ring was down 2.1% year over year, due both just to lower units and higher trip frequency year over year. AUR is still positive and accelerated sequentially. And then just within the basket, just recall that AUR and UPT are not directly comparable due to our changing assortment, but AUR increased and UPT was down, just to give you that extra kind of flavor there.

Okay, last follow-up. New store growth is encouraging. What is underlying the rationale for raising the outlook on new store growth? And also, are there any details you can share regarding new store productivity levels and what you're seeing or thinking there? Thanks for everything.

Yeah, sure. The team has been executing really well. We've been able to get stores opened on time and address many of the you know, issues that we've dealt with in the past that has caused some slippage. So we're all over this and, you know, therefore able to increase the guidance and expectations for the number of stores that we're getting open this year. Same expectations for 2025 and go forward, which is that 10% target. And as mentioned, you know, feeling good and seeing good results with new New stores opening, that's both in infill and developing markets, and those that we've opened over the past several years are ramping well and in line with our underwriting expectations.

Thank you. Best regards. Thank you.

Thanks. Our next question comes from Robbie Ohms with Bank of America. Please proceed with your question. Oh, hey, RJ.

I just want to follow up on the, you know, the guidance and the acceleration and comps for the back half and how you get there. So you're going to get more promotional and that'll drive stronger traffic, but does that, that won't have a negative impact on the average transaction or basket that's already running negative? Or, you know, I'm just, can you just help understand like how the balance of transaction ticket and traffic plays out as you get more promotional and drive the acceleration in comp?

Yeah, sure, I'll take that one. So the activities that are underway is just making some adjustments, sharpening how we negotiate costs and set prices, to deliver the best value and excitement to customers while maintaining healthy margins. We're also investing in price and targeted areas. We're leaning into marketing activities to highlight those values and the treasure hunt that we're delivering to customers. We've already started to see those positive leading indicators. As we've been making these adjustments, I'm confident for the positive impact this will have in the stores and our sales. Reflected in our guidance is the result or the expectation for the work that we're doing and how it will translate to customer excitement and sales, Also factored into our guidance, and Lindsay mentioned, in September, we start to anniversary some of the impacts from the systems implementation, which, of course, carried forward from a sales standpoint through the fourth quarter. And so we will see the impact to comps, positive impact to comps this year as we're anniversarying those. together then with the work that's ongoing, always delivering value, and then, again, maintaining healthy margins for what we have embedded in our guidance in the second half of the year.

And then my follow-up, RJ, can you remind me, so when competitors, you know, target you, see some over-indexing of price, how much of pricing changes are centralized versus, you know, are the IOs independently responding more than normal because of you know, higher prices that they went out with, and then they had to, you know, kind of just walk us through how the IOs are managing these, you know, price changes.

Right, yeah, it's both. So we set prices centrally, and then operators do have autonomy to adjust pricing in the stores. Their pricing activities are a small percentage of the overall assortment, but they'll move some prices and items up and down. depending on their local competitive situations, current pricing at that time, and then also quantities that they've ordered and how they've merchandised it and things that they want to promote locally. So it's a blend of both us and the operators making those changes, and in that way I think gives us the sharpest, most local pricing specific to each store and each market.

Got it. Thanks so much.

Thank you. Our next question comes from Corey Carlo with Jefferies. Please proceed with your question.

Great, thanks. RJ, just to follow up on the quarter date trends that you've highlighted and the trends that you saw in June as well, as you think about the three factors that you outlined, do you see that impacting your basket more or Is it traffic that you're really seeing the delta in? Where are we seeing it? And what do you think are the easiest ways to address these dynamics?

Yeah. Hi, Corey. Nice to hear from you. It's been a mix of both. It's more traffic and then a little bit of basket from units. The traffic impact would be from some customers shopping us with bit less frequently. We have a really broad customer base and most of them across shopping, many other stores as well. So we think we're seeing that dynamic in the traffic. And then units per transaction softened slightly as well, which would be one less item for some customers versus the same time last year. And so both of them, as mentioned, really the result of a slight moderation in customer value relative, again, to this point last year as we're tracking on a year-over-year basis. And then the activities or the things that address this, as I mentioned before, are really just sharpening pricing, sharpening how we negotiate opportunities, delivering even better value and excitement to the customers. And then through our marketing efforts, make sure that they are aware of that. And that's what we've always done. It's part of our normal buying and pricing activities. And so now that we've returned the business to healthier margin levels, we're able to manage that on a more day-to-day basis, consistent with how we've done it over a long period of time in the past. therefore confident that we're able to do that. This is a very flexible and nimble business model. Due to the dynamic nature of how we buy product, we're able to pivot quickly. And so in this case, as I mentioned, we've already started to see some of those leading indicators show even better value. And as those flow out to the stores, we'll see the results with customer behaviors and then resulting sales and customer count trends.

That's really helpful. Thank you. And then just as a follow-up on private label, I think this is the first time you've told us the names and sort of how you're planning to go to market with these lines because you provide a little bit more color around maybe how you're going to be showcasing these brands in stores and how you think about, and I think they're around 100 or so units, but any nuances in terms of how you're going to be showcasing the product to customers and communicating that value in a different way or perhaps the same way than you have for your national brand partners.

Yeah, so we just have a few items out in the stores right now. It's just happening as we speak. We're very excited for these initial items to be out. We, as you know, have been working on this for the better part of the past year and going further back still. So now to see the results of a lot of that groundwork and strategy hitting the stores is very exciting to all of us, operators included. We have three brands that are part of the initial introduction. Simply Go is the food brand, as mentioned, so that will be prominent across many food categories. Then Go Home and Haven for household products and personal care. And then we have our pet brand that's coming a little bit later. You won't see that in the initial introduction. phase-in of products, but for pet food and accessories. We will feature these items prominently in our marketing. As I've mentioned in the past, these items do represent, and they will as we introduce them, better value than the corresponding everyday items that in many cases they're replacing, and also healthier margins for us and for operators. So it's a win all around. We'll feature them in All of our marketing activities, much of that is digital, of course. The operators will be featuring them from a merchandising standpoint. They manage the merchandising. So they'll be managing that part of it, and then we'll be supporting that with in-store signage and other messaging in the store to make sure customers are noticing these great new items and values that are available through our private label offering.

Great. Thanks so much, RJ. Best of luck. Thank you.

Our next question comes from Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Hi, guys. Thanks for taking the question. I wanted to start off with the app. Can you share a little more color on what you're learning, like how customers are interacting with the app and and maybe which markets are performing better than others and why that may be in your opinion. And just a little more color there would be helpful. Thanks.

Sure. Yeah. So we, again, excited about the adoption, increased adoption that we've seen over 700,000 downloads, 8% at the end of the second quarter, 8% of sales compared to 6%. So really, really nice adoption from that. Customers are using it as they're shopping the store. It is both a traffic driver and a basket builder. So the access to inventory, real-time inventory in the store is a great way to bring customers in. So we're seeing that as customers are using the app. And then when they're in the store, and they're looking at the app and maybe they wouldn't have walked down an aisle or it triggers them to shop in other categories if they're seeing it in the app, but maybe they wouldn't have seen it in the store. So love all those aspects about it. Too early still. Joe at this point to talk about what we're seeing in the transactions and also too early then we haven't yet implemented which will be the big win from this is to be able to communicate to them in a customized way based on what they are buying and then what they're not buying and those are still all opportunities in front of us we do and I mentioned this the basket is still much higher than average by quite a bit. So they are shopping more of the store and more of our loyal customers and look for this to contribute to, again, increasing their trip frequency and building a bigger basket still. So a lot of opportunity as I said.

That's great. That's really good to hear. So just to shift gears to another topic, on the real estate side, can you share a little bit more what you are seeing these days in terms of availability and costs? Obviously, accelerating a couple of more stores this year seems opportunistic, which is good, but are you seeing any change in the market out there or availability of stores?

We, yes, there are a lot available. There's a lot of real estate available. A lot of that you consider other retailers that have downsized or closed entirely. Definitely seeing the benefit of that. We ended up with a few stores from 99 cent only. In the Las Vegas market is where those are located. There's a lot of Rite-Aids out there. You got Big Lots is closing a number of stores. So maybe opportunities there for us and others as well. So we love all those opportunities. They go through the same process and filter for all of the real estate that we select also are staying disciplined for the geographies that we're opening stores in. So looking within from a geographic standpoint, our strategy expansion or expansion strategy making sure we have the infrastructure to support those. But the availability is there. From a construction standpoint, opening, a lot of those challenges that have been with us are still there. But to my earlier point, the team's executing really, really well in getting those open. And so you've got this combination of available real estate that fits within our geographic expansion plans together with continued adding of resources and capacity for opening what will be a step-up of stores next year, and in parallel, managing the operator pipeline to make sure that we're recruiting high caliber and then training operators to be ready to successfully open stores as we have been in the past, but mindful of the increases that are ahead of us as that 10% grows on an absolute basis with total store count. But overall... Activities are progressing really well. The teams are working well together. And, you know, again, we talk a lot about the opportunity. We're early innings still of our growth story, over 525 stores now, but the opportunity for thousands here and the geography to support it.

That's great. Thanks, guys, and good luck with this quarter. Thanks, Jeff.

Our next question comes from John Heinbockel with Guggenheim Partners. Please proceed with your question.

Hey, RJ, question. When you talk about over-indexing on price, the second of those items, is that just you're not passing through as much of the benefit that you get on the buy? Is that more treasure hunt or every day it's not more treasure hunt? Right. And then I guess it's such a short period of time that it's occurred. There's no need to reinforce or is there a need to reinforce value with the consumer? It's just if you've got better products at a sharper price, they'll respond.

That's right. We're always reinforcing value with the customer. On an absolute basis, we do continue to offer great value. saving customers still 40% on the basket. We have many WOW items throughout our stores that save them 50% or more. So those are all still there. The over-indexing on price happened more so on more of the opportunistic items flowing through. They come in, they come out. And as we've been adjusting with return of data visibility, It just happened over a short period of time and in a way that was pretty unique for us. We're normally and always managing this on a daily basis, but it was more just the timeframe here and the number of items as we were seeing information and getting back on track, which we have, we are, so we all feel really good about this. And at this point, it's just making those tweaks to items and driving value and all the ways that we always do. And then those get featured in all of our marketing activities and everything the operator does, how they order product, how they merchandise. So a lot of it happens organically. In addition to that, we are also making some targeted price investments on everyday items. So we've already implemented those. We're leaning into marketing to make sure where it's not happening organically through just all the vehicles that communicate our inventory. The app is a great example, but others as well, that we're leaning in from a marketing standpoint to reinforce those values that are there. And for these tweaks and adjustments that we make go forward, making sure that those are prominent and they drive trips and the customers see them in the stores as they're building their basket.

Well, the follow-up would be, right, if you think, you look at the two-year stack, right, you know, your 3Q guide and the implied 4Q, slightly stronger in the fourth quarter. Not a lot, but slightly stronger. And so basically you're assuming, and you fleshed that out a little bit, but you're assuming not a significant improvement in sort of the underlying consumer engagement with GEO. A slight improvement, and you would chalk that up to the price investments.

Right. Yeah. So the guidance implies you look at two-year stack, you look at three-year, you've got a lot of dynamics still looking at the history. But yeah, generally speaking, pretty consistent on a stack basis for where we've been performing very, very healthy levels. Again, And then you have the dynamic of these price investments that we're making that would be factored in there as well. And then, of course, factor in it's a dynamic competitive environment, right? And while the promotional environment right now, as I mentioned, is really back to where it was in 2019, just being mindful of how that might change looking forward and we pay close attention and we'll react to that. And so just trying to be prudent in the guidance overall, reflecting current trends, the work that we're doing, but then also just the world changing around us, not just competitively, but from a macroeconomic standpoint as well. And so I think we've got a good solid number that we'll be able to deliver here as we move through to the end of the year.

Yeah, and John, I'll just add on to that a bit. So just for a little bit further perspective, so our guidance assumes modest deceleration in our two-year stat comps in August and September versus July. But as we... Obviously, as RJ said, there's just a lot of dynamic right now going on in the macro environment. And so with us sharpening our pricing, we definitely expect to see improving comp trend. But we just have a little bit of noise going on. But September, just a reminder, we saw the deceleration when our systems transition went live. So there's definitely some fluctuations in month to month. Thank you.

Thanks, John. Our next question comes from Mark Cardin with UBS. Please proceed with your question.

Good afternoon. Thanks so much for taking the questions. So another one of the comp, just how are comp trends differing geographically? Are you seeing price competition hitting any regions particularly hard, or has it been pretty balanced? You've got some national and regional competitors both investing pretty aggressively in price. So curious if you're seeing any differences in your East Coast and your West Coast stores.

No, it's been balanced. No differences.

Okay, great. And then also, just in terms of when you dig into your comp a little bit, how much variation are you seeing between your various customer cohorts? Are you seeing any incremental pressures from lower-income customers towards the end of the quarter? Is it pretty much across the board?

No, pretty consistent trends and dynamics across different customer segments. Nothing to call out one versus the other, some of the things that I already mentioned. more across the board. And then, you know, I'd say the same for customer satisfaction. I mentioned that it's still healthy. A majority of customers intend to shop and spend more. That's consistent as well across our different customer segments.

Okay, great. Thanks so much. Good luck, guys. Thank you.

Due to time constraints, please limit yourself to one question. Our next question comes from Anthony Bonadio with Wells Fargo. Please proceed with your question.

Yeah. Hey, guys. Thanks for taking my question. I just wanted to ask quickly about UGO. Can you just talk about the initial performance of those stores? And then now that you've had some time with the asset, just how are you thinking about your ability to close the productivity gap in those units and the level of investment that may ultimately be required?

UGO is performing well in line with expectations. The team there continues to do a nice job running the business. We're making good progress with our integration plans in partnership with the team there. Some of the near-term opportunities that we're in the middle of right now, as mentioned, product, so nice integration and collaboration between the teams for both opportunistic and everyday We're on the verge here of starting work. We've been planning, but starting to do the actual work of refreshing some of the stores with fixtures, updated fixtures, some other enhancements to the customer experience. We're excited for that. We'll have those done in the next couple months here. and then some marketing as well. Longer-term plan remains the same. We will eventually rebrand the stores. That's going to be some time out and more fully integrate the business. That won't be until next year and the years after, but really pleased with the progress so far.

Thanks. And then just as a follow-up, I wanted to ask about the closeout pipeline. I know you guys had mentioned a tough compare in August, but can you just speak to the quality of magnitude of deal flow you're seeing right now, how you're expecting that to trend, and just how we should be thinking about compares there.

It's good. Yeah, the closeout buying environment remains healthy across categories. We see good availability of product and variety. We still only buy a fraction of everything that we see. Supplier relationships are strong. We continue to be the preferred partner and first call, which is always our objective. You, of course, always have some degree of fluctuation, just by definition, year over year at the item level, sometimes at the category level. But overall, stores are showing good variety. We're in a healthy place from an inventory standpoint. And, you know, go forward. You know, plenty of product out there still to support growth. So, and the team continues to do a great job partnering with suppliers to help them and then pass savings on to customers. Helpful. Thanks, guys. Thank you.

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hi, everyone. I'll do it in multi-part, so I just ask one time. The first one, it's on the competitive pricing that was mentioned. Can you share if that was national, regional, like where you saw it happen when your prices got out of whack? And then were there any categories in particular that lost traction? And then the second part, totally unrelated, is just thinking about where gross margins can come back to. I know we've talked about this for the last couple of quarters. And then what the benefit may have been this quarter from having, call it too high prices temporarily. Thanks.

On competitive pricing, nothing notable, Simeon, by geography or across categories that we saw in our results there. It was just more in general for some of the softening on value and then resulting comp impact. So nothing of note there. And then you want to talk about margins, Lindsay?

Yeah, so Simeon, thanks for the question. So just on margin... Yeah, we are, you know, the guide for the full year is at the 30.5. So we're working to strive the right balance between margin and comps. And so we continue to look to achieve the margins that are healthy, long-term algorithm of 30.5. You know, we aren't quantifying just the – we haven't quantified the impact of the pricing on margin. There's definitely one factor, as RJ mentioned, on the strong margin. But – You know, we've been making several adjustments following the return of visibility and pulling some levers. And so, you know, the good thing is with our flexible model, we can manage volume of pricing to do this. So we feel that although we have some, you know, higher margins that we're achieving here and in next quarter, full year of 30.5 is definitely reflective of the healthy margin, not only long term for the company, but healthy for this year as well.

Our next question comes from Michael Baker with DA Davidson. Please proceed with your question.

Hey, thanks. So two questions. One, not sure if you have any data or history on this, but in times where you have gotten sharper in pricing, do you see your competitors respond? I mean, maybe the elephant in the room, but is this a price war? Are you guys going to get sharper and you're going to win back some share? So then your competitors might get sharper again. So just wondering what you've seen in the past when you've gotten sharper in pricing. And then a second question, maybe related, maybe not. But what are the benefits you've seen already from 99 cents only shorts going away, both in terms of buying and share gains, if any? Thank you.

Yeah, think about the values that we provide, the deep values and the treasure hunt excitement. A lot of that, most of it comes from opportunistic. And so these items are in and out. Special buys, limited quantities, turns are an important part of that, right? Buy it while it lasts. And so it's just very different than conventional to conventional, static, everyday items. We're price war, driving that down. It's not the case with us. And it's why we've been so successful over many, many years in, well, one, offering tremendous savings on the basket, 40%, but then 50%, 60%, 70%, we measure this in a lot of different ways, Those are the things that really drive excitement. And so we're not, we don't get into these price wars, so to speak, at least as you're thinking about it on a conventional basis. And it also allows us, and the business does pivot and respond quickly, and customers do as well, because every day there's new items arriving in the store. So just a different dynamic than I think maybe that you're thinking about it. And then for 99, so as I mentioned, a few stores, nice opportunity for us as we recently entered the Las Vegas market. We're continuing to build that out. Good real estate there. We have seen some surplus inventory opportunities. They were a big buyer of surplus inventory in the space. Some of that's been directed over to us. We've seen some benefit at the store level, too, for those stores that were in close proximity to a 99. And then employees, maybe future operators as well, having those conversations. So there are several areas of benefit that we're seeing from it.

Our next question comes from Jeremy Hamlin with Craig Hallam. Please proceed with your question.

Thanks for taking the question. So just wanted to ask and see if I could clarify, in terms of the slowdown in trends and traffic, are your traffic trends still positive here to start in Q3? And then just as a follow-up related, in terms of just competing and as the environment gets a bit more aggressive on price, And some of the larger, maybe mass merchant players, also seeing some softening in discretionary categories. Does it make it more challenging with food inflation down significantly to compete? In terms of that type of environment, how long do you think... before you start to see some of those pricing actions have a material impact on overall traffic?

Still positive customer count, so just softer than we'd seen it previously coming off of a high number at 5%. And then on competitive pricing and inflation, again, not concerned. The impact here was the confluence of a few different things happening at once and just I'll say the magnitude and the timing of it. But we are still offering great value. We're back to a place we're managing on a more regular basis, if you will. for responding to promotional pricing and everyday pricing. Inflation, not something that overly concerns us as well. We've got disinflation. If we move to a deflationary environment, we believe we'll continue to grow the business, improve and expand our customer reach regardless. The key for us is to always deliver great value and experience regardless of how the economy is doing and regardless of inflation or not. as it impacts our business differently, and we have and will continue to grow the business based on that.

We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.

Thanks, everyone, for the time, and look forward to talking with you again soon. Take care.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation. you Thank you. Greetings and welcome to Grocery Outlet Fiscal Second Quarter 2024 Earnings Conference Call. At this time, all participants are on a 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 call is being recorded. I would now like to turn the conference over to your host, Christine Chen. Thank you. You may begin.

Christine Chen Good afternoon and welcome to Grocery Outlet's call to discuss financial results for the second quarter for the period ending June 29th, 2024. Speaking from management on today's call will be R.J. Sheedy, President and Chief Executive Officer, and Lindsey Gray, Interim Chief Financial Officer and SVP of Accounting. Following prepared remarks from R.J. and Lindsey, we will open the call for questions. Please note that this conference call is being webcast live and 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 laws. All statements that address future operating, financial, or business statements performance, or the company's strategies or expectations or 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. 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. And now I will turn it over to RJ.

Good afternoon, everyone, and thank you for joining us. We are pleased with our second quarter performance with gross margins and earnings coming in better than expected. Strong customer count continued throughout the quarter, even though comp store sales softened in late June, finishing slightly below our expectations. We made good progress with our systems transition work over the past three months, and the material P&L impact from this is now behind us. We are executing new store openings very well and ahead of schedule. We successfully completed the United Grocery Outlet acquisition on April 1st, and integration work is progressing nicely. Finally, we are excited by the ramping adoption of our personalization app, as well as the recent launch of our private label program. Our second quarter sales grew 12%, while comparable store sales increased 2.9%, which represents 12% growth on a two-year basis. Transaction count remains strong in the quarter, increasing 5%, which was partially offset by a 2% decrease in average basket. Traffic increases continue to be a combination of more new customers and existing customers shopping with us more frequently as we continue to deliver a compelling assortment of high-quality WOW items within an exciting treasure hunt experience. In addition to the 40 stores we acquired from UGO, we opened 10 net new stores in the quarter and recent vintage performance continues to ramp well and in line with expectations. Growth margin of 30.9% was 90 basis points ahead of expectations and a 160 basis point improvement from the first quarter. This was a very strong margin performance considering that it was net of about 100 basis points of residual systems transition impact, which came in as expected. Resulting adjusted EBITDA was $68 million, reflecting a 6% adjusted EBITDA margin. This was 60 basis points ahead of our expectations and a 220 basis points sequential improvement from the first quarter. Altogether, we are very pleased with our progress in returning gross margin and adjusted EBITDA to healthier levels. As a reminder, at the end of August last year, we upgraded our product, inventory, financial, and reporting platforms. This transition has disrupted our business operationally and financially since September, as we've discussed on our last three calls. In May, we announced that we had resolved the last two large remaining system issues impacting profit and that warehouse shrink had returned back to normal levels and we ended the commission support program for our operators in March. We also discussed how poor data visibility had resulted in lower than expected first quarter margins. Importantly, at that time, we had recently improved our payables process and restored data visibility for future margin management and forecasting. This enabled us to return the business to the healthy gross profit levels we are reporting for the second quarter, and I'm proud of how the team was able to execute on this. We continue to make good progress with ongoing systems transition work. Our effort is currently focused on improving visibility to additional operating data, increasing system speed, enhancing functionality, and optimizing the system for efficiencies. While these enhancements will improve aspects of our new systems that are still challenging to employees and operators, none of what remains should have a negative material impact to our future financial results. To support these efforts, we continue to bring on additional new resources and capabilities. We recently hired Sandeep Cholwa as our new SVP Chief Information Officer, reporting to our COO, Ramesh Chakala. Sandeep brings over 20 years of experience in developing, implementing, and managing technology and business strategy. Throughout his career, Sandeep has led several strategic technology and operational transformations and brings strong experience in enterprise platform development and management, including SAP. We also continue to bring on additional new resources to increase our in-house capabilities and further decrease our reliance on third-party consultants. We implemented this new system platform to provide a modern foundation for future growth and scalability of our business model. We also had a strong business case to enhance earnings with improvements in our technology capabilities and business processes. While the implementation has proven to be significantly more challenging than we had planned, we continue to believe that the systems will provide all the fundamental business benefits we underwrote around efficiencies, capabilities, and improvements to inventory management, ordering, and merchandise mix for both GEO and IOs. While food inflation has been moderating, consumers are still challenged with higher food prices and other financial burdens. We continue to offer the best value in food, saving customers 40% on an average basket with many WOW items at 50% or more savings compared to conventional grocery retailers. While we continue to be positioned well, our comp sales softened at the end of June, which has continued thus far in the quarter. We believe the comp softening is the result of a slight year-over-year moderation in the value we provide to customers. There are three reasons for this. First, we are currently lapping our strongest opportunistic buying months last year when our value to customers was particularly strong. Second, in an effort to return the business to healthy margins, we over-indexed in some instances to price, which impacted customer value. Third, as we were making these adjustments, we experienced increases in promotional and pricing activities from key competitors, putting further pressure on our relative value. Improving customer value is within our control through our everyday business processes. We've been actively negotiating costs and adjusting prices to sharpen our value proposition in reaction to competitive dynamics, and we are quickly returning to our targeted values across the many metrics that we track and manage the business by. This model is extremely flexible, and we are able to pivot quickly given our nimble and dynamic buying and pricing model. and we have a long history of successfully navigating changing competitive environments. I'm confident that we will do the same in this instance as we continue to reinforce our value and strengthen our WOW shopping experience in the coming days and weeks. Our customer survey still show that low prices and value remain the most important criteria for store visits, and that satisfaction with GEO remains high. Customers also continue to indicate a high intent to spend the same or more at Grocery Outlet in the next 12 months as they search for value. We also continue to see good product availability across all categories, and the closeout buying environment remains healthy. Our growing size and scale make us an even better partner, as we were able to take more variety and volume across a wider geography. Turning now to store growth, We are opening new stores ahead of schedule and they are performing to plan. We opened 10 net new stores during the second quarter, increasing our store count to 524 locations at quarter end. This includes the UGO acquisition, which was completed during the second quarter, adding 40 stores to the network. We opened our first store in Delaware and our second store in Ohio with our entry into the Cincinnati market and we are now operating in 16 states. New market store economics are healthy, and we are pleased with the portability of our customer value proposition. We've also seen nice progress with ramping sales and profit for new market stores opened over the past several years. We've opened two additional stores so far in the third quarter, and we are on track for our remaining openings between now and the end of the year. Given the health of our store opening schedule, we now expect to add between 62 and 64 new stores this year, including the UGO acquisition. This range represents store growth of approximately 13% over last year. Our future store pipeline is very robust, and we are in a great position to deliver 10% new store growth in 2025. Our organic real estate activities are now focused on 2026 and 2027 store openings. We also continue to evaluate opportunistic real estate as a complement to our organic growth efforts. We are realizing our growth potential through extensive store openings and geographic expansion. And in so doing, we are offering affordable and healthy food at unbeatable value, touching more lives and communities for the better. Turning now to our recent acquisition, the integration of UGO is proceeding well. Our integration focus this year is on expanding the assortment, investing in store refreshes and new fixtures, and introducing some of our marketing programs to the Southeast region. We have already begun coordinating on buys and recently added new everyday low-price products as well as incremental opportunistic items into the UGO stores. We are pleased with how the teams have integrated and we look forward to sharing our accomplishments with product sourcing and store improvements on our future calls. We continue to see high levels of customer engagement with our personalization app. Customer response has been strong with over 700,000 total downloads so far in sales penetration of 8% at the end of the second quarter up from 6% at the end of the first quarter. Our app allows us to communicate our weekly deals to customers, provide early access to special offers, and customize their treasure hunt experience. We are pleased to see that app basket size continues to be consistently higher than non-app transactions. We already see high customer engagement with our marketing. We believe that this app will increase engagement even further and lead to greater customer loyalty, which should accelerate trip frequency, and share of wallet growth. Finally, we are very excited for the launch of our private label program with our first items recently introduced to stores. The first brand to hit stores is Simply Go. This brand represents our high-quality food staples at extremely affordable prices. Our initial categories include beverage, dairy, baking, and pasta. This will be followed by two additional brands, Go Home and Haven and Go Paw and Pamper. Go Home and Haven will be used for household essentials as well as personal care categories. Go Paw and Pamper is our pet brand and will feature both pet food and accessories. We remain on track to introduce approximately 100 new private label SKUs by the end of this year. In addition to better value and inventory consistency for our customers, these initial products will deliver better margin for grocery outlet and operators. We enjoyed being together with all our operators during our annual regional roadshow in May, where we updated them on our business initiatives and listened to their feedback. I would like to personally say thank you to our owner-operators for their grit, determination, and support through what has been a challenging year of systems, issues, and solutions. You all are amazing partners and I appreciate you. I would also like to thank the entire Grocery Outlet team for their dedication and perseverance, which enable us to support our I.O. partners and customers. I'm humbled and inspired every day by the amazing people that are part of this Grocery Outlet family. Before turning the call over to Lindsay, Let me finish with what matters most, our mission of touching lives for the better. We just completed our annual independence from hunger campaign. During this event, our IOs partner with local nonprofits to provide critical food resources to their communities at the time of year when they need it most. Our supplier partners also contribute by donating food and collaborating on events with our IOs. I'm very proud to share that we reached a new record and raised $4.9 million this year, the equivalent of approximately 10 million meals benefiting over 450 local organizations. We are equally proud of the over $25 million that we've raised over the 14-year history of this program. That's a wow. In closing, I remain very confident in our business fundamentals and our ability to realize our near and long-term growth potential. Our differentiated model and value proposition continue to be the drivers of our sales growth. We are a unique specialty discount retailer with a long history of consistently high top-line sales growth. We are aggressively pursuing the tremendous white space in front of us of operating over 4,000 stores in the U.S., and we look forward to introducing our brand to new communities as we expand. And now, I would like to turn it over to Lindsay to discuss our financials.

Thanks, RJ, and good afternoon, everyone. Net sales increased 11.7% to $1.13 billion during the second quarter due to new store sales and a 2.9% increase in comparable store sales, which represents 12% growth on a two-year basis. Comp transaction growth of 5.1% was partially offset by a 2.1% decline in our average basket. We opened 10 net new stores during the quarter, ending with 524 locations, including the UGO acquisition. As RJ mentioned, we remain pleased with the performance of new stores and store openings continue to track ahead of schedule. Our second quarter gross profit increased 6.9% to $349.2 million. Gross margin rate of 30.9% was 90 basis points ahead of expectations. This includes approximately 100 basis points of residual impact from our systems transition, which came in as expected. SG&A expense increased 11.4% to $323.1 million compared to the second quarter of 2023. This includes a $3.8 million residual impact from systems-related commission support, which came in as expected. Net interest expense increased 16.6% to $5.6 million, driven by higher interest rates and higher net borrowings versus the prior year. Our effective GAAP tax rate during the quarter was 31.9%. GAAP net income for the second quarter was $14 million, or 14 cents per share. Adjusted EBITDA was $67.9 million for the quarter, and our adjusted EBITDA margin was 6.0% of sales, 60 basis points ahead of our expectations. Adjusted net income was $25.1 million for the quarter, or 25 cents per diluted share. Turning to our balance sheet, we ended the quarter with $67.1 million of cash. Inventory at the end of the quarter totaled $367.3 million. Total debt was $379.2 million at the end of the second quarter, with net leverage of about 1.4x. During the second quarter, we repurchased 1.1 million shares of stock, totaling $25 million at an average price of $22.66. Now on to guidance. For the full year, we now expect comp store sales growth of approximately 3.5%. We expect comp growth in the third quarter to be approximately 1.5%. We now expect to add a total of 62 to 64 net new stores this year, up from 58 to 62. This includes the 40 newly acquired United Grocery Outlet stores, as well as 22 to 24 new grocery outlet stores. In total, we continue to expect fiscal 2024 net sales between 4.3 to 4.35 billion dollars. For the full fiscal year, we continue to expect gross margin of approximately 30.5%. We expect gross margin for the third quarter of approximately 31.0%. For the full fiscal year, we continue to expect adjusted EBITDA to be in the range of 252 to 260 million dollars. We expect third quarter adjusted EBITDA margin of approximately 6.4%. For the year, we continue to expect DNA to grow in the mid-20s on a percentage basis. We continue to expect share-based compensation of approximately $34 million. Net interest expense is still anticipated to be approximately $21 million. We are now forecasting a normalized tax rate of about 32% due to higher non-deductible share-based compensation expense. We now expect average diluted shares outstanding of approximately $100.5 million down from $101 million due primarily to lower share count from share repurchases. We now expect CapEx net of tenant allowances of approximately $200 million up from $175 million, reflecting higher new store growth for both this year and 2025. We continue to expect full-year adjusted EPS of $0.89 to $0.95 per diluted share. In closing, I want to reiterate that our underlying business remains strong and we are well positioned for long-term growth. I would also like to thank our independent operators for all that you have done and continue to do on a daily basis to support and execute our mission of touching lives for the better. A big thank you as well to the Grocery Outlet team for continuing to support IOs and customers during a challenging systems transition year. We will now open the call up to your questions.

Operator?

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. We ask that you please limit to one question and one follow-up. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Our first question comes from Christina Katai with Deutsche Bank. Please proceed with your question.

Hi, good afternoon and great to see the systems integration issues are finally behind us. I wanted to ask about the EPS upside that you saw in the quarter. So what works better in the second quarter that allows gross margin to be that 90 basis points ahead of plan? And as we think about the reiterated 30.5% gross margin for the year, How should we think about how much of that is conservatism versus anything you might have seen in the competitive environment or any investments that you might have to make in price? And then I'll have a follow-up.

Yeah. Hi, Christina. This is Lindsay. I can take that. So as RJ mentioned, yeah, we definitely had some EPS upside during the quarter. A few things lending to that, definitely strong margins is the first one, and so a few factors at play there, as RJ mentioned. Some strong margin coming in, a little bit of over-indexing on price, which we mentioned, and a few other factors at play, just a strong environment. So that margin definitely flowed through down healthy SG&A as well. some different decent leverage there, and then down to EPS. So that was where we saw the EPS upside in the quarter. But when you look at the full year and our guidance for Q3 of 31, and then the full year guidance of 30.5 that we're holding, we're holding growth margin guidance for the year at 30.5 to reflect investments in price. We'll be making in the second half to drive traffic and comp. So this combined with the lowered comp expectations roughly kind of offsets the adjusted EBITDA and EPS upside in the second quarter that we had. And so as a reminder, as we find margin improvements through buying, IO ordering, allocating, et cetera, we prioritize reinvesting in value. So that's sort of how it tracks through to the 30.5 for the year.

Thank you for that, Lindsay. And then just my follow-up is transactions came in really strong in the second quarter, but you did note some softness that you saw later on. Maybe can you talk a bit more about July and early August trends relative to that implied 3.5% back half comp and just how GEO is positioned, again, in a potentially more competitive environment and you said some price investments. How should we think about the magnitude? Thank you.

Yeah, happy to take that as well. So we usually don't comment on intra-quarterly trends, but we were pleased with April and May, and we saw comp soften at the end of the quarter. And so as we're looking on the go-forward basis, just as a reminder, July and August, we're comping against some pretty healthy levels from last year, and then September is really when we start lapping the system's impact. And so that all is baked into our comp forecast and our guide for Q3.

Okay, great. Thank you. Best of luck.

Thank you. Our next question comes from Oliver Chen with TD Callen. Please proceed with your question.

Hi, RJ and Lauren. Regarding the commentary on softening in the quarter, you gave those three helpful points. What will happen in 3Q and 4Q? How do the opportunistic comparisons look? And also in your comments on promotions, that might be out of your control, as well as over-indexing to price. Just would love your thoughts as we think about our comp forecast. And the average basket being negative, will that trend continue? Is that in line with what you expected for what your guidance calls for? Lastly, you mentioned, if I heard it correctly, new systems are still challenging or getting acquainted with new systems. What did you mean there, and will that, you know, add the risk factors to what you see unfolding? Thank you.

Okay, sure. Hey, Oliver, thanks for the question. I'll take a couple of those, and I'll ask Lindsay to address your question about basket. In terms of the comm softness, it's really think about the confluence of the three factors that I mentioned. in my comments that made this a more dynamic and, you know, I'll say just challenging to manage than anticipated. We always balance value with margin. It's what we do on a daily basis. It was very unique to have these shifts internally and externally happening in such a short period of time, as was the case over these past few months. Important to note that the business is healthy, 2.9% comp. 5% customer count, really healthy two-year stack of 12%, and even more so when you look at customer count on a two-year basis, which is 14%. So we feel really good about the underlying health of the business. We also are confident, as mentioned, in the adjustments that we've already been making to return the customer value to even deeper levels and really increase the level of excitement. The promotional activity, we did notice an increase activity from May, June, into July. Competitors have been more aggressive with promotions to turn some of their negative customer count and volume around. We've also seen some discount retailers lowering everyday prices recently. Overall, though, promotional levels are rational they're now back close to where they were in 2019 so nothing overly concerning to us about the current level of promotional activity and then you know as we as we move forward through the rest of this year our ability to continue to offer great value and excitement and continue to drive healthy comp and customer count as far as the system challenges go yes work still does continue noted in my comments those areas that we're working to enhance around bringing on more operating data, increasing system speed, enhancing functionality, and others. This work will improve on some of these things that are still challenging, harder, with some manual work rounds in certain cases for the team here, as well as for operators. We don't expect any of them to have a meaning negative P&L impact. We're past what we've talked about, those impacts in this most recent quarter, and then looking further back as well. And as we roll out these enhancements, additional fixes, we will begin to realize the many benefits that were part of the initial underwriting and why we're excited to be part of this new modern platform to support growth and introduce new capabilities. And Lindsay, on Oliver's question about the basket.

Yeah. Hey, Oliver. It's Lindsay. So I can talk to you a little bit about the basket. So obviously, pleased with the continued... strength in transactions up 5.1%. Ring was down 2.1% year over year, due both just to lower units and higher trip frequency year over year. AUR is still positive and accelerated sequentially. And then just within the basket, just recall that AUR and UPT are not directly comparable due to our changing assortment, but AUR increased and UPT was down, just to give you that extra kind of flavor there.

Okay, last follow-up. New store growth is encouraging. What is underlying the rationale for raising the outlook on new store growth? And also, are there any details you can share regarding new store productivity levels and what you're seeing or thinking there? Thanks for everything.

Yeah, sure. The team's been executing really well. We've been able to get stores opened on time and address many of the you know, issues that we've dealt with in the past that has caused some slippage. So we're all over this and, you know, therefore able to increase the guidance and expectations for the number of stores that we're getting open this year. Same expectations for 2025 and go forward, which is that 10% target. And as mentioned, you know, feeling good and seeing good results with new New stores opening, that's both in infill and developing markets, and those that we've opened over the past several years are ramping well and in line with our underwriting expectations.

Thank you. Best regards. Thank you.

Thanks. Our next question comes from Robbie Ohms with Bank of America. Please proceed with your question.

Oh, hey, RJ. I just want to follow up on the, you know, the guidance and the acceleration and comps for the back half and how you get there. So you're going to get more promotional and that'll drive stronger traffic, but does that, that won't have a negative impact on the average transaction or basket that's already running negative? Or, you know, I'm just, can you just help understand like how the balance of transaction ticket and traffic plays out as you get more promotional and drive the acceleration in comp?

Yeah, sure, I'll take that one. So, the activities that are underway is just making some adjustments, sharpening how we negotiate costs and set prices, to deliver the best value and excitement to customers while maintaining healthy margins. We're also investing in price and targeted areas. We're leaning into marketing activities to highlight those values and the treasure hunt that we're delivering to customers. We've already started to see those positive leading indicators. As we've been making these adjustments, I'm confident for the positive impact this will have in the stores and our sales. Reflected in our guidance is the result or the expectation for the work that we're doing and how it will translate to customer excitement and sales, Also factored into our guidance, and Lindsay mentioned in September, we start to anniversary some of the impacts from the systems implementation, which of course carried forward from a sales standpoint through the fourth quarter. And so we will see the impact to comps, positive impact to comps this year as we're anniversarying those together then with the work that's ongoing, always delivering value, and then, again, maintaining healthy margins for what we have embedded in our guidance in the second half of the year.

And then my follow-up, RJ, can you remind me, so when competitors, you know, target you, see some over-indexing of price, how much of pricing changes are centralized versus, you know, are the IOs independently responding more than normal because of you know, higher prices that they went out with, and then they had to, you know, kind of just walk us through how the IOs are managing these, you know, price changes.

Right. Yeah, it's both. So we set prices centrally, and then operators do have autonomy to adjust pricing in the stores. Their pricing activities are a small percentage of the overall assortment, but they'll move some prices and items up and down. depending on their local competitive situations, current pricing at that time, and then also quantities that they've ordered and how they've merchandised it and things that they want to promote locally. So it's a blend of both us and the operators making those changes. And in that way, I think, gives us the sharpest, most local pricing specific to each store and each market.

Got it. Thanks so much.

Thank you. Our next question comes from Corey Carlo with Jefferies. Please proceed with your question.

Great, thanks. RJ, just to follow up on the quarter date trend that you've highlighted and the trends that you saw in June as well, as you think about the three factors that you outlined, do you see that impacting your basket more or Is it traffic that you're really seeing the delta in? Where are we seeing it? And what do you think are the easiest ways to address these dynamics?

Yeah. Hi, Corey. Nice to hear from you. It's been a mix of both. It's more traffic and then a little bit of basket from units. The traffic impact would be from some customers shopping us a bit less frequently. We have a really broad customer base and most of them our cross-shopping, many other stores as well. So we think we're seeing that dynamic in the traffic. And then units per transaction softened slightly as well, which would be one less item for some customers versus the same time last year. And so both of them, as mentioned, really the result of a slight moderation in customer value relative, again, to this point last year as we're tracking on a year-over-year basis. And then the activities or the things that address this, as I mentioned before, are really just sharpening pricing, sharpening how we negotiate opportunities, delivering even better value and excitement to the customers. then through our marketing efforts make sure that they are aware of that and that's that's what we've always done it's part of our normal buying and pricing activities and so you know now that we've returned the business to healthier margin level levels we're able to manage that in a more day-to-day basis consistent with how we've done it over a long period of time in the past and therefore confident that we're able to do that. This is a very flexible and nimble business model. Due to the dynamic nature of how we buy product, we're able to pivot quickly. And so in this case, as I mentioned, we've already started to see some of those leading indicators show even better value. And as those flow out to the stores, we'll see the results with customer behaviors and then resulting sales and customer count trends.

That's really helpful. Thank you. And then just as a follow-up on private label, I think this is the first time you've told us the names and sort of how you're planning to go to market with these lines because you provide a little bit more color around maybe how you're going to be showcasing these brands in stores and how you think about, and I think they're around 100 or so units, but any nuances in terms of how you're going to be showcasing the product to customers and communicating that value in a different way or perhaps the same way than you have for your national brand partners.

Yeah, so we just have a few items out in the stores right now. It's just happening as we speak. We're very excited for these initial items to be out. We, as you know, have been working on this for the better part of the past year and going further back still. So now to see the results of a lot of that groundwork and strategy hitting the stores is very exciting to all of us, operators included. We have three brands that are part of the initial introduction. Simply Go is the food brand, as mentioned, so that'll be prominent across many food categories. Then Go Home and Haven for household products and personal care. And then we have our pet brand that's coming a little bit later. You won't see that in the initial introduction. phase-in of products, but for pet food and accessories. We will feature these items prominently in our marketing. As I've mentioned in the past, these items do represent, and they will as we introduce them, better value than the corresponding everyday items that in many cases they're replacing, and also healthier margins for us and for operators. So it's a win all around. We'll feature them in All of our marketing activities, much of that is digital, of course. The operators will be featuring them from a merchandising standpoint. They manage the merchandising, so they'll be managing that part of it, and then we'll be supporting that with in-store signage and other messaging in the store to make sure customers are noticing these great new items and values that are available through our private label offering.

Great. Thanks so much, RJ. Best of luck. Thank you.

Our next question comes from Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Hi, guys. Thanks for taking the question. I wanted to start off with the app. Can you share a little more color on what you're learning, like how customers are interacting with the app and and maybe which markets are performing better than others and why that may be, in your opinion. And just a little more color there would be helpful. Thanks.

Sure. Yeah. So we, again, excited about the adoption, increased adoption that we've seen over 700,000 downloads, 8% at the end of the second quarter, 8% of sales compared to 6%. So really, really nice adoption from that. Customers are using it as they're shopping the store. It is both a traffic driver and a basket builder. So the access to inventory, real-time inventory in the store is a great way to bring customers in. So we're seeing that as customers are using the app. And then when they're in the store, and they're looking at the app and maybe they wouldn't have walked down an aisle or it triggers them to shop in other categories if they're seeing it in the app, but maybe they wouldn't have seen it in the store. So love all those aspects about it. Too early still. Joe at this point to talk about what we're seeing in the transactions and also too early then we haven't yet implemented which will be the big win from this is to be able to communicate to them in a customized way based on what they are buying and then what they're not buying and those are still all opportunities in front of us we do and I mentioned this the basket is still much higher than average by quite a bit. So they are shopping more of the store and more of our loyal customers and look for this to contribute to, again, increasing their trip frequency and building a bigger basket still. So a lot of opportunity as I said.

That's great. That's really good to hear. So just to shift gears to another topic, on the real estate side, can you share a little bit more what you are seeing these days in terms of availability and costs? Obviously, accelerating a couple of more stores this year seems opportunistic, which is good, but are you seeing any change in the market out there or availability of stores?

We, yes, there are a lot available. There's a lot of real estate available. A lot of that you consider other retailers that have downsized or closed entirely. Definitely seeing the benefit of that. We ended up with a few stores from 99 cent only. in the Las Vegas market is where those are located. There's a lot of Rite-Aids out there. You got Big Lots is closing a number of stores. So maybe opportunities there for us and others as well. So we love all those opportunities. They go through the same process and filter for all of the real estate that we select. Also are staying disciplined for the geographies that we're opening stores in, so looking within, from a geographic standpoint, our strategy expansion, or expansion strategy, and making sure we have the infrastructure to support those, but the availability is there. From a construction standpoint, opening, a lot of those challenges that have been with us are still there, but to my earlier point, executing, the team's executing really, really well, And getting those open. And so you've got this combination of available real estate that fits within our geographic expansion plans, together with continued adding resources and capacity for opening what will be a step up of stores next year. And in parallel, managing the operator pipeline to make sure that we're recruiting high caliber and then training operators to be ready to successfully open stores as we have been in the past, but mindful of the increases that are ahead of us as that 10% grows on an absolute basis with total store count. But overall, activities are progressing really well. The teams are working well together. And, you know, again, we talk a lot about the opportunity. We're early innings still of our growth story, over 500, 525 stores now, but the opportunity for thousands here and the geography to support it.

That's great. Thanks, guys, and good luck with this quarter. Thanks, Jeff.

Our next question comes from John Heinbockel with Guggenheim Partners. Please proceed with your question.

Hey, RJ, question. When you talk about over-indexing on price, the second of those items, is that just you're not passing through as much of the benefit that you get on the buy? Is that more treasure hunt or every day it's not more treasure hunt? Right. And then I guess it's such a short period of time that it's occurred. There's no need to reinforce or is there a need to reinforce value with the consumer? It's just if you've got better products at a sharper price, they'll respond.

That's right. We're always reinforcing value with the customer. We on an absolute basis, we do continue to offer great value. saving customers still 40% on the basket. We have many WOW items throughout our stores that save them 50% or more. So those are all still there. The over-indexing on price happened more so on more of the opportunistic items flowing through. They come in, they come out. And as we've been adjusting with return of data visibility, It just happened over a short period of time and in a way that was pretty unique for us. We're normally and always managing this on a daily basis, but it was more just the timeframe here and the number of items as we were seeing information and getting back on track, which which we have, we are, so we all feel really good about this and at this point it's just making those tweaks to items and driving value and all the ways that we always do. And then those get featured in all of our marketing activities and everything the operator does, how they order product, how they merchandise, so a lot of it happens organically In addition to that, we are also making some targeted price investments on everyday items. So we've already implemented those. We're leaning into marketing to make sure where it's not happening organically through just all the vehicles that communicate our inventory. The app is a great example, but others as well, that we're leaning in from a marketing standpoint to reinforce those values that are there. And for these tweaks and adjustments that we make go forward, making sure that those are prominent and they drive trips and the customers see them in the stores as they're building their basket.

Well, the follow-up would be, right, if you think, you look at the two-year stack, right, you know, your 3Q guide and the implied 4Q, slightly stronger in the fourth quarter. Not a lot, but slightly stronger. And so basically you're assuming, and you fleshed that out a little bit, but you're assuming not a significant improvement in sort of the underlying consumer engagement with GEO. A slight improvement, and you would chalk that up to the price investments.

Right. Yeah. So the guidance implies you look at two-year stack, you look at three-year, you've got a lot of dynamics still looking at the history. But yeah, generally speaking, pretty consistent on a stack basis for where we've been performing very, very healthy levels. Again, And then you have the dynamic of these price investments that we're making that would be factored in there as well. And then, of course, factor in it's a dynamic competitive environment, right? And while the promotional environment right now, as I mentioned, is really back to where it was in 2019, just being mindful of how that might change looking forward and we pay close attention and we'll react to that. And so just trying to be prudent in the guidance overall, reflecting current trends, the work that we're doing, but then also just the world changing around us, not just competitively, but from a macroeconomic standpoint as well. And so I think we've got a good solid number that we'll be able to deliver here as we move through to the end of the year.

Yeah, and John, I'll just add on to that a bit. So just for a little bit further perspective, so our guidance assumes modest deceleration in our two-year stat comps in August and September versus July, but as we You know, obviously, as RJ said, there's just a lot of dynamic right now going on in the macro environment. And so, you know, with us sharpening our pricing, we definitely expect to see improving comp trend. But we just have a little bit of noise going on. But, you know, September, just a reminder, we saw the deceleration when our systems transition went live. So there's definitely some fluctuations in month to month. Thank you. Thanks, John.

Our next question comes from Mark Cardin with UBS. Please proceed with your question.

Good afternoon. Thanks so much for taking the questions. So another one of the comp, just how are comp trends differing geographically? Are you seeing price competition hitting any regions particularly hard, or has it been pretty balanced? You've got some national and regional competitors both investing pretty aggressively in price. So curious if you're seeing any differences in your East Coast and your West Coast stores.

No, it's been balanced. No differences.

Okay, great. And then also just in terms of when you dig into your comp a little bit, how much variation are you seeing between your various customer cohorts? Are you seeing any incremental pressures from lower income customers towards the end of the quarter? Is it pretty much across the board?

No, pretty consistent trends and dynamics across different customer segments. Nothing to call out one versus the other. Some of the things that I already mentioned. more across the board. And then, you know, I'd say the same for customer satisfaction. I mentioned that it's still healthy. A majority of customers intend to shop and spend more. That's consistent as well across our different customer segments.

Okay, great. Thanks so much. Good luck, guys. Thank you.

Due to time constraints, please limit yourself to one question. Our next question comes from Anthony Bonadio with Wells Fargo. Please proceed with your question.

Yeah. Hey, guys. Thanks for taking my question. I just wanted to ask quickly about UGO. Can you just talk about the initial performance of those stores? And then now that you've had some time with the asset, just how are you thinking about your ability to close the productivity gap in those units and the level of investment that may ultimately be required?

UGO is performing well in line with expectations. The team there continues to do a nice job running the business. We're making good progress with our integration plans in partnership with the team there. Some of the near-term opportunities that we're in the middle of right now, as mentioned, product, so nice integration and collaboration between the teams for both opportunistic and everyday. We're on the verge here of starting work. We've been planning, but starting to do the actual work of refreshing some of the stores. with fixtures, updated fixtures, some other enhancements to the customer experience. We're excited for that. We'll have those done in the next couple months here. And then some marketing as well. Longer-term plan remains the same. We will eventually rebrand the stores. That's going to be some time out and more fully integrate the business. That won't be until next year and the years after, but really pleased with the progress so far.

Thanks. And then just as a follow-up, I wanted to ask about the closeout pipeline. I know you guys had mentioned a tough compare in August, but can you just speak to the quality magnitude of deal flow that you're seeing right now, how you're expecting that to trend, and just how we should be thinking about compares there?

It's good. Yeah, the closeout buying environment remains healthy across categories. We see good availability of product and variety. We still only buy a fraction of everything that we see. Supplier relationships are strong. We continue to be the preferred partner and first call, which is always our objective. You, of course, always have some degree of fluctuation just by definition year over year at the item level, sometimes at the category level. But overall, stores are showing good variety. We're in a healthy place from an inventory standpoint. And, you know, go forward, you know, plenty of product out there still to support growth. So, and the team continues to do a great job partnering with suppliers to help them and then pass savings on to customers. Helpful. Thanks, guys. Thank you.

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hi, everyone. I'll do it in multi-part, so I just ask one time. The first one, it's on the competitive pricing that was mentioned. Can you share if that was national, regional, like where you saw it happen when your prices got out of whack? And then were there any categories in particular that lost traction? And then the second part, totally unrelated, is just thinking about where gross margins can come back to. I know we've talked about this for the last couple of quarters. And then what the benefit may have been this quarter from having, call it too high prices temporarily. Thanks.

On competitive pricing, nothing notable, Simeon, by geography or across categories that we saw in our results there. It was just more in general for some of the softening on value and then resulting comp impact. So nothing of note there. And then you want to talk about margins, Lindsay?

Yeah. So, Simeon, thanks for the question. So just on margin, yeah. Yeah, we are, you know, the guide for the full year is at the 30.5. So we're working to strive the right balance between margin and comps. And so we continue to look to achieve the margins at our healthy long-term algorithm of 30.5. You know, we aren't quantifying just the – we haven't quantified the impact of the pricing on margin. There's definitely one factor, as RJ mentioned, on the strong margin. But – You know, we've been making several adjustments following the return of visibility and pulling some levers. And so, you know, the good thing is with our flexible model, we can manage volume of pricing to do this. So we feel that although we have some, you know, higher margins that we're achieving here and in next quarter, full year of 30.5 is definitely reflective of the healthy margin, not only long term for the company, but healthy for this year as well.

Our next question comes from Michael Baker with DA Davidson. Please proceed with your question.

Hey, thanks. So two questions. One, not sure if you have any data or history on this, but in times where you have gotten sharper in pricing, do you see your competitors respond? I mean, maybe the elephant in the room, but is this a price war? Are you guys going to get sharper and you're going to win back some share? So then your competitors might get sharper again. So just wondering what you've seen in the past when you've gotten sharper in pricing. And then a second question, maybe related, maybe not. But what are the benefits you've seen already from 99 cents only shorts going away, both in terms of buying and share gains, if any? Thank you.

Yeah, think about the values that we provide, the deep values and the treasure hunt excitement. A lot of that, most of it comes from opportunistic. And so these items are in and out. Special buys, limited quantities, turns are an important part of that, right? Buy it while it lasts. And so it's just very different than conventional to conventional, static, everyday items. We're price war, driving that down. It's not the case with us. And it's why we've been so successful over many, many years in, well, one, offering tremendous savings on the basket, 40%, but then 50%, 60%, 70%. We measure this in a lot of different ways. Those are the things that really drive excitement. We don't get into these price wars, so to speak, at least as you're thinking about it on a conventional basis. It also allows us, and the business does pivot and respond quickly, and customers do as well because every day there's new items arriving in the store. Just a different dynamic than I think maybe that you're thinking about it. And then for 99, so as I mentioned, a few stores, nice opportunity for us as we recently entered the Las Vegas market. We're continuing to build that out. Good real estate there. We have seen some surplus inventory opportunities. They were a big buyer of surplus inventory in the space. Some of that's been directed over to us. We've seen some benefit at the store level, too, for those stores that were in close proximity to a 99. And then employees, maybe future operators as well, having those conversations. So there are several areas of benefit that we're seeing from it.

Our next question comes from Jeremy Hamlin with Craig Hallam. Please proceed with your question.

Thanks for taking the question. So just wanted to ask and see if I could clarify, in terms of the slowdown in trends and traffic, are your traffic trends still positive here to start in Q3? And then just as a follow-up related, in terms of just competing and as the environment gets a bit more aggressive on price, And some of the larger, maybe mass merchant players also seeing some softening in discretionary categories. Does it make it more challenging with food inflation down significantly to compete? In terms of that type of environment, how long do you think... before you start to see some of those pricing actions have a material impact on overall traffic?

Still positive customer count, so just softer than we'd seen it previously coming off of a high number at 5%. And then on competitive pricing and inflation, again, not concerned. The impact here was the confluence of a few different things happening at once and just I'll say the magnitude and the timing of it. But we are still offering great value. We're back to a place we're managing on a more regular basis, if you will. for responding to promotional pricing and everyday pricing. Inflation, not something that overly concerns us as well. We've got disinflation. If we move to a deflationary environment, we believe we'll continue to grow the business, improve and expand our customer reach regardless. The key for us is to always deliver great value and experience regardless of how the economy is doing and regardless of inflation or not. as it impacts our business differently, and we have and will continue to grow the business based on that.

We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.

Thanks, everyone, for the time, and look forward to talking with you again soon. Take care.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.