Grocery Outlet Holding Corp.

Greetings and welcome to the Grocery Outlet's second quarter 2025 earnings results conference call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Ferry, Vice President of Treasury and Investor Relations. Thank you, you may begin.

Good afternoon and welcome to Grocery Outlet's call to discuss financial results for the second quarter ended June 28th, 2025. Speaking for management on today's call will be Jason Potter, President and Chief Executive Officer and Chris Miller, Chief Financial Officer. Following prepared remarks from Jason and Chris, we will open the call for questions. Please note that this conference call is being webcast live and a recording will be available via playback on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meeting of the federal securities laws. All statements that address future operating, financial or business performance or the company's strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Description of these factors can be found in this afternoon's press release as well as in the company's periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company's website or on sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. Additionally, during today's call, the company will reference certain non-GAAP financial information, including adjusted items. Reconciliation of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release. On the Investor section of the company's website under news and releases and in the company's SEC filings. And now I would like to turn it over to Jason.

Thanks Ian and welcome everyone. We delivered solid second quarter results that exceeded our outlook. Net sales of 1.18 billion grew .5% over last year while adjusted EBITDA of 68 million and adjusted EPS of 23 cents, each of which came in above their respective guidance ranges. We also grew comp store sales .1% from last year in line with our guidance and opened nine net new stores, keeping us on pace to achieve our 33 to 35 annual store opening target for this year. We continued to deliver on the profitability front, reporting a .6% gross margin also ahead of our outlook as we again drove improvements in inventory management and merchandising. From a cost perspective, we managed operating expenses with discipline throughout the quarter as a percentage of net sales, SG&A declined 10 basis points from last year and we see opportunity to drive further operating leverage. In short, we achieved our objectives for Q2 and as such we are reaffirming all previous guidance ranges for the full year with the exception of adjusted EPS, which we are increasing due primarily to favorable interest expense. We also made important progress during the past quarter on the four strategic imperatives we outlined on our last update. One, tackling new store performance, two, securing top talent, three, addressing execution gaps and four, improving our execution at scale. We have significant white space in front of us which represents multiples of the revenue of our current store base generating today. Executing against these four imperatives will help set the stage to capture that opportunity and drive improving returns on invested capital. First, tackling new store performance. We're taking deliberate steps to improve performance across our store base. We're rebalancing store growth towards a healthy mix of core versus new markets, adjusting our internal returns framework, developing more robust site selection criteria and testing several key commercial pilots to drive our performance. Our pilots have included improving our merchandising, enhancing our IO support and adjusting and experimenting with marketing to tell our brand story. These efforts have contributed to our 2025 cohort of new stores performing ahead of plan on a year to date basis. As we drive improvements in our new stores, we are reviewing our store plans, carefully selecting locations with high potential and the ability to generate store economics that meet or exceed our hurdle rates. Slowing down our store expansion will allow us to dial in the model to find the optimal level of sustainable unit growth that generates solid returns on invested capital. As the result of our disciplined underwriting standards and focused execution, we expect returns to steadily improve. In addition, we expect to deliver cash on cash returns above 20% in year four for the 25 and 26 cohorts on a combined basis. Our second priority is securing top talent. Over the course of this year, we've made progress on talent and are grateful to welcome several new leaders to our team, including Matt Delly, our new chief merchandising officer. Matt has a proven track record of strong results across the retail spectrum with more than 20 years of experience spanning merchandising, supply chain, assortment planning and product development. We're very excited to have him on our team and in a couple of weeks, he sees many amazing sets of opportunities to advance our selling capabilities and drive scale advantages throughout this business. Our talent priority also extends to our board. In June, we announced the additions of two new board members with deep experience to steward the company through our next chapter of growth. Mike Kobayashi brings many years of leadership experience from Ross stores, including driving operational excellence and successful technology transformations. He's gonna add valuable perspective as we unlock the powerful potential of our systems implementation. Chip Malloy's proven financial leadership experience at retailers like Sprouts Farmers Market and PetSmart will compliment our team's focus on achieving improved profitability and attractive shareholder returns. These additions bring a fresh perspective, deep experience and the governance experience to help the organization build on this turnaround. Lastly, I'd like to highlight the many contributions that both Tom Herman and Ken Alterman have made to the company in their 21 and 14 years of respective service to the board. Saying thanks is not enough for all the hard work and their dedication to grocery outlet. They will be missed. Our third priority is addressing execution gaps. On the systems work we're undertaking, we've made steady progress during the last two quarters, and this is positioning us to unlock more opportunities across the business. We expect to complete the last major systems update for our IOs by the end of the third quarter. We're continuing to progress by building resilience in our work with better governance and data integrity, process improvement and selective software simplification. Next year we're going to transition from development to optimization. In Q2 we completed the real time order guide rollout, leading to improved inventory visibility and in stock within our stores. Feedback from IOs who have used the real time order guide has been overwhelmingly positive. To illustrate the powerful impact of gains in inventory availability, consider that within our focus stores we've seen a material in stock improvement on our top 200 items that's driving roughly 200 basis points of comp lift. We're building on the success of the real time order guide with the launch of our new arrival guide, which we plan to rollout this fall. The new arrival guide will significantly expand the ordering window for both everyday items and opportunistic offerings to our IOs, allowing them to more thoughtfully plan and balance their product mix. The new arrival order guide had been a critical execution tool that our IOs relied on pre-systems launch for their planning. We're excited about reaching this execution milestone and helping our IOs win guess by improving their ability to plan product with extreme value. During the second quarter we've also made progress on our private brands efforts. We've introduced our own wine label called Second Cheapest Wine, given the current state of oversupply in the wine industry, we recognized a unique window of opportunity here to launch a compelling selection of wines at under $5 a bottle. This item has generated significant buzz and sales. We continue to believe strongly in our unique value proposition. On our supply chain initiatives, I'm also pleased to report that our transition to One DC in the Pacific Northwest has been executed flawlessly by our team, a big win in simplification of operations and improving service levels to our IOs at a lower cost. We'll continue to evolve this element of our capability set over time with our next DC conversion in the East to begin in Q4. Our fourth priority is improving execution at scale. When I think about grocery outlets future, I'm especially energized by how today's efforts should enable us to scale sustainably over the long term for this business. Last quarter, we shared our goal to transform grocery outlet into a truly outstanding selling organization. As I mentioned, on our last call, we've been working on a model store and sharing best practices with IOs to deliver a winning in-store experience and improved store financial performance. For example, in our Oakland, California test store, we've made key enhancements to layout, to signage and storytelling, merchandising, and implemented a new fresh category ordering and forecasting tool, all of which have contributed to middle single digit lift in comp versus our control group. And importantly, we believe these improvements can be implemented at other stores at a manageable incremental cost per store. We've begun to roll these improvements out to a pilot group of stores and are accelerating the most impactful of these improvements, particularly our forecasting and ordering tools in fresh to help drive IOs success now. By offering our IOs stronger support, tools and training, we believe we can strengthen the value proposition for our customers and our operators at the same time. I'm very excited about partnering with our IOs to help them drive their success, and I look forward to updating you all on our progress over the next couple of quarters. Since our last earnings report, I've spent more time with our IOs and with our stakeholders to hone in on the large opportunity in front of us. Everything I've learned continues to strengthen my conviction that the work we're undertaking today will position us to create value for everyone that touches this business. A few comments on customers. We've begun the work to better understand customer perception of our brand to ensure that we're creating an experience that customers love. In the research we've completed so far, we've reaffirmed that our value proposition continues to resonate with our core guests and that the treasure hunt is a strong motivator of trips. We have an opportunity here to better tell our story. On value last quarter, I spoke about our increased focus on known value items or KVIs. Since the start of this year, we've sharpened our KVI positioning while delivering sequential improvements in gross margin by improving shrink and mix. We're pleased with our current positioning on the pricing of KVIs across all markets, and when looking at the whole basket, we continue to see and deliver substantial savings versus our peers. Demonstrating our value positioning consistently will support the building of trust with customers across our network. Our last guests have also given us some specific direction on the opportunities to earn their business back. The great news is in the areas that we need to improve, they're primarily execution related. For one example, customers want more consistency in product availability. To improve our shopping experience, we will continue to focus on execution related support to ensure greater consistency across our stores. We are doing just that in two important ways. First, as I mentioned, the systems progress we're achieving is enabling us to improve our in stock position and create some positive, modest sequential improvement in our opportunistic mix versus Q1. We expect this to further strengthen with the rollout of our new arrival guide as we help iOS better understand what's coming. This capability will advance iOS sales planning process. Second, we're now rolling out the new forecasting and ordering capability with tools and training that focus on fresh meat and produce. These improvements in support will help drive sales by being in stock. And this has been an extremely successful part of what we've done in our Oakland pilot by driving sales through in stock availability and consistency with added benefits of improved product freshness in both meat and produce. Driving the success of our iOS is critical to our success. Over the last several years, we've invested in the success of our iOS. These investments have contributed to low voluntary I over turnover, which remained below 10% last year. However, we need to keep evolving to ensure we have a pipeline of the right mix of experience and quality across all regions and markets. I've had more time in the field and have enjoyed learning from our iOS and gaining insights on their respective market regarding opportunities and challenges that they face. We have many enthusiastic operators that will be piloting and collaborating on many of the new commercial activities we're testing this quarter, including implementing the successful merchandising, store layout changes and communication changes that are driving results in our Oakland store. This IO direct involvement should help us to rapidly calibrate our commercial approach for maximum execution capability at scale. To drive IO success going forward, we're strengthening our sourcing model, investing in training and tools, and engaging more closely to share commercial best practices. This work builds on the stronger systems foundation we're establishing, further enhancing visibility into our inventory for iOS to consistently offer a winning experience for their customers. So what does this mean for our shareholders? This should mean a higher and more sustainable growth rate as key initiatives begin to drive comp growth back towards historical range. It should mean consisting gross margins, which are benefiting from an increased mix of opportunistic offerings and improvements in our shrink. It should mean operating more efficiently with greater discipline and keeping costs in check to drive operating leverage as we return to growth. I believe this should help us achieve our 6% adjusted EBITDA margin milestone on the way to even stronger margins in the future. It should also translate into stronger returns on invested capital as we underrate new stores with better data, processes and rigor. In closing, we believe we have a path to stronger organic growth, margin improvement and improving returns on capital. By focusing on execution and getting the fundamentals right, we see significant long-term potential for all stakeholders. While we're early in this journey, we are already making solid progress and I have strong conviction in the power of this model. I want to thank our independent operators, our team members, our suppliers and shareholders for your continued support. Together, we will thrive as we position GroceryEllet for its next stage of growth and prosperity. Before turning the call over to Chris, let me finish with a few thoughts on our mission of touching lives for the better. We just completed our annual Independence for Hunger campaign and during this event, our IOs partner with local nonprofits to provide critical food resources to their communities at a time of the year when they need it most. Our supply partners also contribute by donating food and collaborating on events with our IOs. I'm very proud to share that we've raised over $5 million this year, the equivalent of more than 10 million meals benefiting over 500 local organizations. We are equally proud of the $30 million that we've raised over the 15-year history of this program. That is a wow and we're very proud of it. With that, I'll turn the call over to Chris to take you through our financial results and our outlook. Thank you.

Thanks, Jason. In the second quarter, we achieved encouraging progress as we began to execute the strategic plans we laid out last quarter. As Jason shared, our second quarter results exceeded our outlook and as we deliver on the key initiatives of our strategy, we're beginning to see modest comp improvement. At the same time, our focus on achieving operational excellence continued to drive gains and profitability. Looking beyond the quarter, our disciplined approach to store expansion is setting the stage for stronger long-term returns on invested capital. These wins bolster our confidence in the achievability of our plans for the year and as a result, we are re-firming a 2025 outlook except for adjusted EPS, which we are increasing due primarily to favorable interest expense. I will walk you through our Q2 results before sharing more detail about our outlook. The comparisons I will provide are on a -over-year basis unless noted otherwise. Please also note that with the closing of our UGO acquisition on April 1st of 2024, our second quarter 2025 results and their prior year comparisons include UGO for the full quarter. Net sales increased .5% to $1.18 billion driven by a combination of new stores opened in the last 12 months and a .1% increase in comparable store sales in the second quarter. Comp growth was driven by a .5% increase in transactions, partially offset by a .4% decrease in average transaction size. We continue to make progress on driving in stocks on everyday items and increasing our mix of opportunistic offerings, all of which are showing initial signs of contributing to comps. In the second quarter, we opened 11 new stores and closed two stores. We remain on track to deliver our annual target for 33 to 35 net new stores for the year, and we ended the second quarter with 552 stores in 16 states. Gross profit increased .3% to $360.7 million, and we achieved gross margin of 30.6%, which exceeded the high end of our outlook range. Gross margin was down 30 basis points compared to last year, but increased 20 basis points compared to the first quarter of 2025, driven primarily by improvements in inventory management. SG&A increased .2% to $336.8 million compared with the second quarter last year, and leveraged 10 basis points to .5% of net sales. The decline in the -over-year SG&A ratio was driven primarily by a decrease in commissions, as we are no longer paying elective commission support related to the system's conversion. This was partially offset by growth-related costs in stores and corporate support. Relative to Q1 this year, SG&A as percentage of net sales was down 90 basis points due primarily to reductions in salary expense and incentive compensation and other corporate costs. Our cost reduction program is off to a solid start, and we expect to begin realizing significant gross savings in the second half of 2025. While a majority of these savings will be reinvested in the second half to drive growth and support our IOs, we expect substantial net savings from this initiative in 2026. As we discussed on the last call, we are shifting our focus toward clustered store openings with the most attractive market conditions, and as part of that effort, the company incurred $11.2 million in charges during the second quarter related to the previously announced restructuring plan. The charges related to a combination of impairment and disposal of long-lived assets and lease termination costs. The actions under the restructuring plan are now substantially complete. Net income was $5 million, or five cents, per fully diluted share compared to net income of $14 million, or 14 cents, per diluted share last year. Adjusted net income decreased .3% to $22.8 million, or 23 cents, per adjusted diluted share, compared to $25.1 million, or 25 cents, per adjusted diluted share last year. Adjusted EBITDA was $67.7 million for the quarter, compared to $67.9 million last year. Adjusted EBITDA margin was .7% of net sales, down 30 basis points from the prior year, and up 110 basis points from the first quarter this year. Net interest expense was $6.5 million, up $985,000 year over year. The increase in net interest expense was driven primarily by higher average principal debt, partially offset by a decrease in interest rates. Income tax expense was $1.3 million, down from $6.5 million last year. Our effective tax rate for the quarter was 20.3%, compared with .9% last year. The change in our effective tax rate was primarily due to changes in our level of earnings, partially offset by non-deductible executive compensation. Net cash provided by operating activities for the first half of 2025 was $132.6 million, compared with $49.4 million last year. The increase was driven primarily by the timing of working capital flows. In addition to ending the quarter with $55.2 million in cash, we had $205 million of available capacity on our revolver. We remain committed to investing prudently in growth initiatives with a focus on delivering high returns on invested capital. During the second quarter, we invested CAPEX of $58.3 million net of tenant allowances, primarily on new stores, supply chain related projects, IT, and store maintenance. Total net of issuance costs was $474 million at the end of the second quarter, down $3.5 million from year end, with net leverage at 1.7 times adjusted EBITDA. Now turning to our guidance for the third quarter and the rest of 2025. As a reminder, this year is a 53 week year. Sales from the 53rd week will be excluded from our same store sales calculation. As Jason and I shared, we are affirming our outlook for the year except for adjusted EPS, which we are increasing due primarily to favorable interest expense. Our outlook for the year assumes the following. Comp store sales growth of between 1% and 2%. The addition of 33 to 35 net new stores, gross margins in the range of 30 to 30.5%, adjusted EBITDA of $260 million to $270 million, adjusted EPS in the range of 75 cents to 80 cents per fully diluted share, compared with 70 cents to 75 cents previously. In addition, we are updating the following assumptions for the year. Restructuring charges of $63 million versus 59 to $61 million previously. Net interest expense of approximately $27 million versus $32 million previously. The reduction in interest expense versus our previous view is due primarily to lower anticipated interest rates. Share based compensation of approximately $17 million versus $25 million previously. For the third quarter of this year, we expect comp store sales between .5% and 2%. The addition of nine net new stores, gross margin between 30 and 30.5%, adjusted EBITDA in the range of 63 to $67 million, and diluted adjusted earnings per share between 17 cents and 19 cents. In closing, we have a tremendous opportunity in ample white space in front of us. By executing our strategic initiatives, we believe we will unlock value and potential in the business while generating meaningful growth, profitability, and returns on capital on behalf of our customers, our IOs, and our shareholders. And with that, we'll open it up for questions.

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 one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. We ask that you please limit to one question and one follow-up. 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 Anthony Bonadio with Wells Fargo. Please proceed with your question.

Yeah, hey, guys. Thanks for taking our questions. So I just wanted to ask about the comp guidance. Your reiterated guidance implies a pretty healthy acceleration in the back half. I realize it compares E somewhat, but can you just talk a little bit more about your confidence level there at this point, given what you've seen into July and August, and just talk us through some of the underlying drivers there?

Hey, Anthony, it's Jason here. Thanks for the question. Yeah, we're feeling good about where we're going right now. We're seeing green shoots from initiatives we believe will build momentum in the back half of the year. I've talked about value, sharpening our KVIs, the drag on value perception there. We think that works now significantly complete. We know that there's some storytelling to do there. We're going to be doing some experimenting there, but feel good about the pricing. The pricing studies we've also done, when we look at the total basket, we're in a good spot there now, 15 to 20% lower than a discount peer. And I feel strongly that that's going to help us as time goes on. We're also seeing improvements in our in-stock. So I know we've talked a lot about that with tools, but we're seeing specifically improvements on our fastest selling 20% of SKUs in the stores. As our operation team creates focus and collaborates with IOs, as one example, we're seeing 150 to 200 basis points of comp improvement just on that portion of the business. So really helpful there. The implementation of our new arrival guide this fall will supplement what we've already rolled out in Q2. And this is something that IOs have given us a lot of feedback on. They're really excited about what that will mean. This is going to help with their forward planning. So their ability to book, see and secure product will help two things. One, in-stock. And the second piece, it really will help them with their opportunistic selection of SKUs. They're going to be able to book those products outside their ordering windows. And we believe those things will contribute positively to sales. Some other points, our consolidation in the Pacific Northwest, I mentioned in my opening comments, that's helping that region with better in-stock for service levels and variety. So two really important points there. All of that, in addition to probably a really important point here is we are rolling out a forecasting tool, ordering tool we've never had in meat and produce specifically. And so this is not a systems dependent tool, but it works very effectively. I've done it in my past in other organizations. We're seeing double digit increases in sales in those two departments in our test stores. And so we're now rolling that out to the entirety of the business. So for all of those reasons, we feel that the business will forecast the guidance we're giving. We're feeling good about it. Helpful, thanks guys.

Thanks, Anthony. Our next question comes from Corey Tarlow with Jeffreys. Please proceed with your question.

Great, thanks. I just wanted to talk about, Jason, one of the comments you made about the newer cohorts of stores. Sounds like they're performing a little bit better. Was just curious, maybe if you could unpack some of the drivers there. And secondarily, it seems like a lot of the changes that you're making are very sensible, number one, and also very trackable given the comp lift that you are seeing. We're hearing like 150 to 200 basis points or mid single digits. How do you think about the opportunity based on what you're seeing in your test stores as you continue to roll out some of these initiatives across the broader fleet?

Yeah, it's a great question. I'm really excited about it, to be honest. The pilot work that we're doing in Oakland, we've just introduced, we're almost done in Marin City. Our IO there, you have to talk to her. She's levitating off the ground. She's so excited about what she's seeing with her guests and the results. We're gonna obviously roll anything that works and resonates with guests. That's what we're gonna put into this business. All the things we're learning about what we're doing here are gonna go into the new store executions. In the near term, we've talked about the store count, we've talked about the mix. When we think about the mix here, we have adjusted the mix of stores, infill versus new markets. That is important to note. Just a little hair north of 50% of the stores we've opened this year are infill. We are spending a lot of time on site selection criteria, making sure that our volume underwriting makes sense and that we're spending a lot of time on site strength. These are kind of fundamental good practices when you're thinking about growth. The work that's already begun on clustering and how we think about IO support in those markets, the supply chain support, the marketing, all helpful pieces. We see healthy returns building in 25 and 26 as a result of that work and effort to come.

That's great. And then just Chris on the sort of the shape or the timeline of gross margin evolution, how should we be thinking about some of the puts and takes from the transition into the new DC? And then I believe there's a new conversion coming as well as the pricing that you've been injecting into the business to help to drive sales. So curious how to think about the gross margin as well as we look ahead. Thank you.

Yeah, sure. So we feel good about where our gross margin guidance is at for the year. We obviously, we've talked about some improvements in shrink and we think there's more there. But just given the various initiatives and pilots that were Jason mentioned some of them, but we just wanna have some flexibility in the margin. So I'd say at this point, the 30 to the 30 and a half is a good range for the margin.

Okay, thank you very much. Best of luck, I'll pass it on.

Thanks Corey. Our next question comes from Mark Carden with UBS. Please proceed with your question.

Good afternoon, thanks so much for taking the questions. So to start, just what are you seeing recently with respect to the health of the consumer, any incremental changes to the shopping habits over the course of the past few months? And then just related, how are you thinking about potential impacts from snap changes going forward?

Thanks. Hey Mark, we aren't seeing anything as of yet on customer. We know that there's lots of talk about recession and those kinds of potential things. This business historically wins during periods of recession and in the past high kind of peak inflation. What we're doing here is really readying the business for any kind of eventuality in the market. So we're really focused on what the customer's looking for and what we think the opportunities are to improve our execution and obviously the experience. And so that's our focus. Again, not seeing a lot that would tell us that the customer's changing at this point. Snap should drive, whenever you see some of those changes, people are looking for value and the folks that are on those programs, definitely we would be a choice for them, a selection of choice for them and we expect to take advantage of that.

That's great. And then as a follow up, Jason, it sounds like some productive meetings with your IOs. How would you describe the current health of your IO base? Is your pipeline seeing much of an impact from any of the macro uncertainties or any lingering concerns about some of the prior execution challenges? Just what's shaping up in general on that front?

Yeah, sure. We see a healthy balance between supply and the demand when it comes to IO engagement. I am actively engaging with our IO network. I think communication is an essential ingredient in building trust. And so we've introduced a number of new ways to increase the frequency and depth of communication. I think that's very helpful. When we think of the health of the IO network, I know I mentioned in my remarks, voluntary attrition is less than 10% this last year, year on year. So we're feeling good about where we are. It doesn't mean that there isn't room to improve and clearly the business has been through some challenges with systems that made some of those, their -to-day work very challenging. I'm very committed to our IO network making both the business stronger, which obviously leads to higher profits, but also easier to run. And so I think we're on the same page with our IOs on what's required and what that roadmap might look like. Great, thanks so much. Good luck, guys.

Thank

you.

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

Oh, hey, Jason. My question, my first question is on the new arrivals guide and also the order guide, can you just kind of give us some color on the new arrivals guide, like how these systems are for the IOs versus what was going on pre the SAS rollout?

Sure, Robbie, yeah, great question. So the new order guide has come out that went very successfully. The feedback's been very good. We were actually able to make some enhancements to pre-GOT implementation. The speed of the system is actually faster than it was before. Feedback's been great. I guess the difference, the subtle difference between what we talked about with the order guide and the new arrival guide is the notion that our operators can reserve product, they can see what's coming and reserve product outside of their ordering window. So really what it does is it helps them build their merchandising plan and their execution for their team. And so they'll go in and they'll review what's coming. This is how it worked in the past, over a period of time as they go to execute. And so when we're meeting with IOs, this is something they're very excited about. And we're making good progress on the development on that front and expect to have that rolled out between Q3 and Q4. So right before our key selling season, and again, we're excited about that progress from our team.

That sounds great. And Chris, maybe for you, just the, can you remind us where you guys are on the curve on the SGMA commission support? That was a, less support was a benefit this quarter. Is it a tailwind? How many more quarters is that a tailwind for you guys?

No, it's not. I mean, it's, there's no more commission support we're providing.

Right, so like versus last year, when did you stop the commission support? Maybe just remind us, is that, was this the last quarter where you were getting a benefit from no longer providing the support? Yes, that's correct.

So going forward, it'll be, year over year comparisons will be the same.

Perfect, thanks so much.

Thanks, Robbie.

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

Thanks for taking the questions. And wanted to start with your new unit development, kind of moving forward. You talked about the plans, I think you said, nine in the third quarter, and that you're mostly or slightly over 50% infill markets. As you look ahead and you think about how to plan the business to continue growing, moving into 26 and beyond, are you looking to go to 70% infill markets? Can you give us a little visibility on what you're thinking in terms of the future on that?

Sure, sure, happy to. So, again, from the last calls, we talked about slowing down, working the model, and the near term, the points I've gone through are helpful to get those returns up over 20. We feel good about that. My aspiration is to improve those returns actually over 30, and we're gonna do that over time. And that's all about making sure that we open stores at higher starting sales rates. That means the brand awareness has to be there, our storytelling's gonna be strong, we wanna make sure that IO strength and execution is there, and that we're localizing stores and markets. And all of that will lead to decisions about, how, what the mix is. But in the 26, 27 range, we're in the zone around 50% or better on infill. And we feel that we've got at least 20 to 25 opportunities per year to continue to infill-based opportunities with high returns that will help us with the mix as we work the model.

Got it. And then just stepping back, so you've got the real-time order guide in place, you have new arrivals, which sounds like an exciting initiative. What do the IOs tell you, now that you've got real-time order guide done, what do they tell you they want or need the most to really get the business back to where it should be?

Yeah, I've had a number of IOs tell me that the number one thing they've been waiting for is the new arrival guide. So there's a fair bit of excitement around the rollout of that this fall. That's the number one piece. Clearly, there's other small components. We wanna make sure that our stores are easy to run, and so the systems they use, the processes that we provide, the support we give, we wanna make sure that that's as frictionless as possible so that our IOs are able to focus on their communities, their teams, and obviously their customers. And I can't understate the distraction that happened with the system implementation that's made the IOs very, have to be very inward-focused and the -to-day running of the business has been challenged. So those are the two themes, I would say, have been most shared with me as far as on that front. So new arrival guide, lots of excitement. We'll continue to make progress on the little things that are important to our IOs to make the stores easier to run. Those are the two things that on the system front that our IOs have given feedback on.

Just a clarifying question on the comment about the new arrival guide. And I think you said a double-digit lift in meat and produce. Is that just on the test location in Oakland? Yeah,

yeah, thanks for the clarity there. Importantly, that is a new capability. So it's called product movement record just in time ordering, and it's for meat and produce. And it's actually not linked to the new order guide, or new item arrival guide. Those capabilities in the business were really grocery-focused, -good-focused in the past, and they continue to be. We do have meat and produce in our order guides, obviously, but this will help our stores very specifically in the way they think about forecasting for demand and the fulfillment of fresh produce and meat. And what we've seen so far in the two stores we've got this in is double-digit sales increases for both meat and produce. This has a lot of spin-off benefits. Obviously, being in stock is one of the most important things that customers have given us feedback on, how we can earn their business back. And clearly, being in stock on the things you sell is very profitable to do. And so I'm personally extremely excited about the prospects of seeing that rolled out. And I know that the IOs that are going through the training right now are also equally excited about the simplicity of that and what that means for their business.

Great. Thanks for taking the questions and best wishes. Thank

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

Hi. Did you guys... Thanks. Did you guys talk about the pace? I don't think I heard it, but the pace throughout the second quarter, how the months progressed, and then I guess related to that, if my math is right, and sorry, I'm doing that on the fly here, it might not be correct, but it seems like the... If you look at the full year guidance, then we have the third quarter guidance, so you can sort of back into the fourth quarter. Seems like a much better sort of ramp or comp and growth and margins, et cetera, on basically all line items in the fourth quarter versus the third quarter, even adjusting for the extra week. Any particular reason for that? Is that right? And any particular reason for that? Thanks.

Yeah, I think just to make sure I understand your question, are you asking about the improvement in run rate on comp sales? Mike, is that what you're...

Yeah, sorry. It is really two different questions. First, within the second quarter, can you talk about the pacing throughout the second quarter, and then stop, then full stop? The second question is, if you look at the implied guidance for the third quarter versus the fourth quarter, the fourth quarter looks like it has better comps, better margin growth, better EBITDA growth, et cetera, than does the third quarter, even adjusting for the extra week. All that's on a -over-year basis.

Yeah, sure. So on the first question, we do expect to see improvement in comps, and that's what we're seeing right now. So our guidance right now is consistent with our experience. And just to make sure that it's clear, we do have a 53rd week included in our guidance for Q4, and so there is the benefit of the leverage, if you will, for that last week of the year, just to make sure that's clear. Right,

I get that. But again, maybe my math is off, but even taking out 75 million sales, and I think you said 5 million EBITDA, and what we think that means for EPS, it seems better in the fourth quarter, but okay. But again, I was referring to, my first part of the question was, in the second quarter, talk about April versus May versus June, and what you're seeing in early July, if you could, or in July and early August.

Yeah, it's consistent with the guidance, so we're seeing an improvement in run rate, and clearly we feel strongly that the initiatives that we've begun to roll out and implement in the business are gonna have more and more momentum as the year goes on. That's our thinking.

Understood, okay, that makes sense. I appreciate it.

You bet,

thanks Mike.

Our next question comes from Oliver Chen with TD Cowan. Please proceed with your question.

Hi, thanks a lot. We're excited about the private label innovation you've been doing. What are your thoughts on what's happening there in medium term, in terms of plans and mix and how it may interplay? Also, as you think about key value items as well, how will that manifest in terms of improving the comps over time, or what are your thoughts about that as part of the portfolio and what you're seeing in elasticity? And lastly, the question on opportunistic supply. I just would love your updated thoughts on how that looks right now in the marketplace. Thank you.

Thanks, Oliver. Okay, I'll take the middle, I think the second question first. So on KVIs, it's just important to note that it's, you need to be priced right in a real way for customers as they come into the door, and they need to see that over time. So there's a frequency part of this. There's a lag in perception versus reality. And so the work we've done, we feel great about. So we're in good shape there. I think we've got some opportunity to tell our story in a stronger way through our marketing, and we've got some experiments going on with that. So that's part of the comp story. So we're seeing some improvement in run rate on comp on KVI items. Nothing dramatic, but we're starting to see some of that. On private label, we definitely have opportunity to continue to dial in our assortment strategies and ranges. And so that's some work in play. Some of the piloting work we've done will lead us to certain decisions. But clearly, opening price point quality private label is a positive contributor in the mix. It's a positive and accretive margin play. It can help you with brand-related loyalty. And so the example of the second cheapest wine rollout, we just got a tremendous amount of credit from our guests on having a product like that under $5 a bottle with a fairly high quality profile. So good feedback there. And that work will continue. And then on the op mix, third question you had, there's our buying teams continue to have lots of opportunity. And we're not seeing a problem or an issue as far as finding the product. It's, you know, as we continue to improve what we're doing here, we did see a slight improvement, a modest improvement in our mix in op. And I think that, again, as we work with our IOs and give them new information, it's helping us, you know, will drive results that show up in comp store sales as well as, I think, improved margins. And that clearly op does a number of things for us, including drive a lot of value for customers. So we're excited about what's ahead there.

OK, thanks. One follow-up. You gave a lot of great details about the new store environment and strategies. What are the harder parts of what you're endeavouring? And or why weren't some of these principles in place prior? Thank you.

There's a lot of execution to do. So in any of these things, it's just a tremendous amount of execution to do. There's process work to do. I think if we think about the business and, you know, the challenges with systems, we're very distracting here. And so I think a lot of what's happened here has just been a tremendous drag on the organization's focus. And so as we come out of that darkness, so to speak, you know, we're going to open up a lot of opportunity for ourselves to be focused on the customer and improving our business.

Thanks a lot. Best regards.

Thank you. Our next question comes from Leah Jordan with Goldman Sachs. Please proceed with your question.

Thank you. Good afternoon. At the beginning of the call, Jason, you highlighted an opportunity to drive further leverage of SG&A over time. And this has been a main investor concern for a long time. So seeing if you could provide more detail on that, you know, what are the areas that you could optimize over time and any colour on the potential timeline there?

Sure. You know, Chris has done some... a little bit of outline on that, but we do see opportunity on a number of fronts. We'll probably give you a little more colour on that maybe in the next call. But, you know, one of the things that we... is kind of obvious, I guess, to everybody is the systems work. We do believe that as we move through the stabilized phase into more of an optimized phase, there's going to be opportunities for us to improve the tools we provide to stores and our business, but also simplification work that will happen. And there will be spin-off effects on costs, whether it's capex and some opex. Those things will come. And then the work we've already engaged with, Goods Not for Resale, the continued work on shrink improvement, all of these things are going to be helpful for us as we continue to grow the business in a profitable way and take costs out over time. That's how we've been thinking about it.

Yeah, and just, Chris, just to add to that, we're very focused on G&A for sure, and I'm very pleased with the progress that we've made thus far. We're also, as part of it, looking at all areas, including supply chain, freight, and other costs that we can be more efficient on. And again, there's some progress made on there. So, you know, the savings will be meaningful. And we'll contribute to leverage. You know, we may reinvest some of that to help drive, you know, sales and comps with our IOs, but I do expect for 2026 that it will be a meaningful contribution overall.

Very helpful. Thank you.

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

Hey, guys. Good. Jason, one thing I want to start with, I think you said in the test stores, right, meat and produce are up double digit. I mean, I take that to mean, you know, somewhat north of 10%. But I think you also said that maybe total comp was up mid-single digit. So I'm curious. I don't think meat and protein are not, or meat and produce are not huge percentages. So you're getting a lift, a sizable lift beyond meat and produce. Is that fair? And then how representative do you think that is as you roll this out?

Yeah, I think that's absolutely the case, John. It's across many categories. So we're seeing nice improvement across the business. I want to make sure I underline something here. We did not reduce prices beyond what we've talked about kind of globally. So that's important to note. And we didn't add any marketing to the test stores. So this is purely merchandising related customer reaction. Nothing to do, we didn't stimulate it anyway. So I want to make sure that's clear. And, you know, some of the benefits we're getting at customers are by making the stores easier to shop, frankly, the feedback we're getting is that guests can see the product more clearly. They are telling us we have better assortment in addition to better in-stock. And so, you know, what we're seeing in the test stores is customer count increasing, but also really nice basket growth across categories. So a really healthy mix of, you know, kind of opportunity. And I see that being something that's transferable right across the business. So, you know, you kind of wait until you have six or eight stores, which is what we're doing next. We've got a number of IOs who have signed up and are excited. They've been, you know, the local stores come in and they see what we're up to. And we've got a group of those that are going to be rolling these things into some stores in this quarter. But I think those things are very transferable to the entirety of the business. So, you know, we're very excited about what we're seeing so far,

John. And then quick follow-up. I know it's still early in your tenure, but have you started a form of view on company-owned stores? Because I know you've got UGO. Is there a place for company-owned stores in certain regions where you don't think so?

Yeah, you know, it's an interesting conversation to have. You know, I believe in the IO model. I think what's really important is to make sure, the company or not, that you have a very high-quality individual that's running the operation. And so, you know, that's how I think about it. So what we're going to do here is everything we can do to support having the most talented individual or individuals owning or operating our stores. And, you know, we do have a handful of corporate stores already. The same kind of thinking would apply. I don't have, John, a program that says we're going to open 50 corporate stores or anything like that. That's not in my thinking at this point. Thank you. Thanks, John.

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

Hey, good afternoon. So one of the comments was about consistency, keeping the same products on the shelf, some of them customers. Do you have a view on the mix between closeout and every day? And if you have to increase every day, does the math of the model change in any way? It doesn't sound like it, but curious how you think about that.

Yeah, no. There is a few hundred products you want to carry every day, but the vast majority, thousands of products would be opportunistic. So when you think of what's interesting about retail is there is a small number, several hundred. It represents a fairly large portion of sales that almost everyone buys universally. But beyond that, there are literally thousands and thousands of products in our stores and will continue to be and are in the test stores that provide this model with a unique mix and profit profile.

OK, and then related to something you said earlier, you said in the test stores you haven't touched price or I don't know if I missed that comment or you haven't lowered price in any capacity. If you think about what's going to drive stronger comps in general, I don't know if you put your finger on it. Is value a component of it or value should still be there even with consistency in the same breath?

Yeah, I think it's a little bit of a different question Value generally for customers, they define it as value equals, and everybody has a different formula, price plus quality over service. And so it's very important to get those components in the right mix. It's very important to communicate those components in the right way. And it's very important to deliver that consistently over time. And so value for sure is pricing. It's promotion, it's the total basket. It's also how you communicate it and merchandise it. And so the point I was trying to make was just to let you all know, this wasn't a, hey let's lower prices and drive comp sales. This is really about what do customers enjoy and appreciate in a shopping experience? What are they telling us? And how do we merchandise the stores to increase sales and increase our bottom line? And so the two objectives here are to make something relevant for the customer so they come and they're loyal. And the second is to improve our profitability profile. And so we've been able to achieve that and that's something that's gonna be an important component of everything we do here.

Okay, thanks, good luck.

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

Yeah, hey guys, thanks for taking my question. So I wanted to ask about transactions and ticket. You know, you talked about transactions definitely being up, ticket being down a little bit. Is that a reflection of the consumer or the pricing environment or the number of items in the basket? I'm just curious what you're seeing from that standpoint.

Yeah, it's a bit of a trend that company's been on for some time is, you know, pretty healthy customer count but some weakness in the basket. And, you know, in the last quarter we saw some improvement in the basket and we're gonna keep working that. So I don't think it has, there isn't anything macro that I can see yet that would tell me that that's what's driving it. Not in a significant enough way that I could give you a conclusion. I do know that making the stores, the experience better, we're gonna get bigger baskets and we saw that in our test store in Oakland. The basket's very healthy there, well above kind of company norm and growing. And so, you know, we're getting, you know, what you always love is more items in the basket, larger baskets and, you know, customer count growth. And we're getting all of those things in the test environment.

That's great to hear, yeah, because that's kind of where I was heading with that. I'm glad you answered that, thank you. And then my other quick question, I know it's probably a little further afield at the moment but on digital or e-commerce, what are your view of that? Now you've been there, you know, half a year or so. Any thoughts on the strategy from that standpoint?

Yeah, we've got, you know, some digital execution. I do think that there's opportunity for us to make some improvements there. We're not ready to share anything there that has not been our first focus. So we're, you know, we're focused on the core. Obviously, many retailers are doing really well on that front and I think we have some, you know, room to grow,

absolutely. That's helpful, thank you. Good luck with this quarter.

Thanks very much.

Our next question comes from Bill Kirk with Roth Capital Partners. Please proceed with your question.

Good evening, everybody. Jason, as you've spent more time with the IOs, have you given any consideration to allowing more scale at the IO level and maybe for the best operators to have more stores?

Yeah, we've, I think there's been a history here and then something we've continued with is IOs having, you know, one or two stores. We did add in this quarter some of our most competent, successful IOs, additional stores, and, you know, when you see, like anything else, you want to make sure that you're providing opportunity and I think that's something that we feel good about. Okay.

And then a, I don't know, I guess more housekeeping question. On the Easter shift that was in the period, did you mention how big that was, the comp, and does the shift, does it impact more the transactions or the transaction size?

Yeah, I think last quarter we talked about the quantum on the shift. We did recognize that, you know, the guidance we gave for the quarter was 1% and that's about what we hit, and so all those components from the last quarter's call basically showed up in the number.

Okay,

thank you. Thank you,

Matt. You're

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

Thank you very much, everyone, for joining. I know we have some follow-up calls. I look forward to keeping you up to date on the business. We're excited about what's happening here at Grocery Elda and thank you for your attention this afternoon.

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