Grocery Outlet Holding Corp.

Greetings and welcome to the Grocery Outlet Fourth Quarter 2025 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ian Ferry, Vice President of Strategic Finance and Investor Relations. Please go ahead.

Good afternoon. and welcome to Grocery Outlet's call to discuss financial results for the fourth quarter into January 3rd, 2026. 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 meaning 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 takes 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 thank you all for joining our call today. I joined Grocery Outlet because I believe in what makes this business special, a uniquely differentiated model that provides tremendous value to customers with opportunities to scale. One year into my time here, I believe in those things more than ever, but I want to be direct with you today. Our fourth quarter results were unacceptable and our outlook for 2026 reflects a business that has more work to do than we expected. I own this and own fixing the issues. Today, we plan to provide an explanation of how we got here, where we are, and what we're doing about it. First, how we got here. For context, I'd like to walk you through the sequence of events over the last six months. This is important because I want you to understand not just what happened, but where our thinking was at each stage, where we have had the course correct, and why we remain confident in our ability to achieve the potential we see in our business. When we reported Q2 earnings in August, we had several reasons for cautious optimism. We delivered three consecutive months of comp improvement, We'd been focused on improving value by sharpening our KVI base pricing, reversing missteps that occurred in 24, and believed that this had been a key driver in holding value back for our customers. Through this same period, we were able to maintain gross margin stability through shrink improvement. Our 25 cohort of new stores was performing ahead of plan, and we'd modulated the 26 growth plans to prioritize returns on capital. And finally, we believe that restoring key operator tools from our systems work, like the real-time order guide and new arrival guide, would create an immediate tailwind to store productivity. However, as we discussed in our last earnings call beginning in late September, comp performance began to deteriorate. We shared that some of this was a direct result of decisions we made on marketing that were net negative, and we responded by recalibrating our marketing mix and doubling down on in-store execution. With new leaders across store ops, merchandising and supply chain, we began accelerating our store refresh program based on encouraging early results. Following our Q3 call, November comps were weak, driven in part by the timing of EBT distributions that negatively impacted our Snap business and affordability pressure on our core customer increased more than we'd expected. Despite finishing Q4 with positive traffic, basket pressure intensified resulting in a negative comp for Q4. Comp sales continued to decelerate in January, driven by declining units per transactions and slowing traffic growth. At that point, we took a hard look at the business from end to end, buying and supply chain, pricing and promotions, the customer experience, and our store network. We also sourced feedback from our customers and our operators. This deep review surfaced three fundamental drivers of comp deceleration. First, the environment had shifted meaningfully, as store and industry data validated that consumer pressure had intensified through the fourth quarter and now into the first quarter. Second, customer survey and third-party research showed that while our base pricing was competitive, our leadership position on value perception had eroded. While we made progress by addressing KBIs, we needed to address value more holistically. Third, our push to improve in-stocks and add assortment to ensure the availability of everyday items squeezed our supply chain, impacting our ability to deliver high-quality opportunistic product that drives value in this business. Shoppers came in looking for the value and the treasure hunt experience they expect from Grocery Outlet, but left with fewer items per trip because we didn't deliver the weight of wow items and the breadth of assortment that drives basket size and value. While we made progress over the past year commercially, we've had to take decisive action to drive near-term improvement, and we have more work to do to improve our value proposition for our customers. Now let me turn to share what we're doing about it. First, on restoring op mix. Grocery Outlet has historically delivered extreme savings by providing tremendous deals on opportunistic product. Our customers' perception of value is driven by our opportunistic product And they describe these products as great deals or promotions with discounts up to 60% across an ever-changing and wide breadth of branded high-quality assortment. Before I dive into what we're doing differently, let me just say first off that we're convinced that ample opportunistic supply exists. We're in constant contact with our major suppliers, and it's clear to us that many of the drivers of constant supply remain intact. Over the next several months, our team is intensely focused on ensuring we have the right weight and depth of quality opportunistic branded product flowing into our mix to restore a winning position on value with our customer. To support this, we've made several important changes to how we buy and merchandise. First, we added DC capacity and improved the flow of goods by reducing inventories across non-productive categories to ensure we have room for opportunistic product. Second, we've also made improvements to our internal forecasting to maximize opportunistic buying. Third, we've improved communication and our internal planning horizon to give our operators more time to plan effective op product execution. And in January, we unified our merchandising and purchasing functions under a strong and experienced leader, Matt Deli, who's focused on delivering stronger collaboration and organizational agility with a specific focus on opportunistic offerings and supplier engagement. These changes are designed to ensure we're consistently doing what we do best, providing extreme value for customers across a wide range, quality branded product that drives comp sales and strong margins. Our opportunistic pipeline is building. Over the past few weeks, we've seen roughly a 200 basis point increase in the opportunistic sales mix and roughly 150 basis point increase in opportunistic shipment volume. Driving value with promotion as a bridge. Over the near term, as we build back our opportunistic product levels to what we believe is necessary to win, we're bridging that gap by investing in promotions on branded and fresh product to generate excitement. We anticipate roughly $20 million of incremental promotional investment this year or approximately 40 basis points of gross margin, the majority of which will be front loaded in the first half of this year. We began these investments in early February and comp performance has improved by roughly 100 basis points month over month relative to January. That's an early data point, not a declaration of victory, but it tells us the customer is responding positively. Now, expanding our store refresh program. Value is clearly our number one commercial focus. In the mid and long term, we intend to sharpen our customer experience as well. Our store refresh program is designed to achieve this important goal. Operators and customer feedback in recently refreshed stores have been consistently positive, and early data from these stores shows encouraging comp lifts versus our control group. As we've scaled, our understanding of what's working commercially and operationally is helping us continue to strengthen execution as we expand our rollout. These results give us confidence and conviction to move forward with the 150-store target by the end of this year. making our stores easier to run with tools and support for operators. With much of the system stabilization now behind us, we're supporting our operators by removing barriers and are delivering more effective tools, removing friction in our operations, creating opportunities to drive results. Improvements in item level inventory management have now been embedded into our proprietary order guide for produce and meat, and we're supporting our operators to better align fresh inventory with demand. We intend to continue to expand these types of capabilities across categories later this year. Reporting is also improving, and we've made progress in providing our operators with improved comparability and exception reporting to accelerate the identification of opportunities to improve specific underlying business performance. Supporting our operators also means we're making investments in field personnel and support to improve forward planning and communication. While these efforts have driven recent improvement in operator engagement, we are yet to see this translate into increased comp growth. However, we remain convinced that as we fine tune our value perception with customers and our opportunistic mix, improved operator tools and support will serve as a tailwind. Store closures. In addition to the commercial components that are essential to the core business turnaround I just reviewed, We've also taken a hard look at our store portfolio. Following a rigorous analysis of the fleet, we identified 36 stores in the network that we concluded did not have a viable path to sustained profitability, regardless of the operational support we could provide. We've made the difficult decision to close 36 locations, 24 of which are located in the east, representing roughly 30% of that region's fleet. We are not fully exiting any state, and we believe we have a meaningful opportunity to grow in the East over the long term. However, it's clear now that we expanded too quickly, and these closures are a direct correction. It's important to note that the remaining 51 stores in the East are profitable on a four-wall basis and delivered a positive 3.3% comp in the fourth quarter, which gives us confidence in the core health of the go-forward portfolio. We expect these closures will result in an annualized adjusted EBITDA improvement of roughly $12 million and will enable us to operate profitably across each of our markets. Just as importantly, closing these stores will free operational capacity and focus that we will redirect toward our model refresh rollout of the 150 stores this year. These closures do not change our long-term view that ample white space remains ahead of us. and we continue to plan to open another 30 to 33 net new stores in 2026, but they do reflect a more disciplined approach. Going forward, we plan to expand with a more clustered model to improve supply chain efficiency and marketing leverage. We're also adjusting how we go to market. We're piloting new approaches to store openings to strengthen returns on capital. For example, as we launch our stores in Virginia in 2026, these locations will start as company-run with the intent of bringing them up to profitability before handing them over to independent operators. Once proven, we believe this approach could be applied in more markets as we continue to grow this business. The decisions we've already made earlier this year to underwrite stricter standards has also strengthened our outlook for our 26th cohort of new stores, which are now projected to deliver an IRR in the 25% range, And the 27 cohort is now projected to deliver an IRR of up to 30%, up significantly from our projections just a year ago. A strategic review of UGO. Finally, we're scrutinizing every aspect of the business to remove distractions and improve shareholder value. To that end, we've made the decision to implement a strategic review of UGO. In an effort to focus on what's important to returning this business to sustainable growth, We're reevaluating the organizational impact that would be required from a full integration of that business relative to the anticipated benefit. I want to close by being straightforward about where we stand. We haven't delivered the results that our shareholders, our operators, or our customers deserve, and I take responsibility for that. What I can tell you is that we have a clear understanding of the commercial challenge and we're taking decisive action. We're prioritizing restoring value perception for our customers, We're rebuilding the opportunistic pipeline that defines this brand, and we're reinvigorating the shopping experience in our stores. We're seeing early, tangible signs of progress. And at the same time, we're eliminating distractions, including closing underperforming stores and reallocating resources to deliver stronger operating results and return on capital. The road ahead will require patience, and we understand this is difficult given the recent results. We will be measured by what we deliver, not by what we promise, and we intend to earn back your confidence through execution. We're confident that we have the right plans in place and the right team to execute them, and I look forward to sharing more about the progress we're making in the months ahead. Thank you, and I appreciate your time today. I'll now turn it over to Chris to walk through the financials in detail.