Grocery Outlet Holding Corp Stock

Thank you. and welcome to the Grocery Outlet's second quarter 2026 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. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Niccolo Cotarelli, Senior Vice President of Strategic Finance 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 and to July 4th, 2026. Speaking for management on today's call will be Jason Potter, President and Chief Executive Officer, and Ian Ferry, Chief Financial Officer. Thank you. Following prepared remarks from Jason and Ian, we will open the call for questions. Please note that this conference call is being webcast live, and the 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. 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.

Hey, good afternoon, everyone, and thank you for joining us. During the second quarter, our work to stabilize the business and return growth gained momentum. A stronger opportunistic offering and sharper value communication drove sequential comp improvement and results above our outlook across key financial metrics. Revenue increased 1% to $1.19 billion, with comparable store sales down 30 basis points. That was a 70 basis point improvement from Q1, despite an adverse headwind from the timing of Easter this year. Traffic grew 1.8%, basket declined 2.1% year over year, but improved approximately 100 basis points from Q1 as customers responded to our stronger opportunistic offerings. Gross margin of 30.2 also exceeded our outlook due primarily to lower than planned promotional spending.

Combined with disciplined cost management, the sales and margin outperformance drove adjusted EBITDA of approximately 66 million and adjusted EPS of 20 cents, both well above our outlook. Our first half progress reinforces our confidence that restoring the core strengths of the GroShielded model can drive sustainable improvement. It's still early, but the business is responding. And let me start with our primary objective, improving comps. Strengthening our opportunistic offering is central to enhancing our value proposition and returning the business to sustainable comp growth. Since the start of this year, we've prioritized improved sourcing, product flow, visibility, and store-level execution while expanding key supplier relationships. Together these actions have significantly increased and strengthened our opportunistic assortment and improved our mix.

The impact is showing up in our sales. Opportunistic comp store sales improved significantly from Q1, helping lift the total company comps into positive territory in May and June. The breadth of opportunistic SKUs increased meaningfully quarter to quarter with improving quality. Year-over-year growth in opportunistic units per transaction also improved significantly relative to the first quarter. These are encouraging early signs that customers are responding to a broader and better selection of compelling deals as we improve our op mix. That growth is an outcome of category-level focus and execution. We've prioritized and have seen outsized opportunistic improvement in grocery, our largest category.

In Grocery, a determined effort to revitalize supplier partnerships drove higher opportunistic product flow, opportunistic comps, and our total comps. This is how our model is designed to work, and we're implementing the same actions in other categories like Deli and Frozen. Paul Miller is leading the work to strengthen our sourcing and merchandising capabilities. Paul returned in June as Executive Vice President and Chief Purchasing and Merchandising Officer. A 25-year grocery outlet veteran, he helped develop our opportunistic offering, deepen key supplier relationships, and enhance the treasure hunt experience. In just two months into his return, his merchant instincts and leadership are already making an impact here. We're very pleased to have him back.

To support our revitalized offering, we are improving the ways that we communicate value to our customers. We completed our repositioning around extreme value and the treasure hunt, supporting our product efforts with simpler signage, more prominent value items, and targeted at-home and digital media. With a stronger assortment and better analytics, we can deploy marketing and promotional spending more precisely. That will allow us to rely more on product and marketing to drive comps and less incremental price investment in the second half of the year, even as the competitive environment remains promotional. In Q3, we're deploying enhanced messaging to improve our price perception. We plan to deploy new signage in stores that supports our value positioning, and we'll extend that messaging into our digital presence and our app. We're also taking steps to introduce parity pricing in e-commerce.

These actions will make the savings available at Grocery Outlet easier for customers to see, to access, and understand. Together, stronger product, clearer value messaging, and broader customer engagement are designed to drive more consistent comp growth. Capturing the full benefit requires strong execution in every store, which brings me to our independent operators. Our independent operators are one of the greatest advantages of the Grocery Outlet model. They know their communities and their customers. With the right assortment, the right tools and support, their entrepreneurial energy really brings our model to life. Over the past year, we've expanded reporting and actionable insights, strengthened communication with our field organization, and invested in training.

We're also spending more time in the field and engaging operators more directly. Our goal is straightforward. We want operators to spend less time sifting through data and more time serving customers to grow their businesses. A common set of facts and priorities helps operators and field teams identify issues sooner, focus on actions that matter most, and deliver a more consistent customer experience. A good example of this is how we're working with IOs in the field. Using fleet-wide data, we identify stores where targeted coaching and operational support can have the greatest impact. Our field teams then work side-by-side with operators on a focused set of actions, including in-stock conditions, merchandising, store standards, and operating routines. This annual business review and enhanced merchandising reporting help translate the data into action.

We're encouraged by these results so far. Participating stores have consistently outperformed their control groups, reinforcing that meaningful improvement can come from disciplined execution of store-level fundamentals. We're turning those learnings into repeatable tools and routines for the broader fleet. We're also giving operators a more immediate view of customer sentiment. We've introduced new point of sale feedback that connects customer responses with transaction data, helping operators identify service gaps and adjust their actions at store level. This capability is now in approximately 100 stores and the early results support a fleet-wide rollout. In parallel, we're improving efficiency. Our new dynamic routing program removes ordering constraints and optimizes delivery routes, increasing delivery quantity and improving opportunistic product flow across a significant portion of our fleet.

The The program is currently in approximately 200 stores, and we expect to complete the rollout over the next year. These efforts are lifting customer and operator sentiment and engagement. Customer NPS improved meaningfully again in Q2, while our I.O. survey feedback was overwhelmingly favorable. I.O. satisfaction increased across categories from last year. and the majority of our operators rated our recent systems upgrades as extremely or very valuable. Beyond the data, we're seeing increased engagement from our IOs on a variety of initiatives. These outcomes reinforce our conviction that we're focused on the right priorities. The same discipline we're bringing to store execution is also guiding how we manage the business and deploy capital.

Improving operational discipline means making timely decisions, directing resources to the highest value opportunities, and holding every investment to rigorous performance standards. In April, we completed the closure of 36 underperforming stores as part of our store optimization plan. The outcome is a healthier portfolio that we feel is better positioned for long-term profitable growth. We remain on track to eliminate a $12 million drag to annualize the adjusted EBITDA with the majority of the benefit expected to occur in 2027. We see encouraging signs of progress in the remaining stores in the East. Comparable stores in May and June significantly exceeded the company average, while Q2 margins strengthened on a year-on-year basis. That discipline also extends to our new store growth program, where we're applying greater rigor to site selection, new store underwriting, IO engagement, and execution.

We remain confident in the portability of our model and the immense white space that exists. The ability to offer savings up to 40% versus conventional players allows us to provide a unique and compelling value proposition to customers in a wide variety of geographies. However, as we continue to work on improving the core offering in our business and year one store productivity, it's critical that we prioritize the highest return markets and expand capacity at an appropriate pace. As such, our 2027 openings will be weighted toward infill opportunities. We're taking a similarly measured approach to our store refresh program. Improving the store experience remains an important long-term priority. As we continue those efforts, we're pacing our investment to ensure quality execution that allows the business to focus on our primary goal of driving calm through our opportunistic assortment.

We continue to target approximately 100 refreshes completed by the end of the year. So, looking to the second half, the consistent progress we've delivered since January reinforces our conviction that discipline execution against our priorities remains the right approach, and we enter the second half with improving underlying momentum. Customers are responding to the stronger opportunistic offering and the clearer value messaging. Operator engagement has improved, and our sharper approach to execution and capital allocation is also beginning to improve performance. Those strengths will be important as consumers spend cautiously and the operating environment remains somewhat promotional. They'll also help us navigate the near-term impact of the multi-state cyclospora outbreak. Our products have not been involved in any cyclospora recalls, but like others in the industry, we've experienced pressure on produce sales.

We saw an impact in July and expect a headwind of roughly 100 basis points to total company comps for the third quarter. Even so, we're encouraged by the underlying direction of the business and remain focused on advancing our core priorities. Before I close, I'd like to recognize an important leadership transition. Chris Miller recently retired as CFO of Grocery Outlet. Chris provided steady, experienced leadership to the critical first year of our turnaround and leaves strong finance and accounting teams in place to carry the work forward. On behalf of the board and the entire organization, I want to thank him for his leadership and wish him all the best in retirement. I'm also very pleased to welcome Ian Ferry, who many of you know as our new Chief Financial Officer.

Over the past year, Ian has become a trusted strategic partner to me and our Board. His financial discipline, operating insight, and long-term perspective have already made a meaningful impact here. I look forward to continuing our work together. In closing, our first half progress strengthens my confidence in Grocery Outlet's long-term opportunity. It's still early, and we have work ahead, but the business is responding. Consumers continue to prioritize value, and our differentiated model is built for this environment. When we strengthen the opportunistic assortment, equip operators with better tools, and apply greater discipline to execution and investment, performance improves.

We have the foundation to build a stronger, more productive, and more profitable grocery outlet. I want to thank our independent operators, our team members here, and our supplier partners for their hard work this quarter. I'd also like to note with gratitude that we just completed our annual Independence from Hunger campaign, during which I.O.s partnered with local nonprofits to provide critical resources to those most in need. I'm proud of the positive impact our operators make in this regard in the communities they serve, work, and live. Finally, I want to thank our shareholders for your continued support and engagement. We remain committed to earning your confidence through disciplined execution and consistent results. And with that, I'll turn it over to Ian.

Ian? IAN HILLIARD- Thanks, Jason. As CFO, my objective is to help ensure we build a business that creates durable long-term shareholder value. That means allocating capital with discipline, measuring ourselves against the right long-term metrics, and communicating our progress with transparency. Our second quarter results provide further evidence that the operational improvements Jason discussed are translating into better financial performance. While our performance has ample room for improvement, stronger sales trends, disciplined spending, and sharper capital allocation are beginning to improve the business and its long-term earnings potential. I will start with the quarter and then discuss our full year and third quarter outlook. While it's otherwise noted, the comparisons I provide are on a year-over-year basis. Starting with the top line. Second quarter net sales increased 1% to $1.19 billion.

Sales from stores opened over the past 12 months more than offset the impact of optimization plan closures and a modest decline in comparable store sales. We opened 10 stores and closed 12 during the quarter. Comparable store sales declined 30 basis points, including an approximately 50 basis point headwind from the Easter shift. This was above our outlook for a decline of 1.5% to 2%. Traffic remained positive while basket improved roughly 100 basis points sequentially. Importantly, comps across our opportunistic portfolio improved significantly from Q1, reinforcing our confidence in the actions underway. Gross profit dollars were flat at $360.7 million, representing a gross margin of 30.2%, above our 29.8% to 30.0% outlook.

Gross margin declined 30 basis points year over year, primarily due to the promotions we instituted at the start of the year to reinforce our value position, as well as store closure related markdowns and write-offs, partially offset by better inventory management. Sequentially, gross margin improved 60 basis points from Q1, reflecting reduced liquidation activity associated with the store optimization plan, lower promotional spending, and favorable seasonality. On a year-over-year basis, SG&A increased less than 1% to $339.5 million, and as a percentage of net sales, remained consistent with last year at 28.5%. Sequentially, SG&A improved 130 basis points as a percentage of net sales compared to Q1, primarily driven by higher sales leverage, optimization benefits, and lower marketing expense. We also recorded $5.4 million in net restructuring charges related to the optimization plan. This This included $14.8 million in cash charges, partially offset by $9.4 million in non-cash credits, primarily from the net write-off of right-of-use lease assets and lease liabilities. Below the operating line, net interest expense was $6.6 million, comparable to last year.

Our GAAP effective tax rate was 38.8% compared with 20.3% last year. That income was $5.6 million or $0.06 per diluted share compared with $5 million or $0.05 per diluted share last year. Adjusted net income was $20.3 million, or 20 cents per diluted adjusted share, compared with 22.8 million, or 23 cents per diluted adjusted share last year. Adjusted EBITDA was $65.7 million, or 5.5% of net sales, compared with $67.7 million, or 5.7% of net sales last year. Both adjusted EBITDA and diluted adjusted EPS exceeded our outlook. Turning to the balance sheet and cash flow statement. We ended the quarter with $74 million in cash and approximately 154 million of revolver availability.

Total debt net of issuance costs was $505.6 million, up $16.3 million from Q1. Net leverage remained 1.8 times adjusted EBITDA. Operating cash flow was $43.2 million compared with $73.6 million last year. The Decrease primarily reflected the timing of accrued and other liabilities, lower operating lease liabilities following the optimization plan, and lower net income after adjusting for non-cash charges. Capital expenditures were $43.7 million, or $38.7 million net of tenant improvement allowances. Now let me turn to our outlook. The actions we began implementing at the start of the year are delivering progress.

Given our stronger than expected second quarter performance, we are raising the low ends of our full year financial outlook ranges. For the full year, we now expect net new store openings of 30 to 33, net sales of 4.7 billion to 4.72 billion, comparable store sales in the range of negative 0.5 percent to 0.0 percent, a gross margin of 29.8% to 30%. We continue to expect approximately 20 million of incremental promotional investment for the full year, with spending expected to further taper in the second half as our stronger opportunistic mix and treasure hunt support underlying comp performance. We expect adjusted EBITDA of $225 million to $235 million, diluted adjusted EPS of $0.51 to $0.55 a share, and capital expenditures net of tenant improvement allowances of $170 million. For the third quarter, we expect comparable store sales ranging from negative 1% to 0.0%, gross margin of 29.8% to 30%, adjusted EBITDA of 58 to 61 million. diluted adjusted EPS of 14 cents to 16 cents a share. In summary, the initiatives we outlined at the start of the year are gaining traction, and we are managing the business with greater discipline. Strengthening the opportunistic offering and customer value proposition remains our priority.

We will stay focused on execution in the second half and look forward to updating you on our progress. With that, I will turn the call over to the operator for questions.

We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would 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. The first question is from Jeremy Hamblin from Craig Hallam Capital Group.

Please go ahead.

Hey, this is Will on for Jeremy. Thanks for taking our questions. I'm just wondering if you can share any more color on the cadence of comp trends through the quarter and then here into Q3 and then what traffic versus basket is looking like here quarter to date?.

Look, we're making progress on our comp store sales and we're encouraged by the sequential improvement we've had. Just to walk you through that, January was meaningfully negative to remind everybody, and we've made significant progress since that point. Pre-cyclospora impact, total comps had improved by about 300 base basis points to the end of Q2. To talk about, answer your question on traffic, Q2, again, a solid number there, 1.8 on top of the 1.5 last year. The basket declined by just over 2%, but did show about 100 basis points of sequential improvement from Q1. And that was a mix of about 1%, less than 1% inflation. It's a mix. But we did also, encouragingly, experienced an improvement in units per transaction with op in the basket.

When you're thinking about the guide, I think the way that we've thought about about this for Q3, as Ian's pointed out, minus one to flat. that 100 basis point cyclosporine impact is notable. And just a couple points there I'd like to make on that. Our produce business was running very healthy and running well above inflation prior to the outbreak. We're continuing to monitor it. We've got an understanding of what's happening category to category. We think that that's going to moderate a bit into Q4, but right now estimating about 100 bps. Clearly we can see things like bagged salads, a fairly large impact. But we feel that this is a temporary headwind and the underlying performance of the business continues to improve and we're encouraged by what we see going forward for Q4.

Okay, that's very helpful. Then I just wanted to understand where the opportunistic product is mixing today versus Q1, and then where you'd like to see that by year end, and then what sort of total comp benefit you'd expect to see from that change in mix from the beginning of the year?.

Yes, certainly. First and foremost, we're Our pursuit of OP has everything to do with creating value for customers. There's a very high correlation between comps and our total comp business. We can see that in our store cohorts. It's the value and sales generating engine of the business, as you know. It's the heart of what drives our unique treasure hunt experience. And the plan that we developed is meant to create a sustainable quality of sales and margin. What we've seen through this first half of the year, up comp accelerated meaningfully in Q2, up about 500 basis points relative to the start of Q1.

Our mix expanded well over 300 basis points and continues to accelerate as a As I mentioned, we have this headwind with cyclospora, but expect that to be temporary. And we've got some really bright lights as we've executed this plan. One great example is grocery, our largest and most important category. I know, You may be curious about this. Our comps finished at 3.5% in Q2, and that playbook being executed by Paul Miller is now we're seeing advancing sales momentum in the next two most important areas, both development and sales. Deli and Frozen right now. Seeing good inventory flow, we've expanded our range of branded op, And again, the confidence we have in the plan, the supplier engagement, supplier acquisition, what's happening in our basket, We see the momentum in the business and, again, reflect it in where we see the business going in the back half. Appreciate the color. Thank you. You bet.

The next question is from Cory Carlo from Jefferies. Please go ahead.

Great. Thanks, Jason. Appreciate the time. I was wondering if you could talk just broadly around kind of what specific milestones you're using to measure in the improvements in the business and when do you feel like you can shift to perhaps like a more offensive posturing, if you will, And how are you kind of measuring that internal cultural shift back toward the traditional kind of treasure hunt model that grocery outlets use?.

and to thrive in? Yes, I think the things that we've been measuring and holding ourselves account to, we've made progress across all what we've that we think are the most important KPIs. Continued traffic growth, which is really important. We saw some basket expansion we think is important. We also noted improving net promoter scores beginning of the year right through to the end of the quarter. Our op mix has expanded, the comps have expanded, we see a lot of improvement in execution related to our reporting and visibility that's helped folks across the supply chain manage the flow of inventory both when when they're writing POs, when they're meeting with suppliers, helping us execute with speed and more precision, which is really important. So seeing good inventory flow, good quality of opportunistic product, which is something we're measuring. measure things like the amount of variety and balancing that, as well as things like turns or gemroid. Those are all important elements to measure.

And ultimately, looking at what the customers are doing and the trips it's generating and what that means for things like net MPS and value score. And ultimately, we expect to have that show up in higher level of comp sales in terms of both traffic and basket.

That's helpful. And then just as a follow-up, a number of your competitors have highlighted that they INVESTING INTO PRICE THROUGHOUT THE BACK HALF. SO IT FEELS AS IF THE GROWTH OF THE environment will be getting more competitive as we look over the next several months. I'm curious how you think about your strategy in light of how some of your competitors are going to be posturing their pricing. Thanks.

Yes, no, great question. Look, it's always competitive out there in my 30 years. You're always, fighting it out to win the customers' hearts. And we're obviously alert to the competitive activity and some of the announcements that have been made, as well as in the syndicated data, seeing a recent uptick in promotion. We know the customer is searching for value, the customer is under pressure, we all read the news and can see what happens at the pump and so on. I think what we've done to grow opportunistic this year, our positioning there, the plan we're executing against is right on the money, so to speak, to deal with this issue. And if you look at kind of what happened in our business in this first half and specifically in Q2, our retail inflation was a little bit below 1%. And that has a lot to do with what we're doing with Op.

And when we think about competition or price, there's many things to evaluate. We're continually monitoring and measuring our price pricing against a number of different competitors across major MSAs. We continue to see a nice price gapping on a basket of goods for us, 15 to 20 percent below mass, 30 to 40 against conventional. I think that's important to note. For us, when we're dealing with these kinds of things, the best way to deal with that is through OPP. It, opportunistic is a pretty magical thing for us. It drives sales and margins. It drives value for the customer.

Paul came to me this week and shared an example of 50 plus truckloads of a well-known, relevant, branded drink. It sells for $8 in the market. It will be selling for under $1 in the market sometime next week. Those kinds of things just really displace comparisons and is a big part of what drives customers. customers to our stores. And I think staying competitive and making sure that we're paying attention to what's happening in the market is always going to be an important element of what we do here. But continue to see that we're going to be able to We're being reinforced and encouraged by our work on opportunistic supply, variety quality, distribution, and inventory flow and terms.

That's very helpful. Thanks so much and best of luck. Thank you. The next question is from Robbie Ohms from Bank of America. Please go ahead.

Oh, hey, Jason. Hey, I was hoping as a follow-up, could you help us, can you maybe parse out, you know, it sounds like you've really got opportunistic is an important initiative and it's working and you're seeing great things, but you also have the store refresh program. And when we think of those two things, can you sort of help? us think about the, you know, what kind of, you know, how much each of those two things are going to drive and how much are they interrelated with each other?.

Yes, great question, Robbie. Clearly, we continue to believe in improving the in-store experience as an essential part of the strategy. And what we've done in the first half of this year is to make sure that everybody in the company's priority is restoring op across the network. That's what's driving improvement in our business. Clearly, refresh is an important component of that. Like I said on the recording, 100 stores by the end of the year is on track. We continue to get great feedback from customers and operators. We think that what's important here, and one of the calibrations we made as we focus on improving value and improving op is to make sure that we're supporting operators with the tools and the assistance to ensure a consistent execution as we do these rollouts. couple cohorts than we'd like and we wanted to shorten the disruption period to optimize the results and so we've calibrated that slightly and so we continue to think that that's going to be an important long-term element of our turnaround story, but the main event here for us is improving value through opportunistic supply, and that's going to continue to be the focus of the company in the back half.

That's really helpful. And then my follow-up on that is, you mentioned earlier in the call the supplier partnerships, you know, improving or recovering or something like that. What happened with the supplier partnerships and how much improvement is there to come from here? Sure.

Look, I think I just want to say we're really proud of how the teams engage with suppliers and the relationships that the built with the supply community over many decades, frankly. It's a critical point of difference for Grocery Outlet and part of our strategic moat. Paul Miller in his leadership brings a special understanding of supplier connection. we lost that connection, but I think we, as we, you know, really outlined the plan for what we're going to do with opportunistic. It's an important point to call out that engaging with suppliers, face-to-face meetings, being a one-stop solution for our supply community, taking quick care of their brands, being good brand stewards, and responding in a rapid way is all part of Paul's philosophy. And we're seeing good results there. New supplier acquisitions up about 11% this year. And we're seeing just kind of great results across the board as the deals come in.

And it's just a doubling down of something that we've always done well and just made sure that the entire company under Paul's leadership is focused on it.

That sounds great. Thank you. Thanks, Robbie. The next question is from Edward Kelly from Wells Fargo. Please go ahead.

Yes, hi. Good afternoon, everyone. So, you know, business certainly seems to be starting to turn a corner. As we think about, you know, guidance, you didn't flow much of the upside this quarter or your better optimism, I guess, into the full-year guide. Is that, you know, just cyclospora or are there some other, you know, incremental offsets? And then related to the cyclospora and the 100 basis point impact, is that just July through August so far, that impact? Is that that you expect that to continue all quarter? Just kind of curious as to how you, you know, came up with that. Okay.

Yes, hey, this is Ian. I'll take that. So if you look at the B for Q2, and we are pleased with where the performance ended up, we beat the midpoint by about $9 million. Probably half of that was due to outperformance on comp and gross margin rate. Of the remaining $4.5 million, two-thirds of that is SG&A dollars that will actually shift into the back half of the year, primarily the third quarter. And then one and a half was just good cost discipline versus plan. the way that I would think about the quarter is roughly a $6 million beat versus midpoint on an organic basis with $3 million shifting. And then as you think about Q3, there will be a sequential step down in gross margins, even though we are further tapering promotional investment, and there's a little bit of store closure costs that that roll off, the produce issues that Jason highlighted do come with elevated shrink, and that will be a meaningful hit in the third quarter that will flow through into gross margins, and we also have just a modest level of seasonality. So when you net all that out, and then we look at the balance of the year, we felt like the guidance that we gave is appropriate and we want to be prudent with our outlook.

Yes, of the cyclospora. We're basically assuming that the pressure is going to be with us through the end of the quarter.

Okay. And then Jason, I wanted to ask you, you talked about the.

promotion you know just sort of into the back yes our year but then sorry you're breaking up there I don't operator if you can just make sure the line is clear there we just didn't hear anything getting a few words in there sorry.

Yes, sorry, maybe it was the speaker. So, Jason, I wanted to ask you on the promotional side. You talked about maybe pulling back or normalizing to some extent in the back half, and then some of that void gets filled, I guess, with value communication, and maybe it's increased op as well, but the backdrop is competitive. I'm just kind of curious as to how you – feel about sustaining, you know, some of the momentum that's improved, you know, while, you.

you know, you normalize on a promo side? Yes, no, great question. So, a couple things to say. You know, Grocery Outlet has not been traditionally a promotional company and we don't intend to continue that. We create excitement and value through, obviously, the branded op deals and, as you pointed out, the treasure hunt experience. We did establish, early in the year, this $20 million promotional bridge, this synthetic bridge that was designed to solve supplement our OP offering as we rebuilt the offering. Now, we're on track with that plan to rebuild our OP offering, which is why the focus of the company is everyone's attention is turned there. And we're on track to taper those promotions, those replacement promotions, if you will, is fully sort of restored by the end of the third quarter.

So a couple things there. When I look at the weight of op, the number of deals at various levels of savings, and the KPIs that associate to call it promotion, our plan is also on track. So pleased with the progress on growing up. We don't expect to see the need for more promotional investment beyond what we've already discussed. And to your point, we remain disciplined but responsive. Obviously, maintaining the right competitive price gaps is critical, but I just want to reinforce we think we're on the right track, and we'll monitor if anything changes, but expect that our plan is, prudent and appropriate for the back half of the year. Thank you.

Thank you. The next question is from Oliver Chen from TDKelen. Please go ahead.

Hi, good afternoon. This is Iris Stankich on for all our... You described grocery outlet as a counter cyclical model that can benefit when consumers come under greater pressure. And I'm just wondering, as we've moved through the quarter, have you seen any change in customer behavior that gives you confidence that the value perception is becoming more and more important? becoming more visible to shoppers, whether through a new customer acquisition, trip frequency, or basket? Thank you.

Yes, thanks for the question. Yes, clearly, generally what we've seen in the past is You'll see pressure in the basket first, and then obviously when trade down happens, we get traffic. We haven't seen that yet, but we think the work we're doing positions us well for that. As I mentioned, traffic did increase just about 2% in the corridor. That's been sort of running above that 2% mark, which is the intent of our plan this year. We also saw improvement in our basket, and we did see improvement in UPT relative to OP in the basket. So our customers are recognizing value, they're seeing more of it in the store, that's showing up in the underlying metrics, and we believe and they're convinced that that's what's driving our sales and the relationship between op value and comps are connected and drives the heart of the differentiation that we have in the business.

that's what I would share today on that front. Okay, got it. And then just as a follow-up, I know that last quarter you noted you were for United Grocery Outlet and expected it to be a 2026 discussion. Are you able to provide an update on where that process stands today and whether your view of the strategic fit of the business has evolved since then?.

Yes, hey Iris, this is Ian. I can take that. So you're right, we do think it's a 2026 conversation. There's work ongoing. We're looking at a variety of options. When that work concludes, we'll update you as soon as that happens, but no update today of any note.

Got it. Thank you. The next question is from John Heinbockel from Guggenheim Partners. Please go ahead. Okay.

Jason, I wanted to ask, as you lean more into up, so what is changing, if anything, with planograms and space allocation toward that? And then, you know, if you think about balance leaning into up heavier, I think historically, right, you guys have been pretty good about avoiding markdowns, even on close code projects. product. Maybe talk about that tension, you know, leaning in and trying to avoid markdowns.

Yes, great question, John. So we don't, we have kind of, I'll call it, planograms is sort of a an industry term where you've got obviously every item is allocated in the space. We have space allocation and so what we did in the first half of the year, we did mention that we would be discontinuing 400 to 500 MTO and private label items to make space for more opportunistic variety. I'm pleased to report that we did get that done, made those transitions. That's shown up in sales and in the store. And the vast majority of those markdowns, if there were any, were done already in the first half. Okay. We always have some markdowns when we're changing product out the business. Year to year, we'll sell 80,000 to 100,000 unique SKUs as products come and go.

And so it is a normal cadence for the business to manage, and we're happy how that first half has gone, John.

Maybe as a follow-up, I think you talked about a lot of the 27 openings, a bigger percentage will be in existing markets. Is the plan to open more than you did this year, right, in 27 or about the same? And then I think the idea when you did UGO is to have volume. sufficient on the East Coast to really lean into OP product. I think you're probably there. You don't need to open that many more on the East Coast to get access to OP. Is that fair?.

Yes, on your first question, we haven't, we're not prepared yet to release sort of a store count for next year, but it is our intent to open much more infill. Obviously, as we stated, we're excited about the long-term white space and growth potential of the business, and in the near term, you know, we've made some tough decisions to make make sure that we're focused on infill opportunities, and that really allows us to leverage the brand, power the brand locally, the people power. Our IO community is really important, and the density of stores helps with that. Distribution strength, obviously, which the core markets, We've got a well-oiled machine there, and supported by discipline underwriting, we think is the right approach in the near term. To your point on the East, we just opened New DC to support that group of stores, and we feel that that's absolutely helping our results in the East. We're pleased with the performance of the stores post-closure work. stores are running profitably as a group and ahead of plan and positive comps already this year. So all of those elements, we are feeling good about those decisions, John.

Thank you.

You're welcome. The next question is from Joe Feldman from Telsey Advisory Group. Please go ahead.

Hey, guys. Thanks for taking the question. I wanted to ask, dig in on that field operations changes you've made. Can you share just a little more color on that? Like, what's actually different that the field operations, I guess, field managers or whatever they're called, are doing in the stores and how they're helping in a different way? and what maybe sales and costs are related to that. Thanks.

Yes, it's a great question. Look, first and foremost, the Iowa model is a unique competitive advantage for us. We know that it's essential for us in the long term to continue to improve support for our operators. Execution is a huge component of a customer experience and the intent of the team is double-checking down on communication and collaboration with our operators. Specifically, we're adding field support. That's been done. We've implemented things like dynamic routing that I mentioned in my opening remarks. That really helps with op flow and in stocks, so there's support there. implementing things like store level POS customer feedback reporting to give our IOs much more salient information about specific customer feedback trends and the DSMs work directly with them. on action plans to help make improvements where needed. And then one of the biggest ones we've had this year is really unlocking some of the data.

We have this process we call an annual business review, but it's really using Fleet White data, the field teams, provide our operators a ranking against another group of stores, similar state, similar volumes, and allow them to see in a way, you know, margins, sales, underlying cost drivers, and then support it with a suite of reporting that helps them dial in on opportunities to drive sales, to drive margins, to drive improvement in their business. This frequent, more frequent and ongoing collaboration and communication is definitely a change, and I think everybody in the company, including the operators, are excited about that support and direction.

That's really helpful, thank you. Maybe as a follow-up, I've probably asked you guys this in the past, but how are you communicating the changes to your existing base or prior customers? Like I know in the past people used to love the opportunistic goods, now that you have back and you're flowing it into the store? Like, are you – how are those – the customer finding out about it? And to maybe recapture some of the ones that may have left grocery outlet. Thanks. Yes, no, great question. Clearly, you know, driving value is key.

We introduced extreme value in the front half of the year across channels, what we think is a clear price messaging, clear value communication. We've updated some signage and we have actually a kit going out to all stores this quarter to support our 80th anniversary. We think that's going to be a helpful additional support piece. continue to adjust our media mix to reach customers more effectively related to the groups that really get excited about the treasure hunt. They love discovery, they love value. And we're seeing that that work is helping satisfaction scores and resonating with those groups of customers, including lapsed customers.

That's helpful. Thanks. Good luck with this third quarter. Thank you.

The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Hey, Jason. Hey, Ian. First, I want to ask about this improvement through the anatomy of your customer cohorts. So are you seeing best customers shop more, average ones stepping up? And then I don't know if there's a component of new customers coming to the brand.

Yes, I think kind of high level, top level, Simeon, thanks for the question. Driving traffic was our first objective, and I think that has proven to be effective in the first half. We're going to continue to lean in there with our plan. Some of what you do is to drive frequency, and the other pieces that help long term are continuing to improve your business and your execution to work on things like the basket. So there's always a combination of things that you're trying to achieve, but our first objective is to really dial in the value piece, get recognition for that, drive frequency, and drive the traffic.

That's the key priority. And then related to it, you know, you have transactions. It sounds like, you know, the basket's still down. You mentioned grocery is getting fixed or getting better, positive. I think you called out deli and frozen as works in progress. How impactful can opportunistic be there? Is that just inherently more of an everyday category? And what is that diagnosis? Meaning, how do you change the basket from here? I know this company used to comp much higher than where we were. So what are the things that you need to finish to close the gap? Yes.

We're just executing the same playbook. Those are the two next most important categories for op. That's why I point them out. They're large, important, and op will play a huge role in the turnaround here and getting sales. Those two categories are everything. areas we see as the next most logical place to really drive sales. And we're getting good, positive early results as the team has Not totally tuned everything in, but definitely we're seeing momentum there and excited about what that's going to mean as we go forward.

The next question is from Mike Baker from DA-Davidson.

Great, thanks. You know, kind of a follow-up on what Simeon was just asking or maybe getting to. Your guidance, even if you add back CycleSport, is about flat, yet grocery, a big part of your business, is up 3%, I think you said. You're adding the playbook to other big categories. I think opportunistic is now probably, if you set up 200 base points, that's about 48% now versus it'll get to 50. Like, you're getting there. You're doing all the things. What are the things implemented? What do we think the long-term comp should be? I presume something better than, you know, flat to up 1% if you add back to the cyclospora.

Yes, great question. We definitely see continued acceleration through the year, and we fully expect the business to get back to a healthy level of comps, something well north of inflation. So I think in the past, this business comped three to five on a pretty regular basis, and we don't see a reason why we can't do that. Okay, yes, fair enough. That would certainly help.

One other question, you said something, if I caught it right, about variability and the most recent implementation of systems. So if you could talk a little bit, and then slowing it down. I may have misunderstood, but can you talk about, can you flesh that out a little bit?.

No, no, I wasn't referring to systems. Happily, we have nothing to report on systems. We planted the flag and our systems are stable. Good progress there a couple quarters ago. What I was referring to was the last couple of cohorts of refreshed stores, and we found that just the length of time to make the changes was disrupting customers and what the team is doing right now is dialing that down to make those changeovers much more rapidly with better support pre and post in order to make sure that we don't turn people away as we're making what we think are positive changes. So that's what I was referencing. Okay.

Okay. Understood. Thank you. Thank you. The next question is from Bill Kirk from Roth Capital Partners. Please go ahead.

Good evening, everyone. Jason and Ian, you both mentioned and even quantified the adverse impact of Easter timing in 2Q. What I was wondering, I guess, is at the end of 2Q, did you have a positive July 4th timing benefit? And if so, how large was that? Yes. It was immaterial. I see. Okay. And then, Ian, in your prepared remarks, you talked about, I think you opened with the importance of building a durable model focused on creating long-term shareholder value. So philosophically speaking, how do you evaluate the decision to ease up on promotion and pricing? in the context of your focus on helping build that durable, sustainable model.

Yes, good question. I mean, as you think about what drives long-term equity value creation, it's consistency of growth paired with improving returns on capital. We have a long way to go, but we think we're making progress along both of those fronts. I think the good news for us is that opportunistic really drives to everyone in the model, whether you're a customer, a shareholder, or an I.O. So there's great savings. It comes at a high margin, and it delivers good excitement for the customer. So what we've seen is we've already started to taper the promotions, and the reason why we've been able to do that is because we've been increasing op. And the customer doesn't really understand the distinction between a promoted branded item or op. They just see deals. And so as you mix out some of the more promotional stuff and mix in op, it's not something that they notice.

So we really did view that 20 million as a synthetic bridge. We expect it to be done by the end of the third quarter. And as we look into 2027, perhaps we have a tailwind on gross margin to some extent. We expect to be back in a more normalized comp level. And my philosophy as CFO is that we absolutely should be driving SG&A leverage. So, as you look to next year, we certainly hope, and it's our expectation, we'll have a more normalized-looking P&L.

Thank you, Anne. That's what I was looking for. I'll pass it along. As a reminder, to ask a question, please press star 1. There are no further questions at this time. I would like to turn the floor back over to Jason Potter for closing comments.

Well, thanks very much for your questions today. I look forward to continued engagement and reporting continued improvement in our business in the future. So thanks, everybody, for today and wish you well.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

This live transcript is auto-generated without human intervention or review.

[Call has ended.]

Greetings, and welcome to the Grocery Outlet's First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ian Ferry, Senior Vice President of Strategic Finance and Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the first quarter ended April 4, 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 with 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 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 Investors 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.

Good afternoon, everyone, and thank you for joining us on today's call. In the first quarter, we delivered results in line with our guidance as our work to strengthen the business gain traction. We reported Q1 revenue of $1.17 billion, up 3.6% with comparable store sales down 1%, slightly ahead of our outlook for a decline of minus 2.5% and negative 1.5%.

Traffic remained positive, up approximately 2%, with consistent improvement throughout the quarter. This was offset by continued basket pressure from lower units per transaction. Gross margin of 29.6% was also within our outlook range and included a 50 basis point impact related to our previously announced store closures. Adjusted EBITDA of $43.1 million came in at the top end of our range, while adjusted EPS of $0.05 was $0.01 above the guidance range we shared in March.

As I mentioned, performance improved as the quarter progressed, with traffic strengthening each month and exiting March at a meaningful higher rate than at the start of the quarter. In the month of March, weekly traffic grew in the range of 2% to 5% year-to-year, reaffirming that our value-oriented product offering continues to resonate with consumers. While we're encouraged by the progress we're beginning to see, we're not satisfied with our current level of performance and are focused on the work we have in front of us.

As we said in March, we entered 2026 with a clear agenda, restore what makes this brand special, tighten execution where we've fallen short and improve returns. That work is well underway, and while it's still early, the traction we see reinforces our conviction that we are taking the right actions. Grocery Outlet has meaningful strengths, a differentiated model, a highly relevant value proposition, strong independent operators and a format that resonates when we execute well. Our focus is on translating those strengths into a more consistent performance. Our work to achieve this center is on improving comp store performance while continuing to advance important strategic initiatives that deliver stronger long-term growth and profitability.

Restoring customer value perception. Let me start with customer value perception because that's where our work begins. Our job right now is to make Grocery Outlet a more compelling choice for the customer. In this environment, value matters more than ever. We must make that value visible, consistent, exciting and easy to shop. We executed on that in several ways during this last quarter. First and most importantly, we've made meaningful strides to increase the mix of branded opportunistic products in our stores. Our best opportunistic deals offer savings up to 70% versus conventional retailers. These savings when paired with the excitement of a treasure hunt experience, provide a compelling experience that our customers love.

Since the start of the year, we've increased our opportunistic mix by nearly 2 percentage points with meaningful improvement across inventory, shipments, variety and sales. We've made meaningful progress improving our sourcing, increasing product visibility and helping operators further differentiate their stores. That works included upgrading systems and reporting, expanding supplier outreach, shortening delivery times, testing short-dated offerings and engaging suppliers more directly at the leadership level. These efforts enabled us to move quickly in Q1 on excess inventory from several top-selling brands, delivering significant savings for customers while creating high margin, high volume opportunities for us and our operators.

Second, we invested in reshaping value perception. As we work to improve the impact of our opportunistic supply, the near-term synthetic promotional support we're providing is driving customers into our stores. It's been especially effective around high-traffic occasions like this year's Super Bowl and Easter where event-driven promotions helped drive meaningful traffic gains. This is an important first step in restoring comp performance as the momentum from our improving opportunistic product mix begins to translate into stronger transaction trends.

Through the first quarter, we received positive feedback from both customers and our IOs. And as we invest, we're managing the impact on gross margins through disciplined promotional targeting and our ongoing focus on improving our mix. We continue to expect these investments to be in the range of $20 million for this year.

Third, we're sharpening our value messaging through our extreme value campaign. This work is focused on making our value proposition unmistakable, highlighting the significant savings customers can find on branded products often at meaningful discounts to conventional retailers and reinforcing the excitement of the treasure hunt experience that defines Grocery Outlet. To support this, we're driving awareness through targeted at home and digital campaigns that bring our deals and product discovery to life.

In market, we're focused on awareness-based media, in-store, we're simplifying signage and elevating key value items to make savings more visible, easier to navigate and more compelling at the shelf. Together, these 3 initiatives with a singular focus of improving value are beginning to drive a meaningful positive customer response, reflected in improving sales, improving traffic trends, Net Promoter Score and survey data while reinforcing one another. Though there's much to do to restore comp performance, the trends we're seeing in traffic are consistent with the initial stages of stabilization that we would expect at this point.

Improving the in-store experience. We also continue to improve the in-store experience to support stronger store level performance across our fleet. One of the most important of these initiatives is our store refresh program. And in the first quarter, we completed 34. As of today, we've completed 58 stores in total. These refreshed stores are benefiting from improvements in layout, signage and merchandising to make the shopping trip easier and reinforce value more clearly. We continue to receive positive feedback from both customers and operators, and we are confident that improving the customer in-store experience is the right step for Grocery Outlet and that it will become an important lever over time.

The impact of our value restoration initiatives in Q1 reinforces our conviction that an all hands on deck focused on executing our opportunistic engine is the fastest and most effective path to improving results across the business. With a clear path to deliver on that objective, the results that support that focus, we're prioritizing our initial resources on that work. That requires deliberate choices about how we execute our other priorities this year, including taking a more measured pace on our store refresh program. We will continue to invest in these longer-term improvements to our stores while maintaining a near-term focus on driving comp sales through opportunistic initiatives that I've discussed. As we balance our resources around these efforts, we now expect to complete approximately 100 store refreshes by year-end. This sharper focus will reduce distractions and help us return comp growth as quickly as possible.

Supporting independent operators. Independent operators are central to restoring our performance, and they've been clear about what they need, better analytical tools, more actionable insight greater visibility into what is working across the system. And that's exactly what we're focused on delivering. In Q1, we made meaningful progress. During the quarter, we held regional forums to share best practices across operators. We enhanced benchmarking capabilities and expanded the functionality of our real-time order guide. We also streamlined commercial communications to help operators simplify execution at store level.

Importantly, we also launched a new annual business review, or ABR, process across our entire store base. This process benchmarks each store against top quartile peers with similar market characteristics and sales volumes. Then translates those performance gaps into clear profit opportunities for our operators to pursue. For each store, we can now help operators quantify the potential opportunity across sales mix, shrink and other important operating expenses while enabling operators to track progress against those opportunities over time. Just as importantly, we pair these insights with best practice recommendations and field support to help operators realize those improvements.

While company-wide margin performance in Q1 was impacted by strategic promotional investments as well as inventory liquidations associated with our store closures, we're encouraged by the underlying operational trends we're seeing at store level. Operators saw encouraging trends in profitability during the quarter, driven primarily by better shrink performance. If these Q1 improvements are sustained through the balance of the year, they could translate into meaningful incremental annual operator income per store.

Over time, improvements like these create meaningful upside for Grocery Outlet through stronger gross profit performance across the system. Our ABR process encourages accountability while giving operators a practical road map to improve their business, supported by quarterly reviews and ongoing field partnership. And we believe that as operators see benefits from these enhanced analytical tools, engagement with the key company initiatives will also improve. When operators have the right tools, visibility and support to execute effectively, the customer experience improves, store performance improves, operator economics strengthen and the overall business should become more productive and resilient.

Optimizing the store base and strengthening returns. As I mentioned earlier, we continue to drive our key strategic objectives as we work to restore comp performance. Among our most important objectives are optimizing the store base and improving our returns. As we outlined in March, we are closing 36 underperforming stores this year. These closures are now complete and have improved fleet quality and will strengthen the earnings profile of the business over time.

Based on the progress we've achieved to date, we continue to expect adjusted EBITDA improvement of approximately $12 million at the conclusion of our restructuring on an annual run rate basis. We've also tightened our approach to new store growth. We continue to believe that there is substantial white space ahead for Grocery Outlet, but growth must be disciplined, productive and supported by the right economics. That means being more selective on real estate, applying rigorous underwriting and holding ourselves to high standards on capital returns. This approach would position us to grow from a stronger foundation and create more value over time. We are focused not just on growing but growing in a sustainable way. Finally, as we noted in March, we're continuing to explore strategic options for UGO and we'll provide updates when we have more to share.

Securing top talent. Having the right strategy is critical to our success, so Is having the right talent to execute it. We recently welcomed Jim Porterfield as our next Chief Marketing Officer. Jim brings more than 30 years of brand leadership and consumer insight experience to Grocery Outlet. Jim previously served as Chief Marketing Officer at Pinsight Media and as a Senior Vice President at Bernstein-Rein Advertising before founding his own firm, Meaningful Works. Most recently, he's advised several well-known retail and restaurant brands, including Grocery Outlet. Jim's experience, strategic judgment and passion for building strong brands make him the right leader to help advance our strategy and strengthen Grocery Outlet's position as one of America's most loved brands.

Securing top talent is also a priority at our Board level. In April, we added 2 exceptional independent directors. Frances Allen brings over 40 years of consumer and food industry expertise across brand strategy, marketing, franchising, technology and operations. Felicia Thornton brings more than 30 years of executive leadership across grocery retail, specialty retail, with deep expertise in corporate finance, strategic growth and operational restructuring and governance. Both new members have highly relevant experience that will help our efforts to strengthen execution and reinforce Grocery Outlet's long-standing leadership in value.

Finally, in closing, when taken together, we believe that our near-term actions and continued execution against our strategic priorities position us for improved performance. While we still have work ahead, we're making solid progress that's beginning to be reflected in the business. We're executing our plan, improving consistency and building a more durable foundation. I'm confident that the work underway will position Grocery Outlet to become a stronger, more productive and more profitable business for many years to come. I want to thank our independent operators, our team members and our supply partners for their hard work and their commitment. I'd also like to thank our shareholders for your continued support as we move the business forward with focus and attention.

I'll now turn it over to Chris to walk through the quarter and the financials in more detail. Thank you.

Thanks, Jason. Our first quarter results demonstrate the early progress we're achieving against the initiatives we began implementing at the start of the year. The work we're undertaking to reinvigorate our opportunistic product flow and the investments we made in promotion help stabilize and improve our sales trends. At the same time, we advanced our store refresh program as well as our planned store closures to strengthen performance across the fleet. I'll walk you through our first quarter results and then comment on our outlook for the year and second quarter. Please note the comparisons I will provide are on a year-over-year basis, unless otherwise indicated.

Starting with the top line. First quarter net sales increased 3.6% to $1.17 billion driven by stores opened over the last 12 months, partially offset by a decrease in comparable store sales. In the first quarter, we opened 7 new stores and closed 28 which includes 27 as we began implementing our restructuring, ending the quarter with 549 stores in 16 states. We closed the remaining 9 stores tied to the restructuring in April.

Comparable store sales declined 1% in the first quarter. As Jason mentioned, this was slightly ahead of our outlook and driven by continued positive traffic which was up 2.1% but was offset by a 3.1% decline in average transaction size. We noted in our March call that our lower mix of opportunistic products has weighed on our ticket size. We're addressing this by improving the levels of opportunistic products in our mix, investing in promotions and sharpening our value messaging. Since implementing those initiatives at the start of the year, we saw a month-over-month improvement in comp results throughout Q1. While the primary benefits thus far have been seen in customer traffic, we expect benefits to ticket to follow.

Gross profit increased just under 1% to $345.2 million, representing a gross margin of 29.6%. Gross margin included approximately $6 million or 50 basis point impact from inventory liquidations and write-downs related to the announced store closures. The 80 basis point year-over-year decline in gross margin was driven primarily by promotional investments as well as the impact from store closures, partially offset by improvements in inventory management.

SG&A increased 4.8% to $347 million, representing 29.8% of net sales, a 40 basis point year-over-year increase driven primarily by higher professional fees, commissions and other costs to support the growth of the business, partially offset by lower incentive compensation. In the quarter, we had restructuring charges of $18.2 million related to the store closures and a noncash goodwill impairment charge of $158 million related to the decline in our market capitalization.

Below the operating line, net interest expense was $6.4 million, roughly in line with prior year. Our effective tax rate was 2.2% compared with 19.7% last year. The year-to-year change was primarily attributable to the goodwill impairment charge recognized during the quarter which reduced the effective tax rate by 13.2%.

Net loss for the first quarter was $180.3 million or a net loss of $1.83 per fully diluted share owing primarily to the restructuring and noncash goodwill impairment charges I mentioned a moment ago. This compares to a net loss of $23.3 million or $0.24 per fully diluted share last year which was also impacted by restructuring charges.

Adjusted net income, which excludes restructuring charges and the goodwill impairment, along with other items, was $4.6 million or $0.05 per fully diluted share. Adjusted EBITDA was $43.1 million for the quarter, representing 3.7% of net sales compared to $51.9 million or 4.6% of net sales last year.

Turning to the balance sheet and cash flow. We ended the quarter with $59 million in cash and approximately $175 million in available capacity on the revolver. Total debt net of issuance costs was $489.3 million at the end of the first quarter, down $3.6 million from the end of 2025 and with net leverage of 1.8x adjusted EBITDA. Net cash provided by operating activities during the first quarter was $52.6 million, down from $58.9 million last year. The decrease in operating cash flow was driven primarily by changes in working capital, including inventory and accrued liabilities, partially offset by a lower net loss in the current quarter after adjusting for noncash charges. CapEx the first quarter was $56.8 million or $53.9 million net of tenant improvement allowances. We expect to spend approximately $170 million in CapEx for the year.

Now on to our outlook. We are reiterating our guidance for the full year, the details of which are included in our earnings release. For the second quarter, we expect comparable store sales to decline between 1.5% and 2%. This includes an estimated 50 basis point headwind from the Easter calendar shift. We expect gross margin between 29.8% and 30% as we expect to continue promotional investments to bridge the ramp of our opportunistic product mix. Adjusted EBITDA between $55 million to $58 million and diluted EPS of $0.11 to $0.13 per share.

In conclusion, the execution of the initiatives we laid out at the start of the year is driving early results. We're restoring the value and shopping experience customers expect and that has contributed to stabilizing and improving comp trends. At the same time, we're managing the business with discipline while continuing to advance our important strategic initiatives. We're confident that the work we're doing today will better position the company for sustainable growth and we look forward to sharing more about the progress we're achieving throughout the year.

With that, we'll now open it up for questions.

[Operator Instructions] The first question is from Edward Kelly from Wells Fargo.

I wanted to start on the guidance. So you maintained the guidance for the full year. Q1, a little bit better. I mean, you sound certainly a bit more optimistic. But the backdrop, if you think about the macro, the low-income consumer is under more pressure, supply chain costs are probably higher with fuel, I would think. I'm just curious if you could sort of take a step back because you are still implying better results, especially in the back half of the year. How you thought about these considerations? And what's baked into the guidance for it?

Yes. Thanks, Edward. It's Jason here. First, I'd just say our business has typically benefited from countercyclical demand when there's pressure on the consumer. And we have every expectation that work we're doing now will benefit Grocery Outlet as we improve value for customers. When we think -- take a look at our progress we're making against our opportunistic plan, it gives us confidence that the results so far our results so far that we're going to have continued progress that's going to drive performance improvement through this year. And I think when we think about the year, the only thing I would say is given our recent comp volatility in the short period of time, we had comp stabilization, we think we're being prudent with the outlook given those backdrops.

Can I maybe just follow up on the outlook as it pertains to the gross margin. So you've dedicated $20 million to the sort of promotional bridge in Q1. Curious as to how your thinking about sort of confidence level around not needing to continue that in the back half? And then could you specifically maybe just talk a bit more about what the impact of fuel is on your supply chain costs? And what's in guidance for that?

Yes. Edward, it's Chris. Yes, in terms of gross margins, this business has been very consistent in delivering gross margins in the past, right? And we fully expect to get back to those levels once we get through the promotional spend that we've talked about, the $20 million and opportunistic product, begins to be a bigger component of our mix, which we expect towards the back half of the year. So our first quarter, we saw the 29.6% margin. And we've talked about the 50 basis points there from the store closures. So that gets you to a little bit over 30% for Q1 with the promotional spend in there.

And then our guidance also includes some additional liquidations in the second quarter, $1.5 million related to the closures. So we'll have a little bit of that in there for the second quarter and then the promotions. But after that, we start to kind of wind down or slow the -- or lessen the promotional spend in Q3 and then totally in Q4. So we expect to be at higher levels of gross margin as we -- in the back half of the year. The impact of the fuel is not all that significant at this point, it's about maybe 10 basis points that we've seen so far.

The next question is from Mark Carden from UBS.

So to start, I wanted to dig into the store refreshes a bit. It sounds like you guys have made good progress getting to 58, but you're reducing the target to 100 this year. Just as you've deployed these, have you seen any deceleration in their comp lift? Would just be great to get a little more color on your decision to slow these a bit and reprioritize some of the investments in value?

Yes. Mark, it's Jason here. Thanks for the question. First, I just want to say I believe -- we believe we have a huge opportunity to improve the in-store experience and execution in the business over time. And just as a reminder, why we began this journey on refresh was to improve the customer experience. The feedback we got from customers has been directly incorporated into what we're doing there, and it's intended to improve the customer experience in 3 ways: one, improving the ease of shop; two, improving our in-stock and the consistency for customers there; and we also improved the merchandising and implemented stronger signage to communicate value.

What we've seen so far is in all of the executions as we measure customer feedback, we've got improvements in perception. The operators have loved the changes and we've gotten really fantastic feedback. The first group of stores that have 1 full quarter of sales reporting is hitting the numbers we've been talking about. We feel good about that. This is really about pacing for us. So it's important that as we prioritize the company's resources to focus wholly on op execution, which is the fastest way for us to improve our comp sales that this is a calibration of effort. I do want to share, though, that as we've scaled this up, we have had some more variability in sales and execution. And the team feels that pacing this to more like 100 locations will give us the needed support we need to help operators through that change. We expect that in the fullness of time, all of the stores will meet our sales expectations.

Great. Appreciate the color there. And then as a follow-up, just with respect to traffic. You guys have seen a nice acceleration there. Are you seeing any meaningful differences right now in behavior between some of the different income cohorts, and just what specifically are you seeing with respect to the SNAP customer?

Yes. I guess on the first on the SNAP customer, still a little less than 10% of our sales. And everything we see there on EBT dollars and customers is relatively stable. So I don't think there's anything we can add at this point, that's what we see there. Second question on traffic. Again, not seeing a big difference in kind of cohort, but continued improvement in traffic month-on-month-on-month as the quarter progressed.

The next question is from Simeon Gutman from Morgan Stanley.

This is Zach on for Simeon. I wanted to ask about the mix improvement. You mentioned that there was about a 2-point improvement in mix and that has supported transactions. I'm curious why that wouldn't have translated to better units per transaction as well since you also said UPT was still under pressure this quarter.

Yes. Thanks for the question, Zach. The reason why we're talking about op, it's the value engine that drives this company's comp sales, and we think we're on track to make that happen. Couple of bullet points on the improvement in mix. So shipments are up, inventory is up, sales are up over 200 basis points in the mix. We did not see a major improvement in UPT, but we did see the traffic improvement. So we feel that the work we've done on promotion, communication and the work on op shows up in a number of ways. First and foremost, we're seeing traffic increase. Secondly, we're seeing that NPS, our value scores increase. And we think that's directly related to the work we're doing on op. Now as the year goes on, we expect to see improvement in basket over time. So at this point, we've had the nice bump in traffic. We see and feel that, that's now on track, and we'll look to continue to see basket improvement as we work that mix.

The next question is from John Heinbockel from Guggenheim Partners.

Jason, you referenced all hands on op. So I'm curious, what does that entail differently, right, than what you might have had a couple of months ago. And then what's the importance of the short-dated product, right? I imagine you can get good value, but there's shrink risk. How do you -- how are you attacking that?

Yes. Thanks for the questions, John. I'll start with the last first. Short-coded product is something we start to experiment with. So there's -- with visibility in the system, we're able now to see what's happening in a different way than we did previously. So we're flagging that product differently. We've started with one major vendor. We are monitoring it through the supply chain differently. And obviously, the work we've done on improving reporting visibility and tracking helps us increase speed and flow of op through the supply chain. And so as that pilot works its way out, we'll continue to expand that into other vendors for the obvious benefit of expanding our op mix and margin and value for customers.

On the other piece with focus, whether it's operations, the buying team, what have you, it's a matter of narrowing our focus to make sure that all hands and all functions of the company are working to help execute our op plan given how important it is to our comp sales and the relationship we have with those two things. Just one example that I think really helps people understand why this is so important. There's a relationship in our highest comping locations where we have strong op. And that op has everything to do with how it's ordered, how it's merchandised and the focus. We continue to work on optimizing our assortments. So we've made some reductions on MTO and private label product to make room for op. We're working on our communication of extreme value positioning that we've talked about. We rolled out new reporting and visibility, and we've done some of that in operations as well that helps people see and understand what's happening. And we've increased our supplier engagement to refocus our teams on what we do best, which is prioritizing op and making deals and translating that into value for customers.

The next question is from Robby Ohmes from Bank of America.

Jason, Chris, a couple of quick follow-ups. The first, just on the second quarter comp guidance minus -- I think you said minus 1.5% to minus 2%. What's the traffic and ticket sort of assumption that we should be using there?

Well, I think -- I mean, from a traffic perspective, I think we'll continue to see the positive traffic that we exited Q1. And then as Jason talked about, improving the basket, that will start to happen as op becomes a greater percentage of the mix. So I think we're expecting to see that start to improve probably towards the back half of the second quarter.

Got you. And then just on the -- you mentioned promotions in a couple of different ways. So the promotions you're doing, were you in promotions that were a significant benefit to the comps in the first quarter, like our promotions helping the 2.1% transaction comp?

Yes. Just to kind of reference what we're talking about, Robby, is we typically have not a promotional company. The key way that this company delivers value through opportunistic supply. And so the way you can think of this, we saw in Q4, we had a shortage of product, and we wanted to make sure that we bridge a gap between what we felt we needed in, call it, value-driving product and what we had in the system. And so the promotions that we developed, the synthetic promotions that we created with branded product are meant to be a bridge as we work our op plan. And so what's happening through Q1 and what's happening as this year goes on is as we improve our mix, as we improve the inventory and range that we see progress on right now, we'll start to taper those mechanical synthetic promotions turn those down as the op turns up. And what we're seeing in the business is that we're making that trade off kind of as we speak, and feel good about the progress on that front.

The next question is from Jeremy Hamblin from Craig-Hallum.

I want to come back to the opportunistic mix. And as you're going through the store refreshes as you're looking at kind of building back opportunistic product. Can you give us a sense for like what portion of the mix do you want it to get to? And is there a potential to take it even further if it's driving better basket and driving more traffic. Just ultimately, just gaining a sense for where you think this will go and how long you expect it to take?

Yes. Thanks for the question, Jeremy. We have a historical sort of mix that where we think the weight of this is very helpful for the business. We see that with our highest-performing stores and comps. We do have -- I don't think we've talked about this, but something that gets close to half and half on a mix basis is very healthy for us. And that's -- as we promote the mix or talk about adding range and variety in our operations, we see improvements in the mix or the -- for op versus like as an example, MTO. There's still value created with our made-to-order product, but clearly, the level of discount, the level of value and the accretion of margin is very helpful for our business. And so that's something we're just going to continue to work on broadly by category and by store. And so I'd love to see that get to closer to a 50-50 blend. We're not at that level at this point. But where we see a high level of op, we see a high level of sales.

Where is the mix blending at across the chain today?

It's not something we'll release on a call. But I think what's important is we've had about a 200 basis point improvement in that mix since the beginning of the quarter. And we can see clearly the relationship between that mix and the value that gets created for the customer. And as I said, that's helpful given that's how we differentiate our business as well as very helpful on the margin front.

Fair enough. Switching gears, just on the UGO strategic alternatives, are you, at this point in time, getting a sense for what the options are with that, if there's potential bidders for that business? And can you share with us the expected time frame in which you would be able to share with us kind of what decisions are being made, is that a 2026 initiative?

Sure. Yes. No, thanks for the question. Yes, we're getting a sense of what the options are, and we'll share more when we have something substantial to share. Definitely a '26 conversation.

The next question is from Corey Tarlowe from Jefferies.

Great. I was just wondering if you could talk a little bit about kind of the improvements that you saw within the quarter, maybe by month, and then quarter-to-date, if you could just give us kind of what you saw from a traffic and ticket perspective? Because one would think that based on you talking about the improvements and how the business is value-oriented that when gas prices rise, maybe there was an inflection in the business. So I'm curious, could you kind of talk through what you saw and what you're seeing, that would be really helpful.

Yes. Thanks for the question, Corey. Yes. Again, I think we are firm believers of the business is going to get back to healthy levels of comp sales performance over time. January, as we shared in March, we believe we hit bottom after experiencing like traffic erosion and sales erosion through Q4. And on the last call, we talked about expecting sequential improvement in comps driven by traffic through strengthening our Net Promoter Scores and obviously, through the op metrics that we had outlined, and that's played out as planned. And so traffic was close to flat at the beginning of the year, and we saw, again, sequential improvement. We saw a nice range of traffic in March, although we had -- there's an Easter shift kind of there, something between 2% and 5% traffic on given weeks.

As I mentioned in the prepared remarks, we thought we did a really nice job connecting with the customer on some key events in Q1 that we think will help with momentum as we go forward, including Super Bowl and we thought we had a very strong Easter. So not as much progress on the basket as was asked earlier, but we do think that as we work this plan, that we'll see improvements in units per transaction as op becomes a stronger part of our mix.

Got it. And then I just wanted to ask a quick follow-up. So it looks like your comps were minus 1% in Q1 and then in Q2, it sounds like you're guiding to, I think it was a negative 1.5% to 2%. So if traffic is improving, is the offset that I guess, the units per transaction has been lower? I'm just trying to understand the deceleration from Q1 to Q2.

Yes. Yes, great question. I just think just to share, given our recent comp volatility and the short period of stabilization we've had, we just want to be prudent with our outlook.

The next question is from Leah Jordan from Goldman Sachs.

I wanted to go back to one of Ed's questions because what has changed since we last connected is the inflationary backdrop, but your outlook is staying the same. Just we talked about fuel, but maybe just digging deeper on the cost side. How are you thinking about inflationary pressures in the year? What are you hearing from suppliers? Anything there? And then ultimately, how do you think about your ability to pass anything on as we move through the year in this environment as you're still kind of working on your value messaging as well?

Yes. Thanks for the question, Leah. I think we look at the business, what's important right now is we're -- we run a basket savings gap of something between 15% and 20% with mass and 30% to 40% against conventional players. We're monitoring this. We monitor it regularly, and we're going to maintain that spread regardless of the external conditions or as they necessitate. We see and hear whether it's a supplier's PPI index, inflation numbers, fuel and so on. So if this persists, obviously, there'll be some downstream effects. But we feel that we -- with the work we're doing on opportunistic supply, given its profile, the average unit retail of opportunistic product as we work the mix that we should see a nice benefit for our customers in a period like this.

Okay. That's helpful. And then maybe a follow-up separately. I wanted to go on the value messaging and marketing. A couple of quarters back, right? It was an issue. You fine-tuned it here. Maybe we've had some wins around Super Bowl and Easter. But maybe you could talk about what you're doing around every day. What's resonating? What's not? Where would you say you're in that journey of like fine tuning the message? And what really still needs to be done at this point?

Yes. No, thanks for the question. We've had very good success on a broad basis with awareness-based marketing, our outdoor work as well as social search has been very effective. And for our IOs, they've been very effective in telling stories related to opportunistic product and sharing basket comparisons. So we think that those elements have resonated. We've done a bit of work on that. And we can see that our value scores are improving with customers related to the communication support that we thought was important to deliver and continue to deliver.

The next question is from Joe Feldman from Telsey Advisory Group.

I wanted to go back to conversion, I guess. I'm curious as to you're getting much better traffic, which is terrific, and it seems like people are seeing the better value, but why wasn't the ticket stronger? Like are people just don't have enough cash in their pockets or are price is not low enough so they're still not putting in enough items. I mean what is -- it just doesn't compute for me, I guess, on the conversion side.

Yes. No, we're pleased with the traffic improvement. Converting those trials into loyalty takes time. We think that working our value messaging and being consistent in that experience for customers as well as working the customer experience in store, all of those things will contribute to more loyalty, affinity and larger baskets. And so it's we wish it would happen a little faster, but that's generally in my experience, what it takes and that consistency of approach is something that we're very committed to.

Got it. And so I guess maybe we'll ask some more offline about it. But I guess on the comp for the quarter, did that exclude the 27 stores that you closed already? Presumably it did. Like is that an accurate statement?

Yes, that's correct.

Next question is from Oliver Chen from TD Cowen.

Jason and Chris, regarding the baskets and opportunistic opportunity going forward. Which parts of opportunistic have the most opportunity to impact that basket if you thought about categories or is it overall? And then you mentioned the annual business review process. Would just love some insights into that and how it's -- how that will manifest with the independent operators and things they can do or what opportunity you see when you implement that? And third question is, as you engage in the store closures, how is it helping perhaps inform your store openings and what you're thinking about in terms of prudent site selection?

Okay. Thanks, Oliver. On the first question on op, it is a cross broad-based approach, that's always required. We've made progress across certain categories and less on others, but overall, feel good about where we are with shipments and inventory range and how that's showing up in sales. And we can see the relationship there that drives comps. So feeling good there. I wouldn't call out any one specific thing, but it always needs to be a broad base of categories for the customer.

The second question you had was around the annual review process that we've implemented now with our operators. This is a two-pronged piece, which is creating reporting and visibility for our operators so they can see where they are on a relative basis to their peer group, peer groups include things like relative sales, location or state like customer profiles and so on. And the reporting that we're providing puts them in that group where they can see things like shrink dashboard, it can show them specific SKUs where they may be out of pocket on.

Our operators are really excited about having this information. It's something they've been asking for. And we've been at this stage, just able to turn that on. And so we can see that it creates a lot of engagement. It's easy to understand, and it's allowing them to take immediate action and make improvements in their business. And we think that that's just good retail practice, and they're excited about it. And we're excited to see how that's going to translate for our business over time.

The second part of that is in operations, in particular, when our folks are visiting stores, they're also judged on their support for the operators on that front. So they're coming to the stores with that information and assisting our operators helping to activate those opportunities throughout the business.

And I think the third question was specifically on real estate. Obviously, we want to make sure that we're not picking challenged locations, being disciplined about location selection, making sure that we're building quality long-term earnings for the company is essential. And we want to pick locations that have higher potential for volume that are easier to -- for egress, ingress neighborhoods that make sense for our business. And the return selection criteria includes higher hurdle rates for returns. I think '26 is over 25% and '27, we're working hard to push that number closer to 30%. We've clustered openings and we're shifting our mix to more core markets as we work that part of the decision tree to make sure that this business can get back to a 6% EBITDA margin over time.

Okay. And Jason, a follow-up on opportunistic is so important and the people behind that infrastructure and the buyers are working hard day to day or hour to hour. But what's happening with the people side of the opportunistic talent that you have now? And any thoughts there? And as you -- with the new CMO, was this something you always thought the organization needed? Just would love your context on timing and how this interplayed, what's happening now versus when you had for early -- first started?

Yes. No, it's -- I've learned a lot in the first year being here. Clearly, opportunistic and value for us go hand-in-hand. It's a big chunk of the value equation for this, making sure that our stores are resonate with customers on the affordability front. At the same time, it's important to recognize the customer experience, things like quality, wait times, flow of stores, ease of shop, those kinds of things are also critical. So having a clear focus on making sure that we deliver value for customers with op is our #1 and focused priority for the whole company. Clearly, merchandising is an important component and something that we will leave in over time. But for everyone involved, including our new CMO, opportunistic supply and everything we're doing there is what that team is wholly focused on.

Next question is from Bill Kirk from ROTH Partners.

I wanted to go -- keep going on Joe's second question. I imagine the closures would include some stores that were comping worse than reported results. So could you give us a sense for what the closed stores as a group had been comping before they exited the comp base? And then do you think any of their traffic shifts from those closed stores into your other locations?

Yes. I would just say that it's really not material. The impact of the store closures on our overall comp. And from a cannibalization or just other -- shifting to other stores, that's also not material.

Okay. Easy. Are you able to tell in the transaction growth if it's coming from new customers into the stores? Or could it be existing customers that are splitting their trips. And if the traffic is new customers, are there any notable trades among those new shoppers, can you tell us they're completely new or if they're lapsed folks who are returning to your stores?

It's a mix of new customers and existing. So some of what we did obviously drove frequency and there's been some comments about basket. We didn't see as much basket trends translation into higher UPT, but clearly, the frequency piece is there and the new customer pieces there. I don't have any other further insight for you on specific customer kind of segmentation, but we do see and know that it's a mix.

There are no further questions at this time. I would like to turn the floor back over to Jason Potter for closing comments.

Well, again, thank you very much for your interest. We appreciate all the questions and look forward to your engagement with some of you a little later on today. Thank you very much for your time.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the Grocery Outlet Fourth Quarter 2025 Earnings Results Conference Call. [Operator Instructions] 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 call to discuss financial results for the fourth quarter ended January 3, 2026. The 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 Investors 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 on 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 6 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 3 consecutive months of comp improvement. We've been focused on improving value by sharpening our KPI based pricing, reversing missteps that occurred in '24 and and believe that this had been a key driver in holding value back for our customers. Through the same period, we're able to maintain gross margin stability through shrink improvement.

Our 25 cohort of new stores was performing ahead of plan, and we've 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 fishing 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 surface 3 fundamental drivers of comp deceleration.

First, the environment has 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 KPIs, 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 a few 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, but discounts up to 60% across an ever-changing and at 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 Apple 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 nonproductive 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, [indiscernible], who is 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 #1 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 4-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 '26, 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 '26 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 are 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 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.

Thanks, Jason. In 2025, we made important progress against our key strategic initiatives. However, as Jason shared, in the fourth quarter, we encountered headwinds which impacted our financial results. I will walk you through our Q4 financials before sharing details about our outlook for the year ahead. Please note that the comparisons I will provide for on a year-over-year basis, unless otherwise indicated.

Starting with the top line. Fourth quarter net sales increased 10.7% to $1.22 billion and included an incremental $82.4 million from a 53rd week in 2025. Excluding the extra week, net revenue increased 3.2%, driven by the addition of net new stores, partially offset by an 80 basis point decline in comparable store sales. The decline in comp, which excludes sales from the extra week, was owed to a 170 basis point decline in average transaction size, offset partially by a 90 basis point increase in traffic. As Jason discussed, we believe several factors contributed to the comp decline, including our emphasis on driving better in-stocks for everyday items, which came at the expense of delivering the compelling value items our customers expect as well as macro factors, including the impact of the U.S. government shutdown on federally funded benefits as well as a more promotional environment.

In the fourth quarter, we opened 7 new stores on both a net and gross basis. In 2025, we added 42 new stores and closed 5, ending the year with 570 stores across 16 states. Gross profit increased 11.5% to $361 million, representing a gross margin of 29.7%. Gross margin expanded 20 basis points year-to-year but came in below our outlook as a result of higher seasonal promotions and additional markdowns to clear excess inventory. While those markdowns impacted Q4 margins, the helped us start the new year and a healthier inventory position.

SG&A was $337.1 million and grew 13.6% in the quarter. As a percentage of net sales, SG&A represented 27.7%, representing a 70 basis point year-to-year increase. The increase was due to lapping a substantial decrease in performance achievement adjustments last year as well as growth in our store network, partially offset by lower severance costs. Jason mentioned our plans to close 36 underperforming stores, which I will touch on in a moment. Related to these closures, we incurred $109.8 million of noncash impairment charges for long-lived assets in Q4.

Also in Q4, we performed our required annual impairment testing of goodwill, which resulted in the recognition of $149 million noncash goodwill impairment charge. Below the operating line, net interest expense was $7.7 million, up $0.7 million from last year as the average principal debt outstanding increased but was partially offset by a decrease in average borrowing rates. Our effective tax rate for the quarter was 10% compared with 47.4% last year. The year-to-year change was primarily due to the nondeductible goodwill impairment.

Net loss was $218.2 million or negative $2.22 per fully diluted share compared to net income of $2.3 million or $0.02 per fully diluted share in the prior year. Adjusted net income increased 28.8% to $18.7 million or $0.19 per share. Adjusted EBITDA was $68 million for the quarter, up from $57.2 million last year, driven in large part by the benefit of the 53rd week. This also contributed to incremental 40 basis points to adjusted EBITDA margin, which was 5.6% for the quarter compared with 5.2% last year.

Turning to the balance sheet and cash flow statement. We ended the year with $69.6 million in cash and approximately $175 million in available capacity on our revolver. Our net cash provided by operating activities during 2025, increased by $110 million to $222.1 million, driven primarily by tighter inventory management and other working capital improvements. CapEx for fiscal 2025 before tenant improvement allowances was $220.3 million an increase of $13.4 million over fiscal 2024, driven primarily by higher number of net new stores opened in 2025.

CapEx, net of tenant improvement allowance for fiscal 2025 was approximately $192 million, $18 million below our outlook of $210 million. Total debt, net of issuance costs was $492.9 million at the end of the fourth quarter, up $15.4 million from the beginning of the year with net leverage of 1.7x adjusted EBITDA. Before turning to guidance, I want to share a little more detail about store closures that Jason discussed. Prudent, disciplined capital management and improved return on investment capital are core priorities for us. We approached the store closure process with rigor. We began by evaluating all stores with negative 4-wall adjusted EBITDA, exclusive of TCAP burden.

We developed a rating system based on real estate quality, competitive dynamics, operational execution and recent trends and applied those ratings across the portfolio. From there, we modeled store-level NPVs and compare those to estimated lease breakage costs. We also ensure that any closures align with our long-term strategic plans. After that thorough review, we decided to close 36 stores that were not meeting our performance standards. Once completed, we expect these closures will result in annualized adjusted EBITDA improvement of approximately $12 million. This should enable us to operate more profitably across our markets going forward while focusing our financial and operating resources where they can earn the strongest returns.

We expect to complete these store closures during the second quarter and anticipate that we will incur cash charges of approximately $57 million, bad debt expense of approximately $12 million partially offset by net noncash write-offs of lease liabilities of approximately $52 million over the course of this year as we exit the leases associated with these stores. As Jason noted, we've established stringent underwriting standards for 2026 and 2027, new store cohorts and the relative performance of our refreshed stores gives us confidence in the stores we plan to open moving forward.

Now on to our outlook. We are starting the year by taking deliberate actions that are designed to strengthen operating performance and position the company to deliver improved financial results. However, as you might expect, some of these actions will impact our 2026 results. The store closures will moderate revenue growth and the promotional investments we're making will be reflected in near-term gross margins.

Specifically, with respect to the store closures, we expect to see roughly 40 basis points or approximately $4 million of gross margin pressure in the first quarter this year from the inventory liquidation impact from the closures. It's also important to note that 2025 53rd week contributed $82.4 million in sales and $9 million in adjusted EBITDA. These benefits will not carry over into 2026. For the full year, we expect comp store sales growth to be between negative negative 2% to flat.

For the first quarter, we expect comparable store sales to be between negative 2.5% to negative 1.5%. Aside from the store optimization plan closures, we expect to add between 30 and 33 net new stores for this year, fairly evenly distributed across the quarters. We expect total net sales for our fiscal 2026 of between $4.6 billion to $4.72 billion. We expect the closure of the 36 stores will impact top line growth by approximately 2% for the full year, we expect gross margins to be in the range of 29.7% to 30%, reflecting promotional investment to drive sales in the first half and the inventory liquidation impact from the closures.

We expect first quarter gross margins in the range of 29.6% to 29.8% or 30% to 30.2%, excluding the previously mentioned inventory liquidation impact from our store closure plan. For the full fiscal year, we expect adjusted EBITDA to be in the range of $220 million to $235 million, and we expect first quarter adjusted EBITDA to be between $39 million to $43 million.

For the year, we expect depreciation and amortization of about $136 million driven primarily by CapEx spending, net of tenant allowances of approximately $170 million. This includes investments in store openings and remodels, our distribution centers and systems as well as store maintenance projects.

For the year, we expect net interest expense to be approximately $27 million. We expect to generate meaningful cash flow from operations in 2026 and which will be used to grow and maintain the business and fund cash requirements related to the store closures between $51 million and $63 million. We expect share-based compensation of approximately $18 million, a normalized tax rate of 28% and average fully diluted shares outstanding for the year of approximately $99 million. Thus, we expect full year adjusted EPS to be in the range of $0.45 to $0.55 per fully diluted share and first quarter adjusted EPS of approximately $0.01 to $0.

04. In conclusion, while we're disappointed with our Q4 results, we're clear and confident on the steps to return the business to a position of strength, and we are taking decisive action to deliver on the promise and potential of our business. This work will take time, but by driving our key strategic priorities and focusing on execution, we believe we will strengthen our value proposition and store experience in support of sustainably stronger results for years to come. And with that, we'll open it up for questions.

[Operator Instructions] Our first question is from Jeremy Hamblin with Craig Hallum.

I thought I would just start with getting an understanding of the same-store sales trends. And you noted that you've seen a 100 basis point improvement in February versus January. I wanted to see if you could put some context behind that. And how both traffic and basket have kind of shifted here as we've entered 2026.

Jeremy, it's Chris. So yes, so in the third quarter last year, as you may recall, we started to see a little bit of a softening as we exited the quarter. And then when we went into the fourth quarter, of course, we had the government shutdown, which we talked about and the impact of that on SNAP and EBT, which impacted both October and November, and we were expecting to see December come back and be more normal comp. However, we didn't quite see that. We actually continue to decelerate into December. It was highly promotional and really the environment, we feel got a little bit worse externally. And then that flowed into January where we kind of bottomed out. But all along the way, their customer count remains positive. It did decel as well, but it was positive all the way through into January. And then as we -- as Jason pointed out, in February when we started to invest in doing some promotions, we did see some recovery of about 100 basis points in February and expect that to improve in March as well as we continue to promote.

Got it. So fair to assume that you're kind of solidly negative here in the mark order? SP1 Yes. I mean that's our guidance, right.

It was minus 2.5% to minus 1.5 million.

Yes. Okay. And just coming back to understanding the core issue, where you've identified the value and kind of value proposition because it sounds like you're struggling with basket. Is it that you don't have the right goods that your customer set is looking for? Or is this really about competition and competition that has just been a lot more aggressive or closer in value to your price points?

It's Jason here. I'll answer the question. We can see clearly that value slipped because of the gap that was created in December, January time period on the weight -- the breadth and weight of our op mix, in particular. -- and we know that restoring that will drive improved perception ultimately, comps. Customer -- our customers talk about op as great deals or promotions, and that's absolutely critical for us to drive value perception. In this time period, we've been looking at, obviously, we're monitoring this closely. Momentum is building our op mix is now up about 200 bps month-on-month over the last month from January and shipments up about about 150 bps. And we can see that your question about basket it directly relates to op. And so the drop in our units per transaction there are addressable based on our plan. And we've got the whole team focused on supporting on driving improvements on the buy side to drive that supply chain on opportunistic product.

Our next question is from [indiscernible] with Jefferies. .

I'm on for [indiscernible] today. I was curious about SNAP benefit specifically, I wanted to ask about the February reductions that kind of just rolled out? And then any other color you could give around what you're seeing to consumer responses to the step changes.

Yes. Maybe I'll just take you back to November. I know there was a lot of conversation about that at that time. What we eventually did experience in November was a double-digit decrease and EBT sales, given the SNAP benefit being interrupted that created some noise for us. We did see a recovery in December, but not to the level we were perhaps expecting and it's something we continue to monitor. But in Q4, that's basically what happened. So November disruption and that roughly just under 10% of our sales with a double-digit increase during that period.

Got you. So nothing -- I guess I'm kind of curious, is there anything baked in for the recent. Is that reflected in the guidance?

Yes. February has recovered if that was something just to mention. And yes, it's in the guide.

Our next question is from Oliver Chen with TD Cowen.

On your opening comments, what would you say as earlier or faster in terms of fixing an opportunity versus longer term? And then you do have a lot of new leaders as you mentioned, across ops, merchandising and supply chain. How could you get us comfortable in terms of that new leadership and the right testing to make sure that things are optimized for go forward. And lastly, it's probably related, but the value perception on consumer is perceiving value versus what you're going to correct opportunistic. Like in other words, will it take a while for consumers to come back? Or how are you thinking about customers' perception versus what you're offering and timing around that?

Yes. Thanks, Oliver. Maybe I'll answer the second question first. So when we're looking at the business, we can see clearly that opportunistic is we have a gap right now internally and what we've delivered for supply and mix and value is directly related to the weight of that category of products, if you will, you can think of it like promotional wage. We think that restoring that pipeline is a 3- to 6-month piece. The promotions that we're implementing, the synthetic promotions we're creating are basically a bridge in the time period it's going to take for us to get that in the right place. And value is definitely driven -- perception is driven in our business by the depth and breadth of opportunistic product. And we're still comfortable there's plenty of supply. We don't think it's a gating factor to ambition, but we have some work to do there to deliver that. We've got a number of things that we've put in place to make sure that that happens. Number one, we've unified the buying team under 1 leader, [indiscernible]. He's got experience in that business. We feel good about the support we're providing for that team. We've added some resources there. We've got momentum, as I mentioned, on shipments and mix. We've made some changes in our supply chain with new leadership to create capacity to ensure that as becomes available, we can flow that product through the system. We did burn off some less productive inventory in GM and about, we think is going to be very helpful. There's lots of opportunity for us to continue to expand on what we're doing there on the upfront. So that's the value perception piece. On the piece with new leadership, clearly, there's always a learning curve in any business. I mean, I'm still learning. I think I've learned a lot in this business in the first year. We're going to apply those learnings to improve the business at every stage we go I'm highly confident in the team we've brought on. They're very confident. We've got a lot of great feedback from peers as well as operators on their level of engagement and understanding of the business and what they're going to deliver here over time.

Our next question is from Simeon Gutman with Morgan Stanley.

This is [indiscernible] on for Simeon. For the first question, I wanted to ask you about the $40 million in promotional investments that you've talked about for the year. Can I ask you, is there any specific categories or types of merchandise that they're touching. Do they stay in place? Do they become permanent? Or can you get some of it back over time? And are there any offsets? Can you lean on vendors or work with vendors, suppliers, look for efficiencies to try to mitigate some of the impact on the bottom line?

Thanks for the question. It's a quantum of about $20 million, just to clarify. And what we're doing is we're using fresh products, in some cases, direct-to-store branded quality product as a bridge -- this is not a permanent part of our P&L. We think that the way we've approached this is by waiting the promotions based on the gap we have with opportunistic product is how we've sized what we think is necessary. And so not a permanent part. Part of what makes up such an important part of our business is it drives margins as well as value. And on the flip side, we are not a traditional promotional company, nor do we intend to be a traditional promotional company. And so when you promote those kinds of products, the margins are typically lower, but we are endeavoring to make sure that we are providing value for our customers in the short term as we work to close that gap.

Great. As a follow-up, if I could ask you about the marketing mix is one of the elements you mentioned last quarter that sort of drove some of the weakness towards the end of the third quarter. Could you give us an update how that developed over the fourth quarter and how you're thinking about it into 2026?

No, that's a great question. We did calibrate our marketing post that September time period. both in weight and channel. We've seen a nice result in the -- especially in Q1 so far year-to-date in the way we're executing our marketing spend we reoriented more to outdoor and search and a little less on some of the smaller items as well as some broad-based marketing that we were doing that we didn't think was hitting the right target groups had the spend per value that we were looking for. So that, we think we've dialed in the right location at this point.

Our next question is from John Heinbockel with Guggenheim Partners.

Jason, I wanted to start with, can you talk about the connection between the everyday product and opportunistic, right, and every -- the focus on everyday hurting opportunistic. Is that just capacity in the warehouse? And then does it take -- you referenced 3 to 6 months pipeline. I'm curious how long you think it takes to get opportunistic bought again, I would think that would be fail quick, right, to buy that, get it in warehouse and into stores. Maybe talk about why it takes that long to get where you want to get to?

Yes. I think what I'm looking for, John, what I expect to see in the next 90 days is a 2 or 3 things. By creating this bridge as well as what we're working on an opportunistic product, we expect to see a 200 basis point improvement in flow, a 200 basis point improvement in our mix on op. I also expect to see some value perception scores improving and then on the sales line, a traffic number that's north of 2 and stability in our basket on UPT. And when we're looking at the business at the tail end of Q4 and into the first part of Q1 that UPT piece is under pressure comes really all from [indiscernible]. On your question about every day, every day is for us, we're just trying to meet a minimum standard. So that is not the main event. The majority of our product is opportunistic in our stores and will remain that way. I think that what we're doing right now is calibrating those assortments to make sure that treasure hunt is the main event. That's what our customers care about, and that's our differentiator, and that's our future.

And then as a follow-up, the 24 closures in the East, at least maybe I'm wrong, do not include I mean how do you think about that review? Do you think there'll be UGO closings? And you job is company-owned, sort of your thought process on -- do they stay company-owned? Do you transition them? Where do you think that review ends up?

Yes. I mean our effort to execute a turnaround here and narrow our focus as we come to the conclusion we'd like to conduct a strategic review of that business. A couple of things to say. We have confidence in the business, the team there, the market, it continues to be profitable and stable. But given our priorities and the trend in the core business, we want to make sure we're evaluating our options. I don't know what the outcome of that will be at this point. John, but we're -- there's a range of possible outcomes there from full integration to a potential sale, but we're going to evaluate each one of those on its individual merits and we'll keep you up to date on that progress over time.

Our next question is from Edward Kelly with Wells Fargo.

So taking a step back, if we sort of think about the business before you got there and where things are moving currently, there's been the systems issues, which have been disruptive and then some of the things you mentioned about marketing and the Snap stuff and then obviously, the environment seems to be more promotional. You're adjusting to this, but how does this impact the way that you're thinking about the long-term margin structure of the business? And then as you think about things like store growth, you're still opening stores next year, those leases probably signed. Are you still signing leases beyond that? Just how do we think about what all this means for the business bigger picture and longer term?

Yes. I mean, bigger picture on the margin structure, confident that we're going to be able to expand margins over time. What we're doing right now, as I mentioned, is a temporary bridge Op is a driver, accretive margins, attractive on the value front for customers. I think when you talk about systems, we're only going to get better at running the business as we extract ourselves from that period, there's a whole host of things that we're going to be able to do there, including something I mentioned in my opening remarks, which is giving support to our operators to get even better at what they do best. And then on the store closure front, just a couple of things I just want to take a minute to talk about because I think it's really important given where the company has come from. First of all, we're not going through another restructure. This is it. If you kind of play back the last year on that front, Q1, the company made the decision to slow unit growth the past practice, I guess, of really promoting a high unit growth -- high single-digit unit growth created some challenges and some dysfunction. Clearly, there's white space for us there, but we need to make sure we have the winning conditions in place for sustainable growth. I think that's really important. And as we kind of entered the new year in January, we wanted to make sure that we spent time reviewing every part of the business and the store network was part of that. So we did come to the conclusion to close 36 locations that didn't have a viable path of profitability. And we want to make sure that resources are focused on the key priorities of the business. So those are some of the things that we had thought through. Our process over the last year on the network and growing is very much focused on sustainable growth and returns on invested capital. And key ingredients to that include site selection quality making sure sales productivity potential is there. Those things, I think, there's a lot of real estate in the 36 that's very challenged. We're underwriting stores now, locations that have more potential. We spent time on lowering our CapEx costs the conversations we've had over the last couple of quarters include clustering, waiting to core markets, leveraging marketing, brand strength, supply chain and obviously, the operators are key. And so we look at our outlook for the underwriting we have this year on the 30 to 33 we made decisions last year as well on that portfolio and feeling much better about the 25% IRR and the following year with that cohort of stores in the 30% range. So clearly, we -- growth is important, but we want to make sure that we're improving the strength of the company as we do that.

Okay. And then just a follow-up. You mentioned the highly promotional external environment that began in December. Could you maybe provide a little bit more color there in terms of where that promotional activity has been coming from and how broad that is?

Yes. We cover a lot of different states in the country, and we saw pick your promotion far deeper promotions starting actually around the Thanksgiving time period that ran right through December, early January with some pretty aggressive high low out in the marketplace. And we just see continued aggression across a host of commodities crossover competition that we have. So we would just describe it as more promotional. And our customers in store and so on, we're seeing challenges with affordability there. And I think that our gap there on up through December and the New Year has obviously affected the business, and we need to double down and make sure that we're able to deliver in a significant way.

Our next question is from Joe Feldman with Telsey Advisory Group.

I guess my first one, I also wanted to ask on stores. Can you I guess why would you open 30 new stores or so this year before you get the format right for the existing stores. It feels like we're not fully there yet on the format, and maybe I'm wrong, but that's my interpretation of what I'm hearing. And yet we're going to keep opening stores without knowing what's the right and best format. So maybe you could address that first.

Sure, Joe. I think that the stores that we have in the portfolio for this year, first of all, are highly weighted to core markets. So I think West Coast. And that's a big part of what we've calibrated to. The -- we've cut some of the locations out that we didn't feel were high potential, and we're confident that that approach is a much more attractive way to open stores. The following year, we have a smaller cohort of stores that we've obviously signed leases for. There's -- but after scrutinizing and going through the network work that we did, it was quite rigorous, we still feel comfortable that, that is the right thing to do for the business.

Okay. Got it. And then -- if I heard you guys correctly, I think in your prepared remarks, Jason, you mentioned you're going to open stores -- new company-owned stores, I guess, and then you'll come back later within IO. That seems like a pretty big change in strategy. And maybe you could help us understand that.

Yes. Maybe I'll talk about the company has done in the past, which has been successful. So in places like California where we've opened a lot of stores over a long period of time. Operators -- strong operators would typically open new locations. And there is a a competency, skill set, and understanding of the business. It's very extremely important in a new store. New stores are generally difficult to run, [indiscernible] to be lower as your ramping up. And so when we look to places like the east, where we have much fewer stores, the network is relatively new. The experience of the team is obviously at a different place than it is in a place like California, we think that number, obviously, site selection, strength of the site is key, but that first year sales productivity number is critical. We do want all of our operators to have an opportunity to make money. And attracting highly skilled people to the business is a very important part of what we're doing. And so we're taking some of the risk by driving that year 1 sales productivity with the idea that we'll hand that off in a more stable way to our operators post year 1. And we think that, that approach might be an interesting thing for us to understand in a place like the east part of the country.

And just one quick on that one, sorry. But does that mean you're going to have, like, say, a really successful IO in the West Coast going on the East Coast store for you?

Yes, we have had that happen. So that's not -- it's happened before, but it's not -- clearly, as you think about moving across country there's only a handful of individuals that are sort of up for that kind of challenge. So you typically are recruiting from a geography, right? And that's also helpful. So as we build that team and as we build that market, that will get easier. But we do think that it's essential to get stores up to speed, so to speak, on a sales productivity standpoint. And we'd like to see if this is one of the ways we can improve our performance long term.

Our next question is from Mark Carden with UBS.

So I want to start with the IOs. Going forward, what steps can you take to help for [indiscernible] is the long-term opportunity of the company just especially when considering the exits you guys are making. You guys talked about support. Are you planning to offer additional incentives in the near term? Or as I demand and retention has been pretty consistent with what you guys have seen in the past?

Yes, that's a great question. So a couple of points here. The restructuring with the 36 locations closing is a result of these operations not having a viable path to profit, as we talked about -- we do want to make sure -- ensure that our operators are healthy and they have a legitimate opportunity to profit from the skill and effort they bring to our business and their community. We're very focused on providing improving levels of support for our operators in terms of tools, reporting and reducing friction in the business to help them build sales, improve their profit make the business easier to run and obviously, together strengthen the brand. And so where we are right now, comps are critical, as they accelerate the P&L follows and our operators are -- we've obviously spent quite a bit of time over the last number of weeks before this call sharing this plan with them, decided about it, they're supportive. And people are -- we're all [indiscernible] here together. So one of the things that we brought to operators to help with some of this, call it, profit potential in the business is there's some real opportunity for them to improve bottom line, their bottom lines with some of the things we've recently rolled out, including the inventory management system that's now embedded for fresh meat and produce in our order guide. We've also introduced peer group comparability and exception reporting on things like shrink. All of these things provide immediate and obvious opportunity for them to address improving their profits and health right now. So that's the way we thought about it is -- but we haven't considered anything else at this point, but the whole company, including our operators are focused on driving comps.

That's helpful. And then as a follow-up, you talked about the 36 closures being more heavily weighted towards the East, but that you remain committed to the region and aren't fully exiting any state -- how do you think about the pace of growth in that region going forward? Just as broke as deemphasized over the next few years, given store densities will presumably be lower out East? Just how are you thinking about that?

Yes. No, it's a great point. The -- a couple of things to say there. We believe that growth will be extendable in those kinds of areas where returns are disappointed in the East in particular. We're, as I mentioned, putting winning conditions in place for that business, including the way we launch we just talked about in Virginia, how we underwrite in select locations is important. We've modulated already the kind of mix of stores in core markets versus new, and we've done that over the last couple of quarters, which reflects some of the returns that we've indicated. In the East, in particular, the 51 stores that we have remain are all four-wall profitable, and they were comping over 3% in the last quarter. We think that the DC we just opened in the East, which was opened flawlessly by the team will greatly support the improved product availability that we need for those stores. And the work will continue there, but we're probably going to go in a more measured pace in a place like the East than for sure what's happened over the last 5 years.

Our next question is from [indiscernible] with Bank of America.

I wanted to follow up on the I/O questions. Just are the IOs -- are they still having any lingering execution issues related to systems? And is that part of the headwind here? And another question is just on the promotions you're doing, are the IOs sharing in the promotional funding? And is that going to be sort of a headwind for them and was any of the value slipping that's been going on related to IO decisions on what they're highlighting in their stores or what they're buying from an off-price basket? Any thoughts on that would be really helpful.

Good to talk to you. So on the systems piece, our orientation this year is there's 4 buckets that we want to support our operators with. First is when we interact with them in any way, shape or form, we want to add value by helping them improve their sales. We want to help them improve their profits we want to make the business easier to run. And obviously, all of this work together is to improve the brand strength, which creates loyalty for customers. On your question on systems, we had a, I'd say, a very long laundry list of things that we're getting in their way, making -- creating friction in the stores. We still have some work to do that we're going to clean up kind of right around the end of Q1. We've made progress there. It's not perfect, but we clearly -- when we talk to the operators, we've restored tools. We've made changes, and we continue to make progress there. I'd like and I've told the operators this we want to make the stores as easy to run as humanly possible. We want them focused on their customer and improving their business and working with their teams. And they had -- as you kind of noted, a fair amount of distraction over the last couple of years related to that. On the promotion front, there is some sharing that goes on. Obviously, the model here is to share profitability, but we've also made some decisions about what that looks like in the short term. We obviously are always keeping a very close eye on the margins and making sure that we're doing everything possible to ensure that the operators are profitable and healthy. Those are 2 of the questions. Maybe Robbie, if you had the third point [indiscernible]

Yes, maybe a way to phrase it me. So for example, the percent of opportunistic product declining, I guess, a bit in the stores. Was that something that happened because IO has lost flexibility? Or was it sort of aggregate decisions by IOs to reduce opportunistic product? Or was that something centrally done?

No. The operators are very, very focused on opportunistic product. They are absolutely motivated to grow sales and drive margins, and that's 1 of the first things they review, look at, try to understand. I think that if you kind of go back in time, one of the things that happened here was with the implementation of the new systems in '23, we did see a substantial reduction in the mix on op just generally. And some of that we thought was related to tools and visibility. Some of it's related to work of expanding things like [indiscernible] products or, in some cases, some of own brands implementation. But operators are game to drive that. And what we're doing now is just making sure we've done everything possible to increase the supply and the quality of those choices for our operators to make sure that they can fully take advantage of that. And the customer wins and so do we, on the margin side on sales.

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

Hi, everyone. It's Simeon Gutman, Morgan Stanley's hardline, broadline and food retail analyst. It is my pleasure to welcome Grocery Outlet, represented by Jason Potter, President and CEO.

I want to point you to Grocery Outlet's 8-K for safe harbor language. I'm also going to read our Morgan Stanley disclosure for important disclosures. Please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative.

Grocery Outlet is now a turnaround story in a way of reengineering growth value proposition engineered by Jason. I will start by asking maybe to level set, you put a press release out this morning to talk about the context of it, and then we will get into our discussion. Thank you.

Thanks, Simeon. Well, good morning, everyone -- I guess, good afternoon. Yes, we put out an 8-K this morning. One of the things that had transpired at the -- our last earnings call, I think it was first couple of days in November was obviously the disruption in SNAP benefits. SNAP is a significant part of our business, about 9% of our sales. And at the time, we really didn't know how to forecast what that might have meant for the quarter.

And so what we had told all the folks we met with was, look, if this doesn't sort of unwind itself or kind of revert to a normative state in a few days, we'll likely put out an 8-K and clarify what happened with the business. And so for Grocery Outlet, I'm not sure anyone else has released any information yet, but we thought it was important at this stage of our turnaround to be as transparent of where we are in the business as possible. And so we thought it was appropriate to share that information with the market this morning.

Kind of the details of that, what we experienced in November was about an 8% decline in SNAP sales. We saw also about 0.5 point decel in our non-SNAP sales. So that's the rationale for sending out that information. And then when looking at SNAP, clearly, a lot of our customers are under pressure. We service a lower income demographic and the value that the business provides is important for those families to stretch their budgets.

And so the folks on SNAP, and I guess when we looked at the month that has been in November, traffic remained positive for us. So we continue to generate positive traffic. The business has had most of the year, units per transaction have been down year-on-year, but the month-to-month, month-on-month trend in November was basically about what it had been. So fairly stable.

But what we did see was the AUR drop in a more significant way. And so our assumption or I guess, our assessment of it has been that with AUR down that much in November that the folks that -- as they -- those benefits came back, we could see it in the business. They're really trying to stretch their budget. And so they're trading down into lower-priced items or smaller sizes. And that obviously had an impact on the business in November for the quarter.

And pardon my ignorance if you've stated that in the press release, but have you had enough time post the resumption of benefits to see a normalized trend?

No, I think it's early in December. Typically, what happens with SNAP is when that money is received, it's usually spent within a 10-day period, something like that. Typically, what we would see in the business is first of the month, some kind of spike in SNAP sales and then it would decel as the month progressed. It doesn't mean we didn't get SNAP sales later in the month, but specifically in November, we saw very negative SNAP sales in the first half and very positive in the back half, all of that netting though to a reduction in our comps.

Okay. So backtracking first, thank you for being part of the conference.

Of course.

The 2025 has been an eventful year for food retail for the company and I think for you personally. Can you talk about what's been the biggest surprises, good, bad and different?

Yes. Nothing necessarily that was a surprise. I think if there's anything that -- kind of 2 things. We would have expected or I would have expected, given the positioning of the business to be more receptive to a more challenging consumer environment. We haven't sort of seen that in our comps, although we continue to have positive traffic as sort of a counterpoint, but that's probably been the biggest surprise.

I think I had a very good opportunity with the Board to spend time with them and time with IOs and folks in the business before I began my time at Grocery Outlet in February. So nothing necessarily surprising, but I do think that, that might be one of the things that would have thought the business would be a little more responsive.

Now where that kind of goes is really to a lot of the work we've done this year. And that's really trying to understand from the consumer being consumer-centric, what's maybe changed in the business, what do they care about, what's important to them. And really our refresh program, what we're doing is we're changing the experience in the stores. I don't know how many of you I've spoken with or if you've been on some of the calls, but we've got a group of pilot stores where we're really shifting and addressing the experience based on what the customers are telling us. And we talk to core customers. We talk to occasionals and obviously lapsed customers and some folks that are in target groups that we think are important.

And there are several elements that came out of that work that we've implemented in our pilot group that we're getting very favorable results on. And so -- one is that this business, the unique sourcing model, we derive a very large value on a basket of goods against just about anybody. Something in the neighborhood of 15% to 20% against discount and 35% to 40% against conventional when we do a basket sort of comparison. The company spent time getting KVIs right over the last year. We feel we're in a good position there.

But when it comes to the in-store experience, I felt and through the work we've done with consumer that we're not telling our story in a way that's, I guess, modern for the customer today. So we traditionally use some general terms, bargain bliss and typically use elsewhere pricing in our stores, but not anything very specific. And so we have a more explicit execution in these stores. So we're doing basket comparisons. We're calling out KVI pricing. We've done a lot of, I'll call it, value communication throughout the stores. And we think that, that's been a helpful -- a very helpful component of getting those store sales moving, and we're seeing perception pops in value in those locations.

The other piece that the customer -- our customers have talked to us about is, look, I'm busy and I would really appreciate a store that's a little easier to navigate. Help me understand and predict where I can find things. And so not to bore everyone with the details, but we did change, and this is important in a retail selling environment, the merchandising in the stores, co-locating produce and meat, which probably doesn't sound like anything revolutionary to anyone here.

But as the business evolved, things were added in the stores in ways that didn't necessarily create an intuitive navigation. And so some of those changes we made, we're seeing very nice pop in sales. We've also created a flow in the store that's more predictable and adding core items to make sure that we're addressing the basket needs that customers have.

And so part of that navigation is also, look, you need to do a better job on in-stock. You're I can't trust you to be consistent, and I'm looking for certain items every single time I come to your store. And so we also implemented a series of tools, systems, procedures against the fresh departments and some in grocery that are helping our stores in those pilot groups execute at a much higher level, more consistently. And all of that is contributing to nice mid-single-digit increases in sales.

And so that surprise of why isn't the business responding to the environment, I think, has a lot to do with our own execution. And frankly, the exciting thing for us as we go forward into next year is we intend on rolling that out in a big way across the business, something like north of 150 stores we'll touch next year. And I'm excited about the structural change that will bring for comps, obviously.

Stepping back for a second on health of consumer, which you've touched on and you gave some insight, you think that inflation is just catching up to the consumer's basket, not inside the grocery walls, and that could be part of the response? And is there a trade down? Can you trade down inside your store, too?

Well, we saw that in November. We saw some signs of trade down. That's the first time we've sort of been able to see something that would tell us that that's happening. And so when units per transaction are stable and AUR drops and we did a little bit of the underlying work, we can see some trade down. Not in a massive way, but enough to -- that it hurts.

Beyond that, the health of the customer, clearly, the lower income folks are really -- have been under pressure for some time. And when you -- when I've talked to some of them and we can reflect on other experiences. I mean, I've had some discount experience elsewhere. People may also tend to consolidate purchases when they're under a lot of pressure. A lot of our customers come to the stores on public transit, they're taking the bus. If they have a car, they're really thinking about what the price of fuel might be.

And so there is that kind of rub that although the market might be attractive for us at this point, a combination of getting the store conditions right, executing right and there are other considerations I think, are at play for us.

Yes. So you mentioned a couple of the changes the analyst community have been seeing what the flow looks like. Customer in some of your stores, you can tell it's better. Can you -- taking your temperature on ranking order like the things that are most important? Is it flow? Is it getting the right assortment? I know you've used some national data to reassort in some categories.

There are definitely -- like if you kind of chunk this out, there are components that we could do and we are rolling out across the entirety of the network probably a little earlier than -- there's a magic of doing things together. When you change something in a significant way in the stores, there's some disruption. And so you want to make sure you maximize the output of that. Clearly, we're getting a nice lift on the systems, tools and processes around fresh. We got a very nice lift on co-locating those departments. So I'll just give one example.

The first day we moved -- so I don't know how much folks know about the stores, but at the front of our stores, typically, what you'll find is some refrigerated spot boxes, what are called, and you'll see a 4-foot spot box of seafood. And this is probably one of the clearest examples I can give. The first day we moved the seafood to the back of the store where the rest of the proteins are. So you think of beef, chicken, pork, deli, frozen meat, and we put the seafood back with the rest, the sales jumped 100%.

And the location where the seafood is the most -- the highest traffic in the store, you have the most footsteps by it. But by co-locating those departments together, what the customers told us immediately was you have more selection. this is great. You've added selection into the store. In fact, we didn't, we had actually less SKUs, but their perception and the way that people shop was just much more convenient for them. And so as they were thinking about proteins, they do that as one thing. The way that the customer thinks about when they're purchasing, there's decisions about, well, what proteins am I going to build my meals around, they want to see that together.

The example I was giving this morning to some of the other folks was, if you go to a car dealership and probably the best example I can give is the #1 selling truck in America is a Ford F-150. You go to any Ford dealership, they don't merchandise the trucks with the vans and the sedans. They sit separately on the lot. So you have your whole selection of F-150s together. You look at vans and sedans and Mustangs, they typically park those vehicles in one location, so people can -- someone that's buying a car, they have very specific needs. They're looking for those needs. They do that as one thing. And so maybe that's a bit of a stretch as an example, but that's basically what we did was, again, nothing revolutionary there. But as the business evolved, it wasn't ever necessarily considered.

And so being a great buying organization and letting the IOs merchandise the stores, there's sort of an evolution that happened. But by stepping back and really looking at what does the customer want, what are they asking us to deliver and then putting that into one package together, we think that's powerful. But -- so to answer your question, getting the fresh inventory right, co-locating those really big bump, putting core items up and down the aisles, making sure those are in stock in the way that we merchandise them, big pop.

And then as you go, there's other components we think are important. And some of the marketing changes are more difficult to tell from a sales standpoint. But when we measure perception, we're seeing an increase in value perception. And so we think that, that's more of a leading indicator than a lagging. We saw the immediate sales impact on things like seafood. But clearly, if you do a better job communicating who you are and what the value prop is, you're going to get -- that's future sales.

One example of this and telling the story in a better way is I was talked about this this morning with some folks. I was in a store with an IO on the day before Thanksgiving. And one of his regulars, his name is Benny, came up to him and said, "Look -- she had a big smile on her face. She was like beaming. Look what I got for $50. I got all my Thanksgiving for $50." And she just wanted to tell him how much that meant to her and thank them. And it was regular course for him and she's a regular customer, but that's some of the work we need to do that's hard to tell early what that refresh is going to do for us.

But what we're going to do is the fun part of what we've done is we didn't do any marketing around those changes. The lifts we're getting are really about the customer that's in the store. And so what we've seen so far is basket increase in those stores, now traffic in those stores, and then we'll be able to layer in marketing and stronger communication around what the offering is and what the value prop is. And we're going to use examples like that to help customers really understand what we're all about.

It started with 2 stores. I guess it started with 1, but is it still 2?

Yes, we've got more like 6 or 7 stores now complete. Last week was -- November was not the most fun we've had in a while. Comps were not so strong. But those stores definitely are punching far beyond what the rest of the business is. And even the early days of the next cohort of stores, we're seeing really good results. I was -- it's an exciting thing to see what happens when you really change something in a store. We'll have nearly 20 done by the end of the year. And then our intent is to continue to roll that out at a pace we think that the IO community can absorb.

One of the pieces of learning we've had is because the way that the business worked, we brought something like 100,000 SKUs could change in a year. So stores would bring product in, comes in, it's out, it's in a different location. It's changing all the time. There didn't necessarily need to be a tremendous amount of discipline on how to put products where in a store.

And so some of that learning has been -- and this is a conversation I was having with Benny, the IO in Petaluma, was, look, we had some bad habits. And it's been something I've had to work on, but Benny was very excited about going through that experience, learning what happened. And then for us, making sure that we're supporting our IOs in the right kinds of ways with training materials and support so that as we execute this, it's sticky. And so a little bit of story about where we are. But yes, some very good results early.

So the spread is holding above the average, even if November was a little slower. There shouldn't be any problem scaling. These stores are far enough from each other in different communities. There isn't a diminishing marginal return here from doing this.

No, not at all. This is scalable. We're not gated by demand. I think the IOs that we brought quite a number through the stores now, and we've had some of our IOs actually telling the story behind what has happened. I think on the last earnings call or maybe I can't remember which one it was, we maybe actually called out one of the stores that were part of this. And the IO there, her name is Chandra, just a wonderful person. She says we're getting phone calls every day for days and days from our IO saying, are those the numbers? Is that what's happening? And so part of what we're doing is celebrating those things, taking the learnings and letting our IOs tell the story behind what's happening to their businesses.

And obviously, IOs get lots of feedback. When you're in a store, customers are telling you all day long how you're doing. Some of them will engage directly and they'll tell you those things and others don't. But the folks that are in those stores shopping today, tons of favorable feedback. And so people like Chandra telling the story about what the customers are saying, what the changes mean to her and her family and for the store success is pretty powerful.

You're slowing store growth and more focused on existing markets. How much of a debate is the growth in general? You seem like you're getting the internal parts of the business ironed out. How important is growing at the same time as getting the internal right?

For us, at this point, I think the most important thing is to get our core business working. It's -- the growth is going to be there. There's lots of space to grow. One of the things you do in a turnaround is make sure that you're as focused as you can be on the core, most important priorities. That also includes where you spend your CapEx. We think next year, we've already talked about this 30 to 35 net new. One of the important things, I think, within that is we've shifted the mix to more 2/3 infill versus 2/3 in new markets. We think that's important, especially as we focus on improving our returns on invested capital.

Slowing the pace also doesn't mean we're going to stop, but we can be very discerning about the real estate that we execute. We're clustering. We're taking advantage of marketing in that way. We're -- it helps us with our people part of the business as well as distribution. And so we think that, that's definitely a no-regret move. Clearly, it's painful at the beginning when you do those kinds of things, but we want to be able to get the core business in a good place, focus on that.

The amount of focus we have around operations and getting this 150-store piece up and running and supporting IOs is absolutely critical for us. And so we want to minimize as much of the distraction as we can. New stores are exciting, but they take extra effort. It takes more resources, more OpEx. There's the CapEx piece, and we intend on being free cash flow positive next year. We went through a year where we did some borrowing to build our stores. And so we think that having a prudent flowing there will help us focus and get the core business right.

On execution, especially marketing, there's been some learnings along the way. Can you talk about those and how do you adjust?

Yes. I think we've done a number of things there, turning different marketing up and down through the fourth quarter. We've got more dollars, I guess, being spent through the quarter than we did in Q3. The key, I think, for us in the marketing piece is, obviously, you want to have it in the right channels.

There's 2 pieces of marketing that are really key. One is to get the in-store communication sharper, more explicit. And the second is on the external side, making sure that our message is also clear. So some of the things we've done have been very effective over a long period of time, but we want to make sure that people really understand that value prop. So you have more customers saying, look what I got for $50.

So there's the savings part, but for a lot of people, it's what can I do with my life. And she was basically saying, look, I'm really happy I save this money, but I've got money to spend now because I've been able to save so much money with the store, and you got my needs taken care of.

And so we'll be using a lot of those kind of proof points in our communication. We've started to do more targeting related to telling stories versus just item and price, which is important. The storytelling part of the marketing externally is going to be part of what we do.

Some of the operational changes that you've made in some perishable categories, we got to see some of the process of order planning tools that a business previously didn't have, right? So can you help us appreciate the improvement in the business?

Yes. So in retail, I learned this early. You -- to be a great retailer, you have to forecast -- I mean, margins are very tight. So you have to forecast well, order well, fulfill well. There's planning that goes in and schedule well. And so for many years, basically how ordering worked at Grocery Outlet in Fresh, and it's how work still in the vast majority of stores is more of an estimate of what I need. And so we tend to overservice the stores. A lot of our stores get 5-, 6-day delivery. And so there's a lot of service that goes on when you're not precise about what you need.

And so by implementing some systems related to how much space an item needs at what price point with a forecast based on when my truck shows up in my sales, you end up matching supply and demand at a much higher level. The product is fresher, turns faster and it doesn't require as much labor and kind of the other supply chain-related costs that go with that. So we have a nice opportunity in front of us to really modernize some of how the business works as we've getting through these systems, challenges the business has had, we're getting to the tail end of that.

And so a lot of what we're doing on that kind of fresh piece is helping educate our IOs on a process that helps them understand the business in a new way. And that learning in our initial groups of stores has been very positive. They're very excited about it. And as time goes on, we'll be able to automate more and more of it. And so this business has a lot of opportunity given what it's been through in the last couple of years on areas like shrink and sales. And so doing a nice job there, we're going to get benefit on both of those fronts.

Pricing, do you think the perception to the customer is as good as you advertise, meaning this 15% to 20% versus discounters, 35% to 40%?

No, I don't think it is. And even when I talk to some people working in the store, so the first thing you want to do is you want to make sure that the people that work there really understand it. This is a small subtle thing in retail. everyone that works in the store is having a conversation every minute of the day with the customer. And so whether you're selling quality or service or price or a combination thereof, people need to know what it is that they're doing and why that's important. And so some of the work we're doing is also educating the people that work in the stores.

And by showing people very explicitly, here's what our pricing is on a basket of goods, either in the back room or at the front door with a cart, that's been ah, like you've got a few of those moments where people are going, wow, that's -- I knew it was good, but I didn't realize it was that good when you really show them. And so I think that there's lots of opportunity for us as this business develops in our marketing, both internally and externally with the customer for them to better understand the positioning.

The regular in Petaluma, who was given Benny the thumbs up on the $50 Thanksgiving basket, clearly understands what she's getting and was very happy with that. We just have to find ways to make sure that, that's true across occasionals and some of our lapsed customers. We need to reinforce that. And some of that happens through the merchandising and the signage and also storytelling.

We spent some time in the catch-up aisle and the barbecue sauce. And you're going to bring some more everyday items, national brands to meet the customers' needs.

Right.

How does -- this will be the constant question is how does that alter or change price perception when you have to buy more every day?

Yes. I mean you have to be priced right on the things that people buy most often. That's just retail 101. So I think we -- like all the folks we've met with, we've used the same example, which is sort of a Heinz ketchup. So the folks at craft are probably happy we're using this, but we want our stores to carry that item every day. It's -- and you need to be priced at the market. And so there's a margin impact on that.

But there's also a huge benefit in that what we see when people buy that item, they're also buying a much larger basket of goods, a dramatically larger basket. And so if you think of condiments as something that people have in their fridge, in their cupboard, it's a stock-up kind of thing, right? It's not something that you -- it's not an impulse item. People generally don't walk down the condiment aisle unless it's a different kind of sauce on things like that. So if you take Mayo mustard, ketchup, those are more or less on people's list, right? You might find a hot sauce is not, right? So that's more of an impulse. But those kinds of items you have to carry every day. And they tend to have a different margin profile, but they have a very attractive basket profile.

And so one of the things our customers talk to us about where, look, you have a ketchup, but I don't want that one. This is the one I want, and I want you to have it consistently and make it easy for me to shop. And so by doing that, what we've seen is, first, larger baskets in those stores and now more traffic. And so as like all brands, trust is the most important thing to build. And so by being consistent, you build trust and you deliver day-to-day for me. And if you do, then I'm going to trust the brand, and I'm going to consolidate some of my basket with you as a result. And if you can't deliver that, that's great. I'll come to you for some of these other things, but maybe I don't spend as much with you.

Competitive positioning and the occasion, almost what you touched on, there doesn't seem to be a #2 going after the closeout off-price grocery space. But how does the customer shop your store? Is it small basket convenience? What percentage are doing the full shop?

It's interesting. Every retail business that I have been a part of and the biggest one is 1,500 stores, people shop in kind of missions. And so you'll typically find somewhere or I found somewhere between 40% and 50% of the baskets are actually $20 or less. There's actually a fair bit of -- if that's my store, you have around a very small radius, you get a lot of people coming in for quick lunches, drinks. There's a profile of items that fall into that basket. That's profitable, and that's good, but you also want to graduate people up, kind of get your fresh shop.

So that's a bigger basket, but typically $40, $50, a high propensity of produce and meat. And then as you think about -- and this is true for the people in the room, if you do the grocery shopping, if I want to spend $150, it has all kinds of categories in it. And so this business is no different. It has a fairly large portion of convenience baskets. But part of what we're doing here is also trying to earn the fresh basket and the larger baskets with our customer.

And so it's great to have those smaller ones, but there's a lot of profit to be made as you graduate up the trust sort of scale and people aggregate their purchase with you.

State of the IOs, any surprises first as you've come into the business? And when you were running a large chain, you've spent time with your store managers. Are you spending a different amount of time more or less having -- working with the IOs?

No, I think in all retail businesses, whether it's a store manager, the franchisee or the IO, the most important position in the company, the folks that are operating the stores. And so having a cadence of communication and engagement is essential. And so it's more than maybe what they're used to, but it's also important for us to engage. And so we're finding -- it's not necessarily different for me, but you don't want people to play fill in the blank. It's very important to be continually communicating the good news, the bad news, whatever it is, also updating people on what's happening. And so communication can be a big strength in the business. And so we're -- that's definitely something that's different.

Clearly, when you have people that have their personal money at stake, their incomes, they want to understand what's happening in the business, and there's lots and lots of feedback, which is great. But I don't think that's necessarily different than any business that I've been involved in.

When I was a kid, I grew up in a franchise business. And the franchise business that I grew up in, those folks own the building, they own the inventory. They really cared about the profitability, and they cared about return on their capital. And I don't see this as that different. It's -- people have a profit motive. They want to know what's happening and how you can help them grow their business and grow it profitably. And so whether it's a corporate chain or any other, it's a different flavor, and you have to take those flavors into account, but the communication piece is key.

The pipeline, does it get richer, meaning does it get enriched since you're going to open fewer? And then as far as standard of -- operating standard, how wide of a range of best practices do you see across the board?

Yes. I think there's -- we'll probably have more variability than I definitely would like to see. And so we're starting to work on measuring that variability for the customer and making sure that we're working on the right things and that you want to make sure that people are spending their time on standards that add value and eliminating the things that don't. So that's a piece of work that we have in front of us, if that answers your question.

Yes. And pipeline, I mean you've had a pipeline, I guess, it gets a little better now.

Yes. One of the things we probably oriented a little bit more to is, in my experience, having folks that have a track record and have retail experience, whether it's a franchisee store manager or now in this case, an IO, the quality of that individual is just so important. Having retail experience helps a lot. And so we've shifted a little bit in our pipeline profile of who we're trying to attract to the business. We've also shifted the way that we're compensating those people to attract them.

And given the upside being in IO, again, there is a strong business case to make sure that you're bringing on the very best talent of that position that you can find. And one of the main points of an IO model is you should be able to disproportionately attract talent that maybe you don't even deserve given the opportunity. And so we're orienting the business in that regard.

Gross margin is a big topic, but coming from systems implementation, that triggered a lot of gross margin variability, lack of visibility on ordering. Then there were some pricing things to mitigate it. There were some other margin stuff to mitigate it, IOs payments, et cetera. We should be in the full workout phase from that and a new normal of stability?

Yes. Margins have been more stable this year, to be sure. We have lots of opportunity in shrink even today. So we're not back to a normative state there. So I'm excited about what -- some of the systems work we're completing now. One of the things that's been absent for the last 2 years is for our buying teams, they can't see what inventory we have in the store. So that's a pretty big disconnect in the business. You're trying to match supply chain and demand. And so we're almost ready to turn that on so that our buying group can see what's the inventory fully in the system.

And so those kinds of opportunities help you navigate margin as it comes, what's coming, what the mix is, do you have the right things in the right stores and so on. So there's some nice upside as we go forward. There's always going to be the conversation about how much you invest or how variable things are. But it's been an uncomfortable struggle for the team for some time just given some of the lack of visibility and the connection parts of tools.

We're now at the tail end of that. Earlier this year, I think systems-wise, we had something in the neighborhood of 350 fixes, either technical connections, process breakdowns, whatever they might be. We whittled that down now to something around 100 left. And so the business continues to improve its predictability and visibility.

And the return to operating leverage, normalized growth, it seems like the store fixes are the quickest path to get there. So what's holding back from turning the green light on and doing as many as quick as possible?

Yes. I think we had this debate internally. One of the things that's important to do is to make sure that we bring everyone with us as we make the changes. And so in the initial pilots, some of the feedback we had from IOs were don't go too fast. There's a big change. We need to have support. And that was some of the learning. And so what we're doing next year is we think we're going to be able to go faster as time goes on, but we want to make sure that we're building the operations support, the training, the development, all of that work around the changes at a pace that our IOs are comfortable with and can execute, so we have stickiness.

Probably the worst thing that could happen is if we -- typically, in my past, we might have done all the stores in 1 year. You're able to -- sometimes in a corporate environment, you might have done something just a little bit different, but it's important to bring the people with us. And so we're pacing that in a way we think is appropriate given the situation. All of the missteps in the company, there's been trust lost, and we have a lot of trust to build with our IOs. And so we want to make sure whatever it is we're doing, we're delivering the mail and that it's sticky.

And have you shared how many is an appropriate number for the organization for year?

Yes. We talked about next year, we're fully planning to do north of 150 and intend to be done in the first 2 years. And as those rollouts happen and you dial it in, you typically you go faster anyhow. It takes about 5 weeks to do one. And then there's both training and that you're doing through that and some postwork after. So 6, 7 weeks in, you come out of the other side of the dip as you're tearing the store apart, and that's where you see the comp growth.

It's a compelling offering for our IOs, the incomes that they're going to accrue are very significant and with a very short payback for them. So folks that have done this already are really excited about what it means for them and what it will mean for our Grocery Outlet.

Great. Well, I'll leave it on a positive note. I appreciate you being here. Thanks for the update. Good luck through the end of the fourth quarter and into '26. Thank you. Appreciate it. Thanks.

Thank you very much. Thanks for your attention.

Greetings, and welcome to the Grocery Outlet Third Quarter 2025 Earning Results Conference Call. [Operator Instructions] 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 third quarter ended September 27, 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 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 uncertainty 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 Investors 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 today's call. In the third quarter, we continued to advance our strategy, while executing to deliver strong bottom line results. We grew net sales 5.4% to $1.17 billion, with sales in comparable stores up 1.2%, which I'll discuss in greater detail in a moment. In the quarter, we also added 11 net new stores.

Importantly, in Q3, we began to roll out our store refresh concept to an initial wave of independently operated stores. We are seeing encouraging results with the pilot stores that are participating in this program, and we're planning to accelerate the expansion of the program throughout the rest of the year and into '26.

On the execution front, we continue to operate with discipline to achieve healthy profitability. We reported a gross margin of 30.4%, consistent with our outlook, while carefully managing spending allowed us to deliver an adjusted EBITDA of $67 million at the top of our outlook range and adjusted EPS of $0.21, which exceeded guidance due to favorable taxes.

While Q3 results were broadly consistent with our expectations, comp store sales of 1.2% came in below our outlook range. Leading into the final weeks of the quarter, we were pacing to our 1.5% to 2% outlook with traffic up roughly 2% over that time frame. However, during those final weeks, we experimented with promotional activity, as well as marketing mix that was, we believe, net negative.

Testing is a key part of the work we're doing to drive sustainable growth, and we'll continue to eliminate things that don't contribute and double down on what does. In this case, we've course corrected and over the last couple of weeks, we've seen a return to weekly comp growth. While recent comps have been positive, given the slow start to Q4, we now expect same-store sales growth to come in between flat and up 1% for the quarter. Chris will detail the impact to our annual guidance in just a few minutes.

Since joining the company 9 months ago, I've spoken about 4 key strategic imperatives: tackling new store performance, securing top talent, addressing execution gaps and improving execution at scale. These remain our key focus areas and will be going forward. On the new store front, our strategy continues to progress in the manner I outlined on our previous call and the performance of our '25 cohort remains ahead of plan.

In addition, we continue to secure talent at the company with 2 recent hires that I'll comment on later. However, given the current situation with softer comps than we'd all like, I'm going to focus on most of my comments on this call on the latter 2 pillars that address execution at the company. First, on execution gaps. We've made significant progress on restoring systems functionality to enhance our IO's ability to deliver a higher level of in-stock performance with better inventory visibility, and the second is now scaling execution through our model store refresh program, which will deliver a much stronger in-store experience for our customers.

I'll now share how the systems and support work we're doing on behalf of IOs, which we expect to yield a meaningful impact in '26, will enable our operators to drive comps and build momentum. We began this year with the goal of delivering meaningful improvements in inventory visibility and availability for our IOs. We started by building upon the strength and technology foundation of our systems integration, rolling out our real-time order guide. And in October, we began introducing our new arrival order guide. Both initiatives have given our IOs greater visibility to inventory and the capability to sharpen merchandising in their stores. I recently spent time with IOs around the country and heard resoundingly that the greater upstream inventory visibility has enhanced their ability to execute. This is exactly what we mean by making Grocery Outlet a great selling organization.

By year-end, we expect IOs to have regained all order guide systems functionality that existed prior to the SAP implementation, which will allow us to shift our focus from fixing integrated related issues to driving growth. To build on the strength of our order guide implementation, we're now enhancing these tools with forecasting capabilities for fresh meat and produce. We're supporting these updates with training to help our IOs manage inventory even more efficiently.

Creating proficiency in matching forecasting and demand is foundational for improving the execution needed to drive a sustained sales performance. With that in mind, these new enhancements combine 3 essential components that IOs can implement to deliver on that objective.

Number one, resetting the retail display areas for fresh products to prioritize top-selling items. Second, implementing operational SOPs that support accurate inventory counts, high returns, while improving the quality of our fresh offering; and three, implementing training to execute these new systems, methods and procedures on this forecasting system so stores can deliver a consistent in-stock position just in time.

Each part of this system supports the others, and we believe this holistic approach will improve our operators' ability to execute consistently. We believe this will be one of the most important and impactful initiatives implemented across the company. We expect in the coming months, we'll have this capability embedded into our proprietary order guide, making it easier for IOs to operate their businesses.

Through enhancements we're making to our order guide, operators will not only have better visibility of supply, but they will be better equipped to forecast and meet demand, which will improve the customer experience. Delivering a stronger in-store experience has been our top priority, and the results of our store refresh give us confidence in our ability to meaningfully accelerate our comp growth going forward. Let me start with some background.

We've spent much of this year engaging with customers and our IOs to discern where we could drive a better in-store experience. Feedback from the survey work indicated that our customers felt a lack of consistency in their store visit experience. While customers appreciate the value we offer and enjoy the treasure hunt aspect of shopping in our stores, they indicated that the experience was challenging to shop and that a lack of consistent availability of various key items hurt their trust in us.

We want our customers to see us as the place where they can shop every day confidently, creating an experience that delivers value. To address this feedback and strengthen our performance, we focused on 3 critical areas within the pilot stores. First, improving the store layout; second, expanding and standardizing our core assortment; and third, elevating our in-store value messaging.

Customer receptivity has been outstanding. These 3 initiatives have driven mid-single-digit comp lift in our 2 pilot stores with a full quarter reporting, and we have several more stores in various stages of completion. While we learn more about the sales lift potential as we touch additional stores, based on the promising early results we've seen so far, we plan on meaningfully scaling the store refresh.

We believe that this initiative and the retail fundamentals it's based on can be rolled out to the vast majority of our store base. We expect to end the year with approximately 20 stores completed. We also expect to complete at least another 150 stores by the end of '26 and complete the balance of addressable stores in '27.

We believe this work, combined with the system stabilization, improved IO tools should position us to drive future sustainable comp growth. I'll share some details around those changes to give you a sense of their impact.

Starting with improving the store layout and the merchandising changes we made. In our pilot stores, we've improved the layout to create a more inviting and more intuitive shopping experience. When shoppers now enter our store, they enter with a clear sight line to understand the layout. We've removed the forced flow and have logically grouped categories throughout the store and ensured the fresh departments are merchandised together.

We improved the store flow by relocating produce to the front of the store, co-locating meat and fish and moving general merchandise and health and beauty towards the back of the store. Now these may sound like modest changes, but they're delivering big results, bringing produce upfront and center and expanding our offerings of high-quality fruit and vegetables has driven double-digit comp lift in meat and produce within our test group.

And to illustrate the impact for customers, our independent operator at Rohnert Park, California shared the following feedback. I'm really excited about the freshness, openness and clarity the changes bring to the store, and that is exactly what customers are telling us. We've implemented these changes informed by our customer feedback and getting input from our IOs.

We look forward to working with our IOs across the business this year to demonstrate the meaningful impact our refresh will have for their customers and their stores. Getting fresh right is a big part of helping us earn the opportunity to grow basket with our customers.

Now turning to core assortment. Within our improved store flow, we're ensuring that our stores are in stock on core basket-building items. This allows customers to do more of their shopping during their trips to Grocery Outlet and ultimately make Grocery Outlet their primary shopping destination. To address this opportunity, we defined 400 core items that all stores will carry going forward and be consistently in stock on. These items include well-known name brands like Heinz Ketchup, Daisy Sour Cream and Eggo Waffles, along with many of our private label staples that are on our customers' regular shopping list.

Our refreshed store ensures that our stores are easy to shop by merchandising categories in a logical, intuitive way with a consistent product location and assortment on shelf, while still leaving plenty of room for our opportunistic buys and treasure hunt experience. Improving the experience overall by being more consistent and easier to shop are key areas of friction that will support sustainable momentum in our comp sales.

Now on elevating in-store messaging. We feel it's important to make our messaging work harder. In these refreshed locations, we have created a kit that clearly communicates a feeling of value throughout the store. This signage helps shoppers see the tremendous value they're getting while ensuring they're benefiting from the improved core assortments and the unique opportunistic offerings we carry.

Reading shoppers with great merchandising supported by strong messaging is cementing our value prop with customers that come to our stores. Our business offers tremendous value and improving our marketing, our branding and communication will all contribute positively to telling our unique and differentiated story.

As we roll out our store refresh, we'll continue to operate with discipline with the goal of driving improved returns on capital, another important priority for the company. These investments come at manageable incremental investment and their execution is relatively straightforward. We estimate that our payback period on these investments is roughly 3.5 years. And accordingly, we expect these initiatives to yield attractive returns while improving our IO incomes.

Our refreshed store is also focused on ensuring that our new stores achieve a 20%-plus return target by creating sustainable comp growth. Going forward, our new stores will launch in our refreshed format. We've rolled this new approach already in one of our new locations late in Q3 with early and favorable results.

A key focus for the upcoming year's rollout is delivering on these merchandising standards and part of becoming a great selling organization is continuing to improve our ability to localize our stores. Supporting localization has the power to drive store productivity, and we're approaching this theme of localization in new ways.

For example, in Southern California, we're testing a model store with a more demographically relevant assortment with supporting marketing and promotion designed to serve the large and growing Hispanic population in the region. While our tests are early, we're seeing encouraging results from this test, and we see an opportunity to deploy this widely through the region.

Finally, and critically, we've prioritized securing top talent for this business to propel our work in our stores. We recently welcomed 2 strong leaders to our team. Our new Chief Store Operations Officer, Frank Kerr, brings a wealth of operations and consumer experience to Grocery Outlet. He joins us from Lidl, where he was instrumental in the company's U.S. expansion, leading store operations, supply chain, logistics and merchandising as Senior VP Ops and its Chief Customer Officer, also responsible for marketing, consumer insight, digital commerce and promotional planning and strategy.

Early in Frank's career, he served as Vice President of Retail Operations at Save-A-Lot, where he led retail and wholesale of over 900 stores in 32 states. Frank's leadership across large grocery fleets and experience scaling IO models is invaluable to us in our next chapter of development.

Our new Chief Supply Chain Officer, Scott Fremont, brings deep insight to Grocery Outlet from a decorated 18-year career at Target, where he most recently served as Vice President of Global Transportation, Trade and Logistics. Scott's deep knowledge of supply chain logistics and management strengthen this critical area of our business as we update and evaluate our centralized distribution network to deliver improved levels of execution for our IOs, and we're very excited to welcome Scott to the team and work with him to unlock the tremendous potential in our business.

In closing, while we're dissatisfied with our current comp performance, we're making significant sustainable progress against our strategy, setting the company up to deliver stronger comp performance in '26 and beyond. As we roll out our refreshed stores, we'll continue to focus on execution and improving returns on capital. And finally, we expect to enter the upcoming year with our systems implementation work substantially complete, allowing us to be laser-focused on delivering consistent growth and capturing the large opportunity in front of us.

I'd like to thank the entire Grocery Outlet team, including and especially our IOs for their continued dedication as we work together to deliver for our customers and position the company for sustainable growth and stronger profitability in years to come. One final note, as we observe the current situation unfolding related to the federal government shutdown and potential disruption to SNAP benefits, IOs will be working as they always have to have a positive impact in the communities they serve. Many of them will be raising money to support local food banks and other related support efforts. While the current situation remains uncertain, Grocery Outlet and our IOs are here to make our local communities better.

And with that, I'll turn it over to Chris to take you through the numbers. Chris?

Thanks, Jason. In the third quarter, we continued to make progress on our key strategic initiatives, while delivering adjusted earnings per share that exceeded our outlook. I'll walk you through our Q3 results before sharing more detail about our outlook for the remainder of the year. Please note that the comparisons I will provide are on a year-over-year basis unless noted otherwise.

Net sales increased 5.4% to $1.17 billion, propelled by 11 net new stores and a 1.2% increase in comparable store sales. In the third quarter, we opened 13 new stores and closed 2 stores, enabling us to increase our targeted openings to 37 net new stores for the year. We ended the third quarter with 563 stores across 16 states.

Comp growth of 1.2% was driven by a 1.8% increase in the number of transactions, partially offset by a 60 basis point decrease in average transaction size due primarily to a reduction in the number of units per transaction. As Jason noted, we believe the variance in comp relative to our outlook of 1.5% to 2% for the quarter was due primarily to changes to our marketing mix and promotional timing.

Over the last couple of weeks, we've seen a return to positive weekly comps. Gross profit increased 3% to $355.1 million or 30.4% as a percentage of net sales, which was at the upper end of our outlook range. Gross margin was down 70 basis points compared to last year. However, it was consistent with the first half average of 30.5% this year.

SG&A increased 8.7% to $331 million compared with Q3 last year, representing 28.3% of net sales, an increase of 80 basis points. The year-to-year increase in SG&A as a percent of sales was driven primarily by costs attributed to new store growth, software amortization and incentive compensation.

As expected, we also incurred $1.3 million in restructuring charges related to our previously announced restructuring plan, which was substantially completed in the second quarter. Compared to the second quarter of this year, SG&A as a percentage of net sales improved 20 basis points.

Net interest expense was $6.7 million, up $266,000 year-over-year. The increase in net interest expense was driven primarily by higher average principal debt, partially offset by a decrease in average interest rates. Our effective tax rate for the quarter was 28% compared with 28.6% last year. The change in our effective income tax rate was due primarily to the benefit of certain acquisition-related deductions, partially offset by a reduction in the tax benefit from share-based compensation.

Net income was $11.6 million or $0.12 per fully diluted share compared to net income of $24.2 million or $0.24 last year. Adjusted net income was $20.7 million or $0.21 per adjusted diluted share compared to $27.9 million or $0.28. Adjusted EBITDA was $66.7 million for the quarter compared to $72.3 million last year. Adjusted EBITDA margin was 5.7% of net sales, down 80 basis points from the prior year, but consistent with the second quarter of this year.

Turning to cash flow and the balance sheet. Our net cash provided by operating activities through the third quarter of 2025 was $149.8 million compared with $72.5 million last year. The increase was driven primarily by improvements in working capital. In addition to ending the quarter with $52.1 million in cash, we had $175 million in available capacity on our revolver.

We remain committed to improving returns on invested capital as we prudently invest to accelerate growth. During the third quarter, we invested $39 million net of tenant allowances, primarily in new stores, supply chain projects and information technology. We expect capital spending of approximately $210 million for 2025. For 2026, we expect a meaningful reduction in our CapEx spending even with our large store refresh effort. Total debt, net of issuance costs was $500.3 million at the end of the third quarter, up $22.8 million from year-end, with net leverage at 1.8x adjusted EBITDA.

Turning to our outlook for the balance of the year. Given the impact to late September and early October comps from the marketing and promotional adjustments we discussed, we now expect comp store sales for the year to be in the range of 0.6% to 0.9%. We also want to note that given the very dynamic nature of funding for SNAP benefits in light of the federal government shutdown, any potential disruption to sales resulting from delayed or missed SNAP benefits due to the ongoing shutdown is not currently factored into our guidance.

As a reminder, the percentage of sales coming from electronic benefits transfer payments, a substantial portion of which may be related to SNAP benefits was roughly 9% last year. In addition, we are adjusting the rest of our outlook as follows. For the year, we expect to add 37 net new stores compared with 33 to 35 previously, report net sales of $4.7 billion to $4.72 billion, achieve gross margin in the range of 30.3% to 30.4% compared with 30% to 30.5% previously; deliver adjusted EBITDA of $258 million to $262 million compared with $260 million to $270 million previously.

Report adjusted EPS in the range of $0.78 to $0.80 per fully diluted share compared with $0.75 to $0.80 previously. Book net interest expense of approximately $27 million, and we expect to end the year with share-based compensation of approximately $12 million. For the fourth quarter, this translates to comp store sales between flat and plus 1%, the addition of 7 net new stores, gross margin between 30% and 30.3%, adjusted EBITDA in the range of $72 million to $76 million and diluted adjusted earnings per share between $0.21 and $0.23.

As Jason shared, we are excited about the rollout of our model store concepts, which we expect to contribute to comp sales growth in the next fiscal year. While we're still working through our budget and will not be guiding 2026 until our fourth quarter earnings call, I did want to flag a couple of unique items to consider as you model 2026.

First, 2025 included a 53rd week, which we expect to contribute an incremental $9 million in adjusted EBITDA and 10 basis points of EBITDA margin expansion that will not repeat in 2026. Second, we expect that next year we'll be back to a more normalized comp growth rate. And as such, we expect a roughly $10 million to $13 million headwind from cash incentive compensation versus this year, which we expect to be a partial payout year.

In closing, the important work we've done to stabilize and strengthen the business have set us on a path for renewed growth, and we expect the expanded rollout of our refreshed stores and improved execution across our fleet to support stronger comp growth in 2026. As we bring our strategy to life, we will remain disciplined and focused on continuing to deliver strong bottom line results and improved returns on capital. We have a tremendous opportunity ahead, and we have the strategy and team in place to deliver on its promise.

And with that, we'll open it up for questions.

[Operator Instructions] And our first question comes from Jeremy Hamblin with Craig-Hallum.

So, I want to start just with the same-store sales. And for Q3, the 1.2% comp, I just want to get the split of the transaction versus average ticket. And then as you progressed through the quarter and you noted some changes in the timing of marketing and some of the promotional events and mix, how did that play out in terms of where you saw the decel in comps? Was it primarily transaction driven? Or were you getting a mixture of downside coming from both transaction in ticket?

Yes. Thanks for the question, Jeremy. It's Jason here. Just to walk through the timeline to give you a bit of more detail. We were tracking in July at about 1.6% comp and August 2.3%. So, we were well within our expectation of comps with the guidance we provided. As I mentioned in my opening remarks, part of what we're doing here, we're doing a lot of experimenting. And in late Q3, we were adjusting promotions, some of the activity we have been trying as well as the marketing mix with some of the channel mix.

As it turned out, we could see a strong correlation into September where we made those adjustments and saw the impact on comps. To give you kind of an idea here, transactions were running just under 2% and baskets down slightly. And we saw a little bit of a slow on the transaction count during that September period. And what happened was into the last week of September and in the first week of October, comps went negative.

Unfortunately, we've got -- seen some lingering effects through October on that. But since course correcting, we've bounced back to positive comps. As I said, we're not where we want to be, but I'm really excited because we feel we have the solutions in our refresh concept, focusing on improving our ease to shop, standardizing our core assortment and better communicating our unique value positioning with sharper marketing. And all of those things are going to be really positive for us as we move through the end of this quarter and into next year.

Just a quick follow-up. In terms of what you're lapping for the remainder of the quarter versus the first 4 or 5 weeks, the comps get easier or tougher from here?

Yes. December is a little easier in kind of the quarter. November is a little tougher, but December is a bit easier.

And our next question comes from Corey Tarlowe with Jefferies.

I just had a question on the kind of the performance in the quarter on the comp and the drivers that you highlighted, I believe it was the promotional activity and the marketing mix. Is there any way you could provide a little bit more color as to kind of what the learnings were, what you tried and what maybe the optimal strategy is going forward for those specific aspects?

Sure. No, it's a great question, Corey. So, part of what we're doing is we want to optimize everything we put into the business. We have been executing some promotions that just weren't delivering the combination of sales and return we were looking for. So, we've made some adjustments to those into September. We think that was still the right decision. The marketing, we had been experimenting with more social and had adjusted some of the traditional mediums that we had implemented, and we saw a pretty strong correlation there. So, what we did is course corrected on the marketing piece for Q4 and going forward. That was instructive.

And frankly, some of the things that we've also been testing have worked well. So, one example of that that's unique to us is our wine business. And we've seen some really strong favorable results related to promotion there. There's a lot of opportunistic product on the market, and that's an area where we're doubling down, and we've put more of that into our planning for Q4.

Great. And then I just had more of a cost-related question. You've made some new hires, and I'm just curious about how to think about SG&A and what the comp leverage point there would be given the growth that you have in terms of stores and people.

Corey, it's Chris. Yes. So, we expect not to get too far into next year, but we do expect modest leverage next year. I talked about on a previous call, our cost savings initiative to drive cost out of the company. And we've made a lot of progress there. It's actually completed. And we've identified $15 million to $20 million of cost savings over the next 2 years. Most of that will fall into next year.

Now I should say a good portion of that is CapEx and some of it's related to our supply chain. But there is SG&A cost reductions there, which will help with leverage next year. On the other side of that, though, is we are going to invest some of that savings in additional capabilities, primarily around merchandising. But net-net, we should see some modest leverage next year.

And moving on to John Heinbockel with Guggenheim Partners.

Jason, 2 questions on the refresh program. Is your idea to cluster that as much as you can, try to get greater awareness of it? And then when you think about how long is that process taking for you and the IO to get done? Is there any disruption in the interim period?

Yes. Great questions, John. Yes, first and foremost, for sure, we're going to cluster. We're going to start in the core markets and work our way out from there. We think that clustering does all kinds of good things, right? There's marketing opportunity. There's labor leverage you can get as you're clustering, and it's helpful support for the IOs as you do that in an area. Through the pilot process we've had over the last 6 months, the IOs have been really instructive for us giving us feedback on the things that we need to adjust as we've gotten ready now to go. And so that's important.

So, yes, clustering for sure. And then on the timing, so really what this is, is it's a fairly light touch in the store. But as you remerchandise the store, there's disruption. And so typically, when you do a reline and you're moving things around, this is going to take about 5 weeks to execute in the store. So you see some sales pressure during that period, but an immediate pop afterward. And we're seeing that consistently as we've gone through these 2 -- more than a quarter worth of data in the 2 pilots. And as we introduce this to more stores, they're following a similar pattern. But early days there, but we have enough data now we feel very confident in what we're doing.

And maybe as a follow-up, the 400 core items, right? So I don't know how many of those would be consistent across the base. But what are you doing to draw attention to that? Do you need an inventory investment? Do you need signage to kind of drive home the point that you're consistently carrying those?

Yes. No, it was -- it took some consideration to make sure that, that consistency is something that our customers have told us they really are asking us to deliver on. And so in changing the merchandising, we're changing the space to sales on those items, and we're creating signage around them. So they're very obvious to see. These are things that are on people's shopping list typically. And so there is a very consistent core assortment there. And we've seen a nice uptick, obviously, on the basket size -- on the basket side, I should say, John, in the pilot stores as a result.

Moving on to Edward Kelly with Wells Fargo.

I wanted to follow-up on the comp weakness that you saw at the end of the quarter and the shift in strategy here. It seems like the weakness was more traffic driven, which leads me to believe that maybe it was more tied to the shift in marketing. I was curious if you could maybe dig into that a little bit. And then if the comp hasn't bounced all the way back yet despite the shift, what is that saying?

Yes. It's -- first and foremost, we saw a pretty strong correlation between the marketing channel mix decision we made towards the end of the quarter and the traffic kind of falling off towards the end of the quarter. So, we got that back in place as quick as we could and I've seen a bounce back. Sometimes these things tend to linger, but we feel good about the amount of marketing, the quantum is -- we feel good about and the mix is -- I think we've made that appropriate for Q4. So, we're expecting some improvement in our run rate.

Okay. And then just a follow-up on SNAP. So, there's no impact from SNAP in guidance. And I guess it's dynamic, right? You have the November issue and then potential for SNAP cuts next year. I was curious if you could just talk about historically what you've seen during periods of changes in SNAP. And then as it pertains to sort of like current business trends, do you think that some of that is already starting to work its way into the comp that you're seeing now?

Yes. It's probably too early to tell on -- just given it's been a handful of days that this has happened. But in the past, what I can tell you the facts about our business -- as Chris mentioned in the opening, SNAP accounts for about 9% of our sales. In '23, you might remember that there was a significant reduction in SNAP benefits. What happened here at that time was basically the tender types changed, but there really was no impact to sales. And typically, depending on when those benefits are paid, you'll see an immediate spend. And so again, depending on how long this goes, at this point, we're not speculating on that, but we did want to provide guidance that was clean of that, just given we just don't know how that's going to turn out.

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

One of the questions I want to ask was about the localization effort. And I guess, how will the effort be different from the current model, I guess, in terms of -- I thought the whole -- one of the strengths of this business was you have IOs that localize their own stores because they're actually owners. And I guess if you could help me with understand that localization effort a little better, I'd appreciate it.

Sure, John. Some of the feedback we got from SoCal was a need for the company to give -- provide more support to our local IOs. And some of that equates into making sure we're sourcing product that they need for their local community. And so in the case of what we're doing in Los Angeles is providing a suite of assortment now available for them to better address what they're asking for to supply their local customers. And so, we've got that begun and excited about the initial results there. And that's something that we think as this business gets more focused on becoming a great selling organization, helping our stores localize and taking advantage of their strength is going to be a big win for us.

Got it. And then just on 2026, I know it's early, but from a store perspective, I fully understand the refreshes, 150 makes a lot of sense. How should we think about new stores for next year? Are you guys rethinking the flow of stores compared to where the trend has been?

Yes, I think we indicated on a previous call a range of 30 to 35 net new for next year. On the refresh piece, we've already begun to start to implement those retail fundamentals in our new store executions, and we intend to do that in all the new stores next year.

And Mark Carden with UBS has our next question.

So to start, you called out some heightened promotional activity impacting your gross margin. Was this essentially all tied to some of the tests you guys were doing in September? Or did they expand beyond that? And then just related more broadly, what are you seeing in the competitive landscape?

Yes. Thanks, Mark. Yes, there was some promotion in there for sure that we had been adjusting that we think turned into some net negative sales. But really, as the marketing, we believe, was the major contributor there. Clearly, there's -- depending on the month, promotions ebb and flow. I think the latest reporting shows a little bit of an uptick in promotion in September. But I think I'll leave that for you guys to discern, but we're not seeing anything in a significant way as far as a shift.

Okay. Great. And then as a follow-up, just how are IOs responding right now to the uneven macro? I know like outside of the pilot improvement rollouts, you guys have been investing more in the training process. Have you seen any corresponding improvements in talent traction? And just more broadly, what are you seeing with -- in terms of IO satisfaction?

Yes. We spent some time on the road meeting with really all of our IOs earlier in Q3, middle of Q3. There is definitely excitement related to the improvements and things that are coming both from systems. We're seeing positive feedback there on our order guide. We're seeing positive feedback and some real excitement related to the refresh program. I think our IOs taking the feedback, working in a collaborative way with them to grow their business and make their incomes grow is obviously something that's really important to everybody. And we're seeing nice participation in our meetings and good communication back and forth. So, we're feeling good about where this is going to go. And everybody always likes to win as a team, and we're seeing more and more of that as we roll these programs out.

And moving next to Simeon Gutman with Morgan Stanley.

This is Zach on for Simeon. I just wanted to follow up on the refresh program. What type of uplift are you assuming that will provide on a consolidated basis? And how does the timing of that look over the next few quarters?

Yes. The pilot stores, we've got a nice mid-single-digit lift given the staging of rollout and quantum of stores, you can probably get a sense of the mechanical lift that we are expecting in our business next year. But this is definitely going to be a comp accelerator for us. And we're excited about what we see as the longer this is in our stores, we're seeing some nice acceleration as well. So, feeling good about how that's going to play out in '26 for sure.

And as a quick follow-up, how should we assess the resources the company has and also the IO appetite for these rollouts? Is there any -- are there any constraints? Or is everybody on the same page and should the rollout go according to plan?

Yes. We really believe the value proposition of the IOs is compelling. We're not limited in this case in IO demand nor in CapEx. What we're really doing here is making sure we're being responsible to support them with the right training to ensure that we have sustainability in the changes. We're implementing new systems, methods and procedures in the stores. There's new merchandising standards that they're working their way through. But mid-single-digit comp lift, basket improvement, all those things creates really nice returns for the company and even better returns.

Our IOs are going to have their return in a matter of months. So, I think people are going to be very excited to see how this plays out.

Moving next to Leah Jordan with Goldman Sachs.

It sounds like you're still doing a lot of testing and learning on your business, and we had a little bit of a misstep with the marketing this quarter. So, I was just wondering what's giving you the confidence to go forward in a bigger way on the store refresh rollout? Just after just such a short period in a small number of stores, and why don't you think more testing needs to be done? And then of the initiatives that you have rolling out between the stores and the IO tools, I guess, there's a long list there. So, which of the items do you think will be the biggest driver to drive that comp acceleration next year?

Yes, these things work together. So, we're really confident that the testing we've done over time on a couple of stores, now seeing results on a wider group of stores initially. The things we're doing, we're changing the fundamental customer experience through merchandising, implementing the method systems and procedures we are, create the conditions so we have an in-stock that's going to be really a winning experience for the customer. And the lift associated with those things is clear to us, improving ease of shop, making sure we're consistent and the communication related to value, all are things we've gotten feedback from the customers on. It's very clear and the sales piece.

So, lots of retailers will put products into 1 or 2 stores and roll out when they have results. And we feel that we've done enough testing and we've taken enough time and done enough adjusting to make sure that we have a clear idea of what will happen. So, retail fundamentals, some of the things we're doing here are really retail 101. So, this isn't -- we're not necessarily cutting new ground here. We're merchandising in logical ways. We're organizing the store in ways that the customers can understand, supported with great signage. And the tools we're implementing are simple and straightforward for IOs to execute at a higher level. So, all of that, we feel is going to contribute to a very predictable set of outcomes.

And the great thing about this business is, as we implement this in, let's call it, roughly 20 stores this quarter, we can make further adjustments as we go, but the fundamentals are there.

That's very helpful. And then just one quick follow-up. I guess it sounds like you plan to accelerate comps next year and on the back of these initiatives. So, if that comes to fruition, can you just remind us what comp you need to now leverage SG&A in the business? I know you talked about lowering some costs next year to an earlier question, but just what is the actual leverage point of the business now?

Yes. It's around 2.5% comp growth in order to leverage.

And we'll go next to Kendall Toscano with Bank of America.

I was just curious if you could speak to as you're expanding the store refresh program, can you share more detail on the types of markets where you've been able to test it so far? And have the performance lifts on these stores been different in markets where the competitive landscape might look a little different and particularly in markets where you're competing with the deep discount players?

Yes. Kendall, thanks for the question. Yes, we've got a number of different competitors in the different markets and haven't seen -- because this is really execution, and I'll call it, we're talking to the customers that we have. We're seeing a big jump in basket and then seeing some improvement, obviously, in the traffic as a result of the experience. And so, I feel good about the mix of stores and the competition and the results that we have. So again, giving us confidence to move forward.

Got it. That's helpful. And then other question was just on price gaps and how those are trending and whether that looks any different than it did pre-systems conversion? And also, is there any expectation that you'll continue to invest in price for 4Q or into next year?

Right. No, great question. We do checks every week. We did 10 major market MSA checks just last week. We remain to be 15% to 20% on a basket of goods lower than discount, 35% to 40% on conventional. And so, things to remember there, our OpEx, 40% of sales, it's a core driver of value. We have real advantage there. No one's going to get around us on pricing there. It's a big contributor. Clearly, there's always an opportunity to adjust on an individual item basis. You're going to have situations where you're beat, but that's something the team monitors week-to-week, and we continue to make adjustments there.

And we're really confident that the work we're doing right now on value messaging and telling our story is going to be super helpful in improving with the margins we are running at and the price advantages we have, a much better level of understanding from our customer base on the value that this business brings.

And Michael Baker with D.A. Davidson has our next question.

Okay. Wondering if you've looked at comps in markets that might have higher immigration populations. There could be some spending impacts from some of the issues that are going on there. I'm wondering if that's something that you've seen with your customer at all.

No, Michael, good question. Nothing to report there.

Okay. And then I guess, kind of -- well, I don't know if it's a related question, but I'll ask this also. SNAP benefits, you talked about that a little bit on the call, and so nothing in your guidance. But have you done any work or estimates or anything to sort of say, okay, what if this does last a week or 2 weeks or the impact of SNAP benefits going away for X amount of time would impact your business by X amount. And perhaps maybe there's even a positive offset where you get some trade down. I'm not sure the way you think about it. But I'm wondering if you've done any tests on, let's say, this lasts for another week.

Yes. I think we're assessing. We just don't have enough data yet to give you a determination. I think if there's anything significant that materializes in the next 30 days, we would create some kind of release to inform everybody in kind of the proper way if there's something material there.

Okay. But nothing yet. One last quick one, if I could. At one point, you talked about, I think, "normal comp for 2026. Remind us what you consider to be a return to normal comps?

Yes. I think our objective is always to run -- to grow our business on a share basis, grow faster than inflation. That's my objective here. We intend to win. And so, we're putting the pieces in place to do that for next year.

And moving on to Oliver Chen with TD Cowen.

Hi, Jason and Chris, the business model of Grocery Outlet has been amazingly resilient over a long-term basis in that mid-single-digit comp range. What do you think about broadly the path to getting there more consistently, the key drivers and milestones? I'm sure the refresh and stabilization of systems will play a role. And on the earlier topics around independent operators, what would you highlight as 2 to 3 key areas that they speak to in terms of IOs potentially needing more support or flexibility and how changes may be impacting their day-to-day op.

Yes. No, great questions. Look, we benefit greatly by talking to our IO groups frequently. We do these things called backroom meetings, and we meet groups of 20 IOs and really try to understand what's happening at the ground level. There's 2 big pieces to getting comps to, I think, on a sustainable basis in a great place. One is obviously getting the systems distraction behind us. We're getting very close there. We're restoring full functionality on pre-SAP implementation for order guide has been a great win. We've made a number of systems improvements over time. So that is something that our IOs give us feedback on, have been giving us feedback on as it's been painful for everybody and people want to move past that to a place where -- and this is what I've told the IOs, I want to make sure this business is really easy to run, and we want to make sure we're providing them with the tools and support that makes their day-to-day -- their focus is on the customer and their local community and doing everything they can with their team to execute. And so that's our orientation.

The refresh program is going to be a big chunk of how we create a consistent execution in the stores. We're providing some very specific tools and new SOPs. We've made adjustments to the merchandising that we thought through, understanding what's happening with the customer and getting feedback from the IOs locally, tuning that in. And then -- another piece of feedback is localization.

So again, the company, in this case, needs to do more to support our IOs with product that really is relevant for their local community. And in this case in Los Angeles, in particular, is a really nice opportunity for us to demonstrate through our IOs the power of working together on that, but giving them what they are asking for in order to deliver on an experience for their customers that's relevant. And we think that our business in a place like Los Angeles is a very strong fit.

We just need to do what we need to do to make sure that the assortment and the communication, the execution in that new way is done collaboratively, and we're excited about what that's going to mean for this business as we go forward. So those are some examples.

Okay. Jason, a follow-up. The buying team in many ways, we view as like the secret sauce of an organization such as yourself. Like what are your thoughts about changes or not changes there in terms of how that talent is going to be orientated in light of what you're doing? And then second, as you react around the marketing programs, what are you seeing in terms of customer perception lags or not lags? Our surveys show that a lot of customers really want these core items for a long time. So just would love your thoughts on any hypothesis you have there, too.

We're [Technical Difficulty] hearing you. I don't know if there's something on our end here on your end. Could you repeat the question? I try again? I just.

Yes. First one was on buying team and just the buying team being the secret sauce and what's happening with the nature of that talent as you think about these changes you're making? And second question follow-up was on customer perception lags between the marketing and changes you're making relative to when customers are noticing our surveys say that this is a really good change.

Great. Great. Yes, I think we're doing everything we -- it's really important for us to -- when we talk about being a great selling organization, we are a great buying organization, and it's an and. And so the conversation we're having with our buying teams are we want them out there. The relationships they've built over time are exceptional. It's a very unique business in that respect. Typically, what you see in retail is a more at times can be contentious set of relationships with vendors. In our case, this is -- I feel like one team, many of the times when I am able to participate in some of the sessions. And so we're just doing everything possible to make sure we're giving them those tools to continue to nurture those relationships and have close connection there.

And then on marketing lag, customer perception, it does take time. And we believe that these changes over time and what we've seen in the pilot markets, the customers respond pretty quickly, and they can recognize in a pretty remarkably fast way if something is good or not. I mean, in retail, you get feedback the first day. And it doesn't take that long to figure out if you're doing something that works and they appreciate because literally, they tell you. We've been standing in stores days on end as we make these changes and customers will tell us what they like and what they don't like and they tell our IOs what they like and they don't like. And so our job is to make sure we're listening carefully to respond to the things they like and get rid of the friction points for our customers.

And so that's really what this is. It's not necessarily anything magical. It's responding to what customers want and making sure we're delivering that consistently.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Thanks, everyone.