Grocery Outlet - Earnings Call - Q2 2025
August 5, 2025
Transcript
Speaker 1
Welcome to the Grocery Outlet Second Quarter 2025 Earnings Results Conference Call. At this time, all participants are on a listen-only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Ferry, Vice President of Treasury and Investor Relations. Thank you. You may begin. Good afternoon and welcome to Grocery Outlet's call to discuss financial results for the second quarter ended June 28, 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 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. Now I would like to turn.
Speaker 0
It over to Jason. Thanks Ian and welcome everyone. We delivered solid second quarter results that exceeded our outlook. Net sales of $1.18 billion grew 4.5% over last year while adjusted EBITDA of $68 million and adjusted EPS of $0.23, each of which came in above their respective guidance ranges. We also grew comp store sales 1.1% from last year in line with our guidance and opened nine net new stores, keeping us on pace to achieve our 33 to 35 annual store opening target for this year. We continued to deliver on the profitability front, reporting a 30.6% gross margin, also ahead of our outlook as we again drove improvements in inventory management and merchandising. From a cost perspective, we managed operating expenses with discipline throughout the quarter.
As a percentage of net sales, SG&A declined 10 basis points from last year and we see opportunity to drive further operating leverage. In short, we achieved our objectives for Q2 and as such we are reaffirming all previous guidance ranges for the full year with the exception of adjusted EPS, which we are increasing due primarily to favorable interest expense. We also made important progress during the past quarter on the four strategic imperatives we outlined on our last update: 1 tackling new store performance, 2 securing top talent, 3 addressing execution gaps, and 4 improving our execution at scale. We have significant white space in front of us, which represents multiples of the revenue of our current store base generating today. Executing against these four imperatives will help set the stage to capture that opportunity and drive improving returns on invested capital.
First, tackling new store performance, we're taking deliberate steps to improve performance across our store base. We're rebalancing store growth towards a healthy mix of core versus new markets, adjusting our internal returns framework, developing more robust site selection criteria, and testing several key commercial pilots to drive our performance. Our pilots have included improving our merchandising, enhancing our IO support, and adjusting and experimenting with marketing to tell our brand story. These efforts have contributed to our 2025 cohort of new stores performing ahead of plan on a year-to-date basis. As we drive improvements in our new stores, we are reviewing our store plans carefully, selecting locations with high potential and the ability to generate store economics that meet or exceed our hurdle rates.
Slowing down our store expansion will allow us to dial in the model to find the optimal level of sustainable unit growth that generates solid returns on invested capital. As the result of our disciplined underwriting standards and focused execution, we expect returns to steadily improve. In addition, we expect to deliver cash on cash returns above 20% in year four for the 2025 and 2026 cohorts on a combined basis. Our second priority is securing top talent. Over the course of this year, we've made progress on talent and are grateful to welcome several new leaders to our team, including Matt Deli, our new Chief Merchandising Officer. Matt has a proven track record of strong results across the retail spectrum. With more than 20 years of experience spanning merchandising, supply chain, assortment planning, and product development, we're very excited to have him on our team.
In a couple of weeks, he sees many amazing sets of opportunities to advance our selling capabilities and drive scale advantages throughout this business. Our talent priority also extends to our board. In June, we announced the additions of two new board members with deep experience to steward the company through our next chapter of growth. Mike Kobayashi brings many years of leadership experience from Ross Stores, including driving operational excellence and successful technology transformations. He is going to add valuable perspective as we unlock the powerful potential of our systems implementation. Chip Malloy's proven financial leadership experience at retailers like Sprouts Farmers Market and PetSmart will complement our team's focus on achieving improved profitability and attractive shareholder returns. These additions bring a fresh perspective, deep experience, and the governance experience to help the organization build on this turnaround.
Lastly, I'd like to highlight the many contributions that both Tom Herman and Ken Alterman have made to the company in their 21 and 14 years of respective service to the board. Saying thanks is not enough for all the hard work and their dedication to Grocery Outlet, they will be missed. Our third priority is addressing execution gaps on the systems work we're undertaking. We've made steady progress during the last two quarters and this is positioning us to unlock more opportunities across the business. We expect to complete the last major systems update for our IOs by the end of the third quarter. We're continuing to progress by building resilience in our work with better governance and data integrity, process improvement, and selective software simplification. Next year we're going to transition from development to optimization.
In Q2, we completed the Real Time Order Guide rollout, leading to improved inventory visibility and in stock within our stores. Feedback from independent operators who have used the Real Time Order Guide has been overwhelmingly positive to illustrate the powerful impact of gains in inventory availability. Consider that within our focus stores we've seen a material in stock improvement on our top 200 items that's driving roughly 200 basis points of comp lift. We're building on the success of the Real Time Order Guide with the launch of our new Arrival Guide, which we plan to roll out this fall. The new Arrival Guide will significantly expand the ordering window for both everyday items and opportunistic offerings to our independent operators, allowing them to more thoughtfully plan and balance their product mix.
The new Arrival Order Guide had been a critical execution tool that our independent operators relied on pre-systems launch for their planning. We're excited about reaching this execution milestone and helping our independent operators win guests by improving their ability to plan product with extreme value. During the second quarter, we've also made progress on our private brands efforts. We've introduced our own wine label called Second Cheapest Wine. Given the current state of oversupply in the wine industry, we recognized a unique window of opportunity here to launch a compelling selection of wines. At under $5 a bottle, this item has generated significant buzz and sales. We continue to believe strongly in our unique value proposition.
On our supply chain initiatives, I'm also pleased to report that our transition to one DC in the Pacific Northwest has been executed flawlessly by our team, a big win in simplification of operations and improving service levels to our independent operators at a lower cost. We'll continue to evolve this element of our capability set over time with our next DC conversion in the east to begin in Q4. Our fourth priority is improving execution at scale. When I think about Grocery Outlet's future, I'm especially energized by how today's efforts should enable us to scale sustainably over the long term for this business. Last quarter we shared our goal to transform Grocery Outlet into a truly outstanding selling organization.
As I mentioned on our last call, we've been working on a model store and sharing best practices with IOs to deliver a winning in-store experience and improved store financial performance. For example, in our Oakland, California test store, we've made key enhancements to layout, signage, and storytelling merchandising and implemented a new fresh category ordering and forecasting tool, all of which have contributed to middle single-digit lift in comp versus our control group. Importantly, we believe these improvements can be implemented at other stores at a manageable incremental cost per store. We've begun to roll these improvements out to a pilot group of stores and are accelerating the most impactful of these improvements, particularly our forecasting and ordering tools in fresh to help drive IO success. By offering our IOs stronger support tools and training, we believe we can strengthen the value proposition for our customers and our operators.
At the same time, I'm very excited about partnering with our IOs to help them drive their success, and I look forward to updating you all on our progress over the next couple of quarters. Since our last earnings report, I've spent more time with our IOs and with our stakeholders to hone in on the large opportunity in front of us. Everything I've learned continues to strengthen my conviction that the work we're undertaking today will position us to create value for everyone that touches this business. A few comments on customers. We've begun the work to better understand customer perception of our brand to ensure that we're creating an experience that customers love. In the research we've completed so far, we've reaffirmed that our value proposition continues to resonate with our core guests and that the treasure hunt is a strong motivator of trips.
We have an opportunity here to better tell our story on value. Last quarter I spoke about our increased focus on known value items or KVIs. Since the start of this year, we've sharpened our KVI positioning while delivering sequential improvements in gross margin by improving shrink and mix. We're pleased with our current positioning on the pricing of KVIs across all markets, and when looking at the whole basket, we continue to see and deliver substantial savings versus our peers. Demonstrating our value positioning consistently will support the building of trust with customers across our network. Our LAPS guests have also given us some specific direction on the opportunities to earn their business back. The great news is in the areas that we need to improve they are primarily execution related. For one example, customers want more consistency in product availability to improve our shopping experience.
We will continue to focus on execution related support to ensure greater consistency across our stores. We are doing just that in two important ways. First, as I mentioned, the systems progress we are achieving is enabling us to improve our in stock position and create some positive modest sequential improvement in our opportunistic mix versus Q1. We expect this to further strengthen with the rollout of our new Arrival Guide as we help independent operators better understand what's coming. This capability will advance independent operators' sales planning process. Second, we're now rolling out the new forecasting and ordering capability with tools and training that focus on fresh meat and produce.
These improvements and support will help drive sales by being in stock and this has been an extremely successful part of what we've done in our Oakland, California pilot by driving sales through in stock availability and consistency with added benefits of improved product freshness in both meat and produce. Driving the success of our independent operators is critical to our success. Over the last several years we've invested in the success of our independent operators. These investments have contributed to low voluntary independent operator turnover which remained below 10% last year. However, we need to keep evolving to ensure we have a pipeline of the right mix of experience and quality across all regions and markets. I've had more time in the field and have enjoyed learning from our independent operators and gaining insights on their respective market regarding opportunities and challenges that they face.
We have many enthusiastic operators that will be piloting and collaborating on many of the new commercial activities we're testing this quarter, including implementing the successful merchandising store layout changes and communication changes that are driving results in our Oakland, California store. This independent operator direct involvement should help us to rapidly calibrate our commercial approach for maximum execution capability at scale to drive independent operator success going forward, we're strengthening our sourcing model, investing in training and tools and engaging more closely to share commercial best practices. This work builds on the stronger systems foundation we're establishing, further enhancing visibility into our inventory for IOs to consistently offer a winning experience for their customers. What does this mean for our shareholders? This should mean a higher and more sustainable growth rate as key initiatives begin to drive comp growth back towards historical range.
It should mean consistent gross margins which are benefiting from an increased mix of opportunistic offerings and improvements in our shrink. It should mean operating more efficiently with greater discipline and keeping costs in check to drive operating leverage as we return to growth. I believe this should help us achieve our 6% adjusted EBITDA margin milestone on the way to even stronger margins in the future. It should also translate into stronger returns on invested capital as we underwrite new stores with better data processes and rigor. In closing, we believe we have a path to stronger organic growth, margin improvement, and improving returns on capital. By focusing on execution and getting the fundamentals right, we see significant long term potential for all stakeholders. While we're early in this journey, we are already making solid progress and I have strong conviction in the power of this model.
I want to thank our independent operators, our team members, our suppliers, and shareholders for your continued support. Together we will thrive as we position Grocery Outlet for its next stage of growth and prosperity. Before turning the call over to Chris, let me finish with a few thoughts on our mission of touching lives for the better. We just completed our annual Independence from Hunger campaign and during this event our IOs partner with local nonprofits to provide critical food resources to their communities at a time of the year when they need it most. Our supply partners also contribute by donating food and collaborating on events with our IOs. I'm very proud to share that we raised over $5 million this year, the equivalent of more than 10 million meals, benefiting over 500 local organizations.
We are equally proud of the $30 million that we've raised over the 15 year history of this program. That is a wow and we're very proud of it. With that, I'll turn the call over to Chris to take you through our financial results and our outlook. Thank you.
Speaker 1
Thanks Jason. In the second quarter we achieved encouraging progress as we began to execute the strategic plans we laid out last quarter. As Jason shared, our second quarter results exceeded our outlook and as we deliver on the key initiatives of our strategy, we are beginning to see modest comp improvement. At the same time, our focus on achieving operational excellence continues to drive gains in profitability. Looking beyond the quarter, our disciplined approach to store expansion is setting the stage for stronger long term returns on invested capital. These wins bolster our confidence in the achievability of our plans for the year and as a result we are reaffirming our 2025 outlook except for adjusted EPS which we are increasing due primarily to favorable interest expense. I will walk you through our Q2 results before sharing more detail about our outlook.
The comparisons I will provide are on a year over year basis unless noted otherwise. Please also note that with the closing of our UGO acquisition on April 1, 2024, our second quarter 2025 results and their prior year comparisons include UGO. For the full quarter, net sales increased 4.5% to $1.18 billion, driven by a combination of new stores opened in the last 12 months and a 1.1% increase in comparable store sales. In the second quarter, comp growth was driven by a 1.5% increase in transactions, partially offset by a 0.4% decrease in average transaction size. We continue to make progress on driving in stocks on everyday items and increasing our mix of opportunistic offerings, all of which are showing initial signs of contributing to comps. In the second quarter we opened 11 new stores and closed two stores.
We remain on track to deliver our annual target for 33 to 35 net new stores for the year and we ended the second quarter with 552 stores in 16 states. Gross profit increased 3.3% to $360.7 million and we achieved gross margin of 30.6% which exceeded the high end of our outlook range. Gross margin was down 30 basis points compared to last year, but increased 20 basis points compared to the first quarter of 2025, driven primarily by improvements in inventory management. SG&A increased 4.2% to $336.8 million compared with the second quarter last year and leveraged 10 basis points to 28.5% of net sales. The decline in the year over year SG&A ratio was driven primarily by a decrease in commissions as we are no longer paying elective commission support related to the system's conversion.
This was partially offset by growth related costs in stores and corporate support relative to Q1. This year, SG&A as a percentage of net sales was down 90 basis points due primarily to reductions in salary expense and incentive compensation and other corporate costs. Our cost reduction program is off to a solid start and we expect to begin realizing significant gross savings in the second half of 2025. While a majority of these savings will be reinvested in the second half to drive growth and support our IOs, we expect substantial net savings from this initiative in 2026. As we discussed on the last call, we are shifting our focus toward clustered store openings with the most attractive market conditions and as part of that effort, the company incurred $11.2 million in charges during the second quarter related to the previously announced restructuring plan.
The charge is related to a combination of impairment and disposal of long-lived assets and lease termination costs. The actions under the restructuring plan are now substantially complete. Net income was $5 million or $0.05 per fully diluted share compared to net income of $14 million or $0.14 per diluted share last year. Adjusted net income decreased 9.3% to $22.8 million or $0.23 per adjusted diluted share compared to $25.1 million or $0.25 per adjusted diluted share last year. Adjusted EBITDA was $67.7 million for the quarter compared to $67.9 million last year. Adjusted EBITDA margin was 5.7% of net sales, down 30 basis points from the prior year and up 110 basis points from the first quarter this year. Net interest expense was $6.5 million, up $985,000 year over year.
The increase in net interest expense was driven primarily by higher average principal debt, partially offset by a decrease in interest rates. Income tax expense was $1.3 million, down from $6.5 million last year. Our effective tax rate for the quarter was 20.3% compared with 31.9% last year. The change in our effective tax rate was primarily due to changes in our level of earnings, partially offset by non-deductible executive compensation. Net cash provided by operating activities for the first half of 2025 was $132.6 million compared with $49.4 million last year. The increase was driven primarily by the timing of working capital flows. In addition to ending the quarter with $55.2 million in cash, we had $205 million of available capacity on our revolver. We remain committed to investing prudently in growth initiatives with a focus on delivering high returns on invested capital.
During the second quarter, we invested CapEx of $58.3 million net of tenant allowances primarily on new stores, supply chain related projects, IT, and store maintenance. Total debt net of issuance costs was $474 million at the end of the second quarter, down $3.5 million from year end with net leverage at 1.7 times adjusted EBITDA. Now turning to our guidance for the third quarter and the rest of 2025, as a reminder, this year is a 53-week year. Sales from the 53rd week will be excluded from our same store sales calculation. As Jason and I shared, we are affirming our outlook for the year.
Except for adjusted EPS, which we are increasing due primarily to favorable interest expense, our outlook for the year assumes the comp store sales growth of between 1% and 2%, the addition of 33 to 35 net new stores, gross margins in the range of 30% to 30.5%, adjusted EBITDA of $260 million to $270 million, adjusted EPS in the range of $0.75 to $0.80 per fully diluted share compared with $0.70 to $0.75 previously. In addition, we are updating the following assumptions for the year. Restructuring charges of $63 million versus $59 million to $61 million previously. Net interest expense of approximately $27 million versus $32 million previously. The reduction in interest expense versus our previous view is due primarily to lower anticipated interest rates. Share-based compensation of approximately $17 million versus $25 million previously.
For the third quarter this year, we expect comp store sales between 1.5% and 2%, the addition of nine net new stores, gross margin between 30% and 30.5%, adjusted EBITDA in the range of $63 million to $67 million, and diluted adjusted earnings per share between $0.17 and $0.19. In closing, we have a tremendous opportunity and ample white space in front of us. By executing our strategic initiatives, we believe we will unlock value and potential in the business while generating meaningful growth, profitability, and returns on capital on behalf of our customers, our IOs, and our shareholders. With that, we'll open it up for questions. Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
You may press star 2 if you'd like to remove your question from the queue. We ask that you please limit to one question and one follow-up. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.
Speaker 0
Our first.
Speaker 1
Question comes from Anthony Bonadio with Wells Fargo Securities. Please proceed with your question. Hey guys, thanks for taking our question. I just wanted to ask about the comp guidance you reiterated. Guidance implies a pretty healthy acceleration in the back half. I realize compares ease.
Speaker 0
Somewhat, can you just talk a little.
Speaker 1
Little bit more about your confidence level there at this point given what you've seen into July and August, and just talk us through some of the underlying drivers there.
Speaker 0
Hey Anthony, it's Jason here. Thanks for the question. Yeah, we're feeling good about where we're going right now. We're seeing green shoots from initiatives we believe will build momentum in the back half of the year. I've talked about value, sharpening our KVIs, the drag on value perception there. We think that work's now significantly complete. We know that there's some storytelling to do there. We're going to be doing some experimenting there, but feel good about the pricing. The pricing studies we've also done, when we look at the total basket, we're in a good spot there now, 15% to 20% lower than discount peer and I feel strongly that that's going to help us as time goes on. We're also seeing improvements in our in stock, so I know we've talked a lot about that with tools.
We're seeing specifically improvements on our fastest selling 20% of SKUs in the stores as our operation team creates focus and collaborates with IOs. As one example, we're seeing 150 to 200 basis points of comp improvement just on that portion of the business. Really helpful there. The implementation of our new Arrival Guide this fall will supplement what we've already rolled out in Q2 and this is something that IOs have given us a lot of feedback on. They're really excited about what that will mean. This is going to help with their forward planning. Their ability to book, see and secure product will help two things, one in stock and the second piece it really will help them with their opportunistic selection of SKUs. They're going to be able to book those products outside their ordering windows and we believe those things will contribute positively to sales.
Some other points, our consolidation in the Pacific Northwest I mentioned in my opening comments, that's helping that region with better in stock for service levels and variety. Two really important points there. All of that in addition to probably a really important point here is we are rolling out a forecasting tool, ordering tool we've never had in meat and produce specifically. This is not a systems dependent tool but it works very effectively. I've done it in my past in other organizations. We're seeing double digit increases in sales in those two departments in our test stores. We're now rolling that out to the entirety of the business. For all of those reasons, we feel that the business will, the forecast, the guidance we're giving, we're feeling good about. Helpful. Thanks guys. Thanks, Anthony.
Speaker 1
Great. Thanks. Just wanted to talk about Jason, one of the comments you made about the newer cohorts of stores. Sounds like they're performing a little bit better. Was just curious maybe if you could unpack some of the drivers there. Secondarily, it seems like a lot of the changes that you're making are very sensible, number one, and also very trackable given the comp lift that you are seeing. We're hearing like 150 to 200 basis points or mid single digits. How do you think about the opportunity based on what you're seeing in your test stores as you continue to roll out some of these initiatives across the broader fleet?
Speaker 0
Yeah, it's a great question. I'm really excited about it, to be honest. The pilot work that we're doing in Oakland we've just introduced. We're almost done in Marin City. Our independent operator there, you have to talk to her levitating off the ground. She's so excited about what she's seeing with her guests and the results we're going to obviously roll. You know, anything that works and resonates with guests, that's what we're going to put into this business. All of the things we're learning about what we're doing here are going to go into the new store executions. In the near term, we've talked about the store count, we've talked about the mix. When we think about the mix here, we have adjusted the mix of stores, infill versus new markets. That is important to note.
More than just a little hair north of 50% of the stores we've opened this year are infill. We are spending a lot of time on site selection criteria, making sure that our volume underwriting makes sense and that we're spending a lot of time on site strength. These are kind of fundamental good practices when you're thinking about growth. The work that's already begun on clustering and how we think about independent operator support in those markets, the supply chain support, the marketing, all helpful pieces. We see healthy returns building in 2025 and 2026 as a result of that work and effort to come.
Speaker 1
That's great. Chris, on the sort of the shape or the timeline of gross margin evolution, how should we be thinking about some of the puts and takes from the transition into the new DC? I believe there's a new conversion coming, as well as the pricing that you've been injecting into the business to help to drive sales. Curious how to think about that.
Speaker 0
Gross margin as well as we look ahead.
Speaker 1
Thank you. Yeah, sure. We feel good about where our gross margin guidance is at for the year. We obviously have talked about some improvements in shrink and we think there's more there. Just given the various initiatives and pilots that Jason mentioned, we just want to have some flexibility in the margin. I'd say at this point, the 30% to 30.5% is a good range for the margin. Okay, thank you very much. Best of luck. I'll pass it on.
Speaker 0
Thanks, Corey.
Speaker 1
Our next question comes from Mark David Carden with UBS Investment Bank. Please proceed with your question. Good afternoon.
Speaker 0
Thanks so much for taking the question.
Speaker 1
To start, just what are you seeing recently with respect to the health of the consumer? Any incremental changes to the shopping habits over the course of the past few months? Just related, how are you thinking about potential impacts from SNAP changes going forward?
Speaker 0
Thanks. Hey, Mark, we aren't seeing anything as of yet on customer. We know that there's lots of talk about recession and those kinds of potential things. This business historically wins during periods of recession and in the past, high, kind of peak inflation. What we're doing here is really readying the business for any kind of eventuality in the market. We're really focused on what the customer is looking for and what we think the opportunities are to improve our execution and obviously the experience. That's our focus. Again, not seeing a lot that would tell us that the customer is changing at this point. SNAP should drive that whenever you see some of those changes, people are looking for value.
The folks that are on those programs, definitely we would be a choice for them, a selection of choice for them, and we expect to take advantage of that.
Speaker 1
That's great. As a follow up, Jason, it sounds like some productive meetings with your independent operators. How would you describe the current health of your IO base? Is your pipeline seeing much of an impact from any of the macro uncertainties or any lingering concerns about some of the prior execution challenges? What's shaping up in general on that front?
Speaker 0
Yeah, sure. We see a healthy balance between supply and the demand. When it comes to I.O. engagement, I am actively engaging with our I.O. network. I think communication is an essential ingredient in building trust. We've introduced a number of new ways to increase the frequency and depth of communication. I think that's very helpful when we think of the health of the I.O. network. I know I mentioned in my remarks voluntary attrition is less than 10%, and this last year, year on year, so we're feeling good about where we are. It doesn't mean that there isn't room to improve. Clearly, the business has been through some challenges with systems that made some of their day-to-day work very challenging. I'm very committed to our I.O. network, making both the business stronger, which obviously leads to higher profits, but also easier to run.
I think we're on the same page with our I.O.s on what's required and what that roadmap might look like. Great, thanks so much. Good luck, guys. Thank you.
Speaker 1
Our next question comes from Robert Frederick Ohmes with BofA Securities. Please proceed with your question. Oh, hey Jason, my first question is on the new Arrival Guide and also the Real Time Order Guide. Can you just kind of give us some color on, you know, the new Arrival Guide? Like what, how these systems are for the independent operators versus what was going on pre the SaaS rollout?
Speaker 0
Sure, Robbie, yeah, great, great question. The new order guide has come out; that went very successfully. The feedback's been very good. We were actually able to make some enhancements to pre-go-live implementation. The speed of the system is actually faster than it was before. Feedback's been great. I guess the difference, the subtle difference between what we talked about with the order guide and the new Arrival Guide is the notion that our operators can reserve product, they can see what's coming and reserve product outside of their ordering window. What it does is it helps them build their merchandising plan and their execution for their team. They'll go in and they'll review what's coming. This is how it worked in the past or over a period of time as they go to execute.
When we're meeting with IOs, this is something they're very excited about and we're making good progress on the development on that front and expect to have that rolled out between Q3 and Q4, right before our key selling season. Again, we're excited about that progress from our team.
Speaker 1
That sounds great. Chris, maybe for you, can you remind us where you guys are on the curve on the SG&A commission support? You know that less support was a benefit this quarter. Is it a tailwind? How many more quarters is that a tailwind for you guys? No, it's not. I mean, there's no more commission support we're providing. Right. Versus last year, when did you stop the commission support? Maybe just remind us, was this the last quarter where you were getting a benefit from no longer providing the support? Yes, that's correct. Going forward, year over year comparisons will be the same. Perfect.
Speaker 0
Thanks so much. Thanks Robbie.
Speaker 1
Our next question comes from Jeremy Scott Hamblin with Craig-Hallum Capital Group. Please proceed with your question. Thanks for taking the questions and wanted.
Speaker 0
To start with your new unit development.
Speaker 1
Kind of moving forward. You talked about the plan, I think you said 9 in the third quarter and that you're mostly or slightly over 50% infill markets. As you look ahead and you think about how to plan the business to continue growing, moving into 2026 and beyond, are you looking to go to 70% infill markets? Can you give us a little visibility.
Speaker 0
Sure, happy to. You know, again from the last calls, we talked about slowing down, working the model in the near term. The points I've gone through are helpful to get those returns up over 20%. We feel good about that. My aspiration is to improve those returns actually over 30%, and we're going to do that over time. That's all about making sure that we open stores at higher starting sales rates. That means the brand awareness has to be there. Our storytelling is going to be strong. We want to make sure that IO strength and execution is there and that we're localizing stores and markets. All of that will lead to decisions about how, what the mix is.
In the kind of 2026, 2027 range, we're in the zone around 50% or better on infill, and we feel that we've got at least 20 to 25 opportunities per year to continue to infill, infill-based opportunities with high returns that will help us with the mix as we work the model.
Speaker 1
Got it.
Speaker 0
Just stepping back, you've got the Real Time Order Guide in.
Speaker 1
Place, you have new arrivals, which sounds like an exciting initiative. What are the IOs tell you now that you've got Real Time Order Guide done? What do they tell you they want or need the most to really get the business back to where it should be?
Speaker 0
Yeah, I've had a number of IOs tell me that the number one thing they've been waiting for is the new Arrival Guide. There's a fair bit of excitement around the rollout of that this fall. That's the number one piece. Clearly, there's other small components. We want to make sure that our stores are easy to run, and the systems they use, the processes that we provide, the support we give, we want to make sure that that's as frictionless as possible so that our IOs are able to focus on their communities, their teams, and obviously their customers. I can't understate the distraction that happened with the system implementation that's made the IOs have to be very inward focused, and the day-to-day running of the business has been challenged.
Those are the two themes I would say have been most shared with me as far as that on that front. New Arrival Guide, lots of excitement. We'll continue to make progress on the little things that are important to our IOs to make the stores easier to run. Those are the two things that on the system front that our IOs have given feedback on. Just a clarifying question on the comment about the new Arrival Guide and you.
Speaker 1
I think you said a double-digit lift in meat and produce. Is that just on the test location in Oakland, California?
Speaker 0
Yeah, yeah. Thanks for the clarity there. Importantly, that is a new capability. It's called product movement record. Just in time ordering, and it's for meat and produce, and it's actually not linked to the new order guide or new item Arrival Guide. Those capabilities in the business were really grocery focused, packaged good focused in the past, and they continue to be. We do have meat and produce in our order guides, obviously, but this will help our stores very specifically in the way they think about forecasting for demand and the fulfillment of fresh produce and meat. What we've seen so far in the two stores we've got this in is double digit sales increases for both meat and produce. This has a lot of spinoff benefits.
Obviously, being in stock is one of the most important things that customers have given us feedback on, how we can earn their business back. Clearly, being in stock on the things you sell is very profitable to do. I'm personally extremely excited about the prospects of seeing that rolled out. I know that the IOs that are going through the training right now are also equally excited about the simplicity of that and what that means for their business.
Speaker 1
Great. Thanks for taking the questions and best wishes.
Speaker 0
Thank you.
Speaker 1
Our next question comes from Michael Baker with D.A. Davidson & Co. Please proceed with your question. Thanks. Did you guys talk about the pace? I don't think I heard it.
Speaker 0
The pace throughout the second quarter.
Speaker 1
How the months progressed, and then I guess related to that, if my math is right, and sorry, doing it on.
Speaker 0
The fly here might not be correct.
Speaker 1
It seems like the third, if you look at the full year guidance, then we have the third quarter.
Speaker 0
Guidance, so you can sort of back.
Speaker 1
Into the fourth quarter seems like a.
Speaker 0
Much better sort of ramp or comp.
Speaker 1
Growth in margins, etc. on basically all line items in the.
Speaker 0
Fourth quarter versus the third quarter, even.
Speaker 1
Adjusting for the next week. Any particular reason for that? Is that right?
Speaker 0
there any particular reason for that?
Speaker 1
Thanks.
Speaker 0
Yeah, I think just to make sure I understand your question, are you asking about the improvement in run rate on comp sales? Mike, is that what you're—yeah, sorry.
Speaker 1
It is really two different questions. First, within the second quarter, can you.
Speaker 0
Talk about the pacing throughout the second.
Speaker 1
Quarter and then stop. The second question is, if you look at the implied guidance for the third.
Speaker 0
Quarter versus the fourth quarter, the fourth quarter looks like it has better comps.
Speaker 1
Better margin growth, better EBITDA growth, et cetera, than does the third quarter, even.
Speaker 0
Adjusting for the extra week.
Speaker 1
All that's on a year over year basis.
Speaker 0
Yeah, sure. On the first question, we do expect to see improvement in comps and that's what we're seeing right now. Our guidance right now is consistent with our experience. Just to make sure that it's clear, we do have a 53rd week included in our guidance for Q4, and there is the benefit of the leverage, if you will, for that last week of the year, just to make sure that's clear.
Speaker 1
Right, I get that, but again, maybe my math is off, but even taking out $75 million in sales and I think you said $5 million EBITDA and what we think that means for EPS, it seems better in the fourth quarter. Okay, but again, I was referring to.
Speaker 0
My first part of the question was.
Speaker 1
In the second quarter, talk about April versus May versus June and what you're seeing in early July, if you could.
Speaker 0
July and early August. Yeah, it's consistent with the guidance. We're seeing an improvement in run rate, and we feel strongly that the initiatives that we've begun to roll out and implement in the business are going to have more and more momentum as the year goes on. That's our thinking. Understood.
Speaker 1
Okay, that makes sense. I appreciate it.
Speaker 0
You bet. Thanks, Mike.
Speaker 1
Our next question comes from Oliver Chen with TD Cowen. Please proceed with your question. Hi. Thanks a lot. We're excited about the private label innovation you've been doing. What are your thoughts on what's happening there and medium term in terms of plans and mix and how it may interplay? Also, as you think about key value items as well, how will that manifest in terms of improving the comps over time or what are your thoughts about that as part of the portfolio and what you're seeing in elasticity. Lastly, the question on opportunistic supply. I just would love your updated thoughts on how that looks right now in the marketplace. Thank you.
Speaker 0
Thanks, Oliver. Okay, I'll take the middle. I think the second question first. On KVI's, it's just important to note that you need to be priced right in a real way for customers as they come into the door and they need to see that over time. There's a frequency part of this. There's a lag in perception versus reality. The work we've done we feel great about. We're in good shape there. I think we've got some opportunity to tell our story in a stronger way through our marketing and we're going to, we've got some experiments going on with that. That's part of the comp story. We're seeing some improvement in run rate on comp, on KVI items. Nothing dramatic, but we're starting to see some of that on private label. We definitely have opportunity to continue to dial in our assortment strategies and ranges.
That's some work in play. Some of the piloting work we've done will lead us to certain decisions. Clearly, opening price point quality private label is a positive contributor in the mix. It's a positive and accretive margin play. It can help you with brand related loyalty. The example of the Second Cheapest Wine rollout, we just got a tremendous amount of credit from our guests on having a product like that under $5 a bottle with a fairly high quality profile. Good feedback there and that work will continue. On the op mix, third question you had, our buying teams continue to have lots of opportunity and we're not seeing a problem or an issue as far as finding the product. As we continue to improve what we're doing here, we did see a slight improvement, a modest improvement in our mix and op.
I think that again, as we work with our IOs and give them new information, it's helping us, will drive results that show up in comp store sales as well as I think improve margins and that clearly OP does a number of things for us, including drive a lot of value for customers. We're excited about what's ahead there.
Speaker 1
Okay, thanks. One follow-up, you gave a lot of great details about the new store environment and strategies. What are the harder parts of what you're endeavoring and or why weren't some of these principles in place prior? Thank you.
Speaker 0
There's a lot of execution to do, so any of these things, there's just a tremendous amount of execution to do. There's process work to do. I think if we think about the business and the challenges with systems were very distracting here. I think a lot of what's happened here has just been a tremendous drag on the organization's focus. As we come out of that darkness, so to speak, we're going to open up a lot of opportunity for ourselves to be focused on the customer and improving our business.
Speaker 1
Thanks a lot.
Speaker 0
Best regards. Thank you.
Speaker 1
Our next question comes from Leah Dianne Jordan with Goldman Sachs Group. Please proceed with your question. Thank you. Good afternoon. At the beginning of the call, Jason, you highlighted an opportunity to drive further leverage of SG&A over time. This has been a main investor concern for a long time. Seeing if you could provide more detail on that, what are the areas that you could optimize over time and any color on the potential timeline there.
Speaker 0
Sure, Chris has done a little bit of outline on that, but we do see opportunity on a number of fronts. We'll probably give a little more color on that maybe in the next call. One of the things that is kind of obvious, I guess to everybody, is the systems work. We do believe that as we move through the stabilize phase into more of an optimized phase, there's going to be opportunities for us to improve the tools we provide to stores and our business, but also simplification work that will happen, and there'll be spinoff effects on costs. Whether it's CapEx and some OpEx, those things will come.
The work we've already engaged with, goods not for resale, the continued work on shrink improvement, all of these things are going to be helpful for us as we continue to grow the business in a profitable way and take costs out over time. That's how we've been thinking about it.
Speaker 1
Yeah. Chris, just to add to that, we're very focused on SG&A for sure, and I'm very pleased with the progress that's been made thus far. We're also, as part of it, looking at all areas, including supply chain, freight, and other costs that we can be more efficient on. There's some progress made on there. The savings will be meaningful and will contribute to leverage. We may reinvest some of that to help drive sales and comps with our independent operators, but I do expect for 2026 that it will be a meaningful contribution overall. Very helpful. Thank you. Our next question comes from John Edward Heinbockel with Guggenheim Securities. Please proceed with your question. Hey, guys. Good.
Speaker 0
Jason, one thing I want to start with.
Speaker 1
I think you said in the test.
Speaker 0
Stores, right, meat and produce are up double digit. I mean, I take that to mean, you know, somewhat north of 10%. I think you also said that maybe total comp was up mid single digit. I'm curious. I don't think meat and protein are not, or meat and produce are not huge percentages. You're getting a lift, a sizable lift beyond meat and produce.
Speaker 1
Is that fair?
Speaker 0
How representative do you think that is as you roll this out? Yeah, I think that's absolutely the case, John. It's across many categories. We're seeing nice improvement across the business. I want to make sure I underline something here. We did not reduce prices beyond what we've talked about globally. That's important to note. We didn't add any marketing to the test stores. This is purely merchandising-related customer reaction, nothing to do with anything else. We didn't stimulate it in any way. I want to make sure that's clear. Some of the benefits we're getting at customers are by making the stores easier to shop. Frankly, the feedback we're getting is that guests can see the product more clearly. They are telling us we have better assortment in addition to better in stock.
What we're seeing in the test stores is customer count increasing, but also really nice basket growth across categories. It's a really healthy mix of opportunity. I see that being something that's transferable right across the business. You kind of wait until you have six or eight stores, which is what we're doing next. We've got a number of independent operators who have signed up and are excited. The local stores come in and they see what we're up to, and we've got a group of those that are going to be rolling these things into some stores in this quarter. I think those things are very transferable to the entirety of the business. We're very excited about what we're seeing so far, John. Quick follow up, the I.
Speaker 1
Know it's still early in your tenure.
Speaker 0
Have you started to form a view on company owned stores? I know you've got Ugo. Is there a place for company owned stores in certain regions or you don't think so? Yeah, it's an interesting conversation to have. I believe in the IO model. I think what's really important is to make sure, company or not, that you have a very high quality individual that's running the operation. That's how I think about it. What we're going to do here is everything we can do to support having the most talented individual or individuals owning or operating our stores. We do have a handful of corporate stores already. The same kind of thinking would apply. I don't have, John, a program that says we're going to open 50 corporate stores or anything like that. That's not in my thinking at this point. Thank you. Thanks, John.
Speaker 1
Our next question comes from Simeon Ari Gutman with Morgan Stanley. Please proceed with your question. Hey, good afternoon.
Speaker 0
One of the comments was about.
Speaker 1
Consistency, keeping the same products on the shelf, some of them customers. You have a view on the mix.
Speaker 0
Between closeout and every day, if you have to increase every.
Speaker 1
Day, does the math of the model change in any way?
Speaker 0
It doesn't sound like it, but curious how you think about that. Yeah, no. There is a few hundred products you want to carry every day, but the vast majority, thousands of products, would be opportunistic. When you think of what's interesting about retail, there is a small number, several hundred, that represents a fairly large portion of sales that almost everyone buys universally. Beyond that, there are literally thousands and thousands of products in our stores and will continue to be and are in the test stores that provide this model with a unique mix and profit profile.
Speaker 1
Okay. Related to something you said earlier, you said in the test stores.
Speaker 0
You haven't touched price, or I don't.
Speaker 1
Know if I missed that comment or you haven't lowered price in any capacity.
Speaker 0
If you think about what's going to drive stronger comps in general.
Speaker 1
I don't know if you put your.
Speaker 0
Is value a component of it, or value should still be?
Speaker 1
There even with consistency in the same breath?
Speaker 0
Yeah, value generally for customers, they define it, you know, it's value equals and just everybody has a different formula, price plus quality over service. It's very important to get those components in the right mix. It's very important to communicate those components in the right way. It's very important to deliver that consistently over time. Value for sure is pricing, it's promotion, it's the total basket. It's also how you communicate it and merchandise it. The point I was trying to make was just to let you all know this wasn't a, hey, let's lower prices and drive comp sales. This is really about what the customers enjoy and appreciate in a shopping experience. What are they telling us and how do we merchandise the stores to increase sales and increase our bottom line?
The two objectives here are to make something relevant for the customer so they come and they're loyal. The second is to improve our profitability profile. We've been able to achieve that. That's something that's going to be an important component of everything we do here.
Speaker 1
Okay, thanks.
Speaker 0
Good luck. Thank you.
Speaker 1
Our next question comes from Joseph Isaac Feldman with Telsey Advisory Group. Please proceed with your question. Hey, guys, thanks for taking my question. I wanted to ask about transactions and ticket. You talked about transactions definitely being up, ticket being down a little bit. Is that a reflection of the consumer or the pricing environment or the number of items in the basket? I'm just curious what you're seeing from that standpoint.
Speaker 0
Yeah, it's a bit of a trend the company's been on for some time, you know, pretty healthy customer count, but some weakness in the basket. In the last quarter we saw some improvement in the basket and we're going to keep working that. I don't think it has. There isn't anything macro that I can see yet that would tell me that that's what's driving it, not in a significant enough way that I could give you a conclusion. I do know that making the stores, the experience better, we're going to get bigger baskets. We saw that in our test store in Oakland, California.
The basket's very healthy there, well above kind of company norm and growing, and we're getting, you know, what you always love is more items in the basket, larger baskets, and now customer count growth, and we're getting all of those things in the test environment.
Speaker 1
That's great to hear. Yeah, that's kind of where I was heading with that. I'm glad you answered that. Thank you. My other quick question, I know it's probably a little further afield at the moment, but on digital or E-commerce, what are your view of that now? You've been there half a year or so. Any thoughts on the strategy from that standpoint?
Speaker 0
Yeah, we've got some digital execution. I do think that there's opportunity for us to make some improvements there. We're not ready to share anything there. That has not been our first focus. We're focused on the core. Obviously, many retailers are doing really well on that front, and I think we have some room to grow. Absolutely.
Speaker 1
Got it. That's helpful.
Speaker 0
Thank you. Good luck with this quarter. Thanks very much.
Speaker 1
Our next question comes from William Joseph Kirk with ROTH Capital Partners. Please proceed with your question. Good evening, everybody. Jason, as you've spent more time with the IOs, have you given any consideration to allowing more scale at the IO level and maybe for the best operators to have more stores?
Speaker 0
Yeah, I think there's been a history here, and that's something we've continued with, is independent operators having, you know, one or two stores. We did add in this quarter some of our most competent, successful independent operators' additional stores. You know, when you see, like anything else, you want to make sure that you're providing opportunity, and I think that's something that we feel good about.
Speaker 1
Okay. I guess more housekeeping question on the Easter shift that was in the period. Did you mention how big that was to comp and does the shift, does it impact more the transactions or the transaction size?
Speaker 0
Yeah, I think last quarter we talked about the quantum on the shift. We did recognize that, you know, the guidance we gave for the quarter was 1% and that's about what we hit. All those components from the last quarter's call basically showed up in the number.
Speaker 1
Okay, thank you.
Speaker 0
You're welcome.
Speaker 1
We have reached the end of the question and answer session. I would now like to turn the call back over to management for closing comments.
Speaker 0
Thank you very much everyone for joining. I know we have some follow up calls. I look forward to keeping you up to date on the business. We're excited about what's happening here at Grocery Outlet, and thank you for your attention this afternoon.
Speaker 1
This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation.