Q3 2019 Earnings Call
Greetings and welcome to the grocery outlet fiscal third quarter 2019 earnings conference.
Earnings results Conference call at this time, all participants are you listen only mode.
<unk> answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference is being recorded.
Now I'd like turn the conference over to your hosts Joseph feeling Poland, Vice President Investor Relations. Please go ahead.
Thank you.
Good afternoon, everyone and thank you for joining us on todays call to discuss grocery outlets third quarter 2019 results.
Participants on this call will make forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
Any such items, including our outlook for fiscal 2019 and future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
A description of these factors can be found in this afternoon's press releases as well as in our registration statement and quarterly reports on Form 10-Q filings with the FCC old which can be found on our website that investors that grocery <unk> dot com.
We take we undertake no obligation to revise or update any forward looking statements or information.
During our call we made reference certain non-GAAP financial information, including adjusted items reconciliations of GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure it can be found in the supplemental financial tables included in this afternoon's press release and in our filings.
We use non-GAAP measures as they lead in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.
Presenting on today's call will be gross Roberts, Chief Executive Officer, Eric Lindbergh.
Vice Chairman Mcgregor either.
<unk>, RJ, CD and Chief Financial Officer, Charles Brock.
Following our prepared remarks, well open the call for questions.
With that I'll turn it over to Eric.
Thank you Joe Good afternoon, everyone. Thanks for joining us today Burger RG had I will share highlights from our third quarter as well as an update on our growth strategy is Charles will then review financial results and provide details.
Revised outlook for fiscal 2019.
We're extremely pleased to see continued momentum in our business through the third quarter with strong financial results across the board are outstanding performance over the last three quarters is a direct result of hard work dedication from our entire staff and family of independent operators I want to say, thank you to all of them for their efforts.
As reflected in our October 2nd press release announcing our preliminary results, we delivered top line growth of 13.1% in the third quarter, driven by new store openings and a 5.8% increase in comp store sales are strong top line performance was complemented by gross margin expansion and lower than projected expenses lower.
Yes, you exceed our expectations for adjusted EBITDA, which increased 13.2% to $44.2 million, notably this increase was burdened by an estimated $1.8 million and public company costs, which we did not incur in the same period last year.
Our objective remains to deliver consistent gross margin performance and reinvest in our business to support our long term growth objectives that said base that are better than expected year to date performance. We are raising her for your guidance, which Charles will discuss in more detail.
Now I'd like to turn over to some highlights from the quarter.
Beginning with our comp growth the strength was once again broad based across product categories regions in store advantages as we continue to deliver across our three primary growth drivers.
First and foremost we're committed to providing our customers deep value and unique treasure hunt shopping experiences in the stores.
We continue to strengthen our relationships with our current suppliers as well is seeking out in developing new relationships to procure brand name products at amazing values. The pipeline of opportunistic product remains very strong we continue to generate excitement for our customers.
Second we remain committed to supporting the independent operators and delivering the Wow in store shopping experience. One example, this commitment is around a regional meetings that we held whether I chose in early October our leadership team visited nine cities in five days to share a recent updates.
Provide opportunities for the iOS to share their best practices and to respond to their questions key component of our success is derived from our efforts of Ohio was one always ensure that we are providing the right level of ongoing support and engagement.
We were thrilled with the broad participation from 95% of our independent operators and the enthusiasm throughout these meetings as it reinforces. The this is time well spent by both management team and our I O us.
Third we leveraged marketing to increased brand awareness and engagement.
Both the corporate and the local level, our bargain bus marketing campaign continues to be very well received by customers. This corporate marketing is supported by local events and other advertising led by Iows within their individual communities RJ, we'll talk about some of these advances we made across these growth drivers.
Moving to our store expansion strategy, we remain pleased with the performance of our new stores during the quarter. We opened eight new sites, bringing the year to date total to 24, New York New locations, these new stores or a balance of existing mature markets in developing markets and they continue to perform in line with our expectations Mack will talk about.
At our expansion strategy in more detail shortly.
We remain focused on the execution of our differentiated business model.
It's the combination of the opportunistic sourcing and the local independent operator that allows us to out local the chains and out chain. The locals. We believe that this is the formula behind the consistency in our comp stores growth at our history of strong stable financial performance.
Looking forward, we remain excited about the opportunities ahead, and we remain committed to delivering measured and consistent growth while operating our business for long term success to reiterate our long term growth objectives, we expect to deliver consistent long term comp store sales growth of 1% to 3% handily primarily through the three drivers I mentioned earlier.
We remain on track to grow our store base, 10% and away with a healthy balance of openings are cross mature markets. We have a high level brand recognition and developing markets, where we are building brand awareness to that end. We're extremely pleased to have filled our newly created leadership position for the executive Vice President of our East region. So we look to develop our growth plans.
In the mid Atlantic market.
Lastly, as I stated earlier, we will continue to strategically reinvest or productivity savings back into the business to support future growth with that I'll turn it over the call to RJ who'll provide more details on our recent initiatives.
Thanks, Eric and good afternoon, everyone.
We were very pleased with our broad based comp in margin results in the third quarter.
Our customer value proposition remains strong and we continue to make it even stronger.
Our philosophy is to always reinvest in our business in comp growth strategies.
These efforts have and will continue to support a current and long term growth objectives.
I will start by reiterating that opportunistic buying remain strong in the third quarter.
<unk> tend to stick products, which represent about half of our assortment delivered deep value and drive the treasure Hunt shopping experience.
Stand out results in our nosh in wine categories represent the impact of delivering brand name products to our customers at unbeatable values.
We've continued to enhance or buying efforts. This year were they more specialized approach with some buyers now focused solely on either opportunistic or everyday products in their respective categories.
This has led to improvements in both opportunistic and everyday sourcing as well as improvements in category management.
Our planning team, which provides inventory management and analytical expertise is another critical factor to our continued success across all categories.
Let me talk next about how we improved the ways, we support I chose in delivering a while shopping experience.
We continue to enhance the tools, we provide iOS, which helps them operate more efficiently, while also making smarter decisions to drive their business.
As you May recall I also like to pop approximately 75% of their assortment and have autonomy to create unique merchandising displays highlighting their while deals.
This strengthens the local feel of each store.
A real time order guide is one example of a critical business tool that we continue to invest them.
It is a custom developed proprietary system that optimally manages the flow of products between the warehouses and stores.
Recent enhancements to this ordering platform provide greater visibility to product availability product information and relevant selling statistics for smarter and faster decision making.
Hi, investing in ordering technology and supply chain improvements, we can better equipped the I chose to optimize their inventory, while continuing to strengthen the while shopping experience for their customers.
Our third comp growth strategy is to increase customer awareness and engagement through local in store level marketing.
We continue to find more relevant and engaging ways to communicate with consumers.
We expanded our digital marketing efforts, leveraging social media email streaming radio connected TV and third party media distribution channels.
We have a highly engaged in growing email subscriber base that receives our daily while alerts and regular digital ads.
Our digital marketing efforts allow us to dynamically highlight the best products in the customers local store.
This takes the treasure hunt experienced beyond the four walls of our stores communicating the wow externally to our customers.
In the future, we see an opportunity to further personalize, our digital communications to increase engagement with existing customers and to introduce new caused customers to our stores.
We are committed to reinvesting productivity gains back into sourcing and distribution iOS support and marketing initiatives.
This is part of our ongoing effort to further strengthen our compelling value proposition.
One example of this is a network optimization study that we have recently begun.
We're partnering with an outside firm to assist in the long term strategic evaluation of our supply chain network, which will help us plan for the next decade, a successful growth.
Now I'll turn it over to Mcgregor.
Thanks, RJ and good afternoon, everyone.
Hi, I'm extremely pleased to see the continued progress, we're making across our retail expansion strategy.
During third quarter, we opened eight new stores and closed one at the end of its lease term, bringing our total to 24 openings year to date and 337 stores in total at the end of the third quarter.
As Eric said, we're pleased with the performance across our new store base as we maintain a balanced approach to real estate expansion.
Our business model is prudent be highly portable and we've seen our stores to exceed across a variety of geographies urban SBS and income levels performance at our recently opened stores demonstrates this wide demographic appeal and continued consumer shift towards value.
We're very focused on continuing to balance store openings in existing mature markets, where we are well established and developing markets such as southern California and longer term the mid Atlantic, where we're continuing to build our brand awareness.
I'm pleased to share that we have begun building the corporate structure needed to support our long term growth objectives in the mid Atlantic region to that and we hired another Mayo with a newly created leadership role of executive Vice President of our East region.
Adam brings 23 years of experience in the retail club channel and will lead our efforts to expand our existing mid Atlantic store base and future expansion.
We look forward to leveraging her operational and merchandising expertise as we develop our long term plans for this market.
Looking ahead, we expect opening an additional nine stores in fiscal 2019, we also have a high level of visibility into our 2020 lease opportunities and are on track to deliver approximately 10% unit growth with a strong pipeline of future real estate locations.
Before I turn it over to Charles I want to share. An example of how our I O is create a unique community heal and generate awareness within their individual stores as you've heard us to speak about in the past our iOS are constantly finding creative ways to engage with the community whether be true in store events contest or other attention grabbing activity.
This is an important part of building brand awareness at the local level as well as deepening customer engagement, we often like to highlight some of these new and imaginative ideas across our I O community one of the more unconventional examples of this came to US just recently and Samuelson bespoke where a couple.
First met at our local store asked our I O. If they can hold their marriage ceremony and the same I'll, where they first met.
A couple exchange married marriage valves in the Candy I'll know less the store team who came to know the happy newlyweds, we're thrilled to be a part of their special day, the wedding brought new meaning to our campaign tagline falling in love on every aisle and it was picked up in the local papers and on social media.
These types of stories are truly key differentiators that contribute to the success of our business model and a representative of the entrepreneurial spirit of the independent operator community and with that I'll turn it over to Charles.
Thanks, Mac and good afternoon, everyone I will begin with a review of our third quarter financial results followed by an update on our outlook for fiscal 2019 before opening the call for today.
Our third quarter performance reflects continued strength across all of our financial metrics sales for the third quarter increased 13.1% to $652.5 million compared to the same period last year.
This growth was the result of a 5.8% increase in comparable store sales on top of the 4.2% comp increase in the prior year period as well as the sales contribution from 30 net new stores opened over the past 12 months.
The growth in comparable store sales was broad based and driven by contributions from both customer traffic and average ticket with strong performance across store regions vintages.
We opened eight new stores during the quarter with the balance of openings immature and developing markets is Mcgregor stated we <unk>. We remain very pleased with the performance of our recent vintages, along with the productivity of our entire store base.
With respect to margin performance third quarter gross margin dollars rose to $201.1 million, a 14.5% increase compared to the third quarter fiscal 2018.
Gross margin rate expanded 40 basis points to 30.8% inline with our expectations. This increase was the result, the strong opportunistic purchasing as well as increased efficiencies and product delivery and inventory management.
Yes, Genie expense increased 15.1% to $161 million largely attributable to increased commissions, resulting from gross margin dollar growth due to new unit expansion and strong comparable store performance.
As a reminder, our business has a highly variable cost structure due to our gross profit share with iOS, which flexes with sales and margin rate performance.
Other factors impacting third quarter SGN, a included incremental occupancy costs associated with new store growth and the impact of $1.8 million, a public company costs, which we did not incur last year.
In addition, third quarter S. unit growth also includes roughly $600000 of secondary offering costs that were expense because the company did not raise primary proceeds and the October threerd stock offering.
In total however, SGN expenses were lower than anticipated due to timing shifts into the fourth quarter.
Stock based compensation expense for the third quarter was $2.9 million roughly half of this reflects ongoing expense associated with stock options and restricted stock units granted at the IPO.
The other half was due to vesting of time based stock options associated with our October 2014 equity plan.
Versus the third quarter last year interest expense decreased by approximately $6 million, 45.7% to $7.3 million as result of our IPO related debt pay down and subsequent repricing.
We recorded income tax expense of $3.7 million, representing an effective tax rate, 23% and the quarter.
The lower tax rate reflects a tax benefit associated with the exercise an employee options during the quarter.
GAAP net income for the quarter was $12.4 million or 13 cents per diluted share compared to net income of $7.7 million or 11 cents per diluted share in the prior year.
In order to better illustrate the underlying performance of the business. We also reported adjusted EBITDA and adjusted net income, which excludes certain expenses, including those related to our IPO secondary offering and prior financing transactions.
In the third quarter $600000 SGN expense related to our secondary stock offering was added back to adjusted EBITDA and adjusted net income.
No. However that we do not add back ongoing public company costs, such as the $1.8 million and expense we incurred in the third quarter.
A reconciliation of our adjusted EBITDA and adjusted net income to GAAP results can be found in our earnings release and 10-Q.
For the quarter adjusted EBITDA grew 13.2% to $44.2 million from $39 million last year.
This result exceeded our preliminary estimate of $42 million to $43 million largely due to the expense timing shifts I mentioned.
Adjusted net income increased 58.8% to $20.6 million or 22 cents per diluted share based on an average of 93.2 million diluted shares in the quarter.
This compares to $13 million or 19 cents per diluted share on 68.5 million diluted shares in the prior year.
Now, let's turn to our balance sheet as of quarter end, we had cash cash equivalents a $44 million.
Inventory was $206.4 million as compared to $185.6 million in the same period last year.
As a reminder, due to the opportunistic nature of our business inventory levels can and will fluctuate from quarter to quarter as we take advantage of buying opportunities that become available.
Over the long term, we expect working capital to grow roughly in line with sales.
Regarding our capital structure, we ended the third quarter with $475 million in gross debt, reflecting a 2.6 times adjusted EBITDA net leverage ratio.
Subsequent to quarter end, we prepaid $15 million on a first lien term loan in late October .
Now let me move on to guidance, we've raised our full year 2019 earnings guidance to account for a strong year to date performance through the third quarter and our expectations for the balance of the year.
We now expect net sales for fiscal 2019 to be slightly above $2.55 billion.
This assumes comparable store sales growth of approximately 4.9% for the full year and the addition of 33, new stores and full year 2018, along with three closures, resulting in 300 and fit 46 stores at year end.
We continue to expect our Q4 gross margin rate will increase over last year consistent with a year to date gross margin improvement we delivered.
Keep in mind that fourth quarter gross margin rates for typically lower than other quarters due to the impact of holiday product and mix.
With regard to ask DNA, we expect to see accelerated as gene a growth in the fourth quarter driven by number one ramping public company costs, including cost to comply with Sarbanes Oxley incremental accounting and legal expense and directors and officers insurance cost.
Number two shifts in expense timing from prior quarters into Q4, including self insurance and personnel related costs and number three various business and technology reinvestments to support our long term growth strategies.
With respect to adjusted EBITDA, we're increasing our full year guidance to be in a range of 167 million to $168 million up from our previous range of 162 million to $165.5 million.
We've assumed a tax rate of approximately 28% and approximately 94.5 million weighted average fully diluted shares outstanding in the fourth quarter.
Note that the share count excludes the potential future impact a 5.8 million unvested performance options associated with pre IPO grants.
Accordingly, we are raising our full year guidance for adjusted earnings per diluted share, which we now expect will be 73 to 74 cents compared to 68 to 71 cents previously.
Finally capital expenditures net of approximately $10 million in landlord allowances are now expected to be between 90 $95 million for the full year, which reflects the additional new store in the fourth quarter and the timing of first quarter openings.
In summary, we remain very pleased with a broad based strength in our business is we continued to execute on our long term growth strategies now we'd like to open the line for questions.
Thank you at this time will be conducting a question answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone would indicate your line is into question Q. As a reminder, please limit yourselves to one question in order to allow Todd as much time as possible to ask.
To answer questions you May press star to if you'd like to remove your questions from the Q.
Participants using speaker equipment, it may be necessary to pick up your handset before pressing in the Sarkies one moment, please while we pull for questions.
Your first question comes from the line of a Randy Konik with Jefferies. Please proceed with your question.
Yeah. Thanks, Thanks, a lot a good afternoon guys. I guess my question first question would be for RJ, you know the theme of the companies to be one of a focus on continuous improvement.
And you gave us some you give some broad strokes about the independent operator dashboard and the enhancements you kind of made there maybe give us some perspective on where thats, where the business come from.
A few years or go how the das dashboard has improved productivity in a measured way and then how do we think about.
Areas of focus for the dashboard to continue to enhance productivity across the ordering process and or I guess supply chain.
Over the next few years going forward. Thanks.
Sure Hi, Randy yes, so.
Let me, let me cover a couple of things on that question.
First from a systems investment standpoint, we've really made a significant effort I will say over the past six years or so to enhance some of our core operating systems.
A lot of this is custom developed specific to our business and the way that we operate.
We talked about things like the real time, Warner Guy mentioned that in my comments related to that distribution system.
The order Guy and that is used for direct store delivery products. You. All does all of those custom Bill and then in addition to that number of what we believed to be best in class Third party software platforms that have helped us bring better business intelligence to the company, we have a new WMS system relatively new WMS list.
I'm over the past several years a platform through which we communicate.
Better communicate with with operators and managed processes internally and there are several others there as well.
Typically too when you talk about the operator dashboard I would point to a two specific things. One is the real time order guide again that is the primary tool for transferring products from the warehouse to the stores. The vast majority of which has pulled into the stores by the operators they're making.
Decisions.
Which really creates the localized assortment that we enjoy specific to that market and those customers and.
How the operator can best provides does products to their customers and within that tool. There is a lot of information and increasingly more information and tools to manage that as best we can so giving them the best information, making it as efficient as possible and then allowing them to order.
For the right products in the right quantities again for there for their local customer and their needs, which are the way they have been taken merchandise within the store. So a lot of information and and it's a tool to transfer product, but it's also a dashboard about half that information to help them make smarter decisions. We also provide.
On the business intelligence side.
Couple of dashboards.
Really several that one help them manage their business.
As far as comp Cosan margin goes and customer service and a brings all the operating information.
Benchmark information.
Very detailed level to help them understand where their business is trending from the things that they might do to capture opportunities.
And.
And those have proven to be very helpful again for them and the decision making specific to their store. So those are just some examples of recent investments will continue to enhance those specific systems and then you know as we talk about continue to look for new systems and tools that we can bring to the business to improve the way that we do thanks.
Thanks, and then just one quick follow up maybe perhaps for Eric or Mac.
You think about the dual prongs of marketing around awareness and engagement.
And you think about how you grew a awareness outside of California in the other states.
And then ill then engagement how do you guys. How do you guys think about distorting your marketing messaging, a bargain Bliss and then specifics.
Around engagement persons awareness as you think about growing into new stage, just kind of getting a perspective of what you didnt have passed it kind of built into the new states to give us your perspective on how you're thinking about approaching marketing.
Going into additional states going forward be helpful. Thanks.
Yeah, Hey, Randy Nice to talk to you know we didn't market a whole lot in early years.
At grocery I'll, let it was more experience.
Coming into the store and finding the bargains, we have a fundamental belief that if we can tell that story and continue to repeat that story, yeah. We're going to win we know the values are unbeatable, yeah, we measure them you guys. It measured.
So what you really have now is more the methodology that we're going to tell that story and so you know years and years ago, It was TV and radio and quite.
Yeah literally print ads every week for retailers in today, those tools that were using or just a little bit more modern.
We're pushing down the continuum of try to get information, that's most relevant to the consumer that's individually.
To get that message and then I'd say the second piece is the operators are getting a lot more sophisticated at local marketing so they're picking up on the queues and their neighborhoods in their communities.
They're responding directly to customers in front of them in their stores and they are using the order guide the merchandising and they're using their community involvement to go very very deep in community and I would say that ought to continue since Mac and I've been at grocery outlet, we've just gotten better and better systematically every year at using the.
Tools and developing.
A little deeper understanding of how the consumer wants to to talk to us and be talk too. So.
That that hopefully answers your question.
Your next question comes from line of Robby Ohmes with Bank of America. Please proceed with your question.
Hey, guys. Thanks for taking my question I'm going to make it to really brief just.
Hi, I'm like on the long term comp guidance of 1% to 3%, you're obviously doing much better than that can you remind us why you can't keep doing much better than one to three.
Going forward and then similarly.
Your gross margin is coming in as you expected, but up nicely year over year can you remind us why you couldn't continue to grow the gross margin going forward. Thanks.
Hey, Robbie its Charles let me tackle the comp question and I'll turn it over that are just talked about gross margin.
But with respect to the comp sales and again as we've talked about two really good about the health of the business and the broad based strength that we've seen over.
Over the course of the year, if you can see in our implied guidance.
The Q4 were guiding.
In essence above the high end of our long term copper answered that the 1% to 3% you referenced.
We do think about that 1% to 3% is really the essence of the way that we we manage and plan the business over the long term workforce happy when we when we outperform that but we think that the discipline of sticking to that 1% to 3% range.
And the way the we managed behind that is really key reason behind the consistency the financials that with delivered over time.
Let me turn into Argenta talk about margins sure. Yes. So on margin we've been we've been very pleased with the performance that we've seen this year I would point to.
It being the results of of a number of improvements.
On the purchasing side a lot of work done there to negotiate cost on the everyday side of the business I'm always point to strength of opportunistic in deal flow and that really comes from the strong partnerships, we have with our suppliers always working to be better partners to them and.
Strengthening those relationships further we see nice productivity enhancements from the supply chain standpoint, and then there is that there's a lot that we've done that we've seen the benefit of this year.
By way of inventory management, and that that specific allocations and distribution logic and again the systems that we used to manage that so I'm really really pleased with the results that we've seen there you know in terms of.
How we think about margin looking forward as we've said I'm expecting that to be consistent with the levels that we've delivered this year.
We're also is the balance of delivering first and foremost value to the customer customer excitement in the while shopping experience and then.
Maintaining a healthy margin as well and so we feel like we have the right balance again pleased with the improvements that we've seen this year, but expect that margin to be pretty stable looking forward.
Your next question comes from one of the Simeon Gutman with Morgan Stanley . Please proceed with your question.
Hi, good afternoon, everyone.
My question somewhat of a follow up to the prior couple.
You know you have all this extra topline growth relative to your plan and gross margin as was mentioned is doing better. So what I guess, where are you investing all these incremental gross profit dollars. I know you gave us some examples but thinking on a near term basis, where you're able to spend that isn't advertising.
Can you point to some other items and then just just to clarify it it sounds like there's going to be.
Semester DNA.
Moving to the fourth quarter. It seems like the math would be about a 100 basis points. Some de leveraging Q4 to get to their your EBITDA guide to confirm that thanks.
Yeah, I mean, it's hard to ill take the first part of your question then maybe Charles will want to cover the second part.
In terms of.
Reinvestment opportunities I'd say, there's a there's a healthy list of things that we continue to reinvest in to support long term growth, which is which is how we oriented in the way that we think about.
How we manage our investment dollars I mentioned a few in my comments, you know maybe a little bit more color on some of those because I think they are good examples.
One being this more recent specialization around opportunistic in everyday and think of that as both the current and future investment in people process systems and other related expenses to manage these different has is the assortment. So that's a that's a new one from the.
Getting of this year and.
That orientation and investment that goes along with it will will carry forward.
Theres a lot on the system side real time order Guy distribution system as we look forward there'll be other enhancements to follow.
Those are investments again, both current and future in the development of course, but.
Also oftentimes process sees.
In ways that we operate the business to better support growth on the topline whether that supply chain or or purchasing again inventory management or some other part of the business and so all those things.
Hi, together the network optimization study that I mentioned, you know again. Another example that one is looking well out into the future.
At infrastructure and really everything around supply chain, how we can best support future growth yeah. As we look out over the next 510 15 20 plus years since so.
There's a there's a longer list of other things that we continue to invest in and we we see the results in years like this one on both topline and from a margin standpoint.
I mean, its Charleston, with respect to as we think about EBITDA margins for the fourth quarter. So again, just a few things to.
To keep in mind is you're looking sequentially a number one our fourth quarter gross margins are generally lower.
Over the course of the year due to the impact of holiday product mix.
So again, we're seeing nice.
Year to date gross margin improvement of about 32 bits and we would expect to see that that carry forward into the ended the fourth quarter. So the real key is SGN, a and again as we think about changes relative to last year. The key factors are the impact the public company cost, which is really ramping.
We continue to the think the $8 million that Weve circle that this annualized public company cost is accurate, but we are seeing heavier we expect to see heavier spend in the fourth quarter of this year continuing into the first half of 2020, largely as a result of.
Being right in the sick of Sox implementation over that time period.
Secondly, as we talked about the timing shifts in ethylene expense out of Q2 in Q3.
Into Q4 has an impact that has to do with things such as self insurance expenses was other personnel related cost.
And then lastly, the the reinvestment that RJ spoke to you. So in total those are the key drivers I think the the number that you referenced is probably a little bit high but those are the factors.
Thank you.
Your next question.
Comes from line of Oliver Chen with Cowen and company. Please proceed with your question.
Hi, Thank you very much congrats regarding supply chain, what do you see on the road ahead for the major needs a near and longer term and one of the things that are survey.
Really pointed to was a big opportunity and the mobile apps slush loyalty.
Point of view in terms of customers wanting that as well as the opportunity to to employ a lot of data and analytics and machine learning around.
Customers using that so would love your thoughts on both thank you.
Sure Hi, Oliver.
So.
With regards to supply chain I think we do a very nice job moving product.
Into and into our system and through the through the stores. There's there's always room to improve and I think we've done a nice job of ticking through some of those improvements this year.
I mentioned, some productivity enhancements and other changes that we've made to.
Improve the flow of product in the most efficient way possible. The did the study that I mentioned is the is more of a further look out when we get to higher store accounts and expand beyond geographies and.
Really covers all aspects of supply chain from transportation inbound outbound capacity planning the systems that we deploy to manage that.
And.
You know everything everything for how products move through the system and so.
That's just the way that we managed the business nothing immediate or specifically needed there other than taking a look at how to support that longer term growth expectation in regards to marketing and digital and personalization.
Again this is something that we continue to look at for the future. We we don't have a loyalty program today.
We think theres an opportunity to be more specific we love.
The improvements that we've made from a digital standpoint through social media.
And we're active in a number of platforms there increasingly through streaming radio and connected TV. We think we've seen a nice nice lift in both awareness in more newer markets, but then also engagement and trips in more mature markets and and leveraging the database that we have that a store in items specific we.
It's very compelling in a way that brings those deals outside of the four wall for the stores. We think that does goes a long way to driving trips and then of course, they find many great deals around that which leads to basket.
We're going to spend a lot more time over the next year. So I'm looking at the opportunity from a personalization standpoint, we think near to the extent that that proves favorable will then get to that next level of communication being more specific to more specific to the customer not just at the store an item level.
Thank you very helpful Best regards happy holidays as well.
Thank you too.
Your next question comes from mine of Michael Lasser with you've yes. Please proceed with your question.
Good evening. Thanks, a lot for taking my question I have three questions actually first on your comp guidance for the fourth quarter. It implies a 3.9% comp which is very specific and would represent.
Your lowest two and three years stacks of the year I was there anything that's going on that would drive to slow down.
I mean, two more quick ones.
Hey, Michael its Charles just on the comp guidance no. It really has to do with the the way that we manage the business for the long term I wouldn't say, there's anything specific to the fourth quarter.
But we just think this is the prudent way to think about the business.
Happy that the business is at this point firing on virtually all cylinders through the through the third quarter.
But knowing what we know now that's that's the way, we we think about fourth quarter.
In Charles My My other question is even if we take out the $1.8 million a public company costs in the third quarter and given the fact that there was some.
<unk> expenses that flowed out of Threeq, you had a four Q. It looks like there's still would have been some de leverage on the extraordinary expense side, despite a very healthy comp.
What comp do you think you need to lever the <unk> the operating expenses of the business at this point.
Yeah, we think about a two comp leveraging our fixed costs.
Okay and then my last question is are there was a mention in the transcript that youve reorganized some of the the buying positions such that the buyers are solely focused on opportunistic buys he is that allowing you to get better opportunistic buys and also help help the gross margin and is it also.
A recognition that the business is very dependent on these really good opportunistic buys in order to drive the types of the comps that have been produced recently.
Yeah, Yeah, I would say the reorganization there was to manage the complete assortment better. So you know nothing so specific to opportunistic or to the everyday side <unk>. Prior within these departments that have recently specialized.
A buyer was managing both sides of the assortment within the categories that he or she managed and so bye bye specializing you. We think we can manage both for those that are focused on that both the everyday everyday side of the business better because it is a different process. It's a different type of released.
Should ship, it's different cadence on a different approach to two optimization and managing categories.
So we think we get benefits there and then also on the opportunistic side again unique in different in the way that you work and partner with suppliers and manage items and think about that and.
All those are both of those skews me of course tied together through how we manage inventory from an open to buy standpoint, and then how we manage health of inventory within each specific category.
So that's the that's the thinking behind it I would describe it as.
This is just the most current state or progress as it regards as it relates to specialization we.
Higher example was when we introduced the planning function back in 2013.
We've seen we've seen great benefit from that in a lot of different areas and.
Freed up time for people to do the things that they do best and this is really just another.
Lately different iteration of that and we think most of that benefit we've seen some this year, but really most of that benefit is in front of us still.
Thank you very much.
Your next question comes from line of.
Karen short with Barclays. Please proceed with your question.
Hi, Thanks.
A couple of questions.
Give any color on the Kate.
In the quarter and then.
On inflation.
Hey, Karen it's Charles we don't speak specifically to results within the quarter.
As it relates to inflation.
We continue to see a inflation throughout the year being a modest tailwind. We would expect is that would continue.
And then just a reminder, relative to others.
It's a more muted impact for for our business as a result of both the opportunistic buying model.
As well is the gross profit share was operator, so it has a as more muted impact on both.
But the way up in the way down.
And then in terms of.
Just a.
Little bit more on the buyers I just wanted to clarify.
You're not adding another buyer for each category correct, because it sounded like you were saying that.
<unk>.
Second one for.
<unk>.
I understand.
No no I mean, I'm, describing just the team in roles and responsibilities there and buyers are managing multiple categories.
Okay and then.
Last question just in terms of.
Good.
Maybe can you talk a little bit.
Yeah.
Yes.
Yes.
Okay.
Yeah, So I would say.
Take care and this is Eric I would say just relative to operator health and our culture. This is how we get out and talk to operators. So once or twice a year, we're with them I would say this year. It was a very positive engagement. They were engaged you were very curious I'm half. The meeting is dedicated information sharing in half is dedicated to sort.
Acuity, we asked them to help communicate their best practices that we think are fundamentally.
Changing their business for the good ensure those with other operators in the room.
Generally the operators were very very open and Im curious and ask lots of good questions.
We use these events, we pre survey them they help us sort of modifier strategy. We seek the feedback on things that are working things that aren't working we confront the things that are working and we can sort us slightly course correct.
I would say on their mind. This year, you know, they're fairly here and now we'll take questions I'm a lot about product.
A lot about supply logistics.
A lot about the tools rollout that we've been on for last 18 months two years. So I would say those are probably the the the lions share of the questions, but its just a it's a great way for us to be out with our larger team in front of the operators engaging and they're really seeing.
First hand with southern mine.
Your next question comes from line of Paul Trussell with Deutsche Bank. Please proceed with your question.
Hey, good afternoon that on a quarter.
Just a few questions on the real estate size.
First maybe just talk a little bit more about.
What you're seeing in terms of new store productivity.
Both in California and into other states and markets you've expanded into.
Also you touched on the higher.
For the repeat eastern region, maybe just help us to the extent you can now.
How should we should be thinking about the growth plans for the mid Atlantic.
And what's your expectations are for that area. Thanks.
Hey, Paul This is Charles let me start out with some of the specifics around new store performance now I'll turn it over to Max to talk about our regional growth plans.
But I think with respect to new stores I'm very pleased with the performance, we're seeing from new sites. They continue to perform in line with our underwriting expectations.
We track each new store opening closely but I think it's worth reiterating that our stores do have a meaningful sales ramp over the course of their first four years cumulatively, that's about 25% topline growth. So we really take the long view and we we also track the.
The ramp of those vintages.
Make sure that they're in line to hit their maturity sales targets. So we feel good those about new sites that are opening and the ramp of recent vintages.
Is it relates to performance across regions.
I think the call out there is that we use an underwriting we use a blended underwriting model knowing that we're going to have the mix.
Stores, a newer markets along with stores and more mature markets that have higher levels of brand awareness. So what were seen as expected would be that sales volumes typically track that level of brand awareness and we're seeing good progress across all regions with with all regions.
I reporting good results and a third quarter.
Hi, Paul its Mcgregor.
Back to growth plans and newer geographies I think very consistent with what we have said in the past and that is that we see both the opportunity to continue to infill in core mature markets. And then also remain very focused on building out the southern California market, where again, we think we're about halfway there.
And then and then really turning our attention too.
Two opening more stores in the mid Atlantic and certainly hiring Heather is a great first step in that direction.
We fully intend to her to continuing to build the infrastructure to support a higher growth rate as time goes on but.
You know again not to repeat myself, but we really believe in sort of this crawl walk run approach.
He is up in a few stores in 2020 in that region and they continue to build from there. So I think over time certainly next three to five years, you'll continue to see a healthy number of stores opening in both core mature markets in southern California and also in the mid Atlantic.
Thanks for the color there just wasn't really quick follow up just on the balance sheet.
You mentioned in the release that you.
A pay down some of the first lien term low maybe just remind us of cut of.
Which targets and timeline to get there.
Sure again this is Charles.
I would say, we've not yet established a formal long term leverage target but of course as a result, the IPO, we were able to cut our annualized debt service in half, which which is freed up some cash that allowed us to make that 15 million dollar principal payment in late October , but I'd say in terms of price.
I already is our first priority for cash is always to invest in growth.
And then once we've done that.
We can use cash <expletive> to further de lever.
Again had an established a long term target.
Over the near term, we'd expect to use cash in excess of growth capital to de lever.
Okay.
Your next question comes from the draw the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.
Hi, guys two things, let me start supply chain right. So the Ontario facility, one doesn't begin to make an impact.
I assume it's not material enough to move the gross margin dial.
Beyond that what are you still need to do on the West coast.
Hi, John Yes, Aereo I'm pleased with.
That facility as it's been ramping up here.
Still we're still flowing product through there and starting distribute starting to distribute more locally then then up from Adesto. So.
But I understand there's there are certainly benefit to the business.
But there's also some offsets that we're managing as well and the business does become more more complex, but we love it for.
The better Servicenow provides stores in southern California markets get the gift product to them sooner.
And then of course local free will enjoy that benefit as well.
So with that you know you talk about the West coast market. We're as that continues to ramp we've got our two primary facilities that in servicing Southern California. We've got two primary facilities in the nor Cal market and then two up in the northwest we feel very well covered.
For the regions and as we continue opened stores in both in fill in new markets. We think we're well positioned from a supply chain standpoint.
Your next question comes from Atlanta, Chris Protocol with Goldman Sachs. Please proceed with your question.
Good evening guys. Thanks, so much for taking my questions. Just a couple on my end, maybe as a follow up the Paul's question earlier.
Financial leverage probably below where are you anticipated at this point any updated thoughts on share repurchase or dividend and then along that same line would you consider accelerating a store growth what would be maybe a prohibiting factor from doing that and any big capital capital expenditures that we need to be aware of on the horizon.
Hi, Chris its Mcgregor I'll start with the latter part of your question No I think we continue to feel.
Comfortable with 10% unit growth annually I think consistent with what Charles said relative to pop we think it's the right way to think about it longer term for the business that I'd just reiterate again that.
As the absolute store count number continues to grow each year. It is it's a significant undertaking here from a variety of functional areas to continue to support that level of growth, but we're comfortable at our ability to continue to do that.
And then Chris with respect to fill the numbers again as it relates to share repurchases or or dividends. You know I don't think we're ready at this point to make any comment there.
<unk> near term continuing to focus on investing in the business and then delevering from there I will provide an update.
Likely next year with respect to more specific long term leverage target.
And then as it relates to your next question around Capex again first priority for us is investing in new stores.
We love the return that our new store model offers.
Roughly two thirds of our spend of our Capex spend historically has gone to to fund new stores and then the remaining third we're always looking at reinvesting back into the existing fleet.
That includes both sales and margin driving initiatives as well as just the regular maintenance cycle around the store upgrades and repairs and then in addition to that comprising that remaining one third would be everything that we do from a distribution I see systems in.
Corporate side to.
Constantly be reinvesting back into the business.
To set ourselves up for long term success.
Great. Thanks, and then I know my quarter early but as you look out. The 2020, you know and then think about guidance any reason that guidance would deviate either to the upside or downside from the long term algorithm.
Are you all have laid out.
Well I would say we feel very good about where we are as we think about the three parallel pipelines and our business number one product number two real estate and number three new iOS.
All look healthy so we feel great about that.
We will be anniversary and strong results next year, but with respect to our long term growth algorithm will continue to feel like that is.
That's right, where we want to be in that's consistent with the way that we manage the business.
And so our next call will provide more fulsome guidance with respect to 2020.
Your final question comes from mine of Joseph Feldman with Telsey Advisory Group. Please proceed with your question.
Hi, guys. Thanks for taking my question wanted to ask about.
The Io pipeline, maybe just the people and the ability to get quality people and talented ones I know in your core markets you seem to have very good depth, but the ability to get them to move to new markets like southern California, or even the mid Atlantic can you talk about that.
Yes, Hey, Joe Eric I think best practice for Us and we tried it a lot of different ways over the years as you might guess is to get recruiting from market in market.
In local carries a heavy weight with us. So you know take the southern California market, where we operate 70 plus stores, we've gone into that market, where the recruiting team a training team and resources in market to make sure that.
We can find people that understand the local markets or get a live not have to relocate that's not to say we haven't tried it other ways. What that's generally the way, we try and do it and think about it strength. The program remains very very strong I'd say, a healthy mix of people coming from outside retailers and you can name the retailers in.
A sort of the suit retail business, we're getting all of them a lot of knocking on the door and then the other balances coming from internal candidates take a little bit longer to get up to speed, but we're finding a lot of success in both sides and then we've built a you're kind of a team here from sort of start to finish.
So from the time to enter the program to I'm getting assessed to putting together a specific training program to mentor him through training to deploying them to stores to handing them off to the DSMB. There's a touch point along the way that is really driven to to get them up to speed as quickly as possible and get them to sort of that.
Full independent operator status.
Great and just one follow up.
I know you you guys said you hired the new E V. P have their Mayo and had 23 year background I guess in real estate just any more color you can share about what maybe where she came from what would.
Has always been in that market, presumably she has but you know other retailers she's worked for.
Yes, so Walmart and Sams she has a background in real estate, but really she's.
Or specialty is in merchandising and operations started in club stores that are early early days.
Has operated regions in the mid Atlantic has operated on the West Coast.
Just a great great executive all around so we're really excited she is brand new started October 7th. So she is in a sort of a three to four month immersion getting to know grocery outlet leadership practices.
Really getting to know the iOS across the company. So we couldn't be more excited to see sort of the progress will start making 2020.
Ladies and gentlemen, we have reached the end of the question answer session and I would like to turn the call back to Eric Lindenberg for closing remarks.
Don't have a lot to say closing remarks, just want to say thanks for being on the call with us.
And I know, we have some follow up to do each one of you, but I appreciate all your questions. Thanks for being on and we'll talk you soon.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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