Q4 2019 Earnings Call
[music].
Greetings and welcome to grocery outlets fourth quarter 2019 earnings results Conference call.
At this time, all participants are in listen only mode.
Yes, you didn't answer session will follow the formal presentation.
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As a reminder of this conference is being recorded.
It's now my pleasure to introduce your host Joseph Palin Vice President of Investor Relations. Thank you you may now be again. Thank you. Good afternoon, everyone and thank you for joining us on todays call to discuss grocery outlets fourth quarter in fiscal 2019 results participants on this call will make forward looking statements, which are subject to various risks.
Uncertainties that could cause our actual results to differ materially from these statements.
Any such items, including our outlook for fiscal 2020 and future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act that 1995.
A description of these factors can be found in this afternoon's press releases as well as in our latest prospectus Embryotic reports, we file with the FCC.
All of which they may be found on our website investors that gross <unk> dot com or SCC dot Gov.
We undertake no obligation to revise or update any forward looking statements or information.
Right I recall, we may reference certain non-GAAP financial information, including adjusted items.
So you mentioned the GAAP to non-GAAP measures as was the description limitations in rationale for using each measure maybe found in the supplemental financial tables included in a separate press release ended our FCC filings.
Reference non-GAAP measures and some of our financial discussion because we believe they are they more accurate accurately represent the true operational performance and underlying results.
Presenting on today's call will be grocery outlet Chief Executive Officer, Eric Lindbergh.
President R.J.C. and Chief Financial Officer, Charles Blocker, following our prepared remarks, well open the call for questions.
I'll turn it over to Eric.
Thank you Joe Good afternoon, everyone hope that you're well unsafe.
Well, let you know that as part of our social distancing efforts, Joe Charles our Jay and I are all in separate locations handling this call in the queue in a remotely.
Bear with US is sound quality and coordination, maybe a little less than optimal.
In light of the kroner buyers pandemic current environment the focus of our call today will be on how we are independent operators are supporting customers through this challenging an uncertain time.
First safety remains our number one priority we continue to make numerous precautions with health and safety of mine, we are deemed essential businesses and communities in states that have issued shelter in place mandates in stores remain open to serve our customers are iOS and their staff on the front lines I want them to know how much we value their incredible effort.
And helping to communities they serve.
Ongoing safety and health of our corporate employees.
Those their staff, our vendor partners and our customers remains our top priority, we're taking precautions to ensure their wellbeing.
In that effort, we've been active various safety measures, including the cancellation of our annual supplier meeting the elimination of non essential business travel moving all employees, who are able to to work from home and maintaining work environment. According to the CDC guidelines for all those employees still needed in our offices.
We will continue to stay vigilant on these activities. According to the guidance from the World Health organization, the CDC and local health organizations for as long as absolutely necessary.
You are significantly higher customer demand are buying organization supply chain teams and iows are working around the clock to keep shelf stock for our customers.
Our purchasing team is intently focused on working with our vendor partners to replenish the high demand products for our stores.
We had been working very closely with suppliers to purchase these basic needs such as water paper supplies rice and beans, and canned goods. We are amongst many others experiencing some delay for those items broadly speaking we continue to have good access to product in our purchasing aggressively to keep our warehouses fall.
We are incredibly grateful for the support we've been seeing from our vendors as well as the diligence of our buying team in this effort.
It's a real testament to the value of the long standing relationships, we have other partners.
As for the supply chain, we're working hard to get products into stores as quickly as possible. We've made several adjustments in the past week based on sudden spikes in demand that we've seen.
What are recognized everyone in our logistics network for the dedication to supporting stores and customers that includes or distribution center employees or transportation fleet drivers third party vendors are DST suppliers and their drivers all of them are working nonstop to keep goods on the shelves.
Our iOS and their employees working extremely hard as well to support their local communities with essential products and are continuously looking for sercel ways to handle the high volume of customers and business their efforts truly exemplify the entrepreneurship and the community first trades. This company was founded upon.
We are so proud to see their commitment to customers and know that their communities are extremely grateful to have them. There. We realized that these are very challenging times that I just want to say thank you to them for their tireless efforts during times like these we are reminded of the critical role grocery outlet plays and so many local communities our business model is particularly well.
Suited to serve them due to our value orientation flexibility of our purchasing model. The many benefits of a local independent operator operating the store.
Our dedicated a nimble corporate team is working together their community of iOS to find solutions is unpredictable as a future environment, maybe we think that we're well positioned to continue to serve these communities and deliver on our mission touching lives for the better.
While we are very much focused today on the here and now we're also not taking your eye off the long term objectives in that regard I wanted to share that during the fourth quarter. We expanded our board of directors with the addition of two highly experienced independent members Jeb Bachmann brings a wealth of experience and audit and risk management as a tenure.
Executive at Pwc will also serve as chairman of our audit and risk Management Committee.
Mary Kay Haven comes to US with 33 years of experience in global brand management in the food industry, where she successfully led several multi billion dollar divisions at Wrigley following a 27 year career at Kraft foods.
We're already benefiting from their experience and look forward to their contributions as we continue to execute our growth strategies.
I'll now turn the call or the RJ to provide more details on our efforts.
Thank you Eric and good afternoon, everyone.
Let me emphasize our top priority health and safety of the people in our grocery out with family our partner companies in the communities we serve.
We had been working hard to keep people say well adjusting to meet the demands of the current environment.
As Eric mentioned are buying team is working overdrive source more product to meet the increased demand we are experiencing.
On the everyday side, our focus has been on replenishing the need based products that have seen the largest spikes in sales.
As for opportunistic we continued to see healthy deal flow from suppliers.
We will keep a close I however on any impact that higher cramp primary channel sales may have a surplus inventory in the future.
As a reminder, supplied just continuity the positive for our business in the long run.
And this environment represents a high degree of supply chain disruption.
We will continue to lean on our longstanding vendor relationships and work to develop new supplier partners to capture these opportunities as they become available.
Extremely proud of the team's effort in support of buying these past few weeks.
Turning to supply chain, we're working equally hard to get products through the warehouses and into stores.
Our self managed distribution centers third party partners and transportation fleet are working around the clock to make this happen.
We've made a number of adjustments to our real time order guide distribution system and warehouse operations to alleviate the strain on the system. During this extraordinary situation.
Our flexible systems in operations have allowed us to do this quickly.
Although the sudden sales increase has created challenges our team has risen to the occasion to best support our iOS and their customers.
Turning next to the strength of our I O community.
I always or even more important to their communities and each other during difficult times.
Our efforts to support our I O community and the communication and best practice sharing that happens within the network or amplified during this challenging period.
There are countless examples of this over the past two weeks, including real time feedback through our eye care platform.
Social media best practice sharing advice on store Sanitization and tips for how to handle increased customer traffic.
Many of the best operational ideas come from our stores and several of the interest of the adjustments we've made to the business recently have come at their suggestion.
Our partnership with iOS is strong and we're thankful for it.
On the marketing side, we have continued to communicate through digital marketing, including email streaming radio connected TV and third party media distribution channels.
We've adapted these platforms and overall marketing strategy. These past two weeks to focused customer communications on local product availability and the safety precautions, we're taking in our stores.
Our marketing channels are also being utilized for community outreach to reassure customers that we are here to help.
This approach will continue for as long as necessary.
As we work together through this rapidly changing environment. We're currently prioritizing our efforts in resources to address the immediate need the business.
At the same time, we haven't lost sight of our long term strategy.
Our approach has been and we'll continue to be focused on making smart disciplined investments to support our growth.
I would like to conclude by taking this opportunity to add my thanks to our entire team.
It was in their store associates.
As well as our drivers and the folks that are distribution centers for their tireless effort and commitment to our customers.
Now I'll turn the call over to Charles.
Thanks, RJ good afternoon, everyone.
Well our priority is across the business are focused on navigating through the uncertainty created by the current Alaris I'm pleased to report that our strong financial performances continue.
Our liquidity position is strong.
Following my overview of our fourth quarter performance I will share our thoughts on where we stand today and our expectations for the remainder of the here.
We were very pleased with the continued momentum we saw in the fourth quarter and the strength across all of our core financial metrics.
Sales for the fourth quarter increased 12% to $655.5 million compared to the same period last year.
This growth with its all about 5.1 present increase comparable store sales as well so sales contribution from 31 net new stores opened during fiscal 2019.
We opened 10, new stores during the quarter with a balance of openings and mature and developing geographies.
This was one more than we had anticipated as we were able to pull forward one of our plan 2020 opening ended the fourth quarter.
Fourth quarter gross profit increased 13.7% to $200.3 million compared to fourth quarter fiscal 2018.
Our gross margin rate expanded 45 basis points to 30.6% inline with expectations.
Consistent with trends through the third quarter. This increase was the result of strong opportunistic purchasing as well as increased efficiencies and product delivery and inventory management.
SGN expense grew 19.3% to $167.9 billion largely attributable to higher commissions, resulting from gross margin dollar growth related the store expansion strong comparable store performance gross margin rate improvement.
Additionally, SGN a increases were impacted by the adoption of S. C. H 42 movies accounting standards, which moved approximately $3.2 million a previous amortization expense into non cash rent.
In addition to roughly $2 million a public company costs in the quarter.
Stock based compensation expense for the fourth quarter was $5.6 million.
Roughly two thirds is related to the final year investing for most time based stock options under our 2014 equity plan with the balance being recurring expense associated with stock options and restricted stock units granted at the IPO.
Persons that fourth quarter last year interest expense decreased 55.2% to $6.7 million as a result of our IPO related debt pay down and subsequent credit agreement repricing.
Due to the tax benefit associated with employee option exercises during the quarter, we recorded a fourth quarter income tax rate of 4.6%.
This drove the full year effective tax rate down to 8.1%.
GAAP net income for the quarter was $9.8 million was 11 cents per diluted share compared to a net loss of $4.6 million or seven cents per diluted share in the prior year.
For the quarter adjusted EBITDA grew 5.6% to $41.5 million $39.3 million last year.
Excluding the impact of public company costs, adjusted EBITDA increased 10.7%.
Adjusted net income increased 67.8% to $19.9 million or 21 cents per diluted share based on an average of 93.1 million diluted shares in the quarter.
This compares to $11.9 million or 17 cents per diluted share on 68.5 million diluted shares in the prior year.
Note that because fourth quarter option exercises resulted in large benefits to our effective tax rate. We've presented adjusted net income based on our tax rate excluding discrete items.
We believe that this more appropriately presents results as it reflects a normalized annual tax rate of approximately 28%.
Turning to our balance sheet at year end, we had cash cash equivalents at $20.1 million.
Inventory was $219.4 million as compared to $198.3 million in the same period last year.
For the year, we generated $132.8 million and operating cash invested $97.2 million in gross capex.
Able to use excess cash generated by the business to make an additional $15 million debt prepayments in the fourth quarter.
Resulting positive net cash flow for 2019 was $7 million.
Regarding our capital structure, we ended the fourth quarter was $460 million and gross debt, reflecting a 2.6 times adjusted EBITDA net leverage ratio.
Now, let me discuss our expectations regarding the current year.
As we are adapting to the current operating environment, our top priorities remain the safety of our customers and their grocery outlet community, while continuing to critical work getting product to the stores and on the shelves for our customers.
While we can't say with certainty how the Corona virus will impact our business, let me share with you what we've seen to date.
The first eight weeks of the quarter comp sales trends remained healthy consistent with our fourth quarter performance.
Beginning in March we saw a customer demand both traffic and ticket begin to build in conjunction with concerns driving the corona buyers as a result comp sales increases have been significant across regions and as we've discussed the entire organizations working hard to satisfy customer demand.
Less than one week remain in our fiscal first quarter, you're currently standing at a quarter. They call. It is in the mid teens.
That said the operating environment is quite fluid and it's impossible to predict the magnitude and duration of the criminal vivus impacts.
Yes, and for how long elevated sales trends might continue as well as a potential impacts demand normalizes.
With this recent uptick in sales, our cash and liquidity position has strengthened.
In addition, late last week purely as some precautionary measure the current uncertainty in the global financial markets and turned down $90 million from our revolving credit facility to further bolstered our balance sheet.
Combined with pre existing cash our current cash balance now stands at over $150 million.
We feel extremely good about our liquidity position given that our credit facility does not mature until 2025 in an office as broad flexibility provided our first lien net debt to adjusted EBITDA leverage ratio based below seven times.
Given the uncertainty surrounding the operating environment, we're not providing formal annual guidance at this time. However, we wanted to share with you how we're managing the business.
With respect to comp sales, while we are currently operating elevated levels continue to believe in our growth algorithm of a 1% to 3% comp range over the long term.
The second unit growth. So far 2020, well had 10 stores opened by the end of this week and if approved sites and signed leases for 2020 openings.
System with our 10% annual unit growth target.
That said, we expect to that 2020 L brands are likely to be negatively impacted by delays in acquiring permits and the availability of construction resources given the growing mandate to shelter in place.
Despite this potential near term disruptions, we continue to search for new sites to build our longer term real estate pipeline.
With respect to gross margin, while we continue to expect stability in margin rates over the long term, we recognize the gross margin could experience short term fluctuations for a variety of reasons.
Regarding expenses recall that our SGN a model is more variable in nature with both topline and margin performance shared with operators Our commission structure.
In addition, we plan to continue doing that in the business in pursuit of our long term growth objectives.
These reasons, we expect SGN a to be stable as a percentage of sales over the long term.
For 2020, specifically, we expect to incur approximately $9 million in public company costs compared to $4.5 million and 29 team. We may also incur unplanned costs relating to the impact the current to buyers.
With respect to adjusted EBITDA, we manage the business for stability EBITDA margin rates over the long term.
Moving further down the TNL.
Some of our recent revolver draw annualized interest expense, it's expected to be slightly below $25 million based on current LIBOR rates.
We continue to expect a normalized tax rate of approximately 28%, which excludes discreet items.
We expect weighted average diluted share count for the year to be approximately 100 million shares. This reflects the impact of 5.8 million performance based stock options related to our 2014 equity plan of which 70% vested concurrent with our February 20, Twond secondary offering will be reflected in our.
First quarter share count.
As it relates to capital spending we continue to prioritize our investments as follows number one opening new stores consistent with a 10% annual unit growth target number two reinvesting in existing fleet of stores and number three investing in supply chain I T and infrastructure to support growth.
Over the long term, we expect the majority of Capex spend will fund new store growth with the balance supporting existing fleet and infrastructure investment.
As we learn more about the cadence of 2020 store openings will provide more color regarding their expectations spending the timing and amount of 2020 capital spend.
In closing and what is proven to be a very volatile operating and financial environment.
Continuing to be pleased with the strength and durability of our business model, our cash flow generation and our liquidity position.
What's even more important it's incredible talent dedication organization in a broader grocery outlet community.
You can't thank them enough for everything they're doing to serve our customers during this challenging period.
Before we begin Q in a let me pass the call back there.
Thank you Charles I'm, just want to wrap up with a few thoughts in an environment like this we really believe that the grocery outlet operating model offers several key advantages.
Number one or flexible purchasing supply chain and merchandising approach allows us to adapt to changing conditions number two our independent operators are deeply connected to their local communities and can adjust to best meet their needs.
Over three because gross profit is shared through our commission model. Our cost structure is largely variable mean, there's greater level of downside protection. The trends were to change and finally number four we generate excess cash and if needed we can modulate our capital spending.
So as a reminder, we're all sitting in different locations today, we're going to move over to the acuity session and just want to apologize in advance if you hear any overlap or delay during the questions I like to open up the line for questions. Thank you.
Thank you we will now be conducting a question and answer session.
If you'd like to ask a question you May press star one on your telephone keypad a confirmation tunnel indicate your line is any question Q.
You May press Star too if you would like to remove your question from the Q.
For a participant shooting speaker equipment, and maybe necessary to pick up your handset before pressing the star key.
First question comes on line of Randy Konik with Jefferies. Please proceed with your question.
Hey, guys.
Thanks for taking my question I wanted to talk about Eric RJ. It sounds like in Charleston sounds like yeah. Good problem the habit drinking through a on a fire hose it sounds like with the Spike in demand you give us some perspective on.
Changes that are occurring on the D.C. side.
And how we should expect.
The mix of opportunistic versus everyday value on mix in the business to kind of Oh change if at all over the the nor the near near term as we kind of gets through this corona Spike. If you will just that's my first question.
Our ugly.
You take the.
The mix part and I'll.
Comment on distribution.
Okay sure So hey, Randy Thanks for the question.
In regards to Mick we have seen biggest demand increases on some of our core categories. Well. These are predominantly yeah, we call everyday Iraqi show, which would of course includes sanitizer. So.
Health products paper pasta beans rights canned food et cetera.
No no different than what others are experiencing so and I said you know many of these are everyday items. So so yes still have some degree of of mix shift here in the short term, but I'll also say that customers that are coming into our stores have also been buying opportunistic opportunistic items in both.
These high demand categories. These categories are not exclusively everyday.
And then of course categories throughout the store the spike in demand that we've seen has been a both in mix of of traffic and basket.
And for customers that are coming in you look at the composition of their basket and overall sales profile, it's pretty broad it's not you know not super concentrated.
I will say angeles everyday items, so Neil mixed in the short term I will simply be the result of where that demand is what it looks like in the weeks ahead.
And then ultimately how we're able to source to replenish to this demand.
And then Eric you want to take that DC, Yeah, Hey, Randy how are Ya. Thanks to the question. We reacted very quickly we started seeing this I'm sort of the beginning of March.
But the teams sort of on a on a heightened alert we were able to make some very quick adjustments in the distribution center relative to the increase in volume is.
Really unlike anything we've ever seen obviously, we're not able to keep up with all of the holes in the stores like every other retailer in the consumable business. We've got holes in the stores. Unfortunately, but we came in with a really heavy are healthy inventory position, we were or you know both its.
Sure level in D.C., so that was able to get us through sort of the first push.
We've we've seen an increase of inbound drivers one become drive for US that includes both third party and sold drivers I want to come so that's been very helpful.
We've had in Pacsun sort of had to work through the DSE side of things is fully released by the last couple of weeks, but I would say we've maintained it probably the toughest think Ross it's been just at the D. C level picking cases, so we've made some systems adjustments.
Sort of take the cases per line up a little bit to make it a little bit easier for every pick or when they start to pick more cases versus less.
Obviously, the volume could could or could could handle that and then secondarily we.
Re purpose a bunch of people from the office from reset grew from a group we call SCS really deals all the equipment or inventory crew. All volunteers were willing to go out and getting learn a good to talk on the system and hope that cases, so it's been very much a and all hands on deck.
Every DC.
And maybe just one quick follow up is have you seen.
Yeah with this spike have you seen a corresponding a pickup in Oh Wow sign offs in terms of yeah. This.
It's unprecedented a events kind of leading to more.
New customers kind of coming into the store through word of mouth are discovering et cetera, just curious on anything you're seeing on that side of the sense.
Yeah, Randy we have maybe just a few quick comments on just customers and communication to customers in general we've shifted our strategy here in light of the current situation really an effort to improve product slow to help store operations and then and then adjustment.
Suggesting you know in light of information that customers are looking for now.
And that has resulted in an uptick in sign ups for awhile alerts sign ups to be in the email database our focus from a marketing standpoint is around communicating inventory and items to customers that that's what they want to know where can I find these products work and I find inventory.
The one that's right are great vehicle for that in that they go out daily their store and item specific and so customers have been have been signing up a an increasing rate there our weekly Stuart digital ads again those are also a store in items specific or another great via.
Called all of our email database customers receive those as well and then the last thing I'll say that comes to digital marketing that I think as has been working well and it's appreciated by customers here is the activity on social media.
We've we've adjusted I'll call it companies social media content of course.
As it relates to St. Patrick's day, and other content. We would have posted you know we're not we're not posting that content, but what we have going on right now is that the independent operators, both on Facebook and Instagram, which are great platforms for this using those social media channels to communicate with customers what items they haven't stock.
What their inventory it looks like what's on order.
Literally walking up and down the aisle on Facebook live.
And is very much appreciated by by customers beyond that messaging is simple and straightforward letting customers know that that we're here to help and you know that were yeah were part of their communities and doing everything that we can to keep the stores filled with product.
Okay, great job I. Thanks, a lot guys really appreciate to help.
Thanks Randy.
Thanks Randy.
Our next question comes on the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much M. I wondered actually start I think at the end of the prepared remarks, you made a comment that you know you've made a lot of changes based on the Io suggestions I was wondering if you could actually elaborate on that a little bit.
Yeah, So Ah Hey, Karen it's Eric.
We have a daily group.
It gets together there about 18 of us that joined zoom call each day and have been doing that for about three weeks.
And that group.
It's taking all of the information we're gathering during the day I'm from operators and from our systems and from just anything and putting together four or five P.M. briefing that we get out to the stores.
So we've been communicating a lot. So we've heard from operators as we've had these you know you try to manage your big crowds of people runs on product at the same time is trying to keep the stores safe and clean and healthy and we're really so.
We've had everything from how to handle the special senior days to how do you discount product for central groups of people to crowd control to honor the six foot distancing in stores too.
What's the right way keep restrooms opened stores not keep restrooms open signage for.
Limits on products.
Suggestions from operators on how to make changes the real time wouldn't guide so that product flows faster suggestions from operators on you know what they're doing internally for their employees for rest and safety.
We have a lot of different ways to communicate one is through our service now platform called I care and or eye care communities platform allows operators to sort of have an internal private blog amongst them that we can view and we can input on so.
You know we identified sort of.
First week of March that if we're going to be a distributed workforce, which we had been since the 10th.
We're gonna have to over communicated so that's what we've done I'd say, it's worked fairly well I'm not every idea we get from operators.
Is it good one, but we're filtering the ones and sharing best practices and then.
I see I'd say, the the district sales merchandise managers, which we have 13 or 14, each have 25 or 30 stores, they're out in the field. They can't travel by airplane, obviously, so they're in their cars either visiting stores were talking to sort of every single day. So.
It's really been quite refreshing to get all of this bubbling up of best practices and then we can disseminate.
The best ideas about overloading I'm today, so hopefully that helps.
No. That's helpful and then I guess I mean the.
Questions that we received obviously on the supply of opportunistic buys just looking at you know many months already like whether it's three months or nine months I know you mentioned, obviously disruption benefits, but how are you thinking about the potential that there maybe a little less supply from an opportunistic perspective, just even if it.
Temporary in a couple of quarter isn't I guess I'm, not saying no. How do you, we'd obviously, you're all hands on dock right now, but how do you think about like what you're thinking through first say the fall when strategically when hopefully things that are a little more back to normal like how do you how do you pay that or how are you.
Pivoting to that strategically.
Oh, Hi, Hi, Karen I'll I'll take the first part of your question I think I think we all can chime in on on the second part as far as opportunistic supply goes continue to see healthy deal flow as we said in the remarks from our traditional suppliers.
You know just looking back at last week sort of in the midst of everything going on the team here wrote a lot of opportunistic purchase orders had to support the increased demand were seeing and I'll say that this was even in some of the highest demand categories.
Such as rice, and water and some others, where we continue to see surplus inventory, what we call opportunistic.
Are you point to the strong relationships that we have a with our partners continues to be an advantage for us we continue to be a solution provider for them. Even in these in these times I'm also point to our diversified supplier base. We have all of a long list of suppliers that we do business with were not heavily.
Concentrated with anyone supplier.
Yeah, no supply representing more than 5% of purchases or sales and so you know that that to our benefit as well.
I'll also say that we have been contacted recently here by many well call non traditional suppliers. So many many companies now that need to move product as their primary retail partner partners have closed and just to give you a flavor for what this looks like a few examples.
I'd point to foodservice of course with.
All of the restaurants, and you know other foodservice retailers being closed on many of them contacting us.
You know asking if we can we can buy product we've had some instances with health and supplements suppliers. These would be that sell to Jim's in other fitness based retailers are reaching out to us with surplus inventory and then on the hardline side with all of the retail closures that have happened.
We started to hear from them as well and so definitely an immediate need to keep product flowing and I think as we look forward a will continue to see more that and you know as we as we've said disruption to the is a positive in the long run I think we're starting to come we are starting to see even right now when you consider.
Looking further out though production increases that are happening right now and what happens to that when demand normalizes.
Again, all of the closures that are happening out there with other retailers and then there's just a multitude of things happening within the supply chain wet whether it's new packaging, that's being created or changes to manufacturing runs or new distribution partnerships that are being formed all of this is is change and Ah yes.
Interruption in an environment where demand.
Incredibly difficult to forecast and so.
For us looking forward, it's about leaning on these long standing relationships that we have it's about continuing to.
Develop new supplier partnerships in developing those you know as we go and being disciplined in smart about the opportunities that we take advantage of as they come in.
And then and then let me just touch on the second part of your question you know as far as strategy goes and you can you can tell me if you.
We're looking for something else, but you know I think Charles said it you know from a from a long term strategy standpoint, we continue to pursue the same growth priorities that we've had you know round purchasing delivering more loud deals and expanding the offering continuing to support I chose.
Continuing to increase customer awareness and engagement continuing to execute on the store expansion plan I'm continuing to reinvest back in the business to support growth and you know those are investments in people and processes systems and so while we are.
Andy here and now Reprioritizing to make sure.
We keep everyone in the community safe and healthy and get product to the stores, none of those priorities change and and we continue to higher for people as an example, right in some of these roles that represent infrastructure for growth and so.
That will continue and as things normalize here.
Bill will then so get back to a more heavy emphasis on those things however, long that takes.
Yeah, I was coming up but it did that for me angle that you're obviously going to get a lot of new customers that are saying you would fresh eyes than it would just seem that it opens the door potentially free rent tire unit growth. We're keeping in mind you don't want to stretch. The organization you know going forward, but you know obviously you have an appealing format that I. Thank you.
And a lot of customers want to actually returned to with higher degree of frequency than you've ever seen.
Yeah, we agree.
[laughter], thanks very much.
Thanks, Jim Thank you.
Our next question comes from the line of Michael Lasser with you'd be yes. Please proceed with your question.
Good evening, Thanks for taking my call.
So I want to touch on the availability there was a great answer argue a lot of detail I want to push on it a little further.
Do you expect the availability of your core opportunistic buys to increase.
The same or reduce in the next you know it beyond you know in the coming months, what's the thought being that.
Manufactures are gonna be shifting more of their production to these core categories.
Our in heavy demand they may be less willing to.
Expand into new skews, which may or may or may not happen is successful in could comprise somebody opportunistic by market in the past.
Yeah, Hey, Michael Thanks for the question.
Hard to say I, everything's pretty fluid right now and you.
I don't think any of us have a have a crystal ball for perfect clarity on what the future holds.
All I will say again, though is you know so far we've continued to see plenty of product and we have leaned into more products because of the demand and so.
Field feel really good about that.
But yes, sure look where we're mindful of potential disruption that primary channel sales may have an opportunistic you know whether its changes to manufacturing or a you may be constraints from a from a transportation standpoint, you know there certainly there's certainly plenty other factors at play here.
But though but we've been able to buy a increased volume you know those were looking to continue to replenish the stores.
And then again.
I would say to the extent that we you know and it may be within certain suppliers, you'll see some some contraction there I would point to the diversification that we have within our supplier base. The a you know the continued acquisition of new supplier partners.
And.
And and these additional suppliers now that are reaching out to us I think I think you know if anything there may be smaller blips more specific in nature.
And hard to say.
Hard to quantify that but just given some of the outreach that we've seen.
Looking forward.
We're extremely bullish from an opportunistic standpoint in light of the amount of disruption that's happening there so not not overly concerned but of course something that we're keeping close on something that were partnering very closely with our suppliers on we you know we have we have we have really strong relationships that were soon.
For thankful for it and I'm just in the past week two weeks well, we always take care to have a personal touch and open communication with them you know I'd say, that's even intensified further I'm always placement phone calls not just right and peos and so just staying very close to the challenges that they're facing and making sure you know where the best partner, we possibly can be in there.
Is challenging times.
And my follow up question is going to be probably in two parts recognizing that you don't want to provide too much guidance because there's so much uncertainty in the current time, we could read that a lot of a lot of different ways, we could rebound.
To see that things are going to be so good because.
Our consumers rely on grocery outlet during tough times, absolutely you do you.
During the last recession, how did the business perform and how should we think about any parallels and be yeah.
That is right that that you might see accelerate a comp growth for the coming periods. How should we think about the flow through on that you mentioned that your same store sales are up mid teens in.
Mm in the current quarter to date, we are one week last so how should we be modeling a flow through in the earnings for this current period. Thank you very much.
Hey, Michael it's Eric good to speak with you I'll take a return a and let Charles talked a little bit about some of the my modeling.
Look we did perform really well in the last recession.
Enjoy really robust comps comps came you know in both customer count.
In ticket and they were broad across all of our department. So.
That's sort of setting the stage. If this leads to recession. You know we think this will be a pretty unique situation. We don't have like like no one.
A crystal ball, how that plays out, but we we do think people reset again to value, we think grocery out but because of the model will be really well placed.
Take advantage that we've seen a lot of new customers last few weeks and we think we'll keep them just because the simplicity the model the hard hitting values that we have then you layer on top of that the independent operator touch and were so thankful that we've had very very carrying independent operators out these communities working overtime in taking.
Extra special care. So we think a lot of that will stick.
Our priorities will remain very much the same as you've heard us in the past deliver a lot of value. We think we when we.
We don't know how long this.
Last but the last time. This happened, we we sort of reset to a new normal and we think we kept a lot of those customers from sort of 2010 to now so.
We model that step up yeah.
Pretty pretty bullish that those customers will continue to find the values super compelling in grocery outlet.
Yeah, Michael it's Charles just to add to that really our decision not to provide formal guidance is just as a result, so the fact that the environment is so two and right now its just really hard to say how things are going to play out over the next.
Several quarters here and beyond.
As you think about the comp impact to that so obviously as we've talked about in March elevated customer demand is shoppers are in the store.
Stocking up their pantries, ostensibly those trends will moderate at some point as.
Again, they're refrigerators and pantries or full and then on the on the back side of that there could be a negative impact as the shoppers works through all that inventory they've got a home so I'd say, particularly over the midterm. It. It's just hard to predict how things play out longer term as is aircraft.
Since I think there are some potential tailwinds for us that could be positive with respect to a longer term shipped potentially up towards more food at home spending.
As well as just.
Again more focus on value on behalf of the customer so regardless of exactly how it plays out we feel like we've got the flexibility in the model and we can we can adjust we continue to oriented around over the long term once again the backside. This our longer term comp algorithm of 1% to 3% as it relates to.
Flow through again, probably a short term long term.
To answer here over the short term you absolutely could have some flow through as we do have you know our cost model is more variable in nature, but there are six cost elements as it relates to occupancy corporate GE in a and marketing I'm. So you can have some flow through over the short term keep in mind. However.
Or is that we do expect it there will be some offsetting costs related to the Corona virus that we really can't quantify right now whether those are cleaning prevention consol, because with a workforce working from home a lot of different impacts that were just uncertain about it at this time and then layering on top of that.
Just so we don't do side and the fact that we do have public company costs at $9 million units. This year. So you could see long long winded answer to say you could see some short term a positive flows through over the longer term. We continue to think about managing business for SGN a margin stability.
Well it is our Jay referenced we haven't lost sight of everything we're doing to continue to reinvest in the business in pursuit of of our growth objectives.
Our next question comes from the line of all over China with Cowen and company. Please proceed with your question.
Hi, Thank you regarding the trends that you're seeing in the past month them. What are your thoughts on how the week to week cadence is looking as well as as you look at regional trends and how it's been trending regionally versus a more correlated I would also love your thoughts on digital options, whether you think of.
Got options like buying online pickup in store curbside pickup and if those have become a more or less attractive are interesting just in light of everything that's evolving. Thank you.
Hey, Oliver as Charles let me tackle the first target as it relates to some March and then pass it over to Jeff RJ, but what we've seen in March I would say, it's it's been across the board across regions. We've seen significant increases that had come from a combination of customer trap.
Big.
In ticket we are course very closely looking at the at the trends and and trying to dissect then to glean more more information about what to expect but I'd say at this point don't think it's instructive for us to to dive too much into those details. This is again the environment continues to be.
Just incredibly fluid.
Hey, Oliver regarding digital curbside pickup yeah Lucky in light of the current environment. We have started to explore some curbside pickup options. This is an effort to to help those that are higher risk score just don't feel safe coming into the stores.
And and you know as time goes on you know this this may be more people. So we'll see how things evolve, but want to help get food to folks in any way possible. You also mentioned on this topic that a couple of stores have begun to pilot you know a few different options here.
And a great example of entrepreneurship of the Io on display, which which we of course lugs. So I think those efforts together with their own thinking we'll evaluate a in decide if we've got a solution here in the near term throw out more widely that said also say thing.
Looking long term, we haven't changed our position on E. Commerce I'm still believes strongly in the model or the store treasure Hunt experience delivering best value to customers that the independent operator in connection with customers and you know everything that they represent and deliver from allow shopping experience standpoint, so I'm very much a in the media.
At a term solution that we're looking for ultimately when customers returned to stores.
We know that we still have these compelling differentiators and E commerce wouldn't be a high priority relative to other things that we're investing in okay, and just a follow up regarding the comps and what you're saying theres been some limitations on the number of people that can be in stores as well as some of the quantity limitations on how would you characterize.
The demand profile versus supply versus relative to constraints setter and the shopping experience and the nature of the comp is it would it be much higher under under if there weren't a these other factors just curious about how did you contextualize that.
Yeah, Hey, Oliver.
Yeah, we have had some opportunities on products that just weren't there the demand was pretty extreme and came from.
No were so.
I don't think Theres a retailer in the consumable business wouldn't say the same thing that said, we were able to pivot fairly quickly one of the differences that we did notice.
Was the having an operator sort of interest were 24, seven with the ability to live order versus the algorithmic ordering I think that many retailers employee I think was a difference maker for re supplying relative to limitations on customers in the stores, we had a few cases.
Downtown San Francisco mission, the store that you shop that before we had to sort of limit the number of people in the store just to be safe, but those were all localized and you know again, we were able to publish best practices and Keith.
Operators reasonable with the number of people in the stores. We had many cases, where you know we just didnt have basket for people, who shop and that was self limiting so.
Yeah, we work through those over the first few days and again recoveries than it's been really strong so hopefully that answers your question.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks. Good afternoon. My first question is on gross margin.
I think the way you described it as we looked at open ended we'll see how it goes which is there can you give us a fund doesn't sound like there was any different from source in the near term, but give us a sense on on how it's going to thus far and surge environment.
I forget if you've ever given us the rule of thumb no for every percentage increase.
Got it hurts is opportunistic what could happen to the gross margin.
The movement over time.
Hi, Simeon Thanks to the question Yeah. Just so few comments on gross margin you know really a number of puts and takes here yeah, we talk about product mix for opportunistic and every day.
Mentioned, a little bit on that earlier just to remind you are here not all everyday products are lower margin or below average margin and in fact, some of the high velocity items.
That we're currently seeing our at higher margin in so to the second part of your question no. We haven't given any guidelines for percentage mix shifts didn't impact on margin largely for that reason reason it is quite a range of margin. So.
It's really down did that to the item level in terms of how that impacts.
Margin you the other other another factor you know that that's that were mine club is inflation deflation and certainly time frames associated with these inflation probably more in the near term started to see some of this already.
Eggs being the most recent example, and then you think about deflation in the longer term and then I'd also point to opportunistic a product that is expected to come from channel disruption already already talked about that.
Probably the last point on this is to the extent that there is some margin fluctuation from a percent standpoint, and as it relates to mix as a result of increased demand. This of course would would drive gross profit dollars and so while there may be some short term fluctuation from a rate standpoint, I'm still still feel pretty good about driving profit dollar.
And then of course long term I'm.
Despite any short term fluctuations, we see would expect it to normalize as you know things rebalance back to study safe.
Okay. Thank you my follow up was on the I know who talk broadly how they're going.
I think what's the cost go maybe limiting the GE on reported work weeks now how well they how well do not have seen on expenses and their own labor and then back to that flow through question. I mean have you have you ever trains your own policy or for some closing out of the modeled the model, making sure that they're taking care of as well.
Yeah, Hey, it's a it's Eric models. The model, we wouldn't change we think these you're gonna be temporary circumstances operators doing well, they're tired energized.
They're excited to be on the front lines. They never seen anything like this I would say the operators realize that this is way bigger than just selling more products. This is a time about being opened being safe and being you know really a an anchor in the community and I would say, they're all leading into that we talked about the countless.
Samples and sort of best practice sharing and are there sort of feeding off of one another.
We're not dictating a whole lot to them unless it's around brand standards and safety, otherwise, we might even be flexible and and and use the best of Ah you know kind of is this operator model to the benefit in the situation. So they do a great or deny hosted a call yesterday with all the operators.
We didnt alive.
In Q in a for about an hour yesterday afternoon, just to sort of touched base and answer questions and I would say they were very positive very supportive and very excited.
Our next question comes from the line a Paul Trussell with Deutsche Bank. Please proceed with your question.
Hey, guys. This is actually could be I could tie on for Paul I guess I just wanted to ask about some of your bigger picture goal. Starting here you know putting corner virus impact aside and these thing that your store your assortment will evolved at all and do you find a need to expand and some certain categories.
Yeah, I Christina its RJ, so I think consistent with what we've said before you will continue to look for opportunities from an assortment standpoint, we leave a you know we mostly filled and you know what I've called gaps before the category level.
And seafood is one we've had in our stores for quite a while now but I'm more recent one that was a gap that we've that we've introduced in that seeing nice benefit from beyond that those opportunities really live at the item level. So as we continue to go deeper you know from everyday specialization standpoint, we identify those opportunities and to.
Take advantage of them Opportunistically as well so that would really be the probably the biggest impact or area for improvement from an assortment standpoint looking forward.
Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question.
Yeah, Hi, guys. Good afternoon wonderful how are you guys seeing any issues or wood with labor, whether it's a.
Pushback from employees that don't feel comfortable showing up to work or Conversely, just not enough you know needing more employees and trying to hire more people I think you mentioned something with a lot of drivers looking for jobs, but.
Any comments around labor with would be helpful.
Yeah, no I'm quite the opposite operators are reporting a lot of fresh faces knocking on the do we're looking for employment people that have in Glasgow and the service sector.
Relative to D.C., we've also seen.
Fresh number of people coming in so I am today, it's been.
The opposite we've had no sort of pushed back we've given people that feel at all uncomfortable some folks that we have working for us over the age of 60, we've been very very careful just to make sure they feel safe and protected and you're not pushing them beyond their bounds internally and the corporate.
As we have roughly 300 people working from home. So that is required to technology, new practices, and that's worked really well as well.
Ladies and gentlemen, we have run out of time for questions. This does concludes acumen nice session I'd like to hand, it back to management for closing remarks.
Hey, guys. Thanks, so much look forward to following up with you in the coming days on follow up calls on appreciate your jumping on listening I. Appreciate all your questions and we'll look forward to catch up with you soon thanks.
Ladies and gentlemen, this does conclude todays teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.
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