Q1 2020 Earnings Call
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When I went to protocol. So what do you hope to date, so for pellet Vice President Investor Relations. Thank you you may begin. Thank you. Good afternoon, everyone. Thank you for joining us on todays call to discuss grocery outlet first quarter financial results.
It's based on this call will make forward looking statements, which are subject to various risks and uncertainties that could cause our actual results.
On this day.
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 1995.
A description of these factors can be found in this afternoon's press release, which is why was it and our latest prospectus and periodic reports, we filed with the FCC all of which they may be found by went away and that's sort of start grocery <unk> dot com well at the scene Dot Gov.
Undertake no obligation to revise or update any forward looking statements or information.
During our call we may reference certain non-GAAP financial information, including adjusted items reconciliations of GAAP non-GAAP measures as well the description limitations rationale for using its not sure maybe found in the supplemental financial tables and put into this afternoon's press release.
The filing and on the investors tab of our website.
Reference non-GAAP measures and some of our financial discussion, it's as we believe they more accurately represent the true operational performance underlying results of our business.
Presenting on today's call will be grocery outlet Chief Executive Officer, Eric lumber.
President RJ shooting and Chief Financial Officer, Charles Rocker.
During our prepared remarks, well open the call for questions with that I'll turn it over to Eric.
Thanks, Joe Good afternoon, everyone I hope you and your family's remain healthy unsafe, we're continue or a social distancing effort. So Joe Charles Arjun I once again be conducting our earnings call remotely.
Our discussion today will be primarily focused on providing you with an update on how we've been operating our business through the krona virus pandemic as well as how we expect to operator business moving forward.
Starting with our top priorities our efforts remain centered around ensuring the safety of our team and communities supporting our I O is working with suppliers to purchase product and continuing to deliver strong operational execution.
First to safeguard our I O is their store teams and customers comprehensive safety measures in line with the CDC and public health guidelines have been knocked it across the organization sample. The safety measures. The iOS instituted include Queen stations at the entrance space markers to ensure a social distancing plexiglas barriers at the.
Checkouts as well as precautionary signage throughout the entire store.
We have temporarily provided incremental financial support to offset some of these incremental costs in the spirit of our partnership with the iOS.
We recognize that day and their teams had been on the front lines of its pandemic provide a vital service to their communities were incredibly grateful for their outstanding efforts.
Second our purchasing teams have done just an amazing job of leveraging their vendor relationships to keep up with demand for opportunistic opportunistic and everyday products.
We have been working closely with their supplier partners to byproduct to be custard man it throughout the pandemic while at the same time, finding new sources of supply we cannot overstate the value of our long standing partnerships and we continuously strive to be a great solution provider first suppliers, who work with.
Third our supply chain.
With the significant increase in demand that began in mid March we increased their frequency of deliveries to stores and made necessary adjustments within our distribution center operations in order to handle the higher volumes, our entire distribution network, including D.C. workers and we drivers worked tirelessly to get products and stores as quickly and safely as possible.
Overall, we feel really good about the current quantity and quality of inventory in our stores in distribution centers.
Our flexible business model value orientation localized approach a product offering have enabled us to effectively navigate through the initial sale stages of the pandemic can deliver a 17% comp growth in the first quarter.
We're all extremely proud of the team's success in managing through this difficult period.
Turning to an update on our real estate expansion strategy.
We have opened 10 stores in the first quarter and I've been working closely with their developers to get the remainder of our plan stores opened by year end.
Despite the delays related to Kobin 19, we still expect to open 28, the 30 stores this year.
We feel good about the opportunities in front of US continued to build our pipeline to a 10% annual unit growth.
Well, we continue to focus on our response to Cobot 19, we've not lost sight of our growth strategy and remain committed to making investments that will enable us to capture the long term potential of our business.
We know that people are one of the best long term investments, we can make to that end, we recently hired Andrea Borden or to the newly created role of Chief Human Resources Officer.
Andrew brings 30 years of experience and talent acquisition and up development as well as organizational development, which will be instrumental as we grow and scale our business over the coming years. We're excited to have Andrey onboard to help contribute to the next chapter of our growth with that I'll turn it over to RJ.
Thanks, Eric and good afternoon, everyone.
I hope that you and your families for Allstate unhealthy.
We've been working hard to support her operators and serving their communities since the cobot 19 outbreak began.
I would like to recognize the tremendous effort of our team our suppliers and other partner companies during this challenging period.
We have leverage them any strength of our business model and have adapted processes to meet the demands of the current environment.
We reacted quickly to the unprecedented surge in consumer demand.
Adjustments were made to our buying process ordering platform warehouse operations and distribution system to keep pace with this sudden sales increase.
The result was greater supply chain capacity and efficiency and the rapid product replenishment necessary to support increased demand.
I'm happy to say that our current inventory position at stores in warehouses is very healthy and puts us in great shape overall to continue to support.
And your customers.
Our ability to execute through this heightened demand period is the result of our buying model like the both supply chain entrepreneurial independent operators and the amazing talent that supports these and other parts of the business.
Let me talk first about the strength of our buying model.
Our team continues to operate at a high level as they bounce the buying of opportunistic in everyday products.
Our ability to successfully purchase product is a testament to the talented members of our buying team.
In the absence of travel and trade shows they've taken a more proactive and personal approach to communicating with our existing suppliers and outreach with creative solutions for new partners.
Our collaboration with suppliers has never been better and we thank them for the continued partnership during this time.
We continue to be healthy opportunistic deal flow from our existing suppliers.
These offers are for products that stand all categories, including some of those experiencing the highest consumer demand.
We've also been contacted by many new suppliers that need to move through product as their distribution outlets have closed we're experiencing significant sales decline.
He is the buyers that distribute to foodservice restaurant department stores and airlines in airports just to name a few.
We expect these new relationships to develop into longer mutually beneficial partnerships no different than those we enjoy with the rest of our supplier family.
I've had been well reported in the media. There is currently a huge amount of activity and change in the grocery and consumer packaged goods landscape.
Manufacturers have dramatically increased production and they are actively making production line SKU assortment and packaging changes.
Imbalances between supply and demand have and will continue to occur.
We have already begun to benefit from some of these imbalances and we expect to see more opportunities in the future.
In terms of everyday Staples, we're also maintaining our focus on supplying essential item that customers continue to stock up on.
Other than certain high velocity skews that remain allocated we are back to healthy inventory levels within everyday categories.
Let me turn now to our supply chain.
Our distribution center employees fleet drivers and third party vendors all continue to execute at an exceptional level.
We have been moving record volumes through or do you see it has increased the frequency of deliveries to the stores.
These efforts are supported by the flexibility of our warehouse management systems real time order guide and distribution system functionality.
Our efforts throughout the pandemic have truly been amazing.
Providing them with the support they need at the top priority for us as Eric said and communication is essential to our partnerships.
We've been holding virtual weekly Townhall update in addition to providing daily communications on recent developments.
Strong coordination between grocery outlet and operators have supported helpful. Best practice sharing these past two month.
We also continue to provide real time response to Io feedback.
I care platform as normal course of business.
Our marketing efforts have been focused on three areas.
First reassuring customers that health and safety measures taken by iOS in their stores customer houses our top priority.
Second the communication of exciting products and continued value that we provide.
Our local independent operators excel at using social media to engage with their communities in this way and we're pleased with the customers response for example, a number of Ipos have used Facebook lite everyday to speak to customers about new item in store or or arriving soon and then even taken live questions from customers with specific or.
Well.
Our third marketing focus has been on community outreach and the local connection that are iOS provide.
They are important leaders within their markets.
We're very pleased with our combined company and local Io marketing efforts during this unprecedented time.
Looking forward, we remain committed to our philosophy, a reinvestment and innovation. This approach has enabled us in many ways to successfully execute during past two months.
We've made significant progress and developing upgrading key operating systems be passed several years, including a warehouse management system, our point of sale system in the real time order guide among many others.
The investments we made in operational innovation and systems enhancements have contributed meaningfully to our business performance. Since then and more recently have been critical to our ability to react to the challenges created by the current a virus pandemic.
We've also invested heavily in purchasing inventory management and other corporate support teams all of which had been paying dividends.
We will continue to invest in talent technology, and operational improvements to enhance functionality and drives efficiencies to support long term growth.
With that I'll turn the call over to Charles.
Thanks, Arent Jane and good afternoon, everyone. Our priorities remain focused on safety, if our customers are independent operators and all of us who support them.
Our strong financial performance and healthy liquidity position is a testament to the unique strengths of our business model any credible execution by our entire team independent operators.
Our first quarter results reflects strength across all of our core financial metrics.
Sales for the quarter increased 25.4% to $760.3 million compared with the same period last year.
This growth was driven by 17.4% increase in comparable store sales as well as the sales contribution from 32 net new stores open ended the first quarter last year.
Our comp performance in the quarter was a result at the higher store traffic and larger average baskets.
Comps were strong across all regions, including mature geographies as well as our southern California in mid Atlantic stores.
We opened 10, new stores and close to during the first quarter. We continue to be pleased with the performance of our newer stores, which like our mature sites experienced elevated customer demand.
First quarter gross profit increased 26.7% in the prior year to $237 million, driven by new store growth and higher comparable store sales. Our gross margin rate increased approximately 30 basis points to 31.2% due to reduced markdowns and throwaways as a result.
The faster inventory turnover as well as leverage on our distribution costs.
These improvements were partially offset by modest mix shift headwinds.
As she any expense grew 22.3% to $186.9 million with the increase largely attributable to higher variable commissions, the independent operators as well as higher store occupancy in corporate expenses.
SGN a expense also included $2.3 million, a public company cost not incurred last year.
$1.1 million and transaction costs related to our February secondary offering and $850000 related to our adoption the new accounting standard regarding accounts receivable reserves.
Stock based compensation expense for the first quarter was $20.3 million largely related to the 4.1 million performance based stock options invested in conjunction with our secondary offering on February Threerd 2020.
Interest expense decreased 64.5% to $5.8 million as a result of our IPO related debt pay down subsequent credit agreement Repricings.
GAAP net income for the quarter increased 235% to $12.6 million or 13 cents per diluted share compared to net income of $3.8 million or six cents per diluted share in the prior year.
For the quarter adjusted EBITDA grew 45.8% to $57 million $39.1 million last year.
Adjusted net income increased 242.2% $34 million worth 36 cents per diluted share based on an average of approximately 95 million diluted shares in the quarter.
This compares to $9.9 million or 15 cents per diluted share on 68.6 million diluted shares in the prior year.
No we recorded a tax benefit in the first quarter largely related to the exercise investing at employee share based awards granted in prior periods.
Relative to our normalized tax rate the benefits reported net income was approximately $5 million for purposes of calculating adjusted net income we add back to our reported net income the tax effective non-GAAP adjustments at our normalized tax rate, excluding discrete items that normalized rate was 28% for the quarter.
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Turning to our balance sheet at the end of our first quarter, we had cash and cash equivalents of $160.9 million.
Inventory declined to $188.3 million is elevated customer demand in March temporarily drew down on store in warehouse inventory levels.
Total debt, including the $90 million drawn under revolving credit facility was $550 million at the ended the first quarter.
For the quarter, we generated $67.8 million operating cash and invested $28.2 million in gross capex.
This combined with the revolver draw down silicon positive net cash flow through the first quarter of $132.8 million.
We feel extremely good about our liquidity position given that our business continues to generate healthy internal cash flow combined with a broad flexibility of our credit agreement.
Note that our first lien facility does not mature until 2025, and we have ample room to drive seven times leverage covenant restrictions.
Now, let me provide an update regarding trends to date in the second quarter through the first five weeks of Q2 comp sales growth is tracking in the mid teens, we're seeing customers consolidated trips to stores, resulting in lower traffic, which is being more than offset by larger baskets. Note. However that we are less than half way through the quarter.
And it is difficult to predict the impact on purchasing behaviors shelter in place restrictions media.
It's RJ discussed we've been actively purchased senior receiving product response to customer demand and has now rebuilt to healthy inventory position in our stores in warehouses.
With respect to new stores, we've signed leases for 2020 openings consistent with our 10% annual unit growth target.
While construction activities continue we do anticipate the Covidien 18 will impact our ability to open all stores on time.
Our current expectation is that we'll open between 28 and 30 stores this year with no additional closures plan.
Looking forward, we remain excited about the availability of attracted real estate sites, which we continued to build our store pipeline to support 10% annual unit growth.
While we continue to have confidence in our long term margin stability. Our gross margin rate may be impacted in the near term due to a number of could related factors, including higher distribution in supply chain cost short term product mix shifts and potential increases in commodity prices.
Regarding SGN, a we expect to incur incremental operational expenses related to cope with 19, including additional cleaning and safety measures cost for protective equipment and supplies at our stores in facilities and higher corporate and distribution center personnel expense, including premium pay overtime and temporary labor.
The impact of these incremental expenses was minimal in the first quarter, but is likely to more significantly impact second quarter results and potentially extend into future quarters, It's cobot 19 evolves.
Consistent with our long term philosophy, we continue to actively invest in our long term growth objectives.
Example, we've accelerated our investment and talent to add new skills in bench strength across the organization.
We're also putting more resources into areas, where we see opportunities to improve our operational capabilities.
Taking those factors into account as well as the addition of both full year a public company costs, we continue to manage towards a full year adjusted EBITDA margin rate that is in line with prior year.
We do however, anticipate the quarterly adjusted EBITDA margins will experience greater variability with significant pressure in the second quarter for the reasons I discussed.
Moving further down the TNL inclusive of our recent 90 million dollar draw down on our revolver annualized interest expense is expected to be slightly below $25 million based on current LIBOR rates.
We also continue to expect the normalized tax rate of approximately 28%, which exclude discrete items.
We expect weighted average diluted share count for the year to be approximately 100 million shares. This reflects the full destin 5.8 million performance based stock options related to our 2014 equity plan, which occurred upon the closing of our recent secondary offering on April 27.
We expect stock based compensation for the second quarter to be approximately $12 million largely due to the final vesting of those performance options.
Turning to our capital expenditure plans, we remain committed to our investment priorities, which are building and opening new stores inline with our long term, 10% annual unit growth target.
Reinvesting back into the existing store base in investing in our supply chain I T systems and infrastructure to support growth.
While our Capex spend in fiscal 2020 may fluctuate due to the timing of new store openings. We currently expect the capex for the year, we'll be in the range $90 million to $100 million.
In closing, we're extremely proud of our team's performance through this highly challenging and dynamic environment I want to thank our employees iOS in a broader grocery outlet community for their sustained commitment and amazing execution. During this health crisis.
As we navigate the next phase and this pandemic, we remain more confident than ever and the strength and durability of our business model.
While our long term growth algorithm remains unchanged, we believe that broader changes occurring in the marketplace very much play to our strengths were well positioned for the future.
With that we can turn it back to the operator to begin QNX.
Thank you.
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One moment, while we pull for our first question.
Our first question comes from Randy Konik with Jefferies. Please proceed with the question.
Yes, Thanks, a lot I actually have two questions. The first is maybe for Erika RJ.
Could you you had some process changes to adapt.
To that demand surge that you saw it in that business are there any kind of any of those process changes that took place that you foresee being more permanent kinda give you more of a that you learn that you could use in a different way to help business functionality a once we get through co but just curious.
To start.
Yeah, Hey, Randy it's our jail take that one so yes as noted in the comment we had a number of changes that we made to react to that see increased demand and never quite a lot.
And we really benefited also as mentioned from.
Some of the system enhancements, we've made over the years and really leaned on the flexibility of the model. So it served us served us well.
Ordering functionality changes distribution methods and approach a store ordering frequencies volume certainly.
Plenty of changes as it relates to as it relates to capacity in supply chain, all the way from buying through a warehouse and distribution and then certainly many changes many changes first practicing practices in the stores go.
It was first takeaways and and what we take from this looking forward I think more than anything view. This most recent time period as an illustration of the strength and agility of of the model and we continue to lean into all these things that make this business unique.
And have really fueled our growth in the past and we expect to looking forward, So and I can go across the entire business, but maybe just to point out a few on the buying side talk about the proactive and personal approach we've taken to buying product I think we continue to to reach and even higher level than the team.
The operate at at in the past and that will serve us well, both with existing suppliers and with new suppliers renewed focus on relationships solutions provided to our partners.
Which more and more I would say our are even more creative than we've seen in the past and certainly as it relates to you know I'll call non traditional suppliers are reaching out to us for help at this time on the store side gosh countless examples of operators with their connection to community really demonstrate.
Rating the benefit of ownership I mean that ownership mindset again flexibility, whether its ordering or merchandising.
On a local way I'm all of these things.
Have really benefited us and I think you know again at levels that maybe we hadnt experienced in the past it will serve us well looking forward and the last thing I would mention really more around culture and communication I think as you know all of us are experiencing working remotely.
Making quick decisions collaborating lot of the tenants of our business and culture I think it really.
I have really.
Ben Ben Shining at this time period, and so I think all those things we carry forward as well, so really nothing terribly new or different more just emphasizing you all the things that we love about this business and may be showing us new and better ways that we can execute than we had before.
Yeah, that's a great description there something my last question would be they talk to the or the new areas of supply that nontraditional. If you will one of those non traditional suppliers asking of you and what are you asking love them I'm sure that some of the packaging.
The way they are traditionally produced all those products for those different venues are different types of customer sets. How has that changed for you. So kind of walk us through that relationship building process, that's going on ongoing right now and how we should be thinking about that into the future. Thanks guys.
Yes, sure. So yes, some had a number of people reach out to us and.
Yes, you can imagine there many suppliers now with excess product because the their traditional retail partners have not been open or open and more limited capacity and in terms of what that looks like you know I'd say it comes in all different flavors. There's there's you know the most straightforward would be suppliers with price.
Okay, that's retail ready so to speak.
With the U.P.C. I did they sold through.
You know other other food retailers are non food retailers the product that's ready to go and.
The benefit or that the solution that we provide there is helping them with volume, helping them get cost recovery and that's pretty straightforward with others.
And as Youve seen or heard a lot of that constraint with suppliers selling to foodservice or non traditional retail is around packaging and it is around having product the retail ready so those changes have.
Are being made there have been made and others to be made still looking forward and so.
We're partnering with those companies at times will help develop packaging at times will take things and in all say less retail ready packaging and we can do some reconditioning to that so we do have those capabilities.
And our customers expect to find you know maybe some things that are a little more unusual or different from a packaging standpoint, so that'll that'll works just fine and and are there other examples beyond that.
These suppliers, we do very much orient towards providing solutions you know whatever the cases.
We do look to maintain these relationships well into the future and for US. The objective is to be there when you situations arise whether they're now or happened among from now or further out we have suppliers across the many that we work with that we're getting lifts from regularly and others are more point in time and.
And would expect this new set of suppliers coming in to be similar in profile. So it is about establishing the relationship helping them in these situations and then having them join that big group of thousands of suppliers that we work with.
On a regular everyday basis, that's that's served us well and we'll continue to do that as more and more suppliers reach out to us for help.
Thank you. Our next question comes from Paul Trussell with Deutsche Bank. Please proceed with your question.
Thank you and good afternoon.
I wanted to [noise].
Actually you know inquire about some of the elevated expenses.
That transpired maybe late.
This does prior quarter and we will see during the second quarter of you can just give a little bit more detail on how to think about quantifying that and also a somewhat related you spoke about the assistance that you're providing the I O is at this time, maybe just give a little bit more color around that as well.
Thank you.
Hey, Paul. This is this is Charles let me, let me give you a little bit of color in terms of extensive I'd say, it's really across a variety of there is within our facility as well as within the stores themselves.
So its cleaning and safety costs at the distribution centers that are at our stores. It's personnel costs me think about premium pay for people who are on the front line.
Overtime costs at our and our Dcs additional labor is we're dealing with some pretty.
Elevated volumes.
And then there are costs that typically would be borne by the iOS that really in the spirit of partnership.
We have stepped up and it made sure that we're supporting them in bearing some to those costs things like protective equipment at stores a single use bags for for example that a that given the way to customers and not charging for.
So really again, a a number of different things, we wanted to call out and folks that because of the timing of sales ramp really kicking in in the middle of March into the first quarter. The impacted those expenses was pretty minimal as it relates to the first quarter, but we do anticipate there will be more significant.
With respect to Q2.
We did not quantifying that number frankly, we've we've only had the benefit of one fiscal month and the second quarter to look at those expenses.
So we didn't think it was appropriate to try to estimate the exact cost, but we did want to call lots of folks that we would expect adjusted EBITDA margins in the second quarter to be pressured as as a result in some of those costs.
Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.
Thanks, Hey, good afternoon, everyone. My question is also around buying.
I think our Jay mentioned that things have shored up and I guess I don't know if you mentioned visibility, but maybe supply demand looks a little maybe a little more predictable I'm sorry, if I'm putting words in your mouth can you talk about the availability market in general.
There'd be an issue a couple of quarters from now given the surge and the maybe the lack of close out deals of that may arise in the next six months or is the backdrop such that theres. So many different sources that you're looking at that.
Reasons to be worried I'm, you know around six months from now shouldn't exist and then you mentioned commodity costs I think as well why wouldn't you be able and what it seems to be a price taking market for consumers why wouldn't you be able to pass those along to the customer. Thanks.
Hey, I mean, yes, so to answer your your first question on the opportunistic side.
We've really seen healthy opportunistic deal flow all the way through from mid March. When this thing started all the way took till now and continue to point to the relationships. We have the partnerships that we have suppliers need solutions to some of these imbalances even now and then also the diversification.
One of our of our supply base and that we work with lots and lots of suppliers to while we may see pockets of softness here and there more normal course of business that's true really at any time.
Looking forward I'd say if anything.
The amount of supplier the pool supply out there I think only continues to grow.
We've talked before about supply chain and balance.
Being a positive for this business, it's very much true some of these non traditional suppliers as we described them coming in I think that continues despite retail or reopening for one because I think it'll it'll be a longer build for customers back into those stores and for those sales volumes to get back up to more.
Normal levels and there's there's certainly many that are still close so I think that backlog that exist within supply chain continues to serve us well as far as opportunistic supply goes.
I'd also point to.
More traditional suppliers the amount of change and and disruption that's occurred with production lines and assortment and skews and you had suppliers narrowing their their skew lifts and now they're expanding back out and of course different rates were different suppliers, but all of these changes.
Create.
All sorts of imbalances or or some degree of.
Product Tales, if you will in the supply chain and and typically we're seeing those types of things come through from a traditional suppliers. So.
If you don't feel optimistic about that looking out but of course, none of us have been crystal ball and.
We'll continue to manage it as as we have.
To your tier second question around cost.
We've seen some price inflation eggs was the big one.
Back at the end of March beginning of April and that has since the beta does that come down a bit from those peaks a few weeks ago. We're seeing some inflation now in meets more recently with what's happened there within supply chain.
I wouldn't say, we've experienced really any material changes as it relates to to sales or the margin as far as inflation goes or you'll remember, we're we're more of a relative pricing model. So we're maintaining our pricing spread relative to others and delivering that value.
On the basket, and then and even deeper value on specific items and so.
As these costs increase through the through the supply chain.
Oh, well manage those with our partners supplier partners and then from a retail pricing standpoint always maintained value and then managing margin along with that.
Our next question comes from Allergan put Chin with Cowen. Please proceed with your question.
Hi, It was really encouraging the the markdown management what are your thoughts on inventory management ahead, and what kind of opportunities you have in terms of systems and infrastructure. We'd also love your view on digital engagement going forward a lot of our surveys speak to customers really appreciating all the digital engagement you have no.
What do you think it's going to happen later with curbside with marketing with Instacart or micro fulfillment just different avenues for you to continue to innovate. Thank you.
Hey, Oliver So the question so yes. It for the first part of your question you know as far as markdown inventory management goes yeah, I'd say consistent with the work that we've been doing for a while now to better manage starts with the by so open to buy we think about that.
Relative to everyday and opportunistic and its buying and inventory management teams working together to maintain that optimal optimal balance.
It's a little bit unique for us in that the assortment does change quite a bit I will flex in and out of categories as we orient towards value.
And and our and our sales will will go up and down according to that and so it's we've become quite good and the team is very very talented in a way that they're able to manage that inventory.
You know better and better each year and then on the system side, whether it's the order guide and information that we provide there for the operators ordering real time as were mostly a poll system or the distribution system in the way that we manage whether it's shorter coated products or what we call scores or or the.
This value items I think we continue to continue to get more refined and allocating and distributing product in a in a better way and then all the way through the supply chain.
Activity efficiencies.
Within the warehouses WMS has got a long way to helping US there. So a number of really positive things from a inventory management systems and also.
Ultimately sales and margin standpoint.
And we'll continue to work through that that list of enhancements that we that we've had on the list looking forward.
As far as digital go continues to be big part of our marketing strategy, we continue to.
Market digitally across new platforms with new content continues to be shared.
Great partnership between grocery outlet in the operators so the benefits of enterprise upscale brand level marketing along with the local connection that operators have very active on on social media, we continue to see healthy email sign ups.
And now talking to them more specifically as their introduce to grocery outlet in a way that we can better educate them on the model and the treasure hunt and value and all of that the attributes of the value proposition.
And the other thing I would mention from a digital marketing standpoint continue to give operators more and more more tools to create their own that get the system gets them started and then they cure rate from there whether it's removing items routing items and ultimately again this blend of both sort of automated system.
Our enterprise marketing along with.
The local connection and local store offering that the the operator them controls.
E Commerce continued pilot in a smaller number of stores.
We'll keep a close eye on that and see how it evolves, but would describe it very much as pilot stage right now and really more from a customer service standpoint.
In providing that to those customers that maybe don't feel safe coming into the stores.
We'll decide but something that we want to rollout a further longer term.
And and.
See where that goes.
Our next question comes from John Heinbockel with Guggenheim. Please proceed with your question.
So true to really maybe related questions number one.
Performance of everyday product versus opportunistic.
Yeah, maybe compare those and is that the primary mix headwind right. You think your phase here in the second quarter and then secondly, obviously would seem to be a lot of.
Non food discretionary.
Close out opportunities, maybe the thought process on investing inventory in that area.
In a recession you can get great values. Good margin will people buy that product is that how do you weigh the pros and cons there.
Yeah, Hey, John so yeah, as far as everyday and opportunistic Oh, we have seen a little bit of a shift there of course, the biggest increases more within core category categories, whether its.
Beans, rice, you ought to other canned foods toilet paper, you know and such and within these categories. There are many everyday items. So.
There has been some mix shift there and and then also some margin headwind as well, but but I'll say it really hasn't been too extreme.
And customers that are coming into the store are buying opportunistic as well some opportunistic within these categories and then they're shopping.
The whole store and so I think that has a muted the impact from a from a margin standpoint.
And as we've said.
Everyday and opportunistic items do span.
The spectrum, if you will from a margin standpoint, and so not not everyday items are lower or lower margin.
So that's the dynamic there and then as it relates to non food close out opportunities. Yes. We think there's we think there's a ton of opportunity. There. We as you know we do sell general merchandise HPC not non food items and so we're leaning into those opportunities, where we're seeing value and I'd say.
You know not not inconsistent with how we manage the business in general we always orient towards value and as a result, the assortment and the mix does fluctuate based on the products that we have access to you'll note that skews no no set hierarchy were not constrained as far as warehouse goes we're not constrained as far as.
Plan O grams in the stores go in that we don't have the so the model supports it really well for us it's more about choosing those items, where we can offer the most excitement to the customer the best value the treasure high and and the operators get excited about them and then the customers as well.
So we just have access now to maybe more of those than we have before and that that's a positive thing. The difficulty of course is I'm, saying no to suppliers and that we're only limited by the number of stores we haven't.
Volume as it grows.
More difficult part of that but but yeah really excited about the opportunities in food as well as non food.
Our next question comes from Michael Lasser would you be S. Please proceed with your question.
Good evening, Thanks for taking my question.
In the trend of mid teen comp.
In quarter to date has it been consistent all quarter or decelerate or accelerated when of course the period.
And also.
Everything evident that you're seeing some of the customers that you might have opportunistically picked up as a result of this situation coming back and become more regular customers or is most of that.
Hey above average costs, both being good bye bye you're more loyal customers, we're just buying more when they come in very much.
Hey, Michael This is Charles let me, let me tackle the first part of your question then I'll turn it over to RJ talk about customers.
But with respect to the comp trend in the quarter I would say it has been it has been generally consistent when we reported we give it prelim look is to April month to date results a few weeks ago and at that time, we talked about we're tracking.
In the high single digits that was after three weeks, which included the.
The impact of an earlier Easter holiday this year and so we got that comp benefit from that Easter shift into the.
Fourth week of April so once you normalize for that holiday shift I would say that trends across the quarter have been fairly stable. The average basket has remained elevated traffic patterns have been had been steady over the course of the quarter and again broadly consistent across regions across store vintages as well.
Hey, Michael second part of your question, Yeah, we have seen many new customers coming to our stores. These past couple of months and you know certainly excited.
For for them coming back is as future loyal customers you know I'd say, a few things about <unk>, how do we how do we retain them.
Or how do we how do we convert them from the first time customers into into repeat customers.
First I'd say the store experience goes a long way there new customers are finding us I think in many cases because of inventory.
Back at the end of March where.
We were in good inventory position, if you know maybe they weren't finding what they're looking for in their regular store. They were there are coming in finding out and I think we showed very well and I'd say that continues even to now as we talk about the healthy inventory position that were and I think that that makes a nice impression on customers of course value continued to deliver great.
Value when they come into the store I think for the first time many of them surprised the values that they see.
Even better at these times with other retailers less promotional so I think.
Our LP pricing strategy and the value we provide a shows very well of course the treasure Hunt we have had a lot of new items coming in and out of the store. These past couple of months. So customers of course love seeing that and then the local ownership the customer service at the operators are providing and a connection that they have with the community.
It's all these things I'm core to the model or are sticky and I think gets those customers coming back.
Then of course, we supported with marketing and really marketing is to communicate held these attributes and these things that customers experience when they are coming into the store so whether its digital that I talked about before and as we look to be more personalized and the way that we communicate with them. We think that goes a long way.
We can you continue to invest in TV and radio with new creative and have taken advantage of added value spots there.
And really just just as we think communicate the wow outside the four walls of the store so.
Hard to predict how traffic will trend looking forward, how buying behavior might change, but do you think we're positioned really well do you think the need for value continues has has been strong and I think it continues to be even stronger and so of course, we can provide customers with the best value out there so I think more and more.
Of down Bull will come to love grocery outlet.
Our next question comes from Karen short. Please proceed with your question.
[noise] that's.
The bigger picture question I mean, obviously youve discussed the fact that there won't be embedded costs that were well likely be ongoing in terms of cleanliness and things like that and that's something that would pressure. The I O is going far less and I guess I'm really wondering is bigger picture does this whole pandemic make good <unk> more.
I talked in pilots or less given that I also would say that pay scales. They're gonna have to go up and maintain a high about be maintained at a higher level.
Many of the essential retailers across the country. Just wondering if you'd have some high level thoughts on that and then the second question just wanted to ask as you obviously don't seem to want to give us a dollar amount on.
Leading financial support to the iOS, but is there any way you can't just maybe give us a little more context in terms of how to think about keeping me on on that kind of.
Yeah, Hey, Karen it's like a I'll take the first one and then perhaps let Charles jump in on two yeah, we think operators you're going to be more attracted to the model one of the first things we noticed in the early days was just the independence of the operator getting to react and then.
Our community in a way that felt right for the customers be that inventory be that's a hours. They wanted to be open just reacting to local and and ER and state.
Sure the directives the operators leaned in and and it was very collaborative on their part.
Oh, we think long term you know, we're seeing an uptick in inbounds from people.
That are interested we don't know thats kobin related or not but.
I'm just looking at sort of you know into last year trend to first quarter. This trend a number of people coming out we think that's going to be a continued trend.
We think that that the hourly pay you know that's been sort of a headwind we've had for five years <unk> from $10 to $15 and most of our areas everyone's offering you know frontline pay our operators doing the same thing we think those increase expenses are perhaps short term.
They're definitely overcome by you know increased profitability increased volume for the operators.
So I think on a net net you know it's a positive situation the operators, it's been stressful for them.
Lots of feedback that they're tired they've been sort of gas on for call. It two and a half months since the beginning of this but they would not.
I want to be anywhere else. It's we've been very very positive about just being able to respond to you know each one of their communities take care of their employees and and serve on the front line. So.
Charles you want to take the second part of that one.
Yeah, Karen and let me try to give you a little bit more context at least Directionally I think.
Yes, I think you can understand is it's continues to be very fluid for us and so it's tough to credit specific dollar amount to these costs.
But I think what we can say is we do continue as we think about adjusted EBITDA margins, we continue to manage the business.
To maintain margins inline with our 2018 full year performance and so when we think about Q1, and obviously performed well above that target I think just directionally Q2, we would expect to be below sort of that full year adjusted.
EBITDA target if you will as a result of those costs that a that I kind of walked us through.
Our next question comes from Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Thanks, and I wanted to ask a question about a store development you know the push out of openings and delays that might be coming from from coal that.
Two things first is in terms of the plan that you would have started 2020 with do we get some of those stores that that would have been developed this year do we kind of catch that in 2021. So that you have a little bit of an outsized growth in 2021 and then the second part is you know.
To the training that you typically do for I O is going through that process. You know you have you ever kind of your grocery outlet University, how do you adjust that process I'm moving forward and are there going to be you know any additional costs associated with that are pretty.
Actually fewer costs, if you're not doing it in person.
Yeah, Hey, Jeremy Eric.
So look we're feeling good about the the year.
From a near term standpoint.
You know we opened 10 stores in Q1, we still expect to open 20 to 30 a year. We're working each store. We're trying to open is sort of a specific set of circumstances and location. So we're working with developers to get there are many of the 2020 stores open, but it's really a case by case I would.
I'd expect to be.
Impacted a bit in the 2020 opening cadence, but it's really hard to guess at this point, what that's going to end up being.
I think to your point about trying to play catch up and perhaps pushing a bunch of those stores in a 21 I think.
We'll get back to the long term a algorithm of sort of 10% in 2021, we've signed leases. That's a good news pipeline remains really really strong it's possible and I think it's likely that we're going to see some better real estate opportunities come later in the year beginning of next year.
I think patients will pay off a lot of landlords are not going to be quick to recognize that.
Hey trend should be lower but you know essentially I think we're going to deliver a pretty close to what we said we do this year pick back up to the 10% cadence next year.
We sort of a favorable outlook.
What might come beyond that relative the training this is where and nimble organization morons and pivots.
Obviously, we can't have big gatherings for universities and classic.
We had pivoted to a fuel based training probably two years ago. We generally would have iOS in the office to interview then they go through their days of discovery, which is sort of their onboarding to start training and then they come back perhaps one.
Two or three day University class in a in Emeryville, So I'm actually the it would see recruiters have reported that their process is a little bit more streamlined because we're doing everything through zoom and teams I'm getting quicker access making decisions faster you know, we're gonna have to work a little bit harder to.
To get training into stores, but you know stores were opened operators are there that really energized about the new candidates coming yet so I.
I think we'll see some level of development and perhaps some costs.
And our training modules. So that we can do testing and training deeper modules online some simulation and that's that's in the process right now and something that I think co goodwill forced to be a little bit quicker, but overall I wouldn't say, it's going to be a a big disruption, it's probably just gonna be an opportunity Germany for us to.
You know get better a little bit quicker.
Thanks, guys. Good luck.
Our next question comes from Joe Feldman with Telsey Advisory. Please proceed with your question.
Hey, guys congratulations on the quarter and wanted to ask.
The inventory again I'm just can you explain I know the way the quarter ended it seem like you know it was a bit light and and I know you said a few times in the prepared remarks that you feel comfortable where inventory levels around and you are in good shape, but.
Operator there.
Yes. His line when you so I'm not sure.
Do we have a question from Robby Ohmes.
So that line is.
Are you muted Joe Feldman.
Oh I'm not can you guys hear me.
He just came back we lost share could you start over.
Sure I I pod, yeah, I don't know what happens is happening no I just wanted to ask again about the inventory that you know the prepared remarks, you guys commented that you feel very good about your inventory position and yet the quarter ended I think it was downtown 11% or so.
I'm just wanted to another explanation of what gives you confidence that you do have what you're either maybe the current number is actually better than what the quarter at number was but.
And also where you might be light in some categories are still goes basic Uh huh.
Toilet paper things like that where it's the right.
Yeah, Hey, Joe its RJ, yeah, so what happened, but at the ended the quarter at the end of March you. We of course were like just I guess to be passed or it's still in the midst of the huge increase in buying as customers were we're filling up their pantries and so the reason.
Both of that was of course lower inventory in the stores, which was then quickly followed then by lower inventory in the warehouses. The stores were looking to replenish so more just the cycle and the timing of when the quarter ended.
Since then I'm really throughout the month of April. We then built back up both in the warehouses and in the stores to the point, where we sit today in a much healthier inventory position than where we sat really two weeks after that image that initial demand shock. So.
You know that was again, just because of the sudden and.
Strong increase and customer sales that we saw that persisted for a couple of weeks. There and then you know as far as where we're still like it. It's its really limited so still a few items that are on allocation from suppliers toilet paper, although that's.
Coming back stronger one of the more difficult ones remains in disinfecting wipes I mean, just fewer companies producing those and so.
There are few pockets here and there still but I'm really across the the assortment.
The but the inventory is strong in that and that's true both in the stores and in the warehouses. So.
Really testament to the great job done by the by buying team by the planning team and then all the way through the supply chain from the warehouses. The transportation and then to all the efforts in the stores and ordering product and getting it out on the shelves.
Thank you at this time I would like to turn the call back over to ever Glenbrook for closing comments.
Great. Thanks, everyone I really appreciate your time today. Thanks for your questions. We look forward to catching up with you today and tomorrow for some follow up calls and questions and we'll talk you soon thanks so much.
This concludes todays teleconference. You may disconnect your lines at this time and thank you for your participation.
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