Q3 2020 Grocery Outlet Holding Corp Earnings Call
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Brief question and answer session will follow the formal presentation.
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Now my pleasure to introduce your host Joe Pallet. Please go ahead.
Thank you good afternoon, everyone and thank you for joining us on today's call to discuss grocery outlets third quarter financial results purchase.
Participants on this call will make forward looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
Any such items, including our outlook for fiscal 2020 and future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
A description of these factors can be found in this afternoons press release as well as in our latest prospectus and periodic reports, we file with the FCC all of which when it may be found on our website at investors that grocery <unk> dot com front as we see dot Gov.
We 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 to non-GAAP measures as well as the description limitations in Russia. The rationale for using each measure maybe found in the supplemental financial tables included in this afternoons press release, and our SEC filings and the investors tab.
Our web site.
We reference non-GAAP measures and some of our financial discussions as we believe they more accurately represents the true operational performance and the underlying results of our business.
Presenting on today's call will be gross routes Chief Executive Officer, Eric Lundberg.
President R.J.C.D. and Chief Financial Officer, Charles Brock.
Following our prepared remarks, we will open the call for questions with that I will turn it over to Eric.
Thanks, Joe Good afternoon, everyone.
I'm very pleased with our third quarter results as we continue to leverage our flexible and differentiated business model.
Our performance reflects our commitment to providing our customers unbeatable values in a treasure hunt of ever changing products, along with friendly customer service and locally curated assortment provided by our independent operators.
For the third quarter, we generated 17% revenue growth driven by 35 net store openings since the end of the same period last year in combination with 9.1% comp increase.
This follows a 5.8% comp increase in the third quarter last year.
Our strong comp performance was driven by higher basket size as customers continue to consolidate their shopping trips.
Gross margin expanded 40 basis points ahead of our expectations, primarily through the reduction in product Mark Downs and throwaways.
Adjusted EBITDA increased 25% despite elevated costs related to co bed and reinvestments back at our business to support our long term growth strategies.
The consistency of our results would not be possible without the hard work and dedication of our entire team, including our iOS and their store associates operators do an extraordinary job of creating a safe friendly and exciting shopping environment.
They actively engage with local consumers through social media and by personally connecting with customers in our stores.
Over seven decades, we have developed tremendous customer loyalty as we remain focused on delivering deep values at a fun treasure hunt shopping experience for our customers.
We know that our customer shopper stores in different ways and for different reasons, some because they're on a limited budget and rely on us for our great values and others because they just enjoy treasure hunt experiences that are seeking great deals.
And we'd love to hear feedback from all of them a few standout customer comments. We recently received include.
From a customer in Springfield, Oregon, I Love shopping here I can get my Money's worth you know hard economy.
From one of our fans in Santa Barbara, California, I loved the store they are innovative and always Wal stock of lots of cool things.
And this one one of my favorites, which came in from response to one of our Instagram posts I like to wake up to a big Bowl a bargain blessed before a hard day at the office thanks for being there for me.
These testimonials are great illustrations of our strong connection with customers and the unique value proposition that our model delivers.
Well, we're always looking to strengthen our relationships with our existing customers were equally focused on bringing grocery outlets model to new communities at expanding our retail footprint to that end. We opened 10 new stores. During the third quarter was seven more expected to open in the fourth quarter. This will bring our total 2020 store openings to 34, representing.
Approximately 10% unit growth looking forward, we remain pleased with the health of our real estate pipeline in support of our 10% annual unit growth objective.
As we have discussed previously we have significant white space in front of us, which we believe supports over 1500, new stores in existing states a neighboring markets.
Our business model was rooted in value it has a broad customer appeal.
This has resulted in a store model that has proven to be highly portable with strong performance across geographies urban as it is and with customers at various income levels.
We have made great progress this year in establishing our foundation for growth in the mid Atlantic region, where we plan to open approximately three to five stores next year, we remain focused on building our pipeline to support ongoing growth in this region and were very encouraged by both the quality of the real estate sites, we're seeing and the operator talent we're finding.
Well, we're energized about the growth potential of the east we will manage this expansion, but the same disciplined growth we have taken in the west.
Our first priority is to ensure we maintain high standards and freshness product assortment merchandising cleanliness and safety. These standards and sure that will provide a consistent customer shopping experience as we continue to grow brand awareness in the market.
I recently had an opportunity to tour the stores in Pennsylvania and held a small town hall meeting with our team.
I want to thank our entire team for their incredible execution as I was extremely pleased to see the engagement and enthusiasm of our iOS I can honestly say that the stores have never looked better from a merchandising freshness visual presentation perspective, we continue to be very pleased with our results.
As we look forward, we remain committed to reinvesting back in the business across talent and infrastructure as well as operational and systems enhancements as we scale for long term growth.
We have added some incredible talent to our organization over the last 12 months and I'm very pleased to share that we recently hired Harrison Louis to be our Chief information Officer.
Harrison brings over 30 years of business leadership, and I T experienced a grocery outlet, including the design and integration of digital platforms.
And big data adoption and cloud based operations his knowledge and expertise make him a great complement to our leadership team and we're excited to have them on board.
In summary, I'm extremely proud of our operating results and the continued strong execution on behalf of our entire organization. This year.
We have a long track record of consistent performance in various economic cycles, and we have again proven our ability to react swiftly and effectively in uncertain times, we continue to see enormous growth opportunity in front of us and are making the right investments to scale our business for long term success. We look forward to updating you on that progress in the future with that.
I'll turn it over to RJ.
Thanks, Eric.
We attribute our strong third quarter and year to date performance to our differentiated and flexible business model, which has allowed us to successfully navigate coated.
This model enabled us to consistently deliver a unique combination of extreme value unexpected deals and friendly customer service.
Our value proposition remains strong and is supported by all company departments working together and in partnership with our network of independent operators.
Everyone is performing at an exceptional level and we are incredibly thankful for the commitment and contribution of each and every team member.
Our strong differentiated foundation has driven consistent performance over many years and we are well positioned for continued growth.
Our opportunistic in everyday inventory is healthy and the pipeline remains strong.
Our buying team continues to identify and source product, but let her the while shopping experience for our customers.
We are seeing the benefit of longstanding supplier relationships as well as those that had been established in recent months.
Let me provide just a few examples from the thousands of deals that we have recently purchased to illustrate the types of opportunities that our relationships yield.
Example, number one is the purchase of 50000 cases of coffee K Cups from a top brand supplier in the category.
This is a relatively new supplier relationships that we've grown nicely in the past two years.
This item was recently discontinued by one of the suppliers primary channel partners and we were able to help them move through the excess supply.
We were selling this product with more than 50% savings elsewhere retail pricing.
Our supplier received good cost recovery and our customers aren't drawing a great deal and what has been hit very high demand category. This year.
Example, number two is the purchase of 60000 cases of a leading brand of coconut water.
This was a situation where a large multi brand supply decided.
I decided to discontinue a product line to focus on its core offering this.
This opportunity was identified during one of our strategic planning meetings.
We help them move inventory and in turn are able to sell a one liter bottle coconut water for 199 that's.
That's a 67% savings elsewhere retail pricing.
Example, number three is the purchase of 30000 cases of one gallon containers of salsa from a long term supplier in fact, Peter Reid, our founder Jim Reid son started this relationship over 40 years ago.
This was a foodservice items that ended up at surplus inventory due to lower demand.
We are selling a gallon of salsa for for 99, a 60% discount to elsewhere retail pricing.
Our customers love the value from this unique retail item.
These are just a few examples of the many without deals that generate loyalty with our customers.
We remain focused on cultivating relationships creative problem solving and quick decision, making as these are the core principles that allow us to capture these fantastic product opportunities.
Longer term, we expect market disruption to yield even more opportunistic supplied from large and small suppliers alike.
Our buyers remain focus on deepening existing relationships and we are very pleased with the many new supplier partnerships recently farmed.
Our marketing strategy is another critical component of creating and communicating excitement to our customers.
Initiatives at both the corporate and local level are designed to increase brand awareness foster customer engagement and drive traffic.
Messaging remains rooted unbeatable value and high quality brand names across the entire assortment.
We target a broad spectrum of bargain minded customers, which encompasses those that shop us as a primary secondary or tertiary store.
Our objective is to be the first choice for these consumers regardless of how they shop us and to continue to grow traffic and basket across all groups.
We have increased our emphasis on digital marketing across email digital ads and social media platforms, and we're pleased with the progress.
One example of our expanded digital reaches the price Nitin display AD that we run on Facebook Instagram, Google and flip.
These digital ads served to highlight the excitement of the in store treasure Hunt experience in the local community.
Digital platforms are the perfect medium for the dynamic that's running product within our localized assortments we.
We've developed store level inventory <unk> to highlight over 1500 unique items each week with our AD partners there.
This allows us to dynamically feature new deals that they arrive in store for both new and existing customers.
Digital platforms are also a great complement to our hyper local Io model.
Some examples are operator curated digital ads personalized IPO activity on social media and Geo fence targeting efforts to drive traffic we've.
We've also begun to test next door's neighborhood, social network to spotlight, our operators and their important donations to local food banks and charities.
Our growing customer email database will further amplify our digital marketing efforts.
We recently enhanced our point of sale system to enable more seamless customer email entry at checkout.
Our welcome series E Mail campaign is resonating with new customers and is garnering a high level of engagement.
We look forward to leveraging our growing customer file as we continue on our journey towards personalized marketing.
Our customer loyalty is also fueled by our commitment to the local market.
I remain incredibly proud of the many ways in which your operators support their local communities.
One recent example of this was shown by David and Karen Mckinney in our Lamaur, California store.
They recently partnered with a local resident Mitch couch to build and donate student desks to local families. In this time of need these.
These families are currently facing the challenges of distance learning and mentioned the mckinney's partnership is helping to ease that burden for their community.
This is but one example of how I make a lasting impact in the neighborhood they serve.
As we look forward, we remain very well positioned to continue to deliver the wife shopping experience to both current and new customers.
[laughter] unrelenting focus on delivering exceptional value to the customer has driven our past success and we are confident they will continue to fuel future growth.
I will now turn the call over to Charles.
Thanks, RJ good afternoon, everyone sales for the third quarter increased 17.1% to $764.1 million compared with the same period last year.
This growth was driven by a 9.1% increase in comparable store sales as well as the sales contribution from 35 net additional stores opened since the end of the third quarter last year.
Our strong comp performance in the quarter was broad based across all regions vintages and categories.
Trends were in line with our expectations driven by an increase in average transaction size, partially offset by a reduction in traffic as customers continued to consolidate trips over.
Over the quarter traffic trends remain stable well average basket size moderated its food away from home spending increase.
We opened 10, new stores in the quarter ending with 372 locations.
Sales productivity trends in our new stores, including recent vintages as well as 2020 openings remain healthy reflecting elevated demand compared to last year.
Third quarter gross profit increased 18.4% from the prior year to $238.2 million.
Our gross margin rate increased 40 basis points to 31.2%, primarily due to reduced markdowns and throwaways, resulting from faster inventory turns which were better than expected.
SGN expense grew 17.9% to $190 million, we the increase largely due to higher variable commissions to independent operators related to gross margin dollar growth higher store occupancy costs due to store expansion increased investments in personnel and infrastructure and kobin related expense.
Yes.
Consistent with our commitment to reinvest in our business in support of our long term growth objectives. Our third quarter estimate also includes incremental investment and talent and tools to improve our operating capabilities.
As a result of these factors SGN as a percentage of sales increased 20 basis points to 24.9% to 24.7% in the same period last year.
Stock based compensation expense for the third quarter was $3.9 million, which reflects current performance expectations for annual awards issued under our long term incentive program implemented earlier this year.
As a result of the tax benefit associated with employee option exercises during the third quarter, we incurred a 15 million dollar tax benefit, resulting in an effective tax rate of negative 58.8%.
Relative to our normalized tax rate this option related tax benefit added $22 million to net income in the quarter or 22 cents per diluted share.
As such GAAP net income for the quarter increased to $40.5 million or 41 cents per diluted share compared to net income of $12.4 million or 13 cents per diluted share in the prior year.
For the quarter, adjusted EBITDA increased 25.1% to $55.3 million from $44.2 million last year.
Adjusted net income increased 142% to $49.9 million or 50 cents per diluted share based on an average of 99.3 million diluted shares in the quarter.
Turning to our balance sheet liquidity, we ended the third quarter was $59 million of cash as we built inventory to healthy levels to support holiday and year end demand.
We invested $35.9 million in Capex in the third quarter as we continued to build new stores.
Yes back into the existing fleet.
We remain very pleased with our liquidity position as we continue to conservatively manage our balance sheet through the pandemic and retain ample flexibility under our credit agreement.
Now, we would like to share our thinking with respect to the balance of the year.
Comp sales for the fourth quarter to date are tracking in the positive mid single digits based on current trends, we expect comp results for the fourth quarter remained consistent at these levels.
While we always experience a seasonal dip in our fourth quarter gross margins due to holiday mix, we expect our gross margin rate in the fourth quarter to be at or slightly below prior year levels, reflecting ongoing headwinds from tobin related distribution expenses and commodity cost pressures.
With respect to expenses, we remain focused on the health and safety of our employees customers and independent operators.
Accordingly, we will continue to incur incremental cobot related cost for the foreseeable future.
In addition, the fourth quarter will include higher personnel expenses as well as public company costs associated with our final stages Sox implementation.
As a result, we continue to expect adjusted EBITDA margins for the fourth quarter to be modestly below prior year levels.
We expect interest expense to be roughly $5 million on a quarterly basis based on current rates.
We continue to expect a normalized tax rate of approximately 28%, which excludes discrete items and a weighted average diluted share count for the fourth quarter to be approximately 100 million shares.
We plan to open seven stores in the fourth quarter with no. Additional closures. This would result in 34, new stores opened during the year and full year capex of approximately $105 million net of tenant allowances.
In summary, we are extremely encouraged by our third quarter and year to date performance, which demonstrates the power and flexibility of our business model as well as exceptional dedication and consistent execution on behalf of all of our iOS and team members.
We remain committed to investing in our business as we continue to strengthen our foundation for long term growth.
With that we can turn it back to the operator to begin Q and a.
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Our first question comes from Randy Konik with Jefferies. Please go ahead.
[noise] Ah Thanks, a lot and good evening and good afternoon, everybody couple of questions on just Charles I think on the Capex I think the number you just gave is slightly below our model.
Yet there is a it looks like there is some upside slight upside number of stores, you're gonna have done for the year versus our prior guidance. So I guess the question is are you getting more favorable terms on your store builds.
Then from a Brian Mcandrews perspective, what is he saying about what he's seeing in the field as he goes about his his calls and relationship building with the different landlords.
And the different real estate opportunities that are out there. That's my first question and I have one more yeah.
Hey, Randy I'll take that Brian Mcandrews portion and then perhaps Charles or want to come back with Capex. So it's.
It's still early yet I think in the downturn cycle I think we've all read.
That way.
We think theres going to be some real estate opportunities coming next year, we've been really actually quite pleased with what we've seen.
The pipeline for real estate remains really strong we've got a lot of great sites signed up for 2021, we've managed through 2020 quite well.
Lots of roadblocks thrown at us and the team is.
Handled as well.
The markets that we're in are quite competitive we've used the same sort of flexibility that we have you know splitting up boxes, taking smaller you know 10000 square foot size, taking larger you know say 30000 square foot sites. We've used all the flexibility we can make sure we have a first crack.
And a lot of these sites.
I'd say similar to other parts of the business, we've really invested in this area and I think it's.
It's paying off you know that the team is is really jelled quite well so.
I'd say, it's early days yet to start counting.
A lot of these opportunistic sites, but our belief is that you know what's happened to the economy should produce.
Nice opportunities going forward.
Yes, Randy it's Charles just to add to that I'd say from a capex standpoint, yes no.
No changes here relative to the way we thought about Capex. Historically again pleased that we opened 10 stores in the quarter and as we guided expect to open an additional seven here in the fourth quarter. So any capex change you're seeing there is really just the result of timing shifts with risk.
Back to construction in the various projects we have in process.
Great and then my last question is when you guys went public I believe that it's worth that basket size was around $25 I could be mistaken and the average Vince.
Visit was like twice a month so.
<unk> <unk>.
We think about that post that that normal lives level. It seems as if there would be a lot of massive opportunity for that basket size go up pretty substantially and the frequency of shop per month to go up pretty dramatically. So I just want to get some perspective on that and then when you look at it.
What's going on with the basket size now can you just give us maybe a little color on on that on that higher basket is yet.
Due to increased breadth within the basket or is that the consumer is loading up on a more units per skewed just did you give a little more color on what you're actually doing would be super helpful. Thanks, guys.
Yeah, Hey, Randy it's our Jakone I can take that and others can chime in yet yeah, we agree with your comment on the opportunity here.
In terms of both basket growth and and trips as we think about the customers that are shopping our stores.
The frequency with which they shop and then and then certainly all the customers are consumers out there that we can can you do attract to the model. So so I think you know everything that you point out there and as we've talked about in the past you know continues to be true yeah, We think thats, a big opportunity for us in terms of the comp and composition of our call.
<unk>, we do still continue to see some consolidation in trips and so when customers are coming in.
They are they're stocking up they're buying more than they than they normally would or or they did pre coded and so you know that that's the trend that we've seen a really consistently since the beginning of this kobe time period with some moderation as food away from home spend has increased with openings of every markets.
Regarding regarding mix and what's in the basket.
And as we think about performance of the of the business.
We continue to be really pleased with what we're seeing here and that is very balanced. So we continue to see growth across the entire assortment, we continue to see growth in basket composition.
For both opportunistic and everyday as we talk about those two different pieces of the assortment.
We we do still see some elevated demand in certain categories. That's persist I don't think thats unique to us but.
But when customers are coming in and looking for those items and buying them in larger quantities. They're also they're also shopping the whole store so across all of our fresh categories Center store hardline GM and HPC as well so happy with it the composition, there and and you know in terms of.
<unk> units and ring I think consistent with what's happening more broadly in the industry. You know the big bigger increases there has been on units when customers were initially stocking up they're just buying more items and then that's moderated to some degree as again spend away from home has shifted with markets reopening.
[music].
Very helpful. Thanks, guys.
You bet.
Next question Oliver Chen with Cowen. Please go ahead.
Hi, Thank you very much nice quarter regarding your comments on food away from home and that relationship Wood basket size do you do you think you'll consent and continue to see a certain degree of volatility there and door as we all contemplate potential resurgence as just would love your views there.
And then the new customer element is quite compelling.
What's the nature of the new customer any any consumer insights you're seeing that can help lend itself to retention and engagement that that new customer acquisition point. Thanks.
Yeah, Hey, why don't I take the first one and then perhaps.
RJ you can jump in on the second one so.
[laughter].
Cover macro trend, it's anyone's guess I don't I don't have a great sense for when or how this will start to unwind and returned to normal what's normal look like.
So we know that you know food at home is helped anyone that's in the food.
ER business, you know the grocery business the discount business I mean, we've all sort of benefited how this starts to return how long how sustainable. It is I think it's just too tough to call but.
We just remain you know super focused on value very.
Very focused on the I O very focused on delivering what our customers expect us.
You know to deliver to them, which is incredible value.
Joe you know, even if I could give you. The answer is it's really tough to compare geo to all the other conventionals out there were this treasure Hunt limited skews were you know sort of hard hitting values in wells.
We don't have a lot of the other things that other retailers sort of use for for their strategy. So it's really tough to say, where the macros headed and how the customers can respond but.
We're just going to remain flexible and do we do focus on the bi folks and the value and focus now.
Hey, Albert regarding new customers continue to be pleased with the amount of new customers that are shopping our stores seen consistently healthy growth there.
In particular, and we've mentioned this before.
New customers continue to to find us in our more developing markets, specifically, southern California, and Pennsylvania. So like what we're seeing there in terms of of new customer growth and when we think about customer segments and who these customers are you know I'd say that we're seeing new customers across all types.
We target you will recall the bargain minded customers. So these are these are people that are seeking value. There's certainly a lot of them out there yeah. We think we think if.
If anything there there will continue to be more as the monks role ahead here you know some of these customers need need to save money based on income levels. You know others. Just are looking for more of the thrill of the hunt.
But that but the common denominator here is that they seek value has been and we think continues to be really important. So that's that's where our focus is.
But because this is such a broad group of consumers are they do shop us differently right. Some of US some of them shop us as a primary store others were more secondary or tertiary we surveyed these customers. All the time, we know that satisfaction levels are very high from the customer surveys that we that we put out there.
And and as we look at comps they have been healthy across these these customer groups as well so.
As mentioned in the comments our objective here is to grow and where we think the opportunity is to grow both basket.
And traffic with these customers and that you know the typical progression is to.
First identifier or get on the radar through awareness. We then engage with them through our marketing efforts and then when they come into the store and they shop up and down the iOS the model really resonates. It's the it's the treasure Hunt, it's the values that it's great items and then of course, it's the connection with the operator, which is incredibly unique so.
Yeah. The strength of that model continues to be there are new customers are finding us and then does a yield future loyal customers. Thanks, RJ just a last follow up Eric the mid Atlantic independent operator opportunity sounds quite compelling and you're making great progress there could you elaborate on what you're seeing.
And how you know your program is scaling and continues to be very successful in new regions along that line. Thank you yeah, absolutely Oliver just took a nice trip back there last months and Oh.
A week with Heather and the team and I was really happy with what I saw let me just give you a few details deeper so really high engagement with the isos, there, they're leading in that market.
We walked stores I mentioned that they never looked better merchandising a freshness upfront item selection on the Powerwall and the end caps adjacent season the market we've invested in.
In marketing. So every store back there has the bargain bliss package that Leila rolled out last year or so.
Thats looking great and then from an Io standpoint.
We've got some really strong market iows, that's important because we'll use local market I chose for training and so as we recruited I think we have you know half a dozen new recruits cheeses foreign operators and training in that market and they do a lot of their training with our content, but they learn it.
In stores.
We've got some really solid operators in that market that are helping us get those folks trained and then I'd say the last thing is just from a real estate standpoint, we took a tour with no more local real estate.
Market Representative and then Brian myself, Tom with Man and then Heather I think we're going to see some nice opportunities in the broader Pennsylvania, and New Jersey market. So.
You know heathers has done a great job she's she's leading she's in charge of that market as a general manager she's making calls on what we're going to market and how we're going to market and.
Where we're going to go in from a trading standpoint, I couldn't be more pleased to see that team developing so.
Just look in the second grade [noise].
Thank you best regards.
You too thanks Oliver.
Next question comes from Paul Trussell with Deutsche Bank. Please go ahead.
Good afternoon.
And congrats on another good quarter.
I wanted to first enquire about what your data or or you're just you're gauge.
It of how you're performing.
In your markets from a share standpoint, and what you're seeing more broadly as it relates to competition and promotional activity.
And then as it relates to the quarter to date.
Performance you know mid single digit comps is is what you are putting up pre pandemic.
But maybe just provide a you know your level of confidence right that you will sustain that comp rate.
Going forward just given that the business has seen a natural deceleration you know over the last few months a post you know cobot. Thank you.
Yeah, Hey, Paul Eric here.
So let me take the kind of more the general market share and then I'll jump over to promotion and then we can talk sort about the long term.
We think the value propositions as strong as ever we think we would use to illustrate that is just a very strong topline growth across every geography and every vintage in every department. So I'm, just really strong across all of those.
No customer loyalty solid Margie mentioned surveys they tell us that satisfaction remains really high and its really high because we're combining these attributes of value and treasure Hunt customer service and then community connection and those all continue to resonate with the customer.
I'd bring you back to sort of last year, we first met to this concept without changing the locals and outlook on the chains don't underestimate that that's alive and very very healthy in the model.
We are seeing new customers, particularly in our newer and developing markets as RJ pointed out of southern California mid Atlantic So.
We know you know weve literally got decades of gross out there for new.
New units and you know what what we've proven I think is very portable and expandable model. So in the long term, we're going to continue just to reinvest in that algorithm of you know sort of multi years in the future relative to promotion.
You're right, we did see a decrease in the promotional activity early on uncoated I think as people pull back the horns, they didn't know what to promote.
We saw that activity go back it has since increased but I believe it to be still below where sort of normal levels, you know 30, 35% product promotion levels.
The way, we stay intact with it we do a lot of price checking and we continue to monitor prices versus key competitors.
Relative to grocery outlet and we keep really close to it to make sure we were delivering value because that's what our customers are coming to the store for so.
What we're providing the value and named brands the local shopping experience and the Io. That's it's really tough to replicate in terms of long term I'm not sure we're changing.
Our outlook. This year is going to be one heck of an anomaly I think for all of us.
And certainly we'd expect at some point.
In the future that the algorithm sort of returns back to me.
More of a long term targets that we've talked about before.
Thank you just one quick follow up would be you know you mentioned some some positives on the inventory front just are there any categories or areas, where you are having a common challenges from a supply chain standpoint.
I'd say.
Look I'd say the deal flow has been really healthy supply has been really healthy and I'd say two reasons. One we've got an amazing team of buyers who were working really hard everyday and they've got great great relationships.
Pipeline of opportunistic is really strong we continue to have more product available to us and were able to buy.
You know Weve talked about this idea of market disruption.
That is and I think it is going to continue to be our friend I think in the short term.
You know the flexibility in the model, we're just built to react Paul to everything Thats coming our way I think in the long term you know any sort of some supply chain imbalance, it's going to be a positive for us were built that way and I wouldn't underestimate I think what we've done is we've created solutions for suppliers, along the way that sort.
It gets us to the top of the leadership position in terms of relationships I wouldn't underestimate the importance of being with those suppliers during all kinds of cycles and that is we've tried to do.
Thank you next question comes from Kate Mcshane with Goldman Sachs. Please go ahead.
Hi, Good afternoon. Thanks for taking my question I was just.
Kerry this is kind of building on to a question that with that earlier, but just if there's been any real difference.
Regards to your lower end consumer and was the snap composition different this quarter than maybe you saw I in the previous quarters and any learnings you have from from that consumer.
Yeah.
I would say the snap has not been markedly different.
Other than you know, you've obviously seen many more dollars sort of put into the system.
States are famous for changing of how they distribute so we're always trying to figure out what day, what state is going to drop but I wouldn't say it's been.
Largely different given the pandemic and the additional.
Additional dollars no.
[noise], Okay, and again I think on a question that was already asked but just just given.
It's still a state of the world where people are not travelling in there at home. When you I know you have a deck around holiday.
You know with regards to sales, but just given this holiday with more people Dan how many have smaller gatherings, but it sounds like they'll be out less.
Do you have any expectation or.
Do you think there is a chance that you could see a reacceleration of the comp as we get more into the holiday season.
I think it's it's possible you know if you just do the math on.
You know what people are planning.
Planning to do with their time, they're not going to travel. So that's more at home, they're gonna have more discretionary dollars to spend I think the gatherings, you're going to be more frequent but smaller.
I would say this you know it's hard for us to project out predict it but we are prepared I think from an inventory standpoint in both on the MTO side, which the fourth quarter food prep for us tends to be a little bit more weighted toward made to order versus opportunistic, but you know just looking at the often is deals that we've been buying every Friday.
In the buyers are viewed the last four or five weeks, what's loaded into the store right now and into the warehouse is pretty exciting opportunistic so.
You know those trends are.
I think going to be short lived you know we're looking at is much more from a long term standpoint, but I think your thesis is.
As good as any just looking at how the customer is going to behave in this fourth quarter.
Yes.
Next question comes from Bobby Robbie Ohmes with Bank of America. Please go ahead.
Oh, Hey, guys. Thanks for taking my question I think you know my follow up is just you.
One the mid single digit comps it.
Obviously deceleration from Threeq you the industry data I've seen has been we have decelerated like that for the grocery industry as far as we can tell is there or is there something that happened in October you know was was Halloween significantly different this year for you guys.
Did you know what what changed is it more traffic and basket you know just maybe more color I'd also be curious I mean, when you when you look at the.
Opportunistic menu that year I always are looking at for Fourq you this year versus last year as the menu as good or better they're just trying to get a little more color on the b cell comps.
Yeah again, I just take you back to its it's it's so hard to compare a grocery outlet experience to a conventional said stop with that.
I'd go back on sort of recent trends look.
We're thrilled.
The quarter I think every point, we measure 2020 is a year and the quarter, it's going to be a banner year overall comp consistency.
Steroid stronger across departments regions vintages.
Weve stabilized in the mid single digits.
We are seeing.
Increased basket.
You know, we said that on the call.
We're continuing Ravi just to play the game and we play we're buying products, we're investing in the infrastructure and the team are really working on the iOS to make sure. The experience in the store is you know is unbeatable value customers get we've added safe to that you know just making sure that.
The stores are safe, they can possibly be and.
We're going to hold on through the pandemic until things start to get back to normal, but I wouldn't say on your Halloween specific question that other than you know there weren't a lot of trick or treaters out we still bought and sold a lot of candy and and all of our I'd say home decor for fall and harvest.
Sold out pretty quickly, which we bought more of that but other than those two specifics I would say there's nothing in the sort of late September October numbers that we look at and say is markedly different.
Thank you next question Michael is there with you, but yes. Please go ahead.
Good afternoon. Thanks, a lot for taking my question one of the enduring outcome for the for the broader grocery sector coming out of this year is going to be a higher penetration of E commerce.
How does that make you rethink the digital aspect of your business. So.
If he com penetration was pretty cool Goodwood, three four and 5% in the grocery sector now.
And 15% you just mean that the addressable market opportunity might be lower and in more difficult. If you of course, you outlined is not participating in that growth.
Yeah, Hi, Michael it's our Joe I'll take that one we get in regards to E. Commerce, we have not changed our position which.
Which is to say that it is not a priority for US right now of course, it's something that we continue to look closely at and it's not a priority for the same reasons that we've talked about in the past, it's really hard to replicate the treasure Hunt experience online and you know and then on top of that just the close connection.
Customers have with the operator and the overall in store, we call while shopping experience in terms of growth prospects. We continue to be super excited about the ample long term growth opportunity with with real estate expansion for one there's a lot of white space out there and and yeah. We're pleased.
Just with the progress that we've seen there and and you know the pipeline is very strong looking forward and also growth potential within our existing stores talked earlier about continuing to grow basket customer account and gaining share within the markets, where we already have stores, where we're we're a lower share.
Our player and so there's plenty of room right Rod.
Regarding I'm just more broadly digital aspect of the business in the stores. We do continue to focus quite heavily on growing our our digital infrastructure digital marketing is a big big part of that so.
It relates to social media the email database that continues to grow future plans for personalization, we think there's a ton of upside opportunity. There and then and then more broadly continuing to use data and analytics to manage the business. Both in terms of the decisions that we make but also.
You know the information that helps us be more efficient or the systems that help us operate more efficiently within corporate and then and then certainly at the store level. What the operators are doing every day. So we'll continue to evaluate ecommerce overtime, but no immediate chan no immediate changes in terms of prioritization.
Yes.
Next question Karen short with Barclays. Please go ahead.
Hi, Thanks, very much I'm, just a couple of questions I'm curious on your inventory growth I got dropped for briefly but it did you.
Do you have any color on why you had such high inventory growth relative to your comp guidance for Fourq you.
So maybe a little color on that and then I had one or two other quick ones.
Yeah, Karen it's Charles let me tackle that I'd say overall, we're really pleased with the quantity and composition of the inventory as we exited the third quarter. It was healthy across regions as we look at specific categories and key items.
It was it was really right, where we wanted it to be it does reflect the build for holiday and and ended the year demand.
Keep in mind for us that over the long term as we have talked about we would expect inventory to grow roughly in line with sales on a quarter to quarter basis. It can definitely fluctuate due to the nature of our of our buying model. So it's not necessarily linear but overall, we're really pleased with how we exited the third quarter.
Okay, and then I'm wondering I guess, you talked about new store productivity this quarter and I'm just kind of curious philosophically because that's always a metric that you've kind of talked us away from anchoring on too. So I'm wondering why that's certainly something that you want to point to and or it's more relevant and what not.
Really hasn't been something that we should have.
You know you've guided us to not look to in the past.
Yeah, I would I wouldn't if that was the way you interpreted that really what's in our intention I would just say for US you know, we're pleased with new store productivity, we've talked about the fact that rising tides lifting all boats that I don't think fundamentally we think about new store productivity any.
Any any differently than we have it really is for us that the larger white space opportunity.
And we just feel great about the infrastructure were building too you have to go after that for the long term.
Next question some old Gutman with Morgan Stanley. Please go ahead.
Hey, guys. This is Michael Tessler on for Simeon. Thank you for your questions.
I guess first on gross margin there's been some great great expansion all here, including in Q3 in shrink because then you know the beneficial benefit there I guess my question there be.
Longer term.
Our goal here has been to add.
Keep margins flattish and that is still the goal and there'd be an expectation that maybe next short next couple of years that you did that upside from this year it would be the reinvested or what might naturally reverse or are we perhaps taking advantage of the higher run rate on on the margin going forward.
Hey, Michael its Charles Yeah, I would say that nothing's changed for us in terms of the way we think about margin. We continue to manage for the long term the goal towards stable margins and making sure. We're always reinvesting back into into the value propositions, we think about third quarter yeah.
Yeah that you know roughly 40 bips improvement versus last year.
Was better than we thought frankly, you know that did come from more favorable shrink than we had anticipated.
And that can help to offset some of the some of the commodity cost and coke related cost pressures in the third quarters, we think about the fourth quarter with moderating topline really that shrink benefit goes away. However, we continue to feel those headwinds around commodity.
In Cobi cost so that's really the nature of our guide.
The color, we provided around Q4 margins being at or slightly below prior year.
The tier to your question over the long term you know continue to think the same way, we always have about managing for stable gross margins.
Next question.
John Heinbockel with Guggenheim. Please go ahead.
So two quick things maybe for RJ.
There's always a notch performing in the current environment and in a trip consolidating environment.
Have you tried to find more big pack product.
And have you been able to.
Then just secondly on me maybe for Charles work on an on investing back into the business and you're talking about talent and technology.
More color on that particularly on the talent side, what are you doing anything with regard to.
The buying stuff is already pretty robust.
Or anything out in the field.
Hey, John Yeah, not nosh continue to be a a great growth category for us consistent with you know how its been for a long long time now so.
I wouldn't say any material change there in terms of relative growth to the rest of the business. So I'm really pleased with the continued growth there and and that's across many different categories of course in the assortment big.
Big pack product yet no no specific initiative there to to grow larger pack sizes within the assortment you know as we do it's about value and in some cases that could be larger pack items larger quantities. We gave the example of the gallon salsa so seeing some of that with food serve.
This shift in lower demand, there and some opportunities, but broadly speaking well, we're continuing to see where we can find value whether at some larger pack or regular sized packaging.
Yeah, Hey, John Eric.
Let me talk just a little bit I'd, probably emphasize talent. We've we've made a lot of investments and talent.
Particularly as we saw the volumes start to pick up in India.
Into Q1 Q2, we started to pull forward some of the positions to make sure. We are ready for it. So we really invested a lot in the whole real estate world, So thats construction and maintenance.
Maintenance and everyone sort of gets stores ready to be opened only through opening finance and accounting and Charles is area. We've we've added some serious resources to help us through the first year compliance requirements for Sox, which is not exciting but super important I'd.
I'd say field operations, we continued to scale that group both from a field training standpoint again, a lot of the OTI has come into the system. So.
So between learning coaches and you folks on the fuel just shepherding them through the the learning that is required for four to six months I think probably most exciting is buying you know we're always looking for talent were able to hire someone that was sort of a unknown veteran from 99 cents only joined us about a month and a half ago. So really.
Cited about her addition, and then multiple positions at the assistant buyer level I'm, just a really incredible team of go getters, we're really proud of them and you know this has been a very challenging year for group that really loves to get out in front of.
Suppliers, they've done an amazing job staying really well connected so.
Yeah, it's all across but just give you a few of those maybe RJ on that on the technology side. If you want to add anything go for it.
Yeah, No I think I mean, consistent with investment across all parts of the business we've made investments in the.
He team I love, having Harrison onboard other.
Other members of the team and continued investment in really infrastructure as we look to further develop.
Systems, and then build capabilities to support future growth.
Next question comes from Jeremy Hamblin with Craig Hallum. Please go ahead.
Thanks, and congrats on the strong quarter I.
I wanted to just confirm something on the modestly following trends here.
Is that coming more from.
Your basket size getting a little smaller or is that more reflection. It sounds like of traffic trends softening just a bit so theres more food.
Food away from home.
Charles you want to take Jeremy Charles <unk>.
Let me take that one I would say you know it really has been the same dynamics we've seen since the.
Beginning to covert just post the initial wave of that panic buying it's been first and foremost customers continuing to prioritize safety in their consolidated their trips there again.
Again, as we've talked about very much engaged in mission driven shopping so those traffic trends have stayed steady.
And what we have seen change is that a moderation in in the basket. So they continue to stock up and buy more but that those numbers come down a little bit as I'm again food away from home options could increase for that.
Next question, Michael Baker with D.A. Davidson. Please go ahead.
Hi, Thank you a couple of follow ups first a in some of your customer survey work Oh, you're picking up customers new customers, but are you seeing any increased the percent of your customers that see you as a primary source versus a secondary source versus a tertiary sources has that changed at all during.
This pandemic.
It's been it's been pretty consistent meaning we're seeing healthy growth across all groups and therefore that that balances remaining pretty steady.
Okay.
Interesting and then no. Maybe this is just looking out you know over the coming quarters and I don't know if you're prepared to talk with US, but you know you are up against some pretty tough comparisons in the first half of next year no. One knows what's going to happen of course, but but you do have to put in your inventory and you do plan. It you know a couple of quarters in advance or.
So I'm just wondering how you think about planning your inventory when you when you know you're up against these these are double digit comps. Thanks.
Yeah, Hey, it's Charles <unk> <unk>. It's a good question I think you alluded to and Eric referenced earlier, there's there's just a lot that we don't know.
Over the coming months here, we are expecting the backdrop to remain very fluid. We're looking at a range of scenarios on having to do with the timing for when a vaccine is widely distributed what's that what's the macro backdrop.
I would say whatever happens we'll be ready you know this business model is built on flexibility and particularly as we think about supply chain and the purchasing team and their ability to to move.
Move quickly so we'll be ready for whatever is.
Whatever.
Backdrop, we're presented with over the next several quarters here I'm really as we think about next year. We're focused on what we can control we are thinking about being very mindful to match our investments with the top line trends, we're seeing we're seeing in the business. So so well.
We'll stay nimble we are excited about as we think about next year the ability to bring to bear a lot of the investments to the benefit of those investments we've pulled into 2020 with respect to people and tools.
But as we get more visibility we will provide its we'd look to provide everyone with an update here when we report Q4 numbers.
Next question, Joe Feldman <unk> tax thank you.
Yeah, Hey, guys. Thanks for taking my questions. I also have a couple of follow ups have you.
You talked about a little bit of a moderation you know down in that mid single digit level are there any categories that you've seen more or less moderation.
You want to take that no I, yes.
Yes, no. It's it's been across the basket Joe <unk>.
Nothing nothing.
Specifically that pull out other than it depends on how far back you're looking certainly you had really high demand in categories like like paper and Sanitizer cleaners, you know what other items like that soaps et cetera.
So yeah that's.
That certainly has come down from the higher levels earlier in the year and then you know beyond that I'd say, it's you know it's more broadly across the basket again, reflecting food away from home that the shift in spend.
Got it thanks and then.
One other one.
I know it maybe a little early to think about 2021, but just kind of a high level are there any.
Puts and takes we should think about from a profitability standpoint, or you know any I know bill obviously, we have elevated <unk> related expenses, presumably that continues into next year and <unk>.
Are there any.
Things that we should just think about as we look out to do our own models that you.
You know might stick out.
Yeah, I think again this is Charles.
Talked about there are so many moving pieces as we think about what 2021 might present. This way. So you know at this stage I think would be premature to try to determine.
Determine exactly what those are and what the magnitude of those puts and takes might be that as we as we think about again reporting Q4 numbers here.
Early next year, we'll look to provide a more fulsome update based on what we're seeing.
Thank you I would like to turn the floor over to Eric for closing remarks.
Thanks, everyone enjoyed your questions and connecting with you. Thanks, a lot for your interest in all your continued support will we'll talk to you in a in a future quarter look forward to catching up with you over the next couple of days. So thank you [noise].
This concludes today's teleconference. You may disconnect your lines at this time.