Q4 2020 Grocery Outlet Holding Corp Earnings Call
Yeah.
Greetings and welcome to grocery outlet fiscal fourth quarter, 2020 earnings results Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
And as a reminder, this conference is being recorded if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
It is now my pleasure to introduce your host Joseph Pelland, Vice President of Investor Relations. Thank you you may begin thank.
Thank you good afternoon, everyone and thank you for joining us on today's call to discuss grocery outlet's fourth quarter and full year, 2020 financial results.
Participants on this call will make forward looking statements, including our outlook for 'twenty fiscal 2020, one and future performance that should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These forward looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
A description of these factors can be found in this afternoon's press release as well as and our periodic reports we file with the SEC all of which may be found on our website at investors at grocery outlet dot com or on SEC Gov.
We undertake no obligation to revise or update any forward looking statements or information.
These statements are estimates only and not a guarantee of future performance.
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 and rationale for using each measure maybe found in the supplemental financial tables included in this afternoon's press release, and our SEC filings and the investors tab of our website.
We reference non-GAAP measures and some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.
Presenting on today's call will be grocery outlet's, Chief Executive Officer, Eric Lindbergh.
Is it at RJ, Sheedy, and Chief Financial Officer, Charles broker.
Following our prepared remarks, we will open the call for questions with that I'll turn it over to Eric.
Thanks, Joe and good afternoon, and thank you for joining us today for the discussion of our fourth quarter fiscal 2020 result.
Looking back at the year I'm extremely proud of the work we have done two rows of the challenges and opportunities created by Covid.
Our financial performance throughout this year and demonstrates the strength and flexibility of our business model for.
For the full year, 2020, we delivered new store growth of 10% of 35 stores open and despite the difficulties created by the pandemic.
We also exceeded our long term targets across key financial metrics, including comp store sales growth of 12, 7% gross margin.
And expansion of 30 basis points to 31, 1%.
And adjusted EBITDA growth of 32%.
We achieved those results by staying true to our business model, providing our customers with treasure hunt and ever changing deals friendly customer service and our locally curated assortment provided by the independent operators.
We work closely with our supplier partners and leveraged our operational agility to meet consumers' needs and the law.
Getting them with unexpected deals each and every time they walked into grocery outlet.
Throughout this difficult period, our highly committed independent operators proved their resilience dedication and creativity and the many ways. They helped each other and their communities.
This included remaining in stock on our central items, and keeping customers and formed on the arrival of in demand products, while maintaining clean and safe stores for their customers and and ever changing landscape of apartments and protocols.
Sure of our mission of touching lives better and we're committed to getting back to our communities with a focus on reducing food and security.
Perhaps one of the greatest accomplishments of last year was our independence from hunger campaign.
It was a record year with customers donating $3 million to their local stores and grocery outlet contributing $1 million with all money going directly to local charities.
I want to thank our teams and thank our iOS once again for their extraordinary efforts.
Our flexible business model supported by many years of strategic investments positioned us to deliver exceptional results and an unprecedented environment.
We continue to build on our strong foundation and reinvest in our business as we prepare for the many years of growth ahead and big.
Big part of this investment has been our effort to attract develop and retain talent and we're very pleased to have assembled a group of highly accomplished and skilled team members across the organization.
And most recent senior executive hire as Tim Scott, our Chief supply chain Officer.
Tim started this January and brings more than 20 years of business leadership and supply chain experience your grocery outlet and most recently as senior Vice President supply chain for Soapies, one of Canada's largest grocery retailers and we look forward at tims contributions as we continue develop our supply chain and support future growth.
Our efforts to bring talented individuals with deep experience and new skill sets did not stop there.
We also further expanded our board of directors, which now stands at 12 members. Most recently, we announced the addition of two New Board members Maria Fernanda Mejia, who draws from our consumer goods experience across strategic planning brand management and supply chain and Gail Moody Bird, who has a wealth of experience and digital and brand marketing demand Gen.
<unk> and merchandising.
We're extremely pleased to have a diverse well rounded board of directors with a breadth of background insights and expertise that will benefit the business.
As I stated earlier the success, we have achieved this year is attributable to our strong execution of our business model, which is differentiated and two primary ways, how we buy and how we sell our accomplishments throughout this year only further my confidence and excitement and the future growth potential of this business.
Starting with Dubai, we continued to closely partner with our strong network of suppliers as well as build new vendor relationships during 2020.
We help them to manage and unprecedented demand and swiftly changing consumer behavior during a challenging period at.
At the same time, we continue to ensure that we consistently meet the needs of our customers with a full assortment and great value. We cannot of accomplish this if it were not for the strength of our buying organization and the infrastructure, we have invested and for many years.
Turning to the cell iOS and their associates worked tirelessly to serve their communities during periods of high demand and uncertainty.
They further deepen relationships with their customers, while introducing new shoppers to our value proposition and.
In addition to the ever changing deals and extreme values at as the customer loyalty garnered by our Io suite friendly and helpful Service that drives return visits of stores for example throughout the holiday season, and several of our stores give back to their customers and need each year through random acts of kindness selecting customers throughout the season to pay for their groceries at.
Check out this type of unexpected generosity of personal connection and it creates with customers is a great example of what sets our model part.
On the real estate front, we opened 35 stores and 2020, keeping pace with our stated objective of 10% unit growth annually. Despite the hurdles created by Covid.
We also continue to make progress and investing in infrastructure to position us for successful expansion and our existing west coast markets as well as and our mid Atlantic region.
This year, we plan to open 36 to 38 stores and are excited to be reaching the 400 and sure Mark. This summer. These openings will include three to five new stores and the mid Atlantic region.
In terms of iOS, we continue to build our pipeline of operators and training with high quality candidates. We are receiving significant interest from quality candidates with grocery retail backgrounds as well as candidates across a number of other industries that we believe will translate well into our business model.
We remain focused on recruiting those who share the entrepreneurial spirit of our organization and we continue to enhance our training program to become more scalable and efficient and in order to support future store growth.
Before I hand, it off to RJ and I wanted to highlight of milestone in the history of grocery outlet and we've come a long way since Jim Reid founded the company and $19 46, and 2021 marks our 75th anniversary. The business has evolved but we remain centered on delivering value through our unique business model, our focus on execution and our commitment.
To our mission of touching lives and the better.
We reflect on our history, we're very proud of the impact we've been able to have over the past 75 years and the lives of our employees independent operators customers suppliers and all of those whom we've touched.
As we look forward, we are energized by the opportunity to continue to expand this impact long into the future I will now turn over the call to RJ.
Thank you Eric.
We are proud to have delivered an exceptional year navigating the challenges of COVID-19, while serving our customers' needs.
Throughout this period, we have consistently delivered extreme value unexpected deals and friendly customer service and our stores.
Our unique and proven approach to serving customers and sets us apart of the retailer and it gives us great confidence and our future.
Wow shopping experience that we deliver create strong customer loyalty and as the engine that drives our business.
Our inventory levels remained healthy throughout the year depth of value remains strong and we were able to consistently offer and exciting treasure hunt of Wow deals for customers shopping our stores.
Our best in class purchasing team and our flexible supply chain enabled us to deliver value and the opportunistic and everyday products that our customers have come to expect.
And our ability to manage discontinuous inventory complemented by an assortment of everyday products allowed us to stay and stocked with the right items to meet customer demand.
We recently participated in the S. M I Midwinter conference, where we had the opportunity to meet with leadership teams for many of our longstanding strategic supplier partners.
These are always highly productive meetings, where we talk about long term strategy and share growth objectives.
We continue to be encouraged by the strength of these relationships the frequent and open dialogue and the creative solutions, we continue to develop to handle surplus inventory needs.
Looking forward the pipeline of opportunistic supply remains healthy.
Current market disruption continues to deliver a steady supply of surplus inventory and our long and proven track record and makes us a valuable resource and trusted partner for our suppliers.
Our focus on strategic partnerships and flexibility combined with our growing scale positions us as the preferred partner and the secondary market.
Turning to marketing, we maintained consistent communication of ever changing stores specific wow deals through our email distribution list and other digital platforms.
We also continue to drive brand awareness through digital and social media supported by select traditional print ads radio and TV.
At the local level, our iOS communicate product availability and low deals and engage with customers through social media and grassroots efforts to drive awareness and repeat visits.
We are excited to celebrate our 75th Diamond anniversary this year with contests and giveaways as well as company sponsored events.
At the store level or iOS will be hosting local celebration to support this milestone.
These new activities will be a great complement to our ongoing marketing approach, which remains focused on expanding brand awareness and deepening customer engagement.
Turning to business technology, many prior years of strategic investments positioned us well to deliver exceptional results and an unprecedented environment.
Over the past 10 years, we have supported business and improvement and growth through meaningful investments and enterprise systems.
Examples include our proprietary real time order guide and distribution systems, along with new best in class warehouse management.
Pos and business analytics platforms.
It's regular disciplined approach the system investments continues in 2020, one as we begin to implement planned upgrades to our financial system inventory management platform and product data warehouse.
As we have done in the past, we will develop proprietary systems to suit our unique business model, while also partnering with best in class software providers.
As we implement these investments over the next several years, we expect benefits to include enhanced purchasing and inventory planning capabilities as well as improved efficiency scalability and security of our systems.
In addition, these efforts will support our ongoing personalization efforts improved our data and analytics and will serve as an important foundation for future digital initiatives.
In summary, we are extremely proud of what we've accomplished over the past year and are well positioned for the future as we continue to focus on scaling our business for long term growth.
With that I will turn the call over to Charles.
Thanks, RJ and good afternoon, everyone. We were pleased to have delivered strong results and the fourth quarter and full year fiscal 2020.
We are very grateful to our teams and our independent operators for their tireless efforts and we remain committed to serving our customers' needs.
At the same time, we continue to reinvest in our business as we pursue our long term growth strategies.
Following our discussion of fourth quarter and full year results, we will provide some comments on quarter to date trends and our outlook with respect of the current year.
For the fourth quarter sales increased 23, 1% to $806 8 million compared with the same period last year.
These results include $53 $3 million of sales contribution from our 50 <unk> week of fiscal 2020.
Our growth was driven by a seven 9% increase and comparable store sales as well as the sales contribution from 33 net additional stores opened since the end of last year.
During the fourth quarter, we opened eight new stores ending with 380 locations. We remain pleased with the performance of our new stores, along with recent vintages, which continues to deliver sales productivity in line with our expectations.
Our strong comp performance and the quarter was broad based across regions and vintages and categories comps continued to be driven by an increase in average transaction size, partially offset by a reduction and traffic as customers continue to consolidate trips.
Fourth quarter gross profit increased 22% from the prior year to $244 4 million.
Our gross margin rate decreased 30 basis points to 33% in line with historical Q4 levels, reflecting holiday product mix.
SG&A expenses grew 17, 7% to $197 6 million the increase was largely due to higher variable commissions to independent operators related to gross margin dollar growth increased investments in personnel and infrastructure higher store occupancy costs due to store expansion and COVID-19 related.
Fences.
G&A as a percentage of sales decreased 110 basis points to 24, 5% to 25, 6% and the same period last year.
Stock based compensation expense for the fourth quarter was $3 $8 million, which primarily reflects expense associated with annual awards issued under our long term incentive program implemented earlier in 2020.
Depreciation and amortization increased to $15 2 million at 55% versus the fourth quarter last year, which was impacted by the adoption of new lease accounting.
And as a result of the tax benefit associated with employee option exercises during the fourth quarter, we incurred and effective tax rate of negative two 3%.
Relative to our normalized tax rate this added $7 $6 million to net income and at a quarter or <unk> <unk> per diluted share.
And as such and GAAP net income for the quarter increased to $24 $3 million or 24 cents per diluted share compared to net income of $9 $8 million or at 11 cents per diluted share and the prior year.
With respect to the non-GAAP metrics, we use to evaluate our business beginning with the fourth quarter of fiscal 2020, we updated our definition of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods.
At this revision reflects the following changes.
First we no longer add back new store Preopening expenses, when calculating adjusted EBITDA and adjusted net income and.
And second we normalize for that windfall tax impact of employee option exercises and vesting of stock awards when calculating adjusted net income and.
In addition, we further simplified our presentation by collapsing debt extinguishment and modification costs and the other add back line.
Under our revised definition fourth quarter, adjusted EBITDA increased 24, 7% to $51 $2 million from $41 $1 million last year adjusted.
Net income increased 46% to $24 2 million or 24 cents per diluted share based on an average of $99 5 million diluted shares and the quarter.
Versus the previous definition, adjusted EBITDA of $300000, lower and the fourth quarter and.
Adjusted net income now, reflecting a normalized tax rate is $7 $8 million lower compared with the previous definition of free.
Reconciliation between the previous and revised non-GAAP calculations, including the comparison over the past eight quarters is available on our press release.
Our fourth quarter results represented a strong finish to a challenging but record year for.
For fiscal 2020, and total net sales increased 22, 5% to over $3 1 billion.
And as comparable store sales grew 12, 7%.
Our gross margin rate expanded by 30 basis points versus the prior year, helping to drive strong bottom line growth adjust.
Adjusted EBITDA increased over at 32% to nearly $223 million.
Turning to our balance sheet liquidity, we generated strong cash flow during the quarter ending the year with $105 $3 million of cash and a healthy inventory position.
We invested $115 million and Capex for the year net of tenant improvement allowances as we continued to build new stores and invest back into the existing fleet. In addition to make and ongoing investments in it and infrastructure.
This includes costs related to 2021 store openings under construction at year end.
Looking ahead as we think about the current year and we will continue to manage our business with the same flexibility we've demonstrated throughout 2020.
<unk> of the operating environment, we will look to remain nimble and focused on the customer and ensuring that we deliver a compelling assortment of opportunistic and everyday values along with of Wow shopping experience at the same time, we will stay focused on our long term goals and continue to invest and future growth.
And that begins with new store expansion, we expect to open 36 to 38 stores and 2021 in line with our 10% annual growth target with store openings fairly evenly spread throughout the year.
We do not anticipate any additional store closures beyond the one stores we closed in January.
In terms of existing stores sales trends January comp sales were and the positive mid single digits driven by continued larger basket sizes offsetting reduced traffic.
During comp sales moderated to the positive low single digits as we began to anniversary at the onset of last year's Covid demand surge towards the end of the month.
That initial wave of customer demand peaks and March of last year, we saw comps increased 37%.
Tumors aggressively stocked up on products.
And as we fully cycle prior year March results, we expect comps through the first quarter and total to be on the negative high single digits.
And regards to gross margins, we expect 2021 gross margin rates to track in line with pre Covid levels as we return to normalized levels of inventory shrink.
Similarly for the year, we expect SG&A as a percentage of sales to be consistent with pre COVID-19 levels, which takes into account investments and personnel and infrastructure as well as continued COVID-19 related costs as we prioritize the health and safety of our employees customers and independent operators.
With respect to adjusted EBITDA margins, we expect full year 2021 results as a percentage of sales to be in line with 2019 performance, which reflects historical levels of operating leverage.
Call. However, that we did not incur public company costs until the second half of 2019.
As such we would expect first half 2021, adjusted EBITDA margins to be slightly below their 2019 benchmarks.
As we continue to open new stores and invest and our infrastructure, we expect depreciation and amortization expense will increase on a percentage basis and the high teens versus the prior year.
We expect stock based compensation to be and the low $20 million range, and we expect a normalized tax rate of approximately 28%, which excludes discrete items.
We expect full year capex to be approximately $130 million net of tenant allowances, reflecting the addition of of 36 to 38, new stores existing store maintenance and improvements and ongoing infrastructure and technology investments.
We look forward we are excited about the progress we've made and the business. The investments we continue to make across the company and our sustained long term growth potential and with that.
And that we can turn it back to the operator to begin Q&A.
Okay.
Thank you ladies and gentlemen at this time, we will be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May Press Star two if you would like to remove your question from the Q4 participants using speaker equipment and may be necessary to pick.
Up your handset before pressing of Starkey and the interest of time, if you could please limit yourself to one question and one follow up so we may get to everyone's questions.
Our first question comes from the line of Oliver Chen with Cowen and company. Please proceed with your question.
Yeah.
Hi, great quarter.
And regarding the guidance, which is very helpful and thanks for giving the month to month details on what are your thoughts going forward.
The comparison eases throughout the year and also as as with this guidance do you expect it to continue and the negative range for the foreseeable future as you anniversary last year and at the main Delta here traffic in terms of traffic being more negative than check size. Thank you.
Hey, Oliver it's Charles let me provide a little bit more color with respect of how we're thinking about 2021 of.
Of course, there are a lot of things that we just don't have great visibility into it at this point and continue to I think change by the day, such as the pace of vaccine Rollouts, what the cadence of reopening and looks like and then what our consumer behaviors.
And as that reopening unfolds and of course, you add to that the macro backdrop and the impact of the stimulus sort of split.
So many moving pieces.
The best way to share our approach with you that we're looking at a number of metrics internally.
And to track the business, we're looking at sales velocity and on two year basis and of course, we're looking at customer satisfaction, which we know has been.
Very much validated by our recent Q4 surveys that were engaged and where the customers.
And then also looking at traffic.
Traffic and ticket trends on an absolute basis. So as we think about all of those metrics. We're feeling really good about about where we stand but again, there's just so much we don't know about the year. Good news for US is that our business model is built on flexibility and so on.
As we progress over the next several quarters will just remain focused on satisfying our customers being really nimble regardless of the operating environment, but overall I think we very much like how we're positioned and our orientation towards value.
Okay, a quick follow up on inventory planning and such a dynamic environment.
How are you thinking in terms of approaching these compares for planning inventory relative to sales and or keeping your open to buy pretty open with flexibility.
Yeah Yeah.
Okay go ahead RJ.
Sorry, Charles go ahead.
Yeah I think.
Oliver This is really just speaks to the strength of our business keep in mind that.
Not having fixed assortments not having commitments in terms of long term buys.
We are not bought out several months ahead like perhaps some others and so it just gives us that.
And that flexibility to react with again one of the very.
Unique aspects of our business and so we're feeling great about where inventory stands right now and the way that we exited the fourth quarter, so really healthy sell throughs over the course of of Q4. So as we look sort of at the quantity and composition of the inventory, we have whether you slice and dice at by.
<unk> regions items.
And Phil feel great about where we are and so the team is just ready to.
And do what they always do in terms of react.
And make sure that we're managing that inventory appropriately.
Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good evening, Thanks, a lot for taking my question.
Number one what are you hearing from your I own about wage pressure, particularly some of the.
Zero pay that's been well publicized and.
And some of your markets.
And what's the approach for how that how are you going to be able to navigate around that and how that's going to impact of model.
Yeah, Hey, Michael good to hear your voice and thanks for the question. This is Eric.
So yeah theres been a lot going on on that.
That topic around hero pay I would start by just reminding everyone on the call.
And for those that don't know at just some of the basic structures.
On the iOS have total control over their store labor. So we don't have a lot of involvement and Thats to say, we don't set the pay we don't set the hours of rates of raises or any of that kind of stuff.
A lot of the jurisdictions that we're learning our focus on grocers that are over 300 employees.
And then obviously it doesn't apply to a lot of our iOS, where most of our sense of small businesses. There have been some jurisdictions that are considering this temporary hike and of <unk>.
<unk> focus around all of retail and all restaurants, regardless of size. So we're watching that obviously.
We are in the mode of tracking it closely trying to understand at <unk>.
And the same mode, our strong belief as of this would be something that sunsets as the economy starts to return to some something we would sort of quote unquote call normal.
But ultimately this is no similar to what we've seen 4567 years as some of the West Coast States of.
Increase the hourly.
Wage for most most employees on the minimum side from sort of seven and $8 federally up to 13 14 and 15 most of the operators have digested knows what it means for US is we have to invest in and systems and technologies and processes that help save you on.
Operators time, and make them a little bit more efficient. So we can't really do much about the wage inflation, but we can do a lot of on the back end and so that's what we've been working on investing and.
On behalf of the operators.
That's very helpful. And then my follow up question is on the outlook for this year. It seems like with the first quarter got into you're pointing to a pretty.
Able to your stack kind of up and not high single digit range, which would be consistent with what grocery outlet and his crew for a long time outside of the pandemic. So why why shouldn't we just.
Roll forward, the two year stack.
Over the next few quarters.
Yeah, Michael It's Charles again, so I think if you looked at R. R.
And our guidance.
For Q1, and again at a negative high single digit comp on top of a 17.
10%.
Comp last year and to your point the historical two year stack for US has been typically 8% to 9%. So we're seeing at track.
Head of of that historical rate, but for us very much staying focused on.
Debt aggregate velocity of sales and looking at at debt at.
Average weekly sales on a two year basis, and feeling good about about where we stand but.
Of course, so much.
And that we don't know at this point and it continues to be.
A very very fluid environment and so.
Don't have perfect visibility beyond the first quarter.
Our next question comes from the line of Robbie <unk> with Bank of America Merrill Lynch. Please proceed with your question.
Oh, Hey, guys. Thanks for taking my question.
I guess maybe for you.
Eric just can you give some color on how you think the iOS or approaching their income statements coming up against negative comps there.
Incentivized.
And to go for the highest gross margin, but I would expect that they can possibly get when their sales are declining I'm. Just could you maybe just maybe help us understand how the dynamic.
Work this quarter and over the next couple of quarters against these strange.
Times that we're anniversarying and.
How did they how will this change the way they order from you will be hard for you guys to know what theyre going to do like maybe just walk us through what whats action the dynamic here.
Yes, so there it's a great. It's a great question, they're really focused on delivering for the customer of theirs, they're delivering.
<unk> and the stores are conditioning serviced and the store.
They had a great year don't forget last year.
Our record revenue for most of our operators the flow through of profitability was quite nicely and are on hand cash position is also nice.
We encourage the operators to think about sales and we encourage them to think about gross margin dollars net gross margin rate and then the beauty of this model is margins can come up and go down because it's not a static mix. So operators have some levers they can pull relative to what they're looking for in terms of more sales and more gross.
Margin dollars.
We have counsel at home and spent a lot of time and stores, just reminding and reminding them. We're very much long term focus, let's not take our foot off the pedal and terms of service or safety standards.
Take our foot off the pedal and terms of local marketing.
There will be lots and lots of short term trends that will keep our eyes on but we're running of long term business. So keep your eyes on the price keep driving inventory and keep driving sales keep driving promotion and.
Engagement with the customer involvement and the community and 'twenty 'twenty, one will be of funny lap year, it'll have an asterix next to it and we will all remember kind of this combined period of 2000, and 'twenty and 2021 but.
We don't over possess about sort of the real short term and and certainly.
We would be out in the stores calling out.
Any activity, we saw that we thought it would be sort of a negative like pulling back on sort of as youre pulling back on.
And just getting people through the lines youre pulling back on inventory and again operators I think are aligned with us on what we planned for.
Got you that's really helpful. And then maybe for you Charles can.
Can you just why the change in the way you guys calculate adjusted EBITDA and then sorry can you just review again.
And how we should think about comparing to 2019 adjusted EBITDA and is that a is that at a different adjusted EBITDA.
Or maybe just walk us through that again as well sure Yeah. Robbie let me provide you just see the rationale behind the change and it really came down to.
And some feedback we heard around simplifying the add backs that we use.
And number one and number two improving the comparability between periods and so as you look at and and the.
The earnings release, and we provide the full reconciliation between the revised definition and the previous definition and we go back over eight quarters. So you can see the difference as it relates to adjusted EBITDA I would describe the change is modest because all we've really done is we're no longer adding back preopening costs.
Which were against $300000 for Q4, and $1 5 million for the full fiscal year and that at this pre.
Consistent with.
The prior year as well.
As it relates to adjusted net income really the change there is to normalize for these windfall tax benefits of if you recall over the course of the year under our prior previous definition.
Received windfall GAAP tax benefits and some of that and flow through to adjusted net income now we're normalizing for that to reflect a 28%.
Normalized tax rate and that's just going to make for a much more relevant comparisons as we go.
Quarter to quarter and compare versus the prior year.
So and then your second question with respect to margins for 2021 and the way.
And we're thinking about.
The margin structure for the year really is that it represents a return to our historical pre COVID-19 margin rates and so as you think over the throughout the P&L that means a return to normalized levels of inventory shrink on the gross margin line.
And it reflects all of the personnel investments and the Covid costs that we expect to continue to incur.
On a cost across the cost structure. So.
Do you think about gross margin SG&A adjusted EBITDA as a percentage of sales.
We expect that it will approximate 2019 levels and again as Eric talked about a big part of that consistency is because of the flexibility of the model not having fixed assortments and our Dcs and stores and the fact that we do have a more variable cost structure and.
And then the other models due to the commission.
And so for those reasons Orient back at 2019 with a caveat that.
If you recall on the first half of 2019, we did not incur of public company costs. Those are tracking about $2 $5 million per quarter, and so we'd expect that first half 'twenty, one EBITDA margins to be lower as a result of just the public company cost impact.
Our next question comes from the line of Randy <unk> with Jefferies. Please proceed with your question.
Yeah. Thanks, a lot on quick question just on.
Can we just get an update on nosh and.
And what's been going on there and then as you think about next few years of of categories or product enhancements of focus where do you expect to make some changes or incremental focus.
And then I think RJ brought it up earlier.
At I guess and industry wide meeting.
Talk to I guess, some of your partners and talked a little bit more about the long term on how are you guys thinking about those partnerships evolving.
Over the medium to long term did you talk about different.
No.
<unk> ability to supply different product categories, and just get a little.
Color on how your your conversations and your relationships are expected to change going forward over the medium to long term. What these are these partners.
Okay.
Hi, Randy it's RJ I'll tackle those three questions. So to your first question on Nash.
We continue to see great growth from the nosh category.
And broadly speaking right that's across most categories within the stores so.
Continue to see great growth, we continue to see.
Great product availability on the opportunistic side and not like the rest of the store is a blend of opportunistic and every day and so in that way able to offer consistency were not available opportunistically and important to the customer.
And then around at the treasure Hunt and the deeper values that we would get on an opportunistic basis. So.
All of that continues.
Along with the recent trend and we continue to be excited about future growth potential category.
Category enhancement.
And we feel we feel pretty good about the broader assortment and we have.
Really all of the major categories that you'd find and conventional grocery retail represented for us the opportunities really live more at the item level or the brand level within subcategories. So we continue to we have and we will continue to go after those opportunities to.
And to fill in where there may be gaps, we deploy industry data understanding where market share is and always balancing.
Value and opportunistic with with demand and instances, where we may not be able to source product opportunistically. So that model has served us well and will continue to look to enhance the assortment as such and looking forward and then with regards to the <unk> meeting.
Love the opportunity that it provides to connect at a at a senior level with long standing supplier partners and.
And the relationships that we've maintained for many many years.
We continue to be encouraged by the strength of the relationship and the access to supply.
And specifically to your question about.
Evolution of the partnerships and where.
Or are they going all point to.
Some of few specific examples of conversations that we had.
And these meetings I think and paying a little bit of a picture. One example, with its supplier that we met with we had a really productive conversation on how we can more strategically blend opportunistic and everyday products. We represent a very attractive primary sales channel on the everyday side for these.
<unk> 380 stores 3 billion sales and growing with the growth potential in front of us and so we.
And we look to strategically partner with them.
There are appropriate for our assortment and our customers to bring and every day represent that growth opportunity for them and then in turn.
Gain increasing access to.
Two of share of opportunistic so.
And that continues to be of good model that we followed with some of our largest.
A long standing relationships and we've deployed at and we will continue to play at with other other suppliers.
Another example, conversation that we had with of different supplier is identifying opportunities around assortment changes packaging changes brand changes, there's been an incredible amount of disruption as far as assortment goes.
This past year, we expect that to continue this year and in these conversations we represent.
Great partner for them to transition and a more cleaner faster way as it relates to inventory management on their side, we continue to get more creative about moving upstream.
And Ben.
Good point of partnership and expansion for us.
And with these companies and <unk>.
Identifying these opportunities.
Perhaps with longer shelf life more product available, we can help them and that in turn and provide even deeper variety and assortment to our to our customers and so we with the number of suppliers, we have over thousands of suppliers that we work with on an annual basis.
A lot of the effort Randy is to take some of these best practices that exist, maybe within specific or a smaller group of suppliers and extend and more broadly to others and in that way broaden and deepen the relationships that we enjoy.
Our next question comes from the line of Jai Hahn Hoy and buckle with Guggenheim. Please proceed with your question.
Hey, guys two things.
The performance of a closeout versus every day.
And recently, how do you think that plays out in 'twenty one.
That's number one number two if you think about other than public company cost.
What do you think about going back to 2019 levels.
<unk> costs are higher in 'twenty, one and 19.
And all of their investments significant investments that you've made here.
Whatever and.
And in 'twenty, one that didn't exist at <unk> 19.
Hi, John It's RJ I'll I'll take the first question and then I'll kick it over to Charles for your second question as far as mix goes opportunistic and everyday.
As we've said we continue to see.
Healthy flow of opportunistic deals across all of our categories. So really pleased and encouraged by.
The current pipeline and future pipeline as well.
We have said before and this trend has continued that as customers have consolidated trips and increase the basket and.
And with the increased demand they have been buying everyday products at a slightly higher rates and opportunistic. So we have seen a little bit of a mix shift on the margin at.
As it relates to every day, moving a little bit faster than that opportunistic that's been true throughout this past year and.
As you know, we handle fluctuations and the mix all of the time, so nothing that we haven't been able to adjust to and for US. It is.
Delivering value and we do that across opportunistic and everyday and so we'll continue to manage the assortment at such as far as rest of the year.
We're as Charles said really hard to predict.
As to how things change vaccine rollouts changes in behavior et cetera. So I guess all I'd say is we will continue to deploy the same approach as far as inventory and purchasing as we have and will.
We'll remain nimble flexible and will deliver value where the customer is looking for it and.
And the mix will change with that.
And John It's Charles just a bit more color in terms of investments that we've made over the past several years and for me I think it starts with.
And the orientation that we've talked about in terms of always reinvesting back into the business. So we're always looking for ways that we can operate more efficiently and drive leverage across the P&L and those line items.
And where we can but as we find those improvements we're looking to.
Plow those dollars back into the organization, whether that's and personnel where we've made.
Significant investments across really across the entire business, we start with with purchasing where we know we get a great Bang for Buck there.
Technology has been and areas, where we've made significant investments over the past several years.
And as well as net.
And this path to becoming a public company on the finance side of the house.
As well as supply chain and HR, so really lots of organizational investments too.
Improve our capabilities and our bench strength not to mention it.
Spansion as we go on to new market. So all of the.
All of the groundwork we've done and the mid Atlantic has been it's been insignificant investment and then that that continues on the capital side as well so always looking at ways that we can continue to reinvest back into the existing fleet of stores, whether that's on.
Fixtures and upgrades to drive the topline or just general maintenance. So really encompasses all aspects of the business.
Okay.
Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your question.
Hi, Good afternoon, and this is Christine on Cotai on for Paul and congrats on a great quarter.
And one of the follow up on some of the previous questions. You know regarding your long queue can you just talk about what you are seeing from a traffic and basket standpoint that you know what really transpired between January and February of anything to call out and then secondly are there any metrics that you can share on what you're seeing from the new customer count and and rent perspective.
And compare to your legacy base. Thank you.
Yeah, Hi, Christine It's Charles Let me, let me start it off and the first part of your question. So as we think about the trends that we've seen and the first quarter really it's a continuation of the trends we saw on the back half of last year.
So again that trip consolidation being offset by <unk>.
Larger basket sizes and sales for January.
That debt held true end of February you can see that overall comp coming down a little bit from January and the positive mid singles to February and the low flow singles as we started to lap the onset of Covid here at the tail end of February.
But then expect and as we look forward with March.
A big comp that we'll be anniversarying here, 77% for the month of March.
And expecting that that dynamic between traffic and ticket that is largely held true since the onset of COVID-19 begin to invert as the comparisons change so.
And really speaks to my comment earlier about.
We're staying focused on the absolute number as we're looking at absolute traffic counts and looked at on absolute.
Basket sizes, just to understand where we are of that feeling really good about how we're tracking thus far.
Hey, and all.
On the jumping on the second half on engagement so keep in mind that.
The one thing that we're really trying to drive value on that.
That is the factor that we.
We think is more.
Most important and we think about loyalty and the stores.
And we think we do at better than anyone else.
In terms of really highlighting and differentiating the value that we that we see.
And on every shop on every item for the for the customer.
Our local Io because they have a big obligation in terms of marketing and spending a lot of time differentiating and their local market whether thats.
And being involved with the customer ordering and merchandising locally being involved and the community count.
Countless I'd say small, but meaningful examples of how the Io and serving their customer and then ultimately what we look at is the kind of the report card for that activity is how are we doing on our internal surveys relative to custom.
Customer satisfaction, which is a blend of all of those things are they getting value of are they feeling and the treasure Hunt.
As the stores clean and safe that's been sort of a new one and the satisfaction levels were getting back on our surveys are very very high so engagement.
Both of electronically and in store.
Fuels sales right, where we should be so.
Thanks.
Our next question comes from the line of Karen short with Barclays. Please proceed with your question.
Hi, Thanks, very much and just.
And I wanted to just clarify so at for EBIT Dod as a base for 2019 I believe the number you reported on.
On an adjusted basis on your definition was 178 million and EBITDA. So I just wanted to clarify on my only taking and that included public company costs. So we're only at subtracting $1 5 million off of that number on a apples to apples basis. When we think of the margin in 'twenty one and.
Can you just clarify that and then I had a couple.
On a couple of bigger picture questions.
Share Karen with Charles Let me, let me clarify at so as we look back at.
Adjusted EBITDA margins in 2019 anything of this is probably the easiest way to think about it.
And the margins for the full year were about six 6%.
And so that's where and total.
We would expect to approximate that that level here in 2021, but as we think about how the quarters will flow as we compare against those 2019 levels.
And again public company cost of today.
Roughly at 30 bps impact to us that we didn't incur and the first half of 2019. So as you think about modeling the quarters keep that in mind that they would expect to see relative to 2019, roughly 30 bps of headwind and the first half of the year.
Okay, and then I wanted to just talk about the iOS for a second set of.
First question I had is are you still planning on doing and interest forgiveness in 2020. One and then I was wondering if you could give us just a bit of and update on the pipeline of islands, but also more specifically when some of these I guess newer breed of iOS and non traditional operators.
I'll start actually operating stores and I know that you only started at broadening your search.
During 2020, but maybe a little update on both of those would be great. Yes, yes, I'll take the first and then Charles you can you can talk about the forgiveness, but.
Really really solid pipeline, we've already deployed a few that have come in and the early spring and have been trained.
Really excited about just sort of opening up what COVID-19 has done for us and sort of turning the eyes of some folks from restaurants. So.
We'll wait a while before we call at success, but.
Certainly it's been successful from the topline and.
The numbers coming in.
And certainly from a training perspective, we're seeing.
Good throughput.
Through the system and sort of learning how to run the stores.
And then Karen and charged back to.
Two COVID-19 costs and I said this is a comment on COVID-19 costs broadly not just the interest forgiveness, but yes, we would envision that continuing until we have.
Really a change to the visibility and change and the environment, but as we think about 2021, we're expecting that to continue.
Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question and.
Hey, everyone.
My first it's a follow up somewhat to John's question, So maybe for Charles first.
Regarding the margin I get.
The gross margin, you'll give back assuming shrink picks back up on the SG&A side.
I think you and implied that your reinvestment rate is going higher and I wanted to clarify is that right or you're just giving yourself flexibility in the model to be able to reinvest at a higher rate during the year.
Yes, I mean, no I think for us not.
And not a change in terms of our approach of reinvestment that just reflects the fact again for us going back to 2019 looking at those margin rates. We very much expect that will continue to operate and 2021 in line with those level of cell, yes. The benefits we saw as it relates to shrink.
And 2020, and we don't expect that to continue but as we think about the rest of the P&L expect at too.
To be similar margins to 2019.
Okay. That's helpful and then maybe Terry.
Eric or others.
And that's on Omni channel I know, it's maybe more theoretical but curious how much it gets kicked around as you think about the next one to two years of the business.
Hey, Sammy and it's R. J Yeah, no. We we talked about at quite a bit we continue to engage in dialogue with.
Third party.
Partners on the technology side on the service side, and really really just to stay close to the landscape and options that might be available to us and all of that said, we have not changed our position on ecommerce in terms of priorities and that it is not a priority for US right now we continue to be excited and and we continue to focus.
Our attention on growth opportunity in front of us by way of real estate expansion geographic expansion that comes with that.
Continued opportunity within existing markets everything around comp sales.
And specifically to technology, while not prioritizing ecommerce we are very excited about the broader technology investments that we're making and the business.
And ultimately.
While we're investing for other more specific purposes.
Many of them would provide us foundation and the event that we do prioritize ecommerce at some point so.
And then the only other thing I'd add is you know as we've talked about before.
Marketing remains a big area of focus by way of digital and while we stopped short of the actual transaction, there's quite a bit that we communicate through digital platforms around the assortment and and the excitement and the store to raise awareness and increase engagement.
Our next question comes from the line of Jeremy Hamblin with Craig Hallum. Please proceed with your question.
Okay.
And I wanted to come back to the gross margins in Q4 actually for a second and so.
Down 30 basis points and I.
Wanted to just.
Understand the commentary around holiday mix at.
Was there a change because you know we look at that compared to 2019 levels was there a change and the overall level of.
Holiday mix in there that drove that one way or another were there particular other items and.
And whether or not you did you start to see any uptick in shrink.
And that's why you're anticipating a little bit more in 2020. One just any color you can share on that would be helpful. Sure. Jeremy It's Charles let me provide a little bit more context. So yes, we look at.
As you point out for Q4 for US sequentially, we see that the impact of holiday and mix.
Going from Q3 to Q4.
And I'd say as we look at Q4.
Margins very much of a return to historical levels. So.
2018 was 31% 2019, 36% so.
The results, we posted and feel really good to us it was maybe a little bit more holiday product mix as a result of.
Folks being at home we are.
Also saw modest headwinds as it relates to commodity costs and proteins and dairy continued to feel the impact of COVID-19.
Covid related costs at the D C of which flow through margins, but overall I would describe Q4 margins as our normal fluctuations quarter to quarter.
And we continue to manage the business for stable margins over the long term and feel real good about where we are.
Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question.
Hey, guys. Thanks for taking my question.
Wanted to ask on the real estate front I know you are accelerating the growth of again or 36% to 38 stores.
How is the quality of the real estate debt.
Youre seeing are you seeing better rents were hearing that from other <unk>.
Retailers out there that rents have come down a bit and also just wondering if like I said, if you are seeing better quality locations and then your season pass.
I'll take that this is Eric.
I would start with.
We are seeing a really healthy pipeline the pipeline is strong.
We pretty much can tell you exactly where we will open in 2021 so.
Going to be a good year.
I would not say that we've seen.
A big influx of high quality lower price deals yet.
Certainly that can be hopeful for that but.
Landlords have very strong balance sheets as we've found in other markets and that takes I think of little bit more time.
And just sort of flow through.
We've tried to remain really flexible.
All of the markets, we operate and across the west and in the east and we've been able to be flexible able.
Able to split up of larger box able to take a small box and it will take a larger box.
Something that's standalone, something thats and a larger center.
Remaining flexible tends to get you the first call.
Also drive traffic, which has been helpful to get.
On People's radar screen and so.
Similar to other areas of the business. The last thing I'd say is we've really invested in this area and I'm very very proud of what we delivered in 2020 of it was an exceptionally difficult operating year.
Cross a lot of fronts, but particularly and just getting stores open and we were able to get very very close to what we said we'd do.
And that only happened because we invested and the right people and the team to hit that so I think we've built the team.
We're going to be patient.
Gonna be opening of lot of stores, we've got that message out.
And I would hope.
And kind of true.
Subsequent months.
We apologize but that is all the time, we have for questions I'd like to hand, it back to Mr. Eric Lindbergh for closing remarks.
Yes, Thanks, you guys.
As always we are.
Of spending time with you and engaging really appreciate all of your interest and your support and thank you for jumping on this afternoon and spend some time at west Thanks, a lot.
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.