Q1 2021 Grocery Outlet Holding Corp Earnings Call
Yeah.
Greetings and welcome to grocery first quarter 2021 earnings results conference call. At this time, all participants on a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, at this conference is being recorded I would now like to turn the conference of Whats The hope Joseph Pelland, Vice President of Investor Relations. Thank you you may begin.
Thank you good at.
Afternoon, and thank you for joining us on today's call to discuss grocery outlet's first quarter 2021 financial results. Joining me on today's call are grocery Outlet's, Chief Executive Officer, Eric Lindbergh.
Is it at our J C D and Chief Financial Officer, Charles broker.
Following our prepared remarks, we will open the call for questions.
At this conference call is being webcast live and a recording will be available via telephone playback for approximately two weeks at.
Will also be archived on the investors section of our website participants on this call will make forward looking statements, including our outlook for fiscal 2021 and future performance. 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 on this afternoon's press release as well as in our periodic reports, we file with the SEC all of which may be found on our website at investors that grocery outlet dot com or on SEC Gov.
Undertakes no obligation to revise or update any forward looking statements or information.
Statements are estimates only and not a guarantee of future performance.
During our call. We will also reference certain non-GAAP financial information, including adjusted items reconciliations of GAAP to non-GAAP measures as well as of the description limitations and rationale for using each measure maybe found in the supplemental financial tables included in this afternoon's press release at our SEC filings in the investors tab of our website.
With that I'll turn it over to Eric.
Thanks, Joe Good afternoon, and thank you for joining us for our discussion of our first quarter results. We are pleased of delivered on our expectations in the first quarter as we began to lap the onset of the pandemic last year.
Our ability to consistently execute at this high level would not have been possible without the hard work and dedication of our corporate at Io teams one.
Of the thank them once again for their commitment to our customers local communities and to our mission of touching lives for the better.
Their combined efforts drove continued strong first quarter financial performance comp sales decreased eight 2% following a $17 four per cent increase from the same period last year.
New stores continued to perform in line with their expectations contribute meaningfully to total sales volume, which was down a modest 1% profitability.
He remains strong with adjusted EBITDA margin above 2019 levels.
We attribute our continued strong performance to the steadfast execution of our differentiated business model.
All of your proposition is as strong as ever in our ability to deliver extreme savings of treasure Hunt experience of locally curated assortment of friendly environment continues to resume resonate with customers.
This was reaffirmed by a recent survey work, which shows that our customers continue to rate value is the most important criteria when determining where to shop.
Our customers remain extremely satisfied with the value of grocery outlet consistently provides.
We are confident in our ability to continue delivering industry, leading value as we have throughout our 75 year history.
Turning to a few operational highlights from our first quarter.
Our purchasing team does an exceptional job of working with suppliers to ensure we are the preferred partner for opportunistic product.
Flexibility of our buying model at our buyers expertise enables us to consistently provide the balance assortment of opportunistic and everyday products that creates the wow shopping experience.
At store level, our iOS remain committed to helping their respective communities their customers and each other they consistently keep customers up to date on the latest deals on brand name products and maintain a clean and safe shopping environment.
Many of our corporate team members myself included have been fortunate this year to spend much more time on the stores. The iOS. These visits are always a positive experience as we get to see firsthand the true commitment of our operators, while uncertainty and challenges remain the morale of our iOS is very high and their outlook is positive.
On the real estate front, we continue to balance of openings between mature of developing markets to build our brand awareness and reach new customers. During the first quarter. We opened 10, new stores closing, one, bringing our quarter end store count of 389.
So far on the second quarter, we've opened six additional locations and continue to see new stores performed well across geographies.
Within the next few months, we'll be opening our 400th store in Hayley Idaho of town, just south of the Sun Valley Ski resort in east of Boise.
In addition to creating local job opportunities, we look forward to becoming an integral part of the Haley community.
Consistent with our 10% annual target we remain on track to open between 36, and 38 stores in 2020 one three to five of these stores will be on the east, including the two that we've opened already year to date.
As we continue to open stores, we also maintain a disciplined approach to reinvesting back into our existing store base for these investments we continually evaluate potential lay out and fix shrink updates to enhance the customer experience and support merchandising some.
Recent tests include moving or produce section to the front of store and moving nosh, one of our highest performing categories into the first Io. In addition, we continue to make in store fixture of investments to support purchasing and basket growth, including produce scales do freestanding refrigerated fixtures at new produce tables that will enable <unk> to better highlight.
Our fresh offering.
Ultimately, we want our stores to provide the optimal experience for customers and this evolution is just one of the many ways, we look to to continuously enhance the customer shopping environment.
Before turning the call over to RJ I would like to take a moment to discuss of positive impact we have with respect to the environmental social and governance considerations outlined at our recent proxy filing.
Our ESG focus reflects our commitment to our mission of touching lives for the better end to best serve the interests of all of our stakeholders having.
Having a positive impact on all of those we touch has been part of our history and culture at grocery outlet for 75 years and continues to be a guiding principle as we grow our business our business model drives a number of positive environmental and social outcomes from reducing food waste through our optimistic purchasing to providing healthy affordable nutrition to all remember.
Of our communities to the opportunity for the iOS to achieve financial freedom, while serving their local communities.
We're proud of the positive influence we've had throughout our long history, and we continue to focus on building our business to expand our impact in the future of course, it all starts with our talented team, which includes company employees as well as independent operators. They are the heart of who we are and what we do we remain committed to their health.
Safety and wellness believe it is vitally important that we create and foster a culture of inclusion and belonging that makes each of our employees of iOS, you'll engaged empowered and safe.
In conclusion, we believe that our commitment to our business model philosophy of reinvestment in growth and strong execution are behind the consistency of our financial performance.
While we continue to navigate through COVID-19, we are encouraged by the health of our business enduring strength of our value proposition the dedication of our independent operators employees.
We are excited by the long runway for growth as we expand our presence and remain committed to making the right long term investments as we move forward.
With that I will turn the call over to RJ.
Thanks, Eric we've.
We remain grateful to our network of independent operators are buying and distribution teams and our valued partners for delivering the Wow shopping experience that our customers enjoy each and every day.
Our strong offering of extreme values across an exciting assortment of opportunistic and everyday products continues to resonate with customers.
You're seeing healthy deal flow as change in customer demand product innovation and ramping production are all contributing to excess supply.
Our long standing supplier relationships combined with our approach to supplier acquisition and development give us a competitive advantage and preferred access to surplus product as it becomes available.
Several years ago, we redefine roles within our purchasing team to specialized activities around opportunistic purchasing everyday products and category management.
This evolution increase the scalability of our model and has proven beneficial as we've expanded our supplier network evolved our assortment and extended our geographic and customer reach.
Specialization allows our opportunistic buyers to deepen long standing supplier relationships developed strategic partnerships with high growth brands and expand our vendor base.
We continue to hunt for the best deals, while strategically partnering with suppliers to develop mutually beneficial solutions to a variety of supply chain challenges.
Communication and connection with our partners have never been better and we look forward to seeing many of them in person again throughout the remainder of this year.
Our everyday sourcing and category management capabilities have also benefited from specialization.
We continually evolve our assortment to offer customers the highest demand items as a complement to the ever changing opportunistic deals.
Our scale and strength of partnerships have increasingly supported the development of products and labels exclusively for grocery outlet customers.
These items deliver great value with healthy margins and they represent an important part of the Wow shopping experience.
We are pleased with customer response to these products and the resulting performance across a number of categories, including snack nuts coffee and bakery.
[noise] tailoring the assortment to regional preferences is another important element of category management.
We've put specific focus on adapting our assortment to local tastes as part of our geographic expansion.
This is a strategy that we deployed in southern California, and we will follow a similar playbook as we build our presence in the east.
We recently hired local buyers to our east team to help grow our regional supplier network and to introduce more brands and items specific to local demand.
This approach is tightly integrated with our centralized team leveraging the investments we've made in infrastructure and supply chain to optimize the assortment across the entire network.
We are pleased with the enhancements at specialization has introduced to our business and we believe we will benefit from this approach well into the future.
Our assortment has and will continue to evolve as we look to provide the best balance of extreme value and consistency to drive customer loyalty and sales.
Our success starts with the buy but equally important is effective communication with our customers.
We pay close attention to our customer satisfaction and engagement and the regular survey feedback we receive keeps us informed of trends and customer perception or behaviors.
E surveys combined with Io feedback provide us with helpful customer insights.
Our most recent survey shows that value remains the most important criteria when choosing where to shop and that our target customers are extremely satisfied with the savings we deliver.
We continue to see leading NPS scores of over 70%, which we attribute to our unique combination of unbeatable value exciting treasure hunt deals friendly customer service and fun store shopping experience.
Recent customer feedback also confirms the healthy state of the many value based metrics, we track such as depth of basket savings and number of extreme wow items per store.
We believe that the importance of value only increases looking forward.
As such we continue to communicate the unbeatable deals across the full shop at our assortment provides.
We've advanced digital media marketing with a focus on broadcasting our best deals through new platforms and at the local level and we continue to introduce tools to support our iOS and their local marketing efforts on.
Our marketing tactics will further evolve as we develop new and compelling ways to tell customers about our unique value proposition.
In summary, we are pleased with the strength of our supply pipeline and we look forward to continuing to scale and strength in the differentiated moat around our business.
High customer loyalty is the reason we have been successful over many decades spanning all economic cycles macro and competitive environments.
We continue to reinvest back into the business and remain excited about our long term growth potential.
I'll now turn the call over to Charles.
Thanks, RJ and good afternoon, everyone. Following on our discussion of first quarter results. We will provide some comments on quarter to date trends and our outlook with respect at the current year.
For the first quarter net sales were $752 $5 million, a decrease of 1% compared with the same period last year.
Comparable store sales declined eight 2% at can sit at $17 four per cent increase in the first quarter last year.
Absolute customer traffic and average drink trends remained largely consistent with at fourth quarter.
Partially offsetting the comp decline was the sales contribution from 34 net new stores opened since the end of the same period last year.
In the first quarter alone, we opened 10, new stores and closed one ending with 389 locations.
We remain pleased with the performance of our new stores, along with recent vintages, which continued to deliver sales productivity in line with our underwriting expectations.
First quarter gross profit was $231 $9 million down to two per cent from the prior year.
Our gross margin rate finished at 38% in line with historical results. Despite the impact of rising commodity and freight costs and normalized inventory turns.
SG&A expenses grew 9% to $188 $6 million to the increases in store occupancy and maintenance costs related to store expansion and investments in personnel and infrastructure.
This was largely offset by lower variable commissions to independent operators as well as reduced travel and meeting expense.
Depreciation and amortization increased at 15 $5 million at 21% versus the first quarter last year, driven by store growth capital investments.
Stock based compensation expense was $3 $9 million in the first quarter compared to $23 million on the same period last year as prior year expense included the initial vesting of performance options related to our 2014 equity plan.
We incurred an effective tax rate of five 3% in the quarter as a result of the tax benefit associated with employee option exercises.
As such GAAP net income per quarter increased 49, 4% to $18 $9 million or 19 cents per diluted share.
With respect to non-GAAP measures first quarter. Adjusted EBITDA was slightly ahead of our expectations at $48 $8 million or $6 five per cent is at a percentage of sales as we benefited from the variable nature of our cost structure and strong expense management.
Adjusted net income was $23 $1 million or 23 cents per diluted share based on an average of $99 6 million diluted shares in the quarter.
Turning to our balance sheet liquidity, we ended the quarter with $95 $3 million of cash we invested $36 $6 million in total capex during the quarter at least we continued to build new stores reinvest in the existing fleet and make ongoing investments in infrastructure and technology.
Turning to current trends second quarter to date comparable store sales are in the negative low double digits on an absolute basis average weekly sales trends had remained consistent with the first quarter supported by the steady customer traffic and average basket sizes.
As we look forward several transitory factors of difficult to forecast, including the pace and degree of the vaccine rollout local market reopening and the impact of stimulus funds on the consumer.
Assuming current trends continue we expect comp sales for the full second quarter will remain in the negative low double digits.
As the operating environment evolves, we will leverage the inherent flexibility of our model and unique value proposition to best serve our customers.
Turning to gross margin, we expect second quarter performance to be approximately 35 per cent, which reflects normalized inventory turns as always we will continue to utilize the flexibility of our supply chain to mitigate headwinds, including commodity and freight costs.
In terms of bottom line performance, we expect to deliver second quarter adjusted EBITDA margins consistent with our financial model at approximately $6 five per cent of sales.
Finally, we continue to make important investments in support of our future growth. Our capex plans remain unchanged from fiscal 2021 at approximately $130 million net of tenant allowances, reflecting the addition of 36 to 38, new stores existing store maintenance and improvements as well as on.
Ongoing infrastructure and technology investments.
In summary, we're confident in the underlying strength of the business, which is supported by our strong inventory position and our high degree of customer engagement and excitement.
We continue to manage the business for the long term and believe that our model is uniquely positioned for success as we look forward, we remain committed to achieving our long term objectives of 1% to 3% comp growth, 10% annual unit growth and consistent margins.
With that we can turn it back to the operator to begin Q&A.
Thank you at this time, we will conduct a question answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, while we poll for our first question.
Our first question is John from John Hi, Heinbach on with Guggenheim. Please proceed.
And maybe for Oh for Eric or of our J. When you what do you think about <unk>.
Drop rate of above average inflation, but if that's what we're going to be for the next six to 12 months. So what what changes in the model on how do you manage that in terms of what products, you're seeing buying how vendors are changing right. How do you think about pass through.
What do you do differently and how does the how do you think of your customer behaves differently.
Hey, John.
Sorry, Jay Thanks for the question.
Now, let me, let me speak to inflation and probably within that question to more broadly some of the other stress.
Stresses that we're seeing on the supply chain, which there are many well publicized and we hear directly from supplier conversations that we engage in every day.
Economy is definitely in flux and we're <unk>.
Seeing those pressures come through and I would I'd point to commodity cost increases on those have been pretty broad based.
I would include some of the pressures around freight rates labor shortages that we're seeing when the supply chain as well.
We've always said end, it's true that this model is inflated to some degree on these pressures relative to more traditional retailers that said, we do still feel the effects of these things to answer your specific question about how we mitigate or what we do to react to these factors I'd point to a number of things.
First is opportunistic supply, it's a unique buying model as you well know and the way that we buy these products is very different from a from a conventional model where pricing may be more fixed.
And more impacted by some of the inflationary pressures we have at an extremely diversified supplier base, we do move in and out of products in between suppliers.
And that then results in an ever changing mix of products, we're changing all of the time and I'd say, that's true for both opportunistic and everyday items.
And it's something that our customers are used to and in fact, they enjoy about the shopping experience at a important part of the treasurer on that they expect and enjoy and then I'd also point to how we price items, where pricing items every day and the way that we do that as we price to value in the market.
So we keep very close tabs on our competitive price positioning and in that way, we're able to remain a high degree of flexibility in the way that we priced products of the value that we deliver.
And ultimately the healthy margins and the stability of those margins that we're able to do.
Deliver that we have over many years end.
We talk about maintaining a well into the future on.
Top of those things, which are attributes of the business I'd also point to maintaining a healthy list of margin enhancing initiatives that we're always pursuing we think those have benefited us in recent months and certainly those and others on top of them will benefit us.
Looking forward so.
All of that said, we do expect pressures exist and we do expect to manage margins.
In this more stable band that we've been able to keep his historically through prior cycles and over many years.
And.
Something that we will maintain this year than certainly over the longer term as well.
And then maybe as a follow up to that.
I don't know if you've done work lately on you a bit your basket right price.
Spreads right versus the competition, particularly traditional as they've gotten more right of run.
Promotions through loyalty cards.
As the as the traditional GAAP widened.
As far as you can tell them you know or if it has our customers preceding that.
Yeah. So we are we track value of a number of different ways John.
Basket savings is definitely one, but I point to others that we measure.
There that we look at it as a measure of value of the customer.
The values remain very healthy throughout all of last year and then into this year, we do price in measure value relative to promotional pricing as well at.
And as I mentioned, we're able to react very quickly to those changes that we've seen so really pleased with state of inventory really pleased with the mix between opportunistic and everyday and end.
Really pleased with the value that we're delivering to customers.
Thank you.
Thank you.
Yeah.
Our next question comes from Randy <unk> with Jefferies. Please proceed.
Okay.
Hey can you hear me.
Yes, we can hear you fine rating.
Hey, guys. So I don't know if you went over at this but any kind of commentary around variability on.
In performance by.
By geographic region and update on kind of of mid Atlantic sorry kind of on a little late so I didn't know if you went over that already yeah.
Hey, Randy I'll take the mid Atlantic and then maybe Charles can jump in at the back end for some of the variability but.
Yes, 2020 was of great year for us Heather on boarded.
A lot of sort of building the foundation and getting the team in place feel really good about that we do expect opened three to five stores. There. This year just opened our Mount Airey store, which is their second store, they're going to look very similar to what we have there already with slight.
There's obviously no beer and wine.
But we're like in the real estate opportunity, we're liking the build of the team.
You know, we're liking that we've got some of that foundational building piece done end.
And really remain Super excited about all of the opportunities we're seeing.
And then Randy it's Charles just to answer your question around sort of regional performance. It's been interesting so as much as we're in the early days of reopening here at clearly has not been of binary start.
Our California markets are we're seeing.
On a gradual reopening reopening, but it's very much a phased approach on a county by county basis, and then Conversely, as we look at the Pacific Northwest, we've seen of recent uptick in COVID-19 trends, there and so they've started to.
Institute, some some new restrictions on sort of go on the other way.
All of that said when we look at regional performance.
The overarching trend of customers.
Moving to consolidate their trips to the store continues.
And so what that means is from a comp perspective, we've seen largely consistent comp performance.
In both Q1, and then Q2 to date and so while again the reopening is at starting we have not seen that filter through to the change in grocery purchase behavior at this point.
And all of you are you able to parse out at all how you're thinking through the transactional changes from you.
I know that existing customers of consolidating trips, but are you able to kind of parse out behavior of what's going on with new customer acquisition and stuff like that just give us some thoughts on on what you're seeing there.
Yeah, Yeah, Hi, Randy Yes, we do I would say.
First we're pleased with increases that we've seen in awareness engagement and trial across all customer types. So.
That would be those that shop is of primary store secondary store and then tertiary shoppers as well.
I'd also say, we're getting positive feedback we're seeing positive feedback from our surveys from both new customers and those that have shopped us for longer periods of time.
On the customer appeal to this business is quite broad so that that cuts across lots of different demographic segments and customers do shop us in different ways.
So you have them coming to grocery outlet, if they're new and they will fall into different patterns, if their primary more secondary or tertiary.
That's part of how this model works and then you factor on the changes from COVID-19 here, you see different patterns, there as well and so those are all things.
Of that we track and you'll have a good pulse on from the survey results that we look at and.
Overall, the feedback there is positive at.
Confirms and is consistent with our own internal tracking of savings baskets savings of strong good representation of Wow items.
Unique combination of our attributes resonates with new customers and.
All of that bodes very well and at the end of the day.
Now you are at.
Is very important and we believe.
Only increases of importance and for all of those new customers that have shopped us in the past year.
Back that to continue to lead to more frequent trips and bigger baskets.
Great understood. Thanks, guys.
Yeah.
Thank you. Our next question comes from Michael Lasser with UBS. Please proceed.
Good afternoon. Thanks, a lot for taking my question I know you said that weekly volume are consistent quarter to date with where they were even though in the first quarter yet.
The weekly volume, presumably in the year ago period were higher in the second quarter than they were in the first quarter because as we line up at the arithmetic math the two year stack is lower.
To start this quarter than it was last quarter.
So do you think that just didn't.
At the World is reopening there's the of rush to go back out to eat and at that shifting food at home food away from holding in your markets or do you think that at least the of longer term trend where e-commerce penetration is higher.
And in that light.
Decrease your addressable market as a result of having you know a little less e-commerce presence.
Hey, Mike.
Yeah, I know Theres a lot of there. Thank you.
So I would say.
From our perspective.
We're in the middle of of a very volatile time for the consumer things like consumer trends behaviors, even customer psychology, they're really hard to predict I think in the near term. So we're not going to try and do that what we've done is manage our business through through this pandemic. The best we can.
How are controlling the things that we have of real impact on you know great buyers delivering supervalu is the stores carrying operators.
Delivering service and.
Kind of marketing and continuing to engage with new customers that are interested in what we offer.
Big picture, we're really confident that nothing has fundamentally changed with the long term.
Model, delivering 1% to three comps growing the store base, 10% filling in the white space investing back into value, which is what we stand for and then ultimately growing earnings plus 10% per year I'd say, we got to 'twenty, one and it really requires you to look at the year because of the noise.
As a little differently. So for 'twenty, one we're really focused on sort of the absolutes of average weekly sales traffic.
Customer and get customer engagement that RJ talked to excitement on the store.
On to that I'd say look after moderating throughout the second half of last year sales have stabilized and that's good.
Really happy with the quality of the inventory of the Io merchandising and then everything that RJ said about the customer of what they're telling us through surveys.
And so while there are definitely macro factors that can broadly impact consumer behavior in the short term, we're really confident that.
The long term algorithm at everything I spoke to is kind of is going to return the customer is going to return to value and net will be back to you.
It's sort of less noisy numbers in 2022.
Inc.
Hello.
Even at <unk>.
Average weekly volumes have been stable the aggregate volume in the third quarter of last year was lower than it was in the fourth quarter. So should we assume comps will be less negative in the third quarter and then assuming this average weekly volume number of holes.
The fourth quarter.
C a little slippage in your comp again in the fourth quarter, I know, you're not providing guidance, but to the extent that you could give us some perspective on how you're thinking about that would be incredibly helpful.
Yeah, Michael It's Charles let me I'll, just say there are so many sort of short term factors here at play that are really challenging to kind of parse apart is as Eric mentioned, you've got the the pace on the timing of the vaccine rollout you've got re openings by market you've got macro.
Economic factors.
Including the impact of stimulus funds on the consumers. So as we look at all of those things and try to predict exactly how the near term will unfold. We recognize we don't have the crystal ball and so it's just really tough to pin down those numbers with any degree of certainty of so our objective was just to provide.
At commentary with respect to what we're seeing so far in the quarter and give a sense.
To folks in terms of if those current trends continue what it looks like but is the environment continues to evolve.
As RJ mentioned, we're going to do everything to leverage the inherent flexibility of our model to our advantage. We are staying very focused on.
Managing the business for the long term and focusing on what we can control. So we think that's a really good set up for us over the long term.
Okay. Thank you very much of good luck.
Our next question comes from Paul Trussell with Deutsche Bank. Please proceed.
Hi, Good afternoon. This is Christine at Cotai on for Paul and Thank you for taking our questions on four for all of the details.
I wanted to stay with the top line you know when we're looking at your quarter to date per format at the low double digit comp decline would imply at two year stack of of bad in the mid single digit range, which is really what you were putting up on a one year basis pre pandemic. So you know how are you thinking about trip consolidation that's been at and benefiting your conventional peers.
Engaging with some of your lots of consumers and just your overall.
Overall ability that you had at least.
Okay, great going forward.
Yeah, Hi, Christine as Charles let me provide a little bit more color again, some background noise there, but I think this is another example of where it's just important to distinguish between the absolute trends in the percentage comparison so.
As we look at absolute traffic can ring levels, we feel good that those those levels were stable in Q1 that continued into Q2 here.
So again customers continue to consolidate their trips and purchased larger baskets as we look at the year over year comparisons admittedly those are becoming increasingly noisy.
Recall that last year as COVID-19 to call that initial wave of demand came from both the surge in traffic and ticket and then as the Lockdown really took hold customers moved to trip consolidation, we saw traffic declines, but that continued larger basket size at moderated over the course of 2020 and then.
<unk> stabilized here.
In Q1, so that year over year relationship of traffic and ticket from a comp standpoint is changing.
But again those absolute numbers are same staying stable, which makes us feel great and thats really what were focusing on to look through the noise. So we feel great about again, the long term positioning of the business. The fact that our value orientation. We're supremely confident will win the day over the long term and so everything we do.
Moving to make the.
At the right investments in the business in pursuit of this objectives, we think it's the right thing to do.
Got it and just wanted to ask a follow up you know what is your gauge of how youre performing at your market share looking at any or all of their marketing spend in the near end markets, maybe out and on the East coast, Yes on.
From a share standpoint, but also what are you seeing more broadly as it relates to competition and promotional activity.
Yeah, Hey, Christy.
Yeah.
Predictable I think the result of everyone lapping 2020, COVID-19 buildup from from last year, we're seeing a lot of promotional activity from other retailers.
We've stayed pretty focused on maintaining the value proposition.
Following our pricing strategy of monitoring pricing really really closely ensuring that we maintain that value prop.
We've seen this this deep promotional environment in the past don't think it's necessarily sustainable.
We're not confident that the suppliers are willing to fund at where.
We're pretty confident that from our past retailers arent going to be able to sustain at so we're pretty confident at.
Will it will taper by some some period of time this year at.
And we're going to continue to ultimately play the game that we play which is providing value on brand names local shopping experience delivered by the Io. So.
That's what I would say relative to sort of the competitive environment.
Great. Thank you so much on good luck.
Thank you. Thank you.
Our next question comes from Robbie <unk> with Bank of America. Please proceed.
Oh, Hey, guys I was hoping to get you guys to maybe help us understand what maybe the strategy is for your iOS in this environment kind of what Youre seeing are they.
With this volatility did they overbuy.
Are they.
Having to be more promotional than they would like to be in some cases because of the promotional environment you're talking about.
Just curious what there.
All of the aisles of responding to all of this with gross margins coming in so much on a year over year basis in sales down so much.
Yeah.
Ravi this is the environment, we thrive in.
This model was built for this buyers are definitely on offense going after product or.
Our super flexible to take advantage.
Of everything we're seeing in I'd say coming off of one of the most difficult operating environments last year anything that feels like.
That's letting up a bit as the economy starts to reopen feels really good. So all of the restrictions that they were under all of the cleaning mandates all of the COVID-19 scares.
All of the regulations and enforcement agencies climbing up and down the stores.
This year it feels like a lot of wind in their sales.
Inventories never been in a better position than it is today, it's I'd say that holds for the last year. So they are really excited about the opportunistic that theyre seeing and really excited about those opportunities. So.
They might be a little bit more focused on the micro that we are focused on the macro but.
We've been out of ton.
<unk> been over at 100 120 stores this year and I'd say the morale is really high we feel like we've gotten through the bulk of the difficult operating environment and Theyre just looking forward and you know look there theyre looking at the same thing we are as an operator, they're looking at the sales they run through and they're looking at their expense level and that's all healthy is at.
<unk> in Q1, so it feels good.
And the just to understand the.
The traffic so is the traffic basically running somewhat flattish on a year over year basis is that the way we should think about.
Once you guys are saying.
Yeah, Ravi it's Charles the traffic has been flat.
With respect to Q1 and Q2.
And it really has been at I'd say consistent traffic pattern since the onset of COVID-19. Initially there was at demand at pushing customers into stores as they did that first wave of stocking up but after that it really has been trip consolidation that his has continued.
And then just real quick just to understand on on the Io as do they.
Traffic, maybe not coming back as much as basket is kind of coming in do they try and buy more opportunistic or do they look for more inline programs for you guys. How do they think about managing what's going on.
Yes.
They're looking at the order guide there are probably a little bit more shorter term focused on that theyre looking at the order guide, which is a representation of what's in the warehouse that given time, they're ordering of their ordering.
Six to seven times a week so.
We're certainly looking to build inventory on those items that are most exciting.
To the customer end.
What they are saying to US is the order guide, which again is sort of there.
Theyre Bible for ordering is looking really strong right now so I'm with that opportunistic inventory. They know they have a greater ability to excite the customer and usually a little better margin. So.
That gets I'm really excited.
And just very last one are they seeing deflation you know given the promotions are they having to be more price aggressive.
Versus last year at this time, where you didn't have to be price aggressive at all.
Yeah, So hey, Robby.
In terms of competitive promotion I think Eric just spoke to this a little bit but we.
From a pricing strategy standpoint from a marketing strategy standpoint.
That is shared between activities that we would do essentially on the operators do.
In their stores at.
And ultimately for us.
I would say regardless of promotional environment, because we've been through all of them.
We're focused on highlighting the best deals on the best values to our customers. So the operating role here, which is extremely powerful would be as they are communicating.
Specific items that are in their stores showing great value.
Post that on social media they.
They do have flexibility in pricing. So they can they can take a hot deal and make it even harder and then promote that widely on social media and.
That's just one example of many where the.
Flexibility of this model allows them to.
To adjust for the inventory on their store and the specific customers they have within their market. So we talk about.
More local assortment and more specific to customer need so.
That flexibility.
Serves us really well.
In these months, but throughout time historically so.
Those of the types of activities at <unk> them engage in.
Yeah.
Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed.
Hey, everyone. Good afternoon.
Following up on the on the sales question that you've been getting if if if I guess our model is right.
It looks like if this low double digit run rate holds.
At the sales per foot could be a little lower than where it was in 2019 Q2, if that math is sort of right. I know you mentioned you know not worried about long term. We're in a weird time is there any more parsing out you can do whether.
Our new customers versus existing because theyre at imply something that either new arent repeating you know new arent coming back anymore at the same rate or that existing baskets are changing can you share what's changing if that's the right way the day to shaking out.
Yeah, Hey, Simeon, yes, I can comment on that so again.
We're pleased with the increase in awareness and new customers that we've seen over the past year.
The trip consolidation does continue that's true for new customers as well as well as existing customers. So I'd say, there's a lot of noise still in traffic patterns as we look at new customers long standing customers primary secondary tertiary.
We look mostly two levels of satisfaction and excitement they have with the shop and we feel really good about that in terms of whats changed I think you asked within your question.
As we surveyed customers continually.
And I take you back to last year, I mean, certainly noticed a change in terms of the increased importance of health and safety cleanliness of the stores I'm going back to March April may timeframe last year when.
At this this pandemic hit us all.
With that we also saw increased importance on engagement with local sort of local nature of the shop was resonating.
And we also saw from surveys that they were at consolidating trips and increasing the basket on reducing trips outside of the house on all of these things that we noted as changes back a year ago have eased back from where they were at Q2 Q3 last year and that comes with reopening in the vaccine.
And consistent with what was observed in sales patterns, what I would say is consistent throughout.
What has remained consistent throughout as the value. We deliver that's remained strong theyre enjoying the treasurer on the connection with the operator continues to be a differentiator in stock levels are healthy and so those are those of the things that we look at.
To best gauge future sales performance.
Not just for this year, but also at Lilly.
For longer term in terms of how we think about the business.
And then as a follow up at.
And with him at a low double digit negative quarter to date are there any categories that are bucking. The trend can you share with us. If there are examples on why and I guess look sales you know of declining given the comparison do you see them at.
Divergence between stores that are operated with more highly tenured iOS versus less experienced one do you see divergence at that opening up over the last couple of quarters or at least in the quarter to date trends.
Okay. Yeah. So to answer your first question in terms of growth by category I'd point to non.
Josh that spanned departments, but it's a group of products that continues to grow at rates above above average perform above average.
We've got a nice and growing mix of the total assortment and I would say no further within that we see we see varying ranges and levels of growth by store I think getting to your the second part of your question Nosh is probably a good example, where.
The operator for the items that they pull into their store and how they merchandise then caters to a local customer preferences.
And demands and so.
Those those performance patterns I would say are more specific to the market than they are necessarily too.
You know to tenure to different characteristics of the operator, and we've also seen some nice growth in.
Fresh a nice performance in fresh produce meat.
We introduced fresh seafood recently, so that continues to increase in customer adoption and.
I'd also mentioned beer and wine is a category that has performed well we.
We did expand spirits up in the northwest over the past year.
So that's contributed there, but also just demand given extended closures of.
Of bar, specifically within that category.
Hey, Simeon Eric I'll take that.
Second part of your question, So I'd say, the only differentiation in performance that you'd see from tenured iowa's might be at.
And some of the operator stores that have been in our existing market for a long long time in the same store and they've just sort of had the market growth aspect that some of the newer operators of newer markets don't yet have because of the lack of maturity of their store but.
If you look across 400 operators and said is there a meaningful difference in performance between tenured and experienced.
That would either gets you one hopeful and excited or disappointed I'd say no.
Ladies and gentlemen at this time, we ask that you limit yourself to one question and one follow up our next question comes from Karen short with Barclays. Please proceed.
Hey, thanks very much.
A couple of well I do have two questions first is on the gross margin.
You are very specific I think on <unk>, calling out at 35 per cent. So wondering if you could give a little bit more color on that and I mean, that's obviously down more than we would have thought and then just on that front with respect to that.
Environment broadly inflation is obviously high end I'm wondering if you could just talk to how that would impact your like buy opportunity just broadly does that actually make it easier or harder with respect to inflation and also rationalization of skus.
At the manufacturers.
Yeah, Hi, Karen This is our day I'll start with your second question then maybe Charles can cover your first yes, I would say.
Neither positive nor negative in terms of access to supply.
We're seeing incredible deals right now across all of our categories.
We're really excited.
And we remain bullish on future opportunistic supply trends pipeline is strong and we're seeing deals come to us in a variety of ways.
There is as you're well aware.
An unprecedented amount of supply chain disruption, you've got at product innovation, that's alive and well.
You've got you've got production I'll say coming back online to catch up finally with demand and that will continue through the rest of the year and so all of this contributes to more surplus product and we love the relationships, we have and how well we're positioned to capture those when they come through yes.
Yes, Karen as Charles just a little bit more color. There I think RJ talked a lot of this earlier, but it's pretty unique the way our model allows us to mitigate some of these margin headwinds.
Can't fully ignore them, but it definitely helps us to absorb them and you can see that when you look back over a longer time period in terms of our margin performance through a variety of of cycles different inflationary environments.
And so Q1 I think it was a good example, where we felt some of those higher commodity and freight costs at.
And we had we are back to normalized turns relative to where we were last year and so really pleased with our margin performance in the first quarter in Q2, I think some of those same headwinds are going to exist just to a greater degree.
And that is really.
The the thought behind our guidance of approximately 35% per for the second quarter, but for US again, those quarterly fluctuations very normal for our business. We look at the margin and feel like it's very healthy.
And continue to have confidence in our ability over the long term to deliver margin stability.
Our next question comes from Oliver Chen with Cowen. Please proceed.
Hi, Thank you in your remarks on the regional specialization opportunity and also exclusive.
<unk>.
How do you see that manifesting in your buyer teams indoor your your mix over time.
Indoor thoughts on margins and how that May interplay. Thank you.
Yes so.
We've managed.
Changes in mix.
During shorter periods of time, and then over a longer period of time with.
We'd always delivering value and maintaining stable margins so I.
We don't anticipate nor are we planning for this continued evolution of the assortment to have any meaningful impact on.
On margin if that's if that's your question.
As the business has evolved over the years and as we expected and we'll manage it to continue to evolve to stay relevant for our customer demands and to always be delivering industry leading value.
We expect to maintain.
<unk> margins.
Across opportunistic and every day.
Our very flexible so both of those sides of the assortment.
Extreme amount of flexibility.
And we're able to.
Capture of the best opportunities that deliver the right balance of value end.
<unk> valued at the customer and then margin to the business. So.
As you talk about regional.
Our products being more relevant geography level or product development.
Labels exclusive to grocery outlet, we think that only enhances the experience end.
And overall strength of the business.
Thank you.
I wanted to ask a question comes from Joe Feldman with Telsey Advisory. Please proceed.
Yeah.
Yeah, Hey, guys. Thanks for taking the question.
I apologize if I did miss it but you alluded to some in store changes that youre doing I think.
Maybe down in California, or something and I was just wondering what kind of lift you might be seeing from changes like by moving the nosh to the first style end.
What kind of drove.
The change in the first place was at a few of those did at and kind of bubbled up made sense or.
Just any color commentary about that would be helpful. Thanks.
Yeah, Hey, Joe Thanks for the question.
So let me just set the tone for what we do do relative to new stores, we're always.
Attempting to innovate I would say at each store openings and opportunity to try something new or remove something around keep in mind that each of our boxes can.
It can be somewhat dissimilar from the last we're not sort of stamping out a.
Yes sort of a static box so a lot of of flexibility, we look at it and I'd say Mount areas of Good example, on the East is as a result of the box that we took.
And then certainly has a lot to do at the urban nature of the customer walking into the store within sort of of six block area. So.
Changes are.
Really in pursuit of where the customer is already headed more fresh so we put the fresh produce and meat.
And some of the fish products upfront.
Then I'd say nosh.
We've talked about that for years and sort of of double digit growing comping category lots and lots of new supply we need more space. So we've taken that to the first aisle.
So just those are a couple of examples that we go after and look we'll play with them. The great thing about grocery outlet is we can test. These quickly if we like what we see we can move them both back into the company to existing stores or on a go forward basis too.
New stores and I would point to a few things that we've done the work in cooler for refrigerated alcohol is something that you'll see throughout the.
Walk in dairy we had no dairy 20 years ago, and then we were selling at out of the Deli case now it's in sort of a goal from behind case those are all just innovations that.
We don't see big but they are big for the operator of their big for the consumer and we're we're always trying to test things based on where the customer is and then pull them through.
The store design process test them, if we like them great. If we don't throw them out and move on but I wouldn't want you to build in a whole bunch of sort of model.
The increase is based on this this is something we've always done we just thought it was important to highlight a few.
At related to the east in.
All of our new stores.
Okay. That's helpful. Thanks.
Our next question comes from Jeremy Hamblin with Craig Hallum. Please proceed.
Thanks, I wanted to ask a question actually about you know.
Labor.
As it relates to your independent operators.
We've heard many people many restaurants at retailers having trouble.
With hiring.
Obviously, it's.
It's not something specific to your end of the.
Of the business model, but certainly impacts your independent operators wanted to get a sense for what you are hearing from them in terms of whether or not they are.
Some wage pressures.
Whether or not they are able to staff the stores adequately.
And whether or not.
It's cause any disruption in terms of your weekly deliveries of supply chain at all.
Yeah, Hey, Jeremy Thanks for the question this is Eric.
I'd say no disruption.
It is a more difficult environment I think the biggest difference is restaurants closed down temporarily a lot of people went away found other jobs and I think re hiring in this environment from from scratch is very very difficult.
Our operators were in continuous operation.
If nothing else.
Most of them were increasing.
The staff they needed to handle sort of pandemic volume last year. So.
They had been.
I think experiencing that same difficulty, but they had of staff and they were able to hold on to that staff many of them offered premium pay.
During this period just naturally.
This wasn't compelled by any of the hero or hazard pay it was just sort of what they wanted to do to make sure they could retain.
I'd say operators because they are entrepreneurs they figure out the balance between labor and productivity and so as rates go up they have to become more productive and find ways to be more efficient. We obviously help on the back end through technology and supply chain, but they have all kinds of tricks up their sleeves in terms of flexible schedules, giving.
People time off.
Being a good employer working the store themselves, they're not just owners are owner operators. So they're side by side there their staff, so I would say difficult, yes disruptive no.
Will it return, let's see what the stimulus does I think it's very hard to compete against.
What's going on in the stimulus stimulus environment for people that are making the decision between staying home and going to work, but we find ourselves net fortunate unfortunate situation to have a place that people like to be be employed and work productively on.
That's helpful and just as a quick follow up do you have a sense for what the.
Average pay rate is up versus let's say.
2019 levels.
For you pointed out yes, we really down share.
I would just offer perhaps anecdotally when I hear an operator.
Lament that it's hard to hire people and you ask what the wage rate is.
They're needing to go above.
Whoever is close by Starbucks offering 16 Bucks an hour they've got to be above that so I might offer at a buck or two on our over where it was this time last year, but it would just be anecdotal.
Great. Thanks.
Good luck guys.
Income from Germany.
Brian Mac Monero at bedroom Berg. Please proceed.
Alright. Thank you for taking my question could you talk about the two new stores, you've opened year to date in the East I know you have one in east Norton and the other one at Mount Airey I think Mount Airy. It's only been opened maybe 12 days, but how are they performing in their early days relative to our new store you would open out west.
Yeah.
Yes. Thank you for the question, yes, it's still early innings.
You know were excited by the community outreach that we got.
Particularly just seem out of area and the excitement around around that opening.
Engagement from the Io in that community great customer feedback some interesting.
Day sales dynamics, just because of the urban nature of that store, but we're really happy with the positioning of both of those stores I don't know if you had a chance to see them, but very very prominent.
In terms of retail locations facade sort of immediate impact in those neighborhoods. So.
Way too early to call are way too early to tell in 12 days, but we're happy with what we're seeing.
And then just a quick follow up on the east It looks like you have several job postings for potential store locations across the six or seven mid Atlantic States on.
Or are buyers of supply in general limiting factors in terms of the pace of your build out on out East end do you expect an acceleration in store groups on the East next year from your current three to five year on at pace.
Thank you.
Yes, So let me just address the job posting a comment I think what youre, saying is youre seeing probably store directors store manager store operator.
Our recruiting team does a lot of sort of initial trolling.
All of the job posting just to sort of generate people that think of themselves as directors, but havent thought of themselves as being owners and operators a lot of them are able to translate over.
Two operators. So that's why we post that way.
And your second question was around.
Just sort of additional growth in the east three three to five the number this year, yes, I would I would like to see more I mean, we're certainly seeing a lot of mid Atlantic real estate opportunities on market.
Put a finger on the page in terms of that number but.
I would just tell you we're building the foundation of the infrastructure. So that we can have more stores back there so I think that.
That should be our last question of that right.
Hey, guys.
We're going to wrap up thanks, a lot for joining us. This afternoon looking forward of continuing the dialogue in the coming day. So thank you very much.
This does conclude today's teleconference. You may disconnect. Your lines at this time at thank you for your participation and have a great day.
Goodbye.