Q2 2021 Grocery Outlet Holding Corp Earnings Call

August 10, 2021

[music].

Greetings and welcome to the grocery outlet at fiscal second quarter 2021 earnings results conference call.

At this time all participants are on the 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 of this conference is being recorded.

I'd now like to turn on the conference over to our read of how do you.

Thank you you may begin.

Thank you.

Good afternoon, and thank you for joining us on today's call to discuss the rest of the outlet second quarter 2021 financial results of Joy.

Joining me on today's call are grocery Outlet's, Chief Executive Officer, Eric Lindbergh.

President RJ sheedy.

And Chief Financial Officer, Charles Bracher.

Following our prepared remarks, we will open the call for questions.

Conference call is being webcast live and a recording will be available via telephone playback.

Proximately 2 weeks.

And then ultimately archives in the Investor Relations section of our website.

Participants on this call we 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.

It could cause our actual results to differ materially from these statements at.

A description of these factors can be found in this afternoon's press release as well as in our periodic reports we filed at the SEC all of which may be found on our website at investors the grocery outlet dot com.

Or on the SEC Dot 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 will also 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.

It may be found in the supplemental financial tables included in this afternoon's press release at our SEC filings and the Investor tab of our website with that I.

I will turn it over to Eric.

Thanks, Robin and good afternoon, and thank you for joining us for a discussion on our second quarter performance. Let me begin by welcoming <unk> into the grocery outlet family. We look forward to benefiting from Irvine's Investor Relations leadership and experience as we continue to engage with the investment community.

We are pleased to have exceeded our expectations for the second quarter as we lap the elevated sales experienced during the early months of the pandemic our cash.

Comparable store sales were slightly better than expected at negative, 10% and on a 2 year stack basis increased 6.7%.

Gross margin and adjusted EBITDA results also exceeded our expectations as we successfully manage the cost pressures facing our business.

With respect the comp trends, we believe there are certain transitory dynamics, such as additional stimulus funds and ongoing trip consolidation the continued to impact short term shopping behavior.

We expect consumers prioritization of value to increase as those dynamics of Si.

As such our long term strategy remains unchanged to leverage our deep supplier relationships and passionate network of independent operators to provide the most compelling value in grocery retail bar none.

As we continue to execute against the strategy and reinvest in support of our long term objectives, we remain confident in our ability to achieve sustainable consistent and profitable growth.

From a purchasing standpoint, we are uniquely positioned to capitalize on current supply chain dynamics and are extremely pleased with the opportunities we are seeing across categories.

We are already capturing great buys in areas such as Noche stemming from the renewed focus on product innovation the ramp in production and the challenges of forecasting in this environment.

Our team continues to do a fantastic job of sourcing opportunistic deals and strengthening relationships with existing and new suppliers alike.

Does that end, we're looking forward to our annual supplier meeting the September which will mark our 23rd year for the special event.

Hopeful that we will be able to meet in person, but regardless of format, we value of the opportunity to connect discuss long term strategy with our supplier partners.

They are of critical part of our success and we are excited to exchange insights and ideas that allow us to expand the relationships with them.

While our purchasing capabilities are second to none of our network of passionate independent operators is really what sets our business apart at.

As the progression of Covid, including the Delta of various continues to be front and center our iOS on their associates are navigating extraordinary labor inflationary pressures to.

To help offset those headwinds we continue to make the investments, which allows <unk> to operate more efficiently and reduce end to end cost.

That includes the ongoing improvement of ordering and inventory management tools as well as the upstream supply chain distribution efficiencies. For example, recently brought temperature controlled outbound transportation in house, which improves store service levels and helps reduce system wide freight costs, we continue to pursue other opportunities to drive.

<unk> throughout the chain that benefit both of our operators and grocery outlet.

But at the current headwinds our iOS and their dedicated local store teams continued to do an excellent job of serving their customers and delivering the wow shopping experience at.

Tourist stores every week and I'm always very.

Very very impressed with the passion commitment and resilience displayed by the operators.

Similar to our supplier meeting we're looking forward to a regional operator meeting in October, which we hope will also be in person at <unk>.

Valuable opportunity for us to discuss the business, including our near term strategies execution as well as our longer term growth plans.

In addition to ongoing investments, we make to advance our purchasing and supply chain capabilities. We continue to invest steadily in the store growth to bring market, leading values to more customers and communities. This remains a huge opportunity given the broad appeal and success of our value proposition across markets geographies and demographics.

I am proud to share that we reached an exciting milestone this year the opening of our for hundreds of grocery outlet store located in Hayley Idaho on June 24 at Haile.

Daily is just out of the Sun Valley Ski resort and east of Boise is being run by grocery outlet veteran Shane Anderson, who has been warmly received by the local community.

In total we opened 11, new stores in the quarter, including 1 in Pennsylvania, our real estate and construction team continued to do a fantastic job getting new sites opened despite all of the challenges of sourcing equipment and securing trade labor.

Main pleased at the new store productivity is in line with our expectations, but the trends at our new mid Atlantic stores similar to those of the initial entry in Southern California. We are building the foundation for store growth in the east, including investments in purchasing and infrastructure, we look forward to growing our presence and brand awareness in the region.

Of the 36 at 38 stores, we plan to open this year, we expect that 3 to 5 of those openings will be on the east, including our first store in New Jersey.

We know that we have tremendous runway to expand our footprint based on the power of our value proposition and the portability of our model as we look forward. We remain committed to our stated target of 10% annual unit growth remain equally committed to making the critically important investments across the business, particularly in real estate purchasing recruiting and training and technology.

That all support that expansion.

Firmly believe our stores represent the most important growth driver, but we're also exploring complementary ways to reach new customers and deliver value.

The higher demand for grocery E. Commerce now provides an interesting opportunity for us to extend our industry, leading value and treasure Hunt experience. We are excited to begin testing various E. Commerce approach is to determine what works best with our unique model RJ will discuss more of this in a few moments.

Before turning the call over to him I am pleased to share that we completed our 11th annual independence from Hunger campaign in July of this program has raised more than $14 million to date for local food banks, helping to reduce food and security and our communities.

The Io surpassed last year's store level of donations raising nearly $3 million for local food agencies. The renewable as examples of iowa's engaging their customers and creative ways to support the cost for example, Tom Chris the operator at our Myrtle Creek, Oregon store committed to camping on top of the semi trailer and the grocery outlet parking lot until it was filled with food and supply.

As for the community.

And just under 2 weeks the tally of nearly $25000 on cash donations and over 7 pallets of food at which point Tom was finally able to come down from this campsite.

This effort is a powerful example of grocery outlet unique culture, the strength of our operator community on our shared mission of touching lives for the better I am so proud of the results I want to thank everyone, who participated with that I will turn the call over to RJ.

Thanks, Eric.

Let me start with an update on opportunistic supply.

We are highly encouraged by the continued growth in our supply pipeline as we are seeing a wider assortment of opportunities bigger deals and deeper values.

We saw the increase in surplus products beginning in the first quarter and that acceleration has continued through today.

Renewed investments in product innovation together with increased capacity and production are contributing to the breadth of items and brands in the marketplace right now.

Overall, our inventory is healthy across departments and we expect the strong pipeline of opportunistic product to continue as we move through the rest of the year.

We believe that we are the partner of choice for our suppliers and are uniquely positioned to capture all buying opportunities as they arise.

As Eric mentioned, we are excited to be hosting our annual supplier meeting again next month.

This is an invaluable event as we learned about our suppliers initiatives share of strategic direction and explore better ways of working together.

Beyond discussing ideas and future initiatives. This is an opportunity to deepen our relationships and build new ones as we plan for the future.

Looking forward, we will continue to invest in value as our first priority.

At the same time, we will explore new ways to expand our share of wallet and broaden our customer base.

We plan to do this by increasing the relevance of our assortment extending our consumer reach and connecting with customers in a more personalized way.

First we will continue to strategically expand our assortment.

We are leveraging consumer data and capitalizing on our strong supplier network to introduce more high demand items across departments.

<unk> remains 1 of our best performing categories and is a primary focus for expansion along with our fresh departments.

Fresh we recently introduced variable weight produced in all stores and we are seeing positive results from new prepared products in both produce and fresh meat.

To support this assortment expansion, we will adjust our marketing messages to feature both of our deep value as well as the convenience of the full shop that we offer.

We will also continue to communicate in announced deals and fresh product to promote trip frequency.

We've had great success with prior assortment improvements and we see additional opportunity to create greater excitement with the next phase of this initiative.

Second as Eric mentioned, we plan to begin a test and learn approach to evaluate various e-commerce solutions, such as delivery and buy online pickup in store.

These tests will assess several factors such as the alignment with our unique model operational and technical considerations and total market opportunity.

We are currently in discussions with potential third party partners and we look forward to updating you as these tests launch and progress.

Finally, we continue to move forward with our personalized customer marketing initiatives.

We have outlined the program and system requirements to capture and utilize transaction data to communicate with customers in a more relevant way.

We expect to introduce a test of this new program in the first half of 2022, accompanied by the introduction of the mobile App.

This initiative will enable us to more effectively communicate new products and our low values to customers based on their preferences with the goal of driving more frequent trips and of higher basket.

In parallel we continue to enhance our marketing tactics and a variety of ways. We are more precisely segmented our customer messaging via connected TV marketing and have increased our usage of certain app and digital platforms that have proven to show good returns and testing.

We will also continue to optimize the mix of TV radio and digital on a market by market basis based on customer responsiveness.

In conclusion, we remain confident in our long term growth potential and we are excited to build upon the core strength of our business as we advance these important initiatives.

We expect that they will allow us to capture more of our market potential by increasing our appeal with core customers expanding our reach to new customers and enhancing our communications with all of the grocery outlet shoppers.

We look forward to sharing our progress as we move forward.

With that I will turn the call over to Charles.

Thanks, RJ and good afternoon, everyone of our second quarter results exceeded our expectations, reflecting the outstanding efforts by our team and our independent operators as we continue to navigate COVID-19.

Following our discussion of second quarter financial results, we will provide some commentary on third quarter to date trends and our outlook for the remainder of the year.

For the second quarter net sales were $775.5 million.

A decrease of 3.5% compared to the same period last year.

Comparable store sales decreased 10% as compared to an increase of 16, 7% in the second quarter last year.

Versus the prior year, our comp decline reflects a decrease in average ticket as well as the lower traffic.

On a sequential basis second quarter traffic was up modestly versus the first quarter.

Contributing to total sales was the impact of 38 additional stores opened on a net basis since the end of the second quarter last year.

We finished the quarter with 400 locations and remain pleased with the performance of our newly opened stores, including recent vintages, which continued to deliver sales productivity in line with our underwriting expectations.

Second quarter gross margin of 37% was above our expectations and roughly in line with pre pandemic performance despite inflationary headwinds.

Our purchasing planning and distribution teams continued to do a fantastic job leveraging the flexibility of our operational model to navigate rising commodity and freight costs.

Versus the second quarter of 2020, our gross margin decreased 90 basis points predominantly due to the normalization of inventory turns and the impact of inflation.

SG&A expense decreased 2.5% to $193 million.

Due to lower variable commissions to independent operators and decreased incentive compensation expense.

It was partially offset by store occupancy and maintenance costs related to a higher store count as well as ongoing investments in personnel and infrastructure to support our growth.

Depreciation and amortization increased to $17 million of 28, 3% versus the second quarter last year, driven by store growth as well as continued capital investments in systems and infrastructure.

Stock based compensation expense was $4.2 million in the quarter compared to $10.2 million in the same period last year as prior year expense included the final vesting of performance options related to our 2014 equity plan.

Net interest expense decreased 25, 6% to $3.9 million versus the second quarter last year due to lower LIBOR rates as well as reduced borrowings under our revolving credit facility.

Our GAAP results also reflect the 4 million insurance recovery related to the launch of our Paradise, California store in 2018 due to wildfire.

Per door, a normalized tax rate of approximately 28%, we incurred an effective tax rate of 17, 2% in the quarter due to the tax benefit associated with employee option exercises the.

The result of these factors GAAP net income for the quarter was $19.6 million or <unk> 20 per diluted share compared to net income of $29.3 million or <unk> 30 per diluted share in the prior year.

Note that our non-GAAP measures exclude the $4 million gain associated with our insurance recovery for.

For the quarter adjusted EBITDA was $50.8 million, representing 6.6 percentage of sales.

Adjusted net income was $23.3 million or 23 per diluted share based on an average of $99.6 million diluted shares in the quarter.

Turning to our balance sheet and liquidity, we ended the quarter with $126.6 million of cash and healthy inventory mix totaling $248.2 million.

Total debt was $453 million at the end of the second quarter net of discounts and issuance costs, which reflects a net leverage ratio of 1.6 times adjusted EBITDA.

We generated $58.7 million in net cash from operating activities. During the second quarter of fiscal 2021 of $36.5 million increase over prior year.

We invested $29.9 million on total capex during the quarter as we continued to build new stores and reinvest in the existing fleet and make ongoing investments in infrastructure and technology.

Turning to the third quarter sales trends remain consistent with the second quarter, along the similar traffic and ticket patterns as.

As a result quarter to date comp sales were down 6%.

Assuming the current trends continue we expect the comp sales for our full fiscal third quarter will be down in the negative mid single digits.

And the limited visibility today, we would expect fourth quarter comps to be consistent with the third quarter on a 2 year stack basis.

With respect of gross margin, we expect third quarter performance to be approximately 36% modestly below pre COVID-19 levels, reflecting the increase in inflationary pressures and commodity and freight costs.

We continued to effectively leverage our flexible purchasing and distribution model to mitigate these headwinds.

In terms of bottom line performance, taking into account inflationary environment as well as modest expense deleverage, we expect third quarter adjusted EBITDA margin to be approximately 6.5 percentage of sales.

Eric RJ discussed we continued to make important investments across the business to support future growth of.

Our store opening plans for 2021 remained at 36% to 38, new stores and we continue to invest back into the existing fleet, while making ongoing investments in infrastructure and technology.

For the year, we expect to invest approximately $130 million of Capex net of tenant allowances.

The result of our ongoing investments, we expect depreciation and amortization expense will be approximately $18 million for both the third and fourth quarters.

In summary, we continue to be pleased with the underlying strength of the business across opportunistic supply our product assortment and our strong engagement with customers and independent operators looking forward. We are confident in our ability to build upon these points of differentiation as we make progress towards our long term growth objectives and with that.

We can turn it back to the operator to begin Q&A.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.

We ask that you please limit to 1 question and 1 follow up at <unk>.

Confirmation tone will indicate your line is in the question queue. You May press star 2 if you'd like to remove your question from the queue.

For the partition participants using speaker equipment at may be necessary to pick up your handset before pressing the star keys, 1 moment, please while we poll for questions.

Our first question comes from Oliver Chen with Cowen <unk> Company. Please proceed with your question.

Alright. Thank you the details the very helpful. Theres, a lot of great initiatives on the horizon.

The 2 year comp stack.

Decelerated.

With respect to the third quarter guidance.

Would you attribute that to and what do you see with respect to the changing nature of the consumer as well as the as we look for.

As the compares get easier well there'll be a path to normalization back to that.

Plus 4% to 6% range. Thank you.

Hey, Oliver Eric.

We want to make sure of the audience. Okay, we're getting a little bit of feedback on this end, but thanks for the question, Yes, I would say.

The answer to your question, we do continue to contend with some of the transitory factors such as trip consolidation stimulus.

We look at <unk>, we look at <unk>.

Traffic and range continues to moderate but it's ahead of where we were pre pandemic, which is good we are seeing some sequential improvement in traffic, but it's a little below our seasonal patterns. Both are contributing to the modest decline that we're seeing at the 2 year stack basis.

But the 2 year stacked trend has stabilized we've seen those trends.

Eloping nicely in June and July.

We don't know exactly when the consumer returns.

And when we're going to see that certainly as we look forward, there's a lot of unknowns relative to the delta.

Relative to the consumer of stimulus everything we've said to date. So I think your question's a good 1 more.

We're leaning into a lot of these initiatives as you stated we're excited about those we think some will take longer than others to develop.

But if we look into third and fourth quarter, we're really confident in the things that sort of gotten us here of the value prop.

Supply is really healthy customer loyalty is solid.

We're engaged in the strong so.

We've got we've got a lot working for us right now.

Okay, Eric in the my follow up the E Commerce comment.

Im very innovative with which ones might happen sooner.

How are you prioritizing the roadmap there is a lot of different opportunities that are all possible on the you'll also have to make decisions in terms of managing margin relative to the the convenience and technology investments. Thank you.

Yes, Hi, Oliver I can I can take those questions.

Yes in terms of the timing on initiatives.

We are mindful of.

Being stretched too thin I'll say.

We take a very disciplined approach.

Thoughtful approach and focused approach to the things that we do here.

And we'll take the same approach to these initiatives that we've outlined as far as timing on E Commerce goes.

As mentioned, we're in discussions right now.

With some potential third party partners.

Just trying to figure out exactly how and when and what exactly it looks like as far as the test goes our hope and intention is though that we of the test out in market in the next several months.

So hope to have that up and running soon again, the test how well it fits with our model.

Some of the things that we've talked about more unique to us in the past relative to the e-commerce the <unk>.

Potential and then just more of the execution.

And system based considerations there.

<unk> I've mentioned in my comments would be at first half of 2022.

I am frame a lot of.

The work recently has gone into outlining of the program.

Thinking about the data that we will collect and ultimately the use of that in an effort to speak in a more relevant and impactful way with customers, we already have really high engagement in.

In the marketing that we put out spin.

Specifically mentioned the Wow alerts end.

At the store end item detail of the spend takes it down to the customers. So we think we will see even higher levels of engagement there and then at regardless of your question on on margin and how we might manage that.

In the midst of these things that we have on the list I would simply say, we have of long term history and track record of margin consistency.

And that has been the case as this business has evolved and it's evolved quite a bit over the past.

Several decades in the face of increased everyday items in the assortment.

We've maintained that margin stability through different.

Michael macroeconomic cycles.

And the.

Beyond the model itself, how we byproduct which is at.

Unique to us and the great way that we've been able to manage consistency. We also always have the healthy lift on margin enhancement initiatives and continue to pursue those opportunities and so feel really good looking forward about our ability to maintain those stable margins.

Thank you very much.

Our next question comes from Robbie <unk> with Bofa Global Research. Please proceed with your question.

Oh, Hey, guys. Thanks for taking my question I was hoping that you could maybe talk more about what the the pressures are that the iOS are facing right now I'd be curious like how are they handling the.

The challenging wage environment.

And are there other cost pressures that they're facing the kind of impacting your profitability beyond what they would normally have to deal with.

And maybe within that.

It sounds like.

You guys are seeing plenty of supply, but is the kind of quality of the supply in line with historical norms. It would seem like it would be of different kind of supply vs.

The more historical normal environments are there any kind of issues getting the kind of items that would normally drive traffic, maybe just give us a flavor for what the items youre seeing and how they may behaving differently in this environment.

Rob the Eric Let me take the first question on the Io.

It's a good question and then ill.

The flip it over to RJ, let him talk a little bit more about the supply, yes look I would say the iOS are just remarkably resilient, it's been a really tough run for the last 18 months they've moved from Covid in the major investments.

Just to keep their stores safe and secure and at move right into this unprecedented labor markets something they've never seen something we've never seen before it's been really tough as an operating environment.

Now you've got the uncertainty.

Of the Delta variant and sort of implications again for their stores and operations and it's just it's just a tough environment out of the stores, but that all said they are very resilient. They show up every day to deliver without fail and they continue to work really really hard improving.

They're they're they're businesses.

Ultimately I think the biggest thing we can do is to drive sales and margin into their store and Thats what were really focused on.

Can really help on by driving things like sourcing and margin dollars marketing investment even E. Comm that we're talking about is something that will help benefit them.

And then on the on the back side or the behind the scenes.

We're making a lot of investments in things like Capex in the stores, new technologies and everything that we can do relative to efficiency. So the.

We can help them.

Same time be more efficient and really streamline their own opex. So I would say that's going well.

Really focus as last year on staying close to them being out in front of him traveling a lot.

And I'd say they are stressed and I'd say, it's been a tough environment, but theyre hanging in there and we do get some time with them in October we're going to spend time out and all of the reasons about 10 separate meeting small groups of sort of discussing.

We have ways to sort of.

Make sure we're communicating and tell them, what we're up to and listen as well but.

That's a little bit on the Io health and sort of where we are of flip it over to RJ for product, Yes, Yes, hi, Robby yeah in terms of supply of the quality is really good we're seeing healthy lifts, we're seeing nice mix across departments and categories.

What we're seeing we're just seeing great opportunities come through some of the themes that we're hearing from suppliers as.

The product is coming our way.

Definitely seeing the impact of increased production investments in capacity suppliers of the found new sources of of supply in the past year to address the bottleneck. So.

We're seeing those investments play through and in this year that has proven difficult or more difficult to forecast that yields some of the product that we're seeing.

Innovation pipelines are healthy.

It's a frequent conversation on topic of discussion as they've reinvested profit back into innovation and long term growth and so whether that is pack size changes or rebranding labels or new items. Some of the things around as consumer trends have changed.

Those have yielded product opportunities for us.

And then just more generally you think about the amount of adjustment changes that have occurred in products and assortments.

To me what has been a very dynamic consumer environment.

Those of yielded product as well so feel really good about the.

The product the partnerships that we have and as mentioned.

All of that that continues well through the rest of the year.

Alright, great. Thanks, so much guys.

Our next question comes from John Hind backhaul with Guggenheim. Please proceed with your question.

So what are you guys seeing with regard to inflation overall right and.

I would imagine since for the price leader there would be an opportunity to pass that through is that happening or is there some wariness with doing that with the with the comp trend as it is.

Hey, John.

Yes, definitely seeing inflation.

Well publicized stresses out there on the supply chain, we hear of directly in our supplier of conversations as well, whether it's increased commodity costs are of freight rates are the.

Impact at the labor shortages and challenges of the stream.

And they are putting on the supply chain.

We do expect it to remain a headwind here for.

All of US as we as we look forward and we noticed some acceleration in Q2 continues.

So far through the third quarter.

This model does mitigate the.

Those risks and pressures more so than traditional retailers, we do still feel the effects of COVID-19. However.

We mitigated through a highly diversified supplier base, we've got an ever changing mix of products, we're in and out of opportunistic and everyday items, we're back and forth between suppliers. So that offers us some protection we price items all the time, so we're constantly able to manage that sales margin.

<unk>.

The relationship if you will.

And as already mentioned, we're always pursuing healthy margin enhancers to offset pressures such as these in terms of pricing we price the value. So.

We're always focused on value first and as we deliver that value will become an even more compelling place to shop and as we see price is being adjusted in market out of at other retailers. We adjusted Accordingly, we always pay very close attention to that.

Continue to play to pay close attention to it as well.

We'll maintain value and be able to move with the market as that occurs.

Maybe as a follow up the.

So do you think as you embraced E. Commerce do you think it's more of your customer wants more delivery or both of us.

I assume youre not going to put the labor the.

Picking right. The go to selection on the Io so that'll be done by the third party.

And then I know you guys have always said, it's hard to replicate what you do online.

Have you found a good way in terms of the mobile in terms of the App right.

At present the.

The treasure Hunt.

The effective way right for your customers.

Yes, good question, Sean and those are those are at.

Actually the things that we'll be testing as we as we get something out in market and Youre right. We have talked about these things in the past.

It's being just I'll say more unique to us not a straightforward.

The standard approach if you will the e-commerce.

The delivery focused we want to explore both of those the adoption for both of those of the increase so we think they are both potentially interesting opportunities are approaches for us. So thats very much both of those are in scope of as we're thinking about the test.

At Treasury as well Great question, that's part of the test also how well does that translate online.

As items are in the now does that come across the customers see the excitement online as they would walking up and down the aisles of the store, we will get a better read on that once we get out there end market, which is really the point of this thing is too.

To try a few different options are lots of different ways companies are going about it we think the right approach for us is the.

The called a lighter investment lower Capex investment approach to learn and then once we settle on the <unk>.

On 2 or 3 several options.

Net are a good fit.

We will adjust and figure out our longer term plans from that.

Thank you.

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Hey, guys. This is Michael Kessler on for Simeon. Thank you for taking the questions.

I wanted to first gas can go back to the comp trajectory and trends.

At year basis, they are running below your historical trend and below what the kind of broader food and food retail industry is doing and you've mentioned kind.

The high level, a couple of factors that might be influencing that so I guess I was wondering if you can go into a little more detail as far as sizing the amount of ranking them as far as what is most impactful relative to what we were going to be seeing pre COVID-19 and then could you bucket them into whether they were driven primarily by consumer changes brought on by the pandemic or anything else that youre seeing in the market.

Hey, Michael I would say so.

Slightly more weighted to.

Towards the basket DSL.

Then it would be of customer count I think.

We look at <unk>.

Some of the trends for the <unk>.

Tumor.

We really need the stimulus to abate.

We need some of the sort of.

Activities that people would stop doing hitting multiple stores looking for just the primary shop.

2 to abate as well will help us.

But look I'd say everything we're doing right now we just don't know when.

The value returned is sort of of capital D for the customer, but at the meantime, everything you hear us doing is just.

Putting into additional marketing efforts.

Expanding the assortment adjusting the marketing message to now include not only the deep value the convenience.

Even the e-commerce for US I think we're going to learn something that'll be beneficial and then certainly the personalized marketing so.

Look we don't have perfect visibility towards.

Sort of the future quarters, I think thats, why we sort of held with that cadence for for Q3 for a similar to where we are right now and look any any upside we have for that we can manage certainly from the supply chain and certainly capacity in the stores. So.

Look we're bullish on the value that we have the other.

<unk> already and we're doing some some pretty exciting things that we think will impact us in Q3 and for.

Great. Thank you and quick follow up and not to pile on on the ecommerce, but with 1 more on that 1 I guess first why now and second have you kind of stopped or even maybe have discussions with your.

At your CPG supplier partners about the idea of of having.

Discounted merchandise from the brands online I know that at something you guys have mentioned in the past is the potential barrier of listing them online.

Yes, Michael I'll take part 1 and then RJ can take part 2.

You've listened to us for a couple of years talk about e-commerce and sort of what our attitude is and that is quite simply the stores continue to really represent the most important growth driver for us, but I think what's hit us.

For E Commerce, particularly in food that took about 10 years to go from 1% to 5% penetration and then in Q quarter does it went up to 10% and the reality from our perspective is it's not going to go back to 5%, but it's more likely to go to 15% so that gives us.

Certainly a lot of confidence it's here.

And we can explore way to go out and reached the new customer and deliver what we think.

<unk> values in the entire industry to our existing and new customers and so that's got us pretty excited how we do at what the reaction is I mean theres a lot of work to be done. There you guys know that I'd say at just the key difference to the why now is just the demand is so much different than we would have projected.

Even EBIT a year or 2 ago. So.

But let RJ provide a little bit more around the supplier on how we'll handle that right now Michael.

1 of the reasons that we are of preferred partner for our suppliers because we protect the brand or we protect the brands for the items that they sell both in store and from an external marketing standpoint.

We take a supplier specific approaches each has different requests or preferences for where the brand has seen or the item has seen or not seen and it can even be deal specific so we have the infrastructure and.

And the approach and the history here of doing that with relationships that go back a long time e-commerce wont be any different we're going to do at and the way that.

It works right.

The supplier point of view.

Well I would imagine we'll take a supplier specific approach just as we have with everything else. So very much of part of the conversation.

No issues on our end managing that way.

Our next question comes from Karen short with Barclays. Please proceed with your question.

Hi, guys. This is Zane Barack on for Karen short.

I wanted to piggyback on the comp question the slowdown on the true your trend.

Is it.

Are you seeing that in certain categories.

Is there a divergence from iron ore performance by cohort older versus new.

And also on market by market or has the performance been pretty consistent across the chain.

In terms of the Gis.

It's Charles.

With respect to the trends that really has been broadly consistent there has not been a discernible trend by market whereby at vintage or by product.

Eric said.

It has been it's come from both.

A moderation in ring, which remains elevated versus pre COVID-19, but it has moderated and then traffic continues.

<unk> continues to increase but it is increasing a bit slower than we have seen historically on a seasonal basis sales of the 2 I'd say ring is slightly larger contributor to that moderate in 2 year stack, but.

Feel good that over the past 8 weeks or so that trend has stabilized at 2 year stacked trend of stabilized.

And would anticipate that given what we know now to carry at port.

Through the balance of the year.

<unk>.

Thanks, and then maybe 1 on gross margin.

I guess like how do you characterize the competitive landscape in general on the promo.

Promotional environment.

And you've mentioned.

Some color on gross margin for for the third quarter any puts and takes.

Maybe the basis point impact.

From commodity inflation versus price and so on.

Hey, it's Eric Yes. So we are seeing an increased promotional activity from from other retailers I wouldn't say, we're back to where we were at 2019, but it is certainly higher than 2020.

What we're doing is focusing on just maintaining value of the spread between us and the next nearest competitor.

We continue to follow our pricing and our marketing plan.

We're monitoring prices across the variety of stores, and then making any adjustments that we need to to make sure that net spread roughly 40% on basket for for regular retailers at 20% per value. There and then ultimately we think.

<unk> that we provide on the brand names in the local shopping experience is what will win the day for consumers.

Charles maybe you want to share a little bit more on in terms of costs and commodity.

With respect to gross margin speaking specifically to the second quarter, so relative to prior year.

The largest factor there was just normalized shrink as sales of moderated versus last year, but clearly inflationary pressures having.

Having an impact as well, particularly with respect of fresh departments at.

Along with freight and fuel costs. In addition debt relative to prior year at really at the moderating churns.

The biggest factor, but feel great about how we're managing gross margin in light of what's an extraordinary inflationary environment to be tracking of roughly in line with pre COVID-19 levels.

We're really proud of the team's efforts there.

Our next question comes from Michael Lasser with UBS. Please proceed with your question.

Good afternoon. Thanks, a lot for taking my question.

As you look out over the next couple of quarters, you're expecting the.

Trends to moderate the multiyear stack.

Any reason why you won't get back to positive comp as you look out to 'twenty 2.

This is just the.

Sure.

Reopening e-commerce drag.

Type situation.

Hey, Michael of Charles Yes, Let me just offer a few comments there without being overly specific too.

Future year of guidance that I think what you're saying is admittedly at this current backdrop doesn't doesn't necessarily play to our strength as customers continue to consolidate their trips and have.

And the lots of cash in their pockets.

Feeling great about the underlying health of the business as we look at cross opportunistic supply of product assortment customer excitement and engagement and loyalty.

Great about that and the 1 thing, we really haven't talked about as well.

With respect to the new store growth really proud of the team's efforts getting stores open in the challenging environment.

The continued to feel great about the runway for growth we have there.

Add to that all of those elements of the underlying health of the business the thing.

We are doing to further extend our reach into October value of the customer we feel great about how we're set up for.

Kind of the long term and ultimately that returns at the value that we know is coming.

Hard for any of us to say exactly when that kicks in but we will be well positioned when it happens.

And my follow up is debt.

As you mentioned previously.

The Iowa.

Never really operated at maybe condition glare.

On experiencing negative comp.

The impact of the paycheck at especially at.

Gross margin has been under pressure and the ceiling at.

On the wage expense side and now they might not be.

Mindful of e-commerce element to the business, how do you per day.

<unk> from.

Sacrificing long term outcome at the <unk>.

So just trying to maximize the.

The short run said another way how do you make sure the.

We remain focused on.

Operating the optimal business interest.

The environment.

On the dysfunctions.

Yeah, Hey, Michael it's a it's at.

Thoughtful question.

We've got a long long history of of communication end.

Coordination with the <unk>.

We're out of law, we are of team our field team is close to 100 people in so.

What guides the business is sort of at a group of standards that.

Debt, we all agreed to that we didn't set and tell them.

Net together and.

It has a lot to do with fullness and service levels in the stores.

Inventory to variety to shrink the freshness to display its all of those sort of keys around retail and so.

No short term any operator can kind of take a pass on investing in their store at investing in labor at investing in.

The marketing, but long term at.

Pops on a number of different.

Sort of radar screens around us in that.

Creates the conversation for us to go back look at our business plan and look at the long term and make sure that we're seeing the same things and were addressing any short term issues through the long term but.

We do believe a lot of what we're seeing last year was a good financial year for most of our operators, but a very challenging operating year. This year on the more challenging financial year and still a tough operating year, so we'd like to see them come through this.

2022.

Smarter wiser.

Bit more battle worn which is where we're headed.

They are hanging in there we're at.

Supporting them in a lot of different ways again, communicating a lot with them and trying to stay as close as we can.

So that we don't have any any big.

Sort of distractions as you say.

Our next question comes from Kristine at Cotai with Deutsche Bank. Please proceed with your question.

Hi, good afternoon, and thanks for taking the question.

Wanted to follow up on the on the headwinds that are out there from inflation constraint to food cost and wage at.

You talked about how you're helping the iOS.

But I was wondering if you are seeing any signs that the io as theyre getting a little bit more frustrated than perhaps kind of number could increase in the coming months of year, given the difficult environment, but now we're also adding in the added complexity of E. Commerce, and then I have a longer term question.

Yes, I would say.

We haven't seen at I would say that.

We didn't have a lot of turnover last share we've had a little bit.

More this year, but I wouldn't say, it's out of the ordinary we're still well below that sort of 10% I think we are looking forward to the end of the year being under that 10% number so.

Look the environment is certainly stressful, it's not really just turnover at the store level at the.

More difficult and challenging thing is you just can't find people that want to work.

That will change.

People realize that the stimulus is coming to an end.

I think that.

It's right in front of US I can't tell you exactly when it is.

In the absence of finding people that can come and work theyre getting the operators of getting a little bit of little bit of leverage financial leverage on the labor line because they just can't put enough people to work, but that means the.

The individual operators of working even harder more hours, which.

It is not sustainable so.

Time will tell when that returns youre right, we are supporting them a ton.

Try to do everything we can again the biggest thing we can do is drive gross margin dollars of their store support them through buying support them through some of the back office efficiencies.

And just be very sensitive to the situation that most of them are in.

Got it and I have my longer term question would be if we weren't you assumed at the shopping habits that consumers have created since March of last year are going to be sticking around the consolidation becomes more permanent what changes do you think you need to make to your model, whether it's the size of the box.

Any changes to the assortment of whether its a good e-commerce business to really make sure that you do regained at market share and you.

Get back the previous comp.

Hey, Kristina.

There is no change to the model.

We're really really confidence confidence at the consumer will revert, we can't say exactly when but what for 7.7 decades.

We have been seeing value become increasingly more important of the consumer so that's very heartening to us we.

We do have around the survey data, we use and we rely on at sort of of North star in.

We're seeing high satisfaction on the current customers, we are seeing a high intention to return from some of the lapsed customers.

And we've got just the high level of confidence that once stimulus support subsides consumers will return more and more to the ICU.

Our next question comes from Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Hey, guys. Thanks for taking the 2 questions.

I wanted to ask.

About the.

With regard to inventory I know the supply sounds great.

But it did seem like it's a bit high relative to sales and you kind of touched on it in the prepared remarks, but can you just give a little more color on.

On what's going on there is some of that more driven by inflation is at just because sales are a little softer because it sounds like sales came in better than what you thought.

So I just wanted to address the gist of the inventory issue a little bit.

Yeah, Hey, Joe It's Charles I can take that for us.

If you recall given the opportunistic nature of the business inventory doesn't necessarily track and the linear fashion with sales and so it will quarter to quarter fluctuate a bit on a longer term basis yesterday at that correlation to sales debt.

We feel as RJ said feel great about both the quantity and the composition of inventory, it's healthy across categories and items and the mix between opportunistic and everyday so.

We feel we feel really good about where we stand here is.

Already into the back half of the year.

Our next question comes from Jeremy Hamblin with Craig Hallum. Please proceed with your question.

Hey, guys. This is Ryan on for Jeremy Thanks for taking my questions.

I wanted to go back to the same store sales can you maybe.

Provide more detail on the month to month cadence from say June than here in the first couple of weeks in August and I believe the Q for commentary you provided actually indicates a slight pickup from Q3. So assuming that's correct is that purely a function of easier compares or do you expect things to normalize just a bit.

Yeah, Hey, Ryan It's Charles let me try to tackle that I think I'll hit on every everything you asked here, but yes as we look at Q2, the backdrop I would say with largely at the <unk>.

Same factors at play throughout the quarter, so trip consolidation more spend going towards food away from home the impact of stimulus as we've talked about I'd say overall of the monthly topline trends on the dollar basis, they were pretty consistent throughout the quarter monthly comp trends did improve.

As we progressed through the quarter to your point at as comparisons prior year comparisons begin to ease a little debt.

And we've talked about the.

The 2 year stack didn't moderate as we move through the second quarter at has since stabilized. So as we look here at the third quarter really the same themes are at play on the comp basis.

The results continued to get a little bit better at here is.

Comparisons continue to ease Q3 to date standard of negative 6 as we think about that 2 year stack that puts this our expectation.

For Q3 in total of negative mid single digit comp and then based on what we know now and obviously lots of play out here for for the balance of the year, but our expectation would be the hold that 2 year stacked trend from.

From Q3 into Q4.

Our next question comes from Brian Mcnamara with Bahrenburg. Please proceed with your question.

Alright, Thanks for taking the question just given the comp deceleration on the apparent share loss of conventional grocery and club stores do you have a sense of how you're performing relative to your closeout grocery peers.

I'm trying to get at it is our conventional grocery and club simply growing faster relative to the close of market at the moment.

Yeah, Hey, Brian It's RJ I'll handle that question, Yes, I think we've I think we've hit on a lot of the points of view on comp.

The current environment not in our favor right. It's a good question because we're a different kind of store than conventional grocery retail customers do shop with differently, we talked about things like the trip consolidation and the impact of stimulus those are going to impact us and they are impacting us differently.

The conventional.

So all of those things with.

That would explain some of the differences that you see our numbers to others.

<unk>.

Can't comment necessarily on other closed out grocery.

We're a little more unique in that regard the other close our retailers different categories.

But again for US we look at some of the fundamental metrics from things that we use to manage the business the delivery of value of the health of the assortment.

The state of the operator, and what they are providing by way of customer service and connection the community within each of their stores and then take the longer term view.

And I think all of this has been mentioned but.

To be very excited about the long term potential.

We will get past.

These transitory factors environment, and we'll be positioned really well from a from a comp standpoint. When you look at those numbers as we cycle and then as Charles mentioned on the new store growth continues.

Continues to be something that we are marching forward on 10% of new stores on the basin.

The growth potential or opportunity that provide so feel really good about all of those things and the playbook that we're following to capture.

We have reached the end of the question and answer session. At this time I'd like to turn the call back over to Eric at Lindbergh for closing comments.

Hey, Thanks, everyone really appreciate your questions engagement.

Thank you we look forward to catching up with you right now of 1 on 1 and thanks for everyone listening I appreciate it talk to you soon.

This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.

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The.

Greetings and welcome to grocery outlet fiscal second quarter of 2021 earnings results Conference call.

At this time all participants are on the listen only mode at.

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 of this conference is being recorded I would now like to turn the conference over to a higher end.

And thank you you may begin.

Thank you.

Afternoon, and thank you for joining us on today's call to discuss gross.

The second quarter 2021 financial results.

Joining me on today's call are grocery Outlet's, Chief Executive Officer, Eric Lindbergh.

RJ Sheedy and Chief Financial Officer, Charles Rocker.

Following our prepared remarks, we will open the call for questions.

The conference call is being webcast live and a recording will be available via telephone playback.

Approximately 2 weeks.

And then ultimately archives in the Investor Relations section of our website.

Participants on this call we 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 in this afternoons press release at.

As well as in our.

Periodic reports, we filed at the SEC all of which may be found on our website at investors day grocery outlet dot com.

On the SEC Dot 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 will also reference certain non-GAAP financial information.

<unk> adjusted items.

Reconciliations of GAAP to non-GAAP measures at.

As well as the description limitations and rationale for using each measure.

May be found in the supplemental financial tables included in this afternoon's press release at our SEC filings and the Investor tab of our website.

That I.

I will turn it over to Eric.

Thanks, Robin and good afternoon, and thank you for joining us for a discussion on our second quarter performance. Let me begin by welcoming our of into the grocery outlet family. We look forward to benefiting from Arvin's Investor Relations leadership and experience as we continue to engage on the investment community.

We are pleased to have exceeded our expectations for the second quarter as we lap the elevated sales experienced during the early months of the pandemic, our comparable store sales were slightly better than expected at negative 10% and on a 2 year stack basis increased 6.7%.

Gross margin and adjusted EBITDA results also exceeded our expectations as we successfully manage the cost pressures facing our business.

With respect to comp trends, we believe there are certain transitory dynamics, such as additional stimulus funds and ongoing trip consolidation that continue to impact short term shopping behavior.

We expect consumers prioritization of value to increase as those dynamics of size as.