Q3 2021 Grocery Outlet Holding Corp Earnings Call
Good afternoon, and welcome to grocery Outlet's fiscal second quarter 2021 earnings results conference call. During the presentation. All participants will be in a listen only mode. Afterwards, we will conduct a question and answer session at that time. If you have a question. Please press the one followed by the four on your telephone.
If at any time during the conference you need to reach an operator. Please press star Zero as a reminder, today's conference is being recorded I would like to turn the conference over to Arvind Bhatia. Please go ahead.
Thank you good afternoon, and thank you for joining us on today's call to discuss grocery outlet's third quarter 2021 financial results.
Joining me on the call are grocery outlet's, Chief Executive Officer, Erik Lindbergh.
President RJ, Sheedy, and Chief Financial Officer, Charles Drucker.
Following our prepared remarks, we.
We will open the call for questions.
This conference call is being <unk>.
Cast live and a recording will be available via audio playback for approximately two weeks.
It will also be archived in the Investor Relations section of our website.
Participants on this call, we'll make forward looking statements, including statements regarding our outlook for the fourth quarter and 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 afternoon's press release as well as.
In our periodic reports filed with the SEC.
All of which may be found on our website at investors on grocery outlet dot com.
Or on SEC Gov.
Except as required by law, 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.
Clothing adjusted items.
Reconciliations of GAAP to non-GAAP measures.
As well as the description limitations and rationale for using each measure maybe found in the supplemental financial table.
In this afternoons press release.
<unk> SEC filings and the investors tab on our website.
With that I'll turn it over to Eric.
Thanks, Robin and good afternoon, everyone and thank you for joining us for a discussion of our third quarter results.
I am pleased with our sales and margin performance during the third quarter and I'm encouraged by the early momentum in Q4 with October comp sales flat to last year.
We continue to offer the most compelling value in grocery retail by executing our core strategy, leveraging our unique purchasing capabilities and passionate network of independent operators.
We're also making progress on initiatives to further increase share of wallet and broadened our reach including a strategic expansion of our assortment.
Launch of an e-commerce pilot.
And development of personalized customer marketing tools.
We are as excited as ever about our runway to extend our reach through ongoing store growth as well as new digital opportunities.
Reflecting confidence in the health of our business and our long term growth potential our board of directors has authorized a $100 million share repurchase program that complements our primary objectives opening stores.
Reinvesting in existing fleet.
Building, a strong infrastructure for the future.
Let me now take a moment.
To share with you some of our key priorities as we navigate the current environment.
First we are staying true to our model of offering great value to our customers. We remain focused on being an industry leader in opportunistic sourcing and our best in class buying team continues to execute at a very high level.
In a dynamic supply chain environment, we are benefiting from the flexibility of our model and the nimbleness of our purchasing team to deliver customers a full assortment as.
As well as the deep discounts and treasure hunt experience that they expect.
Second we continue to strengthen our relationships with our iOS through a consistent engagement and improved support to help them better serve their customers. We just returned from a 10 city regional Roadshow, where we connected face to face with iOS sharing ideas listening to their feedback and discussing strategies to drive sales enhanced <unk>.
Operations and collaborate even more effectively.
It's been a very challenging operating environment due to inflation labor and supply chain issues I'm humbled by the resilience and the can do attitude the entrepreneurial spirit that our iOS demonstrate every single day.
They continue to have a positive impact in their local communities, while delivering outstanding service to their customers.
Third we are improving.
Moving our messaging and our marketing communication.
While we continue to highlight our most compelling wow deals. We're also putting a spotlight on the broad selection and full shop that we provide our.
Our focused messaging will become even more important in the future as we strategically expand our product assortment, particularly in the key areas such as Nash and fresh.
With respect to personalized customer marketing, we are making progress building the infrastructure required to test our mobile app in the first half of 2022.
We are excited about the potential of this effort as we believe the capability to communicate new products and great values based on individual preferences positively impact the customer experience.
Fourth our new store growth engine, which we believe remains our biggest driver of long term shareholder value remains healthy both in terms of future pipeline and new store performance.
During Q3, we opened seven new sites ending the quarter with 407 stores in.
In terms of new unit productivity, we continue to be pleased with the early performance of the stores opened this year as well as the continued sales ramp of recent vintages across both infill and new markets.
With respect to our real estate pipeline, we are tracking towards the new store goal, we set forth getting of the year.
I want to thank our highly talented real estate team for their continued focus despite challenges in sourcing construction materials equipment and trade labor.
As part of our fourth quarter openings, we are proud to be returning to Paradise, California three years after 2018 wildfire.
Our operators Wayne, Olivia occurrence or making incredible contributions and rebuilding after the fire that destroyed our store and most of the town.
As we look beyond this year, we continue to find great sites across markets and as such remain excited about the long term unit growth potential.
Our real estate team has a strong lineup of new stores in 2022, while we don't know when building materials and labor challenges will ease our construction team will continue to work creatively to navigate those headwinds to build our stores the best of their ability.
<unk> forward, we remain focused on continuing to expand in existing and new markets as we make progress towards our full white space potential.
In addition to our real estate pipeline, our pool of future iOS remains very healthy with a robust stream of potential recruits.
We feel that over 20000 leads annually from which we shortlist only the strongest candidates.
Evolve their training approach to include a virtual learning environment that supplement in store training.
I will get some leverage the strengths of our operator field and corporate teams. This enhanced training program for aspiring operators launching the FERC first quarter as yielded promising early results in terms of effectiveness scalability and community building.
Finally, while our stores remain a priority. We're also very excited about the potential to reach more customers by adding the convenience of e-commerce.
After giving careful consideration to the unique aspects of our opportunistic purchasing independent operator model. We recently initiated a pilot program with instant card RJ will discuss in more detail. While the pilot is only just commence we along with our independent operators are very excited about the potential of this new channel to expand our reach and further leverage our.
Just the retail footprint.
Before turning it over to RJ I want to thank the entire community of operators employees partners for their continued commitment to our mission touching lives for the better.
So our community of operators employees and partners our business continues to deliver unbeatable food values reduced food and security positively impact local communities and create economic opportunity for entrepreneurs and employees.
While I'm constantly amazed by everything the operators are doing to help their communities I'd like to share. One example that struck a chord with me recently Elliott.
<unk> and our Alameda store donated more than 40000 meals to local food banks. So far in 2021. In addition, they partner with to do good foundation to feed homeless children raised funds for the Alameda Arts Association.
Gratulation Deleon reader and a big thank you for your inspiring philanthropy and the leadership in your community.
I'd like to turn it over to RJ.
Thanks, Eric I'd like to begin by thanking all of our operators and their team members for continuing to execute exceptionally well in order to serve their customers.
Their focus and dedication are contributing to our continued momentum in the fourth quarter.
And while we are pleased with the health of our underlying business. We are also excited about progress made on several key initiatives.
First for an update on supply we are encouraged by our pipeline of opportunistic product.
We continue to capture outstanding buys across all categories to deliver extreme value and a fun treasure hunt experience to our customers.
Renewed supplier investments in product innovation and additional capacity and production are still contributing to the breadth and depth of offers we are seeing letting.
Let me provide a few examples of recent buys resulting from these dynamics.
Example, number one is the purchase of 100000 cases of hard Seltzer from a Canadian beverage company that recently entered the U S market.
As brands have proliferated and the popular Seltzer category has become more crowded the supplier offered us a large block of excess product.
While competitors are selling the brands 12 packs at $18. We are offering the same item at $5 99, almost a 70% savings while still generating a healthy margin.
Example, number two is a closed vendor partner within the snack category, who recently expanded into plant based ice cream.
That sometimes happens initial supply exceeded demand, resulting in the vendor rationalizing their SKU assortment.
As a result, we were able to purchase 130000 cases of the ice cream.
We are selling the product for $2 99, representing a 50% savings and an exciting deal for our nosh customers.
Example, number three is another long standing supplier, who is innovating across their brand portfolio and expanding into more traditional retail locations.
They are introducing new products across numerous growing categories, including keto plant and protein based diets.
We have provided a complementary channel to alleviate their supply demand imbalances as these new offerings, enabling us to grow our opportunistic business with them.
These are just a few examples resulting from current supply dynamics and we expect these tailwind to continue well into 2022.
We like many others are navigating supply chain labor and transportation challenges impacting item specific availability and delivery.
However, the flexibility of our unique buying model coupled with our strong vendor relationships are helping us maintain healthy inventory levels and a high in stock percentage on key items.
We are leaning on our agile approach to inventory management, our ability to move quickly between suppliers and the speed with which we move product through our distribution network.
These attributes will continue to serve us well in the face of ongoing headwinds.
Inflation is another dynamic that is impacting our industry.
While inflation is real we are demonstrating how our business uniquely mitigate its challenges.
First we have been moving between suppliers and in and out of items to manage value cost and margin.
This is a normal part of our buying process and contributes the excitement of the treasure Hunt.
Second as competitive pricing has moved up we are fast to follow the.
The value we provide has become even more compelling as consumers are paying higher prices elsewhere.
Third is the flexibility by which we manage assortment and pricing.
We price items every day as they come into our supply chain and stores.
Through these methods, we continue to offer customers a full assortment, while successfully maintaining our relative value across conventional and discount peers.
As we are following inflation related price movements, we are beginning to see both topline and margin benefits we.
We are proud of how the team has been navigating this fluid environment and we continue to manage it closely.
Let me now turn to our efforts to strategically expand our assortment.
This initiative is underway and we are pleased with our early progress as we have recently added 200, new skus to the offering.
As planned Nash has been a focus for these incremental items in addition to fresh ethnic and local products.
We will continue to strategically add key items to the assortment in order to build the basket further enhancing customer convenience and trip frequency.
Our customers have responded favorably to similar strategic product expansions in the past. So we remain optimistic about the longer term benefits of this initiative.
On the marketing front, we continue to optimize our mix of radio TV and digital spend across each of our markets.
In particular, we have increased spending on digital platforms based on the effectiveness of those investments and driving new customer trips into our stores.
We are also equipped our independent operators with several new methods to communicate their local deals more effectively to their customers first.
First as a tool, enabling iOS to select store specific wow items to be marketed through connected TV.
These compelling values are promoted to consumers any stores trade area similar to the Wow alerts that go to our growing E Mail database.
Another new capability is an AI tool that allows operators to tailor marketing offerings based on customer mobility patterns.
<unk> customizable platform such as these further enhance the personal grassroots marketing efforts of iOS that connect them closely with customers and communities.
With respect to E Commerce, we recently launched a partnership with <unk> as Eric mentioned.
We are currently offering same day delivery from 68 pilot stores in California markets, including Los Angeles, Fresno, The Bay area in Sacramento.
As a reminder, we are conducting this pilot first to learn our offering translates online in order to deliver a positive wow shopping experience and second to understand the potential incremental sales opportunity it can generate.
While too early to share any results, we along with our iOS are pleased with the operational execution. So far and are excited about the potential to provide value with the convenience of e-commerce.
We will continue to share updated data with you as this pilot progresses.
Now I'll hand, it off to Charles to provide a financial update.
Thanks, RJ and good afternoon, everyone spend a few minutes discussing our third quarter financial results and then provide commentary on our fourth quarter trends and our outlook for the remainder of the year.
We are pleased with our third quarter results across our key performance metrics.
Comparable store sales decreased four 3% on top of an increase of nine 1% in the third quarter last year.
While third quarter traffic and basket size were stable relative to Q2, our comp sales decline versus last year was the result of lower traffic.
Net sales were $768 $9 million up.
Slightly compared to the same period last year.
Contributing to total sales with the impact of <unk> 35, net new stores opened since the end of the third quarter last year.
We finished the quarter was 407 locations. We remain pleased with the performance of our newly opened stores in both infill and new markets.
Our 2021 openings as well as recent vintages continue to deliver sales productivity in line with our expectations.
Third quarter gross margin of 38.
8% was above our expectations and in line with pre pandemic levels, despite inflationary headwinds.
Impaired to the third quarter of 2020 our.
Our gross margin decreased approximately 40 basis points predominantly due to the normalization of inventory churns and higher supply chain freight and fuel costs.
SG&A increased 1% versus the prior year to $191 6 million.
Due primarily to increased store occupancy and Io Commission expense related to store growth offset by lower incentive compensation expense.
Depreciation and amortization increased to $17 5 million up 24% versus the third quarter last year.
Driven by new store growth as well as continued capital investments in systems and infrastructure.
Stock based compensation expense was $1 $9 million down.
Down 51% versus last year, reflecting current performance expectations relating to our performance based share awards.
Net interest expense decreased 18, 3% to $4 million versus the third quarter last year due to lower effective LIBOR rates.
Compared to our normalized tax rate of approximately 28%, we incurred an effective tax rate of 22, 8% in the quarter due to the excess tax benefit associated with employee stock option exercises.
As a result of these factors GAAP net income for the third quarter was $17 1 million or <unk> 17 per diluted share.
The GAAP net income for the third quarter of 2020 reflected a tax benefit due to employee stock options of $22 million 22 per share.
So the quarter adjusted EBITDA was $51 4 million rep.
Representing six 7% of sales slightly ahead of our expectations.
Adjusted net income was $23 $4 million 24 per diluted share based on an average of $99 2 million diluted shares in the quarter.
Turning to our balance sheet, we grew our cash balance to $156 million and ended the quarter with a healthy inventory mix totaling $246 million.
Total debt net of discounts and issuance cost was $450 9 million at the end of the third quarter, which reflects a net leverage ratio of one five times adjusted EBITDA.
We generated $56 $6 million in net cash from operating activities during the third quarter of $47 4 million increase over the same period in the prior year.
We invested $26 $5 million in total capex during the quarter as we continued to build new stores reinvest in the existing fleet and make ongoing investments in infrastructure and technology.
Turning to the current quarter. We are pleased that comp sales in October were flat versus last year, reflecting a higher two year comp stack relative to Q3.
So RJ discussed we continue to focus on delivering industry, leading value, while making price adjustments based on market inflationary news.
While we are encouraged by quarter to date performance, our prior year comp sales comparisons become more challenging as we move through the fourth quarter, and we remain cognizant of ongoing supply chain and consumer uncertainty.
As such we expect comp sales for the full fourth quarter to be in the range of negative three 5% to negative two 5%.
In terms of new stores as Eric mentioned, we are tracking to hit our full year, New store opening plan with eight new stores in Q4 with most opening towards the end of the year.
Recall that this year's fourth quarter as a normal 13 week period compared to the fourth quarter of 2020, which benefited from $53 million of additional sales related to the extra fiscal week.
As such we expect total sales for Q4 2021 to be approximately $770 million to $775 million.
With respect to gross margin, we expect fourth quarter performance to be approximately 35%, which reflects the normal impact that seasonal holiday product mix.
Our fourth quarter margin expectation represents performance in line with pre COVID-19 levels, despite ongoing inflationary pressures from commodity and freight costs.
In terms of bottom line performance taking into account the normalized 13 week calendar and modest expense deleverage, we expect fourth quarter adjusted EBITDA margin to be approximately six 1% of sales.
Also expect depreciation and amortization of expense of approximately $18 5 million.
Net interest expense of approximately $4 million and a normalized tax rate of 28% for the fourth quarter.
With respect to our capital allocation strategy, our priorities remain unchanged.
First investing in new store growth as we continue our disciplined white space expansion.
Second reinvesting back into the existing store base.
And third making important investments in infrastructure and technology to support our future growth.
For 2021, we expect to invest approximately $130 million of Capex.
Tenant allowances, while still generating positive net cash flow.
In addition to our growth focused capital investments our board has authorized a $100 million share repurchase program, reflecting our confidence in the long term outlook.
This program will allow us to utilize our excess cash in order to repurchase shares on an opportunistic basis and further optimize our capital structure.
To conclude I'd like to again, thank our iOS and employees for their hard work and solid execution over the course of the year.
Throughout an evolving and dynamic operating environment, we have benefited from the flexibility of our business model the resilience of our team and our strong engagement with customers. We have strengthened our foundation, while also making important investments in future growth.
And with that we can turn it back to the operator to begin Q&A.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you'll hear with re prompt to acknowledge your request. If your question has been answered and you would like to withdraw please press the one and three.
Also ask that you please limit your questions to one.
And one moment please for our first question.
Our first question is from the line of Kate Mcshane with Goldman Sachs. Please go ahead.
Good afternoon.
A question.
Sure.
My question centered around October and what Youre seeing in October.
Your stock is slightly better.
Some of that is price, but is there a way to dimensionalize, how much is price versus traffic.
Hey, Kate Eric Thanks for the question, Yes, we're really pleased with what we're seeing.
Two year stack is slightly ahead of Q3.
We are still seeing a lot more ring and we are seeing.
Customer count so we look at it.
We say that.
We're not quite seeing the customer returning yet so.
Still building basket and.
That is it feels good at this point just to see some better numbers in October than in Q3.
But yet to see a real return on customer count.
This is Charles just to add to that.
Sequentially traffic in October it's stable relative to what we saw in the third quarter. So as Erik described.
The benefit we're seeing is really coming from average ring is we're following the market market wide price increases driven by inflation.
Thank you.
Our next question is from Michael Lasser with UBS. Please go ahead.
Good afternoon. This is mark Carden on for Michael today. Thanks, a lot for taking the question. So on your instant card offering how much flexibility do you guys have to ultimately add more opportunistic item you guys faced a lot of restrictions on this front from vendors.
We will have in CCAR ultimately show.
But our unique local stores.
Yeah, sure Hey, Mark Thanks for the question.
Yes, we have a lot of flexibility the way. This is set up is that.
It's showing.
Real time inventory the day for each specific store that's participating in the pilot group of 68 stores at this point in time.
Yes, still plenty of opportunity for us to continue to develop how we show the great items available in further represent the Wow that we have in the stores to those shopping online as well.
Makes sense. Thanks, guys. Good luck.
Thanks.
Our next question is from Simeon got men with Morgan Stanley. Please go ahead.
Hi, everyone. Thanks for the question of just put two into one first new space productivity. It looks below average for Q3, and I think implied for Q4, but can speak to what's going on there and then the second question is there some rumbles of price investments from some of the bigger company can you talk about your spread in every day.
As well as some of the while I guess, we heard some examples in a while but every day and maybe some other nausea items, even thank you.
A sitting in it's Charles let me take the first part of your question with respect to new store productivity.
As we mentioned in the comments feel really good new stores continue to track very much in line with our expectations and.
That's true for recent vintages that continue to ramp.
As well as source, we'd open so far this year, we understand the optics I think the way you guys do some of the back of the envelope math given as you can see the necessary.
Base appears to show that Noncom deceleration in Q3.
And that's really driven by the timing of new store openings, both five quarter and within the quarter going back to prior years. If you recall, we use a fork.
14 months comp.
And so it's really bad timing that is constant optical headwind.
<unk>.
But I can tell you that if you look at actual noncomp sales dollars in the third quarter very much in line consistent with what we saw in the first couple of quarters of the year.
And the overall.
We always talk about Noncomp productivity, when you compare that relative to the average store.
It remains in the highest 60% range.
And to your second question.
Value spread as it relates to inflation I think I think you're asking about promotional activity there as well.
On the inflation side first course of action for us is to manage the assortment moving between suppliers and items.
And I think we've done that quite well given our diversify supplier base in the normal change and the assortment that customers are accustomed to and look forward to quite frankly on the part of the treasurer on competitive pricing has increased with inflation cost increases from suppliers pass through now.
Retail or fast to follow on those we have maintained consistent levels of value across the many metrics that we track so whether you're looking at the basket still delivering around that 40% save up to relative to conventional grocery retailers.
The representation of sales at even higher save up to percentages is very healthy and I'd say that value spread is consistent with how we managed it or what we track to pre COVID-19 across every day and opportunistic as well.
The value spread in terms of absolute dollars the value is even more important to customers because of those elsewhere prices are higher and harder to get as much for for your dollar spent and then last thing I'd mention is the flexibility with which we managed pricing that's been helpful. As it relates to inflation, but also.
Very helpful. As we as we always have manage our value relative to competitors and so as a promotional environment continues to change. The fact that we're pricing items every day. It allows us to manage cost managed value minutes margin ultimately deliver value and.
We're pleased with how the teams managed it so far it's contributed topline has also been able to deliver healthy margins and.
Expect will be able to continue to manage it well looking forward.
Our next question is from robbing ailments with the Bank of America. Please go ahead.
Hey, good evening, guys I'm going to sneak in two questions. The first is just on the the.
The new Skus you guys are adding Ah are you bringing into suppliers or is it the existing suppliers and are the margins on the items you know kind of in line with what you would see on other items that are already in the store and then second just in terms of the traffic anything you're thinking about doing on the marketing side to try and.
Abby accelerate sort of a return of positive traffic.
Yeah, Hey, Rob Thanks for the questions.
So first on.
Mansion assortment really happy to have added one additional skus.
Cover the curly pretty broad range of categories Nausea course continues to be a focus but also fashion.
Logo is mentioned in the comments.
It's a mix of they're all new items, it's a mix of new suppliers, an existing suppliers. We've looked at industry data, we leaned on supplier partnerships.
But from operators as well.
Targeting the items that are most important into customer basket and trips.
Not been.
Presented in the past and so.
You'll feel really good about those ads the contribution estimate.
Those in those ways tripping basket and then.
Ads that are still to come as you know we've evolved the assortment we've added items over a long period of time now for auto racing Dominator brand.
It has benefited us in a lot of ways that we expect to see similar benefits for future product expansion.
Second question marketing strategy, what are we doing to drive traffic.
We continue to optimize our miss across radio television digital continue to lean into digital more heavily it's more targeted inefficient and that way.
We have been testing different messaging and different offers with a focus on customer acquisition.
We've found some new platforms that have shown a nice return by way of.
New customers so connected Teevee credit card program platforms. Some other guild based apps, there's a longer list there.
We started to invest in seeing positive results and will continue to expand and then I'd also mentioned some of these new tools that we've introduced to operators.
To help them further communicate more personally and in a very local community based way with their customers and.
Those are as important if not more I'll say then.
The centralized marketing investments that we make and it's really the blend of both.
For us by way of how each outreach and new customer trial, it's always centered on the value of the deals the items the brand.
As those things that drive excitement and then rounded out with other attribute of model the treasurer on the local connection the great customer service and through the tools now operators are able to do that in a more efficient and effective way still with their own personalization and.
And curation, if you will as it relates to their own customers and the needs of the local market.
Our next question is from the line of John <unk> with a Guggenheim partners. Please go ahead.
So it goes we've got two topics one on the assortment expansion.
If you break those down into treasure Hunt.
Right or closeout versus every day.
How does that breakdown.
Where do you where do you want to go further with.
With a short <unk> right just the 200 a stepping stone.
And some private brand is still not on the near term horizon.
And then just lastly, one quick thing on Instacart It would it be your expectation that in the short run.
Be quick hit is with customers, who know G O and know how to shop it.
So sharp wallet with them as opposed to new customer captured.
Hey, Thanks for the question so I'll take those certain.
Certain expansion is 200 items are predominantly.
Everyday items, so their items that we want to represent in the assortment that customers no. They can find spread again.
Their trip important to their basket and in that way as convenient to shops similar to what we've done in other everyday categories, such as fresh seafood or going back.
Longer period of time.
When we got it more of our fresh items et cetera. So that's the focus of course, we're always adding new opportunistic items. That's just part of the model right, but specifically for these more reasonable reason that they are on the everyday side of private label is still an opportunity for us.
<unk> leaned into that just yet, but I think that's a nice AD and complement both private label and product development.
So, we'll we'll look to introduce more of that here.
Here in the medium to longer term and then to your question on E Commerce.
Focus here really well, it's twofold, it's 4% or the amount of our customers that shop online today, the shop or stores, but they also shop online you certainly want to capture those dollars and so we will see as incremental but as important is.
The potential to attract new customers. We think there are quite a lot of consumers out there that would really enjoy the shopping experience. These sorts of the items of values just for a number of reasons haven't ever been in a store before.
Maybe they are aware, but they haven't tried it or just hasn't fit into their shopping patterns and so we think being online initially here through this pilot within the card is a great way for us to introduce the brand to drive try I'll have them come to know we are.
And what we represent.
That way.
Complement our customer acquisition efforts through.
Historical or more traditional marketing efforts. So we're excited about both both are incremental dollars. So to speak one is incremental customers. The others just sure walls of existing customers.
Our next question is from Kristina K tie with Deutsche Bank. Please go ahead.
Hi, good afternoon. Thanks for the question.
What kind of question on pricing and inflation I guess, what I'm starting to see some try some assistance from consumer agenda sensation. Larry backdrops. So are you finding that prices Navy starting to become a greater priority for consumers versus what it has been over the last 12 to 18 months and as you clearly value focus how are you thinking about.
Your ability to take some of the shirt back over the coming quarters.
Yes, we think it's very noticed very much notice by consumers, we think increasingly.
Something that will cause them to change patterns or look for ways to save money.
The levels of inflation that we're seeing today, you don't expect it to subside any time soon we think oriented customers.
Got to value.
To value more so than they have been recently because of other needs are priorities.
We haven't seen it quite yet as mentioned in our own traffic count.
So.
For us.
The focus is delivering value and we have.
We've been able to manage that well and we think theirs.
There's there's a real or there will increasingly be real need to save even more money.
Not just because of inflation, but also when you consider it.
The stimulus is ended unemployment benefits of ended a lot of a lot of it.
Support.
Subsidies that were part of Covid have ended and now on top of that you have you have inflation.
Really hurting consumer.
Wallace and so we think that ultimately turns in our favor in terms of customer now.
Our next question is from Karen short with Barclays. Please go ahead.
Hi, Thank you very much I just have a two part as well first can you actually provide what the excellent place and number was in the quarter, but doesn't the bigger question I have is when I look at your sales per square foot.
And your gross profit dollars per square foot versus 19, both of those my checks actually got significantly worse and three Q then one cure. Thank you and so I guess I'm trying to triangulate that with the fact that you're calling out and inflation is helping you a little bit.
Yeah. Your first question, Karen not providing a specific number would all say though is are.
Makes it a little bit different and of course, our pricing is different as it relates to everyday and opportunistic so generally speaking.
Impact of inflation on our business is going to be a little bit less than what you see an industry just because of those assortment in pricing dynamics and then Charles Yes carrier with respect to your question around gross margin per foot.
I think our point of view feeling really good about you look at the Q3 margin we've posted to the 38.
It was it was above our expectations and in the context of this inflationary environment deliver.
Delivering that number which is right in line with Prepandemic create inflation levels of 2019.
That's where we feel really good and you think of purchasing team's doing a great job on <unk> side.
Everything we've talked about continuing to leverage the flexibility of the model.
And then yeah, we are following the market.
Based pricing moves, but maintaining that relative value. So.
Able to replicate that pre pandemic gross margin right feels really good and if you look into the fourth quarter. We do expect that will continue to manage that margin effectively if you recall, we always see that seasonal decline from Q3, and Q4 real and gross margin related to haul.
At a food mix.
Our expectation of 35% again, consistent with 2019 levels. Despite.
Despite the impact of inflation.
Our next question is from Jill Fellman with Telsey Advisory Group. Please go ahead.
Hey, guys. Thanks for taking my question wanted to ask about the stores and you know it sounded like you guys are.
The pipeline for next year's looking fairly good but you made a comment about.
Cereals, and the expenses related to that going up I was wondering if you could just.
Explore that a little bit more time to talk a bit what you're seeing and.
Hi, that's impacting maybe the store opening model and cost to do something.
Yeah, Hey, Joe Let me start that then maybe Charles can talk about the costs we.
We're excited about sort of what we have on the docket for balance of this year and next year, what's been challenging.
Real estate deal pipeline, but the construction and getting those stores open pipeline.
Just navigating all the constraints availability of materials that creativity, we've had to use to be.
<unk> steal to get things open has just been really challenging it's unclear to us.
How those will either a bit or persist.
So we're being pretty cautious on 2022 in terms of outlook. We think we'll have our stores will be more back and waited in terms of second half of the year, we've been able to manage the cost so far.
They have have gone up a bit.
Over the five year average.
Will that come back down we think we will see some relief in the cost so we've seen sort of in.
Lumber and some and steel.
But look people are willing to pay for things that they can't get it so.
In anyone's guess in terms of long term.
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And our next question is from Michael Baker with Davidson. Please go ahead.
Hey, guys. So I wanted to ask what the two year comp trend it seems to be stabilizing and a 4% to 5% range.
It's nicer to stabilizing but it is below what you were running.
Prior to the pandemic of five years prior to prior to the pandemic to to your stock rate was pretty consistent at about like 9% like almost every year, maybe 8% to 9%.
But should we think about this to your stock of four to five as being the new run rate meeting cops and the 2% to 2.5% range I get that sort of what your long term algo is set up one to three I think you say, but you.
This is the pandemic you were able to beat out so consistently uhm is there a pass to get back to those kind of numbers. Thanks.
Yeah, Mike It's Charles let let me get this offer a few thoughts I mean I think overall.
Respect to the operating backdrop that we're working we feel really good about how we're executing and.
And the the performance that we're delivering as we look forward.
Definitely see no change to the long term algorithm that we've talked about it very much intact. We think it does get stronger to your point is customers returned to value to overtime.
Historically, we have outperformed that sort of 1% to 3% comp range.
Based on based on the importance of value. So so we think that again, we're well positioned as customer and reorient in that direction.
But everything else in terms of the algorithm unit growth I think Eric talked about with a strong lineup. The stores. Yes. We are navigating construction challenges that knows no change to a long term expectation thereof, 10% unit growth on the margin side doing a great job of managing for margin consistency and performance and that.
Current environment and again over the long term, we do manage the business for gross margin and adjusted EBITDA margin stability. So we feel really good about where we are.
And where we're headed into 2022 and beyond.
And Mister Lindbergh I would like to turn the call back to you you may continue with your presentation or closing remarks.
Yeah sure. Thank you thanks, everyone for jumping all I appreciate your engagement and we'll talk in the next few minutes on one on ones and thank you operator I appreciate it.
Welcome Sir and that does conclude the conference call for today. We thank you all for your participation I kindly ask that you. Please disconnect your lines have a great day everyone.
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