Q4 2021 Grocery Outlet Holding Corp Earnings Call

March 1, 2022

[music].

Greetings and welcome to the grocery outlet fourth quarter 2021 earnings results Conference call.

At this time all participants are in a listen only mode.

Brief 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, this conference is being recorded.

It is now my pleasure to introduce your host Arvind Bhatia VP of Investor Relations. Thank you you may begin.

Thank you.

Good afternoon, everyone and thank you for joining us on today's call to discuss grocery outlet's fourth quarter 2021 financial results.

Joining me on today's call are grocery outlet's, Chief Executive Officer, Erik Lindbergh.

President RJ, Sheedy, and Chief Financial Officer, Charles broker.

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

This conference call is being webcast live and.

And a recording will be available via telephone playback.

Proximately 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.

Our outlook for fiscal 2022 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.

As well as in our periodic reports filed with the SEC all of which may be found on our website at investors, our grocery outlet dot com or on SEC Gov.

We undertake no obligation to revise or update any forward looking statements or information.

These statements are estimates only and not a guarantee of future performance.

During our call we 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.

May be found in the supplemental financial tables.

In this afternoon's press release and.

And our SEC filings and the Investor tab on our website.

With that it is my pleasure to turn the call over to Eric.

Thanks, Robin and good afternoon, everyone and thank you for joining us for a discussion of our fourth quarter results.

Very pleased with our fourth quarter performance, which exceeded our sales and gross margin expectations and reflected sequential improvement in trends from the third quarter comparable store sales declined one 2% and on a two year stack basis increased six 7%.

Acceleration of almost 200 basis points from the third quarter.

This performance reflects strong execution across our business I'm incredibly grateful to our corporate teams for their hard work as well as for our operators, whose commitment to serving their communities is unwavering.

Looking back at fiscal 2021, we successfully navigated macro challenges, including the pandemic and global supply chain issues.

Spite these headwinds we leveraged our flexible business model to deliver customers unbeatable deals and exciting treasure hunt experience that they love.

Expanded our store base with the opening of 36, new stores in 2021, representing over a 9% growth on a net basis.

We remain pleased with our new store productivity across markets. In addition, we embarked on several new initiatives to expand our reach and increase share of wallet, including an e-commerce pilot and strategically expanding our product assortment.

As you look at quarter to date trends sales continue to improve reflecting increases in both ticket and traffic versus the prior year looking.

Looking ahead, we remain confident that the strength of our model combined with our strategic initiatives will drive incremental top line growth.

Furthermore, we anticipate a more favorable operating environment for our extreme value model as consumers contend with continued inflationary pressures and reduce stimulus support.

To that end, we remain committed to our unique value proposition, namely, providing the best value in grocery retail to our customers.

In an inflationary environment, the incredible savings, we offer customers become even more important.

Finding an opportunity to both increase our share of wallet as well as reach new customers.

Despite ongoing supply chain disruption our purchasing team continues to find exciting deals and we are pleased with our assortment across departments.

Our independent operators have done an amazing job delivering these exceptional values in the Wow shopping experience to their local communities, while the past year presented our ideas with unprecedented challenges they rose to the occasion in order to serve their customers and we continued to invest in systems and process improvements to support them.

But that same goal in mind, we recently realigned our organizational structure to streamline and strengthen corporate resources available to iOS, while continuing to support their local decision, making and independents.

To lead this effort, we promoted <unk> to the newly created position of Chief stores Officer.

Jim has a deep understanding of our culture and business model and has forged strong relationships with iOS over her six years of grocery outlet, making her uniquely qualified person for this role.

She has been met with a warm welcome during their store visits over the last few months.

Under <unk> leadership, we are confident that we can more effectively support iOS and growing their businesses by leveraging resources and best practices.

Turning to marketing in 2021, we enhanced our messaging.

<unk> not only our industry leading prices, but also the broad selection of top brands in the full shop that we provide.

As we look to further evolve our marketing approach we remain on track to expand our personalization efforts and plan to pilot mobile app by the middle of this year.

This will enable us to communicate new products and in store values directly to customers based on their individual preferences, which we ultimately expect will drive higher trip frequency and share of wallet.

Another initiative that will allow us to extend our reach in E. Commerce. We are excited to have our E. Commerce pilot operating in 68 stores in California on the <unk> platform, where importantly, the pilot has gone smoothly and while early we are optimistic about the future potential we plan to roll it out to all stores over the next few months.

We believe these strategic initiatives are complementary to our measured and disciplined new store expansion.

Our 2021 stores are off to a good start which along with recent vintages are ramping consistent with our underwriting expectations. Our value proposition is resonating across geographies and we continue to build in strength in brand awareness in both mature and newer markets for.

For these reasons, we remain confident in the long term unit potential of our differentiated new store model.

<unk> to our goal of 10% annual unit growth.

As said as we mentioned in our last call, we were experiencing near term challenges, including labor and material shortages.

Extending the time and the cost to open stores. In addition, we are seeing longer lead times and lease execution as well as site permitting and development.

As a result of these challenges we expect to open approximately 28 net new stores in the current year with two thirds of planned openings weighted in the back half. We believe these challenges are largely temporary and we remain committed to resuming our 10% unit growth in 2023.

We will provide further updates on our progress and timing as we move through the year.

Lastly, I want to provide an update on our ESG efforts for years grocery outlet together with iOS has been positively impacting communities in a number of ways from providing great value to customers fighting food and security to reducing food waste and supporting small business owners. This year, we will be taking our next step in our ESG journey as we can.

Materiality assessment with a third party to determine the metrics, we use to assess our social and environmental impact and track our future progress.

We look forward to sharing these learnings from that assessment once it is complete.

Before turning it over to RJ I want to reiterate my confidence in the strength of our model and our long term growth potential I'm pleased that we've begun to see customer traffic turned positive, which I believe signals that value is becoming increasingly important harbinger for a more favorable macro environment for grocery outlet.

As we move through the year, we're confident that our strategic initiatives will further drive customer reach and engagement with that I'll turn it over to RJ.

Thanks, Eric.

To start by thanking our independent operators and their team members for their continued commitment to serving customers in their local communities. We remain grateful for their leadership and how they represent the grocery outlet brand each and every day.

We are pleased with our performance in the fourth quarter and look forward to building on this success in 2022.

Our supply pipeline has remained healthy and our inventory levels have positioned us well to start the year.

We continue to remain agile leveraging the flexibility of our assortment and supply chain to deliver great products and value to our customers.

Ongoing supply chain disruption has resulted in order cancellations across the industry, providing an opportunity for us.

One example was our purchase of 22 shipping containers of holiday butter cookies, which we offered to customers at an 85% savings versus competitors' prices.

We expect high levels of supply chain disruption to continue and.

And we look forward to helping suppliers with future inventory challenges such as these.

Our flexible business model combined with our strong supplier relationships provide a meaningful competitive advantage for access to product.

We were pleased to have increased our opportunistic purchases in the fourth quarter growing our business with some of our top suppliers in excess of 50%.

This momentum has carried over to the first quarter with year to date purchases delivering great value to consumers and leading to healthy inventory positions.

We look forward to further strengthening our supplier relationships at our annual supplier meeting later this month.

This meeting provides a great forum to exchange ideas discuss upcoming product pipelines and to procure opportunistic deals for the coming months.

Our supplier partners are critical to our success and we are always excited to engage with them on these topics.

We also continue to see benefits from our focus on new supplier acquisition and development.

We expanded our large supplier network further increasing our flexibility and broadening our opportunistic assortment.

In addition, we were able to stay on trend and offer innovative new items with our growing network of emerging brands.

Turning to everyday assortment expansion, we added 275, new skus to our offering last year, providing a more complete shop for our customers.

Item selection was informed by industry data supplier conversations and operator and customer feedback.

We are pleased with the added convenience that this provides to our customers, which we believe drives greater loyalty.

Looking forward, we plan to add 300 more skus this year.

We remain focused on growth categories, such as Noche fresh ethnic and local and we expect this next phase of expansion to also contribute to hiring in transaction count.

Turning now to inflation, we continued to manage higher product costs through our flexible pricing and buying model.

As we have said in the past our business uniquely mitigates the challenges of inflation and we are pleased with the value and margin we were able to deliver in the fourth quarter.

First we successfully moved in and out of items in between suppliers.

This helped us both manage cost and deliver new items that contribute to the treasure Hunt experience.

Second we took pricing up on select everyday items following competitor price increases.

Third in our opportunistic assortment, we made real time pricing decisions that allowed us to manage sales and margin in a way that is unique to this model.

Turning now to E. Commerce, we are pleased with the results from our <unk> pilot.

Execution in our first few months has been very smooth and feedback from our operators have been positive.

Our item fulfillment rate is healthy and customer satisfaction scores are high.

While it is still early we have already learned a great deal and are pleased with the initial customer response and larger baskets that are purchased online.

As a result of this pilot success, we will be rolling out in CCAR to all stores by the end of the second quarter.

E Commerce is a great complement to our traditional customer acquisition efforts and we are excited for the potential to attract new customers and drive incremental sales.

From a corporate marketing standpoint, we continue to utilize the mix of radio TV and digital media to communicate the way out to consumers.

We have strategically increased our spending on digital platforms and are focused on providing a consistent message of value and quality across a broad assortment to build brand awareness and drive traffic to our stores.

In addition, our localized marketing tools have been well received by operators.

No that each store is market profile is unique and our iOS have deep knowledge of their customers preferences are.

Our proprietary systems enable iOS to curate store specific Wow items that are then shown through connected TV and digital AD platforms and mobile display advertising.

These tools enable a more personalized grassroots approach to help them grow their sales.

As Eric mentioned, we are on track to begin a pilot for our new loyalty App. This summer.

This program will provide our customers real time item visibility to the many great deals within their local stores and will allow us to capture valuable data about their shopping behaviors.

Customers that opt in we will also benefit by receiving early access to popular events like our wine sale as well as notifications when their favorite brands and products land in stores.

We also plan to digitize our popular when what you save promotion, which will reinforce their total dollar saved from shopping at GL.

In conclusion, I am more confident than ever in our powerful business model.

Our unique access to opportunistic product combined with continued strong execution from our independent operators position us well for 2022 and beyond in.

In addition, our strategic product expansion e-commerce , and personalization initiatives provide new levers to increase share of wallet and customer reach.

I will now turn it over to Charles to provide a financial update.

Thanks, RJ and good afternoon, everyone I will begin with a discussion on fourth quarter and full year results followed by comments on our outlook for the full year and first quarter of 2022.

We're pleased with our fourth quarter results and particularly the sequential acceleration in top line trends, we delivered versus the third quarter.

Comparable store sales decreased one 2% ahead of our expectations lapping an increase of seven 9% in the fourth quarter last year.

While traffic trends were stable versus the third quarter, our comp sales declined versus the fourth quarter last year was due to lower traffic, partially offset by an increase in average ticket.

Net sales were $782 7 million as compared to $806 8 million in the same period last year, which included $53 $3 million in sales and the extra week in fiscal 2020.

On a 13 week basis sales increased three 9% for the quarter.

Contributing to this growth was the impacted 35 net new stores opened in 2021 as we ended the year with 415 locations.

We remain pleased with new store performance, which continues to be consistent with our underwriting expectations and both infill and new markets.

We delivered strong fourth quarter gross margins of 39% above our expectations and ahead of pre pandemic levels.

Compared to the fourth quarter of 2020, our gross margin increased 60 basis points as we leveraged our flexible purchasing model.

Net headwinds such as inflation and higher freight cost, while maintaining our competitive value benchmarks.

G&A expense increased one 5% to $200 6 million compared to the fourth quarter of 2020, reflecting increased store occupancy and Io Commission expense related to new store growth as well as the unplanned cancellation cost for our scheduled operator conference due to Covid.

These increases were partially offset by reduced incentive compensation expense as well as lower expense based on a normal 13 week quarter compared to the prior year.

G&A expense increased to $18 4 million up 21% versus the fourth quarter last year, driven by new store growth existing fleet enhancements and upgrades as well as continued capital investments in systems and infrastructure.

Stock based compensation expense was $7 6 million.

Compared to $3 8 million in last year's fourth quarter due to the impact of additional grants in 2021 as well as current performance expectations related to our performance based share awards.

Net interest expense decreased seven 8% to $3 8 million versus.

Versus the fourth quarter last year due to lower effective interest rates.

Compared to our normalized tax rate of approximately 28%, we incurred an effective tax rate of 43% in the quarter, which equates to a 19, 6% effective tax rate for the year.

As a result of these factors GAAP net income for the fourth quarter was $6 6 million.

Or <unk> <unk> per diluted share.

For the quarter adjusted EBITDA was $47 4 million.

Representing six 1% of sales.

Adjusted net income was $20 million or <unk> 20 per diluted share based on an average of $99 1 million diluted shares in the quarter.

Turning to our balance sheet, our liquidity remains very healthy as we ended the year with $140 million of cash and a strong inventory position.

At the same time, we continue to invest in future growth as we deployed $114 million and net capex across new stores reinvestments in the existing fleet as well as enhancements to our technology and infrastructure platform.

Looking ahead, we are excited about the momentum we are building in 2022 for.

For the full year, we are projecting comp sales in the range of 4% to 5% slightly ahead of our long term algorithm.

This reflects our confidence in the underlying strength of our model as well as contribution from our new initiatives.

While we remain committed to our 10% long term unit growth target as Eric mentioned, we plan to open 28, net new stores in 2022 due to longer lead times in store permitting development and construction.

During the first quarter, we plan to open five new stores and closed one store for a net of four new stores.

The remainder of the year, we expect to open six six and 12 stores for the second third and fourth quarters, respectively with no additional closures planned.

And our comp sales and new store assumptions, we project fiscal 2022 sales of 333 to 338 billion.

We expect gross margins to be approximately 36% for the year in line with our historical performance. We will continue to leverage our flexible bond model to navigate the current inflationary environment, while delivering compelling value to the customer.

With respect to SG&A as always we are continuing to prudently invest in people infrastructure and technology to support our growth and to drive efficiency over the long term.

As a percentage of sales our SG&A forecast assumes modest leverage as we expect the store expense efficiency on comp sales growth will be partially offset by higher payroll insurance and normalized incentive compensation expense versus the prior year.

In terms of bottom line performance, we expect adjusted EBITDA to be in the range of $210 million to $217 million and fully diluted adjusted EPS in the range of 92 to <unk> 97 for the year.

And our earnings guidance, we have assumed DNA of approximately 76 million stock based compensation of approximately $30 million and net interest expense of approximately $17 million.

In addition, we expect a normalized tax rate of 28% and average diluted shares outstanding of approximately $100 million for the year.

We expect Capex net of tenant allowances to be approximately $115 million for the year.

This reflects our continued priority of building new stores reinvesting in our existing fleet and continued investments in infrastructure technology and supply chain capabilities.

Turning to the first quarter, we are excited about the momentum that we've carried into the year.

From a topline perspective, we are encouraged by quarter to date trends and expect first quarter comp sales growth of approximately 3%.

Notably quarter to date comp performance is coming from positive contributions from both ticket and traffic, which we expect to continue through the year.

So in our comp assumption and the addition of four net stores in the quarter, we expect first quarter sales of approximately $810 million.

For the first quarter, we expect gross margin of approximately 33%.

We're navigating the current cost environment, while further investing in customer value.

We know that our customers are increasingly feeling the pinch of inflation and we believe we are prudently balancing sales margin and value.

As such we remain confident in our ability to manage towards our full year gross margin expectations of 36%.

In regards to the first quarter expenses, we expect some deleverage due predominantly to higher infrastructure costs, including payroll insurance and normalized incentive compensation as well as costs related to our March supplier meeting, which didn't occur last year.

As a result, we expect first quarter adjusted EBITDA margin of approximately five 7%.

In closing I would like to extend my gratitude to our iOS and employees for their continued dedication and strong execution in overcoming many challenges we encountered last year.

Our team successfully navigated a changing environment by maintaining strong engagement with customers and leveraging the flexibility of our business model looking forward. We remain focused on driving long term shareholder value by continuing to invest in our core business and strategic growth initiatives.

With that we can turn it back to the operator to begin Q&A.

Thank you we will now conduct a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad.

Formation tone will indicate your line is in the question queue you.

You May press Star two if you will.

Do we move your question from the queue.

For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keyed once again Thats star one to ask a question at this time one moment, while we poll for our first question.

Our first question comes from Kate Mcshane with Goldman Sachs. Please proceed.

Hi. Thank you. Good afternoon. My first question is just on the customer traffic can you talk about when exactly the customer traffic turned positive and I know you mentioned that you expect the contribution of both traffic and ticket at tier comp growth in 2022, but how do you see the cadence of that.

I guess, we go through the year.

Yeah, Hey, cadence Charles Thanks for the question, so with respect to traffic trends.

As we mentioned in the first quarter here is really when we saw it turned positive which we we feel good about we think thats an encouraging sign for us.

And really points to customers increasingly seeking out value and then as we think about trends traffic and ring and ring trends through the balance of the year.

We expect that traffic will have a bigger impact as we move into into the back half.

And really driving that is the impact of our strategic initiatives.

Which across SKU assortment expansion ecommerce and personalization.

Should all be all be traffic drivers layering on to that as again, the macro operating environment for us.

Denise to improve.

It becomes more favorable as customers continued to feel the pinch of inflation and reduce stimulus, we think that'll be a traffic tailwind as well.

Great and if I could just follow up quickly with one additional question.

Just in terms of what you've seen.

Any kind of new customer acquisition, this past quarter, and if you could maybe update us on the stickiness.

New customers you've acquired over the last 18 months.

Yes, eight cadence RJ can handle that question I'd say in terms of customer mix and customer acquisition continued to be pleased with the mix of customers coming to grocery outlet C&I.

See a nice mix of what we refer to as more core customers, where we're gaining higher share of wallet and then those that are maybe shopping us more occasionally on a tertiary basis. So.

The composition of new customer shopping us in recent months I would say very consistent with what we've seen in the past.

It's a healthy mix just given that we're a unique shopping serve different shopping needs for for different customer segments and then in terms of stickiness, We survey customers regularly and very encouraged by.

The feedback that we've received from recent surveys they are having a good experience at grocery outlet. They are pleased with the amount of money that they are saving the treasure Hunt experience is resonating with them. So all of the things that we look at four.

To determine health of the value proposition. If you will are healthy and that of course.

Bodes well for for future share of wallet gains as well as future.

Future Trust and then in addition to that point.

To some of these initiatives that we are well under way with as making us even more relevant and compelling.

Consumers.

As we continue to expand the assortment will look at that as a nice basket builder and then future trip driver. We've seen some nice acquisition from this initial e-commerce pilot and as we look to roll out to all stores here consider that to be an additional customer acquisition vehicle I'm really reaching a segment.

The population that we had not yet for <unk>.

Previously tapped into and then as it relates to personalized marketing and an app for consumers we've talked in the past about the high levels of engagement consumers have with our Wow alerts and other marketing efforts.

We expect and believe that once we get personalization up and running that engagement will be even higher still so all of those things.

Incremental or additive to what already is a very sticky and positive customer experience.

Very helpful. Thank you.

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

Hi, This is actually Hannah <unk> on for Simeon Gutman, Thanks for taking the time.

Im wondering if youre seeing in your new customer acquisition and existing customer behavior or any signs of kind of trade down into the discounter specialty channel that you're operating in or any trip consolidation.

Basically any trends to suggest that you are either.

Benefiting from from a trade down dynamic post stimulus or kind of acquiring more of those low income consumers just anything on that outlook.

Yes.

R. J again, yes regards to.

Profile or changing consumer behaviors I would say.

We're very pleased with.

Positive transaction count quarter to date.

We certainly consumers are making different choices. These days in light of inflation in light of stimulus having largely expired.

<unk> has moved moved by here.

Lot of the <unk>.

Excess savings.

Having been spent or being spend so.

We think those macro trends are now turning more to our favor where they've been more headwinds for us in the past.

We do know that many consumers as I mentioned, they're making different choices whether it.

The items that they buy the categories.

Where they shop and for those that are making those decisions about where they shop.

Operating the best value in grocery retail compared to anyone so really positioned well in that regard for us the focus continues to be on delivering great value.

<unk> to maintain healthy inventories continuing to deliver the treasure hunt experience.

And then the operator continuing to do what they do connecting with customers in a very personal way.

Creating a great shopping environment through merchandising efforts in the care and attention AK to running their stores and all of those things uniquely combined.

The value proposition that we offer to customers so.

Like where we're positioned and.

Leave that consumers will continue to look for.

Better value in food retail and starting to feel some of that positive momentum as we started off the year here.

Makes sense. Thank you.

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

Good evening. Thanks, a lot for taking my question, how does inflation factor into your forecast or 24.

4% comp forecast for.

For 2022, and how does it compare to what you experienced in the fourth quarter.

Yeah, Hey, Michael It's Charles let me provide a little color there so.

Our assumption in our comp forecast is that inflation remains elevated.

Throughout the year keep in mind for us the inflationary impact is a bit different than for others.

<unk> always described the impact is more muted because of our model specifically the fact that we've got a change in assortment, which makes the year over year comparison, a little bit more challenging.

Mix adjustment by department versus others that might have a full service meat Department for example.

And then of course as we've talked about.

We're laser focused on value, we do think that becomes.

More important.

In the current environment again as consumers are really feeling feel under pressure there. So.

Near term as we said inflation has really been a benefit to ring longer term.

We'll get benefit traffic as well as customers increasingly seek out that value.

And then my follow up question is given that your gross profit.

<unk> was pretty strong.

We split those gross profit dollars with your I O is that we're leaving some of the pressure that they're feeling from experiencing.

Uh huh.

Hi, labor rates and other pressures on that business is right now.

Yeah, Hey, Michael it's Eric.

I would say that the Io mentality, today's very optimistic 2022, having gone through what they went through which is a challenging operating environment last 18 months two years.

Looking forward product is feeling good.

We're balancing the right values, we've got good set of initiatives and certainly a few extra dollars coming in on the topline Commission will help a lot.

I wouldn't say there out of the woods in terms of kind of a labor challenges, but in terms of optimism and looking forward there.

Theyre definitely green light.

And I'm very optimistic about the year.

Thank you very much and good luck.

Our next question comes from John <unk> with Guggenheim Partners. Please proceed.

Hey, guys just wanted to start with.

What are you seeing what are your Io seen with turnover right in this labor environment and the impact of that on.

You would measure service alright, whether it's in stock.

And other service scores that they are you would measure have you seen any any change in that.

Hey, John Eric No, we really Havent it has been a challenged.

Environment I would say the average operator is operating at below their normal capacity in terms of how many people they would like to have working versus who they do have working keep.

Keep in mind. These are working owners. So they have absorbed some of that pressure themselves working more hours.

Given some of the best people in their stores over time and access to more days in the rotating schedule. So they have been able to keep up with it.

Track a lot on the back in terms of customer experience. So we haven't seen a measurable drop in the <unk> scores that we measure and see and then we just stay very close to operators around what they're seeing here and now and some of the trends in Q1 are positive in that applications coming into stores seem to be coming in people.

Seem to be walking and looking for work where that was not the case.

Certainly last year or going into the second half.

And then maybe.

A follow up.

If you think about.

The improvement you guys expect right during the course of the year right in comp momentum, which could be two to 300 basis points.

I'm going to guess you probably say that's more skewed to micro right. Your self help for your initiatives as opposed to macro but.

But how do you think that plays out and then on the Mike The initiative piece.

How would you rank those right you talked about assortment personalization ecommerce.

Which one is the <unk>.

Most impactful factor of the three.

Yeah, Hey, John It's Charles Let me, let me try to tackle that so we havent.

Broken out the impact.

We expect these new initiatives to drive the comp as.

As we said we're excited about them, but admittedly it's still early so theres a lot that we don't know.

We do think that as these things take hold in the second half of the year.

They will begin to contribute to comp I think even even more broadly we're really excited about the long term impact of these initiatives.

Once they begin to bear fruit.

Okay. Thank you.

Our.

Question comes from Cristina <unk> with Deutsche Bank. Please proceed.

Hi, good afternoon, thanks for taking our question.

Just had a question on new store growth, which obviously is a pretty meaningful part of your story can.

Can you talk a bit more about what youre seeing from a real estate equipment availability and our cost to build perspective is the cost to build new stores, starting to creep up with higher cost of raw materials and equipment and could that potentially impact your new store economics.

Hey, Kristina Eric.

I'll tackle that one look we're pretty excited about what we did last year given the challenges all the headwinds that you've read about.

Things were experiencing supply chain construction just.

Dealmaking permitting development everything has been a little bit slower, we think that will pick up somewhat.

This year, we think the cost we've got baked in the assumptions around the model.

Are fine.

To be a temporary increase in what we have to pay we think those will abate the biggest drivers for us in the sort of long range return model is really the top line and what we're able to drive gross profit margin dollars through through the model not so much the cost of the unit.

That said, we have seen some temporary cost increases we've seen those go up and come back down, but stay a little bit elevated, but we're pretty confident that we'll be able to absorb those in the model as we've got it underwritten.

Great and if I could just follow up you know thinking about your value proposition resonating with consumers in a tough any inflationary environment.

Can you just talk about your price gaps relative to your peers has that changed has it gotten wider as we see conventional groceries.

You seem to be passing on most of the cost increases and from your vantage point.

Are there any changes in the overall competitive landscape that you have started to notice there is it.

Is it relatively unchanged.

Yes, Hey, Kristina, it's RJ, Yes, let me, let me elaborate a little bit more on how we are <unk>.

Handling inflation first thing I'll say really proud of the team for how we're navigating the current inflationary environment.

There's a lot happening. These days, we do continue to see higher cost coming through from suppliers for all the reasons that you know whether its ingredients or packaging or labor freight.

Pretty much across the board.

Say that we were.

We're following the same strategy that we have in the past recently than in prior years. It does continue to serve us well and we do believe we are uniquely positioned to mitigate these inflationary challenges and as mentioned in our comments.

First course of action for US is to look for where we can deliver the best value in a healthy margin and for the right items for the consumables and the assortment. So we continue to move between items and suppliers. Our diversified supplier base is really beneficial in times like these.

Relationships with thousands of suppliers and so that has served us well more specifically to pricing where competitors are pricing has moved up we are fast to follow we have been doing that.

You asked about value.

First and foremost for us is maintaining consistent value deltas across I'll say.

Many different metrics that we track and we think about just a few examples we think about basket savings.

To deliver that 40% value to conventional grocery retailers, we look at sales percentages at even higher stave off to levels different tranches, if you will across save up to values.

Think about value delivered for everyday items, we think about value delivered on the opportunistic side as well and all of those metrics are healthy and.

And we think.

Those are serving us well as we as we measure transaction trends in.

Well the value prop is resonating with customers and then lastly, I would say for opportunistic product. We're very unique in that we're managing pricing and making decisions between value and margin item decisions within the assortment every single day and so.

A lot of agility, there to strike the right the right balance.

And how that all comes together so.

Yes, we're really pleased with the value that we're offering feel confident in continuing to be able to manage consistent margins and again.

In times like these while those deltas, you'll call them consistent on an absolute dollar basis, they're more meaningful to consumers because everything is more expensive and those dollars saved.

Our big deal they are always important, but I'd say, an even bigger deal now so we continue to keep the focus there and.

That has and will continue to serve us well.

Thank you so much and best of luck.

Thank you. Our next question comes from Michael Baker with D. A Davidson. Please proceed.

The EBITDA margins, it's going to be down 80 basis points from the first quarter, but then you're talking about flat to down maybe 10 basis points for the year. What gives you the confidence that it gets better and then if you end the year end market guidance of six 3% to six four that's <unk>.

Hello.

Your average you were between $6 six or six 7% from for the four years prior to the pandemic when and why can't you get back to that level.

Yeah, Hey, Mike It's Charles you cut out there on the first part of the question, but I think I think I got the gist of it.

So yes, as you point out our adjusted EBITDA guidance for the year implies a bit of margin compression more so in the first quarter of the year I'd say the general themes across EBITDA margin for the year would be kind of the flow through.

Some moderation in terms of gross margin rate as we are navigating the cost environment.

Obviously these are these just.

Described focused very much on value to the customer.

Offsetting that will be a bit of a tailwind from an SG&A perspective. So we do expect to get some store leverage on the positive comp however, that's offset by.

The headwinds of lower unit growth as well as higher infrastructure costs year over year things like payroll incentive compensation and insurance.

So again boiling it all the way down and we think for the year in total that will result in some modest deleverage.

With respect to EBITDA margins more so in the first quarter of the year.

But as we sort of exit the Covid environment, we do expect that we'll return to a normalized EBITDA margin rates.

Going forward consistent with our long term algorithm.

Okay, and then a second follow up question is on.

The card and the 68 stores that you've seen or that you have and I should say what kind of comp lift are you seeing.

What gives you confidence that this is a incremental sell rather than cannibalistic et cetera. Thanks.

I think we would have a hard time, putting a.

Finger on the exact comp.

But just let me walk you through some of it.

From our perspective, we think it's a pretty.

Independent customer from customers in our stores from survey work, we've done about people.

Spending money online, we know that a lot of the marketing that's come through instant card has been to their customers. So we know a lot just fresh faces coming in the store.

Feedback from the operators has been really really positive I would say the customer satisfaction scores are very high because the fulfillment rates. There we think because the values are there.

They're shopping more in terms of basket size is larger than the in store basket, which is good and we think we're gaining some incremental customers.

Haven't shopped us before.

Again majority of them are <unk> customers, and we hope to convert them because of the model and be able to show them. The Wow shopping experience, but do it online so.

Pretty excited about it we will start rolling it out in Q2 balance of the stores and keep you guys up to date on what we're seeing.

Okay fair enough. Thank you.

Thanks.

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

Hi, Thanks, very much I just wanted to follow up on that last question on EBITDA. So.

Obviously, you've highlighted what will.

Cause some of the EBITDA margin compression in <unk>, but.

As we look to <unk> significantly less compression. So maybe you could just give a little bit of color on why you think there will be such a meaningful.

Improvement I guess in that metric.

Karen It's Charles Yeah. Thanks for the question. So I think the big difference when you think about.

First quarter EBITDA margins versus the balance of the year, probably two thirds of the of the deleverage that we would expect to see in the first quarter is really coming from.

Gross margin rate.

And then the balance of it coming from.

Expense deleverage payroll incentive compensation, we also as we mentioned in my.

In my comments the impact of our supplier meeting, causing some deleverage in the first quarter.

Relative to the balance of the year.

But as we move through into Q2 and into the back half.

Again, we expect to see more normalized gross margin rates and then we start to see.

Some more store expense leverage in terms of SG&A that is helping to offset this.

This higher infrastructure and payroll costs.

That's helpful. Thank you and then just wondering with respect to your comp for next year at the midpoint, So I guess what im.

We look at two year, we look at three year.

Ongoing like which number of years comparison, we should be looking at is.

Constant challenge, but if I look at your three year comps that would get me to kind of 11, 5% versus what you would've been pre pandemic at about $14. Five so I guess wondering when do you think you might get to more of the pre pandemic performance and why wouldn't that be happening this year, especially.

Given the challenges that consumer will be facing.

Yes, I think.

So Karen it is a matter of I think.

Continued consolidation, we're seeing that we.

We believe the early signs that that continues to.

It is beginning to abate.

And that really is the factor that's driven some of this sequential stacked comp.

Impacts.

And so as we think about the balance of the year again that should start to.

Move in our favor and then as we emerge from Covid.

<unk>.

Mine is more of a tailwind we see this with stack results begin to normalize.

Great. Thank you.

Our next question comes from Robbie <unk> with Bank of America. Please proceed.

Oh, Hey, guys. Two quick follow up questions. One is just how exactly does it work with the.

Like how does it work because I think they all have somewhat different assortments I mean, not gigantic different I was just curious how the process works and is it a burden on them or are you guys handling it and then just a second quick one.

How are are the applications for people to become iOS changing for the better or worse in the environment that we're going into thanks, Yes, Hey, Ravi I'll take that last one first.

No not changing for the worse, increasing topline funnel is still over 20000, I would say look.

The opportunity to prospect to have your own business work with your family.

Have an unlimited potential for earning and have that be derived by your work your hard work and the ability to sort of impact that community. That's a dream that a lot of people have and we continue to see people knocking on the door.

So that's great news relative to.

E Commerce instant card.

We handle all the technology within instant card that works really well, we plugged in the same technology, we use for our Wow alerts. So each store has an individual inventory.

And we're able to set thresholds and controls that.

Don't show the customer things that are in limited supply. So there is a high hit rate and in terms of the operator, they just need to run their store. They don't even really know someone's in their store from instant card. They may recognize assured our credit card they pay with but they're just taking care of customers.

We've been able to do this on a price markup basis, so in terms of margin rate.

Neutrality, it's there so we're definitely on the same page with the Io that it can work and it is working and.

I'd say, they're pretty excited about it.

Great and maybe just one more historically when when.

When gas prices go really high and stay high what is that good for you guys as well.

Yeah, Hey, Ravi yes.

Think about gas prices, along with inflation and just things that consumers are spending money on.

And.

And then creating this heightened sensitivity or need for value. So put it put it in that same bucket of it is hard right and getting harder.

For consumers to just afford things in.

Food being a necessity and healthy food really important.

So we view that as.

A tailwind so to speak along the same same lines.

Inflation, so I think that I think that probably helps us.

Got it that's really helpful. Thank you.

Okay.

Our next question comes from Bill Kirk with MK and partners. Please proceed.

Hi, I have another one on comp composition, so traffic positive inflation positive does that imply basket volume is flat or negative in <unk> and the 2022 guidance.

Basket volume sort of ring is positive Bill. This is Charles for the first quarter. So again traffic has turned positive but the bigger driver in the first quarter continues to be continues to be ring, we think that as we move through the balance of the year.

Again traffic becomes a more meaningful contributor.

And is that ring positive excluding inflation.

Is it positive excluding inflation.

It's yes from an AUR perspective.

It's up it is not up as much as inflation.

<unk> is down for a couple of reasons number one units in the basket, we're comparing against that occur with elevated base.

And number two back to the fluidity of our assortment it makes it a little bit.

Challenging year over year to have direct comparisons that said.

Important to note the units in the basket is up versus 2019 levels.

Which again for us.

The continuation of trip consolidation.

Perfect that's exactly what I was going for and then as a follow up it doesn't look like you've used any of the new buyback program the $100 million.

Hundred million dollars program I think you said it was going to be used opportunistically. So I guess, maybe could you share some of the criteria you would look to to put that program into use.

Yes, we actually we have put it to use we established it in the fourth quarter.

Program in place and as we.

When we did it we like having another tool we can use to deploy capital.

As we mentioned, we said we'd be prudent with how we repurchase shares.

We are doing that here in the first quarter. So we've begun to buyback shares opportunistically.

And we will report on the specific number at quarter end, when we file our Q.

Okay perfect. Thank you.

Our next question comes from Scott <unk> with <unk> capital. Please proceed.

Hey, guys. Thanks for taking my question. So I just wanted to I think you went into some detail about product availability.

In the opening comments.

But I just wanted to kind of get some more color around that I mean, we just had like Smucker report today, and they're having a real hard time, producing like dog food. So we've heard from a lot of the CPG guys. If they are just really having a hard time.

And I've been in some of your stores lately and lighters theres definitely tons of products, that's not a problem, but there is like.

Products that used to be there maybe not the same size arent there anymore like cheerios is just not there. So I was wondering if you could give us a little color around that how it can pick impacting your business.

And what you can do going forward do you expect it to continue so any thoughts around that would be great.

Hey, Scott.

I'd say, a few things on that topic first.

By its nature. This is a cyclical business.

To your point about Cheerios, we byproduct opportunistically by definition.

We don't have it on a consistent everyday basis, we have half the assortment that we call everyday half it's opportunistic so.

And you understand that there is just that there isn't any of that nature, which fuels the treasure hunt and how we buy how we operate.

That said.

Yes, we are very encouraged by the pipeline of opportunistic product we continue to see.

A healthy lifts in opportunities from our supplier partners.

We do cycle and as mentioned, we're always between suppliers and categories not necessarily consistent but overall.

Very very healthy we've seen nice increases with some of our largest suppliers.

And so that feels really good.

Really good momentum healthy inventory positions as we finished the year, which is carried forward to the beginning of the year as well and so as we think about future on order or looking at in stock position.

Physicians.

On the everyday side, despite the headwinds that exist.

Feeling feeling really good about that the team has done a fabulous job of staying in close contact with suppliers.

Actively traveling we've been doing that for a while now so be together with us face to face mentioned, our annual supplier meeting here coming up so a great opportunity for us to spend.

More time with suppliers.

Despite.

Some of the production challenges and issues that Cpg's continue to face, whether it's labor related or transportation transportation.

Plenty of activity, that's fueling opportunistic supply on product innovation.

Is still alive and well you had a lot of investment in additional capacity, yes demand is still high but.

That capacity and production has come online.

You've got you've got a lot of adjustments to portfolios and skus, whether it's to meet consumer needs and behaviors with some with sustained cooking at home health and wellness trends or media inflation related we've seen some of that as well packaging changes science changes impacting impacting some.

Fly in.

And predictability of inventory in the space and our supplier partner warehouses, so lots of things contributing to breadth and depth of offers that we're seeing in for US always the focus remains on how we can be the best partner.

Two to the suppliers that we work with to help them with these with these challenges how we can continue to push on strategic relationships that we have and.

We'll be there to help them as these opportunities continue to arise.

Okay.

Thanks for all the color I had just one follow up to what you said and something we said earlier I think you said you had 275 skus added to kind of.

Kind of regular product just there every day and they're going to add another 300.

This year.

I guess now you're up to about 50 50 always they're not there how do you see this changing your business model over time or maybe there is no change, but it does seem like that number could change to creep up and the consumer maybe has more expectations of the products.

Good chunk of products being there all the time so how do you think the business model plays out with that element going on.

Yes, so strategic SKU expansion has been a long term initiative for us we've been doing it for a long long time now we expect it to continue to be part of future growth and evolution and as we've added items over the years.

They've added convenience to the customer.

It's a great basket builder initially it does drive trip frequency over at <unk>.

Longer period of time as customers come to know and expect.

To find these items in our stores every day, so view it as both a basket builder and a trip driver and makes us more compelling and relevant and we have lots of previous examples at the category level. If you were to go back further in time fresh seafood going back further still.

I think to talk about Nash as a category.

Go further back still fresh meat produce some of these items better a little more everyday weighted.

That 2030 years ago, and we're part of the offering so it's really expanded our reach and broadened our customer appeal and its accretive just really nice.

Blend full shop and value across the whole store so.

It's been a it's been a really important part of our growth story and the recent $2 75, and 300 planned. This year and then think about years ahead, we expect it to continue to play.

Really positive role there.

Perfect. Thanks, I appreciate it.

Welcome.

We have come to the end of the Q&A session. At this time I would like to turn the floor back over to Erik Lindbergh for closing comments.

Thanks, everyone.

State your time today and your questions look forward to connecting with you each over the next cut.

Hours and have a good night.

This does concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

[music].

Greetings and welcome to the grocery outlet fourth quarter 2021 earnings results Conference call.

At this time all participants are in a listen only mode.

Brief 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, this conference is being recorded.

It is now my pleasure to introduce your host Arvind Bhatia VP of Investor Relations. Thank you you may begin.

Thank you.

Good afternoon, everyone and thank you for joining us on today's call to discuss grocery outlet's fourth quarter 2021 financial results.

Joining me on today's call are grocery outlet's, Chief Executive Officer, Erik Lindbergh.

President RJ, Sheedy, and Chief Financial Officer, Charles Blocker.

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

This conference call is being webcast live.

A recording will be available via telephone playback.

Proximately 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.

Our outlook for fiscal 2022 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.

As well as in our periodic reports filed with the SEC all of which may be found on our website at investors our grocery outlet dot com.

Or on SEC Gov.

We undertake no obligation to revise or update any forward looking statements or information.

These statements are estimates only and not a guarantee of future performance.

During our call.

We'll 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 maybe found in the supplemental financial tables.

In this afternoon's press release and.

And our SEC filings and the Investor tab on our website.

With that it is my pleasure to turn the call over to Eric.

Thanks, Robin and good afternoon, everyone and thank you for joining us for a discussion of our fourth quarter results.

Acceleration of almost 200 basis points from the third quarter.

Looking back at fiscal 2021, we successfully navigated macro challenges, including the pandemic and global supply chain issues.

Despite these headwinds we leveraged our flexible business model to deliver customers unbeatable deals and exciting treasure hunt experience that they love.

Expanded our store base with the opening of 36, new stores in 2021, representing over a 9% growth on a net basis.

As you look at quarter to date trends sales continue to improve reflecting increases in both ticket and traffic versus the prior year looking.

Looking ahead, we remain confident that the strength of our model combined with our strategic initiatives will drive incremental top line growth.

Furthermore, we anticipate a more favorable operating environment for our extreme value model as consumers contend with continued inflationary pressures and reduce stimulus support.

To that end, we remain committed to our unique value proposition, namely, providing the best value in grocery retail through our customers.

In an inflationary environment, the incredible savings, we offer customers become even more important.

Finding an opportunity to both increase our share of wallet as well as reach new customers.

Despite ongoing supply chain disruption our purchasing team continues to find exciting deals and we are pleased with our assortment across departments.

Our independent operators have done an amazing job delivering these exceptional values in the Wow shopping experience to their local communities, while the past year presented our ideas with unprecedented challenges they rose to the occasion in order to serve their customers and we continue to invest in systems and process improvements to support them.

To lead this effort, we promoted <unk> to the newly created position of Chief stores Officer.

Jim has a deep understanding of our culture and business model and has forged strong relationships with iOS over her six years at grocery outlet, making her uniquely qualified person for this role.

She has been met with a warm welcome during their store visits over the last few months.

Under <unk> leadership, we are confident that we can more effectively support iOS and growing their businesses by leveraging resources and best practices.

Turning to marketing in 2021, we enhanced our messaging.

<unk> not only our industry leading prices, but also the broad selection of top brands in the full shop that we provide.

As we look to further evolve our marketing approach we remain on track to expand our personalization efforts and plan to pilot a mobile app by the middle of this year.

Another initiative that will allow us to extend our reach in E. Commerce. We are excited to have our E. Commerce pilot operating in 68 stores in California on the <unk> platform.

Importantly, the pilot has gone smoothly and while early we are optimistic about the future potential we plan to roll it out to all stores over the next few months.

We believe these strategic initiatives are complementary to our measured and disciplined new store expansion.

We are committed to our goal of 10% annual unit growth that said as we mentioned in our last call, we were experiencing near term challenges, including labor and material shortages.

Extending the time and the cost to open stores. In addition, we're seeing longer lead times and lease execution as well as site permitting and development.

We will provide further updates on our progress in timings as we move through the year.

Lastly, we want to provide an update on our ESG efforts for years grocery outlet together with iOS has been positively impacting communities in a number of ways from providing great value to customers fighting food and security to reducing food waste and supporting small business owners.

This year, we will be taking our next step in our ESG journey as we complete materiality assessment with a third party to determine the metrics, we use to assess our social and environmental impact and track our future progress.

We look forward to sharing these learnings from that assessment once it's complete.

Before turning it over to RJ I want to reiterate my confidence in the strength of our model and our long term growth potential I am pleased that we have begun to see customer traffic turned positive, which I believe signals that value is becoming increasingly important harbinger for a more favorable macro environment for grocery outlet.

As we move through the year, we are confident that our strategic initiatives will further drive customer reach and engagement with that I'll turn it over to RJ.

Thanks, Eric.

We are pleased with our performance in the fourth quarter and look forward to building on this success in 2022 or.