Q1 2022 Grocery Outlet Holding Corp Earnings Call
[music].
Greetings and welcome to grocery Outlet's first quarter 2022 earnings results conference call.
At this time, all participants are in listen only mode.
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As a reminder, this conference is being recorded.
And now I'd like to turn the conference over to your host Arvind Bhatia, Vice President of Investor Relations. Please go ahead.
Good afternoon, everyone and thank you for joining us on today's call to discuss grocery outlet's first quarter 2022 financial results.
Joining me on today's call are grocery Outlet's, Chief Executive Officer, Eric Lindberg, President RJ, Sheedy, and Chief Financial Officer, Charles Bracher.
Following our prepared remarks, we will open the call for questions.
This conference call is being webcast live and a recording will be available via telephone 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 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.
Our investors started grocery outlet dot com.
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Buys 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 maybe found in the supplemental financial tables.
Included in this afternoon's press release.
Our SEC filings.
And the investors 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 for our discussion of our first quarter results. We are very pleased with our first quarter performance and the continued advancement of our long term growth strategies, we delivered strong topline growth as comparable store sales increased five 2% well ahead of expectations. While average ticket was the primary driver of car.
Growth, we saw increasingly positive year over year traffic trends throughout the quarter traffic was also up sequentially compared to Q4.
The momentum in our business is extending into the second quarter with continued strength in both traffic and ticket further validating our belief that consumers are increasingly prioritizing value again.
Our supply pipeline remains strong and our iOS, we're excited about the positive trends in the business.
We're making continued progress on our new initiatives to expand customer reach and increase share of wallet, including ecommerce SKU expansion and development of our mobile app.
With increased confidence in our outlook, we're raising guidance for the full year, which Charles will discuss in further detail a little later.
As you know our value proposition is fueled in large part by our independent operators I am pleased to share that they are energized by the momentum in the business and looking forward to delivering a very strong year I always are engaging with new customers and highlighting our industry, leading value and treasure Hunt experience. We believe this will drive repeat visits and greater loyalty over the long.
Term.
Also I always are maintaining healthy in stock positions and product variety across departments as they continue to benefit from our flexible purchasing merchandising approach.
Our strong relationship with the iOS is supported by collaboration transparency timely and open communications as well as ongoing training and field support to.
That and we continue to invest in systems and process improvements to help operators drive higher sales improve their margins and achieve greater efficiency. We solicit feedback regularly from our iOS, which allows us to identify sales and cost efficiency opportunities in areas, where we can further further support them.
Meanwhile, we also continue to invest in our ability to attract identify recruit and train future iOS our pipeline of iOS remains healthy and we are pleased with the quality and quantity of individuals' we continue to attract it.
Independence and autonomy continue to be the most important reasons for potential iOS have joined grocery outlet. In addition, many operators are highly motivated by the opportunity to work with their family members and get back to their local communities.
As a reminder, we strengthened our training program for future operators last year to include both in store learning and a robust online platform.
Through this comprehensive training program aspiring operator trainees or a O ts had been able to leverage the experience and strength of existing iOS, while being supported by our field and corporate teams to date seven cohorts have gone through the new training program. The program has improved consistency and training and increased scalability.
Due to its online component as an example, one of the aspects of the training that gets high marks is a simulation exercise that allows a O T is to test your strategies and day to day execution in a virtual environment.
Overall, we have received very positive feedback on the effectiveness of the new program and we are continually working to make further enhancements going forward.
Turning now to real estate, we opened four new stores and closed one location during the first quarter. We remain on track to open 28, net new stores during the year, including approximately 10 stores in the mid Atlantic area as we expand our footprint in the east.
The challenges we discussed on our last call related to labor and material shortages, along with longer lead times and lease execution and site permitting continued to persist. However, based on our pipeline of deals already approved and the potential sites identified we expect to return to a 10% unit growth beginning in 2023.
Meanwhile, we remain pleased with the new store performance across markets, including recent vintages as they continue to ramp in line with our underwriting expectations.
With respect to ESG as many of you know our historical growth has been powered by our unique business model in which sustainability is at the heart of our culture, our strategy and our operations.
Our opportunistic sourcing capability and flexible supply chain allow us to procure product that would otherwise go to waste, we empower our operators to curate their assortments and offer these products are deep values to their local customers. We believe that building long term win win partnerships with our communities and our suppliers is essential to our business model.
And future growth, Moreover, we recognize or producing waste and enhancing the productive use of resources is intrinsically tied to our operational excellence.
And hence tutor our mission of touching lives for the better we believe it's sustainable business practices are essential to the creation of long term value at grocery outlet.
As we continue to grow our store footprint, we will have an even greater positive impact on communities, creating a virtuous cycle.
As part of our ESG journey, we have formed a sustainability working group to identify and assess additional ESG factors that are material to our business. The group is helping develop strategies to support our ESG goals and formalize our disclosures to demonstrate progress to that end. We are conducting a materiality assessment in GAAP analysis, this year and expect to publish our.
First sustainability report next year. In addition, we have taken important steps to evolve our governance, including submitting shareholder proposals to eliminate certain supermajority voting provisions and to declassify. Our board by 2026. These changes reflect our natural progression as a public company and are aligned with the feedback received during our investor.
Outreach in 2020 one two.
To conclude we are extremely pleased with the momentum in our business, especially the strong engagement and enthusiasm of our iOS as well as our healthy supply pipeline.
Additionally, we continue to make progress on our strategic growth initiatives as we remain well positioned to return to our 10% unit growth as we move forward.
The strength of our business is a direct result of the hard work of our entrepreneurial independent operators along with our dedicated team members in the field, our distribution centers and our corporate offices.
So very proud to work alongside these incredibly talented individuals and I believe that we are stronger and better positioned today than at any other time in our history with that I'll turn the call over to RJ.
Thanks, Eric.
Or is off to a strong start with traffic turning positive in the first quarter and momentum continuing to build further in the second quarter.
Consumers are clearly feeling pinched by inflation and looking to stretch their grocery dollar.
With eating out becoming even more expensive gas prices at record high levels and government stimulus waning, we believe consumer behavior is shifting.
Our most recent consumer survey results show increase in importance of value both for our core and secondary customers.
As consumers look for value alternatives, we remain in a great position to offer them significant savings.
Fundamentals of our business are healthy and our Wow deals treasure Hunt experience and in store inventory levels are resonating with customers.
Let me start with an update on our supply pipeline the strength of our purchasing team combined with our long standing relationships with key suppliers have never been more valuable than in the current environment. We.
We have the scale the flexibility and the capability to act quickly, which is why we remain the preferred partner for our suppliers.
As a result, our inventory levels and opportunistic supply pipeline remain in good shape, enabling us to continue to offer our customers. The unbeatable deals we are known for.
We continue to deepen our supplier relationships to that end. We recently hosted our annual supplier conference in Dallas are first in person conference with this group after a three year hiatus.
We believe that this face to face interaction allowed us to strengthen our strategic partnerships with top suppliers and develop relationships with new and emerging partners.
There was palpable excitement going into the event as it has historically been a powerful platform for exchanging ideas reviewing future product pipeline and growing our opportunistic purchases.
Given the ongoing industry wide supply chain challenges the foreign proved to be even more timely and relevant than in the past years.
Having personally participated in numerous supplier conversation I would share the following key takeaways number one our suppliers continued to invest in capacity and ramp production to meet demand.
At the same time forecasting has been challenging for them due to the inconsistency in demand patterns and continued supply chain challenges.
Number two our suppliers are investing in innovation the planned introduction of new items brand extensions and packaging changes.
Number three not surprisingly our suppliers are facing and trying to manage through unprecedented levels of inflation in their businesses.
We are ideally positioned to capitalize on these dynamics, we are finding new and creative ways to help our supplier partners manage surplus inventory.
More broadly our purchasing team continues to identify new opportunities, resulting from supply chain disruption a favorable trend that we believe is likely to intensify over the foreseeable future.
Recent examples of how we are capitalizing on the current environment include our purchase of 20000 cases, a frozen entrees from a.
Highly recognized brand, which we offered to customers, adding more than 50% discount.
This product was produced for the European market, but due to instability in the region and rising freight car became available to us at an extreme value.
Another example was our purchase of 25000 cases as a premier gourmet popcorn that was originally headed to a leading department store.
The opportunity, resulting from cancellation of the order due to shipping delays and enabled us to offer the product to our customers at a more than 60% discount.
Turning now to inflation, we continue to see higher prices from suppliers as they manage inflationary increases in their businesses, including the cost of ingredients packaging freight and labor.
As always we believe we continue to strike the right balance between value and margin.
During Q1, our customer value proposition remains strong and drove positive top line momentum.
The impact of inflation on gross margin was slightly higher than we had anticipated during Q1.
Ever gross margin has rebounded in line with our annual plan and traffic continues to strengthen.
Overall, we are leveraging our flexible buying model to mitigate inflationary pressures in a variety of ways, including pivoting between alternative suppliers as well as similar items, while maintaining the relative savings we're known for.
One recent example of how we engage with a new egg supplier, allowing us to switch from direct store delivery to warehouse distribution and offer a deeper value of our customers, while driving a better margin rate for us.
Another example was our switch to a new supplier of fresh salmon fillet that allowed us to mitigate rising costs tight supply.
At the same time, we were able to improve product quality, while continuing to deliver a great value.
Next let me take a moment to update you on our strategic initiatives.
First on E. Commerce, we remain excited about the long term potential of this initiative.
Following positive results from written sticker pilot, we recently completed a rollout to nearly all of our stores.
While it's only been a few weeks and through rollout. We are pleased with the smooth execution and a favorable response from iOS customer so far.
In addition later this quarter, we will launch a pilot with additional partners in the same 68 stores that were part of the instant care pilot, enabling us to expand our customer reach even further.
Second with regard to our strategic SKU expansion, we remain pleased with the customer response to the new everyday items, we have added since last year.
Year to date, we have launched more than 175, new skus on top of the 275 Skus. We added in the second half of last year.
For the remainder of this year, we plan to increase our new SKU count by another 150, as we strive to provide a fuller shop, greater convenience and value for our customers on a consistent everyday basis.
In terms of target items, we remain focused on growth categories, such as Nash crash ethnic and local.
Third we are making steady progress on our personalization initiatives remain on track to pilot our mobile App. This summer.
We are excited to extend the treasure hunt experience beyond the four walls of the store and further tailor our customer messaging.
As I mentioned on our last call. This program will offer our customers real time item visibility two exciting deals and allow us to customize our communication based on their preferences.
Our database of active email subscribers provides us a built in platform that we can leverage as we activate members.
Through this initiative, we look forward to deepening engagement with our customer base and driving higher trip frequency and share of wallet over time.
More broadly we continue to refine our marketing tactics in order to increase brand awareness drive traffic and optimize media spend.
In this inflationary environment customers are searching for ways to save money and we are emphasizing our industry leading prices in our messaging across radio TV and digital media.
At the local level independent operators continue to utilize our proprietary tools to curate wow items and highlight those exciting deals to their local customers.
We believe these combined efforts are amplifying our underlying momentum as customers increasingly look for ways to save money.
Before I turn it over to Charles I would like to take a moment to thank our supplier partners for their continued support for a great turnout at our annual supplier meeting.
I'm also grateful to our independent operators and their team members for their unrelenting focus and dedication to delivering the Wow experience that is so critical to growing our brand.
Now I will turn it over to Charles to provide a financial update.
Thanks, RJ and good afternoon, everyone I will begin with a discussion of our first quarter results followed by comments on our outlook for the second quarter and full year 2022.
We are pleased with our first quarter performance and the momentum that we're carrying across our business comparable store sales increased five 2% well ahead of our 3% expectation driven by both higher basket and positive traffic growth.
Net sales increased 10, 5% to $831 4 million driven by a strong comparable store performance.
Bind with the impact of 29 net new stores opened since the first quarter of 2021.
During the quarter, we opened four new stores and closed one location and in the quarter was 418 stores.
We remain pleased with new store performance, which continues to be consistent with our underwriting expectations and both infill and new markets.
We delivered first quarter gross margins of 32% slightly below our expectations reflect an accelerated inflation during the quarter, particularly with respect to commodity items.
Our gross margin rate improved towards the end of the quarter and we exited Q1 at a run rate in line with our full year goal of 36%.
SG&A expense increased 10% to $207 4 million compared to the first quarter of 2021.
This was due to increased Io commission expense and store occupancy costs related to new store growth as well as higher personnel expense and the impact of our annual supplier meeting, which didn't occur last year due to COVID-19.
As a percentage of sales SG&A decreased 10 basis points versus the prior year largely due to store expense leverage on sales growth.
G&A expense increased to $18 2 million up 17, 3% versus the first quarter last year in line with their expectations similar to prior quarters. The increase in DNA was a result of growth in new stores and our continued investments in existing stores as well as systems and infrastructure.
Stock based compensation expense was $5 8 million compared to $3 9 million in last year's first quarter, primarily due to the impact of our 2021 grants as well as current performance expectations related to our performance based share awards.
Net interest expense decreased five 7% to $3 7 million versus the first quarter last year, primarily due to increased interest income on independent operator notes.
Compared to our normalized tax rate of approximately 28%, we incurred an effective tax rate of 26, 5% for the quarter due to excess tax benefits related to the exercise and vesting of equity awards.
As a result of these factors GAAP net income for the first quarter was $11 6 million or 12 cents per diluted share.
First quarter adjusted EBITDA was $49 3 million ahead of our expectations going into the quarter, reflecting top line outperformance.
Adjusted net income was $21 5 million or 22 cents per diluted share based on an average of $99 4 million diluted shares in the quarter.
In terms of our balance sheet, our liquidity remains very healthy as we ended the quarter with $138 million of cash and a strong inventory position.
For the quarter, our Capex net of tenant improvement allowances was $27 2 million, reflecting new store growth enhancements to our existing store base and investments across our technology and infrastructure platform.
Turning to the second quarter comp momentum continues to be strong with healthy contribution from both ticket and traffic.
Just on quarter to date trends, we expect comp sales growth of approximately 6% for the quarter in total.
We expect to open seven new stores in Q2, including one store opening which shifted from the first quarter, helping drive overall net sales of approximately $855 million.
Reflecting the current inflationary environment, we expect gross margin of approximately 36% for the second quarter in line with current trends.
With respect to second quarter expenses, we expect modest SG&A deleverage as the impact of higher incentive compensation relative to the prior year is only partially offset by fixed cost leverage resulting from comp sales growth.
All in we expect second quarter adjusted EBITDA margin of approximately six 3%.
Based on outperformance in the first quarter and strong quarter to date trends, we are raising our full year topline and bottom line guidance.
We are increasing our full year comp sales range to $5 five to six 5% an increase of 150 basis points compared to previous guidance.
With respect to new store openings, we remain on track to open 28, net new stores in 2022 with the majority of stores opening in the back half of the year.
Due to our higher comp expectations, we are raising our fiscal 2022 sales guidance range to 3.39 to 3.42 billion.
With respect to gross margin, we continue to expect full year gross margin of approximately 36% based on current trends.
In terms of SG&A, we continue to expect modest improvement as a percentage of sales for the full year driven by fixed cost leverage on comp sales growth, partially offset by higher expense related to incentive compensation compared to the prior year as well as infrastructure growth.
With respect to adjusted EBITDA, we are raising our full year guidance range to 213, it to $220 million up 3 million from prior expectations.
Moving further down the P&L, we continue to expect D&A of approximately 76 million in stock based compensation expense of approximately $30 million.
And while our capital allocation priorities of building new stores and investing in future growth remain unchanged. We are actively utilizing our excess cash to mitigate the impact of a rising interest rate environment.
As such our board authorized the prepayment of $75 million in term loans on April 29th from our existing cash balance.
We expect to win this prepayment our net interest expense will be approximately $18 million for the year based on today's forward rate curve.
In addition, we continue to expect a normalized tax rate of 28% and average diluted shares outstanding of approximately 100 million for the year.
Taking all of those factors into account, we are increasing our full year adjusted EPS guidance range to 94 to 99 cents, an increase of two cents per share versus our previous estimate.
In closing our year to date results reflect our unique business model as well as the strong execution from our iOS and employees is.
As consumers are increasingly feeling the pinch of inflation I'd like to thank our teams for their commitment to delivering the savings and service that are so important to our customers and with that we can turn it back to the operator to begin Q&A.
Yeah.
Thank you.
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Yeah.
Our first question from the lineup, but I'll be honest with bank of America. Please go ahead.
Oh, Hey, guys. Thanks for taking my question Congrats on a good.
Corner really two questions. One is can you give us a little more color on you know when the traffic picked up through the first quarter and you know what what can continue to drive that momentum for the rest of the year and the second question is just maybe more color on how you guys are instituting the higher price.
<unk> that are being passed on to you or the iOS all passing those on similarly or are some of them passing them on more than others I would just love to get a sense of how that's playing out thank you.
Hey, Robbie it's Charles Let me, let me start with the first part of your question and then I can pass it to Eric to talk about iOS, but just to give you a bit more color around the cadence of comp and traffic in the quarter. We felt really good about kind of how things did.
So we saw steady improvement throughout Q1 and encouraging for us to see that momentum is carried forth into into Q2 was a bit more of a benefit I mean.
Uh huh.
Driving driving the comp here in Q2, so as we look forward. We you know for the balance of the year, we would expect that both continue to be positive contributors in.
In the back half yeah traffic will be a larger contributor both as we lap easier traffic comps versus last year, and then I think you'll start to see the impact.
Some of these new initiatives in the traffic driving a benefit we see we see from some of those as we move into the back half.
Hey, Robbie it's RJ, let me, let me touch on inflation and then maybe Eric hit on the second part of your second question and sorry, excuse my voice that please them a bit under.
Under the weather today. So hope you can hear me, Okay, you know as far as inflation goes and how we're instituting higher prices you know first thing I'd say or I'd reiterate.
Is we take a couple of courses of action before passing on price of course, we're seeing higher costs coming through from our suppliers from all the input that they have higher costs on them and we continue to follow the same strategy that we have and it continues to serve us well. So you'll first we're moving between suppliers.
We're moving in and out of items, we're always looking to manage value cost and margin.
In a in a very balanced way to maintain value to customer, but also a margin to the company.
We're leaning on the diversified supplier base in times like these so that has helped us quite a bit and instances, where we are receiving higher cost first and foremost of importance to us is that we're maintaining value to the consumer and as competitive retails have increased will be fast to follow them.
That's really the strategy that we've deployed here, we continue to track and manage very closely our basket savings that we deliver 40% relative to other conventional grocery retailers. We look at a lot of other value metrics a percent of sales at higher save up to levels, we're keeping a close eye on commodity pricing.
I'm sure that those are priced in line.
And everyday pricing items due to the flexibility through which we byproduct and manage the assortment to make sure that we're in line from a value and margin standpoint, and then Eric you want to touch on how the price has been passed through to the stores and the role of the operator, Yeah. You bet Ravi you get all three of us.
Question.
So look we.
We still price, 99% of everything that runs through the store iOS have the ability to price up a price down as they see fit to match your local market or.
Get a little bit more margin that's limited to a few items per store. So it's really not something you know even a big.
Big that we measure I'd say look the operators are super dynamic I'm really really flexible and they follow our pricing research that we do.
And look they're just really focus right now on the present, which is traffic's up.
In stock positions are better they are driving sales in the store. So they are just they are really positive about the current environment. So that's what I'd say.
That sounds great. Thanks, so much guys.
Yeah.
Thank you we have next question from the line of Kate Mcshane with Goldman Sachs. Please go ahead.
Hi, Thanks for taking my question.
If you could maybe talk through that gross margin dynamic a little in a little bit more detail that you saw during the quarter and what gives you confidence in that 30.6 mm being sustained for the rest of the year and then our second question is just around the competitive environment. You know in terms of what you're seeing that's response to inflation.
And at some of your more direct competition.
Yeah, Hey, Katy, it's Charles but let me start with the first part of your question.
On margin and then I'll turn it over to Eric there on competition.
Yeah, so for us in the quarter you know it is RJ spoke to we feel really good about how we're balancing.
Cost and value and margin in light of the current environment.
Everything he talked about in terms of the flexibility of the model that we're leaning on in light of the back up we think it's working really well.
So yeah the margin impact in Q1 was a bit deeper than we thought going into into the quarter and really I would say you know inflationary cost pressures where were broad based across categories. We did see some accelerated inflation in some of the key commodity items that we.
You know, where we're matching price with others.
And that probably had a little bit more of a margin impact I think we felt really good about how we kind of move that through through the chain. If you will and the way in which we exited the first quarter.
In line with their 30.6% goal. So we always talk about youre going to see normal quarter to quarter fluctuations in margin, but you know we continue to have confidence in our ability to manage it.
The margin stability over the longer term and again the way that we exited the first quarter. You know it gives us gives us a lot of confidence in hitting that 36% goal for the for the year in total.
Hey, Kate Eric I would say relative to promotional environment. It seems pretty stable to us I would say it really has not changed a lot since 2021 or even Q4 of 2021 I would say that promotions are a little bit more selective.
No I think that's some part of that is just supply chain related shortages, creating not a need and a desire to go out and promote and increased volume behind items, and then I think secondarily.
<unk> seems to be navigating the price increases in the current environment of inflation. So I'd say, we're not seeing a lot of changes in the current promotional environment.
Thank you.
Thank you we have next question from the line of John Hind Vulcan with Guggenheim. Please go ahead.
So I wanted to start with you guys are operated through a bunch of downturns historically.
What if anything changes in the recession playbook.
You know nuance right either.
Principally merchandising but.
Merchandising marketing and then do you think that the new tools that you have that you didn't have in the last downturn.
How does that impact.
Impact, how you think about going to market.
Yeah, Hey, John Eric I would say the evolution of the model is a let's say way ahead of where it was in a way to nine.
And I'd point out a few things just the itemization the disciplined merchandising a lot of the Capex, we put into it supports the fresh just the penetration of Mi penetration of produce daily deliveries of fresh I think our fresh foot forward is.
<unk> is extremely strong compared to 28 2008 nine.
I'd say second the message that.
We continue to pound on.
Anywhere you look is all about value and quality and selection. So we're able to deliver and thread the needle of those three messages where value is first but we also have selection and we also have fresh.
And that's enabled us I think to attract a different level of of consumer.
And then I'd say you know right now we're hyper focused on the deal the Wow experience.
That's the message that the operators are hearing delivering.
Those deals in the store no matter what that's most important that's what people come for so it's hard to look back and say the conditions are identical to O eight O nine.
Because they arent, but certainly when the customer's pressed.
Hard for their purchasing power.
A grocery outlet in the past and I think turning to G. O now that's what we're starting to see.
And in the past right you think about what you would see now.
In terms of shopping frequency and then within the basket right.
I would imagine the items per basket right would pick up meaningfully.
If you go back historically always, Illinois, where did you see the biggest lift and your comps.
Gosh I'm drawing from memory right now, but I'm going to say it was mainly in increased transactions and you know I'd be guessing, but I think it was more than half transactions in a way to nine.
Okay. Thank you.
Thank you we have next question from the line of Oliver Chen with Cowen. Please go ahead.
Hi, there this is Katie on for Oliver Chen. Thanks, So much for taking my question. The first question is really how do you compare the current opportunistic buying environment today versus 2019, and then maybe birthday previous inflationary environment. Obviously, you know under the assumption that the current environment.
It's pretty unprecedented.
Then on a follow up to that would just love some more color on all the progress you've made on the online friends.
Specifically, how will the grocery outlet app interact and interface with the instant partnerships. So is there any crossover there between shopping or could there I'll try and definitely be any sort of cannibalization I.
Thanks, so much.
Hi, Katy it's RJ I'll, Oh I'll take the first part of your question and.
Touch on part of the stack and Eric May want to chime in there as well.
As far as opportunistic buying goes we continue to be really encouraged by pipeline of opportunistic product available you know certainly supply chain challenges disruption inflation etcetera make this quite a unique environment. We've been in this business doing this for a long long time. So we've we've been through all cycles and I'll defer.
Types of environment. This one certainly unique but continue to see greater availability of product continue to capture outstanding buys across all categories. Our momentum in the first quarter I'd say, it's carried over into the second quarter, resulting.
Resulting in really healthy inventory positions, Eric just talked about delivering the wow the treasure hunt the great deals to consumers.
In a time, when they're really looking for value and opportunistic sourcing and the value that we're providing from that is going a really long way in helping to boost momentum for sure.
And in our comments I mentioned the annual supplier meeting was an opportunity for us to connect in person with many of our top suppliers songs from newly formed relationships as well and really encouraged by those conversations and how we can partner more strategically with them.
And be an even better partner to them than we've been in the past. So encouraged by that and then you know just just as far as some of the trends and things that we're seeing from a supply standpoint as mentioned product innovation are.
Yeah, it's still alive and well with suppliers despite supply chain challenges. So they do continue to innovate and introduce new product you know certainly additional capacity and production has.
It has been a big focus for them and as we talk about looking forward just due to the unpredictability of demand and supply in forecasting really really hard all of those have we think even more so we will continue to lead to.
Two more opportunistic product for us and then just when you consider the amount of change in our portfolios at the suppliers have been through over the past couple of years, all that yields yields product as well so yeah, yeah in general feeling really good.
And.
Looking forward again, I think the pipeline of supply strengthens further still Eric you want to touch on E Commerce, Yeah, Hey, Katy. Thanks for the question I would start with this say in skirts working well we've got it in let's say a majority of our stores, we plan to rollout Uber eats and indoor Dash couple other plan.
It forms.
Here pretty quickly to the first set of pilot stores operators continue to.
Tell us it's working well for them the customer we're looking at surveys rating the experience Hi, a couple of point out basket is north continues to be north of our in store basket, which we like we think we're seeing some incremental cut.
Customers that would not necessarily come in and see our.
Our values so they're seeing our values online, we think that's creating a nice cross shop opportunity.
I think I'd, let RJ kick it back to you to talk on how its going to.
Interact with the App and how we see that working.
Yeah. So just a quick update on our personalization initiative in the mobile App. So still on track to begin a pilot for this this summer so in a few months here.
On the some of the features of the App will be real time visibility into that.
Many great deals within the store.
Full visibility to the entire stores inventory on a real time basis early access to some of our popular events like our wine sale notifications when favorite brands and products they have in store.
We also plan to digitize our popular when you say promotion.
Which reinforces the total dollar saved him from customer shopping at grocery outlet and so a bunch of features there how it intersects with E. Commerce you know that's that's further down the road and we've mentioned before that the mobile app.
We believe gives us a better platform to bring the treasure hunt to life outside of the four walls of the store.
We've had some limitations in being able to do that through more I'll call them more conventional platforms and so really excited by the by the ability or the opportunity to bring those deals to life and really accentuate the treasure hunt and everything the customer experiences while shopping in the store through this mobile app.
At some point in the future naturally you'd expect those to converge and if they can see the inventory if they can create their wish list and they can select favorites and such from the mobile App. The next step would be ecommerce, we haven't gotten that far yet a first for US is to just pilot. This build the engagement that we expect will be there and then as we.
Regrets with instant card and other partners on the ecommerce side, we'll look to Oh, we will look to.
Further enhance our total digital offering them as it relates to both.
Great. Thank you so much.
Thank you.
Thank you we have next question from the line I'm Simeon Gutman with Morgan Stanley . Please go ahead.
Yeah.
Hi, guys. This is Michael Kessler on for Simeon Thanks for taking my questions.
First I wanted to ask about the comments you made on trade down you're beginning to see more of it is what it what it sounded like.
I don't know if you have any kind of sense of.
Whether it is occurring from new consumers are new customers trading back down to you or new customers that haven't been to grocery outlet trading down or if it's more of your current customers who never maybe continue to start Sam shop, you guys through the pandemic are relying on you more as a primary shop and then any I guess.
Maybe somebody Johns question I like the mix of our product up there you're seeing being bought.
Changing everyday versus opportunistic.
R. J you want to take that one.
Yeah sure Hey, Michael Thanks for the question Yeah in terms of customers.
Excuse me.
We see shopping our stores I'd say, a few things one continuing to see really good customer mix with high satisfaction and the experience. They are happening so that feels really good and we have seen more new customers shopping us because of inflation because of the return to value starting to see that for sure, but we're also starting to see it a bit.
From supply chain and others, having gaps on their shelves something we've heard that more anecdotally from operators since they've been creating new customers in their stores I'd say more of the strength of a lot of the strength is with our tertiary customers, we see that in our survey data. This.
This is the segment customer segment that we've seen the highest increase in trips and spend that we've seen increases.
Broadly across our core and primary secondary and tertiary as well, but particular strength within tertiary.
And the reasons for that again return to value customers are seeking value.
Previously, maybe a little less important now really really important and so they're they're turning to grocery outlet to find that.
There's an element here, where consumers are shopping more stores again with the easing of consolidated trips. So that's that's been a headwind for us and that's been easing somewhat I think the decline in E. Commerce is probably contributing to that as well again consumers more out and about and I'm going back to shopping in the store so really.
The beginnings of the reversal of some of the 2021 behavioral convenience based changes that had occurred that posed some challenges to us there. So.
Feel really good about that you know for us as we as we have been and will continue to it's about actively marketing to these consumers I'm already mentioned highlighting value and assortment in the deals. So we continue to message that very strongly across all media types. We think are our initiatives for their support.
These increases in trips that we've seen more recently, expanding our skus offering a more relevant assortment to consumers like E. Commerce of course for those that continue to shop in that channel and then looking forward more personalized communication to communicate more of what interests them, specifically products and brands and that's all.
It's about the value of the treasure Hunt.
And the connection that the operators have with them. So yeah overall feel really good about the new trips are new customers and then increase in frequency that we have.
Been experiencing more recently.
Great. That's helpful. My follow up on the.
The supply environment and the closeout market do you think that the deals or the presentation of the customer is getting better and is that also may be a contributor to the acceleration that we're seeing in the comps is it more of just status quo at a good level and how do you anticipate that continuing.
Evolve given this pretty persistent level of inflation that we're seeing.
Yeah, Yeah, so it's always about the deals and the value.
And we do think that's a really healthy place right now we love that we're seeing new customers shopping our stores now, but you have to offer the value and you have to offer them the excitement of the treasure on and the convenience and the and the broad assortment that we have for them to return and so you'll feel really good about the products.
That we have in the stores hats off to the operators for doing what they do merchandising the product in a way that's right for their consumers and educating them on the bottle and helping them make.
If they're shopping in the store so a big big part of the model and then and then the connection to their customers and their communities. So those go together hand in hand, with the product and the values themselves, but again feel really good about availability of supply.
The deals and the value and as customers continue to shop us and find us maybe new for the first time increasingly here.
Our job then is to make sure that they're getting the products, they're looking for in their state of a lot of money, while they're doing it and feeling feeling really good about where we're at with that.
Great. Thank you Roger.
Okay.
Thank you.
A reminder to participants to limit.
Limit your questions to one question and one follow up. Thank you. Our next question from the line of Cristina <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Thanks, a lot and congrats on a good quarter I just had a follow up on pricing we've been hearing that some CPG companies are planning for more price increases later this year. So maybe if you could talk about your value gaps in your everyday assortment. But then also maybe just touch on why consumers are finding some of the greatest value on the opportune.
Thanks, Syed and since you said that you're managing to value I'm just curios how closely have you been following conventionals and price increases and are you finding any resistance at all from consumers and some of the categories, maybe where you have been taking our prices more.
Yeah, Hi, Christy and thanks for the question, yes, So a few things there from a pricing standpoint.
All your GAAP standpoint, we pay very close attention to pricing from our competitors and so certainly wanted to maintain our value proposition and we think about value in it and a lot of different ways. I mentioned previously baskets savings always looking to be at that 40% or more savings on an app.
Average basket too.
Two conventional grocery retailers, so that's a really important metric.
But that's an average so certainly there are items that customers are going to save a little bit less you know think more of the commodity items that we're buying on an everyday basis and.
Don't have quite the cost advantage a pricing advantage there that we wouldn't others. So those are going to be less than the 40%, but then on the flip side you have and this is predominantly opportunistic you have items that are delivering an even greater stave off two level, so 50%, 60% and we've had items as high as 82.
Even 90% I'm, some really really extreme values and with healthy margin and that's the benefit of the opportunistic sourcing model that we deploy them. So we do think about the number of items as a percent of sales offer that those different stave off two levels.
And we measured at the department level, we measure at the category level, we're looking at specific items and save up to and velocities and in this business and we pay very close attention to lots of different metrics related to value because that is the that is the value proposition to the customer. So all of those metrics are where they're at right now.
So I feel really good to us we feel like we're in it we're in a good place.
Relative to our competitors and we think that will keep customers are.
Returning to grocery outlet.
Great. Thank you.
Thank you.
Thank you we have next question from the line of Mark Carden with UBS. Please go ahead.
Good afternoon, and thanks, a lot for taking my question. So it seems like Youre building some nice momentum on the comp front, how good can comps get if current levels of inflation last for an extended period of time would you expect the pace of your market share gains to increase in this scenario and then what levels of inflation are you guys building into your guidance for the balance of the year.
Yeah, Hey, Mark Let me. This is Charles let me try to tackle that so I would say our expectation as we think about inflation looking forward and we don't profess to have a clearer crystal ball than anyone else out there, but suffice to say it'll remain we expect it will remain elevated through the year.
<unk>, we we'd expect to see you know larger year over year impact in.
In the first half and as we start to lap some of those higher numbers in the back half of last year.
That'll be you know that that.
That will impact some of some of the growth rates, we always try to remind folks that keep in mind for us the inflation impact is more muted on our business due to our model. So you think about first and foremost it's a it's a changing assortment. So it is tough to drive some of these comparisons year over year.
It's not apples to apples the mix adjustment for us it is a little bit different you know you think about department mixes and not having full service meat departments. For example, and then for US of course are always focused on customer value. So you know.
That's that's another factor to consider so given what we know now you know as we thought a lot about guidance, we feel like our our our approach here is really balanced.
We feel great about the momentum that we're driving in the business, but it still continues to be very dynamic backdrop do you think about supply chain, we're not through the woods on Covid you know all of the all the factors at play with.
With respect to the consumer so cause some of those things be tailwind for us absolutely, particularly as it drives consumers increasingly too to prioritize value.
But we feel like the guidance we have right now is is.
Is appropriate in light of the environment that we can see today.
Great. That's helpful and makes sense and then just as a really quick follow up are you guys seeing any outsized benefit from your stores that are in close proximity to the conventional grocers that tend to be at the higher end of the pricing spectrum.
I'd say, our only anecdotally operators are reporting fresh faces people coming in with comments around how expensive things are at other stores. So I'd say certainly traffic is up we're benefiting from that trade down from conventional but it's only anecdotal at this point.
Got it thanks, so much and good luck.
Thank you. Thank you.
You have next question from the line of Mike Baker with D. A Davidson. Please go ahead.
Oh, Hey, guys just a couple of follow ups on the margins one.
You're running a 30.6 today and that's expected in the second quarter I guess to be at 36 for the year, which is the guidance you have to be above that in the back half and historically I don't think the seasonality works like that so I'm just curious as you know I'll get someone already asked you what gives you the confidence but why would.
Not only gross margins better in the second quarter was the first quarter, but they have to keep getting better throughout the year. So I guess I'll just not as good but what gives you the confidence that gross margins can keep getting better from here.
Hey, Mike It's Charles Yeah, Let me, let me tackle that you know typically if you go back and look at our historical quarterly margins, you'll see that Q3 is skus no basis, a typically a high watermark.
I think for US you know as we what gives us the confidence is yeah. We looked at the first quarter and some of those cost increases came faster and broader than we expected and see I think you're seeing a bit of a timing impact as we're.
Absorbing those and then and then making price adjustments and so it really gets down to the cadence of margin through the first quarter in and feeling like Okay. We pass.
We.
Pass some of those along and exited at a good place and then we look at kind of our typical seasonal trend from here on out and feel like we've got good line of sight, there and you keep in mind.
We talk a lot about investing in the business and lots of different ways systems and tools being a big part of that and so we do have a long list of I'd say margin driving improvements, we're always looking to to find efficiencies across the way we by the way operators order products the way we distribute to.
For them and manage inventory at store level. So those things you know as we look at that list and some of the early its there it gives us confidence 30 points.
Sure Fair enough one more if I could.
As mentioned on a previous question, but I don't think fully flushed out of answered, but within your higher average ticket.
Ticket count is that coming more boy, we know it's coming from inflation, but what are we seeing in units per transaction is that up as well or is that down but you know our average selling prices are up.
Yeah, Yeah yeah.
Think about the composition of the basket clearly.
It's being driven by that.
Higher average unit retail and I sort of talked about you know for us it is a bit more muted than perhaps for others, but nonetheless, that's the key driver. There units is in the basket are down on a year over year basis, I'd say just the important thing to keep in mind. There is we're comparing against the Covid.
Elevated base with higher levels of trip consolidation last year or so.
We take a lot of comfort and confidence as we think about you.
Units first of all being steady over the past three quarters. So on an aggregate basis units in the basket or holding steady and then importantly, there are up modestly versus pre pandemic levels. So that's.
That's another thing where we take a lot of comfort.
Yeah. That's helpful. I appreciate that thank you.
Yep.
Thank you we have next question from the line of Karen short with Barclays. Please go ahead.
Hi, Thanks, I wanted to just clarify two things so with respect here full year comps taking that 6%.
You're still going to be a you know a three year stacked up.
Which is lower than your $14 five.
So I guess I'm wondering why you're expecting a slowdown in the three year stacked as inflation continues to increase.
<unk> your ability to pass through and will continue to increase as the year progresses.
My first question.
It's it's Charles.
Let me tackle that and again I think you know we've spent a lot of time thinking about.
The current environment and the impact on our comps going forward and the various puts and takes and again clearly it can go higher.
Higher or lower but we think our approach is balanced where we love the the momentum that we're driving in the business, but it continues to be there's a lot. We we don't know at this point various factors that play a lot of those things that I mentioned so we're.
We're just trying to strike that right balance between what we know and don't know it today.
We were feeling good about the current momentum and opportunities joins forward, but I'm trying.
Trying to be prudent at the same time.
Okay and then just my second question on gross margins is there any way to quantify and when you see what the actual basis point impact might've been on gross margins.
From me you know I think delayed pass through on cost increases, but then as we think about the rest of the year I mean, it's possible that inflation continues to be a challenge for everyone. So why would you think that that make me a bit I guess as we get into two acute care market in terms of pressure on gross.
Martin.
Yeah, I would say first of all I don't think we can necessarily quantify it specifically I mean of course, you can see their debt going into the quarter, we expected to see a 30 threes were a little bit.
All of that but I think the thing that gives us confidence that we are very much we remain in a highly inflationary environment and as I said before just the the way that which we exited March and the momentum we're carrying here into the second quarter gives us confidence that a lot of those sort of.
Cost increases and the timing impact of when we feel that as and when we flow those through had been reflected so yeah.
In light and <unk>.
Combination with the various initiatives that we have gives us gives us confidence that that 36.
<unk> is the right target for us.
Thank you.
Thank you, ladies and gentlemen, who have reached the end of the question and answer session and I'd like to turn the call back to Eric Lindbergh CEO for closing remarks, how about you Sir.
Thanks, So much operator I appreciate you guys listening I appreciate your questions look forward to catching up with you a little one more this evening and everyone have a great night. Thanks.
Thank you.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
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