Q3 2022 Grocery Outlet Holding Corp Earnings Call
Greetings and.
And welcome to the crunchy.
Third quarter earnings results Conference call.
At this time.
Listen only mode.
A brief question and answer session follow the formal presentation.
If anyone should require operator assistance during the clubs.
She's just starting here.
As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Arvind Bhatia, Vice President of Investor Relations. Please go ahead Sir.
Thank you.
Afternoon, and thank you for joining us on today's call to discuss grocery outlet's third quarter 2022 financial results.
Joining me on today's call are grocery outlet's, Chief Executive Officer, Erik Lindbergh.
Residents RJ sheedy.
And key financial Officer, Charles Bracher.
Following our prepared remarks, we will open the call for questions.
This conference call is being webcast live and a Ric.
<unk> 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 will 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 at investors dark grocery outlet dot com or dot Gov.
We undertake no obligation to revise or update any forward looking statements or information.
These statements are estimates only and not a guarantee of future performance.
During our call. We will also reference certain non-GAAP financial information, including adjusted items.
Reconciliations of GAAP to non-GAAP measures as.
As well as the description limitations and rationale for using each measure maybe found in the supplemental financial tables included in this afternoons press release.
And our SEC filings and the investors tab.
Or our website.
With that it is my pleasure to turn the call over to Eric.
Thanks, Marvin and good afternoon, everyone and thank you for joining us.
Before we jump into a discussion of our strong third quarter results I'd like to comment on the leadership transition we announced this afternoon.
As you may have seen I plan to move to the role of chairman of the board and RJ will become President and Chief Executive Officer effective January one.
This announcement is a culmination of careful and thoughtful succession planning with the board to ensure a seamless transition of the CEO role.
RJ joined the company in early 2012 and has held key leadership positions in the area of strategy purchasing and planning marketing and operations and has served as president since 2019.
When RJ joined US the business is roughly $1 billion in sales and over 170 stores.
Over the past 10 years RJ has played an integral role in both building and executing our strategic vision as we have tripled topline and grown to more than 430 locations.
RJ and I have worked closely for many years and he is more than ready to take this next step.
His leadership style exemplifies our culture and values is passionate about the business and as collaborative long term approach resonates with and inspires our team I'm confident that there is no one better to lead grocery outlet into the next chapter of growth that RJ.
I look forward to working closely with them and with the executive team and my future role as chairman.
Immensely grateful for the opportunity to have led such a remarkable group of people.
While I will move away from day to day I will continue to be invested both emotionally and financially in grocery outlet success as chairman of the board.
As part of this transition I also want to thank Erik for gas our current chairman for his many years of leadership and valuable advice and friendship.
The company will continue to benefit from Eric's guidance as he moves into the role of lead independent director.
As you'll hear throughout the call our business is performing well and our value oriented model is positioned to continue gaining share.
Our growth runway as long with the potential for more than 10 times. The store count we have today, we have the right strategic initiatives to fuel sustained comp sales growth.
I am extremely pleased with our third quarter results and the continued momentum in our business. We are seeing an increase in new customers to our stores in existing customers are spending more with us.
Third quarter sales grew 19% driven primarily by strong comparable store sales growth of 15% as well as contribution from new stores opened over the last year.
We're also encouraged to see an uptick in transaction count and balanced contribution between traffic and ticket.
We delivered gross margin in line with our expectation as we continue to benefit from our dynamic and opportunistic model.
Better than expected topline and gross profit dollar growth resulted in bottom line results that exceeded expectations.
Based on our third quarter results quarter to date trends, we are raising our full year guidance, which Charles will discuss shortly.
Turning now to our store expansion strategy, we opened six stores in the third quarter ending with 431 locations. We remain pleased with the new store trends as well as recent vintages continuing to ramp in line with our blended underwriting model.
Especially encouraging is been the progress of our mid Atlantic market, where we continue to invest in and build the brand.
Our store count increases and the consumer awareness grows we're seeing higher traffic, which is fueling top line trends, including comparable store sales growth that is above company average.
In terms of future store growth, we remain pleased with the real estate opportunities. We're seeing as we continue to identify new sites across our existing and new markets.
Our real estate construction and new store teams remain extremely active and we are encouraged by the quality of our sites in our pipeline over the next 24 months that said, we continue to face various headwinds in opening new stores on a timely basis, including permitting and inspection delays equipment and labor availability and utility related.
Lead times as a result, two fourth quarter openings have been pushed back into 2023, while it's difficult to predict exactly when those store opening challenges might ease we will continue to adapt and remain nimble as we work our way towards our normalized target of 10% annual unit growth.
With respect to our pipeline of future operators are entrepreneurial model and our positive momentum are contributing to a strong inbound interest from perspective iOS, we're seeing a healthy number of qualified candidates apply for aspiring operator training program and the quality of recent graduates is strong.
At the same time iOS operating existing stores have been energized by the momentum increasing customer traffic and improving operating conditions.
This renewed enthusiasm was evident throughout our regional operator meeting we held in late September .
Our leadership team visited 10 cities over six days to share recent business updates collaborate on holiday execution and respond to the operator's questions and feedback throughout the meeting's iOS were enthusiastic about the expanded merchandise assortment and strategy heading into the holiday season.
Also the opportunistic inventory and treasure hunt experience and the ongoing investments that we're making in technology and infrastructure.
Before I turn the call over to RJ I, just wanted to take a moment to again, thank our extended grocery outlet family, which includes our iOS.
Their employees and all of our team members across our corporate office field and supply chain.
This truly is a unique company with dedicated and passionate people who care deeply about each other and the communities we serve.
I'm, so proud of what we've accomplished and even more excited about the opportunities in front of us as.
As I transition my role I look forward to contributing in new ways as we fulfill our mission of touching lives for the better in the years ahead with that I'll turn the call over to RJ.
Thanks, Eric.
I am grateful and honored to be assuming the role of president and CEO as well as joining the board of directors I want to first say, thank you to Eric for his contributions and commitment to grocery outlet over the past three decades.
His leadership and vision have inspired us all.
It's been a privilege to work alongside him and I look forward to our continued partnership as we transition into our new roles.
I joined grocery outlet because of its mission and model and incredible people and culture.
We provide access to affordable quality food and we save customers money to live better lives.
We reduced food waste through our supplier partnerships and opportunistic sourcing.
We provide opportunities for independent operators and their employees as well as our team members and we together with our operators get back to the communities in which we live and operate.
As we grow and reach new customers, so does our impact.
So excited and humbled to be a part of this effort working in partnership with our operators and our amazing team.
Our business fundamentals remain healthy and we are seeing several positive consumer trends.
Traffic and spending from our core customers are up indicating stronger retention within an expanding share of wallet.
We are also gaining new customers as shoppers increasingly seek out value.
In addition, overall satisfaction among both our core and tertiary customers remains strong and lastly awareness of and intent to shop grocery outlet over the next 12 months have increased.
We believe our positive consumer and top line trends are the result of disciplined focus on our three primary comp growth drivers.
One providing our customers with the deepest value and a unique treasure hunt assortment of quality products number two supporting our operators in delivering a wow shopping experience and number three driving customer awareness and engagement through company and operator marketing efforts.
Let me provide an update across these initiatives starting with the strength of our assortment.
We have great product variety across departments, our inventory position is healthy and our pipeline of opportunistic product as strong.
In addition, we are pleased with the ongoing sales contribution from our expanded assortment and we will continue to selectively add items based on customer demand.
As we approach the holiday season, we are well positioned in key seasonal categories from both opportunistic deal flow and strategic SKU expansion.
We are capitalizing on increased store traffic by delivering customers the deepest value for their holiday shopping at a time when they need it most.
True to the grocery outlet model, our seasonal offering will provide customers unmatched savings and convenience within a fun treasure Hunt shopping environment.
Our operators continue to execute at a high level and serve their communities with passion and dedication.
They are the best ambassadors of our brand and we are excited to continue to support them in ways that allow them to grow their business and reach new customers.
In addition to ongoing investments and store improvements and fixtures, we continued to strengthen our marketing technology and infrastructure in ways that benefit iOS.
Let me provide an example specific to technology.
As we first shared with you last year, we continue to make steady progress on planned upgrades to our financial system inventory platform and operating applications.
These enhancements will provide additional functionality and scalability to support key areas of our business, including purchasing inventory management and store operations.
I am, particularly excited about the store facing improvements that will enable operators to make smarter decisions and operate more efficiently to drive sales and profit growth.
These new applications are being developed in partnership with our iOS and we are excited for the planned implementation in the middle of next year.
Turning now to marketing, we continue to utilize a test and learn approach to inform our strategy and allocate investments.
As part of that effort, we are more effectively leveraging data, including market and store level attributes to gauge media effectiveness across markets and channels com.
Complementing this is the personal connection that our operators have with their communities and customers.
Consumers are particularly receptive right now to our local Io and value messaging and we are seeing in our results.
With respect to our digital efforts, we have developed and tested our new personalization App and we are excited for customers to begin using it.
The App will soon be available to download and use in our Washington test stores.
As a reminder, this new program will give customers access to new trending and top selling items on a real time basis as well as curated product recommendations based on their preferences.
It will also track customer savings and provide opportunities for them to win what they saved by shopping at grocery outlet.
Our test our operators have expressed a lot of enthusiasm for the user interface and functionality and are excited to see customers use it in their stores high.
High customer engagement will provide us with a robust customer shopping data, which will further enhance our current marketing efforts and improved operating results over time.
Last with regards to E Commerce, we continue to expand our reach and capture incremental customers through our online partnerships today substantially all of our stores are live with both <unk> and door Dash and we expect to have a majority of stores up on Uber eats by the end of this week.
While we are still early in our E. Commerce journey, we remain excited for the access to this new channel provides to a more convenience based customer.
In closing I want to thank Eric again for his successful leadership of grocery outlet.
This is a special company that has our mission of touching lives for the better at its core.
I'm proud of what we've accomplished this year and I couldnt be more excited about the tremendous opportunity that lies ahead.
Before I turn it over to Charles I'd also like to take a moment to thank our independent operators, our supplier partners and our corporate teams for their passion dedication and ongoing commitment to serving our customers and communities every day.
I will now turn it over to Charles for a financial update.
Thanks, RJ and good afternoon, everyone I will begin with a discussion of our third quarter results followed by comments regarding the fourth quarter and our revised guidance for the fiscal year.
We delivered strong third quarter results, which exceeded plan on both the top and bottom lines.
Comparable store sales accelerated to 15, 4% driven by higher traffic and ticket.
Our comp store sales growth resulted from a seven 9% increase in transaction count and six 9% higher ring star.
Strong comp and new store performance drove 19, 4% growth in net sales to $918 $2 million.
During the third quarter, we opened six new stores ending with 431 locations.
Third quarter gross profit increased 18, 4% to $286 million, we were pleased with our third quarter gross margin performance of 36%, which was inline with expectations.
<unk> related to product and supply chain costs persist, but our purchasing and planning team continues to do a fantastic job delivering a compelling product assortment to customers.
Value along with healthy margins.
Turning to expenses third quarter, SG&A increased 18, 7% to $227 5 million compared to the third quarter of last year.
The increase reflected $21 $6 million and higher store related expenses and $14 $2 million and increased corporate related costs.
<unk> related expenses were driven by higher commission payments to iOS, reflecting strong gross profit growth as well as higher store occupancy costs due to new store expansion.
Corporate related expenses increased mostly due to higher incentive compensation, reflecting stronger financial performance versus the prior year.
As a percentage of sales SG&A decreased 10 basis points as leverage on store costs was largely offset by higher incentive compensation expense.
DNA increased 10, 9% to $19 $4 million and share based compensation was $9 1 million.
Reflecting the impact of grants made in the past 12 months as well as current expectations related to our performance based share awards.
Net interest expense increased 21, 5% to $4 $8 million due to the.
Packed at higher interest rates on our variable cost that this.
This was partially offset by the $75 million principal prepayments on our senior term loan in April this year.
Our effective tax rate was 12%, which is below our normalized rate of approximately 28% 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 third quarter was $17 5 million.
Or 17 cents per diluted share.
Adjusted EBITDA increased 15% to $59 1 million for the quarter, reflecting six 4% of sales adjusted.
Adjusted net income increased 14, 2% to $26 $8 million and adjusted diluted earnings per share was 27.
On an average of 105 million diluted shares.
Turning to our balance sheet, our liquidity remains strong as we ended the quarter was $107 $3 million of cash inventory grew 4% from the second quarter to $332 million and remains healthy in terms of quantity mix and turnover.
Our third quarter Capex net of tenant improvement allowances was $32 1 million.
Reflecting new store growth continued upgrades to our existing fleet and ongoing technology and infrastructure investments.
Next I'd like to touch on our fourth quarter trends and update you on our full year outlook we remain.
And pleased with our top line momentum as well as the strength of our seasonal assortment.
As a result, we expect comp sales growth of 12% in the fourth quarter and we are raising our fiscal 2022 comp guidance to approximately 11%.
In terms of unit growth, we expect to open 10, new stores in the fourth quarter and 26 net new stores for the year.
Based on our comp sales and new store expectations, we are raising our fiscal 2022 sales guidance to approximately $3 $5 5 billion.
With respect to margins, we expect fourth quarter gross margins of approximately 33%, which reflects normal fourth quarter seasonality to the holiday product mix and targeted price investments for the full year, we expect gross margins of approximately 35%.
In terms of expenses, we expect fourth quarter SG&A as a percentage of sales to be down year over year due to the impact of store expense leverage from fixed costs and Io commissions, partially offset by higher incentive compensation expense.
For the full year, we are increasing our adjusted EBITDA guidance to approximately $224 million.
Further we expect DNA of approximately $76 million for the year and share based compensation of approximately $32 million.
Up slightly from prior guidance, reflecting performance expectations for our share based awards. We continue to expect net interest expense of approximately $19 million for the full year, reflecting a run rate of $6 5 million for the fourth quarter based on current interest rates.
Lastly, we forecast normalized tax rate of 28% and average diluted shares outstanding of approximately $101 million for the fourth quarter.
Taking all these factors into account we are raising our full year adjusted EPS guidance to approximately $1 per share.
In summary, we are pleased with our solid year to date performance and continued momentum in the fourth quarter.
Customers are seeking out value more than ever and our incredible family of iOS and team members is delivering on their behalf.
Before we begin Q&A I'd like to take a moment to thank Eric for his leadership and Delobel Mark. He is left on grocery outlet. We have a strong foundation and are incredibly well positioned to drive long term growth and shareholder value as we move forward and now I would like to turn the call over to the operator to begin Q&A.
Thank you, Sir ladies and gentlemen at this stage, we will begin the question and answer session.
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In the interest of time, please limit yourself to one question and one follow up question.
The first question, we have is from <unk> <unk> from Bank of America.
The first question.
We have is from Oliver Chen from Cowen and company.
Yes.
Hi, everybody, congrats Eric RJ, great quarter as well.
As we think ahead to the store growth pipeline you called out some puts and takes in terms of what youre seeing with encouraging availability. Yet you had also lots of supply chain considerations. What are your thoughts for how the the availability in the supply chain environment looks for <unk>.
More growth as we look to next year as well.
And then would love your thoughts on that.
Independent operators and the temporary commission adjustment program.
As well as rising interest rates.
Have those and are played with what Youre seeing in terms of the health of the iOS and the environment. We're in now thank you.
Yes, Thanks, Oliver for the question so.
I'll start on that.
Yes, I would say.
The pipeline is really healthy.
We are seeing plenty of stores look out the next 24 months.
That pipeline is healthy so the good news is that we're not really seeing an issue of real estate availability I would say that the.
The issue does remain that.
The delays.
For timing for a host of issues that I detailed on the prepared remarks, it's real it doesn't.
It seemed to be lining up.
We are still working towards.
I'm pretty confident that goal of 10% unit growth.
We look at it as a <unk>.
Larry.
A bump in the road, where 400 stores, we've got decades of growth towards sort of filling out.
Sort of our goals no reason, we can't exist in every market, we've talked about that a lot. We're in nine states today, but the construction challenges may persist and.
It's everything from labor availability to materials too thin.
Things like just getting power connected to stores. So I think we're not alone in stating that has been a challenge, but we're going to work through it and we'll get back to that 10% feel really confident in that and.
This will be a blip that we're dealing with in these last couple of years relative to iOS.
Look I'd say.
They are they are doing really well our strong results are benefiting the io they're participating in the upside.
Gross profit growth 18%.
Gets split with the iOS.
Traffic is growing in stock is getting healthier variety is really strong.
As healthy as it's been.
And we and they are super focused on.
Giving sales and healthy margins so relative to your question.
Our job is really to make sure the operators can grow through.
All of their years of being an operator, particularly the early years of starting a new business, it's not easy some ramp fast some ramp slow so our job is to make sure we're supporting them and Thats. The program you referenced so.
That's alive and well.
We're doing everything we can to make sure those stores.
Get up to run rate volumes.
Thank you best regards.
Thank you. The next question we have is from Cristina <unk> from Deutsche Bank.
Hi, good afternoon, congratulations on the very strong quarter, and congrats RJ and Eric on the.
RJ on the promotion.
I wanted to ask about a few of your initiatives that you that you mentioned in your prepared remarks, one of them is on marketing and just really focusing on delivering a consistent value message and then two just on SKU expansion and data analytics. So can you just maybe tell US where you are seeing some of the benefits in terms of sales lift and how you are thinking about.
The opportunity as you head into 2023.
Yeah sure. Thanks, Thanks, Kristina I'll take that this is RJ, so just to start with.
Marketing.
For us it is about providing a consistent message of value and quality across the assortment.
We referenced in the comments inventories really strong health of opportunistic is really strong we have great representation of our everyday items. Some so just feel really good about the health of the inventory and then as a result, what we're able to message to consumers.
At this time of year holiday shopping important time.
For for them and the food that they are buying and particularly so right now looking for value and we're able to we're able to offer that so as a reminder, from marketing standpoint grocery outlet centralized marketing.
Tools and information that we push out complemented by operators. They continue to be a strong voice in their communities and in that partnership I'm really sets us apart.
From the rest, we think in terms of value and local and the personalization at the operators bring to it.
We're really excited about our personalization app personalization app, so that will allow us to be even more targeted and specific to consumers. We're just on the verge here going live in our Washington test stores and.
That'll help us speak more specifically to what customers are buying the items that they like on the items that we know the like that maybe haven't found yet and so really look forward to use of that and then the data that it provides to be even more effective with our marketing efforts in terms of SKU expansion I'm pleased with the progress we continue to make we added another 150.
Items or so this past quarter, so year to date puts us close to 500.
700 over the past 12 months holiday time period is always a time when we're strategically introducing items. So feel good about the assortment, we're representing now.
Two a few other recent examples we have.
A test underway right now with grab and go home meal replacement items early weeks still but I'm pleased so far with the results. We continue to focus on Nash natural organic specialty healthy that continues to be a growth driver for us and then looking forward from here as we've done we will continue to strategically add items and categories.
<unk>, we think we've got a nice well rounded assortment, but always opportunities as consumer trends and supplier service change.
That's great. Thank you so much and enjoy your holidays.
Thanks, you too.
The next question, we have is from Gutman from Morgan Stanley .
Hey, guys. Good afternoon, everyone Simeon Gutman.
Or maybe more of a technical modeling question the flow through in Q3, and then implied in Q4 can you talk about I guess, what if anything is changing at the margin it looks a little bit lighter on the incremental sales.
We got some of the components, but curious if theres something high level, we should be thinking about.
Yeah.
Yes, Simeon it's Charles let me just talk to sort of.
Our expectations with respect to to Q4 specific to gross margin and SG&A.
As you heard in my prepared remarks, we expect.
Q4, gross margins of 33%, which is very.
Typical in terms of our fourth quarter.
Seasonal holiday mix impact so thats again down 30 bps sequentially from the third quarter, reflecting that holiday mix also reflecting.
The fact that at the time when customers are really looking for savings.
We're being especially sharp with respect to our.
Seasonal assortment and pricing and expect to lead the market in terms of value.
So as you compare against last year from a gross margin perspective, if you recall Q4 last year a bit of an anomaly for us at 39%.
But overall feel really good about how we're managing margin with respect to the cost inflation environment, we're dealing with as it relates to SG&A.
At the fourth quarter, we are expecting to see a bit more SG&A leverage in Q4 compared to Q3 I would say overall the same fundamental SG&A drivers, we're seeing which is we are getting fixed cost leverage on the higher comps that were that were delivering and that's being partially offset by higher incentive comp.
Sensation, but specific to Q4 also expecting that commission expense as a leverage driver.
Again back to the higher Q4 gross margin we saw last year. So of course, that's getting shared 50 50.
With the iOS. So it really is that year over year in Q4.
Margin rate differential, which will drive a little bit more.
SG&A SG&A leverage in Q4.
Okay. Thanks, Charles maybe the quick follow up Eric just I apologize if I missed it.
In prepared remarks, just stepping down all the continuity with the iOS and then RJ what is your bench looked like in the next six to 12 months has it changed at all from what it looks like today.
Yeah, Simeon Eric I'll start then RJ can follow up.
We're starting to transition immediately it will be effective first day of January 2023.
In terms of planned to have continuity with iOS.
Part of what I'll be doing is spending some time each month out operationally in the stores keeping the relationship with iOS.
Attending the Io meeting, which we'll have in February the supplier conference in March and just being present at sort of a bigger company meetings and maintaining relationships, but the biggest thing I'll be doing will be supporting RJ, making this a seamless transition.
And.
Just making sure that goes well.
Hey, Simeon in terms of team and what might change I.
I'd say, we have a great team.
No changes there you know naturally some reporting changes as Eric moves to his new role, but otherwise.
We've got a great group, leading this company and then I would comment just more in general.
Looking forward I've been with the business for quite a while now played a leading role in setting our strategy and growth initiatives. So no no changes to the strategy that will remain consistent as will the list of growth opportunities initiatives that we've been talking about for a while now.
To focus on our comp growth drivers of providing the deepest value the unique treasure hunt supporting operators in delivering the wow experience in the stores driving customer awareness and engagement through marketing.
Everything around new stores so.
Youll continue to hear a lot of consistency.
US and our efforts to continue to grow this business.
Thank you.
Thank you. The next question we have is from Robby <unk> from Bank of America.
Hey, guys can you hear me.
Yes, we can hear you fine.
Excellent.
And RJ congrats.
And Eric Congrats as well.
So my first question is the new customers that you are seeing any anything different about them demographically that you can speak to and where do you think they are coming from.
Yes, so I'll take that one Ravi yes. So we are very encouraged by what we're seeing with customers.
More new customers also just note again, an increase in trip frequency overall spend is up satisfaction levels are high intent to shop high so feel really really good about that in terms of demographics I'd say continue to see a healthy mix and as you know the.
<unk> range is quite broad so we appeal to a very broad set of consumers.
I will note that we have seen on average is slightly higher income customer.
Hoping and within our newer customers shopping at grocery outlet suggests to us.
Trade down behavioral change there for those customers that are feeling the pinch of inflation, we do continue to see strength with lower income customers as well.
We're more of a necessity item.
And so customers are looking for value and the things that they.
They need to need to buy.
And then just one other final note as we ask customers.
What are the most important shopping criteria and the things that draw them to grocery outlet, we've seen a higher percentage of customers ranking low prices and unexpectedly great deals within that top set of things that theyre looking for and why they are choosing to shop grocery outlet. So.
All really consistent with what we're seeing out in the market and some of those trends around inflation.
Consumers looking to save money.
Thanks, That's helpful. And then my second question is maybe a little bit of a.
Intermediate term question.
What would it take.
Same store sales that are really high rate.
What kind of environment.
Or what dynamics would you guys need to see the adjusted EBITA margin.
Instead of sort of what.
Flatlining around six five.
Heading heading back over seven again, what when could could we see something like that happen and what what combination of things would you guys need to see that happen.
Yes, Ravi it's Charles let me tackle that one I would say, we feel great about the health of the business and how we're positioned heading into next year.
It's still unclear to us exactly what the the backdrop will be presented with from a inflationary standpoint and potential recession here, but.
But for US we continue to Orient around the long term algorithm that we've always talked about and been consistent so that low single digit comp, 10% unit growth and stable margins. So as you think about.
Why why stable margins EBITDA margins overtime for us it is about sharing those gross margin gains 50, 50 with the iOS and then importantly, reinvesting in infrastructure and everything that we need to do to to support future growth. So.
We feel great about about how things are going and kind of where we're positioned heading into the year, but we continue to think about that long term algorithm is the one that's right for the business over the long term.
Got it thank you.
Okay.
Thanks, Rob here.
The next question is from India, Jordan <unk> from Goldman Sachs.
Hi, Good afternoon, I just wanted to follow up on the gross margin discussion.
Is the current view of your buying environment and how has that evolved from the strong level that you mentioned last quarter and then the other pieces around kind of promotions. What is the current view of the promotional environment and what are your expectations going into next year.
Hi, Lee.
I'll hit the first part and then I'll pass it over to Eric to talk about promotions in terms of supply continue to be encouraged by the pipeline of deals that we're seeing it's very broad based across all categories.
Say the environment is just generally very positive right now from a buying standpoint, we have seen momentum grow throughout the year and continues into the quarter that we're in right now so feel really good about that and as a result inventory is healthy and we're delivering customers great value for their holiday shop at a time when they need it most.
Terms of what we're seeing from suppliers I've mentioned, a few things one forecasting challenges persist due to inconsistency in demand and supply chain challenges so that yields opportunities for us product innovation is healthy we are seeing new items brand extensions Brandon label changes.
So again, a good thing for our business a lot of additional capacity has come online. This in many cases has been mismatched with demand and back to inconsistency. So we've seen some product and opportunities from that and then in general I would say suppliers are just very actively adjusting products and assortments, so whether it's to meet the ons.
Changes in consumer needs and behaviors or some cases throughout this year inflation related with packaging sizes supply availability and are there other changes. So all of these things very favorable for us and ultimately our customers. So just feeling really really good about opportunistic supply.
Hey, just briefly on the second part of your question what are we seeing in terms of competition promotional environment, it's pretty consistent.
I wouldn't say, it's changed a lot since our answer in Q2 and that is that the promotional environment remains really stable I'd say the traditional retailers are being pretty rational as they think about pricing.
Oh water is still increasing because of all the cost pressure.
They are being targeted.
Some of their specific offering discounts obviously, we've all seen.
The non food retailers sort of moving through heavy excess inventories, but relative to folks that we compare against and compete against we've seen promotions being a lot more selective I would say probably not back to the levels that we saw in 2019.
And just keep in mind this model's super flexible enabled enables us to be.
Very nimble and react to changes in that promotional environment as we see fit.
But.
A very promotional very stable environment.
Great. Thank you.
Ladies and gentlemen, just a reminder, if you'd like to ask a question. Please press star and then one now.
The next question is from Jeremy Johnson from.
Craig Hallum Capital group.
Thanks for taking the question and congrats to both of you.
I had two questions here. The first is in terms of unit development. As we look ahead to next year fair to assume that some of these headwinds continue into next year, and maybe not quite back to that 10% growth algorithm.
And then secondly wanted to just.
Understand a little bit more you know it's been several quarters now that the mid Atlantic region has been outperforming and any additional color that you can share on why you think that's.
You know the case and.
Is it less competition.
Is there something about why the brand is resonating so well in that market yes.
Yes, Jeremy Eric here.
<unk> heard me answer Oliver's question, So I won't repeat all of that I would just say, yes fair to say that.
A lot of the timing.
Issues that we've detailed remain in place.
Are they going to get better yes, we think they are.
When we're not exactly sure. So we're going to continue to adapt keep signing up stores, putting through real estate and make sure. We've got a really good slate.
Of stores to open in the next 24 months.
The east is getting.
Really good traction.
It will be near 30 stores 30, plus stores at the end of the year.
We've put a lot into <unk> hurt us in the past years talk about building the scale and the ability to open these stores in market and recruit iOS, we've done that a lot in the last couple of years. So we feel like that foundation is set the brand is starting to get nice awareness.
Something that's approaching.
Fairness numbers, we have out in the west so that feels good we put additional marketing into the market, which has been received very well.
We're hearing back from the iOS through their customers and through surveys as the values are appreciated the stores are incredibly relevant they love the model they love the brands, particularly the nosh.
Particularly produce so.
These are all the things that we thought would occur once you start to get a little bit more scale, a little bit more brand awareness.
And we would see that continuing as we add additional stores, there and expand some of the geography, where we're currently serving so.
It's all good news.
Great. Thanks, best wishes guys.
Thank you.
Next question is from John Baugh.
From Guggenheim.
Hey, guys wanted to start on the.
The East Coast question.
Where do you think you need to get to to quote unquote have scale.
And <unk>.
<unk> ability to more significantly expanded product assortment.
And where would you think about items added right. So you've added 700 items over the last year.
How many items would you like to add.
On the East coast, right, maybe relative to that.
As you move to scale right, maybe you could I don't know 50 or 60 locations or more.
Yeah, Hey, John 70 stores feels like scale, the beginning of scale for us quicker.
Quickly approaching that with the additions I'll, let RJ.
Talk a little bit about sort of the desired variety.
Yes, when we talked about SKU expansion, John it's not specific to the west so those item counts.
For the most part available chain wide of course, we do have regional differences in different certainly different assortment as it relates to opportunistic product.
In the warehouse, but to but to Eric's point as we open more stores.
It does help from an inventory standpoint, both in terms of localized assortment volume for everyday items and then four.
For opportunistic as well and just being able to move more product through the system.
I wouldn't say, there's a specific number and state.
As it relates to variety.
That's all.
All stores, that's a number that we've seen continue to grow and for the better we've been able to maximize space within the stores increased inventory turns that's been done through both system enhancements and just the way that we manage inventory and so.
<unk> for all of the store growth ahead of us in the east and how it helps us from a merchandising and buying standpoint.
And then maybe secondly, right when you think about your transition.
What would you spend more time on right.
And then you have been.
What do you spend less on rate and I guess.
How do you how do you tackle the CEO role in a way that is.
Different if at all then Eric.
Yes.
Just in terms of where Eric has been more focused.
Two operator relationships real estate.
It's certainly been heavily involved in company vision infrastructure. So.
I would point to those areas as we're certainly been involved but we would look for my level of attention and focus to increase stepping into the into the CEOC as you know John I have had direct responsibility for purchasing.
Purchasing planning supply chain marketing operations technology lots of different operating parts of the business together with strategy and Eric and I.
In the rest of the team manage this business and strong partnership collaboration and.
We feel really good about continuity within the team overall.
Part of your question I think similar answer to the one that I gave previously no no no major changes to strategy no major changes to initiatives.
We do follow we have will continue to follow a disciplined annual strategic planning process.
It's always a balance of near term and long term view, so none of that changes.
And.
As we move forward here, we'll continue to keep you updated on future initiatives in the evolution of the business.
Thank you.
Thank you.
Thanks, John .
The next question is from Joe Feldman from Telsey Advisory.
Yeah, Hey, guys. Thanks for taking the question.
Wanted to ask on the digital side I know its still emerging and small but I'm wondering.
If you are seeing.
Any patterns with the way customers are interacting with you.
Those that are using digital are there.
Certain products theyre trending towards a certain maybe basket size or are they higher end consumers lower end consumer like any any kind of trends you could talk about with regard to the digital side of things.
Yes, yes, I would say.
More specifically the difference that we're seeing is.
Just the makeup of the customer base. So we talked about the Incrementals of E Commerce and what it has offered to us so far it is still early.
<unk> just rolled out with while chain wide within scarred earlier this year and then more recently door dash and we're just on the verge here with Uber.
But it is a more convenience based customer so that would be the biggest difference that I would point to.
The Threep platform partners that we're working with they each have slightly different use cases customer groups reasons and occasions for which Theyre shopping online. So we see some slight differences. There overall, we do see a bigger basket in terms of what their shopping.
I would say pretty broad representation of our assortment and so they are finding all items.
<unk> of course, the value and the deals that we're providing in those are across all categories. So.
Nothing specific in terms of the <unk>.
Basket itself or the mix.
But overall pleased.
<unk> been a nice rollout for us seamless for the operators incremental sales and profit dollars for both grocery outlet and iOS and we'll keep you posted on future enhancements, we've been focused on rolling out with these three partners and then.
Certainly plenty of opportunity as it as it relates to different forms of e-commerce delivery pickup and other enhancements that we look to make from an online merchandising and ultimate.
Customer experience.
That's great. Thank you.
For that and then just another one on.
With regards to inflation.
Kind of curious if you could share how much it maybe contributed to sales or asked another way, how youre thinking about it going forward as well.
You know just especially heading into next year, and what's kind of I assume it's baked into the guidance, but just kind of what level might be baked into.
Thanks, Yes.
We're not going to provide a whole lot of guidance on next year until Q4.
I would say.
Look this model's one that I would describe as really resilient works well.
A whole bunch of different macro environment backdrops, just looking back over history, you can see some really stable comps and margins.
Without the year, so that to US is that this flexibility is definitely an advantage.
<unk> on next year, and what we're thinking about inflation.
We're really expecting disinflation.
Prices have gone up quickly and stayed I think there'll be a little bit sticky.
And people will not repeal those and pull them back as quickly. So I think the pricing will be a little bit more sticky.
We're not expecting deflation, but we would expect to see some disinflation and then look no no crystal ball on recession, that's tied into that question as well, we just know that when customers are pressed hard on purchasing power grocery outlet shines.
Every situation is a little bit different but the last time, we had a pretty strong recession.
Nine.
Had some really nice numbers. So we will just continue to focus on delivering value to the customers and take what we get relative to the backdrop.
Sounds great. That's great. Thanks, good luck with the quarter and congrats to you guys.
Especially I think.
Hello.
Thank you. The next question is from Mark.
Yes.
Good afternoon. Thanks, so much for taking my question first congratulations to both of you Eric RJ under transition and nice quarter. When you look at your traffic trajectory how does it compare with what you saw in the early days.
Recession is the acceleration come at a similar pace as trade down coming any faster this time around and what tools do you think will be most impactful on holding onto your new shoppers longer term.
I'd say, it's really different.
The business is much more mature now.
Just the offering.
Marketing our brand awareness today versus 10, 11, 12 years ago, I'd say the offering the variety the freshness. The nosh some of the categories. We've been talking about for a few years are much more developed.
Just the store count from 120 or 30 back then the 430 now the brand awareness.
We've repurposed the brand once or twice since then so.
I would say similar patterns in terms of new customers coming in perhaps you'd call. It trade down people moving from regular retail traditional down into grocery out looking for value and thats pretty similar.
But it's just it's a different business with a lot of the same themes, it's just I'd rather.
I'd rather have the model we have today than the.
The one we had no eight or nine because we're just so much more advanced than what we offer and how we take care of the customer.
Fair enough and then as a quick follow up can you talk through what you saw from a monthly cadence perspective on your comp, presumably you saw a pretty big spike in a quarter, where do you think the biggest source of upside relative to what you might've expected three months back.
Yes, Mark markets Charles.
Definitely the acceleration we saw was related to traffic as you think about the Q2 to Q3 trends.
Really pleased with the overall health of comp and how balanced it was and we slice and dice it across.
The vintage of stores geography departments. It was very healthy in terms of the cadence over the quarter. It was also quite consistent.
So just feel really good about the momentum that we're seeing in the business and that nice uptick in traffic that we saw from Q2 to Q3 so.
I like where we stand in Q4 here.
Cognizant of the fact that it is a fluid environment.
A lot here to play out in terms of exactly where inflation goes and the impact of fed raising rates and consumer confidence. So all of those things would be in a bit more prudent as you probably saw with respect to our cute Q4, three year stacked comp expectations, but.
Again, really health really happy with the health of the comp base.
Thanks, so much good luck.
Thank you.
Thank you. The next question is from Mike Jacobsen D. A davidson.
Yeah.
Okay.
Two real quick because it's getting closer to the hour one.
Any thoughts any color on.
Units per transaction.
The ticket was up but was it was it all inflation driven or are you seeing more units transaction really what I'm getting out is any anything that tells us that the consumers trading down or buying fewer items per trip or anything along those lines that gives us insight into the consumer.
Yeah, Mike It's Charles.
Say overall, you look at the basket very similar trends in Q3 relative to Q2, so to your point it is coming from higher AUR.
Units are down slightly versus last year again, we're comparing against a COVID-19 elevated base and higher levels of trip consolidation last year, but that overall the aggregate unit number of holding steady for the past three quarters.
Again slightly ahead of where it was pre pandemic. So so basket feels feels really good to us.
Okay. That's helpful and then.
Thinking about 2023, and the comments you just made about prices being sticky.
There are some costs that might come down first of all presumably you're lapping some big incentive comp this year.
And in transportation supply chain cost, maybe they don't go down but they don't go up as much it's unclear exactly what happens there, but I guess the point is.
Is there an opportunity for some margin enhancement next year, if prices are sticky and you don't have the same level of cost increases that we're seeing in 2022 on a couple of different lines.
Yes, perhaps again, we don't want to get in front of ourselves and actually provide specific guidance right now, we'll do that in a normal cadence on the Q4 call.
But yes, when you look at this year, we are of course, seeing better comp growth, but thats coming with slightly lower gross margins and EBITDA margins as we feel the impact of cost inflation as well as higher incentive compensation as we've talked about on the SG&A line. So as we think about <unk>.
Next year and beyond.
Back to the long term algorithm.
We would expect that we see those things normalize over time, it's just.
Not a matter of if but when.
Well, if I could squeeze in one more follow up and so the margins are down a little bit versus pre pandemic. They're all EBITDA was 6667 right in that range they are down a little bit.
Some of those cost when you say so when you say stable is it stable from a new base, which we've been.
Last year around $6 three or is it is it stable versus where it was pre pandemic.
We would say that we are confident that we can get back to those pre inflation margins over time. So you think about 2019 as it is a benchmark of a 38 gross margin six 6% EBITDA margins were.
We're fully confident that we'll get back to that.
To those levels overtime.
Very helpful. I appreciate the color. Thank you.
Sure.
Thank you the next question.
Corey <unk> from Jefferies.
Yes.
Hi, Good afternoon. Thanks for taking my question and congrats Eric RJ on the new rules.
Thank you.
So firstly I was wondering if you could just talk about labor availability, what that looks like at present as you look to open your new stores throughout the remainder of this year.
Yes.
So if you're talking about I O availability really strong.
Continued momentum on the recruiting side and the trading side lots of people interested those numbers from last year up this year.
We think it's purely the opportunity of people telling people and then the recruiting efforts in terms of labor in the stores still challenging still expensive.
I would say, it's not as tight as it was this time last year, even at the beginning of this year, but I would not say from our <unk>.
Trips and travels out with the stores in our regional conference. We just did that were out of the woods yet on labor, we would anticipate that getting a little bit easier next year, but it's been slow to recover for the operators.
Got it and then Charles could you just talk a little bit more about inventory and how you're expecting that to.
Evolve throughout the remainder of this year.
Yeah, we feel really good about the health of inventory.
Here in the fourth quarter, so again up 4% versus Q2 up more significantly year over year again keep in mind that with our model of those inventory changes are not necessarily linear so comparing versus Earl why is it is a bit skewed for a variety of reasons.
<unk> <unk>.
Great about where we're positioned.
Here for the fourth quarter and just the health across.
Categories and items and again back to the strength of the holiday assortment that we're putting forth.
I would expect that as we exit the year to come down modestly from where we from where we entered the quarter.
Great. Thank you very much and best of luck.
Thank you thanks Corey.
Thank you ladies and gentlemen.
And also a question and answer session.
I would now like to turn the floor back over to Eric for closing comments. Please go ahead Sir.
Thanks, operator, thanks, everyone for joining us thanks for your time and look forward to catching up with you shortly and we'll talk to you soon bye bye.
Thank you Sir.
Ladies and gentlemen.
Concludes today's conference. Thank you for joining US you may now disconnect your lines.
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