Q1 2023 Grocery Outlet Holding Corp Earnings Call
Greetings and welcome to the grocery outlet's first quarter 'twenty 'twenty earnings call.
At this time participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference Keith quick start and then Don on Wednesday.
M E pad that's it.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce the host John V. No. Thank you and you May proceed sir.
Good afternoon, and welcome to grocery outlet's call to discuss financial results for the first quarter ending March 31, 2023 speaking from management on today's call will be our J C D, President and Chief Executive Officer, and Charles Bracher.
Our Chief Financial Officer, following prepared remarks from RJ and Charles We will open the call for questions. Please.
Please note that this conference call is being webcast live and a recording will be available via telephone playback on the Investor Relations section of the company's website.
Participants on this call may make forward looking statements within the meaning of the federal Securities Law, all statements that address future operating financial or business performance or the companys strategies or expectations are forward looking statements. These forward looking statements are subject to bear.
These risks and uncertainties that could cause our actual results to differ materially from these statements a.
A description of these factors can be found in this afternoon's press release as well as the company's periodic reports filed with the SEC all of which may be found on the Investor Relations section of the Companys website or on SEC Gov. The company undertakes no obligation to revise or.
Any forward looking statements or information, except as required by law. These statements are estimates only and not a guarantee of future performance.
Today's call. The company 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 the <unk>.
Afternoon's press release, and the company's SEC filings with that out of the way I would now like the call turn the call over to Mr. RJ Sheedy.
Hello, and good afternoon, everyone. Thank you for joining us today to discuss our first quarter performance.
Our results exceeded our expectations driven by strong same store sales growth margin expansion and bottom line leverage.
We delivered a 12% increase in comparable store sales, which combined with new store openings led to a 16% increase in net sales.
Our comp sales growth continues to be led by strong customer count, which increased 8% versus last year, while our average basket size increased 4%.
Strong sales margin and operating leverage drove a 100 basis point increase in our adjusted EBITDA margin, which resulted in a 37% increase in adjusted EBITDA to $63 million.
We are proud of our results this quarter, along with our continued efforts to generate sustainable long term growth.
Our mission of touching lives for the better guides, our decision, making and anchors us to our purpose of growth for positive impact.
We will achieve this by executing on our three strategic pillars of number one strengthening our core model number two evolving our business and number three expanding our reach.
Strengthening our core model focuses on deepening our value elevating operator support and increasing customer awareness acquisition and retention.
We have a differentiated and proven business model and we are working to make it even stronger.
Evolving our business, it's about introducing new capabilities to increase our relevancy and improve how we operate.
Mary opportunities include expanding and enhancing our assortment investing in technology to drive efficiencies and using data and analytics to improve all aspects of our business.
Expanding our reach allows us to take our highly transportable unique model to new markets and customers we.
We will continue to grow our presence in existing territories together with expansion into new geographies.
We also see opportunities to further develop newer sales channels, such as e-commerce to grow our brand and accelerate our reach to new customers.
We are pleased with the current trends in our business and we continue to offer consumers the best value in food retail at a time when they need it most.
Our compelling Wow shopping experience is attracting new customers and existing customers are spending more with us.
Consumers are feeling the strain of higher prices throughout the economy, and we are helping them save money by offering high quality food at industry, leading values we.
We are seeing healthy trends across all customer income levels and satisfaction levels are high with most customers expecting to maintain or increase their spend with us in the future.
Moving now to product we are seeing an increase in the breadth and depth of offers as we expand and strengthen our supplier relationships.
There is a lot of disruption in the marketplace today, which is leading to a very strong closeout environment.
We recently held our annual supplier conference, where we met with many of our key suppliers. Some attendees were long standing relationships, while others were newer to the G O family.
We came away very encouraged with the opportunities in front of us and how we can partner more strategically to grow our shared businesses.
Let me provide a couple of examples from the many deals that we have recently purchased to illustrate the types of opportunities we are seeing.
Example, number one is the purchase of 170000 cases of frozen chicken.
This came from a supplier we have been doing business with for over 25 years.
Our partner was left with excess inventory due to lower than expected promotional sales and we were able to help them move the additional volume.
We bought all of their excess inventory moved it quickly through our supply chain and we're able to offer it to customers at a 60% savings.
Example, number two is the purchase of 120000 cases of a leading brand of nutritional bars and drinks.
In this situation production ramped up through the pandemic, resulting in inventory that exceeded moderating demand levels.
We partnered with the supplier to provide them with cost recovery, while clearing out necessary space in their warehouse.
We worked creatively to alleviate them of their supply chain challenge and in turn we're able to offer our customers great items at a 70% savings to elsewhere pricing.
These are just two examples of the thousands of Wow deals that excite customers and drive trips and baskets with new and existing shoppers.
Equally important to compelling products are the independent operators, who are at the heart of what makes grocery outlet unique and successful.
They wow customers in their stores with localized deals and they set themselves apart with their friendly service and community connection.
Our iOS are energized by the current sales momentum the new customer shopping their stores and the healthy mix of variety and amazing deals from our supplier partners.
We remain focused on supporting operators to drive sales and margin while improving their operating efficiency.
One way we do this is by utilizing technology to modernize and simplify store processes and decision making.
We recently rolled out a new handheld technology application to improve how operators receive product and manage inventory levels.
This new technology system reduces manual product, receiving work and improved data accuracy, leading to greater efficiencies in source.
Later this year, we will be deploying new enhancements to our proprietary ordering platform, which will provide iowa's additional data and insights to improve productivity and drive sales and margin.
We also continue to invest in training to better support our iOS to help them grow their businesses.
We actively develop a library of online content and modules as a resource for iOS to learn new systems and best practices throughout the store.
We also facilitate regional workshops, where operators collaborate on a variety of topics such as fresh merchandising marketing and community partnership.
Turning now to store growth, we are pleased with the performance of our new stores, particularly those in developing markets and we remain on track to open 25 to 28 net new stores this year.
We continued to invest in real estate and construction resources, both internally and externally to support our store growth and new market expansion.
We are also actively engaging with new brokers and landlords and are considering opportunistic real estate as it becomes available from other retailers.
Recruiting and training new operators is equally important to successful store growth.
Our pipeline of aspiring operators in training or a O Ts is healthy.
We continue to enhance our training program recently hosting a group of Aot's Our office for the return of G O University.
This is a multi day program, where aot's are immersed in training sessions with our emeryville team as well as experienced operators. They learn everything from the history of grocery outlet to current best practices and everything in between.
The group left with a deeper understanding of our business and culture and a high level of excitement for success in their future stores.
Let me now share. An example of an operator, who has successfully growing awareness and sales for positive impact.
Dante rose as the operator of our Sherwood Philadelphia store that opened last year.
He grew up in the neighborhood and now working with his family is providing fresh affordable food to consumers living in this urban community.
Dante was recently recognized for his efforts and invited to the White House conference for health Hunger and nutrition.
He spoke about the grocery outlet model and how it enables him to run a successful business supporting an underserved area.
Dante his entrepreneurial spirit and commitment to his community and body the power of our unique business model and our mission of touching lives for the better.
In closing I would like to thank Dante and all of our independent operators for their hard work and dedication to making grocery outlet and amazing experience for our customers.
I am excited about the current momentum in our business and the many opportunities in front of US we remain focused on executing our strategic plan to drive long term growth and positive impact.
I will now turn the call over to Charles to discuss our financials.
Thanks, RJ and good afternoon, everyone. Our first quarter results exceeded our expectations as we delivered strong same store sales growth margin expansion and expense leverage comparable store sales increased 12, 1% driven by a seven 9% growth in transactions and a three 9% increase.
And average basket.
Net sales increased 16, 1% to $965 $5 million as a result of our strong comp performance combined with the impact of 26 net new stores opened since the first quarter of 2022.
During the quarter, we opened three new stores as planned ending with 444 locations. We remain pleased with the performance of new stores, including sales volumes and newly opened sites as well as the growth of recent vintages.
Our first quarter gross margin increased 90 basis points to 31, 1% and gross profit increased 19, 8% to $305 million.
Gross margin came in ahead of our expectations and was driven by favorable buying and strong execution throughout the supply chain.
SG&A expense increased 15, 7% to $267 $7 million compared to the first quarter of 2022.
SG&A growth was driven by increased Io Commission expense, resulting from higher gross profit store occupancy costs related to new store growth and costs related to resuming our annual Io conference.
As a percentage of sales SG&A decreased 10 basis points versus the prior year, primarily due to occupancy and fixed cost leverage.
Note that we are now, including depreciation and amortization and stock based compensation expense and SG&A.
Net interest expense increased 68% to $5 $9 million due to the impact of higher interest rates on our variable cost debt, partially offset by a reduction in average borrowings outstanding versus the prior year.
Our effective tax rate during the quarter was 36, 4%, which was above our normalized rate due to the impact of equity awards that vested below their grant price.
GAAP net income for the first quarter increased to $13 $7 million or 14 cents per diluted share.
Adjusted EBITDA increased 36, 9% to $63 $1 million for the quarter and our adjusted EBITDA margin increased 100 basis points from the same period last year to six 5% of sales.
Adjusted net income increased 47% to $27 million or 27 cents per diluted share.
During the quarter, we enhanced our financial flexibility and lowered our borrowing cost by entering into a new $300 million term loan and a $400 million revolving credit facility is.
As part of the refinancing we paid down $60 million in debt ending the quarter with $82 $1 million of cash and $325 million of drawn debt.
We generated $87 $6 million in operating cash flow during the quarter and invested $38 $5 million in Capex net of tenant improvement allowances, reflecting new store growth upgrades to our existing fleet and ongoing technology and infrastructure investments.
Our inventory balance at quarter end was $316 $4 million and remains healthy in terms of quantity mix in turnover.
Next let me provide some commentary on our outlook for the balance of the year.
Given our strong first quarter performance and continued momentum we are raising our guidance for the fiscal year.
For the second quarter, we expect comp growth to be approximately 5% as we anniversary higher prior year growth.
For the full year, we are raising our comp sales guidance to be in the range of 5% to 6%.
Consistent with previous guidance, we expect to open between 25, and 28 net new stores for the year with openings weighted towards the back half.
In the second quarter, we expect to open two stores and closed one store with the balance of our new stores evenly split between the third and fourth quarters.
In total we now project fiscal 2023 net sales of approximately $3 $9 billion.
We expect gross margin for the second quarter and full year of approximately 37%.
This represents an increase in our full year guidance, reflecting our strong Q1 performance along with normal seasonal margin moderation in the back half of the year.
With respect to the bottom line, we expect second quarter adjusted EBITDA of approximately six 3% of sales.
For the full year, we are raising our guidance for adjusted EBITDA to be in the range of $240 million to $246 million.
Moving down the P&L, we continue to expect net interest expense of approximately $22 million for the year, which reflects projected forward interest rates on $300 million of outstanding debt.
We forecast a normalized tax rate of 28% and average diluted shares outstanding of approximately $101 5 million.
As a result, we are raising our full year adjusted EPS guidance to a range of 96 cents to $1 per diluted share.
With respect to Capex, we continue to project approximately $155 million net of tenant improvement allowances, reflecting new store growth and continued investments in our store base and business infrastructure.
As a reminder, our capex guidance includes buildout costs for stores that will open over the next 18 to 24 months.
In closing I want to thank our entire grocery outlet team and operator family for executing at a high level on behalf of our customers. We continued to deliver the best value in grocery retail and we are excited about the growth runway ahead of us.
We will now open the call up to your questions operator.
Thank you we will now be conducting a question and answer session.
I would like to ask a question. Please press star.
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Please note to limit your questions to one question and one follow up question.
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For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key one moment. Please while we poll for questions.
The first question comes from Robert Young from Bank of America. Please proceed with your question Ravi.
How are you guys.
Yeah.
Can you guys hear me.
How are you guys there.
Hello.
Yeah.
In Europe can you hear me Oh, Yeah, no I can okay see you there.
Hey, guys, sorry, we were responding yeah [laughter].
So my my my first question is just on inflation can you can you tell us how much of the strong same store sales was inflation and just your thoughts on what inflation looks like for the for the rest of the year for you guys.
Yeah, Robbie it's Charles let me, let me provide a little color there so you could see.
Our results for the first quarter. The majority of the comp came from from traffic. We did continue to see a.
Benefit from from the higher basket as well so seeing continue to see a high food and the food inflation broadly across across the store. It is it is moderating.
We look forward that is our expectation that it will continue to to disinflate over the balance of the year, particularly as we lap accelerating prior year numbers. The one thing to keep in mind, though for US given our model of the impact of inflation is a bit more muted because of the way, we buy product and our ability to flex the as.
Assortments. So the headline number you see for inflation out there doesn't necessarily translate to us as we look forward, we expect to see it continue to moderate here as we progress through the balance of 2023.
Thanks, That's really helpful. And then just another question that I get a lot is can you talk about maybe even looking back about the how the iOS are doing are they are.
Are they are you know broadly speaking as profitable as they.
Historically event or are they more profitable or are they.
Our new iOS is it is it more challenging to finance you know, becoming a new Io because of interest rates. Maybe could you. Just you know it was cost of labor pressuring the iOS like where where are the iOS right. Now is this a good time for them or.
Maybe some help with that would be great.
Yeah sure Robbie Thanks, Yeah. So overall operator financial health is good.
Strong results here are certainly benefiting operators as they participate in the upside of both sales and gross profit growth and just as a reminder, right. We split growth gross profit with them 50, 50, so in a period, where we're seeing 20% increase in gross profit, yes, certainly goes a long way to a healthy commission.
And then through their through their P&L bottomline profit for them and that's coming off of what was a strong year of strong financial year in 2022. So financially speaking there. They are in good shape, they're optimistic given that comps are growing traffic is growing inventory in variety of healthy.
We all continue to be focused on driving sales and with healthy margin and we continued investing in stores Capex and other technology to improve sales and efficiencies for the operators that they do still certainly are contending or have to contend with challenges as it relates to labor.
Cost, which of course is a big expense for them and other operating costs. That's been the case for a while now and we work closely with them and we're always looking to make more investments as I, just mentioned, whether it's capex or technology or other process improvement to help them manage their P&L as efficiently as.
They can and a good operating environment like this again with recent results the profitability overall is good.
And just very last one I think you guys during parts of Covid, maybe had to increase some of the loans to the iOS to either ones that way, maybe having a harder time R. R.
Higher balances related to that being worked down in this environment now that we're in or how should we think about that.
Yeah, Ravi, it's Charles referring to operator, a are we continue to monitor that really closely and recall it really is much more for the operators about just that store ramp as they continued to build volumes and brand awareness in the early years of the store.
They accumulate those balances and they pay them down over time, and so as we track the loan portfolio and the progress the offers and make them feel really good about.
What that path forward.
That's great. Thanks, so much.
Thanks Ravi.
Thank you. The next question comes from Cristina <unk> from Deutsche Bank. Please proceed with your question Kristina.
Hey, guys. Good afternoon, and congrats on a great quarter I wanted to start with you know you mentioned that you are seeing both new customers and existing customers shop more with us. So can you talk a bit more about what youre seeing in the current consumer environment broadly share anything potentially on where you are quarter to date trends are running and then as we.
About the snap reduction did that contribute at all to the comp upside given your strong value proposition.
Yeah, Hey, Christy and thanks for the question I'll take the first part of that and then Charles can touch on a couple of things that you asked at the end there. So yes in terms of customer trends are really encouraged by what we continue to see here and I would say that it's all of the same positive trends as we talked about on our last call in February .
Youll first seeing strength across all customer types. All income levels. We do continue to see as we noted more new customer shopping our stores.
Our survey data shows a higher average income customer shopping with us which suggests that more customers are changing behaviors, they're looking for value, they're coming to us where they may have not shopped grocery outlet previously for the great value we provide on on the many brands and items that we have throughout the stores. So.
Those are all positive trends and then together with that we have seen an increase in trip frequency and spend with existing customers when they're in our store shopping as we survey them regularly the satisfaction levels are high and there is a high intent to shop with us and spend more with us over the next <unk>.
Six to 12 months as we asking or in our survey. So all of those are very positive.
And then we continue to lean into the investments and priorities that we've talked about to retain those customers first and foremost it's about inventory in value and then together with the role of the operator plays it's very sticky experience and one that is very positive for consumers, which then leads to retention and.
Future trips as we build continue to build that loyal customer base and Charles I wanted to touch on the other part yeah at Christina as Charles with respect to snap as we as we said on the last call. Yeah. Our point of view is that a reduction in snap benefits is not necessarily a headwind for our business and that's been true historic.
If you look back over time.
We've comped positively through cycles of reduced snap funding and so looking at Q1 is those funding dollars were reduced in March we did not see as expected a meaningful impact to comp.
That very much tells us that again. This is just a tender type that our customer is using as opposed to a customer that we might be might be at risk of losing so feel really good about about that snap performance and then.
Again, the expectation is as we move forward. This is yet one more sort of cumulative pressure to be added to our consumers as they look to stretch their dollars.
That's great in terms of how we are positioned to to.
To help them do that.
Thank you for that and if I could just squeeze in a follow up just on gross margin.
And the mix is always changing so.
We manage for for that long term stability Q1 was great to see as we look into Q2 here tracking to a 37 feeling great about that which is allowing us to raise our full year guide for the year as well great.
Great. Thank you so much.
Thanks, Thank you.
Thank you. The next question comes from Jordan <unk> from Goldman Sachs. Please proceed with your question.
Thank you good afternoon. This FBA Jordan.
First wanted to check in and see what you're seeing in the promotional environment and if theres any differences by region and then related to that.
How do you view your price gaps currently in the everyday assortment.
Yes. Thanks, Thanks for the question.
Promotional environment remained stable, we're seeing really across the board other retailers' remaining rational in terms of how they are promoting items. They continue to be more targeted I'd say in specific.
And the offers are the discounts that they're offering and other other related promotional activity. So really not a whole lot of change there that's been the case for a while now and then.
Not a lot of change to the competitive environment in general in terms of the value that we're providing as you know it's something that we manage very closely.
And it's it's very strong we continue to offer great value on the average basket the target there for us is 40% relative to conventional retail and.
That has maintained we manage that actively and then together with that many other metrics that we look at and we're constantly managing we always want to be delivering the best value overall to consumers no matter, how they shop us and we do have a wide variety of customer types and shopping occasions.
Waste customer shop us and so we measure that value and the excitement that we deliver to them in the stores in a number of different ways and we've always said that in an environment like this when the consumer is as pressured as they are to stretch their dollar to afford the food that they normally purchase to feed themselves and their.
<unk>.
That value Delta is worth even more than it is in times when maybe the need for value is a little bit less so really happy to be continuing to offer that value I think we're seeing that play forward and some of the comp trends and more specifically traffic and basket trends as customers are shopping us more.
Thank you and for my follow up I wanted to check on the new unit pipeline understand.
The growth this year is it still back half weighted but as you can do to build it out longer term are you seeing any improvement to the timelines for permitting or construction or where are you really seeing any bottlenecks still.
Yes, sure. So I think consistent with comments on the last call. We're still on track for the 25% to 28 net new stores. This year as we noted with a return to the 10% run rate in the second half of this year as the stores are more back half weighted and then we continue to work towards the 10% annual target.
Into 2024 and years looking forward.
We do have a good lineup of stores when we look out over the next 24 to 36 months do you think about pipeline and lead times and so.
Yes. Thank you.
Thanks, Leah thank you so much.
Thank you. The next question comes from Joe Feldman from Telsey Advisory piece, because he'd with your question Joe.
Oh, great. Thanks for taking the question guys.
Yeah, I don't recall hearing much about the mid Atlantic and your presentation. I was just curious if that region performing any differently from from the stores in the west coast and <unk>.
If you're seeing any any variance that way.
Yeah, Joe It's Charles continue to be really pleased with performance in our newer regions.
That are delivering comp you know at the top of the company average so and that's true for both southern California continue to make nice progress there we've got about 100 stores in market today.
And just pleased with the way we've been able to grow brand awareness from productivity in that market and the mid Atlantic as.
As you point out.
The comps in that region continue to be at the top of the company average.
Likewise very much following the same playbook, we havent, southern California, and making good progress there building brand awareness further densify the region.
So it's just excited about a room for growth in that market going forward.
That's great to hear thank you and maybe for my follow up I wanted to ask you guys you talked about the healthy pipeline of opportunistic purchases and I was just curious how we should think about maybe the mix of wow products versus the regular products and how you're planning to continue to excite people with through <unk>.
<unk> in the store and maybe just get into that a little bit.
Okay.
Yeah sure. So we continue to be really encouraged by the pipeline of opportunistic product as we said, it's broad based across all categories, we're seeing really nice lifts and we're engaging.
In a strategic way with many of our suppliers. So all of that feels good its positive momentum that we've had.
Say really throughout all of last year, and then through the first part of this year as well.
In terms of the mix still generally 50 50, that's been pretty stable for a long period of time right now I'd say more important than mix really is how we are delivering the best value across both the opportunistic and everyday sides of the business.
Those two parts of the assortment.
The consumer view, they don't know the difference right for them. It's just am I seeing the products that matter to me am I excited by the value and a big part of what we offer is newness and treasure hunt and excitement when they shop, our stores and we do that really across the entire assortment, whether it's opportunistic or.
Every day and so those are the things as I mentioned earlier, the things that we manage closely and all of that is is in really good shape and so the experience for the consumer is really strong and.
We continue to focus on that and then we continue to develop and get better at both opportunistic and everyday to to continue to make the assortment as relevant as possible and deliver always the best value and levels of excitement to them as they are if they're shopping our stores.
Got it that's great very helpful. Thanks, guys. Good luck this quarter.
Yes. Thank you thanks.
Thank you. The next question comes from Oliver Chen from PD Cowen. Please proceed with your question on the van.
Hi, Thanks, it's Tom on for Oliver.
Just a question on SKU expansion curious as to how we should expect the year to shape out relative to last shares I think 700 Skus added.
So are you still seeing opportunities for additional SKU expansion and how would that essentially affect the timeline for development of private label offerings.
Yeah, Hey, Tom Thanks, Yes.
SKU expansion as a normal part of our ongoing business. So so to answer your question, Yes, we continue to add skus to the assortment.
<unk> 150, new items that we've brought in in the first quarter of this year and and yes, you'll you'll remember we started talking about this initiative I think back in the fourth quarter in the second half of 'twenty, one and over that period of time. Since then we've added close to 1000 incremental skus.
So again always looking to make the assortment more relevant and we've had some really nice adds to the assortment. We always talk about nosh natural organic specialty healthy that continues to be a focus some really nice items and brands added within fresh categories more generally ethnic categories is.
A nice area of expansion for us local and agree opportunity and differentiator for us in enrollment the operator plays as it relates to more localized items more recently, we've introduced an assortment of grab and go items items home meal replacement type items and pleased with the results there so far so.
That is ongoing and will continue whether it's at the item level or subcategory level and.
We will continue to enhance the shopping experience as it relates to private label.
We're still excited about this as a long term opportunity we are building capabilities and setting the foundation this year.
Think of it as an enhancement to the everyday assortment. This is not a replacement for opportunistic there continues to be more than available for us to buy and to support growth as we've talked about.
But within the everyday side of the business private label can really help us deliver more value. It can create more excitement for the customer. It can offer an additional reason to visit a store think about unique destination items and they can also serve to strengthen the treasure Hunt we're going to do this in a way that is.
Is appropriate and unique for us and we're all excited about that as really a next step forward in terms of what the assortment provides.
Too early to give anything more specifically than that is we're really just forming the strategy and doing some foundational work, but we'll certainly keep you up today as we move through the year and into next year.
Great Thats very helpful. A follow up on the.
The digital business as a whole number one on the pilot of the digital App I believe in Washington State. If you could just brief us on how that's going and then on the third party delivery side.
Just curious how penetration is trending and if.
Those delivery services carry a higher U P T to essentially offset any disinflationary pressures.
Yes, sure. So first on the App, we've been successfully piloting this new personalization app in our Washington stores since the end of last year.
Really pleased so far we've received positive customer feedback, it's providing customers real time visibility to the many great deals within those stores. It brings the treasure hunt outside of the four walls in a way that's unique to this new platform that we built it digitizes our popular when you say promotion there are none.
There are other features to that that make it very engaging for customers and we've heard that feedback.
<unk> from them over time of course, it will allow us to capture valuable data about shopping behaviors and therefore make it even more relevant and that we can communicate in a more customized specific way based on customer purchasing behavior over time so.
Love that it's already engaging for them and it will become even more engaging as they use it and time moves forward.
We have started to roll it out to additional regions that it's actually happening right now and we will expect to have it in all of our stores by the end of the year. We're following more of a phased rollout approach and from there we'll grow the user base and of course, we'll continue to make enhancements to the program and look forward to all the burner.
Office that will come from that and then quickly on ecommerce really pleased with E. Commerce growth, we're seeing nice incremental sales, but we haven't disclosed specific penetration still small.
Remember, we just rolled out to all.
While the two remaining platforms near the end of last year. So we're on all three major platforms right now and SOCAR Uber eats door dash, but still very young and still growing as a part of our business. It's a great way.
For US there has been a great way for us to acquire new customers and so we've seen a lot of incrementally there and to the last part of your question.
Think of it as margin profit neutral for both grocery outlet and the operators and.
Very seamless operationally so.
All around it's been a great program for us.
Yes.
Tom do you have any further questions.
That is all thing.
Thank you ladies and gentlemen, just another reminder, if you'd like to ask a question Keith Please Scott and then one if you'd like to ask a question. Please press star and then one.
The next question comes from John Heimbach <unk> from Guggenheim Securities. Please proceed with your question John .
Hey, Doug.
And looking at opportunistic real estate right given this environment.
Are you primarily looking mid Atlantic.
And what are you looking for.
You did an acquisition of a third leg to get there in the first place but.
When you think about formats.
Can you buy formerly unionized locations.
What are the.
The constraints right in terms of the kind of.
Acquisitions you'd be looking at.
How available are they today.
Yeah. Thanks, John so the.
The first part of your question, we're looking at opportunistic real real estate across all of the markets that we're operating in and then also in.
Terms of our geographic expansion what would be appropriate for us. So it's not just in the east and then to the second part of your question.
We are evaluating these opportunities really no different than we would than we do as we're identifying sites through brokers or through landlord trade of course.
It needs to be the right size.
The right characteristics that we apply.
All the market data that we bring customer data to better understand the potential there.
Cost of course, and everything else, so really no different there the difference is that that we're evaluating.
Perhaps bigger blocks of stores or sites that are available.
And they've come up.
More specific or unique way.
And as you well know right. There is a lot of a lot of movement.
Retail or with other retailers right now and so.
The growth plans that we have put us in really good position to take advantage of it but it needs to be right for us and so that's where the evaluation comes in and that's the work that we're doing is we're having getting access to these lists and making sure that we're making smart decisions. Both in terms of location and then also all the other attributes and economics of it no different.
And we would normal course of.
Conversations with brokers and landlords.
Okay, and then maybe a follow up the Io pipeline right in terms of <unk>.
Quantity and quality right, because obviously you've had some delays this year and expansion right. So the Io pipeline is probably a little bit bigger.
Then you had planned so is that still growing right in.
Patient of 24 and five and.
And then the quality you're right because I think it's been a pretty high quality.
Capability wise over the last couple of years.
Any change in who you're recruiting.
It is yeah. The Io pipeline is very healthy we do manage it together John with the real estate pipeline. So you think about lead times. There is not exactly the same but we manage it closely based on future store openings and the recruiting and training process and time related to that as well. So we are able.
To keep those pretty well in sync, yes, we are recruiting for certainly for operators as we think about 2024 stores and even out into 2025, because sometimes the decision making process can be a longer time period for interested candidates and so we're constantly managing those converse.
Patients and both both operator count and then also geographic preferences and how all of those things come together.
The quality is really good this continues to be a really attractive model for those thinking about joining us and opening up and running one of their own stores.
So the pipeline is healthy in terms of quantity and quality and it's really all of the things that have always attracted them over the years to this model they can own and operate their own business. They operate independently with the support and scale of grocery outlet to get to work with family they get to get back to community. Certainly there is income potential there that may.
Not be available to them from wherever they are coming from and that appeals to really a wide variety of potential operators and that profile there.
Say pretty consistent with what its been continue to see those with grocery retail experience or other retail experience and we've also seen some call it maybe non traditional experience.
And then together with internals right as we refer to in turn those folks that have operated within the grocery outlet system. As we grow that continues to be a bigger source of future operators. Just because you have more people that had been in the system for periods of time, so yeah everything there feeling good in.
Well supporting future growth goals.
Thank you.
Thanks, John .
Thank you. The next question comes from <unk> from <unk>.
<unk> from Jefferies. Please proceed with your question.
Hi, good afternoon, and thanks for taking my questions.
RJ I think you mentioned in your prepared remarks, there was a comment about your recent supplier conference could you just talk about.
The tone of the conversations that you had with your suppliers versus what you had incurred in prior years I think the availability.
<unk> has been a little bit better what are some of the topics of discussion that people are bringing up this year, that's new versus in prior years.
Any color you can provide here would be really helpful.
Yes, Thanks, Cory yeah. The tone the tone was was really positive.
We love this meeting it's a great chance for us to spend time.
With as I mentioned suppliers, we've done business with for decades, but also suppliers, where maybe the relationship is a little bit newer and so.
And an opportunity to step back I would say from the day to day and think longer term and more strategically about the partnership that we have together and those are always fun conversations if I were to compare it to a year ago.
At that time.
Back in 2022, a lot of the conversation or more of the conversations were really around supply chain and allocations and ramping production back up in those things as we were still working through many of the impacts from from Covid and the pandemic this year and it's true.
The world in general right more of the normal type of conversations that we've always had throughout the years and so.
We talked about how we can be a better partner to support them with opportunistic with many suppliers.
It is a blend of opportunistic and everyday.
The number of stores that we have and growing we certainly represent an attractive.
The supplier would refer to as the primary sales channel there for everyday product and so.
Again those are those are fun conversations to have and how we can grow our shared businesses together. So yes, great great conversations and then those were talking to suppliers. All the time right. So they provide a great platform for us as the year moves forward.
And as we're working through opportunities together with them.
Great. Thanks, and then just for Charles could you talk a little bit about how to think about the second quarter comp versus what you did in the first quarter I think for the first quarter. You initially guided to something like I believe it was 10 and then you.
<unk> posted an a plus 12 and you've talked about 8% new customer growth, but in the second quarter I believe plus five as far as how youre thinking about the guide. So could you maybe just talk about how to think how to think about.
The trajectory for the comp.
In the coming quarter, Thanks sure Corey.
Corey happy to do that so Q2 feel really good about the momentum we continue to drive.
And the start we've got here early in the quarter, especially the strength in traffic.
That said, we're very mindful of the fact that we're right in the thick of.
Lapping accelerating comps from last year. So you think about the uptick in comps in.
In 2022 from the first quarter into the second quarter to third quarter Cross those was at 10 point increase in comp and that was not only the impact of high inflation, but also the fact that we were building traffic as we progressed through the year. So the guide for Q2.
He is taking that into account as well as the fact that it continues to be a very fluid consumer and macro environment lots of lots of cross currents that we're keeping a close eye on in terms of inflation remains very high yes, it's moderating interest rates high consumer credit so all of those things taken together.
Other we look at the Q2 guide and the implied guide for the balance of the year.
And on a stack basis, we feel like that's a.
Our balanced and prudent guide.
Okay, great. Thank you very much I appreciate all the help and best of luck.
Thank you. Thank you.
Yes.
Thank you next question comes from Karen short from Credit Suisse. Please proceed with your question Kevin.
Hi, Thanks, just a couple of questions first thing I just wanted to clarify on gross margins. Specifically, So you said 37 gross margin in for Tim.
So that implies 35 ish percent not to split hairs here.
Our second half, but that should be compression year over year.
In Q2, and then a slight expansion in the second half. So wanted a little clarification on that and then I had a bigger picture question.
Yes, so so care and you think about the this is Charles do you think about the guide for the year 37 in total that reflects our strong Q1, the 37% for Q2 and then for the balance of the year. The fact that we are very typical for us to see this normal seasonal moderation.
And margin as a result of just changes in product mix. When you think about third quarter in the summer months higher penetration of snacks and soda and in the fourth quarter holiday mix.
Typical seasonal flow, we see and that's what's embedded in the full year margin guide for the year.
Yes.
Okay and then.
I don't think I've asked this question is for a while but with respect to the actual.
Economic for Nio team opening a new store can you just walk through an update on that specifically because obviously we.
When you IPO there was data on that and I don't know that I really asked the question or it's come up.
The topic.
Because things have changed so much since 2019.
I'm wondering if you could just give a little color and update on that.
And what Karen just because it's.
Theres a lot.
Most of it.
Specifically net income Q in IL, so I understand the gross margin component and I understand the interest expense component.
Like what is there Matt.
We will take home.
As a team.
Whatever one unit.
Per unit.
Yes, it's up versus 2019, so you think about the benefit that they've seen from.
Topline and flow.
Going through yes.
Yes, it's they've seen increases in expenses.
But in terms of the net impact to the iOS very consistent to a little bit better than the model.
We talked about.
When we went public.
So can you give a range of numbers.
Yes, so so Karen roughly think about mature Io, we've always talked about 250000 for Bottomline income and we're seeing levels for mature ideas.
In excess of that.
Okay. Thanks, and then just the last question I had is there any contemplation.
Sure.
Your guidance for that.
<unk> excellent deflation in <unk>.
That's sort of inflation deflation.
Yes, we don't we don't expect there to be deflation. We do again disinflation is are our best point of view at this point.
But the model even in a deflationary environment. The model is really where the flexibility of the model shines through so we know we can perform well in that environment as well, but our current expectation is for continued inflation moderation.
Okay.
Okay. Thanks very much.
Thank you. The next question comes from Simeon Gutman from Morgan Stanley . Please proceed with your question for me.
Yeah.
Hey, Gary This is Michael Kessler on for Simeon.
One more on guidance.
I think you beat by $6 million in EBITDA in Q1, and the full year was raised by about $3 million I think at the midpoint.
So anything to note there as far as.
If theres any reason why the the rest of the year should be any weaker than you thought originally it was just conservatism.
Investment front.
We should know about.
Yeah, It's Michael it's Charles So it really is just a matter of when you flow through the P&L right. You think about our mid single digit comp guide for for the year in total gross margin at 37.
20 basis points up year over year.
Our driving expense leverage, which we feel really good about.
So I think as youre comparing against.
The beat in Q1, it really is more about this flowing through those.
Through this margin lines to get to get to our guidance, but we feel really good about how the P&L is shaping up and particularly the leverage that we're driving so far in the year and the path ahead for 2023.
Okay, and one more one on the Io front any changes with regards to the flow of applicants or interest levels.
Especially as rates have gone up and maybe just a clarifying question.
I know you guys lend often to the Io is when they.
Take on a store.
Has that changed at all as far as the rates that are being negotiated they're charged and any I guess any updates on how you facilitate that process.
Yes, no well so to your I think your broader question Michael the pipeline remains healthy no change in level of interest or number of folks coming to us or.
Im interested in the model as it relates to interest rates or really anything else. So that's all tracking really well to support growth.
Thank you.
Thank you.
Thank you. The next question comes from Michael Baker from D. A Davidson. Please proceed with your question Michael.
Okay, two real quick.
Getting on and our one.
Let me ask on SG&A incentive comp kick in I think incentive comp was a big.
The increase last year until we thought it would be a savings this year can.
Can you talk about how much incentive comp hurt you last year as your comps accelerated and what do you expect to save this year, but now that you are bidding maybe that goes away. So just how do we think about incentive comp in 2023.
Yes, Michael Charles we do expect that incentive comp will be a.
We will leverage incentive comp year over year as we have a more of a normalized payout. This year you didn't really see the impact of that in the first quarter, it's really as we move into the second quarter and the balance of the year last year is when we started ticking up those accruals. So we expect to see some SG&A.
Fit in Qs two through four offsetting that is the fixed cost leverage that we are driving in the business.
Comp sales normalize.
More of a moderating tailwind from from fixed cost leverage, but yes, we expect to see some meaningful incentive comp leverage in the balance of the year.
Okay understood last one.
So gross 90 basis points gross margin increase I think is the most I have in my model since our IPO.
I sort of want to ask was there anything unique in this quarter, but clearly there was because it's the biggest gain you know you've had in quite a while.
The guidance for the second quarter I guess, you said did you say did I hear right, that's where you're tracking or that sort of what you were assuming because you just assume it goes back to a normal rate and then your doctor will assume.
Unprecedented level or is that actually you know what you are seeing.
10 weeks or 10 weeks, but however, many weeks through.
Yeah, Yeah. So it's taking the second part first so early in the second quarter, 37% is our expectation at this point based on what we what we know now I think again, just taking a step back as we think about I mentioned, we manage the business for stable margins over time, but you get that normal.
The fluctuation.
Historically, you can look back over the years and you see roughly a one point fluctuation low to high in margin performance across cycles. So it's incredibly tight on a on an annual basis, but just because of the nature of the model.
The assortment change in the mix changing youre going to see those quarter over quarter changes and so, particularly when you are comparing.
A great Q1 this year versus.
Q1 last year that was on the lower side and then Conversely, where.
Looking at Q2, which was high last year. So I think there's a bit of that dynamic just the year over year on a particular quarter, but overall, we're really pleased with the way that we're managing margin, particularly in light of the cost environment.
Okay. Thanks, John I'm going to try to squeeze one more if I could.
Can you remind us the pace of comps last year and so the spirit of the question is the 5% that you're looking for for the quarter is that what you've seen quarter to date or you know maybe youre above that but comparisons get harder. So that's how you expect the quarter to end up.
Yes, it's really it's really comparison thing. So you think again about the ramp of comp we saw last year as we're looking at stacked comps from Q1 into Q2 and informing our guide for both the second quarter and the balance of the year. We're looking at it on a sort of a stacked comp basis as well as translating that into average.
Weekly sales at the store to understand normal patterns and that's that's the nature of the guys got.
Got it so it sounds like your stock comps are pretty consistent because the second quarter of stock guidance is pretty much in line with first by 100 basis points or so.
That's right yes.
Okay. Thank you.
Thanks, Michael.
Thank you that does conclude our question and answer session I'd now like to turn the call rich.
RJ Sheedy for closing remarks, thank you Sir.
Thanks, everyone for joining us today, we appreciate the support and we look forward to updating you on the next call.
Sure.
Thank you and.
Ladies and gentlemen that does conclude today's conference. Thank you very much for joining US you may now disconnect your lines.
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