Q2 2023 Grocery Outlet Holding Corp Earnings Call
Greetings and welcome to grocery outlet F. Two Q2023 earnings result conference call.
At this time all 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. Please press star zero on the telephone keypad.
As a reminder, this conference is being in the content. It is now my pleasure to introduce your host Lynn Walter from ICR. Thank you Ms. Walter you may begin.
Good afternoon, and welcome to grocery outlet's call to discuss financial results for the second quarter ending July one 2023.
I'm from management on today's call will be RJ, Sheedy, President and Chief Executive Officer, and Charles Bracher, Chief Financial Officer.
Following prepared remarks from RJ and Charles we will open the call for questions. 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.
It depends 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 various risks and uncertainties that could cause actual results to differ materially from these statements.
A description of these factors can be found in this afternoon's press release as well as the company's periodic reports filed with the SEC all of which may be found on the Investor Relations section of the company's website or on S. E C Dot Gov.
The company undertakes no obligation to revise or update any forward looking statements or information, except as required by law.
These statements are estimates only and not a guarantee of future performance.
During today's call. The company will also reference certain non-GAAP financial information, including adjusted items reconciliations.
A GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure maybe found in the supplemental financial tables included in this afternoon's press release and the company's SEC filings.
With that out of the way I would now like to turn the call over to RJ.
Good afternoon, everyone and thank you for joining us.
We are very pleased with our second quarter results and the continued momentum in our business.
Our differentiated model and strong value proposition are driving industry, leading sales growth and we are fulfilling our mission of touching lives for the better.
More customers are shopping us for the first time existing customers are spending more with us and overall customer satisfaction continues to increase.
Second quarter sales grew 13% driven by a 9% increase in comparable store sales and total quarterly sales reached a new record of over $1 billion.
Traffic remained very strong in the quarter, increasing 9% and average basket remained high and consistent with last year.
Gross margin was also very strong in the quarter up 120 basis points to 32, 3%.
This together with sales growth drove a 23% increase in adjusted EBITDA to $71 million.
At the end of the second quarter, we operated 447 stores across eight states.
We remain pleased with the performance of our newer stores with sales levels and growth in line with our historical performance in underwriting model.
We continue to see positive momentum in our newer markets, particularly in the east where we are increasing awareness in our customer base through targeted marketing investments strong io execution and expanding store count.
Our strong performance is driven by our differentiated model and compelling value proposition.
We save customers, an average of 40% compared to conventional grocery retailers with our best Wow items saving customers, 70% or more.
Shopping at grocery outlet combines a fun treasure hunt experience with the convenience of our small box format.
And our independent operators provide a localized assortment and personalized customer service, while giving back to the communities in which they live and operate.
We are a unique high growth specialty discount retailer, we have delivered strong and consistent performance with an average annual same store sales increase of 5% over the past 20 years.
As a result, we have steadily increased our market share and touched countless lives for the better.
Providing access to high quality food saving customers money and giving back to our communities is a formula that works across demographics geographies and macroeconomic environments and we are still in the early stages of our growth story.
Our model is unique in two distinct ways opportunistic purchasing and independent operators.
Our opportunistic purchasing model delivers an ever changing assortment of high quality items at prices that are well below our competitors.
We have a talented and tenured team of specialized buyers who work in close partnership with suppliers to deliver wow items to our customers.
We work strategically and creatively to provide solutions to our partners, while strengthening the trusted relationships that we share.
We also manage a flexible and agile supply chain to quickly move all types of products from suppliers to stores and customers.
This business was built from the ground up around the opportunistic purchasing model and we've been perfecting and expanding upon it for more than 75 years.
Our growing size and scale make us a stronger partner with even better access to products.
The independent operator model is equally important to our success, our iOS are entrepreneurs merchants' business owners and community leaders.
We partner with them to deliver the Wow shopping experience to customers and we support them in every aspect of the business.
Operators enjoy the autonomy of running their own stores selecting localized product, making merchandising decisions and providing outstanding service to their customers every day.
Operators also offer employment and career growth opportunities for their teams and they demonstrate community leadership by giving back.
Running a store is hard work, but independent operators are incredibly talented and resourceful.
Our true entrepreneur is in every sense of the word.
Throughout our history operators have navigated numerous changes in the business environment always meeting challenges head on.
Current operator satisfaction and engagement levels are high and voluntary turnover remains consistently low.
The grocery outlet model offers very attractive operator, economics with a low upfront investment healthy annual income potential and unlimited upside.
We split gross profit whether operators in the form of commission payments and we therefore, both benefit from sales and margin growth.
In the second quarter comparable store, operator commission payments increased by more than 10% versus the prior year.
Since 2019 average operator net income has grown in the low single digits on an annual percentage basis.
Strong commission growth combined with labor and operating efficiencies have more than offset higher store level expenses, such as wages and utilities.
And last year average mature store, operator, net income exceeded $250000.
We are always investing to support long term operator success.
We deploy capital to build new stores, we consigned inventory to operators and we market to customers across many channels.
We also provide financing to help iOS with new store startup costs, and we offer cash flow support as needed during the early years as stores ramp.
We are continually reinvesting capital to upgrade fixtures implement new technology and deliver tools that help io as gross sales and profit.
For example, we offer platforms and support to help operators local marketing and community engagement that complement our companywide marketing initiatives.
Another example is our forthcoming store portal, which is a new platform that will provide operators with better analytics and easier access to information to make smarter business decisions.
We look forward to delivering this new application to operators this quarter.
Interest in becoming an operator is at an all time high.
We received nearly 30000 leads last year, which is up 50% over the past four years.
Becoming an Io is a highly selective process as we accepted less than 1% of interested candidates to the G O family last year.
Our selective recruiting process combined with a comprehensive training program continues to produce high quality operators to support store growth.
Our unique independent operating model demonstrates the power and differentiation of small business at scale.
And the strong partnership we have with operators allows us as we say to our chain the locals and out local the chains there.
There is nothing else quite like it.
Looking ahead, we have tremendous white space with the potential to operate over 4000 stores in the U S.
We are continuing to invest in real estate and construction resources to fulfill our future store potential.
We've recently hired new people to the team and we are expanding strategic relationships with external partners, including large property owners.
We are also considering opportunistic real estate and small regional acquisition opportunities that align with our geographic expansion and store growth strategies.
We are excited about the many activities underway in our store growth potential in both infill and developing markets.
Before turning the call over to Charles Let me finish with what matters. Most our mission of touching lives for the better.
We just completed our annual independence from hunger campaign.
This is an event, where our iOS partner with local nonprofits to provide critical food resources to their communities at the time of year when they need it most.
In addition to the incredible efforts from our operators our supplier partners also contribute by donating food and collaborating on events.
I'm very proud to share that we raised a record $4 million this year benefiting over 500 local organizations.
We are equally proud of the $20 million that we raised over their 13 year history of this program.
In closing I would like to thank our entire team and our Io partners for going above and beyond to serve our customers and communities. We appreciate all that you do to make the G O shopping experience one of a kind.
We are well positioned to build on this current momentum and we are pleased to be raising our guidance for the year.
Looking forward, we are excited for the growth ahead, and the positive impact we will have on an ever expanding group of customers.
I will now turn the call over to Charles to discuss our financials.
Thanks, RJ and good afternoon, everyone.
Our second quarter came in ahead of our expectations driven by strong same store sales growth and margin expansion.
As RJ mentioned, we achieved quarterly sales over $1 billion for the first time in our history.
We are all proud of this achievement and I want to thank our employees and our independent operators for their contribution in achieving this significant milestone.
For the quarter net sales increased 12, 5% to $1.01 billion, primarily due to a nine 2% increase in comparable store sales along with the impact of new stores opened since the second quarter of last year.
Strong transaction growth drove our comp while our average transaction size remained high and flat to last year.
We opened four new stores and closed one store during the quarter ending with 447 locations.
We remain pleased with their new store initial sales volumes in recent vintages are ramping in line with our expectations.
Second quarter gross margin increased 120 basis points to 32, 3% and gross profit increased 16, 9% to $326 $6 million.
Our buyers are doing a fantastic job partnering with suppliers and we are seeing healthy deal flow across categories.
Strong execution combined with the favorable buying environment drove the better than expected margin result.
SG&A expense increased 14, 9% to $291 million compared to the second quarter of 2022.
The increase was driven by higher commission payments to idaho's, reflecting gross profit growth store occupancy cost due to new unit growth.
And incentive comp expense based on our strong first half results.
As a percentage of sales SG&A increased 60 basis points versus the prior year, primarily due to higher variable commission expense, resulting from our strong gross margin performance.
Yeah.
Net interest expense increased 23% to $4 $8 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.
With respect to the bottom line GAAP net income for the second quarter increased 21, 8% to $24 $5 million or 24 cents per diluted share.
Adjusted net income increased 18, 5% to $31 $9 million or 32 cents per diluted share.
And adjusted EBITDA increased 22, 7% to $75 million for the quarter.
As a percentage of sales adjusted EBITDA expanded 60 basis points from the prior year to 7%.
Turning to the balance sheet, we ended the quarter with $88 million of cash and $320 million of inventory.
Our inventory balance remains healthy in terms of quantity mix and turnover.
Gross debt was $298 million at the end of the second quarter with net leverage less than one times adjusted EBITDA.
We generated $70 million of operating cash flow during the quarter and invested $35 million in Capex net of tenant improvement allowances, primarily for new store growth upgrades to our existing fleet and ongoing technology and infrastructure investments.
Next let me provide some commentary on our outlook for the balance of the year.
Given our strong first half performance and continued momentum we are raising our guidance for the fiscal year.
For the third quarter, we expect comp growth to be approximately six 5% for.
For the full year, we are raising our comp sales guidance to be in the range of 7% to 8%.
We continue to expect to open between 25, and 28 net new stores for the year.
In the third quarter, we expect to open eight stores with the balance opening in the fourth quarter.
In total we now project fiscal 2023 net sales of approximately $3 $95 billion.
We expect third quarter gross margin to be approximately 31, 3%.
Factoring in our normal fourth quarter margin seasonality, we now expect full year gross margin of approximately 31, 3%.
This represents an increase of 60 basis points from our prior full year outlook.
With respect to the bottom line, we expect third quarter adjusted EBITDA of approximately six 4% of sales.
For the full year, we are raising our guidance for adjusted EBITDA to be in the range of $254 million to $260 million.
At the midpoint, our guidance represents approximately 20% adjusted EBITDA growth versus last year.
Moving down the P&L, we expect net interest expense of approximately $21 million for the year, which reflects projected forward interest rates on our outstanding debt.
For adjusted net income purposes, we forecast a slightly higher 2023 tax rate of 30%.
This is up from our prior expectation of 28% due to the impact of increased taxable income and high rate states as well as non deductible compensation expense.
We expect average diluted shares outstanding of approximately $101 million.
As a result, we are raising our full year adjusted EPS guidance to be in the range of $1.04 to $1.08 per diluted share.
With respect to Capex, we continue to project approximately $155 million net of tenant improvement allowances, reflecting new store growth and ongoing investments in our store base and business infrastructure.
In closing we are extremely pleased with our results. This quarter, we know that our strong performance would not be possible without the tireless efforts of our operators in the entire grocery outlet team. We appreciate all you do to make grocery outlet the company that it is today.
Our brand momentum is strong and we look forward to continued growth in the years ahead.
We will now open the call up to your questions operator.
Thank you David.
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One moment, please while we poll for questions.
First question comes from the line of Oliver Chen.
But Eddie Cowen and company. Please go ahead.
Hi, Thanks, great quarter.
We look to the back half do you expect for the basket to also be flat and what should we know about of disinflation or deflation in terms of what you're seeing.
Also you you commented on on the great buying environment do you expect that to continue and it was quite favorable to your gross margins and finally, a lot of great comments on developing markets and targeted marketing.
What have been some of the key learnings in terms of making progress there. Thank you very much.
Hey, Oliver It's Charles let me start with the basket will try to take these take these questions in order.
But really pleased with the basket trends that we're seeing in the second quarter. We are as expected seen moderating inflation and so AUR, while still up came down from the first quarter recall that for us the impact of inflation is more muted because of our <unk>.
Because of our buying model and then units in the basket is down modestly versus versus the prior year, which we would expect to see given the higher frequency.
Frequency and traffic that were driving.
And again for us, it's not directly comparable given the nature of the buy and the fact that the it's an ever changing mix and assortment within the store, but units overall still slightly ahead of pre pandemic levels, which we feel really good about so as we look towards the balance of the year, we really think that the same trends.
Traffic will be the larger driver of comp as customers continue to seek out value.
And then ring again with a moderating inflation could should continue too.
To moderate.
As those trips increase.
Regarding the buying environment Oliver Yes, we continue to be encouraged by the pipeline of opportunistic product. It continues to be broad based across categories.
<unk> momentum all the way back from the beginning of the year through Q2 as carried forward to this quarter as well, we continue to see really healthy inventory positions and variety available to both operators and to customers and contributing to the great value and treasure Hunt and positive experience customer.
Or having shopping our store so lots of a lot of positive trends there that we like in regards to marketing we continue to see nice returns from our targeted marketing efforts, we do still continue to invest more in certain areas and we're always following a test and learn approach as we deploy try.
Learn from new marketing activities.
Very active in the digital space as Youre, well aware and always trying new activities there will be even more targeted once we fully roll out and do a full launch behind our personalized program. The app that we have out there and some of our stores and so we're excited for that and the additional benefit that it will.
Right.
Thank you best regards.
Thank you.
Okay.
Thank you next question comes from the line of Robbie <unk> with Bank of America. Please go ahead.
Hey, good evening, guys, a great quarter to two follow ups to Oliver's questions. The first just can you give a little more on the gross margin increase.
You know I understand buying could be better, but also I think you and the iOS price usually do a certain gross margin and you also mentioned execution as part of the.
Gross margin benefit can you give us examples of what what do you mean by that is that much less clearance less shrink and.
And then maybe how should we think about gross margin for next year versus these really strong gross margins you are putting up now is just the new.
Sustainable gross margin, we should be thinking about for you guys.
That would be my first first question on gross margin.
Yeah, Robyn Charles Thanks for the question Yeah, what we're really proud of the margin performance that we delivered in the second quarter. It clearly was ahead of our expectations as we went into the quarter and really a few factors at play as we look at it number one we always talk about normal with our models and see the quarterly.
<unk>, just because of the nature of the buy and the ever changing Assortments, how I would describe the second quarter performance just as naturally at the higher end of that number two yes. It is a favorable favorable buying environment for US right now, we're seeing healthy deal flow across departments, which feels really good.
And then lastly, yes strong execution from the team that you can think about this is really end to end the way, we manage inventory from the buy through supply chain.
Through allocations to store and importantly, everything the operators do at store level to efficiently manage inventory and minimize shrink. So each of those players has an important part to contribute to overall margin management and I'd say, they're just executing really well, which we feel great about.
<unk>.
And so as we look forward.
You see this in our guidance.
Guidance for the back half of the year, we do expect that some of these things continue in terms of purchasing back half of the year deal flow and backdrop continues to look really positive.
We are expecting as we always see normal seasonal moderation in margins as we move from Q1 first half the second half and again that has to do with product mix in the third quarter. So you can think about you know higher mix salty snacks, and sodas and bottled water and in the fourth quarter the impact.
Our holiday items. So that's all factored into our back half guidance as it relates to margin as we look forward longer term.
For us I think that the recipe for success has always been we talked about managing for stable margins over the long term and always making sure that we're reinvesting in value back to the customer so.
We've got a long list of what we I'd say our margin driving improvements across.
Buying across Io ordering allocations.
But again, we always think about the flywheel of investing back into value and driving that customer excitement within the store and incremental traffic.
That's really helpful and just a quick follow up any difference in the sort of more discretionary like non food part of the assortment versus what the consumables food is doing.
No no no no no no notable difference Robby, we're seeing strong growth really across the assortment and it's the performance that we're seeing are that we're reporting is not related to mix.
Great. Thanks, so much guys.
Thank you.
Thank you next question comes from the line of Kristina a day.
Deutsche Bank. Please go ahead.
Hi, good afternoon, and congrats RJ and Eric on the great results.
You have a similar question just to follow up on the gross margin right.
Just wanted to ask you about that that's sort of the healthy buying environment is there anything that would tell you that maybe the buying environment, becoming permanently more favorable for grocery outlet. As you are bigger you have more importance with your vendors and therefore grocery outlet, Ken essentially sustained structurally higher margins and it wouldnt really have.
To go back to the pre pandemic levels that you were really managing to before.
Yeah, Thanks, Kristina I'll take that one yes.
Already mentioned really pleased with the buying environment, but it's also the activities that we you know.
We're always involved in the investments that we make.
Our objective is always to be an even better partner to the suppliers that we work with and just as a reminder, some of these relationships go back decades, as we grow we do become a stronger partner, we do gain even better access to product part of the growth story for US has been as we expand geographically we open up.
<unk> for other distribution centers in.
In areas, where product is held that we can then take advantage of so yes. There is structural benefit improvement that comes from growth and we're always looking to get better and we're seeing that certainly benefiting from that and the partnerships that we have and the access to product that it gives us and then the value.
We're able then in turn to provide to our customers.
As far as the current environment and where it goes from here.
Time will tell if it can be cyclical it is cyclical certainly at the item level.
By definition.
Deals don't repeat themselves but.
We have relationships across many suppliers and we're.
Our capabilities are such that we're able to provide solutions in lots of different ways, and therefore continue to gain even better access to product as it relates to margin I would encourage you to think about those opportunistic and everyday product together contributing to some of the more recent margin performance.
And from an execution standpoint, we continue to get better at managing value together with margin for both opportunistic and everyday products. So.
Like where we're at.
Certainly like.
The view that we have to the end of this year and we'll just continue to manage the business in that way looking forward.
Thank you for that and just as a follow up so it does sound like the Io, they're feeling pretty great and thank you for all of that those statistics that you gave us.
Sally to customers and that's why they they love us and continue to shop with us so.
Not overly concerned havent seen a whole lot of changes recently and.
Wherever it goes from here, we together with operators I think we'll manage it just fine.
Great. Thank you so much and best of luck.
Thank you.
Thank you next question comes from the line of Joe Feldman with Telsey Advisory. Please go ahead.
Yeah, Hey, guys. Thanks for taking my question.
Great quarter, I guess, what are you guys seeing in terms of the health of the consumer it sounds like Youre seeing a lot more frequency.
The baskets holding up.
I guess I'm curious, if you're just seeing customers trading down like more affluent customer shopping more often or.
You know maybe buying differently within categories at all.
Hmm.
Just any anything about the health of the consumer would be great. Thanks, Yes sure. Yes. Thanks for the question Joe Yes, we continue to be encouraged by what we're seeing with consumer and shopping patterns and behaviors.
I'd say, it's all the same positive trends that we mentioned on our last call. We continue which is which is great. We continue to see strength across all income levels. So we think about different customer types and how they shop us and there is the strength more broadly across those different segments. We are still.
Seeing an acceleration of new customers shopping stores. So of course, we love that the operators are seeing them in their stores every day and they're interacting with them and educating them on the model. So that's a very positive trend for us and a driver of some of the same store transaction count increases that we've seen throughout the year.
Our survey data continues to show that there are more higher middle to higher income customers shopping with us, suggesting that they are changing their behaviors that are coming to us for value on the great brands and items that we're offering and then we've also seen an increase in trip frequency overall spend from our existing.
Customer base.
They too are.
Really resonating values are really resonating with them and they've increased we've increased our share of wallet with them customer satisfaction as mentioned as high intent to shop more in the future is high and I would say beyond just the backdrop of course, which is supportive the initiatives that we are pursuing further support.
These positive trends.
<unk> mentioned investments that we're always making an opportunistic purchasing we continue to strengthen our everyday assortment, making sure that it is the most relevant assortment of items brands of course value always for the customer and then together with save some more recent initiatives around E Commerce, we've got more personalize.
Communication here in front of us with the App and certainly many of the other initiatives that we're investing in to drive the business forward. So.
Yeah, a lot of a lot of positive trends that have been playing out throughout the year as it relates to the customer.
Excellent and then just as a follow up.
Yeah.
I think I heard you guys say it correctly.
If I heard it correctly I mean that you would consider.
Consider opportunistic real estate and small regional acquisition opportunities, which I know you've obviously you did that in the mid Atlantic but.
Are there some things that you are preparing us for or things.
Things that you might see out ahead that you're excited about.
Yeah, Yeah sure So let me.
<unk> of them Joe is within several activities that are underway right now.
We are going after the tremendous white space, that's available to US first I, just remind or say again that we continue to invest in resources, bringing in new team members to support the real estate construction process. One notable recent hire as Kelvin Chung he joined US several months ago as Chief store development officer over.
Seeing real estate construction facilities management, he brings a wealth of experience in leading the team and our effort to scale and expand capabilities for growth.
I'm really excited about some strengthening partnerships that we have with external partners. One in particular, some new strategic relationship discussions that we're having with large property owners.
The way to complement the traditional organic growth efforts that we've had underway.
And then in addition to all of that to your question. Yes, we are considering opportunistic real estate lists as we talked about on the last call.
Some retailers that have gone out of business and liquidating in the real estate available.
Any of other instances, where retailers are closing locations closing stores and list of becoming available where we may have an opportunity to capture some of those.
More than one at a time, so we like that and then.
And then we're also considering small regional acquisitions and what's important here is thinking about these.
That would line up with our geographic strategy and also store growth and long term growth plans and so all of these things together.
Certainly a lot underway all these things together, we think about them as supporting future growth in the same at the same rate and along the same lines that we've always talked about it but we love that we have lots of different avenues for that and again, given the white space and the potential with this business those are interesting conversations.
To be to be having right now.
Thank you for clarifying that and good luck with this quarter guys. Thanks.
Yeah, Thanks, Jeff Joe.
Thank you <unk>.
Question comes from the line of.
Jordan <unk> with Goldman Sachs. Please go ahead.
Good afternoon. Thank you for taking my question.
Wanted to check in on that new store pipeline.
Your total count with reaffirmed but it does seem like two or three may have slipped from the third quarter to the fourth quarter. This year versus your prior guide. So just curious what's driving that and if you could provide a status update on how the pipeline is building for 24 and into 'twenty five as well as any commentary on the permitting and construction environment.
<unk>.
Sure Yeah lately, it's Charles let me take the first part of your question with respect to store count for 2023, So no change to our initial guidance.
For the year in total we expect to open eight stores as I mentioned in the third quarter, and so you're always going to get a little bit of a shifting from quarter to quarter, but I would describe the back half overall is very consistent with our expectation.
Going into the year.
And then RJ yet regarding 2024 in out years Leo continue to work on growing the future store count.
As I just mentioned the work includes organic growth together with consideration for opportunistic real estate as well as smaller regional acquisition opportunities along with.
Some additional new partnerships that complement our own internal activities. So.
So the activities are new as it relates to opportunistic real estate and of course consideration of regional acquisitions. They are interesting for US again, given the white space that we have all of these activities are in progress right now, they're all interconnected and and we're in the process right now of evaluating it altogether with.
In the context of targeted growth over the next I'll call. It 12 to 36 months and we'll plan to provide further update with more specifics together with what would be full year 2024 guidance during our February Q4 call.
Okay, great. Thank you and I just wanted to follow up on the customer health kind of conversation.
To touch on snap customers, specifically could you.
Add any color on how those customers behavior trended throughout the quarter and are you starting to see some normalization there yes.
Yes.
I'd say playing out very consistently with our expectations. So we've always talked about for US we don't view a reduction in snap benefits as a headwind you think about our model and it appeals very much to that value oriented consumer and.
And we can see that when we look back over time, we're very positively comped through cycles of reduce snap funding.
Yeah snap benefit reduction you think about it as just one more thing that's adding cumulative pressure to that consumer and encourage them to stretch their dollar.
And we expect over time that will continue to be a traffic driver for us. So so far in 'twenty three.
We've seen that migration just in tender type.
As the snap benefits have been reduced.
And I think you'll see that in our healthy comp and traffic trends.
Very helpful. Thank you.
Okay. Thanks for that.
Thank you next question comes from the line of Karen short with Credit Suisse. Please go ahead.
Hi, Thanks, very much I hope, you're all well go to talk to you.
So a couple of questions I had.
The first question is.
Can you give us some sense of what the comps are on the east coast.
And on the east versus the West.
And then can you give some sense of what the actual interest rate is for the iOS.
Today.
Versus what they would ask what you charge them as an interest rate versus what they would have to have as an interest rate isn't totally independent operator.
And then two more questions.
Yeah, Hi, Karen as Charles Let me take the first parts of regional performance, particularly in the East we're really pleased with.
Newer regions I'd say, both southern California, and mid Atlantic both of those continue to post.
Kind of a company leading comps.
On both the current year basis, and on a multiyear stack basis, which feels great and so.
Driving increased brand awareness and trial into the stores and continue to densify those regions were seen.
The momentum build which we which we feel great about and then as it relates to interest rates for the Io. So keep in mind, it's a fixed interest rate that we charge iOS. So it's a standard 995% so.
So that number has not changed.
Is kind of variable interest rates have increased.
And that number has not.
You're done with the forgiving that interest rate right.
We do not forgive the interest rate in the stores on T cap, we will reduce the interest rate for those stores, which we continue to do.
Overall interest rates are flat.
Okay, and then my second or third question is so you said new customers are driving ticket and so and then we obviously have an inflation, but ticket and flat. So I guess when you have new customers driving ticket and you also have inflation that would drive ticket.
Why is ticket flat.
No. The comment is that new customers are a notable component to transaction count increases not ticket.
Okay, but then ticket in general why would that be flat with high.
High inflation.
Again moderating for us our model mutes the impact of inflation and so we're still seeing some inflation flow through but it's but it's moderated as we move through the year. We would expect that to continue to be the case and in units as I mentioned slightly down versus the prior year and you can.
About that.
Having DM are being impacted by higher frequency is customers, who are making those incremental trips to stores.
Okay, great. Thanks, so much.
Thank you.
Thank you next question comes from the line of Mark Gordon.
With UBS. Please go ahead.
Good afternoon. Thanks, so much for taking the question. So obviously you guys posted a really strong traffic number this quarter and it sounds like youre doing well across all income levels. What are you seeing from some of the customers that you've acquired over the past few years are you holding onto more than you would've expected how does your customer retention compare I guess to some prior cycles of elevated growth.
Yeah, So hey, Mark Thanks for the question, we don't track specific customer transactions that that'll be a new capability that we have that will come with the personalization app. So we can't speak specifically to customer trends and how we're seeing.
The basket changing et cetera, what I can say, though is speaking more generally to retention and stickiness of the model a lot of positive trends in data that we see in the customer survey already mentioned some of that already around high satisfaction levels and tend to shop more with healthy inventory levels value.
<unk> treasurer.
All of the things that we're doing from an assortment standpoint, and then for the operator, providing great customer service and educating customers new customers on the model. There is a tremendous amount of stickiness and retention that comes from that for those that the model resonates with its not all customers right, where our various pre spin.
Civic.
Differentiated model and so not for everyone, but for plenty of people that are looking for value.
They have and will continue to shop us more frequently or they will return as more loyal customers. We referenced nine just as a time period certainly many different dynamics, but it was a time period, where we had a really high increase in new customer shopping our stores and then as the economy approved many of them stuck with us.
We continue to comp positively so.
Stronger company today than we were back then and all of the feedback that we get from consumers and what operators are seeing everyday in their stores, we feel really good about future retention and continued growth.
Okay, Great and then a follow up just another question on real estate. If you guys did find a suitable acquisition would you taper back planned new store openings to keep that 10% ish unit growth number or would you expect for it to be incremental.
Yes, no not not incremental as best we can manage it we do want to stay disciplined and measured at the rate that 10% rate that we've talked about growing over over the long term and.
We think that's a healthy way to grow we never one store count or store growth to be ahead of investments that we're making in the business.
Real estate is just one part of it but yet you have to and we do manage and consider I think a lot about investments throughout the business to support growth, whether its operator recruiting and training certainly inventory and supply chain.
Everything related to new markets grow awareness and driving trial, and then retaining future loyal customers and so there's just a lot that goes into it than it's been.
Best we can as we think about all of these components.
Are there acquisitions of real estate blocks that were able to take advantage of together with organic growth, we'd look to try to keep that at that same rate that we've always talked about.
Got it thanks, so much and goodbye.
Okay. Thank you.
Thank you.
A reminder to all participants please restrict yourself to one question and one follow up next.
Comes from the line of John Hind book will go.
<unk> Securities. Please go ahead.
Hey, guys I'm going to beat the gross margin horse a little bit further.
What are you seeing with shrink and mix and I am curious right even during the best days of 2020.
Gross margin Didnt performed as well.
What do you think is different is there less competition for opportunistic purchases.
Is it more discipline right on your pricing that.
Just curious.
What is different today, if anything versus couple of years ago.
Yeah, John It's Charles Let me answer the point you referenced there on shrink and then I'll turn it to RJ.
But as it relates to shrink and clearly there's been a lot of headlines on this topic out there.
We're fortunately have not seen a significant change in our historical shrink rates and probably a couple of factors at play when you think about our business number one of course get lower value price points, but number two and probably more importantly.
It's just the Io control of the store and the customer local connection that they have and the fact that they've got to share that we have a shared gross margin management inventory management incentive with them. So I think that really motivate send it to keep close eye on shrink and as a result, we're seeing very consistent performance.
You'd asked about mix as well within that question generally pretty balanced it does fluctuate the assortment is always changing but generally the mix is pretty balanced.
And then to your question on opportunistic strength.
<unk> continues to be a really dynamic.
Plenty of disruption is still in the supply chain.
<unk>.
We did anticipate as capacity was coming online production lines were increasing reaching this point, where there would be even more product available then as always available on a kind of a regular steady state basis, and so that has continued to be the case throughout this year product innovation.
<unk> has come back pretty strong with suppliers that always yields product.
A lot of adjustments generally speaking with the state of work remote work in the office.
As suppliers are looking to meet those needs and so all of that has yielded product and then again together with would've already mentioned is the work that we do to continue to offer even better solutions and stronger partnership with suppliers that we work with and that's really benefited us as well and hats off to our entire team and the <unk>.
Relationships that we have maintained in the partnerships, where we worked together and strategically with suppliers just.
Just working really well right now and it's from a lot of hard work and effort from the team and the people that we partner with.
Alright, and then my follow up would be when does the portal is going to be out there.
What do you think.
If you had to pick two elements of that.
So that'll be the most impactful for the Io is what would that be I'm sort of curious in terms of you have so many items.
Elasticity does that is that one of them that would that would allow the io is to price more opportunistic if they haven't to date.
Yes.
Really excited about the portal together with some of the other system enhancements that we will be implementing this quarter.
So it's here being implemented very soon and then yes in terms of the benefits for the operator gosh. So many I think John <unk>.
First thing that comes to mind is just easier access to information and access to new information that they've not seen before at least not in the format that it will be available and then with that comes better decision, making faster better decision, making around inventory around.
Ordering.
Round.
Managing the mix really in all aspects for how they manage their business.
Which is which is a huge benefit so which to grow sales and improve margin and then the other benefit that I would mention is just efficiencies.
Certainly you've talked about rising costs operating expenses labor et cetera challenges that we together with operators has managed through for a long time now.
This new platform portal will allow them to operate even more efficiently better use of their time reallocate it to spend time with customers or.
Or operate the P&L more efficiently to help them with their income growth.
Alright, thank you.
Thank you Sean.
Thank you next question comes from the line of Cody Carlo with Jefferies. Please go ahead.
Great. Thanks wanted to ask on category performance or maybe if you could talk a little bit about dry grocery performance versus fresh and then maybe any incremental details you can add on the nosh category. That's continued to grow very nicely.
Yes, so categories I'd say in general really strong.
Broad based across the assortment.
I wouldn't necessarily call out one versus the other so there's really strength across the basket, which of course is a good place to be and then nausea Nash Nash.
<unk> organic specialty healthy debt of course lives across departments and really throughout the whole store and we have a really nice penetration of Nash within the basket and continues to be if I can call. It a category or an attribute any way set of attributes that continue to drive our comps we keep me.
See some of our higher growth items some of the best values in some of the more exciting items for customers within the Nash category and we do expect that to continue to grow as a percentage of total sales.
Great. Thanks, and then just a quick follow up on what you're seeing quarter to date it.
It looks like you've guided for.
Six 5%.
For the third quarter, but you've comp.
I believe around <unk>.
High single digits or low double digit so far.
This year, so what kind of.
Informs that is that what you're seeing presently or is that conservatism or just any color there would be helpful.
Yes, we're really pleased with the start to the third quarter and again.
You can think about comp dynamics that we saw in the second quarter really continue into traffic.
Continues to be very strong as it relates to the guide for the year for the balance of the year in the third quarter specifically.
We've looked at a variety of stacked comp metrics, an implied average weekly sales on a seasonal basis.
But the big factors there are we're lapping.
Higher comps in the back half of last year, So think kind of mid teens and just continue to be cognizant that the overall macro consumer environment is fluid, but we love the momentum that we're seeing.
Great. That's very helpful. Thank you very much and best of luck.
Thank you.
Thank you next question comes from the line of Mike Baker with D. A Davidson. Please go ahead.
Hey, just wanted to ask about the online business.
What are you seeing there.
Yes e-commerce continue to be pleased with some of the results there were seeing nice incremental sales.
We were active across the three major platforms into the car door dash <unk> and still with plenty of room to grow as we think about developing.
Other other.
Channels within E. Commerce, we continue to be delivery, only which is just the percentage of the total channel and.
We will look to enhance that in the future, but everything is working great online.
Can you any quantification of what percent of the chain is that and can you remind us that or any you know what percent of sales or any way to.
Got it.
Yes, it's in all stores. So all stores are active on those platforms, but it's a small percent of sales we haven't disclosed the specific penetration now.
Understood. Thank you.
Welcome.
Thank you.
Next question comes from the line of small Gutman with Morgan Stanley . Please go ahead.
Hi, everyone. Thanks. Good afternoon. So this may be an easy one because I missed the beginning of it can you talk about what what changed structurally or what changed with gross margin and I did hear the earlier question about something maybe being structural.
Given how consistent your gross margins have been why shouldn't we take what we're run rating now.
As the right run rate going forward.
Yes, it assuming that Charles we did address this earlier I'll give you the quick.
Summary here so as we look at Q2 margin performance, yes stronger than we expected going into the quarter really proud of the number that we posted and as we look at that a few things that we point to number one.
We've talked about this normal given our buying model that have these quarterly fluctuations is the assortment is ever changing and so we think Q2 is just naturally at the higher end of that normal quarter to quarter variability.
Number two the buying environment, we're seeing some great tailwind there so healthy deal flow across departments and across categories, which is benefiting us and then number three the team has been doing a fantastic job and I would say that end to end from purchasing through the warehouses.
All the way to stores and everything that the operators due to effectively manage inventory at store level. So so all of those benefits in the second quarter as we look towards the back half of this year, we think a lot of those things continue we think the the deal offered an opportunistic buying backdrop continues to be <unk>.
<unk>.
Just to remind you we do always have seasonal margin moderation in the back half of the year due to summer product mix and in holiday product mix.
But just feel great about how the team is executing.
Across the business.
Okay helpful and sorry for repeating the other question is does this is logistic does the Io have discretion to set a price or company given everyone conforms or the Io can move price around based on their market based on what they what they want to do in their store.
Hey, Ken Yes, we said price essentially to start and then they have the autonomy to adjust some prices based on what you just said market dynamics competitive factors et cetera, and it's great great part of the model Okay.
Has that ever been a call out as far as something that's been margin enhancing our margin degrading where enough enough of that happens in your system or that I don't think we've ever talked about that I just have just been outside question.
No. It's a small number of items Simeon so now right. Okay. Thank you take care.
Yeah. Thanks. Thanks.
Thank you.
No further questions at this time I would like to turn the floor back over to RJ Sheedy for closing comments.
Yes, thanks, everyone for joining us today appreciate the support and we look forward to updating you on our next call.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
You for your participation.
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