Q4 2023 Grocery Outlet Holding Corp Earnings Call

Speaker Change: [music].

Operator: Greetings and welcome to the Grocery Outlet Full Year 2023 Earnings Results Conference Call. At this time, all participants are in listen-only mode.

Greetings and welcome to the grocery outlet full year 2023 earnings results Conference call.

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

Operator: The question and answer session will follow the formal presentation. Please note that participants are restricted to one question at a time. If anyone should require operator assistance during the conference, please press star then zero on your telephone keypad.

A question and answer session will follow the formal presentation.

All participants are restricted to one question at a time.

If anyone should require operator assistance during the conference. Please press Star then zero on your telephone keypad.

Operator: As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christine Chen, Head of Investor Relations. Please go ahead, Mel.

A reminder, this conference is being recorded.

I would now like to turn the conference over to your host Christine <unk> head of Investor Relations. Please go ahead on.

Oliver Chen: Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the fourth quarter and fiscal year for the period ending December 30th, 2023. Speaking 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. Participants on this call may make forward-looking statements within the meaning of the federal securities laws. For example, all statements that address future operating financial or business performance or the company's 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. 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 sec.gov. Good afternoon, everyone, and thank you for joining us.

Christine: Good afternoon, and welcome to grocery outlet's call to discuss financial results for the fourth quarter and fiscal year for the period ending December 30th 2023 speaking 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.

Christine: 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 laws, all statements that address future operating financial or business performance or the companys strategies or expectations are forward looking statements. These forward looking.

Christine: Statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements description of these factors can be found in this afternoon's press release as well as the Companys periodic reports filed with the SEC all of which may be found on the Investor Relations section of the company's website or on SEC Gov.

Speaker Change: Good afternoon, everyone and thank you for joining us.

RJ Sheedy: We are happy to be speaking to you today about our business results, the acquisition of United Grocery Outlet, and our outlook for 2024. Let me start by providing some commentary on business performance and notable growth initiatives over the next few years. First, our fourth-quarter results were slightly ahead of our expectations, and traffic and customer acquisition remained strong.

Speaker Change: We're happy to be speaking to you today about our business results acquisition of United grocery outlet and outlook for 2024.

Speaker Change: Let me start by providing some commentary on business performance and notable growth initiatives over the next few years.

First our fourth quarter results were slightly ahead of our expectations and traffic and customer acquisition remains strong.

RJ Sheedy: We continue to deliver unbeatable value with an exciting treasure hunt experience, and our underlying business fundamentals remain healthy. Second, we are excited to be acquiring United Grocery Outlet, which adds 40 stores to our network. This is an ideal strategic fit given our similar business models, customer value propositions, and shared mission of serving and helping others. This acquisition provides Grocery Outlet with scale and a new geography, as well as a platform for future expansion in the Southeast. Third, we are making good progress on a number of strategic initiatives that we believe will strengthen our value proposition and contribute to future growth. Our personalization app is now rolling out to all stores, and we will soon begin to invest in marketing to drive downloads and adoption.

Speaker Change: We continue to deliver unbeatable value with an exciting treasure hunt experience and our underlying business fundamentals remain healthy.

Speaker Change: Second we are excited to be acquiring United grocery outlet, which adds 40 stores to our network. This.

Speaker Change: This is an ideal strategic fit given our similar business models customer value propositions and shared mission of serving and helping others.

Speaker Change: This acquisition provides grocery outlet with scale in a new geography, as well as a platform for future expansion in the southeast.

Speaker Change: We are thrilled to welcome the United grocery outlet team into the grocery outlet family and we look forward to working together on the many growth opportunities ahead.

Speaker Change: Third we are making good progress on a number of strategic initiatives that we believe will strengthen our value proposition and contribute to future growth. Our personalization App is now rolling out to all stores and we will soon begin to invest in marketing to drive downloads and adoption.

RJ Sheedy: We are also looking forward to the launch of our new private label program later this year. Finally, we are excited to welcome Ramesh Chakala to Grocery Outlet in the new role of Chief Operations Officer. I have known Ramesh for a number of years, and he is familiar with our business through previous consulting work.

Speaker Change: We are also looking forward to the launch of our new private label program later this year.

Speaker Change: Finally, we are excited to welcome relief Cecala to grocery outlet in the new role of Chief operations Officer.

Speaker Change: I have known <unk> for a number of years and he is familiar with our business through previous consulting work.

RJ Sheedy: Ramesh is leading our business technology and supply chain teams to help us scale and improve our capabilities to support growth. Let me now expand on each of these in more detail. Fourth quarter sales increased 6.3% driven by a 2.7% increase in comparable store sales, which was ahead of our expectations. Transaction count remains strong at 7.5%, increasing throughout the quarter. While food inflation has been moderating, consumers still face higher food prices and other financial burdens.

Speaker Change: <unk> is leading our business technology and supply chain teams to help us scale and improve our capabilities to support growth.

Speaker Change: Let me now expand on each of these with more details.

Speaker Change: Fourth quarter sales increased six 3% driven by a 2.7% increase in comparable store sales, which was ahead of our expectations.

Speaker Change: Transaction count remained strong at 7.5% increasing throughout the quarter.

Speaker Change: While food inflation has been moderating consumers still face higher food prices and other financial burdens.

RJ Sheedy: Our compelling savings and ever-changing assortment of high-quality WOW items continue to drive healthy traffic increases and market share gains. Fourth quarter gross margin was also ahead of our expectations at 30.2%. The closeout market remains strong, and our growing size and scale provide increasing access to products with strong customer value and healthy margins. We opened 13 new stores in the fourth quarter, including our first store in Ohio, ending the year with 468 locations.

Speaker Change: Our compelling savings and ever changing assortment of high quality Wow items continue to drive healthy traffic increases and market share gains.

Speaker Change: Fourth quarter gross margin was also ahead of our expectations at 32%.

Speaker Change: The closeout market remains strong and our growing size and scale provide increasing access to products with strong customer value and healthy margin.

Speaker Change: We opened 13, new stores in the fourth quarter, including our first store in Ohio, ending the year with 468 locations.

RJ Sheedy: Recent vintages continue to ramp well, and we are pleased with new store performance. We have made steady progress with our systems implementation work, though data integration efforts are taking longer than expected and are still impacting our business results. The largest remaining issues are related to warehouse product expiry data and store-level reporting for IOs.

Speaker Change: Recent vintages continue to ramp well and we are pleased with new store performance.

Speaker Change: We have made steady progress with our systems implementation work, though data integration efforts are taking longer than expected and are still impacting our business results.

Speaker Change: The largest remaining issues are related to warehouse product expiry data and store level reporting for iOS.

RJ Sheedy: We expect these to be resolved soon, after which the P&L impact will be behind us. Charles will provide more details in his comments. Despite the system's disruption, business fundamentals are healthy, and our new applications are supporting daily operations well. We are proud to have delivered strong results in 2023, growing sales by 11% to a record $4 billion. This was driven by comp store sales growth of 7.5% and a customer count increase of 8.3%.

Speaker Change: We expect these to be resolved soon after which the P&L impact will be behind us.

Speaker Change: <unk> will provide more details in his comments.

Speaker Change: Despite the system's disruption business fundamentals are healthy and our new applications are supporting daily operations well.

Speaker Change: We are proud to have delivered strong results during 2023 growing sales by 11% to a record $4 billion.

Speaker Change: This was driven by comp store sales growth of 7.5% and a customer count increase of eight 3%.

RJ Sheedy: We also leveraged gross profit by 76 basis points and grew adjusted EBITDA by 18%. Now, let's turn to the acquisition. United Grocery Outlet is a healthy, profitable, and growing business. Their opportunistic buying model, similar company values, and adjacent geographic footprint make it an ideal strategic fit. Founded 50 years ago, United Grocery Outlet offers customers tremendous savings within a treasure hunt shopping environment.

Speaker Change: We also leveraged gross profit by 76 basis points and grew adjusted EBITDA by 18%.

Speaker Change: Now, let's turn to the acquisition.

Speaker Change: United grocery outlet is a healthy profitable and growing business.

Speaker Change: There are opportunistic buying model similar company values and adjacent geographic footprint make it an ideal strategic fit.

Speaker Change: Founded 50 years ago, United grocery outlet offers customers tremendous savings within a treasure hunt shopping environment.

RJ Sheedy: Strong partnerships with national and regional brands enable it to provide quality food at unbeatable prices to its loyal customer base. United Grocery Outlet also operates as a local business with a mission of giving back and making a positive impact on its community. Their stores average 17,000 square feet and have seen healthy same-store sales growth in recent years, driven by both transaction count and rank. This acquisition provides Grocery Outlet a great entry point into the Southeast region with 40 stores across the six states of Tennessee, North Carolina, Georgia, Alabama, Kentucky, and Virginia.

Speaker Change: Strong partnerships with national and regional brands enable it to provide quality food at unbeatable prices to its loyal customer base.

United Grocery outlet also operates as a local business with a mission of giving back and making a positive impact on their community.

Speaker Change: Their stores averaged 17000 square feet and have seen healthy same store sales growth in recent years, driven by both transaction count and rank.

Speaker Change: This acquisition provides grocery outlet a great entry point into the southeast region with 40 stores across the six states of Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia.

RJ Sheedy: United Grocery Outlet also operates a distribution center that can support additional new store growth in the broader southeast region. This is an exciting addition as we pursue our white space opportunity of over 4,000 stores across the U.S. Distribution center infrastructure in this region also provides us with better access to opportunistic product that can benefit all grocery outlet stores. We have many levers to accelerate sales growth in partnership with the United Grocery Outlet team. Some of these opportunities include assortment expansion, additional store fixtures and improvements, and technology and marketing investments. We also see our independent operator model as another lever for growth.

Speaker Change: You know your grocery outlet also operates a distribution center, which can support additional new store growth and the broader southeast region.

Speaker Change: This is an exciting addition, as we pursue our white space opportunity of over 4000 stores across the U S.

Speaker Change: Distribution center infrastructure in this region also provides us with better access to opportunistic product that can benefit all grocery outlet stores.

Speaker Change: We have many levers to accelerate sales growth in partnership with the United grocery outlet team.

Speaker Change: Some of these opportunities include assortment expansion additional store fixtures and improvements in technology and marketing investments.

Speaker Change: We also see our independent operator model as another lever for growth.

RJ Sheedy: It is an important differentiator for us, and we believe that it can have a positive impact in this region as well. We look forward to updating you on the integration progress as we go. In addition to the United Grocery Outlet stores, we plan to open 15 to 20 stores for a total of 55 to 60 net new stores this year. Our real estate pipeline is healthy, with approved sites for 2025 in a good position to deliver our 10% annual growth goal. Given this, most of our recent real estate efforts have been focused on building the 2026 pipeline. This will add to what is currently over 100 approved sites for 2025 and 2026 combined.

It is an important differentiator for us and we believe that it can have a positive impact in this region as well.

Speaker Change: We look forward to updating you on the integration progress as we go.

Speaker Change: In addition to the United grocery outlet stores, we plan to open 15 to 20 stores for a total of 55 to 60 net new stores this year.

Speaker Change: Our real estate pipeline is healthy with approved sites for 2025 in good position to deliver our 10% annual growth goal.

Speaker Change: Given this most of our recent real estate efforts have been focused on building the 'twenty 'twenty six pipeline.

Speaker Change: This will add to what is currently over 100 approved sites for 'twenty 'twenty, five and 'twenty 'twenty six combined.

RJ Sheedy: We continue to pursue organic growth combined with additional real estate opportunities that align with our long-term geographic expansion and stored growth strategy. We are expanding strategic relationships with large property owners, evaluating opportunistic real estate lists, and exploring additional strategic regional acquisitions. The combination of these activities will help us deliver on our tremendous long-term store growth and geographic expansion opportunities. Let's turn now to other strategic initiatives. Our personalization app is on track to be active in all stores by the end of the first quarter. This app will allow us to communicate our weekly deals to customers and customize their treasure hunt experience.

Speaker Change: We continue to pursue organic growth combined with additional real estate opportunities that align with our long term geographic expansion and store growth strategies.

Speaker Change: We are expanding strategic relationships with large property owners evaluating opportunistic real estate lists and exploring additional strategic regional acquisitions.

Speaker Change: The combination of these activities will help us deliver on our tremendous long term store growth and geographic expansion opportunities.

Speaker Change: Let's turn now to other strategic initiatives.

Speaker Change: Our personalization App is on track to be active in all stores by the end of the first quarter.

Speaker Change: This app will allow us to communicate our weekly deals to customers and customize their treasure Hunt experience.

RJ Sheedy: This will increase customer engagement with Grocery Outlet and help drive trip frequency and share of wallet. We are also looking forward to launching our first new private label products later in the second half of the year with a goal of 100 SKUs by year end. Our assortment will initially focus on everyday value commodity categories that deliver better value and margin and complete the full shop. These items will help us capture larger baskets and create a stickier customer relationship. Our private label strategy will also include NOSH categories and unique items that will serve as another differentiator enhancing the customer shopping experience. Next, for a people update, we welcomed Ramesh Chakal last month in the new role of Chief Operations Officer. Ramesh's experience in retail and operations organizations includes 14 years at Walmart, where, as SVP, he led its global supply chain and food manufacturing operations, as well as its global technology organization.

Speaker Change: This will increase customer engagement with grocery outlet and helped drive trip frequency and share of wallet.

Speaker Change: We are also looking forward to launching our first new private label products later in the second half of the year with a goal of 100 skus by year end.

Speaker Change: Our assortment will initially focus on everyday value commodity categories that deliver better value and margin and complete the full shop.

Speaker Change: These items will help us capture larger baskets and create stickier customer relationship.

Speaker Change: Our private label strategy will also include Nash categories and unique items that will serve as another differentiator enhancing the customer shopping experience.

Speaker Change: Next for people update we welcomed from East Chicago last month in the new role of Chief Operations Officer.

Speaker Change: Remissions experience in retail and operations organizations includes 14 years at Walmart, whereas S. V. P. He led its global supply chain and food manufacturing operations as well as its global technology organization.

RJ Sheedy: Most recently, Ramesh has been a senior advisor to CARNI on their operations, supply chain technology, and consumer industry and retail practices. I look forward to working with him to further optimize our supply chain and technology infrastructure to support our long-term growth. We are in the process of our search for a new CFO, and I'm happy to have Lindsey Gray, our SVP of Accounting and Principal Accounting Officer, stepping into the role of interim CFO, effective March 1st. Lindsay has been with Grocery Outlet for the last eight years, leading our accounting team. She is an experienced financial executive with deep knowledge of the grocery outlet business and over 14 years of leadership in finance. She is also well-connected throughout the business and a strong supporter of the I.O. Model

Speaker Change: Most recently he roomy she has been a senior advisor to Carney and their operation supply chain technology, and consumer industry and retail practices.

Speaker Change: I look forward to working with him to further optimize our supply chain and technology infrastructure to support our long term growth.

Speaker Change: We are in process with our search for a new CFO and I'm happy to have Lindsay Gray R. S V. P of accounting and principal accounting officer stepping into the role of interim CFO effective March 1st.

Speaker Change: Lindsey has been with grocery outlet for the last eight years, leading our accounting team.

Speaker Change: She is an experienced financial executive with deep knowledge of grocery outlet's business in over 14 years of leadership in finance.

Speaker Change: She also is well connected throughout the business and a strong supporter of the Io model.

RJ Sheedy: In closing, I would like to thank the Grocery Outlet team and our IOs for their dedication and many contributions. The entrepreneurial spirit of our IOs combined with the buying power of our team creates a powerfully unique customer experience, which positions us well to continue to grow our market share. I also want to thank Charles for his invaluable contributions to Grocery Outlet. Thank you, Charles, for all that you've done over the past 12 years. You will be greatly missed by everyone, and we wish you the best of luck in the next chapter of your career.

Speaker Change: In closing I would like to thank the grocery outlet team and our iOS for their dedication and many contributions.

Speaker Change: The entrepreneurial spirit of our iOS combined with the buying power of our team creates a powerful unique customer experience, which positions us well to continue to grow our market share.

Speaker Change: I also want to thank Charles for his invaluable contributions to grocery outlet.

Speaker Change: Thank you Charles for all that you've done over the past 12 years.

Charles Bracher: He will be greatly missed by everyone and we wish you the best of luck in the next chapter of your career.

Charles Bracher: And with that, I'll turn it over to Charles. Thanks, RJ, and good afternoon, everyone. Our fourth-quarter results slightly exceeded our expectations, reflecting continued strength in transaction growth, which improved throughout the quarter. For fiscal 2023, in total, we delivered strong top-line growth with comp sales increasing 7.5 percent, yielding $4 billion in total sales. We also drove healthy bottom-line growth with adjusted EBITDA of 17.7% and adjusted net income increasing 15.2%. For the quarter, net sales increased 6.3% to $989.8 million due to a 2.7% increase in comparable store sales and the impact of new stores opened over the past 12 months. Comp transaction growth of 7.5% was partially offset by a 4.5% decline in our average basket. We estimate the system transition impacted comp sales by approximately 200 basis points for the quarter. We opened 13 new stores during the quarter, including 7 in the East and 1 in Southern California, ending the year with 468 locations.

Charles Bracher: And with that I'll turn it over to Charles.

Charles Bracher: Thanks, RJ and good afternoon, everyone, our fourth quarter results slightly exceeded our expectations, reflecting continued strength in transaction growth, which improved throughout the quarter for.

Charles Bracher: For fiscal 2023 in total we delivered strong topline growth with comp sales, increasing seven 5%, yielding $4 billion in total sales.

Charles Bracher: We also drove healthy bottom line growth with adjusted EBITDA up 17, 7% and adjusted net income increasing 15.2% for.

Charles Bracher: For the quarter net sales increased six 3% to $989 $8 million due to a two 7% increase in comparable store sales and the impact of new stores opened over the past 12 months.

Charles Bracher: Comp transaction growth of seven 5% was partially offset by a 4.5% decline in our average basket.

Charles Bracher: We estimate the system transition impacted comp sales by approximately 200 basis points for the quarter.

Charles Bracher: We opened 13, new stores during the quarter, including seven in the east and one in southern California and in the year with 468 locations we.

Charles Bracher: We remain pleased with the performance of our new stores, which are ramping in line with our expectations. Gross profit increased 6.3% to $298.9 million, representing a 30.2% gross margin rate, slightly better than our expectation. We continue to experience healthy deal flow, which helped offset the margin impact of our system integration, which we estimate was approximately 130 basis points in the course. Turning to expenses, fourth quarter SG&A increased 8.8% to $279.9 million

Charles Bracher: We remain pleased with the performance of our new stores, which are ramping in line with our expectations.

Charles Bracher: Gross profit increased six 3% to $298 $9 million, representing a 32% gross margin rate slightly better than our expectations.

Charles Bracher: We continue to experience healthy deal flow, which helped to offset the margin impact of our system integration, which we estimate was approximately 130 basis points in the quarter.

Charles Bracher: Turning to expenses fourth quarter, SG&A increased eight 8% to $279 $9 million.

Charles Bracher: As a percentage of sales, SG&A increased 65 basis points. The increase was driven by higher commission payments to IOs, store occupancy due to new unit growth, and DNA expense. This was partially offset by lower incentive and stock-based compensation accruals. The higher commission expense reflects gross profit growth along with additional commission support we elected to provide our IOs in connection with our system transition. Net interest expense decreased 74.2% to $1.5 million in the quarter.

Charles Bracher: As a percentage of sales SG&A increased 65 basis points.

Charles Bracher: The increase was driven by higher commission payments to iOS store occupancy due to new unit growth and D&A expense.

Charles Bracher: This was partially offset by lower incentive and stock based compensation accruals.

Charles Bracher: The higher commission expense reflects gross profit growth along with additional commission support we elected to provide our iOS in connection with our system transition.

Charles Bracher: Net interest expense decreased 74, 2% to $1 $5 million in the quarter.

Charles Bracher: This reflects a reduction in net borrowing versus the prior year, partially offset by higher average rates. In addition, we recorded a reduction of approximately $2 million in the quarter to reflect full-year capitalized interest costs related to store construction and other capital projects. Our effective GAAP tax rate during the quarter was 19.3%. For non-GAAP purposes, our normalized tax rate was approximately 31% and a quarter, which reflects a 30% rate for the full fiscal year.

Charles Bracher: This reflects a reduction in net borrowing versus the prior year, partially offset by higher average rates.

Charles Bracher: In addition, we recorded a reduction of approximately $2 million in the quarter to reflect full year of capitalized interest costs related to store construction and other capital projects.

Charles Bracher: Our effective GAAP tax rate during the quarter was 19, 3%.

Charles Bracher: For non-GAAP purposes, our normalized tax rate was approximately 31% in the quarter, which reflects a 30% rate for the full fiscal year.

Charles Bracher: As a result of these factors, gap net income for the fourth quarter was $14.1 million, or $0.14 per diluted share. For the fourth quarter, adjusted EBITDA was $50.9 million, or 5.1% of sales, slightly better than expected. Adjusted net income was $18.2 million for the quarter, or 18 cents per diluted share. Turning to our balance sheet, we ended the quarter with $115 million of cash. Our inventory position improved throughout the quarter, ending at $350 million. Total debt was $292.7 million at the end of the fourth quarter, with net leverage less than one times adjusted EBITDA.

Charles Bracher: As a result of these factors GAAP net income for the fourth quarter was $14 $1 million or 14 cents per diluted share.

Charles Bracher: For the fourth quarter, adjusted EBITDA was $59 million or five 1% of sales slightly better than expected.

Charles Bracher: Adjusted net income was $18 $2 million for the quarter or <unk> 18 cents per diluted share.

Charles Bracher: Turning to our balance sheet, we ended the quarter with $115 million of cash.

Charles Bracher: Our inventory position improved throughout the quarter ending at $350 million.

Charles Bracher: Total debt was $292 $7 million at the end of the fourth quarter with net leverage less than one times adjusted EBITDA.

Charles Bracher: For fiscal 2023, we generated $303.5 million of operating cash flow, and we invested $175.6 million in CAPEX, the Net Attendant Improvement Allowance. This was higher than initially planned due to the timing of payments for new stores and costs related to our system's implementation. Now, let me provide you with some commentary on our fiscal 2024 guidance, which includes the impacts of the United Grocery Outlet acquisition and the system transition. We expect the acquisition to close at the beginning of the second quarter.

Charles Bracher: For fiscal 'twenty to 'twenty, three we generated $303 $5 million of operating cash flow and we invested $175 $6 million in capex net of tenant improvement allowances.

Charles Bracher: This was higher than initially planned due to the timing of payments for new stores and costs related to our systems implementation.

Charles Bracher: Now let me provide you with some commentary on our fiscal 2024 guidance, which includes the impacts of the United grocery outlet acquisition and the system transition.

Charles Bracher: We expect the acquisition to close at the beginning of the second quarter, our first quarter guidance assumes no financial impact from the acquisition and our full year guidance assumes nine months of financial results from United grocery outlet.

Charles Bracher: Our first quarter guidance assumes no financial impact from the acquisition, and our full year guidance assumes nine months of financial results from United Grocery Outlet. As a result, our fiscal 2024 guidance assumes incremental sales of approximately $125 million, adjusted EBITDA of $7 million, and a modest benefit to adjusted EPS. With respect to our system transition, while we have made progress, the data integration efforts have taken longer than anticipated.

Charles Bracher: As a result, our fiscal 'twenty 'twenty four guidance assumes incremental sales of approximately $125 million adjusted EBITDA of $7 million and a modest benefit to adjusted EPS.

Charles Bracher: With respect to our system transition, while we have made progress the data integration efforts have taken longer than anticipated.

Charles Bracher: Because of this we expect will continue to experience P&L impacts during the first quarter.

Charles Bracher: Because of this, we expect we'll continue to experience P&L impacts during the first quarter. With that as a background, let me provide you with our expectations for fiscal 2024. For the full year, we are projecting comp sales growth in the range of 3% to 4%. We expect comp growth in the first quarter to be approximately 2 percent, which includes an estimated 50 basis point impact from the system transition.

Charles Bracher: With that as background, let me provide you with our expectations for fiscal 2024.

Charles Bracher: For the full year, we are projecting comp sales growth in the range of 3% to 4%.

Charles Bracher: We expect comp growth in the first quarter to be approximately 2%, which includes an estimated 50 basis point impact from the system transition.

Charles Bracher: We expect to add a total of 55 to 60 net new stores this year.

Charles Bracher: This includes the 40 newly acquired United grocery outlet stores as well as 15 to 20, new stores in our existing markets evenly split by quarter.

Charles Bracher: We expect to add a total of 55 to 60 net new stores this year. This includes the 40 newly acquired United Grocery Outlet stores, as well as 15 to 20 new stores in our existing markets, evenly split by quarter. In total, we project fiscal 2024 net sales of $4.3 to $4.35 billion. For the full fiscal year, we project a gross margin of approximately 31.3 percent.

Charles Bracher: In total we project fiscal 2024 net sales of 4.3 to 4.35 billion.

Charles Bracher: For the full fiscal year, we project gross margin of approximately 31, 3%.

Charles Bracher: We expect gross margin for the first quarter of approximately 34%, which includes an estimated 100 basis point impact from the system transition.

Charles Bracher: We expect sequential improvement in gross margins into the back half of the year.

Charles Bracher: We expect gross margin for the first quarter of approximately 30.4 percent, which includes an estimated 100 basis point impact from the system transition. We expect sequential improvement in gross margins into the back half of the year. For the full fiscal year, we expect adjusted EBITDA to be in the range of $275 to $283 million.

Charles Bracher: For the full fiscal year, we expect adjusted EBITDA to be in the range of $275 million to $283 million.

Charles Bracher: We expect first quarter adjusted EBITDA margin of approximately 5%, reflecting lower gross margin and higher Io Commission support.

Charles Bracher: For the year, we expect DNA to grow in the mid teens on a percentage basis, reflecting the impact of store growth, the United grocery outlet acquisition and infrastructure Reinvestments.

Charles Bracher: We expect a first quarter adjusted EBITDA margin of approximately 5%, reflecting lower gross margin and higher IO commission support. For the year, we expect DNA to grow in the mid-teens on a percentage basis, reflecting the impact of store growth, the United Grocery Outlet acquisition, and infrastructure reinvestment. We expect stock-based compensation of approximately $32 million for the year. Net interest expense is anticipated to be approximately $17 million.

Charles Bracher: We expect stock based compensation of approximately $32 million for the year.

Charles Bracher: Net interest expense is anticipated to be approximately $17 million.

Charles Bracher: We forecast our normalized tax rate of 30% and average diluted shares outstanding of approximately $102 million we.

Charles Bracher: We expect Capex net of tenant improvement allowances of approximately $170 million, reflecting new store growth upgrades to our existing fleet, including approximately $15 million of anticipated United grocery outlet store capital improvements as well as ongoing investments in.

Charles Bracher: We forecast a normalized tax rate of 30% and average diluted shares outstanding of approximately $102 million. We expect CAPEX net of tenant improvement allowances of approximately $170 million, reflecting new store growth, upgrades to our existing fleet, including approximately $15 million of anticipated United Grocery Outlet store capital improvements, as well as ongoing investments in technology, supply chain, and infrastructure. We expect the resulting full year adjusted EPS to be in the range of $1.14 to $1.20 per diluted share.

Charles Bracher: Allergy supply chain and infrastructure.

Charles Bracher: We expect resulting in full year adjusted EPS to be in the range of $1 14 to $1 20 per diluted share.

Speaker Change: In closing I want to thank the grocery outlet team and operator community for an incredible past 12 years grocery outlet is truly a unique company and I will miss being part of this organization.

Charles Bracher: In closing, I want to thank the Grocery Outlet team and the operator community for an incredible past 12 years. Grocery Outlet is truly a unique company, and I will miss being part of this organization. I'm incredibly proud of all that we have accomplished, and I want to thank RJ, the board, and the leadership team for their fantastic partnership along the way. We will now open the call to your questions. Operator.

Speaker Change: I'm incredibly proud of all that we have accomplished and I want to thank RJ the board and the leadership team for their fantastic partnership along the way.

Speaker Change: We will now open the call up to your questions.

Speaker Change: Operator.

Speaker Change: Okay.

Speaker Change: Thank you Sir.

Speaker Change: At this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star and then one on your telephone keypad.

Speaker Change: Nation tone will indicate your line is in the question queue.

Operator: Thank you, sir. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and then two if you would like to remove your question from the queue. Call boxes use speaker equipment. It may be necessary to pick up your handset before pressing the star.

Speaker Change: You May press Star and then two if you would like to move your question from the queue.

Speaker Change: Oh pocketed using speaker equipment, it may be necessary to pick up you'll have full cocoa pricing stocks.

Speaker Change:

Speaker Change: So first question that'd be held today is from Oliver Chen from T. D. Cohen. Please go ahead.

Oliver Chen: Thanks, a lot hi, RJ and Charles and Charles Congratulations the United grocery outlet deal it sounds quite synergistic I would love your thoughts on what characteristics, where most attractive how might the integration phases go and then what should we know about the ramp to maturity.

Oliver Chen: The fourth question that we have today is from Oliver Chen of T.D. Cohen. Please go ahead. Thanks a lot. Hi RJ and Charles, and congratulations. The United Grocery Outlet deal sounds quite synergistic. I would love your thoughts on what characteristics were most attractive, how the integration phases would go, and then what we should know about the ramp to maturity of these stores and why you like the Southeast. As a housekeeping item, too, you mentioned that the deal will modestly benefit adjusted EPS. Are there any details on how this will be financed and anything else we should know in looking at the EPS accretion dilution? Thank you. Thanks, Oliver. Hi, it's RJ.

Oliver Chen: Of these stores and why you like the South East a housekeeping item here you mentioned that the deal will modestly benefit adjusted EPS are there any details on how this will be financed and anything else. We should know in looking at the EPS accretion dilution. Thank you.

Oliver Chen: Thanks, Oliver Hi, It's R. J I'll take the first part of that and then kick it over to Charles for the second part of your question. Yeah. We're real excited about this acquisition.

RJ Sheedy: Things that we like about it first I'd say is companies are of great match. We have a shared mission is touching lives in serving customers with similar business models store size shared customer value propositions around unbeatable value in the treasure Hunt experience all that supported by opportunistic sourcing and localized assortments. So just.

RJ Sheedy: I'll take the first part of that and then kick it over to Charles for the second part of your question. Yeah, we're really excited about this acquisition. A lot of things that we like about it, but the first thing I'd say is that companies are a great match. We have a shared mission of touching lives and serving customers. We have similar business models, store size, shared customer value propositions around unbeatable value and the treasure hunt experience, all supported by opportunistic sourcing and localized assortment. So there are just a lot of similarities between the two businesses. This is a growth acquisition, and there are a lot of benefits related to growth. United Grocery Outlet is already a healthy growing business across the six states in the southeast where they operate.

RJ Sheedy: A lot of similarities between the two businesses. This is a growth acquisition and a lot of benefits there related to gross you know your grocery outlet already is a healthy growing business across the six states in the southeast where they operate we in addition to just continued growth of that business, we believe that we.

RJ Sheedy: Have several levers by which we can accelerate growth in the United grocery outlet stores in just a few examples here one expanding the assortment we think a nice opportunity. There are two would be to enhance the store experience through investments in fixtures and signage and technology.

RJ Sheedy: In addition to just continued growth in that business, we believe that we have several levers by which we can accelerate growth in the United Grocery Outlet stores. Just a few examples here: one, expanding the assortment, we think a nice opportunity there. Two would be to enhance the store experience through investments in fixtures, signage, and technology.

RJ Sheedy: I'm also looking to make additional investments in marketing to continue to drive traffic and growth in that region and as I mentioned in my comments. We also believe that there are benefits to introducing the operator model to this region as well so a lot there to be.

RJ Sheedy: Yes, we think can help the grocery outlet business they have a bigger fresh meat assortment.

RJ Sheedy: So something for us to learn from they of course have relationships with regional suppliers and then we think we can take advantage of and then some other unique operating practices that we look forward to learning from.

RJ Sheedy: Also, looking to make additional investments in marketing to continue to drive traffic and growth in that region. And, as I mentioned in my comments, we also believe that there are benefits to introducing the operator model to this region as well. So there is a lot there to be... We think it can help the grocery outlet business. They have a bigger fresh meat assortment, so something for us to learn from.

RJ Sheedy: Another benefit that I mentioned here is the infrastructure that comes with the deal. It provides us infrastructure in an adjacent region to our current east footprint. It's a great entry point for us into the southeast it's great infrastructure to support future growth as we continue to pursue this tremendous white space.

RJ Sheedy: They, of course, have relationships with regional suppliers that we think we can take advantage of, and then some other unique operating practices that we look forward to learning from. Another benefit that I mentioned here is the infrastructure that comes with the deal. It provides us with infrastructure in an adjacent region to our current east footprint, a great entry point for us into the southeast.

RJ Sheedy: <unk> that we have and when you think about the infrastructure that comes with this deal together with the platform that we already have up in the mid Atlantic region. We now have a lot of the eastern U S covered in terms of infrastructure for supporting future growth and then lastly, I'd say from an infrastructure standpoint, a nice benefit here expect.

RJ Sheedy: As far as opportunistic buying goes in giving us better access to product that in this region I'm an advantage there for him having local presence to land product locally and then Charles you want to touch on Yeah, Oliver It's Charles just quickly on.

RJ Sheedy: It's great infrastructure to support future growth as we continue to pursue this tremendous white space opportunity that we have. And when you think about the infrastructure that comes with this deal, together with the platform that we already have in the mid-Atlantic region, we now have a lot of the eastern U.S. covered in terms of infrastructure for supporting future growth. And then, lastly, I'd say, from an infrastructure standpoint, a nice benefit here expected is as far as opportunistic buying goes and giving us better access to product that's in this region, an advantage there for having a local presence to land product locally. And then, Charles, do you want to touch on that?

Charles Bracher: How were approaching the financing and sort of the EPS impact of the acquisition with respect to 2024. So we do anticipate using cash on hand upon closing.

Charles Bracher: To finance the deal and so in our guidance, we talk to the EBITDA impact from this deal, which we estimate to be roughly $7 million a prorated for 2024, and so think of that as really steady state performance of the business is.

Charles Bracher: As it currently stands and then further down the P&L because of the the financing with cash we have factored in.

Charles Bracher: Yeah. Yeah. Oliver, it's Charles.

Charles Bracher: Just quickly on how we're approaching the financing and sort of EPS impact of the acquisition with respect to 2024. So we do anticipate using cash on hand upon closing to finance the deal. And so in our guidance, we talk about the EBITDA impact from the deal, which we estimate to be roughly $7 million prorated for 2024. And so think of that as the really steady state performance of the business as it currently stands. And then further down the P&L, because of the financing with cash, we have factored into our interest expense the impact of really lost interest income into our guidance there.

Charles Bracher: Into our interest expense the impact of really lost interest income into our guidance, there and likewise in DNA and our.

Charles Bracher: Our mid teens guidance reflects the impact of depreciation and amortization related to 90 grocery outlets all of that comes together to deliver modest EPS accretion in 2024.

Speaker Change: Thank you very much best regards.

Speaker Change: Thanks, Thanks Ara.

Speaker Change: Thank you, ladies and gentlemen, just a reminder, participants all restricted to one question at a time.

Speaker Change: Next question, we have comes from Kristine Oncotype with Deutsche Bank. Please go ahead.

Kristine Oncotype: Hi, good afternoon, and thank you for taking my question I just had a question about the southern states and how you're thinking about the store expansion potential. There now that you will have 40 stores in the region. So one is there a profitability differential like so how do you view the profitability potential in the region and how that compares relative to the rest of the Geo network.

Charles Bracher: And likewise, in DNA, our mid-teams guidance reflects the impact of depreciation and amortization related to United Grocery Outlets. All that comes together to deliver modest EPS accretion in 2024. Thank you very much.

Kristine Oncotype: Are these included in your 2025 and 2026 store plans just anything that you can share in terms of if you started to look for I O in the region and just lastly, you acquired D. C. You've talked about that he can support figure go I was just wondering how many stores. It can fully support thank you.

Oliver Chen: Best regards. Thanks. Thanks, Oliver.

Operator: Thank you. Ladies and gentlemen, just a reminder, participants are restricted to one question at a time. The next question we have comes from Kristina Katai of Doja Bank. Please go ahead. Hi, good afternoon.

Speaker Change: Yeah, Hi, Christina Thanks for the question I'll take the first part and then Charles can touch on part of your question as well.

Kristina Katai: Thank you for taking the question. I just had a question about the southern states and how you're thinking about the store expansion potential there now that you will have 40 stores in the region. So, first, is there a profitability differential?

Speaker Change: As I mentioned, we are excited about the infrastructure here you know your grocery outlet operates a multi multi temperature D C.

Speaker Change: <unk>.

Speaker Change: So that that we think will serve us well both of course supporting growth in existing stores and then also to your question as we think about future new store growth. We our immediate focus right now is on integration. So we don't have immediate plans to accelerate store growth beyond what the unite.

RJ Sheedy: So how do you view the profitability potential in the region and how it compares relative to the rest of the geo network? Are these included in your 2025 and 2026 store plans? Just anything that you can share in terms of if you have started to look for IOs in the region.

Speaker Change: Rialto team already had plans.

Speaker Change: So we'll do the work together with the U G O team too to proceed on that integration plan and then as we look forward.

Speaker Change: The southeast region lot of potential for growth there the existing D. C can support growth for the next call. It several years from our new growth store growth standpoint, and then similar to how we manage across the entire network and across all of our points of distribution center and infrastructure.

RJ Sheedy: And just lastly, the acquired DC. You've talked about that it can support further growth. I was just wondering how many stores it can fully support.

RJ Sheedy: Yeah, hi Christina, thanks for the question. I'll take the first part and then Charles can touch on part of your question as well. Yeah, as I mentioned, we are excited about the infrastructure here. United Grocery Outlet operates a multi-temperature DC, so that we think will serve us well, both of course, supporting growth in existing stores and, also, as you asked, as we think about future new store growth.

Speaker Change: Well, we'll make we'll make the necessary investments in that to support future store growth, but again, you'll love the volume that it provides us loves the scale that it provides us and loved.

Speaker Change: The love the entry point into this region of the country, which will support a lot of future stores and Christina as Charles just a bit more color on the store productivity and comparisons versus our Geo stores. So we're excited about the potential here is RJ said looking at store productivity the average sales volumes.

RJ Sheedy: Our immediate focus right now is on integration, so we don't have immediate plans to accelerate store growth beyond what the United Grocery Outlet team already had planned. So we'll do the work together with the UGO team to proceed with that integration plan. And then as we look forward, the Southeast region has a lot of potential for growth there.

Speaker Change: For the <unk> stores about half of our current stores. The basket really similar traffic is really the opportunity for us. So we think there is big opportunity to drive that higher through a combination of expanding the assortment driving since their investments we can make an historic capex in tech.

Charles Bracher: The existing DC can support growth for the next, call it several years, from a new store growth standpoint. And then, similar to how we manage across the entire network and across all of our points of distribution centers and infrastructure, we'll make the necessary investments in that to support future store growth. But again, love the volume that it provides us, love the scale that it provides us, and love the entry point into this region of the country, which will support a lot of future stores. Christina and Charles, just a bit more color on the store productivity and comparisons versus our geo stores.

Speaker Change: And technology.

As well as on the marketing side in terms of the margin profile I'd say no real structural margin challenges as we look at the business gross margins a little bit higher than our own stores are really because of mix differences and then more limited everyday assortment that they have store expenses, a little bit higher than I was current.

Speaker Change: We operate all of that and that's down to a very similar EBITDA profile.

Speaker Change: And so again looking at looking ahead, we are excited about what we can do here as we grow these stores to look more like grocery outlet stores in the future.

Speaker Change: Thank you so much.

Speaker Change: Thank you.

Speaker Change: Yeah.

Speaker Change: Thank you. Our next question is coming from the line of Robbie <unk> with Bank of America. Please proceed with your question.

Charles Bracher: So we're excited about the potential here, as RJ said. Looking at store productivity, the average sales volumes for the UGO stores, about half of our current stores, the basket really similar, traffic is really the opportunity for us. So we think there's a big opportunity to drive that higher through a combination of expanding the assortment and driving trips there, investments we can make into store CapEx and technology, as well as on the marketing side. In terms of the margin profile, I'd say there are no real structural margin challenges as we look at the business. Gross margins are a little bit higher than our own stores, really because of mixed differences in the more limited everyday assortment that they have.

Robbie: Oh, Hey, guys. Thanks for taking my questions. One just a clarification the I'm sorry, the Ugo stores that you're acquiring are they currently in the Io model.

Robbie: They are not now.

Robbie: Are you planning are you planning to convert them to the Io model.

Speaker Change: We do yes, we do think of course, the IR model is super important to our business an important part of our value proposition. We think those benefits will apply to the southeast region as well.

Speaker Change: We are still getting to know the business and individual stores you were putting integration plans in place as we speak we just announced the deal right a little over a week ago. So we're now working together with your grocery outlet team on those plans.

Kristina Katai: Store expenses are a little bit higher than IOs currently operate, but all of that necks down to a very similar EBITDA profile. So again, looking ahead, we're excited about what we can do here as we grow these stores to look more like grocery outlet stores in the future. Thank you so much.

Speaker Change: But yes, we do think about introducing the operator model to these stores as well.

Speaker Change: And then R. J just to again to kind of clarify so the the.

RJ Sheedy: I think youre going to do 55 stores, you are saying for 'twenty four.

Operator: Thank you. Thank you. Our next question is coming from the line of Robbie Ohmes with Bank of America. Please proceed with your question. Oh, hey, guys.

RJ Sheedy: 15 to 20 of them would sort of be organic not part of the acquisition, but I think you guys were targeting 10% growth organically before you announced the acquisition, which would be more like 47 organic stores. So did you did.

Robbie Ohmes: Thanks for taking my questions. You know, one clarification, the, sorry, the UGO stores that you're acquiring, are they currently in the IO model? The day or not, now?

RJ Sheedy: Are you planning to convert them to the I-O model? We do, yes, we do think, of course, the I.O. model is super important to our business and an important part of our value proposition. We think those benefits will all apply to the Southeast region as well. We are still getting to know the business and the individual stores. We're putting integration plans in place as we speak. We just announced the deal right here a little over a week ago.

RJ Sheedy: Did you push stores into the future where are you tracking to kind of Miss.

RJ Sheedy: Opening the forty-seven organic stores, but then you made this acquisition like maybe help me understand just the organic outlook.

Speaker Change: Sure Yeah, what we've been focused on delivering the 10% annual store growth. This year, we've talked about that throughout and on the past few calls. We've also talked about pursuing this growth across several fronts rate organic growth of course, but also consideration of opportunistic real estate.

RJ Sheedy: So we're now working together with the United Grocery Outlet team on those plans. But yes, we do think about introducing the operator model to these stores as well. And then RJ, just to kind of clarify, so the, the, I think you're going to do 55 stores, you're saying for 24, and 15 to 20 of them would sort of be organic, you know, not part of the acquisition. But I, I think you guys were targeting 10% growth organically before you announced. The acquisition, which would be more like 47 organic stores. So did you push stores into the future? Or were you tracking to kind of miss something?

Speaker Change: We have some new exciting strategic relationships, we built and then these regional acquisition opportunities that we've been we've been considering as well and all of these activities combined would represent the 10% as we started to see progress on the United grocery outlet acquisition, we were able to manage and moderate.

Speaker Change: Some of the other activities with this 10% goal in mind and keep in mind that real estate is just one part of successfully opening new stores, we were super mindful of infrastructure needed to support them of course, Theres operator recruiting readiness, there's marketing and there are a lot of other things that go into opening stores.

RJ Sheedy: You know, opening 47 organic stores, but then you made this acquisition, like maybe helping me understand just the organic, you know, outlook. Sure, yeah. Well, we've been focused on delivering 10% annual store growth this year. We've talked about that throughout, and on the past few calls, we've also talked about pursuing this growth across several fronts, right? Organic growth, of course, but also consideration of opportunistic real estate. We have some new exciting strategic relationships we've built, and then these regional acquisition opportunities that we've been considering as well. And all of these activities combined would represent the 10%. As we started to see progress on the United Grocery Outlet acquisition, we were able to manage and moderate some of the other activities with this 10% goal in mind. And keep in mind that real estate is just one part of successfully opening new stores, right? We were super mindful of the infrastructure needed to support them.

Speaker Change: Cecily.

Speaker Change: And so we were able to make those modifications.

Speaker Change: And we love where we're at we've got 55 to 60, new stores planned. This year, okay. So a little bit ahead of the 10% growth but.

Speaker Change: For the work that we've done in the.

Speaker Change: Plans that are in place we're excited about the integration work with the 40 as well as the 15 to 20 that we will open organically.

Speaker Change: Great. Thanks, so much.

Speaker Change: Yeah, you bet.

Speaker Change: The next question we have comes from Joe Feldman of Telsey Advisory Group. Please go ahead.

Joseph Isaac Feldman: Hey, guys. Thanks for taking my question one of them to go back on the private label, if you could share a little more color. There I know, it's not coming until the second half, but just curious what if you could dive in a little more on categories. You mentioned nosh, but are there other I guess everyday categories that youre looking to fill.

Joseph Isaac Feldman: With these products and how might that impact you know the relationship with any of the vendors or suppliers that you have thanks.

RJ Sheedy: Of course, there's operator recruiting and readiness, there's marketing, and there are a lot of other things that go into opening stores successfully. And so we were able to make those changes, and we love where we're at. We've got 55 to 60 new stores planned this year. Okay, it's a little bit ahead of the 10% growth, but for the work that we've done and the plans that are in place, we're excited about the integration work with the 40, as well as the 15 to 20 that we will open organically. Great. Thanks so much.

Speaker Change: Yes, Hi, Joe Yes, we are excited to be getting to the point here, where we will be introducing these new items and brands later this year and as you know we've been spending a lot of time building capabilities in setting the strategy and the foundation. This past year, so exciting for us to be at the point here soon where we will have these new items.

Speaker Change: Being introduced to the store.

Speaker Change: These items will be an enhancement to where everyday assortment.

Speaker Change: Hortman provide better value for customers better shopping experience better baskets, and then also better margin for the business. So a lot of things to be excited for there as I mentioned in my comments, our second half of the year is when we'll start introducing these items to the store and we have this goal of 100 new Ita.

Robbie Ohmes: Yeah, you bet. Thank you. The next question we have comes from Joe Feldman of the Healthy Advisor Group. Please go ahead.

Speaker Change: By the end of the year. The initial focus will be in more commodity categories, where and we have a nice opportunity to offer better value and again, you know margin than some of the items that we're currently carrying and I'll just give you a few examples for where you sort of start to see some of these initial items water will be one of the first ones.

Operator: Hey, guys, thanks for taking the question. I wanted to go back to the private label, so if you could share a little more color there, I know it's not coming until the second half, but just curious what, if you could dive in a little more on categories. You mentioned NOSH, but are there other, I guess, everyday categories that you're looking to fill with these products, and how might that impact, you know, the relationship with any of the vendors or suppliers that you have? Thanks. Yeah. Hi Joe.

Speaker Change: We've got some nice opportunities in items lined up within the baking category pasta category and cheese as well. So those are those are just a few we've got others of course on the lists that'll be part of the 100 items and then in addition to some of these commodity categories also planning to introduce I'll call them more.

RJ Sheedy: Yeah, we're excited to be, you know, getting to the point where we will be introducing these new items and brands later this year. And as you know, we've been spending a lot of time building capabilities and setting the strategy and the foundation this past year, so it's exciting for us to be at the point here soon where we will have these new items being introduced to the store. These items will be an enhancement to our everyday assortment. The first half of the year is when we'll start introducing these items to the store, and we have this goal of 100 new items by the end of the year. The initial focus will be on more commodity categories where we have a nice opportunity to offer better value and, again, you know, margin than some of the items that we're currently carrying. And I'll just give you a few examples of where you'll start to see some of these initial items. Water will be one of the first ones. We've got some nice opportunities and items lined up within the baking category, the pasta category, and cheese as well. So those are just a few.

Speaker Change: Frenchie aid items and.

Speaker Change: We're nauseous great opportunity here are items that can just further strengthen the treasure hunt experience can further differentiate us and also serve as another point of.

Speaker Change: Well differentiation and destination for for customers that are shopping our stores. So a lot there for us to like still just the beginning this is going to be a longer journey, but at least excited to be taking this first big step in getting this initial wave of products out to the stores and to our customers.

Speaker Change: Great. Thank you and good luck Charles with everything.

Speaker Change: Thank you.

Speaker Change: Thank you Paul.

Speaker Change: Just bear in mind that if.

Speaker Change: If you would like to ask a question you can start and then the one now.

Speaker Change: Next question, we have comes from Mark Kaufman from UBS. Please go ahead.

Mark Kaufman: Good afternoon. Thanks, so much for taking the question. So for the year ahead, youre expecting a gross margin that's north of 31% for the second straight year, even with the systems headwind noticeably above your historical rate.

RJ Sheedy: We've got others, of course, on the list that'll be part of the 100 items. And then, in addition to some of these commodity categories, we are also planning to introduce, I'll call them, more differentiated items, and where NOSH is a great opportunity here, items that can just further strengthen the treasure hunt experience, can further differentiate us, and also serve as another point of, well, differentiation and destination for customers that are shopping in our stores So, a lot there for us to like, still just the beginning. This is going to be a longer journey, but I am at least excited to be taking this first big step in getting this initial wave of product out to the stores and to our customers. Great. Thank you, and good luck, Charles, with everything. Thanks. Thank you. Thank you, sir.

It sounds like trends are expected to improve in <unk> as well just what are the biggest factors driving this change thanks.

Mark Kaufman: Yeah, Mark it's Charles I would say you know for us.

Charles Bracher: We're just really pleased with.

Charles Bracher: The purchasing backdrop that we continue to experience yes.

Charles Bracher: The technology implementation.

Charles Bracher: Had an impact but the deal flow we're seeing.

Charles Bracher: The backdrop from a buying perspective feels very good.

Charles Bracher: Beyond that continuing to see inflation moderate very much as we expected and promotional activity.

Charles Bracher: Looks to still remain very very rational so.

Feel great about the setup for the year to your point, it's above our sort of historical margin performance.

Charles Bracher: Looking back over time, but again, just think some of those tail winds will play to our strengths. This here.

Operator: Ladies and gentlemen, just a reminder, if you would like to ask a question, you can start in the middle. The next question we have comes from Mark Codden from UBS. Please go ahead. Good afternoon.

Speaker Change: Great and then how is the overall product pipeline chicken up for 2024 are you guys expecting to see much change in the peso CTG innovation.

Speaker Change: It's a it's good yeah, we continue to be encouraged by the pipeline of opportunistic product. It continues to be broad based across categories.

Mark Codden: Thanks so much for taking the question. So for the year ahead, you're expecting a gross margin that's north of 31% for the second straight year, even with the system's headwind, noticeably above your historical rate. Sounds like trends are expected to improve in 2H as well. Just what are the biggest factors driving this change? Thanks. Yeah, Mark, it's Charles.

Speaker Change: There's a lot of positive momentum throughout all of last year through to the end of the year and Thats all carry forward through the first quarter so far.

Speaker Change: We think carries forward through.

Speaker Change: Through this year and as far as just.

Speaker Change: Some of the trends we've talked about in the past.

Speaker Change: Forecasting continues to be hard so that contributes to opportunistic supply, yes product innovation.

Charles Bracher: I would say, you know, for us, we're just really pleased with the purchasing backdrop that we continue to experience. Yes, the technology implementation has had an impact, but the deal flow we're seeing, the backdrop from a buying perspective feels very good. Beyond that, continuing to see inflation moderate very much as we expected, and promotional activity looks to still remain very rational. So, you know, feel great about the setup for the year. To your point, it's above our sort of historical margin performance looking back over time. But again, just think some of those tailwinds will play to our strengths this year.

Speaker Change: Continues to be healthy and the increase in <unk>.

Speaker Change: As suppliers introduce new items and they extend brands and branded label changes in packaging changes those are all beneficial from a surplus inventory standpoint and then.

Speaker Change: Just generally changes in assortment and products are favorable and so there continues to be a lot of dynamic factors to that.

Speaker Change: Supply environment. So all of those have a feeling pretty good about what we're seeing currently and what's in front of us here through the rest of the year.

RJ Sheedy: And then how's the overall product pipeline shaping up for 2024? Are you guys expecting to see much change in the pace of CPG innovation? It's good.

Speaker Change: Great. Thanks, so much good luck guys.

Speaker Change: Thank you.

Speaker Change: Thank you.

Core Economy: Next question you have comes from core economy of Jefferies. Please go ahead.

Core Economy: Great. Thanks, and good afternoon, so I.

RJ Sheedy: Yeah, we continue to be encouraged by the pipeline of opportunistic products. It continues to be broad-based across categories. There was a lot of positive momentum throughout all of last year, you know, through to the end of the year, and that's all carried forward through the first quarter so far, and we think it will carry forward through, you know, this year. And, you know, as far as just some of the trends we've talked about in the past, forecasting continues to be hard, so that contributes to opportunistic supply. Yes, product innovation continues to be healthy and increasing as suppliers introduce new items, and they extend brands, and there's brand and label changes, and packaging changes. Those are all beneficial from a surplus inventory standpoint.

Core Economy: I wanted to ask about the <unk> acquisition.

Jefferies: And then as you think about.

Speaker Change: This acquisition versus the one you made about a decade ago in Amelia.

Jefferies: What's when does the Io model makes sense, because I think RJ or or or Charles you had mentioned that the productivity or the sales volumes are about half of the fleet. Currently so when does it make sense to introduce the Io model is it a multi quarter.

Jefferies: Or or a multi year phasing and then how do you think about some of the similarities and differences between when you bought Amelia and how that integrated into the enterprise versus buying Ugo today.

Mark Codden: And then just generally changes in assortment and, you know, products are favorable, and so there continues to be a lot of dynamic factors in the supply environment. So, you know, all those have us feeling pretty good about what we're seeing currently and what's in front of us here through the rest of the year. Thanks so much.

Speaker Change: Yeah. Thanks, Cory let me I'm going to start with your second question and then ill let me come back to the first part of your question. The Emilia as acquisitions long time ago. Many things have changed in our business. Since then I will note some similarities between that acquisition in this one similar business models value propositions shared valley.

Operator: Thank you. The next question we have comes from Corey Connors of Jefferies. Please go ahead.

Speaker Change: We use for how we operate in both cases.

Corey Connors: Great, thanks, and good afternoon. So, I wanted to ask about the UGO acquisition, and as you think about this acquisition versus the one you made about a decade ago in Amelia's, when does the I.O. model make sense? Because I think RJ or Charles you had mentioned that the productivity or the sales volumes are about half of the fleet currently. So when does it make sense to introduce the I.O. model?

Speaker Change: So that's certainly similar.

Speaker Change: Both are providing us with infrastructure to support growth in a new region in the case of Emilia is it was really an entry point to the east coast and here now a new region in the east coast, but both coming with stores and distribution center a local team that will continue operating the businesses are all very helpful for entry into a new.

Speaker Change: Fee.

Speaker Change: And then.

RJ Sheedy: Is it a multi-quarter or a multi-year phasing? And then, how do you think about some of the similarities and differences between when you bought Amelia's and how that integrated into the enterprise versus buying UGO today? Yeah, thanks, Corey. Let me start with your second question and then I'll, let me come back to the first part of your question. The Amelia's acquisition was a long time ago.

Speaker Change: At this point about providing better access to opportunistic supply we saw that play out in a really positive way with Amelia is and we expect that to be the same for product that.

Speaker Change: That is local within that region in the case of United grocery outlet. So a lot of similarities there in terms of a lot of differences as well just in terms of store count.

Speaker Change: Other parts of operation, but probably more similarities than not in terms of timing and integration again, we are really just starting to work through integration planning together with the United grocery outlet team is it.

RJ Sheedy: Many things have changed in our business since then, and I will note some similarities between that acquisition and this one. Similar business models, value propositions, and shared values for how we operate in both cases, so that's certainly similar. Both are providing us with infrastructure to support growth in a new region. In the case of Amelia's, it was really an entry point to the East Coast, and here now, a new region in the East Coast, but both coming with stores and distribution centers, a local team that will continue operating the business, those are all very helpful for entry into a new geography. And then this point about providing better access to opportunistic supply, we saw that play out in a really positive way with Amelia's, So there are a lot of similarities there.

Speaker Change: Hasn't been that long since the deal has been announced.

Speaker Change: First I'd say, it's a healthy growing business. So our top priority is to maintain current business momentum and be smart about how we begin to integrate it and how we think about prioritizing and sequencing and timing for some of these these growth opportunities and that getting to your question around the operator model.

Speaker Change: But it would also apply to rebranding and other things that we might do we wanted to make sure that we've got a well integrated plan and we're doing and making these changes in the right cadence not the right pace relative to the ongoing business and making sure we're striking a healthy balance there.

Speaker Change: About the activation of a lot of these.

RJ Sheedy: In terms of, a lot of differences as well, just in terms of store count and other parts of operation, but probably more similarities than not. In terms of timing and integration, again, we are really just starting to work through integration planning together with the United Grocery Outlet team, as it hasn't been that long since the deal was announced. First, I'd say it's a healthy growing business, so our top priority is to maintain current business momentum and be smart about how we begin to integrate it and how we think about prioritizing, sequencing, and timing for some of these growth opportunities. And that, getting to your question around the operator model, but it would also apply to rebranding and other things that we might do.

Speaker Change: Accelerated growth opportunities that are taking place over the next couple of years. There are things that we would want to get in place prior to any rebranding or conversion.

Speaker Change: Some of the nearer term opportunities would be around expanding the assortment.

Speaker Change: Some of the investments that we want to make into the stores.

Speaker Change: And you get some of those things in place and then following that we would think about sequencing. The rebranding and then and then also some of the opportunities which will need to be store specific you know need to be thoughtful about how we do this as far as introducing the operator model but.

Speaker Change: That wouldn't happen.

Speaker Change: As far as the operator opportunities go wouldn't happen in this first year, you know think of that as.

RJ Sheedy: We want to make sure that we've got a well-integrated plan and we're doing and making these changes at the right cadence, not the right pace, relative to the ongoing business and making sure we're striking a healthy balance there. Think about the activation of a lot of these accelerated growth opportunities that have taken place over the next couple of years. There are things that we would want to get in place prior to any rebranding or conversion.

Speaker Change: As starting really in the second year and then following a period of time similar to Amelia is where we would look to introduce that over time in a store specific basis.

Speaker Change: Got it and then just a quick follow up what was a ring up in 2023, and then within your guide what's the expectation for ticket or rig increase.

Speaker Change: 24.

Corey Connors: Some of the nearer-term opportunities would be around expanding the assortment, some of the investments that we want to make into the stores, and you get some of those things in place. And then, following that, we would think about sequencing the rebranding, and then also some of the opportunities, which will need to be store-specific, need to be thoughtful about how we do this as far as introducing the operator model. But that wouldn't happen, at least as far as the operator opportunities go, wouldn't happen in this first year. Think of that as starting really in the second year and then following a period of time similar to Amelia's, where we would look to introduce that over time and on a store-specific basis. Got it. And then just a quick follow-up. What was the ring up in 2023? And then within your guide, what's the expectation for ticket or ring increase? in 24.

Speaker Change: Yeah. So let me start with the latter there so as we think about the.

Speaker Change: For our business the components of comp for the balance of the year and we think that 2024 will continue to see comps driven by traffic and that's gonna be offset in part by lower basket. So on the traffic side.

Speaker Change: Yes, and food inflation moderating, but in absolute terms remains high.

Speaker Change: The consumer is feeling pressure from a from that along with higher interest rates and consumer credit. So we think all of that will be a tailwind for us from a traffic standpoint, as we've seen recently.

Speaker Change: From a basket standpoint, it will be lower.

Speaker Change: Due to number one.

Speaker Change: The increased.

Speaker Change: Frequency and the impact that has on baskets in more trips and lower baskets as well as moderating inflation within within the basket itself again, the components for our business a little less comparable due to the changing nature of the assortment.

RJ Sheedy: Yeah, so let me start with the ladder there. So as we think about the, you know, for our business, the components of comp for the balance of the year, we think that 2024 will continue to see comps driven by traffic. And that's going to be offset in part by lower baskets. So on the traffic side, yes, food inflation is moderating, but in absolute terms, it remains high. Consumers are feeling pressure from that, along with high interest rates and consumer credit.

Speaker Change: Great. Thank you very much.

Speaker Change: Thanks Kurt.

Speaker Change: Thank you, ladies and gentlemen, just a reminder, he's no question.

Speaker Change: One question at a time.

Speaker Change: Next question comes from John Holmes Jaco.

Speaker Change: Hmm Securities. Please go ahead.

Speaker Change: So you guys wanted to start with when do you think is it really the end of the first quarter.

Speaker Change: When there's a complete normalization in how the iOS or using the systems.

Corey Connors: So we think all of that will be a tailwind for us from a traffic standpoint, as we've seen recently. From a basket standpoint, it will be lower due to, number one, the increased trip frequency and the impact that has on baskets and more trips, lower baskets, as well as moderating inflation. Within the basket itself, again, the components of our business, a little less comparable to the change in the nature of the assortment. Great, thank you very much. Thanks, Cory.

Speaker Change: Financial impact.

Speaker Change: Is that fair.

Speaker Change: But how do you think about when you when you try to forecast the recovery in the back half of the year right. Because you lost over 200 basis points of comp in over 100 basis points of gross I mean, it looks like there is some recovery, but the.

Speaker Change: Certainly nowhere near complete recovery.

Speaker Change: Yeah.

Speaker Change: Yeah, Yeah, John It's Charles let me give you a little bit.

Charles Bracher: Of context on the impact of technology and probably helpful. Does is provide you with the impact on Q4, and then how we're thinking about the first quarter as well so in total.

Operator: Ladies and gentlemen, just a reminder, please no questions are restricted to one question at a time. The next question we have comes from John Heinbockel of Guggenheim Security. Please go ahead. Hey guys, I wanted to start with when do you think it will be the end of the first quarter when there's a complete normalization in how the IOs are using the systems and financial impact? Is that fair?

Charles Bracher: Think about the EBITDA impact from the technology transition and and interruptions is impacting EBITDA by $20 million in the fourth quarter about half of that comes from the elective Io Commission support that we are.

John Heinbockel: And then how do you think about when you try to forecast the recovery in the back half of the year? Right, because you lost over 200 basis points of comp and over 100 basis points of gross. I mean, it looks like there's some recovery, but there's certainly nowhere near a complete recovery.

Charles Bracher: We provided to operators the balance coming from combination of the impact the top line and in gross margin rate as we've as we've disclosed in the first quarter.

Charles Bracher: Those impacts continue but to a lesser degree so that.

Charles Bracher: Yeah, yeah, John, Charles, let me give you a little bit of context on the impact of technology and would probably be helpful to just provide you with the impact on Q4 and then how we're thinking about the first quarter as well. So, in total, think about the EBITDA impact from the technology transition and interruptions is impacting EBITDA by $20 million in the fourth quarter. About half of that comes from the elective IO Commission support that we provide to operators.

Charles Bracher: What had been a $20 million EBITDA impact in Q4 down to what we estimate and as implied in our guidance of roughly $14 million impact to.

Charles Bracher: So the first quarter again half of that coming from.

Charles Bracher: Elective, Idaho Commission and the balance from from sales and margin impact so continuing to provide that support journey impacted period, but the monthly impact.

Charles Bracher: As we're tracking it continues to decline, which feels good to us our current guidance assumes that we resolve the remaining issues in front of us and are back to steady state operations and conclude the elected commission support by the end of the first quarter.

Charles Bracher: The balance coming from the combination of the impact at the top line and gross margin rate, as we've disclosed. In the first quarter, those impacts continued but to a lesser degree, so that what had been a $20 million EBITDA impact in Q4 down to what we estimate and is implied in our guidance of roughly $14 million impact to the first quarter. Again, half of that coming from the elective IO Commission and the balance from sales and margin impact. So, continuing to provide that support during the impacted period, but the monthly impact, as we're tracking it, continues to decline, which feels good to us. Our current guidance assumes that we resolve the remaining issues in front of us and are back to steady state operations and conclude the elective commission support by the end of the first quarter. All right, one quick follow-up, then, and the food business is a little bit different, but have you seen any impact from all the bad weather and rain? in California

Speaker Change: Alright, one quick follow up then.

Speaker Change: The food business, a little bit different but have you seen any impact from all.

Speaker Change: Well, the bad weather and rain.

Speaker Change: And California is up there that would be separate from the 50 basis points of Andy but if you have you seen anything.

Speaker Change: Yeah, it's not not significant nothing to call out for us.

Speaker Change: Okay. Thank you.

Speaker Change: Yeah. Thanks, Sean.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: We have comes from India Jordan of Goldman Sachs. Please go ahead.

India Jordan: Good afternoon. Thank you for taking my question I, just wanted to touch on the <unk> comp a little bit it looks like the headwind from the systems change came in about 100 basis points better than you initially guided but less and that flowed through to the total comp. So I guess, what surprised you versus your internal.

India Jordan: Patients for the core business and can you talk about just the dynamics in ticket overall and how volumes trended as the ERP rollout.

Speaker Change: Yeah. So let me start first in terms of overall comp for two seven for us in the quarter a bit better than we guided it was a combination of slightly higher basket.

John Heinbockel: That would be separate from the 50 basis points, if any, but have you seen anything? Yeah, not really significant. Nothing to call out for us.

Speaker Change: So think about that as being the inventory recovery coming out and we are working through the system implementation was a bit faster than we thought so that helps basket and supplementing that traffic was a little bit better.

Charles Bracher: Okay, thank you. Yep. Thanks, John. Thank you. The next question we have comes from Leah Jordan of Golden Tax. Please go ahead.

Speaker Change: In terms of cadence throughout the quarter, we saw comps improve modestly as we progressed.

Operator: Good afternoon, thank you for taking my question. I just wanted to touch on the 4Q comp a little bit. It looks like the headwind from the systems change came in about 100 basis points better than you initially guided, but less than that flowed through to the total comp.

Speaker Change: More importantly, we're tracking very closely is the prior year comparisons get a little bit noisy now.

Speaker Change: Looking at average weekly sales and so some nice improvement through the fourth quarter that has continued into the first quarter. So feel like the underlying.

Speaker Change: Trends in the business are healthy and improving as we can work our way through the system transition.

Leah Jordan: So I guess, what surprised you versus your internal expectations for the core business? And can you talk about just the dynamics and ticket overall and how volumes trended as the ERP rollout improved? Yeah, so let me start first in terms of overall comp for, again, 2.7 for us in the quarter, a bit better than we guided. It was a combination of a slightly higher basket, so think about that as being the inventory recovery coming out, working through the system implementation was a bit faster than we thought for that health basket, and supplementing that traffic was a little bit better. In terms of cadence throughout the quarter, we saw comps improve modestly as we progressed. But more importantly, we're tracking very closely, the prior year comparisons get a little bit noisy now, we're looking at average weekly sales, and so some nice improvement through the fourth quarter that has continued into the first quarter. So I feel like the underlying trends in the business are healthy and improving as we, again, work our way through the system transition Great

Speaker Change: Hum.

Speaker Change: Great. Thank you and then for my follow up I just wanted to go back to the gross margin discussion just curious if you've assumed any benefit from the private label rollout and any magnitude of that impact and also on close out I guess, what have you assumed within guidance is it relatively stable throughout the year or any impact on a year over year basis there.

Speaker Change: And then longer term should we still think that margins stay relatively flat or has anything structurally changed in the business.

Speaker Change: Yeah, So no impact from private label small number of items rolling them out later in the year not meaningful to margin.

Speaker Change: An opportunistic standpoint.

Speaker Change: I'd say stable, which is which is favorable this nice trends that I've talked about contributed in 2023, we expect to contribute similarly to gross margin in 2024, and then longer term you will continue to operate this business for stable margins I'm always looking to reinvest that back in back into Val.

Speaker Change: All you in driving customer trips both.

Speaker Change: <unk> and retention and frequency and we continue to see some really nice trends. There. So we like this balance that we have between the value that we're delivering and of course the margin that that is being delivered to the P&L. So that continues to be the approach.

Charles Bracher: Thank you. And then for my follow-up, I just wanted to go back to the gross margin discussion. I'm just curious if you've assumed any benefit from the private label rollout and any magnitude of that impact. And also on closeout, I guess, what have you assumed within guidance? Is it relatively stable throughout the year or any impact on a year-over-year basis there?

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: The next question we have comes from Michael Baker of D. A Davidson. Please go ahead.

Michael Lasser: Okay. Thanks. So the acquired companies are EBITDA margins are about five 5% pretty close to.

Leah Jordan: And then longer term, should we still think that margins will stay relatively flat, or has anything structurally changed in the business? Yeah, so no impact from private labels, small number of items, rolling them out later in the year, so not meaningful to margin. From an opportunistic standpoint, I'd say stable, which is favorable.

Michael Lasser: What you guys do maybe a little bit below the six 4% that you did this year, but I don't have the sales volumes. So if you can get those sales volumes, even close to your core stores, what does that mean about the margins from our United grocery outlet do they go that much higher or do you reinvest that to keep them.

Charles Bracher: You know, those nice trends that I've talked about, as they contributed to gross margin in 2023, we expect them to contribute similarly to gross margin in 2024. And then, longer term, continue to operate this business for stable margins, always looking to reinvest back into value and driving customer trips, both acquisition, retention, and frequency. And we continue to see some really nice trends there.

Michael Lasser: At about the mid 6% range. Its just seems interesting that their margins are not that far from you on so much of our sales. Thanks, Yeah, Mike It's Charles probably I'd say it is premature at this point given we haven't closed the transaction at the.

Charles Bracher: The business again last year, roughly $160 million in top line EBITDA about $10 million, so really similar EBITDA margin profile.

Leah Jordan: So we like this balance that we have between the value that we're delivering and, of course, the margin that is being delivered to the P&L. So that continues to be the approach. Thank you. The next question we have comes from Michael Baker of D.A.B.

Charles Bracher: Our business as RJ said, we're really excited about the long term growth potential for this business, but we do want to be really measured in our approach and so it's it would just be premature for us to put put a number to it.

Operator: Okay, thanks. So, the acquired company's EBITDA margins are about 5.5%, right? Pretty close to what you guys do, maybe a little bit below the 6.4% that you did this year, but on half the sales volumes. So, if you can get those sales volumes even close to your core stores, what does that mean about the margins from United Grocery Outlet? Do they go that much higher, or do you reinvest that to keep them at about that mid-6% range? It just seems interesting that their margins are not that far from you on so much less. Yeah, Mike, it's Charles.

Charles Bracher: But the again the paths, we're taking is integrated in the business make sure we protect what they have combined the best of Ugo Angio with the goal of continuing to operate the business really in steady state this year.

Charles Bracher: We'll start to invest again lots of ways. We think we can drive growth, we're going to learn a lot that will inform what exactly the P&L looks like in the future.

Charles Bracher: We do think there's big opportunity for growth and again, taking the best of what we do and what you G. O does we're excited about it.

Speaker Change: Fair enough makes sense. Thank you.

Charles Bracher: Thanks.

Speaker Change: Thank you.

Michael Lasser: Probably, I'd say, just premature at this point, given we haven't closed the transaction. The business, again, last year, roughly $160 million in top line, EBITDA, about $10 million, so really a similar EBITDA margin profile to our business. As RJ said, we are really excited about the long-term growth potential for this business, but we do want to be really measured in our approach. And so, it would just be premature for us to put a number to it.

Speaker Change: Ladies and gentlemen, just a final reminder, if you would like to ask a question. Please press star.

Speaker Change: And then one now.

Speaker Change: Next question comes from Jeremy Hamblin.

Jeremy Scott Hamblin: Craig Hallum. Please go ahead.

Jeremy Scott Hamblin: Thanks, and congrats on the strong results I wanted to come back to the New unit development here and just understand in terms of.

Jeremy Scott Hamblin: Where you are now in opening these stores that youre kind of your capital outlay and doing that you know versus where it might've been a couple of years ago.

Charles Bracher: But again, the path we're taking is to integrate the business, make sure we protect what they have, and combine the best of UGO and GO with the goal of continuing to operate the business really in a steady state this year. We'll start to invest in lots of ways we think we can drive growth. We're going to learn a lot that will inform what exactly the P&L looks like in the future, but we do think there's a big opportunity for growth. And again, taking the best of what we do and what UGO does, we're excited about. Fair enough. It makes sense.

Jeremy Scott Hamblin: And then just thinking about that in context of you know the investments you're making here in U G O.

Jeremy Scott Hamblin: Deal.

Jeremy Scott Hamblin: And then the it looks like you I think you had indicated there was an additional 15 million of capital improvements that you're looking.

Jeremy Scott Hamblin: To make into the Ugo locations can you just talk about in terms of returns on capital. You know are you getting more from kind of your base.

Michael Lasser: Ladies and gentlemen, just a final reminder, if you would like to ask a question, please press star and then 1. Next question, we now come to Jeremy Hamblin. Craig Hallam, you can go ahead.

Jeremy Scott Hamblin: Our legacy business and how does that compare to the.

Jeremy Scott Hamblin: The United deal.

Jeremy Scott Hamblin: Yeah.

Jeremy Scott Hamblin: Jeremy It's Charles let me provide you a little bit of context to how we've really thought about the the returns for the acquisition. We do think this will generate healthy returns for us.

Operator: Thanks and congratulations on the strong results. I wanted to come back to the new unit development here and just understand in terms of where you are now in opening these stores and your capital outlay in doing that, you know, versus where it might have been a couple of years ago. And then just thinking about that in context of, you know, the investments you're making here in the UGO deal. And then it looks like, I think you had indicated, there's an additional $15 million of capital improvements that you're looking to make at the UGO locations. Can you just talk about returns on capital, you know, are you getting more from kind of your base legacy business, and how does that compare to the UGO? The United.

Jeremy Scott Hamblin: Over time, we really looked at it through a few different lenses. The first was just what's the base business that we're buying so we think we're paying a fair multiple for the 40 stores that exist today plus.

Jeremy Scott Hamblin: The distribution center, just just based on the last 12 months performance of the business is.

Jeremy Scott Hamblin: As we said we think it will be modestly accretive to 2024 earnings so that feels good.

Jeremy Scott Hamblin: Beyond that there really the next lens was thinking about the opportunity we have to drive growth within the existing store base. So as we said it will take time, but as we integrate as we invest in the stores. We think there's meaningful upside just within the 40 stores today to drive accelerated growth higher.

Jeremy Scott Hamblin: Productivity better bottom line.

Jeremy Scott Hamblin: Yeah, Jeremy, it's Charles. Let me provide you with a little bit of context on how we've really thought about the returns for the acquisition. We do think this will generate healthy returns for us over time, and we really looked at it through a few different lenses. The first was just what is the base business that we're buying?

Jeremy Scott Hamblin: Fuels fuels the return and then lastly, again as it is the platform that this gives us to accelerate growth into a new region and RJ talks about.

Jeremy Scott Hamblin: Not only the real estate opportunity and in total that gives us but also the impact it can have for us from a buying perspective, so that those would all be additive to the way we thought about the return. So we think this is going to be a great use of capital for us and we love the way that it really supplements and complements what we do from an organic growth perspective.

Charles Bracher: So we think we're paying a fair multiple for the 40 stores that exist today, plus the distribution center, just based on the last 12 months' performance of the business. As we said, we think it will be modestly accretive to 2024 earnings, so that feels good. Beyond that, really, the next lens was thinking about the opportunity we have to drive growth within the existing store base. So, as we said, it will take time, but as we integrate, as we invest in these stores, we think there's meaningful upside just within the 40 stores today to drive accelerated growth, higher productivity, and a better bottom line that fuels the return. And then lastly, again, the platform that this gives us to accelerate growth in a new region.

Jeremy Scott Hamblin: Active.

Speaker Change: Got it and then just a follow up there in terms of your your.

Speaker Change: Your existing stores grocery outlet stores, where does your kind of initial cash investment lie.

Speaker Change: At this point in time, I think a few years ago. It was you know in the two 2 million in change for the store build out inventory Preopening expense.

Speaker Change: We believe that that's a little bit higher now just wanted to sense right at good here as you're looking at you know.

Speaker Change: FY 'twenty five and six of 100 total locations, which what's kind of the expected.

Charles Bracher: And RJ talked about not only the real estate opportunity and the total that it gives us, but also the impact it can have for us from a buying perspective. So those would all be added into the way we've thought about the return. So we think this is going to be a great use of capital for us, and we love the way that it really supplements and complements what we do from an organic growth perspective. And then just to follow up there, in terms of your existing stores, grocery outlet stores, where does your kind of initial cash investment lie? At this point in time, I think, you know, a few years ago, it was, you know, in the two, two million and change for the store build out inventory pre opening expense. You know, we believe that it is higher now.

Speaker Change: Uh huh.

Speaker Change: Yeah, you're exactly right, we are seeing higher capex cost today than we were in a really good the $2 million number.

Speaker Change: Ties back to when we brought the business public in 2019, and so clearly it's a different inflationary environment today versus then so yeah everything labor materials equipment have had an impact probably in total we're seeing a need for a cost of about 25% higher than where we were.

Speaker Change: At the time of IPO.

Speaker Change: That said, we've got a number of levers that we're actively working on to reduce costs everything from value engineering.

Speaker Change: The build out to strategic sourcing and bulk purchasing of equipment.

Jeremy Scott Hamblin: Just wanted to do it here as you're looking at, you know, FY 25 and six of 100 total locations, which was kind of the Yeah, you're exactly right. We are seeing higher CapEx costs today than we were. The $2 million number ties back to when we took the business public in 2019. And so clearly, it's a different inflationary environment today versus then.

Speaker Change: I will say that when you look at the store model and the returns it's store volume product profitability that have a much bigger impact on returns relative to capex.

Speaker Change: So continue to be pleased with the the volumes and the profitability, we're driving from new stores and so while the recent vintages are seen as higher construction costs. It is not weighing down our returns in a meaningful way you can think about it is really having about a five point impact on sort of mature year.

Charles Bracher: So yeah, everything, labor, materials, and equipment, have had an impact probably in total. We're seeing new store costs about 25% higher than where we were at the time of IPO. That said, we've got a number of levers that we're actively working on to reduce costs, everything from value engineering, the build out, to strategic sourcing and bulk purchasing of equipment.

Speaker Change: Our four ROIC. So that's come down from 35% that's still really a healthy you know roughly a 30% based on current construction jobs.

Speaker Change: Great. Thanks for taking the questions best wishes.

Speaker Change: Thank you thanks, Eric.

Speaker Change: Final question, we have comes from.

Charles Bracher: I will say that when you look at the store model and the returns, it's store volume and product profitability that have a much bigger impact on returns relative to CapEx. And so we need to be pleased with the volumes and the profitability we're driving from these stores. And so while recent vintages are seen as higher construction costs, they are not weighing down our returns in a meaningful way.

Speaker Change: I think those are good and you're cool had been terminated.

Speaker Change: At a time.

Speaker Change: Operator, operator.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Apologies.

Speaker Change: Apologies. The final question, we have comes from Simeon Gutman of Morgan Stanley. Please go ahead.

Simeon Ari Gutman: Hey, everyone Luckily our airtime has unexpired yet.

Simeon Ari Gutman: No what happened with that one we were just as appalled inhaler apologies.

Speaker Change: No worries.

Simeon Ari Gutman: I wanted to go back to the.

Jeremy Scott Hamblin: You can think of it as really having about a five point impact on sort of the mature year for ROICs. So that's come down from 35%, but still really healthy, roughly 30% based on current construction. Great. Thanks for taking questions. Best wishes. Thank you. The final question we have comes from... Your airtime is exhausted, and your call has been terminated. Please load airtime. Operator.

Simeon Ari Gutman: Ticket size I know, it's a bit of a enigma to look at same SKU inflation for your business is there a best guess on.

Simeon Ari Gutman: What that may be doing to the basket size versus we're putting fewer items in the basket or if there's some trade down happening and then I'll just put the follow up in here given the interest of time Charles gave us some some some numbers on the fourth quarter and the first quarter.

Operator: The final question we have comes from Simeon Gutman of Morgan Stanley. Please go ahead. Hey everyone, luckily our airtime has not expired yet. We don't know what happened with that one. We were just as appalled as you were.

Simeon Ari Gutman: Emission sharing and I think you've disclosed the second and third are there in the filings, but if you can just give us that one more time, because there's going to be a pretty meaningful inflection in the composition of the P&L during the year. Thanks.

Simeon Ari Gutman: Apologies. No worries. I want to go back to the ticket size.

Simeon Ari Gutman: I know it's a bit of an enigma to look at same-skew inflation for your business. Is there a best guess on what that may be doing to the basket size versus us putting fewer items in the basket or if there's some trade-down happening? And then I'll just put the follow-up in here, given the interest in time. Charles gave us some numbers on the fourth quarter and first quarter commission sharing.

Speaker Change: Yeah, Let me just start with I'm, assuming the basket and so you can think about within the basket again not directly comparable for US we always talk about our model mutes the impact of inflation on the way up the inflation on the way down but we are we continue to see slightly higher average unit retails that's being offered.

Charles Bracher: I think you've disclosed the second and third, or they're in the filings, but if you can just give us that one more time, because there's going to be a pretty meaningful inflection in the composition of the P&L during the year. Thanks. Yeah, let me just start with Simeon in the basket, and so you can think about it within the basket, again, not directly comparable for us.

Simeon Ari Gutman: Set by fewer.

Simeon Ari Gutman: But fewer items in the basket.

Simeon Ari Gutman: Again. This is trip frequency has increased as well as that's had a bit of an impact from the system.

Simeon Ari Gutman: <unk>.

Simeon Ari Gutman: Just to reiterate the numbers I provided with respect to the system EBITDA impact for Q4, and Q1 I'll give you both numbers. So you have them again for the fourth quarter total EBITDA impact.

Charles Bracher: We always talk about our model, which mutes the impact of inflation on the way up and deflation on the way down, but we continue to see slightly higher average unit retail prices, although that's being offset by fewer items in the basket. Again, as trip frequency has increased, as well as having a bit of an impact from the system transition. Just to reiterate the numbers I provided with respect to the system EBITDA impact for Q4 and Q1. I'll give you both numbers so you have them. For the fourth quarter, total EBITDA impact, roughly $20 million, about half of which is IOCommission support. As you look in the Qs and the Ks, you'll see that number as it relates to the anomaly in commission trend, and the balance, again, is a combination of sales impact and gross margin impact. For the first quarter, we're seeing the monthly trend come down in terms of the impact. We expect the full first quarter EBITDA headwind to be roughly $14 million. Again, half of that being IOCommission, and sales and margin being the balance.

Simeon Ari Gutman: Roughly $20 million.

Simeon Ari Gutman: About half of which is Io Commission support says you're looking accused in the case you can you'll see that number is.

Simeon Ari Gutman: As it relates to kind of the anomaly and commission trends.

Simeon Ari Gutman: And the balance again combination sales impact and gross margin impact for the first quarter. We are we're seeing a monthly trend.

Simeon Ari Gutman: Come down in terms of the impact we expect the full first quarter EBITDA headwind to be roughly $14 million again.

Simeon Ari Gutman: Has that been a commission and sales and margin being the balance.

Speaker Change: Great. Thanks Best of luck to you Charles.

Charles Bracher: Thank you.

Simeon Ari Gutman: Thank you ladies and gentlemen, we have reached the end of our question and answer session I would like to turn the call back to RJ Sheedy for closing remarks. Please go ahead Sir.

Simeon Ari Gutman: Great, thanks. Best of luck to you, Charles. Thank you. Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session, and I would like to turn the call back to RJ Sheedy for closing remarks. Please go ahead, sir. Thanks everyone for your time today, and we look forward to talking with you again on future calls. I appreciate it. Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for joining us. You may now disconnect your lines.

RJ Sheedy: Thanks, everyone for your time today, and we look forward to talking with you again on future calls I appreciate it take care.

Speaker Change: Thank you ladies and gentlemen that does conclude today's conference. Thank you for joining US you may now disconnect your lines.

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