Q1 2024 Grocery Outlet Holding Corp Earnings Call

Operator: Greetings, and welcome to the Grocery Outlet First Quarter 2024 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Chen, VP of Investor Relations. Thank you. You may begin.

Greetings and welcome to the grocery outlet's first quarter 'twenty 'twenty four earnings results Conference call.

Operator: At this time all participants are in a listen only mode.

Operator: Question and answer session will follow the formal presentation.

Operator: If anyone should require operator, just during the conference. Please press star zero on your telephone keypad.

Operator: As a reminder, this conference being recorded.

Operator: It is now my pleasure to introduce your host Christine Chen.

Christine Chen: P of Investor Relations. Thank you you may begin.

Christine Chen: Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the first quarter of the period ending March 30, 2024. Speaking from management on today's call will be R.J. Sheedy, President and Chief Executive Officer, and Lindsey Gray, Interim Chief Financial Officer and SVP of Accounting. Following prepared remarks from R.J. and Lindsey, 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.

Christine Chen: Good afternoon, and welcome to grocery outlet's call to discuss financial results for the first quarter for the period ending March 30 of 2024 speaking from management on today's call will be RJ, Sheedy, President and Chief Executive Officer, and Lindsey grade interim Chief Financial Officer, and SVP of accounting following prepared remarks from RJ and Lindsay we don't.

Christine Chen: On 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, all statements that address future operating financial or business performance or the company strategies our expectation.

Christine Chen: 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.

Christine Chen: Our 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 Companys periodic reports filed with the SEC all of which may be found on the Investor Relations section of the company's website or an S U shaped up.

Robert Joseph Sheedy: Good afternoon, everyone, and thank you for joining us. We will be speaking to you today about our business results, the progress and ongoing impact of our systems transition, strategic growth initiatives, and our outlook for 2024. Our sales and customer growth remain strong during the first quarter as we continue to deliver unbeatable value with an exciting treasure hunt experience. We are delivering continued increases in traffic and sales, and our business fundamentals are healthy. Our low first quarter margins were the result of both expected and unexpected impacts from our system's transition. We've made good progress since our last call resolving known issues and have ended the IO Commission Support Program as planned.

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

Robert Joseph Sheedy: We will be speaking to you today about our business results and progress in ongoing impact of our systems transition strategic growth initiatives and outlook for 2024.

Robert Joseph Sheedy: Our sales and customer growth remains strong during the first quarter as we continue to deliver unbeatable value with an exciting treasure hunt experience.

Robert Joseph Sheedy: We are delivering continued increases in traffic and sales in our business fundamentals are healthy.

Robert Joseph Sheedy: Our low first quarter margins were the result of both expected and unexpected impacts from our systems transition.

Robert Joseph Sheedy: We've made good progress since our last call resolving known issues and have ended the Io Commission's support program as planned.

Robert Joseph Sheedy: However, our results were incrementally impacted by unforeseen systems transition cost that surfaced at the end of the quarter.

Robert Joseph Sheedy: We are all very disappointed with our poor Q1 results and we are committed to getting these system impacts behind us very soon.

Robert Joseph Sheedy: However, our results were incrementally impacted by unforeseen systems transition costs that surfaced at the end of the quarter. We are all very disappointed with our poor Q1 results, and we are committed to getting these system impacts behind us very soon. Let me start with business performance and then comment on the system's transition. Our first quarter sales exceeded our expectations, increasing 7.4 percent, driven by a 3.9 percent increase in comparable store sales, which accelerated throughout the quarter. Transaction count growth remains strong at 7%.

Robert Joseph Sheedy: Let me start with business performance and then comment on the systems transition.

Robert Joseph Sheedy: Our first quarter sales exceeded our expectations, increasing seven 4% driven by a 3.9% increase in comparable store sales, which accelerated throughout the quarter.

Robert Joseph Sheedy: Transaction count growth remains strong at 7%.

Robert Joseph Sheedy: Food inflation remains high, and we continue to deliver a compelling assortment of high-quality wow items that are driving traffic and sales growth. We opened six new stores in the corridor, and recent vintage performance continues to ramp well and in line with expectations. First quarter gross margin of 29.3% was 110 basis points below our expectations and includes approximately 210 basis points of impact from our systems transition issues.

Robert Joseph Sheedy: Food inflation remains high and we continued to deliver a compelling assortment of high quality Wow items that are driving traffic and sales growth.

Robert Joseph Sheedy: We opened six new stores in the quarter and recent vintage performance continues to ramp well and in line with expectations.

Robert Joseph Sheedy: First quarter gross margin of 29, 3% was 110 basis points below our expectations and includes approximately 210 basis points of impact from our systems transition issues.

Robert Joseph Sheedy: In late August, we upgraded our product, inventory, financial, and reporting platforms. This transition has disrupted our business operationally and financially over the past eight months, as we discussed in our last two calls. In February, there were two large remaining system issues impacting profits. One was related to warehouse product expiry data, and the other related to store level reporting.

Robert Joseph Sheedy: In late August, we upgraded our product inventory financial and reporting platforms.

Robert Joseph Sheedy: This transition has disrupted our business operationally and financially over the past eight months as we've discussed in our last two calls.

Robert Joseph Sheedy: We have since resolved both of these, and the negative impact to first quarter gross margin came in as expected at about 100 basis points. We've reduced warehouse shrink close to normal levels with better data visibility and accurate store level reporting enabling us to end the commission support program in March. Lindsey will speak later about some residual expenses from the Commission Support Program that will extend through the end of the second quarter.

Robert Joseph Sheedy: In February there were two large remaining system issues impacting profit.

Robert Joseph Sheedy: One was related to warehouse product expiry data and the other related to store level reporting.

Robert Joseph Sheedy: We have since resolved both of these and the negative impact to first quarter gross margin came in as expected at about 100 basis points.

Robert Joseph Sheedy: We've reduced warehouse shrank close to normal levels with better data visibility and accurate store level reporting enabled us to end the Commission's support program in March.

Robert Joseph Sheedy: Lindsay will speak later about some residual expense from the commission support program that will extend through the end of the second quarter.

Robert Joseph Sheedy: While we are encouraged by this progress, we are disappointed that we did not foresee the additional 110 basis points of margin impact. This was quantified during catch-up invoice processing and final margin reconciliation at the end of the quarter. Delayed payment processes during Q1 combined with poor data visibility contributed to this miss versus guidance.

Robert Joseph Sheedy: While we are encouraged by this progress we are disappointed that we did not foresee the additional 110 basis points of margin impact.

Robert Joseph Sheedy: This was quantified during ketchup invoice processing and final margin reconciliation at the end of the quarter.

Robert Joseph Sheedy: Delayed payment processes during Q1 combined with poor data visibility contributed to this mess versus guidance.

Robert Joseph Sheedy: We are disappointed by this as it is below our performance and forecasting standards. We have recently improved our payables process in the new system and have also increased our data visibility. Both of these improvements will enable us to manage the business back to historical margin levels and forecast with the same consistency as we did before. We continue to work through remaining system functionality and performance enhancements under the leadership of our new COO, Ramesh Chakala.

Robert Joseph Sheedy: We are disappointed by this as it is below our performance in forecasting standards.

Robert Joseph Sheedy: We have recently improved our payables process and the new system and have also increased our data visibility.

Robert Joseph Sheedy: Both of these improvements will enable us to manage the business back to historical margin levels and forecast with the same consistency as we did before.

Robert Joseph Sheedy: We continue to work through remaining system functionality and performance enhancements under the leadership of our new C O over in East Chicago.

Robert Joseph Sheedy: He has already provided great expertise to help us accelerate progress since he joined in January. We also continue to bring on many additional new resources to increase our in-house SAP capabilities. This decreases our reliance on third-party consultants and builds our internal expertise to manage these systems going forward. The team continues to focus on optimizing systems for efficiency, enhancing functionality, and improving visibility to operating data throughout the business. We are all frustrated by the size and duration of this disruption. It has been costly, and our recent execution is well below our expectations.

Robert Joseph Sheedy: He has already provided great expertise to help us accelerate progress since he joined in January.

Robert Joseph Sheedy: We also continue to bring on many additional new resources to increase our in house capabilities.

Robert Joseph Sheedy: Capabilities.

Robert Joseph Sheedy: This decreases our reliance on third party consultants and builds our internal expertise to manage these systems going forward.

Robert Joseph Sheedy: The team continues to focus on optimizing systems for efficiencies enhancing functionality and improving visibility to operating data throughout the business.

Robert Joseph Sheedy: We're all frustrated by the size and duration of this disruption.

Robert Joseph Sheedy: It has been costly and our recent execution is well below our expectations.

Robert Joseph Sheedy: But this disruption is also temporary and fixable, and we are on the right path forward. We have made a tremendous amount of progress since last year, and we look forward to completing the work and seeing business results revert back to more normal levels very soon. Let me turn now to our Healthy Business Fundamentals and Growth Initiatives. Recent customer surveys show that our brand awareness continues to increase, and our net promoter score is near an all-time high.

Robert Joseph Sheedy: But this disruption is also temporary and fixable and we are on the right path forward.

Robert Joseph Sheedy: We have made a tremendous amount of progress since last year, and we look forward to completing the work and seeing business results revert back to more normal levels very soon.

Robert Joseph Sheedy: Okay.

Robert Joseph Sheedy: Let me turn now to our healthy business fundamentals and growth initiatives.

Robert Joseph Sheedy: Recent customer survey show that our brand awareness continues to increase and our net promoter score is near an all time high.

Robert Joseph Sheedy: Customers are spending more of their dollars with us, and they indicate a high intent to spend even more in the next 12 months. Customers are very satisfied with product selection, reflecting healthy inventory and variety across all regions.

Robert Joseph Sheedy: Customers are spending more of their dollars with us and they indicate a high intent to spend even more in the next 12 months.

Robert Joseph Sheedy: Customers are very satisfied with product selection, reflecting healthy inventory and variety across all regions.

Robert Joseph Sheedy: Furthermore, we are seeing increases in satisfaction and spend across all customer segments with particular strength among middle to higher-income customers. The closeout buying environment remains very strong, and we are seeing great availability of product across all categories. We are highly selective in our purchasing decisions as we buy only a fraction of the available product we are offered.

Robert Joseph Sheedy: Furthermore, we are seeing increases in satisfaction and spend across all customer segments with particular strength among middle to higher income customers.

Robert Joseph Sheedy: The closeout buying environment remains very strong and we are seeing great availability of product across all categories.

Robert Joseph Sheedy: We are highly selective in our purchasing decisions as we buy only a fraction of the available product we are offered.

Robert Joseph Sheedy: And our growing size and scale make us an even better partner as we are able to take on more variety and volume across a wider geography. We've also recently seen more opportunities as a result of 99 Cents only entering Chapter 11 bankruptcy. We look forward to helping suppliers with surplus inventory challenges that were previously directed elsewhere. We recently held our annual supplier conference, where we met with many of our key partners. Some attendees were longstanding relationships, while others were newer to the GEO family.

Robert Joseph Sheedy: And our growing size and scale make us an even better partner as we are able to take more variety and volume across a wider geography.

Robert Joseph Sheedy: We've also recently seen more opportunities as a result of 99 cents only entering chapter 11 bankruptcy.

Robert Joseph Sheedy: We look forward to helping suppliers with surplus inventory challenges that were previously directed elsewhere.

Robert Joseph Sheedy: We recently held our annual supplier conference, where we met with many of our key partners.

Robert Joseph Sheedy: Some attendees were long standing relationships, while others were newer to the G O family.

Robert Joseph Sheedy: During this meeting, we engage in strategic conversations to identify new opportunities and to form more integrated partnerships. New suppliers that attended the conference represent a group of over 600 new relationships that we established last year. And we are on track to add a similar number this year as well.

Robert Joseph Sheedy: During this meeting we engage in strategic conversations to identify new opportunities and to form more integrated partnerships.

Robert Joseph Sheedy: New suppliers that attended the conference represent a group of over 600, new relationships that we established last year.

Robert Joseph Sheedy: And we are on track to add a similar number this year as well.

Robert Joseph Sheedy: We came away from the conference very encouraged with the opportunities in front of us and how we can strengthen partnerships further to grow our shared business. Transitioning now to our stores, operators have been doing a great job selecting localized assortments and executing value merchandising to present the wow shopping experience to their customers. They and their teams also engage with shoppers in a personalized way that is truly unique to this model. We see this responding with strong results in customer count and sales growth. Year-to-date operator income has increased, but voluntary turnover levels remain low, and interest in becoming an operator continues to be at an all-time high. Becoming an I.O.

Robert Joseph Sheedy: We came away from the conference very encouraged with the opportunities in front of us and how we can strengthen partnerships further to grow our shared business.

Robert Joseph Sheedy: Transitioning now to our stores operators have been doing a great job selecting localized assortments and executing value merchandising to represent the wow shopping experience to their customers.

Robert Joseph Sheedy: They and their teams also engage with shoppers in a personalized way that is truly unique to this model.

Robert Joseph Sheedy: We see this resonating with strong results in customer count and sales growth.

Robert Joseph Sheedy: Year to date, operator income has increased voluntary turnover levels remain low and interest in becoming an operator continues to be at an all time high.

Robert Joseph Sheedy: is a highly selective process, as we accept less than 1% of interested candidates from our annual leads of over 30,000. Our selective recruiting process, combined with a comprehensive training program, continues to produce high-quality operators. We look forward to being together with all operators during our annual regional roadshow that starts this Friday and runs through all of next week. This is an opportunity to update them on business initiatives, hear their feedback and input, and strengthen the partnership that makes this business so unique.

Robert Joseph Sheedy: Becoming an I O is a highly selective process as we accept less than 1% of interested candidates from our annual leads of over 30000.

Robert Joseph Sheedy: Our selective recruiting process combined with a comprehensive training program continues to produce high quality operators.

Robert Joseph Sheedy: We look forward to being together with all operators during our annual regional Road show that starts this Friday and extends through all of next week.

Robert Joseph Sheedy: This is an opportunity to update them on business initiatives hear their feedback and input and strengthen the partnership that makes this business so unique.

Robert Joseph Sheedy: Turning now to store growth, our new stores are opening ahead of schedule and are performing to plan. We opened six stores during the first quarter, increasing our store count to 474 locations at quarter end. We've opened six additional new stores so far in the second quarter and are positioned well for openings in the second half of the year. In addition, we completed the United Grocery Outlet acquisition on April 1st, which added 40 stores across six new states. Given the health of our store opening schedule, we now expect to add 58 to 62 new stores this year, including UGO. The midpoint of this range represents store growth of 13% over last year.

Robert Joseph Sheedy: Turning now to store growth our new stores are opening ahead of schedule and are performing to plan.

Robert Joseph Sheedy: We opened six stores during the first quarter, increasing our store count to 474 locations at quarter end.

Robert Joseph Sheedy: We've opened six additional new stores, so far in the second quarter and are positioned well for openings in the second half of the year.

Robert Joseph Sheedy: In addition, we completed the United grocery outlet acquisition on April one, which added 40 stores across six new states.

Robert Joseph Sheedy: Given the health of our store opening schedule, we now expect to add 58 to 62, new stores this year, including UGI.

Robert Joseph Sheedy: The midpoint of this range represents store growth of 13% over last year.

Robert Joseph Sheedy: We remain in a strong position to deliver 10% new store growth in 2025. Our 2025 pipeline is robust, and our organic real estate activities are now focused on building the 2026 and 2027 pipelines. We also continue to evaluate opportunistic real estate as a complement to our organic growth efforts. We successfully completed the UGO acquisition on April 1st, and integration is proceeding well.

Robert Joseph Sheedy: We.

Robert Joseph Sheedy: Main in a strong position to deliver 10% new store growth in 2025.

Robert Joseph Sheedy: Our 2025 pipeline is robust and our organic real estate activities are now focused on building the 2026 and 2027 pipeline.

Robert Joseph Sheedy: We also continue to evaluate opportunistic real estate as a complement to our organic growth efforts.

Robert Joseph Sheedy: We successfully completed the <unk> acquisition on April 1st and integration is proceeding well.

Robert Joseph Sheedy: Fully integrating the business and rebranding the stores will take time, but we are very encouraged by the progress so far. We have many levers to accelerate sales growth in partnership with the United Grocery Outlet team. Our near-term integration focus is on expanding the assortment, investing in store refreshes and new fixtures, and introducing some of our marketing programs to the Southeast region. We also look forward to leveraging the multi-temp distribution center to access more opportunistic product that can benefit both grocery outlet and UGO stores. Next, we completed the rollout of our personalization app to all grocery outlet stores during the first quarter. The app allows us to communicate our weekly deals to customers and customize their treasure hunt experience.

Robert Joseph Sheedy: Fully integrating the business and rebranding the stores will take time, but we are very encouraged by the progress so far.

Robert Joseph Sheedy: We have many levers to accelerate sales growth in partnership with the United grocery outlet team.

Robert Joseph Sheedy: Our near term integration focus is on expanding the assortment investing in store refreshes and new fixtures and introducing some of our marketing programs to the southeast region.

Robert Joseph Sheedy: We also look forward to leveraging the multi temp distribution center to access more opportunistic product that can benefit both grocery outlet and Ugo stores.

Robert Joseph Sheedy: Next we completed the rollout of our personalization app to all grocery outlet stores during the first quarter.

Robert Joseph Sheedy: The App allows us to communicate our weekly deals to customers and customize their treasure Hunt experience.

Robert Joseph Sheedy: We are encouraged by the initial customer response, with over 400,000 total downloads so far and Q1 sales penetration of 6%. Over time, we believe the app will create increased customer loyalty through greater engagement, which will help drive trip frequency and share of wallets. Finally, we are very excited to be introducing our private label program to stores in the third quarter. As we have previously discussed, this is a program that we have been working on for the past year, which we believe will become another key differentiator, providing even more value and excitement for our customers.

Robert Joseph Sheedy: We are encouraged by the initial customer response with over 400000 total downloads so far in Q1 sales penetration of 6%.

Robert Joseph Sheedy: Overtime, we believe the App will create increased customer loyalty through greater engagement, which will help drive trip frequency and share of wallet.

Robert Joseph Sheedy: Yeah.

Robert Joseph Sheedy: Finally, we are very excited to be introducing our private label program to stores in the third quarter.

Robert Joseph Sheedy: As we have previously discussed this is a program that we have been working on for the past year, which we believe will become another key differentiator, providing even more value and excitement for our customers.

Robert Joseph Sheedy: The first items to hit the stores will be in the beverage and grocery categories. These initial products will be followed by additional items in both of these categories, as well as in the dairy, household, and baking categories.

Robert Joseph Sheedy: The first items to hit the stores will be in the beverage and grocery categories.

Robert Joseph Sheedy: These initial products will be followed by additional items in both of these categories as well as within the dairy household and baking categories.

Robert Joseph Sheedy: In addition to better value and inventory consistency for our customers, these initial products will deliver better margin for Grocery Outlet and IOs. We remain on track to introduce approximately 100 new private label SKUs by the end of the year. In closing, I remain very confident in our business fundamentals and our ability to realize our long-term growth potential. Our differentiated model and value proposition continue to be the drivers of our strong sales growth.

Robert Joseph Sheedy: In addition to better value and inventory consistency for our customers. These initial products will deliver better margin for grocery outlet and iOS.

Robert Joseph Sheedy: We remain on track to introduce approximately 100, new private label Skus by the end of the year.

Robert Joseph Sheedy: In closing I remain very confident in our business fundamentals and our ability to realize our long term growth potential.

Robert Joseph Sheedy: Our differentiated model and value proposition continued to be the drivers of our strong sales growth.

Robert Joseph Sheedy: We are a unique specialty discount retailer with a long history of consistently high top line sales growth, and our future growth algorithm remains intact. Our mission is to touch lives for the better, and the positive impact that we have on people increases as our business grows. We are aggressively pursuing the tremendous white space in front of us of operating over 4,000 stores in the U.S., and we look forward to introducing our brand to new communities as we expand.

Robert Joseph Sheedy: We are a unique specialty discount retailer with a long history of consistently high topline sales growth.

Robert Joseph Sheedy: And our future growth algorithm remains intact.

Robert Joseph Sheedy: Our mission is touching lives for the better and the positive impact that we have on people increases as our business grows.

Robert Joseph Sheedy: We are aggressively pursuing the tremendous white space in front of us of operating over 4000 stores in the U S and we look forward to introducing our brand to new communities as we expand.

Robert Joseph Sheedy: I want to thank our amazing IOs for their partnership and for delivering outstanding service and value to our customers. Thanks also to the entire GEO team for their dedication and perseverance, which enables us to support our IO partners and customers. I also want to say thank you to all grocery outlet partners and shareholders for their support and patience as we have worked through the system's transition. This is a great business, and we are committed to getting results back on track to achieve our bright expectations for future growth. And now, I would like to introduce you to Lindsey Gray, Interim CFO and SVP of Accounting, to discuss our financials.

Robert Joseph Sheedy: Okay.

Robert Joseph Sheedy: I want to thank our amazing iOS for their partnership and for delivering outstanding service and value to our customers.

Lindsey Gray: Thanks also to the entire team for their dedication and perseverance, which enable us to support our I O partners and customers.

Lindsey Gray: I also want to say, thank you to all grocery outlet partners and shareholders for their support and patience as we have worked through the systems transition.

Lindsey Gray: This is a great business and we are committed to getting results back on track to achieve our bright expectations for our future growth.

Lindsey Gray: And now I would like to introduce you to Lindsay Gray interim CFO and SVP of accounting to discuss our financials.

Lindsey Gray: Thanks, RJ. And good afternoon, everyone.

Lindsey Gray: Thanks, RJ and good afternoon, everyone. Our first quarter results reflect strong top line sales growth driven by a 7% increase in comp transactions.

Lindsey Gray: The integration of our new systems led to higher than anticipated costs, which impacted our margins leading to results below our expectations.

Lindsey Gray: Net sales increased seven 4% to $1.04 billion due to a three 9% increase in comparable store sales.

Lindsey Gray: Comp transaction growth of 7% was partially offset by a two 9% decline in our average basket.

Lindsey Gray: Our first quarter results reflect strong top-line sales growth, driven by a 7% increase in comp transactions. However, the integration of our new systems led to higher than anticipated costs, which impacted our margins, leading to results below our expectations. Net sales increased 7.4% to $1.04 billion due to a 3.9% increase in comparable store sales. Comp transaction growth of 7% was partially offset by a 2.9% decline in our average basket. We opened six new stores during the quarter, ending with 474 locations. We remain pleased with the performance of new stores, and store openings are tracking ahead of schedule.

Lindsey Gray: We opened six new stores during the quarter ending with 474 locations.

Lindsey Gray: We remain pleased with the performance of new stores and store openings are tracking ahead of schedule.

Lindsey Gray: Our first quarter growth profit increased 1.1% to $303.9 million. Our gross margin rate of 29.3% was impacted by our system integration, which we estimate was approximately 210 basis points in the quarter, 110 basis points higher than we originally expected, as RJ previously discussed. SG&A expense increased 13.3% to $303.4 million compared to the first quarter of 2023. This includes $12.4 million from commission support that we elected to provide as a result of our system upgrades. It also includes increased depreciation and amortization expense and higher store occupancy costs related to new store growth. Net interest expense decreased 46.3% to $3.2 million, driven by a reduction in net borrowings versus the prior year.

Lindsey Gray: Okay.

Lindsey Gray: Our first quarter gross profit increased one 1% to $303 $9 million.

Lindsey Gray: Our gross margin rate of 29, 3% was impacted by our system integration, which we estimate was approximately 210 basis points in the quarter 110 basis points higher than we originally expected as RJ previously discussed.

Lindsey Gray: SG&A expense increased 13, 3% to $303 $4 million compared to the first quarter of 2023.

Lindsey Gray: This includes $12 $4 million from commission support that we elected to provide as a result of our system upgrades.

Lindsey Gray: It also includes increased depreciation and amortization expense and higher store occupancy costs related to new store growth.

Lindsey Gray: Net interest expense decreased 46, 3% to $3 $2 million driven by a reduction in net borrowings versus the prior year.

Lindsey Gray: We recognize a tax benefit of $1.6 million during the quarter, a result of pre-tax book loss combined with excess tax benefits related to the exercise of stock options. Gap's net loss for the first quarter was $1 million, or a penny per share. Adjusted EBITDA was $39.4 million for the quarter, and our adjusted EBITDA margin was 3.8% of sales. Adjusted net income was $8.8 million for the quarter, or $0.09 per diluted share.

Lindsey Gray: We recognized a tax benefit of $1 $6 million during the quarter. A result of pretax book loss combined with excess tax benefits related to the exercise of stock options.

Lindsey Gray: GAAP net loss for the first quarter was $1 million or a penny per share.

Lindsey Gray: Adjusted EBITDA was $39 $4 million for the quarter and our adjusted EBITDA margin was three 8% of sales.

Lindsey Gray: Adjusted net income was $8 8 million for the quarter or nine cents per diluted share.

Lindsey Gray: Turning to our balance sheet, we ended the quarter with $66.9 million in cash. Inventory at the end of the quarter totaled $362.7 million. Total debt was $291 million at the end of the first quarter, with net leverage less than one times adjusted EBITDA. Now on to guidance.

Lindsey Gray: Turning to our balance sheet.

Lindsey Gray: We ended the quarter with $66 $9 million of cash inventory at the end of the quarter totaled $362 $7 million.

Lindsey Gray: Total debt was $291 million at the end of the first quarter with net leverage less than one times adjusted EBITDA.

Lindsey Gray: Now onto guidance.

Lindsey Gray: Forecasting has been difficult during this system transition, as we have not had good visibility into our normal business reporting and tools. Compounding this have been data integration issues and new processes that we and our operators are adapting to within new applications. Our guidance takes this into consideration as we complete the final stages of our stabilization work. Our fiscal 2024 guidance continues to assume incremental sales of approximately $125 million, adjusted EBITDA of $7 million, and a modest benefit to adjusted EPS from the acquisition of UGO.

Lindsey Gray: Forecasting has been difficult during the system transition as we have not had good visibility to our normal business reporting and tools.

Lindsey Gray: Compounding this have been data integration issues and new processes that we and our operators are adapting to within new applications.

Lindsey Gray: Our guidance takes this into consideration as we complete final stages of our stabilization work.

Lindsey Gray: Yeah.

Lindsey Gray: Our fiscal 2024 guidance continues to assume incremental sales of approximately $125 million adjusted EBITDA of $7 million and a modest benefit to adjusted EPS from the acquisition of Ugo.

Lindsey Gray: For the full year, we are now projecting comp sales growth in the range of 3.5 to 4.5%, up from 3 to 4% to reflect better than expected first quarter sales. We expect comp growth in the second quarter to be approximately 3.2%, which reflects a 100 basis points Easter shift out of Q2 into Q1. We now expect to add a total of 58 to 62 net new stores this year, up from 55 to 60. This includes the 40 newly acquired United Grocery Outlet stores, as well as 18 to 22 new grocery stores.

Lindsey Gray: For the full year, we are now projecting comp sales growth in the range of three five to four 5% up from 3% to 4%.

Lindsey Gray: To reflect better than expected first quarter sales.

Lindsey Gray: We expect comp growth in the second quarter to be approximately three 2%, which reflects a 100 basis points Easter shift out of Q2 into Q1.

Lindsey Gray: We now expect to add a total of 58 to 62 net new stores. This year up from 55 to 60.

Lindsey Gray: This concludes the 40 newly acquired United grocery outlet stores as well as 18 to 22, new grocery outlet stores.

Lindsey Gray: In total, we continue to project fiscal 2024 net sales of $4.3 to $4.35 billion. For the full fiscal year, we now project a growth margin of approximately 30.5%. We expect growth margin for the second quarter of approximately 30.0%, which includes an estimated 100 basis point impact from the system's transition. This is due to residual expense from our commission support program as we finish store physical inventory counts in the second quarter. We expect growth margins to increase sequentially in the back half of the year.

Lindsey Gray: In total we continue to project fiscal 2024, net sales of $4 $3 billion to $4.35 billion.

Lindsey Gray: For the full fiscal year, we now project gross margin of approximately 35%.

Lindsey Gray: We expect gross margin for the second quarter of approximately 30.0%, which includes an estimated 100 basis point impact from the system transition.

Lindsey Gray: This is due to residual expense from our commission support program as we finish store physical inventory counts in the second quarter.

Lindsey Gray: We expect gross margins to increase sequentially in the back half of the year.

Lindsey Gray: For the full fiscal year, we now expect Adjusted EBITDA to be in the range of $252 to $260 million. We expect a second quarter adjusted EBITDA margin of approximately 5.4%, which also includes some residual SG&A expense from the end of the commission support program. For the year, we now expect DNA to grow in the mid-20s on a percentage basis, reflecting an updated forecast for the impact of store growth, the United Grocery Outlet acquisition, and infrastructure reinvestment.

Lindsey Gray: For the full fiscal year, we now expect adjusted EBITDA to be in the range of $252 million to $260 million.

Lindsey Gray: We expect second quarter adjusted EBITDA margin of approximately five 4%.

Lindsey Gray: Which also includes some residual SG&A expense from the end of the commission support program.

Lindsey Gray: For the year, we now expect D&A to grow in the mid twenties on a percentage basis, reflecting an updated forecast for the impact of store growth, the United grocery outlet acquisition and infrastructure Reinvestments.

Lindsey Gray: We expect stock-based compensation of approximately $34 million. Net interest expense is anticipated to be approximately $21 million. We continue to forecast a normalized tax rate of 30 percent. We now expect average diluted shares outstanding of approximately $101 million, down from $102 million due to a lower share count from share repurchases. We now expect CapEx net of tenant allowances of approximately $175 million, reflecting higher new store growth and consistent investments in existing fleet upgrades, including anticipated UGO store capital improvements, as well as ongoing investments in technology, supply chain, and infrastructure.

Lindsey Gray: We expect stock based compensation of approximately $34 million net.

Lindsey Gray: Net interest expense is anticipated to be approximately $21 million.

Lindsey Gray: We continue to forecast a normalized tax rate of 30%.

Lindsey Gray: We now expect average diluted shares outstanding of approximately $101 million down from $102 million due to lower share count from share repurchases.

Lindsey Gray: We now expect Capex net of tenant allowances of approximately $175 million, reflecting higher new store growth and consistent investments in existing fleet upgrades, including anticipated Ugo store capital improvements.

Lindsey Gray: As well as ongoing investments in technology supply chain and infrastructure.

Lindsey Gray: We now expect full-year adjusted EPS to be in the range of $0.89 to $0.95 per diluted share. In closing, I would like to take a moment to thank our incredible team of independent operators and employees for continuing their hard work and dedication to serving our customers. Our underlying business remains strong, and we are well positioned for long-term growth. We will now open the call to your questions.

Lindsey Gray: We now expect full year adjusted EPS to be in the range of 89 to 95 cents per diluted share.

Lindsey Gray: In closing I would like to take a moment to thank our incredible team of independent operators and employees for continuing their hard work and dedication to serving our customers. Our underlying business remains strong and we are well positioned for long term growth.

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

Operator: Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. We ask that you limit yourself to one question and one follow-up. You may press Star 2 if you would like to remove your question from the queue. For participants using Speakery equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment while we pull for our first question. Our first question comes from Robbie Ohms with Bank of America. Please proceed.

Speaker Change: Thank you we will now conduct a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, we ask that you limit yourself to one question and one follow up you May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.

Robert Frederick Ohmes: Present with Barclays.

Robert Frederick Ohmes: One moment, while we poll for our first question.

Robert Frederick Ohmes: First question comes from Robbie <unk> with Bank of America. Please proceed.

Robert Frederick Ohmes: Oh, hey, good evening, everybody. My first question is, you know, maybe, RJ, can you walk us through, you know, why this couldn't kind of happen again in the second quarter? You know, why we, you know, as you progress through this quarter, couldn't have variances and kind of have this happen similar to what happened in the first quarter?

Robert Frederick Ohmes: Oh, Hey, good evening everybody.

Robert Frederick Ohmes: My first question is just.

Robert Frederick Ohmes: Maybe you RJ can you walk us through why this couldnt kind of happen again in the second quarter why.

Robert Frederick Ohmes: As you progress through this quarter, you couldnt have variances and kind of have this happen similar to what happened in the first quarter.

Robert Joseph Sheedy: Sure. Yeah, hi, Robbie.

RJ: Sure Yeah, Hi, Robby first let me say again that we're disappointed that we're still experiencing these issues and to this extent.

RJ: It's a big upgrade with a lot of learnings along the way and work continues that said, we do continue to make good progress cleaning up many of the data integration issues. We've been dealing with we have been learning new processes as mentioned.

RJ: Important to note that we've been bringing back critical reporting and visibility, which led to some of the impact in the miss versus guidance in the first quarter.

Robert Joseph Sheedy: First, let me say again that we're disappointed that we're still experiencing these issues. And to this extent, it was a big upgrade with a lot of learnings along the way, and work continues. That said, we do continue to make good progress cleaning up many of the data integration issues we've been dealing with. We've been learning new processes, as mentioned, and it is important to note that we've been bringing back critical reporting and visibility, which led to some of the impact in MIPS versus guidance in the first quarter. More recently, Ramesh has brought great leadership to the team.

Robert Joseph Sheedy: More recently Remissions book brought great leadership to the team he's helping us be better organized with our cleanup efforts and approach.

Robert Joseph Sheedy: Given us much better timelines and knowledge of the work remaining with the right plan to pursue it. So we feel good about the progress there.

Robert Joseph Sheedy: We've also been increasing third party support where needed as well as hiring more talent to the team we've been adding our own SAP capabilities, which has reduced our reliance on consultants in this area. All of this to just give us better control together with the progress that we've made we're in a better place now than we were a couple of months ago.

Robert Joseph Sheedy: He's helping us be better organized with our cleanup efforts and approach. It's given us much better timelines and knowledge of the work remaining with the right plan to pursue it, so we feel good about the progress there. We've also been increasing third-party support where needed, as well as hiring more talent for the team. We've been adding our own SAP capabilities, which has reduced our reliance on consultants in this area. All of this is to just give us better control together with the progress that we've made.

Robert Joseph Sheedy: So feel good about that and see.

Robert Joseph Sheedy: Like we are.

Robert Joseph Sheedy: We have our arms around where we are and still what's in front of US I'll also mentioned just to in terms of the work that we're focused on right. Now are three primary areas. One is continuing to bring more operating data and metrics back on line to help us manage the business. The second one is optimizing the system for.

Robert Joseph Sheedy: <unk> functionality and then the third area is improving the system for process efficiencies and so again, while we're disappointed by the size and duration of the impact is temporary it is fixable, we fixed a lot and we're aware of the work that's remaining and as far as the guidance goes.

Robert Joseph Sheedy: As Lindsay said forecasting is clearly been difficult due to more limited visibility.

Robert Joseph Sheedy: The good news is that we have brought back visibility to help us better manage the business and better forecast.

Robert Joseph Sheedy: We're in a better place now than we were a couple of months ago, so feel good about that and feel like we are, and we have our arms around where we are and still what's in front of us.

Robert Joseph Sheedy: And all of that considered we're trying to be and we are being we believe prudent with our updated guidance in terms of Q2 and then for the year. We think it accurately reflects where we are right now what's in front of US while also taking into consideration. Some recent variations that we've seen relative to expectation.

Robert Joseph Sheedy: I'll also mention just two, in terms of the work that we're focused on right now, three primary areas. One is continuing to bring more operating data and metrics back online to help us manage the business. The second one is optimizing the system for improved functionality, and then the third one is improving the system for process efficiencies.

Robert Joseph Sheedy: <unk>.

Robert Joseph Sheedy: All of that considered, we're trying to be, and we believe we are being, prudent with our updated guidance. In terms of Q2 and then for the year, we think it accurately reflects where we are right now, what's in front of us, while also taking into consideration some recent variations that we've seen relative to expectations. And underlying, just maybe the last comment here, underlying all of this, it is important to say that we continue to be really pleased with business fundamentals.

Robert Joseph Sheedy: And underlying just maybe the last comment here underlying all of this important.

Robert Joseph Sheedy: To say that we continue to be really pleased with business fundamentals they are healthy.

Robert Joseph Sheedy: Seeing great topline growth, our new systems, while still impacting us on the P&L. They are supporting daily business operations well and.

Robert Joseph Sheedy: We're also pleased that we've been able to make great progress on some of our long term initiatives. So all of that sets us up well not just for this year, but for growth as we look forward.

Robert Joseph Sheedy: They are healthy, we're seeing great top-line growth, and our new systems, while still impacting us on the P&L, are supporting daily business operations well. And we're also pleased that we've been able to make great progress on some of our long-term initiatives. So all of that sets us up well, not just for this year, but for growth as we look forward.

Robert Joseph Sheedy: Thanks, that's helpful. And my follow-up question is that you mentioned IO interest kind of being at all-time highs. Why is that? Is it something in the environment, and there's been no sort of loss of confidence related to the systems disruptions, you know, on the IO pipeline?

Speaker Change: Thanks, that's helpful and my follow up is I think you mentioned Io interest kind of being at all time highs.

Speaker Change: What why is that is it something in the environment.

Speaker Change: And there's been no sort of loss of confidence related to the systems disruptions on the Io pipeline.

Robert Joseph Sheedy: Speaking first to just where IOs are relative to the systems, I'd say they're very encouraged to have store-level reporting back, which has enabled them to manage the business as they did before. We're all happy that the improvements have allowed us to come off of the protection program, so that's good for them and for us. They're starting to see the benefits of the system now that we've stabilized a lot of it compared to what we had before. That's a good thing.

Speaker Change: Speaking first to just where iOS <unk> relative to the systems.

Robert Joseph Sheedy: Say theyre very encouraged to have store level reporting back which has enabled them to manage the business as they did before.

Robert Joseph Sheedy: We're all happy that the improvements have allowed us to come off of the protection program. So that's good for them and for US. They are starting to see the benefits of the system now that we've that we've stabilized a lot of it compared to what we had before that's a positive and then as we do continue to work to bring back data visibility along with funk.

Robert Joseph Sheedy: And then as we do continue to work to bring back data visibility along with functionality, along with efficiencies as well, they'll enjoy even more of those benefits. So all of that is feeling really good to them. We've been in close communication with them throughout, and the partnership is strong. I think it's made the partnership even stronger what we have done and worked through together.

Robert Joseph Sheedy: Now the along with efficiencies as well they will enjoy even more of those benefits. So all of that is feeling really good to them. We've been in close communication with them throughout and the partnership is strong I think it's made the partnership even stronger what we've been through and worked through together. So that's that's where they are in terms.

Robert Joseph Sheedy: So that's where they are in terms of the systems. In terms of just interest in the business and on the recruiting system side and where the pipeline stands. You know, I'd say it's the same things that have always attracted people to this model.

Robert Joseph Sheedy: Of this systems in terms of just interest in the business and the on the recruiting side and where the pipeline stands.

Robert Joseph Sheedy: Say, it's the same things that have always attracted people to this model they have the opportunity to own and operate their own business. Many of them are working together side by side with family as the partnership is in oftentimes extended family, helping them working in the store.

Robert Joseph Sheedy: They have the opportunity to own and operate their own business. Many of them are working side by side with family, as the partnership is, and oftentimes, extended family, helping them work in the store. The independence is a big part of why they come here. They get to order their own product. They get to merchandise it how they see fit. They cater to the needs of their own local customers.

Robert Joseph Sheedy: Independence is a big part of why they come here they get to order their own product they get the merchandise it how they see fit they cater to the needs of their local customer they love that they love the opportunity to give back it's a big part of our mission and resonates strongly with operators coming in and of course, there's financial upside as well.

Robert Joseph Sheedy: They love that. They love the opportunity to give back. It's a big part of our mission and resonates strongly with operators coming in. And, you know, of course, there's financial upside as well. There's no cap on the commission, and as they grow their sales and manage margin in their stores, they get to enjoy that, along with the benefit that it has on the business. And so all of those things that they understand, and those that have been part of the recruiting process, have understood some of the system challenges.

Robert Joseph Sheedy: There is no no cap to the commission and as they grow their sales and manage margin in their stores.

Robert Joseph Sheedy: Get to enjoy and that along with the benefit that it has to the business and so all of those things they understand and those that have been part of the recruiting process of understood. Some of the system challenges. They view it similarly to us and existing operators is temporary in nature and we are getting passed it and they think about the long term.

Robert Joseph Sheedy: They view it, similarly to us and existing operators, as temporary in nature, and we are getting past it, and they think about the long-term growth potential of this business and all of the attributes that come with being an operator, which continue to be really attractive.

Robert Joseph Sheedy: Both potential of this business and all of the attributes that come with being an operator, which continued to be really attractive.

Unknown Attendee: Got it. Thanks so much.

Speaker Change: Got it thanks, so much.

Speaker Change: Thanks Robby.

Krisztina Katai: The next question comes from Krisztina Katai with Doja Bank. Please proceed.

Unknown Attendee: The next question comes Squirts, Dana <unk> with Deutsche Bank. Please proceed.

Krisztina Katai: Hi, good afternoon, and thanks for taking the question. So I wanted to follow up on the system conversion issues that you experienced and just ask if, in particular, what is still negatively impacting you as we sit here in the second quarter. And RJ, I think you said the grocery outlet will return to more normalized operations. I think the word you used was very soon. So how should we think about the timeline for this to be fully behind us, and do you still think the growth margin can reach 31% or higher once these issues are behind us?

Krisztina Katai: Hi, good afternoon, and thanks for taking the question I wanted to follow up on that on the system conversion issues that you experienced and just ask you in particular, what is still negatively impacting you as we sit here in the second quarter and I'd tell you I think you said the grocery outlet will return to more normalized operations I think the word that.

Krisztina Katai: Was very soon so how best to think about the timeline for just to be fully behind us and do you still think that gross margin can reach 31% or high once these issues are behind us.

Robert Joseph Sheedy: Yes, let me speak first to the residual impact cost in the second quarter, and then I'll talk to the second part or the longer-term view part of your question. We did, we fixed store level reporting in March, and we already talked about that, which has allowed us to end the commission protection program going forward. It is important to know that store margins and I.O. commissions are determined when we take physical inventory counts in the store.

RJ: Yes, let me speak first to the residual impact cost in the second quarter, and then I'll talk to the second part or the longer term view part of your question. We did we fixed store level reporting March already talked about that which has allowed us to end the commission protection program going forward import.

Robert Joseph Sheedy: And to know that store margins in Io commissions are determined when we take physical inventory count in the store typically this happens three to four times per year for the average store and this residual cost that we are talking about in the second quarter relates to certain elements of margin and commission, which can only be calculated.

Robert Joseph Sheedy: Typically, this happens three to four times per year for the average store, and this residual cost that we are talking about in the second quarter relates to certain elements of margin and commission, which can only be calculated after a full inventory period has been completed. Those counts are happening now, and they will be complete for all stores in June.

Robert Joseph Sheedy: After a full inventory period has been completed those counts are happening now and they will be complete for all stores. In June. So this is what is reflected in the 100 basis points lower margin that we talked about.

Robert Joseph Sheedy: So this is what is reflected in the 100 basis points lower margin that we talked about as a residual cost in the second quarter. It also relates to our guidance for slightly higher commissions in SG&A for the commission that will also be paid in the second quarter. What's important to note about this is that it's time bound specific to the physical inventory count schedule. This is not a situation where we need to fix something that's still not working in the system, and we're in the middle of that work that's been fixed.

Robert Joseph Sheedy: As a residual cost in the second quarter. It also relates to within our guidance for slightly higher Commission and SG&A for the commission that also will be paid in the second quarter Whats important to note about this is that it's time bound specific to the physical physical inventory count schedules. This is not a.

Robert Joseph Sheedy: Situation, where we need to fix something that is still not working in the system and.

Robert Joseph Sheedy: We're in the middle of that work that's been fixed it's just residual and according to the physical counts in a way that margin and commission is calculated.

Robert Joseph Sheedy: It's just residual and according to the physical counts and the way that margin and commission are calculated. So that's the explanation for the ongoing cost in Q2 as we quantify that. In terms of our belief or conviction in the underlying health of gross margin, I will tell you that the product margin pressure that we've been experiencing is entirely due to the system transition issues and, more specifically, data visibility and more difficulty managing margin as a result. That's both for us and for the operators.

Robert Joseph Sheedy: That's the explanation for the ongoing costs in Q2, as we quantified that in terms of our belief or conviction in the underlying health of gross margin I will tell you that the product margin pressure that we've been experiencing is entirely due to the system transition issues.

Robert Joseph Sheedy: And more specifically data visibility and more difficulty managing margin as a result.

Robert Joseph Sheedy: Both for us and for the operators, we both play an important role in managing margin. We've quantified it specific to what we've discussed these different issues that we've been experiencing it and the underlying health of margin is is there we're continuing to see great list of deals.

Robert Joseph Sheedy: We both play an important role in managing margin. We've quantified it specific to what we've discussed, these different issues that we've been experiencing, and the underlying health of margin is there. We're continuing to see great lists of deals, and opportunistic supply continues to be really healthy. We're managing the everyday side of the business really well, and so the underlying health and structure of the margin is there, and once we get past this impact in the second quarter, we do believe that we will revert back, and you'll see the more normalized margins for the business as we get into the third quarter and fourth quarter, You can look at or do the math on the margin in the second half, and you'll see the expectation there is to revert back to healthier levels.

Robert Joseph Sheedy: Opportunistic supply continues to be really healthy, we're managing everyday side of the business really well and so the underlying health.

Robert Joseph Sheedy: And structure of the margin is there and once we get past this impact in the second quarter. We do believe that we will revert back and you'll see you'll see the more normalized margins for the business as we get into the third quarter and fourth quarter and that's reflected in guidance for the year you can you can.

Robert Joseph Sheedy: When you look at it or do the math on the margin in the second half and Youll see the expectation there is to revert back to healthier levels.

Krisztina Katai: Got it. And just as a follow-up, also, I guess, regarding gross margins, but you mentioned that 99 cents only is liquidating, and they were certainly a large part of the secondary sourcing market. We'd just love to get your thoughts on what you think about the benefits that grocery outlets can see to further capitalize on the favorable buying environment. And do you foresee any potential gross margin benefits as a result of this in the medium to long term?

Speaker Change: Got it and just as a follow up although I guess regarding gross margin, but you mentioned that 99 cents only liquidating and Dave are certainly a large part of the secondary sourcing markets, we'd love to get your thoughts on how you think about the benefit that grocery outlet can see hardware capitalize on the favorable buying.

Krisztina Katai: Environment and do you foresee any potential gross margin benefit as a result of death in the medium to long term. Thank you.

Robert Joseph Sheedy: Thanks, Krisztina. In regards to 99 cents only, yes, we do, and we have already started to see some benefit there. As I mentioned in my comments, we've seen product come our way that was previously directed to them, and we do expect that to be ongoing as they were a notable participant in the space for opportunistic product. And so we're excited about helping suppliers with the opportunities there where they previously would have sold for 99 cents only.

Robert Joseph Sheedy: Thank you. We thank you, Kristina.

Speaker Change: We thanks Kristina in regards to the 99 cent only yes, we do and we have already started to see some benefit there as I mentioned in my comments, we've seen product come our way that was previously directed to them.

Robert Joseph Sheedy: We do expect that to be ongoing as they were.

Robert Joseph Sheedy: Notable participant in the space for opportunistic product and so we're excited about helping suppliers with the opportunities there where they previously would have sold to 99 cents only so that helps us of course with offering great value to customers as it relates to opportunistic product, we enjoy healthy margins there.

Robert Joseph Sheedy: And it helps the assortment overall so we're excited for that also mentioned just while we're on this topic.

Robert Joseph Sheedy: We see some potential real estate opportunities here as well. So we are looking at some of the real estate that's come available from.

Robert Joseph Sheedy: The 99 cents only situation to see if there is any there that can fit our real estate portfolio. We're mindful of growth rate next year and other components that go into growth that we've talked about in the past, but we do want to take advantage of good real estate opportunities as they are they are available there as they're going through that process. So we look for.

Robert Joseph Sheedy: So that helps us, of course, with offering great value to customers as it relates to opportunistic products. We enjoy healthy margins there, and it helps the assortment overall. So we're excited about that, but we do want to take advantage of good real estate opportunities as they're available there as we go through that process. So we look forward to anything that might come there. And then last, I'd say it's a good opportunity to attract customers to the grocery outlet.

Robert Joseph Sheedy: Forward to anything that might come there and then lastly, I'd say, it's a good opportunity to attract customers to grocery outlet. We do have some overlap with them. It's a different shop, but we have overlap with them and certainly so in markets, where our stores are in close proximity and so we've been.

Robert Joseph Sheedy: We do have some overlap with them. It's a different shop, but we have overlap with them, and certainly so in markets where stores are in close proximity. And so we've been doing some work to target those customers to help them look to save money with us, where previously they may have been shopping with 99 cents only. Potentially, store operators as well, and store employees for operators. And so we think there are a number of areas where we could benefit from those stores closing.

Robert Joseph Sheedy: We've been doing some work to target those customers to help them look to save money with us where previously they may have been shopping with 99% only.

Robert Joseph Sheedy: Potentially store operators as well store employees for operators and so we think there are a number of areas, where we could benefit from.

Robert Joseph Sheedy: From those stores closing.

Speaker Change: Thank you best of luck.

Speaker Change: Thank you.

Oliver Chen: The next question comes from Oliver Chen with TD Cowen. Please proceed.

Robert Joseph Sheedy: The next question comes from Oliver Chen with TD Cowen. Please proceed.

Oliver Chen: What happened with respect to customer impact, and how have you been managing that process as well? And also, we'd love your thoughts on pricing in terms of a private label opportunity or pricing trends that you're seeing. We're seeing a lot of bifurcation across the sector with pricing at other retailers as well.

Oliver Chen: Okay.

Oliver Chen: Issues, what happened with respect to customer impact and how have you been managing that process as well.

Oliver Chen: And also would love your thoughts on pricing in terms of.

Oliver Chen: Private label opportunity or our pricing trends that you're seeing we're seeing a lot of bifurcation across the sector with pricing and other retailers as well. Thank you.

Robert Joseph Sheedy: Hi Oliver. Thanks for the questions. In terms of customer impact, it was really minimal in the first quarter and came in below our expectations. We talked before about a 50 basis point of potential impact on queue and comps. We think it came in well below that.

Speaker Change: Hi, Oliver Thanks for the questions in terms of customer impact.

Speaker Change: It was really minimal in the first quarter came in below our expectations, we talked before about.

Robert Joseph Sheedy: <unk>.

Speaker Change: 50 basis points in <unk>.

Speaker Change: Potential impact to Q1 comps, we think it came in well below that inventory has been healthy variety is healthy.

Speaker Change: As far as the ongoing impacts of the systems go really not impacting the customer experience I mentioned that it's supporting daily operations, well and so we don't we don't see it really in the customer experience or in the comps.

Robert Joseph Sheedy: Inventory has been healthy, variety is healthy, you know, as far as the ongoing impacts of the systems go, really not impacting the customer experience. I mentioned that it's supporting daily operations well, and so we don't see it in the customer experience or in the comps that were part of our Q1 results. So we feel good about that.

Robert Joseph Sheedy: Were they were part of our Q1 results. So we feel good about that to your question around pricing and value always paying close attention to value, we're managing pricing accordingly to what competitors are doing the promotional environment remains very rationale has increased a little bit, but nothing that we haven't seen before.

Robert Joseph Sheedy: To your question around pricing and value, always paying close attention to value. We're managing pricing accordingly to what competitors are doing. The promotional environment remains very rational.

Robert Joseph Sheedy: Four we're offering great value, we see it in results from customer surveys and satisfaction levels, we're certainly seeing it in traffic trends and overall topline growth. So we feel good about that and then you mentioned private label, we're really excited about introducing private label in the third quarter. This year.

Robert Joseph Sheedy: It's increased a little bit, but nothing that we haven't seen before. We're offering great value. We see it in the results of customer surveys and satisfaction levels. We're certainly seeing it in traffic trends and overall top line growth. So we feel good about that.

Robert Joseph Sheedy: As I've mentioned before private label will be an enhancement to our everyday assortment in a couple of different ways. One is value I always think about value first these items will provide better value for customers relative to items that they may be replacing and that is the case with some of them.

Robert Joseph Sheedy: Other items that were introducing our new.

Robert Joseph Sheedy: New adds to the assortment and better value certainly to what they might be paying elsewhere and we also think about better margin for the business that's for operators and for grocery outlet as we share that with commissions.

Robert Joseph Sheedy: And then you mentioned private label. We're really excited about introducing private label in the third quarter this year. As I've mentioned before, private label will be an enhancement to our everyday assortment in a couple of different ways. One is value. Always think about value first.

Robert Joseph Sheedy: And so.

Robert Joseph Sheedy: We look forward to introducing few items, we talked about categories grocery and beverage. We're starting there and then getting into some additional categories dairy household and baking the value of these items provide and then lastly, I'd say another point of differentiation many of these items.

Robert Joseph Sheedy: These items will provide better value for customers relative to items that they may be replacing, and that is the case with some of them. Other items that we're introducing are new. They add to the assortment and better value, certainly compared to what they might be paying elsewhere. And we also think about better margin for the business. That's for operators and for grocery outlets. We share that with commissions.

Robert Joseph Sheedy: And so we look forward to introducing a few items. We talked about categories, grocery, and beverage. We're starting there and then getting into some additional categories, dairy, household, and baking. The value that these items provide. And then, you know, lastly, I'd say another point of differentiation. Many of these items, well, they'll all be unique to us, but many of them will be more unique items, whether in the NASH space, you know, different formulations, new ads, to the shop that create another reason for customers to shop at our stores beyond just the value that they provide.

Robert Joseph Sheedy: It'll all be unique to us, but many of them will be more unique items, whether in the Nash space.

Robert Joseph Sheedy: Current formulations, new adds to the shop that create another reason for customers to shop, our stores beyond just the value that they provide.

Oliver Chen: Thank you. A follow-up. We know you've made a lot of progress on the mobile app.

Speaker Change: Thank you a follow up we know you've made a lot of progress on the mobile App just any thoughts there in terms of engagement and transaction and.

Robert Joseph Sheedy: Just any thoughts there in terms of engagement and transactions? And the other question we've been getting is around labor costs. I think we're in a pretty tight labor market as well. Are there things we should know in terms of modeling that and or independent operators and their margins?

Robert Joseph Sheedy: And the other question we've been getting is around labor costs, given that we're in a pretty tight labor market as well and I think we should know in terms of modeling modeling that and door.

Robert Joseph Sheedy: Tenant operator and their margin. Thank you.

Robert Joseph Sheedy: We successfully completed the rollout to all remaining stores, but that was back in the middle of the second quarter. It included all of California and Nevada. That was the only group that was remaining. So, that all went well. We're really pleased with customer adoption and feedback so far. I mentioned over 400,000 downloads and 6% of sales are on track with what we expected, and we expect it to continue to grow from here. So the engagement's really strong.

Robert Joseph Sheedy: Thank you. We have successfully completed the rollout.

Robert Joseph Sheedy: We successfully completed the rollout to all remaining stores that was back in the middle of the second quarter.

Robert Joseph Sheedy: It included all of California, and Nevada that was the group that was remaining so that all went well, we're really pleased with customer adoption and feedback so far I mentioned over 400000 downloads and 6% of sales.

Robert Joseph Sheedy: On track with what we expected and we expect it to continue to grow from here and so the engagement is really strong and then of course as customers continue to use the app on their shopping trips that will give us valuable data and it will increase engagement further still is we'll be able to message more specifically to who they are.

Robert Joseph Sheedy: And then, of course, as customers continue to use the app on their shopping trips, it will give us valuable data, and it will increase engagement further still as we'll be able to message more specifically to who they are and the items that they're buying. So we're off and running there and look forward to all the benefits that we'll provide. And then, as far as continued cost pressures go with operators, yes, wages and operating costs continue.

Robert Joseph Sheedy: And the items that they're buying so we're often running there and look forward to all the benefits that will provide and then as far as continued cost pressures go with operators, yes wages operating costs continue.

Robert Joseph Sheedy: Operators continue to be very resilient and resourceful about how they're managing this, and we manage it in partnership with them. We have been growing the top line. We've had some margin pressures here recently. We've protected operators from that, so their income has grown year over year. And then we continue to prioritize work to help them be more efficient and help them grow their profit along with how we manage and think about profit growth on our P&L.

Robert Joseph Sheedy: Operators continue to be very resilient and resourceful about how they're managing this we manage in partnership with them.

Robert Joseph Sheedy: We have been growing the top line.

Robert Joseph Sheedy: We've had some some margin pressures here recently, we've protected operators from that so other income has grown year over year and then we continue to prioritize work to help them be more efficient and help them grow their profit along with how we manage and think about profit growth on our P&L.

Speaker Change: Thank you best regards.

Mark David Carden: Thank you. Thank you, Oliver. Once again, as a reminder, we ask that you ask one question. Our next question comes from Mark Carden with UBS. Please proceed.

Speaker Change: Thanks Oliver.

Mark David Carden: Once again as a reminder, we ask that you ask one question. Our next question comes from Mark Carden with UBS. Please proceed.

Mark David Carden: Once again, as a reminder, we ask that you ask one question. Our next question comes from Mark Cardin with UBS. Please proceed. Good afternoon. Thanks so much for taking the time to ask me this question.

Mark David Carden: Good afternoon. Thanks, so much for taking my questions. So digging into the store growth acceleration a bit. This is the first time, we've seen an intra your tick up in quite a while is it being driven by fewer building headwinds are you see more opportunistic locations you might say.

Mark David Carden: <unk>, just assuming it's a bit early for that 99% only location. So I just wanted to dig in a bit more on what drove that decision.

Robert Joseph Sheedy: Hi Mark. Yeah, for this year, think of it as just management of the process. We've been able to get stores opened a little bit earlier than anticipated. On that schedule, the construction team is operating really well.

Mark David Carden: Hi, Mark for the yes for this year.

Robert Joseph Sheedy: Think of it as just management of the process, we've been able to get stores opened a little bit earlier than anticipated on that schedule. The construction team is operating really well, we've we've talked a lot over the past couple of years about some of the challenges and the adjustments that we've made and so I.

Robert Joseph Sheedy: We've talked a lot over the past couple of years about some of the challenges and the adjustments that we've made. And so I'd say that those things are operating smoothly as far as we've adapted the resources that we've brought in and how we're managing the process overall. That, in parallel with the ongoing work of recruiting and training operators to be ready, it's important, too, to make sure that they're ready to take those stores.

Robert Joseph Sheedy: Say that those things are operating smoothly for how we've adapted the resources that we brought in and how we're managing the process overall.

Robert Joseph Sheedy: That in parallel with the ongoing work of recruiting and training operators to be ready that's important too to make sure that they're ready to take those stores and so.

Robert Joseph Sheedy: And so because we are managing the process as well as we are, we're taking advantage of some of those opportunities and have, therefore, increased guidance for the year. But it doesn't reflect the opportunities that are in front of us. Certainly not 99.

Robert Joseph Sheedy: Because we are managing the process as well as we are we're taking advantage of some of those opportunities and.

Robert Joseph Sheedy: Therefore, then increased guidance for the year. It doesn't reflect the opportunities that are in front of US certainly not 99, you think about that as a 2025 opportunity and we continue to look at other lists as well and so we love where we're at in terms of the pipeline.

Robert Joseph Sheedy: You think about that as a 2025 opportunity, and we continue to look at other lists as well. And so we love where we're at in terms of the pipeline. Certainly, what's happening this year, the pipeline for next year, 26, 27, coming together really well. And again, for us, just trying to be mindful of the rate of growth and make sure that we've got all the right pieces in place. We're investing in the infrastructure ahead of growth so that when we do open these stores, we open them successfully.

Robert Joseph Sheedy: <unk> certainly what's happening this year pipeline for next year 'twenty, six 'twenty, seven coming together really well and again.

Robert Joseph Sheedy: For us just trying to be mindful of the rate of growth and make sure that we've got all the right pieces in place we're investing in the infrastructure ahead of growth. So that when we do open these stores, we opened them successfully.

Speaker Change: Alright, thanks, so much I'll pass it along.

Speaker Change: Thanks Mark.

Corey Tarlowe: The next question comes from Corey Tarlow with Jeffries. Please proceed.

Robert Joseph Sheedy: The next question comes from Cory <unk> with Jefferies. Please proceed.

Corey Tarlowe: Great. Thank you.

Corey Tarlow: Great. Thank you.

Corey Tarlow: RJ it sounded like in response to a prior question that it was.

Robert Joseph Sheedy: R.J., it sounded like in response to a prior question that it was your expectation that you're returning to a more normalized margin in the back half. Along with that, is it also your expectation that these systems implementation issues should be resolved by the end of the second quarter? Or is it that the financial impact from these issues is resolved, yet the implementation is still likely to be ongoing? Is there any way to dimensionize the timing and duration of the remaining tasks that you have left and as well as the impact of those issues?

Corey Tarlow: Your expectation that you're returning to a more normalized margin in the back half.

Robert Joseph Sheedy: Along with that is it also the expectation that these.

Robert Joseph Sheedy: Some implementation issues should be resolved by the end of the second quarter or is it that the financial impact from these issues is resolved yet.

Robert Joseph Sheedy: Implementation is still likely to be ongoing is there any way to dimensionalize, the timing and duration of the remaining tasks that you have left and as well as the impact of those issues.

Robert Joseph Sheedy: Yes, we do believe that the large and notable impact will be in the second quarter for what's remaining. There may be some spillover into the second half of the year. As I mentioned, we are trying to be prudent in our guidance as we think about the progression here from Q2 into Q3 and into Q4. But think about what's meaningful from a P&L stand point. standpoint as being really contained, for the most part, to the second quarter.

R.J.: Yes, we we do believe that the large and notable impact.

Robert Joseph Sheedy: We'll be in the second quarter for what's remaining.

Robert Joseph Sheedy: We.

Robert Joseph Sheedy: There may be some spillover into the second half of the year as I mentioned, we are trying to be prudent in our guidance as we think about the progression here from Q2 into Q3 and into Q4.

Robert Joseph Sheedy: But think about the.

Robert Joseph Sheedy: What's meaningful from a P&L standpoint, as being really contained for the most part to the second quarter.

Robert Joseph Sheedy: The work will continue, and I say that we'll always be enhancing these systems. We will be working beyond the second quarter in terms of operating data visibility, functionality, efficiencies, the things that I talked about previously. And so that will certainly continue through the rest of the year to make them even better and to capture these benefits, which is part of why we implemented these new systems to begin with. But not when you think about the impact on the P&L, as I mentioned, we've got this residual cost of the commission program.

Robert Joseph Sheedy: The work will continue ongoing and.

Robert Joseph Sheedy: And I say that we'll always be enhancing the systems, we will be working beyond to the second quarter in terms of operating data visibility functionality efficiencies the things that I that I talked about previously and so that will certainly continue through the rest of the year to make them even better.

Robert Joseph Sheedy: And to capture these benefits for.

Robert Joseph Sheedy: Part of why we implemented these new systems to begin with but not when you think about the impact on the P&L of <unk> as I mentioned and we've got this residual cost of the commission program that is time bound so it will be through that at the end of the second quarter and then there may be some minimal minimal impacts into the.

Robert Joseph Sheedy: That's time-bound. So we'll be through it at the end of the second quarter. And then there may be some, you know, minimal impacts into the second half of the year. None of which is, or would change any of that in terms of what we know about where we are and the work that's ahead of us still.

Robert Joseph Sheedy: Half of the year.

Robert Joseph Sheedy: None of which that's.

Robert Joseph Sheedy: All reflected in our guidance, none of which would would change any of that in terms of what we know for where we are and the work that's ahead of us stuff.

Corey Tarlowe: Thank you, that's very helpful. I just have one follow-up on the comp. Is there any way to dimensionalize traffic versus tickets for what you saw in the quarter?

Speaker Change: Thank you that's very helpful. I just had one follow up on the comp is there any way to dimensionalize.

Corey Tarlowe: Traffic versus ticket for what you saw in the quarter.

Lindsey Gray: Hi, Corey. This is Lindsay. So traffic versus ticket. So traffic was up 7%, but Ring was down 2.9% year over year due to lower units. But we're really pleased that comps continue to be driven by these strong transactions. However, absolute inflation remains high. And so customers are still prioritizing value. So we're seeing both new and existing customer increases, with pretty high satisfaction and minimal system impact on comp. So really encouraged by the strong transactions. Yeah, ring was down 2.9% due to lower units, both from higher trip frequency and moderating inflation.

Corey Tarlowe: Hi, Cory this is lindsey so traffic versus ticket so traffic was up 7%.

Lindsey Gray: Ring was down two 9% year over year due to lower units, but we're really pleased that comps continue to be driven by these strong transactions.

Lindsey Gray: Pollute inflation remains high and so the customers are still prioritizing value. So we're seeing both new and existing customer increases.

Lindsey Gray: With pretty high satisfaction.

Lindsey Gray: Minimal system impact to comps, so really encouraged by the strong transactions.

Lindsey Gray: <unk> was down two 9% due to lower units, both from higher frequency and moderating inflation.

Corey Tarlowe: Great. Thank you so much.

Corey Tarlowe: Great. Thank you so much.

Joseph Isaac Feldman: Thanks, Corey. The next question comes from Joe Feldman with Telsi Advisory. Please proceed. Yeah, hey, good afternoon, guys. Thanks for taking the question. I wanted to ask about SNAP and

Speaker Change: Thanks, Brian.

Joseph Isaac Feldman: The next question comes from Joe Feldman with Telsey Advisory. Please proceed. Yeah, hey, good afternoon.

Corey Tarlowe: The next question comes from Joe Feldman with Telsey Advisory. Please proceed.

Joseph Isaac Feldman: Yeah.

Joseph Isaac Feldman: Afternoon, guys. Thanks for taking my question.

Joseph Isaac Feldman: Wanted to ask about.

Joseph Isaac Feldman: Snap and how that's impacted your business if at all if I recall it it's around 10% of sales and I know you have a lot of exposure to California, and I think they were the last state to just start with some of the benefits.

Joseph Isaac Feldman: And how are you thinking about it for this year ahead like will that have an impact on spending.

Joseph Isaac Feldman: For you guys.

Joseph Isaac Feldman: Thanks, Yeah, Hi, Joe This is Lindsey I'll take that question so.

Lindsey Gray: Thanks. Yeah. Hi Joe. This is Lindsay.

Lindsey Gray: I'll take the question. So, yeah, so we did see an impact from EBT in Q1, but it was consistent with our expectations. So, we've seen that EBT reduction, but it really is just a migration to other tender types. EBT, for us, is really just a tender type. Our EBT today is back to about pre-COVID levels. So, our model, we believe it just really appeals to that value-minded customer. So, even as we've seen EBT benefits drop, it does add cumulative pressure on these consumers to stretch their dollars.

Lindsay: Yes, so we did a.

Speaker Change: You're right, we did see an impact.

Lindsey Gray: From EBT in Q1, but consistent with our expectations. So we've seen that EBT reduction, but it really is just a migration to other tender types EBT for us is really a tender type.

Lindsey Gray: Our EBT today is back to about pre COVID-19 levels.

Lindsey Gray: So our model we believe it just really much appeal to that value minded customer so even as we've seen the EBT benefits drop it.

Lindsey Gray: It does add cumulative pressure to these consumers to stretch their dollars. So we don't see them, leaving our stores. Its really just said a change out of their tender type.

Lindsey Gray: So, we don't see them leaving our stores. It's really just a change in their tender type. So, some of it does have an immediate impact on traffic. Some of it takes time, but we really feel good looking at all the trips we're driving into the store when you look at our traffic numbers.

Lindsey Gray: So some of it does have an immediate impact on traffic some of it takes time, but we really feel good looking at all the trips were driving into the store when you look at our traffic numbers.

Speaker Change: Got it. Thank you guys good luck with the corn.

Chuck: Thanks, Chuck here.

John Edward Heinbockel: The next question comes from John Heinbockel with Guggenheim. Please proceed.

Lindsey Gray: The next question comes from John <unk> with Guggenheim. Please proceed.

John Edward Heinbockel: Hey, Arjun. One quick one and then one strategic.

John Edward Heinbockel: Hey R J.

John Edward Heinbockel: Ed.

John Edward Heinbockel: One quick one on the one more on strategic the impact on the physicals, where the.

John Edward Heinbockel: The impact on the physicals or the way that plays in here, right, is how that relates to a product that is out of code, right, and I guess has to be thrown away as opposed to shrink. And I don't know if you're seeing anything with shrink. And then my strategic question, right, is when you think about the I don't know if you have an idea where that, where your ultimate target is, and what do you think the interplay of that is with the treasure hunt? If you keep the items separate, there's no impact, and I guess you'll endeavor to do that, make sure there's minimal overlap between the two.

John Edward Heinbockel: The way that plays in here right is what that relates to <unk>.

John Edward Heinbockel: Product that is out of code.

John Edward Heinbockel: And I guess it has to be thrown away as opposed to shrink.

John Edward Heinbockel: Don't know if youre seeing anything would shrink.

John Edward Heinbockel: My strategic question Ryan is when you think about the role of private brand right. So 100 items initially.

John Edward Heinbockel: I don't know if you have an idea of where that where your ultimate target is and what do you think the interplay of that is with the treasure Hunt. If you keep the items separate theres no impact and I guess, you will endeavor to do that make sure there's minimal overlap between the two.

Robert Joseph Sheedy: Hi John. On the physical inventories, you think about margin as it relates to store inventory management. So that's really what gets reflected in the physical inventories that we take. Yes, there's shrink, but also, in this case, prior to having the reporting fixed, which was in March, you had some other components of margin, markdowns, price adjustments, throwaways, those things as well that show up there.

John Edward Heinbockel: Hi, John the yet on the physical inventories.

Robert Joseph Sheedy: Do you think about margin as it relates to store inventory management.

Robert Joseph Sheedy: So that's really what gets reflected in the physical inventories that we take yes, there shrink but also in this case prior to having the reporting.

Robert Joseph Sheedy: Fixed which was in March you have some other components to margin markdowns price adjustments throwaways, those things as well that show up there. So that's what would be reflected in this residual cost and then go forward we're on the normal.

Robert Joseph Sheedy: So that's what would be reflected in this residual cost. And then we go forward; we're on the normal, everything's recording as properly within the system, and commissions are either full or the regular 50-50 split. And then for your question on private brands and the treasure hunt, we think they can enhance the treasure hunt. So certainly, there are some items within our planned private label assortment that will be more commodity-based. They'll be in the stores all the time, and like I said, they'll offer better value. And in some cases, they'll be, well, really in all cases, high-quality items. And so there'll certainly be an enhancement there.

Robert Joseph Sheedy: Everything's recording is as you know.

Robert Joseph Sheedy: Properly within the system and commissions are full or the regular 50 50 split.

Robert Joseph Sheedy: And then for your question on private brands and treasure Heine, we think it can enhance the treasure hunt. So certainly there are some items within our planned private label assortment that will be more commodity base they'll be in the stores all the time and like I said no offer better value in some cases.

Robert Joseph Sheedy: It'll be.

Robert Joseph Sheedy: Well really in all cases, all cases high quality items, and so there'll be certainly be an enhancement there and in the treasure Hunt aspect of our business is really important one we do intend to have a treasure hunt component to their private label assortment, there's lots of different ways to do that seasonal.

Robert Joseph Sheedy: And then the treasure hunt aspect of our business is a really important one. We do intend to have a treasure hunt component in the private label assortment. There are lots of different ways to do that. Seasonal products certainly lend themselves to that, being in and out of those items as the seasons come and go. And then, just on a regular, everyday basis, we look forward to having the treasure hunt element be a part of the assortment there as well, where we are pulsing in and out of items and creating that newness and excitement within the private label, the same that exists within the branded side from an opportunistic standpoint.

Robert Joseph Sheedy: <unk>, certainly lend themselves to that being in and out of those items as the seasons come and go and then just on a regular everyday basis, we look forward to having the treasure hunt element and be a part of the assortment there as well, where we are pulsing in and out of items and creating that newness and excitement within private label.

Robert Joseph Sheedy: The same that it exists within the.

Robert Joseph Sheedy: The branded side from an opportunistic standpoint.

Speaker Change: Thank you.

Speaker Change: Thanks, John.

Jeremy Scott Hamblin: The next question comes from Jeremy Hamblin with Craig Hallam. Please proceed.

Robert Joseph Sheedy: The next question comes from Jeremy Hamblin with Craig Hallum. Please proceed.

Jeremy Scott Hamblin: Thanks for taking the questions. Sorry, but I want to come back to Commission support and what the range of impact is in Q2. I wasn't sure if that was, you know, the 12.4 million is what you're embedded in in your guidance. That's part one. Part two is just the cumulative effect over the course now of four quarters, which I think sounds like it's more than $50 million, but I wanted to see if you could quantify the cumulative effect of kind of the systems update issues, inventory is kind of completing the process here, and adjustments. Is there a risk that when that comes back by the end of June, it could be worse than what you had embedded here in your guidance?

Jeremy Scott Hamblin: Thanks for taking the questions Oh, sorry, but I want to come back to the commission support and what the the range for impact is in Q2 I wasn't sure. If that was you know the $12 4 million is what your embedded in your guidance.

Jeremy Scott Hamblin: That's part one part two is just the cumulative effect over the course now four quarters. So I think it sounds like it's more than $50 million, but wanted to see if you could quantify the cumulative effect of kind of the systems update issues.

Jeremy Scott Hamblin: And then lastly related to this is you know.

Jeremy Scott Hamblin: If if you're looking for physicals.

Jeremy Scott Hamblin: Inventories as kind of completing the process here and adjustments.

Jeremy Scott Hamblin: Is there risk that.

Jeremy Scott Hamblin: That when that comes back by the end of June that it could be worse than than what you.

Jeremy Scott Hamblin: Had embedded here on your guidance.

Lindsey Gray: Yeah, hi, Jeremy, this is Lindsay. I can take those questions. So first, on commission support. I'm happy to quantify that. So the impact overall for Q1 for us for these system issues was approximately $24 million, and about half of that is commission support for our operators. That's the 12.4 that I mentioned earlier.

Jeremy Scott Hamblin: Yeah, Hi, Jeremy This is Lindsey I can take those questions so far.

Lindsay: First your question on commission support so happy to to quantify though so.

Lindsey Gray: The impact overall for Q1 for US for these system issues was approximately $24 million and about half of half of that is commission support for our operators.

Lindsey Gray: And that's a 12.4 that I mentioned, we mentioned earlier for Q2 for our guide we're estimating about a $9 million impact from the systems transitions overall and about again half of that will be this kind of trailing off of commission support down that margin protection has ended now operator.

Lindsey Gray: For Q2, for our guide, we're estimating about a $9 million impact from the system's transitions overall. And about half of that will be this kind of trailing off of commission support now that margin protection has ended, and now that operator protection has ended. Overall, and, you know, we've quantified this over the last few quarters, overall, the impact that the system's transition has had on us is about $65 million. And about half of that is operator commission support.

Lindsey Gray: Protection is happening.

Lindsey Gray: Overall.

Lindsey Gray: We've quantified this over the last few quarters overall the impact that the systems transition has had on us is about $65 million.

Lindsey Gray: And about half of that is the operator Commission support.

Lindsey Gray: And then the physical inventory question that you had, so we track these daily as they're taking place, and we're monitoring the results every day. And so our forecast for commission support in Q2 is a pretty good estimate, just because we track these daily and we're keeping on top of the results we're seeing coming in from the store. So we feel pretty good about the numbers that we baked into the Q2 guide.

Lindsey Gray: Yeah.

Lindsey Gray: The physical inventory, yeah, and then the physical inventory question that you had.

Lindsey Gray: So we track these daily as Theyre, taking place and were monitoring the results every day and so our forecast for the commission support.

Lindsey Gray: In Q2, we feel is pretty.

Lindsey Gray: Pretty good estimate just because we're tracking these daily and we're keeping on top of the results we're seeing coming in from the store. So we feel pretty good about the numbers that we baked into the Q2 guide.

Jeremy Scott Hamblin: Got it. Thanks for the call. Our best wishes. Thank you.

Speaker Change: Got it thanks for the color best wishes.

Speaker Change: Thank you.

Leah Dianne Jordan: The next question comes from Leah Goldman with Goldman Sachs. Please proceed.

Jeremy Scott Hamblin: The next question comes from Lee of Goldman with Goldman Sachs. Please proceed.

Leah Dianne Jordan: I just wanted to see if you could help us understand why your comp guide is going up, but your net sales guide is staying the same. Is this just a knock-on impact from the UGO stores, or is there any change in your expectation for new store performance?

Leah Dianne Jordan: I just wanted to see if you could help us understand.

Leah Dianne Jordan: Why your comp guidance.

Leah Dianne Jordan: Net sales guidance staying the same is this just a knock on impact from the U T O stores or is there any change in your expectation for new store performance.

Lindsey Gray: Hi Leah, this is Lindsay. So, it's truly just due to rounding, nothing that's changed under our guidance.

Leah Dianne Jordan: Hey, Leo this is lindsey so.

Lindsay: It's truly just due to rounding nothing that's changed within our guidance.

Lindsey Gray: Yeah.

Leah Dianne Jordan: Okay, that's helpful. Thank you.

Leah: Okay. That's helpful. Thank you and then I just wanted to go back to the Io pipeline discussion. It sounds like things are tracking for your new store growth to get back to 10% and 25 that will be a big step up on new stores plus you have the transition.

Leah Dianne Jordan: And then I just wanted to go back to the IO pipeline discussion. It sounds like things are tracking for your new store growth to get back to 10% in 2025. That'll be a big step up in new stores, plus you have the transition of the UGO stores as well, so just a bigger step up in IO needs next year. And given the timeline with the training that they need, have all of the IOs been selected at this point? Where are you in that process? And any color on the background and quality of those would be helpful as well. Mm hmm.

Leah Dianne Jordan: The U T O stores as well so just a bigger step up in an Io needs next year.

Leah Dianne Jordan: And given the timeline with the training that they need to have all of the iOS been selected at this point where are you in that process and any color on the background and quality of those would be helpful as well.

Robert Joseph Sheedy: Yeah, hi, Leah. We know they've not all been selected, so think about the lead time for I.O. recruiting and training as being about a year. It can flex, be shorter in some cases and longer in other cases.

Speaker Change: Mhm, Yeah, Hi, Leah we know they have not all been selected so think about the lead time for Io recruiting and training is being about a year.

Speaker Change: It can flex be shorter in some cases longer or in other cases and you know.

Robert Joseph Sheedy: And, you know, that we manage that in parallel with the real estate pipeline. So we think about it, and why we think about it, and we always manage to have a good healthy growth rate. We're mindful of not growing too fast, in large part because of the operator pipeline and making sure we get qualified people in there running the stores. We're in a great position to do that for next year. We continue to recruit for the stores that we plan to open, you know, for any that we might take advantage of opportunistically. That adds to the current pipeline. We've got the lead time in front of us still to do that.

Speaker Change: That we manage that in parallel with the real estate pipeline. So we think about and why we think about and we always manage to.

Robert Joseph Sheedy: Good healthy growth rate, we're mindful of not growing too fast in large part because of the operator pipeline and making sure we get qualified people and theyre running the stores.

Robert Joseph Sheedy: We're in great position to do that for next year, we continue to recruit for the stores that we plan to open for any that we might take advantage opportunistically.

Robert Joseph Sheedy: That adds to the current pipeline and we've got the lead time in front of us still to do that in terms of quality I think your question was for incoming operators. It's a big part of both the recruiting and training process really important that we're recruiting high quality operators to come in and that we set them.

Robert Joseph Sheedy: In terms of quality, I think your question was about incoming operators; it's a big part of both the recruiting and training processes. Really important that we're recruiting high-quality operators to come in and that we set them up for success. We have a very rigorous multi-step process from a recruiting standpoint. We need to make sure it's the right fit for them and, certainly, the right fit for us. And then there's another important part of the process; when they come in and they're in training, not everyone makes it through training.

Robert Joseph Sheedy: Up for success, we have a very rigorous multi step process from a recruiting standpoint, we need to make sure. It's the right fit for them and certainly the right fit for US and then there is another important part of the process when they come in and they are in training not everyone makes it through training there is a healthy percentage.

Robert Joseph Sheedy: There is a healthy percentage of attrition that happens in training, and that's important to make sure again that the fit is right and that the capabilities are there for anything that maybe wasn't identified in the recruiting process. And so that gets us to then when they are ready to apply for the store, I'd say the third filter, an important one, is that we select the right fit for the store, for the right community that they're going into, and for what the operator is looking for, certainly in terms of where to live and what type of store to operate because we do have stores across all different types of markets.

Robert Joseph Sheedy: Of attrition that happens in training and that's important to make sure again that the fit is right and that the capabilities are there for anything that maybe wasn't identified in the recruiting process and so that gets us to that.

Robert Joseph Sheedy: Then when they are ready to apply for the store I'd say the third filter important one is that we select the right fit for the store.

Robert Joseph Sheedy: For the REIT community for the community that they're going into and for what the operators looking for are certainly you know in terms of where to live and what type of store to operate because we do have stores across all different types of markets.

Robert Joseph Sheedy: Yeah.

Leah Dianne Jordan: Very helpful. Thank you.

Speaker Change: Very helpful. Thank you.

Speaker Change: Thanks Leah.

Simeon Ari Gutman: The next question comes from Simeon Gutman with Morgan Stanley. Please proceed with the question.

Leah Dianne Jordan: The next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Simeon Ari Gutman: Hi everyone. Also, a follow-up on the gross margin and the systems issues. If the prior quarter's gross margin went up a bunch, and now, you know, there's this give back.

Simeon Ari Gutman: Hi, everyone and also a follow up on the gross margin in the systems issues.

Simeon Ari Gutman: The prior quarter's gross margin went up a bunch.

Simeon Ari Gutman: And now.

Simeon Ari Gutman: This give back.

Simeon Ari Gutman: You were still going through integration and systems issues while the gross margin went up. What was discovered or new in this period that was different from the prior and then besides, obviously, the cost of inventory being higher? Was there any other costs that are being run through gross margin that are not explicit product costs? There's other, you know, labor that's tied to it.

Simeon Ari Gutman: We're still going through integration and systems issues, while the gross went up what.

Simeon Ari Gutman: It was discovered or new in this period that was different from the prior and then besides obviously the cost of inventory being higher.

Simeon Ari Gutman: Was there any other costs that are being run through gross margin that are.

Simeon Ari Gutman: <unk> run through gross margin that are not explicit product costs theres other labor that tied to it.

Robert Joseph Sheedy: Hi Simeon. For the first quarter, this additional 110 basis point impact, we identified this on the back end of the quarter. It was quantified during catch-up invoice processing and margin reconciliation. So we had some delayed payment processes due to new systems, but really, the main cause was limited data visibility for how we manage and forecast margin. It was a bigger issue in the first quarter than it was in the fourth quarter because of the amount of time that we've been managing the business with limited data.

Simeon Ari Gutman: Hi, Simeon for the first quarter. This additional 110 basis point impact we identified this.

Robert Joseph Sheedy: The back end of the quarter. It was quantified during ketchup invoice processing and margin reconciliation so.

Robert Joseph Sheedy: So we had some delayed payment processes due to the new system, but really the main cause was limited data visibility for how we manage and forecast margin. It was a bigger issue in the first quarter than it was in the fourth quarter because of the amount of time that we've been managing the business with limited data think about last year as we implemented.

Robert Joseph Sheedy: Think about, you know, last year, as we implemented the new systems, we had inventory already in the system, in the warehouse, in the stores. We had POs written with product landing relative to other items that are in the assortment, and all of that comes back to how we negotiate costs with our suppliers.

Robert Joseph Sheedy: The new systems, we had inventory already in the system and the warehouse in stores. We had P. O is written with product landing that carryforward really into well into the fourth quarter and resulted in the margin that we reported we're a data driven organization margin visibility as is <unk>.

Robert Joseph Sheedy: Specially important for an opportunistic model like ours, we're negotiating cost were setting prices, we're managing gross margin daily and we're constantly balancing retails with value margin along with the volume decisions that we make you know how much we choose to buy you relative to other items that are in the assortment and all.

Robert Joseph Sheedy: So it's a very dynamic margin management approach that we take. It's a unique characteristic of our model. It's a strength, quite frankly.

Robert Joseph Sheedy: That comes back to how we negotiate costs with our suppliers. So it's a very dynamic.

Robert Joseph Sheedy: Margin management approach that we take it as a unique characteristic of our model. It's a strength quite frankly, it's enabled us to deliver consistently steady and strong margins throughout our entire history. We've discussed it as one of the ways, we uniquely manage healthy margin during inflationary time periods and so therefore it did in <unk>.

Robert Joseph Sheedy: It's enabled us to deliver consistently steady and strong margins throughout our entire history. We've discussed it as one of the ways we uniquely manage healthy margins during inflationary time periods. And so, therefore, data and tools are critical for how dynamic the decision-making is, both for us and then for operators. As I mentioned, they use tools and data as well to manage margin in a very dynamic way at the store level. And so, you know, what happened here is we got off track in the first quarter.

Robert Joseph Sheedy: <unk> are critical for how dynamic the decision making is both for US and then for operators as I mentioned, they use tools and data as well to manage margin in a very dynamic way at the store level and so what's.

Robert Joseph Sheedy: What's happened here is we got off track in the first quarter. We've had limited visibility until just recently and so we lost track of where margin was trending. The good news is that we were able to bring that back once we identified exactly where we were in for the work that we've been doing that happened several weeks.

Robert Joseph Sheedy: [noise] ago, and the recovery has already begun so we've been able to and I'm talking down at the sub class class Department level for how we manage margin able to strike that right balance between value and margin for the business with the right information on a weekly basis, where it hasnt been there or it's been more.

Robert Joseph Sheedy: We've had limited visibility until just recently, and so we lost track of where margin was trending. So we've been able to—and I'm talking down at the subclass, class, department level about how we manage margin—able to strike that right balance between value and margin for the business with the right information on a weekly basis where it hasn't been there or it's been more limited, you know, as far as those operating metrics go, to help us make those decisions.

Robert Joseph Sheedy: Ltd.

Robert Joseph Sheedy: As far as those operating metrics go to help us make those decisions and again buying fundamentals are healthy. So this is really about getting back to better margin management or the normal margin management that we've always had in this business and with the increased visibility that we brought online online recently we've been.

Robert Joseph Sheedy: And again, the fundamentals are healthy, so this is really about getting back to better margin management or the normal margin management that we've always had in this business and with the increased visibility that we brought online.

Robert Joseph Sheedy: To do that.

Simeon Ari Gutman: Can I just sneak a follow-up to that? Sorry, I was going to answer the second part of your question, just other costs and gross margins. So gross margin, as we've always had, includes product costs and all the costs that we incur to get the product to the store. So that's always included distribution costs as well. But not an impact, as far as the margin pressures here are concerned, they've been specific to the system's issues. There aren't other costs or higher costs in some of these other components. Right?

Speaker Change: Can I just sneak a follow up to that.

Simeon Ari Gutman: So that's.

Simeon Ari Gutman: I can answer the second part of your question just other cost and gross margins. So.

Simeon Ari Gutman: Gross margin as we've always has includes product cost and all the costs that we incur to get product to the store. So that's always included distribution costs as well.

Simeon Ari Gutman: Not an impact to as far as the margin pressures here they've been specific to the systems issues, there aren't other costs or higher costs in some of these other components.

Robert Joseph Sheedy: And RJ, knowing like, you know, there'll be some time to recover, but you mentioned the buying fundamentals are healthy. In the prior several quarters, we saw a step up in gross margin from the prior run rate to that. I know you were asked this earlier, where did the gross margin settle out? Does it settle out to where we were running in 2023? Or does it settle out to the pre-23 run rate before we had the system? Yeah, when you

Speaker Change: Right and RJ, knowing there'll be some time to recover but you mentioned the buying fundamentals are healthy the prior several quarters, we saw a step up in gross margin from the prior run rate to that I know you were asked this earlier, where do the gross margin settle out does it settle out to where we were running in 2023 or does it settle out to the pre twenty-three run.

Robert Joseph Sheedy: Right before we had the system issues.

Robert Joseph Sheedy: Yeah, when you look at our guidance, you'll see in the back half of the year, it's in between, which is to say the beginning of 2023, in the second quarter in particular last year, was really a historical high point for us. We talked about that at the time. So we do expect margin in the second half to be at a nice, healthy rate, again, to increase sequentially from the number that we've guided to in the second quarter and then increase from there at a healthy rate and above historical averages. That's not at the same level that it was in the second quarter, which was particularly high and the highest we've seen in a really, really long time.

Robert Joseph Sheedy: Yeah.

RJ: When you when you look at our guidance Youll see in the back half of the year. It's it's in between which is to say beginning of 2023 in the second quarter. In particular last year was really a historical high point for US we talked about that at the time.

Robert Joseph Sheedy: So we do expect margin in the second half to be at a nice healthy rate again to increase sequentially.

Robert Joseph Sheedy: Is the number that we've guided to in the second quarter and then increasing from there.

Robert Joseph Sheedy: At a healthy rate and above historical averages.

Robert Joseph Sheedy: That's not at the same level that it was in the second quarter again that was particularly high and the highest we've seen in a really really long time.

Speaker Change: Thank you.

Speaker Change: Thanks Amy.

Unknown Executive: Thank you. At this time, I would like to turn the call back to management for closing comments.

Speaker Change: Thank you at this time I would like to turn the call back to management for closing comments.

Operator: Thank you everyone for joining us, and we look forward to talking with you again on the next call. Thanks and take care. Thank you. This does conclude today's teleconference. You may disconnect your lines.

Speaker Change: Thanks, everyone for joining us and we look forward to talking with you again on the next call Thanks and take care.

Operator: Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

Speaker Change: Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a great day.

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