Q2 2024 Grocery Outlet Holding Corp Earnings Call
Operator: Greetings and welcome to Grocery Outlet's Fiscal Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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.
Greetings and welcome to grocery Outlet's fiscal second quarter 2024 earnings conference call. At this time, all participants are in a listen only mode.
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 call is being recorded.
I would now like to turn the conference over to your host Christine Chen. Thank you you may begin.
RJ Sheedy: Good afternoon, and welcome to grocery outlet's call to discuss financial results for the second quarter for the period ending June 29, 2024 speaking from management on today's call will be RJ, Sheedy, President and Chief Executive Officer, and Lindsey, Great interim Chief Financial Officer, and SVP of accounts following for Katherine.
Speaker Change: Marshall RJ Lindsay we will open the call for questions. Please note that this conference call is being webcast live and a recording will be available via telephone playback on the Investor Relations section of the company's website participants on this call may make forward looking statements within the meaning of the federal Securities laws, all statements that address future operating financial or business performance or the company.
Speaker Change: Oh jeez or expectations are forward looking statements. These forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release as well as the company's periodic reports filed with the SEC all of which may be found on the Investor Relations section of the company's website or on SEC dotcom.
RJ Sheedy: And now I will turn it over to RJ.
RJ Sheedy: Good afternoon, everyone and thank you for joining us.
RJ Sheedy: We are pleased with our second quarter performance with gross margins and earnings coming in better than expected strong.
RJ Sheedy: Customer count continued throughout the quarter, even though comp store sales softened in late June finishing slightly below our expectations.
Speaker Change: We made good progress with our systems transition work over the past three months and a material P&L impact from this is now behind us.
Speaker Change: We are executing new store openings, very well and ahead of schedule.
Speaker Change: We successfully completed the United grocery outlet acquisition on April one and integration work is progressing nicely.
Speaker Change: Finally, we are excited by the ramping adoption of our personalization app as well as the recent launch of our private label program.
Speaker Change: Our second quarter sales grew 12%, while comparable store sales increased two 9%, which represents 12% growth on a two year basis.
Speaker Change: Transaction count remained strong in the quarter, increasing 5%, which was partially offset by a 2% decrease in average basket.
Speaker Change: Traffic increases continue to be a combination of more new customers and existing customers shopping with us more frequently as we continue to deliver a compelling assortment of high quality Wow items within an exciting treasure hunt experience.
Speaker Change: In addition to the 40 stores, we acquired from Ugo, We opened 10 net new stores in the quarter and recent vintage performance continues to ramp well and in line with expectations.
Speaker Change: Gross margin of 39% was 90 basis points ahead of expectations and a 160 basis point improvement from the first quarter.
Speaker Change: This was a very strong margin performance considering that it was net of about 100 basis points of residual systems transition impact which came in as expected.
Speaker Change: Resulting adjusted EBITDA was $68 million, reflecting a 6% adjusted EBITDA margin.
Speaker Change: This was 60 basis points ahead of our expectations and a 220 basis point sequential improvement from the first quarter.
Unknown Executive: All together, we are very pleased with our progress in returning gross margin and adjusted EBITDA to healthier levels. We continue to offer the best value in food, saving customers 40% on an average basket with many wow items at 50% or more savings compared to conventional grocery retailers.
Speaker Change: Altogether, we are very pleased with our progress in returning gross margin and adjusted EBITDA to healthier levels.
As a reminder, at the end of August last year, we upgraded our product inventory financial and reporting platforms.
Speaker Change: This transition has disrupted our business operationally and financially since September as we've discussed on our last three calls.
Speaker Change: In May we announced that we had resolved the last two large remaining system issues impacting profit in that warehouse shrink had returned back to normal levels and we ended the commission's support program for our operators in March.
Speaker Change: We also discussed how poor data visibility had resulted in lower than expected first quarter margins.
Speaker Change: Importantly at that time, we had recently improved our payables process and restore data visibility for future margin management and forecasting.
Speaker Change: This enabled us to return the business to the healthy gross profit levels. We are reporting for the second quarter and I'm proud of how the team was able to execute on this.
Speaker Change: We continue to make good progress with ongoing systems transition work.
Speaker Change: Our effort is currently focused on improving visibility to additional operating data in.
Speaker Change: Increasing system speed enhancing functionality and optimizing the system for efficiencies.
Speaker Change: While these enhancements will improve the aspects of our new systems that are still challenging to employees and operators. None of what remains should have a negative material impact to our future financial results.
Speaker Change: To support these efforts, we continue to bring on additional new resources and capabilities.
Speaker Change: We recently hired some deep cholula as our new SVP, Chief Information officer reporting to our C O L remission Chicago.
Speaker Change: Sandy brings over 20 years of experience in developing implementing and managing technology and business strategy.
Speaker Change: Throughout his career Sandeep has led several strategic technology and operational transformations and brings strong experience in enterprise platform development and management, including S. P.
Speaker Change: We also continue to bring on additional new resources to increase our in house capabilities and further decrease our reliance on third party consultants.
Speaker Change: We implemented this new system platform to provide a modern foundation for future growth and scalability of our business model.
Speaker Change: We also had a strong business case to enhance earnings with improvements in our technology capabilities and business processes.
Speaker Change: While the implementation has proven to be significantly more challenging than we had planned we continue to believe that the systems will provide all of the fundamental business benefits, we underwrote around efficiencies capabilities and improvements to inventory management ordering and merchandise mix for both Geo and iOS.
Speaker Change: Okay.
Speaker Change: While food inflation has been moderating consumers are still challenged with higher food prices and other financial burdens.
Speaker Change: We continue to offer the best value in food saving customers, 40% on an average basket with many wow items at 50% or more savings compared to conventional grocery retailers.
Speaker Change: While we continue to be positioned well our comp sales softened at the end of June which has continued thus far in the quarter.
Speaker Change: We believe the comps softening as a result of a slight year over year moderation and the value we provide to customers.
Speaker Change: There are three reasons for this first we are currently lapping our strongest opportunistic buying months last year, when our value to customers was particularly strong.
Speaker Change: Second in an effort to return the business to healthy margins, we over index in some instances to price which impacted customer value.
Speaker Change: Third as we were making these adjustments we experienced increases in promotional and pricing activities from key competitors, putting further pressure on a relative value.
Speaker Change: Improving customer value is within our control through our everyday business processes we.
Speaker Change: We have been actively negotiating costs and adjusting prices to sharpen our value proposition and reaction to competitive dynamics and we are quickly returning to our targeted values across the many metrics that we track and manage the business by.
Speaker Change: This model is extremely flexible and we are able to pivot quickly given our nimble and dynamic buying and pricing model.
Speaker Change: And we have a long history of successfully navigating changing competitive environments.
Speaker Change: I am confident that we will do the same in this instance, as we continue to reinforce our value and strengthen our Wow shopping experience in the coming days and weeks.
Speaker Change: Our customer surveys still show that low prices and value remain the most important criteria for store visits and that satisfaction with <unk> remains high.
Speaker Change: Customers also continue to indicate a high intent to spend the same or more at grocery outlet in the next 12 months as they search for value.
Speaker Change: We also continued to see good product availability across all categories and the closeout buying environment remains healthy.
Speaker Change: Our growing size and scale make us an even better partner as we were able to take more variety and volume across a wider geography.
Speaker Change: Turning now to store growth, we are opening new stores ahead of schedule and they are performing to plan.
Speaker Change: We opened 10 net new stores during the second quarter, increasing our store count to 524 locations at quarter end.
Speaker Change: This includes the <unk> acquisition, which was completed during the second quarter, adding 40 stores to the network.
Speaker Change: We opened our first store in Delaware, and our second store in Ohio, with our entry into the Cincinnati market and we are now operating in 16 states.
Speaker Change: New market store economics are healthy and we are pleased with the portability of our customer value proposition.
Speaker Change: We've also seen nice progress with ramping sales and profit for new market stores opened over the past several years.
Speaker Change: We have opened two additional stores so far in the third quarter and we are on track for our remaining openings between now and the end of the year.
Speaker Change: Given the health of our store opening schedule, we now expect to add between 62 and 64, new stores this year, including the <unk> acquisition.
Speaker Change: This range represents store growth of approximately 13% over last year.
Speaker Change: Our future store pipeline is very robust and we are in a great position to deliver 10% new store growth in 2025.
Speaker Change: Our organic real estate activities are now focused on 2026 and 2027 store openings. We also continue to evaluate opportunistic real estate as a complement to our organic growth efforts.
Speaker Change: We are realizing our growth potential through extensive store openings and geographic expansion.
Speaker Change: And in so doing we are offering affordable and healthy food at unbeatable value touching more lives and communities for the better.
Speaker Change: Turning now to our recent acquisition the integration of Ugo is proceeding well.
Speaker Change: Our integration focus this year is on expanding the assortment investing in store refreshes and new fixtures and introducing some of our marketing programs to the southeast region.
Speaker Change: We have already begun coordinating on buys and recently added new everyday low priced products as well as incremental opportunistic items into the Ugo stores.
Speaker Change: We are pleased with how the teams have integrated and we look forward to sharing our accomplishments with product sourcing and store improvements on our future calls.
Speaker Change: We continue to see high levels of customer engagement with our personalization app.
Speaker Change: Customer response has been strong with over 700000 total downloads, so far and sales penetration of 8% at the end of the second quarter up from 6% at the end of the first quarter.
Speaker Change: Our app allows us to communicate our weekly deals to customers provide early access to special offers and customize their treasure Hunt experience.
Speaker Change: We are pleased to see that that basket size continues to be consistently higher than non app transactions.
Speaker Change: We already see high customer engagement with our marketing.
Speaker Change: We believe that this app will increase engagement, even further and lead to greater customer customer loyalty, which should accelerate trip frequency and share of wallet growth.
Speaker Change: Finally, we are very excited for the launch of our private label program with our first items recently introduced to stores.
Speaker Change: The first brand to hit stores is simply go.
Speaker Change: This brand represents our high quality food staples at extremely affordable prices.
Speaker Change: Our initial categories include beverage dairy baking in pasta.
Speaker Change: This will be followed by two additional brands go home and Haven and go PA and pamper.
Speaker Change: Go home and Haven will be used for household essentials as well as personal care categories.
Speaker Change: Go PA and Pamper is our pet brand and will feature both pet food and accessories.
Speaker Change: We remain on track to introduce approximately 100, new private label Skus by the end of this year.
Speaker Change: In addition to better value and inventory consistency for our customers. These initial products will deliver better margin for grocery outlet and operators.
Speaker Change: We enjoyed being together with all our operators during our annual regional Road show in May where we updated them on our business initiatives and listen to their feedback.
Speaker Change: I would like to personally say, thank you to our owner operators for their grit determination in support through what has been a challenging year of systems issues and solutions you all are amazing partners and I appreciate you.
Speaker Change: I would also like to thank the entire grocery outlet team for their dedication and perseverance, which enable us to support our I O partners and customers I'm humbled and inspired every day by the amazing people that are part of this grocery outlet family.
Speaker Change: Yeah.
Speaker Change: Before turning the call over to Lindsey, let me finish with what matters. Most our mission of touching lives for the better.
Speaker Change: We just completed our annual independence from hunger campaign.
Speaker Change: During this event, our iOS partner with local nonprofits to provide critical food resources to their communities at the time of year when they need it most.
Speaker Change: Our supplier partners also contribute by donating food and collaborating on events with our iOS.
Speaker Change: I'm very proud to share that we reached a new record and raised $4 $9 million. This year the equivalent of approximately 10 million meals benefiting over 450 local organizations.
Speaker Change: We are equally proud of the over $25 million that we've raised over the 14 year history of this program.
Speaker Change: That's a wow.
Speaker Change: In closing I remain very confident in our business fundamentals and our ability to realize our near and long term growth potential.
Speaker Change: Our differentiated model and value proposition continued to be the drivers of our sales growth.
Speaker Change: We are a unique specialty discount retailer with a long history of consistently high topline sales growth.
Speaker Change: Gross margin rate of 39% was 90 basis points ahead of expectations.
Speaker Change: This includes approximately 100 basis points of residual impact from our systems transition, which came in as expected.
Speaker Change: SG&A expense increased 11, 4% to $323 $1 million compared to the second quarter of 2023.
Speaker Change: This includes a $3 8 million dollar residual impact from systems related Commission support which came in as expected.
Speaker Change: Net interest expense increased 16, 6% to $5 $6 million driven by higher interest rates and higher net borrowings versus the prior year.
Speaker Change: Our effective GAAP tax rate during the quarter was 31, 9%.
Speaker Change: GAAP net income for the second quarter was $14 million or <unk> 14 per share.
Speaker Change: Adjusted EBITDA was $67 $9 million for the quarter and our adjusted EBITA margin was 6.0% of sales 60 basis points ahead of our expectations.
Speaker Change: Adjusted net income was $25 $1 million for the quarter or <unk> 25 per diluted share.
Speaker Change: Turning to our balance sheet, we ended the quarter with $67 $1 million of cash.
Speaker Change: Inventory at the end of the quarter totaled $367.3 million.
Speaker Change: We expect share based compensation of approximately $34 million.
Speaker Change: Net interest expense is still anticipated to be approximately $21 million.
Speaker Change: We are now forecasting a normalized tax rate of about 32% due to higher non deductible share based compensation expense.
Speaker Change: We now expect average diluted shares outstanding of approximately $105 million down from $101 million due primarily to lower share count from share repurchases.
Speaker Change: We now expect Capex net of tenant allowances of approximately $200 million up from $175 million, reflecting higher new store growth for both this year and 2025.
Speaker Change: We continue to expect full year adjusted EPS of <unk> 89 to 95 cents per diluted share.
Speaker Change: In closing I want to reiterate that our underlying business remains strong and we are well positioned for long term growth.
Unknown Executive: We will now open the call up to your questions. Operator.
Unknown Executive: Some strong margin coming in, a little bit of overindexing on price, which we mentioned, and a few other factors at play, just a strong environment. So, that margin definitely flowed through healthy SG&A as well, some decent leverage there, and then down to EPS. So, that was where we saw the EPS upside in the quarter. But when you look at the full year, so our guidance for Q3 of 31, and then the full year guidance of 30.5 that we're holding, we're holding growth margin guidance for the year at 30.5 to reflect investments in price we'll be making in the second half to drive traffic and comp.
Speaker Change: Some some strong margin coming in a little bit of over indexing on price, which we mentioned.
Speaker Change: And a few other factors at play just as strong environment.
Speaker Change: So that margin definitely flowed through down healthy SG&A as well.
Speaker Change: Some different.
Speaker Change: Decent leverage there and then down to EPS. So so that was where we saw the EPS upside in the quarter, but when you look at the full year and our so our guidance for Q3 of 31 and then the full year guidance of 30.5 that were holding.
Speaker Change: We're holding girth my didn't gross margin guidance for the year at 30.5 to reflect investments in price will be making in the second half to drive traffic and comp.
Unknown Executive: So, this combined with the lowered comp expectations roughly kind of offsets the adjusted EBITDA and EPS upside in the second quarter that we had. And so, as a reminder, as we find margin improvements through buying, I.O. ordering, allocating, etc., we prioritize reinvesting in value. So, that's sort of how it tracks through to the 30.5 for the year.
Speaker Change: So this combined with the lowered comp expectations, roughly kind of offsets the adjusted EBITDA and EPS upside in the second quarter that we had and so as a reminder, as we find margin improvements through buying Io ordering allocating et cetera, we prioritize reinvesting in value. So that's sort of how it tracks through to the 30.
Speaker Change: <unk> five for the year.
Speaker Change: Thank you for that Lindsay and then just my follow up is transaction came in really strong in the second quarter, but you did note. Some softness that you saw later on maybe can you talk a bit more about July and early August trends relative to that implied three and a half.
Speaker Change: <unk> case over these over these past few months I'm important to note that the business is healthy 2.9% comp, 5% customer count really healthy two year stack of 12% and even more so when you look at customer count on a two year basis, which is 14%.
Speaker Change: So feel really good about the underlying health of the business. We also are confident as mentioned in the adjustments that we've already been making to return.
Speaker Change: The customer value to even deeper levels and really increase the level of excitement the promotional activity. We did notice an increase activity from me.
Speaker Change: May June into July competitors have been more aggressive with promotions to turn.
Speaker Change: Some of their negative customer count and volume around we've also seen some discount retailers lowering everyday prices recently or overall, though promotional levels or rational are now back close to where they were in 2019, so nothing overly concerning to us about the current level of promotional activity and then.
Operator: Our next question comes from Robbie Ohmes with Bank of America. Please proceed with your question.
Speaker Change: I just wanted to follow up on the you know the guidance and the acceleration in comps for the back half and how you get there. So so youre going to get more promotional and that will drive stronger traffic, but but does that that won't have a negative impact on the average transaction or basket, that's already running negative.
Speaker Change: Can you just help understand like how the balance of transaction ticket.
Speaker Change: Traffic plays out as you get more promotional and drive the acceleration in comp.
Speaker Change: Yeah sure I'll take that one so the activities that are underway.
Speaker Change: Making some adjustments sharpening, how we negotiate costs and set prices to deliver the best value and excitement to customers, while maintaining healthy margins. We're also investing in price in targeted areas were leaning into marketing activities to highlight those values in the treasure Hunt that we're delivering to customers we've already started.
Speaker Change: To see those positive leading indicators as we've been making these adjustments I'm confident for the positive impact. This will have in the stores and our sales reflected in our guidance is the result, or the expectation for the work that we're doing and how it will translate to customer excitement and sales also.
Unknown Attendee: The trends that you saw in June as well as the three factors that you outlined, do you see that impacting
Speaker Change: Indicators show, even better value and as those fly to the stores, we will see the results with customer behaviors, and then resulting sales and customer count trends.
Speaker Change: That's really helpful. Thank you.
Speaker Change: And then just as a follow up on private label I think this is the first time, you've told US the names and sort of how you are planning to go to market with these.
Speaker Change: With these lines could you provide a little bit more color around.
Speaker Change: Maybe how you are going to be showcasing these brand in stores and how you think about it.
Speaker Change: I think they are around 100, or so units but.
Speaker Change: Any any nuances in terms of how youre going to be.
Speaker Change: Showcasing the product to customers and communicating that value in a different way or perhaps the same way.
Speaker Change: Then you have for your National brand partners.
Speaker Change: Yes, so we.
Speaker Change: Just have a few items out in the stores right now Thats just happening as we speak we're very excited for these initial items to be out.
Speaker Change: As you know have been working on this for the better part of the past year and going further back still so now to see the results of a lot of that groundwork in strategy hitting the stores is very exciting to all of US operators included we have three brands that are part of the initial introduction simply go in.
Speaker Change: The food brand.
As mentioned so that will be prominent across many food categories. Then go home and Haven for household products.
Speaker Change: In personal care and then we have our pet brand Thats coming a little bit later, you won't see that in the initial phase.
Speaker Change: Cooperative Publishing which were all 70%, slightly less than 70%, like 50%, so remember to do the honors for this, and you have a microconductors, a magnifier, bond, current say, to the front of the vendor. And on the server side there's also, again, just a standard configuration process, so that allows us to see the onboard and the pods and the software outside the vendor interface that requires us to create the young Wallet for Mathan, which, because it's a two end package system, comes standard through an old protected environment. So there's a few things you can do on here.
Speaker Change: We're normally and always managing this on a daily basis, but it was more just the timeframe here and the number of items as we were seeing information and getting back on track, which we have, we are, so we all feel really good about this. And at this point, it's just making those tweaks.
Speaker Change: to items and driving value and, you know, all the ways that we always do.
Speaker Change: And then those get featured in all of our marketing activities and everything the operator does, how they order product, how they merchandise. So a lot of it happens organically. In addition to that, we are also making some targeted price investments on everyday items. So we've already implemented those. We're leaning into marketing to make sure where it's not happening organically through just all the vehicles that communicate our inventory. The app is a great example, but others as well that we're leaning in from a marketing standpoint to reinforce those values that are there. And for these tweaks and adjustments that we make go forward.
Speaker Change: Making sure that those are prominent and they drive trips and the customers see them in the stores as they're building their basket.
Speaker Change: Well, the follow-up would be, right, if you think, you look at the two-year stack, right, you know, your 3Q guide and the implied 4Q.
Speaker Change: Slightly stronger in the fourth quarter. Not a lot, but slightly stronger. And so basically you're assuming, I'm going to flesh that out a little bit, but you're assuming not a significant improvement.
Speaker Change: In sort of the underlying consumer engagement with with GEO, a slight improvement and you would chalk that up to the price investments.
Speaker Change: Right, yeah, so the the guidance implies you look at two year stack, you look at three year, you've got a lot of, you know, dynamics still looking at looking at the history. But yeah, generally speaking,
Speaker Change: pretty consistent on a stacked basis.
Speaker Change: for where we've been performing very, very healthy levels again.
Speaker Change: Unknown Release Date August 28, 2013
Speaker Change: So, really back to where it was in 2019, just being mindful of how that might change looking forward and, you know, we'll, we pay close attention and we'll react to that. And so just trying to be prudent, prudent in the guidance overall, you know, reflecting current trends, the work that we're doing, but then also just, you know, the world changing around us, not just competitively, but from a macroeconomic standpoint as well. And so I think we've got, you know, a good solid number that we'll be able to deliver here as we move through to the end of the year.
Speaker Change: Yeah, and then, John , I'll just add on to that a bit. So, just for a little bit further perspective, so our guidance assumes modest deceleration in our two-year stat comps in August and September versus July . But, you know, as we...
Speaker Change: And, you know, obviously, as RJ said, there's just a lot of dynamic right now going on in the macro environment. And so, you know, with us sharpening our pricing, we definitely expect to see improving comp trend. But we just have a little bit of noise going on. But yeah. Thank you.
Speaker Change: You know, September , just a reminder, we saw the deceleration when our systems transition went live, so there's definitely some fluctuations in month-to-month.
Speaker Change: Thank you.
John: Thanks, John .
Speaker Change: Our next question comes from Mark Carden with UBS. Please proceed with your question.
Unknown Attendee: Good afternoon. Thanks so much for taking the questions.
Mark Carden: Good afternoon. Thanks so much for taking the questions. So another one of the comp, just how are comp trends differing geographically? Are you seeing price competition hitting any regions particularly hard? Or has it been pretty balanced? You've got some national and regional competitors both investing pretty aggressively in price. So curious if you're seeing any differences?
Speaker Change: and your East Coast and your West Coast stores.
Speaker Change: No, it's been balanced, no differences.
Speaker Change: Okay, great. And then also just in terms of when you dig into your comp a little bit, how much variation are you seeing between your various customer cohorts? Were you seeing any incremental pressures from lower income customers towards the end of the quarter? Or is it pretty much across the board?
Speaker Change: No, pretty consistent trends and dynamics across different customer segments. Nothing to call out one versus the other, some of the things that I already mentioned.
Speaker Change: More across the board, and then I'd say the same for customer satisfaction. I mentioned that it's still healthy. A majority of customers intend to shop and spend more. That's consistent as well across our different customer segments.
Speaker Change: Okay, great. Thanks so much.
Speaker Change: Thank you. Thanks.
Speaker Change: Due to time constraints, please limit yourself to one question.
Unknown Attendee: So another one of the comps, just how are comp trends differing geographically? Are you seeing price competition hitting any regions particularly hard? Or has it been pretty balanced? You've got some national and regional competitors both investing pretty aggressively in price. Curious if you're seeing any differences in your East Coast and your West Coast stores.
Speaker Change: Our next question comes from Anthony Bonadio with Wells Fargo. Please proceed with your question.
Operator: Our next question comes from Anthony Bonadio with Wells Fargo. Please proceed with your question. Yeah, hey guys, thanks for taking my question. I just wanted to ask quickly about UGO. Can you just talk about the initials?
Anthony Bonadio: Yeah, hey guys, thanks for taking my question. I just wanted to ask quickly about UGO. Can you just talk about the initial performance of those stores?
Speaker Change: And then now that you've had some time with the asset, just how are you thinking about your ability to close the productivity gap in those units and the level of investment that may ultimately be required?
Speaker Change: UGO is performing well, in line with expectations. The team there continues to do a nice job running the business. We're making good progress with our integration plans.
Speaker Change: In partnership with the team there.
Speaker Change: Some of the near-term opportunities that we're in the middle of right now, as mentioned, product, so nice integration and collaboration between the teams for both opportunistic and everyday. We're on the verge here of starting work. We've been planning but starting to do the actual work of refreshing some of the stores with fixtures, updated fixtures, some other enhancements to the customer experience. We're excited for that. We'll have those done in the next couple months here. And then some marketing as well. Longer-term plan remains the same. We will eventually rebrand the stores. That's going to be some time out and more fully integrate the business.
Speaker Change: That won't be until next year and the years after, but I'm really pleased with the progress so far.
Unknown Attendee: And then, just as a follow-up, I wanted to ask about the closeout pipeline. I know you guys had mentioned a tough compare in August, but can you just speak to the quality and magnitude of deal flow that you're seeing right now, how you're expecting that to trend, and just how we should be thinking about comparing? It's good.
Speaker Change: Thanks. And then just as a follow-up, I wanted to ask about the closeout pipeline. I know you guys had mentioned a tough compare in August , but can you just speak to the quality magnitude of deal flow that you're seeing right now, how you're expecting that to trend, and just how we should be thinking about compares there?
Unknown Executive: Yeah, the closeout buying environment remains healthy across categories. We see good availability of product and variety. We still only buy a fraction of everything that we see, but supplier relationships are strong. We continue to be the preferred partner in first call, which is always our objective. You, of course, always have some degree of fluctuation just by definition, year-over-year at the item level, you know, sometimes at the category level. But, you know, overall, stores are showing a good variety.
Speaker Change: It's good. Yeah, the closeout buying environment remains healthy across categories. We see good availability of product and variety. We still only buy a fraction of everything that we see. Supplier relationships are strong. We continue to be the preferred partner in first call.
Speaker Change: which is always our objective. You, of course, always have some degree of fluctuation, just by definition, year-over-year at the item level, you know, sometimes at the category level. But, you know, overall, stores are showing good variety. We're in a healthy place from an inventory standpoint.
Unknown Executive: We're in a healthy place from an inventory standpoint, and, you know, going forward, there is plenty of product out there still to support growth. So, the team continues to do a great job, partner with suppliers to help them, and then pass savings on to customers.
Speaker Change: And, you know, go forward, you know, plenty of product out there still to support growth. So and the team continues to do a great job, partnering with suppliers to help them and then pass savings on to customers.
Speaker Change: All full. Thanks, guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Simeon Gutman with Morgan Stanley . Please proceed with your question.
Simeon Gutman: Hi, everyone. I'll do it in multi-parts, so I just ask one time. The first one, it's on the competitive pricing that was mentioned.
Simeon Gutman: Can you share if that was national, regional, like where you saw it happen when your prices
Speaker Change: Got out of whack. And then are there, were there any categories in particular?
Speaker Change: that lost traction. And then the second part, totally unrelated, is just thinking about where gross margins can come back to. I know we've talked about this for the last couple quarters. And then what the benefit may have been this quarter from having call it too high prices temporarily. Thanks.
Unknown Executive: On competitive pricing, nothing notable, Simeon, by geography or across categories that we saw in our results, there was just more in general for some of the softening on value and then resulting comp impact. So, nothing of note there, and then do you want to talk about margins one day?
Simeon Gutman: On competitive pricing, nothing notable, Simeon, by geography or across categories that we saw in our results there was just more in general for some of the softening on value and then resulting comp impact, so nothing of note there. And then you want to talk about margins one day?
Unknown Executive: Yeah. So, Simeon, thanks for the question.
Speaker Change: Yeah, so, Simeon, thanks for the question. So, just on margin,
Unknown Executive: So, just on margin, yeah, we are, you know, the guide for the full year is at 30.5. So, we're working to strike the right balance between margin and comps. And so, we continue to look to achieve the margins that are healthy long-term algorithm at 30.5. You know, we are quantifying just the; we haven't quantified the impact of pricing on margin. It's definitely one factor, as RJ mentioned, on the strong margin.
Simeon Gutman: Yeah, we are, you know, the guide for the full year is at the 30.5. So we're working to strive the right balance between margin and comps. And so we continue to look to achieve the margins that are healthy, long-term algorithm at 30.5.
Speaker Change: You know, we aren't quantifying just the – we haven't quantified the impact of the pricing on margin. There's definitely one factor, as RJ mentioned, on the strong margin. But, you know, we've been making several adjustments following the return of visibility and pulling some levers. And so, you know, the good thing is, with our flexible model, we can manage volume of pricing to do this.
Unknown Executive: But, you know, we've been making several adjustments following the return of visibility and pulling some levers. And so, you know, the good thing is that with our flexible model, we can manage the volume of pricing to do this. So, we feel that although we have some higher margins that we're achieving here and in the next quarter, a full year of 30.5 is definitely reflective of a healthy margin, not only long-term for the company but healthy for this year as well.
Speaker Change: We feel that although we have some, you know, higher margins that we're achieving here and in next quarter, full year 30.5 is definitely reflective of the healthy margin, not only long term for the company, but healthy for this year as well.
Operator: Our next question comes from Michael Baker with D.A. Davidson. Please proceed with your question.
Speaker Change: Our next question comes from Michael Baker with D.A. Davidson. Please proceed with your question.
Michael Baker: Hey, thanks. So, two questions. One, not sure if you have any data or history on this, but in times where you have gotten sharper in pricing,
Unknown Attendee: Do you see your competitors responding? I mean, not, you know, maybe the elephant in the room, but is this a price war? Are you guys going to get sharper, and are you going to win back some share? So then your competitors might get sharper again. So just wondering what you've seen in the past when you've gotten sharper in price. And then a second question, maybe related, maybe not, but what are the benefits you've seen already from 99 cents only being a source going away, both in terms of buying and share gains, if any? Thank you. Yeah, I think so.
Michael Baker: Do you see your competitors respond? I mean, you know, maybe the elephant in the room, but is this a price war? Are you guys going to get sharper and you're going to win back some share? So then your competitors might get sharper again. So just wondering what you've seen in the past when you've gotten sharper in price.
Speaker Change: And then a second question, maybe related, maybe not, but what are the benefits you've seen already from 99 cents only stores going away, both in terms of buying and share gains, if any?
Speaker Change: Yeah, think about the values that we provide, the deep values and the treasure hunt excitement. A lot of that, most of it comes from opportunistic, and so these items are in and out, special buys, limited quantities.
Speaker Change: Transcripts provided by Transcription Outsourcing, LLC.
Speaker Change: And, well, one, offering tremendous savings on the basket, 40%, but then 50%, 60%, 70%, we measure this in a lot of different ways. Those are the things that really drive excitement. So we're not, we don't get into these price wars, so to speak, at least as you're thinking about it on a conventional basis, and it also allows us, and the business does pivot and respond quickly, and customers do as well, because every day there's new items arriving in the store. So just a different dynamic than I think maybe that you're thinking about it. And then for 99, so as I mentioned, a few stores, a nice opportunity for us, as we recently entered the Las Vegas market, we're continuing to build that out, good real estate there. We have seen some...
Speaker Change: We've seen some surplus inventory opportunities. They were a big buyer of surplus inventory in the space. So some of that's been directed over to us. We've seen some benefit at the store level too for those stores that were in close proximity to a 99. And then employees, maybe future operators as well, having those conversations. So there are several areas of benefit that we're seeing from it.
Operator: Our next question comes from Jeremy Hamblin, with Craig Hallam. Please proceed with your question.
Speaker Change: Our next question comes from Jeremy Hamblin with Craig Hallam. Please proceed with your question.
Unknown Attendee: Thanks for taking the question. So, just wanted to ask and see if I could clarify in terms of the slowdown in trends and traffic, are your traffic trends still positive here to start in Q3? And then, just as a follow-up question, in terms of just competing and as... before you start to see some of those pricing actions have a material impact overall.
Jeremy Hamblin: Thanks for taking the question. So just wanted to ask and see if I could clarify in terms of the slowdown in trends and traffic, are your traffic trends still positive here to start in Q3?
Speaker Change: And then just as a follow-up related, in terms of just competing and as...
Speaker Change: Also seeing some softening in discretionary categories. Does it make it more challenging with inflation, food inflation, down significantly to compete?
Speaker Change: You know, in terms of that type of environment of, you know, how long do you think,
Speaker Change: Before you start to see some of those pricing actions have a material impact on overall traffic.
Unknown Executive: Still positive customer accounts, so just softer than we'd seen it previously coming off of a high number at 5%. And then on competitive pricing and inflation, again, not concerned. The impact here was the confluence of a few different things happening at once, and I'll just say the magnitude and the timing of it.
Speaker Change: Still positive customer account, so just softer than we'd seen it previously coming off of a high number at 5%.
Speaker Change: Amen.
Speaker Change: On competitive pricing and inflation, again, not concerned, the impact here was the confluence of a few different things happening at once and just, I'll say, the magnitude and the timing of it. But we are still offering great value. We're back to a place. We're managing on a more regular basis, if you will, for responding to promotional pricing and everyday pricing. Inflation, not something that overly concerns us as well. We've got disinflation. If we move to a deflationary environment, we believe we'll continue to grow the business, improve and expand our customer reach regardless.
Unknown Executive: But we are still offering great value. We're back to a place where we manage on a more regular basis, if you will, for responding to promotional pricing and everyday pricing. Inflation is not something that overly concerns us as well. We've got disinflation. If we move to a deflationary environment, we believe we'll continue to grow the business, improve, and expand our customer reach regardless. The key for us is to always deliver great value and experiences regardless of how the economy is doing and regardless of inflation or not, as it impacts our business differently. And we have grown the business based on that.
Speaker Change: The goal for us is to always deliver a great value and experience regardless of how the economy is doing and regardless of inflation or not as it impacts our business differently and we have and will continue to grow the business based on that.
Speaker Change: Unknown Attendee, Christine Chen, Unknown Executive
Unknown Executive: We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.
Speaker Change: We have reached the end of the question and answer session. I'd now like to turn the call back over to management for closing comments.
Unknown Executive: Thanks everyone for the time, and I look forward to talking to you again soon. Take care.
Speaker Change: Thanks everyone for the time and look forward to talking with you again soon. Take care.
Operator: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Speaker Change: This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.
Speaker Change: For more information, visit www.FEMA.gov
Speaker Change: Unknown Attendee, Christine Chen, Unknown Executive Unknown Attendee, Christine Chen, Unknown Executive