Q3 2024 Grocery Outlet Holding Corp Earnings Call
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Speaker Change: Should anyone 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.
Christine Chen: Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the third quarter for the period...
Ending September 28, 2024.
Speaker Change: Speaking from management on today's call will be Eric Lindberg, Chairman of the Board and Interim President and Chief Executive Officer, and Lindsay Gray, Interim Chief Financial Officer and SVP of Accounting.
Following prepared remarks from Eric and Lindsay, we will open the call for questions.
Speaker Change: 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.
Speaker Change: 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 are the company's strategies or expectations or 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.gov.
Speaker Change: and now I will turn it over to Eric.
Eric Lindberg: Good afternoon, everyone, and thank you for joining us.
Eric: Before we get into the review of the third quarter, let me just acknowledge that we are reporting our results in a transitional moment.
Eric: Last week we announced that RJ Sheedy agreed to step down from the President and CEO positions and from the company's Board of Directors.
I want to thank R.J. for all of his contributions over the last 12 years. R.J. has played a critical role in scaling and evolving our business, helping to set our foundation for the future.
Eric: I have returned to Grocery Outlet full-time, serving as Interim President and CEO.
This is my first week in the role, and I can honestly say that I'm really excited to be back.
Eric: Working closely with the Grocery Outlet team and our independent operators again.
Eric: The board has retained a leading global executive search firm to begin the process of hiring a permanent president and CEO.
Eric: Until then, I'll be fully engaged in the business, plan to make significant progress on the priorities, which we'll share more details on during this call.
As I told our team and our operators last week, and I'll reiterate to you today, we have made a leadership change, but we are not changing our underlying strategy or commitment to what has differentiated us for almost 80 years.
Eric: Grocery Outlet delivers unbeatable value, a unique treasure hunt shopping experience, and amazing customer service through our best-in-class opportunistic buying model and independently operated neighborhood grocery stores.
Eric: We have proven over many years that when we execute, our value proposition resonates across demographics, geographies, and almost any macroeconomic environment. This transition is about refocusing on strong execution and doubling down.
on that differentiated value proposition.
Speaker Change: I'd like to share my perspectives on four areas. Where we are today, our Q3 highlights, where we'll be focused in the near term, and implications on our guidance.
Speaker Change: Let me start with where we are today.
Speaker Change: First on systems.
Eric: In August of 2023, we transitioned to SAP from our legacy systems and experienced significant issues including poor data visibility, slow system speeds, and a loss of tools and functionality.
Eric: These issues hurt our buyers' ability to write purchase orders efficiently, our inventory planning and supply chain teams' ability to accurately manage inventory, and our operators' ability to see real-time inventory in their order guide to bring product into their stores. The impact on the business has been significant.
Eric: We have made substantial progress over the last year, including ending Operator Commission support.
Eric: While the new system is fully functional, work remains to improve visibility into additional operating data, to increase speed, and to refine the tools that we and our operators use to manage the business. This work is critical to executing our dynamic business effectively.
Eric: Next on execution. The disruptions from our systems transition strain our organization and resources, making execution of the core business more challenging.
Eric: Furthermore, we have a list of great growth initiatives that we've covered with you on previous calls. But upon reflection, we probably have tried to do too much at once.
Eric: Further impacting our everyday execution.
Eric: We aren't going to stop pursuing any of these exciting initiatives we have, but we need to be measured in the pace of the rollout as we prioritize our execution.
Eric: and finally on value.
Eric: As discussed on the call in Q2, we missed the mark on value earlier this year due to a combination of pricing actions we took to re-establish healthy margins.
Eric: that coincided with competitive pricings that picked up.
Eric: For years we have measured our value to deliver customers through a series of metrics.
Eric: First, the total percentage savings we deliver customers on their basket. We target approximately 40% savings versus conventional grocers and approximately 20% savings versus discounters.
Eric: Second, we target price parity with deep discounters on a list of key commodity items, for example, milk and eggs.
Eric: and third we measure the share of sales we generate from items with more than 60% savings versus conventional retailers.
Eric: This captures the extreme value, the treasure hunt experience in our stores and represents the deals that our customers tell their friends and family members about.
Eric: As we look at these metrics, we are feeling confident about where our overall basket savings level and commodity pricing are sitting right now.
Eric: But still have some work to do on delivering the extreme 60% value items on a consistent basis to our customers.
Eric: We made strong progress on restoring value through Q3, and our relative value has improved. Our value is strong, and we are on the right path to where we want to be. We just need to execute better in this area.
Speaker Change: Unknown Speaker 0
Speaker Change: Let me share a bit about third quarter results. While we are disappointed with our weaker comp store sales of 1.2 given the execution issues I mentioned above,
Speaker Change: We delivered strong, double-digit, top-line growth.
Speaker Change: Our two-year stack comp was a healthy 7.6% ahead of our long-term algorithm. Our comp transaction count was up 2% in Q3 and 10.6% on a two-year basis.
Speaker Change: showing that despite execution challenges, our model continues to resonate.
Speaker Change: We opened five net new stores, increasing our store count to 529 locations at quarter end.
Speaker Change: Our new store growth algorithm is back on track.
Speaker Change: Our gross profit margin was on plan, and this flowed through to a beat on adjusted EBITDA. Lindsay will share some more of those Q3 results in just a moment.
Speaker Change: This is a great business, and when we execute, we deliver industry-leading value through a unique shopping experience that can't be beat.
Speaker Change: My near-term priorities are to refocus on the core tenets of this model. Number one, it all starts with value. As mentioned, we must consistently deliver across our key value metrics to create an exciting treasure hunt shop every time the customer steps foot into one of our stores.
Speaker Change: The closeout buying environment remains very healthy. Deal flow is very strong, and we believe that we are still the best partner in the industry. Consumers continue to prioritize value, and we are well positioned to capture growth in this environment.
Speaker Change: Number two, supporting our independent operators. The systems disruptions have made the last year incredibly challenging for operators and the inefficiencies have pulled them away from doing what they love, serving their communities.
Speaker Change: Being an independent operator is not easy, and the resolve our IOs have shown this past year is just incredible. We are focusing on giving our operators the tools and the support that they need to execute their business efficiently and to amaze our customers.
Speaker Change: I really look forward to reconnecting with the operator community in person over the coming weeks.
Speaker Change: Full functionality of these tools is a critical piece of that model.
Speaker Change: In addition to getting operators all the tools they need, improving systems functionality for our internal teams is critical to improving efficiency, to increasing automation, and to reducing process workarounds that we've been forced to implement over the past year. It's simply taking our teams too long to do the basics.
Speaker Change: And lastly, I'll be working on simplifying our priorities to enable our teams to focus on execution of the core business.
Speaker Change: If I've learned one thing in my 30 plus years here at Grocery Outlet, it's that we are at our best when we're focused on executing the basics and a small set of strategic priorities.
Speaker Change: One weekend, I'm still getting my arms around the detailed operating plans of the business.
Speaker Change: I'll take the time in the coming weeks, working with the leadership team.
Speaker Change: to take a step back and ensure that we are hyper focused on the right set of priorities that will enable us to be successful. At the core, this business is about delivering unbeatable value on a relevant assortment with great customer service every day. We have to execute the basics. I look forward to sharing more with you on the next call.
Speaker Change: So, having covered our current state Q3 performance and our near-term focus areas, let me provide some insight into the resetting of our guidance for the balance of the year. At the core, our business fundamentals are solid.
Speaker Change: We have a strong value proposition in the market. We are growing top-line sales in the double digits, and we have a long runway for growth.
Speaker Change: Our recent execution challenges we described are making this business harder to forecast than usual. Harder than any time in my 30-year career with the company.
Speaker Change: And why did this? We took a hard look at our Q4 forecast and landed where we feel is appropriate given our recent track record of forecasting and missing guidance.
Speaker Change: While we made strong progress on our relative value proposition in Q3, we recognize that we are not fully where we need to be. Restoring our value proposition has taken longer than expected due to the systems inefficiencies discussed in the competitive environment.
Speaker Change: We do not see the competitive environment as a fundamental impediment to getting back to where we want to be on value. We have a strong history of navigating changing competitive environments, and we will continue to balance value and margin with our opportunistic buying model.
Speaker Change: There are some higher expenses that we did not anticipate earlier in the year that impacted adjusted EBITDA on Q3 and will continue to flow through the fourth quarter.
Speaker Change: While the new system is fully functional, we are still investing in enhancements and adding extra internal and external resources, resulting in higher costs, which should be largely temporary.
Speaker Change: In addition, our Q4 SG&A estimate was a bit too low, and our updated guidance reflects a number more consistent with Q3 levels. The net result is an approximately $16 million reduction in anticipated full-year adjusted EBITDA from the midpoint.
Speaker Change: We recognize this is a significant downward revision. We've stared at this a lot, but given where Q3 came out, and my recent return to the seat, we think this is a prudent estimate. I'd like to now pass the call over to Lindsay to share more about our financial results. Thanks.
Lindsay Gray: Welcome back, Eric, and good afternoon, everyone.
Lindsay Gray: Next sales increased 10.4% to $1.11 billion during the third quarter due to new store sales and a 1.2% increase in comparable store sales.
Lindsay Gray: which represents 7.6% comp growth on a two-year basis.
Lindsay Gray: Comps during the summer months were challenging, but accelerated in September to 3.8%.
Speaker Change: Our third quarter growth profit increased 9.2% to $344.9 million.
Speaker Change: Gross margin rate of 31.1% was 10 basis points ahead of our expectations and a 20 basis point sequential improvement from the second quarter.
Speaker Change: SG&A expense increased 9.5% to $304.6 million compared to the third quarter of 2023.
Lindsay Gray: Net interest expense increased 52.4% to $6.4 million, driven by higher average principal debt.
Speaker Change: to enable share repurchases and other cash outlays to support the continued growth of the business after the acquisition of United Grocery Outlet earlier this year.
Speaker Change: Our effective GAAP tax rate during the quarter was 28.6%.
Speaker Change: an increase over the effective tax rate in the third quarter of 2023 of 18.6 percent.
Speaker Change: Primarily driven by lower excess tax benefits related to the exercise of stock options, non-deductible acquisition and integration costs related to the acquisition of UGO, and lower pre-tax book income.
Speaker Change: Gap net income for the third quarter was $24.2 million, or $0.24 per fully diluted share.
Speaker Change: Adjusted EBITDA increased by 6% to $72.3 million for the quarter, and our adjusted EBITDA margin was 6.5% of net sales, 10 basis points ahead of our expectations, and a 50 basis point sequential improvement from the second quarter.
Speaker Change: Adjusted net income was $27.9 million for the quarter, or $0.28 per fully diluted share.
Speaker Change: Turning to our balance sheet, we ended the quarter with $68.7 million of cash. Inventory at the end of the quarter totaled $396.9 million.
Speaker Change: Total debt was $429.3 million at the end of the third quarter, with net leverage of about 1.5x.
Speaker Change: During the third quarter, we repurchased about 1.2 million shares of stock, totaling $25 million at an average price of $21.50.
Speaker Change: During the fourth quarter, our board approved a new share repurchase authorization for up to $100 million. This program replaces our previous share repurchase program, under which $9.4 million remained available for repurchases.
Speaker Change: The new Share Repurchase Program is effective immediately and does not have an expiration date.
Speaker Change: Eric spoke earlier to the thinking that went into our updated guidance. Now let me run you through the numbers.
Speaker Change: We expect comp store sales growth in the fourth quarter to be approximately 2.0 percent.
Speaker Change: While October trends were similar to September, our guidance reflects more difficult comparisons in the remaining months of 2024 and our continuing work to sharpen our value proposition.
Speaker Change: We now expect to add a total of 66 net new stores this year, up from our previous range of 62 to 64. This includes the 40 acquired United Grocery Outlet stores and 26 net new organic store openings.
Speaker Change: In total, we now expect fiscal 2024 net sales of slightly above $4.35 billion.
Speaker Change: We now expect growth margin of approximately 30.4% for fiscal 2024.
Speaker Change: For the full year, we now expect Adjusted EBITDA to be in the range of $237 to $242 million, which implies fourth quarter Adjusted EBITDA of $57 to $62 million.
Speaker Change: Our lowered forecast for adjusted EBITDA reflects the impact of lower comps and growth margins, as well as higher SG&A than previously anticipated.
Speaker Change: For the year we continue to expect DNA to grow in the mid-20s on a percentage basis, reflecting investments in our systems as well as accelerated new store growth during the year.
Speaker Change: We now expect share-based compensation of approximately $22 million. Net interest expense is now anticipated to be approximately $23 million.
Speaker Change: We continue to expect a normalized tax rate of about 32%.
Speaker Change: We now expect average fully diluted shares outstanding for the year of approximately 100.3 million, down from 100.5 million due primarily to lower share count from share repurchases.
Speaker Change: We continue to expect CapEx net of tenant allowances of approximately $200 million.
Speaker Change: Thank you.
Speaker Change: We now expect full year adjusted EPS of $0.77 to $0.80 per fully diluted share.
Speaker Change: Finally, let me make a few comments about 2025.
Speaker Change: We will lay out our formalized guidance on our fourth quarter earnings call as we have typically done in years past.
Speaker Change: Broadly speaking, at this point, we believe the full year of fiscal 2025 should be framed around a return to our long-term growth and algorithm targets, which as a reminder are
Speaker Change: Gross Margin of approximately 30.5% and Adjusted EBITDA Margin of approximately 6%. Building to this full year number as the year progresses.
Speaker Change: For fiscal 2025, we will have increased capital expenditures due to a higher number of organic new store openings and supply chain investments, and as a result, higher depreciation and amortization.
Speaker Change: We look forward to updating you in more detail regarding 2025 on our year-end earnings call in February.
Speaker Change: And now I'll pass it back to Eric for closing.
Eric Lindberg: Let me close with this. I'm very confident in our business fundamentals and our ability to realize our long-term growth potential.
Eric Lindberg: We are a unique, specially discount retailer with a long history of consistent growth.
Eric Lindberg: We need some time to get back to the basics, focus on execution, and a small set of prioritized growth initiatives while enabling our passionate, independent operators to serve their communities.
Speaker Change: We'd like to now open up the call for your questions. Operator?
Speaker Change: Subs by www.zeoranger.co.uk
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question and answer session. Please limit yourselves to one question only. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please while we pull for questions.
Speaker Change: The first question is from Christina Katai from Deutsche Bank. Please go ahead.
Christina Katai: Hi, good afternoon and welcome back, Eric.
Christina Katai: I wanted to start with sales. Your 3Q comp was largely in line. September was solid. But you took your 4Q outlook down. It sounds like some of that is conservatism considering the October commentary. But Eric, you talked about the need to execute better. So what are some of your first priorities to get execution under control? How much pressure are you still seeing from the system integration issues at this point? And how should we think about a realistic timeline for that to be fully behind us?
Eric Lindberg: It's a heck of a question. Hi, Christina. Let me take the first part of that and then Lindsay can jump in. So I said doubling down on value. When the customer needs us most, we need to be there for them. So we made a ton of progress, but we're not quite done.
Speaker Change: So we're going to continue to pull the lever on price, particularly with Opportunistic to make sure the wow's there.
Speaker Change: We are going to support and make sure that the relationship with our IOs is intact. We just need to provide them with tools, you know, so they can run their business a little bit more efficiently.
Speaker Change: I want to put the systems transition work in the rearview mirror. Frankly, I don't want to talk about this next year.
Speaker Change: I want to hear about all the great things it's doing for us, not all the things that we can't do because of the system. So that's on the list. And then I'd say, really looking closely at all the priorities that we have on our list and making sure that
Speaker Change: We narrow that down. I know we win when we're focused on a short list of things that matter the most, and so that's what we're going to do over the coming weeks is make sure that list is right on.
Speaker Change: And then Christina, this is Lindsay, I can follow up a bit. So, yeah, so our Q4 guide, so we feel good about the trends we saw in September and October. October trends were similar to September, but, you know, they did reflect a slight slowdown on a two-year basis. So,
Speaker Change: You know also at the same time we're facing difficult comparisons as we progress through the fourth quarter so with all that said we took a step back and we just really felt it was prudent to be a bit more cautious in Our outlook for the full year in the fourth quarter and we revised our guidance accordingly So we're still working to get our value prop where we want it And you know as we expect price competition, you know coupled with the holidays and whatnot That's everything that went into the the Q4 guide for comp
Speaker Change: The next question is from Robby Ohms from Bank of America. Please go ahead.
Robby Ohms: Oh, hey, Eric. Nice to talk to you again.
Robby Ohms: My question is, I was hoping we could just get more color on, you know, RJ's departure and also what type of CEO you're looking to replace him with. And maybe related to that, you know, just to clarify the
Speaker Change: You know the systems, where is the systems disruption right now? Is it behind you or is there still risk to the first half of next year related to that?
Speaker Change: Yeah. Hey, Robbie, good to talk to you again. Thanks for that question. So let me start first with the CEO transition.
Speaker Change: You all know this last year has been really difficult. It's been an operational challenge year from the system's transition. We have not executed like we want, like our expectations, or like our history.
Speaker Change: And that's been super challenging. I'd say because of the relationship that we've all enjoyed, you know, working with RJ for many, many years.
Speaker Change: We were patient. We felt like that was the right thing to do, to be patient. But I can tell you, the same way that you all might have been feeling about our performance, we were feeling that internally as well. So we finally got to a point after the last board meeting where we sat down, we had a frank conversation.
Speaker Change: and we had an agreement to move forward. So I really want to make sure everyone knows that we didn't have any major disagreement. There's no new finding that you guys will learn about later. There's no other shoe to drop.
Speaker Change: This was just a little bit of inconvenient timing and sort of a function of how things played out, nothing more.
Speaker Change: The question on systems, yeah, kind of where are we today? I'll repeat a little bit of what I've said. I'm still digging into it. I'm still getting up to speed.
Speaker Change: Let me say this, the system is fully functional, we're still working on enhancements, we're still working on efficiency, which are words that just say it's not quite working to the speed that we expect.
Speaker Change: I would say full stabilization has been a bigger undertaking than we originally anticipated. Internally, you know, that just translates, it's been more resources, it's taken more time.
Speaker Change: But I would say that we're making a lot of progress. I'll give you a couple of examples of things that I'm looking for that may address sort of your timing.
Speaker Change: The biggest thing to me is for the operators is having their real-time order guide and their new arrival order guide back Those sound like very tactical things, but as a merchant
Speaker Change: be able to tap into the system and pick what you want in your store. That's kind of Nirvana in an opportunistic model. And so we have not had that tool. It's not back yet. When we get that back, I think we've...
Speaker Change: Unknown Executive, Charles Bracher
Speaker Change: and the New York Times. Thank you. Thank you. Thank you. Thank you.
Speaker Change: The next question is from Anthony Bonadio from Wells Fargo. Please go ahead.
Anthony Bonadio: Thank you for taking the question. So just wanted to dig in a little bit on margins. Taking a step back and thinking about your EBITDA margin, we've now seen some pretty
Speaker Change: Unknown Executive, Charles Bracher
Anthony Bonadio: and now some more uncertainty as you rework guidance again. So I guess maybe just at a high level. Can you talk about
Speaker Change: How we should think about the appropriate margin profile for the business over a longer time frame, and then just as a follow up.
Speaker Change: You mentioned pulling back from some strategic priorities to focus on less. Can you just talk about specifically what items you're referring to there?
Speaker Change: Yeah, Anthony, he doesn't see I can take the first part of margin. So
Anthony Bonadio: You know, our long term algorithm for margin, you know, since we started talking with you all has been 30.5%. And we still believe that's a great place for us to be. We love reinvesting, you know, the dollars that we have back in the business, and that continues to be a priority. So that is our long term algo that we still have. That's why we wanted to I wanted to emphasize it in the call script as well, just because that's what we want to orient everyone to.
Eric Lindberg: You know, for 2025 is where you can think of that, and then I'll hand it over to Eric. Yeah, hey, Anthony. Yeah, day five, not quite ready to tell you what we're taking off the list or adding to the list or putting higher on the list. We'll be doing that work in the coming weeks. It's really clear to me being back a short time that we're trying to do too much and we're not doing it all well.
Speaker Change: Unknown Speaker
Speaker Change: The next question is from John Heimbachel from Guggenheim Partners. Please go ahead.
John Heimbachel: Two quick things, you know, one, I know you're talking about a 6% EBITDA margin next year because you want to reinvest back into price and value.
John Heimbachel: Eric, do you think that you're being conservative with a low single-digit comp, particularly in this macro?
John Heimbachel: Right, and then secondly, what are you looking for in a new CEO characteristic-wise, right? Because you've got a very unique culture and business model, and I assume that you are not a candidate for the job permanently.
Eric Lindberg: Yeah, let me take the first part of that.
John Heimbachel: Hey, John, good to catch up with you. Yeah, I've been pretty clear. We are going to search for a new CEO.
Speaker Change: Not in a hurry. I'm here and I'm prepared to stay as long as it takes. This is a unique place. You've known it for a long, long time.
John Heimbachel: We've got a really good search firm. She has been very successful in other placements. She helped out.
Speaker Change: President and CEO over at Sprouts and she did some work with Gap and Athleta and some others. So we feel very confident in the caliber that we're working with. Our goal is to land
Speaker Change: A terrific new leader, you know, full stop. If I had to go down my list of things I'm looking for, some public company experience, obviously important.
Speaker Change: Proven track record, someone who's scaled a retail model, which is, you know, certainly what we're we're doing and what is in front of us. Some retail some fresh
Speaker Change: and then someone that's really excited about this model. This is not for everyone. It's not conventional retail. It's very unique. It's very differentiated.
Speaker Change: So we need to find someone that looks at it and says, I get it, and I see it, and shares that vision. So a lot of that is around culture that you mentioned. A lot of that is about, you know, we do things a little bit differently. But those are sort of the top four or five qualities that we're looking for.
Speaker Change: Thank you.
Speaker Change: Hey, this is Lindsay. John, thanks for the question. So I'll just chat with you a little about your question on guidance. And so, yeah, so the 1 to 3 comp percentage is what we're targeting and what we continue to target. I think what your question was, was just the adjusted EBITDA margins of 6%. So if you look at our historical levels, the, you know, approximate 6% is really where we've landed on average over the last five years or so. Of course, it's gone up and down quarter to quarter a bit. But we really feel like that's a good place for us to be and, you know, what we continue to shoot for. Definitely still have some systems costs to work through, though, as Eric mentioned, and, you know, it's taking a little longer to stabilize and we
Speaker Change: We want to get it right and we want to, you know, get the tool working as well as possible. It's fully functional and everything. We're just doing a lot of…
Speaker Change: finessing enhancements and whatnot. But that said, as you think about 2025, that long-term algorithm of the 6% is what we shoot for, but kind of building towards that, if you will, throughout the year.
Anthony Bonadio: Unknown Speaker 0
Speaker Change: As a reminder, please limit yourselves to one question.
Speaker Change: Next question is from Mark Carden from UBS. Please go ahead.
Mark Carden: Good afternoon. Thanks so much for taking the question and welcome back, Eric. So on the UGO acquisition, how is it going relative to your expectations? How much has it been impacted by some of your recent execution challenges?
Anthony Bonadio: And then with the leadership changes, are you thinking any differently about timing for moving these stores over to independent operators? Thanks.
Eric Lindberg: Yeah, hey Mark, nice to hear your voice. Yeah, it's going, UGO is pretty new. It's going right as we thought.
Eric Lindberg: We did not have a very aggressive transition schedule. In fact, we did not plan to convert those stores until much later, actually after 2025.
Eric Lindberg: Initially, the biggest opportunity we see is to get them into the fold of reporting. Second is to make sure that the products that we have that they don't have, they can have.
Eric Lindberg: We have tried a few, one or two refreshes of their stores, so coming in with some of the things we've learned from data that helps sell product better inside the store from a merchandising standpoint. Very good read back on those initials, so we'll do some of that next year, call it 5, 6, 7, 10 stores.
Eric Lindberg: And then ultimately, conversion to IO and conversion over to GeoBrand will come later. Not in a hurry to do it. We want to make sure that we hit some of those other initiatives first, and then we can transition them over. We've done that before.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question is from Corey Tarlow from Jeffries. Please go ahead.
Corey Tarlow: Great, thanks and good afternoon. I was wondering about
Corey Tarlow: How do you think about the complexion of unit growth going forward, whether it's via acquisition or organic growth, and what's the right rate for the business?
Speaker Change: I believe you've previously targeted 10% in the past. We're just curious, Eric, if there's any change in thinking there. And then just on the investments that you've made in the value proposition, and I think that you're planning to continue to make, is there any way to put into context
Speaker Change: The magnitude of the investments that you're making now versus in the past and what the impact could be. Thank you.
Speaker Change: Yeah, hey Corey, let me take the second question first.
Eric Lindberg: I'd say the value prop, we are making investments. I would not say they are...
Eric Lindberg: For my estimation, any different than what we've had to do, you know, two, three, four times I can recall and recount.
Eric Lindberg: We get slightly off every once in a while and we're getting back so we told you how we measure and let me just walk through those measurements again the 40 and the 20% basket so 40% savings over conventional check
Eric Lindberg: 20% savings over discount check, take a basket of 100 commodities, these are the frequently bought items. They need to be priced at parity versus discount check. The last one that's not quite a check that we're working on is the excitement drivers, right? Our operators will say, yeah, the order guide looks great.
Eric Lindberg: There's not enough excitement drivers. So we need to we need to inflect on that.
Speaker Change: I would not say that the margin we have to put into that is extreme, but we don't know. We haven't done that work yet, so we want to make sure we have plenty to invest if we need to, and make sure that when we get there, we know we're there and we've got it to keep.
Speaker Change: Second is on unit growth. Yeah, it's a good question. I would say that traditionally our
Speaker Change: We have the capacity to do the stores, you know, think back to three years ago, post COVID, a lot of delays, it created havoc with supply chain, all that's behind us, the dealmakers have done.
Speaker Change: and the construction team has done an amazing job in the last year or so setting up 2025 really well. So I think we mentioned, you know, 50 stores or so that are signed ready for 2025. We're actually working on 2026.
Speaker Change: So, you know, no, no, no concerns or issues there. And, you know, I wouldn't, I wouldn't say that we wouldn't do another acquisition but I wouldn't say we're going to go look for another acquisition. Thanks. Thanks for the question.
Speaker Change: Unknown.
Speaker Change: The next question is from Oliver Chen from TD Cowen. Please go ahead.
Oliver Chen: Hi, Eric and Lindsay.
Oliver Chen: As you think about the challenges and opportunities ahead,
Oliver Chen: How would you rank them, Eric? What are the key priorities in terms of the bigger challenges that you see? Also, any context on thinking in a nearer term versus medium term in terms of some of the issues? And interrelated, you have great relationships with independent operators. Just wondering your thoughts on what it will take to continue to foster those as well. Thanks.
Eric Lindberg: Yeah, hey, Oliver. Thanks for the questions. Look, I'd say first on my list and in my mind, and I'd say on the minds of everyone here is let's make sure that
Eric Lindberg: We go deep enough on value and we get that momentum back a bit like a flywheel once you start rolling
Eric Lindberg: It's really easy to keep rolling. I think we did ourselves some damage, frankly, in Q1 through early Q3 and
Eric Lindberg: I think we've got one of the best offerings for
Eric Lindberg: Thanksgiving meal and our product offering in an opportunistic world can sometimes be challenging but we are really well set up for that.
Eric Lindberg: So I feel good about it and we're going to focus on that and then as we're successful we're going to start to you know lay out some of the other initiatives.
Eric Lindberg: Relative to IOs, look, these guys have had a tough, tough year. It has been...
Speaker Change: Flying a little bit blind, things not working, things coming back online not being fast or quick, redundant efforts and activities in the stores, inefficiencies, frustration. We've heard it all. We were with the operators.
Speaker Change: In Dallas, at our annual meeting for four or five days, three or four days in September and I would say, read the mood as very positive. They are a graceful group of people.
Speaker Change: They give us a lot of room to try things and sometimes we make mistakes and this has been one of our biggest and so they're supportive as long as we communicate with them and as long as we tell them the truth and share with them what the timing is and what the fix is, which is what we're doing.
Speaker Change: So, I'll leave Thursday. We'll go Thursday, Friday, Saturday. We'll see about 70 operators. We'll do it again next Thursday, Friday, Saturday. We'll see another 70 or so. And then Dory and I will take a trip out to the east and see some more operators around Thanksgiving time. So, they need to know that we care. They need to know that we're listening. They need to know that we're working hard to address their issues.
Speaker Change: And, you know, they are patient and they're forgiving and we're super lucky to have that relationship.
Speaker Change: You can tell by the timing, probably my seventh or eighth day back, I'll be out with a bunch of operators taking questions like this and sharing with them kind of what we're doing. So, super important to us and we take that incredibly seriously.
Speaker Change: The next question is from Joe Feldman from Telsey Advisory Group. Just go ahead.
Joe Feldman: Yeah, hi guys. Thanks for taking the question. Garrett, I wanted to just ask you, when you've talked about execution, and I apologize if I missed it, but what are some of the things that you'd like to execute better, and like where are the maybe a project or two that you think could get a little delayed, if you could share any color on that initially? Thanks.
Speaker Change: Yeah, look, let me just talk about all the things that we're trying to do, you know, make an acquisition.
Speaker Change: Russell, the project we call SAP, you know, launch a private label, you know, run an app and some new marketing tools, you know, manage a...
Speaker Change: a workforce that's not always here all the time. Just the challenges of this business when tools are not working for you has been a little bit more difficult than we.
Speaker Change: Robert Sheedy, Unknown Executive, Charles Bracher
Speaker Change: with the team and decide what stays, what delays, what goes. And, you know, I wouldn't say any of the things that I've mentioned are off the list, but
Speaker Change: You know, my example of UGO, we don't need to go do a whole bunch of work on UGO right now because they're running, they're operating, we get them some product, they're going to be fine. We do a little bit of reinvestment back in the store, they're going to be fine.
Speaker Change: The next question is from Leah Jordan from Goldman Sachs. Please go ahead.
Leah Jordan: Good afternoon. Thank you for taking my question. So I understand your system visibility isn't fully back to where you want it, but it has improved over the last year. So I'm just curious why your 4Q guide suggests we aren't really getting any gross margin lift from lapping that initial initial disruption last year. You know, just curious where that all went. Is it all competitive pressures? And I guess I'm also curious why you aren't getting a benefit from some closeout competitors going away as well.
Speaker Change: John Heinbockel, John Heinbockel, David
Leah Jordan: Hey Leah, this is Lindsay. I can speak to that. So, yeah, so just, you know, I'll address just a couple of pieces, you know, comp and margin as well. So,
Leah Jordan: You know, we were still facing, you know, some some issues with the system as we talked about data visibility. You're right. We brought it back in a in a great way earlier in the year.
Leah Jordan: What Eric mentioned, though, as well, is that while we've made a lot of progress and the system is functional and operating, it's taking the teams and the operators a lot longer to do some of the tasks they did before. And frankly, it's just still very inefficient.
Leah Jordan: And so as you think about how nimble we are and how we love to be.
Speaker Change: We've been really hampered by, you know, these tools that we're trying to improve. So we're continuing to do that. So giving you that flavor kind of leads into comp. And so, you know, we, there's a couple reasons on comp. So, you know, even though we saw recent trends.
Speaker Change: We're facing some difficult comparisons for Q4.
Speaker Change: You know, we want to be prudent as well. We really hope our Guide is conservative and it proves to be conservative, but just given all the reasons we've laid out We really wanted to make sure that we were laying out the comp that we feel is achievable and then with gross margin
Speaker Change: You know get some margin dollars, and we lost some value And that's really just plays into you know coming out of that into q3 Feeling like we still have a bit of a drag with some of the system inefficiencies nothing material in q3 or q4, but there's just
Speaker Change: like kind of little bits everywhere that just are a drag on margin. And so what I would say is we're not seeing anything like we saw back in the early days with, you know, the adverse material impacts that we've walked you all through from Q3 of last year through Q2 of this year. But we just still have some some value to work through for our customers and some margin improvement. So, you know, getting back to your question, did we get it all back or not?
Speaker Change: You know, I think that we're in a much better position than last year, but we're not fully back. So again, thinking about all that, and then also layering in the conservatism is
Speaker Change: Really, we're relaying out our guidance. And like I said, we hope it's really conservative But that's where we're at right now. Hey, Leah, I'll jump on the second part of your question. We are getting a pretty good benefit from the 99 and big
Speaker Change: Announcements, that's been flowing through, you know, sort of since last year and through this year. I'd say our op buying is really strong right now. Definitely.
Speaker Change: you know picking up and both from what we're buying, penetration of what we're shipping to the stores.
Speaker Change: The increase in margins. So that's all I would say the good column. We need to make sure that the value and we measure value in lots of different ways. We've just discussed a few with you.
Speaker Change: We need to make sure that people are really taking notice of those best deals out in the store. So that's what we're heads down on.
Speaker Change: As a reminder, please limit yourselves to one question.
Speaker Change: The next question is from Michael Baker from D.A. Davidson. Please go ahead.
Speaker Change: Unknown Speaker 0
Michael Baker: Okay, hi. My one question will be on the buying environment, if I could. So relative to the peak in 2023, which I think margins peaked at about 31,
Michael Baker: Transcripts provided by Transcription Outsourcing, LLC.
Michael Baker: was just so strong that it's unlikely to repeat again. I get that there's always closeouts and you never run out of products, but it was just probably, it's fair to say it was just as good as it's going to get, you know, post-COVID because of all that supply chain disruption.
Speaker Change: Hey Michael, let me just walk you back a little bit on history and talk a little bit about buying margin.
Michael Baker: So through, you know, call it 20, 25 years of paying attention here, we've operated within a very narrow band. Some can't believe how narrow, sort of call it 30 to 31 percent.
Michael Baker: and delivered a 5% comp on average and positive comps for 20 of the last 21 years.
Michael Baker: that's that's been delivered while we've introduced massive changes in the business those changes are things like MTO or more low margin fresh product or you know the acceleration of produce or meat you know the introduction of new categories and
Speaker Change: I'd say while we've taken lots and lots of intrusion from
Speaker Change: And that's that's half of our assortment. So we can pay attention and watch really closely. And so I would never say that we'll never see these margins again, I would say, the contrary, we roll between the band of sort of 30 and 31, maybe call it
Speaker Change: 30 and 31 and a half and have gotten very, very comfortable.
Speaker Change: being in that band, and that's with anything that's happened to this market.
Speaker Change: Right now product is healthy. When you see more and more opportunistic coming in, you should think, you know, margins are going to be better unless we choose to invest those, which is what we're doing right now to make sure that we've got the customer. So that's a little bit of how it works and how it has worked for, you know, a long time.
Speaker Change: Unknown Speaker
Speaker Change: The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.
Simeon Gutman: Hi everyone. Hey Eric. This is definitely beating a dead horse. I wanted to ask again about the systems issues creating a weaker value proposition.
Simeon Gutman: You know the IOs know where relative value I would think sits and certain goods sell at certain prices so
Speaker Change: If you think about that logic, you know, the safeguards not being in place to know that like can you can you talk us through that, you know, how
Eric Lindberg: These things weren't caught, and then frankly how systems issues led to that value just not being there for a certain period of time. Thanks. Yeah, no, you got it. We did this to ourselves. I'm going to take ownership for that.
Eric Lindberg: We priced for margin. We did not price for value consistently. Upon reflection and looking back at it, it's pretty easy to call that, right? Armchair quarterbacks.
Eric Lindberg: However, is.
Eric Lindberg: There were really good reasons why we did that. We'd had a pretty scarring first quarter.
Eric Lindberg: We thought margin was well within our control, and at the same time people were taking prices down, we took prices up, okay?
Eric Lindberg: So we are where we are.
Eric Lindberg: You're right about the operators. They have the ability to price things up and down, but they allow us to price, call it, 99% of the time. We ask operators to be right on micro-market adjustments that they need on a few items. We don't ask them to be us and try and price.
Speaker Change: We have a much better ability to see the broader lens of competitiveness and to set the price right. And you got to keep in mind, we share gross profit margins. So operators are focused on margin, sometimes to a fault like we are. So that's a bit of the explanation. Did systems cause it? You know, it's really the visibility.
Speaker Change: that occurred with the lack of proper systems that caused it. And then our reaction, easy again to weigh in on now, I think was probably improper.
Speaker Change: The next question is from Jacob Aiken Phillips from Milius Research. Please go ahead.
Speaker Change: Hi, thanks for the question.
Speaker Change: So I'm wondering, you said that like part of it is this is a transition was not being able to like have the visibility or inventory. And then part of it was like some competitive pressures when you took pricing. So can you help us contextualize like,
Speaker Change: What that means for comping over that in 4Q and in 2025, because I don't know, I would have expected a better 4Q given you're lapping like 200 bps from last year.
Speaker Change: and then separately, you don't seem to be planning to reduce unit growth at all. So how do we think about new sort of productivity like in the coming years?
Speaker Change: Yeah, hey, Jacob, I can take the first part of the question. So, yeah, it's definitely a tough comp guide. I get it. You know, the Q420, that's tough. You know, and again, after seeing, you know, the positive trends in September and October, but, you know, if you look at it to your basis, it's showing a slight slowdown. And,
Speaker Change: Again, we're progressing to the fourth quarter where we still had some difficult comparison last year even given the system's impact so
Speaker Change: With COMP, it's just, it's really being prudent. There's a lot going on right now. And we've got holidays and we've got a few things going on. And frankly, we just really wanted to make sure that we were reading the, you know, the competitive pressures right for COMP.
Speaker Change: along with, you know, GM at 30.5 and EBITDA at 6, as I mentioned. So, again, that's really what we're trying to orient folks to for 25. As Eric said, we really don't want to be talking about these systems next year. We hope we're not, and so we really just want to make sure that everyone's oriented to those long-term algos as we head into 25.
Speaker Change: Hey, Jacob. Yeah, I think you asked about new store growth. I don't see any problem with the ability to open, you know, the 50 plus stores next year. We've got leases signed. Team Sun, a really nice job of setting those up. So I'd say that.
Speaker Change: That number feels good.
Speaker Change: As a reminder, please limit yourselves to one question.
Speaker Change: The next question is from Jeremy Hamblin from Craig Hallam. Please go ahead.
Jeremy Hamblin: Great. And Eric, welcome back.
Jeremy Hamblin: I wanted to just ask about, you know, some of the systems costs that are involved here that you noted.
Jeremy Hamblin: You noted some internal as well as external costs, presumably some consultants.
Speaker Change: But can you quantify what the magnitude of that is on a quarterly run rate? And then what portion of that?
Speaker Change: is likely to be ongoing as we move through these issues in 25 versus more temporary costs here over the next quarter or two.
Speaker Change: Yeah, hey Jeremy, I don't think we're going to quantify that. It is going to be somewhat ongoing in Q1. Maybe Lindsay, you can, we're not going to quantify.
Lindsay Gray: No, yeah, Jerry, we haven't quantified that. But, you know, let me just give you a little context around that, because, you know, it sounds general, just kind of systems costs. And so, as we think about everywhere, we're spending some higher levels of SG&A than we had previously forecasted, a lot that goes into maintaining and improving systems infrastructure. So systems infrastructure, first of all,
Lindsay Gray: Super sophisticated system with SAP and a lot of other ancillary systems we put into place as well when we went live just the the
Speaker Change: The infrastructure that we need, the cloud, the GCP and whatnot, all higher run rate than what we expected and grew more than we thought.
Speaker Change: Second, resources. You're totally right. So during this transition period where we're trying to, you know, continue to further stabilize the system and do enhancements.
Speaker Change: You've got internal resources, you've got external resource, you have some overlap as you're transitioning those resources internally. We've made some great hires internally with SAP knowledge, which is fantastic. But then you have the overlap where you're rolling consultants off. And we really want to make sure we get this right and we remediate things correctly. So resources is a large part of this as well. And again, definitely a transition time and temporary. And so
Speaker Change: Jeremy, if you're thinking of 25, you know what I mentioned is
Speaker Change: You know, what we want to see is, you know, EBITDA of around 6% in 2025, but really building to that for the full year as we go through the year, just because
Speaker Change: We only have seven weeks left, and we really, you know, we're going to be working on this as we have been as hard as we can, but we expect some of these transitionary costs to continue into 2025.
Speaker Change: We have time for one more question. The next question is from Bill Kirk from Roth Capital Partners. Please go ahead.
Bill Kirk: Hi, thank you. Thank you for sneaking me in. So in the industry, the availability of like e-commerce options keeps increasing, whether it's the broader assortment or wider delivery radius, or even maybe more manageable fees.
Speaker Change: So, I guess the question is, what are your IOs seeing in terms of new competition that might not have existed before that they now have to go up against as the availability of e-commerce options has increased?
Speaker Change: Yeah, hey, Bill. I would say.
Speaker Change: Not a lot at the value end. All of those delivery options come with a cost which is a higher price.
Speaker Change: So.
Speaker Change: For now, people are reverting to value. You know, it's super convenient to order things and have them delivered.
Speaker Change: We're getting a lot of engagement from customers on the prices, and I'd say that Treasure Hunt
Speaker Change: In store is is still really strong. It's it's well worth the trip. We hear that and feedback and surveys all the time People are finding that you know that treasure hunts a little bit more difficult online We don't mean to you know cast any sort of shade at
Speaker Change: Those that are, you know, perpetuating that model, but for us, it's a minor part.
Speaker Change: of what we do. And the major part of what we do is the treasure hunt. And look, we're continuing, we've got all of our platforms up, and we're continuing to explore econ, but it's not a major part of our strategy today.
Speaker Change: This concludes the question and answer session. I would like to turn the floor back over to Eric Lindberg for closing comments.
Eric Lindberg: Yeah, thanks you guys.
Speaker Change: It's good to be back. I'm excited to be back with the people.
Eric Lindberg: The operators and the team really bullish on the business and so appreciate you all giving us some time and having a lot of interest in our business. So thanks for the time today. We'll talk to you in a few minutes. Look forward to it. Thank you.
Speaker Change: Unknown.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Thank you