Q4 2024 Grocery Outlet Holding Corp Earnings Call
Greetings and welcome to the grocery outlet Q4, and full year 2024, earning results conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you require operator assistance during the conference. Please press star zero on your.
Speaker Change: Telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce you to your host Christine Chen Director of Investor Relations. Thank you. Christine you may begin good afternoon, and welcome to grocery outlet's call to discuss financial results for the fourth quarter and fiscal year ended December 28 2024.
Speaker Change: Speaking from management on today's call will be Erik Lindbergh Chairman of the Board, Jason Potter, President and Chief Executive Officer, Chris Miller, Chief Financial Officer, and Tory Burch SVP of strategy and finance following prepared remarks from Eric Jason and Chris We will open the call for questions. Please note that this conference call is being webcast live and a recording will be available.
Speaker Change: A 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 Law, all statements that address future operating financial or business performance or the company strategies or expectations are forward looking statements.
Speaker Change: 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 in 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 SEDAR.
Speaker Change: The company undertakes no obligation to revise or update any forward looking statements or information. These statements are estimates only and not a guarantee of future performance. During today's call. The company will also reference certain non-GAAP financial information, including adjusted items reconciliations of GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure maybe found in the supplemental.
Speaker Change: The tables included in this afternoon's press release of the company's SEC filings and now I'd like to hand, it over to Eric Good afternoon, everyone and thank you for joining US we had a solid fourth quarter and are pleased with the progress we're making on our biggest areas of focus we delivered on key value metrics and we're able to generate comps that were above expectations driven by customer count.
Eric: Demonstrating that our model continues to resonate.
Eric: No grocery outlet is known for delivering unbeatable value our unique treasure hunt experience and amazing customer service on the surface. This is a simple business that performs very well when operations are executed properly.
Eric: Due primarily to our systems conversion 2024 was a year in which many critical operational elements were out of sync, which was further exacerbated by trying to do too much too fast, but we are working urgently to get back on track.
Eric: As interim CEO my intention was to slow things down.
Eric: Focus on executing the basics really really well and to reevaluate some of our strategic initiatives that were impacting our execution.
Eric: We've made great progress on many fronts, but theres still more work to be done.
Eric: As we discussed on our last earnings call. My immediate focus was around a few key areas, namely appointing key leaders to take us forward improve.
Eric: Improving our value proposition.
Eric: Progressing on systems transition work and reviewing our strategic initiatives and priorities.
Eric: Let me provide you with a brief update on each one of these.
Eric: We have put in place a talented and experienced team to drive the mission and vision of the company for.
Speaker Change: I'm really excited to welcome Jason Potter as our new CEO, Jason brings over 30 years of experience growing and scaling successful grocery concepts, including franchise driven models. It's been a lot of time with Jason recently, and his vision values and hands on leadership style aligned well with our goals and our culture.
Speaker Change: Since he just started at the beginning of February we won't have a big role in our call today, but I wanted to take this opportunity to have him introduce himself and say a few words Jason.
Jason Potter: Thank you Eric I am thrilled to join the team here at the grocery outlet. The grocery outlet has a unique business model that combines the capability of opportunistic buying at scale with the potential for nimble execution by local independent operators.
Jason Potter: I was attracted to this business because the grocery outlet team has over many decades develop this differentiated concept, creating an incredible customer experience that generates that feeling of the thrill of the treasure Hunt.
Jason Potter: We have so much opportunity to grow this business, which creates very exciting opportunities for our team.
Jason Potter: Customers suppliers and our shareholders as Eric has pointed out.
Jason Potter: While we have some near term challenges related to the systems implementation and new store performance. These challenges are actively being addressed and will be overcome.
Speaker Change: These challenges and opportunities are familiar territory for me as I've spearheaded multiple turnarounds across many grocery model.
Speaker Change: In each case, we were successful in driving sales and profitability and ultimately returns for all stakeholders by improving collaboration.
Speaker Change: Execution and the customer experience.
Speaker Change: Earlier this month I hit the ground running with the support of the <unk> Board.
Speaker Change: We are aligned on the core objective of delivering consistent and disciplined growth.
Speaker Change: I understand what it takes to lead and scale this business and I look forward to working with the team our independent operators the board and our suppliers to maximize the full potential of the grocery outlet. Thanks.
Thanks, Jason in addition to Jason we also welcomed our new CFO and CIO in January Chris Miller joined as CFO and has over 40 years of finance and accounting experience, including 20 years of public company experience in wholesale and retail industries with a great track record of delivering on execution and profitability objectives.
Speaker Change: <unk>.
Speaker Change: Lindsay Gray, who has been serving as our interim CFO for the company since March of last year will continue in her role as senior Vice President accounting and principal accounting officer, which she held prior to enduring her appointment as interim CFO.
Speaker Change: I'd like to thank Lindsey for stepping up and leading us during a pivotal year for the business and we are very fortunate to have her continued leadership over our accounting and reporting function moving forward.
Speaker Change: Next is Kumar Mishra, he joined as our CIO and has 25 years of experience in IP leadership, including extensive experience implementing and fixing.
Speaker Change: It will be instrumental as we continue our systems conversion journey. Most recently he was the VP of information technology at Reynolds consumer products and also has worked at Nielsen and the old land group.
Speaker Change: Now moving on to our value proposition comparable store sales increased two 9% in the fourth quarter driven by a 3% growth in comp count as customers responded to our healthiest assortment of Wow items, featuring our deepest discounts or value metrics are all improving and we continue to take advantage of the tremendous avere.
Speaker Change: The ability of opportunistic products that are available in the marketplace. While we're beginning to see value move in the right direction. We can do more to best communicate our industry leading value to our customers. Our marketing team is working on a more targeted approach with some exciting new messaging during the first quarter that centers on value and weekly deals.
Speaker Change: Meanwhile, our operations team is focusing on supporting our iOS with in store merchandising on items with our deepest value.
Speaker Change: Next we've made steady progress improving and enhancing base functionality across the business and our operator, our buying and our back end finance systems and tools.
Speaker Change: We have line of sight for enhancing other functionalities that are necessary for our inventory planners and operators to optimize inventory management at both the store and the warehouse level, we've made progress towards launching our upgraded real time order guide, which we expect to begin phasing in during the second quarter as I mentioned on the last call. This is the <unk>.
Speaker Change: Merchandising and inventory management tool for our independent operators and we will take the right amount of time that it takes to get this working the way. It should in addition, we continue to work on improving the speed and the visibility into key operational data and better reporting. This includes tools for operators to make decisions and manage the business more efficiently and more automd.
Speaker Change: Asian to resolve back office inefficiencies, our new CIO has his team focused on fully delivering all of the functionality that maximizes our efficiency.
Speaker Change: As I mentioned previously we were trying to do too much too fast we implemented a major new system completed a significant acquisition that increased our store count materially.
Speaker Change: Rapidly expanding into new markets, and we began executing on our capacity increasing supply chain initiative. We know we have a vast addressable market and tremendous long term growth opportunities.
Speaker Change: Best take advantage, we need to simplify and take a more rigorous and disciplined approach to how we allocate incremental capital with that in mind, we've been evaluating our recent new store openings infrastructure and growth initiatives.
Speaker Change: This work is ongoing but I wanted to share a few key areas that we're addressing.
Speaker Change: First we are reassessing, our new store opening strategy, we know that when we open a new store in an existing market, where we have brand recognition and distribution support in close proximity these stores typically ramp faster than a store in a less developed new market.
Speaker Change: For new markets clustering openings and adjacency to existing markets is important for brand recognition for marketing and for operational synergies all of which contribute to how quickly our new store can ramp.
Speaker Change: As we looked at our opening schedule for the next two years I saw that we were trying to opened too many stores and too many new markets, which don't perform as well as existing markets or new adjacent markets. Thus, we are narrowing the focus in our future new store openings to target existing markets and small and a smaller set of high priority Adjace.
Speaker Change: At new markets and that will help us improve new store sales productivity and the return on invested capital.
Speaker Change: In addition, a more narrowed focus to new store openings will allow our infrastructure to more effectively support our expansion efforts lastly, we have experienced increasing pressure on build out costs and while we're focused on ways to value engineer. These cost out it will take us some time to test it achieve a lower cost store build.
Speaker Change: Therefore, we believe that it is prudent to approach our new store growth goals at a more disciplined and measured pace, which will allow us to execute better and drive long term sustainable growth with improving ROIC.
Speaker Change: When we last spoke we had over 50 leases signed for 2025 as a result of our narrowed focus we expect to open 33 to 35 net new stores in 2025, and exit leases with suboptimal locations, which Chris will discuss a little bit more in detail later.
Speaker Change: While we are tempering, our near term unit growth expectations I want to reiterate that we believe are white space remains vast with a potential to open over 4000 stores across the United States.
Speaker Change: Next in terms of supply chain, we've reassessed, our infrastructure and taken a closer look at the most efficient and cost effective way to scale, our warehousing and distribution network.
Speaker Change: In order to support long term expansion of our business, we need to continue investing in our supply chain. We spent a lot of time looking at the best use of capital to optimize our distribution network and to support our growth and have decided not to pursue an expansion in the multi temperature distribution, which would have added complexity and required a much higher level of capital investment.
Speaker Change: We believe that we can simplify our regional supply chain strategy to drive operational efficiencies improve inventory management and support our growth in a more capital efficient way for.
Speaker Change: For example in February we opened a new 680000 square foot ambient distribution centre in Vancouver, Washington to increase the warehouse capacity in the Pacific Northwest that will support our growing business in Washington, Oregon and Idaho.
Speaker Change: This DC will consolidate all our part of five warehouse facilities in the greater Portland area into a new and more modern facility with room to grow and is optimally located to more efficiently service stores across the northwest we're phasing in capacity by category and location and expect to be fully scaled this warehouse by the end of 'twenty.
Speaker Change: 25.
Speaker Change: Consolidated or a Pacific northwest distribution into one facility is expected to increase efficiencies and lower DC cost in the region over the long term.
Speaker Change: This facility will also offer better service and efficiencies for operators in that region.
Speaker Change: Finally, as an initial step to reassessing, our G&A cost structure, we have implemented a reduction in the workforce. This reduction is a prudent step in building a more scalable cost structure, we're continuing to explore additional opportunities to further scale G&A through automation and process improvements over the longer term as we add new capabilities to the.
Speaker Change: Business.
As we took a long hard look at these areas over the last three months. It was clear that these were necessary steps to building a stronger foundation from which to scale in the future. We're taking these steps to grow the business profitably and allocate capital in a manner, which we expect will generate solid returns.
Speaker Change: We know that we have tremendous long term growth potential and believe we're taking the right steps to drive sustainable growth profitability and ROIC going forward.
In closing, it's been a busy and rewarding for months for me serving as interim CEO as I step back into my role as chairman I wanted to share a few final perspectives on where we're going as a company.
Speaker Change: First for me it all starts with leadership and Jason and Chris are the right people for the job their wealth of experience coupled with their proven track records of driving operational execution will take this already differentiated business to the next level.
Speaker Change: Second our focus on new store return economics prudent capital deployment and building a scalable cost structure are the right steps to ensure that we drive sustainable growth going forward.
Speaker Change: There is still more work to be done, but we're on the right path.
Speaker Change: Third being back in the day to day execution of this business is only reaffirmed my conviction in grocery outlet.
Speaker Change: Our recent financial performance reflects temporary impacts from systems conversions and execution challenges, but I remain as confident as ever in the long term potential of this business to drive industry, leading long term value for all of our stakeholders.
Speaker Change: Before handing things over to Chris I'd like to thank the team and our independent operators for all of their hard work. During this challenging period your commitment to our stores your commitment to our communities and your commitment to our mission of touching lives for the better inspires me every single day with that I'd like to turn the call over to Chris. Thank you.
Chris Miller: Thanks, Eric and good afternoon, everyone.
Chris Miller: Let me start by saying that I'm incredibly excited to be part of grocery outlet and to partner with Jason and team to drive the business forward.
The main reason I joined grocery outlet as for its unique business model and a significant growth opportunity it presents.
Chris Miller: We believe we have the right priorities and strategies in place to optimize that model and combined with our strong balance sheet. I believe we can grow profitably, while driving higher returns on capital over the long term.
We are pleased with the progress we made during the fourth quarter, we delivered on our key value metrics and traffic continued to drive com demonstrating that our model remains very relevant with consumers.
Chris Miller: We continue to see significant availability of opportunistic goods and our buyers were able to execute on driving value for our operators and customers. This drove comps ahead of our guidance and earnings that was within our guidance.
Chris Miller: With that overview I'll now share our fourth quarter results in more detail and review our outlook for 2025, which includes a 50 <unk> week.
Chris Miller: Net sales increased 10, 9% to $1 $1 billion for the fourth quarter due to new store sales and a two 9% increase in comparable store sales, which represents five 6% comp growth on a two year basis.
Chris Miller: Comp transactions increased 3%, while average basket was flat we opened five new stores during the quarter ending the year with 533 locations, which is approximately 14% unit growth for the year.
Chris Miller: Our fourth quarter gross profit increased eight 4% to $323 $9 million.
Gross margin was 29, 5% a decline of 70 basis points year over year.
Chris Miller: While an increase in opportunistic sales positively impacted margins for the quarter. This was more than offset by lower margins realized in our deli category, mainly from a significant ongoing issue with the supply and pricing of eggs.
Chris Miller: In addition, higher inventory shrinkage.
Chris Miller: <unk>, primarily to continued systems issues negatively impacted margins for the quarter.
Chris Miller: SG&A expenses increased $32 $6 million or 11, 6% to $312 5 million compared to the fourth quarter of 2023.
Chris Miller: The increase in SG&A expenses was driven primarily by $15 9 million in restructuring charges increases in store related expenses and depreciation offset by lower incentive compensation.
Chris Miller: Regarding the aforementioned restructuring charges, approximately $9 $2 million related to our decision to exit store leases in certain new markets as Eric mentioned and the remaining $6 7 million is related to supply chain expansion projects.
Chris Miller: Will not be moving forward with.
Chris Miller: Net interest expense was $7 million, an increase of $5 $5 million over the fourth quarter last year the.
Chris Miller: The increase in interest expense was driven primarily by higher average principal debt to enable share repurchases and capital spending to support the continued growth of the business after the acquisition of United grocery outlet or Ugo.
Chris Miller: Our effective tax rate for the quarter was 47, 4% compared with 19, 3% for the fourth quarter of last year. The increase was driven primarily by lower excess tax benefits related to the exercise of stock options and nondeductible costs related to the acquisition of <unk>.
Chris Miller: <unk>.
Chris Miller: Net income for the fourth quarter was $2 $3 million or <unk> <unk> per fully diluted.
Chris Miller: Diluted share adjusted net income was $14 $5 million for the quarter.
Chris Miller: Our 15 portfolio diluted share.
Chris Miller: Adjusted EBITDA increased 12, 5% to $57 $2 million for the quarter and adjusted EBITDA margin was five 2% of net sales.
Turning to our balance sheet, we ended the quarter with $62 $8 million of cash.
Chris Miller: And an inventory balance of $394 2 million, which is an increase of 12, 6% over the prior year.
Chris Miller: We made progress in bringing inventory down in the fourth quarter and there is further opportunity to optimize inventory as we restore systems and tools throughout the year.
Chris Miller: We generated $112 million in cash flow from operations, which was used primarily to fund capital investments, which totaled $185 $7 million net.
Chris Miller: Net of tenant allowances in fiscal 2024.
Chris Miller: The majority of our capital investments for our new stores store maintenance systems and infrastructure related projects.
Chris Miller: Total debt net of issuance cost was 477 $5 million at the end of the fourth quarter with net leverage of 175 times adjusted EBITDA.
Chris Miller: During the fourth quarter, we repurchased approximately one 5 million shares of stock totaling $25 million at an average price of $16 62.
Chris Miller: For the year.
Chris Miller: <unk> 398 million shares at an average price of $20 23 per share for a total cost of $84 million as we announced previously our board approved a new $100 million share repurchase plan in November.
Chris Miller: Now turning to our guidance for fiscal 2025.
Chris Miller: As a reminder, this year is a 53 week year.
Chris Miller: Sales from the 50 <unk> week will be excluded from our same store sales calculation.
Chris Miller: For the full year, we expect comp store sales growth to be between 2% to 3%.
Chris Miller: For the first quarter, we expect comparable store sales to be flat, which reflects the timing of the Easter holiday. In addition to impacts from overall general economic trends.
Chris Miller: Recall that last year Easter was March 31, while this year Easter is April 20th.
Chris Miller: We expect this shift to impact comps by approximately 100 basis points.
Chris Miller: We expect to add between 33 and 35 net new stores this year fairly evenly distributed across the quarters.
Chris Miller: We expect total net sales for fiscal 2025 of between four seven to $4 $8 million, which includes about $75 million from the 50 <unk> week.
Chris Miller: For the full year, we expect gross margins to be in the range of 30% to 35% and first quarter gross margins in the range of 29, 5% to 30%.
Chris Miller: While we expect to continue to benefit from increased value penetration egg prices and inventory shrinkage will continue to pressure margins for at least the first half of the year.
Chris Miller: As Eric mentioned earlier, we're still working to improve tools processes and outcomes to further improve shrink, which although improved on a year over year basis is still tracking at higher levels than before the systems conversion.
Chris Miller: Our inventory planners and operators still need better solutions and tools to optimize inventory management at both the store and warehouse level. So we expect this will continue to have some impact on margin. In addition, we continue to work on process improvements related to our utilization of SAP.
Chris Miller: And refining the tools that we and our operators used to manage the business, which should benefit gross margins in the long term.
Chris Miller: We expect to incur additional restructuring charges in 2025, and the range of $36 million to $45 million. This includes $30 million to $37 million from exiting store leases $1 6 million in the first quarter related to organizational restructuring and between four point.
Chris Miller: Five to $6 $5 million in professional fees.
Chris Miller: We expect the majority of these charges to be recognized in the first half of this year.
Chris Miller: For the full fiscal year, we expect adjusted EBITDA to be in the range of $260 million to $270 million.
Chris Miller: And we expect first quarter adjusted EBITDA of between $45 million to $50 million.
Chris Miller: For the year, we expect depreciation and amortization of about $130 million driven primarily.
Chris Miller: Merrily by Capex spending net of tenant allowances of approximately $210 million.
Chris Miller: This includes investments in store openings, and Remodels, our distribution centers and systems as well as store maintenance projects.
Chris Miller: For the year, we expect net interest expense to be approximately $38 million, an increase of approximately $16 million compared with 2024.
Chris Miller: As I mentioned earlier, our debt increased last year to support share repurchases capital spending and the acquisition of Ugo <unk>.
Chris Miller: We expect to invest the majority of our cash flow from operations and growing and maintaining the business and.
Chris Miller: And thus, we do not expect to reduce our debt load in 2025.
Chris Miller: We expect share based compensation of approximately $24 million, a normalized tax rate of 32% and average fully diluted shares outstanding for the year of approximately $99 million.
Chris Miller: Thus, we expect full year adjusted EPS to be in the range of 70 to 75.
Chris Miller: Per fully diluted share and first quarter adjusted EPS of approximately five to 10.
Chris Miller: This reflects the impacts of higher depreciation and amortization and interest expense as previously mentioned.
Chris Miller: In closing grocery outlet has a long history of consistent growth and a tremendous amount of white space still in front of it.
Chris Miller: We are highly focused on executing on our strategic priorities and better enabling our passionate independent operators to serve our communities.
Chris Miller: I believe with our renewed focus we will be successful in generating meaningful profitability and returns on capital over the long term.
Chris Miller: I look forward to providing updates on our progress going forward.
Chris Miller: We will now open the call up to your questions operator.
Speaker Change: Thank you we will now be conducting a question and answer session. If you would.
Speaker Change: I'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two 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: So that we may address questions from as many participants as possible. We ask that you limit yourself to one question. If you have additional questions you may re queue and time permitting those questions will be addressed one moment. Please while we poll for questions.
Speaker Change: Thank you.
Speaker Change: Our first question comes from the line of Cristina Katia with Deutsche Bank. Please proceed.
Cristina Katia: Hi, good afternoon, and a lot of time, Jason and Chris So I I have a three part question one just starting with the leadership appointments I'd be curious if you could discuss what attracted you to grocery outlet to just within the 2025 outlook can you just bridge for us the adjusted EBITDA to EPS outlook I think you decided.
Cristina Katia: Higher interest expense, but that's the bottom line also include the restructuring charges and then lastly, just on the more narrowed focus with the new store openings is that indicative of a change in the go forward algorithm as well. Thank you.
Jason Potter: Good afternoon. Thanks for the warm welcome Jason here I guess, the first part of the question I will answer.
Cristina Katia: Many things that attracted me to grocery outlet.
Jason Potter: First and foremost.
Jason Potter: Got it.
Jason Potter: <unk> differentiated business model.
Jason Potter: The culture here and the people involved.
Jason Potter: Our record of winning all give me great confidence in.
Jason Potter: The potential this business has.
Jason Potter: I think the model itself when you.
Jason Potter: When I learn more about these opportunistic supply that generates the thrill for customers as they shop.
Jason Potter: Paired with.
Jason Potter: This opportunity for local operators to execute.
Jason Potter: Really interesting and powerful combination.
Jason Potter: And.
Jason Potter: In my experience I guess my background also I really am excited to help and help drive change here and results. So.
Chris Miller: That was the first part of your question the second part I'll pass to Chris I think he can.
Chris Miller: Yes, hi.
Chris Miller: Yes, you sided interest and that is certainly.
Chris Miller: One of the reasons why.
Chris Miller: EPS is not growing at the same rate as adjusted EBITDA.
Adjusted <unk>.
Chris Miller: <unk> does not include the restructuring charges.
Chris Miller: The other component that's impacting.
Chris Miller: EPS is higher.
Depreciation and amortization so between those two items.
Chris Miller: That's why EPS is growing at a lower rate.
Chris Miller: Yeah, Hey, Kristina its Eric.
Speaker Change: I'll take the third part.
Speaker Change: We think the number that we've chosen for this year is going to help us address the execution challenges.
Speaker Change: So think about it we're going to go to work on two things one is the new store in kind of new market non adjacent market on our performance and then second is sort of this creeping higher costs that we've seen.
Speaker Change: We need to better execute and we think this is a year to do that give the team.
Speaker Change: The time to go and open 33 to 35 stores.
Speaker Change: As a reminder, we will probably on a plan to open something more like 55 to 60 stores, which I think would have been a mistake. So.
Speaker Change: This will help us get out and execute and.
Speaker Change: Have some wins in those markets.
Speaker Change: Tickets right now.
Speaker Change: Thank you.
Speaker Change: As a reminder, please ask only one question. Our next question comes from the line of Anthony <unk> with Wells Fargo. Please proceed.
Anthony: Yeah, Hey, guys. Thanks for taking my questions. So just wanted to talk about the gross margin in the systems issues.
Anthony: It looks like the gross margin came in quite a bit softer than guidance. So can you just talk a little bit more about what changed on the system side versus where you sat on the last call how youre thinking about the path to recovery there.
Anthony: Then anything you can do to quantify the impact in Q4.
Anthony: Yeah, Hi, Anthony it's Chris so.
Speaker Change: The Q4 margin.
Anthony: As I mentioned in my remarks, we did see.
Anthony: Better value in the fourth quarter, which helped margins but.
Anthony: Offsetting that was.
Anthony: The impact of eggs in pricing and supply, which had about 50 basis points.
Anthony: <unk> impact for margin in the quarter.
Speaker Change: And then as you pointed out the inventory shrinkage and continued tissues around our systems are not being able to.
Speaker Change: Drive downstream that was the other component.
Speaker Change: For the fourth quarter.
Speaker Change: Thank you. Our next question comes from the line of Robbie <unk> with Bank of America. Please proceed.
Robbie: Oh, Hey, Thanks for taking my question My question is.
Maybe for Eric.
Speaker Change: The with the phase in in the second quarter of the improved.
Robbie: Tools for the operators.
Robbie: Will it when you when you get everything phased and you want the system is working the way you want.
Robbie: The system must be better for the iOS than the old systems were or will they just be better. Then you know obviously there are underperformance now and have you lost any iOS due to this system disruption.
Ravi: Yeah, Hey, Ravi.
Ravi: Great question.
Speaker Change: The second part first I don't think we've lost operators due to the system I think it was a tough year.
Ravi: Though starting in 'twenty, three and then getting into 'twenty for those.
Speaker Change: Those were just challenging times.
Speaker Change: And just as a reminder, the overall turnover was kind of right in where it's been for historical last 10 years or so.
Speaker Change: We are we are moving towards getting most of the systems back by Q2 that we had before and that will enable us to call.
Speaker Change: This system the environment, you know efficient effective stabilized.
Speaker Change: Pick the word you'd like and then we go to work on the enhancements that will make the system better than it was August of 2023.
Speaker Change: We were on a legacy system that was on supported and we chose a new system and obviously, we know the history on that.
Speaker Change: We are hoping to be able to tell you by the.
Speaker Change: We ended this year that were there which is things are working we are back to being as efficient we have some new tools in the arsenal both for operators.
Speaker Change: And internally and Thats, the buyers and the financial team that will make us better more efficient and more effective so.
Speaker Change: All eyes on that and I feel like we're making pretty good progress against it.
Thank you.
Speaker Change: Our next question comes from the line of Oliver Chen with TD Cowen. Please proceed.
Tom Nice: Hi, It's Tom Nice Entre Oliver I was wondering if you could discuss the pace of comps throughout the quarter as well as the exit rate.
Tom Nice: And then how should we think about the balance between investing in price versus prioritizing margin consistency for the year ahead.
Eric: Hey, Tom it's Eric.
Eric: So Q4 felt pretty good sort of the near term comp standpoint.
Eric: I would say customer count continued to be healthy and solid in fact transactions were positive across all geographies Thats great news.
Eric: We think a lot of that is directly attributable to the work that the buyers did in terms of restoring value in really shifting back to value.
Eric: That's what we talked about on the last call and then following that was messaging the value in a different way than we did most of 2024.
Eric: We do have some work to do on the basket. Obviously, if you just look at the composition, we think that's addressable in assortment and in some merchandising initiatives, which we're starting now.
Eric: Transfer to Q1, I would say the first quarter has started out a little softer than we'd like.
Eric: If you go and look at the data reported for other retailers sort of the all outlet data. We're following the same sort of trend that is January.
Eric: A little stronger and then there is a deceleration in February Thats exactly where <unk> is looking at our Jan in Fab. We believe some of that is just tied to sort of general economic trends.
Eric: We have more variability in those numbers.
Eric: Then across the geographies and we would like so we have some work to do and then as Chris mentioned.
Chris Miller: The guide for the quarter is all around that start plus Easter that Easter swings and it cost us about 100 bps against the quarter.
Speaker Change: Thank you. Our next question comes from the line of Mark Carden with UBS. Please proceed.
Speaker Change: Good afternoon, and thanks, so much for taking the questions everyone and welcome Jason and Chris So to start Jason you, let a turnaround at fresh market, which serves as a bit of a different end market, but at the same time, it's a smaller grocer with a unique go to market proposition I know, it's early days, but have you seen any parallels between the two organizations and along those lines.
Speaker Change: <unk> opportunity Centrust's similar improvements for low hanging fruit after that.
Speaker Change: Yes.
Speaker Change: The first three weeks or so.
Speaker Change: Listening learning gathering information clear.
Speaker Change: Clearly that's going to help help my for my thinking for the long term.
Speaker Change: Yes, my experience recently at the fresh market.
Speaker Change: It was a total team effort and we were <unk>.
Speaker Change: Probably say, we grew both sales and profitability and obviously returns for the shareholders.
Speaker Change: And a pretty substantial way by focusing on a few things one improving execution.
Focusing on the guest experience.
Speaker Change: We worked hard there to build a service culture and really working as a team on a clear defined strategy and so.
Speaker Change: So there is some some things there to takeaway and to utilize here.
Speaker Change: Clearly when you execute at a high level of experience with the fresh market, we were able to really shift the guest experience.
Speaker Change: And maybe as evidenced as our.
Speaker Change: At that time during my time there.
Speaker Change: We're able to.
Speaker Change: Achieve.
Speaker Change: Readers Choice award at USA today.
Speaker Change: For 'twenty, one 'twenty two 'twenty three.
Speaker Change: Best in America.
Speaker Change: For sure those are things that I'll say forward in my thinking here.
Speaker Change: But as Eric said, you know the near term priorities are clear and we've got to make sure we're focused on the key.
Speaker Change: Our focused priorities as we go forward.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of John Hamill Bockel with Guggenheim. Please proceed.
Speaker Change: There are two quick things.
Speaker Change: Historically, you guys have picked up market share in a tougher macros.
Speaker Change: Is the issue now is with U P. J just level of inflation right.
Speaker Change: Right versus what you might have seen historically, so it's back to you as much as it is macro.
Speaker Change: And then secondly, where are we with Eugenio.
Speaker Change: Right in terms of moving that to an I O model.
Speaker Change: Is it and is it possible could you use a company operated model.
Speaker Change: In certain geographies and just keep at company operated and not Io or you don't believe in that.
Speaker Change: Yeah, let me.
Speaker Change: Let me touch on the first one and then we'll maybe couple of US can talk about <unk> just philosophically.
Speaker Change: Yeah look.
Speaker Change: You guys have looked at our basket, we're blessed by traffic transactions customer count what you want to call. It has been really healthy for a lot of years.
Speaker Change: We have some work to do on the basket, we probably have more questions and we have answers to be quite honest.
Speaker Change: It's been it's been a lot of fun and very engaging to have Jason here asking a lot of questions that frankly, we need to do some deeper work on so let us put a pin in that one and come back with a better thought perhaps next quarter or.
Speaker Change: In a separate call but.
Speaker Change: G O philosophically.
Speaker Change: The magic of having an operation that is different than the operator model is that you can test and learn.
Speaker Change: Have a hard data that tells us we need to go execute the Io.
Speaker Change: Land today, I would say that it is in the plan as we integrate into the future. We've got 41 stores. We've got distribution, we've got a DNA that's very much steeped in buying opportunistic we've got a pretty good following in the southeast and we think we've got lots and lots of opportunities from our playbook that we've learned over four.
Speaker Change: <unk> hundred 400, plus stores to go and apply there relative to other.
Speaker Change: Ugo integration Dorian you may want to just sort of give the one two threes of where we are yeah. Just a couple of main things. We're working on there is we've talked about before.
Speaker Change: The first store refresh as satcom product introductions really expanding assortment and then broader integration that Eric alluded to good progress in the back half of the year on refreshes. So completed about five across the network seeing a nice uplift in sales there.
Speaker Change: We continue to introduce new products really on a weekly basis that includes both some of our everyday assortment that where gaps in the <unk> assortment before as well as introductions to vendors that we've been doing business with for a long time, but maybe have not done business. So feeling good.
Eric: There and then to Eric's point we've.
Eric: Got some work to do there first to really drive sales and then over time in a great more broadly, including the operator model.
Speaker Change: Thank you. Our next question comes from the line of Cory Carlo with Jefferies. Please proceed.
Cory Carlo: Great. Thanks.
Speaker Change: I guess my question to Eric Eric.
Cory Carlo: Restructuring as planned it caused you to think differently about.
Cory Carlo: Yeah, the the right cadence of store openings.
Cory Carlo: <unk> margin profile over the long term.
Yeah, Hey, Corey I wouldn't say this the restructuring plan, maybe think differently I would say the execution of the business, maybe think about we needed to do something different.
Cory Carlo: To me.
Cory Carlo: We have to address the sub performance and we need to do something different than we were doing before.
Cory Carlo: And when I talked in the last call I talked about reducing the priorities, let's narrow down to the things we can execute well, we're going to start with value we need to fill the leadership team.
Cory Carlo: But in that it was look we were going to try and opened too many stores and too many new markets that did not have connections to adjacent markets.
Cory Carlo: And that's really hard to do.
Cory Carlo: You start with sort of four or five things that you need to be successful in market awareness you need people power, meaning you got to be able to recruit them and train them and support them in region, you need some distribution and marketing synergies and then you've got to have the messaging.
Cory Carlo: That's going to hit in a market with lots and lots of stores and we were not doing that so.
Cory Carlo: That execution informed.
Cory Carlo: I think the start of the.
Cory Carlo: Look at the.
Cory Carlo: <unk>.
Cory Carlo: Re org and the real estate then we can go a little deeper on supply chain and then at home here for SG&A, we worked with some really talented outside folks on cost and we made cuts where we're actually.
Cory Carlo: Going back on priority, so we sort of put the three of them together.
Cory Carlo: That's the way we think about it.
Cory Carlo: Thank you.
Cory Carlo: Next question comes from the line of Anthony Chuck.
Speaker Change: <unk> with loop capital markets. Please proceed.
Speaker Change: That should come up but that was close enough for government work.
Speaker Change: So first off let me just add my my welcome to Jason and Chris as well I guess my question was on.
Speaker Change: How you feel about that.
Speaker Change: We're value because I and I asked the question because I remember on the last earnings call you were talking about the fact that you felt like maybe you.
Speaker Change: The guy who wasn't as compelling.
Speaker Change: As it has been historically.
Speaker Change: In the second and third quarter.
Speaker Change: But you felt like you were you were sort of getting that back and certainly our pricing work showed that we saw very compelling.
Speaker Change: Value pricing relative to <unk>.
Speaker Change: Very large company in Bentonville, Arkansas, but would just love your perspective in terms of kind of where you are on values and whether you are where you.
Speaker Change: What do you Wanna be thank you.
Dorian: Yeah. This is Dorian, let me talk a bit about values. So first off really pleased with the value progress. We made through Q4, if you remember back to the last call really talked about a couple of different measures that we use to gauge value. The first overall basket the value we deliver on our basket.
Dorian: Target, 40% savings versus a conventional grocer, 20% first discounters feeling good about where that is stack and the share of sales that we generate from items with 60% or greater savings versus a conventional think up there said the extreme value treasure.
Dorian: Hi, I'm driving items that friends people tell their friends and families. About this is where we said last call. We had some work to do and we really improve that throughout the course of the quarter.
Dorian: The last piece is price parity with discounters on a targeted list of commodity items and more where we want to be there. So feeling good about the value delivered versus conventional and discount retailers. We feel that's translated into app traffic quite as well in <unk>.
Dorian: Q4, with the 3% traffic increase so continuing to focus on those and then also looking at execution now that value as well how do we just get all the credit for those great deals throughout the supply chain in our stores through marketing and that's our focus now.
Speaker Change: Thank you. Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed.
Speaker Change: Thanks, guys for taking the question so wanted to follow up the <unk>.
Capex budget for the year.
Speaker Change: You know I think it's a little bit above.
Speaker Change: This past year and I'm wondering you know with the reduction in stores, maybe you could share some thoughts as to where where you're allocating the capex dollars.
Speaker Change: Yes sure.
Speaker Change: So you're right our guidance.
Speaker Change: Guidance is for $210 million of Capex for this year versus the 185 or <unk> 86 last year.
Speaker Change: It's actually more stores, because we opened 26.
Speaker Change: Stores last year.
Speaker Change: And then.
Speaker Change: Of course, we have the Ugo stores.
Speaker Change: Wired and we're looking at 33% to 35 this year so that's driving.
Speaker Change: I think part of it as well as some capex related to our new distribution center in the Pacific Northwest.
Speaker Change: Those are probably the two the two main drivers of the increase overall.
Speaker Change: Thank you. Our next question comes from the line of Mike Baker with D. A Davidson. Please proceed.
Mike Baker: Thanks, I just wanted to follow up on a previous question and ask about the long term margin profile of this had always been a 6% even mid 6% EBITDA business.
Mike Baker: Obviously below that now all of these changes you're doing focusing on existing markets. All the supply chain savings Youre doing et cetera is the idea that that gets you back to that 6% range does that get you above that 6% range or is that range sort of you know not not not in the cards anymore.
Mike Baker: Yeah. So you know where we believe we've got a lot of opportunity in front of us.
Mike Baker: We talked about the amount of white space.
Mike Baker: And this company has performed very well historically.
Mike Baker: We've put out our guidance for this year, we're not not really prepared to talk about pass that on.
Mike Baker: Future years, So I think we're just going to leave it at that at this point.
Mike Baker: Yes.
Speaker Change: Thank you. Our next question comes from the line of Jordan <unk> with Goldman Sachs. Please proceed.
Speaker Change: Good afternoon, and thank you for taking my question.
Jordan: I just wanted to talk about the comp guide of 2% to 3% because you know this is below your historical run rate of mid single digit would you typically do in a normalized environment, which we appear to be in right now and we've talked about a lot of the puts and takes you guys are working through around restructuring, but I guess my bigger question is has anything changed in the competitive environment today.
Speaker Change: That makes it more challenging for you to maybe get back to your your older Al go overtime as it sounds like you know, we still had a year plus of issues, but were still needing to advertise more and prove our value and then now I'm hearing about.
Jordan: Increased merchandising efforts as well so any color there would be helpful. Thank you.
Speaker Change: Yes, let me jump in quickly on competition nothing we feel has fundamentally changed in the competitive environment promotional environment remains pretty rationale Dave.
Speaker Change: Data suggest it back around pre COVID-19 levels.
Speaker Change: Obviously you know.
Speaker Change: Commercial environment changed in 2020 and for a couple of years, we continue to aim for a price is 40% on the basket, 70% plus on our best deals feel like we're delivering that so our relative value proposition feels like it's good.
Speaker Change: Again, our model really flexible to deliver in different competitive environments as they change we've proven that over the last many years to do that well.
Speaker Change: We will continue to do so.
Speaker Change: Nothing on the competitive side that makes us.
Speaker Change: Phil differently about comps this year going forward.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed.
Simeon Gutman: Good afternoon, welcome to everyone knew I wanted to ask first on systems.
Simeon Gutman: I guess at one point, we thought that it was temporal it seems like their continual and at what point in 'twenty five do we our systems issues behind the company. That's part one and then Eric you made some mention something that was intriguing you said, Jason is asking a lot of questions and we need to you know I guess a zoom in on them a bit can you can you.
Speaker Change: Hypothesize like the kind of things that you are looking at as far as I don't know if its merchandising because you mentioned you have the footsteps, but youre not getting the basket or the conversion and our localization value. What are what are these questions and like what are you probing. Thank you.
Simeon Gutman: Yeah, Let me take the first one.
Simeon Gutman: We see them in.
Simeon Gutman: We have made a lot of progress.
Simeon Gutman: I think 25 is going to be.
Simeon Gutman: <unk> here.
Simeon Gutman: And then put us in a position to harness the capabilities that we.
Simeon Gutman: Install.
Simeon Gutman: Systems are working the financial visibility that we've talked about some of the Kinks from 2024 behind us.
Simeon Gutman: Systems functional.
Simeon Gutman: We still do not have all the tools that we need to execute.
Simeon Gutman: Additionally, as cost effectively as before but those are coming.
Simeon Gutman: Some of the critical tools specifically.
Simeon Gutman: Are ones that we need to manage the inventory holistically, but really for operators to optimize.
Simeon Gutman: Opportunistic product.
Simeon Gutman: Their inventory management in the stores so.
Simeon Gutman: You've heard us talk a little bit about inventory shrink, so thats something thats getting better, but it's not improved to a 100% of where it was so there is still some fixes, but we are feeling very good and very confident.
Simeon Gutman: I'll take a shot at.
Speaker Change: Some of the things that I'm seeing from Jason that maybe he can.
Simeon Gutman: Add to it but.
Jason Potter: He is asking a lot of questions around trip.
Jason Potter: People are shopping grocery outlet, how we improve the trip.
Jason Potter: How do we improve the execution of the stores.
Jason Potter: Never seen someone more comfortable.
Jason Potter: Out in the store looking at how we make money challenging what we do how we do it.
Jason Potter: And doing it from an operator.
Jason Potter: Friendlier centric perspective, because he has managed franchise operations. In fact, there was a day he wanted to be an operator of his own stores. So he thinks about the store and how we make money and that lens comes across.
Jason Potter: He's going to dig very deep on how we operate the second piece I would say and then I'll turn it over to him is all about data.
Data and integrity data management, starting with the truth and then you can do a lot and I would say our data is still somewhat imperfect, but it is on the list of things to get done this year, but that.
Jason Potter: Connecting the insights from a retailer.
Jason Potter: <unk> been very very successful to the data that we have I think is going to be pretty powerful. So those are a couple of examples from me.
Speaker Change: Thanks, Eric Yeah, I guess I'm, just really curious at this stage so as I mentioned I'm going to a learning mode in listening mode and gathering information mode to make sure that.
Jason Potter: I have everything I need to.
Jason Potter: Okay quality decisions on behalf of.
Speaker Change: Everyone that touches this business, including the shareholders.
Jason Potter: I'm very excited about what I see for opportunity here just to be clear.
Jason Potter: I think we have a lot of upside in the future with at least the way I see the business and there's a lot of fantastic things going on here, but there's also things that I know, we can work on and get answers to and find new ways to drive the business and successful way so.
Jason Potter: It's been a really interesting three weeks than we.
Jason Potter: We intend to.
Jason Potter: Work hard to make progress every day or so.
Jason Potter: Thanks for the question.
Speaker Change: Thank you. Our next question comes from the line of Jeremy Hamblin with Craig Hallum Group. Please proceed.
Jeremy Hamblin: Hey, guys will on for Jeremy Thanks for taking my question I'm, just curious about the progress you've made with the private label penetration and then as a follow up I'm wondering if you can share how the private labels are performing versus the rest of the business.
Jeremy Hamblin: And then maybe any specific categories or items, you've seen the strongest response to you so far thanks.
Speaker Change: Yeah happy to chat a little about that so overall pleased with the performance of our private label products that we've introduced so far customers have responded positively and while it's still a small portion of our business.
Speaker Change: Lot of these items are becoming top sellers in their categories.
Speaker Change: We launched about 180 <unk> by the end of last year. That's ahead of our original plan. When we are thinking more of 100 will launch another 150 or so this year as well.
Speaker Change: In addition, we think we are hitting the mark on better value to the customer more consistent inventory, which is something our customers have told us they want.
Speaker Change: And these initial products are delivering some margin incrementally as well over some of the items that they are replacing so thats benefiting both grocery outlet and our operators and the future plans to introduce continue to introduce items differentiated items as <unk>.
Speaker Change: Well right now our focus a lot on core necessities, but we'll continue to put in some differentiated items that we think can add to the treasure hunt experience even more.
Speaker Change: As we continue to grow.
Speaker Change: This area of the business.
Speaker Change: Thank you.
Speaker Change: Last question comes from the line of Jacob Atkins Phillips with Lucius Group I mean research. Please proceed.
Speaker Change: Hi, everyone. Good afternoon.
Speaker Change: Wanted to ask another one on the unit growth. So I understood that the 20 about 20 stores were reduced this year and the new markets, but I'm curious, how you're thinking about building up the pipeline for new stores in the future beyond 2025 like what's the timeline for that and then also like I assume.
Speaker Change: There's like a pipeline for independent operators and Mike.
Speaker Change: How has that affected and what's the pipeline for building up that as well.
Speaker Change: Yes pipeline is healthy on both sides, obviously, we had excess to what we needed to open for 25% and 26. So we did the reduction.
Speaker Change: I think the gate that we're going to go through is execution and.
Speaker Change: We're going to have to test some things we've got some things underway.
Speaker Change: We reduced some of the.
Speaker Change: I'd say non adjacent markets, so that execution risk goes down and performance goes up so those will play out this year relative to iOS, it's still.
Speaker Change: You know far north on the top end of the funnel of what we need for recruiting approximately hundred operators a year or so selectivity should be the name of the game and drawing in the most capable operators training them and deploying them successfully but.
Speaker Change: I would say no issues on the topline funnel for either new storage real estate nor operators. This is all about.
Speaker Change: What we're going to execute what we're going to choose to do so that we can improve the ROIC in the model.
Speaker Change: Thank you there are no further questions at this time I'd like to pass the call back over to Eric for any closing remarks.
Speaker Change: Thanks Aly.
Eric: Everyone for your questions. Your input your interests really excited to spend some more time with you and Chris and Jason. So we will be on with you in a few moments with the follow up calls so thank.
Speaker Change: Thank you operator, thanks, everyone bye.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Okay.