NASDAQ:GO Grocery Outlet Q4 2023 Earnings Report $15.33 -1.00 (-6.12%) Closing price 04:00 PM EasternExtended Trading$15.50 +0.17 (+1.10%) As of 07:56 PM Eastern Extended trading is trading that happens on electronic markets outside of regular trading hours. This is a fair market value extended hours price provided by Polygon.io. Learn more. Earnings HistoryForecast Grocery Outlet EPS ResultsActual EPS$0.13Consensus EPS $0.11Beat/MissBeat by +$0.02One Year Ago EPSN/AGrocery Outlet Revenue ResultsActual Revenue$989.82 millionExpected Revenue$982.44 millionBeat/MissBeat by +$7.38 millionYoY Revenue GrowthN/AGrocery Outlet Announcement DetailsQuarterQ4 2023Date2/27/2024TimeN/AConference Call DateTuesday, February 27, 2024Conference Call Time4:30PM ETConference Call ResourcesConference Call AudioConference Call TranscriptPress Release (8-K)Annual Report (10-K)Earnings HistoryCompany ProfilePowered by Grocery Outlet Q4 2023 Earnings Call TranscriptProvided by QuartrFebruary 27, 2024 ShareLink copied to clipboard.There are 15 speakers on the call. Operator00:00:00Greetings, and welcome to the Grocery Outlet Full Year 2023 Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note, participants are restricted to one question at a time. As a reminder, this conference is being recorded. Operator00:00:28I would now like to turn the conference over to your host, Christine Chen, Head of Investor Relations. Please go ahead, ma'am. Speaker 100:00:35Good afternoon, and welcome to Grocery Outlets' call to discuss financial results for the Q4 fiscal year for the period ending December 30, 2020 3. Speaking from management on today's call will be R. J. Sheedy, President and Chief Executive Officer and Charles Brocker, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Speaker 100:00:56Please note that this conference call is being webcast live and a recording will be available via telephone playback on the Investor Relations section of the company's website. Participants on this call may make forward looking statements within the meaning of the federal securities laws. All statements that address future operating, financial or business performance or the company's strategies or expectations are forward looking statements. These forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. 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 200:01:35Good afternoon, everyone, and thank you for joining us. We are happy to be speaking to you today about our business results, acquisition of United Grocery Outlet and outlook for 2024. Let me start by providing some commentary on business performance and notable growth initiatives over the next few years. First, our 4th quarter results were slightly ahead of our expectations and traffic and customer acquisition remains strong. We continue to deliver unbeatable value with an exciting treasure hunt experience and our underlying business fundamentals remain healthy. Speaker 200:02:122nd, we are excited to be acquiring United Grocery Outlet, which adds 40 stores to our network. This is an ideal strategic fit given our similar business models, customer value propositions and shared mission of serving and helping others. This acquisition provides Grocery Outlet with scale in a new geography as well as a platform for future expansion in the Southeast. We are thrilled to welcome the United Grocery Outlet team into the Grocery Outlet family and we look forward to working together on the many growth opportunities ahead. 3rd, we are making good progress on a number of strategic initiatives that we believe will strengthen our value proposition and contribute to future growth. Speaker 200:02:57Our personalization app is now rolling out to all stores and we will soon begin to invest in marketing to drive downloads and adoption. We are also looking forward to the launch of our new private label program later this year. Finally, we are excited to welcome Ramesh Chikala to Grocery Outlet in the new role of Chief Operations Officer. I have known Ramesh for a number of years and he is familiar with our business through previous consulting work. Ramesh is leading our business technology and supply chain teams to help us scale and improve our capabilities to support growth. Speaker 200:03:33Let me now expand on each of these with more details. 4th quarter sales increased 6.3% driven by a 2.7% increase in comparable store sales, which was ahead of our expectations. Transaction count remains strong at 7.5% increasing throughout the quarter. While food inflation has been moderating, consumers still face higher food prices and other financial burdens. Our compelling savings and ever changing assortment of high quality Wow items continue to drive healthy traffic increases and market share gains. Speaker 200:04:144th quarter gross margin was also ahead of our expectations at 30.2%. The closeout market remains strong and our growing size and scale provide increasing access to products with strong customer value and healthy margin. We opened 13 new stores in the Q4, including our first store in Ohio, ending the year with 4 68 locations. Recent vintages continue to ramp well and we are pleased with new store performance. We have made steady progress with our systems implementation work, though data integration efforts are taking longer than expected and are still impacting our business results. Speaker 200:04:57The largest remaining issues are related to warehouse product expiry data and store level reporting for IOs. We expect these to be resolved soon after which the P and L impact will be behind us. Charles will provide more details in his comments. Despite the systems disruption, business fundamentals are healthy and our new applications are supporting daily operations well. We are proud to have delivered strong results during 2023, growing sales by 11% to a record $4,000,000,000 This was driven by comp store sales growth of 7.5% and a customer count increase of 8.3%. Speaker 200:05:40We also leveraged gross profit by 76 basis points and grew adjusted EBITDA by 18%. Now let's turn to the acquisition. United Grocery Outlet is a healthy, profitable and growing business. Their opportunistic buying model, similar company values and adjacent geographic footprint make it an ideal strategic fit. Founded 50 years ago, United Grocery Outlet offers customers tremendous savings within a treasure hunt shopping environment. Speaker 200:06:14Strong partnerships with national and regional brands enable it to provide quality food at unbeatable prices to its loyal customer base. United Grocery Outlet also operates as a local business with a mission of giving back and making a positive impact on their community. Their stores average 17,000 square feet and have seen healthy same store sales growth in recent years driven by both transaction count and ring. This acquisition provides Grocery Outlet a great entry point into the Southeast region with 40 stores across the 6 states of Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia. United Grocery Outlet also operates a distribution center, which can support additional new store growth in the broader Southeast region. Speaker 200:07:04This is an exciting addition as we pursue our white space opportunity of over 4,000 stores across the U. S. Distribution center infrastructure in this region also provides us with better access to opportunistic product that can benefit all grocery outlet stores. We have many levers to accelerate sales growth in partnership with the United Grocery Outlet team. Some of these opportunities include assortment expansion, additional store fixtures and improvements and technology and marketing investments. Speaker 200:07:37We also see our independent operator model as another lever for growth. It is an important differentiator for us and we believe that it can have a positive impact in this region as well. We look forward to updating you on integration progress as we go. In addition to the United Grocery Outlet stores, we plan to open 15 to 20 stores for a total of 55 60 net new stores this year. Our real estate pipeline is healthy with approved sites for 2025 in good position to deliver our 10% annual growth goal. Speaker 200:08:15Given this, most of our recent real estate efforts have been focused on building the 2026 pipeline. This will add to what is currently over 100 approved sites for 20252026 combined. We continue to pursue organic growth combined with additional real estate opportunities that align with our long term geographic expansion in store growth strategies. We are expanding strategic relationships with large property owners, evaluating opportunistic real estate lists and exploring additional strategic regional acquisitions. The combination of these activities will help us deliver on our tremendous long term store growth and geographic expansion opportunities. Speaker 200:09:02Let's turn now to other strategic initiatives. Our personalization app is on track to be active in all stores by the end of the Q1. This app will allow us to communicate our weekly deals to customers and customize their treasure hunt experience. This will increase customer engagement with grocery outlet and help drive trip frequency and share of wallet. We are also looking forward to launching our 1st new private label products later in the second half of the year with a goal of 100 SKUs by year end. Speaker 200:09:36Our assortment will initially focus on everyday value commodity categories that deliver better value and margin and complete the full shop. These items will help us capture larger baskets and create a stickier customer relationship. Our private label strategy include nosh categories and unique items that will serve as another differentiator enhancing the customer shopping experience. Next, for a people update, we welcomed Ramesh Chikala last month in the new role of Chief Operations Officer. Ramesh's experience in retail and operations organizations includes 14 years at Walmart, where as SVP, he led its global supply chain and food manufacturing operations as well as its global technology organization. Speaker 200:10:24Most recently, Ramesh has been a senior advisor to Kearney in their operations, supply chain technology and consumer industry and retail practices. I look forward to working with him to further optimize our supply chain and technology infrastructure to support our long term growth. We are in process with our search for a new CFO and I'm happy to have Lindsay Gray, our SVP of Accounting and Principal Accounting Officer stepping into the role of interim CFO effective March 1. Lindsay has been with Grocery Outlets for the last 8 years leading our accounting team. She is an experienced financial executive with deep knowledge of Grocery Outlets business and over 14 years of leadership in finance. Speaker 200:11:09She also is well connected throughout the business and a strong supporter of the IO model. In closing, I would like to thank the Grocery Outlet team and our IOs for their dedication and many contributions. The entrepreneurial spirit of our IOs combined with the buying power of our team creates a powerfully unique customer experience, which positions us well to continue to grow our market share. I also want to thank Charles for his invaluable contributions to Grocery Outlet. Thank you, Charles for all that you've done over the past 12 years. Speaker 200:11:43You'll be greatly missed by everyone and we wish you the best of luck in the next chapter of your career. And with that, I'll turn it over to Charles. Thanks, Speaker 300:11:53RJ, and good afternoon, everyone. Our 4th quarter results slightly exceeded our expectations, reflecting continued strength in transaction growth, which improved throughout the quarter. For fiscal 2023 in total, we delivered strong top line growth with comp sales increasing 7.5% yielding $4,000,000,000 in total sales. We also drove healthy bottom line growth with adjusted EBITDA up 17.7% and adjusted net income increasing 15.2%. For the quarter, net sales increased 6.3 percent to $989,800,000 due to a 2.7% increase in comparable store sales and the impact of new stores opened over the past 12 months. Speaker 300:12:41Comp transaction growth of 7.5% was partially offset by a 4.5% decline in our average basket. We estimate the system transition impacted comp sales by approximately 200 basis points for the quarter. We opened 13 new stores during the quarter, including 7 in the East and 1 in Southern California, ending the year with 4 68 locations. We remain pleased with the performance of our new stores, which are ramping in line with our expectations. Gross profit increased 6.3 percent to $298,900,000 representing a 30.2% gross margin rate, slightly better than our expectations. Speaker 300:13:28We continue to experience healthy deal flow, which helped offset the margin impact of our system integration, which we estimate was approximately 130 basis points in the quarter. Turning to expenses, 4th quarter SG and A increased 8.8 percent to $279,900,000 As a percentage of sales, SG and A increased 65 basis points. The increase was driven by higher commission payments to IOs, store occupancy due to new unit growth and D and A expense. This was partially offset by lower incentive and stock based compensation accruals. The higher commission expense reflects gross profit growth along with additional commission support we elected to provide our IOs in connection with our system transition. Speaker 300:14:21Net interest expense decreased 74.2 percent to $1,500,000 in the quarter. This reflects a reduction in net borrowing versus the prior year, partially offset by higher average rates. In addition, we recorded a reduction of approximately $2,000,000 in the quarter to reflect full year capitalized interest costs related to store construction and other capital projects. Our effective GAAP tax rate during the quarter was 19.3%. For non GAAP purposes, our normalized tax rate was approximately 31% in the quarter, which reflects a 30% rate for the full fiscal year. Speaker 300:15:05As a result of these factors, GAAP net income for the 4th quarter was $14,100,000 or $0.14 per diluted share. For the Q4, adjusted EBITDA was $50,900,000 or 5.1 percent of sales, slightly better than expected. Adjusted net income was $18,200,000 for the quarter or $0.18 per diluted share. Turning to our balance sheet, we ended the quarter with $115,000,000 of cash. Our inventory position improved throughout the quarter ending at $350,000,000 Total debt was $292,700,000 at the end of the Q4 with net leverage less than 1x adjusted EBITDA. Speaker 300:15:54For fiscal 2023, we generated $303,500,000 of operating cash flow and we invested $175,600,000 in CapEx, net of tenant improvement allowances. This was higher than initially planned due to the timing of payments for new stores and costs related to our systems implementation. Now let me provide you with some commentary on our fiscal 2024 guidance, which includes the impacts of the United Grocery Outlet acquisition and the system transition. We expect the acquisition to close at the beginning of the second quarter. Our Q1 guidance assumes no financial impact from the acquisition and our full year guidance assumes 9 months of financial results from United Grocery Outlet. Speaker 300:16:44As a result, our fiscal 20 of approximately $125,000,000 adjusted EBITDA of $7,000,000 and a modest benefit to adjusted EPS. With respect to our system transition, while we have made progress, the data integration efforts have taken longer than anticipated. Because of this, we expect we'll continue to experience P and L impacts during the Q1. With that as background, let me provide you with our expectations for fiscal 2024. For the full year, we are projecting comp sales growth in the range of 3% to 4%. Speaker 300:17:24We expect comp growth in the Q1 to be approximately 2%, which includes an estimated 50 basis point impact from the system transition. We expect to add a total of 55 to 60 net new stores this year. This includes the 40 newly acquired United Grocery Outlet stores as well as 15 to 20 new stores on our existing markets, evenly split by quarter. In total, we project For the full fiscal year, we project gross margin of approximately 31.3%. We expect gross margin for the Q1 of approximately 30.4%, which includes an estimated 100 basis point impact from the system transition. Speaker 300:18:16We expect sequential improvement in gross margins into the back half of the year. For the full fiscal year, we expect adjusted EBITDA to be in the range of $275,000,000 to $283,000,000 We expect 1st quarter adjusted EBITDA margin of approximately 5%, reflecting lower gross margin and higher IO commission support. For the year, we expect D and A to grow in the mid teens on a percentage basis, reflecting the impact of store growth, the United Grocery Outlet acquisition and infrastructure reinvestments. We expect stock based compensation approximately $32,000,000 for the year. Net interest expense is anticipated to be approximately $17,000,000 We forecast a normalized tax rate of 30% and average diluted shares outstanding of approximately 102,000,000. Speaker 300:19:16We expect CapEx net of tenant improvement allowances of approximately $170,000,000 reflecting new store growth, upgrades to our existing fleet, including approximately $15,000,000 of anticipated United Grocery Outlet store capital improvements as well as ongoing investments in technology, supply chain and infrastructure. We expect resulting full year adjusted EPS to be in the range of $1.14 to $1.20 per diluted share. In closing, I want to thank the Grocery Outlet team and operator community for an incredible past 12 years. Grocery Outlet is truly a unique company and I will miss being part of this organization. I'm incredibly proud of all that we have accomplished and I want to thank RJ, the Board and the leadership team for their fantastic partnership along the way. Speaker 300:20:11We will now open the call up to your questions. Operator? Operator00:20:20Thank you, sir. At this time, we will be conducting a question and answer session. The first question that we have today is from Oliver Chen from TD Cowen. Please go ahead. Speaker 400:20:55Thanks a lot. Hi, RJ and Charles and Charles, congratulations. The United grocery outlet deal sounds quite synergistic. I would love your thoughts on what characteristics were most attractive? How might the integration phases go? Speaker 400:21:11And then what should we know about the ramp to maturity of these stores and why you like the Southeast? A housekeeping item too, you mentioned that the in looking at the EPS accretion dilution? Thank you. Speaker 200:21:34Thanks, Oliver. Hi, it's RJ. I'll take the first part of that and then kick it over to Charles for the second part of your question. Yes, we're really excited about this acquisition. A lot of things that we like about it. Speaker 200:21:46First, I'd say is companies are a great match. We have a shared mission of touching lives and serving customers. We have similar business models, store size, shared customer value propositions around unbeatable value and the treasure hunt experience, all that supported by opportunistic sourcing and localized assortment. So just a lot of similarities between the two businesses. This is a growth acquisition and a lot of benefits there related to growth. Speaker 200:22:13United Grocery Outlet already is a healthy growing business across the states in the Southeast where they operate. We in addition to just continued growth of that business, we believe that we have several levers by which we can accelerate growth in the United Grocery Outlet stores. Just a few examples here, 1, expanding the assortment, we think a nice opportunity there. 2, would be to enhance the store experience through investments in to continue to drive traffic and growth in that region. And then I mentioned in my comments, we also believe that there are benefits to introducing the operator model to this we think can help the grocery outlet business. Speaker 200:23:09They have a bigger fresh meat assortment, so something for us to learn from. They, of course, have relationships with regional suppliers, Speaker 500:23:18and then we think we Speaker 200:23:18can take advantage of. And then some other unique operating practices that we look forward to learning from. Another benefit that I mentioned here is the infrastructure that comes with the deal. It provides us infrastructure in an adjacent region to our current East footprint. It's a great entry point for us into the Southeast. Speaker 200:23:40It's great infrastructure to support future growth as we continue to pursue this tremendous white space opportunity that we have. And when you think about the infrastructure that comes with this deal together with Eastern U. S. Covered in terms of infrastructure for supporting future growth. And then lastly, I'd say, from an infrastructure standpoint, a nice benefit here expected as far as opportunistic buying goes and giving us better access to product that in this region, an advantage there for having local presence to land product locally. Speaker 200:24:17And then Charles, do you want to touch on? Yes. Oliver, it's Charles. Just quickly on how we're approaching the we talked to the EBITDA impact from the deal, which we estimate to be roughly $7,000,000 prorated for 2024. And so think of that as really steady state performance of the business as it currently stands. Speaker 200:24:55And then further down the P and L because of the financing with cash, we have factored into our interest expense the impact of really lost interest income into our guidance there. And likewise, in D and A, our mid teens guidance reflects of depreciation and amortization related to United Grocery Outlets. All of that comes together to deliver modest EPS accretion in 2024. Speaker 400:25:26Thank you very much. Best regards. Speaker 300:25:29Thanks. Thanks, Oliver. Operator00:25:32Thank you. The next question we have comes from Christina Kothari of Deutsche Bank. Please go ahead. Speaker 600:25:45Hi, good afternoon. Thank you for taking the question. I just had a question about the Southern states and how you're thinking about the store expansion potential there now that you will have 40 stores in the region. So one, is there a profitability differential? Like so how do you view the profitability potential in the region and how it compares relative to the rest of the Geo network? Speaker 600:26:05Are these included in your 2025 2026 store plans? Just anything that you can share in terms of if you started to look for IOs in the region? And just lastly, you acquired DC, you've talked about that it can support further growth. Just wondering how many stores it can fully support? Thank you. Speaker 200:26:25Yes. Hi, Christina. Thanks for the question. I'll take the first part and then Charles can touch on part of your question as well. Yes, as I mentioned, we are excited about the infrastructure Your grocery outlet operates a multi temperature DC. Speaker 200:26:40And so that we think will serve us well, both, of course, supporting growth in existing stores and then also to your question, as we think about future new store growth. We our immediate focus right now is on integration. So we don't have immediate plans to accelerate sort of growth beyond what the United Grocery Outlet team already had planned. So we'll do the work together with the UGO team to proceed on that integration plan. And then as we look forward, the Southeast region, a lot of potential for growth there. Speaker 200:27:19The existing DC can support growth for the next, call it, several years from a new growth store growth standpoint. And then similar to how we manage across the entire network and across all of our points of distribution center and infrastructure, we'll make the necessary investments in that to support future store growth. But again, love the volume that it provides us, love the scale that it provides us and love the entry point into this region of the country, which will support a lot of future stores. And Christine, it's Charles. Just a bit more color on the store productivity and comparisons versus our Geo store. Speaker 200:28:01So yes, we're excited about the potential here as RJ said. Looking at store productivity, the average sales volumes for the UGO stores about half of our current stores. The basket really similar traffic is really the opportunity for us. So we think there is big opportunity to drive that higher through a combination of expanding the assortment, driving trips there, investments we can make into store CapEx and technology, as well as on the marketing side. In terms of the margin profile, I'd say no real structural margin challenges as we look at the business. Speaker 200:28:40Gross margins a little bit higher than our own stores, really because of mix differences and then more limited everyday assortment that they have. Store expenses, a little bit higher than IOs currently operate. But all of that nets down to a very similar EBITDA profile. And so again, looking ahead, we're excited about what we can do here as we grow these stores to look more like grocery outlet stores in the future. Speaker 600:29:08Thank you so much. Speaker 200:29:10Thank you. Thanks. Speaker 100:29:16Thank you. Our next question is coming from the line of Robbie Ohmes with Bank of America. Please proceed with your question. Speaker 700:29:22Hey, guys. Thanks for taking my questions. One, just a clarification, the sorry, the UGO stores that you're acquiring, are they currently in the IO model? They are not, no. They're coming Are you planning to convert them to the IO model? Speaker 200:29:38We do, yes. We do think, of course, the IO model is super important to our business and important part of our value proposition. We think those benefits will all apply to the Southeast region as well. We are still getting to know the business, the individual stores. We're putting integration plans in place as we speak. Speaker 200:30:00We just announced the deal right a little over a week ago. So we're now working together with the United Grocery Outlet team on those plans. But yes, we do think about introducing the operator model to these stores as well. Speaker 700:30:14And then, RJ, just to again to kind of clarify. So the I think you're going to do 55 stores you're saying for 24 and 15 to 20 of them would sort of be organic, not part of the acquisition. But I think you guys were targeting 10% growth organically before you announced the acquisition, which would be more like 47 organic stores. So did you push stores into the future? Or were you tracking to kind of miss opening the 47 organic stores, but then you made this acquisition? Speaker 700:30:49Like maybe help me understand just the organic Speaker 800:30:53outlook. Sure. Speaker 200:30:55Yes. Well, we've been focused on delivering the 10% annual store growth this year. We've talked about that throughout. And on the past few calls, we've also talked about pursuing this growth across several fronts, right? Organic growth, of course, but also consideration of opportunistic real estate. Speaker 200:31:15We have some new strategic relationships we've built and then these regional acquisition opportunities that we've been considering as well. And all of these activities combined would represent the 10%. As we started to see progress on the United Grocery Outlet acquisition, We were able to manage and moderate some of the other activities with this 10% goal in mind. And keep in mind that real estate is just one part of successfully opening new stores, right? We were super mindful of infrastructure needed to support them. Speaker 200:31:48Of course, there's operator recruiting and ready there's marketing and there are a lot of other things that go into opening stores successfully. And so we were able to make those modifications and we love where we're at. We've got 55 to 60 new store planned this year. Okay, it's a little bit ahead of the 10% growth, but for the work that we've done and the plans that are in place, we're excited about the integration work with the 40 as well as the 15 to 20 that we will open organically. Speaker 700:32:21Great. Thanks so much. Speaker 200:32:23Yes, you bet. Operator00:32:27Thank you. The next question we have comes from Joe Feldman of Telsey Advisory Group. Please go ahead. Speaker 900:32:34Hey guys, thanks for taking the question. I wanted to go back on the private label, if you could share a little more color there. I know it's not coming until the second half, but just curious what if you could dive in a little more on categories, you mentioned NASH, but are there other, I guess, everyday categories that you're looking to fill with these products? And how might that impact the relationship with any of the vendors or suppliers that you have? Thanks. Speaker 200:33:03Yes. Hi, Joe. Yes, we're excited to be getting to the point here where we will be introducing these new items and brands later this year. And as you know, we've been spending a lot of time building capabilities and setting the strategy and the foundation this past year. So exciting for us to be at the point here soon where we'll have these new items being introduced to the store. Speaker 200:33:25These items will be an enhancement to where every day is provide better value for customers, better shopping experience, better baskets and then also better margin for the business. So a lot of things to be excited for there. As I mentioned in my comments, second half of the year is when we'll start introducing these items to the store and we have this goal of 100 new items by the end of the year. The initial focus will be in more commodity categories, where we have a nice opportunity to offer better value and again margin than some of the items that we're currently carrying. And I'll just give you few examples, for where you'll start to see some of these initial items. Speaker 200:34:07Water will be one of the first ones. We've got some nice opportunities and items lined up within the baking category, pasta category and cheese as well. So those are just a few. We've got others, of course, on the list that will be part of the 100 items. And then in addition to some of these commodity categories, also planning to introduce, I'll call them more differentiated items and where NASH is great opportunity here, items that can just further strengthen the treasure hunt experience, can further differentiate us and also serve as another point of differentiation and destination for customers that are shopping our stores. Speaker 200:34:49So a lot there for us to like, still just the beginning. This is going to be a longer journey, but at least excited to be taking this first big step in getting this initial wave of products out to the stores and to our customers. Speaker 900:35:04Great. Thank you and good luck Charles with everything. Thanks. Thank you. Operator00:35:11Thank you, sir. The next question we have comes from Mark Carvin from UBS. Please go ahead. Speaker 1000:35:24Good afternoon. Thanks so much for taking the question. So for the year ahead, you're expecting a gross margin that's north of 31% for the 2nd straight year, even with the systems headwind noticeably above your historical rate. Sounds like trends are expected to improve in 2H as well. Just what are the biggest factors driving this change? Speaker 1000:35:43Thanks. Speaker 200:35:44Yes, Mark, it's Charles. I would say for us, we're just really pleased with the purchasing backdrop that we continue to experience. Yes, the technology implementation has had an impact, but the deal flow we're seeing, the backdrop from a buying perspective feels very good. Beyond that, continuing to see inflation moderate very much as we expected and promotional activity looks to still remain very, very rational. So feel great about the setup for the year. Speaker 200:36:21To your point, it's above our sort of historical margin performance looking back over time. But again, just think some Speaker 300:36:31of those tailwinds will play to our strengths this year. Speaker 1000:36:35Great. And then how is the overall product pipeline shaping up for 2024? Are you guys expecting to see much change in the pace of CPG innovation? Speaker 200:36:45It's good. Yes, we continue to be encouraged by the pipeline of opportunistic product. It continues to be broad based across categories. There was a lot of positive momentum throughout all of last year through the end of the year and that's all carried forward through the Q1 so far. I mean, we think carries forward through this year. Speaker 200:37:06And as far as just some of the trends, we've talked about in the past, forecasting continues to be hard, so that contributes to opportunistic supply. Yes, product innovation continues to be healthy and increase and as suppliers introduce new items and they extend brands and there's brand and label changes and packaging changes. Those are all beneficial from a surplus inventory standpoint. And then just generally changes in assortment and products are favorable. And so there continues to be a lot of dynamic factors to the supply environment. Speaker 200:37:46So all those have us feeling pretty good about what we're seeing currently and what's in front of us here through the rest of the year. Speaker 1000:37:55Great. Thanks so much. Good luck, guys. Speaker 200:37:57Thank you. Operator00:38:00Thank you. The next question we have comes from Cory Connolly of Jefferies. Please go ahead. Speaker 500:38:07Great. Thanks and good afternoon. So I wanted to ask about the UGO acquisition. And as you think about this acquisition versus the one you made about a decade ago in Amelia's, What's when does the IO model make sense? Because I think, RJ or Charles, you had mentioned that the productivity or the sales volumes are about half of the fleet currently. Speaker 500:38:40So when does it make sense to introduce the IO model? Is it a multi quarter or a multi year phasing? And then how do you think about some of the similarities and differences between when you bought Emilia's and how that integrated into the enterprise versus buying UGO today? Speaker 200:39:02Yes, thanks, Corey. Let me I'm going to start with your second question and then I'll let me come back to the first part of your question. The Amelia's acquisition a long time ago, many things have changed in our business since then. I will note some similarities between that acquisition and this one, similar business models, value propositions, shared values for how we operate in both cases. So that's certainly similar. Speaker 200:39:28Both are providing us with infrastructure to support growth in a new region. In the case of Amelia's, it was really an entry point to the East Coast and here now a new region in the East Coast, but both coming with stores and distribution center, local team that will continue operating the business. Those are all very helpful for entry into a new geography. And then this point about providing better access to opportunistic supply, we saw that play out in a really positive way with Emilio's and we expect that to be the same for product that is local within that region in the case of United Grocery Outlet. So a lot of similarities there. Speaker 200:40:08In terms of a lot of differences as well just in terms of store count and other parts of operation, but probably more similarities than not. In terms of timing and integration, again, we are really just starting to work through integration planning together with the United Grocery Outlet team as it hasn't been that long since the deal has been announced. First, I'd say it's a healthy growing business. So our top priority is to maintain current business momentum and be smart about how we begin to integrate it and how we think about prioritizing and sequencing and timing for some of these growth opportunities. And that getting to your question around the operator model, but it would also apply to rebranding and other things that we might do, we want to make sure that we've got a well integrated plan and we're doing and making these changes in the right cadence and at the right pace relative to the ongoing business and making sure we're striking a healthy balance there. Speaker 200:41:09Think about the activation of a lot of these accelerated growth opportunities that are taking place over the next couple of years. There are things that we would want to get in place prior to any rebranding or conversion. Speaker 1000:41:28Some of Speaker 200:41:28the near term opportunities would be around expanding the assortment, some of the investments that we want to make into the stores and you get some of those things in place. And then following that, we would think about sequencing the rebranding and then also some of the opportunities, which will need to be store specific, need to be thoughtful about how we do this as far as introducing the operator model. But that wouldn't happen at least as far as operator opportunities go, wouldn't happen in this 1st year. Think of that as starting really in the 2nd year and then following a period of time similar to Amelia's where we would look to introduce that over time and on a store specific basis. Speaker 500:42:11Got it. And then just a quick follow-up. What was Ring up in 2023? And then within your guide, what's the expectation for ticket or ring increase in 2024? Speaker 200:42:26Yes. So let me start with the ladder there. So as we think about the for our business, the components of comp for the balance of the year, we think that 2024 will continue to see comps driven by traffic and that's going to be offset in part by lower basket. So on the traffic side, yes, food inflation moderating, but in absolute terms remains high. The consumer is feeling pressured from that along with high interest rates and consumer credit. Speaker 200:42:59So we think all of that will be a tailwind for us from a traffic standpoint as we've seen recently. From a basket standpoint, it will be lower due to number 1, the increased trip frequency and the impact that has on baskets and more trips and lower baskets as well as moderating inflation. Within the basket itself, again, the components for our business a little less comparable due to the changing nature of the assortment. Speaker 500:43:30Great. Thank you very much. Speaker 200:43:32Yes. Thanks, Corey. Operator00:43:35Thank you. The next question in here comes from John Heinbockel of Guggenheim Securities. Please go ahead. Speaker 1100:43:50Hey, guys. I wanted to start with, when do you think is it really the end of the Q1 when there is a complete normalization and how the IOs are using the systems and financial impact. Is that fair? And then how do you think about when you try to forecast the recovery in the back half of the year, right, because you lost over 200 basis points of comp and over 100 basis points of gross. I mean, it looks like there's some recovery, but certainly nowhere near a complete recovery. Speaker 200:44:24Yes, yes. John, it's Charles. Let me give you a little bit of context on the impact of technology and probably helpful to just provide you with the impact on Q4 and then how we're thinking about Q1 as well. So in total, think about the EBITDA impact from the technology transition and interruptions is impacting EBITDA by $20,000,000 in the 4th quarter. About half of that comes from the elective IO commission support that we provided to operators. Speaker 200:45:01The balance coming from combination of the impact of the top line and gross margin rate as we've disclosed. In the Q1, those impacts continued, but to a lesser degree. So that would have been a $20,000,000 EBITDA impact in Q4 down to what we estimate and is implied in our guidance of roughly $14,000,000 impact to the Q1. Again, half of that coming from elective IO commission and the balance from sales in March. So continuing to provide that support during the impacted period, but the monthly impact is we're tracking it continues to decline, which feels good to us. Speaker 200:45:47Our current guidance assumes that we resolve the remaining issues in front of us and are back to steady state operations and conclude the elective commission support by Speaker 300:45:58the end of the Q1. Speaker 1100:46:00All right. One quick follow-up then. And the food business is a little bit different, but have you seen any impact from the bad weather and rain in California, is that that would be separate from the 50 basis points if any, but have you seen anything? Speaker 200:46:17Yes. Not significant, nothing to call out for us. Speaker 1100:46:21Okay. Thank you. Speaker 300:46:23Yes. Thanks, John. Operator00:46:25Thank you. Thank you. The next question we have comes from Leah Jordan of Goldman Sachs. Please go ahead. Speaker 1200:46:34Good afternoon. Thank you for taking my question. I just wanted to touch on the 4Q comp a little bit. It looks like the headwind from the systems change came in about 100 basis points better than you initially guided, but less than that flowed through to the total comp. So I guess what surprised you versus your internal expectations for the core business? Speaker 1200:46:55And can you talk about just the dynamics in ticket overall and how volumes trended as the ERP rollout improved? Speaker 200:47:03Yes. So let me start first in terms of overall comp for again the 2.7% for us in the quarter, a bit better than we guided. It was a combination of slightly higher basket. So think about that as being the inventory recovery working through the system implementation was a bit faster than we thought, so that helped basket and supplementing that traffic was a little bit better. In terms of cadence throughout the quarter, Speaker 300:47:35we saw comps improve modestly as we progressed. Speaker 200:47:39More importantly, we're tracking very closely as the prior year comparisons get a little bit noisy now. We're looking at average weekly sales and saw some nice improvement through the Q4 that has continued into the Q1. So feel like the underlying trends in the business are healthy and improving as we again work our way through the system transition. Speaker 1200:48:07Great. Thank you. And then for my follow-up, I just wanted to go back to the gross margin discussion. Just curious if you've assumed any benefit from the private label rollout and any magnitude of that impact? And also on closeout, I guess, what have you assumed within guidance? Speaker 1200:48:22Is it relatively stable throughout the year or any impact on a year over year basis there? And then longer term, should we still think that margins stay relatively flat or has anything structurally changed in the business? Speaker 200:48:36Yes. So no impact from private label, small number of items rolling them out later in the year, so not meaningful to margin. From an opportunistic standpoint, I'd say stable, which is favorable. Those nice trends that I've talked about as they contributed in 2023, we expect to contribute similarly to gross margin in 2024. And then longer term, you'll continue to operate this business for stable margins, always looking to reinvest back into value and driving customer trips, both acquisition and retention and frequency. Speaker 200:49:14And we continue to see some really nice trends there. So we like this balance that we have between the value that we're delivering and of course, the margin that is being delivered to the P and L. So that continues to be the approach. Speaker 1200:49:30Thank you. Speaker 900:49:32Thank you. Operator00:49:36The next question we have comes from Michael Baker of D. A. Davidson. Please go ahead. Speaker 800:49:43Okay. Thanks. So the acquired companies EBITDA margins are about 5.5%, right? Pretty close to what you guys do, maybe a little bit below the 6.4% that you did this year, but on half the sales volumes. So if you can get those sales volumes even close to your core stores, what does that mean about the margins from United Grocery Outlet? Speaker 800:50:10Do they go that much higher? Or do you reinvest that to keep them at about that mid-six percent range? It just seems interesting that their margins are not that far from you on somewhat to us sales. Thanks. Speaker 200:50:22Yes, Mike, it's Charles. Probably, I'd say it's premature at this point given we haven't closed the transaction. The business again last year roughly $160,000,000 in top line, EBITDA about $10,000,000 so really similar EBITDA margin profile to our business. As RJ said, really excited about the long term growth potential for this business, but we do want to be really measured in our approach. And so it's it would just be premature for us to put a number to it. Speaker 200:50:55But the again, the path we're taking is integrate the business, make sure we protect what they have, combine the best of UGO and GEO with the goal of continuing to operate the business really in steady state this year. We'll start to invest again lots of ways we think we can drive growth. We're going to learn a lot that will inform what exactly the P and L looks like in the future. But we do think there's big opportunity for growth and again taking the best of what we do and what UGO does, we're excited about it. Speaker 700:51:33Fair enough. Makes sense. Thank you. Thanks. Operator00:51:39Thank you. The next question, we now, comes from Jeremy Hamblin of Craig Hallum. Please go ahead. Speaker 1300:51:54Thanks and congrats on the strong results. I wanted to come back to the new unit development here and just understand in terms of where you are now in opening these stores that your kind of your capital outlay in doing that versus where it might have been a couple of years ago? And then just thinking about that in context of the investments you're making here in UGO deal. And then the it looks like you I think you had indicated there's an additional $15,000,000 of capital improvements that you're looking to make into the UGO locations. Can you just talk about in terms of returns on capital, are you getting more from kind of your base legacy business? Speaker 1300:52:51And how does that compare to the United deal? Speaker 200:52:57Yes. Jeremy, it's Charles. Let me provide you a little bit of context to how we really thought about the returns for the acquisition. We do think this will generate healthy returns for us over time. And we really looked at it through a few different lenses. Speaker 200:53:13The first was just what's the base business that we're buying. So we think we're paying a fair multiple for the 40 stores that exist today plus the distribution center just based on Speaker 300:53:27the last 12 months performance of the business. Speaker 200:53:30As we said, we think it will be modestly accretive to 2024 earnings. So that feels good. Beyond that, really the next lens was thinking about the opportunity we have to drive growth within the existing store base. So as we said, it will take time, but as we integrate, as we invest in these stores, we think there's meaningful upside just within the 40 stores today to drive accelerated growth, higher productivity, better bottom line that fuels the return. And then lastly, again, is the platform that this gives us to accelerate growth into a new region. Speaker 200:54:10And R. J. Talked about not only the real estate opportunity and total that gives us, but also the impact it can have for us from a buying perspective. So those would all be additive to the way we've thought about the return. So we think this is going to be a great use of capital for us and we love the way that it really supplements and complements what we do from an organic growth perspective. Speaker 1300:54:35Got it. And then just a follow-up there in terms of your existing stores, grocery outlet stores, where does your kind of initial cash investment lie at this point in time? I think a few years ago, it was in the $2,000,000 and change for the store build out inventory preopening expense. We believe that's little bit higher now. Just wanted to see how that stood here as you're looking at FY 'twenty five and 'six of 100 total locations, was kind of the expected outlook related to that. Speaker 200:55:16Yes, you're exactly right. We are seeing higher CapEx costs today than we were really the $2,000,000 number ties back to when we brought the business public in 20 19. And so clearly, it's a different inflationary environment today versus then. So yes, everything labor, materials, equipment had an impact probably in total. We're seeing new store costs about 25% higher than where we were at the time of IPO. Speaker 200:55:47That said, we've got a number of levers that we're actively working on to reduce costs, everything from value engineering, the build out to strategic sourcing and bulk purchasing of equipment. I will say that when you look at the store model and the returns, it's store volume and product profitability that have a much bigger impact on returns relative to CapEx. And so continue to be pleased with the volumes and the profitability we're driving from new stores. And so while the recent vintages are seen as higher construction costs, it is not weighing down our returns in a meaningful way. You can think about it is really having about a 5 point impact on sort of mature year 4 ROICs. Speaker 200:56:34So that's come down from 35%, but still really a healthy roughly at 30% based on current construction costs. Speaker 1300:56:44Great. Thanks for taking questions. Best wishes. Speaker 200:56:48Thank you. Thanks, Aaron. Operator00:56:52Final question we have comes from. Your airtime is exhausted and your call has been terminated. Please load airtime. Apologies. The final question we have comes from Simeon Gutman of Morgan Stanley. Operator00:57:19Please go ahead. Speaker 1400:57:22Hey, everyone. Luckily, our airtime has not expired yet. Speaker 100:57:26I don't know what happened with that one. We were just as appalled as you were. Apologies. Speaker 1400:57:31No worries. I want to go back to the ticket size. I know it's a bit of enigma to look at same SKU inflation for your business. Is there a best guess on what that may be doing to the basket size versus we're putting fewer items in the basket or if there's some trade down happening? And then I'll just put the follow-up in here given the interest of time. Speaker 1400:57:54Charles gave us some numbers on the Q4 and the Q1 commission sharing. I think you've disclosed the second and third order in the filings, but if you can just give us that one more time because there's going to be a pretty meaningful inflection in the composition of the P and L during the year? Thanks. Speaker 200:58:12Yes. Let me just start with assuming the basket. And so you can think about within the basket again, not directly comparable for us. We always talk about our model mutes the impact of inflation on the way up, deflation on the way down, but we are we continue to see slightly higher average unit retails that's being offset by fewer items in the basket. Again, as trip frequency has increased as well as that had a bit of an impact from the system transition. Speaker 200:58:47Just to reiterate the numbers I provided with respect to the system EBITDA impact for Q4 and Q1. I'll give you both numbers, so you have them again. For the Q4 total EBITDA impact roughly $20,000,000 about half of which is IO commission support. So as you look in the Qs and the Ks, you can you'll see that number as it relates to kind of the anomaly in commission trend and the balance again combination of sales impact and gross margin impact. For the Q1, we're seeing the monthly trend come down in terms of the impact. Speaker 200:59:32We expect the full first quarter EBITDA headwind to be roughly $14,000,000 again, half of that being IO commission and sales and margin being the balance. Speaker 1400:59:45Great, thanks. Best of luck to you, Charles. Speaker 900:59:48Thank you. Operator00:59:51Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back to RJ Sheedy for closing remarks. Please go ahead, sir. Speaker 201:00:02Thanks, everyone, for your time today, and we look forward to talking with you again on future calls. Appreciate it. Take care. Operator01:00:10Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.Read morePowered by Conference Call Audio Live Call not available Earnings Conference CallGrocery Outlet Q4 202300:00 / 00:00Speed:1x1.25x1.5x2x Earnings DocumentsPress Release(8-K)Annual report(10-K) Grocery Outlet Earnings HeadlinesWhy Grocery Outlet Holding Corp. (GO) Is Among the Best Food Stocks to Buy Under $30May 7 at 8:32 AM | msn.comGrocery Outlet Enlists iFoodDS for FSMA 204 Traceability ComplianceMay 7 at 8:30 AM | prnewswire.comURGENT: Someone's Moving Gold Out of London...People who don’t understand the gold market are about to lose a lot of money. Unfortunately, most so-called “gold analysts” have it all wrong… They tell you to invest in gold ETFs - because the popular mining ETFs will someday catch fire and close the price gap with spot gold. May 7, 2025 | Golden Portfolio (Ad)Grocery Outlet Holding Corp. Announces First Quarter Fiscal 2025 Financial ResultsMay 6 at 5:47 PM | gurufocus.comGrocery Outlet Holding Corp. Announces First Quarter Fiscal 2025 Financial ResultsMay 6 at 4:01 PM | globenewswire.comTelsey Advisory Group Comments on Grocery Outlet Q1 EarningsMay 3, 2025 | americanbankingnews.comSee More Grocery Outlet Headlines Get Earnings Announcements in your inboxWant to stay updated on the latest earnings announcements and upcoming reports for companies like Grocery Outlet? Sign up for Earnings360's daily newsletter to receive timely earnings updates on Grocery Outlet and other key companies, straight to your email. Email Address About Grocery OutletGrocery Outlet (NASDAQ:GO) operates as a retailer of consumables and fresh products sold through independently operated stores in the United States. Its stores offer products in various categories, such as dairy and deli, produce, floral, fresh meat, seafood products, grocery, general merchandise, health and beauty care, frozen food, beer and wine, and ethnic products. 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There are 15 speakers on the call. Operator00:00:00Greetings, and welcome to the Grocery Outlet Full Year 2023 Earnings Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. Please note, participants are restricted to one question at a time. As a reminder, this conference is being recorded. Operator00:00:28I would now like to turn the conference over to your host, Christine Chen, Head of Investor Relations. Please go ahead, ma'am. Speaker 100:00:35Good afternoon, and welcome to Grocery Outlets' call to discuss financial results for the Q4 fiscal year for the period ending December 30, 2020 3. Speaking from management on today's call will be R. J. Sheedy, President and Chief Executive Officer and Charles Brocker, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Speaker 100:00:56Please note that this conference call is being webcast live and a recording will be available via telephone playback on the Investor Relations section of the company's website. Participants on this call may make forward looking statements within the meaning of the federal securities laws. All statements that address future operating, financial or business performance or the company's strategies or expectations are forward looking statements. These forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. 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 200:01:35Good afternoon, everyone, and thank you for joining us. We are happy to be speaking to you today about our business results, acquisition of United Grocery Outlet and outlook for 2024. Let me start by providing some commentary on business performance and notable growth initiatives over the next few years. First, our 4th quarter results were slightly ahead of our expectations and traffic and customer acquisition remains strong. We continue to deliver unbeatable value with an exciting treasure hunt experience and our underlying business fundamentals remain healthy. Speaker 200:02:122nd, we are excited to be acquiring United Grocery Outlet, which adds 40 stores to our network. This is an ideal strategic fit given our similar business models, customer value propositions and shared mission of serving and helping others. This acquisition provides Grocery Outlet with scale in a new geography as well as a platform for future expansion in the Southeast. We are thrilled to welcome the United Grocery Outlet team into the Grocery Outlet family and we look forward to working together on the many growth opportunities ahead. 3rd, we are making good progress on a number of strategic initiatives that we believe will strengthen our value proposition and contribute to future growth. Speaker 200:02:57Our personalization app is now rolling out to all stores and we will soon begin to invest in marketing to drive downloads and adoption. We are also looking forward to the launch of our new private label program later this year. Finally, we are excited to welcome Ramesh Chikala to Grocery Outlet in the new role of Chief Operations Officer. I have known Ramesh for a number of years and he is familiar with our business through previous consulting work. Ramesh is leading our business technology and supply chain teams to help us scale and improve our capabilities to support growth. Speaker 200:03:33Let me now expand on each of these with more details. 4th quarter sales increased 6.3% driven by a 2.7% increase in comparable store sales, which was ahead of our expectations. Transaction count remains strong at 7.5% increasing throughout the quarter. While food inflation has been moderating, consumers still face higher food prices and other financial burdens. Our compelling savings and ever changing assortment of high quality Wow items continue to drive healthy traffic increases and market share gains. Speaker 200:04:144th quarter gross margin was also ahead of our expectations at 30.2%. The closeout market remains strong and our growing size and scale provide increasing access to products with strong customer value and healthy margin. We opened 13 new stores in the Q4, including our first store in Ohio, ending the year with 4 68 locations. Recent vintages continue to ramp well and we are pleased with new store performance. We have made steady progress with our systems implementation work, though data integration efforts are taking longer than expected and are still impacting our business results. Speaker 200:04:57The largest remaining issues are related to warehouse product expiry data and store level reporting for IOs. We expect these to be resolved soon after which the P and L impact will be behind us. Charles will provide more details in his comments. Despite the systems disruption, business fundamentals are healthy and our new applications are supporting daily operations well. We are proud to have delivered strong results during 2023, growing sales by 11% to a record $4,000,000,000 This was driven by comp store sales growth of 7.5% and a customer count increase of 8.3%. Speaker 200:05:40We also leveraged gross profit by 76 basis points and grew adjusted EBITDA by 18%. Now let's turn to the acquisition. United Grocery Outlet is a healthy, profitable and growing business. Their opportunistic buying model, similar company values and adjacent geographic footprint make it an ideal strategic fit. Founded 50 years ago, United Grocery Outlet offers customers tremendous savings within a treasure hunt shopping environment. Speaker 200:06:14Strong partnerships with national and regional brands enable it to provide quality food at unbeatable prices to its loyal customer base. United Grocery Outlet also operates as a local business with a mission of giving back and making a positive impact on their community. Their stores average 17,000 square feet and have seen healthy same store sales growth in recent years driven by both transaction count and ring. This acquisition provides Grocery Outlet a great entry point into the Southeast region with 40 stores across the 6 states of Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia. United Grocery Outlet also operates a distribution center, which can support additional new store growth in the broader Southeast region. Speaker 200:07:04This is an exciting addition as we pursue our white space opportunity of over 4,000 stores across the U. S. Distribution center infrastructure in this region also provides us with better access to opportunistic product that can benefit all grocery outlet stores. We have many levers to accelerate sales growth in partnership with the United Grocery Outlet team. Some of these opportunities include assortment expansion, additional store fixtures and improvements and technology and marketing investments. Speaker 200:07:37We also see our independent operator model as another lever for growth. It is an important differentiator for us and we believe that it can have a positive impact in this region as well. We look forward to updating you on integration progress as we go. In addition to the United Grocery Outlet stores, we plan to open 15 to 20 stores for a total of 55 60 net new stores this year. Our real estate pipeline is healthy with approved sites for 2025 in good position to deliver our 10% annual growth goal. Speaker 200:08:15Given this, most of our recent real estate efforts have been focused on building the 2026 pipeline. This will add to what is currently over 100 approved sites for 20252026 combined. We continue to pursue organic growth combined with additional real estate opportunities that align with our long term geographic expansion in store growth strategies. We are expanding strategic relationships with large property owners, evaluating opportunistic real estate lists and exploring additional strategic regional acquisitions. The combination of these activities will help us deliver on our tremendous long term store growth and geographic expansion opportunities. Speaker 200:09:02Let's turn now to other strategic initiatives. Our personalization app is on track to be active in all stores by the end of the Q1. This app will allow us to communicate our weekly deals to customers and customize their treasure hunt experience. This will increase customer engagement with grocery outlet and help drive trip frequency and share of wallet. We are also looking forward to launching our 1st new private label products later in the second half of the year with a goal of 100 SKUs by year end. Speaker 200:09:36Our assortment will initially focus on everyday value commodity categories that deliver better value and margin and complete the full shop. These items will help us capture larger baskets and create a stickier customer relationship. Our private label strategy include nosh categories and unique items that will serve as another differentiator enhancing the customer shopping experience. Next, for a people update, we welcomed Ramesh Chikala last month in the new role of Chief Operations Officer. Ramesh's experience in retail and operations organizations includes 14 years at Walmart, where as SVP, he led its global supply chain and food manufacturing operations as well as its global technology organization. Speaker 200:10:24Most recently, Ramesh has been a senior advisor to Kearney in their operations, supply chain technology and consumer industry and retail practices. I look forward to working with him to further optimize our supply chain and technology infrastructure to support our long term growth. We are in process with our search for a new CFO and I'm happy to have Lindsay Gray, our SVP of Accounting and Principal Accounting Officer stepping into the role of interim CFO effective March 1. Lindsay has been with Grocery Outlets for the last 8 years leading our accounting team. She is an experienced financial executive with deep knowledge of Grocery Outlets business and over 14 years of leadership in finance. Speaker 200:11:09She also is well connected throughout the business and a strong supporter of the IO model. In closing, I would like to thank the Grocery Outlet team and our IOs for their dedication and many contributions. The entrepreneurial spirit of our IOs combined with the buying power of our team creates a powerfully unique customer experience, which positions us well to continue to grow our market share. I also want to thank Charles for his invaluable contributions to Grocery Outlet. Thank you, Charles for all that you've done over the past 12 years. Speaker 200:11:43You'll be greatly missed by everyone and we wish you the best of luck in the next chapter of your career. And with that, I'll turn it over to Charles. Thanks, Speaker 300:11:53RJ, and good afternoon, everyone. Our 4th quarter results slightly exceeded our expectations, reflecting continued strength in transaction growth, which improved throughout the quarter. For fiscal 2023 in total, we delivered strong top line growth with comp sales increasing 7.5% yielding $4,000,000,000 in total sales. We also drove healthy bottom line growth with adjusted EBITDA up 17.7% and adjusted net income increasing 15.2%. For the quarter, net sales increased 6.3 percent to $989,800,000 due to a 2.7% increase in comparable store sales and the impact of new stores opened over the past 12 months. Speaker 300:12:41Comp transaction growth of 7.5% was partially offset by a 4.5% decline in our average basket. We estimate the system transition impacted comp sales by approximately 200 basis points for the quarter. We opened 13 new stores during the quarter, including 7 in the East and 1 in Southern California, ending the year with 4 68 locations. We remain pleased with the performance of our new stores, which are ramping in line with our expectations. Gross profit increased 6.3 percent to $298,900,000 representing a 30.2% gross margin rate, slightly better than our expectations. Speaker 300:13:28We continue to experience healthy deal flow, which helped offset the margin impact of our system integration, which we estimate was approximately 130 basis points in the quarter. Turning to expenses, 4th quarter SG and A increased 8.8 percent to $279,900,000 As a percentage of sales, SG and A increased 65 basis points. The increase was driven by higher commission payments to IOs, store occupancy due to new unit growth and D and A expense. This was partially offset by lower incentive and stock based compensation accruals. The higher commission expense reflects gross profit growth along with additional commission support we elected to provide our IOs in connection with our system transition. Speaker 300:14:21Net interest expense decreased 74.2 percent to $1,500,000 in the quarter. This reflects a reduction in net borrowing versus the prior year, partially offset by higher average rates. In addition, we recorded a reduction of approximately $2,000,000 in the quarter to reflect full year capitalized interest costs related to store construction and other capital projects. Our effective GAAP tax rate during the quarter was 19.3%. For non GAAP purposes, our normalized tax rate was approximately 31% in the quarter, which reflects a 30% rate for the full fiscal year. Speaker 300:15:05As a result of these factors, GAAP net income for the 4th quarter was $14,100,000 or $0.14 per diluted share. For the Q4, adjusted EBITDA was $50,900,000 or 5.1 percent of sales, slightly better than expected. Adjusted net income was $18,200,000 for the quarter or $0.18 per diluted share. Turning to our balance sheet, we ended the quarter with $115,000,000 of cash. Our inventory position improved throughout the quarter ending at $350,000,000 Total debt was $292,700,000 at the end of the Q4 with net leverage less than 1x adjusted EBITDA. Speaker 300:15:54For fiscal 2023, we generated $303,500,000 of operating cash flow and we invested $175,600,000 in CapEx, net of tenant improvement allowances. This was higher than initially planned due to the timing of payments for new stores and costs related to our systems implementation. Now let me provide you with some commentary on our fiscal 2024 guidance, which includes the impacts of the United Grocery Outlet acquisition and the system transition. We expect the acquisition to close at the beginning of the second quarter. Our Q1 guidance assumes no financial impact from the acquisition and our full year guidance assumes 9 months of financial results from United Grocery Outlet. Speaker 300:16:44As a result, our fiscal 20 of approximately $125,000,000 adjusted EBITDA of $7,000,000 and a modest benefit to adjusted EPS. With respect to our system transition, while we have made progress, the data integration efforts have taken longer than anticipated. Because of this, we expect we'll continue to experience P and L impacts during the Q1. With that as background, let me provide you with our expectations for fiscal 2024. For the full year, we are projecting comp sales growth in the range of 3% to 4%. Speaker 300:17:24We expect comp growth in the Q1 to be approximately 2%, which includes an estimated 50 basis point impact from the system transition. We expect to add a total of 55 to 60 net new stores this year. This includes the 40 newly acquired United Grocery Outlet stores as well as 15 to 20 new stores on our existing markets, evenly split by quarter. In total, we project For the full fiscal year, we project gross margin of approximately 31.3%. We expect gross margin for the Q1 of approximately 30.4%, which includes an estimated 100 basis point impact from the system transition. Speaker 300:18:16We expect sequential improvement in gross margins into the back half of the year. For the full fiscal year, we expect adjusted EBITDA to be in the range of $275,000,000 to $283,000,000 We expect 1st quarter adjusted EBITDA margin of approximately 5%, reflecting lower gross margin and higher IO commission support. For the year, we expect D and A to grow in the mid teens on a percentage basis, reflecting the impact of store growth, the United Grocery Outlet acquisition and infrastructure reinvestments. We expect stock based compensation approximately $32,000,000 for the year. Net interest expense is anticipated to be approximately $17,000,000 We forecast a normalized tax rate of 30% and average diluted shares outstanding of approximately 102,000,000. Speaker 300:19:16We expect CapEx net of tenant improvement allowances of approximately $170,000,000 reflecting new store growth, upgrades to our existing fleet, including approximately $15,000,000 of anticipated United Grocery Outlet store capital improvements as well as ongoing investments in technology, supply chain and infrastructure. We expect resulting full year adjusted EPS to be in the range of $1.14 to $1.20 per diluted share. In closing, I want to thank the Grocery Outlet team and operator community for an incredible past 12 years. Grocery Outlet is truly a unique company and I will miss being part of this organization. I'm incredibly proud of all that we have accomplished and I want to thank RJ, the Board and the leadership team for their fantastic partnership along the way. Speaker 300:20:11We will now open the call up to your questions. Operator? Operator00:20:20Thank you, sir. At this time, we will be conducting a question and answer session. The first question that we have today is from Oliver Chen from TD Cowen. Please go ahead. Speaker 400:20:55Thanks a lot. Hi, RJ and Charles and Charles, congratulations. The United grocery outlet deal sounds quite synergistic. I would love your thoughts on what characteristics were most attractive? How might the integration phases go? Speaker 400:21:11And then what should we know about the ramp to maturity of these stores and why you like the Southeast? A housekeeping item too, you mentioned that the in looking at the EPS accretion dilution? Thank you. Speaker 200:21:34Thanks, Oliver. Hi, it's RJ. I'll take the first part of that and then kick it over to Charles for the second part of your question. Yes, we're really excited about this acquisition. A lot of things that we like about it. Speaker 200:21:46First, I'd say is companies are a great match. We have a shared mission of touching lives and serving customers. We have similar business models, store size, shared customer value propositions around unbeatable value and the treasure hunt experience, all that supported by opportunistic sourcing and localized assortment. So just a lot of similarities between the two businesses. This is a growth acquisition and a lot of benefits there related to growth. Speaker 200:22:13United Grocery Outlet already is a healthy growing business across the states in the Southeast where they operate. We in addition to just continued growth of that business, we believe that we have several levers by which we can accelerate growth in the United Grocery Outlet stores. Just a few examples here, 1, expanding the assortment, we think a nice opportunity there. 2, would be to enhance the store experience through investments in to continue to drive traffic and growth in that region. And then I mentioned in my comments, we also believe that there are benefits to introducing the operator model to this we think can help the grocery outlet business. Speaker 200:23:09They have a bigger fresh meat assortment, so something for us to learn from. They, of course, have relationships with regional suppliers, Speaker 500:23:18and then we think we Speaker 200:23:18can take advantage of. And then some other unique operating practices that we look forward to learning from. Another benefit that I mentioned here is the infrastructure that comes with the deal. It provides us infrastructure in an adjacent region to our current East footprint. It's a great entry point for us into the Southeast. Speaker 200:23:40It's great infrastructure to support future growth as we continue to pursue this tremendous white space opportunity that we have. And when you think about the infrastructure that comes with this deal together with Eastern U. S. Covered in terms of infrastructure for supporting future growth. And then lastly, I'd say, from an infrastructure standpoint, a nice benefit here expected as far as opportunistic buying goes and giving us better access to product that in this region, an advantage there for having local presence to land product locally. Speaker 200:24:17And then Charles, do you want to touch on? Yes. Oliver, it's Charles. Just quickly on how we're approaching the we talked to the EBITDA impact from the deal, which we estimate to be roughly $7,000,000 prorated for 2024. And so think of that as really steady state performance of the business as it currently stands. Speaker 200:24:55And then further down the P and L because of the financing with cash, we have factored into our interest expense the impact of really lost interest income into our guidance there. And likewise, in D and A, our mid teens guidance reflects of depreciation and amortization related to United Grocery Outlets. All of that comes together to deliver modest EPS accretion in 2024. Speaker 400:25:26Thank you very much. Best regards. Speaker 300:25:29Thanks. Thanks, Oliver. Operator00:25:32Thank you. The next question we have comes from Christina Kothari of Deutsche Bank. Please go ahead. Speaker 600:25:45Hi, good afternoon. Thank you for taking the question. I just had a question about the Southern states and how you're thinking about the store expansion potential there now that you will have 40 stores in the region. So one, is there a profitability differential? Like so how do you view the profitability potential in the region and how it compares relative to the rest of the Geo network? Speaker 600:26:05Are these included in your 2025 2026 store plans? Just anything that you can share in terms of if you started to look for IOs in the region? And just lastly, you acquired DC, you've talked about that it can support further growth. Just wondering how many stores it can fully support? Thank you. Speaker 200:26:25Yes. Hi, Christina. Thanks for the question. I'll take the first part and then Charles can touch on part of your question as well. Yes, as I mentioned, we are excited about the infrastructure Your grocery outlet operates a multi temperature DC. Speaker 200:26:40And so that we think will serve us well, both, of course, supporting growth in existing stores and then also to your question, as we think about future new store growth. We our immediate focus right now is on integration. So we don't have immediate plans to accelerate sort of growth beyond what the United Grocery Outlet team already had planned. So we'll do the work together with the UGO team to proceed on that integration plan. And then as we look forward, the Southeast region, a lot of potential for growth there. Speaker 200:27:19The existing DC can support growth for the next, call it, several years from a new growth store growth standpoint. And then similar to how we manage across the entire network and across all of our points of distribution center and infrastructure, we'll make the necessary investments in that to support future store growth. But again, love the volume that it provides us, love the scale that it provides us and love the entry point into this region of the country, which will support a lot of future stores. And Christine, it's Charles. Just a bit more color on the store productivity and comparisons versus our Geo store. Speaker 200:28:01So yes, we're excited about the potential here as RJ said. Looking at store productivity, the average sales volumes for the UGO stores about half of our current stores. The basket really similar traffic is really the opportunity for us. So we think there is big opportunity to drive that higher through a combination of expanding the assortment, driving trips there, investments we can make into store CapEx and technology, as well as on the marketing side. In terms of the margin profile, I'd say no real structural margin challenges as we look at the business. Speaker 200:28:40Gross margins a little bit higher than our own stores, really because of mix differences and then more limited everyday assortment that they have. Store expenses, a little bit higher than IOs currently operate. But all of that nets down to a very similar EBITDA profile. And so again, looking ahead, we're excited about what we can do here as we grow these stores to look more like grocery outlet stores in the future. Speaker 600:29:08Thank you so much. Speaker 200:29:10Thank you. Thanks. Speaker 100:29:16Thank you. Our next question is coming from the line of Robbie Ohmes with Bank of America. Please proceed with your question. Speaker 700:29:22Hey, guys. Thanks for taking my questions. One, just a clarification, the sorry, the UGO stores that you're acquiring, are they currently in the IO model? They are not, no. They're coming Are you planning to convert them to the IO model? Speaker 200:29:38We do, yes. We do think, of course, the IO model is super important to our business and important part of our value proposition. We think those benefits will all apply to the Southeast region as well. We are still getting to know the business, the individual stores. We're putting integration plans in place as we speak. Speaker 200:30:00We just announced the deal right a little over a week ago. So we're now working together with the United Grocery Outlet team on those plans. But yes, we do think about introducing the operator model to these stores as well. Speaker 700:30:14And then, RJ, just to again to kind of clarify. So the I think you're going to do 55 stores you're saying for 24 and 15 to 20 of them would sort of be organic, not part of the acquisition. But I think you guys were targeting 10% growth organically before you announced the acquisition, which would be more like 47 organic stores. So did you push stores into the future? Or were you tracking to kind of miss opening the 47 organic stores, but then you made this acquisition? Speaker 700:30:49Like maybe help me understand just the organic Speaker 800:30:53outlook. Sure. Speaker 200:30:55Yes. Well, we've been focused on delivering the 10% annual store growth this year. We've talked about that throughout. And on the past few calls, we've also talked about pursuing this growth across several fronts, right? Organic growth, of course, but also consideration of opportunistic real estate. Speaker 200:31:15We have some new strategic relationships we've built and then these regional acquisition opportunities that we've been considering as well. And all of these activities combined would represent the 10%. As we started to see progress on the United Grocery Outlet acquisition, We were able to manage and moderate some of the other activities with this 10% goal in mind. And keep in mind that real estate is just one part of successfully opening new stores, right? We were super mindful of infrastructure needed to support them. Speaker 200:31:48Of course, there's operator recruiting and ready there's marketing and there are a lot of other things that go into opening stores successfully. And so we were able to make those modifications and we love where we're at. We've got 55 to 60 new store planned this year. Okay, it's a little bit ahead of the 10% growth, but for the work that we've done and the plans that are in place, we're excited about the integration work with the 40 as well as the 15 to 20 that we will open organically. Speaker 700:32:21Great. Thanks so much. Speaker 200:32:23Yes, you bet. Operator00:32:27Thank you. The next question we have comes from Joe Feldman of Telsey Advisory Group. Please go ahead. Speaker 900:32:34Hey guys, thanks for taking the question. I wanted to go back on the private label, if you could share a little more color there. I know it's not coming until the second half, but just curious what if you could dive in a little more on categories, you mentioned NASH, but are there other, I guess, everyday categories that you're looking to fill with these products? And how might that impact the relationship with any of the vendors or suppliers that you have? Thanks. Speaker 200:33:03Yes. Hi, Joe. Yes, we're excited to be getting to the point here where we will be introducing these new items and brands later this year. And as you know, we've been spending a lot of time building capabilities and setting the strategy and the foundation this past year. So exciting for us to be at the point here soon where we'll have these new items being introduced to the store. Speaker 200:33:25These items will be an enhancement to where every day is provide better value for customers, better shopping experience, better baskets and then also better margin for the business. So a lot of things to be excited for there. As I mentioned in my comments, second half of the year is when we'll start introducing these items to the store and we have this goal of 100 new items by the end of the year. The initial focus will be in more commodity categories, where we have a nice opportunity to offer better value and again margin than some of the items that we're currently carrying. And I'll just give you few examples, for where you'll start to see some of these initial items. Speaker 200:34:07Water will be one of the first ones. We've got some nice opportunities and items lined up within the baking category, pasta category and cheese as well. So those are just a few. We've got others, of course, on the list that will be part of the 100 items. And then in addition to some of these commodity categories, also planning to introduce, I'll call them more differentiated items and where NASH is great opportunity here, items that can just further strengthen the treasure hunt experience, can further differentiate us and also serve as another point of differentiation and destination for customers that are shopping our stores. Speaker 200:34:49So a lot there for us to like, still just the beginning. This is going to be a longer journey, but at least excited to be taking this first big step in getting this initial wave of products out to the stores and to our customers. Speaker 900:35:04Great. Thank you and good luck Charles with everything. Thanks. Thank you. Operator00:35:11Thank you, sir. The next question we have comes from Mark Carvin from UBS. Please go ahead. Speaker 1000:35:24Good afternoon. Thanks so much for taking the question. So for the year ahead, you're expecting a gross margin that's north of 31% for the 2nd straight year, even with the systems headwind noticeably above your historical rate. Sounds like trends are expected to improve in 2H as well. Just what are the biggest factors driving this change? Speaker 1000:35:43Thanks. Speaker 200:35:44Yes, Mark, it's Charles. I would say for us, we're just really pleased with the purchasing backdrop that we continue to experience. Yes, the technology implementation has had an impact, but the deal flow we're seeing, the backdrop from a buying perspective feels very good. Beyond that, continuing to see inflation moderate very much as we expected and promotional activity looks to still remain very, very rational. So feel great about the setup for the year. Speaker 200:36:21To your point, it's above our sort of historical margin performance looking back over time. But again, just think some Speaker 300:36:31of those tailwinds will play to our strengths this year. Speaker 1000:36:35Great. And then how is the overall product pipeline shaping up for 2024? Are you guys expecting to see much change in the pace of CPG innovation? Speaker 200:36:45It's good. Yes, we continue to be encouraged by the pipeline of opportunistic product. It continues to be broad based across categories. There was a lot of positive momentum throughout all of last year through the end of the year and that's all carried forward through the Q1 so far. I mean, we think carries forward through this year. Speaker 200:37:06And as far as just some of the trends, we've talked about in the past, forecasting continues to be hard, so that contributes to opportunistic supply. Yes, product innovation continues to be healthy and increase and as suppliers introduce new items and they extend brands and there's brand and label changes and packaging changes. Those are all beneficial from a surplus inventory standpoint. And then just generally changes in assortment and products are favorable. And so there continues to be a lot of dynamic factors to the supply environment. Speaker 200:37:46So all those have us feeling pretty good about what we're seeing currently and what's in front of us here through the rest of the year. Speaker 1000:37:55Great. Thanks so much. Good luck, guys. Speaker 200:37:57Thank you. Operator00:38:00Thank you. The next question we have comes from Cory Connolly of Jefferies. Please go ahead. Speaker 500:38:07Great. Thanks and good afternoon. So I wanted to ask about the UGO acquisition. And as you think about this acquisition versus the one you made about a decade ago in Amelia's, What's when does the IO model make sense? Because I think, RJ or Charles, you had mentioned that the productivity or the sales volumes are about half of the fleet currently. Speaker 500:38:40So when does it make sense to introduce the IO model? Is it a multi quarter or a multi year phasing? And then how do you think about some of the similarities and differences between when you bought Emilia's and how that integrated into the enterprise versus buying UGO today? Speaker 200:39:02Yes, thanks, Corey. Let me I'm going to start with your second question and then I'll let me come back to the first part of your question. The Amelia's acquisition a long time ago, many things have changed in our business since then. I will note some similarities between that acquisition and this one, similar business models, value propositions, shared values for how we operate in both cases. So that's certainly similar. Speaker 200:39:28Both are providing us with infrastructure to support growth in a new region. In the case of Amelia's, it was really an entry point to the East Coast and here now a new region in the East Coast, but both coming with stores and distribution center, local team that will continue operating the business. Those are all very helpful for entry into a new geography. And then this point about providing better access to opportunistic supply, we saw that play out in a really positive way with Emilio's and we expect that to be the same for product that is local within that region in the case of United Grocery Outlet. So a lot of similarities there. Speaker 200:40:08In terms of a lot of differences as well just in terms of store count and other parts of operation, but probably more similarities than not. In terms of timing and integration, again, we are really just starting to work through integration planning together with the United Grocery Outlet team as it hasn't been that long since the deal has been announced. First, I'd say it's a healthy growing business. So our top priority is to maintain current business momentum and be smart about how we begin to integrate it and how we think about prioritizing and sequencing and timing for some of these growth opportunities. And that getting to your question around the operator model, but it would also apply to rebranding and other things that we might do, we want to make sure that we've got a well integrated plan and we're doing and making these changes in the right cadence and at the right pace relative to the ongoing business and making sure we're striking a healthy balance there. Speaker 200:41:09Think about the activation of a lot of these accelerated growth opportunities that are taking place over the next couple of years. There are things that we would want to get in place prior to any rebranding or conversion. Speaker 1000:41:28Some of Speaker 200:41:28the near term opportunities would be around expanding the assortment, some of the investments that we want to make into the stores and you get some of those things in place. And then following that, we would think about sequencing the rebranding and then also some of the opportunities, which will need to be store specific, need to be thoughtful about how we do this as far as introducing the operator model. But that wouldn't happen at least as far as operator opportunities go, wouldn't happen in this 1st year. Think of that as starting really in the 2nd year and then following a period of time similar to Amelia's where we would look to introduce that over time and on a store specific basis. Speaker 500:42:11Got it. And then just a quick follow-up. What was Ring up in 2023? And then within your guide, what's the expectation for ticket or ring increase in 2024? Speaker 200:42:26Yes. So let me start with the ladder there. So as we think about the for our business, the components of comp for the balance of the year, we think that 2024 will continue to see comps driven by traffic and that's going to be offset in part by lower basket. So on the traffic side, yes, food inflation moderating, but in absolute terms remains high. The consumer is feeling pressured from that along with high interest rates and consumer credit. Speaker 200:42:59So we think all of that will be a tailwind for us from a traffic standpoint as we've seen recently. From a basket standpoint, it will be lower due to number 1, the increased trip frequency and the impact that has on baskets and more trips and lower baskets as well as moderating inflation. Within the basket itself, again, the components for our business a little less comparable due to the changing nature of the assortment. Speaker 500:43:30Great. Thank you very much. Speaker 200:43:32Yes. Thanks, Corey. Operator00:43:35Thank you. The next question in here comes from John Heinbockel of Guggenheim Securities. Please go ahead. Speaker 1100:43:50Hey, guys. I wanted to start with, when do you think is it really the end of the Q1 when there is a complete normalization and how the IOs are using the systems and financial impact. Is that fair? And then how do you think about when you try to forecast the recovery in the back half of the year, right, because you lost over 200 basis points of comp and over 100 basis points of gross. I mean, it looks like there's some recovery, but certainly nowhere near a complete recovery. Speaker 200:44:24Yes, yes. John, it's Charles. Let me give you a little bit of context on the impact of technology and probably helpful to just provide you with the impact on Q4 and then how we're thinking about Q1 as well. So in total, think about the EBITDA impact from the technology transition and interruptions is impacting EBITDA by $20,000,000 in the 4th quarter. About half of that comes from the elective IO commission support that we provided to operators. Speaker 200:45:01The balance coming from combination of the impact of the top line and gross margin rate as we've disclosed. In the Q1, those impacts continued, but to a lesser degree. So that would have been a $20,000,000 EBITDA impact in Q4 down to what we estimate and is implied in our guidance of roughly $14,000,000 impact to the Q1. Again, half of that coming from elective IO commission and the balance from sales in March. So continuing to provide that support during the impacted period, but the monthly impact is we're tracking it continues to decline, which feels good to us. Speaker 200:45:47Our current guidance assumes that we resolve the remaining issues in front of us and are back to steady state operations and conclude the elective commission support by Speaker 300:45:58the end of the Q1. Speaker 1100:46:00All right. One quick follow-up then. And the food business is a little bit different, but have you seen any impact from the bad weather and rain in California, is that that would be separate from the 50 basis points if any, but have you seen anything? Speaker 200:46:17Yes. Not significant, nothing to call out for us. Speaker 1100:46:21Okay. Thank you. Speaker 300:46:23Yes. Thanks, John. Operator00:46:25Thank you. Thank you. The next question we have comes from Leah Jordan of Goldman Sachs. Please go ahead. Speaker 1200:46:34Good afternoon. Thank you for taking my question. I just wanted to touch on the 4Q comp a little bit. It looks like the headwind from the systems change came in about 100 basis points better than you initially guided, but less than that flowed through to the total comp. So I guess what surprised you versus your internal expectations for the core business? Speaker 1200:46:55And can you talk about just the dynamics in ticket overall and how volumes trended as the ERP rollout improved? Speaker 200:47:03Yes. So let me start first in terms of overall comp for again the 2.7% for us in the quarter, a bit better than we guided. It was a combination of slightly higher basket. So think about that as being the inventory recovery working through the system implementation was a bit faster than we thought, so that helped basket and supplementing that traffic was a little bit better. In terms of cadence throughout the quarter, Speaker 300:47:35we saw comps improve modestly as we progressed. Speaker 200:47:39More importantly, we're tracking very closely as the prior year comparisons get a little bit noisy now. We're looking at average weekly sales and saw some nice improvement through the Q4 that has continued into the Q1. So feel like the underlying trends in the business are healthy and improving as we again work our way through the system transition. Speaker 1200:48:07Great. Thank you. And then for my follow-up, I just wanted to go back to the gross margin discussion. Just curious if you've assumed any benefit from the private label rollout and any magnitude of that impact? And also on closeout, I guess, what have you assumed within guidance? Speaker 1200:48:22Is it relatively stable throughout the year or any impact on a year over year basis there? And then longer term, should we still think that margins stay relatively flat or has anything structurally changed in the business? Speaker 200:48:36Yes. So no impact from private label, small number of items rolling them out later in the year, so not meaningful to margin. From an opportunistic standpoint, I'd say stable, which is favorable. Those nice trends that I've talked about as they contributed in 2023, we expect to contribute similarly to gross margin in 2024. And then longer term, you'll continue to operate this business for stable margins, always looking to reinvest back into value and driving customer trips, both acquisition and retention and frequency. Speaker 200:49:14And we continue to see some really nice trends there. So we like this balance that we have between the value that we're delivering and of course, the margin that is being delivered to the P and L. So that continues to be the approach. Speaker 1200:49:30Thank you. Speaker 900:49:32Thank you. Operator00:49:36The next question we have comes from Michael Baker of D. A. Davidson. Please go ahead. Speaker 800:49:43Okay. Thanks. So the acquired companies EBITDA margins are about 5.5%, right? Pretty close to what you guys do, maybe a little bit below the 6.4% that you did this year, but on half the sales volumes. So if you can get those sales volumes even close to your core stores, what does that mean about the margins from United Grocery Outlet? Speaker 800:50:10Do they go that much higher? Or do you reinvest that to keep them at about that mid-six percent range? It just seems interesting that their margins are not that far from you on somewhat to us sales. Thanks. Speaker 200:50:22Yes, Mike, it's Charles. Probably, I'd say it's premature at this point given we haven't closed the transaction. The business again last year roughly $160,000,000 in top line, EBITDA about $10,000,000 so really similar EBITDA margin profile to our business. As RJ said, really excited about the long term growth potential for this business, but we do want to be really measured in our approach. And so it's it would just be premature for us to put a number to it. Speaker 200:50:55But the again, the path we're taking is integrate the business, make sure we protect what they have, combine the best of UGO and GEO with the goal of continuing to operate the business really in steady state this year. We'll start to invest again lots of ways we think we can drive growth. We're going to learn a lot that will inform what exactly the P and L looks like in the future. But we do think there's big opportunity for growth and again taking the best of what we do and what UGO does, we're excited about it. Speaker 700:51:33Fair enough. Makes sense. Thank you. Thanks. Operator00:51:39Thank you. The next question, we now, comes from Jeremy Hamblin of Craig Hallum. Please go ahead. Speaker 1300:51:54Thanks and congrats on the strong results. I wanted to come back to the new unit development here and just understand in terms of where you are now in opening these stores that your kind of your capital outlay in doing that versus where it might have been a couple of years ago? And then just thinking about that in context of the investments you're making here in UGO deal. And then the it looks like you I think you had indicated there's an additional $15,000,000 of capital improvements that you're looking to make into the UGO locations. Can you just talk about in terms of returns on capital, are you getting more from kind of your base legacy business? Speaker 1300:52:51And how does that compare to the United deal? Speaker 200:52:57Yes. Jeremy, it's Charles. Let me provide you a little bit of context to how we really thought about the returns for the acquisition. We do think this will generate healthy returns for us over time. And we really looked at it through a few different lenses. Speaker 200:53:13The first was just what's the base business that we're buying. So we think we're paying a fair multiple for the 40 stores that exist today plus the distribution center just based on Speaker 300:53:27the last 12 months performance of the business. Speaker 200:53:30As we said, we think it will be modestly accretive to 2024 earnings. So that feels good. Beyond that, really the next lens was thinking about the opportunity we have to drive growth within the existing store base. So as we said, it will take time, but as we integrate, as we invest in these stores, we think there's meaningful upside just within the 40 stores today to drive accelerated growth, higher productivity, better bottom line that fuels the return. And then lastly, again, is the platform that this gives us to accelerate growth into a new region. Speaker 200:54:10And R. J. Talked about not only the real estate opportunity and total that gives us, but also the impact it can have for us from a buying perspective. So those would all be additive to the way we've thought about the return. So we think this is going to be a great use of capital for us and we love the way that it really supplements and complements what we do from an organic growth perspective. Speaker 1300:54:35Got it. And then just a follow-up there in terms of your existing stores, grocery outlet stores, where does your kind of initial cash investment lie at this point in time? I think a few years ago, it was in the $2,000,000 and change for the store build out inventory preopening expense. We believe that's little bit higher now. Just wanted to see how that stood here as you're looking at FY 'twenty five and 'six of 100 total locations, was kind of the expected outlook related to that. Speaker 200:55:16Yes, you're exactly right. We are seeing higher CapEx costs today than we were really the $2,000,000 number ties back to when we brought the business public in 20 19. And so clearly, it's a different inflationary environment today versus then. So yes, everything labor, materials, equipment had an impact probably in total. We're seeing new store costs about 25% higher than where we were at the time of IPO. Speaker 200:55:47That said, we've got a number of levers that we're actively working on to reduce costs, everything from value engineering, the build out to strategic sourcing and bulk purchasing of equipment. I will say that when you look at the store model and the returns, it's store volume and product profitability that have a much bigger impact on returns relative to CapEx. And so continue to be pleased with the volumes and the profitability we're driving from new stores. And so while the recent vintages are seen as higher construction costs, it is not weighing down our returns in a meaningful way. You can think about it is really having about a 5 point impact on sort of mature year 4 ROICs. Speaker 200:56:34So that's come down from 35%, but still really a healthy roughly at 30% based on current construction costs. Speaker 1300:56:44Great. Thanks for taking questions. Best wishes. Speaker 200:56:48Thank you. Thanks, Aaron. Operator00:56:52Final question we have comes from. Your airtime is exhausted and your call has been terminated. Please load airtime. Apologies. The final question we have comes from Simeon Gutman of Morgan Stanley. Operator00:57:19Please go ahead. Speaker 1400:57:22Hey, everyone. Luckily, our airtime has not expired yet. Speaker 100:57:26I don't know what happened with that one. We were just as appalled as you were. Apologies. Speaker 1400:57:31No worries. I want to go back to the ticket size. I know it's a bit of enigma to look at same SKU inflation for your business. Is there a best guess on what that may be doing to the basket size versus we're putting fewer items in the basket or if there's some trade down happening? And then I'll just put the follow-up in here given the interest of time. Speaker 1400:57:54Charles gave us some numbers on the Q4 and the Q1 commission sharing. I think you've disclosed the second and third order in the filings, but if you can just give us that one more time because there's going to be a pretty meaningful inflection in the composition of the P and L during the year? Thanks. Speaker 200:58:12Yes. Let me just start with assuming the basket. And so you can think about within the basket again, not directly comparable for us. We always talk about our model mutes the impact of inflation on the way up, deflation on the way down, but we are we continue to see slightly higher average unit retails that's being offset by fewer items in the basket. Again, as trip frequency has increased as well as that had a bit of an impact from the system transition. Speaker 200:58:47Just to reiterate the numbers I provided with respect to the system EBITDA impact for Q4 and Q1. I'll give you both numbers, so you have them again. For the Q4 total EBITDA impact roughly $20,000,000 about half of which is IO commission support. So as you look in the Qs and the Ks, you can you'll see that number as it relates to kind of the anomaly in commission trend and the balance again combination of sales impact and gross margin impact. For the Q1, we're seeing the monthly trend come down in terms of the impact. Speaker 200:59:32We expect the full first quarter EBITDA headwind to be roughly $14,000,000 again, half of that being IO commission and sales and margin being the balance. Speaker 1400:59:45Great, thanks. Best of luck to you, Charles. Speaker 900:59:48Thank you. Operator00:59:51Thank you. Ladies and gentlemen, we have reached the end of our question and answer session. And I would like to turn the call back to RJ Sheedy for closing remarks. Please go ahead, sir. Speaker 201:00:02Thanks, everyone, for your time today, and we look forward to talking with you again on future calls. Appreciate it. Take care. Operator01:00:10Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.Read morePowered by