Greetings, and welcome to the Grocery Outlet's Third Quarter 2022 Earnings Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Arvind Bhatia, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us on today's call to discuss Grocery Outlet's third quarter 2022 financial results. Joining me on today's call are Grocery Outlet's Chief Executive Officer, Eric Lindberg; President, RJ Sheedy; and Chief Financial Officer, Charles Bracher. Following our prepared remarks, we will open the call for questions. This conference call is being webcast live and a recording will be available via telephone playback for approximately two weeks. It will also be archived in the Investor Relations section of our website. Participants on this call will make forward-looking statements, including our outlook for fiscal 2022 and future performance. These forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release as well as in our periodic reports we file with the SEC, all of which may be found on our website at investors.groceryoutlet.com or on sec.gov. We undertake no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. During our call, we will also reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release and our SEC filings and the Investors tab for our website. With that, it is my pleasure to turn the call over to Eric.

Thanks, Arvind. Good afternoon, everyone, and thank you for joining us. Before we jump into a discussion of our strong third quarter results, I'd like to comment on the leadership transition we announced this afternoon. As you may have seen, I plan to move to the role of chairman of the Board and RJ will become President and Chief Executive Officer effective January 1st. This announcement is a culmination of careful and thoughtful succession planning with the Board to ensure a seamless transition of the CEO role. RJ joined the company in early 2012 and has held key leadership positions in the area of strategy, purchasing and planning, marketing and operations, and has served as President since 2019. When RJ joined us, the business was roughly $1 billion in sales and over 170 stores. Over the past 10 years, RJ has played an integral role in both building and executing our strategic vision as we have tripled top line and grown to more than 430 locations. RJ and I have worked closely for many years and he is more than ready to take this next step. His leadership style exemplifies our culture and values. He is passionate about the business and his collaborative long-term approach resonates with and inspires our team. I am confident that there is no one better to lead Grocery Outlet into the next chapter of growth than RJ. I look forward to working closely with him and with the executive team in my future role as Chairman and I am immensely grateful for the opportunity to have led such a remarkable group of people. While I will move away from day-to-day, I will continue to be invested both emotionally and financially in Grocery Outlet's success as Chairman of the Board. As part of this transition, I…

Thanks Eric. I am grateful and honored to be assuming the role of president and CEO as well as joining the Board of Directors. I want to first say thank you to Eric for his contributions and commitment to Grocery Outlet over the past three decades. His leadership and vision have inspired us all. It's been a privilege to work alongside him and I look forward to our continued partnership as we transition into our new roles. I joined Grocery Outlet because of its mission and model and incredible people and culture. We provide access to affordable quality food and we save customers money to live better lives. We reduce food waste through our supplier partnerships and opportunistic sourcing. We provide opportunities for independent operators and their employees as well as our team members and we together with our operators, give back to the communities in which we live and operate. As we grow and reach new customers, so does our impact. I'm so excited and humbled to be a part of this effort working in partnership with our operators and our amazing team. Our business fundamentals remain healthy and we are seeing several positive consumer trends. Traffic and spending from our core customers are up indicating stronger retention with an expanding share of wallet. We are also gaining new customers as shoppers increasingly seek out value. In addition, overall satisfaction among both our core and tertiary customers remain strong. And lastly, awareness of an intent to shop Grocery Outlet over the next 12 months have increased. We believe our positive consumer and top line trends are the result of discipline. Focus on our three primary comp growth drivers. Number one, providing our customers with the deepest value in a unique treasure hunt assortment of quality products. Number two, supporting…

Thanks, RJ, and good afternoon everyone. I will begin with a discussion of our third quarter results, followed by comments regarding the fourth quarter and our revised guidance for the fiscal year. We delivered strong third quarter results, which exceeded plan on both the top and bottom lines. Comparable store sales accelerated to 15.4% driven by higher traffic and ticket. Our comp store sales growth resulted from a 7.9% increase in transaction count and 6.9% higher ring. Strong comp and new store performance drove 19.4% growth in net sales to $918.2 million. During the third quarter, we opened six new stores ending with 431 locations. Third quarter gross profits increased 18.4% to $280.6 million. We were pleased with our third quarter gross margin performance of 30.6%, which was in line with expectations. Headwinds related to product and supply chain costs persist, but our purchasing and planning team continues to do a fantastic job delivering a compelling product assortment to customers at deep value along with healthy margins. Turning to expenses, third quarter SG&A increased 18.7% to $227.5 million compared to the third quarter of last year. The increase reflected $21.6 million in higher store related expenses and $14.2 million in increased corporate related costs. Store related expenses were driven by higher commission payments to IOs, reflecting strong gross profit growth as well as higher store occupancy costs due to new store expansion. Corporate related expenses increased mostly due to higher incentive compensation reflecting stronger financial performance versus the prior year. As a percentage of sales SG&A decreased 10 basis points as leveraged on store costs was largely offset by higher incentive compensation expense. D&A increased 10.9% to $19.4 million and share based compensation was $9.1 million, reflecting the impact of grants made in the past 12 months, as well as…

Thank you, Charles. [Operator Instructions] The first question we have is from Robby Ohmes from Bank of America. Apologies, the first question we have is from Oliver Chen from Cowen and Company.

Hi everybody. Congrats, Eric and RJ, great quarter as well. As we think ahead to the store growth pipeline, you called out some puts and takes in terms of what you're seeing with encouraging availability, yet also lots of supply chain considerations. What are your thoughts for how the availability and the supply chain environment looks for store growth as we look to next year as well? And then I would love thoughts on independent operators and the temporary commission adjustment program as well as rising interest rates. How have those interplayed with what you're seeing in terms of the health of the IOs and the environment we're in now? Thank you.

Yes. Thanks Oliver for the question. So I'll start on that. Yes, I would say the pipeline is really healthy. We are seeing plenty of stores, you know look out the next 24 months, that pipeline is healthy. So the good news is that we're not really seeing an issue of real estate availability. I would say that the issue does remain that the delays for timing for a host of issues that I detailed on the prepared remarks, it is real. It doesn't seem to be letting up. We are still working towards and pretty confident of that goal of 10% unit growth. We look at it as a temporary sort of bump in the road. We're 400 stores. We've got decades of growth towards sort of filling out sort of our goals. No reason we can't exist in every market. We've talked about that a lot. We're in nine states today. But the construction challenges they persist and it's everything from labor availability to materials to things like just getting power connected to stores. So I think we're not alone in stating that it's been a challenge. But we're going to work through it and we'll get back to that 10%. I feel really confident in that. And this will be a blip that we're dealing with in these last couple years. Relative to IOs, look I'd say they are, they're doing really well. Our strong results are benefiting the IO. They're participating in the upside gross profit growth 18% that gets split with the IOs. Traffic is growing. In-stock is getting healthier. Variety is really strong. It's as healthy as it's been. And we and they are super focused on driving sales and healthy margins. So relative to your question, our job is really to make sure the operators can grow through all of their years of being an operator, particularly the early years of starting a new business. It's not easy. Some ramp fast, some ramp slow. So our job is to make sure we're supporting them and that's the program you referenced. So that's alive and well, and we're doing everything we can to make sure those stores get up to run rate volumes.

Thank you. Best regards.

Thank you. The next question we have is from Krisztina Katai from Deutsche Bank.

Hi, good afternoon. Congratulations on a very strong quarter and congrats RJ and Eric on the, well, RJ on the promotion. So I wanted to ask about a few of your initiatives that you mentioned on in your prepared remarks. One of them is on marketing and just really focusing on delivering a consistent value message and then two, just on SKU expansion and data analytics. So can you just maybe tell us where you are seeing some of the benefits in terms of sales lift and how you're thinking about the opportunity as you head into 2023?

Yes, sure. Thanks Krisztina. I'll take that. This is RJ. So just to start with marketing, for us it is about providing a consistent message of value and quality across the assortment. As we referenced in the comments, inventory is really strong. Health of opportunistic is really strong. We have great representation of our everyday items, so I just feel really good about the health of the inventory. And then as a result what we're able to message to consumers at this time of the year, holiday shopping, important time for them and the food that they're buying and particularly so right now looking for value and we're able to offer that. So as a reminder from a marketing standpoint Grocery Outlet, centralized marketing, a lot of tools and information that we push out complimented by operators, they continue to be a strong voice in their communities. And then that partnership really sets us apart from the rest we think in terms of value and local and the personalization that the operators bring to it. We're really excited about our personalization app, personalization app, so that will allow us to be even more targeted and specific to consumers. We're just on the verge here of going live in our Washington test stores and that will help us speak more specifically to what customers are buying the items that they like, the items that we know they like that maybe they haven't found yet. And so really look forward to use of that and then the data that it provides to be even more effective with our marketing efforts.

That's great. Thank you so much and enjoy your holidays.

Thanks, you too.

The next question we have is from Simeon Gutman from Morgan Stanley.

Hey, guys. Good afternoon everyone, Simeon Gutman. So first maybe more of a technical modeling question, the flow through in Q3 and then implied in Q4. Can you talk about, I guess what if anything's changing at the margins? It looks a little bit, I guess, lighter on the incremental sales and I know we got some of the components, but curious if there's something high level we should be thinking about?

Yes, Simeon, it's Charles. Let me just talk to sort of the, our expectations with respect to Q4 specific to gross margin and SG&A. And as you've heard in my prepared remarks, we expect Q4 gross margins of 30.3%, which is very typical in terms of our fourth quarter seasonal holiday mix impact. So that's, again, down 30 bps sequentially from the third quarter reflecting that holiday mix. Also reflecting the fact that at the time when customers are really looking for savings, we are being especially sharp with respect to our seasonal assortment and pricing and expect to lead the market in terms of value. And so as you compare against last year from a gross margin perspective, if you recall Q4 last year, a bit of an anomaly for us at 30.9%, but overall feel really good about how we're managing margin with respect to the cost inflation environment we're dealing with. As it relates to SG&A looking at the fourth quarter, we are expecting to see a bit more SG&A leverage in Q4 compared to Q3. I'd say overall the same fundamental SG&A drivers we're seeing, which is we are getting fixed cost leverage on the higher comps that we're delivering, that's being partially offset by higher incentive compensation, but specific to Q4 also expecting that commission expense is a leverage driver. Again, back to the higher Q4 gross margin we saw last year. So of course that's getting shared 50-50 with IOs, so really is that year-over-year Q4 margin rate differential, which will drive a little bit more SG&A leverage in Q4.

Okay, thanks Charles. And maybe the quick follow up on Eric, just on timing, I apologize if I missed unprepared remarks. Just stepping down the continuity with the IOs and then RJ, what does your bench look like in the next six to 12 months? Does it change at all from what it looks like today?

Yes Simeon, Eric. I'll start and then RJ can follow up. We're starting the transition immediately. It will be effective first day of January, 2023. In terms of plan to have continuity with IOs, part of what I'll be doing is spending some time each month out operationally in the stores, keeping the relationship with IOs, attending the IO meeting which we'll have in February, the supplier conference in March, and just being present at sort of bigger company meetings and maintaining relationships. But biggest thing I'll be doing will be supporting RJ making this a seamless transition and just making sure that goes well.

Hey, Simeon, in terms of team and what might change, I'd say we have a great team. So, no changes there. Naturally some reporting changes as Eric moves to his new role, but otherwise we've got a great group leading this company. And then I'd comment just more in general looking forward, I've been with the business for quite a while now, have played a leading role in setting our strategy and growth initiatives, so no changes to strategy. That will remain consistent as will the list of growth opportunities initiatives that we've been talking about for a while now. Continue to focus on our comp growth drivers of providing the deepest value, the unique treasure hunt, supporting operators and delivering the WOW! experience in the stores, driving customer awareness and engagement to marketing, everything around new stores. So you'll continue to hear a lot of consistency from us and our efforts to continue to grow this business.

Thank you.

Thank you. The next question we have is from Robby Ohmes from Bank of America.

Hey guys, can you hear me?

Yes. Yes, we can hear you fine.

Hey Robby. Excellent.

Thanks and RJ congrats and Eric, congrats as well. So my first question is, the new customers that you are seeing anything different about them demographically that you can speak to? And where do you think they're coming from?

Yes, so I'll take that one, Robbie. Yes, so we are very encouraged by what we're seeing with customers. More new customers, also just note again an increase in trip frequency, overall spend is up satisfaction levels are high, intent to shop high. So feel really, really good about that. In terms of demographics, I'd say continue to see a healthy mix. And the demographic range is quite broad, so we appeal to a very broad set of consumers. I will note that we have seen on average a slightly higher income customer shopping and within our newer customers shopping at Grocery Outlet suggest to us a trade down behavioral change there for those customers that are feeling the pinch of inflation. We do continue to see strength with lower income customers as well. We're more of a necessity item and so customers are looking for value in the things that they need to buy. And then just one other final note as we ask customers what are the most important shopping criteria and the things that draw them to Grocery Outlet? We've seen a higher percentage of customers ranking low prices and unexpectedly great deals within that top set of things that they're looking for and why they're choosing to shop Gross Outlet. So all really consistent with what we're seeing out in the market and some of those trends around inflation and consumers looking to save money.

Thanks, that's helpful. And then my second question is maybe a little bit of a intermediate term question. What would it take your same-store sales at a really high rate, what kind of environment or what dynamics would you guys need to see the adjusted EBITDA margin instead of sort of flat lining around six and a half, heading back over 7 again? What, when could we see something like that happen and what combination of things would you guys need to see that happen?

Yes, Robbie, it's Charles. Let me tackle that one. I would say, we feel great about the health of the business and how we're positioned heading into next year. Still unclear to us exactly what the backdrop will be presented with from an inflationary standpoint and potential recession here. But for us, we continue to orient around the long-term algorithm that we've always talked about and been consistent, so that low single digit comp 10% unit growth and stable margins. So as you think about why stable margins, EBITDA margins over time, for us it is about sharing those gross margin gains 50-50 with the IOs, and then importantly reinvesting in infrastructure and in everything that we need to do to support future growth. So we feel great about how things are going and kind of where we're positioned heading into the year. But we continue to think about that long-term algorithm is the one that's right for the business over the long-term.

Got it. Thank you.

Thanks, Robby, sure.

The next question we have is from Leah Jordan from Goldman Sachs.

Hi, good afternoon. I just wanted to follow up on the growth margin discussion. What is the current view of your buying environment and how has that evolved from the strong level that you mentioned last quarter? And then the other pieces around kind of promotions, what is the current view of the promotional environment and what are your expectations going into next year?

Hi, Leah. Yes, I'll hit the first part and then I'll pass it over to Eric to talk about promotions. In terms of supply continued to be encouraged by the pipeline of deals that we're seeing. It's very broad based. It's across all categories. I'd say the environment is just generally very positive right now from a buying standpoint. We have seen momentum grow throughout the year and continues into the quarter that we're in right now, so feel really good about that. And as a result, inventory is healthy and we're delivering customers great value for their holiday shop at a time when they need it most. In terms of what we're seeing from suppliers, I'd mentioned a few things. One, forecasting challenges persist due to inconsistency and demand and supply chain challenges. So that yields opportunities for us. Product innovation is healthy. We are seeing new items, brand extensions, brand and label changes, so again, a good thing for our business. A lot of additional capacity has come online, and this in many cases has been mismatched with demands and back to inconsistency. So we've seen some product and opportunities from that. And then in general, I'd say suppliers are just very actively adjusting products and assortments. So whether it's to meet the ongoing changes in consumer needs and behaviors or in some cases throughout this year, inflation related with packaging, sizes, supply availability, and other changes. So all of these things very favorable for us and ultimately our customers. So just feeling really good about opportunistic supply.

Yes. Hey, Leah, just briefly on the second part of your question, what are we seeing in terms of competition, promotional environment? It's pretty consistent. I wouldn't say it's changed a lot since our answer in Q2, and that is that the promotional environment remains really stable. I'd say the traditional retailers are being pretty rational as they think about pricing. A lot are still increasing because of all the cost pressure. They're being targeted on some of their specific offering discounts. Obviously we've all seen the non-food retailers sort of moving through heavy excess inventories, but relative to folks that we compare against and compete against, we've seen promotions being a lot more selective. I would say probably not back to the levels that we saw in 2019. And just keep in mind, this model is super flexible, enables us to be very nimble and react to changes in that promotional environment as we see fit. But who knows when that changes. I don't have a crystal ball into next year, but for now it's a very stable environment.

Great. Thank you.

Thank you. [Operator Instructions] The next question we have is from Jeremy Hamblin from Craig-Hallum Capital Group.

Thanks for taking the question and congrats to both of you. I had two questions here. The first is, in terms of unit development, as we look ahead to next year, fair to assume that some of these headwinds continue into next year and maybe not quite back to that 10% growth algorithm? And then secondly, I wanted to just understand a little bit more, it's been several quarters now that the mid-Atlantic region has been outperforming and any additional color that you can share on why you think that's the case and is it less competition? Is there something about why the brand is resonating so well in that market? Thanks.

Yes, Jeremy, Eric here. You heard me answer Oliver's questions. I won't repeat all of that. I would just say yes, fair to say that a lot of the timing issues that we've detailed remain in place. Are they going to get better? Yes, we think they are. When we're not exactly sure. So we're going to continue to adapt keep signing up stores, putting through real estate and make sure we've got a really good slate of stores to open in the next 24 months. The east is getting really good traction. We will be near 30 stores, 30 plus stores at the end of the year. We've put a lot into, you've heard us in the past years talk about building the scale and the ability to open these stores and market and recruit IOs. We've done that a lot in the last couple of years. We feel like that foundation is set. The brand is starting to get nice awareness, something that's approaching the awareness numbers we have out in the west, so that feels good. We've put additional marketing into the market which has been received very well. What we're hearing back from the IOs through their customers and through surveys is, the values are appreciated. The stores are incredibly relevant. They love the model. They love the brands, particularly the NOSH and particularly produce. So these are all the things that we thought would occur once you start to get a little bit more scale, a little bit more brand awareness. And we'd see that continuing as we add additional stores there and expand some of the geography where we're currently serving, so it's all good news.

Great. Thanks, best wishes, guys.

Thank you.

Next question we have is from John Heinbockel from Guggenheim.

Hey, guys, I wanted to start on the East Coast question. Where do you think you need to get to, to "have scale" and an ability to more significantly expand product assortment? And where would you, and anything about items added, right? So you've added 700 items over the last year. How many items would you like to add on the East Coast, right? Maybe relative to that as you move to scale, right? Maybe get to, I don't know, 50 or 60 locations or more?

Yes. Hey, John. 70 stores feels like scale, the beginning of scale for us, quickly approaching that with the additions. I'll let RJ talk a little bit about sort of the desired variety in the East.

Yes, when we talk about SKU expansion, John, it is not specific to the west. So those item counts for the most part available chain-wide. Of course we do have regional differences and certainly different assortments as it relates to opportunistic product in the warehouse. But to Eric's point, as we open more stores it does help from an inventory standpoint, both in terms of localized assortment volume for everyday items, and then for opportunistic as well, and just being able to move more product through the system. I wouldn't say there's a specific number or end state as it relates to variety. That's in all stores that's a number that we've seen continue to grow and for the better. We've been able to maximize space within the stores, increase inventory turns, that's been done through both system enhancements and just the way that we manage inventory. And so, excited for all of the store growth ahead of us in the east, and how it helps us from a merchandising and buying standpoint.

May be secondly, right, when you think about your transition, what will you spend more time on, right, than you have been? What do you spend less on, right? And I guess, how do you tackle the CEO role in a way that is different if at all, than Eric's?

Yes. So just in terms of where Eric has been more focused, I'd point to operator relationships, real estate, he has certainly been heavily involved in company vision, infrastructure. So I'd point to those areas as where I've certainly been involved, but would look for my level of attention and focus to increase stepping into the CEO seat. As you know, John, I've had direct responsibility for purchasing, planning, supply chain, marketing operations, technology, lots of different operating parts of the business together with strategy. And, Eric and I and the rest of the team manage this business in strong partnership, collaboration and I feel really good about continuity within the team overall. To the second part of your question, I think similar answer to the one that I gave previously. No major changes to strategy, no major changes to initiatives. We do follow, we have, we will continue to follow a disciplined annual strategic planning process. It's always a balance of near-term and long-term view, so none of that changes. And as we move forward here, we'll continue to keep you updated on future initiatives and the evolution of the business.

Thank you.

Thank you.

Thanks, John.

The next question we have is from Joel Kelsey [ph] from Chelsea Advisory [ph].

Yes. Hey, guys. Thanks for taking the question. Why don't I ask on the digital side, I know it's still emerging and small, but I'm wondering if you're seeing any patterns with the way customers are interacting with you, those that are using digital are there certain products they are trending towards or certain maybe basket size or are they higher end consumers, lower end consumers? Like any kind of trends you could talk about with regard to the digital side of things?

Yes. Yes, I'd say more specifically, the difference that we're seeing is just the makeup of the customer base. So we will talk about the incrementality of e-commerce and what it's offered to us so far, it's still early, again, just rolled out with, well chain-wide with Instacart earlier this year, and then more recently DoorDash, and we're just on the verge here with Uber. But it is a more convenience based customer. So that would be the biggest difference that I would point to between the three platform partners that we're working with. They each have slightly different use cases, customer groups, reasons and occasions for which they're shopping online. So we see some slight differences there. Overall, we do see a bigger basket in terms of what they're shopping I'd say pretty broad representation of our assortment and so they're finding all items gravitating, of course to value and the deals that we're providing and those are across all categories. So nothing so specific in terms of the basket itself or the mix. But overall pleased, it's been a nice rollout for us, seamless for the operators, incremental sales and profit dollars for both Grocery Outlet and IOs and we'll keep you posted on future enhancements. We've been focused on rolling out with these three partners. And then certainly plenty of opportunity as it relates to different forms of e-commerce, delivery, pickup, and other enhancements that we look to make from an online merchandising and ultimately customer experience.

That's great. Thank you for that. And then just another one on with regards to inflation I was kind of curious if you could share how much it may be contributed to sales or asked another way how you're thinking about it going forward as well? You know, just especially heading into next year and what's kind of, I assume it's baked into the guidance, but just kind of what level it might be baked into? Thanks.

Yes. We're not going to provide a whole lot of guidance on next year until Q4. I'd say look, this model is one that I would describe is really resilient, works well in a whole bunch of different macro environment backdrops. Just looking back over history, you can see some really stable comps and margins throughout the year. So that to us as it -- this flexibility is definitely an advantage. Particular on next year and what we're thinking about inflation we're really expecting disinflation. Prices have gone up quickly and stayed. I think they'll be a little bit sticky and people will not repeal those and pull them back as quickly. So I think the pricing will be a little bit more sticky. We're not expecting deflation, but we would expect to see some disinflation and then look, no crystal ball on recession. That's tied into that question as well. We just know that when customers are pressed hard on purchasing power, Grocery Outlet shines. Every situation is a little bit different, but the last time we had a pretty strong recession, 2008, 2009, we had some really nice numbers. So we will just continue to focus on delivering value to the customers and take what we get relative to the backdrop.

Sounds great. Sounds great. Thanks. Good luck with the quarter and congrats to you guys, to RJ especially. Thanks.

Thanks Bob.

Thank you. The next question we have is from Mark Carden from UBS.

Good afternoon. Thanks so much for taking my questions. First, congratulations to both of you, Eric and RJ on the transition and nice quarter. When you look at your traffic trajectory, how does it compare with what you saw in the early days of the 2008, 2009 recession? Has the acceleration come at a similar pace? Is trade down coming any faster this time around? And what tools do you think will be most impactful in holding onto your new shoppers longer-term?

I'd say it's really different. The business is much more mature now. Just the offering, marketing, our brand awareness today versus 10, 11, 12 years ago, I'd say the offering, the variety, the freshness, the NOSH, some of the categories we've been talking about for a few years are much more developed. Just the store count from 120 or 130 back then to 430 now, the brand awareness, we've repurposed the brand once or twice since then. So I would say similar patterns in terms of new customers coming in. Perhaps you'd call it trade down, people moving from regular retail, traditional down into a grocery aisle looking for value that's pretty similar. But it's just, it's a different business with a lot of the same themes. It's just, I'd rather have the model we have today than the one we had in 2008 or 2009 because we're just so much more advanced in what we offer and how we take care of the customer.

Fair enough. And then as a quick follow up, can you talk through what you saw from a monthly cadence perspective on your comp? Presumably you saw a pretty big spike mid-quarter. Where, where do you think the biggest source of upside was relatively to what you might have expected three months back?

Yes, Mark it's Charles. It definitely would be the acceleration we saw was related to traffic. As you think about the Q2 to Q3 trends, really pleased with the overall health of comp and how balanced it was. And you could slice and dice it across the vintage of the stores, geography, departments. It was very healthy. In terms of the cadence over the quarter, it was also quite consistent. So I just feel really good about the momentum that we're seeing in the business and that nice uptick in traffic that we saw from Q2 to Q3. So like where we stand in Q4 here still cognizant of the fact that it is a fluid environment. There's a lot here to play out in terms of exactly where inflation goes, and the impact of fed raising rates and consumer confidence. So, all those things were being a bit more prudent, as you probably saw with respect to our Q4, three year stacked comp expectations, but again, really happy with the health of the comp base.

Thanks so much. Good luck.

Thank you.

Thank you. The next question we have is from Mike Baker from D.A. Davidson.

Okay. Two real quick because it is getting close here to the hour. One, any thoughts, any color on units per transaction or we know that the ticket was up, but was it all inflation driven or you see more units transaction? Really what I'm getting at is anything that tells us that the consumer's trading down or buying fewer items per trip or anything along those lines that gives us insight into the consumer?

Yes. Mike, it's Charles. I'd say overall, if you look at the basket, very similar trends in Q3 relative to Q2. So to your point, it's coming from higher AURs. Units are down slightly versus last year. Again we're comparing against a COVID elevated base and higher levels of trip consolidation last year. But that overall, so the aggregate unit number are holding steady for the past three quarters and again, slightly ahead of where it was pre-pandemic. So basket feels really good to us.

Okay. That's helpful. And then thinking about 2023 and the comments you just made about prices being sticky, there are some costs that might come down. First of all, presumably you're lapping some big incentive comp this year and transportation supply chain costs, maybe they don't go down, but they don't go up as much. It's unclear exactly what happens there. But I guess that the point is, it's an opportunity for some margin enhancement next year if prices are sticky and you don't have the same level of cost increases that we're seeing in 2022 on a couple of different lines?

Yes, yes, perhaps again, we don't want to get in front of ourselves and actually provide specific guidance right now. We'll do that in our normal cadence on the Q4 call. But yes, when you look at this year, we are of course seeing better comp growth, but that's coming with slightly lower gross margins and EBITDA margins as we feel the impact that cost inflation as well as higher incentive compensation as we've talked about on the SG&A line. So as we think about next year and beyond back to the long-term algorithm would expect that we see those things normalize over time. It's just not a matter of if, but when.

Well, if I could squeeze in one more follow up then. So, the margins are down a little bit versus pre-pandemic, they were always, EBITDA was 6.6, 6.7, right in that range, they are down a little bit because of some of those costs. When you say, So when you say stable, is it stable from a new base, which we've been, this year and last year around 6.3 or is it stable versus where it was pre-pandemic?

We, we would say that we are confident that we can get back to those pre-inflation margins over time. So you think about 2019 as a benchmark of a 30.8 gross margin and 6.6% EBITDA margins, we're fully confident that we'll get back to that -- to those levels over time.

Very helpful. I appreciate the color. Thank you.

Sure.

Thank you. The next question we have is from Corey Tarlowe from Jefferies.

Hi, good afternoon. Thanks for taking my question and congrats Eric and RJ on the new roles.

Thank you.

Thanks.

So firstly, I was wondering if you could just talk about labor availability, what that looks like at present as you look to open your new stores throughout the remainder of this year?

Yes. So if you're talking about IO availability, really strong continued momentum on the recruiting side and the training side, lots of people interested, those numbers from last year are up this year. We think it's purely the opportunity of people telling people and then the recruiting efforts. In terms of labor in the stores, it's still challenging, still expensive. I would say it's not as tight as it was this time last year, or even at the beginning of this year, but I would not say from our trips and travels out with the stores and our regional conference we just did that we're out of the woods yet on labor. We would anticipate that getting a little bit easier next year, but it's been slow to recover for the operators.

Got it. And then Charles, could you just talk a little bit more about inventory and how you're expecting that to evolve throughout the remainder of this year?

Yes, we feel really good about the health of inventory here in the fourth quarter. So again, up 4% versus Q2, up more significantly year-over-year. Again, keep in mind that with our model, those inventory changes are not necessarily linear. So comparing versus LY is a bit skewed for a variety of reasons. But we feel great about where we're positioned here for the fourth quarter and just the health across categories and items. And again, back to the strength of the holiday assortment that we're putting forth and would expect it as we exit the year to come down modestly from where we entered the quarter.

Great. Thank you very much and best of luck.

Thank you.

Thanks Corey.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Eric Lindberg for closing comments. Please go ahead, sir.

Thanks operator. Thanks everyone for joining us. Thanks for your time. I look forward to catching up with you shortly, and we'll talk to you soon. Bye-Bye.

Thank you, sir. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.