Greetings. And welcome to Grocery Outlet Third Quarter 2023 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. We ask that all callers limit themselves to one question and one follow-up. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Chen, Vice President of Investor Relations. Please proceed.

Good afternoon. And welcome to Grocery Outlet’s call to discuss financial results for the third quarter for the period ending September 30, 2023. Speaking from management on today’s call will be RJ Sheedy, President and Chief Executive Officer; and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live and a recording will be available via telephone playback and on the Investor Relations section of the company’s website. Participants on this call may make forward-looking statements within the meaning of 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 at sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. During today’s call, the company will also reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using each measure may be found in the supplemental financial tables included in this afternoon’s press release and the company’s SEC filings. And with that, I would now like to turn the call over to RJ.

Good afternoon, everyone, and thank you for joining us. We are pleased with our third quarter performance and the underlying trends in our business. We continue to drive industry-leading sales growth due to our differentiated value proposition and we are delivering on our mission of touching lives for the better. Customers are increasingly seeking value in their everyday lives and we provide unbeatable value and access to affordable quality food. Our third quarter sales increased 9%, driven by a 6.4% increase in comparable store sales. Transaction count remained strong in the quarter, increasing 9%, which is consistent with the prior two quarters. Traffic increases continue to be a combination of more new customers in our stores and existing customers shopping with us more frequently. Gross margin was also very strong in the quarter, up 80 basis points to 31.4%. This, together with sales growth, drove a 20% increase in adjusted EBITDA to $68 million. Adjusted EPS grew 24% to $0.31 per diluted share. While pleased with our third quarter performance, we experienced operational disruptions as we transition to upgraded systems. On prior calls, we have discussed our approach and history of investing in modernizing systems to improve capabilities and drive efficiency. We began to implement our most recent enhancements in late August, which include upgrades to product, inventory, financial and reporting platforms. One important component of this upgrade is a new store portal that will provide operators with improved data to make better purchasing, merchandising and marketing decisions. We are excited for the improved functionality, scalability and data analytics that this and other enhancements will provide. The transition to these new systems has resulted in ordering and inventory disruptions that have impacted third quarter and fourth quarter results. We have been partnering closely with our independent operators to minimize the…

Thanks, RJ, and good afternoon, everyone. Our third quarter results reflect the continued momentum we are seeing in our business, which drove strong comparable store sales growth and margin expansion. For the quarter, net sales increased 9.3% to $1 billion, primarily due to a 6.4% increase in comparable store sales and the impact of new stores opened over the past 12 months. Our system upgrades impacted comparable store sales by an estimated 150 basis points as comps were running in the high single digits before the transition. Transaction growth remained strong, increasing 8.6%, slightly offset by a 1.9% decline in our average basket. We opened eight new stores during the quarter, ending with 455 locations. Our new stores are performing well and building in line with our expectations. Third quarter gross margin increased 80 basis points to 31.4% and gross profit increased 12.5% to $315.7 million. Healthy deal flow and a favorable buying environment drove margin expansion and more than offset inventory inefficiencies related to our system transition, which we estimate to have impacted gross margin by approximately 50 basis points. SG&A expense increased 8.7% to $278.1 million compared to the third quarter of 2022. The increase was driven by higher commission payments to IOs, store occupancy costs due to new unit growth and higher incentive compensation expense reflecting our strong performance, partially offset by vendor receivable. Higher commission expense reflects strong gross profit growth, together with support we elected to provide to our IOs in connection with our system upgrades. As a percentage of sales, SG&A decreased by 20 basis points to 27.7%. Net interest expense decreased 11.9% to $4.2 million due to a reduction in long-term debt versus the prior year and higher interest income, partially offset by the impact of higher effective borrowing rates. With respect to…

Operator?

Thank you. [Operator Instructions] Our first question comes from Leah Jordan with Goldman Sachs. Please proceed.

Good afternoon. Thank you for taking my question. I just wanted to start off with a couple of questions around the new platforms you implemented this quarter. What has been the biggest challenge related to the ordering? Is it just learning the new program, is there anything specific about the functionality that surprised you? And then you also said the disruption would be largely behind us by year-end, but how should we think about any impact into the first half of next year, especially any cost that we should think about annualizing? And then also, you mentioned that would bring better data analytics. Just curious, how quickly you think you can implement those learnings or have you any insights to share in just the first few months?

Hi, Leah. I will take the first couple of parts of that question and then I will turn it over to Charles to address your question around impact into 2024. First, just some more information on what I shared in my comments. We did upgrade a number of systems at the end of August, inclusive of product inventory, financial and reporting platforms. These upgrades include replacement of our AS400 system, which is our legacy ERP system with SAP, along with other third-party plus some new proprietary applications for buying in store operations. So that was the enhancement that was implemented back a couple of months ago. It’s the continuation of prior ERP upgrades that we have implemented over the past eight years to 10 years and consistent with the approach that we have talked about in making ongoing investments in modernizing our systems to build foundation for future growth and scalability of the business model. As far as benefits, you asked about data and analytics, we really look forward to the enhancements that these new platforms will provide. They will give us new capabilities for how we manage the business, they will drive efficiencies through better data and analytics that will support us with better decision-making and that will be an improvement, enhancement for both the operator community as well for Grocery Outlet in total. In terms of the challenges and the disruption that we face as we transition to the new systems, we were challenged with inventory visibility and the impact here was on ordering and inventory management in general, and unfortunately, this disruption did have an impact throughout the business and the P&L. And notably, as mentioned in our comments, topline sales were impacted by lighter inventory levels, slightly lower variety. We had some pressure on margin as…

Yeah. Leah, this is Charles. Just a bit more color on cost and sort of the cadence as you think about the quarterly impact going into next year. So as it relates to the third quarter, again, think of this as being one month of impact to the fiscal quarter. And so as RJ mentioned, we felt both the topline and a margin impact in Q3, along with elective commission support. You see the same impacts in the fourth quarter, just to a greater degree as we are feeling the kind of full three-month impact, if you will, in the fourth quarter. We do expect that as we -- over the course of the fourth quarter, all of those impacts moderate and as disappointed as we are with the magnitude of the impact in the fourth quarter, we do expect and believe that it will be largely behind us by the end of the year. And so, our view at this point is, we will enter the new year without any lingering cost impacts or otherwise related to the transition.

Okay. Thank you. That’s very helpful. So for my follow-up, I just wanted to ask about new store growth for next year. I know you are not giving formal guidance yet, but any color around how the pipeline is building, what you are seeing in the construction and permitting environment or how maybe the progress around discussions for potential M&A to get to 10% for next year? Thanks.

Yeah. Yeah. We are feeling good about future store growth opportunities, white space remains massive, you continue to think about that 4,000-plus number across the U.S. So plenty of opportunities out there for us. If I were to go back earlier in the year from prior calls, first goal was to get back to 10% growth rate this year and we are happy to be tracking to this now with eight new stores that we opened in the third quarter and on track for 13 more in the fourth quarter that will get us the net 27 new stores for the year. So tracking well there. Regarding 2024 and the out years as we are actively working the pipeline right now for 2025 and 2026 as well, continue to see great opportunities. And the efforts underway continue to include organic growth, together with consideration of opportunistic real estate lists as well as smaller regional acquisition opportunities. And same is what we have talked about before, we think about all of those activities coming together to represent future store growth. We do try to stay close to that 10% target as we think about the moving pieces here. There are a lot of opportunities, certainly as it relates to dispossessed real estate and lists that are available that we are evaluating. And then more recently from the past call, past several months, opportunities around acquisitions, those are interesting for us to explore and how it might complement the other activities that we have underway. So feeling good about the number of things in the pipeline and we will provide further update more specifically on 2024 store count on our February Q4 call.

Great. Thank you.

Thank you.

Thanks.

Our next question comes from Oliver Chen with TD Cowen. Please proceed.

Hi, RJ and Charles. Regarding your comp guidance, is your expectation that traffic continues to be very positive, offset by average unit retail? What should we think about in terms of average unit retails near- and longer term? And as we appreciate a lot of the good changes on the new store portal. The issues you had, just what gives you confidence that they will be largely behind by end of year? And then a follow-up, as we think about new regions, it sounded like store productivity was in line with your expectations. I would just love your thoughts on your supply chain footprint. You gave more color on how you approach M&A. But that framework would be interesting to hear more about as well? Thank you very much.

Great. Oliver, it’s Charles. Let me tackle the first part of your question, then I will kick it over to RJ. So with respect to comp composition, we are really pleased with the health of the comp that we are driving, as you can see, continues to come from strong transaction growth. Customers clearly responded to the values and treasure hunt and love that we are seeing both increased visits from existing and new customers with high satisfaction. As it relates to the comp headwind as a result of the systems transition, that really did impact ticket. So ring, as you saw, was down a little less than 2% for the quarter, really coming from lower units and that’s both as a result of higher trip frequency. But, yes, lighter inventory levels and variety is a result of the system transition. AUR is still positive, but moderating very much as we expected, as we are lapping higher year-over-year inflation levels. And so, yeah, looking forward, from our perspective, it really is the same basket dynamics that we expect to continue. Just recall, for us, the impact of inflation, of deflation on the way down, it’s more muted because of our buying model. And then that AUR units in the basket dynamic isn’t necessarily directly comparable due to the changing nature of our assortment.

And on the -- your question around the systems upgrades, Oliver, as I mentioned before, we have addressed the bigger issues that we faced earlier on around inventory issue -- around inventory visibility issues, as well as product flow challenges, both into the warehouse and also from the warehouse to the stores. So that progress feels really good. And as a result, we have returned to more, I will call them, more normalized store ordering practices, and then together with that, healthier warehouse and store inventory levels at a really important time. So feeling good about the progress that we have made in support of the holiday shopping period that we are in the middle of right now. We are still adapting to other parts of the new systems. There are a lot of new processes, new functionality that comes with these new systems and then together with that, working our way back to what we would consider to be optimized inventory levels along with how we manage the business and total margin and operations included. Given the progress that we have made and the daily progress that we continue to make, we do feel confident in being able to resolve these outstanding issues to the point where the impact is then largely behind us by the end of the year. And then to your third question around new store performance, feeling good there, continue to see really nice performance from new stores across all geographies. And then I think you were also asking about acquisitions and supply chain footprint. As we continue to grow our stores, whether it’s through organic growth or opportunistic list or perhaps acquisitions, of course, infrastructure is a really important part of supporting that growth and we have always made those investments ahead of the store count that follows or that is part of our longer term growth plan. So it wouldn’t be any different as we think about those opportunities and back to my comments around wanting to center around this 10% annual growth number because of infrastructure investments that we want to make sure that we are growing at a healthy rate.

Thank you. Best regards.

Thanks, Oliver.

Thanks.

[Operator Instructions] Our next question comes from Robby Ohmes with Bank of America. Please proceed.

Oh! Hey. Thanks for taking my question. Is the system -- the technology platform disruptions, does that change the time line for e-commerce initiatives like launching your app, I think, the plan was for 2024?

Yeah. So we -- let me just update you on where we are with the app, and in general, a more personalized approach to marketing. So we did -- just as a reminder, we have been successfully piloting the app in our Washington stores since the end of last year. So it’s been out there in those markets for a while. More recently, this year, we rolled out to Oregon and the East. California and Nevada stores don’t have it yet. We had planned to introduce it by the end of the year, that has been delayed by these system upgrades and some of the things that we are still working through. Having said that, we do plan to introduce the app to these markets very soon. So I think about a Q1 timeframe. So just a little bit delayed there. And then from there, we would do more of a full-on introduction and rollout. It’s been a soft launch to this point, as we have been learning about how it operates and customer experience, which I am pleased to say has been really positive. The customer adoption has been good and the feedback has been positive so far. We are seeing a nice percent of transactions on the app through the app. So that all feels really good despite not having really put any marketing muscle behind it. That’s all in front of us still as an opportunity for 2024.

That’s helpful. And then my follow-up question is, how exactly does commission support work? How do you guys -- how does that work for the IO and how do you determine how much commission support to give them in a situation like this?

Yeah. I will start and then, Charles, you can chime in here. In terms of impact to operators and the commission support, the inventory visibility and ordering challenges that I mentioned, of course, impacted the operator’s ability to manage the flow of product into their stores. Largely, they are pulling product in through the order guide and when these challenges started back in September, beginning of September, that was very difficult for them to do. We have been in very close communication with them throughout and we have been navigating these challenges together. And the partnership that we have with them, we talk a lot about the partnership and the relationship that we have with operators. It’s been a really big part to minimizing the impact that this has had on customers and the business. We are not happy with the magnitude of impact on the business. But overall, the customer experience, there’s not been a huge impact on that, a little bit lighter in inventory, some lower variety accounts, but together with everything the operators have done, we have been able to minimize that impact. We did elect at the outset of the implementation to provide operators with commission support, and the purpose for that was, well, one, in spirit of the partnership that we have with them, and then two, to help minimize the impact of this transition on their commission and income together with the work that we have been doing to minimize the impact on the customer and our P&L.

Yeah.

Anything else, Charles?

No. No. Just to add to that, Robby. As RJ said, it really is a reflection of the spirit of partnership, the relationship we have with IOs. And so we didn’t disclose a specific dollar amount, but it is included, of course, in our SG&A for the third quarter and the estimated impact in the fourth quarter is included in our EBITDA guidance we provided.

Got it. Thanks so much.

Thanks.

Thanks, Robby.

Our next question comes from Krisztina Katai with Deutsche Bank. Please proceed.

Hey, guys. Thanks for the question. So RJ, I just wanted to follow up on the system upgrades. I mean, it does sound like you anticipated some disruption, but then it has actually come in well ahead of that, like, one, is that a fair characterization, and then two, is it fair to say that this doesn’t alter any of the margin structure into next year or the long-term and you will essentially be able to fully recapture all of the margin pressures once you lap the third and the fourth quarters?

The -- yeah, for your first question, that is a fair characterization. We did expect -- this is a big transition from a legacy platform that we have been operating on for the past several decades. So and it’s something that we have been working on for a couple of years now. So we have always known how large it was and complex. We did expect as a result, some disruption, certainly, not to this degree or this magnitude. So I think you characterized it well. And then, in terms of impact looking forward, and I think, similar to the earlier question, we -- as I said, we do the transitional impact to be contained to this year, from what we have already experienced in the third quarter and then largely behind us at the end of the year. So you should think about us reverting back to previous performance and all the things that we have always talked about related to consumer trends, topline sales and how we have managed for both gross margin and bottomline profit.

Got it. Thank you. And just as a follow-up, I had a question on the IO pipeline, especially as you are planning your 2024- and 2025-unit expansion plan. Last quarter, you provided some very helpful statistics on average IO net income. But just the question is, do you have any concern in or any difficulty maybe attracting top talent in future years, especially just thinking if rates stay higher for longer, is that something that you are concerned about?

No. No. We don’t have any concerns about that. There are more than enough potential future operators. It’s a really attractive model. They get to own and operate their own business. They have got the combination of independents together with the support and scale that we provide. They work with family. They have this opportunity to give back unlimited financial upside. We have talked -- we talked on the last call about some of the economics, favorable economics and average operator income. So no, there are a lot of people out there and the leads continue to be really healthy annual leads, we mentioned last time, is around 30,000. And so for us, the work is to make sure that we are finding the best candidates and the right fit, and so we do go through an extensive process and it goes both ways, it needs to be the right fit for them as well. But, yeah, no concerns about the IO pipeline to support future stores.

Great. Thank you so much.

Thank you.

The next question comes from Joe Feldman with Telsey Advisory. Please proceed.

Hi, guys. Thanks for taking the question. I guess just one more on the systems transition. I guess I was kind of curious about the staging of it. You guys are always very methodical, like, even like the app, take your time testing, learning and I was curious as to -- was there a reason behind needing to flip the switch on all those systems at once versus staging it a little bit more?

Well, first, we -- as you know, Joe, over the past 10 years, we have modernized and upgraded many of our enterprise systems, inclusive of a warehouse management system, we were operating on a relatively new point-of-sale system, we have a new HR system. And so the -- my point here is that this wasn’t a full across the enterprise, every single operating system. So we have been more methodical in that regard. As it relates to these current upgrades for what we were replacing, the product platform, inventory, financial and reporting, it did require us to do a much bigger implementation across the functionality that previously existed on the AS400, our legacy enterprise system with, as I mentioned, replacing that with SAP, together with other third-party and some new proprietary systems. And so those -- that functionality all, for the most part, previously was on AS400. So it was a situation where we needed to do a bigger implementation than more piecemeal, I think, than what you are suggesting or asking about.

Got it. Thank you for explaining that. I appreciate that. And then just a quick follow-up, with some of the new customers that you are continuing to see, I was just curious how the profile is any different maybe from the existing customers and how sticky they are, like are you retaining them?

Yeah. The profile is pretty similar. I’d say the one notable difference, consistent with my comments on prior calls is that, we are seeing particular strength with middle income and higher income customers. Within the new customers that we are seeing, there are lower income customers there as well, we are over-indexing on middle to higher income where the need for value is more pronounced for that group or has become more pronounced throughout the year as inflation has carried on and so that would be the one notable difference. But overall, the profile is generally representative of our current customer mix as we are quite broad, as you know. And then in terms of stickiness, we don’t track specific customers. So I can’t speak to first trip, second trip and then the stickiness. We do know, however, that satisfaction levels are really high. This is from customer surveys that we do. We know that they like the savings and the products and the assortment that they are seeing in the store and we also know that their intent to shop more in the future is high as well. And we see that for customers that have shopped us more recently and also true for customers that have been shopping us for a long time. So that to us is a good indication of stickiness and then a future, I will call it, new base for loyal customers as we look out into 2024 and beyond.

Got it. That’s great. Thanks for that and good luck this quarter. Thank you.

Thank you.

[Operator Instructions] Our next question comes from John Heinbockel with Guggenheim Securities. Please proceed.

Hey, guys. I am going to try to do two quick here, two topics. Number one, the impact on comp in the quarter on ticket, was that in stock? And then related to that, is that now -- has the customer experience now begun to improve, let’s say, October and early November over September, because I would imagine it’s important, right, when you think about the holidays to have the experience getting a lot better heading into Thanksgiving. So that’s number one. And then number two, maybe just talk about your thoughts on brand -- clustering and brand awareness on the East Coast. As you talked about Ohio, I know you are opening in Pittsburgh and you think about the Western part of the territory versus Jersey and Baltimore. More important to cluster or do you just want to get to, again, good locations, get to the 70 locations on the East Coast so the procurement kicks in?

Hey, John. It’s Charles. Let me tackle the first part with respect to your question around ticket and the basket. Yeah, as I mentioned, really the comp headwind we saw in the third quarter, it impacted ticket, and specifically, it was lower units. So we are not having the normal sort of levels of inventory in stocks and variety as a result of the system transition was really the headwind there and would expect that continues to be the driver of the headwind in the fourth quarter. As I mentioned, a bigger comp impact because you have got the full three months, but do anticipate that that improves over the balance of the fourth quarter.

And that’s really to the second part of your question. The customer experience has improved where we were a little bit lighter in inventory and variety impacting the basket. That has since improved quite a bit. And so still a little bit to go, but we feel really good about the inventory levels and what’s represented in the store now and so the experience is even better, and as you know, an important time of the year for us. And then, as far as clustering goes, yeah, that is our approach. We do try to cluster as best we can. Of course, you have real estate availability and timing that you can’t do it exactly to how you might draw it up from a brand awareness and support standpoint. But we think pretty close within the geographies that we are looking at. We have our first store in Western Pennsylvania recently opened. So that will carry over now to Ohio, just across the border for our first store and so very close markets there. And then we are building the brand awareness, whether it’s in Maryland or New Jersey, as we continue to infill there and so while these are different markets, still trying to stay more concentrated rather than opening a store in Florida or opening a store in Texas or where have to be really, really spread far apart. So we do try to follow that clustering strategy as part of our real estate growth strategy.

All right. Thank you.

Thanks, John.

Thank you.

The next question comes from Mark Carden with UBS. Please proceed.

Good afternoon. Thanks so much for taking my questions. So you guys talked about strength continuing in the closeout market. How is the product pipeline shaping up relative to what you have seen in the past few quarters and then for how long would you expect the CPG innovation-related opportunities remain elevated going forward?

The pipeline continues to be really strong, Mark. It has been the case throughout the year. I’d say consistent where we are, well, third quarter and then where we are in the fourth quarter here, consistent with the strength that we have seen throughout the year, meaning it’s broad across categories, it’s broad across suppliers, there continues to be a lot of positive momentum in terms of the breadth and the depth of the lists that we are seeing. And you asked about innovation. Innovation is one of several trends that continue to benefit surplus supply in our business. First, I’d say, forecasting continues to be really hard. That’s been true throughout. I think it continues to be a challenge for suppliers and any time there are these imbalances that yield surplus inventory. Innovation, as you noted, that has increased new items, new brand extensions, brand label changes, as consumer preferences or changes, innovation goes along with that. I see that continuing well in front of us and so that’s a positive trend for us. And then just changes in the assortment more generally, there’s been a lot of that and anticipate that to continue as well. So no reason for us to think, we certainly haven’t seen any signs of that slowing down and we expect that strength to continue into next year.

Great. Thanks so much. Good luck.

Thanks, Mark.

The next question comes from Corey Tarlowe with Jefferies. Please proceed.

Great. Thanks. I was wondering if you talk a little bit about your price gaps relative to the competition? So in recent months, I think, some of your competitors have gotten a little bit more aggressive on pricing. Have you noticed as a result and a need to adjust your prices accordingly, and if so, how do those price gaps compared to what they have been in the past?

The price gaps are very healthy. We always are managing value. We look at it a lot of different ways and that’s both for everyday pricing and promotional pricing. We have seen a little bit of a tick up in promotional activities. Nothing that concerns us. We have been at this business for a long time in all types of promotional environments and our value continues to show a really nice spread and it’s the reason why we have seen such healthy growth this year. We maintain the basket savings, and the target there is 40% relative to conventional grocers. That puts us at around a 20% basket savings to the big discounters in our markets. And at a time like this, when inflation is really high for food and then for everything else, consumers are finding us as the place that offers the best value and access to affordable food compared to anyone else out there. So we will continue to keep a close eye on that. As the promotional environment changes, we will adjust accordingly. No concerns with a slight increase there and feeling really good about the value that we are delivering to customers and the trends that it’s driving.

Great. Thank you very much. Best of luck.

Thank you.

The next question comes from Michael Baker with D.A. Davidson. Please proceed.

Okay. Thanks. I am curious about the, what would your comp guidance have been with, so I guess your comp guidance would have been 500 basis points or 300 basis points better without this, I am sorry, it would have been about 5%. So still a little bit of a slowdown from what you would have been at about 8% without this issue. Why the slowdown? Is that just sort of being conservative? You guys always seem to guide conservatively or is there another reason why even adjusting the systems issue back, the comps would slow?

Yeah. Mike, I think, when you do the math and look at some of the stack comps, you would see once you adjust for the system impact, you are going to see pretty steady performance as it relates to the guide and so it really is more of a reflection of just lapping higher numbers from prior year, both with respect to increases in traffic that we were driving last year, as well as just higher inflation levels impacting the basket.

Okay. That makes sense. And if I could ask sort of a follow-up, I guess, to that. The -- it seemed like, correct me if I am wrong, but we sort of backed into your guidance -- back of the second quarter, you gave back half guidance and then you gave some color on the third quarter. So you could back into the fourth quarter and it seemed like you were planning on something close to about 2, 2.5 and that was before the systems issue. Now if you back out the systems issue, it seems like you are planning out something closer to 5. So, I guess, my question is without the systems issue, would your fourth quarter outlook have been better than it was previously? In other words, is the underlying business actually even better than you had thought, excluding the systems issue?

Yeah. Again, just to clarify there, Mike. So we have not previously commented on fourth quarter comps. Again, we provide kind of a range for the full year and the current quarter commentary, if you will. So I can’t reconcile the numbers you are speaking to other than to say for us, again, as you normalize for the system transition impact, we are feeling really good about the underlying health of the business as it relates to comp and particularly the traffic that we are driving into the stores as customers are really responding to the values we are offering and everyone continues, while inflation is moderating, absolute prices remain really high, and so consumers are seeking us out.

Yeah. Understood. But understanding you didn’t give fourth quarter guidance in the past, I understand that, but you gave full year guidance. We knew the first half and you gave third quarter guidance. So I can back into you have implied, if you will, fourth quarter outlook. I guess that’s what I was referring to. But fair enough...

Yeah. We could provide a full year range, but I get your point.

Yeah. Okay. Appreciate the color. Thank you.

Thanks.

Thank you.

The next question comes from Simeon Gutman with Morgan Stanley. Please proceed.

Hey, guys. It’s Michael Kessler on for Simeon. Thanks for taking us. My one question, just looking at Q4 related to a prior question, the Q4 outlook, it looks like it’s implying about 100 basis points of potentially lower margin lease versus the consensus setup and where we were thinking. As far as the kind of the recapture potential for next year, the fact that it could be mostly resolved, does that kind of mean that we should be seeing some sort of like relatively comparable bounce back next year as we move into 2024 or is there also some sort of component of higher run rate costs associated with the new systems that kind of just speak to the evolution of your systems and the business as it scales?

Yeah. Michael, it’s Charles. I’d say, it’s premature for us to provide specific guidance. I think RJ’s reference was with respect to the fact that we don’t expect to see any lingering margin impacts going into next year. But, again, at this stage, we will stick with our current cadence of providing fiscal year guidance on the February call. But, again, in terms of our orientation, we are feeling great about the underlying health of the business, really looking forward to next year. Again, value is resonating with customers, the buying environment is strong and so we know we will be well positioned for whatever the backdrop exactly is for fiscal 2024 and we will provide all that color on the next call.

Okay. Thank you.

The next question comes from Jeremy Hamblin with Craig-Hallum. Please proceed.

Thanks. Sorry, one more follow-up here on commission support. Just in terms of dollars and cents, the commission support, is that going to be higher, I would assume, in Q4, because of the bigger impact to comps than the total value in Q3? And then, secondly, if we kind of back out the gross margin impact here, you have obviously had other strong year on comps, but it looks like your -- just your structural gross margin maybe is a little bit higher than what it had been pre-pandemic. But just wanted to see if you could comment on that and any particular driver of that or is that just quality buying environment and still a little bit of inflationary pricing offset by costs coming down a little bit?

Sure. So as it relates to the incremental commission support, yes, in the fourth quarter, we do expect that it will be a larger impact than the third quarter, again, for the same reasons that we are seeing a larger impact to both comp and gross margin with the additional months in the fourth quarter. That again is all reflected in the fourth quarter guidance that we provided. As it relates to sort of the normalized margin for 2023. Yes, we feel, again, it really is a reflection a variety of things. It is a favorable buying environment. The team continues to do a great job and we continue to see great deals across the assortment. So, again, premature for us to say exactly what the environment will look like in the next year, but feel great about the positioning as we enter fiscal 2024.

Great. Thanks for taking the questions. Best of luck.

Thank you.

Thank you. At this time, I would like to turn the floor back over to RJ Sheedy for closing comments.

Thanks everyone for joining us today. Appreciate your support and look forward to updating you on our next call. Have a great rest of the day. Thank you.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.