Greetings, and welcome to the Grocery Outlet First Quarter 2024 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, Christine Chen, VP of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Grocery Outlet call to discuss financial results for the first quarter for the period ending March 30, 2024. Speaking from management on today's call will be RJ Sheedy, President and Chief Executive Officer; and Lindsay Gray, Interim Chief Financial Officer and SVP of Accounting. Following prepared remarks from RJ and Lindsay, 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 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. 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.

Good afternoon, everyone, and thank you for joining us. We will be speaking to you today about our business results, progress, and ongoing impact of our systems transition, strategic growth initiatives, and outlook for 2024. Our sales and customer growth remained strong during the first quarter as we continued to deliver unbeatable value with an exciting treasure hunt experience. We're delivering continued increases in traffic and sales and our business fundamentals are healthy. Our low first quarter margins were the result of both expected and unexpected impacts from our systems transition. We've made good progress since our last call resolving known issues and have ended the IO commission support program as planned. However, our results were incrementally impacted by unforeseen systems transition costs that surfaced at the end of the quarter. We're all very disappointed with our poor Q1 results and we are committed to getting these system impacts behind us very soon. Let me start with business performance and then comment on the systems transition. Our first quarter sales exceeded our expectations, increasing 7.4%, driven by a 3.9% increase in comparable store sales which accelerated throughout the quarter. Transaction count growth remains strong at 7%. Food inflation remains high and we continue to deliver a compelling assortment of high-quality WOW! items that are driving traffic and sales growth. We opened six new stores in the quarter and recent vintage performance continues to ramp well and in line with expectations. First quarter gross margin of 29.3% was 110 basis points below our expectations and includes approximately 210 basis points of impact from our systems transition issues. In late August, we upgraded our product inventory, financial and reporting platforms. This transition has disrupted our business operationally and financially over the past eight months, as we discussed on our last two calls.…

Thanks, RJ, and good afternoon, everyone. Our first quarter results reflect strong top line sales growth driven by a 7% increase in comp transactions. The integration of our new systems led to higher than anticipated costs, which impacted our margins leading to results below our expectations. Net sales increased 7.4% to $1.04 billion due to a 3.9% increase in comparable store sales. Comp transaction growth of 7% was partially offset by a 2.9% decline in our average basket. We opened six new stores during the quarter, ending with 474 locations. We remain pleased with the performance of new stores and store openings are tracking ahead of schedule. Our first quarter gross profit increased 1.1% to $303.9 million. Our gross margin rate of 29.3% was impacted by our system integration, which we estimate was approximately 210 basis points in the quarter, 110 basis points higher than we originally expected, as RJ previously discussed. SG&A expense increased 13.3% to $303.4 million compared to the first quarter of 2023. This includes $12.4 million from commission support that we elected to provide as a result of our system upgrades. It also includes increased depreciation and amortization expense and higher store occupancy costs related to new store growth. Net interest expense decreased 46.3% to $3.2 million, driven by a reduction in net borrowings versus the prior year. We recognized a tax benefit of $1.6 million during the quarter, a result of pretax book loss combined with excess tax benefits related to the exercise of stock options. GAAP net loss for the first quarter was $1 million or $0.01 per share. Adjusted EBITDA was $39.4 million for the quarter and our adjusted EBITDA margin was 3.8% of sales. Adjusted net income was $8.8 million for the quarter, or $0.09 per diluted share. Turning to our balance…

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

Hi, good evening, everybody. My first question is just maybe, RJ, can you walk us through why this couldn't kind of happen again in the second quarter? Why we -- as you progress through this quarter, you couldn't have variances and kind of have this happen similar to what happened in the first quarter?

Sure. Yes. Hi, Robbie. First, let me say again that we're disappointed that we're still experiencing these issues. And to this extent, it was a big upgrade with a lot of learnings along the way and work continues. That said, we do continue to make good progress cleaning up many of the data integration issues we've been dealing with. We've been learning new processes as mentioned, and important to note that we've been bringing back critical reporting and visibility which led to some of the impact in the miss versus guidance in the first quarter. More recently, Ramesh has brought great leadership to the team. He's helping us be better organized with our cleanup efforts and approach. It's given us much better timelines and knowledge of the work remaining with the right plan to pursue it. So we feel good about the progress there. We've also been increasing third-party support where needed, as well as hiring more talent to the team. We've been adding our own SAP capabilities which has reduced our reliance on consultants in this area. All of this to just give us better control together with the progress that we've made. We're in a better place now than we were a couple of months ago. So feel good about that and feel like we are and we have our arms around where we are and still what's in front of us. I'll also mention just too in terms of the work that we're focused on right now, three primary areas. One is continuing to bring more operating data and metrics back online to help us manage the business. The second one is optimizing the system for improved functionality. And then the third area is improving the system for process efficiencies. And so again, while we're disappointed by…

Thanks. That's helpful. And my follow-up, RJ, I think you mentioned IO interest kind of being at all-time highs. Why is that? Is it something in the environment? And there is been no sort of loss of confidence related to the systems disruptions on the IO pipeline?

Speaking first to just where IOs are relative to the systems, I'd say, they're very encouraged to have store-level reporting back, which has enabled them to manage the business as they did before. We're all happy that the improvements have allowed us to come off of the protection program. So that's good for them and for us. They're starting to see the benefits of the system. Now that we've stabilized a lot of it compared to what we had before, that's a positive. And then, as we do continue to work to bring back data visibility along with functionality, along with efficiencies as well, they'll enjoy even more of those benefits. So all of that is feeling really good to them. We've been in close communication with them throughout, and the partnership is strong. I think it's made the partnership even stronger, what we've been through and worked through together. So that's where they are in terms of the systems. In terms of just interest in the business and on the recruiting side and where the pipeline stands, I'd say, it's the same things that have always attracted people to this model. They have the opportunity to own and operate their own business. Many of them are working together side-by-side with family, as the partnership is, and oftentimes extended family, helping them, working in the store. The independence is a big part of why they come here. They get to order their own product, they get to merchandise it how they see fit. They cater to the needs of their local customer. They love that. They love the opportunity to give back. It's a big part of our mission and resonates strongly with operators coming in. And of course, there's financial upside as well. There's no cap to the commission. And as they grow their sales and manage margin in their stores, they get to enjoy in that, along with the benefit that it has to the business. And so all of those things they understand, and those that have been part of the recruiting process have understood some of the system challenges. They view it similarly to us and existing operators as temporary in nature. And we are getting past it, and they think about the long-term growth potential of this business and all of the attributes that come with being an operator, which continue to be really attractive.

Got it. Thanks so much.

Thanks, Robbie.

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

Hi. Good afternoon, and thanks for taking the question. So I wanted to follow up on the system conversion issues that you experienced and just ask if in particular what is still negatively impacting you as we sit here in the second quarter. And RJ, I think you said the Grocery Outlet will return to more normalized operations. I think the word said was very soon. So how best to think about the timeline for this to be fully behind us? And do you still think the gross margin can reach 31% or higher once these issues are behind us?

Yes. Let me speak first to the residual impact cost in the second quarter and then I'll talk to the second part or the longer-term view part of your question. We did -- we fixed store-level reporting, March, already talked about that, which has allowed us to end the commission protection program going forward. Important to know that store margins and IO commissions are determined when we take physical inventory counts in the store. Typically this happens three to four times per year for the average store. And this residual cost that we are talking about in the second quarter relates to certain elements of margin and commission, which can only be calculated after a full inventory period has been completed. Those counts are happening now and they will be complete for all stores in June. So this is what is reflected in the 100 basis points lower margin that we talked about as residual cost in the second quarter. It also relates to, within our guidance for slightly higher commission in SG&A for the commission that also will be paid in the second quarter. What's important to note about this is that it's time-bound specific to the physical inventory count schedules. This is not a situation where we need to fix something that's still not working in the system and we're in the middle of that work that's been fixed. It's just residual and according to the physical counts and the way that margin and commission is calculated. So that's the explanation for the ongoing cost in Q2 as we quantified that. In terms of our belief or conviction in the underlying health of gross margin, I will tell you that the product margin pressure that we've been experiencing is entirely due to the system transition issues and more specifically data visibility and more difficulty managing margin as a result. That's both for us and for the operators. We both play an important role in managing with margin. We've quantified it specific to what we've discussed, these different issues that we've been experiencing it, and the underlying health of margin is there. We're continuing to see great lists of deals. Opportunistic supply continues to be really healthy. We're managing everyday upside of the business really well. And so the underlying health and structure of the margin is there. And once we get past this impact in the second quarter, we do believe that we will revert back and you'll see the more normalized margins for the business as we get into the third quarter and fourth quarter and that's reflected in guidance for the year. You can look at or do the math on the margin in the second half and you'll see the expectation there is to revert back to healthier levels.

Got it. And just as a follow-up also I guess regarding gross margins, but you mentioned that $0.99 only is liquidating and they were certainly a large part of the secondary sourcing market. Just love to get your thoughts on how you think about the benefits that Grocery Outlet can see to further capitalize on the favorable buying environment. And do you foresee any potential gross margin benefits as a result of this in the medium to long term? Thank you.

Thanks, Krisztina. In regards to $0.99 only, yes we do, and we have already started to see some benefit there. As I mentioned in my comments, we've seen product come our way that was previously directed to them, and that we do expect that to be ongoing as they were a notable participant in the space for opportunistic product. And so we're excited about helping suppliers with the opportunities there, where they previously would have sold to $0.99 only. So that helps us of course with offering great value to customers as it relates to opportunistic product. We enjoy healthy margins there and helps the assortment overall. So we're excited for that. I'll also mention just while we're on this topic, we see some potential real estate opportunities here as well. So we are looking at some of the real estate that's come available from the $0.99 only situation to see if there is any there that can fit our real estate portfolio. We're mindful of the growth rate next year and other components that go into growth that we've talked about in the past. But we do want to take advantage of good real estate opportunities as they're available there, as they're going through that process. So we look forward to anything that might come there. And then last, I'd say, it's a good opportunity to attract customers to Grocery Outlet. We do have some overlap with them. It's a different shop, but we have overlap with them. And certainly so in markets where stores are in close proximity, and so we've been doing some work to target those customers to help them look to save money with us, where previously they may have been shopping with $0.99 only, potentially store operators as well, store employees for operators. And so we think there are a number of areas where we could benefit from those stores closing.

Thank you. Best of luck.

Thank you.

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

What happened with respect to customer impact? And how have you been managing that process as well? And also, I'd love your thoughts on pricing in terms of a private label opportunity, our pricing trends that you're seeing, we're seeing a lot of bifurcation across those sectors with pricing at other retailers as well. Thank you.

Hi, Oliver, thanks for the questions. In terms of customer impact, it was really minimal in the first quarter, came in below our expectations. We talked before about 50 basis points in potential impact to Q1 comps. We think it came in well below that. Inventory has been healthy, variety is healthy. As far as the ongoing impacts of the systems go, really not impacting the customer experience. I mentioned that it's supporting daily operations well. And so we don't see it really in the customer experience or in the comps that were part of our Q1 results. So we feel good about that. To your question around pricing and value, always paying close attention to value. We're managing pricing accordingly to what competitors are doing. The promotional environment remains very rational. It's increased a little bit, but nothing that we haven't seen before we're offering great value. We see it in results from customer surveys and satisfaction levels. We're certainly seeing it in traffic trends and overall top line growth. So we feel good about that. And then you mentioned private label, we're really excited about introducing private label in the third quarter of this year. As I've mentioned before, private label will be an enhancement to our everyday assortment in a couple of different ways. One is value. Always think about value first. These items will provide better value for customers relative to items that they may be replacing. And that is the case with some of them. Other items that we're introducing are new adds to the assortment and better value certainly to what they might be paying elsewhere. And we also think about better margin for the business, that's for operators, and for grocery outlets. We share that with commissions. And so we look forward to introducing a few items, we talked about categories, grocery, and beverage. We're starting there and then getting into some additional categories, dairy, household, and baking. The value that these items provide. And then lastly, I'd say, another point of differentiation, many of these items, well, they'll all be unique to us, but many of them will be more unique items, whether in the NOSH space, different formulations, new ads to the shop that create another reason for customers to shop our stores beyond just the value that they provide.

Thank you. A follow-up, we know you've made a lot of progress on the mobile app. Just any thoughts there in terms of engagement and transactions? And the other question we've been getting is around labor costs. And given that we're in a pretty tight labor market as well. Are there any things we should know in terms of modeling that and/or independent operators and their margins? Thank you.

We successfully completed the rollout to all remaining stores that was back in the middle of the second quarter. It included all of California and Nevada that was the group that was remaining. So that all went well. We're really pleased with customer adoption and feedback so far. I mentioned over 400,000 downloads and 6% of sales on track with what we expected, and we expect it to continue to grow from here. So the engagement is really strong. And then, of course, as customers continue to use the app on their shopping trips, it will give us valuable data and it will increase engagement further still as we'll be able to message more specifically to who they are and the items that they're buying. So we're off and running there and look forward to all the benefits that we'll provide. And then as far as continued cost pressures go with operators, yes, wages operating costs continue. Operators continue to be very resilient and resourceful about how they're managing this. We manage it in partnership with them. We have been growing the top line. We've had some margin pressures here recently. We've protected operators from that. So their income has grown year-over-year. And then we continue to prioritize work to help them be more efficient and help them grow their profit, along with how we manage and think about profit growth on our P&L.

Thank you. Best regards.

Thanks, Oliver.

Once again, as a reminder, we ask that you ask one question. Our next question comes from Mark Carden with UBS. Please proceed.

Good afternoon. Thanks so much for taking the questions. So digging into the store growth acceleration a bit. This is the first time we've seen an intra-year tick-up in quite a while. Is it being driven by fewer building headwinds? Are you seeing more opportunistic locations than you might have originally anticipated? Just assuming it's a bit early for the $0.99-only locations. So just want to dig in a bit more on what drove that decision.

Hi, Mark. For the -- yes, for this year, think of it as just management of the process. We've been able to get stores opened a little bit earlier than anticipated. On that schedule, the construction team is operating really well. We've talked a lot over the past couple of years about some of the challenges and the adjustments that we've made. And so I'd say that those things are operating smoothly for how we've adapted the resources that we brought in and how we're managing the process overall. That in parallel with the ongoing work of recruiting and training our operators to be ready, that's important too, to make sure that they're ready to take those stores. And so because we are managing the process as well as we are, we're taking advantage of some of those opportunities and have therefore then increased guidance for the year. It doesn't reflect the opportunities that are in front of us. You know, certainly not 99. You know, you think about that as a 2025 opportunity, and we continue to look at other lists as well. And so we love where we're at in terms of the pipeline, certainly what's happening this year, pipeline for next year, '26, '27, coming together really well. And again, for us, just trying to be mindful of the rate of growth and make sure that we've got all the right pieces in place. We're investing in the infrastructure ahead of growth so that when we do open these stores, we open them successfully.

Great. Thanks so much. I'll pass it along.

Thanks, Mark.

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

Great. Thank you. RJ, it sounded like in response to a prior question that it was your expectation that you're returning to a more normalized margin in the back half. Along with that, is it also the expectation that these systems implementation issues should be resolved by the end of the second quarter, or is it that the financial impact from these issues is resolved yet the implementation is still likely to be ongoing? Is there any way to dimensionalize the timing and duration of the remaining tasks that you have left, and as well as the impact of those issues?

Yes, we do believe that the large and notable impact will be in the second quarter for what's remaining. We -- there may be some spillover into the second half of the year. As I mentioned, we are trying to be prudent in our guidance as we think about the progression here from Q2 into Q3 and into Q4. But think about what's meaningful from a P&L standpoint as being really contained for the most part to the second quarter. The work will continue ongoing, and I say that, we'll always be enhancing these systems. We will be working beyond the second quarter in terms of operating data visibility, functionality, efficiencies, the things that I talked about previously. And so that will certainly continue through the rest of the year to make them even better and to capture these benefits for part of why we implemented these new systems to begin with. But not -- when you think about the impact on the P&L, as I mentioned, we got this residual cost of the commission program that's time-bound. So we'll be through that at the end of the second quarter. And then there may be some minimal impacts into the second half of the year. None of which, that's all reflected in our guidance. None of which would change any of that in terms of what we know for where we are and the work that's ahead of us still.

Thank you. It's very helpful. I just had one follow-up on the comp. Is there any way to dimensionalize traffic versus ticket for what you saw in the quarter?

Hi, Corey. This is Lindsay. So traffic versus ticket, so traffic was up 7%, ring was down 2.9% year-over-year due to lower units. But we're really pleased that comps continue to be driven by these strong transactions. Absolute inflation remains high and so the customers are still prioritizing value. So we're seeing both new and existing customer increases with pretty high satisfaction, minimal system impact to comps. So really encouraged by the strong transactions, yes, ring was down 2.9% due to lower units, both from higher trip frequency and moderating inflation.

Great. Thank you so much.

Thanks, Corey.

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

Yes. Hi, good afternoon, guys. Thanks for taking the question. I wanted to ask about SNAP and how that's impacted your business if at all. If I recall, it's around 10% of sales. And I know you have a lot of exposure to California, and I think they were the last state to just stop with some of the benefits, that -- and how you're thinking about it for this year ahead? Like, will that have an impact on spending for you guys? Thanks.

Yes. Hi, Joe. This is Lindsay. I'll take the question. So, yes, so we did see an impact from EBT in Q1, but consistent with our expectations. So we've seen that EBT reduction, but it really is just a migration to other tender types. EBT for us is really just a tender type. Our EBT today is back to about pre-COVID levels. So our model, we believe it just really much appeals to that value-minded customer. So even as we've seen the EBT benefits drop, it does add cumulative pressure to these consumers to stretch their dollars. So we don't see them leaving our stores, it's really just a change out of their tender type. So some of it does have an immediate impact on traffic. Some of it takes time, but we really feel good looking at all the trips we're driving into the store when you look at our traffic numbers.

Got it. Thank you, guys. Good luck with the quarter.

Thanks, Joe.

Thank you.

The next question comes from John Heinbockel with Guggenheim. Please proceed.

Hi, RJ. Two -- one quick one, and then one more -- one strategic. The impact on the physicals or the way that plays in here is what that relates to a product that is out of code, right? And I guess, has to be thrown away as opposed to shrink. I don't know if you're seeing anything with shrink. And then my strategic question, right, is when you think about the role of private brand, right, so 100 items initially, I don't know if you have an idea where that, where your ultimate target is. And what do you think the interplay of that is with the treasure hunt? If you keep the items separate, there is no impact. And I guess you'll endeavor to do that. Make sure there is minimal overlap between the two.

Hi, John. On the physical inventories, you think about margin as it relates to store inventory management. So that's really what gets reflected in the physical inventories that we take. Yes, there is shrink, but also in this case, prior to having the reporting fixed, which was in March, you have some other components to margin markdowns, price adjustments, throwaways, those things as well that show up there. So that's what would be reflected in this residual cost. And then go forward, we're on the normal, everything's recording as properly within the system, and commissions are either full or the regular 50-50 split. And then for your question on private brands and treasure hunt, we think it can enhance the treasure hunt. So certainly there are some items within our planned private-label assortment that will be more commodity-based. They'll be in the stores all the time, and like I said, they'll offer better value. And in some cases, it'll be, well, really in all cases, high-quality items. And so there'll be -- certainly be an enhancement there. And then the treasure hunt aspect of our business is a really important one. We do intend to have a treasure hunt component to the private label assortment. There is lots of different ways to do that. Seasonal products certainly lend themselves to that, being in and out of those items as the seasons come and go. And then just on a regular everyday basis, we look forward to having the treasure hunt element be a part of the assortment there as well, where we are pulsing in and out of items and creating that newness and excitement within private label, the same that exists within the branded side from an opportunistic standpoint.

Thank you.

Thanks, John.

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

Thanks for taking the questions. Sorry, but I want to come back to the commission support and what the range of impact is in Q2. I wasn't sure if that was the $12.4 million is what you're embedded in your guidance. That's part one. Part two is just the cumulative effect over the course now of four quarters, which I think sounds like it's more than $50 million. But wanted to see if you could quantify the cumulative effect of kind of the systems update issues. And then lastly, related to this is, if you're looking for physicals inventories, it's kind of completing the process here and adjustments. Is there a risk that, when that comes back by the end of June, that it could be worse than what you had embedded here in your guidance?

Yes. Hi, Jeremy. This is Lindsay, I can take those questions. So first, your question on commission support, so happy to quantify those. So the impact overall for Q1 for us, for these system issues was approximately $24 million, and about half of that is commission support for our operators. That's the $12.4 million that I mentioned --we mentioned earlier. For Q2 for our guide, we're estimating about a $9 million impact from the systems transitions overall. And about, again half of that will be this kind of trailing off of commission support. Now that margin protection has ended, now that operator protection has ended. Overall, and we've quantified this over the last few quarters, overall, the impact that the systems transition has had on us is about $65 million. And about half of that is the operator commission support.

And the physical inventories?

Yep. And then the physical inventory question that you had. So we track these daily as they're taking place and we're monitoring the results every day. And so our forecast for the commission support in Q2, we feel is pretty good estimate just because we're tracking these daily and we're keeping on top of the results we're seeing coming in from the stores. So we feel pretty good about the numbers that we baked into the Q2 guide.

Got it. Thanks for the color. Best wishes.

Thank you.

Thanks, Jeremy.

The next question comes from Leah Jordan with Goldman Sachs. Please proceed.

I just wanted to see if you could help us understand why your comp guide is going up but your net sales guide is staying the same. Is this just a knock-on impact from the UGO stores or is there any change in your expectation for new store performance?

Hi Leah, this is Lindsay. So it's truly just due to rounding, nothing that's changed within our guidance.

Okay, that's helpful. Thank you. And then I just wanted to go back to the IO pipeline discussion. It sounds like things are tracking for your new store growth to get back to 10% in '25. That'll be a big step up on new stores, plus you have the transition of the UGO stores as well. So just a bigger step up in IO needs next year. And given the timeline with the training that they need, have all of the IOs been selected at this point, where are you in that process? And any color on the background and quality of those would be helpful as well.

Yes. Hi Leah, we know they've not all been selected, so think about the lead time for IO recruiting and training as being about a year. It can flex, be shorter in some cases, and -- or longer in other cases. And that we manage that in parallel with the real estate pipeline. So we think about and why we think about and we always manage to good healthy growth rate. We're mindful of not growing too fast in large part because of the operator pipeline and making sure we get qualified people in there running the stores. We're in a great position to do that for next year. We continue to recruit for the stores that we plan to open, for any that we might take advantage opportunistically that adds to the current pipeline. We've got the lead time in front of us still to do that. In terms of quality, I think your question was for incoming operators. It's a big part of both the recruiting and training process. Really important that we're recruiting high-quality operators to come in and that we set them up for success. We have a very rigorous multistep process from a recruiting standpoint. We need to make sure it's the right fit for them and certainly the right fit for us. And then there's another important part of the process when they come in and they're in training, not everyone makes it through training. There is a healthy percentage of attrition that happens in training and that's important to make sure, again that the fit is right and that the capabilities are there for anything that maybe wasn't identified in the recruiting process. And so that gets us to then when they are ready to apply for this store. I'd say the third filter, an important one, is that we select the right fit for the store, for the right community -- for the community that they're going into, and for what the operator is looking for, certainly in terms of where to live and what type of store to operate, because we do have stores across all different types of markets.

Very helpful. Thank you.

Thanks, Leah.

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

Hi, everyone. Also a follow-up on the gross margin and the systems issues. The prior quarters' gross margin went up a bunch, and now there is this give back. You were still going through integration and systems issues while the gross went up. What was discovered or new in this period that was different from the prior? And then besides obviously the cost of inventory being higher, was there any other costs that are being run through gross margin, that are run through gross margin, that are not explicit product cost? There is other labor that's tied to it.

Hi, Simeon. For the first quarter, this additional 110 basis point impact, we identified this on the back end of the quarter. It was quantified during catch-up invoice processing and margin reconciliation. So we had some delayed payment processes due to the new systems. But really the main cause was limited data visibility for how we manage and forecast margin. It was a bigger issue in the first quarter than it was in the fourth quarter because of the amount of time that we've been managing the business with limited data. Think about last year as we implemented the new systems, we had inventory already in the system, in the warehouse, and the stores. We had POs written with product landing that carried forward really into -- well into the fourth quarter and resulted in the margin that we reported. We're a data-driven organization. Margin visibility is especially important for an opportunistic model like ours. We're negotiating costs, we're setting prices, we're managing gross margin daily, and we're constantly balancing retails with value margin, along with the volume decisions that we make, how much we choose to buy relative to other items that are in the assortment. And all that comes back to how we negotiate costs with our suppliers. So it's a very dynamic margin management approach that we take. It's a unique characteristic of our model. It's a strength, quite frankly. It's enabled us to deliver consistently steady and strong margins. Throughout our entire history, we've discussed it as one of the ways we uniquely manage healthy margin during inflationary time periods. And so, therefore, data and tools are critical for how dynamic the decision-making is, both for us and then for operators. As I mentioned, they use tools and data as well to manage margin in a very dynamic way at the store level. And so what's happened here is we got off track. In the first quarter, we've had limited visibility until just recently, and so we lost track of where margin was trending. The good news is that we were able to bring that back once we identified exactly where we were and for the work that we've been doing. That happened several weeks ago and the recovery has already begun. So we've been able to, and I'm talking down at the sub-class, class department level for how we manage margins, able to strike that right balance between value and margin for the business with the right information on a weekly basis, where it hasn't been there or it's been more limited as far as those operating metrics go to help us make those decisions. And again, buying the fundamentals are healthy. So this is really about getting back to better margin management or the normal margin management that we've always had in this business. And with the increased visibility that we brought online recently, we've been able to do that.

If I -- can I just sneak a follow-up related to that. Please go ahead.

Sorry, I was just going to answer the second part of your question, just other costs and gross margin. So gross margin, as we've always had, includes product costs and all the costs that we incur to get product to the store. So that's always included distribution costs as well.

But not an impact to -- as far as the margin pressures here. They've been specific to the systems issues. There are other costs or higher costs than some of these other components.

Right. And RJ, knowing be some time to recover, but you mentioned the buying fundamentals are healthy. The prior several quarters we saw a step-up in gross margin from the prior run rate to that. I know you were asked this earlier, where did the gross margin settle out? Does it settle out to where we were running in 2023, or does it settle out to the pre-'23 run rate before we had the system issues?

Yes. When you look at our guidance, you'll see in the back half of the year, it's in between, which is to say the beginning of 2023 in the second quarter, in particular last year was really a historical high point for us. We talked about that at the time. So we do expect margin in the second half to be at a nice healthy rate, again to increase sequentially from the number that we've guided to in the second quarter and then increasing from there at a healthy rate and above historical averages. That's not at the same level that it was in the second quarter. Again that was particularly high and the highest we've seen in a really, really long time.

Thank you.

Thanks, Simeon.

Thank you. At this time, I would like to turn the call back to management for closing comments.

Thanks, everyone, for joining us, and we look forward to talking with you again on the next call. Thanks and take care.

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.