Greetings, and welcome to the Grocery Outlet First Quarter 2025 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to introduce your host, Christine Chen, Vice President of Investor Relations. Thank you. You may begin.

Good afternoon and welcome to Grocery Outlet's call to discuss financial results for the first quarter ended March 28th, 2025. Speaking from management on today's call will be Jason Potter, President and Chief Executive Officer; and Chris Miller, Chief Financial Officer. Following prepared remarks from Jason and Chris, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via telephone playback on the Investor Relations section of the company's website. Participants on this call may make 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 in the company's periodic reports filed with the SEC, all of which may be found on the Investor Relations' section of the company's website or on 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. Additionally, during today's call, the company will reference certain non-GAAP financial information, including adjusted items. Reconciliation 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 now, I would like to turn it over to Jason.

Thank you, Christine and welcome everyone. It's great to be with you on the call today. I'll begin with a brief update on the quarter and then spend much of my time on what I focused on in my first couple of months and how I'm thinking about our priorities. First, we delivered on our first quarter outlook. Comp store sales increased 30 basis points from last year. slightly ahead of our guidance for the quarter that we provided. We opened 10 net new stores, positioning us to achieve our annual target for 33 to 35 stores this year. These stores are off to a solid start, performing ahead of expectations. We also exceeded our gross margin outlook by improving our shrink run rate through improved inventory visibility, reporting and execution. Together, these wins enabled us to deliver net sales of $1.13 billion, up 8.5% over last year and report adjusted EBITDA and adjusted EPS above their respective outlook ranges for the first quarter. We also reached an important milestone with our systems integration, including the initial Phase 1 rollout of our real-time ordering guide that we plan on having fully rolled out by the end of the second quarter. Chris is going to walk you through the numbers in greater detail, but just having completed my first three months as CEO, I wanted to share some early observations and give everyone on the call a sense for the work we plan to undertake to unlock the tremendous opportunity that I see here in the business. Now, over the first three months, I visited and met with more than 50 of our independent operators, had the opportunity to meet and speak with dozens of suppliers, talked with many of the customers in our stores. I've listened, gained valuable and candid…

Thanks, Jason, and good afternoon, everyone. Our first quarter results highlight improved execution in a dynamic environment. We delivered on the key value metrics that are driving store traffic as our buyers continue to deliver value for both operators and customers, reinforcing the relevance of our model with consumers. We also continue to operate the business with discipline, enabling us to exceed our outlook for gross margin and deliver adjusted EBITDA and EPS above the top of our outlook range. As Jason noted, while first quarter results exceeded our outlook, we are making a modest adjustment to our comp store sales outlook for the balance of the year, reflecting our updated expectations for consumer trends, given the uncertainty of the macro environment. Despite this adjustment, we remain confident in our ability to manage the factors within our control and deliver the gross margin, adjusted EBITDA and adjusted EPS outlook we shared with you in February. We also remain committed to improving same-store sales growth as we progress through the year with a sound strategy in place, as Jason shared. We believe the initiatives we are undertaking will not only drive meaningful near-term improvement, but also drive sustainable, long-term growth and return on invested capital for years to come. I will walk you through our first quarter results and then turn to our outlook. The comparisons I will provide are on a year-over-year basis, unless noted otherwise. Net sales increased 8.5% to $1.13 billion driven by a combination of new stores opened in the last 12 months, the addition of UGO in April last year as well as a 30 basis point increase in comparable store sales. Comp growth was driven by a 2.3% increase in the number of transactions, partially offset by a 2% decrease in average transaction size. Our…

Thank you. We will now be conducting question-and-answer session. [Operator Instructions] First question is Anthony Bonadio from Wells Fargo. Please go ahead.

Yeah. Hey, guys. Thanks for taking our question. So as you've got settled into your new seats, can you maybe just talk high level about how you're thinking about the appropriate strategy and growth level for the business? And then maybe anything you're thinking about differently versus what we've seen from management historically?

Thanks for the question. It's Jason here. Clearly, I believe the business is we're going to focus on execution here. Creating a loved brand is essential. And so the priorities we have are the capabilities that we're going to build against that to deliver that experience for customers that is going to drive loyalty and performance in the business over time. So the four key things I mentioned earlier, tackling new store performance matching talent for the strategy we're going to execute, continuing to improve our system execution and executing at scale as we move this business to a selling organization are all essential capabilities we're building against this focused execution, again, to deliver a brand reputation with a winning customer experience is going to be the key to our success. So happy to follow that on with another question.

And our next question are Corey Tarlowe from Jefferies. Please go ahead.

Great. Thanks. I appreciate all the color today. I was wondering if you could talk a little bit more about the second quarter guide and the full year outlook, and how we should be thinking about the change in the comp trajectory that you outlined. If I think you had used two things, it was basket and macro. Could you maybe unpack that a little bit more for us?

Sure. Maybe I'll take the first part here. The work we're doing right now includes commercial and execution-related activity. And it's a little harder for me to predict the short-term here, but I think we're working on the right things. I know we are. So we're doing several things on the commercial side. First, I mentioned earlier that we're tightening our gapping on KPIs. We're working on the mix and pushing our opportunistic opportunities through the network as well as promoting private label. Those elements are going to absolutely help value. We also have addressed some quality-related standards that I mentioned delivering that every day for guests is critical for their everyday shop. And then execution-related activities, like the work we're doing on our DCs in the Pacific Northwest, and the progress we've made on the real-time order guide to help our in-stock and our fill rates, all of that will help the business tremendously. And I believe we'll add sales as this year goes on. It's more of a timing question for me. Maybe I'll ask Chris just to add a little more color to how the numbers flow.

Yes, sure. So just given what we saw in the first quarter, we -- our traffic is strong, a 2.3% growth, our basket was down 2%. And those trends are somewhat continuing, especially the softer basket into Q2. We're still seeing very strong traffic. So -- and then just given the uncertainty that's out there from a macro lens, we thought it was prudent to lower the top line or comparable line store sales growth. But I would just say, as Jason mentioned, we're -- we believe we're doing the right things to drive the basket and comp making sure we're in stock on our top selling items and having very good produce, et cetera. There's a lot of things that we're doing right now, and we expect to see those help drive comps in the back half of the year. So what I'd say is that, we expect modest sequential improvement in the back half in our comps.

Next question is from Robbie Ohmes from Bank of America. Please go ahead.

Hey. Thanks for taking my questions. My first question is with the real-time order guide in place now in the East Coast stores in California, have you seen -- I'm surprised -- have you seen any improvement in comps related to that?

What we're seeing initially is clearly, first of all, the feedback we're getting from RIOs is really positive. They're able to see what's available and how to take advantage of putting the right things on their truck. And so what we've really seen to start with is an improvement in our fill rates. So the fill rates have jumped the 93% range to over 99%. And so that doesn't always translate immediately into sales. But clearly, as you match the ability to match demand and your planning with supply, you should see an improvement, and we expect one, again, feeling really good about that work and that progress. And Robbie, like I mentioned, we'll have that all complete by the end of the second quarter. So the better in stock you have, the more sales you get and around it goes.

Next question here is from Mark Carden from UBS. Please go ahead.

Hi. This is Matthew Rothway on for Mark Carden. Thanks for taking our question. I was hoping you could unpack the gross margin performance in the quarter, obviously, coming in much better than expectations. What drove that outperformance? I know last quarter, there was some negative impact from the egg shortage and pricing. Did you see any of that this quarter? And then it looks like it's -- you're not expecting this progress to quite carry through for the rest of the year. So what are your expectations as we look at the balance of the year? Thank you.

Yeah. Sure. Hi. It's Chris. So yeah, Q1, we definitely saw improvement in shrinkage, which I mentioned in my remarks, and that's a result of a lot of the work we're doing with our system as well as process around that. So we do expect that, that is sustainable as we go through the year. And I would just say for the full year margins, yes, there's potentially more shrink there as well as improvement in assortment, whether that's opportunistic, mix, private label, those are all things that could influence the margin. It's just a little early at this point to know what impact that's going to be. But we are definitely working on those things to also drive margin in the back half of the year.

Our next question is from Oliver Chen from TD Cowen. Please go ahead.

Hey. This is Tom Nass on for Oliver Chen. I wanted to ask for any color around any trends you've been seeing on opportunistic sourcing given the current environment. And then secondly, any details you can share around independent operator profitability trends year-to-date so far?

Yeah. Thanks, Tom, for the question. Opportunistic supply continues to be there. We've got very strong supplier relationships. I had a great opportunity in my first 90 days or so to meet a lot of them talk to a lot of them. That continues to be a source of strength. I think that part of our opportunity here, some of the upside in this business as I look at all the different opportunities is tools and visibility into what's available. And so I know the feedback we got from our IOs, they're very pleased to see and be able to see what's available and opportunistic. The unique part of this business, there's literally tens of thousands of SKUs that go through this business that are unique and the ability for our IOs to be able to see it, understand what it is, what the savings are, the value and helping them plan and then execute that is tremendous. So we've also recently started to share specific scan data related to mix to help our IOs understand the opportunities and increase our level of communication on that front. So for us, it's the opportunity to execute at a higher level. It's not a question of supply. But obviously, that's something we want to double down on and continue to build those supply relationships and grow the business as quickly as we can on that front.

Our next question is from John Heinbockel from Guggenheim Securities. Please go ahead.

Jason, two related questions. So when you talk about the KPIs, is your thought you sort of look at every day versus the treasury -- close out treasure hunt. Where do you think there's the bigger opportunity? I know treasury, you got away from that a little bit last year. So that's number one. And then number two, when you talk about execution, what's your thought on sort of field organization, right? Because I think the field organization has been historically by design, maybe a little bit lean. Is that an area of potential investment?

Thanks, John, for the question. So I think the -- in the early days here, and this is work that Eric had really begun in the late fall last year was to tighten up on KPIs. I think that's a regular thing that you do. We're in the process of continuing to improve our monitoring of that. We've made some adjustments in my time here. We're going to continue to make adjustments as we go, where we think it's necessary. It's important to stay tight on that front. It helps value perception tremendously. So it's very important, as you know. And the opportunistic is really with our real-time order guide unlock really helping our IOC and understand what's there and that ability to flow supply through the system is going to be very helpful for us. So both things are very important when you're building value. It's also important to communicate well in store. And so we've been experimenting with some marketing materials. We think that's a nice opportunity. And I guess the second part of your question is clearly, whatever we can do to improve the support for stores, we'll consider. I think it's a little early on that front. But as I spend more time with the operations team and our IO group, we want to make sure that we're doing everything we can to help them be successful. So at least that's the way I think about it.

Our next question is from Joe Feldman from Telsey Advisory Group. Please go ahead.

Yes. Hi. Thanks for taking my question guys. I wanted to go back to the basket size for a minute. Is it -- can you share a little more color like what you're seeing with the basket? Like is it lower mix of -- is it lower units, fewer units in the basket? Is it the pricing? Is it because the inventory issues that we're still dealing with, maybe that's why there's just not the items people want when they come in. I was just hoping you could get a little more color there. Thanks.

Sure. Sure. Well, the great news is the hardest part in any of these businesses is the traffic. Traffic has been quite good, it remains solid. I think that's usually the most difficult thing to achieve. And we've got the people coming in. This business has a tremendous value delivery system to it. And forever in a day, people are going to be looking for value. So we feel good from the work that's been done on both KPIs and the opportunistic mix efforts that we're making. In the basket in particular, when we look at it, it's items per basket. So there is an opportunity for us on a couple of fronts there to do some work. And the work we've done early on ensuring that we're making sure that commercially, we're in the right place. Some of the things I mentioned on base quality, things like bananas and avocados as small as that might sound, are critical for day-to-day shopping. Again, having -- make sure the fill rates are in the right place so that our stores are able to fulfill the customer shop, all important elements to building the basket. So our focus and our conversations here and the communication that we're providing and the work we're doing is really to help build those baskets. That's going to be a focus.

Our next question is from Michael Baker from D.A. Davidson. Please go ahead.

Okay. Thanks. I wanted to ask you if you could quantify the Easter shift because I'm a little surprised that April -- it doesn't sound at least as if April is off to a great start, given the Easter shift. So I wonder if you think you're seeing any impact already from the uncertainty from "Liberation Day" on April 2. Did you -- maybe it might be hard to tease out because of the Easter shift, but have you seen any kind of downshift in how the consumer is reacting since then?

Yeah, I would say we thought it was a little soft, for sure. It's difficult to sort of pin it to what. But clearly, there's a shift there. And with some other, I guess, a lot of news out there, changes for the customer. There's clearly some uncertainty for them. But that's probably part of our thinking here at April was a little softer than I'd like.

Okay. It makes sense. And if I could ask a follow-up, when you talk about the KPIs, can you talk about where -- do you think your price gaps? I know that the previous management team had some -- knew that they need to get a little bit sharper and close some of those price gaps with competitors. Where do you think you stand now? You said you always need to focus on the value, but do you feel like you need to get specifically catch-up with some other guys who are being more prices promotional?

I think we're in a good spot, as we sit here today. There clearly has been some work done over the last couple of quarters. And whenever there's -- that gets a little bit out of the pocket, so to speak, you can lose some perception. I think maybe that's part of the story here. And so ensuring that you're tight, you stay tight, and make sure you're on top of that every day is critical. And that's just an ongoing piece of work. So I feel good about where we are right now. It doesn't mean that you're ever done. And you want to be strategic about those things. Clearly, part of our work here as you think about customer -- the consumer today, and maybe there's some uncertainty out there is we want to be in their corner fighting hard for them to deliver value. So being fit and ready commercially and execution-wise are critical. And KPIs are just part of that equation.

Next question is from Anthony Chukumba from Loop Capital Markets. Please go ahead.

Thanks for taking my question. So you talked about seeking indirect cost reduction opportunities. I was just wondering if you can -- if you can just sort of highlight some of the potential areas for cost reductions and sort of order of magnitude that you're targeting. Thank you.

Yeah. Sure, Anthony. It's Chris. So there's a couple of things on the cost efficiency program I mentioned. The first is, as you called out, is indirect procurement. And look, I've done a few of these before in my career. And we think there's definitely meaningful cost there. But we have to work through it. It's a kind of a methodical, intentional approach that we're taking. And maybe some of the -- I'll give you a couple of examples. One is in the supply chain area, looking at freight, looking at buying supplies, pallets, simple things like that. In our IT organization, looking at different spend there as well as professional fees, et cetera. So that's a piece of work we started. And as I said, it's going to -- we'll progress through that. And then the other piece that's worth mentioning is just overall efficiencies that we expect to get. And one example of that is in our -- again, in our supply chain a little bit different, though, with the opening of our new facility in the Pacific Northwest, we're able to consolidate several warehouses into one and really capture efficiencies in transportation, warehousing, just all across the supply chain. So -- and we have other initiatives that we're working on just to drive cost out as well. So that's what I'd say about where we're at with our program.

Next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Good afternoon. So just to go back on the April trend line, was the traffic something that's lower or the consumer got afraid with their basket. And I ask because the premise we would have is that if the backdrop does get weaker, you think that maybe trade down should help this business. This is part one. So it's a question and the thought. And then the second, it looks like some of the language with restructuring plan changed maybe the cash expenditures, if that's right. Does it impact the guidance in any way? Thank you.

First part of the question, we're -- yes, I mentioned it was a little softer than I'd like. We're not -- we haven't seen any evidence of things like trading down and so on that you typically see. But clearly, we've got some softness in the basket, and that's something we think is more execution related, and we're monitoring that, obviously. And I think the second part of the question is a cash question. I'll pass to Chris.

Yes. So on the restructuring, what we said was or what I said was that we're going to be within the original range, which we said. 50 to 60 initially, we tightened that up to 59 to 61 is where we're landing with the five additional stores. So there's really no impact to the profitability guidance for the year, the adjusted profitability numbers, if that's what you're asking.

Next question is from Leah Jordan from Goldman Sachs. Please go ahead.

Thank you. Good afternoon. Your gross margin improved nicely in the quarter, but you're still losing market share. So I just wanted to see if you could talk through how you're thinking about the trade-offs between defending share and maintaining margins in the current environment. I guess just given the lower comp outlook, how are you thinking about reinvestment of any margin upside as you go throughout the year? Or just given the softer April, how quickly can you react on pricing when you see a behavior shift? Thank you.

Thanks, Leah, I think the idea of one foot on the gas and one foot on the break is how I'm thinking about it. Clearly, we want to create room for ourselves to create the optionality to be more aggressive. And we think with the improvements that are naturally coming in the business from some of the capabilities we're unlocking as well as the future work that we think will help us improve our cost base. Those things are very helpful for us to be fit and make adjustments in the business as we go. The commercial and execution related things we've begun here from here and no regret moves. So those things are going to add sales and we'll do the job on balancing the margins for sales. Clearly, comps are an essential part, probably the number one metric that I look at. And so we have some work to do there, but good about what's going to come later.

Next question is from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead. Q – Jeremy Hamblin: Thanks for taking the question. Just shifting gears a bit here. I wanted to ask about United Grocery Outlet as you get your first few months in here, and I don't know how much time you spent on those locations, but I wanted to get a sense for how you feel like they're performing. And I know that not a lot is going to be done with them in 2025, but just getting a sense for the time frame on how you think you might integrate that portion of the business a bit more with the total company.

Yes. I think the basic headline there is we're growing sales. It's in line with expectation and it's something we're going to integrate 2026, late 2026 is probably the time frame. So that's what I would share today.

This concludes the question-and-answer session. I'd like to turn the floor back to management for any closing comments.

Can you repeat again? Sorry, what was that? Operator

This is our last question. Do you have any closing comments to close out the call? End of Q&A:

Oh, yes. Thank you very much for your interest today. I'm very excited to be here. This is a an incredible business to be a part of. I'm excited about the future. We've got lots of execution opportunity here. We're going to get that back on track. We've got a great model, motivated people, and we look forward to sharing exciting wins as we go here, and thank you for your attention today.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.