Greetings, and welcome to the Grocery Outlet Third Quarter 2025 Earning Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Ferry, Vice President of Treasury and Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the third quarter ended September 27, 2025. Speaking for 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 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 uncertainty 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 on the Investors section of the company's website under News and Releases and in the company's SEC filings. And now I would like to turn it over to Jason.

Thanks, Ian, and thank you all for joining today's call. In the third quarter, we continued to advance our strategy, while executing to deliver strong bottom line results. We grew net sales 5.4% to $1.17 billion, with sales in comparable stores up 1.2%, which I'll discuss in greater detail in a moment. In the quarter, we also added 11 net new stores. Importantly, in Q3, we began to roll out our store refresh concept to an initial wave of independently operated stores. We are seeing encouraging results with the pilot stores that are participating in this program, and we're planning to accelerate the expansion of the program throughout the rest of the year and into '26. On the execution front, we continue to operate with discipline to achieve healthy profitability. We reported a gross margin of 30.4%, consistent with our outlook, while carefully managing spending allowed us to deliver an adjusted EBITDA of $67 million at the top of our outlook range and adjusted EPS of $0.21, which exceeded guidance due to favorable taxes. While Q3 results were broadly consistent with our expectations, comp store sales of 1.2% came in below our outlook range. Leading into the final weeks of the quarter, we were pacing to our 1.5% to 2% outlook with traffic up roughly 2% over that time frame. However, during those final weeks, we experimented with promotional activity, as well as marketing mix that was, we believe, net negative. Testing is a key part of the work we're doing to drive sustainable growth, and we'll continue to eliminate things that don't contribute and double down on what does. In this case, we've course corrected and over the last couple of weeks, we've seen a return to weekly comp growth. While recent comps have been positive, given the slow…

Thanks, Jason. In the third quarter, we continued to make progress on our key strategic initiatives, while delivering adjusted earnings per share that exceeded our outlook. I'll walk you through our Q3 results before sharing more detail about our outlook for the remainder of the year. Please note that the comparisons I will provide are on a year-over-year basis unless noted otherwise. Net sales increased 5.4% to $1.17 billion, propelled by 11 net new stores and a 1.2% increase in comparable store sales. In the third quarter, we opened 13 new stores and closed 2 stores, enabling us to increase our targeted openings to 37 net new stores for the year. We ended the third quarter with 563 stores across 16 states. Comp growth of 1.2% was driven by a 1.8% increase in the number of transactions, partially offset by a 60 basis point decrease in average transaction size due primarily to a reduction in the number of units per transaction. As Jason noted, we believe the variance in comp relative to our outlook of 1.5% to 2% for the quarter was due primarily to changes to our marketing mix and promotional timing. Over the last couple of weeks, we've seen a return to positive weekly comps. Gross profit increased 3% to $355.1 million or 30.4% as a percentage of net sales, which was at the upper end of our outlook range. Gross margin was down 70 basis points compared to last year. However, it was consistent with the first half average of 30.5% this year. SG&A increased 8.7% to $331 million compared with Q3 last year, representing 28.3% of net sales, an increase of 80 basis points. The year-to-year increase in SG&A as a percent of sales was driven primarily by costs attributed to new store growth, software amortization…

[Operator Instructions] And our first question comes from Jeremy Hamblin with Craig-Hallum.

So, I want to start just with the same-store sales. And for Q3, the 1.2% comp, I just want to get the split of the transaction versus average ticket. And then as you progressed through the quarter and you noted some changes in the timing of marketing and some of the promotional events and mix, how did that play out in terms of where you saw the decel in comps? Was it primarily transaction driven? Or were you getting a mixture of downside coming from both transaction in ticket?

Yes. Thanks for the question, Jeremy. It's Jason here. Just to walk through the timeline to give you a bit of more detail. We were tracking in July at about 1.6% comp and August 2.3%. So, we were well within our expectation of comps with the guidance we provided. As I mentioned in my opening remarks, part of what we're doing here, we're doing a lot of experimenting. And in late Q3, we were adjusting promotions, some of the activity we have been trying as well as the marketing mix with some of the channel mix. As it turned out, we could see a strong correlation into September where we made those adjustments and saw the impact on comps. To give you kind of an idea here, transactions were running just under 2% and baskets down slightly. And we saw a little bit of a slow on the transaction count during that September period. And what happened was into the last week of September and in the first week of October, comps went negative. Unfortunately, we've got -- seen some lingering effects through October on that. But since course correcting, we've bounced back to positive comps. As I said, we're not where we want to be, but I'm really excited because we feel we have the solutions in our refresh concept, focusing on improving our ease to shop, standardizing our core assortment and better communicating our unique value positioning with sharper marketing. And all of those things are going to be really positive for us as we move through the end of this quarter and into next year.

Just a quick follow-up. In terms of what you're lapping for the remainder of the quarter versus the first 4 or 5 weeks, the comps get easier or tougher from here?

Yes. December is a little easier in kind of the quarter. November is a little tougher, but December is a bit easier.

And our next question comes from Corey Tarlowe with Jefferies.

I just had a question on the kind of the performance in the quarter on the comp and the drivers that you highlighted, I believe it was the promotional activity and the marketing mix. Is there any way you could provide a little bit more color as to kind of what the learnings were, what you tried and what maybe the optimal strategy is going forward for those specific aspects?

Sure. No, it's a great question, Corey. So, part of what we're doing is we want to optimize everything we put into the business. We have been executing some promotions that just weren't delivering the combination of sales and return we were looking for. So, we've made some adjustments to those into September. We think that was still the right decision. The marketing, we had been experimenting with more social and had adjusted some of the traditional mediums that we had implemented, and we saw a pretty strong correlation there. So, what we did is course corrected on the marketing piece for Q4 and going forward. That was instructive. And frankly, some of the things that we've also been testing have worked well. So, one example of that that's unique to us is our wine business. And we've seen some really strong favorable results related to promotion there. There's a lot of opportunistic product on the market, and that's an area where we're doubling down, and we've put more of that into our planning for Q4.

Great. And then I just had more of a cost-related question. You've made some new hires, and I'm just curious about how to think about SG&A and what the comp leverage point there would be given the growth that you have in terms of stores and people.

Corey, it's Chris. Yes. So, we expect not to get too far into next year, but we do expect modest leverage next year. I talked about on a previous call, our cost savings initiative to drive cost out of the company. And we've made a lot of progress there. It's actually completed. And we've identified $15 million to $20 million of cost savings over the next 2 years. Most of that will fall into next year. Now I should say a good portion of that is CapEx and some of it's related to our supply chain. But there is SG&A cost reductions there, which will help with leverage next year. On the other side of that, though, is we are going to invest some of that savings in additional capabilities, primarily around merchandising. But net-net, we should see some modest leverage next year.

And moving on to John Heinbockel with Guggenheim Partners.

Jason, 2 questions on the refresh program. Is your idea to cluster that as much as you can, try to get greater awareness of it? And then when you think about how long is that process taking for you and the IO to get done? Is there any disruption in the interim period?

Yes. Great questions, John. Yes, first and foremost, for sure, we're going to cluster. We're going to start in the core markets and work our way out from there. We think that clustering does all kinds of good things, right? There's marketing opportunity. There's labor leverage you can get as you're clustering, and it's helpful support for the IOs as you do that in an area. Through the pilot process we've had over the last 6 months, the IOs have been really instructive for us giving us feedback on the things that we need to adjust as we've gotten ready now to go. And so that's important. So, yes, clustering for sure. And then on the timing, so really what this is, is it's a fairly light touch in the store. But as you remerchandise the store, there's disruption. And so typically, when you do a reline and you're moving things around, this is going to take about 5 weeks to execute in the store. So you see some sales pressure during that period, but an immediate pop afterward. And we're seeing that consistently as we've gone through these 2 -- more than a quarter worth of data in the 2 pilots. And as we introduce this to more stores, they're following a similar pattern. But early days there, but we have enough data now we feel very confident in what we're doing.

And maybe as a follow-up, the 400 core items, right? So I don't know how many of those would be consistent across the base. But what are you doing to draw attention to that? Do you need an inventory investment? Do you need signage to kind of drive home the point that you're consistently carrying those?

Yes. No, it was -- it took some consideration to make sure that, that consistency is something that our customers have told us they really are asking us to deliver on. And so in changing the merchandising, we're changing the space to sales on those items, and we're creating signage around them. So they're very obvious to see. These are things that are on people's shopping list typically. And so there is a very consistent core assortment there. And we've seen a nice uptick, obviously, on the basket size -- on the basket side, I should say, John, in the pilot stores as a result.

Moving on to Edward Kelly with Wells Fargo.

I wanted to follow-up on the comp weakness that you saw at the end of the quarter and the shift in strategy here. It seems like the weakness was more traffic driven, which leads me to believe that maybe it was more tied to the shift in marketing. I was curious if you could maybe dig into that a little bit. And then if the comp hasn't bounced all the way back yet despite the shift, what is that saying?

Yes. It's -- first and foremost, we saw a pretty strong correlation between the marketing channel mix decision we made towards the end of the quarter and the traffic kind of falling off towards the end of the quarter. So, we got that back in place as quick as we could and I've seen a bounce back. Sometimes these things tend to linger, but we feel good about the amount of marketing, the quantum is -- we feel good about and the mix is -- I think we've made that appropriate for Q4. So, we're expecting some improvement in our run rate.

Okay. And then just a follow-up on SNAP. So, there's no impact from SNAP in guidance. And I guess it's dynamic, right? You have the November issue and then potential for SNAP cuts next year. I was curious if you could just talk about historically what you've seen during periods of changes in SNAP. And then as it pertains to sort of like current business trends, do you think that some of that is already starting to work its way into the comp that you're seeing now?

Yes. It's probably too early to tell on -- just given it's been a handful of days that this has happened. But in the past, what I can tell you the facts about our business -- as Chris mentioned in the opening, SNAP accounts for about 9% of our sales. In '23, you might remember that there was a significant reduction in SNAP benefits. What happened here at that time was basically the tender types changed, but there really was no impact to sales. And typically, depending on when those benefits are paid, you'll see an immediate spend. And so again, depending on how long this goes, at this point, we're not speculating on that, but we did want to provide guidance that was clean of that, just given we just don't know how that's going to turn out.

Our next question comes from Joe Feldman with Telsey Advisory Group.

One of the questions I want to ask was about the localization effort. And I guess, how will the effort be different from the current model, I guess, in terms of -- I thought the whole -- one of the strengths of this business was you have IOs that localize their own stores because they're actually owners. And I guess if you could help me with understand that localization effort a little better, I'd appreciate it.

Sure, John. Some of the feedback we got from SoCal was a need for the company to give -- provide more support to our local IOs. And some of that equates into making sure we're sourcing product that they need for their local community. And so in the case of what we're doing in Los Angeles is providing a suite of assortment now available for them to better address what they're asking for to supply their local customers. And so, we've got that begun and excited about the initial results there. And that's something that we think as this business gets more focused on becoming a great selling organization, helping our stores localize and taking advantage of their strength is going to be a big win for us.

Got it. And then just on 2026, I know it's early, but from a store perspective, I fully understand the refreshes, 150 makes a lot of sense. How should we think about new stores for next year? Are you guys rethinking the flow of stores compared to where the trend has been?

Yes, I think we indicated on a previous call a range of 30 to 35 net new for next year. On the refresh piece, we've already begun to start to implement those retail fundamentals in our new store executions, and we intend to do that in all the new stores next year.

And Mark Carden with UBS has our next question.

So to start, you called out some heightened promotional activity impacting your gross margin. Was this essentially all tied to some of the tests you guys were doing in September? Or did they expand beyond that? And then just related more broadly, what are you seeing in the competitive landscape?

Yes. Thanks, Mark. Yes, there was some promotion in there for sure that we had been adjusting that we think turned into some net negative sales. But really, as the marketing, we believe, was the major contributor there. Clearly, there's -- depending on the month, promotions ebb and flow. I think the latest reporting shows a little bit of an uptick in promotion in September. But I think I'll leave that for you guys to discern, but we're not seeing anything in a significant way as far as a shift.

Okay. Great. And then as a follow-up, just how are IOs responding right now to the uneven macro? I know like outside of the pilot improvement rollouts, you guys have been investing more in the training process. Have you seen any corresponding improvements in talent traction? And just more broadly, what are you seeing with -- in terms of IO satisfaction?

Yes. We spent some time on the road meeting with really all of our IOs earlier in Q3, middle of Q3. There is definitely excitement related to the improvements and things that are coming both from systems. We're seeing positive feedback there on our order guide. We're seeing positive feedback and some real excitement related to the refresh program. I think our IOs taking the feedback, working in a collaborative way with them to grow their business and make their incomes grow is obviously something that's really important to everybody. And we're seeing nice participation in our meetings and good communication back and forth. So, we're feeling good about where this is going to go. And everybody always likes to win as a team, and we're seeing more and more of that as we roll these programs out.

And moving next to Simeon Gutman with Morgan Stanley.

This is Zach on for Simeon. I just wanted to follow up on the refresh program. What type of uplift are you assuming that will provide on a consolidated basis? And how does the timing of that look over the next few quarters?

Yes. The pilot stores, we've got a nice mid-single-digit lift given the staging of rollout and quantum of stores, you can probably get a sense of the mechanical lift that we are expecting in our business next year. But this is definitely going to be a comp accelerator for us. And we're excited about what we see as the longer this is in our stores, we're seeing some nice acceleration as well. So, feeling good about how that's going to play out in '26 for sure.

And as a quick follow-up, how should we assess the resources the company has and also the IO appetite for these rollouts? Is there any -- are there any constraints? Or is everybody on the same page and should the rollout go according to plan?

Yes. We really believe the value proposition of the IOs is compelling. We're not limited in this case in IO demand nor in CapEx. What we're really doing here is making sure we're being responsible to support them with the right training to ensure that we have sustainability in the changes. We're implementing new systems, methods and procedures in the stores. There's new merchandising standards that they're working their way through. But mid-single-digit comp lift, basket improvement, all those things creates really nice returns for the company and even better returns. Our IOs are going to have their return in a matter of months. So, I think people are going to be very excited to see how this plays out.

Moving next to Leah Jordan with Goldman Sachs.

It sounds like you're still doing a lot of testing and learning on your business, and we had a little bit of a misstep with the marketing this quarter. So, I was just wondering what's giving you the confidence to go forward in a bigger way on the store refresh rollout? Just after just such a short period in a small number of stores, and why don't you think more testing needs to be done? And then of the initiatives that you have rolling out between the stores and the IO tools, I guess, there's a long list there. So, which of the items do you think will be the biggest driver to drive that comp acceleration next year?

Yes, these things work together. So, we're really confident that the testing we've done over time on a couple of stores, now seeing results on a wider group of stores initially. The things we're doing, we're changing the fundamental customer experience through merchandising, implementing the method systems and procedures we are, create the conditions so we have an in-stock that's going to be really a winning experience for the customer. And the lift associated with those things is clear to us, improving ease of shop, making sure we're consistent and the communication related to value, all are things we've gotten feedback from the customers on. It's very clear and the sales piece. So, lots of retailers will put products into 1 or 2 stores and roll out when they have results. And we feel that we've done enough testing and we've taken enough time and done enough adjusting to make sure that we have a clear idea of what will happen. So, retail fundamentals, some of the things we're doing here are really retail 101. So, this isn't -- we're not necessarily cutting new ground here. We're merchandising in logical ways. We're organizing the store in ways that the customers can understand, supported with great signage. And the tools we're implementing are simple and straightforward for IOs to execute at a higher level. So, all of that, we feel is going to contribute to a very predictable set of outcomes. And the great thing about this business is, as we implement this in, let's call it, roughly 20 stores this quarter, we can make further adjustments as we go, but the fundamentals are there.

That's very helpful. And then just one quick follow-up. I guess it sounds like you plan to accelerate comps next year and on the back of these initiatives. So, if that comes to fruition, can you just remind us what comp you need to now leverage SG&A in the business? I know you talked about lowering some costs next year to an earlier question, but just what is the actual leverage point of the business now?

Yes. It's around 2.5% comp growth in order to leverage.

And we'll go next to Kendall Toscano with Bank of America.

I was just curious if you could speak to as you're expanding the store refresh program, can you share more detail on the types of markets where you've been able to test it so far? And have the performance lifts on these stores been different in markets where the competitive landscape might look a little different and particularly in markets where you're competing with the deep discount players?

Yes. Kendall, thanks for the question. Yes, we've got a number of different competitors in the different markets and haven't seen -- because this is really execution, and I'll call it, we're talking to the customers that we have. We're seeing a big jump in basket and then seeing some improvement, obviously, in the traffic as a result of the experience. And so, I feel good about the mix of stores and the competition and the results that we have. So again, giving us confidence to move forward.

Got it. That's helpful. And then other question was just on price gaps and how those are trending and whether that looks any different than it did pre-systems conversion? And also, is there any expectation that you'll continue to invest in price for 4Q or into next year?

Right. No, great question. We do checks every week. We did 10 major market MSA checks just last week. We remain to be 15% to 20% on a basket of goods lower than discount, 35% to 40% on conventional. And so, things to remember there, our OpEx, 40% of sales, it's a core driver of value. We have real advantage there. No one's going to get around us on pricing there. It's a big contributor. Clearly, there's always an opportunity to adjust on an individual item basis. You're going to have situations where you're beat, but that's something the team monitors week-to-week, and we continue to make adjustments there. And we're really confident that the work we're doing right now on value messaging and telling our story is going to be super helpful in improving with the margins we are running at and the price advantages we have, a much better level of understanding from our customer base on the value that this business brings.

And Michael Baker with D.A. Davidson has our next question.

Okay. Wondering if you've looked at comps in markets that might have higher immigration populations. There could be some spending impacts from some of the issues that are going on there. I'm wondering if that's something that you've seen with your customer at all.

No, Michael, good question. Nothing to report there.

Okay. And then I guess, kind of -- well, I don't know if it's a related question, but I'll ask this also. SNAP benefits, you talked about that a little bit on the call, and so nothing in your guidance. But have you done any work or estimates or anything to sort of say, okay, what if this does last a week or 2 weeks or the impact of SNAP benefits going away for X amount of time would impact your business by X amount. And perhaps maybe there's even a positive offset where you get some trade down. I'm not sure the way you think about it. But I'm wondering if you've done any tests on, let's say, this lasts for another week.

Yes. I think we're assessing. We just don't have enough data yet to give you a determination. I think if there's anything significant that materializes in the next 30 days, we would create some kind of release to inform everybody in kind of the proper way if there's something material there.

Okay. But nothing yet. One last quick one, if I could. At one point, you talked about, I think, "normal comp for 2026. Remind us what you consider to be a return to normal comps?

Yes. I think our objective is always to run -- to grow our business on a share basis, grow faster than inflation. That's my objective here. We intend to win. And so, we're putting the pieces in place to do that for next year.

And moving on to Oliver Chen with TD Cowen.

Hi, Jason and Chris, the business model of Grocery Outlet has been amazingly resilient over a long-term basis in that mid-single-digit comp range. What do you think about broadly the path to getting there more consistently, the key drivers and milestones? I'm sure the refresh and stabilization of systems will play a role. And on the earlier topics around independent operators, what would you highlight as 2 to 3 key areas that they speak to in terms of IOs potentially needing more support or flexibility and how changes may be impacting their day-to-day op.

Yes. No, great questions. Look, we benefit greatly by talking to our IO groups frequently. We do these things called backroom meetings, and we meet groups of 20 IOs and really try to understand what's happening at the ground level. There's 2 big pieces to getting comps to, I think, on a sustainable basis in a great place. One is obviously getting the systems distraction behind us. We're getting very close there. We're restoring full functionality on pre-SAP implementation for order guide has been a great win. We've made a number of systems improvements over time. So that is something that our IOs give us feedback on, have been giving us feedback on as it's been painful for everybody and people want to move past that to a place where -- and this is what I've told the IOs, I want to make sure this business is really easy to run, and we want to make sure we're providing them with the tools and support that makes their day-to-day -- their focus is on the customer and their local community and doing everything they can with their team to execute. And so that's our orientation. The refresh program is going to be a big chunk of how we create a consistent execution in the stores. We're providing some very specific tools and new SOPs. We've made adjustments to the merchandising that we thought through, understanding what's happening with the customer and getting feedback from the IOs locally, tuning that in. And then -- another piece of feedback is localization. So again, the company, in this case, needs to do more to support our IOs with product that really is relevant for their local community. And in this case in Los Angeles, in particular, is a really nice opportunity for us to demonstrate through our IOs the power of working together on that, but giving them what they are asking for in order to deliver on an experience for their customers that's relevant. And we think that our business in a place like Los Angeles is a very strong fit. We just need to do what we need to do to make sure that the assortment and the communication, the execution in that new way is done collaboratively, and we're excited about what that's going to mean for this business as we go forward. So those are some examples.

Okay. Jason, a follow-up. The buying team in many ways, we view as like the secret sauce of an organization such as yourself. Like what are your thoughts about changes or not changes there in terms of how that talent is going to be orientated in light of what you're doing? And then second, as you react around the marketing programs, what are you seeing in terms of customer perception lags or not lags? Our surveys show that a lot of customers really want these core items for a long time. So just would love your thoughts on any hypothesis you have there, too.

We're [Technical Difficulty] hearing you. I don't know if there's something on our end here on your end. Could you repeat the question? I try again? I just.

Yes. First one was on buying team and just the buying team being the secret sauce and what's happening with the nature of that talent as you think about these changes you're making? And second question follow-up was on customer perception lags between the marketing and changes you're making relative to when customers are noticing our surveys say that this is a really good change.

Great. Great. Yes, I think we're doing everything we -- it's really important for us to -- when we talk about being a great selling organization, we are a great buying organization, and it's an and. And so the conversation we're having with our buying teams are we want them out there. The relationships they've built over time are exceptional. It's a very unique business in that respect. Typically, what you see in retail is a more at times can be contentious set of relationships with vendors. In our case, this is -- I feel like one team, many of the times when I am able to participate in some of the sessions. And so we're just doing everything possible to make sure we're giving them those tools to continue to nurture those relationships and have close connection there. And then on marketing lag, customer perception, it does take time. And we believe that these changes over time and what we've seen in the pilot markets, the customers respond pretty quickly, and they can recognize in a pretty remarkably fast way if something is good or not. I mean, in retail, you get feedback the first day. And it doesn't take that long to figure out if you're doing something that works and they appreciate because literally, they tell you. We've been standing in stores days on end as we make these changes and customers will tell us what they like and what they don't like and they tell our IOs what they like and they don't like. And so our job is to make sure we're listening carefully to respond to the things they like and get rid of the friction points for our customers. And so that's really what this is. It's not necessarily anything magical. It's responding to what customers want and making sure we're delivering that consistently.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Thanks, everyone.