Grocery Outlet Holding Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) (unaudited) April 1, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 82,115 $ 102,728 Independent operator receivables and current portion of independent operator notes, net of allowance $ 5,273 and $ 2,238 8,693 10,805 Other accounts receivable, net of allowance $ 28 and $ 7 4,277 4,368 Merchandise inventories 316,397 334,319 Prepaid expenses and other current assets 15,725 15,137 Total current assets 427,207 467,357 Independent operator notes and receivables, net of allowance $ 10,684 and $ 12,509 24,914 22,535 Property and equipment, net 574,225 560,746 Operating lease right-of-use assets 917,175 902,163 Intangible assets, net 68,713 63,993 Goodwill 747,943 747,943 Other assets 9,504 7,667 Total assets $ 2,769,681 $ 2,772,404 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 158,618 $ 137,631 Accrued and other current liabilities 55,586 53,213 Accrued compensation 13,249 27,194 Current portion of long-term debt 5,625 — Current lease liabilities 58,754 54,586 Income and other taxes payable 9,107 7,890 Total current liabilities 300,939 280,514 Long-term debt, net 317,436 379,650 Deferred income tax liabilities, net 25,912 19,782 Long-term lease liabilities 996,427 980,759 Other long-term liabilities 1,428 1,485 Total liabilities 1,642,142 1,662,190 Commitments and contingencies (Note 8) Stockholders' equity: Common stock, par value $ 0.001 per share, 500,000,000 shares authorized; 98,285,804 and 97,674,356 shares issued and outstanding, respectively 98 98 Series A preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 851,194 847,589 Retained earnings 276,247 262,527 Total stockholders' equity 1,127,539 1,110,214 Total liabilities and stockholders' equity $ 2,769,681 $ 2,772,404 See Notes to Condensed Consolidated Financial Statements 3 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data) (unaudited) 13 Weeks Ended April 1, 2023 April 2, 2022 Net sales $ 965,467 $ 831,427 Cost of sales 664,924 580,538 Gross profit 300,543 250,889 Selling, general and administrative expenses 267,725 231,461 Income from operations 32,818 19,428 Other expenses: Interest expense, net 5,919 3,682 Loss on debt extinguishment and modification 5,340 — Total other expenses 11,259 3,682 Income before income taxes 21,559 15,746 Income tax expense 7,839 4,172 Net income and comprehensive income $ 13,720 $ 11,574 Basic earnings per share $ 0.14 $ 0.12 Diluted earnings per share $ 0.14 $ 0.12 Weighted average shares outstanding: Basic 97,920 96,148 Diluted 100,569 99,434 See Notes to Condensed Consolidated Financial Statements 4 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount Balance as of December 31, 2022 97,674,356 $ 98 $ 847,589 $ 262,527 $ 1,110,214 Exercise and vesting of share-based awards 734,310 — 204 — 204 Share-based compensation expense — — 6,676 — 6,676 Repurchase of common stock ( 122,862 ) — ( 3,275 ) — ( 3,275 ) Net income and comprehensive income — — — 13,720 13,720 Balance as of April 1, 2023 98,285,804 $ 98 $ 851,194 $ 276,247 $ 1,127,539 See Notes to Condensed Consolidated Financial Statements 5 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount Balance as of January 1, 2022 96,144,433 $ 96 $ 811,701 $ 197,475 $ 1,009,272 Exercise and vesting of share-based awards 276,473 — 887 — 887 Share-based compensation expense — — 5,795 — 5,795 Repurchase of common stock ( 139,718 ) — ( 3,451 ) — ( 3,451 ) Dividends paid — — ( 7 ) — ( 7 ) Net income and comprehensive income — — — 11,574 11,574 Balance as of April 2, 2022 96,281,188 $ 96 $ 814,925 $ 209,049 $ 1,024,070 See Notes to Condensed Consolidated Financial Statements 6 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) 13 Weeks Ended April 1, 2023 April 2, 2022 Cash flows from operating activities: Net income $ 13,720 $ 11,574 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 18,309 17,120 Amortization of intangible and other assets 2,366 1,870 Amortization of debt issuance costs and debt discounts 401 628 Non-cash rent 1,144 1,936 Loss on debt extinguishment and modification 5,340 — Share-based compensation 6,676 5,795 Provision for accounts receivable reserves 1,369 1,233 Deferred income taxes 6,130 4,056 Other 105 362 Changes in operating assets and liabilities: Independent operator and other accounts receivable ( 2,008 ) ( 1,752 ) Merchandise inventories 17,922 ( 21,892 ) Prepaid expenses and other assets ( 397 ) 2,620 Income and other taxes payable 1,217 265 Trade accounts payable, accrued compensation and other liabilities 11,343 9,340 Operating lease liabilities 3,995 3,174 Net cash provided by operating activities 87,632 36,329 Cash flows from investing activities: Advances to independent operators ( 1,547 ) ( 2,402 ) Repayments of advances from independent operators 2,010 1,667 Purchases of property and equipment ( 32,894 ) ( 32,109 ) Proceeds from sales of assets 20 29 Investments in intangible assets and licenses ( 7,936 ) ( 2,707 ) Net cash used in investing activities ( 40,347 ) ( 35,522 ) Cash flows from financing activities: Proceeds from exercise of stock options 204 887 Proceeds from senior term loan due 2028 300,000 — Proceeds from revolving credit facility 25,000 — Principal payments on senior term loan due 2025 ( 385,000 ) — Principal payments on finance leases ( 320 ) ( 325 ) Repurchase of common stock ( 3,275 ) ( 3,451 ) Dividends paid — ( 7 ) Debt issuance costs paid ( 4,507 ) — Net cash used in financing activities ( 67,898 ) ( 2,896 ) Net decrease in cash and cash equivalents ( 20,613 ) ( 2,089 ) Cash and cash equivalents at beginning of period 102,728 140,085 Cash and cash equivalents at end of period $ 82,115 $ 137,996 See Notes to Condensed Consolidated Financial Statements 7 Table of Contents GROCERY OUTLET HOLDING CORP. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Organization and Summary of Significant Accounting Policies Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned subsidiaries, collectively, "Grocery Outlet," "we," or the "Company") is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. As of April 1, 2023, we had 444 stores throughout California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland and New Jersey. Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the United States ("U.S.") Securities and Exchange Commission (the "SEC") for interim reporting. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022 (the "2022 Form 10-K"). The condensed consolidated balance sheet as of December 31, 2022 included herein has been derived from those audited consolidated financial statements. Our unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions were eliminated. In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future interim or annual period. Certain prior period amounts in the condensed consolidated statements of operations and comprehensive income have been reclassified to conform to the current period presentation. Specifically, in order to enhance the comparability of our results with our peers, depreciation and amortization expenses and share-based compensation expenses are now included in selling, general and administrative expenses. The reclassification of these items had no impact on net income, earnings per share, or retained earnings in the current or prior periods. Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties. Changes in these estimates are recorded when known. We consider our accounting policy relating to long-lived asset impairment to be a significant accounting policy that involves management's estimate and judgment. Segment Reporting — We manage our business as one operating segment. In addition, all of our sales were made to customers located in the U.S. and all property and equipment is located in the U.S. Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages. This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts. Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities in our condensed consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities in our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term, reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date, to determine the present value of our lease payments. Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term while finance lease payments are charged to interest expense and depreciation and amortization expense over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these short-term leases is recognized on a straight-line basis over the lease term. 8 Table of Contents We generally lease retail facilities for store locations, distribution centers, office space and equipment and account for these leases as operating leases. We account for one retail store lease and certain equipment leases as finance leases. Lease and non-lease components are accounted for separately. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores. Fair Value Measurements — Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows: Level 1 — Quoted prices in active markets for identical assets or liabilities Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions The assets' or liabilities' fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of April 1, 2023 or December 31, 2022. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. There were no transfers of assets or liabilities between levels within the fair value hierarchy during the 13 weeks ended April 1, 2023. Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below: Cash and cash equivalents, independent operator ("IO") receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature, their variable interest rates or the effect of the related allowance for expected credit losses. Independent operator notes receivable (net) — The carrying value of such financial instruments approximates their fair value due to the effect of the related allowance for expected credit losses. The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values of our significant financial liabilities that are not recorded at fair value on the condensed consolidated balance sheets (amounts in thousands): April 1, 2023 December 31, 2022 Carrying Amount (1) Estimated Fair Value (2) Carrying Amount (1) Estimated Fair Value (3) Financial Liabilities: Senior term loans (Level 2) $ 298,061 $ 300,000 $ 379,650 $ 383,075 Revolving credit facilities (Level 2) $ 25,000 $ 25,000 $ — $ — _______________________ (1) The carrying amounts of our senior term loans as of April 1, 2023 and December 31, 2022 are net of unamortized debt discounts of zero and $ 0.6 million, respectively, and debt issuance costs of $ 1.9 million and $ 4.7 million, respectively. (2) The estimated fair value of our current senior term loan and revolving credit facility borrowings under our 2023 Credit Agreement, as defined in Note 3, are deemed to approximate the carrying value, excluding unamortized debt issuance costs, because the interest rates are variable with short reset periods and are reflective of current market rates. (3) The estimated fair value of our prior senior term loan, as defined in Note 3, was determined based on the average quoted bid-ask prices for the prior senior term loan in an over-the-counter market on the last trading day of the periods presented. 9 Table of Contents Revenue Recognition Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. For e-commerce related sales in which a third-party provides home delivery service, revenue is recognized upon delivery to the customer. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Discounts provided to customers by us are recognized at the time of sale as a reduction in net sales as the products are sold. Discounts provided by IOs are not recognized as a reduction in net sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons. We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any material performance obligations other than our gift card deferred revenue liability, or any material costs to obtain or fulfill a contract as of April 1, 2023 and December 31, 2022. Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize revenue for the unused portion of the gift cards ("breakage") under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $ 2.9 million and $ 3.6 million as of April 1, 2023 and December 31, 2022, respectively. Breakage amounts were immaterial for the 13 weeks ended April 1, 2023 and April 2, 2022. Disaggregated Revenues — The following table presents net sales revenue by type of product for the periods indicated (amounts in thousands): 13 Weeks Ended April 1, 2023 April 2, 2022 Perishable (1) $ 345,839 $ 300,842 Non-perishable (2) 619,628 530,585 Total net sales $ 965,467 $ 831,427 _______________________ (1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood. (2) Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer and wine. Variable Interest Entities — In accordance with the variable interest entities sub-section of Accounting Standards Codification ("ASC") Topic 810, Consolidation , we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our condensed consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE. We had 441 , 438 and 414 stores operated by IOs as of April 1, 2023, December 31, 2022 and April 2, 2022, respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO selects a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. The IO is required to furnish initial working capital and to acquire certain store and safety assets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice. 10 Table of Contents As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us. Net sales related to IO stores were $ 951.6 million and $ 817.0 million for the 13 weeks ended April 1, 2023 and April 2, 2022, respectively. We, in turn, pay each IO a commission based on a share of the gross profit of the store. Inventories and related net sales proceeds are our property, and we are responsible for store rent and related occupancy costs. IO commissions are expensed and included in SG&A. IO commissions were $ 145.2 million and $ 122.7 million for the 13 weeks ended April 1, 2023 and April 2, 2022, respectively. IO commissions of $ 8.5 million and $ 6.2 million were included in accrued and other current liabilities as of April 1, 2023 and December 31, 2022, respectively. An IO may fund its initial store investment from existing capital, a third-party loan or most commonly through a loan from us, as further discussed in Note 2. As collateral for IO obligations and performance, the Operator Agreement grants us the security interests in the assets owned by each IO related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, each IO is a VIE that we have a variable interest in. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (i) the power to direct the activities that most significantly impact the IO's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of the IO's ability to direct those activities. Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of its own labor. Labor activities that significantly impact the IO's economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreement illustrate the lack of ultimate control over the IO. Therefore, the Company is not the primary beneficiary of these VIEs. Our maximum exposure, in accordance with ASC Topic 810, to the IOs is generally limited to the IO notes and IO receivables due from these entities, which was $ 49.6 million and $ 48.1 million as of April 1, 2023 and December 31, 2022, respectively. See Note 2 for additional information. Recently Adopted Accounting Standards Accounting Standards Update ("ASU") No. 2022-02 — In March 2022, the Financial Accounting Standards Board issued ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We adopted ASU 2022-02 beginning in the first quarter of fiscal 2023. The adoption of ASU 2022-02 had no material impact on our condensed consolidated financial statements. Recently Issued Accounting Pronouncements No recently issued accounting pronouncements are expected to have a material effect in our condensed consolidated financial statements. Note 2. Independent Operator Notes and Independent Operator Receivables The amounts included in IO notes and IO receivables consist primarily of funds we loaned to IOs, net of estimated uncollectible amounts. IO notes, which are payable on demand and have no maturity date, typically bear interest at rates between 3.00 % and 9.95 %. Accrued interest receivable on IO notes is included within the "independent operator receivables and current portion of independent operator notes, net of allowance" line item on the condensed consolidated balance sheets and was $ 1.1 million and $ 0.9 million as of April 1, 2023 and December 31, 2022, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of April 1, 2023 or December 31, 2022. 11 Table of Contents Notes and receivables from our IOs participating in our TCAP, as defined below, are not considered to be past due or on a non-accrual status due to delinquency and are excluded from such measures. IO notes and IO receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets. The allowance is estimated using an expected loss framework, which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include: • TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are participating in our Temporary Commission Adjustment Program ("TCAP") as of the end of each reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in IO skills and experience. • Non-TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are not participating in TCAP as of the end of each reporting period. • New store — Includes the notes and receivables from IOs with stores that have been open for less than 18 months as of the end of each reporting period, and may or may not be participating in TCAP. Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an individual basis. Amounts due from IOs and the related allowances as of April 1, 2023 and December 31, 2022 consisted of the following (amounts in thousands) : Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net April 1, 2023 Independent operator notes $ 37,467 $ ( 822 ) $ ( 9,905 ) $ 26,740 $ 1,826 $ 24,914 Independent operator receivables 12,097 ( 4,451 ) ( 779 ) 6,867 6,867 — Total $ 49,564 $ ( 5,273 ) $ ( 10,684 ) $ 33,607 $ 8,693 $ 24,914 Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net December 31, 2022 Independent operator notes $ 37,522 $ ( 700 ) $ ( 12,509 ) $ 24,313 $ 1,778 $ 22,535 Independent operator receivables 10,565 ( 1,538 ) — 9,027 9,027 — Total $ 48,087 $ ( 2,238 ) $ ( 12,509 ) $ 33,340 $ 10,805 $ 22,535 A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands): 13 Weeks Ended April 1, 2023 April 2, 2022 Beginning balance $ 14,747 $ 11,912 Provision for IO notes and IO receivables reserves 1,348 1,207 Write-off of provision for IO notes and IO receivables ( 138 ) ( 572 ) Ending Balance $ 15,957 $ 12,547 12 Table of Contents The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of April 1, 2023 (amounts in thousands): Credit Quality Indicator 2023 (YTD) 2022 2021 2020 2019 Prior Total TCAP $ 447 $ 5,147 $ 5,317 $ 2,748 $ 522 $ 958 $ 15,139 Non-TCAP 861 4,227 3,097 2,685 1,978 1,981 14,829 New store 1,380 5,357 762 — — — 7,499 Total $ 2,688 $ 14,731 $ 9,176 $ 5,433 $ 2,500 $ 2,939 $ 37,467 TCAP IO Notes Notes of IOs participating in our TCAP represented 51.4 % and 49.7 % of total IO notes balances as of April 1, 2023 and December 31, 2022, respectively. A total of $ 1.8 million of IO notes were moved into our TCAP during the 13 weeks ended April 1, 2023. The weighted average contractual interest rate of such IO notes was reduced from 9.95 % to 3.00 %. In addition, $ 1.0 million of IO notes were transferred from TCAP to Non-TCAP during the 13 weeks ended April 1, 2023. Note 3. Long-term Debt Long-term debt consisted of the following (amounts in thousands): April 1, 2023 December 31, 2022 Senior term loan due 2025 $ — $ 385,000 Senior term loan due 2028 300,000 — Revolving credit facility 25,000 — Long-term debt, gross 325,000 385,000 Less: Unamortized debt issuance costs and debt discounts ( 1,939 ) ( 5,350 ) Long-term debt, less unamortized debt discounts and debt issuance costs 323,061 379,650 Less: Current portion ( 5,625 ) — Long-term debt, net $ 317,436 $ 379,650 2023 Credit Agreement On February 21, 2023, we entered into a credit agreement with Bank of America, N.A., as administrative agent and collateral agent, and the other parties party thereto (the "2023 Credit Agreement"). The 2023 Credit Agreement provides for senior secured credit facilities consisting of (i) a senior secured term loan facility (the "senior term loan") in an aggregate principal amount of $ 300.0 million and (ii) a senior secured revolving credit facility (the "revolving credit facility" and, together with the senior term loan, the "new credit facilities") in an aggregate principal amount of $ 400.0 million. The revolving credit facility includes sub-commitments for $ 50.0 million letters of credit and $ 25.0 million of swingline loans. The senior term loan was borrowed in full at closing, and $ 25.0 million of the revolving credit facility was borrowed at closing. Also on February 21, 2023, we repaid all of the outstanding indebtedness under our Prior First Lien Credit Agreement, defined below, as well as fees and expenses in connection therewith. All obligations of the Company’s subsidiaries under the Prior First Lien Credit Agreement were discharged as of such date. In connection with the closing of the 2023 Credit Agreement and repayment of the Prior First Lien Credit Agreement and in accordance with ASC Topic 470-50, Debt-Modifications and Extinguishments, we wrote off $ 5.1 million of previously unamortized debt issuance costs and debt discounts and incurred $ 0.2 million in debt modification costs, which were recorded within loss on debt extinguishment and modification for the 13 weeks ended April 1, 2023. Furthermore, a total of $ 4.6 million of creditor and third-party debt issuance costs were capitalized or carried over from the prior credit facilities, as defined below, and will be amortized over the term of the new credit facilities. Borrowings under the 2023 Credit Agreement bear interest at a rate equal to, at our option, either (a) the base rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the federal funds rate then in effect, plus 0.50 %, (ii) the prime rate then in effect and (iii) a specified Term SOFR (as defined in the 2023 Credit Agreement) rate plus 1.00 %, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 0.75 % to 1.75 % based on our Total Net Leverage Ratio (as defined in the 2023 Credit Agreement); and (b) an adjusted Term SOFR rate determined 13 Table of Contents on the basis of a one, three or six month interest period, plus 0.10 %, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 1.75 % to 2.75 % based on our Total Net Leverage Ratio. As of April 1, 2023, interest on borrowings under the new credit facilities was based on one-month Term SOFR with an applicable margin of 2.25 %. The new credit facilities of the 2023 Credit Agreement permit us to add incremental term loan facilities, increase any existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving credit facility tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in excess of the sum of the greater of $ 200.0 million and 100 % of Consolidated EBITDA (as defined in the 2023 Credit Agreement), subject to certain limitations, plus (b) voluntary prepayments of the term loan facility, voluntary permanent reductions of the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens on the collateral securing the new credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn, and after giving effect to any appropriate pro forma adjustment events) we would be in compliance, on a pro forma basis (but excluding the cash proceeds of such incurrence), with a Total Net Leverage Ratio of 3.00 to 1.00. Our obligations under the 2023 Credit Agreement are unconditionally guaranteed by all of the Company’s wholly owned direct and indirect restricted subsidiaries, subject to certain exceptions. All obligations under the 2023 Credit Agreement, and the guarantees of such obligations, are secured, subject to permitted liens and other exceptions, by substantially all of the Company’s assets and those of each subsidiary guarantor. The 2023 Credit Agreement requires us to make scheduled amortization payments of the senior term loan starting in June 2023. We may voluntarily prepay the new credit facilities, in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in applicable cases. Senior Term Loan due 2028 Our $ 300.0 million senior term loan under our 2023 Credit Agreement matures on February 21, 2028 and had an interest rate of 7.11 % as of April 1, 2023. Revolving Credit Facility As of April 1, 2023 we had $ 3.5 million of outstanding letters of credit and $ 371.5 million of remaining borrowing capacity available under the revolving credit facility, which matures on February 21, 2028. The interest rate on the revolving credit facility was 7.11 % as of April 1, 2023. As discussed above, $ 25.0 million of the revolving credit facility was borrowed at closing and remained outstanding as of April 1, 2023. We are required to pay a quarterly commitment fee ranging from 0.15 % to 0.30 % on the daily unused amount of the commitment under the revolving credit facility based upon our Total Net Leverage Ratio. We are also required to pay fronting fees and other customary fees for letters of credit issued under the revolving credit facility. Prior First Lien Credit Agreement GOBP Holdings, Inc., our wholly owned subsidiary, was the borrower under a first lien credit agreement (the "Prior First Lien Credit Agreement") with a syndicate of lenders that consisted of a $ 385.0 million senior term loan (the "prior senior term loan") and a revolving credit facility (the "prior revolving credit facility" and, together with the prior senior term loan, the "prior credit facilities") for an amount up to $ 100.0 million. Prior Senior Term Loan due 2025 Our prior senior term loan under our Prior First Lien Credit Agreement had a maturity of October 22, 2025 and had an applicable margin of 2.75 % for Eurodollar loans and 1.75 % for base rate loans. On April 29, 2022, we prepaid $ 75.0 million of principal on the prior senior term loan outstanding under our Prior First Lien Credit Agreement. In connection with the payment, we wrote off $ 1.3 million of previously unamortized debt issuance costs and debt discounts. As discussed above, on February 21, 2023, in connection with the closing of the 2023 Credit Agreement, we repaid the remaining $ 385.0 million of principal on the prior senior term loan outstanding under our Prior First Lien Credit Agreement. Prior Revolving Credit Facility Our prior revolving credit facility under our Prior First Lien Credit Agreement had a maturity of October 23, 2023. No amounts were outstanding under the prior revolving credit facility as of December 31, 2022 and no amounts were outstanding as of final repayment of the Prior First Lien Credit Agreement. 14 Table of Contents We were required to pay a quarterly commitment fee ranging from 0.25 % to 0.50 % on the daily unused amount of the commitment under the prior revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We were also required to pay fronting fees and other customary fees for letters of credit issued under the prior revolving credit facility. Debt Covenants The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of subsidiaries to pay dividends or make other payments to the borrower. The 2023 Credit Agreement also contains financial performance covenants requiring us to satisfy a maximum total net leverage ratio test and a minimum interest coverage ratio test as of the last day of each fiscal quarter ending on or after April 1, 2023. The maximum total net leverage ratio test requires us to be in compliance with a Total Net Leverage Ratio no greater than 3.50 to 1.00 as of the last day of each test period ending prior to the test period ending on or about December 31, 2025, and no greater than 3.25 to 1.00 as of the last day of each test period ending thereafter, subject to certain adjustments set forth in the 2023 Credit Agreement. The minimum interest coverage ratio test requires us to be in compliance with a Consolidated Interest Coverage Ratio (as defined in the 2023 Credit Agreement) no less than 1.75 to 1.00 as of the last day of each test period. As of April 1, 2023, we were in compliance with all applicable financial covenant requirements for our 2023 Credit Agreement. Schedule of Principal Maturities Principal maturities of debt as of April 1, 2023 are as follows (amounts in thousands): Remainder of fiscal 2023 $ 3,750 Fiscal 2024 7,500 Fiscal 2025 15,000 Fiscal 2026 15,000 Fiscal 2027 15,000 Thereafter 268,750 Total $ 325,000 Interest Expense, Net Interest expense, net, consisted of the following (amounts in thousands): 13 Weeks Ended April 1, 2023 April 2, 2022 Interest on loans $ 7,107 $ 3,531 Amortization of debt issuance costs and debt discounts 401 628 Interest on finance leases 72 90 Interest income ( 1,661 ) ( 567 ) Interest expense, net $ 5,919 $ 3,682 15 Table of Contents Loss on Debt Extinguishment and Modification Loss on debt extinguishment and modification consisted of the following (amounts in thousands): 13 Weeks Ended April 1, 2023 April 2, 2022 Write off of debt issuance costs $ 4,518 $ — Write off of debt discounts 578 — Debt modification costs 244 — Loss on debt extinguishment and modification $ 5,340 $ — Note 4. Stockholders' Equity Share Repurchase Program In November 2021, our Board of Directors approved a share repurchase program. This program, effective November 5, 2021 and without an expiration date, authorized us to repurchase up to $ 100.0 million of our outstanding common stock utilizing a variety of methods including open-market purchases, accelerated share repurchase programs, privately negotiated transactions, structured repurchase transactions and repurchases under a Rule 10b5-1 plan (which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under securities laws). Any repurchased shares are constructively retired and returned to an unissued status. During the 13 weeks ended April 1, 2023, we repurchased 122,862 shares of common stock totaling $ 3.3 million at an average price of $ 26.66 per share in open-market transactions pursuant to a Rule 10b5-1 plan. During the 13 weeks ended April 2, 2022, we repurchased 139,718 shares of common stock totaling $ 3.5 million at an average price of $ 24.70 per share in open-market transactions pursuant to a Rule 10b5-1 plan. As of April 1, 2023, we had $ 93.3 million of repurchase authority remaining under the share repurchase program. Note 5. Share-based Awards For a discussion of our share-based incentive plans, refer to Note 8 of our 2022 Form 10-K. Share-based Award Activity The following table summarizes stock option activity under all equity incentive plans during the 13 weeks ended April 1, 2023: Time-Based Stock Options Performance-Based Stock Options Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price Options outstanding as of December 31, 2022 2,562,774 $ 12.13 801,635 $ 4.68 Exercised ( 20,278 ) 10.08 — — Forfeitures ( 1,577 ) 22.00 — — Options outstanding as of April 1, 2023 2,540,919 $ 12.14 801,635 $ 4.68 Options vested and exercisable as of April 1, 2023 1,696,785 $ 7.46 801,635 $ 4.68 16 Table of Contents The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 13 weeks ended April 1, 2023: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 31, 2022 690,354 $ 31.79 Granted 439,297 27.29 Vested ( 289,969 ) 32.45 Forfeitures ( 13,097 ) 31.35 Unvested balance as of April 1, 2023 826,585 $ 29.17 The following table summarizes performance-based restricted stock unit ("PSU") activity under the Grocery Outlet Holding Corp. 2019 Incentive Plan during the 13 weeks ended April 1, 2023: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 31, 2022 1,331,803 $ 32.89 Granted (1) 433,241 27.29 Adjustment for expected performance achievement (2) 65,355 31.83 Vested ( 436,522 ) 36.90 Forfeitures ( 7,097 ) 31.71 Unvested balance as of April 1, 2023 (3) 1,386,780 $ 29.83 _______________________ (1) Represents initial grant of PSUs based on performance target level achievement of 100 %. (2) Represents the adjustment to previously granted PSUs based on performance expectations as of April 1, 2023. (3) An additional 785,582 PSUs could potentially be included if the maximum performance level of 200 % is reached for all PSUs outstanding as of April 1, 2023. Share-based Compensation Expense We recognize compensation expense for stock options, RSUs and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. We recognize share-based award forfeitures in the period such forfeitures occur. Share-based compensation expense consisted of the following (amounts in thousands): 13 Weeks Ended April 1, 2023 April 2, 2022 Time-based stock options $ 408 $ 458 RSUs 2,495 3,325 PSUs 3,773 2,005 Dividends (1) — 7 Share-based compensation expense $ 6,676 $ 5,795 _______________________ (1) Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with a recapitalization that occurred in fiscal 2018. 17 Table of Contents Note 6. Income Taxes Our income tax expense and effective income tax rate were as follows (amounts in thousands, except percentages): 13 Weeks Ended April 1, 2023 April 2, 2022 Income tax expense $ 7,839 $ 4,172 Effective income tax rate 36.4 % 26.5 % The Company's tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, the Company updates the estimated annual effective tax rate. Our effective income tax rate for the 13 weeks ended April 1, 2023 was higher than the combined U.S. federal and state statutory income tax rate primarily due to excess tax expense related to the vesting of RSUs and PSUs below their grant price. The increase in our effective income tax rate for the 13 weeks ended April 1, 2023 compared to the 13 weeks ended April 2, 2022 was primarily driven by the above mentioned excess tax expense related to the vesting of RSUs and PSUs below their grant price during the 13 weeks ended April 1, 2023 as compared to excess tax benefits from the exercise of stock options and vesting of RSUs during the 13 weeks ended April 2, 2022. Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision in our condensed consolidated statements of operations and comprehensive income and include accrued interest and penalties with the related income tax liability on our condensed consolidated balance sheets. To date, we have not recognized any interest and penalties, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax positions as of April 1, 2023 and December 31, 2022, respectively, and do not anticipate any changes to our uncertain tax positions within the next 12 months. Note 7. Related Party Transactions Related Party Leases As of April 1, 2023 and April 2, 2022, we leased 14 and 15 store locations, respectively, and one warehouse location from entities in which Eric Lindberg, Jr., Chairman of our Board of Directors (and formerly our Chief Executive Officer until December 31, 2022), and MacGregor Read, Jr., who served as Vice Chairman of our Board of Directors until September 1, 2022, or their respective families, had a direct or indirect financial interest. As of April 1, 2023, the right-of-use assets and lease liabilities related to these properties was $ 36.7 million and $ 41.1 million, respectively. As of December 31, 2022, the right-of-use assets and lease liabilities related to these properties was $ 40.5 million and $ 45.5 million, respectively. These related parties received aggregate lease payments from us of $ 1.7 million and $ 1.6 million for the 13 weeks ended April 1, 2023 and April 2, 2022, respectively. Independent Operator Notes and Independent Operator Receivables We offer interest-bearing notes to IOs and the gross amount of IO operating notes and IO receivables due was $ 49.6 million and $ 48.1 million as of April 1, 2023 and December 31, 2022, respectively. See Note 2 for additional information. Note 8. Commitments and Contingencies We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We establish an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We monitor those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, we do not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. Management believes that we do not have any pending litigation that, separately or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows. 18 Table of Contents Note 9. Earnings Per Share The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data): 13 Weeks Ended April 1, 2023 April 2, 2022 Numerator Net income and comprehensive income $ 13,720 $ 11,574 Denominator Weighted-average shares outstanding – basic 97,920 96,148 Effect of dilutive options 2,122 2,989 Effect of dilutive RSUs and PSUs (1) 527 297 Weighted-average shares outstanding – diluted 100,569 99,434 Earnings per share: Basic $ 0.14 $ 0.12 Diluted $ 0.14 $ 0.12 _______________________ (1) We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued assuming the end of our reporting period was the end of the relevant PSU award contingency period. The following weighted-average common share equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive (amounts in thousands): 13 Weeks Ended April 1, 2023 April 2, 2022 RSUs 95 365 19 Table of Contents