What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-02-28 compared with 2023-03-01 · 141 added, 181 removed, 279 unchanged (54% of the section changed)

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For discussion related to the results of operations and changes in financial condition for fiscal 2022 compared to fiscal 2021 refer to "Item 7.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the fiscal year ended January 1, 2022.

Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

We operate on a fiscal year that ends on the Saturday closest to December 31st each year.

References to fiscal 2022, fiscal 2021, and fiscal 2020 refer to the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

Our 2022 and 2021 fiscal years consisted of 52 weeks while our 2020 fiscal year consisted of 53 weeks.

References to fiscal 2023, fiscal 2022, and fiscal 2021 refer to the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

Our 2023, 2022 and 2021 fiscal years all consisted of 52 weeks.

As used in this report, references to "Grocery Outlet," "the Company," "the registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp.

and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.

and its consolidated subsidiary unless otherwise indicated or the context requires otherwise.

We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores.

Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional grocers.

Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers.

Entrepreneurial independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product offering.

As of December 31, 2022, we had 441 stores in California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland and New Jersey.

Macroeconomic Conditions

During fiscal 2022 and continuing into fiscal 2023, our business was and continues to be impacted by current macroeconomic conditions including supply chain and labor challenges, inflation, and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs within their businesses.

As of December 30, 2023, we had 468 stores in California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland, New Jersey and Ohio.

Macroeconomic Conditions and Recent Developments

Over the past several years, and to a lesser extent recently, our business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, inflation and subsequent disinflation, and changes in consumer behavior, and our IOs have been impacted by staffing challenges, increased labor costs and utility costs within their businesses.

Furthermore, planned construction and opening of new stores has been, and may continue to be, negatively impacted due to both increased lead times to acquire materials, obtain permits and licenses as well as higher construction and development related costs, causing our new store growth in fiscal 2022 and 2023 to be below our long-term strategic goal of 10% annualized store growth on average .

The extent of the continuing impact of these factors on our operational and financial performance will depend on many factors, including certain factors outside of our control.

We continue to utilize our unique buying model, our strong vendor relationships and our agile approach to inventory management to offer customers a compelling product assortment at a deep competitive value, however, like many companies in the grocery and retail sectors, we continue to experience increased product costs, which is being mitigated in part in higher retail pricing by us and IOs.

These cost increases resulted in part from supply disruptions, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain and other disruptions.

In addition to increased product costs, we have incurred greater selling, general and administrative expenses ("SG&A") related to personnel, travel, and other third party and operational costs due to the aforementioned factors.

Further, planned construction and opening of new stores during fiscal 2022 was, and may continue to be, negatively impacted due to both increased lead times to acquire materials, obtain permits and licenses as well as higher construction and development related costs.

In fiscal 2022 we opened 27 new stores, which was below our long-term strategic goal of 10% unit growth.

O ur planned new store growth in fiscal 2023 is also expected to be below our long-term strategic unit growth goal, however we expect the pace of openings to accelerate in the second half of the year to our 10% annualized new unit growth rate.

Our new store growth efforts for fiscal 2024 and beyond are focused on organic growth and new real estate opportunities that align with our long-term geographic expansion and store growth strategies.

Complementary growth opportunities may include expanding strategic relationships with large property owners, evaluating acquisitions of opportunistic real estate that become available through consolidation in the retail sector, and exploring strategic regional acquisitions of operating businesses.

On February 14, 2024 we entered into a stock purchase agreement to acquire United Grocery Outlet, which includes 40 stores in six adjacent states we do not operate in currently (Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia) and a company-operated distribution center.

We expect this transaction to close early in the second quarter of fiscal 2024.

In addition to the newly acquired United Grocery Outlet stores, we plan to open approximately 15 to 20 stores in existing markets in fiscal 2024, for a planned total of 55 to 60 net new stores in fiscal 2024.

In late August 2023, we replaced components of our enterprise resource planning system, including our financial ledger, inventory management platform and product data warehouse system.

The implementation of these system upgrades resulted in disruption to our business operations, including o rdering and inventory disruptions, which impacted our results of operations during the remainder of fiscal 2023, as more fully described below in “Comparison of fiscal 2023 to fiscal 2022." Some of these disruptions are still ongoing as of the date of this filing and are expected to negatively impact the first quarter of fiscal 2024 results.

For additional information regarding the risks related to our business and operations, see "Item 1A.

Risk Factors" of this Annual Report on Form 10-K.

Key Factors and Measures We Use to Evaluate Our Business

We consider a variety of financial and operating measures in assessing the performance of our business.

The key generally accepted accounting principles ("GAAP") financial measures we use are net sales, gross profit and gross margin, SG&A and operating income.

The key generally accepted accounting principles ("GAAP") financial measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A") and operating income.

The key operational metrics and non-GAAP financial measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share.

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• Net sales increased 10.9% to $3.97 billion for fiscal 2023 from $3.58 billion for fiscal 2022.

comparable store sales increased by 11.8% in fiscal 2022.

• We opened 27 new stores and closed one, ending fiscal 2022 with 441 stores in eight states.

• Comparable store sales increased by 7.5% in fiscal 2023, driven by a 8.3% increase in the number of transactions partially offset by a 0.8% decrease in average transaction size.

• Gross margin increased by 80 basis points to 31.3%, compared to gross margin of 30.5% for fiscal 2022.

• In late August, we implemented new technology platforms and, as a result, experienced disruptions which are estimated to have negatively impacted comparable store sales by approximately 90 basis points and gross margin by 50 basis points in fiscal 2023.

• We opened 28 new stores and closed one, ending fiscal 2023 with 468 stores in nine states.

• Net income increased 22.1% to $79.4 million, or $0.79 per diluted share for fiscal 2023, compared to net income of $65.1 million, or $0.65 per diluted share, for fiscal 2022.

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Please note that our non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP.

Beginning with the fourth quarter of fiscal 2022, we updated our definitions of adjusted EBITDA, adjusted net income and adjusted earnings per share to no longer exclude the impact of non-cash rent expense and the provision for (write-off of) accounts receivable reserves.

The presentation for adjusted EBITDA, adjusted net income and adjusted earnings per share for fiscal 2021 and 2020 has been recast to reflect these changes and a reconciliation between the current and previous definitions of adjusted EBITDA, adjusted net income and adjusted earnings per share have been provided.

See the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including their definitions, how management utilizes such non-GAAP financial measures and reconciliations of the non-GAAP measures and the most directly comparable GAAP measures.

See the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including their definitions, how the non-GAAP measures provide useful information to investors and how management utilizes them, and reconciliations of the non-GAAP measures and the most directly comparable GAAP measures.

Key Components of Results of Operations

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Our ever-changing selection of offerings across diverse product categories supports growth in net sales by attracting new customers and encouraging repeat visits from our existing customers.

The spending habits of our customers are affected by changes in macroeconomic conditions and discretionary income.

Our customers' discretionary income is significantly impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment.

The spending habits of our customers are affected by changes in macroeconomic conditions, governmental benefit programs such as the Supplemental Nutrition Assistance Program and discretionary income.

Our customers' discretionary income is impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment.

Because we offer a broad selection of merchandise at extreme values, historically our business has benefited from periods of economic uncertainty.

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Gross margin is gross profit as a percentage of our net sales.

Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit.

Gross margin is a measure used by

management to indicate whether we are selling merchandise at an appropriate gross profit.

Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary.

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Our gross profit is variable in nature and generally follows changes in net sales.

While our disciplined buying approach has produced consistent gross margins throughout economic cycles, which we believe has helped to mitigate adverse impacts on gross profit and results of operations, changes in consumer demand like we experienced and continue to experience as a result of the current macroeconomic conditions, including inflationary cost increases for goods, labor and transportation, supply chain constraints and changes in discretionary income, have resulted and could continue to result in

unexpected changes to our gross margins.

While our disciplined buying approach has produced consistent gross margins throughout economic cycles, which we believe has helped to mitigate adverse impacts on gross profit and results of operations, changes in consumer demand as a result of macroeconomic conditions, including inflationary cost increases for goods, labor and transportation, supply chain constraints and changes in discretionary income, have resulted and could continue to result in higher variability to our gross margins.

The components of our cost of sales, as well as our gross profit and gross margin, may not be comparable to the same or similar measures of our competitors and other retailers.

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SG&A are comprised of both store-related expenses and corporate expenses.

Our store-related expenses include commissions paid to IOs, occupancy and our portion of maintenance costs and the cost of opening new IO stores.

Our store-related expenses include commissions paid to IOs, occupancy and our portion of maintenance costs, depreciation and amortization of store-related assets and the cost of opening new IO stores.

Company-operated store-related expenses also include payroll, benefits, supplies and utilities.

Corporate expenses include payroll and benefits for corporate and field support, marketing and advertising, insurance and professional services and operator recruiting and training costs.

Corporate expenses include payroll and benefits for corporate and field support, share-based compensation, marketing and advertising, insurance and professional services, depreciation and amortization of corporate assets and operator recruiting and training costs.

We continue to closely manage our expenses and monitor SG&A as a percentage of net sales.

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The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers.

In the first quarter of fiscal 2023, in order to enhance the comparability of our results with our peers, we updated our presentation of the consolidated statements of operations and comprehensive income to include depreciation and amortization expenses and share-based compensation expenses within selling, general and administrative expenses.

Prior period amounts have been reclassified to conform to current period presentation.

The reclassification of these items had no impact on net income, earnings per share, or retained earnings in the current or prior periods.

Operating Income

Operating income is gross profit less SG&A, depreciation and amortization and share-based compensation.

Operating income excludes interest expense, net, gain on insurance recoveries, loss on debt extinguishment and modification and income tax expense (benefit).

Operating income is gross profit less SG&A.

Operating income excludes interest expense, net, gain on insurance recoveries, loss on debt extinguishment and modification and income tax expense.

We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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Gross profit 1,241,679 1,092,099 948,786

Operating expenses:

Selling, general and administrative 889,347 773,718 772,409

Depreciation and amortization 75,206 68,358 55,479

Share-based compensation 32,556 17,615 38,084

Total operating expenses 997,109 859,691 865,972

Income from operations 94,990 89,095 107,375

Selling, general and administrative expenses 1,115,897 997,109 859,691

Operating income 125,782 94,990 89,095

Other expenses (income):

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Income before income taxes 104,081 75,749 77,501

Income tax expense (benefit) 10,697 15,191 (19,579)

Income tax expense 24,644 10,697 15,191

Net income and comprehensive income $ 79,437 $ 65,052 $ 62,310

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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Gross profit 31.3 % 30.5 % 30.8 %

Operating expenses:

Selling, general and administrative 24.9 % 25.1 % 24.6 %

Depreciation and amortization 2.1 % 2.2 % 1.8 %

Share-based compensation 0.9 % 0.6 % 1.2 %

Total operating expenses 27.9 % 27.9 % 27.6 %

Income from operations 2.7 % 2.9 % 3.4 %

Selling, general and administrative expenses 28.1 % 27.9 % 27.9 %

Operating income 3.2 % 2.7 % 2.9 %

Other expenses (income):

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Income before income taxes 2.6 % 2.1 % 2.5 %

Income tax expense (benefit) 0.3 % 0.5 % (0.6) %

Income tax expense 0.6 % 0.3 % 0.5 %

Net income and comprehensive income 2.0 % 1.8 % 2.0 %

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Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas.

Excluded from our comparable store definition are those stores that have been closed for an extended period as well as any planned store closures or dispositions.

Excluded from our comparable store definition are those stores that have been temporarily closed for an extended period, those that have had their business materially disrupted for both planned projects as well as due to unforeseen circumstances, permanent store closures and dispositions.

When applicable, as was the case with fiscal 2020 and will be the case with fiscal 2025, we exclude the net sales in the non-comparable week of a 53-week year from the same store sales calculation after comparing the current and prior year weekly periods that are most closely aligned.

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EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are also frequently used by analysts, investors and other interested parties to evaluate us and other companies in our industry.

Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results.

We use EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures.

In addition, we use adjusted EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions.

Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results.

We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides additional information for analyzing trends in our business.

We define EBITDA as net income before net interest expense, income taxes and depreciation and amortization expenses.

Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, asset impairment and gain or loss on disposition and certain other expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude.

Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, loss on debt extinguishment and modification, asset impairment and gain or loss on disposition, acquisition costs and certain other expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude.

Adjusted net income represents net income adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs, tax adjustment to normalize the effective tax rate, and tax effect of total adjustments.

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In the future, we will incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income.

Our presentation of EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive our non-GAAP measures.

Our presentation of EBITDA, adjusted EBITDA, adjusted net

income and adjusted earnings per share should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive our non-GAAP measures.

The following table summarizes key operating metrics and non-GAAP financial measures for the periods presented (amounts in thousands, except for percentages and store counts):

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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(1) Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved.

For fiscal 2020, which is a 53-week year, we excluded the sales in the non-comparable week from the comparable store sales calculation after comparing the current and prior year weekly periods that are most closely aligned.

(2) See "—GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.

Beginning with the fourth quarter of fiscal 2022, we updated our definitions of adjusted EBITDA and adjusted net income to no longer exclude the impact of non-cash rent expense and the provision for (write-off of) accounts receivable reserves.

GAAP to Non-GAAP Reconciliations

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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Interest expense, net 16,361 17,967 15,564

Income tax expense (benefit) 10,697 15,191 (19,579)

Income tax expense 24,644 10,697 15,191

Depreciation and amortization expenses 87,982 78,251 71,124

78,251 71,124 58,051

EBITDA 208,424 171,967 164,189

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31,091 32,556 17,615

Asset impairment and gain or loss on disposition (3)

1,176 1,241 1,727

Loss on debt extinguishment and modification (2)

5,340 1,274 —

Adjusted EBITDA, revised definition $ 214,682 $ 182,892 $ 212,705

Revised definition no longer adjusts for:

Non-cash rent (5)

Asset impairment and gain or loss on disposition (3)

485 1,176 1,241

Provision for (write-off of) accounts receivable reserves (6)

Acquisition costs (4)

6,822 7,709 (153)

Adjusted EBITDA, previous definition $ 225,932 $ 198,458 $ 222,922

Adjusted EBITDA $ 252,621 $ 214,682 $ 182,892

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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31,091 32,556 17,615

Loss on debt extinguishment and modification (2)

5,340 1,274 —

Asset impairment and gain or loss on disposition (3)

485 1,176 1,241

Acquisition costs (4)

6,822 7,709 (153)

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(14,936) (14,702) (8,318)

Adjusted net income, revised definition $ 93,858 $ 78,588 $ 105,309

Adjusted net income $ 108,113 $ 93,858 $ 78,588

GAAP earnings per share

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Diluted $ 0.79 $ 0.65 $ 0.63

Adjusted earnings per share, revised definition

Basic $ 0.97 $ 0.82 $ 1.15

Diluted $ 0.94 $ 0.79 $ 1.07

Revised definition no longer adjusts for:

Non-cash rent (5)

6,932 10,753 10,673

Provision for (write-off of) accounts receivable reserves (6)

4,318 4,813 (456)

Change in tax effect of total adjustments (9)

(3,087) (4,241) (2,861)

Adjusted net income, previous definition $ 102,021 $ 89,913 $ 112,665

Adjusted earnings per share, previous definition

Adjusted earnings per share

Basic $ 1.10 $ 0.97 $ 0.82

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___________________________

(1) Includes depreciation related to our distribution centers, which is included within the cost of sales line item in our consolidated statements of operations and comprehensive income.

See NOTE 1—Organization and Summary of Significant Accounting Policies to our Consolidated Financial Statements for additional information about the components of cost of sales.

(2) Includes non-cash share-based compensation expense and $0.1 million, $0.2 million, and $0.4 million of cash dividends paid in fiscal 2022, 2021, and 2020 respectively, on vested share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016.

(1) Includes non-cash share-based compensation expense and less than $0.1 million, $0.1 million, and $0.2 million of cash dividends paid in fiscal 2023, 2022, and 2021 respectively, on vested share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016.

(2) Represents the write-off of debt issuance costs and debt discounts as well as debt modification costs related to refinancing and/or repayment of our credit facilities.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.

(3) Represents asset impairment charges and gains or losses on dispositions of assets.

(4) Represents other non-recurring, non-cash or non-operational items, such as store closing costs, technology upgrade implementation costs, legal settlements and other legal expenses, loss on debt extinguishment, costs related to employer payroll

taxes associated with equity awards, certain personnel-related costs, strategic project costs, gain on insurance recoveries, and miscellaneous costs.

(5) Consists of the non-cash portion of rent expense, which represents the difference between our straight-line rent expense recognized under GAAP and cash rent payments.

The adjustment can vary depending on the average age of our lease portfolio, which has been impacted by our significant store growth in recent years.

(6) Represents non-cash changes in reserves related to our IO notes and accounts receivable.

(7) Represents the amortization of debt issuance costs and incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases.

(8) Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not consider in our evaluation of ongoing performance, including excess tax benefits related to stock option exercises and vesting of restricted stock units ("RSUs") that are recorded in earnings as discrete items in the reporting period in which they occur.

(4) Represents costs related to the acquisition of United Grocery Outlet, including due diligence, legal, and other consulting expenses.

(5) Represents other non-recurring, non-cash or non-operational items, such as technology upgrade implementation costs, strategic project costs, costs related to employer payroll taxes associated with equity awards, legal settlements and other legal expenses, store closing costs, certain personnel-related costs and miscellaneous costs.

(6) Represents the amortization of debt issuance costs as well as the incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases.

(7) Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not consider in our evaluation of ongoing performance, including excess tax expenses or benefits related to stock option exercises and vesting of restricted stock units that are recorded in earnings as discrete items in the reporting period in which they occur.

(8) Represents the tax effect of the total adjustments.

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

Net sales $ 3,969,453 $ 3,578,101 $ 391,352 10.9 %

The increase in net sales for fiscal 2022 compared to fiscal 2021 was primarily attributable to an increase in comparable store sales as well as non-comparable store net sales growth primarily from the 26 net new stores opened during fiscal 2022.

The increase in net sales for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase in comparable store sales as well as non-comparable store net sales growth primarily from the 27 net new stores opened during fiscal 2023, partially offset by disruptions related to our aforementioned system upgrades.

Comparable store sales increased 7.5% for fiscal 2023 compared to fiscal 2022.

The increase was driven by a 5.9% increase in the number of transactions combined with a 5.6% increase in average transaction size.

The increase was driven by an 8.3% increase in the number of transactions combined with a 0.8% decrease in average transaction size.

Cost of Sales

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

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% of net sales 68.7 % 69.5 %

The increase in cost of sales for fiscal 2022 compared to fiscal 2021 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 26 net new stores opened during fiscal 2022 (as discussed above).

Costs as a percentage of net sales increased for fiscal 2022 compared to fiscal 2021 due to the impact of inflationary product and supply chain cost pressures, partially offset by increases in retail pricing.

Due to the interdependencies of the above-mentioned inflationary and supply chain factors as well as our dynamic ever-changing assortment, we are unable to quantify the impact that they individually had on costs as a percentage of net sales.

The increase in cost of sales for fiscal 2023 compared to fiscal 2022 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 27 net new stores opened during fiscal 2023.

Costs as a percentage of net sales decreased for fiscal 2023 compared to fiscal 2022 primarily due to our changing assortment along with generally strong purchasing and inventory management in fiscal 2023, partially offset by the late third quarter and fourth quarter of fiscal 2023 impacts related to our system upgrades.

Gross Profit and Gross Margin

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

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Gross margin 31.3 % 30.5 %

The increase in gross profit for fiscal 2022 compared to fiscal 2021 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 26 net new stores opened during fiscal 2022 (as discussed above).

Gross margin decreased for fiscal 2022 compared to fiscal 2021 due to the impact of inflationary product and supply chain cost pressures, partially offset by increases in retail pricing (as discussed above).

The increase in gross profit for fiscal 2023 compared to fiscal 2022 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 27 net new stores opened during fiscal 2023, partially offset by the late third quarter and fourth quarter of fiscal 2023 impacts related to our system upgrades.

Gross margin increased for fiscal 2023 compared to fiscal 2022 primarily due to our changing assortment along with generally strong purchasing and inventory management during fiscal 2023, partially offset by impacts related to our system upgrades.

Selling, General and Administrative Expenses

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

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The increase in SG&A for fiscal 2023 compared to fiscal 2022 was driven by $98.0 million in higher store-related expenses and $20.8 million in higher corporate-related expenses.

Store-related expenses primarily increased as a result of

higher commission payments to IOs, reflecting gross profit growth, as well as higher store occupancy costs due to 26 net new stores opened during 2022.

Corporate-related expenses increased largely due to higher incentive compensation, reflecting stronger financial performance versus the prior year.

As a percentage of net sales, SG&A decreased slightly for fiscal 2022 compared to fiscal 2021 as leverage on store-related expenses was largely offset by higher incentive compensation expense.

Depreciation and Amortization Expense

Fiscal Year End

2022 January 1,

2022 $ Change % Change

Depreciation and amortization $ 75,206 $ 68,358 $ 6,848 10.0 %

% of net sales 2.1 % 2.2 %

The increase in depreciation and amortization expenses for fiscal 2022 compared to fiscal 2021 was primarily driven by new store growth and existing store investments.

Share-based Compensation Expense

Fiscal Year Ended

2022 January 1,

2022 $ Change % Change

Share-based compensation $ 32,556 $ 17,615 $ 14,941 84.8 %

% of net sales 0.9 % 0.6 %

The increase in share-based compensation expenses for fiscal 2022 compared to fiscal 2021 was primarily due to the impact of share-based awards granted in October of fiscal 2021 and March of fiscal 2022 as well as an increase in the number of performance-based restricted stock units ("PSUs") expected to be earned based on revised performance expectations during fiscal 2022.

See NOTE 8—Share-based Awards to our Consolidated Financial Statements for additional information.

Store-related expenses primarily increased as a result of higher commission payments to IOs, reflecting gross profit growth together with incremental support we elected to provide

to our IOs in connection with our system upgrades, as well as higher store occupancy costs due to 27 net new stores opened during 2023, partially offset by the recognition of e-commerce vendor obligations.

Corporate-related expenses increased largely due to increased personnel and professional service costs to support the continued growth of the business as well as increased corporate-related depreciation and amortization expense driven by investments in general and administrative infrastructure.

As a percentage of net sales, SG&A increased slightly for fiscal 2023 compared to fiscal 2022 primarily due to the aforementioned factors.

Interest Expense, net

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

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% of net sales 0.4 % 0.5 %

The increase in net interest expense for fiscal 2022 compared to fiscal 2021 was primarily driven by increases in the effective borrowing rate, partially offset by both the April 2022 prepayment of $75.0 million of principal on the senior term loan outstanding under our prior first lien credit agreement, dated as of October 22, 2018, as well as increased interest income from cash and cash equivalents.

The decrease in net interest expense for fiscal 2023 compared to fiscal 2022 was primarily driven by increased interest income from IO notes and cash and cash equivalents as well as $2.1 million in capitalized interest in fiscal 2023, partially offset by increased interest expense on loans.

The increased interest expense on loans was due to increases in the effective borrowing rate on loans, partially offset by a decrease in principal debt outstanding over fiscal 2023.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.

Gain on Insurance Recoveries

Fiscal Year Ended

2022 January 1,

2022 $ Change % Change

Gain on insurance recoveries $ — $ (3,970) $ 3,970 (100.0) %

% of net sales — % (0.1) %

During fiscal 2021, we recorded a $4.0 million gain on insurance due to proceeds received related to the loss of our Paradise, California store due to a wildfire in 2018.

Loss on Debt Extinguishment and Modification

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

Loss on debt extinguishment and modification $ 1,274 $ — $ 1,274 N/A

Loss on debt extinguishment and modification $ 5,340 $ 1,274 $ 4,066 319.2 %

% of net sales 0.1 % — %

During fiscal 2022, we recorded a $1.3 million loss on debt extinguishment related to the prepayment of $75.0 million of principal on the senior term loan outstanding under our prior first lien credit agreement, dated as of October 22, 2018.

During fiscal 2023, we recorded a $5.3 million loss on debt extinguishment related to the payoff of $385.0 million of principal on the senior term loan outstanding under our prior credit facilities.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.

Income Tax Expense (Benefit)

Income Tax Expense

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

Income tax expense (benefit) $ 10,697 $ 15,191 $ (4,494) (29.6) %

Income tax expense $ 24,644 $ 10,697 $ 13,947 130.4 %

% of net sales 0.6 % 0.3 %

Effective tax rate 23.7 % 14.1 %

The decrease in income tax expense for fiscal 2022 compared to fiscal 2021 was primarily driven by benefits associated with accelerated tax depreciation on fixtures and equipment as well as leasehold assets.

The increase in income tax expense for fiscal 2023 compared to fiscal 2022 was primarily driven by higher pre-tax income.

The increase in our effective income tax rate for fiscal 2023 compared to fiscal 2022 was primarily driven by lower excess tax benefits related to the exercise of stock options as well as non-deductible executive compensation under Internal Revenue Code Section 162(m) during fiscal 2023, which was not applicable during fiscal 2022.

See NOTE 10—Income Taxes to our Consolidated Financial Statements for additional information.

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

Adjusted EBITDA $ 252,621 $ 214,682 $ 37,939 17.7 %

The increase in adjusted EBITDA for fiscal 2022 compared to fiscal 2021 was primarily attributable to net sales growth, as discussed above, partially offset by decreases in gross margin and increases in SG&A.

The increase in adjusted EBITDA for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase in comparable store sales of 7.5% for fiscal 2023 as well as higher net sales resulting from new store growth, combined with increased gross margin.

Adjusted Net Income

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 $ Change % Change

Adjusted net income $ 108,113 $ 93,858 $ 14,255 15.2 %

The increase in adjusted net income for fiscal 2022 compared to fiscal 2021 was primarily a result of net sales growth, as discussed above, partially offset by decreases in gross margin and increases in SG&A.

The increase in adjusted net income for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase in comparable store sales of 7.5% for fiscal 2023 as well as higher net sales resulting from new store growth, combined with increased gross margin.

Liquidity and Capital Resources

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As of December 30, 2023, we had cash and cash equivalents of $115.0 million, which consisted primarily of cash held in checking and money market accounts with financial institutions.

In addition, on such date we had a revolving credit facility with $100.0 million in borrowing capacity under a first lien credit agreement, dated as of October 22, 2018, with GOBP Holdings, Inc., as borrower (the "Prior First Lien Credit Agreement").

As of December 31, 2022, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under this revolving credit facility.

We did not borrow under this revolving credit facility during fiscal 2022 and had no borrowings outstanding thereunder as of December 31, 2022.

On February 21, 2023, we entered into the Credit Agreement, which provides for senior secured credit facilities consisting of (i) a senior secured term loan facility in an aggregate principal amount of $300.0 million and (ii) a senior secured revolving credit facility in an aggregate principal amount of $400.0 million.

The term loan facility was borrowed in full on such date, and $25.0 million of the revolving credit facility was borrowed on such date, resulting in a remaining borrowing capacity of $375.0 million under the revolving credit facility.

The new senior secured credit facilities of the 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 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 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.

We used the net proceeds from the Credit Agreement, together with cash on hand, to repay all of the outstanding balance on the credit facilities under our Prior First Lien Credit Agreement of $387.2 million, and pay fees and expenses in connection therewith.

All of our subsidiaries’ obligations under the Prior First Lien Credit Agreement were discharged at such time.

We may, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt.

In April 2022, for example, we prepaid $75.0 million of principal on the senior term loan outstanding under our Prior First Lien Credit Agreement.

In addition, we have a revolving credit facility with $400.0 million in borrowing capacity under our 2023 Credit Agreement.

As of December 30, 2023, we had no borrowings outstanding under the revolving credit facility and $4.2 million of outstanding standby letters of credit, resulting in $395.8 million of remaining borrowing capacity available under this revolving credit facility.

On February 21, 2023, we entered into the 2023 Credit Agreement, which provides for senior secured credit facilities consisting of (i) a senior secured term loan facility (the "senior term loan") in an original 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 senior term loan was borrowed in full on such date, and $25.0 million of the revolving credit facility was borrowed on such date.

Also on February 21, 2023, we repaid all of the outstanding indebtedness under our prior first lien credit agreement, as well as fees and expenses in connection therewith.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for further detail regarding the 2023 Credit Agreement and our prior first lien credit agreement.

We may also, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt.

On April 21, 2023, we repaid the $25.0 million of principal on our revolving credit facility.

Since the April 21, 2023 repayment, no amounts were borrowed under this revolving credit facility.

The senior secured 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 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 (as defined in the 2023 Credit Agreement) of 3.00 to 1.00.

Material Cash Requirements

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Debt Obligations and Interest Payments

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for further detail of our Prior First Lien Credit Agreement, which consisted of a $385.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, and the timing of principal maturities.

As of December 31, 2022, based on the then-current interest rate of

7.13%, expected future interest payments associated with our debt totaled $78.2 million, with $27.8 million payable during fiscal 2023.

In February 2023, we repaid this indebtedness with the net proceeds from borrowings under our Credit Agreement as discussed above.

Our borrowings under the Credit Agreement bear interest at variable interest rates.

In addition, t he Credit Agreement requires the Company to make scheduled quarterly amortization payments of the outstanding term loans starting in June 2023.

Such payments total $56.3 million over the term of the term loan facility, with $3.8 million payable during Fiscal 2023.

The remaining term loan facility principal balance will become due in February 2028 at maturity.

See NOTE 14—Subsequent Event to our Consolidated Financial Statements for further detail of our Credit Agreement.

See NOTE 6—Long-term Debt to our Consolidated Financial Statements for further detail of our 2023 Credit Agreement, which consists of a senior term loan with $294.4 million of principal outstanding as of December 30, 2023 and a revolving credit facility for an amount up to $400.0 million, and the timing of principal maturities.

As of December 30, 2023, based on the then-current interest rate of 7.46%, expected future interest payments associated with our debt totaled $85.5 million, with $22.0 million payable during fiscal 2024.

The 2023 Credit Agreement requires us to make scheduled quarterly amortization payments on the senior term loan.

Such payments total $50.6 million over the remaining term of the

senior term loan, with $5.6 million payable in fiscal 2024.

The remaining senior term loan principal balance will become due in February 2028 at maturity.

Capital Expenditures

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Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities—Issuer Purchases of Equity Securities" for discussion about our Board-authorized share repurchase program.

As of December 31, 2022, we expect to pay less than $0.1 million related to dividends declared in our recapitalization in 2018 for stock options that will vest during fiscal 2023.

Pursuant to The Globe Holding Corp.

2014 Plan, if we are unable to make those payments, we may instead elect to reduce the per share exercise price of each such option by an amount equal to the dividend amount in lieu of making the applicable dividend payment.

As of December 30, 2023, we currently do not expect to declare any dividends on our common stock in the foreseeable future.

Acquisition of United Grocery Outlet

On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a stock purchase agreement to acquire BBGO Acquisition, Inc., a holding company that owns all of the outstanding capital stock of The Bargain Barn Inc., which does business as United Grocery Outlet, for approximately $62.0 million in cash, subject to customary purchase price adjustments.

This transaction is expected to close early in the second quarter of fiscal 2024 and remains subject to customary closing conditions.

We expect to finance the transaction with available cash.

See "Acquisition of United Grocery Outlet" in "Item 1.

Business" of this Annual Report on Form 10-K for further detail.

Debt Covenants

The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants.

The Credit Agreement contains certain covenants that, among other things, limit the our ability and the ability of our restricted subsidiaries to:

The 2023 Credit Agreement contains certain covenants that, among other things, limit the our ability and the ability of our restricted subsidiary to:

pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments;

3 unchanged sentences

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 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, as specified therein.

Our Prior First Lien Credit Agreement also contained certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants and restricted us from entering into certain types of transactions.

Additionally, borrowing under the revolving credit facility under our Prior First Lien Credit Agreement was subject to compliance with a first lien secured leverage ratio of 7.00 to 1.00 (as specified in the Prior First Lien Credit Agreement), tested quarterly if, and only if, the aggregate principal amount outstanding and/or issued, as applicable, from the revolving facility, letters of credit (to the extent not cash collateralized or backstopped or, in the aggregate, not in excess of the greater of $10.0 million and the stated face amount of letters of credit outstanding on the closing date) and swingline loans exceeded 35% of the total amount of the revolving credit facility commitments.

As of December 31, 2022, we were in compliance with all applicable financial covenant requirements for our Prior First Lien Credit Agreement.

and allow to exist certain restrictions on the ability of our subsidiary 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.

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 December 30, 2023, we were in compliance with all applicable financial covenant requirements for our 2023 Credit Agreement.

The following table summarizes our cash flows for the periods presented (amounts in thousands):

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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Net cash provided by operating activities was $303.4 million for fiscal 2023 compared to $185.5 million for fiscal 2022.

The $19.9 million increase was primarily due to higher net sales driven by an increase in comparable store sales combined with changes to our working capital balances.

Changes to trade accounts payable and accrued compensation increased net cash flow provided by operating activities, which were partially offset by changes to merchandise inventory levels.

The $117.9 million increase was primarily driven by higher trade accounts payable, higher accrued expenses and changes in merchandise inventory levels, combined with increased net sales driven by comparable stores sales and new store growth, partially offset by increases in prepaid expenses.

The changes in trade accounts payable and accrued expenses were partially attributable to disruptions related to our aforementioned system upgrades.

Cash Used in Investing Activities

Net cash used in investing activities for fiscal 2022, fiscal 2021, and fiscal 2020 was primarily for capital expenditures and loans to IOs.

Net cash used in investing activities was $194.2 million for fiscal 2023 compared to $149.9 million for fiscal 2022.

The $13.2 million increase was primarily related to an increase in expenditures related to construction of newly opened stores and stores under development and existing store capital investments, combined with an increase of investments in computer software intangible assets.

Of the $149.9 million net cash used in investing activities during fiscal 2022, $130.5 million represented purchases of property and equipment prior to the application of tenant improvement allowances.

The $44.2 million increase was primarily due to increased spending on property and equipment due to higher store count and accelerated payments made to construction vendors near the end of fiscal 2023, as well as increased investments in computer software intangible assets related to upgrading components of our enterprise resource planning system, including our financial ledger, inventory management platform and product data warehouse system.

Cash Provided by (Used in) Financing Activities

Net cash used in financing activities of $72.9 million for fiscal 2022 was primarily due to the prepayment of $75.0 million of principal on the senior term loan outstanding under our First Lien Credit Agreement as well as the repurchase of $3.5 million worth of common stock, partially offset by $6.9 million in proceeds from the exercise of stock options.

Net cash provided by financing activities of $5.9 million for fiscal 2021 was primarily due to $7.2 million in proceeds from the exercise of stock options, partially offset by $1.2 million in principal payments on finance leases.

Net cash used in financing activities of $97.0 million for fiscal 2023 was primarily due to the payoff of $385.0 million of principal on the prior senior term loan outstanding under our prior credit facilities, repayment of the $25.0 million of principal on our revolving credit facility under our new credit facilities, $4.5 million in debt issuance costs paid, the repurchase of $5.9 million worth of common stock, and $5.6 million in scheduled principal payments on the senior term loan under our new current credit facilities, partially offset by $325.0 million in proceeds from the new credit facilities.

Net cash used in financing activities of $72.9 million for fiscal 2022 was primarily due to the prepayment of $75.0 million of principal on the senior term loan outstanding under our prior credit facilities as well as the repurchase of $3.5 million worth of common stock, partially offset by $6.9 million in proceeds from the exercise of stock options.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with GAAP.

Our consolidated financial statements are prepared in accordance with GAAP.

A summary of our significant accounting policies can be found in NOTE 1—Organization and Summary of Significant Accounting Policies to our Consolidated Financial Statements.

The preparation of our consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures.

These judgments and estimates are based on historical experience and other factors believed to be reasonable under the circumstances.

We evaluate our estimates and assumptions on an ongoing basis.

Our judgments and estimates are based on historical experience and other factors believed to be reasonable under the circumstances.

Management evaluated the development and selection of our critical accounting policies and estimates and believes that the following involves a higher degree of judgment or complexity and is most significant to reporting our results of operations and financial position, and is therefore discussed as critical.

The following critical accounting policy reflects a significant estimate and judgment used in the preparation of our consolidated financial statements.

With respect to critical accounting policies, even a relatively minor variance between actual and expected results can potentially have a materially favorable or unfavorable impact on subsequent results of operations.

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Our impairment calculations contain uncertainties because they require us to make assumptions and to apply judgment to estimate future cash flows.

Key assumptions used in estimating future cash flows include projected sales growth and operating expenses.

Estimates of sales growth and operating expenses are based on internal projections and consider the store’s historical performance, length of time the store has been open, the local market economics and the business environment impacting the store’s performance.

Key assumptions used in estimating future cash flows include projected sales growth, gross margin and operating expenses.

Estimates of sales growth, gross margin and operating expenses are based on internal projections and consider the store’s historical performance, length of time the store has been open, the local market economics and the business environment impacting the store’s performance.

These estimates are subjective and our ability to realize future cash flows is affected by factors such as ongoing maintenance and improvement of the assets, changes in economic conditions and changes in operating performance.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis