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Item 8. Financial Statements and Supplementary Data

2024-02-28 compared with 2023-03-01 · 242 added, 223 removed, 748 unchanged (38% of the section changed)

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We have audited the accompanying consolidated balance sheets of Grocery Outlet Holding Corp.

and subsidiaries (the "Company") as of December 31, 2022 and January 1, 2022, the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows, for each of the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, and the related notes and Schedule I listed in the Index at Item 15 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and January 1, 2022, and the results of its operations and its cash flows for each of the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2023 expressed an unqualified opinion on the Company's internal control over financial reporting.

and subsidiary (the "Company") as of December 30, 2023 and December 31, 2022, the related consolidated statements of operations and comprehensive income, stockholders' equity, and cash flows, for each of the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 28, 2024, expressed an adverse opinion on the Company's internal control over financial reporting because of a material weakness.

Basis for Opinion

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Long-Lived Store Asset Impairment — Refer to Note 1, 3, and 4 to the financial statements

Long-Lived Asset Impairment — Recoverability of stores identified with impairment indicators — Refer to Notes 1, 3, and 4 to the financial statements

Critical Audit Matter Description

The Company performs an analysis of the carrying value of all long-lived store assets for impairment at an individual store level whenever events or changes in circumstances indicate that the carrying value of individual store assets may not be recoverable.

The Company's impairment analysis determines whether projected undiscounted future cash flows from operations are sufficient to recover the carrying value of these store assets.

The Company's long-lived assets, primarily property and equipment and lease right-of-use assets, are grouped at the store level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities.

On at least a quarterly basis, management reviews the Company's asset groups for indicators of impairment through an analysis which detects events or changes in circumstances that indicate that the carrying value of asset groups may not be recoverable.

Management's impairment analysis determines whether projected undiscounted future cash flows from

operations are sufficient to recover the carrying value of these store assets.

Impairment may result when the carrying value of these store assets exceeds the estimated undiscounted future cash flows over the remaining useful life.

The total amount of property and equipment, including store assets, and operating lease right-of-use assets as of December 31, 2022 are $560.7 million and $902.2 million, respectively.

The Company's impairment analysis consists of (1) identifying stores with

indicators of impairment, (2) testing the identified store assets for recoverability and (3) measuring the impairment loss, if any.

During the year ended December 31, 2022, the Company recorded no impairment of long-lived assets.

Management's impairment analysis consists of (1) identifying stores with indicators of impairment, (2) testing the identified store assets for recoverability and (3) measuring the impairment loss, if any.

During the year ended December 30, 2023, management did not record impairment of long-lived assets.

The principal considerations for our determination that performing procedures relating to the impairment of store-level long-lived assets is a critical audit matter relates to the significant judgment by management in developing the estimated future cash flows expected to be generated by the asset.

This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the cash flows, including the significant assumptions for sales growth rate and gross margin.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to management's judgments regarding the forecasts of future cash flows included the following, among others:

• We tested the operating effectiveness of controls over management's long-lived store asset impairment evaluation, including those over future sales growth and gross margin projections

• We evaluated management's ability to accurately forecast future sales growth and gross margin by comparing actual results to management's historical forecasts

• We evaluated the reasonableness of management's sales growth and gross margin forecasts by comparing the forecasts to:

– Current and past sales and gross margins of the overall Company and individual store level asset groups

• We evaluated management's ability to accurately forecast future sales growth, gross margin, and operating expenses by comparing actual results to management's historical forecasts

• We evaluated the reasonableness of management's sales growth, gross margin, and operating expense forecasts by comparing the forecasts to:

– Current and past sales, gross margins, and operating expenses of the overall Company and individual store level asset groups

– Consistency with external market and industry data

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San Francisco, California

March 1, 2023

February 28, 2024

We have served as the Company's auditor since 2007.

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(in thousands, except share and per share amounts)

2022 January 1,

2023 December 31,

Current assets:

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Independent operator receivables and current portion of independent operator notes, net of allowance $ 5,092 and $ 2,238

14,943 10,805

Other accounts receivable, net of allowance $ 2 and $ 7

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Total current assets 516,551 467,357

Independent operator notes, net of allowance $ 12,509 and $ 10,506

Independent operator notes and receivables, net of allowance $ 11,059 and $ 12,509

28,134 22,535

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Accrued compensation 24,749 27,194

Current portion of long-term debt 5,625 —

Current lease liabilities 63,774 54,586

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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

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Shares Amount

Balance at December 28, 2019 89,005,062 $ 89 $ 717,282 $ 28,013 $ 745,384

Cumulative effect of accounting change — — — 439 439

Balance at January 2, 2021 94,854,336 $ 95 $ 787,047 $ 135,165 $ 922,307

Exercise and vesting of share-based awards 1,290,097 1 7,225 — 7,226

Tax paid on behalf of employees related to net settlement of share-based awards — — ( 483 ) — ( 483 )

Share-based compensation expense — — 17,615 — 17,615

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Share-based compensation expense — — 32,556 — 32,556

Repurchase of common stock ( 139,718 ) — ( 3,451 ) — ( 3,451 )

Dividends paid — — ( 105 ) — ( 105 )

Net income and comprehensive income — — — 65,052 65,052

Balance at January 1, 2022 96,144,433 $ 96 $ 811,701 $ 197,475 $ 1,009,272

Exercise and vesting of share-based awards 1,669,641 2 6,888 — 6,890

Balance at December 31, 2022 97,674,356 $ 98 $ 847,589 $ 262,527 $ 1,110,214

Exercise and vesting of share-based awards, net of shares withheld for employee taxes 1,804,023 1 5,420 — 5,421

Share-based compensation expense — — 31,091 — 31,091

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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Share-based compensation 31,091 32,556 17,615

Provision for (write-off of) accounts receivable reserves 4,318 4,813 ( 456 )

Provision for independent operator and other accounts receivable reserves 3,674 4,318 4,813

Proceeds from insurance recoveries - business interruption and inventory — — 2,103

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Proceeds from exercise of stock options 5,958 6,890 7,226

Proceeds from revolving credit facility loan — — 90,000

Principal payments on revolving credit facility loan — — ( 90,000 )

Payments made for net settlement of employee share-based compensation awards

Principal payments on senior term loan ( 75,000 ) — ( 188 )

Principal payments on other borrowings ( 1,271 ) ( 1,155 ) ( 1,024 )

Tax withholding related to net settlement of employee share-based awards ( 537 ) — —

Proceeds from term loan due 2028 300,000 — —

Proceeds from revolving credit facility 25,000 — —

Principal payments on revolving credit facility ( 25,000 ) — —

Principal payments on senior term loan due 2025 ( 385,000 ) ( 75,000 ) —

Principal payments on senior term loan due 2028 ( 5,625 ) — —

Principal payments on finance leases ( 1,398 ) ( 1,271 ) ( 1,155 )

Repurchase of common stock ( 5,893 ) ( 3,451 ) —

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Supplemental disclosure of cash flow information:

Cash paid for interest $ 19,142 $ 14,604 $ 20,311

Cash paid for interest, net of amounts capitalized $ 22,722 $ 19,142 $ 14,604

Income taxes paid (refunded) in cash $ 7,557 $ ( 1,721 ) $ 477

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

(together with its wholly owned subsidiary, 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.

Effective July 12, 2023, subsidiaries Globe Intermediate Corp., GOBP Holdings, Inc.

and GOBP Midco, Inc.

were merged with and into Grocery Outlet Holding Corp.

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

Grocery Outlet Holding Corp.

(the "Parent Company") owns 100 % of Globe Intermediate Corp.

("Intermediate"), which owns 100 % of GOBP Holdings, Inc.

("GOBP Holdings"), which owns 100 % of GOBP Midco, Inc.

("Midco"), which owns 100 % of Grocery Outlet Inc.

(the "Parent Company") owns 100 % of Grocery Outlet Inc.

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

The fiscal years ended December 31, 2022 ("fiscal 2022") and January 1, 2022 ("fiscal 2021") consisted of 52 weeks while the fiscal year ended January 2, 2021 ("fiscal 2020") consisted of 53 weeks.

The fiscal years ended December 30, 2023 ("fiscal 2023'), December 31, 2022 ("fiscal 2022") and January 1, 2022 ("fiscal 2021") all consisted of 52 weeks.

Basis of Presentation — The accompanying 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").

Our consolidated financial statements include the accounts of Grocery Outlet Holding Corp.

and its wholly owned subsidiaries.

and its wholly owned subsidiary.

All intercompany balances and transactions were eliminated.

In the opinion of management, these consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented.

Beginning in the fourth quarter of fiscal 2022, non-cash rent previously included within changes in operating lease assets and liabilities, net is now separately presented in our consolidated statements of cash flows.

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

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

Beginning with the first quarter of fiscal 2023, certain prior period amounts in the 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 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.

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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 estimate and judgment.

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.

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All cash equivalents are unrestricted and available for immediate use.

Cash and cash equivalents consisted primarily of cash held in checking and money market accounts as of December 30, 2023 and December 31, 2022.

Allowance for Independent Operator ("IO") Receivables and IO Notes and Other Accounts Receivable — We maintain allowances and accruals for estimated losses of amounts advanced to IOs and other third parties determined to be uncollectible.

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To date, we have not experienced any losses on our cash deposits.

No single customer or store represented more than 10% of net sales for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

No single customer or IO represented more than 10% of accounts receivable or notes receivable as of December 31, 2022 and January 1, 2022.

No single customer or store represented more than 10% of net sales for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022.

No single customer or IO represented more than 10% of accounts receivable or notes receivable as of December 30, 2023 and December 31, 2022.

Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value.

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If the sum of the undiscounted future cash flows is less than the carrying amount of an asset, we record an impairment loss for the amount by which the carrying amount of the asset exceeds its fair value.

The total amount of property and equipment, including store assets, and operating lease right-of-use assets as of December 31, 2022 were $ 560.7 million and $ 902.2 million, respectively, and as of January 1, 2022 were $ 499.4 million and $ 898.2 million, respectively.

The total amount of property and equipment, including store assets, and operating lease right-of-use assets as of December 30, 2023 were $ 642.5 million and $ 945.7 million, respectively, and as of December 31, 2022 were $ 560.7 million and $ 902.2 million, respectively.

The estimated fair value of the asset or asset group is based on the estimated discounted future cash flows of the asset or asset group using a discount rate commensurate with the related risk.

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Measurement of such an impairment loss would be based on the excess of the carrying amount over fair value.

There were no goodwill impairment charges recorded during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

There were no changes in the carrying amount of goodwill for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021.

There were no goodwill impairment charges recorded during the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022.

There were no changes in the carrying amount of goodwill for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022.

Intangible assets include trademarks, computer software, and liquor licenses.

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If the carrying amount of the intangible assets are not recoverable, the impairment is measured as the amount by which the carrying value of the intangible asset exceeds its fair value.

There were no impairments of intangible assets recognized during the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

There were no impairments of intangible assets recognized during the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022.

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.

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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 December 31, 2022 or January 1, 2022.

There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of December 30, 2023 or December 31, 2022.

Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges.

See NOTE 3—Property and Equipment and NOTE 5—Goodwill and Intangible Assets, for additional information.

There were no transfers of assets or liabilities between levels within the fair value hierarchy during the fiscal years ended December 31, 2022 or January 1, 2022.

There were no transfers of assets or liabilities between levels within the fair value hierarchy during the fiscal years ended December 30, 2023 or December 31, 2022.

Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below:

Cash and cash equivalents, 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 or their variable interest rates.

IO 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 consolidated balance sheets (amounts in thousands):

2022 January 1,

2023 December 31,

Carrying Amount (1)

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Financial Liabilities:

Senior term loan (Level 2) $ 379,650 $ 383,075 $ 451,468 $ 457,700

Senior term loans (Level 2) $ 292,732 $ 294,375 $ 379,650 $ 383,075

_______________________

(1) The carrying amounts as of December 31, 2022 and January 1, 2022 are net of unamortized debt discounts of $ 0.6 million and $ 1.0 million, respectively, and debt issuance costs of $ 4.7 million and $ 7.5 million, respectively.

(2) The estimated fair value of our senior term loan was determined based on the average quoted bid-ask prices for the senior term loan in an over-the-counter market on the last trading day of fiscal 2022 and 2021.

(1) The carrying amounts of our senior term loans as of December 30, 2023 and December 31, 2022 are net of unamortized debt discounts of zero and $ 0.6 million, respectively, and debt issuance costs of $ 1.6 million and $ 4.7 million, respectively.

(2) The estimated fair value of our current senior term loan borrowings under our 2023 Credit Agreement, as defined in Note 6—Long-term Debt, was deemed to approximate the carrying value, excluding unamortized debt issuance costs, because the interest rate is variable with short reset periods and is reflective of the current market rate.

(3) The estimated fair value of our prior senior term loan, as defined in Note 6—Long-term Debt, 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 period presented.

Revenue Recognition

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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 December 31, 2022 and January 1, 2022.

Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold.

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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 $ 3.6 million as of December 31, 2022 and January 1, 2022.

Breakage amounts were $ 0.3 million, $ 0.3 million and $ 0.2 million for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

Disaggregated Revenues — The following table presents net sales revenue by type of product for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021 (amounts in thousands):

2022 January 1,

Our gift card deferred revenue liability was $ 3.2 million and $ 3.6 million as of December 30, 2023 and December 31, 2022, respectively.

Breakage amounts were $ 0.2 million, $ 0.3 million and $ 0.3 million for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively.

Disaggregated Revenues — The following table presents net sales revenue by type of product for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022 (amounts in thousands):

2023 December 31,

2022 January 1,

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(1) Perishable departments include dairy and deli;

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and beer and wine.

(3) The fiscal years ended December 31, 2022 and January 1, 2022 consisted of 52 weeks while the fiscal year ended January 2, 2021 consisted of 53 weeks.

Cost of Sales — Cost of sales includes, among other things, merchandise costs, inventory markdowns, shrink, transportation, third-party delivery fees and distribution and warehousing costs, including depreciation.

Marketing and Advertising Expenses — Costs for store promotions, newspaper, television, radio and other media advertising are expensed at the time the promotion or advertising takes place.

Advertising costs are included in SG&A in the accompanying consolidated statements of operations and comprehensive income and amounted to $ 34.6 million, $ 32.6 million and $ 25.9 million, respectively, in the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

Advertising costs are included in SG&A in the accompanying consolidated statements of operations and comprehensive income and amounted to $ 36.4 million, $ 34.6 million and $ 32.6 million, respectively, in the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022.

Share-based Awards — We estimate the fair value of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") based upon the closing price of our common stock as reported on the Nasdaq Global Select Market on the date of grant.

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A valuation allowance is established, when necessary, to reduce net deferred income tax assets to the amount expected to be realized.

We have not recorded any valuation allowances against our deferred income tax balances for the fiscal years ended December 31, 2022 and January 1, 2022.

We have not recorded any valuation allowances against our deferred income tax balances for the fiscal years ended December 30, 2023 and December 31, 2022.

Significant items comprising our future tax benefits and liabilities (deferred tax assets and liabilities) include lease liability obligations, right-of-use assets, depreciation and amortization, net operating losses and other carryforwards, goodwill and share-based compensation expense.

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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 438 , 411 and 375 stores operated by IOs as of December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

We had 466 , 438 and 411 stores operated by IOs as of December 30, 2023, December 31, 2022 and January 1, 2022, respectively.

We have agreements in place with each IO.

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As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us.

Net sales related to IO store s were $ 3.5 billion, $ 3.0 billion, and $ 3.1 billion for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

Net sales related to IO store s were $ 3.9 billion, $ 3.5 billion, and $ 3.0 billion for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

We, in turn, pay each IO a commission based on a share of the gross profit of the store.

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IO commissions are expensed and included in SG&A.

IO commissions were $ 533.1 million, $ 463.8 million, and $ 469.3 million for the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021, respectively.

IO commissions of $ 6.2 million and $ 9.1 million were included in accrued and other current liabilities as of December 31, 2022 and January 1, 2022, respectively.

IO commissions were $ 621.7 million, $ 533.1 million, and $ 463.8 million for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively.

IO commissions of $ 21.7 million and $ 6.2 million were included in accrued and other current liabilities as of December 30, 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—Independent Operator Notes and Independent Operator Receivables.

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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 $ 48.1 million and $ 40.6 million as of December 31, 2022 and January 1, 2022, respectively.

Therefore, we are 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 $ 59.2 million and $ 48.1 million as of December 30, 2023 and December 31, 2022, respectively.

See NOTE 2—Independent Operator Notes and Independent Operator Receivables, for additional information.

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Recently Adopted Accounting Standards

No recently adopted accounting pronouncements had a material effect on our consolidated financial statements.

Recently Issued Accounting Pronouncements

Accounting Standards Update ("ASU") No.

2022-02 — In March 2022, the Financial Accounting Standards Board issued ASU No.

2022-02 — In March 2022, the Financial Accounting Standards Board ("FASB") issued ASU No.

2022-02, Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02").

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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 will adopt ASU 2022-02 beginning in the first quarter of fiscal 2023.

We do not expect the adoption of ASU 2022-02 to have a material impact on our consolidated financial statements.

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 consolidated financial statements.

Recently Issued Accounting Pronouncements

2023-07 — In November 2023, the FASB issued ASU No.

2023-07, Segment Reporting (Topic 280) ("ASU 2023-07").

ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets.

All disclosure requirements of ASU 2023-07 are required for entities with a single reportable segment.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024.

We will adopt ASU 2023-07 upon the effective date and expect it to only impact our disclosures with no impact on our consolidated financial statements.

2023-09 — In December 2023, the FASB issued ASU No.

2023-09, Income Taxes (Topic 740) ("ASU 2023-09").

ASU 2023-09 requires public entities’ to disclose additional information in specified categories with respect to the reconciliation of the effective tax rate to the statutory rate (the rate reconciliation) for federal, state, and foreign income taxes.

It also requires greater detail about individual reconciling items in the rate reconciliation to the extent the impact of those items exceeds a specified threshold.

In addition to new disclosures associated with the rate reconciliation, the ASU requires information pertaining to taxes paid (net of refunds received) to be disaggregated for federal, state, and foreign taxes and further disaggregated for specific jurisdictions to the extent the related amounts exceed a quantitative threshold.

ASU 2023-09 is effective for fiscal years beginning after December 15, 2024.

We will adopt ASU 2023-09 upon the effective date and expect it to only impact our disclosures with no impact on our consolidated financial statements.

NOTE 2— Independent Operator Notes and Independent Operator Receivables

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IO notes, which are payable on demand and have no maturity date, typically bear interest at rates between 5.50 % 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 consolidated balance sheets and was $ 0.9 million and $ 0.5 million as of December 31, 2022 and January 1, 2022, respectively.

There were no IO notes that were past due or on a non-accrual status due to delinquency as of December 31, 2022 or January 1, 2022.

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 consolidated balance sheets and was $ 1.8 million and $ 0.9 million as of December 30, 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 December 30, 2023 or December 31, 2022.

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.

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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

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:

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• 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.

• 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 December 31, 2022 and January 1, 2022 consisted of the following (amounts in thousands) :

Amounts due from IOs and the related allowances as of December 30, 2023 and December 31, 2022 consisted of the following (amounts in thousands) :

Allowance Current Portion Long-term Portion

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Gross Current Portion Long-term Portion Net

January 1, 2022

December 31, 2022

Independent operator notes $ 37,522 $ ( 700 ) $ ( 12,509 ) $ 24,313 $ 1,778 $ 22,535

3 unchanged sentences

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

Beginning balance $ 14,747 $ 11,912 $ 8,109

Provision for (write-off of) IO notes and IO receivables reserves 4,160 4,790 ( 473 )

Cumulative effect of accounting change — — ( 439 )

Provision for IO notes and IO receivables reserves 3,588 4,160 4,790

Write-off of uncollectible IO notes and IO receivables ( 2,184 ) ( 1,325 ) ( 987 )

Ending balance $ 16,151 $ 14,747 $ 11,912

The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of December 31, 2022 (amounts in thousands):

The following table presents the gross write-off of IO notes and IO receivables by year of origination for the fiscal year ended December 30, 2023 (amounts in thousands):

Fiscal 2023 $ 212

Fiscal 2022 —

Fiscal 2021 654

Fiscal 2020 184

Fiscal 2019 125

Total $ 2,184

The following table presents the outstanding gross balance of IO notes by fiscal year of origination and credit quality indicator as of December 30, 2023 (amounts in thousands):

Fiscal Year of Origination

Credit Quality Indicator 2023 2022 2021 2020 2019 Prior Total

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Total $ 12,339 $ 12,790 $ 7,658 $ 4,309 $ 1,458 $ 2,569 $ 41,123

TCAP IO Notes

Notes of IOs participating in our TCAP represented 51.6 % and 49.7 % of total IO note balances as of December 30, 2023 and December 31, 2022, respectively.

A total of $ 5.3 million of IO notes were added into our TCAP during the fiscal year ended December 30, 2023.

The weighted average contractual interest rate of such IO notes was reduced from 9.95 % and, as of December 30, 2023, was 5.50 %.

In addition, $ 2.8 million of IO notes were transferred from TCAP to Non-TCAP during the fiscal year ended December 30, 2023.

NOTE 3— Property and Equipment

Property and equipment as of December 31, 2022 and January 1, 2022 consisted of the following (amounts in thousands):

Property and equipment as of December 30, 2023 and December 31, 2022 consisted of the following (amounts in thousands):

Property and Equipment, At Cost Accumulated Depreciation

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Totals $ 1,041,255 $ ( 398,793 ) $ 642,462

January 1, 2022

December 31, 2022

Leasehold improvements $ 392,448 $ ( 117,745 ) $ 274,703

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Consolidated Statements of Operations and Comprehensive Income Location December 30,

2022 January 1,

2023 December 31,

2022 January 1,

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NOTE 4— Leases

Leases for 15 of our store locations and one warehouse location were controlled by related parties as of December 31, 2022 and January 1, 2022.

As of December 30, 2023 and December 31, 2022, we leased 14 and 15 of our store locations, respectively, and one warehouse location from related parties.

See NOTE 11—Related Party Transactions, for additional information.

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Leases Classification December 30,

2022 January 1,

2023 December 31,

Operating lease assets Operating right-of-use assets $ 945,710 $ 902,163

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Lease Cost Classification (1)

2022 January 1,

2023 December 31,

2022 January 1,

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Finance lease cost:

Amortization of right-of-use assets Depreciation and amortization 1,316 1,249 964

Amortization of right-of-use assets Selling, general and administrative expenses 1,423 1,316 1,249

Interest on leased liabilities Interest expense, net 340 341 378

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The weighted-average lease terms and discount rates of operating and finance leases were as follows:

2022 January 1,

2023 December 31,

Weighted-average remaining lease term:

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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Total goodwill and intangible assets $ 884,996 $ ( 58,497 ) $ 826,499

Information regarding our goodwill and intangible assets as of January 1, 2022 was as follows (amounts in thousands):

Information regarding our goodwill and intangible assets as of December 31, 2022 was as follows (amounts in thousands):

Gross Carrying Amount Accumulated Amortization Net Carrying Amount

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Total goodwill and intangible assets $ 867,131 $ ( 55,195 ) $ 811,936

Amortization expense for finite-lived intangible assets was $ 6.6 million, $ 6.6 million, and $ 6.5 million for t he fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

Amortization expense for finite-lived intangible assets was $ 10.1 million, $ 6.6 million, and $ 6.6 million for t he fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

The estimated future amortization expense related to finite-lived intangible assets as of December 30, 2023 is as follows (amounts in thousands):

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Long-term debt consisted of the following (amounts in thousands):

2022 January 1,

Prior First Lien Credit Agreement:

Senior term loan $ 385,000 $ 460,000

2023 December 31,

Senior term loan due 2025 $ — $ 385,000

Senior term loan due 2028 294,375 —

Long-term debt, gross 294,375 385,000

1 unchanged sentence

( 1,643 ) ( 5,350 )

Long-term debt, less unamortized debt discounts and debt issuance costs 292,732 379,650

Current portion ( 5,625 ) —

Long-term debt, net $ 287,107 $ 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 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 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 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 and the agreement was terminated 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 fiscal year ended December 30, 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 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 December 30, 2023, interest on borrowings under the new credit facilities was based on one-month Term SOFR with an applicable margin of 2.00 %.

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 the Company’s wholly owned restricted subsidiary, subject to certain exceptions.

All obligations under the 2023 Credit Agreement, and the guarantee of such obligations, are secured, subject to permitted liens and other exceptions, by substantially all of the Company’s assets and those of the subsidiary guarantor.

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

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 senior term loan under our 2023 Credit Agreement matures on February 21, 2028 and had an interest rate of 7.46 % as of December 30, 2023.

Revolving Credit Facility

As of December 30, 2023 we had $ 4.2 million of outstanding letters of credit and $ 395.8 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 7.46 % as of December 30, 2023.

As discussed above, $ 25.0 million of the revolving credit facility was borrowed at closing.

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

No amounts were outstanding under the revolving credit facility as of December 30, 2023.

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

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, 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 and a revolving credit facility for an amount up to $ 100.0 million, with sub-commitments for $ 35.0 million of letters of credit and $ 20.0 million of swingline loans, as of December 31, 2022.

The Prior First Lien Credit Agreement permitted voluntary prepayment on borrowings without premium or penalty.

Borrowings under the Prior First Lien Credit Agreement were secured by substantially all the assets of the borrower subsidiary and its guarantors.

On February 21, 2023, we repaid all of the outstanding indebtedness under the Prior First Lien Credit Agreement of $ 387.2 million 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.

See NOTE 14—Subsequent Event, for additional information.

Senior Term Loan

On April 29, 2022, we prepaid $ 75.0 million of principal on the senior term loan outstanding under our Prior First Lien Credit Agreement.

One of our former wholly owned subsidiaries, which has since been merged with and into Grocery Outlet Holding Corp., 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.

Our $ 385.0 million senior term loan under our Prior First Lien Credit Agreement had a maturity date of October 22, 2025, had an applicable margin of 2.75 % for Eurodollar loans and 1.75 % for base rate loans, and had an effective interest rate of 7.13 % as of December 31, 2022.

Due to previous prepayments on the senior term loan, no further principal payment on the term loan was due until the maturity date.

Revolving Credit Facility

As of December 31, 2022, we had $ 3.5 million of outstanding standby letters of credit and $ 96.5 million of r emaining borrowing capacity available under the revolving credit facility under our Prior First Lien Credit Agreement, which had a maturity date of October 23, 2023 .

No amounts were outstanding under the revolving credit facility as of December 31, 2022 and January 1, 2022 and no amounts were borrowed under the revolving credit facility during the fiscal years ended December 31, 2022 and January 1, 2022.

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 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 revolving credit facility.

The interest rate for the revolving credit facility was determined based on a formula using certain market rates.

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.

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 Prior First Lien Credit Agreement contained certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants.

The Prior First Lien Credit Agreement restricted us from entering into certain types of transactions, such as incurring additional debt or issuing certain preferred shares, and making certain types of payments including dividends and stock repurchases and other similar distributions, with certain exceptions.

Additionally, the revolving credit facility under our Prior First Lien Credit Agreement was subject to compliance with a first lien secured leverage ratio (as specified in the Prior First Lien Credit Agreement) of 7.00 to 1.00, 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.

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 subsidiary 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 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.

Schedule of Principal Maturities

9 unchanged sentences

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

4 unchanged sentences

Interest income ( 7,631 ) ( 3,389 ) ( 1,321 )

Capitalized interest ( 2,115 ) — —

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

2 unchanged sentences

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

2 unchanged sentences

Debt modification costs 244 — —

Debt extinguishment and modification costs $ 1,274 $ — $ 198

Loss on debt extinguishment and modification $ 5,340 $ 1,274 $ —

NOTE 7— Stockholders' Equity

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Holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and to the rights of the holders or one or more outstanding series of our preferred stock.

Secondary Offerings

On February 3, 2020, certain selling stockholders completed a secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred offering costs of $ 1.1 million, which were recognized in SG&A expenses during fiscal 2020.

We received $ 1.4 million in cash (excluding withholding taxes) in connection with the exercis e of 191,470 opti ons by certain stockholders participating in this secondary public offering.

On April 27, 2020, certain of our selling stockholders completed another secondary public offering of shares of our common stock.

We did not receive any of the proceeds from the sale of these shares by the selling stockholders.

We incurred related offering costs of $ 1.0 million which we recognized in SG&A expenses during fiscal 2020.

We received $ 1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.

On May 28, 2020, the stockholder affiliated with our former private equity sponsor, Hellman and Friedman LLC, distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders.

We did not receive any proceeds or incur any material costs related to this distribution.

Share Repurchase Program

3 unchanged sentences

During the fiscal year ended December 30, 2023, we repurchased 254,516 shares of common stock totaling $ 6.8 million at an average price of $ 26.75 per share in open-market transactions pursuant to a Rule 10b5-1 plan.

During the fiscal year ended January 1, 2022, we did not repurchase any shares of our common stock.

During the fiscal year ended December 31, 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 December 30, 2023, we had $ 89.8 million of repurchase authority remaining under the share repurchase program.

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The fair value of stock option, RSU and PSU awards is determined as of the grant date.

For time-based stock options, a Black-Scholes valuation model is utilized to estimate the fair value of the awards.

For performance-based stock options, a Monte Carlo simulation approach implemented in a risk-neutral framework is utilized to estimate the fair value of the awards.

For time-based stock options, a Black-Scholes valuation model was utilized to estimate the fair value of the awards.

For performance-based stock options, a Monte Carlo simulation approach implemented in a risk-neutral framework was utilized to estimate the fair value of the awards.

For RSUs and PSUs, the closing price of our common stock as reported on the grant date is utilized to estimate the fair value of the awards.

1 unchanged sentence

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

8 unchanged sentences

Exercise Price

Options outstanding as of December 28, 2019 6,243,667 $ 10.57 5,777,121 $ 4.57

Options outstanding as of January 2, 2021 3,864,772 $ 12.42 2,325,580 $ 4.54

Granted — — — —

5 unchanged sentences

Forfeitures ( 296,345 ) 21.25 — —

Options outstanding as of January 1, 2022 3,135,141 $ 12.77 1,696,194 $ 4.58

Options outstanding as of December 31, 2022 2,562,774 $ 12.13 801,635 $ 4.68

Granted — — — —

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The total intrinsic value of time-based stock options exercised w as $ 11.7 million, $ 7.1 million and $ 15.5 million for fiscal 2023, 2022 and 2021, respectively .

The total intrinsic value of performance-based stock options exercised w as $ 15.9 million, $ 29.9 million and $ 20.0 million for fiscal 2023, 2022 and 2021, respectively .

Intrin sic value represents the difference between the current fair value of the underlying stock and the exercise price of the stock option.

2 unchanged sentences

Grant Date Fair Value

Unvested balance as of December 28, 2019 190,872 $ 22.89

Unvested balance as of January 2, 2021 341,842 $ 35.16

Granted 669,546 28.70

5 unchanged sentences

Forfeitures ( 95,884 ) 30.61

Unvested balance as of January 1, 2022 836,496 $ 30.14

Unvested balance as of December 31, 2022 690,354 $ 31.79

Granted 552,372 27.50

5 unchanged sentences

Grant Date Fair Value

Unvested balance as of December 28, 2019 — $ —

Unvested balance as of January 2, 2021 407,462 $ 36.90

319,606 35.45

7 unchanged sentences

Forfeitures ( 72,651 ) 33.79

Unvested balance as of January 1, 2022 576,725 $ 36.36

Unvested balance as of December 31, 2022 1,331,803 $ 32.89

451,077 27.34

1 unchanged sentence

432,774 28.84

Vested ( 441,346 ) 36.84

Forfeitures ( 20,319 ) 29.83

9 unchanged sentences

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

Time-based stock options $ 770 $ 471 $ 2,030

Performance-based stock options — — 26,079

RSUs 11,327 14,855 8,488

6 unchanged sentences

(2) Total recognized income tax benefit related to share-based compensation expense was $ 8.3 million, $ 8.7 million and $ 4.7 million for fiscal 2023, 2022 and 2021, respectively.

Share-based compensation expense qualifying for capitalization was insignificant for each of the fiscal years ended December 31, 2022, January 1, 2022 and January 2, 2021.

Share-based compensation expense qualifying for capitalization was insignificant for each of the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022.

Accordingly, no share-based compensation expense was capitalized during these years.

Time-Based Stock Options

Unamortized compensation cost related to unvested time-based options was $ 0.8 million as of December 31, 2022, $ 0.7 million of which related to time-based stock options granted at the time of our IPO.

The $ 0.8 million of unamortized compensation cost is expected to be amortized over a weighted average period of approximately 0.6 years.

Unamortized compensation cost related to unvested time-based stock options was immaterial as of December 30, 2023.

Performance-Based Stock Options

On February 3, 2020 and April 27, 2020, certain selling stockholders completed secondary public offerings of shares of our common stock.

In conjunction with these secondary offerings, certain performance criteria were achieved resulting in the vesting of 4.1 million and 1.7 million performance-based stock options, respectively, and the recognition of $ 18.5 million and $ 7.6 million, respectively, of share-based compensation expense associated with the vesting of these performance-based stock options.

As of January 2, 2021, all outstanding performance-based stock options were fully vested and fully expensed and, as such, we did not record compensation expense for performance-based stock options during the fiscal years ended December 31, 2022 and January 1, 2022.

We had no unamortized compensation cost related to performance-based stock options as of December 30, 2023.

Time-Based RSUs

2 unchanged sentences

Unamortized compensation cost related to the expected level of achievement of unvested PSUs was $ 21.3 million as of December 30, 2023, which is expected to be amortized over a weighted average period of approximately 1.7 years.

For time-based stock options and RSUs that were outstanding on the dividend date of October 22, 2018 and that are expected to vest in fiscal 2022 and beyond, we intend to make dividend payments as these time-based stock options and RSUs vest.

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

As such, our dividends are not considered declared and payable and are not accrued as a liability in our consolidated balance sheet as of December 31, 2022.

We paid $ 0.1 million, $ 0.2 million and $ 0.4 million of d ividends during the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively, which were included in share-based compensation expense.

Unamortized compensation cost related to future dividend payments on unvested time-based stock options and RSU share-based awards was immaterial as of December 31, 2022.

For time-based stock options and RSU share-based awards that were outstanding on the dividend date of October 22, 2018 and that vested in fiscal 2023, fiscal 2022, and fiscal 2021, we made dividend payments as these awards vested.

We paid $ 0.1 million and $ 0.2 million of d ividends during the fiscal years ended December 31, 2022 and January 1, 2022, respectively, which were included in share-based compensation expense.

We paid less than $ 0.1 million of dividends during the fiscal year ended December 30, 2023.

There was no unamortized compensation cost related to future dividend payments on unvested time-based stock options and RSU share-based awards as of December 30, 2023.

NOTE 9— Retirement Plans

We make contributions to the UFCW—Northern California Employers Joint Pension Trust Fund (the "Pension Fund") and the UFCW—Benefits Trust Fund ("Benefits Fund"), each a multiemployer plan, established for the benefit of union employees at two company operated stores under the terms of a collective bargaining agreement.

We currently operate under a collective bargaining agreement that expired on September 6, 2022 and which is in the process of being renegotiated as of the filing date of this Annual Report on Form 10-K.

We currently operate under a collective bargaining agreement that expires on February 28, 2026.

Minimum contributions outside of the agreed upon contractual rates are not required for the Pension Fund.

Payments into the Pens ion Fun d were $ 0.5 million, $ 0.6 million, and $ 0.6 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

Payments into the Pens ion Fun d were $ 0.6 million, $ 0.5 million, and $ 0.6 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

We paid no surcharges to the Pension Fund.

15 unchanged sentences

However, we are unable to separate contribution amounts to the postretirement benefit part of the Benefits Fund from contribution amounts paid to the active employee part of the Benefits Fund.

Payments into the Benefits Fund were $ 1.2 million, $ 1.4 million, and $ 1.4 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

Payments into the Benefits Fund were $ 1.4 million, $ 1.2 million, and $ 1.4 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

For our nonunion employees, we offered the following plans during fiscal 2023, 2022 or 2021:

A defined contribution retirement plan for warehouse employees, which required an annual contribution of 15 % of eligible salaries.

For fiscal 2022 and 2021, a defined contribution retirement plan for warehouse employees, which required an annual contribution of 15 % of eligible salaries.

This defined contribution retirement plan was available to nonunion employees who met certain service criteria.

A noncontributory profit-sharing plan for administrative personnel under which the Board of Directors may authorize an annual contribution of up to 15 % of eligible salaries.

For fiscal 2022 and 2021, a noncontributory profit-sharing plan for administrative personnel and, for fiscal 2023, for administrative and warehouse personnel, in each case under which the Board of Directors may authorize an annual contribution of up to 15 % of eligible salaries.

This profit-sharing plan is available to nonunion employees who meet certain service criteria.

We expensed $ 6.9 million, $ 1.5 million and $ 6.1 million for contributions to the two plans described above in (a) and (b) for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

We expensed $ 6.8 million, $ 6.9 million and $ 1.5 million for contributions to the two plans described above in (a) and (b) for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

A 401(k) retirement plan for warehouse employees, which is available to those employees who meet certain service criteria.

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will match employee contributions at a rate of 35 % of each participating employee's contributions, not to exceed 6 % of wages.

We expensed an insignificant amount for contributions to this plan for each of the fiscal years ending December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

We expensed an insignificant amount for contributions to this plan for each of the fiscal years ending December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

NOTE 10— Income Taxes

Components of income tax expense (benefit)

Income before income taxes consisted entirely of income from domestic operations of $ 75.7 million, $ 77.5 million, and $ 87.1 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, respectively.

The components of income tax expense (benefit) consisted of the following (amounts in thousands):

Components of income tax expense

Income before income taxes consisted entirely of income from domestic operations of $ 104.1 million, $ 75.7 million, and $ 77.5 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.

The components of income tax expense consisted of the following (amounts in thousands):

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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18,819 10,367 12,944

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

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

Statutory rate reconciliation

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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State income taxes net of federal benefit 5.4 % 2.7 % 4.7 %

Section 162(m) compensation limitation on covered employees 2.2 % — % — %

Excess federal tax benefits from exercise and vest of share-based awards ( 3.3 ) % ( 9.2 ) % ( 8.2 ) %

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Significant components of our deferred tax assets and liabilities were as follows (amounts in thousands):

2022 January 1,

2023 December 31,

Deferred tax assets:

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Reserves and allowances 5,702 4,648

Other — 4,510

Debt transaction costs 369 —

Total deferred tax assets 371,721 370,359

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Net deferred tax assets (liabilities) $ ( 38,601 ) $ ( 19,782 )

We have net operating loss carryforwards of $ 215.7 million for federal income tax purposes, of which $ 54.0 million expires beginning in 2032 and $ 161.7 million carries forward indefinitely.

We have net operating loss carryforwards of $ 145.0 million for federal income tax purposes, which carries forward indefinitely.

There are also net operating loss carryforwards of $ 18.0 million for state income tax purposes, which begin to expire in 2029.

Certain tax attributes, which begin to expire in 2031, are subject to an annual limitation as a result of our acquisition of GOBP Holdings, our wholly owned subsidiary, which constitutes a change in ownership as defined under Internal Revenue Code Section 382.

Based on our analysis, our projected net operating losses to be utilized in future years will not be affected by this annual limitation.

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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 December 31, 2022 and January 1, 2022, respectively, and do not anticipate any changes to our uncertain tax positions within the next 12 months.

We had no uncertain tax positions as of December 30, 2023 and December 31, 2022, respectively, and do not anticipate having any material uncertain tax positions within the next 12 months.

We are subject to taxation in the United States and various state jurisdictions.

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Related Party Lease s

As of December 31, 2022 and January 1, 2022, we leased 15 store locations and one warehouse location from entities in which Eric Lindberg, Jr., Chairman of our Board of Directors (and 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 December 30, 2023 and December 31, 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 December 30, 2023, the right-of-use assets and lease liabilities related to these properties was $ 42.6 million and $ 47.6 million, respectively.

As of January 1, 2022, the right-of-use assets and lease liabilities related to these properties was $ 36.9 million and $ 41.6 million, respectively.

These related parties received aggregate lease payments from us of $ 6.8 million, $ 6.1 million, and $ 6.0 million for the fiscal years ended December 31, 2022, January 1, 2022, and January 2, 2021, 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 $ 6.8 million, $ 6.8 million, and $ 6.1 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 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 $ 48.1 million and $ 40.6 million as of December 31, 2022 and January 1, 2022, respectively.

We offer interest-bearing notes to IOs and the gross amount of IO operating notes and IO receivables due was $ 59.2 million and $ 48.1 million as of December 30, 2023 and December 31, 2022, respectively.

See NOTE 2—Independent Operator Notes and Independent Operator Receivables, for additional information.

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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.

If it is at least a reasonable possibility that a material loss will occur, we 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.

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Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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_______________________

(1) On February 3, 2020, in conjunction with a secondary offering, certain performance criteria were achieved resulting in the vesting of 4.1 million performance-based stock options, and accordingly, these vested performance-based stock options are included in the diluted weighted-average shares outstanding for fiscal 2020.

On April 27, 2020 in conjunction with an additional secondary offering, certain performance criteria were achieved resulting in the vesting of the remaining 1.7 million unvested performance-based stock options, and accordingly, these vested performance-

based stock options are included in the diluted weighted-average shares outstanding for fiscal 2020.

See NOTE 8—Share-based Awards, for additional information.

(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.

No PSUs were included in diluted weighted-average shares outstanding for fiscal 2021 and 2020.

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):

Fiscal Year Ended

2022 January 1,

2023 December 31,

2022 January 1,

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NOTE 14— Subsequent Event

On February 21, 2023, the Company entered into a credit agreement with Bank of America, N.A., as administrative agent and collateral agent, and the other parties party thereto (the "Credit Agreement").

The Credit Agreement provides for senior secured credit facilities consisting of (i) a senior secured term loan facility (the "term loan facility") 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 term loan facility, the "credit facilities") in an aggregate principal amount of $ 400.0 million.

The term loan facility was borrowed in full at closing, and $ 25.0 million of the revolving credit facility was borrowed at closing.

On February 21, 2023, the Company repaid all of the outstanding indebtedness under the Prior First Lien Credit Agreement of $ 387.2 million 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.

The revolving credit facility includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the swingline loans.

The credit facilities permit the Company to add one or more 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) the Company 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.

The lenders under the credit facilities are not under any obligation to provide any such incremental commitments or loans under incremental facilities and any such incremental commitments or loans under incremental facilities are subject to certain customary conditions.

Borrowings under the Credit Agreement in dollars 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 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 the Company's total net leverage ratio;

As of the closing date, interest on the initial borrowings under the new credit facility were based on one-month Term SOFR with an applicable margin of 2.25 %.

The credit facilities mature on February 21, 2028.

The Company’s obligations under the Credit Agreement are unconditionally guaranteed by all of the Company’s wholly owned restricted subsidiaries, subject to certain exceptions.

All obligations under the 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 Credit Agreement requires the Company to make scheduled amortization payments of the outstanding term loans.

The Company may voluntarily prepay the senior secured 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.

The 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 Company’s ability and the ability of the Company’s 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 Credit Agreement also contains financial performance covenants requiring the Company 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.

On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a Stock Purchase Agreement (the "Purchase Agreement") with BBGO Acquisition, Inc., a Delaware corporation ("Holdings"), specified parties therein that beneficially own Holdings (the "Sellers"), and Southvest Fund VII, L.P., a Delaware limited partnership (the "Sellers' Representative", and together with the Sellers, the "Seller Parties" and, together with Holdings and Grocery Outlet Inc., the "Parties") to acquire all of the issued and outstanding capital stock of Holdings for approximately $ 62.0 million in cash, subject to customary purchase price adjustments (the "Transaction").

We expect to finance the Transaction with available cash.

Holdings is the owner of all of the issued and outstanding capital stock of The Bargain Barn, Inc., a Tennessee corporation doing business as United Grocery Outlet ("United Grocery Outlet").

United Grocery Outlet operates 40 discount grocery stores across six states in the southeastern United States.

The Purchase Agreement contains customary representations, warranties and covenants of each of the Seller Parties and Grocery Outlet.

The Parties have agreed to a representation and warranty insurance policy for the benefit of Grocery Outlet regarding specified breaches of representations and warranties, subject to specified exclusions and deductibles.

The obligations of the Parties to consummate the Transaction are subject to the satisfaction or waiver of customary closing conditions.

The Transaction is expected to close early in the second quarter of fiscal 2024.

The Purchase Agreement may be terminated at any time prior to closing by mutual written consent of the Parties, or by either Grocery Outlet or the Sellers (i) if the closing has not occurred on or prior to April 10, 2024, (ii) if the other party materially breaches or fails to perform under the Purchase Agreement and fails to timely cure, or (iii) if the Transaction is prohibited by a governmental entity or by applicable law.

Until the closing of the Transaction or the earlier termination of the Purchase Agreement, the Sellers are subject to restrictive covenants regarding an alternative transaction.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data