Grocery Outlet Holding Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA GROCERY OUTLET HOLDING CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 64 Consolidated Balance Sheets 66 Consolidated Statements of Operations and Comprehensive Income 67 Consolidated Statements of Stockholders' Equity 68 Consolidated Statements of Cash Flows 69 Notes to Consolidated Financial Statements 70 63 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and the Board of Directors of Grocery Outlet Holding Corp. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Grocery Outlet Holding Corp. 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. 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 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'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 64 Table of Contents 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. 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, gross margin and operating expenses. 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 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 – Internal communications to management and the Board of Directors • We tested the completeness, accuracy, and relevance of underlying data used in determining undiscounted cash flows. /s/ DELOITTE & TOUCHE LLP San Francisco, California February 28, 2024 We have served as the Company's auditor since 2007. 65 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 114,987 $ 102,728 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 4,185 4,368 Merchandise inventories 349,993 334,319 Prepaid expenses and other current assets 32,443 15,137 Total current assets 516,551 467,357 Independent operator notes and receivables, net of allowance $ 11,059 and $ 12,509 28,134 22,535 Property and equipment, net 642,462 560,746 Operating lease right-of-use assets 945,710 902,163 Intangible assets, net 78,556 63,993 Goodwill 747,943 747,943 Other assets 10,230 7,667 Total assets $ 2,969,586 $ 2,772,404 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 209,354 $ 137,631 Accrued and other current liabilities 66,655 53,213 Accrued compensation 24,749 27,194 Current portion of long-term debt 5,625 — Current lease liabilities 63,774 54,586 Income and other taxes payable 13,808 7,890 Total current liabilities 383,965 280,514 Long-term debt, net 287,107 379,650 Deferred income tax liabilities, net 38,601 19,782 Long-term lease liabilities 1,038,307 980,759 Other long-term liabilities 2,267 1,485 Total liabilities 1,750,247 1,662,190 Commitments and contingencies (NOTE 12) Stockholders' equity: Common stock, par value $ 0.001 per share, 500,000,000 shares authorized; 99,223,863 and 97,674,356 shares issued and outstanding, respectively 99 98 Series A Preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 877,276 847,589 Retained earnings 341,964 262,527 Total stockholders' equity 1,219,339 1,110,214 Total liabilities and stockholders' equity $ 2,969,586 $ 2,772,404 See Notes to Consolidated Financial Statements 66 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (in thousands, except per share data) Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Net sales $ 3,969,453 $ 3,578,101 $ 3,079,582 Cost of sales 2,727,774 2,486,002 2,130,796 Gross profit 1,241,679 1,092,099 948,786 Selling, general and administrative expenses 1,115,897 997,109 859,691 Operating income 125,782 94,990 89,095 Other expenses (income): Interest expense, net 16,361 17,967 15,564 Gain on insurance recoveries — — ( 3,970 ) Loss on debt extinguishment and modification 5,340 1,274 — Total other expenses (income) 21,701 19,241 11,594 Income before income taxes 104,081 75,749 77,501 Income tax expense 24,644 10,697 15,191 Net income and comprehensive income $ 79,437 $ 65,052 $ 62,310 Basic earnings per share $ 0.80 $ 0.67 $ 0.65 Diluted earnings per share $ 0.79 $ 0.65 $ 0.63 Weighted average shares outstanding: Basic 98,709 96,812 95,725 Diluted 100,831 100,162 99,418 See Notes to Consolidated Financial Statements 67 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) Common Stock Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount 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 Share-based compensation expense — — 17,615 — 17,615 Dividends paid — — ( 186 ) — ( 186 ) Net income and comprehensive income — — — 62,310 62,310 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 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 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 Repurchase of common stock ( 254,516 ) — ( 6,809 ) — ( 6,809 ) Dividends paid — — ( 15 ) — ( 15 ) Net income and comprehensive income — — — 79,437 79,437 Balance at December 30, 2023 99,223,863 $ 99 $ 877,276 $ 341,964 $ 1,219,339 See Notes to Consolidated Financial Statements 68 Table of Contents GROCERY OUTLET HOLDING CORP. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Cash flows from operating activities: Net income $ 79,437 $ 65,052 $ 62,310 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property and equipment 76,600 70,451 63,442 Amortization of intangible and other assets 11,382 7,800 7,682 Amortization of debt issuance costs and debt discounts 1,084 2,264 2,511 Non-cash rent 5,226 6,932 10,753 Gain on insurance recoveries — — ( 3,970 ) Loss on debt extinguishment and modification 5,340 1,274 — Share-based compensation 31,091 32,556 17,615 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 Deferred income taxes 18,819 10,367 12,944 Other 487 1,176 1,251 Changes in operating assets and liabilities: Independent operator and other accounts receivable ( 11,031 ) ( 7,230 ) ( 21 ) Merchandise inventories ( 15,674 ) ( 58,817 ) ( 30,345 ) Prepaid expenses and other assets ( 10,716 ) 841 3,301 Income and other taxes payable 5,918 705 ( 362 ) Trade accounts payable, accrued compensation and other liabilities 91,049 35,094 3,179 Operating lease liabilities 10,761 12,728 8,381 Net cash provided by operating activities 303,447 185,511 165,587 Cash flows from investing activities: Advances to independent operators ( 8,565 ) ( 9,819 ) ( 10,024 ) Repayments of advances from independent operators 5,734 6,917 4,563 Purchases of property and equipment ( 168,990 ) ( 130,482 ) ( 123,384 ) Proceeds from sales of assets 24 39 37 Investments in intangible assets and licenses ( 23,000 ) ( 16,586 ) ( 9,772 ) Proceeds from insurance recoveries - property and equipment 632 — 1,867 Net cash used in investing activities ( 194,165 ) ( 149,931 ) ( 136,713 ) Cash flows from financing activities: Proceeds from exercise of stock options 5,958 6,890 7,226 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 ) — Dividends paid ( 15 ) ( 105 ) ( 186 ) Debt issuance costs paid ( 4,513 ) — — Net cash provided by (used in) financing activities ( 97,023 ) ( 72,937 ) 5,885 Net increase (decrease) in cash and cash equivalents 12,259 ( 37,357 ) 34,759 Cash and cash equivalents at beginning of period 102,728 140,085 105,326 Cash and cash equivalents at end of period $ 114,987 $ 102,728 $ 140,085 Supplemental disclosure of cash flow information: 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 Property and equipment accrued at end of period $ 7,310 $ 18,536 $ 14,986 Intangible assets accrued at end of period $ 5,507 $ 3,736 $ 1,613 Acquisition of equipment in exchange for reduction of independent operator notes and independent operator receivables $ — $ — $ 7,609 See Notes to Consolidated Financial Statements 69 Table of Contents GROCERY OUTLET HOLDING CORP. Notes to Consolidated Financial Statements NOTE 1— Organization and Summary of Significant Accounting Policies Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned 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 Grocery Outlet Inc. ("GOI"). Fiscal Year — We operate on a fiscal year that ends on the Saturday closest to December 31st each year. 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 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 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. Actual results can differ from these estimates depending upon certain risks and uncertainties. Changes in these estimates are recorded when known. We consider our accounting policy relating to long-lived asset impairment to be a significant accounting policy that involves management's estimate and judgment. Segment Reporting — We manage our business as one operating segment. In addition, all of our sales were made to customers located in the U.S. and all property and equipment is located in the U.S. Cash and Cash Equivalents — We consider all highly liquid investments, purchased with original maturities of three months or less, to be cash equivalents. 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. See NOTE 2 — Independent Operator Notes and Independent Operator Receivables, for additional information. Concentrations of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents and accounts and notes receivable. Although we deposit our cash with creditworthy financial institutions, our deposits typically exceed federally insured limits. 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 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. Cost is determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages. This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts. 70 Table of Contents Property and Equipment — Property and equipment is stated at cost less accumulated depreciation and includes expenditures for significant improvements to leased premises. Depreciation of property and equipment is calculated using the straight-line method over the estimated useful lives of the assets, generally ranging from three to 15 years. Amortization of leasehold improvements is calculated based on the shorter of their estimated useful life or the remaining terms of the lease. Remaining lease terms currently range from one to 20 years. We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets, including property and equipment, may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered through undiscounted future cash flows derived from their use and eventual disposition. For purposes of this assessment, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities, primarily at an individual store level. 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 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. There were no adjustments to the carrying value of long-lived assets due to impairment charges during fiscal 2023, 2022 and 2021 . See NOTE 3—Property and Equipment and NOTE 4—Leases for additional information. Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities in our consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities in our consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term, reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date, to determine the present value of our lease payments. Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term while finance lease payments are charged to interest expense and depreciation and amortization expense over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these short-term leases is recognized on a straight-line basis over the lease term. We generally lease retail facilities for store locations, distribution centers, office space and equipment and account for these leases as operating leases. We account for one retail store lease and certain equipment leases as finance leases. Lease and non-lease components are accounted for separately. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores. Goodwill and Other Intangible Assets — We have both goodwill and intangible assets recorded on our consolidated balance sheets. Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in a business combination. Goodwill is not amortized, but rather is subject to an annual impairment evaluation which is performed during our fourth quarter or when events or changes in circumstances indicate that the value of goodwill may be impaired. Our impairment evaluation of goodwill consists of an initial qualitative assessment of our reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If it is concluded that this is the case, a quantitative evaluation, based on discounted cash flows, is performed which requires us to estimate future cash flows, growth rates and economic and market conditions. If the quantitative evaluation indicates that goodwill is not recoverable, an impairment loss is calculated and recognized during that period. 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 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. Trademarks represent the value of all our trademarks and trade names in the marketplace. We are amortizing the value assigned to the trade names on a straight-line basis over 15 years. Computer software includes both acquired software and eligible costs to develop internal-use software that are incurred during the application development stage. These assets are amortized over their estimated useful 71 Table of Contents lives of three to 10 years. Liquor license assets have been classified as indefinite-lived intangible assets and accordingly, are not subject to amortization. We review our intangible assets for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable. 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 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. The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows: Level 1 — Quoted prices in active markets for identical assets or liabilities Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions. The assets' or liabilities' fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of 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 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, their variable interest rates or the effect of the related allowance for expected credit losses. 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): December 30, 2023 December 31, 2022 Carrying Amount (1) Estimated Fair Value (2) Carrying Amount (1) Estimated Fair Value (3) Financial Liabilities: Senior term loans (Level 2) $ 292,732 $ 294,375 $ 379,650 $ 383,075 _______________________ (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. 72 Table of Contents Revenue Recognition Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. For e-commerce related sales in which a third-party provides home delivery service, revenue is recognized upon delivery to the customer. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Discounts provided to customers by us are recognized at the time of sale as a reduction in net sales as the products are sold. Discounts provided by IOs are not recognized as a reduction in net sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons. We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any material performance obligations other than our gift card deferred revenue liability, or any material costs to obtain or fulfill a contract as of December 30, 2023 and December 31, 2022. Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize revenue for the unused portion of the gift cards ("breakage") under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $ 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): December 30, 2023 December 31, 2022 January 1, 2022 Perishable (1) $ 1,404,461 $ 1,272,200 $ 1,067,198 Non-perishable (2) 2,564,992 2,305,901 2,012,384 Total net sales $ 3,969,453 $ 3,578,101 $ 3,079,582 _______________________ (1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood. (2) Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer and wine. 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 $ 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. The PSUs vest in one installment after a three year performance period based on the achievement of cumulative operating goals. We recognize compensation expense for share-based payment awards with only a service condition on a straight-line basis over the requisite service period, which is generally the award's vesting period. Vesting of these awards would be accelerated for certain employees in the event of a change in control as well as certain termination events. Compensation expense for share-based payment awards subject to vesting based upon the achievement of a performance condition is recognized on a graded-vesting basis at the time the achievement of the performance condition becomes probable. We recognize share-based award forfeitures as they occur rather than estimating by applying a forfeiture rate. 73 Table of Contents While we recognize share-based compensation expense over the performance period and/or requisite service period based on the fair market value of the award as of the grant date, we will not know the actual amount of tax benefit an award will generate until such award is exercised (for stock options) or vested (for RSUs or PSUs). Until such award is exercised or vested we assume that the amount ultimately recognized for tax purposes is the same amount we are currently recognizing in our operating results, that is for "book" purposes. Consequently, our deferred tax asset related to share-based compensation expense, which totaled $ 11.5 million as of December 30, 2023, is based on each qualifying award's grant date fair value rather than the award's to-be-determined exercise date intrinsic value (or vesting date fair value). For awards exercised or vested during our fiscal year ended December 30, 2023, the difference between the grant date fair value and the exercise or vest date intrinsic value totaled $ 16.2 million. If the share price for our common stock were to depreciate for a sustained period of time, we could be required to recognize a tax shortfall. Such shortfalls could have a material effect on our cash flows and financial results. See NOTE 8—Share-based Awards and NOTE 10—Income Taxes, for additional information. Income Taxes — Income taxes are accounted for using an asset and liability approach that requires recognition of deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events are considered, other than changes in the tax law. 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 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. We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We record uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 740, Income Taxes, on the basis of a two-step process in which (i) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the more likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Variable Interest Entities — In accordance with the variable interest entities sub-section of ASC Topic 810, Consolidation, we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE. We had 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. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO selects a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. The IO is required to furnish initial working capital and to acquire certain store and safety ass ets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice. 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 $ 3.9 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. Inventories and related net sales proceeds are our property, and we are responsible for store rent and related occupancy costs. IO commissions are expensed and included in SG&A. IO commissions were $ 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. 74 Table of Contents 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. As collateral for IO obligations and performance, the Operator Agreement grants us the security interests in the assets owned by each IO related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, each IO is a VIE that we have a variable interest in. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (i) the power to direct the activities that most significantly impact the IO's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of the IO's ability to direct those activities. Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of its own labor. Labor activities that significantly impact the IO's economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreement illustrate the lack of ultimate control over the IO. Therefore, 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. Net Income Per Share — Basic net income per share is calculated using net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income per share reflects the dilutive effects of stock options and RSUs outstanding during the period, to the extent such securities would not be anti-dilutive, as well as dilutive PSUs, and is determined using the treasury stock method. Recently Adopted Accounting Standards Accounting Standards Update ("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"). ASU 2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. 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 ASU No. 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. ASU No. 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. 75 Table of Contents NOTE 2— Independent Operator Notes and Independent Operator Receivables The amounts included in IO notes and IO receivables consist primarily of funds we loaned to IOs, net of estimated uncollectible amounts. IO notes, which are payable on demand and have no maturity date, typically bear interest at rates between 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 $ 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. IO notes and IO receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets. The allowance is estimated using an expected loss framework, which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include: • TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are participating in our Temporary Commission Adjustment Program ("TCAP") as of the end of each reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in IO skills and experience. • Non-TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are not participating in TCAP as of the end of each reporting period. • New store — Includes the notes and receivables from IOs with stores that have been open for less than 18 months as of the end of each reporting period, and may or may not be participating in TCAP. Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an individual basis. Amounts due from IOs and the related allowances as of December 30, 2023 and December 31, 2022 consisted of the following (amounts in thousands) : Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net December 30, 2023 Independent operator notes $ 41,123 $ ( 754 ) $ ( 10,435 ) $ 29,934 $ 1,800 $ 28,134 Independent operator receivables 18,105 ( 4,338 ) ( 624 ) 13,143 13,143 — Total $ 59,228 $ ( 5,092 ) $ ( 11,059 ) $ 43,077 $ 14,943 $ 28,134 Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net December 31, 2022 Independent operator notes $ 37,522 $ ( 700 ) $ ( 12,509 ) $ 24,313 $ 1,778 $ 22,535 Independent operator receivables 10,565 ( 1,538 ) — 9,027 9,027 — Total $ 48,087 $ ( 2,238 ) $ ( 12,509 ) $ 33,340 $ 10,805 $ 22,535 76 Table of Contents A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands): Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Beginning balance $ 14,747 $ 11,912 $ 8,109 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 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 Prior 1,009 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 TCAP $ 3,086 $ 6,669 $ 4,020 $ 1,878 $ 402 $ 991 $ 17,046 Non-TCAP 4,024 3,750 3,638 2,431 1,056 1,578 16,477 New store 5,229 2,371 — — — — 7,600 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 30, 2023 and December 31, 2022 consisted of the following (amounts in thousands): 77 Table of Contents Property and Equipment, At Cost Accumulated Depreciation and Amortization Property and Equipment, Net December 30, 2023 Leasehold improvements $ 453,496 $ ( 148,633 ) $ 304,863 Fixtures and equipment 527,769 ( 249,838 ) 277,931 Other 376 ( 322 ) 54 Construction in progress 59,614 — 59,614 Totals $ 1,041,255 $ ( 398,793 ) $ 642,462 December 31, 2022 Leasehold improvements $ 392,448 $ ( 117,745 ) $ 274,703 Fixtures and equipment 457,383 ( 206,932 ) 250,451 Other 376 ( 309 ) 67 Construction in progress 35,525 — 35,525 Totals $ 885,732 $ ( 324,986 ) $ 560,746 Construction in progress is primarily composed of leasehold improvements and fixtures and equipment related to new or remodeled stores where construction had not been completed at year-end. Depreciation expense on property and equipment for fiscal 2023, 2022 and 2021 was as follows (amounts in thousands): Fiscal Year Ended Consolidated Statements of Operations and Comprehensive Income Location December 30, 2023 December 31, 2022 January 1, 2022 Cost of sales $ 1,963 $ 1,711 $ 1,486 Operating expenses 74,637 68,740 61,956 Total depreciation expense on property and equipment $ 76,600 $ 70,451 $ 63,442 78 Table of Contents NOTE 4— Leases 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. As of December 30, 2023, we had executed leases for 41 store locations that we had not yet taken possession of with total undiscounted future lease payments of $ 229.5 million and lease terms through 2043. Based upon our initial investment in store leasehold improvements, we utilize an initial, reasonably-certain lease life of 15 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from five to 15 years or more. Our leases do not include any material residual value guarantees or material restrictive covenants. We also have non-cancelable subleases with unrelated third parties with future minimum rental receipts as of December 30, 2023 totaling $ 4.0 million ending in various years through 2036, which have not been deducted from the future minimum lease payments. The balance sheet classification of our right-of-use lease assets and lease liabilities was as follows (amounts in thousands): Leases Classification December 30, 2023 December 31, 2022 Assets: Operating lease assets Operating right-of-use assets $ 945,710 $ 902,163 Finance lease assets Other assets 6,433 5,771 Total lease assets $ 952,143 $ 907,934 Liabilities: Current Operating Current lease liabilities $ 62,273 $ 53,316 Finance Current lease liabilities 1,501 1,270 Noncurrent Operating Long-term lease liabilities 1,033,590 976,345 Finance Long-term lease liabilities 4,717 4,414 Total lease liabilities $ 1,102,081 $ 1,035,345 79 Table of Contents The components of lease expense were as follows (amounts in thousands): Fiscal Year Ended Lease Cost Classification (1) December 30, 2023 December 31, 2022 January 1, 2022 Operating lease cost Selling, general and administrative expenses $ 141,501 $ 132,065 $ 123,799 Finance lease cost: 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 Variable lease cost Selling, general and administrative expenses 1,093 740 547 Sublease income Selling, general and administrative expenses ( 1,237 ) ( 868 ) ( 1,114 ) Net lease cost $ 143,120 $ 133,594 $ 124,859 _______________________ (1) Certain supply chain related lease costs herein are included in cost of sales. Maturities of lease liabilities as of December 30, 2023 were as follows (amounts in thousands): Operating Leases Finance Leases Total Fiscal 2024 $ 132,593 $ 1,818 $ 134,411 Fiscal 2025 150,048 1,574 151,622 Fiscal 2026 148,993 1,190 150,183 Fiscal 2027 143,800 888 144,688 Fiscal 2028 141,590 712 142,302 Thereafter 842,050 1,053 843,103 Total lease payments 1,559,074 7,235 $ 1,566,309 Less: Imputed interest ( 463,211 ) ( 1,017 ) Present value of lease liabilities $ 1,095,863 $ 6,218 The weighted-average lease terms and discount rates of operating and finance leases were as follows: December 30, 2023 December 31, 2022 Weighted-average remaining lease term: Operating leases 10.8 years 11.0 years Finance leases 5.0 years 5.1 years Weighted-average discount rate: Operating leases 6.55 % 6.36 % Finance leases 5.89 % 5.31 % 80 Table of Contents Supplemental cash flow information related to leases was as follows (amounts in thousands): Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 135,871 $ 125,221 $ 113,886 Operating cash flows from finance leases $ 344 $ 332 $ 378 Finance cash flows from finance leases $ 1,409 $ 1,279 $ 1,155 Leased assets obtained in exchange for new operating lease liabilities $ 131,758 $ 88,681 $ 139,663 Leased assets obtained in exchange for new finance lease liabilities $ 1,782 $ 39 $ 2,019 NOTE 5— Goodwill and Intangible Assets Information regarding our goodwill and intangible assets as of December 30, 2023 was as follows (amounts in thousands): Gross Carrying Amount Accumulated Amortization Net Carrying Amount Trademarks $ 58,400 $ ( 35,897 ) $ 22,503 Computer software 69,643 ( 22,600 ) 47,043 Total finite-lived intangible assets 128,043 ( 58,497 ) 69,546 Liquor licenses 9,010 — 9,010 Total intangible assets 137,053 ( 58,497 ) 78,556 Goodwill 747,943 — 747,943 Total goodwill and intangible assets $ 884,996 $ ( 58,497 ) $ 826,499 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 Trademarks $ 58,400 $ ( 32,004 ) $ 26,396 Computer software 51,964 ( 23,191 ) 28,773 Total finite-lived intangible assets 110,364 ( 55,195 ) 55,169 Liquor licenses 8,824 — 8,824 Total intangible assets 119,188 ( 55,195 ) 63,993 Goodwill 747,943 — 747,943 Total goodwill and intangible assets $ 867,131 $ ( 55,195 ) $ 811,936 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. 81 Table of Contents The estimated future amortization expense related to finite-lived intangible assets as of December 30, 2023 is as follows (amounts in thousands): Fiscal 2024 $ 12,937 Fiscal 2025 12,474 Fiscal 2026 9,649 Fiscal 2027 6,778 Fiscal 2028 6,249 Thereafter 21,459 Total $ 69,546 NOTE 6— Long-term Debt Long-term debt consisted of the following (amounts in thousands): December 30, 2023 December 31, 2022 Senior term loan due 2025 $ — $ 385,000 Senior term loan due 2028 294,375 — Long-term debt, gross 294,375 385,000 Less: Unamortized debt issuance costs and debt discounts ( 1,643 ) ( 5,350 ) Long-term debt, less unamortized debt discounts and debt issuance costs 292,732 379,650 Less: 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 %. 82 Table of Contents 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 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. 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. 83 Table of Contents We were required to pay a quarterly commitment fee ranging from 0.25 % to 0.50 % on the daily unused amount of the commitment under the prior revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We were also required to pay fronting fees and other customary fees for letters of credit issued under the prior revolving credit facility. Debt Covenants The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among other things, limit our ability and the ability of our restricted 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 Principal maturities of debt as of December 30, 2023 were as follows (amounts in thousands): Fiscal 2024 $ 5,625 Fiscal 2025 15,000 Fiscal 2026 15,000 Fiscal 2027 15,000 Fiscal 2028 243,750 Thereafter — Total $ 294,375 Interest Expense, Net Interest expense, net, consisted of the following (amounts in thousands): Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Interest on loans $ 24,666 $ 18,743 $ 13,930 Amortization of debt issuance costs and debt discounts 1,084 2,264 2,511 Interest on finance leases 340 341 378 Other 17 8 66 Interest income ( 7,631 ) ( 3,389 ) ( 1,321 ) Capitalized interest ( 2,115 ) — — Interest expense, net $ 16,361 $ 17,967 $ 15,564 84 Table of Contents Loss on Debt Extinguishment and Modification Loss on debt extinguishment and modification consisted of the following (amounts in thousands): Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Write-off of debt issuance costs $ 4,518 $ 1,127 $ — Write-off of debt discounts 578 147 — Debt modification costs 244 — — Loss on debt extinguishment and modification $ 5,340 $ 1,274 $ — NOTE 7— Stockholders' Equity As of December 30, 2023, the total amount of the Company’s authorized capital stock consisted of 500,000,000 shares of common stock, par value $ 0.001 per share, and 50,000,000 shares of undesignated preferred stock, par value of $ 0.001 per share. Common Stock Holders of our common stock are entitled to one vote for each share held of record on all matters on which stockholders are entitled to vote generally, including the election or removal of directors. The holders of our common stock do not have cumulative voting rights in the election of directors. Preferred Stock We did not have any shares of preferred stock issued or outstanding as of December 30, 2023. Our Board of Directors has the authority to issue shares of preferred stock from time to time on terms it may determine, with respect to any series of preferred stock, the powers (including voting powers), preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof as the board of directors may from time to time determine, which could affect the relative voting power or other rights of the holders of our common stock. The issuance of preferred stock could have the effect of decreasing the trading price of our common stock, restricting dividends on the common stock, diluting the voting power of our common stock, or subordinating the liquidation rights of the common stock. Dividend Rights 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. Share Repurchase Program In November 2021, our Board of Directors approved a share repurchase program. This program, effective November 5, 2021 and without an expiration date, authorized us to repurchase up to $ 100.0 million of our outstanding common stock utilizing a variety of methods including open market purchases, accelerated share repurchase programs, privately negotiated transactions, structured repurchase transactions and under a Rule 10b5-1 plan (which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under securities laws). Any repurchased shares are constructively retired and returned to an unissued status. During the 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 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. 85 Table of Contents NOTE 8— Share-based Awards Share-based Incentive Plans The Globe Holding Corp. 2014 Stock Incentive Plan (the "2014 Plan") became effective on October 21, 2014. Under the 2014 Plan, we granted stock options and RSUs to purchase shares of our common stock. Effective as of June 19, 2019, we terminated the 2014 Plan and as a result no further equity awards may be issued under the 2014 Plan. Any outstanding awards granted under the 2014 Plan will remain subject to the terms of the 2014 Plan and the applicable equity award agreements. On June 4, 2019, our Board of Directors and stockholders approved the Grocery Outlet Holding Corp. 2019 Incentive Plan (the "2019 Plan"). A total of 4,597,862 shares of common stock were reserved for issuance under the 2019 Plan at that time. In addition, on the first day of each fiscal year beginning in fiscal 2020 and ending in fiscal 2029, the 2019 Plan provides for an annual automatic increase of the shares reserved for issuance in an amount equal to the positive difference between (i) 4 % of the "outstanding common stock" (as defined in the 2019 Plan) on the last day of the immediately preceding fiscal year and (ii) the plan share reserve on the last day of the immediately preceding fiscal year, or a lesser number as determined by our Board of Directors. As of December 30, 2023, there were a total of 7,242,549 shares of common stock reserved for issuance under the 2019 Plan, which includes 429,826 shares added effective January 1, 2023 per the above noted annual automatic increase. As of December 30, 2023, there were 2,950,047 remaining shares available for issuance of new equity awards under the 2019 Plan. Long-term incentive programs ("LTIPs") under the 2019 Plan consist of time-based RSUs and PSUs. RSUs granted under the LTIPs generally vest over one to three years . Half of the total PSUs granted under the LTIPs will vest upon the achievement of certain revenue-based performance targets ("Tranche I PSUs") and half will vest upon the achievement of certain adjusted EBITDA-based performance targets ("Tranche II PSUs") as determined by the Compensation Committee following the last day of a three-year performance period. The number of PSUs ultimately earned will equal the number of Tranche I and Tranche II PSUs granted multiplied by the applicable percentage of actual revenue and adjusted-EBITDA performance target levels achieved, and can range from 0 % to 200 % of the number of PSUs granted. Fair Value Determination 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 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. The respective valuation methods resulted in weighted-average grant date fair values for RSUs and PSUs granted during fiscal 2023, 2022 and 2021 as follows: Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 RSUs $ 27.50 $ 29.70 $ 28.70 PSUs $ 27.34 $ 29.16 $ 35.45 We did not award any time-based or performance-based stock options during fiscal 2023, 2022 and 2021. 86 Table of Contents Share-based Award Activity The following table summarizes stock option activity under all equity incentive plans during fiscal 2023, 2022 and 2021: Time-Based Stock Options Performance-Based Stock Options Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price Options outstanding as of January 2, 2021 3,864,772 $ 12.42 2,325,580 $ 4.54 Granted — — — — Exercised ( 538,307 ) 7.77 ( 629,386 ) 4.41 Forfeitures ( 191,324 ) 19.77 — — Options outstanding as of January 1, 2022 3,135,141 $ 12.77 1,696,194 $ 4.58 Granted — — — — Exercised ( 276,022 ) 9.63 ( 894,559 ) 4.50 Forfeitures ( 296,345 ) 21.25 — — Options outstanding as of December 31, 2022 2,562,774 $ 12.13 801,635 $ 4.68 Granted — — — — Exercised ( 462,972 ) 8.17 ( 574,030 ) 3.91 Forfeitures ( 8,279 ) 21.93 — — Options outstanding as of December 30, 2023 2,091,523 $ 12.97 227,605 $ 6.62 Options vested and exercisable as of December 30, 2023 2,081,490 $ 12.97 227,605 $ 6.62 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. The following table summarizes RSU activity under all equity incentive plans during fiscal 2023, 2022 and 2021: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of January 2, 2021 341,842 $ 35.16 Granted 669,546 28.70 Vested ( 110,956 ) 34.64 Forfeitures ( 63,936 ) 34.05 Unvested balance as of January 1, 2022 836,496 $ 30.14 Granted 449,438 29.70 Vested ( 499,696 ) 27.38 Forfeitures ( 95,884 ) 30.61 Unvested balance as of December 31, 2022 690,354 $ 31.79 Granted 552,372 27.50 Vested ( 345,887 ) 32.50 Forfeitures ( 39,019 ) 29.87 Unvested balance as of December 30, 2023 857,820 $ 28.82 87 Table of Contents The following table summarizes PSU activity under the 2019 Plan during fiscal 2023, 2022 and 2021: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of January 2, 2021 407,462 $ 36.90 Granted (1) 319,606 35.45 Adjustment for expected performance achievement (2) ( 91,332 ) 35.45 Forfeitures ( 59,011 ) 36.52 Unvested balance as of January 1, 2022 576,725 $ 36.36 Granted (1) 404,382 29.16 Adjustment for expected performance achievement (2) 423,347 31.86 Forfeitures ( 72,651 ) 33.79 Unvested balance as of December 31, 2022 1,331,803 $ 32.89 Granted (1) 451,077 27.34 Adjustment for expected performance achievement (2) 432,774 28.84 Vested ( 441,346 ) 36.84 Forfeitures ( 20,319 ) 29.83 Unvested balance as of December 30, 2023 (3) 1,753,989 $ 29.50 _______________________ (1) Represents initial grant of PSUs based on performance target level achievement of 100 %. (2) Represents the adjustment to previously granted PSUs based on performance expectations as of the end of each respective reporting period. (3) An additional 424,341 PSUs could potentially be included if the maximum performance level of 200 % is reached for all PSUs outstanding as of December 30, 2023. Share-based Compensation Expense We recognize compensation expense for stock options, RSUs, and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. Share-based compensation expense and the related tax benefit consisted of the following (amounts in thousands): Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Time-based stock options $ 770 $ 471 $ 2,030 RSUs 11,327 14,855 8,488 PSUs 18,979 17,125 6,911 Dividends (1) 15 105 186 Share-based compensation expense (2) $ 31,091 $ 32,556 $ 17,615 _______________________ (1) Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016. (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 30, 2023, December 31, 2022 and January 1, 2022. Accordingly, no share-based compensation expense was capitalized during these years. 88 Table of Contents Time-Based Stock Options Unamortized compensation cost related to unvested time-based stock options was immaterial as of December 30, 2023. Performance-Based Stock Options We had no unamortized compensation cost related to performance-based stock options as of December 30, 2023. Time-Based RSUs Unamortized compensation expense for RSUs was $ 15.2 million as of December 30, 2023, which is expected to be amortized over a weighted average period of approximately 1.9 years. Performance-Based RSUs 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. Dividends 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. 89 Table of Contents 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 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 $ 0.6 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. The risks of participating in a multiemployer pension plan such as the Pension Fund are different from single-employer pension plans in the following aspects: a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. b. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. c. If we stop participating in its multiemployer pension plan, we may be required to pay those plans an amount based on our proportionate share of the underfunded status of such plan, referred to as a withdrawal liability. The following information represents our participation in the Pension Fund for the annual period ended December 31, 2022, the latest available information from the Pension Fund. All such information is based on information we received from the Pension Fund. The Pension Fund's Employer Identification Number is 946313554 and the Plan Number is -001. Our contributions represented less than 5 % of the total contributions to the Pension Fund. Under the provisions of the Pension Protection Act (PPA) zone status, the Pension Fund was in critical status during the plan year. Among other factors, generally, plans in critical status are less than 65 percent funded. In an effort to improve the Pension Fund's funding situation, the trustees adopted a rehabilitation plan on July 8, 2010 and most recently updated it on May 3, 2022. The rehabilitation plan changes the benefits for participants who retire and commence a pension on or after January 1, 2012, and changes future benefit accruals earned on or after January 1, 2012. Except in limited circumstances, the pensions of participants and beneficiaries whose pension effective date is before January 1, 2012, are not affected. The Benefits Fund provides medical, dental, pharmacy, vision, and other ancillary benefits to active employees and retirees. The majority of our contributions cover active employees and as such, may not constitute contributions to a postretirement benefit plan. 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 $ 1.4 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. 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. b. 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 $ 6.8 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. c. A 401(k) retirement plan for warehouse employees, which is available to those employees who meet certain service criteria. d. A 401(k) retirement plan for administrative personnel, which is available to those employees who meet certain service criteria. e. We are not obligated to match any employee contributions for the 401(k) retirement plans. However, for certain employees who meet certain service criteria, we have a 401(k) retirement plan under which we 90 Table of Contents 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 30, 2023, December 31, 2022, and January 1, 2022, respectively. NOTE 10— Income Taxes 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 December 30, 2023 December 31, 2022 January 1, 2022 Current: Federal $ 1,051 $ — $ — State 4,774 330 2,247 Total current 5,825 330 2,247 Deferred: Federal 16,127 7,308 10,838 State 2,692 3,059 2,106 Total deferred 18,819 10,367 12,944 Income tax expense $ 24,644 $ 10,697 $ 15,191 Statutory rate reconciliation A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows: Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Taxes at federal statutory rates 21.0 % 21.0 % 21.0 % 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 ) % Return to provision ( 2.0 ) % ( 1.1 ) % 1.9 % Other 0.4 % 0.7 % 0.2 % Effective income tax rate 23.7 % 14.1 % 19.6 % 91 Table of Contents Deferred income taxes Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities were as follows (amounts in thousands): December 30, 2023 December 31, 2022 Deferred tax assets: Accrued compensation $ 5,902 $ 6,459 Share-based compensation expense 11,543 14,040 Inventory 6,534 6,482 Transaction costs 596 782 Lease liability obligation 308,776 289,539 Net operating loss and other carryforwards 32,299 48,409 Reserves and allowances 5,702 4,648 Debt transaction costs 369 — Total deferred tax assets 371,721 370,359 Deferred tax liabilities: Prepaid expenses ( 1,264 ) ( 1,249 ) Depreciation and amortization ( 85,261 ) ( 81,167 ) Intangible assets ( 5,876 ) ( 6,522 ) Right-of-use assets ( 267,696 ) ( 255,256 ) Goodwill ( 48,865 ) ( 43,488 ) Debt transaction costs — ( 1,231 ) Other ( 1,360 ) ( 1,228 ) Total deferred tax liabilities ( 410,322 ) ( 390,141 ) Net deferred tax assets (liabilities) $ ( 38,601 ) $ ( 19,782 ) 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. Based on our analysis, our projected net operating losses to be utilized in future years will not be affected by this annual limitation. Management assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit the use of the existing deferred tax assets. A significant piece of objective positive evidence was the cumulative income incurred over the three-year period ended December 30, 2023. Based on our current assessment, we anticipate it is more likely than not that we will generate sufficient taxable income to realize all of our material deferred tax assets. As such we did not record a valuation allowance against these material deferred tax assets as of December 30, 2023. Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision in our consolidated statements of operations and comprehensive income and include accrued interest and penalties with the related income tax liability on our consolidated balance sheets. To date, we have not recognized any interest and penalties, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax positions as of 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. As of December 30, 2023, our tax returns remain open to examination by the tax authorities for tax years 2012 to 2022 for U.S. federal and for various state jurisdictions. 92 Table of Contents NOTE 11— Related Party Transactions Related Party Lease s 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 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 $ 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. NOTE 12— Commitments and Contingencies We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We establish an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We monitor those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, we do not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, 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. NOTE 13— Earnings Per Share The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data): Fiscal Year Ended December 30, 2023 December 31, 2022 January 1, 2022 Numerator Net income and comprehensive income $ 79,437 $ 65,052 $ 62,310 Denominator Weighted-average shares outstanding - basic 98,709 96,812 95,725 Effect of dilutive options 1,760 2,813 3,564 Effect of dilutive RSUs and PSUs 362 537 129 Weighted-average shares outstanding - diluted (1) 100,831 100,162 99,418 Earnings per share: Basic $ 0.80 $ 0.67 $ 0.65 Diluted $ 0.79 $ 0.65 $ 0.63 _______________________ (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. 93 Table of Contents 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 December 30, 2023 December 31, 2022 January 1, 2022 RSUs 34 98 11 NOTE 14— Subsequent Event 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. 94 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 95 Table of Contents