Grocery Outlet Holding Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) (unaudited) March 30, 2024 December 30, 2023 Assets Current assets: Cash and cash equivalents $ 66,885 $ 114,987 Independent operator receivables and current portion of independent operator notes, net of allowance $ 4,744 and $ 5,092 13,347 14,943 Other accounts receivable, net of allowance $ 32 and $ 2 5,484 4,185 Merchandise inventories 362,730 349,993 Prepaid expenses and other current assets 29,954 32,443 Total current assets 478,400 516,551 Independent operator notes and receivables, net of allowance $ 11,263 and $ 11,059 28,236 28,134 Property and equipment, net 680,614 642,462 Operating lease right-of-use assets 949,065 945,710 Intangible assets, net 80,189 78,556 Goodwill 747,943 747,943 Other assets 10,084 10,230 Total assets $ 2,974,531 $ 2,969,586 Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 223,710 $ 209,354 Accrued and other current liabilities 63,064 66,655 Accrued compensation 11,389 24,749 Current portion of long-term debt 5,625 5,625 Current lease liabilities 63,932 63,774 Income and other taxes payable 14,340 13,808 Total current liabilities 382,060 383,965 Long-term debt, net 285,331 287,107 Deferred income tax liabilities, net 36,909 38,601 Long-term lease liabilities 1,043,715 1,038,307 Other long-term liabilities 1,943 2,267 Total liabilities 1,749,958 1,750,247 Commitments and contingencies (Note 8) Stockholders' equity: Common stock, par value $ 0.001 per share, 500,000,000 shares authorized; 100,147,065 and 99,223,863 shares issued and outstanding, respectively 100 99 Series A preferred stock, par value $ 0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding — — Additional paid-in capital 883,534 877,276 Retained earnings 340,939 341,964 Total stockholders' equity 1,224,573 1,219,339 Total liabilities and stockholders' equity $ 2,974,531 $ 2,969,586 See Notes to Condensed Consolidated Financial Statements 3 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (in thousands, except per share data) (unaudited) 13 Weeks Ended March 30, 2024 April 1, 2023 Net sales $ 1,036,944 $ 965,467 Cost of sales 732,999 664,924 Gross profit 303,945 300,543 Selling, general and administrative expenses 303,382 267,725 Operating income 563 32,818 Other expenses: Interest expense, net 3,176 5,919 Loss on debt extinguishment and modification — 5,340 Total other expenses 3,176 11,259 Income (loss) before income taxes ( 2,613 ) 21,559 Income tax expense (benefit) ( 1,588 ) 7,839 Net income (loss) and comprehensive income (loss) $ ( 1,025 ) $ 13,720 Basic earnings (net loss) per share $ ( 0.01 ) $ 0.14 Diluted earnings (net loss) per share $ ( 0.01 ) $ 0.14 Weighted average shares outstanding: Basic 99,520 97,920 Diluted 99,520 100,569 See Notes to Condensed Consolidated Financial Statements 4 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount Balance as of December 30, 2023 99,223,863 $ 99 $ 877,276 $ 341,964 $ 1,219,339 Exercise and vesting of share-based awards 1,124,005 1 3,441 — 3,442 Share-based compensation expense — — 8,142 — 8,142 Repurchase of common stock ( 200,803 ) — ( 5,325 ) — ( 5,325 ) Net loss and comprehensive loss — — — ( 1,025 ) ( 1,025 ) Balance as of March 30, 2024 100,147,065 $ 100 $ 883,534 $ 340,939 $ 1,224,573 See Notes to Condensed Consolidated Financial Statements 5 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued (in thousands, except share amounts) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Stockholders' Equity Shares Amount Balance as of December 31, 2022 97,674,356 $ 98 $ 847,589 $ 262,527 $ 1,110,214 Exercise and vesting of share-based awards 734,310 — 204 — 204 Share-based compensation expense — — 6,676 — 6,676 Repurchase of common stock ( 122,862 ) — ( 3,275 ) — ( 3,275 ) Net income and comprehensive income — — — 13,720 13,720 Balance as of April 1, 2023 98,285,804 $ 98 $ 851,194 $ 276,247 $ 1,127,539 See Notes to Condensed Consolidated Financial Statements 6 Table of Contents GROCERY OUTLET HOLDING CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) 13 Weeks Ended March 30, 2024 April 1, 2023 Cash flows from operating activities: Net income (loss) $ ( 1,025 ) $ 13,720 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of property and equipment 20,955 18,309 Amortization of intangible and other assets 3,934 2,366 Amortization of debt issuance costs and debt discounts 228 401 Non-cash rent 922 1,144 Loss on debt extinguishment and modification — 5,340 Share-based compensation 8,142 6,676 Provision for independent operator and other accounts receivable reserves 583 1,369 Deferred income taxes ( 1,692 ) 6,130 Other 364 105 Changes in operating assets and liabilities: Independent operator and other accounts receivable 1,241 ( 2,008 ) Merchandise inventories ( 12,737 ) 17,922 Prepaid expenses and other assets 2,305 ( 397 ) Income and other taxes payable 532 1,217 Trade accounts payable, accrued compensation and other liabilities ( 17,432 ) 11,343 Operating lease liabilities 1,521 3,995 Net cash provided by operating activities 7,841 87,632 Cash flows from investing activities: Advances to independent operators ( 3,132 ) ( 1,547 ) Repayments of advances from independent operators 1,503 2,010 Purchases of property and equipment ( 46,266 ) ( 32,894 ) Proceeds from sales of assets — 20 Investments in intangible assets and licenses ( 2,992 ) ( 7,936 ) Net cash used in investing activities ( 50,887 ) ( 40,347 ) Cash flows from financing activities: Proceeds from exercise of stock options 3,442 204 Proceeds from senior term loan due 2028 — 300,000 Proceeds from revolving credit facility — 25,000 Principal payments on senior term loan due 2025 — ( 385,000 ) Principal payments on senior term loan due 2028 ( 1,875 ) — Principal payments on finance leases ( 382 ) ( 320 ) Repurchase of common stock ( 6,241 ) ( 3,275 ) Debt issuance costs paid — ( 4,507 ) Net cash used in financing activities ( 5,056 ) ( 67,898 ) Net decrease in cash and cash equivalents ( 48,102 ) ( 20,613 ) Cash and cash equivalents at beginning of period 114,987 102,728 Cash and cash equivalents at end of period $ 66,885 $ 82,115 See Notes to Condensed Consolidated Financial Statements 7 Table of Contents GROCERY OUTLET HOLDING CORP. Notes to Condensed Consolidated Financial Statements (Unaudited) Note 1. Organization and Summary of Significant Accounting Policies Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned 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. As of March 30, 2024, we had 474 stores throughout California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland, New Jersey and Ohio. Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the United States ("U.S.") Securities and Exchange Commission (the "SEC") for interim reporting. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 (the "2023 Form 10-K"). The condensed consolidated balance sheet as of December 30, 2023 included herein has been derived from those audited consolidated financial statements. Our unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiary. All intercompany balances and transactions were eliminated. In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future interim or annual period. Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties. Changes in these estimates are recorded when known. We consider our accounting policy relating to long-lived asset impairment to be a significant accounting policy that involves management's estimate and judgment. Segment Reporting — We manage our business as one operating segment. In addition, all of our sales were made to customers located in the U.S. and all property and equipment is located in the U.S. Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages. This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts. Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities in our condensed consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities in our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term, reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date, to determine the present value of our lease payments. Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term while finance lease payments are charged to interest expense and depreciation and amortization expense over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these short-term leases is recognized on a straight-line basis over the lease term. 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. 8 Table of Contents 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 March 30, 2024 or December 30, 2023. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. There were no transfers of assets or liabilities between levels within the fair value hierarchy during the 13 weeks ended March 30, 2024. Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below: Cash and cash equivalents, independent operator ("IO") receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature, their variable interest rates or the effect of the related allowance for expected credit losses. Independent operator notes (net) — The carrying value of such financial instruments approximates their fair value due to the effect of the related allowance for expected credit losses. The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values of our significant financial liabilities that are not recorded at fair value on the condensed consolidated balance sheets (amounts in thousands): March 30, 2024 December 30, 2023 Carrying Amount (1) Estimated Fair Value (2) Carrying Amount (1) Estimated Fair Value (2) Financial Liabilities: Senior term loans (Level 2) $ 290,956 $ 292,500 $ 292,732 $ 294,375 _______________________ (1) The carrying amounts of the senior term loans as of March 30, 2024 and December 30, 2023 were net of debt issuance costs of $ 1.5 million and $ 1.6 million, respectively. (2) The estimated fair value of our current senior term loan borrowings under the 2023 Credit Agreement, as defined in Note 3, 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. 9 Table of Contents Revenue Recognition Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. For e-commerce related sales in which a third-party provides home delivery service, revenue is recognized upon delivery to the customer. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. Discounts provided to customers by us are recognized at the time of sale as a reduction in net sales as the products are sold. Discounts provided by IOs are not recognized as a reduction in net sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons. We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any material performance obligations other than our gift card deferred revenue liability, or any material costs to obtain or fulfill a contract as of March 30, 2024 and December 30, 2023. Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize revenue for the unused portion of the gift cards ("breakage") under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $ 2.3 million and $ 3.2 million as of March 30, 2024 and December 30, 2023, respectively. Breakage amounts were immaterial for the 13 weeks ended March 30, 2024 and April 1, 2023. Disaggregated Revenues — The following table presents net sales revenue by type of product for the periods indicated (amounts in thousands): 13 Weeks Ended March 30, 2024 April 1, 2023 Perishable (1) $ 380,265 $ 345,839 Non-perishable (2) 656,679 619,628 Total net sales $ 1,036,944 $ 965,467 _______________________ (1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood. (2) Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer and wine. Variable Interest Entities — In accordance with the variable interest entities sub-section of Accounting Standards Codification ("ASC") Topic 810, Consolidation , we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our condensed consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE. We had 472 , 466 and 441 stores operated by IOs as of March 30, 2024, December 30, 2023 and April 1, 2023, respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO selects a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. The IO is required to furnish initial working capital and to acquire certain store and safety assets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice. 10 Table of Contents As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us. Net sales related to IO stores were $ 1.0 billion and $ 951.6 million for the 13 weeks ended March 30, 2024 and April 1, 2023, 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 selling, general and administrative expenses. IO commissions were $ 160.8 million and $ 145.2 million for the 13 weeks ended March 30, 2024 and April 1, 2023, respectively. IO commissions of $ 13.9 million and $ 21.7 million were included in accrued and other current liabilities as of March 30, 2024 and December 30, 2023, respectively. An IO may fund its initial store investment from existing capital, a third-party loan or most commonly through a loan from us, as further discussed in Note 2. As collateral for IO obligations and performance, the Operator Agreement grants us the security interests in the assets owned by each IO related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, each IO is a VIE that we have a variable interest in. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (i) the power to direct the activities that most significantly impact the IO's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of the IO's ability to direct those activities. Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of its own labor. Labor activities that significantly impact the IO's economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreement illustrate the lack of ultimate control over the IO. Therefore, 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 $ 57.6 million and $ 59.2 million as of March 30, 2024 and December 30, 2023, respectively. See Note 2 for additional information. Recently Adopted Accounting Standards No recently adopted accounting pronouncements had a material effect in our condensed consolidated financial statements. Recently Issued Accounting Pronouncements Accounting Standards Update ("ASU") No. 2023-07 — In November 2023, the Financial Accounting Standards Board ("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 are currently evaluating the impact on our consolidated financial statements and disclosures. 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 are currently evaluating the impact on our consolidated financial statements and disclosures. 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 11 Table of Contents receivables and current portion of independent operator notes, net of allowance" line item on the condensed consolidated balance sheets and was $ 2.0 million and $ 1.8 million as of March 30, 2024 and December 30, 2023, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of March 30, 2024 or December 30, 2023. Notes and receivables from our IOs participating in our Temporary Commission Adjustment Program ("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 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 March 30, 2024 and December 30, 2023 consisted of the following (amounts in thousands) : Allowance Current Portion Long-term Portion Gross Current Portion Long-term Portion Net March 30, 2024 Independent operator notes $ 41,276 $ ( 713 ) $ ( 10,665 ) $ 29,898 $ 1,662 $ 28,236 Independent operator receivables 16,314 ( 4,031 ) ( 598 ) 11,685 11,685 — Total $ 57,590 $ ( 4,744 ) $ ( 11,263 ) $ 41,583 $ 13,347 $ 28,236 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 12 Table of Contents A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands): 13 Weeks Ended March 30, 2024 April 1, 2023 Beginning balance $ 16,151 $ 14,747 Provision for IO notes and IO receivables reserves 553 1,348 Write-off of uncollectible for IO notes and IO receivables ( 697 ) ( 138 ) Ending Balance $ 16,007 $ 15,957 The following table presents the outstanding gross balance of IO notes by fiscal year of origination and credit quality indicator as of March 30, 2024 (amounts in thousands): Fiscal Year of Origination Credit Quality Indicator 2024 (YTD) 2023 2022 2021 2020 Prior Total TCAP $ 541 $ 3,356 $ 6,979 $ 3,383 $ 1,875 $ 1,392 $ 17,526 Non-TCAP 831 3,828 3,542 3,478 2,276 2,460 16,415 New store 1,381 4,637 1,317 — — — 7,335 Total $ 2,753 $ 11,821 $ 11,838 $ 6,861 $ 4,151 $ 3,852 $ 41,276 TCAP IO Notes Notes of IOs participating in our TCAP represented 53.3 % and 51.6 % of total IO note balances as of March 30, 2024 and December 30, 2023, respectively. A total of $ 1.2 million of IO notes were added into our TCAP during the 13 weeks ended March 30, 2024. The weighted average contractual interest rate of such IO notes during that period was reduced from 9.95 % and, as of March 30, 2024, was 5.50 %. In addition, $ 0.2 million of IO notes were transferred from TCAP to Non-TCAP during the 13 weeks ended March 30, 2024. Note 3. Long-term Debt Long-term debt consisted of the following (amounts in thousands): March 30, 2024 December 30, 2023 2023 Credit Agreement: Senior term loan due 2028 $ 292,500 $ 294,375 Long-term debt, gross 292,500 294,375 Less: Unamortized debt issuance costs ( 1,544 ) ( 1,643 ) Long-term debt, less unamortized debt issuance costs 290,956 292,732 Less: Current portion ( 5,625 ) ( 5,625 ) Long-term debt, net $ 285,331 $ 287,107 2023 Credit Agreement We are party to a credit agreement, dated February 21, 2023 (the "2023 Credit Agreement"), with Bank of America, N.A., as administrative agent and collateral agent, and a syndicate of lenders that consists of (i) a senior secured term loan facility (the "senior term loan") and (ii) a senior secured revolving credit facility (the "revolving credit facility" and, together with the senior term loan, the "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. Borrowings under the 2023 Credit Agreement bear interest at a rate equal to, at our option, either (a) the base rate, which is defined as a fluctuating rate per annum equal to the greatest of (i) the federal funds rate then in effect, plus 0.50 %, (ii) the prime rate then in effect and (iii) a specified Term SOFR (as defined in the 2023 Credit Agreement) rate plus 1.00 %, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 0.75 % to 1.75 % based on our Total Net Leverage Ratio (as defined in the 2023 Credit Agreement); and (b) an adjusted Term SOFR rate determined 13 Table of Contents on the basis of a one, three or six month interest period, plus 0.10 %, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 1.75 % to 2.75 % based on our Total Net Leverage Ratio. As of March 30, 2024, interest on borrowings under the credit facilities was based on one-month Term SOFR with an applicable margin of 2.00 %. The 2023 Credit Agreement permits 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 any term loan facility, voluntary permanent reductions of the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens on the collateral securing the credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn, and after giving effect to any appropriate pro forma adjustment events) we would be in compliance, on a pro forma basis (but excluding the cash proceeds of such incurrence), with a Total Net Leverage Ratio of 3.00 to 1.00. Our obligations under the 2023 Credit Agreement are unconditionally guaranteed by the Company’s wholly owned restricted subsidiaries, 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 each subsidiary guarantor. The 2023 Credit Agreement requires us to make scheduled amortization payments of the senior term loan. We may voluntarily prepay the 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 The senior term loan under the 2023 Credit Agreement matures on February 21, 2028 and had an interest rate of 7.43 % as of March 30, 2024. Revolving Credit Facility As of March 30, 2024 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 7.43 % as of March 30, 2024. No amounts were outstanding under the revolving credit facility as of March 30, 2024 and December 30, 2023. $ 25.0 million of principal on the revolving credit facility was borrowed at closing on February 21, 2023 and was subsequently repaid on April 21, 2023. Subsequent to March 30, 2024, in April 2024, $ 80.0 million of principal was borrowed from the 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. Debt Covenants The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of our subsidiaries to pay dividends or make other payments to the borrower. The 2023 Credit Agreement also contains financial performance covenants requiring us to satisfy a maximum total net leverage ratio test and a minimum interest coverage ratio test as of the last day of each fiscal quarter. 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) of no less than 1.75 to 1.00 as of the last day of each test period. As of March 30, 2024, we were in compliance with all applicable financial covenant requirements for the 2023 Credit Agreement. Schedule of Principal Maturities Principal maturities of debt as of March 30, 2024 are as follows (amounts in thousands): 14 Table of Contents Remainder of fiscal 2024 $ 3,750 Fiscal 2025 15,000 Fiscal 2026 15,000 Fiscal 2027 15,000 Fiscal 2028 243,750 Thereafter — Total $ 292,500 Interest Expense, Net Interest expense, net, consisted of the following (amounts in thousands): 13 Weeks Ended March 30, 2024 April 1, 2023 Interest on loans $ 5,678 $ 7,107 Amortization of debt issuance costs and debt discounts 228 401 Interest on finance leases 95 72 Interest income ( 2,492 ) ( 1,661 ) Capitalized interest ( 333 ) — Interest expense, net $ 3,176 $ 5,919 Loss on Debt Extinguishment and Modification Loss on debt extinguishment and modification consisted of the following (amounts in thousands): 13 Weeks Ended March 30, 2024 April 1, 2023 Write off of debt issuance costs $ — $ 4,518 Write off of debt discounts — 578 Debt modification costs — 244 Loss on debt extinguishment and modification $ — $ 5,340 Note 4. Stockholders' Equity Share Repurchase Program In November 2021, our Board of Directors approved a share repurchase program. This program, effective November 5, 2021 and without an expiration date, authorizes 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 we might otherwise be precluded from doing so under securities laws). Any repurchased shares are constructively retired and returned to an unissued status. During the 13 weeks ended March 30, 2024, we repurchased 200,803 shares of common stock totaling $ 5.3 million at an average price of $ 26.52 per share in open-market transactions pursuant to a Rule 10b5-1 plan. During the 13 weeks ended April 1, 2023, we repurchased 122,862 shares of common stock totaling $ 3.3 million at an average price of $ 26.66 per share in open-market transactions pursuant to a Rule 10b5-1 plan. As of March 30, 2024, we had $ 84.4 million of repurchase authority remaining under the share repurchase program. Note 5. Share-based Awards For a discussion of our share-based incentive plans, refer to Note 8 of our 2023 Form 10-K. Share-based Award Activity 15 Table of Contents The following table summarizes stock option activity under all equity incentive plans during the 13 weeks ended March 30, 2024: Time-Based Stock Options Performance-Based Stock Options Number of Options Weighted-Average Exercise Price Number of Options Weighted-Average Exercise Price Options outstanding as of December 30, 2023 2,091,523 $ 12.97 227,605 $ 6.62 Exercised ( 453,640 ) 7.34 ( 29,775 ) 3.81 Options outstanding as of March 30, 2024 1,637,883 $ 14.53 197,830 $ 7.05 Options vested and exercisable as of March 30, 2024 1,627,850 $ 14.53 197,830 $ 7.05 The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 13 weeks ended March 30, 2024: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 30, 2023 857,820 $ 28.82 Granted 575,389 25.79 Vested ( 339,198 ) 29.73 Forfeitures ( 4,957 ) 28.08 Unvested balance as of March 30, 2024 1,089,054 $ 26.94 The following table summarizes performance-based restricted stock unit ("PSU") activity under the Grocery Outlet Holding Corp. 2019 Incentive Plan during the 13 weeks ended March 30, 2024: Number of Shares Weighted-Average Grant Date Fair Value Unvested balance as of December 30, 2023 1,753,989 $ 29.50 Granted (1) 559,861 25.79 Adjustment for expected performance achievement (2) 88,817 27.34 Vested ( 301,392 ) 35.45 Forfeitures ( 2,364 ) 27.77 Unvested balance as of March 30, 2024 (3) 2,098,911 $ 27.57 _______________________ (1) Represents initial grant of PSUs based on performance target level achievement of 100 %. (2) Represents the year-to-date adjustment to previously granted PSUs based on performance expectations as of March 30, 2024. (3) An additional 648,189 PSUs could potentially be included if the maximum performance level of 200 % is reached for all PSUs outstanding as of March 30, 2024. 16 Table of Contents Share-based Compensation Expense We recognize compensation expense for stock options, RSUs and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. We recognize share-based award forfeitures in the period such forfeitures occur. Share-based compensation expense consisted of the following (amounts in thousands): 13 Weeks Ended March 30, 2024 April 1, 2023 Time-based stock options $ 9 $ 408 RSUs 3,236 2,495 PSUs 4,897 3,773 Share-based compensation expense $ 8,142 $ 6,676 Note 6. Income Taxes Our income tax expense (benefit) and effective income tax rate were as follows (amounts in thousands, except percentages): 13 Weeks Ended March 30, 2024 April 1, 2023 Income tax expense (benefit) $ ( 1,588 ) $ 7,839 Effective income tax rate ( 60.8 ) % 36.4 % Our tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective fiscal quarter. During each interim period, we update the estimated annual effective tax rate. Our effective income tax rate for the 13 weeks ended March 30, 2024 was lower than the combined U.S. federal and state statutory income tax rate primarily due to a pretax book loss combined with excess tax benefits related to the exercise of stock options, partially offset by non-deductible executive compensation under Internal Revenue Code Section 162(m). The decrease in our effective income tax rate for the 13 weeks ended March 30, 2024 compared to the 13 weeks ended April 1, 2023 was primarily driven by a pretax book loss combined with excess tax benefits from the exercise of stock options during the 13 weeks ended March 30, 2024 and excess tax expense related to the vesting of RSUs and PSUs during the 13 weeks ended April 1, 2023. Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision in our condensed consolidated statements of operations and comprehensive income (loss) and include accrued interest and penalties with the related income tax liability on our condensed consolidated balance sheets. To date, we have not recognized any interest and penalties, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax positions as of March 30, 2024 and December 30, 2023, respectively, and do not anticipate having any material uncertain tax positions within the next 12 months. Note 7. Related Party Transactions Related Party Leases As of March 30, 2024 and April 1, 2023, we leased 14 store locations and one warehouse location from entities in which Eric Lindberg, Jr., Chairman of our Board of Directors, or his family, had a direct or indirect financial interest. As of March 30, 2024, the right-of-use assets and lease liabilities related to these properties was $ 41.7 million and $ 46.7 million, respectively. 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. These related parties received aggregate lease payments from us of $ 1.8 million and $ 1.7 million for the 13 weeks ended March 30, 2024 and April 1, 2023, 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 $ 57.6 million and $ 59.2 million as of March 30, 2024 and December 30, 2023, respectively. See Note 2 for additional information. 17 Table of Contents Note 8. Commitments and Contingencies We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We establish an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We monitor those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, we do not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, 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 9. Earnings (Net Loss) Per Share The following table sets forth the calculation of basic and diluted earnings (net loss) per share (amounts in thousands, except per share data): 13 Weeks Ended March 30, 2024 April 1, 2023 Numerator Net income (loss) and comprehensive income (loss) $ ( 1,025 ) $ 13,720 Denominator Weighted-average shares outstanding – basic 99,520 97,920 Effect of dilutive options — 2,122 Effect of dilutive RSUs and PSUs (1) — 527 Weighted-average shares outstanding – diluted 99,520 100,569 Earnings (net loss) per share: Basic $ ( 0.01 ) $ 0.14 Diluted $ ( 0.01 ) $ 0.14 _______________________ (1) We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued assuming the end of our reporting period was the end of the relevant PSU award contingency period. The following weighted-average common share equivalents were excluded from the calculation of diluted earnings (net loss) per share because their effect would have been anti-dilutive (amounts in thousands): 13 Weeks Ended March 30, 2024 April 1, 2023 Time-based stock options 1,136 — RSUs and PSUs 895 95 Total 2,031 95 Note 10. Subsequent Event On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a Stock Purchase Agreement with BBGO Acquisition, Inc., a Delaware corporation ("Holdings"), specified parties therein that beneficially owned Holdings, and Southvest Fund VII, L.P., a Delaware limited partnership, to acquire all of the issued and outstanding capital stock of Holdings (the "Transaction"). On April 1, 2024, the Transaction was completed for the net purchase consideration of approximately $ 62 million, including cash on hand, and subject to post-closing adjustments. 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 operated 40 discount grocery stores across six states in the southeastern United States as of March 30, 2024. 18 Table of Contents