Grocery Outlet Holding Corp. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this report, and the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2023 ("2023 Form 10-K"). This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other sections of this report. See "Special Note Regarding Forward-Looking Statements" in this report. We operate on a fiscal year that ends on the Saturday closest to December 31st each year. Fiscal 2023 ended December 30, 2023. References to the first quarter of fiscal 2024 and the first quarter of fiscal 2023 refer to the 13 weeks ended March 30, 2024 and April 1, 2023, respectively. As used in this report, references to "Grocery Outlet," "the Company," "the registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise. Overview We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product offering. As of March 30, 2024, we had 474 stores in California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland, New Jersey and Ohio. Macroeconomic Conditions and Recent Developments Over the past several years, and to a lesser extent recently, our business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, inflation and subsequent disinflation, and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their businesses. Furthermore, planned construction and opening of new stores has been, and may continue to be, negatively impacted due to both increased lead times to acquire materials, obtain permits and licenses, hook up utilities as well as higher construction and development related costs. The extent of the continuing impact of these factors on our operational and financial performance will depend on many factors, including certain factors outside of our control. Our new store growth efforts for fiscal 2024 and beyond are focused on organic growth and new real estate opportunities that align with our long-term geographic expansion and store growth strategies. Complementary growth opportunities may include expanding strategic relationships with large property owners, evaluating acquisitions of opportunistic real estate that become available through consolidation in the retail sector, and exploring strategic regional acquisitions of operating businesses. On February 14, 2024 we entered into a stock purchase agreement to acquire United Grocery Outlet, which included 40 stores in six adjacent states we did not operate in as of such date (Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia) and a company-operated distribution center. This transaction closed on April 1, 2024. In addition to the newly acquired United Grocery Outlet stores, we plan to open approximately 18 to 22 stores in fiscal 2024, for a planned total of 58 to 62 net new stores in fiscal 2024. We opened six new stores in the first quarter of fiscal 2024. In late August 2023, we replaced components of our enterprise resource planning system, including our financial ledger, inventory management platform and product data warehouse system. The implementation of these system upgrades resulted in disruption to our business operations, including ordering and inventory disruptions, as well as payment processing, which adversely impacted our results of operations in fiscal 2023 as well as the first quarter of fiscal 2024, as more fully described below in “Comparison of the 13 weeks ended March 30, 2024 and April 1, 2023." While we have since improved the data visibility to help us manage and forecast the business, some of these disruptions are still ongoing as of the date of this filing and are expected to have negative impacts on our results of operations into the second half of fiscal 2024. 19 Table of Contents Key Factors and Measures We Use to Evaluate Our Business We consider a variety of financial and operating measures in assessing the performance of our business. The key generally accepted accounting principles ("GAAP") financial measures we use are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A") and operating income. The key operational metrics and non-GAAP financial measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share. First Quarter of Fiscal 2024 Overview Key financial and operating performance results for the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 were as follows: • Net sales increased 7.4% to $1.04 billion from $965.5 million in the first quarter of fiscal 2023. • Comparable store sales increased by 3.9%, driven by a 7.0% increase in the number of transactions, partially offset by a 2.9% decrease in average transaction size. • We opened six new stores, ending the first quarter of fiscal 2024 with 474 stores in nine states. • Gross margin decreased by 180 basis points to 29.3%, compared to gross margin of 31.1% in the first quarter of fiscal 2023. As previously disclosed, we experienced disruptions as a result of the implementation of new technology platforms in late August 2023. Such disruptions are estimated to have negatively impacted gross margin by 210 basis points in the first quarter of fiscal 2024. • Selling, general and administrative expenses increased by 13.3% to $303.4 million, or 29.3% of net sales. This includes $12.4 million of commission support we elected to provide our operators in connection with our system upgrades. • Net loss was $1.0 million, or $(0.01) per share, compared to net income of $13.7 million, or $0.14 per diluted share, in the first quarter of fiscal 2023. • Adjusted EBITDA (1) decreased 37.5% to $39.4 million compared to $63.1 million in the first quarter of fiscal 2023. • Adjusted net income (1) decreased 67.4% to $8.8 million, or $0.09 per adjusted diluted share (1) , compared to $27.0 million, or $0.27 per adjusted diluted share, in the first quarter of fiscal 2023. _______________________ (1) Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures, which exclude the impact of certain special items. Please note that our non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including their definitions, how the non-GAAP measures provide useful information to investors and how management utilizes them, and reconciliations of the non-GAAP measures and the most directly comparable GAAP measures. Key Components of Results of Operations Net Sales We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. 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 that are funded solely by IOs are not recognized as a reduction in net sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Net sales consist of net sales from comparable stores, described below under "Operating Metrics and Non-GAAP Financial Measures - Comparable Store Sales," and non-comparable stores. Growth of our net sales is generally driven by expansion of our store base in existing and new markets as well as comparable store sales growth. Net sales are impacted by the spending habits of our customers, product mix and supply, as well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories supports growth in net sales by attracting new customers and encouraging repeat visits from our existing customers. The spending habits of our customers are affected by changes in macroeconomic conditions, governmental benefit programs such as the Supplemental Nutrition Assistance Program and discretionary income. Our customers' discretionary income is impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment. Because we offer a broad selection of merchandise at extreme values, historically our business has benefited from periods of economic uncertainty. 20 Table of Contents Cost of Sales, Gross Profit and Gross Margin Cost of sales includes, among other things, merchandise costs, inventory markdowns, inventory losses, transportation costs and distribution and warehousing costs, including depreciation. Gross profit is equal to our net sales less our cost of sales. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can vary. Our gross profit is variable in nature and generally follows changes in net sales. While our disciplined buying approach has produced consistent gross margins throughout economic cycles, which we believe has helped to mitigate adverse impacts on gross profit and results of operations, changes in consumer demand as a result of macroeconomic conditions, including inflationary cost increases for goods, labor and transportation, supply chain constraints and changes in discretionary income, have resulted and could continue to result in higher variability to our gross margins. The components of our cost of sales, as well as our gross profit and gross margin, may not be comparable to the same or similar measures of our competitors and other retailers. Selling, General and Administrative Expenses SG&A are comprised of both store-related expenses and corporate expenses. Our store-related expenses include commissions paid to IOs, occupancy and our portion of maintenance costs, depreciation and amortization of store-related assets and the cost of opening new IO stores. Company-operated store-related expenses also include payroll, benefits, supplies and utilities. Corporate expenses include payroll and benefits for corporate and field support, share-based compensation, marketing and advertising, insurance and professional services, depreciation and amortization of corporate assets and operator recruiting and training costs. We continue to closely manage our expenses and monitor SG&A as a percentage of net sales. SG&A generally increases as we grow our store base and invest in our corporate infrastructure. SG&A related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as gross profits decline. We expect that our SG&A will continue to increase in future periods as we continue to grow our net sales and gross profits. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers. Operating Income Operating income is gross profit less SG&A. Operating income excludes interest expense, net, loss on debt extinguishment and modification and income tax expense (benefit). We use operating income as an indicator of the productivity of our business and our ability to manage expenses. 21 Table of Contents Results of Operations The following tables summarize key components of our results of operations both in dollars and as a percentage of net sales (amounts in thousands, except for percentages): 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 13 Weeks Ended March 30, 2024 April 1, 2023 Percentage of net sales (1) Net sales 100.0 % 100.0 % Cost of sales 70.7 % 68.9 % Gross profit 29.3 % 31.1 % Selling, general and administrative expenses 29.3 % 27.7 % Operating income 0.1 % 3.4 % Other expenses: Interest expense, net 0.3 % 0.6 % Loss on debt extinguishment and modification — % 0.6 % Total other expenses 0.3 % 1.2 % Income (loss) before income taxes (0.3) % 2.2 % Income tax expense (benefit) (0.2) % 0.8 % Net income (loss) and comprehensive income (loss) (0.1) % 1.4 % _______________________ (1) Components may not sum to totals due to rounding. 22 Table of Contents Operating Metrics and Non-GAAP Financial Measures Number of New Stores The number of new stores reflects the number of stores opened during a particular reporting period. New stores require an initial capital investment from us for store build-outs, fixtures and equipment that we amortize over time as well as cash required for inventory and pre-opening expenses and typically the issuance of IO notes to support IO startup costs. We expect new store growth to be a very significant and critical driver of our net sales growth over the long term. We lease substantially all of our store locations. Our initial lease terms on stores are typically ten years with options to renew for two or three successive five-year periods. Comparable Store Sales We use comparable store sales as an operating metric to measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales are impacted by the same factors that impact net sales. Comparable store sales consists of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas. Excluded from our comparable store definition are those stores that have been temporarily closed for an extended period, those that have had their business materially disrupted for both planned projects as well as due to unforeseen circumstances, permanent store closures and dispositions. When applicable, as was the case with fiscal 2020 and will be the case with fiscal 2025, we exclude the net sales in the non-comparable week of a 53-week year from the same store sales calculation after comparing the current and prior year weekly periods that are most closely aligned. Opening new stores is a primary component of our growth strategy and, as we continue to execute on our growth strategy, we expect that a significant portion of our net sales growth will be attributable to non-comparable store net sales. Accordingly, comparable store sales is only one of many measur es we use to assess the success of our growth strategy. EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP financial measures that are supplemental key metrics used by management and our Board of Directors to assess our financial performance. EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are also frequently used by analysts, investors and other interested parties to evaluate us and other companies in our industry. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate our operating results. We use these non-GAAP measures to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. In addition, we use adjusted EBITDA to supplement GAAP measures of performance to evaluate our performance in connection with compensation decisions. We believe that excluding items from operating income, net income (loss) and net income (loss) per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides additional information for analyzing trends in our business. We define EBITDA as net income (loss) before net interest expense, income taxes and depreciation and amortization expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, loss on debt extinguishment and modification, asset impairment and gain or loss on disposition, acquisition costs and certain other expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude. Adjusted net income represents net income (loss) adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs, tax adjustment to normalize the effective tax rate, and tax effect of total adjustments. Basic adjusted earnings per share is calculated using adjusted net income, as defined above, and basic weighted average shares outstanding. Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares outstanding. These non-GAAP measures may not be comparable to similar measures reported by other companies and have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of the non-GAAP measures through the use of various GAAP measures. In the future, we will incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income. Our presentation of these non-GAAP measures should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive such non-GAAP measures. 23 Table of Contents The following table summarizes key operating metrics and non-GAAP financial measures for the periods presented (amounts in thousands, except for percentages and store counts): 13 Weeks Ended March 30, 2024 April 1, 2023 Other Financial and Operations Data Number of new stores 6 3 Number of stores open at end of period 474 444 Comparable store sales increase (1) 3.9 % 12.1 % EBITDA (2) $ 25,452 $ 48,153 Adjusted EBITDA (2) $ 39,395 $ 63,078 Adjusted net income (2) $ 8,809 $ 27,024 _______________________ (1) Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. (2) See "GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations. 24 Table of Contents GAAP to Non-GAAP Reconciliations The following tables provide a reconciliation from our GAAP net income (loss) to EBITDA and adjusted EBITDA, GAAP net income (loss) to adjusted net income, and our GAAP earnings (net loss) per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data): 13 Weeks Ended March 30, 2024 April 1, 2023 Net income (loss) $ (1,025) $ 13,720 Interest expense, net 3,176 5,919 Income tax expense (benefit) (1,588) 7,839 Depreciation and amortization expenses 24,889 20,675 EBITDA 25,452 48,153 Share-based compensation expenses (1) 8,142 6,676 Loss on debt extinguishment and modification (2) — 5,340 Asset impairment and gain or loss on disposition (3) 364 107 Acquisition costs (4) 2,649 — Other (5) 2,788 2,802 Adjusted EBITDA $ 39,395 $ 63,078 13 Weeks Ended March 30, 2024 April 1, 2023 Net income (loss) $ (1,025) $ 13,720 Share-based compensation expenses (1) 8,142 6,676 Loss on debt extinguishment and modification (2) — 5,340 Asset impairment and gain or loss on disposition (3) 364 107 Acquisition costs (4) 2,649 — Other (5) 2,788 2,802 Amortization of purchase accounting assets and deferred financing costs (6) 1,322 1,567 Tax adjustment to normalize effective tax rate (7) (794) 1,592 Tax effect of total adjustments (8) (4,637) (4,780) Adjusted net income $ 8,809 $ 27,024 GAAP earnings (net loss) per share Basic $ (0.01) $ 0.14 Diluted $ (0.01) $ 0.14 Adjusted earnings per share Basic $ 0.09 $ 0.28 Diluted $ 0.09 $ 0.27 Weighted average shares outstanding Basic 99,520 97,920 Diluted 99,520 100,569 Non-GAAP weighted average shares outstanding Basic 99,520 97,920 Diluted (9) 101,136 100,569 ___________________________ (1) Includes non-cash share-based compensation expense and cash dividends paid on vested share-based awards as a result of dividends declared in connection with a recapitalization that occurred in fiscal 2018. 25 Table of Contents (2) Represents the write-off of debt issuance costs and debt discounts as well as debt modification costs related to refinancing and/or repayment of our credit facilities. See Note 3 to the condensed consolidated financial statements for additional information. (3) Represents asset impairment charges and gains or losses on dispositions of assets. (4) Represents costs related to the acquisition of United Grocery Outlet, including due diligence, legal, and other consulting expenses. (5) Represents other non-recurring, non-cash or non-operational items, such as technology upgrade implementation costs, certain personnel-related costs, costs related to employer payroll taxes associated with equity awards, store closing costs, legal settlements and other legal expenses, strategic project costs and miscellaneous costs. (6) Represents the amortization of debt issuance costs as well as the incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, which included trademarks, customer lists, and below-market leases. (7) Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not consider in our evaluation of ongoing performance, including excess tax expenses or benefits related to stock option exercises and vesting of restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") that are recorded in earnings as discrete items in the reporting period in which they occur. (8) Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items. (9) To calculate diluted adjusted earnings per share, we adjusted the weighted-average shares outstanding for the dilutive effect of all potential shares of common stock. Comparison of the 13 weeks ended March 30, 2024 and April 1, 2023 (amounts in thousands, except percentages) Net Sales 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Net sales $ 1,036,944 $ 965,467 $ 71,477 7.4 % The increase in net sales for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily attributable to an increase in comparable store sales as well as non-comparable store net sales growth primarily from the 30 net new stores opened over the last 12 months, partially offset by disruptions related to our aforementioned system upgrades. Comparable store sales increased 3.9% for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023. The increase in comparable store sales for the 13 weeks ended March 30, 2024 was driven by a 7.0% increase in the number of transactions, partially offset by a 2.9% decrease in average transaction size. Cost of Sales 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Cost of sales $ 732,999 $ 664,924 $ 68,075 10.2 % % of net sales 70.7 % 68.9 % The increase in cost of sales for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily the result of an increase in comparable store sales combined with non-comparable net sales from 30 net new stores opened over the last 12 months as well as by impacts related to our system upgrades. Cost as a percentage of net sales increased for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 primarily due to inventory management impacts related to our system upgrades, as certain tools we used to manage the business on our legacy system are taking longer to rebuild, which have impacted data visibility. 26 Table of Contents Gross Profit and Gross Margin 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Gross profit $ 303,945 $ 300,543 $ 3,402 1.1 % Gross margin 29.3 % 31.1 % The increase in gross profit for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 30 net new stores opened over the last 12 months, partially offset by impacts related to our system upgrades. Gross margin decreased for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 primarily due to inventory management impacts related to our system upgrades, as certain tools we used to manage the business on our legacy system are taking longer to rebuild, which have impacted data visibility. Selling, General and Administrative Expenses 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change SG&A $ 303,382 $ 267,725 $ 35,657 13.3 % % of net sales 29.3 % 27.7 % The increase in SG&A for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was driven by $22.7 million in higher store-related expenses and $12.9 million in higher corporate-related expenses. Store-related expenses primarily increased as a result of higher commission payments to IOs, reflecting gross profit growth together with $12.4 million of incremental support we elected to provide to our IOs in connection with our system upgrades, as well as higher store occupancy costs due to 30 net new stores opened over the last 12 months. Corporate-related expenses increased largely due to increased personnel and professional service costs to support our system upgrades and support the continued growth of the business, including the acquisition of United Grocery Outlet, higher marketing expenses largely due to a change in the timing of our spring wine sale and increased corporate-related depreciation and amortization expense driven by investments in general and administrative infrastructure. As a percentage of net sales, SG&A increased for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 primarily due to the aforementioned factors. Interest Expense, Net 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Interest expense, net $ 3,176 $ 5,919 $ (2,743) (46.3) % % of net sales 0.3 % 0.6 % The decrease in net interest expense for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily driven by a decrease in principal debt outstanding over the last 12 months combined with increased interest income from higher interest rates on our cash and cash equivalents and IO notes. See Note 3 to the condensed consolidated financial statements for additional information. Loss on Debt Extinguishment and Modification 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Loss on debt extinguishment and modification $ — $ 5,340 $ (5,340) (100.0) % % of net sales — % 0.6 % During the 13 weeks ended April 1, 2023, we recorded a $5.3 million loss on debt extinguishment related to the payoff of $385.0 million of principal on the senior term loan outstanding under our prior credit facilities. 27 Table of Contents Income Tax Expense (Benefit) 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Income tax expense (benefit) $ (1,588) $ 7,839 $ (9,427) (120.3) % % of net sales (0.2) % 0.8 % Effective tax rate (60.8) % 36.4 % During the 13 weeks ended March 30, 2024, we recorded a net income tax benefit of $1.6 million compared to a net income tax expense of $7.8 million for the 13 weeks ended April 1, 2023. This change was primarily the result of 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), during the 13 weeks ended March 30, 2024 and excess tax expense related to the vesting of RSUs and PSUs incurred during the 13 weeks ended April 1, 2023. Net Income (Loss) 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Net income (loss) $ (1,025) $ 13,720 $ (14,745) (107.5) % % of net sales (0.1) % 1.4 % As a result of the foregoing factors, net income decreased from $13.7 million for the 13 weeks ended April 1, 2023 to a net loss of $1.0 million for the 13 weeks ended March 30, 2024. Adjusted EBITDA 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Adjusted EBITDA $ 39,395 $ 63,078 $ (23,683) (37.5) % The decrease in adjusted EBITDA for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily due to the reduction in gross margin and increase in SG&A related expenses, as discussed above. Adjusted Net Income 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Adjusted net income $ 8,809 $ 27,024 $ (18,215) (67.4) % The decrease in adjusted net income for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily due to the reduction in gross margin and increase in SG&A related expenses, as discussed above. 28 Table of Contents Liquidity and Capital Resources Sources of Liquidity Based on our current operations and new store growth plans, we expect to satisfy our short-term and long-term cash requirements through a combination of our existing cash and cash equivalents position, funds generated from operating activities, and the borrowing capacity available in the revolving credit facility under our credit agreement, dated as of February 21, 2023 (the "2023 Credit Agreement"). If cash generated from our operations and borrowings under the revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive. As of March 30, 2024, we had cash and cash equivalents of $66.9 million, which consisted primarily of cash held in checking and money market accounts with financial institutions. In addition, we have a revolving credit facility with $400.0 million in borrowing capacity under the 2023 Credit Agreement. As of March 30, 2024, we had no borrowings outstanding under the revolving credit facility and $4.2 million of outstanding standby letters of credit, resulting in $395.8 million of remaining borrowing capacity available under this revolving credit facility. No amounts were borrowed under this revolving credit facility during the 13 weeks ended March 30, 2024. Subsequent to March 30, 2024, in April 2024, $80.0 million of principal was borrowed from the revolving credit facility. The senior secured credit facilities of the 2023 Credit Agreement permit us to add incremental term loan facilities, increase any existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving credit facility tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in excess of the sum of the greater of $200.0 million and 100% of Consolidated EBITDA (as defined in the 2023 Credit Agreement), subject to certain limitations, plus (b) voluntary prepayments of 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 (as defined in the 2023 Credit Agreement) of 3.00 to 1.00. We may also, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt. Material Cash Requirements Other than the information noted below, there has been no material change in our material cash requirements since the end of fiscal 2023. See our 2023 Form 10-K for additional information. Capital Expenditures Capital expenditures include purchases of capital assets such as property and equipment as well as intangible assets and licenses. Capital expenditures for the 13 weeks ended March 30, 2024, before the impact of tenant improvement allowances, were $49.3 million, and, net of tenant improvement allowances, were $46.5 million. We currently expect total capital expenditures, net of tenant improvement allowances, to be approximately $175.0 million for fiscal 2024, which includes new store store growth, upgrades to our existing fleet including United Grocery Outlet store capital improvements, as well as ongoing investments in technology, supply chain and infrastructure. Debt Obligations The 2023 Credit Agreement requires us to make scheduled quarterly amortization payments of the senior term loan. Such payments total $48.8 million over the remaining term of the senior term loan, with $3.8 million payable over the remainder of fiscal 2024. The remaining senior term loan principal balance will become due in February 2028 at maturity. See Note 3 to our condensed consolidated financial statements for additional information. Acquisition of United Grocery Outlet On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a stock purchase agreement to acquire BBGO Acquisition, Inc., a holding company that owns all of the outstanding capital stock of The Bargain Barn Inc., which does business as United Grocery Outlet, for approximately $62 million, including cash on hand, and subject to customary purchase price adjustments. This transaction closed on April 1, 2024. See Note 10 to our condensed consolidated financial statements for additional information. 29 Table of Contents 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 the 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. 30 Table of Contents Cash Flows The following table summarizes our cash flows for the periods presented (amounts in thousands, except percentages): 13 Weeks Ended March 30, 2024 April 1, 2023 $ Change % Change Net cash provided by operating activities $ 7,841 $ 87,632 $ (79,791) (91.1) % Net cash used in investing activities (50,887) (40,347) (10,540) 26.1 % Net cash used in financing activities (5,056) (67,898) 62,842 (92.6) % Net decrease in cash and cash equivalents $ (48,102) $ (20,613) $ (27,489) 133.4 % Cash Provided by Operating Activities Net cash provided by operating activities was $7.8 million for the 13 weeks ended March 30, 2024 compared to $87.6 million for the same period in fiscal 2023. The decrease in net cash provided by operating activities of $79.8 million for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily driven by changes in merchandise inventory levels and accrued expenses combined with lower net income. Cash Used in Investing Activities Net cash used in investing activities was $50.9 million for the 13 weeks ended March 30, 2024 compared to $40.3 million for the same period in fiscal 2023. The increase in net cash used in investing activities of $10.5 million for the 13 weeks ended March 30, 2024 compared to the same period in fiscal 2023 was primarily due to increased spending on property and equipment due to higher store count and construction related to future stores. Cash Used in Financing Activities Net cash used in financing activities of $5.1 million for the 13 weeks ended March 30, 2024 was primarily due to the repurchase of $5.3 million of our common stock and $1.9 million in scheduled principal payments on the senior term loan under the 2023 Credit Agreement, partially offset by $3.4 million in proceeds from the exercise of stock options. Net cash used in financing activities of $67.9 million for the 13 weeks ended April 1, 2023 was primarily due to the payoff of $385.0 million of principal on the prior senior term loan outstanding under our prior first lien credit facility as well as the repurchase of $3.3 million of our common stock, partially offset by $325.0 million in proceeds from the issuance of the senior term loan and revolving credit facility borrowings under the 2023 Credit Agreement. Critical Accounting Policies and Estimates Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting. The preparation of our condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our judgments and estimates are based on historical experience and other factors believed to be reasonable under the circumstances. With respect to critical accounting policies, even a relatively minor variance between actual and expected results can potentially have a materially favorable or unfavorable impact on subsequent results of operations. There have been no material changes to our critical accounting policies and estimates during the 13 weeks ended March 30, 2024 from those disclosed in our 2023 Form 10-K. Recent Accounting Pronouncements Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report. 31 Table of Contents