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Item 1. Financial Statements

2024-08-07 compared with 2024-05-08 · 157 added, 105 removed, 420 unchanged (38% of the section changed)

46 unchanged sentences

GROCERY OUTLET HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Net sales $ 1,128,520 $ 1,010,255 $ 2,165,464 $ 1,975,722

7 unchanged sentences

Total other expenses 5,559 4,766 8,735 16,025

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

Income before income taxes 20,546 31,715 17,933 53,274

Income tax expense 6,545 7,244 4,957 15,083

Net income and comprehensive income $ 14,001 $ 24,471 $ 12,976 $ 38,191

Basic earnings per share $ 0.14 $ 0.25 $ 0.13 $ 0.39

Diluted earnings per share $ 0.14 $ 0.24 $ 0.13 $ 0.38

Weighted average shares outstanding:

14 unchanged sentences

Balance as of March 30, 2024 100,147,065 $ 100 $ 883,534 $ 340,939 $ 1,224,573

Exercise and vesting of share-based awards 112,410 — 302 — 302

Share-based compensation expense — — 7,001 — 7,001

Repurchase of common stock ( 1,104,726 ) ( 1 ) ( 25,032 ) — ( 25,033 )

Net income and comprehensive income — — — 14,001 14,001

Balance as of June 29, 2024 99,154,749 $ 99 $ 865,805 $ 354,940 $ 1,220,844

See Notes to Condensed Consolidated Financial Statements

11 unchanged sentences

Balance as of April 1, 2023 98,285,804 $ 98 $ 851,194 $ 276,247 $ 1,127,539

Exercise and vesting of share-based awards, net of shares withheld for employee taxes 487,445 1 1,507 — 1,508

Share-based compensation expense — — 11,305 — 11,305

Dividends paid — — ( 9 ) — ( 9 )

Net income and comprehensive income — — — 24,471 24,471

Balance as of July 1, 2023 98,773,249 $ 99 $ 863,997 $ 300,718 $ 1,164,814

See Notes to Condensed Consolidated Financial Statements

3 unchanged sentences

26 Weeks Ended

2024 April 1,

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:

Net income $ 12,976 $ 38,191

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation of property and equipment 43,462 36,969

18 unchanged sentences

Repayments of advances from independent operators 2,692 3,551

Business acquisition, net of cash and cash equivalents acquired ( 60,774 ) —

Purchases of property and equipment ( 85,131 ) ( 66,025 )

1 unchanged sentence

Investments in intangible assets and licenses ( 6,532 ) ( 12,309 )

Proceeds from insurance recoveries - property and equipment — 215

Net cash used in investing activities ( 155,286 ) ( 78,084 )

1 unchanged sentence

Proceeds from exercise of stock options 3,744 1,578

Tax withholding related to net settlement of employee share-based awards — ( 449 )

Proceeds from senior term loan due 2028 — 300,000

Proceeds from revolving credit facility 90,000 25,000

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

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

2 unchanged sentences

Repurchase of common stock ( 31,274 ) ( 3,275 )

Dividends paid — ( 9 )

Debt issuance costs paid — ( 4,513 )

Net cash used in financing activities ( 5,056 ) ( 67,898 )

Net cash provided by (used in) financing activities 57,926 ( 94,194 )

Net decrease in cash and cash equivalents ( 47,922 ) ( 15,158 )

6 unchanged sentences

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.

(together with its wholly owned subsidiaries, collectively, "Grocery Outlet," "we," or the "Company") is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold primarily through a network of independently operated stores.

As of June 29, 2024, we had 524 stores throughout California, Washington, Oregon, Pennsylvania, Tennessee, Idaho, Nevada, North Carolina, Maryland, New Jersey, Georgia, Ohio, Alabama, Delaware, Kentucky and Virginia.

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.

2 unchanged sentences

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

and its wholly owned subsidiary.

and its wholly owned subsidiaries.

All intercompany balances and transactions were eliminated.

4 unchanged sentences

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.

We consider our accounting policy relating to long-lived asset impairment to be a significant accounting policy that involves management's estimates and judgments.

Segment Reporting — We manage our business as one operating segment.

2 unchanged sentences

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.

Cost is primarily 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.

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The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of March 30, 2024 or December 30, 2023.

There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of June 29, 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.

There were no transfers of assets or liabilities between levels within the fair value hierarchy during the 26 weeks ended June 29, 2024.

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

8 unchanged sentences

Financial Liabilities:

Senior term loans (Level 2) $ 290,956 $ 292,500 $ 292,732 $ 294,375

Senior term loan (Level 2) $ 289,180 $ 290,625 $ 292,732 $ 294,375

Revolving credit facility (Level 2) $ 90,000 $ 90,000 $ — $ —

_______________________

(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.

(1) The carrying amounts of the senior term loan as of June 29, 2024 and December 30, 2023 were net of debt issuance costs of $ 1.4 million and $ 1.6 million, respectively.

(2) The estimated fair value of our current senior term loan and revolving credit facility 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.

Revenue Recognition

5 unchanged sentences

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.

2 unchanged sentences

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.

Our gift card deferred revenue liability was $ 2.0 million and $ 3.2 million as of June 29, 2024 and December 30, 2023, respectively.

Breakage amounts were immaterial for the 13 and 26 weeks ended June 29, 2024 and July 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

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Perishable (1)

15 unchanged sentences

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 had 481 , 466 and 445 stores operated by IOs as of June 29, 2024, December 30, 2023 and July 1, 2023, respectively.

We have agreements in place with each IO.

7 unchanged sentences

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.

Net sales related to IO stores were $ 1.07 billion and $ 997.2 million for the 13 weeks ended June 29, 2024 and July 1, 2023, respectively, and $ 2.10 billion and $ 1.95 billion for the 26 weeks ended June 29, 2024 and July 1, 2023, respectively.

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

1 unchanged sentence

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.

IO commissions were $ 167.0 million and $ 158.2 million for the 13 weeks ended June 29, 2024 and July 1, 2023, respectively, and $ 327.8 million and $ 303.4 million for the 26 weeks ended June 29, 2024 and July 1, 2023, respectively.

IO commissions of $ 16.0 million and $ 21.7 million were included in accrued and other current liabilities as of June 29, 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.

10 unchanged sentences

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.

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 $ 59.5 million and $ 59.2 million as of June 29, 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.

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

Recently Issued Accounting Pronouncements

15 unchanged sentences

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 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.

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 condensed consolidated balance sheets and was $ 2.3 million and $ 1.8 million as of June 29, 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 June 29, 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.

9 unchanged sentences

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) :

Amounts due from IOs and the related allowances as of June 29, 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

June 29, 2024

Independent operator notes $ 43,508 $ ( 632 ) $ ( 10,602 ) $ 32,274 $ 1,599 $ 30,675

8 unchanged sentences

A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands):

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Beginning balance $ 16,007 $ 15,957 $ 16,151 $ 14,747

Provision for IO notes and IO receivables reserves 1,338 762 1,891 2,110

Write-off of uncollectible for IO notes and IO receivables ( 697 ) ( 138 )

Write-off of uncollectible IO notes and IO receivables ( 781 ) ( 324 ) ( 1,478 ) ( 462 )

Ending Balance $ 16,564 $ 16,395 $ 16,564 $ 16,395

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):

The following table presents the outstanding gross balance of IO notes by fiscal year of origination and credit quality indicator as of June 29, 2024 (amounts in thousands):

Fiscal Year of Origination

5 unchanged sentences

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.

Notes of IOs participating in our TCAP represented 50.4 % and 51.6 % of total IO note balances as of June 29, 2024 and December 30, 2023, respectively.

A total of $ 0.7 million of IO notes were added into our TCAP during the 13 weeks ended June 29, 2024.

The weighted average contractual interest rate of such IO notes during that period was reduced from 9.95 % and, as of June 29, 2024, was 5.50 %.

In addition, $ 2.2 million of IO notes were transferred from TCAP to Non-TCAP during the 13 weeks ended June 29, 2024.

A total of $ 1.9 million of IO notes were added into our TCAP during the 26 weeks ended June 29, 2024.

The weighted average contractual interest rate of such IO notes during that period was reduced from 9.95 % and, as of June 29, 2024, was 5.50 %.

In addition, $ 2.4 million of IO notes were transferred from TCAP to Non-TCAP during the 26 weeks ended June 29, 2024.

Long-term Debt

3 unchanged sentences

Senior term loan due 2028 $ 290,625 $ 294,375

Revolving credit facility 90,000 —

Long-term debt, gross 380,625 294,375

8 unchanged sentences

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 March 30, 2024, interest on borrowings under the credit facilities was based on one-month Term SOFR with an applicable margin of 2.00 %.

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 June 29, 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.

5 unchanged sentences

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.

The senior term loan under the 2023 Credit Agreement matures on February 21, 2028 and had an interest rate of 7.44 % as of June 29, 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.

As of June 29, 2024 we had $ 4.5 million of outstanding letters of credit and $ 305.5 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 7.44 % as of June 29, 2024.

The aggregate outstanding principal balance under the revolving credit facility was $ 90.0 million and zero as of June 29, 2024 and December 30, 2023, respectively.

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.

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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.

As of June 29, 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):

Principal maturities of debt as of June 29, 2024 are as follows (amounts in thousands):

Remainder of fiscal 2024 $ 1,875

6 unchanged sentences

Interest expense, net, consisted of the following (amounts in thousands):

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Interest on loans $ 7,089 $ 5,867 $ 12,767 $ 12,974

1 unchanged sentence

Interest on finance leases 84 78 179 150

Other 24 — 24 —

Interest income ( 1,524 ) ( 1,406 ) ( 4,016 ) ( 3,067 )

3 unchanged sentences

Loss on debt extinguishment and modification consisted of the following (amounts in thousands):

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Write off of debt issuance costs $ — $ — $ — $ 4,518

7 unchanged sentences

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.

During the 13 weeks ended June 29, 2024, we repurchased 1,104,726 shares of common stock totaling $ 25.0 million at an average price of $ 22.66 per share in open-market transactions pursuant to a Rule 10b5-1 plan.

During the 26 weeks ended June 29, 2024, we repurchased 1,305,529 shares of common stock totaling $ 30.4 million at an average price of $ 23.25 per share in open-market transactions pursuant to a Rule 10b5-1 plan.

During the 13 weeks ended July 1, 2023, we did not repurchase any shares of common stock under the share repurchase program.

During the 26 weeks ended July 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 June 29, 2024, we had $ 59.4 million of repurchase authority remaining under the share repurchase program.

Share-based Awards

1 unchanged sentence

Share-based Award Activity

The following table summarizes stock option activity under all equity incentive plans during the 13 weeks ended March 30, 2024:

The following table summarizes stock option activity under all equity incentive plans during the 26 weeks ended June 29, 2024:

Time-Based Stock Options Performance-Based Stock Options

5 unchanged sentences

Exercised ( 474,341 ) 7.35 ( 67,775 ) 3.81

Options outstanding as of March 30, 2024

Options outstanding as of June 29, 2024

1,617,182 $ 14.62 159,830 $ 7.82

Options vested and exercisable as of March 30, 2024

Options vested and exercisable as of June 29, 2024

1,617,182 $ 14.62 159,830 $ 7.82

The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 13 weeks ended March 30, 2024:

The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 26 weeks ended June 29, 2024:

Number of Shares Weighted-Average

5 unchanged sentences

Forfeitures ( 78,822 ) 26.97

Unvested balance as of March 30, 2024

Unvested balance as of June 29, 2024

1,028,851 $ 26.41

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:

2019 Incentive Plan during the 26 weeks ended June 29, 2024:

Number of Shares Weighted-Average

4 unchanged sentences

Adjustment for expected performance achievement (2)

121,531 27.29

Vested ( 301,392 ) 35.45

Forfeitures ( 149,324 ) 27.48

Unvested balance as of March 30, 2024 (3)

Unvested balance as of June 29, 2024 (3)

1,984,665 $ 27.57

1 unchanged sentence

(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.

(2) Represents the year-to-date adjustment to previously granted PSUs based on performance expectations as of June 29, 2024.

(3) An additional 552,008 PSUs could potentially be included if the maximum performance level of 200 % is reached for all PSUs outstanding as of June 29, 2024.

Share-based Compensation Expense

2 unchanged sentences

Share-based compensation expense consisted of the following (amounts in thousands):

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Time-based stock options $ 2 $ 314 $ 11 $ 722

1 unchanged sentence

PSUs 3,673 8,287 8,570 12,060

Dividends (1)

Share-based compensation expense $ 7,001 $ 11,305 $ 15,143 $ 17,981

Our income tax expense (benefit) and effective income tax rate were as follows (amounts in thousands, except percentages):

13 Weeks Ended

2024 April 1,

Income tax expense (benefit) $ ( 1,588 ) $ 7,839

_______________________

(1) Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with a recapitalization that occurred in fiscal 2018.

Our income tax expense and effective income tax rate were as follows (amounts in thousands, except percentages):

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Income tax expense $ 6,545 $ 7,244 $ 4,957 $ 15,083

Effective income tax rate 31.9 % 22.8 % 27.6 % 28.3 %

1 unchanged sentence

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.

Our effective income tax rate for the 13 and 26 weeks ended June 29, 2024 was higher than the combined U.S.

federal and state statutory income tax rate primarily due to non-deductible executive compensation under Internal Revenue Code Section 162(m).

The increase in our effective income tax rate for the 13 weeks ended June 29, 2024 compared to the 13 weeks ended July 1, 2023 was primarily driven by lower excess tax benefits related to the exercise of stock options.

The decrease in our effective income tax rate for the 26 weeks ended June 29, 2024 compared to the 26 weeks ended July 1, 2023 was primarily driven by excess tax benefits related to share-based compensation having a larger impact on the effective tax rate for the 26 weeks ended June 29, 2024 due to decreased pretax book income.

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 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.

We had no uncertain tax positions as of June 29, 2024 and December 30, 2023, respectively, and do not anticipate having any material uncertain tax positions within the next 12 months.

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 June 29, 2024 and July 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 June 29, 2024, the right-of-use assets and lease liabilities related to these properties was $ 38.9 million and $ 43.9 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.

These related parties received aggregate lease payments from us of $ 1.9 million and $ 1.7 million for the 13 weeks ended June 29, 2024 and July 1, 2023, respectively, and $ 3.7 million and $ 3.4 million for the 26 weeks ended June 29, 2024 and July 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.

We offer interest-bearing notes to IOs and the gross amount of IO operating notes and IO receivables due was $ 59.5 million and $ 59.2 million as of June 29, 2024 and December 30, 2023, respectively.

See Note 2 for additional information.

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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.

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

2024 April 1,

Net income (loss) and comprehensive income (loss) $ ( 1,025 ) $ 13,720

Earnings Per Share

The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data):

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Net income and comprehensive income $ 14,001 $ 24,471 $ 12,976 $ 38,191

Weighted-average shares outstanding – basic

2 unchanged sentences

Effect of dilutive RSUs and PSUs (1)

68 133 274 330

Weighted-average shares outstanding – diluted

100,369 100,639 100,753 100,604

Earnings (net loss) per share:

Earnings per share:

Basic $ 0.14 $ 0.25 $ 0.13 $ 0.39

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(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

2024 April 1,

Time-based stock options 1,136 —

RSUs and PSUs 895 95

Total 2,031 95

Subsequent Event

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):

13 Weeks Ended 26 Weeks Ended

2023 June 29,

RSUs 818 21 617 58

Business Combination

Acquisition of United Grocery Outlet

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.

On April 1, 2024, the Transaction was completed for the total purchase consideration of $ 62.8 million, including $ 2.0 million of cash and cash equivalents on hand, subject to post-closing adjustments, and was funded with cash on hand.

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.

United Grocery Outlet operated 40

discount grocery stores across six states in the southeastern United States as of April 1, 2024.

The acquisition provides us with the opportunity to scale in a new region as well as a platform for future potential expansion in the Southeast.

We accounted for the acquisition as a business combination using the acquisition method of accounting, which requires, among other things, that we allocate the purchase consideration to the identifiable assets acquired and liabilities assumed based on their acquisition-date fair values.

The fair values of the acquired assets and assumed liabilities recorded on our condensed consolidated financial statements may be subject to adjustment pending completion of final valuation.

These fair value estimates will be reevaluated and adjusted, if needed, during the measurement period of up to one year from the acquisition date, and recorded as adjustments to goodwill.

The following table summarizes the preliminary purchase price allocation recorded for acquired assets and assumed liabilities at the acquisition date (amounts in thousands):

Cash and cash equivalents $ 2,003

Other accounts receivable 148

Merchandise inventories

Prepaid expenses and other current assets 2,828

Property and equipment, net 6,950

Operating lease right-of-use assets 35,266

Other assets 422

Total assets acquired 90,714

Trade accounts payable 3,090

Accrued and other current liabilities 434

Accrued compensation 2,693

Current lease liabilities 2,581

Income and other taxes payable 742

Deferred income tax liabilities, net 476

Long-term lease liabilities 17,921

Total liabilities assumed 27,937

Total net assets acquired $ 62,777

The goodwill recognized reflects the expected future benefits from certain synergies and intangible assets that do not qualify for separate recognition.

The goodwill will not be deductible for income tax purposes.

During the 26 weeks ended June 29, 2024, we recognized $ 7.6 million in acquisition and integration costs related to due diligence, legal, other consulting and retention bonus expenses.

Such costs were included within selling, general and administrative expenses on the condensed consolidated statements of operations and comprehensive income.

Pro forma results are not presented as the impact of this acquisition is not material to our condensed consolidated financial results.

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

What changed 10-Q

Item 1. Financial Statements