What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-07 compared with 2024-05-08 · 142 added, 121 removed, 237 unchanged (53% of the section changed)

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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.

References to the second quarter of fiscal 2024 and the second quarter of fiscal 2023 refer to the 13 weeks ended June 29, 2024 and July 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.

We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores.

We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold primarily 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.

Our stores are primarily run by entrepreneurial independent operators ("IOs") who create a neighborhood feel through personalized customer service and a localized product offering.

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

Macroeconomic Conditions and Recent Developments

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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.

Additionally, we have recently experienced increases in promotional and pricing activities from key competitors, putting further pressure on our relative value.

In turn, we have been actively negotiating costs and adjusting prices to sharpen our value proposition.

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.

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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.

On April, 1 2024, we acquired 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.

Our near-term integration focus is expanding the assortment, investing in store refreshes and new fixtures and introducing some of our marketing programs to the Southeast region.

In addition to the newly acquired United Grocery Outlet stores, we plan to open approximately 22 to 24 stores in fiscal 2024, for a planned total of 62 to 64 net new stores in fiscal 2024.

We opened six new stores in the first quarter of fiscal 2024.

Excluding the United Grocery Outlet transaction, we opened 17 new stores and closed one store in the first half 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.

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 half of fiscal 2024, as more fully described below in "Comparison of the 13 and 26 weeks ended June 29, 2024 and July 1, 2023." We have since improved the data visibility to help us manage and forecast the business and we do not expect any further disruptions that would result in material negative impacts on our results of operations in the second half of fiscal 2024.

Beginning in the third quarter of fiscal 2024, we will be introducing our private label program to stores.

In addition to providing better value and inventory consistency for our customers, our private label products are expected to deliver

better margin for us and our IOs.

We currently anticipate introducing approximately 100 new private-label SKUs by the end of fiscal 2024.

Key Factors and Measures We Use to Evaluate Our Business

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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.

Second Quarter of Fiscal 2024 Overview

Key financial and operating performance results for the second quarter of fiscal 2024 compared to the second quarter of fiscal 2023 were as follows:

• Net sales increased 11.7% to $1.13 billion from $1.01 billion in the second quarter of fiscal 2023.

• Comparable store sales increased by 2.9%, driven by a 5.1% increase in the number of transactions, partially offset by a 2.1% 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.

• In addition to the 40 stores acquired as part of the United Grocery Outlet acquisition on April 1, 2024, we opened 11 new stores and closed one store, ending the second quarter of fiscal 2024 with 524 stores in 16 states.

• Gross margin decreased by 140 basis points to 30.9%, compared to gross margin of 32.3% in the second 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.

Such disruptions are estimated to have negatively impacted gross margin by 100 basis points in the second quarter of fiscal 2024 and 150 basis points in the first half of fiscal 2024.

• SG&A expenses increased by 11.4% to $323.1 million, or 28.6% of net sales.

This included $3.8 million of commission support we elected to provide our operators in connection with our system upgrades in the second quarter of fiscal 2024 and totaled $16.2 million in the first half of fiscal 2024.

• Net income was $14.0 million, or $0.14 per diluted share, compared to net income of $24.5 million, or $0.24 per diluted share, in the second quarter of fiscal 2023.

• Adjusted EBITDA (1) decreased 3.7% to $67.9 million compared to $70.5 million in the second quarter of fiscal 2023.

• Adjusted net income (1) decreased 21.4% to $25.1 million, or $0.25 per adjusted diluted share (1) , compared to $31.9 million, or $0.32 per adjusted diluted share, in the second quarter of fiscal 2023.

_______________________

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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).

Operating income excludes interest expense, net, loss on debt extinguishment and modification and income tax expense.

We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

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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

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

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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

13 Weeks Ended

2024 April 1,

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

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Percentage of net sales (1)

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Total other expenses 0.5 % 0.5 % 0.4 % 0.8 %

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 %

Income before income taxes 1.8 % 3.1 % 0.8 % 2.7 %

Income tax expense 0.6 % 0.7 % 0.2 % 0.8 %

Net income and comprehensive income 1.2 % 2.4 % 0.6 % 1.9 %

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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.

The number of new stores reflects the number of stores opened or acquired during a particular reporting period.

Newly opened 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.

Certain newly acquired stores may require refreshes and new fixtures.

We expect new store growth to be a very significant and critical driver of our net sales growth over the long term.

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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.

Comparable store sales consists of net sales from our stores beginning on the first day of the fourteenth full fiscal month following a store's opening, which is when we believe comparability is achieved, or the thirteenth full fiscal month following a store's acquisition.

Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas.

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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.

Opening or acquiring 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.

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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.

We believe that excluding items from operating income, net income and earnings 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 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 and integration costs, costs related to the amortization of inventory purchase accounting asset step-ups 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 adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for the amortization of property and equipment purchase accounting asset step-ups 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.

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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.

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.

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

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 June 29,

Other Financial and Operations Data

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2.9 % 9.2 % 3.4 % 10.6 %

$ 52,650 $ 57,601 $ 78,102 $ 105,754

Adjusted EBITDA (3)

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(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.

(1) Includes addition of 40 stores from acquisition of United Grocery Outlet.

(2) 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, or the thirteenth full fiscal month following the store's acquisition.

(3) See "GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.

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

2024 April 1,

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

The following tables provide a reconciliation from our GAAP net income to EBITDA and adjusted EBITDA, GAAP net income to adjusted net income, and our GAAP earnings per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data):

13 Weeks Ended 26 Weeks Ended

2023 June 29,

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

Interest expense, net 5,559 4,766 8,735 10,685

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

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

Depreciation and amortization expenses 26,545 21,120 51,434 41,795

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Share-based compensation expenses (1)

7,001 11,305 15,143 17,981

Loss on debt extinguishment and modification (2)

Asset impairment and gain or loss on disposition (3)

Acquisition costs (4)

381 236 745 343

Acquisition and integration costs (4)

4,937 — 7,586 —

Amortization of purchase accounting assets (5)

2,070 1,377 4,858 4,179

Adjusted EBITDA $ 67,878 $ 70,519 $ 107,273 $ 133,597

13 Weeks Ended

2024 April 1,

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

13 Weeks Ended 26 Weeks Ended

2023 June 29,

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

Share-based compensation expenses (1)

7,001 11,305 15,143 17,981

Loss on debt extinguishment and modification (2)

Asset impairment and gain or loss on disposition (3)

Acquisition costs (4)

381 236 745 343

Acquisition and integration costs (4)

4,937 — 7,586 —

Amortization of purchase accounting assets and deferred financing costs (5)

2,228 1,424 3,550 2,991

2,070 1,377 4,858 4,179

Tax adjustment to normalize effective tax rate (7)

86 (2,448) (708) (856)

Tax effect of total adjustments (8)

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Adjusted net income $ 25,095 $ 31,919 $ 33,904 $ 58,943

GAAP earnings (net loss) per share

GAAP earnings per share

Basic $ 0.14 $ 0.25 $ 0.13 $ 0.39

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

Non-GAAP weighted average shares outstanding

Basic 99,520 97,920

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(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.

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(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.

(4) Represents costs related to the acquisition and integration of United Grocery Outlet, including due diligence, legal, other consulting and retention bonus expenses.

(5) For purposes of determining adjusted EBITDA, this line represents the incremental amortization of inventory step-ups resulting from purchase price accounting related to acquisitions.

For purposes of determine adjusted net income, in addition to the previously noted items, this line also represents the incremental amortization of property and equipment step-ups from acquisitions, as well as the amortization of debt issuance costs, as these items are already included in the adjusted EBITDA reconciliation within the depreciation and amortization expenses and interest income, net, respectively.

(6) 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.

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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)

13 Weeks Ended

2024 April 1,

Comparison of the 13 and 26 weeks ended June 29, 2024 and July 1, 2023 (amounts in thousands, except percentages)

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

Net sales $ 1,128,520 $ 1,010,255 $ 118,265 11.7 % $ 2,165,464 $ 1,975,722 $ 189,742 9.6 %

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.

The increase in net sales for the 13 and 26 weeks ended June 29, 2024 compared to the same periods 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 77 net new stores acquired or opened over the last 12 months.

Comparable store sales increased 2.9% for the 13 weeks ended June 29, 2024 and 3.4% for the 26 weeks ended June 29, 2024 compared to the same periods in fiscal 2023.

The increase in comparable store sales for the 13 weeks ended June 29, 2024 was driven by a 5.1% increase in the number of transactions, partially offset by a 2.1% decrease in average transaction size.

The increase in comparable store sales for the 26 weeks ended June 29, 2024 was driven by a 6.0% increase in the number of transactions, partially offset by a 2.5% decrease in average transaction size.

Cost of Sales

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

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% of net sales 69.1 % 67.7 % 69.8 % 68.3 %

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.

The increase in cost of sales for the 13 and 26 weeks ended June 29, 2024 compared to the same periods in fiscal 2023 was primarily the result of an increase in comparable store sales combined with non-comparable net sales from 77 net new stores acquired or 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 and 26 weeks ended June 29, 2024 compared to the same periods 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 took longer to rebuild, which impacted data visibility.

Gross Profit and Gross Margin

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

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Gross margin 30.9 % 32.3 % 30.2 % 31.7 %

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.

The increase in gross profit for the 13 and 26 weeks ended June 29, 2024 compared to the same periods in fiscal 2023 was primarily the result of an increase in comparable store sales combined with non-comparable sales from 77 net new stores acquired or opened over the last 12 months, partially offset by impacts related to our system upgrades.

Gross margin decreased for the 13 and 26 weeks ended June 29, 2024 compared to the same periods 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 took longer to rebuild, which impacted data visibility.

Selling, General and Administrative Expenses

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

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% of net sales 28.6 % 28.7 % 28.9 % 28.2 %

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.

The increase in SG&A for the 13 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was driven by $27.9 million in higher store-related expenses and $5.1 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 $3.8 million of incremental support we elected to provide our IOs in connection with our system upgrades, additional personnel costs from the Company-operated stores that were acquired in the United Grocery Outlet transaction, as well as higher store occupancy costs due to 77 net new stores acquired or opened over the last 12 months.

Corporate-related expenses increased largely due to United Grocery Outlet acquisition related costs and increased professional service costs to support our system upgrades and support the continued growth of the business, partially offset by lower share-based compensation expenses.

The increase in SG&A for the 26 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was driven by $50.6 million in higher store-related expenses and $18.1 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 $16.2 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 77 net new stores acquired or opened over the last 12 months and additional personnel costs from the Company-operated stores that were acquired in the United Grocery Outlet transaction.

Corporate-related expenses increased largely due to increased professional service costs to support our system upgrades and support the continued growth of the business, higher marketing expenses, and United Grocery Outlet acquisition related costs.

As a percentage of net sales, SG&A decreased slightly for the 13 weeks ended June 29, 2024 and increased for the 26 weeks ended June 29, 2024 compared to the same periods in fiscal 2023 primarily due to the aforementioned factors.

Interest Expense, Net

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

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% of net sales 0.5 % 0.5 % 0.4 % 0.5 %

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.

The increase in net interest expense for the 13 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was primarily driven by higher average principal debt outstanding during the 13 weeks ended June 29, 2024, due largely to support share repurchases and other cash outlays, after the acquisition of United Grocery Outlet.

The decrease in net interest expense for the 26 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was primarily driven by increased interest income from higher interest rates on our cash and cash equivalents and IO notes combined with the capitalization of $0.7 million of interest.

See Note 3 to the condensed consolidated financial statements for additional information.

Loss on Debt Extinguishment and Modification

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

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% of net sales — % — % — % 0.3 %

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.

Income Tax Expense (Benefit)

13 Weeks Ended

2024 April 1,

During the 26 weeks ended July 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.

Income Tax Expense

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

Income tax expense (benefit) $ (1,588) $ 7,839 $ (9,427) (120.3) %

Income tax expense $ 6,545 $ 7,244 $ (699) (9.6) % $ 4,957 $ 15,083 $ (10,126) (67.1) %

% of net sales 0.6 % 0.7 % 0.2 % 0.8 %

Effective tax rate 31.9 % 22.8 % 27.6 % 28.3 %

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

2024 April 1,

The decrease in income tax expense for the 13 and 26 weeks ended June 29, 2024, compared to the same periods in fiscal 2023 was primarily due to lower pretax book income.

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.

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

Net income (loss) $ (1,025) $ 13,720 $ (14,745) (107.5) %

Net income $ 14,001 $ 24,471 $ (10,470) (42.8) % $ 12,976 $ 38,191 $ (25,215) (66.0) %

% of net sales 1.2 % 2.4 % 0.6 % 1.9 %

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.

As a result of the foregoing factors, net income decreased for the 13 and 26 weeks ended June 29, 2024 compared to the same periods in fiscal 2023.

Adjusted EBITDA

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

Adjusted EBITDA $ 67,878 $ 70,519 $ (2,641) (3.7) % $ 107,273 $ 133,597 $ (26,324) (19.7) %

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.

The decrease in adjusted EBITDA for the 13 and 26 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was primarily due to the reduction in gross margin and the increase in SG&A related expenses, as discussed above.

Adjusted Net Income

13 Weeks Ended

2024 April 1,

13 Weeks Ended 26 Weeks Ended

2023 $ Change % Change June 29,

2023 $ Change % Change

Adjusted net income $ 25,095 $ 31,919 $ (6,824) (21.4) % $ 33,904 $ 58,943 $ (25,039) (42.5) %

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.

The decrease in adjusted net income for the 13 and 26 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was primarily due to the reduction in gross margin and the increase in SG&A related expenses, as discussed above.

Liquidity and Capital Resources

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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.

As of June 29, 2024, we had cash and cash equivalents of $67.1 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.

As of June 29, 2024, we had $90.0 million outstanding under the revolving credit facility and $4.5 million of outstanding standby letters of credit, resulting in $305.5 million of remaining borrowing capacity available under this revolving credit facility.

During the 26 weeks ended June 29, 2024, $90.0 million was borrowed under this revolving credit facility to support share repurchases and other cash outlays, after the acquisition of United Grocery Outlet.

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.

6 unchanged sentences

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.

Capital expenditures for the 26 weeks ended June 29, 2024, before the impact of tenant improvement allowances, were $91.7 million, and, net of tenant improvement allowances, were $86.7 million.

We currently expect total capital expenditures, net of tenant improvement allowances, to be approximately $200.0 million for fiscal 2024, which includes new 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

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Such payments total $46.9 million over the remaining term of the senior term loan, with $1.9 million payable over the remainder of fiscal 2024.

The remaining senior term loan principal balance will become due in February 2028 at maturity.

The remaining senior term loan principal balance and any outstanding revolving credit facility 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.

On April 1, 2024, Grocery Outlet Inc., our wholly owned subsidiary, acquired 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.

The acquisition 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.

See Note 10 to our condensed consolidated financial statements for additional information.

11 unchanged sentences

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.

The following table summarizes our cash flows for the periods presented (amounts in thousands, except percentages):

26 Weeks Ended

March 30, 2024 April 1, 2023 $ Change % Change

June 29, 2024 July 1, 2023 $ Change % Change

Net cash provided by operating activities $ 49,438 $ 157,120 $ (107,682) (68.5) %

Net cash used in investing activities (155,286) (78,084) (77,202) 98.9 %

Net cash used in financing activities (5,056) (67,898) 62,842 (92.6) %

Net cash provided by (used in) financing activities 57,926 (94,194) 152,120 161.5 %

Net decrease in cash and cash equivalents $ (47,922) $ (15,158) $ (32,764) 216.1 %

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.

Net cash provided by operating activities was $49.4 million for the 26 weeks ended June 29, 2024 compared to $157.1 million for the same period in fiscal 2023.

The decrease in net cash provided by operating activities of $107.7 million for the 26 weeks ended June 29, 2024 compared to the same period in fiscal 2023 was primarily driven by changes in accounts payable and accrued expenses combined with lower net income and changes in merchandise inventory levels.

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.

Net cash used in investing activities was $155.3 million for the 26 weeks ended June 29, 2024 compared to $78.1 million for the same period in fiscal 2023.

The increase in net cash used in investing activities of $77.2 million for the 26 weeks ended June 29, 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 combined with the acquisition of United Grocery Outlet in April 2024.

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.

Net cash provided by financing activities of $57.9 million for the 26 weeks ended June 29, 2024 was primarily due to the borrowing of $90.0 million on our revolving credit facility under the 2023 Credit Agreement and $3.8 million in proceeds from the exercise of stock options, partially offset by the repurchase of $31.3 million of our common stock and $3.8 million in scheduled principal payments on the senior term loan under the 2023 Credit Agreement.

Net cash used in financing activities of $94.2 million for the 26 weeks ended July 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, repayment of the $25.0 million of principal on our revolving credit facility, $4.5 million in debt issuance costs paid and the repurchase of $3.3 million worth of common stock, partially offset by $325.0 million in proceeds from the 2023 Credit Agreement.

Critical Accounting Policies and Estimates

4 unchanged sentences

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.

There have been no material changes to our critical accounting policies and estimates during the 26 weeks ended June 29, 2024 from those disclosed in our 2023 Form 10-K.

Recent Accounting Pronouncements

1 unchanged sentence

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 2. Management’s Discussion and Analysis