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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-07 · 144 added, 93 removed, 286 unchanged (45% of the section changed)

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").

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 Quarterly Report on Form 10-Q ("Form 10-Q" or “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.

3 unchanged sentences

Fiscal 2023 ended December 30, 2023.

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.

References to the third quarter of fiscal 2024 and the third quarter of fiscal 2023 refer to the 13 weeks ended September 28, 2024 and September 30, 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.

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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.

As of September 28, 2024, we had 529 stores in California, Washington, Oregon, Pennsylvania, Tennessee, Idaho, Nevada, Maryland, North Carolina, New Jersey, Georgia, Ohio, Alabama, Delaware, Kentucky and Virginia.

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.

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

Additionally, during fiscal 2024 we have seen 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.

The ext ent 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 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.

On April 1, 2024, we acquired The Bargain Barn, Inc., a Tennessee corporation doing business as United Grocery Outlet (“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.

Excluding the United Grocery Outlet transaction, we opened 17 new stores and closed one store in the first half of fiscal 2024.

In addition to the newly acquired United Grocery Outlet stores, we plan to open 27 stores in fiscal 2024, for a planned total of 66 net new stores in fiscal 2024.

Excluding the United Grocery Outlet transaction, we opened 22 new stores and closed one store during the 39 weeks ended September 28, 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 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.

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 for the fiscal months of September through December of 2 023 as well as during the 39 weeks ended September 28, 2024, as more fully described below in "Comparison of the 13 and 39 weeks ended September 28, 2024 and September 30, 2023." We have since improved the data visibility to help us manage and forecast the business and we continue to work to further improve visibility into additional operating data, increase speed and refine the tools that we and our independent operators use to manage the business.

In the third quarter of fiscal 2024, we began to introduce our private label products in stores.

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

We currently anticipate introducing over 150 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.

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.

Third Quarter of Fiscal 2024 Overview

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

• Net sales increased 10.4% to $1.11 billion from $1.00 billion in the third quarter of fiscal 2023.

• Comparable store sales increased by 1.2%, driven by a 2.0% increase in the number of transactions, partially offset by a 0.7% decrease in average transaction size.

• 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 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.

• We opened 5 new stores, ending the third quarter of fiscal 2024 with 529 stores in 16 states.

• Gross ma rgin decreased by 30 basis points to 31.1%, compare d to gross margin of 31.4% in the third quarter of fiscal 2023.

• SG&A increased by 9.5% to $304.6 million, or 27.5% of net sales.

• Net income wa s $24.2 million, or $0.24 per diluted share, compared to net income of $27.1 million, or $0.27 per diluted share, in the third quarter of fiscal 2023.

• Adjusted EBITDA (1) increased 6.0% to $72.3 million co mpared to $68.1 million in the third quarter of fiscal 2023.

• Adjusted net inco me (1) decreased 10.1% to $27.9 million, or $0.28 pe r adjusted diluted share (1) , compared to $31.0 million, or $0.31 per adjusted diluted share, in the third quarter of fiscal 2023.

_______________________

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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.

Net sales are impacted by the spending habits of our customers, customer perception of value in our offerings, 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.

29 unchanged sentences

13 Weeks Ended 39 Weeks Ended

2023 June 29,

September 28,

2024 September 30,

2023 September 28,

2024 September 30,

Net sales $ 1,108,183 $ 1,003,913 $ 3,273,647 $ 2,979,635

11 unchanged sentences

13 Weeks Ended 39 Weeks Ended

2023 June 29,

September 28,

2024 September 30,

2023 September 28,

2024 September 30,

Percentage of net sales (1)

48 unchanged sentences

13 Weeks Ended 39 Weeks Ended

2023 June 29,

September 28,

2024 September 30,

2023 September 28,

2024 September 30,

Other Financial and Operations Data

9 unchanged sentences

_______________________

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

(1) 39 weeks ended September 28, 2024 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 unchanged sentences

13 Weeks Ended 39 Weeks Ended

2023 June 29,

September 28,

2024 September 30,

2023 September 28,

2024 September 30,

Net income $ 24,178 $ 27,140 $ 37,154 $ 65,331

14 unchanged sentences

13 Weeks Ended 39 Weeks Ended

2023 June 29,

September 28,

2024 September 30,

2023 September 28,

2024 September 30,

Net income $ 24,178 $ 27,140 $ 37,154 $ 65,331

30 unchanged sentences

(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.

For purposes of determining adjusted net income, in addition to the previously noted item, this line also represents 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, 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, legal settlements and other legal expenses, store closing costs, strategic project costs and miscellaneous costs.

(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.

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

Comparison of the 13 and 39 weeks ended September 28, 2024 and September 30, 2023 (amounts in thousands, except percentages)

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

Net sales $ 1,108,183 $ 1,003,913 $ 104,270 10.4 % $ 3,273,647 $ 2,979,635 $ 294,012 9.9 %

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.

The increase in net sales for the 13 and 39 weeks ended September 28, 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 74 net new stores acquired or opened over the last 12 months.

Comparable store sales increased 1.2% for the 13 weeks ended September 28, 2024 and 2.6% for the 39 weeks ended September 28, 2024 compared to the same periods in fiscal 2023.

The increase in comparable store sales for the 13 weeks ended September 28, 2024 was driven by a 2.0% increase in the number of transactions, partially offset by a 0.7% decrease in average transaction size.

The increase in comparable store sales for the 39 weeks ended September 28, 2024 was driven by a 4.6% increase in the number of transactions, partially offset by a 1.9% decrease in average transaction size.

Cost of Sales

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

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% of net sales 68.9 % 68.6 % 69.5 % 68.4 %

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.

The increase in cost of sales for the 13 weeks ended September 28, 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 74 net new stores acquired or opened over the last 12 months.

The increase in cost of sales for the 39 weeks ended September 28, 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 74 net new stores acquired or opened over the last 12 months, as well as impacts related to our system upgrades.

Cost as a percentage of net sales increased slightly for the 13 weeks ended September 28, 2024 compared to the same period in fiscal 2023.

Cost as a percentage of net sales increased for the 39 weeks ended September 28, 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 took longer to rebuild, which impacted data visibility.

Gross Profit and Gross Margin

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

1 unchanged sentence

Gross margin 31.1 % 31.4 % 30.5 % 31.6 %

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.

The increase in gross profit for the 13 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was primarily the re sult of an increase in comparable store sales combined with non-comparable sales from 74 net new stores acquired or opened over the last 12 months.

The increase in gross profit for the 39 weeks ended September 28, 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 74 net new stores acquired or opened over the last 12 mo nths, partially offset by impacts related to our system upgrades.

Gross margin decreased slightly for the 13 weeks ended September 28, 2024 compared to the same period in fiscal 2023.

Gross margin decreased for the 39 weeks ended September 28, 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 took longer to rebuild, which impacted data visibility.

Selling, General and Administrative Expenses

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

1 unchanged sentence

% of net sales 27.5 % 27.7 % 28.4 % 28.1 %

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.

The increase in SG&A for the 13 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was driven by $26.5 million in higher store-related expenses while corporate-related expenses remained relatively flat.

Store-related expenses primarily increased as a result of higher store occupancy costs due to 74 net new stores acquired or opened over the last 12 months, additional personnel costs from the Company-operated stores that were acquired in the United Grocery Outlet transaction, and the recognition of an e-commerce vendor receivable during the 13 weeks ended September 30, 2023.

These increases were partially offset by lower commission payments to IOs primarily due to $7.2 million of incremental support we elected to provide our IOs in connection with our system upgrade during the 13 weeks ended September 30, 2023, while support was minimal during the 13 weeks ended September 28, 2024.

Corporate-related expenses remained relatively flat and included lower incentive compensation expenses, partially offset by increases in other corporate-related expenses to support the continued growth of the business.

The increase in SG&A for the 39 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was driven by $77.7 million in higher store-related expenses and $17.5 million in higher corporate-related expenses.

Store-related expenses primarily increased as a result of higher commission payments to IOs, largely due to 33 net new stores operated by IOs over the last 12 months and an increase of $9.0 million period over period in incremental support we elected to provide to our IOs in connection with our system upgrades.

Also contributing to the increase in SG&A, were higher store occupancy costs due to 74 net new stores acquired or opened over the last 12 months, additional personnel costs from the Company-operated stores that were acquired in the United Grocery Outlet transaction, and the recognition of an e-commerce vendor receivable during the 39 weeks ended September 30, 2023.

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

As a percentage of net sales, SG&A decreased slightly for the 13 weeks ended September 28, 2024 and increased slightly for the 39 weeks ended September 28, 2024 compared to the same periods in fiscal 2023 primarily due to the aforementioned factors.

Interest Expense, Net

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

1 unchanged sentence

% of net sales 0.6 % 0.4 % 0.5 % 0.5 %

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.

The increase in net interest expense for the 13 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was primarily driven by higher average principal debt outstanding during the 13 weeks ended September 28, 2024, due largely to support share repurchases and other cash outlays to support the continued growth of the business, after the acquisition of United Grocery Outlet.

The increase in net interest expense for the 39 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was primarily driven by higher average principal debt outstanding during the 39 weeks ended September 28, 2024, due largely to support share repurchases and other cash outlays to support the continued growth of the business, after the acquisition of United Grocery Outlet, partially offset by the capitalization of $1.0 million of interest for the 39 weeks ended September 28, 2024.

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

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13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

1 unchanged sentence

% of net sales — % — % — % 0.2 %

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.

During the 39 weeks ended September 30, 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 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

1 unchanged sentence

% of net sales 0.9 % 0.6 % 0.4 % 0.7 %

Effective tax rate 31.9 % 22.8 % 27.6 % 28.3 %

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.

Effective income tax rate

28.6 % 18.6 % 28.2 % 24.6 %

The increase in income tax expense for the 13 weeks ended September 28, 2024, compared to the same period in fiscal 2023 was primarily due to the increase in our effective income tax rate.

The decrease in income tax expense for the 39 weeks ended September 28, 2024, compared to the same period in fiscal 2023 was primarily due to lower pretax book income, partially offset by the increase in our effective income tax rate.

The increase in our effective income tax rate for the 13 and 39 weeks ended September 28, 2024 compared to the 13 and 39 weeks ended September 30, 2023 was primarily driven by lower excess tax benefits related to the exercise of stock options, non-deductible acquisition and integration costs related to the acquisition of United Grocery Outlet, and lower pretax book income.

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

1 unchanged sentence

% of net sales 2.2 % 2.7 % 1.1 % 2.2 %

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.

As a result of the foregoing factors, net income decreased for the 13 and 39 weeks ended September 28, 2024 compared to the same periods in fiscal 2023.

Adjusted EBITDA

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

Adjusted EBITDA $ 72,258 $ 68,143 $ 4,115 6.0 % $ 179,531 $ 201,740 $ (22,209) (11.0) %

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.

The increase in adjusted EBITDA for the 13 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was primarily due to the increase in gross profit, partially offset by the increase in SG&A related expenses, as discussed above.

The decrease in adjusted EBITDA for the 39 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was primarily due to the increase in SG&A related expenses, partially offset by the increase in gross profit, as discussed above.

Adjusted Net Income

13 Weeks Ended 39 Weeks Ended

2023 $ Change % Change June 29,

September 28,

2024 September 30,

2023 $ Change % Change September 28,

2024 September 30,

2023 $ Change % Change

Adjusted net income $ 27,853 $ 30,989 $ (3,136) (10.1) % $ 61,757 $ 89,932 $ (28,175) (31.3) %

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.

The decrease in adjusted net income for the 13 and 39 weeks ended September 28, 2024 compared to the same periods in fiscal 2023 was primarily due to the increase in SG&A related expenses, partially offset by the increase in gross profit, as discussed above.

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").

(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.

There can be no assurance that 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 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.

As of September 28, 2024, we had cash and cash equivalents of $68.7 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 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.

As of September 28, 2024, we had $140.0 million outstanding under the revolving credit facility and $4.5 million of outstanding standby letters of credit, resulting in $255.5 million of remaining borrowing capacity available under this revolving credit facility.

During the 39 weeks ended September 28, 2024, $140.0 million was borrowed under this revolving credit facility to support share repurchases and other cash outlays to support the continued growth of the business, after the acquisition of United Grocery Outlet.

In October 2024, we borrowed an additional $30.0 million of principal under the revolving credit facility primarily to support share repurchases.

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.

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Capital expenditures include purchases of capital assets such as property and equipment as well as intangible assets and licenses.

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.

Capital expenditures for the 39 weeks ended September 28, 2024, before the impact of tenant improvement allowances, were $140.8 million, and, net of tenant improvement allowances, were $124.9 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.

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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.

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

Acquisition of United Grocery Outlet

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.

The acquisition was completed for the total purchase consideration of $62.5 million, including $2.0 million of cash and cash equivalents on hand, after post-closing adjustments, and was funded with cash on hand.

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

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:

The 2023 Credit Agreement contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to:

pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments;

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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 June 29, 2024, we were in compliance with all applicable financial covenant requirements for the 2023 Credit Agreement.

As of September 28, 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):

39 Weeks Ended

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

September 28, 2024 September 30, 2023 $ Change % Change

Net cash provided by operating activities $ 72,465 $ 276,218 $ (203,753) (73.8) %

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Net cash provided by (used in) financing activities 86,879 (92,253) 179,132 194.2 %

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

Net (decrease) increase in cash and cash equivalents $ (46,334) $ 52,935 $ (99,269) (187.5) %

Cash Provided by Operating Activities

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.

Net cash provided by operating activities was $72.5 million for the 39 weeks ended September 28, 2024 compared to $276.2 million for the same period in fiscal 2023.

The decrease in net cash provided by operating activities of $203.8 million for the 39 weeks ended September 28, 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 $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 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.

Net cash used in investing activities was $205.7 million for the 39 weeks ended September 28, 2024 compared to $131.0 million for the same period in fiscal 2023.

The increase in net cash used in investing activities of $74.6 million for the 39 weeks ended September 28, 2024 compared to the same period in fiscal 2023 was primarily due to the acquisition of United Grocery Outlet in April 2024 combined with increased spending on property and equipment due to higher store count and construction related to future stores.

Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities of $86.9 million for the 39 weeks ended September 28, 2024 was primarily due to the borrowing of $140.0 million on our revolving credit facility under the 2023 Credit Agreement and $8.3 million in proceeds from the exercise of stock options, partially offset by the repurchase of $56.4 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 $92.3 million for the 39 weeks ended September 30, 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, $3.8 million in scheduled principal payments on the senior term loan under the 2023 Credit Agreement 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

Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting.

Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the United States ("U.S.") Securities and Exchange Commission (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.

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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 26 weeks ended June 29, 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 39 weeks ended September 28, 2024 from those disclosed in our 2023 Form 10-K.

Recent Accounting Pronouncements

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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