Grocery Outlet Holding Corp (GO) Q4 2022 Earnings Call Transcript

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Grocery Outlet Holding Corp (NASDAQ:GO) Q4 2022 Earnings Conference Call February 28, 2023 4:30 PM ET

Company Participants

Lynn Walter - IR

Robert Sheedy - President, CEO & Director

Charles Bracher - EVP & CFO

Conference Call Participants

Leah Jordan - Goldman Sachs Group

Oliver Chen - Cowen and Company

Krisztina Katai - Deutsche Bank

Robert Ohmes - Bank of America Merrill Lynch

Karen Short - Crédit Suisse

Mark Carden - UBS

Joseph Feldman - Telsey Advisory Group

Corey Tarlowe - Jefferies

Michael Kessler - Morgan Stanley

John Heinbockel - Guggenheim Securities


Greetings and invited to nan Grocery Outlet Fourth Quarter 2022 Earnings Results Conference Call. [Operator Instructions].

I will now move nan telephone complete to Lynn Walter.

Lynn Walter

Good afternoon, and invited to Grocery Outlet telephone to talk financial results for nan 4th fourth and afloat twelvemonth 2022 periods ending December 31, 2022. Speaking from guidance connected today's telephone will beryllium R.J. Sheedy, President and Chief Executive Officer; and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will unfastened nan telephone for questions.

Please statement that this convention telephone is being webcast live, and a signaling will beryllium disposable via telephone playback and connected nan Investor Relations conception of nan company's website. Participants connected this telephone whitethorn make forward-looking statements wrong nan meaning of national securities laws. All statements that reside early operating, financial aliases business capacity aliases nan company's strategies aliases expectations are forward-looking statements. These forward-looking statements are taxable to various risks and uncertainties that could origin existent results to disagree materially from these statements. A explanation of these factors tin beryllium recovered successful this afternoon's property merchandise arsenic good arsenic nan company's periodic reports revenge pinch nan SEC, each of which whitethorn beryllium recovered connected nan Investor Relations conception of nan company's website aliases connected The institution undertakes nary responsibility to revise aliases update immoderate forward-looking statements aliases information. These statements are estimates only and not a guarantee of early performance.

During today's call, nan institution will besides reference definite non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures arsenic good arsenic nan description, limitations and rationale for utilizing each measurement whitethorn beryllium recovered successful nan supplemental financial tables included successful this afternoon's property merchandise and nan company's SEC filings.

With that said, I would now for illustration to move nan telephone complete to RJ.

Robert Sheedy

Good afternoon, everyone, and convey you for joining us. We are very pleased pinch our 4th fourth results and nan beardown momentum successful our business. We proceed to present unmatched worth to our customers astatine a clip erstwhile they request it most. As consumers are dealing pinch grounds inflation, they are turning to america for entree to affordable value nutrient and our industry-leading savings. .

Our compelling WOW! shopping acquisition is attracting caller customers and existing customers are spending much of their dollars pinch us. Fourth 4th income accrued 19%, driven by a 15.1% summation successful comparable shop sales. Positive postulation trends accelerated successful nan 4th fourth pinch a 10% transaction count summation versus nan anterior year.

Our mean handbasket size besides accrued successful nan quarter, up 4.6%. We opened 10 caller stores successful nan 4th fourth to extremity nan twelvemonth pinch 441 locations. We are pleased pinch caller shop capacity and caller vintages are ramping well. We are besides encouraged by our momentum successful caller markets, including nan East wherever comps proceed to lead nan company. We negociate gross separator good contempt continued inflationary pressures, expanding gross profit by complete 16%. Better-than-expected apical statement and gross profit capacity mixed pinch shop disbursal leverage resulted successful robust bottommost statement growth.

Our business fundamentals stay strong. The pipeline of opportunistic products is patient and our assortment is much applicable than ever. Independent operators are serving customer needs and are engaging caller customers pinch their section assortment and worth merchandising, and our trading efforts promoting worth and savings are resonating pinch consumers. We are acquiring caller customers, expanding stock of wallet and customer restitution levels are high.

The readiness of opportunistic merchandise remains strong. Our supplier partners are showing america patient lists of surplus items, and we are moving creatively to thief them pinch their inventory challenges. Our scale, long-standing relationships and expertise to move quickly, make america nan preferred partner for our suppliers excess products. And our buying spot continues to amended arsenic we grow. We are excited to big immoderate of our cardinal suppliers astatine our upcoming yearly supplier convention successful March. This is an important multi-day arena that allows america to meet successful personification to collaborate and strategically scheme our business together. Our independent operators are excited by nan income momentum and nan galore caller customers they spot successful their stores.

Operators negociate inventory according to section preferences, and they are actively trading wrong their communities. We were together pinch each IOs past week astatine our yearly usability convention and nan power was palpable. Our beardown business and civilization facilitated champion believe sharing, nan procreation of caller ideas and alignment connected our shared objectives. IOs are besides actively engaging pinch their communities, and they are giving backmost to section organizations successful this clip of need. We are inspired each time by their activity and nan productivity pinch which they tally their businesses.

Our ngo of rubbing lives for nan amended has guided america for much than 75 years, and this greater intent will proceed to steer our early growth. Our business touches lives for nan amended successful our communities, really we support our group and really we protect our planet. This shows up successful galore ways. We supply entree to affordable value food, and we prevention customers money. We springiness backmost to nan communities successful which we unrecorded and operate. We connection a level for independent operators to successfully tally their ain businesses, and we connection opportunities for profession maturation and affirmative effect for our employees.

We besides reduced nutrient waste, thereby helping to alteration greenhouse state emissions. We negociate our business for semipermanent sustainable growth, which allows america to summation our effect successful each of these areas. And we are executing a strategy built connected 3 superior maturation pillars to thief america execute our mission. Number one, strengthening our halfway model; number two, evolving our business; and number three, expanding our reach.

Let maine concisely touch connected each of these. Our first and superior maturation pillar is to proceed to fortify our halfway business model. Our unsocial buying and trading attack has ever been and will proceed to beryllium nan maturation motor of this business. It differentiates america and provides a compelling worth proposition to a wide scope of customers. We stay focused connected deepening our value, strengthening nan wealth hunt shopping experience, elevating usability support and expanding customer awareness, acquisition and retention.

We ever activity to fortify supplier relationships and further create opportunistic purchasing pinch caller processes and investments. One existent illustration is nan preamble of cross-dock capabilities and caller geographies and that are person to supplier inventory locations. These caller resources will amended our elasticity and let america to amended service suppliers erstwhile surplus inventory challenges hap nationwide.

Independent operators are nan look of our marque and our support helps them beryllium much effective and successful. We person made caller investments successful our usability support squad to let for much nonstop collaboration connected sales, separator and ratio opportunities. Many operating champion practices were shared successful past week's yearly meeting, and we previewed a caller usability facing exertion level that will thief IOs simplify and modernize nan measurement they negociate their business.

We besides proceed to travel a test-and-learn attack to optimize our trading strategy and investments. As portion of that effort, we are much efficaciously leveraging information specified arsenic shop attributes to gauge media effectiveness crossed markets and channels. Our 2nd maturation pillar is business evolution, and we are focused connected advancing our exemplary successful respective ways. Starting pinch nan assortment, we are pleased pinch nan incremental income from our SKU description complete nan past year. Key attraction categories person been NASH, fresh, taste and local. Unique and differentiated backstage explanation products correspond nan adjacent multiyear shape of mundane assortment enhancement.

This year, we scheme to adhd activity talent to build nan strategy and instauration for this caller offering. Over nan adjacent respective years, we scheme to create and present backstage explanation items that fortify nan worth proposition for our customers while driving income and profit. We besides proceed to further digitize our business pinch much integrated end-to-end technology. We person a successful history of modernizing systems to amended capabilities and thrust efficiencies.

This year's strategy upgrades see product, inventory, financial and reporting platforms. These exertion enhancements will supply caller functionality and scalability to support cardinal areas of our business including purchasing, inventory guidance and shop operations. In addition, these systems will supply a beardown instauration upon which we will create early customer and usability facing technology. One illustration is our personalization app, which is presently being piloted successful Washington State. This caller programme extends nan wealth hunt beyond nan 4 walls of nan shop and early feedback is positive. In summation to customer benefits, this app will make robust shopping information to heighten our existent trading efforts and amended customer engagement complete time.

This year's exertion upgrades will let america to merge much robust information analytics passim our business. Future activity will beryllium aimed astatine improving information value and integrating automated analytics to thief pinch operations and efficiencies.

Our 3rd semipermanent maturation pillar is to grow our scope by opening caller stores, expanding to caller geographies and processing caller income channels. We judge we person nan imaginable for much than 10x nan number of stores we person today. We proceed to negociate short-term caller shop headwinds, which person delayed further shop openings. As a result, we now expect to unfastened 25 to 28 nett caller stores this year.

Our 3-year pipeline is healthy, and we expect to beryllium backmost to our 10% yearly caller portion maturation complaint starting successful nan 2nd half of this year. Our scheme for fiscal 2024 presently includes 47 caller stores distributed much evenly passim nan year. As I mentioned earlier, we are very pleased pinch our beardown momentum successful nan eastbound arsenic consciousness of our marque continues to grow.

We are besides encouraged by early results successful caller states, specified arsenic Maryland and New Jersey, and we are excited to present nan GO marque to galore caller communities. Store maturation will beryllium complemented by description into caller income channels. We are pleased pinch our e-commerce business pinch Instacart, DoorDash and Uber Eats, and we proceed to study and heighten our offerings pinch these partners. We position e-commerce arsenic a awesome instrumentality for america to build consciousness and get caller customers successful some existing and caller markets.

In closing, I would for illustration to convey nan full Grocery Outlet squad and our IOs for their dedication and galore contributions. We run a very typical business. The entrepreneurial tone of our IOs, mixed pinch nan buying powerfulness of our squad creates a powerfully unsocial customer experience. Our exceptionally debased prices, beardown merchandise offering and continued investments successful nan business position america very good for early growth.

I will now move it complete to Charles to talk our financial results.

Charles Bracher

Thanks, RJ, and bully afternoon, everyone. We were pleased pinch our 4th fourth performance, which exceeded our expectations connected some nan apical and bottommost lines.

We ended nan twelvemonth pinch beardown momentum arsenic comparable shop income accrued 15.1%. We generated a 10% summation successful transaction count and a 4.6% summation successful mean handbasket for nan quarter. We opened 10 caller stores ending nan twelvemonth pinch 441 locations. Our robust comp growth, mixed pinch nan publication from caller stores led to an 18.9% summation successful nett income to $930.8 million.

Gross profit accrued 16.2% to $281.2 million. We delivered a 30.2% gross margin, somewhat little than first expectations owed to costs pressures connected commodity items. Overall, our gross separator capacity was accordant pinch our humanities 4th fourth scope arsenic our buying and readying teams proceed to skillfully equilibrium costs and worth to nan customer.

Turning to expenses. Fourth 4th SG&A accrued 14.8% to $230.2 cardinal compared to nan anterior year. The summation reflected $22.1 cardinal successful higher store-related expenses driven by committee payments to IOs and shop occupancy costs owed to caller shop description . Corporate-related expenses accrued $7.6 million, driven by higher inducement compensation, reflecting stronger financial capacity versus nan anterior twelvemonth arsenic good arsenic continued organizational maturation and strategy investments.

As a percent of sales, SG&A decreased 90 ground points arsenic leverage connected shop expenses offset higher inducement compensation expense. D&A accrued 2.3% to $18.8 million. Share-based compensation was $8.2 million, reflecting nan effect of grants made successful nan past 12 months arsenic good arsenic existent expectations related to our performance-based stock awards.

Net liking disbursal accrued 48.2% to $5.6 cardinal owed to nan effect of higher liking rates connected our adaptable costs indebtedness which much than offset savings related to $75 cardinal successful reduced main versus nan anterior year. Our effective taxation complaint during nan 4th was 13.4%, which is beneath our normalized complaint of astir 28%. As a consequence of these factors, GAAP nett income for nan 4th fourth much than doubled versus nan anterior twelvemonth to $15.9 cardinal aliases $0.16 per diluted share.

With respect to our non-GAAP capacity measures, please statement that we person updated our definitions of adjusted EBITDA, adjusted nett income and adjusted net per stock to nary longer exclude nan effect of noncash rent disbursal and nan proviso for accounts receivable reserves.

For context, noncash rent disbursal and accounts receivable reserves were $6.9 cardinal and $4.3 million, respectively, for fiscal 2022. Going forward, we will beryllium presenting adjusted EBITDA and adjusted net based upon our revised meaning only. In our property merchandise issued today, we person provided a humanities reconciliation for nan past 8 quarters which breaks retired these 2 noncash statement items and bridges betwixt our anterior and revised non-GAAP definitions.

For nan 4th quarter, adjusted EBITDA based upon our anterior meaning accrued 21.2% to $57.5 cardinal aliases 6.2% of sales, reflecting our revised definition, adjusted EBITDA accrued 24.3% to $54.3 cardinal for nan 4th aliases 5.8% of sales. Adjusted nett income based upon our anterior meaning accrued 24.4% to $24.9 cardinal for nan 4th aliases $0.25 per share. Reflecting our revised definition, adjusted nett income accrued 31.1% to $22.6 cardinal aliases $0.22 per diluted share.

Turning to our equilibrium sheet. We ended nan 4th pinch $102.7 cardinal of cash. Inventory was successful statement pinch nan 3rd 4th astatine $334.3 cardinal and remains patient successful position of quantity, operation and turnover. Our 4th fourth CapEx, nett of tenant betterment allowances was $44.4 million, reflecting caller shop maturation and nan timing of continued upgrades to our existing fleet and ongoing exertion and infrastructure investments.

On February 21, we refinanced our in installments facility, resulting successful little borrowing costs and accrued liquidity and financial flexibility. Our caller installation includes a $300 cardinal word indebtedness and a $400 cardinal revolver, allowing america to clasp little rate connected nan equilibrium expanse and frankincense offset nan effect of higher liking rates. In addition, nan caller installation lowers our borrowing costs complete metallic by astir 40 ground points.

At closing, our pro forma capitalization includes a $300 cardinal word loan, $25 cardinal drawn against nan revolver and astir $70 cardinal successful cash.

Next, fto maine supply immoderate commentary connected our first outlook for some nan first 4th and afloat fiscal twelvemonth 2023. For nan afloat year, we are projecting comp income maturation successful nan scope of 4.5% to 5.5%. In position of quarterly income cadence, we expect comp maturation successful nan first 4th to beryllium astir 10% pinch comps moderating passim nan twelvemonth arsenic we thigh inflationary increases. We expect to unfastened betwixt 25 and 28 nett caller stores for nan twelvemonth pinch openings weighted towards nan backmost half.

We expect to unfastened 5 stores and closed 1 shop during nan first half of nan year. We expect to unfastened nan equilibrium of our caller stores and frankincense return to our annualized 10% portion maturation tally complaint successful nan 2nd half. In total, we task fiscal 2023 nett income of $3.85 cardinal to $3.9 billion. We expect gross separator for nan first 4th and nan afloat fiscal twelvemonth of astir 30.6%.

For nan afloat fiscal year, we expect adjusted EBITDA based connected our revised meaning to beryllium successful nan scope of $237 cardinal to $243 million. This includes nan effect of astir $14 cardinal successful disbursal related to noncash rent and AR reserves. We expect first 4th adjusted EBITDA of astir 6% of sales.

We expect D&A to turn successful nan debased teens connected a percent ground and share-based compensation of astir $30 cardinal for nan year. Net liking disbursal is anticipated to beryllium astir $22 cardinal based upon our caller refinancing and projected guardant liking rates. We forecast a normalized taxation complaint of 28% and mean diluted shares outstanding of astir $101.5 million. We expect CapEx, nett of tenant allowances of astir $155 million, reflecting caller shop growth, upgrades to our existing fleet and continued investments successful technology, proviso concatenation and infrastructure. As a result, we expect afloat twelvemonth adjusted EPS based upon our revised meaning of $0.94 to $0.99 per share.

In closing, we are pleased pinch our beardown business fundamentals, and we are excited astir nan maturation runway successful beforehand of us. We are grateful to person an unthinkable squad of Grocery Outlet labor successful our firm offices, fulfillment centers and successful nan section who are supporting our talented IOs and bringing nan WOW! shopping acquisition to our customers each day. We look guardant to building connected our existent momentum arsenic we proceed to present semipermanent maturation and worth for our shareholders.

We will now unfastened nan telephone up to your questions. Operator?

Question-and-Answer Session


[Operator Instructions]. First mobility comes from Leah Jordan pinch Goldman Sachs.

Leah Jordan

I first wanted to cheque successful connected nan bottlenecks to increasing units this year. Where are you still seeing nan pressure? Are you seeing immoderate improvements? And what gives you assurance to returning backmost to that 10% growth? And is location immoderate consequence to immoderate units slipping into '24?

Robert Sheedy

Yes. Leah, acknowledgment for nan question. So a fewer things here. First, our existent property pipeline is really strong. We proceed to find awesome existent property to support caller shop maturation goals, nan lineup of stores and opportunities for nan adjacent 36 months. It's healthy. We proceed to beryllium really excited astir nan imaginable that we person to open, arsenic we've said, complete 10x nan shop count that we person today. Recent challenges person ne'er been an rumor of existent property aliases tract availability. The challenges person been, arsenic we've said previously, pinch delays successful permitting, inspections, instrumentality availability, we've had difficulties pinch work and inferior providers. A number of things successful nan shop opening process that person led to immoderate of nan delays that we've been experiencing. And conscionable for perspective, anterior to these challenges, clip lines, generally, we're successful nan scope of 12 to 24 months. Every tract is unique, a small spot different, but that was nan wide range. .

Now pinch these challenges that we've been experiencing much for illustration 18 to 36 months. So rather a displacement successful position of clip statement and getting caller stores opened. What we've done arsenic a consequence is simply a batch of adjusting successful position of processes and clip lines. You deliberation astir each of nan different parts of nan caller shop approach, whether it's permitting, certainly, everything astir construction, instrumentality ordering, conscionable to sanction a few. A batch of effort goes into getting a caller shop opened and we've made a bunch of adjustments. And arsenic such, we person had immoderate shop dates that person pushed back, which has resulted successful immoderate of nan shop counts from past twelvemonth and past this twelvemonth arsenic well. We judge that existent caller shop estimate is realistic. We deliberation it's risk-adjusted for nan situation that we're in. It's provided headwinds don't get immoderate worse from here.

And taking a measurement backmost from each of this, really position this arsenic much short term, telephone it 18 months betwixt past year, first 6 months of this year, a disruption to our semipermanent 10% yearly caller shop maturation goal. Really excited to beryllium backmost connected way for nan number of stores that will unfastened successful nan 2nd half of this twelvemonth and consciousness assured pinch nan anticipation for Forty Seven caller stores adjacent twelvemonth and past ongoing astatine that 10% complaint from there.


Next mobility comes from Jeremy Hamblin pinch Craig-Hallum Capital Group.

Unidentified Analyst

This is Jack connected for Jeremy. My mobility benignant of comes astir nan request broadside of things. With nan SNAP benefits expiring present connected March 1, really do you guys deliberation astir that? Do you deliberation of that arsenic a nett affirmative connected nan comp aliases a antagonistic conscionable astir nutrient headdress benefits?

Charles Bracher

Yes, Jack, this is Charles. Today, if you look astatine Snap for our business, it's debased double digits arsenic a percentage. We would not position a simplification successful SNAP benefits arsenic being a headwind for us. And we tin look backmost complete clip and look astatine wherever we positively comped done cycles of reduced SNAP funding. You really deliberation astir our model, and it appeals very, very powerfully to that SNAP value-oriented customer. And truthful we really position this arsenic much of a tender type that our customer is utilizing versus a customer that we're gaining aliases losing. So arsenic you deliberation astir erstwhile SNAP backing is reduced to your point, successful galore ways, that is bully for our exemplary arsenic those benefits decline, it does put much unit connected those consumers and they travel to america to agelong their dollar.


Next question, Oliver Chen pinch Cowen.

Oliver Chen

Regarding nan guidance, arsenic we deliberation astir nan comps, what do you spot happening to handbasket and nan drivers, including ostentation and/or disinflation arsenic you look astatine that arsenic nan twelvemonth goes on. And past a longer-term mobility connected backstage label, it looks for illustration a awesome opportunity here. What's going to beryllium earlier versus later successful nan execution here? And which categories do you spot nan astir opportunity? And are location immoderate separator implications we should deliberation astir successful our models arsenic well.

Charles Bracher

Oliver, it's Charles. Let maine commencement pinch that, and past I'll tackle really we're reasoning astir 2023 and past move it to RJ to talk astir backstage label. So really looking astatine trends present truthful acold successful nan first quarter, nutrient ostentation is decidedly proven to beryllium sticky. We proceed to spot those value increases broadly crossed categories, including notably successful nan halfway of nan store. .

And past benignant of looking complete nan equilibrium of nan year, it is difficult to opportunity pinch certainty precisely really and erstwhile that unwinds. We do expect that ostentation will mean arsenic we move done nan twelvemonth and peculiarly arsenic we thigh accelerating anterior twelvemonth numbers. And conscionable callback for america that nan effect of ostentation connected our business is much muted versus others because of our opportunistic exemplary and our expertise to flex nan assortment.

And truthful arsenic we deliberation astir postulation versus ringing complete nan equilibrium of nan year, again, it's difficult to opportunity precisely really that unfolds fixed inflation. But we do expect that some postulation and ringing will beryllium affirmative contributors to comp for nan year.

Traffic, arsenic you tin spot here, has been nan ample driver precocious arsenic customers are really looking for value. And past ringing should mean complete nan people of nan twelvemonth arsenic trips summation and we thigh those higher anterior twelvemonth numbers. So we emotion that patient publication betwixt postulation and rainfall expected to continue. But notably, we don't request that to thrust beardown comp growth.

Robert Sheedy

Oliver, acknowledgment for nan questions. On backstage label, yes, we're really excited astir this opportunity present successful beforehand of us. We do deliberation of it arsenic a important semipermanent opportunity and arsenic an enhancement to our mundane broadside of nan business. Think of this twelvemonth arsenic america building nan capacity and really mounting nan foundation, truthful building nan capacity and activity talent, starting to build retired nan team. And past nan strategy and nan instauration for really backstage explanation will heighten nan sum.

We, arsenic I deliberation you know, person a very, I'll telephone it, mini magnitude of backstage explanation wrong our assortment today. It's debased azygous digits. It's been much opportunistic successful quality arsenic we've introduced immoderate of those items and those brands complete nan year. So really taking a measurement backmost from that and reasoning agelong word and what we want backstage explanation to represent. The attraction for america will beryllium what sets america apart.

First and foremost, it's astir value. So really we present awesome worth to customers done a backstage explanation offering. And past nan added use present is anticipation to person these items service arsenic an further destination, if you will, destination point assortment and travel driver on pinch nan remainder of nan assortment that we person today.

We besides deliberation we tin correspond nan wealth hunt successful really we negociate this portion of nan assortment, truthful do it successful a measurement that's unsocial to america and nan anticipation and nan acquisition that customers person erstwhile they shop our stores. I'd opportunity it's excessively early. You asked astir items aliases categories. I think, excessively early astatine this constituent to springiness immoderate specifics connected items aliases brands conscionable arsenic we're starting to put that strategy aliases we'll put that strategy successful spot today. But certainly, we'll update you arsenic we create that and commencement introducing items and categories to nan assortment.

Oliver Chen

Okay. Lastly, you cited a batch of awesome initiatives cross-docking usability support teams, nan shop attribution model. How would you prioritize which ones mightiness beryllium bigger needle movers if there's a measurement to dimensionalize nan impact. They each sound rather for illustration awesome drivers for some proviso and request optimization.

Robert Sheedy

Yes, we person initiatives that we're pursuing. How do we prioritize? First, I'd opportunity we're very deliberate and disciplined astir first conscionable choosing what gets connected nan list. There are surely a number of things that we could prosecute that we're not talking astir because we are trying to enactment focused and person nan teams beryllium aligned together market outlet usability partners and arsenic good arsenic nan partnerships that we person pinch suppliers arsenic well.

And truthful there's a longer database of things that we're not pursuing astatine this time, we'll get to them. In position of what's connected nan list. We deliberation they each tin beryllium impactful. We -- certainly, immoderate are bigger than others. But we deliberation astir -- and arsenic we negociate nan business, ever reinvesting backmost into whether it's group aliases process aliases systems aliases circumstantial initiatives that make america better. And truthful nan database of things that we're talking astir are really much examples than thing other wrong nan broader strategy of -- aliases nan broader attack of america investing ever to make nan business stronger.


[Operator Instructions]. Your adjacent mobility comes from Krisztina Katai pinch Deutsche Bank.

Krisztina Katai

I wanted to inquire astir pricing. I guess, particularly successful ray of immoderate of nan sticky ostentation that you mentioned. Maybe if you could talk astir your worth spread successful your mundane assortment. As we look comparative to nan title successful large container retail, besides conventionals. And past arsenic a follow-up, are you seeing immoderate much promotional activity successful nan marketplace arsenic worth players for illustration yourselves proceed to summation stock perchance astatine nan disbursal of conventionals?

Robert Sheedy

Yes. Thanks, Krisztina. So connected your first mobility astir pricing, we're a worth retailer, truthful we're ever focused connected delivering worth and maintaining that worth done immoderate type of macro environment, whether it's ostentation aliases deflation. We salary very adjacent attraction to that. We measurement it successful tons of different ways, really arsenic a proxy for nan acquisition that nan customer has, right? They shop america for worth on pinch nan different unsocial attributes of nan business, wealth hunt, nan usability model, right, customer work that they provide, nan relationship and community. And truthful -- but worth and value is really important.

As it relates to nan existent situation pinch inflation, yes, we've seen prices summation nan unit landscape, we follow. So we're going to hold for -- and we person waited for different retailers to raise their prices earlier we make immoderate moves ourselves. And nan logic for that is ever wanting to support that worth delta. And we tin do that successful a way, I think, that's unsocial to us.

We ever talk astir nan elasticity and nan pricing adjustments that we make each time connected nan opportunistic broadside of nan business, but we're besides very elastic pinch our mundane assortment. We're not stocking immoderate circumstantial contracts aliases measurement agreements, nan assortment is very flexible. We don't person a rigid level for illustration others do. And truthful we're capable to move successful and retired of items and suppliers connected nan mundane side, nary different than we do connected nan opportunistic side. And done that, past present awesome worth first without changing prices astatine each for making those adjustments.

But past wherever needed aliases wherever we are seeing costs increases. And we person -- we'll travel different retailers to make that value delta those deltas are moreover much important now because it's harder for nan user to get much pinch their money. And truthful they're -- and we're seeing that successful postulation trends and handbasket trends and immoderate of nan things that we talk astir arsenic it relates to stock of wallet.

Specific to nan promotional environment, remains unchangeable for nan things that we spot here. Traditional retailers still are behaving much rationally, I'd say. It surely has ticked up for to spell backmost a mates of years erstwhile it came measurement down, it's travel backmost up. But successful ray of inflation, I deliberation successful ray of separator pressures, possibly that others are feeling. It's been a very logical promotional environment, much targeted to circumstantial items.

Again, this 1 here, we connection awesome unbeatable mundane value. We've operated successful each sorts of promotional environments. This is thing extracurricular nan ordinary. We proceed to flex our pricing and assortment to set and react. But thing successful nan existent situation that is thing that we haven't managed aliases extracurricular nan norm.


Next question, Robby Ohmes pinch Bank of America.

Robert Ohmes

RJ, possibly conscionable a follow-up connected nan exertion investments. Can you -- person you guys framed nan cost? Is it -- is it importantly incremental successful 2023 versus 2022?

Robert Sheedy

Yes. Let maine remark first connected conscionable wide exertion upgrades that we're making, Robby, and past get backmost to your mobility connected nan costs itself. But conscionable first to put this successful context, We, arsenic you know, person been investing successful modernizing exertion capabilities complete a agelong play of time. We do return a multiyear position of nan roadworthy map, systems roadworthy map.

So what we're talking astir for this twelvemonth and early years is really nary different than immoderate of nan investments that we've made successful nan past. And if I were to look backmost complete nan past I don't know, telephone it, 8 years, we've made immoderate important enhancements and upgrades to nan operating systems that we tally nan business on.

So I deliberation astir storage guidance system, HR system, our ain proprietary ordering and distribution system, conscionable to sanction a few, plentifulness of different investments. Really excited astir immoderate of nan strategy modernization efforts that will beryllium put into spot this year. So arsenic mentioned, we're investing successful caller platforms to thief our buyers pinch accusation and capabilities for everything successful nan buying process, mentioned caller devices for shop operators to thief them amended tally their stores, driving sales, managing margin, operating efficiencies, really excited astir that, enhancing our information business intelligence and nan reports and devices that we bring to decision-making. And there's a fistful of different operating systems astir this that are portion of this year's upgrades.

We've ever followed a phased attack to really we negociate strategy implementations and strategy enhancements and this twelvemonth being nary different. In position of nan expense, it's portion of our, I'll telephone it, normal CapEx fund that's been existent successful nan past, existent this year.

And past arsenic we look to proceed to put successful exertion arsenic we grow. Think of those investments, whether they're superior aliases ongoing operating expenses arsenic being portion of nan normal levels of CapEx and past surely wrong fund and semipermanent expectations arsenic we've communicated them.

Robert Ohmes

That's helpful. And conscionable different follow-up was conscionable nan East Coast stores, tin you punctual me, are they conscionable catching up to nan West Coast? Or is location thing typical you're doing pinch them for them to beryllium outperforming nan West Coast?

Robert Sheedy

Yes. So East Coast is still a processing market. We -- successful position of nan attack there, it's ever been astir building infrastructure first, increasing marque consciousness and proceedings and past processing nan marketplace arsenic we unfastened much stores complete time. So that's nan attack that we took to SoCal, if I were to usage that arsenic an example, from erstwhile we entered nan marketplace backmost successful 2012. And we've seen nan consciousness and productivity, turn successful lockstep there. And it's what we're seeing successful nan Mid-Atlantic from a capacity standpoint. The -- that region has been starring nan institution successful comp income maturation from nan investments that we've been making. And it's investments yes, successful caller stores arsenic we're ramping up there, but besides conscionable successful nan marketplace successful wide to raise wide raise consciousness DRIVE trial, and we've seen past nan productivity of nan stores travel and suit.

So really, really excited astir that. It has been nan anticipation arsenic we've started to thin successful much pinch those investments to support caller shop growth. And arsenic we proceed to adhd shop count successful nan East aliases immoderate processing caller marketplace everything improves from there, whether it's purchasing, nan flywheel, if you will, astir recruiting and training operators.

Certainly, standard helps pinch trading and proviso concatenation and section support successful these different areas. So really emotion bully astir nan momentum that we're seeing successful capacity successful nan East but past besides these investments that we've made to support a increasing shop count for nan opportunity that's there.


Next question, Joe Feldman pinch Telefe Advisory Group. .

Joseph Feldman

Actually, I wanted to travel up connected that past taxable Robby brought up. How is your IO pipeline successful nan East? Is it arsenic beardown arsenic successful nan West? And really are you uncovering group successful nan East? And also, I was funny if you're experiencing nan aforesaid benignant of existent property delays successful nan eastbound arsenic you are successful nan West?

Robert Sheedy

Yes. So nan IO pipeline is healthy. Overall, it's very healthy. And successful nan East, it's healthy, surely different, right, arsenic you don't person nan guidelines of stores successful nan eastbound arsenic you do successful nan West. But I would punctual you that arsenic we enlistee for operators, sometimes it's region specific, but different times, we are recruiting them into nan system, and we person examples of operators moving stores successful nan eastbound that are from nan West Coast aliases they trained successful nan West Coast, and that's wherever we recruited them from. So don't deliberation of recruiting operators arsenic truthful region specific. Of course, it's important, and that's portion of nan conversation, but it's really recruiting into nan strategy and past it's astir a penchant for a geography. .

The things that pull aliases that person ever attracted operators successful nan West are aforesaid successful nan East, right, nan opportunity to ain and run your ain business. this really unsocial operation of independence, but besides pinch nan support and standard of market outlet, you tin activity pinch your family, you person an opportunity to springiness backmost and person affirmative impact. certainly, financial upside. So each of these things are charismatic arsenic well.

The cardinal quality for anyone that's surviving aliases from nan East, there's conscionable possibly little consciousness for outlet arsenic they didn't turn up pinch it. And truthful there's an acquisition process location and consciousness and acquisition process location that's a small spot much unique. But we've sewage a awesome squad successful place, and we're having tons of really productive conversations pinch prospective operators. So we consciousness really bully astir nan pipeline.

And past successful position of our existent estate, yes, thing circumstantial aliases unsocial astir nan East comparative to different markets, those challenges that we've been managing are beautiful widespread.

Joseph Feldman

Got it. If I could conscionable travel up much connected nan IOs. I was conscionable curious, from nan arena you guys conscionable hosted, I cognize you said group -- nan IOs were beautiful excited astir nan coming year. But I was conscionable funny if there's thing successful particular, you tin talk astir aliases thing that they're astir excited about? Is it conscionable nan merchandise assortment? Or is location thing for illustration connected nan tech broadside that they've really been asking for aliases that they could usage aliases request successful nan stores?

Robert Sheedy

Yes, sure. So well, first, fto maine conscionable remark connected nan meeting. awesome to beryllium together pinch each of our operators. It had been a while because of COVID, wherever we've each been together arsenic a group. So conscionable really bully to beryllium together. Energy was really positive, really excited for nan twelvemonth ahead. So to your question, what they're emotion bully about, decidedly income momentum, comps, increasing income successful their stores, much specifically postulation trends and much circumstantial to that caller customers. So emotion seeing caller customers successful their stores and engaging pinch them and telling them astir nan business and nan exemplary and really they tin prevention a ton of money and person entree to awesome food. So really excited astir that.

Inventory and assortment really healthy. So operators, they're successful nan bid guideline each day. Their stores are full, you're capable to correspond awesome brands and worth to customers, wealth hunt acquisition is really strong. marketing. Marketing is resonating. They're seeing it successful their markets. Customers are talking astir it, some our efforts and their efforts.

And past continued investments, we've ever talked astir investments that we proceed to make successful nan stores whether it's superior successful nan stores, shelving, fixtures, different things, wide maintenance. They're ever happy to get those investments aliases person those investments made.

And past you mentioned technology. You -- this will beryllium a large measurement guardant for america this year. We've been operating connected immoderate of our systems for a agelong time. We spent nan clip to preview immoderate of nan caller capabilities and systems. It will beryllium an ongoing effort passim nan twelvemonth anterior to implementation conscionable to negociate nan change. But they're conscionable excited astir continued enhancements successful nan business and each nan momentum that we're experiencing is great. Macro situation is favorable, but we proceed to prosecute initiatives and make investments to make nan business amended still. So conscionable emotion bully overall.


Next question, John Heinbockel pinch Guggenheim Partners.

John Heinbockel

RJ, 2 things I want to commencement with, you guys don't person group planograms, but arsenic you deliberation astir adding assortment and past backstage brand, nan complexity, right, of managing that assortment and possibly helping nan IOs more, right, deliberation astir that move planogram, if you will. Is that improving? And is this nan IT level going to thief pinch that? And past secondly, erstwhile you deliberation astir backstage brand, right, successful your model, really do you deliberation astir that philosophically successful position of nan abstraction you want to springiness it connected nan shelf? And really do you value it, right? Traditional unit correct would value immoderate 15%, 20%, 25% discount, nan nationalist brand. How do you deliberation astir that?

Robert Sheedy

Yes. Let maine effort to reply some of those, John, astatine nan aforesaid clip here. So deliberation of backstage explanation arsenic an enhancement to our mundane assortment. So to nan 2nd portion of your question, we already do that today, right, successful position of pricing and worth mundane items arsenic compared to opportunistic, right? We're showing worth crossed nan full shop and we're ever managing existent clip and balancing inventory and items and worth arsenic opportunistic is coming successful and out, and we're managing an mundane assortment. Think of backstage explanation arsenic america being capable to connection moreover amended worth to customers connected nan mundane broadside of nan business together pinch unsocial items, destination items. .

You're right, we don't person planograms. But again, really not truthful different than really we negociate mundane assortment today, backstage explanation items will conscionable beryllium a -- deliberation of it arsenic a better, much sought after, unique, together pinch worth point nan mundane broadside of nan business. We're not introducing backstage explanation to switch aliases arsenic a substitute for opportunistic. We person plentifulness of room to turn and bring connected much opportunistic items. So it's not that astatine all. If that's wherever your mobility is coming from arsenic a replacement for. This is structurally arsenic an enhancement to nan portion of nan business that we already negociate coming conscionable pinch different items successful our ain brand.

John Heinbockel

Okay. And past pinch respect to -- it was asked astir nan East Coast pipeline, right? So I deliberation complete nan past 15 months aliases so, half nan openings person been connected nan East Coast, I don't know, do you deliberation that percent won't enactment that way, I don't believe. But possibly talk to nan magnitude of nan East Coast pipeline. And I don't cognize successful nan past, I deliberation nan remark was that you astir apt request to get adjacent to connected nan East Coast to person scale. Do you deliberation that's still true. And I conjecture you would get location successful 2.5, 3 years?

Charles Bracher

Yes, John, it's Charles. Yes, we very overmuch are sticking to nan benignant of crawl, walk, tally accuracy successful nan East Coast. And truthful for 2022, it was astir 1/3 of caller shop openings. We're successful nan East. For '23, it will beryllium astir nan same, and past we will ramp shop maturation location successful that marketplace successful 2024. So it will beryllium much of an moreover divided betwixt East Coast and West Coast caller shop openings.

And truthful arsenic you deliberation astir -- you benignant of referenced erstwhile you benignant of get nan standard there, that 70-ish stores, yes, we deliberation that's successful nan correct ZIP code. And truthful I deliberation your -- nan mathematics you did successful position of clip statement is beautiful accurate.


Next question, Corey Tarlowe pinch Jefferies.

Corey Tarlowe

Firstly, conscionable connected nan afloat twelvemonth guideline wrong nan discourse of inflation, recognizing that mean past year, ostentation was moving astatine a very elevated grade. And clearly, I deliberation your comps reflected that. And this year, ostentation started to decline. And I deliberation again, nan guideline astir apt reflects immoderate of that. But what do you deliberation could beryllium a imaginable facet arsenic you deliberation astir upside aliases driving imaginable upside to nan exemplary for this year? Where do you deliberation that, that could astir apt travel from?

And past secondarily, conscionable unpacking nan CapEx. So it sounds for illustration nan shop openings are going to beryllium comparatively accordant benignant of successful '23 versus '22? -- guiding looking astatine thing like, what is it, 25 to 28 caller shop openings versus past twelvemonth of, I think, but nan CapEx is stepping up from $130 cardinal to $155 million. So could you possibly unpack what nan CapEx looks for illustration for this year?

Charles Bracher

Sure. Corey, it's Charles. Let maine return some of those. So arsenic we deliberation astir nan guideline for nan twelvemonth and wherever imaginable upside could travel from, it's difficult to say. We do deliberation that nan guideline we provided is balanced fixed nan backdrop continues to beryllium dynamic. We emotion nan momentum that we've carried into nan first quarter. So continuing to spot that uptick successful postulation arsenic nan user again looks to agelong their dollar that feels really bully to america to beryllium driving those trips into nan store.

And past I deliberation nan much of nan wildcard is precisely really ostentation moderates and what nan timing is of that. As we deliberation astir CapEx walk for nan year, arsenic RJ mentioned, nan halfway driver continues to beryllium shop maturation and fleet investment. It is year-over-year up a small spot pinch respect to technology. And truthful immoderate of nan strategy enhancements we're making are driving a spot of that maturation year-over-year.

And then, of course, we're seeing an uptick successful nan inflationary effect of costs, whether that's pinch respect to caller stores. arsenic good arsenic different reinvestments backmost successful nan infrastructure. So really a operation of those things are driving nan -- a spot of a higher maturation year-over-year. But proceed to consciousness really bully astir those investments we're making backmost into nan business.


[Operator Instructions]. Your adjacent mobility comes from Karen Short pinch Credit Suisse.

Karen Short

I conscionable -- I person a mates of questions. So nan first mobility is your communicative has ever been for illustration remarkably unchangeable EBITDA margins. And obviously, correct now, what you're guiding to is beneath what you've benignant of historically bounced astir successful connected nan separator range. So wondering if you could springiness a small much colour connected that. And past connected CapEx, your CapEx dollar magnitude is importantly higher than I mean, possibly we were mismodeling, but past we were modeling, but pinch importantly little units than we were modeling. So wondering if you could conscionable talk to that a small bit.

Charles Bracher

Yes. A mates of things. Karen, this is Charles. Let maine return those successful reverse order, if you will. So starting pinch CapEx for Q4. So yes, it was a small spot higher than we anticipated. The cardinal driver there, there's immoderate timing impacts of shop possessions arsenic good arsenic nan postulation of TI allowances from landlords. And truthful again, nan guidance that we supply is nett of those allowances. So that was astir apt nan biggest driver versus our anticipation comparative to anterior quarterly trends. And truthful that was really nan cardinal to Q4. Otherwise, immoderate of that inflation.

Karen Short

Specifically, it was specifically a '23 question, not 4Q.

Charles Bracher

So again, 23% maturation pinch respect to CapEx, it's very overmuch those points that I talked to before. Store growth, yes, units connected a year-over-year ground beautiful consistent. We are seeing much inflationary costs increases, arsenic you would expect. That's thing that we proceed to negociate through, and we're looking astatine ways that we tin proceed to offset immoderate of those increases.

Technology is simply a driver of nan year-over-year maturation from '22 to '23 and past ongoing inflationary impacts would beryllium nan other. And punctual maine of your first question. And past EBITDA margin...

Karen Short

EBITDA, yes.

Charles Bracher

Yes. So Karen, truthful we've ever talked astir our accuracy of maintaining unchangeable margins complete nan agelong term. And for us, it's very overmuch a matter of reinvesting backmost into nan business arsenic we deliberation astir nan maturation runway up of us. So whether that's investing for maturation crossed people, exertion aliases marketing. So arsenic we deliberation astir nan guideline for 2023, we're still very overmuch oriented those semipermanent IPO targets that we provided.

With respect to adjusted EBITDA, support successful mind, definitionally, there's been nan alteration location pinch respect to noncash rent and AR. So erstwhile you spell backmost and normalize for those benignant of pre-IPO for us, 6.5% to 6.6% successful position of EBITDA separator rate. And past adjusting for that, that really puts you correct successful statement pinch our guidance for fiscal '23. So for us, very overmuch proceed to negociate nan business for unchangeable margins. We consciousness bully astir wherever we are for 2023 comparative to that benignant of semipermanent approach, a spot of separator -- gross separator unit arsenic it relates to inflation, but overall, I consciousness really bully astir wherever we are.

Karen Short

Sorry, tin I conscionable inquire 1 much speedy question. In position of nan stores that person been opened by nontraditional IOs for illustration non-grocery, is location immoderate colour you tin supply successful position of capacity of those stores comparative to ones that person been opened by accepted IOs?

Robert Sheedy

No, nary difference. You bet.


Next question, Mark Carden pinch UBS.

Mark Carden

So a follow-up connected nan shop count. After respective years of opening less caller stores. Do you spot it becoming incrementally much challenging to revert backmost to humanities 10% cadence successful 2H, conscionable from an execution standpoint and immoderate of nan complexities of operating successful an opportunistic market, getting IOs up to speed. Or does that musculus representation from pre-pandemic days really conscionable make it beautiful soft connected to permitting and proviso concatenation headwinds normalize moreover erstwhile you're going disconnected nan higher base.

Robert Sheedy

Yes. No, I mean, certainly, you request to do things otherwise astatine bigger aliases higher standard arsenic nan numbers spell up. But no, we've had a insignificant short-term disruption present successful these past 18 months, but I'm excited to beryllium backmost connected nan 10% maturation tally complaint later this twelvemonth and past emotion bully astir shop count and our expertise to get those stores unfastened and 2024 and past ongoing arsenic nan guidelines continues to turn and nan caller shop count continues to grow.

Mark Carden

Okay. Great. And past 1 much speedy one. Just successful nan past, really has postulation been impacted by periods of disinflation astatine market outlet. You guys person laid retired a number of promising initiatives. But what near-term actions you deliberation will beryllium astir meaningful successful position of holding connected to immoderate of your newer shoppers, past possibly observe Grocery Outlet for nan first clip complete nan past fewer years, particularly competitor prices commencement to travel down.

Robert Sheedy

Yes. So first, I'd say, Mark, our way grounds history shows nan exemplary is very resilient and useful good successful each macroeconomic environment. So inflation, deflation, acold much muted arsenic it relates to effect connected nan business. I conjecture nan 1 arsenic dress to that is successful a recessionary aliases arsenic we're experiencing now precocious inflationary situation wherever nan request for worth is really high, it ticks up, right, arsenic customers are seeking value. If I were to spell backmost to '08, '09, we saw that 2 years. And past there's -- arsenic it relates to retention, there's tremendous stickiness successful nan acquisition that customers have. And truthful that play and of course, each play is different.

Customers recovered america for nan first time, loved nan acquisition and proceed to shop us. We came retired of those years pinch affirmative comps. Beyond that, we worked really difficult to enactment apical of mind to thrust trips to summation stock of wallet. So a batch of efforts connected nan trading beforehand that we're pursuing and certainly, nan usability plays a cardinal domiciled location arsenic well. So nary matter which measurement ostentation goes, we deliberation it will beryllium pinch america present for a while still disinflation aliases moreover deflation still for illustration what we're doing and are excited astir nan maturation potential.


Next question, Simeon Gutman pinch Morgan Stanley.

Michael Kessler

This is Michael Kessler connected for Simeon. So benignant of taking a measurement back, it's been choppy fewer years pinch nan COVID swings, nan caller portion delays. I cognize we had immoderate of nan accommodation changes. So nan net powerfulness of nan business has stalled a small spot since 2019 aliases 2020. So conscionable wondering, this year, reestablishing, I guess, a caller baseline for nan benignant of return to, I guess, I deliberation astatine IPO, much for illustration a mid-double digit aliases mid-teens bottommost statement growth. Is that benignant of nan correct measurement to deliberation astir nan station '23 outlook? And is location thing that would, I guess, thrust a higher aliases little number from what you tin show correct now? .

Charles Bracher

Yes, Michael, this is Charles. I deliberation we get backmost there. The -- if you look astatine nan guideline for '23 and admittedly benignant of bottommost statement adjusted nett income maturation is being impacted by higher liking rates. And truthful year-over-year, contempt nan truth that we've paid down debt, and we again person a caller in installments installation that has lowered nan borrowing cost. Underlying guidelines rates proceed to person a large effect year-over-year. And truthful that's really nan headwind arsenic we deliberation astir bottommost statement maturation and getting backmost to that benignant of IPO algorithm.

But overall, we consciousness really bully astir nan wellness of nan business and wherever nan P&L is. We are driving leverage. We're investing that backmost into nan business. And again, we deliberation it sets america up for semipermanent growth.

Michael Kessler

Got it. And conscionable a speedy follow-up. If to nan grade that comps travel successful amended apical statement transcend your expectations. Can you conscionable talk a small spot astir what nan flow-through mightiness look for illustration connected those sales? Would you look to reinvest arsenic acold arsenic that versus flowing it done to nan bottommost line?

Charles Bracher

Yes. It's ever been our accuracy to reinvest backmost into nan business. You tin spot immoderate flow-through successful nan short term. Again, we person less points fixed costs leverage owed to our exemplary and nan sharing of commissions pinch but you tin spot immoderate flow-through successful nan adjacent term. Longer term, whether we're seeing improvements successful gross margin. We're ever looking for a measurement to negociate costs, amended negociate inventory done nan concatenation arsenic we find those opportunities arsenic we find ways to negociate G&A much efficiently, we do look to put those backmost into nan business. Again, we've sewage decades of occurrence to show america that's nan correct point for america to do.


Thank you. I would for illustration to move nan level complete to RJ for closing remarks.

Robert Sheedy

Thank you each for joining america today. I admit nan support, and we look guardant to updating you each connected nan adjacent call. Thanks.


This concludes today's teleconference. You whitethorn disconnect your lines astatine this time, and convey you for your participation.

Editor: Naga

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