Greetings, and welcome to Grocery Outlet's Fiscal Fourth Quarter 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Pelland, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon everyone, and thank you for joining us on today's call to discuss Grocery Outlet's fourth quarter and full year 2020 financial results. Participants on this call will make forward-looking statements, including our outlook for fiscal 2021 and future performance that should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release, as well as in our periodic reports, which we file with the SEC, all of which may be found on our website at investors.groceryoutlet.com or on sec.gov. We undertake no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. During our call, we may reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release, in our SEC filings, and the Investors tab of our website. We reference non-GAAP measures in some of our financial discussions, as we believe they more accurately represent the true operational performance and underlying results of our business. Presenting on today's call will be Grocery Outlet's Chief Executive Officer, Eric Lindberg; President, RJ Sheedy; and Chief Financial Officer, Charles Bracher. Following our prepared remarks, we will open the call for questions. With that, I'll turn it over to Eric.

Thanks, Joe. Good afternoon and thank you for joining us today for the discussion of our fourth quarter fiscal 2020 results. Looking back at the year, I'm extremely proud of the work that we have done, as we rose to the challenges and opportunities created by COVID. Our financial performance throughout this year demonstrates the strength and flexibility of our business model. For the full year 2020, we delivered new store growth of 10%, as 35 stores opened despite the difficulties created by the pandemic. We also exceeded our long-term targets across key financial metrics, including comp store sales growth of 12.7%, gross margin expansion of 30 basis points to 31.1%, and adjusted EBITDA growth of 32%. We achieved those results by staying true to our business model, providing our customers with treasure hunt and ever-changing deals, friendly customer service, and a locally curated assortment provided by the independent operators. We worked closely with our supplier partners and leveraged our operational agility to meet consumers' needs, delighting them with unexpected deals each and every time they walk into a Grocery Outlet. Throughout this difficult period, our highly committed independent operators proved their resilience, dedication, and creativity in the many ways they helped each other in their communities. This included remaining in stock on essential items and keeping customers informed on the arrival of in-demand products, while maintaining clean and safe stores for their customers in an ever-changing landscape of requirements and protocols. True to our mission of touching lives for the better, we are committed to giving back to our communities with a focus on reducing food insecurity. Perhaps one of the greatest accomplishments last year was our Independence from Hunger campaign. It was a record year with customers donating $3 million to their local stores, and Grocery Outlet contributing $1 million, with all money going directly to local charities. I want to thank our teams and thank our IOs once again for their extraordinary efforts. Our flexible business model supported by many years of strategic investments positioned us to deliver exceptional results in an unprecedented environment. We continue to build on our strong foundation and reinvest in our business as we prepare for the many years of growth ahead. A big part of this investment has been our effort to attract, develop, and retain talent. We're very pleased to have assembled a group of highly accomplished and skilled team members across the organization. Our most recent senior executive hire is Tim Scott, our Chief Supply Chain Officer. Tim started this January and brings more than 20 years of business leadership and supply chain experience to Grocery Outlet, most recently as the Senior Vice President of Supply Chain for Sobeys, one of Canada's largest grocery retailers. We look forward to Tim's contributions as we continue to develop our supply chain in support of future growth. Our efforts to bring talented individuals with deep experience and new skill sets did not stop there. We also further expanded our Board of Directors, which now stands at 12 members. Most recently we announced the addition of two new Board members; María Fernanda Mejía, who draws from her consumer goods experience across strategic planning, brand management, and supply chain; and Gail Moody-Byrd, who has a wealth of experience in digital and brand marketing, demand generation, and merchandising. We are extremely pleased to have a diverse well-rounded Board of Directors with a breadth of background insights and expertise that will benefit the business. As I stated earlier, the success we have achieved this year is attributable to the strong execution of our business model, which is differentiated in two primary ways: how we buy and how we sell. Our accomplishments throughout this year only further my confidence and excitement in the future growth potential of this business. Starting with the buy, we continued to closely partner with our strong network of suppliers as well as build new vendor relationships during 2020. We helped them to manage unprecedented demand and swiftly changing consumer behavior during a challenging period. At the same time, we continued to ensure that we consistently meet the needs of our customers with a full assortment and great value. We could not have accomplished this if it were not for the strength of our buying organization and the infrastructure we have invested in for many years. Turning to the sell. IOs and their associates worked tirelessly to serve their communities during periods of high demand and uncertainty. They further deepened relationships with their customers, while introducing new shoppers to our value proposition. In addition to the ever-changing deals and extreme values, it is the customer loyalty garnered by our IOs through friendly and helpful service that drives return visits to the stores. For example, throughout the holiday season, several of our stores gave back to their customers in need each year through random acts of kindness, selecting customers throughout the season to pay for their groceries at checkout. This type of unexpected generosity, the personal connection it creates with customers, is a great example of what sets our model apart. On the real estate front, we opened 35 stores in 2020, keeping pace with our stated objective of 10% unit growth annually despite the hurdles created by COVID. We also continued to make progress in investing in infrastructure to position us for successful expansion in our existing West Coast markets as well as in our mid-Atlantic region. This year, we plan to open 36 to 38 stores and are excited to be reaching the 400-store mark this summer. These openings will include three to five new stores in the Mid-Atlantic region. In terms of IOs, we continue to build our pipeline of operators in training with high-quality candidates. We are receiving significant interest from quality candidates with grocery retail backgrounds, as well as candidates across a number of other industries that we believe will translate well into our business model. We remain focused on recruiting those who share the entrepreneurial spirit of our organization and we continue to enhance our training program to become more scalable and efficient in order to support future store growth. Before I hand it off to RJ, I wanted to highlight a milestone in the history of Grocery Outlet. We've come a long way since Jim Read founded the company in 1946, and 2021 marks our 75th anniversary. The business has evolved, but we remain centered on delivering value through our unique business model, our focus on execution, and our commitment to our mission of touching lives for the better. As we reflect on our history, we're very proud of the impact we've been able to have over the past 75 years on the lives of our employees, independent operators, customers, suppliers, and all of those whom we've touched. As we look forward, we are energized by the opportunity to continue to expand this impact long into the future. I will now turn over the call to RJ.

Thank you, Eric. We are proud to have delivered an exceptional year navigating the challenges of COVID while serving our customers' needs. Throughout this period, we have consistently delivered extreme value, unexpected deals, and friendly customer service in our stores. Our unique and proven approach to serving customers sets us apart as a retailer and it gives us great confidence in our future. The WOW! shopping experience that we deliver creates strong customer loyalty and is the engine that drives our business. Our inventory levels remained healthy throughout the year, depth of value remained strong, and we were able to consistently offer an exciting treasure hunt of WOW! deals for customers shopping our stores. Our best-in-class purchasing teams and our flexible supply chain enabled us to deliver value in the opportunistic and everyday products that our customers have come to expect. Our ability to manage discontinuous inventory complemented by an assortment of everyday products allowed us to stay in stock with the right items to meet customer demand. We recently participated in the FMI Midwinter Conference where we had the opportunity to meet with leadership teams from many of our long-standing strategic supplier partners. These are always highly productive meetings where we talk about long-term strategy and shared growth objectives. We continue to be encouraged by the strength of these relationships, the frequent and open dialogue, and the creative solutions we continue to develop to handle surplus inventory needs. Looking forward, the pipeline of opportunistic supply remains healthy. Current market disruption continues to deliver a steady supply of surplus inventory and our long and proven track record makes us a valuable resource and trusted partner for our suppliers. Our focus on strategic partnerships and flexibility combined with our growing scale positions us as the preferred partner in the secondary market. Turning to marketing, we maintained consistent communication of ever-changing store-specific WOW! deals through our email distribution list and other digital platforms. We also continued to drive brand awareness through digital and social media supported by select traditional print ads, radio, and TV. At the local level, our IOs communicate product availability and WOW! deals and engage with customers through social media and grassroots efforts to drive awareness and repeat visits. We are excited to celebrate our 75th diamond anniversary this year with contests and giveaways, as well as company-sponsored events. At the store level, our IOs will be hosting local celebrations to support this milestone. These new activities will be a great complement to our ongoing marketing approach, which remains focused on expanding brand awareness and deepening customer engagement. Turning to business technology, many prior years of strategic investments positioned us well to deliver exceptional results in an unprecedented environment. Over the past 10 years, we have supported business improvement and growth through meaningful investments in enterprise systems. Examples include our proprietary real-time order guide, distribution systems, along with new best-in-class warehouse management, POS, and business analytics platforms. This regular disciplined approach to system investments continues in 2021 as we begin to implement planned upgrades to our financial system, inventory management platform, and product data warehouse. As we have done in the past, we will develop proprietary systems to suit our unique business model while also partnering with best-in-class software providers. As we implement these investments over the next several years, we expect benefits to include enhanced purchasing and inventory planning capabilities as well as improved efficiency, scalability, and security of our systems. In addition, these efforts will support our ongoing personalization efforts, improve our data and analytics, and will serve as an important foundation for future digital initiatives. In summary, we are extremely proud of what we have accomplished over the past year and are well positioned for the future as we continue to focus on scaling our business for long-term growth. With that, I will turn the call over to Charles.

Thanks, RJ and good afternoon everyone. We were pleased to have delivered strong results in the fourth quarter and full year fiscal 2020. We are very grateful to our teams and our independent operators for their tireless efforts, and we remain committed to serving our customers' needs. At the same time, we continue to reinvest in our business as we pursue our long-term growth strategies. Following our discussion of fourth quarter and full year results, we will provide some comments on quarter-to-date trends and our outlook with respect to the current year. For the fourth quarter, sales increased 23.1% to $806.8 million compared with the same period last year. These results include $53.3 million of sales contribution from our 53rd week of fiscal 2020. Our growth was driven by a 7.9% increase in comparable store sales, as well as the sales contribution from 33 net additional stores opened since the end of last year. During the fourth quarter, we opened eight new stores, ending with 380 locations. We remain pleased with the performance of our new stores along with recent vintages, which continued to deliver sales productivity in line with our expectations. Our strong comp performance in the quarter was broad-based across regions, vintages, and categories. Comps continue to be driven by an increase in average transaction size, partially offset by a reduction in traffic, as customers continued to consolidate trips. Fourth quarter gross profit increased 22% from the prior year to $244.4 million. Our gross margin rate decreased 30 basis points to 30.3%, in line with historical Q4 levels reflecting holiday product mix. SG&A expense grew 17.7% to $197.6 million. The increase was largely due to higher variable commissions to independent operators related to gross margin dollar growth, increased investments in personnel and infrastructure, higher store occupancy costs due to store expansion, and COVID-related expenses. SG&A as a percentage of sales decreased 110 basis points to 24.5% from 25.6% in the same period last year. Stock-based compensation expense for the fourth quarter was $3.8 million, which primarily reflects expense associated with annual awards issued under our long-term incentive program implemented earlier in 2020. Depreciation and amortization increased to $15.2 million, up 55% versus the fourth quarter last year, which was impacted by the adoption of new lease accounting. As a result of the tax benefit associated with employee option exercises during the fourth quarter, we incurred an effective tax rate of negative 2.3%. Relative to our normalized tax rate, this added $7.6 million to net income in the quarter or $0.08 per diluted share. As such, GAAP net income for the quarter increased to $24.3 million or $0.24 per diluted share compared to net income of $9.8 million or $0.11 per diluted share in the prior year. With respect to the non-GAAP metrics, we use to evaluate our business, beginning with the fourth quarter of fiscal 2020, we updated our definitions of adjusted EBITDA and adjusted net income to simplify our presentation and enhance comparability between periods. This revision reflects the following changes. First, we no longer add back new store preopening expenses when calculating adjusted EBITDA and adjusted net income. And second, we normalize for the windfall tax impact and employee option exercises and vesting of stock awards when calculating adjusted net income. In addition we further simplified our presentation by collapsing debt extinguishment and modification costs into the other add-back line. Under our revised definition, fourth quarter adjusted EBITDA increased 24.7% to $51.2 million from $41.1 million last year. Adjusted net income increased 46% to $24.2 million or $0.24 per diluted share based on an average of 99.5 million diluted shares in the quarter. Versus the previous definition, adjusted EBITDA is $300,000 lower in the fourth quarter. Adjusted net income now reflecting a normalized tax rate is $7.8 million lower compared to the previous definition. A full reconciliation between the previous and revised non-GAAP calculations including the comparison over the past eight quarters is available in our press release. Our fourth quarter results represented a strong finish to a challenging but record year. For fiscal 2020, in total, net sales increased 22.5% to over $3.1 billion as comparable store sales grew 12.7%. Our gross margin rate expanded by 30 basis points versus the prior year helping to drive strong bottom-line growth. Adjusted EBITDA increased over 32% to nearly $223 million. Turning to our balance sheet and liquidity. We generated strong cash flow during the quarter ending the year with $105.3 million of cash and a healthy inventory position. We invested $150 million in CapEx for the year net of tenant improvement allowances as we continued to build new stores and invest back into the existing fleet in addition to making ongoing investments in IT and infrastructure. This includes costs related to 2021 store openings under construction at year end. Looking ahead, as we think about the current year, we will continue to manage our business with the same flexibility we demonstrated throughout 2020. Regardless of the operating environment, we will look to remain nimble and focused on the customer, ensuring that we deliver a compelling assortment of opportunistic and everyday values along with the WOW! shopping experience. At the same time, we will stay focused on our long-term goals and continue to invest in future growth. That begins with new store expansion. We expect to open 36 to 38 stores in 2021, in line with our 10% annual growth target with store openings fairly evenly spread throughout the year. We do not anticipate any additional store closures beyond the one store we closed in January. In terms of existing store sales trends, January comp sales were in the positive mid-single digits driven by continued larger basket sizes offsetting reduced traffic. February comp sales moderated to the positive low single digits as we began to anniversary the onset of last year's COVID demand surge towards the end of the month. That initial wave of customer demand peaked in March of last year where we saw comps increase 37% as consumers aggressively stocked up on products. As we fully cycle prior year March results, we expect comps for the first quarter in total to be in the negative high single digits. In regards to gross margins, we expect 2021 gross margin rate to track in line with pre-COVID levels as we return to normalized levels of inventory shrink. Similarly for the year, we expect SG&A as a percentage of sales to be consistent with pre-COVID levels, which takes into account investments in personnel and infrastructure as well as continued COVID-related costs as we prioritize the health and safety of our employees, customers, and independent operators. With respect to adjusted EBITDA margins, we expect full year 2021 results as a percentage of sales to be in line with 2019 performance, which reflects historical levels of operating leverage. Recall however that we did not incur public company costs until the second half of 2019. As such, we would expect first half 2021 adjusted EBITDA margins to be slightly below their 2019 benchmarks. As we continue to open new stores and invest in our infrastructure, we expect depreciation and amortization expense will increase on a percentage basis in the high teens versus the prior year. We expect stock-based compensation to be in the low $20 million range and we expect a normalized tax rate of approximately 28%, which excludes discrete items. We expect full year CapEx to be approximately $130 million net of tenant allowances reflecting the addition of the 36 to 38 new stores, existing store maintenance and improvements, and ongoing infrastructure and technology investments. As we look forward, we are excited about the progress we made in the business and the investments we continue to make across the company and our sustained long-term growth potential. With that, we can turn it back to the operator to begin Q&A.

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Oliver Chen with Cowen & Company. Please proceed with your question.

Hi. It was a strong quarter. I appreciate the helpful guidance and the month-to-month details. What are your thoughts on the outlook as the comparisons become easier throughout the year? Additionally, do you anticipate the guidance to remain in a negative range for the foreseeable future as you anniversary last year? Is the primary difference here due to traffic being more negative than the average check size? Thank you.

Hi, Oliver. It's Charles. Let me provide a little bit more color with respect to how we're thinking about 2021. Of course, there are a lot of things that we just don't have great visibility into at this point and continue to change by the day such as the pace of vaccine rollouts, what the cadence of reopening looks like, and then what are consumer behaviors as that reopening unfolds. And of course, you add to that the macro backdrop and the impact of stimulus. With so many moving pieces, I think the best way to share our approach with you is that we're looking at a number of metrics internally to track the business. We're looking at sales velocity on a two-year basis. Of course, we're looking at customer satisfaction, which we know has been very much validated by our recent Q4 surveys that we're engaging with the customers, and then also looking at traffic and ticket trends on an absolute basis. As we think about all of those metrics, we're feeling really good about where we stand. But again, there's just so much we don't know about the year. The good news for us is that our business model is built on flexibility. And so as we progress over the next several quarters, we'll just remain focused on satisfying our customers, being really nimble regardless of the operating environment. But overall, I think we very much like how we're positioned in our orientation towards value.

Okay. A quick follow-up on inventory planning in such a dynamic environment. How are you thinking in terms of approaching these compares for planning inventory relative to sales and/or keeping your open to buy pretty open with flexibility?

Yes. I'll say there.

Please, go ahead, RJ.

Sorry, Charles. Go ahead.

Yes. I think, Oliver, this really just speaks to the strength of our business. Keep in mind that not having fixed assortments, not having commitments in terms of long-term buys, we are not bought out several months ahead like perhaps some others. And so it just gives us that flexibility to react. It's again one of the very unique aspects of our business. And so we're feeling great about where inventory stands right now and the way that we exited the fourth quarter. We saw really healthy sell-throughs over the course of Q4. So as we look sort of at the quantity and composition of inventory we have, whether you slice and dice it by categories, regions, items, feel great about where we are. And so, the team is just ready to do what they always do in terms of reacting and making sure that we're managing that inventory appropriately.

Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good evening. Thanks a lot for taking my question. Number one, what are you hearing from your IOs about wage pressure, particularly some of the hero pay that's been well-publicized in some of your markets? And what's the approach for how that – how are you going to be able to navigate around that and how that may impact the model?

Yes. Hey, Michael, good to hear your voice. Thanks for the question. This is Eric. So yes, there's been a lot going on, on that topic around hero pay. I would start by just reminding everyone on the call for those that don't know it, just some of the basic structures. The IOs have total control over their store labor. So we don't have a lot of involvement. That's to say, we don't set the pay, we don't set the hours or rates or raises or any of that kind of stuff. A lot of the jurisdictions that we're learning are focused on grocers that are over 300 employees. That obviously, doesn't apply to a lot of our IOs or most of our IOs since they're small businesses. There have been some jurisdictions that are considering this temporary hike and a broader focus around all retail and all restaurants, regardless of size. So, we're watching that obviously. We are in the mode of tracking it closely, trying to understand it. IOs are in the same mode. Our strong belief is that this will be something that sunsets as the economy starts to return to something we would sort of call normal. Ultimately, this is no similar to what we've seen four, five, six, seven years as some of the West Coast states have increased the hourly wage for most employees on the minimum side from sort of $7, $8, federally up to $13, $14, $15. Most of the operators have digested those. What it means for us is we have to invest in systems and technologies and processes that help save the operator's time and make them a little bit more efficient. So we can't really do much about the wage inflation but we can do a lot on the back end. And so that's what we've been working on investing in on behalf of the operators.

That's very helpful. And then my follow-up question is on the outlook for this year. Seems like with the first quarter guidance, you're pointing to a pretty stable two-year stack comp in the high-single-digit range, which would be consistent with what Grocery Outlet has produced for a long time outside of the pandemic. So, why shouldn't we just roll forward the two-year stack over the next few quarters?

Yes. Michael, it's Charles again. So I think if you look at our guidance for Q1, and again a negative high-single-digit comp on top of a 17% comp last year, and to your point the historical two-year stack for us has been typically 8% to 9%. So, we're seeing it track ahead of that historical rate. But for us, very much staying focused on just that aggregate velocity of sales and looking at average weekly sales on a two-year basis and feeling good about where we stand. But, of course, so much that we don't know at this point. It continues to be a very fluid environment. So, we just don't have perfect visibility beyond the first quarter.

Our next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch. Please proceed with your questions.

Thank you for taking my question. Eric, could you share your insights on how the IOs are managing their income statements, especially when facing negative comparisons? Since they are motivated to maximize their gross margins during declining sales, I’m curious how you think this will affect their strategies this quarter and in the upcoming quarters. How will this impact their ordering patterns with you? Will it be challenging for your team to predict their actions? Please help us understand the dynamics at play here.

Yes, it's a great question. They are really focused on delivering for the customer and ensuring conditions in the store are optimal. They've had a fantastic year, with record revenue for most operators last year. The profitability flow-through was quite strong, and their cash position is also robust. We encourage operators to prioritize sales and gross margin dollars rather than just gross margin rate. The beauty of our model is that margins can fluctuate, as it is not a static mix. Operators have various levers to pull based on their goals for increased sales or gross margin dollars. We have advised them and spent significant time in stores, reminding them of our long-term focus. It's important not to lose sight of service or safety standards, nor to neglect local marketing efforts. While there will be many short-term trends to monitor, we are focused on long-term business strategies. We need to keep our sights set on driving inventory, sales, and promotion engagement, along with community involvement. The year 2021 will be unique and memorable, especially when reflecting on the combined period of 2020 and 2021. However, we do not overemphasize short-term issues. We will be vigilant in the stores, addressing any negative activities we notice, such as reducing service levels or inventory. I believe operators are aligned with us on our plans.

That's really helpful. Charles, could you explain the reason for the change in the method of calculating adjusted EBITDA? Additionally, could you clarify how we should compare it to the adjusted EBITDA from 2019? Is it a different adjusted EBITDA, or could you walk us through that again?

Sure. Yes, Robbie, let me explain the reasoning behind the change. It stemmed from feedback we received about simplifying the add-back we use and enhancing comparability between periods. In the earnings release, we include the complete reconciliation between the revised definition and the previous one, covering over eight quarters to highlight the differences. Regarding adjusted EBITDA, I’d say the change is modest because we have stopped adding back pre-opening costs, which were $300,000 for Q4 and $1.5 million for the full fiscal year, consistent with the previous year. For adjusted net income, the change is aimed at normalizing for the windfall tax benefits we received throughout the year. Under our previous definition, some of these windfall GAAP tax benefits flowed through to adjusted net income, but now we are normalizing that to reflect a 28% normalized tax rate, which will provide more relevant comparisons on a quarter-to-quarter basis and against the prior year. As for margins in 2021, we envision a return to our historical pre-COVID margin rates. This means a return to normalized levels of inventory shrink on the gross margin line and reflects ongoing personnel investments and COVID-related costs within our cost structure. We anticipate that gross margin, SG&A, and adjusted EBITDA as a percentage of sales will align with 2019 levels. A significant factor for this consistency is our flexible model that avoids fixed assortments in our distribution centers and stores, coupled with a more variable cost structure than other models due to the IO commission. However, it's worth noting that in the first half of 2019, we did not have public company costs, which are now about $2.5 million per quarter. Therefore, we expect first half 2021 EBITDA margins to be lower because of the impact of these public company costs.

Our next question comes from the line of Randy Konik with Jefferies. Please proceed with your question.

Thanks a lot. I have a quick question regarding an update on NOSH and what's been happening there. As you look towards the next few years, what categories or product enhancements do you plan to prioritize? Additionally, RJ mentioned earlier that you discussed some long-term partnerships during an industry-wide meeting. How are you planning for those partnerships to evolve in the medium to long term? Did you address different availability of supply across various product categories? I would appreciate some insight into how your conversations and relationships with these partners are expected to develop moving forward.

Hi Randy, it's RJ. I'll address those three questions. Regarding your first question on NOSH, we are experiencing significant growth in the NOSH category, which is consistent across most store categories. Product availability continues to be strong on the opportunistic side, and NOSH, like the rest of the store, combines both opportunistic and everyday products, maintaining a level of consistency that is essential for our customers. We’re also focused on the treasure hunt aspect and the deeper values we can offer opportunistically. This trend is promising, and we are optimistic about future growth potential. As for category enhancements, we are pleased with our broader assortment, covering all major categories found in conventional grocery retail. Our opportunities predominantly lie at the item or brand level within subcategories. We will continue to pursue these opportunities to address any gaps. We utilize industry data to understand market share while balancing value and demand, even when sourcing product opportunistically is challenging. This approach has been effective, and we will strive to enhance our assortment moving forward. Regarding the FMI meeting, it provides an excellent opportunity to connect with our long-standing supplier partners. We are encouraged by the strength of these relationships and our access to supply. In terms of evolving partnerships, I can share some specific examples from our discussions. We had a productive conversation with one supplier about strategically blending opportunistic and everyday products. As we are a significant sales channel for these suppliers with our 380 stores and $3 billion in sales, we aim to partner strategically where appropriate to support their growth while increasing our access to opportunistic products. Another discussion with a different supplier focused on identifying opportunities for changes in assortment, packaging, and branding. Given the considerable disruptions in assortment this past year, we expect this trend to continue. We position ourselves as a valuable partner for them to transition inventory effectively. We are also becoming more innovative in moving upstream, which has led to good partnerships and opportunities for longer shelf life products. With over 1,000 suppliers annually, our goal is to leverage best practices from specific suppliers and extend these strategies broadly to enrich and deepen the relationships we maintain.

Our next question comes from the line of John Heinbockel with Guggenheim. Please proceed with your question.

Hey, everyone. I have two questions. First, how do you see the performance of closeout compared to regular sales playing out in 2021? Second, aside from costs associated with being a public company, which expenses are higher in 2021 than they were in 2019 as you consider returning to 2019 levels? Additionally, have you made any significant investments, like in IT or other areas, in 2021 that were not present in 2019?

Hi John, it's RJ. I'll answer the first question and then pass it to Charles for your second question. Regarding the mix, both opportunistic and everyday categories are experiencing a good flow of opportunistic deals, which is encouraging for our current and future pipeline. We've noted that customers are consolidating trips and increasing their purchases, which has caused everyday products to sell slightly faster than opportunistic ones. This mix shift has been consistent throughout the year. We regularly manage these fluctuations, and it’s something we can adapt to without issues. Our focus remains on delivering value across both product types, and we'll continue to adjust our offerings accordingly. As for the rest of the year, as Charles mentioned, it's challenging to predict how factors like vaccine rollouts and behavior changes will impact us. We'll maintain our current strategy for inventory and purchasing, staying nimble and flexible, and continue to provide value based on customer demand, which will influence the mix.

Hey, John, it's Charles. I want to provide some additional insights into our investments over the past several years. It really starts with our commitment to reinvesting back into the business. We’re continuously searching for ways to operate more efficiently and leverage our profit and loss statements. As we identify areas for improvement, we reinvest those resources back into the organization, particularly in personnel—where we’ve made considerable investments throughout the entire business. We begin with purchasing, where we see a great return on our spending. Technology has also seen significant investments in recent years, along with our journey towards becoming a public company, particularly in finance, supply chain, and HR. We’ve made many organizational investments to enhance our capabilities and strengthen our team, alongside expansion into new markets. Our groundwork in the Mid-Atlantic has been a substantial investment, which also extends to our capital expenditures. We continually seek ways to reinvest in our existing fleet of stores, whether it’s through upgrades and enhancements to boost sales or general maintenance. This approach covers all facets of the business.

Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your question.

Hi, good afternoon. This is Krisztina Katai on for Paul. Congrats on a great quarter. I've wanted to follow-up on some of the previous questions regarding your 1Q. Can you just talk about what you are seeing from a traffic and basket standpoint that really transpired between January and February? Anything to call out? And then secondly, are there any metrics that you can share on what you're seeing from a new customer count and spend rent perspective compared to your legacy base? Thank you.

Hi, Krisztina, it's Charles. Let me begin by addressing the first part of your question. As we review the trends from the first quarter, we see a continuation of what we observed in the latter half of last year. The consolidation of trips has been balanced out by larger basket sizes. This pattern carried through from January into February. Overall, we noticed a slight decline in comparable sales from positive mid-single digits in January to low single digits in February as we began to compare against the onset of COVID at the end of February. Looking ahead to March, we are anticipating a significant comparable in March, with a 37% increase. We expect that the trend between traffic and ticket size, which has largely remained consistent since the start of COVID, will start to shift as the comparisons change. This supports my earlier point about focusing on the absolute numbers. We are monitoring actual traffic counts and basket sizes to gauge our performance, and we feel optimistic about how we are progressing so far.

And I'll jump in on the second half on engagement. So keep in mind the one thing that we're really trying to drive is value. And that is the factor that we think is most important when we think about loyalty in the stores. We think we do it better than anyone else in terms of really highlighting and differentiating the value that we see on every shop on every item for the customer. The local IO because they have a big obligation in terms of marketing is spending a lot of time differentiating in their local market whether that's being involved with the customer, ordering and merchandising locally, being involved in the community. There are countless I'd say small but meaningful examples of how the IO is serving their customer. And then ultimately what we look at as the kind of the report card for that activity is how are we doing on our internal surveys relative to customer satisfaction, which is a blend of all of those things. Are they getting value? Are they feeling the treasure hunt? Is the store clean and safe? That's been a new one, and the satisfaction levels that we're getting back in our surveys are very, very high. So engagement both electronically and then in-store feels right where we should be. So thanks.

Our next question comes from the line of Karen Short with Barclays. Please proceed with your question.

Hi, thanks very much. I want to clarify something. For EBITDA in 2019, I believe you reported an adjusted number of $178 million. I just want to confirm that this amount included public company costs, so are we only subtracting $1.5 million from that figure on an apples-to-apples basis when considering the margin in 2021? Can you clarify that? I also have a couple of larger questions.

Sure, Karen. It's Charles. Let me clarify. So as we look back, adjusted EBITDA margins in 2019, I think this is probably the easiest way to think about it were – the margins for the full year were about 6.6%. And so that's where in total, we would expect to approximate that level here in 2021. But as we think about how the quarters will flow as we compare against those 2019 levels, again, public company costs today are roughly a 30 basis points impact to us that we didn't incur in the first half of 2019. So as you think about modeling the quarters, keep that in mind, that we'd expect to see relative to 2019 roughly 30 bps of headwind in the first half of the year.

Okay. And then, I wanted to just talk about the IOs for a second. So the first question I had is, are you still planning on doing interest forgiveness in 2021? And then, I was wondering if you could give us just a bit of an update on the pipeline of IOs. But also more specifically, when some of these, I guess, newer breed of IOs and non-traditional operators will start actually operating stores. I know that you only started broadening your search in 2020 but maybe a little update on both of those would be great?

Yeah. I'll take the first, and then Charles you can talk about the forgiveness. But really, really solid pipeline, we've already deployed a few that have come in, in the early spring and have been trained. Really excited about just sort of opening up, what COVID has done for us in sort of turning the eyes of some folks from restaurants. So we'll wait a while before we call it a success. But certainly, it's been successful from the top line and the numbers coming in. And certainly from a training perspective, we're seeing good throughput through the system and sort of learning how to run a store.

And then, Karen with respect to – to COVID costs. And I think this is a comment on COVID costs broadly, not just the interest forgiveness. But yes, we would envision that continuing until we have really a change to visibility and a change in the environment. But as we think about 2021, we're expecting that to continue.

Our next question comes from the line of Simeon Gutman with Morgan Stanley. Please proceed with your question.

My first is a follow-up somewhat to John's question. So, maybe for Charles, first. Regarding the margin, I get the gross margin you'll give back assuming shrink ticks back up. On the SG&A side, I think you implied that your reinvestment rate is going higher. And I wanted to clarify, is that right, or are you just giving yourself flexibility in the model to be able to reinvest at a higher rate during the year?

Yes. Simeon, no, I think for us, it's not a change in terms of our approach to reinvestment. That just reflects the fact again for us going back to 2019, looking at those margin rates we very much expect that we'll continue to operate in 2021 in line with those levels. So yes, the benefits we saw are related to shrink. In 2020, we don't expect that to continue. But as we think about the rest of the P&L we expect it to be similar margins to 2019.

Okay. That's helpful. And then maybe to Eric or others. Thoughts on omni-channel. I know it's maybe more theoretical, but curious how much it gets kicked around as you think about the next one to two years of the business? Hey, Simeon, it's RJ. Yeah. No, we talked about it quite a bit. We continue to engage in dialogue with third-party partners on the technology side on the service side really just to stay close to the landscape and options that might be available to us. All that said, we've not changed our position on e-commerce in terms of priorities and that it is not a priority for us right now. We continue to be excited, and we continue to focus our attention on growth opportunities in front of us by way of real estate expansion, geographic expansion that comes with that, and continued opportunity within existing markets everything around comp sales. Specifically to technology, while not prioritizing e-commerce, we are very excited about the broader technology investments that we're making in the business. Ultimately, while we're investing for other more specific purposes, many of them would provide a foundation in the event that we do prioritize e-commerce at some point. And then the only other thing I'd add is as we've talked about before, marketing remains a big area of focus by way of digital. While we stop short of the actual transaction, there's quite a bit that we communicate through digital platforms around the assortment and the excitement in the store to raise awareness and increase engagement.

Our next question comes from the line of Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Thanks. I wanted to revisit the gross margins in Q4 for a moment. They were down 30 basis points, and I would like to understand the discussion regarding the holiday mix. Was there a change in this mix compared to 2019 that influenced the margins? Were there any specific factors that contributed to this? Additionally, did you notice any increase in shrink, which might explain your projections for 2021? Any insights on this would be appreciated.

Sure. Jeremy, it's Charles. Let me provide a little more context. As we look at Q4 sequentially, we see the impact of holiday mix going from Q3 to Q4. For Q4 margins, we are returning to historical levels. In 2018, the margin was 30.1%, and in 2019 it was 30.6%. The results we posted feel really good to us. There was possibly a bit more of a holiday product mix due to people being at home. We also experienced some modest headwinds related to commodity costs in proteins and dairy. We continue to feel the effects of COVID-related costs at the distribution center, which impact margins. Overall, I would describe Q4 margins as part of our normal quarter-to-quarter fluctuations. We are focused on managing the business for stable margins over the long term and feel good about our position.

Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Thank you for taking my question. I wanted to inquire about the real estate situation. I know you're planning to open 36 to 38 stores. How would you assess the quality of the real estate available to you? Are you experiencing lower rents? We've heard from other retailers that rents have decreased slightly. Additionally, I'm curious if you are finding better location options compared to the past.

I'll take that. This is Eric. I would start with we are seeing a really healthy pipeline. The pipeline is strong. We pretty much can tell you exactly where we'll open in 2021. So, it's going to be a good year. I would not say that we've seen a big influx of high-quality lower-priced deals yet. Certainly, I can be hopeful for that. But landlords have very strong balance sheets, as we found in other markets. And that takes I think a little bit more time to sort of flow through. We've tried to remain really flexible. All the markets we operate in across the West and in the East, we've been able to be flexible, able to split up a larger box, able to take a small box, able to take a larger box, something that's stand-alone, something that's in a larger center. Remaining flexible tends to get you the first call. We also drive traffic, which has been helpful to get on people's radar screens. So, similar to other areas of the business, the last thing I'd say is we've really invested in this area. I'm very, very proud of what we delivered in 2020. It was an exceptionally difficult operating year across a lot of fronts, but particularly in just getting stores open. And we were able to get very, very close to what we said we'd do. And that only happened because we invested in the right people and the team to hit that. So I think we built the team. We're going to be patient. We're going to be opening a lot of stores. We've gotten that message out. And I would hope that your question comes through in subsequent months.

We apologize, but that is all the time we have for questions. I'd like to hand it back to Mr. Eric Lindberg for closing remarks.

Yes. Thank you, guys. As always, we love spending time with you and engaging. Really appreciate all of your interest and your support. And I just thank you for jumping on this afternoon and spending some time with us. Thanks a lot.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.