Greetings, and welcome to Grocery First Quarter 2021 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. I would now like to turn the conference over to your host, Joseph Pelland, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining us on today’s call to discuss Grocery Outlet’s first quarter 2021 financial results. Joining me on today’s call are 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. This conference call is being webcast live and a recording will be available via telephone playback for approximately two weeks. It will also be archived in the Investors section of our website. Participants on this call will make forward-looking statements, including our outlook for fiscal 2021 and future performance. 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 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 will also 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. With that, I’ll turn it over to Eric.

Thanks, Joe. Good afternoon, and thank you for joining us for a discussion of our first quarter results. We are pleased to have delivered on our expectations in the first quarter as we’ve begun to lap the onset of the pandemic last year. Our ability to consistently execute at this high level would not have been possible without the hard work and dedication of our corporate and Independent Operators teams. I want to thank them once again for their commitment to our customers, local communities, and to our mission of touching lives for the better. Their combined efforts drove continued strong first quarter financial performance. Comparable sales decreased 8.2% following a 17.4% increase in the same period last year. New stores continued to perform in line with our expectations, contributing meaningfully to total sales volume, which was down a modest 1%. Profitability remains strong with adjusted EBITDA margin above 2019 levels. We attribute our continued strong performance to the steadfast execution of our differentiated business model. Our value proposition is as strong as ever, and our ability to deliver extreme savings, a treasure hunt experience, and a locally curated assortment in a friendly environment continues to resonate with customers. This was reaffirmed by our recent survey work, which shows that our customers continue to rate value as the most important criteria determining where to shop. Our customers remain extremely satisfied with the value Grocery Outlet consistently provides. We are confident in our ability to continue delivering industry-leading value as we have throughout our 75-year history. Turning to a few operational highlights from our first quarter, our purchasing team does an exceptional job of working with suppliers to ensure we are the preferred partner for opportunistic products. The flexibility of our buying model and our buyer’s expertise enables us to consistently provide the balanced assortment of opportunistic and everyday products that creates the wow shopping experience. At a certain level, our Independent Operators remained committed to helping their respective communities, their customers, and each other. They consistently keep customers up to date on the latest deals on brand name products and maintain a clean and safe shopping environment. Many of our corporate team members, myself included, have been fortunate this year to spend much more time in the stores with the Independent Operators. These visits are always a positive experience as we get to see firsthand the true commitment of our operators, while uncertainty and challenges remain, the morale of our Independent Operators is very high and their outlook is positive. On the real estate front, we continue to balance our openings between mature and developing markets to build our brand awareness and reach new customers. During the first quarter, we opened 10 new stores, closing one, bringing our quarter-end store count to 389. So far in the second quarter, we’ve opened six additional locations and continue to see new stores perform well across geographies. Within the next few months, we will be opening our 400th store in Hailey, Idaho, a town just south of the Sun Valley Ski Resort and east of Boise. In addition to creating local job opportunities, we look forward to becoming an integral part of the Hailey community. Consistent with our 10% annual target, we remain on track to open between 36 and 38 stores in 2021, with three to five of these stores being in the East, including the two that we’ve opened already year-to-date. As we continue to open stores, we also maintain a disciplined approach to reinvesting back into our existing store base. For these investments, we continually evaluate potential layout and fixturing updates to enhance the customer experience and support merchandising. Some recent tests include moving our produce section to the front of store and moving NOSH one of our highest performing categories into the first aisle. In addition, we continue to make in-store fixture investments to support purchasing and basket growth, including produce scales, new freestanding refrigerated fixtures, and new produce tables that enable our Independent Operators to better highlight our fresh offering. Ultimately, we want our stores to provide the optimal experience for customers. And this evolution is just one of the many ways we look to continuously enhance the customer shopping environment. Before turning the call over to RJ, I would like to take a moment to discuss the positive impact we have with respect to the environmental, social, and governance considerations outlined in our recent proxy filing. Our ESG focus reflects our commitment to our mission of touching lives for the better and to best serve the interests of all of our stakeholders. Having a positive impact on all of those we touch has been part of our history and culture at Grocery Outlet for 75 years and continues to be a guiding principle as we grow our business. Our business model drives a number of positive environmental and social outcomes from reducing food waste through our opportunistic purchasing, to providing healthy, affordable nutrition to all members of our communities, to the opportunity for the Independent Operators to achieve financial freedom while serving their local communities. We’re proud of the positive influence we’ve had throughout our long history. We continue to focus on building our business to expand our impact in the future. Of course, it all starts with our talented team, which includes company employees, as well as independent operators. They are the heart of who we are and what we do. We remain committed to their health, safety, and wellness. I believe it is vitally important that we create and foster a culture of inclusion and belonging that makes each of our employees and Independent Operators feel engaged, empowered, and safe. In conclusion, we believe that our commitment to our business model philosophy of reinvestment and growth, strong execution are behind the consistency of our financial performance. While we continue to navigate through COVID, we are encouraged by the health of our business and the strength of our value proposition, and the dedication of our independent operators and employees. We are excited by the long runway for growth as we expand our presence and remain committed to making the right long-term investments as we move forward. With that, I will turn the call over to RJ.

Thanks, Eric. We remain grateful to our network of independent operators, our buying and distribution teams, and our valued partners for delivering the wow shopping experience that our customers enjoy each and every day. Our strong offering of extreme values across an exciting assortment of opportunistic and everyday products continues to resonate with customers. We are seeing healthy deal flow as changing customer demand, product innovation, and ramping production are all contributing to excess supply. Our longstanding supplier relationships combined with our approach to supplier acquisition and development give us a competitive advantage and preferred access to surplus product as it becomes available. Several years ago, we redefined roles within our purchasing team to specialize activities around opportunistic purchasing, everyday products, and category management. This evolution increased the scalability of our model and has proven beneficial as we’ve expanded our supplier network, evolved our assortment, and extended our geographic and customer reach. Specialization allows our opportunistic buyers to deepen longstanding supplier relationships, develop strategic partnerships with high-growth brands, and expand our vendor base. We continue to hunt for the best deals while strategically partnering with suppliers to develop mutually beneficial solutions to a variety of supply chain challenges. Communication and connection with our partners have never been better. And we look forward to seeing many of them in person again throughout the remainder of this year. Our everyday sourcing and category management capabilities have also benefited from specialization. We continually evolve our assortment to offer customers the highest demand items as a complement to the ever-changing opportunistic deals. Our scale and strength of partnerships have increasingly supported the development of products and labels exclusively for Grocery Outlet customers. These items deliver great value with healthy margins and represent an important part of the wow shopping experience. We are pleased with customer response to these products and the resulting performance across a number of categories, including snack nuts, coffee, and bakery. Tailoring the assortment to regional preferences is another important element to category management. We’ve put specific focus on adapting our assortment to local tastes as part of our geographic expansion. This is a strategy that we deployed in Southern California, and we will follow a similar playbook as we build our presence in the East. We’ve recently hired local buyers to our East team to help grow our regional supplier network and to introduce more brands and items specific to local demand. This approach is tightly integrated with our centralized team, leveraging the investments we’ve made in infrastructure and supply chain to optimize the assortment across the entire network. We are pleased with the enhancements that specialization has introduced to our business and we believe we will benefit from this approach well into the future. Our assortment has and will continue to evolve as we look to provide the best balance of extreme value and consistency to drive customer loyalty and sales. Our success starts with the buy, but equally important is effective communication with our customers. We pay close attention to our customers’ satisfaction and engagement and the regular survey feedback we receive keeps us informed of trends in customer perception or behaviors. Our most recent survey shows that value remains the most important criteria when choosing where to shop and that our target customers are extremely satisfied with the savings we deliver. We continue to see leading Net Promoter Scores (NPS) of over 70%, which we attribute to our unique combination of unbeatable value, exciting treasure hunt deals, friendly customer service, and fun store shopping experience. Recent customer feedback also confirms the healthy state of the many value-based metrics we track such as depth of basket savings and number of extreme wow items per store. We believe that the importance of value only increases looking forward. As such, we continue to communicate the unbeatable deals across the full shop that our assortment provides. We’ve advanced digital media marketing with a focus on broadcasting our best deals through new platforms and at the local level. And we continue to introduce tools to support our Independent Operators and their local marketing efforts. Our marketing tactics will further evolve as we develop new and compelling ways to tell customers about our unique value proposition. In summary, we are pleased with the strength of our supply pipeline and we look forward to continuing to scale and strengthen the differentiated moat around our business. High customer loyalty is the reason we have been successful over many decades, spanning all economic cycles, macro and competitive environments. We continue to reinvest back into the business and remain excited about our long-term growth potential. I will now turn the call over to Charles.

Thanks, RJ, and good afternoon, everyone. Following our discussion of first quarter results, we will provide some comments on quarter-to-date trends and our outlook with respect to the current year. For the first quarter, net sales were $752.5 million, a decrease of 1% compared to the same period last year. Comparable store sales declined 8.2% against a 17.4% increase in the first quarter last year. Absolute customer traffic and average ring trends remain largely consistent with our fourth quarter; partially offsetting the comp decline was the sales contribution from 34 net new stores opened since the end of the same period last year. In the first quarter alone, we opened 10 new stores and closed one, ending with 389 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 underwriting expectations. First quarter gross profit was $231.9 million, down 2.2% from the prior year. Our gross margin rate finished at 30.8%, in line with historical results despite the impact of rising commodity and freight costs and normalized inventory turns. SG&A expense grew 0.9% to $188.6 million, due to the increases in store occupancy and maintenance costs related to store expansion and investments in personnel and infrastructure. This was largely offset by lower variable commissions to independent operators, as well as reduced travel and meeting expenses. Depreciation and amortization increased to $15.5 million, up 20.1% versus the first quarter last year, driven by store growth and capital investments. Stock-based compensation expense was $3.9 million in the first quarter compared to $20.3 million in the same period last year, as prior year expense included the initial vesting of performance options related to our 2014 equity plan. We incurred an effective tax rate of 5.3% in the quarter as a result of the tax benefit associated with employee option exercises. As such GAAP net income for the quarter increased 49.4% to $18.9 million or $0.19 per diluted share. With respect to non-GAAP measures, first quarter adjusted EBITDA was slightly ahead of our expectations at $48.8 million or 6.5% as a percentage of sales, as we benefited from the variable nature of our cost structure and strong expense management. Adjusted net income was $23.1 million or $0.23 per diluted share based on an average of 99.6 million diluted shares in the quarter. Turning to our balance sheet liquidity, we ended the quarter with $95.3 million of cash. We invested $36.6 million in total CapEx during the quarter as we continued to build new stores, reinvest in the existing fleet, and make ongoing investments in infrastructure and technology. Turning to current trends, second quarter-to-date comparable store sales are in the negative low double digits. On an absolute basis, average weekly sales trends have remained consistent with the first quarter, supported by the steady customer traffic and average basket sizes. As we look forward, several transitory factors are difficult to forecast, including the pace and degree of the vaccine rollout, local market reopenings, and the impact of stimulus funds on the consumer. Assuming current trends continue, we expect comp sales for the full second quarter will remain in the negative low double digits. As the operating environment evolves, we will leverage the inherent flexibility of our model and unique value proposition to best serve our customers. Turning to gross margin, we expect second quarter performance to be approximately 30.5%, which reflects normalized inventory turns. As always, we will continue to utilize the flexibility of our supply chain to mitigate headwinds, including commodity and freight costs. In terms of bottom line performance, we expect to deliver second quarter adjusted EBITDA margins, consistent with our financial model at approximately 6.5% of sales. Finally, we continue to make important investments in support of our future growth. Our CapEx plans remain unchanged for fiscal 2021 at approximately $130 million net of tenant allowances, reflecting the addition of 36 to 38 new stores, existing store maintenance and improvements as well as ongoing infrastructure and technology investments. In summary, we’re confident in the underlying strength of the business, which is supported by our strong inventory position and our high degree of customer engagement and excitement. We continue to manage the business for the long-term and believe that our model is uniquely positioned for success. As we look forward, we remain committed to achieving our long-term objectives of 1% to 3% comp growth, 10% annual unit growth, and consistent margins. And with that, we can turn it back to the operator to begin Q&A.

Thank you. At this time, we will conduct a question-and-answer session. Our first question is from John Heinbockel with Guggenheim. Please proceed.

Maybe for Eric or RJ. When you think about a backdrop, right, of above-average inflation, if that’s where we’re going to be for the next 6 to 12 months. So what changes in the model? And how do you manage that in terms of what products you’re seeing, buying, how vendors are changing, right? How you think about pass-through? What do you do differently and how does the – do you think your customer behaves differently?

Hey, John. I’ll take that. It’s RJ. Thanks for the question. I’ll – let me speak to inflation and probably within that question to more broadly, some of the other stresses that we’re seeing on the supply chain, which there are many well-publicized, and we hear directly from supplier conversations that we engage in every day. The economy is definitely in flux and we’re seeing those pressures come through. And I’d – I’d point to commodity cost increases; those have been pretty broad-based. I’d include some of the pressures around freight rates, labor shortages that we’re seeing within the supply chain as well. We’ve always said, and it’s true that this model is insulated to some degree on these pressures relative to more traditional retailers. That said, we do still feel the effects of these things. To answer your specific question about how we mitigate or what we do to react to these factors, I’d point to a number of things. First is, opportunistic supply. It’s a unique buying model, as you well know, and the way that we buy these products is very different from the conventional model where pricing may be more fixed and more impacted by some of the inflationary pressures. We have an extremely diversified supplier base. We do move in and out of products and between suppliers, and that then results in an ever-changing mix; products are changing all of the time. And I’d say that’s true for both opportunistic and everyday items. It’s something that our customers are used to. In fact, they enjoy about the shopping experience. It’s an important part of the treasure hunt that they expect and enjoy. And then I’d also point to how we price items. We’re pricing items every day, and the way that we do that is we price to value in the market. And so we keep very close tabs on our competitive price positioning. In that way, we’re able to maintain a high degree of flexibility in the way that we price products, the value that we deliver, and ultimately the healthy margins, and the stability of those margins that we’ve been able to deliver for many years and that we talk about maintaining well into the future.

Yes. And maybe as a follow-up to that, if you – I don’t know if you’ve done work lately on your basket, right, price spreads, right, versus competition, particularly traditional as they’ve gone more right running promotions through loyalty cards. Has the traditional gap widened as far as you can tell and if it has, are customers perceiving that?

Yes. So we track value a number of different ways, John. Basket savings is definitely one, but I’d point to others that we measure that we look at as a measure of value to the customer. The value has remained very healthy throughout all of last year and then into this year. We do price and measure value relative to promotional pricing as well. As I mentioned, we’re able to react very quickly to those changes that we’ve seen. So really pleased with the state of inventory, really pleased with mix between opportunistic and everyday, and really pleased with the value that we’re delivering to customers.

Thank you.

Thank you.

Our next question comes from Randy Konik with Jefferies. Please proceed.

Hi, can you hear me?

Yes, we can hear you fine, Randy.

Hey guys. So I don’t know if you went over this, but any kind of commentary around variability in performance by geographic region and an update on kind of the mid-Atlantic? Sorry, I got on a little late, so I didn’t know if you went over that already.

Yes. Hey, Randy. I’ll take the mid-Atlantic and then maybe Charles can jump in at the back end for some of the variability. But 2020 was a great year for us; we were onboarding a lot of sort of building the foundation and getting the team in place, feel really good about that. We do expect to open three to five stores there this year; we just opened our Mt. Airy store, which is our second store. They’re going to look very similar to what we have there already with slight nuances, obviously, beer and wine. But we’re liking the real estate opportunity, we’re liking the build as a team. We’re liking that we’ve gotten some of that foundational building piece done, and we really remain super excited about all the opportunities we’re seeing.

And then Randy, it’s Charles. Just to answer your question around sort of regional performance. It’s been interesting. As much as we’re in the early days of reopening here, it clearly has not been a binary start. In our California markets, we’re seeing a gradual reopening, but it’s very much a phased approach on a county-by-county basis. And then conversely, as we look at the Pacific Northwest, we’ve seen a recent uptick in COVID trends there, and so they’ve started to institute some new restrictions to sort of go on the other way. All that said, when we look at regional performance, the overarching trend of customers wanting to consolidate their trips to the store continues. So what that means is from a comp perspective, we’ve seen largely consistent comp performance in both Q1 and Q2 to date. So while again, reopening is starting, we have not seen that filter through to a change in grocery purchase behavior at this point.

And are you able to parse out at all how you’re thinking through the transactional changes from – I know that existing customers are consolidating trips. But are you able to kind of parse out behavior of what’s going on with new customer acquisition and stuff like that? Just give us some thoughts on what you’re seeing there.

Yes. Hi, Randy. Yes, we do. I’d say first, we’re pleased with the increases that we’ve seen in awareness, engagement, and trial across all customer types. So that would be those that shop us as a primary store, secondary store, and then tertiary shoppers as well. I’d also say we’re getting positive feedback or seeing positive feedback from our surveys from both new customers and those that have shopped us for longer periods of time. The customer appeal to this business is quite broad, so that cuts across lots of different demographic segments. Customers do shop us in different ways. And so you have them coming to Grocery Outlet, if they’re new, and they’ll fall into a different pattern than if they’re primary, more secondary, or tertiary, and that’s part of how this model works. Then you factor in the changes from COVID, you see different patterns there as well. Those are all things that we track and have a good pulse on from the survey results that we look at; overall the feedback there is positive, it confirms and it’s consistent with our own internal tracking of savings. Basket savings is strong. Good representation of wow items. The unique combination of our attributes resonates with new customers and all of that bodes very well. At the end of the day, value is very important, and we believe its importance only increases. For all those new customers that have shopped us in the past year, we expect that to continue to lead to more frequent trips and bigger baskets.

Great. Understood. Thanks guys.

Thank you.

Our next question comes from Michael Lasser with UBS. Please proceed.

Good afternoon. Thanks a lot for taking my question. I know you said that weekly volumes are consistent quarter to date with where they were in the first quarter, yet your weekly volumes, presumably in a year ago period were higher in the second quarter than they were in the first quarter, because as we line up the arithmetic math, the two-year stack is lower to start this quarter than it was last quarter. So do you think that there’s just as the world is reopening, there’s a rush to go back to out to eat and that shifting food at home to food away from home in your market? Or do you think that this is a longer-term trend where e-commerce penetration is higher and in that might decrease your addressable market as a result of having a little less e-commerce presence?

Yes. Hey, Mike. There’s a lot in there. Thank you. Yes, so I would say from our perspective, we’re in the middle of a very volatile time for the consumer; things like consumer trends, behaviors, and even customer psychology are really hard to predict, I think in the near-term. So we’re not going to try and do that. What we’ve done is manage our business through this pandemic the best we know how, controlling the things that we have a real impact on – great buyers, delivering super values to the stores, our operators delivering service, and kind of marketing and continuing to engage with new customers that are interested in what we offer. Big picture, we’re really confident that nothing has fundamentally changed with the long-term model delivering one to three comp growth, growing the store base 10%, filling in the white space, investing back into value, which is what we stand for, and then ultimately, growing earnings plus 10% per year. I’d say we got to 2021, and it really requires you to look at the year because of the noise a little differently. So for 2021, we’re really focused on sort of the absolutes of average weekly sales, traffic, and customer engagement that RJ talked to, and excitement in the store. To that, I’d say, look, after moderating throughout the second half of last year, sales have stabilized and that’s good. We’re really happy with the quality of the inventory, the operators’ merchandising, and then everything that RJ said about the customer, what they’re telling us through surveys. While there are definitely macro factors that can broadly impact consumer behavior in the short-term, we’re really confident that the long-term algorithm that everything I spoke to is going to return, the customer is going to return to value and that we’ll be back to sort of less noisy numbers in 2022.

Thanks. As a follow-up, even if average weekly volumes have been stable, the aggregate volume in the third quarter of last year was lower than it was in the fourth quarter. Should we assume comps will be less negative in the third quarter? And then assuming this average weekly volume number holds through the fourth quarter, then you might see a little slippage in your comp again in the fourth quarter. I know you’re not providing times, but to the extent that you could give us some perspective on how you’re thinking about that would be incredibly helpful.

Yes. Michael, it’s Charles. Let me – I’ll just say, there are so many sort of short-term factors here at play that are really challenging to pin down as Eric mentioned. You’ve got the pace and the time of the vaccine rollout; you’ve got reopenings by market; you’ve got macroeconomic factors including the impact of stimulus funds on the consumer. So as we look at all of those things and try to predict exactly how the near-term will unfold, we recognize we don’t have a crystal ball. And so it’s just really tough to pin down those numbers with any degree of certainty. Our objective was just to provide commentary with respect to what we’re seeing so far in the quarter, and give a sense to folks in terms of if those current trends continue, what it looks like. As the environment continues to evolve, as RJ mentioned, we’re going to do everything to leverage the inherent flexibility of our model to our advantage. We’re staying very focused on managing the business for the long-term and focusing on what we can control. So we think that’s a really good setup for us over the long-term.

Okay. Thank you very much and good luck.

Our next question comes from Paul Trussell with Deutsche Bank. Please proceed.

Hi, good afternoon. This is Krisztina Katai on for Paul. And thank you for taking our questions and for all of the details. So I wanted to stay with the top line: when we’re looking at your quarter-to-date performance, the low double-digit comp decline would imply to your stack of about in the mid single-digit range, which is really what you were putting up on a one-year basis, pre-pandemic. So how are you thinking about trip consolidation? That’s really been benefiting your conventional peers, re-engaging with some of your last consumers and just your overall ability that you have, so you can really reaccelerate the comp rate going forward.

Hi, Krisztina, it’s Charles. Let me provide, again, a little bit more color, again, some background noise there. But I think this is another example where it’s just important to distinguish between the absolute trends and the percentage comparison. As we look at absolute traffic and ring levels, we feel good that those levels were stable in Q1. That’s continued into Q2 here. Customers continue to consolidate their trips and purchase larger baskets. As we look at the year-over-year comparisons, admittedly, those are becoming increasingly noisy. You recall that last year is COVID to call that initial wave of demand came from both the surge in traffic and ticket. That’s the lockdown really to call customers who moved to trip consolidation. We saw traffic declines, but that continued larger basket size moderated over the course of 2020 and then again stabilized here in Q1. So that year-over-year relationship of traffic and ticket from a comp standpoint is changing. But again, those absolute numbers are staying stable, which makes us feel great. That’s really what we’re focusing on to look through the noise. So we feel great about, again, the long-term positioning of the business, the fact that our value orientation, we’re supremely confident we’ll win the day over the long-term. So everything we’re doing to make the right investments in the business and pursue those objectives, we think is the right thing to do.

Got it. And just wanting to ask a follow-up, what is your gauge of how you’re performing in your market? If we’re looking at your older markets and then the newer markets, maybe out on the East Coast. From the share standpoint, but also what are you seeing more broadly as it relates to competition and promotional activity?

Yes. Hey, Krisztina. Yes, as predictable, I think the result of everyone lapping 2020 COVID buildup from last year, we’re seeing a lot of promotional activity from other retailers. We’ve stayed pretty focused on maintaining the value proposition; we’re following our pricing strategy, moderating pricing really, really closely ensuring that we maintain that value proposition. We’ve seen this deep promotional environment in the past; I don’t think it’s necessarily sustainable. We’re not confident that the suppliers are willing to fund it. We’re pretty confident that from our past, retailers aren’t going to be able to sustain it. So we’re pretty confident it will taper by some period of time this year and we’re going to continue to ultimately play the game that we play, which is providing value on brand names and a local shopping experience delivered by the Independent Operators. So that’s what I’d say relative to sort of the competitive environment.

Great. Thank you so much. And good luck.

Thank you.

Our next question comes from Robbie Ohmes with Bank of America. Please proceed.

Hey, guys. I was hoping to get you to maybe help us understand what maybe the strategy is for your Independent Operators in this environment. Kind of what you’re seeing. Are they – with this volatility, did they overbuy? Are they having to be more promotional than they would like to be in some cases, because of the promotional environment you’re talking about? I’m just curious what they’re – how the Independent Operators are responding to all this, with gross margins coming in so much on a year-over-year basis and sales down so much.

Yes. Robbie, this is the environment we thrive in. This model was built for this; buyers are definitely on the offense going after product. Independent Operators are super flexible to take advantage of everything we’re seeing. I’d say coming off of one of the most difficult operating environments last year, anything that feels like that’s letting up a bit is the economy starts to reopen feels really good. Inventory has never been in a better position than it is today. I’d say that holds for the last year, so they’re really excited about the opportunistic products that they’re seeing and really excited about those opportunities. They might be a little bit more focused on the micro than we are focused on the macro, but we’ve been out a ton; I’ve been over to 120 stores this year. I’d say the morale is really high. We feel like we’ve gotten through the bulk of the difficult operating environment and they’re just looking forward.

And just to understand, is the traffic basically running somewhat flattish on a year-over-year basis? Is that the way we should think about what you guys are saying?

Yes. Robbie, it’s Charles. So traffic has been flat with respect to Q1 and Q2. And it really has been, I’d say, consistent traffic patterns since the onset of COVID. Initially, there was that demand push of customers into stores as they did that first wave of stocking up. But after that, it really has been trip consolidation that continues.

And then just real quick, just to understand on the Independent Operators, do they – with traffic, maybe not coming back as much as basket is kind of coming in. Do they try and buy more opportunistic or do they look for more in-line programs for you guys? How do they think about managing what’s going on?

Yes. So they’re looking at the order guide. There are probably a little bit more shorter-term focused than that. They’re looking at the order guide, which is a representation of what’s in the warehouse at that given time they’re ordering. They’re ordering six, seven times a week. So they’re certainly looking to build inventory on those items that are most exciting to the customer. What they’re saying to us is the order guide, which again is sort of viable for ordering, is looking really strong right now. With that opportunistic inventory, they know they have a greater ability to excite the customer and usually a little better margin. So that gets them really excited.

And just very last one. Are they seeing deflation given the promotions? Are they having to be more price aggressive versus last year at this time where you didn’t have to be priced aggressive at all?

Yes. So hey, Robbie. Yes, in terms of competitive promotion, I think Eric just spoke to this a little bit, but from a pricing strategy standpoint, from a marketing strategy standpoint, that is shared between activities that we would do centrally and the operators do in their stores. Ultimately, for us, regardless of promotional environment, because we’ve been through all of them, we’re focused on highlighting the best deals and the best values to our customers. The operator role here, which is extremely powerful, would be as they’re communicating a specific items that are in their store showing great value. They’ll post that on social media. They do have flexibility in pricing, so they can take a hot deal and make it even hotter and then promote that widely on social media. That’s just one example of many where the flexibility of this model allows them to adjust for the inventory in their store and the specific customers they have within their market. We talk about more local assortment and more specific to customer needs. That flexibility serves us really well in these months, but throughout time historically. Those are the types of activities that you see them engage in.

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed.

Hey everyone, good afternoon. Following up on the sales questions that you’ve been getting, if I guess our model is right, it looks like if this low-double-digit run rate holds that the sales per foot could be a little lower than where it was in 2019. Q2 is if that math is sort of right, I know you mentioned, not worried about long-term, we’re in a weird time. Is there any more parsing out you can do whether a new customers versus existing, because it implies something that either new aren’t repeat, new aren’t coming back anymore at the same rate or that existing baskets are changing. Can you share what’s changing if that’s the right way the data is shaking out?

Yes. Hey Simeon, yes, I can comment on that. So again pleased with the increase in awareness and new customers that we’ve seen over the past year. The trip consolidation does continue, that’s true for new customers as well as existing customers. I’d say there’s a lot of noise still in traffic patterns as we look at new customers, longstanding customers, primary, secondary, tertiary. We look mostly to levels of satisfaction and excitement they have with the shop, and we feel really good about that. In terms of what’s changed, I think you asked within your question, as we’ve surveyed customers continually, and I take you back to last year, I mean certainly noticed a change in terms of the increased importance of health and safety, the cleanliness of the stores. I’m going back to March, April, May timeframe last year when this pandemic hit us all. With that, we also saw increased importance and engagement with local. So the local nature of the shop was resonating. We also saw from surveys that they were consolidating trips and increasing the basket, reducing trips outside of the house. All of these things that we noted as changes back a year ago eased back from where they were in Q2, Q3 last year that comes with re-openings and the vaccine rollout and consistent with what we’ve observed in sales patterns. What I would say is consistent throughout or what has remained consistent throughout is the value we deliver; that’s remained strong. They’re enjoying the treasure hunt. The connection with the operator continues to be a differentiator and stock levels are healthy. Those are the things that we look at to best gauge future sales performance, not just for this year but ultimately for longer-term in terms of how we think about the business.

And then as a follow-up, within the low-double-digit negative quarter-to-date, are there any categories that are bucking the trend? Can you share with us if there are examples and why? I guess look, sales are declining given the comparison. Do you see a divergence between stores that are operated with more highly tenured Independent Operators versus less experienced ones? Do you see divergence is that opening up over the last couple of quarters or at least in the quarter-to-date trends?

Okay. Yes. So to answer your first question in terms of growth by category, I’d point to NOSH that spans departments, but it’s a group of products that continues to grow at rates above average, perform above average. We’ve got a nice and growing mix of the total assortment. I’d say further within that, we see varying ranges and levels of growth by store. I think getting to the second part of your question, NOSH is probably a good example where the operator for the items that they pull into their store and how they merchandise then caters to local customer preferences in demands. So those performance patterns, I would say are more specific to the market than they are necessarily to tenure or different characteristics of the operator. We’ve also seen some nice growth in fresh, nice performance in fresh produce and meat. We introduced fresh seafood recently, so that continues to increase in customer adoption. I’d also mention beer and wine as a category that’s performed well. We did expand spirits up in the Northwest over the past year, so that’s contributed there but also just demand given extended closures of bars specifically within that category.

Hey Simeon, Eric, I’ll take that second part of your question. So I’d say the only differentiation in performance that you’d see from tenured Independent Operators might be in some of the operator stores that have been in an existing market for a long, long time in the same store and they’ve just sort of had the market growth aspect that some of the newer operators and newer markets don’t yet have because of the lack of maturity of their store. But if you look across 400 operators and said, is there a meaningful difference in performance between tenured and experienced that would either get you one hopeful and excited or disappointed, I’d say no.

[Operator Instructions] Our next question comes from Karen Short with Barclays. Please proceed.

Hey, thanks very much. Well, I do have two questions, but first is on gross margin. You are very specific, I think on Q2 calling out 30.5%. So wondering if you could give a little bit more color on that, and that’s obviously down more than we would have thought. And then just on that front with respect to the environment broadly, inflation is obviously high. I’m wondering if you could just talk about how that would impact your buy opportunity just broadly. Does that actually make it easier or harder with respect to inflation and also rationalization of SKU's with respect to the manufacturers?

Yes. Hi, Karen, I’ll start with your second question; then maybe Charles can cover your first. Yes. I’d say neither positive nor negative we’re seeing, in terms of access to supply, we’re seeing incredible deals right now across all of our categories. We’re really excited. We remain bullish on future opportunistic supply trends; pipeline is strong, and we’re seeing deals come to us in a variety of ways. There’s, as you’re well aware, an unprecedented amount of supply chain disruption. You’ve got product innovation that’s alive and well. You’ve got production, I’ll say coming back online to catch up finally with demand, and that will continue through the rest of the year. So all of this contributes to more surplus product and we love the relationships we have and how well we’re positioned to capture those when they come through.

Yes, Karen, it’s Charles. Just to a little bit more color there, and I think RJ talked to a lot of this earlier, but it’s pretty unique the way our model allows us to mitigate some of these margin headwinds. You can’t fully ignore them, but it definitely helps us to absorb them. You can see that when you look back over a longer time period in terms of our margin performance through a variety of cycles, different inflationary environments. Q1, I think was a good example where we felt some of those higher commodity and freight costs. We’re back to normalized turns relative to where we were last year, and so really pleased with our margin performance in the first quarter. In Q2, I think some of those same headwinds are going to exist just to a greater degree, and that is really the thought behind our guidance is approximately 30.5% for the second quarter. But for us, again, those quarterly fluctuations are very normal for our business. We look at the margin and feel like it’s very healthy and continue to have confidence in our ability over the long-term to deliver margin stability.

Our next question comes from Oliver Chen with Cowen. Please proceed.

Hi, thank you. In your remarks on the regional specialization opportunity and also exclusive products, how do you see that manifesting in your buyer teams and/or your mix over time and/or thoughts on margins and how that may interplay? Thank you.

Yes. So we’ve managed changes in mix. I’ll say during shorter periods of time and then over a longer period of time with always delivering value and maintaining stable margins. We don’t anticipate nor are we planning for this continued evolution of the assortment to have any meaningful impact on margin, if that’s your question. The business has evolved over the years, and as we expected, and we’ll manage it to continue to evolve to stay relevant for customer demands and to always deliver industry-leading value. We expect to maintain stable margins across opportunistic and everyday. We’re very flexible. Both of those sides of the assortment, there’s an extreme amount of flexibility, and we’re able to capture the best opportunities that deliver the right balance of value to the customer and then margin to the business. As you talk about regional products being more relevant at a geography level or product development labels exclusive to Grocery Outlet, we think that only enhances the experience and overall strength of the business.

Thank you.

You bet.

Our next question comes from Joe Feldman with Telsey Advisory. Please proceed.

Yes. Hey guys, thanks for taking the question. I apologize if I did miss it, but you alluded to some in-store changes that you’re doing. I think maybe down in California or something. I was just wondering what kind of lift you might be seeing from changes like by moving the NOSH to the first IO. And what kind of drove the change in the first place? Was it a few Independent Operators did it, and kind of bubbled up and made sense, or just any color commentary about that would be helpful? Thanks.

Yes. Hey Joe, thanks for the question. Let me just set the tone for what we do relative to new stores. We’re always attempting to innovate. I would say each store opening is an opportunity to try something new or remove something around; keep in mind that each of our boxes can be somewhat dissimilar from the last; we’re not sort of stamping out a static box. A lot of the flexibility we look at, and I’d say, Mount Airy is a good example in the East is a result of the box that we took. It has a lot to do with the urban nature of the customer, walking to the store within a six-block area. So the changes are really in pursuit of where the customer already headed more fresh. So we put the fresh produce and meat, and some of the fish products upfront. Then I’d say NOSH, we’ve talked about that for years as a sort of a double-digit growing comp in category; lots and lots of new supply, we need more space. We’ve taken that to the first aisle. Those are a couple of examples that we go after. And look, we’ll play with them; the great thing about Grocery Outlet is we can test these quickly. If we like what we see, we can move them back into the company, to existing stores or on a go-forward basis to new stores. I’d point to a few things that we’ve done: the walk-in cooler for refrigerated alcohol is something that you’ll see throughout the walk-in dairy. We had no dairy 20 years ago; now it’s in fill-from-behind cases. Those are all just innovations that don’t seem big, but they’re big for the operator; they’re big for the consumer. We’re always trying to test things based on where the customer is and then pull them through the store design process, test them; if we like them, great. If we don’t, we throw them out and move on, but I wouldn’t want you to build in a whole bunch of sort of model increases based on this. This is something we’ve always done; we just thought it was important to highlight a few as it related to the East and all of our new stores.

Okay, that’s helpful. Thanks.

Our next question comes from Jeremy Hamblin with Craig-Hallum. Please proceed.

Thanks. I wanted to ask a question actually about labor as it relates to your Independent Operators. As we’ve heard many people, many restaurants and retailers having trouble with hiring, obviously it’s not something specific to your end of the business model, but certainly impacts your independent operators. I wanted to get a sense for what you are hearing from them in terms of whether or not they are feeling some wage pressures, whether or not they are able to staff the stores adequately, and whether or not it’s caused any disruption in terms of your weekly deliveries in the supply chain at all. Thanks.

Yes. Hey Jeremy, thanks for the questions. I would say no disruption. It is a more difficult environment. I think the biggest difference is restaurants closed down temporarily; a lot of people went away, found other jobs. I think rehiring in this environment from scratch is very, very difficult. Our operators have been in continuous operation, if nothing else, most of them were increasing the staff they needed to handle sort of pandemic volume last year. So they had been I think experiencing that same difficulty, but they had a staff and they managed to hold on to that staff. Many of them offered premium pay, during this period just naturally. This wasn’t compelled by any of the hero or hazard pay. It was just sort of what they wanted to do to make sure they could retain. I’d say operators because they’re entrepreneurs, they figure out the balance between labor and productivity. As rates go up, they have to become more productive and find ways to be more efficient. We obviously help on the backend through technology and supply chain, but they have all kinds of tricks up their sleeves in terms of flexible schedules, giving people time off, being a good employer, working the store themselves; they’re not just owners or owner operators, they’re side by side with their staff. I would say difficult, yes, disruptive, no. Will it return? Let’s see what the stimulus does. I think it’s very hard to compete against what’s going on in the stimulus environment for people that are making the decision between staying home and going to work. We find ourselves in that fortunate situation to have a place that people like to be employed and work productively in.

That’s helpful. And just as a quick follow-up, do you have a sense for what the average pay rate is up versus let’s say 2019 levels for your operating staff?

Yes, we really don’t. Jeremy, I would just offer perhaps anecdotally, when I hear an operator lament that it’s hard to hire people and you ask what the wage rate is, they’re needing to go $1 above whoever is close by; Starbucks is offering $16 an hour. They’ve got to be above that. So I might offer it’s $1 or $2 an hour over where it was this time last year, but it would just be anecdotal.

Great. Thanks. Best of luck, guys.

Thank you. Thanks, Jeremy.

Thank you.

Our next question comes from Brian McNamara with Berenberg. Please proceed.

Hey, thank you for taking my question. Can you talk about the two new stores you’ve opened year-to-date in the East? I know you have one in East Norton and another one in Mount Airy. I think Mount Airy has only been open maybe 12 days. But how are they performing in their early days relative to a new store you would open out West?

Yes. And yes, thank you for the question. Yes, it’s still early innings. We’re excited by the community outreach that we got particularly just seeing Mount Airy and the excitement around that opening, engagement from the Independent Operator in that community, and great customer feedback. Some interesting I’d say sales dynamics just because of the urban nature of that store, but we’re really happy with the positioning of both of those stores. I don’t know if you’ve had a chance to see them, but they’re very prominent in terms of retail locations, facade, and immediate impact in those neighborhoods. So way too early to call or way too early to tell in 12 days, but we’re happy with what we’re seeing.

And then just a quick follow-up on the East. It looks like you have several job postings for potential store locations across the six or seven Mid-Atlantic States. Are buyers or supply in general limiting factors in terms of the pace of your build out East? Do you expect an acceleration in store growth in the East next year from your current three to five unit pace? Thank you.

Yes. So let me just address the job posting comment. I think what you’re saying is you’re seeing probably store directors, store managers, store operator roles; our recruiting team does a lot of sort of initial trolling in the all job postings just to sort of generate people that think of themselves as directors but haven’t thought of themselves as being owners and operators. A lot of them are able to translate over to operator. Your second question was around just sort of additional growth in the East three to five, the number this year. Yes, I would like to see more. I mean, we’re certainly seeing a lot of mid-Atlantic real estate opportunities. I’m not going to put a finger on the page in terms of that number, but I would just tell you we’re building the foundation, the infrastructure so that we can have more stores back there. So I think that should be our last question. Is that right? Hey guys, we’re going to wrap up. Thanks a lot for joining this afternoon. I’m looking forward to continuing the dialogue in the coming days. So thank you very much.

This does conclude today’s teleconference. You may disconnect your lines at this time, and thank you for your participation. Have a great day.