Good afternoon, and welcome to Grocery Outlet call to discuss financial results for the fourth quarter and full year 2022 periods ending December 31, 2022. Speaking from management on today's call will be R.J. Sheedy, President and Chief Executive Officer; and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via telephone playback and on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of federal securities laws. All statements that address future operating, financial or business performance or the company's strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause 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 the company's periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company's website or on sec.gov. The company undertakes 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 today's call, the company 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 and the company's SEC filings. With that said, I would now like to turn the call over to RJ.

Good afternoon, everyone, and thank you for joining us. We are very pleased with our fourth quarter results and the strong momentum in our business. We continue to deliver unmatched value to our customers at a time when they need it most. As consumers are dealing with record inflation, they are turning to us for access to affordable quality food and our industry-leading savings. Our compelling WOW! shopping experience is attracting new customers and existing customers are spending more of their dollars with us. Fourth quarter sales increased 19%, driven by a 15.1% increase in comparable store sales. Positive traffic trends accelerated in the fourth quarter with a 10% transaction count increase versus the prior year. Our average basket size also increased in the quarter, up 4.6%. We opened 10 new stores in the fourth quarter to end the year with 441 locations. We are pleased with new store performance and recent vintages are ramping well. We are also encouraged by our momentum in new markets, including the East where comps continue to lead the company. We manage gross margin well despite continued inflationary pressures, increasing gross profit by over 16%. Better-than-expected top line and gross profit performance combined with store expense leverage resulted in robust bottom line growth. Our business fundamentals remain strong. The pipeline of opportunistic products is healthy and our assortment is more relevant than ever. Independent operators are serving customer needs and are engaging new customers with their local assortment and value merchandising, and our marketing efforts promoting value and savings are resonating with consumers. We are acquiring new customers, increasing share of wallet and customer satisfaction levels are high. The availability of opportunistic product remains strong. Our supplier partners are showing us healthy lists of surplus items, and we are working creatively to help them with their inventory challenges. Our scale, long-standing relationships and ability to move quickly, make us the preferred partner for our suppliers excess products. And our buying strength continues to improve as we grow. We are excited to host some of our key suppliers at our upcoming annual supplier conference in March. This is an important multi-day event that allows us to meet in person to collaborate and strategically plan our business together. Our independent operators are excited by the sales momentum and the many new customers they see in their stores. Operators manage inventory according to local preferences, and they are actively marketing within their communities. We were together with all IOs last week at our annual operator conference, and the energy was palpable. Our strong partnership and culture facilitated best practice sharing, the generation of new ideas and alignment on our shared objectives. IOs are also actively engaging with their communities, and they are giving back to local organizations in this time of need. We are inspired every day by their leadership and the creativity with which they run their businesses. Our mission of touching lives for the better has guided us for more than 75 years, and this greater purpose will continue to steer our future growth. Our business touches lives for the better in our communities, how we support our people and how we protect our planet. This shows up in many ways. We provide access to affordable quality food, and we save customers money. We give back to the communities in which we live and operate. We offer a platform for independent operators to successfully run their own businesses, and we offer opportunities for career growth and positive impact for our employees. We also reduced food waste, thereby helping to decrease greenhouse gas emissions. We manage our business for long-term sustainable growth, which allows us to increase our impact in each of these areas. And we are executing a strategy built on three primary growth pillars to help us achieve our mission. Number one, strengthening our core model; number two, evolving our business; and number three, expanding our reach. Let me briefly touch on each of these. Our first and primary growth pillar is to continue to strengthen our core business model. Our unique buying and selling approach has always been and will continue to be the growth engine of this business. It differentiates us and provides a compelling value proposition to a wide range of customers. We remain focused on deepening our value, strengthening the treasure hunt shopping experience, elevating operator support and increasing customer awareness, acquisition and retention. We always seek to strengthen supplier relationships and further develop opportunistic purchasing with new processes and investments. One current example is the introduction of cross-dock capabilities and new geographies that are closer to supplier inventory locations. These new resources will improve our flexibility and allow us to better serve suppliers when surplus inventory challenges occur nationwide. Independent operators are the face of our brand and our support helps them be more effective and successful. We have made recent investments in our operator support team to allow for more direct collaboration on sales, margin and efficiency opportunities. Many operating best practices were shared in last week's annual meeting, and we previewed a new operator-facing technology platform that will help IOs simplify and modernize the way they manage their business. We also continue to follow a test-and-learn approach to optimize our marketing strategy and investments. As part of that effort, we are more effectively leveraging data such as store attributes to gauge media effectiveness across markets and channels. Our second growth pillar is business evolution, and we are focused on advancing our model in several ways. Starting with the assortment, we are pleased with the incremental sales from our SKU expansion over the past year. Key focus categories have been NASH, fresh, ethnic and local. Unique and differentiated private label products represent the next multiyear phase of everyday assortment enhancement. This year, we plan to add leadership talent to build the strategy and foundation for this new offering. Over the next several years, we plan to develop and introduce private label items that strengthen the value proposition for our customers while driving sales and profit. We also continue to further digitize our business with more integrated end-to-end technology. We have a successful history of modernizing systems to improve capabilities and drive efficiencies. This year's system upgrades include product, inventory, financial and reporting platforms. These technology enhancements will provide new functionality and scalability to support key areas of our business, including purchasing, inventory management and store operations. In addition, these systems will provide a strong foundation upon which we will develop future customer and operator-facing technology. One example is our personalization app, which is currently being piloted in Washington State. This new program extends the treasure hunt beyond the four walls of the store and early feedback is positive. In addition to customer benefits, this app will generate robust shopping data to enhance our current marketing efforts and improve customer engagement over time. This year's technology upgrades will allow us to integrate more robust data analytics throughout our business. Future work will be aimed at improving data quality and integrating automated analytics to help with operations and efficiencies. Our third long-term growth pillar is to expand our reach by opening new stores, expanding to new geographies and developing new sales channels. We believe we have the potential for more than 10 times the number of stores we have today. We continue to manage short-term new store headwinds, which have delayed additional store openings. As a result, we now expect to open 25 to 28 net new stores this year. Our three-year pipeline is healthy, and we expect to be back to our 10% annual new unit growth rate starting in the second half of this year. Our plan for fiscal 2024 currently includes 47 new stores distributed more evenly throughout the year. As I mentioned earlier, we are very pleased with our strong momentum in the East as awareness of our brand continues to grow. We are also encouraged by early results in new states, such as Maryland and New Jersey, and we are excited to introduce the GO brand to many new communities. Store growth will be complemented by expansion into new sales channels. We are pleased with our e-commerce business with Instacart, DoorDash and Uber Eats, and we continue to learn and enhance our offerings with these partners. We view e-commerce as a great tool for us to build awareness and acquire new customers in both existing and new markets. In closing, I would like to thank the entire Grocery Outlet team and our IOs for their dedication and many contributions. We operate a very special business. The entrepreneurial spirit of our IOs, combined with the buying power of our team creates a powerfully unique customer experience. Our exceptionally low prices, strong product offering and continued investments in the business position us very well for future growth. I will now turn it over to Charles to discuss our financial results.

Thanks, RJ, and good afternoon, everyone. We were pleased with our fourth quarter performance, which exceeded our expectations on both the top and bottom lines. We ended the year with strong momentum as comparable store sales increased 15.1%. We generated a 10% increase in transaction count and a 4.6% increase in average basket for the quarter. We opened 10 new stores ending the year with 441 locations. Our robust comp growth, combined with the contribution from new stores led to an 18.9% increase in net sales to $930.8 million. Gross profit increased 16.2% to $281.2 million. We delivered a 30.2% gross margin, slightly lower than initial expectations due to cost pressures on commodity items. Overall, our gross margin performance was consistent with our historical fourth quarter range as our buying and planning teams continue to skillfully balance cost and value to the customer. Turning to expenses. Fourth quarter SG&A increased 14.8% to $230.2 million compared to the prior year. The increase reflected $22.1 million in higher store-related expenses driven by commission payments to IOs and store occupancy costs due to new store expansion. Corporate-related expenses increased $7.6 million, driven by higher incentive compensation, reflecting stronger financial performance versus the prior year as well as continued organizational growth and system investments. As a percentage of sales, SG&A decreased 90 basis points as leverage on store expenses offset higher incentive compensation expense. D&A increased 2.3% to $18.8 million. Share-based compensation was $8.2 million, reflecting the impact of grants made in the past 12 months as well as current expectations related to our performance-based share awards. Net interest expense increased 48.2% to $5.6 million due to the impact of higher interest rates on our variable cost debt which more than offset savings related to $75 million in reduced principal versus the prior year. Our effective tax rate during the quarter was 13.4%, which is below our normalized rate of approximately 28%. As a result of these factors, GAAP net income for the fourth quarter more than doubled versus the prior year to $15.9 million or $0.16 per diluted share. With respect to our non-GAAP performance measures, please note that we have updated our definitions of adjusted EBITDA, adjusted net income and adjusted earnings per share to no longer exclude the impact of noncash rent expense and the provision for accounts receivable reserves. For context, noncash rent expense and accounts receivable reserves were $6.9 million and $4.3 million, respectively, for fiscal 2022. Going forward, we will be presenting adjusted EBITDA and adjusted earnings based upon our revised definition only. In our press release issued today, we have provided a historical reconciliation for the past 8 quarters which breaks out these 2 noncash line items and bridges between our prior and revised non-GAAP definitions. For the fourth quarter, adjusted EBITDA based upon our prior definition increased 21.2% to $57.5 million or 6.2% of sales, reflecting our revised definition, adjusted EBITDA increased 24.3% to $54.3 million for the quarter or 5.8% of sales. Adjusted net income based upon our prior definition increased 24.4% to $24.9 million for the quarter or $0.25 per share. Reflecting our revised definition, adjusted net income increased 31.1% to $22.6 million or $0.22 per diluted share. Turning to our balance sheet. We ended the quarter with $102.7 million of cash. Inventory was in line with the third quarter at $334.3 million and remains healthy in terms of quantity, mix and turnover. Our fourth quarter CapEx, net of tenant improvement allowances was $44.4 million, reflecting new store growth and the timing of continued upgrades to our existing fleet and ongoing technology and infrastructure investments. On February 21, we refinanced our credit facility, resulting in lower borrowing costs and increased liquidity and financial flexibility. Our new facility includes a $300 million term loan and a $400 million revolver, allowing us to hold less cash on the balance sheet and thus offset the impact of higher interest rates. In addition, the new facility lowers our borrowing cost over silver by approximately 40 basis points. At closing, our pro forma capitalization includes a $300 million term loan, $25 million drawn against the revolver and approximately $70 million in cash. Next, let me provide some commentary on our initial outlook for both the first quarter and full fiscal year 2023. For the full year, we are projecting comp sales growth in the range of 4.5% to 5.5%. In terms of quarterly sales cadence, we expect comp growth in the first quarter to be approximately 10% with comps moderating throughout the year as we lap inflationary increases. We expect to open between 25 and 28 net new stores for the year with openings weighted towards the back half. We expect to open 5 stores and closed 1 store during the first half of the year. We expect to open the balance of our new stores and thus return to our annualized 10% unit growth run rate in the second half. In total, we project fiscal 2023 net sales of $3.85 billion to $3.9 billion. We expect gross margin for the first quarter and the full fiscal year of approximately 30.6%. For the full fiscal year, we expect adjusted EBITDA based on our revised definition to be in the range of $237 million to $243 million. This includes the impact of approximately $14 million in expense related to noncash rent and accounts receivable reserves. We expect first quarter adjusted EBITDA of approximately 6% of sales. We expect D&A to grow in the low teens on a percentage basis and share-based compensation of approximately $30 million for the year. Net interest expense is anticipated to be approximately $22 million based upon our recent refinancing and projected forward interest rates. We forecast a normalized tax rate of 28% and average diluted shares outstanding of approximately $101.5 million. We expect CapEx, net of tenant allowances of approximately $155 million, reflecting new store growth, upgrades to our existing fleet and continued investments in technology, supply chain and infrastructure. As a result, we expect full year adjusted EPS based upon our revised definition of $0.94 to $0.99 per share. In closing, we are pleased with our strong business fundamentals, and we are excited about the growth runway in front of us. We are grateful to have an incredible team of Grocery Outlet employees in our corporate offices, fulfillment centers and in the field who are supporting our talented IOs and bringing the WOW! shopping experience to our customers each day. We look forward to building on our current momentum as we continue to deliver long-term growth and value for our shareholders.

First question comes from Leah Jordan with Goldman Sachs.

I first wanted to check in on the bottlenecks to growing units this year. Where are you still seeing the pressure? Are you seeing any improvements? And what gives you confidence in returning back to that 10% growth? And is there any risk to some units slipping into '24?

Yes. Leah, thanks for the question. So a few things here. First, our real estate pipeline is really strong. We continue to find great real estate to support new store growth goals, the lineup of stores and opportunities for the next 36 months. It's healthy. We continue to be really excited about the potential that we have to open, as we've said, over 10x the store count that we have today. Recent challenges have never been an issue of real estate or site availability. The challenges have been, as we've said previously, with delays in permitting, inspections, equipment availability, and we've had difficulties with service and utility providers. A number of things in the store opening process have led to some of the delays that we've been experiencing. Just for perspective, prior to these challenges, timelines generally were in the range of 12 to 24 months. Each site is unique and a little bit different, but that was the general range. Now with these challenges that we've been experiencing, it's more like 18 to 36 months. So quite a shift in terms of timeline and getting new stores opened. What we've done as a result is a lot of adjusting in terms of processes and timelines. You think about all of the different parts of the new store approach, whether it's permitting, certainly everything around construction and equipment ordering, just to name a few. A lot of effort goes into getting a new store opened, and we've made a lot of adjustments. As such, we have had some store dates that have pushed back, which has resulted in some of the store counts from last year and then this year as well. We believe that the current new store estimate is realistic. We think it's risk-adjusted for the environment that we're in. It's provided headwinds don't get any worse from here. Taking a step back from all of this, we really view this as more short term, call it 18 months, between last year and the first 6 months of this year, a disruption to our long-term 10% annual new store growth goal. We're really excited to be back on track for the number of stores that will open in the second half of this year and feel confident with the expectation for 47 new stores next year and then ongoing at that 10% rate from there.

This is Jack on for Jeremy. My question kind of comes around the demand side of things. With the SNAP benefits expiring here on March 1, how do you guys think about that? Do you think of that as a net positive on the comp or a negative just around food cap benefits?

Yes, Jack, this is Charles. Today, if you look at SNAP for our business, it's low double digits as a percentage. We would not view a reduction in SNAP benefits as being a headwind for us. We can look back over time and see where we positively comped through cycles of reduced SNAP funding. You really think about our model, and it appeals very, very strongly to that SNAP value-oriented customer. We really view this as more of a tender type that our customer is using versus a customer that we're gaining or losing. When SNAP funding is reduced, in many ways, that is good for our model as those benefits decline; it does put more pressure on those consumers, and they come to us to stretch their dollar.

Regarding the guidance, as we think about the comps, what do you see happening to basket and the drivers, including inflation and/or disinflation as you look at that as the year goes on? And then a longer-term question on private label, it looks like a great opportunity here. What's going to be earlier versus later in the execution here? And which categories do you see the most opportunity? And are there any margin implications we should think about in our models as well?

Oliver, it's Charles. Let me start with that, and then I'll tackle how we're thinking about 2023 and then turn it to RJ to talk about private label. Really looking at trends here so far in the first quarter, food inflation has definitely proven to be sticky. We continue to see those price increases broadly across categories, including notably in the center of the store. Looking over the balance of the year, it is hard to say with certainty exactly how and when that unwinds. We do expect that inflation will moderate as we move through the year and particularly as we lap accelerating prior year numbers. Recall that the impact of inflation on our business is more muted versus others because of our opportunistic model and our ability to flex the assortment. As we think about traffic versus ring over the balance of the year, it's hard to say exactly how that unfolds given inflation. We do expect that both traffic and ring will be positive contributors to comp for the year. Traffic, as you can see here, has been the large driver recently as customers are really looking for value. Ring should moderate over the course of the year as trips increase and we lap those higher prior year numbers. We love that healthy contribution between traffic and ring expected to continue, but notably, we don't need that to drive strong comp growth.

Oliver, thanks for the questions. On private label, yes, we're really excited about this opportunity here in front of us. We think of it as a significant long-term opportunity and as an enhancement to our everyday side of the business. Think of this year as us building the capability and really setting the foundation, so building the capability and leadership talent, starting to build out the team. Then the strategy and the foundation for how private label will enhance the sum. We, as I think you know, have a very small amount of private label within our assortment today. It's low single digits. It's been more opportunistic in nature as we've introduced some of those items and those brands over the year. So really taking a step back from that and thinking long term about what we want private label to represent. The focus for us will be what sets us apart. First and foremost, it's about value. How we deliver great value to customers through a private label offering. The added benefit is the expectation for these items to serve as an additional destination, if you will, destination item assortment and trip driver along with the rest of the assortment that we have today. We also think we can represent the treasure hunt in how we manage this part of the assortment, so do it in a way that's unique to us and the expectation and the experience that customers have when they shop our stores. I'd say it's too early to give any specifics on items or categories as we're starting to put that strategy in place today. But certainly, we'll update you as we develop that and start introducing items and categories to the assortment.

Okay. Lastly, you cited a lot of great initiatives cross-docking operator support teams, the store attribution model. How would you prioritize which ones might be bigger needle movers if there's a way to dimensionalize the impact. They all sound quite like great drivers for both supply and demand optimization.

Yes, we have initiatives that we're pursuing. How do we prioritize? First, I'd say we're very deliberate and disciplined about first just choosing what gets on the list. There are certainly a number of things that we could pursue that we're not talking about because we are trying to stay focused and have the teams be aligned together, Grocery Outlet operator partners and as well as the partnerships that we have with suppliers. There's a longer list of things that we're not pursuing at this time, but we'll get to them. In terms of what's on the list, we think they all can be impactful. Some are bigger than others, but we think about -- and as we manage the business, always reinvesting back into whether it's people, process, systems or specific initiatives that make us better. The list of things that we're talking about are really more examples within the broader approach of investing always to make the business stronger.

Your next question comes from Krisztina Katai with Deutsche Bank.

I wanted to ask about pricing. I guess especially in light of some of the sticky inflation that you mentioned. Maybe if you could talk about your value gap in your everyday assortment. As we look relative to the competition in big box retail, also conventionals. And then as a follow-up, are you seeing any more promotional activity in the marketplace as value players like yourselves continue to gain share potentially at the expense of conventionals?

Yes. Thanks, Krisztina. So on your first question about pricing, we're a value retailer, so we're always focused on delivering value and maintaining that value through any type of macro environment, whether it's inflation or deflation. We pay very close attention to that. We measure it in lots of different ways, really as a proxy for the experience that the customer has, right? They shop us for value along with the other unique attributes of the business, treasure hunt, the operator model, customer service that they provide, the connection and community. But value and price is really important. As it relates to the current environment with inflation, yes, we've seen prices increase in the retail landscape, which we follow. We will wait for other retailers to raise their prices before we make any moves ourselves. The reason for that is always wanting to maintain that value delta. We can do that in a unique way. We always talk about the flexibility and the pricing adjustments that we make every day on the opportunistic side of the business, but we're also very flexible with our everyday assortment. We're not stocking any specific contracts or volume agreements; the assortment is very flexible. We don't have a rigid hierarchy like others do. We can move in and out of items and suppliers on the everyday side, just as we do on the opportunistic side. Through that, we can deliver great value without changing prices at all for making those adjustments. Where needed or where we are seeing cost increases, we do follow other retailers to make that price delta, and those deltas are even more important now because it's harder for the consumer to get more with their money. We see that in traffic trends and basket trends and the things that we discuss as it relates to share of wallet. Specific to the promotional environment, it remains stable. Traditional retailers are behaving more rationally. It has ticked up compared to a couple of years ago when it came down, but in light of inflation and margin pressures, others are feeling. It's been a very rational promotional environment, more targeted to specific items. We offer great unbeatable everyday value. We've operated in all sorts of promotional environments. This is nothing outside the ordinary. We continue to flex our pricing and assortment to adjust and react. But nothing in the current environment is anything that we haven't managed or that's outside the norm.

RJ, maybe just a follow-up on the technology investments. Can you -- have you guys framed the cost? Is it -- is it significantly incremental in 2023 versus 2022?

Yes. Let me comment first on just general technology upgrades that we're making, Robby, and then get back to your question on the cost itself. But just first to put this in context, we, as you know, have been investing in modernizing technology capabilities over a long period of time. We take a multiyear view of the road map, systems road map. What we're discussing for this year and future years is similar to the investments made in the past. If I look back over the last 8 years, we've made significant enhancements and upgrades to operating systems that run the business. I think about warehouses management systems, HR systems, our own proprietary ordering and distribution systems, just to name a few, and many other investments. I'm really excited about some of the system modernization efforts that will be put into place this year. We’re investing in new platforms to help our buyers with information and capabilities for everything in the buying process, mentioned new tools for store operators to help them better run their stores, driving sales, managing margin, operating efficiencies; I'm really excited about that; enhancing our data business intelligence and the reports and tools that we bring to decision-making. There's a handful of other operating systems around this that are part of this year's upgrades. We’ve always followed a phased approach to managing system implementations and system enhancements and this year is no different. In terms of expense, it's part of our normal CapEx budget that's been true in the past, true this year. We look to continue to invest in technology as we grow. Investment, whether capital or ongoing operating expenses, are part of the normal levels of CapEx and certainly within budget and long-term expectations as we've communicated.

That's helpful. And just another follow-up was just the East Coast stores, can you remind me, are they just catching up to the West Coast? Or is there something special you're doing with them for them to be outperforming the West Coast?

Yes. The East Coast is still a developing market. In terms of the approach there, it's always been about building infrastructure first, growing brand awareness and trial and then developing the market as we open more stores over time. That's the approach that we took to SoCal, if I were to use that as an example. We’ve seen the awareness and productivity grow in lockstep there, and it's what we're seeing in the Mid-Atlantic from a performance standpoint. That region has been leading the company in comp sales growth from the investments that we're making. Those investments include new stores that are ramping up, but also just in the market to raise overall awareness and drive trial. We’ve seen the productivity of stores follow suit. So I'm really excited about that. It has been the expectation as we've started to lean in more with those investments to support new store growth. As we continue to add store count in the East or any developing new market, everything improves from there, whether it's purchasing, the flywheel around recruiting and training operators. Certainly, scale helps with marketing and supply chain and field support. I'm feeling good about the momentum that we're seeing in performance in the East and the investments that we've made.

Actually, I wanted to follow up on that last topic Robby brought up. How is your IO pipeline in the East? Is it as strong as the West? How are you finding people in the East? And are you experiencing the same kind of real estate delays in the East as you are in the West?

Yes. The IO pipeline is healthy. Overall, it's healthy, and in the East, it's healthy, certainly different, as you don't have the base of stores in the East as you do in the West. I would remind you that as we recruit for operators, sometimes it's region-specific, but other times, we are recruiting them into the system. We have examples of operators running stores in the East that are from the West Coast, or they trained in the West Coast, and that's where we recruited them from. Don’t think of recruiting operators as region-specific. Of course, it's important, and that's part of the conversation, but it's about recruiting into the system and then it's about a preference for a geography. The things that attract operators in the West are the same in the East, the opportunity to own and operate your own business. This unique combination of independence, along with the support and scale of Grocery Outlet, the chance to work with your family, to give back and have a positive impact, and certainly financial upside. All of these things are attractive as well. The key difference for anyone living in or from the East is that there's maybe lower awareness for the outlet as they didn't grow up with it. There’s an education process there that's a bit unique. But we’ve got a great team in place and we're having lots of productive conversations with prospective operators. We’re feeling good about the pipeline. In terms of our real estate: yes, nothing specific or unique about the East compared to other markets; those challenges that we've been managing are pretty widespread.

Got it. If I could just follow up more on the IOs. I was just curious, from the event you guys just hosted, you said people were pretty excited about the coming year. I was curious if there's anything in particular you can talk about or anything that they're most excited about? Is it just the product assortment? Or is there anything like on the tech side that they've really been asking for or that they could use in the stores?

Yes, sure. Well, first let me comment on the meeting. It was great to be together with all of our operators. It had been a while because of COVID, and we hadn’t all been together as a group. It was really nice to be together, and the energy was really positive; they are excited for the year ahead. What they feel good about is definitely sales momentum, comps, and growing sales in their stores, more specifically traffic trends with new customers. They love seeing new customers in their stores and engaging with them about the business and the model. They are excited to tell customers how they can save a ton of money and have access to great food. Inventory and variety are really healthy. Operators are using the order guide every day. Their stores are full and able to represent great brands and value to customers; the treasure hunt experience is really strong. Marketing is resonating; they're seeing it in their markets. Customers are talking about it, both our efforts and their own. They’re also happy about the ongoing investments we have made in the stores, whether it's capital in the stores, shelving, fixtures, or general maintenance. You mentioned technology; this will be a big step forward for us this year. We’ve been operating on some of our systems for a long time, and we've previewed some of the new capabilities and systems. It will be an ongoing effort throughout the year prior to implementation just to manage the change. But they are excited about continued enhancements in the business and the momentum we're experiencing is great. The macro environment is favorable, but we're also pursuing initiatives and making investments to make the business better. So just feeling good overall.

RJ, 2 things I want to start with. You guys don't have set planograms, but as you think about adding assortment and then private brand, the complexity, right, of managing that assortment and maybe helping the IOs more. How is that dynamic planogram improving? And is this IT platform going to help with that? And then secondly, how do you think about private brand in your model; how do you think about the space you want to give it on the shelf, and how do you price it? Traditional retail would price some 15%, 20%, 25% discount versus the national brand. How do you think about that?

Yes. Let me try to answer both questions at the same time here. Think of private label as an enhancement to our everyday assortment. To the second part of your question, we already do that today in terms of pricing and value in everyday items compared to opportunistic. We’re showing value across the entire store and managing real time, balancing inventory and items and value as opportunistic is coming in and out, and we’re managing an everyday assortment. Think of private label as us being able to offer even better value to customers on the everyday side of the business along with unique items, destination items. You're right; we don't have planograms; but it’s really not so different than how we manage everyday assortment today. Private label items will just be a better, more sought after and unique value item in the everyday side of the business. We're not introducing private label to replace or as a substitute for opportunistic. We have plenty of room to grow and bring on more opportunistic items. This is structurally an enhancement to the part of the business that we already manage today, just with different items in our own brand.

Yes, John, it's Charles. We are sticking to the crawl, walk, run philosophy in the East Coast. For 2022, it was about 1/3 of new store openings in the East. For '23, it will be about the same, and then we will ramp up store growth there in 2024. It will be more of an even split between East Coast and West Coast new store openings. As you think about getting close to scale, that’s around 70-ish stores, yes, we think that's in the right ZIP code, and your math regarding the timeline is pretty accurate.

Firstly, just on the full-year guide within the context of inflation. Last year, inflation was running at a very elevated rate, which, I think, reflected in your comps. This year, inflation started to decline, and I think again, the guide probably reflects some of that. What could be a potential factor in driving upside potential to the model this year? Where do you think it could most likely come from? Secondly, regarding CapEx, it sounds like the store openings are going to be relatively consistent in '23 versus '22, guiding for 25 to 28 new store openings versus last year. However, the CapEx is stepping up from $130 million to $155 million. Could you unpack what the CapEx looks like for this year?

Sure. Corey, it's Charles. Let me take both. As we think about the guide for the year, potential upside comes from traffic and overall business performance. We love the momentum that we've carried into the first quarter, continuing to see an uptick in traffic as consumers again look to stretch their dollar. The wildcard is exactly how inflation moderates and the timing of that. Our CapEx spend for the year continues to be driven by store growth and fleet investments. It’s year-over-year up a little due to technology. Some system enhancements are driving this yearly growth. We're also seeing an uptick in inflationary costs for new stores and other reinvestments in the infrastructure. So a combination of those factors is driving a bit of higher growth year-over-year. However, we feel really good about those investments we're making back into the business.

I just have a couple of questions. So the first question is, your story has always been remarkably stable EBITDA margins. Right now, what you're guiding to is below what you've historically bounced around in on the margin range. Could you give a little more color on that? Regarding CapEx, your dollar amount is significantly higher than maybe we were mismodeling, with significantly lower units than we were modeling. Could you speak to that?

A couple of things, Karen. Starting with CapEx for Q4, yes the number was a little bit higher than we anticipated. The key driver was some timing impacts of store possessions and the collection of TI allowances from landlords. The guidance we provide is net of those allowances. That was probably the biggest driver versus our expectation relative to prior quarterly trends. With respect to EBITDA margin, we've always talked about our philosophy of maintaining stable margins over the long term. For us, it's about reinvesting back into the business as we look at the growth runway ahead. With respect to adjusted EBITDA, there's been a change in definitions; when normalizing for that, the rate puts you right in line with our guidance for fiscal '23. We'll continue managing the business for stable margins.

No, no difference. You bet.

So a follow-up on the store count. After several years of opening fewer new stores, do you see it becoming incrementally more challenging to revert back to historical 10% cadence in 2H, just from an execution standpoint, and some of the complexities of operating in an opportunistic market, getting IOs up to speed? Or does that muscle memory from pre-pandemic days make it smooth as permitting and supply chain headwinds normalize?

Yes. You need to do things differently at higher scale as the numbers go up. We’ve had a minor short-term disruption over the past 18 months, but I'm excited to be back on the 10% growth run rate later this year, feeling good about store count and our ability to get those stores open continually in 2024 and beyond as the base continues to grow and the new store count continues to expand.

Okay. Great. And then one more quick one. In the past, how has traffic been impacted by periods of disinflation at Grocery Outlet? You’ve laid out a number of promising initiatives, but what near-term actions might be most meaningful in holding on to some of your newer shoppers, especially as competitor prices start to come down?

First, our track record shows the model is very resilient and works well in all macroeconomic environments, whether inflation or deflation. In a recessionary or high inflation environment where the need for value is high, customer interest ticks up, as we're experiencing now. If I reflect back to '08 or '09, we saw that for two years. There is great stickiness in the customer experience; they discover us and continue to shop us. We’re actively pursuing marketing efforts to drive trips to gain share of wallet. Regardless of inflation trends, we are excited about the growth potential.

This is Michael Kessler on behalf of Simeon. It's been a choppy few years with swings from COVID, new unit delays. The earnings power of the business has stalled a bit since 2019 or 2020. So I'm wondering if this year can establish a new baseline for kind of return to mid-double-digit or mid-teens bottom line growth. Is that the right way to think about the post-'23 outlook? What could drive a higher or lower number from what you can tell right now?

Yes, Michael, this is Charles. We believe we can get back there. If you look at the guide for '23, adjusted net income growth is being impacted by higher interest rates. Year-over-year, despite paying down debt and our new credit facility lowering borrowing costs, base rates continue to have a significant impact. However, we feel great about the business's health and P&L. We are driving leverage, investing back into the business, and believe it positions us for long-term growth.

Got it. And just a quick follow-up. If, to the extent that comps come in better and top-line exceeds expectations, could you talk about the flow-through on those sales? Would you look to reinvest as far as that versus flowing it through to the bottom line?

It's always been our philosophy to reinvest back into the business. You can see some flow-through in the short term. We have fewer points of fixed cost leverage due to our model. However, in the near term, you could see some flow-through. Longer term, we look to invest when seeing improvements in gross margin. As we find ways to manage costs more efficiently, we will look to invest back into the business, leveraging our decades of success on the right strategies.

Thank you all for joining us today. I appreciate the support, and we look forward to updating you all on the next call. Thanks.

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