Greetings. And welcome to Grocery Outlet Third Quarter 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. We ask that all callers limit themselves to one question and one follow-up. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Chen, Vice President of Investor Relations. Please proceed.

Good afternoon. And welcome to Grocery Outlet’s call to discuss financial results for the third quarter for the period ending September 30, 2023. Speaking from management on today’s call will be RJ 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 at 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. And with that, I would now like to turn the call over to RJ.

Good afternoon, everyone, and thank you for joining us. We are pleased with our third quarter performance and the underlying trends in our business. We continue to drive industry-leading sales growth due to our differentiated value proposition and we are delivering on our mission of touching lives for the better. Customers are increasingly seeking value in their everyday lives and we provide unbeatable value and access to affordable quality food. Our third quarter sales increased 9%, driven by a 6.4% increase in comparable store sales. Transaction count remained strong in the quarter, increasing 9%, which is consistent with the prior two quarters. Traffic increases continue to be a combination of more new customers in our stores and existing customers shopping with us more frequently. Gross margin was also very strong in the quarter, up 80 basis points to 31.4%. This, together with sales growth, drove a 20% increase in adjusted EBITDA to $68 million. Adjusted EPS grew 24% to $0.31 per diluted share. While pleased with our third quarter performance, we experienced operational disruptions as we transition to upgraded systems. On prior calls, we have discussed our approach and history of investing in modernizing systems to improve capabilities and drive efficiency. We began to implement our most recent enhancements in late August, which include upgrades to product, inventory, financial and reporting platforms. One important component of this upgrade is a new store portal that will provide operators with improved data to make better purchasing, merchandising and marketing decisions. We are excited for the improved functionality, scalability and data analytics that this and other enhancements will provide. The transition to these new systems has resulted in ordering and inventory disruptions that have impacted third quarter and fourth quarter results. We have been partnering closely with our independent operators to minimize the impact on customers and sales. We have also elected to provide commission support to our operators as we continue to make steady progress adapting to the new systems. We anticipate the transitional impact to be largely behind us by the end of the year. Charles will provide more details in his commentary. While food inflation has been moderating, consumers are still challenged with higher food prices and other financial burdens. Our 40% average basket savings compared to conventional grocers saves customers money at a time when they need it most. We also continue to wow customers with an ever-changing treasure hunt assortment that includes savings on many items of up to 70% or more. This unique value proposition has been driving new shoppers to our stores throughout the year, resulting in ongoing increases in market share. Our recent customer survey shows that increased trip frequency is resulting in higher spending. Our consistently low prices and unexpected great deals are driving high customer satisfaction, as value remains the most important criterion for store visits. And our overall brand awareness continues to increase, with customers intending to spend more with us in the next 12 months. In terms of products, we are pleased with continued strength in opportunistic supply and the solid execution of our purchasing team. The closeout market remains strong and our growing size and scale provide increasing access to products. We remain highly selective with our opportunistic purchases and we continue to buy only the best deals that are presented to us. We look forward to becoming a more valuable partner to suppliers as we grow and expand our geographic reach. As one of the largest buyers of consumable closeouts, we quickly buy and sell through large volumes of product, which helps our suppliers manage their excess inventory. Suppliers have increased their manufacturing capacities over the past several years and more recently have been rapidly adjusting and innovating their product assortments. These dynamics create more opportunities for our purchasing team as we work in close partnership with our suppliers to help them with their surplus inventory situations. We continue to strengthen our longstanding partnerships with large CPG suppliers. We maintain strategic relationships throughout these organizations and we manage the partnerships for long-term, mutually beneficial sales and profit growth. New supplier acquisition and development remain another important buying focus. Many smaller suppliers rely on us to not only assist them with surplus inventory, but to also help them scale more quickly. We help them build production lines, and we provide a unique opportunity to grow their brands more easily than through other distribution channels. These partnerships allow us to offer our customers more brands, items and value, particularly within our fast-growing natural, organic, specialty and healthy categories. Our NOSH product offering appeals to a broad customer base and further strengthens the treasure hunt shopping experience that drives a bigger basket, more frequent visits and new customer acquisition. Turning to operator support. We continue to work collaboratively with operators to build programs and initiatives that support and enhance their business. Our relationship with our independent operators is a true partnership and we are continuously reinvesting to upgrade fixtures, implement new technology and processes, and deliver efficiencies that help them grow sales and profits. For example, we recently consolidated the purchasing of many store supplies that independent operators previously bought on their own. Our scale and distribution network allow us to save operators money on many items they use to run their business. The new store portal is another example of investments we make to help independent operators. This new system will help them more efficiently receive inventory, manage the assortment and access data to improve their operations. We look forward to realizing these benefits as we move past our initial transition period challenges. Average store operator income continues to grow, driven by the sales and gross profit growth that we split with our independent operators in the form of commission. In the third quarter, operator commission payments increased by low double digits on a comparable store basis versus the prior year. Commission growth has been very healthy this year and we look forward to helping independent operators with future efficiency and business enhancements. We opened eight stores during the third quarter, including our 450th store, which was also our first store in Las Vegas. We ended the quarter with 455 stores and we are on track to open 27 net new stores for the full year. We continue to be pleased with our new store performance, including those in our Southern California and East Coast markets. We also look forward to opening our first Ohio store before the end of the year, in addition to stores in other new communities within our existing supply chain reach. Our new store growth efforts for 2024 and beyond remain focused on organic growth, together with new real estate opportunities that align with our long-term geographic expansion and store growth strategies. Complementary growth opportunities include expanding strategic relationships with large property owners, evaluating opportunistic real estate lists and exploring strategic regional acquisitions. Our white space remains huge with the potential to operate over 4,000 stores across the U.S. Finally, we are extremely proud to have recently published our first annual ESG report. This report showcases the positive impact that we have on our communities, our people and our planet. Our mission of touching lives for the better has been core to the business from the start and fulfilling this purpose has resulted in positive environmental and social impact throughout our 77-year history. Our report highlights seven key impact areas. The first three areas positively impact our communities. First, we save customers a tremendous amount of money. Over the past five years, we have saved customers over $10 billion compared to conventional grocers and we aim to provide customers $3 billion in annual savings in 2024. Second, we provide access to affordable, quality food. About 10% of the U.S. population is food insecure. We increase food access in our communities by providing customers with affordable, quality food from trusted name-brand suppliers. And third, we give back to our communities, since its founding in 2011, our Independence from Hunger Drive has raised over $16 million to fight food insecurity in our local communities. The next two highlighted areas positively impact our people. First, our highly differentiated model creates unique opportunities for our independent operators to become local business owners and entrepreneurs. Operators enjoy the autonomy of running their own businesses, selecting localized products and providing outstanding service to their customers every day. We provide support to help them achieve the American dream. Second, we also create exciting opportunities for our employees. We continue to hire great talent to support growth and we continually reinvest in development and career advancement opportunities for our best-in-class team. In addition, our focus on our core values and ED&I initiatives help strengthen our culture and business overall. Our final two highlighted areas have a positive impact on our planet. Our opportunistic sourcing model reduces food waste by creating value from products that may otherwise be discarded. Our partnership with suppliers keeps food out of landfills, reducing methane emissions while providing accessible nutrition to communities that need it. Lastly, we are focused on improving operational efficiency in our business and we partner with independent operators to manage energy use in stores. These investments are good for both Grocery Outlet and independent operator profit growth, as well as for the environment. We are proud of the positive impact we have had throughout our history. As we continue to grow our business, we remain committed to exploring new and innovative ways to further enhance the positive impact that Grocery Outlet has on our communities, our people and our planet. In closing, I want to thank our amazing independent operators for their partnership and service. I also want to thank the entire Grocery Outlet team for all that they do, which enables us to support our independent operator partners and deliver outstanding service and value to our customers. We see tremendous opportunities ahead of us and believe that the investments we are making today will position us for long-term growth and increase profitability. I will now turn the call over to Charles to discuss our financials.

Thanks, RJ, and good afternoon, everyone. Our third quarter results reflect the continued momentum we are seeing in our business, which drove strong comparable store sales growth and margin expansion. For the quarter, net sales increased 9.3% to $1 billion, primarily due to a 6.4% increase in comparable store sales and the impact of new stores opened over the past 12 months. Our system upgrades impacted comparable store sales by an estimated 150 basis points as comps were running in the high single digits before the transition. Transaction growth remained strong, increasing 8.6%, slightly offset by a 1.9% decline in our average basket. We opened eight new stores during the quarter, ending with 455 locations. Our new stores are performing well and building in line with our expectations. Third quarter gross margin increased 80 basis points to 31.4% and gross profit increased 12.5% to $315.7 million. Healthy deal flow and a favorable buying environment drove margin expansion and more than offset inventory inefficiencies related to our system transition, which we estimate to have impacted gross margin by approximately 50 basis points. SG&A expense increased 8.7% to $278.1 million compared to the third quarter of 2022. The increase was driven by higher commission payments to independent operators, store occupancy costs due to new unit growth and higher incentive compensation expense reflecting our strong performance, partially offset by vendor receivable. Higher commission expense reflects strong gross profit growth, together with support we elected to provide to our independent operators in connection with our system upgrades. As a percentage of sales, SG&A decreased by 20 basis points to 27.7%. Net interest expense decreased 11.9% to $4.2 million due to a reduction in long-term debt versus the prior year and higher interest income, partially offset by the impact of higher effective borrowing rates. With respect to the bottom line, GAAP net income for the third quarter increased 55.1% to $27.1 million or $0.27 per diluted share. Adjusted net income increased 23.4% to $31 million or $0.31 per diluted share. Adjusted EBITDA increased 20% to $68.1 million for the quarter. As a percentage of sales, adjusted EBITDA increased 60 basis points from the prior year to 6.8%. Turning to the balance sheet. We ended the quarter with $155.7 million of cash, slightly above normalized levels, as we experienced longer payable processing times as a result of the system transition. We ended the third quarter with $308.6 million of inventory. Gross debt was $296.3 million at the end of the third quarter, with net leverage less than 1 time adjusted EBITDA. During the quarter, we generated $119.1 million of operating cash flow and invested $42.7 million in CapEx, net of tenant improvement allowances, primarily for new store growth, upgrades to our existing fleet, and technology and infrastructure investments. Now let me provide some commentary on our expectations for the fourth quarter and update our outlook for the full year. While our underlying business remains strong, we do expect the system transition to significantly impact financial results in the fourth quarter and to a greater degree than the third quarter, given the additional months affected. With respect to the top line, we expect fourth quarter comp growth to be approximately 2%, which assumes a 300-basis-point headwind from the system transition. For the full year, we now expect our comp sales growth to be in the range of 7% to 7.5%. In terms of unit growth, we expect to open 13 new stores in the fourth quarter and 27 net new stores for the year. We continue to expect fiscal 2023 net sales of approximately $3.95 billion. We expect fourth quarter gross margin to be approximately 30%, reflecting normal holiday seasonality along with approximately 150 basis points of impact due to the system transition. For the full year, we now expect gross margin of approximately 31.2%, a 70-basis-point improvement over last year. With respect to the bottom line, we project fourth quarter adjusted EBITDA margin of approximately 5% of sales, reflecting the previously mentioned system transition impacts along with commission support that we are electing to provide operators. For the full year, we now expect adjusted EBITDA to be in the range of $248 million to $252 million. At the midpoint, our guidance represents healthy bottom line leverage and approximately 16% adjusted EBITDA growth versus last year. Moving down the P&L. We continue to expect net interest expense of approximately $21 million for the year, which reflects projected forward interest rates on our outstanding debt. For adjusted net income purposes, we project a full-year tax rate of approximately 30%, along with average diluted shares outstanding of approximately 101 million. Based on these expectations, we now expect full-year adjusted EPS to be in the range of $1.04 per diluted share to $1.06 per diluted share. Regarding CapEx, we continue to project approximately $155 million for the full year, net of tenant improvement allowances, reflecting new store growth and ongoing investments in our store base and business infrastructure. In closing, I would like to take a moment to thank our incredible team of independent operators and employees for continuing to execute at a high level on behalf of our customers. Our underlying business remains strong and we are making important investments to further strengthen our value proposition and position us for long-term growth. We will now open the call up to your questions.

Thank you. Our first question comes from Leah Jordan with Goldman Sachs. Please proceed.

Good afternoon. Thank you for taking my question. I just wanted to start off with a couple of questions around the new platforms you implemented this quarter. What has been the biggest challenge related to the ordering? Is it just learning the new program, is there anything specific about the functionality that surprised you? And then you also said the disruption would be largely behind us by year-end, but how should we think about any impact into the first half of next year, especially any cost that we should think about annualizing? And then also, you mentioned that would bring better data analytics. Just curious, how quickly you think you can implement those learnings or have you any insights to share in just the first few months?

Hi, Leah. I will take the first couple of parts of that question and then I will turn it over to Charles to address your question around impact into 2024. First, just some more information on what I shared in my comments. We did upgrade a number of systems at the end of August, inclusive of product inventory, financial and reporting platforms. These upgrades include replacement of our AS400 system, which is our legacy ERP system with SAP, along with other third-party plus some new proprietary applications for buying in store operations. So that was the enhancement that was implemented back a couple of months ago. It’s the continuation of prior ERP upgrades that we have implemented over the past eight years to 10 years and consistent with the approach that we have talked about in making ongoing investments in modernizing our systems to build a foundation for future growth and scalability of the business model. As far as benefits, you asked about data and analytics, we really look forward to the enhancements that these new platforms will provide. They will give us new capabilities for how we manage the business, they will drive efficiencies through better data and analytics that will support us with better decision-making and that will be an improvement, enhancement for both the operator community as well for Grocery Outlet in total. In terms of the challenges and the disruption that we face as we transition to the new systems, we were challenged with inventory visibility and the impact here was on ordering and inventory management in general, and unfortunately, this disruption did have an impact throughout the business and the P&L. And notably, as mentioned in our comments, top line sales were impacted by lighter inventory levels and slightly lower variety. We had some pressure on margin as it relates to inventory inefficiencies and then SG&A was higher as well as we elected to provide operators with support. I will say that we did expect some disruption during this transition. It was factored into our previous guidance, just not to the degree that we have been experiencing it, and of course, we are very disappointed with the magnitude of it and we own it, we own where we are. And at this point, we have addressed the inventory visibility issues, along with other issues we experienced earlier on. So we have made very good progress there. We have also recently returned to more normalized store ordering practices. We have much healthier warehouse inventory levels and flow throughout the system. So we are feeling good about all of that. I will also say that we are still adapting to other parts of the new systems. We were working through some of these new processes and working our way back to what I would describe as more optimal inventory levels and margin management, and therefore, the impact that we anticipate throughout the fourth quarter here. Nevertheless, we are making good daily progress, and as I mentioned, we do anticipate the transitional impacts to be largely behind us as we get to the end of the year. And I will kick it over to Charles now to comment on 2024.

Yeah, Leah, this is Charles. I want to provide a bit more insight on costs and what to expect for the quarterly impact as we head into next year. Regarding the third quarter, consider this as having one month of impact within the fiscal quarter. As RJ noted, we experienced both revenue and margin effects in Q3, along with elective commission support. You will see similar effects in the fourth quarter, but to a greater extent, as we are encountering the full three-month impact during that time. We anticipate that over the course of the fourth quarter, all these impacts will ease. Although we are disappointed with the magnitude of the impact in the fourth quarter, we believe it will largely be behind us by year-end. Therefore, we expect to enter the new year without any lingering cost issues or other concerns related to the transition.

Okay. Thank you. That’s very helpful. So for my follow-up, I just wanted to ask about new store growth for next year. I know you are not giving formal guidance yet, but any color around how the pipeline is building, what you are seeing in the construction and permitting environment or how maybe the progress around discussions for potential M&A to get to 10% for next year? Thanks.

Yeah. Yeah. We are feeling good about future store growth opportunities, white space remains massive, you continue to think about that 4,000-plus number across the U.S. So plenty of opportunities out there for us. If I were to go back earlier in the year from prior calls, first goal was to get back to a 10% growth rate this year and we are happy to be tracking to this now with eight new stores that we opened in the third quarter and on track for 13 more in the fourth quarter that will get us the net 27 new stores for the year. So tracking well there. Regarding 2024 and the out years as we are actively working the pipeline right now for 2025 and 2026 as well, continue to see great opportunities. And the efforts underway continue to include organic growth, together with consideration of opportunistic real estate lists as well as smaller regional acquisition opportunities. And same as what we have talked about before, we think about all of those activities coming together to represent future store growth. We do try to stay close to that 10% target as we think about the moving pieces here. There are a lot of opportunities, certainly as it relates to dispossessed real estate and lists that are available that we are evaluating. And then more recently from the past call, past several months, opportunities around acquisitions, those are interesting for us to explore and how it might complement the other activities that we have underway. So feeling good about the number of things in the pipeline and we will provide further update more specifically on 2024 store count on our February Q4 call.

Great. Thank you.

Thank you.

Thanks.

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

Hi, RJ and Charles. Regarding your comp guidance, is your expectation that traffic continues to be very positive, offset by average unit retail? What should we think about in terms of average unit retail near- and longer-term? And as we appreciate a lot of the good changes on the new store portal. The issues you had, just what gives you confidence that they will be largely behind by end of year? And then a follow-up, as we think about new regions, it sounded like store productivity was in line with your expectations. I would just love your thoughts on your supply chain footprint. You gave more color on how you approach M&A, but that framework would be interesting to hear more about as well? Thank you very much.

Great. Oliver, it’s Charles. Let me tackle the first part of your question, then I will kick it over to RJ. So with respect to comp composition, we are really pleased with the health of the comp that we are driving, as you can see, continues to come from strong transaction growth. Customers clearly responded to the values and treasure hunt and love that we are seeing both increased visits from existing and new customers with high satisfaction. As it relates to the comp headwind as a result of the systems transition, that really did impact ticket. So ring, as you saw, was down a little less than 2% for the quarter, really coming from lower units and that’s both as a result of higher trip frequency. But, yes, lighter inventory levels and variety is a result of the system transition. AUR is still positive, but moderating very much as we expected, as we are lapping higher year-over-year inflation levels. And so, yeah, looking forward, from our perspective, it really is the same basket dynamics that we expect to continue. Just recall, for us, the impact of inflation, of deflation on the way down, it’s more muted because of our buying model. And then that AUR units in the basket dynamic isn’t necessarily directly comparable due to the changing nature of our assortment.

Regarding your question about the systems upgrades, we have resolved the major issues we encountered earlier related to inventory visibility and product flow challenges, both into and out of the warehouse. This progress is encouraging. Consequently, we have returned to more typical store ordering practices, which, along with healthier inventory levels in our warehouses and stores, is especially crucial during the holiday shopping season we are currently experiencing. We are still adjusting to other aspects of the new systems, which come with various new processes and functionalities. We're also working towards what we consider optimal inventory levels, factoring in our business management and overall margin and operations. Given the advancements we've made and continue to see daily, we are confident that we will largely resolve these outstanding issues by the end of the year. Regarding new store performance, we are pleased with the strong results from new stores across all regions. You also inquired about acquisitions and the supply chain footprint. As we expand our store count through organic growth or acquisitions, infrastructure remains a key element in supporting that growth. We have consistently invested in infrastructure ahead of the store count as part of our long-term growth strategy. This approach will not change as we pursue these opportunities, and we aim to maintain a healthy growth rate centered around a 10% annual growth target due to our infrastructure investments.

Thank you. Best regards.

Thanks, Oliver.

Thanks.

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

Oh! Hey. Thanks for taking my question. Does the technology platform disruption affect the timeline for e-commerce initiatives like launching your app, which I believe was planned for 2024?

Yes. Let me update you on our app and our personalized marketing approach. We have been successfully piloting the app in our Washington stores since the end of last year, so it has been in those markets for some time. Recently, we expanded to Oregon and the East. The California and Nevada stores have not adopted it yet. We had intended to launch it by the end of the year, but system upgrades have caused a delay. However, we plan to introduce the app to these markets very soon, likely around Q1. This has been a soft launch so far as we’ve learned about the operations and customer experience, which has been very positive. Customer adoption has been strong, and the feedback has been good. We are seeing a nice percentage of transactions through the app. Overall, we feel optimistic despite not having pushed any marketing efforts behind it yet. There are still opportunities for us in 2024.

That's helpful. My follow-up question is how does commission support work? How does it function for the independent operator and how do you decide the amount of commission support to provide in this type of situation?

Yeah. I will start and then, Charles, you can chime in here. In terms of impact to operators and the commission support, the inventory visibility and ordering challenges that I mentioned, of course, impacted the operator’s ability to manage the flow of product into their stores. Largely, they are pulling product in through the order guide and when these challenges started back in September, beginning of September, that was very difficult for them to do. We have been in very close communication with them throughout and we have been navigating these challenges together. And the partnership that we have with them, we talk a lot about the partnership and the relationship that we have with operators. It’s been a really big part to minimizing the impact that this has had on customers and the business. We are not happy with the magnitude of impact on the business. But overall, the customer experience, there’s not been a huge impact on that, a little bit lighter in inventory, some lower variety accounts, but together with everything the operators have done, we have been able to minimize that impact. We did elect at the outset of the implementation to provide operators with commission support, and the purpose for that was, one, in spirit of the partnership that we have with them, and then two, to help minimize the impact of this transition on their commission and income together with the work that we have been doing to minimize the impact on the customer and our P&L.

Yeah.

Anything else, Charles?

No. No. Just to add to that, Robby. As RJ said, it really is a reflection of the spirit of partnership, the relationship we have with independent operators. And so we didn’t disclose a specific dollar amount, but it is included, of course, in our SG&A for the third quarter and the estimated impact in the fourth quarter is included in our EBITDA guidance we provided.

Got it. Thanks so much.

Thanks.

Thanks, Robby.

Our next question comes from Krisztina Katai with Deutsche Bank. Please proceed.

Hey, guys. Thanks for the question. So RJ, I just wanted to follow up on the system upgrades. I mean, it does sound like you anticipated some disruption, but then it has actually come in well ahead of that, like, one, is that a fair characterization, and then two, is it fair to say that this doesn’t alter any of the margin structure into next year or the long-term and you will essentially be able to fully recapture all of the margin pressures once you lap the third and the fourth quarters?

For your first question, that is a fair characterization. We did expect this to be a major transition from a legacy platform that we have been using for several decades. It is something we have been working on for a couple of years now, and we have always been aware of its size and complexity. We anticipated some disruption, but certainly not to this degree or magnitude. I think you described it accurately. In terms of future impact, similar to the earlier question, we expect the transitional effects to be confined to this year, based on what we've already experienced in the third quarter, and largely resolved by the end of the year. You should anticipate us returning to previous performance levels and all the factors we've always discussed regarding consumer trends, top-line sales, and how we manage both gross margin and bottom-line profit.

Got it. Thank you. And just as a follow-up, I had a question on the independent operator pipeline, especially as you are planning your 2024- and 2025-unit expansion plan. Last quarter, you provided some very helpful statistics on average independent operator net income. But just the question is, do you have any concern in or any difficulty maybe attracting top talent in future years, especially just thinking if rates stay higher for longer, is that something that you are concerned about?

No, we don’t have any concerns about that. There are more than enough potential future operators. It’s a really attractive model. They get to own and operate their own business, benefiting from the combination of independents along with the support and scale that we provide. They work with family and have the opportunity for unlimited financial upside. We previously discussed the favorable economics and average operator income. There are plenty of leads available, and the leads continue to be strong, with around 30,000 annual leads mentioned last time. Our focus is on finding the best candidates and ensuring a good fit, which involves an extensive process that works both ways. It needs to be the right fit for them as well. So, we have no concerns about the independent operator pipeline to support future stores.

Great. Thank you so much.

Thank you.

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

Hi, thank you for taking my question. I have one more inquiry about the systems transition. I’m curious about the staging of it. You always approach these matters very methodically, taking the time to test and learn. Was there a specific reason for needing to switch on all those systems at once instead of staging it more gradually?

Well, first, as you know, Joe, over the past 10 years, we have modernized and upgraded many of our enterprise systems, including a warehouse management system and a relatively new point-of-sale system, as well as a new HR system. My point here is that this didn’t involve a complete overhaul of every single operating system. We have approached this more methodically. Regarding the current upgrades, we were replacing the product platform along with inventory, financial, and reporting systems, which required a larger implementation than what existed on AS400, our legacy enterprise system. We are replacing that with SAP, along with other third-party and new proprietary systems. Most of the functionality was previously on AS400, so we needed to undertake a more extensive implementation than a piecemeal approach.

Got it. Thank you for explaining that. I appreciate that. And then just a quick follow-up, with some of the new customers that you are continuing to see, I was just curious how the profile is any different maybe from the existing customers and how sticky they are, like are you retaining them?

Yeah. The profile is pretty similar. I’d say the one notable difference, consistent with my comments on prior calls is that, we are seeing particular strength with middle-income and higher-income customers. Within the new customers that we are seeing, there are lower-income customers there as well, we are over-indexing on middle to higher income where the need for value is more pronounced for that group or has become more pronounced throughout the year as inflation has carried on and so that would be the one notable difference. But overall, the profile is generally representative of our current customer mix as we are quite broad, as you know. And then in terms of stickiness, we don’t track specific customers. So I can’t speak to first trip, second trip and then the stickiness. We do know, however, that satisfaction levels are really high. This is from customer surveys that we do. We know that they like the savings and the products and the assortment that they are seeing in the store and we also know that their intent to shop more in the future is high as well. And we see that for customers that have shopped us more recently and also true for customers that have been shopping us for a long time. So that to us is a good indication of stickiness and then a future, I will call it, new base for loyal customers as we look out into 2024 and beyond.

Got it. That’s great. Thanks for that and good luck this quarter. Thank you.

Thank you.

Our next question comes from John Heinbockel with Guggenheim Securities. Please proceed.

Hey, everyone. I want to touch on two quick topics. First, can you clarify the impact on compensation for the quarter regarding ticket sales? Also, has the customer experience improved in October and early November compared to September? I imagine it’s crucial to enhance the experience before the holiday season, especially with Thanksgiving coming up. Secondly, I'd like to hear your thoughts on brand clustering and awareness on the East Coast. You mentioned Ohio and are opening in Pittsburgh, but how do you see the Western part of the territory compared to New Jersey and Baltimore? Is it more important to cluster in those areas, or is the focus on establishing good locations in order to reach the target of 70 locations on the East Coast so that procurement can ramp up?

Hey, John. It’s Charles. Let me tackle the first part with respect to your question around ticket and the basket. Yeah, as I mentioned, really the comp headwind we saw in the third quarter, it impacted ticket, and specifically, it was lower units. So we are not having the normal sort of levels of inventory in stocks and variety as a result of the system transition was really the headwind there and would expect that continues to be the driver of the headwind in the fourth quarter. As I mentioned, a bigger comp impact because you have got the full three months, but do anticipate that that improves over the balance of the fourth quarter.

And that’s really to the second part of your question. The customer experience has improved where we were a little bit lighter in inventory and variety impacting the basket. That has since improved quite a bit. And so still a little bit to go, but we feel really good about the inventory levels and what’s represented in the store now and so the experience is even better, and as you know, an important time of the year for us. And then, as far as clustering goes, yeah, that is our approach. We do try to cluster as best we can. Of course, you have real estate availability and timing that you can’t do it exactly to how you might draw it up from a brand awareness and support standpoint. But we think pretty close within the geographies that we are looking at. We have our first store in Western Pennsylvania recently opened. So that will carry over now to Ohio, just across the border for our first store and so very close markets there. And then we are building the brand awareness, whether it’s in Maryland or New Jersey, as we continue to infill there and so while these are different markets, still trying to stay more concentrated rather than opening a store in Florida or opening a store in Texas or where have to be really, really spread far apart. So we do try to follow that clustering strategy as part of our real estate growth strategy.

All right. Thank you.

Thanks, John.

Thank you.

The next question comes from Mark Carden with UBS. Please proceed.

Good afternoon. Thanks so much for taking my questions. So you guys talked about strength continuing in the closeout market. How is the product pipeline shaping up relative to what you have seen in the past few quarters and then for how long would you expect the CPG innovation-related opportunities remain elevated going forward?

The pipeline continues to be really strong, Mark. It has been the case throughout the year. I’d say consistent where we are, well, third quarter and then where we are in the fourth quarter here, consistent with the strength that we have seen throughout the year, meaning it’s broad across categories, it’s broad across suppliers, there continues to be a lot of positive momentum in terms of the breadth and the depth of the lists that we are seeing. And you asked about innovation. Innovation is one of several trends that continue to benefit surplus supply in our business. First, I’d say, forecasting continues to be really hard. That’s been true throughout. I think it continues to be a challenge for suppliers and any time there are these imbalances that yield surplus inventory. Innovation, as you noted, that has increased new items, new brand extensions, brand label changes, as consumer preferences or changes, innovation goes along with that. I see that continuing well in front of us and so that’s a positive trend for us. And then just changes in the assortment more generally, there’s been a lot of that and anticipate that to continue as well. So no reason for us to think, we certainly haven’t seen any signs of that slowing down and we expect that strength to continue into next year.

Great. Thanks so much. Good luck.

Thanks, Mark.

The next question comes from Corey Tarlowe with Jefferies. Please proceed.

Great. Thanks. I was wondering if you talk a little bit about your price gaps relative to the competition? So in recent months, I think, some of your competitors have gotten a little bit more aggressive on pricing. Have you noticed as a result and a need to adjust your prices accordingly, and if so, how do those price gaps compare to what they have been in the past?

The price gaps are very healthy. We always are managing value. We look at it a lot of different ways and that’s both for everyday pricing and promotional pricing. We have seen a little bit of a tick up in promotional activities. Nothing that concerns us. We have been at this business for a long time in all types of promotional environments and our value continues to show a really nice spread and it’s the reason why we have seen such healthy growth this year. We maintain the basket savings, and the target there is 40% relative to conventional grocers. That puts us at around a 20% basket savings to the big discounters in our markets. And at a time like this, when inflation is really high for food and then for everything else, consumers are finding us as the place that offers the best value and access to affordable food compared to anyone else out there. So we will continue to keep a close eye on that. As the promotional environment changes, we will adjust accordingly. No concerns with a slight increase there and feeling really good about the value that we are delivering to customers and the trends that it’s driving.

Great. Thank you very much. Best of luck.

Thank you.

The next question comes from Michael Baker with D.A. Davidson. Please proceed.

Okay. Thanks. I am curious about the, what would your comp guidance have been with, so I guess your comp guidance would have been 500 basis points or 300 basis points better without this, I am sorry, it would have been about 5%. So still a little bit of a slowdown from what you would have been at about 8% without this issue. Why the slowdown? Is that just sort of being conservative? You guys always seem to guide conservatively or is there another reason why even adjusting the systems issue back, the comps would slow?

Yeah. Mike, I think, when you do the math and look at some of the stack comps, you would see once you adjust for the system impact, you are going to see pretty steady performance as it relates to the guide and so it really is more of a reflection of just lapping higher numbers from prior year, both with respect to increases in traffic that we were driving last year, as well as just higher inflation levels impacting the basket.

Okay. That makes sense. If I could ask a follow-up, it seems like we backed into your guidance. By the end of the second quarter, you adjusted your guidance downward, and then you provided some insights for the third quarter. From that, it appeared you were expecting something around 2 to 2.5 before the systems issue arose. Now, if we disregard the systems issue, it looks like your plan is closer to 5. So my question is, without the systems issue, would your fourth quarter outlook have been more optimistic than before? In other words, is the fundamental performance of the business actually better than you initially anticipated, excluding the systems issue?

Yeah. Again, just to clarify there, Mike. So we have not previously commented on fourth quarter comps. Again, we provide kind of a range for the full year and the current quarter commentary, if you will. So I can’t reconcile the numbers you are speaking to other than to say for us, again, as you normalize for the system transition impact, we are feeling really good about the underlying health of the business as it relates to comp and particularly the traffic that we are driving into the stores as customers are really responding to the values we are offering and everyone continues, while inflation is moderating, absolute prices remain really high, and so consumers are seeking us out.

Yeah. Understood. But understanding you didn’t give fourth quarter guidance in the past, I understand that, but you gave full year guidance. We knew the first half and you gave third quarter guidance. So I can back into you have implied, if you will, fourth quarter outlook. I guess that’s what I was referring to. But fair enough...

Yeah. We could provide a full year range, but I get your point.

Yeah. Okay. Appreciate the color. Thank you.

Thanks.

Thank you.

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

Hey, guys. It’s Michael Kessler on for Simeon. Thanks for taking us. My one question, just looking at Q4 related to a prior question, the Q4 outlook, it looks like it’s implying about 100 basis points of potentially lower margin lease versus the consensus setup and where we were thinking. As far as the kind of the recapture potential for next year, the fact that it could be mostly resolved, does that kind of mean that we should be seeing some sort of like relatively comparable bounce back next year as we move into 2024 or is there also some sort of component of higher run rate costs associated with the new systems that kind of just speak to the evolution of your systems and the business as it scales?

Yeah. Michael, it’s Charles. I’d say, it’s premature for us to provide specific guidance. I think RJ’s reference was with respect to the fact that we don’t expect to see any lingering margin impacts going into next year. But, again, at this stage, we will stick with our current cadence of providing fiscal year guidance on the February call. But, again, in terms of our orientation, we are feeling great about the underlying health of the business, really looking forward to next year. Again, value is resonating with customers, the buying environment is strong and so we know we will be well positioned for whatever the backdrop exactly is for fiscal 2024 and we will provide all that color on the next call.

Okay. Thank you.

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

Thanks. Sorry, one more follow-up here on commission support. Just in terms of dollars and cents, the commission support, is that going to be higher, I would assume, in Q4, because of the bigger impact to comps than the total value in Q3? And then, secondly, if we kind of back out the gross margin impact here, you have obviously had other strong years on comps, but it looks like your structural gross margin maybe is a little bit higher than what it had been pre-pandemic. But just wanted to see if you could comment on that and any particular driver of that or is that just quality buying environment and still a little bit of inflationary pricing offset by costs coming down a little bit?

Sure. So as it relates to the incremental commission support, yes, in the fourth quarter, we do expect that it will be a larger impact than the third quarter, again, for the same reasons that we are seeing a larger impact to both comp and gross margin with the additional months in the fourth quarter. That again is all reflected in the fourth quarter guidance that we provided. As it relates to sort of the normalized margin for 2023. Yes, we feel, again, it really is a reflection of a variety of things. It is a favorable buying environment. The team continues to do a great job and we continue to see great deals across the assortment. So, again, premature for us to say exactly what the environment will look like in the next year, but feel great about the positioning as we enter fiscal 2024.

Great. Thanks for taking the questions. Best of luck.

Thank you.

Thank you. At this time, I would like to turn the floor back over to RJ Sheedy for closing comments.

Thanks everyone for joining us today. Appreciate your support and look forward to updating you on our next call. Have a great rest of the day. Thank you.

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