Greetings, and welcome to Grocery Outlet’s Fiscal Third Quarter 2024 Earnings Results Conference. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Christine Chen, VP of Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the third quarter for the period ending September 28th, 2024. Speaking from management on today's call will be Eric Lindberg, Chairman of the Board and Interim President and Chief Executive Officer; and Lindsay Gray, Interim Chief Financial Officer and SVP of Accounting. Following prepared remarks from Eric and Lindsay, 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 on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of the 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 in the Investor Relations section of the company's website or on sec.gov. And now I will turn it over to Eric.

Good afternoon, everyone, and thank you for joining us. Before we get into the review of the third quarter, let me just acknowledge that we are reporting our results in a transitional moment. Last week, we announced that RJ. Sheedy agreed to step down from the President and CEO positions and from the company's Board of Directors. I want to thank RJ for all of his contributions over the last 12 years. RJ has played a critical role in scaling and evolving our business, helping to set our foundation for the future. I have returned to Grocery Outlet full-time serving as Interim President and CEO. This is my first week in the role and I can honestly say that I'm really excited to be back. I am working closely with the Grocery Outlet team and our independent operators again. The board has retained the leading Global Executive search firm to begin the process of hiring a permanent President and CEO. Until then, I'll be fully engaged in the business and plan to make significant progress on the priorities, which we’ll share more details on during this call. As I told our team and our operators last week, I’ll reiterate to you today, we have made a leadership change, but we are not changing our underlying strategy or commitment to what has differentiated us for almost 80 years. Grocery Outlet delivers unbeatable value, a unique treasure hunt shopping experience, and amazing customer service through our best-in-class opportunistic buying model in independently operated neighborhood grocery stores. We have proven over many years that when we execute, our value proposition resonates across demographics, geographies, and almost any macroeconomic environment. This transition is about refocusing on strong execution and doubling down on that differentiated value proposition. I'd like to share my perspectives on four areas: where we are today, our Q3 highlights, where we'll be focused in the near term, and implications on our guidance. Let me start with where we are today. First on systems. In August of 2023, we transitioned to SAP from our legacy systems and experienced significant issues, including poor data visibility, slow system speeds, and a loss of tools and functionality. These issues hurt our buyers’ ability to write purchase orders efficiently, our inventory planning and supply chain teams’ ability to accurately manage inventory, and our operators’ ability to see real-time inventory in their order guide to bring product into their stores. The impact on the business has been significant. We have made substantial progress over the last year, including ending operator commission support. While the new system is fully functional, work remains to improve visibility into additional operating data to increase speed and to refine the tools that we and our operators use to manage the business. This work is critical to executing our dynamic business effectively. Next on execution. The disruptions from our systems transition strained our organization and resources, making execution of the core business more challenging. Furthermore, we have a list of great growth initiatives that we've covered with you on previous calls. But upon reflection, we probably have tried to do too much at once, further impacting our everyday execution. We are going to stop pursuing any of these exciting initiatives we have, but we need to be measured in the pace of the rollout as we prioritize our execution. And finally, on value. As discussed on the call in Q2, we missed the mark on value earlier this year due to a combination of pricing actions we took to reestablish healthy margins that coincided with competitive pricing that picked up. For years, we have measured our value delivered to customers through a series of metrics. First, the total percentage savings we deliver to customers on their basket. We target approximately 40% savings versus conventional groceries and approximately 20% savings versus discounters. Second, we target price parity with deep discounters on a list of key commodity items, such as milk and eggs. Third, we measure the share of sales we generate from items with more than 60% savings versus conventional retailers. This captures the extreme value that the treasure hunt experience in our stores represents—the deals that our customers tell their friends and family members about. As we look at these metrics, we feel confident about where our overall basket savings level and commodity pricing are sitting right now. However, we still have some work to do on delivering the extreme 60% value items consistently to our customers. We made strong progress on restoring value through Q3, and relative value has improved. Our value is strong, and we are on the right path to where we want to be. We just need to execute better in this area. Let me share a bit about third-quarter results. While we are disappointed with our weaker comp store sales of 1.2% given the execution issues I mentioned above, we delivered strong double-digit top-line growth. Our two-year stacked comp was a healthy 7.6%, ahead of our long-term algorithm. Our comp transaction count was up 2% in Q3 and 10.6% on a two-year basis, showing that despite execution challenges, our model continues to resonate. We opened five net new stores, increasing our store count to 529 locations at quarter end. Our new store growth algorithm is back on track. Our gross profit margin was on plan and this flowed through to a beat on adjusted EBITDA. Lindsay will share some more of those Q3 results in just a moment. This is a great business, and when we execute, we deliver industry-leading value through a unique shopping experience that can't be beaten. My near-term priorities are to refocus on the core tenets of this model. Number one, it all starts with value as mentioned. We must consistently deliver across our key value metrics to create an exciting treasure hunt shop every time the customer steps foot into one of our stores. The closeout buying environment remains very healthy, deal flow is very strong, and we believe that we are still the best partner in the industry. Consumers continue to prioritize value, and we are well-positioned to capture growth in this environment. Number two, supporting our independent operators. The systems disruptions have made the last year incredibly challenging for operators and the inefficiencies have pulled them away from doing what they love—serving their communities. Being an independent operator is not easy, and the resilience our operators have shown this past year is just incredible. We are focusing on giving our operators the tools and support they need to execute their business efficiently and to amaze their customers. I really look forward to reconnecting with the operator community in person over the coming weeks. Number three, completing our systems transition work. We need the tools to operate at speed and efficiency that enable our internal teams to execute this business at its full potential. Full functionality of these tools is a critical piece of that model. In addition to giving operators all the tools they need, improving systems functionality for internal teams is critical to improving efficiency, increasing automation, and reducing process workarounds that we've been forced to implement over the past year. It's simply taking our teams too long to do the basics. Lastly, I'll be working on simplifying our priorities to enable our teams to focus on executing the core business. But one thing I've learned in my 30-plus years here at Grocery Outlet is that we are at our best when we're focused on executing the basics in a small set of strategic priorities. One weekend, I'm still getting my arms around the detailed operating plans of the business. I'll take the time in the coming weeks, working with the leadership team, take a step back, and ensure that we are hyper-focused on the right set of priorities that will enable us to be successful. At the core, this business is about delivering unbeatable value on a relevant assortment with great customer service every day. We have to execute the basics. I look forward to sharing more with you on the next call. So, having covered our current state, Q3 performance, and our near-term focus areas, let me provide some insights into the resetting of our guidance for the balance of the year. At the core, our business fundamentals are solid. We have a strong value proposition in the market. We are growing topline sales in double digits. We have a long runway for growth. Our recent execution challenges we described are making this business harder to forecast than usual, harder than any time in my 30-year career with the company. In light of this, we took a hard look at our Q4 forecast and landed where we feel is appropriate given our recent track record of forecasting and missing guidance. While we made strong progress on a relative value proposition in Q3, we recognize that we are not fully where we need to be, restoring our value proposition. That's taken longer than expected due to the systems inefficiencies discussed in the competitive environment. We do not see the competitive environment as a fundamental impediment to getting back to where we want to be on value. We have a strong history of navigating changing competitive environments and we will continue to balance value and margin with our opportunistic buying model. There are some higher expenses that we did not anticipate earlier in the year that impacted adjusted EBITDA in Q3 and will continue to flow through the fourth quarter. While the new system is fully functional, we are still investing in enhancements and adding extra internal and external resources resulting in higher costs, which should be largely temporary. In addition, our Q4 SGA estimate was a bit too low and our updated guidance reflects a number more consistent with Q3 levels. The net result is an approximately $16 million reduction in anticipated full-year adjusted EBITDA from the midpoint. We recognize this is a significant downward revision. We've stared at this a lot. But given where Q3 came out and my recent return to the seat, we think this is a prudent estimate. I'd like to now pass the call over to Lindsay to share more about our financial results. Thanks.

Welcome back to Eric, and good afternoon, everyone. Net sales increased 10.4% to $1.11 billion during the third quarter due to new store sales and a 1.2% increase in comparable store sales, which represents 7.6% comp growth on a two-year basis. Comp transaction growth of 2% was partially offset by a 0.7% decline in our average basket. Comps during the summer months were challenging, but accelerated in September to 3.8%. Our third-quarter gross profit increased 9.2% to $344.9 million. The gross margin rate of 31.1% was 10 basis points ahead of our expectations and a 20 basis point sequential improvement from the second quarter. SG&A expense increased 9.5% to $304.6 million compared to the third quarter of 2023. Net interest expense increased 52.4% to $6.4 million, driven by higher average principal debt to enable share repurchases and other cash outlays to support the continued growth of the business after the acquisition of United Grocery Outlet earlier this year. Our effective GAAP tax rate during the quarter was 28.6%, an increase over the effective tax rate in the third quarter of 2023 of 18.6%, primarily driven by lower excess tax benefits related to the exercise of stock options, non-deductible acquisition and integration costs related to the acquisition of UGO, and lower pre-tax book income. GAAP net income for the third quarter was $24.2 million or $0.24 per fully diluted share. Adjusted EBITDA increased by 6% to $72.3 million for the quarter, and our adjusted EBITDA margin was 6.5% of net sales, 10 basis points ahead of our expectations and a 50 basis point sequential improvement from the second quarter. Adjusted net income was $27.9 million for the quarter or $0.28 per fully diluted share. Turning to our balance sheet. We ended the quarter with $68.7 million of cash. Inventory at the end of the quarter totaled $396.9 million. Total debt was $429.3 million at the end of the third quarter with net leverage of about 1.5x. During the third quarter, we repurchased about 1.2 million shares of stock totaling $25 million at an average price of $21.50. Subsequent to quarter end, we repurchased an additional 1.5 million shares of common stock totaling $25 million at an average price of $16.62 per share. During the fourth quarter, our Board approved a new share repurchase authorization for up to $100 million. This program replaces our previous share repurchase program under which $9.4 million remained available for repurchases. The new share repurchase program is effective immediately and does not have an expiration date. Eric spoke earlier to the thinking that went into our updated guidance. Now, let me run you through the numbers. For the full year, we now expect comp store sales growth of approximately 2.4%. We expect comp store sales growth in the fourth quarter to be approximately 2.0%. While October trends were similar to September, our guidance reflects more difficult comparisons in the remaining months of 2024 and our continuing work to sharpen our value proposition. We now expect to add a total of 66 net new stores this year, up from our previous range of 62 to 64. This includes the 40 acquired United Grocery Outlet stores and 26 net new organic store openings. In total, we now expect fiscal 2024 net sales of slightly above or $0.35 billion. We now expect gross margin of approximately 30.4% for fiscal 2024. We expect gross margin for the fourth quarter of approximately 30.2%, reflecting typical Q3 to Q4 seasonality and investments in increasing our value proposition in our opportunistic assortment to drive sales. For the full year, we now expect adjusted EBITDA to be in the range of $237 million to $242 million, which implies fourth-quarter adjusted EBITDA of $57 million to $62 million. Our lowered forecast for adjusted EBITDA reflects the impact of lower comps and gross margins, as well as higher SG&A than previously anticipated. For the year, we continue to expect D&A to grow in the mid-20s on a percentage basis, reflecting investments in our systems as well as accelerated new store growth during the year. We now expect share-based compensation of approximately $22 million. Net interest expense is now anticipated to be approximately $23 million. We continue to expect a normalized tax rate of about 32%. We now expect average fully diluted shares outstanding for the year of approximately 100.3 million, down from 100.5 million due primarily to lower share count from share repurchases. We continue to expect CapEx net of tenant allowances of approximately $200 million. We now expect full-year adjusted EPS of $0.77 to $0.80 per fully diluted share. Finally, let me make a few comments about 2025. We will lay out our formalized guidance on our fourth-quarter earnings call as we have typically done in years past. Broadly speaking, at this point, we believe the full year of fiscal 2025 should be framed around a return to our long-term growth algorithm targets, which, as a reminder, are comparable store sales growth of 1% to 3%, gross margin of approximately 30.5%, and adjusted EBITDA margin of approximately 6%, building to this full-year number as the year progresses. For fiscal 2025, we will have increased capital expenditures due to a higher number of organic new store openings and supply chain investments and as a result, higher depreciation and amortization. We look forward to updating you in more detail regarding 2025 on our year-end earnings call in February. And now, I'll pass it back to Eric for closing.

Let me close with this. I'm very confident in our business fundamentals and our ability to realize our long-term growth potential. We are a unique specialty discount retailer with a long history of consistent growth. We need some time to get back to the basics, focus on execution, and a small set of prioritized growth initiatives while enabling our passionate independent operators to serve their communities. We'd like to now open up the call for your questions, operator?

The first question is from Krisztina Katai from Deutsche Bank. Please go ahead.

Hi, good afternoon, and welcome back Eric. I wanted to start with sales. Do you think your comp was largely in line? September was solid, but you took your Q4 outlook down. It sounds like some of that is conservative, and considering the October commentary. But Eric, you talked about the need to execute better. So what are some of your first priorities to get execution under control? How much pressure are you still seeing from the system integration issues at this point? And how should we think about a realistic timeline for that to be fully behind us?

It's a heck of a question. Hi, Krisztina. Let me take the first part of that, and then Lindsay can jump in. So, I said doubling down on value. When the customer needs us most, we need to be there for them. So we made a ton of progress, but we're not quite done. We are going to continue to pull the lever on price, particularly with opportunistic buying, to make sure the value is there. We are going to support and ensure that our relationship with our independent operators is intact. We just need to provide them with the tools so they can run their business a bit more efficiently. I want to put the systems transition work in the rearview mirror. Frankly, I don't want to talk about this next year. I want to hear about all the great things it's doing for us, not all the things that we can't do because of the system. So that's on the list. And then I'd say, I'm really looking closely at all the priorities that we have on our list and making sure that we narrow that down. I know we win when we're focused on a short list of things that matter the most. That's what we will do over the coming weeks, to ensure that list is right on.

And Krisztina, this is Lindsay, I can follow up a bit. So, yeah, our Q4 guide. So we feel good about the trends that we saw in September and October. October trends were similar to September, but it did reflect a slight slowdown in two-year basis. At the same time, we're facing difficult comparisons as we forecast the fourth quarter. So, with all that said, we took a step back and we just felt it was prudent to be a bit more cautious in our outlook for the full year in the fourth quarter, and we revised our guidance accordingly. We're still working to get our value proposition where we want it, as we expect price competition, coupled with the holidays, all of that went into the Q4 guide for comps.

The next question is from Robbie Ohmes from Bank of America. Please go ahead.

Oh. Hey Eric. Nice to talk to you again. My question is, I was hoping we could just get more color on RJ's departure and also what type of CEO you're looking to replace him with. And may be related to that, just to clarify the systems, where are the systems disruptions right now? Is it behind you, or is there still risk to the first half of next year related to that?

Yeah. Hey Robbie. Good to talk to you again. Thanks for the question. So let me start first with the CEO transition. You all know, this last year has been really difficult. It’s been an operational challenge year from the systems transition. We have not executed like we wanted, like our expectations and like our history. That’s been super challenging. I’d say because of the relationship that we've all enjoyed, working with RJ for many, many years, we were patient. We felt like that was the right thing to do. But I can tell you the same way that you all might be feeling about our performance—we were feeling that internally as well. We finally got to a point after the last Board meeting where we sat down. We had a frank conversation and we formed an agreement to move forward. I want to make sure everyone knows that we didn't have any major disagreement. There’s no new finding that you guys have learned about later; there is no surefire drop. This is just a little bit of inconvenient timing, sort of a function of how things played out, nothing more. The question on systems is kind of where we are today? I'll repeat a little bit of what I've said. The system is fully functional. We're still working on enhancements. We're still working on efficiency, which just means it's not quite working to the speed that we expect. I would say full stabilization has been a bigger undertaking than we originally anticipated internally. That just translates to more resources; it’s taken more time. But I would say that we're making a lot of progress. I'll give you a couple of examples of things that I'm looking for that may address sort of your timing. The biggest thing for the operators is having their real-time order guide and new arrival order guide back. That may sound tactical but, as a merchant, being able to order off of our system and look at a live inventory to know what they want in their store—that's nirvana in an opportunistic model. We have not had that tool; it's not back yet. When we get that back, I think we’ve rounded the corner and the system will be finished. It's working, but it's not doing for us what we need it to do completely. I really look forward to getting it, as I said, in the rearview mirror.

The next question is from Anthony Bonadio from Wells Fargo. Please go ahead.

Yeah, thank you for taking the question. So just wanted to dig in a little bit on margins. Taking a step back and thinking about your EBITDA margin. We've now seen some pretty sizable swings since the pandemic began, that was obviously exacerbated even more recently with the systems issues, and now some more uncertainty as you rework guidance again. I guess, maybe just at a high level, can you talk about how we should think about the appropriate margin profile for the business over a longer time frame? And just as a follow-up, you mentioned pulling back from some strategic priorities to focus on less; can you just talk about specifically what items you are referring to there?

Yeah. Anthony, this is Lindsay. I can take the first part on margin. So, our long-term algorithm for margin, since we started talking with you all has been 30.5%. We still believe that's a great place for us to be. We love reinvesting the dollars that we have back in the business, and that continues to be a priority. So that is our long-term algo that we still have. That's why I wanted to emphasize it on the call, as well. Just because that's what we want to orient everyone to. Margins definitely fluctuate here at Grocery Outlet based on assortment and a variety of other matters. I definitely admit it's been a rocky few quarters with things going up and down. Just a reminder, last year we saw really high margins. Assortment was great at that time. We were delivering great value to the customers. It changes quarter-to-quarter. Long-term, 30.5% is what we want to orient you towards. And for 2025, that's where you can think of that. And then I'll hand it over to Eric.

Yeah. Hey Anthony, from day one, I'm not quite ready to tell you what we’re thinking off the list or adding to the list or putting higher on the list. We’ll be doing that work in the coming weeks. It’s really clear to me being back—so little time—that we're trying to do too much and we're not doing it all well.

The next question is from John Heinbockel from Guggenheim Partners. Please go ahead.

Hey Eric, two quick things. One, I know you're talking about a 6% EBITDA margin next year because you want to reinvest back into pricing value. Eric, do you think that, are you being conservative with the low-single-digit comp, particularly in this macro? And then secondly, what are you looking for in a new CEO characteristic-wise? Right? Because you've got a very unique culture and business model, and I assume that you are not a candidate for the job permanently.

Yeah, let me take the first part of that. Hey John, didn't catch up with you. Yeah, I’ve been pretty clear that we are going to search for a new CEO; not in a hurry. I'm here, and I'm prepared to say as long as it takes. This is a unique place; you've known it for a long time. We've got a really good search firm. She has been very successful in other placements. She helped out with the President and CEO of Sprouts, and she did some work with Gap and others. So we feel very confident in the caliber that we're working with. Our goal is to land a terrific new leader. Full stop. If I had to go down my list of things, I'm looking for public company experience, obviously important proven track record; someone who has scaled a retail model, which is certainly what we're doing and what is in front of us. Some retail, some fresh. Then someone who's really excited about this model. This is not for everyone. It's not conventional retail. It's very unique; it's very differentiated. So we need to find someone that looks at it and says, I get it, I see it, and shares that vision. A lot of that is around culture that you mentioned. We do things a little bit differently. But those are sort of the top four or five qualities that we are looking for.

Hey, this is Lindsay. John, thanks for the question. I'll just chat with you a little about your question on guidance. So, yeah, so the 1 to 3 comp percentage is what we're targeting, and what we continue to target. I think what your question was just the adjusted EBITDA margins of 6%. If you look at our historical levels, the approximate 6% is really where we've landed on average over the last five years or so. Of course, it's gone up and down quarter-to-quarter a bit. But we really feel like that's a good place for us to be and what we continue to shoot for. Definitely still have some systems cost to work through though as Eric mentioned, and it’s taking a little longer to stabilize. We want to get it right and get the tool working as well as possible. It's fully functional and everything, but as we think about 2025, that long-term algorithm of 6% is what we shoot for, kind of building towards that throughout the year.

The next question is from Mark Carden from UBS. Please go ahead.

Good afternoon. Thanks so much for taking the question and welcome back, Eric. So on the UGO acquisition, how was it going well with your expectations? How much has it been impacted by some of your recent execution challenges? And then, with the leadership changes, are you thinking any differently about the timing for moving new stores over to independent operators? Thanks.

Yeah, hey Mark, nice to hear your voice. Yeah, the UGO acquisition is pretty new and it’s going as we thought. We did not have a very aggressive transition schedule. In fact, we did not plan to convert those stores until much later—actually after 2025. Initially, the biggest opportunity we see is to get them into the fold of reporting. Second is to ensure that the products we have that they don't have— they can have. They have quite a few items and we have less items scanning to their stores. We see immediate sales opportunities to infuse them with some of the products we have. We have tried a few refreshes of their store with some of the things we've learned from data that help sell products better inside the store from a merchandising standpoint. It’s very good to lean back on those initials. So, we will do some of that next year, call it 5, 6, 7, or 10 stores. Ultimately, conversion to independent operators and conversion over to the Grocery Outlet brand will come later; we're not in a hurry to do it. We want to make sure that we hit some of those other initiatives first, and then we can transition them over—we've done that before.

The next question is from Corey Tarlowe from Jefferies. Please go ahead.

Great. Thanks, and good afternoon. I was wondering about unit growth. How do you think about the complexion of unit growth going forward, whether it's the acquisition or organic growth? What's the right rate for the business? I believe you previously targeted 10% in the past, but just curious, Eric, if there's any change in thinking there? And just on the investments that you've made in the value proposition and that you think you're planning to continue to make? Is there any way to put into context the magnitude of the investments that you're making now versus in the past and what the impact could be? Thank you.

Yeah, hey Corey. Let me take the second question first. I'd say the value prop we are making investments. I would not say they are from my estimation any different than what we've had to do two, three, four times I can recall and recount. We get slightly off every once in a while and we're getting back. So we told you how we measure, and let me just walk through those measurements again: the 40% and the 20% basket. So, 40% savings over conventional check, 20% savings over discount check. Take a basket of 100 commodities—these are the frequently bought items. They need to be priced to parity versus discount check. The last one that's not quite a check that we're working on is the excitement drivers. Our operators will say, 'Yeah, the order guide looks great, but there's not enough excitement drivers.' So we need to inflect on that. I would not say that the margin we have to put into that is extreme, but we don't know; we haven't done that work yet. We want to make sure we have plenty to invest if we need and make sure that when we get there, we know we're there and we've got it to keep. Second is on unit growth. It’s a good question. I would say that our acquisitions have been very opportunistic, where we find someone that kind of fits into the culture and geography we might jump into that. I wouldn't say you'll look for a whole bunch of that in the future. I would say from a new store perspective, the 10% is not at risk. We have the stores. We have the capacity to do the stores. Think back two to three years ago post-COVID—there were a lot of delays. It created havoc with the supply chain. All that’s behind us. The deal-makers have done and the construction team has done an amazing job in the last year, setting up 2025 really well. We mentioned 50 stores or so that are signed; that is for 2025, and we're actually working on 2026. There are no concerns of issue there, and I wouldn't say that we wouldn't do another acquisition, but I wouldn't say we're going to look for another acquisition. Thanks for the question.

The next question is from Oliver Chen from TD Cowen. Please go ahead.

Hi Eric and Lindsay. As you think about the challenges and opportunities ahead, I want you to rank them. Eric, what are the key priorities in terms of the bigger challenges that you see? Also, any context on thinking in the near term versus medium term in terms of some of the issues? And interrelated, you have great relationships with the operators. Wondering your thoughts on what it will take to continue to foster those as well? Thanks.

Yeah, hey Oliver. Thanks for the questions. Look, I'd say first on my list, and in my mind, and I'd say on the mind of everyone here is, let's make sure that we go deep in our core value. We get that momentum back—it's like a flywheel; once you start rolling, you can keep it rolling. I think we did ourselves some damage frankly in Q1 through Q3 in pricing for margin versus pricing for value, and we're paying the price for that right now. However, we're getting it back and we're feeling good about it. There's a lot of energy and momentum. We have one of the best offerings for Thanksgiving meal, and our product offering in an opportunistic realm can sometimes be challenging, but we are really well set up for that. I feel good about it, and we're going to focus on that. As we're successful, we're going to start to lay out some of the other initiatives. Relative to independent operators, look, these guys have had a tough year. It has been a flying a little blind. Things not working. Things coming back online are not being fast or quick. We're done with ineffective activities in stores, and the frustrations we heard were real. I would say we were with the operators in Dallas at our Annual Meeting for four or five days in September, and the mood was very positive. They are a graceful group of people. They give us a lot of room to try things, and sometimes we make mistakes, and this has been one of our biggest. They are supportive as long as we communicate with them, tell the truth, and share the timing of what the fix is, which is what we're doing. We’re super lucky to have that relationship, but you can tell it’s probably my seventh or eighth day back. I’ll be out with a bunch of operators taking questions like this and sharing with them what we're doing. It’s super important to us, and we take that incredibly seriously.

The next question is from Joe Feldman from Telsey Advisory Group. Please go ahead.

Yeah. Hi guys. Thanks for taking the question. Eric, I wanted to just ask you when you’ve talked about execution, and I apologize if I missed it, but what are some of the things that you'd like to execute better, and where are maybe a project or two that you think could get a little delayed if you could share any color on that initially? Thanks.

Yeah. Look, let me just talk about all the things that we are trying to do, make an acquisition, wrestle the project we call SAP, launch private label, run an app, and some new marketing tools, manage a workforce that’s not always here all the time. Just the challenges of this business when the tools are not working for you have been a little bit more difficult than we ever thought. Whatever we want, we’re going to lay out all of the initiatives with the team and decide what stays, what delays, what goes. I wouldn’t say any of the things that I’ve mentioned are off the list, but as an example of UGO, we don’t need to go do a whole bunch of work on UGO right now because they are running. They are operating. If we get them some products, they’re going to be fine.

The next question is from Leah Jordan from Goldman Sachs. Please go ahead.

Good afternoon. Thank you for taking my question. I understand your system visibility isn't fully back to where you want it, but it has improved over the last year or so. I'm just curious why your Q4 guide suggests we aren't really getting any growth margin left from lapping that initial disruption last year. Just curious where that all went. Is it all competitive pressures? And I guess I'm also curious why you aren't getting the benefit from some close-out competitors going away as well.

Hey Leah, this is Lindsay. I can speak to that. So, just, I’ll address just a couple of the pieces: comp and margin, as well. We’re still facing some issues with the system, as we talked about. Data visibility, you're right. We brought it back in a great way earlier in the year. What Eric mentioned, though, is that while we've made a lot of progress and the system is functional and operating, it's taking the teams and the operators a lot longer to be some of the tasks they did before. Frankly, it’s still very inefficient. As we think about how nimble we are and how we love to be, we've been really hampered by these tools that we’re trying to improve. So we are continuing to work on that. Given you that flavor leads into comp and the reasons for our comps. Now, even though we saw positive trends, facing some difficult comparisons for Q4 and we want to be prudent. We really hope our guide proves to be conservative, but just given all the reasons we laid out, we wanted to ensure that we were laying out the comps that we feel are achievable. Regarding gross margins, the same thing is there. We're trying to get some margin dollars back, and we lost some value in the earlier part of the year. We're trying to get back from that challenge. It plays into coming out of that in Q3. Feeling like we still have a bit of a drag from some inefficiencies—nothing material in Q3 or Q4, but we just have to do better on delivering value to our customers and get our margin improvements. So getting back to your question, did we get it all back or not? I think that we are in a much better position than last year, but we are not fully back yet. So we’re layering into conservatism as we lay out our guidance and we hope it will prove conservative.

Hey Leah, I’ll jump on the second part of your question. We are getting a good benefit from the closing of a few competitors; that’s been flowing through since last year into this year. I’d say our operations are really strong right now. Definitely we are picking up in both what we are buying and what we are shipping to the stores, which is increasing our margins. So, that's all good. We just need to ensure that our value, and we measure value in a lot of different ways; people are really taking notice of those best deals at the stores. So that's where heads down.

The next question is from Michael Baker from D.A. Davidson. Please go ahead.

Okay, hi, my one question will be on the buying environment if I could. So relative to the peak in 2023, I think margins peaked at about 31.3%, now you are targeting 30.5%, though which is your long-term plan. Is it that you are reinvesting more back, or is it that the buying environment post-COVID, when there was so much supply chain disruption, was just so strong that it’s unlikely to repeat again? I guess that has always closed out, and you never run out of products. But it was just—it's better to say which is as good as kind of get post-COVID because of all that supply chain disruption.

Yeah, hey, Michael. Let me just walk you back on a little bit of history and talk a little bit about buying margins. For the past 20 to 25 years, we’ve operated within a very narrow band, some can't believe how narrow—that's sort of call it 30% to 31%—and delivered a 5% comps on average and positive comps for 20 of the last 21 years. That’s been delivered while we’ve introduced massive changes in the business as changes are things like MTO or more low-margin fresh products or the acceleration of produce or meat, introduction of new categories. I’d say, while we've taken lots of intrusion from market competitors, this model— for those of you who can't quite get your heads around it or appreciate it—it's very different. We have the ability to price something this week that will sell next week, and that's half of our assortment, so we can pay attention and watch closely. I would never say that we'll never see these margins again; I would say to the contrary, we roll between the band of sort of 30 and 31, maybe call it 30 and 31.5, and have gotten very, very comfortable being in that band. That’s consistent with whatever has happened in this market. Right now, product is healthy. When you see more and more being opportunistically bought in, you should think margins are going to be better unless we choose to invest those—which is what we're doing right now to ensure we have the customers. That’s a little bit of how it works and how it has worked for a long time.

The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Hi everyone. Hey Eric. This is definitely beating a dead horse. I wanted to ask again about your systems issues creating a weaker value proposition. So, I get that you may not have had visibility on the buy, and that could have affected what you were selling prices were on the shelf. The independent operators know where relative value sits, and certain goods sell at certain prices. Can you talk us through that logic? How these things weren't caught, and then frankly how systems issues led to that value just not being there for a certain period of time? Thanks.

Yeah, no, you got it. We did this to ourselves. I’m going to take ownership for that. We priced for margin; we did not price for value consistently. Upon reflection and looking back at it, it’s pretty easy to call that, right, armchair quarterbacks however. There were really good reasons why we did that. We'd had a pretty scarring first quarter; we thought margin was well within our control, and at the same time people were taking prices down, we took prices up. We are where we are. Right about the operators, they have the ability to price things up and down, but they allow us to price 99% of the time. We ask operators to be right on micro market adjustments that they need on a few items. We don’t ask them to be us—to try and price. We have a much better ability to see the broader lens of competitiveness and to set the price right. You got to keep in mind, we share gross profit margin. So operators are focused on margins; sometimes they’ll fall like we are. So, that's a bit of the explanation. Did systems cause it? It's really the visibility that occurred with the lack of proper systems that caused it and then our reaction is again to weigh in on now. I think it’s probably improper.

The next question is from Jacob Aiken-Phillips from Melius Research.

Hi. Thanks for the question. So I'm wondering, you said that part of this transition was not being able to have visibility or inventory, and then part of it was fixing competitive pressures with pricing. Can you help us contextualize what that means to comping over that in Q4 and in 2025? Because I don't know. I would have expected a better Q4, given you kind of 200 basis points from last year. And then, separately, you don't seem to be planning to reduce unit growth at all. So how do we think about new productivity in the coming years?

Yeah, hey Jacob. I can take the first part of the question. Just tough comp guide. I get it. The Q4 was tough, and again after seeing the positive trends in September and October. But if you look at a two-year basis, it's showing a slight slowdown. Again, we’re progressing through the fourth quarter where we still had some difficult comparisons last year and we need to ensure we're prudent. That's why we are guiding adjusted our guidance down. For ‘25, again, not commenting formally on guidance, but reiterating our long-term algorithm definitely stands. We continue thinking about comp store sales growth of 1 to 3% and our long-term targets around that.

Hey Jacob, yeah, I think you asked about new store growth. I don't see any problems with the ability to open the 50+ stores next year. We've got those signed; the team's done a really nice job of setting that up. So, I'd say that number feels good.

The next question is from Jeremy Hamblin from Craig-Hallum. Please go ahead.

Great, and Eric, welcome back. I wanted to just ask about some of the systems costs involved here. You noted some internal as well as external costs, presumably some consultants. But can you quantify what the magnitude of that is on a quarterly run rate? And then what portion of that is likely to be ongoing as we move through these issues in ‘25 versus more temporary costs here over the next quarter or two?

Yeah, hey, Jeremy. I don't think we're going to quantify that. It is going to be somewhat ongoing in Q1. Maybe Lindsay, you can..

No, yeah, Jeremy. We haven't quantified that but let me just give you a little context around that, because it sounds general; just kind of systems—and so, we think about everywhere where we're spending some higher levels of SG&A than we had previously forecasted. A lot goes into maintaining and improving systems infrastructure. So system infrastructure first of all is super sophisticated with SAP and a lot of other ancillary systems we put into place when we went live. Just the infrastructure that we need, the cloud, the GPT, whatnot—all higher run rate than what we expected and grew more than we thought. Second, resources, you're totally right. During this transition period, while we're trying to continue to further stabilize the system and enhancements, you've got internal resources, external resources, and some overlap while transitioning those resources internally. We've made some great hires internally with SAP knowledge, which is fantastic. But then you have the overlap where you're rolling on consultants because we really want to ensure we get this right and remediate things correctly. So resources are a large part of this as well. And, again, it's definitely a transition time and temporary. As we look at ’25, we want to see about 6% as we get towards that, but we'll be working on this as hard as we can. We expect some of these transitionary costs to continue into 2025.

We have time for one more question. The next question is from Bill Kirk from Roth Capital Partners. Please go ahead.

All right. Thank you, thank you for sneaking me in. So, in the industry, the availability of e-commerce options keeps increasing, whether it’s the broader assortment or wider delivery radius, maybe more manageable fees. My question is, what are your independent operators seeing in terms of new competition that might not have existed before that they now have to go up against as the availability of e-commerce options has increased?

Yeah, hey Bill. I would say not a lot at the value end. All of those delivery options come with a cost, which is a higher price. For now, people are reverting to value. It's super convenient to order things and have them delivered. But we're getting a lot of engagement from customers on the prices. Our treasure hunt in-store is still really strong. It's well worth the trip. We hear that feedback in surveys all the time. People are finding that treasure hunt a little more difficult online. We don't mean to pass any sort of shade at those that are perpetuating that model. For us, it's a minor part of what we do. The major part of what we do is the treasure hunt. We're continuing; we've got all of our platforms up, and we keep exploring e-com, but it's not a major part of our strategy today.

This concludes the question and answer session. I would like to turn the floor back over to Eric Lindberg for closing comments.

Yeah, thank you guys. It's good to be back. I'm excited to be back with the people, the operators, and the team. I’m really bullish on the business and so appreciate you all giving us some time and having a lot of interest in our business. So, thanks for the time today, and we'll talk to you in a few minutes. Look forward to it. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.