Greetings, and welcome to the Grocery Outlet Third Quarter 2025 Earnings Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Ferry, Vice President of Treasury and Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the third quarter ended September 27, 2025. Speaking for management on today's call will be Jason Potter, President and Chief Executive Officer; and Chris Miller, Chief Financial Officer. Following prepared remarks from Jason and Chris, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via 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 uncertainty that could cause actual results to differ materially from these statements. Description of these factors can be found in this afternoon's press release as well as in the company's periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company's website or on sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. Additionally, during today's call, the company will reference certain non-GAAP financial information, including adjusted items. Reconciliation 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 on the Investors section of the company's website under News and Releases and in the company's SEC filings. And now I would like to turn it over to Jason.

Thanks, Ian, and thank you all for joining today's call. In the third quarter, we continued to advance our strategy while executing to deliver strong bottom line results. We grew net sales 5.4% to $1.17 billion, with sales in comparable stores up 1.2%, which I'll discuss in greater detail in a moment. In the quarter, we also added 11 net new stores. Importantly, in Q3, we began to roll out our store refresh concept to an initial wave of independently operated stores. We are seeing encouraging results with the pilot stores that are participating in this program, and we're planning to accelerate the expansion of the program throughout the rest of the year and into '26. On the execution front, we continue to operate with discipline to achieve healthy profitability. We reported a gross margin of 30.4%, consistent with our outlook, while carefully managing spending allowed us to deliver an adjusted EBITDA of $67 million at the top of our outlook range and adjusted EPS of $0.21, which exceeded guidance due to favorable taxes. While Q3 results were broadly consistent with our expectations, comp store sales of 1.2% came in below our outlook range. Leading into the final weeks of the quarter, we were pacing to our 1.5% to 2% outlook with traffic up roughly 2% over that time frame. However, during those final weeks, we experimented with promotional activity, as well as marketing mix that we believe was net negative. Testing is a key part of the work we're doing to drive sustainable growth, and we'll continue to eliminate things that don't contribute and double down on what does. In this case, we've course-corrected and over the last couple of weeks, we've seen a return to weekly comp growth. While recent comps have been positive, given the slow start to Q4, we now expect same-store sales growth to come in between flat and up 1% for the quarter. Chris will detail the impact to our annual guidance in just a few minutes. Since joining the company 9 months ago, I've spoken about 4 key strategic imperatives: tackling new store performance, securing top talent, addressing execution gaps and improving execution at scale. These remain our key focus areas and will be going forward. On the new store front, our strategy continues to progress in the manner I outlined on our previous call, and the performance of our '25 cohort remains ahead of plan. In addition, we continue to secure talent at the company with 2 recent hires that I'll comment on later. However, given the current situation with softer comps than we'd all like, I'm going to focus on most of my comments on this call on the latter 2 pillars that address execution at the company. First, on execution gaps. We've made significant progress on restoring systems functionality to enhance our Independent Operators' (IOs) ability to deliver a higher level of in-stock performance with better inventory visibility, and the second is now scaling execution through our model store refresh program, which will deliver a much stronger in-store experience for our customers. I'll now share how the systems and support work we're doing on behalf of IOs, which we expect to yield a meaningful impact in '26, will enable our operators to drive comps and build momentum. We began this year with the goal of delivering meaningful improvements in inventory visibility and availability for our IOs. We started by building upon the strength and technology foundation of our systems integration, rolling out our real-time order guide. And in October, we began introducing our new arrival order guide. Both initiatives have given our IOs greater visibility to inventory and the capability to sharpen merchandising in their stores. I recently spent time with IOs around the country and heard resoundingly that the greater upstream inventory visibility has enhanced their ability to execute. This is exactly what we mean by making Grocery Outlet a great selling organization. By year-end, we expect IOs to have regained all order guide systems functionality that existed prior to the SAP implementation, which will allow us to shift our focus from fixing integration-related issues to driving growth. To build on the strength of our order guide implementation, we're now enhancing these tools with forecasting capabilities for fresh meat and produce. We're supporting these updates with training to help our IOs manage inventory even more efficiently. Creating proficiency in matching forecasting and demand is foundational for improving the execution needed to drive sustained sales performance. With that in mind, these new enhancements combine 3 essential components that IOs can implement to deliver on that objective. Number one, resetting the retail display areas for fresh products to prioritize top-selling items. Second, implementing operational SOPs that support accurate inventory counts, high returns, while improving the quality of our fresh offering; and three, implementing training to execute these new systems, methods and procedures on this forecasting system so stores can deliver a consistent in-stock position just in time. Each part of this system supports the others, and we believe this holistic approach will improve our operators' ability to execute consistently. We believe this will be one of the most important and impactful initiatives implemented across the company. We expect in the coming months, we'll have this capability embedded into our proprietary order guide, making it easier for IOs to operate their businesses. Through enhancements we're making to our order guide, operators will not only have better visibility of supply, but they will be better equipped to forecast and meet demand, which will improve the customer experience. Delivering a stronger in-store experience has been our top priority, and the results of our store refresh give us confidence in our ability to meaningfully accelerate our comp growth going forward. Let me start with some background. We've spent much of this year engaging with customers and our IOs to discern where we could drive a better in-store experience. Feedback from the survey work indicated that our customers felt a lack of consistency in their store visit experience. While customers appreciate the value we offer and enjoy the treasure hunt aspect of shopping in our stores, they indicated that the experience was challenging to shop and that a lack of consistent availability of various key items hurt their trust in us. We want our customers to see us as the place where they can shop every day confidently, creating an experience that delivers value. To address this feedback and strengthen our performance, we focused on 3 critical areas within the pilot stores. First, improving the store layout; second, expanding and standardizing our core assortment; and third, elevating our in-store value messaging. Customer receptivity has been outstanding. These 3 initiatives have driven mid-single-digit comp lift in our 2 pilot stores with a full quarter reporting, and we have several more stores in various stages of completion. While we learn more about the sales lift potential as we touch additional stores, based on the promising early results we've seen so far, we plan on meaningfully scaling the store refresh. We believe that this initiative and the retail fundamentals it's based on can be rolled out to the vast majority of our store base. We expect to end the year with approximately 20 stores completed. We also expect to complete at least another 150 stores by the end of '26 and complete the balance of addressable stores in '27. We believe this work combined with the system stabilization and improved IO tools should position us to drive future sustainable comp growth. I'll share some details around those changes to give you a sense of their impact. Starting with improving the store layout and the merchandising changes we made. In our pilot stores, we've improved the layout to create a more inviting and more intuitive shopping experience. When shoppers now enter our store, they enter with a clear sight line to understand the layout. We've removed the forced flow and have logically grouped categories throughout the store and ensured the fresh departments are merchandised together. We improved the store flow by relocating produce to the front of the store, co-locating meat and fish and moving general merchandise and health and beauty towards the back of the store. Now these may sound like modest changes, but they're delivering big results; bringing produce upfront and center and expanding our offerings of high-quality fruit and vegetables has driven double-digit comp lift in meat and produce within our test group. And to illustrate the impact for customers, our independent operator at Rohnert Park, California shared the following feedback: "I'm really excited about the freshness, openness and clarity the changes bring to the store, and that is exactly what customers are telling us." We've implemented these changes informed by our customer feedback and getting input from our IOs. We look forward to working with our IOs across the business this year to demonstrate the meaningful impact our refresh will have for their customers and their stores. Getting fresh right is a big part of helping us earn the opportunity to grow basket with our customers. Now turning to core assortment. Within our improved store flow, we're ensuring that our stores are in stock on core basket-building items. This allows customers to do more of their shopping during their trips to Grocery Outlet and ultimately make Grocery Outlet their primary shopping destination. To address this opportunity, we defined 400 core items that all stores will carry going forward and be consistently in stock on. These items include well-known name brands like Heinz Ketchup, Daisy Sour Cream and Eggo Waffles, along with many of our private label staples that are on our customers' regular shopping list. Our refreshed store ensures that our stores are easy to shop by merchandising categories in a logical, intuitive way with a consistent product location and assortment on shelf, while still leaving plenty of room for our opportunistic buys and treasure hunt experience. Improving the experience overall by being more consistent and easier to shop are key areas of friction that will support sustainable momentum in our comp sales. Now on elevating in-store messaging. We feel it's important to make our messaging work harder. In these refreshed locations, we have created a kit that clearly communicates a feeling of value throughout the store. This signage helps shoppers see the tremendous value they're getting while ensuring they're benefiting from the improved core assortments and the unique opportunistic offerings we carry. Reading shoppers with great merchandising supported by strong messaging is cementing our value proposition with customers that come to our stores. Our business offers tremendous value and improving our marketing, our branding and communication will all contribute positively to telling our unique and differentiated story. As we roll out our store refresh, we'll continue to operate with discipline with the goal of driving improved returns on capital, another important priority for the company. These investments come at manageable incremental investment and their execution is relatively straightforward. We estimate that our payback period on these investments is roughly 3.5 years. And accordingly, we expect these initiatives to yield attractive returns while improving our IO incomes. Our refreshed store is also focused on ensuring that our new stores achieve a 20%-plus return target by creating sustainable comp growth. Going forward, our new stores will launch in our refreshed format. We've rolled this new approach already in one of our new locations late in Q3 with early and favorable results. A key focus for the upcoming year's rollout is delivering on these merchandising standards and part of becoming a great selling organization is continuing to improve our ability to localize our stores. Supporting localization has the power to drive store productivity, and we're approaching this theme of localization in new ways. For example, in Southern California, we're testing a model store with a more demographically relevant assortment with supporting marketing and promotion designed to serve the large and growing Hispanic population in the region. While our tests are early, we're seeing encouraging results from this test, and we see an opportunity to deploy this widely through the region. Finally, and critically, we've prioritized securing top talent for this business to propel our work in our stores. We recently welcomed 2 strong leaders to our team. Our new Chief Store Operations Officer, Frank Kerr, brings a wealth of operations and consumer experience to Grocery Outlet. He joins us from Lidl, where he was instrumental in the company's U.S. expansion, leading store operations, supply chain, logistics and merchandising as Senior VP Ops and its Chief Customer Officer, also responsible for marketing, consumer insight, digital commerce and promotional planning and strategy. Early in Frank's career, he served as Vice President of Retail Operations at Save-A-Lot, where he led retail and wholesale of over 900 stores in 32 states. Frank's leadership across large grocery fleets and experience scaling IO models is invaluable to us in our next chapter of development. Our new Chief Supply Chain Officer, Scott Fremont, brings deep insight to Grocery Outlet from a decorated 18-year career at Target, where he most recently served as Vice President of Global Transportation, Trade and Logistics. Scott's deep knowledge of supply chain logistics and management strengthens this critical area of our business as we update and evaluate our centralized distribution network to deliver improved levels of execution for our IOs, and we're very excited to welcome Scott to the team and work with him to unlock the tremendous potential in our business. In closing, while we're dissatisfied with our current comp performance, we're making significant sustainable progress against our strategy, setting the company up to deliver stronger comp performance in '26 and beyond. As we roll out our refreshed stores, we'll continue to focus on execution and improving returns on capital. And finally, we expect to enter the upcoming year with our systems implementation work substantially complete, allowing us to be laser-focused on delivering consistent growth and capturing the large opportunity in front of us. I'd like to thank the entire Grocery Outlet team, including and especially our IOs for their continued dedication as we work together to deliver for our customers and position the company for sustainable growth and stronger profitability in years to come. One final note, as we observe the current situation unfolding related to the federal government shutdown and potential disruption to SNAP benefits, IOs will be working as they always have to have a positive impact in the communities they serve. Many of them will be raising money to support local food banks and other related support efforts. While the current situation remains uncertain, Grocery Outlet and our IOs are here to make our local communities better. And with that, I'll turn it over to Chris to take you through the numbers.

Thanks, Jason. In the third quarter, we continued to make progress on our key strategic initiatives, while delivering adjusted earnings per share that exceeded our outlook. I'll walk you through our Q3 results before sharing more detail about our outlook for the remainder of the year. Please note that the comparisons I will provide are on a year-over-year basis unless noted otherwise. Net sales increased 5.4% to $1.17 billion, propelled by 11 net new stores and a 1.2% increase in comparable store sales. In the third quarter, we opened 13 new stores and closed 2 stores, enabling us to increase our targeted openings to 37 net new stores for the year. We ended the third quarter with 563 stores across 16 states. Comp growth of 1.2% was driven by a 1.8% increase in the number of transactions, partially offset by a 60 basis point decrease in average transaction size due primarily to a reduction in the number of units per transaction. As Jason noted, we believe the variance in comp relative to our outlook of 1.5% to 2% for the quarter was due primarily to changes to our marketing mix and promotional timing. Over the last couple of weeks, we've seen a return to positive weekly comps. Gross profit increased 3% to $355.1 million or 30.4% as a percentage of net sales, which was at the upper end of our outlook range. Gross margin was down 70 basis points compared to last year. However, it was consistent with the first half average of 30.5% this year. SG&A increased 8.7% to $331 million compared with Q3 last year, representing 28.3% of net sales, an increase of 80 basis points. The year-to-year increase in SG&A as a percent of sales was driven primarily by costs attributed to new store growth, software amortization and incentive compensation. As expected, we also incurred $1.3 million in restructuring charges related to our previously announced restructuring plan, which was substantially completed in the second quarter. Compared to the second quarter of this year, SG&A as a percentage of net sales improved 20 basis points. Net interest expense was $6.7 million, up $266,000 year-over-year. The increase in net interest expense was driven primarily by higher average principal debt, partially offset by a decrease in average interest rates. Our effective tax rate for the quarter was 28% compared with 28.6% last year. The change in our effective income tax rate was due primarily to the benefit of certain acquisition-related deductions, partially offset by a reduction in the tax benefit from share-based compensation. Net income was $11.6 million or $0.12 per fully diluted share compared to net income of $24.2 million or $0.24 last year. Adjusted net income was $20.7 million or $0.21 per adjusted diluted share compared to $27.9 million or $0.28. Adjusted EBITDA was $66.7 million for the quarter compared to $72.3 million last year. Adjusted EBITDA margin was 5.7% of net sales, down 80 basis points from the prior year, but consistent with the second quarter of this year. Turning to cash flow and the balance sheet. Our net cash provided by operating activities through the third quarter of 2025 was $149.8 million compared with $72.5 million last year. The increase was driven primarily by improvements in working capital. In addition to ending the quarter with $52.1 million in cash, we had $175 million in available capacity on our revolver. We remain committed to improving returns on invested capital as we prudently invest to accelerate growth. During the third quarter, we invested $39 million net of tenant allowances, primarily in new stores, supply chain projects and information technology. We expect capital spending of approximately $210 million for 2025. For 2026, we expect a meaningful reduction in our CapEx spending even with our large store refresh effort. Total debt, net of issuance costs was $500.3 million at the end of the third quarter, up $22.8 million from year-end, with net leverage at 1.8x adjusted EBITDA. Turning to our outlook for the balance of the year. Given the impact to late September and early October comps from the marketing and promotional adjustments we discussed, we now expect comp store sales for the year to be in the range of 0.6% to 0.9%. We also want to note that given the very dynamic nature of funding for SNAP benefits in light of the federal government shutdown, any potential disruption to sales resulting from delayed or missed SNAP benefits due to the ongoing shutdown is not currently factored into our guidance. As a reminder, the percentage of sales coming from electronic benefits transfer payments, a substantial portion of which may be related to SNAP benefits was roughly 9% last year. In addition, we are adjusting the rest of our outlook as follows. For the year, we expect to add 37 net new stores compared with 33 to 35 previously, report net sales of $4.7 billion to $4.72 billion, achieve gross margin in the range of 30.3% to 30.4% compared with 30% to 30.5% previously; deliver adjusted EBITDA of $258 million to $262 million compared with $260 million to $270 million previously. Report adjusted EPS in the range of $0.78 to $0.80 per fully diluted share compared with $0.75 to $0.80 previously. Book net interest expense of approximately $27 million, and we expect to end the year with share-based compensation of approximately $12 million. For the fourth quarter, this translates to comp store sales between flat and plus 1%, the addition of 7 net new stores, gross margin between 30% and 30.3%, adjusted EBITDA in the range of $72 million to $76 million and diluted adjusted earnings per share between $0.21 and $0.23. As Jason shared, we are excited about the rollout of our model store concepts, which we expect to contribute to comp sales growth in the next fiscal year. While we're still working through our budget and will not be guiding 2026 until our fourth quarter earnings call, I did want to flag a couple of unique items to consider as you model 2026. First, 2025 included a 53rd week, which we expect to contribute an incremental $9 million in adjusted EBITDA and 10 basis points of EBITDA margin expansion that will not repeat in 2026. Second, we expect that next year we'll be back to a more normalized comp growth rate. And as such, we expect a roughly $10 million to $13 million headwind from cash incentive compensation versus this year, which we expect to be a partial payout year. In closing, the important work we've done to stabilize and strengthen the business has set us on a path for renewed growth, and we expect the expanded rollout of our refreshed stores and improved execution across our fleet to support stronger comp growth in 2026. As we bring our strategy to life, we will remain disciplined and focused on continuing to deliver strong bottom line results and improved returns on capital. We have a tremendous opportunity ahead, and we have the strategy and team in place to deliver on its promise. And with that, we'll open it up for questions.

And our first question comes from Jeremy Hamblin with Craig-Hallum.

So, I want to start just with the same-store sales. And for Q3, the 1.2% comp, I just want to get the split of the transaction versus average ticket. And then as you progressed through the quarter and you noted some changes in the timing of marketing and some of the promotional events and mix, how did that play out in terms of where you saw the deceleration in comps? Was it primarily transaction driven? Or were you getting a mixture of downside coming from both transaction in ticket?

Yes. Thanks for the question, Jeremy. It's Jason here. Just to walk through the timeline to give you a bit more detail. We were tracking in July at about 1.6% comp and August 2.3%. So, we were well within our expectation of comps with the guidance we provided. As I mentioned in my opening remarks, part of what we're doing here, we're doing a lot of experimenting. And in late Q3, we were adjusting promotions, some of the activity we have been trying as well as the marketing mix with some of the channel mix. As it turned out, we could see a strong correlation into September where we made those adjustments and saw the impact on comps. To give you kind of an idea here, transactions were running just under 2% and baskets down slightly. And we saw a little bit of a slowdown in the transaction count during that September period. And what happened was into the last week of September and in the first week of October, comps went negative. Unfortunately, we've seen some lingering effects through October on that. But since course-correcting, we've bounced back to positive comps. As I said, we're not where we want to be, but I'm really excited because we feel we have the solutions in our refresh concept, focusing on improving our ease to shop, standardizing our core assortment, and better communicating our unique value positioning with sharper marketing. All of those things are going to be really positive for us as we move through the end of this quarter and into next year.

Just a quick follow-up. In terms of what you're lapping for the remainder of the quarter versus the first 4 or 5 weeks, do the comps get easier or tougher from here?

Yes. December is a little easier in kind of the quarter. November is a little tougher, but December is a bit easier.

And our next question comes from Corey Tarlowe with Jefferies.

I just had a question on the performance in the quarter on the comp and the drivers that you highlighted, I believe it was the promotional activity and the marketing mix. Is there any way you could provide a little bit more color as to what the learnings were, what you tried, and what maybe the optimal strategy is going forward for those specific aspects?

Sure. No, it's a great question, Corey. So, part of what we're doing is we want to optimize everything we put into the business. We have been executing some promotions that just weren't delivering the combination of sales and return we were looking for. So we made some adjustments to those in September. We think that was still the right decision. The marketing, we had been experimenting with more social and had adjusted some of the traditional mediums that we had implemented, and we saw a pretty strong correlation there. So, what we did is course-corrected on the marketing piece for Q4 and going forward. That was instructive. And frankly, some of the things that we've also been testing have worked well. So, one example of that that's unique to us is our wine business. And we've seen some really strong favorable results related to promotion there. There's a lot of opportunistic product on the market, and that's an area where we're doubling down and we've put more of that into our planning for Q4.

Great. And then I just had more of a cost-related question. You've made some new hires, and I'm just curious about how to think about SG&A and what the comp leverage point there would be given the growth that you have in terms of stores and people.

Corey, it's Chris. Yes. So, we expect not to get too far into next year, but we do expect modest leverage next year. I talked about on a previous call, our cost savings initiative to drive cost out of the company. And we've made a lot of progress there. It's actually completed. And we've identified $15 million to $20 million of cost savings over the next 2 years. Most of that will fall into next year. Now I should say a good portion of that is CapEx and some of it's related to our supply chain. But there are SG&A cost reductions there, which will help with leverage next year. On the other side of that, though, we are going to invest some of that savings in additional capabilities, primarily around merchandising. But net-net, we should see some modest leverage next year.

And moving on to John Heinbockel with Guggenheim Partners.

Jason, 2 questions on the refresh program. Is your idea to cluster that as much as you can, try to get greater awareness of it? And then when you think about how long is that process taking for you and the IO to get done? Is there any disruption in the interim period?

Yes, great questions, John. First and foremost, we're definitely going to cluster. We'll begin in the core markets and expand from there. Clustering creates various benefits, including marketing opportunities and labor efficiency, as well as support for the IOs in that area. Over the past six months, our pilot process has provided valuable feedback from the IOs, helping us identify necessary adjustments as we prepare. So, clustering is definitely on our agenda. Regarding timing, the execution in the store is relatively low impact, but remerchandising does cause some disruption. Typically, when you rearrange the store, it takes about five weeks to complete. During that time, you might experience some sales pressure, but we usually see an immediate increase afterwards. We have consistently observed this pattern over more than two quarters of data from the two pilots we've conducted. As we roll this out to more stores, they are following a similar trend. Although it's still early, we have enough data to feel very confident in our approach.

And maybe as a follow-up, the 400 core items. So I don't know how many of those would be consistent across the base. But what are you doing to draw attention to that? Do you need an inventory investment? Do you need signage to kind of drive home the point that you're consistently carrying those?

Yes. No, it took some consideration to make sure that, that consistency is something that our customers have told us they really are asking us to deliver on. And so in changing the merchandising, we're changing the space to sales on those items, and we're creating signage around them. So they're very obvious to see. These are things that are on people's shopping lists typically. And so there is a very consistent core assortment there. And we've seen a nice uptick, obviously, on the basket size on the basket side, I should say, John, in the pilot stores as a result.

Moving on to Edward Kelly with Wells Fargo.

I wanted to follow-up on the comp weakness that you saw at the end of the quarter and the shift in strategy here. It seems like the weakness was more traffic driven, which leads me to believe that maybe it was more tied to the shift in marketing. I was curious if you could maybe dig into that a little bit. And then if the comp hasn't bounced all the way back yet despite the shift, what is that saying?

Yes, we observed a strong connection between our marketing channel decisions made toward the end of the quarter and the decline in traffic during that time. We promptly restored our marketing efforts and have seen a rebound. While such issues can sometimes persist, we are confident in the volume and mix of our marketing strategies, which we believe are suitable for Q4. As a result, we anticipate an improvement in our performance moving forward.

Okay. And then just a follow-up on SNAP. So, there's no impact from SNAP in guidance. And I guess it's dynamic, right? You have the November issue and then potential for SNAP cuts next year. I was curious if you could just talk about historically what you've seen during periods of changes in SNAP. And then as it pertains to sort of like current business trends, do you think that some of that is already starting to work its way into the comp that you're seeing now?

Yes, it's probably too early to determine the effects since it has only been a few days since this occurred. Historically, SNAP accounts for about 9% of our sales. In 2023, there was a notable decrease in SNAP benefits. At that time, the types of tender changed, but there was no impact on sales. Generally, sales will see an immediate increase based on when benefits are distributed. Therefore, while we cannot speculate on how this situation will evolve, we wanted to provide guidance that is unaffected by these uncertainties.

Our next question comes from Joe Feldman with Telsey Advisory Group.

One of the questions I want to ask is about the localization effort. How will this effort differ from the current model? I thought one of the strengths of this business was having independent operators who can localize their own stores since they are actual owners. I would appreciate it if you could help me understand the localization effort better.

Sure, John. Some of the feedback we received from Southern California indicated that the company should offer more support to our local independent operators. This includes ensuring we source products that cater to their community's needs. In Los Angeles, for example, we are now providing a range of products designed to better meet their demands and serve their local customers. We have initiated this process and are thrilled with the initial outcomes. As our business continues to focus on becoming an effective sales organization, assisting our stores in localizing their offerings and leveraging their strengths will be a significant advantage for us.

Got it. And then just on 2026, I know it's early, but from a store perspective, I fully understand the refreshes, 150 makes a lot of sense. How should we think about new stores for next year? Are you guys rethinking the flow of stores compared to where the trend has been?

Yes, I think we indicated on a previous call a range of 30 to 35 net new for next year. On the refresh piece, we've already begun to implement those retail fundamentals in our new store executions, and we intend to do that in all the new stores next year.

And Mark Carden with UBS has our next question.

So, to start, you called out some heightened promotional activity impacting your gross margin. Was this essentially all tied to some of the tests you guys were doing in September? Or did they expand beyond that? And then just related more broadly, what are you seeing in the competitive landscape?

Yes, thanks, Mark. There were definitely some promotions that we adjusted, which we believe resulted in some negative sales. The marketing efforts were the main factor in this situation. Promotions tend to vary by month, and the latest data indicates a slight increase in promotions in September. However, I will let you all analyze that. Overall, we are not observing any significant changes.

Okay. Great. And then as a follow-up, just how are IOs responding right now to the uneven macro? I know like outside of the pilot improvement rollouts, you guys have been investing more in the training process. Have you seen any corresponding improvements in talent traction? And just more broadly, what are you seeing in terms of IO satisfaction?

Yes. We spent some time on the road meeting with really all of our IOs earlier in Q3, middle of Q3. There is definitely excitement related to the improvements and things that are coming, both from systems. We're seeing positive feedback there on our order guide. We're seeing positive feedback and some real excitement related to the refresh program. I think our IOs taking the feedback, working in a collaborative way with them to grow their business and make their incomes grow is obviously something that's really important to everybody. And we're seeing nice participation in our meetings and good communication back and forth. So, we're feeling good about where this is going to go. And everybody always likes to win as a team, and we're seeing more and more of that as we roll these programs out.

And moving next to Simeon Gutman with Morgan Stanley.

This is Zach on for Simeon. I just wanted to follow up on the refresh program. What type of uplift are you assuming that will provide on a consolidated basis? And how does the timing of that look over the next few quarters?

Yes. The pilot stores, we've got a nice mid-single-digit lift given the staging of rollout and quantum of stores, you can probably get a sense of the mechanical lift that we are expecting in our business next year. But this is definitely going to be a comp accelerator for us. And we're excited about what we see as the longer this is in our stores, we're seeing some nice acceleration as well. So, feeling good about how that's going to play out in '26 for sure.

As a quick follow-up, how should we evaluate the company's resources and the interest in these rollouts? Are there any constraints, or is everyone aligned, and should the rollout proceed as planned?

Yes. We really believe the value proposition of the IOs is compelling. We're not limited in this case in IO demand nor in CapEx. What we're really doing here is making sure we're being responsible to support them with the right training to ensure that we have sustainability in the changes. We're implementing new systems, methods, and procedures in the stores. There's new merchandising standards that they're working their way through. But mid-single-digit comp lift, basket improvement, all those things create really nice returns for the company and even better returns. Our IOs are going to have their return in a matter of months. So, I think people are going to be very excited to see how this plays out.

Moving next to Leah Jordan with Goldman Sachs.

It sounds like you're still doing a lot of testing and learning on your business, and we had a little bit of a misstep with the marketing this quarter. So, I was just wondering what's giving you the confidence to go forward in a bigger way on the store refresh rollout? Just after just such a short period in a small number of stores, and why don't you think more testing needs to be done? And then of the initiatives that you have rolling out between the stores and the IO tools, I guess, there's a long list there. So, which of the items do you think will be the biggest driver to drive that comp acceleration next year?

Yes, these elements work together effectively. We are very confident in the testing we have conducted over time in a few stores, and we are now seeing results across a broader range of stores. Our efforts are focused on transforming the customer experience through better merchandising and implementing systematic procedures. Our goal is to ensure that we maintain a strong in-stock position, which we believe will lead to a positive experience for customers. The improvements are clear to us: enhancing the shopping experience, ensuring consistency, and clearly communicating value are all aspects we’ve received positive feedback on from customers. Many retailers typically test products in one or two stores before deciding to expand, but we feel we have conducted sufficient testing and adjustments to have a solid understanding of what to expect. The fundamentals we are applying here are essentially standard retail practices. We are merchandising sensibly and organizing the store in a customer-friendly way, complemented by effective signage. The tools we are implementing are straightforward for stores to apply at a higher level. We believe all these factors will lead to predictable outcomes. Notably, as we implement these strategies in approximately 20 stores this quarter, we will be able to make ongoing adjustments, but the foundational elements are already in place.

That's very helpful. And then just one quick follow-up. I guess it sounds like you plan to accelerate comps next year and on the back of these initiatives. So, if that comes to fruition, can you just remind us what comp you need to now leverage SG&A in the business? I know you talked about lowering some costs next year to an earlier question, but just what is the actual leverage point of the business now?

Yes. It's around 2.5% comp growth in order to leverage.

And we'll go next to Kendall Toscano with Bank of America.

I was just curious if you could speak to as you're expanding the store refresh program, can you share more detail on the types of markets where you've been able to test it so far? And have the performance lifts on these stores been different in markets where the competitive landscape might look a little different and particularly in markets where you're competing with the deep discount players?

Yes, Kendall, thank you for the question. We have several competitors across different markets, but we haven't noticed significant issues. This is mainly about execution, and we are actively engaging with our customers. We're experiencing a notable increase in basket sizes along with improvements in traffic due to the enhanced customer experience. Therefore, I feel positive about our store mix, the competition, and our results, which give us confidence to continue moving forward.

Got it. That's helpful. And then other question was just on price gaps and how those are trending and whether that looks any different than it did pre-systems conversion? And also, is there any expectation that you'll continue to invest in price for 4Q or into next year?

Right. No, great question. We do checks every week. We did 10 major market MSA checks just last week. We remain to be 15% to 20% on a basket of goods lower than discount, 35% to 40% on conventional. And so, things to remember there, our OpEx, 40% of sales, it's a core driver of value. We have a real advantage there. No one's going to get around us on pricing there. It's a big contributor. Clearly, there's always an opportunity to adjust on an individual item basis. You're going to have situations where you're beat, but that's something the team monitors week-to-week, and we continue to make adjustments there. We're really confident that the work we're doing right now on value messaging and telling our story is going to be super helpful in improving with the margins we are running at and the price advantages we have, a much better level of understanding from our customer base on the value that this business brings.

And Michael Baker with D.A. Davidson has our next question.

Okay. Wondering if you've looked at comps in markets that might have higher immigration populations. There could be some spending impacts from some of the issues that are going on there. I'm wondering if that's something that you've seen with your customer at all.

No, Michael, good question. Nothing to report there.

Okay. I have a question that might be related. Earlier, you mentioned what you consider to be a normal comparison for 2026. Can you remind us what you define as a return to normal comparisons?

Yes. Our goal is to grow our business and outpace inflation. That is my focus. We are determined to succeed, and we are preparing to achieve that for next year.

And moving on to Oliver Chen with TD Cowen.

Hi, Jason and Chris, the business model of Grocery Outlet has been amazingly resilient over a long-term basis in that mid-single-digit comp range. What do you think about broadly the path to getting there more consistently, the key drivers and milestones? I'm sure the refresh and stabilization of systems will play a role. And on the earlier topics around independent operators, what would you highlight as 2 to 3 key areas that they speak to in terms of IOs potentially needing more support or flexibility and how changes may be impacting their day-to-day operations?

We benefit significantly from regular communication with our independent operators. We hold backroom meetings with groups of 20 IOs to gain insights into their experiences on the ground. Achieving sustainable comp growth relies on two main factors. First, we are close to resolving the system distractions that have been challenging. We have made substantial progress in restoring full functionality following the pre-SAP implementation, which has been a positive development. We've implemented numerous system improvements based on feedback from our IOs, who have found this process difficult and wish to move forward. My goal is to ensure that running this business is straightforward, equipping them with the necessary tools and support so they can concentrate on their customers and local communities. Our refresh program will significantly contribute to consistent execution in stores by offering specific tools and new standard operating procedures. We've adjusted our merchandising based on customer insights and IO feedback, and there is a need for better localization. The company must enhance support for our IOs by providing products that resonate with their local communities. In Los Angeles, for instance, we have a valuable opportunity to showcase effective collaboration between our IOs and the company while delivering relevant customer experiences. We believe that our approach in Los Angeles aligns well with the market, and it's crucial for us to ensure that assortment, communication, and execution are coordinated to achieve our objectives. We are enthusiastic about the future potential of this initiative.

Okay. Jason, a follow-up. The buying team, in many ways, we view as like the secret sauce of an organization such as yourself. Like what are your thoughts about changes or not changes there in terms of how that talent is going to be oriented in light of what you're doing? And then second, as you react around the marketing programs, what are you seeing in terms of customer perception lags or not lags? Our surveys show that a lot of customers really want these core items for a long time. So just would love your thoughts on any hypothesis you have there, too.

We're hearing you. I don't know if there's something on our end here on your end. Could you repeat the question? I try again?

Yes. First one was on the buying team and just the buying team being the secret sauce and what's happening with the nature of that talent as you think about these changes you're making? And then second question follow-up was on customer perception lags between the marketing and changes you're making relative to when customers are noticing; our surveys say that this is a really good change.

Yes, I think we're doing everything we can. It's really important for us to emphasize that when we discuss being a great selling organization, we are also a great buying organization; it's both aspects working together. The conversations with our buying teams focus on getting them out there, as the relationships they've built over time are exceptional. Our business is unique in that regard. Typically, in retail, relationships with vendors can be contentious, but in our case, I feel like one team, especially when I participate in some of the sessions. We are committed to providing them with the tools they need to nurture those relationships and maintain a close connection. Regarding marketing lag and customer perception, it does take time for changes to resonate. However, from what we've observed in pilot markets, customers tend to respond quickly and can recognize when something is good. In retail, feedback comes in fast; it doesn’t take long to tell if something works, and customers express their opinions directly. We've spent days in stores making these changes, listening to customers share what they like and dislike, and conveying that feedback to our teams. Our responsibility is to listen carefully, respond to customer preferences, and eliminate friction points to ensure we are consistently delivering what they want. There's nothing particularly magical about it; it's all about responding effectively to customer needs.

And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Thanks, everyone.