Greetings, and welcome to Grocery Outlet's First Quarter 2026 Earnings Results Conference Call. Operator instructions were provided. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ian Ferry, Senior Vice President of Strategic Finance and Investor Relations. Thank you. You may begin.

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the first quarter ended April 4, 2026. 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 with 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. 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.

Good afternoon, everyone, and thank you for joining us on today's call. In the first quarter, we delivered results in line with our guidance as our work to strengthen the business gained traction. We reported Q1 revenue of $1.17 billion, up 3.6% with comparable store sales down 1%, slightly ahead of our outlook for a decline of minus 2.5% to negative 1.5%. Traffic remained positive, up approximately 2%, with consistent improvement throughout the quarter. This was offset by continued basket pressure from lower units per transaction. Gross margin of 29.6% was also within our outlook range and included a 50 basis point impact related to our previously announced store closures. Adjusted EBITDA of $43.1 million came in at the top end of our range, while adjusted EPS of $0.05 was $0.01 above the guidance range we shared in March. As I mentioned, performance improved as the quarter progressed, with traffic strengthening each month and exiting March at a materially higher rate than at the start of the quarter. In the month of March, weekly traffic grew in the range of 2% to 5% year-to-year, reaffirming that our value-oriented product offering continues to resonate with consumers. While we're encouraged by the progress we're beginning to see, we're not satisfied with our current level of performance and are focused on the work we have in front of us. As we said in March, we entered 2026 with a clear agenda: restore what makes this brand special, tighten execution where we've fallen short and improve returns. That work is well underway, and while it's still early, the traction we see reinforces our conviction that we are taking the right actions. Grocery Outlet has meaningful strengths, a differentiated model, a highly relevant value proposition, strong independent operators and a format that resonates when we execute well. Our focus is on translating those strengths into a more consistent performance. Our work to achieve this centers on improving comparable store performance while continuing to advance important strategic initiatives that deliver stronger long-term growth and profitability. Restoring customer value perception. Let me start with customer value perception because that's where our work begins. Our job right now is to make Grocery Outlet a more compelling choice for the customer. In this environment, value matters more than ever. We must make that value visible, consistent, exciting and easy to shop. We executed on that in several ways during this last quarter. First and most importantly, we've made meaningful strides to increase the mix of branded opportunistic products in our stores. Our best opportunistic deals offer savings up to 70% versus conventional retailers. These savings, when paired with the excitement of a treasure hunt experience, provide a compelling experience that our customers love. Since the start of the year, we've increased our opportunistic mix by nearly 2 percentage points with meaningful improvement across inventory, shipments, variety and sales. We've made meaningful progress improving our sourcing, increasing product visibility and helping operators further differentiate their stores. That work included upgrading systems and reporting, expanding supplier outreach, shortening delivery times, testing short-dated offerings and engaging suppliers more directly at the leadership level. These efforts enabled us to move quickly in Q1 on excess inventory from several top-selling brands, delivering significant savings for customers while creating high margin, high volume opportunities for us and our operators. Second, we invested in reshaping value perception. As we work to improve the impact of our opportunistic supply, the near-term synthetic promotional support we're providing is driving customers into our stores. It's been especially effective around high-traffic occasions like this year's Super Bowl and Easter where event-driven promotions helped drive meaningful traffic gains. This is an important first step in restoring comparable performance as the momentum from our improving opportunistic product mix begins to translate into stronger transaction trends. Through the first quarter, we received positive feedback from both customers and our independent operators. And as we invest, we're managing the impact on gross margins through disciplined promotional targeting and our ongoing focus on improving our mix. We continue to expect these investments to be in the range of $20 million for this year. Third, we're sharpening our value messaging through our extreme value campaign. This work is focused on making our value proposition unmistakable, highlighting the significant savings customers can find on branded products often at meaningful discounts to conventional retailers and reinforcing the excitement of the treasure hunt experience that defines Grocery Outlet. To support this, we're driving awareness through targeted at-home and digital campaigns that bring our deals and product discovery to life. In market, we're focused on awareness-based media; in-store, we're simplifying signage and elevating key value items to make savings more visible, easier to navigate and more compelling at the shelf. Together, these three initiatives with a singular focus of improving value are beginning to drive a meaningful positive customer response, reflected in improving sales, improving traffic trends, Net Promoter Score and survey data while reinforcing one another. Though there's much to do to restore comparable performance, the trends we're seeing in traffic are consistent with the initial stages of stabilization that we would expect at this point. Improving the in-store experience. We also continue to improve the in-store experience to support stronger store level performance across our fleet. One of the most important of these initiatives is our store refresh program. In the first quarter, we completed 34 refreshes. As of today, we've completed 58 stores in total. These refreshed stores are benefiting from improvements in layout, signage and merchandising to make the shopping trip easier and reinforce value more clearly. We continue to receive positive feedback from both customers and operators, and we are confident that improving the customer in-store experience is the right step for Grocery Outlet and that it will become an important lever over time. The impact of our value restoration initiatives in Q1 reinforces our conviction that an all-hands-on-deck focus on executing our opportunistic engine is the fastest and most effective path to improving results across the business. With a clear path to deliver on that objective and the results that support that focus, we're prioritizing our initial resources on that work. That requires deliberate choices about how we execute our other priorities this year, including taking a more measured pace on our store refresh program. We will continue to invest in these longer-term improvements to our stores while maintaining a near-term focus on driving comparable sales through opportunistic initiatives that I've discussed. As we balance our resources around these efforts, we now expect to complete approximately 100 store refreshes by year-end. This sharper focus will reduce distractions and help us return to comparable growth as quickly as possible. Supporting independent operators. Independent operators are central to restoring our performance, and they've been clear about what they need: better analytical tools, more actionable insight and greater visibility into what is working across the system. That's exactly what we're focused on delivering. In Q1, we made meaningful progress. During the quarter, we held regional forums to share best practices across operators. We enhanced benchmarking capabilities and expanded the functionality of our real-time order guide. We also streamlined commercial communications to help operators simplify execution at store level. Importantly, we also launched a new annual business review, or ABR, process across our entire store base. This process benchmarks each store against top quartile peers with similar market characteristics and sales volumes, then translates those performance gaps into clear profit opportunities for our operators to pursue. For each store, we can now help operators quantify the potential opportunity across sales mix, shrink and other important operating expenses while enabling operators to track progress against those opportunities over time. Just as importantly, we pair these insights with best practice recommendations and field support to help operators realize those improvements. While company-wide margin performance in Q1 was impacted by strategic promotional investments as well as inventory liquidations associated with our store closures, we're encouraged by the underlying operational trends we're seeing at store level. Operators saw encouraging trends in profitability during the quarter, driven primarily by better shrink performance. If these Q1 improvements are sustained through the balance of the year, they could translate into meaningful incremental annual operator income per store. Over time, improvements like these create meaningful upside for Grocery Outlet through stronger gross profit performance across the system. Our ABR process encourages accountability while giving operators a practical road map to improve their business, supported by quarterly reviews and ongoing field partnership. And we believe that as operators see benefits from these enhanced analytical tools, engagement with the key company initiatives will also improve. When operators have the right tools, visibility and support to execute effectively, the customer experience improves, store performance improves, operator economics strengthen and the overall business should become more productive and resilient. Optimizing the store base and strengthening returns. As I mentioned earlier, we continue to drive our key strategic objectives as we work to restore comparable performance. Among our most important objectives are optimizing the store base and improving our returns. As we outlined in March, we are closing 36 underperforming stores this year. These closures are now complete and have improved fleet quality and will strengthen the earnings profile of the business over time. Based on the progress we've achieved to date, we continue to expect adjusted EBITDA improvement of approximately $12 million at the conclusion of our restructuring on an annual run rate basis. We've also tightened our approach to new store growth. We continue to believe that there is substantial white space ahead for Grocery Outlet, but growth must be disciplined, productive and supported by the right economics. That means being more selective on real estate, applying rigorous underwriting and holding ourselves to high standards on capital returns. This approach would position us to grow from a stronger foundation and create more value over time. We are focused not just on growing but growing in a sustainable way. Finally, as we noted in March, we're continuing to explore strategic options for UGO and we'll provide updates when we have more to share. Securing top talent. Having the right strategy is critical to our success, so is having the right talent to execute it. We recently welcomed Jim Porterfield as our next Chief Marketing Officer. Jim brings more than 30 years of brand leadership and consumer insight experience to Grocery Outlet. Jim previously served as Chief Marketing Officer at Pinsight Media and as a Senior Vice President at Bernstein-Rein Advertising before founding his own firm, Meaningful Works. Most recently, he's advised several well-known retail and restaurant brands, including Grocery Outlet. Jim's experience, strategic judgment and passion for building strong brands make him the right leader to help advance our strategy and strengthen Grocery Outlet's position as one of America's most loved brands. Securing top talent is also a priority at our Board level. In April, we added two exceptional independent directors. Frances Allen brings over 40 years of consumer and food industry expertise across brand strategy, marketing, franchising, technology and operations. Felicia Thornton brings more than 30 years of executive leadership across grocery retail and specialty retail, with deep expertise in corporate finance, strategic growth, operational restructuring and governance. Both new members have highly relevant experience that will help our efforts to strengthen execution and reinforce Grocery Outlet's long-standing leadership in value. Finally, in closing, when taken together, we believe that our near-term actions and continued execution against our strategic priorities position us for improved performance. While we still have work ahead, we're making solid progress that's beginning to be reflected in the business. We're executing our plan, improving consistency and building a more durable foundation. I'm confident that the work underway will position Grocery Outlet to become a stronger, more productive and more profitable business for many years to come. I want to thank our independent operators, our team members and our supply partners for their hard work and their commitment. I'd also like to thank our shareholders for your continued support as we move the business forward with focus and attention. I'll now turn it over to Chris to walk through the quarter and the financials in more detail. Thank you.

Thanks, Jason. Our first quarter results demonstrate the early progress we're achieving against the initiatives we began implementing at the start of the year. The work we're undertaking to reinvigorate our opportunistic product flow and the investments we made in promotion help stabilize and improve our sales trends. At the same time, we advanced our store refresh program as well as our planned store closures to strengthen performance across the fleet. I'll walk you through our first quarter results and then comment on our outlook for the year and second quarter. Please note the comparisons I will provide are on a year-over-year basis, unless otherwise indicated. Starting with the top line. First quarter net sales increased 3.6% to $1.17 billion driven by stores opened over the last 12 months, partially offset by a decrease in comparable store sales. In the first quarter, we opened 7 new stores and closed 28 which includes 27 as we began implementing our restructuring, ending the quarter with 549 stores in 16 states. We closed the remaining 9 stores tied to the restructuring in April. Comparable store sales declined 1% in the first quarter. As Jason mentioned, this was slightly ahead of our outlook and driven by continued positive traffic which was up 2.1% but was offset by a 3.1% decline in average transaction size. We noted in our March call that our lower mix of opportunistic products has weighed on our ticket size. We're addressing this by improving the levels of opportunistic products in our mix, investing in promotions and sharpening our value messaging. Since implementing those initiatives at the start of the year, we saw a month-over-month improvement in comp results throughout Q1. While the primary benefits thus far have been seen in customer traffic, we expect benefits to ticket to follow. Gross profit increased just under 1% to $345.2 million, representing a gross margin of 29.6%. Gross margin included approximately $6 million or 50 basis points impact from inventory liquidations and write-downs related to the announced store closures. The 80 basis point year-over-year decline in gross margin was driven primarily by promotional investments as well as the impact from store closures, partially offset by improvements in inventory management. SG&A increased 4.8% to $347 million, representing 29.8% of net sales, a 40 basis point year-over-year increase driven primarily by higher professional fees, commissions and other costs to support the growth of the business, partially offset by lower incentive compensation. In the quarter, we had restructuring charges of $18.2 million related to the store closures and a noncash goodwill impairment charge of $158 million related to the decline in our market capitalization. Below the operating line, net interest expense was $6.4 million, roughly in line with prior year. Our effective tax rate was 2.2% compared with 19.7% last year. The year-to-year change was primarily attributable to the goodwill impairment charge recognized during the quarter which reduced the effective tax rate by 13.2%. Net loss for the first quarter was $180.3 million or a net loss of $1.83 per fully diluted share owing primarily to the restructuring and noncash goodwill impairment charges I mentioned a moment ago. This compares to a net loss of $23.3 million or $0.24 per fully diluted share last year which was also impacted by restructuring charges. Adjusted net income, which excludes restructuring charges and the goodwill impairment, along with other items, was $4.6 million or $0.05 per fully diluted share. Adjusted EBITDA was $43.1 million for the quarter, representing 3.7% of net sales compared to $51.9 million or 4.6% of net sales last year. Turning to the balance sheet and cash flow. We ended the quarter with $59 million in cash and approximately $175 million in available capacity on the revolver. Total debt net of issuance costs was $489.3 million at the end of the first quarter, down $3.6 million from the end of 2025 and with net leverage of 1.8x adjusted EBITDA. Net cash provided by operating activities during the first quarter was $52.6 million, down from $58.9 million last year. The decrease in operating cash flow was driven primarily by changes in working capital, including inventory and accrued liabilities, partially offset by a lower net loss in the current quarter after adjusting for noncash charges. CapEx in the first quarter was $56.8 million or $53.9 million net of tenant improvement allowances. We expect to spend approximately $170 million in CapEx for the year. Now on to our outlook. We are reiterating our guidance for the full year, the details of which are included in our earnings release. For the second quarter, we expect comparable store sales to decline between 1.5% and 2%. This includes an estimated 50 basis point headwind from the Easter calendar shift. We expect gross margin between 29.8% and 30% as we expect to continue promotional investments to bridge the ramp of our opportunistic product mix. Adjusted EBITDA between $55 million to $58 million and diluted EPS of $0.11 to $0.13 per share. In conclusion, the execution of the initiatives we laid out at the start of the year is driving early results. We're restoring the value and shopping experience customers expect and that has contributed to stabilizing and improving comp trends. At the same time, we're managing the business with discipline while continuing to advance our important strategic initiatives. We're confident that the work we're doing today will better position the company for sustainable growth and we look forward to sharing more about the progress we're achieving throughout the year. With that, we'll now open it up for questions.

Operator instructions were provided. The first question is from Edward Kelly from Wells Fargo.

I wanted to start on the guidance. So you maintained the guidance for the full year. Q1, a little bit better. I mean, you sound certainly a bit more optimistic. But the backdrop, if you think about the macro, the low-income consumer is under more pressure, supply chain costs are probably higher with fuel, I would think. I'm just curious if you could sort of take a step back because you are still implying better results, especially in the back half of the year. How you thought about these considerations? And what's baked into the guidance for it?

Yes. Thanks, Edward. It's Jason here. First, I'd just say our business has typically benefited from countercyclical demand when there's pressure on the consumer. And we have every expectation that the work we're doing now will benefit Grocery Outlet as we improve value for customers. When we think about the progress we're making against our opportunistic plan, it gives us confidence that the results so far indicate we'll have continued progress that's going to drive performance improvement through this year. And I think when we think about the year, the only thing I would say is given our recent comp volatility in the short period of time, we had comp stabilization, and we think we're being prudent with the outlook given those backdrops.

Can I maybe just follow up on the outlook as it pertains to the gross margin. So you've dedicated $20 million to the sort of promotional bridge in Q1. Curious as to how your thinking about sort of confidence level around not needing to continue that in the back half? And then could you specifically maybe just talk a bit more about what the impact of fuel is on your supply chain costs? And what's in guidance for that?

Yes. Edward, it's Chris. Yes, in terms of gross margins, this business has been very consistent in delivering gross margins in the past, and we fully expect to get back to those levels once we get through the promotional spend that we've talked about, the $20 million, and opportunistic product becomes a bigger component of our mix, which we expect towards the back half of the year. So our first quarter, we saw the 29.6% margin. And we've talked about the 50 basis points there from the store closures. So that gets you to a little bit over 30% for Q1 with the promotional spend in there. And then our guidance also includes some additional liquidations in the second quarter, $1.5 million related to the closures. So we'll have a little bit of that in there for the second quarter and then the promotions. But after that, we start to wind down or lessen the promotional spend in Q3 and then fully in Q4. So we expect to be at higher levels of gross margin in the back half of the year. The impact of fuel is not all that significant at this point; it's about maybe 10 basis points that we've seen so far.

The next question is from Mark Carden from UBS.

So to start, I wanted to dig into the store refreshes a bit. It sounds like you guys have made good progress getting to 58, but you're reducing the target to 100 this year. Just as you've deployed these, have you seen any deceleration in their comp lift? Would just be great to get a little more color on your decision to slow these a bit and reprioritize some of the investments in value?

Yes. Mark, it's Jason here. Thanks for the question. First, I want to say we believe we have a huge opportunity to improve the in-store experience and execution in the business over time. As a reminder, why we began this journey on refresh was to improve the customer experience. The feedback we got from customers has been directly incorporated into what we're doing, and it's intended to improve the customer experience in three ways: one, improving the ease of shop; two, improving our in-stock and consistency for customers; and three, improving merchandising and implementing stronger signage to communicate value. What we've seen so far is in all of the executions as we measure customer feedback, we've got improvements in perception. The operators have loved the changes and we've gotten really strong feedback. The first group of stores that have one full quarter of sales reporting is hitting the numbers we've been talking about. We feel good about that. This is really about pacing for us. So it's important that as we prioritize the company's resources to focus wholly on opportunistic execution, which is the fastest way for us to improve our comparable sales, that this is a calibration of effort. I do want to share, though, that as we've scaled this up, we have had some more variability in sales and execution. The team feels that pacing this to more like 100 locations will give us the needed support to help operators through that change. We expect that in the fullness of time, all of the stores will meet our sales expectations.

Great. Appreciate the color there. And then as a follow-up, just with respect to traffic. You guys have seen a nice acceleration there. Are you seeing any meaningful differences right now in behavior between some of the different income cohorts, and just what specifically are you seeing with respect to the SNAP customer?

Yes. On SNAP customers, still a little less than 10% of our sales. Everything we see there on EBT dollars and customers is relatively stable. So I don't think there's anything to add at this point; that's what we see there. On traffic cohorts more broadly, we're not seeing a big difference across cohorts, but there is continued improvement in traffic month-over-month as the quarter progressed.

The next question is from Simeon Gutman from Morgan Stanley.

This is Zach on for Simeon. I wanted to ask about the mix improvement. You mentioned that there was about a 2-point improvement in mix and that has supported transactions. I'm curious why that wouldn't have translated to better units per transaction as well since you also said UPT was still under pressure this quarter.

Thanks for the question, Zach. The opportunistic engine is the value driver for this company and we think we're on track. A couple of points on the improvement in mix: shipments are up, inventory is up, and sales mix is up roughly 200 basis points. We did not see a major improvement in units per transaction yet, but we did see the traffic improvement. So the work we've done on promotion, communication and opportunistic sourcing shows up in a number of ways: first and foremost, the traffic increase; secondly, improvements in NPS and value scores. We expect to see improvement in basket over time as the year goes on. At this point, we've had a nice bump in traffic, and we believe basket will follow as the mix continues to improve.

The next question is from John Heinbockel from Guggenheim Partners.

Jason, you referenced all-hands on opportunistic execution. So I'm curious, what does that entail differently than what you might have had a couple of months ago? And then what's the importance of the short-dated product? I imagine you can get good value, but there's shrink risk. How are you attacking that?

Thanks for the questions, John. On short-dated product, we started experimenting with it and now have better visibility in our systems. We're flagging that product differently, starting with one major vendor, monitoring it through the supply chain differently, and using improved reporting and tracking to increase speed and flow. As that pilot progresses, we'll expand to other vendors to broaden our opportunistic mix and margin. Regarding all-hands focus, it's about narrowing our focus so all functions of the company work to execute our opportunistic plan given its importance to comparable sales. One example: in our highest comping locations we have strong opportunistic assortments, and that stems from how product is ordered, merchandised and prioritized. We've also reduced some MTO and private label space to make room for opportunistic items, improved communication of our extreme value positioning, rolled out new reporting and visibility, and increased supplier engagement. All of this refocuses teams on prioritizing opportunistic deals and translating them into customer value.

The next question is from Robby Ohmes from Bank of America.

Jason, Chris, a couple of quick follow-ups. The first is just on the second quarter comp guidance; I think you said minus 1.5% to minus 2%. What's the traffic and ticket assumption that we should be using there?

Well, from a traffic perspective, we expect to continue to see the positive traffic that we exited Q1 with. As Jason mentioned, improving the basket will start to happen as opportunistic product becomes a greater percentage of the mix. We expect to see that start to improve probably towards the back half of the second quarter.

Got you. And then just on the promotions in a couple of different ways. So the promotions you're doing, were you in promotions that were a significant benefit to the comps in the first quarter, like were the promotions helping the 2.1% traffic comp?

Just to clarify, historically this company has not been a heavily promotional business; the primary way we deliver value is opportunistic supply. In Q4 we had a shortage of opportunistic product and wanted to bridge the gap between what we needed as value-driving product and what we had in the system. The synthetic promotions we developed with branded product were meant to be a bridge while we executed our opportunistic plan. Through Q1 we improved inventory and range, and we will taper these synthetic promotions as opportunistic supply increases. We're making that trade-off now and are encouraged by the progress.

The next question is from Jeremy Hamblin from Craig-Hallum.

I want to come back to the opportunistic mix. As you're going through the store refreshes and building back opportunistic product, can you give us a sense for what portion of the mix you want it to get to? And is there a potential to take it even further if it's driving better basket and more traffic? Ultimately, what's your view on where this will go and how long you expect it to take?

Thanks, Jeremy. Historically, where we see the business perform best is with a balanced mix. We haven't disclosed a specific current mix by store chain-wide, but a blend getting closer to roughly a 50-50 mix on opportunistic versus non-opportunistic items is healthy for us and correlates with strong-performing stores. We're not at that level today, but where we see a high level of opportunistic mix, we see higher sales. We saw about a 200 basis point improvement in the mix since the beginning of the quarter, and we can clearly see the relationship between that mix and the customer value created. We'll continue to work category-by-category and by store to expand opportunistic range and drive the improvement in basket and traffic.

Where is the mix blending at across the chain today?

It's not something we'll release on a call. What's important is the improvement we've seen — roughly a 200 basis point improvement in the mix since the beginning of the quarter — and the clear relationship between that mix and value for customers.

The next question is from Corey Tarlowe from Jefferies.

Great. I was just wondering if you could talk a little bit about the improvements that you saw within the quarter, maybe by month, and then quarter-to-date, if you could just give us kind of what you saw from a traffic and ticket perspective? Because one would think that based on you talking about the improvements and how the business is value-oriented that when gas prices rise, maybe there was an inflection in the business. So I'm curious, could you kind of talk through what you saw and what you're seeing, that would be really helpful.

Thanks, Corey. We believe the business will return to healthy comparable sales performance over time. In January we believe we hit bottom after experiencing traffic and sales erosion through Q4. On the last call we discussed expecting sequential improvement in comps driven by traffic, stronger NPS and the opportunistic metrics we've outlined, and that's played out. Traffic was close to flat at the beginning of the year, and we saw sequential improvement, with a nice range of traffic in March. There was an Easter calendar shift, but weekly traffic in March ranged between 2% and 5% year-over-year during certain weeks. We connected with customers on key events in Q1, including the Super Bowl and a strong Easter, which helped momentum. We did not see as much progress on basket, but we expect units per transaction to improve as opportunistic mix strengthens.

Got it. And then I just wanted to ask a quick follow-up. So it looks like your comps were minus 1% in Q1 and then in Q2, it sounds like you're guiding to negative 1.5% to 2%. So if traffic is improving, is the offset that units per transaction has been lower? I'm just trying to understand the deceleration from Q1 to Q2.

Yes, great question. Given our recent comp volatility and the short period of stabilization we've had, we want to be prudent with our outlook.

The next question is from Leah Jordan from Goldman Sachs.

I wanted to go back to one of Ed's questions because what has changed since we last connected is the inflationary backdrop, but your outlook is staying the same. We talked about fuel, but maybe just digging deeper on the cost side. How are you thinking about inflationary pressures in the year? What are you hearing from suppliers? Anything there? And ultimately, how do you think about your ability to pass anything on as we move through the year in this environment as you're still kind of working on your value messaging as well?

Thanks, Leah. We're monitoring inflation closely. We run a basket savings gap of something between 15% and 20% versus mass and 30% to 40% versus conventional players. We monitor supplier input, PPI indices, fuel and other inflationary indicators regularly, and we'll maintain our value spread to customers regardless of external conditions. Given the profile of opportunistic supply and its average unit retail, as we work the mix we should see a benefit for customers in an inflationary environment. If pressures persist, there could be downstream effects, but our expectation is that opportunistic sourcing will help us deliver value while protecting margins.

Okay. That's helpful. And then maybe a follow-up separately on the value messaging and marketing. A couple of quarters back it was an issue. You've fine-tuned it here. Maybe we've had some wins around Super Bowl and Easter. But could you talk about what you're doing around everyday messaging? What's resonating? What's not? Where would you say you are in that journey of fine-tuning the message and what still needs to be done?

We've had good success with awareness-based marketing, outdoor advertising, social and search channels. Those have been effective, and our independent operators have been effective telling stories related to opportunistic product and sharing basket comparisons. We can see value scores improving with customers related to the communications we've put behind our strategy. We're continuing to invest and refine these efforts as we scale our opportunistic mix and in-store execution.

The next question is from Joe Feldman from Telsey Advisory Group.

I wanted to go back to conversion. I'm curious: you're getting much better traffic, which is terrific, and it seems like people are seeing the better value, but why wasn't the ticket stronger? Are people just not able to spend more or is price not low enough so they're still not putting in enough items? It just doesn't compute for me on the conversion side.

We're pleased with the traffic improvement. Converting trials into loyalty takes time. Working our value messaging and being consistent in the in-store experience, along with improving product availability, will contribute to more loyalty, affinity and larger baskets. We wish it would happen faster, but that's generally the nature of building consistency and trust with customers, and we're committed to that approach.

Got it. And so I guess maybe we'll ask some more offline about it. But on the comp for the quarter, did that exclude the 27 stores that you closed already? Presumably it did. Is that accurate?

Yes, that's correct.

Next question is from Oliver Chen from TD Cowen.

Regarding baskets and opportunistic opportunity going forward: which parts of opportunistic have the most opportunity to impact basket if you thought about categories, or is it overall? And you mentioned the annual business review process. Would love some insights into that and how it will manifest with independent operators and things they can do or what opportunity you see when you implement that? And third, as you engage in the store closures, how is it helping inform your store openings and site selection?

Thanks, Oliver. On opportunistic, it's a broad-based approach; we need breadth across categories to drive basket improvement. We've made progress in certain categories and less in others, but overall shipments and inventory range are improving and showing up in sales. Regarding the annual business review process, it's a two-pronged initiative: reporting and visibility that benchmarks each store against peer groups by market characteristics and sales volume, showing dashboards like shrink, SKU-level gaps and other analytics. Operators have been asking for this and are excited to have it; it allows immediate action and improvements. The field team supports operators by using this data when visiting stores and assisting activation. On real estate, we are being disciplined: avoid challenged locations, focus on high-potential volume, good ingress/egress, clustered openings and higher hurdle rates on returns. We're targeting higher return thresholds (over 25% for 2026 and pushing toward 30% for 2027) and shifting towards core markets to drive sustainable growth and longer-term EBITDA expansion to reach a mid-single-digit margin over time.

A follow-up on opportunistic talent: what's happening with the people behind that infrastructure and the buyers? Any thoughts there? And with the new CMO, was this always a need and how does that interplay with opportunistic efforts?

Opportunistic sourcing and delivering value are core to our strategy. The merchandising and buying teams are critical and focused on opportunistic execution. Having the right marketing leadership, including our new CMO, helps amplify the value proposition and support the in-store execution and customer communication. Everyone involved is aligned on prioritizing opportunistic supply and improving the customer experience holistically.

Next question is from Bill Kirk from ROTH Partners.

I wanted to go back to the closures. I imagine the closures would include some stores that were comping worse than reported results. Could you give us a sense for what the closed stores as a group had been comping before they exited the comp base? And do you think any of their traffic shifts into your other locations?

I would say it's not material. The impact of the store closures on our overall comps and any cannibalization or shifting to other stores is not material.

Are you able to tell in the transaction growth if it's coming from new customers into the stores? Or could it be existing customers splitting their trips? If the traffic is new customers, are there notable trades among those new shoppers, are they completely new or lapsed customers returning?

It's a mix of new customers and existing customers. Some of what we're seeing is increased frequency among existing customers; some is return-to-store behavior from lapsed customers and some is new trials. We don't have further segmentation detail beyond that to share on the call, but it is a mix.

There are no further questions at this time. I would like to turn the floor back over to Jason Potter for closing comments.

Well, again, thank you very much for your interest. We appreciate all the questions and look forward to your engagement with some of you a little later on today. Thank you very much for your time.

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