Grocery Outlet Holding Corp. Common Stock 2026 Q2 Earnings Call

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the second quarter ended July 4th, 2026. Speaking for management on today's call will be Jason Potter, President and Chief Executive Officer, and Ian Ferry, Chief Financial Officer. Following prepared remarks from Jason and Ian, 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 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 investor section of the company's website under News & Releases, and in the company's SEC filings. Now I would like to turn it over to Jason.

Hey, good afternoon, everyone, and thank you for joining us. During the second quarter, our work to stabilize the business and return growth gained momentum. A stronger opportunistic offering and sharper value communication drove sequential comp improvement and results above our outlook across key financial metrics. Revenue increased 1% to $1.19 billion with comparable store sales down 30 basis points. That was a 70 basis point improvement from Q1, despite an adverse headwind from the timing of Easter this year. Traffic grew 1.8%, basket declined 2.1% year-over-year, but improved approximately 100 basis points from Q1 as customers responded to our stronger opportunistic offerings. Gross margin of 30.2% also exceeded our outlook due primarily to lower than planned promotional spending. Combined with disciplined cost management, the sales and margin outperformance drove adjusted EBITDA of approximately $66 million and adjusted EPS of $0.20, both well above our outlook.

Our first half progress reinforces our confidence that restoring the core strengths of the Grocery Outlet model can drive sustainable improvement. It's still early, but the business is responding. Let me start with our primary objective, improving comps. Strengthening our opportunistic offering is central to enhancing our value proposition and returning the business to sustainable comp growth. Since the start of this year, we've prioritized improved sourcing, product flow, visibility, and store-level execution while expanding key supplier relationships. Together, these actions have significantly increased and strengthened our opportunistic assortment and improved our mix. The impact is showing up in our sales. Opportunistic comp store sales improved significantly from Q1, helping lift the total company comps into positive territory in May and June. The breadth of opportunistic SKUs increased meaningfully quarter to quarter with improving quality.

In addition, year-over-year growth in opportunistic units per transaction also improved significantly relative to the first quarter. These are encouraging early signs that customers are responding to a broader and better selection of compelling deals as we improve our op mix. That growth is an outcome of category-level focus and execution. We've prioritized and have seen outsized opportunistic improvement in grocery, our largest category. In grocery, a determined effort to revitalize supplier partnerships drove higher opportunistic product flow, opportunistic comps, and our total comps. This is how our model is designed to work, and we're implementing the same actions in other categories like deli and frozen. Paul Miller is leading the work to strengthen our sourcing and merchandising capabilities. Paul returned in June as Executive Vice President and Chief Purchasing and Merchandising Officer.

A 25-year Grocery Outlet veteran, he helped develop our opportunistic offering, deepen key supplier relationships, and enhance the Treasure Hunt experience. In just two months into his return, his merchant instincts and leadership are already making an impact here. We're very pleased to have him back. To support our revitalized offering, we are improving the ways that we communicate value to our customers. We completed our repositioning around extreme value and the Treasure Hunt, supporting our product efforts with simpler signage, more prominent value items, and targeted at-home and digital media. With a stronger assortment and better analytics, we can deploy marketing and promotional spending more precisely. That will allow us to rely more on product and marketing to drive comps and less incremental price investment in the second half of the year, even as the competitive environment remains promotional.

In Q3, we're deploying enhanced messaging to improve our price perception. We plan to deploy new signage in stores that supports our value positioning and will extend that messaging into our digital presence and our app. We're also taking steps to introduce parity pricing in e-commerce. These actions will make the savings available at Grocery Outlet easier for customers to see, to access, and understand. Together, stronger product, clear value messaging, and broader customer engagement are designed to drive more consistent comp growth. Capturing the full benefit requires strong execution in every store, which brings me to our independent operators. Our independent operators are one of the greatest advantages of the Grocery Outlet model. They know their communities and their customers. With the right assortment, the right tools and support, their entrepreneurial energy really brings our model to life.

Over the past year, we've expanded reporting and actionable insights, strengthened communication with our field organization, and invested in training. We're also spending more time in the field and engaging operators more directly. Our goal is straightforward. We want operators to spend less time sifting through data and more time serving customers to grow their businesses. A common set of facts and priorities helps operators and field teams identify issues sooner, focus on actions that matter most, and deliver a more consistent customer experience. A good example of this is how we're working with IOs in the field. Using fleet-wide data, we identify stores where targeted coaching and operational support can have the greatest impact. Our field teams then work side by side with operators on a focused set of actions, including in-stock conditions, merchandising, store standards, and operating routines.

This annual business review and enhanced merchandising reporting help translate the data into action. We're encouraged by these results so far. Participating stores have consistently outperformed their control groups, reinforcing that meaningful improvement can come from disciplined execution of store-level fundamentals. We're turning those learnings into repeatable tools and routines for the broader fleet. We're also giving operators a more immediate view of customer sentiment. We've introduced new point-of-sale feedback that connects customer responses with transaction data, helping operators identify service gaps and adjust their actions at store level. This capability is now in approximately 100 stores, and the early results support a fleet-wide rollout. In parallel, we're improving efficiency. Our new dynamic routing program removes ordering constraints and optimizes delivery routes, increasing delivery quantity and improving opportunistic product flow across a significant portion of our fleet.

The program is currently in approximately 200 stores, and we expect to complete the rollout over the next year. These efforts are lifting customer and operator sentiment and engagement. Customer NPS improved meaningfully again in Q2, while our IO survey feedback was overwhelmingly favorable. IO satisfaction increased across categories from last year, and the majority of our operators rated our recent systems upgrades as extremely or very valuable. Beyond the data, we're seeing increased engagement from our IOs on a variety of initiatives. These outcomes reinforce our conviction that we're focused on the right priorities. The same discipline we're bringing to store execution is also guiding how we manage the business and deploy capital. Improving operational discipline means making timely decisions, directing resources to the highest value opportunities, and holding every investment to rigorous performance standards.

In April, we completed the closure of 36 underperforming stores as part of our store optimization plan. The outcome is a healthier portfolio that we feel is better positioned for long-term profitable growth. We remain on track to eliminate a $12 million drag to annualized adjusted EBITDA, with the majority of the benefit expected to occur in 2027. We see encouraging signs of progress in the remaining stores in the East. Comparable stores in May and June significantly exceeded the company average, while Q2 margins strengthened on a year-on-year basis. That discipline also extends to our new store growth program, where we're applying greater rigor to site selection, new store underwriting, IO engagement, and execution. We remain confident in the portability of our model and the immense white space that exists.

The ability to offer savings up to 40% versus conventional players allows us to provide a unique and compelling value proposition to customers in a wide variety of geographies. However, as we continue to work on improving the core offering in our business and year one store productivity, it is critical that we prioritize the highest return markets and expand capacity at an appropriate pace. As such, our 2027 openings will be weighted toward infill opportunities. We are taking a similarly measured approach to our store refresh program. Improving the store experience remains an important long-term priority. As we continue those efforts, we are pacing our investment to ensure quality execution that allows the business to focus on our primary goal of driving comp through our opportunistic assortment. We continue to target approximately 100 refreshes completed by the end of the year.

Looking to the second half, the consistent progress we have delivered since January reinforces our conviction that disciplined execution against our priorities remains the right approach, and we enter the second half with improving underlying momentum. Customers are responding to the stronger opportunistic offering and the clearer value messaging. Operator engagement has improved, and our sharper approach to execution and capital allocation is also beginning to improve performance. Those strengths will be important as consumers spend cautiously and the operating environment remains somewhat promotional. They will also help us navigate the near-term impact of the multi-state Cyclospora outbreak. Our products have not been involved in any Cyclospora recalls, but like others in the industry, we have experienced pressure on produce sales. We saw an impact in July and expect a headwind of roughly 100 basis points to total company comps for the third quarter.