Grocery Outlet Holding Corp. (GO) Earnings

Management highlights

- Near-Term Performance and Prioritization * Q1 results were in line with guidance, with improving sequential trends: traffic strengthened throughout the quarter, reaching 2-5% year-over-year weekly growth in March, demonstrating that the company's value proposition resonates with consumers. * Management prioritizes near-term opportunistic product mix improvement and comp sales stabilization, leading to a slower pace for the longer-term store refresh program; the full 2026 underperforming store closure plan is now complete. - Customer Value Restoration Initiatives * Increased opportunistic branded product mix by nearly 2 percentage points since the start of 2026, supported by improved sourcing, enhanced systems, expanded supplier outreach, shorter delivery times, and testing of short-dated product offerings. These products deliver up to 70% savings vs conventional retailers and drive high margins. * Invested $20 million in targeted promotional spending as a temporary bridge to full opportunistic mix improvements, which drove meaningful traffic gains around key events like Super Bowl and Easter. * Launched the Extreme Value Campaign to sharpen value messaging, combining targeted digital and in-market awareness media with simplified in-store signage to make savings more visible. - In-Store Experience Improvements * Completed 34 store refreshes in Q1, bringing the total to 58 completed stores to date. Refreshes improve layout, signage, and merchandising to simplify shopping and reinforce value, with positive early feedback from customers and operators. * Reduced the 2026 full-year store refresh target to 100 stores to reallocate resources to the higher-priority opportunistic product initiative, to speed up comp sales recovery. - Independent Operator (IO) Support * Launched a new Annual Business Review (ABR) process across all stores, which benchmarks each store against top-quartile peers with similar market characteristics, quantifies profit improvement opportunities across sales mix, shrink, and expenses, and provides actionable best practices and field support. * Enhanced analytical tools, expanded real-time order guide functionality, held regional best practice forums, and streamlined communications to simplify store-level execution. Improved shrink performance drove encouraging Q1 operator profitability trends. - Store Base Optimization and Disciplined Growth * Completed all 36 planned 2026 underperforming store closures, which is expected to deliver $12 million in annualized adjusted EBITDA improvement. * Adopted a more selective, disciplined approach to new store growth, with stricter real estate underwriting and higher return hurdles to ensure sustainable, profitable expansion. * Continues to explore strategic options for the UGO business, with updates to come when substantive decisions are made. - Leadership and Talent * Added new Chief Marketing Officer Jim Porterfield, who brings 30+ years of consumer brand and marketing experience, and added two new independent directors with deep consumer, grocery, and restructuring expertise to strengthen execution and long-term strategy.

Guidance

- Full-year 2026 guidance is maintained (unchanged from prior guidance, with details included in the earnings release). - Full-year 2026 CapEx is expected to be approximately $170 million. - Second quarter 2026 guidance: * Comparable store sales expected to decline between 1.5% and 2%, including a 50 basis point headwind from the Easter calendar shift. Management expects continued positive traffic, with unit per transaction improvement expected to begin in the back half of Q2. * Gross margin expected to be between 29.8% and 30%, reflecting ongoing promotional investments to support the opportunistic mix ramp, plus an additional $1.5 million in store closure related liquidation costs. * Adjusted EBITDA expected to be between $55 million and $58 million. * Diluted EPS expected to be between 11 cents and 13 cents per share. - Management expects promotional spending will begin to taper in Q3 and end in Q4, with gross margin improving to historical levels in the back half of 2026 as opportunistic product mix grows. The company is being prudent with guidance given recent comp volatility and the early stage of stabilization.

Segment performance

Grocery Outlet reports consolidated results for its single grocery retail segment. For Q1 2026 ending April 4, 2026: - Net sales: $1.17 billion, a 3.6% year-over-year increase, driven by new store openings partially offset by a 1% comparable store sales decline. - Comparable store traffic was up 2.1% year-over-year, offset by a 3.1% decline in average transaction size. - Gross profit: $345.2 million, up <1% year-over-year, with a gross margin of 29.6% (including a 50 basis point negative impact from store closure inventory liquidations, and an 80 basis point year-over-year decline driven by promotional investments and store closures partially offset by inventory management improvements). - SG&A: $347 million, up 4.8% year-over-year, representing 29.8% of net sales (a 40 basis point year-over-year increase, driven by higher professional fees and commissions partially offset by lower incentive compensation). - Restructuring charges: $18.2 million related to store closures; non-cash goodwill impairment charge: $158 million. - Reported net loss: $180.3 million ($1.83 per diluted share), compared to a $23.3 million net loss ($0.24 per diluted share) in Q1 2025. - Adjusted net income: $4.6 million ($0.05 per diluted share), 1 cent above prior guidance. - Adjusted EBITDA: $43.1 million, representing 3.7% of net sales, compared to $51.9 million (4.6% of net sales) in Q1 2025, coming in at the upper end of prior guidance. - Operating cash flow: $52.6 million, down from $58.9 million year-over-year. - CapEx: $56.8 million ($53.9 million net of tenant improvement allowances). - End of quarter store count: 549 stores across 16 states, after opening 7 new stores and closing 28 underperforming locations in Q1 (the remaining 9 planned 2026 store closures were completed in April).

Risks & headwinds

- Early-stage comp sales stabilization: After a period of comp and traffic erosion through Q4 2025, stabilization is still in the early stages, with continued pressure on average transaction size (units per transaction) that has not yet reversed. - Macroeconomic pressure: Low-income consumers are facing ongoing pressure, and rising fuel and supply chain costs could create incremental cost headwinds, though management notes fuel impact has been only ~10 basis points to date. - Inflationary pressure: Ongoing supplier and input inflation could require pricing adjustments, though management maintains a 15-20% basket savings gap vs mass retailers and 30-40% gap vs conventional retailers, and expects opportunistic product will provide customer benefit in this environment. - Short-dated product testing carries inherent shrink risk, which management is mitigating via improved tracking, visibility, and controlled pilot scaling with one initial vendor before wider expansion. - Forward-looking statements are subject to inherent uncertainties that could cause actual results to differ materially from guidance, with key risk factors detailed in the company's SEC filings.

Analyst Q&A

• Q: With full-year guidance maintained despite better-than-expected Q1 and ongoing macro pressures on low-income consumers and fuel costs, what considerations are baked into the guidance and the expectation of better back half results? /

  A: Management notes Grocery Outlet’s value model is typically counter-cyclical when consumers face pressure. Early progress on the opportunistic product plan gives confidence that continued improvement will drive stronger performance through the year. Prudent guidance is appropriate given the still early stage of comp stabilization after recent volatility. On gross margins, the $20 million promotional investment is temporary, and margins will return to historical levels after promotional spending tapers in Q3 and ends in Q4 as opportunistic mix grows. Fuel cost impact so far is only ~10 basis points, which is not material.

• Q: Why did the 200 basis point opportunistic mix improvement not translate to better units per transaction (UPT) in Q1, if mix drives better value and basket size? /

  A: The early benefits of mix improvement and promotional investments first showed up in rising customer traffic and improved net promoter (value perception) scores, which aligns with expectations for the early stage of the plan. Management expects UPT and average basket size will improve over time as the opportunistic mix grows further through the year. Traffic stabilization is the first milestone, and basket improvement will follow as the plan continues to execute.

• Q: What does the 'all hands on deck' focus on opportunistic product entail, and how is the company managing shrink risk for the new short-dated product pilot? /

  A: All hands on deck means narrowing company-wide focus across all functions to prioritize the opportunistic plan, which is the core driver of comp sales for the highest-performing Grocery Outlet locations. Actions include reducing MTO/private label assortment to free up space for opportunistic product, refining extreme value messaging, rolling out improved performance reporting, and increasing direct supplier engagement. For short-dated product, the company is running a controlled pilot with one vendor, using new tracking and visibility systems to manage flow and mitigate shrink, and will expand only if the pilot is successful to increase mix, margin, and customer value.

• Q: What is the target end-state for opportunistic product mix, and what is the timeline and update on UGO strategic alternatives? /

  A: A 50/50 split between opportunistic and other product is a healthy long-term target for the chain, which drives stronger comps and margins at top-performing stores. The company has already delivered a 200 basis point mix improvement in Q1, and will continue to work toward this target category by category and store by store. For UGO strategic alternatives, management is evaluating options, expects this to be resolved in 2026, and will share a substantive update when a decision is finalized.