Grocery Outlet Holding Corp. (GO) Q1 2020 Earnings Report, Transcript and Summary

Greetings and welcome to Grocery Outlet’s First Quarter Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host today, Joseph Pelland, Vice President of Investor Relations. Thank you. You may now begin.

Thank you. Good afternoon, everyone, and thank you for joining us on today’s call to discuss Grocery Outlet’s first quarter financial results. Participants on this call will make forward-looking statements, which are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. Any such items, including our outlook for fiscal 2020 and future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A description of these factors can be found in this afternoon’s press release as well as in our latest prospectus and periodic reports we file with the SEC, all of which may be found on our website at investors.groceryoutlet.com, or on sec.gov. We undertake no obligation to revise or update any forward-looking statements or information. During our call, we may 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, in our SEC filings and on the Investors tab of our website. We reference non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. Presenting on today’s call will be Grocery Outlet’s Chief Executive Officer, Eric Lindberg; President, RJ Sheedy; and Chief Financial Officer, Charles Bracher. Following our prepared remarks, we will open the call for questions. With that, I’ll turn it over to Eric.

Thanks, Joe. Good afternoon everyone. I hope you and your families remain healthy and safe. We are continuing our social distancing efforts. So Joe, Charles, RJ and I will once again be conducting our earnings call remotely. Our discussion today will be primarily focused on providing you with an update on how we’ve been operating our business through the coronavirus pandemic as well as how we expect to operate our business moving forward. Starting with our top priorities, our efforts remain centered around ensuring our safety of our team and communities supporting our IOs, working with suppliers to purchase product and continuing to deliver strong operational execution. First to safeguard our IOs, their store teams and customers, comprehensive safety measures in line with the CDC and public health guidelines have been enacted across the organization. Samples of safety measures, the IOs have instituted include cleaning stations at the entrance, space markers to ensure social distancing, plexiglass barriers at the checkouts as well as precautionary signage throughout the entire store. We have temporarily provided incremental financial support to offset some of these incremental costs in the spirit of our partnership with the IOs. We recognized that they and their teams have been on the front lines of this pandemic and provide a vital service to their communities, and we’re incredibly grateful for their outstanding efforts. Second, our purchasing teams have done just an amazing job of leveraging their vendor relationships to keep up with demand for opportunities and everyday products. We have been working closely with our supplier partners to buy product to meet customer demand throughout the pandemic while at the same time finding new sources of supply. We cannot overstate the value of our longstanding partnerships and we continuously strive to be a great solution provider for our suppliers, who work with. Third our supply chain. With the significant increase in demand that began in mid-March, we increased the frequency of deliveries to stores and made necessary adjustments within our distribution center operations in order to handle the higher volumes. Our entire distribution network, including DC workers and fleet drivers, worked tirelessly to get products to stores as quickly and safely as possible. Overall, we feel really good about the current quantity and quality of inventory in our stores and distribution centers. Our flexible business model, value orientation, localized approach and product offering have enabled us to effectively navigate through the initial stages of the pandemic and deliver a 17% comp growth in the first quarter. We’re all extremely proud of the team’s success and managing through this difficult period. Turning to an update on our real estate expansion strategy. We have opened 10 stores in the first quarter and have been working closely with our developers to get the remainder of our planned stores open by year-end. Despite the delays related to COVID-19, we still expect to open 28 to 30 stores this year. We feel good about the opportunities in front of us and continue to build our pipeline to a 10% annual unit growth. While we continue to focus on our response to COVID-19, we have not lost sight of our growth strategies and remain committed to making investments that will enable us to capture the long-term potential of our business. We know that people are one of the best long-term investments we can make. To that end, we recently hired Andrea Bortner to the newly created role of Chief Human Resources Officer. Andrea brings 30-years of experience in talent acquisition and development as well as organizational development, which will be instrumental as we grow and scale our business over the coming years. We’re excited to have Andrea onboard to help contribute to the next chapter of our growth. With that, I’ll turn it over to RJ.

Thanks Eric and good afternoon everyone. I hope that you and your families are all safe and healthy. We’ve been working hard to support our operators in serving their communities since the COVID-19 outbreak began. I would like to recognize the tremendous effort of our team, our suppliers, and other partner companies during this challenging period. We have leveraged the many strengths of our business model and have adapted processes to meet the demands of the current environment. We reacted quickly to the unprecedented surge in consumer demands. Adjustments were made to our buying process, ordering platform, warehouse operations and distribution system to keep pace with this sudden sales increase. The result was greater supply chain capacity and efficiency and the rapid product replenishment necessary to support increased demand. I’m happy to say that our current inventory position at stores and warehouses is very healthy and puts us in great shape overall to continue to support IOs and their customers. Our ability to execute through this heightened demand period is the result of our buying model, flexible supply chain, entrepreneurial independent operators, and the amazing talent that supports these and other parts of the business. Let me talk first about the strength of our buying model. Our team continues to operate at a high level as they balance the buying of opportunistic in everyday products. Our ability to successfully purchase products is a testament to the talented members of our buying team. In the absence of travel and trade shows, they’ve taken a more proactive and personal approach to communicating with our existing suppliers and to outreach with creative solutions for new partners. Our collaboration with suppliers has never been better and we thank them for the continued partnership during this time. We continue to see healthy opportunistic deal flow from our existing suppliers. These offers are for products that span all categories including some of those experiencing the highest consumer demand. We’ve also been contacted by many new suppliers that need to move through product as their distribution outlets have closed or are experiencing significant sales declines. These include suppliers that distribute to food service, restaurants, department stores and airlines and airports just to name a few. We expect these new relationships to develop into longer mutually beneficial partnerships. No different than those we enjoy with the rest of our supplier family. As it has been well reported in the media, there is currently a huge amount of activity and change in the grocery and consumer packaged goods landscape. Manufacturers have dramatically increased production and they’re actively making production line skew assortment and packaging changes. The imbalances between supply and demand have and will continue to occur. We have already begun to benefit from some of these imbalances and we expect to see more opportunities in the future. In terms of everyday staples we’re also maintaining our focus on supplying essential items that customers continue to stock up on. Other than certain high velocity skews that remain allocated. We are back to healthy inventory levels within everyday categories. Let me turn now to our supply chain. Our distribution center employees, fleet drivers, and third party vendors all continue to execute at an exceptional level. We have been moving record volumes through our DCs and have increased the frequency of deliveries to the stores. These efforts are supported by the flexibility of our warehouse management systems, real time order guide and distribution system functionality. Our IO efforts throughout this pandemic have truly been amazing. Providing them with the support they need is a top priority for us, as Eric said and communication is essential to our partnerships. We’ve been holding virtual weekly town hall updates in addition to providing daily communications on recent developments. Strong coordination between Grocery Outlet and operators has supported helpful best practice sharing these past two months. We also continued to provide real-time response to IO feedback through our iCare platform as normal course of business. Our marketing efforts have been focused in three areas: first, reassuring customers of health and safety measures taken by IOs in their stores. Customer health is our top priority; second, the communication of exciting products and continued value that we provide. Our local independent operators excel at using social media to engage with their communities in this way, and we are pleased with the customers’ response. For example, a number of IOs have used Facebook Live every day to speak to customers about new items in-store or arriving soon and have even taken live questions from customers with specific requests. Our third marketing focus has been on community outreach and the local connection that our IOs provide. They are important leaders within their markets. We are very pleased with our combined company and local IO marketing efforts during this unprecedented time Looking forward, we remain committed to our philosophy of reinvestment and innovation. This approach has enabled us in many ways to successfully execute during the past two months. We’ve made significant progress in developing and upgrading key operating systems these past several years, including a warehouse management system, our point-of-sale system and a real-time order guide, among many others. The investments we made in operational innovation and systems enhancements have contributed meaningfully to our business performance since then and more recently have been critical to our ability to react to the challenges created by the coronavirus pandemic. We have also invested heavily in purchasing, inventory management and other corporate support teams, all of which have been paying dividends. We will continue to invest in talent, technology and operational improvements to enhance functionality and drive efficiencies to support long-term growth. With that, I will turn the call over to Charles.

Thanks, R.J. And good afternoon everyone. Our priorities remain focused on the safety of our customers, our independent operators and all of us who support them. Our strong financial performance and healthy liquidity position is a testament to the unique strengths of our business model in the incredible execution by our entire team and independent operators. Our first quarter results reflect strength across all of our core financial metrics. Sales for the quarter increased 25.4% and to $760.3 million compared with the same period last year. This growth was driven by a 17.4% increase in comparable store sales as well as the sales contribution from 32 net new stores opened since the end of the first quarter last year. Our comp performance in the quarter was a result of both higher store traffic and larger average baskets. Comps were strong across all regions, including mature geographies as well as our Southern California and Mid-Atlantic stores. We opened 10 new stores and closed two during the first quarter. We continue to be pleased with the performance of our newer stores, which, like our mature sites, experienced elevated customer demand. First quarter gross profit increased 26.7% from the prior year to $237 million, driven by new store growth and higher comparable store sales. Our gross margin rate increased approximately 30 basis points to 31.2% due to reduced markdowns and throwaways as a result of faster inventory turnover as well as leverage on our distribution costs. These improvements were partially offset by modest mix shift headwinds. SG&A expense grew 22.3% to $186.9 million, with the increase largely attributable to higher variable commissions to independent operators as well as higher store occupancy and corporate expenses. SG&A expense also included $2.3 million of public company costs not incurred last year, $1.1 million in transaction costs related to our February secondary offering and $850,000 related to our adoption of the new accounting standard regarding accounts receivable reserves. Stock-based compensation expense for the first quarter was $20.3 million, largely related to the $4.1 million performance-based stock options that vested in conjunction with our secondary offering on February 3, 2020. Interest expense decreased 64.5% to $5.8 million as a result of our IPO-related debt paydown and subsequent credit agreement repricings. GAAP net income for the quarter increased 235% to $12.6 million, or $0.13 per diluted share compared to net income of $3.8 million, or $0.06 per diluted share in the prior year. For the quarter, adjusted EBITDA grew 45.8% to $57 million from $39.1 million last year. Adjusted net income increased 242.2% to $34 million or $0.36 per diluted share based on an average of approximately 95 million diluted shares in the quarter. This compares to $9.9 million or $0.15 per diluted share on 68.6 million diluted shares in the prior year. Note that we recorded a tax benefit in the first quarter, largely related to the exercise and vesting of employee share-based awards granted in prior periods. Relative to our normalized tax rate, the benefit to reported net income was approximately $5 million. For purposes of calculating adjusted net income, we add back to our reported net income, the tax effective non-GAAP adjustments in our normalized tax rate, excluding discrete items. That normalized rate was 28% for the quarter. Turning to our balance sheet. At the end of our first quarter, we had cash and cash equivalents of $160.9 million. Inventory declined to $188.3 million as elevated customer demand in March temporarily drew down on store and warehouse inventory levels. Total debt, including the $90 million drawn on a revolving credit facility was $550 million at the end of the first quarter. For the quarter, we generated $67.8 million in operating cash and invested $28.2 million in gross CapEx. This combined with the revolver drawdown resulted in positive net cash flow for the first quarter of $132.8 million. We feel extremely good about our liquidity position given that our business continues to generate healthy internal cash flow combined with the broad flexibility of our credit agreement. Note that our first lien facility does not mature until 2025 and we have ample room relative to drive seven times leverage covenant restriction. Now let me provide an update regarding trends to-date in the second quarter. Through the first five weeks of Q2, comp sales growth is tracking in the mid-teens. We are seeing customers consolidate their trips to stores resulted in lower traffic, which is being more than offset by larger baskets. Note however, that we are less than halfway through the quarter and it is difficult to predict the impact on purchasing behaviors as shelter in place restrictions ease. As RJ discussed, we have been actively purchasing and receiving product in response to customer demand and has now rebuilt to a healthy inventory position in our stores and warehouses. With respect to new stores, we have signed leases for 2020 openings consistent with our 10% annual unit growth target. While construction activities continue, we do anticipate that COVID-19 will impact our ability to open all stores on time. Our current expectation is that we’ll open between 28 and 30 stores this year with no additional closures plan. Looking forward, we remain excited about the availability of attractive real estate sites which we continue to build our store pipeline to support 10% annual unit growth. While we continue to have confidence in our long-term margin stability, our gross margin rate may be impacted in the near-term due to a number of COVID-related factors, including a higher distribution and supply chain costs, short-term product mix shifts and potential increases in commodity prices. Regarding SG&A, we expect to incur incremental operational expenses related to COVID-19, including additional cleaning and safety measures, cost for protective equipment and supplies at our stores and facilities and higher corporate and distribution center personnel expense, including premium pay, overtime and temporary labor. The impact of these incremental expenses was minimal in the first quarter, but is likely to more significantly impact second quarter results and potentially extend in the future quarters as COVID-19 evolves. Consistent with our long-term philosophy, we continue to actively invest in our long-term growth objectives. For example, we have accelerated our investment in talent to add new skills and bench strength across the organization. We are also putting more resources into areas where we see opportunities to improve our operational capabilities. Taking those factors into account as well as the addition of a full year of public company costs, we continue to manage towards a full year adjusted EBITDA margin rate that is in line with prior year. We do, however, anticipate the quarterly adjusted EBITDA margins will experience greater variability with significant pressure in the second quarter for the reasons I discussed. Moving further down the P&L. Inclusive of our recent $90 million draw down on our revolver, annualized interest expense is expected to be slightly below $25 million based on current LIBOR rates. We also continue to expect a normalized tax rate of approximately 28%, which exclude discrete items. We expect weighted average diluted share count for the year to be approximately 100 million shares. This reflects the full vesting of 5.8 million performance-based stock options related to our 2014 equity plan, which occurred upon the closing of our recent secondary offering on April 27. We expect stock-based compensation for the second quarter to be approximately 12 million largely due to the final vesting of those performance options. Turning to our capital expenditure plans. We remain committed to our investment priorities, which are building and opening new stores in line with our long-term 10% annual unit growth target, reinvesting back into the existing store base and investing in our supply chain, IT systems and infrastructure to support growth. While our CapEx spend in fiscal 2020 may fluctuate due to the timing of new store openings, we currently expect that CapEx for the year will be in the range of $90 million to $100 million. In closing, we’re extremely proud of our team’s performance through this highly challenging and dynamic environment. I want to thank our employees, IOs and the broader Grocery Outlet community for their sustained commitment and amazing execution during this health crisis. As we navigate the next phase of this pandemic, we remain more confident than ever in the strength and durability of our business model. While our long-term growth algorithm remains unchanged, we believe that the broader changes occurring in the marketplace very much play to our strengths, and we’re well positioned for the future. With that, we can turn it back to the operator to begin Q&A.

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Randy Konik with Jefferies. Please proceed with your question.

Yes, thanks a lot. I actually have two questions. The first is maybe for Eric or RJ. Could you – you had some process changes to adapt to the demand surge that you saw in the business. Are there any kind of, any of those process changes that took place that you foresee being more permanent to kind of give you more of – that you learned that you could use in a different way to help business functionality once we get through COVID? Just curious there to start.

Yes. Hey, Randy, it’s RJ. I’ll take that one. So, yes, as noted in the comments, we had a number of changes that we made to react to the increase demand and there were quite a lot. And we really benefited also as mentioned from some of the system enhancements we’ve made over the years and really leaned on the flexibility of the model. So it served us well. Ordering functionality changes distribution methods and approach, store ordering frequencies, volumes, certainly plenty of changes as it relates to – as it relates to capacity in the supply chain, all the way from buying through warehouse and distribution. And then certainly many changes as far as practicing, practices in the stores go. As far as takeaways and what we take from this looking forward, I think more than anything view this most recent time period as an illustration of the strength and agility of the model and we continue to lean into all of these things that make this business unique, and have really fueled our growth in the past and we expect to looking forward. So, and I can go across the entire business, but maybe just to point out a few, on the buying side, talk about the proactive and personal approach we’ve taken to buying product. I think we continued to reach an even higher level than the teams operate at in the past and that’ll serve us well both with existing suppliers and with new suppliers, renewed focus on relationships, solutions provided to our partners, which more and more, I would say, are even more creative than we’ve seen in the past. And certainly, as it relates to what I’ll call nontraditional suppliers reaching out to us for help at this time. On the store side, gosh, countless examples of operators with their connection to community, really demonstrating the benefit of ownership, that ownership mindset, again, flexibility whether it’s ordering or merchandising in a local way, all of these things have really benefited us, and I think, again, at levels that maybe we hadn’t experienced in the past, it will serve us well looking forward. And the last thing I would mention really more around culture and communication. I think as all of us are experiencing, we’re working remotely, making quick decisions, collaborating. A lot of the tenets of our business and culture, I think, have really been shining at this time period. And so I think all those things, we carry forward as well. So really nothing terribly new or different, more just emphasizing all the things that we love about this business and maybe showing us new and better ways that we can execute than we had before.

Yes. That’s a great description there. So my last question would be you talked to the new areas of supply that are nontraditional, if you will. What are those nontraditional suppliers asking of you? And what are you asking of them? I’m sure that some of the packaging and the way they’ve traditionally produced those products for those different venues or different types of customer sets have to change for you. So kind of walk us through that relationship-building process that’s going on – ongoing right now and how we should be thinking about that into the future. Thanks, guys.

Yes, sure. So yes, so we had a number of people reach out to us, and as you can imagine, there are many suppliers now with excess product because their traditional retail partners have not been open or open in more limited capacity. And in terms of what that looks like, I’d say it comes in all different flavors. There’s – the most straightforward would be suppliers with product that’s retail-ready, so to speak, with the UPC, either they’ve sold through the other food retailers or non-food retailers, but the product that’s ready to go. And the benefit or the solution that we provide there is helping them move volume, helping them get cost recovery, and that’s pretty straightforward. With others, and as you’ve seen or heard, a lot of the constraint with suppliers selling to foodservice or nontraditional retail is around packaging, and it is around having product be retail ready. So those changes have – are being made. They have been made and others to be made still looking forward. And so we’re partnering with those companies. At times, we’ll help develop packaging. At times, we’ll take things and, I said, less retail ready packaging, and we can do some reconditioning to that. So we do have those capabilities and our customers expect to find maybe some things that are a little more unusual or different from a packaging standpoint. So that all works just fine. And then there are other examples beyond that. These suppliers, we do very much orient towards providing solutions. Whatever the case is, we do look to maintain these relationships well into the future. And for us, the objective is to be there when these situations arise, whether they’re now or they happen a month from now or further out. We have suppliers across the many that we work with that we’re getting lifts from regularly and others are more point in time and would expect this new set of suppliers coming in to be similar in profile. So it is about establishing the relationship, helping them in these situations and then having them join the group of the thousands of suppliers that we work with on a regular everyday basis. So that served us well, and we’ll continue to do that as more and more suppliers reach out to us for help.

Thank you. Our next question comes from Paul Trussell with Deutsche Bank. Please proceed with your question.

Thank you, and good afternoon. I wanted to actually inquire about some of the elevated expenses that transpired maybe late this prior quarter and we will see here in the second quarter. If you can just give a little bit more detail on how to think about quantifying that. And also somewhat related, you spoke about the assistance that you’re providing the IOs at this time. Maybe just give a little bit more color around that as well. Thank you.

Hey, Paul, this is Charles. Let me give you a little bit of color in terms of expenses. I’d say it’s really across a variety of areas within our facility as well as within the stores themselves. So it’s cleaning and safety costs at the distribution centers, at our stores. It’s personnel cost when you think about premium pay for people who are on the front lines, overtime costs in our DCS, additional labor as we’re dealing with some pretty elevated volumes. And then there are costs that typically would be borne by the IOs, but really in the spirit of partnership, we have stepped up and have made sure that we’re supporting them and bearing some of those costs as things like protective equipment at the stores, single-use bags, for example, that they give it away to customers and not charging for. So really, again, a number of different things. We wanted to call out the folks that because of the timing of the sales ramp really kicking in, in the middle of March, at the end of the first quarter, the impact of those expenses was pretty minimal as it relates to the first quarter, but we do anticipate it will be more significant with respect to Q2. We did not quantify that number, frankly. We’ve only had the benefit of one fiscal month in the second quarter to look at those expenses. So we didn’t think it was appropriate to try to estimate the exact cost, but we did want to call out to folks that we would expect adjusted EBITDA margins in the second quarter to be pressured as a result of some of those costs.

Our next question comes from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Thanks. Hey, good afternoon, everyone. My question is also around buying. I think RJ mentioned that things have shored up, and I guess, I don’t know if you mentioned visibility, but maybe supply demand looks a little – maybe a little more predictable. I’m sorry if I’m putting words in your mouth. Can you talk about the availability market in general? Could there be an issue a couple of quarters from now, given the surge and maybe the lack of closeout deals that may arise in the next six months? Or is the backdrop such that there’s so many different sources that you’re looking at that reasons to be worried around six months from now shouldn’t exist. And then you mentioned commodity costs, I think, as well. Why wouldn’t you be able – in what seems to be a price taking market for consumers, why wouldn’t you be able to pass those along to the customer? Thanks.

Hey, Simeon, yes. So to answer your first question, on the opportunistic side, we’ve really seen healthy opportunistic deal flow all the way through from mid-March when this thing started all the way until now and continue to point to the relationships we have, the partnerships that we have. Suppliers need solutions to some of these imbalances even now, and then also the diversification of our supply base and that we work with lots and lots of suppliers. So while we may see pockets of softness here and there, more normal course of business, that’s true really at any time. Looking forward, I’d say, if anything, the amount of supply or the pool supply out there, I think, only continues to grow. We’ve talked before about supply chain and balance being a positive for this business. It’s very much true. Some of these non-traditional suppliers as we described them coming in, I think that continues despite retail reopening for one, because I think it will be a longer build for customers back into those stores and for those sales volumes to get back up to more normal levels. And there’s certainly many that are still closed. So I think that backlog that exists within the supply chain continues to serve us well as far as opportunistic supply goes. I’d also point to more traditional suppliers the amount of change and disruption that’s occurred with production lines and assortments and SKUs. And you had suppliers narrowing their SKU lists and now they’re expanding back out and of course, different rates for different suppliers. But all of these changes create all sorts of imbalances or some degree of product tales, if you will, in the supply chain. And typically we’re seeing those types of things come through from traditional suppliers. So feel optimistic about that, looking out. But, of course, none of us have the crystal ball and we’ll continue to manage it as we have. To your second question around costs. We’ve seen some price inflation eggs was the big one back at the end of March, beginning of April, and that has since dated as those that come down a bit from those peaks a few weeks ago. We’re seeing some inflation now in meat more recently with what’s happened there within supply chain. I wouldn’t say we’ve experienced really any material changes as it relates to sales or to margin as far as inflation goes. Remember, we’re more of a relative pricing model, so we’re maintaining our pricing spread relative to others and delivering that value on the basket and then even deeper value on specific items. And so as these costs increase through the supply chain, we’ll manage those with our partners, supplier partners, and then from a retail pricing standpoint, always maintain value and then managing margin along with that.

Our next question comes from Oliver Chen with Cowen. Please proceed with your question.

Hi. It was really encouraging the markdown management. What are your thoughts on inventory management ahead and what kind of opportunities you have in terms of systems and infrastructure? And we’d also love your view on digital engagement going forward. A lot of our surveys speak to customers really appreciating all the digital engagement you have now. What do you think is going to happen later with, with curbside, with marketing, with Instacart or micro fulfillment and just different avenues for you to continue to innovate? Thank you.

Oliver, thanks for the question. So yes, the first part of your question, as far as markdown in inventory management goes, I’d say consistent with the work that we’ve been doing for awhile now to better manage. It’s starts with the buy, so open to buy, how we think about that relative to every day and opportunistic and it’s buying and inventory management teams working together to maintain that optimal balance. It’s a little bit unique for us in that the assortment does change quite a bit. We’ll flex in and out of categories as we orient towards value and our sales will go up and down according to that. And so – we’ve become quite good and the team is, is very, very talented in a way that they’re able to manage that inventory better and better each year. And then on the system side, whether it’s the order guide and the information that we provide there for the operators ordering real time as we’re mostly a pull system or if the distribution system in the way that we manage, whether it’s shorter coated product or what we call scores, or the deepest value items. I think we continue to get more refined and allocating and distributing product in a better way. And then all the way through the supply chain, productivity, efficiencies, within the warehouses, WMS has got a long way to helping us there. So a number of really positive things from inventory management systems and also ultimately, sales and margin standpoint, and we’ll continue to work through that list of enhancements that we’ve had on the list looking forward. As far as digital goes, continues to be a big part of our marketing strategy. We continue to market digitally across new platforms with new content, continues to be shared. Great partnership between Grocery Outlet and the operators, so the benefits of the enterprise scale, brand level marketing along with the local connection that operators have very active on social media. We continue to see healthy email signups and now talking to them more specifically as they’re introduced to Grocery Outlet in a way that we can better educate them on the model and the treasure hunt and value and all of the attributes of the value proposition. And the other thing, I would mention from a digital marketing standpoint, continue to give operators more and more – more tools to create their own ads, get the system, get them started and then they curate from there, whether it’s removing items or adding items. And ultimately again, this blend of both sort of automated system or enterprise marketing along with the local connection and local store offering that the operator then controls. E-commerce continued to pilot in a smaller number of stores. We’ll keep a close eye on that and see how it evolves, but we would describe it very much as pilot stage right now, I mean, really more from a customer service standpoint and providing that to those customers that maybe don’t feel safe coming into the stores. We’ll decide with something that we want to rollout further longer term and to see where that goes.

Our next question comes from John Heinbockel with Guggenheim. Please proceed with your question.

So two maybe related questions, number one performance of everyday product versus opportunistic, maybe compare those. And was that the primary mix headwind, right? That you think you face here in the second quarter. And then secondly, obviously, would seem to be a lot of non-food discretionary closeout opportunities, maybe the thought process on investing inventory in that area in a recession you can get great values, good margin. Will people buy that product? Is that – how do you weigh the pros and cons there?

Yes, John. So yes, as far as everyday and opportunistic goes we have seen a little bit of a shift there. Of course, the biggest increases more within core categories, whether it’s beans, rice, other canned foods, toilet paper and such. And within these categories there are many everyday items. So there has been some mix shift there. And then also some margin headwind as well. But I’ll say it really hasn’t been too extreme. Again, customers that are coming into the store or buying opportunistic as well some opportunistic within these categories and their shopping the whole store. And so, I think that has muted the impact from a margin standpoint, and as we’ve said, everyday an opportunistic item do spend the spectrum, if you will, from a margin standpoint and so not everyday items are lower margin. So that’s the dynamic there. And then as it relates to non-food close out opportunities yes, we think there’s – we think there’s a ton of opportunity there. We – as you know, we do sell general merchandise, HBC, non-food items. And so we’re leaning into those opportunities where we’re seeing value and I’d say, not inconsistent how we’ve managed the business in general. We always orient towards value and as a result, the assortment and the mix does fluctuate based on the products that we have access to. No set skews, no set hierarchy. We’re not constrained as far as warehouse goes. We’re not constrained as far as planograms and the stores go. And we don’t have those. So the model supports it really well. For us, it’s more about choosing those items where we can offer the most excitement to the customer, the best value, the treasure hunt. And the operators get excited about them and then the customers as well. And so we just have access now to maybe more of those than we have before. And that’s, that’s a positive thing. The difficulty of course is, I’m saying no to suppliers and that we’re only limited by the number of stores we have and volume as it grows. That’s the more difficult part of it. But yes, really excited about the opportunities in food as well as non food.

Our next question comes from Michael Lasser with UBS. Please proceed with your question.

Good evening. Thanks a lot for taking my question. In the trend of mid-teens comp that you’ve seen quarter to date has it been consistent all quarter or decelerate or accelerated or the course of the period? And also, is there any evidence that you’re seeing some of the customers that you might have opportunistically picked up as a result of this situation, come back and become more regular customers? Or is most of the above average comp growth being driven by your most loyal customers were just buying more when they come in? Thank you very much.

Hey, Michael, this is Charles. Let me tackle the first part of your question then I’ll turn it over to RJ to talk about customers. But with respect to the comp trend in the quarter, I would say it has been generally consistent when we reported, we gave it a prelim look as to April month to date results a few weeks ago. And at that time we talked about, we were tracking in the high single-digits. That was after three weeks, which included the impact of an earlier Easter holiday this year. And so we got the comp benefit from that Easter shift in the fourth week of April. So once you normalize for that holiday shifts, I would say the trends across the quarter have been fairly stable. The average basket has remained elevated traffic patterns have been steady over the course of the quarter and again, broadly consistent across regions, across stores, vintages as well.

Hey, Michael, second part of your question. Yes, we have seen many new customers coming to our stores these past couple of months. And certainly excited for them coming back as future loyal customers. I’d say a few things about that, how do we retain them or how do we convert them from first time customers into repeat customers? First, I’d say the store experience goes a long way there. New customers are finding us I think in many cases, because of inventory both back at the end of March, where we were in good inventory position if maybe; they weren’t finding what they were looking for in their regular store. They were coming and finding us and I think we showed very well. And I’d say that continues even to now as we talk about the healthy inventory position that we’re in. I think that that makes a nice impression on customers. Of course, value, continue to deliver great value. When they come into the store, I think for the first time, many of them surprised the values that they see even better at these times with other retailers less promotional. So I think, our EDLP pricing strategy and the value we provide shows very well. Of course, the treasure hunt, we have had a lot of new items coming in and out of the store these past couple of months. So, customers of course, love seeing that. And then the local ownership the customer service that the operators are providing and then the connection that they have with the community. And so all these things core to the model are sticky and I think gets those customers coming back. Then of course, we supported with marketing and really marketing is to communicate all of these attributes and these things that customers experience when they’re coming into the store. So, whether it’s digital that I talked about before and as we look to be more personalized in the way that we communicate with them, we think that goes a long way. We can continue to invest in TV and radio as new creative and have taken advantage of added value spots there. And really just as we say, communicate the wow outside the four walls of the store. So, hard to predict how traffic will trend looking forward, how buying behavior might change, but do you think we’re positioned really well? Do you think the need for value continues, has been strong and I think it, it continues to be even stronger. And so of course, we can provide customers with the best value out there. So, I think more and more of them will come to love grocery outlet.

Our next question comes from Karen Short [Barclays Capital]. Please proceed with your question.

Hey, thanks very much. I just had a bigger picture question. I mean obviously, you’ve discussed the fact that there will be embedded costs that were – will likely be ongoing in terms of cleanliness and things like that and that’s something that will pressure the IOs going forward. So, I guess what I’m really wondering is bigger picture, does this whole pandemic make grocery outlet more attractive tiles or less, given that I also would say that pay scales are going to have to go up and maintain a high – to be maintained at a higher level at many of the essential retailers across the country. Just wondering if you have some high level thoughts on that and then the second question I just wanted to ask is, you obviously don’t seem to want to give us a dollar amount on providing financial support to the iOS, but is there any way you could just maybe give us a little more context in terms of how to think about 2Q and beyond on that front?

Yes. Hey Karen, it’s Eric. I’ll take the first one and then perhaps let Charles jump in on two. Yeah. We think operators are going to be more attracted to the model. One of the first things we noticed in the early days was just the independence of the operator getting to react in their community in a way that felt right for the customers, be that inventory be that hours they wanted to be open, just reacting to local and state sort of directives. The operators leaned in, and it was very collaborative on their part. We think long term, we’re seeing an uptick in inbounds from people that are interested. We don’t know if that’s COVID-related or not, but just looking at sort of end of last year trend to first quarter this trend, number of people coming in, we think that’s going to be a continued trend. We think the hourly pay, that’s been sort of a headwind we’ve had for five years sort of from $10 to $15 in most of our areas. Everyone’s offering frontline pay. Our operators are doing the same thing. We think those increased expenses are perhaps short term. They’re definitely overcome by increased profitability, increased volume for the operators. So I think on a net-net, it’s a positive situation for the operators. It’s been stressful for them. We’ve gotten lots of feedback that they’re tired. They’ve been sort of gas on for, call it 2.5 months since the beginning of this. But they would not want to be anywhere else. It’s – they’ve been very, very positive about just being able to respond to each one of their communities, take care of their employees and serve on the front line. So Charles, do you want to take the second part of that one?

Yes. Karen, let me try to give you a little bit more context at least directionally. I think you can understand that it continues to be very fluid for us and so it’s tough to put a specific dollar amount to these costs. But I think what we can say is we do continue – as we think about adjusted EBITDA margins, we continue to manage the business to maintain margins in line with our 2019 full year performance. And so when we think about Q1 and obviously, performed well above that target, I think just directionally, Q2, we would expect to be below sort of that full year adjusted EBITDA target, if you will, as a result of those costs that I kind of walked us through.

Our next question comes from Jeremy Hamblin with Craig-Hallum. Please proceed with your question.

Thanks. And I wanted to ask a question about store development, the push out of openings and delays that might be coming from COVID. Two things. First is in terms of the plan that you would have started 2020 with, do we get some of those stores that would have been developed this year – do we kind of catch that in 2021, so that you have a little bit of an outsized growth in 2021? And then the second part is related to the training that you typically do for IOs going through that process, you have kind of your Grocery Outlet university, how do you adjust that process moving forward? And are there going to be any additional costs associated with that or potentially fewer costs if you’re not doing it in person?

Yes. Jamie, Eric. So look, we’re feeling good about the year. From a near-term standpoint, we opened 10 stores in Q1. We still expect to open 28 to 30 in the year. We’re working – each store we’re trying to open is sort of a specific set of circumstances and location. So we’re working with developers to get the remaining of the 2020 stores open, but it’s really a case-by-case. I would expect to be impacted a bit in the 2020 opening cadence, but it’s really hard to guess at this point, what that’s going to end up being. I think to your point about trying to play catch-up and perhaps pushing a bunch of those stores in 2021, I think we’ll get back to the long-term algorithm of sort of 10% in 2021. We’ve signed leases that’s a good news. Pipeline remains really, really strong. It’s possible and I think it’s likely that we’re going to see some better real estate opportunities coming later in the year, beginning of next year. I think patients will pay-off; a lot of landlords are not going to be quick to recognize that return should be lower. But essentially I think we’re going to deliver pretty close to what we said we’d do this year. Pick back up to the 10% cadence next year, with sort of a favorable outlook of what might come beyond that. Relative to training, this is where a nimble organization learns and pivots. Obviously we can’t have big group gatherings for universities and classes. We pivoted to a fuel-based training probably two years ago. We generally would have IOs in the office to interview. Then they go through their days of discovery, which is sort of their on-boarding to start training and then they come back, perhaps for one, two or three day university class in Emeryville. So actually the AOC recruiters have reported that their process is a little bit more streamlined because they are doing everything through zoom and teams. Getting quicker access, making decisions faster, we’re going to have to work a little bit harder to get training into stores, but stores are open, operators are there and they’re really energized about the new candidates that’s coming in. So I think we’ll see some level of development and perhaps some costs in our training modules so that we can do testing and training, deeper modules online, some simulation. And that’s – that’s in the process right now. And something that I think COVID will force to be a little bit quicker, but overall I wouldn’t say it’s going to be a big disruption. It’s probably just going to be an opportunity for us to get better a little bit quicker.

Thanks guys. Good luck.

Our next question comes from Joe Feldman with Telsey Advisory. Please proceed with your question.

Hey guys, congratulations on the quarter. And wanted to ask about the inventory again, I’m just – can you explain, I know the way the quarter ended, it seemed like, it was a bit light and I know you said a few times in the prepared remarks that you feel comfortable where inventory levels are at and you’re in good shape, but... [Technical Difficulty]

Operator, there?

Yes, his line went mute. So I’m not sure.

Do we have a question from Robbie Owens?

Are you muted? Joe Feldman.

No, I’m not muted. Can you guys hear me?

You just came back. We lost you. Can you start over?

Sure. I apologize. Yes, I don’t know what was happening. No, I just wanted to ask again about the inventory that, the prepared remarks you guys commented that you feel very good about your inventory position and yet the quarter ended, I think it was downtown 11% or so. I just wanted another explanation of what gives you confidence that you do have? What you need? And maybe the current number is actually better than what the quarter-end number was. But – and also where you might be light in some categories is still those basic toilet paper, things like that where it’s still light?

Yes. Hey Joe, it’s RJ. Yes, what happened – at the end of the quarter, at the end of March, we of course were like just, I guess two weeks past or still in the midst of the huge increase in buying as customers were filling up their pantries. And so, the result of that was of course lower inventory in the stores, which was then quickly followed then by lower inventory in the warehouse as the stores were looking to replenish. So more just the cycle and the timing of when the quarter ended, and since then really throughout the month of April, we then built back up both in the warehouses and in the stores to the point where we sit today in a much healthier inventory position than where we sat really two weeks after that initial demand shock. So and that was again, just because of the sudden and strong increase in customer sales that we saw that, that persisted for a couple of weeks there. And then, as far as where we’re still light, it’s really limited. So still a few items that are on allocation from suppliers, toilet paper, although that’s coming back stronger, one of the more difficult ones remains in disinfecting wipes. I mean, there’s just fewer companies producing those. And so there are a few pockets here and there still, but really across the assortment the inventory is strong and that’s both true, both in the stores and in the warehouses. So really testament to the great job done by the buying team, by the planning team, and then all the way through the supply chain from the warehouses to transportation and then to all the efforts in the stores and ordering product and getting it out on the shelves.

Thank you. At this time, I would like to turn the call back over to Eric Lindberg for closing comments.

Great. Thanks everyone. Really appreciate your time today. Thanks for your questions. We look forward to catching up with you today and tomorrow for some follow-up calls and questions and we’ll talk to you soon. Thanks so much.

This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.