Greetings, and welcome to Grocery Outlet's Fiscal Fourth Quarter 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. [Operator Instructions] It is now my pleasure to introduce your host, Joseph Pelland, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon everyone, and thank you for joining us on today's call to discuss Grocery Outlet's fourth quarter and full year 2020 financial results. Participants on this call will make forward-looking statements, including our outlook for fiscal 2021 and future performance that should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release, as well as in our 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. These statements are estimates only and not a guarantee of future performance. During our call, we may reference certain non-GAAP financial information, including adjusted items. Reconciliations 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 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 and thank you for joining us today for the discussion of our fourth quarter fiscal 2020 results. Looking back at the year, I'm extremely proud of the work that we have done, as we rose to the challenges and opportunities created by COVID. Our financial performance throughout this year demonstrates the strength and flexibility of our business model. For the full year 2020, we delivered new store growth of 10%, as 35 stores opened despite the difficulties created by the pandemic. We also exceeded our long-term targets across key financial metrics, including comp store sales growth of 12.7%, gross margin expansion of 30 basis points to 31.1%, and adjusted EBITDA growth of 32%. We achieved those results by staying true to our business model, providing our customers with treasure hunt and ever-changing deals, friendly customer service, and a locally curated assortment provided by the independent operators. We worked closely with our supplier partners and leveraged our operational agility to meet consumers' needs delighting them with unexpected deals each and every time they walk into a Grocery Outlet. Throughout this difficult period, our highly committed, independent operators, proved their resilience, dedication, and creativity in the many ways they helped each other in their communities. This included remaining in stock on essential items and keeping customers informed on the arrival of in-demand products, while maintaining clean and safe stores for their customers in an ever-changing landscape of requirements and protocols. True to our mission of touching lives for the better, we are committed to giving back to our communities with a focus on reducing food insecurity. Perhaps one of the greatest accomplishments last year was our Independence from Hunger campaign. It was a record year with customers donating $3 million to their local stores, and Grocery Outlet contributing…

Thank you Eric. We are proud to have delivered an exceptional year navigating the challenges of COVID, while serving our customers' needs. Throughout this period, we have consistently delivered extreme value, unexpected deals and friendly customer service in our stores. Our unique and proven approach to serving customers sets us apart as a retailer and it gives us great confidence in our future. The WOW! shopping experience that we deliver creates strong customer loyalty and is the engine that drives our business. Our inventory levels remained healthy throughout the year, depth of value remained strong and we were able to consistently offer an exciting treasure hunt of WOW! deals for customers shopping our stores. Our best-in-class purchasing teams and our flexible supply chain enabled us to deliver value in the opportunistic and everyday products that our customers have come to expect. And our ability to manage discontinuous inventory complemented by an assortment of everyday products allowed us to stay in stock with the right items to meet customer demand. We recently participated in the FMI Midwinter Conference where we had the opportunity to meet with leadership teams from many of our long-standing strategic supplier partners. These are always highly productive meetings where we talk about long-term strategy and shared growth objectives. We continue to be encouraged by the strength of these relationships, the frequent and open dialogue and the creative solutions we continue to develop to handle surplus inventory needs. Looking forward, the pipeline of opportunistic supply remains healthy. Current market disruption continues to deliver a steady supply of surplus inventory and our long and proven track record makes us a valuable resource and trusted partner for our suppliers. Our focus on strategic partnerships and flexibility combined with our growing scale positions us as the preferred partner in the secondary…

Thanks, RJ and good afternoon everyone. We were pleased to have delivered strong results in the fourth quarter and full year fiscal 2020. We are very grateful to our teams and our independent operators for their tireless efforts and we remain committed to serving our customers' needs. At the same time, we continue to reinvest in our business as we pursue our long-term growth strategies. Following our discussion of fourth quarter and full year results, we will provide some comments on quarter-to-date trends and our outlook with respect to the current year. For the fourth quarter, sales increased 23.1% to $806.8 million compared with the same period last year. These results include $53.3 million of sales contribution from our 53rd week of fiscal 2020. Our growth was driven by a 7.9% increase in comparable store sales as well as the sales contribution from 33 net additional stores opened since the end of last year. During the fourth quarter, we opened eight new stores ending with 380 locations. We remain pleased with the performance of our new stores along with recent vintages, which continued to deliver sales productivity in line with our expectations. Our strong comp performance in the quarter was broad-based across regions, vintages and categories. Comps continue to be driven by an increase in average transaction size, partially offset by a reduction in traffic as customers continued to consolidate trips. Fourth quarter gross profit increased 22% from the prior year to $244.4 million. Our gross margin rate decreased 30 basis points to 30.3%, in line with historical Q4 levels reflecting holiday product mix. SG&A expense grew 17.7% and to $197.6 million. The increase was largely due to higher variable commissions to independent operators related to gross margin dollar growth, increased investments in personnel and infrastructure, higher store occupancy costs…

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Oliver Chen with Cowen & Company. Please proceed with your question.

Hi. Great quarter. Regarding the guidance which is very helpful. Thanks for giving the month-to-month details. What are your thoughts going forward A, as the comparison eases throughout the year? And also as -- with this guidance, do you expect it to continue in the negative range for the foreseeable future as you anniversary last year? And is the main delta here in terms of traffic being more negative than check size? Thank you.

Hi, Oliver. It's Charles. Let me provide a little bit more color with respect to how we're thinking about 2021. Of course, there are a lot of things that we just don't have great visibility into at this point and continue to I think change by the day such as the pace of vaccine rollouts with the cadence of reopening looks like and then what are consumer behaviors as that reopening unfolds. And of course, you added to that the macro backdrop and the impact of stimulus. So with so many moving pieces, I think, the best way to share our approach with you is that we're looking at a number of metrics internally to track the business. We're looking at sales velocity on a two-year basis. Of course, we're looking at customer satisfaction, which we know has been very much validated by our recent Q4 surveys that we're engaging with the customers and then also looking at traffic and ticket trends on an absolute basis. So, as we think about all of those metrics, we're feeling really good about where we stand. But again, there's just so much we don't know about the year. The good news for us is that our business model is built on flexibility. And so as we progress over the next several quarters, we'll just remain focused on satisfying our customers being really nimble regardless of the operating environment. But overall, I think we very much like how we're positioned in our orientation towards value.

Okay. A quick follow-up on inventory planning in such a dynamic environment. How are you thinking in terms of approaching these compares for planning inventory relative to sales and/or keeping your open to buy pretty open with flexibility?

Yes. I'll say there.

Please, go ahead RJ.

No. Sorry Charles. Go ahead.

Yes. I think, Oliver this really just speaks to the strength of our business. Keep in mind that not having fixed assortments, not having commitments in terms of long-term buys, we are not bought out several months ahead like perhaps some others. And so it just gives us that flexibility to react. It's again one of the very unique aspects of our business. And so we're feeling great about where inventory stands right now and the way that we exited the fourth quarter. Saw really healthy sell-throughs over the course of Q4. So as we look sort of at the quantity and composition of inventory we have, whether you slice and dice it by categories, regions, items, feel great about where we are. And so, the team is just ready to do what they always do in terms of react and make sure that we're managing that inventory appropriately.

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

Good evening. Thanks a lot for taking my question. Number one, what are you hearing from your IOs about wage pressure, particularly some of the hero pay that's been well-publicized in some of your markets? And what's the approach for how that – how are you going to be able to navigate around that and how that may impact the model?

Yes. Hey, Michael, good to hear your voice. Thanks for the question. This is Eric. So yes, there's been a lot going on, on that topic around hero pay. I would start by just reminding everyone on the call for those that don't know it, just some of the basic structures. The IOs have total control over their store labor. So we don't have a lot of involvement. That's to say, we don't set the pay, we don't set the hours or rates or raises or any of that kind of stuff. A lot of the jurisdictions that we're learning are focused on grocers that are over 300 employees. That obviously, doesn't apply to a lot of our IOs or most of our IOs since they're small businesses. There have been some jurisdictions that are considering this temporary hike and a broader focus around all retail and all restaurants, regardless of size. So, we're watching that obviously. We are in the mode of tracking it closely, trying to understand it. IOs are in the same mode. Our strong belief is that this will be something that sunsets as the economy starts to return to something we would sort of "call normal." But ultimately, this is no similar to what we've seen four, five, six, seven years as some of the West Coast states have increased the hourly wage for most employees on the minimum side from sort of $7, $8, federally up to $13, $14, $15. Most of the operators have digested those. What it means for us is we have to invest in systems and technologies and processes that help save the operator's time and make them a little bit more efficient. So we can't really do much about the wage inflation but we can do a lot on the back end. And so that's what we've been working on investing in on behalf of the operators.

That's very helpful. And then my follow-up question is on the outlook for this year. Seems like with the first quarter guidance, you're pointing to a pretty stable two-year stack comp in the high-single-digit range, which would be consistent with what Grocery Outlet has produced for a long time outside of the pandemic. So, why shouldn't we just roll forward the two-year stack over the next few quarters?

Yes. Michael, it's Charles again. So I think if you look at our guidance for Q1, and again a negative high-single-digit comp on top of a 17% comp last year, and to your point the historical two-year stack for us has been typically 8% to 9%. So, we're seeing it track ahead of that historical rate. But for us, very much staying focused on just that aggregate velocity of sales and looking at average weekly sales on a two-year basis and feeling good about where we stand. But, of course, so much that we don't know at this point. It continues to be a very fluid environment. So, we just don't have perfect visibility beyond the first quarter.

Our next question comes from the line of Robbie Ohmes with Bank of America Merrill Lynch. Please proceed with your questions.

Hey, guys. Thanks for taking my question. I guess maybe for you, Eric. Just, can you give some color on how you think the IOs are approaching their income statements, coming up against negative comps? They're incentivized to go for the highest gross margins, I would expect that they can possibly get when their sales are declining. I'm just -- can you maybe help us understand, how the dynamic will work this quarter and over the next couple of quarters against these strange times that we're anniversarying? I mean how do they -- how -- will this change the way they order from you? Will it be hard for you guys to know what they're going to do? Like maybe just walk us through what's actually the dynamic here.

Yes. So they’re -- it's a great question. They're really focused on delivering for the customer. They're delivering conditions in the store. They're conditioning service in the store. They had a great year don't forget last year, record revenue for most of our operators. The flow-through of profitability was quite nice. Their on-hand cash position is also nice. We encourage the operators to think about sales. We encourage them to think about gross margin dollars, not gross margin rate. And then, the beauty of this model is margins can come up and go down, because it's not a static mix. So, operators have some levers they can pull relative to what they're looking for in terms of more sales or more gross margin dollars. We have counseled them and spent a lot of time in stores, just reminding them we're very much long-term focused. Let's not take our foot off the pedal in terms of service or safety standards, not take our foot off the pedal in terms of local marketing. There will be lots and lots of short-term trends that we'll keep our eyes on, but we're running a long-term business. So, keep the eyes on the prize, keep driving inventory, keep driving sales, keep driving promotion engagement with the customer involvement in the community. And 2021 will be a funny lap year. It will have an asterisk next to it, and we'll all remember kind of this combined period of 2020 and 2021. But, we don't over possess about sort of the real short-term. And certainly, we would be out in the stores calling out any activity we saw that we thought would be sort of negative, like pulling back on service or pulling back on just getting people to the lines or pulling back on inventory. And again, operators, I think are aligned with us on what we plan for.

Got you, that's really helpful. And then, maybe for you Charles, can you just -- why the change in the way you guys calculate adjusted EBITDA? And then, sorry, can you just review again, how we should think about comparing to 2019 adjusted EBITDA? And is that a different adjusted EBITDA, or maybe just walk us through that again as well.

Sure. Yes. Robbie, let me provide you just the rationale behind the change, and it really came down to some feedback we heard around simplifying the add-back that we use and -- number one. And number two, improving the comparability between periods. So as you look at -- in the earnings release, we provide the full reconciliation between the revised definition and the previous definition. We go back over eight quarters, so you can see the difference. As it relates to adjusted EBITDA, I would describe the change as modest, because all we've really done is, we're no longer adding back pre-opening costs, which were again $300,000 for Q4 and $1.5 million for the full fiscal year. And that was pretty consistent with the prior year as well. As it relates to adjusted net income, really the change there is to normalize for these windfall tax benefits. So, if you recall, over the course of the year, under our previous definition, we had received windfall GAAP tax benefits and some of that is flowing through to adjusted net income. Now we are normalizing for that to reflect a 28% normalized tax rate and that's just going to make for much more relevant comparisons as we go quarter-to-quarter and compare versus the prior year. So -- and then your second question with respect to margins for 2021. The way we're thinking about the margin structure for the year really is that, it represents a return to our historical pre-COVID margin rates. And so, as you think over the throughout the P&L that means, return to normalized levels of inventory shrink on the gross margin line. It reflects all of the personnel investments and the COVID costs that we expect to continue to incur across the cost structure. So as you think about gross margin, SG&A, adjusted EBITDA as a percentage of sales we expect that it will approximate 2019 levels. And again, as Eric talked about a big part of that consistency is because of the flexibility of the model, not having fixed assortments in our DCs and stores the fact that we do have a more variable cost structure than other models due to the IO commission. And so for those reasons orient back to 2019 with the caveat that if you recall in the first half of 2019, we did not incur public company costs. Those are tracking about $2.5 million per quarter. And so, we'd expect that first half 2021 EBITDA margins to be lower as a result of just the public company cost impact.

Our next question comes from the line of Randy Konik with Jefferies. Please proceed with your question.

Thanks a lot. Quick question just on -- can we just get an update on NOSH and what's been going on there? And then as you think about the next few years of categories or product enhancements or focus, where do you expect to make some changes or incremental focus? And then I think RJ brought it up earlier that I guess in industry-wide meeting talked to I guess some of your partners and talked a little bit more about the long term. How are you guys thinking about those partnerships evolving over the medium to long term? Did you talk about different availabilities of supply different product categories? Just get a little color on how your conversations and your relationships are expected to change going forward over the medium to long term with these partners?

Hi Randy, it's RJ. I'll tackle those three questions. So to your first question on NOSH, we continue to see great growth from the NOSH category. And broadly speaking right that's across most categories within the store. So continue to see great growth. We continue to see great product availability on the opportunistic side. And NOSH like the rest of the store is a blend of opportunistic in every day and so in that way able to offer consistency. We're not available opportunistically and important to the customer. And then around that the treasure hunt and the deeper values that we would get on an opportunistic basis. So all that continues along with recent trend and we continue to be excited about future growth potential. Category enhancements, we feel pretty good about the broader assortment. We have really all of the major categories that you'd find in conventional Grocery retail represented. For us the opportunities really live more at the item level or the brand level within subcategories. So we continue to -- we have and we will continue to go after those opportunities to fill in where there may be gaps. We deploy industry data understanding where market share is and always balancing value and opportunistic with demand in instances where we may not be able to source product opportunistically. So that model has served us well and we'll continue to look to enhance the assortment as such looking forward. And then with regards to the FMI meeting, love the opportunity that it provides to connect at a senior level with long-standing supplier partners and the relationships that we've maintained for many, many years. We continue to be encouraged by the strength of the relationship and the access to supply. Specifically to your question about evolution of the partnerships…

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

Hey, guys. Two things, the performance of closeout versus every day, recently how do you think that plays out in 2021? So that's number one. Number two, if you think about other than public company cost, what -- thinking about going back to 2019 levels, what costs are higher in 2021 than 2019? And are there investments -- significant investments that you've made be IT or whatever in 2021, that didn't exist in 2019?

Hi, John, it's RJ. I'll take the first question. And then, kick it over to Charles, for your second question. As far as mix goes opportunistic and every day, as we've said, we continue to see a healthy flow of opportunistic deals across all of our categories, so really pleased and encouraged by the current pipeline and future pipeline as well. We have said before, and this trend has continued that as customers have consolidated trips and increased the basket and with the increased demand, they have been buying everyday products at a slightly higher rate than opportunistic. So we have seen a little bit of a mix shift on the margin as it relates to every day moving a little bit faster than opportunistic. That's been true throughout this past year. And as you know, we handle fluctuations in the mix all of the time, so nothing that we haven't been able to adjust to. And for us, it's about delivering value and we do that across opportunistic and every day. And so we'll continue to manage the assortment as such. As far as rest of the year, we're -- as Charles said, really hard to predict, as to how things change vaccine rollouts changes in behavior et cetera. So I guess, all I'd say is, we'll continue to deploy the same approach as far as inventory and purchasing as we have. We'll remain nimble, flexible. We'll deliver value where the customer is looking for it. And the mix will change with that.

Hey, John, it's Charles. Just a bit more color in terms of investments that we've made over the past several years. And for me, I think it starts with, the orientation that we've talked about in terms of always reinvesting back into the business. So we're always looking for ways that we can operate more efficiently. And drive leverage across the P&L and those line items that we -- where we can. But as we find those improvements we're looking to plow those dollars back into the organization whether that's in personnel where we've made significant investments across -- really across the entire business. We start with purchasing where we know we get a great bang for our buck there. Technology has been an area where we've made significant investments over the past several years, as well as this path to becoming a public company on the finance side of the house as well as supply chain and HR. So really lots of organizational investments to improve our capabilities and our bench strength not to mention expansion as we go into new markets. So all the groundwork we've done in the Mid-Atlantic has been a significant investment. And then that continues on to the capital side as well. So always looking at ways that we can continue to reinvest back into the existing fleet of stores whether that's fixtures and upgrades to drive the top line or just general maintenance. So really encompasses all aspects of the business.

Our next question comes from the line of Paul Trussell with Deutsche Bank. Please proceed with your question.

Hi, good afternoon. This is Krisztina Katai on for Paul. Congrats on a great quarter. I've wanted to follow-up on some of the previous questions regarding your 1Q. Can you just talk about what you are seeing from a traffic and basket standpoint that really transpired between January and February? Anything to call out? And then secondly, are there any metrics that you can share on what you're seeing from a new customer count and spend rent perspective compared to your legacy base? Thank you.

Yeah. Hi, Krisztina, it's Charles. Let me start it off in the first part of your question. So as we think about the trends that we've seen in the first quarter really it's a continuation of the trends we saw in the back half of last year. So again that trip consolidation being offset by larger basket sizes. And so for January that held true into February. You can see that overall comp coming down a little bit from January in the positive mid-singles to February in the low singles as we started to lap the onset of COVID here at the tail end of February. But then expecting as -- again we look forward with March a big comp that will be anniversarying here 37% for the month of March. And expecting that that dynamic between traffic and ticket that has largely held true since the onset of COVID begins to invert as those comparisons change. So this really speaks to my comment earlier about we're staying focused on the absolute numbers. We're looking at absolute traffic counts. We're looking at absolute basket sizes just to understand where we are, but feeling really good about how we're tracking thus far.

And I'll jump in on the second half on engagement. So keep in mind the one thing that we're really trying to drive is value. And that is the factor that we think is most important when we think about loyalty in the stores. We think we do it better than anyone else in terms of really highlighting and differentiating the value that we see on every shop on every item for the customer. The local IO because they have a big obligation in terms of marketing is spending a lot of time differentiating in their local market whether that's being involved with the customer, ordering and merchandising locally being involved in the community. They're just countless I'd say small but meaningful examples of how the IO is serving their customer. And then ultimately what we look at as the kind of the report card for that activity is how are we doing on our internal surveys relative to customer satisfaction, which is a blend of all of those things. Are they getting value? Are they feeling the treasure hunt? Is the store clean and safe? That's been a new one and the satisfaction levels that we're getting back in our surveys are very, very high. So engagement both electronically and then in-store feels right where we should be. So thanks.

Our next question comes from the line of Karen Short with Barclays. Please proceed with your question.

Hi, thanks very much. Just -- I want to just clarify. So for EBITDA as a base for 2019, I believe the number you reported on an adjusted basis on your definition was $178 million in EBITDA. So I just want to clarify. Am I only taking -- and that included public company costs. So we're only subtracting $1.5 million off of that number on an apples-to-apples basis, when we think of the margin in 2021. Can you just clarify that? And then I had a couple of bigger picture questions.

Sure, Karen. It's Charles. Let me clarify. So as we look back, adjusted EBITDA margins in 2019, I think this is probably the easiest way to think about it were – the margins for the full year were about 6.6%. And so that's where in total, we would expect to approximate that level here in 2021. But as we think about, how the quarters will flow as we compare against those 2019 levels, again, public company costs today are roughly a 30 bps impact to us that we didn't incur in the first half of 2019. So as you think about modeling the quarters, keep that in mind, that we'd expect to see relative to 2019 roughly 30 bps of headwind in the first half of the year.

Okay. And then, I wanted to just talk about the IOs for a second. So the first question, I had is, are you still planning on doing interest forgiveness in 2021? And then, I was wondering, if you could give us just a bit of an update on the pipeline of IOs. But also more specifically, when some of these, I guess, newer breed of IOs and non-traditional operators will start actually operating stores. I know that, you only started broadening your search during 2020 but maybe a little update on both of those would be great?

Yeah.

Yeah.

I'll take the first, and then Charles you can talk about the forgiveness. But really, really solid pipeline, we've already deployed a few that have come in, in the early spring and have been trained. Really excited about just sort of opening up, what COVID has done for us in sort of turning the eyes of some folks from restaurants. So we'll wait a while before we call it a success. But certainly, it's been successful from the top line and the numbers coming in. And certainly from a training perspective, we're seeing good throughput through the system and sort of learning how to run a store.

And then Karen with respect to – to COVID cost. And I think this is a comment on COVID costs broadly not just the interest forgiveness. But yes, we would envision that continuing until we have really a change to visibility and a change in the environment. But as we think about 2021, we're expecting that to continue.

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

My first is a follow-up somewhat to John's question. So, maybe for Charles, first. Regarding the margin, I get the gross margin you'll give back assuming shrink ticks back up. On the SG&A side, I think you implied that your reinvestment rate is going higher. And I wanted to clarify, is that right, or you're just giving yourself flexibility in the model to be able to reinvest at a higher rate during the year?

Yes. Simeon, no, I think for us not a change in terms of our approach to reinvestment. That just reflects the fact again for us going back to 2019, looking at those margin rates we very much expect that we'll continue to operate in 2021 in line with those levels. So yes, the benefits we saw is related to shrink. In 2020, we don't expect that to continue. But as we think about the rest of the P&L expect it to be similar margins to 2019.

Okay. That's helpful. And then maybe to Eric or others. Thoughts on omni-channel. I know it's maybe more theoretical, but curious how much it gets kicked around as you think about the next one to two years of the business?

Hey, Simeon, it's RJ. Yeah. No we talked about it quite a bit. We continue to engage in dialogue with third-party partners on the technology side on the service side really just to stay close to the landscape and options that might be available to us. All that said, we've not changed our position on e-commerce in terms of priorities and that it is not a priority for us right now. We continue to be excited and we continue to focus our attention on growth opportunity in front of us by way of real estate expansion geographic expansion that comes with that, continued opportunity within existing markets everything around comp sales. And specifically to technology, while not prioritizing e-commerce, we are very excited about the broader technology investments that we're making in the business. And ultimately, while we're investing for other more specific purposes, they -- many of them would provide a foundation in the event that we do prioritize e-commerce at some point. So -- and then the only other thing I'd add is as we've talked about before marketing remains a big area of focus by way of digital. And while we stop short of the actual transaction, there's quite a bit that we communicate through digital platforms around the assortment and the excitement in the store to raise awareness and increase engagement.

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

Thanks. And I wanted to come back to the gross margins in Q4 actually for a second. So down 30 basis points and I wanted to just understand the commentary around holiday mix. Was there a change? Because we look at that compared to 2019 levels. Was there a change in the overall level of holiday mix in there that drove that one way or another? Were there particular other items? And whether or not you -- did you start to see any uptick in shrink and that's why you're anticipating a little bit more in 2021? Just any color you can share on that would be helpful?

Sure. Jeremy, it's Charles. Let me provide a little bit more context. So yeah, as we look at -- as you point out for -- Q4 for us sequentially we see that impact of holiday mix going from Q3 to Q4. I'd say as we look at Q4 margins very much a return to historical levels. So 2018 was 30.1%; 2019 30.6%. So the results we posted feel really good to us. It was maybe a little bit more a holiday product mix as a result of folks being at home. We also saw modest headwinds as it relates to commodity costs in proteins and dairy. Continue to feel the impact of COVID-related costs at the DC which flow through margins. But overall, I would describe Q4 margins is our normal fluctuations quarter-to-quarter. We continue to manage the business for stable margins over the long-term and feel good about where we are.

Our next question comes from the line of Joe Feldman with Telsey Advisory Group. Please proceed with your question.

Hey, guys. Thanks for taking my question. Wanted to ask on the real estate front. I know you're accelerating the growth again or 36 to 38 stores. How is the quality of the real estate that you're seeing? Are you seeing better rents? We're hearing that from other retailers out there that rents have come down a bit. And also, just wondering if -- like I said if you're seeing better quality locations than you've seen in the past.

I'll take that. This is Eric. I would start with we are seeing a really healthy pipeline. The pipeline is strong. We pretty much can tell you exactly where we'll open in 2021. So, it's going to be a good year. I would not say that we've seen a big influx of high-quality lower-priced deals yet. Certainly, I can be hopeful for that. But landlords have very strong balance sheets, as we found in other markets. And that takes I think a little bit more time to sort of flow through. We've tried to remain really flexible. All the markets we operate in across the West and in the East, we've been able to be flexible, able to split up a larger box, able to take a small box, able to take a larger box, something that's stand-alone, something that's in a larger center. Remaining flexible tends to get you the first call. We also drive traffic, which has been helpful to get on people's radar screen. So, similar to other areas of the business, the last thing I'd say is, we've really invested in this area. I'm very, very proud of what we delivered in 2020. It was an exceptionally difficult operating year across a lot of fronts, but particularly in just getting stores open. And we were able to get very, very close to what we said we'd do. And that only happened because we invested in the right people and the team to hit that. So I think we built the team. We're going to be patient. We're going to be opening a lot of stores. We've gotten that message out. And I would hope that your question comes through in subsequent months.

We apologize, but that is all the time we have for questions. I'd like to hand it back to Mr. Eric Lindberg for closing remarks.

Yes. Thanks you, guys. As always, we love spending time with you and engaging. Really appreciate all of your interest and your support. And I just thank you for jumping on this afternoon and spending some time with us. Thanks a lot.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.