Greetings, and welcome to Grocery First Quarter 2021 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. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Joseph Pelland, Vice President of Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining us on today’s call to discuss Grocery Outlet’s first quarter 2021 financial results. Joining me on today’s call are 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. This conference call is being webcast live and a recording will be available via telephone playback for approximately two weeks. It will also be archived in the Investors section of our website. Participants on this call will make forward-looking statements, including our outlook for fiscal 2021 and future performance. 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 will also 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. With that, I’ll turn it over to Eric.

Thanks, Joe. Good afternoon, and thank you for joining us for a discussion of our first quarter results. We are pleased to have delivered on our expectations in the first quarter as we’ve begun to lap the onset of the pandemic last year. Our ability to consistently execute this high level would not have been possible without the hard work and dedication of our corporate and IO teams. I want to thank them once again for their commitment to our customers, local communities and to our mission of touching lives for the better. Their combined efforts drove continued strong first quarter financial performance. Comp sales decreased 8.2% following a 17.4% increase in the same period last year. New stores continued to perform in line with our expectations, contribute meaningfully to total sales volume, which was down a modest 1%. Profitability remains strong with adjusted EBITDA margin above 2019 levels. We attribute our continued strong performance to the steadfast execution of our differentiated business model. Our value proposition is as strong as ever, and our ability to deliver extreme savings, a treasure hunt experience, and a locally curated assortment a friendly environment continues to resonate with customers. This was reaffirmed by our recent survey work, which shows that our customers continue to rate value as the most important criteria determining where to shop. Our customers remain extremely satisfied with the value Grocery Outlet consistently provides. We are confident in our ability to continue delivering industry-leading value as we have throughout our 75-year history. Turning to a few operational highlights from our first quarter, our purchasing team does an exceptional job of working with suppliers to ensure we are the preferred partner for opportunistic product. The flexibility of our buying model and our buyer’s expertise enables us to consistently provide the balance…

Thanks, Eric. We remain grateful to our network of independent operators, our buying and distribution teams and our valued partners for delivering the wow shopping experience that our customers enjoy each and every day. Our strong offering of extreme values across an exciting assortment of opportunistic and everyday products continues to resonate with customers. We are seeing healthy deal flow as changing customer demand, product innovation and ramping production are all contributing to excess supply. Our longstanding supplier relationships combined with our approach to supplier acquisition and development give us a competitive advantage and preferred access to surplus product as it becomes available. Several years ago, we redefined roles within our purchasing team to specialize activities around opportunistic purchasing everyday products and category management. This evolution increased the scalability of our model and has proven beneficial as we’ve expanded our supplier network evolved our assortment and extended our geographic and customer reach. Specialization allows our opportunistic buyers to deepen longstanding supplier relationships, develop strategic partnerships with high growth brands and expand our vendor base. We continue to hunt for the best deals, while strategically partnering with suppliers to develop mutually beneficial solutions to a variety of supply chain challenges. Communication and connection with our partners have never been better. And we look forward to seeing many of them in person again throughout the remainder of this year. Our everyday sourcing and category management capabilities have also benefited from specialization. We continually evolve our assortment to offer customers the highest demand items as a complement to the ever changing opportunistic deals. Our scale and strength of partnerships have increasingly supported the development of products and labels exclusively for Grocery Outlet customers. These items deliver great value with healthy margins and represent an important part of the WOW! shopping experience. We are…

Thanks, RJ and good afternoon, everyone. Following our discussion of first quarter results, we will provide some comments on quarter-to-date trends and our outlook with respect to the current year. For the first quarter net sales were $752.5 million, a decrease of 1% compared to the same period last year. Comparable store sales declined 8.2% against a 17.4% increase in the first quarter last year. Absolute customer traffic and average ring trends remain largely consistent with our fourth quarter, partially offsetting the comp decline was the sales contribution from 34 net new stores open since the end of the same period last year. In the first quarter alone, we opened 10 new stores and closed one, ending with 389 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 underwriting expectations. First quarter gross profit was $231.9 million, down 2.2% from the prior year. Our gross margin rate finished at 30.8% in line with historical results despite the impact of rising commodity and freight costs and normalized inventory turns. SG&A expense grew 0.9% to $188.6 million, due to the increases in store occupancy and maintenance costs related to store expansion and investments in personnel and infrastructure. This was largely offset by lower variable commissions to independent operators, as well as reduced travel and meeting expense. Depreciation and amortization increased to $15.5 million, up 20.1% versus the first quarter last year, driven by store growth and capital investments. Stock-based compensation expense was $3.9 million in the first quarter compared to $20.3 million in the same period last year, as prior year expense included the initial vesting of performance options related to our 2014 equity plan. We incurred effective tax rate of 5.3% in the quarter as…

Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question is from John Heinbockel with Guggenheim. Please proceed.

Maybe for Eric or RJ. When you think about a backdrop, right, of above average inflation, if that’s where we’re going to be for the next 6 to 12 months. So what changes in the model? And how do you manage that in terms of what products you’re seeing, buying, how vendors are changing, right? How you think about pass-through. What do you do differently and how does the – do you think your customer behaves differently?

Hey, John. I’ll take that. It’s RJ. Thanks for the question. I’ll – let me speak to inflation and probably within that question to more broadly, some of the other stresses that we’re seeing on the supply chain, which there are many well publicized, and we hear directly from supplier conversations that we engage in every day. Economy is definitely in flux and we’re seeing those pressures come through. And I would – I’d point to commodity cost increases, those have been pretty broad based. I’d include some of the pressures around freight rates, labor shortages that we’re seeing with the supply chain as well. We’ve always said, and it’s true that this model is inflated to some degree on these pressures relative more traditional retailers. That said, we do still feel the effects of these things. To answer your specific question about, how we mitigate or what we do to react to these factors. I’d point to a number of things. First is, opportunistic supply. It’s a unique buying model is as you well know, and the way that we buy these products is very different from conventional model where pricing may be more fixed and more impacted by some of the inflationary pressures. We have an extremely diversified supplier base. We do move in and out of products and between suppliers, and that then results in ever-changing mix, products are changing all of the time. And I’d say that’s true for both opportunistic and everyday items. And it’s something that our customers are used to. And in fact, they enjoy about the shopping experience. It’s an important part of the treasure hunt that they expect and enjoy. And then I’d also point to how we price items. We’re pricing items every day and the way that we do that as we price to value in the market. And so we keep very close tabs on our competitive price positioning. And in that way, we’re able to remain a high degree of flexibility in the way that we price products, the value that we deliver, and ultimately the healthy margins, and the stability of those margins that we’re able to deliver that we have over many years and we talk about maintaining a well into the future. On top of those things, which are attributes of the business, I’d also point to maintaining a healthy list of margin enhancing initiatives that we’re always pursuing. We think those have benefited us in recent months and certainly those and others on top of them will benefit us looking forward. So all that said, we do expect pressures exist, we do expect to manage margins within this more stable band that we’ve been able to keep historically through prior cycles and over many years and something that we’ll maintain this year and then certainly over the longer term as well.

Yes. And maybe as a follow-up to that, if you – I don’t know if you’ve done work lately on your basket, right, price spreads, right, versus competition, particularly traditional as they’ve gone more right running promotions through loyalty cards. Has the traditional gap widened as far as you can tell and our – if it has, are customers perceiving that?

Yes. So we track value a number of different ways, John. Basket savings is definitely one, but I’d point to others that we measure that we look at as a measure of value to the customer. The values remained very healthy throughout all of last year and then into this year. We do price and measure value relative to promotional pricing as well. And as I mentioned, we’re able to react very quickly to those changes that we’ve seen. So really pleased with state of inventory, really pleased with mix between opportunistic and every day and really pleased with the value that we’re delivering to customers.

Thank you.

Thank you.

Our next question comes from Randy Konik with Jefferies. Please proceed.

Hi, can you hear me?

Yes, we can hear you fine, Randy.

Hey guys. So I don’t know if you went over this, but any kind of commentary around variability in performance by geographic region and update on kind of the mid-Atlantic. Sorry, I got on a little late, so I didn’t know if you went over that already.

Yes. Hey, Randy. I’ll take the mid-Atlantic and then maybe Charles can jump in at the back end for some of the variability. But 2020 was a great year for us, Heather onboarded. A lot of sort of building the foundation, getting the team in place feel really good about that. We do expect to open three to five stores there this year, just open our Mt. Airy store, which is our second store. They’re going to look very similar to what we have there already with slight nuances, obviously, beer and wine. But we’re liking the real estate opportunity, we’re liking to build as a team. We’re liking that we’ve got some of that foundational building piece done and really remain super excited about all the opportunities we’re seeing.

And then Randy, it’s Charles. Just to answer your question around sort of regional performance. It’s been interesting. So as much as we’re in the early days of reopening here, it clearly has not been a binary start. In our California markets, we’re seeing a gradual reopening, but it’s very much a phased approach on a county-by-county basis. And then conversely, as we look at the Pacific Northwest, we’ve seen a recent uptick in COVID trends there and so they’ve started to institute some new restrictions to sort of go on the other way. All that said, when we look at regional performance, the overarching trend of customers, anyone to consolidate their trips to the store continues. And so what that means is from a comp perspective, we’ve seen largely consistent comp performance in both Q1 and Q2 to-date. So while again, reopening is starting. We have not seen that filtered through to a change in grocery purchase behavior at this point.

And are you able to parse out at all, how you’re thinking through the transactional changes from – I know that existing customers are consolidating trips. But are you able to kind of parse out behavior of what’s going on with new customer acquisition and stuff like that? Just give us some thoughts on what you’re seeing there.

Yes. Hi, Randy. Yes, we do. I’d say, first, we’re pleased with increases that we’ve seen in awareness, engagement and trial across all customer types. So that would be – those – that shop us as a primary store, secondary store and then tertiary shoppers as well. I’d also say, we’re getting positive feedback or seeing positive feedback from our surveys from both new customers and those that have shopped us for longer periods of time. The customer appeal to this business is quite broad, so that cuts across lots of different demographic segments. And customers do shop us in different ways. And so you have them coming to Grocery Outlet, if they’re new and they’ll fall into a different patterns, if they’re primary, more secondary or tertiary, and that’s part of how this model works. And then you factor in the changes from COVID, you see different patterns there as well. And so those are all things that we track and have a good pulse on from the survey results that we look at. And overall the feedback there is positive, it confirms and it’s consistent with our own internal tracking of savings. Basket savings is strong. Good representation of WOW! items. The unique combination of our attributes resonates with new customers and all of that bodes very well. At the end of the day, value is very important and we believe only increases importance and for all those new customers that have shopped us in the past year, expect that to continue to lead to more frequent trips and bigger baskets.

Great. Understood. Thanks guys.

Thank you.

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

Good afternoon. Thanks a lot for taking my question. I know you said that weekly volumes are consistent quarter to date with where they were in the first quarter, yet your weekly volumes, presumably in a year ago period were higher in the second quarter that may were in the first quarter, because as we line up the arithmetic math, the two year stack is lower this – to start this quarter than it was last quarter. So do you think that there’s just as the world is reopening, there’s a rush to go back to out to eat and that shifting food at home to food away from home in your market. Or do you think that this is a longer-term trend where e-commerce penetration is higher and in that might decrease your addressable market as a result of having a little less e-commerce presence.

Yes. Hey, Mike. There’s a lot of there. Thank you. Yes, so I would say, from our perspective, we’re in the middle of a very volatile time for the consumer, things like consumer trends, behaviors, even customer psychology. They’re really hard to predict, I think in the near-term. So we’re not going to try and do that. What we’ve done is manage our business through this pandemic, the best we know how, controlling the things that we have a real impact on, great buyers, delivering super values to the stores, carrying operators delivering service and kind of marketing and continuing to engage with new customers that are interested in what we offer. I’d say big picture, we’re really confident that nothing has fundamentally changed with the long-term model delivering one to three comps, growing the store base 10% filling in the white space, investing back into value, which is what we stand for, and then ultimately, growing earnings plus 10% per year. I’d say, we got to 2021, and it really requires you to look at the year, because of the noise a little differently. So for 2021, we’re really focused on sort of the absolutes of average weekly sales, traffic, customer engagement that RJ talked to excitement in the store. And to that, I’d say, look after moderating throughout the second half of last year, sales have stabilized and that’s good. We’re really happy with the quality of the inventory, the IO merchandising, and then everything that RJ said about the customer, what they’re telling us through surveys. And so while there are definitely macro factors that that can broadly impact consumer behavior in the short-term, we’re really confident that the long-term algorithm that everything I spoke to is going to return, the customer is going to return to value and that we’ll be back to sort of less noisy numbers in 2022.

Thanks. As a follow-up, even at average weekly volumes have been stable, the aggregate volume in the third quarter of last year was lower than it was in the fourth quarter. Should we assume comps will be less negative in the third quarter? And then assuming this average weekly volume number hold through the fourth quarter, then you might see a little slippage in your comp again in the fourth quarter. I know you’re not providing times, but to the extent that you could give us some perspective on how you’re thinking about that would be incredibly helpful.

Yes. Michael, it’s Charles. Let me – I’ll just say, there are so many sort of short-term factors here at play that are really challenging to kind of parse apart as Eric mentioned, you’ve got the pace and the time of the vaccine roll out. You got reopenings by market, you’ve got macro economic factors and including the impact of stimulus funds on the consumer. So as we look at all of those things and try to predict exactly how the near-term will unfold. We recognize, we don’t have the crystal ball. And so it’s just really tough to pin down those numbers with any degree of certainty. So our objective was just to provide commentary with respect to what we’re seeing so far in the quarter, and give a sense to folks in terms of if those current trends continue, what it looks like. But as the environment continues to evolve, as RJ mentioned, we’re going to do everything to leverage the inherent flexibility of our model to our advantage. We’re staying very focused on managing the business for the long-term and focusing on what we can control. So we think that’s a really good setup for us over the long-term.

Okay. Thank you very much and good luck.

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

Hi, good afternoon. This is Krisztina Katai on for Paul. And thank you for taking our questions and for all of the details. So I wanted to stay with the top line, when we’re looking at your quarter-to-date performance, the low double-digit comp decline would imply to your stack of about in the mid single-digit range, which is really what you were putting up on a one-year basis, pre-pandemic. So how are you thinking about trip consolidation? That’s really been benefiting your conventional peers, re-engaging with some of your last consumers and just your overall ability that you have, so you can really reaccelerate the comp rate going forward.

Hi, Krisztina, it’s Charles. Let me provide, again, a little bit more color, again, some background noise there. But I think this is another example where it’s just important to distinguish between the absolute trends and the percentage comparison. So as we look at absolute traffic and ring levels, we feel good that those levels were stable in Q1. That’s continued into Q2 here. So again, customers continue to consolidate their trips and purchase larger baskets. As we look at the year-over-year comparisons, admittedly, those are becoming increasingly noisy. You recall that last year is COVID to call that initial wave of demand came from both the surge in traffic and ticket. And then it’s the lockdown really to cold customers move to trip consolidation we saw traffic declines, but that continued larger basket size that moderated over the course of 2020 and then again stabilized here in Q1. So that year-over-year relationship of traffic and ticket from a comp standpoint is changing. But again, those absolute numbers are staying stable, which makes us feel great. And that’s really what we’re focusing on to look through the noise. So we feel great about, again, the long-term positioning of the business, the fact that our value orientation, we’re supremely confident we’ll win the day over the long-term. So everything we’re doing to make the right investments in the business and pursued those objectives, we think is the right thing to do.

Got it. And just wanting to ask a follow-up, what is your gauge of how you’re performing in your market? If we’re looking at your older markets and then the newer markets, maybe out in the East Coast. From the share standpoint, but also what are you seeing more broadly as it relates to competition and promotional activity?

Yes. Hey, Kriszty. Yes, as predictable, I think the result of everyone lapping 2020 COVID buildup from last year, we’re seeing a lot of promotional activity from other retailers. We’ve stayed pretty focused on maintaining the value proposition, we’re following our pricing strategy, moderating pricing really, really closely ensuring that we maintain that value prop. We’ve seen this deep promotional environment in the past, I don’t think it’s necessarily sustainable. We’re not confident that the suppliers are willing to fund it. We’re pretty confident that from our past retailers aren’t going to be able to sustain it. So we’re pretty confident, it will taper by some period of time this year and we’re going to continue to, ultimately, play the game that we play, which is providing value on brand names, local shopping experience delivered by the IO. So that’s what I’d say relative to sort of the competitive environment.

Great. Thank you so much. And good luck.

Thank you.

Our next question comes from Robbie Ohmes with Bank of America. Please proceed.

Hey, guys. I was hoping to get you guys to maybe help us understand what maybe the strategy is for your IOs in this environment. Kind of what you’re seeing. Are they – with this volatility, did they overbuy. Are they having to be more promotional than they would like to be in some cases, because of the promotional environment you’re talking about. I’m just curious what they’re – how the IOs are responding to all this, with gross margins coming in so much on a year-over-year basis and sales down so much.

Yes. Robbie, this is the environment we thrive in. This model was built for this, buyers are definitely on offense going after product. IOs are super flexible to take advantage of everything we’re seeing. And I’d say coming off of one of the most difficult operating environments last year, anything that feels like, that’s letting up a bit is the economy starts to reopen feels really good. So all of the restrictions that they were under – all of the cleaning mandates, all of the COVID scares, all of the regulations, enforcement agencies, climbing up and down the stores. This year feels like, a lot of wind in their sails. Inventory has never been in a better position than it is today. I’d say that holds for the last year. So they’re really excited about the opportunistic that they’re seeing and really excited about those opportunities. So they might be a little bit more focused on the micro than we are focused on the macro, but, we’ve been out a ton, been over to 120 stores this year. And I’d say the morale is really high. We feel like we’ve gotten through the bulk of the difficult operating environment and they’re just looking forward and, look, they’re looking at the same thing we are as an operator. They’re looking at the sales they run through and they’re looking at their expense level and that’s all healthy as it stabilized in Q1, so it feels good.

And just to understand the – is the traffic – so is the traffic basically running somewhat flattish on a year-over-year basis? Is that the way we should think about. What you guys are saying?

Yes. Robbie, it’s Charles. So traffic has been flat with respect to Q1 and Q2. And they really has been, I’d say, consistent traffic patterns since the onset of COVID. Initially, there was that demand push of customers into stores as they did that first wave of stocking up. But after that, it really has been trip consolidation that is continued.

And then just real quick, just to understand on the IOs, do they – with traffic, maybe not coming back as much as basket is kind of coming in. Do they try and buy more opportunistic or they look for more in-line programs for you guys? How do they think about managing what’s going on?

Yes. So they’re looking at the order guide. There are probably a little bit more shorter term focused than that. They’re looking at the order guide, which is a representation of what’s in the warehouse that given time they’re ordering. They’re ordering six, seven times a week. So they’re certainly looking to build inventory on those items that are most exciting to the customer. And what they’re saying to us as the order guide, which again, is sort of they are viable for ordering is looking really strong right now. So with that opportunistic inventory, they know they have a greater ability to excite the customer and usually a little better margin. So that gets them really excited.

And just very last one. Are they seeing deflation given the promotions, are they having to be more price aggressive versus last year at this time where you didn’t have to be priced aggressive at all?

Yes. So hey, Robbie. Yes, in terms of competitive promotion, I think Eric just spoke to this a little bit, but we – from a pricing strategy standpoint, from a marketing strategy standpoint, that is shared between activities that we would do centrally and the operators do in their stores. And ultimately for us, I’d say regardless of promotional environment, because we’ve been through all of them. We’re focused on highlighting the best deals and the best values to our customers. So the operator role here, which is extremely powerful, would be as they’re communicating a specific items that are in their store showing great value. They’ll post that on social media. They do have flexibility in pricing. So they can take a hot deal and make it even hotter and then promote that widely in social media. And that’s just one example of many where the flexibility of this model allows them to adjust for the inventory in their store and the specific customers they have within their market. So we talk about more local assortment and more specific to customer needs. So that flexibility serves us really well in these months, but throughout time historically. So those are the types of activities that you see them engage in.

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

Hey everyone, good afternoon. Following up on the sales questions that you’ve been getting, if I guess our model is right, it looks like if this low-double digit run rate holds that the sales per foot could be a little lower than where it was in 2019. Q2 is if that math is sort of, right, I know you mentioned, not worried about long-term, we’re in a weird time. Is there any more parsing out you can do whether a new customers versus existing, because it implies something that either new aren’t repeat, new aren’t coming back anymore at the same rate or that existing baskets are changing. Can you share what’s changing if that’s the right way the data shaking out.

Yes. Hey Simeon, yes, I can comment on that. So again pleased with the increase in awareness and new customers that we’ve seen over the past year. The trip consolidation does continue, that’s true for new customers as well as existing customers. So I’d say, there’s a lot of noise still in traffic patterns, as we look at new customers, longstanding customers, primary, secondary tertiary. We look mostly to levels of satisfaction and excitement they have with the shop. And we feel really good about that. In terms of what’s changed, I think you asked within your question, as we’ve surveyed customers continually, and I take you back to last year, I mean certainly noticed a change in terms of the increased importance of health and safety, cleanliness of the stores. I’m going back to March, April, May timeframe last year when that – this pandemic hit us all. With that, we also saw increased importance and engagement with local. So the local nature of the shop was resonating. And we also saw from surveys that, they were consolidating trips and increasing the basket, reducing trips outside of the house. All of these things that we noted as changes back a year ago had eased back from where they were Q2, Q3 last year that comes with re-openings and the vaccine rollout and consistent with what we’ve observed in sales patterns. What I would say is consistent throughout or what has remained consistent throughout is the value we deliver. That’s remained strong. They’re enjoying the treasure hunt. The connection with the operator continues to be a differentiator and stock levels are healthy. And so those are the things that we look at to best gauge, future sales performance, not just for this year, but ultimately for longer-term in terms of how we think about the business.

And then as a follow-up within the low-double digit negative quarter-to-date, are there any categories that are bucking the trend? Can you share with us if there are examples and why? And I guess look, sales are declining given the comparison. Do you see a divergence between stores that are operated with more highly tenured IOs versus less experienced one? Do you see divergence is that opening up over the last couple of quarters or at least in the quarter-to-date trends?

Okay. Yes. So to answer your first question in terms of growth by category, I’d point to NOSH that spans departments, but it’s a group of products that continues to grow at rates above average, perform above average. We’ve got a nice and growing mix of the total assortment. And I’d say further within that, we see varying ranges and levels of growth by store. I think getting to your the second part of your question, NOSH is probably a good example where the operator for the items that they pull into their store and how they merchandise then caters to local customer preferences in demands. And so those performance patterns, I would say are more specific to the market than they are necessarily to tenure to different characteristics of the operator. We’ve also seen some nice growth in fresh, nice performance in fresh produce meat. We introduced fresh seafood recently, so that continues to increase in customer adoption. And I’d also mentioned beer and wine as a category that’s performed well. We did expand spirits up in the Northwest over the past year. So that’s contributed there, but also just demand given extended closures of a bar specifically within that category.

Hey Simeon, Eric, I’ll take that second part of your question. So I’d say the only differentiation in performance that you’d see from tenured IOs might be in some of the operator stores that have been in an existing market for a long, long time in the same store and they’ve just sort of had the market growth aspect that, some of the newer operators and newer markets don’t yet have, because the lack of maturity of their store. But if you look across 400 operators and said, is there a meaningful difference in performance between tenured and experienced that would either get you one hopeful and excited or disappointed, I’d say, no.

[Operator Instructions] Our next question comes from Karen Short with Barclays. Please proceed.

Hey, thanks very much. Well, I do have two questions, but first is on the gross margin. You are very specific, I think on 2Q calling out 30.5%. So wondering if you could give a little bit more color on that and that’s obviously down more than we would have thought. And then just on that front with respect to the environment broadly, inflation is obviously high. And I’m wondering if you could just talk to how that would impact your like buy opportunity just broadly. Does that actually make it easier or harder with respect to inflation and also rationalization of skews with respect to the manufacturers?

Yes. Hi Karen, I’ll start with your second question then maybe Charles can cover your first. Yes. I’d say neither positive nor negative, we in terms of access to supply, the – we’re seeing incredible deals right now across all of our categories. We’re really excited. And we remain bullish on future opportunistic supply trends, pipeline strong, and we’re seeing deals come to us in a variety of ways. There’s as you’re well aware, and unprecedented amount of supply chain disruption, you’ve got product innovation, that’s alive and well. You’ve got production, I’ll say coming back online to catch up finally with demand and that will continue through the rest of the year. And so all of this contributes to more surplus product and we love the relationships we have and how well we’re positioned to capture those when they come through.

Yes, Karen, it’s Charles. Just to a little bit more color there, and I think RJ talked to a lot of this earlier, but it’s pretty unique the way our model allows us to mitigate some of these margin headwinds. You can’t fully ignore them, but it definitely helps us to absorb them. And you can see that when you look back over a longer time period in terms of our margin performance through a variety of cycles, different inflationary environments. And so Q1, I think was a good example where we felt some of those higher commodity and freight costs. And we had – we’re back to normalized turns relative to where we were last year, and so really pleased with our margin performance in the first quarter. In Q2, I think some of those same headwinds are going to exist just to a greater degree. And that is really the thought behind our guidance is approximately 30.5% for the second quarter. But for us, again, those quarterly fluctuations, very normal for our business. We look at the margin and feel like it’s very healthy, and continue to have confidence in our ability over the long-term to deliver a margin stability.

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

Hi, thank you. In your remarks on the regional specialization opportunity and also exclusive products, how do you see that manifesting in your buyer teams and/or your mix over time and/or thoughts on margins and how that may interplay? Thank you.

Yes. So we’ve managed changes in mix. I’ll say during shorter periods of time, and then over a longer period of time with always delivering value and maintaining stable margins. So I – we don’t anticipate nor are we planning for this continued evolution of the assortment to have any meaningful impact on margin, if that’s your question. As the business has evolved over the years, and as we expected and we’ll manage it to continue to evolve, to stay relevant for customer demands and to always delivering industry-leading value. We expect to maintain stable margins. We across opportunistic and every day are very flexible. So both of those sides of the assortment, there’s an extreme amount of flexibility, and we’re able to capture the best opportunities that deliver the right balance of value and value to the customer and then margin to the business. So as you talk about regional products being more relevant at a geography level or product development labels exclusive to Grocery Outlet, we think that only enhances the experience and overall strength of the business.

Thank you.

You bet.

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

Yes. Hey guys, thanks for taking the question. I apologize if I did miss it, but you alluded to some in-store changes that you’re doing. I think maybe down in California or something. And I was just wondering what kind of lift you might be seeing from changes like by moving the NOSH to the first IO. And what kind of drove the change in the first place? Was it a few IOs did it, and kind of bubbled up and made sense or just any color commentary about that would be helpful? Thanks.

Yes. Hey Joe, thanks for the question. So let me just set the tone for what we do relative to new stores. We’re always attempting to innovate. I would say each store openings and opportunity to try something new or remove something around, keep in mind that each of our boxes can be somewhat dissimilar from the last we’re not sort of stamping out a sort of a static box. So a lot of the flexibility we look at and I’d say, Mount Airy is a good example in the East is as a result of the box that we took. And then certainly has a lot to do with the urban nature of the customer, walking to the store within sort of a six block area. So the changes are really in pursuit of where the customer already headed more fresh. So we put the fresh produce and meat, and some of the fish products upfront. Then I’d say NOSH, we’ve talked about that for years is sort of a double-digit growing comp in category lots and lots of new supply. We need more space. We’ve taken that to the first aisle. So just those are a couple of examples that we go after, and look, we’ll play with them that the great thing about Grocery Outlet is we can test these quickly. If we like what we see, we can move them both back into the company, to existing stores or on a go-forward basis to new stores. And I’d point to a few things that we’ve done the walk-in cooler for refrigerated alcohol is something that you’ll see throughout the walk in dairy. We had no dairy 20 years ago, and then we were selling it out of the deli case. Now it’s in sort of a fill from behind cases. Those are all just innovations that don’t seem big, but they’re big for the operator. They’re big for the consumer. And we’re always trying to test things based on where the customer is and then pull them through the store design process, test them if we like them great. If we don’t, we throw them out and move on, but I wouldn’t want you to build in a whole bunch of sort of model increases based on this. This is something we’ve always done. We just thought it was important to highlight a few as it related to the East and all of our new stores.

Okay, that’s helpful. Thanks

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

Thanks. I wanted to ask a question actually about labor as it relates to your independent operators. And as we’ve heard many people, many restaurants and retailers having trouble with hiring, obviously it’s not something specific to your end of the business model, but certainly impacts your independent operators. I wanted to get a sense for what you are hearing from them in terms of whether or not they are feeling some wage pressures, whether or not they are able to staff the stores adequately, and whether or not it’s caused any disruption in terms of your weekly deliveries supply chain at all. Thanks.

Yes. Hey Jeremy, thanks for the questions. This is Eric. I would say no disruption. It is a more difficult environment. I think the biggest difference is restaurants closed down temporarily, a lot of people went away, found other jobs. And I think rehiring in this environment from scratch is very, very difficult. Our operators we’re in continuous operation, if nothing else most of them were increasing the staff they needed to handle sort of pandemic volume last year. So they had been I think experiencing that same difficulty, but they had a staff and they were able to hold on to that staff. Many of them offered a premium pay, during this period just naturally. This wasn’t compelled by any of the hero or hazard pay. It was just sort of what they wanted to do to make sure they could retain. I’d say operators because they’re entrepreneurs, they figure out the balance between labor and productivity. And so as rates go up, they have to become more productive and find ways to be more efficient. We obviously help on the back end through technology and supply chain, but they have all kinds of tricks up their sleeves in terms of flexible schedules, giving people time off, being a good employer, working the store themselves, they’re not just owners or owner operators, so they’re side by side, they’re staff. So I would say difficult, yes, disruptive, no. Will it return? Let’s see what the stimulus does. I think it’s very hard to compete against what’s going on in the stimulus environment for people that are making the decision between staying home and going to work. But we find ourselves in that fortunate situation to have a place that people like to be employed and work productively in.

That’s helpful. And just as a quick follow-up, do you have a sense for what the average pay rate is up versus let’s say 2019 levels for your operating staff.

Yes, we really don’t. Jeremy, I would just offer perhaps anecdotally, when I hear an operator lament that it’s hard to hire people and you ask what the wage rate is, they’re needing to go $1 above whoever is close by Starbucks offering $16 an hour. They’ve got to be above that. So I might offer its $1 or $2 an hour over where it was this time last year, but it would just be anecdotal.

Great. Thanks. Best of luck, guys.

Thank you. Thanks, Jeremy,

Thank you.

Our next question comes from Brian McNamara with Berenberg. Please proceed.

Hey, thank you for taking my question. Can you talk about the two new stores you’ve opened year-to-date in the East? I know you have one in East Norton and another one in Mount Airy. I think Mount Airy has only been open maybe 12 days. But how are they performing in their early days relative to a new store you would open out West?

Yes. And yes, thank you for the question. Yes, it’s still early innings. We’re excited by the community outreach that we got particularly just seeing Mount Airy and the excitement around that opening, engagement from the IO in that community, great customer feedback. Some interesting I’d say sales dynamics just because of the urban nature of that store, but we’re really happy with the positioning of both of those stores. I don’t know if you’ve had a chance to see them, but very, very prominent in terms of retail locations, facade sort of immediate impact in those neighborhoods. So way too early to call or way too early to tell in 12 days, but we’re happy with what we’re seeing.

And then just a quick follow-up on the East. It looks like you have several job postings for potential store locations across the six or seven Mid-Atlantic States. Are buyers are supply in general limiting factors in terms of the pace of your build out East. And do you expect an acceleration in store growth in the East next year from your current three to five unit pace? Thank you.

Yes. So let me just address the job posting comment. I think what you’re saying is you’re seeing probably store directors, store managers, store operator, our recruiting team does a lot of sort of initial trolling in the – all the job posting just to sort of generate people that think of themselves as directors, but haven’t thought of themselves as being owners and operators. A lot of them are able to translate over to operator. So that’s why we post that way. And your second question was around just sort of additional growth in the East three to five, the number this year. Yes, I would like to see more. I mean we’re certainly seeing a lot of mid-Atlantic real estate opportunities. I’m not going to put a finger on the page in terms of that number, but I would just tell you we’re building the foundation, the infrastructure, so that we can have more stores back there. So I think that should be our last question. Is that right? Hey guys, we’re going to wrap up. Thanks a lot for joining this afternoon. I’m looking forward to continuing the dialogue in the coming days. So thank you very much.

This does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation and have a great day.