Greetings. And welcome to Grocery Outlet Full-Year 2023 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. Please note participants are restricted to one question at a time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Christine Chen, Head of Investor Relations. Please go ahead, ma'am.

Good afternoon. And welcome to Grocery Outlet’s call to discuss financial results for the fourth quarter and fiscal year for the period ending December 30, 2023. Speaking from management on today’s call will be RJ Sheedy, President and Chief Executive Officer; and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live and a recording will be available via telephone playback and on the Investor Relations section of the company’s website. Participants on this call may make forward-looking statements within the meaning of federal securities laws. All statements that address future operating, financial or business performance or the company’s strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. A description of these factors can be found in this afternoon’s press release, as well as the company’s periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company’s website or at sec.gov.

Good afternoon, everyone, and thank you for joining us. We are happy to be speaking to you today about our business results, acquisition of United Grocery Outlet and outlook for 2024. Let me start by providing some commentary on business performance and notable growth initiatives over the next few years. First, our fourth quarter results were slightly ahead of our expectations and traffic and customer acquisition remains strong. We continue to deliver unbeatable value with an exciting treasure hunt experience and our underlying business fundamentals remain healthy. Second, we are excited to be acquiring United Grocery Outlet, which adds 40 stores to our network. This is an ideal strategic fit given our similar business models, customer value propositions and shared mission of serving and helping others. This acquisition provides Grocery Outlet which scale in a new geography as well as a platform for future expansion in the Southeast. We are thrilled to welcome the United Grocery Outlet team into the Grocery Outlet family and we look forward to working together on the many growth opportunities ahead. Third, we are making good progress on a number of strategic initiatives that we believe will strengthen our value proposition and contribute to future growth. Our personalization app is now rolling out to all stores and we will soon begin to invest in marketing to drive downloads and adoption. We are also looking forward to the launch of our new private label program later this year. Finally, we are excited to welcome Ramesh Chikkala to Grocery Outlet in the new role of Chief Operations Officer. I have known Ramesh for a number of years and he is familiar with our business through previous consulting work. Ramesh is leading our business technology and supply chain teams to help us scale and improve our capabilities to…

Thanks, RJ, and good afternoon, everyone. Our fourth quarter results slightly exceeded our expectations reflecting continued strength in transaction growth which improved throughout the quarter. For fiscal 2023 in total, we delivered strong top-line growth with comp sales increasing 7.5% yielding $4 billion in total sales. We also drove healthy bottom-line growth with adjusted EBITDA up 17.7% and adjusted net income increasing 15.2%. For the quarter, net sales increased 6.3% to $989.8 million due to a 2.7% increase in comparable store sales and the impact of new stores opened over the past 12 months. Comp transaction growth of 7.5% was partially offset by a 4.5% decline in our average basket. We estimate the system transition impacted comp sales by approximately 200 basis points for the quarter. We opened 13 new stores during the quarter, including seven in the East and one in Southern California, ending the year with 468 locations. We remain pleased with the performance of our new stores which are ramping in line with our expectations. Gross profit increased 6.3% to $298.9 million, representing a 30.2% gross margin rate, slightly better than our expectations. We continue to experience healthy deal flow, which helped offset the margin impact of our system integration, which we estimate was approximately 130 basis points in the quarter. Turning to expenses, fourth quarter SG&A increased 8.8% to $279.9 million. As a percentage of sales, SG&A increased 65 basis points. The increase was driven by higher commission payments to IOs, store occupancy due to new unit growth and D&A expense. This was partially offset by lower incentive and stock based compensation accruals. The higher commission expense reflects gross profit growth along with additional commission support we elected to provide our IOs in connection with our system transition. Net interest expense decreased 74.2% to $1.5 million…

At this time, we will be conducting a question-and-answer session. [Operator Instructions] The first question that we have today is from Oliver Chen from TD Cowen.

The United Grocery Outlet deal sounds quite synergistic. I would love your thoughts on what the characteristics were most attractive? How might the integration phases go? And then what should we know about the ramp to maturity of these stores and why you like the Southeast? A housekeeping item too, you mentioned that the deal will modestly a benefit adjusted EPS. Are there any details on how this will be financing anything else it should be on looking at the EPS accretion dilution?

I'll take the first part of that and then kick it over to Charles for the second part of your question. Yes, we're really excited about this acquisition. A lot of things that we like about it. First I'd say is companies are a great match. We have a shared mission of touching lives and serving customers. We have similar business models, store size, shared customer value propositions around shared customer value propositions around unbeatable value and the treasure hunt experience, all that supported by opportunistic sourcing and localized assortment. So, just a lot of similarities between the two businesses. This is a growth acquisition and a lot of benefits there related to growth. United Grocery Outlet already is a healthy growing business across the six states in the Southeast where they operate. We, in addition to just continued growth of that business, we believe that we have several levers by which we can accelerate growth in the United Grocery Outlet stores. Just a few examples here, one, expanding the assortment, we think a nice opportunity there. Two, would be to enhance the store experience through investments in fixtures and signage and technology. Also looking to make additional investments in marketing to continue to drive traffic and growth in that region. And then I mentioned in my comments, we also believe that there are benefits to introducing the operator model to this region as well. So a lot there to be [Technical Difficulty] we think can help the grocery outlet business. They have a bigger fresh meat assortment, so something for us to learn from. They of course have relationships with regional suppliers, and then we think we can take advantage of and then some other unique operating practices that we look forward to learning from. Another benefit that I mentioned here is the infrastructure that comes with the deal. It provides us infrastructure in an adjacent region to our current East footprint. It's a great entry point for us into the Southeast. It's great infrastructure to support future growth as we continue to pursue this tremendous white space opportunity that we have. And when you think about the infrastructure that comes with this deal together with the platform that we already have up in the mid-Atlantic region, we now have a lot of the Eastern U.S. covered in terms of infrastructure for supporting future growth. And then lastly, I'd say from an infrastructure standpoint, a nice benefit here expected as far as opportunistic buying goes and giving us better access to product that in this region, an advantage there for having local presence to land product locally. And Charles, do you want to touch on?

Yes, Oliver, it's Charles. Just quickly on how we're approaching the financing and sort of EPS impact of the acquisition with respect to 2024. So we do anticipate using cash on hand upon closing to finance the deal. And so in our guidance, we talked to the EBITDA impact from the deal, which we estimate to be roughly $7 million prorated for 2024. And so think of that as really steady state performance of the business as it currently stands. And then further down the P&L because of the financing with cash, we have factored into our interest expense the impact of really lost interest income into our guidance there and likewise in D&A, our mid-teens guidance reflects the impact of depreciation and amortization related to United Grocery Outlets. All that comes together to deliver modest EPS accretion in 2024.

[Operator Instructions] The next question we have comes from Krisztina Katai of Deutsche Bank.

I just had a question about the Southern States and how you're thinking about the store expansion potential there now that you will have potential there now that you will have 4 stores in the region. So one, is there a profitability differential? Like, so how do you view the profitability potential in the region? And how it compares relative to the rest of the geo network? Are these included in your 2025 and 2026 store plans? Just anything that you can share in terms of if you started to look for IOs in the region? And just lastly, the acquired DC, you've talked about that it can support further growth. Just wondering how many stores it can fully support?

I'll take the first part and then Charles can touch on part of your question as well. Yes, as I mentioned, we are excited about the infrastructure here United Grocery Outlet operates a multi temperature DC. And so that we think will serve us well both, of course, supporting growth in existing stores and then also to your question, as we think about future new store growth. We our immediate focus right now is on integration. So we don't have immediate plans to accelerate sort of growth beyond what the United Grocery Outlet team already had planned. So we'll do the work together with the UGO team to proceed on that integration plan. And then as we look forward, the Southeast region, lot of potential for growth there. The existing DC can support growth for the next, call it, several years from a new growth store growth standpoint. And then similar to how we manage across the entire network and across all of our points of distribution center and infrastructure, we'll make the necessary investments in that to support future store growth. But again, love the volume that it provides us, love the scale that it provides us and love the entry point into this region of the country which will support a lot of future stores.

And Krisztina, it's Charles, just a bit more color on the store productivity and comparisons versus our Geo stores. So, yes, we're excited about the potential here as RJ said. Looking at store productivity, the average sales volumes for the new Geo store is about half of our current stores. The basket really similar traffic is really the opportunity for us. So we think there is big opportunity to drive that higher through a combination of expanding the assortment, driving trips there, investments we can make into store CapEx and technology, as well as on the marketing side. In terms of the margin profile, I'd say no real structural margin challenges as we look at the business. Gross margins a little bit higher than our own stores, really because of mix differences in the more limited everyday assortment that they have. Store expenses a little bit higher than IOs currently operate. But all of that nets down to a very similar EBITDA profile. And so again looking ahead, we're excited about what we can do here as we grow these stores to look more like grocery outlet stores in the future.

Our next question is coming from the line of Robby Ohmes with Bank of America.

One, just a clarification, the sorry, the UGO stores that you're acquiring, are they currently in the IO model?

They are not, no.

Are you planning to convert them to the IO model?

We do, yes. We do think, of course, the IO model is super important to our business and important part of our value proposition. We think those benefits will all apply to the Southeast region as well. We are still getting to know the business, the individual stores. We're putting integration plans in place as we speak. We just announced the deal right a little over a week ago. So we're now working together with the United Grocery Outlet team on those plans. But yes, we do think about introducing the operator model to these stores as well.

And then R.J., just to -- again, to kind of clarify. So the -- I think you're going to do 55 stores you're saying for '24 and 15 to 20 of them would sort of be organic, not part of the acquisition. But I think you guys were targeting 10% growth organically before you announced the acquisition, which would be more like 47 organic stores. So did you -- did you push stores into the future? Or were you tracking to kind of miss opening the 47 organic stores, but then you made this acquisition? Like maybe help me understand just the organic outlook.

Sure. Yes. We've been focused on delivering the 10% annual store growth this year. We've talked about that throughout. And on the past few calls, we've also talked about pursuing this growth across several fronts, right? Organic growth, of course, but also consideration of opportunistic real estate. We have some new exciting strategic relationships we've built and then these regional acquisition opportunities that we've been considering as well. And all of these activities combined would represent 10%. As we started to see progress on the United Grocery Outlet acquisition, we were able to manage and moderate some of the other activities with this 10% goal in mind. And keep in mind that real estate is just one part of successfully opening new stores, right? We were super mindful of infrastructure needed to support them. Of course, there's operator recruiting readiness, there's marketing and there are a lot of other things that go into opening stores successfully. And so, we were able to make those modifications and we love where we're at. We've got 55 to 60 new stores planned this year, okay, it's a little bit ahead of the 10% growth. But for the work that we've done and the plans that are in place, we're excited about the integration work with the 40 as well as the 15 to 20 that we will open organically.

The next question we have comes from Joe Feldman of Telsey Advisory Group.

I wanted to go back on the private label, if you could share a little more color there. I know it's not coming until the second half. But just curious what if you could dive in a little more in categories. You mentioned NOSH, but are there other, I guess, everyday categories that you're looking to fill with these products? And how might that impact the relationship with any of the vendors or suppliers that you have?

We're excited to be getting to the point here where we will be introducing these new items and brands later this year. And as you know, we've been spending a lot of time building capabilities and setting the strategy and the foundation this past year. So exciting for us to be at the point here soon, where we'll have these new items being introduced to the store. . These items will be an enhancement to our everyday assortment, provide better value for customers, better shopping experience, better baskets and then also better margin for the business. So, a lot of things to be excited for there. As I mentioned in my comments, second half of the year is when we'll start introducing these items to the store and we have this goal of 100 new items by the end of the year. The initial focus will be in more commodity categories where and -- we have a nice opportunity to offer better value and again, margin and some of the items that we're currently carrying. And I'll just give you a few examples for where you start to see some of these initial items, water will be one of the first ones. We've got some nice opportunities in items lined up within the baking category, pasta category and cheese as well. So those are just a few. We've got others, of course, on the list that will be part of the 100 items. And then in addition to some of these commodity categories, also planning to introduce, I'll call them more differentiated items and where NOSH is a great opportunity here, items that can just further strengthen the treasure hunt experience can further differentiate us and also serve as another point of well, differentiation and destination for customers that are shopping our stores. So a lot there for us to like, still just the beginning. This is going to be a longer journey, but at least excited to be taking this first big step in getting this initial wave of products out to the stores and to our customers.

[Operator Instructions] The next question now comes from Mark Carden from UBS.

So for the year ahead, you're expecting a gross margin that's north of 31% for the second straight year, even with the systems headwind, noticeably above your historical rate, sounds like trends are expected to improve in 2H as well. Just what are the biggest factors driving this change?

Yes, Mark, it's Charles. I would say for us, we're just really pleased with the purchasing backdrop that we continue to experience. Yes, the technology implementation has had an impact, but the deal flow we're seeing, the backdrop from a buying perspective feels very good. Beyond that, continuing to see inflation moderate very much as we expected in promotional activity looks to still remain very rational. So I feel great about the setup for the year. To your point, it's above our sort of historical margin performance looking back over time, but again, just think some of those tailwinds will play to our strengths this year.

And then how is the overall product pipeline shaping up for 2024? Are you guys expecting to see much change in the pace of CPG innovation?

It's good. Yes, we continue to be encouraged by the pipeline of opportunistic product. It continues to be broad-based across categories. There was a lot of positive momentum throughout all of last year through to the end of the year and that's all carried forward through the first quarter so far I mean, we think carries forward through this year. And as far as just some of the trends we've talked about in the past, forecasting continues to be hard. So that contributes to opportunistic supply. Yes, product innovation continues to be healthy and increase in -- as suppliers introduce new items and they extend brands and there's branded label changes and packaging changes, those are all beneficial from the surplus inventory standpoint. And then just generally, changes in assortment and products are favorable. And so there continues to be a lot of dynamic factors to the supply environment. So all those have us feeling pretty good about what we're seeing currently and what's in front of us here through the rest of the year.

The next question we have comes from Corey Tarlowe of Jefferies.

So I wanted to ask about the UGO acquisition. And as you think about this acquisition versus the one you made about a decade ago in Amelia's, what's -- when does the IO model make sense? Because I think RJ or Charles, you had mentioned that the productivity or the sales volumes are about half of the fleet currently. So when does it make sense to introduce the IO model? Is it a multi-quarter or multi-year phasing? And then how do you think about some of the similarities and differences between when you bought Amelia's and how that integrated into the enterprise versus buying UGO today?

I'm going to start with your second question, and then I'll come back to the first part of your question. The Amelia's acquisition was a long time ago. Many things have changed in our business since then. I will note some similarities between that acquisition and this one, similar business model, value propositions, shared values for how we operate in both cases. So that's certainly similar. Both are providing us with infrastructure to support growth in a new region. In the case of Amelia's, it was really an entry point to the East Coast and here now a new region in the East Coast, but both coming with stores and distribution centers, local team that we'll continue operating the business those are all very helpful for entry into a new geography. And then, this point about providing better access to opportunistic supply. We saw that play out in a really positive way with Amelia's and we expect that to be the same for product that is local within that region in the case of United Grocery Outlet. So a lot of similarities there. In terms of -- a lot of differences as well, just in terms of store count and other parts of operation, but probably more similarities than not. In terms of timing and integration, Again, we are really just starting to work through integration planning together with the United Grocery Outlet team as it hasn't been that long since the deal has been announced. First, I'd say it's a healthy growing business. So our top priority is to maintain current business momentum and be smart about how we begin to integrate it and how we think about prioritizing and sequencing and timing for some of these growth opportunities. And that -- getting to your question around the operator…

And then just a quick follow-up. What was ring up in 2023? And then within your guide, what's the expectation for ticket or ring increase in '24?

Yes. So let me start with the latter there. So as we think about the -- for our business, the components of comp for the balance of the year, we think that 2024 will continue to see comps driven by traffic and that's going to be offset impart by lower basket. So on the traffic side, yes, food inflation moderating, but in absolute terms remains high. The consumer is feeling pressure from that along with high interest rates and consumer credit. So we think all of that will be a tailwind for us from a traffic standpoint as we've seen recently. From a basket standpoint, it will be lower due to number one, the increased trip frequency and the impact that has on baskets and more trips, lower baskets as well as moderated inflation. Within the basket itself, again, the components for our business, a little less comparable due to the changing nature of the assortment.

[Operator Instructions] The next question we have comes from John Heinbockel of Guggenheim Securities.

I just wanted to start with when do you think, is it really the end of the first quarter when there's a complete normalization? And how the IOs are using the systems and financial impact? Is that fair? And then how do you think about when you try to forecast the recovery in the back half of the year, right? If you lost over 200 basis points of comp and over 100 basis points of gross. I mean, it looks like there is some recovery, but certainly nowhere near a complete recovery.

Yes, John, it's Charles. Let me give you a little bit of context on the impact of technology and probably helpful to just provide you with the impact on Q4 and then how we're thinking about the first quarter as well. So in total, think about the EBITDA impact from the technology transition and interruptions is impacting EBITDA by $20 million in the fourth quarter. About half of that comes from the elective IO commission support that we provided to operators. The balance coming from a combination of the impact of the top line and gross margin rate, as we've disclosed. In the first quarter, those impacts continued but to a lesser degree. So that -- what had been a $20 million EBITDA impact in Q4, down to what we estimate and is implied in our guidance of roughly $14 million impact to the first quarter. Again, half of that coming from elective IO commission and the balance from sales and margin impact. So continue to provide that support during the impacted period, but the monthly impact as we're tracking it continues to decline, which feels good to us. Our current guidance assumes that we resolve the remaining issues in front of us and are back to steady-state operations and conclude the elective commission support by the end of the first quarter.

One quick follow-up then. The food business is a little bit different, but have you seen any impact from the bad weather and rain in California? Is that would be separate from the 50 basis points, if any, but have you seen anything?

Yes, not significant. Nothing to call out for us.

The next question we have comes from Leah Jordan of Goldman Sachs.

I just wanted to touch on the 4Q comp a little bit. It looks like the headwind from the systems change came in about 100 basis points better than you initially guided, but less than that flowed through to the total comp. So I guess what surprised you versus your internal expectations for the core business? And can you talk about just the dynamics in ticket overall and how volumes trended as the ERP rollout improved?

Yes. So let me start first in terms of overall comp for -- I’m going 2.7% for us in the quarter, a bit better than we guided. It was a combination of slightly higher basket. So think about that as being the inventory recovery coming out -- working through the system implementation was a bit faster than we thought so that helped basket. And supplementing that traffic was a little bit better. In terms of cadence throughout the quarter, we saw comps improve modestly as we progressed. More importantly, we're tracking very closely the prior year comparisons get a little bit noisy now. We're looking at average weekly sales into some nice improvement through the fourth quarter that has continued into the first quarter. So I feel like the underlying trends in the business are healthy and improving as we can work our way through the system transition.

And then for my follow-up, I just wanted to go back to the gross margin discussion. Just curious if you've assumed any benefit from the private label rollout and any magnitude of that impact? And also on close out, I guess, what have you assumed within guidance? Is it relatively stable throughout the year? Or any impact on a year-over-year basis there? And then longer term, should we still think that margins stay relatively flat or has anything structurally changed in the business?

So, no impact from private label, a small number of items rolling them out later in the year. So not meaningful to margin. From an opportunistic standpoint, I'd say, stable, which is favorable. Those nice trends that I talked about as they contributed in 2023, we expect to contribute similarly to gross margin in 2024. And then longer term, continue to operate this business for stable margins, always looking to -- that back into value and driving customer trips, both acquisition and retention and frequency. And we continue to see some really nice trends there. So we like this balance that we have between the value that we're delivering and of course, the margin that is being delivered to the P&L. So that continues to be the approach.

The next question we have comes from Michael Baker of D.A. Davidson.

So the acquired companies EBITDA margins are about 5.5%, right? Pretty close to what you guys do, maybe a little bit below the 6.4% that you did this year, but on half the sales volumes. So if you can get those sales volumes even close to your core stores, what does that mean about the margins from United Grocery Outlet? Do they go that much higher? Or do you reinvest that to keep them at about that mid-6% range? It's just -- it seems interesting that their margins are not that far from you on somewhat to our sales.

Yes, Mike, it's Charles. Probably, I'd say it is premature at this point given again we haven't closed the transaction. The business, again, last year roughly $160 million in top line, EBITDA about $10 million. So really similar EBITDA margin profile to our business. As RJ said, really excited about the long-term growth potential for this business, but we do want to be really measured in our approach. And so it's -- it would just be premature for us to put a number to it. But the -- again, the path we're taking is integrate the business, make sure we protect what they have, combine the best of UGO and GO with the goal of continuing to operate the business really in steady state this year. We'll start to invest. Again, lots of ways we think we can drive growth. We're going to learn a lot that will inform what exactly the P&L looks like in the future. But we do think there's a big opportunity for growth and again, taking the best of what we do and what UGO does. We're excited about it.

[Operator Instructions] The next question we have comes from Jeremy Hamblin of Craig-Hallum.

Congrats on the strong results. I wanted to come back to the new unit development here and just understand in terms of where you are now in opening these stores at your -- kind of your capital outlay in doing that versus where it might have been a couple of years ago? And then just thinking about that in context of the investments you're making here in UGO deal? And then the -- it looks like you -- I think you had indicated there is an additional $15 million of capital improvements that you're looking to make into the UGO locations. Can you just talk about in terms of returns on capital, are you getting more from kind of your base legacy business? And how does that compare to the United deal?

Yes. Jeremy, it's Charles. Let me provide you a little bit of context to how we really thought about the returns for the acquisition. We do think this will generate healthy returns for us over time. And we really looked at it through a few different lenses. The first was just what's the base business that we're buying. So we think we're paying a fair multiple for the 40 stores that exist today plus the distribution center just based on the last 12 months' performance of the business. As we said, we think it will be modestly accretive to 2024 earnings. So that feels good. Beyond that, really the next lens was thinking about the opportunity we have to drive growth within the existing store base. So as you said, it will take time but as we integrate, as invest in the stores we think there's meaningful upside just within the 40 stores today to drive accelerated growth, higher productivity, better bottom line that fuels the return. And then lastly, again, it's the platform that this gives us to accelerate growth into a new region. And RJ talked about not only the real estate opportunity in total that gives us, but also the impact it can have for us from a buying perspective. So those would all be additive to the way we thought about the return. So we think this is going to be a great use of capital for us and we love the way that it really supplements and complements what we do from an organic growth perspective.

And then just a follow-up there. In terms of your existing stores, Grocery Outlet stores. Where does your kind of initial cash investment lie at this point in time? I think a few years ago, it was in the $2 million and change for the store build-out inventory preopening expense. We believe that's a little bit higher now. Just wanted to sense here as you're looking at FY '25 and 6 of 100 total locations, what's kind of the expected outlook related to?

Yes, you're exactly right. We are seeing higher CapEx costs today than we were really the $2 million number ties back to when we brought the business public in 2019. And so clearly, it's a different inflationary environment today versus then. So yes, everything labor materials, equipment has had an impact. Probably in total, we're seeing new store costs about 25% higher than where we were at the time of IPO. That said, we've got a number of levers that we're actively working on to reduce costs, everything from value engineering. The build-out to strategic sourcing and both purchasing of equipment. I will say that when you look at the store model and the returns, it's store volume and product profitability that have a much bigger impact on returns relative to CapEX and so continue to be pleased with the volumes and the profitability we're driving from new stores. And so while the recent vintages are seeing as higher construction costs, it is not weighing down our returns in a meaningful way. You can think about it as really having about a 5 point impact on sort of mature year for ROIC. So that's come down from 35%, but still really a healthy, roughly 30% based on current construction cost.

The final question we have comes from Simeon Gutman of Morgan Stanley.

Everyone luckily, our airtime has not expired yet. .

We don't know what happened with that one. We were just as appalled as you were apologies.

No worries. I want to go back to the ticket size. I know it's a bit of an enigma to look at same SKU inflation for your business. Is there a best guess on what that may be doing to the basket size versus we're putting fewer items in the basket or if there's some trade down happening? And then I'll just put the follow-up in here, given the interest of time. Charles gave us some numbers on the fourth quarter and the first quarter commission sharing. I think you've disclosed the second and third or they're in the filings, but if you can just give us that one more time because there's going to be a pretty meaningful inflection in the composition of the P&L during the year.

Yes. Let me just start with Simeon, the basket. And so you can think about within the basket, again, not directly comparable for us. We always talk about our model mutes the inactive inflation on the way of deflation on the way down, but we are -- we continue to see slightly higher average unit retails. That's being offset by fewer items in the basket. Again, as trip frequency has increased as well as has had a bit of an impact from the system transition. Just to reiterate the numbers I provided with respect to the system EBITDA impact for Q4 and Q1. I'll give you both numbers. So you have them again. For the fourth quarter, total EBITDA impact roughly $20 million about half of which is IO commission support. So, as you look in the Qs and the Ks, you can -- you'll see that number as it relates to kind of the anomaly and commission trend. And the balance, again, the combination of sales impact and gross margin impact. For the first quarter, we're seeing the monthly trend come down in terms of the impact. We expect the full first quarter EBITDA headwind to be roughly $14 million. Again, half of that being IO commission and sales and margin being the balance.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to RJ Sheedy for closing remarks. Please go ahead, sir.

Thanks, everyone, for your time today and we look forward to talking with you again on future calls. Appreciate it. Take care. .

Thank you. Ladies and gentlemen, that then concludes today's conference. Thank you for joining us. You may now disconnect your lines.