Grocery Outlet Q2 2026 Earnings Call - Opportunistic Sales Surge Drives Beat on Top and Bottom Line

Conference Call Operator: Greetings, and welcome to the Grocery Outlet’s second quarter 2026 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. It is now my pleasure to introduce your host, Niccolo Cocciarelli, Senior Vice President of Strategic Finance and Investor Relations. Thank you. You may begin.

Niccolo Cocciarelli, Senior Vice President of Strategic Finance and Investor Relations, Grocery Outlet: Good afternoon, and welcome to Grocery Outlet’s call to discuss financial results for the second quarter ended July 4th, 2026. Speaking for management on today’s call will be Jason Potter, President and Chief Executive Officer, and Ian Ferry, Chief Financial Officer. Following prepared remarks from Jason and Ian, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via playback on the investor relations section of the company’s website. Participants on this call may make forward-looking statements within the meaning of the 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.

Description of these factors can be found in this afternoon’s press release, as well as in 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 on sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. Additionally, during today’s call, the company will reference certain non-GAAP financial information, including adjusted items. Reconciliation of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure may be found in the supplemental financial tables included in this afternoon’s press release on the investor section of the company’s website under News & Releases, and in the company’s SEC filings. Now I would like to turn it over to Jason.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Hey, good afternoon, everyone, and thank you for joining us. During the second quarter, our work to stabilize the business and return growth gained momentum. A stronger opportunistic offering and sharper value communication drove sequential comp improvement and results above our outlook across key financial metrics. Revenue increased 1% to $1.19 billion with comparable store sales down 30 basis points. That was a 70 basis point improvement from Q1, despite an adverse headwind from the timing of Easter this year. Traffic grew 1.8%, basket declined 2.1% year-over-year, but improved approximately 100 basis points from Q1 as customers responded to our stronger opportunistic offerings. Gross margin of 30.2% also exceeded our outlook due primarily to lower than planned promotional spending. Combined with disciplined cost management, the sales and margin outperformance drove adjusted EBITDA of approximately $66 million and adjusted EPS of $0.20, both well above our outlook.

Our first half progress reinforces our confidence that restoring the core strengths of the Grocery Outlet model can drive sustainable improvement. It’s still early, but the business is responding. Let me start with our primary objective, improving comps. Strengthening our opportunistic offering is central to enhancing our value proposition and returning the business to sustainable comp growth. Since the start of this year, we’ve prioritized improved sourcing, product flow, visibility, and store-level execution while expanding key supplier relationships. Together, these actions have significantly increased and strengthened our opportunistic assortment and improved our mix. The impact is showing up in our sales. Opportunistic comp store sales improved significantly from Q1, helping lift the total company comps into positive territory in May and June. The breadth of opportunistic SKUs increased meaningfully quarter to quarter with improving quality.

In addition, year-over-year growth in opportunistic units per transaction also improved significantly relative to the first quarter. These are encouraging early signs that customers are responding to a broader and better selection of compelling deals as we improve our op mix. That growth is an outcome of category-level focus and execution. We’ve prioritized and have seen outsized opportunistic improvement in grocery, our largest category. In grocery, a determined effort to revitalize supplier partnerships drove higher opportunistic product flow, opportunistic comps, and our total comps. This is how our model is designed to work, and we’re implementing the same actions in other categories like deli and frozen. Paul Miller is leading the work to strengthen our sourcing and merchandising capabilities. Paul returned in June as Executive Vice President and Chief Purchasing and Merchandising Officer.

A 25-year Grocery Outlet veteran, he helped develop our opportunistic offering, deepen key supplier relationships, and enhance the Treasure Hunt experience. In just two months into his return, his merchant instincts and leadership are already making an impact here. We’re very pleased to have him back. To support our revitalized offering, we are improving the ways that we communicate value to our customers. We completed our repositioning around extreme value and the Treasure Hunt, supporting our product efforts with simpler signage, more prominent value items, and targeted at-home and digital media. With a stronger assortment and better analytics, we can deploy marketing and promotional spending more precisely. That will allow us to rely more on product and marketing to drive comps and less incremental price investment in the second half of the year, even as the competitive environment remains promotional.

In Q3, we’re deploying enhanced messaging to improve our price perception. We plan to deploy new signage in stores that supports our value positioning and will extend that messaging into our digital presence and our app. We’re also taking steps to introduce parity pricing in e-commerce. These actions will make the savings available at Grocery Outlet easier for customers to see, to access, and understand. Together, stronger product, clear value messaging, and broader customer engagement are designed to drive more consistent comp growth. Capturing the full benefit requires strong execution in every store, which brings me to our independent operators. Our independent operators are one of the greatest advantages of the Grocery Outlet model. They know their communities and their customers. With the right assortment, the right tools and support, their entrepreneurial energy really brings our model to life.

Over the past year, we’ve expanded reporting and actionable insights, strengthened communication with our field organization, and invested in training. We’re also spending more time in the field and engaging operators more directly. Our goal is straightforward. We want operators to spend less time sifting through data and more time serving customers to grow their businesses. A common set of facts and priorities helps operators and field teams identify issues sooner, focus on actions that matter most, and deliver a more consistent customer experience. A good example of this is how we’re working with IOs in the field. Using fleet-wide data, we identify stores where targeted coaching and operational support can have the greatest impact. Our field teams then work side by side with operators on a focused set of actions, including in-stock conditions, merchandising, store standards, and operating routines.

This annual business review and enhanced merchandising reporting help translate the data into action. We’re encouraged by these results so far. Participating stores have consistently outperformed their control groups, reinforcing that meaningful improvement can come from disciplined execution of store-level fundamentals. We’re turning those learnings into repeatable tools and routines for the broader fleet. We’re also giving operators a more immediate view of customer sentiment. We’ve introduced new point-of-sale feedback that connects customer responses with transaction data, helping operators identify service gaps and adjust their actions at store level. This capability is now in approximately 100 stores, and the early results support a fleet-wide rollout. In parallel, we’re improving efficiency. Our new dynamic routing program removes ordering constraints and optimizes delivery routes, increasing delivery quantity and improving opportunistic product flow across a significant portion of our fleet.

The program is currently in approximately 200 stores, and we expect to complete the rollout over the next year. These efforts are lifting customer and operator sentiment and engagement. Customer NPS improved meaningfully again in Q2, while our IO survey feedback was overwhelmingly favorable. IO satisfaction increased across categories from last year, and the majority of our operators rated our recent systems upgrades as extremely or very valuable. Beyond the data, we’re seeing increased engagement from our IOs on a variety of initiatives. These outcomes reinforce our conviction that we’re focused on the right priorities. The same discipline we’re bringing to store execution is also guiding how we manage the business and deploy capital. Improving operational discipline means making timely decisions, directing resources to the highest value opportunities, and holding every investment to rigorous performance standards.

In April, we completed the closure of 36 underperforming stores as part of our store optimization plan. The outcome is a healthier portfolio that we feel is better positioned for long-term profitable growth. We remain on track to eliminate a $12 million drag to annualized adjusted EBITDA, with the majority of the benefit expected to occur in 2027. We see encouraging signs of progress in the remaining stores in the East. Comparable stores in May and June significantly exceeded the company average, while Q2 margins strengthened on a year-on-year basis. That discipline also extends to our new store growth program, where we’re applying greater rigor to site selection, new store underwriting, IO engagement, and execution. We remain confident in the portability of our model and the immense white space that exists.

The ability to offer savings up to 40% versus conventional players allows us to provide a unique and compelling value proposition to customers in a wide variety of geographies. However, as we continue to work on improving the core offering in our business and year one store productivity, it is critical that we prioritize the highest return markets and expand capacity at an appropriate pace. As such, our 2027 openings will be weighted toward infill opportunities. We are taking a similarly measured approach to our store refresh program. Improving the store experience remains an important long-term priority. As we continue those efforts, we are pacing our investment to ensure quality execution that allows the business to focus on our primary goal of driving comp through our opportunistic assortment. We continue to target approximately 100 refreshes completed by the end of the year.

Looking to the second half, the consistent progress we have delivered since January reinforces our conviction that disciplined execution against our priorities remains the right approach, and we enter the second half with improving underlying momentum. Customers are responding to the stronger opportunistic offering and the clearer value messaging. Operator engagement has improved, and our sharper approach to execution and capital allocation is also beginning to improve performance. Those strengths will be important as consumers spend cautiously and the operating environment remains somewhat promotional. They will also help us navigate the near-term impact of the multi-state Cyclospora outbreak. Our products have not been involved in any Cyclospora recalls, but like others in the industry, we have experienced pressure on produce sales. We saw an impact in July and expect a headwind of roughly 100 basis points to total company comps for the third quarter.

Even so, we are encouraged by the underlying direction of the business and remain focused on advancing our core priorities. Before I close, I would like to recognize an important leadership transition. Chris Miller recently retired as CFO of Grocery Outlet. Chris provided steady, experienced leadership through the critical first year of our turnaround and leaves strong finance and accounting teams in place to carry the work forward. On behalf of the board and the entire organization, I want to thank him for his leadership and wish him all the best in retirement. I am also very pleased to welcome Ian Ferry, who many of you know, as our new Chief Financial Officer. Over the past year, Ian has become a trusted strategic partner to me and our board. His financial discipline, operating insight, and long-term perspective have already made a meaningful impact here. I look forward to continuing our work together.

In closing, our first half progress strengthens my confidence in Grocery Outlet’s long-term opportunity. It is still early and we have work ahead, but the business is responding. Consumers continue to prioritize value, and our differentiated model is built for this environment. When we strengthen the opportunistic assortment, equip operators with better tools, and apply greater discipline to execution and investment, performance improves. We have the foundation to build a stronger, more productive, and more profitable Grocery Outlet. I want to thank our independent operators, our team members here, and our supplier partners for their hard work this quarter. I would also like to note with gratitude that we just completed our annual Independence from Hunger campaign, during which IO’s partner with local nonprofits to provide critical resources to those most in need.

I’m proud of the positive impact our operators make in this regard in the communities they serve, work, and live. Finally, I want to thank our shareholders for your continued support and engagement. We remain committed to earning your confidence through disciplined execution and consistent results. With that, I’ll turn it over to Ian. Ian?

Ian Ferry, Chief Financial Officer, Grocery Outlet: Thanks, Jason. As CFO, my objective is to help ensure we build a business that creates durable, long-term shareholder value. That means allocating capital with discipline, measuring ourselves against the right long-term metrics, and communicating our progress with transparency. Our second quarter results provide further evidence that the operational improvements Jason discussed are translating into better financial performance. While our performance has ample room for improvement, stronger sales trends, disciplined spending, and sharper capital allocation are beginning to improve the business and its long-term earnings potential. I will start with the quarter and then discuss our full year and third quarter outlook. Unless otherwise noted, the comparisons I provide are on a year-over-year basis. Starting with the top line. Second quarter net sales increased 1% to $1.19 billion.

Sales from stores opened over the past 12 months more than offset the impact of optimization plan closures and a modest decline in comparable store sales. We opened 10 stores and closed 12 during the quarter. Comparable store sales declined 30 basis points, including an approximately 50 basis point headwind from the Easter shift. This was above our outlook for a decline of 1.5%-2%. Traffic remained positive, while basket improved roughly 100 basis points sequentially. Importantly, comps across our opportunistic portfolio improved significantly from Q1, reinforcing our confidence in the actions underway. Gross profit dollars were flat at $360.7 million, representing a gross margin of 30.2%, above our 29.8%-30.0% outlook.

Gross margin declined 30 basis points year-over-year, primarily due to the promotions we instituted at the start of the year to reinforce our value position, as well as store closure related markdowns and write-offs, partially offset by better inventory management. Sequentially, gross margin improved 60 basis points from Q1, reflecting reduced liquidation activity associated with the store optimization plan, lower promotional spending, and favorable seasonality. On a year-over-year basis, SG&A increased less than 1% to $339.5 million, and as a percentage of net sales remained consistent with last year at 28.5%. Sequentially, SG&A improved 130 basis points as a percentage of net sales compared to Q1, primarily driven by higher sales leverage, optimization benefits, and lower marketing expense. We also recorded $5.4 million in net restructuring charges related to the optimization plan.

This included $14.8 million in cash charges, partially offset by $9.4 million in non-cash credits, primarily from the net write-off of right of use lease assets and lease liabilities. Below the operating line, net interest expense was $6.6 million, comparable to last year. Our GAAP effective tax rate was 38.8%, compared with 20.3% last year. Net income was $5.6 million or $0.06 per diluted share, compared with $5 million or $0.05 per diluted share last year. Adjusted net income was $20.3 million, or $0.20 per diluted adjusted share, compared with $22.8 million or $0.23 per diluted adjusted share last year. Adjusted EBITDA was $65.7 million or 5.5% of net sales, compared with $67.7 million or 5.7% of net sales last year. Both adjusted EBITDA and diluted adjusted EPS exceeded our outlook. Turning to the balance sheet and cash flow statement.

We ended the quarter with $74 million in cash and approximately $154 million of revolver availability. Total debt net of issuance costs was $505.6 million, up $16.3 million from Q1. Net leverage remained 1.8 times adjusted EBITDA. Operating cash flow was $43.2 million compared with $73.6 million last year. The decrease primarily reflected the timing of accrued and other liabilities, lower operating lease liabilities following the optimization plan, and lower net income after adjusting for non-cash charges. Capital expenditures were $43.7 million, or $38.7 million net of tenant improvement allowances. Now let me turn to our outlook. The actions we began implementing at the start of the year are delivering progress. Given our stronger than expected second quarter performance, we are raising the low ends of our full-year financial outlook ranges.

For the full year, we now expect net new store openings of 30 to 33, net sales of $4.7 billion to $4.72 billion, comparable store sales in the range of negative 0.5% to 0.0%, gross margin of 29.8% to 30%. We continue to expect approximately $20 million of incremental promotional investment for the full year, with spending expected to further taper in the second half as our stronger opportunistic mix and Treasure Hunt support underlying comp performance. We expect adjusted EBITDA of $225 million to $235 million, diluted adjusted EPS of $0.51 to $0.55 a share, and capital expenditures net of tenant improvement allowances of $170 million. For the third quarter, we expect comparable store sales ranging from negative 1% to 0.0%, gross margin of 29.8% to 30%, adjusted EBITDA of $58 million to $61 million, and diluted adjusted EPS of $0.14 to $0.16 a share.

In summary, the initiatives we outlined at the start of the year are gaining traction, and we are managing the business with greater discipline. Strengthening the opportunistic offering and customer value proposition remains our priority. We will stay focused on execution in the second half and look forward to updating you on our progress. With that, I will turn the call over to the operator for questions.

Conference Call Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question is from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead.

Will, Analyst, Craig-Hallum Capital Group: Hey, this is Will on for Jeremy. Thanks for taking our questions. Just wondering if you can share any more color on the cadence of comp trends through the quarter and then here into Q3, and then what traffic versus basket is looking like here quarter to date.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Hey, Will. It’s Jason here. Look, we’re making progress on our comp store sales, and we’re encouraged by the sequential improvement we’ve had. Just to walk you through that, January was meaningfully negative, to remind everybody, and we’ve made significant progress since that point. Pre-cyclospora impact total comps had improved by about 300 basis points to the end of Q2. To answer your question on traffic, Q2, again, a solid number there, 1.8 on top of the 1.5 last year. The basket declined by just over 2% but did show about 100 basis points of sequential improvement from Q1. That was a mix of about 1%, a little less than 1% inflation and some mix. But we did also encouragingly experience an improvement in units per transaction with op in the basket.

When you’re thinking about the guide, I think the way that we’ve thought about this for Q3, as Ian’s pointed out, minus one to flat. That 100 basis point cyclospora impact is notable. Just a couple points there I’d like to make on that. Our produce business was running very healthy and running well above inflation prior to the outbreak. We’re continuing to monitor it. We’ve got an understanding of what’s happening category to category. We think that that’s going to moderate a bit into Q4, but right now estimating about 100 basis points. Clearly, we can see things like bagged salads, a fairly large impact. But we feel that this is a temporary headwind and the underlying performance of the business continues to improve and we’re encouraged by what we see going forward for Q4.

Will, Analyst, Craig-Hallum Capital Group: Okay, that’s very helpful. Then I just wanted to understand where the opportunistic product is mixing today versus Q1, and then where you’d like to see that by year-end, and then what sort of total comp benefit you’d expect to see from that change in mix from the beginning of the year?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, certainly. First and foremost, our pursuit of opp has everything to do with creating value for customers. There’s a very high correlation between opp comps and our total comp business. We can see that in our store cohorts. It’s the value and sales generating engine of the business. As you know, it’s the heart of what drives our unique Treasure Hunt experience. The plan that we developed is meant to create a sustainable quality of sales and margin. What we’ve seen through this first half of the year, opp comp accelerated meaningfully in Q2, up above 500 basis points relative to the start of Q1. Our mix expanded well over 300 basis points and continues to accelerate. As I mentioned, we have this headwind with Cyclospora, but expect that to be temporary. We’ve got some really bright lights as we’ve executed this plan.

One great example is grocery, our largest and most important category. I know you may be curious about this. Our comps finished at 3.5% in Q2. That playbook being executed by Paul Miller is now, we’re seeing advancing sales momentum in the next two most important areas, both deli and frozen right now. Seeing good inventory flow where we’ve expanded our range of branded opp. Again, the confidence we have in the plan, with supplier engagement, supplier acquisition, what’s happening in our basket. We see the momentum in the business and again, reflected in where we see the business going in the back half.

Will, Analyst, Craig-Hallum Capital Group: Appreciate the color. Thank you.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: You bet.

Conference Call Operator: The next question is from Corey Tarlowe from Jefferies. Please go ahead.

Corey Tarlowe, Analyst, Jefferies: Great. Thanks, Jason. Appreciate the time. I was wondering if you could talk just broadly around what specific milestones you’re using to measure any improvements in the business, and when do you feel like you can shift to perhaps a more offensive posturing, if you will? How are you measuring that internal cultural shift back toward the traditional Treasure Hunt model that Grocery Outlet tends to thrive in?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, I think the things that we’ve been measuring and holding ourselves account to, we’ve made progress across all what we think are the most important KPIs. Continued traffic growth, which is really important. We saw some basket expansion we think is important. We also noted improving Net Promoter Scores from the beginning of the year right through to the end of the quarter. Our opp mix has expanded. The comps have expanded. We see a lot of improvement in execution related to our reporting and visibility that’s helped folks across the supply chain manage the flow of inventory, both when they’re writing POs, when they’re meeting with suppliers, helping us execute with speed and more precision, which is really important. So seeing good inventory flow, good quality of opportunistic product, which is something we’re measuring.

We measure things like the amount of variety, and balancing that, as well as things like turns or GMROI. Those are all important elements to measure and ultimately, looking at what the customers are doing and the trips it’s generating and what that means for things like NPS and value score. Ultimately, we expect to have that show up in a higher level of comp sales in terms of both traffic and basket.

Corey Tarlowe, Analyst, Jefferies: That’s helpful. Just as a follow-up, a number of your competitors have highlighted investing into price throughout the back half, so it feels as if the grocery environment will be getting more competitive as we look over the next several months. I’m curious how you think about your strategy in light of how some of your competitors are going to be posturing their pricing. Thanks.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah. No, great question. Look, it’s always competitive out there in my 30 years. You’re always fighting it out to win the customers’ hearts. We’re obviously alert to the competitive activity and some of the announcements that have been made, as well as, in the syndicated data, seeing a recent uptick in promotion. We know the customer’s searching for value, customer’s under pressure. We all read the news and can see what happens at the pump and so on. I think what we’ve done to grow opportunistic this year, our positioning there, the plan we’re executing against is right on the money, so to speak, to deal with this issue.

If you look at what happened in our business in this first half and specifically in Q2, our retail inflation was a little bit below 1%, and that has a lot to do with what we’re doing with opp. When we think about competition or price, there’s many things to evaluate. We’re continually monitoring and measuring our pricing against a number of different competitors across major MSAs. We continue to see a nice price gapping on a basket of goods for us, 15%-20% below mass, 30%-40% against conventional. I think that’s important to note. For us, when we’re dealing with these kinds of things, the best way to deal with it is through opp. Opportunistic is a pretty magical thing for us. It drives sales and margins. It drives value for the customer.

Paul came to me this week and shared an example of 50-plus truckloads of a well-known relevant branded drink, sells for $8 in the market that we’ll be selling for under $1 in the market sometime next week. Those kinds of things just really displace comparisons and is a big part of what drives customers to our stores. I think staying competitive and making sure that we’re paying attention to what’s happening in the market is always going to be an important element of what we do here, but continue to see that we’re being reinforced and encouraged by our work on opportunistic supply, variety, quality, distribution, and inventory flow and turns.

Corey Tarlowe, Analyst, Jefferies: That’s very helpful. Thanks so much, and best of luck.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Thank you.

Conference Call Operator: The next question is from Robert Ohmes from Bank of America. Please go ahead.

Robert Ohmes, Analyst, Bank of America: Oh, hey, Jason.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Sure.

Robert Ohmes, Analyst, Bank of America: Hey, I was hoping as a follow-up, could you maybe parse out, it sounds like you’ve really got opportunistic as an important initiative and it’s working and you’re seeing great things, but you also have the store refresh program. When we think of those two things, can you sort of help us think about how much each of those two things are going to drive and how much are they interrelated with each other?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, great question, Robbie. Clearly, we continue to believe in improving the in-store experience as an essential part of the strategy. What we’ve done in the first half of this year is to make sure that everybody in the company’s priority is restoring op across the network. That’s what’s driving improvement in our business. Clearly, refresh is an important component of that. Like I said, on the recording, 100 stores by the end of the year is on track. We continue to get great feedback from customers and operators. We think that what’s important here, and one of the calibrations we made as we focus on improving value and improving op, is to make sure that we’re supporting operators with the tools and the assistance to ensure a consistent execution as we do these rollouts.

We had more variability in the last couple cohorts than we’d like, and we wanted to shorten the disruption period to optimize the results. So we’ve calibrated that slightly. So we continue to think that that’s going to be an important long-term element of our turnaround story. But the main event here for us is improving value through opportunistic supply, and that’s going to continue to be the focus of the company in the back half.

Robert Ohmes, Analyst, Bank of America: That’s really helpful. My follow-up on that is, you mentioned earlier in the call the supplier partnerships improving or recovering or something like that. What happened with the supplier partnerships, and how much improvement is there to come from here?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Look, I just want to say we’re really proud of how the teams engage with suppliers and the relationships that the company’s built with the supply community over many decades, frankly. It’s a critical point of difference for Grocery Outlet and part of our strategic moat. Paul Miller and his leadership brings a special understanding of supplier connection. I don’t think we lost that connection, but I think as we’ve really outlined the plan for what we’re going to do with opportunistic, it’s an important point to call out that engaging with suppliers, face-to-face meetings, being a one-stop solution for our supply community, taking quick care of their brands, being good brand stewards, and responding in a rapid way is all part of Paul’s philosophy. We’re seeing good results there. New supplier acquisition’s up about 11% this year.

We’re seeing just kind of great results across the board as the deals come in, and it’s just a doubling down of something that we’ve always done well and just made sure that the entire company, under Paul’s leadership, is focused on it.

Robert Ohmes, Analyst, Bank of America: That sounds great. Thank you.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Thanks, Robbie.

Conference Call Operator: The next question, pardon me. The next question is from Edward Kelly from Wells Fargo. Please go ahead.

Edward Kelly, Analyst, Wells Fargo: Yeah. Hi, good afternoon, everyone. Business certainly seems to be starting to turn the corner. As we think about guidance, you didn’t flow much of the upside this quarter or your better optimism, I guess, into the full-year guide. Is that just Cyclospora or are there some other incremental offsets? And then related to the Cyclospora and the 100 basis point impact, is that just July through August so far, that impact? Is that you would expect that to continue all quarter? Just kind of curious as to how you came up with that.

Ian Ferry, Chief Financial Officer, Grocery Outlet: Yeah. Hey, this is Ian. I’ll take that. So if you look at the beat for Q2, and we are pleased with where the performance ended up, we beat the midpoint by about $9 million. Roughly half of that was due to outperformance on comp and gross margin rate. Of the remaining $4.5 million, two-thirds of that is SG&A dollars that will actually shift into the back half of the year, primarily the third quarter, and then $1.5 was just good cost discipline versus plan. So the way that I would think about the quarter is roughly a $6 million beat versus midpoint on an organic basis with $3 million shifting. And then as you think about Q3

There will be a sequential step down in gross margins, even though we are further tapering promotional investment and there’s a little bit of store closure costs that roll off. The produce issues that Jason highlighted do come with elevated shrink, and that will be a meaningful hit in the third quarter that will flow through into gross margins. We also have just a modest level of seasonality. When you net all that out and then we look at the balance of the year, we felt like the guidance that we gave is appropriate and we want to be prudent with our outlook.

Edward Kelly, Analyst, Wells Fargo: And then 100 basis points?

Ian Ferry, Chief Financial Officer, Grocery Outlet: Yeah. Of the Cyclospora. We’re basically assuming that the pressure is going to be with us through the end of the quarter.

Edward Kelly, Analyst, Wells Fargo: Okay. Jason, I wanted to ask you talked about the promotion, just sort of maybe pulling back, normalizing as you get into the back half of the year.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Sorry, you’re breaking up there. I don’t know, operator, if you can just make sure the line is clear there. We just didn’t hear anything. We’re getting a few words in there. Sorry.

Edward Kelly, Analyst, Wells Fargo: Yeah, sorry. Maybe it was the speaker. Jason, I wanted to ask you on the promotional side, you talked about maybe pulling back or normalizing to some extent in the back half, and then some of that void gets filled, I guess, with value communication and maybe it’s increased off as well, but the backdrop is competitive. I’m just kind of curious as to how you feel about sustaining some of the momentum that’s improved while you normalize on the promo side.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, no, great question. Couple things to say. Grocery Outlet has not been traditionally a promotional company, and we don’t intend to continue that. We create excitement and value through, obviously, the branded off deals and, as you pointed out, the Treasure Hunt experience. We did establish early in the year this $20 million promotional bridge, the synthetic bridge that was designed to supplement our off offering as we rebuilt the offering. Now, we’re on track with that plan to rebuild our off offering, which is why the focus of the company is everyone’s attention is turned there. We’re on track to taper those promotions, those replacement promotions, if you will, as off mix is fully sort of restored by the end of the third quarter. So, a couple of things there.

When I look at the weight of off, the number of deals at various levels of savings and the KPIs that associate to call it promotion, our plan is also on track. Pleased with the progress on growing off. We don’t expect to see the need for more promotional investment beyond what we’ve already discussed. To your point, we remain disciplined but responsive. Obviously, maintaining the right competitive price gaps is critical, but I just want to reinforce, we think we’re on the right track and we’ll monitor if anything changes, but expect that our plan is prudent and appropriate for the back half of the year.

Edward Kelly, Analyst, Wells Fargo: Thank you.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Thank you.

Conference Call Operator: The next question is from Oliver Chen from TD Cowen. Please go ahead.

Iris Stankich, Analyst, TD Cowen: Hi, good afternoon. This is Iris Stankich on for Oliver. Grocery Outlet is described as a countercyclical model that can benefit when consumers come under greater pressure. I am just wondering, as we have moved through the quarter, have you seen any change in customer behavior that gives you confidence that the value perception is becoming more visible to shoppers, whether through new customer acquisition, trip frequency, or basket? Thank you.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, thanks for the question. Clearly, generally what we’ve seen in the past is, you’ll see pressure in the basket first, then obviously when trade down happens, we get traffic. We haven’t seen that yet, but we think the work we’re doing positions us well for that. As I mentioned, traffic did increase just about 2% in the quarter. That’s been running about that 2% mark, which is the intent of our plan this year. We also saw improvement in our basket, and we did see improvement in UPT relative to op in the basket. So our customers are recognizing value. They’re seeing more of it in the store. That’s showing up in the underlying metrics.

We believe, and they’re convinced, that’s what’s driving our sales and the relationship between op value and comps are connected and drives the heart of the differentiation that we have in the business. That’s what I would share today on that front.

Iris Stankich, Analyst, TD Cowen: Okay, got it. Then just as a follow-up, I know that last quarter you noted for United Grocery Outlet and expected it to be a 2026 discussion. Are you able to provide an update on where that process stands today and whether your view of the strategic fit of the business has evolved since then?

Ian Ferry, Chief Financial Officer, Grocery Outlet: Yeah. Hey, Iris, this is Ian. I can take that. So you’re right. We do think it’s a 2026 conversation. There’s work ongoing. We’re looking at a variety of options. When that work concludes, we’ll update you as soon as that happens. But no update today of any note.

Iris Stankich, Analyst, TD Cowen: Got it. Thank you.

Conference Call Operator: The next question is from John Heinbockel from Guggenheim Securities. Please go ahead.

John Heinbockel, Analyst, Guggenheim Securities: Hey, Jason. Wanted to ask, as you lean more into op, what is changing, if anything, with planograms and space allocation towards that? Then, if you think about balance leaning into op heavier, I think historically, right, you guys have been pretty good about avoiding markdowns, even on close code product. Maybe talk about that tension, leaning in

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Sure

John Heinbockel, Analyst, Guggenheim Securities: and trying to avoid markdowns.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah. Great question, John. We have kind of, call it planograms is sort of an industry term where you’ve got, obviously every item is allocated in the space. We have space allocation.

What we did in the first half of the year, we did mention that we would be discontinuing 400 to 500 MTO and private label items to make space for more opportunistic variety. I’m pleased to report that we did get that done, made those transitions. That’s shown up in sales and in store. The vast majority of those markdowns, if there were any, were done already in the first half. We always have some markdowns when we’re changing product out. The business year to year will sell 80,000 to 100,000 unique SKUs as products come and go. It is a normal cadence for the business to manage and we’re happy how that first half has gone, John.

John Heinbockel, Analyst, Guggenheim Securities: Maybe as a follow-up, I think you talked about a lot of the 27 openings or a bigger percentage will be in existing markets. Is the plan to open more than you did this year, right, in 27 or about the same? I think the idea when you did UGO is to have volume sufficient on the East Coast to really lean into op product. I think you’re probably there, where you don’t need to open that many more on the East Coast to get access to op. Is that fair?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah. On your first question, we’re not prepared yet to release sort of a store count for next year. It is our intent to open much more infill. Obviously, as we stated, we’re excited about the long-term white space and growth potential of the business. In the near term, we’ve made some tough decisions to make sure that we’re focused on infill opportunities, and that really allows us to leverage the brand, the power of the brand locally, the people power. Our IO community is really important, and the density of stores helps with that.

John Heinbockel, Analyst, Guggenheim Securities: Yep.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Distribution strength, obviously, which the core markets, we’ve got a well-oiled machine there and supported by disciplined underwriting we think is the right approach in the near term. To your point on the East, we just opened a new DC to support that group of stores, and we feel that that’s absolutely helping our results in the East. We’re pleased with the performance of the stores, post-closure work. Those stores are running profitably as a group and ahead of plan and positive comps already this year. All of those elements, we are feeling good about those decisions, John.

John Heinbockel, Analyst, Guggenheim Securities: Thank you.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: You’re welcome.

Conference Call Operator: The next question is from Joseph Feldman from Telsey Advisory Group. Please go ahead.

Joseph Feldman, Analyst, Telsey Advisory Group: Hey, guys. Thanks for taking the question. Wanted to dig in on that field operations changes you’ve made. Can you share just a little more color on that? Like, what’s actually different that the field operations, I guess field managers or whatever they’re called, are doing in the stores and how they’re helping in a different way, and what maybe sales and costs are related to that? Thanks.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, no, it’s a great question. Look, first and foremost, the IO model is a unique competitive advantage for us. We know that it’s essential for us in the long term to continue to improve support for our operators. Execution is a huge component of the customer experience and the intent of the team is double down on communication and collaboration with our operators. Specifically, we’re adding field support. That’s been done. We’ve implemented things like dynamic routing that I mentioned in my opening remarks. That really helps with op flow and in stocks, so there’s support there. Implementing things like store level POS, customer feedback reporting to give our IOs much more salient information about specific customer feedback trends. The DSMs work directly with them on action plans to help make improvements where needed.

Then, one of the biggest wins we’ve had this year is really unlocking some of the data. We have this process, we call it an annual business review, but it’s really using fleet-wide data. The field teams provide our operators a ranking against another group of stores, similar state, similar volumes, and allow them to see in a way, margin, sales, underlying cost drivers, and then supported with a suite of reporting that helps them dial in on opportunities to drive sales, to drive margins, to drive improvement in their business. This more frequent, and ongoing collaboration and communication is definitely a change and I think everybody in the company, including the operators, are excited about that support and direction.

Joseph Feldman, Analyst, Telsey Advisory Group: That’s really helpful. Thank you. Maybe as a follow-up, I’ve probably asked you guys this in the past, but how are you communicating the changes to your existing base or prior customers? I know in the past people used to love the opportunistic goods. Now that you have them back and you’re flowing it into the store. How is the customer finding out about it and to maybe recapture some of the ones that may have left Grocery Outlet? Thanks.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, no, it’s a great question. Clearly, driving value is key. We introduced extreme value in the front half of the year across channels with what we think is a clearer price messaging, clearer value communication. We’ve updated some signage, and we have actually a kit going out to all stores this quarter to support our 80th anniversary. We think that’s going to be a helpful additional support piece. We continue to adjust our media mix to reach customers more effectively related to the groups that really get excited about the Treasure Hunt. They love discovery, they love value. And we’re seeing that work is helping satisfaction scores and resonating with those groups of customers, including lapsed customers.

Joseph Feldman, Analyst, Telsey Advisory Group: Got it. That’s helpful. Thanks. Good luck with this third quarter.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Thank you.

Conference Call Operator: The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Gutman, Analyst, Morgan Stanley: Hey, Jason. Hey, Ian. First, I want to ask about this improvement through the anatomy of your customer cohorts. Are you seeing best customers shop more, average ones stepping up, and then I do not know if there is a component of new customers coming to the brand?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, I think kind of high level, top level, Simeon, thanks for the question. Driving traffic was our first objective, and I think that has proven to be effective in the first half. We are going to continue to lean in there with our plan. Obviously, some of what you do is to drive frequency, and the other pieces that help long term are continue to improve your business and your execution to work on things like the basket. There is always a combination of things that you are trying to achieve, but our first objective is to really dial in the value piece, get recognition for that, drive frequency, and drive the traffic. That is the key priority.

Simeon Gutman, Analyst, Morgan Stanley: Related to it, you have transactions. It sounds like the basket is still down. You mentioned grocery is getting fixed or getting better, positive. I think you called out deli and frozen as works in progress. How impactful can opportunistic be there? Is that just inherently more of an everyday category? What is that diagnosis? Meaning, how do you change the basket from here? I know this company used to comp much higher than where we were. What are the things that you need to finish to close the gap?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah, we are just executing the same playbook. Those are the two next most important categories for opp. That is why I point them out. They are large, important, and opp will play a huge role in the turnaround here and getting sales. Those two categories are areas we see as the next most logical place to really drive sales. We are getting good positive early results as the team has not totally tuned everything in, but definitely we are seeing momentum there and excited about what that is going to mean as we go forward.

Conference Call Operator: The next question is from Mike Baker from D.A. Davidson. Please go ahead.

Mike Baker, Analyst, D.A. Davidson: Great. Thanks. Kind of a follow-up on what Simeon was just asking or maybe getting to. Your guidance, even if you add back Cyclospora, is about flat, yet grocery, a big part of your business, is up 3%, I think you said. You are adding the playbook to other big categories. I think opportunistic is now probably, if you set up 300 basis points, that is about 48% now versus it will get to 50%. You are getting there. You are doing all the things. When all those things are implemented, what do we think the long-term comp should be? I presume something better than flat to up 1% if you add back the Cyclospora.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah. Great question. We definitely see continued acceleration through the year. We fully expect the business to get back to a healthy level of comps, something well north of inflation. I think in the past, this business comped 3%-5% on a pretty regular basis, and we do not see a reason why we cannot do that.

Mike Baker, Analyst, D.A. Davidson: Okay. Yeah, fair enough. That would certainly help. One other question. You said something, if I caught it right, about variability in the most recent implementation of systems. If you could talk a little bit and then slowing it down. I may have misunderstood, but can you flesh that out a little bit?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Yeah. I wasn’t referring to systems. Happily, we have nothing to report on systems. We’ve planted the flag and our systems are stable. Good progress there a couple quarters ago. What I was referring to was the last couple of cohorts of refresh stores, and we found that just the length of time to make the changes was disrupting customers. The team’s doing right now is dialing that down to make those changeovers much more rapidly with better support pre and post in order to make sure that we don’t turn people away as we’re making what we think are positive changes. So that’s what I was referencing.

Mike Baker, Analyst, D.A. Davidson: Okay. Understood. Thank you.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Thank you.

Conference Call Operator: The next question is from Bill Kirk from ROTH Capital Partners. Please go ahead.

Bill Kirk, Analyst, ROTH Capital Partners: Good evening, everyone. Jason and Ian, you both mentioned and even quantified the adverse impact of Easter timing in 2Q. What I was wondering, I guess, is at the end of 2Q, did you have a positive July 4th timing benefit? If so, how large was that?

Jason Potter, President and Chief Executive Officer, Grocery Outlet: It was immaterial.

Bill Kirk, Analyst, ROTH Capital Partners: I see. Okay. Ian, in your prepared remarks, I think you opened with the importance of building a durable model focused on creating long-term shareholder value. Philosophically speaking, how do you evaluate the decision to ease up on promotion and pricing in the context of your focus on helping build that durable, sustainable model?

Ian Ferry, Chief Financial Officer, Grocery Outlet: Yeah. Good question. As you think about what drives long-term equity value creation, it’s consistency of growth paired with improving returns on capital. We have a long way to go, but we think we’re making progress along both of those fronts. I think the good news for us is that opportunistic really drives benefit to everyone in the model, whether you’re a customer, a shareholder, or an IO. So there’s great savings. It comes at a high margin. It delivers good excitement for the customer. What we’ve seen is we’ve already started to taper the promotions. The reason why we’ve been able to do that is because we’ve been increasing op, and the customer doesn’t really understand the distinction between a promoted branded item or op. They just see deals.

As you mix out some of the more promotional stuff and mix in op, it is not something that they notice. We really did view that $20 million as a synthetic bridge. We expect it to be done by the end of the third quarter. As we look into 2027, perhaps we have a tailwind on gross margin to some extent. We expect to be back in a more normalized comp level. My philosophy as CFO is that we absolutely should be driving SG&A leverage. As you look to next year, we certainly hope, and it is our expectation we will have a more normalized-looking P&L.

Bill Kirk, Analyst, ROTH Capital Partners: Thank you, Ian. That is what I was looking for. I will pass it along.

Conference Call Operator: As a reminder, to ask a question, please press star one. There are no further questions at this time. I would like to turn the floor back over to Jason Potter for closing comments.

Jason Potter, President and Chief Executive Officer, Grocery Outlet: Well, thanks very much for your questions today, and look forward to continued engagement and reporting continued improvement in our business in the future. Thanks, everybody, for today, and wish you well.

Conference Call Operator: This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.