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Grocery Outlet (NASDAQ: GO)
Q3 2024 Earnings Call
Nov 05, 2024, 4:30 p.m. ET

Agenda for Today’s Earnings Call

• Management Overview
• Q&A Session
• Speaker List

Management Overview:

Operator

Good day, and welcome to Grocery Outlet’s earnings conference for the third quarter of fiscal year 2024. All participants are currently in listen-only mode. A question-and-answer segment will follow our main presentation. Please keep to one question each.

[Operator instructions] Remember, this conference is being recorded. I now introduce your host, Christine Chen, VP of Investor Relations. Christine, the floor is yours.

Christine Chen — Vice President, Investor Relations

Good afternoon, everyone, and thank you for joining Grocery Outlet’s call regarding our financial results for Q3, ending September 28, 2024. Joining me today are Eric Lindberg, chairman of the board and interim president and CEO, and Lindsay Gray, interim CFO and senior vice president of accounting. After their remarks, we will open the call for questions. This call is also being webcast, and a recording will be available later on our Investor Relations website.

Please note that some statements made during this call may be forward-looking, according to federal securities laws. These statements involve risks and uncertainties that could lead to actual results diverging from expectations. More details on these risks can be found in our press release as well as in our filings with the SEC, available on our Investor Relations webpage and sec.gov.

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Now, I will hand the call to Eric.

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Thank you, Christine, and good afternoon to everyone. I appreciate your joining us today. Before we discuss Q3 performance, I want to recognize that this is a pivotal time for us. Just last week, we announced RJ Sheedy’s decision to step down as president and CEO and from our board of directors. I extend my thanks to RJ for his 12 years of dedication and leadership.

RJ has been integral in growing and evolving our business, setting a solid foundation for our future. I’m back with Grocery Outlet full-time as interim president and CEO, and I’m eager to collaborate with our fantastic team and independent operators once more.

The board has hired a top executive search firm to assist in finding a permanent president and CEO. In the meantime, I’ll be fully involved in executing our business plan and emphasizing key priorities, which I’ll outline shortly. Even with this leadership change, our fundamental strategy and commitment to delivering value, which has distinguished us for nearly 80 years, remain unchanged.

Grocery Outlet stands out by providing exceptional value, an exciting shopping experience, and superior customer service through our unique buying model and independently operated grocery stores. We have a solid history of resonating with diverse customers and succeeding in various market conditions when we execute effectively.

Let me share my thoughts on four areas: our present situation, highlights from Q3, our immediate focus, and the implications for our guidance. First, let’s examine our current status.

Late in August 2023, we transitioned to an SAP system, moving away from our older systems, which resulted in multiple challenges. We faced issues like poor data management, slow processing speeds, and lost functionalities. These setbacks impaired our buyers’ ability to efficiently create orders and hindered our inventory management and supply chain effectiveness.

The impact has been substantial, though we have made solid progress over the past year, including ending operator commission support. While our new system is operational, we still need to enhance visibility into other operational data and refine the tools utilized by us and our operators to manage business more effectively. This work is essential for proper execution of our dynamic environment.

Next, let’s address execution challenges. Our recent system transition strained resources, complicating our ability to effectively run the core business. Additionally, while we have numerous promising growth initiatives discussed in past calls, we might have overloaded our organization, compromising daily operations. Moving forward, we will prioritize execution over pursuing all of these initiatives at once.

Lastly, let’s touch on value. As mentioned in our previous Q2 call, we fell short in delivering value earlier this year due to some pricing decisions aimed at restoring healthier margins coinciding with rising competition in pricing.

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Grocery Outlet: Addressing Execution Challenges Amid Growth

Focused on Value and Operational Improvements

Grocery Outlet is striving to achieve price equality with deep discount competitors on essential items like milk and eggs. Additionally, the company tracks sales from products offering over 60% savings compared to traditional retailers. This metric highlights the unique “treasure hunt” shopping experience that keeps customers coming back, sharing stories about the deals they find. While the company feels positive about its current level of overall savings and pricing, they recognize a need to consistently offer those highly discounted items.

Progress has been made in restoring value during the third quarter, and the company’s relative value has shown improvement. Although comp store sales were down by 1.2%, double-digit growth in overall revenue was achieved. The two-year comparable store sales growth stands at 7.6%, surpassing long-term expectations. Furthermore, a 2% increase in comp transaction counts during Q3 indicates that even with challenges in execution, the business model remains appealing. The total number of stores increased to 529 with the opening of five new locations in this quarter.

The company’s growth strategy for new stores is back on track, benefiting from a gross profit margin that aligned with plans, leading to a positive adjusted EBITDA outcome. As Lindsay will elaborate shortly, this reinforces the notion that the business possesses the potential to deliver unmatched value through an exceptional shopping experience when operations execute effectively.

The immediate focus is to return to the core principles of Grocery Outlet’s business model. First and foremost, value must be consistently delivered across key metrics to create an engaging store environment that customers enjoy. The buying environment remains robust, providing an excellent opportunity for value-driven sales. Secondly, supporting independent operators is critical. The operational disruptions over the last year have made their roles more difficult, pulling them away from customer service.

Operators need efficient tools to run their businesses effectively, and efforts are being made to equip them fully. The team also plans to enhance internal efficiency by transitioning to improved systems that eliminate tedious manual processes. Given my experience over the past 30 years, I understand that focusing on fundamental operational tasks is key to our success.

Grocery Outlet’s mission is to deliver unmatched value, a diverse selection of products, and outstanding customer service every day. As we navigate through Q3’s performance and strategic focus, attention will also be given to resetting our guidance for the remaining year.

Despite recent execution challenges, the business fundamentals remain solid. The company offers a strong market value proposition, boasting double-digit growth in top-line sales and indicating more room for expansion. The ongoing operational setbacks have made forecasting more complex, a situation unlike anything experienced in my extensive tenure. After careful consideration, adjustments were made to Q4 expectations based on recent performance and historical patterns.

Although we’ve made strides in enhancing our value offering in Q3, we are aware that additional improvements are necessary. The challenges related to operational systems have prolonged the process of restoring our value proposition. However, the competitive landscape does not fundamentally impede our efforts, as we have a successful history of navigating market changes.

Unexpected higher expenses have also affected adjusted EBITDA figures for Q3, a trend likely to persist into Q4. The system is fully operational, yet enhancements and additional resources are driving these temporary cost increases. Adjusted guidance for SG&A expenses was revised upward to align with actual Q3 levels, resulting in a projected full-year adjusted EBITDA reduction of approximately $16 million from previous estimates.

Recognizing this adjustment is significant, we believe it is a prudent course of action given the circumstances. Now, I’ll hand over the floor to Lindsay for more detailed insights about our financial performance.

Thanks.

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

Welcome back, Eric, and good afternoon, everyone. Net sales rose by 10.4% to $1.11 billion in the third quarter, reflecting sales from new stores and a 1.2% increase in comparable store sales. This translates to a healthy 7.6% growth over the past two years. While the comp transaction growth of 2% was offset by a slight decline in average basket size, momentum did build in September with a notable uptick to 3.8%.

In Q3, gross profit climbed 9.2% to $344.9 million, with a gross margin rate of 31.1%, surpassing expectations by 10 basis points and improving sequentially from Q2. SG&A expenses grew by 9.5% to $304.6 million, while net interest expenses surged by 52.4% to $6.4 million, driven by increased debt to support operational growth after the acquisition of United Grocery Outlet.

The effective GAAP tax rate during the quarter was 28.6%, significantly higher than last year’s 18.6%. This rise primarily stems from reduced tax benefits from stock options and costs linked to the UGO acquisition, alongside lower pre-tax book income. Consequently, GAAP net income for Q3 was $24.2 million, equating to $0.24 per share.

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Company Reports Strong 3rd Quarter Results Amid Challenges

3rd Quarter Financial Highlights

Adjusted EBITDA rose to $72.3 million for the quarter, marking a 6% increase. Our adjusted EBITDA margin stood at 6.5% of net sales, which is ten basis points ahead of our forecasts and shows a 50-basis-point improvement from the previous quarter.

Adjusted net income for the quarter was $27.9 million, translating to $0.28 per fully diluted share. As for our balance sheet, we concluded the quarter with $68.7 million in cash, while inventory reached $396.9 million.

Total debt at the end of the third quarter was $429.3 million, leading to a net leverage of approximately 1.5 times. During this period, we repurchased about 1.2 million shares for $25 million at an average price of $21.50 per share. After the quarter, we acquired an additional 1.5 million shares for another $25 million at an average price of $16.62 per share. Our board has now approved a new share repurchase program of up to $100 million, replacing the previous plan, which still had $9.4 million available for repurchases. This new program is effective immediately and has no expiration date.

Revised Sales and Earnings Guidance

For the full year, we project comp store sales growth of approximately 2.4%. In terms of the fourth quarter, we expect a lower growth rate of about 2%. While October trends mirrored those in September, we anticipate tougher comparisons in the remaining months of the year and are working to enhance our value proposition. We now plan to add a total of 66 net new stores, an increase from our earlier estimate of 62 to 64 stores.

This includes 40 stores acquired from United Grocery Outlet and 26 new organic store openings. Overall, fiscal 2024 net sales are expected to exceed $4.35 billion. Gross margin for the year is anticipated to be approximately 30.4%, with around 30.2% for the fourth quarter, reflecting the usual seasonal changes and investment in our value offerings.

Future Financial Expectations

Adjusted EBITDA for the full year is now projected between $237 million and $242 million, suggesting fourth-quarter adjusted EBITDA in the range of $57 million to $62 million. The updated forecast is due to reduced comparable store sales and gross margins, along with greater selling, general, and administrative costs than previously expected. For the year, we still foresee depreciation and amortization growth in the mid-20s percentage-wise, driven by investments in our systems and rapid store openings. Share-based compensation is estimated to reach about $22 million, while net interest expense is projected at roughly $23 million. We maintain a normalized tax rate around 32%.

We are now forecasting an average of approximately 100.3 million fully diluted shares outstanding for the year, slightly down from 100.5 million due to share repurchases. Capex, net of tenant allowances, is expected to be around $200 million.

Adjusted EPS for the full year is anticipated to fall between $0.77 and $0.80 per fully diluted share. Looking ahead to 2025, we will provide formal guidance during our fourth-quarter earnings call in February. We believe fiscal 2025 should focus on returning to our long-term growth targets, with comparable store sales growth of 1% to 3%, a gross margin near 30.5%, and an adjusted EBITDA margin of roughly 6%.

CEO’s Insights on Business Fundamentals

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

In closing, I am confident in our business fundamentals and our path to achieving long-term growth. As a specialty discount retailer with a strong history of consistent growth, we need to refocus on execution and prioritize key growth initiatives while supporting our dedicated independent operators in their local communities.

We are now ready to take your questions. Operator?

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. Please limit yourself to one question only. [Operator instructions] One moment, please, while we collect questions.

The first question is from Krisztina Katai from Deutsche Bank. Please proceed.

Krisztina Katai — Analyst

Hi, good afternoon, and welcome back, Eric. To start off, your comparable store sales results were mostly in line, and September was strong. However, your fourth-quarter outlook seems more conservative, possibly reflecting October’s performance. Can you remark on your priorities for improving execution? How much impact are system integration issues still having, and what is a realistic timeline for those to be resolved?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Pleased to address that, Krisztina. Let’s begin with the necessity for value enhancement. When customers need us most, our presence must be felt. We have made significant progress but are not finished yet. Our pricing strategy will be a clear focus, especially to ensure the “WOW” factor for our customers. Strengthening the relations with our independent operators is also key. We aim to equip them with tools for better efficiency.

It’s crucial for me to move past discussions on the systems transition. Next year, I prefer to highlight the advantages this new system provides rather than focusing on limitations.

Our strategy involves closely examining our priorities and narrowing them down to what matters most. This focused approach will be essential as we move forward.

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

Following up on the fourth-quarter guidance, we are optimistic about the trends observed in September and October. Although October’s trends mirrored September’s, they displayed a slight slowdown when compared over two years. This quarter will present tougher year-over-year comparisons. Consequently, we deemed it prudent to adopt a more cautious outlook for the full year and adjusted our guidance accordingly. Given the pricing competition and holiday season, these factors influenced our Q4 expectations.

Operator

The next question is from Robby Ohmes from Bank of America.

Leadership Transition and Financial Strategy: Key Insights from GO’s Latest Call

Robert Ohmes — Analyst

Hi Eric, it’s great to connect again. I’d like to begin with some details regarding RJ’s departure and your approach to finding a new CEO. Additionally, could you clarify the current status of the systems disruptions? Are they resolved, or should we expect ongoing risks in the first half of next year?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Hello Robby, it’s also good to talk to you again. To start with the CEO transition, last year was notably challenging for us.

We faced significant operational hurdles linked to the systems transition. Our performance fell short of expectations and our historical standards, creating a tough environment. While we valued our long-standing relationship with RJ, we ultimately reached a mutual agreement to move on after our latest board meeting. I want to reassure everyone that there were no major conflicts or surprises; it was simply a matter of timing and the circumstances we encountered.

As for the systems, I’m still getting fully up to speed on that front. The system is now operational, but we are still focusing on enhancements and efficiency. This stabilization process has required more resources and time than anticipated, though I’m pleased to report that we are making significant progress.

For instance, our operators are in need of a real-time order guide and a new arrival tool. While these may seem minor, having live inventory access is crucial for our merchants. We’re on track to recover this functionality and ensure that our system meets our operational needs.

The tool is operational but still not completely fulfilling our needs. However, I am optimistic about moving forward and finally putting this behind us.

Operator

The next question comes from Anthony Bonadio at Wells Fargo. Please proceed.

Anthony Bonadio — Analyst

Thanks for the opportunity. I’d like to explore margins further. Since the pandemic began, we’ve seen considerable swings in the EBITDA margin. The recent systems issues have added to this uncertainty as guidance is adjusted. Can you share your thoughts on what the margin profile will look like in the long run? Additionally, you mentioned narrowing focus on strategic priorities—could you specify what that entails?

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

Thanks, Anthony. Regarding margins, our long-term target has consistently been 30.5%. We believe this is still a viable goal. We prioritize reinvesting profits back into the business, which is why I wanted to emphasize this target in our conversation.

Margins at GO are influenced by product assortment and various factors. It’s been a volatile few quarters, as evidenced by last year when we enjoyed high margins due to favorable assortment. The fluctuations in margins can be expected from quarter to quarter, but we aim for that 30.5% mark long-term, looking ahead to 2025.

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Hi Anthony, regarding the strategic priorities, we’re not ready yet to detail what will be prioritized. It’s clear to me that we have been attempting to manage too many initiatives without executing them effectively.

Operator

The next question comes from John Heinbockel at Guggenheim Partners. Please go ahead.

John Heinbockel — Analyst

Thanks, Eric. I have two quick inquiries. First, I understand you anticipate a 6% EBITDA margin next year with a focus on reinvesting in pricing and value. Given the current macroeconomic situation, do you believe this is a conservative approach, especially with a low single-digit comp expectation? Second, what qualities are you seeking in a new CEO given your unique culture and business model? Are you planning to remain in your interim role permanently?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Hi John, great to hear from you. Yes, I’ve been straightforward that we are not rushing the CEO search. I intend to remain here as long as needed. We’re working with a reputable search firm with a solid track record.

Our priority is to find a strong leader who can navigate our unique business model. Key traits for this new CEO include public company experience, a proven performance history, and a passion for our distinct operations. This role requires someone who understands our vision and is excited about our approach.

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

Thanks for the question, John. To elaborate on your inquiry about guidance, we are currently targeting a 1% to 3% comparable store sales increase; this will be part of our focus moving forward.

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UGO Acquisition and Future Growth: Insights from Eric Lindberg

Strong Profit Margins to Continue

Eric Lindberg, Chairman and Interim CEO, discussed the company’s goal of maintaining adjusted EBITDA margins at approximately 6%. According to Lindberg, this figure has been consistent for the past five years, albeit with some variability quarter to quarter. He emphasized that while the company has some system costs to address, the goal remains to stabilize operations and enhance financing tools.

UGO Acquisition: Progress and Next Steps

Mark Carden from UBS questioned the status of the UGO acquisition and its alignment with company expectations amid recent execution challenges. Lindberg responded that the transition schedule for the UGO stores is not aggressive, with plans to convert them to independent operators only after 2025. He highlighted immediate sales opportunities by merging UGO’s products with the company’s offerings. Initial store refreshes have shown positive outcomes, with plans to execute similar updates next year on a limited number of stores.

Unit Growth Strategies: A Balancing Act

Corey Tarlowe from Jefferies asked about future unit growth, considering both acquisitions and organic growth. Lindberg addressed unit growth by stating that while past acquisitions have been opportunistic, the company is targeting a steady growth rate of 10% for new stores. He reassured stakeholders that construction efforts are on track, with plans for 50 new stores in 2025 already signed, and preparations for 2026 underway.

Priorities Amid Industry Challenges

Oliver Chen from TD Cowen inquired about the company’s challenges and priorities moving forward. Lindberg outlined the immediate goal of restoring value momentum, particularly after facing difficulties in pricing strategies earlier this year. He expressed optimism about the company’s product offerings for the upcoming holiday season. While acknowledging challenges faced by independent operators, he noted a positive mood among them and emphasized their resilience and support for the company’s initiatives.

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Communicating Challenges and Future Plans: Insights from Eric Lindberg and Team

Recent discussions led by Eric Lindberg, Chairman and Interim President and CEO, highlight a commitment to transparency as the company navigates operational difficulties. Lindberg emphasized the importance of communicating openly about challenges, timelines, and corrective measures.

In an effort to engage with their operators, Lindberg stated, “I will leave Thursday to meet around 70 operators and will continue this engagement over the next few weekends.” This outreach aims to reinforce that the management team is attentive to operator concerns and dedicated to finding solutions.

The relationship with operators appears to be strong, characterized by patience and understanding. Lindberg acknowledged that maintaining this connection is critical, noting, “They need to know that we care, listen, and are addressing their issues.” This proactive approach serves to bolster morale during uncertain times.

Operator

The subsequent question came from Joe Feldman at Telsey Advisory Group. Please proceed.

Joe Feldman — Analyst

Thank you for the opportunity to speak. Eric, could you elaborate on specific areas of execution that you believe need improvement? Additionally, are there any projects that may face delays?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Absolutely. We’re addressing several initiatives, such as potential acquisitions, the SAP project, launching private labels, managing our mobile app, and introducing new marketing tools. Additionally, coordinating a workforce that isn’t always consistently available has added challenges. The operational difficulties we’ve faced with ineffective tools have been more challenging than anticipated. We are currently evaluating which initiatives will proceed as planned, which may be delayed, and which ones we will push forward.

It’s worth mentioning the UGO project, which is not needing immediate changes as operations are stable with sufficient product supply.

Operator

The next question was posed by Leah Jordan from Goldman Sachs. Please go ahead.

Leah Jordan — Goldman Sachs — Analyst

Good afternoon, thank you for the opportunity. I’ve noticed your system visibility has improved but is still not at optimal levels. Given your 4Q guidance, why aren’t we seeing an increase in gross margins compared to the disruptions of last year? Is it mainly competitive pressures?

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

Thanks, Leah. To clarify, our data visibility is indeed better, but operational inefficiencies remain. Although the system is functional, it’s taking longer for teams to complete tasks. We’re facing tough year-over-year comparisons for Q4, which we want to navigate cautiously. Our guidance is conservatively set to reflect achievable goals while addressing gross margin issues stemming from earlier operational setbacks.

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Adding to Lindsay’s points, our operational buying environment is showing signs of strength, and we’re leveraging opportunities from recent announcements and supplier relationships to enhance margin performance. However, we must ensure customers recognize the value of the deals available in-store.

Operator

As a reminder, please limit your questions to one. The next question is from Michael Baker from D.A. Davidson. Please proceed.

Michael Baker — Analyst

Hello. I would like to ask about the buying environment. Margins peaked at 31.3% in 2023, while your current target is 30.5%. Are you investing more in business operations, or do you think the post-COVID buying environment could have represented a peak we won’t see again?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Michael, let’s discuss buying margins based on historical trends. For the past 20 to 25 years, our margin has fluctuated between 30% and 31%. Consistent comp growth averaging 5% has been achieved, even as we embraced significant changes within our operations, such as the introduction of lower-margin products and expanding into new categories. The landscape will continue to evolve, but our long-term strategy remains rooted in these historical patterns.

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Challenges Ahead: Insights from Recent Earnings Call

Understanding Margin Fluctuations and System Pressures

Amid growing competition, our business model emphasizes dynamic pricing; we can price products this week for next week’s sales, affecting half of our assortment. This approach requires close monitoring, and while we expect margins will fluctuate, we are comfortable operating within a range of 30% to 31.5%. The current condition of our products is satisfactory, and despite market changes, we believe margins may improve unless we choose to reinvest those gains to attract customers.

Market Conditions and Value Proposition

Operator

The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.

Simeon Gutman — Analyst

Hi, everyone. I want to revisit the systems issues that may have weakened our value proposition.

It’s clear that the lack of visibility affected pricing and, consequently, value on the shelves. Can you explain how these failures occurred and the impact they had during that period?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

You’re correct, and I take responsibility for this situation.

We focused on margin over consistent value. Reflecting on our past decisions, it’s evident we believed margin was manageable. When others decreased prices, we increased ours in response to a challenging first quarter. Operators have the ability to adjust prices; however, we typically guide pricing at a broader level. Understanding the overall competitive landscape allows us to set more accurate prices.

Our focus is often on gross profit margins, leading to occasional oversight in pricing for actual value. The systems-related visibility issues contributed significantly to our challenges, and our reactions, while easy to critique now, were misaligned with what was needed at the time.

Operational Challenges in Q4 and Beyond

Operator

The next question is from Jacob Aiken-Phillips from Melius Research. Please go ahead.

Jacob Aiken-Phillips — Melius Research — Analyst

Thank you. Could you elaborate on how these factors might affect performance in Q4 and into 2025? Given a tough comparison from last year, what does your outlook look like for new store productivity?

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

Yes, challenges in Q4 are well noted. Comparing results to last year will be difficult due to previous performance, but we aim to maintain our cautious outlook given anticipated competitive pressures.

While the goals for Q4 and overall performance for the full year are being adjusted, we must ensure we provide value to customers, which is a priority for us going forward. For 2025, although we’re not officially issuing guidance, we expect performance to remain robust, with comp sales growth of 1% to 3% and a gross margin of around 30.5%. We’re hopeful that system issues will be resolved, allowing us to focus back on our long-term objectives.

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Regarding new store growth, we expect to open over 50 locations next year and feel confident our teams have set up everything effectively.

Clarifying Systems Costs and Future Projections

Operator

The next question is from Jeremy Hamblin from Craig-Hallum. Please go ahead.

Jeremy Hamblin — Analyst

Welcome back, Eric. Can you discuss the system costs? What are the quarterly implications for these costs, and how will they impact 2025?

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

As of now, we prefer not to quantify those costs. However, it is essential to note that some expenses will continue into Q1.

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

To provide context, our overall spending has increased, primarily in maintaining and enhancing systems infrastructure, which involves sophisticated platforms like SAP. The costs associated with this setup are higher than we initially expected, but they will ultimately support our long-term objectives.

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Transitioning Resources and E-Commerce Competition: Key Insights from the Latest Earnings Call

Stabilizing the System Amid Transition Period

As we navigate this transitional phase, effectively managing resources remains crucial. We’re blending internal hires with external consultants to strengthen our capabilities. Recent hires with expertise in SAP are promising, but we must also ensure a smooth overlap during this change. Our focus is on getting this right to address ongoing challenges correctly.

Projected EBITDA Targets for 2025

Jeremy, in line with your projections, we are aiming for an EBITDA of around 6% in 2025. This goal is a part of our broader strategy as we work through the remaining weeks of this year and prepare for the upcoming one. We anticipate incurring some transitional costs that will carry over into 2025, emphasizing the importance of our efforts during this period.

Responses to Increased E-Commerce Options

Operator: We will take one final question. Bill Kirk from ROTH Capital Partners, you have the floor.

Bill Kirk: Thank you for allowing me to ask my question. With more e-commerce options becoming available lately, how are your IOs responding to new types of competition they haven’t had to face before?

Eric Lindberg: Great question, Bill. In the value segment, the increase in delivery options does come with higher prices, which makes value-driven customers rethink their choices. While e-commerce is gaining traction, our customer feedback indicates that traditional in-store shopping still holds strong appeal. Shoppers often describe the thrill of searching for deals as more challenging online, reinforcing the importance of our in-store experience.

Closing Remarks from Leadership

Operator: We’ll now return the floor to Eric Lindberg for final comments.

Eric Lindberg: Thank you for your engagement today. It’s a pleasure to rejoin the team and reconnect with everyone involved. I’m optimistic about our business’s potential and appreciate your interest in our progress. We look forward to talking again soon.

Operator: Thank you, everyone. This concludes today’s session.

Duration: 0 minutes

Call Participants

Christine Chen — Vice President, Investor Relations

Eric Lindberg — Chairman and Interim President and Chief Executive Officer

Lindsay Gray — Interim Chief Financial Officer and Senior Vice President of Accounting

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