Operator: Greetings, and welcome to the Grocery Outlet's Second Quarter 26 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, Dorian Bertsch, Senior Vice President of Strategic Finance and Investor Relations. Thank you. You may begin.
Dorian Bertsch: Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the second quarter ended 07/04/2026. Speaking for management on today's call will be Jason Potter, president and chief executive officer and Ian D. 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 the 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 Relations section of the company's website under News and Releases and in the company's SEC filings. And now I would like to turn it over to Jason.
Jason Potter: 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 drive sustainable improvement it is still early, but the business is responding. And let me start with our primary objective, improving comps. Strengthening our opportunistic offering is central to enhancing our value and returning the business to sustainable comp growth. Since the start of this year, we have 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 improving quality. In addition, year-over-year growth in opportunities 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 have 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 are 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 2 months into his return, his merchant instincts and leadership are already making an impact here. We are 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. This 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 are deploying enhanced messaging to improve our price perception, we plan to deploy new signage in stores that supports our value positioning, and we will extend that messaging into our digital presence and our app. We are 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 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 1 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 have expanded reporting and actionable insights strengthened communication with our field organization, and invested in training. We are 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 are working with our 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, operating routines. This annual business review and enhanced merchandising reporting help translates the data into action. We are encouraged by these results so far. Participating stores consistently outperformed their control groups, reinforcing that meaningful improvement can come from disciplined execution of store level fundamentals. We are turning those learnings into repeatable tools and routines for the broader fleet. We are also giving operators a more immediate view of customer sentiment. '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 are 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. 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 are seeing increased engagement from our IOs on a variety of initiatives. These outcomes reinforce our conviction that we are focused on the right priorities. The same discipline we are 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 we feel is better positioned for long term profitable growth. We remain on track to eliminate a $12 million drag 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 are 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 of 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-1 store productivity, it is critical that we prioritize the highest return markets and expand capacity at an appropriate pace. As such, our 27 openings will be weighted toward in-fill opportunities. We are taking a similarly measured approach to our store refresh program, Improving the store experience remains an important long term priority. And 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. So 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. Strengths will be important as consumers spend cautiously the operating environment remains somewhat promotional. They will also help us navigate the near term impact of the multistate 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. Christopher Miller recently retired as CFO of Grocery Outlet, Christopher provided steady experienced leadership to 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 D. Ferry, many of you know as our new chief financial officer. Over the past year, Ian's 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 IOs partner with local nonprofits to provide critical resources to those most in need. I am 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. And with that, I will turn it over to Ian.
Ian D. Ferry: 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 the 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% to 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 to 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 noncash 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 of $20.3 million or $0.20 per diluted adjusted share, compared with $22.8 million or $0.23 per diluted 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 at 1.8x 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 noncash 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 per 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 per 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.
Operator: Thank you. We will now be conducting a question-and-answer session. You may press 2 if you would like to remove your question from the queue. Pressing the star keys. 1 moment, while we poll for questions. The first question is from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead.
Will Smith: Hey. This is Will on for Jeremy. Thanks for taking our questions. Just wondering if we can or if you can share any more color on the cadence of comp trends for the quarter. And then here into Q3. And then what traffic versus basket is looking like here quarter to date?
Jason Potter: Hey. Will, it is Jason here. We are making progress on our comp store sales, and we are encouraged by the sequential improvement we have had Just to walk you through that, January was meaningfully negative to remind everybody. And we have made significant progress since that point. Pre Cyclospora impact total comps have improved by about 300 basis points to the end of Q2. To talk about to answer your question on traffic, Q2 again, solid number there, 1.8. On top of the 1.5 last year. Basket declined by just over 2%. But did show about 100 basis points of sequential improvement from Q1. And that was a mix of about 1% and less than 1% inflation and some mix. But we did also, encouragingly, experienced an improvement in units per units per transaction with op in the basket. When you are thinking about the guide, I think the way that we have thought about this for Q3, as Ian's pointed out, -1% to 0%. That 100 basis point Cyclospora impact is notable. And I just a couple points there I would like to make. On that. Our produce business was running very healthy and running well above inflation prior to the outbreak. We are continuing to monitor it. We have got, you know, an understanding what is happening category to category. We think that is gonna moderate a bit into Q4, but, right now, estimating about a 100 bps. Clearly, we can see things like bag salads, a fairly large impact But we feel that this is a temporary headwind. The underlying performance of the business continues to improve and we are encouraged by what we see going forward for Q4.
Will Smith: Okay. that is very helpful. Then I just wanted to understand where The opportunistic product is mixing today versus Q1. And then, like, where you would where you would like to see that by year end? And then what sort of total comp benefit you would expect to see from that change in mix from the beginning of the year?
Jason Potter: Yes, certainly. First and foremost, you know, we are our pursuit of op has everything to do with creating value for customers. there is a very high correlation between op comps and our total comp business. We can see that in our store cohorts. it is the value and sales generating engine of the business. As you know, it is the heart of what drives unique treasure hunt experience. And the plan that we developed is meant to create a sustainable quality of sales and margin. What we have seen through this first half of the year up Comp accelerated meaningfully in Q2. Up about 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. And we have got some really, bright lights, as we have executed this plan. 1 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. And that playbook being executed by Paul Miller is and now we are seeing advancing sales momentum in the next 2 most important areas, both deli and frozen, right now. Seeing good inventory flow. We have expanded our range of branded op. And, again, the confidence we have in the plan, supplier engagement, supplier acquisition, what is 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 Smith: Appreciate the color. Thank you.
Jason Potter: You bet.
Operator: The next question is from Corey Tarlowe from Jefferies. Please go ahead.
Corey Tarlowe: Great. Thanks, Jason. Appreciate the time. I was wondering if you could talk just broadly around kind of what specific milestones you are using to measure any improvements in the business? And when do you feel like you can shift to perhaps, like, a more offensive posturing, if you will, And how are you kind of measuring that internal cultural shift back toward the traditional kind of treasure hunt model that Grocery Outlet tends to thrive in.
Jason Potter: Yeah. I think the things that we have been measuring and holding ourselves accountable to, we have made progress across all we think are the most important KPIs. Continued traffic growth, which is really important. We saw some basket expansion, we think it is important. Also noted, improving net promoter scores from the beginning of the year right through to the end of the quarter. Our op mix has expanded. The comps have expanded. We see a lot of improvement in execution related to our reporting and visibility that is helped folks across the supply chain. Manage the flow of inventory both when they are writing POs, when they are 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 are 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 is generating and what that means for you know, things like net NPS and value score and ultimately, we expect to have that show up in a higher level of comp sales. In terms of both traffic and basket.
Corey Tarlowe: that is helpful. And then 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 am 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: Yeah. No. Great question. Look, it is always competitive out there in my 30 years. You are always fighting it out to win the customer's hearts. And we are 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 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 have done to grow opportunistic this year our positioning there, the plan we are executing against is right on the money, so to speak. To deal with this issue. And you know, if you look at kind of 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 are doing with op. And, you know, when we think about competition or price, there is many things to evaluate We are 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% to 20%. Low mass, 30% to 40%, against conventional. I think that is important to note. And for us, when we are dealing with these kinds of things, the best way to deal with it is through op. It opportunistic is a pretty magical thing for us. It drives sales and margins. It drives value for the customer. You know, Paul came to me this week and shared a example of 50 plus truckloads of a well known relevant branded drink Sells for $8 in the market. They will 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. And you know, I think staying competitive and making sure that we are paying attention to what is happening in market is always gonna be an important element of what we do here. But continue to see that being reinforced and encouraged by our work on opportunistic supply, variety, quality, distribution, an inventory flow and turns. it is very helpful. Thanks so much, and best of luck.
Corey Tarlowe: Thank you.
Operator: The next question is from Robert Ohmes from BofA Securities. Please go ahead.
Robert Ohmes: Oh, hey, Jason. Hey. I was hoping as a follow-up, could you help us can you maybe parse out, you know, it sounds like you have really got opportunistic, is an important initiative and it is and it is working. You are seeing great things, but you also have the store refresh program, and we think of those 2 things, can you sort of help us think about the you know, what kind of know, how much each of those 2 things are going to drive and how much are they interrelated with each other.
Jason Potter: Yeah. Great question, Robert Ohmes. You know, clearly, we continue to believe in improving the in-store experiences as an essential part of the strategy. And what we have done in the first half of this year is to make sure that everybody in the company's priority on restoring op across the network. that is what is driving improvement in our business. Clearly, you know, refresh is an important component of that. Luke I said, on the recording, 100 stores by the end of the year is on track. Continue to get great feedback from customers and operators. We think that what is important here and 1 of the calibrations we made as we have focused on improving value and improving op is to make sure that we are supporting operators with the tools and the assistance to ensure consistent execution as we do these rollouts. We had more variability in the last couple cohorts than we would like, and we wanted to shorten the disruption period to optimize the results. And so we calibrated that slightly. And so we continue to think that is 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. that is gonna continue to be the focus of the company in the back half. that is really helpful.
Robert Ohmes: And then my follow-up on that is you mentioned, earlier in the call the supplier partnerships improving or recovering or something like that. Can you what happened with the supplier partnerships in how much improvement is there still to come from here?
Jason Potter: Look. I think I just wanna say we are really proud of how the team's engage with suppliers and the relationships that the company's built with supply community over many decades, frankly. it is a critical point of difference for Grocery Outlet and part of our strategic moat. Paul Miller in his leadership brings a special understanding of supplier connection I do not think we lost that connection, but I think we as we have, really outlined the plan for what we are gonna do with opportunistic it is an important point to call out that engaging with suppliers face to face meetings, being a 1 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. And, you know, we are seeing good results there. New supplier acquisitions up above 11% this year. And we are seeing just kind of great results across the board as the deals come in, and it is just a doubling down of something that we have always done well. And just made sure that the entire company under Paul's leadership is focused on it.
Robert Ohmes: That sounds great. Thank you. Robert Ohmes.
Operator: The next question pardon me, the next is from Edward Kelly from Wells Fargo. Please go ahead.
Edward Kelly: Yes. Hi. Good afternoon, everyone. So, you know, the business certainly seems to be starting to turn the corner. As we think about, you know, guidance, you did not flow much of the up upside this quarter or your better optimism, I guess, into the full year guide. Is that you know, 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 impacted that you expect that to continue all quarter? Just kind of curious as to how you came up with that.
Ian D. Ferry: Yeah. Hey. This is Ian. I will 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, 2-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, you know, there will be a sequential step down in gross margins even though we are further tapering promotional investment and there is 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. And we also have a just a modest level of seasonality. So 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: And then 100 basis points?
Ian D. Ferry: Yeah. Yeah. Of the Cyclospora we are, we are basically assuming that the pressure is gonna be with us through the end of the quarter.
Edward Kelly: Okay. And then, Jason, I wanted to ask you, you know, talked about the promotion, you know, just sort of pulling back and normalizing it Into the back half of the year. But then Corey.
Operator: You are breaking up there. I do not know, operator, if you can just make sure the line is clear there. We just did not hear anything. We are getting a few words in there.
Edward Kelly: Corey. Yeah. Corey. Maybe it was the speaker. So, Jason, I wanted to ask you on 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, you know, maybe it is increased you know, op you know, as well, but the backdrop is competitive. I am just kind of curious as to how you feel about sustaining, you know, some of the momentum that is improved, you know, while you know, you normalize on the promo side.
Jason Potter: Yeah. No. Great question. So couple things to say. You know, Grocery Outlet has not been traditionally a promotional company, and we do not intend to continue that. We create excitement and value through obviously, the branded op deals and as you pointed out, the treasure hunt experience. We did establish early in the year this $20 million promotional bridge. This is a synthetic bridge that was designed to supplement our op offering as we rebuilt the offering. Now we are on track with that plan to rebuild our op offering, which is why, the focus of the company is, everyone is attention is turned there. We are on track to taper those promotions, those replacement promotions, if you will, as op mix is fully sort of restored by the end of the third quarter. So couple of things there. I look at the weight of op, number of deals at various levels of savings, and the KPIs that associate with, call it, the promotion plan is also on track. Pleased with the progress on growing op, we do not expect to see the need for more promotional investment beyond what we have already discussed. And to your point, we remain disciplined but responsive. Obviously, maintaining the right competitive price gaps is critical. But I just wanna reinforce we think we are on the right track and we will monitor if anything changes. But expect that our plan is prudent and appropriate for the back half of the year. Thank you.
Operator: Thank you. Next question is from Oliver Chen from TD Cowen. Please go ahead.
Iris: Hi, good afternoon. This is Iris on for Oliver. You have described Grocery Outlet as a countercyclical model that can benefit when consumers come under greater pressure And 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 it is through a new customer acquisition, trip frequency, or basket? Thank you.
Jason Potter: Yes. Thanks for the question. Yes. Clearly, generally, what we seen in the past is that you will see pressure in the basket, first, and then obviously, that with when trade down happens, we get traffic. We have not seen that yet, but we think the work we are doing positions us well for that. As I mentioned, traffic did increase just about 2% in the quarter. that is been sort of running about that 2% mark, which is 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 are seeing more of it in the store. that is showing up in the underlying metrics. And we believe and they are convinced that is what is 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. So that is what I would share today on that front.
Iris: Okay. Got it. And 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 D. Ferry: Yeah. Hey, Iris. This is Ian. I can take that. So you are right. We do think it is a 2026 conversation. there is work ongoing. We are looking at a variety of options. When that work concludes, we will update you as soon as that happens, but no update today of any note.
Iris: Got it. Thank you.
Operator: The next question is from John Heinbockel from Guggenheim Partners. Please go ahead.
John Heinbockel: Jason. I wanted to ask, as you lean more into up, so what is changing, if anything, with planograms and space allocation toward that And then, you know, think of if you think about balance leaning into up heavier, I think historically, right, you guys have been pretty good about avoiding markdowns. Even on closed code product Let me talk about that tension. Know, leaning in and trying to avoid markdowns.
Jason Potter: Yeah. Great question, John. So we do not we have kind of call it planograms is sort of a industry term where you have got obviously, every item is allocated in the space. We have space allocation. Mhmm. And so what we did in the first half of the year, we did mention that we would be discontinuing 4 to 500 MTO and private label items to make space for more opportunistic variety. I am pleased to report that we did get that done, made those transitions that is shown up in sales and in store. And, the vast majority of those markdowns, if there were any, were done already in the first half. We always have some markdowns when we are changing, you know, product out. The business year to year will sell 80 to 100 thousand unique SKUs as, products come and go. So it is a normal cadence for the business to manage, and, happy how that first half has gone, John.
John Heinbockel: Maybe as a follow-up, the think you talked about a lot of the 27 openings were a bigger percentage will be in existing markets. You is the plan to open more than you did this year, right, in 2027 or about the same And then I think the idea with when you did UGO is to have volume sufficient on the East Coast to really lean into our product. I think you are probably there. We do not need to open that many more on the East Coast to get access to op. Is that fair?
Jason Potter: Yeah. On your first question, we have not not prepared yet to release sort of a store count for next year, but it is our intent to open much more infill. Obviously, as we stated, we are excited about the long term white space. And growth potential of the business. And in the near term, you know, we have made some tough decisions to make sure that we are focused on in-fill opportunities, that really allows us to leverage the brand, power the brand, low the people power. You know, our IO community is really important, and the density of stores helps with that. Distribution strength, obviously, which you know, the core markets We have 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 is absolutely helping our results in the East. We are 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. So, all of those elements, we are feeling good about those decisions, John.
John Heinbockel: Thank you.
Jason Potter: You are welcome.
Operator: The next question is from Joseph Feldman from Telsey Advisory Group. Please go ahead.
Joseph Feldman: Hey, guys. Thanks for taking the question. I wanted to ask dig in on that field operations changes you have made. Can you share just a little more color on that? Like, what is actually different that the field operation I guess, field managers or whatever they are called, are doing in the stores and how they are helping in a different way and what maybe sales and costs are related to that? Thanks.
Jason Potter: Yeah. No. it is a it is a great question. Look, first and foremost, the IO model is a unique competitive advantage for us. We know that it is essential for us in the long term to continue to improve support for our operators. You know, 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 are adding field support. that is been done We have implemented things like dynamic routing that I mentioned in my opening remarks. That really helps with op flow and in-stocks. So there is support there. Implementing things like a store level POS customer feedback reporting to give our IOs, much more salient information about specific customer feedback, trends, and the DSMs work directly with them on, you know, action plans to help make improvements. needed. Then, 1 of the biggest ones we have had this year is really, unlocking some of the data We have this process we call an annual business review, but it is really using fleet wide data. The field teams provide our operators. A ranking of against another group of stores, similar state, similar volumes, and allow them to see in a way, you know, margin, sales, underlying cost drivers, and then support it with a suite of reporting that helps them dial in on opportunities drive sales, to drive, margins, to drive improvement in the business. This more frequent and ongoing collaboration and communication is definitely a change. And I think everybody in the company is including the operators, are excited about that support and direction. that is really helpful.
Joseph Feldman: Thank you. Maybe as a follow-up, probably asked you guys this in the past, but how are you communicating the changes to your existing base or prior customers? Like, you know, I know in the past, people used to love the opportunistic goods. Now that you have them back, you are flowing it into the stores, like, are you how are those customers finding out about it? And to maybe recapture some of the ones that may have left Grocery Outlet? Thanks.
Jason Potter: Yeah. No. Great question. Clearly, you know, driving value is key. We introduced extreme value in the front half of the year across channels, but we think it is a clear price messaging, clear value communication. We have updated some signage, and we have a actually, a kit going out to all stores this quarter. To support our eightieth anniversary. We think that is gonna 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 are seeing that work is helping satisfaction scores and resonating with those groups of customers, including lapse customers.
Joseph Feldman: Got it. that is helpful. Thanks. Good luck with this, third quarter.
Jason Potter: Thank you.
Operator: The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.
Simeon Ari Gutman: Hey, Jason. Hey, Ian. First, I want to ask about this improvement through the anatomy of your customer cohorts. So are you seeing best customers shop more, average ones stepping up? Then I do not know if there is a component of new customers coming to the brand.
Jason Potter: Yeah. I think kind of high level, top level, Simeon Gutman. Thanks for the question. Driving traffic was our first objective, and I think the that is proven to be effective in the first half. We are gonna 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 continuing to improve your business and your execution to work on things like the basket. So 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 Ari Gutman: And then related to it, you know, you have transactions. It sounds like, you know, the basket's still down. You mentioned grocery is getting fixed. they are getting better, they are 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? And what is that diagnosis? Meaning, how do you change the basket? From here? I know this company used to comp, you know, much higher than where we were. So what are the things that, you know, you need to finish to close the gap?
Jason Potter: Yeah. We are just executing the same playbook. Those are the 2 next most important categories for op. that is why I point them out. They are large important, and op will play a huge role in the turnaround here and getting sales. And those 2 categories are areas we see as the next most logical place to really drive sales. We are getting early, you know, good, positive early results as the team has, you know, not totally tuned everything in, but, definitely we are seeing momentum there and excited about what that is gonna mean as we go forward.
Operator: The next question is from Mike Baker from D.A. Davidson.
Michael Baker: 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. Yes, grocery, a big part of your business is up 3%, I think you said. You are adding that 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. Like, you are getting there. You are doing all the things. When all the things are implemented, What do we think the long term comp should be? I presume something better than, you know, flat to up 1% if you add back the Cyclospora.
Jason Potter: Yeah. We great question. We definitely see continued acceleration through the year. And, you know, we fully expect the business to get back to a healthy level of comps something north well north of inflation. So I think in the past, this business comp 3 to 5 on a pretty regular basis and we do not see a reason why we cannot do that.
Michael Baker: Okay. Yeah. Fair enough. That would certainly help. 1 other question. You said something, if I caught it right, about variability and the most recent implementation of systems So if you could talk a little bit and then slowing it down, I may have misunderstood, but can you talk about can you flesh that out a little bit?
Jason Potter: Yeah. No, no. I was not referring to systems. Happily, we have nothing to report on systems. We are we are we have planted the flag, and our systems are stable. Good progress there a couple quarters ago. What I was referring to as the last couple of cohorts of refresh stores, and we found that just the length of time to make the changes was disrupting customers, and what the team's doing right now is dialing that down to make those changeovers much more rapidly with better support pre and post. Order to make sure that we do not turn people away as we are making what we think are positive changes. So that is what I was referencing.
Michael Baker: Okay. Understood. Thank you.
Operator: Thank you. The next question is from Bill Kirk from ROTH Capital Partners. Please go ahead.
Bill Kirk: 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 4 timing benefit? And if so, how large was that?
Ian D. Ferry: It was immaterial.
Bill Kirk: I see. Okay. And then, Ian, in your in your prepared remarks, you know, you talked about I think you opened with the importance of building a durable model so focused on creating long term shareholder value. So 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 D. Ferry: Yeah. Good question. I mean, as you think about what drives long term equity, value creation, it is consistency of growth paired with improving returns on capital. We have a long way to go, but we think we are 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 are a customer, a shareholder, or an IO. So there is great savings. It comes at a high margin. And it delivers good excitement for the customer. So what we have seen is we have already started to taper the promotions And the reason why we have been able to do that is because we have been increasing op. And the customer does not really understand the distinction between a promoted branded item or op. They just see deals. And so as you mix out some of the more promotional stuff and mix in op, it is not something that they noticed. So we really did view that 20 million as a synthetic bridge. We expect it to be done, by the end of the third quarter. And, you know, as we look into 2027, perhaps we have a tailwind on gross margin to extent. We expect to be back in a more normalized comp level And my philosophy as CFO is that we absolutely should be driving as and A leverage. So, you know, 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: Frank you, Ian. that is what I was looking for. I will pass it along.
Operator: As a reminder, to ask a question, please press 1. 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: Well, thanks very much for your questions today. I look forward to continued engagement and reporting continued improvement in our business in the future. Thanks everybody for today and wish you well.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.