Greetings, welcome to the Grocery Outlet first quarter 2023 earnings call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star and then zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce the host, John Rouleau. Thank you. You may proceed, sir. Good afternoon, welcome to Grocery Outlet's call to discuss financial results for the first quarter ending March 31st, 2023. Speaking from management on today's call will be RJ Sheedy, President and Chief Executive Officer, and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via telephone playback 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 law. 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 our actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release, as well as 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, except as required by law. These statements are estimates only and not a guarantee of future performance. During today's call, the company will also reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release and the company's SEC filings. With that out of the way, I would now like to turn the call over to Mr. RJ Sheedy. Hello, good afternoon, everyone. Thank you for joining us today to discuss our first quarter performance. Our results exceeded our expectations, driven by strong same-store sales growth, margin expansion, and bottom-line leverage. We delivered a 12% increase in comparable store sales, which combined with new store openings led to a 16% increase in net sales. Our comp sales growth continues to be led by strong customer count, which increased 8% versus last year, while our average basket size increased 4%. Strong sales, margin, and operating leverage drove a 100 basis point increase in our Adjusted EBITDA margin, which resulted in a 37% increase in Adjusted EBITDA to $63 million. We are proud of our results this quarter, along with our continued efforts to generate sustainable long-term growth. Our mission of touching lives for the better guides our decision-making and anchors us to our purpose of growth for positive impact. We will achieve this by executing on our three strategic pillars of, number one, strengthening our core model, number two, evolving our business, and number three, expanding our reach. Strengthening our core model focuses on deepening our value, elevating operator support, and increasing customer awareness, acquisition, and retention. We have a differentiated and proven business model, and we are working to make it even stronger. Evolving our business is about introducing new capabilities to increase our relevancy and improve how we operate. Primary opportunities include expanding and enhancing our assortment, investing in technology to drive efficiencies, and using data and analytics to improve all aspects of our business. Expanding our reach allows us to take our highly transportable, unique model to new markets and customers. We will continue to grow our presence in existing territories together with expansion into new geographies. We also see opportunities to further develop newer sales channels, such as e-commerce, to grow our brand and accelerate our reach to new customers. We are pleased with the current trends in our business, and we continue to offer consumers the best value in food retail at a time when they need it most. Our compelling wow shopping experience is attracting new customers, and existing customers are spending more with us. Consumers are feeling the strain of higher prices throughout the economy, and we are helping them save money by offering high-quality food at industry-leading values. We are seeing healthy trends across all customer income levels, and satisfaction levels are high with most customers expecting to maintain or increase their spend with us in the future. Moving now to product, we are seeing an increase in the breadth and depth of offers as we expand and strengthen our supplier relationships. There is a lot of disruption in the marketplace today, which is leading to a very strong closeout environment. We recently held our annual supplier conference, where we met with many of our key suppliers. Some attendees were long-standing relationships, while others were newer to the GO family. We came away very encouraged with the opportunities in front of us and how we can partner more strategically to grow our shared businesses. Let me provide a couple of examples from the many deals that we have recently purchased to illustrate the types of opportunities we are seeing. Example number one is the purchase of 170,000 cases of frozen chicken. This came from a supplier we've been doing business with for over 25 years. Our partner was left with excess inventory due to lower than expected promotional sales, and we were able to help them move the additional volume. We bought all of their excess inventory, moved it quickly through our supply chain, and were able to offer it to customers at a 60% savings. Example number two is the purchase of 120,000 cases of a leading brand of nutritional bars and drinks. In this situation, production ramped up through the pandemic, resulting in inventory that exceeded moderating demand levels. We partnered with the supplier to provide them with cost recovery while clearing out necessary space in their warehouse. We worked creatively to alleviate them of their supply chain challenge, and in turn, were able to offer our customers great items at a 70% savings to elsewhere pricing. These are just two examples of the thousands of wow deals that excite customers and drive trips and baskets with new and existing shoppers. Equally important to compelling products are the independent operators who are at the heart of what makes Grocery Outlet unique and successful. They wow customers in their stores with localized deals, and they set themselves apart with their friendly service and community connection. Our IOs are energized by the current sales momentum, the new customers shopping their stores, and the healthy mix of variety and amazing deals from our supplier partners. We remain focused on supporting operators to drive sales and margin while improving their operating efficiency. One way we do this is by utilizing technology to modernize and simplify store processes and decision-making. We recently rolled out a new handheld technology application to improve how operators receive product and manage inventory levels. This new technology system reduces manual product receiving work and improves data accuracy, leading to greater efficiencies in stores. Later this year, we will be deploying new enhancements to our proprietary ordering platform, which will provide IOs additional data and insights to improve productivity and drive sales and margin. We also continue to invest in training to better support our IOs to help them grow their businesses. We actively develop a library of online content and modules as a resource for IOs to learn new systems and best practices throughout the store. We also facilitate regional workshops where operators collaborate on a variety of topics such as fresh merchandising, marketing, and community partnership. Turning now to store growth, we are pleased with the performance of our new stores, particularly those in developing markets, and we remain on track to open 25-28 net new stores this year. We continue to invest in real estate and construction resources, both internally and externally, to support our store growth and new market expansion. We are also actively engaging with new brokers and landlords and are considering opportunistic real estate as it becomes available from other retailers. Recruiting and training new operators is equally important to successful store growth. Our pipeline of Aspiring Operators in Training, or AOTs, is healthy. We continue to enhance our training program, recently hosting a group of AOTs in our office for the return of GO University. This is a multi-day program where AOTs are immersed in training sessions with our Emeryville team, as well as experienced operators. They learn everything from the history of Grocery Outlet to current best practices and everything in between. The group left with a deeper understanding of our business and culture and a high level of excitement for success in their future stores. Let me now share an example of an operator who is successfully growing awareness and sales for positive impact. Donta Rose is the operator of our Sharswood Philadelphia store that opened last year. He grew up in the neighborhood and now, working with his family, is providing fresh, affordable food to consumers living in this urban community. Donta was recently recognized for his efforts and invited to the White House Conference on Hunger, Nutrition, and Health. He spoke about the Grocery Outlet model and how it enables him to run a successful business supporting an underserved area. Donta's entrepreneurial spirit and commitment to his community embody the power of our unique business model and our mission of touching lives for the better. In closing, I would like to thank Donta and all of our Independent Operators for their hard work and dedication to making Grocery Outlet an amazing experience for our customers. I am excited about the current momentum in our business and the many opportunities in front of us. We remain focused on executing our strategic plan to drive long-term growth and positive impact. I will now turn the call over to Charles to discuss our financials. Thanks, RJ. Good afternoon, everyone. Our first quarter results exceeded our expectations as we delivered strong same-store sales growth, margin expansion, and expense leverage. Comparable store sales increased 12.1%, driven by 7.9% growth in transactions and a 3.9% increase in average basket. Net sales increased 16.1% to $965.5 million as a result of our strong comp performance combined with the impact of 26 net new stores opened since the first quarter of 2022. During the quarter, we opened three new stores as planned, ending with 444 locations. We remain pleased with the performance of new stores, including sales volumes in newly opened sites, as well as the growth of recent vintages. Our first quarter gross margin increased 90 basis points to 31.1%, and gross profit increased 19.8% to $300.5 million. Gross margin came in ahead of our expectations and was driven by favorable buying and strong execution throughout the supply chain. SG&A expense increased 15.7% to $267.7 million compared to the first quarter of 2022. SG&A growth was driven by increased IO commission expense resulting from higher gross profit, store occupancy costs related to new store growth, and costs related to resuming our annual IO conference. As a percentage of sales, SG&A decreased 10 basis points versus the prior year, primarily due to occupancy and fixed cost leverage. Please note that we are now including depreciation and amortization and stock-based compensation expense in SG&A. Net interest expense increased 60.8% to $5.9 million due to the impact of higher interest rates on our variable cost debt, partially offset by a reduction in average borrowings outstanding versus the prior year. Our effective tax rate during the quarter was 36.4%, which was above our normalized rate due to the impact of equity awards that vested below their grant price. GAAP net income for the first quarter increased to $13.7 million, or $0.14 per diluted share. Adjusted EBITDA increased 36.9% to $63.1 million for the quarter, and our Adjusted EBITDA margin increased 100 basis points from the same period last year to 6.5% of sales. Adjusted net income increased 40.7% to $27 million or $0.27 per diluted share. During the quarter, we enhanced our financial flexibility and lowered our borrowing cost by entering into a new $300 million term loan and a $400 million revolving credit facility. As part of the refinancing, we paid down $60 million in debt, ending the quarter with $82.1 million of cash and $325 million of drawn debt. We generated $87.6 million in operating cash flow during the quarter and invested $38.5 million in CapEx, net of tenant improvement allowances, reflecting new store growth, upgrades to our existing fleet, and ongoing technology and infrastructure investments. Our inventory balance at quarter end was $316.4 million and remains healthy in terms of quantity, mix, and turnover. Next, let me provide some commentary on our outlook for the balance of the year. Given our strong first quarter performance and continued momentum, we are raising our guidance for the fiscal year. For the second quarter, we expect comp growth to be approximately 5% as we anniversary higher prior year growth. For the full year, we are raising our comp sales guidance to be in the range of 5%-6%. Consistent with previous guidance, we expect to open between 25 and 28 net new stores for the year, with openings weighted towards the back half. In the second quarter, we expect to open two stores and close one store, with the balance of our new stores evenly split between the third and fourth quarters. In total, we now project fiscal 2023 net sales of approximately $3.9 billion. We expect gross margin for the second quarter and full year of approximately 30.7%. This represents an increase in our full year guidance, reflecting our strong Q1 performance, along with normal seasonal margin moderation in the back half of the year. With respect to the bottom line, we expect second quarter Adjusted EBITDA of approximately 6.3% of sales. For the full year, we are raising our guidance for Adjusted EBITDA to be in the range of $240 million-$246 million. Moving down the P&L, we continue to expect net interest expense of approximately $22 million for the year, which reflects projected forward interest rates on $300 million of outstanding debt. We forecast a normalized tax rate of 28% and average diluted shares outstanding of approximately 101.5 million. As a result, we are raising our full year adjusted EPS guidance to a range of $0.96-$1.00 per diluted share. With respect to CapEx, we continue to project approximately $155 million net of tenant improvement allowances, reflecting new store growth and continued investments in our store base and business infrastructure. As a reminder, our CapEx guidance includes build-out costs for stores that will open over the next 18-24 months. In closing, I wanna thank our entire Grocery Outlet team and operator family for executing at a high level on behalf of our customers. We continue to deliver the best value in grocery retail, we are excited about the growth runway ahead of us. We will now open the call up to your questions. Operator? Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star and then one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. Please note to limit your questions to one question and one follow-up question. You may press star and then two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star keys. One moment please while we poll for questions. The first question comes from Robby Ohmes from Bank of America. Please proceed with your question, Robby. Sorry, how are you guys? Can you guys hear me? Hi, are you guys there? Hello. Can you hear us? Can you hear us? Oh, yeah. Now I can. Okay. You're there. Okay. Excellent. Hey, guys. We're here. I'm sorry we were responding. Go ahead. My first question is just on inflation. Can you tell us how much of the strong same-store sales was inflation and just your thoughts on what inflation looks like for the rest of the year for you guys? Yeah, Robby, it's Charles. Let me, let me provide a little color there. You could see results for the first quarter. The majority of the comp came from traffic. We did continue to see benefit from the higher basket as well. Continue to see a high food inflation broadly across the store. It is moderating. As we look forward, that's our expectation that it will continue to disinflate over the balance of the year, particularly as we lap accelerating prior year numbers. The one thing to keep in mind, though, for us, given our model, the impact of inflation is a bit more muted because of the way we buy product and our ability to flex the assortment. The headline number you see for inflation out there doesn't necessarily translate to us because we look forward, we expect to see it continue to moderate here as we progress through the balance of 2023. Thanks. That's really helpful. Just another question that I get a lot is can you talk about, you know, maybe even looking back about how the IOs are doing. You know, are they, you know, broadly speaking, as profitable as they, you know, historically have been? Are they more profitable or are they, you know, are new IOs... Is it, more challenging to finance, you know, becoming a new IO, you know, because of interest rates? You know, maybe could you just, you know, is cost of labor pressuring the IOs? Like, where are the IOs right now? Is this a good time for them or, you know, maybe some help with that would be great. Sure. Sure, Robby. Thanks. Overall, operator financial health is good. The strong results here are certainly benefiting operators as they participate in the upside of both sales and gross profit growth. Just as a reminder, right, we split gross profit with them 50/50. In a period where we're seeing 20% increase in gross profit, that certainly goes a long way to a healthy commission and then, you know, through their, through their P&L bottom line profit for them. That's coming off of what was a strong year, a strong financial year in 2022. Financially speaking, they're in good shape. They're optimistic given that comps are growing, traffic is growing, inventory and variety are healthy. We all continue to be focused on driving sales and with healthy margin. We continue to invest in stores, CapEx, and other technology to improve sales and efficiencies for the operators. They do still certainly are contending or have to contend with challenges as it relates to labor cost, which of course is a big expense for them and other operating costs. That's been the case for a while now. We work closely with them, and we're always looking to make more investments, as I just mentioned, whether it's in capex or technology or other process improvements to help them manage their P&L as efficiently as they can. In a good operating environment like this, again, with recent results, the profitability overall is good. Just very last one. I think you guys during parts of COVID maybe, you know, had to increase some of the loans to the IOs to, you know, the ones that were maybe having a harder time. Are, you know, higher balances related to that being, you know, worked down in this environment now that we're in? Or how should we think about that? Yeah. Robbie, it's Charles. Referring to operator AR, we continue to monitor that really closely. You know, recall it really is much more for the operators about just that store ramp as they continue to build volumes and brand awareness in the early years of the store. They accumulate those balances, and they pay them down over time. As we track the loan portfolio and the progress the operators are making feel really good about that path forward. That's great. Thanks so much. Thanks, Robby. Thank you. The next question comes from Krisztina Katai from Deutsche Bank. Please proceed with your question, Krisztina. Hey, guys. Good afternoon, and congrats on a great quarter. I wanted to start with, you know, you mentioned that you're seeing both new customers and existing customers shop more with you. Can you talk a bit more about what you're seeing in the current consumer environment broadly, share anything potentially on where your quarter to date trends are running? As we think about the SNAP reduction, did that contribute at all to the comp upside given your strong value proposition? Yeah. Hey, Krisztina. Thanks for the question. I'll take the first part of that, and then Charles can touch on a couple of things that you asked at the end there. Yeah, in terms of customer trends, really encouraged by what we continue to see here, and I'd say that it's all the same positive trends as we talked about on our last call in February. You know, first seeing strength across all customer types, all income levels. We do continue to see, as we noted, more new customer shopping our stores. Our survey data shows a higher average income customer shopping with us, which suggests that more customers are changing behaviors. They're looking for value. They're coming to us where they may have not shopped Grocery Outlet previously for the great value we provide on the many brands and items that we have throughout the stores. Those are all positive trends. Together with that, we've seen an increase in trip frequency and spend with existing customers. When they're in our store shopping, as we survey them regularly, the satisfaction levels are high, and there's a high intent to shop with us and spend more with us, over the next, six to twelve months, as we ask in our, in our survey. All of those are very positive. We continue to lean into the investments and priorities that we've talked about to retain those customers. You know, first and foremost, it's about inventory and value. Together with the role that the operator plays, it's a very sticky experience and one that's very positive for consumers, which then leads to retention and future trips as we continue to build that loyal customer base. Charles, do you wanna touch on the other part? Krisztina, it's Charles. With respect to SNAP, as we said on the last call, our point of view is that a reduction in SNAP benefits is not necessarily a headwind for our business, and that's been true historically, if you look back over time. We've comped positively through cycles of reduced SNAP funding. Looking at Q1, as those funding dollars were reduced in March, we did not see, as expected, a meaningful impact to comp. To us, that very much tells us that again, this is just a tender type that our customer is using as opposed to a customer that we might be at risk of losing. So feel really good about that SNAP performance. You know, again, the expectation is as we move forward, this is yet one more sort of cumulative pressure to be added to consumers as they look to stretch their dollars. You know, that's great in terms of how we're positioned to help them do that. Thank you for that. If I could just squeeze in a follow-up just on gross margin. The 1Q came in much better than your guidance. Could you talk about the dynamics during the quarter? I think you mentioned favorable buying and also the supply chain, and just overall how best to think about upside to the 30.7% number you gave us for both 2Q and the year. Sure. Yeah, really pleased with Q1 margin performance, particularly in light of ongoing cost inflation. As I said, you know, the team, and when I say the team, it really is end-to-end from the purchasing team to planning and inventory management, supply chain teams managing and distributing product and then of course the IOs at store effectively managing the inventory through point of sale. Great performance. The buying environment is very good. We love to see that. I'd just remind you that, you know, for us, we always take the view of managing the business for stable margins. It's normal to get these kind of quarter-to-quarter margin fluctuations given our buying model. Again, think about the fact that the assortment and the mix is always changing. You know, we manage for that long-term stability. Q1 was great to see. As we look into Q2 here, tracking to a 30.7, feeling great about that, which is allowing us to raise our full year guide for the year as well. Great. Thank you so much. Thanks. Thank you. Thank you. The next question comes from Leah Jordan from Goldman Sachs. Please proceed with your question, Leah. Thank you. Good afternoon. This is Leah Jordan. I first wanted to check in and see what you're seeing in the promotional environment and if there's any differences by region. Then related to that, how do you view your price gaps currently in the everyday assortment? Thanks, thanks for the question, Leah. The promotional environment remains stable. We're seeing really across the board other retailers remaining rational in terms of how they're promoting items. They continue to be more targeted, I'd say, and specific in the offers or the discounts that they're offering and, you know, other related promotional activity. Really not a whole lot of change there. That's been the case for a while now. You know, not a lot of change just to the competitive environment in general. In terms of the value that we're providing, as you know, it's something that we manage very closely, and it's very strong. We continue to offer great value on the average basket. The target there for us is 40% relative to conventional retail, and that has maintained. You know, we manage that actively. Together with that, many other metrics that we look at and we're constantly managing, we always wanna be delivering the best value overall to consumers no matter how they shop us, and we do have a wide variety of customer types and shopping occasions and ways customers shop us. We measure that value and the excitement that we deliver to them in the stores in a number of different ways. We've always said that, in an environment like this, when the consumer is as pressured as they are to stretch their dollar to afford the food that they normally purchase to feed themselves and their family, that value delta is worth even more than it is in times when maybe the need for value is a little bit less. Really happy to be continuing to offer that value, and I think we're seeing that play forward in some of the comp trends and more specifically, traffic and basket trends as customers are shopping us more. Thank you. For my follow-up, I wanted to check on the new unit pipeline. Understand, the growth this year is still back half weighted, but as you continue to build it out longer term, are you seeing any improvement to the timelines for permitting or construction or where are you really seeing any bottlenecks still? Yeah, sure. I'd say consistent with comments on the last call, we're still on track for the 25 to 28 net new stores this year, as we noted, with a return to the 10% run rate in the second half of this year as the stores are more back half weighted. We continue to work towards the 10% annual target into 2024 and years looking forward. We do have a good lineup of stores when we look out over the next 24 to 36 months as you think about pipeline and lead times. We're tracking and doing the work there to continue to fill the pipeline and build out that lineup of stores. In terms of the challenges, I'd say, they haven't necessarily eased any. The team continues to work hard to manage through them. We are still seeing extended lead times. We are still managing and working through challenges as it relates to construction and supply chain. Consistent with what we talked about on the last call as well, it has stabilized. As we've adjusted processes and expectations and lead times, we've seen that remain stable, and as a result, still on track for delivering store count this year and targeting to be back on track and remaining at that 10% in the years looking forward. Lee, does that conclude your questions? Yes. Thank you. Thanks, Leah. Thank you so much. Thank you. The next question comes from Joe Feldman from Telsey Advisory. Please proceed with your question, Joe. Great. Thanks for taking the question, guys. I don't recall hearing much about the Mid-Atlantic in your presentation. I was just curious if that region is performing any differently from the stores in the West Coast and if you're seeing any variance that way. Yeah, Joe, it's Charles. Continue to be really pleased with performance in our newer regions that are delivering comp, you know, at the top of the company average. That's true for both Southern California, continue to make nice progress there. We've got about 100 stores in market today, and just pleased with the way we've been able to grow brand awareness and productivity in that market. Then Mid-Atlantic, as you point out, the comps in that region continue to be at the top of the company average. Likewise, very much following the same playbook we have in Southern California, making good progress there, building brand awareness, further densifying the region. Just excited about our room for growth in that market going forward. That's great to hear. Thank you. Maybe for my follow-up, wanted to ask you guys, you talked about the healthy pipeline of opportunistic purchases, and I'm just curious how we should think about maybe the mix of WOW products versus the regular products and how you're planning to continue to excite people through merchandising in the store. Maybe just get into that a little bit. Thanks. Yeah, sure. We continue to be really encouraged by the pipeline of opportunistic products. As we said, it's broad-based across all categories. We're seeing really nice lists, and we're engaging in a strategic way with many of our suppliers. All of that feels good. It's positive momentum that we've had, you know, I'd say really throughout all of last year and then through the first part of this year as well. In terms of the mix, still generally 50/50. That's been pretty stable for a long period of time right now. I'd say more important than mix really is how we are delivering the best value across both the opportunistic and everyday sides of the business, you know, those two parts of the assortment. With the consumer view, they don't know the difference, right? For them, it's just, am I seeing the products that matter to me, and am I excited by the value? A big part of what we offer is newness and treasure hunt and excitement when they shop our stores. We do that really across the entire assortment, whether it's opportunistic or every day. Those are the things, as I mentioned earlier, the things that we manage closely and all of that is in really good shape. The experience for the consumer is really strong and, you know, we continue to focus on that. We continue to develop and get better at both opportunistic and every day to continue to make the assortment as relevant as possible and to deliver always, you know, the best value and levels of excitement to them as they're shopping our stores. Got it. That's great. Very helpful. Thanks, guys. Good luck this quarter. Yeah. You bet. Thanks. Thank you. The next question comes from Oliver Chen from TD Cowen. Please proceed with your question, Oliver. Hi. Thanks. It's Tom on for Oliver. Just a question on SKU expansion. Curious as to how we should expect the year to shape out relative to last year's, I think, 700 SKUs added. Are you still seeing opportunities for additional SKU expansion? How would that essentially affect the timeline for development of private label offerings? Hey, Tom. Thanks. Yeah, we SKU expansion is a normal part of our ongoing business. To answer your question, yes, we continue to add SKUs to the assortment, approximately 150 new items that we've brought in in the first quarter of this year. Yeah, you'll remember we started talking about this initiative, I think back in the fourth quarter, in the second half of 2021. Over that period of time since then, we've added close to 1,000 incremental SKUs. Again, always looking to make the assortment more relevant. We've had some really nice adds to the assortment. We always talk about NOSH, natural, organic, specialty, healthy. That continues to be a focus. Some really nice items and brands added within fresh categories more generally. Ethnic categories has been a nice area of expansion for us. Local, and a great opportunity and differentiator for us in the role that the operator plays as it relates to more localized items. More recently, we've introduced an assortment of grab-and-go items, home meal replacement type items, and pleased with the results there so far. That is ongoing and will continue whether it's at the item level or subcategory level, and we'll continue to enhance the shopping experience. As it relates to private label, we're still excited about this as a long-term opportunity. We are building capabilities and setting the foundation this year. Think of it as an enhancement to the everyday assortment. This is not a replacement for opportunistic. There continues to be more than available for us to buy and to support growth as we've talked about. Within the everyday side of the business, private label can really help us deliver more value. It can create more excitement for the customer. It can offer an additional reason to visit a store, you know, think about unique destination items, and it can also serve to strengthen the treasure hunt. We're gonna do this in a way that is appropriate and unique for us, and we're all excited about that as really a next step forward in terms of what the assortment provides. Too early to give anything more specifically than that as we're really just forming the strategy and doing some foundational work, but we'll certainly keep you up to date as we move through the year and into next year. Great. That's very helpful. A follow-up on the digital business as a whole. Number one, on the pilot of the digital app, I believe in Washington State, if you could just brief us on how that's going. On the third-party delivery side, just curious how penetration is trending and if those delivery services carry a higher UPT to essentially offset any disinflationary pressures. Yeah, sure. First on the app, we've been successfully piloting this new personalization app in our Washington stores since the end of last year. Really pleased so far. We've received positive customer feedback. It's providing customers real-time visibility to the many great deals within those stores. It brings the treasure hunt outside of the four walls in a way that's unique to this new platform that we built. It digitizes our popular Win What You Save promotion. There are a number of other features too that make it very engaging for customers, and we've heard that feedback directly from them. Over time, of course, it will allow us to capture valuable data about shopping behaviors and therefore make it even more relevant in that we can communicate in a more customized, specific way based on customer purchasing behavior over time. Love that it's already engaging for them and it will become even more engaging as they use it and time moves forward. We have started to roll it out to additional regions. That's actually happening right now, and we'll expect to have it in all of our stores by the end of the year. We're following more of a phased rollout approach and, you know, from there, we'll grow the user base and of course, we'll continue to make enhancements to the program and, you know, look forward to all the benefits that will come from that. Quickly on e-commerce, really pleased with e-commerce growth. We're seeing nice incremental sales. We haven't disclosed specific penetration. Still small. Remember, you know, we just rolled out to, well, the two remaining platforms, near the end of last year. We're on all three major platforms right now, Instacart, Uber Eats, DoorDash, but still very young and still growing as a part of our business. It's a great way for us, or has been a great way for us to acquire new customers. We've seen a lot of incrementality there. To the last part of your question, you know, think of it as margin profit neutral for both Grocery Outlet and the operators and, you know, very seamless operationally. You know, all around it's been a great program for us. Tom, do you have any further questions? That is all. Thank you. Thank you. Ladies and gentlemen, just another reminder, if you'd like to ask a question, please press star and then one. If you'd like to ask a question, please press star and then one. The next question comes from John Heinbockel from Guggenheim Securities. Please proceed with your question, John. Hey, guys. In looking at opportunistic real estate, right, given this environment, are you primarily looking, Mid-Atlantic? You know, what are you looking for? I know you did an acquisition in the Mid-Atlantic to get there in the first place, but when you think about formats, you know, can you buy formally unionized, locations? Sort of, you know, what are the constraints, right, in terms of the kind of, you know, acquisitions you'd be looking at. You know, how available are they today? Thanks, John. The first part of your question, we're looking at opportunistic real estate across all of the markets that we're operating in, also, you know, in terms of our geographic expansion, what would be appropriate for us. It's not just in the East. To the second part of your question, it we're evaluating these opportunities really no different than we would or than we do as we're identifying sites through brokers or through landlords, right? Of course, it needs to be the right size, needs to have the right characteristics that we apply, all the market data that we bring, you know, customer data to better understand the potential there, cost, of course, and everything else. Really no different there. The difference is that we're evaluating, perhaps bigger blocks of stores or sites that are available, and they've come up in a more specific or unique way. As you well know, right, there is a lot of movement in retail or with other retailers right now. The growth plans that we have put us in a really good position to take advantage of it, but it needs to be right for us. That's where the evaluation comes in, and that's the work that we're doing as we're getting access to these lists and, you know, making sure that we're making smart decisions, both in terms of location and then also all the other attributes and economics of it, no different than we would, you know, normal course of conversations with brokers and landlords. Okay. Then maybe a follow-up. The IO pipeline, right, in terms of quantity and quality, right? Obviously, you know, you've had some delays this year in expansion, right? The IO pipeline's probably a little bit bigger, you know, than you'd planned. Is that, is that still growing, right, in anticipation of 2024 and 2025? Then the quality, right? I think it's been a pretty high quality, capability-wise over the last couple of years. Any change in who you're recruiting? It is. Yeah, the IO pipeline is very healthy. We do manage it together, John, with the real estate pipeline. You think about lead times there. It's not exactly the same, but we manage it closely based on future store openings and the recruiting and training process and time related to that as well. We're able to keep those pretty well in sync. Yes, we are recruiting for, certainly for operators as we think about 2024 stores and even out into, you know, 2025, because sometimes the decision-making process can be a longer time period for interested candidates. We're constantly managing those conversations and both operator count and then also geographic preferences and how all of those things come together. The quality is really good. This continues to be a really attractive model for those thinking about joining us and opening up and running one of their own stores. The pipeline's healthy in terms of quantity and quality. It's really all the things that have always attracted them over the years to this model. They can own and operate their own business. They, they operate independently with the support and scale of Grocery Outlet. They get to work with family. They get to give back to community. Certainly, there's income potential there that may not be available to them from wherever they're coming from. That appeals to really a wide variety of potential operators. That profile there, you know, I'd say pretty consistent with what it's been. Continue to see those with grocery retail experience or other retail experience. We've also seen some with a, you know, call it maybe non-traditional experience, and then together with internals, right? As we refer to in-internals, folks that have operated within the Grocery Outlet system, as we grow, that continues to be a bigger source of future operators just because you have more people that have been in the system for periods of time. Yeah, everything there feeling good and, you know, well supporting future growth goals. Thank you. Thanks, John. Thank you. The next question comes from Corey Tarlowe from Jefferies. Please proceed with your question, Corey. Hi, good afternoon, and thanks for taking my questions. RJ, I think you mentioned in your prepared remarks, there was a comment about your recent supplier conference. Could you just talk about the tone of the conversations that you had with your suppliers versus what you had heard in prior years? I think the availability has been a little bit better. What are some of the topics of discussion that people are bringing up this year that's new versus in prior years? Any color you could provide here would be really helpful. Yeah. Thanks, Corey. Yeah, the tone was really positive. It's, we love this meeting. It's a great chance for us to spend time with, as I mentioned, suppliers we've done business with for decades, but also suppliers where maybe the relationship is a little bit newer. So, and an opportunity to step back, I'd say, from the day-to-day and think longer term and more strategically about the partnership that we have together. Those are always fun conversations. If I were to compare it to a year ago, you know, at that time, back in 2022, a lot of the conversation or more of the conversations were really around supply chain and allocations and ramping production back up and, you know, those things as we were still working through, you know, many of the impacts from COVID and the pandemic. You know, this year, and it's true with just the world in general, right? More of the normal type of conversations that we've always had throughout the years. You know, we talk about how we can be a better partner to support them with opportunistic. With many suppliers, it is a blend of opportunistic and every day. With the number of stores that we have and growing, you know, we certainly represent an attractive, what a supplier would refer to as a primary sales channel there for everyday product. Again, those are, those are fun conversations to have and how we can grow our shared businesses together. Yeah, great conversations. We're talking to suppliers all the time, right? They provide a great platform for us as the year moves forward, and as we're working through opportunities together with them. Great. Thanks. Then just for Charles, could you talk a little bit about how to think about the second quarter comp versus what you did in the first quarter. I think for the first quarter, you initially guided to something like, I believe it was 10, and then you posted a +12, and you talked about 8% new customer growth. Then the second quarter is, I believe, +5 as far as how you're thinking about the guide. Could you maybe just talk about how to think about the trajectory for the comp in the coming quarter? Thanks. Sure. Yeah. Yeah, Corey, happy to do that. Q2, feel really good about the momentum we continue to drive in the start we've got here early in the quarter, especially the strength in traffic. You know, that said, we're very mindful of the fact that we're right in the thick of lapping accelerating comps from last year. You think about the uptick in comps in 2022 from the first quarter into the second quarter into the third quarter. Across those was a 10-point increase in comp. That was not only the impact of high inflation, but also the fact that we were building traffic as we progressed the year. The guide for Q2 is taking that into account, as well as the fact that it continues to be a very fluid consumer and macro environment. Lots of crosscurrents that we're keeping a close eye on in terms of inflation remaining very high. Yes, it's moderating. Interest rates high, consumer credit. All of those things taken together, we look at the Q2 guide and the implied guide for the balance of the year. On a stacked basis, we feel like that's a balanced and prudent guide. Okay, great. Thank you very much. Appreciate all the help and best of luck. Thank you. Thank you. Thank you. The next question comes from Karen Short from Credit Suisse. Please proceed with your question, Karen. Hi. Thanks. Just a couple questions. First thing, I just wanna clarify on gross margin specifically. You said 30.7 gross margin for 2Q. That implies 30.5%-ish, not to split hairs here, but for second half. That's a decent compression year-over-year in 2Q, and then a slight expansion in the second half. Wanted a little clarification on that, and then I had a bigger picture question. Karen, This is Charles. Think about the guide for the year, 30.7% in total. That reflects a strong Q1, the 30.7% for Q2. For the balance of the year, the fact that it's typical for us to see this normal seasonal moderation in margin as a result of just changes in product mix. You think about third quarter, the summer months, higher penetration of snacks and soda, the fourth quarter, holiday mix. That's the typical seasonal flow we see, that's what's embedded in the full year margin guide for the year. I don't think I've asked this question for a while, but with respect to the actual economics for an IO team opening a new store, can you just walk through an update on that specifically? Because obviously, you know, when you IPO'd, there was data on that, and I don't know that I've really asked the question or it's come up just as a topic because things have changed so much since 2019. Wondering if you could just give a little color and update on that. Karen, just because it's a lengthy... There's a lot there to- No. Specific. Specifically net income to an IO. I understand the gross margin component. I understand the interest expense component. Like, what is their net actual take home as a team? Yeah. Whatever one unit, per unit. Yeah. It's up versus 2019. You think about the benefit that they've seen from top line, it flowing through. Yes, it's, they've seen increases in expenses. In terms of the net impact to the IOs, very consistent to a little bit better than the model we talked about when we went public. Can you give a range of numbers per unit? Yeah. Karen, roughly for you think about a mature IO, we've always talked about $250,000 for bottom line income. We're seeing levels for mature IOs, you know, in excess of that. Okay, thanks. Just the last question I had, is there any contemplation within your, you know, your guidance for the potential for actual deflation in 4Q? Not disinflation, but deflation? Yeah, we don't expect there to be deflation. Again, disinflation is our best point of view at this point. You know, the model, even in a deflationary environment, the model is it's really where the flexibility of the model shines through. We know we can perform well in that environment as well. Current expectation is for continued inflation moderation. Okay. Thanks very much. Thank you. The next question comes from Simeon Gutman from Morgan Stanley. Please proceed with your question, Simeon. Thank you. This is Michael Kessler on for Simeon. One more on guidance. I think you beat by $6 million on EBITDA in Q1, and the full year was raised by about $3 million, I think, at the midpoint. Anything to note there as far as, you know, if there's any reason why the rest of the year should be any weaker than you thought originally? Or is this just conservatism depending on the investment front that we should know about? It's Michael, it's Charles. It really is just a matter of when you flow through the P&L, right? You think about our mid-single-digit comp guide for the year-end total. Gross margin at 30.7%, 20 basis points up year-over-year. We are driving expense leverage, which we feel really good about. I think as you're comparing against kind of the beat in Q1, it really is more about just flowing through those through those margin lines to get to our guidance. We feel really good about how the P&L is shaping up, and particularly the leverage that we're driving so far in the year and the path ahead for 2023. Okay. One more on the IO front. Any changes with regards to the flow of applicants or interest levels, especially as rates have gone up? Maybe just a clarifying question. I know you guys lend often to the IOs when they take on a store. Has, you know, that changed at all as far as the rates that are, you know, being negotiated there or charged? Guys, any updates on how you know, facilitate that process? Yeah, no, well, I think your broader question, Michael, the pipeline remains healthy. No change in level of interest or number of folks coming to us or, you know, being interested in the model as it relates to interest rates or really anything else. That's all tracking really well to support growth. Thank you. Thank you. Thank you. The next question comes from Michael Baker from D.A. Davidson. Please proceed with your question, Michael. Okay. two real quick here because it's getting on an hour. One, let me ask about SG&A, incentive comp. I think incentive comp was a big increase last year, and so we thought it would be a savings this year. Can you talk about how much incentive comp hurt you last year as your comps accelerated and what you expect to save this year? But now that you're beating, maybe that goes away. Just how do we think about incentive comp in 2023? Yeah, Michael, it's Charles. We do expect an incentive comp will be a, we'll leverage incentive comp year-over-year as we have more of a normalized payout this year. You didn't really see the impact of that in the first quarter. It's really as we move into the second quarter and the balance of the year. Last year is when we started ticking up those accruals. We expect to see some SG&A benefit in Q2 through four. Offsetting that is the fixed cost leverage that we are driving in the business. As comp sales normalize, you get more of a moderating tailwind from fixed cost leverage. Yes, we expect to see some meaningful incentive comp leverage in the balance of the year. Okay. Understood. Last one. The gross margin, the 90 basis points gross margin increase, I think is the most I have in my model since your IPO. I, you know, I sort of want to ask, was there anything unique in this quarter? Clearly there was, 'cause it's the biggest gain, you know, you've had in quite a while. The guidance for the second quarter, I guess you said... Did I hear right? That's where you're tracking or that's sort of what you're assuming because you just assume it goes back to a normal rate and you're not gonna assume, you know, this unprecedented level? Is that actually, you know, what you're seeing, 10 weeks or not 10 weeks, but however many weeks through the quarter we are in? Yeah. Yeah. Yeah. Just taking the second part first. Early in the second quarter, 30.7% is our expectation at this point based on what we, what we know now. I think, again, just taking a step back as we think about, you know, I mentioned we manage the business for stable margins over time, but you get that normal fluctuation. Historically, you can look back over the years and you see roughly a 1 point, you know, fluctuation, low to high in margin performance across cycles. It's incredibly tight on an annual basis, but just because of the nature of the model, the assortment change and the mix change in, you're gonna see those quarter-over-quarter changes. Particularly when you're comparing, you know, a great Q1 this year versus, a Q1 last year that was on the lower side, and then conversely, you know, we're looking at Q2, which was high last year. I think there's a bit of that dynamic, just the year-over-year in a particular quarter. Overall, you know, we're really pleased with the way that we're managing margin, particularly in light of the cost environment. Okay. Makes sense. I'm gonna try to squeeze one more, if I could. Can you remind us the pace of comps last year? The spirit of the question is the 5% that you're looking for for the quarter, is that what you've seen quarter to date? Or, you know, maybe you're above that, but comparisons get harder, so that's how you expect, you know, the quarter to end up? Yeah, it's really comparison things. You think again about the ramp of comp we saw last year. As we're looking at stacked comps from Q1 into Q2 and informing our guide for both the second quarter and the balance of the year, we're looking at it on a sort of a stacked comp basis, as well as translating that into average weekly sales at the store to understand normal patterns, and that's the nature of the guide. Got it. It sounds like your stacked comps are pretty consistent 'cause the second quarter of stacked guidance is pretty much in line with first by 100 basis points or so. That's right. Yep. Okay. Thank you. Thanks, Michael. Thank you. That does conclude our question and answer session. I'd now like to turn the call over to RJ Sheedy for closing remarks. Thank you, sir. Thanks, everyone, for joining us today. We appreciate the support and we look forward to updating you on the next call. Thanks. Thank you very much, sir. ladies and gentlemen, that does conclude today's conference. Thank you very much for joining us. You may now disconnect your lines