Grocery Outlet Holding Corp.
2023 Annual Report on Form 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 30, 2023
or
For the transition period from
to
Commission File Number: 001-38950
Grocery Outlet Holding Corp.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
5650 Hollis Street, Emeryville, California
(Address of principal executive offices)
47-1874201
(I.R.S. Employer
Identification No.)
94608
(Zip Code)
(510) 845-1999
(Registrant’s telephone number, including area code)
Title of each class
Trading Symbol
Name of each exchange on which registered
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share
GO
Nasdaq Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing
reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of
the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock of the registrant as of June 30, 2023, the last business day of the second fiscal quarter (based on a
closing price of $30.61 per share), held by non-affiliates was approximately $2.9 billion.
As of February 22, 2024, the registrant had 99,227,528 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information required in response to Part III of Form 10-K (Items 10, 11, 12, 13, and 14) is hereby incorporated by reference to portions of the registrant’s Proxy
Statement for the Annual Meeting of Stockholders to be held in 2024. The Proxy Statement will be filed by the registrant with the Securities and Exchange Commission no
later than 120 days after the end of the registrant’s fiscal year ended December 30, 2023.
GROCERY OUTLET HOLDING CORP.
FORM 10-K
TABLE OF CONTENTS
Special Note Regarding Forward-Looking Statements
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Properties
Legal Proceedings
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
[Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
PART IV
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K ("Form 10-K" or "report") and the documents
incorporated by reference herein constitute "forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements contained in this report and the documents incorporated by reference herein
other than statements of historical fact may constitute forward-looking statements, including statements regarding our
future operating results and financial position, our business strategy and plans, business and market trends,
macroeconomic and geopolitical conditions, and the sufficiency of our cash balances, working capital and cash generated
from operating, investing, and financing activities for our future liquidity and capital resource needs. Words such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "outlook," "plan," "project," "seek," "will," and similar
expressions, are intended to identify such forward-looking statements. These forward-looking statements are subject to a
number of risks, uncertainties and assumptions that may cause actual results to differ materially from those expressed or
implied by any forward-looking statements we make, including those described under the headings "Risk Factors," and
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in this report or as described
in other subsequent reports we file with the United States ("U.S.") Securities and Exchange Commission (the "SEC"). We
encourage you to read this report and our other filings with the SEC carefully. Moreover, we operate in a very competitive
and rapidly changing environment and new risks emerge from time to time.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, and our
expectations based on third-party information and projections are from sources that management believes to be reputable,
we cannot guarantee future results, levels of activities, performance or achievements. These forward-looking statements
are made as of the date of this report or as of the date specified herein and we have based these forward-looking
statements on our current expectations and projections about future events and trends. Except as required by law, we do
not undertake any duty to update any of these forward-looking statements after the date of this report or to conform these
statements to actual results or revised expectations.
As used in this report, references to "Grocery Outlet," "the Company," "registrant," "we," "us" and "our," refer to
Grocery Outlet Holding Corp. and its consolidated subsidiary unless otherwise indicated or the context requires otherwise.
Our fiscal year ends on the Saturday closest to December 31st each year. References to fiscal 2023, fiscal 2022, and
fiscal 2021 refer to the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022, respectively. Our
2023, 2022 and 2021 fiscal years all consisted of 52 weeks.
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ITEM 1. BUSINESS
Our Company
PART I
Grocery Outlet is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold
through a network of independently operated stores. As of December 30, 2023, we had 468 stores in California,
Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland, New Jersey and Ohio. Our headquarters is in Emeryville,
California.
Each of our stores offers a fun, treasure hunt shopping experience in an easy-to-navigate, small-box format. An ever-
changing assortment of "WOW!" deals, complemented by everyday staple products, generates customer excitement and
encourages frequent visits from bargain-minded shoppers. Our flexible buying model allows us to offer quality, name-
brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial
independent operators ("IOs") run our stores and create a neighborhood feel through personalized customer service and a
localized product offering. This differentiated approach has driven consistent comparable store sales growth and allowed us
to produce positive comparable store sales in 20 of the last 21 years.
Our differentiated model for buying and selling delivers a "WOW!" shopping experience, which generates customer
excitement, inspires loyalty and supports profitable sales growth:
•
How we buy: We source quality, name-brand consumables and fresh products opportunistically through a
large, centralized purchasing team that leverages long-standing and actively managed supplier relationships to
acquire merchandise at significant discounts. Our speed and efficiency in responding to supplier needs, combined
with our specialized supply chain capabilities and flexible merchandising strategy, enhance our access to
discounted products and allow us to turn inventory quickly and profitably. Our buyers proactively source on-trend
products based on changing consumer preferences, including a wide selection of Natural, Organic, Specialty and
Healthy ("NOSH") products. We also source everyday staple products to complement our opportunistic offerings.
Each store offers a curated and ever-changing assortment of items, creating a "buy now" sense of urgency that
promotes return visits and fosters customer loyalty.
•
How we sell: Our stores are independently operated by entrepreneurial small business owners who have a
relentless focus on selecting the best products for their communities, providing personalized customer service and
driving improved store performance. Unlike a store manager of a traditional retailer, IOs are independent
businesses and are responsible for store operations, including ordering, merchandising and managing inventory,
marketing locally and directly hiring, training and employing their store workers. IOs initially contribute capital to
establish their business and share store-level gross profits with us. These factors both align our interests and
incentivize IOs to grow their business profitably to realize financial upside. This combination of local decision-
making supported by our purchasing scale and corporate resources results in a "small business at scale" model that
we believe is difficult for competitors to replicate.
Our value proposition has broad appeal with bargain-minded customers across a broad range of income levels,
demographics and geographies. We believe that our sustained focus on delivering ever-changing "WOW!" deals within a
fun, treasure hunt shopping environment has generated strong customer loyalty and brand affinity. We believe that our
broad customer appeal supports significant new store growth opportunities, and we plan to continue to expand our reach to
additional customers and geographies across the United States.
Our stores generally have performed well across all economic cycles, as demonstrated by our pattern of positive
comparable store sales growth and healthy gross margin rates. Our comparable store sales decreased in fiscal 2021 (for the
first time in 18 years) as we lapped heightened demand during the onset of the COVID-19 pandemic in 2020. Our business
returned to have positive comparable store sales in fiscal 2022 and 2023. Our model also is somewhat insulated from store
labor-related variability because IOs directly employ their store workers. The result is a highly scalable business with lower
corporate fixed costs, providing further protection in the event of an economic downturn and growth opportunities in a
strong economy.
As discussed below under "Acquisition of United Grocery Outlet" on February 14, 2024, Grocery Outlet Inc., our
wholly owned subsidiary, entered into a stock purchase agreement to acquire BBGO Acquisition, Inc., a holding company
that owns all of the outstanding capital stock of The Bargain Barn, Inc., which does business as United Grocery Outlet
("United Grocery Outlet"). The transaction is expected to close early in the second quarter of fiscal 2024 and remains
subject to customary closing conditions.
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Our History
Our founder, Jim Read, pioneered our opportunistic buying model in 1946 and subsequently developed the IO
selling approach, which harnesses individual entrepreneurship and local decision-making to better serve our customers.
Underlying this differentiated model was a mission that still guides us today: "Touching Lives for the Better." Since 2006,
the third generation of Read family leadership, Eric Lindberg, Jr., Chairman of our Board of Directors and former Chief
Executive Officer, has continued to advance this mission.
Grocery Outlet Holding Corp. was incorporated in Delaware on September 11, 2014. In June 2019, we completed
the initial public offering of our common stock. Our common stock trades on the Nasdaq Global Select Market under the
symbol "GO".
Our Growth Strategies
We believe that our compelling WOW! shopping experience will continue to drive new and existing customers to
shop our stores. Propelled by our strong business fundamentals, we believe we are well-positioned to expand our footprint
and grow our customer base. We are executing a long-term growth strategy built on three primary pillars:
•
•
•
Strengthen our core business model. Our unique buying and selling approach has always been and will continue
to be the growth engine of this business. It differentiates us and provides a compelling value proposition to a wide
range of customers. We remain focused on deepening our value, strengthening the treasure hunt shopping
experience, elevating IO support, and increasing customer awareness, acquisition, and retention. We continually
seek to strengthen supplier relationships and further develop opportunistic purchasing with new processes and
investments.
Evolve our business. We are focused on advancing our model through expanding our assortment and digitizing
our business with more integrated end-to-end technology. We also continue to implement operational initiatives to
support IOs in enhancing the customer experience.
Expand our footprint. We believe that new store growth remains our biggest driver of long-term stockholder
value and continue to believe the success of our stores across a broad range of geographies, population densities
and demographic groups creates a significant opportunity to profitably increase our store count in existing and
new local regions and states. We intend to continue to expand our reach to additional customers and geographies
across the United States.
Products and Pricing
Each store offers a curated and ever-changing assortment of products, consisting of on-trend, quality, name-brand
consumables and fresh products. Our product offering includes a constant rotation of opportunistic products,
complemented by an assortment of competitively priced everyday staples, across grocery, produce, refrigerated and frozen
foods, beer and wine, fresh meat and seafood, general merchandise and health and beauty care. We have continued to
expand our product assortment to meet customer needs, including a wide selection of NOSH, fresh, ethnic and local
products.
A typical Grocery Outlet basket is priced approximately 40% lower than conventional grocers and approximately
20% lower than discount retailers. Opportunistically sourced products represent approximately half of our purchasing mix.
We refer to our best opportunistic purchases as "WOW!" deals, which generally represent deep discounts of 40% to 70%
relative to conventional retailers. These products encourage repeat shopper visits and typically sell quickly due to their
compelling value, short duration and continually changing availability.
Procurement
Our flexible sourcing and supply chain model differentiates us from traditional retailers and allows us to provide
customers with quality, name-brand consumables and fresh products at exceptional values. We take advantage of
opportunities to acquire merchandise at substantial discounts that regularly arise from order cancellations, manufacturer
overruns, packaging changes and approaching "sell-by" dates. As strong stewards of our suppliers' brands, we are a
preferred partner of leading consumer packaged goods ("CPGs") with a reputation for making rapid decisions, purchasing
in significant volumes and creatively solving their inventory challenges. Our buying strategy is deliberately flexible to
allow us to react to constantly changing opportunities and customer preferences.
Our centralized sourcing team, consisting of our purchasing and inventory planning groups, have deep experience
and decades-long relationships with leading CPG companies. Our team is highly selective when evaluating opportunities
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available to us and maintains a disciplined yet solutions-oriented approach. We are always seeking out and developing new
supplier relationships to acquire desirable products at discounts that excite our customers. Our inventory planning group
collaborates with and supports our buyers to ensure we purchase the appropriate type and quantity of products in order to
maintain adequate inventory levels in key product categories.
We believe that we have a leading share of the large and growing excess inventory market. We also believe that the
overall excess inventory market continues to grow due to increased manufacturing capacities and rapidly changing product
assortments. As we grow, we expect to have even greater access to quality merchandise due to our increased scale, broader
supplier awareness and expanded geographic presence. Additionally, we believe that changing consumer preferences will
continue to support the proliferation of small and innovative CPG brands, and allow us to add new suppliers to our
network.
We supplement our opportunistic purchases with competitively priced everyday staples in order to provide a
convenient shopping experience. We typically source these staple products (e.g., milk, eggs, sugar) from multiple suppliers
to lower our costs and we generally avoid long-term supply commitments to maintain the flexibility to pursue opportunistic
buys as they arise. We also have near-term plans to develop and expand our private label products.
Supply Chain and Distribution
Over time, we have honed our supply chain operations to support our opportunistic buying approach and to quickly
and efficiently deliver products to our stores. We believe our supply chain flexibility enables us to solve suppliers'
inventory challenges and, therefore, obtain significant discounts on purchases. After agreeing to purchase product from a
supplier, we move quickly to receive, process and distribute the goods. Our systems, including our new store portal, allow
IOs real-time visibility to our inventory, significantly reducing time to shelf. IOs typically order multiple deliveries per
week resulting in higher inventory turns, lower shrink and a frequent assortment of new products on shelf.
We also have dedicated teams to handle unique situations in which products need to be reconditioned or relabeled
for sale. These items may include products without a UPC label, goods labeled for another geography, or inventory with
damaged packaging.
We rely on our distribution and transportation network, including by means of truck, ocean and rail to provide goods
to our distribution centers and stores in a timely and cost-effective manner. Deliveries to our stores occur from our
distribution centers or directly from our suppliers. We distribute inventory through eight primary distribution centers, three
of which we operate and five of which are operated by third parties. We have an in-house transportation fleet as well as
strong transportation partner relationships that provide consistent performance and timely deliveries to our stores.
We intend to continue to invest in our distribution and logistics infrastructure in order to support our anticipated
store growth over the long term, including as we enter into new geographies.
Independent Operators
IOs are independent business entities owned by one or more entrepreneurially minded individuals who typically live
in the same community as their store with a focus on ordering and merchandising the best products for their communities,
providing personalized customer service and driving improved store performance. The vast majority of the IOs operate a
single store, with most working as a two-person team to leverage complementary operator skill sets. We encourage the IOs
to establish local roots and actively participate in their communities to foster strong personal connections with customers.
We generally share 50% of store-level gross profits with IOs, thereby incentivizing them to grow their business
profitably and realize financial upside. The independent operator agreement (the "Operator Agreement") that we sign with
each IO gives the IO broad responsibility over store-level decision-making, unlike a store manager of a traditional retailer.
This decision-making includes merchandising, selecting a majority of products, managing inventory, marketing locally,
directly hiring, training and employing their store workers and supervising store operations to carry out our brand's
commitment to superior customer service. As a result, our IO model reduces our fixed costs, corporate overhead and
exposure to wage inflation pressures and centralized labor negotiations.
IOs leverage our national purchasing network, sophisticated ordering and information systems and field support in
order to operate more efficiently. We facilitate collaboration among IOs to share best practices through company-wide and
regional meetings, our IO intranet and other online and informal communications.
The combination of local decision-making supported by our purchasing expertise and corporate resources results in
a "small business at scale" model that we believe is difficult for competitors to replicate. Our collaborative relationship
with the IOs creates a powerful selling model allowing us to deliver customers exceptional value with a local touch.
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As of December 30, 2023, 466 of our 468 stores were operated by IOs. We have entered into an Operator
Agreement with each IO, which grants that IO a license to operate a particular Grocery Outlet Bargain Market retail store
and to use our trademarks, service marks, trade names, brand names and logos under our brand standards. The Operator
Agreement, along with our Best Business Practice Manual, defines our brand standards and sets forth the terms of the
license granted to that IO. IOs have discretion to determine the manner and means for accomplishing their duties and
implementing our brand standards. The success of this licensing arrangement depends upon mutual commitments by us and
the IO to cooperate with each other and engage in practices that protect our brand standards and the reputation of our brand
and enhance the sales, business and profit potential of the IO's store. The Operator Agreement provides that either the IO or
we may terminate the Operator Agreement for any reason on 75 days' written notice, and that we may terminate the
Operator Agreement immediately for cause.
IOs are responsible for operational decision-making for their store, including hiring, training and employing their
own workers as well as ordering and merchandising products. The IO orders merchandise solely from us, which we, in
turn, deliver to IOs on consignment. As a result, we retain ownership of all merchandise until the point in time that
merchandise is sold to a customer. Under the Operator Agreement, IOs are given the right to select a majority of
merchandise that is sold in their store. IOs choose merchandise from our order guide according to their knowledge and
experience with local customer purchasing trends, preferences, historical sales and other related factors.
IOs are able to uniquely display and merchandise product in order to appeal to their local customer base. IOs also
have discretion to adjust pricing in response to local competition or product turns, provided that the overall outcome based
on an average basket of items comports with our reputation for selling quality name-brand consumables and fresh products
and other merchandise at significant discounts. IOs are expected to engage in local marketing efforts to promote their store
and enhance the reputation and goodwill of the Grocery Outlet brand. To protect our brand and reputation, the Operator
Agreement requires IOs to adhere to brand standards, including cleanliness, customer service, store appearance, conducting
their business in compliance with all laws and observing requirements for storing, handling and selling merchandise.
As consignor of all merchandise, the aggregate sales proceeds belong to us. We, in turn, pay IOs a commission that
is generally 50% of the store's gross profit in exchange for the IO's services in staffing and operating the store. Any spoiled,
damaged or stolen merchandise, markdowns or price changes impact gross profit and therefore the IO's commission. We
generally split these losses equally with IOs. As a result, IOs are exposed to the risk of loss of such merchandise and are
incentivized to minimize any such losses. Our relationship with the IOs is an important part of our business. To alleviate
the disruption caused by the system upgrades that we implemented in late August 2023 and are more fully described below
under "Business Technology", we elected to provide incremental commission support to IOs beginning in the third quarter
of fiscal 2023 and extending into the first quarter of fiscal 2024.
We lease and build out each Grocery Outlet location. Under the Operator Agreement, we provide IOs with the right
to occupy the store premises solely to operate the retail store on the terms set forth in the Operator Agreement. The
Operator Agreement specifies the retail store that the IO is entitled to operate, but it does not grant the IO an exclusive
territory, restrict us from opening stores nearby, or give the IO preference to relocate to another store as opportunities arise.
As the store tenant, we fund the build-out of the store including racking, refrigeration and other equipment (which we
maintain ownership of) and pay rent, common area maintenance and other lease charges. IOs must cover their own initial
working capital requirements and acquire certain store and safety assets. IOs may fund their initial store investment from
their existing capital, a third-party loan or, most commonly, through a loan from us (an "IO Note"). The IOs are required to
hire, train and employ a properly trained workforce to enable the IO to fulfill its obligations under the Operator Agreement.
IOs are responsible for expenses required for business operations, including all labor costs, utilities, credit card processing
fees, supplies, taxes (i.e., withholding, contributions and payroll taxes and income taxes on commissions paid to them),
fines, levies and other expenses attributable to their operations.
In a typical year, we receive and filter thousands of leads for prospective new IOs in pursuit of smart and
entrepreneurially minded retail leaders to support our continued growth. After a robust screening and interview process, we
select the top candidates to enter a rigorous Aspiring Operator in Training ("AOT") program with the goal of potentially
becoming an IO. AOTs receive on-the-job training as an employee of an experienced IO that applies to serve as a training
store for us, which gives AOTs the chance to experience first-hand what running a Grocery Outlet and managing
employees will require. We supplement on-the-job training with classes at our headquarters, when available, and through
online tutorials. Upon successful completion of the training program, AOTs submit business plans to apply for new stores
as they become available. Those business plans generally include a competitive analysis of the local market, operational
strategy, marketing plan and projected financial performance. Based on the strength of that business plan, including an
AOT's familiarity with the local market, we ultimately select an IO as new store opportunities open and facilitate the
transition.
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Our Stores and Expansion Opportunities
As of December 30, 2023, our 468 total stores averaged approximately 14,000 square feet on the sales floor. We
lease substantially all of our store locations, with initial lease terms of generally ten years and options to renew for two or
three successive five-year periods.
Our stores are convenient, neatly organized, well maintained and easy to navigate with wide aisles and clear signage
to guide the customer through our various departments such as produce, beer and wine and fresh meat and seafood. The
stores require neither membership fees nor bulk purchases for customers to save money and have a high level of customer
service. Upon entering a store, customers are greeted by signage introducing the IOs, a tailored selection of fresh produce
and other perishables, followed by a "Power Wall" displaying some of our most compelling offerings.
Stores are assorted and merchandised uniquely by IOs providing a "WOW!" treasure hunt shopping experience. A
majority of the assortment in each Grocery Outlet store is selected by IOs based on local preference and shopping history
while the remaining assortment is delivered to stores to support marketing circulars and manage "sell-by" dates. We have
several customized systems and tools in place, including our ordering system that allows IOs to see our real-time inventory
and provides ordering suggestions based on local store characteristics.
We continue to implement operational initiatives to support IOs in enhancing the customer experience. We develop
and improve tools that provide IOs with actionable insights on sales, margin and customer behavior, enabling them to
further grow their business. We seek to continuously improve our inventory planning tools to help IOs make better local
assortment decisions while reducing out-of-stock items and losses related to product markdowns, throwaways and theft
("shrink"). We also regularly deploy updated fixtures, signage and enhanced in-store marketing to further improve the
shopping experience, which we believe results in higher customer traffic and average basket sizes.
We believe that new store growth remains our biggest driver of long-term stockholder value. We further believe the
success of our stores across a broad range of geographies, population densities and demographic groups creates a
significant opportunity to profitably increase our store count. In fiscal 2023 we opened 28 new stores in California (10),
Maryland (5), Pennsylvania (4), Washington (2), Nevada (2), New Jersey (2), Oregon (1), Idaho (1) and first store in Ohio
(1). We deploy a store model that generates robust store-level financial results, strong cash flow and attractive return. We
have a dedicated real estate team that utilizes a rigorous site selection process in order to source new store locations that
generate strong overall returns and generally targets new stores of between 15,000 and 20,000 total square feet with an
average of 4,000 square feet of non-selling space.
We believe our white space remains vast with the potential to operate approximately 4,800 stores across the United
States. Our new store growth efforts for fiscal 2024 and beyond remain focused on organic growth together with new real
estate opportunities (such as our pending acquisition of United Grocery Outlet) that align with our long-term geographic
expansion and store growth strategies. Complementary growth opportunities include expanding strategic relationships with
large property owners, evaluating opportunistic real estate lists, and exploring strategic regional acquisitions. We believe
organic growth combined with these complementary opportunities will enable us to grow our store base on average
approximately 10% per year.
Marketing
Our ability to consistently deliver "WOW!" deals that generate customer excitement is our strongest marketing tool.
We believe our value proposition has broad appeal with bargain-minded consumers. We promote brand awareness and
drive customers to shop through centralized marketing initiatives along with local IO marketing efforts. As a result of this
approach and local marketing campaigns funded by IOs, our marketing expense as a percent of sales is relatively low.
We focus our centralized marketing efforts to build brand awareness and communicate specific in-store deals to
drive customer traffic, primarily through digital ads, emailed "WOW! Alerts," social media, television and radio
commercials and in-store and outdoor signage. We have increased our usage of digital advertising, allowing us to more
quickly develop, deploy and target marketing communications based on our changing inventories and store- specific deals.
We also market via television, streaming television platforms and radio (terrestrial and digital) to specific markets to build
brand awareness and highlight the value we provide. We reinforce these efforts with in-store price and item signage as well
as outdoor marketing via billboards and truck wraps. In fiscal 2023, we launched a mobile personalization app in our
Washington, Oregon, Pennsylvania, Idaho, Maryland, New Jersey and Ohio stores and we plan to launch the app to our
stores in California and Nevada by the end of the first quarter of fiscal 2024. The app allows customers to track their
savings and provides new, trending and top selling items as well as curated product recommendations based on user
preferences. Further, the app provides us with critical information to make our marketing efforts more effective and
efficient.
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IOs develop and fund their local marketing plan to drive customer engagement. IO efforts include community
outreach such as partnering with food banks, sponsoring youth athletic programs and offering discounts to veterans. In
addition, IOs develop and manage their own social media marketing platforms, posting creative and compelling content.
Competition
We compete for consumer spend with a diverse group of retailers, including mass, discount, conventional grocery,
department, drug, convenience, hardware, variety, online and other specialty stores. These businesses compete with us on
the basis of price, selection, quality, customer service, convenience, location, store format, shopping experience, or any
combination of these or other factors. They may also compete with us for products and locations. We also face internally
generated competition when we open new stores in markets we already serve.
The competitive landscape is highly fragmented and localized; however, our customers most often cite Walmart and
Safeway as retailers where they also shop for consumables. We see discount retailers of consumable products, which
include Costco, WinCo, Target, Trader Joe's, Aldi and Lidl, as competitors given their broad product offerings at low
prices relative to conventional grocery stores. We compete with both conventional grocery stores and discounters by
offering an ever-changing selection of name-brand products in a fun, treasure hunt shopping environment at a significant
discount.
Many competitors and a number of pure online retailers are attempting to attract customers by offering various
forms of e-commerce. We have embraced online and digital marketing, including launching a mobile personalization app
during fiscal 2023, which we plan to continue to expand in fiscal 2024, and rolling out online shopping to our stores
through partnerships with online grocery delivery companies in recent years.
Beyond competition for consumers, we compete against a fragmented landscape of opportunistic purchasers,
including retailers (e.g., Big Lots and 99 Cents Only) and wholesalers to acquire excess merchandise for sale in our stores.
Our established relationships with most of our suppliers along with our distribution scale, buying power, financial
credibility and responsiveness often makes us the first call for available deals.
Business Technology
Our information systems provide a broad range of business process assistance and real-time data to support our
purchasing and planning approach, merchandising team and strategy, multiple distribution center management, store and
operational insight and financial reporting. We selected and developed these technologies to provide the flexibility and
functionality to support our unique buying and selling model as well as to identify and respond to merchandising and
operating trends in our business.
The ongoing modernization, enhancement and maintenance of our information systems have allowed us to support
the growth in our business and store base. We have modernized and added several systems that provide us additional
functionality and scalability in order to better support operational decision-making, including enhanced point of sale,
warehouse management, human resource planning, business intelligence, vendor tracking and lead management, store
communications, real estate lease management and financial planning and analysis systems.
We modify, update and replace our systems and infrastructure from time to time, including by adding new hardware,
software and applications; maintaining, updating or replacing legacy programs; converting to enhanced systems;
integrating new service providers; and adding enhanced new functionality, such as cloud computing technologies. In
addition, we have a customized enterprise resource planning system, components of which have been replaced over the
past several years, including our financial ledger, inventory management platform and product data warehouse system,
which were replaced in late August 2023. As previously disclosed, the implementation of these system upgrades resulted in
ordering and inventory disruptions, which impacted our results of operations during the remainder of fiscal 2023. We also
will continue to identify and implement productivity improvements through both operational initiatives and system
enhancements, such as category assortment optimization, improved inventory management tools and greater purchasing
specialization.
We also have built a series of tools that empower IOs to make intelligent decisions to grow their business from
improving product ordering, reducing shrink, and gaining intelligence into their store performance and profitability. We
believe these investments have resulted in valuable business insights and operational improvements.
8
Trademarks and Other Intellectual Property
We own federally registered trademarks related to our brand, including "GROCERY OUTLET BARGAIN
MARKET", "WOW!", "NOSH" and "BARGAIN BLISS" In addition, we maintain trademarks for the images of certain
logos that we use, including the "GROCERY OUTLET BARGAIN MARKET" logo, the "NOSH" logo and the "WOW!"
logo. We are also in the process of pursuing several other trademarks to further identify our services. We have disclaimed
the terms "GROCERY OUTLET" and "MARKET" with respect to our "GROCERY OUTLET BARGAIN MARKET"
trademarks, among other disclaimed terms with respect to our registered trademarks and trademark applications.
Our trademark registrations have various expiration dates; however, assuming that the trademark registrations are
properly renewed, they have a perpetual duration. We also own several domain names, including www.groceryoutlet.com
and www.ownagroceryoutlet.com, and registered and unregistered copyrights in our website content. Our Operator
Agreement grants the IOs a limited, non-exclusive license to use our trademarks solely in connection with the operation
and promotion of their store and not in connection with other activities. To maintain quality of use of our trademarks, we
exercise actual control over the IO's use of our trademarks and IOs are not permitted to sublicense our trademarks to others.
We attempt to obtain registration of our trademarks as practical and pursue infringement of those marks when appropriate.
We rely on trademark and copyright laws, trade-secret protection and confidentiality, license and other agreements with the
IOs, suppliers, employees and others to protect our intellectual property.
Regulations
We and the IOs are subject to regulation by various federal agencies, including the Food and Drug Administration
(the "FDA"), the Federal Trade Commission (the "FTC"), the U.S. Department of Agriculture (the "USDA") the Consumer
Product Safety Commission and the Environmental Protection Agency. We and the IOs are also subject to various federal,
state and local laws and regulations, including those governing labor and employment, including minimum wage
requirements and employee safety, advertising, privacy, safety and environmental protection and consumer protection
regulations, including those that regulate retailers and/or govern product standards, the importation, transportation,
promotion and sale of merchandise, packaging material safety and recycling and the operation of stores and warehouse
facilities. In addition, we and the IOs must comply with provisions regulating health and sanitation standards, food
labeling, non-food labeling and licensing for the sale of food and alcoholic beverages. We actively monitor changes in
these laws. In addition, we and the IOs are subject to environmental laws, including but not limited to hazardous waste
laws, regulations related to refrigeration and stormwater, pursuant to which we and/or the IOs could be strictly and jointly
and severally liable, regardless of our knowledge or responsibility.
Food and Dietary Supplements—The FDA regulates the safety of certain food and food ingredients, as well as
dietary supplements under the federal Food, Drug, and Cosmetic Act (the "FDCA"). Similarly, the USDA's Food Safety
Inspection Service ensures that the country's commercial supply of meat, poultry, catfish and certain egg products is safe,
wholesome and correctly labeled and packaged.
The Food Safety Modernization Act (the "FSMA") amended the FDCA in 2011 and expanded the FDA's regulatory
oversight of all supply chain participants. Most of the FDA's promulgated regulations are now in effect and mandate that
risk-based preventive controls be observed by the majority of food producers. This authority applies to all domestic food
facilities and, by way of imported food supplier verification requirements, to all foreign facilities that supply food products.
The FDA also exercises broad jurisdiction over the labeling and promotion of food. Under certain circumstances,
this jurisdiction extends even to product-related claims and representations made on a company's website or similar printed
or graphic media. All foods, including dietary supplements, must bear labeling that provides consumers with essential
information with respect to standards of identity, net quantity, nutrition facts, ingredient statements and allergen
disclosures. The FDA also regulates the use of structure/function claims, health claims, nutrient content claims and the
disclosure of calories and other nutrient information for frequently sold items. In addition, compliance dates on various
nutrition initiatives that impacted supply chain participants, such as in relation to partially hydrogenated oils, went into
effect in 2021.
The FDA has comprehensive authority to regulate the safety, ingredients, labeling and good manufacturing practices
for dietary supplements. The Dietary Supplement Health and Education Act (the "DSHEA") amended the FDCA in 1994
and expanded the FDA's regulatory authority over dietary supplements. Through DSHEA, dietary supplements became a
regulated commodity while also allowing structure/function claims on products. However, no statement on a dietary
supplement may expressly or implicitly represent that it will diagnose, cure, mitigate, treat or prevent a disease.
9
EBT Payments—Approximately 11% of our net sales in fiscal 2023 were in the form of Electronic Benefits Transfer
("EBT") payments and a substantial portion of these payments may be related to benefits associated with the Supplemental
Nutritional Assistance Program ("SNAP"). The U.S. Department of Agriculture regulates these programs and their
eligibility requirements. The registration and ongoing compliance requirements for SNAP participation are fairly complex
and each of the IOs holds their registration under the name of their business entity and is responsible to ensure that their
employees consistently comply with all SNAP rules.
Food and Dietary Supplement Advertising—The FTC exercises jurisdiction over the advertising of foods and dietary
supplements. The FTC has the power to impose monetary sanctions, consent decrees and/or other penalties that can
severely limit a company's business practices. In recent years, the FTC has instituted numerous enforcement actions against
companies carrying dietary supplements for failure to have adequate substantiation for claims made in advertising or for
the use of false or misleading advertising claims.
Compliance—As is common in the retail industry, we rely on our suppliers and manufacturers to ensure that the
products they manufacture and sell to us comply with all applicable regulatory and legislative requirements. In general, our
purchase orders require that suppliers be compliant and represent and warrant to compliance with laws and require
indemnification and/or insurance from our suppliers and manufacturers.
However, even with adequate insurance and indemnification, any claims of non-compliance could significantly
damage our reputation and consumer confidence in products we sell. In addition, the failure of such products to comply
with applicable regulatory and legislative requirements could prevent us from marketing the products or require us to recall
or remove such products from our stores. In order to comply with applicable statutes and regulations, our suppliers and
manufacturers have from time to time reformulated, eliminated or relabeled certain of their products.
We also source a portion of our products from outside the United States. The U.S. Foreign Corrupt Practices Act and
other similar anti-bribery and anti-kickback laws and regulations generally prohibit companies and their intermediaries
from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our policies and
our supplier compliance agreements mandate compliance with applicable law, including these laws and regulations.
Human Capital Management
Employees—Our people are at the heart of who we are and what we do. They are key to achieving our business
goals and growth strategy. As of December 30, 2023, we had 997 employees, 901 of whom were full-time and 96 of whom
were part-time. As of December 30, 2023, 516 of our employees were based at our corporate headquarters in Emeryville,
California, and our Leola, Pennsylvania office, 158 of which were classified as field employees. As of December 30, 2023,
our distribution centers employed 355 persons. The remaining employees were employees in our Company-operated stores.
As of December 30, 2023, 126 of our employees were union employees, all of whom were employees at two Company-
operated stores. We have experienced no material interruptions of operations due to disputes with our employees and
consider our relations with our employees to be very good.
Our mission is to Touch Lives for the Better. To do this, we work together to foster a culture grounded in talented
and passionate people who live our values: entrepreneurship, integrity, achievement, family, service to others, diversity and
fun. Our values translate into our human capital offerings to recruit, engage, develop, reward and retain employees who
believe in our mission and emulate our values.
Employee Development—We seek to grow leaders at every level of our organization by creating a culture of
mentoring and coaching. As part of our succession planning, we prioritize growing talent internally within our organization
and invest resources to develop our employee's skill sets and career path. As an example, our current Chief Executive
Officer, Robert J. Sheedy, Jr., joined Grocery Outlet in 2012 as our Vice President of Strategy and thereafter was promoted
three times before becoming President and Chief Executive Officer in January 2023. Some of our offerings during 2023
(offered virtually and, in some cases, in person) included:
•
•
•
Certification program opportunities, including offerings in personal growth and professional development;
Lunch and learn events, featuring a wide variety of personal development topics and industry speakers; and
Individual coaching for leadership development, and other leadership training on an ad hoc basis
We encourage internal promotions and hiring for open positions. During fiscal 2023, we promoted 79 corporate and field
employees.
Employee Health and Safety—Providing a safe and compliant working environment and ensuring safety is critical to
the Company. We have robust safety programs in place to prevent workplace injury and illness. In recent years, we have
refined and adopted additional safety training initiatives in a variety of areas, including among others, hazard
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communications, fire prevention, emergency action playbooks, blood borne pathogens, health illness avoidance, and active
shooter. These refinements and initiatives are ongoing. We also maintain a Safety Committee for our distribution center
employees and our Safety Department regularly provides new injury avoidance information at monthly distribution center
employee-wide meetings. Additionally, we provide detailed health and safety resources to our independently operated
stores, including specific information and requirements by state to support their adherence to compliance.
Employee Compensation and Benefits—We provide compensation and comprehensive benefits designed to recruit,
reward and retain the talent necessary to advance our mission, meet our business goals and execute our long-term growth
strategy. Our compensation components vary by employee level and include cash based compensation, cash bonuses,
equity awards and a profit-sharing program. Additionally, we provide generous and highly competitive health and welfare
benefits programs.
Equity, Diversity and Inclusion—We report annually on employment data, including ethnicity, in line with Equal
Opportunity Commission ("EEOC") guidelines and we believe that a diverse and inclusive team is critical to our long-term
business success.
Workforce Demographics
Gender Breakdown
All Employees
Women
Men
Director & above roles
Women
Men
Racial & Ethnic Breakdown (1)
All Employees
Hispanic/Latino, Asian, Black/African America, Native Hawaiian/Other Pacific Islander, Multiracial,
or American Indian/Alaskan Native
White
Director & above roles
Hispanic/Latino, Asian, Black/African America, Native Hawaiian/Other Pacific Islander, Multiracial,
or American Indian/Alaskan Native
White
_______________________
(1)
Racial and Ethnic data excludes employees who chose not to disclose or left the field blank.
December 30,
2023
37 %
63 %
37 %
63 %
64 %
36 %
35 %
65 %
In fiscal 2023, of the 79 promoted corporate and field employees, 49% were female and 46% were racially and
ethnically diverse, excluding employees who chose not to disclose or left the field blank.
We have several employee resource groups that enhance our inclusive and diverse culture, including our overarching
Equity, Diversity and Inclusion Council, our Black Partnership Network, and our WOW! (Winning with Outstanding
Women) Network. We also provide regular training on diversity and inclusion topics, including those relating to current
events in our communities.
We will continue to focus on genuine equal opportunity for all in hiring, retention and advancement, and cultivating
an inclusive and diverse corporate culture through continued education, employee resource groups and education and
development opportunities across our organization.
We strive to nurture and uphold an inclusive and diverse environment, free from discrimination of any kind,
including sexual or other discriminatory/harassing behavior. We do this by setting an appropriate tone at the top with an
open-door policy, having robust policies/procedures in our Code of Ethics and Whistleblower Policy as well as maintaining
an internal audit function - all of which support compliance with regulations and ethical behavior.
11
Acquisition of United Grocery Outlet
On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a stock purchase agreement
with BBGO Acquisition, Inc., a Delaware corporation ("Holdings"), specified parties therein that beneficially own
Holdings (the "Sellers"), and Southvest Fund VII, L.P., a Delaware limited partnership (the "Sellers' Representative", and
together with the Sellers, the "Seller Parties" and, together with Holdings and Grocery Outlet, the "Parties") to acquire all
of the issued and outstanding capital stock of Holdings for approximately $62.0 million in cash, subject to customary
purchase price adjustments (the "Transaction"). We expect to finance the Transaction with available cash.
Holdings is the owner of all of the issued and outstanding capital stock of The Bargain Barn, Inc., a Tennessee
corporation doing business as United Grocery Outlet ("United Grocery Outlet"). United Grocery Outlet operates 40
discount grocery stores across six adjacent states we do not operate in currently (Tennessee, North Carolina, Georgia,
Alabama, Kentucky and Virginia) and a company-operated distribution center. With an opportunistic buying model, similar
company values and adjacent geographic footprint, we believe United Grocery Outlet will be a strong strategic fit with our
business. The transaction is expected to close early in the second quarter of fiscal 2024 and is subject to customary closing
conditions. Unless otherwise stated, none of the disclosures in this Report reflect our pending acquisition of United
Grocery Outlet.
Website Disclosure
We use our website, https://investors.groceryoutlet.com, as a channel of distribution of Company information.
Financial and other important information about us is routinely accessible through and posted on our website. Accordingly,
investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls
and webcasts. The contents of our website and information accessible through our website is not, however, incorporated by
reference or a part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are
available, free of charge, on our website as soon as practicable after the we file the reports with the SEC.
Information about our Executive Officers
The following table sets forth information about our executive officers as of the date of this filing:
Name
Robert J. Sheedy, Jr
Charles C. Bracher
Ramesh Chikkala
Andrea R. Bortner
Pamela B. Burke
Luke D. Thompson
Steven K. Wilson
Calvin Chung
Age Position
49 President and Chief Executive Officer
51 EVP, Chief Financial Officer
59 EVP, Chief Operations Officer
61 EVP, Chief Human Resources Officer
56 EVP, Chief Stores Officer
51 EVP, General Counsel and Secretary
59 EVP, Chief Purchasing Officer
60 SVP, Chief Store Development Officer
Set forth below is a brief description of the business experience of our executive officers. All of our officers serve at
the discretion of our Board of Directors.
Robert J. Sheedy, Jr. has served as our President, Chief Executive Officer and as a director since January 2023.
Previously, Mr. Sheedy served as our President from January 2019 to December 2022, as our Chief Merchandise,
Marketing & Strategy Officer from April 2017 to December 2018, our Chief Merchandise & Strategy Officer from March
2014 to April 2017 and our Vice President, Strategy from April 2012 to February 2014. Before joining us, Mr. Sheedy
served in various roles at Staples Inc., an office supply company, from 2005 to 2012, most recently as its Vice President,
Strategy.
Charles C. Bracher has served as our EVP, Chief Financial Officer since August 2012. Before joining us, Mr.
Bracher served in various roles at Bare Escentuals, Inc., a mineral cosmetics company, from 2005 to 2012, most recently as
Chief Financial Officer. Mr. Bracher began his career in the Investment Banking Division of Goldman, Sachs & Co. As
previously reported, on December 8, 2023, Mr. Bracher submitted his resignation, effective March 1, 2024, to pursue
another opportunity, and he will serve thereafter as a consultant to the Company to assist in the transition of his role.
Ramesh Chikkala has served as our EVP, Chief Operations Officer since January 2024. Before joining us, Mr.
Chikkala served as a senior advisor to the operations, supply chain, and technology practices at A.T. Kearney, Inc., a global
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management consulting firm, from August 2019 to January 2024. From July 2006 to July 2019, Mr. Chikkala held several
roles of increasing responsibility at Walmart Inc., a global omnichannel retailer, including as Senior Vice President, Global
Supply Chain (Omnichannel) and Food Manufacturing (April 2013 to July 2019), Senior Vice President, Information
Technology (January 2009 to March 2013), and Vice President, Information Technology (July 2006 to December 2008). In
addition, he also held senior operations and supply chain roles at retailers including Family Dollar Stores, Inc. (2001 to
2006), Gap, Inc. (1997 to 2001) and Food Lion, LLC (1995 to 1996).
Andrea R. Bortner has served as our EVP, Chief Human Resources Officer since March 2020. Before joining us,
Ms. Bortner served as Chief Human Resources Officer at Maxar Technologies, Inc., a space technology company, from
August 2016 to October 2019 and as Chief Human Resources Officer at Catalina, an advertising and marketing company,
from August 2012 to June 2016.
Pamela B. Burke has served as our EVP, Chief Stores Officer since January 2022. Ms. Burke previously served as
our EVP, Chief Administrative Officer, General Counsel and Secretary from January 2019 to December 2021 and our
General Counsel and Secretary from June 2015 to December 2018. Before joining us, Ms. Burke served in various
management positions at CRC Health Group, Inc., a provider of specialized behavioral health services, most recently as
Senior Vice President of Legal, HR and Risk from April 2010 to February 2015.
Luke D. Thompson has served as our EVP, General Counsel and Secretary since February 2024. Previously, he
served as our SVP, General Counsel and Secretary from July 2022 until February 2024. Before joining us, Mr. Thompson
served in various roles at Big 5 Sporting Goods, a sporting goods retailer, from 2002 to 2022, most recently as Executive
Vice President, General Counsel and Secretary.
Steven K. Wilson has served as our EVP, Chief Purchasing Officer since January 2023. Previously, Mr. Wilson
served as SVP, Chief Purchasing Officer from September 2020 to December 2022, as our Senior Vice President of
Purchasing from February 2018 to August 2020 and as our Vice President of Purchasing from July 2006 to January 2018.
Prior to being appointed Vice President of Purchasing, Mr. Wilson served in various positions of increasing responsibility
with us since 1994.
Calvin Chung has served as our SVP, Chief Store Development Officer since March 2023. Mr. Chung previously
served as SVP & Chief Development Officer of Office Depot, a provider of retail consumer and small business products
and services, from August 2018 to March 2023, as Senior Vice President, Global Real Estate at Levi Strauss & Co., an
international apparel company, from October 2016 to August 2018, and as Vice President, Real Estate Development—Asia
at Walmart from February 2013 to October 2016. Prior to Walmart he served as Director of Property Development for
Target Corporation.
The Board of Directors intends to appoint Lindsay E. Gray as Interim Chief Financial Officer, effective March 1,
2024, and she will continue to serve as Senior Vice President, Accounting. Ms. Gray will be principal financial officer
during her interim service and will continue to be the principal accounting officer. Ms. Gray, age 39, has been our Senior
Vice President, Accounting since January 2023. She also served as the Company's Vice President, Corporate Controller
from August 2016 to December 2022. Previously, Ms. Gray worked at Beverages & More, Inc. (dba BevMo!), a U.S.
specialty beverage retailer, including as Controller from August 2015 to August 2016 and as Director of Financial
Reporting from November 2010 to August 2015. In addition, Ms. Gray served as an Audit Senior at Deloitte and Touche
LLP from September 2006 to July 2010.
13
ITEM 1A. RISK FACTORS
The following risk factors are important to understanding various statements in this Annual Report on Form 10-K or
elsewhere. The factors described below, individually or in the aggregate, could materially adversely affect our business,
business prospects, financial condition, operating results, cash flows and stock price, and may cause actual results,
performance or achievements in future periods to differ materially from those assumed, projected or contemplated.
Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge from time to time.
As discussed under "Acquisition of United Grocery Outlet" in "Item 1. Business" on February 14, 2024, Grocery
Outlet Inc., our wholly owned subsidiary, entered into a stock purchase agreement to acquire United Grocery Outlet. The
transaction is expected to close early in the second quarter of fiscal 2024 and is subject to customary closing conditions.
Unless otherwise stated, none of the disclosures in this Report reflect our pending acquisition of United Grocery Outlet.
The following is a summary of the principal risks that could adversely affect our business, operations and financial
results:
Risks Related to Our Operations
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
failure of suppliers to consistently supply us with opportunistic products at attractive pricing, which is generally
not in our control;
inability to successfully identify trends and maintain an appropriate level of opportunistic products;
failure to maintain or increase comparable store sales;
any significant disruption to our distribution network, the operations of our distributions centers and our timely
receipt of inventory;
inflation and other changes affecting the market prices of the products we sell;
risks associated with newly opened stores;
failure to open, relocate or remodel stores on schedule and on budget;
costs and successful implementation of marketing, advertising and promotions;
failure to maintain our reputation and the value of our brand, including protecting our intellectual property;
inability to maintain sufficient levels of cash flow from our operations;
risks associated with leasing substantial amounts of space;
failure to properly integrate any acquired businesses;
natural or man-made disasters, climate change, power outages, major health epidemics, pandemic outbreaks,
terrorist acts, global political events or other serious catastrophic events and the concentration of our business
operations;
failure to participate effectively in the growing online retail marketplace;
unexpected costs and negative effects if we incur losses not covered by our insurance program;
difficulties associated with labor relations and shortages;
inability to attract, train and retain highly qualified employees or the loss of key personnel;
failure to remediate our material weakness in our internal control over financial reporting;
Risks Related to Our Business Environment
•
•
risks associated with economic conditions;
competition in the retail food industry;
• movement of consumer trends toward private labels and away from name-brand products; risks associated with
deploying our own private label brands;
Risks Related to Our IO Model
•
•
inability to attract and retain qualified independent operators ("IOs");
failure of our IOs to successfully manage their business;
14
•
•
•
•
•
•
•
failure of our IOs to repay notes outstanding to us;
inability of our IOs to avoid excess inventory shrink;
any loss or changeover of an IO;
legal proceedings initiated against our IOs;
legal challenges to the IO/independent contractor business model;
failure to maintain positive relationships with our IOs;
risks associated with actions our IOs could take that could harm our business;
Risks Related to our Information Technology Systems, Data Protection and Cybersecurity
• material disruption to our information technology systems;
•
failure to maintain the security of information we hold relating to personal information or payment card data of
our customers, employees and suppliers;
Risks Related to Legal and Regulatory Risks
•
•
•
risks associated with products we and our IOs sell;
risks associated with laws and regulations generally applicable to retailers;
legal proceedings from customers, suppliers, employees, governments or competitors;
Risks Associated with our Indebtedness
•
•
our substantial indebtedness could affect our ability to operate our business, react to changes in the economy or
industry or pay our debts and meet our obligations;
restrictive covenants in our debt agreements may restrict our ability to pursue our business strategies, and failure
to comply with any of these restrictions could result in acceleration of our debt;
Risks Related to Accounting, Tax and Financial Statement Matters
•
•
risks associated with tax matters, including changes in tax laws;
changes in accounting standards and subjective assumptions, estimates and judgments by management related to
complex accounting matters;
Risks Related to Our Common Stock
•
•
•
our quarterly operating results fluctuate and may fall short of prior periods, our projections or the expectations of
securities analysts or investors;
future sales, or the perception of future sales, by us or our existing stockholders in the public market could cause
the market price for our common stock to decline; and
provisions in our organizational documents could delay or prevent a change of control.
For a more complete discussion of the material risks facing our business, see below.
15
Risks Related to Our Operations
We depend on suppliers to consistently supply us with opportunistic products at attractive pricing, which is
generally not in our control.
Our business is dependent on our ability to strategically source a sufficient volume and variety of opportunistic
products at attractive pricing. While opportunistic buying, operating with appropriate inventory levels and frequent
inventory turns are key elements of our business strategy, they subject us to risks related to the pricing, quantity, mix,
quality and timing of inventory flowing to our stores. We do not have significant control over the supply, cost or
availability of many of the opportunistic products offered for sale in our stores. Shortages or disruptions in the availability
of quality products that excite our customers and drive customer traffic could have a material adverse effect on our
business, financial condition and results of operations. As our store base continues to grow, our ability to secure
opportunistic products in sufficient quantities may become more difficult.
All of our inventory is acquired through purchase orders and we generally do not have long-term contractual
agreements with our suppliers that obligate them to provide us with products exclusively or at specified quantities or prices,
or at all. Any of our current suppliers may decide to sell products to our competitors and may not continue selling products
to us. In order to retain our competitive advantage, we need to continue to develop and maintain relationships with
qualified suppliers that can satisfy our standards for quality and our requirements for delivery of products in a timely and
efficient manner at attractive prices. The need to grow existing relationships and develop new relationships with qualified
suppliers is particularly important as we seek to continue to expand our operations and enhance our product offerings in the
future.
Manufacturers and distributors of name-brand, large volume products have become increasingly consolidated.
Further consolidation of manufacturers or distributors could reduce our supply options and detrimentally impact the terms
under which we purchase products. If one or more of our existing significant suppliers were to be unable or unwilling to
continue providing products to us on attractive terms, or at all, we may have difficulty finding replacement suppliers on
commercially reasonable terms or at all. The loss of one or more of our existing significant suppliers or our inability to
develop relationships with new suppliers could reduce our competitiveness, slow our plans for further expansion and cause
our net sales and operating results to be materially adversely affected.
Our supply chain is subject to risks, including distribution and transportation, labor disputes or constraints, union
organizing activities, financial liquidity, inclement weather, natural disasters, significant public health and safety events,
supply constraints and general economic and political conditions that could limit our suppliers' ability to provide us with
quality products. As discussed elsewhere in these risk factors, these risks have in the past delayed or precluded, and may in
the future delay or preclude, delivery of product to us on a timely basis or at all.
We may not be able to successfully identify trends to meet consumer demand and maintain an appropriate level of
opportunistic products.
We depend on repeat visits by our customer base to drive sales, and we rely on desirable opportunistic products at
discounts to excite our customers to make such repeat visits. Consumer preferences often change rapidly and without
warning. We may not successfully address consumer trends or be able to acquire desirable opportunistic products, and we
expect competition for customers to increase as online shopping by customers continues to expand.
We generally make individual purchase decisions for products that become available, and these purchases may be
for large quantities that we may not be able to sell on a timely or cost-effective basis. Some of our products are sourced
from suppliers at significantly reduced prices for specific reasons, and we are not always able to purchase specific products
on a recurring basis. To the extent that some of our suppliers are better able to manage their inventory levels and reduce the
amount of their excess inventory, the amount of over-stock and short-dated products available to us could also be
materially reduced, making it difficult to deliver products to our customers at attractive prices. Maintaining adequate
inventory of quality, name-brand products requires significant attention and monitoring of market trends, local markets and
developments with suppliers and our distribution network, and it is not certain that we or our IOs will be effective in
inventory management.
We base our purchases of inventory, in part, on our sales forecasts. If our sales forecasts overestimate customer
demand, we may experience higher inventory levels and need to take markdowns on excess or slow-moving inventory,
leading to decreased profit margins. Conversely, if our sales forecasts underestimate customer demand, we may have
insufficient inventory to meet demand, leading to lost sales, either of which could materially adversely affect our financial
performance. In addition, a majority of the assortment in each Grocery Outlet store is selected by IOs based on local
preference and shopping history, and the inability of the IOs to successfully identify trends in the local market could
materially adversely affect our financial performance.
16
Our long-term success depends in part on our ability and the ability of the IOs to maintain or increase comparable
store sales, and if we are unable to continue to achieve comparable store growth over the long-term, our
profitability and performance could be materially adversely impacted.
The IOs are responsible for store operations. Our success depends on, among other things, increasing comparable
store sales through our opportunistic purchasing strategy and the ability of the IOs to increase sales and profits. To increase
net sales, and therefore comparable store sales growth and profits, we and the IOs focus on delivering value and generating
customer excitement by strengthening opportunistic purchasing, providing an increasing number of everyday products,
optimizing inventory management, maintaining strong store conditions and effectively marketing current products and new
product offerings. Competition and pricing pressures from competitors and suppliers may also materially adversely impact
our comparable sales if we lose customers as a result.
After many years of consecutive growth in comparable store net sales, we had year-over-year declines in fiscal
2021, primarily due to outsized financial performance in fiscal 2020 and continued impacts of the COVID-19 pandemic,
including changes in consumer behavior, supplier issues and other related challenges. While fiscal 2022 and 2023 were
years of comparable positive sales growth, our comparable store sales growth in future years could be lower than our
historical average or our future target for many reasons, many of which we do not significantly control, including general
economic conditions that may not favor our model, operational performance (including by the IOs), price inflation or
deflation, or changes in response to competitive factors, changes in our existing supplier relationships or our inability to
develop new supplier relationships, industry competition (e-commerce), new competitive entrants near our stores, price
changes in response to competitive factors, any comparison year or quarter having above-average net sales results, possible
supply shortages or other operational disruptions, the number and dollar amount of customer transactions in our stores, our
ability to provide product or service offerings that generate new and repeat visits to our stores and the level of customer
engagement that we and the IOs provide in our stores. In addition, we may not accurately model cannibalization by our
new stores when we open new stores in established markets, which could reduce comparable store sales.
Significant disruption in our distribution network and our timely receipt of inventory has had in recent years, and
could continue to have, an adverse impact on our operating performance.
We rely on our distribution, transportation and technology network and systems to provide goods to our distribution
centers and stores in a timely and cost-effective manner. Our stores are highly dependent on the successful operations of
our distribution, transportation and technology networks, as IOs use these systems to order multiple deliveries per week
and many of our products have a limited shelf life from the time of purchase, particularly opportunistic buys and fresh
foods. Deliveries to our stores occur from our distribution centers or directly from our suppliers. We use three primary
leased distribution centers that we operate and five primary distribution centers operated by third-parties. Any disruption,
unanticipated or unusual expense or operational failure related to these processes and systems could affect store operations
negatively. For example, during fiscal 2023 we replaced components of our enterprise resource planning system, including
our financial ledger, inventory management platform and product data warehouse system. The implementation of these
system upgrades resulted in ordering and inventory disruptions beginning in late August 2023, which resulted in reduced
net sales and gross margin. Please also see the risk factor below entitled: "Any material challenges or difficulties in
maintaining or updating our existing technology, including developing or implementing new technology could have a
material adverse effect on our business or results of operations."
We have also experienced ordering and inventory disruptions in recent years related to system issues at our third
party distribution centers. If similar circumstances were to occur and persist, they could have a material adverse impact on
our operations and our ability to generate sales and earn profits.
In addition, events beyond our control, such as disruptions in operations due to fire, adverse weather conditions or
other catastrophic events or labor disagreements, may result in delays in the delivery of merchandise to our stores. While
we maintain business interruption and cybersecurity insurance, in the event our distribution centers are shut down for any
reason, such insurance may not be sufficient and any related insurance proceeds may not be timely paid to us, and our
reputation and customer relationships could still be adversely impacted. Furthermore, there can be no guarantee that we
will be able to renew the leases or third-party distribution and transportation contracts, as applicable, on our distribution
centers on attractive terms or at all, which may increase our expenses and cause temporary disruptions in our distribution
network.
As we continue to implement our store growth strategy, our distribution centers may not have sufficient capacity to
optimally support all of our stores and effectively managing our distribution network and distribution centers will become
more complex. Our new store locations receiving shipments may be further away from our distribution centers, which may
increase transportation costs and may create transportation scheduling strains, or may require us to add additional facilities
to the network.
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Because we are an extreme value retailer and compete to a substantial degree on price, changes affecting the market
prices of the products we sell, many of which we cannot control, including due to inflation or deflation, competition,
supplier increases in freight, supply or other operating costs, including energy prices, or worsening economic
conditions, could materially adversely affect our financial condition and operating results.
A critical differentiator of our business is our ability to offer value to our customers, including offering prices that
are substantially below those offered by some of our competitors. We carefully monitor the market prices of our products
in order to maintain our price advantage and reputation. Over the past couple years, we have experienced varying levels of
inflation, resulting in part from various supply disruptions, increased shipping and transportation costs, increased
commodity costs, increased labor costs in the supply chain and other disruptions caused by the recent economic
environment, which we have not been able to fully offset through price increases. Our IOs have experienced increased
costs related to labor and utilities, among others. If costs of goods continue to increase and our suppliers seek price
increases from us, we may not be able to mitigate such increases and have sometimes, and may continue to, increase our
prices, which could deter customer traffic and reduce the number and average basket size of customer transactions. Some
of our larger competitors are in a better position to absorb cost increases while maintaining price competitiveness. If our
competitors are more competitive on pricing relative to our pricing, we may lose customers and/or need to mark down
prices. Our gross margins and profitability also may be adversely impacted by higher supply costs that we cannot fully pass
along or if we need to lower product prices due to competition. As a result of our low-price model, the foregoing
competitive pressures may reduce our profitability and materially adversely affect our business, financial condition and
results of operations.
Our newly opened stores may negatively impact our financial results in the short-term and/or may not achieve sales
and operating levels consistent with our more mature stores on a timely basis or at all.
We have actively pursued new store growth, including in new markets, and plan to continue doing so in the future.
Our new store openings may not be successful or reach the sales and profitability levels of our existing stores, and may
impact our ability to attract and develop potential IOs. Some new stores may be located in areas with different competitive
and market conditions as well as different customer discretionary spending patterns than our existing markets. Some new
stores and future new store opportunities may be located in new geographic areas where we have limited or no meaningful
experience or brand recognition. We may experience a higher cost of entry in those markets as we build brand awareness
and drive customers to incorporate us into their shopping habits.
New store openings may negatively impact our financial results in the short-term due to the effect of store opening
costs and lower sales and contribution to overall profitability during the initial period following opening. New stores,
particularly those in new markets, build their sales volume, brand recognition and customer base over time and, as a result,
for approximately 4-5 years, generally have lower margins and higher operating expenses as a percentage of sales than our
more mature stores. New stores may not achieve sustained sales and operating levels consistent with our more mature store
base on a timely basis or at all. This lack of performance may have a material adverse effect on our financial condition and
operating results.
We may not anticipate all of the challenges imposed by the expansion of our operations into new geographic
markets. We may not manage our expansion effectively, and our failure to achieve or properly execute our expansion plans
could limit our growth or have a material adverse effect on our business, financial condition and results of operations.
Our growth strategy is highly dependent on our ability to identify and open future store locations and relocate or
remodel existing store locations in new and existing markets.
We believe that new store growth remains our biggest driver of long-term stockholder value. We opened 28 new
stores in fiscal 2023. Our ability to open stores in a timely and successful manner depends in part on the following factors:
the availability of attractive store locations (including stores that will not compete significantly with existing stores and that
can be reasonably serviced by our distribution network) and rent prices; the costs of construction and the availability of
construction labor and materials; the absence of entitlement processes or occupancy delays; the ability to negotiate
acceptable lease and development terms; our relationships with current and prospective landlords; the ability to attract
potential IOs who are strong entrepreneurs; the ability to secure and manage the inventory necessary for the launch and
operation of new stores; the availability of capital funding for expansion; and general economic conditions. Any or all of
these factors and conditions could materially adversely affect our growth and profitability.
Our long-term goal is to expand our store base by approximately 10% annually on average over the next several
years. However, we cannot assure you that we will be able to consistently (on a year-over-year basis) achieve a high level
of new store growth. Over the last few years, planned construction and opening of new stores have been, and may continue
to be, negatively impacted due to labor and materials shortages as well as longer lead times in lease execution, site
permitting and construction. These challenges impacted our organic new store growth in fiscal 2022 and 2023 and are
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expected to impact organic growth in fiscal 2024 as well. Additionally, we may expand into neighboring states and regions
in the United States and/or engage in acquisitions (such as our pending acquisition of United Grocery Outlet) to meet our
growth goals, and such expansion heightens the risks, challenges and uncertainties of development. We may not have the
level of cash flow or financing necessary to support our growth strategy. Further, much of our new store growth is in new
markets where we do not have the same brand recognition at this time. Our proposed expansion will place increased
demands on our operational, managerial and administrative resources. These increased demands could cause us to operate
our existing business less efficiently, which in turn could cause deterioration in the financial performance of our existing
stores. If we experience a decline in performance, we may slow or discontinue store openings, or we may decide to close
stores that are unable to operate in a profitable manner. If we fail to successfully implement our growth strategy, including
by opening new stores on a timely basis and on budget, our operations, financial condition and operating results would be
materially and adversely affected.
Our success depends upon the successful implementation of our marketing, advertising and promotional efforts.
We promote brand awareness and drive customers to shop through centralized marketing initiatives along with local
IO marketing efforts. We and the IOs use marketing and promotional programs to attract customers into our stores and to
encourage purchases. If we or the IOs are unable to develop and implement effective marketing, advertising and
promotional strategies, we may be unable to achieve and maintain brand awareness and repeat store visits. We may not be
able to advertise cost effectively in new or smaller markets in which we have fewer stores, which could slow growth at
such stores. Changes in the amount and degree of promotional intensity or merchandising strategies by our competitors
could cause us to have difficulties in retaining existing customers and attracting new customers. If the efficacy of our
marketing or promotional activities declines or if such activities of our competitors are more effective than ours, it could
have a material adverse effect on our business, financial condition and results of operations.
While we have launched a mobile personalization app in some states and are increasing the rollout to additional
states in fiscal 2024, which informs customers of new and top selling items, provides curated product recommendations
and tracks savings, we do not maintain a traditional loyalty program for customers, and our competitors may be able to
offer their customers promotions or loyalty program incentives that could result in fewer shopping trips to or purchases
from our stores. If we are unable to retain the loyalty of our customers, our sales could decrease and we may not be able to
grow our store base as planned, which could have a material adverse effect on our business, financial condition and results
of operations. Certain of our competitors have established, long-standing, mobile apps and personalized marketing. There
can be no assurance that our investment in this area will be repaid.
If we fail to maintain our reputation and the value of our brand, including protection of our intellectual property
rights, our sales and operating results may decline and the carrying value of our goodwill and other intangible
assets may be impaired.
We believe our continued success depends on our ability to maintain and grow the value of our brand. Brand value
is based in large part on perceptions of subjective qualities. The reputation of our company and our brand may be damaged
in all, one or some of the markets in which we do business, by adverse events at the corporate level or by an IO acting
outside of Grocery Outlet's brand standards, or by action (or inaction), by us or our IOs on issues like social policies,
merchandising, compliance related to social, product, labor and environmental standards or other sensitive topics. Further,
any perceived lack of transparency about such matters, could harm our reputation. The increasing use of social media
platforms and online forums may increase the chance that an adverse event could negatively affect the reputation of our
brand. The online dissemination of negative information about our brand, including inaccurate information, could harm our
reputation and our brand.
We regard our intellectual property, including trademarks and service marks, as having significant value, and our
brand is an important factor in the marketing of our stores. We monitor and protect against activities that might infringe,
dilute or otherwise violate our trademarks and other intellectual property and rely on trademark and other laws of the
United States, but we may not be able or willing to successfully enforce our trademarks or intellectual property rights
against competitors or challenges by others. For example, we are aware of certain companies in jurisdictions where we do
not currently operate using the term "GROCERY OUTLET." Moreover, we have disclaimed the terms "GROCERY
OUTLET" and "MARKET" with respect to our "GROCERY OUTLET BARGAIN MARKET" trademarks, among other
disclaimed terms with respect to our registered trademarks and trademark applications. If a third party uses such disclaimed
terms in its trademarks, we cannot object to such use. Additionally, if we fail to protect our trademarks or other intellectual
property rights, others may copy or use our trademarks or intellectual property without authorization, which may harm the
value of our brand, reputation, competitive advantages and goodwill and adversely affect our financial condition, cash
flows or results of operations. Actions we have taken to establish and protect our intellectual property rights may not be
adequate.
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There may in the future be opposition and cancellation proceedings from time to time with respect to some of our
intellectual property rights. We have initiated, and may in the future initiate, oppositions and cancellation proceedings to
thwart third party filings that encroach upon our intellectual property rights. In some cases, litigation may be necessary to
protect or enforce our trademarks and other intellectual property rights. Furthermore, third parties may assert intellectual
property claims against us, and we may be subject to liability, required to enter into costly license agreements, if available
at all, required to rebrand our products and/or prevented from selling some of our products if third parties successfully
oppose or challenge our trademarks or successfully claim that we infringe, misappropriate or otherwise violate their
trademarks, copyrights, patents or other intellectual property rights. Bringing or defending any such claim, regardless of
merit, and whether successful or unsuccessful, could be expensive and time-consuming and have a negative effect on our
business, reputation, results of operations and financial condition.
Our brand value and intellectual property represents a significant portion of our goodwill and intangible assets.
Accounting rules require us to review the carrying value of our goodwill and other intangible assets for impairment
annually or whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully
recoverable. If the testing performed indicates that impairment has occurred, we are required to record a non-cash
impairment charge. The testing goodwill and intangible assets for impairment requires us to make estimates that are subject
to significant assumptions. Changes in our estimates, or changes in actual performance compared with these estimates, may
affect the fair value of goodwill or intangible assets, which also may result in an non-cash impairment charge. If a
significant amount of our goodwill and other intangible assets were deemed to be impaired, our financial condition and
results of operations could be materially adversely affected.
We will require significant capital to fund our expanding business. If we are unable to maintain sufficient levels of
cash flow from our operations, we may not be able to execute or sustain our growth strategy or we may require
additional financing, which may not be available to us on satisfactory terms or at all.
Our cash flow from operations may not provide sufficient capital to support our expanding business and execute our
growth strategy, including to pay our lease obligations, build out new stores and distribution centers, remodel our stores,
purchase opportunistic inventory, pay employees competitive wages and provide benefits, continue the ongoing
modernization, enhancement and maintenance of our information systems, make loans to IOs and further invest in the
business. Further, our plans to grow our store base may create cash flow pressure if new locations do not perform as
projected.
We may need to obtain additional funds through public or private financings, collaborative relationships or other
arrangements. Any equity financing or convertible financing that we may pursue could result in additional dilution to our
existing stockholders and would be subject to capital market conditions at the time of any offering. Debt financing, if
available, would increase our leverage and may involve restrictive covenants that could affect our ability to raise additional
capital or operate our business. Additional financing may not be available to us on attractive terms to us, if at all. Inability
to obtain necessary or desired liquidity could impede our competitive position, business, financial condition and results of
operations and we may need to delay, limit or eliminate planned store openings or operations or other elements of our
growth strategy.
We are subject to risks associated with leasing substantial amounts of space, including future increases in
occupancy costs.
We currently lease substantially all of our store locations, primary distribution centers and administrative offices
(including our headquarters in Emeryville, California), and a number of these leases expire or are up for renewal each year.
Our operating leases typically have initial lease terms of ten years with renewal options for two or three successive five-
year periods at our discretion.
Typically, the largest portion of a store's operating expense that we bear is the cost associated with leasing the
location. Our total lease payment obligations for all operating leases in existence as of December 30, 2023 was $132.6
million for fiscal 2024 and $1.4 billion in aggregate for fiscal years 2025 through 2043, and these obligations will increase
as we open new stores that are leased. We are also generally responsible for property taxes, insurance and common area
maintenance for our leased properties. If we are unable to make the required payments under our leases, the lenders or
owners of the relevant leased properties, distribution centers or administrative offices may, among other things, repossess
those assets, which could adversely affect our ability to conduct our operations. In addition, our failure to make payments
under our operating leases could trigger defaults under other leases or under our 2023 Credit Agreement (defined below),
which could cause the counterparties under those agreements to accelerate the obligations due thereunder.
The operating leases for our store locations, distribution centers and administrative offices expire at various dates
through 2043. When the lease term for our stores expire, we may be unable to negotiate renewals, either on commercially
reasonable terms or at all, which could cause us to close stores or to relocate stores within a market on less favorable terms.
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Any of these factors could cause us to close stores in desirable locations, which could have a material adverse impact on
our results of operations.
Over time, current store locations may not continue to be desirable because of changes in demographics within the
surrounding area or a decline in shopping traffic. While we have the right to terminate some of our leases under specified
conditions, we may not be able to terminate a particular lease if or when we would like to do so. If we decide to close
stores, we are generally required to continue to perform obligations under the applicable leases, which generally include
paying rent and operating expenses for the balance of the lease term. When we assign leases or sublease space to third
parties, we may have to pay a portion of the rent and other expenses and we can remain liable on the lease obligations if the
assignee or sublessee does not perform.
Although historically we have not consummated material acquisitions, we recently entered into an agreement to
purchase United Grocery Outlet and we periodically consider acquisitions and other transactions as part of our
long-term business and real estate strategy. If we consummate any such transaction, a failure to integrate such
assets and business successfully, could have a material adverse effect on our business and financial statements.
Historically, we have rarely pursued or consummated material acquisitions, investments or joint ventures, although
we periodically consider such opportunities as part of our growth strategy to complement our current business by
enhancing our customer base, geographic penetration and scale. On February 14, 2024 we entered into a stock purchase
agreement to acquire United Grocery Outlet, which includes 40 stores in six adjacent states we do not operate in currently
(Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia) and a company-operated distribution center. We
expect this transaction to close early in the second quarter of fiscal 2024. Finding and assessing a potential growth
opportunity and completing a transaction involves extensive due diligence, management time and expense, all of which
diverts management's attention and liquidity that could be applied to our existing core business.
Furthermore, the success of any acquisition, including our pending acquisition of United Grocery Outlet, is
dependent, in part, on our ability to realize the expected benefits from the integration of the acquired businesses or assets.
We may incur unexpected liabilities or make incorrect estimates regarding the planned accounting for acquisitions, such as
the need to record non-recurring charges or write-off of significant amounts of goodwill or other assets that could adversely
affect our results of operations, and we could have unexpected challenges due to the limitations of our due diligence
process or contractual provisions. Further, the integration of acquired businesses is a complex, costly and time-consuming
process that requires significant management attention and resources. It is possible that the integration process could result
in the loss of key employees, the disruption of our operations, inconsistencies in and incompatibility of information
technology and accounting systems, as well as other compliance standards, controls, procedures and policies, difficulties in
achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition, additional
litigation, compliance or regulatory risk (including post-closing disputes with the transaction parties), the diversion of
management’s attention to integration matters and difficulties in the assimilation of employees and corporate cultures. We
also may be unable to maintain relationships with customers and partners of the acquired entities, or such transaction could
harm our existing business relationships. Further, the historical business model and strategy of the acquired business and
the Company may be materially different, and therefore there may be heightened risks to operating the acquired business
prior to integration, or to the extent certain operations and strategy are not integrated. Given our limited history in
consummating such transactions, the foregoing risks may be heightened due to our lack of experience in integrating similar
businesses.
In addition, for significant transactions, we may expect to incur additional debt, assume contingent liabilities, issue
equity and/or increase capital expenditures, which may increase leverage risks, result in dilution or reduce capital available
for other investments in ongoing operations.
Further, we believe that our success depends, in substantial part, on our ability to continue to maintain and enhance
our brand. If any acquisition or investment dilutes or otherwise adversely affects our existing brand, causes brand
confusion or impairs our ability to enhance our brand, our business, financial condition, and results of operations could be
adversely impacted.
Natural or man-made disasters, climate change, power outages, major health epidemics, pandemics, terrorist acts,
political events and other serious catastrophic events could disrupt our business, may expose us to unexpected costs
and negatively affect our financial performance. The current concentration of our stores creates an exposure to
local or regional impacts of such events and local economic downturns.
Our business has been and could in the future be severely impacted by natural or man-made disasters and unusual
weather conditions (which may become more frequent due to climate change), power outages, pandemic outbreaks,
terrorist acts, global political events and other serious catastrophic events beyond our control. In the event of a natural or
man-made disaster, governments have and, in the future, may declare a state of emergency and impose regulations on
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business operations. These occurrences could adversely impact our business by causing direct asset or inventory losses or
physical damage to our distribution centers or our stores, store closures, reduced customer traffic or changed shopping
behaviors, disruptions to production, supply and delivery of products to our stores, staffing shortages, increased costs or
disruptions to our information systems and other systems. With respect to future outbreaks, to the extent that a pathogen is,
or is perceived to be, food-borne, the price and availability of certain food products may be impacted and could cause our
customers to consume less of such product.
As of December 30, 2023, we operated 267 stores and distributed product from four distribution centers in
California in addition to having our administrative offices in California, making California our largest market, representing
57% of our total stores. As a result, our business is currently more susceptible to any unforeseen events or circumstances of
the types described above that negatively affect these areas as well as regional conditions, economic downturns or
disruptions, such as changes in demographics, population and employee bases, wage increases, property tax increases, and
changes in economic conditions, than the operations of more geographically diversified competitors. For example, there
have been significant fires across the west coast of the United States over the last several years, causing a number of stores
to be closed as well as suffer inventory losses related to power outages and evacuations. In 2018, our store in Paradise,
California, burned down entirely. The frequency and severity of wildfires may increase in the future due to climate change.
The United States and other countries have experienced, and may experience in the future, major health epidemics
related to viruses or other pathogens. Epidemics, or the perception that such epidemics may occur, may cause people to
avoid gathering in public places, which may adversely affect our customer traffic, our ability and that of our IOs to
adequately staff our stores and operations, and our ability to transport product on a timely basis.
Furthermore, the long-term impacts of climate change are expected to be widespread and unpredictable. Climate
change poses both physical risks (posed by extreme weather conditions, drought, and/or rising sea levels), and transition
risks (posed by regulatory changes or reputational risks). These factors could, among other negative consequences, increase
our energy costs, damage our stores or distribution centers, disrupt our supply chain, negatively impact our workforce or
reputation, and increase compliance and technology costs. Any of these occurrences may disrupt our business and
materially adversely affect our financial condition and results of operations and the occurrence of any of these events in a
region where our stores or other operations are concentrated may increase the impact of such disruption and adverse effect.
We have very limited experience competing in the growing online retail marketplace.
During fiscal 2021 and 2022, we entered into partnerships with three third party grocery delivery companies to
provide online shopping at our stores. Certain of our competitors and a number of pure online retailers have established
robust online operations and significantly increased their online sales and presence in recent years.
Increased competition from online grocery retailers and our lack of a robust online retail presence may reduce our
customers' desire to purchase products from us. If we decide to expand our online shopping business, we will be exposed to
new risks and challenges. Furthermore, there can be no assurance that any investments that we make to expand our online
shopping capabilities will result in a positive return on investment. These factors could have a material adverse effect on
our business, financial condition and results of operations.
We may incur losses not covered by our insurance or claims may differ from our estimates.
Our insurance coverage may not be sufficient, and any related insurance proceeds may not be timely paid to us. Our
insurance coverage reflects deductibles, self-insured retentions, limits of liability and similar provisions that we believe are
reasonable based on our operations. However, there are types of losses we may incur but against which we cannot be
insured or which we believe are not economically reasonable to insure, such as losses due to acts of war, employee and
certain other crime, certain wage and hour and other employment-related claims, including class actions, actions based on
certain consumer protection laws and some natural and other disasters or similar events. If we incur these losses and they
are material, our business could suffer. Further, injured parties with claims against our IOs may bring actions against us if
our IOs failed to secure and retain adequate insurance.
Certain types of events, such as earthquakes or wildfires, may result in sizable losses for the insurance industry and
adversely impact the availability of adequate insurance coverage or result in excessive premium increases. Our retail stores
located in California, and the inventory in those stores, are not currently insured against losses due to earthquakes. We have
experienced significant challenges in renewing the insurance policies for our stores and insurers have incurred substantial
losses related to property claims from fires, floods and other catastrophic events and are significantly increasing policy
premiums, increasing their requirements around building engineering standards or cutting back capacity for coverage
offerings to layered/quota share. For example, there have been significant fires across the west coast of the United States
over the last several years. In 2018, our store in Paradise, California, burned down entirely and we have also suffered
inventory losses related to power outages and evacuations due to fires. These risks may be exacerbated in the future due to
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climate change. To offset negative insurance market trends, we may elect to increase our self-insurance coverage, accept
higher deductibles or reduce the amount of coverage.
We currently self-insure, or insure through captive insurance companies, a significant portion of expected losses
under our workers' compensation, automobile liability and general liability insurance programs. Unanticipated changes in
any applicable actuarial assumptions and management estimates, could result in materially different expenses than
expected under these programs, which could have a material adverse effect on our results of operations and financial
condition.
Labor relation difficulties could materially adversely affect our business.
Employees at two Company-operated stores are represented by the United Food and Commercial Workers Union.
Our employees and those of the IOs have the right at any time to form or affiliate with a union. As we continue to grow,
enter different regions and operate distribution centers, unions may attempt to organize the employees of our different IOs
or our distribution centers within certain regions. If we determine to open more Company-operated stores, we may have
additional employees represented by unions. We cannot predict the adverse effects that any future organizational activities
will have on our business, financial condition and operating results. If we or the IOs were to become subject to work
stoppages, we could experience disruption in our operations and increases in our labor costs, either of which could
materially adversely affect our business, financial condition and operating results.
If we or our IOs are unable to attract, train and retain qualified employees, our financial performance may be
negatively affected. Additionally, our success depends in part on our executive officers and other key personnel.
Our future growth, performance and positive customer experience depends on our and the IOs' ability to attract,
train, retain and motivate qualified employees who understand and appreciate our culture and are able to represent our
brand effectively and establish credibility with our business partners and customers. We and the IOs face intense
competition for management personnel and hourly employees. If we and the IOs are unable to attract and retain adequate
numbers of qualified employees, our operations, customer service levels and support functions could suffer. There is no
assurance that we and the IOs will be able to attract or retain highly qualified employees to operate our business.
Additionally, we believe that our success depends to a significant extent on the skills, experience and efforts of our
executive officers and other key personnel. Due to the uniqueness of our model, the unexpected loss of services of any of
our executive officers or other key personnel could have a material adverse effect on our business and operations. In
December 2022, our then Chief Executive Officer transitioned to the role of Chairman of the Board, and effective March 1,
2024, our Chief Financial Officer will be departing to pursue another opportunity. There can be no assurance that our
executive succession planning, retention or hiring efforts will be successful. Competition for skilled and experienced
management in our industry is intense, and we may not be successful in attracting and retaining qualified personnel. We do
not maintain key person insurance on any of our key personnel.
Difficulties associated with the replacement of components of our enterprise resource planning system caused a
material weakness our internal control over financial reporting. If we are unable to remediate the material
weakness in our internal control over financial reporting or if we experience other material weaknesses, it may
negatively impact our ability to meet our reporting obligations and cause investors to lose confidence in our
reported financial information, which in turn could cause the trading price of our common stock to decline.
As disclosed in "Item 9A. Controls and Procedures" of this Annual Report on Form 10-K, in connection with the
preparation of financial statements for fiscal 2023, management determined that we had a material weakness in our internal
control over financial reporting pertaining to certain information technology general computer controls that were
insufficient during the replacement of components of our enterprise resource planning system in late August 2023, which
led to a significant increase in the volume of transactions across user access, program change management, and IT
operations for which our existing controls were not designed to address. Our remediation efforts began during the fiscal
quarter ended December 30, 2023 and are expected to be completed during the current fiscal year ending December 28,
2024. We cannot assure that the measures we have taken to date and may take in the future will be sufficient to remediate
the control deficiencies that led to our material weakness or that we will prevent or avoid potential future material
weaknesses. Any weaknesses or deficiencies or any failure to implement required new or improved controls, or difficulties
encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to
meet our financial reporting obligations, our obligations under our debt instruments or result in material omissions or
misstatements in our financial statements. Any material weakness (including the material weakness referenced above) and
our failure to remediate such material weakness could have a material adverse effect on our business and financial
statements, as well as our reputation and reduce our stock price. Additionally, material weaknesses could result in litigation
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or regulatory actions by the SEC or other regulatory authorities or other disputes involving federal and state securities laws,
loss of investor confidence, and diversion of financial and management resources from the operation of our business.
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Risks Related to Our Business Environment
Economic conditions and other economic factors may materially adversely affect our financial performance and
other aspects of our business by negatively impacting our customers' disposable income or discretionary spending,
increasing our costs and expenses, affecting our ability to plan and execute our strategic initiatives, and materially
adversely affecting our sales, results of operations and performance.
General conditions in the United States and global economy that are beyond our control may materially adversely
affect our business and financial performance. While we have not previously been materially adversely affected by periods
of decreased consumer spending, any factor that could materially adversely affect the disposable income of our customers
could decrease our customers' spending and number of trips to our stores, which could result in lower sales, increased
markdowns on products, a reduction in profitability due to lower margins and may require increased selling and
promotional expenses. These factors include but are not limited to unemployment, minimum wages, significant public
health and safety events, inflation and deflation, the threat, outbreak or escalation of terrorism, military conflicts, or other
hostilities and related international sanctions (such as the ongoing Russia-Ukraine or Middle East conflicts), trade wars and
interest and tax rates.
Many of the factors identified above also affect commodity rates, costs of transportation, leasing, labor, insurance
and healthcare, the strength of the U.S. dollar, measures that create barriers to or increase the costs associated with
international trade, changes in laws, regulations and policies and other economic factors, all of which may impact our cost
of goods sold and our selling, general and administrative expenses, which could materially adversely affect our business,
financial condition and results of operations. These factors could also materially adversely affect our ability to plan and
execute our strategic initiatives, invest in and open new stores, prevent current stores from closing, and may have other
material adverse consequences which we are unable to fully anticipate or control, all of which may materially adversely
affect our sales, cash flow, results of operations and performance. We have limited or no ability to control many of these
factors.
Food retailers provide alternative options for consumers and compete aggressively to win those consumers; our
failure to offer a compelling value proposition to consumers could limit our growth opportunities.
The retail food industry includes mass and discount retailers, warehouse membership clubs, online retailers,
conventional grocery stores and specialty stores. These businesses provide alternative options for the consumers whom we
aim to serve. Our success relative to these retailers is driven by a combination of factors, primarily product selection and
quality, price, location, customer engagement and store format. Our success depends on our ability to differentiate
ourselves and provide value to our customers, and our failure to do so may negatively impact our sales. To the extent that
other food retailers lower prices or run promotions, our ability to maintain profit margins and sales levels may be
negatively impacted. We and the IOs may have to increase marketing expense to attract customers, and may have to mark
down prices to be competitive and not lose market share. This limitation may materially adversely affect our margins and
financial performance.
Competition for customers has intensified as other discount food retailers, such as Aldi, Lidl and WinCo have
moved into, or increased their presence in, our geographic and product markets. We expect this competition to continue to
increase. In addition, we experience high levels of competition when we enter new markets. Some of the other food
retailers may have been in the region longer and may benefit from enhanced brand recognition in such regions. Some food
retailers may have greater financial or marketing resources than the IOs do and may be able to devote greater resources to
sourcing, promoting and selling their products than the IOs. As competition in certain regions intensifies, or we move into
new regions or other food retailers open stores in close proximity to our stores, we may experience a loss of sales, decrease
in market share, reduction in margin from competitive price changes or greater operating costs.
If consumer trends move toward private label and away from name-brand products, our competitive position in the
market may weaken. Additionally, our private label brands may not be successful and may increase certain risks
that we face.
Our business model has traditionally relied on the sale of name-brand products at meaningful discounts to drive
frequent store visits and net sales. Consumer acceptance of, and even preference for, private label products has been
increasing, however, and a trend away from name-brand products could weaken our competitive position in the market.
Private label products tend to be lower priced than name-brand products and, as a result, we may have more difficulty
competing against private label products on the basis of price. While we have started to invest in developing and selling our
own private labels, there can be no assurance that the performance of any such private label products would be sufficient to
offset the potential decreased sales of name-brand products. In addition, as we invest in and deploy our private label
products, we are subjected to various new risks and regulations including product liability claims, claims related to product
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labeling, claims related to rights of third parties and other risks associated with entities that source, sell and market
exclusive private label offerings for retailers. Any failure to appropriately address some or all of these risks could have a
material adverse effect on our sales, business, results of operations and financial condition.
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Risks Related to Our IO Model
If we are unable to attract and retain qualified IOs, our financial performance may be negatively affected.
Our future growth and performance depend on our ability to attract, develop and retain qualified IOs who can
effectively and efficiently run stores, understand and appreciate our culture and are able to represent our brand effectively,
in particular because the vast majority of our IOs operate a single store. A material decrease in profitability of the IOs may
make it more difficult for us to attract and retain qualified IOs. Our relationship with the IOs is an important part of our
business. To alleviate the disruption caused by our system upgrades, we elected to provide incremental commission support
to IOs beginning in the third quarter of fiscal 2023 and extending into the first quarter of fiscal 2024.
While we use a variety of methods to attract and develop the IOs, including through our Aspiring Operators in
Training ("AOT") program, there can be no assurance that we will continue to be able to recruit and retain a sufficient
number of qualified AOTs and other candidates to open successful new locations in order to meet our growth targets. Our
ability to maintain our current performance and achieve future growth additionally depends on the IOs' ability to meet their
labor needs while controlling wage and labor-related costs.
If the IOs are not successful in managing their business, our financial results and brand image could be negatively
affected.
The financial health and operational effectiveness of the IOs is critical to their and our success. The IOs are business
entities owned by entrepreneurs who generally live in the same community as the store that they operate as our independent
contractor. IOs are responsible for operating their store consistent with our brand standards, hiring and supervising store-
level employees, merchandising and selling products, conducting local marketing, connecting with their community and
complying with applicable laws, and managing and paying the expenses associated with their business. Although we select
IOs through a rigorous vetting and training process, and continue to help IOs develop their business skills after they enter
into an Operator Agreement with us, it is difficult to predict in advance whether a particular IO will be successful. If an IO
is unable to successfully establish, manage and operate the store, their store's performance and quality of service could be
materially adversely affected. In addition, any poor performance could negatively affect our financial results and our brand
reputation.
Failure of the IOs to repay notes outstanding to us may materially adversely affect our financial performance.
We extend financing to IOs for their initial startup costs in the form of notes payable to us that bear interest at rates
between 5.50% and 9.95%. There can be no assurance that any IO, will achieve long-term store volumes or profitability
that will allow them to repay any amounts due nor is there any assurance that any IO will be able to repay amounts due
through other means.
The outstanding aggregate balance of notes receivable from IOs has increased over time as we have accelerated new
store growth combined with increases to initial IO capital and working capital requirements. This balance may continue to
increase as we open new stores. There were $41.1 million and $37.5 million of notes to IOs outstanding as of
December 30, 2023 and December 31, 2022, respectively, with allowances of $11.2 million and $13.2 million as of
December 30, 2023 and December 31, 2022, respectively.
If the IOs are unable to avoid excess inventory shrink, our business and results of operations may be adversely
affected.
The IOs order merchandise solely from us, which we, in turn, deliver to IOs on a consignment basis. As a result, we
retain ownership of all merchandise until the point in time that merchandise is sold to a customer. The IOs, however, are
responsible for inventory management at their stores. Any spoiled, damaged or stolen merchandise, markdowns or price
changes impact gross profit and, therefore, IO commission. We generally split these losses equally with IOs, however,
excessive levels of shrink are deducted from commissions paid to IOs. Excessive shrink generally indicates poor inventory
management and the IO's failure to use due care to secure their store against theft. If IOs were to not effectively control or
manage inventory in their stores, they could experience higher rates of inventory shrink which could have a material
adverse effect on their financial health, which in turn, may materially and adversely affect our business and results of
operations.
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Our Operator Agreements may be terminated by either party and upon short notice, and any loss or changeover of
an IO may cause material business disruptions.
Each Operator Agreement is subject to termination by either party without cause upon 75 days' notice. We may also
terminate immediately "for cause." The "for cause" termination triggers include, among other things, a failure to meet our
brand standards, misuse of our trademarks and actions that in our reasonable business judgment threaten to harm our
business reputation.
If we or an IO terminates the Operator Agreement then we must approve a new IO for that store. Any IO changeover
consumes substantial time and resources. Often, a changeover will involve more than one transition, as an IO may move
from an existing store, thereby creating an opening at the IO's previous store. A failure to transition a store successfully to
another IO can negatively impact the customer experience or compromise our brand standards. Termination of an Operator
Agreement could therefore result in the reduction of our sales and operating cash flow, and may materially adversely affect
our business, financial condition and results of operations.
Legal proceedings initiated against the IOs could materially impact our business, reputation, financial condition,
results of operations and cash flows.
We and the IOs are subject to a variety of litigation risks, including, but not limited to, individual personal injury,
product liability, intellectual property, employment-related actions, litigation with or involving our relationship with IOs
and property disputes and other legal actions in the ordinary course of our respective businesses. If the IOs are unable to
provide an adequate remedy in a legal action, the plaintiffs may attempt to hold us liable. We maintain that under current
applicable laws and regulations we are not joint employers with the IOs, and should not be held liable for their actions.
However, these types of claims may increase costs and affect the scope and terms of insurance or indemnifications we and
the IOs may have.
Our Operator Agreements require each IO to maintain certain insurance types and levels. Losses arising from certain
extraordinary hazards, employment matters or other matters, however, may not be covered, and insurance may not be
available (or may be available only at prohibitively expensive rates) with respect to many other risks, or IOs may fail to
procure the required insurance. Moreover, any loss incurred could exceed policy limits and policy payments made to IOs
may not be made on a timely basis.
Any legal actions against the IOs may negatively affect the reputation of our brand, which could result in a reduction
of our sales and operating cash flow, which could be material and which could adversely affect our business, financial
condition and results of operations.
In the past, certain business models that use independent contractors to sell directly to customers have been subject
to challenge under various laws, including laws relating to franchising, misclassification and joint employment. If
our business model is determined to be a franchise, if IOs are found not to be independent contractors, but our
employees, or if we are found to be a joint employer of an IO's employees, our business and operations could be
materially adversely affected.
The IOs are independent contractors. Independent contractors and the companies that engage their services have
come under increased legal and regulatory scrutiny in recent years as courts have adopted new standards for these
classifications and federal legislators continue to introduce legislation concerning the classification of independent
contractors as employees, including legislation that proposes to increase the tax and labor penalties against employers who
intentionally or unintentionally misclassify employees as independent contractors and are found to have violated
employees' overtime or wage requirements. Federal and state tax and other regulatory authorities and courts apply a variety
of standards in their determination of independent contractor status. For example, the California state legislature enacted
AB-5, which became effective in California on January 1, 2020. AB-5 codified a new test for determining worker
classification that is much narrower than the traditional standard in defining the scope of who is classified as an
independent contractor. There has been limited guidance to date regarding interpretation or enforcement, and there is a
significant degree of uncertainty regarding its application. In addition, AB-5 has been the subject of widespread national
discussion and it is possible that other jurisdictions may enact similar laws. There is a risk that a governmental agency or
court could disagree with our assessment that IOs are independent contractors or that other laws and regulations could
change. If any IOs were determined to be our employees, we would incur additional exposure under federal and state tax,
workers' compensation, unemployment benefits, labor, employment, environmental and tort laws, which could potentially
include prior periods, as well as potential liability for employee benefits and tax withholdings.
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Even if IOs are properly classified as independent contractors, there is a risk that a governmental agency or court
might disagree with our assessment that each IO is the sole employer of its workers and seek to hold us jointly and
separately responsible as a co-employer of an IO's workers. In this case, we would incur additional exposure under federal
and state tax, workers' compensation, unemployment benefits, labor, employment and tort laws, which could potentially
include prior periods, as well as potential liability for employee benefits and tax withholdings since joint employers are
each separately responsible for their co-employees' benefits. A misclassification ruling would mean that both IOs and IOs'
employees are our employees.
We continue to observe and monitor our compliance with current applicable laws and regulations, but we cannot
predict whether laws and regulations adopted in the future, or standards adopted by the courts, regarding the classification
of independent contractors will materially adversely affect our business or operations. Further, if we were to become
subject to franchise laws or regulations, it would require us to provide additional disclosures, register with state franchise
agencies, impact our ability to terminate our Operator Agreements and may increase the expense of, or adversely impact
our recruitment of new IOs.
Our success depends on our ability to maintain positive relationships with the IOs and any failure to maintain our
relationships on positive terms could materially adversely affect our business, reputation, financial condition and
results of operations.
The IOs develop and operate their stores under terms set forth in our Operator Agreements. These agreements give
rise to relationships that involve a complex set of mutual obligations and depend on mutual cooperation and trust. We have
a standard Operator Agreement that we use with the IOs, which contributes to uniformity of brand standards. We generally
have positive relationships with the IOs, based in part on our common understanding of our mutual rights and obligations
under the Operator Agreement. However, we and the IOs may not always maintain a positive relationship or always
interpret the Operator Agreement in the same way. Our failure to maintain positive relationships with the IOs could
individually or in the aggregate cause us to change or limit our business practices, which may make our business model
less attractive to the IOs or stockholders or more costly to operate. Active and/or potential disputes with IOs could damage
our brand image and reputation.
The success of our business depends in large part on our ability to maintain IOs in profitable stores. If we fail to
maintain our IO relationships on acceptable terms, or if one or more of the more profitable IOs were to terminate their
Operator Agreements, become insolvent or otherwise fail to comply with brand standards, our business, reputation,
financial condition and results of operations could be materially and adversely affected.
The IOs could take actions that could harm our business.
The IOs are contractually obligated to operate their stores in accordance with the brand standards set forth in the
Operator Agreements. However, IOs are independent contractors whom we do not control. The IOs operate and oversee the
daily operations of their stores and have sole control over all of their employees and other workforce decisions. As a result,
IOs make decisions independent of us that bear directly on the ultimate success and performance of their store.
Nevertheless, the nature of the brand license creates a symbiotic relationship between our outcome and each IO. Indeed,
because we and each of the IOs associate our separate businesses with the Grocery Outlet name and brand reputation, the
failure of any IO to comply with our brand standards could potentially have repercussions that extend beyond that IO's own
market area and materially adversely affect not only our business, but the business of other IOs and the general brand
image and reputation of the Grocery Outlet name. This, in turn, could materially and adversely affect our business and
operating results. If any particular IO operates a store in a manner inconsistent with our brand standards, we cannot assure
you that we will be able to terminate the Operator Agreement of that IO without disruptions to the operations and sales of
that IO's store or other stores.
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Risks Related to Our Information Technology Systems, Data Protection and Cybersecurity
Any material challenges or difficulties in maintaining or updating our existing technology, including developing or
implementing new technology could have a material adverse effect on our business or results of operations.
We modify, update and replace our systems and infrastructure from time to time, including by adding new hardware,
software and applications; maintaining, updating or replacing legacy programs; converting to global systems; integrating
new service providers; and adding enhanced or new functionality, such as cloud computing technologies. In late August
2023, we replaced components of our enterprise resource planning system, including our financial ledger, inventory
management platform and product data warehouse system. The implementation of these system upgrades resulted in more
than anticipated ordering and inventory disruptions during the remainder of fiscal 2023. These disruptions are estimated to
have negatively impacted comparable store sales by approximately 90 basis points and gross margin by 50 basis points in
fiscal 2023. These implementation issues also contributed to our material weakness in our internal control over financial
reporting, as discussed in "Item 9A. Controls and Procedures" of this Annual Report on Form 10-K. If we experience
ongoing disruptions with these updates and/or are unable to remediate our material weakness in the future, such events
could have a material adverse effect on our business, prospects, results of operations, financial condition and/or cash flows.
Further, the time and resources required to implement or optimize the benefits of new technology initiatives, or
potential issues that arise in implementing such initiatives, could reduce the efficiency of our operations in the short term.
The efficient operation and successful growth of our business depends upon our information systems, including our ability
to operate, maintain and develop them effectively. A failure of those systems could disrupt our business, subject us to
liability, damage our reputation, or otherwise impact our financial results.
Any failure to maintain the security of information we hold relating to personal information or payment card data
of our customers, employees and suppliers, whether as a result of cybersecurity attacks or otherwise, could subject
us to litigation, government enforcement actions and costly response measures, and could materially disrupt our
operations and harm our reputation and sales.
In the ordinary course of business, we and the IOs collect, store, process, use and transmit confidential business
information and certain personal information relating to customers, employees and suppliers. All customer payment data is
encrypted, and we do not store such data in our systems. We rely in part on commercially available systems, software,
hardware, services, tools and monitoring to provide security for collection, storage, processing and transmission of personal
and/or confidential information. It is possible that cyber attackers might compromise our security measures and obtain the
personal and/or confidential information of the customers, employees and suppliers that we hold or our business
information.
Moreover, an employee, contractor or third party with whom we work or to whom we outsource business operations
may fail to monitor their or our systems effectively, may fail to maintain appropriate safeguards, may misuse the personal
and/or confidential information to which they have access, may attempt to circumvent our security measures, may
purposefully or inadvertently allow unauthorized access to our or their systems or to personal and/or confidential
information or may otherwise disrupt our business operations. We and our customers could suffer harm if valuable
business data or employee, customer and other proprietary information were corrupted, lost or accessed or misappropriated
by third parties due to a security failure in our systems or those of our suppliers or service providers. It could require
significant expenditures to remediate any such failure or breach, severely damage our reputation and our relationships with
customers and suppliers, result in unwanted media attention and lost sales and expose us to risks of litigation and liability.
In addition, as a result of recent security breaches and ransomware attacks at a number of prominent retailers, the media
and public scrutiny of information security and privacy has become more intense and the regulatory environment has
become increasingly uncertain, rigorous and complex. As with most companies, we have experienced cyber-attacks,
attempts to breach our systems and other similar incidents, none of which were material in fiscal 2023. As a result, we have
incurred significant costs and will continue to incur such costs to monitor and safeguard our systems. We may incur
significant costs if there is an unauthorized disclosure of personal information and we may not be able to comply with new
regulations.
In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may
expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data
protection, information security and consumer protection. For example, the California Consumer Privacy Act ("CCPA"),
which became effective on January 1, 2020, established a new privacy framework for covered businesses. In November
2021, California voters passed Proposition 24, also known as the California Privacy Rights Act ("CPRA"), which amends
and expands the CCPA. The CCPA and CPRA provide new and enhanced data privacy rights to California residents, such
as giving California consumers and employees the right to access and/or delete their personal information, affording
consumers and employees the right to opt out of certain sales of personal information, as well as sharing for cross context
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behavioral advertising, and prohibiting covered businesses from discriminating against consumers (e.g., charging more for
services) for exercising any of their CCPA/CPRA rights. The CPRA went into effect January 1, 2023 and added definitions
for "sensitive information" as well as "contractors," and bolstered the requirements for agreements that cover the exchange
of data. CPRA also established a California Privacy Protection Agency, which is responsible for enforcement activities,
rulemaking, and public awareness related to privacy and data protection. Any failure to comply with the laws and
regulations surrounding the protection of personal information, privacy and data security could subject us to legal and
reputational risks and costs, including significant fines for non-compliance, any of which could have a negative impact on
revenues and profits.
Because we and the IOs accept payments using a variety of methods, including cash and checks, credit and debit
cards, Electronic Benefit Transfer ("EBT") cards and gift cards, we may be subject to additional rules, regulations,
compliance requirements and higher fraud losses. For certain payment methods, we or the IOs pay interchange and other
related card acceptance fees, along with additional transaction processing fees. We and the IOs rely on third parties to
provide payment transaction processing services, including the processing of credit cards, debit cards, EBT cards and gift
cards, and it could disrupt our business if these companies become unwilling or unable to provide these services to us,
experience a data security incident or fail to comply with applicable laws, rules and industry standards.
We are also subject to payment card association operating rules, including data security rules, certification
requirements and rules governing electronic funds transfers, which could change over time. For example, we and the IOs
are subject to Payment Card Industry Data Security Standards, which contain compliance guidelines and standards with
regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder
data. In addition, if our internal systems are breached or compromised, we and the IOs may be liable for card re-issuance
costs, subject to fines and higher transaction fees and lose our ability to accept credit and/or debit card payments from our
customers, and our business and operating results could be materially adversely affected.
Security breaches and other disruptions to our information technology networks and systems, including a
disruption related to cybersecurity, could interfere with our operations and the operations of the IOs and our
suppliers, any of which could have a material adverse effect on our business and financial performance.
Cyber-attacks are rapidly evolving and becoming more frequent. Such threats and the means for obtaining access to
information in digital and other storage media are becoming increasingly sophisticated and may not immediately produce
signs of intrusion. A cyber incident could be caused by malicious outsiders (including state-sponsored espionage or
cyberwarfare) or insiders using sophisticated methods to circumvent firewalls, encryption and other security defenses.
Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not
recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement
adequate preventative measures. With more employees working remotely at times, there may be increased opportunities for
unauthorized access and cyber-attacks. Further, the United States government has warned of the potential risk of Russian
cyberattacks stemming from the ongoing Russian-Ukraine conflict.
It is possible that cyber attackers might compromise our security measures and obtain the personal and/or
confidential information of the customers, IOs, employees and suppliers that we hold or our business information.
Moreover, such cyber-attacks may disrupt access to our and/or our suppliers' networks and systems. Such disruptions could
result in delays or cancellations of customer orders or delays or interruptions in the shipment of orders. In addition, cyber-
attacks may cause us to incur significant remediation costs, result in delays and disruptions to key business operations, and
divert attention of management and key information technology resources. These cyber-incidents could also subject us to
liability, expose us to significant expense, and cause significant harm to our reputation and our business.
We rely on the integrity, security and consistent operation of a variety of information technology systems and back-
up systems for the efficient functioning of our business, including point of sale, inventory management, purchasing,
financials, logistics, accounts payable and human resources information systems. Such systems are subject to damage or
interruption from power outages, facility damage, computer and telecommunications failures, computer viruses,
cybersecurity breaches, cyber attacks (including malicious codes, worms, phishing and denial of service attacks and
ransomware), software upgrade failures or code defects, natural disasters and human error. Damage or interruption to, or
defects of design related to, these systems or the integration of such systems may require a significant investment to fix or
replace, and we may suffer disruptions in our operations in the interim, loss or corruption of critical data and negative
publicity, all of which could have a material adverse effect on our business or results of operations. Although we have
taken steps designed to reduce the risk of these events occurring, there can be no guarantee that we or a third party on
which we rely will not suffer one of these events. While we maintain cyber risk insurance intended to provide coverage in
the event of a breach or other data security incident, there can be no assurance that these policies will cover all incidents
that might occur or that the coverage limits under such policies will be adequate for any incidents, claims or damages that
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we might experience. Additionally, we are exposed to vulnerabilities with respect to our IO's information technology
systems.
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Legal and Regulatory Risks
Real or perceived concerns that products we and the IOs sell could cause unexpected side effects, illness, injury or
death could expose us to lawsuits and harm our reputation, which could result in unexpected costs.
As discussed under "Regulations" in "Item 1. Business", we and the IOs are subject to regulation by various federal
agencies. If our products do not meet applicable safety standards or our customers' expectations regarding safety, we could
experience lost sales, increased costs, litigation or reputational harm. Any lost confidence on the part of our customers
would be difficult and costly to reestablish. Issues regarding the quality or safety of any food items sold by us, regardless of
the cause, could have a substantial and adverse effect on our sales and operating results, as well as our reputation.
There is increasing governmental scrutiny, regulation of and public awareness of food safety. Unexpected side
effects, illness, injury or death caused by products we and the IOs sell or involving suppliers that supply us with products
could result in the discontinuance of sales of these products or our relationship with such suppliers or prevent us from
achieving market acceptance of the affected products. We cannot be sure that consumption or use of our products will not
cause side effects, illness, injury or death in the future, as product deficiencies might not be identified before we sell such
products to our customers.
We also may be subject to claims, lawsuits or government investigations relating to such matters resulting in costly
product recalls and other liabilities that could materially adversely affect our business and results of operations. Even if a
product liability claim is unsuccessful or is not fully pursued, negative publicity could materially adversely affect our
reputation with existing and potential customers and our corporate and brand image, and these effects could persist over the
long term. Any claims brought against us may exceed our existing or future insurance policy coverage or limits. Any
judgment against us that is in excess of our policy limits would have to be paid from our cash reserves, which would reduce
our capital resources. Further, we may not have sufficient capital resources to pay a judgment, in which case our creditors
could levy against our assets.
We are subject to laws and regulations generally applicable to retailers. Compliance with, failure to comply with, or
changes to such laws and regulations could have a material adverse effect on our business and financial
performance.
Our business is subject to numerous and frequently changing federal, state and local laws and regulations. We
routinely incur significant costs in complying with these regulations. The complexity of the regulatory environment in
which we and the IOs operate and the related cost of compliance are increasing due to additional legal and regulatory
requirements, our expanding operation and increased enforcement efforts and the future application of certain of these legal
requirements to our business may be uncertain. New or existing laws, regulations and policies, liabilities arising thereunder
and the related interpretations and enforcement practices, particularly those dealing with environmental protection and
compliance, climate change, wage and hour and other employment-related laws, taxation, zoning and land use, workplace
safety, public health, community right-to-know, product safety or labeling, food safety, alcohol and beverage sales, vitamin
and supplements, information security and privacy, among others, may result in significant added expenses or may require
extensive system and operating changes that may be difficult to implement and/or could materially increase our cost of
doing business. For example, we or the IOs have had to comply with recent new laws in many of the states or counties in
which we operate regarding recycling, waste, minimum wages, sick time, vacation, plastic bag and straw bans and sugar
taxes. In addition, we and the IOs are subject to environmental laws, including but not limited to hazardous waste laws,
regulations related to refrigeration and stormwater, pursuant to which we and/or the IOs could be liable or to which we
could be strictly and jointly and severally liable, regardless of our knowledge of or responsibility.
Approximately 11% of sales in fiscal 2023 were in the form of EBT payments and a substantial portion of these
payments may be related to benefits associated with the Supplemental Nutritional Assistance Program ("SNAP").
Accordingly, changes in EBT regulations by the U.S. Department of Agriculture or in SNAP benefits by Congress could
adversely affect our financial performance. The registration and ongoing compliance requirements for SNAP participation
are fairly complex and each of the IOs holds their registration under the name of their business entity and is responsible for
ensuring their employees consistently comply with all SNAP rules. Failure to comply can result in de-registration by
USDA which, for stores located in areas with high percentages of SNAP customers, can have a significant negative
financial impact.
We cannot assure you that we or the IOs will comply promptly and fully with all laws, regulations, policies and the
related interpretations that apply to our stores. Untimely compliance or noncompliance with applicable regulations or
untimely or incomplete execution of a required product recall, can result in the imposition of penalties (including loss of
licenses, eligibility to accept certain government benefits such as SNAP or significant fines or monetary penalties), civil or
criminal liability, damages, class action litigation or other litigation, in addition to reputational damage. Even with adequate
insurance and indemnification, any claims of non-compliance could significantly damage our reputation and consumer
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confidence in products we sell. In addition, the failure of such products to comply with applicable regulatory and legislative
requirements could prevent us from marketing the products or require us to recall or remove such products from our stores.
Legal proceedings from customers, suppliers, employees, governments or competitors could materially impact our
business, reputation, financial condition, results of operations and cash flows.
From time to time, we are subject to allegations, and may be party to legal claims and regulatory proceedings,
relating to our business operations. Such allegations, claims and proceedings may be brought by third parties, including our
customers, suppliers, employees, governmental or regulatory bodies or competitors, and may include class actions. In
recent years, companies have experienced an increase in the number of significant discrimination and harassment and wage
and hour claims generally. The outcome of litigation, particularly class action lawsuits, is difficult to assess or quantify.
Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the
potential loss relating to such lawsuits may remain unknown for substantial periods of time. While our IOs and suppliers
may indemnify us for certain adverse outcomes, we may still bear significant expenses related to such proceedings.
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Risks Associated with Our Indebtedness
Our substantial indebtedness could materially adversely affect our financial condition and our ability to operate our
business, react to changes in the economy or industry or pay our debts and meet our obligations under our debt and
could divert our cash flow from operations for debt payments.
We entered into a new Credit Agreement on February 21, 2023 (the "2023 Credit Agreement") under which we have
a significant amount of indebtedness. The 2023 Credit Agreement provides for senior secured credit facilities consisting of
(i) a senior secured term loan facility of $300.0 million, of which $294.4 million was outstanding as of December 30, 2023,
and (ii) a senior secured revolving credit facility of $400.0 million, under which we had $395.8 million of availability after
giving effect to outstanding letters of credit.
In addition, subject to limited restrictions in our 2023 Credit Agreement, we may be able to incur substantial
additional debt in the future.
Our substantial debt could have important consequences to you, including the following:
•
it may be difficult for us to satisfy our obligations, including debt service requirements under our outstanding
debt, resulting in possible defaults on and acceleration of such indebtedness;
• we may be unable to obtain additional financing or refinance our existing debt on commercially reasonable
terms, or at all;
•
a substantial portion of cash flow from operations may be dedicated to debt payments, reducing cash available
to fund operations, capital expenditures, business opportunities, acquisitions and other purposes;
• we may need to refinance our debt, sell material assets or operations or raise additional debt or equity capital to
service our debt and meet our other commitments;
• we are more vulnerable to economic downturns and adverse industry conditions and our flexibility to plan for,
or react to, changes in our business or industry is more limited; and
•
our ability to capitalize on business opportunities and to react to competitive pressures, as compared to our
competitors, may be compromised.
Our ability to make payments on our debt and to fund planned capital expenditures depends on our ability to
generate cash in the future, which to some extent is subject to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. If we incur additional debt above the levels currently in effect,
including utilizing the availability under our revolving credit facility, the risks associated with our leverage, including those
described above, would increase.
Furthermore, all of our debt under our 2023 Credit Agreement bears interest at variable rates. If these rates were to
increase significantly, as they did in fiscal 2022, whether because of an increase in market interest rates or otherwise, our
ability to borrow additional funds may be reduced and the risks related to our substantial debt would intensify.
Restrictive covenants in our 2023 Credit Agreement may restrict our ability to pursue our business strategies, and
failure to comply with any of these restrictions could result in acceleration of our debt.
The operating and financial restrictions and covenants in our 2023 Credit Agreement may materially adversely affect
our ability to finance future operations or capital needs or to engage in other business activities. Such restrictions and
covenants limit our ability, among other things, to:
pay dividends on or make distributions in respect of our common stock or make other restricted payments;
sell certain assets;
incur additional debt or issue certain preferred shares;
•
•
• make certain investments;
•
•
•
• make certain payments in respect of certain junior debt obligations;
•
•
designate our subsidiary as an unrestricted subsidiary.
enter into certain transactions with our affiliates; and
create liens on certain assets to secure debt;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
35
A breach of any of these covenants could result in a default under our 2023 Credit Agreement. Upon the occurrence
of an event of default under our 2023 Credit Agreement, the lenders could elect to declare all amounts outstanding under
our 2023 Credit Agreement to be immediately due and payable and terminate all commitments to extend further credit. If
we were unable to repay those amounts, these lenders could proceed against the collateral granted to them to secure that
indebtedness. We have pledged a significant portion of our assets as collateral to secure our 2023 Credit Agreement. Our
future operating results may not be sufficient to enable compliance with the financial performance covenants in our 2023
Credit Agreement, and we may not have sufficient assets to repay amounts outstanding under our 2023 Credit Agreement.
In addition, in the event of an acceleration of our debt upon a default, we may not have or be able to obtain sufficient funds
to make any accelerated payments.
Furthermore, the terms of any future indebtedness we may incur could have further additional restrictive covenants.
We may not be able to maintain compliance with these covenants in the future, and in the event that we are not able to
maintain compliance, we cannot assure you that we will be able to obtain waivers from the lenders or amend the covenants.
36
Risks Related to Accounting, Tax and Financial Statement Matters
Tax matters, including changes in tax laws, our ability to use deferred tax assets, and the impact of tax audits, could
have a material adverse effect on our business, financial condition and results of operations.
We are subject to taxes in the United States under federal, state and local jurisdictions in which we operate. We
compute our income tax provision based on enacted federal and state tax rates. The governing tax laws and applicable tax
rates vary by jurisdiction and are subject to interpretation and macroeconomic, political and other factors. For example, the
results of U.S. Presidential and Congressional elections may lead to tax law changes. Further, the ultimate amount of tax
payable in a given financial statement period may be impacted by sudden or unforeseen changes in tax laws, changes in the
mix and level of earnings by taxing jurisdiction, or changes to existing accounting rules or regulations. Accordingly, the
determination of our overall provision for income tax and other taxes is inherently uncertain as it requires significant
judgement around complex transactions and calculations. As a result, fluctuations in our ultimate obligations may differ
materially from amounts recorded in our financial statements and could adversely affect our business, financial condition
and results of operations in the periods where such determination is made.
In addition, an increasing number of states and local jurisdictions are considering or have adopted laws that impose
new tax measures, including revenue-based taxes and other tax measures. Should similar tax measures succeed in other
jurisdictions in which we operate, we expect that our operating expenses will increase.
As of December 30, 2023, we had tax-effected Federal and State net operating loss deferred tax assets of
$30.4 million and $1.4 million, respectively. Our ability to use our deferred tax assets is dependent on our ability to
generate future earnings within the operating loss carry-forward periods. The $30.4 million tax effected Federal deferred
tax asset does not expire and will carryforward indefinitely. The tax effected State deferred tax assets of $1.4 million will
expire beginning in 2029. Some or all of our deferred tax asset could expire unused if we are unable to generate taxable
income in the future sufficient to utilize the deferred tax asset, or we enter into transactions that limit our right to use it. If a
material portion of our deferred tax asset expires unused, it could have a material adverse effect on our future business,
results of operations, financial condition and the value of our common stock. Furthermore, we are required by accounting
rules to periodically assess our deferred tax assets for a valuation allowance, if necessary. In performing these assessments,
we use our historical financial performance to determine whether we have potential valuation allowance concerns and as
evidence to support our assumptions about future financial performance. A significant decline in our financial performance
could negatively affect the results of our assessments of the recoverability of our deferred tax assets. A valuation allowance
against our deferred tax assets could be material and could have a material adverse impact on our financial condition and
results of operations.
We may be subject to examinations in the future by federal, state and local authorities on income, employment, sales
and other tax matters which may result in assessments of additional taxes. Various tax authorities may disagree with tax
positions we take and if any such tax authorities were to successfully challenge one or more of our tax positions, the results
could adversely affect our financial condition. We may engage in litigation regarding such matters, which may be time
consuming and expensive and may not be successful. While we regularly assess the likelihood of adverse outcomes
resulting from such examinations and the adequacy of our provision for taxes, there can be no assurance that such
provision is sufficient and that a determination by a tax authority would not have an adverse effect on our business,
financial condition and results of operations.
Changes in accounting rules or interpretations thereof, changes to underlying legal agreements as well as other
factors applicable to our analysis of the IO entities as variable interest entities could significantly impact our ability
to issue our financial statements on a timely basis.
In accordance with the variable interest entities sub-section of Accounting Standards Codification Topic 810,
Consolidation, we assess during each of our reporting periods whether we are considered the primary beneficiary of a
variable interest entity ("VIE") and therefore are required to consolidate the VIE in our financial statements. We have
concluded that the IO entities represent VIEs. However, we have concluded we are not such VIE's primary beneficiary and,
accordingly, we do not consolidate the IO entities' financial information. Changes in accounting rules or interpretations
thereof, changes to the underlying Operator Agreements (as defined elsewhere in this report) as well as other factors that
may impact the economic performance of the IO entities which may be relevant to our analysis of whether to consolidate
the IO entities as VIEs could significantly impact our ability to issue our financial statements on a timely basis if, as a
result, we are determined to be the primary beneficiary of the IO entities and should consolidate such entities. For example,
collecting the requisite accounting data from certain of our IO entities in order to consolidate their financial information
would involve substantial time, effort and cost.
37
Risks Related to Our Common Stock
Our quarterly operating results fluctuate and may fall short of prior periods, our projections or the expectations of
securities analysts or investors. The market price of our common stock has been volatile and may continue to
fluctuate substantially, due to fluctuations in our operating results or otherwise, which could result in substantial
losses for purchasers of our common stock.
Our operating results have fluctuated from quarter to quarter at points in the past and they may do so in the future.
Therefore, results of any one fiscal quarter are not a reliable indication of results to be expected for any other fiscal quarter
or for any year. If we fail to control costs, appropriately adjust costs to actual results, increase our results over prior
periods, achieve our projected results, or meet the expectations of securities analysts or investors, our stock price may
decline, and the decrease in the stock price may be disproportionate to the shortfall in our financial performance.
During fiscal 2023, our common stock has traded at prices as low as $25.71 and as high as $36.54. The market price
volatility of our common stock may continue due to fluctuations in our quarterly operating results or in response to other
factors (regardless of our actual operating performance) included in this Risk Factors section and due to the following:
•
•
•
•
•
•
•
changes in expectations as to our future financial performance, including guidance, if any, that we provide to
the public, any changes in this guidance or our failure to meet this guidance, investment recommendations by
securities analysts and investors or if securities analysts do not publish research or reports about our business;
declines in the market prices of stocks generally, changes in general economic or market conditions or trends in
our industry or markets;
strategic actions or announcements by us, our competitors or other third parties;
changes in business or regulatory conditions;
additions or departures of key management personnel;
investor perceptions of the investment opportunity associated with our common stock relative to other
investment alternatives; and
the development and sustainability of an active trading market for our stock.
Price volatility may be greater if the public float and trading volume of our common stock are low. In the past,
following periods of market volatility, stockholders have instituted securities class action litigation. If we were involved in
securities litigation, it could have a substantial cost and divert resources and the attention of executive management from
our business regardless of the outcome of such litigation.
Furthermore, we currently do not expect to declare any dividends on our common stock in the foreseeable future. In
addition, because we are a holding company, our ability to pay dividends on our common stock may be limited by
restrictions on our ability to obtain sufficient funds through dividends from our subsidiary, including restrictions under our
Credit Agreement, and may be further restricted by the terms of any future debt or preferred securities. Your only
opportunity to achieve a return on your investment currently is if the price of our common stock appreciates.
Future sales, or the perception of future sales, by us or our existing significant stockholders in the public market
could cause the market price for our common stock to decline.
Future sales of shares of our common stock by our existing significant stockholders in the public market, or the
perception that such sales could occur, could harm the prevailing market price of shares of our common stock and might
make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares
of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-
outstanding shares of our common stock. Further, any issuance of additional equity securities by us may result in additional
dilution to you.
Provisions in our organizational documents could delay or prevent a change of control.
Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may
have the effect of delaying or preventing a merger, acquisition, tender offer, takeover attempt or other change of control
transaction that a stockholder might consider to be in its best interest, including attempts that might result in a premium
over the market price of our common stock.
These provisions provide for, among other things:
38
•
•
•
•
the division of our Board of Directors into three classes (which provision sunsets in 2026);
the ability of our Board of Directors to issue one or more series of preferred stock with powers, preferences and
rights that may be senior or on parity with our common stock, which may reduce its value and could have the
effect of impeding the success of an attempt to acquire us or otherwise effect a change of control;
advance notice for nominations of directors by stockholders and for stockholders to include matters to be
considered at stockholder meetings; and
certain limitations on convening special stockholder meetings.
These provisions could make it more difficult for a third party to acquire us, even if the third-party's offer may be
considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a
premium for their shares.
Our amended and restated bylaws provide, subject to limited exceptions, that the Court of Chancery of the State of
Delaware and, to the extent enforceable, the federal district courts of the United States of America will be the sole
and exclusive forums for certain stockholder litigation matters, which could limit our stockholders' ability to obtain
a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide, subject to limited exceptions, that unless we consent in writing to the
selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by
law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our company, (ii)
action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of our company to
the Company or our stockholders, (iii) action asserting a claim against the Company or any director, officer or other
employee of the Company arising pursuant to any provision of the Delaware General Corporation Law, or the DGCL, or
our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers
jurisdiction on the Court of Chancery of the State of Delaware or (iv) action asserting a claim against the Company or any
director, officer or other employee of the Company governed by the internal affairs doctrine. These provisions shall not
apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended (the
"Exchange Act") or any other claim for which the federal courts have exclusive jurisdiction. Unless we consent in writing
to the selections of an alternative forum, the federal district courts of the United States of America shall be the exclusive
forum for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended
(the "Securities Act"), subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of
such exclusive forum provision. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital
stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated bylaws.
These choice of forum provisions may limit a stockholder's ability to bring a claim in a different judicial forum,
including one that it may find favorable or convenient for disputes with us or any of our directors, officers or other
employees which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of
forum provisions that will be contained in our amended and restated bylaws to be inapplicable or unenforceable with
respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with
resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.
39
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
40
ITEM 1C. CYBERSECURITY
Assessing, identifying and managing data security, privacy and cybersecurity related risks are integrated into our
overall enterprise risk management ("ERM") process, which considers all strategic, operational, compliance and financial
risks across the organization. Our ERM process is conducted on an annual basis by our internal audit team through
feedback from senior management, certain functional leaders and certain Board members. Risks are categorized as low,
medium and high risks based on a quantitative and qualitative evaluation of how each risk could impact the Company's
operations, current objectives and long-term strategies. Each high risk is assigned to a member of senior management as the
risk owner and the Board or a Board Committee for oversight, with the risk owner developing a risk mitigation plan that is
tracked to completion. Low and medium risks are subject to various levels of internal monitoring. The annual risk
assessment is reviewed with the Audit and Risk Committee and the Board of Directors.
Our Audit and Risk Committee is responsible for the oversight of data security, privacy and cybersecurity related
risks. Our CIO has a Bachelor of Science in Computer Engineering and over 26 years of experience in senior leadership
privacy, information technology and cybersecurity oversight roles, including within the grocery retail industry. Our CIO
reports to our Chief Operations Officer who also has decades of information technology experience, including with
retailers such as Walmart, Inc., Family Dollar Stores, Inc. and Gap, Inc. Under the direction of our information technology
department, we have implemented policies and controls in line with the requirements of the International Organization for
Standardization and have assessed our cybersecurity maturity levels against the National Institute of Standards and
Technology framework to set appropriate standards and guidelines. We monitor and remediate threats through our
managed detection and response, and our vulnerability management programs. We provide regular employee
communications and mandatory training, periodically review our incident response and breach notification plan, and
leverage third-party expertise for testing, assessments and improvements. We have an onboarding and periodic security
review process of all third party vendors who have or will have access to our confidential information. We also have
established business continuity disaster recovery plans that are designed to limit downtime and data loss in the event of a
security breach.
As we have increased our remote workforce in recent years, the Audit and Risk Committee and management have
focused on enhancing the security of remote access with trusted devices, endpoint security controls and infrastructure
resiliency. As part of this process, we enhanced our security incident response procedures to address risks specific to
remote working conditions. We continue to monitor and take reasonable actions intended to improve our security posture
with process improvement, testing, simulation training and investments where necessary and appropriate for our company.
We have a written incident response plan that is implemented by our cybersecurity incident response team,
comprised of members of our information security, legal, human resources, finance and communications teams, and whose
function is to respond to any such incident, define and seek to control the extent of the incident, assess and take reasonable
actions intended to remediate any damage caused, and implement measures designed to prevent future reoccurrences. The
materiality of any cybersecurity incident is evaluated by senior management, including the legal and finance departments,
and, in certain circumstances by our third-party advisors. We periodically perform simulations (referred to as tabletop
exercises) at a management level with external resources and advisors.
We face a number of cybersecurity risks in connection with our business. Although such risks have not materially
affected us, including our results of operations or financial condition, in fiscal 2023 and recent years, we have, from time to
time, experienced threats to and attempted breaches of our data and systems, including malware and computer virus
attacks. In the future, we may not be successful in preventing or mitigating a cybersecurity incident that could ultimately
have a material adverse effect on our business, operations and financial performance. We carry cyber risk insurance that
provides protection against a breach or other data security incident, but such insurance may not be sufficient, and any
related insurance proceeds may not be timely paid to us. For more information about the cybersecurity risks we face, see
the risk factors under the heading entitled "Risks Related to our Information Technology Systems, Data Protection and
Cybersecurity" in "Item 1A. Risk Factors" of this Annual Report on Form 10-K.
41
ITEM 2. PROPERTIES
As of December 30, 2023, we leased 467 of our 468 stores and each of our self-operated distribution centers and
warehouse facilities. The one remaining store was owned by an IO. Our stores are located in California (267), Washington
(72), Oregon (61), Pennsylvania (31), Idaho (13), Nevada (11), Maryland (8), New Jersey (4) and Ohio (1). Our initial
lease terms for store locations are typically ten years with options to renew for two or three successive five-year periods.
Our corporate headquarters, located in Emeryville, California, is leased under an agreement that expires in 2028, with an
option to renew for a five-year period. Our three self-operated primary distribution centers range from approximately
100,000 square feet to approximately 400,000 square feet. Including options to renew, our primary distribution centers
have leases expiring between 2026 and 2035.
We believe that our corporate and distribution center facilities are in good operating condition and adequate to
support the current needs of our business. We intend to continue to invest in our distribution and logistics infrastructure in
order to support our anticipated store growth over the long term, including as we enter new geographies.
42
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may be party to litigation that arises in the ordinary course of our business. Management
believes that we do not have any pending litigation that, separately or in the aggregate, would have a material adverse
effect on our results of operations, financial condition or cash flows, and no material legal proceedings were terminated,
settled or otherwise resolved during the 13 weeks ended December 30, 2023.
SEC regulations require us to disclose information about certain environmental proceedings if we reasonably believe
that such proceedings may result in monetary sanctions above a stated threshold. Pursuant to SEC regulations, we use a
threshold of $1.0 million for purposes of determining whether disclosure of any such proceedings is required.
43
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
44
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
The principal market on which our common stock is traded is the Nasdaq Global Select Market under the symbol
"GO."
Stockholders
American Stock Transfer & Trust Company, LLC is the transfer agent and registrar for our common stock. As of
February 22, 2024, there were 10 stockholders of record of our common stock. A substantially greater number of
stockholders are "street name" or beneficial holders, whose shares are held of record by banks, brokers and other financial
institutions.
Dividend Policy
We currently do not expect to declare any dividends on our common stock in the foreseeable future. Instead, we
anticipate that all of our earnings in the foreseeable future will be used to provide working capital, to support our
operations, to finance the growth and development of our business and to reduce our net debt. Any determination to declare
dividends in the future will be at the discretion of our Board of Directors, subject to applicable laws, and will be dependent
on a number of factors, including our earnings, capital requirements and overall financial condition. In addition, because
we are a holding company, our ability to pay dividends on our common stock may be limited by restrictions on our ability
to obtain sufficient funds through dividends from our subsidiary. Further, our ability to pay dividends on our common
stock is subject to restrictions under our 2023 Credit Agreement, and may be further restricted by the terms of any future
debt or preferred securities. See NOTE 6— Long-term Debt to our Consolidated Financial Statements for additional
information about our 2023 Credit Agreement.
Stock Performance Graph
The following graph shows a comparison of cumulative total return (equal to stock appreciation plus dividends)
from June 20, 2019 (the date our common stock began trading on the NASDAQ Global Select Market) through
December 30, 2023 for:
•
•
•
Grocery Outlet Holding Corp.
Nasdaq Global Market Composite Index
Nasdaq US Benchmark Retailers Index
45
Comparison of Cumulative Total Return (Since Listing)
$200
$150
$100
$50
6/20/2019
12/28/2019
1/2/2021
1/1/2022
12/31/2022
12/30/2023
Grocery Outlet Holding Corp.
Nasdaq US Benchmark Retailers Index
Nasdaq Global Market Composite Index
Grocery Outlet
Holding Corp.
Nasdaq Global Market
Composite Index
Nasdaq US
Benchmark Retailers
Index
$
$
$
6/20/2019
12/28/2019
1/2/2021
1/1/2022
12/31/2022
12/30/2023
100.00 $
117.40 $
137.67 $
99.19 $
102.39 $
94.56
100.00 $
107.91 $
170.37 $
142.69 $
67.69 $
66.29
100.00 $
112.61 $
167.61 $
194.52 $
133.28 $
182.93
We are required to provide a line-graph presentation comparing cumulative stockholder returns on an indexed basis
with a broad equity market index and either a published industry index or an index of peer companies selected by us. We
have selected the Nasdaq Global Market Composite Index for the broad equity market index and the Nasdaq US
Benchmark Retailers Index as the published industry index.
Notes:
•
•
•
Assumes initial investment of $100.00 at our closing stock price on June 20, 2019 (our initial listing date). Total
return includes reinvestment of dividends.
If the accounting period end date ends on a day that is not a trading day, the preceding trading day is used.
The information included under the heading "Stock Performance Graph" in Item 5 of this Annual Report on Form
10-K is "furnished" and not "filed" and shall not be deemed to be "soliciting material" or subject to Regulation
14A, shall not be deemed "filed" for purposes of Section 18 of the Exchange Act or otherwise subject to the
limitations of that section, and shall not be deemed incorporated by reference into any of our filings under the
Securities Act or the Securities Exchange Act, whether made before or after the date of this report and irrespective
of any general incorporation by reference language in any such filing.
•
The stock price performance shown in the graph is not necessarily indicative of future price performance.
Unregistered Sales of Equity Securities
None.
46
Issuer Purchases of Equity Securities
The following table sets forth information on our share repurchase program activity during the fourth quarter of
fiscal 2023 (amounts in thousands, except share and per share data):
Period
Total Number of
Shares Purchased
Average Price Paid
Per Share (1)
October 1, 2023—October 28, 2023
69,554 $
October 29, 2023—November 25,
2023
November 26, 2023—December 30,
2023
Total fourth quarter
27,939
34,161
131,654 $
26.75
26.93
26.97
26.84
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs (2)
Maximum Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs (2)
69,554 $
91,422
27,939
34,161
131,654
90,671
89,751
_______________________
(1)
Includes commissions for the shares repurchased under the share repurchase program.
(2)
In November 2021, our Board of Directors approved a share repurchase program. This program, effective November 5, 2021 and
without an expiration date, authorizes us to repurchase, from time to time and at prices the Company deems appropriate, up to
$100.0 million of our outstanding common stock utilizing a variety of methods including open market purchases, accelerated
share repurchase programs, privately negotiated transactions, structured repurchase transactions and repurchases under a Rule
10b5-1 plan (which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under
securities laws). In addition to the Company's discretion, such repurchases are subject to, among other things, market conditions,
applicable legal requirements and debt covenants. The shares purchased were made in open-market transactions pursuant to a
Rule 10b5-1 plan.
ITEM 6. [RESERVED]
47
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
You should read the following discussion of our financial condition and results of operations in conjunction with the
consolidated financial statements and related notes thereto included in "Item 8. Financial Statements and Supplementary
Data." This discussion may contain forward-looking statements based upon current expectations that involve risks and
uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a
result of various factors, including those described in "Item 1A. Risk Factors" or set forth in other sections of this report.
For discussion related to the results of operations and changes in financial condition for fiscal 2022 compared to
fiscal 2021 refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in
Part II of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
We operate on a fiscal year that ends on the Saturday closest to December 31st each year. References to fiscal 2023,
fiscal 2022, and fiscal 2021 refer to the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022,
respectively. Our 2023, 2022 and 2021 fiscal years all consisted of 52 weeks.
As used in this report, references to "Grocery Outlet," "the Company," "the registrant," "we," "us" and "our," refer
to Grocery Outlet Holding Corp. and its consolidated subsidiary unless otherwise indicated or the context requires
otherwise.
OVERVIEW
We are a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a
network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic
products at prices generally 40% to 70% below those of conventional retailers. Entrepreneurial independent operators
("IOs") run our stores and create a neighborhood feel through personalized customer service and a localized product
offering. As of December 30, 2023, we had 468 stores in California, Washington, Oregon, Pennsylvania, Idaho, Nevada,
Maryland, New Jersey and Ohio.
Macroeconomic Conditions and Recent Developments
Over the past several years, and to a lesser extent recently, our business has been and continues to be impacted by
macroeconomic conditions including supply chain and labor challenges, inflation and subsequent disinflation, and changes
in consumer behavior, and our IOs have been impacted by staffing challenges, increased labor costs and utility costs within
their businesses. Furthermore, planned construction and opening of new stores has been, and may continue to be,
negatively impacted due to both increased lead times to acquire materials, obtain permits and licenses as well as higher
construction and development related costs, causing our new store growth in fiscal 2022 and 2023 to be below our long-
term strategic goal of 10% annualized store growth on average. The extent of the continuing impact of these factors on our
operational and financial performance will depend on many factors, including certain factors outside of our control.
Our new store growth efforts for fiscal 2024 and beyond are focused on organic growth and new real estate
opportunities that align with our long-term geographic expansion and store growth strategies. Complementary growth
opportunities may include expanding strategic relationships with large property owners, evaluating acquisitions of
opportunistic real estate that become available through consolidation in the retail sector, and exploring strategic regional
acquisitions of operating businesses. On February 14, 2024 we entered into a stock purchase agreement to acquire United
Grocery Outlet, which includes 40 stores in six adjacent states we do not operate in currently (Tennessee, North Carolina,
Georgia, Alabama, Kentucky and Virginia) and a company-operated distribution center. We expect this transaction to close
early in the second quarter of fiscal 2024. In addition to the newly acquired United Grocery Outlet stores, we plan to open
approximately 15 to 20 stores in existing markets in fiscal 2024, for a planned total of 55 to 60 net new stores in fiscal
2024.
In late August 2023, we replaced components of our enterprise resource planning system, including our financial
ledger, inventory management platform and product data warehouse system. The implementation of these system upgrades
resulted in disruption to our business operations, including ordering and inventory disruptions, which impacted our results
of operations during the remainder of fiscal 2023, as more fully described below in “Comparison of fiscal 2023 to fiscal
2022." Some of these disruptions are still ongoing as of the date of this filing and are expected to negatively impact the first
quarter of fiscal 2024 results.
For additional information regarding the risks related to our business and operations, see "Item 1A. Risk Factors" of
this Annual Report on Form 10-K.
48
Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key
generally accepted accounting principles ("GAAP") financial measures we use are net sales, gross profit and gross margin,
selling, general and administrative expenses ("SG&A") and operating income. The key operational metrics and non-GAAP
financial measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net
income and adjusted earnings per share.
Fiscal 2023 Overview
Key financial and operating performance results for our fiscal 2023 compared to our fiscal 2022 were as follows:
•
•
•
•
Net sales increased 10.9% to $3.97 billion for fiscal 2023 from $3.58 billion for fiscal 2022.
Comparable store sales increased by 7.5% in fiscal 2023, driven by a 8.3% increase in the number of
transactions partially offset by a 0.8% decrease in average transaction size.
Gross margin increased by 80 basis points to 31.3%, compared to gross margin of 30.5% for fiscal 2022.
In late August, we implemented new technology platforms and, as a result, experienced disruptions which are
estimated to have negatively impacted comparable store sales by approximately 90 basis points and gross
margin by 50 basis points in fiscal 2023.
• We opened 28 new stores and closed one, ending fiscal 2023 with 468 stores in nine states.
•
•
•
Net income increased 22.1% to $79.4 million, or $0.79 per diluted share for fiscal 2023, compared to net
income of $65.1 million, or $0.65 per diluted share, for fiscal 2022.
Adjusted EBITDA(1) increased 17.7% to $252.6 million for fiscal 2023 compared to $214.7 million for fiscal
2022.
Adjusted net income(1) increased 15.2% to $108.1 million, or $1.07 per adjusted diluted share(1) for fiscal 2023
compared to $93.9 million, or $0.94 per adjusted diluted share, for fiscal 2022.
_______________________
(1)
Adjusted EBITDA, adjusted net income and adjusted diluted earnings per share are non-GAAP financial measures, which
exclude the impact of certain special items. Please note that our non-GAAP financial measures should be considered as a
supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the
"Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including
their definitions, how the non-GAAP measures provide useful information to investors and how management utilizes them, and
reconciliations of the non-GAAP measures and the most directly comparable GAAP measures.
Key Components of Results of Operations
Net Sales
We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and
remitted to governmental authorities. Discounts provided to customers by us are recognized at the time of sale as a
reduction in net sales as the products are sold. Discounts that are funded solely by IOs are not recognized as a reduction in
net sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Net sales
consist of net sales from comparable stores, described below under "Comparable Store Sales," and non-comparable stores.
Growth of our net sales is generally driven by expansion of our store base in existing and new markets as well as
comparable store sales growth. Net sales are impacted by the spending habits of our customers, product mix and supply, as
well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories
supports growth in net sales by attracting new customers and encouraging repeat visits from our existing customers. The
spending habits of our customers are affected by changes in macroeconomic conditions, governmental benefit programs
such as the Supplemental Nutrition Assistance Program and discretionary income. Our customers' discretionary income is
impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends
and preferences, which fluctuate depending on the environment. Because we offer a broad selection of merchandise at
extreme values, historically our business has benefited from periods of economic uncertainty.
Cost of Sales, Gross Profit and Gross Margin
Cost of sales includes, among other things, merchandise costs, inventory markdowns, inventory losses,
transportation costs and distribution and warehousing costs, including depreciation. Gross profit is equal to our net sales
less our cost of sales. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by
49
management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by
product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs,
which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can
vary. Our gross profit is variable in nature and generally follows changes in net sales. While our disciplined buying
approach has produced consistent gross margins throughout economic cycles, which we believe has helped to mitigate
adverse impacts on gross profit and results of operations, changes in consumer demand as a result of macroeconomic
conditions, including inflationary cost increases for goods, labor and transportation, supply chain constraints and changes
in discretionary income, have resulted and could continue to result in higher variability to our gross margins. The
components of our cost of sales, as well as our gross profit and gross margin, may not be comparable to the same or similar
measures of our competitors and other retailers.
Selling, General and Administrative Expenses
SG&A are comprised of both store-related expenses and corporate expenses. Our store-related expenses include
commissions paid to IOs, occupancy and our portion of maintenance costs, depreciation and amortization of store-related
assets and the cost of opening new IO stores. Company-operated store-related expenses also include payroll, benefits,
supplies and utilities. Corporate expenses include payroll and benefits for corporate and field support, share-based
compensation, marketing and advertising, insurance and professional services, depreciation and amortization of corporate
assets and operator recruiting and training costs. We continue to closely manage our expenses and monitor SG&A as a
percentage of net sales. SG&A generally increases as we grow our store base and invest in our corporate infrastructure.
SG&A related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as
gross profits decline. We expect that our SG&A will continue to increase in future periods as we continue to grow our net
sales and gross profits. The components of our SG&A may not be comparable to the components of similar measures of
our competitors and other retailers.
In the first quarter of fiscal 2023, in order to enhance the comparability of our results with our peers, we updated our
presentation of the consolidated statements of operations and comprehensive income to include depreciation and
amortization expenses and share-based compensation expenses within selling, general and administrative expenses. Prior
period amounts have been reclassified to conform to current period presentation. The reclassification of these items had no
impact on net income, earnings per share, or retained earnings in the current or prior periods.
Operating Income
Operating income is gross profit less SG&A. Operating income excludes interest expense, net, gain on insurance
recoveries, loss on debt extinguishment and modification and income tax expense. We use operating income as an indicator
of the productivity of our business and our ability to manage expenses.
50
Results of Operations
The following tables summarize key components of our results of operations both in dollars and as a percentage of
net sales (amounts in thousands, except for percentages):
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other expenses (income):
Interest expense, net
Gain on insurance recoveries
Loss on debt extinguishment and modification
Total other expenses (income)
Income before income taxes
Income tax expense
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
3,969,453 $
2,727,774
1,241,679
1,115,897
3,578,101 $
2,486,002
1,092,099
997,109
125,782
94,990
3,079,582
2,130,796
948,786
859,691
89,095
16,361
—
5,340
21,701
104,081
24,644
17,967
—
1,274
19,241
75,749
10,697
15,564
(3,970)
—
11,594
77,501
15,191
62,310
Net income and comprehensive income
$
79,437 $
65,052 $
Percentage of net sales (1)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other expenses (income):
Interest expense, net
Gain on insurance recoveries
Loss on debt extinguishment and modification
Total other expenses (income)
Income before income taxes
Income tax expense
Net income and comprehensive income
_______________________
(1)
Components may not sum to totals due to rounding.
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
100.0 %
100.0 %
100.0 %
68.7 %
31.3 %
28.1 %
3.2 %
0.4 %
— %
0.1 %
0.5 %
2.6 %
0.6 %
2.0 %
69.5 %
30.5 %
27.9 %
2.7 %
0.5 %
— %
— %
0.5 %
2.1 %
0.3 %
1.8 %
69.2 %
30.8 %
27.9 %
2.9 %
0.5 %
(0.1) %
— %
0.4 %
2.5 %
0.5 %
2.0 %
51
Operating Metrics and Non-GAAP Financial Measures
Number of New Stores
The number of new stores reflects the number of stores opened during a particular reporting period. New stores
require an initial capital investment from us for store build-outs, fixtures and equipment that we amortize over time as well
as cash required for inventory and pre-opening expenses.
We expect new store growth to be the primary driver of our net sales growth over the long term. We lease
substantially all of our store locations. Our initial lease terms on stores are typically ten years with options to renew for two
or three successive five-year periods.
Comparable Store Sales
We use comparable store sales as an operating metric to measure performance of a store during the current reporting
period against the performance of the same store in the corresponding period of the previous year. Comparable store sales
are impacted by the same factors that impact net sales.
Comparable store sales consists of net sales from our stores beginning on the first day of the fourteenth full fiscal
month following the store's opening, which is when we believe comparability is achieved. Included in our comparable store
definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade
areas. Excluded from our comparable store definition are those stores that have been temporarily closed for an extended
period, those that have had their business materially disrupted for both planned projects as well as due to unforeseen
circumstances, permanent store closures and dispositions. When applicable, as was the case with fiscal 2020 and will be the
case with fiscal 2025, we exclude the net sales in the non-comparable week of a 53-week year from the same store sales
calculation after comparing the current and prior year weekly periods that are most closely aligned.
Opening new stores is a primary component of our growth strategy and, as we continue to execute on our growth
strategy, we expect that a significant portion of our net sales growth will be attributable to non-comparable store net sales.
Accordingly, comparable store sales is only one of many measures we use to assess the success of our growth strategy.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are supplemental key metrics used
by management and our Board of Directors to assess our financial performance. EBITDA, adjusted EBITDA, adjusted net
income and adjusted earnings per share are also frequently used by analysts, investors and other interested parties to
evaluate us and other companies in our industry. Management believes it is useful to investors and analysts to evaluate
these non-GAAP measures on the same basis as management uses to evaluate our operating results. We use EBITDA,
adjusted EBITDA, adjusted net income and adjusted earnings per share to supplement GAAP measures of performance to
evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against
that of other peer companies using similar measures. In addition, we use adjusted EBITDA to supplement GAAP measures
of performance to evaluate our performance in connection with compensation decisions. We believe that excluding items
from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our
core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides
additional information for analyzing trends in our business.
We define EBITDA as net income before net interest expense, income taxes and depreciation and amortization
expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, loss on debt
extinguishment and modification, asset impairment and gain or loss on disposition, acquisition costs and certain other
expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or
magnitude. Adjusted net income represents net income adjusted for the previously mentioned adjusted EBITDA
adjustments, further adjusted for costs related to amortization of purchase accounting assets and deferred financing costs,
tax adjustment to normalize the effective tax rate, and tax effect of total adjustments. Basic adjusted earnings per share is
calculated using adjusted net income, as defined above, and basic weighted average shares outstanding. Diluted adjusted
earnings per share is calculated using adjusted net income, as defined above, and diluted weighted average shares
outstanding. EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP measures
and may not be comparable to similar measures reported by other companies. EBITDA, adjusted EBITDA, adjusted net
income and adjusted earnings per share have limitations as analytical tools, and you should not consider them in isolation
or as a substitute for analysis of our results as reported under GAAP. We address the limitations of the non-GAAP
measures through the use of various GAAP measures. In the future, we will incur expenses or charges such as those added
back to calculate adjusted EBITDA or adjusted net income. Our presentation of EBITDA, adjusted EBITDA, adjusted net
52
income and adjusted earnings per share should not be construed as an inference that our future results will be unaffected by
the adjustments we have used to derive our non-GAAP measures.
The following table summarizes key operating metrics and non-GAAP financial measures for the periods presented
(amounts in thousands, except for percentages and store counts):
Other Financial and Operations Data
Number of new stores
Number of stores open at end of period
Comparable store sales increase (decrease) (1)
EBITDA (2)
Adjusted EBITDA (2)
Adjusted net income (2)
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
28
468
7.5 %
27
441
11.8 %
36
415
(6.0) %
$
$
$
208,424
252,621
108,113
$
$
$
171,967
214,682
93,858
$
$
$
164,189
182,892
78,588
_______________________
(1)
Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following
the store's opening, which is when we believe comparability is achieved.
(2)
See "—GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.
GAAP to Non-GAAP Reconciliations
The following tables provide a reconciliation from our GAAP net income to EBITDA and adjusted EBITDA, GAAP
net income to adjusted net income, and our GAAP earnings per share to adjusted earnings per share for the periods
presented (amounts in thousands, except per share data):
Net income
Interest expense, net
Income tax expense
Depreciation and amortization expenses
EBITDA
Share-based compensation expenses (1)
Loss on debt extinguishment and modification (2)
Asset impairment and gain or loss on disposition (3)
Acquisition costs (4)
Other (5)
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
79,437 $
65,052 $
16,361
24,644
87,982
208,424
31,091
5,340
485
459
6,822
17,967
10,697
78,251
171,967
32,556
1,274
1,176
—
7,709
62,310
15,564
15,191
71,124
164,189
17,615
—
1,241
—
(153)
Adjusted EBITDA
$
252,621 $
214,682 $
182,892
53
Net income
Share-based compensation expenses (1)
Loss on debt extinguishment and modification (2)
Asset impairment and gain or loss on disposition (3)
Acquisition costs (4)
Other (5)
Amortization of purchase accounting assets and deferred financing
costs (6)
Tax adjustment to normalize effective tax rate (7)
Tax effect of total adjustments (8)
Adjusted net income
GAAP earnings per share
Basic
Diluted
Adjusted earnings per share
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
$
$
$
$
79,437 $
31,091
5,340
485
459
6,822
5,838
(6,423)
(14,936)
108,113 $
65,052 $
32,556
1,274
1,176
—
7,709
10,877
(10,084)
(14,702)
93,858 $
0.80 $
0.79 $
1.10 $
1.07 $
0.67 $
0.65 $
0.97 $
0.94 $
62,310
17,615
—
1,241
—
(153)
11,821
(5,928)
(8,318)
78,588
0.65
0.63
0.82
0.79
98,709
100,831
96,812
100,162
95,725
99,418
___________________________
(1)
Includes non-cash share-based compensation expense and less than $0.1 million, $0.1 million, and $0.2 million of cash dividends
paid in fiscal 2023, 2022, and 2021 respectively, on vested share-based awards as a result of dividends declared in connection
with recapitalizations that occurred in fiscal 2018 and 2016.
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Represents the write-off of debt issuance costs and debt discounts as well as debt modification costs related to refinancing and/or
repayment of our credit facilities. See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional
information.
Represents asset impairment charges and gains or losses on dispositions of assets.
Represents costs related to the acquisition of United Grocery Outlet, including due diligence, legal, and other consulting
expenses.
Represents other non-recurring, non-cash or non-operational items, such as technology upgrade implementation costs, strategic
project costs, costs related to employer payroll taxes associated with equity awards, legal settlements and other legal expenses,
store closing costs, certain personnel-related costs and miscellaneous costs.
Represents the amortization of debt issuance costs as well as the incremental amortization of an asset step-up resulting from
purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC,
which included trademarks, customer lists, and below-market leases.
Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not
consider in our evaluation of ongoing performance, including excess tax expenses or benefits related to stock option exercises
and vesting of restricted stock units that are recorded in earnings as discrete items in the reporting period in which they occur.
Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding
any non-recurring and unusual tax items.
54
Comparison of fiscal 2023 to fiscal 2022 (amounts in thousands, except percentages)
Net Sales
Net sales
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$
3,969,453 $
3,578,101 $
391,352
10.9 %
The increase in net sales for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase in
comparable store sales as well as non-comparable store net sales growth primarily from the 27 net new stores opened
during fiscal 2023, partially offset by disruptions related to our aforementioned system upgrades.
Comparable store sales increased 7.5% for fiscal 2023 compared to fiscal 2022. The increase was driven by an 8.3%
increase in the number of transactions combined with a 0.8% decrease in average transaction size.
Cost of Sales
Cost of sales
% of net sales
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$ 2,727,774
$ 2,486,002
$
241,772
9.7 %
68.7 %
69.5 %
The increase in cost of sales for fiscal 2023 compared to fiscal 2022 was primarily the result of an increase in
comparable store sales combined with non-comparable sales from 27 net new stores opened during fiscal 2023.
Costs as a percentage of net sales decreased for fiscal 2023 compared to fiscal 2022 primarily due to our changing
assortment along with generally strong purchasing and inventory management in fiscal 2023, partially offset by the late
third quarter and fourth quarter of fiscal 2023 impacts related to our system upgrades.
Gross Profit and Gross Margin
Gross profit
Gross margin
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$ 1,241,679
$ 1,092,099
$
149,580
13.7 %
31.3 %
30.5 %
The increase in gross profit for fiscal 2023 compared to fiscal 2022 was primarily the result of an increase in
comparable store sales combined with non-comparable sales from 27 net new stores opened during fiscal 2023, partially
offset by the late third quarter and fourth quarter of fiscal 2023 impacts related to our system upgrades.
Gross margin increased for fiscal 2023 compared to fiscal 2022 primarily due to our changing assortment along with
generally strong purchasing and inventory management during fiscal 2023, partially offset by impacts related to our system
upgrades.
Selling, General and Administrative Expenses
SG&A
% of net sales
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$ 1,115,897
$
997,109
$
118,788
11.9 %
28.1 %
27.9 %
The increase in SG&A for fiscal 2023 compared to fiscal 2022 was driven by $98.0 million in higher store-related
expenses and $20.8 million in higher corporate-related expenses. Store-related expenses primarily increased as a result of
higher commission payments to IOs, reflecting gross profit growth together with incremental support we elected to provide
55
to our IOs in connection with our system upgrades, as well as higher store occupancy costs due to 27 net new stores opened
during 2023, partially offset by the recognition of e-commerce vendor obligations. Corporate-related expenses increased
largely due to increased personnel and professional service costs to support the continued growth of the business as well as
increased corporate-related depreciation and amortization expense driven by investments in general and administrative
infrastructure.
As a percentage of net sales, SG&A increased slightly for fiscal 2023 compared to fiscal 2022 primarily due to the
aforementioned factors.
Interest Expense, net
Interest expense, net
% of net sales
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$
16,361
$
17,967
$
(1,606)
(8.9) %
0.4 %
0.5 %
The decrease in net interest expense for fiscal 2023 compared to fiscal 2022 was primarily driven by increased
interest income from IO notes and cash and cash equivalents as well as $2.1 million in capitalized interest in fiscal 2023,
partially offset by increased interest expense on loans. The increased interest expense on loans was due to increases in the
effective borrowing rate on loans, partially offset by a decrease in principal debt outstanding over fiscal 2023.
See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.
Loss on Debt Extinguishment and Modification
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
Loss on debt extinguishment and modification
$
5,340
$
1,274
$
4,066
319.2 %
% of net sales
0.1 %
— %
During fiscal 2023, we recorded a $5.3 million loss on debt extinguishment related to the payoff of $385.0 million of
principal on the senior term loan outstanding under our prior credit facilities. During fiscal 2022, we recorded a $1.3
million loss on debt extinguishment related to the prepayment of $75.0 million of principal on the senior term loan
outstanding under our prior credit facilities.
See NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information.
Income Tax Expense
Income tax expense
% of net sales
Effective tax rate
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$
24,644
$
10,697
$
13,947
130.4 %
0.6 %
23.7 %
0.3 %
14.1 %
The increase in income tax expense for fiscal 2023 compared to fiscal 2022 was primarily driven by higher pre-tax
income.
The increase in our effective income tax rate for fiscal 2023 compared to fiscal 2022 was primarily driven by lower
excess tax benefits related to the exercise of stock options as well as non-deductible executive compensation under Internal
Revenue Code Section 162(m) during fiscal 2023, which was not applicable during fiscal 2022.
See NOTE 10—Income Taxes to our Consolidated Financial Statements for additional information.
56
Net Income
Net income
% of net sales
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
$
79,437
$
65,052
$
14,385
22.1 %
2.0 %
1.8 %
As a result of the foregoing factors, net income increased in fiscal 2023 compared to fiscal 2022.
Adjusted EBITDA
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
Adjusted EBITDA
$
252,621 $
214,682 $
37,939
17.7 %
The increase in adjusted EBITDA for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase
in comparable store sales of 7.5% for fiscal 2023 as well as higher net sales resulting from new store growth, combined
with increased gross margin.
Adjusted Net Income
Fiscal Year Ended
December 30,
2023
December 31,
2022
$ Change
% Change
Adjusted net income
$
108,113 $
93,858 $
14,255
15.2 %
The increase in adjusted net income for fiscal 2023 compared to fiscal 2022 was primarily attributable to an increase
in comparable store sales of 7.5% for fiscal 2023 as well as higher net sales resulting from new store growth, combined
with increased gross margin.
57
Liquidity and Capital Resources
Sources of Liquidity
Based on our current operations and new store growth plans, we expect to satisfy our short-term and long-term cash
requirements through a combination of our existing cash and cash equivalents position, funds generated from operating
activities, and the borrowing capacity available in the revolving credit facility under our credit agreement, dated as of
February 21, 2023 (the "2023 Credit Agreement"). If cash generated from our operations and borrowings under our
revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain
additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us
when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.
Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new
debt instruments at interest rates, maturities and terms we deem attractive.
As of December 30, 2023, we had cash and cash equivalents of $115.0 million, which consisted primarily of cash
held in checking and money market accounts with financial institutions. In addition, we have a revolving credit facility
with $400.0 million in borrowing capacity under our 2023 Credit Agreement. As of December 30, 2023, we had no
borrowings outstanding under the revolving credit facility and $4.2 million of outstanding standby letters of credit,
resulting in $395.8 million of remaining borrowing capacity available under this revolving credit facility.
On February 21, 2023, we entered into the 2023 Credit Agreement, which provides for senior secured credit
facilities consisting of (i) a senior secured term loan facility (the "senior term loan") in an original aggregate principal
amount of $300.0 million and (ii) a senior secured revolving credit facility (the "revolving credit facility" and, together
with the senior term loan, the "new credit facilities") in an aggregate principal amount of $400.0 million. The senior term
loan was borrowed in full on such date, and $25.0 million of the revolving credit facility was borrowed on such date. Also
on February 21, 2023, we repaid all of the outstanding indebtedness under our prior first lien credit agreement, as well as
fees and expenses in connection therewith. See NOTE 6—Long-term Debt to our Consolidated Financial Statements for
further detail regarding the 2023 Credit Agreement and our prior first lien credit agreement.
We may also, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt. On
April 21, 2023, we repaid the $25.0 million of principal on our revolving credit facility. Since the April 21, 2023
repayment, no amounts were borrowed under this revolving credit facility.
The senior secured credit facilities of the 2023 Credit Agreement permit us to add incremental term loan facilities,
increase any existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving
credit facility tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in
excess of the sum of the greater of $200.0 million and 100% of Consolidated EBITDA (as defined in the 2023 Credit
Agreement), subject to certain limitations, plus (b) voluntary prepayments of the term loan facility, voluntary permanent
reductions of the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens
on the collateral securing the credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the
full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn,
and after giving effect to any appropriate pro forma adjustment events) we would be in compliance, on a pro forma basis
(but excluding the cash proceeds of such incurrence), with a Total Net Leverage Ratio (as defined in the 2023 Credit
Agreement) of 3.00 to 1.00.
Material Cash Requirements
Leases
We have operating and finance lease arrangements for substantially all store locations, distribution centers, and
certain office space and equipment. As of December 30, 2023, total lease assets and lease liabilities were $952.1 million
and $1.1 billion, respectively, and we had executed leases for 41 store locations that we had not yet taken possession of
with total undiscounted future lease payments of $229.5 million and lease terms through 2043. See NOTE 4—Leases to
our Consolidated Financial Statements for further detail of our lease obligations and the timing of lease liability maturities.
Debt Obligations and Interest Payments
See NOTE 6—Long-term Debt to our Consolidated Financial Statements for further detail of our 2023 Credit
Agreement, which consists of a senior term loan with $294.4 million of principal outstanding as of December 30, 2023 and
a revolving credit facility for an amount up to $400.0 million, and the timing of principal maturities. As of December 30,
2023, based on the then-current interest rate of 7.46%, expected future interest payments associated with our debt totaled
$85.5 million, with $22.0 million payable during fiscal 2024. The 2023 Credit Agreement requires us to make scheduled
quarterly amortization payments on the senior term loan. Such payments total $50.6 million over the remaining term of the
58
senior term loan, with $5.6 million payable in fiscal 2024. The remaining senior term loan principal balance will become
due in February 2028 at maturity.
Capital Expenditures
Our capital expenditures are primarily related to new store openings, ongoing store maintenance and improvements,
expenditures related to our distribution centers and infrastructure-related investments, including investments related to
upgrading and maintaining our information technology systems and corporate offices. We expect to fund capital
expenditures through cash generated from our operations. As compared to capital expenditures of $175.6 million, net of
tenant improvement allowances, in fiscal 2023, we expect to incur capital expenditures of approximately $170.0 million,
net of tenant improvement allowances, in fiscal 2024, primarily related to new store openings, ongoing store maintenance
and improvements and systems and infrastructure investments.
Working Capital and Purchase Commitments
Our primary working capital requirements are for the purchase of inventory, payroll, rent, issuance of IO notes,
other store facilities costs, distribution costs and general and administrative costs. Our working capital requirements
fluctuate during the year, driven primarily by the timing of inventory fluctuations, new store openings and capital spending.
Our purchase commitments consist of non-cancelable obligations under service and supply contracts. As of
December 30, 2023, we had total purchase obligations of $4.9 million, with $4.6 million payable during fiscal 2024.
Share Repurchases and Dividends
We may repurchase our common stock pursuant to programs approved by our Board of Directors. As of
December 30, 2023, we had $89.8 million of repurchase authority remaining under the current share repurchase program.
See "Item 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities—Issuer Purchases of Equity Securities" for discussion about our Board-authorized share repurchase program.
As of December 30, 2023, we currently do not expect to declare any dividends on our common stock in the
foreseeable future.
Acquisition of United Grocery Outlet
On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a stock purchase agreement to
acquire BBGO Acquisition, Inc., a holding company that owns all of the outstanding capital stock of The Bargain Barn
Inc., which does business as United Grocery Outlet, for approximately $62.0 million in cash, subject to customary purchase
price adjustments. This transaction is expected to close early in the second quarter of fiscal 2024 and remains subject to
customary closing conditions. We expect to finance the transaction with available cash. See "Acquisition of United
Grocery Outlet" in "Item 1. Business" of this Annual Report on Form 10-K for further detail.
Debt Covenants
The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and
exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among
other things, limit the our ability and the ability of our restricted subsidiary to: pay dividends or distributions, repurchase
equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and
preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain
restrictions on the ability of our subsidiary to pay dividends or make other payments to the borrower. The 2023 Credit
Agreement also contains financial performance covenants requiring us to satisfy a maximum total net leverage ratio test
and a minimum interest coverage ratio test as of the last day of each fiscal quarter. The maximum total net leverage ratio
test requires us to be in compliance with a Total Net Leverage Ratio no greater than 3.50 to 1.00 as of the last day of each
test period ending prior to the test period ending on or about December 31, 2025, and no greater than 3.25 to 1.00 as of the
last day of each test period ending thereafter, subject to certain adjustments set forth in the 2023 Credit Agreement. The
minimum interest coverage ratio test requires us to be in compliance with a Consolidated Interest Coverage Ratio (as
defined in the 2023 Credit Agreement) no less than 1.75 to 1.00 as of the last day of each test period.
As of December 30, 2023, we were in compliance with all applicable financial covenant requirements for our 2023
Credit Agreement.
59
Cash Flows
The following table summarizes our cash flows for the periods presented (amounts in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash Provided by Operating Activities
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
303,447 $
(194,165)
185,511 $
(149,931)
165,587
(136,713)
(97,023)
12,259 $
(72,937)
(37,357) $
5,885
34,759
Net cash provided by operating activities was $303.4 million for fiscal 2023 compared to $185.5 million for fiscal
2022. The $117.9 million increase was primarily driven by higher trade accounts payable, higher accrued expenses and
changes in merchandise inventory levels, combined with increased net sales driven by comparable stores sales and new
store growth, partially offset by increases in prepaid expenses. The changes in trade accounts payable and accrued expenses
were partially attributable to disruptions related to our aforementioned system upgrades.
Cash Used in Investing Activities
Net cash used in investing activities was $194.2 million for fiscal 2023 compared to $149.9 million for fiscal 2022.
The $44.2 million increase was primarily due to increased spending on property and equipment due to higher store count
and accelerated payments made to construction vendors near the end of fiscal 2023, as well as increased investments in
computer software intangible assets related to upgrading components of our enterprise resource planning system, including
our financial ledger, inventory management platform and product data warehouse system.
Cash Provided by (Used in) Financing Activities
Net cash used in financing activities of $97.0 million for fiscal 2023 was primarily due to the payoff of
$385.0 million of principal on the prior senior term loan outstanding under our prior credit facilities, repayment of the
$25.0 million of principal on our revolving credit facility under our new credit facilities, $4.5 million in debt issuance costs
paid, the repurchase of $5.9 million worth of common stock, and $5.6 million in scheduled principal payments on the
senior term loan under our new current credit facilities, partially offset by $325.0 million in proceeds from the new credit
facilities. Net cash used in financing activities of $72.9 million for fiscal 2022 was primarily due to the prepayment of
$75.0 million of principal on the senior term loan outstanding under our prior credit facilities as well as the repurchase of
$3.5 million worth of common stock, partially offset by $6.9 million in proceeds from the exercise of stock options.
60
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. A summary of our significant
accounting policies can be found in NOTE 1—Organization and Summary of Significant Accounting Policies to our
Consolidated Financial Statements. The preparation of our consolidated financial statements requires us to make judgments
and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate
our estimates and assumptions on an ongoing basis. Our judgments and estimates are based on historical experience and
other factors believed to be reasonable under the circumstances.
Management evaluated the development and selection of our critical accounting policies and estimates and believes
that the following involves a higher degree of judgment or complexity and is most significant to reporting our results of
operations and financial position, and is therefore discussed as critical. With respect to critical accounting policies, even a
relatively minor variance between actual and expected results can potentially have a materially favorable or unfavorable
impact on subsequent results of operations.
Long-lived asset impairment
We evaluate long-lived assets, including property and equipment and lease right-of-use assets, for impairment when
events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. For purposes of
this evaluation, long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash
flows are largely independent of the cash flows of other assets. Our retail stores are evaluated for impairment at the store
level. A long-lived asset or asset group may be impaired if its carrying value exceeds its estimated undiscounted future cash
flows over its remaining useful life. The total amount of property and equipment, including store assets, and operating lease
right-of-use assets as of December 30, 2023 were $642.5 million and $945.7 million, respectively.
Our impairment calculations contain uncertainties because they require us to make assumptions and to apply
judgment to estimate future cash flows. Key assumptions used in estimating future cash flows include projected sales
growth, gross margin and operating expenses. Estimates of sales growth, gross margin and operating expenses are based on
internal projections and consider the store’s historical performance, length of time the store has been open, the local market
economics and the business environment impacting the store’s performance. These estimates are subjective and our ability
to realize future cash flows is affected by factors such as ongoing maintenance and improvement of the assets, changes in
economic conditions and changes in operating performance. We have not made any material changes in the accounting
methodology used to evaluate the impairment of long-lived assets during fiscal 2023. If actual results are not consistent
with our estimates and assumptions used to calculate estimated future cash flows, we may be exposed to impairment losses
that could be material.
If a long-lived asset or asset group is determined to be impaired, we record an impairment loss for the amount by
which the carrying value of the asset or asset group exceeds its fair value. The estimated fair value of the asset or asset
group is based on the estimated discounted future cash flows of the asset or asset group using a discount rate commensurate
with the related risk.
There were no adjustments to the carrying value of long-lived assets due to impairment charges during fiscal 2023,
2022 and 2021.
Recent Accounting Pronouncements
Refer to NOTE 1—Organization and Summary of Significant Accounting Policies to our Consolidated Financial
Statements.
61
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our operating results are subject to market risk from interest rate fluctuations on our credit facilities, which bear
variable interest rates. As of December 30, 2023, our outstanding borrowings included $294.4 million from our senior term
loan under the 2023 Credit Agreement. As of December 30, 2023, the interest rate on the senior term loan was 7.46% (See
NOTE 6—Long-term Debt to our Consolidated Financial Statements for additional information). Based on the outstanding
balance and interest rate of our senior term loan as of December 30, 2023, a hypothetical 10% relative increase or decrease
in the interest rate would cause an increase or decrease in interest expense, excluding the capitalization of interest, of
approximately $2.2 million over the next 12 months.
We do not use derivative financial instruments for speculative or trading purposes, but this does not preclude our
adoption of specific hedging strategies in the future.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to
accurately measure the impact of inflation due to the imprecise nature of the estimates required, we have experienced over
the last several years varying levels of inflation, resulting in part from various supply disruptions, increased shipping and
transportation costs, increased commodity costs, increased labor costs in the supply chain, increased SG&A related to
personnel, travel, and other operational costs and other disruptions caused by the current macroeconomic environment.
Similarly, our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their
businesses. Furthermore, our results of operations and financial condition may be materially impacted by inflation in the
future.
62
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GROCERY OUTLET HOLDING CORP.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34)
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Page
64
66
67
68
69
71
63
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Grocery Outlet Holding Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Grocery Outlet Holding Corp. and subsidiary (the
"Company") as of December 30, 2023 and December 31, 2022, the related consolidated statements of operations and
comprehensive income, stockholders' equity, and cash flows, for each of the fiscal years ended December 30, 2023,
December 31, 2022 and January 1, 2022, and the related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of
December 30, 2023 and December 31, 2022, and the results of its operations and its cash flows for each of the fiscal years
ended December 30, 2023, December 31, 2022, and January 1, 2022, in conformity with accounting principles generally
accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company's internal control over financial reporting as of December 30, 2023, based on criteria
established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 28, 2024, expressed an adverse opinion on the Company's
internal control over financial reporting because of a material weakness.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,
whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our
opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements
that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or
disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex
judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the
critical audit matter or on the accounts or disclosures to which it relates.
Long-Lived Asset Impairment — Recoverability of stores identified with impairment indicators — Refer to Notes 1, 3,
and 4 to the financial statements
Critical Audit Matter Description
The Company's long-lived assets, primarily property and equipment and lease right-of-use assets, are grouped at the store
level, which is the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets
and liabilities.
On at least a quarterly basis, management reviews the Company's asset groups for indicators of impairment through an
analysis which detects events or changes in circumstances that indicate that the carrying value of asset groups may not be
recoverable. Management's impairment analysis determines whether projected undiscounted future cash flows from
64
operations are sufficient to recover the carrying value of these store assets. Impairment may result when the carrying value
of these store assets exceeds the estimated undiscounted future cash flows over the remaining useful life. Management's
impairment analysis consists of (1) identifying stores with indicators of impairment, (2) testing the identified store assets
for recoverability and (3) measuring the impairment loss, if any. During the year ended December 30, 2023, management
did not record impairment of long-lived assets.
The principal considerations for our determination that performing procedures relating to the impairment of store-level
long-lived assets is a critical audit matter relates to the significant judgment by management in developing the estimated
future cash flows expected to be generated by the asset. This in turn led to a high degree of auditor judgment, subjectivity,
and effort in performing procedures and evaluating the cash flows, including the significant assumptions for sales growth
rate, gross margin and operating expenses.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management's judgments regarding the forecasts of future cash flows included the
following, among others:
• We evaluated management's ability to accurately forecast future sales growth, gross margin, and operating
expenses by comparing actual results to management's historical forecasts
• We evaluated the reasonableness of management's sales growth, gross margin, and operating expense forecasts by
comparing the forecasts to:
– Current and past sales, gross margins, and operating expenses of the overall Company and individual
store level asset groups
– Consistency with external market and industry data
–
Internal communications to management and the Board of Directors
• We tested the completeness, accuracy, and relevance of underlying data used in determining undiscounted cash
flows.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2024
We have served as the Company's auditor since 2007.
65
GROCERY OUTLET HOLDING CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Assets
Current assets:
Cash and cash equivalents
Independent operator receivables and current portion of independent operator notes,
net of allowance $5,092 and $2,238
Other accounts receivable, net of allowance $2 and $7
Merchandise inventories
Prepaid expenses and other current assets
Total current assets
Independent operator notes and receivables, net of allowance $11,059 and $12,509
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable
Accrued and other current liabilities
Accrued compensation
Current portion of long-term debt
Current lease liabilities
Income and other taxes payable
Total current liabilities
Long-term debt, net
Deferred income tax liabilities, net
Long-term lease liabilities
Other long-term liabilities
Total liabilities
Commitments and contingencies (NOTE 12)
Stockholders' equity:
Common stock, par value $0.001 per share, 500,000,000 shares authorized; 99,223,863
and 97,674,356 shares issued and outstanding, respectively
Series A Preferred stock, par value $0.001 per share, 50,000,000 shares authorized; no
shares issued and outstanding
Additional paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See Notes to Consolidated Financial Statements
66
December 30,
2023
December 31,
2022
$
114,987 $
102,728
$
$
14,943
4,185
349,993
32,443
516,551
28,134
642,462
945,710
78,556
747,943
10,230
2,969,586 $
209,354 $
66,655
24,749
5,625
63,774
13,808
383,965
287,107
38,601
1,038,307
2,267
1,750,247
10,805
4,368
334,319
15,137
467,357
22,535
560,746
902,163
63,993
747,943
7,667
2,772,404
137,631
53,213
27,194
—
54,586
7,890
280,514
379,650
19,782
980,759
1,485
1,662,190
99
—
98
—
877,276
341,964
1,219,339
847,589
262,527
1,110,214
$
2,969,586 $
2,772,404
GROCERY OUTLET HOLDING CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
Net sales
Cost of sales
Gross profit
Selling, general and administrative expenses
Operating income
Other expenses (income):
Interest expense, net
Gain on insurance recoveries
Loss on debt extinguishment and modification
Total other expenses (income)
Income before income taxes
Income tax expense
Net income and comprehensive income
Basic earnings per share
Diluted earnings per share
Weighted average shares outstanding:
Basic
Diluted
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
3,969,453 $
2,727,774
1,241,679
1,115,897
3,578,101 $
2,486,002
1,092,099
997,109
125,782
94,990
3,079,582
2,130,796
948,786
859,691
89,095
16,361
—
5,340
21,701
104,081
24,644
17,967
—
1,274
19,241
75,749
10,697
$
$
$
79,437 $
65,052 $
0.80 $
0.79 $
0.67 $
0.65 $
98,709
100,831
96,812
100,162
15,564
(3,970)
—
11,594
77,501
15,191
62,310
0.65
0.63
95,725
99,418
See Notes to Consolidated Financial Statements
67
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8
6
GROCERY OUTLET HOLDING CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment
Amortization of intangible and other assets
Amortization of debt issuance costs and debt discounts
Non-cash rent
Gain on insurance recoveries
Loss on debt extinguishment and modification
Share-based compensation
Provision for independent operator and other accounts receivable
reserves
Proceeds from insurance recoveries - business interruption and
inventory
Deferred income taxes
Other
Changes in operating assets and liabilities:
Independent operator and other accounts receivable
Merchandise inventories
Prepaid expenses and other assets
Income and other taxes payable
Trade accounts payable, accrued compensation and other liabilities
Operating lease liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Advances to independent operators
Repayments of advances from independent operators
Purchases of property and equipment
Proceeds from sales of assets
Investments in intangible assets and licenses
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
79,437 $
65,052 $
62,310
76,600
11,382
1,084
5,226
—
5,340
70,451
7,800
2,264
6,932
—
1,274
31,091
32,556
63,442
7,682
2,511
10,753
(3,970)
—
17,615
3,674
4,318
4,813
—
18,819
487
(11,031)
(15,674)
(10,716)
5,918
91,049
10,761
303,447
—
10,367
1,176
2,103
12,944
1,251
(7,230)
(21)
(58,817)
(30,345)
841
705
35,094
12,728
185,511
3,301
(362)
3,179
8,381
165,587
(8,565)
(9,819)
(10,024)
5,734
6,917
(168,990)
(130,482)
24
39
(23,000)
(16,586)
4,563
(123,384)
37
(9,772)
1,867
Proceeds from insurance recoveries - property and equipment
632
—
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from exercise of stock options
Tax withholding related to net settlement of employee share-based
awards
Proceeds from term loan due 2028
Proceeds from revolving credit facility
Principal payments on revolving credit facility
Principal payments on senior term loan due 2025
Principal payments on senior term loan due 2028
Principal payments on finance leases
Repurchase of common stock
(194,165)
(149,931)
(136,713)
5,958
6,890
7,226
(537)
300,000
25,000
(25,000)
—
—
—
—
(385,000)
(75,000)
(5,625)
(1,398)
(5,893)
—
(1,271)
(3,451)
—
—
—
—
—
—
(1,155)
—
69
Dividends paid
Debt issuance costs paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest, net of amounts capitalized
Income taxes paid (refunded) in cash
Property and equipment accrued at end of period
Intangible assets accrued at end of period
Acquisition of equipment in exchange for reduction of independent
operator notes and independent operator receivables
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
(15)
(4,513)
(97,023)
12,259
102,728
114,987 $
22,722 $
7,557 $
7,310 $
5,507 $
(105)
—
(72,937)
(37,357)
140,085
102,728 $
19,142 $
(1,721) $
18,536 $
3,736 $
(186)
—
5,885
34,759
105,326
140,085
14,604
477
14,986
1,613
— $
— $
7,609
$
$
$
$
$
$
See Notes to Consolidated Financial Statements
70
GROCERY OUTLET HOLDING CORP.
Notes to Consolidated Financial Statements
NOTE 1—Organization and Summary of Significant Accounting Policies
Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet
Holding Corp. (together with its wholly owned subsidiary, collectively, "Grocery Outlet," "we," or the "Company") is a
high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of
independently operated stores. Effective July 12, 2023, subsidiaries Globe Intermediate Corp., GOBP Holdings, Inc. and
GOBP Midco, Inc. were merged with and into Grocery Outlet Holding Corp. As of December 30, 2023, we had 468 stores
throughout California, Washington, Oregon, Pennsylvania, Idaho, Nevada, Maryland, New Jersey and Ohio.
Grocery Outlet Holding Corp. (the "Parent Company") owns 100% of Grocery Outlet Inc. ("GOI").
Fiscal Year — We operate on a fiscal year that ends on the Saturday closest to December 31st each year. The fiscal
years ended December 30, 2023 ("fiscal 2023'), December 31, 2022 ("fiscal 2022") and January 1, 2022 ("fiscal 2021") all
consisted of 52 weeks.
Basis of Presentation — The accompanying consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and
regulations of the United States ("U.S.") Securities and Exchange Commission (the "SEC"). Our consolidated financial
statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiary. All intercompany
balances and transactions were eliminated. In the opinion of management, these consolidated financial statements include
all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods
presented. Beginning with the first quarter of fiscal 2023, certain prior period amounts in the consolidated statements of
operations and comprehensive income have been reclassified to conform to the current period presentation. Specifically, in
order to enhance the comparability of our results with our peers, depreciation and amortization expenses and share-based
compensation expenses are now included in selling, general and administrative expenses. The reclassification of these
items had no impact on net income, earnings per share, or retained earnings in the current or prior periods.
Use of Estimates — The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties.
Changes in these estimates are recorded when known. We consider our accounting policy relating to long-lived asset
impairment to be a significant accounting policy that involves management's estimate and judgment.
Segment Reporting — We manage our business as one operating segment. In addition, all of our sales were made
to customers located in the U.S. and all property and equipment is located in the U.S.
Cash and Cash Equivalents — We consider all highly liquid investments, purchased with original maturities of
three months or less, to be cash equivalents. All cash equivalents are unrestricted and available for immediate use. Cash
and cash equivalents consisted primarily of cash held in checking and money market accounts as of December 30, 2023
and December 31, 2022.
Allowance for Independent Operator ("IO") Receivables and IO Notes and Other Accounts Receivable — We
maintain allowances and accruals for estimated losses of amounts advanced to IOs and other third parties determined to be
uncollectible. See NOTE 2—Independent Operator Notes and Independent Operator Receivables, for additional
information.
Concentrations of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts and notes receivable. Although we deposit our cash with
creditworthy financial institutions, our deposits typically exceed federally insured limits. To date, we have not experienced
any losses on our cash deposits. No single customer or store represented more than 10% of net sales for the fiscal years
ended December 30, 2023, December 31, 2022 and January 1, 2022. No single customer or IO represented more than 10%
of accounts receivable or notes receivable as of December 30, 2023 and December 31, 2022.
Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value. Cost is
determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store
inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages.
This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts.
71
Property and Equipment — Property and equipment is stated at cost less accumulated depreciation and includes
expenditures for significant improvements to leased premises. Depreciation of property and equipment is calculated using
the straight-line method over the estimated useful lives of the assets, generally ranging from three to 15 years. Amortization
of leasehold improvements is calculated based on the shorter of their estimated useful life or the remaining terms of the
lease. Remaining lease terms currently range from one to 20 years.
We evaluate events and changes in circumstances that could indicate carrying amounts of long-lived assets,
including property and equipment, may not be recoverable. When such events or changes in circumstances occur, we assess
the recoverability of long-lived assets by determining whether or not the carrying value of such assets will be recovered
through undiscounted future cash flows derived from their use and eventual disposition. For purposes of this assessment,
long-lived assets are grouped with other assets and liabilities at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities, primarily at an individual store level. If the sum of the
undiscounted future cash flows is less than the carrying amount of an asset, we record an impairment loss for the amount
by which the carrying amount of the asset exceeds its fair value. The total amount of property and equipment, including
store assets, and operating lease right-of-use assets as of December 30, 2023 were $642.5 million and $945.7 million,
respectively, and as of December 31, 2022 were $560.7 million and $902.2 million, respectively. The estimated fair value
of the asset or asset group is based on the estimated discounted future cash flows of the asset or asset group using a
discount rate commensurate with the related risk. There were no adjustments to the carrying value of long-lived assets due
to impairment charges during fiscal 2023, 2022 and 2021. See NOTE 3—Property and Equipment and NOTE 4—Leases
for additional information.
Leases — We determine if an arrangement is a lease at inception. Operating leases are included in operating lease
right-of-use assets, current lease liabilities, and long-term lease liabilities in our consolidated balance sheets. Finance leases
are included in other assets, current lease liabilities, and long-term lease liabilities in our consolidated balance sheets.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our
obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are
recognized at commencement date based on the present value of the lease payments over the lease term, reduced by
landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is
estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the
information available at the commencement date, to determine the present value of our lease payments. Lease term is
defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably
certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis
over the lease term while finance lease payments are charged to interest expense and depreciation and amortization expense
over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for
these short-term leases is recognized on a straight-line basis over the lease term.
We generally lease retail facilities for store locations, distribution centers, office space and equipment and account
for these leases as operating leases. We account for one retail store lease and certain equipment leases as finance leases.
Lease and non-lease components are accounted for separately. We sublease certain real estate to unrelated third parties
under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores.
Goodwill and Other Intangible Assets — We have both goodwill and intangible assets recorded on our
consolidated balance sheets.
Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in
a business combination. Goodwill is not amortized, but rather is subject to an annual impairment evaluation which is
performed during our fourth quarter or when events or changes in circumstances indicate that the value of goodwill may be
impaired. Our impairment evaluation of goodwill consists of an initial qualitative assessment of our reporting unit to
determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If it is
concluded that this is the case, a quantitative evaluation, based on discounted cash flows, is performed which requires us to
estimate future cash flows, growth rates and economic and market conditions. If the quantitative evaluation indicates that
goodwill is not recoverable, an impairment loss is calculated and recognized during that period. Measurement of such an
impairment loss would be based on the excess of the carrying amount over fair value. There were no goodwill impairment
charges recorded during the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022. There were
no changes in the carrying amount of goodwill for the fiscal years ended December 30, 2023, December 31, 2022, and
January 1, 2022.
Intangible assets include trademarks, computer software, and liquor licenses. Trademarks represent the value of all
our trademarks and trade names in the marketplace. We are amortizing the value assigned to the trade names on a straight-
line basis over 15 years. Computer software includes both acquired software and eligible costs to develop internal-use
software that are incurred during the application development stage. These assets are amortized over their estimated useful
72
lives of three to 10 years. Liquor license assets have been classified as indefinite-lived intangible assets and accordingly,
are not subject to amortization. We review our intangible assets for impairment when events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the carrying amount of the intangible assets are not
recoverable, the impairment is measured as the amount by which the carrying value of the intangible asset exceeds its fair
value. There were no impairments of intangible assets recognized during the fiscal years ended December 30, 2023,
December 31, 2022 and January 1, 2022.
Fair Value Measurements — Fair value is defined as the exchange price, or exit price, representing the amount
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to
measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are
described as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own
assumptions when pricing the financial instruments, such as cash flow modeling assumptions.
The assets' or liabilities' fair value measurement level within the fair value hierarchy is based on the lowest level of
any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of
observable inputs and minimize the use of unobservable inputs when measuring fair value.
There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of December 30,
2023 or December 31, 2022. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment
charges. See NOTE 3—Property and Equipment and NOTE 5—Goodwill and Intangible Assets, for additional
information. There were no transfers of assets or liabilities between levels within the fair value hierarchy during the fiscal
years ended December 30, 2023 or December 31, 2022.
Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described
below:
Cash and cash equivalents, IO receivables, other accounts receivable and accounts payable — The carrying value
of such financial instruments approximates their fair value due to factors such as their short-term nature, their variable
interest rates or the effect of the related allowance for expected credit losses.
IO notes receivable (net) — The carrying value of such financial instruments approximates their fair value due to the
effect of the related allowance for expected credit losses.
The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values
of our significant financial liabilities that are not recorded at fair value on the consolidated balance sheets (amounts in
thousands):
December 30,
2023
December 31,
2022
Carrying
(1)
Amount
Estimated Fair
(2)
Value
Carrying
(1)
Amount
Estimated Fair
(3)
Value
Financial Liabilities:
Senior term loans (Level 2)
$
292,732 $
294,375 $
379,650 $
383,075
_______________________
(1)
(2)
(3)
The carrying amounts of our senior term loans as of December 30, 2023 and December 31, 2022 are net of unamortized debt
discounts of zero and $0.6 million, respectively, and debt issuance costs of $1.6 million and $4.7 million, respectively.
The estimated fair value of our current senior term loan borrowings under our 2023 Credit Agreement, as defined in Note 6—
Long-term Debt, was deemed to approximate the carrying value, excluding unamortized debt issuance costs, because the interest
rate is variable with short reset periods and is reflective of the current market rate.
The estimated fair value of our prior senior term loan, as defined in Note 6—Long-term Debt, was determined based on the
average quoted bid-ask prices for the prior senior term loan in an over-the-counter market on the last trading day of the period
presented.
73
Revenue Recognition
Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits
collected and remitted to governmental authorities. For e-commerce related sales in which a third-party provides home
delivery service, revenue is recognized upon delivery to the customer. Our performance obligations are satisfied upon the
transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale.
Discounts provided to customers by us are recognized at the time of sale as a reduction in net sales as the products are sold.
Discounts provided by IOs are not recognized as a reduction in net sales as these are provided solely by the IO who bears
the incremental costs arising from the discount. We do not accept manufacturer coupons.
We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in
the current year from performance obligations satisfied in previous periods, any material performance obligations other
than our gift card deferred revenue liability, or any material costs to obtain or fulfill a contract as of December 30, 2023
and December 31, 2022.
Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift
cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift
cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize
revenue for the unused portion of the gift cards ("breakage") under the proportional method, where recognition of breakage
income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $3.2
million and $3.6 million as of December 30, 2023 and December 31, 2022, respectively. Breakage amounts were $0.2
million, $0.3 million and $0.3 million for the fiscal years ended December 30, 2023, December 31, 2022 and January 1,
2022, respectively.
Disaggregated Revenues — The following table presents net sales revenue by type of product for the fiscal years
ended December 30, 2023, December 31, 2022 and January 1, 2022 (amounts in thousands):
Perishable (1)
Non-perishable (2)
Total net sales
December 30,
2023
1,404,461 $
2,564,992
3,969,453 $
December 31,
2022
1,272,200 $
2,305,901
3,578,101 $
$
$
January 1,
2022
1,067,198
2,012,384
3,079,582
_______________________
(1)
(2)
Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood.
Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer
and wine.
Cost of Sales — Cost of sales includes, among other things, merchandise costs, inventory markdowns, shrink,
transportation, third-party delivery fees and distribution and warehousing costs, including depreciation.
Marketing and Advertising Expenses — Costs for store promotions, newspaper, television, radio and other media
advertising are expensed at the time the promotion or advertising takes place. Advertising costs are included in SG&A in
the accompanying consolidated statements of operations and comprehensive income and amounted to $36.4 million, $34.6
million and $32.6 million, respectively, in the fiscal years ended December 30, 2023, December 31, 2022 and January 1,
2022.
Share-based Awards — We estimate the fair value of restricted stock units ("RSUs") and performance-based
restricted stock units ("PSUs") based upon the closing price of our common stock as reported on the Nasdaq Global Select
Market on the date of grant. The PSUs vest in one installment after a three year performance period based on the
achievement of cumulative operating goals.
We recognize compensation expense for share-based payment awards with only a service condition on a straight-
line basis over the requisite service period, which is generally the award's vesting period. Vesting of these awards would be
accelerated for certain employees in the event of a change in control as well as certain termination events. Compensation
expense for share-based payment awards subject to vesting based upon the achievement of a performance condition is
recognized on a graded-vesting basis at the time the achievement of the performance condition becomes probable.
We recognize share-based award forfeitures as they occur rather than estimating by applying a forfeiture rate.
74
While we recognize share-based compensation expense over the performance period and/or requisite service period
based on the fair market value of the award as of the grant date, we will not know the actual amount of tax benefit an award
will generate until such award is exercised (for stock options) or vested (for RSUs or PSUs). Until such award is exercised
or vested we assume that the amount ultimately recognized for tax purposes is the same amount we are currently
recognizing in our operating results, that is for "book" purposes. Consequently, our deferred tax asset related to share-based
compensation expense, which totaled $11.5 million as of December 30, 2023, is based on each qualifying award's grant
date fair value rather than the award's to-be-determined exercise date intrinsic value (or vesting date fair value). For awards
exercised or vested during our fiscal year ended December 30, 2023, the difference between the grant date fair value and
the exercise or vest date intrinsic value totaled $16.2 million. If the share price for our common stock were to depreciate for
a sustained period of time, we could be required to recognize a tax shortfall. Such shortfalls could have a material effect on
our cash flows and financial results. See NOTE 8—Share-based Awards and NOTE 10—Income Taxes, for additional
information.
Income Taxes — Income taxes are accounted for using an asset and liability approach that requires recognition of
deferred tax assets and liabilities for expected future tax consequences of events that have been recognized in our
consolidated financial statements or tax returns. In estimating future tax consequences, all expected future events are
considered, other than changes in the tax law. A valuation allowance is established, when necessary, to reduce net deferred
income tax assets to the amount expected to be realized. We have not recorded any valuation allowances against our
deferred income tax balances for the fiscal years ended December 30, 2023 and December 31, 2022. Significant items
comprising our future tax benefits and liabilities (deferred tax assets and liabilities) include lease liability obligations, right-
of-use assets, depreciation and amortization, net operating losses and other carryforwards, goodwill and share-based
compensation expense.
We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax
expense. We record uncertain tax positions in accordance with Accounting Standards Codification ("ASC") Topic 740,
Income Taxes, on the basis of a two-step process in which (i) we determine whether it is more likely than not that the tax
positions will be sustained on the basis of the technical merits of the position and (ii) for those tax positions that meet the
more likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent
likely to be realized upon ultimate settlement with the related tax authority.
Variable Interest Entities — In accordance with the variable interest entities sub-section of ASC Topic 810,
Consolidation, we assess at each reporting period whether we, or any consolidated entity, are considered the primary
beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our
consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether
an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's
primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance
and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE.
We had 466, 438 and 411 stores operated by IOs as of December 30, 2023, December 31, 2022 and January 1, 2022,
respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided
to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO selects a
majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to
the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors.
The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any
time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh
products and other merchandise at extreme discounts. The IO is required to furnish initial working capital and to acquire
certain store and safety assets. The IO is also required to hire, train and employ a properly trained workforce sufficient in
number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for
expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes,
fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice.
As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us.
Net sales related to IO stores were $3.9 billion, $3.5 billion, and $3.0 billion for the fiscal years ended December 30, 2023,
December 31, 2022, and January 1, 2022, respectively. We, in turn, pay each IO a commission based on a share of the
gross profit of the store. Inventories and related net sales proceeds are our property, and we are responsible for store rent
and related occupancy costs. IO commissions are expensed and included in SG&A. IO commissions were $621.7 million,
$533.1 million, and $463.8 million for the fiscal years ended December 30, 2023, December 31, 2022 and January 1, 2022,
respectively. IO commissions of $21.7 million and $6.2 million were included in accrued and other current liabilities as of
December 30, 2023 and December 31, 2022, respectively.
75
An IO may fund its initial store investment from existing capital, a third-party loan or most commonly through a
loan from us, as further discussed in NOTE 2—Independent Operator Notes and Independent Operator Receivables. As
collateral for IO obligations and performance, the Operator Agreement grants us the security interests in the assets owned
by each IO related to the respective store. Since the total investment at risk associated with each IO is not sufficient to
permit each IO to finance its activities without additional subordinated financial support, each IO is a VIE that we have a
variable interest in. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (i) the power to
direct the activities that most significantly impact the IO's economic performance and (ii) the obligation to absorb losses or
the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification
of significant activities and an assessment of the IO's ability to direct those activities.
Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that
significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and
the price of such merchandise, both of which the IO controls. The IO is also responsible for all of its own labor. Labor
activities that significantly impact the IO's economic performance include hiring, training, supervising, directing,
compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities
which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's
economic performance. Furthermore, the mutual termination rights associated with the Operator Agreement illustrate the
lack of ultimate control over the IO. Therefore, we are not the primary beneficiary of these VIEs.
Our maximum exposure, in accordance with ASC Topic 810, to the IOs is generally limited to the IO notes and IO
receivables due from these entities, which was $59.2 million and $48.1 million as of December 30, 2023 and December 31,
2022, respectively. See NOTE 2—Independent Operator Notes and Independent Operator Receivables, for additional
information.
Net Income Per Share — Basic net income per share is calculated using net income available to common
stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted net income
per share reflects the dilutive effects of stock options and RSUs outstanding during the period, to the extent such securities
would not be anti-dilutive, as well as dilutive PSUs, and is determined using the treasury stock method.
Recently Adopted Accounting Standards
Accounting Standards Update ("ASU") No. 2022-02 — In March 2022, the Financial Accounting Standards Board
("FASB") issued ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). ASU
2022-02 eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the
guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. ASU
2022-02 also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced
disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty.
We adopted ASU 2022-02 beginning in the first quarter of fiscal 2023. The adoption of ASU 2022-02 had no material
impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
ASU No. 2023-07 — In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280)
("ASU 2023-07"). ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant
segment expenses that are regularly provided to the chief operating decision maker and included within each reported
measure of segment profit or loss, an amount and description of its composition for other segment items, and interim
disclosures of a reportable segment’s profit or loss and assets. All disclosure requirements of ASU 2023-07 are required for
entities with a single reportable segment. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and
interim periods within fiscal years beginning after December 15, 2024. We will adopt ASU 2023-07 upon the effective date
and expect it to only impact our disclosures with no impact on our consolidated financial statements.
ASU No. 2023-09 — In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740) ("ASU
2023-09"). ASU 2023-09 requires public entities’ to disclose additional information in specified categories with respect to
the reconciliation of the effective tax rate to the statutory rate (the rate reconciliation) for federal, state, and foreign income
taxes. It also requires greater detail about individual reconciling items in the rate reconciliation to the extent the impact of
those items exceeds a specified threshold. In addition to new disclosures associated with the rate reconciliation, the ASU
requires information pertaining to taxes paid (net of refunds received) to be disaggregated for federal, state, and foreign
taxes and further disaggregated for specific jurisdictions to the extent the related amounts exceed a quantitative threshold.
ASU 2023-09 is effective for fiscal years beginning after December 15, 2024. We will adopt ASU 2023-09 upon the
effective date and expect it to only impact our disclosures with no impact on our consolidated financial statements.
76
NOTE 2—Independent Operator Notes and Independent Operator Receivables
The amounts included in IO notes and IO receivables consist primarily of funds we loaned to IOs, net of estimated
uncollectible amounts. IO notes, which are payable on demand and have no maturity date, typically bear interest at rates
between 5.50% and 9.95%. Accrued interest receivable on IO notes is included within the "independent operator
receivables and current portion of independent operator notes, net of allowance" line item on the consolidated balance
sheets and was $1.8 million and $0.9 million as of December 30, 2023 and December 31, 2022, respectively. There were
no IO notes that were past due or on a non-accrual status due to delinquency as of December 30, 2023 or December 31,
2022. Notes and receivables from our IOs participating in our TCAP, as defined below, are not considered to be past due or
on a non-accrual status due to delinquency and are excluded from such measures.
IO notes and IO receivables are financial assets which are measured and carried at amortized cost. An allowance for
expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis
of these assets to arrive at the net carrying amount expected to be collected for such assets.
The allowance is estimated using an expected loss framework, which includes information about past events, current
conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over
their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality
indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective
evaluation include:
•
•
•
TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months
that are participating in our Temporary Commission Adjustment Program ("TCAP") as of the end of each
reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in
meeting their working capital needs for various reasons, such as new or increased competition or differences in IO
skills and experience.
Non-TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18
months that are not participating in TCAP as of the end of each reporting period.
New store — Includes the notes and receivables from IOs with stores that have been open for less than 18 months
as of the end of each reporting period, and may or may not be participating in TCAP.
Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances
or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an
individual basis.
Amounts due from IOs and the related allowances as of December 30, 2023 and December 31, 2022 consisted of the
following (amounts in thousands):
Allowance
Gross
Current
Portion
Long-term
Portion
Net
Current
Portion
Long-term
Portion
December 30, 2023
Independent operator notes $
Independent operator
receivables
41,123 $
(754) $
(10,435) $
29,934 $
1,800 $
28,134
18,105
(4,338)
(624)
13,143
13,143
—
Total
$
59,228 $
(5,092) $
(11,059) $
43,077 $
14,943 $
28,134
Allowance
Gross
Current
Portion
Long-term
Portion
Net
Current
Portion
Long-term
Portion
December 31, 2022
Independent operator notes $
Independent operator
receivables
Total
$
37,522 $
(700) $
(12,509) $
24,313 $
1,778 $
22,535
10,565
48,087 $
(1,538)
(2,238) $
—
(12,509) $
9,027
33,340 $
9,027
10,805 $
—
22,535
77
A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands):
Beginning balance
Provision for IO notes and IO receivables reserves
Write-off of uncollectible IO notes and IO receivables
Ending balance
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
14,747 $
3,588
(2,184)
16,151 $
11,912 $
4,160
(1,325)
14,747 $
8,109
4,790
(987)
11,912
The following table presents the gross write-off of IO notes and IO receivables by year of origination for the fiscal
year ended December 30, 2023 (amounts in thousands):
Fiscal 2023
Fiscal 2022
Fiscal 2021
Fiscal 2020
Fiscal 2019
Prior
Total
$
$
212
—
654
184
125
1,009
2,184
The following table presents the outstanding gross balance of IO notes by fiscal year of origination and credit quality
indicator as of December 30, 2023 (amounts in thousands):
Credit Quality Indicator
2023
2022
2021
2020
2019
Prior
Total
Fiscal Year of Origination
TCAP
Non-TCAP
New store
Total
TCAP IO Notes
$
3,086 $
6,669 $
4,020 $
1,878 $
402 $
991 $
17,046
4,024
5,229
3,750
2,371
3,638
—
2,431
—
1,056
—
1,578
—
16,477
7,600
$
12,339 $
12,790 $
7,658 $
4,309 $
1,458 $
2,569 $
41,123
Notes of IOs participating in our TCAP represented 51.6% and 49.7% of total IO note balances as of December 30,
2023 and December 31, 2022, respectively.
A total of $5.3 million of IO notes were added into our TCAP during the fiscal year ended December 30, 2023. The
weighted average contractual interest rate of such IO notes was reduced from 9.95% and, as of December 30, 2023, was
5.50%. In addition, $2.8 million of IO notes were transferred from TCAP to Non-TCAP during the fiscal year ended
December 30, 2023.
NOTE 3—Property and Equipment
Property and equipment as of December 30, 2023 and December 31, 2022 consisted of the following (amounts in
thousands):
78
December 30, 2023
Leasehold improvements
Fixtures and equipment
Other
Construction in progress
Totals
December 31, 2022
Leasehold improvements
Fixtures and equipment
Other
Construction in progress
Totals
Property and
Equipment, At
Cost
Accumulated
Depreciation
and
Amortization
Property and
Equipment, Net
$
453,496 $
(148,633) $
527,769
376
59,614
1,041,255 $
(249,838)
(322)
—
(398,793) $
392,448 $
457,383
376
35,525
885,732 $
(117,745) $
(206,932)
(309)
—
(324,986) $
$
$
$
304,863
277,931
54
59,614
642,462
274,703
250,451
67
35,525
560,746
Construction in progress is primarily composed of leasehold improvements and fixtures and equipment related to
new or remodeled stores where construction had not been completed at year-end.
Depreciation expense on property and equipment for fiscal 2023, 2022 and 2021 was as follows (amounts in
thousands):
Consolidated Statements of Operations and Comprehensive Income Location
Cost of sales
Operating expenses
Total depreciation expense on property and equipment
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
1,963 $
1,711 $
74,637
68,740
76,600 $
70,451 $
1,486
61,956
63,442
79
NOTE 4—Leases
As of December 30, 2023 and December 31, 2022, we leased 14 and 15 of our store locations, respectively, and one
warehouse location from related parties. See NOTE 11—Related Party Transactions, for additional information.
As of December 30, 2023, we had executed leases for 41 store locations that we had not yet taken possession of with
total undiscounted future lease payments of $229.5 million and lease terms through 2043.
Based upon our initial investment in store leasehold improvements, we utilize an initial, reasonably-certain lease life
of 15 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from five
to 15 years or more. Our leases do not include any material residual value guarantees or material restrictive covenants. We
also have non-cancelable subleases with unrelated third parties with future minimum rental receipts as of December 30,
2023 totaling $4.0 million ending in various years through 2036, which have not been deducted from the future minimum
lease payments.
The balance sheet classification of our right-of-use lease assets and lease liabilities was as follows (amounts in
thousands):
Leases
Assets:
Operating lease assets
Finance lease assets
Total lease assets
Liabilities:
Current
Operating
Finance
Noncurrent
Operating
Finance
Total lease liabilities
Classification
Operating right-of-use assets
Other assets
Current lease liabilities
Current lease liabilities
Long-term lease liabilities
Long-term lease liabilities
December 30,
2023
December 31,
2022
$
$
$
$
945,710 $
6,433
952,143 $
902,163
5,771
907,934
62,273 $
1,501
53,316
1,270
1,033,590
4,717
1,102,081 $
976,345
4,414
1,035,345
80
The components of lease expense were as follows (amounts in thousands):
Lease Cost
Operating lease cost
Finance lease cost:
Classification (1)
Selling, general and
administrative expenses
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
141,501 $
132,065 $
123,799
Amortization of right-of-use assets Selling, general and
Interest on leased liabilities
Variable lease cost
Sublease income
Net lease cost
administrative expenses
Interest expense, net
Selling, general and
administrative expenses
Selling, general and
administrative expenses
1,423
340
1,093
1,316
341
740
1,249
378
547
(1,237)
143,120 $
(868)
133,594 $
(1,114)
124,859
$
_______________________
(1)
Certain supply chain related lease costs herein are included in cost of sales.
Maturities of lease liabilities as of December 30, 2023 were as follows (amounts in thousands):
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Thereafter
Total lease payments
Less: Imputed interest
Operating Leases
$
Finance Leases
Total
132,593 $
150,048
148,993
143,800
141,590
842,050
1,559,074
(463,211)
1,095,863 $
134,411
151,622
150,183
144,688
142,302
843,103
1,566,309
1,818 $
1,574
1,190
888
712
1,053
7,235 $
(1,017)
6,218
Present value of lease liabilities
$
The weighted-average lease terms and discount rates of operating and finance leases were as follows:
Weighted-average remaining lease term:
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
December 30,
2023
December 31,
2022
10.8 years
5.0 years
11.0 years
5.1 years
6.55 %
5.89 %
6.36 %
5.31 %
81
Supplemental cash flow information related to leases was as follows (amounts in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Finance cash flows from finance leases
Leased assets obtained in exchange for new operating lease liabilities
Leased assets obtained in exchange for new finance lease liabilities
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
$
$
$
135,871 $
344 $
1,409 $
131,758 $
1,782 $
125,221 $
332 $
1,279 $
88,681 $
39 $
113,886
378
1,155
139,663
2,019
NOTE 5—Goodwill and Intangible Assets
Information regarding our goodwill and intangible assets as of December 30, 2023 was as follows (amounts in
thousands):
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Trademarks
Computer software
Total finite-lived intangible assets
Liquor licenses
Total intangible assets
Goodwill
$
58,400 $
(35,897) $
69,643
128,043
9,010
137,053
747,943
(22,600)
(58,497)
—
(58,497)
—
Total goodwill and intangible assets
$
884,996 $
(58,497) $
22,503
47,043
69,546
9,010
78,556
747,943
826,499
Information regarding our goodwill and intangible assets as of December 31, 2022 was as follows (amounts in
thousands):
Trademarks
Computer software
Total finite-lived intangible assets
Liquor licenses
Total intangible assets
Goodwill
Total goodwill and intangible assets
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
$
58,400 $
(32,004) $
51,964
110,364
8,824
119,188
747,943
867,131 $
$
(23,191)
(55,195)
—
(55,195)
—
(55,195) $
26,396
28,773
55,169
8,824
63,993
747,943
811,936
Amortization expense for finite-lived intangible assets was $10.1 million, $6.6 million, and $6.6 million for the
fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
82
The estimated future amortization expense related to finite-lived intangible assets as of December 30, 2023 is as
follows (amounts in thousands):
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Thereafter
Total
NOTE 6—Long-term Debt
Long-term debt consisted of the following (amounts in thousands):
Senior term loan due 2025
Senior term loan due 2028
Long-term debt, gross
Less: Unamortized debt issuance costs and debt discounts
Long-term debt, less unamortized debt discounts and debt issuance costs
Less: Current portion
Long-term debt, net
2023 Credit Agreement
$
$
12,937
12,474
9,649
6,778
6,249
21,459
69,546
December 30,
2023
$
— $
December 31,
2022
385,000
294,375
294,375
(1,643)
292,732
(5,625)
—
385,000
(5,350)
379,650
—
$
287,107 $
379,650
On February 21, 2023, we entered into a credit agreement with Bank of America, N.A., as administrative agent and
collateral agent, and the other parties thereto (the "2023 Credit Agreement"). The 2023 Credit Agreement provides for
senior secured credit facilities consisting of (i) a senior secured term loan facility (the "senior term loan") in an original
aggregate principal amount of $300.0 million and (ii) a senior secured revolving credit facility (the "revolving credit
facility" and, together with the senior term loan, the "new credit facilities") in an aggregate principal amount of $400.0
million. The revolving credit facility includes sub-commitments for $50.0 million letters of credit and $25.0 million of
swingline loans. The senior term loan was borrowed in full at closing, and $25.0 million of the revolving credit facility was
borrowed at closing.
Also on February 21, 2023, we repaid all of the outstanding indebtedness under our Prior First Lien Credit
Agreement, defined below, as well as fees and expenses in connection therewith. All obligations of the Company’s
subsidiaries under the Prior First Lien Credit Agreement were discharged and the agreement was terminated as of such
date. In connection with the closing of the 2023 Credit Agreement and repayment of the Prior First Lien Credit Agreement
and in accordance with ASC Topic 470-50, Debt-Modifications and Extinguishments, we wrote off $5.1 million of
previously unamortized debt issuance costs and debt discounts and incurred $0.2 million in debt modification costs, which
were recorded within loss on debt extinguishment and modification for the fiscal year ended December 30, 2023.
Furthermore, a total of $4.6 million of creditor and third-party debt issuance costs were capitalized or carried over from the
prior credit facilities, as defined below, and will be amortized over the term of the new credit facilities.
Borrowings under the 2023 Credit Agreement bear interest at a rate equal to, at our option, either (a) the base rate,
which is defined as a fluctuating rate per annum equal to the greatest of (i) the federal funds rate then in effect, plus 0.50%,
(ii) the prime rate then in effect and (iii) a specified Term SOFR (as defined in the 2023 Credit Agreement) rate plus
1.00%, subject to the interest rate floors set forth therein, plus an applicable margin ranging from 0.75% to 1.75% based on
our Total Net Leverage Ratio (as defined in the 2023 Credit Agreement); and (b) an adjusted Term SOFR rate determined
on the basis of a one, three or six month interest period, plus 0.10%, subject to the interest rate floors set forth therein, plus
an applicable margin ranging from 1.75% to 2.75% based on our Total Net Leverage Ratio. As of December 30, 2023,
interest on borrowings under the new credit facilities was based on one-month Term SOFR with an applicable margin of
2.00%.
83
The new credit facilities of the 2023 Credit Agreement permit us to add incremental term loan facilities, increase any
existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving credit facility
tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in excess of the
sum of the greater of $200.0 million and 100% of Consolidated EBITDA (as defined in the 2023 Credit Agreement),
subject to certain limitations, plus (b) voluntary prepayments of the term loan facility, voluntary permanent reductions of
the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens on the
collateral securing the new credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the
full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn,
and after giving effect to any appropriate pro forma adjustment events) we would be in compliance, on a pro forma basis
(but excluding the cash proceeds of such incurrence), with a Total Net Leverage Ratio of 3.00 to 1.00.
Our obligations under the 2023 Credit Agreement are unconditionally guaranteed by the Company’s wholly owned
restricted subsidiary, subject to certain exceptions. All obligations under the 2023 Credit Agreement, and the guarantee of
such obligations, are secured, subject to permitted liens and other exceptions, by substantially all of the Company’s assets
and those of the subsidiary guarantor.
The 2023 Credit Agreement requires us to make scheduled amortization payments of the senior term loan. We may
voluntarily prepay the new credit facilities, in whole or in part, at any time without premium or penalty, subject to
reimbursement of the lenders’ breakage and redeployment costs in applicable cases.
Senior Term Loan due 2028
Our senior term loan under our 2023 Credit Agreement matures on February 21, 2028 and had an interest rate of
7.46% as of December 30, 2023.
Revolving Credit Facility
As of December 30, 2023 we had $4.2 million of outstanding letters of credit and $395.8 million of remaining
borrowing capacity available under the revolving credit facility, which matures on February 21, 2028. The interest rate on
the revolving credit facility was 7.46% as of December 30, 2023. As discussed above, $25.0 million of the revolving credit
facility was borrowed at closing. On April 21, 2023, we repaid the $25.0 million of principal on our revolving credit
facility. No amounts were outstanding under the revolving credit facility as of December 30, 2023. Since the April 21,
2023 repayment, no amounts were borrowed under this revolving credit facility.
We are required to pay a quarterly commitment fee ranging from 0.15% to 0.30% on the daily unused amount of the
commitment under the revolving credit facility based upon our Total Net Leverage Ratio. We are also required to pay
fronting fees and other customary fees for letters of credit issued under the revolving credit facility.
Prior First Lien Credit Agreement
One of our former wholly owned subsidiaries, which has since been merged with and into Grocery Outlet Holding
Corp., was the borrower under a first lien credit agreement (the "Prior First Lien Credit Agreement") with a syndicate of
lenders that consisted of a $385.0 million senior term loan (the "prior senior term loan") and a revolving credit facility (the
"prior revolving credit facility" and, together with the prior senior term loan, the "prior credit facilities") for an amount up
to $100.0 million.
Prior Senior Term Loan due 2025
Our prior senior term loan under our Prior First Lien Credit Agreement had a maturity of October 22, 2025 and had
an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans.
On April 29, 2022, we prepaid $75.0 million of principal on the prior senior term loan outstanding under our Prior
First Lien Credit Agreement. In connection with the payment, we wrote off $1.3 million of previously unamortized debt
issuance costs and debt discounts.
As discussed above, on February 21, 2023, in connection with the closing of the 2023 Credit Agreement, we repaid
the remaining $385.0 million of principal on the prior senior term loan outstanding under our Prior First Lien Credit
Agreement.
Prior Revolving Credit Facility
Our prior revolving credit facility under our Prior First Lien Credit Agreement had a maturity of October 23, 2023.
No amounts were outstanding under the prior revolving credit facility as of December 31, 2022 and no amounts were
outstanding as of final repayment of the Prior First Lien Credit Agreement.
84
We were required to pay a quarterly commitment fee ranging from 0.25% to 0.50% on the daily unused amount of
the commitment under the prior revolving credit facility based upon the leverage ratio defined in the agreement and certain
criteria specified in the agreement. We were also required to pay fronting fees and other customary fees for letters of credit
issued under the prior revolving credit facility.
Debt Covenants
The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and
exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among
other things, limit our ability and the ability of our restricted subsidiary to: pay dividends or distributions, repurchase
equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and
preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain
restrictions on the ability of our subsidiary to pay dividends or make other payments to the borrower. The 2023 Credit
Agreement also contains financial performance covenants requiring us to satisfy a maximum total net leverage ratio test
and a minimum interest coverage ratio test as of the last day of each fiscal quarter. The maximum total net leverage ratio
test requires us to be in compliance with a Total Net Leverage Ratio no greater than 3.50 to 1.00 as of the last day of each
test period ending prior to the test period ending on or about December 31, 2025, and no greater than 3.25 to 1.00 as of the
last day of each test period ending thereafter, subject to certain adjustments set forth in the 2023 Credit Agreement. The
minimum interest coverage ratio test requires us to be in compliance with a Consolidated Interest Coverage Ratio (as
defined in the 2023 Credit Agreement) no less than 1.75 to 1.00 as of the last day of each test period.
As of December 30, 2023, we were in compliance with all applicable financial covenant requirements for our 2023
Credit Agreement.
Schedule of Principal Maturities
Principal maturities of debt as of December 30, 2023 were as follows (amounts in thousands):
Fiscal 2024
Fiscal 2025
Fiscal 2026
Fiscal 2027
Fiscal 2028
Thereafter
Total
$
5,625
15,000
15,000
15,000
243,750
—
$
294,375
Interest Expense, Net
Interest expense, net, consisted of the following (amounts in thousands):
Interest on loans
Amortization of debt issuance costs and debt discounts
Interest on finance leases
Other
Interest income
Capitalized interest
Interest expense, net
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
24,666 $
18,743 $
13,930
1,084
340
17
(7,631)
(2,115)
2,264
341
8
(3,389)
—
2,511
378
66
(1,321)
—
$
16,361 $
17,967 $
15,564
85
Loss on Debt Extinguishment and Modification
Loss on debt extinguishment and modification consisted of the following (amounts in thousands):
Write-off of debt issuance costs
Write-off of debt discounts
Debt modification costs
Loss on debt extinguishment and modification
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
4,518 $
578
244
5,340 $
1,127 $
147
—
1,274 $
—
—
—
—
NOTE 7—Stockholders' Equity
As of December 30, 2023, the total amount of the Company’s authorized capital stock consisted of 500,000,000
shares of common stock, par value $0.001 per share, and 50,000,000 shares of undesignated preferred stock, par value of
$0.001 per share.
Common Stock
Holders of our common stock are entitled to one vote for each share held of record on all matters on which
stockholders are entitled to vote generally, including the election or removal of directors. The holders of our common stock
do not have cumulative voting rights in the election of directors.
Preferred Stock
We did not have any shares of preferred stock issued or outstanding as of December 30, 2023. Our Board of
Directors has the authority to issue shares of preferred stock from time to time on terms it may determine, with respect to
any series of preferred stock, the powers (including voting powers), preferences and relative, participating, optional and
other special rights, and the qualifications, limitations or restrictions thereof as the board of directors may from time to time
determine, which could affect the relative voting power or other rights of the holders of our common stock. The issuance of
preferred stock could have the effect of decreasing the trading price of our common stock, restricting dividends on the
common stock, diluting the voting power of our common stock, or subordinating the liquidation rights of the common
stock.
Dividend Rights
Holders of our common stock are entitled to receive dividends when, as and if declared by our board of directors
out of funds legally available therefor, subject to any statutory or contractual restrictions on the payment of dividends and
to the rights of the holders or one or more outstanding series of our preferred stock.
Share Repurchase Program
In November 2021, our Board of Directors approved a share repurchase program. This program, effective November
5, 2021 and without an expiration date, authorized us to repurchase up to $100.0 million of our outstanding common stock
utilizing a variety of methods including open market purchases, accelerated share repurchase programs, privately
negotiated transactions, structured repurchase transactions and under a Rule 10b5-1 plan (which would permit shares to be
repurchased when the Company might otherwise be precluded from doing so under securities laws). Any repurchased
shares are constructively retired and returned to an unissued status.
During the fiscal year ended December 30, 2023, we repurchased 254,516 shares of common stock totaling $6.8
million at an average price of $26.75 per share in open-market transactions pursuant to a Rule 10b5-1 plan. During the
fiscal year ended December 31, 2022, we repurchased 139,718 shares of common stock totaling $3.5 million at an average
price of $24.70 per share in open-market transactions pursuant to a Rule 10b5-1 plan. As of December 30, 2023, we had
$89.8 million of repurchase authority remaining under the share repurchase program.
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NOTE 8—Share-based Awards
Share-based Incentive Plans
The Globe Holding Corp. 2014 Stock Incentive Plan (the "2014 Plan") became effective on October 21, 2014. Under
the 2014 Plan, we granted stock options and RSUs to purchase shares of our common stock. Effective as of June 19, 2019,
we terminated the 2014 Plan and as a result no further equity awards may be issued under the 2014 Plan. Any outstanding
awards granted under the 2014 Plan will remain subject to the terms of the 2014 Plan and the applicable equity award
agreements.
On June 4, 2019, our Board of Directors and stockholders approved the Grocery Outlet Holding Corp. 2019
Incentive Plan (the "2019 Plan"). A total of 4,597,862 shares of common stock were reserved for issuance under the 2019
Plan at that time. In addition, on the first day of each fiscal year beginning in fiscal 2020 and ending in fiscal 2029, the
2019 Plan provides for an annual automatic increase of the shares reserved for issuance in an amount equal to the positive
difference between (i) 4% of the "outstanding common stock" (as defined in the 2019 Plan) on the last day of the
immediately preceding fiscal year and (ii) the plan share reserve on the last day of the immediately preceding fiscal year, or
a lesser number as determined by our Board of Directors. As of December 30, 2023, there were a total of 7,242,549 shares
of common stock reserved for issuance under the 2019 Plan, which includes 429,826 shares added effective January 1,
2023 per the above noted annual automatic increase. As of December 30, 2023, there were 2,950,047 remaining shares
available for issuance of new equity awards under the 2019 Plan.
Long-term incentive programs ("LTIPs") under the 2019 Plan consist of time-based RSUs and PSUs. RSUs granted
under the LTIPs generally vest over one to three years. Half of the total PSUs granted under the LTIPs will vest upon the
achievement of certain revenue-based performance targets ("Tranche I PSUs") and half will vest upon the achievement of
certain adjusted EBITDA-based performance targets ("Tranche II PSUs") as determined by the Compensation Committee
following the last day of a three-year performance period. The number of PSUs ultimately earned will equal the number of
Tranche I and Tranche II PSUs granted multiplied by the applicable percentage of actual revenue and adjusted-EBITDA
performance target levels achieved, and can range from 0% to 200% of the number of PSUs granted.
Fair Value Determination
The fair value of stock option, RSU and PSU awards is determined as of the grant date. For time-based stock
options, a Black-Scholes valuation model was utilized to estimate the fair value of the awards. For performance-based
stock options, a Monte Carlo simulation approach implemented in a risk-neutral framework was utilized to estimate the fair
value of the awards. For RSUs and PSUs, the closing price of our common stock as reported on the grant date is utilized to
estimate the fair value of the awards.
The respective valuation methods resulted in weighted-average grant date fair values for RSUs and PSUs granted
during fiscal 2023, 2022 and 2021 as follows:
RSUs
PSUs
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
27.50 $
27.34 $
29.70 $
29.16 $
28.70
35.45
We did not award any time-based or performance-based stock options during fiscal 2023, 2022 and 2021.
87
Share-based Award Activity
The following table summarizes stock option activity under all equity incentive plans during fiscal 2023, 2022 and
2021:
Options outstanding as of January 2, 2021
Granted
Exercised
Forfeitures
Options outstanding as of January 1, 2022
Granted
Exercised
Forfeitures
Options outstanding as of December 31, 2022
Granted
Exercised
Forfeitures
Options outstanding as of December 30, 2023
Options vested and exercisable as of December 30,
2023
Time-Based Stock Options
Performance-Based Stock Options
Number of
Options
Weighted-
Average
Exercise Price
Number of
Options
Weighted-
Average
Exercise Price
3,864,772 $
—
(538,307)
(191,324)
3,135,141 $
—
(276,022)
(296,345)
2,562,774 $
—
(462,972)
(8,279)
2,091,523 $
12.42
—
7.77
19.77
12.77
—
9.63
21.25
12.13
—
8.17
21.93
12.97
2,325,580 $
—
(629,386)
—
1,696,194 $
—
(894,559)
—
801,635 $
—
(574,030)
—
227,605 $
2,081,490 $
12.97
227,605 $
4.54
—
4.41
—
4.58
—
4.50
—
4.68
—
3.91
—
6.62
6.62
The total intrinsic value of time-based stock options exercised was $11.7 million, $7.1 million and $15.5 million for
fiscal 2023, 2022 and 2021, respectively. The total intrinsic value of performance-based stock options exercised was $15.9
million, $29.9 million and $20.0 million for fiscal 2023, 2022 and 2021, respectively. Intrinsic value represents the
difference between the current fair value of the underlying stock and the exercise price of the stock option.
The following table summarizes RSU activity under all equity incentive plans during fiscal 2023, 2022 and 2021:
Number of
Shares
Weighted-
Average
Grant Date Fair
Value
341,842 $
669,546
(110,956)
(63,936)
836,496 $
449,438
(499,696)
(95,884)
690,354 $
552,372
(345,887)
(39,019)
857,820 $
35.16
28.70
34.64
34.05
30.14
29.70
27.38
30.61
31.79
27.50
32.50
29.87
28.82
Unvested balance as of January 2, 2021
Granted
Vested
Forfeitures
Unvested balance as of January 1, 2022
Granted
Vested
Forfeitures
Unvested balance as of December 31, 2022
Granted
Vested
Forfeitures
Unvested balance as of December 30, 2023
88
The following table summarizes PSU activity under the 2019 Plan during fiscal 2023, 2022 and 2021:
Unvested balance as of January 2, 2021
Granted (1)
Adjustment for expected performance achievement (2)
Forfeitures
Unvested balance as of January 1, 2022
Granted (1)
Adjustment for expected performance achievement (2)
Forfeitures
Unvested balance as of December 31, 2022
Granted (1)
Adjustment for expected performance achievement (2)
Vested
Forfeitures
Unvested balance as of December 30, 2023 (3)
Number of
Shares
Weighted-
Average
Grant Date Fair
Value
407,462 $
319,606
(91,332)
(59,011)
576,725 $
404,382
423,347
(72,651)
1,331,803 $
451,077
432,774
(441,346)
(20,319)
1,753,989 $
36.90
35.45
35.45
36.52
36.36
29.16
31.86
33.79
32.89
27.34
28.84
36.84
29.83
29.50
_______________________
(1)
Represents initial grant of PSUs based on performance target level achievement of 100%.
(2)
(3)
Represents the adjustment to previously granted PSUs based on performance expectations as of the end of each respective
reporting period.
An additional 424,341 PSUs could potentially be included if the maximum performance level of 200% is reached for all PSUs
outstanding as of December 30, 2023.
Share-based Compensation Expense
We recognize compensation expense for stock options, RSUs, and PSUs by amortizing the grant date fair value on a
straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable.
Share-based compensation expense and the related tax benefit consisted of the following (amounts in thousands):
Time-based stock options
RSUs
PSUs
Dividends (1)
Share-based compensation expense (2)
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
770 $
471 $
11,327
18,979
14,855
17,125
15
31,091 $
105
32,556 $
$
2,030
8,488
6,911
186
17,615
_______________________
(1)
Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with
recapitalizations that occurred in fiscal 2018 and 2016.
(2)
Total recognized income tax benefit related to share-based compensation expense was $8.3 million, $8.7 million and $4.7 million
for fiscal 2023, 2022 and 2021, respectively.
Share-based compensation expense qualifying for capitalization was insignificant for each of the fiscal years ended
December 30, 2023, December 31, 2022 and January 1, 2022. Accordingly, no share-based compensation expense was
capitalized during these years.
89
Time-Based Stock Options
Unamortized compensation cost related to unvested time-based stock options was immaterial as of December 30,
2023.
Performance-Based Stock Options
We had no unamortized compensation cost related to performance-based stock options as of December 30, 2023.
Time-Based RSUs
Unamortized compensation expense for RSUs was $15.2 million as of December 30, 2023, which is expected to be
amortized over a weighted average period of approximately 1.9 years.
Performance-Based RSUs
Unamortized compensation cost related to the expected level of achievement of unvested PSUs was $21.3 million as
of December 30, 2023, which is expected to be amortized over a weighted average period of approximately 1.7 years.
Dividends
For time-based stock options and RSU share-based awards that were outstanding on the dividend date of October 22,
2018 and that vested in fiscal 2023, fiscal 2022, and fiscal 2021, we made dividend payments as these awards vested.
We paid $0.1 million and $0.2 million of dividends during the fiscal years ended December 31, 2022 and January 1,
2022, respectively, which were included in share-based compensation expense. We paid less than $0.1 million of dividends
during the fiscal year ended December 30, 2023. There was no unamortized compensation cost related to future dividend
payments on unvested time-based stock options and RSU share-based awards as of December 30, 2023.
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NOTE 9—Retirement Plans
We make contributions to the UFCW—Northern California Employers Joint Pension Trust Fund (the "Pension
Fund") and the UFCW—Benefits Trust Fund ("Benefits Fund"), each a multiemployer plan, established for the benefit of
union employees at two company operated stores under the terms of a collective bargaining agreement. We currently
operate under a collective bargaining agreement that expires on February 28, 2026. Minimum contributions outside of the
agreed upon contractual rates are not required for the Pension Fund. Payments into the Pension Fund were $0.6 million,
$0.5 million, and $0.6 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022,
respectively. We paid no surcharges to the Pension Fund.
The risks of participating in a multiemployer pension plan such as the Pension Fund are different from single-
employer pension plans in the following aspects:
a. Assets contributed to the multiemployer plan by one employer may be used to provide benefits to
employees of other participating employers.
b.
c.
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be
borne by the remaining participating employers.
If we stop participating in its multiemployer pension plan, we may be required to pay those plans an
amount based on our proportionate share of the underfunded status of such plan, referred to as a withdrawal
liability.
The following information represents our participation in the Pension Fund for the annual period ended December
31, 2022, the latest available information from the Pension Fund. All such information is based on information we received
from the Pension Fund.
The Pension Fund's Employer Identification Number is 946313554 and the Plan Number is -001. Our contributions
represented less than 5% of the total contributions to the Pension Fund. Under the provisions of the Pension Protection Act
(PPA) zone status, the Pension Fund was in critical status during the plan year. Among other factors, generally, plans in
critical status are less than 65 percent funded. In an effort to improve the Pension Fund's funding situation, the trustees
adopted a rehabilitation plan on July 8, 2010 and most recently updated it on May 3, 2022. The rehabilitation plan changes
the benefits for participants who retire and commence a pension on or after January 1, 2012, and changes future benefit
accruals earned on or after January 1, 2012. Except in limited circumstances, the pensions of participants and beneficiaries
whose pension effective date is before January 1, 2012, are not affected.
The Benefits Fund provides medical, dental, pharmacy, vision, and other ancillary benefits to active employees and
retirees. The majority of our contributions cover active employees and as such, may not constitute contributions to a
postretirement benefit plan. However, we are unable to separate contribution amounts to the postretirement benefit part of
the Benefits Fund from contribution amounts paid to the active employee part of the Benefits Fund. Payments into the
Benefits Fund were $1.4 million, $1.2 million, and $1.4 million for the fiscal years ended December 30, 2023,
December 31, 2022, and January 1, 2022, respectively.
For our nonunion employees, we offered the following plans during fiscal 2023, 2022 or 2021:
a.
b.
c.
d.
e.
For fiscal 2022 and 2021, a defined contribution retirement plan for warehouse employees, which
required an annual contribution of 15% of eligible salaries. This defined contribution retirement plan was
available to nonunion employees who met certain service criteria.
For fiscal 2022 and 2021, a noncontributory profit-sharing plan for administrative personnel and, for
fiscal 2023, for administrative and warehouse personnel, in each case under which the Board of Directors
may authorize an annual contribution of up to 15% of eligible salaries. This profit-sharing plan is
available to nonunion employees who meet certain service criteria.
We expensed $6.8 million, $6.9 million and $1.5 million for contributions to the two plans described
above in (a) and (b) for the fiscal years ended December 30, 2023, December 31, 2022, and January 1,
2022, respectively.
A 401(k) retirement plan for warehouse employees, which is available to those employees who meet
certain service criteria.
A 401(k) retirement plan for administrative personnel, which is available to those employees who meet
certain service criteria.
We are not obligated to match any employee contributions for the 401(k) retirement plans. However, for
certain employees who meet certain service criteria, we have a 401(k) retirement plan under which we
91
will match employee contributions at a rate of 35% of each participating employee's contributions, not to
exceed 6% of wages. We expensed an insignificant amount for contributions to this plan for each of the
fiscal years ending December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
NOTE 10—Income Taxes
Components of income tax expense
Income before income taxes consisted entirely of income from domestic operations of $104.1 million, $75.7 million,
and $77.5 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, respectively.
The components of income tax expense consisted of the following (amounts in thousands):
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Income tax expense
Statutory rate reconciliation
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
$
1,051 $
4,774
5,825
16,127
2,692
18,819
24,644 $
— $
330
330
7,308
3,059
10,367
10,697 $
—
2,247
2,247
10,838
2,106
12,944
15,191
A reconciliation of the U.S. federal statutory income tax rate to our effective income tax rate is as follows:
Taxes at federal statutory rates
State income taxes net of federal benefit
Section 162(m) compensation limitation on covered employees
Excess federal tax benefits from exercise and vest of share-based
awards
Return to provision
Other
Effective income tax rate
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
21.0 %
5.4 %
2.2 %
(3.3) %
(2.0) %
0.4 %
23.7 %
21.0 %
2.7 %
— %
(9.2) %
(1.1) %
0.7 %
14.1 %
21.0 %
4.7 %
— %
(8.2) %
1.9 %
0.2 %
19.6 %
92
Deferred income taxes
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred tax assets and liabilities were as follows (amounts in thousands):
Deferred tax assets:
Accrued compensation
Share-based compensation expense
Inventory
Transaction costs
Lease liability obligation
Net operating loss and other carryforwards
Reserves and allowances
Debt transaction costs
Total deferred tax assets
Deferred tax liabilities:
Prepaid expenses
Depreciation and amortization
Intangible assets
Right-of-use assets
Goodwill
Debt transaction costs
Other
Total deferred tax liabilities
Net deferred tax assets (liabilities)
December 30,
2023
December 31,
2022
$
$
5,902 $
11,543
6,534
596
308,776
32,299
5,702
369
371,721
(1,264)
(85,261)
(5,876)
(267,696)
(48,865)
—
(1,360)
(410,322)
(38,601) $
6,459
14,040
6,482
782
289,539
48,409
4,648
—
370,359
(1,249)
(81,167)
(6,522)
(255,256)
(43,488)
(1,231)
(1,228)
(390,141)
(19,782)
We have net operating loss carryforwards of $145.0 million for federal income tax purposes, which carries forward
indefinitely. There are also net operating loss carryforwards of $18.0 million for state income tax purposes, which begin to
expire in 2029. Based on our analysis, our projected net operating losses to be utilized in future years will not be affected
by this annual limitation.
Management assesses the available positive and negative evidence to estimate whether sufficient future taxable
income will be generated to permit the use of the existing deferred tax assets. A significant piece of objective positive
evidence was the cumulative income incurred over the three-year period ended December 30, 2023. Based on our current
assessment, we anticipate it is more likely than not that we will generate sufficient taxable income to realize all of our
material deferred tax assets. As such we did not record a valuation allowance against these material deferred tax assets as
of December 30, 2023.
Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax
provision in our consolidated statements of operations and comprehensive income and include accrued interest and
penalties with the related income tax liability on our consolidated balance sheets. To date, we have not recognized any
interest and penalties, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax
positions as of December 30, 2023 and December 31, 2022, respectively, and do not anticipate having any material
uncertain tax positions within the next 12 months.
We are subject to taxation in the United States and various state jurisdictions. As of December 30, 2023, our tax
returns remain open to examination by the tax authorities for tax years 2012 to 2022 for U.S. federal and for various state
jurisdictions.
93
NOTE 11—Related Party Transactions
Related Party Leases
As of December 30, 2023 and December 31, 2022, we leased 14 and 15 store locations, respectively, and one
warehouse location from entities in which Eric Lindberg, Jr., Chairman of our Board of Directors (and formerly our Chief
Executive Officer until December 31, 2022), and MacGregor Read, Jr., who served as Vice Chairman of our Board of
Directors until September 1, 2022, or their respective families, had a direct or indirect financial interest. As of
December 30, 2023, the right-of-use assets and lease liabilities related to these properties was $42.6 million and $47.6
million, respectively. As of December 31, 2022, the right-of-use assets and lease liabilities related to these properties was
$40.5 million and $45.5 million, respectively. These related parties received aggregate lease payments from us of $6.8
million, $6.8 million, and $6.1 million for the fiscal years ended December 30, 2023, December 31, 2022, and January 1,
2022, respectively.
Independent Operator Notes and Independent Operator Receivables
We offer interest-bearing notes to IOs and the gross amount of IO operating notes and IO receivables due was $59.2
million and $48.1 million as of December 30, 2023 and December 31, 2022, respectively. See NOTE 2—Independent
Operator Notes and Independent Operator Receivables, for additional information.
NOTE 12—Commitments and Contingencies
We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We
establish an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies
that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any
amounts accrued. We monitor those matters for developments that would affect the likelihood of a loss and the accrued
amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and
reasonably estimable, we do not establish an accrual, but will continue to monitor the matter for developments that will
make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material
loss will occur, we will provide disclosure regarding the contingency. Management believes that we do not have any
pending litigation that, separately or in the aggregate, would have a material adverse effect on our results of operations,
financial condition or cash flows.
NOTE 13—Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except
per share data):
Numerator
Net income and comprehensive income
Denominator
Weighted-average shares outstanding - basic
Effect of dilutive options
Effect of dilutive RSUs and PSUs
Weighted-average shares outstanding - diluted (1)
Earnings per share:
Basic
Diluted
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
$
79,437 $
65,052 $
62,310
98,709
1,760
362
100,831
96,812
2,813
537
100,162
95,725
3,564
129
99,418
$
$
0.80 $
0.79 $
0.67 $
0.65 $
0.65
0.63
_______________________
(1) We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued
assuming the end of our reporting period was the end of the relevant PSU award contingency period.
94
The following weighted-average common share equivalents were excluded from the calculation of diluted earnings
per share because their effect would have been anti-dilutive (amounts in thousands):
RSUs
NOTE 14—Subsequent Event
Fiscal Year Ended
December 30,
2023
December 31,
2022
January 1,
2022
34
98
11
On February 14, 2024, Grocery Outlet Inc., our wholly owned subsidiary, entered into a Stock Purchase Agreement
(the "Purchase Agreement") with BBGO Acquisition, Inc., a Delaware corporation ("Holdings"), specified parties therein
that beneficially own Holdings (the "Sellers"), and Southvest Fund VII, L.P., a Delaware limited partnership (the "Sellers'
Representative", and together with the Sellers, the "Seller Parties" and, together with Holdings and Grocery Outlet Inc., the
"Parties") to acquire all of the issued and outstanding capital stock of Holdings for approximately $62.0 million in cash,
subject to customary purchase price adjustments (the "Transaction"). We expect to finance the Transaction with available
cash.
Holdings is the owner of all of the issued and outstanding capital stock of The Bargain Barn, Inc., a Tennessee
corporation doing business as United Grocery Outlet ("United Grocery Outlet"). United Grocery Outlet operates 40
discount grocery stores across six states in the southeastern United States.
The Purchase Agreement contains customary representations, warranties and covenants of each of the Seller Parties
and Grocery Outlet. The Parties have agreed to a representation and warranty insurance policy for the benefit of Grocery
Outlet regarding specified breaches of representations and warranties, subject to specified exclusions and deductibles. The
obligations of the Parties to consummate the Transaction are subject to the satisfaction or waiver of customary closing
conditions. The Transaction is expected to close early in the second quarter of fiscal 2024.
The Purchase Agreement may be terminated at any time prior to closing by mutual written consent of the Parties, or
by either Grocery Outlet or the Sellers (i) if the closing has not occurred on or prior to April 10, 2024, (ii) if the other party
materially breaches or fails to perform under the Purchase Agreement and fails to timely cure, or (iii) if the Transaction is
prohibited by a governmental entity or by applicable law. Until the closing of the Transaction or the earlier termination of
the Purchase Agreement, the Sellers are subject to restrictive covenants regarding an alternative transaction.
95
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
96
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management including our Chief Executive Officer and
Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
"Exchange Act") as of the end of the period covered by this report. Our disclosure controls are designed to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is
accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial
Officer, as appropriate, to allow timely decisions regarding required disclosures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were not effective as a result of the material weakness in our internal control over
financial reporting, described below, as of December 30, 2023. A "material weakness" is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement in annual or interim financial statements will not be prevented or detected on a timely basis.
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial
reporting, as defined by Rule 13a-15(f) of the Exchange Act. The Company's management conducted an assessment of the
Company's internal control over financial reporting based on the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013). In connection with this
assessment, the Company’s management identified deficiencies in the design and operating effectiveness of controls in its
internal control over financial reporting related to certain information technology general computer controls ("ITGC’s").
The replacement of components of our enterprise resource planning system in late August 2023 led to a significant increase
in the volume of transactions across user access, program change management, and IT operations for which our existing
controls were not designed to address. As a result, certain of the Company’s related business controls that are dependent
upon the affected ITGC’s were also deemed ineffective. We did not identify any misstatements to the consolidated
financial statements as of and for the year ended December 30, 2023 because of these control deficiencies. However, the
pervasive impact of these control deficiencies to the Company's internal control over financial reporting created a
reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or
detected on a timely basis. Therefore, we concluded that the deficiencies represent a material weakness in our internal
control over financial reporting and, as such, our internal control over financial reporting was not effective as of
December 30, 2023.
Deloitte & Touche LLP, an independent registered public accounting firm, who audited the fiscal 2023 consolidated
financial statements included in this Annual Report on Form 10-K, issued an adverse report on the Company’s internal
control over financial reporting reflecting this material weakness as of December 30, 2023 as stated in its report which is
set forth below.
Remediation Plan
Management is in the process of establishing a remediation plan and expects its remediation efforts will involve
implementing additional controls or a redesign of controls to ensure that user access, program change management and IT
operations controls are designed and operating effectively. These remediation efforts began during the fiscal quarter ended
December 30, 2023 and are expected to be completed during the fiscal year ending December 28, 2024.
Changes in Internal Control over Financial Reporting
Other than the material weakness described above, which was identified by management as part of the Company
annual assessment of internal control over financial reporting, during the fiscal quarter ended December 30, 2023, there
was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule
13a-15(d) and 15d-15(d) of the Exchange Act that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
Limitations on Effectiveness of Controls
In designing and evaluating the disclosure controls and procedures and internal control over financial reporting,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only
97
reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and
procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in
evaluating the benefits of possible controls and procedures relative to their costs.
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Grocery Outlet Holding Corp.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Grocery Outlet Holding Corp. and subsidiaries (the
"Company") as of December 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of
the effect of the material weakness identified below on the achievement of the objectives of the control criteria, the
Company has not maintained effective internal control over financial reporting as of December 30, 2023, based on criteria
established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated financial statements as of and for the year ended December 30, 2023, of the Company
and our report dated February 28, 2024, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's
internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Material Weakness
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that
there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will
not be prevented or detected on a timely basis. The following material weakness has been identified and included in
management's assessment:
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General Information Technology Controls (GITCs)
The Company identified deficiencies in the design and operating effectiveness of controls in its internal control
over financial reporting related to certain information technology general computer controls ("ITGC's"). The
replacement of components of the Company's enterprise resource planning system in late August 2023 led to a
significant increase in the volume of transactions across user access, program change management, and IT
operations for which their existing controls were not designed to address. As a result, certain of the Company's
related business controls that are dependent upon the affected ITGC's were also deemed ineffective. The Company
concluded that the pervasive impact of these control deficiencies to the Company's internal control over financial
reporting created a reasonable possibility that a material misstatement to the consolidated financial statements
would not be prevented or detected on a timely basis.
The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of
the consolidated financial statements as of and for the year ended December 30, 2023, of the Company, and this report does
not affect our report on such financial statements.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
February 28, 2024
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ITEM 9B. OTHER INFORMATION
Rule 10b5-1 Trading Plans - Directors and Section 16 Officers
During the 13 weeks ended December 30, 2023, none of our directors or Officers (as such term is defined under
Section 16 of the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of
Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) of the Exchange Act
or any "non-Rule 10b5-1 trading arrangement."
101
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
102
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference from sections entitled "Corporate
Governance and Board Matters," "Executive Officers," "Proposals for Consideration at Annual Meeting – Proposal 1 –
Election of Class II Directors" and "Additional Information" in our definitive Proxy Statement related to the 2024 Annual
Meeting of Stockholders to be filed with the SEC within 120 days of our fiscal year ended December 30, 2023 (the "2024
Proxy Statement").
There were no material changes to the procedures by which stockholders may recommend nominees to our board of
directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference from sections entitled "Compensation
Discussion and Analysis," "Named Executive Officer Compensation Tables" (excluding the information under the
subheading "Pay Versus Performance"), "Corporate Governance and Board Matters – Director Compensation," "Corporate
Governance and Board Matters – Board of Directors – Compensation Committee Interlocks and Insider Participation," and
"Compensation Committee Report" in our 2024 Proxy Statement. However, the Compensation Committee Report included
in such 2024 Proxy Statement shall not be deemed "filed" with the SEC for the purposes of Section 18 of the Exchange Act
or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by
us with the SEC, regardless of any general incorporation language in such filing.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference from sections entitled "Security Ownership
of Certain Beneficial Owners and Management," and "Securities Authorized for Issuance Under Equity Compensation
Plans" in our 2024 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information required by this item is incorporated herein by reference from sections entitled "Certain
Relationships and Related Party Transactions," and "Corporate Governance and Board Matters – Board of Directors –
Director Independence" in our 2024 Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference from the section entitled "Other Audit and
Risk Committee Matters" in our 2024 Proxy Statement.
103
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements
See Index to Consolidated Financial Statements at "Item 8. Financial Statements and Supplementary Data."
2. Financial Statement Schedules
All schedules have been omitted because they are either not required, not applicable, not present in amounts
sufficient to require submission of the schedule, or the required information is included elsewhere in this Annual Report on
Form 10-K.
Description of Grocery Outlet Holding Corp.'s Securities
10-K 001-38950
3/1/2023
3. Exhibits
Exhibit
No.
3.1
3.2
4.1
4.2
4.3
10.1†
10.2†
10.3†
10.4†
10.5†
10.6†
10.7†
10.8†
10.9†
10.10†
10.11†
10.12†
Exhibit
Restated Certificate of Incorporation of Grocery Outlet Holding
Corp.
Amended and Restated Bylaws of Grocery Outlet Holding
Corp.
Form of Stock Certificate for Common Stock
Amended and Restated Stockholders Agreement by and among
Grocery Outlet Holding Corp. and the other parties named
therein
Globe Holding Corp. 2014 Stock Incentive Plan
Amended and Restated Time Vesting Stock Option Grant
Notice and Agreement (Globe Holding Corp. 2014 Stock
Incentive Plan) (Eric J. Lindberg, Jr.), dated October 21, 2014
Form of Performance Vesting Stock Option Grant Notice and
Agreement (Globe Holding Corp. 2014 Stock Incentive Plan)
(Charles C. Bracher, Robert J. Sheedy, Jr., Steven K. Wilson)
Form of Time Vesting Stock Option Grant Notice and
Agreement (Globe Holding Corp. 2014 Stock Incentive Plan)
(Charles C. Bracher, Robert J. Sheedy, Jr., Steven K. Wilson)
Form of Nonqualified Option Grant and Award Agreement
(Grocery Outlet Holding Corp. 2019 Incentive Plan)
2021 Form of Restricted Stock Unit Grant and Agreement
(Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
2021 Form of Performance Stock Unit Grant and Agreement
(Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
Form of Performance Stock Unit Grant and Agreement
(Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
(effective October 2021)
Form of Restricted Stock Unit Grant and Agreement (Grocery
Outlet Holding Corp. 2019 Stock Incentive Plan) (effective
October 2021)
2023 Form of Performance Stock Unit Grant and Agreement
(Grocery Outlet Holding Corp. 2019 Stock Incentive Plan)
Restricted Stock Unit Grant and Agreement (Grocery Outlet
Holding Corp. 2019 Stock Incentive Plan) (CEO Form)
104
3.1
4.1
4.2
4.3
10.13
10.15
10.18
10.19
Incorporated by Reference
Form
8-K
File
No.
001-38950
Filing
Date
6/10/2022
Exhibit
No.
3.1
8-K
001-38950
4/8/2022
S-1/A 333-231428
6/10/2019
10-K 001-38950
3/25/2020
S-1/A 333-231428
5/22/2019
S-1/A 333-231428
5/22/2019
S-1/A 333-231428
5/22/2019
10.16
S-1/A 333-231428
5/22/2019
10.17
S-1/A 333-231428
6/10/2019
10-K 001-38950
3/2/2021
10.32
10-K 001-38950
3/2/2021
10.33
10-K 001-38950
3/2/2022
10.29
10-K 001-38950
3/2/2022
10.30
10-Q 001-38950
5/10/2023
10.8
10-K 001-38950
3/1/2023
10.34
Grocery Outlet Holding Corp. 2019 Incentive Plan
S-1/A 333-231428
6/10/2019
10-Q 001-38950
8/9/2023
10.1
8-K
001-38950
11/8/2022
10.2
10-Q 001-38950
10-Q 001-38950
10-Q 001-38950
11/10/2020
11/10/2020
11/8/2023
10.1
10.2
10.1
8-K
001-38950
11/8/2022
10.1
S-1/A 333-231428
6/10/2019
10.31
8-K
001-38950
2/23/2023
10.1
10-Q 001-38950
5/10/2023
10.2
10-Q 001-38950
5/10/2023
10.3
10-Q 001-38950
5/10/2023
10.4
10-Q 001-38950
5/10/2023
10.5
10.13†
Form of Restricted Stock Unit Grant and Agreement for Non-
Employee Directors (Grocery Outlet Holding Corp. 2019 Stock
Incentive Plan) (effective June 2023)
10.14† Non-Employee Director Compensation Policy (as amended
November 2, 2022 and as effective January 1, 2023)
10.15† Grocery Outlet Holding Corp. Directors Deferral Plan
10.16† Grocery Outlet Holding Corp. Executive Severance Plan
10.17† Grocery Outlet Inc. 2019 Annual Incentive Plan (Amended and
10.18†
10.19†
10.20
10.21
10.22
10.23
10.24
21.1*
23.1*
24.1*
31.1*
31.2*
32.1**
32.2**
Restated Effective August 24, 2023)
Employment Agreement, effective January 1, 2023, by and
among Robert J. Sheedy, Jr., Grocery Outlet Inc. and Grocery
Outlet Holding Corp.
Form of Indemnification Agreement between Grocery Outlet
Holding Corp. and directors and executive officers of Grocery
Outlet Holding Corp.
Credit Agreement, dated as of February 21, 2023, by and
among Grocery Outlet Holding Corp., the Lenders and Letter of
Credit Issuers from time to time party thereto, and Bank of
America, N.A., as the Administrative Agent, Collateral Agent
and Swingline Lender., the Lenders and Letter of Credit Issuers
from time to time party thereto, and Bank of America, N.A., as
the Administrative Agent, Collateral Agent and Swingline
Lender.
Pledge and Security Agreement, dated as of February 21, 2023,
among Grocery Outlet Holding Corp., the subsidiaries of
Grocery Outlet Holding Corp. from time to time party thereto
and Bank of America, N.A., as Collateral Agent
Copyright Security Agreement, dated as of February 21, 2023,
among Grocery Outlet Inc. and Bank of America, N.A., as
Collateral Agent
Trademark Security Agreement, dated as of February 21, 2023,
among Grocery Outlet Inc. and Bank of America, N.A., as
Collateral Agent
Guarantee, dated as of February 21, 2023, among Grocery
Outlet Holding Corp., the subsidiaries of Grocery Outlet
Holding Corp. from time to time party thereto and Bank of
America, N.A., as Administrative Agent and Collateral Agent
Subsidiary of the Registrant
Consent of Deloitte and Touche LLP
Power of Attorney (incorporated by reference to the signature
page to this Annual Report on Form 10-K)
to
Certification of Principal Executive Officer pursuant
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant
to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Certification of Principal Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
97.1†* Grocery Outlet Holding Corp.
Incentive Compensation
Clawback Policy
101.INS Inline XBRL Instance Document - the instance document does
not appear in the Interactive Data File because its XBRL tags
are embedded within the Inline XBRL document.
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101.CAL Inline XBRL Extension Calculation Linkbase Document
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101.LAB Inline XBRL Extension Label Linkbase Document
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Cover Page Interactive Data File - the cover page interactive
data file does not appear in the Interactive Data File because its
XBRL tags are embedded within the Inline XBRL document
and included as Exhibit 101.
____________________________________
† Management contract or compensatory plan or arrangement.
* Filed herewith.
** Furnished herewith. The certifications attached as Exhibit 32.1 and 32.2 that accompany this Annual Report on Form
10-K are deemed furnished and not filed with the Securities and Exchange Commission and are not to be
incorporated by reference into any filing of Grocery Outlet Holding Corp. under the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual
Report on Form 10-K, irrespective of any general incorporation language contained in such filing.
106
ITEM 16. FORM 10-K SUMMARY
Not applicable.
107
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Date: February 28, 2024
Grocery Outlet Holding Corp.
By:
/s/ Robert J. Sheedy, Jr.
Robert J. Sheedy, Jr.
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below hereby
constitute and appoint Robert J. Sheedy, Jr., Lindsay E. Gray and Luke D. Thompson, or any of them, his or her attorneys-
in-fact, for such person in any and all capacities, to sign any amendments to this report and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that either of said attorneys-in-fact, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Robert J. Sheedy, Jr.
Robert J. Sheedy, Jr.
/s/ Charles C. Bracher
Charles C. Bracher
/s/ Lindsay E. Gray
Lindsay E. Gray
/s/ Eric J. Lindberg, Jr.
Eric J. Lindberg, Jr.
/s/ Erik D. Ragatz
Erik D. Ragatz
/s/ Kenneth W. Alterman
Kenneth W. Alterman
/s/ John E. Bachman
John E. Bachman
/s/ Mary Kay Haben
Mary Kay Haben
/s/ Thomas F. Herman
Thomas F. Herman
/s/ Carey F. Jaros
Carey F. Jaros
/s/ Gail Moody-Byrd
Gail Moody-Byrd
/s/ Jeffrey R. York
Jeffrey R. York
Title
Date
President and Chief Executive Officer; Director
(Principal Executive Officer)
February 28, 2024
Chief Financial Officer
(Principal Financial Officer)
Senior Vice President, Accounting
(Principal Accounting Officer)
February 28, 2024
February 28, 2024
Director, Chairman of the Board
February 28, 2024
Lead Independent Director
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
February 28, 2024
Director
Director
Director
Director
Director
Director
Director
108