Grocery Outlet Holding Corp.: Form 10-Q for the period ended Sep 27, 2025

You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q, and the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our 2024 Form 10-K. 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 set forth in other sections of this report. See "Special Note Regarding Forward-Looking Statements" in this report.

We operate on a fiscal year that ends on the Saturday closest to December 31st each year. The fiscal years ended January 3, 2026 (“fiscal 2025”) and December 28, 2024 ("fiscal 2024") consist of 53 weeks and 52 weeks, respectively. References to the third quarter of fiscal 2025 and the third quarter of fiscal 2024 refer to the 13 weeks ended September 27, 2025 and September 28, 2024, respectively. References to the second quarter of fiscal 2025 refer to the 13 weeks ended June 28, 2025. References to the first quarter of fiscal 2025 refer to the 13 weeks ended March 29, 2025.

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 subsidiaries 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 primarily 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. Our Grocery Outlet stores are primarily run by entrepreneurial independent operators ("IOs") who create a neighborhood feel through personalized customer service and a localized product offering. As of September 27, 2025, we had 563 stores in California, Washington, Oregon, Pennsylvania, Tennessee, Idaho, Nevada, Maryland, New Jersey, Ohio, North Carolina, Georgia, Alabama, Delaware, Kentucky and Virginia.

Recent Trends and Developments

The extent of the continuing impact of the factors set forth below on our operational and financial performance will depend on many factors, including certain factors outside of our control.

Macroeconomic Conditions and Regulatory Developments. Over the past several years, our business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, inflation and subsequent disinflation, tariffs, and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their businesses. In recent periods, comparable store sales have been negatively impacted by decreased average transaction size. We are actively pursuing initiatives to increase average transaction size through our deployment of enhanced in-store merchandising and execution to further improve the shopping experience.

Tariffs, such as those recently implemented or proposed by the U.S. government on goods imported from China and certain other countries, may result in cost increases on some of the products we sell, such as fresh meat and general merchandise that we import from impacted countries, as well as the materials and supplies we use for store construction. Tariffs may also negatively affect consumer sentiment. The tariff environment remains highly dynamic and specific tariffs applicable to our business continue to evolve. While we are regularly re-evaluating the potential impact of implemented and proposed tariffs, the short-term impact of price increases due to tariffs is largely dependent on our ability to negotiate with suppliers, opportunities to change sources of supply, our assortment decisions and whether or not we pass the effects through to our customers, which will largely depend upon competitive market conditions. It is reasonably possible that new or additional tariffs will be periodically implemented or proposed given the current global trade environment. Sustained uncertainty about, or worsening of, current global economic conditions and further tariffs and escalations of tensions between the U.S. and its trading partners has and could continue to adversely impact the stability of global financial markets and result in a global economic slowdown and long-term changes to global trade, which could in turn have a material adverse impact on our business and financial condition.

On July 4, 2025, the One Big Beautiful Bill Act ("OBBBA") was signed into law. We expect the OBBBA to have favorable impacts on our current year cash taxes payable and immaterial impacts to our effective tax rate.

On October 1, 2025, the U.S. Government entered a shutdown, which is ongoing as of this filing. This shutdown has adversely impacted the disbursement of benefits from federally-funded assistance programs that many of our customers depend on, including the Supplemental Nutrition Assistance Program (“SNAP”), and a prolonged shutdown could continue to adversely impact future disbursements. During the last fiscal year, approximately 9% of our net sales were in the form of Electronic Benefits Transfer payments and a substantial portion of these payments may be related to benefits associated with SNAP. In addition, a prolonged shutdown could delay our ability to register and participate in SNAP for future new stores that we open. We are closely monitoring the known and potential impacts of the shutdown, which if prolonged, could affect the spending habits of our customers and adversely impact our business performance and results of operations.

Pricing Competition. During the last few years we have observed an increase in promotional and pricing activities from key competitors, putting further pressure on our relative value proposition, which in turn, has resulted in our increased efforts to actively negotiate costs and adjust prices to sharpen our value proposition.

Restructuring Plan. We initiated a restructuring plan during the fourth quarter of fiscal 2024, with continued implementation in fiscal 2025, intended to improve long-term profitability, cash flow generation and return on invested capital, optimize the footprint of new store growth and lower our cost base (the "Restructuring Plan"). The Restructuring Plan included (i) the termination of a total of 28 leases for unopened stores in suboptimal locations and the discontinued development of certain future store sites where we had incurred initial costs, but leases had not yet been signed, (ii) the cancellation of certain capital-intensive warehouse projects and (iii) a reduction in headcount in building a more scalable cost structure. As of September 27, 2025, we incurred total costs under the Restructuring Plan of $62 million, of which $38 million were cash expenditures. All costs incurred during the third quarter and first three quarters of fiscal 2025 are included in Restructuring charges on the condensed consolidated statements of operations and comprehensive income (loss). The actions under the Restructuring Plan were substantially completed in the second quarter of fiscal 2025.

See Note 11 to the condensed consolidated financial statements for additional information regarding the Restructuring Plan, including the costs incurred and restructuring liability activity.

New Store Growth. 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, hook up utilities as well as higher construction and development related costs. Recently implemented and proposed tariffs could further impact our constructions costs.

Our new store growth efforts are focused on organic growth combined with complementary 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 April 1, 2024, we acquired The Bargain Barn, Inc., a Tennessee corporation doing business as United Grocery Outlet ("United Grocery Outlet"), which included 40 stores in six adjacent states we did not operate in as of such date (Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia) and a company-operated distribution center. The acquisition provides us with the opportunity to scale in a new region and is a platform for potential future expansion in the Southeast. Our near-term integration focus is expanding the assortment, investing in store refreshes and new fixtures and introducing some of our marketing programs to the Southeast region. We opened 35 stores and closed 5 stores in the first three quarters of fiscal 2025 and plan to open 37 net new stores in fiscal 2025.

Enterprise Resource Planning System Upgrades and Challenges. 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 significant disruption to our business operations, including ordering and inventory disruptions, as well as payment processing, which adversely impacted our results of operations during the remainder of fiscal 2023 through and into fiscal 2025. We have since improved the data visibility to help us manage and forecast the business and we continue to work to further improve visibility into additional operating data, and to increase the speed and efficiency of the tools that we and our IOs use to manage the business.

Private Label Products. We introduced our private label products in stores beginning in the third quarter of fiscal 2024, with approximately 400 new private-label SKUs across various grocery, deli, frozen, general merchandise and wine categories introduced through the third quarter of fiscal 2025. Our private label products are intended to foster customer loyalty through both everyday commodity staples and unique items exclusive to us. In addition to providing better value and inventory consistency for our customers, our private label products generally deliver higher margins for us and our IOs.

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 financial measures we use in accordance with accounting principles generally accepted in the United States of America ("GAAP") are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A"), operating income, net income (loss) and comprehensive income (loss) and earnings (net loss) per share. 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.

Third Quarter of Fiscal 2025 Overview

Key financial and operating performance results for the third quarter of fiscal 2025 compared to the third quarter of fiscal 2024 were as follows:

• Net sales increased 5.4% to $1.17 billion from $1.11 billion in the third quarter of fiscal 2024.
• Comparable store sales increased by 1.2%, driven by a 1.8% increase in the number of transactions, partially offset by a 0.6% decrease in average transaction size.
• Gross margin decreased by 70 basis points to 30.4%, compared to gross margin of 31.1% in the third quarter of fiscal 2024.
• We opened 13 new stores and closed 2 stores, ending the third quarter of fiscal 2025 with 563 stores in 16 states.
• SG&A increased by 8.7% to $331.0 million, or 28.3% of net sales.
• Operating income was $22.8 million, which included $1.3 million in charges during the quarter related to the Restructuring Plan (see Note 11 to the condensed consolidated financial statements for additional information).
• Net income was $11.6 million, or $0.12 per diluted share, compared to net income of $24.2 million, or $0.24 per diluted share, in the third quarter of fiscal 2024.
• Adjusted net income(1) decreased 25.7% to $20.7 million, or $0.21 diluted adjusted earnings per share(1), compared to $27.9 million, or $0.28 diluted adjusted earnings per share, in the third quarter of fiscal 2024.
• Adjusted EBITDA(1) was $66.7 million compared to $72.3 million in the third quarter of fiscal 2024.

(1) Adjusted net income, diluted adjusted earnings per share and adjusted EBITDA 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 financial measures provide useful information to investors and how management utilizes them, and reconciliations of the non-GAAP financial measures and the most directly comparable GAAP financial 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 "Operating Metrics and Non-GAAP Financial Measures - 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, customer perception of value in our offerings, 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, our business has in the past benefited from certain periods of economic uncertainty.

Gross Profit and Gross Margin

Gross profit is equal to our net sales less our cost of sales, which includes, among other things, merchandise costs, inventory markdowns, inventory losses, transportation costs and distribution and warehousing costs, including depreciation. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by 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, the cost of opening new IO stores and impairment of long-lived assets. 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 profit. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers.

Restructuring Charges

Restructuring charges include lease termination costs, non-cash impairment and disposal of long-lived assets, employee severance and benefit costs and legal, professional and other costs related to the Restructuring Plan. See Note 11 to the condensed consolidated financial statements for additional information on the Restructuring Plan.

Operating Income

Operating income is gross profit less SG&A. Operating income excludes interest expense, net and income tax expense. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

Results of Operations

The following table summarizes key components of our results of operations both in dollars and as a percentage of net sales (amounts in thousands, except for percentages):

(1) Components may not sum to totals due to rounding.

* Represents a change that is not meaningful.

Operating Metrics and Non-GAAP Financial Measures

Number of New Stores

The number of new stores reflects the number of stores opened or acquired during a particular reporting period. Newly opened 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 and typically the issuance of IO notes to support IO startup costs. Certain newly acquired stores may require refreshes and new fixtures.

We expect new store growth to be a significant and critical 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 consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following a store's opening, which is when we believe comparability is achieved, or the thirteenth full fiscal month following a store's acquisition. 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 is 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. Starting in the second quarter of fiscal 2025, comparable stores sales include the addition of stores from the acquisition of United Grocery Outlet on April 1, 2024.

Opening or, on a limited strategic basis, acquiring 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 non-GAAP financial measures that 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 financial measures on the same basis as management uses to evaluate our operating results. We use these non-GAAP financial measures to supplement GAAP financial 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 financial measures of performance to evaluate our performance in connection with compensation decisions. We believe that excluding items from operating income, net income (loss) and earnings (net loss) 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 (loss) before net interest expense, income taxes and depreciation and amortization expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense (benefit), asset impairment and gain or loss on disposition, acquisition and integration costs, costs related to the amortization of inventory purchase accounting asset step-ups, restructuring charges, 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 (loss) adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for the amortization of property and equipment purchase accounting asset step-ups 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. These non-GAAP financial measures may not be comparable to similar measures reported by other companies and 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 financial 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 these non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive such 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):

(1) For the 39 weeks ended September 28, 2024, includes the addition of 40 stores from acquisition of United Grocery Outlet.

(2) 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, or the thirteenth full fiscal month following the store's acquisition.

(3) See "GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.

GAAP to Non-GAAP Reconciliations

The following tables provide reconciliations from our GAAP net income (loss) to EBITDA and adjusted EBITDA, GAAP net income (loss) to adjusted net income, and our GAAP earnings (net loss) per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data):

32

(1) Includes non-cash share-based compensation expense.

(2) Represents non-restructuring asset impairment charges and gains or losses on dispositions of assets.

(3) Represents costs related to the acquisition and integration of United Grocery Outlet, including due diligence, legal, other consulting and retention bonus expenses.

(4) For purposes of determining adjusted EBITDA, this line represents the incremental amortization of inventory step-ups resulting from purchase price accounting related to the acquisition of United Grocery Outlet. For purposes of determining adjusted net income, in addition to the previously noted item, this line also represents 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, as well as the amortization of debt issuance costs, as these items are already included in the adjusted EBITDA reconciliation within the depreciation and amortization expenses and interest expense, net, respectively.

(5) Represents charges related to the Restructuring Plan, which include lease termination costs, non-cash impairment and disposal of long-lived assets, employee severance and benefit costs and legal, professional and other costs. See Note 11 to the condensed consolidated financial statements for additional information on the Restructuring Plan.

(6) Represents other non-recurring, non-cash or non-operational items, such as certain personnel-related hiring and termination costs of $2.1 million and $7.4 million for the 13 and 39 weeks ended September 27, 2025, respectively, system implementation costs of $1.9 million and $4.2 million for the 13 and 39 weeks ended September 27, 2025, respectively, strategic project costs of $3.0 million and $4.1 million for the 13 and 39 weeks ended September 27, 2025, respectively, store closing costs, costs related to employer payroll taxes associated with equity awards, legal settlements and other legal expenses and miscellaneous costs.

(7) 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 benefits or shortfalls related to stock option exercises and vesting of time-based restricted stock units ("RSUs") and performance-based restricted stock units ("PSUs") that are recorded in earnings as discrete items in the reporting period in which they occur.

(8) 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.

(9) As discussed in Note 9 to the condensed consolidated financial statements, for the 39 weeks ended September 27, 2025, there is no difference in the weighted-average shares outstanding used to calculate the basic and diluted GAAP net loss per share due to the Company's net loss.

(10) To calculate diluted adjusted earnings per share, we adjusted the weighted-average shares outstanding for the dilutive effect of all potential shares of common stock.

Comparison of the 13 and 39 weeks ended September 27, 2025 and September 28, 2024 (amounts in thousands, except percentages)

Net Sales

The increases in net sales for the 13 and 39 weeks ended September 27, 2025 were primarily attributable to the addition of 34 net new stores opened over the last 12 months as well as an increase in comparable store sales.

Comparable store sales increased 1.2% for the 13 weeks ended September 27, 2025, driven by a 1.8% increase in the number of transactions, partially offset by a 0.6% decrease in average transaction size. For the 39 weeks ended September 27, 2025, comparable store sales increased 0.9%, driven by a 1.9% increase in the number of transactions, partially offset by a 1.0% decrease in average transaction size.

Gross Profit and Gross Margin

The increases in gross profit for the 13 and 39 weeks ended September 27, 2025 were primarily the result of the addition of 34 net new stores opened over the last 12 months combined with increases in comparable store sales.

For the 13 weeks ended September 27, 2025, gross margin declined largely due to pricing adjustments on everyday staples designed to support our value proposition and appeal to the bargain-minded customer and supply chain investments. For the 39 weeks ended September 27, 2025, gross margin remained flat.

Selling, General and Administrative Expenses

The increase in SG&A for the 13 weeks ended September 27, 2025 includes $19.7 million in higher store-related expenses driven primarily by higher commissions, store occupancy costs, and depreciation. Also contributing to the increase in SG&A was an increase of $6.8 million in corporate-related expenses due primarily to higher incentive compensation, software amortization and other costs to support the continued growth of the business. As a percentage of net sales, SG&A increased compared to the prior year due primarily to the aforementioned factors.

The increase in SG&A for the 39 weeks ended September 27, 2025 includes $58.0 million in higher store-related expenses driven primarily by higher store occupancy costs, commissions, depreciation, personnel costs from Company-operated stores acquired in the United Grocery Outlet transaction in April of last year, and bad debt reserves. Also contributing to the increase in SG&A was an increase of $9.8 million in higher corporate-related expenses due primarily to higher software amortization, insurance, severance and other costs to support the continued growth of the business, partially offset by acquisition costs in the prior year. As a percentage of net sales, SG&A increased compared to the prior year due primarily to the aforementioned factors, partially offset by a decrease from elective commission support we provided to operators in the prior year related to the systems conversion.

Restructuring Charges

Restructuring charges for the 39 weeks ended September 27, 2025 included lease termination costs, non-cash impairment and disposal of long-lived assets, employee severance and benefit costs and legal, professional and other costs related to the Restructuring Plan (see Note 11 to the condensed consolidated financial statements for additional information).

Interest Expense, Net

The increases in net interest expense for the 13 and 39 weeks ended September 27, 2025 were primarily driven by higher average principal debt outstanding during the 13 and 39 weeks ended September 27, 2025, partially offset by lower average interest rates on these borrowings during the 13 and 39 weeks ended September 27, 2025.

Income Tax Expense

The decrease in income tax expense for the 13 weeks ended September 27, 2025 was primarily due to the change in earnings in the current period, partially offset by an increase in our estimated annual effective tax rate for fiscal 2025, driven by changes in forecasted annual income. The decrease in income tax expense for the 39 weeks ended September 27, 2025 was primarily due to the change in earnings in the current period, partially offset by a reduction in the tax benefit from share-based compensation during the 39 weeks ended September 27, 2025.

The change in our effective income tax rate for the 13 weeks ended September 27, 2025 compared to the 13 weeks ended September 28, 2024 was primarily due to the benefit of certain acquisition related deductions, partially offset by a reduction in the tax benefit from share-based compensation. The change in our effective income tax rate for the 39 weeks ended September 27, 2025 compared to the 39 weeks ended September 28, 2024 was primarily driven by the change in earnings, partially offset by a reduction in the tax benefit from share-based compensation.

On July 4, 2025, the OBBBA was signed into law. The OBBBA includes changes to U.S. federal tax law, which may be subject to further clarification and the issuance of interpretive guidance. We expect the OBBBA to have favorable impacts on our current year cash taxes payable and immaterial impacts to our effective tax rate.

Net Income (Loss)

* Represents a change that is not meaningful.

As a result of the foregoing factors, net income decreased for the 13 weeks ended September 27, 2025 compared to the same period in fiscal 2024, and net loss was $6.8 million for the 39 weeks ended September 27, 2025 compared to net income of $37.2 million for the same period in fiscal 2024.

Adjusted EBITDA

Adjusted EBITDA decreased for the 13 weeks ended September 27, 2025 compared to the prior year, primarily as a result of a decline in gross margin and higher SG&A, partially offset by an increase in net sales, as discussed above.

The increase in adjusted EBITDA for the 39 weeks ended September 27, 2025 compared to the prior year was primarily attributable to an increase in gross profit.

Adjusted Net Income

The decrease in adjusted net income for the 13 weeks ended September 27, 2025 was primarily attributable to a decline in gross margin, higher SG&A (including higher depreciation expense) and higher net interest expense, partially offset by an increase in net sales for the 13 weeks ended September 27, 2025, as discussed above.

The decrease in adjusted net income for the 39 weeks ended September 27, 2025 was primarily attributable to higher SG&A (including higher depreciation expense) and higher net interest expense, partially offset by an increase in net sales for the 39 weeks ended September 27, 2025, as discussed above.

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 February 21, 2023, with Bank of America, N.A. (the "2023 Credit Agreement"). If cash generated from our operations and borrowings under the 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 that 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 September 27, 2025, we had cash and cash equivalents of $52.1 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 the 2023 Credit Agreement. As of September 27, 2025, we had $220.0 million of borrowings outstanding under the revolving credit facility and $5.1 million of outstanding standby letters of credit, resulting in $174.9 million of remaining borrowing capacity available 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 any 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.

We may also, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt.

Material Cash Requirements

There has been no material change in our material cash requirements since the end of fiscal 2024, other than those which occur in the ordinary course of business and the information noted below. See our 2024 Form 10-K for additional information.

Capital Expenditures

Capital expenditures include purchases of capital assets such as property and equipment as well as intangible assets and licenses. Capital expenditures for the 39 weeks ended September 27, 2025, before tenant improvement allowances, were $174.9 million, and, net of tenant improvement allowances, were $154.9 million. We currently expect total capital expenditures, net of tenant improvement allowances, to be approximately $210.0 million for fiscal 2025, which includes new store growth, upgrades to our existing store base, ongoing investments in technology and supply chain and infrastructure.

Debt Obligations

The 2023 Credit Agreement requires us to make scheduled quarterly amortization payments of the senior term loan. Such payments total $37.5 million over the remaining term of the senior term loan, with $7.5 million payable over the remainder of fiscal 2025. The remaining senior term loan principal balance and any outstanding revolving credit facility balance will become due in February 2028 at maturity. See Note 3 to the condensed consolidated financial statements for additional information.

Purchase Commitments

During the 39 weeks ended September 27, 2025, we renewed a contract related to storage and handling services at certain third-party distribution centers, which includes a non-cancelable obligation of $26.3 million through 2030, as of September 27, 2025.

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 subsidiaries 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 subsidiaries 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) of no less than 1.75 to 1.00 as of the last day of each test period.

As of September 27, 2025, we were in compliance with all applicable financial covenant requirements for the 2023 Credit Agreement.

Cash Flows

The following table summarizes our cash flows for the periods presented (amounts in thousands):

Cash Provided by Operating Activities

The increase in net cash provided by operating activities of $77.4 million for the 39 weeks ended September 27, 2025 compared to the same period in fiscal 2024 was primarily driven by changes in accrued and other liabilities, trade accounts payable and accrued compensation, partially offset by the net loss for the 39 weeks ended September 27, 2025. The changes in accrued and other liabilities and trade accounts payable were primarily due to timing differences of accruals and payments for goods and services and the disruptions related to the implementation of our systems conversion for the 39 weeks ended September 28, 2024.

Cash Used in Investing Activities

The decrease in net cash used in investing activities of $23.1 million for the 39 weeks ended September 27, 2025 compared to the same period in fiscal 2024 was primarily due to the acquisition of United Grocery Outlet in the prior year, partially offset by increased spending on property and equipment due to higher store count and construction related to future stores.

Cash Provided by Financing Activities

Net cash provided by financing activities of $22.0 million for the 39 weeks ended September 27, 2025 was primarily due to the borrowing of $50.0 million on our revolving credit facility, partially offset by principal payments of $20.0 million on our revolving credit facility and $7.5 million in scheduled principal payments on the senior term loan under the 2023 Credit Agreement. Net cash provided by financing activities of $86.9 million for the 39 weeks ended September 28, 2024 was primarily due to the borrowing of $140.0 million on our revolving credit facility under the 2023 Credit Agreement and $8.3 million in proceeds from the exercise of stock options, partially offset by the repurchase of $56.4 million of our common stock and $3.8 million in scheduled principal payments on the senior term loan under the 2023 Credit Agreement.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting. The preparation of our condensed 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. 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.

There have been no material changes to our critical accounting policies and estimates during the 39 weeks ended September 27, 2025 from those disclosed in our 2024 Form 10-K.

Recent Accounting Pronouncements

Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report.

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 September 27, 2025, our outstanding borrowings included $281.3 million from the senior term loan and $220.0 million from the revolving credit facility under the 2023 Credit Agreement. As of September 27, 2025, the interest rate on these borrowings ranged from 6.51% to 6.59% (see Note 3 to the condensed consolidated financial statements for additional information). Based on the outstanding balances and interest rates of the senior term loan and the revolving credit facility as of September 27, 2025, 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 $3.3 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 and subsequent disinflation, resulting in part from various supply disruptions, increased shipping and transportation costs, increased commodity costs, increased labor costs in the supply chain, increased materials costs to develop new stores, increased SG&A related to personnel, travel, and other operational costs and other disruptions caused by the recent 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.

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management including our Principal Executive Officer and Principal 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 and procedures 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 Principal Executive Officer and our Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded our disclosure controls and procedures were not effective as of September 27, 2025 due to the ongoing remediation of our material weakness in our internal control over financial reporting identified as of December 30, 2023 and continuing as of September 27, 2025. 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.

Previously Identified Material Weakness and Ongoing Remediation Plan

The previously identified material weakness in internal control over financial reporting relates to deficiencies in the design and operating effectiveness of certain information technology general computer controls ("ITGC's"). In particular, 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 information technology operations for which our existing controls for such matters were not designed to address. As a result, certain of the Company's related business controls that are dependent upon the affected ITGCs were also deemed ineffective.

As of December 28, 2024, management's assessment concluded that the controls required to remediate the material weakness were designed and implemented appropriately, however, certain controls were not consistently operating effectively for a sufficient period of time to conclude the material weakness was remediated. We did not identify any material misstatements to the consolidated financial statements as of and for the year ended December 28, 2024, and as of and for the fiscal quarter ended September 27, 2025, 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 represented 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 28, 2024 and continuing as of September 27, 2025.

The previously identified material weakness will be considered fully remediated once management has concluded, through continued testing, that these specific controls have operated effectively for a sufficient period of time. This ongoing remediation effort is expected to be fully completed during fiscal 2025.

For further information regarding the identified material weakness, see Part I, Item 1A. "Risk Factors" and Part II, Item 9A. "Controls and Procedures" in our 2024 Form 10-K.

Changes in Internal Control over Financial Reporting

Other than the remediation effort identified above, during the fiscal quarter ended September 27, 2025, there was no change in our internal control over financial reporting 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 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.

In addition to the other information set forth in this Form 10-Q, our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of our 2024 Form 10-K under the heading "Risk Factors," any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results and stock price. There have been no material changes to our risk factors since the 2024 Form 10-K.