Grocery Outlet Holding Corp. (GO) Earnings

Management highlights

- Core Turnaround Progress & Comps Improvement - Sequential comparable store sales improvement of 70 basis points from Q1 2026, reaching a decline of 30 basis points in Q2 despite a 50 basis point headwind from Easter timing; total company comps turned positive in May and June after a weak start to the year - Opportunistic product comps accelerated meaningfully in Q2, improving 500 basis points relative to Q1, with opportunistic SKU mix expanding over 300 basis points quarter over quarter; increased opportunistic units per transaction also improved significantly - Traffic grew 1.8% YoY, while average basket declined 2.1% YoY but improved 100 basis points sequentially from Q1 - Sourcing & Merchandising Changes - 25-year Grocery Outlet veteran Paul Miller returned in June as EVP and Chief Purchasing and Merchandising Officer to lead sourcing and merchandising revitalization, with early positive impact on supplier engagement and opportunistic product flow - Revitalized supplier partnerships have driven new supplier acquisitions up 11% year to date, with consistent improvement in opportunistic product quality and breadth - Independent Operator (IO) & Store Execution - Expanded reporting, actionable insights, and field training to help IOs focus more on customer service rather than data analysis; targeted side-by-side coaching for underperforming stores on in-stock, merchandising and store standards has resulted in participating stores outperforming control groups - New point-of-sale customer feedback tools rolled out to 100 stores, with plans for a full fleet-wide rollout; new dynamic routing program to optimize delivery and improve opportunistic product flow is active in 200 stores, with full rollout expected within one year - IO satisfaction improved across all categories YoY, with a majority of operators rating recent systems upgrades as extremely or very valuable - Capital Allocation & Portfolio Optimization - Completed closure of 36 underperforming stores in April 2026 as part of the store optimization plan, which is expected to eliminate a $12 million annualized drag to adjusted EBITDA, with most of the benefit realized in 2027 - Post-closure, remaining East region stores delivered Q2 comps well above the company average with strengthening YoY margins; a new distribution center is now supporting East region operations - 2027 new store openings will be weighted to high-return infill opportunities to leverage existing brand density and distribution; the store refresh program is paced to prioritize core opportunistic assortment growth, with ~100 refreshes still targeted for full year 2026 - Value Communication & Marketing - Completed repositioning around extreme value and the treasure hunt experience, with updated in-store signage and targeted digital/at-home marketing to improve price perception; new Q3 initiatives will expand enhanced value messaging to the company's app and digital presence, plus introduce parity pricing for e-commerce

Guidance

- Full year 2026 guidance: Management raised the lower end of full year guidance ranges following stronger than expected Q2 performance - Net new store openings: 30 to 33 stores - Net sales: $4.7 billion to $4.72 billion - Comparable store sales: negative 0.5% to 0.0% (up from prior weaker guidance range) - Gross margin: 29.8% to 30%, maintained from prior guidance - Adjusted EBITDA: $225 million to $235 million - Diluted adjusted EPS: $0.51 to $0.55 per share - Capital expenditures net of tenant allowances: $170 million, maintained - The $20 million full year incremental promotional investment plan remains in place, with promotional spending expected to taper further in the second half as opportunistic mix grows - Third quarter 2026 guidance: - Comparable store sales: negative 1% to 0.0%, which includes a 100 basis point headwind from the ongoing multi-state cyclospora outbreak impacting produce sales - Gross margin: 29.8% to 30% - Adjusted EBITDA: $58 million to $61 million - Diluted adjusted EPS: 14 cents to 16 cents per share - Long-term, management expects the business to return to a healthy baseline of 3% to 5% annual comparable store growth, well above inflation

Segment performance

Grocery Outlet reports consolidated results and does not break out separate financial performance for distinct product segments in this call. The only category-level performance provided notes that the core grocery category (the company's largest category) delivered 3.5% comparable store sales growth in Q2 2026, following revitalized supplier partnerships and increased opportunistic product flow. Deli and Frozen are the next largest priority categories for opportunistic expansion, with early positive momentum reported but no specific financial performance metrics provided.

Risks & headwinds

- Continued promotional competition in the grocery sector, with competitors announcing incremental price investment for the second half of 2026 - Consumer spending remains cautious, creating pressure on average basket size - The multi-state cyclospora outbreak has created near-term headwinds: while no Grocery Outlet products have been recalled, produce sales have declined, creating a 100 basis point expected drag on Q3 comparable store sales, with elevated produce shrink pressuring Q3 gross margins; management expects the impact to moderate in Q4 2026 - Execution risk remains as the company completes its core turnaround initiatives, including expanding opportunistic product into new categories and rolling out new operational tools across the full store fleet

Analyst Q&A

• Q: What is the cadence of comp improvement through Q2, what is the current traffic/basket trend, and what is the expected timeline for opportunistic mix gains to drive total comps? /

  A: Comp trends improved meaningfully throughout the first half of 2026, with total comps improving by roughly 300 basis points from January to the end of Q2 (before the cyclospora outbreak). Q2 delivered 1.8% YoY traffic growth, while basket declined ~2% YoY but improved 100 basis points sequentially from Q1. Opportunistic comps accelerated 500 basis points from Q1, with mix expanding more than 300 basis points, and the same successful playbook used to deliver 3.5% Q2 comp growth in grocery is now driving early momentum in Deli and Frozen. The 100 basis point cyclospora headwind is expected to be temporary, with underlying business performance continuing to improve into Q4.

• Q: Why didn't stronger Q2 performance lead to a larger upward revision to full year guidance, and how long will the cyclospora impact last? /

  A: Q2 beat the guidance midpoint by roughly $9 million: half of the outperformance came from better comp and gross margin, ~$3 million of SG&A outperformance will shift to the second half of the year, with the remaining from consistent cost discipline. For Q3, elevated produce shrink from the cyclospora outbreak will pressure gross margins, offsetting the benefit of tapering promotional spending and rolling store closure costs. Management assumes the cyclospora related pressure will last the full third quarter, and chose to maintain a prudent full year outlook given the near-term headwind.

• Q: How will Grocery Outlet compete against increased promotional and price investment from competitors in the second half? /

  A: Management monitors competitive pricing and confirms Grocery Outlet maintains a 15-20% basket price gap versus mass retailers and 30-40% versus conventional grocers. The company's core strategy of expanding opportunistic product is well-suited for a competitive pricing environment, as high-value opportunistic deals drive both customer value and strong margins for the business. Management does not plan to increase incremental promotional spending beyond the already planned $20 million full year bridge, and will continue relying on expanded opportunistic assortment to drive value.

• Q: How do you balance the store refresh program with your top priority of expanding opportunistic assortment, and how has progress on revitalizing supplier partnerships progressed? /

  A: Store refresh remains an important long-term priority to improve the in-store experience, and the 2026 target of 100 completed refreshes remains on track. Management has calibrated the pace of refreshes to reduce execution variability and customer disruption, keeping core opportunistic growth as the near-term top priority. Supplier partnerships were not broken, but the company has refocused on in-person engagement and faster deal processing under Paul Miller's leadership, leading to an 11% increase in new supplier acquisitions year to date with strong early results on deal flow.

• Q: What changes have been made to space allocation to accommodate more opportunistic product, and how is markdown risk managed? /

  A: The company already discontinued 400 to 500 lower-margin MTO and private label items in the first half of 2026 to free up space for additional opportunistic SKUs, with the vast majority of associated markdowns already completed. Constant SKU rotation is a normal part of the Grocery Outlet model, which typically turns over 80,000 to 100,000 unique SKUs annually, and markdown activity remains at normal cadence with no unexpected elevated risk.