Prepared remarks
Greetings, and welcome to Grocery Outlet's Second Quarter 2026 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Dorian Bertsch, Senior Vice President of Strategic Finance and Investor Relations. Thank you. You may begin.
Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the second quarter ended 07/04/2026. Speaking for management on today's call will be Jason Potter, President and Chief Executive Officer, and Ian D. Ferry, Chief Financial Officer. Following prepared remarks from Jason and Ian, we will open the call for questions. Please note that this conference call is being webcast live and the recording will be available via playback on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of the federal securities laws. All statements that address future operating, financial, or business performance or the company's strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. Description of these factors can be found in this afternoon's press release as well as in the company's periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company's website or on sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. Additionally, during today's call, the company will reference certain non-GAAP financial information, including adjusted items. Reconciliation of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release on the Investor Relations section of the company's website under News and Releases and in the company's SEC filings. And now I would like to turn it over to Jason.
Good afternoon, everyone, and thank you for joining us. During the second quarter, our work to stabilize the business and return growth gained momentum. A stronger opportunistic offering and sharper value communication drove sequential comp improvement and results above our outlook across key financial metrics. Revenue increased 1% to $1.19 billion with comparable store sales down 30 basis points. That was a 70 basis point improvement from Q1 despite an adverse headwind from the timing of Easter this year. Traffic grew 1.8%. Basket declined 2.1% year-over-year, but improved approximately 100 basis points from Q1 as customers responded to our stronger opportunistic offerings. Gross margin of 30.2% also exceeded our outlook due primarily to lower-than-planned promotional spending. Combined with disciplined cost management, the sales and margin outperformance drove adjusted EBITDA of approximately $66 million and adjusted EPS of $0.20, both well above our outlook. Our first-half progress reinforces our confidence that restoring the core strengths of the Grocery Outlet model drives sustainable improvement. It is still early, but the business is responding. Let me start with our primary objective: improving comps. Strengthening our opportunistic offering is central to enhancing our value and returning the business to sustainable comp growth. Since the start of this year, we have prioritized improved sourcing, product flow, visibility, and store-level execution while expanding key supplier relationships. Together, these actions have significantly increased and strengthened our opportunistic assortment and improved our mix. The impact is showing up in our sales. Opportunistic comparable store sales improved significantly from Q1, helping lift the total company comps into positive territory in May and June. The breadth of opportunistic SKUs increased meaningfully quarter to quarter, improving quality. In addition, year-over-year growth in opportunistic units per transaction also improved significantly relative to the first quarter. These are encouraging early signs that customers are responding to a broader and better selection of compelling deals as we improve our opportunistic mix. That growth is an outcome of category-level focus and execution. We have prioritized and have seen outsized opportunistic improvement in grocery, our largest category. In grocery, a determined effort to revitalize supplier partnerships drove higher opportunistic product flow, opportunistic comps, and our total comps. This is how our model is designed to work and we are implementing the same actions in other categories like deli and frozen. Paul Miller is leading the work to strengthen our sourcing and merchandising capabilities. Paul returned in June as Executive Vice President and Chief Purchasing and Merchandising Officer. A 25-year Grocery Outlet veteran, he helped develop our opportunistic offering, deepen key supplier relationships, and enhance the treasure hunt experience. In just two months into his return, his merchant instincts and leadership are already making an impact here. We are very pleased to have him back. To support our revitalized offering, we are improving the ways that we communicate value to our customers. We completed our repositioning around Extreme Value and the treasure hunt, supporting our product efforts with simpler signage, more prominent value items, and targeted at-home and digital media. With a stronger assortment and better analytics, we can deploy marketing and promotional spending more precisely. This will allow us to rely more on product and marketing to drive comps, and less incremental price investment in the second half of the year, even as the competitive environment remains promotional. In Q3, we are deploying enhanced messaging to improve our price perception, we plan to deploy new signage in stores that supports our value positioning, and we will extend that messaging into our digital presence and our app. We are also taking steps to introduce parity pricing in e-commerce. These actions will make the savings available at Grocery Outlet easier for customers to see, to access, and to understand. Together, stronger product, clear value messaging, and broader engagement are designed to drive more consistent comp growth. Capturing the full benefit requires strong execution in every store, which brings me to our independent operators. Our independent operators are one of the greatest advantages of the Grocery Outlet model. They know their communities and their customers. With the right assortment, the right tools, and the right support, their entrepreneurial energy really brings our model to life. Over the past year, we have expanded reporting and actionable insights, strengthened communication with our field organization, and invested in training. We are also spending more time in the field and engaging operators more directly. Our goal is straightforward. We want operators to spend less time sifting through data and more time serving customers to grow their businesses. A common set of facts and priorities helps operators and field teams identify issues sooner, focus on actions that matter most, and deliver a more consistent customer experience. A good example of this is how we are working with our independent operators in the field. Using fleet-wide data, we identify stores where targeted coaching and operational support can have the greatest impact. Our field teams then work side-by-side with operators on a focused set of actions, including in-stock conditions, merchandising, store standards, and operating routines. This annual business review and enhanced merchandising reporting help translate the data into action. We are encouraged by these results so far. Participating stores consistently outperformed their control groups, reinforcing that meaningful improvement can come from disciplined execution of store-level fundamentals. We are turning those learnings into repeatable tools and routines for the broader fleet. We are also giving operators a more immediate view of customer sentiment. I've introduced new point-of-sale feedback that connects customer responses with transaction data, helping operators identify service gaps and adjust their actions at the store level. This capability is now in approximately 100 stores and the early results support a fleet-wide rollout. In parallel, we are improving efficiency. Our new dynamic routing program removes ordering constraints and optimizes delivery routes, increasing delivery quantity and improving opportunistic product flow across a significant portion of our fleet. The program is currently in approximately 200 stores, and we expect to complete the rollout over the next year. These efforts are lifting customer and operator sentiment and engagement. Customer NPS improved meaningfully again in Q2, while our independent operator survey feedback was overwhelmingly favorable. Independent operator satisfaction increased across categories from last year, and the majority of our operators rated our recent systems upgrades as extremely or very valuable. Beyond the data, we are seeing increased engagement from our independent operators on a variety of initiatives. These outcomes reinforce our conviction that we are focused on the right priorities. The same discipline we are bringing to store execution is also guiding how we manage the business and deploy capital. Improving operational discipline means making timely decisions, directing resources to the highest-value opportunities, and holding every investment to rigorous performance standards. In April, we completed the closure of 36 underperforming stores as part of our store optimization plan. The outcome is a healthier portfolio we feel is better positioned for long-term profitable growth. We remain on track to eliminate a $12 million drag annualized adjusted EBITDA with the majority of the benefit expected to occur in 2027. We see encouraging signs of progress in the remaining stores in the East; comparable stores in May and June significantly exceeded the company average, while Q2 margins strengthened on a year-over-year basis. That discipline also extends to our new store growth program, where we are applying greater rigor to site selection, new store underwriting, independent operator engagement, and execution. We remain confident in the portability of our model and the immense white space that exists. The ability to offer savings of up to 40% versus conventional players allows us to provide a unique and compelling value proposition to customers in a wide variety of geographies. However, as we continue to work on improving the core offering in our business and year-one store productivity, it is critical that we prioritize the highest-return markets and expand capacity at an appropriate pace. As such, our 2027 openings will be weighted toward in-fill opportunities. We are taking a similarly measured approach to our store refresh program. Improving the store experience remains an important long-term priority. And as we continue those efforts, we are pacing our investment to ensure quality execution that allows the business to focus on our primary goal of driving comp through our opportunistic assortment. We continue to target approximately 100 refreshes completed by the end of the year. So looking to the second half, the consistent progress we have delivered since January reinforces our conviction that disciplined execution against our priorities remains the right approach, and we enter the second half with improving underlying momentum. Customers are responding to the stronger opportunistic offering and the clearer value messaging. Operator engagement has improved and our sharper approach to execution and capital allocation is also beginning to improve performance. These strengths will be important as consumers spend cautiously; the operating environment remains somewhat promotional. They will also help us navigate the near-term impact of the multistate Cyclospora outbreak. Our products have not been involved in any Cyclospora recalls, but like others in the industry, we have experienced pressure on produce sales. We saw an impact in July and expect a headwind of roughly 100 basis points to total company comps for the third quarter. Even so, we are encouraged by the underlying direction of the business and remain focused on advancing our core priorities. Before I close, I would like to recognize an important leadership transition. Christopher Miller recently retired as CFO of Grocery Outlet. Christopher provided steady, experienced leadership to the critical first year of our turnaround, and leaves strong finance and accounting teams in place to carry the work forward. On behalf of the board and the entire organization, I want to thank him for his leadership and wish him all the best in retirement. I am also very pleased to welcome Ian D. Ferry, many of you know him, as our new Chief Financial Officer. Over the past year, Ian has become a trusted strategic partner to me and our board. His financial discipline, operating insight, and long-term perspective have already made a meaningful impact here. I look forward to continuing our work together. In closing, our first-half progress strengthens my confidence in Grocery Outlet's long-term opportunity. It is still early, and we have work ahead, but the business is responding. Consumers continue to prioritize value, and our differentiated model is built for this environment. When we strengthen the opportunistic assortment, equip operators with better tools, and apply greater discipline to execution and investment, performance improves. We have the foundation to build a stronger, more productive, and more profitable Grocery Outlet. I want to thank our independent operators, our team members here, and our supplier partners for their hard work this quarter. I would also like to note with gratitude that we just completed our annual Independence from Hunger campaign, during which independent operators partner with local nonprofits to provide critical resources to those most in need. I am proud of the positive impact our operators make in the communities they serve, work, and live. Finally, I want to thank our shareholders for your continued support and engagement. We remain committed to earning your confidence through disciplined execution and consistent results. With that, I will turn it over to Ian.
Thanks, Jason. As CFO, my objective is to help ensure we build a business that creates durable long-term shareholder value. That means allocating capital with discipline, measuring ourselves against the right long-term metrics, and communicating our progress with transparency. Our second quarter results provide further evidence that the operational improvements Jason discussed are translating into better financial performance. While our performance has ample room for improvement, stronger sales trends, disciplined spending, and sharper capital allocation are beginning to improve the business and its long-term earnings potential. I will start with the quarter and then discuss our full-year and third-quarter outlook. Unless otherwise noted, the comparisons I provide are on a year-over-year basis. Starting with the top line, second-quarter net sales increased 1% to $1.19 billion. Sales from stores opened over the past 12 months more than offset the impact of the optimization plan closures and a modest decline in comparable store sales. We opened 10 stores and closed 12 during the quarter. Comparable store sales declined 30 basis points, including an approximately 50 basis point headwind from the Easter shift. This was above our outlook for a decline of 1.5% to 2%. Traffic remained positive, while basket improved roughly 100 basis points sequentially. Importantly, comps across our opportunistic portfolio improved significantly from Q1, reinforcing our confidence in the actions underway. Gross profit dollars were flat at $360.7 million, representing a gross margin of 30.2%, above our 29.8% to 30.0% outlook. Gross margin declined 30 basis points year over year primarily due to the promotions we instituted at the start of the year to reinforce our value position as well as store-closure-related markdowns and write-offs, partially offset by better inventory management. Sequentially, gross margin improved 60 basis points from Q1, reflecting reduced liquidation activity associated with the store optimization plan, lower promotional spending, and favorable seasonality. On a year-over-year basis, SG&A increased less than 1% to $339.5 million and as a percentage of net sales remained consistent with last year at 28.5%. Sequentially, SG&A improved 130 basis points as a percentage of net sales compared to Q1, primarily driven by higher sales leverage, optimization benefits, and lower marketing expense. We also recorded $5.4 million in net restructuring charges related to the optimization plan. This included $14.8 million in cash charges partially offset by $9.4 million in noncash credits, primarily from the net write-off of right-of-use lease assets and lease liabilities. Below the operating line, net interest expense was $6.6 million, comparable to last year. Our GAAP effective tax rate was 38.8%, compared with 20.3% last year. Net income was $5.6 million or $0.06 per diluted share compared with $5 million or $0.05 per diluted share last year. Adjusted net income was $20.3 million or $0.20 per diluted adjusted share, compared with $22.8 million or $0.23 per diluted share last year. Adjusted EBITDA was $65.7 million or 5.5% of net sales compared with $67.7 million or 5.7% of net sales last year. Both adjusted EBITDA and diluted adjusted EPS exceeded our outlook. Turning to the balance sheet and cash flow statement, we ended the quarter with $74 million in cash and approximately $154 million of revolver availability. Total debt net of issuance costs was $505.6 million, up $16.3 million from Q1. Net leverage remained at 1.8x adjusted EBITDA. Operating cash flow was $43.2 million compared with $73.6 million last year. The decrease primarily reflected the timing of accrued and other liabilities, lower operating lease liabilities following the optimization plan, and lower net income after adjusting for noncash charges. Capital expenditures were $43.7 million or $38.7 million net of tenant improvement allowances. Now let me turn to our outlook. The actions we began implementing at the start of the year are delivering progress. Given our stronger-than-expected second-quarter performance, we are raising the low ends of our full-year financial outlook ranges. For the full year, we now expect net new store openings of 30 to 33, net sales of $4.7 billion to $4.72 billion, comparable store sales in the range of negative 0.5% to 0.0%, and gross margin of 29.8% to 30.0%. We continue to expect approximately $20 million of incremental promotional investment for the full year, with spending expected to further taper in the second half as our stronger opportunistic mix and treasure hunt support underlying comp performance. We expect adjusted EBITDA of $225 million to $235 million, diluted adjusted EPS of $0.51 to $0.55 per share, and capital expenditures net of tenant improvement allowances of $170 million. For the third quarter, we expect comparable store sales ranging from negative 1% to 0.0%, gross margin of 29.8% to 30.0%, adjusted EBITDA of $58 million to $61 million, and diluted adjusted EPS of $0.14 to $0.16 per share. In summary, the initiatives we outlined at the start of the year are gaining traction, and we are managing the business with greater discipline. Strengthening the opportunistic offering and customer value proposition remains our priority. We will stay focused on execution in the second half and look forward to updating you on our progress. With that, I will turn the call over to the operator for questions.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. You may press 2 if you would like to remove your question from the queue. Pressing the star keys. One moment, while we poll for questions. The first question is from Jeremy Hamblin from Craig-Hallum Capital Group. Please go ahead.
Hey. This is Will on for Jeremy. Thanks for taking our questions. Just wondering if you can share any more color on the cadence of comp trends for the quarter and then into Q3. And then what traffic versus basket is looking like here quarter to date?
Hey Will, it is Jason. We are making progress on our comparable store sales, and we are encouraged by the sequential improvement we have had. Just to walk you through that, January was meaningfully negative to remind everybody, and we have made significant progress since that point. Pre-Cyclospora impact, total comps have improved by about 300 basis points to the end of Q2. To answer your question on traffic, Q2 was a solid number there, 1.8%, on top of the 1.5% last year. Basket declined by just over 2%, but did show about 100 basis points of sequential improvement from Q1. That was a mix of about 1% from units and less than 1% from inflation and some mix. Encouragingly, we experienced an improvement in units per transaction with opportunistic items in the basket. When you are thinking about the guide, I think the way that we have thought about this for Q3, as Ian pointed out, is -1% to 0%. That 100 basis point Cyclospora impact is notable. A couple of points on that: our produce business was running very healthy and well above inflation prior to the outbreak. We are continuing to monitor it and have an understanding of what is happening category to category. We think that is going to moderate a bit into Q4, but right now we are estimating about a 100 basis point headwind. Clearly, we can see things like bag salads having a fairly large impact. We feel this is a temporary headwind. The underlying performance of the business continues to improve and we are encouraged by what we see going into Q4.
Okay, that is very helpful. Then I just wanted to understand where the opportunistic product is mixing today versus Q1, and then where you would like to see that by year end? And then what sort of total comp benefit you would expect to see from that change in mix from the beginning of the year?
Certainly. Our pursuit of opportunistic product has everything to do with creating value for customers. There is a very high correlation between opportunistic comps and our total comp business; we can see that in our store cohorts. It is the value and sales-generating engine of the business and the heart of what drives the unique treasure hunt experience. The plan we developed is meant to create a sustainable quality of sales and margin. What we have seen through this first half of the year: opportunistic comps accelerated meaningfully in Q2, up about 500 basis points relative to the start of Q1. Our mix expanded well over 300 basis points and continues to accelerate. As I mentioned, we have this headwind with Cyclospora but expect that to be temporary. We have some bright spots as we execute this plan. One great example is grocery, our largest and most important category. Our comps finished at 3.5% in Q2. That playbook being executed by Paul Miller is now advancing sales momentum in the next two most important areas, both deli and frozen. Right now we are seeing good inventory flow. We have expanded our range of branded opportunistic items. Given supplier engagement and what is happening in our basket, we see momentum in the business and that is reflected in where we see the business going in the back half.
Appreciate the color. Thank you.
The next question is from Corey Tarlowe from Jefferies. Please go ahead.
Great. Thanks, Jason. Appreciate the time. I was wondering if you could talk broadly about what specific milestones you are using to measure improvements in the business? And when do you feel like you can shift to perhaps a more offensive posture? And how are you measuring that internal cultural shift back toward the traditional treasure hunt model that Grocery Outlet tends to thrive in?
I think the things we've been measuring and holding ourselves accountable to are the most important KPIs. We've made progress across these. Continued traffic growth is really important; we saw some basket improvement, which matters. We also noted improving net promoter scores from the beginning of the year through the end of the quarter. Our opportunistic mix has expanded and comps have expanded. We see a lot of improvement in execution related to our reporting and visibility that has helped folks across the supply chain manage the flow of inventory when they are writing POs and when they are meeting with suppliers, helping us execute with speed and more precision. We are seeing good inventory flow and good quality of opportunistic product, which is something we are measuring. We measure the amount of variety and balance that with turns or GMROI. Those are all important elements to measure. Ultimately, we look at what customers are doing — trips, net NPS, value score — and we expect that to show up in a higher level of comp sales in terms of traffic and basket.
That is helpful. And then as a follow-up, a number of your competitors have highlighted investing into price throughout the back half, so the grocery environment may get more competitive. How do you think about your strategy in light of how some competitors will posture pricing?
Great question. It is always competitive out there. We are alert to the competitive activity and some announcements, as well as seeing a recent uptick in promotion in syndicated data. Customers are searching for value and customers are under pressure. What we have done to grow opportunistic this year and our positioning is right for dealing with this environment. In the first half and specifically in Q2, our retail inflation was a little bit below 1%, and that has a lot to do with what we are doing with opportunistic. When we think about competition or price, we continually monitor and measure our pricing against different competitors across major MSAs. We continue to see a nice price gap on a basket of goods for us, roughly 15% to 20% versus some peers, and 30% to 40% versus conventional. For us, opportunistic deals drive sales and margins and customer value. Paul shared an example this week of 50-plus truckloads of a well-known branded drink that sells for $8 in the market that will be sold for under $1 in our market next week. Those kinds of deals displace comparisons and drive customers to our stores. We will remain competitive and monitor market activity, but we continue to see reinforcement from our opportunistic supply, variety, quality, distribution, inventory flow, and turns.
Thank you.
The next question is from Robert Ohmes from BofA Securities. Please go ahead.
Hey, Jason. As a follow-up, could you parse out how opportunistic improvements and the store refresh program each will drive results and how interrelated they are?
Great question. We continue to believe improving the in-store experience is essential to the strategy. What we did in the first half was prioritize restoring opportunistic product across the network; that is what is driving improvement. The refresh program is an important component; we remain on track for 100 stores by year end and continue to get great feedback from customers and operators. As we focused on improving value and opportunistic, we made a calibration to ensure we support operators with the tools and assistance to ensure consistent execution during rollouts. We saw more variability in the last couple of cohorts than we would like and wanted to shorten the disruption period to optimize results. So we calibrated that slightly. Refreshes remain an important long-term element of the turnaround, but the main event for us is improving value through opportunistic supply, and that will continue to be the company's focus in the back half.
And then my follow-up: you mentioned supplier partnerships improving. What happened with supplier partnerships and how much improvement is still to come?
We are proud of how the team engages with suppliers and the relationships the company has built with the supply community over decades. It is a critical point of difference for Grocery Outlet and part of our strategic moat. Paul Miller brings a special understanding of supplier connections. I do not think we lost that connection, but as we outlined the opportunistic plan, reengaging with suppliers face-to-face, being a one-stop solution for suppliers, taking quick care of their brands, being good brand stewards, and responding rapidly is all part of Paul's philosophy. We are seeing good results. New supplier acquisitions are up above 11% this year, and we are seeing strong results as deals come in. This is a doubling down of something we have always done well and now have the company focused on it.
That sounds great. Thank you.
The next question is from Edward Kelly from Wells Fargo. Please go ahead.
Yes. Hi, good afternoon. The business seems to be turning the corner. As we think about guidance, you did not flow much of the upside this quarter into the full-year guide. Is that just Cyclospora or are there other incremental offsets? And related to the Cyclospora and the 100 basis point impact, is that just July through August so far that is impacted, and do you expect that to continue all quarter? How did you come up with that?
Edward, I will take that. If you look at the beat for Q2, we beat the midpoint by about $9 million. Roughly half of that was due to outperformance on comp and gross margin rate. Of the remaining $4.5 million, two-thirds of that is SG&A dollars that will actually shift into the back half of the year, primarily the third quarter, and then $1.5 million was good cost discipline versus plan. So on an organic basis, roughly a $6 million beat versus midpoint with $3 million shifting. As you think about Q3, there will be a sequential step-down in gross margins even though we are tapering promotional investment and store-closure costs roll off. The produce issues that Jason highlighted come with elevated shrink and that will be a meaningful hit in the third quarter that will flow through into gross margins. There is also modest seasonality. Net all that out and we felt the guidance we gave is appropriate and we want to be prudent with our outlook. On the Cyclospora impact, we are assuming the pressure will be with us through the end of the quarter.
Okay. And then, Jason, on promotions: you talked about pulling back and normalizing in the back half. How do you feel about sustaining some of the momentum while normalizing promotion, given the competitive backdrop?
Great question. Grocery Outlet has not traditionally been a promotional company and we do not intend to continue that. We create excitement and value through branded opportunistic deals and the treasure hunt experience. Early in the year we established a $20 million promotional bridge, a synthetic bridge designed to supplement our opportunistic offering as we rebuilt it. We are on track to rebuild the opportunistic offering, which is why the company's focus is there. We are on track to taper those promotional investments as opportunistic mix is restored by the end of the third quarter. We will remain disciplined but responsive, and maintaining the right competitive price gaps is critical. We do not expect to need more promotional investment beyond what we've discussed, and will monitor the market and respond if conditions change.
Next question is from Oliver Chen from TD Cowen. Please go ahead.
Hi, good afternoon. This is Iris on for Oliver. You have described Grocery Outlet as a countercyclical model that can benefit when consumers come under greater pressure. As we moved through the quarter, have you seen any change in customer behavior that gives you confidence that the value perception is becoming more visible to shoppers, whether through new customer acquisition, trip frequency, or basket?
Thanks. Generally, in past cycles, you see pressure on basket first and then traffic follows. We have not seen a full trade-down response yet, but the work we are doing positions us well if that happens. We saw traffic increase about 2% in the quarter, which is consistent with our plan. We also saw improvement in basket and improvement in units per transaction related to opportunistic items. Customers are recognizing value and seeing more of it in stores. That is showing up in underlying metrics, and the relationship between opportunistic value and comps is connected and drives our differentiation.
Got it. And as a follow-up, last quarter you noted United Grocery Outlet is a 2026 discussion. Are you able to provide an update on where that process stands and whether the strategic fit view has evolved?
Iris, we do think it is a 2026 conversation. There is work ongoing and we are looking at a variety of options. When that work concludes, we will update you, but no update today of any note.
The next question is from John Heinbockel from Guggenheim Partners. Please go ahead.
Jason, I wanted to ask as you lean more into opportunistic product, what is changing, if anything, with planograms and space allocation? Also, historically you have been good about avoiding markdowns on close-code product; how do you manage the tension between leaning into opportunistic and avoiding markdowns?
Great question. We do have space allocation and planograms. In the first half we discontinued 400 to 500 MTO and private label items to make space for more opportunistic variety. We completed those transitions, and that has shown up in sales and in stores. The vast majority of markdowns related to those transitions were recognized in the first half. We always have some markdowns when changing product, and the business sells 80,000 to 100,000 unique SKUs year to year as products come and go, so it is a normal cadence. We are happy with how the first half has gone.
As a follow-up, you said 27 openings will be weighted toward existing markets. Is the plan to open more stores in 2027 than this year? And on the East, with UGO, do you now have sufficient volume to lean into opportunistic product without opening many more stores?
We have not prepared a store count for next year yet, but our intent is to open more infill stores. We are excited about long-term white space and growth potential. In the near term, we have made decisions to focus on in-fill opportunities to leverage brand power and distribution strength in core markets. Our independent operator community benefits from store density. Regarding the East, we recently opened a new distribution center to support those stores and feel that is helping results. We are pleased with the performance of the stores post-closure work; those stores are running profitably as a group, ahead of plan, and showing positive comps this year.
The next question is from Joseph Feldman from Telsey Advisory Group. Please go ahead.
Hey, thanks. I wanted to dig into the field operations changes you have made. Can you share more color on what is actually different that field managers are doing in the stores and how they are helping differently, and what sales and costs are related to that?
Great question. The independent operator model is a unique competitive advantage and improving support for operators is essential. Execution drives the customer experience, so we've doubled down on communication and collaboration with operators. Specifically, we added field support and implemented dynamic routing to help with opportunistic flow and in-stocks. We implemented store-level POS customer feedback reporting to give operators more salient information about customer trends; field managers work directly with operators on action plans. One key change is unlocking data through the annual business review, using fleet-wide data to rank stores against similar peers and provide reporting that helps operators dial in on opportunities to drive sales and margins. This more frequent and ongoing collaboration is a change that operators appreciate and find valuable.
Thanks. As a follow-up, how are you communicating the changes to lapsed customers or prior customers? How are those customers finding out about the opportunistic offerings returning?
We are driving value through the Extreme Value positioning across channels. We updated signage and have a kit going out to all stores this quarter to support our 80th anniversary, which will help. We continue to adjust our media mix to reach customers who love discovery and value. That work is helping satisfaction scores and resonating with those customer groups, including lapsed customers.
The next question is from Simeon Gutman from Morgan Stanley. Please go ahead.
Hey, Jason, Ian. Are you seeing the improvement across customer cohorts? Are best customers shopping more, average customers stepping up, or is there a component of new customers coming to the brand?
Top line, driving traffic was our first objective and that has been effective in the first half. We will continue to lean into driving frequency. The other pieces that help long term are improving execution and basket. So there's a combination: drive frequency and improve basket and execution to improve long-term results. Our first objective remains to dial in value recognition and drive traffic.
Related to transactions, basket is still down. Grocery is improving and positive. Deli and frozen are works in progress. How impactful can opportunistic be in those categories? Are they inherently more everyday categories, and what needs to be finished to close the gap and change the basket?
We are executing the same playbook in deli and frozen, which are the next most important categories for opportunistic. Opportunistic will play a huge role in the turnaround and in driving sales in those categories. We are getting positive early results as the team tunes distribution and assortment, and we are excited about what this will mean going forward.
The next question is from Mike Baker from D.A. Davidson. Please go ahead.
Thanks. Follow-up on Simeon's point: guidance, even excluding Cyclospora, is about flat. Grocery is up 3% and opportunistic mix is improving. When all things are implemented, what do you think the long-term comp should be? Historically you comped much higher; what is the target range when restored?
Good question. We see continued acceleration through the year and fully expect the business to get back to a healthy level of comps, well north of inflation. Historically, the business comped 3% to 5% on a regular basis and we do not see a reason why we cannot do that again.
One other question: you mentioned variability in implementations; can you elaborate?
I was referring to variability in the last couple of cohorts of store refresh implementations. We found the length of time to make changes was disrupting customers, so the team is dialing that down to make changeovers more rapidly with better pre- and post-support to shorten disruption and optimize results. Our systems are stable and we have nothing negative to report on systems.
The next question is from Bill Kirk from ROTH Capital Partners. Please go ahead.
Good evening. You mentioned and quantified the adverse impact of Easter timing in Q2. At the end of Q2, did you have a positive July 4 timing benefit, and if so, how large was it?
It was immaterial.
Ian, philosophically, how do you evaluate the decision to ease up on promotion and pricing in the context of building a durable, sustainable model and long-term shareholder value?
Good question. Driving long-term equity value requires consistent growth paired with improving returns on capital. Opportunistic product benefits customers, shareholders, and independent operators because it offers high savings, comes at a high margin, and delivers excitement. We have already started to taper promotions because we increased opportunistic supply. Customers do not distinguish between a promoted branded item or an opportunistic deal; they just see deals. We view the $20 million as a synthetic bridge and expect it to be done by the end of the third quarter. Looking into 2027, we may have a tailwind on gross margin to the extent opportunistic mix continues to improve. As CFO, my philosophy is to drive operating leverage and improving returns as we normalize the P&L.
Thank you. I will pass it along.
As a reminder, to ask a question, please press 1. There are no further questions at this time. I would like to turn the floor back over to Jason Potter for closing comments.
Thanks very much for your questions today. I look forward to continued engagement and reporting continued improvement in our business in the future. Thanks everybody for today and wish you well.
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