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Greetings, and welcome to Grocery Outlet First Quarter 2022 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And now I'd like to turn the conference over to your host, Arvind Bhatia, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and thank you for joining us on today's call to discuss Grocery Outlet's First Quarter 2022 financial results. Joining me on today's call are Grocery Outlet's Chief Executive Officer, Eric Lindberg; President, RJ Sheedy; and Chief Financial Officer, Charles Bracher. Following our prepared remarks, we will open the call for questions. This conference call is being webcast live, and a recording will be available via telephone playback for approximately 2 weeks. It will also be archived in the Investor Relations section of our website. Participants on this call will make forward-looking statements, including our outlook for fiscal 2022 and future performance. These forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements. A description of these factors can be found in this afternoon's press release as well as in our periodic reports we file with the SEC, all of which may be found on our website at investors.groceryoutlet.com or on sec.gov. We undertake no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. During our call, we will also reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release and our SEC filings and the Investors tab for our website. With that, it is my pleasure to turn the call over to Eric.

Thanks, Arvind. Good afternoon, everyone, and thank you for joining for our discussion of our first quarter results. We are very pleased with our first quarter performance and the continued advancement of our long-term growth strategies. We delivered strong top line growth as comparable store sales increased 5.2%, well ahead of expectations. While average ticket was a primary driver of comp growth, we saw increasingly positive year-over-year traffic trends throughout the quarter. Traffic was also up sequentially compared to Q4. The momentum in our business is extending into the second quarter with continued strength in both traffic and ticket, further validating our belief that consumers are increasingly prioritizing value again. Our supply pipeline remains strong, and our IOs are excited about the positive trends in the business. We are making continued progress on our new initiatives to expand customer reach and increase share of wallet, including e-commerce, SKU expansion and development of our mobile app. With increased confidence in our outlook, we are raising guidance for the full year, which Charles will discuss in further detail a little later. As you know, our value proposition is fueled in large part by our independent operators. I am pleased to share that they are energized by the momentum in the business and looking forward to delivering a very strong year. IOs are engaging with new customers and highlighting our industry-leading value and treasure hunt experience. We believe this will drive repeat visits and greater loyalty over the long term. Also, IOs are maintaining healthy in-stock positions and product variety across departments as they continue to benefit from our flexible purchasing and merchandising approach. Our strong relationship with the IOs is supported by collaboration, transparency, timely and open communications as well as ongoing training and field support. To that end, we continue to invest in systems and process improvements to help operators drive higher sales, improve their margins and achieve greater efficiency. We solicit feedback regularly from our IOs, which allows us to identify sales and cost efficiency opportunities in areas where we can further support them. Meanwhile, we also continue to invest in our ability to attract, identify, recruit and train future IOs. Our pipeline of IOs remains healthy, and we are pleased with the quality and quantity of individuals we continue to attract. Independence on autonomy continue to be the most important reasons for potential IOs to join Grocery Outlet. In addition, many operators are highly motivated by the opportunity to work with their family members and give back to their local communities. As a reminder, we strengthened our training program for future operators last year to include both in-store learning and a robust online platform. Through this comprehensive training program, spiring operator trainees or AOTs, have been able to leverage the experience and strengths of existing IOs, while being supported by our field and corporate teams. To date, 7 cohorts have gone through the new training program. The program has improved consistency in training and increased scalability due to its online component. As an example, one of the aspects of the training that gets high marks is a simulation exercise that allows AOTs to test their strategies and day-to-day execution in a virtual environment. Overall, we have received very positive feedback on the effectiveness of the new program, and we are continually working to make further enhancements going forward. Turning now to real estate. We opened 4 new stores and closed 1 location during the first quarter. We remain on track to open 28 net new stores during the year, including approximately 10 stores in the Mid-Atlantic area as we expand our footprint in the East. The challenges we discussed on our last call related to labor and material shortages along with longer lead times and lease execution and site permitting continue to persist. However, based on our pipeline of deals already approved and the potential sites identified, we expect to return to a 10% unit growth beginning in 2023. Meanwhile, we remain pleased with the new store performance across markets, including recent vintages as they continue to ramp in line with our underwriting expectations. With respect to ESG, as many of you know, our historical growth has been powered by our unique business model in which sustainability is at the heart of our culture, our strategy and our operations. Our opportunistic sourcing capability and flexible supply chain allow us to procure product that would otherwise go to waste. We empower our operators to curate their assortments and offer these products at deep values to their local customers. We believe that building long-term win-win partnerships with our communities and our suppliers is essential to our business model and future growth. Moreover, we recognize that reducing waste and enhancing the productive use of resources is intrinsically tied to our operational excellence. And hence, true to our mission of touching lives for the better, we believe that sustainable business practices are essential to the creation of long-term value at Grocery Outlet. As we continue to grow our store footprint, we will have an even greater positive impact on communities, creating a virtuous cycle. As part of our ESG journey, we have formed a sustainability working group to identify and assess additional ESG factors that are material to our business. The group is helping to develop strategies to support our ESG goals and formalize our disclosures to demonstrate progress. To that end, we are conducting a materiality assessment and GAAP analysis this year and expect to publish our first sustainability report next year. In addition, we have taken important steps to evolve our governance, including submitting shareholder proposals to eliminate certain supermajority voting provisions and to declassify our Board by 2026. These changes reflect our natural progression as a public company and are aligned with the feedback received during our investor outreach in 2021. To conclude, we are extremely pleased with the momentum in our business, especially the strong engagement and enthusiasm of our IOs as well as our healthy supply pipeline. Additionally, we continue to make progress on our strategic growth initiatives as we remain well positioned to return to our 10% unit growth as we move forward. The strength in our business is the direct result of the hard work of our entrepreneurial independent operators, along with our dedicated team members in the field, our distribution centers and our corporate offices. I am so very proud to work alongside these incredibly talented individuals, and I believe that we are stronger and better positioned today than at any other time in our history. With that, I'll turn the call over to RJ.

Thanks, Eric. The year is off to a strong start with traffic turning positive in the first quarter and momentum continuing to build further in the second quarter. Consumers are clearly feeling pinched by inflation and looking to stretch their grocery dollar. With the eating out becoming even more expensive, gas prices at record high levels, and government stimulus waning, we believe consumer behavior is shifting. Our most recent consumer survey results show increase in importance of value, both from our core and secondary customers. As consumers look for value alternatives, we remain in a great position to offer them significant savings. The fundamentals of our business are healthy in our WOW! Deals, treasure hunt experience and in-store inventory levels are resonating with customers. Let me start with an update on our supply pipeline. The strength of our purchasing team, combined with our long-standing relationships with key suppliers has never been more valuable than in the current environment. We have the scale, the flexibility and the capability to act quickly, which is why we remain the preferred partner for our suppliers. As a result, our inventory levels and opportunistic supply pipeline remain in good shape, enabling us to continue to offer our customers the unbeatable deals we are known for. We continue to deepen our supplier relationships. To that end, we recently hosted our Annual Supplier Conference in Dallas, our first in-person conference with this group after a 3-year hiatus. We believe that this face-to-face interaction allowed us to strengthen our strategic partnerships with top suppliers and develop relationships with new and emerging partners. There was palpable excitement going into the event as it has historically been a powerful platform for exchanging ideas, reviewing future product pipelines and growing our opportunistic purchases. Given ongoing industry-wide supply chain challenges, the forum proved to be even more timely and relevant than in the past years. Having personally participated in numerous supplier conversations, I would share the following key takeaways: number 1, our suppliers continue to invest in capacity and ramp production to meet demand. At the same time, forecasting has been challenging for them due to inconsistency in demand patterns and continued supply chain challenges. Number 2, our suppliers are investing in innovation with planned introductions of new items, brand extensions and packaging changes. And number 3, not surprisingly, our suppliers are facing and trying to manage through unprecedented levels of inflation in their businesses. We are ideally positioned to capitalize on these dynamics as we are finding new and creative ways to help our supplier partners manage surplus inventory. More broadly, our purchasing team continues to identify new opportunities resulting from supply chain disruption, a favorable trend that we believe is likely to intensify over the foreseeable future. Some recent examples of how we are capitalizing on the current environment include our purchase of 20,000 cases of frozen entrees from a highly recognized brand, which we offer to customers at a more than 50% discount. This product was produced for the European market, but due to instability in the region and rising freight costs became available to us at an extreme value. Another example was our purchase of 25,000 cases of a Premier Gourmet Popcorn that was originally headed to a leading department store. The opportunity resulted from cancellation of the order due to shipping delays and enabled us to offer the product to our customers at a more than 60% discount. Turning now to inflation. We continue to see higher prices from suppliers as they manage inflationary increases in their businesses, including the cost of ingredients, packaging, freight and labor. As always, we believe we continue to strike the right balance between value and margin. During Q1, our customer value proposition remained strong and drove positive top line momentum. The impact of inflation on gross margin was slightly higher than we had anticipated during Q1. However, gross margin has rebounded in line with our annual plan and traffic continues to strengthen. Overall, we are leveraging our flexible buying model to mitigate inflationary pressures in a variety of ways, including pivoting between alternative suppliers as well as similar items, while maintaining the relative savings we are known for. One recent example was how we engage with a new egg supplier, allowing us to switch from direct store delivery to warehouse distribution and offer a deeper value to our customers while driving a better margin rate for us. Another example was our switch to a new supplier of fresh salmon fillet that allowed us to mitigate rising costs and tight supply. At the same time, we were able to improve product quality while continuing to deliver great value. Next, let me take a moment to update you on our strategic initiatives. First, on e-commerce, we remain excited about the long-term potential of this initiative. Following positive results from our Instacart pilot we recently completed a rollout to nearly all of our stores. And while it's only been a few weeks since the rollout, we are pleased with the smooth execution and the favorable response from IOs and customers so far. In addition, later this quarter, we will launch a pilot with additional partners in the same 68 stores that were part of the Instacart pilot, enabling us to expand our customer reach even further. Second, with regard to our strategic SKU expansion, we remain pleased with the customer response to the new everyday items we have added since last year. Year-to-date, we have launched more than 175 new SKUs on top of the 275 SKUs we added in the second half of last year. For the remainder of this year, we plan to increase our new SKU count by another 150 as we strive to provide a fuller shop, greater convenience and value to our customers on a consistent everyday basis. In terms of target items, we remain focused on growth categories such as NASH, fresh, ethnic and local. Third, we are making steady progress on our personalization initiatives and remain on track to pilot our mobile app this summer. We are excited to extend the treasure hunt experience beyond the 4 walls of the store and further tailor our customer messaging. As I mentioned on our last call, this program will offer our customers real-time item visibility to exciting deals and allow us to customize our communication based on their preferences. Our database of active e-mail subscribers provides us a built-in platform that we can leverage as we activate members. Through this initiative, we look forward to deepening engagement with our customer base and driving higher trip frequency and share of wallet over time. More broadly, we continue to refine our marketing tactics in order to increase brand awareness, drive traffic and optimize media spend. In this inflationary environment, customers are searching for ways to save money and we are emphasizing our industry-leading prices in our messaging across radio, TV and digital media. At the local level, independent operators continue to utilize our proprietary tools to curate WOW! items and highlight those exciting deals to their local customers. We believe these combined efforts are amplifying our underlying momentum as customers increasingly look for ways to save money. Before I turn it over to Charles, I would like to take a moment to thank our supplier partners for their continued support and for a great turnout at our Annual Supplier Meeting. I'm also grateful to our independent operators and their team members for their unrelenting focus and dedication to delivering the WOW! experience that is so critical to growing our brand. Now I will turn it over to Charles to provide a financial update.

Thanks, RJ, and good afternoon, everyone. I will begin with a discussion of our first quarter results, followed by comments on our outlook for the second quarter and full year 2022. We are pleased with our first quarter performance and the momentum that we're carrying across our business. Comparable store sales increased 5.2%, well ahead of our 3% expectation driven by both higher basket and positive traffic growth. Net sales increased 10.5% to $831.4 million, driven by our strong comparable store performance combined with the impact of 29 net new stores opened since the first quarter of 2021. During the quarter, we opened 4 new stores and closed 1 location, ending the quarter with 418 stores. We remain pleased with new store performance, which continues to be consistent with our underwriting expectations in both infill and new markets. We delivered first quarter gross margins of 30.2%, slightly below our expectations, reflecting accelerated inflation during the quarter, particularly with respect to commodity items. Our gross margin rate improved towards the end of the quarter, and we exited Q1 at a run rate in line with our full year goal of 30.6%. SG&A expense increased 10% to $207.4 million compared to the first quarter of 2021. This was due to increased IO commission expense and store occupancy costs related to new store growth as well as higher personnel expense and the impact of our annual supplier meeting, which didn't occur last year due to COVID. As a percentage of sales, SG&A decreased 10 basis points versus the prior year, largely due to store expense leverage on sales growth. D&A expense increased to $18.2 million, up 17.3% versus the first quarter last year, in line with our expectations. Similar to prior quarters, the increase in D&A was a result of growth in new stores and our continued investments in existing stores as well as systems and infrastructure. Stock-based compensation expense was $5.8 million compared to $3.9 million in last year's first quarter, primarily due to the impact of our 2021 grants as well as current performance expectations related to our performance-based share awards. Net interest expense decreased 5.7% to $3.7 million versus the first quarter last year, primarily due to increased interest income on independent operator notes. Compared to our normalized tax rate of approximately 28%, we incurred an effective tax rate of 26.5% for the quarter, due to excess tax benefits related to the exercise and vesting of equity awards. As a result of these factors, GAAP net income for the first quarter was $11.6 million or $0.12 per diluted share. First quarter adjusted EBITDA was $49.3 million, ahead of our expectations going into the quarter, reflecting top line outperformance. Adjusted net income was $21.5 million or $0.22 per diluted share based on an average of 99.4 million diluted shares in the quarter. In terms of our balance sheet, our liquidity remains very healthy as we ended the quarter with $138 million of cash and a strong inventory position. For the quarter, our CapEx, net of tenant improvement allowances was $27.2 million, reflecting new store growth, enhancements to our existing store base and investments across our technology and infrastructure platform. Turning to the second quarter. Comp momentum continues to be strong with healthy contribution from both ticket and traffic. Based on quarter-to-date trends, we expect comp sales growth of approximately 6% for the quarter in total. We expect to open 7 new stores in Q2, including 1 store opening, which shifted from the first quarter helping drive overall net sales of approximately $855 million. Reflecting the current inflationary environment, we expect gross margin of approximately 30.6% for the second quarter in line with current trends. With respect to second quarter expenses, we expect modest SG&A deleverage as the impact of higher incentive compensation relative to the prior year is only partially offset by fixed cost leverage resulting from comp sales growth. All in, we expect second quarter adjusted EBITDA margin of approximately 6.3%. Based on outperformance in the first quarter and strong quarter-to-date trends, we are raising our full year top line and bottom line guidance. We are increasing our full year comp sales range to 5.5% to 6.5%, an increase of 150 basis points compared to previous guidance. With respect to new store openings, we remain on track to open 28 net new stores in 2022 with the majority of stores opening in the back half of the year. Due to our higher comp expectations, we are raising our fiscal 2022 sales guidance range to $3.39 billion to $3.42 billion. With respect to gross margin, we continue to expect full year gross margin of approximately 30.6% based on current trends. In terms of SG&A, we continue to expect modest improvement as a percentage of sales for the full year, driven by fixed cost leverage on comp sales growth partially offset by higher expense related to incentive compensation compared to the prior year as well as infrastructure growth. With respect to adjusted EBITDA, we are raising our full year guidance range to $213 million to $220 million, up $3 million from prior expectations. Moving further down the P&L, we continue to expect D&A of approximately $76 million and stock-based compensation expense of approximately $30 million. And while our capital allocation priorities of building new stores and investing in future growth remain unchanged, we are actively utilizing our excess cash to mitigate the impact of a rising interest rate environment. As such, our Board authorized the prepayment of $75 million in term loans on April 29 from our existing cash balance. We expect that with this prepayment, our net interest expense will be approximately $18 million for the year based on today's forward rate curve. In addition, we continue to expect a normalized tax rate of 28% and average diluted shares outstanding of approximately $100 million for the year. Taking all of those factors into account, we are increasing our full year adjusted EPS guidance range to $0.94 to $0.99, an increase of $0.02 per share versus our previous estimate. In closing, our year-to-date results reflect our unique business model as well as the strong execution from our IOs and employees. As consumers are increasingly feeling the pinch of inflation, I'd like to thank our teams for their commitment to delivering the savings and service that are so important to our customers. And with that, we can turn it back to the operator to begin Q&A.

[Operator Instructions] Our first question is from the line of Robbie Ohmes with Bank of America.

Congrats on a good quarter. Really 2 questions. One is, can you give us a little more color on when the traffic picked up through the first quarter? And what could continue to drive that momentum for the rest of the year? And the second question is just maybe more color on how you guys are instituting the higher prices that are being passed on to you? Are the IOs all passing those on similarly or are some of them passing them on more than others? I would just love to get a sense of how that's playing out?

Robbie, it's Charles. Let me start with the first part of your question, and then I can pass it to Eric to talk about IOs. But just to give you a bit more color around the cadence of comp and traffic in the quarter, we felt really good about kind of how things develop. So we saw steady improvement throughout Q1 and encouraging for us to see that momentum is carried forth into Q2 with a bit more of a benefit. I mean driving a comp here in Q2. So as we look forward, we -- for the balance of the year, we would expect that both continue to be positive contributors in the back half, yes, traffic will be a larger contributor, both as we lap easier traffic comps versus last year. And then I think you'll start to see the impact of some of these new initiatives and the traffic driving benefit we see from some of those as we move into the back half.

Robbie, it's RJ. Let me touch on inflation and then maybe Eric can hit on the second part of your second question. And sorry, excuse my voice, please, I'm a bit under the weather today, so I hope you can hear me okay. As far as inflation goes and how we're instituting higher prices, first thing I'd say, I'd reiterate is we take a couple of courses of action before we're passing on price. Of course, we're seeing higher costs coming through from our suppliers from all the inputs that they have higher costs on. And we continue to follow the same strategy that we have, and it continues to serve us well. So first, we're moving between suppliers. Second, we're moving in and out of items. We're always looking to manage value cost and margin in a very balanced way to maintain value to customer, but also margin to the company. We're leaning on our diversified supplier base in times like these. So that has helped us quite a bit. In instances where we are receiving higher costs, first and foremost of importance to us is that we're maintaining value to the consumer. And as competitive retails have increased, we'll be fast to follow. So that's really the strategy that we've deployed here, we continue to track and manage very closely basket savings that we deliver 40% relative to other conventional grocery retailers. We look at a lot of other value metrics, percent of sales at higher safety levels. We're keeping a close eye on commodity pricing, making sure that those are priced in line and everyday pricing items due to the flexibility through which we buy product and manage the assortment to make sure that we're in line from a value and margin standpoint. And then, Eric, you want to touch on how the price has been passed through to the stores and the role of the operator.

Yes, you bet. Robbie, you get all 3 of us. Good question. So look, we still price 99% of everything that runs to the store. IOs have the ability to price up or price down as they see fit to match their local market or get a little bit more margin. That's limited to a few items per store. So it's really not something even big that we measure. I'd say look, the operators are super dynamic, really, really flexible, and they follow our pricing research that we do. And look, they're just really focused right now on the present, which is traffic is up, in-stock positions are better. They're driving sales in the store. So they're just -- they're really positive about the current environment. So that's what I'd say.

We have next question from the line of Kate McShane with Goldman Sachs.

Just if you could maybe talk through the gross margin dynamic in a little bit more detail that you saw during the quarter. And what gives you confidence in that 30.6% being sustained for the rest of the year? And then our second question is just around the competitive environment in terms of what you're seeing as a response to inflation at some of your more direct competition?

Yes. Kate, it's Charles. Let me start with the first part of your question, it's a bit more on margin and then turn it over to Eric there on competition. Yes. So for us in the quarter, as RJ spoke to, we feel really good about how we're balancing cost and value and margin in light of the current environment. Everything he talked about in terms of the flexibility of the model that we're leaning on. In light of the backup, we think is working really -- so yes, the margin impact in Q1 was a bit deeper than we thought going into the quarter. And really, I would say, inflationary cost pressures were broad-based across categories. We did see some accelerated inflation in some of the key commodity items that we -- where we're matching price with others and that probably had a little bit more of a margin impact. I think we felt really good about how we kind of move that through the chain, if you will, and the way in which we exited the first quarter in line with our 30.6% goal. So we always talk about you're going to see normal quarter-to-quarter fluctuations in margin, but we continue to have confidence in our ability to manage to margin stability over the longer term. And again, the way that we exited the first quarter gives us a lot of confidence in hitting that 30.6% goal for the year in total.

Kate, Eric. I would say relative to promotional environment, it seems pretty stable to us. I would say it really has not changed a lot since 2021 or even Q4 of 2021. I would say that promotions are a little bit more selective. I think that some part of that is just supply chain related shortages creating not a need and a desire to go out and promote and increase volume behind items. And then I think secondarily, everyone seems to be navigating the price increases in the current environment of inflation. So I'd say we're not seeing a lot of changes in the current promotional environment.

We have next question from the line of John Heinbockel with Guggenheim.

So I wanted to start with, you guys have operated through a bunch of downturns, historically. What if anything changes in the recession playbook nuance, right, principally merchandising, but merchandising marketing and then you think that the new tools that you have that you didn't have in the last downturn, how does that impact how you think about going to market?

John, Eric. I would say the evolution of the model is, let's say, way ahead of where it was in '08/'09 and I point out a few things. Just itemization, the disciplined merchandising, a lot of the CapEx we put in that supports the fresh just the penetration of meat, penetration of produce, daily deliveries are fresh. I think our fresh foot forward is extremely strong compared to 2008 and '09. I'd say second, the message that we continue to pound on anywhere you look is all about value and quality and selection. So we're able to deliver and thread the needle of those 3 messages where value is first, but we also have selection and we also have fresh, that's enabled us, I think, to attract a different level of consumer. And then I'd say, right now, we're hyper focused on the deal, the WOW! experience, and that's the message that the operators are hearing, delivering those deals in the store, no matter what, that's most important, that's what people come for. So it's hard to look back and say the conditions are identical to '08, '09 because they aren't. But certainly, when the customer is pressed hard for their purchasing power, they've turned to Grocery Outlet in the past. And I think turning to GO now, that's what we're starting to see.

And in the past, right, when you think about what you would see now in terms of shopping frequency and then within the basket, right, I would imagine items per basket, right, would pick up meaningfully. We're buying this back historically, '08, '09, where did you see the biggest lift in your comps?

Gosh, I'm drawing from memory right now, but I'm going to say it was mainly in increased transactions and I'd be guessing, but I think it was more than half transactions in '08, '09.

We have next question from the line of Oliver Chen with Cowen.

This is Katie on for Oliver Chen. The first question is really, how do you compare the current opportunistic buying environment today versus 2019 and then maybe versus previous inflationary environment, obviously, under the assumption that the current environment is pretty unprecedented? And then on a follow-up to that, would just love some more color on all the progress you've made on the online front. Specifically, how will the Grocery Outlet app interact and interface with the Instacart partnership. So is there any crossover there between shopping or could there alternatively be any sort of cannibalization?

Katie, it's RJ. I'll take the first part of the question. And I can touch on part of the stack and Eric may want to chime in there as well. As far as opportunistic buying goes, we continue to be really encouraged by pipeline of opportunistic product available. Certainly, supply chain challenges, disruptions, inflation, et cetera, make us quite a unique environment. We've been in this business, doing this for a long, long time. So we've been through all cycles and all different types of environment. This 1 is certainly unique, but continue to see great availability of product, continue to capture outstanding buys across all categories. momentum in the first quarter, I'd say, is carried over to the second quarter, resulting in really healthy inventory positions. Eric just talked about delivering the WOW!, the treasure hunt, the great deals to consumers in a time when you're really looking for value and opportunistic sourcing and the value that we're providing from that is going a really long way in helping to boost the momentum for sure. In our comments, I mentioned the annual supplier meeting was an opportunity for us to connect in person with many of our top suppliers on some newly informed relationships as well and really encouraged by those conversations and how we can partner more strategically with them and be an even better partner to them than we've been in the past. So encouraged by that. And then just as far as some of the trends and things that we're seeing from a supply standpoint, as mentioned, product innovation still is alive and well with suppliers despite supply chain challenges. So they do continue to innovate and introduce new product, certainly, additional capacity and production has been a big focus for them. And as we talk about looking forward, just due to the unpredictability of demand and supply and forecasting really, really hard, all of those have, we think, even more so will continue to lead to more opportunistic product for us. And just when you consider the amount of change in portfolios that the suppliers have been through over the past couple of years, all of that yields product as well. So yes, in general, feeling really good and looking forward, again, I think the pipeline of supply strengthens further still. Eric, do you want to touch on e-commerce?

Yes. Katy, thanks for the question. I would start with this, say, Instacart is working well. We've got it in, I'd say, a majority of our stores, we plan to roll out UberEATS and DoorDash a couple of other platforms here pretty quickly to the first set of pilot stores. Operators continue to tell us it's working well for them. The customer we're looking at surveys, rating the experience high, couple of point outs. Basket is north -- continues to be north of our in-store basket, which we like. We think we're seeing some incremental customers that would not necessarily come in and see our values. So they're seeing our values online. We think that's creating a nice cross-shop opportunity. I think I'd let RJ kick it back to you to talk on how it's going to interact with the app and how we see that working.

Yes. So just a quick update on our personalization initiative and the mobile app. So still on track to begin a pilot for this summer. So in a few months here the -- some of the features of the app will be real-time visibility and there've many great deals within the store, full visibility to the entire stores inventory on a real-time basis, early access to some of our popular events like our wine sale, notifications when favorite brands and products landed store. We also plan to digitize our popular Win What You Save promotion, which reinforces the total dollar saved from customers shopping at grocery outlet, so a bunch of features there. How it intersects with e-commerce, that's further down the road. We've mentioned before that the mobile app we believe, gives us a better platform to bring the treasure hunt to life outside of the flow walls of the store. We've had some limitations in being able to do that through more, I'll call them, more conventional platforms. And so really excited by the ability or the opportunity to bring those deals to life and really accentuate the treasure hunt and everything the customer experiences, while shopping in the store through this mobile app. At some point in the future, naturally, you'd expect those to converge if they can see the inventory, if they can create their wish list, if they can select favorites and such from the mobile app. The next step would be e-commerce. We haven't gotten that far yet. First for us is to just pilot this, build the engagement that we expect will be there. And then as we progress with Instacart and other partners on the e-commerce side, we will look to further enhance our total digital offering as it relates to both.

We have next question from the line of Simeon Gutman with Morgan Stanley.

This is Michael Kessler on for Simeon. First, I wanted to ask about the comments you made on trade down. You're beginning to see more of it as what it sounded like. I don't know if you have any kind of sense of whether it's occurring from new consumers or new customers trading back down to you or new customers that haven't been to Grocery Outlet trading down or if it's more of your current customers who never maybe continue to shop you guys through the pandemic, relying on you more as a primary shop? And then any, I guess, maybe similar to John's question, like the mix of product that they're -- you're seeing being bought and that's changing every day versus opportunistic?

RJ, you want to take that one?

Yes, sure. Michael, thanks for the question. Yes, in terms of customers that we see shopping our stores. I'd say a few things. One, continue to see really good customer mix with high satisfaction on the experience they're having. So that feels really good. We have seen more new customers shopping us because of inflation, because of the return to value, starting to see that for sure. We're also starting to see it a bit from supply chain and others having gaps on their shelves. We've heard that more anecdotally from operators as they've been creating new customers in their stores. I'd say more of the strength or a lot of the strength is with our tertiary customers. We see that in our survey data. This is the segment -- customer segment that we've seen on the highest increase in trips and spend, but we've seen increases quite broadly across core and primary, secondary and tertiary as well, but particular strength within tertiary. And the reasons for that, again, return to value, customers are seeking value with previously -- maybe a little less important now, really, really important. So they're turning to Grocery Outlet to find that. There's an element here where consumers are shopping more stores again with the easing of consolidated trips. So that's been a headwind for us, and that's been even somewhat -- I think the decline in e-commerce is probably contributing to that as well. Again, consumers more out and about and going back to shopping in the store. So really, the beginnings of the reversal of some of the 2021 behavioral convenience-based changes that have occurred that posed some challenges to us there. So I feel really good about that. For us, as we have been, and we'll continue to, it's about actively marketing to these consumers already mentioned highlighting value and assortment in the deals. So we continue to message that very strongly across all media types. We think our initiatives further support these increases in trips that we've seen more recently, expanding our SKUs, offering a more relevant assortment to consumers. e-commerce, of course, for those that continue to shop in that channel. And then looking forward, more personalized communication to communicate more of what interest them to specifically products and brands. And it's always about the value of the treasure hunt and the connection that the operators have for them. So yes, overall, I feel really good about the new trips, new customers and then increase in frequency that we've been experiencing more recently.

Great. That's helpful. Maybe a follow-up on the supply environment and the closeout market. Do you think that the deals or the presentation of the customer is getting better? And is that also maybe a contributor to the acceleration that we're seeing in the comps? Is it more of just status quo at a good level? And how do you anticipate that continuing to evolve given this pretty persistent level of inflation that we're seeing?

Yes. Yes. So it's always about the deals and the value. And we do think that's in a really healthy place right now. We love that. We're seeing new customers shopping our stores now, but you have to offer the value and you have to offer the excitement and the treasure hunt, and the convenience in the broad assortment that we have for them to return. And so feel really good about the products that we have in the stores. hats off to the operators for doing what they do, merchandising the product in a way that's right for their consumers and educating them on the model and helping them if they're shopping in the store. So a big, big part of the model and then the connection to their customers and their communities. So those go together hand-in-hand with the product and the values themselves. But again, I feel really good about availability of supply in the deals and the value. And as customers continue to shop us and find this maybe new for the first time, increasingly here, our job then is to make sure that they're getting the products they're looking for and they're saving a lot of money while they're doing it and feeling really good about where we're at with that.

[Operator Instructions] The next question is from the line of Krisztina Katai with Deutsche Bank.

Good quarter. Just had a follow-up on pricing. We've been hearing that some CPG companies are planning for more price increases later this year. So maybe if you could talk about your value gaps in your everyday assortment but then also maybe just touch on where consumers are finding some of the greatest value on the opportunititic side. And since you said that you're managing to value, I'm just curious how closely have you been following conventionals and price increases? And are you finding any resistance at all from consumers in some of the categories maybe where you have been taking up prices more?

Yes. Krisztina, thanks for the question. Yes, so a few things there. From a pricing standpoint, value gap standpoint, we pay very close attention to pricing from our competitors, and so certainly want to maintain our value proposition. And we think about value in a lot of different ways. I mentioned previously basket savings, always looking to be at that 40% or more savings on an average basket to conventional grocery retailers. So that's a really important metric. But that's an average. So certainly, there are items that customers are going to save a little bit less, think more of the commodity items that we're buying on an everyday basis. and you don't have quite the cost advantage or pricing advantage there that we would in others. So those are going to be less than the 40%. But then on the flip side, you have -- and this is predominantly opportunistic. You have items that are delivering an even greater save up to level. So 50%, 60%, and we've had items as high as 80% to even 90%, some really, really extreme values and with healthy margin, and that's the benefit of the opportunistic sourcing model that we deploy. So we do think about the number of items, the percent of sales offered at those different save up 2 levels. And we measured at the department level, we measured at the category level, we're looking at specific items and save up 2 and velocities in this business. We pay very close attention to lots of different metrics related to a because that is the value proposition to the customer. So all of those metrics, where they're at right now feel really good to us. We feel like we're in a good place relative to our competitors, and we think that will keep customers returning to Grocery Outlet.

We have next question from the line of Mark Carden with UBS.

So it seems like you're building some nice momentum on the comp front. How good can comps get if current levels of inflation last for an extended period of time? And would you expect the pace of your market share gains to increase in this scenario? And then what levels of inflation are you guys building into your guidance for the balance of the year?

Yes. Mark, let me -- this is Charles. Let me try to tackle that. So I would say our expectation is we think about inflation looking forward, and we don't profess to have a clearer crystal ball than anyone else out there. But suffice to say, it will remain -- we expect it will remain elevated through the year. We'd expect to see larger year-over-year impact in the first half. And as we start to lap some of those higher numbers in the back half of last year, that will be -- that will impact some of the growth rates. We always try to remind folks that, keep in mind for us the inflation impact is more muted on our business due to our model. So you think about, first and foremost, it's a change in assortment. So it is tough to drive some of these comparisons year-over-year. It's not apples-to-apples. The mix adjustment for us is a little bit different. You think about department mixes and not having full-service meat departments, for example. And then for us, of course, always focused on customer value. So that's another factor to consider. So given what we know now, as we thought a lot about guidance, we feel like our approach here is really balanced. We feel great about the momentum that we're driving in the business. But it still continues to be a very dynamic backdrop. If you think about supply chain. We're not through the woods on COVID, all the factors at play with respect to the consumer. So -- could some of those things be tailwinds for us, absolutely, particularly as it drives consumers increasingly to prioritize value, but we feel like the guidance we have right now is appropriate in light of the environment that we can see today.

Great. That's helpful and makes sense. And then just as a really quick follow-up. Are you guys seeing any outsized benefit from your stores that are in close proximity to the conventional grocers that tend to be at the higher end of the pricing spectrum?

I'd say only anecdotally, operators are reporting fresh faces, people coming in with comments around how expensive things are at other stores. So I'd say, certainly, traffic is up. We're benefiting from that trade down from conventional, but it's only anecdotal at this point.

We have next question from the line of Mike Baker with D.A. Davidson.

A couple of follow-ups on the margins. One, so if you're running a 30.6 today, and that's what we expect in the second quarter. I guess to be at 30.6 for the year, which is the guidance, you have to be above that in the back half. And historically, I don't think the seasonality works like that. So I'm just curious, I guess someone already asked you what gives you the confidence. But why would -- not only gross margins better in the second quarter than the first quarter, but they have to keep getting better throughout the year. So I guess I'll just ask again, what gives you the confidence that gross margins can keep getting better from here?

Mike, it's Charles. Let me tackle that. Typically, if you go back and look at our historical quarterly margins, you'll see that Q3 is on a seasonal basis, a typically -- our high watermark. I think for us, as we -- what gives us the confidence is, yes, we looked at the first quarter and some of those cost increases came faster and broader than we expected. And so I think you're seeing a bit of the timing impact as we're absorbing those and then making price adjustments. And so it really gets down to the cadence of margin through the first quarter and feeling like, okay, we we've passed some of those along and exited at a good place, and then we look at kind of our typical seasonal trend from here on out and feel like we've got a good line of sight there. And keep in mind, we talk a lot about investing in the business in lots of different ways, systems and tools being a big part of that. And so we do have a long list, I'd say, margin driving improvements. We're always looking to find efficiencies across the way we buy, the way operators order product, the way we distribute to them and manage inventory at store level. So those things, as we look at that list and some of the early progress there, it gives us confidence --

Fair enough. One more, if I could. It was mentioned on a previous question, but I don't think fully fleshed out or answered. But within your higher average ticket count, is that coming more -- well, we know it's coming from inflation, but what are we seeing in units per transaction? Is that up as well or is that down, but average selling prices are up?

Yes. Yes. So as you think about the composition of the basket, clearly, it's being driven by the higher average unit retail. And I sort of talked about for us that it is a bit more muted than perhaps for others. But nonetheless, that's the key driver there. Units is -- in the basket are down on a year-over-year basis. I'd say just the important thing to keep in mind there is we're comparing against a COVID elevated base with higher levels of trip consolidation last year. So we take a lot of comfort and confidence as we think about units, first of all, being steady over the past 3 quarters. So on a aggregate basis, units in the basket are holding steady. And then importantly, they're up modestly versus pre-pandemic levels. So that's another thing where we take a lot of comfort.

We have next question from the line of Karen Short with Barclays.

I wanted to just clarify 2 things. So with respect to your full year comps taking at 6%, you're still going to be at a 3-year stack of 13, which is lower than your 14.5. So I guess I'm wondering why you're expecting a slowdown in the 3-year stack as inflation continues to increase and presumably, your ability to pass through will continue to increase as the year progresses. That's my first question.

Yes. It's Charles. Let me tackle that. And again, I think we spent a lot of time thinking about the current environment and the impact on comps going forward and the various puts and takes. And again, clearly, it can go higher or lower, but we think our approach is balanced. We love the momentum that we're driving in the business, but it continues to be -- there's a lot we don't know at this point, various factors at play, a lot of those things that I mentioned. So we're just trying to strike that right balance between what we know and don't know it today. We're feeling good about the current momentum and opportunities going forward, but trying to be prudent at the same time.

Okay. And then just my second question on gross margins. Is there any way to quantify in 1Q what the actual basis point impact might have been on gross margins from, I think, delayed pass-through on cost increases. But then as we think about the rest of the year, I mean, it's possible that inflation continues to be a challenge for everyone. So why would you think that, that may abate I guess, as we get into 2Q through 4Q in terms of pressure on gross margin?

Yes. I would say, first of all, I don't think we can necessarily quantify it specifically. I mean, of course, you can see there that going into the quarter, we expected to see 30.3. So we're a little bit below that. But I think the thing that gives us confidence is we are very much -- we remain in a highly inflationary environment and as I said before, just the way that which we exited March and the momentum we're carrying here into the second quarter gives us confidence that a lot of those sort of cost increases and the timing impact of when we feel those and when we flow those through have been reflected. So yes, that, in light -- in combination with the various initiatives that we have gives us confidence that, that 30.6 is the right target for us.

Thank you. Ladies and gentlemen, we've reached the end of the question-and-answer session. And I'd like to turn the call back to Eric Lindberg, CEO, for closing remarks. Over to you, sir.

Thanks so much, operator. I appreciate you guys listening. Appreciate your questions. Look forward to catching up with you a little on more this evening and everyone, have a great night. Thanks.