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Greetings and welcome to the Grocery Outlet Fourth Quarter 2022 Earnings Results Conference Call. [Operator Instructions]. I will now turn the call over to Lynn Walter.

Good afternoon, and welcome to Grocery Outlet call to discuss financial results for the fourth quarter and full year 2022 periods ending December 31, 2022. Speaking from management on today's call will be R.J. Sheedy, President and Chief Executive Officer; and Charles Bracher, Chief Financial Officer. Following prepared remarks from RJ and Charles, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via telephone playback and on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of 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. A description of these factors can be found in this afternoon's press release as well as 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. During today's call, the company 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 the company's SEC filings. With that said, I would now like to turn the call over to RJ.

Good afternoon, everyone, and thank you for joining us. We are very pleased with our fourth quarter results and the strong momentum in our business. We continue to deliver unmatched value to our customers at a time when they need it most. As consumers are dealing with record inflation, they are turning to us for access to affordable quality food and our industry-leading savings. . Our compelling WOW! shopping experience is attracting new customers and existing customers are spending more of their dollars with us. Fourth quarter sales increased 19%, driven by a 15.1% increase in comparable store sales. Positive traffic trends accelerated in the fourth quarter with a 10% transaction count increase versus the prior year. Our average basket size also increased in the quarter, up 4.6%. We opened 10 new stores in the fourth quarter to end the year with 441 locations. We are pleased with new store performance and recent vintages are ramping well. We are also encouraged by our momentum in new markets, including the East where comps continue to lead the company. We manage gross margin well despite continued inflationary pressures, increasing gross profit by over 16%. Better-than-expected top line and gross profit performance combined with store expense leverage resulted in robust bottom line growth. Our business fundamentals remain strong. The pipeline of opportunistic products is healthy and our assortment is more relevant than ever. Independent operators are serving customer needs and are engaging new customers with their local assortment and value merchandising, and our marketing efforts promoting value and savings are resonating with consumers. We are acquiring new customers, increasing share of wallet and customer satisfaction levels are high. The availability of opportunistic product remains strong. Our supplier partners are showing us healthy lists of surplus items, and we are working creatively to help them with their inventory challenges. Our scale, long-standing relationships and ability to move quickly, make us the preferred partner for our suppliers excess products. And our buying strength continues to improve as we grow. We are excited to host some of our key suppliers at our upcoming annual supplier conference in March. This is an important multi-day event that allows us to meet in person to collaborate and strategically plan our business together. Our independent operators are excited by the sales momentum and the many new customers they see in their stores. Operators manage inventory according to local preferences, and they are actively marketing within their communities. We were together with all IOs last week at our annual operator conference and the energy was palpable. Our strong partnership and culture facilitated best practice sharing, the generation of new ideas and alignment on our shared objectives. IOs are also actively engaging with their communities, and they are giving back to local organizations in this time of need. We are inspired every day by their leadership and the creativity with which they run their businesses. Our mission of touching lives for the better has guided us for more than 75 years, and this greater purpose will continue to steer our future growth. Our business touches lives for the better in our communities, how we support our people and how we protect our planet. This shows up in many ways. We provide access to affordable quality food, and we save customers money. We give back to the communities in which we live and operate. We offer a platform for independent operators to successfully run their own businesses, and we offer opportunities for career growth and positive impact for our employees. We also reduced food waste, thereby helping to decrease greenhouse gas emissions. We manage our business for long-term sustainable growth, which allows us to increase our impact in each of these areas. And we are executing a strategy built on 3 primary growth pillars to help us achieve our mission. Number one, strengthening our core model; number two, evolving our business; and number three, expanding our reach. Let me briefly touch on each of these. Our first and primary growth pillar is to continue to strengthen our core business model. Our unique buying and selling approach has always been and will continue to be the growth engine of this business. It differentiates us and provides a compelling value proposition to a wide range of customers. We remain focused on deepening our value, strengthening the treasure hunt shopping experience, elevating operator support and increasing customer awareness, acquisition and retention. We always seek to strengthen supplier relationships and further develop opportunistic purchasing with new processes and investments. One current example is the introduction of cross-dock capabilities and new geographies and that are closer to supplier inventory locations. These new resources will improve our flexibility and allow us to better serve suppliers when surplus inventory challenges occur nationwide. Independent operators are the face of our brand and our support helps them be more effective and successful. We have made recent investments in our operator support team to allow for more direct collaboration on sales, margin and efficiency opportunities. Many operating best practices were shared in last week's annual meeting, and we previewed a new operator facing technology platform that will help IOs simplify and modernize the way they manage their business. We also continue to follow a test-and-learn approach to optimize our marketing strategy and investments. As part of that effort, we are more effectively leveraging data such as store attributes to gauge media effectiveness across markets and channels. Our second growth pillar is business evolution, and we are focused on advancing our model in several ways. Starting with the assortment, we are pleased with the incremental sales from our SKU expansion over the past year. Key focus categories have been NASH, fresh, ethnic and local. Unique and differentiated private label products represent the next multiyear phase of everyday assortment enhancement. This year, we plan to add leadership talent to build the strategy and foundation for this new offering. Over the next several years, we plan to develop and introduce private label items that strengthen the value proposition for our customers while driving sales and profit. We also continue to further digitize our business with more integrated end-to-end technology. We have a successful history of modernizing systems to improve capabilities and drive efficiencies. This year's system upgrades include product, inventory, financial and reporting platforms. These technology enhancements will provide new functionality and scalability to support key areas of our business including purchasing, inventory management and store operations. In addition, these systems will provide a strong foundation upon which we will develop future customer and operator facing technology. One example is our personalization app, which is currently being piloted in Washington State. This new program extends the treasure hunt beyond the 4 walls of the store and early feedback is positive. In addition to customer benefits, this app will generate robust shopping data to enhance our current marketing efforts and improve customer engagement over time. This year's technology upgrades will allow us to integrate more robust data analytics throughout our business. Future work will be aimed at improving data quality and integrating automated analytics to help with operations and efficiencies. Our third long-term growth pillar is to expand our reach by opening new stores, expanding to new geographies and developing new sales channels. We believe we have the potential for more than 10x the number of stores we have today. We continue to manage short-term new store headwinds, which have delayed additional store openings. As a result, we now expect to open 25 to 28 net new stores this year. Our 3-year pipeline is healthy, and we expect to be back to our 10% annual new unit growth rate starting in the second half of this year. Our plan for fiscal 2024 currently includes 47 new stores distributed more evenly throughout the year. As I mentioned earlier, we are very pleased with our strong momentum in the east as awareness of our brand continues to grow. We are also encouraged by early results in new states, such as Maryland and New Jersey, and we are excited to introduce the GO brand to many new communities. Store growth will be complemented by expansion into new sales channels. We are pleased with our e-commerce business with Instacart, DoorDash and Uber Eats, and we continue to learn and enhance our offerings with these partners. We view e-commerce as a great tool for us to build awareness and acquire new customers in both existing and new markets. In closing, I would like to thank the entire Grocery Outlet team and our IOs for their dedication and many contributions. We operate a very special business. The entrepreneurial spirit of our IOs, combined with the buying power of our team creates a powerfully unique customer experience. Our exceptionally low prices, strong product offering and continued investments in the business position us very well for future growth. I will now turn it over to Charles to discuss our financial results.

Thanks, RJ, and good afternoon, everyone. We were pleased with our fourth quarter performance, which exceeded our expectations on both the top and bottom lines. We ended the year with strong momentum as comparable store sales increased 15.1%. We generated a 10% increase in transaction count and a 4.6% increase in average basket for the quarter. We opened 10 new stores ending the year with 441 locations. Our robust comp growth, combined with the contribution from new stores led to an 18.9% increase in net sales to $930.8 million. Gross profit increased 16.2% to $281.2 million. We delivered a 30.2% gross margin, slightly lower than initial expectations due to cost pressures on commodity items. Overall, our gross margin performance was consistent with our historical fourth quarter range as our buying and planning teams continue to skillfully balance cost and value to the customer. Turning to expenses. Fourth quarter SG&A increased 14.8% to $230.2 million compared to the prior year. The increase reflected $22.1 million in higher store-related expenses driven by commission payments to IOs and store occupancy costs due to new store expansion. Corporate-related expenses increased $7.6 million, driven by higher incentive compensation, reflecting stronger financial performance versus the prior year as well as continued organizational growth and system investments. As a percentage of sales, SG&A decreased 90 basis points as leverage on store expenses offset higher incentive compensation expense. D&A increased 2.3% to $18.8 million. Share-based compensation was $8.2 million, reflecting the impact of grants made in the past 12 months as well as current expectations related to our performance-based share awards. Net interest expense increased 48.2% to $5.6 million due to the impact of higher interest rates on our variable cost debt which more than offset savings related to $75 million in reduced principal versus the prior year. Our effective tax rate during the quarter was 13.4%, which is below our normalized rate of approximately 28%. As a result of these factors, GAAP net income for the fourth quarter more than doubled versus the prior year to $15.9 million or $0.16 per diluted share. With respect to our non-GAAP performance measures, please note that we have updated our definitions of adjusted EBITDA, adjusted net income and adjusted earnings per share to no longer exclude the impact of noncash rent expense and the provision for accounts receivable reserves. For context, noncash rent expense and accounts receivable reserves were $6.9 million and $4.3 million, respectively, for fiscal 2022. Going forward, we will be presenting adjusted EBITDA and adjusted earnings based upon our revised definition only. In our press release issued today, we have provided a historical reconciliation for the past 8 quarters which breaks out these 2 noncash line items and bridges between our prior and revised non-GAAP definitions. For the fourth quarter, adjusted EBITDA based upon our prior definition increased 21.2% to $57.5 million or 6.2% of sales, reflecting our revised definition, adjusted EBITDA increased 24.3% to $54.3 million for the quarter or 5.8% of sales. Adjusted net income based upon our prior definition increased 24.4% to $24.9 million for the quarter or $0.25 per share. Reflecting our revised definition, adjusted net income increased 31.1% to $22.6 million or $0.22 per diluted share. Turning to our balance sheet. We ended the quarter with $102.7 million of cash. Inventory was in line with the third quarter at $334.3 million and remains healthy in terms of quantity, mix and turnover. Our fourth quarter CapEx, net of tenant improvement allowances was $44.4 million, reflecting new store growth and the timing of continued upgrades to our existing fleet and ongoing technology and infrastructure investments. On February 21, we refinanced our credit facility, resulting in lower borrowing costs and increased liquidity and financial flexibility. Our new facility includes a $300 million term loan and a $400 million revolver, allowing us to hold less cash on the balance sheet and thus offset the impact of higher interest rates. In addition, the new facility lowers our borrowing cost over silver by approximately 40 basis points. At closing, our pro forma capitalization includes a $300 million term loan, $25 million drawn against the revolver and approximately $70 million in cash. Next, let me provide some commentary on our initial outlook for both the first quarter and full fiscal year 2023. For the full year, we are projecting comp sales growth in the range of 4.5% to 5.5%. In terms of quarterly sales cadence, we expect comp growth in the first quarter to be approximately 10% with comps moderating throughout the year as we lap inflationary increases. We expect to open between 25 and 28 net new stores for the year with openings weighted towards the back half. We expect to open 5 stores and closed 1 store during the first half of the year. We expect to open the balance of our new stores and thus return to our annualized 10% unit growth run rate in the second half. In total, we project fiscal 2023 net sales of $3.85 billion to $3.9 billion. We expect gross margin for the first quarter and the full fiscal year of approximately 30.6%. For the full fiscal year, we expect adjusted EBITDA based on our revised definition to be in the range of $237 million to $243 million. This includes the impact of approximately $14 million in expense related to noncash rent and AR reserves. We expect first quarter adjusted EBITDA of approximately 6% of sales. We expect D&A to grow in the low teens on a percentage basis and share-based compensation of approximately $30 million for the year. Net interest expense is anticipated to be approximately $22 million based upon our recent refinancing and projected forward interest rates. We forecast a normalized tax rate of 28% and average diluted shares outstanding of approximately $101.5 million. We expect CapEx, net of tenant allowances of approximately $155 million, reflecting new store growth, upgrades to our existing fleet and continued investments in technology, supply chain and infrastructure. As a result, we expect full year adjusted EPS based upon our revised definition of $0.94 to $0.99 per share. In closing, we are pleased with our strong business fundamentals, and we are excited about the growth runway in front of us. We are grateful to have an incredible team of Grocery Outlet employees in our corporate offices, fulfillment centers and in the field who are supporting our talented IOs and bringing the WOW! shopping experience to our customers each day. We look forward to building on our current momentum as we continue to deliver long-term growth and value for our shareholders. We will now open the call up to your questions. Operator?

[Operator Instructions]. First question comes from Leah Jordan with Goldman Sachs.

I first wanted to check in on the bottlenecks to growing units this year. Where are you still seeing the pressure? Are you seeing any improvements? And what gives you confidence to returning back to that 10% growth? And is there any risk to some units slipping into '24?

Yes. Leah, thanks for the question. So a few things here. First, our real estate pipeline is really strong. We continue to find great real estate to support new store growth goals, the lineup of stores and opportunities for the next 36 months. It's healthy. We continue to be really excited about the potential that we have to open, as we've said, over 10x the store count that we have today. Recent challenges have never been an issue of real estate or site availability. The challenges have been, as we've said previously, with delays in permitting, inspections, equipment availability, we've had difficulties with service and utility providers. A number of things in the store opening process that have led to some of the delays that we've been experiencing. And just for perspective, prior to these challenges, time lines, generally, we're in the range of 12 to 24 months. Every site is unique, a little bit different, but that was the general range. . Now with these challenges that we've been experiencing more like 18 to 36 months. So quite a shift in terms of time line and getting new stores opened. What we've done as a result is a lot of adjusting in terms of processes and time lines. You think about all of the different parts of the new store approach, whether it's permitting, certainly, everything around construction, equipment ordering, just to name a few. A lot of effort goes into getting a new store opened and we've made a bunch of adjustments. And as such, we have had some store dates that have pushed back, which has resulted in some of the store counts from last year and then this year as well. We believe that current new store estimate is realistic. We think it's risk-adjusted for the environment that we're in. It's provided headwinds don't get any worse from here. And taking a step back from all of this, really view this as more short term, call it 18 months between last year, first 6 months of this year, a disruption to our long-term 10% annual new store growth goal. Really excited to be back on track for the number of stores that will open in the second half of this year and feel confident with the expectation for Forty Seven new stores next year and then ongoing at that 10% rate from there.

Next question comes from Jeremy Hamblin with Craig-Hallum Capital Group.

This is Jack on for Jeremy. My question kind of comes around the demand side of things. With the SNAP benefits expiring here on March 1, how do you guys think about that? Do you think of that as a net positive on the comp or a negative just around food cap benefits?

Yes, Jack, this is Charles. Today, if you look at Snap for our business, it's low double digits as a percentage. We would not view a reduction in SNAP benefits as being a headwind for us. And we can look back over time and look at where we positively comped through cycles of reduced SNAP funding. You really think about our model, and it appeals very, very strongly to that SNAP value-oriented customer. And so we really view this as more of a tender type that our customer is using versus a customer that we're gaining or losing. So as you think about when SNAP funding is reduced to your point, in many ways, that is good for our model as those benefits decline, it does put more pressure on those consumers and they come to us to stretch their dollar.

Next question, Oliver Chen with Cowen.

Regarding the guidance, as we think about the comps, what do you see happening to basket and the drivers, including inflation and/or disinflation as you look at that as the year goes on. And then a longer-term question on private label, it looks like a great opportunity here. What's going to be earlier versus later in the execution here? And which categories do you see the most opportunity? And are there any margin implications we should think about in our models as well.

Oliver, it's Charles. Let me start with that, and then I'll tackle how we're thinking about 2023 and then turn it to RJ to talk about private label. So really looking at trends here so far in the first quarter, food inflation is definitely proven to be sticky. We continue to see those price increases broadly across categories, including notably in the center of the store. . And then sort of looking over the balance of the year, it is hard to say with certainty exactly how and when that unwinds. We do expect that inflation will moderate as we move through the year and particularly as we lap accelerating prior year numbers. And just recall for us that the impact of inflation on our business is more muted versus others because of our opportunistic model and our ability to flex the assortment. And so as we think about traffic versus ring over the balance of the year, again, it's hard to say exactly how that unfolds given inflation. But we do expect that both traffic and ring will be positive contributors to comp for the year. Traffic, as you can see here, has been the large driver recently as customers are really looking for value. And then ring should moderate over the course of the year as trips increase and we lap those higher prior year numbers. So we love that healthy contribution between traffic and rain expected to continue. But notably, we don't need that to drive strong comp growth.

Oliver, thanks for the questions. On private label, yes, we're really excited about this opportunity here in front of us. We do think of it as a significant long-term opportunity and as an enhancement to our everyday side of the business. Think of this year as us building the capability and really setting the foundation, so building the capability and leadership talent, starting to build out the team. And then the strategy and the foundation for how private label will enhance the sum. We, as I think you know, have a very, I'll call it, small amount of private label within our assortment today. It's low single digits. It's been more opportunistic in nature as we've introduced some of those items and those brands over the year. So really taking a step back from that and thinking long term and what we want private label to represent. The focus for us will be what sets us apart. First and foremost, it's about value. So how we deliver great value to customers through a private label offering. And then the added benefit here is expectation to have these items serve as an additional destination, if you will, destination item assortment and trip driver along with the rest of the assortment that we have today. We also think we can represent the treasure hunt in how we manage this part of the assortment, so do it in a way that's unique to us and the expectation and the experience that customers have when they shop our stores. I'd say it's too early. You asked about items or categories. I think, too early at this point to give any specifics on items or brands just as we're starting to put that strategy or we'll put that strategy in place today. But certainly, we'll update you as we develop that and start introducing items and categories to the assortment.

Okay. Lastly, you cited a lot of great initiatives cross-docking operator support teams, the store attribution model. How would you prioritize which ones might be bigger needle movers if there's a way to dimensionalize the impact. They all sound quite like great drivers for both supply and demand optimization.

Yes, we have initiatives that we're pursuing. How do we prioritize? First, I'd say we're very deliberate and disciplined about first just choosing what gets on the list. There are certainly a number of things that we could pursue that we're not talking about because we are trying to stay focused and have the teams be aligned together grocery outlet operator partners and as well as the partnerships that we have with suppliers as well. And so there's a longer list of things that we're not pursuing at this time, we'll get to them. In terms of what's on the list. We think they all can be impactful. We -- certainly, some are bigger than others. But we think about -- and as we manage the business, always reinvesting back into whether it's people or process or systems or specific initiatives that make us better. And so the list of things that we're talking about are really more examples than anything else within the broader scheme of -- or the broader approach of us investing always to make the business stronger.

[Operator Instructions]. Your next question comes from Krisztina Katai with Deutsche Bank.

I wanted to ask about pricing. I guess, especially in light of some of the sticky inflation that you mentioned. Maybe if you could talk about your value gap in your everyday assortment. As we look relative to the competition in big box retail, also conventionals. And then as a follow-up, are you seeing any more promotional activity in the marketplace as value players like yourselves continue to gain share potentially at the expense of conventionals?

Yes. Thanks, Krisztina. So on your first question about pricing, we're a value retailer, so we're always focused on delivering value and maintaining that value through any type of macro environment, whether it's inflation or deflation. We pay very close attention to that. We measure it in lots of different ways, really as a proxy for the experience that the customer has, right? They shop us for value along with the other unique attributes of the business, treasure hunt, the operator model, right, customer service that they provide, the connection and community. And so -- but value and price is really important. As it relates to the current environment with inflation, yes, we've seen prices increase the retail landscape, we follow. So we're going to wait for -- and we have waited for other retailers to raise their prices before we make any moves ourselves. And the reason for that is always wanting to maintain that value delta. And we can do that in a way, I think, that's unique to us. We always talk about the flexibility and the pricing adjustments that we make every day on the opportunistic side of the business, but we're also very flexible with our everyday assortment. We're not stocking any specific contracts or volume agreements, the assortment is very flexible. We don't have a rigid hierarchy like others do. And so we're able to move in and out of items and suppliers on the everyday side, no different than we do on the opportunistic side. And through that, then deliver great value first without changing prices at all for making those adjustments. But then where needed or where we are seeing cost increases. And we have -- we'll follow other retailers to make that price delta those deltas are even more important now because it's harder for the consumer to get more with their money. And so they're -- and we're seeing that in traffic trends and basket trends and some of the things that we talk about as it relates to share of wallet. Specific to the promotional environment, remains stable for the things that we see here. Traditional retailers still are behaving more rationally, I'd say. It certainly has ticked up for to go back a couple of years when it came way down, it's come back up. But in light of inflation, I think in light of margin pressures, perhaps that others are feeling. It's been a very rational promotional environment, more targeted to specific items. Again, this one here, we offer great unbeatable everyday value. We've operated in all sorts of promotional environments. This is nothing outside the ordinary. We continue to flex our pricing and assortment to adjust and react. But nothing in the current environment that is anything that we haven't managed or outside the norm.

Next question, Robby Ohmes with Bank of America.

RJ, maybe just a follow-up on the technology investments. Can you -- have you guys framed the cost? Is it -- is it significantly incremental in 2023 versus 2022?

Yes. Let me comment first on just general technology upgrades that we're making, Robby, and then get back to your question on the cost itself. But just first to put this in context, We, as you know, have been investing in modernizing technology capabilities over a long period of time. We do take a multiyear view of the road map, systems road map. So what we're talking about for this year and future years is really no different than some of the investments that we've made in the past. And if I were to look back over the last I don't know, call it, 8 years, we've made some significant enhancements and upgrades to the operating systems that we run the business on. So I think about warehouse management system, HR system, our own proprietary ordering and distribution system, just to name a few, plenty of other investments. Really excited about some of the system modernization efforts that will be put into place this year. So as mentioned, we're investing in new platforms to help our buyers with information and capabilities for everything in the buying process, mentioned new tools for store operators to help them better run their stores, driving sales, managing margin, operating efficiencies, really excited about that, enhancing our data business intelligence and the reports and tools that we bring to decision-making. And there's a handful of other operating systems around this that are part of this year's upgrades. We've always followed a phased approach to how we manage system implementations and system enhancements and this year being no different. In terms of the expense, it's part of our, I'll call it, normal CapEx budget that's been true in the past, true this year. And then as we look to continue to invest in technology as we grow. Think of those investments, whether they're capital or ongoing operating expenses as being part of the normal levels of CapEx and then certainly within budget and long-term expectations as we've communicated them.

That's helpful. And just another follow-up was just the East Coast stores, can you remind me, are they just catching up to the West Coast? Or is there something special you're doing with them for them to be outperforming the West Coast?

Yes. So East Coast is still a developing market. We -- in terms of the approach there, it's always been about building infrastructure first, growing brand awareness and trial and then developing the market as we open more stores over time. So that's the approach that we took to SoCal, if I were to use that as an example, from when we entered the market back in 2012. And we've seen the awareness and productivity, grow in lockstep there. And it's what we're seeing in the Mid-Atlantic from a performance standpoint. The -- that region has been leading the company in comp sales growth from the investments that we've been making. And it's investments yes, in new stores as we're ramping up there, but also just in the market in general to raise overall raise awareness DRIVE trial, and we've seen then the productivity of the stores follow and suit. So really, really excited about that. It has been the expectation as we've started to lean in more with those investments to support new store growth. And as we continue to add store count in the East or any developing new market everything improves from there, whether it's purchasing, the flywheel, if you will, around recruiting and training operators. Certainly, scale helps with marketing and supply chain and field support in these other areas. So really feeling good about the momentum that we're seeing in performance in the East but then also these investments that we've made to support a growing store count for the opportunity that's there.

Next question, Joe Feldman with Telefe Advisory Group. .

Actually, I wanted to follow up on that last topic Robby brought up. How is your IO pipeline in the East? Is it as strong as in the West? And how are you finding people in the East? And also, I was curious if you're experiencing the same kind of real estate delays in the east as you are in the West?

Yes. So the IO pipeline is healthy. Overall, it's very healthy. And in the East, it's healthy, certainly different, right, as you don't have the base of stores in the east as you do in the West. But I would remind you that as we recruit for operators, sometimes it's region specific, but other times, we are recruiting them into the system, and we have examples of operators running stores in the east that are from the West Coast or they trained in the West Coast, and that's where we recruited them from. So don't think of recruiting operators as so region specific. Of course, it's important, and that's part of the conversation, but it's really recruiting into the system and then it's about a preference for a geography. . The things that attract or that have always attracted operators in the West are same in the East, right, the opportunity to own and operate your own business. this really unique combination of independence, but also with the support and scale of grocery outlet, you can work with your family, you have an opportunity to give back and have positive impact. certainly, financial upside. So all of these things are attractive as well. The key difference for anyone that's living or from the East, there's just maybe lower awareness for outlet as they didn't grow up with it. And so there's an education process there and awareness and education process there that's a little bit more unique. But we've got a great team in place, and we're having lots of really productive conversations with prospective operators. So we feel really good about the pipeline. And then in terms of our real estate, yes, nothing specific or unique about the East relative to other markets, those challenges that we've been managing are pretty widespread.

Got it. If I could just follow up more on the IOs. I was just curious, from the event you guys just hosted, I know you said people -- the IOs were pretty excited about the coming year. But I was just curious if there's anything in particular, you can talk about or anything that they're most excited about? Is it just the product assortment? Or is there anything like on the tech side that they've really been asking for or that they could use or need in the stores?

Yes, sure. So well, first, let me just comment on the meeting. great to be together with all of our operators. It had been a while because of COVID, where we've all been together as a group. So just really nice to be together. Energy was really positive, really excited for the year ahead. So to your question, what they're feeling good about, definitely sales momentum, comps, growing sales in their stores, more specifically traffic trends and more specific to that new customers. So love seeing new customers in their stores and engaging with them and telling them about the business and the model and how they can save a ton of money and have access to great food. So really excited about that. Inventory and variety really healthy. So operators, they're in the order guide every day. Their stores are full, you're able to represent great brands and value to customers, treasure hunt experience is really strong. marketing. Marketing is resonating. They're seeing it in their markets. Customers are talking about it, both our efforts and their efforts. And then continued investments, we've always talked about investments that we continue to make in the stores whether it's capital in the stores, shelving, fixtures, other things, general maintenance. They're always happy to get those investments or have those investments made. And then you mentioned technology. You -- this will be a big step forward for us this year. We've been operating on some of our systems for a long time. We spent the time to preview some of the new capabilities and systems. It will be an ongoing effort throughout the year prior to implementation just to manage the change. But they're just excited about continued enhancements in the business and all the momentum that we're experiencing is great. Macro environment is favorable, but we continue to pursue initiatives and make investments to make the business better still. So just feeling good overall.

Next question, John Heinbockel with Guggenheim Partners.

RJ, 2 things I want to start with, you guys don't have set planograms, but as you think about adding assortment and then private brand, the complexity, right, of managing that assortment and maybe helping the IOs more, right, think about that dynamic planogram, if you will. Is that improving? And is this the IT platform going to help with that? And then secondly, when you think about private brand, right, in your model, how do you think about that philosophically in terms of the space you want to give it on the shelf? And how do you price it, right? Traditional retail right would price some 15%, 20%, 25% discount, the national brand. How do you think about that?

Yes. Let me try to answer both of those, John, at the same time here. So think of private label as an enhancement to our everyday assortment. So to the second part of your question, we already do that today, right, in terms of pricing and value everyday items as compared to opportunistic, right? We're showing value across the entire store and we're always managing real time and balancing inventory and items and value as opportunistic is coming in and out, and we're managing an everyday assortment. Think of private label as us being able to offer even better value to customers on the everyday side of the business together with unique items, destination items. . You're right, we don't have planograms. But again, really not so different than how we manage everyday assortment today, private label items will just be a -- think of it as a better, more sought after, unique, together with value item the everyday side of the business. We're not introducing private label to replace or as a substitute for opportunistic. We have plenty of room to grow and bring on more opportunistic items. So it's not that at all. If that's where your question is coming from as a replacement for. This is structurally as an enhancement to the part of the business that we already manage today just with different items in our own brand.

Okay. And then with regard to -- it was asked about the East Coast pipeline, right? So I think over the last 15 months or so, half the openings have been on the East Coast, I don't know, do you think that percentage won't stay that way, I don't believe. But maybe talk to the magnitude of the East Coast pipeline. And I don't know in the past, I think the comment was that you probably need to get close to on the East Coast to have scale. Do you think that's still true. And I guess you would get there in 2.5, 3 years?

Yes, John, it's Charles. Yes, we very much are sticking to the sort of crawl, walk, run philosophy in the East Coast. And so for 2022, it was about 1/3 of new store openings. We're in the East. For '23, it will be about the same, and then we will ramp store growth there in that market in 2024. So it will be more of an even split between East Coast and West Coast new store openings. And so as you think about -- you sort of referenced when you kind of get the scale there, that 70-ish stores, yes, we think that's in the right

Next question, Corey Tarlowe with Jefferies.

Firstly, just on the full year guide within the context of inflation, recognizing that mean last year, inflation was running at a very elevated grade. And clearly, I think your comps reflected that. And this year, inflation started to decline. And I think again, the guide probably reflects some of that. But what do you think could be a potential factor as you think about upside or driving potential upside to the model for this year? Where do you think that, that could most likely come from? And then secondarily, just unpacking the CapEx. So it sounds like the store openings are going to be relatively consistent kind of in '23 versus '22? -- guiding looking at something like, what is it, 25 to 28 new store openings versus last year of, I think, but the CapEx is stepping up from $130 million to $155 million. So could you maybe unpack what the CapEx looks like for this year?

Sure. Corey, it's Charles. Let me take both of those. So as we think about the guide for the year and where potential upside could come from, it's hard to say. We do think that the guide we provided is balanced given the backdrop continues to be dynamic. We love the momentum that we've carried into the first quarter. So continuing to see that uptick in traffic as the consumer again looks to stretch their dollar that feels really good to us to be driving those trips into the store. And then I think the more of the wildcard is exactly how inflation moderates and what the timing is of that. As we think about CapEx spend for the year, as RJ mentioned, the core driver continues to be store growth and fleet investment. It is year-over-year up a little bit with respect to technology. And so some of the system enhancements we're making are driving a bit of that growth year-over-year. And then, of course, we're seeing an uptick in the inflationary impact of costs, whether that's with respect to new stores. as well as other reinvestments back in the infrastructure. So really a combination of those things are driving the -- a bit of a higher growth year-over-year. But continue to feel really good about those investments we're making back into the business.

[Operator Instructions]. Your next question comes from Karen Short with Credit Suisse.

I just -- I have a couple of questions. So the first question is your story has always been like remarkably stable EBITDA margins. And obviously, right now, what you're guiding to is below what you've kind of historically bounced around in on the margin range. So wondering if you could give a little more color on that. And then on CapEx, your CapEx dollar amount is significantly higher than I mean, maybe we were mismodeling, but then we were modeling, but with significantly lower units than we were modeling. So wondering if you could just talk to that a little bit.

Yes. A couple of things. Karen, this is Charles. Let me take those in reverse order, if you will. So starting with CapEx for Q4. So yes, it was a little bit higher than we anticipated. The key driver there, there's some timing impacts of store possessions as well as the collection of TI allowances from landlords. And so again, the guidance that we provide is net of those allowances. So that was probably the biggest driver versus our expectation relative to prior quarterly trends. And so that was really the key to Q4. Otherwise, some of that inflation.

Specifically, it was specifically a '23 question, not 4Q.

So again, 23% growth with respect to CapEx, it's very much those points that I talked to before. Store growth, yes, units on a year-over-year basis pretty consistent. We are seeing more inflationary cost increases, as you would expect. That's something that we continue to manage through, and we're looking at ways that we can continue to offset some of those increases. Technology is a driver of the year-over-year growth from '22 to '23 and then ongoing inflationary impacts would be the other. And remind me of your first question. And then EBITDA margin...

EBITDA, yes.

Yes. So Karen, so we've always talked about our philosophy of maintaining stable margins over the long term. And for us, it's very much a matter of reinvesting back into the business as we think about the growth runway ahead of us. So whether that's investing for growth across people, technology or marketing. So as we think about the guide for 2023, we're still very much oriented those long-term IPO targets that we provided. With respect to adjusted EBITDA, keep in mind, definitionally, there's been the change there with respect to noncash rent and AR. So when you go back and normalize for those sort of pre-IPO for us, 6.5% to 6.6% in terms of EBITDA margin rate. And then adjusting for that, that really puts you right in line with our guidance for fiscal '23. So for us, very much continue to manage the business for stable margins. We feel good about where we are for 2023 relative to that kind of long-term approach, a bit of margin -- gross margin pressure as it relates to inflation, but overall, I feel really good about where we are.

Sorry, can I just ask one more quick question. In terms of the stores that have been opened by nontraditional IOs like non-grocery, is there any color you can provide in terms of performance of those stores relative to ones that have been opened by traditional IOs?

No, no difference. You bet.

Next question, Mark Carden with UBS.

So a follow-up on the store count. After several years of opening fewer new stores. Do you see it becoming incrementally more challenging to revert back to historical 10% cadence in 2H, just from an execution standpoint and some of the complexities of operating in an opportunistic market, getting IOs up to speed. Or does that muscle memory from pre-pandemic days really just make it pretty smooth on to permitting and supply chain headwinds normalize even when you're going off the higher base.

Yes. No, I mean, certainly, you need to do things differently at bigger or higher scale as the numbers go up. But no, we've had a minor short-term disruption here in these past 18 months, but I'm excited to be back on the 10% growth run rate later this year and then feeling good about store count and our ability to get those stores open and 2024 and then ongoing as the base continues to grow and the new store count continues to grow.

Okay. Great. And then one more quick one. Just in the past, how has traffic been impacted by periods of disinflation at grocery outlet. You guys have laid out a number of promising initiatives. But what near-term actions you think will be most meaningful in terms of holding on to some of your newer shoppers, then maybe discover Grocery Outlet for the first time over the past few years, especially competitor prices start to come down.

Yes. So first, I'd say, Mark, our track record history shows the model is very resilient and works well in all macroeconomic environment. So inflation, deflation, far more muted as it relates to impact on the business. I guess the one as dress to that is in a recessionary or as we're experiencing now high inflationary environment where the need for value is really high, it ticks up, right, as customers are seeking value. If I were to go back to '08, '09, we saw that 2 years. And then there's -- as it relates to retention, there's tremendous stickiness in the experience that customers have. And so that period and of course, every period is different. Customers found us for the first time, loved the experience and continue to shop us. We came out of those years with positive comps. Beyond that, we worked really hard to stay top of mind to drive trips to gain share of wallet. So a lot of efforts on the marketing front that we're pursuing and certainly, the operator plays a key role there as well. So no matter which way inflation goes, we think it will be with us here for a while still disinflation or even deflation still like what we're doing and are excited about the growth potential.

Next question, Simeon Gutman with Morgan Stanley.

This is Michael Kessler on for Simeon. So kind of taking a step back, it's been choppy few years with the COVID swings, the new unit delays. I know we had some of the adjustment changes. So the earnings power of the business has stalled a little bit since 2019 or 2020. So just wondering, this year, reestablishing, I guess, a new baseline for the kind of return to, I guess, I think at IPO, more like a mid-double digit or mid-teens bottom line growth. Is that kind of the right way to think about the post '23 outlook? And is there anything that would, I guess, drive a higher or lower number from what you can tell right now? .

Yes, Michael, this is Charles. I think we get back there. The -- if you look at the guide for '23 and admittedly sort of bottom line adjusted net income growth is being impacted by higher interest rates. And so year-over-year, despite the fact that we've paid down debt, and we again have a new credit facility that has lowered the borrowing cost. Underlying base rates continue to have a big impact year-over-year. And so that's really the headwind as we think about bottom line growth and getting back to that kind of IPO algorithm. But overall, we feel really good about the health of the business and where the P&L is. We are driving leverage. We're investing that back into the business. And again, we think it sets us up for long-term growth.

Got it. And just a quick follow-up. If to the extent that comps come in better top line exceed your expectations. Can you just talk a little bit about what the flow-through might look like on those sales? Would you look to reinvest as far as that versus flowing it through to the bottom line?

Yes. It's always been our philosophy to reinvest back into the business. You can see some flow-through in the short term. Again, we have fewer points fixed cost leverage due to our model and the sharing of commissions with but you can see some flow-through in the near term. Longer term, whether we're seeing improvements in gross margin. We're always looking for a way to manage costs, better manage inventory through the chain as we find those opportunities as we find ways to manage G&A more efficiently, we do look to invest those back into the business. Again, we've got decades of success to tell us that's the right thing for us to do.

Thank you. I would like to turn the floor over to RJ for closing remarks.

Thank you all for joining us today. I appreciate the support, and we look forward to updating you all on the next call. Thanks.