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Greetings, and welcome to Grocery Outlet F2Q 2023 Earnings Results Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host Lyn Walther from ICR. Thank you, Ms. Walter, you may begin.

Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the second quarter ending July 1, 2023. Speaking from management on today's call will be RJ 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 on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of the federal securities laws. All statements that address future operating, financial or business performance or the company's strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements. 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 except as required by law. 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. Reconciliation of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure may be found in the supplemental financial tables included in this afternoon's press release and the company's SEC filings. With that out of the way, 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 second quarter results and the continued momentum in our business. Our differentiated model and strong value proposition are driving industry-leading sales growth, and we are fulfilling our mission of touching lives for the better. More customers are shopping us for the first time, existing customers are spending more with us and overall customer satisfaction continues to increase. Second quarter sales grew 13%, driven by a 9% increase in comparable store sales and total quarterly sales reached a new record of over $1 billion. Traffic remained very strong in the quarter, increasing 9% and average basket remained high and consistent with last year. Gross margin was also very strong in the quarter, up 120 basis points to 32.3%. This, together with sales growth, drove a 23% increase in adjusted EBITDA to $71 million. At the end of the second quarter, we operated 447 stores across 8 states. We remain pleased with the performance of our newer stores, with sales levels and growth in line with our historical performance and underwriting model. We continue to see positive momentum in our newer markets particularly in the East, where we are increasing awareness in our customer base through targeted marketing investments, strong IO execution and expanding store count. Our strong performance is driven by our differentiated model and compelling value proposition. We save customers an average of 40% compared to conventional grocery retailers with our best WOW! items saving customers 70% or more. Shopping at Grocery Outlet combines a fun, treasure hunt experience with the convenience of a small box format. And our independent operators provide a localized assortment and personalized customer service while giving back to the communities in which they live and operate. We are a unique, high-growth specialty discount retailer. We have delivered strong and consistent performance with an average annual same-store sales increase of 5% over the past 20 years. As a result, we have steadily increased our market share and touched countless for the better. Providing access to high-quality food, saving customers money and giving back to our communities is a formula that works across demographics, geographies and macroeconomic environments, and we are still in the early stages of our growth story. Our model is unique in 2 distinct ways: opportunistic purchasing and independent operators. Our opportunistic purchasing model delivers an ever-changing assortment of high-quality items at prices that are well below our competitors. We have a talented and tenured team of specialized buyers who work in close partnership with suppliers to deliver WOW! items to our customers. We work strategically and creatively to provide solutions to our partners while strengthening the trusted relationships that we share. We also manage a flexible and agile supply chain to quickly move all types of products from suppliers to stores and customers. This business was built from the ground up around the opportunistic purchasing model, and we have been perfecting and expanding upon it for more than 75 years. Our growing size and scale make us a stronger partner with even better access to products. The independent operator model is equally important to our success. Our IOs are entrepreneurs, merchants, business owners and community leaders. We partner with them to deliver the WOW! shopping experience to customers, and we support them in every aspect of the business. Operators enjoy the autonomy of running their own stores, selecting localized products, making merchandising decisions and providing outstanding service to their customers every day. Operators also offer employment and career growth opportunities for their teams and they demonstrate community leadership by giving back. Running a store is hard work, but independent operators are incredibly talented and resourceful. They are true entrepreneurs in every sense of the word. Throughout our history, operators have navigated numerous changes in the business environment, always meeting challenges head on. Current operator satisfaction and engagement levels are high and voluntary turnover remains consistently low. The Grocery Outlet model offers very attractive operator economics with a low upfront investment, healthy annual income potential and unlimited upside. We split gross profit with our operators in the form of commission payments, and we, therefore, both benefit from sales and margin growth. In the second quarter, comparable store operator commission payments increased by more than 10% versus the prior year. Since 2019, average operator net income has grown in the low single digits on an annual percentage basis. Strong commission growth, combined with labor and operating efficiencies have more than offset higher store-level expenses such as wages and utilities. And last year, average mature store operator net income exceeded $250,000. We are always investing to support long-term operator success. We deploy capital to build new stores. we can sign inventory to operators, and we market to customers across many channels. We also provide financing to help IOs with new store startup costs, and we offer cash flow support as needed during the early years as stores ramp. We are continually reinvesting capital to upgrade fixtures, implement new technology and deliver tools that help IOs grow sales and profit. For example, we offer platforms and support to help operators with local marketing and community engagement that complement our company-wide marketing initiatives. Another example is our forthcoming store portal, which is a new platform that will provide operators with better analytics and easier access to information to make smarter business decisions. We look forward to delivering this new application to operators this quarter. Interest in becoming an operator is at an all-time high. We received nearly 30,000 leads last year which is up 50% over the past 4 years. Becoming an IO is a highly selective process as we accepted less than 1% of interested candidates to the GO family last year. Our selective recruiting process, combined with a comprehensive training program continues to produce high-quality operators to support store growth. Our unique independent operating model demonstrates the power and differentiation of small business at scale. And the strong partnership we have with operators allows us, as we say, to outchain the locals and out-local the chains. There is nothing else quite like it. Looking ahead, we have tremendous white space with the potential to operate over 4,000 stores in the U.S. We are continuing to invest in real estate and construction resources to fulfill our future store potential. We've recently hired new people to the team, and we are expanding strategic relationships with external partners, including large property owners. We are also considering opportunistic real estate and small regional acquisition opportunities that align with our geographic expansion and store growth strategies. We are excited about the many activities underway and our store growth potential in both infill and developing markets. Before turning the call over to Charles, let me finish with what matters most, our mission of touching lives for the better. We just completed our annual Independence from Hunger campaign. This is an event where our IOs partner with local nonprofits to provide critical food resources to their communities at the time of the year when they need it most. In addition to the incredible efforts from our operators, our supplier partners also contribute by donating food and collaborating on events. I'm very proud to share that we raised a record $4 million this year, benefiting over 500 local organizations. We are equally proud of the $20 million that we raised over the 13-year history of this program. In closing, I would like to thank our entire team and our IO partners for going above and beyond to serve our customers and communities. We appreciate all that you do to make the GO shopping experience one of a kind. We are well positioned to build on this current momentum, and we are pleased to be raising our guidance for the year. Looking forward, we are excited for the growth ahead and the positive impact we will have on an ever-expanding group of customers. I will now turn the call over to Charles to discuss our financials.

Thanks, RJ, and good afternoon, everyone. Our second quarter came in ahead of our expectations, driven by strong same-store sales growth and margin expansion. As RJ mentioned, we achieved quarterly sales over $1 billion for the first time in our history. We are all proud of this achievement, and I want to thank our employees and our independent operators for their contribution in achieving this significant milestone. For the quarter, net sales increased 12.5% to $1.01 billion, primarily due to a 9.2% increase in comparable store sales, along with the impact of new stores opened since the second quarter of last year. Strong transaction growth drove our comp while our average transaction size remained high and flat to last year. We opened 4 new stores and closed 1 store during the quarter, ending with 447 locations. We remain pleased with our new store initial sales volumes and recent vintages are ramping in line with our expectations. Second quarter gross margin increased 120 basis points to 32.3% and gross profit increased 16.9% to $326.6 million. Our buyers are doing a fantastic job partnering with suppliers, and we are seeing healthy deal flow across categories. Strong execution, combined with the favorable buying environment drove the better-than-expected margin result. SG&A expense increased 14.9% to $290.1 million compared to the second quarter of 2022. The increase was driven by higher commission payments to IOs, reflecting gross profit growth, store occupancy costs due to new unit growth and incentive comp expense based on our strong first half results. As a percentage of sales, SG&A increased 60 basis points versus the prior year, primarily due to higher variable commission expense resulting from our strong gross margin performance. Net interest expense increased 23% to $4.8 million due to the impact of higher interest rates on our variable cost debt, partially offset by a reduction in average borrowings outstanding versus the prior year. With respect to the bottom line, GAAP net income for the second quarter increased 21.8% to $24.5 million or $0.24 per diluted share. Adjusted net income increased 18.5% to $31.9 million or $0.32 per diluted share. And adjusted EBITDA increased 22.7% to $70.5 million for the quarter. As a percentage of sales, adjusted EBITDA expanded 60 basis points from the prior year to 7%. Turning to the balance sheet. We ended the quarter with $88 million of cash and $320 million of inventory. Our inventory balance remains healthy in terms of quantity, mix and turnover. Gross debt was $298 million at the end of the second quarter with net leverage less than 1x adjusted EBITDA. We generated $70 million of operating cash flow during the quarter and invested $35 million in CapEx, net of tenant improvement allowances, primarily for new store growth, upgrades to our existing fleet and ongoing technology and infrastructure investments. Next, let me provide some commentary on our outlook for the balance of the year. Given our strong first half performance and continued momentum, we are raising our guidance for the fiscal year. For the third quarter, we expect comp growth to be approximately 6.5%. For the full year, we are raising our comp sales guidance to be in the range of 7% to 8%. We continue to expect to open between 25 and 28 net new stores for the year. In the third quarter, we expect to open 8 stores with a balance opening in the fourth quarter. In total, we now project fiscal 2023 net sales of approximately $3.95 billion. We expect third quarter gross margin to be approximately 31.3%. Factoring in our normal fourth quarter margin seasonality, we now expect full year gross margin of approximately 31.3%. This represents an increase of 60 basis points from our prior full year outlook. With respect to the bottom line, we expect third quarter adjusted EBITDA of approximately 6.4% of sales. For the full year, we are raising our guidance for adjusted EBITDA to be in the range of $254 million to $260 million. At the midpoint, our guidance represents approximately 20% adjusted EBITDA growth versus last year. Moving down the P&L. We expect net interest expense of approximately $21 million for the year, which reflects projected forward interest rates on our outstanding debt. For adjusted net income purposes, we forecast a slightly higher 2023 tax rate of 30%. This is up from our prior expectation of 28% due to the impact of increased taxable income in high rate states as well as nondeductible compensation expense. We expect average diluted shares outstanding of approximately 101 million. As a result, we are raising our full year adjusted EPS guidance to be in the range of $1.04 to $1.08 per diluted share. With respect to CapEx, we continue to project approximately $155 million net of tenant improvement allowances, reflecting new store growth and ongoing investments in our store base and business infrastructure. In closing, we are extremely pleased with our results this quarter. We know that our strong performance would not be possible without the tireless efforts of our operators and the entire Grocery Outlet team. We appreciate all you do to make Grocery Outlet the company that it is today. Our brand momentum is strong, and we look forward to continued growth in the years ahead. We will now open the call up to your questions. Operator?

[Operator Instructions]. First question comes from the line of Oliver Chen with TD Cowen & Company.

As we look to the back half, do you expect for the basket to also be flat? What should we know about disinflation or deflation in terms of what you're seeing? Also, you commented on the great buying environment. Do you expect that to continue. It was quite favorable to your gross margins. And finally, a lot of great comments on developing markets and targeted marketing. What have been some of the key learnings in terms of making progress there?

Oliver, it's Charles. Let me start with the basket, and we'll try to take these questions in order. But really pleased with the basket trends that we're seeing in the second quarter. We are, as expected, seeing moderating inflation and so AUR, while still up, came down from the first quarter. Recall that for us, the impact of inflation is more muted because of our buying model. And then units in the basket is down modestly versus the prior year, which we would expect to see given the higher frequency and traffic that we're driving. And again, for us, it's not directly comparable given the nature of the buy and the fact that the -- it's an ever-changing mix and assortment within the store. But units overall still slightly ahead of pre-pandemic levels, which we feel really good about. So as we look towards the balance of the year, we really think that the same trends continue. Traffic will be the larger driver of comp as customers continue to seek out value and then bring, again, with moderating inflation should continue to moderate as those trips increase.

Regarding the buying environment, Oliver, we continue to be encouraged by the pipeline of opportunistic product. It continues to be broad-based across categories. The positive momentum all the way back from the beginning of the year and through Q2 is carried forward to this quarter as well. We continue to see really healthy inventory positions and variety available to both operators and to customers and contributing to the great value in treasure hunt and positive experience customers are having shopping our stores. So a lot of positive trends there that we like. In regards to marketing, we continue to see nice returns from our targeted marketing efforts. We do still continue to invest more in certain areas, and we're always following a test-and-learn approach as we deploy, try, learn from new marketing activities, certainly very active in the digital space, as you're well aware, and always trying new activities there. We'll be even more targeted once we fully roll out and do a full launch behind our personalized program, the app that we have out there, in some of our stores. And so we're excited for that and the additional benefit that it will provide.

Next question comes from the line of Robby Ohmes with Bank of America.

Two follow-ups to Oliver's questions. The first, just can you give a little more on the gross margin increase? I understand the buying could be better, but also, I think you in the IOs price usually to a certain gross margin. And you also mentioned execution as part of the gross margin benefit. Can you give an example of what you mean by that? Is that less clearance, less shrink? And maybe how should we think about gross margin for next year versus these really strong gross margins you're putting up now? Is this the new sustainable gross margin we should be thinking about for you guys? That would be my first question on gross margin.

Yes. Robby, it's Charles. Thanks for the question. Yes, we're really proud of the margin performance that we delivered. In the second quarter, It clearly was ahead of our expectations as we went into the quarter. And really a few factors at play as we look at it. Number one, we always talk about normal with our model to see the quarterly fluctuations just because of the nature of the buy and the ever-changing assortment. So I would describe the second quarter performance just as naturally at the higher end of that. Number two, yes, it is a favorable buying environment for us right now. We're seeing healthy deal flow across departments, which feels really good. And then lastly, a strong execution from the team that you can think about this as really end to end the way we manage inventory from the buy through supply chain, through allocations to store. And importantly, everything the operators do at store level to efficiently manage inventory and minimize shrink. So each of those players has an important part to contribute to overall margin management. And I'd say they're just executing really well, which we feel great about. And so as we look forward, I think you see this in our guidance for the back half of the year, we do expect that some of these things continue in terms of purchasing back half of the year, deal flow and backdrop continues to look really positive. We are expecting, as we always see normal seasonal moderation in margins as we move from Q1 -- first half to second half. And again, that has to do with product mix in the third quarter, so you can think about higher mix of salty snacks and sodas and bottled water and in the fourth quarter, the impact of Holiday Adam. So that's all factored into our back half guidance as it relates to margin. As we look forward longer term, for us, I think the recipe for success has always been -- we talked about managing for stable margins over the long term and always making sure that we're reinvesting in value back to the customer. So we've got a long list of what I'd say are margin driving improvements across buying, across IO ordering and allocations. But again, we always think about the flywheel of investing back into value and driving that customer excitement within the store in incremental traffic.

That's really helpful. And just a quick follow-up. Any difference in the sort of more discretionary like nonfood part of the assortment versus what the consumables food is doing?

No. No notable difference, Robby. What we're seeing strong growth really across the assortment, and it's the performance that we're seeing or that we're reporting is not related to mix.

Next question comes from the line of Krisztina Katai with Deutsche Bank.

Congrats, RJ and Erik, on the great results. I had a similar question, just to follow up on the gross margin, right? Just wanted to ask about the sort of the healthy buying environment. Is there anything that would tell you that maybe the buying environment is becoming permanently more favorable for Grocery Outlet as you are bigger, you have more importance with your vendors. And therefore, Grocery Outlet can essentially sustain structurally higher margins, and it wouldn't really have to go back to the pre-pandemic levels that you were really managing to before?

Yes. Thanks, Krisztina. I'll take that one. Yes, I already mentioned, really pleased with the buying environment, but it's also the activities that we're always involved in the investment we make. Our objective is always to be an even better partner to the suppliers that we work with. And just as a reminder, some of these relationships go back decades. As we grow, we do become a stronger partner. We do gain even better access to product. Part of the growth story for us has been, as we expand geographically, we open up opportunities for other distribution centers in areas where product is held that we can then take advantage of. So yes, there is structural benefit improvement that comes from growth, and we're always looking to get better. And we're certainly benefiting from that in the partnerships that we have and the access to product that it gives us and then the value that we're able then in turn to provide to our customers. As far as the current environment and where it goes from here, time will tell. It is -- it can be cyclical. It is cyclical, certainly, at the item level, by definition. Deals don't repeat themselves. And -- but we have relationships across many suppliers, and we're -- our capabilities are such that we're able to provide solutions in lots of different ways. And therefore, continue to gain even better access to product. As it relates to margin, I would encourage you to think about both opportunistic and everyday product together, contributing to some of the more recent margin performance. It's less about, yes, strength of opportunistic helps, but the mix is generally balanced and healthy. And from an execution standpoint, we continue to get better at managing value together with margin for both opportunistic and everyday products. So like where we're at, certainly like the view that we have to the end of this year, and we'll just continue to manage the business in that way looking forward.

And just as a follow-up, so it does sound like the IOs are feeling pretty great, and thank you for all of those statistics that you gave us. But how are they feeling -- one is just on the inflation front. Are they at all concerned about any potential promotional activity that could be ramping up from bigger peers that are losing market share? Or is vendor support is ramping up? And just how are they viewing the price gaps relative to peers?

Yes. I'd say that they, together with us in terms of promotional environment, continue to see it remaining relatively stable. We have seen, I'll call it, a slight uptick in some promotional activity. But overall, other retailers are remaining very rational. They continue to be more targeted and specific and some of the discounts that they're offering, and the promotions that they apply. Operators keep a close eye on that. We keep a close eye on it as a value retailer. So it's remained very, very stable. We will continue to watch it closely. Again, our model very flexible. We've been in this business for a long time regardless of how the promotional environment changes or increases or what have you. We will continue to manage our assortment and pricing to continue to offer great value to customers, and that's why they love us and continue to shop with us. So -- yes, not overly concerned. I haven't seen a whole lot of changes recently. And wherever it goes from here, we, together with operators, I think we'll manage it just fine.

Next question comes from the line of Joe Feldman with Telsey Advisor.

In quarter, I guess, what are you guys seeing in terms of the health of the consumer? It sounds like you're seeing a lot more frequency. The basket is holding up. I guess I'm curious if you're just seeing customers trading down like more affluent customers shopping more often or maybe buying differently within categories at all. Just anything about the health of the consumer would be great.

Yes, sure. Yes. Thanks for the question, Joe. Yes, we to be encouraged by what we're seeing with consumer and shopping patterns and behaviors. I'd say it's all the same positive trends that we mentioned on our last call. We continue -- which is great. We continue to see strong all income levels. So we think about different customer types and how they shop us and their strength more broadly across those different segments. We are still seeing an acceleration of new customer shopping stores. So of course, we love that. The operators are seeing them in their stores every day, and they're interacting with them and educating them on the model. So that's a very positive trend for us and a driver of the same-store transaction count increases that we've seen throughout the year. Our survey data continues to show that there are more higher -- middle to higher income customers shopping with us, suggesting that they are changing their behaviors. They're coming to us for value on the great brands and items that we're offering. And then we've also seen an increase in trip frequency overall spend from our existing customer base as they too are really resonating -- values are really resonating with them they've increased or we've increased our share of wallet with them. Customer satisfaction, as mentioned, is high. Intent to shop more in the future is high. And I'd say beyond just the backdrop, of course, which is supportive, the initiatives that we are pursuing further support these positive trends. I already mentioned investments that we're always making in opportunistic purchasing. We continue to strengthen our everyday assortment, making sure that it is the most relevant assortment of items, brands, of course, value always for the customer. And then together with I'd say if some more recent initiatives around e-commerce, we've got more personalized communication here in front of us with the app and certainly many other initiatives that we're investing in to drive the business forward. So -- yes, a lot of positive trends that have been playing out throughout the year as it relates to the customer.

That's excellent. And then just as a follow-up, I think I heard you guys say correctly, if I heard it correctly, I mean, that you would consider opportunistic real estate and small regional acquisition opportunities, which I know you've obviously, you did that in Mid-Atlantic. But are there some things that you're preparing us for or things that you might see ahead that you're excited about?

Yes. So -- yes, sure. So let me give you a think of them, Joe, as within several activities that are underway right now as we are going after the tremendous white space that's available to us. First, I'd just remind or say again that we continue to invest in resources, bringing in new team members to support the real estate and construction process. One notable recent hire is Calvin Cheung. He joined us several months ago as Chief Store Development Officer overseeing real estate, construction, facilities management. He brings a wealth of experience and leading the team and our effort to scale and expand capabilities for growth. I'm really excited about some strengthening partnerships that we have with external partners, one in particular, some new strategic relationship discussions that we're having with large property owners as a way to complement the traditional organic growth efforts that we've had underway. And then in addition to all of that, to your question, yes, we are considering opportunistic real estate lists as we talked about on the last call from retailers that have gone out of business and liquidating and the real estate is available, plenty of other instances where retailers are closing locations, closing stores and list of becoming available where we may have an opportunity to capture several of those more than one at a time. So we like that. And then we're also considering small regional acquisitions. And what's important here is thinking about these that would line up with our geographic strategy and also store growth and long-term growth plans. And so all of these things together certainly, a lot underway all these things together, we think about them as supporting future growth in the same -- at the same rate and along the same lines that we've always talked about it. But we love that we have lots of different avenues for that. And again, given the white space and the potential with this business, those are interesting conversations to be having right now.

Next question comes from the line of Leah Jordan with Goldman Sachs.

I wanted to check in on the new store pipeline. Your total count was reaffirmed, but does seem like 2 or 3 may have slipped from the third quarter to the fourth quarter for this year versus your prior guide. So just curious what's driving that? And if you could provide a status update on how the pipeline is building for '24 and into '25, as well any commentary on the permitting and construction environment?

Sure. Yes, Leah, it's Charles. Let me take the first part of your question with respect to store count for 2023. So no change to our initial guidance for the year in total. We expect to open 8 stores, as I mentioned, in the third quarter. So you're always going to get a little bit of a shifting from quarter-to-quarter. But I would describe the back half overall is very consistent with our expectation going into the year. And then RJ?

Yes. Yes. Regarding 2024 and how years, Leah, continue to work on growing the future store count. As I just mentioned, the work includes organic growth, together with consideration for opportunistic real estate as well as smaller regional acquisition opportunities along with some additional new partnerships that complement our own internal activities. Some of the activities are new as it relates to opportunistic real estate and of course, consideration of regional acquisitions. They're interesting for us, again, given the white space that we have. All of these activities are in progress right now. They're all interconnected. And we're in the process right now of evaluating it all together within the context of targeted growth over the next, call it, 12 to 36 months. And we'll plan to provide a further update with more specifics together with what would be full year 2024 guidance during our February Q4 call.

Okay. Great. And I just wanted to follow up on the customer health kind of conversation. I want to touch on SNAP customers specifically. Could you add any color on how those customers' behavior trended throughout the quarter? And are you starting to see some normalization there?

Yes. Leah, it's -- I think, playing out very consistently with our expectations. So we've always talked about for us, we don't view a reduction in SNAP benefits as a headwind. If you think about our model, and it appeals very much to that value-oriented consumer. And we can see that when we look back over time, we'll possibly comp through cycles of reduced SNAP funding. And SNAP benefit reduction you think about, it's just one more thing that's adding cumulative pressure to that consumer and encourage and then to stretch their dollar. And we expect over time that will continue to be a traffic driver for us. So far in '23, we've seen that migration just in tender type as the SNAP benefits have been reduced. And I think you see that in our healthy comp and traffic trends.

Next question comes from the line of Karen Short with Credit Suisse.

I hope you're all well, good to talk to you. So a couple of questions I had. The first question is -- can you give us some sense of what the comps are on the East Coast on the East versus the West? And then can you give some sense of what the actual interest rate is for the IOs today versus what they would -- what you charge them as an interest rate versus what they would have to have as an interest rate as a totally independent operator? And I have 2 more questions.

Yes. Karen, it's Charles. Let me take the first part. So regional performance, particularly in the East, we're really pleased with newer regions. I'd say both Southern California and Mid-Atlantic, both of those continue to post kind of company-leading comps on both the current year basis and on a multiyear stack basis, which feels great. And so driving increased brand awareness and trial into the stores and continue to densify those regions, we're seeing kind of the momentum build, which we feel great about. And then as it relates to interest rates for the IO. So keep in mind, it's a fixed interest rate that we charge IOs. So it's a standard 9.95%. So that number has not changed as kind of variable interest rates have increased.

And that number has not -- but you're done with forgiving that interest rate, right?

We do not forgive the interest rate. If a store is on TCAP, we will reduce the interest rate for those stores, which we continue to do. But overall, interest rates are flat.

Okay. And then my second or third question is, so you said new customers are driving ticket. And so -- and then we obviously have inflation, but ticket is flat. So I guess when you have new customers driving ticket and you also have inflation that would drive ticket, why is ticket flat?

Yes. So, the comment is that new customers are a notable component to transaction count increases, not ticket.

Okay. But then ticket in general, why would that be flat with high inflation?

Again, moderating for us. Our model mutes the impact of inflation. And so we're still seeing some inflation flow through, but it's moderated as we move through the year, we would expect that to continue to be the case. And the units, as I mentioned, slightly down versus the prior year. And you can think about that having -- or being impacted by higher trip frequency as customers are making those incremental trips to stores.

Next question comes from the line of Mark Carden with UBS.

So obviously, you guys posted a really strong traffic number this quarter, and it sounds like you're doing well across all income levels. What are you seeing from some of the customers that you've acquired over the past few years? Are you holding on to more than you would have expected? How does your customer retention compare, I guess, to the prior cycles of elevated growth?

Yes. So Mark, thanks for the question. We don't track specific customer transactions. That will be a new capability that we have that will come with the personalization app. So we can't speak specifically to customer trends and how we're seeing the basket changing, et cetera. What I can say though is speaking more generally to retention and stickiness of the model. A lot of positive trends and data that we see in the customer survey. I already mentioned some of that already around high satisfaction levels and tend to shop more with healthy inventory levels, value, treasure hunt, all the things that we're doing from an assortment standpoint. And then for the operator, providing great customer service and educating customers, new customers on the model, there's a tremendous amount of stickiness and retention that comes from that for those that the model resonates with. Not all customers, right? We're very specific differentiated model. And so not for everyone, but for plenty of people that are looking for value, they have and will continue to shop us more frequently or they'll return as more loyal customers. We referenced '08, '09, just as a time period, certainly many different dynamics, but it was a time period where we had a really high increase in new customers shop in our stores. And then as the economy improved, many of them stuck with us, and we continue to comp positively. So we're a better, stronger company today than we were back then. And all of the feedback that we get from consumers and what operators are seeing every day in their stores, we feel really good about future retention and continued growth.

Okay. Great. And then as a follow-up, just another question on real estate. If you guys did find a suitable acquisition, would you taper back planned new store openings to keep that 10% unit growth number? Or would you expect for it to be incremental?

Yes. No, not incremental. As best we can manage it. We do want to stay disciplined and measured at the rate -- that 10% rate that we've talked about growing over the long term. And we think that's a healthy way to grow. We never want store count or store growth to be ahead of investments that we're making in the business. Real estate is just one part of it. But yes, you have to and we do manage and consider -- think a lot about investments throughout the business to support growth, whether it's operator recruiting and training, certainly inventory and supply chain, everything related to new markets, growing awareness and driving trial and then retaining future loyal customers. And so there's just a lot that goes into it. And as best we can as we think about all these components, whether they're acquisitions or real estate blocks that we're able to take advantage of, together with organic growth. We'd look to try to keep that at that same rate that we've always talked about.

[Operator Instructions]. Next question comes from the line of John Heinbockel with Guggenheim Securities.

I'm going to beat the gross margin horse a little bit further. What are you seeing with shrink and mix? And I'm curious, right, even during the best days of 2020, gross margin didn't perform this well. What do you think is different? Is there less competition for opportunistic purchases? Is it more disciplined right on how you're pricing that? I'm just curious what is different today, if anything, versus a couple of years ago?

Yes, John. It's Charles. Let me answer the point you referenced there on shrink and then I'll turn it over to RJ. But as it relates to shrink and clearly, there's been a lot of headlines on this topic out there. We have fortunately have not seen a significant change in our historical shrink rates. And probably a couple of factors at play when you think about our business, number one, of course, got lower value price points. But number two, and probably more importantly, is just the IO control of the store and that customer local connection that they have. And the fact that they've got a shared that we have a shared gross margin management, inventory management incentive with them. So I think that really motivates them to keep close eye on shrink. And as a result, we're seeing very consistent performance.

And you'd asked about mix as well within that question. Generally, pretty balanced. It does fluctuate -- the assortment is always changing, but generally, the mix is pretty balanced. The -- and then to your question on opportunistic strength, it continues to be a really dynamic with plenty of disruption still in the supply chain. We did anticipate as capacity was coming online, production lines were increasing reaching this point where there would be even more product available than is always available on a kind of a regular steady-state basis. So that has continued to be the case throughout this year. Product innovation has come back pretty strong with suppliers that always yields product. And a lot of adjustments, generally speaking, with the state of work remote, work in the office, as suppliers are looking to meet those needs. And so all of that is yielded product. And then again, together with what I've already mentioned is the work that we do to continue to offer even better solutions and stronger partnership with suppliers that we work with, and that's really benefited us as well. And hats off to our entire team and the relationships that we have and maintain the partnerships where we work together and strategically with suppliers, just working really well right now, and it's from a lot of hard work and effort from the team and the people that we partner with.

All right. And my follow-up would be, when is the portal going to be out there? And what do you think -- if you had to pick 2 elements of that, that will be the most impactful for the IOs. What would that be? I'm sort of curious in terms of so many items, elasticity. Is that one of the that would allow the IOs to price more opportunistic if they haven't to date?

Yes. We're really excited about the portal, together with some other system enhancements that we will be implementing this quarter. So it's here being implemented very soon. And then yes, in terms of benefits for the operator, gosh, so many. I think, John, the first thing that comes to mind is just easier access to information and access to new information that they've not seen before, at least not in the format that it will be available. And then with that, comes better decision-making, faster, better decision-making around inventory, around ordering, around managing the mix, really in all aspects for how they manage their business, which is a huge benefit, so which to grow sales and improve margin. And then the other benefit that I would mention is just efficiencies. So certainly, you've talked about rise in costs, operating expenses, labor, et cetera, challenges that we, together with operators, have managed through for a long time now, but this new platform portal will allow them to operate even more efficiently, better use of their time, reallocate it to spend time with customers, or operate the P&L more efficiently to help them with their income growth.

Next question comes from the line of Corey Tarlowe with Jefferies.

Great. I wanted to ask on category performance? Or maybe if you could talk a little bit about dry grocery performance versus fresh and then maybe any incremental details you can add on the NOSH category that's continued to grow very nicely.

Yes. So categories, I'd say, in general, really strong broad-based across the assortment. I wouldn't necessarily call out 1 versus the other. So there's really strength across the basket, which of course is a good place to be. And then NOSH, NOSH natural, organic, specialty, healthy that, of course, lives across departments, I mean really throughout the whole store. We have really nice penetration of NOSH within the basket and continues to be -- if I can call it a category or an attribute anyway, a set of attributes that continue to drive our comps. So we see some of our higher growth items, some of the best values and some of the more exciting items for customers. within the NOSH category, and we do expect that to continue to grow as a percentage of total sales.

Great. And then just a quick follow-up on what you're seeing quarter to date. It looks like you've guided for, I think, a 6.5% comp for the third quarter, but you've comped, I believe, around high single digits or low double digits so far this year. So what kind of informs that? Is that what you're seeing presently? Or is that conservatism? Just any color there would be helpful.

Yes. We're really pleased with the start to the third quarter. And again -- you can think about comp dynamics that we saw in the second quarter really continuing to traffic continues to be very strong. As it relates to the guide for the year, for the balance of the year and the third quarter specifically, -- we've looked at a variety of stacked comp metrics and implied average weekly sales on a seasonal basis. But the big factors there are we're lapping higher comps in the back half of last year. So I think kind of mid-teens and just continue to be cognizant that the overall macro consumer environment is fluid, but we love the momentum that we're seeing.

Next question comes from the line of Mike Baker with D.A. Davidson.

I just wanted to ask about the online business. What are you seeing there?

Yes, e-commerce continue to be pleased with some of the results there. We're seeing nice incremental sales. We were active across the 3 major platforms, Instacart, DoorDash, Uber Eats, and still with plenty of room to grow as we you think about developing other channels within e-commerce. We continue to be delivery only, which is just a percentage of the total channel, and we'll look to enhance that in the future, but everything is working great online.

Can you -- any quantifications, what percent of the chain is that in? Can you remind us that? Or any -- what percent of sales, any way to modify or actualize it?

Yes. It's in all stores. So all stores are active on those platforms, but it's a small percent of sales. We haven't disclosed the specific penetration amount.

Next question comes from the line of Simeon Gutman with Morgan Stanley.

So this may be an easy one because I missed the beginning of it. Can you talk about what changed structurally or what changed with gross margin? And I did hear the earlier question about something maybe being structural. Just given how consistent your gross margins have been why shouldn't we take what we're run rating now as the right run rate going forward?

Yes. Simeon, it's Charles. We did address this earlier, I'll give you the quick summary here. So as we look at Q2 margin performance, yes, stronger than we expected going into the quarter. Really proud of the number that we posted. And as we look at that, a few things that we point to, number one is we always talk about is normal given our buying model to have these quarterly fluctuations is the assortment is ever changing. And so we think Q2 was just naturally at the higher end of that normal quarter-to-quarter variability. Number two, the buying environment, we're seeing some great tailwinds there. So healthy deal flow across departments and across categories, which is benefiting us. And then number three, the team has just -- has been doing a fantastic job. And I'd say that's end-to-end from purchasing through the warehouses, all the way to stores and everything that the operators do to effectively manage inventory at store level. So all of those benefits in the second quarter. As we look towards the back half of this year, we think a lot of those things continue. We think the deal opportunistic buying backdrop continues to be favorable. Just to remind you, we do always have seasonal margin moderation in the back half of the year due to summer product mix and holiday product mix. But just feel great about how the team is executing across the business.

Okay. Helpful. And sorry for repeating. The other question is does -- this is logistics. Does the IO have discretion to set a price or it's company given and everyone conforms to the IO can move price around based on their market, based on what they want to do in their store.

They can. Yes, they did we set price essentially to start and then they have the autonomy to adjust some prices based on what you just said, market dynamics, competitive factors, et cetera. And it's a great part of the model.

Okay. Has there ever been a call-out as far as something that's been margin-enhancing or margin degrading where enough of that happens in your system? Or is it -- I don't think we've ever talked about that just on outside question.

No. It's a small number of items, Simeon. So no.

There are no further questions at this time. I would like to turn the floor back over to RJ Sheedy for closing comments.

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