Grocery Outlet Holding Corp. (GO) Earnings Call Transcript & Summary

Yes. Look, I don't know I think people were so focused on execution and responding to the customer and keeping up with overstock, I think promotion for a period of 5 or 6 months probably took a back seat, particularly if you thought about the logic of promoting something that you weren't sure you could get, given the average lead time for most retailers, just were a total mismatch. So we have -- you said something that resonated, we have been very focused on the gap. We are relentless about price checking and keeping our eyes and our tabs on where are we relative to others in the marketplace. And others -- look, we look at the toughest competitors in a marketplace, whether it's a super Walmart that has a full offering and complement a food or it's a WinCo or it's an Aldi. We want to know where we stand, and we want to drive the value to our customers as deep as possible and keep that delta spread. So that's just the philosophical perspective we have on pricing no matter what the marketplace is. I would say, post-COVID return to normal, highly promotional environment, we've lived through those times. It's probably been more of the environment we've been in than last. So very used to that, and I think we'll just sort of roll with those punches as they come. It's, I think, important and probably instructive to just describe the way our merchants work, particularly on the opportunistic product. So thinking about 5,000 SKUs or so in a store on any given day scanning through the register, but over 100,000 SKUs scanning in an average year. And what that is, it's just great turnover of opportunistic products. So the average buyer is looking at inventory today to write in the PO to have come in sometime in the next couple of weeks and get in front of the customer in the next 2 to 3 weeks. Many of those items have not been seen yet. So because of the substitution effect of the buying and the merchandising, we're trying to keep categories and subcategories for. We're not trying to keep slots on shelves full through a planogram. So it gives the merchant a great ability to price in a variable way. It takes a little bit more human interaction, but I think it's a great advantage when prices are moving around and promotional environments are coming on and going off. And it gives our merchants the opportunity to decide what the price is going to be, and we haven't seen the product in front of the customer yet. So that -- we think that is a strategic advantage for our merchants. And if you look at the stability of the merchant product line, over 15 or 20 years, it's been very, very stable. And I think that is one of the reasons why is because of the way we buy and the way we price.

That's helpful. There are two questions that we get as people are learning about your story that people see as a -- or want to understand better if there are potential risks. And one of them is your e-commerce penetration. Has the increased digital adoption among customers during the pandemic caused any change in your outlook towards e-commerce?

I would say we've maintained sort of a guarded outlook on e-com for Grocery Outlet. Look, we start from the place that it's not economical for anyone doing it. There are some very, very large businesses out there where they allow the margin to be eroded because it's good for the overall business for the omnichannel of that retailer, but the activity of delivering groceries to one's home is not a profitable endeavor. I'm not sure it ever will be. So just structurally, there are issues. I think there are ways to peel back from that, that the consumer will be very interested in, particularly in COVID times, and that would be the buy online, pick up in-store, the curbside model, which we think we could execute. We don't have the strategy to do it today, but we think we could. The other alternative is have someone else do the shopping and picking for you and deliver it, and that would be the Instacart model. We've looked at all of them. I think the COVID has provided a sort of an acceleration towards an end for a lot of people and force many to get into that business. We haven't jumped into it head long. We've tested and trialed things with operators who have sort of an entrepreneurial bent and want to try things on their own. And I wouldn't say that the adoption has been massive, nor has it changed, I think, our point of view. Fundamentally, it's very difficult for us to replicate the WOW! shopping experience that you have in store, the treasure hunt and the shopping of sort of this discontinuity online, pretty hard to replicate. Does that mean that we won't develop something that is akin to a BOPUS strategy? No. We're not doing it today, but can we do it down the road and do it profitably? Yes, I think we could. So I guess the fundamentals of your question are has it changed our outlook? I think it might have just accelerated everyone's time line, including ours, but I can tell you, it's not part of our strategy for near term.

Okay. And then the second risk I was referring to was more of a nearer-term pandemic-related risk where people were concerned about how much closeout product you'd be able to get because of just how much demand there was in -- for food, but as you had pointed out, there was a lot of supply, given the disruption to hospitality, hotels, cruises, et cetera. I imagine just with things not much more open than they were before. This is still a good source of -- for product for you. How should we think about this longer term? Are you able to leverage maybe some of the relationships that you're gaining as a result of this disruption for the longer term?

Yes, absolutely. So just sort of as a -- perhaps a level setting on the model, we have a pipeline of old relationships that are really strong. So these are the relationships that go back many, many years. And we needed them and they needed us during COVID. I think the disruption that we've seen in the supply chain is probably not played out fully. Most manufacturers we talked to relayed to us that they were not going to get caught a second time being short shipping and out of stock and unable to take care of their large TRA customers. So they've built, I think, the safety stock that was sort of engineered out of the system in the last 25 years of just-in-time delivery, that everyone touted, and I think they got caught in a massive spike in demand without products. So I think that supply chain buildup will play out, I think, positively in the near-term for us. Second, I would say we continue to lean in and develop sort of the buyer as our sales force. Very different from any other model, akin to what you see in off-price with TJX and how much they have developed their buying force is what we're doing. So we've got a lot of people, a lot of younger talent coming in, and we're very focused on this new supplier acquisition that we've talked about in previous calls, and that is to go out and actually find and develop new relationships with smaller upstart fledgling suppliers of which there are literally thousands every year. We meet a lot of them formally twice a year at the Expo East and the Expo West, which we hope will come back online next year. It was obviously canceled in March as we prepared to go to that, but we've been able to replicate a lot of that virtually and online. We've had -- we've participated in every sort of virtual event, but I think the orientation we have is all about how do we get those suppliers to become long-term partners and trading partners for Grocery Outlet and that's what we're highly focused on. At the same time, we're looking for those larger opportunities to add particular SKUs to the mix. We pushed a lot on the fresh fish initiative last year. Prior to that, it was sort of a double down on the NOSH strategy, which has played out really well. So the buyers are -- they're kind of world travelers. They are always out looking for opportunities and trying to turn those suppliers into potential deals for our customers. And it's been a little bit tougher, I would say, through COVID, but it's also been, I think, eye-opening to just how flexible the model has proven to be.

Great. And then one of my last questions, and then we can turn it over to the audience for any questions they might have. [Operator Instructions] But my last question was just on cash, cash flow. You utilize your incremental free cash flow in paying off debt in the previous quarter. We wondered if you could maybe talk through your thoughts on repositioning and plans pertaining to debt repayments and CapEx? And does your improved cash position can pull any investments forward?

Sure. Kate, it's Charles. So we feel really good about our cash and liquidity position today as we talked about on the call. We had -- we paid down the revolver draw that we made as a precautionary measure. Our first priority for cash is continuing to invest in growth. So we feel great that our model generates enough -- plenty of cash internally for us to do everything we want to do from a CapEx perspective to invest in the 10% annual unit growth target and all of the associated investments we make to infrastructure and systems and people to facilitate that growth. I think with COVID, we have taken a conservative approach and just said, let's continue to build cash on the balance sheet and just preserve flexibility given that none of us have a crystal ball in terms of how exactly this plays out until we get a vaccine. I think following COVID, that will be the right time for us to revisit the conversation and establish a long-term leverage target with the Board and then discuss the appropriate uses of excess cash once we achieve that leverage target.

Great. Just moving over to questions from the audience. We just have one right now, but it has to do going back to your digital strategy. The question is, "what types of functionality are you envisioning that you can provide customers with a mobile app? Do you envision providing product coupons or do you have a more futuristic vision of shopping inspired by flash sales?"

Yes. We're the latter. I mean, coupon is certainly a mobile platform for us. We would want to build it that the customer uses it. The stat that always pops up for me is that we have the average consumer, 60 or 70 apps on our phone, and we use about 10 of them. So how do you develop features and a common benefit for the customer that they want to use that when they're in the store or when they're thinking about you. So that would be the goal. We know that our customers love games. So there's a way of sort of gamifying the shop. That's one idea. Probably the biggest idea for us is just -- I mentioned earlier that we've done the hard work of building the platform, which is a big effort to have. Product inventory that's discontinuous across all of the stores be located for a particular location and have that data be accurate and then match that up with a selected desire from the customer to communicate across either the entire assortment or just particular assortments, whether that's the natural organic specialty or it's refrigerated cheese or it's wine or it's specialty chocolate. So give that customer the ability to see a few select deals that are coming and going in scarce supply and be able to do that on a device that they interact with. We think that's a pretty big idea. We think that will be really successful. You've got all the other features that go along with sort of store mapping or geolocation or just sort of gamifying the visit. We have something that you do if you ever shop the store, we circle the savings. The savings is the collection of items, and it's the delta difference between what you paid, and what you would have paid at a regular retailer. So that power of sort of circling and reminding the customer every time you save $35, you shopped and spent $22, it's pretty powerful. So many of our stores do a drawing based on those receipts, and that's a way we can collect information on the customer by providing e-mail. We think that's a way that we could potentially gear up sort of the chance to win inside the stores. Obviously, you've got coupons, you've got promotions. You've got all sorts of sort of engagement tools that we're paying attention to, but we think there's a lot there. Some of it in development and certainly be something we'll talk about in the future.

Okay. Great. In these last couple of minutes, we have one more question, a little bit bigger picture of a question and that, do you, Eric, look at other management teams or business models? Or do you have -- do you look at other management teams or business models that you look up to and think of things they did in a particularly insightful way? And are there any examples of how they can be applicable to Grocery Outlet?

Yes. It's a long answer. Maybe we can take it offline, but part of our development along the last 20 years has been to knock on different businesses along the way, doors and understand something about what they do. Give you some examples, customer service at In and Out Burger, just sort of hiring and training is a local retail restaurant. Chick-fil-A, they have a franchise model. It's very, very much like the Grocery Outlet, independent operator model. We spent time with their team. They've spent time with our team or their team spent time with our team talking about technology. We've gone back and spent some time with a convenience store operator in Pennsylvania. That's 1 of the 2, I think, most celebrated private companies just to understand the way they build food that is different than what they could just buy through a wholesaler, a commissary food product in their stores. So look, it's -- we're curious people and along the way, it doesn't have to be a Grocery model. It can be just something that's in the consumer's mindset that's really impressive, and we make a habit every year picking 1 or 2 of these businesses to go a little deep with and try and learn something that we can apply to our business.

That's great. Thank you so much for answering these questions. Thank you so much for joining us today. And yes, we wish you lots of the rest of your meeting. Thank you so much.

Thank you, guys.

Thank you.