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Item 2 — Management's Discussion and Analysis
Grocery Outlet Holding Corp. · 10-Q · Q2 FY2026 · Period ended Jul 4, 2026
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You should read the following discussion of our financial condition and results of operations in conjunction with the unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Form 10-Q, and the audited consolidated financial statements and related notes thereto and management's discussion and analysis of financial condition and results of operations included in our 2025 Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in other sections of this report. See "Special Note Regarding Forward-Looking Statements" in this report.
We operate on a fiscal year that ends on the Saturday closest to December 31st each year. The fiscal years ending January 2, 2027 (“fiscal 2026”) and ended January 3, 2026 ("fiscal 2025") consist of 52 weeks and 53 weeks, respectively. References to the second quarter of fiscal 2026 and the second quarter of fiscal 2025 refer to the 13 weeks ended July 4, 2026 and June 28, 2025, respectively.
As used in this report, references to "Grocery Outlet," "the Company," "the registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Overview
We are a growth-oriented extreme value retailer of quality, name-brand consumables and fresh products sold primarily through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Our Grocery Outlet stores are primarily run by entrepreneurial independent operators ("IOs") who create a neighborhood feel through personalized customer service and a localized product offering. As of July 4, 2026, we had 547 stores in California, Washington, Oregon, Pennsylvania, Tennessee, Nevada, Idaho, Maryland, North Carolina, Ohio, Virginia, Georgia, New Jersey, Alabama, Delaware and Kentucky.
Recent Trends and Developments
The extent of the continuing impact of the factors set forth below on our operational and financial performance will depend on many factors, including certain factors outside of our control.
Macroeconomic Conditions. Over the past several years, our business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, varying rates of inflation, tariffs, fuel price increases and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their businesses. In recent periods, comparable store sales have been negatively impacted by decreased average transaction size. We are actively pursuing initiatives to increase average transaction size through our deployment of enhanced in-store merchandising and execution to further improve the shopping experience.
Tariffs, such as those recently implemented or proposed by the U.S. government on goods imported from other countries, may result in cost increases on some of the products we sell, such as fresh meat and general merchandise that we import from impacted countries, as well as the materials and supplies we use for store construction. Tariffs may also negatively affect consumer sentiment. The tariff environment remains highly dynamic and specific tariffs applicable to our business continue to evolve. While we are regularly re-evaluating the potential impact of implemented and proposed tariffs, the short-term impact of price increases due to tariffs is largely dependent on our ability to negotiate with suppliers, opportunities to change sources of supply, our assortment decisions and whether or not we pass the effects through to our customers, which will largely depend upon competitive market conditions. It is reasonably possible that new or additional tariffs will be periodically implemented or proposed given the current global trade environment. Sustained uncertainty about, or worsening of, current global economic conditions and further tariffs and escalations of tensions between the U.S. and its trading partners has and could continue to adversely impact the stability of global financial markets and result in a global economic slowdown and long-term changes to global trade, which could in turn have a material adverse impact on our business and financial condition.
In February 2026, the Supreme Court of the U.S. issued a ruling striking down certain tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA"). In the second quarter of fiscal 2026, we applied for tariff refunds, and refunds received have not been material. The ultimate availability, timing, and amount of any potential additional tariff refunds remains uncertain and is subject to further legal, regulatory, and administrative developments. Subsequent to the ruling, in February 2026, the U.S. presidential administration invoked additional tariffs under other laws resulting in a rapidly changing tariff environment. In July 2026, these additional tariffs expired, and the U.S. presidential administration announced new tariffs, which we are assessing the impact. At this time we cannot reasonably estimate the total financial impact of recent tariff developments and however these and any additional tariffs may materially affect our future results of operations and cash flows.
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Pricing Competition. During the last few years we have observed an increase in promotional and pricing activities from key competitors, putting further pressure on our relative value proposition, which in turn, has resulted in our increased efforts to actively negotiate costs and adjust prices to sharpen our value proposition. We have invested and plan to continue to invest in additional promotional activity in the near term, which adversely impacted gross margin in the first half of fiscal 2026 and which we expect will continue to adversely impact gross margin through the third quarter of fiscal 2026.
Opportunistic Product. We continue working to increase opportunistic product levels to what we believe is necessary to improve the perception of our value leadership and drive sales. As of the second quarter of fiscal 2026, comparable sales from opportunistic product has improved relative to the first quarter of fiscal 2026.
Optimization Plan. We initiated a business optimization plan during the first quarter of fiscal 2026, intended to strengthen long-term profitability and cash flow generation, improve operational execution, optimize our existing store footprint and align with our disciplined new store growth strategy (the "Optimization Plan"). The Optimization Plan provides for the closure of 36 financially underperforming stores ("Closure Stores"), including the termination, sublease or assignment of the applicable store leases; the termination, sublease or assignment of a lease for a distribution center facility that we are no longer utilizing (together with the store leases, the "Lease Exits"); and the termination of operator agreements with IOs for the Closure Stores as well as certain other store locations (the "Operator Agreement Terminations").
We estimate that we will incur between $15 million and $24 million in net total restructuring charges in fiscal 2026 and fiscal 2027 related to the Optimization Plan, and we expect these actions to be substantially completed by the first quarter of fiscal 2027. We incurred bad debt expense of approximately $15 million and cash costs of approximately $3 million in connection with the Operator Agreement Terminations. We have negotiated, or intend to negotiate, a lease termination, sublease or assignment with the landlords of the Lease Exits. We expect to incur net restructuring charges for the Lease Exits totaling between $(3) million and $6 million, which primarily include cash costs of between $50 million and $60 million for lease termination fees, costs to prepare the premises for surrender to the landlords, sublessee or assignee, and idle property costs, partially offset by the net non-cash write-off of the right-of-use assets and lease liabilities associated with these leases of between $(53) million and $(54) million.
During the first half of fiscal 2026, we closed all 36 Closure Stores, and we substantially completed the Operator Agreement Terminations. In addition, we negotiated lease terminations with the landlords for certain of the Lease Exits and wrote-off the right-of-use assets and lease liabilities associated with these leases. We also entered into a sublease for the distribution facility we are no longer using. For the leases associated with the Lease Exits, we incurred costs to prepare the premises for surrender to the landlords and idle property costs, net of proceeds received from sales of assets.
See Note 12 to the condensed consolidated financial statements for additional information regarding the Optimization Plan, including the costs incurred and restructuring liability activity.
New Store Growth. Our new store growth efforts are focused on organic growth combined with complementary real estate opportunities that align with our long-term geographic expansion and store growth strategies. Complementary growth opportunities may include expanding strategic relationships with large property owners, evaluating acquisitions of opportunistic real estate that become available through consolidation in the retail sector, and exploring strategic regional acquisitions of operating businesses.
Excluding the Closure Stores related to the Optimization Plan, we opened 13 net new stores in the first half of fiscal 2026, and we plan to open 30 to 33 net new stores for the full year fiscal 2026. We have begun to expand with a more clustered location model in new markets to improve supply chain efficiency and marketing leverage that reflects our more disciplined approach. We also have started to make adjustments to how we go to market, including piloting new approaches to store openings and underwriting to stricter standards. For example, we are operating certain of these new stores as Company-operated stores initially, which differs from our historical practice, before eventually transitioning the operations to an IO.
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Key Factors and Measures We Use to Evaluate Our Business
We consider a variety of financial and operating measures in assessing the performance of our business. The key financial measures we use in accordance with accounting principles generally accepted in the United States of America ("GAAP") are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A"), operating income (loss), net income (loss) and comprehensive income (loss) and earnings (net loss) per share. The key operational metrics and non-GAAP financial measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share.
Second Quarter of Fiscal 2026 Overview
Key financial and operating performance results for the second quarter of fiscal 2026 compared to the second quarter of fiscal 2025 were as follows:
•Net sales increased 1.1% to $1.19 billion.
•Comparable store sales declined by 0.3%, driven by a 2.1% decrease in average transaction size, partially offset by a 1.8% increase in the number of transactions.
•Gross margin was 30.2%, compared to 30.6% in the second quarter of fiscal 2025, a decline of 40 basis points.
•We opened 10 new stores and closed 12 stores, including 9 stores as a result of the Optimization Plan (see Note 12 to the condensed consolidated financial statements for additional information), ending the second quarter of fiscal 2026 with 547 stores in 16 states.
•Operating income was $15.8 million, which included $5.4 million in net restructuring charges related to the Optimization Plan (see Note 12 to the condensed consolidated financial statements for additional information).
•Net income was $5.6 million, or $0.06 per diluted share, compared to net loss of $5.0 million, or $0.05 per diluted share, in the second quarter of fiscal 2025.
•Adjusted net income(1) was $20.3 million, or $0.20 diluted adjusted earnings per share(1), compared to $22.8 million, or $0.23 diluted adjusted earnings per share, in the second quarter of fiscal 2025.
•Adjusted EBITDA(1) was $65.7 million, compared to $67.7 million in the second quarter of fiscal 2025.
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(1)Adjusted net income, diluted adjusted earnings per share and adjusted EBITDA are non-GAAP financial measures, which exclude the impact of certain special items. Please note that our non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including their definitions, how the non-GAAP financial measures provide useful information to investors and how management utilizes them, and reconciliations of the non-GAAP financial measures and the most directly comparable GAAP financial measures.
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Results of Operations
The following table summarizes key components of our results of operations both in dollars and as a percentage of net sales (amounts in thousands, except for percentages):
13 Weeks Ended
July 04, 2026 June 28, 2025
Amount % of Net Sales (1) Amount % of Net Sales (1) $ Change % Change
Net sales $ 1,192,764 100.0 % $ 1,179,772 100.0 % $ 12,992 1.1 %
Cost of sales 832,046 69.8 % 819,079 69.4 % 12,967 1.6 %
Gross profit 360,718 30.2 % 360,693 30.6 % 25 0.0 %
Selling, general and administrative expenses 339,524 28.5 % 336,764 28.5 % 2,760 0.8 %
Restructuring charges, net 5,428 0.5 % 11,157 0.9 % (5,729) (51.3) %
Operating income 15,766 1.3 % 12,772 1.1 % 2,994 23.4 %
Interest expense, net 6,572 0.6 % 6,544 0.6 % 28 0.4 %
Income before income taxes 9,194 0.8 % 6,228 0.5 % 2,966 47.6 %
Income tax expense 3,568 0.3 % 1,267 0.1 % 2,301 181.6 %
Net income and comprehensive income $ 5,626 0.5 % $ 4,961 0.4 % $ 665 13.4 %
26 Weeks Ended
July 4, 2026 June 28, 2025
Amount % of Net Sales (1) Amount % of Net Sales (1) $ Change % Change
Net sales $ 2,359,116 100.0 % $ 2,305,339 100.0 % $ 53,777 2.3 %
Cost of sales 1,653,199 70.1 % 1,602,201 69.5 % 50,998 3.2 %
Gross profit 705,917 29.9 % 703,138 30.5 % 2,779 0.4 %
Selling, general and administrative expenses 686,546 29.1 % 667,842 29.0 % 18,704 2.8 %
Restructuring charges, net 23,619 1.0 % 45,032 2.0 % (21,413) (47.6) %
Goodwill impairment 158,000 6.7 % — — % 158,000 100.0 %
Operating loss (162,248) (6.9) % (9,736) (0.4) % (152,512) 1566.5 %
Interest expense, net 12,941 0.5 % 13,064 0.6 % (123) (0.9) %
Loss before income taxes (175,189) (7.4) % (22,800) (1.0) % (152,389) 668.4 %
Income tax benefit (493) 0.0 % (4,444) (0.2) % 3,951 (88.9) %
Net loss and comprehensive loss $ (174,696) (7.4) % $ (18,356) (0.8) % $ (156,340) 851.7 %
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(1)Components may not sum to totals due to rounding.
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Operating Metrics and Non-GAAP Financial Measures
Number of New Stores
The number of new stores reflects the number of stores opened or acquired during a particular reporting period. Newly opened stores require an initial capital investment from us for store build-outs, fixtures and equipment that we amortize over time as well as cash required for inventory and pre-opening expenses and typically the issuance of IO notes to support IO startup costs.
We expect new store growth to be an important driver of our net sales growth over the long term. We lease substantially all of our store locations. Our initial lease terms on stores are typically ten to fifteen years with options to renew for three or four successive five-year periods.
Comparable Store Sales
We use comparable store sales as an operating metric to measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales are impacted by the same factors that impact net sales.
Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following a store's opening, which is when we believe comparability is achieved, or the thirteenth full fiscal month following a store's acquisition. Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas. Excluded from our comparable store definition are those stores that have been temporarily closed for an extended period, those that have had their business materially disrupted for both planned projects as well as due to unforeseen circumstances, permanent store closures and dispositions. When applicable, as is the case with fiscal 2025, we exclude the net sales in the non-comparable week of a 53-week year from the same store sales calculation after comparing the current and prior year weekly periods that are most closely aligned. The 36 stores that were closed in March and April of 2026 as a result of the Optimization plan, as discussed further in Note 12 to the condensed consolidated financial statements, were excluded from comparable store sales beginning in February and March of 2026, respectively. Starting in the second quarter of fiscal 2025, comparable store sales include the addition of stores from the acquisition of United Grocery Outlet on April 1, 2024.
Opening or, on a limited strategic basis, acquiring new stores is a significant component of our disciplined new store growth strategy and, as we continue to execute on our growth strategy, we expect that a significant portion of our net sales growth will be attributable to non-comparable store net sales. Accordingly, comparable store sales is only one of many measures we use to assess the success of our growth strategy.
EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP financial measures that are supplemental key metrics used by management and our Board of Directors to assess our financial performance. EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are also frequently used by analysts, investors and other interested parties to evaluate us and other companies in our industry. Management believes it is useful to investors and analysts to evaluate these non-GAAP financial measures on the same basis as management uses to evaluate our operating results. We use these non-GAAP financial measures to supplement GAAP financial measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. In addition, we use adjusted EBITDA to supplement GAAP financial measures of performance to evaluate our performance in connection with compensation decisions. We believe that excluding items from operating income (loss), net income (loss) and earnings (net loss) per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides additional information for analyzing trends in our business.
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We define EBITDA as net income (loss) before net interest expense, income taxes and depreciation and amortization expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, asset impairment and gain or loss on disposition, acquisition and integration costs, costs related to the amortization of inventory purchase accounting asset step-ups, restructuring and related charges, goodwill impairment and certain other expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude. Adjusted net income represents net income (loss) adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for the amortization of property and equipment purchase accounting asset step-ups and deferred financing costs, tax adjustment to normalize the effective tax rate, and tax effect of total adjustments. Basic adjusted earnings per share is calculated using adjusted net income, as defined above, and basic weighted-average shares outstanding. Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted-average shares outstanding. These non-GAAP financial measures may not be comparable to similar measures reported by other companies and have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of the non-GAAP financial measures through the use of various GAAP measures. In the future, we will incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income. Our presentation of these non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive such non-GAAP measures.
The following table summarizes key operating metrics and non-GAAP financial measures for the periods presented (amounts in thousands, except for percentages and store counts):
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 July 4, 2026 June 28, 2025
Other Financial and Operations Data
Number of new stores 10 11 17 22
Number of stores open at end of period 547 552 547 552
Comparable store sales increase (decrease) (1) (0.3) % 1.1 % (0.6) % 0.7 %
EBITDA (2) $ 47,881 $ 44,106 $ (98,977) $ 51,495
Adjusted EBITDA (2) $ 65,656 $ 67,747 $ 108,772 $ 119,632
Adjusted net income (2) $ 20,295 $ 22,766 $ 24,904 $ 35,773
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(1)Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved, or the thirteenth full fiscal month following the store's acquisition.
(2)See "GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.
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GAAP to Non-GAAP Reconciliations
The following tables provide reconciliations from our GAAP net income (loss) to EBITDA and adjusted EBITDA, GAAP net income (loss) to adjusted net income, and our GAAP earnings (net loss) per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data):
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 July 4, 2026 June 28, 2025
Net income (loss) $ 5,626 $ 4,961 $ (174,696) $ (18,356)
Interest expense, net 6,572 6,544 12,941 13,064
Income tax expense (benefit) 3,568 1,267 (493) (4,444)
Depreciation and amortization expenses 32,115 31,334 63,271 61,231
EBITDA 47,881 44,106 (98,977) 51,495
Share-based compensation expense 3,768 1,960 7,523 7,418
Asset impairment and gain or loss on disposition (1) 601 3,834 1,904 3,969
Acquisition and integration costs (2) — 148 — 487
Restructuring and related charges (4) 5,912 11,157 25,826 45,032
Goodwill impairment — — 158,000 —
Other (5) 7,494 6,542 14,496 11,231
Adjusted EBITDA $ 65,656 $ 67,747 $ 108,772 $ 119,632
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 July 4, 2026 June 28, 2025
Net income (loss) $ 5,626 $ 4,961 $ (174,696) $ (18,356)
Share-based compensation expense 3,768 1,960 7,523 7,418
Asset impairment and gain or loss on disposition (1) 601 3,834 1,904 3,969
Acquisition and integration costs (2) — 148 — 487
Amortization of purchase accounting assets and deferred financing costs (3) 1,269 1,269 2,537 2,537
Restructuring and related charges (4) 5,912 11,157 25,826 45,032
Goodwill impairment — — 158,000 —
Other (5) 7,494 6,542 14,496 11,231
Tax adjustment to normalize effective tax rate (6) 687 222 3,206 3,385
Tax effect of total adjustments (7) (5,062) (7,327) (13,892) (19,930)
Adjusted net income $ 20,295 $ 22,766 $ 24,904 $ 35,773
GAAP earnings (net loss) per share:
Basic $ 0.06 $ 0.05 $ (1.77) $ (0.19)
Diluted $ 0.06 $ 0.05 $ (1.77) $ (0.19)
Adjusted earnings per share:
Basic $ 0.20 $ 0.23 $ 0.25 $ 0.37
Diluted $ 0.20 $ 0.23 $ 0.25 $ 0.36
Weighted-average shares outstanding:
Basic 99,014 98,081 98,720 97,801
Diluted (8) 99,773 98,460 98,720 97,801
Non-GAAP weighted-average shares outstanding:
Basic 99,014 98,081 98,720 97,801
Diluted (9) 99,773 98,460 99,459 98,344
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(1)Represents non-restructuring asset impairment charges and gains or losses on dispositions of assets.
(2)Represents costs related to the acquisition and integration of United Grocery Outlet, including due diligence, legal, consulting and retention bonus expenses.
(3)Represents the incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, our former affiliate, as well as the amortization of debt issuance costs.
(4)In the second quarter and first half of fiscal 2026, represents net charges associated with the Optimization Plan. For the second quarter of fiscal 2026, net charges included cash costs associated with the Lease Exits of $13.1 million, costs related to Operator Agreement Terminations of $1.1 million, write-offs of merchandise inventory of $0.5 million, and other restructuring charges, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million. For the first half of fiscal 2026, net charges included bad debt expense of $15.4 million, cash costs associated with the Lease Exits of $13.9 million, costs related to Operator Agreement Terminations of $2.7 million, write-offs of merchandise inventory of $2.2 million, and other restructuring charges, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million. In the second quarter and first half of fiscal 2025, represents charges associated with the Restructuring Plan, including lease termination costs of $5.0 million and $34.1 million, respectively, non-cash impairment and disposal of long-lived assets of $6.1 million and $7.9 million, respectively, employee severance and benefit costs, and legal, professional and other related expenses. All such costs are reflected in Restructuring charges, net on the condensed consolidated statements of operations and comprehensive income (loss), except for write-offs of merchandise inventory, which are included in Cost of sales. See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan and the Restructuring Plan.
(5)Represents other non-recurring, non-cash or non-operational items, such as strategic project costs of $3.4 million and $7.9 million in the second quarter and first half of fiscal 2026, respectively, certain personnel-related hiring and termination costs, legal settlements and other legal expenses, system implementation costs, costs related to employer payroll taxes associated with equity awards, store closing costs, and miscellaneous costs.
(6)Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not consider in our evaluation of ongoing performance, including excess tax benefits or shortfalls related to exercise and/or vesting of share-based awards that are recorded in earnings as discrete items in the reporting period in which they occur.
(7)Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items.
(8)As discussed in Note 10 to the condensed consolidated financial statements, for the first half of fiscal 2026 and the first half of fiscal 2025, there is no difference in the weighted-average shares outstanding used to calculate the basic and diluted GAAP net loss per share due to the Company's net loss.
(9)To calculate diluted adjusted earnings per share, we adjusted the weighted-average shares outstanding for the dilutive effect of all potential shares of common stock.
Comparison of the Second Quarter and First Half of Fiscal 2026 and Fiscal 2025 (amounts in thousands, except percentages)
Net Sales
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Net sales $ 1,192,764 $ 1,179,772 $ 12,992 1.1 % $ 2,359,116 $ 2,305,339 $ 53,777 2.3 %
The increases in net sales for the second quarter and first half of fiscal 2026 were primarily due to new store sales, partially offset by decreased sales from store closures and declines in comparable store sales. We opened 37 new stores over the last 12 months and closed 42 stores, including the closure of 36 stores in March and April of 2026 as a result of the Optimization Plan. See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan.
Comparable store sales declined 0.3% for the second quarter of fiscal 2026, driven by a 2.1% decrease in average transaction size, partially offset by a 1.8% increase in the number of transactions. For the first half of fiscal 2026, comparable store sales declined 0.6%, driven by a 2.6% decrease in average transaction size, partially offset by a 2.0% increase in the number of transactions.
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Gross Profit and Gross Margin
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Gross profit $ 360,718 $ 360,693 $ 25 — % $ 705,917 $ 703,138 $ 2,779 0.4 %
Gross margin 30.2 % 30.6 % 29.9 % 30.5 %
For the second quarter and first half of fiscal 2026, gross margin declined due primarily to the impact of product promotions to drive sales, and inventory markdowns and write-offs associated with the Closure Stores, partially offset by improvements in inventory management.
See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan.
Selling, General and Administrative Expenses
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
SG&A $ 339,524 $ 336,764 $ 2,760 0.8 % $ 686,546 $ 667,842 $ 18,704 2.8 %
% of net sales 28.5 % 28.5 % 29.1 % 29.0 %
The increase in SG&A for the second quarter of fiscal 2026 included a $6.4 million increase in corporate-related expenses, partially offset by a $3.6 million decrease in store-related expenses. The increase in corporate-related expenses was primarily from increased costs to support our continued growth, partially offset by lower marketing costs. The decrease in store-related expenses was primarily from lower impairment of long-lived assets and bad debt reserves.
The increase in SG&A for the first half of fiscal 2026 included a $7.6 million increase in store-related expenses primarily due to higher commissions and other costs to support our continued growth, partially offset by lower bad debt reserves and impairment of long-lived assets. Also included in the increase in SG&A was an $11.1 million increase in corporate-related expenses primarily from increased costs to support our continued growth, partially offset by lower incentive compensation. As a percentage of net sales, the SG&A increase was driven primarily by the aforementioned factors.
Restructuring Charges, Net
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Restructuring charges, net $ 5,428 $ 11,157 $ (5,729) (51.3) % $ 23,619 $ 45,032 $ (21,413) (47.6) %
% of net sales 0.5 % 0.9 % 1.0 % 2.0 %
Net restructuring charges for the second quarter and first half of fiscal 2026 were related to the Optimization Plan. For the second quarter of fiscal 2026, net restructuring charges primarily included cash costs associated with the Lease Exits of $13.1 million, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million. For the first half of fiscal 2026, net restructuring charges primarily included bad debt of $15.4 million, cash costs associated with the Lease Exits of $13.9 million, and cash costs associated with the Operator Agreement Terminations of $2.7 million, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million.
For the second quarter and first half of fiscal 2025, net restructuring charges were related to a prior restructuring plan we initiated during the fourth quarter of fiscal 2024, intended to improve our long-term profitability, cash flow generation and return on invested capital, optimize the footprint of new store growth, and lower our cost base (the "Restructuring Plan"), and primarily included lease termination costs of $5.0 million and $34.1 million, respectively, and impairment and disposal of long-lived assets of $6.1 million and $7.9 million, respectively.
See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan and the Restructuring Plan.
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Goodwill impairment
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Goodwill impairment $ — $ — $ — 100.0 % $ 158,000 $ — $ 158,000 100.0 %
% of net sales — % — % 6.7 % — %
During the first quarter of fiscal 2026, we performed an interim goodwill impairment evaluation, which indicated that the Company's estimated fair value was less than its carrying amount. As a result, we recognized a non-cash goodwill impairment charge in the first quarter of fiscal 2026.
See Note 3 to the condensed consolidated financial statements for additional information.
Income Tax Expense (Benefit)
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Income tax expense (benefit) $ 3,568 $ 1,267 $ 2,301 181.6 % $ (493) $ (4,444) $ 3,951 (88.9) %
Effective income tax rate 38.8 % 20.3 % 0.3 % 19.5 %
The changes in income tax expense for the second quarter and first half of fiscal 2026 was primarily driven by the changes in the level of earnings.
The increase in our effective income tax rate for the second quarter of fiscal 2026 compared to the second quarter of fiscal 2025 was primarily driven by changes in our level of earnings. The decrease in our effective income tax rate for the first half of fiscal 2026 compared to the first half of fiscal 2025 was primarily driven by non-deductible goodwill impairment recognized during the first half of fiscal 2026.
See Note 7 to the condensed consolidated financial statements for additional information.
Net Income (Loss)
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change (1) July 4, 2026 June 28, 2025 $ Change % Change
Net income (loss) $ 5,626 $ 4,961 $ 665 13.4 % $ (174,696) $ (18,356) $ (156,340) 851.7 %
% of net sales 0.5 % 0.4 % (7.4) % (0.8) %
Net income was $5.6 million for the second quarter of fiscal 2026 compared to net income of $5.0 million for the same period in fiscal 2025 as a result of the foregoing factors.
Net loss was $174.7 million for the first half of fiscal 2026 compared to net loss of $18.4 million for the same period in fiscal 2025. Net loss for the first half of fiscal 2026 included goodwill impairment of $158.0 million and net restructuring charges of $23.6 million. Net loss for the first half of fiscal 2025 included net restructuring charges of $45.0 million.
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Adjusted EBITDA
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Adjusted EBITDA $ 65,656 $ 67,747 $ (2,091) (3.1) % $ 108,772 $ 119,632 $ (10,860) (9.1) %
Adjusted EBITDA decreased for the second quarter of fiscal 2026 compared to the prior year, primarily as a result of a decline in gross margin, partially offset by an increase in net sales, as discussed above.
The decrease in Adjusted EBITDA for the first half of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin and higher SG&A, partially offset by an increase in net sales, as discussed above.
Adjusted Net Income
13 Weeks Ended 26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change July 4, 2026 June 28, 2025 $ Change % Change
Adjusted net income $ 20,295 $ 22,766 $ (2,471) (10.9) % $ 24,904 $ 35,773 $ (10,869) (30.4) %
The decrease in adjusted net income for the second quarter of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin, partially offset by an increase in net sales, as discussed above.
The decrease in adjusted net income for the first half of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin and higher SG&A, partially offset by an increase in net sales, as discussed above.
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Liquidity and Capital Resources
Sources of Liquidity
Based on our current operations and new store growth plans, we expect to satisfy our short-term and long-term cash requirements through a combination of our existing cash and cash equivalents position, funds generated from operating activities, and the borrowing capacity available in the revolving credit facility under our credit agreement, dated February 21, 2023, with Bank of America, N.A. (the "2023 Credit Agreement"). If cash generated from our operations and borrowings under the revolving credit facility are not sufficient or available to meet our liquidity requirements, then we will be required to obtain additional equity or debt financing in the future. There can be no assurance that equity or debt financing will be available to us when we need it or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders. Additionally, we may seek to take advantage of market opportunities to refinance our existing debt instruments with new debt instruments at interest rates, maturities and terms we deem attractive.
As of July 4, 2026, we had cash and cash equivalents of $74.2 million, which consisted primarily of cash held in checking and money market accounts with financial institutions. In addition, we have a revolving credit facility with $400.0 million in borrowing capacity under the 2023 Credit Agreement. As of July 4, 2026, we had $240.0 million of borrowings outstanding under the revolving credit facility and $6.2 million of outstanding standby letters of credit, resulting in $153.8 million of remaining borrowing capacity available under this revolving credit facility.
The senior secured credit facilities of the 2023 Credit Agreement permit us to add incremental term loan facilities, increase any existing term loan facility, increase revolving commitments, and/or add incremental replacement revolving credit facility tranches. The aggregate principal amount of such incremental facilities are limited to (a) an amount not in excess of the sum of the greater of $200.0 million and 100% of Consolidated EBITDA (as defined in the 2023 Credit Agreement), subject to certain limitations, plus (b) voluntary prepayments of any term loan facility, voluntary permanent reductions of the commitments for the revolving credit facility and voluntary prepayments of indebtedness secured by liens on the collateral securing the credit facilities, subject to certain exceptions, plus (c) an amount such that (assuming that the full amount of any such incremental revolving increase and/or incremental replacement revolving credit facility was drawn, and after giving effect to any appropriate pro forma adjustment events) we would be in compliance, on a pro forma basis (but excluding the cash proceeds of such incurrence), with a Total Net Leverage Ratio (as defined in the 2023 Credit Agreement) of 3.00 to 1.00.
We may also, from time to time, at our sole discretion, prepay or retire all or a portion of our outstanding debt.
Material Cash Requirements
There has been no material change in our material cash requirements since the end of fiscal 2025, other than those which occur in the ordinary course of business. See our 2025 Form 10-K for additional information.
Capital Expenditures
Capital expenditures include purchases of capital assets such as property and equipment as well as intangible assets and licenses. Capital expenditures for the first half of fiscal 2026, before tenant improvement allowances, were $100.5 million, and, net of tenant improvement allowances, were $92.6 million. We currently expect total capital expenditures, net of tenant improvement allowances, to be approximately $170.0 million for fiscal 2026, which includes new store openings, ongoing store maintenance and improvements, supply chain investments and systems and infrastructure investments.
Debt Obligations
The 2023 Credit Agreement requires us to make scheduled quarterly amortization payments of the senior term loan. Such payments total $22.5 million over the remaining term of the senior term loan, with $7.5 million payable over the remainder of fiscal 2026. The remaining senior term loan principal balance and any outstanding revolving credit facility balance will become due in February 2028 at maturity. See Note 4 to the condensed consolidated financial statements for additional information.
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Debt Covenants
The 2023 Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The 2023 Credit Agreement contains certain covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: pay dividends or distributions, repurchase equity, prepay junior debt and make certain investments; incur additional debt or issue certain disqualified stock and preferred stock; incur liens on assets; merge or consolidate with another company or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets; enter into transactions with affiliates; and allow to exist certain restrictions on the ability of our subsidiaries to pay dividends or make other payments to the borrower. The 2023 Credit Agreement also contains financial performance covenants requiring us to satisfy a maximum total net leverage ratio test and a minimum interest coverage ratio test as of the last day of each fiscal quarter. The maximum total net leverage ratio test requires us to be in compliance with a Total Net Leverage Ratio no greater than 3.25 to 1.00 as of the last day of each test period ending after December 31, 2025, subject to certain adjustments set forth in the 2023 Credit Agreement. The minimum interest coverage ratio test requires us to be in compliance with a Consolidated Interest Coverage Ratio (as defined in the 2023 Credit Agreement) of no less than 1.75 to 1.00 as of the last day of each test period.
As of July 4, 2026, we were in compliance with all applicable financial covenant requirements for the 2023 Credit Agreement.
Cash Flows
The following table summarizes our cash flows for the periods presented (amounts in thousands):
26 Weeks Ended
July 4, 2026 June 28, 2025 $ Change % Change
Net cash provided by operating activities $ 95,708 $ 132,563 $ (36,855) (27.8) %
Net cash used in investing activities (103,077) (136,156) 33,079 (24.3) %
Net cash provided by (used in) financing activities 11,966 (4,045) 16,011 395.8 %
Net increase (decrease) in cash and cash equivalents $ 4,597 $ (7,638) $ 12,235 160.2 %
Cash Provided by Operating Activities
The decrease in net cash provided by operating activities of $36.9 million for the first half of fiscal 2026 compared to the same period in fiscal 2025 was primarily driven by changes in working capital, including merchandise inventories and accrued and other liabilities, and a decrease in operating lease liabilities, partially offset by a lower net loss for the first half of fiscal 2026, after adjusting for non-cash charges. The change in accrued and other liabilities was impacted primarily by the payment timing of operator commissions, marketing costs, and interest on the revolving credit facility, and the decrease in operating lease liabilities was primarily due to Lease Exits during the first half of fiscal 2026 associated with the Optimization Plan (see Note 12 to the condensed consolidated financial statements for additional information).
Cash Used in Investing Activities
The decrease in net cash used in investing activities of $33.1 million for the first half of fiscal 2026 compared to the same period in fiscal 2025 was primarily due to lower purchases of property and equipment for the first half of fiscal 2026 due to a decrease in planned new store openings in fiscal 2026 compared to fiscal 2025 and investments in new warehouses in fiscal 2025.
Cash Provided By (Used In) Financing Activities
The increase in net cash provided by financing activities of $16.0 million for the first half of fiscal 2026 compared to the same period in fiscal 2025 was primarily due to the principal payment on the revolving credit facility during the first half of fiscal 2025, partially offset by the increase in scheduled principal payments on the senior term loan under the 2023 Credit Agreement.
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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP and the applicable rules and regulations of the SEC for interim reporting. The preparation of our condensed consolidated financial statements requires us to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our judgments and estimates are based on historical experience and other factors believed to be reasonable under the circumstances. With respect to critical accounting policies, even a relatively minor variance between actual and expected results can potentially have a materially favorable or unfavorable impact on subsequent results of operations.
Except as discussed below, there have been no material changes to our critical accounting policies and estimates during the first half of fiscal 2026 from those disclosed in our 2025 Form 10-K.
Goodwill
Goodwill is subject to an annual impairment evaluation which is performed during our fourth quarter or when events or changes in circumstances indicate that the value of goodwill may be impaired. Our impairment evaluation of goodwill consists of an initial qualitative assessment of our reporting unit to determine whether it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value. If it is concluded that this is the case, a quantitative assessment is performed, and if the quantitative assessment indicates that the carrying value of our reporting unit exceeds its fair value, an impairment loss is calculated and recognized during that period. Measurement of such an impairment loss would be based on the excess of the carrying amount over fair value.
No goodwill impairment charges were recorded during the second quarter of fiscal 2026, and no goodwill impairment charges were recorded during the second quarter and first half of fiscal 2025. During the first quarter of fiscal 2026, we determined that a triggering event had occurred due to a decline in our stock price, necessitating an interim goodwill impairment evaluation. We performed a quantitative assessment as of April 4, 2026.
The quantitative impairment assessment utilized a combination of an income approach and a market approach to estimate the fair value of the reporting unit, which were equally weighted. The income approach was based on a discounted cash flow model that incorporated projected cash flows and significant assumptions, including revenue growth rates, gross profit margins, and an estimate of the weighted-average cost of capital that we believe reflects market participant assumptions. The market approach utilized a guideline public company method, which required judgment in selecting comparable companies and determining appropriate multiples of revenue and EBITDA.
These estimates involve significant judgment and are subject to uncertainties, including changes in market conditions, interest rates, growth rates, tax rates, costs, customer behavior, regulatory developments, and other macroeconomic factors. In addition, we assessed the reasonableness of the estimated fair value by evaluating the implied control premium relative to our market capitalization and concluded that such premium was reasonable, thereby corroborating our fair value estimate.
The fair value measurement was classified as Level 3 within the fair value hierarchy due to the use of significant unobservable measurement inputs and internal projections.
Assumptions used in impairment testing are made at a point in time and require significant judgment; therefore, they are subject to change based on the facts and circumstances present at each impairment test date. Additionally, these assumptions are generally interdependent and do not change in isolation.
We will continue to closely monitor future performance and any potential impacts on the value of the reporting unit. If the estimated future cash flows decrease below our current expectations, specifically as a result of lower revenue growth rates or operating income margins, or due to an increase in the weighted average cost of capital, the fair value may further decrease resulting in an incremental material goodwill impairment.
Recent Accounting Pronouncements
Refer to Note 1 to the condensed consolidated financial statements included elsewhere in this report.
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