Good afternoon, and welcome to Grocery Outlet's fiscal third quarter 2021 earnings results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, today's conference is being recorded. I would like to turn the conference over to Arvind Bhatia. Please go ahead.
Thank you. Good afternoon and thank you for joining us on today's call to discuss Grocery Outlet's third quarter 2021 financial results. Joining me on the call are Grocery Outlet's Chief Executive Officer, Eric Lindberg, President, R.J. Sheedy, and Chief Financial Officer, Charles Bracher. Following our prepared remarks, we will open the call for questions. This conference call is being webcast live, and a recording will be available via audio playback for approximately two weeks. It will also be archived in the Investor Relations section of our website. Participants on this call will make forward-looking statements, including statements regarding our outlook for the fourth quarter and fiscal 2021 and future performance. These forward-looking statements are subject to various risks and uncertainties that could cause our actual results to differ materially from these statements.
A description of these factors can be found in this afternoon's press release, as well as in our periodic reports we filed with the SEC, all of which may be found on our website at investors.groceryoutlet.com or on sec.gov. Except as required by law, we undertake no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. During our call, we will also reference certain non-GAAP financial information, including adjusted items. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure, may be found in the supplemental financial tables included in this afternoon's press release, our SEC filings, and the Investors tab for our website. With that, I'll turn it over to Eric.
Thanks, Arvind. Good afternoon, everyone, and thank you for joining us for a discussion of our third quarter results. I'm pleased with our sales and margin performance during the third quarter, and I'm encouraged by the early momentum in Q4 with October comp sales flat to last year. We continue to offer the most compelling value in grocery retail by executing our core strategy, leveraging our unique purchasing capabilities, and passionate network of independent operators. We're also making progress on initiatives to further increase share of wallet and broaden our reach, including a strategic expansion of our assortment, the launch of an e-commerce pilot, and development of personalized customer marketing tools. We're as excited as ever about our runway to extend our reach through ongoing store growth as well as new digital opportunities.
Reflecting confidence in the health of our business and our long-term growth potential, our Board of Directors has authorized a $100 million share repurchase program that complements our primary objectives of opening stores, reinvesting in existing fleet, and building a strong infrastructure for the future. Let me now take a moment to share with you some of our key priorities as we navigate the current environment. First, we are staying true to our model of offering great value to our customers. We remain focused on being the industry leader in opportunistic sourcing, and our best-in-class buying team continues to execute at a very high level. In a dynamic supply chain environment, we are benefiting from the flexibility of our model and the nimbleness of our purchasing team to deliver customers a full assortment, as well as the deep discounts and Treasure Hunt experience that they expect.
Second, we continue to strengthen our relationships with our IOs through a consistent engagement and improved support to help them better serve their customers. We just returned from a 10-city regional roadshow where we connected face-to-face with IOs, sharing ideas, listening to their feedback, and discussing strategies to drive sales, enhance operations, and collaborate even more effectively. While it's been a very challenging operating environment due to the inflation, labor, and supply chain issues, I'm humbled by the resilience and the can-do attitude and the entrepreneurial spirit that our IOs demonstrate every single day. They continue to have a positive impact on their local communities while delivering outstanding service to their customers. Third, we are improving our messaging and our marketing communication. While we continue to highlight our most compelling WOW! deals, we're also putting a spotlight on the broad selection and full shop that we provide.
Our focused messaging will become even more important in the future as we strategically expand our product assortment, particularly in the key areas such as NOSH and Fresh. With respect to personalized customer marketing, we are making progress building the infrastructure required to test a mobile app in the first half of 2022. We are excited about the potential of this effort, as we believe the capability to communicate new products and great values based on individual preferences will positively impact the customer experience. Fourth, our new store growth engine, which we believe remains our biggest driver of long-term shareholder value, remains healthy, both in terms of future pipeline and new store performance.
During Q3, we opened seven new sites, ending the quarter with 407 stores. In terms of new unit productivity, we continue to be pleased with the early performance of the stores open this year, as well as the continued sales ramp of recent vintages across both infill and new markets. With respect to our real estate pipeline, we are tracking towards the new store goal we set forth at the beginning of the year. I wanna thank our highly talented real estate team for their continued focus despite challenges in sourcing construction materials, equipment, and trade labor. As part of our fourth quarter openings, we are proud to be returning to Paradise, California three years after the 2018 wildfire. Our operators, Wayne and Livia Kurtz, are making incredible contributions in rebuilding after the fires that destroyed our store and most of the town.
As we look beyond this year, we continue to find great sites across markets, and as such, remain excited about the long-term unit growth potential. Our real estate team has a strong lineup of new stores in 2022. While we don't know when building materials and labor challenges will ease, our construction team will continue to work creatively to navigate those headwinds to build our stores to the best of their ability. Looking forward, we remain focused on continuing to expand in existing and new markets as we make progress towards our full white space potential. In addition to our real estate pipeline, our pool of future IOs remains very healthy with a robust stream of potential recruits. We field over 20,000 leads annually from which we shortlist only the strongest candidates.
We've evolved our training approach to include a virtual learning environment to supplement in-store training, allowing us to leverage the strengths of our operator, field, and corporate teams. This enhanced training program for aspiring operators launched in the first quarter has yielded promising early results in terms of effectiveness, scalability, and community building. Finally, while our stores remain our priority, we're also very excited about the potential to reach more customers by adding the convenience of e-commerce. After giving careful consideration to the unique aspects of our opportunistic purchasing and independent operator model, we recently initiated a pilot program with Instacart, which R.J. will discuss in more detail. While the pilot has only just commenced, we, along with our independent operators, are very excited about the potential of this new channel to expand our reach and further leverage our existing retail footprint.
Before turning it over to R.J., I wanna thank the entire GO community of operators, employees, and partners for their continued commitment to our mission, touching lives for the better. Through our community of operators, employees, and partners, our business continues to deliver unbeatable food values, reduce food insecurity, positively impact local communities, and create economic opportunity for entrepreneurs and employees. While I'm constantly amazed by everything the operators are doing to help their communities, I'd like to share one example that struck a chord with me recently. Elie and Rita Zgheib in our Alameda store have donated more than 40,000 meals to a local food bank so far in 2021. In addition, they've partnered with the Do Good Foundation to feed homeless children and have raised funds for the Alameda Art Association.
Congratulations, Elie and Rita, and a big thank you for your inspiring philanthropy and the leadership in your community. With that, I'd like to turn it over to R.J.
Thanks, Eric. I'd like to begin by thanking all of our operators and their team members for continuing to execute exceptionally well in order to serve their customers. Their focus and dedication are contributing to our continued momentum in the fourth quarter. While we are pleased with the health of our underlying business, we are also excited about progress made on several key initiatives. First, for an update on supply, we are encouraged by our pipeline of opportunistic product. We continue to capture outstanding buys across all categories to deliver extreme value and a fun Treasure Hunt experience to our customers. Renewed supplier investments in product innovation and additional capacity and production are still contributing to the breadth and depth of offers we are seeing. Let me provide a few examples of recent buys resulting from these dynamics.
Example number one is the purchase of 100,000 cases of hard seltzer from a Canadian beverage company that recently entered the U.S. market. As brands have proliferated and the popular seltzer category has become more crowded, the supplier offered us a large block of excess product. While competitors are selling the brand's 12-pack at $18, we are offering the same item at $5.99, almost a 70% savings, while still generating a healthy margin. Example number two is a close vendor partner within the snack category who recently expanded into plant-based ice cream. As sometimes happens, initial supply exceeded demand, resulting in the vendor rationalizing their SKU assortment. As a result, we were able to purchase 130,000 cases of the ice cream.
We are selling the product for $2.99, representing a 50% savings and an exciting deal for our NOSH customers. Example number three is another long-standing supplier who is innovating across their brand portfolio and expanding into more traditional retail locations. They are introducing new products across numerous growing categories, including keto, plant, and protein-based diets. We have provided a complementary channel to alleviate their supply-demand imbalances of these new offerings, enabling us to grow our opportunistic business with them. These are just a few examples resulting from current supply dynamics, and we expect these tailwinds to continue well into 2022. We, like many others, are navigating supply chain, labor, and transportation challenges impacting item-specific availability and delivery. However, the flexibility of our unique buying model, coupled with our strong vendor relationships, is helping us maintain healthy inventory levels and a high in-stock percentage on key items.
We are leaning on our agile approach to inventory management, our ability to move quickly between suppliers, and the speed with which we move product through our distribution network. These attributes will continue to serve us well in the face of ongoing headwinds. Inflation is another dynamic that is impacting our industry. While inflation is real, we are demonstrating how our business uniquely mitigates its challenges. First, we have been moving between suppliers and in and out of items to manage value, cost, and margin. This is a normal part of our buying process and contributes to the excitement of the Treasure Hunt. Second, as competitor pricing has moved up, we are fast to follow. The value we provide has become even more compelling as consumers are paying higher prices elsewhere. Third is the flexibility by which we manage assortment and pricing.
We price items every day as they come into our supply chain and stores. Through these methods, we continue to offer customers a full assortment while successfully maintaining our relative value across conventional and discount peers. As we are following inflation-related price movements, we are beginning to see both top line and margin benefits. We are proud of how the team has been navigating this fluid environment, and we continue to manage it closely. Let me now turn to our efforts to strategically expand our assortment. This initiative is underway, and we are pleased with our early progress, as we have recently added 200 new SKUs to the offering. As planned, NOSH has been a focus for these incremental items in addition to fresh, ethnic, and local products.
We will continue to strategically add key items to the assortment in order to build the basket, further enhancing customer convenience and trip frequency. Our customers have responded favorably to similar strategic product expansions in the past, so we remain optimistic about the longer term benefits of this initiative. On the marketing front, we continue to optimize our mix of radio, TV, and digital spend across each of our markets. In particular, we have increased spending on digital platforms based on the effectiveness of those investments in driving new customer trips into our stores. We have also equipped our independent operators with several new methods to communicate their local deals more effectively to their customers. First is a tool enabling IOs to select store-specific WOW! items to be marketed through connected TV.
These compelling values are promoted to consumers in a store's trade area, similar to the WOW! alerts that go to our growing email database. Another new capability is an AI tool that allows operators to tailor marketing offerings based on customer mobility patterns. Dynamic, customizable platforms such as these further enhance the personal grassroots marketing efforts of IOs that connect them closely with customers and communities. With respect to e-commerce, we recently launched a partnership with Instacart, as Eric mentioned. We are currently offering same-day delivery from 68 pilot stores in California markets, including Los Angeles, Fresno, the Bay Area, and Sacramento. As a reminder, we are conducting this pilot first to learn how our offering translates online in order to deliver a positive WOW! shopping experience, and second, to understand the potential incremental sales opportunity it can generate.
While too early to share any results, we along with our IOs, are pleased with the operational execution so far and are excited about the potential to provide value with the convenience of e-commerce. We will continue to share updates with you as this pilot progresses. Now I'll hand it off to Charles to provide a financial update.
Thanks, R.J., and good afternoon, everyone. I'll spend a few minutes discussing our third quarter financial results and then provide commentary on fourth quarter trends and our outlook for the remainder of the year. We are pleased with our third quarter results across our key performance metrics. Comparable store sales decreased 4.3% on top of an increase of 9.1% in the third quarter last year. While third quarter traffic and basket size were stable relative to Q2, our comp sales decline versus last year was the result of lower traffic. Net sales were $768.9 million, up slightly compared to the same period last year. Contributing to total sales was the impact of 35 net new stores opened since the end of the third quarter last year.
We finished the quarter with 407 locations and remain pleased with the performance of our newly opened stores in both infill and new markets. Both our 2021 openings as well as recent vintages continue to deliver sales productivity in line with our expectations. Third quarter gross margin of 30.8% was above our expectations and in line with pre-pandemic levels despite inflationary headwinds. Compared to the third quarter of 2020, our gross margin decreased approximately 40 basis points, predominantly due to the normalization of inventory turns and higher supply chain, freight, and fuel costs. SG&A increased 1% versus the prior year to $191.6 million, due primarily to increased store occupancy and IO commission expense related to store growth, offset by lower incentive compensation expense.
Depreciation and amortization increased to $17.5 million, up 24% versus the third quarter last year, driven by store growth as well as continued capital investments in systems and infrastructure. Stock-based compensation expense was $1.9 million, down 51% versus last year, reflecting current performance expectations related to our performance-based share awards. Net interest expense decreased 18.3% to $4 million versus the third quarter last year due to lower effective LIBOR rates. Compared to our normalized tax rate of approximately 28%, we incurred an effective tax rate of 22.8% in the quarter due to the excess tax benefit associated with employee stock option exercises. As a result of these factors, GAAP net income for the third quarter was $17.1 million, or $0.17 per diluted share.
Note that GAAP net income for the third quarter of 2020 reflected a tax benefit due to employee stock options of $22 million, or $0.22 per share. For the quarter, adjusted EBITDA was $51.4 million, representing 6.7% of sales, slightly ahead of our expectations. Adjusted net income was $23.4 million, or $0.24 per diluted share, based on an average of 99.2 million diluted shares in the quarter. Turning to our balance sheet, we grew our cash balance to $156 million and ended the quarter with a healthy inventory mix totaling $246 million.
Total debt net of discounts and issuance costs was $450.9 million at the end of the third quarter, which reflects a net leverage ratio of 1.5x adjusted EBITDA. We generated $56.6 million in net cash from operating activities during the third quarter, a $47.4 million increase over the same period in the prior year. We invested $26.5 million in total CapEx during the quarter as we continued to build new stores, reinvest in the existing fleet, and make ongoing investments in infrastructure and technology. Turning to the current quarter, we are pleased that comp sales in October were flat versus last year, reflecting a higher two-year comp stack relative to Q3. As R.J. discussed, we continue to focus on delivering industry-leading value while making price adjustments based on market inflationary moves.
While we are encouraged by quarter-to-date performance, our prior year comp sales comparisons become more challenging as we move through the fourth quarter and we remain cognizant of ongoing supply chain and consumer uncertainty. As such, we expect comp sales for the full fourth quarter to be in the range of -3.5% to -2.5%. In terms of new stores, as Eric mentioned, we are tracking to hit our full year new store opening plan with eight new stores in Q4, with most opening towards the end of the year. Recall that this year's fourth quarter is a normal 13-week period compared to the fourth quarter of 2020, which benefited from $53 million of additional sales related to the extra fiscal week.
As such, we expect total sales for Q4 2021 to be approximately $770 million-$775 million. With respect to gross margin, we expect fourth quarter performance to be approximately 30.5%, which reflects the normal impact of seasonal holiday product mix. Our fourth quarter margin expectation represents performance in line with pre-COVID levels despite ongoing inflationary pressures in commodity and freight costs. In terms of bottom line performance, taking into account the normalized 13-week calendar and modest expense deleverage, we expect fourth quarter adjusted EBITDA margin to be approximately 6.1% of sales. We also expect depreciation and amortization expense of approximately $18.5 million, net interest expense of approximately $4 million, and a normalized tax rate of 28% for the fourth quarter.
With respect to our capital allocation strategy, our priorities remain unchanged. First, investing in new store growth as we continue our disciplined white space expansion. Second, reinvesting back into the existing store base. Third, making important investments in infrastructure and technology to support our future growth. For 2021, we expect to invest approximately $130 million of CapEx, net of tenant allowances, while still generating positive net cash flow. In addition to our growth-focused capital investments, our board has authorized a $100 million share repurchase program reflecting our confidence in the long-term outlook. This program will allow us to utilize our excess cash in order to repurchase shares on an opportunistic basis and further optimize our capital structure. To conclude, I'd like to again thank our IOs and employees for their hard work and solid execution over the course of the year.
Throughout an evolving and dynamic operating environment, we have benefited from the flexibility of our business model, the resilience of our team, and our strong engagement with customers. We have strengthened our foundation while also making important investments in future growth. With that, we can turn it back to the operator to begin Q&A.
Thank you. If you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw, please press the one and the three. We also ask that you please limit your questions to one. One moment, please, for our first question. Our first question is from the line of Kate McShane with Goldman Sachs. Please go ahead.
Good afternoon. Thanks for taking our question. My question is centered around October and what you're seeing in October. You mentioned that the two-year stack is slightly better. I know some of that is price, but is there a way to dimensionalize how much is price versus traffic?
Hey, Kate, Eric. Th anks for the question. Yeah, we're really pleased with what we're seeing. Two-year stack is slightly ahead of Q3. We are still seeing a lot more ring than we are seeing customer count. We look at it, and we say that we're not quite seeing the customer returning yet, so still building basket and you know that feels good at this point just to see some better numbers in October than in Q3. But yet to see a real return of customer count.
Kate, this is Charles. Just to add to that, sequentially, traffic in October is stable relative to what we saw in the third quarter. As Eric describes, the benefit we're seeing is really coming from average ring as we're following those market-wide price increases, driven by inflation.
Thank you.
Our next question is from Michael Lasser with UBS. Please go ahead.
Good afternoon. This is Mark Carden on for Michael today. Thanks a lot for taking the question. On your Instacart offering, how much flexibility do you guys have to ultimately add more opportunistic items? Do you guys face a lot of restrictions on this front from vendors? And is it feasible to have Instacart ultimately show more products that are unique to the local stores? Thanks.
Yeah, sure. Hey, Mark, thanks for the question. Yeah, we have a lot of flexibility. The way that this is set up is that, you know, we're showing real-time inventory to the day for each specific store that's participating in the pilot. It's a group of 68 stores at this point in time. We did have conversations with our supplier partners prior to launching the pilot. There were some that preferred not to have their items, you know, brands shown on the e-commerce platform. I'd say very consistent and in line with preferences and filters we put in place from a general marketing standpoint. These are preferences based on channel conflict concerns. As a percent of assortment or percent of sales, it's small. Single digits.
You know, think about the online assortment as representing the vast majority of what's available in store. If you were to go on there and encourage you to check it out, you'll see plenty of great brands and items, and value, being offered to customers. Pleased that we're up and running. We had to do it in a slightly different way, I think, than most, just given some of the dynamics of our model, you know, to your question related to supplier relationships but also because of the operator model. Pleased that we're up and running here.
Yeah, still plenty of opportunity for us to continue to develop how we show the great items available and, you know, further represent the WOW! that we have in the stores to those shopping online as well.
Makes sense. Thanks, guys, and good luck.
You bet. Thanks.
Our next question is from Simeon Gutman with Morgan Stanley. Please go ahead.
Hi, everyone. Thanks for the question. I'll just put two into one. First, on new space productivity, it looks below average for Q3, and I think implied for Q4. Can you speak to what's going on there? The second question is, there's some rumbles of price investments from some of the bigger companies. Can you talk about your spreads in every day as well as some of the WOW!? I guess we heard some examples in WOW!, but every day and maybe some of the NOSH items even. Thank you.
Hey, Simeon, it's Charles. Let me take the first part of your question with respect to new store productivity. You know, as we mentioned in the comments, feel really good that new stores continue to track very much in line with our expectations. That's true for, you know, recent vintages that continue to ramp, as well as stores that we've opened so far this year. We understand that the optics, I think the way you guys do some of the back of the envelope math, given that you can't see, necessarily, the comp base, appears to show that non-comp deceleration in Q3. That's really driven by the timing of new store openings, both by quarter and within the quarter, going back to prior years.
If you recall, we use a 14-month comp, and so it's really that timing that's causing that optical headwind, if you will. I can tell you that as you look at actual non-comp sales dollars in the third quarter, very much in line, consistent with what we saw in the first couple quarters of the year. Overall, you know, we always talk about non-comp productivity. When you compare that relative to the average store, it remains in the high 60% range.
To your second question, Simeon, on value spread as it relates to inflation, and I think you were asking about promotional activity there as well. On the inflation side, first course of action for us is to manage the assortment movement between suppliers and items. I think we've done that quite well, given our diversified supplier base and the normal change in the assortment that customers are accustomed to and look forward to, quite frankly, as part of the Treasure Hunt. Competitive pricing has increased with inflation, you know, cost increases from suppliers passed through now to retail. We're fast to follow on those. We have maintained consistent levels of value across the many metrics that we track.
Whether you're looking at the basket, still delivering around that 40% savings up to relative to conventional grocery retailers, the representation of sales that even higher savings up to percentages is very healthy. You know, I'd say that value spread is consistent with how we've managed it or what we track to, you know, pre-COVID, across every day and opportunistic as well. That's the value spread in terms of absolute dollars. The value is even more important to customers because those elsewhere prices are higher and, you know, harder to get as much for your dollar spent. Then the last thing I'd mention is the flexibility with which we manage pricing.
That's been helpful as it relates to inflation, but also very helpful as we always have managed our value relative to competitors. As the promotional environment continues to change, the fact that we're pricing items every day allows us to manage cost, manage value, manage margin, you know, ultimately deliver value. We're pleased with how the team's managed it so far. It's contributed to top line. We've also been able to deliver healthy margins and, you know, expect we'll be able to continue to manage it well looking forward.
Our next question is from Robby Ohmes with the Bank of America. Please go ahead.
Hey, good evening, guys. I'm gonna sneak in two questions. The first is just on the new SKUs you guys are adding. Are you bringing in new suppliers or is it existing suppliers? And are the margins on the items, you know, kind of in line with what you would see on other items that are already in the store? Second, just in terms of the traffic, anything you're thinking about doing on the marketing side to try and maybe accelerate sort of a return of positive traffic?
Yeah. Hey, Robby. Thanks for the questions. First on the expansion of the assortment, you know, really happy to have added these 200 additional SKUs. It covers a pretty broad range of categories. NOSH, of course, continues to be a focus, but also fresh and ethnic and local, as mentioned in the comments. It's a mix of, they're all new items, i t's a mix of new suppliers and existing suppliers. We've looked at industry data. We've leaned on supplier partnerships, you know, great input from operators as well in targeting the items that are most important to a customer basket and trips, items that have not been represented in the past.
You know, feel really good about those adds, the contribution that they'll make, you know, in those ways with trip and basket. Adds that are still to come. As you know, we've evolved the assortment. We've added items over a long period of time now. It's broadened our reach. It's elevated our brand. You know, it's benefited us in a lot of ways, and we expect to see similar benefits for future product expansion. Second question, marketing strategy, what are we doing to drive traffic? Yeah, we continue to optimize our mix across radio, TV, digital, continue to lean into digital more heavily. It's more targeted and efficient in that way.
We've been testing different messaging and different offers with a focus on customer acquisition. We've found some new platforms that have shown nice return by way of new customers, so connected TV, credit card program platforms, some other deal-based apps. There's a longer list there that we've started to invest in, have seen positive results, and will continue to expand. Then, you know, I'd also mention some of these new tools that we've introduced to operators to help them further communicate more personally and in a very local community-based way with their customers. You know, those are as important, if not more, I'll say, than you know, the centralized marketing investments that we make.
It's really the blend of both for us by way of outreach and you know new customer trial. It's always centered on the value, the deals, you know, the items, the brands as those things that drive excitement and then rounded out with other attributes of the model, the Treasure Hunt, the local connection, the great customer service. Through these tools now, operators are able to do that in a more efficient, effective way, still with their own personalization and curation, if you will, as it relates to their own customers and the needs of the local market.
Our next question is from the line of John Heinbockel with Guggenheim Partners. Please go ahead.
Guys, I got two topics. One on the assortment expansion. If you break those down into Treasure Hunt, right, or closeout versus every day. How does that break down? Where do you wanna go further with assortment, right? Is the 200 a stepping stone? I assume private brand is still not on the near term horizon. Just lastly, one quick thing on Instacart. Would it be your expectation that in the short run, the quick hit is with customers who know GO and know how to shop it, so share of wallet with them as opposed to new customer capture?
Hey, John. Yeah, thanks for the question. I'll take those. The assortment expansion, these 200 items are predominantly everyday items. They're items that we wanna represent in the assortment that customers know they can find, right? Again, important to their trip, important to their basket. In that way, adds convenience to the shop, similar to what we've done in other everyday categories such as you know fresh seafood or you know going back you know longer period of time when we've added more of our fresh items, et cetera. That's the focus. Of course, we're always adding new opportunistic items. That's just part of the model, right? Specifically for these more recent adds, they are on the everyday side. Private label is still an opportunity for us.
We haven't leaned into that just yet, but think that's a nice add and complement, both private label and product development. We'll look to introduce more of that here in the medium to longer term. To your question on e-commerce, the focus here really is twofold. It's for the percent or the amount of our customers that shop online today. They shop our stores, but they also shop online. We certainly wanna capture those dollars, and so we would see that as incremental. But as important is, you know, the potential to attract new customers.
We think there are quite a lot of consumers out there that would really enjoy the shopping experience, the assortment, the items, the values, just for you know a number of reasons, haven't ever been in a store before. You know, maybe they're aware, but they haven't tried it or you know just hasn't fit into their shopping patterns. We think being online initially here through this pilot with Instacart is a great way for us to introduce the brand, to drive trial, have them come to know, you know, who we are and what we represent and in that way, you know, complement our customer acquisition efforts through, you know, our historical or more traditional marketing efforts. We're excited about both. You know, both are incremental dollars so to speak.
You know, one is incremental customers, the other is just share of wallet with existing customers.
Our next question is from Krisztina Katai with Deutsche Bank. Please go ahead.
Hi. Good afternoon, guys. Thanks for the question. I just had a question on pricing and inflation. I guess we have started to see some price resistance from consumers in this inflationary backdrop. Are you finding that prices may be starting to become a greater priority for consumers versus what it has been over the last 12-18 months? As you're clearly value- focused, how are you thinking about your ability to take some of the share back over the coming quarters?
Yeah. We think it's very noticed, very much noticed by consumers. We think increasingly, you know, something that will cause them to change patterns or, you know, look for ways to save money. The levels of inflation that we're seeing today, and you don't expect it to subside anytime soon, we think orients customers back to value, or to value more so than they have been recently because of other needs or priorities. We haven't seen it quite yet, as mentioned in our own traffic count. You know, for us, the focus is delivering value, and we've been able to manage that well.
We think there's, you know, a real or there will increasingly be a real need to save even more money, not just because of inflation, but also when you consider the stimulus has ended, unemployment benefits have ended. A lot of the support and subsidies that were, you know, part of COVID have ended. Now on top of that, you have inflation that's really hurting consumer wallets. We think that ultimately turns in our favor in terms of customer count.
Our next question is from Karen Short with Barclays. Please go ahead.
Hi. Thanks very much. I just have a two-part question as well. First, can you actually provide what the actual inflation number was in the quarter? The bigger question I have is, when I look at your sales per square foot and your gross profit dollars per square foot versus 2019, both of those metrics actually got significantly worse in 3Q than 1Q or Q2. I guess I'm trying to triangulate that with the fact that you're calling out inflation as helping you a little bit.
Yeah, to your first question, Karen, yeah, we're not providing a specific number. You know what I'll say though is, you know, our mix is a little bit different and of course our pricing is different, as it relates to every day and opportunistic. You know, generally speaking, you know, impact of inflation on our business is gonna be a little bit less than, you know, what you see in industry just because of those assortment and pricing dynamics. Then, Charles?
Yeah. Karen, with respect to your question around gross margin and per foot, I think, in our point of view, we're feeling really good about, y ou look at the Q3 margin we posted a 30.8%. It was above our expectations and in the context of this inflationary environment, us delivering that number, which is right in line with pre-pandemic, pre-inflation levels of 2019, t hat's where we feel really good. We think the purchasing team's doing a great job on the buy side. Everything we talked about, continuing to leverage the flexibility of the model. We are following the market base pricing moves, but maintaining that relative value, able to replicate that pre-pandemic gross margin rate feels really good.
If we look into the fourth quarter, you know, we do expect that we'll continue to manage that margin effectively. If you recall, we always see that seasonal decline from Q3 to Q4 in gross margin related to holiday food mix. Our expectation of 30.5%, again consistent with 2019 levels, despite the impact of inflation.
Our next question is from Joe Feldman with Telsey Advisory Group. Please go ahead.
Yeah. Hey, guys. Thanks for taking my question. Wanted to ask about the stores and, you know, it sounded like you guys are, you know, the pipeline for next year is looking fairly good. You made a comment about materials and the expenses related to that going up. I was wondering if you could just explore that a little bit more and talk a bit what you're seeing and how that's impacting maybe the store opening model and the cost to do so.
Yeah. Hey, Joe, let me start that, then maybe Charles can talk about the cost. We're excited about sort of what we have on the docket for balance of this year and next year. What's been challenging is not the real estate deal pipeline, but the construction and getting those stores open pipeline. You know, just navigating all the constraints, availability of materials, the creativity we've had to use to, you know, beg, borrow, and steal to get things open. It's just been really challenging. It's unclear to us how those will either abate or persist. We're being pretty cautious on 2022 in terms of outlook. We think we'll have our stores will be more back-end weighted in terms of the second half of the year.
We've been able to manage the cost so far, but they have gone up a bit, you know, over sort of the five-year average. Will that come back down? We think we'll see some relief in the cost we've seen sort of in, you know, lumber and some in steel. Look, people are willing to pay for things that they can't get, so, you know, anyone's guess in terms of long term.
As a reminder, if you would like to register for a question, please press the one followed by the four. Our next question is from Michael Baker with Davidson. Please go ahead.
Hey, guys. I wanted to ask about the two-year comp trend. It seems to be stabilizing in the 4%-5% range. It's nice that it's stabilizing, but it is below what you were running, you know, prior to the pandemic. The five years prior to the pandemic, the two-year stack rate was pretty consistent at about like 9%, like almost every year, maybe 8%-9%. Should we think about this two-year stack of 4%-5% as being the new run rate, meaning, you know, comps in the 2%-2.5% range? I get that's sort of what your long-term algo is set at, 1%-3%, I think you said. Prior to the pandemic, you were able to beat that so consistently.
You know, is there a path to get back to those kind of numbers? Thanks.
Yeah, Mike, it's Charles . Let me just offer a few thoughts. I mean, I think overall, you know, with respect to the operating backdrop that we're working in, we feel really good about how we're executing, and the performance that we're delivering. As we look forward, we definitely see no change to the long-term algorithm that we've talked about. That's very much intact. We think it does get stronger, to your point, as customers return to value. Over time, historically, we have outperformed that sort of 1%-3% comp range, based on the importance of value. We think that, again, we're well-positioned as customers reorient in that direction.
Everything else in terms of the algorithm, unit growth, I think Eric talked about, we've got a strong line of the stores. Yes, we're navigating construction challenges, but no change to our long-term expectation there of 10% unit growth. On the margin side, we're doing a great job of managing for margin consistency and performance in the current environment. Again, over the long term, we do manage the business for gross margin and adjusted EBITDA margin stability. We feel really good about where we are, and where we're headed into 2022 and beyond.
Mr. Lindberg, I would like to turn the call back to you. You may continue with your presentation or closing remarks.
Yeah, just a short thank you. Thanks everyone for jumping on. Appreciate your engagement, and we'll talk to you in the next few minutes on one-on-ones. Thank you, operator. Appreciate it.
You're welcome, sir. That does conclude the conference call for today. We thank you all for your participation and kindly ask that you please disconnect your lines. Have a great day, everyone.