Greetings, and welcome to the Grocery Outlet's third quarter 2026 earnings results conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Nicolo Cottarelli, Senior Vice President of Strategic Finance and Investor Relations. Thank you. You may begin.
Good afternoon, and welcome to Grocery Outlet's call to discuss financial results for the third quarter ended October 3rd, 2026. Speaking for management on today's call will be Jason Potter, President and Chief Executive Officer, and Ian Ferry, Chief Financial Officer. Following prepared remarks from Jason and Ian, we will open the call for questions. Please note that this conference call is being webcast live, and a recording will be available via playback on the Investor Relations section of the company's website. Participants on this call may make forward-looking statements within the meaning of the federal securities laws. All statements that address future operating, financial, or business performance, or the company's strategies or expectations are forward-looking statements. These forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from these statements.
Description of these factors can be found in this afternoon's press release, as well as in the company's periodic reports filed with the SEC, all of which may be found on the Investor Relations section of the company's website or on sec.gov. The company undertakes no obligation to revise or update any forward-looking statements or information. These statements are estimates only and not a guarantee of future performance. Additionally, during today's call, the company will reference certain non-GAAP financial information, including adjusted items. Reconciliation of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure, may be found in the supplemental financial tables included in this afternoon's press release on the Investors section of the company's website under News and Releases and in the company's SEC filings. Now I would like to turn it over to Jason.
Good afternoon to you all, and thank you for joining us for our quarterly update. Our results improved in the third quarter, with a return to positive comps driven by our focus on executing an enhanced opportunistic assortment. Revenue increased 0.9% to $1.18 billion, with comparable store sales up 50 basis points. That was an 80 basis point improvement from the comp sales we reported for Q2, despite the adverse headwind from the Cyclospora outbreak during the third quarter. Comp was driven by a 2.4% increase in traffic, representing a 60 basis point sequential improvement from Q2. It was partially offset by a 1.9% decrease in basket, which was a 20 basis point sequential improvement from Q2. Gross margin of 30% was within our outlook range, reflecting slightly less promotional spend than was expected, but slightly greater than anticipated pressure on freight.
Adjusted EBITDA of $59.4 million landed in the middle of our guidance range, and adjusted EPS at $0.16 at the high end, which Ian will discuss further. These results demonstrate continued progress in our efforts to revitalize Grocery Outlet's value proposition and drive sustainable growth. We are committed to reinforcing our position as a leading value retailer, and we are excited about what that progress means for our customers and communities, especially in this challenging economic environment. I will begin today with more detail about our comp sales improvement and the critical link that improving our opportunistic product assortment execution had during Q3. I will also share updates on how we are improving collaboration with our suppliers and supporting our operators in this focused effort. I will finish by sharing how we see the business developing through the end of the year. First, delivering comp improvement.
Our progress on comp continues to be supported by continuing traffic growth, demonstrating that our focus on executing an improved opportunistic assortment and continued emphasis on value communication is drawing more customers into our stores. As inflation continues to pressure household budgets and more shoppers cite value as their top purchase criteria, we are working to ensure our offering is increasingly relevant. During the quarter, our prices on everyday assortment remained competitive, and our retail inflation has tracked below the broader market. During the quarter, we continued to shift our mix to higher levels of opportunistic product, creating greater absolute value and savings across the basket as a result. We see encouraging evidence that this focus is resonating with customers.
Customer credit card data indicates that Q3 traffic growth was driven by an increase in the number of new customers, and we are also gaining traction in e-commerce, where our implementation of parity pricing has resulted in driving incremental sales and positive margin dollars. While economic conditions continue to pressure our customer basket down year-on-year, positive sequential trends in basket size and the underlying units per transaction show we are making progress as we strengthen our assortment and overall execution. Notably, year-on-year opportunistic units per transaction growth was positive in Q3, as customers are responding to the more compelling assortment in our stores. These efforts are strengthening our brand and contributing to positive improvements in customer NPS scores year-on-year. in August, we also celebrated Grocery Outlet's 80th anniversary with targeted marketing that emphasized our improving slate of opportunistic deals.
The three-day event saw double-digit comps across the company and generated strong units per transaction growth. It is a useful example of how we have transitioned this year from broad-based synthetic promotions to now surgically deploying investments to drive more engagement from our customers. Our operators executed at a high level, and it was great to celebrate 80 years of both serving our customers and communities. Our comp progress was achieved despite the impact of the Cyclospora outbreak. While none of our products were involved in any of the Cyclospora recalls, the resulting impact on our produce business reduced total company comp by roughly 60 basis points during the third quarter. This was less than the 100 basis point impact we anticipated based on the data we had in front of us at the time of our Q2 call. Increased produce shrink also compressed overall gross margins slightly.
With that noted, we've seen a nice recovery in both comps and margin in produce, and the category has been growing at above inflation since the start of October. Our buying team and stores are ready to capitalize on the returning demand, and we expect no lingering impact of Cyclospora through the rest of the year. With this effect subsiding, overall company comps were positive in September and have accelerated into October. Returning to positive comp is an important marker of our progress, but the goal is to improve comps further and sustain those gains. To sustain our comp performance improvement, we remain laser-focused on continuing to prioritize execution improvements in our opportunistic assortment, and then sharing these amazing branded deals with our customers to consistently deliver excitement and discovery in every store.
I'll now turn to how we execute against that priority in Q3 and the work to come as we close out this year. On revitalizing our opportunistic assortment. As we discussed, our primary goal since the start of this year has been to strengthen our opportunistic assortment, given its foundational and differentiating role in the Grocery Outlet customer value proposition. We've activated the entire organization in this effort, starting with our buying and merchandising teams, and partnering with our suppliers and collaborating with our independent operators. We've made some important trade-offs. One example is to reduce elements of our everyday assortment to ensure we make the space for opportunistic products in our supply chain and at the shelf. By sourcing more exciting opportunistic deals and merchandising them with excellence, we drove a meaningful improvement in opportunistic comp and mix during the third quarter.
All of that in turn value for our customers. We are seeing this cycle of improvement show up in terms of positive value satisfaction, customer growth, and strengthening baskets. As we shared last quarter, we began this transformation with a specific set of actions to improve the opportunistic assortment for the grocery department. This process and focus drove grocery back to healthy levels of growth in Q2, which was sustained through the third quarter. During the early part of Q3, the team turned to repeating that same focused approach to both the frozen and deli departments. We're pleased to share that the same repeatable process is proving highly effective. Opportunistic mix increased materially in both departments over the quarter, and the department comp has followed.
As we move forward, we intend to maintain our methodical, focused approach to growing and maintaining the opportunistic assortment, working our way through the departments in a manner that allows us to deliver the right level of value, excitement, and novelty with our customers. This is supported by improved signage and updated digital outreach, including our new, more shoppable website and more focused messaging on deals and discovery. We're confident that customers will continue to respond to this renewed and more exciting experience. During Q3, our approach to collaboration and support with our suppliers and operators has also proved effective. As customers respond to the work we're doing in our stores, we're also actively engaging with our independent operators and suppliers. In Q3, we hosted a series of regional roadshows and workshops across the country, giving us the opportunity to connect in person with our operators.
We continue to hear positive feedback about the new tools, processes, and improvements we've introduced earlier this year, and I continue to be impressed with the collaboration, dedication, and commitment to drive growth and profitability that our operators demonstrate every day. We've seen our IOs average income increase year- to- date versus last year as a result of this work, an important indicator for the improving health of the business and operator engagement. In early Q4, we hosted our second supplier summit of the year, creating the perfect opportunity to work with our supplier partners to expand our business opportunities together. These valuable summits generate deal flow, generate new business, help improve execution, and build and reinforce strong relationships. This increased engagement with operators and suppliers creates meaningful opportunities for collaboration and getting the business back to the levels of growth we know we can all achieve together.
We look forward to continuing to partner with our operators and our suppliers to drive performance improvement across the business. As discussed earlier this year, we remain committed to operational discipline and effective capital deployment. Our store refresh and new store programs continue at the measured pace we previously outlined. Finally, our strategic review of the UGO business remains ongoing, and we don't have anything new to share at this time. Now, looking to Q4. Before closing, I'd like to take a moment to share some high-level expectations for the fourth quarter. We believe the positive trends we're seeing coming out of Q3 and into Q4 bode well for sales growth and our comp trajectory. We've wound down the synthetic promotional spending we introduced earlier this year, as our opportunistic assortments, current weight, depth, and quality is now providing significant value and excitement for our customers.
We've learned much during this last year, and we'll stay flexible in deploying targeted promotions where we have a high confidence in driving traffic, or for those promotions that create broader benefits, like our recent successful 80th anniversary celebration that I mentioned. For Q4, we're making a similar surgical investment into our Thanksgiving promotion that we believe will contribute to overall sales performance for this quarter and benefit subsequent periods by increasing the engagement of our most loyal customers. While that planned promotion and some cost pressures in our supply chain that are embedded in the gross margin guidance that Ian will share, we feel confident in our ability to manage margin responsibly and in our ability to expand margins over time. That said, we're remaining diligent and focused on operational discipline as we aim to drive durable, profitable growth.
In closing, we're encouraged by the results of the quarter, but have much left to do before we're satisfied with our performance. Our number one priority continues to be strengthening our opportunistic assortment, which we believe will unlock higher levels of comp growth. We'll continue to optimize and refine our operations to promote growth and drive efficiency across our business. In an environment where value is essential to our customers, our model is uniquely positioned to serve, and we see continued evidence of that in our financial performance. I'm confident in our ability to achieve our goals, and with a stronger foundation, we're well-positioned to capture on our long-term opportunities. We look forward to updating you on how we finish out this year. I'd like to thank our customers, our operators, our team, and our shareholders. Our focus lies firmly in delivering value to all of you.
With that, I will turn it over to Ian. Ian?
Thanks, Jason. In the third quarter, we saw a return to positive comps and delivered financial results in line with our guidance as we continue to strengthen the foundation of the business. Our efforts to restore and enhance the attributes that make this business unique and differentiated are starting to resonate with consumers and drive sales improvement. As we build on the sales trends, we will continue to spend with discipline and expect to improve our profitability and return on capital over time. I will start with the quarter and then discuss our fourth quarter and full-year outlook. Unless otherwise noted, the comparisons I provide are year-over-year. Starting with the top line, third-quarter net sales increased 0.9% to $1.18 billion. Positive comparable store sales and sales from stores opened over the last 12 months more than offset the impact of the Optimization Plan store closures earlier this year.
We opened 14 stores and closed zero during the quarter. Comparable store sales increased 50 basis points, ahead of our guidance of - 1% to flat. The improvement reflected two factors: a smaller-than-anticipated headwind from Cyclospora and stronger traffic and basket driven by our strategy to enhance the opportunistic assortment. On Cyclospora, we guided to 100 basis point impact on Q3 comp, but we came in approximately 40 basis points favorable to that estimate. We continue to see evidence that our focus on the opportunistic assortment is driving traffic and sales. We are encouraged by customer credit card data showing sequential growth in the active number of customers shopping our stores, demonstrating traction in attracting shoppers. Notwithstanding the pressure on the basket, which is impacted by broader economic conditions, sequential improvement on basket and positive results on opportunistic units per transaction growth show that we are making progress.
Gross profit trended slightly favorable to expectations in Q3, with gross margin of 30.0% coming in at the high end of our outlook. Gross profit dollars of $353 million were down slightly year-over-year, and gross margin was down 40 basis points year-over-year. The decline was contemplated in our outlook and reflected pressures we experienced during the quarter, including the impact of the supplemental promotional spend introduced this year, higher supply chain costs, and increased produce shrink related to the Cyclospora outbreak, and was partially offset by the favorable shift in opportunistic mix. We spent less than we expected on our synthetic promotional investments in Q3, notwithstanding investments in the 80th anniversary celebration. GAAP SG&A increased slightly to $332.5 million, and as a percentage of net sales, declined 10 basis points to 28.2%.
Sequentially, GAAP SG&A improved 30 basis points as a percentage of net sales, primarily driven by lower incentive compensation and professional fees, partially offset by higher costs to support our business growth. We also recorded $3.6 million in net restructuring credits related to the Optimization Plan. This included $15.8 million in non-cash credits, primarily from the net write-off of lease right-of-use assets and lease liabilities, partially offset by $12.2 million in cash charges. Below the operating line, net interest expense was $7 million, up 5.1% from last year. Our GAAP effective tax rate was 21.8% compared with 28% last year. Net income was $13.3 million, or $0.13 per diluted share, compared with $11.6 million, or $0.12 per diluted share last year.
Adjusted net income was $15.6 million, or $0.16 per diluted adjusted share, compared with $20.7 million, or $0.21 per diluted adjusted share last year. Adjusted EBITDA was $59.4 million, or 5% of net sales, compared with $66.7 million, or 5.7% of net sales last year. Adjusted EBITDA came in at the middle of our outlook range, while adjusted EPS came in at the high end. Turning to the balance sheet and cash flow statement. We ended the quarter with $59.8 million in cash and approximately $154 million of revolver availability. Total debt net of issuance costs was $502 million, down $3.7 million from Q2. Net leverage was 1.9x adjusted EBITDA at quarter end. Operating cash flow was $18.2 million compared with $17.3 million last year.
The increase was driven primarily by higher accrued and other liabilities due primarily to timing, partially offset by lower operating lease liabilities as a result of the Optimization Plan. Capital expenditures were $28.1 million, or $25.7 million net of tenant improvement allowances. Now, onto our outlook. Our fourth quarter guidance contemplates continued improvement in comp as we drive further execution on our opportunistic initiatives. Our margin outlook reflects the step-down of our promotional work from prior quarters, balanced with some headwinds that we are managing. We are also expecting some pressure in SG&A, driven by higher repairs and maintenance expenses on our fleet and other line items. As a reminder, last year's fourth quarter included a 53rd week in the 2025 fiscal year, adding $82.4 million to net sales and $9 million to adjusted EBITDA.
Our fourth quarter and full year outlook reflect the absence of those benefits this year. For the fourth quarter, we expect comparable store sales ranging from + 1.5%- 2.5%, gross margin of 29.7%- 30.0%, adjusted EBITDA of $57 million-$61 million, and diluted adjusted EPS of $0.11-$0.14 per share. For the full year, we now expect net new store openings of 30- 31 stores, net sales of $4.7 billion-$4.72 billion, comparable store sales in the range of + 0.2%- 0.4%, gross margin of 29.8%-30%, adjusted EBITDA of $225 million-$229 million, diluted adjusted EPS of $0.52-$0.55, and capital expenditures net of tenant improvement allowances of $170 million. In summary, we're confident in our ability to build off the results of the work we've done this year and drive towards sustainable, profitable growth.
Near term, we remain focused on getting more opportunistic product into our stores across more departments, ensuring our value proposition is well communicated to customers, and managing the business with discipline. Echoing Jason, thanks to everyone across the business and to our shareholders. We look forward to updating you at the end of our fiscal year. With that, I will turn the call over to the operator for questions.
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We ask that you limit your questions to one question and one follow-up to allow everyone the opportunity to ask their question. One moment while we pull for questions. Our first question today, we will hear from Robbie Ohmes with Bank of America. Please proceed with your question.
Hey, good evening. Thanks for taking my question. My first question just would be for Jason, sorry if you did this already, but the delivery pricing change with parity pricing, did that hit this quarter, and did you see any significant changes in delivery and things like that? Maybe Instacart, DoorDash merging, could that have an impact on your delivery business?
Sure. Robbie, thanks for the question. First thing I will say is, we do believe the business will continue to generate positive in-store traffic and comp growth of over 3% over time, irrespective of what we are doing online. That said, we did, as we indicated before, implement price parity. In doing that, the reason, the rationale for it was to make sure that the customer, the consumer could see our pricing and understand the offering online. That has been successful. We are really happy with the results. Their ability to see that value is translated into larger baskets and an inflow of new customers. We can kind of see that in the reporting. As we indicated, or what I will share is, it is margin dilutive, obviously taking fees off and creating price parity, but the results are EBITDA positive.
So, we are excited with those changes as they are at this point. It's a small part of our business. Your follow-up question on DoorDash, Instacart, it's early days. We're unsure of what that means, but both great partners, and we expect that great partnership to continue.
Thanks, Jason. Just a quick follow-up. How are you thinking about longer term, a timeline to get the business back to sort of a 6% or higher EBITDA margin? What are sort of the two or three key things that need to happen?
Yeah, Robbie, thanks for the question. We're still in the relative early innings. Our priority this year was to make sure that we were focusing on improving value by improving price perception through our opportunistic assortment. I would tell you that we're excited about the progress there with the team. On that part of the business, to get comps moving and obviously get back to a more normal level of profitability, we've seen op comp accelerate meaningfully through Q3. Our mix continues to expand. The playbook that Paul Miller and the team have put in place for grocery sustained itself through Q3. We've seen improvement across deli and frozen as we've turned our attention there. I think on the value component, what I would hope to be able to do in the next call is to give you an update on where we are there.
We're likely kind of halfway through on that piece of the business. That work will continue meaningfully through next year. The value piece being the key priority of our offering is essential. When we look at the business, our customers have been clear about what else they need. It's also clear to us that the customer experience is important, and so as we work on things like improving our fresh offering, in-stocks, store standards, and so on, that we'll see the basket growth, I think, rebound and start to grow. Our expectation is as we improve the business and continue to execute, loyalty will improve, and ultimately, we'll get the business back to where we know it can achieve.
Sounds great. Thanks, Jason.
Thanks for the question, Robbie.
Next, we'll move to Edward Kelly with Wells Fargo. Please go ahead.
Yeah. Hi, guys. Good afternoon. I wanted to ask you about the guidance and the implied Q4 guidance. Comp coming in a little bit better than expected, that guide comes up. Q3 EBITDA was in line with expectation, but I think the implied Q4 comes down a bit, I guess, with what you did with the full-year EBITDA guide. Can you just maybe talk a little bit more about what's impacting that, and then how much of that sort of carries into 2027? Then, I guess, how close are you to sort of run rate of what EBITDA should look like as you get into next year?
Hey, Ed. It's Ian. Thanks for the question. Just to start out at a high level, as Jason said, our focus this year has been on driving comp acceleration through revitalizing the op pipeline. So in the end of Q3, we exited the quarter at a comp rate that was 400 basis points higher than where we were in January. That feels good, and clearly we're guiding to further improvement in Q4. Meanwhile, we do think we've aligned on a healthier approach to gross margin as we've moved through the year and tapered the promotional bridge that we put in place back in January. So for Q3, you're right, we did outperform on both comp and gross margin rate, which contributed about $2 million of upside, and that was offset by $2 million of unfavorable SG&A pressure.
That came predominantly from elevated repairs and maintenance, so about $1 million, and then the rest just from a handful of discrete items. It's a similar story as you move into Q4. There's probably about $1 million of upside versus the prior implied guide from comp outperformance. And we're guiding to a $3 million lower midpoint. So, when you look at the $4 million net pressure on SG&A, again, a very big chunk of that is just elevated repairs and maintenance, which are just coming in much lumpier than what the budget had, and a handful of discrete items. So, not really expecting that to repeat into next year, but net-net, we're happy with the performance and where we're looking at for Q4.
Okay. And just a follow-up. You mentioned that the promotional bridge is ending. You had some other promo around the 80th anniversary, and then you have Thanksgiving coming up. I'm just kind of curious, as the promotional stuff's rolling off and you think about these more normal weeks, how would you gauge the underlying momentum of the business as the promotion has been rolling off? And then as part of that, could you just maybe dissect basket a bit? I'm just kind of curious. Is basket turning sort of the way that you thought that it would? Is it a little bit slower? Just curious as to how you're thinking about that sequential change.
Yeah. Hey, Ed. I'll take the first part and then shift the basket commentary to Jason. On the promotional spend, we did consistently taper it throughout the year as we got more effective on running promotions, as well as just restoring op mix. And in fact, in October, we had no excess promotion in the system, and comps accelerated month-over-month. So we felt good about that. And in aggregate, we spent certainly less than $20 million that we had planned, and think it would be unlikely that we would repeat that or move that back into the program as we look at next year.
Yeah, Ed. Just to answer your question on basket, I will hit a few points here. First and foremost, the basket has improved a couple hundred basis points from the start of the year. We are happy to see that recovery. There was some improvement as well, Q3 from Q2 overall, and that was really driven by units per transaction from our op focus. So what we are seeing in the baskets is a higher degree of op. That is obviously showing up in a number of places, improving the value in the basket. As I mentioned, the question that Robbie asked, happy to see the basket improving. As we continue to execute and improve the business, I do expect to see basket growth in addition to traffic growth. What we are seeing right now is a consistent ability to generate traffic, but a lagging basket.
I think the continued work we are doing, the focus, it is clear that that is working. We are going to continue that work through next year. As we improve the other side of value, which is the customer experience piece, we are going to see basket growth.
Great. Thank you.
Thanks, Ed.
Corey Tarlowe with Jefferies will have our next question.
Great. Thanks. Jason, you have mentioned a few times the benefit that the business has realized from the change in strategy this year around opportunistic product. I was wondering if you could provide a little bit more detail or quantification around the magnitude of that benefit when a certain number of products or percentage of products are in the store. Do you notice any sort of critical mass forming? I want to just have a better understanding, if possible, of how tangible these benefits are and what the ultimate runway could look like for this. Thanks so much.
Sure, Corey. Great question. Thanks for asking. Op has been the value and sales-generating engine of the business for some time. It is our source of differentiation, obviously. The areas that we see tangible evidence, it is across a host of KPIs, but we know that the degree of op we have in the business and its comp performance is correlated with comp sales. Mix matters, so the improvements we have made several hundred basis points year to date on mix demonstrates a weight, a range of products. So, your point about how many items in store, we are measuring that, and we do measure what do we have every day, what do we have in op, that does matter across the network, and the quality as well. So, we do have measures on quality, things like brand strength and so on, to help us understand what that looks like.
We also measure things like the discount, the actual pricing, how that shows up in the basket, and then things like turns. There is a newness and discovery to this, that flow is important. Making sure we continue to be relevant across the network is important, so we are also manage and monitor the SKUs that are unique in different markets. We do not always have an item that covers every single store, so that is also important. All of that to say, I think by the time we have the call, the next call will likely be halfway through the work. I think this work will continue well into next year. But there is a clear relationship for us that we see with the performance of this part of the business and the overall performance of the core of the business.
And so, the improvements we have seen, especially I would say notable is October, our comp run rate has now exited at a very nice kind of high end of the range that we gave for Q4, all driven by op. So, that synthetic promotion was gone, and again, the value piece that is driven from price perception and value comes from that part of the business. So, excited about what we are doing, but there is more to do, Corey.
Great. Thank you. That is very helpful. And then I was just wondering if you could provide a little bit color on pricing. With fuel prices being what they are, how are you thinking about pricing as we head into next year? Thanks so much.
Yeah. No, that is a great question. It is on everyone's minds, obviously. I would tell you that our pricing gaps are stable. We are monitoring that across the major MSAs. We look at that every day. We do see inflation on everyday assortment. That is something we are managing. We are passing through appropriately to manage the gaps that we have. That has been straightforward for the team. I think the benefits of what we have done with op and extending its mix and its reach, the AURs are lower. People that come in our stores are getting more value with more items in a basket of goods, especially in a period like this. And our ability to maintain the gaps is there.
The team has an agility to move sources of supply, which we have done this year in some cases. And again, the continued work on the mix has been especially helpful during this period. So, as far as we are concerned, we are managing inflation appropriately, and the team has the tools to get it done.
Thank you.
Next we will hear from John Heinbockel with Guggenheim Partners. Please proceed.
Jason, do you think when you look at op comp versus everyday, and I do not know if you look at it that way, where we are today, op comp should lead everyday because you are driving traffic on an improved value proposition? Is that fair? Then I think historically, right, the op margins were quite a bit higher. Do you want to run the business that way, or if the mix is higher, you can provide more value and earn a little bit less margin?
Yeah. Thanks for the question, John. It is a good question. We do monitor different categories of product growth. Op comp has clearly been running faster than the MTO part of our business. That is by design. As the team has continued to improve inventory flow, new supplier acquisition, engagement with our existing suppliers, that has worked really nicely in the business and also really fights inflation effects, if you will, on a basket of goods. The more op we drive, the higher mix of quality op that is available, and you always have to turn the product. People want newness in the store, and that is important. Those things are very healthy for the business, and they drive traffic, and they drive comps. We are going to continue to manage the business on the value side when it comes to price.
If you kind of break value, there's price, there's quality, and customer experience. The price part of what our work is the priority right now, and that work is clearly paying some early dividends and getting the momentum back into the business. The second part of your question on margin, there is a clear margin advantage. It's accretive for us. Every op item we sell versus an MTO item is more profitable. We do have to manage the business as well to make sure that we have enough everyday assortment to meet a broad-based set of needs that customers have. As we move to next year and work on things like better inventory management tools, those kinds of things will also help us build the basket. Op will remain a central focus of the team and our number one priority throughout next year.
My follow-up is, I know you guys had some work you were doing on store layout and format, and I think that was kind of pulled back a little bit. When do you think the top line is sustainable enough where you go back and the IOs want to put some more capital, or where you put more capital into the stores?
Yeah, no, that's a great question, John. Thank you. We are wanting to go at a certain pace here. I think we've moderated that with new stores. We've moderated that with some of the conversation we had around those refresh to make sure that everyone in the organization was focused on the price part of value, which our customers were telling us clearly we had needed to do some work on. That will likely continue well into next year. I think when we get enough momentum behind us and consistency in results, we'll make sure that at that point, we'll turn our attention to those kinds of opportunities, which are still there and provide a lot of headroom for the business. We're still excited about what those things mean.
Some of what we did this year with making the stores easier to shop has shown up in positive feedback from customers and is also helping the digital experience for people that are coming into our stores for the first time. Those things are there, they're present, they're available. Our operators have a good understanding now of what's to come. Again, our focus is going to be to continue to work this part of the business, make sure that's dialed in, and the team there is working hard to create a repeatable set of processes to make sure that this continues. Again, we're excited about the progress, but more to come.
Thank you.
Thanks, John.
Next, we will hear from Mark Carden with UBS. Please go ahead.
Good afternoon. Thanks so much for taking the questions. As you look across your shopper base, to what extent did you see your comp vary across your lower, middle, and higher-income customer cohorts? Are you seeing much in the way of impacts from mass merchants who are doing their own discounting, even if it is not as deep as yours? Then, are you seeing the new customers you were referencing skewing any higher or lower income? Thanks.
Yeah. Mark, thanks. It's Jason. Appreciate the question. I think your question relates to potential trade-down. Couple things I'll say. We think this business is built to succeed in any economic backdrop, and we've had cycles before where things have been pressured for the consumer, and this business pops. We think the work we're doing right now positions us well for that. Couple different stories just to tell, I think, on this point. On the first point, on the customer pressure, I think for the first time in Q3, I saw some evidence. We see it in the basket, but we're looking at things like substitution, and we could see in fresh protein a fair bit of pressure in premium beef.
I think everyone's well aware of the inflation effects that have happened with the cattle shortage, and that started to show up in what we see in that particular category. That said, we have been looking for evidence of trade-down, and this is very thin data at this point, but when we're looking at our credit card data, the new customers that are coming in, we are seeing a slight uptick in premium credit cards. But again, it's not significant enough for us to really make a judgment. I think it's kind of still up in the air. But again, our priority here is to return the model to a best-in-class value offering, and again, we're really laser-focused on the price part of that and executing everyday value and making sure that our op is healthy and growing.
Got it. That's helpful. Thanks. As a follow-up, you opened 14 new stores in Q3. You guys have been making some adjustments to your opening strategy. How did new store productivity track on these stores relative to where you'd like to be? Then, how is the IO pipeline shaping up relative to what you've seen in the past?
Yeah. Thanks for the question. Couple things to say there. Number one, we're still excited about the long-term unit growth opportunity for Grocery Outlet. As a reminder for those of you that maybe are new to this or just to hit it one more time, we have slowed down the pace of new store growth and shifted our mix of store execution on infill, and we did that to make sure that we're improving the rate and consistency of returns. So, again, just as a reminder, in the last three years, the company opened roughly a 50/50 mix, new market to infill. Just to add to the answer to the question you're asking, the 2025 cohort is on track with our performance. The 2026 group is kind of two-thirds infill with a balanced new market.
What I'm seeing right now is, for the 2026 group, the year's not up, infill is largely on track, but I am seeing variability in new markets. We will have some work to do when we do come back around in the midterm to new market growth, refining our process there. In the short term for 2027, our plan is to execute roughly 20 net new openings. They're all infill, and again, that gives us confidence in the predictability and support of the returns that we're going to generate.
Got it. Thanks so much. Good luck.
Thank you.
Next we'll hear from Leah Jordan with Goldman Sachs.
Thank you. Good afternoon. Thanks for taking our question. I just want to stick to the new store growth outlook first. We've been hearing about some tight supply across retail real estate and strip centers and the like, and it sounds like you've got visibility on the 20 new stores for next year. Maybe just what you're seeing in your markets that you're looking at around supply, visibility there for the pipeline for the next couple of years as you start to build that out. Then, maybe an update on unit economics. How are those potentially higher costs, right, if it's a tighter supply, flowing through and impacting your unit economics as you build out those new stores? Thank you.
Hey, Leah. Thanks for the question. On the first part of your question, haven't seen direct evidence of that tightness. Some of what we've seen, there was a lot of drug stores available, and we're seeing a fair bit of open retail. Not saying that that's not the case, but just haven't had that experience here at this point. I think I'll pass part two of the question on to Ian just to sort of address.
Yeah. Hey, Leah. On the unit economics, I mean, you're right. They have come down over the last several years as construction costs have become elevated and CapEx required has gone up. When the company went public, these were, call it, four-wall, four-year returns in excess of 35%, and it's more recently been something closer to 20%-25%. There's also this dynamic where our new markets have kind of varied from plan, whereas, as Jason said, on an infill basis, even with all the challenges we've had as a business, have actually been very consistent in recent years in terms of hitting or exceeding pro forma. As you look at the plan for next year, I think we have a lot of confidence in that because we're essentially doing all infill locations where the visibility is just much higher.
Okay. That's very helpful. Then for my follow-up, I know there's been some discussion around the puts and takes around gross margin, but the street is expecting expansion as we look ahead to 2027. I know you're not providing guidance today. You kind of brought in the expectations for Q4 a bit. I'm just trying to gain comfort in your view on gross margin expansion potential into next year. We've got some cost increases rising. I'm thinking about, typically, you guys have lagged, and there's always kind of a hit, and then you catch up. Is that really still the dynamic we should think about, or the timing and ability to pass through? Then, is there more pressure in the near term from these input costs, or are things like the op mix, more effective promotions, is that enough to kind of offset this interim period?
I'm just trying to think about the next few quarters instead of just this
Yeah
stair-step change up.
Yeah, fair question. Let me just start with Q4 and bridge you on that, then I'll kind of move to 2027. So, as you look at last year in Q4, we did about a 29.7% margin. This year, we're guiding to a 29.7%-30.0%, and we will have about a 40 basis point benefit from just higher opportunistic mix flowing through. In addition, we'll probably see about 20 basis points of improvement on shrink. That will be partially offset by, call it, 40 basis points, give or take, of pressure on supply chain, which is predominantly fuel and freight, which is pronounced this year and certainly worse than our plan. But netting all that out, we still expect at the midpoint to expand gross margins year-over-year in the fourth quarter, largely driven by the opportunistic mix improvement.
Now, as we go to 2027, you're right, we don't have a bottoms-up budget yet. We'll guide on the next call, but maybe I can provide a couple comments on the P&L that'd be helpful. In terms of comp growth, I mean, you've seen where we guided for Q4. We certainly expect that we can sustain that into next year. On gross margins, which is your specific question, we will have the benefit of removing these synthetic promotions next year as we lap that and some of the store closure costs. So, we do expect to see a year-over-year increase in gross margin for 2027.
Now, on the bottom half of the P&L with SG&A, there is likely to be some fixed cost pressure. Mainly I would point you to occupancy, where some of our locations that we are opening are in higher rent areas. An even bigger impact is just escalators on the large base moving through the system, and so that will be a source of deleverage in the P&L. Where it all nets out, we will update you in March. We do expect to have healthy growth and profitability each year as we move forward, but there will be some pressure on SG&A. Lastly, I would just point out, with the reduction in new stores for next year and some ongoing efficiencies, we will expect CapEx aggregate dollars to come down year-over-year, just as they had in 2026.
That is great color. Thank you so much. I will pass it on.
Thank you. As a reminder, please press star one if you would like to ask your question. Next, we will move on to Simeon Gutman with Morgan Stanley. Please proceed with your question.
Hey, Jason. Do you have a view on the overall mix of op versus everyday when, I guess, the dust settles? When you started, you kind of identified places in everyday where you needed to enhance the selection. Do you think that is holding back the basket size, or is it opportunistic that can end up driving the basket size higher?
Yeah, Simeon. Thanks for the question. When you are thinking about the business, and we are looking at the mix and we are looking at SKU count, you also need to make sure that the customer has coverage in certain categories with assortment. So, it is a balancing act, but generally, I would just say that we got too off-balance with too much everyday assortment and not enough opportunistic product. We think that by rebalancing that in the way we have and the work we still have in front of us, that we are going to have a nice everyday assortment that is going to cover the things we need to drive basket for loyal customers, but an exciting, high-turn opportunistic assortment that drives value for the customer.
One kind of salient point to make when you are thinking about mix, there is also, and I have not talked about this before, but everyday product turns at a certain rate, and that is important for everyday baskets, it is important for certain missions. But we do list tens of thousands of op SKUs, and so they turn at a relatively higher rate than the balance of the business. So, there is that newness piece as well as the number of SKUs is important.
So, we are looking at that kind of holistically as we move the business forward. So, I know that is not a perfect answer, but we think that, again, just to underline, we got too far in front of ourselves on everyday assortments, whether that be private label or made-to-order product, and rebalancing that, we found, has been highly effective, and we are going to continue on that path.
Okay. You mentioned October running good without promotion. I assume the Thanksgiving, that one has not begun yet. Can you just talk about the logic with Thanksgiving? Do you think it is defensive table stakes, you have to be there? Or are you seeing these promotions are bringing in new customers and you are able to retain and bring them into the flywheel?
Yeah, no, great question. So, just again to reinforce, we are not going to continue to promote like a traditional retailer. The synthetic bridge we put in place is over. It is all about op. As you pointed out, we did not have these synthetic promotions in October, and I would just tell you again that comps ran at the high end of the range. So, we are feeling good about the underlying performance and value excitement that that is generating. Just given the promotional environment, we are making a surgical bet over and above our regular investment for Thanksgiving. Thanksgiving is really important.
We did not get it quite right last year, and so getting value right during this critical selling period reinforces our positioning, and it creates engagement with our most loyal customers right through the quarter and beyond, and there is a component of new customer attraction that does happen. Now, all of that to say, that is all in our guidance. We are going to remain disciplined but flexible. We are managing the competitive price gaps, we are monitoring the environment, and we, at times, will make informed bets that are surgical, but nothing systematic like we did earlier in the year.
Thank you. Good luck.
Thank you.
There are no further questions at this time. I would now like to turn the call back to Jason Potter for closing remarks. I am sorry, there is somebody that just queued up. Would you like to take that question?
Absolutely.
Thank you. We'll hear from Joe Feldman with Telsey Advisory Group.
Sorry. Thanks, guys. I guess I didn't hit the star one early enough earlier. Question about, you said you guys are seeing new customers, which is terrific, and I'm wondering a couple things. What's drawing them in, and also, are you seeing them repeat after initial visitation?
Yeah, great question, Joe. Thanks for asking it. We are seeing new customers when we look at our credit card data. What's driving them in is the value we're creating through op. We're seeing that in the underlying data, and they are repeating. So, you always manage and you're watching things like customer churn. We're looking at the credit card data as a proxy to understand that, and what we can see right now is that strategy is working and is on point. And again, another reason why we believe that the continued work here is essential and will continue right through next year.
Got it. Okay, that's helpful. So, it's the ops helping to drive it, and that message is getting out. I guess the other question I did have was, when you guys talked about the stores, I know you've closed a bunch of the stores already, the 36 stores. Did you share how much of a headwind that was in the quarter? I was just curious how much pressure it was on total sales, if you could share.
Yeah, we didn't, but it's probably roughly $30 million.
Got it. Okay, yeah, it's just helpful to understand because the growth is, the comp is certainly much better and it looks good, so thanks, guys, and good luck with this quarter.
Thank you, Joe.
There are no further questions. I would now like to turn the call back to Jason Potter for closing remarks.
Once again, we appreciate the questions. Thanks for your engagement on the call. We will see some of you a little later today. Thank you so much for attending.
Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.