Grocery Outlet Holding Corp.

Results of Operations

The following table summarizes key components of our results of operations both in dollars and as a percentage of net sales (amounts in thousands, except for percentages):

(1)Components may not sum to totals due to rounding.

Operating Metrics and Non-GAAP Financial Measures

Number of New Stores

The number of new stores reflects the number of stores opened or acquired during a particular reporting period. Newly opened stores require an initial capital investment from us for store build-outs, fixtures and equipment that we amortize over time as well as cash required for inventory and pre-opening expenses and typically the issuance of IO notes to support IO startup costs.

We expect new store growth to be an important driver of our net sales growth over the long term. We lease substantially all of our store locations. Our initial lease terms on stores are typically ten to fifteen years with options to renew for three or four successive five-year periods.

Comparable Store Sales

We use comparable store sales as an operating metric to measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales are impacted by the same factors that impact net sales.

Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following a store's opening, which is when we believe comparability is achieved, or the thirteenth full fiscal month following a store's acquisition. Included in our comparable store definition are those stores that have been remodeled, expanded, or relocated in their existing location or respective trade areas. Excluded from our comparable store definition are those stores that have been temporarily closed for an extended period, those that have had their business materially disrupted for both planned projects as well as due to unforeseen circumstances, permanent store closures and dispositions. When applicable, as is the case with fiscal 2025, we exclude the net sales in the non-comparable week of a 53-week year from the same store sales calculation after comparing the current and prior year weekly periods that are most closely aligned. The 36 stores that were closed in March and April of 2026 as a result of the Optimization plan, as discussed further in Note 12 to the condensed consolidated financial statements, were excluded from comparable store sales beginning in February and March of 2026, respectively. Starting in the second quarter of fiscal 2025, comparable store sales include the addition of stores from the acquisition of United Grocery Outlet on April 1, 2024.

Opening or, on a limited strategic basis, acquiring new stores is a significant component of our disciplined new store growth strategy and, as we continue to execute on our growth strategy, we expect that a significant portion of our net sales growth will be attributable to non-comparable store net sales. Accordingly, comparable store sales is only one of many measures we use to assess the success of our growth strategy.

EBITDA, Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share

EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are non-GAAP financial measures that are supplemental key metrics used by management and our Board of Directors to assess our financial performance. EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share are also frequently used by analysts, investors and other interested parties to evaluate us and other companies in our industry. Management believes it is useful to investors and analysts to evaluate these non-GAAP financial measures on the same basis as management uses to evaluate our operating results. We use these non-GAAP financial measures to supplement GAAP financial measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions and to compare our performance against that of other peer companies using similar measures. In addition, we use adjusted EBITDA to supplement GAAP financial measures of performance to evaluate our performance in connection with compensation decisions. We believe that excluding items from operating income (loss), net income (loss) and earnings (net loss) per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides additional information for analyzing trends in our business.

We define EBITDA as net income (loss) before net interest expense, income taxes and depreciation and amortization expenses. Adjusted EBITDA represents EBITDA adjusted to exclude share-based compensation expense, asset impairment and gain or loss on disposition, acquisition and integration costs, costs related to the amortization of inventory purchase accounting asset step-ups, restructuring and related charges, goodwill impairment and certain other expenses that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude. Adjusted net income represents net income (loss) adjusted for the previously mentioned adjusted EBITDA adjustments, further adjusted for the amortization of property and equipment purchase accounting asset step-ups and deferred financing costs, tax adjustment to normalize the effective tax rate, and tax effect of total adjustments. Basic adjusted earnings per share is calculated using adjusted net income, as defined above, and basic weighted-average shares outstanding. Diluted adjusted earnings per share is calculated using adjusted net income, as defined above, and diluted weighted-average shares outstanding. These non-GAAP financial measures may not be comparable to similar measures reported by other companies and have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. We address the limitations of the non-GAAP financial measures through the use of various GAAP measures. In the future, we will incur expenses or charges such as those added back to calculate adjusted EBITDA or adjusted net income. Our presentation of these non-GAAP financial measures should not be construed as an inference that our future results will be unaffected by the adjustments we have used to derive such non-GAAP measures.

The following table summarizes key operating metrics and non-GAAP financial measures for the periods presented (amounts in thousands, except for percentages and store counts):

(1)Comparable store sales consist of net sales from our stores beginning on the first day of the fourteenth full fiscal month following the store's opening, which is when we believe comparability is achieved, or the thirteenth full fiscal month following the store's acquisition.

(2)See "GAAP to Non-GAAP Reconciliations" section below for the applicable reconciliations.

GAAP to Non-GAAP Reconciliations

The following tables provide reconciliations from our GAAP net income (loss) to EBITDA and adjusted EBITDA, GAAP net income (loss) to adjusted net income, and our GAAP earnings (net loss) per share to adjusted earnings per share for the periods presented (amounts in thousands, except per share data):

(1)Represents non-restructuring asset impairment charges and gains or losses on dispositions of assets.

(2)Represents costs related to the acquisition and integration of United Grocery Outlet, including due diligence, legal, consulting and retention bonus expenses.

(3)Represents the incremental amortization of an asset step-up resulting from purchase price accounting related to our acquisition in 2014 by an investment fund affiliated with Hellman & Friedman LLC, our former affiliate, as well as the amortization of debt issuance costs.

(4)In the second quarter and first half of fiscal 2026, represents net charges associated with the Optimization Plan. For the second quarter of fiscal 2026, net charges included cash costs associated with the Lease Exits of $13.1 million, costs related to Operator Agreement Terminations of $1.1 million, write-offs of merchandise inventory of $0.5 million, and other restructuring charges, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million. For the first half of fiscal 2026, net charges included bad debt expense of $15.4 million, cash costs associated with the Lease Exits of $13.9 million, costs related to Operator Agreement Terminations of $2.7 million, write-offs of merchandise inventory of $2.2 million, and other restructuring charges, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million. In the second quarter and first half of fiscal 2025, represents charges associated with the Restructuring Plan, including lease termination costs of $5.0 million and $34.1 million, respectively, non-cash impairment and disposal of long-lived assets of $6.1 million and $7.9 million, respectively, employee severance and benefit costs, and legal, professional and other related expenses. All such costs are reflected in Restructuring charges, net on the condensed consolidated statements of operations and comprehensive income (loss), except for write-offs of merchandise inventory, which are included in Cost of sales. See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan and the Restructuring Plan.

(5)Represents other non-recurring, non-cash or non-operational items, such as strategic project costs of $3.4 million and $7.9 million in the second quarter and first half of fiscal 2026, respectively, certain personnel-related hiring and termination costs, legal settlements and other legal expenses, system implementation costs, costs related to employer payroll taxes associated with equity awards, store closing costs, and miscellaneous costs.

(6)Represents adjustments to normalize the effective tax rate for the impact of unusual or infrequent tax items that we do not consider in our evaluation of ongoing performance, including excess tax benefits or shortfalls related to exercise and/or vesting of share-based awards that are recorded in earnings as discrete items in the reporting period in which they occur.

(7)Represents the tax effect of the total adjustments. We calculate the tax effect of the total adjustments on a discrete basis excluding any non-recurring and unusual tax items.

(8)As discussed in Note 10 to the condensed consolidated financial statements, for the first half of fiscal 2026 and the first half of fiscal 2025, there is no difference in the weighted-average shares outstanding used to calculate the basic and diluted GAAP net loss per share due to the Company's net loss.

(9)To calculate diluted adjusted earnings per share, we adjusted the weighted-average shares outstanding for the dilutive effect of all potential shares of common stock.

Comparison of the Second Quarter and First Half of Fiscal 2026 and Fiscal 2025 (amounts in thousands, except percentages)

Net Sales

The increases in net sales for the second quarter and first half of fiscal 2026 were primarily due to new store sales, partially offset by decreased sales from store closures and declines in comparable store sales. We opened 37 new stores over the last 12 months and closed 42 stores, including the closure of 36 stores in March and April of 2026 as a result of the Optimization Plan. See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan.

Comparable store sales declined 0.3% for the second quarter of fiscal 2026, driven by a 2.1% decrease in average transaction size, partially offset by a 1.8% increase in the number of transactions. For the first half of fiscal 2026, comparable store sales declined 0.6%, driven by a 2.6% decrease in average transaction size, partially offset by a 2.0% increase in the number of transactions.

Gross Profit and Gross Margin

For the second quarter and first half of fiscal 2026, gross margin declined due primarily to the impact of product promotions to drive sales, and inventory markdowns and write-offs associated with the Closure Stores, partially offset by improvements in inventory management.

See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan.

Selling, General and Administrative Expenses

The increase in SG&A for the second quarter of fiscal 2026 included a $6.4 million increase in corporate-related expenses, partially offset by a $3.6 million decrease in store-related expenses. The increase in corporate-related expenses was primarily from increased costs to support our continued growth, partially offset by lower marketing costs. The decrease in store-related expenses was primarily from lower impairment of long-lived assets and bad debt reserves.

The increase in SG&A for the first half of fiscal 2026 included a $7.6 million increase in store-related expenses primarily due to higher commissions and other costs to support our continued growth, partially offset by lower bad debt reserves and impairment of long-lived assets. Also included in the increase in SG&A was an $11.1 million increase in corporate-related expenses primarily from increased costs to support our continued growth, partially offset by lower incentive compensation. As a percentage of net sales, the SG&A increase was driven primarily by the aforementioned factors.

Restructuring Charges, Net

Net restructuring charges for the second quarter and first half of fiscal 2026 were related to the Optimization Plan. For the second quarter of fiscal 2026, net restructuring charges primarily included cash costs associated with the Lease Exits of $13.1 million, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million. For the first half of fiscal 2026, net restructuring charges primarily included bad debt of $15.4 million, cash costs associated with the Lease Exits of $13.9 million, and cash costs associated with the Operator Agreement Terminations of $2.7 million, partially offset by the net write-off of right-of-use assets and lease liabilities of $8.6 million.

For the second quarter and first half of fiscal 2025, net restructuring charges were related to a prior restructuring plan we initiated during the fourth quarter of fiscal 2024, intended to improve our long-term profitability, cash flow generation and return on invested capital, optimize the footprint of new store growth, and lower our cost base (the "Restructuring Plan"), and primarily included lease termination costs of $5.0 million and $34.1 million, respectively, and impairment and disposal of long-lived assets of $6.1 million and $7.9 million, respectively.

See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan and the Restructuring Plan.

Goodwill impairment

During the first quarter of fiscal 2026, we performed an interim goodwill impairment evaluation, which indicated that the Company's estimated fair value was less than its carrying amount. As a result, we recognized a non-cash goodwill impairment charge in the first quarter of fiscal 2026.

See Note 3 to the condensed consolidated financial statements for additional information.

Income Tax Expense (Benefit)

The changes in income tax expense for the second quarter and first half of fiscal 2026 was primarily driven by the changes in the level of earnings.

The increase in our effective income tax rate for the second quarter of fiscal 2026 compared to the second quarter of fiscal 2025 was primarily driven by changes in our level of earnings. The decrease in our effective income tax rate for the first half of fiscal 2026 compared to the first half of fiscal 2025 was primarily driven by non-deductible goodwill impairment recognized during the first half of fiscal 2026.

See Note 7 to the condensed consolidated financial statements for additional information.

Net Income (Loss)

Net income was $5.6 million for the second quarter of fiscal 2026 compared to net income of $5.0 million for the same period in fiscal 2025 as a result of the foregoing factors.

Net loss was $174.7 million for the first half of fiscal 2026 compared to net loss of $18.4 million for the same period in fiscal 2025. Net loss for the first half of fiscal 2026 included goodwill impairment of $158.0 million and net restructuring charges of $23.6 million. Net loss for the first half of fiscal 2025 included net restructuring charges of $45.0 million.

Adjusted EBITDA

Adjusted EBITDA decreased for the second quarter of fiscal 2026 compared to the prior year, primarily as a result of a decline in gross margin, partially offset by an increase in net sales, as discussed above.

The decrease in Adjusted EBITDA for the first half of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin and higher SG&A, partially offset by an increase in net sales, as discussed above.

Adjusted Net Income

The decrease in adjusted net income for the second quarter of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin, partially offset by an increase in net sales, as discussed above.

The decrease in adjusted net income for the first half of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin and higher SG&A, partially offset by an increase in net sales, as discussed above.