Grocery Outlet Holding Corp.

We are a growth-oriented extreme value retailer of quality, name-brand consumables and fresh products sold primarily through a network of independently operated stores. Our flexible buying model allows us to offer quality, name-brand opportunistic products at prices generally 40% to 70% below those of conventional retailers. Our Grocery Outlet stores are primarily run by entrepreneurial independent operators ("IOs") who create a neighborhood feel through personalized customer service and a localized product offering. As of October 3, 2026, we had 561 stores in California, Washington, Oregon, Pennsylvania, Tennessee, Nevada, Idaho, Virginia, Maryland, North Carolina, Ohio, Georgia, New Jersey, Alabama, Delaware and Kentucky.

Recent Trends and Developments

The extent of the continuing impact of the factors set forth below on our operational and financial performance will depend on many factors, including certain factors outside of our control.

Macroeconomic Conditions. Over the past several years, our business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, varying rates of inflation, tariffs, fuel price increases and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their businesses. We are monitoring recent elevated macroeconomic inflationary pressures, including higher transportation costs that have adversely affected our gross margin, and are actively assessing their potential ongoing effects on our results of operations. In recent periods, comparable store sales have been negatively impacted by decreased average transaction size. We are actively pursuing initiatives to increase average transaction size through our deployment of enhanced in-store merchandising and execution to further improve the shopping experience. During the third quarter, comparable store sales were temporarily adversely affected by a broad reduction in consumer demand for produce as a result of a Cyclospora outbreak associated with certain fresh produce items. We do not expect the outbreak to have a material ongoing effect on our results of operations.

Tariffs, such as those recently implemented or proposed by the U.S. government on goods imported from other countries, may result in cost increases on some of the products we sell, such as general merchandise that we import from impacted countries, as well as the materials and supplies we use for store construction. Tariffs may also negatively affect consumer sentiment. The tariff environment remains highly dynamic and specific tariffs applicable to our business continue to evolve. While we are regularly re-evaluating the potential impact of implemented and proposed tariffs, the short-term impact of price increases due to tariffs is largely dependent on our ability to negotiate with suppliers, opportunities to change sources of supply, our assortment decisions and whether or not we pass the effects through to our customers, which will largely depend upon competitive market conditions. It is reasonably possible that new or additional tariffs will be periodically implemented or proposed given the current global trade environment. Sustained uncertainty about, or worsening of, current global economic conditions and further tariffs and escalations of tensions between the U.S. and its trading partners has and could continue to adversely impact the stability of global financial markets and result in a global economic slowdown and long-term changes to global trade, which could in turn have a material adverse impact on our business and financial condition.

In February 2026, the Supreme Court of the U.S. issued a ruling striking down certain tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA"). In the second quarter of fiscal 2026, we applied for tariff refunds, and refunds received have not been material. Subsequent to the ruling, the U.S. presidential administration invoked additional tariffs under other laws, resulting in rapid changes to the tariff environment. We continue to assess the impact of recent tariff developments and any additional tariffs may materially affect our future results of operations and cash flows. Additionally, the ultimate availability, timing, and amount of any potential additional tariff refunds remain uncertain and are subject to further legal, regulatory, and administrative developments.

Pricing Competition. During the last few years we have observed an increase in promotional and pricing activities from key competitors, putting further pressure on our relative value proposition, which in turn, has resulted in our increased efforts to actively negotiate costs and adjust prices to sharpen our value proposition. In the first three quarters of fiscal 2026, we invested in additional promotional activity, which adversely impacted gross margin. In the third quarter of fiscal 2026, we reduced promotional activity relative to the first two quarters of fiscal 2026.

Opportunistic Product. A key priority for fiscal 2026 is to strengthen our opportunistic assortment, which is central to our customer value proposition and our efforts to drive sustainable comparable store sales growth. We continue working to increase opportunistic product levels to what we believe is necessary to improve the perception of our value leadership and drive sales. As of the third quarter of fiscal 2026, comparable sales from opportunistic product have improved relative to the first and second quarters of fiscal 2026.

Optimization Plan. We initiated a business optimization plan during the first quarter of fiscal 2026, intended to strengthen long-term profitability and cash flow generation, improve operational execution, optimize our existing store footprint and align with our disciplined new store growth strategy (the "Optimization Plan"). The Optimization Plan provides for the closure of 36 financially underperforming stores ("Closure Stores"), including the termination, sublease or assignment of the applicable store leases; the termination, sublease or assignment of a lease for a distribution center facility that we are no longer utilizing (together with the store leases, the "Lease Exits"); and the termination of operator agreements with IOs for the Closure Stores as well as certain other store locations (the "Operator Agreement Terminations").

We estimate that we will incur total net restructuring charges under the Optimization Plan of between $22 million and $29 million. We increased our estimated range in the third quarter of fiscal 2026 primarily due to an update in expected lease termination costs and idle property costs. The total estimated charges include bad debt expense of approximately $16 million and cash costs of approximately $3 million that we incurred in connection with the Operator Agreement Terminations, as well as expected net restructuring charges for the Lease Exits totaling between $3 million and $10 million. For the Lease Exits, we have negotiated, or intend to negotiate, a lease termination, sublease or assignment with the applicable landlords. The expected net restructuring charges for the Lease Exits primarily include cash costs of between $57 million and $64 million for lease termination fees, costs to prepare the premises for surrender to the landlord, sublessee or assignee, and idle property costs, partially offset by the net non-cash write-off of the right-of-use assets and lease liabilities associated with these leases of approximately $(54) million. We now expect the operational actions and financial impacts of the Optimization Plan to be substantially completed by the fourth quarter of fiscal 2027.

We closed all 36 Closure Stores in March and April of 2026, and during the first three quarters of fiscal 2026, we substantially completed the Operator Agreement Terminations. In addition, we negotiated lease terminations with the landlords for certain of the Lease Exits and wrote off the right-of-use assets and lease liabilities associated with these leases. We also entered into a sublease for the distribution facility we are no longer using. For the leases associated with the Lease Exits, we incurred costs to prepare the premises for surrender to the landlords and idle property costs, net of proceeds received from sales of assets.

See Note 12 to the condensed consolidated financial statements for additional information regarding the Optimization Plan, including the costs incurred and restructuring liability activity.

New Store Growth. Our new store growth efforts are focused on organic growth combined with complementary real estate opportunities that align with our long-term geographic expansion and store growth strategies. Complementary growth opportunities may include expanding strategic relationships with large property owners, evaluating acquisitions of opportunistic real estate that become available through consolidation in the retail sector, and exploring strategic regional acquisitions of operating businesses.

Excluding the Closure Stores related to the Optimization Plan, we opened 27 net new stores in the first three quarters of fiscal 2026, and we plan to open 30 to 31 net new stores for the full year fiscal 2026. We have begun to expand with a more clustered location model in new markets to improve supply chain efficiency and marketing leverage that reflects our more disciplined approach. We also have started to make adjustments to how we go to market, including piloting new approaches to store openings and underwriting to stricter standards. For example, we have opened certain of our fiscal 2026 new stores as Company-operated stores initially, which differs from our historical practice, before transitioning the operations to an IO at a future point in time, the timing of which is uncertain and may vary by property.

Key Factors and Measures We Use to Evaluate Our Business

We consider a variety of financial and operating measures in assessing the performance of our business. The key financial measures we use in accordance with accounting principles generally accepted in the United States of America ("GAAP") are net sales, gross profit and gross margin, selling, general and administrative expenses ("SG&A"), operating income (loss), net income (loss) and comprehensive income (loss) and earnings (net loss) per share. The key operational metrics and non-GAAP financial measures we use are number of new stores, comparable store sales, EBITDA, adjusted EBITDA, adjusted net income and adjusted earnings per share.

Third Quarter of Fiscal 2026 Overview

Key financial and operating performance results for the third quarter of fiscal 2026 compared to the third quarter of fiscal 2025 were as follows:

•Net sales increased 0.9% to $1.18 billion.

•Comparable store sales increased by 0.5%, driven by a 2.4% increase in the number of transactions, partially offset by a 1.9% decrease in average transaction size.

•Gross margin was 30.0%, compared to 30.4% in the third quarter of fiscal 2025, a decline of 40 basis points.

•Weop ened 14 new stores and closed zero stores, ending the third quarter of fiscal 2026 with 561 stores in 16 states.

•Operating income was $24.0 million, which included $3.6 million in net restructuring credits related to the Optimization Plan (see Note 12 to the condensed consolidated financial statements for additional information).

•Net income was $13.3 million, or $0.13 per diluted share, compared to net income of $11.6 million, or $0.12 per diluted share, in the third quarter of fiscal 2025.

•Adjusted net income(1) was $15.6 million, or $0.16 diluted adjusted earnings per share(1), compared to $20.7 million, or $0.21 diluted adjusted earnings per share, in the third quarter of fiscal 2025.

•Adjusted EBITDA(1) was $59.4 million, compared to $66.7 million in the third quarter of fiscal 2025.

(1)Adjusted net income, diluted adjusted earnings per share and adjusted EBITDA are non-GAAP financial measures, which exclude the impact of certain special items. Please note that our non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. See the "Operating Metrics and Non-GAAP Financial Measures" section below for additional information about these items, including their definitions, how the non-GAAP financial measures provide useful information to investors and how management utilizes them, and reconciliations of the non-GAAP financial measures and the most directly comparable GAAP financial measures.