GO 10-K & 10-Q changes, risk factors and insider trading

•any significant disruption to our distribution and transportation network, the operations, technology and capacity of our distributionsdistribution centers and our timely receipt of inventory;

•risks associated with our long-term growth strategy, including opening, relocating or remodeling stores on schedule and on budget, as well as the revised near-term new store growth strategy as reflected in the Restructuring Planbudget;

•risks with implementing our revised near-term growth strategy, including financial and operating impacts associated with our Restructuring Plan and Optimization Plan;

All of our inventory is acquired through purchase ordersorders, and we generally do not have long-term contractual agreements with our suppliers that obligate them to provide us with products exclusively or at specified quantities or prices, or at all. Any of our current suppliers may decide to sell products to our competitors and may not continue selling products to us. In order to retain our competitive advantage, we need to continue to develop and maintain relationships with qualified suppliers that can satisfy our standards for quality and our requirements for delivery of products in a timely and efficient manner at attractive prices. The need to grow existing relationships and develop new relationships with qualified suppliers is particularly important as we seek to continue to expand our operations and enhance our product offerings in the future.

Manufacturers and distributors of name-brand, large volume products have become increasingly consolidated. Further consolidation of manufacturers or distributors could reduce our supply options and detrimentally impact the terms under which we purchase products. If one or more of our existing significant suppliers were to bebecame unable or unwilling to continue providing products to us on attractive terms, or at all, we may have difficulty finding replacement suppliers on commercially reasonable terms or at all. The loss of one or more of our existing significant suppliers or our inability to develop relationships with new suppliers could reduce our competitiveness, slow our plans for further expansion and cause our net sales and operating results, including our gross margin, to be materially adversely affected.

We depend on repeat visits by our customer base to drive sales, and we rely on desirable opportunistic products at discounts to excite our customers to make such repeat visits. Consumer preferences often change rapidly and without warning. We may not successfully address consumer trends or be able to acquire desirable opportunistic products, and we expect competition for customers to increase as online shopping by customers continues to expand. In addition, a majority of the assortment in each Grocery Outlet store is selected by IOs based on local preference and shopping history, and the inability of the IOs to successfully identify trends in the local market could materially adversely affect our financial performance.

We base our purchases of inventory, in part, on our sales forecasts. Since the implementation of system upgrades in August 2023, we and our IOs have experienced significant issues with ordering, inventory planning and management and payment processing, including our ability to accurately forecast sales, which resulted in reduced net sales and gross margin during fiscal 2023 and fiscal 2024. If our sales forecasts overestimate customer demand or we do not have accurate data or visibility into real-time product and inventory levels, we may experience higher inventory levels and need to take markdowns on excess or slow-moving inventory, leading to decreased profit margins. Conversely, if our sales forecasts underestimate customer demand or we do not have accurate data or visibility into real-time product and inventory levels, we may have insufficient inventory to meet demand, leading to lost sales. Either of thethese foregoing challenges could materially adversely affect our financial performance. In addition, a majority of the assortment in each Grocery Outlet store is selected by IOs based on local preference and shopping history, and the inability of the IOs to successfully identify trends in the local market could materially adversely affect our financial performance.

Our long-term success depends in part on our ability and the ability of the IOs to maintain or increase comparable store sales, and ifIf we are unablenot able to continue to achieve comparable store growth over the long-term,long term, our profitability and performance could be materially adversely impacted.

The IOs are responsible for store operations.operations at their store locations. Our success depends on, among other things, increasing comparable store sales through our opportunistic purchasing strategy and the ability of the IOs to increase sales and profits. To increase net sales, and therefore comparable store sales growth and profits, we and the IOs focus on delivering value and generating customer excitement by strengthening opportunistic purchasing, providing an increasing number of everyday products, optimizing inventory management, maintaining strong store conditions and effectively marketing current products and new product offerings. Competition and pricing pressures from competitors and suppliers may also materially adversely impact our comparable sales if we lose customers as a result.

WhileOur wecomparable have had positive comparativestore sales growth forslowed thein vastfiscal majority2025 ofand ourfiscal history,2024 and we may not be able to maintain or improve our comparable store sales growth to historical levels and our comparable store sales may decline in future years for many reasons, many of which we do not significantly control, including general economic conditions that may not favor our model, operational performance (including by the IOs), price inflation or deflation, or changes in response to competitive factors, changes in our existing supplier relationships or our inability to develop new supplier relationships, industry competition (e-commerce),including through e-commerce, new competitive entrants near our stores,entrants, price changes in response to competitive factors, any comparison year or quarter having above-average net sales results, possible supply shortages or other operational disruptions, the number and dollar amount of customer transactions in our stores, our ability to provide product or service offerings that generate new and repeat visits to our stores and the level of customer engagement that we and the IOs provide in our stores. In addition, we may not accurately model cannibalization by our new stores when we open new stores in established markets, which could reduce comparable store sales.

Significant disruption in our distribution and transportation network, our timely receipt of inventory, and adequate distribution center capacity and technology hashave had in recent years, and could continue to have, an adverse impact on our operating performance.

We rely on our distribution, transportation and technology network and systems to provide goods to our distribution centers and stores in a timely and cost-effective manner. Our stores are highly dependent on the successful operationsoperation of our distribution, transportation and technology networks, as IOs use these systems to order multiple deliveries per week and many of our products have a limited shelf life from the time of purchase, particularly opportunistic buys and fresh foods. Deliveries to our stores occur from our distribution centers or directly from our suppliers. We use four primary leased distribution centers that we operate and five primary distribution centers operated by third-parties. Any disruption, unanticipated or unusual expense or operational failure related to these processes and systems could affect store operations negatively. Our system upgrades during fiscal 2023 resulted in significant ordering and inventory disruptions during fiscal 2023 and fiscal 2024, which resulted in reduced net sales and gross margin. Please also see the risk factor below entitled: "Any material challenges or difficulties in maintaining or updating our existing technology, including developing or implementing new technology could have a material adverse effect on our business or results of operations."

In addition, events beyond our control, such as disruptions in operations due to fire,natural disasters, adverse weather conditionsconditions, labor disputes or otherconstraints, catastrophicsignificant eventspublic health and safety events, or laborgeneral disagreements,economic and political conditions, may result in delays in the delivery of merchandise to our stores. While we maintain business interruption and cybersecurity insurance, in the event our distribution centers or the third-party distribution centers that we utilize are shut down for any reason, such insurance may not be sufficient and any related insurance proceeds may not be timely paid to us, and our reputation and customer relationships could still be adversely impacted. Furthermore, there can be no guarantee that we will be able to renew the leases or third-party distribution and transportation contracts, as applicable, on our distribution centers on attractive terms or at all, which may increase our expenses and cause temporary disruptions in our distribution network.

As we continue to implement our store growth strategy, our distribution centers have in the past and may continue to have insufficient capacity or technology to optimally support all of our stores and effectively managing our distribution network and distribution centers will become more complex. Our new store locations receiving shipments may be further away from our distribution centers, which may increase transportation costs and may create transportation scheduling strains, or may require us to add additional facilities to the network. WeFor arefiscal simplifying2025 and fiscal 2026, we shifted our planned investments in our distribution infrastructure strategy infrom fiscalhighly 2025capital-intensive andprojects fiscalto 2026,lower cost distribution centers, which could hinder our ability to compete with companies that have invested in multi-temperature or automated facilities or have a more efficient distribution model. See “Management's Discussion and Analysis of Financial Condition and Results of Operations – Recent Trends and Developments – Restructuring Plan” for additional information.

We have actively pursued new store growth, including in new markets, and plan to continue doing so strategically in the future. Our new store openings may not be successful or reach the sales and profitability levels of our existing stores, particularly in new markets. These factors have in the past and may continue to impact our ability to attract and develop potential IOs. Some new stores may be located in areas with different competitive and market conditions as well as different customer discretionary spending patterns than our existing markets. Some new stores and future new store opportunities may be located in new geographic areas where we have limited or no meaningful experience or brand recognition. We may experience a higher cost of entry in those markets as we build brand awareness and drive customers to incorporate us into their shopping habits.

New store openings may negatively impact our financial results due to the effect of store opening costs and lower sales and contribution to overall profitability during the initial period following opening. In recent years, our costs to build a new store have increased in the past two years and our planned efforts to engineer reduced costs to build will take time and resources, and weoutcomes mayare notinfluenced beby successfulvarious infactors partbeyond orour whole in reducing such costs.control. New stores, particularly those in new markets, build their sales volume, brand recognition and customer base over time and, as a result, for approximatelygenerally four to five years, generally have lower margins and higher operating expenses as a percentage of sales than our more mature stores. New stores may not achieve sustained sales and operating levels consistent with our more mature store base on a timely basis or at all.all, and we may decide to close stores that we are unable to operate in a profitable manner. This lack of performance may have a material adverse effect on our financial condition and operating results.

Our long-term growth strategy is highly dependent on our ability to identify and open future store locations and relocate or remodel existing store locations in new and existing markets, and we are revising our near-term new store growth strategy as reflected in our Restructuring Plan.markets.

We continue to believe that strategic new store growth remains a significant and critical driver of long-term stockholder value. However, while our long-term goal is to continue to expand our store base, we may not be able to, or may determine it is not prudent to, consistently achieveimplement a high rate of new store growth on a year-over-year basis. AsWe parthave ofrecently revised our near-term growth strategy, including through our Restructuring Plan, we are optimizing new store growth in fiscal 2025Plan and fiscalOptimization 2026Plan, toalthough increase efficiencies for distribution and optimize brand awareness and marketing. Therethere can be no assurance that our revised new store growthsuch strategy will be successful. See “Management's Discussion and Analysis of Financial Condition and Results of Operations – Recent Trends and Developments – Restructuring Plan” for additional information. In fiscal 2024, we opened 27 new stores and also acquired 40 stores in connection with our acquisition of United Grocery Outlet.

OurIn the ordinary course, our ability to open stores in a timely and successful manner depends in part on the following factors: the availability of attractive store locations (including stores that will not compete significantly with existing stores and that can be reasonably serviced by our distribution network) and rent prices; the costs of construction and the availability of construction labor and materials; the absence of entitlement processes or occupancy delays; the ability to negotiate acceptable lease and development terms; our relationships with current and prospective landlords; the ability to attract potential IOs who are strong entrepreneurs; the ability to secure and manage the inventory necessary for the launch and operation of new stores; the availability of cash flows and capital funding for expansion; and general economic conditions. Any or all of these factors and conditions could materially adversely affect our growth and profitability.

While our long-term goal is to continue to expand our store base, we cannot assure you that we will be able to consistently (on a year-over-year basis) achieve a high level of new store growth and attractive return on capital, and we are focusing our near-term new store growth strategy in an effort to ensure strong new store execution. Over the last few years, planned construction and opening of new stores have been, and may continue to be, negatively impacted due to labor and materials shortages as well as longer lead times in lease execution, site permitting and construction. These challenges impacted our organic new store growth in recent years. Additionally, we may expand into neighboring states and regions in the United States where we do not have the same brand recognition and/or engage in further acquisitions to meet our growth goals, and such expansion heightens the risks, challenges and uncertainties of development. We may not have the level of cash flow or financing necessary to support our growth strategy. Further, much of our new store growth is in new markets where we do not have the same brand recognition at this time. Our proposedSuch expansion willcould place increased demands on our operational, managerial and administrative resources.resources These increased demands couldand cause us to operate our existing business less efficiently, which in turn could cause deterioration in the financial performance of our existing stores.efficiently. If we experience a decline in performance, we may further slow or discontinue store openings, or we may decide to close additional stores that are unable to operate in a profitable manner.

If we fail to successfully implement our long-term growth strategy, including our strategy in connection with the Restructuring Plan, by opening new stores on a timely basis and on budget, our operations, financial condition and operating results would be materially and adversely affected.

DuringAs part of our revised near-term growth strategy, we completed the fourth quarterimplementation of fiscal 2024, we began to initiate the Restructuring Plan thatin isfiscal intended to improve our profitability2025 and cashwe flowrecently generation, optimizeinitiated the footprintOptimization of new store growth and lower our cost base.Plan. See “Management's Discussion and Analysis of Financial Condition and Results of Operations – Recent Trends and Developments – Optimization Plan and Restructuring Plan” for additional information. The costsimplementation associated withof the Restructuring Plan adversely impacted our results of operations in the fourth quarter of fiscal 2024, and may have a material adverse impact on our results of operations for one or more quarters in fiscal 2025 and for fiscal 2025. In addition, we may fail to manage any disruptions to our operations or growth strategy from the Restructuring Plan. Further, the RestructuringOptimization Plan may significantly harm our reputation with landlords, prospectiveemployees, employeesIOs, and other stakeholders, mayand harm our retention of remaining employees, andwe may not generaterealize the intended benefits from these actions to the extent or as quickly as anticipated, any of which could have an adverse effect on our business, financial condition and results of operations.anticipated.

TheWith estimatedrespect coststo the Optimization Plan: we may not be able to implement the lease terminations and subleases as anticipated on a timely basis, at an acceptable cost (in the case of terminations) or at market prices for the Restructuringremaining Planterms are(in subjectthe to a numbercase of assumptionssubleases), andor risksat andall; will be refined over time as more information becomes available, and thereforethe actual results may differ substantially from our estimates. In particular, the majorityamount of expenses associatedand withcash theexpenditures Restructuringmay Planexceed relateour estimates; we may incur additional expenses not currently contemplated due to leaseunanticipated terminations, and our estimated costsevents associated with certainsuch plannedplan; leasethe terminationsplan remainmay subjectharm our reputation with and lead to variousdisputes uncertainties.with Whilelandlords, employees and IOs, and other stakeholders; the plan may not generate the intended benefits to the extent or as quickly as anticipated; and we havemay reachedfail agreementto inmanage theany firstdisruptions quarter of fiscal 2025 regarding a number of planned lease terminations,to our estimatesoperations ofor thegrowth costsstrategy ofduring thesuch Restructuring Plan assume that we will reach agreement with respect to each planned lease termination, which is uncertain.implementation. If we are unable to agree with a landlord on acceptable terms on which to terminate a lease or are otherwise unable to sublease or assign our interest in the lease to a third party, we may be required to continue to perform obligations under the lease, including paying rent and incurring other operating expenses during the lease term. If we assign or sublease a lease to a third party, we may still have to pay a portion of the rent and other expenses and we can remain liable for the lease obligations if the assignee or sublessee does not perform. In addition, if our efforts to terminate, sublease or assign a lease are unsuccessful and we do not perform our obligations under the lease, the landlord may contend that we are in default under the lease and initiate legal proceedings against us, which could increase the costs relating to the RestructuringOptimization Plan beyond what we currently anticipate.

A critical differentiator of our business is our ability to offer value to our customers, including offering prices that are substantially below those offered by some of our competitors. We carefully monitor the market prices of our products in order to maintain our price advantage and reputation. In recent years, we have experienced varying levels of inflation, resulting in part from various supply disruptions, increased shipping and transportation costs, tariffs, increased commodity costs, increased labor costs in the supply chain and other disruptions caused by the recent economic environment, which we have not been able to fully offset through price increases. Our IOs have experienced increased costs related to labor and utilities, among others. If costs of goods continue to increase and our suppliers seek price increases from us, we may not be able to mitigate such increases and have sometimes, and may continue to, increase our prices, which could deter customer traffic and reduce the number and average basket size of customer transactions. Some of our larger competitors are in a better position to absorb cost increases while maintaining price competitiveness. If our competitors are more competitive on pricing relative to our pricing, we may lose customers and/or need to mark down prices. Our gross margins and profitability also may be adversely impacted by higher supply costs that we cannot fully pass along or if we need to lower product prices due to competition. As a result of our low-price model, the foregoing competitive pressures may reduce our profitability and materially adversely affect our business, financial condition and results of operations.

If we fail to maintain our reputation and the value of our brand, including protection of our intellectual property rights, our sales and operating results may decline and the carrying value of our goodwill and other intangible assets may be impaired.decline.

We believe our continued success depends on our ability to maintain and grow the value of our brand. Brand value is based in large part on perceptions of subjective qualities. The reputation of our company and our brand may be damaged in all, one or some of the markets in which we do business, by adverse events at the corporate level or by an IO acting outside of Grocery Outlet's brand standards, or by action (or inaction), by us or our IOs on issues like social policies, merchandising, compliance related to social, product, labor and environmental standards or other sensitive topics. Further, any perceived lack of transparency about such matters,matters could harm our reputation. The online dissemination of negative information about our brand through social media or other channels, including inaccurate information, could harm our reputation and our brand.

Our brand value and intellectual property representsrepresent a significant portion of our goodwill and intangible assets. Accounting rules require us to review the carrying value of our goodwill and other intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. If the testing performed indicates that an impairment has occurred, we are required to record a non-cash impairment charge. TheDuring testingthe fourth quarter of fiscal 2025, we performed our annual impairment evaluation of goodwill, which indicated that the fair value of the Company was lower than its carrying value, resulting in the recognition of a non-cash impairment charge of $149.0 million during fiscal 2025. Testing goodwill and intangible assets for impairment requires us to make estimates that are subject to significant assumptions. Changes in our estimates, or changes in actual performance compared with these estimates, may affect the fair value of goodwill or intangible assets, which also may result in a non-cash impairment charge. If a significant amount of our goodwill and other intangible assets were deemed to be impaired, our financial condition and results of operations could be materially adversely affected.

Our cash flow from operations may not provide sufficient capital to support our expanding business and execute our growth strategy, including to pay our lease obligations, build out new stores and distribution centers, remodel our stores, purchase opportunistic inventory, pay employees competitive wages and provide benefits, continue the ongoing modernization, enhancement and maintenance of our information systems, make loans to IOsIOs, operate Company-operated stores and further invest in the business. Further, our plans to grow our store base may create cash flow pressure if new locations do not perform as projected.

We currently lease substantially all of our store locations, primary distribution centers and administrative offices (including our headquarters in Emeryville, California), and a number of these leases expire or are up for renewal each year. Our operating leases typically have initial lease terms of ten to fifteen years with renewal options for twothree or threefour successive five-year periods at our discretion.

Typically, the largest portion of a store's operating expense that we bear is the cost associated with leasing the location. Our total lease payment obligations (excluding any unexercised option periods) for all operating leases in existence as of DecemberJanuary 28,3, 20242026 was $146.3$169.8 million for fiscal 20252026 and $1.5$1.17 billion in aggregate for fiscal years 20262027 through 2043,2045, and these obligations will increase as we open new stores that are leased. We are also generally responsible for property taxes, insurance and common area maintenance for our leased properties. If we are unable to make the required payments under our leases, the lenders or owners of the relevant leased properties, distribution centers or administrative offices may, among other things, repossess those assets, which could adversely affect our ability to conduct our operations. In addition, our failure to make payments under our operating leases could trigger defaults under other leases or under our 2023 Credit Agreement (defined below), which could cause the counterparties under those agreements to accelerate the obligations due thereunder.

The operating leases for our store locations, distribution centers and administrative offices expire at various dates through 2043.2045. When the lease termterms for our stores expire, we may be unable to negotiate renewals, either on commercially reasonable terms or at all, which could cause us to close stores or to relocate stores within a market on less favorable terms. Any of these factors could cause us to close stores in desirable locations, which could have a material adverse impact on our results of operations.

Over time, current store locations may not continue to be desirable because of changes in our business strategy, demographics within the surrounding area or a decline in shopping traffic. While we have the right to terminate some of our leases under specified conditions, we may not be able to terminate a particular lease if or when we would like to do so or on commercially reasonable terms. WeIn recentlyconnection havewith the Optimization Plan, we determined to terminate anor aggregatesublease a total of 2336 leases forin unopenedconnection with the closure of underperforming stores in fiscal 20252026 andalong fiscalwith 2026.the Seetermination “Management'sor Discussion and Analysissublease of Financiala Conditiondistribution andcenter Resultsfacility ofthat Operationswe –are Recentno Trendslonger and Developments – Restructuring Plan” for additional information about our Restructuring Plan.utilizing. If we decide to close stores, we are generally required to continue to perform obligations under the applicable leases, which generally include paying rent and operating expenses for the balance of the lease term. When we assign leases or sublease space to third parties, we may have to pay a portion of the rent and other expensesexpenses, and we can remain liable on the lease obligations if the assignee or sublessee does not perform.

Our future growth, performance and positive customer experience depend on our and the IOs' ability to attract, train, retain and motivate qualified employees who understand and appreciate our culture and are able to represent our brand effectively and establish credibility with our business partners and customers. We and the IOs face intense competition for management personnel and hourly employees. If we and the IOs are unable to attract and retain adequate numbers of qualified employees, our operations, customer service levels and support functions could suffer. There is no assurance that we and the IOs will be able to attract or retain highly qualified employees to operate our business. InThis connectionrisk withmay thebe Restructuringenhanced Plan,as we reducedopen headcount by approximately 40 full-time employees in the first quartercertain of fiscal 2025. This part of the Restructuring Plan could negatively impact our orstore our IOs' reputationlocations as anCompany-operated employer of choice and our or our IOs' ability to attract, train, and retain qualified employees in the future.stores.

Additionally, we believe that our success depends to a significant extent on the skills, experience and efforts of our executive officers and other key personnel, and we do not maintain key person insurance on any of our key personnel. Due to the uniqueness of our model, the unexpected loss of services of any of our executive officers or other key personnel could have a material adverse effect on our business and operations. In fiscal 2024 and fiscal 2025, we completed thorough and external searches for several new executive officers, including a new Chief Financial Officer and a new President and Chief Executive Officer, respectively, following the departure of their predecessors.Officer. We utilized interim officers to serve in such capacities for a period of time as well. Competition for skilled and experienced management in our industry is intense, and we may not be successful in the future in attracting and retaining qualified personnel on a timely basis or at all. If we lose the services of our executive officers or other key personnel, or if we are unable to attract, train, assimilate, and retain the highly skilled and other personnel that we need on a timely basis or at all, our business, financial condition and results of operations could be adversely affected.

While we have recently launched a mobile personalization app,app which informs customers of new and top selling items, provides curated product recommendations and tracks savings, we do not maintain a traditional loyalty program for customers, and our competitors may be able to offer their customers promotions or loyalty program incentives that could result in fewer shopping trips to or purchases from our stores. If we are unable to retain the loyalty of our customers, our sales could decrease and we may not be able to grow our store base as planned, which could have a material adverse effect on our business, financial condition and results of operations. Certain of our competitors have established, long-standing mobile apps and personalized marketing. There can be no assurance that our investment in this area will be successful.

As of DecemberJanuary 28,3, 2024,2026, we operated 274284 stores and distributed product from four distribution centers in California in addition to having our administrative offices in California, making California our largest market, representing 51%50% of our total stores. As a result, our business is currently more susceptible to any unforeseen events or circumstances of the types described above that negatively affect these areas as well as regional conditions, economic downturns or disruptions, such as changes in demographics, population and employee bases, wage increases, property tax increases, and changes in economic conditions, than the operations of more geographically diversified competitors. For example, there have been significant fires across the west coast of the United States over the last several years, causing a number of stores to be closed as well as suffer inventory losses related to power outages and evacuations. InFor 2018, our storeexample, in Paradise, California, burned down entirely. In early 2025, certain stores in Southern California were also impacted by fires. The frequency and severity of wildfires may increase in the future due to climate change and man-made catastrophes may increase in the future as well.

The United States and other countries have experienced, and may experience in the future, major health epidemics and pandemics related to viruses or other pathogens. Epidemics or pandemics, or the perception that such epidemics or pandemics may occur, may cause people to avoid gathering in public places, which may adversely affect our customer traffic, our ability and that of our IOs to adequately staff our stores and operations, and our ability to transport product on a timely basis. Additionally, to the extent that a pathogen is, or is perceived to be, food-borne, the price and availability of certain food products may be impacted and could cause our customers to consume less of such product. InFor recentexample, months,in 2024 our grossindustry margins have been adverselywas impacted by the unexpected shortage in supply and rise in egg costs due to the Avian flu, and certain egg producers have experienced shortages, all of which we anticipate to continue in fiscal 2025.flu.

Furthermore, the long-term impacts of climate change are expected to be widespread and unpredictable. Climate change poses both physical risks (posed by extreme weather conditions, drought, and/or rising sea levels), and transition risks (posed by regulatory changes or reputational risks). These factors could, among other negative consequences, increase our energy costs, damage our stores or distribution centers, disrupt our supply chain, negatively impact our workforce or reputation, and increase compliance and technology costs. Any of these occurrences may disrupt our business and materially adversely affect our financial condition and results of operations and the occurrence of any of these events in a region where our stores or other operations are concentrated may increase the impact of such disruption and adverse effect.effects.

Employees at two Company-operated stores are represented by the United Food and Commercial Workers Union. Our employees and those of the IOs have the right at any time to form or affiliate with a union. As we continue to grow, enter different regions and operate distribution centers, unions may attempt to organize the employees of our different IOs or our distribution centers within certain regions. IfWe may from time to time open or operate stores as Company-operated stores, and we determineare planning to open morecertain Company-operatednew stores,stores in fiscal 2026 in this manner. As we do so, this may subject our stores to greater union organizing efforts than we have additionalexperienced employeesin representedthe by unions.past. We cannot predict the adverse effects that any future organizational activities will have on our business, financial condition and operating results. If we or the IOs were to become subject to work stoppages, we could experience disruption in our operations and increases in our labor costs, either of which could materially adversely affect our business, financial condition and operating results.

During fiscal 2021 and fiscal 2022,While we have entered into partnerships with three third party grocery delivery companies to provide online shopping at our stores.stores, Certaincertain of our competitors and a number of pure online retailers have established robust online operations and significantly increased their online sales and presence in recent years.

From time to time, we may pursue or consummate acquisitions and other transactions, including material acquisitions, investments or joint venture transactions, as part of our business and real estate growth strategy to complement our current business by enhancing our customer base, geographic penetration and scale. For example, on April 1,in 2024, we acquired United Grocery Outlet, which included 40 stores in six adjacent states where we did not then-operatethen operate and a distribution center.

Identifying, assessing, consummating and integrating a strategic acquisition or other transaction is a complex, costly and time-consuming process that is subject to significant uncertainties and risks, which may divert the attention of the management team and key personnel from our core business and adversely impact our business, financial condition and results of operations. Additionally, acquisitions and similar transactions may utilize significant liquidity and require additional equity or debt financing, and we may not have sufficient capital for our core business. The integration process also could result in: the loss of key employees; the disruption of our operations; complications in information technology and accounting systems, compliance standards, controls, and other procedures; difficulties in achieving anticipated cost savings, synergies, business opportunities and growth prospects from the acquisition; additional litigation, compliance or regulatory risks; and difficulties in the assimilation of employees and corporate cultures. These risks and uncertainties may impede our ability to successfully complete integrations following strategic acquisitions that we make, and we may choose to later divest businesses that we acquire. Any such sale of acquired assets could result in impairment of goodwill or assets, we may not be able to achieve a favorable return on our investment in the assets, and we may incur significant additional expenses in connection with any sales process. Even if a target company is successfully integrated, an acquisition may fail to further our business strategy as anticipated, adversely impact our reputation, lead to impairment of our purchased goodwill and intangible assets, and expose us to additional liabilities and risks (particularly if entering into new markets or businesses where we have no or limited experience). The foregoing risks may be heightened due to our limited history in consummating strategic acquisitions and other transactions, which could have a material adverse effect on our business, financial condition and results of operations.

General conditions in the United States and global economy that are beyond our control may materially adversely affect our business and financial performance. While we have not previouslyhistorically been materially adversely affected by periods of decreased consumer spending, any factor that could materially adversely affect the disposable income of our customers could decrease our customers' spending and number of trips to our stores, which could result in lower sales, increased markdowns on products, a reduction in profitability due to lower margins and may require increased selling and promotional expenses. These factors include but are not limited to unemployment, minimum wages, significant public health and safety events, government shutdowns, inflation and deflation, tariffs (including those currently announced or threatened, or that may be in the future), the threat, outbreak or escalation of terrorism, military conflicts, or other hostilities and related international sanctions (such as the ongoing Russia-Ukraine or Middle East conflicts),sanctions, trade wars and interest and tax rates. For example, the U.S. Government shutdown during the fourth quarter of fiscal 2025 adversely impacted the disbursement of benefits from federally-funded assistance programs that many of our customers depend on, including SNAP.

The retail food industry includes mass and discount retailers, warehouse membership clubs, online retailers, conventional grocery stores and specialty stores. These businesses provide alternative options for the consumers whom we aim to serve. Our success relative to these retailers is driven by a combination of factors, primarily product selection and quality, price, location, customer engagement and store format. Our success depends on our ability to differentiate ourselves and provide value to our customers, and our failure to do so may negatively impact our sales. To the extent that other food retailers lower prices or run promotions, our ability to maintain profit margins and sales levels may be negatively impacted. We and the IOs may have to increase marketing expenseexpenses to attract customers,customers and may have to mark down prices to be competitive and not lose market share. This limitation may materially adversely affect our margins and financial performance. During fiscal 2024, we observed an increase in promotional and pricing activities from key competitors, which led to our increased efforts to actively negotiate costs and adjust prices to sharpen our value proposition.

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes thereto included in "Item 8. Financial Statements and Supplementary Data." This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those described in "Item 1A. Risk Factors" or set forth in other sections of this report. See "Special Note Regarding Forward-Looking Statements" in this report.

For discussion related to the results of operations and changes in financial condition for fiscal 20232024 compared to fiscal 20222023 refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II of thisthe Annual Report on Form 10-K for the fiscal year ended December 30,28, 2023.2024 ("2024 Form 10-K").

We operate on a fiscal year that ends on the Saturday closest to December 31st each year. References to fiscal 2026, fiscal 2025, fiscal 2024, fiscal 2023, and fiscal 20222023 refer to the fiscal years ended January 2, 2027, January 3, 2026, December 28, 2024, and December 30, 2023, and December 31, 2022, respectively. Our 2024,2025 2023fiscal year consisted of 53 weeks while our 2024 and 20222023 fiscal years all consisted of 52 weeks.

We are a high-growth,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 IOs who create a neighborhood feel through personalized customer service and a localized product offering. As of DecemberJanuary 28,3, 2024,2026, we had 533570 stores in California, Washington, Oregon, Pennsylvania, Tennessee, Idaho, Nevada, Maryland, Nevada,Ohio, New Jersey, North Carolina, New Jersey, Georgia, Ohio, Alabama, Delaware, Kentucky and Virginia.

Macroeconomic Conditions. Over the past several years, and to a lesser extent recently, our business has been and continues to be impacted by macroeconomic conditions including supply chain and labor challenges, inflationvarying andrates subsequentof disinflation,inflation, tariffs, and changes in consumer behavior, and our IOs have been impacted by staffing challenges and increased labor costs and utility costs within their businesses. In recent periods, comparable store sales have been negatively impacted by decreased average transaction size. We are actively pursuing initiatives to increase average transaction size through our deployment of enhanced in-store merchandising and execution to further improve the shopping experience.

Pricing Competition. During fiscalthe 2024last 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.

New Store Growth. Planned construction and opening of new stores has been, and may continue to be, negatively impacted due to both increased lead times to acquire materials, obtain permits and licenses, hook up utilities as well as higher construction and development related costs. 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. On April 1, 2024, we acquired United Grocery Outlet, which included 40 stores in six adjacent states we did not operate in as of such date (Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia) and a company-operated distribution center. TheAs acquisitionof providesJanuary us3, with2026, the opportunity to scale in a new region and is a platform for potential future expansion in the Southeast. Excluding the39 United Grocery Outlet transaction, we opened 27 new stores andwere closedCompany-operated two stores during fiscal 2024. Our near-term integration focus is expanding the assortment, investing in store refreshes and new fixtures and introducing some of our marketing programs to the Southeast region. We plan to open 33 to 35 net new stores in fiscal 2025.stores.

Enterprise Resource Planning System Upgrades and Challenges. In late August 2023, we replaced componentsour ofinternally-developed ourlegacy applications with a customized enterprise resource planning system, including our financial ledger, purchasing, inventory management platformand reporting platforms as well as integrations with our warehouse and productstore data warehouse system.systems. The implementation of these system upgrades resulted in significant disruption to our business operations, including ordering and inventory disruptions, as well as payment processing, which adversely impacted our results of operations during the remainder of fiscal 2023,2023 as well as during fiscal 2024, as more fully described below in “Comparison ofthrough fiscal 2024 toand into fiscal 2023."2025. We have since improvedimplemented themultiple capabilities in fiscal 2025 improving data visibility toand helpincreasing usthe managespeed and forecastefficiency of tools that we and our IOs use to manage the business effectively, and we continue to work to further improve visibility into additional operating data, and to increase the speed and efficiency of the tools that we and our IOs use to manage the business.data.

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,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.

•Comparable store sales increased by 2.7%0.5% in fiscal 2024,2025 on a 52-week basis, driven by a 4.2%1.6% increase in the number of transactions partially offset by a 1.4%1.1% decrease in average transaction size.

•Gross margin decreasedincreased by 11010 basis points to 30.2%,30.3%, compared to gross margin of 31.3%30.2% for fiscal 2023.2024.

•We addedopened 6742 new stores, including 40 stores from the acquisition of United Grocery Outlet, and closed two,five, ending fiscal 20242025 with 533570 stores in 16 states.

•SG&A increased 11.4%by 8.5% to $1.24$1.33 billion, or 28.4% of net sales.

•Adjusted net income(1) wasdecreased by 1.5% to $75.2 million, or $0.76 diluted adjusted earnings per share(1), compared to $76.3 million, or $0.77 perdiluted adjusted diluted share(1) for fiscal 2024 compared to $108.1 million, or $1.07earnings per adjusted diluted share(1), for fiscal 2023.2024.

(1)Adjusted EBITDA,net income, diluted adjusted net income and adjusted diluted 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.

We recognize revenues from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. Discounts provided to customers by us are recognized at the time of sale as a reduction in net sales as the products are sold. Discounts that are funded solely by IOs are not recognized as a reduction in net sales as the IO bears the incidental costs arising from the discount. We do not accept manufacturer coupons. Net sales consist of net sales from comparable stores, described below under "Operating Metrics and Non-GAAP Financial Measures - Comparable Store Sales," and non-comparable stores. Growth of our net sales is generally driven by expansion of our store base in existing and new markets as well as comparable store sales growth. Net sales are impacted by the spending habits of our customers, customer perception of value in our offerings, product mix and supply, as well as promotional and competitive activities. Our ever-changing selection of offerings across diverse product categories supports growth in net sales by attracting new customers and encouraging repeat visits from our existing customers. The spending habits of our customers are affected by changes in macroeconomic conditions, governmental benefit programs such as the Supplemental Nutrition Assistance Program and discretionary income. Our customers' discretionary income is impacted by wages, fuel and other cost-of-living increases including food-at-home inflation, as well as consumer trends and preferences, which fluctuate depending on the environment. Because we offer a broad selection of merchandise at extreme values, historically our business has in the past benefited from certain periods of economic uncertainty.

Cost of Sales, Gross Profit and Gross Margin

CostGross profit is equal to our net sales less our cost of salessales, which includes, among other things, merchandise costs, inventory markdowns, inventory losses, transportation costs and distribution and warehousing costs, including depreciation. Gross profit is equal to our net sales less our cost of sales. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit. Gross margin is impacted by product mix and availability, as some products generally provide higher gross margins, and by our merchandise costs, which can vary. Gross margin is also impacted by the costs of distributing and transporting product to our stores, which can vary. Our gross profit is variable in nature and generally follows changes in net sales. While our disciplined buying approach has produced consistent gross margins throughout economic cycles, which we believe has helped to mitigate adverse impacts on gross profit and results of operations, changes in consumer demand as a result of macroeconomic conditions, including inflationary cost increases for goods, labor and transportation, supply chain constraints and changes in discretionary income, have resulted and could continue to result in higher variability to our gross margins. The components of our cost of sales, as well as our gross profit and gross margin, may not be comparable to the same or similar measures of our competitors and other retailers.

SG&A are comprised of both store-related expenses and corporate expenses. Our store-related expenses include commissions paid to IOs, occupancy and our portion of maintenance costs, depreciation and amortization of store-related assets andassets, the cost of opening new IO stores.stores and impairment of long-lived assets. Company-operated store-related expenses also include payroll, benefits, supplies and utilities. Corporate expenses include payroll and benefits for corporate and field support, share-based compensation, marketing and advertising, insurance and professional services, depreciation and amortization of corporate assets,assets and operator recruiting and training costs and impairment of long-lived assets related to the Restructuring Plan.costs. We continue to closely manage our expenses and monitor SG&A as a percentage of net sales. SG&A generally increases as we grow our store base and invest in our corporate infrastructure. SG&A related to commissions paid to IOs are variable in nature and generally increase as gross profits rise and decrease as gross profits decline. We expect that our SG&A will continue to increase in future periods as we continue to grow our net sales and gross profits.profit. The components of our SG&A may not be comparable to the components of similar measures of our competitors and other retailers.

Operating Income (Loss)

Operating income (loss) is gross profit less SG&A.A, restructuring charges and goodwill impairment. Operating income (loss) excludes interest expense, net, loss on debt extinguishment and modificationnet and income tax expense.expense (benefit). We use operating income (loss) as an indicator of the productivity of our business and our ability to manage expenses.

The following tablestable summarizesummarizes key components of our results of operations both in dollars and as a percentage of net sales (amounts in thousands, except for percentages) for fiscal 2025 (53 weeks) and fiscal 2024 (52 weeks):

We expect new store growth to be a significant and critical 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 twothree or threefour successive five-year periods.

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 was the case with fiscal 2020 and will beis 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. 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.

We operate on a fiscal year that ends on the Saturday closest to December 31st each year. The fiscal years ending January 2, 2027 (“fiscal 2026”) and ended January 3, 2026 ("fiscal 2025") consist of 52 weeks and 53 weeks, respectively. References to the firstsecond quarter of fiscal 2026 and the firstsecond quarter of fiscal 2025 refer to the 13 weeks ended AprilJuly 4, 2026 and MarchJune 29,28, 2025, respectively.

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 AprilJuly 4, 2026, we had 549547 stores in California, Washington, Oregon, Pennsylvania, Tennessee, Nevada, Idaho, Maryland, North Carolina, Maryland, Ohio, Virginia, Georgia, Virginia, New Jersey, Alabama, Delaware and Kentucky.

In the first quarter of fiscalFebruary 2026, the Supreme Court of the U.S. issued a ruling striking down certain tariffs previously imposed under the International Emergency Economic Powers Act ("IEEPA"). In the second quarter of fiscal 2026, we applied for tariff refunds, and refunds received have not been material. The ultimate availability, timing, and amount of any potential additional tariff refunds of such tariffs remainremains uncertain and areis subject to further legal, regulatory, and administrative developments. TheSubsequent to the ruling, in February 2026, the U.S. presidential administration subsequently invoked additional tariffs under other laws resulting in a rapidly changing tariff environment. In July 2026, these additional tariffs expired, and the U.S. presidential administration announced new tariffs, which we are assessing the impact. At this time we cannot reasonably estimate the total financial impact of thisrecent ruling,tariff developments and however it,these and any additional tariffs,tariffs may materially affect our future results of operations and cash flows.

Pricing Competition. During the last few years we have observed an increase in promotional and pricing activities from key competitors, putting further pressure on our relative value proposition, which in turn, has resulted in our increased efforts to actively negotiate costs and adjust prices to sharpen our value proposition. We have invested and plan to continue to invest in additional promotional activity in the near term, which adversely impacted gross margin in the first half of fiscal 2026 and which we expect will continue to adversely impact gross margin through the third quarter of fiscal 2026.

Opportunistic Product. We arecontinue working to increase opportunistic product levels to what we believe is necessary to improve the perception of our value leadership and drive sales. As partof the second quarter of thesefiscal efforts2026, wecomparable havesales investedfrom andopportunistic planproduct has improved relative to continue to invest in additional promotional activity in the near term, which adversely impacted gross margin in the first quarter of fiscal 2026 and which we expect will continue to adversely impact gross margin for the remainder of fiscal 2026.

Optimization Plan. ToWe 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, in the first quarter of fiscal 2026 we conducted a strategic, financial and operational analysis of our store fleet. Following that review, in the first quarter of fiscal 2026, our Board of Directors (the "Board") adopted a business optimization planstrategy (the "Optimization Plan"). thatThe Optimization Plan provides for the closure of 36 financially underperforming stores ("Closure Stores"), including the termination, sublease or assignment of the applicable store leases; the termination, sublease or assignment of a lease for a distribution center facility that we are no longer utilizing (together with the store leases, the "Lease Exits"); and the termination of operator agreements with IOs for the Closure Stores as well as certain other store locations (the "Operator Agreement Terminations").

We estimate that we will incur between $20$15 million and $27$24 million in net total restructuring charges in fiscal 2026 and fiscal 2027 related to the Optimization Plan, and we expect these actions to be substantially completed by the first quarter of fiscal 2027. Estimated restructuring charges expected to beWe incurred in connection with the Operator Agreement Terminations include bad debt expense of approximately $16$15 million and cash costs of approximately $3 million.million in connection with the Operator Agreement Terminations. We have negotiated, or intend to negotiate, a lease termination, sublease or assignment with the landlords of the Lease Exits. We expect to incur net restructuring charges for the Lease Exits oftotaling between $1$(3) million and $8$6 million, which primarily include cash costs of between $49$50 million and $60 million for lease termination fees, costs to prepare the premises for surrender to the landlords, sublessee or assignee, and idle property costs, partially offset by the net non-cash write-off of the right-of-use assets and lease liabilities associated with these leases of between $(4853) million and $(5254) million.

WeExcluding the Closure Stores related to the Optimization Plan, we opened 13 net new stores in the first half of fiscal 2026, and we plan to open 30 to 33 net new stores infor the full year fiscal 2026, excluding the Closure Stores related to the Optimization Plan.2026. We planhave 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 are also makinghave 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 planare to operateoperating certain of these new stores as Company-operated stores initially, which differs from our historical practice, before eventually transitioning the operations to an IO.

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 loss,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.

FirstSecond Quarter of Fiscal 2026 Overview

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

•Net sales increased 3.6%1.1% to $1.17$1.19 billion from $1.13 billion in the first quarter of fiscal 2025.billion.

•Comparable store sales declined by 1.0%,0.3%, driven by 3.1%a 2.1% decrease in average transaction size, partially offset by a 2.1%1.8% increase in the number of transactions.

•AdjustedGross EBITDA(1)margin was $43.1 million,30.2%, compared to $51.9 million30.6% in the firstsecond quarter of fiscal 2025.2025, a decline of 40 basis points.

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. Certain newly acquired stores may require refreshes and new fixtures.

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. StartingThe in the first quarter of fiscal 2026, comparable store sales exclude the36 stores that were closed duringin March and April of 2026 as a result of the Optimization Plan,plan, as discussed further in Note 12 to the condensed consolidated financial statements.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.

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.

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):

(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 quarterhalf of fiscal 2026, represents net charges associated with the Optimization Plan,Plan. includingFor badthe debtsecond expensequarter of $15.5fiscal 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 $1.7$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,Terminations costsof associated$2.7 withmillion, leasewrite-offs exits,of andmerchandise legal,inventory professional,of $2.2 million, and other relatedrestructuring expenses.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 quarterhalf of fiscal 2025, represents charges associated with the Restructuring Plan, including lease termination costs of $29.1$5.0 million and $34.1 million, respectively, non-cash impairment and disposal of long-lived assets,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 chargescharges, net on the condensed consolidated statements of operations and comprehensive loss,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 $4.5$3.4 million and $7.9 million in the second quarter and first quarterhalf of fiscal 2026, respectively, certain personnel-related hiring and termination costs, system implementation costs, legal settlements and other legal expenses, system implementation costs, costs related to employer payroll taxes associated with equity awardsawards, store closing costs, and miscellaneous costs.

(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.

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

The increaseincreases in net sales for the second quarter and first quarterhalf of fiscal 2026 waswere primarily attributabledue to thenew additionstore ofsales, 33partially netoffset by decreased sales from store closures and declines in comparable store sales. We opened 37 new stores opened over the last 12 months,months partiallyand offsetclosed by42 stores, including the closure of 36 stores in March and April of 2026 as a decreaseresult inof comparablethe storeOptimization sales.Plan. See Note 12 to the condensed consolidated financial statements for additional information on the Optimization Plan.

Comparable store sales declined 1.0%0.3% for the 13second weeksquarter endedof April 4,fiscal 2026, driven by a 3.1%2.1% decrease in average transaction size, partially offset by a 2.1%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.

For the second quarter and first quarterhalf of fiscal 2026, gross margin declined due primarily to a 50 basis pointthe impact fromof product promotions to drive sales, and inventory markdowns and write-offs associated with the Closure Stores, and the impact of product promotions to drive sales, partially offset by improvements in inventory management.

The increase in SG&A for the firstsecond quarter of fiscal 2026 includesincluded $11.2a $6.4 million in higher store-related expenses driven primarily by higher commissions and store occupancy costs. Also contributing to the increase in SG&Acorporate-related wasexpenses, anpartially offset by a $3.6 million decrease in store-related expenses. The increase of $4.8 million in corporate-related expenses duewas primarily tofrom increased professional fees and other costs to support our continued growth, partially offset by lower incentivemarketing compensation.costs. AsThe adecrease percentagein store-related expenses was primarily from lower impairment of netlong-lived sales,assets SG&Aand increasedbad compareddebt to the prior year due primarily to the aforementioned factors.reserves.

Restructuring ChargesCharges, Net

Restructuring charges for the first quarter of fiscal 2026 were related to the Optimization Plan and primarily included non-cash bad debt expense associated with Operator Agreement Terminations of $15.5 million and other Operator Agreement Termination costs. For the second quarter and first quarterhalf 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 $29.1$5.0 million and $34.1 million, respectively, and impairment and disposal of long-lived assets.assets of $6.1 million and $7.9 million, respectively.

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

Income Tax Expense (Benefit)

The decreasechanges in income tax benefitexpense for the second quarter and first quarterhalf of fiscal 2026 was primarily driven by the changechanges in the level of earnings.

The changeincrease 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 quarterhalf of fiscal 2026 compared to the first quarterhalf of fiscal 2025 was primarily driven by non-deductible goodwill impairment recognized during the first quarterhalf of fiscal 2026.

Net Income (Loss)

Net lossincome was $180.3$5.6 million for the firstsecond quarter of fiscal 2026 compared to net lossincome of $23.3$5.0 million for the same period in fiscal 2025 as a result of the foregoing factors. Net loss for the first quarter of fiscal 2026 included goodwill impairment of $158.0 million and restructuring charges of $18.2 million. Net loss for the first quarter of fiscal 2025 included restructuring charges of $33.9 million.

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

The decrease in adjusted net income for the firstsecond quarter of fiscal 2026 compared to the prior year was primarily attributable to a decline in gross margin and higher SG&A (including higher depreciation and amortization expense),margin, partially offset by an increase in net sales, as discussed above.