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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 1, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to
Commission File Number: 001-38950
go-20221001_g1.jpg
Grocery Outlet Holding Corp.
(Exact name of registrant as specified in its charter)
Delaware47-1874201
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5650 Hollis Street, Emeryville, California
94608
(Address of principal executive offices)(Zip Code)
(510845-1999
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.001 per shareGONasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐  No  
As of November 3, 2022, the registrant had 97,278,977 shares of common stock outstanding.




GROCERY OUTLET HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
Page
Item 2.
Item 4.

1

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q ("Form 10-Q" or "report") constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, business and market trends, our objectives for future operations, macroeconomic and geopolitical conditions, and the sufficiency of our cash balances, working capital and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs may constitute forward-looking statements. Words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "outlook," "plan," "project," "seek," "will," and similar expressions, are intended to identify such forward-looking statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied by any forward-looking statements we make, including those described under the headings "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the "2021 Form 10-K"), and as described in other subsequent reports we file with the United States ("U.S.") Securities and Exchange Commission (the "SEC"), including this report. We encourage you to read this report and our other filings with the SEC carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make.
You should not rely upon forward-looking statements as predictions of future events. The events and circumstances reflected in the forward-looking statements may not be achieved or occur. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activities, performance or achievements. These forward-looking statements are made as of the date of this report or as of the date specified herein and we have based these forward-looking statements on our current expectations and projections about future events and trends. Except as required by law, we do not undertake any duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
As used in this report, references to "Grocery Outlet," "the Company," "registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Website Disclosure
We use our website, https://investors.groceryoutlet.com, as a channel of distribution of Company information. Financial and other important information about us is routinely accessible through and posted on our website. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. The contents of our website and information accessible through our website is not, however, incorporated by reference or a part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are available, free of charge, on our website as soon as practicable after the we file the reports with the SEC.

2

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
October 1,
2022
January 1,
2022
Assets
Current assets:
Cash and cash equivalents$107,277 $140,085 
Independent operator receivables and current portion of independent operator notes, net of allowance $1,993 and $1,406
9,097 7,219 
Other accounts receivable, net of allowance $88 and $57
3,126 3,159 
Merchandise inventories331,891 275,502 
Prepaid expenses and other current assets17,186 16,780 
Total current assets468,577 442,745 
Independent operator notes, net of allowance $11,469 and $10,506
21,949 21,516 
Property and equipment, net537,678 499,387 
Operating lease right-of-use assets907,057 898,152 
Intangible assets, net60,676 51,921 
Goodwill747,943 747,943 
Other assets7,149 8,144 
Total assets$2,751,029 $2,669,808 
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable$143,037 $122,110 
Accrued and other current liabilities57,471 49,025 
Accrued compensation22,328 8,450 
Current lease liabilities55,698 51,136 
Income and other taxes payable8,914 7,185 
Total current liabilities287,448 237,906 
Long-term debt, net379,261 451,468 
Deferred income tax liabilities, net17,049 9,416 
Long-term lease liabilities981,959 961,746 
Total liabilities1,665,717 1,660,536 
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, par value $0.001 per share, 500,000,000 shares authorized; 97,228,838 and 96,144,433 shares issued and outstanding, respectively
97 96 
Series A preferred stock, par value $0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding
  
Additional paid-in capital838,577 811,701 
Retained earnings246,638 197,475 
Total stockholders' equity1,085,312 1,009,272 
Total liabilities and stockholders' equity$2,751,029 $2,669,808 
See Notes to Condensed Consolidated Financial Statements
3

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Net sales$918,185 $768,880 $2,647,271 $2,296,881 
Cost of sales637,550 531,768 1,836,336 1,590,044 
Gross profit280,635 237,112 810,935 706,837 
Operating expenses:
Selling, general and administrative227,458 191,572 659,116 573,125 
Depreciation and amortization19,406 17,495 56,430 49,997 
Share-based compensation9,084 1,902 24,363 10,051 
Total operating expenses255,948 210,969 739,909 633,173 
Income from operations24,687 26,143 71,026 73,664 
Other expenses (income):
Interest expense, net4,798 3,950 12,355 11,778 
Gain on insurance recoveries   (3,970)
Loss on debt extinguishment  1,274  
Total other expenses (income)4,798 3,950 13,629 7,808 
Income before income taxes19,889 22,193 57,397 65,856 
Income tax expense2,394 5,054 8,234 10,185 
Net income and comprehensive income$17,495 $17,139 $49,163 $55,671 
Basic earnings per share$0.18 $0.18 $0.51 $0.58 
Diluted earnings per share$0.17 $0.17 $0.49 $0.56 
Weighted average shares outstanding:
Basic97,057 95,955 96,587 95,610 
Diluted100,485 99,169 100,051 99,477 
See Notes to Condensed Consolidated Financial Statements

4

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
Common StockAdditional
Paid-In Capital
Retained EarningsStockholders' Equity
SharesAmount
Balance as of January 1, 202296,144,433 $96 $811,701 $197,475 $1,009,272 
Exercise and vesting of share-based awards276,473 — 887 — 887 
Share-based compensation expense— — 5,795 — 5,795 
Repurchase of common stock(139,718)— (3,451)— (3,451)
Dividends paid— — (7)— (7)
Net income and comprehensive income— — — 11,574 11,574 
Balance as of April 2, 202296,281,188 $96 $814,925 $209,049 $1,024,070 
Exercise and vesting of share-based awards565,792 1 3,068 — 3,069 
Share-based compensation expense— — 9,484 — 9,484 
Dividends paid— — (26)— (26)
Net income and comprehensive income — — — 20,094 20,094 
Balance as of July 2, 202296,846,980 $97 $827,451 $229,143 $1,056,691 
Exercise and vesting of share-based awards381,858  2,042 — 2,042 
Share-based compensation expense— — 9,084 — 9,084 
Net income and comprehensive income— — — 17,495 17,495 
Balance as of October 1, 202297,228,838 $97 $838,577 $246,638 $1,085,312 
See Notes to Condensed Consolidated Financial Statements

5

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued
(in thousands, except share amounts)
(unaudited)
Common StockAdditional
Paid-In Capital
Retained EarningsStockholders' Equity
SharesAmount
Balance as of January 2, 202194,854,336 $95 $787,047 $135,165 $922,307 
Exercise and vesting of share-based awards647,137 1 2,952 — 2,953 
Share-based compensation expense— — 3,939 — 3,939 
Dividends paid— — (5)— (5)
Net income and comprehensive income— — — 18,892 18,892 
Balance as of April 3, 202195,501,473 $96 $793,933 $154,057 $948,086 
Exercise and vesting of share-based awards335,747  2,039 — 2,039 
Share-based compensation expense— — 4,210 — 4,210 
Dividends paid— — (92)— (92)
Net income and comprehensive income— — — 19,640 19,640 
Balance as of July 3, 202195,837,220 $96 $800,090 $173,697 $973,883 
Exercise and vesting of share-based awards170,299  1,146 — 1,146 
Share-based compensation expense— — 1,902 — 1,902 
Dividends paid— — (39)— (39)
Net income and comprehensive income— — — 17,139 17,139 
Balance as of October 2, 202196,007,519 $96 $803,099 $190,836 $994,031 
See Notes to Condensed Consolidated Financial Statements
6

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
39 Weeks Ended
October 1,
2022
October 2,
2021
Cash flows from operating activities:
Net income$49,163 $55,671 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment53,067 46,236 
Amortization of intangible and other assets5,631 5,809 
Amortization of debt issuance costs and discounts1,727 1,883 
Gain on insurance recoveries (3,970)
Loss on debt extinguishment1,274  
Share-based compensation24,363 10,051 
Provision for accounts receivable2,773 3,529 
Proceeds from insurance recoveries - business interruption and inventory 2,103 
Deferred income taxes7,633 9,085 
Other890 950 
Changes in operating assets and liabilities:
Independent operator and other accounts receivable(3,509)884 
Merchandise inventories(56,389)(687)
Prepaid expenses and other current assets(406)1,114 
Income and other taxes payable1,729 398 
Trade accounts payable, accrued compensation and other liabilities35,182 (4,526)
Changes in operating lease assets and liabilities, net16,732 13,235 
Net cash provided by operating activities139,860 141,765 
Cash flows from investing activities:
Advances to independent operators(6,974)(7,614)
Repayments of advances from independent operators5,433 3,581 
Purchases of property and equipment(85,359)(89,575)
Proceeds from sales of assets34 24 
Investments in intangible assets and licenses(12,361)(4,566)
Proceeds from insurance recoveries - property and equipment 1,867 
Net cash used in investing activities(99,227)(96,283)
Cash flows from financing activities:
Proceeds from exercise of stock options5,998 6,138 
Principal payments on senior term loan(75,000) 
Principal payments on finance leases(955)(834)
Repurchase of common stock(3,451) 
Dividends paid(33)(136)
Net cash provided by (used in) financing activities(73,441)5,168 
Net increase (decrease) in cash and cash equivalents(32,808)50,650 
Cash and cash equivalents at beginning of period140,085 105,326 
Cash and cash equivalents at end of period$107,277 $155,976 
See Notes to Condensed Consolidated Financial Statements
7

GROCERY OUTLET HOLDING CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned subsidiaries, collectively, "Grocery Outlet," "we," or the "Company") is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. As of October 1, 2022, we had 431 stores throughout California, Washington, Oregon, Pennsylvania, Idaho, Nevada, New Jersey and Maryland.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the United States ("U.S.") Securities and Exchange Commission (the "SEC") for interim reporting. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2022 (the "2021 Form 10-K"). The condensed consolidated balance sheet as of January 1, 2022 included herein has been derived from those audited consolidated financial statements.
Our unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions were eliminated. In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future interim or annual period.
Use of Estimates The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results can differ from these estimates depending upon certain risks and uncertainties. Changes in these estimates are recorded when known.
Segment Reporting We manage our business as one operating segment. In addition, all of our sales were made to customers located in the U.S. and all property and equipment is located in the U.S.
Merchandise Inventories Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the weighted-average cost method for warehouse inventories and the retail inventory method for store inventories. We provide for estimated inventory losses between physical inventory counts based on historical averages. This provision is adjusted periodically to reflect the actual shrink results of the physical inventory counts.
Leases We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, current lease liabilities, and long-term lease liabilities in our condensed consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities in our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term, reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date, to determine the present value of our lease payments. Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term while finance lease payments are charged to interest expense and depreciation and amortization expense over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these short-term leases is recognized on a straight-line basis over the lease term.
We generally lease retail facilities for store locations, distribution centers, office space and equipment and account for these leases as operating leases. We account for one retail store lease and certain equipment leases as finance leases. Lease and non-lease components are accounted for separately. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores.
Fair Value Measurements Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
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The fair value of financial instruments is categorized based upon the level of judgment associated with the inputs used to measure their fair values. Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities
Level 2 — Quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — Unobservable inputs in which there is little or no market data, which requires us to develop our own assumptions when pricing the financial instruments, such as cash flow modeling assumptions
The assets' or liabilities' fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The fair value framework requires that we maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
There were no assets or liabilities measured at fair value on a recurring or non-recurring basis as of October 1, 2022 or January 1, 2022. Generally, assets are recorded at fair value on a non-recurring basis as a result of impairment charges. There were no transfers of assets or liabilities between levels within the fair value hierarchy during the 39 weeks ended October 1, 2022.
Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below:
Cash and cash equivalents, independent operator ("IO") receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature or their variable interest rates.
IO notes receivable (net) — The carrying value of such financial instruments approximates their fair value due to the effect of the related allowance for expected credit losses.
The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values of our significant financial liabilities that are not recorded at fair value on the condensed consolidated balance sheets (amounts in thousands):
October 1,
2022
January 1,
2022
Carrying Amount (1)
Estimated Fair Value (2)
Carrying Amount (1)
Estimated Fair Value (2)
Financial Liabilities:
Senior term loan (Level 2)$379,261 $377,300 $451,468 $457,700 
_______________________
(1)The carrying amounts as of October 1, 2022 and January 1, 2022 are net of unamortized debt discounts of $0.7 million and $1.0 million, respectively, and debt issuance costs of $5.1 million and $7.5 million, respectively.
(2)The estimated fair value of our senior term loan was determined based on the average quoted bid-ask prices for the senior term loan in an over-the-counter market on the last trading day of the periods presented.
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Revenue Recognition
Net Sales — We recognize revenue from the sale of products at the point of sale, net of any taxes or deposits collected and remitted to governmental authorities. For e-commerce related sales in which a third-party provides home delivery service, revenue is recognized upon delivery to the customer. Our performance obligations are satisfied upon the transfer of goods to the customer, at the point of sale, and payment from customers is also due at the time of sale. 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 provided by IOs are not recognized as a reduction in net sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons.
We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any material performance obligations other than our gift card deferred revenue liability, or any material costs to obtain or fulfill a contract as of October 1, 2022 and January 1, 2022.
Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize revenue for the unused portion of the gift cards ("breakage") under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $2.8 million and $3.6 million as of October 1, 2022 and January 1, 2022, respectively. Breakage amounts were immaterial for the 13 and 39 weeks ended October 1, 2022 and October 2, 2021.
Disaggregated Revenues The following table presents net sales revenue by type of product for the periods indicated (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Perishable (1)
$324,652 $268,349 $951,034 $800,623 
Non-perishable (2)
593,533 500,531 1,696,237 1,496,258 
Total net sales$918,185 $768,880 $2,647,271 $2,296,881 
_______________________
(1)    Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood.
(2)    Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer and wine.
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Variable Interest Entities In accordance with the variable interest entities sub-section of Accounting Standards Codification ("ASC") Topic 810, Consolidation, we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE.
We had 427, 411 and 403 stores operated by IOs as of October 1, 2022, January 1, 2022 and October 2, 2021, respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO selects a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. The IO is required to furnish initial working capital and to acquire certain store and safety assets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice.
As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us. Net sales related to IO stores were $903.1 million and $754.4 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $2.60 billion and $2.26 billion for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. We, in turn, pay each IO a commission based on a share of the gross profit of the store. Inventories and related net sales proceeds are our property, and we are responsible for store rent and related occupancy costs. IO commissions are expensed and included in SG&A. IO commissions were $136.5 million and $117.2 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $395.7 million and $345.3 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively. IO commissions of $8.6 million and $9.1 million were included in accrued and other current liabilities as of October 1, 2022 and January 1, 2022, respectively.
An IO may fund its initial store investment from existing capital, a third-party loan or most commonly through a loan from us, as further discussed in Note 2. As collateral for IO obligations and performance, the Operator Agreement grants us the security interests in the assets owned by each IO related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, each IO is a VIE that we have a variable interest in. To determine if we are the primary beneficiary of a VIE, we evaluate whether we have (i) the power to direct the activities that most significantly impact the IO's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of the IO's ability to direct those activities.
Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of its own labor. Labor activities that significantly impact the IO's economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreement illustrate the lack of ultimate control over the IO. Therefore, the Company is not the primary beneficiary of these VIEs.
Our maximum exposure, in accordance with ASC Topic 810, to the IOs is generally limited to the IO notes and IO receivables due from these entities, which was $44.5 million and $40.6 million as of October 1, 2022 and January 1, 2022, respectively. See Note 2 for additional information.
Recently Adopted Accounting Standards
No recently adopted accounting pronouncements had a material effect in our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
Accounting Standards Update ("ASU") No. 2022-02 — In March 2022, the Financial Accounting Standards Board issued ASU No. 2022-02, Troubled Debt Restructurings and Vintage Disclosures ("ASU 2022-02"). ASU 2022-02
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eliminates the accounting guidance on troubled debt restructurings for creditors in ASC Topic 310 and amends the guidance on "vintage disclosures" to require disclosure of current-period gross write-offs by year of origination. ASU 2022-02 also updates the requirements related to accounting for credit losses under ASC Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We will adopt ASU 2022-02 beginning in the first quarter of fiscal 2023. We do not expect the adoption of ASU 2022-02 to have a material impact on our consolidated financial statements.
Note 2. Independent Operator Notes and Independent Operator Receivables
The amounts included in IO notes and IO receivables consist primarily of funds we loaned to IOs, net of estimated uncollectible amounts. IO notes, which are payable on demand and have no maturity date, typically bear interest at rates between 3.00% and 9.95%. Accrued interest receivable on IO notes is included within the "independent operator receivables and current portion of independent operator notes, net of allowance" line item on the condensed consolidated balance sheets and was $0.8 million and $0.5 million as of October 1, 2022 and January 1, 2022, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of October 1, 2022 or January 1, 2022. Notes and receivables from our IOs participating in our TCAP, as defined below, are not considered to be past due or on a non-accrual status due to delinquency and are excluded from such measures.
IO notes and IO receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets.
The allowance is estimated using an expected loss framework, which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include:
TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are participating in our Temporary Commission Adjustment Program ("TCAP") as of the end of each reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in IO skills and experience.
Non-TCAP Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are not participating in TCAP as of the end of each reporting period.
New store Includes the notes and receivables from IOs with stores that have been open for less than 18 months as of the end of each reporting period.
Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an individual basis.
Amounts due from IOs and the related allowances as of October 1, 2022 and January 1, 2022 consisted of the following (amounts in thousands):
AllowanceCurrent PortionLong-term Portion
GrossCurrent PortionLong-term PortionNet
October 1, 2022
Independent operator notes$35,873 $(706)$(11,469)$23,698 $1,749 $21,949 
Independent operator receivables8,635 (1,287) 7,348 7,348  
Total$44,508 $(1,993)$(11,469)$31,046 $9,097 $21,949 
AllowanceCurrent PortionLong-term Portion
GrossCurrent PortionLong-term PortionNet
January 1, 2022
Independent operator notes$34,221 $(811)$(10,506)$22,904 $1,388 $21,516 
Independent operator receivables6,426 (595) 5,831 5,831  
Total$40,647 $(1,406)$(10,506)$28,735 $7,219 $21,516 
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A summary of activity in the IO notes and IO receivables allowance was as follows (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Beginning balance$13,097 $10,177 $11,912 $8,109 
Provision for IO notes and IO receivables712 1,261 2,727 3,561 
Write-off of provision for IO notes and IO receivables(347)(143)(1,177)(375)
Ending Balance$13,462 $11,295 $13,462 $11,295 

The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of October 1, 2022 (amounts in thousands):
Credit Quality Indicator2022 (YTD)2021202020192018PriorTotal
TCAP$2,748 $3,581 $3,116 $774 $705 $494 $11,418 
Non-TCAP4,262 3,532 3,410 2,417 1,285 1,077 15,983 
New store4,167 4,161 144    8,472 
Total$11,177 $11,274 $6,670 $3,191 $1,990 $1,571 $35,873 

Note 3. Long-term Debt
Long-term debt consisted of the following (amounts in thousands):
October 1,
2022
January 1,
2022
First Lien Credit Agreement:
Senior term loan$385,000 $460,000 
Long-term debt, gross385,000 460,000 
Less: Unamortized debt issuance costs and debt discounts
(5,739)(8,532)
Long-term debt, net$379,261 $451,468 
First Lien Credit Agreement
GOBP Holdings, Inc. ("GOBP Holdings"), our wholly owned subsidiary, together with another of our wholly owned subsidiaries, has a first lien credit agreement (the "First Lien Credit Agreement") with a syndicate of lenders that consists of a $385.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, with sub-commitments for a $35.0 million letter of credit and $20.0 million of swingline loans as of October 1, 2022. The First Lien Credit Agreement permits voluntary prepayment on borrowings without premium or penalty. Borrowings under the First Lien Credit Agreement are secured by substantially all the assets of the borrower subsidiary and its guarantors.
Senior Term Loan
On April 29, 2022, we prepaid $75.0 million of principal on the senior term loan outstanding under our First Lien Credit Agreement. In connection with the payment, we wrote off $1.3 million of previously unamortized debt issuance costs and debt discounts.
Our $385.0 million senior term loan matures on October 22, 2025, has an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, and had an effective interest rate of 5.87% as of October 1, 2022. Due to previous prepayments on the senior term loan, no further principal payment on the senior term loan will be due until the maturity date.
Revolving Credit Facility
As of October 1, 2022, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under the revolving credit facility, which matures on October 23, 2023. No amounts were outstanding under the revolving credit facility as of October 1, 2022 and January 1, 2022.
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We are required to pay a quarterly commitment fee ranging from 0.25% to 0.50% on the daily unused amount of the commitment under the revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We are also required to pay fronting fees and other customary fees for letters of credit issued under the revolving credit facility. The interest rate for the revolving credit facility is determined based on a formula using certain market rates.
Debt Covenants
The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement restricts us from entering into certain types of transactions, such as incurring additional debt or issuing certain preferred shares, and making certain types of payments including dividends and stock repurchases and other similar distributions, with certain exceptions. Additionally, borrowing availability under the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7.00 to 1.00.
As of October 1, 2022, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement.
Schedule of Principal Maturities
Principal maturities of debt as of October 1, 2022 are as follows (amounts in thousands):
Remainder of fiscal 2022$ 
Fiscal 2023 
Fiscal 2024 
Fiscal 2025385,000 
Fiscal 2026 
Thereafter 
Total$385,000 
Interest Expense, Net
Interest expense, net, consisted of the following (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Interest on loans$5,015 $3,489 $12,335 $10,454 
Amortization of debt issuance costs and debt discounts537 628 1,727 1,883 
Interest on finance leases81 98 265 288 
Other5 2 5 8 
Interest income(840)(267)(1,977)(855)
Interest expense, net$4,798 $3,950 $12,355 $11,778 
Loss on Debt Extinguishment
Loss on debt extinguishment consisted of the following (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Write off of debt issuance costs$ $ $1,127 $ 
Write off of debt discounts  147  
Loss on debt extinguishment$ $ $1,274 $ 
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Note 4. Stockholders' Equity
Share Repurchase Program
In November 2021, our Board of Directors approved a share repurchase program. This program, effective November 5, 2021 and without an expiration date, authorized us to repurchase up to $100.0 million of our outstanding common stock utilizing a variety of methods including open-market purchases, accelerated share repurchase programs, privately negotiated transactions, structured repurchase transactions and under a Rule 10b5-1 plan (which would permit shares to be repurchased when the Company might otherwise be precluded from doing so under securities laws). Any repurchased shares are constructively retired and returned to an unissued status. During the 13 weeks ended October 1, 2022, we did not repurchase any shares of common stock. During the 39 weeks ended October 1, 2022, we repurchased 139,718 shares of common stock totaling $3.5 million, including commissions, at an average price of $24.70 per share in open-market transactions pursuant to a Rule 10b5-1 plan. As of October 1, 2022, we had $96.5 million of repurchase authority remaining under the share repurchase program.

Note 5. Share-based Awards
For a discussion of our share-based incentive plans, refer to Note 8 of our 2021 Form 10-K.
Share-based Award Activity
The following table summarizes stock option activity under all equity incentive plans during the 39 weeks ended October 1, 2022:
Time-Based Stock OptionsPerformance-Based Stock Options
Number of OptionsWeighted-Average
Exercise Price
Number of OptionsWeighted-Average
Exercise Price
Options outstanding as of January 1, 2022
3,135,141$12.771,696,194$4.58
Exercised(233,777)9.47(800,900)4.49
Forfeitures(238,122)21.80
Options outstanding as of October 1, 2022
2,663,242$12.26895,294$4.66
Options vested and exercisable as of October 1, 2022
1,725,512$7.48895,294$4.66
The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 39 weeks ended October 1, 2022:
Number of SharesWeighted-Average
Grant Date Fair Value
Unvested balance as of January 1, 2022
836,496 $30.14 
Granted448,320 29.70 
Vested(190,082)35.88 
Forfeitures(54,535)30.49 
Unvested balance as of October 1, 2022
1,040,199 $28.88 
The following table summarizes performance-based restricted stock unit ("PSU") activity under the Grocery Outlet Holding Corp. 2019 Incentive Plan during the 39 weeks ended October 1, 2022:
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Number of SharesWeighted-Average
Grant Date Fair Value
Unvested balance as of January 1, 2022
576,725 $36.36 
Granted (1)
404,382 29.16 
Adjustment for expected performance achievement (2)
326,059 32.11 
Forfeitures(45,495)35.43 
Unvested balance as of October 1, 2022 (3)
1,261,671 $32.99 
_______________________
(1)Represents initial grant of PSUs based on performance target level achievement of 100%.
(2)Represents the adjustment to previously granted PSUs based on performance expectations as of October 1, 2022.
(3)An additional 555,313 PSUs could potentially be included if the maximum performance level of 200% is reached for all PSUs outstanding as of October 1, 2022.
Share-based Compensation Expense
We recognize compensation expense for stock options, RSUs and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. We recognize share-based award forfeitures in the period such forfeitures occur.
Share-based compensation expense consisted of the following (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Time-based stock options$(696)$430 $321 $1,467 
RSUs4,225 1,749 11,747 5,162 
PSUs5,555 (316)12,262 3,286 
Dividends (1)
 39 33 136 
Share-based compensation expense$9,084 $1,902 $24,363 $10,051 
_______________________
(1)Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016.

Note 6. Income Taxes
Our income tax expense and effective income tax rate were as follows (amounts in thousands, except percentages):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Income tax expense$2,394 $5,054 $8,234 $10,185 
Effective income tax rate12.0 %22.8 %14.3 %15.5 %
The Company's tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, the Company updates the estimated annual effective tax rate. Our effective income tax rate for the 13 and 39 weeks ended October 1, 2022 was lower than the combined U.S. federal and state statutory income tax rate primarily due to excess tax benefits related to the exercise of stock options and vesting of RSUs. The decrease in our effective income tax rate for the 13 weeks ended October 1, 2022 compared to the 13 weeks ended October 2, 2021 was primarily due to an increase in discrete items related to the exercise of stock options and vesting of RSUs. The decrease in our effective income tax rate for the 39 weeks ended October 1, 2022 compared to the 39 weeks ended October 2, 2021 was primarily driven by lower pretax income.
Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision in our condensed consolidated statements of operations and comprehensive income and include accrued interest and penalties with the related income tax liability in our condensed consolidated balance sheets. To date, we have not recognized any interest and penalties, nor have we accrued for or made payments for interest and penalties. We had no
16

uncertain tax positions as of October 1, 2022 and January 1, 2022, respectively, and do not anticipate any changes to our uncertain tax positions within the next 12 months.
Note 7. Related Party Transactions
Related Party Leases
As of October 1, 2022 and October 2, 2021, we leased 15 store locations and one warehouse location from entities in which Eric Lindberg, Jr., Chief Executive Officer, and MacGregor Read Jr., who served as Vice Chairman of our Board of Directors until September 1, 2022, or their respective families, had a direct or indirect financial interest. As of October 1, 2022, the right-of-use assets and lease liabilities related to these properties was $41.1 million and $46.1 million, respectively. As of January 1, 2022, the right-of-use assets and lease liabilities related to these properties was $36.9 million and $41.6 million, respectively. These related parties received aggregate lease payments from us of $1.7 million and $1.5 million for the 13 weeks ended October 1, 2022 and October 2, 2021, respectively, and $5.1 million and $4.5 million for the 39 weeks ended October 1, 2022 and October 2, 2021, respectively.
Independent Operator Notes and Independent Operator Receivables
We offer interest-bearing notes to IOs and the gross amount of IO operating notes and IO receivables due was $44.5 million and $40.6 million as of October 1, 2022 and January 1, 2022, respectively. See Note 2 for additional information.
Note 8. Commitments and Contingencies
We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We establish an accrual for legal proceedings if and when those matters reach a stage where they present loss contingencies that are both probable and reasonably estimable. In such cases, there may be a possible exposure to loss in excess of any amounts accrued. We monitor those matters for developments that would affect the likelihood of a loss and the accrued amount, if any, thereof, and adjust the amount as appropriate. If the loss contingency at issue is not both probable and reasonably estimable, we do not establish an accrual, but will continue to monitor the matter for developments that will make the loss contingency both probable and reasonably estimable. If it is at least a reasonable possibility that a material loss will occur, the Company will provide disclosure regarding the contingency. Management believes that we do not have any pending litigation that, separately or in the aggregate, would have a material adverse effect on our results of operations, financial condition or cash flows.
Note 9. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data):
13 Weeks Ended39 Weeks Ended
October 1,
2022
October 2,
2021
October 1,
2022
October 2,
2021
Numerator
Net income and comprehensive income$17,495 $17,139 $49,163 $55,671 
Denominator
Weighted-average shares outstanding – basic
97,057 95,955 96,587 95,610 
Effect of dilutive options2,847 3,156 3,031 3,762 
Effect of dilutive RSUs581 58 433 105 
Weighted-average shares outstanding – diluted (1)
100,485 99,169 100,051 99,477 
Earnings per share:
Basic$0.18 $0.18 $0.51 $0.58 
Diluted$0.17 $0.17 $0.49 $0.56 
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(1)We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued assuming the end of our reporting period was the end of the relevant PSU award contingency period. No PSUs were included in diluted weighted-average shares outstanding for the 13 and 39 weeks ended October 1, 2022 and October 2, 2021.
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