SEC Filing | Grocery Outlet, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 September 28, 2019


☐			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

___________________________________

Grocery Outlet Holding Corp.

(Exact name of registrant as specified in its charter)

Delaware

47-1874201

(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)

(510) 845-1999

(Registrant’s telephone number, including area code)

___________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.001 per share

Nasdaq 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 5, 2019, the registrant had 88,892,622 shares of common stock outstanding.

GROCERY OUTLET HOLDING CORP.

Form 10-Q

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		Page

Special Note Regarding Forward-Looking Statements			2

PART I	FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)	5
	Condensed Consolidated Balance Sheets	5
	Condensed Consolidated Statements of Operations and Comprehensive Income	6
	Condensed Consolidated Statements of Stockholders’ Equity	7
	Condensed Consolidated Statements of Cash Flows	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	Overview	29
	Results of Operations	31
	Liquidity and Capital Resources	38
	Off-Balance Sheet Arrangements	40
	Contractual Obligations	40
	Critical Accounting Policies and Estimates	41
	Recent Accounting Pronouncements	41
Item 3	Quantitative and Qualitative Disclosure about Market Risk	41
Item 4	Controls and Procedures	42

PART II	OTHER INFORMATION
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	43
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3	Defaults Upon Senior Securities	43
Item 4	Mine Safety Disclosures	43
Item 5	Other Information	43
Item 6	Exhibits	43

Signatures		45

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References to “the Company,” “we,” “us” and “our” in this Quarterly Report on Form 10-Q (this “Form 10-Q”) refer to Grocery Outlet Holding Corp. and include all of its consolidated subsidiaries, unless otherwise indicated or the context requires otherwise.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. All statements, other than statements of historical facts included in this Form 10-Q, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends and other information, may be forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “should,” “expect,” “intend,” “will,” “estimate,” “anticipate,” “believe,” “predict,” “potential” or “continue” or the negatives of these terms or variations of them or similar terminology. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot provide any assurance that these expectations will prove to be correct and actual results may vary materially from what is expressed in or indicated by the forward-looking statement. Such statements reflect the current views of our management with respect to our business, results of operations and future financial performance.

There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. The following factors are among those that may cause actual results to differ materially from the forward-looking statements:

•failure of suppliers to consistently supply us with opportunistic products at attractive pricing;

•inability to successfully identify trends and maintain a consistent level of opportunistic products;

•failure to maintain or increase comparable store sales;

•changes affecting the market prices of the products we sell;

•failure to open, relocate or remodel stores on schedule;

•risks associated with newly opened stores;

•risks associated with economic conditions;

•competition in the retail food industry;

•inability to retain the loyalty of our customers;

•costs and implementation difficulties associated with marketing, advertising and promotions;

•failure to maintain our reputation and the value of our brand, including protecting our intellectual property;

•any significant disruption to our distribution network, the operations of our distributions centers and our timely receipt of inventory;

•movement of consumer trends toward private labels and away from name-brand products;

•inability to maintain sufficient levels of cash flow from our operations;

•risks associated with leasing substantial amounts of space;

•failure to maintain the security of information we hold relating to personal information or payment card data of our customers, employees and suppliers;

•failure to participate effectively or at all in the growing online retail marketplace;

•material disruption to our information technology systems;

•risks associated with products we and our independent operators (“IOs”) sell;

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•risks associated with laws and regulations generally applicable to retailers;

•legal proceedings from customers, suppliers, employees, governments or competitors;

•unexpected costs and negative effects associated with our insurance program;

•inability to attract, train and retain highly qualified employees;

•difficulties associated with labor relations;

•loss of our key personnel or inability to hire additional qualified personnel;

•changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters;

•impairment of goodwill and other intangible assets;

•any significant decline in our operating profit and taxable income;

•risks associated with tax matters;

•natural disasters and unusual weather conditions (whether or not caused by climate change), pandemic outbreaks, terrorist acts, global political events and other serious catastrophic events;

•economic downturns or natural or man-made disasters in geographies where our stores are located;

•management’s limited experience managing a public company;

•risks associated with IOs being consolidated into our financial statements;

•failure of our IOs to successfully manage their business;

•failure of our IOs to repay notes outstanding to us;

•inability to attract and retain qualified IOs;

•inability of our IOs to avoid excess inventory shrink;

•any loss or changeover of an IO;

•legal proceedings initiated against our IOs;

•legal challenges to the independent contractor business model;

•failure to maintain positive relationships with our IOs;

•risks associated with actions our IOs could take that could harm our business;

•the significant influence of certain significant investors over us;

•our ability to generate cash flow to service our substantial debt obligations; and

•the other factors discussed under “Risk Factors.” in our prospectus filed with the Securities and Exchange Commission (the “SEC”) on October 4, 2019.

The preceding list is not intended to be an exhaustive list of all of our forward-looking statements. The forward-looking statements are based on our beliefs, assumptions and expectations of future performance, taking into account the information currently available to us. These statements are only predictions based upon our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Other sections of this Form 10-Q may include additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time and 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. For a more detailed discussion of the risks, uncertainties and other factors that could cause actual results to differ, please refer to the “Risk Factors” we previously disclosed in our prospectus filed with the SEC on October 4, 2019, and in this Form 10-Q, as

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such risk factors may be updated from time to time in our periodic filings with the SEC. This prospectus and our periodic filings are accessible on the SEC’s website at www.sec.gov.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance and events and circumstances reflected in the forward-looking statements will be achieved or occur. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this Form 10-Q to conform these statements to actual results or to changes in our expectations.

Website Disclosure

We use our website, www.groceryoutlet.com, as a channel of distribution of Company information. Financial and other important information regarding the Company 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 are not, however, a part of this Form 10-Q.

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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)


	September 28, 2019		December 29, 2018
Assets
Current assets:
Cash and cash equivalents	$	44,020	$	21,063
Independent operator receivables and current portion of independent operator notes, net of allowance $1,274 and $1,141	6,594		5,056
Other accounts receivable, net of allowance $16 and $24	3,116		2,069
Merchandise inventories	206,418		198,304
Prepaid rent — related party	512		512
Prepaid expenses and other current assets	17,331		13,368
Total current assets	277,991		240,372
Independent operator notes, net of allowance $9,195 and $7,926	18,268		13,646
Property and equipment — net	340,263		304,032
Operating lease right-of-use asset	680,178		—
Intangible assets — net	64,091		68,824
Goodwill	747,943		747,943
Other assets	6,112		2,045
Total assets	$	2,134,846	$	1,376,862

Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable	$	116,486	$	98,123
Accrued expenses	33,364		31,194
Accrued compensation	12,927		10,795
Current portion of long-term debt	267		7,349
Current lease liability	39,046		—
Income and other taxes payable	4,141		3,463
Total current liabilities	206,231		150,924
Long-term liabilities:
Long-term debt — net	462,251		850,019
Deferred income taxes	15,924		15,135
Lease liability	719,562		—
Deferred rent	—		60,833
Total liabilities	1,403,968		1,076,911
Commitments and contingencies (see Note 9)
Stockholders’ equity:
Capital stock:
Common stock — par value $0.001, voting common stock, 500,000,000 and 107,536,215 shares authorized as of September 28, 2019 and December 29, 2018, respectively; 88,372,134 and 67,435,288 shares issued and outstanding as of September 28, 2019 and December 29, 2018, respectively	88		67
Common stock — par value $0.001, nonvoting common stock, 0 and 17,463,785 shares authorized as of September 28 2019 and December 29, 2018, respectively; 0 and 1,038,413 shares issued and outstanding as of September 28, 2019 and December 29, 2018, respectively	—		1
Series A Preferred stock — par value $0.001, preferred stock, 50,000,000 and 1 share authorized as of September 28, 2019 and December 29, 2018, respectively; 0 and 1 share issued and outstanding as of September 28,, 2019 and December 29, 2018, respectively	—		—
Additional capital	712,987		287,457
Retained earnings	17,803		12,426
Total stockholders’ equity	730,878		299,951
Total liabilities and stockholders’ equity	$	2,134,846	$	1,376,862

See notes to condensed consolidated financial statements.

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GROCERY OUTLET HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(in thousands, except per share data)

(unaudited)


	13 Weeks Ended						39 Weeks Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Net sales	$	652,540	$	576,844	$	1,904,100	$	1,702,460
Cost of sales	451,453		401,295		1,317,276		1,183,227
Gross profit	201,087		175,549		586,824		519,233

Operating expenses:
Selling, general and administrative	161,047		139,863		471,542		416,342
Depreciation and amortization	13,200		11,478		38,090		33,891
Stock-based compensation	2,892		121		25,853		384
Total operating expenses	177,139		151,462		535,485		450,617
Income from operations	23,948		24,087		51,339		68,616

Other expense:
Interest expense, net	7,342		13,526		39,232		40,412
Debt extinguishment and modification costs	472		—		5,634		—
Total other expense	7,814		13,526		44,866		40,412
Income before income taxes	16,134		10,561		6,473		28,204
Income tax expense	3,689		2,892		886		7,724
Net income and comprehensive income	$	12,445	$	7,669	$	5,587	$	20,480

Basic earnings per share	$	0.14	$	0.11	$	0.07	$	0.30
Diluted earnings per share	$	0.13	$	0.11	$	0.07	$	0.30

Weighted average shares outstanding:
Basic	88,345		68,477		75,778		68,473
Diluted	93,183		68,521		78,602		68,503

See notes to condensed consolidated financial statements.

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GROCERY OUTLET HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share amounts)

(unaudited)


	Voting Common				Nonvoting Common					Preferred						Additional Capital	Retained Earnings	Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance — December 29, 2018	67,435,288	$	67	1,038,413	$	1	1	$	—	$	287,457	$	12,426	$	299,951
Cumulative effect of accounting change related to adoption of ASU 2016-02												169		169
Issuance of shares under stock incentive plans	42,438	—								—				—
Stock based compensation										211				211
Dividend paid												(254)		(254)
Net income and comprehensive income												3,774		3,774
Balance — March 30, 2019	67,477,726	67		1,038,413	1		1	—		287,668		16,115		303,851
Issuance of shares under stock incentive plans				30,000	—					314				314
Issuance of common stock upon initial public offering, net of issuance costs	19,765,625	20								400,468				400,488
Conversion of non-voting to voting common stock	1,068,413	1		(1,068,413)	(1)									—
Redemption of preferred stock							(1)	—						—
Stock based compensation										22,750				22,750
Dividend paid												(83)		(83)
Net income (loss) and comprehensive income (loss)												(10,632)		(10,632)
Balance — June 29, 2019	88,311,764	88		—	—		—	—		711,200		5,400		716,688
Issuance of shares under stock incentive plans	60,370	—								(1,021)				(1,021)
Deferred offering costs										(84)				(84)

Stock based compensation										2,892				2,892
Dividend paid												(42)		(42)
Net income and comprehensive income												12,445		12,445
Balance — September 28, 2019	88,372,134	$	88	—	$	—	—	$	—	$	712,987	$	17,803	$	730,878

See notes to condensed consolidated financial statements.

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GROCERY OUTLET HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY, continued

(in thousands, except share amounts)

(unaudited)


	Voting Common				Nonvoting Common					Preferred						Additional Capital	Retained Earnings	Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance — December 30, 2017	67,381,104	$	67	1,038,413	$	1	1	$	—	$	403,289	$	23,776	$	427,133
Cumulative effect of accounting change related to adoption of ASU 2014-09												133		133
Issuance of shares under stock incentive plans	54,184	—												—
Stock based compensation										134				134
Dividend paid												(79)		(79)
Net income and comprehensive income												5,525		5,525
Balance — March 31, 2018	67,435,288	67		1,038,413	1		1	—		403,423		29,355		432,846
Issuance of shares under stock incentive plans	2,100	—								29				29
Stock based compensation										129				129
Dividend paid												(14)		(14)
Net income and comprehensive income												7,286		7,286
Balance —Jun 30 2018	67,437,388	67		1,038,413	1		1	—		403,581		36,627		440,276

Stock based compensation										121				121
Dividend paid												(24)		(24)
Net income and comprehensive income												7,669		7,669
Balance — September 29, 2018	67,437,388	$	67	1,038,413	$	1	1	$	—	$	403,702	$	44,272	$	448,042

See notes to condensed consolidated financial statements.

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GROCERY OUTLET HOLDING CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	39 Weeks Ended
	September 28, 2019		September 29, 2018
Operating activities:
Net income	$	5,587	$	20,480
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment	32,307		27,196
Amortization of intangible assets	7,481		7,384
Amortization of debt issuance costs and bond discounts	1,962		3,275

Debt extinguishment and modification costs	5,634		—
Loss on disposal of assets	500		23
Stock-based compensation	25,853		384
Accounts receivable reserve	2,373		2,242
Deferred lease liabilities	—		12,500
Non-cash lease expense	26,178		—
Deferred income taxes	789		7,496
Changes in operating assets and liabilities:
Independent operator and other accounts receivable	2,813		(256)
Merchandise inventories	(8,114)		(2,619)
Prepaid expenses and other current assets	(4,271)		(2,290)
Income and other taxes payable	584		(147)
Trade accounts payable	20,233		895
Accrued expenses	3,013		9,460
Accrued compensation	2,132		(581)
Operating lease liability	(20,564)		—
Net cash provided by operating activities	104,490		85,442

Investing activities:
Cash advances to independent operators	(9,362)		(5,488)
Repayments of cash advances from independent operators	3,107		2,538
Purchase of property and equipment	(71,424)		(41,091)
Proceeds from sales of assets	680		611
Intangible assets and licenses	(2,934)		(2,802)
Net cash used in investing activities	(79,933)		(46,232)

Financing activities:
Proceeds from initial public offering, net of underwriting discounts paid	407,666		—
Proceeds from issuance of shares under stock incentive plans	970		29
Repurchase of shares under equity incentive plans	(1,677)		—
Deferred offering costs paid	(7,058)		—
Principal payments on 2014 loans	—		(3,967)
Principal payments on 2018 loans	(399,813)		—
Payments on other financing	(619)		(70)
Dividends paid	(379)		(117)
Debt issuance costs paid	(690)		—
Net cash used in financing activities	(1,600)		(4,125)
Net increase in cash and cash equivalents	22,957		35,085
Cash and cash equivalents—Beginning of the period	21,063		5,801
Cash and cash equivalents—End of the period	$	44,020	$	40,886

Supplemental disclosure of cash flow information:


Property and equipment accrued at end of period	$	5,348	$	1,427
Deferred offering costs accrued at end of period	$	19	$	—

See notes to condensed consolidated financial statements.

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GROCERY OUTLET HOLDING CORP.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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 our 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 September 28, 2019, Grocery Outlet had 337 stores in California, Washington, Oregon, Pennsylvania, Idaho and Nevada.

Initial Public Offering — In June 2019, we completed an initial public offering (“IPO”) of 19,765,625 shares of our common stock at a public offering price of $22.00 per share for net proceeds of $407.7 million, after deducting underwriting discounts and commissions of $27.1 million. We also incurred offering costs payable by us of $7.3 million. The shares of common stock sold in the IPO and the net proceeds from the IPO included the full exercise of the underwriters’ option to purchase additional shares.

In October 2019, certain selling stockholders completed a secondary public offering of shares of our common stock. We did not receive any of the proceeds from the sale of these shares by the selling stockholders. We incurred offering costs payable by us of $1.1 million, of which $0.6 million was expensed in the third quarter of 2019. We received $3.2 million in cash (excluding withholding taxes) in connection with the exercise of 451,470 options by certain stockholders participating in this secondary public offering.

Our Amended and Restated Certificate of Incorporation (the “Charter”) became effective in connection with the completion of the IPO on June 24, 2019. The Charter, among other things, provided that all of our outstanding shares of nonvoting common stock were automatically converted into shares of voting common stock on a one-for-one basis and that our authorized capital stock consisted of 500,000,000 shares of common stock, and 50,000,000 shares of preferred stock, par value $0.001 per share. Our bylaws were also amended and restated as of June 24, 2019. Additionally, upon the closing of the IPO, we redeemed all of our outstanding preferred stock for an aggregate of $1.00.

On June 24, 2019, we used the net proceeds from the IPO to repay $150.0 million in principal on the outstanding term loans under our second lien credit agreement, dated as of October 22, 2018 (as amended, the “Second Lien Credit Agreement”), as well as accrued and unpaid interest as of that date of $3.6 million, and terminated the Second Lien Credit Agreement. In addition, using the remainder of net proceeds, together with excess cash on hand, we prepaid a portion of our outstanding first lien term loan totaling $248.0 million plus accrued interest of $3.8 million.

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 requirements of the U.S. Securities and Exchange Commission (the “SEC”) for interim reporting. Accordingly, certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed consolidated balance sheet as of December 29, 2018 has been derived from our audited consolidated financial statements, which are included in the prospectus dated October 3, 2019, as filed with the SEC pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on October 4, 2019 (File No. 333-234036) (the “Prospectus”). The accompanying condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes included in the Prospectus.

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 interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future annual or interim period.

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Forward Stock Split — On June 6, 2019, we effected a 1.403 for 1 forward stock split. All share amounts have been adjusted retroactively for the impact of this forward stock split.

Use of Estimates — The preparation of 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, and changes in these estimates are recorded when known.

Merchandise Inventories — Merchandise inventories are valued at the lower of cost or net realizable value. Cost is determined by the first-in, first-out 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 adopted Accounting Standards Update No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), and all subsequent amendments, effective December 30, 2018 using the modified retrospective approach under which we recorded the cumulative effect of transition as of the effective date and did not restate comparative periods. Under this transition method we determine if an arrangement is a lease at inception. Operating leases are included in right-of-use (“ROU”) assets, current lease liability, and lease liability on the condensed consolidated balance sheets. Finance leases are included in other assets, current lease liability, and lease liability on our condensed consolidated balance sheets.

ROU 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. ROU 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. The ROU asset also excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Amortization of the ROU asset, interest expense on the lease liability and operating and financing cash flows for finance leases is immaterial.

We have lease agreements with retail facilities for store locations, distribution centers, office space and equipment with lease and non-lease components, which are accounted for separately. Leases with an initial term of 12 months or less are not recorded on the balance sheet; lease expense for these leases is recognized on a straight-line basis over the lease term. The short-term lease expense is reflective of the short-term lease commitments on a go forward basis. We sublease certain real estate to unrelated third parties under non-cancelable leases and the sublease portfolio consists of operating leases for retail stores.

Segment Reporting — We manage our business as one operating segment. All of our sales were made to customers located in the United States and all property and equipment is located in the United States.

Fair Value Measurements — 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. For example, cash flow modeling inputs based on management’s assumptions.

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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 following table sets forth the fair value of our financial liabilities by level within the fair value hierarchy (in thousands):


	September 28, 2019		December 29, 2018
Financial Liabilities:
Long-term debt, long-term portion (Level 2)	$	478,454	$	845,327
Long-term debt, current portion (Level 2)	—		7,250
Total financial liabilities (1)	$	478,454	$	852,577

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(1) The carrying amounts of our bank debt, before reduction of the debt issuance costs, approximate their fair values as the stated rates approximate market rates for loans with similar terms.

Cash and cash equivalents, IO receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as the short-term nature or their variable interest rates.

Independent operator notes (net) — The carrying value of such financial instruments approximates their fair value.

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. 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 sales as the products are sold. Discounts provided by independent operators are not recognized as a reduction in sales as these are provided solely by the independent operator who bears the incidental 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 performance obligations, or any material costs to obtain or fulfill a contract as of September 28, 2019 and December 29, 2018.

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 $1.4 million as of September 28, 2019 and $1.7 million as of December 29, 2018. Breakage amounts were immaterial for the 13 and 39 weeks ended September 28, 2019 and September 29, 2018.

Disaggregated Revenues — The following table presents sales revenue by type of product for the periods indicated (in thousands):


	13 Weeks Ended						39 Weeks Ended
	September 28, 2019		September 29, 2018		September 28, 2019		September 29, 2018
Perishable (1)	$	223,329	$	194,723	$	651,758	$	578,069
Non-perishable (2)	429,211		382,121