SEC Filing | Grocery Outlet, Inc.

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go-20200926

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 September 26, 2020


☐			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 6, 2020, the registrant had 94,151,015 shares of common stock outstanding.

GROCERY OUTLET HOLDING CORP.

FORM 10-Q

TABLE OF CONTENTS


		Page
Special Note Regarding Forward-Looking Statements		2

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations and Comprehensive Income	4
	Condensed Consolidated Statements of Stockholders’ Equity	5
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
	Overview	26
	Results of Operations	29
	Liquidity and Capital Resources	36
	Off-Balance Sheet Arrangements	39
	Contractual Obligations	39
	Critical Accounting Policies and Estimates	39
	Recent Accounting Pronouncements	39
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	39
Item 4.	Controls and Procedures	40

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	44
	Signatures	45

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q (“Form 10-Q” or “report”) and the documents incorporated by reference herein constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements contained in this report and the documents incorporated by reference herein other than statements of historical fact, including statements regarding our future operating results and financial position, our business strategy and plans, business trends, and our objectives for future operations, 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. We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described under the headings “Item 1A. Risk Factors,” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report or as described in the other documents and reports we file with the U.S. Securities and Exchange Commission (the “SEC”). 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. In light of these risks, uncertainties and assumptions, the future events and trends discussed in this report may not occur and actual results could differ materially and adversely from those anticipated or implied by the forward-looking statements.

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 should not be relied upon as representing our views as of any date subsequent to the date of this report. 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, www.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, a part of this report.

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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 26, 2020		December 28, 2019
Assets
Current assets:
Cash and cash equivalents	$	59,082	$	28,101
Independent operator receivables and current portion of independent operator notes, net of allowance $1,156 and $1,283	6,122		7,003
Other accounts receivable, net of allowance $32 and $19	5,724		2,849
Merchandise inventories	252,777		219,420

Prepaid expenses and other current assets	20,958		13,453
Total current assets	344,663		270,826
Independent operator notes, net of allowance $8,360 and $9,088	25,763		20,331
Property and equipment, net	399,159		356,614
Operating lease right-of-use assets	819,227		734,327
Intangible assets, net	46,747		47,792
Goodwill	747,943		747,943
Deferred income tax assets, net	2,976		—
Other assets	7,788		7,696
Total assets	$	2,394,266	$	2,185,529
Liabilities and Stockholders’ Equity
Current liabilities:
Trade accounts payable	$	90,191	$	119,217
Accrued expenses	33,303		31,363
Accrued compensation	21,650		14,915
Current portion of long-term debt	68		246
Current lease liabilities	45,793		38,245
Income and other taxes payable	4,973		4,641
Total current liabilities	195,978		208,627
Long-term debt, net	448,613		447,743
Deferred income tax liabilities, net	—		16,020
Long-term lease liabilities	860,849		767,755
Total liabilities	1,505,440		1,440,145
Commitments and contingencies (Note 8)
Stockholders’ equity:
Voting common stock, par value $0.001 per share, 500,000,000 shares authorized; 93,904,922 and 89,005,062 shares issued and outstanding, respectively	94		89

Series A preferred stock, par value $0.001 per share, 50,000,000 shares authorized; no shares issued and outstanding	—		—
Additional paid-in capital	777,831		717,282
Retained earnings	110,901		28,013
Total stockholders’ equity	888,826		745,384
Total liabilities and stockholders’ equity	$	2,394,266	$	2,185,529

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 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Net sales	$	764,082	$	652,540	$	2,327,819	$	1,904,100
Cost of sales	525,899		451,453		1,598,859		1,317,276
Gross profit	238,183		201,087		728,960		586,824
Operating expenses:
Selling, general and administrative	189,880		161,047		574,813		471,542
Depreciation and amortization	14,131		13,200		40,291		38,090
Share-based compensation	3,857		2,892		34,309		25,853
Total operating expenses	207,868		177,139		649,413		535,485
Income from operations	30,315		23,948		79,547		51,339
Other expenses:
Interest expense, net	4,833		7,342		15,937		39,232
Debt extinguishment and modification costs	—		472		198		5,634
Total other expenses	4,833		7,814		16,135		44,866
Income before income taxes	25,482		16,134		63,412		6,473
Income tax expense (benefit)	(14,992)		3,689		(19,037)		886
Net income and comprehensive income	$	40,474	$	12,445	$	82,449	$	5,587
Basic earnings per share	$	0.44	$	0.14	$	0.91	$	0.07
Diluted earnings per share	$	0.41	$	0.13	$	0.84	$	0.07
Weighted average shares outstanding:
Basic	92,489		88,345		90,929		75,778
Diluted	99,266		93,183		98,033		78,602

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 Paid-In Capital		Retained Earnings		Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance as of December 28, 2019	89,005,062	$	89	—	$	—	—	$	—	$	717,282	$	28,013	$	745,384
Cumulative effect of accounting change												439		439
Exercise and vesting of share-based awards	902,132	1								6,032				6,033

Share-based compensation expense										20,277				20,277
Dividends paid										(147)				(147)
Net income and comprehensive income												12,642		12,642
Balance as of March 28, 2020	89,907,194	90		—	—		—	—		743,444		41,094		784,628
Exercise and vesting of share-based awards	1,511,079	1								9,844				9,845
Tax paid on behalf of employees related to net settlement of share-based awards										(483)				(483)
Share-based compensation expense										10,175				10,175
Dividends paid										(97)				(97)
Net income and comprehensive income												29,333		29,333
Balance as of June 27, 2020	91,418,273	$	91	—	$	—	—	$	—	$	762,883	$	70,427	$	833,401
Exercise and vesting of share-based awards	2,486,649	3								11,252				11,255

Share-based compensation expense										3,857				3,857
Dividends paid										(161)				(161)
Net income and comprehensive income												40,474		40,474
Balance as of September 26, 2020	93,904,922	$	94	—	$	—	—	$	—	$	777,831	$	110,901	$	888,826

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 Paid-In Capital		Retained Earnings		Stockholders’ Equity
	Shares	Amount		Shares	Amount		Shares	Amount
Balance as of December 29, 2018	67,435,288	$	67	1,038,413	$	1	1	$	—	$	287,457	$	12,426	$	299,951
Cumulative effect of accounting change												169		169
Exercise and vesting of share-based awards	42,438	—								—				—
Share-based compensation expense										211				211
Dividends paid												(254)		(254)
Net income and comprehensive income												3,774		3,774
Balance as of March 30, 2019	67,477,726	$	67	1,038,413	$	1	1	$	—	$	287,668	$	16,115	$	303,851
Exercise and vesting of share-based awards				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 nonvoting to voting common shares	1,068,413	1		(1,068,413)	(1)									—
Redemption of preferred shares							(1)	—						—
Share-based compensation expense										22,750				22,750
Dividends paid												(83)		(83)
Net income (loss) and comprehensive income (loss)												(10,632)		(10,632)
Balance as of June 29, 2019	88,311,764	$	88	—	$	—	—	$	—	$	711,200	$	5,400	$	716,688
Exercise and vesting of share-based awards	60,370	—								(1,021)				(1,021)
Deferred offering costs										(84)				(84)
Share-based compensation expense										2,892				2,892
Dividends paid												(42)		(42)
Net income and comprehensive income												12,445		12,445
Balance as of 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 CASH FLOWS

(in thousands)

(unaudited)


	39 Weeks Ended
	September 26, 2020		September 28, 2019
Cash flows from operating activities:
Net income	$	82,449	$	5,587
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment	36,772		32,307
Amortization of intangible and other assets	5,481		7,481
Amortization of debt issuance costs and discounts	1,771		1,962
Debt extinguishment and modification costs	198		5,634
Share-based compensation	34,309		25,853
Provision for accounts receivable	321		2,373
Deferred income taxes	(18,996)		789
Other	1,421		500
Changes in operating assets and liabilities:
Independent operator and other accounts receivable	(3,809)		2,813
Merchandise inventories	(33,357)		(8,114)
Prepaid expenses and other current assets	(7,505)		(4,271)
Income and other taxes payable	332		584
Trade accounts payable, accrued compensation and other accrued expenses	(15,545)		25,378
Changes in operating lease assets and liabilities, net	15,419		5,614
Net cash provided by operating activities	99,261		104,490
Cash flows from investing activities:
Advances to independent operators	(8,715)		(9,362)
Repayments of advances from independent operators	5,216		3,107
Purchases of property and equipment	(85,847)		(71,424)
Proceeds from sales of assets	265		680
Intangible assets and licenses	(3,826)		(2,934)
Net cash used in investing activities	(92,907)		(79,933)
Cash flows from financing activities:
Proceeds from initial public offering, net of underwriting discounts paid	—		407,666
Proceeds from exercise of share-based compensation awards	27,133		970
Proceeds from revolving credit facility loan	90,000		—
Principal payments on revolving credit facility loan	(90,000)		—
Payments related to net settlement of share-based compensation awards	(483)		(1,677)
Other direct costs paid related to the initial public offering	—		(7,058)

Principal payments on term loans	(188)		(399,813)
Principal payments on other borrowings	(729)		(619)
Dividends paid	(405)		(379)
Debt issuance costs paid	(701)		(690)
Net cash provided by (used in) financing activities	24,627		(1,600)
Net increase in cash and cash equivalents	30,981		22,957
Cash and cash equivalents at beginning of period	28,101		21,063
Cash and cash equivalents at end of period	$	59,082	$	44,020

See Notes to Condensed Consolidated Financial Statements

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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 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 26, 2020, we had 372 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 and offering costs of $7.2 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.

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 a total 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 loan 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 senior secured term loan under our First Lien Credit Agreement totaling $248.0 million plus accrued interest of $3.8 million. See Note 4 for additional information.

Secondary Public Offerings — On October 8, 2019, certain of our 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 related offering costs of $1.1 million and 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.

On February 3, 2020, certain of our selling stockholders completed an additional 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 related offering costs of $1.1 million which we recognized in selling, general and administrative expenses during the first quarter of fiscal 2020. We received $1.4 million in cash (excluding withholding taxes) in connection with the exercise of 191,470 options by certain stockholders participating in this secondary public offering.

On April 27, 2020, certain of our selling stockholders completed another 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 related offering costs of $1.0 million which we recognized in selling, general and administrative expenses during the second quarter of fiscal 2020. We received $1.6 million in cash (excluding withholding taxes) in connection with the exercise of 269,000 options by certain stockholders participating in this secondary public offering.

On May 28, 2020, the stockholder affiliated with our former private equity sponsor, Hellman and Friedman LLC, distributed the remainder of its holdings representing 9.6 million shares of our common stock to its equity holders. We did not receive any proceeds or incur any material costs related to this distribution.

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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 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 December 28, 2019 filed with the SEC on March 25, 2020. The condensed consolidated balance sheet as of December 28, 2019 included herein has been derived from those audited consolidated financial statements.

The accompanying unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. In the opinion of our management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position, results of operations, cash flows and stockholders' equity for the interim 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. Certain prior period amounts in the condensed consolidated statements of cash flows have been reclassified to conform to the current period presentation. The reclassification of these items had no impact on net income, earnings per share, or retained earnings in the current or prior period.

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.

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.

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 on the condensed consolidated balance sheets. Finance leases are included in other assets, current lease liabilities, and long-term lease liabilities on 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. 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 finance lease right-of-use assets, interest expense on finance lease liabilities 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.

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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. 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 basis as of September 26, 2020 or December 28, 2019. There were no transfers of assets or liabilities between levels within the fair value hierarchy as of September 26, 2020 or December 28, 2019.

Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below:

Cash and cash equivalents, independent operator 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.

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

Notes payable and term loans — The carrying value of such financial instruments generally approximates their fair value since the stated interest rates approximates market rates for loans with similar terms for borrowers with similar credit profiles. However, in accordance with Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, the estimated fair values of our term loans as of September 26, 2020 and December 28, 2019 are set forth below.

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 (in thousands):


	September 26, 2020				December 28, 2019
	Carrying Amount (1)		Estimated Fair Value (2)		Carrying Amount (1)		Estimated Fair Value (2)
Financial Liabilities:
Term Loans (Level 2)	$	458,688	$	448,500	$	458,682	$	466,515

_______________________

(1)The carrying amounts as of September 26, 2020 and December 28, 2019 are net of unamortized debt discounts of $1.3 million and $1.5 million, respectively.

(2)The estimated fair value of our term loans was determined based on the average quoted bid-ask prices for the term loans 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. 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 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 performance obligations, or any material costs to obtain or fulfill a contract as of September 26, 2020 and December 28, 2019.

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 $2.0 million as of September 26, 2020 and December 28, 2019. Breakage amounts were immaterial for the 13 and 39 weeks ended September 26, 2020 and September 28, 2019.

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 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Perishable (1)	$	258,923	$	223,329	$	788,190	$	651,758
Non-perishable (2)	505,159		429,211		1,539,629		1,252,342
Total sales	$	764,082	$	652,540	$	2,327,819	$	1,904,100

_______________________

(1) Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood.

(2) Non-perishable departments include 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 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 it. 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 367, 342 and 332 stores operated by independent operators as of September 26, 2020, December 28, 2019 and September 28, 2019, respectively. We had agreements in place with each independent operator. The independent operator orders its merchandise exclusively from us which is provided to the independent operator on consignment. Under the independent operator agreement, the independent operator may select a majority of merchandise that we consign to the independent operator, which the independent operator chooses from our merchandise order guide according to the independent operator’s knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The independent operator agreement gives the independent operator 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. Independent operators are required to furnish initial working capital and to acquire certain store and safety assets. The independent operator is required to hire, train and employ a properly trained workforce sufficient in number to enable the independent operator to fulfill its obligations under the independent operator agreement. The independent operator 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 independent operator agreement without cause upon 75 days’ notice.

As consignor of all merchandise to each independent operator, the aggregate net sales proceeds from merchandise sales belongs to us. Sales related to independent operator stores were $750.5 million and $638.8 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively, and $2.28 billion and $1.86 billion for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively. We, in turn, pay independent operators a commission based on a share of the gross profit of the store. Inventories and related sales proceeds are our property, and we are responsible for store rent and related occupancy costs. Independent operator commissions were expensed and included in selling, general and administrative expenses. Independent operator commissions were $114.2 million and $98.2 million for the 13 weeks ended September 26, 2020 and September 28, 2019, respectively, and $351.1 million and $285.2 million for the 39 weeks ended September 26, 2020 and September 28, 2019, respectively. Independent operator commissions of $7.9 million and $6.1 million were included in accrued expenses as of September 26, 2020 and December 28, 2019, respectively.

Independent operators may fund their 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 independent operator obligations and performance, the operator agreements grant us the security interests in the assets owned by the independent operator. The total investment at risk associated with each independent operator is not sufficient to permit each independent operator to finance its activities without additional subordinated financial support and, as a result, the independent operators are VIEs which we have variable interests in. To determine if we are the primary beneficiary of these VIEs, we evaluate whether we have (i) the power to direct the activities that most significantly impact the independent operator’s economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the independent operator that could potentially be significant to the independent operator. Our evaluation includes identification of significant activities and an assessment of its ability to direct those activities.

Activities that most significantly impact the independent operator economic performance relate to sales and labor. Sales activities that significantly impact the independent operators’ economic performance include determining what merchandise the independent operator will order and sell and the price of such merchandise, both of which the independent operator controls. The independent operator is also responsible for all of their own labor. Labor activities that significantly impact the independent operator’s economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the independent operator, activities which the independent operator controls. Accordingly, the independent operator has the power to direct the activities that most significantly impact the independent operator’s economic performance. Furthermore, the mutual termination rights associated with the operator agreements do not give the Company power over the independent operator.

Our maximum exposure to the independent operators is generally limited to the gross operator notes and receivables due from these entities, which was $41.4 million and $37.7 million as of September 26, 2020 and December 28, 2019, respectively. See Note 2 for additional information.

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Recently Adopted Accounting Standards

ASU No. 2016-13 — In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13, which was further updated and clarified by the FASB through issuance of additional related ASUs, amends the guidance surrounding measurement and recognition of credit losses on financial assets measured at amortized cost, including trade receivables and debt securities, by requiring recognition of an allowance for credit losses expected to be incurred over an asset’s lifetime based on relevant information about past events, current conditions, and reasonable and supportable forecasts impacting the financial asset's ultimate collectability. This “expected loss” model will likely result in earlier recognition of credit losses than the previous “as incurred” model, under which losses were recognized only upon an occurrence of an event that gave rise to the incurrence of a probable loss. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and is to be adopted on a modified retrospective basis. We adopted ASU 2016-13 on December 29, 2019. The adoption of ASU 2016-13 resulted in a $0.4 million cumulative-effect adjustment to the opening balance of retained earnings. The adoption of the new standard did not have a material impact on our condensed consolidated statements of operations and comprehensive income or condensed consolidated statements of cash flows. See Note 2 for additional information.

ASU No. 2018-15 — In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective retrospectively for fiscal years and interim periods within those years beginning after December 15, 2019. We adopted ASU 2018-15 on December 29, 2019. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

ASU No. 2019-12 — In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 simplifies accounting guidance for certain tax matters including franchise taxes, certain transactions that result in a step-up in tax basis of goodwill, and enacted changes in tax laws in interim periods. In addition, it eliminates a company’s need to evaluate certain exceptions relating to the incremental approach for intra-period tax allocation, accounting for basis differences when there are ownership changes in foreign investments, and interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We will adopt ASU 2019-12 beginning in the first quarter of fiscal 2021. We do not expect the adoption of ASU 2019-12 to have a material impact on our consolidated financial statements.

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Note 2. Independent Operator Notes and Receivables

The amounts included in independent operator notes and accounts receivable consist primarily of funds we loaned to independent operators, net of estimated uncollectible amounts. Independent operator notes are payable on demand and typically bear interest at rates between 3.00% and 9.95%. Accrued interest receivable on independent operator 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 $0.3 million and $0.5 million as of September 26, 2020 and December 28, 2019, respectively. There were no independent operator notes that were past due or on a non-accrual status due to delinquency as of September 26, 2020 or December 28, 2019. TCAP notes and receivables, 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.

Independent operator notes and 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 of independent operators 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 independent operators who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in independent operator skills and experience. For independent operators participating in TCAP, we lower the interest rate and delay repayment obligations on their outstanding notes.

•Non-TCAP — Includes the notes and receivables of independent operators 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 of independent operators 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 independent operators and the related allowances as of September 26, 2020 and December 28, 2019 consisted of the following (in thousands):


			Allowance						Current Portion		Long-term Portion
	Gross		Current Portion		Long-term Portion		Net
September 26, 2020
Independent operator notes	$	36,994	$	(629)	$	(8,360)	$	28,005	$	2,242	$	25,763
Independent operator receivables	4,407		(527)		—		3,880		3,880		—
Total	$	41,401	$	(1,156)	$	(8,360)	$	31,885	$	6,122	$	25,763


			Allowance						Current Portion		Long-term Portion
	Gross		Current Portion		Long-term Portion		Net
December 28, 2019
Independent operator notes	$	31,952	$	(678)	$	(9,088)	$	22,186	$	1,855	$	20,331
Independent operator receivables	5,753		(605)		—		5,148		5,148		—
Total	$	37,705	$	(1,283)	$	(9,088)	$	27,334	$	7,003	$	20,331

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A summary of activity in the independent operator notes and receivable allowance was as follows (in thousands):


	13 Weeks Ended				39 Weeks Ended
	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Beginning balance	$	9,178	$	10,655	$	10,371	$	9,067
Provision for independent operator notes and receivables	384		311		311		2,519
Cumulative effect of accounting change	—		—		(439)		—
Write-off of provision for independent operator notes and receivables	(46)		(497)		(727)		(1,117)
Ending Balance	$	9,516	$	10,469	$	9,516	$	10,469

The following table presents the amortized cost basis of independent operator notes by year of origination and credit quality indicator as of September 26, 2020 (in thousands):


Credit Quality Indicator	2020 (YTD)		2019		2018		2017		2016		Prior		Total
TCAP	$	1,246	$	1,065	$	926	$	105	$	194	$	—	$	3,536
Non-TCAP	3,097		6,269		6,686		2,652		1,044		291		20,039
New store	7,649		5,770		—		—		—		—		13,419
Total	$	11,992	$	13,104	$	7,612	$	2,757	$	1,238	$	291	$	36,994

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Note 3. Leases

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 right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. 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.

Leases for 15 of our store locations and one warehouse location are controlled by related parties. As of September 26, 2020, the right-of-use assets and lease liabilities related to these properties were $40.5 million and $44.9 million, respectively. As of September 26, 2020, we had executed leases for 32 store locations that we had not yet taken possession of with total undiscounted future lease payments of $176.9 million with lease terms through 2037.

Our lease terms may include options to extend the lease when we are reasonably certain that we will exercise such options. Based upon our initial investment in store leasehold improvements, we utilize an initial reasonably certain lease life of 15 years. Most leases include one or more options to renew, with renewal terms that can extend the lease term from five to 15 years or more. Our leases do not include any material residual value guarantees or material restrictive covenants. We also have non-cancelable subleases with unrelated third parties with future minimum rental receipts as of September 26, 2020 totaling $4.5 million ending in various years through 2028 which have not been deducted from the future minimum lease payments.

The balance sheet classification of our right-of-use lease assets and lease liabilities as of September 26, 2020 was as follows (in thousands):

Leases

Classification

Assets:

Operating lease assets

Operating lease right-of-use assets

819,227

Finance lease assets

Other assets

6,189

Total leased assets

825,416

Liabilities:

Current

Operating

Current lease liabilities

44,863

Finance

Current lease liabilities

930

Noncurrent

Operating

Long-term lease liabilities

855,498

Finance

Long-term lease liabilities

5,351

Total lease liabilities

906,642

The components of lease expense were as follows (in thousands):



		13 Weeks Ended				39 Weeks Ended
Lease Cost	Classification	September 26, 2020		September 28, 2019		September 26, 2020		September 28, 2019
Operating lease cost	Selling, general and administrative expenses	$	28,470	$	24,211	$	82,553	$	71,085
Finance lease cost:
Amortization of right-of-use assets	Depreciation and amortization	263		173		710		520
Interest on leased liabilities	Interest expense, net	98		68		285		192
Sublease income	Other income	(186)		(299)		(742)		(949)
Net lease cost		$	28,645	$	24,153	$	82,806	$	70,848

Short-term lease expense and variable lease payments recorded in operating expenses for the 13 and 39 weeks ended September 26, 2020 and September 28, 2019 were immaterial.

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Maturities of lease liabilities as of September 26, 2020 were as follows (in thousands):


	Operating Leases		Finance Leases		Total
Remainder of fiscal 2020	$	26,476	$	318	$	26,794
Fiscal 2021	109,137		1,279		110,416
Fiscal 2022	109,837		1,226		111,063
Fiscal 2023	109,681		1,124		110,805
Fiscal 2024	108,911		1,058		109,969
Thereafter	894,505		2,690		897,195
Total lease payments	1,358,547		7,695		1,366,242
Less: Imputed interest	(458,187)		(1,413)		(459,600)
Present value of lease liabilities	$	900,360	$	6,282	$	906,642

The weighted-average lease term and discount rate as of September 26, 2020 were as follows:


Weighted-average remaining lease term:
Operating leases	12.2 years
Finance leases	6.9 years
Weighted-average discount rate:
Operating leases	7.03	%
Finance leases	5.82	%

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Note 4. Long-term Debt

Long-term debt consisted of the following (in thousands):


	September 26, 2020		December 28, 2019
First Lien Credit Agreement:
Term loan	$	460,000	$	460,188

Notes payable	68		246
Long-term debt, gross	460,068		460,434
Less: Unamortized debt discounts and debt issuance costs	(11,387)		(12,445)
Long-term debt, less unamortized debt discounts and debt issuance costs	448,681		447,989
Less: Current portion	(68)		(246)
Long-term debt, net	$	448,613	$	447,743

First Lien Credit Agreement

On October 22, 2018, GOBP Holdings, Inc (“GOBP Holdings”), our wholly owned subsidiary, together with another of our wholly owned subsidiaries, entered into a first lien credit agreement (the “First Lien Credit Agreement”) with a syndicate of lenders for a $725.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, with a sub-commitment for a $35.0 million letter of credit and a sub-commitment for $20.0 million of swingline loans. Borrowings under the First Lien Credit Agreement are secured by substantially all the assets of the borrower subsidiary and its guarantors. The term loan proceeds were primarily used for retiring our prior first lien credit agreement and paying cash dividends related to our 2018 recapitalization. As of September 26, 2020, we had standby letters of credit outstanding totaling $3.5 million under the First Lien Credit Agreement.

Term Loans

The First Lien Credit Agreement permits voluntary prepayment on borrowings without premium or penalty. In connection with the closing of our IPO, we prepaid $248.0 million of principal and $3.8 million of interest on the outstanding term loan under the First Lien Credit Agreement on June 24, 2019 and elected to apply the prepayment against the remaining principal installments in the direct order of maturity. No further principal payment on the term loan will be due until the maturity date of this term loan. The terms of the First Lien Credit Agreement include mandatory prepayment requirements on the term loan if certain conditions are met (as described in the First Lien Credit Agreement).

First Incremental Agreement — On July 23, 2019, GOBP Holdings together with another of our wholly owned subsidiaries entered into an incremental agreement (the “First Incremental Agreement”) to amend the First Lien Credit Agreement. The First Incremental Agreement refinanced the term loan outstanding under the First Lien Credit Agreement with a replacement $475.2 million senior secured term loan (the “First Replacement Term Loan”) with an applicable margin of 3.50% or 3.25% for Eurodollar loans and 2.50% or 2.25% for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings. The First Replacement Term Loan matured on October 22, 2025, which was the same maturity date as the prior term loan under the First Lien Credit Agreement. We wrote off debt issuance costs of $0.3 million and incurred debt modification costs of $0.2 million during the third quarter of fiscal 2019 in connection with this refinance. On October 23, 2019, we prepaid $15.0 million of principal on the First Replacement Term Loan.

Second Incremental Agreement — On January 24, 2020, GOBP Holdings together with another of our wholly owned subsidiaries, entered into a second incremental agreement (the “Second Incremental Agreement”) which amended the First Incremental Agreement. The Second Incremental Agreement refinanced the First Replacement Term loan under the First Incremental Agreement with a replacement $460.0 million senior secured term loan (the “Second Replacement Term Loan”) with an applicable margin of 2.75% for Eurodollar loans and 1.75% for base rate loans, in each case depending on the public corporate family rating of GOBP Holdings, and made certain other corresponding technical changes and updates to the First Incremental Agreement. The interest rate on the Second Replacement Term Loan was 2.90% as of September 26, 2020. The Second Replacement Term Loan matures on October 22, 2025, which is the same maturity date as prior term loans under the First Lien Credit Agreement and First Incremental Agreement. We wrote off debt issuance costs of $0.1 million and incurred debt modification costs of $0.1 million during the first quarter of fiscal 2020 in connection with this refinance.

Other than as described above, the Second Replacement Term Loan has the same terms as provided under the original First Lien Credit Agreement and the First Incremental Agreement. Additionally, the parties to the Second Incremental Agreement continue to have the same obligations set forth in the original First Lien Credit Agreement and the First Incremental Agreement (collectively, the “First Lien Credit Agreement”).

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Revolving Credit Facility

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. On March 19, 2020, we borrowed $90.0 million under the revolving credit facility of our First Lien Credit Agreement (the “Revolving Credit Facility Loan”), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. On May 26, 2020, we repaid the Revolving Credit Facility Loan in full. As of September 26, 2020, we had $96.5 million of borrowing capacity available under the revolving credit facility.

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 has the ability to restrict us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, 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 September 26, 2020, 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 September 26, 2020 were as follows (in thousands):


Remainder of fiscal 2020	$	68
Fiscal 2021	—
Fiscal 2022	—
Fiscal 2023	—
Fiscal 2024	—
Thereafter	460,000
Total	$